UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 FORM 10-K (Mark One)x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
 EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2008o
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)
   Securities registered pursuant to Section 12(b) of the Act:
  Title of each class

Name of each exchange on which registered8.15% Cumulative
 Trust Preferred Securities(issued by First
 Preferred Capital Trust IV and

New York Stock
 Exchangeguaranteed by First
 Banks, Inc.) Securities registered pursuant
to Section 12(g) of the Act: None (Title of class) Indicate by
check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. o Yes x No Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act. x Yes o No 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. x Yes o No Indicate by
check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this
chapter) is not contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. x 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 definition
of large accelerated filer, accelerated filer and smaller reporting
company in Rule 12b-2 of the Exchange Act. (Check one):
 Large
 accelerated filer o
Accelerated
 filer oNon-accelerated
 filer x (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 Act).o Yes x No None of the
voting stock of the Company is held by non-affiliates. All of the voting stock
of the Company is owned by various trusts, which were established by and for
the benefit of Mr. James F. Dierberg, the Companys Chairman of the Board of
Directors, and members of his immediate family. At
March
25, 2009, there were 23,661 shares of the registrants common stock
outstanding.    FIRST BANKS, INC.ANNUAL REPORT ON FORM 10-KTABLE OF
CONTENTS

PagePart IItem
 1.

Business

1Item
 1A.

Risk
Factors

11Item
 1B.

Unresolved
Staff Comments

17Item
 2.

Properties

17Item
 3.

Legal
Proceedings

17Item
 4.

Submission of
Matters to a Vote of Security
 Holders

17Part IIItem
 5.

Market for the
Registrants Common Equity,
 Related Stockholder Matters and Issuer Purchases of Equity Securities

18Item
 6.

Selected
Financial Data

19Item
 7.

Managements Discussion and Analysis of
 Financial Condition and Results of Operations

20Item
 7A.

Quantitative
and Qualitative Disclosures
 About Market Risk

60Item
 8.

Financial
Statements and Supplementary Data

61Item
 9.

Changes in and
Disagreements with
 Accountants on Accounting and Financial Disclosure

61Item
 9A.

Controls and
Procedures

61Item
 9B.

Other
Information

62Part IIIItem
 10.

Directors,
Executive Officers and Corporate
 Governance

63Item
 11.

Executive
Compensation

67Item
 12.

Security
Ownership of Certain Beneficial
 Owners and Management and Related Stockholder Matters

73Item
 13.

Certain
Relationships and Related
 Transactions, and Director Independence

74Item
 14.

Principal
Accounting Fees and Services

75Part IVItem
 15.

Exhibits,
Financial Statement Schedules

75Signatures

129SPECIAL NOTEREGARDINGFORWARD-LOOKINGSTATEMENTSAND FACTORS
THAT COULDAFFECT FUTURERESULTS

This
Annual Report on Form 10-K 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
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:

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
The
 effects of and changes in trade and monetary and fiscal policies and laws,
 including, but not limited to, the interest rate policies of the Federal Open
 Market Committee of the Federal Reserve Board of Governors, the Federal
 Deposit Insurance Corporations Temporary Liquidity Guarantee Program and the
 U.S. Treasurys Capital Purchase Program and Troubled Asset Repurchase
 Program authorized by the Emergency Economic Stabilization Act of 2008.Ø
The
 current stresses in the financial and residential real estate markets,
 including possible continued deterioration in property values;Ø
Possible
 changes in interest rates may increase funding costs and reduce earning asset
 yields, thus reducing margins;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, as further discussed under Item 1. Business  Supervision and
 Regulation and Item 1. Business Item 1A. Risk Factors;Ø
Changes
 in consumer spending, borrowings and savings habits;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
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 of our loan portfolio without adversely
 affecting interest income;Ø
Possible
 changes in the creditworthiness of customers and the possible impairment of
 collectability of loans;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;Ø
Regulatory
 actions that impact First Banks, Inc. and First Bank, including the
 regulatory agreements entered into between the Company, First Bank, the
 Federal Reserve Bank of St. Louis and the Missouri Division of Finance, as
 further discussed under Item 1. Business Supervision and Regulation  Regulatory
Matters; andØ
Our
 ability to respond to changes in technology or an interruption or breach in
 security of our information systems.With
 regard to our efforts to grow through acquisitions, factors that could affect
 the accuracy or completeness of forward-looking statements contained herein
 include:Ø
The
 competition of larger acquirers with greater resources;Ø
Fluctuations
 in the prices at which acquisition targets may be available for sale;Ø
The
 impact of making acquisitions without using our common stock;Ø
Possible
 asset quality issues, pending litigation, unknown liabilities and/or
 integration issues with the businesses that we have acquired; andØ
The
 impact of the regulatory agreements between the Company, First Bank, the
 Federal Reserve Bank of St. Louis and the Missouri Division of Finance.For
a discussion of these and other risk factors that may impact these
forward-looking statements, please refer to further discussion under 
Item 1. BusinessItem 1A. Risk Factors. We do not have
a duty to and will not update these forward-looking statements. Readers of this
Annual Report on Form 10-K should therefore consider these risks and
uncertainties in evaluating forward-looking statements and should not place
undue reliance on these statements.

PART I

Item 1.
BusinessGeneral.We 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, our wholly owned subsidiary company,
Coast Financial Holdings, Inc., or CFHI, headquartered in Bradenton, Florida,
and SFCs majority-owned subsidiary bank, First Bank, also headquartered in St.
Louis, Missouri. First Bank operates through its branch banking offices and its
subsidiaries, as listed below:

Ø
First Bank Business
 Capital, Inc.;Ø
Missouri Valley Partners,
 Inc., or MVP;Ø
Adrian N. Baker &
 Company, or Adrian Baker;Ø
Universal
 Premium Acceptance Corporation and its wholly owned subsidiary, UPAC of
 California, Inc., or collectively, UPAC;Ø
Small
 Business Loan Source LLC, or SBLS LLC; andØ
FB
 Holdings, LLC, or FB Holdings.First
Banks subsidiaries are wholly owned, except for: (a) SBLS LLC, which is 76.0%
owned by First Bank and 24.0% owned by First Capital America, Inc., or FCA, a
corporation owned and operated by Mr. James F. Dierberg, our Chairman of the
Board, and members of his immediate family; and (b) FB Holdings, which was
53.24% owned by First Bank and 46.76% owned by FCA as of December 31, 2008.

First
Bank currently operates 215 branch offices in California, Florida, Illinois,
Missouri and Texas, with 251 automated teller machines, or ATMs, across the
five states. Over the last ten years, our organization has grown significantly,
primarily as a result of our acquisition strategy, as well as through internal
growth. At December 31, 2008, we had assets of $10.78 billion, loans, net of
unearned discount, of $8.59 billion, deposits of $8.74 billion and
stockholders equity of $867.0 million.

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. Commercial and personal deposit products
include demand, savings, money market and time deposit accounts. In addition,
we market 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. Commercial
lending includes commercial, financial and agricultural loans, real estate
construction and development loans, commercial real estate loans, small
business lending, asset-based loans, trade financing and insurance premium
financing. Consumer lending includes residential real estate, home equity and
installment lending. Other financial services include mortgage banking, debit
cards, brokerage services, employee benefit and commercial and personal
insurance services, internet banking, remote deposit, ATMs, telephone banking,
safe deposit boxes, and trust, private banking and institutional money management
services. The revenues generated by First Bank and its subsidiaries consist
primarily of interest income, generated from our loan and investment security
portfolios, service charges and fees generated from deposit products and
services, and fees and commissions generated by our mortgage banking,
insurance, and trust, private banking and institutional money management
business units. Our extensive line of products and services are offered to
customers primarily within our geographic areas, which include eastern
Missouri, Illinois, including the Chicago metropolitan area, southern and
northern California, Houston and Dallas, Texas, and Florida, including
Bradenton and the greater Tampa metropolitan area. Certain loan products,
including small business loans and insurance premium financing loans, are
generally available nationwide through our subsidiaries, SBLS LLC and UPAC,
respectively.

Primary
responsibility for managing our banking units rests with the officers and
directors of each unit, but we centralize many of our overall corporate
policies, procedures and administrative functions and provide centralized
operational support functions for our subsidiaries. This practice allows us to
achieve various operating efficiencies while allowing our banking units to
focus on customer service.

Various
trusts, established by and administered by and for the benefit of Mr. James F.
Dierberg and members of his immediate family, own all of our voting stock. Mr.
Dierberg and his family, therefore, control our management and policies.

We have formed numerous affiliated Delaware or Connecticut business or statutory
trusts. These trusts operate as financing entities and were created for the
sole purpose of issuing trust preferred securities, and the sole assets of the
trusts are our subordinated debentures. In conjunction with the formation of
our financing entities and their issuance of the trust preferred securities, we
issued subordinated debentures to each of our financing entities in amounts
equivalent to the respective trust preferred securities plus the amount of the
common securities of the individual


1

trusts,
as more fully described in Note 12 to our consolidated financial statements. We
pay interest on our subordinated debentures to our respective financing entities.
In turn, our financing entities pay distributions to the holders of the trust
preferred securities. The interest payable on our subordinated debentures is
included in interest expense in our consolidated statements of operations.

The
trust preferred securities issued by First Preferred Capital Trust IV are
publicly held and traded on the New York Stock Exchange, or NYSE. The remaining
trust preferred securities were issued in private placements. The trust
preferred securities have no voting rights except in certain limited
circumstances.

Recent Developments. On December 31, 2008, First
Banks entered into a Letter Agreement,
including a Securities Purchase Agreement  Standard Terms, or Purchase
Agreement, with the United States Department of the Treasury, or the U.S.
Treasury, pursuant to the Troubled Asset Relief Program Capital Purchase
Program, or TARP. Under the terms of the Purchase Agreement, on December 31,
2008 we issued to the U.S. Treasury, 295,400 shares of senior preferred stock
(Class C Preferred Stock) and a warrant, or Warrant, to acquire up to
14,784.78478 shares of a separate series of senior preferred stock (Class D
Preferred Stock) for an aggregate purchase price of $295.4 million, pursuant to
the standard TARP terms and conditions for non-public companies as described
and set forth in the Purchase Agreement and the Warrant. Pursuant to the terms
of the Warrant, the U.S. Treasury exercised the Warrant on December 31, 2008
and paid the exercise price by having us withhold, from the shares of Class D
Preferred Stock that would otherwise be delivered to the U.S. Treasury upon
such exercise, shares of Class D Preferred Stock issuable upon exercise of the
Warrant with an aggregate liquidation amount equal in value to the aggregate
exercise price of $14,784.78. The senior preferred stock and the Warrant were
issued in a private placement exempt from registration pursuant to Section 4(2)
of the Securities Act of 1933, as amended. The Class C Preferred Stock and the
Class D Preferred Stock are further described in Note 18 to our consolidated
financial statements. The Purchase Agreement contains limitations on certain
actions of the Company, including, but not limited to, payment of dividends,
redemptions and acquisitions of the Companys equity securities, and
compensation of senior executive officers.

In
addition, First Bank elected to participate in the Federal Deposit Insurance
Corporations, or FDIC, Transaction Account Guarantee Program under its
Temporary Liquidity Guarantee Program, as further discussed under Supervision
and Regulation  General. The program strives to strengthen confidence and
encourage liquidity in the banking system by providing full insurance coverage
of non-interest bearing deposit transaction accounts, regardless of dollar
amount.

Strategy. In the development of our banking
franchise, we have focused on
building and reorganizing our infrastructure as necessary to accomplish our
objectives for organic growth, and to supplement this growth with de novo and
acquisition strategies to further expand our banking franchise. Our
organization is structured to leverage a strong sales force in each of our
major market areas in an effort to continue to provide quality financial
products and the highest level of customer service to our expanding customer
base. Within the individual markets, the sales organization is supported by a
regional structure to position it to serve the market opportunities within each
area in the five states in which we operate. We are committed to serving the
small business and mid-sized commercial segments along with the retail consumer
market. We have devoted significant resources to improving our infrastructure
dedicated to rapid approval, underwriting and documentation of consumer loans,
strengthening our small business services area, increasing our commercial
business development staff, reorganizing our marketing and product management
areas, improving the quality and depth of our regional commercial and consumer
management groups, and increasing resources for financial service product line
and delivery systems, branch development and training, and administrative and
operational support.

We
continue to focus on modifying and effectively repositioning our internal and
external resources to better serve the markets in which we operate. Although
these efforts have at times led to certain increased capital expenditures and
related noninterest expenses, we have achieved and expect to see additional
internal growth, more efficient operations and improved profitability over the
long term, in accordance with our long-term corporate vision. In 2008, we
formed a national banking unit to focus on delivering and expanding certain of
our national lines of business, including specialized lending groups such as
leveraged finance, healthcare lending, association banking services, religious
lending, trade finance and treasury management services. We also implemented
additional modifications to our commercial and business banking groups within
our primary markets in a continued effort to build a stronger and more
efficient commercial banking business. These modifications have realigned our
resources to provide a more unified and consistent approach to the delivery of
our products and services across all of our market areas. In line with our
small business lending strategy, we segmented the loan origination and
servicing functions and added new business development officers in certain of
our markets.

In
light of our recent financial performance and current economic events, we have
shifted our focus away from acquisitions in the near term as a means of growing
our organization. However, historically, in the development of our banking
franchise, we have acquired other entities providing financial services as one
means of achieving our

2

growth
objectives and to augment internal growth. Acquisitions serve to enhance our
presence in a given market, to expand the extent of our market area, to enable
us to enter new or noncontiguous markets or to enable us to expand the array of
financial services that we provide. Due to the nature of our ownership, we have
elected to engage only in those acquisitions that can be accomplished for cash,
rather than by issuing securities, which given the characteristics of the
acquisition arena may, at times, place us at a competitive disadvantage
relative to other acquirers offering stock transactions. This results from the
market attractiveness of other financial institutions stock and the advantages
of tax-free exchanges to the selling shareholders. Our acquisition activities
are generally somewhat sporadic because we may consummate multiple transactions
in a particular period, followed by a substantially less active acquisition
period. Furthermore, the intangible assets recorded in conjunction with these
acquisitions create an immediate reduction in our regulatory capital, providing
further financial disincentives to paying large premiums in cash acquisitions.

Recognizing
these facts, we generally follow certain patterns in our acquisitions. First,
we have generally acquired several smaller institutions, sometimes over an
extended period of time, rather than a single larger one. We attribute this
approach to the constraints imposed by the amount of funds required for a
larger transaction, as well as the opportunity to minimize the aggregate
premium required through smaller individual transactions. We have, however,
periodically acquired larger institutions that provided us with the opportunity
to rapidly expand our market presence in a highly desired market area.
Secondly, in some acquisitions, we acquired institutions having significant
asset-quality, ownership, legal, regulatory or other problems. We addressed the
risks of these issues by adjusting the acquisition pricing, accompanied by
appropriate remedial attention after consummation of the transaction. In these
institutions, these issues may have diminished their attractiveness to other
potential acquirers, and therefore may have reduced the amount of acquisition
premium required. Finally, we may have pursued our acquisition strategy in
other geographic areas, or pursued internal growth more aggressively because
cash transactions may not have been economically viable in extremely
competitive acquisition markets.

Our
acquisitions have allowed us to significantly expand our presence throughout
our geographic markets, improve operational efficiencies, convey a more
consistent image and quality of service and more cohesively market and deliver
our products and services. After we consummate an acquisition, we expect to
enhance the franchise of the acquired entity by supplementing the marketing and
business development efforts to broaden the customer base, strengthening
particular segments of the business or filling voids in the overall market
coverage. Following our acquisitions, various undertakings are necessary to
effectively integrate the acquired entities into our business systems and
culture. While the specific activities required are dependent upon the
individual circumstances surrounding each acquisition, the majority of our
efforts have been concentrated in various areas including, but not limited to:
(a) improving asset quality; (b) reducing unnecessary, duplicative and/or
excessive expenses including personnel, information technology and certain
other operational and administrative expenses; (c) maintaining, repairing and,
in some cases, refurbishing bank premises necessitated by the deferral of such
projects by some of the acquired entities; (d) renegotiating long-term leases
that provide space in excess of that necessary for banking activities and/or at
rates in excess of current market rates, or subleasing excess space to third
parties; (e) relocating branch offices that are not adequate, conducive or
convenient for banking operations; and (f) managing actual or potential
litigation that existed with respect to acquired entities to minimize the
overall costs of negotiation, settlement or litigation.

The
post-acquisition process also includes the combining of separate and distinct
entities together to form a cohesive organization with common objectives and
focus. We have invested and continue to invest significant resources to
reorganize staff, recruit and train personnel where needed, and establish the
direction and focus necessary for the combined entity to take advantage of the
opportunities available to it. This investment generally contributes to
increases in noninterest expense, and results in the creation of new banking
units within the newly integrated combined entity, which convey a more
consistent image and quality of service. The new banking units provide a broad
array of banking products to their customers and generally compete effectively
in their marketplaces, even in the presence of other financial institutions
with much greater resources. While some of these modifications do not
contribute to reductions of noninterest expense, they contribute to the
commercial and retail business development efforts of the combined entity, and
ultimately to their prospects for improving future profitability.

During
the past three years, we completed seven bank acquisitions, three branch office
purchases and also added two business lines, including an insurance premium
financing company and an insurance brokerage agency, providing our customers with
new and expanded products and services to complement our existing line of
financial services. Through our acquisition of CFHI on November 30, 2007, we
entered a fifth state, expanding our banking franchise by 20 branch offices in
Floridas Manatee, Pinellas, Hillsborough and Pasco counties. Our entrance into
Florida provided us with further opportunities for growth and delivery of our
full range of financial products and services. We significantly expanded our
banking franchise in the dynamic market areas of Houston, Dallas and southern
California, and further augmented our existing markets in metropolitan Chicago
and the Midwest. With the significant expansion of our Chicago banking
franchise in recent years, we have created a complete regional

3

structure
in the Chicago area as well as three additional commercial banking groups to
enable our credit administration, commercial real estate and commercial and
industrial banking groups, branch administration, credit review, and human
resources and training functions to better serve our customers and employees.
We funded these acquisitions from available cash reserves, borrowings under our
former secured credit facility and proceeds from the issuance of subordinated
debentures. These transactions are further described in Note 2 to our
consolidated financial statements.

Our
business strategy also encompasses the opening of de novo branch offices as
another means of achieving our growth objectives, particularly when our
acquisition prospects are somewhat limited, primarily due to the market
environment requiring significantly higher premiums in order to transact
financial institution acquisitions. Our de novo branch strategy also provides
similar opportunities to our acquisition strategy by allowing us to enhance our
presence in our existing markets and enter new markets. Additionally, we
generally have more flexibility in selecting the most opportunistic sites for
our de novo branches, constructing the branch offices in accordance with our
standard business model and marketing and promoting our customized products and
services under our long-established trade name. During the three years ended
December 31, 2008, we opened the following 11 de novo branch offices:

Branch Office Location

Date OpenedSt. Louis,
 Missouri

January 22, 2007Katy
 (Houston), Texas

February 26, 2007Lincoln
 (Sacramento), California

March 12, 2007Dardenne
 Prairie (St. Louis), Missouri

May 9, 2007Chula Vista
 (San Diego), California

June 25, 2007Brentwood
 (San Francisco), California

September 24, 2007Shadow Creek
 Ranch (Houston), Texas

October 15, 2007Valencia
 (Los Angeles), California

October 29, 2007Naperville
 (Chicago), Illinois

January 14, 2008Arnold (St.
 Louis), Missouri

May 13, 2008Blue Oaks
 Marketplace (Rocklin), California

August 18, 2008Lending Activities. As further discussed under
Managements Discussion and Analysis of
Financial Condition and Results of Operations Loans and Allowance for Loan Losses, our business development
efforts have been primarily focused on the origination of the following general
loan types: commercial, financial and agricultural loans; real estate
construction and land development loans; commercial real estate mortgage loans;
and to a lesser extent, residential real estate mortgage loans. Our lending
strategy emphasizes quality, growth and diversification. Throughout our
organization, we employ a common credit underwriting policy. In addition to
underwriting based on estimates and projection of financial strength,
collateral values and future cash flows, most loans to borrowing entities other
than individuals require the guarantee of the parent company or entity sponsor,
or in the case of smaller entities, the personal guarantees of the principals.
Our aggregate loan portfolio, net of unearned discount, has increased 61.3%
from $5.33 billion at December 31, 2003, to $8.59 billion at December 31, 2008.

Commercial, Financial and
Agricultural. Our
commercial, financial and agricultural loan portfolio was $2.58 billion, or
30.0% of total loans, at December 31, 2008, compared to $2.38 billion, or 26.8%
of total loans, at December 31, 2007. Our commercial loan portfolio has
increased significantly over recent years, reflecting increases of $447.2
million and $193.4 million during 2007 and 2008, respectively, through
acquisitions completed in 2007 and consistent with our strategy of decreasing
our exposure to real estate loans, specifically real estate construction and
development, in light of the current economic environment. The primary
component of commercial, financial and agricultural loans is commercial loans,
which are made based on the borrowers general credit strength and ability to
generate cash flows for repayment from income sources. Most of these loans are
made on a secured basis, generally involving the use of company equipment,
inventory and/or accounts receivable, and, from time to time, real estate, as
collateral. Regardless of collateral, substantial emphasis is placed on the
borrowers ability to generate cash flow sufficient to operate the business and
provide coverage of debt servicing requirements. Commercial loans are
frequently renewable annually, although some terms may be as long as five
years. These loans typically require the borrower to maintain certain operating
covenants appropriate for the specific business, such as profitability, debt
service coverage and current asset and leverage ratios, which are generally
reported and monitored on a quarterly basis and subject to more detailed annual
reviews. Commercial loans are made to customers primarily located in First
Banks geographic trade areas of California, Florida, Illinois, Missouri and
Texas that are engaged in manufacturing, retailing, wholesaling and service
businesses. This portfolio is not concentrated in large specific industry
segments that are characterized by sufficient homogeneity that would result in
significant concentrations of credit exposure. Rather, it is a highly
diversified portfolio that encompasses many industry segments. Within both our
real estate and commercial lending portfolios, we strive for the highest degree
of diversity that is practicable. We also emphasize the development of other
service relationships, particularly deposit accounts, with our commercial
borrowers.

4

Real Estate Construction and
Development. Our real
estate construction and land development loan portfolio was $1.57 billion, or
18.3% of total loans, at December 31, 2008, compared to $2.14 billion, or 24.1%
of total loans, at December 31, 2007. Real estate construction and land
development loans include commitments for construction of both residential and
commercial properties. Commercial real estate projects often require
commitments for permanent financing from other lenders upon completion of the
project and, more typically, may include a short-term amortizing component of
the initial financing. Commitments for construction of multi-tenant commercial
and retail projects generally require lease commitments from a substantial
primary tenant or tenants prior to commencement of construction. We typically
engage in multi-phase, multi-tenant projects, as opposed to large vertical
projects, that allow us to complete the projects in phases and limit the number
of tenant building starts based upon successful lease and/or sale of the tenant
units. We finance some projects for borrowers whose home office is located
within our trade area but the particular project may be outside our normal
trade area. Although we generally do not engage in developing commercial and
residential construction lending business outside of our trade area, certain
loans acquired in acquisitions from time to time have been related to projects
outside of our trade area. Residential real estate construction and development
loans are made based on the cost of land acquisition and development, as well
as the construction of the residential units. Although we finance the cost of
display units and units held for sale, a substantial portion of the loans for
individual residential units have purchase commitments prior to funding.
Residential condominium projects are funded as the building construction
progresses, but funding of unit finishing is generally based on firm sales
contracts.

Commercial Real Estate. Our commercial
real estate loan portfolio
was $2.56 billion, or 29.8% of total loans, at December 31, 2008, compared to
$2.43 billion, or 27.4% of total loans, at December 31, 2007. Commercial real
estate loans include loans for which the intended source of repayment is rental
and other income from the real estate. This includes commercial real estate
developed for lease to third parties as well as the owners occupancy. The
underwriting of owner occupied commercial real estate loans generally follows
the procedures for commercial lending described above, except that the
collateral is real estate, and the loan term may be longer. The primary
emphasis in underwriting loans for which the source of repayment is the
performance of the collateral is the projected cash flow from the real estate
and its adequacy to cover the operating costs of the project and the debt
service requirements. Secondary emphasis is placed on the appraised value of
the real estate, with the requirement that the appraised liquidation value of
the collateral must be adequate to repay the debt and related interest in the
event the cash flow becomes insufficient to service the debt. Generally,
underwriting terms require the loan principal not to exceed 80% of the
appraised value of the collateral and the loan maturity not to exceed ten
years. Commercial real estate loans are made for commercial office space,
retail properties, industrial and warehouse facilities and recreational
properties. We typically only finance commercial real estate or rental
properties that have lease commitments for a majority of the rentable space.

Residential Real Estate Mortgage. Our
residential real estate mortgage loan
portfolio was $1.55 billion, or 18.1% of total loans, at December 31, 2008,
compared to $1.60 billion, or 18.0% of total loans, at December 31, 2007.
Residential real estate mortgage loans are primarily loans secured by
single-family, owner-occupied properties. These loans include both adjustable
rate and fixed rate mortgage loans. We typically originate residential real
estate mortgage loans for sale in the secondary mortgage market in the form of
a mortgage-backed security or to various private third-party investors,
although from time-to-time, we retain certain residential mortgage loans in our
loan portfolio as directed by managements business strategies.

Market Areas. As of December 31, 2008, First
Banks 216
banking facilities were located in California, Florida, Illinois, Missouri and
Texas. First Bank operates in the St. Louis metropolitan area, in eastern
Missouri and throughout Illinois, including Chicago. First Bank also operates
in southern California, including San Diego and the greater Los Angeles
metropolitan area, including Ventura County, Riverside County and Orange
County; in Santa Barbara County; in northern California, including the greater
San Francisco, San Jose and Sacramento metropolitan areas; in Texas in the
Houston and Dallas metropolitan areas, and in Florida, including Bradenton and
the greater Tampa metropolitan area.

5

The
following table lists the geographic market areas in which First Bank operates,
total deposits, deposits as a percentage of total deposits and the number of
locations as of December 31, 2008:

Geographic Area


Total
 Deposits
 (in millions)

Deposits
 as a Percentage
 of Total Deposits

Number
 of
 LocationsSouthern
 California


$
2,089.3




23.9
%



42Northern
 Illinois (including Chicago metropolitan area)



1,558.5




17.8




34St. Louis,
 Missouri metropolitan area



1,449.6




16.6




34Northern
 California



1,116.2




12.8




21Central and
 southern Illinois



1,143.2




13.0




33Texas



521.6




6.0




20Florida



436.5




5.0




20Missouri
 (excluding the St. Louis metropolitan area)



426.6




4.9




12Total
deposits


$
8,741.5




100.0
%



216Competition and Branch Banking.
The activities in which First Bank engages are highly competitive. Those
activities and the geographic markets served primarily involve competition with
other banks, some of which are affiliated with large regional or national
holding companies, and other financial services companies. Financial
institutions compete based upon interest rates offered on deposit accounts and
other credit and service charges, the types of products and quality of services
rendered, the convenience of branch facilities, interest rates charged on loans
and, in the case of loans to large commercial borrowers, relative lending
limits.

Our
principal competitors include other commercial banks, savings banks, savings
and loan associations, mutual funds, and finance companies, including insurance
premium financing companies, trust companies, insurance brokerage companies,
credit unions, mortgage companies, leasing companies, private issuers of debt
obligations and suppliers of other investment alternatives, such as securities
firms and financial holding companies. Many of our non-bank competitors are not
subject to the same degree of regulation as that imposed on bank holding
companies, federally insured banks and national or state chartered banks. As a
result, such non-bank competitors have advantages over us in providing certain
services. We also compete with major multi-bank holding companies, which are
significantly larger than us and have greater access to capital and other
resources.

We
believe we will also continue to face competition in the acquisition of
independent banks, savings banks, branch offices and other financial companies.
We often compete with larger financial institutions that have substantially
greater resources available for making acquisitions.

Subject
to regulatory approval, commercial banks operating in California, Florida,
Illinois, Missouri and Texas are permitted to establish branches throughout
their respective states, thereby creating the potential for additional
competition in our service areas.

Deposit Insurance. Since First Bank is an
institution chartered
by the State of Missouri and a member of the Federal Reserve, both the State of
Missouri Division of Finance, or the MDOF, and the Federal Reserve supervise,
regulate and examine First Bank. First Bank is also regulated by the FDIC,
which previously provided deposit insurance of up to $100,000 for each insured
depositor. Effective October 3, 2008, deposits at FDIC-insured institutions are
insured up to $250,000 for each insured depositor until December 31, 2009, at
which time FDIC deposit insurance for all deposit accounts, except for certain
retirement accounts, will return to $100,000 for each insured depositor.
Insurance coverage for certain retirement accounts, which include all IRA
deposit accounts, was increased permanently to $250,000 for each insured
depositor in 2006. On October 14, 2008, the FDIC announced its temporary
Transaction Account Guarantee Program as part of its Temporary Liquidity
Guarantee Program, which provides full coverage for non-interest bearing
transaction deposit accounts at FDIC-insured institutions that elect to
participate in the program. The program applies to all personal and business
checking deposit accounts that do not earn interest at participating
institutions. This unlimited insurance coverage is temporary and will remain in
effect for participating institutions until December 31, 2009. We have elected
to participate in the FDICs Transaction Account Guarantee Program.

On
February 27, 2009, the FDIC announced amendments to the restoration plan for
the Deposit Insurance Fund, or DIF, to ensure the continued strength of the
insurance fund by imposing a special assessment on FDIC-insured institutions of
20 basis points, implementing changes to the risk-based assessment system, and
setting rates beginning in the second quarter of 2009. The emergency special
assessment will be imposed on June 30, 2009, and will be collected on September
30, 2009. The interim rule will also permit the FDIC to impose an emergency
special assessment after June 30, 2009 of up to 10 basis points, if necessary,
to maintain public confidence in federal deposit insurance.

6

Supervision and Regulation

General. Along with First Bank, we are
extensively
regulated by federal and state laws and regulations which are designed to
protect depositors of First Bank and the safety and soundness of the U.S.
banking system, not our stockholders. To the extent this discussion refers to
statutory or regulatory provisions, it is not intended to summarize all such
provisions and is qualified in its entirety by reference to the relevant
statutory and regulatory provisions. Changes in applicable laws, regulations or
regulatory policies may have a material effect on our business and prospects.
We are unable to predict the nature or extent of the effects on our business
and earnings that new federal and state legislation or regulation may have. The
enactment of the legislation described below has significantly affected the
banking industry generally and is likely to have ongoing effects on First Bank
and us in the future.

As
a registered bank holding company under the Bank Holding Company Act of 1956,
as amended, we are subject to regulation and supervision of the Board of
Governors of the Federal Reserve System, or Federal Reserve. We file annual
reports with the Federal Reserve and provide to the Federal Reserve additional
information as it may require.

Nonbank Subsidiaries. Many of our nonbank
subsidiaries are also
subject to regulation by other applicable federal and state agencies. Our small
business lending subsidiary is regulated by the U.S. Small Business
Administration, or SBA. Our insurance subsidiaries are subject to regulation by
applicable state insurance regulatory agencies. Our other nonbank subsidiaries
are subject to the laws and regulations of both the federal government and the
various states in which they conduct business.

Securities and Exchange Commission. We are
also under the jurisdiction of the United States Securities and Exchange Commission, or
SEC, and certain state securities commissions for matters relating to the
offering and sale of our securities. We are subject to disclosure and
regulatory requirements of the Securities Act of 1933, as amended, and the
Securities Exchange Act of 1934, as amended, as administered by the SEC. The
securities issued by one of our affiliated trusts are listed on the New York
Stock Exchange, or NYSE, under the trading symbol FBSPrA, and therefore, we
are subject to certain rules and regulations of the NYSE.

U.S. Treasury. As further described above
under Recent
Developments, on December 31, 2008, we completed the sale to the U.S. Treasury
of $295.4 million of newly-issued non-voting preferred shares as part of the
TARP. The U.S. Treasury has certain supervisory and oversight duties and
responsibilities under the TARP and, pursuant to the terms of the Purchase
Agreement, the U.S. Treasury is empowered to unilaterally amend any provision
of the Purchase Agreement with us to the extent required to comply with any
changes in applicable federal statutes.

SIGTARP. The Special Inspector General for
the
Troubled Asset Relief Program, or SIGTARP, was established pursuant to Section
121 of the Emergency Economic Stabilization Act of 2008, or EESA, and has the duty,
among other things, to conduct, supervise, and coordinate audits and
investigations of the purchase, management and sale of assets by the U.S.
Treasury under the TARP, including the shares of
non-voting preferred shares purchased from us.

Regulatory Matters. In connection with the
most recent regular
examinations of the Company and First Bank by the Federal Reserve Bank of St.
Louis, or FRB, and the MDOF, the Company and First Bank entered into informal
agreements with each agency. On September 18, 2008, First Bank and its Board of
Directors entered into an informal agreement with the FRB and the MDOF. In
addition, on October 2, 2008, the Company and its Board of Directors entered
into a Memorandum of Understanding with the FRB. Each of the agreements is
characterized by regulatory authorities as an informal action that is neither
published nor made publicly available by the agencies and is used when
circumstances warrant a milder form of action than a formal supervisory action,
such as a cease and desist order.

Under
the terms of the 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
declare 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. The Company received the approval of the
FRB to declare the regular quarterly dividends on its preferred stock to be
paid in February and April 2009 and to make its regular quarterly interest
payments on its outstanding subordinated debentures for further payment to the
individual holders of the respective underlying trust preferred securities in
March and April 2009.

First
Bank, under its agreement with the MDOF and the FRB, has 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 its Tier 1
capital ratio at no less than

7

7.00%. As further described in Note 21 to our
accompanying consolidated financial statements, at December 31, 2008, First
Banks Tier 1 capital ratio was 9.75%, or approximately $260.5 million over the
minimum level required by the agreement.

As
further described in Note 21 to our accompanying consolidated financial
statements, the Company and First Bank were in full compliance with all
provisions of the respective informal agreements as of December 31, 2008. In
addition, the Company and First Bank are committed to ensuring that the
requirements of the agreements are met in a timely manner.

Bank Holding Company Regulation. The
activities of bank holding companies are
generally limited to the business of banking, managing or controlling banks,
and other activities that the Federal Reserve has determined to be so closely
related to banking or managing or controlling banks as to the proper incident
thereto. In addition, under the Gramm-Leach-Bliley Act, or GLB Act, which was
enacted in November 1999 and is further discussed below, a bank holding
company, whose control depository institutions are well-capitalized and
well-managed (as defined in Federal Banking Regulations), and which obtains
satisfactory Community Reinvestment Act (discussed briefly below) ratings,
may declare itself to be a financial holding company and engage in a broader
range of activities. As of this date, we are not a financial holding company.

We are also subject to capital requirements applied on a consolidated basis,
which are substantially similar to those required of First Bank (briefly
summarized below). The Bank Holding Company Act also requires a bank holding
company to obtain approval from the Federal Reserve before:


Ø
acquiring,
 directly or indirectly, ownership or control of any voting shares of another
 bank or bank holding company if, after such acquisition, it would own or
 control more than 5% of such shares (unless it already owns or controls a
 majority of such shares);Ø
acquiring
 all or substantially all of the assets of another bank or bank holding
 company; orØ
merging
 or consolidating with another bank holding company.The
Federal Reserve will not approve any acquisition, merger or consolidation that
would have a substantially anti-competitive result, unless the anti-competitive
effects of the proposed transaction are clearly outweighed by a greater public
interest in meeting the convenience and needs of the community to be served.
The Federal Reserve also considers capital adequacy and other financial and
managerial factors in reviewing acquisitions and mergers.

Safety and Soundness and Similar
Regulations. We
are subject to various regulations and regulatory policies directed at the
financial soundness of First Bank. These include, but are not limited to, the
Federal Reserves source of strength policy, which obligates a bank holding
company such as us to provide financial and managerial strength to its
subsidiary banks; restrictions on the nature and size of certain affiliate
transactions between a bank holding company and its subsidiary depository
institutions and restrictions on extensions of credit by its subsidiary banks
to executive officers, directors, principal stockholders and the related
interests of such persons.

Regulatory Capital Standards. The federal
bank regulatory agencies have
adopted substantially similar risk-based and leverage capital guidelines for
banking organizations. Risk-based capital ratios are determined by classifying
assets and specified off-balance sheet obligations and financial instruments
into weighted categories, with higher levels of capital being required for
categories deemed to represent greater risk. Federal Reserve policy also
provides that banking organizations generally, and particularly those that are
experiencing internal growth or actively making acquisitions, are expected to
maintain capital positions that are substantially above the minimum supervisory
levels, without significant reliance on intangible assets.

Under
the risk-based capital standard, the minimum consolidated ratio of total
capital to risk-adjusted assets required for bank holding companies is 8% and
the minimum consolidated ratio of Tier I capital (as described below) to
risk-adjusted assets required for bank holding companies is 4%. At least
one-half of the total capital must be composed of common equity, retained
earnings, qualifying noncumulative perpetual preferred stock, a limited amount
of qualifying cumulative perpetual preferred stock and minority interests in
the equity accounts of consolidated subsidiaries, less certain items such as
goodwill and certain other intangible assets, which amount is referred to as
Tier I capital. The remainder may consist of qualifying hybrid capital
instruments, perpetual debt, mandatory convertible debt securities, a limited
amount of subordinated debt, preferred stock that does not qualify as Tier I
capital and a limited amount of loan and lease loss reserves, which amount,
together with Tier I capital, is referred to as Total Risk-Based Capital.

In
addition to the risk-based standard, we are subject to minimum requirements
with respect to the ratio of our Tier I capital to our average assets less
goodwill and certain other intangible assets, or the Leverage Ratio. Applicable
requirements provide for a minimum Leverage Ratio of 3% for bank holding
companies that have the highest supervisory
rating, while all other bank holding companies must maintain a minimum Leverage
Ratio of at least 4%

8

to 5%. The Office of the Comptroller of the Currency and
the FDIC have established capital requirements for banks under their respective
jurisdictions that are consistent with those imposed by the Federal Reserve on
bank holding companies.

Information
regarding our capital levels and First Banks capital levels under the federal
capital requirements is contained in Note 21 to our consolidated financial
statements appearing elsewhere in this report. As further described in Note 21
to our consolidated financial statements, on March 1, 2005, the Federal Reserve
adopted a final rule, Risk-Based Capital
Standards: Trust Preferred Securities and the Definition of Capital,
which allows for the continued inclusion, on a limited basis, of trust
preferred securities in Tier I capital. Under the final rule, trust preferred
securities and other restricted core capital elements will be subject to
stricter quantitative limits. The Federal Reserves final rule limits
restricted core capital elements to 25% of the sum of all core capital
elements, including restricted core capital elements, net of goodwill less any
associated deferred tax liability.

Prompt Corrective Action. The FDIC Improvement
Act requires the
federal bank regulatory agencies to take prompt corrective action in respect to
depository institutions that do not meet minimum capital requirements. A
depository institutions status under the prompt corrective action provisions
depends upon how its capital levels compare to various relevant capital
measures and other factors as established by regulation.

The federal regulatory
agencies have adopted regulations establishing relevant capital measures and
relevant capital levels. Under the regulations, a bank will be:

Ø
well
 capitalized if it has a total risk-based capital ratio of 10% or greater, a
 Tier I capital ratio of 6% or greater and a Leverage Ratio of 5% or greater
 and is not subject to any order or written directive by any such regulatory
 authority to meet and maintain a specific capital level for any capital
 measure;Ø
adequately
 capitalized if it has a total risk-based capital ratio of 8% or greater, a
 Tier I capital ratio of 4% or greater and a Leverage Ratio of 4% or greater
 (3% in certain circumstances);Ø
undercapitalized
 if it has a total risk-based capital ratio of less than 8%, a Tier I capital
 ratio of less than 4% or a Leverage Ratio of less than 4% (3% in certain
 circumstances);Ø
significantly
 undercapitalized if it has a total risk-based capital ratio of less than 6%,
 a Tier I capital ratio of less than 3% or a Leverage Ratio of less than 3%;
 andØ
critically
 undercapitalized if its tangible equity is equal to or less than 2% of its
 average quarterly tangible assets.Under
certain circumstances, a depository institutions primary federal regulatory
agency may use its authority to lower the institutions capital category. The
banking agencies are permitted to establish individual minimum capital
requirements exceeding the general requirements described above. See further
discussion above under Regulatory Matters. Generally, failing to maintain the
status of well capitalized or adequately capitalized subjects a bank to
restrictions and limitations on its business that become progressively more
severe as the capital levels decrease.

A
bank is prohibited from making any capital distribution (including payment of a
dividend) or paying any management fee to its holding company if the bank would
thereafter be undercapitalized. Limitations exist for undercapitalized
depository institutions regarding, among other things, asset growth,
acquisitions, branching, new lines of business, acceptance of brokered deposits
and borrowings from the Federal Reserve System. These institutions are also
required to submit a capital restoration plan that includes a guarantee from
the institutions holding company. Significantly undercapitalized depository
institutions may be subject to a number of requirements and restrictions,
including orders to sell sufficient voting stock to become adequately
capitalized, requirements to reduce total assets and cessation of receipt of
deposits from correspondent banks. The appointment of a receiver or conservator
may be required for critically undercapitalized institutions.

Dividends. Our
primary source of funds in the future is the dividends, if any, paid by First
Bank. The ability of First Bank to pay dividends is limited by federal laws, by
regulations promulgated by the bank regulatory agencies and by principles of
prudent bank management. The dividend limitations are further described in Note
11 and Note 22 to our consolidated financial statements appearing elsewhere in
this report. In addition, First Bank has agreed that it will not declare or pay
any dividends or make certain other payments to us without the prior consent of
the MDOF and the FRB, as previously discussed under Regulatory Matters.

Customer Protection. First Bank is also
subject to consumer laws
and regulations intended to protect consumers in transactions with depository
institutions, as well as other laws or regulations affecting customers of
financial institutions generally. These laws and regulations mandate various
disclosure requirements and substantively regulate the manner in which
financial institutions must deal with their customers. First Bank must comply
with

9

numerous
regulations in this regard and is subject to periodic examinations with respect
to its compliance with the requirements.

Community Reinvestment Act. The Community
Reinvestment Act of 1977
requires that, in connection with examinations of financial institutions within
their jurisdiction, the federal banking regulators evaluate the record of the
financial institutions in meeting the credit needs of their local communities,
including low and moderate income neighborhoods, consistent with the safe and
sound operation of those financial institutions. These factors are also
considered in evaluating mergers, acquisitions and other applications to
expand.

The Gramm-Leach-Bliley Act. The GLB Act,
enacted in 1999, amended and
repealed portions of the Glass-Steagall Act and other federal laws restricting
the ability of bank holding companies, securities firms and insurance companies
to affiliate with each other and to enter new lines of business. The GLB Act
established a comprehensive framework to permit financial companies to expand
their activities, including through such affiliations, and to modify the
federal regulatory structure governing some financial services activities. This
authority of financial firms to broaden the types of financial services offered
to customers and to affiliates with other types of financial services companies
may lead to further consolidation in the financial services industry. However,
it may lead to additional competition in the markets in which we operate by
allowing new entrants into various segments of those markets that are not the
traditional competitors in those segments. Furthermore, the authority granted
by the GLB Act may encourage the growth of larger competitors.

The
GLB Act also adopted consumer privacy safeguards requiring financial services
providers to disclose their policies regarding the privacy of customer
information to their customers and, subject to some exceptions, allowing
customers to opt out of policies permitting such companies to disclose
confidential financial information to non-affiliated third parties.

The Sarbanes-Oxley Act. In
July 2002, the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley, was enacted.
Sarbanes-Oxley imposes a myriad of corporate governance and accounting measures
designed to increase corporate responsibility, to provide for enhanced
penalties for accounting and auditing improprieties at publicly traded
companies, and to protect investors by improving the accuracy and reliability
of disclosures under securities laws. All public companies that file periodic
reports with the SEC are affected by Sarbanes-Oxley.

Sarbanes-Oxley
addresses, among other matters: (i) the creation of an independent accounting
oversight board to oversee the audit of public companies and auditors who
perform such audits; (ii) auditor independence provisions which restrict
non-audit services that independent accountants may provide to their audit
clients; (iii) additional corporate governance and responsibility measures
which require the chief executive officer and chief financial officer to
certify financial statements, to forfeit salary and bonuses in certain
situations, and protect whistleblowers and informants; (iv) expansion of the
audit committees authority and responsibility by requiring that the audit
committee have direct control of the outside auditor, be able to hire and fire
the auditor, and approve all non-audit services; (v) requirements that audit
committee members be independent; (vi) disclosure of a code of ethics; and
(vii) enhanced penalties for fraud and other violations. The provisions of
Sarbanes-Oxley also require that management assess the effectiveness of
internal control over financial reporting and that the independent auditor
issue an attestation report on managements report on internal control over
financial reporting. As we are a non-accelerated filer, managements report on
internal control over financial reporting was not subject to attestation by the
Companys Independent Registered Public Accounting Firm as of December 31, 2008
pursuant to temporary rules of the SEC that permit the Company to provide only
managements report in this annual report, as further discussed under Item 9A  Controls and Procedures.

The USA Patriot Act. The Patriot Act
was enacted in October 2001
in response to the terrorist attacks in New York, Pennsylvania and Washington,
D.C. that occurred on September 11, 2001. The Patriot Act is intended to
strengthen the ability of U.S. law enforcement agencies and the intelligence
communities to work cohesively to combat terrorism on a variety of fronts. The
potential impact of the Patriot Act on financial institutions of all kinds is
significant and wide ranging. The Patriot Act contains sweeping anti-money
laundering and financial transparency laws and imposes various regulations,
including standards for verifying client identification at account opening, and
rules to promote cooperation among financial institutions, regulators and law
enforcement entities in identifying parties that may be involved in terrorism
or money laundering. The Patriot Act is expected to increase the administrative
costs and burden of doing business for financial institutions; however, while
we cannot predict the full impact of such an increase, we do not expect it to
differ from that of other financial institutions.

Reserve Requirements; Federal
Reserve System and Federal Home Loan Bank System. First Bank is a member of the Federal
Reserve System and the Federal Home Loan Bank System. As a member, First Bank
is required to hold investments in those systems. First Bank was in compliance
with these requirements at December 31, 2008, with investments of $27.9 million
in stock of the FRB and $19.0 million in stock of the Federal Home Loan Bank of
Des Moines. First Bank also holds an investment of $791,000 in stock of the Federal
Home Loan Bank of San

10

Francisco and $207,000 in stock of the Federal Home Loan
Bank of Dallas, as a nonmember, to collateralize certain Federal Home Loan
Bank, or FHLB, advances assumed in conjunction with certain acquisition
transactions.

The
Federal Reserve requires all depository institutions to maintain reserves
against their transaction accounts and non-personal time deposits. The balances
maintained to meet the reserve requirements imposed by the Federal Reserve may
be used to satisfy liquidity requirements.

We
are authorized to borrow from the FRB and the FHLB. First Bank has established
a borrowing relationship with the FRB, which is secured by commercial loans,
and provides an additional liquidity facility that may be utilized for contingency
purposes. Our borrowing capacity was approximately $1.14 billion and we had FRB
borrowings outstanding of $100.0 million at December 31, 2008. First Banks
borrowing capacity with the FHLB was approximately $911.1 million and we had
FHLB advances outstanding of $200.7 million at December 31, 2008.

Monetary Policy and Economic
Control. The
commercial banking business is affected by legislation, regulatory policies and
general economic conditions as well as the monetary policies of the Federal Reserve.
The instruments of monetary policy available to the Federal Reserve include the
following: (i) changes in the discount rate on member bank borrowings and the
targeted federal funds rate; (ii) the availability of credit at the discount
window; (iii) open market operations; (iv) the imposition of changes in reserve
requirements against deposits of domestic banks; (v) the imposition of changes
in reserve requirements against deposits and assets of foreign branches; and
(vi) the imposition of and changes in reserve requirements against certain
borrowings by banks and their affiliates.

These
monetary policies are used in varying combinations to influence overall growth
and distributions of bank loans, investments and deposits, and this use may
affect interest rates charged on loans or paid on liabilities. The monetary
policies of the Federal Reserve have had a significant effect on the operating
results of commercial banks and are expected to do so in the future. Such
policies are influenced by various factors, including inflation, unemployment,
and short-term and long-term changes in the international trade balance and in
the fiscal policies of the U.S. Government. We cannot predict the effect that
changes in monetary policy or in the discount rate on member bank borrowings
will have on our future business and earnings or those of First Bank.

EESA. In response to the financial crisis
affecting
the banking system and financial markets, on October 3, 2008, the EESA was
signed into law and established the TARP. As part of the TARP, the U.S.
Treasury provided up to $700.0 billion of funding to eligible financial
institutions through the purchase of capital stock and other financial
instruments for the purpose of stabilizing and providing liquidity to the U.S. financial
markets. In connection with EESA, there have been numerous actions by the
Federal Reserve Board, Congress, the U.S. Treasury, the FDIC and others to
further the economic and banking industry stabilization efforts under EESA. It
remains unclear at this time if further legislative and regulatory measures
will be implemented under EESA and what impact those measures may have on us.

ARRA. The American Recovery and Reinvestment
Act of
2009, or ARRA, was signed into law on February 17, 2009, by President Obama.
ARRA includes a wide variety of programs intended to stimulate the economy and
provide for extensive infrastructure, energy, health, and education needs. In
addition, ARRA imposes certain new executive compensation and corporate
expenditure limits on all current and future TARP recipients, including us,
until the institution has repaid the U.S. Treasury, which repayment is now
permitted under ARRA without penalty and without the need to raise new capital,
subject to the U.S. Treasurys consultation with the TARP recipients primary
regulatory agency.

Employees

As
of March 25, 2009, we employed approximately 2,340 employees. None of the
employees are subject to a collective bargaining agreement. We consider our
relationships with our employees to be good.

Item 1A.
Risk
 FactorsReaders
of our Annual Report on Form 10-K should consider the risk factors described
below in conjunction with the other information included in this Annual Report
on Form 10-K, including Managements Discussion and Analysis of Financial
Condition and Results of Operations, our Selected Financial Data, our
consolidated financial statements and the related notes thereto, and the
financial and other data contained elsewhere in this report. See also Special
Note Regarding Forward-Looking Statements and Factors that Could Affect Future
Results appearing at the beginning of this report.

The enactment of the EESA and the ARRA, and governmental
actions pursuant to them, may significantly affect our financial condition,
results of operations and liquidity.EESA, which established the TARP, was signed into law on October 3,
2008. As part of the TARP, the U.S. Treasury provided up to $700 billion of
funding to eligible financial institutions through the purchase of capital
stock and other financial instruments for the purpose of stabilizing and providing
liquidity to the U.S. financial markets. Then, on February 17, 2009, President
Obama signed ARRA, a

11

sweeping economic stimulus and recovery package intended
to stimulate the economy and provide for broad infrastructure, energy, health,
and education needs. There can be no assurance as to the actual impact that
EESA or its programs, including the TARP and ARRA or its programs, will have on
the national economy or the financial markets. The failure of these significant
legislative measures to help stabilize the financial markets and a continuation
or worsening of current financial market conditions could materially and
adversely affect our business, financial condition, results of operations, or
our access to credit. There have been numerous actions undertaken in connection
with or following EESA and ARRA by the Federal Reserve Board, Congress, the
U.S. Treasury, the FDIC and others in efforts to address the current liquidity
and credit crisis in the financial industry that followed the sub-prime
mortgage market meltdown which began in 2007. These measures include homeowner
relief that encourages loan restructuring and modification; the establishment
of significant liquidity and credit facilities for financial institutions and
investment banks; the lowering of the federal funds rate; emergency action
against short selling practices; a temporary guaranty program for money market
funds; the establishment of a commercial paper funding facility to provide
back-stop liquidity to commercial paper issuers; and coordinated international
efforts to address illiquidity and other weaknesses in the banking sector. The
purpose of these legislative and regulatory actions is to help stabilize the U.S.
banking system. EESA, ARRA and the other regulatory initiatives described above
may not have their desired effects. If the volatility in the financial markets
continues and economic conditions fail to improve, or they worsen, our
business, financial condition and results of operations could be materially and
adversely affected.

The Company may be adversely affected by the soundness
of
other financial institutions. Financial services institutions are interrelated as a result of
trading, clearing, counterparty, or other relationships. We have exposure to
many different industries and counterparties, and routinely execute
transactions with counterparties in the financial services industry, including
commercial banks, brokers and dealers, investment banks, and other
institutional clients. Many of these transactions expose us to credit risk in
the event of a default by a counterparty or client. In addition, our credit
risk may be exacerbated when the collateral held by us cannot be realized upon
or is liquidated at prices not sufficient to recover the full amount of the
credit or derivative exposure due to us. Any such losses could have a material
adverse affect on our financial condition and results of operations.

Current levels of market volatility are unprecedented
and
may affect our ability to access capital and credit.The capital and credit markets have been
experiencing volatility and disruption for an extended period. In recent
months, the volatility and disruption has reached unprecedented levels, which
has negatively affected our ability to obtain additional sources of credit
financing and raise debt in the public market at favorable terms. If current
levels of market disruption and volatility continue or worsen, there can be no
assurance that we will not experience a further adverse effect, which may be
material, on our ability to access capital and on our business, financial
condition and results of operations. Our inability to raise additional capital
on terms satisfactory to us or at all may affect our ability to grow and would
adversely affect our financial condition, results of operations and our
regulatory capital ratios and those of First Bank.

Current market developments may adversely affect our
industry, business and results of operations.Dramatic declines in the housing market
during the prior year, with falling home prices and increasing foreclosures and
unemployment, have resulted in significant write-downs of asset values by
financial institutions, including government-sponsored entities and major
commercial and investment banks. These write-downs, initially of
mortgage-backed securities but spreading to credit default swaps and other
derivative securities have caused many financial institutions to seek
additional capital, to merge with larger and stronger institutions and, in some
cases, to fail. Reflecting concern about the stability of the financial markets
generally and the strength of counterparties, many lenders and institutional
investors have reduced, and in some cases, ceased to provide funding to
borrowers including other financial institutions. The resulting lack of
available credit, lack of confidence in the financial sector, increased
volatility in the financial markets and reduced business activity has affected
and could materially and adversely affect our business, financial condition and
results of operations in the future.

The Company and First Bank have entered into informal
agreements with the Federal Reserve Bank of St. Louis and the Missouri Division
of Finance.As further
described in Supervision and Regulation  Regulatory Matters, the Company
and First Bank have entered into informal agreements with the FRB and the MDOF,
or the Regulatory Agreements. Although the Company cannot predict what the
impact of not complying with the Regulatory Agreements would be, failure to
comply could have a material adverse effect on the Companys financial
condition, results of operations and cash flows. Furthermore, under the
Regulatory Agreements, the Company and First Bank must receive approval from
the relevant agency prior to paying any dividends on its capital stock or
making any interest payments on the Companys outstanding subordinated
debentures, which are the source of distributions to holders of trust preferred
securities. Although the Company has received approval to make its next regular
dividend and interest payments, our ability to make subsequent payments depends
on the prior approval of the appropriate regulatory agency.

12

Because of our participation in the TARP under the EESA,
we
are subject to several restrictions, including restrictions on our ability to
declare or pay dividends and repurchase capital stock and trust preferred
securities, as well as restrictions on compensation paid to our executive
officers. Pursuant to the terms of the Purchase
Agreement, our ability to declare or pay dividends on any of our shares is
limited. Specifically, we are unable to make any distributions on our trust
preferred securities or dividends on pari
passupreferred shares if we are in arrears on the payment of
dividends on our Class C Preferred Stock and Class D Preferred Stock. In
addition, we are not permitted to increase dividends on our common shares above
the amount of the last quarterly cash dividend per share declared without the
U.S. Treasurys approval unless all of the Class C Preferred Stock and Class D
Preferred Stock has been redeemed or transferred by the U.S. Treasury to
unaffiliated third parties. Further, our trust preferred securities and pari passu preferred shares may not be
repurchased if we are in arrears on the payment of Class C Preferred Stock and
Class D Preferred Stock dividends. The terms of the Purchase Agreement allow
the U.S. Treasury to impose additional restrictions, including those on
dividends and including unilateral amendments required to comply with changes
in applicable federal law. We are unable to predict the potential impact of any
such amendments. We expect the U.S. Treasury, our bank regulators and other
agencies of the U.S. Government to monitor our use of the TARP proceeds. Our
failure to comply with the terms and conditions of the program or the Purchase
Agreement may subject us to a regulatory enforcement action or legal
proceedings brought by the U.S. Government.

In
addition, pursuant to the terms of the Purchase Agreement, we adopted the U.S.
Treasurys current standards for executive compensation and corporate
governance for the period during which the U.S. Treasury holds our equity
securities issued pursuant to the Purchase Agreement. These standards generally
apply to our Chief Executive Officer, Chief Financial Officer and the three
next most highly compensated senior executive officers. The standards include
(i) ensuring that incentive compensation plans and arrangements for senior
executive officers do not encourage unnecessary and excessive risks that
threaten our value; (ii) required clawback of any bonus or incentive
compensation paid (or under a legally binding obligation to be paid) to a
senior executive officer based on materially inaccurate financial statements or
other materially inaccurate performance metric criteria; (iii) prohibition on
making golden parachute payments to senior executive officers; and (iv) an
agreement not to claim a deduction, for federal income tax purposes, for
compensation paid to any of our senior executive officers in excess of $500,000
per year. The change to the tax deductibility limit on executive compensation
will likely increase the overall cost of our compensation programs in future
periods.

The
adoption of ARRA on February 17, 2009 imposed certain new executive
compensation and corporate expenditure limits on all current and future TARP
recipients, including the Company, until the institution has repaid the U.S.
Treasury, which is now permitted under ARRA without penalty and without the
need to raise new capital, subject to the U.S. Treasurys consultation with the
TARP recipients primary regulatory agency. The executive compensation
standards are more stringent than those previously in effect under the TARP or
those previously proposed by the U.S. Treasury and will affect a larger number
of the Companys employees, but it is not yet clear how these executive
compensation standards will relate to the similar standards announced by the U.S.
Treasury in its guidelines on February 4, 2009, or whether the standards will
be considered effective immediately or only after implementing regulations are
issued by the U.S. Treasury. The new standards include (but are not limited to)
(i) prohibitions on bonuses, retention awards and other incentive compensation,
other than restricted stock grants which do not fully vest during the TARP
period up to one-third of an employees total annual compensation, (ii)
prohibitions on golden parachute payments for departure from a company, (iii)
an expanded clawback of bonuses, retention awards, and incentive compensation
if payment is based on materially inaccurate statements of earnings, revenues,
gains or other criteria, (iv) prohibitions on compensation plans that encourage
manipulation of reported earnings, (v) retroactive review of bonuses, retention
awards and other compensation previously provided by TARP recipients if found
by the U.S. Treasury to be inconsistent with the purposes of TARP or otherwise
contrary to public interest, (vi) required establishment of a company-wide
policy regarding excessive or luxury expenditures, and (vii) inclusion in a
participants proxy statements for annual shareholder meetings of a nonbinding
Say on Pay shareholder vote on the compensation of executives. The impact of
the new executive compensation standards may result in the loss of current
members of our management team and could adversely affect our ability to
compete for talent in the industry.

Negative perception could adversely affect our business,
impacting our financial condition, results of operations and cash flows.Negative perception or publicity is
inherent
in any business. Although the Company takes steps to minimize reputation risk
in dealing with customers and other constituencies, the Company is inherently
exposed to the risk of negative perception by the public and our customers as a
result of, but not limited to, our participation in the TARP under the EESA and
as a result of actions imposed by our regulators. The risk of negative
perception by the public and our customers may adversely affect the Companys
ability to maintain and attract customers.

We could be required to write down goodwill and other
intangible assets.When
we acquire a business, a portion of the purchase price of the acquisition is
allocated to goodwill and other identifiable intangible assets. The amount of

13

the
purchase price that is allocated to goodwill and other intangible assets is
determined by the excess of the purchase price over the net identifiable assets
acquired. At December 31, 2008, our goodwill and other identifiable intangible
assets were $306.8 million. Under current accounting standards, if we determine
goodwill or intangible assets are impaired, we are required to write down the
carrying value of these assets. We conduct a review at least annually to
determine whether goodwill and other identifiable intangible assets are
impaired. We completed such an impairment analysis in 2008 and concluded that
no impairment charge was necessary for the year ended December 31, 2008. We
cannot provide assurance, however, that we will not be required to record an
impairment charge in the future. Any impairment charge would have an adverse
effect on our financial condition and results of operations.

Weakness in the real estate market has adversely
affected us
and may continue to do so. As discussed under
Managements Discussion and Analysis of Financial Condition and Results of
Operations Loans and Allowance for Loan Losses, we have experienced
deterioration within our residential real estate mortgage loan portfolio
throughout 2008, primarily in our Alt A and sub-prime loan portfolios. Our
residential real estate mortgage loans were $1.55 billion at December 31, 2008,
representing 18.1% of our loan portfolio. The effects of ongoing mortgage
market challenges, as well as the ongoing correction in residential real estate
market prices and reduced levels of home sales could result in further price
reductions in single family home values, adversely affecting the value of
collateral securing mortgage loans held, mortgage loan originations and gains
recognized on the sale of mortgage loans. In the event the allowance for loan
losses is insufficient to cover such losses, our earnings, capital, liquidity
and financial condition may be adversely affected.

Our emphasis on commercial real estate lending and real
estate construction and development lending has increased our credit risk. A substantial portion of our loans are
secured by commercial real
estate. Commercial real estate and real estate construction and development
loans were $2.56 billion and $1.57 billion, respectively, at December 31, 2008,
representing 29.8% and 18.3%, respectively, of our loan portfolio. As discussed
under Managements Discussion and Analysis of Financial Condition and Results
of Operations Loans and Allowance for Loan Losses, we have experienced
increasing amounts of nonperforming loans within our real estate construction
and development portfolio and commercial real estate portfolio, reflective of
declining market conditions surrounding land acquisition and development loans
as a result of increased developer inventories, slower lot and home sales, and
declining market values. Adverse developments affecting real estate in one or
more of our markets could further increase the credit risk associated with our
loan portfolio.

We may be required to make further increases in our
provisions for loan losses and to charge off additional loans in the future,
which could adversely affect our results of operations. We maintain an allowance for loan losses,
which is a reserve established through a provision for loan losses charged to
expense, that represents managements best estimate of probable incurred losses
within the existing portfolio of loans. The allowance, in the judgment of
management, is necessary to reserve for estimated loan losses and risks
inherent in the loan portfolio. The level of the allowance reflects
managements continuing evaluation of specific credit risks; loan loss
experience; current loan portfolio quality; present economic, political and
regulatory conditions; industry concentrations and other unidentified losses
inherent in the current loan portfolio. The determination of the appropriate
level of the allowance for loan losses inherently involves a high degree of
subjectivity and judgment and requires us to make significant estimates of
current credit risks and future trends, all of which may undergo material
changes. Changes in economic conditions affecting borrowers, new information
regarding existing loans, identification of additional problem loans and other
factors, both within and outside of our control, may require us to increase our
allowance for loan losses. Increases in nonperforming loans have a significant
impact on our allowance for loan losses. If current trends in the real estate
markets continue, we could continue to experience increased delinquencies and
credit losses, particularly with respect to real estate construction and land acquisition
and development loans and one-to-four family residential mortgage loans.
Moreover, we expect that the current recession will negatively impact economic
conditions in our market areas and that we could experience significantly
higher delinquencies and credit losses.

In
addition, bank regulatory agencies periodically review our allowance for loan
losses and may require us to increase the provision for loan losses or to
recognize further loan charge-offs, based on judgments that differ from those of
management. If loan charge-offs in future periods exceed our allowance for loan
losses, we will need to record additional provisions to increase our allowance
for loan losses. Furthermore, growth in our loan portfolio would generally lead
to an increase in the provision for loan losses. Any increases in our allowance
for loan losses will result in a decrease in net income and capital, and may
have a material adverse effect on our financial condition, results of
operations and cash flows.

Our controls and procedures may fail or be circumvented.Our management regularly reviews and updates
the Companys internal controls, disclosure controls and procedures, and
corporate governance policies and procedures. Any system of controls, however
well designed and operated, is based in part on certain assumptions and can
provide only reasonable, not absolute, assurances that the objectives of the
system are met. Any failure or

14

circumvention
of the controls and procedures or failure to comply with regulations related to
controls and procedures could have a material adverse effect on our business,
financial condition and results of operations.

We are subject to credit quality risks and our credit
policies may not be sufficient to avoid losses.We are subject to the risk of losses
resulting from the failure of borrowers, guarantors and related parties to pay
interest and principal amounts on their loans. Although we maintain credit
policies and credit underwriting and monitoring and collection procedures,
these policies and procedures may not prevent losses, particularly during
periods in which the local, regional or national economy suffers a general
decline. If borrowers fail to repay their loans, our financial condition and
results of operations will be adversely affected.

We rely on dividends from our subsidiaries for most of
our
revenue.First Banks
is a separate and distinct legal entity from our subsidiaries. We receive
substantially all of our revenue from dividends from our subsidiaries. These
dividends are the principal source of funds to pay dividends on our preferred
stock and interest and principal on our debt. Various federal and/or state laws
and regulations limit the amount of dividends that First Bank, and certain
nonbank subsidiaries may pay to First Banks. In the event First Bank is unable
to pay dividends, we may not be able to service our debt (including our
subordinated debentures issued in connection with the issuance of our
outstanding trust preferred securities), pay obligations or pay dividends on
our preferred stock, including the preferred stock we issued to the U.S.
Treasury. The inability to receive dividends from First Bank could have a
material adverse effect on our business, financial condition and results of
operations. See further discussion under Item 1. Business Supervision and Regulation.

Concern of customers over deposit insurance may cause a
decrease in deposits.
With recent increased concerns about bank failures, customers increasingly are
concerned about the extent to which their deposits are insured by the FDIC.
Customers may withdraw deposits in an effort to ensure that the amount they
have on deposit with their bank is fully insured. Decreases in deposits may
adversely affect our funding costs and net income.

Liquidity risk could impair our ability to fund
operations
and jeopardize our financial condition. Liquidity is essential to our business. An
inability to raise funds through traditional deposits, brokered deposits,
borrowings, the sale of securities or loans and other sources could have a
substantial negative effect on our liquidity. Our access to funding sources in
amounts adequate to finance our activities and on terms which are acceptable to
us could be impaired by factors that affect us specifically or the financial
services industry or economy in general. Factors that could detrimentally
impact our access to liquidity sources include a decrease in the level of our
business activity as a result of a downturn in the markets in which our loans
are concentrated or adverse regulatory action against us. Our ability to borrow
could also be impaired by factors that are not specific to us, such as a
disruption in the financial markets or negative views and expectations about
the prospects for the financial services industry in light of the recent
turmoil faced by banking organizations and the continued deterioration in
credit markets.

We
rely on commercial and retail deposits, advances from the FHLB of Des Moines
and other borrowings to fund our operations. Although we have historically been
able to replace maturing deposits and advances as necessary, we might not be
able to replace such funds in the future if, among other things, our results of
operations or financial condition or the results of operations or financial condition
of the FHLB of Des Moines or market conditions were to change.

Although
we consider these sources of funds adequate for our liquidity needs, there can
be no assurance in this regard and we may be compelled to seek additional
sources of financing in the future. Likewise, we may seek additional debt in
the future to achieve our business objectives, in connection with future
acquisitions or for other reasons. There can be no assurance additional
borrowings, if sought, would be available to us or, if available, would be on
terms acceptable to us. The ability of banks and holding companies to raise
capital or borrow in the debt markets has been negatively affected by the
recent adverse economic trend. If additional financing sources are unavailable
or not available on reasonable terms, our financial condition, results of
operations and future prospects could be materially adversely affected.

We
actively monitor the depository institutions that hold our federal funds sold
and cash operating account balances. We are currently not able to provide
assurances that access to our cash equivalents and federal funds sold will not
be impacted by adverse conditions in the financial markets. Our emphasis is
primarily on safety of principal and we seek to diversify our cash balances and
federal funds sold among counterparties to minimize exposure to any one of
these entities. The financial statements and other relevant data of the
counterparties are routinely reviewed as part of our asset/liability management
process. Balances in our accounts with financial institutions in the U.S. may
exceed the FDIC insurance limits. While we monitor and adjust the balances in
our accounts as appropriate, these balances could be impacted if the financial
institutions fail and could be subject to other adverse conditions in the
financial markets.

Geographic distance between our operations increases
operating costs and makes efforts to standardize operations more difficult. We operate banking offices in
California,
Florida, Illinois, Missouri and Texas. The noncontiguous

15

nature
of many of our geographic markets increases operating costs and makes it more
difficult for us to standardize our business practices and procedures. As a
result of our geographic dispersion, we face the following challenges, among
others: (a) operation of information technology and item processing functions
at remote locations including the transportation of documents and increased
communications line charges from various service providers; (b) control of correspondent
accounts, reserve balances and wire transfers in different time zones; (c)
familiarizing personnel with our business environment, banking practices and
customer requirements at geographically dispersed locations; (d) providing
administrative support, including accounting, human resources, credit
administration, loan servicing, internal audit and credit review at significant
distances; and (e) establishing and monitoring compliance with our corporate
policies and procedures in different areas.

Decreases in interest rates could have a negative impact
on
our profitability.
Our earnings are principally dependent on our ability to generate net interest
income. Net interest income is affected by many factors that are partly or
completely beyond our control, including competition, general economic
conditions and the policies of regulatory authorities, including the monetary
policies of the Federal Reserve. Under our current interest rate risk profile,
our net interest income has been and could be negatively affected by a further
decline in interest rates, as further discussed under Managements Discussion
and Analysis of Financial Condition and Results of Operations Interest Rate
Risk Management.

Our interest rate risk hedging activities may not
effectively
reduce volatility in earnings. To offset the risks associated with the effects of changes in market
interest rates, we periodically enter into transactions designed to hedge our
interest rate risk. The accounting for such hedging activities under U.S.
generally accepted accounting principles requires our hedging instruments to be
recorded at fair value. The effect of certain of our hedging strategies may
result in volatility in our quarterly and annual earnings as interest rates
change or as the volatility in the underlying derivatives markets increases or
decreases. The volatility in earnings is primarily a result of marking to
market certain of our hedging instruments and/or modifying our overall hedge
position, as further discussed under Managements Discussion and Analysis of
Financial Condition and Results of Operations  Interest Rate Risk Management.

The financial services business is highly competitive,
and
we face competitive disadvantages because of our size and the nature of banking
regulation. We
encounter strong direct competition for deposits, loans and other financial
services in all of our market areas. Our larger competitors, which have
significantly greater resources, may have advantages over us in providing
certain services. Our principal competitors include other commercial banks,
savings banks, savings and loan associations, mutual funds, finance companies,
trust companies, insurance companies, leasing companies, credit unions,
mortgage companies, private issuers of debt obligations and suppliers of other
investment alternatives, such as securities firms and financial holding
companies. Many of our non-bank competitors are not subject to the same degree
of regulation as that imposed on bank holding companies, federally insured
banks and national or state chartered banks. As a result, such non-bank
competitors may have advantages over us in providing certain services.

We may not be able to implement technological change as
effectively as our competitors. The financial services industry has undergone in the past and
continues to undergo rapid technological change related to delivery and
availability of products and services and operating efficiencies. In many
instances technological improvements require significant capital expenditures,
and many of our larger competitors have significantly greater resources to
absorb such capital expenditures than we may have available. As such, we may be
at a competitive disadvantage in our ability to retain existing customers and
compete for new customers in the marketplace.

We operate in a highly regulated environment. Recently
enacted, proposed and future legislation and regulations may increase our cost
of doing business. We
and our subsidiaries are subject to extensive federal and state legislation,
regulation and supervision. Recently enacted, proposed and future legislation
and regulations have had and are expected to continue to have a significant
impact on the financial services industry. Expansion of our banking franchise
into Florida subjects us to legislation and regulations applicable to that
state, which may also increase our costs of doing business in that market. Some
of the legislative and regulatory changes, including the Sarbanes-Oxley Act,
the USA Patriot Act, the EESA and the ARRA, have and are expected to continue
to increase our costs of doing business, particularly personnel and technology
expenses necessary to maintain compliance with the expanded regulatory
requirements. Additionally, the legislative and regulatory changes could reduce
our ability to compete in certain markets, as further discussed under Business
 Supervision and Regulation.

Our information systems could suffer an interruption or
breach in security. Our operations are heavily reliant upon
our communication and information systems. A failure, interruption or breach in
security of these systems could result in failures or disruptions in our
customer relationship management, general ledger, deposits, loan and other
systems. While we have policies and procedures designed to prevent or limit the
impact of any such failure, interruption or security breach, there can be no
assurance that any such failure, interruption or security breach will not
occur. Any such failure, interruption or security breach could adversely affect
our operations and financial

16

condition
including a resulting loss in customer business, damage to our reputation, and
possible exposure to regulatory scrutiny and litigation, any of which could
have a material adverse affect on our financial condition and results of
operations.

Severe weather, natural disasters, acts of war or
terrorism,
and other external events could significantly impact our business.Severe weather, natural disasters, acts of
war or terrorism, and other adverse external events could have a significant
impact on our ability to conduct business. Such events could affect the
stability of our deposit base, impair the ability of borrowers to repay
outstanding loans, impair the value of collateral securing loans, cause
significant property damage, result in loss of revenue, and/or cause us to
incur additional expenses. Although we have established policies and procedures
addressing these types of events, the occurrence of any such event could have a
material adverse effect on our business, financial condition and results of
operations.

We pursue acquisitions to supplement our internal
growth.
Acquisitions involve varying degrees of inherent risk that could affect our
profitability.
Acquisitions of other banks or businesses may expose us to asset quality
problems, higher than anticipated expenses, operational problems or unknown or
contingent liabilities, including litigation, of the entities we acquire. If
the quantity of these problems exceeds our estimates, our earnings and
financial condition may be adversely affected. Furthermore, acquisitions
generally require integration of the acquired entitys systems and procedures
with ours in order to make the transaction economically feasible. This
integration process is complicated and time consuming and can also be
disruptive to the customers of the acquired business. If the integration
process is not conducted successfully and with minimal effect on the business
and its customers, we may not realize the anticipated economic benefits of
particular acquisitions within the expected time frame, and we may lose higher
than expected numbers of customers or employees of the acquired business.

Competition for acquisitions in the financial services
industry and our status as a privately held company make our efforts to grow
through acquisitions difficult. We face intense competition from other financial institutions in
pursuing acquisitions, particularly related to price. Prices at which
acquisitions can be made fluctuate with market conditions. We have experienced
times during which acquisitions could not be made in specific markets at prices
our management considered acceptable, and we expect that this situation will
happen again. Because of our intention to remain a closely held company, we do
not use our common stock to make acquisitions. Our use of cash as acquisition
consideration can be a disadvantage in acquisitions relative to other
prospective acquirers in those instances in which selling stockholders desire a
tax-free exchange.

Item 1B.
Unresolved
 Staff CommentsNone.

Item 2.
PropertiesWe
own our office building, which houses our principal place of business, located
at 135 North Meramec, Clayton, Missouri 63105. The property is in good
condition and consists of approximately 60,353 square feet, of which
approximately 1,791 square feet is currently leased to others. Of our other 216
offices and four operations and administrative facilities at December 31, 2008,
116 are located in buildings that we own and 104 are located in buildings that
we lease.

We
consider the properties at which we do business to be in good condition
generally and suitable for our business conducted at each location. To the
extent our properties or those acquired in connection with our acquisition of
other entities provide space in excess of that effectively utilized in the
operations of First Bank, we seek to lease or sub-lease any excess space to
third parties. Additional information regarding the premises and equipment
utilized by First Bank appears in Note 7 to our consolidated financial
statements appearing elsewhere in this report.

Item 3.
Legal
 ProceedingsThe
information required by this item is set forth in Item 8 under Note 24,
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. Our management, in consultation with legal counsel, believes the
ultimate resolution of these existing proceedings will not have a material
adverse effect on our business, financial condition or results of operations.

Item 4.
Submission
 of Matters to a Vote of Security HoldersOn
December 24, 2008, in lieu of a special meeting, the shareholders of the
Companys Class A and Class B preferred stock adopted resolutions and consented
to the following actions via unanimous written consent with respect to the TARP
transaction:

Ø
First Banks filed
 Certificates of Designation for the purpose of amending its Restated Articles
 of Incorporation, as amended, to fix the designation and number of shares of
 such series, and the voting and17

other powers, preferences
 and relative, participating, optional or other rights, and the qualifications,
 limitations and restrictions thereof, of the shares of such series of a new
 series of up to 295,400 shares of Fixed Rate Cumulative Perpetual Preferred
 Stock, Class C, par value $1.00 per share and liquidation preference of
 $1,000.00 per share and a new series of up to 14,770 shares of Fixed Rate
 Cumulative Perpetual Preferred Stock, Class D, par value $1.00 per share and
 liquidation preference of $1,000.00 per share in connection with the Purchase
 Agreement;Ø
First Banks execution of
 the Purchase Agreement and its issuance of $295.4 million of Class C
 Preferred Stock to the U.S. Treasury and the Warrant exercisable by the U.S.
 Treasury for shares of Class D Preferred Stock; andØ
First Banks issuance of
 Class D Preferred Stock upon the U.S. Treasurys exercise of the Warrant
 pursuant to the terms of the Warrant.PART II

Item 5.
Market for Registrants Common Equity, Related
Stockholder
 Matters and Issuer Purchases of Equity SecuritiesMarket Information. There is no
established public trading
market for our common stock. Various trusts, which were established by and are
administered by and for the benefit of Mr. James F. Dierberg, our Chairman of
the Board, and members of his immediate family, own all of our voting stock.

Dividends. In recent years, we have
paid minimal
dividends on our Class A Convertible Adjustable Rate Preferred Stock and our
Class B Non-Convertible Adjustable Rate Preferred Stock, and have paid no
dividends on our Common Stock. Beginning in 2009, we will pay dividends on our
newly issued Class C Preferred Stock and our newly issued Class D Preferred
Stock, subject to regulatory approval. Our ability to pay dividends is limited
by regulatory requirements and by the receipt of dividend payments from First
Bank, which is also subject to regulatory requirements. First Bank has agreed
not to declare or pay any dividends or make certain other payments to us
without the prior consent of the MDOF and the FRB, as previously discussed
under Supervision and Regulation  Regulatory Matters. The dividend
limitations are further described in Note 18 and Note 22 to our consolidated
financial statements appearing elsewhere in this report.

18

Item 6.
Selected Financial
DataThe selected consolidated financial data set forth below are derived
from our consolidated financial statements. This information is qualified by
reference to our consolidated financial statements appearing elsewhere in this
report. This information should be read in conjunction with such consolidated
financial statements, the related notes thereto and Managements Discussion
and Analysis of Financial Condition and Results of Operations.

As of
 or For the Year Ended December 31, (1)2008

2007

2006

2005

2004(dollars
 expressed in thousands, except share and per share data)Income
 Statement Data:Interest income

$
592,607


697,556


642,435


490,844


394,782Interest expense


249,501


316,722


265,089


169,439


93,466Net interest
 income


343,106


380,834


377,346


321,405


301,316Provision for
 loan losses


368,000


65,056


12,000


(4,000
)

25,750Net interest
 (loss) income after provision for loan losses


(24,894
)

315,778


365,346


325,405


275,566Noninterest
 income


89,333


83,187


108,321


94,316


85,203Noninterest
 expense


334,544


344,352


315,565


274,235


233,218(Loss) income
 before provision for income taxes and minority interest in (loss) income of
 subsidiaries


(270,105
)

54,613


158,102


145,486


127,551Provision for
 income taxes


18,208


5,075


51,872


51,464


45,064(Loss) income
 before minority interest in (loss) income of subsidiaries


(288,313
)

49,538


106,230


94,022


82,487Minority interest
 in (loss) income of subsidiaries


(1,158
)

78


(587
)

(1,287
)

Net (loss) income

$
(287,155
)

49,460


106,817


95,309


82,487Dividends:Preferred stock

$
786


786


786


786


786Common stock














Ratio of total
 dividends declared to net (loss) income


(0.27
)%

1.59
%

0.74
%

0.82
%

0.95
%Per
 Share Data:Earnings (loss)
 per common share:Basic

$
(12,169.46
)

2,057.14


4,481.23


3,994.88


3,453.01Diluted


(12,169.46
)

2,055.42


4,426.83


3,939.79


3,402.23Weighted average
 shares of common stock outstanding


23,661


23,661


23,661


23,661


23,661Balance
 Sheet Data:Investment
 securities

$
622,926


1,019,271


1,464,946


1,340,783


1,813,349Loans, net of
 unearned discount


8,592,975


8,886,184


7,671,768


7,025,587


6,141,688Total assets


10,783,154


10,902,470


10,162,803


9,173,678


8,735,130Total deposits


8,741,520


9,149,193


8,443,086


7,541,831


7,151,970Other borrowings


575,133


409,616


398,639


558,184


611,401Notes payable





39,000


65,000


100,000


15,000Subordinated
 debentures


353,828


353,752


297,369


212,345


269,440Common
 stockholders equity


558,509


829,014


769,707


653,087


576,639Total
 stockholders equity


866,972


842,077


782,770


666,150


589,702Earnings
 Ratios:Return on average
 assets


(2.66
)%

0.48
%

1.11
%

1.08
%

1.09
%Return on average
 stockholders equity


(35.34
)

6.11


15.04


15.28


14.75Net interest
 margin (2)


3.51


4.04


4.28


3.96


4.38Noninterest
 expense to average assets


3.10


3.33


3.28


3.11


3.09Efficiency ratio (3)


77.36


74.21


64.98


65.97


60.34Tangible
 efficiency ratio (3)


74.79


71.53


63.29


64.80


59.58Asset
 Quality Ratios:Allowance for
 loan losses to loans


2.56
%

1.89
%

1.90
%

1.93
%

2.45
%Nonperforming
 loans to loans (4)


5.15


2.28


0.64


1.38


1.40Allowance for
 loan losses to nonperforming loans (4)


49.77


83.27


299.05


139.23


175.65Nonperforming
 assets to loans and other real estate (5)


6.15


2.40


0.72


1.41


1.46Net loan charge-offs
 to average loans


3.54


0.70


0.09


0.21


0.45Capital
 Ratios:Average
 stockholders equity to average assets


7.52
%

7.83
%

7.39
%

7.08
%

7.41
%Total risk-based
 capital ratio


12.11


9.84


10.04


9.97


10.45Leverage ratio


8.04


7.99


7.89


7.98


7.70(1)
The
 comparability of the selected data presented is affected by the acquisitions
 of 12 banks, an insurance brokerage agency, an insurance premium financing
 company, a loan origination business and five branch offices during the
 five-year period ended December 31, 2008. The selected data includes the
 financial position and results of operations of each acquired entity only for
 the periods subsequent to its respective date of acquisition.(2)
Net
 interest margin is the ratio of net interest income (expressed on a
 tax-equivalent basis) to average interest-earning assets.(3)
Efficiency
 ratio is the ratio of noninterest expense to the sum of net interest income
 and noninterest income. Tangible efficiency ratio is the ratio of noninterest
 expense (excluding amortization of intangible assets) to the sum of net
 interest income and noninterest income.(4)
Nonperforming
 loans consist of nonaccrual loans and certain loans with restructured terms.(5)
Nonperforming
 assets consist of nonperforming loans and other real estate.19

Item 7.
Managements Discussion and Analysis of Financial Condition
and Results of OperationsThe following presents managements discussion and analysis of our
financial condition and results of operations as of the dates and for the
periods indicated. This discussion should be read in conjunction with our
Selected Financial Data, our consolidated financial statements and the
related notes thereto, and the other financial data appearing elsewhere in this
report. This discussion set forth in Managements Discussion and Analysis of
Financial Condition and Results of Operations contains forward-looking
statements with respect to our financial condition, results of operations and
business. These forward-looking statements are subject to certain risks and
uncertainties, not all of which can be predicted or anticipated. Various
factors may cause our actual results to differ materially from those contemplated
by the forward-looking statements herein. We do not have a duty to and will not
update these forward-looking statements. Readers of our Annual Report on Form
10-K should therefore consider these risks and uncertainties in evaluating
forward-looking statements and should not place undue reliance on
forward-looking statements. See Special Note Regarding Forward-Looking
Statements and Factors that Could Affect Future Results appearing at the
beginning of this report and Item 1A ─ Risk Factors, appearing elsewhere
in this report.

RESULTS
OF OPERATIONS

Overview

We recorded a net loss of $287.2 million for the year ended December
31, 2008, compared to net income of $49.5 million and $106.8 million for the
years ended December 31, 2007 and 2006, respectively. Our return on average
assets and our return on average stockholders equity were (2.66%) and
(35.34%), respectively, for the year ended December 31, 2008, compared to 0.48%
and 6.11%, respectively, for 2007, and 1.11% and 15.04%, respectively, for
2006. Our earnings levels reflect the following:

Ø
A provision for loan losses of $368.0 million for the year ended
 December 31, 2008, compared to $65.1 million for the year ended December 31,
 2007 and $12.0 million in 2006;Ø
Net interest income of $343.1 million for the year ended December 31,
 2008, compared to $380.8 million in 2007 and $377.3 million in 2006, which
 contributed to a decline in our net interest margin to 3.51% for the year
 ended December 31, 2008, compared to 4.04% in 2007 and 4.28% in 2006;Ø
Noninterest income of $89.3 million for the year ended December 31,
 2008, compared to $83.2 million in 2007 and $108.3 million in 2006;Ø
Noninterest expense of $334.5 million for the year ended December 31,
 2008, compared to $344.4 million in 2007 and $315.6 million in 2006; andØ
A provision for income taxes of $18.2 million for the year ended
 December 31, 2008, compared to $5.1 million in 2007 and $51.9 million in
 2006.The increase in the provision for loan losses in 2008 and 2007 was driven
by increases in net loan charge-offs of $259.4 million and $50.0 million,
respectively, and increases in our nonperforming loans of $240.2 million and
$153.5 million, respectively, resulting from continued deterioration within our
real estate construction and development and one-to-four family residential
loan portfolios as further discussed under Provision for Loan Losses and
Loans and Allowance for Loan Losses.

The decline in our net interest income and net interest margin in 2008
resulted from an increase in nonaccrual loans of $215.6 million during 2008 and
a 500 basis point aggregate decrease in the prime lending rate, from September
2007 through December 2008, coupled with a significant decline in the London
Interbank Offered Rate, or LIBOR, during the same period; partially offset by a
decrease in deposit and other interest-bearing liability costs. We are
currently in an asset-sensitive balance sheet position and, as such, interest
rate cuts by the Federal Reserve have an immediate short-term negative effect
on our net interest income and net interest margin until we can fully re-price
our deposits to reflect current market interest rates, as further discussed
under Net Interest Income. The decline in our net
interest margin in 2007 resulted from an increase in higher priced deposit
accounts and pressures on loan yields as a result of competitive conditions
within our markets.

The increase in our noninterest income in 2008 primarily resulted from
an increase in gains on loans sold and held for sale, service charges on
deposit accounts and customer service fees and a gain on the extinguishment of
a term repurchase agreement, partially offset by an increase in net losses on
investment securities, a decline in investment management income and a decrease
in the fair value of servicing rights, as further discussed under Noninterest
Income. The decrease in noninterest income in 2007 primarily resulted from a
decrease in gains on loans sold and held for sale attributable to a decrease in
the volume of loans originated and sold in addition to losses of $11.4 million
in 2007 related to repurchase obligations on mortgage loans sold with recourse.
The decrease in volume was

20

primarily attributable to the discontinuation of the origination and
subsequent sale of sub-prime mortgage loans in February of 2007, as well as
overall market disruption.

The overall decrease in the level of noninterest expense for 2008
reflects reductions in salaries and employee benefits expense attributable to
decreased staffing levels in our mortgage banking division and the completion
of certain other staff reductions in 2007 and 2008, as well as reduced
charitable contributions expense and other profit improvement initiatives that
were implemented in order to reduce our noninterest expense levels. These
decreases were partially offset by increases in occupancy and furniture and
equipment expenses, legal, examination and professional fees, expenses on other
real estate properties and FDIC insurance assessment premiums, as further
discussed under Noninterest
Expense. The overall increase in the level of noninterest expense for 2007
reflects increased salaries and employee benefits expense, occupancy and
furniture and equipment expenses and amortization of intangible assets,
commensurate with the significant expansion of our branch office network
resulting from our acquisitions of an insurance premium financing company and
an insurance brokerage agency in 2006, the addition of 38 branch offices associated
with acquisitions in 2006 and 2007 and the opening of eight de novo branch
offices during 2007, in addition to certain other nonrecurring expenses
incurred in 2007, primarily related to profit improvement initiatives and other
items.

The change in the provision for income taxes in 2008 reflects our
decreased level of earnings and the recognition of a net deferred tax asset
valuation allowance of approximately $136.8 million against our deferred tax
assets during 2008, which had the effect of increasing our provision for income
taxes by $123.2 million during 2008, as further discussed under Provision
for Income Taxes. The decrease in the provision for income taxes in 2007
primarily reflects our decreased level of earnings as well as a partial reversal
of our deferred tax asset valuation allowance which had the effect of reducing
the provision for income taxes by $10.7 million.

Financial
Condition and Average Balances

Our average total assets were $10.81 billion for the year ended
December 31, 2008, compared to $10.34 billion and $9.61 billion for the years
ended December 31, 2007 and 2006, respectively, reflecting increases of $466.4
million and $727.8 million, respectively. Our total assets were $10.78 billion
at December 31, 2008, compared to $10.90 billion and $10.16 billion at December
31, 2007 and 2006, respectively, representing a decrease of $119.3 million and
an increase of $739.7 million, respectively. We attribute the decrease in our
total assets in 2008 to decreases in our loan and investment securities
portfolios, deferred income taxes and accrued interest receivable, partially
offset by increases in cash and short-term investments, other real estate owned
and refundable income taxes. We attribute the increase in our total assets in
2007 to a combination of organic growth and growth through acquisitions in our
target markets completed during the past few years, including our acquisition
of CFHI in late 2007 which expanded our banking franchise to the Florida
market, and the acquisition of two financial service companies, an insurance
premium financing company and an insurance brokerage company, thereby providing
our business with new opportunities, and expanding the broad array of products
and services available to our customers. Our acquisitions completed in 2006 and
2007 provided total assets at the time of the transactions of $794.3 million
and $867.3 million, in aggregate, respectively, as well as the related
intangible assets associated with these transactions.

Our interest-earning assets averaged $9.81 billion for the year ended
December 31, 2008, compared to $9.47 billion and $8.86 billion for the years
ended December 31, 2007 and 2006, respectively. Our interest-bearing
liabilities averaged $8.61 billion for the year ended December 31, 2008,
compared to $8.18 billion and $7.52 billion for the years ended December 31,
2007 and 2006, respectively. Funds available from increased average deposits of
$212.6 million and short-term borrowings, as well as increases in maturities,
calls and sales of investment securities of $796.2 million were primarily used
to fund an increase in average loans of $866.4 million in 2008. During 2007,
funds available from increased average deposits of $648.8 million were
primarily used to fund an increase in average loans of $597.5 million. Our
average other borrowings increased $200.8 million in 2008 as a result of
measures taken to improve our overall liquidity position, as further described
below. Our average other borrowings declined $12.8 million during 2007 as a
result of a net reduction of certain term repurchase agreements utilized in
conjunction with our interest rate risk management program. We issued
additional subordinated debentures in 2006 and 2007, which we primarily used to
fund our bank acquisitions and to refinance existing, higher-cost subordinated
debentures in December 2006 and April 2007 on their optional call dates, as
further described below.

Average loans, net of unearned discount, were $8.94 billion, $8.07
billion and $7.47 billion for the years ended December 31, 2008, 2007 and 2006,
respectively. The increase in average loans primarily reflects organic growth
of $255.6 million and $695.1 million in 2008 and 2007, respectively, and our
acquisitions completed in 2006 and 2007, which provided total loans, net of
unearned discount, of $545.1 million and $693.5 million, respectively. Organic
growth in our loan portfolio was partially offset by net loan charge-offs
during the periods, in addition to sales of approximately $10.8 million of our
small business loans in March 2008 and approximately $24.0 million of our
residential mortgage loans in April 2008, as well as the 2007 securitization
and subsequent sale of certain residential mortgage loans held in portfolio,
and sales and/or payoffs of certain nonperforming and other loans in our
residential

21

mortgage loan and commercial real estate loan portfolios in 2007, as
further discussed under Loans and Allowance for Loan Losses. The increase in
average loans for 2008, as compared to 2007, primarily reflects: an increase in
average real estate mortgage loans of $557.2 million; and an increase in
average commercial, financial and agricultural loans of $426.1 million;
partially offset by a decrease in average loans held for sale of $104.8 million;
and a decrease in average real estate construction and development loans of
$9.0 million. The increase in average loans for 2007, as compared to 2006,
primarily reflects: an increase in average commercial, financial and
agricultural loans of $329.7 million; an increase in average real estate
construction and development loans of $211.0 million; and an increase in
average real estate mortgage loans of $152.2 million; partially offset by a
decrease in average loans held for sale of $112.4 million.

Investment securities averaged $794.5 million for the year ended
December 31, 2008, compared to $1.27 billion for the years ended December 31,
2007 and 2006. Average short-term investments were $83.2 million in 2008,
compared to $130.3 million for 2007 and $116.6 million in 2006. Funds provided
by maturities and sales of investment securities in 2008 were primarily
invested in cash and short-term investments and used to fund organic growth in
our loan portfolio. Funds provided by maturities of investment securities in
2007 were primarily used to fund organic loan growth. Securities provided by
our bank acquisitions completed in 2006 and 2007 were $37.3 million and $74.5
million, respectively. Furthermore, we liquidated our trading portfolio in July
2007, reflecting a decrease from the portfolio balance of $81.2 million at
December 31, 2006.

Nonearning assets averaged $992.5 million, $866.9 million and $754.7
million for the years ended December 31, 2008, 2007 and 2006, respectively. The
increases during the periods are attributable to increases in: average bank
premises and equipment largely attributable to our acquisitions and capital
expenditures associated with de novo branch offices; average deferred and
refundable income taxes; average other real estate owned attributable to higher
foreclosure activity, particularly in 2008; intangible assets recognized in
conjunction with our acquisitions completed in 2006 and 2007 of $111.6 million
and $38.3 million, respectively; and the fair value of certain of our derivative
financial instruments during the periods, reflective of changes in the fair
value of these instruments and the maturity and/or termination of certain of
our interest rate swap agreements.

Deposits averaged $8.88 billion, $8.66 billion and $8.01 billion for
the years ended December 31, 2008, 2007 and 2006, respectively. The increases in average deposits in 2008 and 2007
were attributable to organic growth through deposit development programs,
including marketing campaigns and enhanced product and service offerings, and
our ongoing efforts to further develop multiple account relationships
throughout these periods. The increase was also attributable to our
acquisitions of banks and/or branches that were completed in 2006 and 2007,
which provided aggregate deposits of $475.6 million and $787.2 million,
respectively, at the time of their acquisition, partially offset by anticipated
run-off of higher rate certificates of deposit. The increase was partially
offset by the sale of our two banking offices located in Denton and Garland,
Texas in July 2007, which resulted in a decrease in deposits of $52.0 million. Average
demand and savings deposits were $5.02 billion, $4.80 billion and $4.38 billion
for the years ended December 31, 2008, 2007 and 2006, respectively. Average
time deposits were $3.85 billion, $3.86 billion and $3.63 billion for the years
ended December 31, 2008, 2007 and 2006, respectively. Our year-end deposits were $8.74 billion, $9.15 billion and $8.44
billion at December 31, 2008, 2007 and 2006, respectively, reflecting a
decrease of $407.7 million for 2008, compared to an increase of $706.1 million
for 2007. Certificates of deposit decreased $406.0 million to $3.79
billion at December 31, 2008, from $4.19 billion at December 31, 2007,
accounting for the majority of the decrease in 2008. The Florida region
accounted for $260.5 million of the decrease in our time deposits which was
anticipated as part of our planned post-acquisition strategy to improve the net
interest margin in this region. These time deposits carried substantially
higher interest rates than those in our other markets. This decrease was
partially offset by an increase in time deposits in the Certificate of Deposit
Account Registry Service, or CDARS, which increased to $117.0 million at December
31, 2008. We did not have any deposits in the CDARS program at December 31,
2007. We previously placed deposits into the CDARS program and received fee
income; however, beginning in the third quarter of 2008, we elected to receive
deposits placed into the CDARS program on a reciprocal basis, thereby
increasing our time deposits and further enhancing our overall liquidity
position.

Other borrowings averaged $590.2 million, $389.4 million and $402.2
million for the years ended December 31, 2008, 2007 and 2006, respectively. In
light of unstable market conditions, loan funding needs and current deposit
trends, we implemented several strategies during 2008 to strengthen our
liquidity position. The increase in average other borrowings in 2008 reflects an
increase in FHLB advances, FRB borrowings and an increase in our term
repurchase agreement of $20.0 million, partially offset by a decrease in daily
repurchase agreements, primarily in connection with cash management activities
of our commercial deposit customers. Other borrowings were $575.1 million and
$409.6 million at December 31, 2008 and 2007, respectively. In January, May and
July, we entered into $400.0 million of FHLB advances, in aggregate. In
September 2008, we prepaid a $100.0 million FHLB advance. Furthermore, in
November 2008, we prepaid an additional $100.0 million FHLB advance and
replaced it with a $100.0 borrowing from the FRB at a substantially lower rate,
as further described in Note 10 to our consolidated financial statements. The
decrease in the average balances for 2007 reflects the termination of a $100.0
million term

22

repurchase agreement in August 2007 that was entered into in July 2006,
partially offset by an increase in daily repurchase agreements, primarily in
connection with cash management activities of our commercial deposit customers.

Our notes payable averaged $21.6 million, $34.9 million and $88.8
million for the years ended December 31, 2008, 2007 and 2006, respectively.
Notes payable were zero and $39.0 million at December 31, 2008 and 2007,
respectively. During the second quarter of 2008, we were advanced $30.0 million
under a new secured revolving line of credit with an affiliated entity and
utilized the proceeds of the advance to terminate and repay in full all of the
obligations under our existing secured credit facility with a group of
unaffiliated financial institutions, as further described in Note 11 to our
consolidated financial statements. During the third quarter of 2008, we repaid
in full the outstanding balance on the new secured revolving line of credit.
The decrease in 2007 reflects quarterly principal installment payments and
additional prepayments of $61.0 million in aggregate on our term loan facility,
partially offset by an additional borrowing on our term loan facility of $15.0
million in November 2007 to partially fund our acquisition of CFHI, and
borrowings of $20.0 million on our revolving credit facility in December 2007.

Subordinated debentures issued to our affiliated statutory and business
trusts averaged $353.8 million, $320.8 million and $281.5 million for the years
ended December 31, 2008, 2007 and 2006, respectively. Our subordinated
debentures were $353.8 million at December 31, 2008 and 2007. During 2007, we
issued a total of $77.3 million of variable rate subordinated debentures in
private placements through four newly-formed statutory trusts as follows:

Ø
$25.8 million issued to First Bank Statutory Trust VIII on February
 23, 2007, of which a portion of the proceeds from the issuance of these
 debentures were utilized to fund our acquisition of Royal Oaks Bancshares,
 Inc., or Royal Oaks;Ø
$15.5 million issued to First Bank Statutory Trust X on August 31,
 2007;Ø
$25.8 million issued to First Bank Statutory Trust IX on September
 20, 2007; andØ
$10.3 million issued to First Bank Statutory Trust XI on September
 28, 2007.We also assumed $4.1 million of subordinated debentures with our
acquisition of Royal Oaks that Royal Oaks had previously issued to Royal Oaks
Capital Trust I. On April 22, 2007, we repaid in full $25.8 million of variable
rate subordinated debentures that were issued to First Bank Capital Trust, or
FBCT, in conjunction with the redemption of the cumulative variable rate trust
preferred securities issued by FBCT. On January 2, 2007, we repaid in full
$56.9 million of 9.0% fixed rate subordinated debentures in conjunction with
the December 31, 2006 redemption of the trust preferred securities of our
former business trust, First Preferred Capital Trust III.

Noninterest-bearing liabilities averaged $1.38 billion, $1.35 billion
and $1.38 billion for the years ended December 31, 2008, 2007 and 2006,
respectively. Average demand deposits were $1.23 billion, $1.23 billion and
$1.27 billion for the years ended December 31, 2008, 2007 and 2006,
respectively. Average other liabilities were $152.1 million, $121.5 million and
$114.7 million for the years ended December 31, 2008, 2007 and 2006,
respectively. The increase for 2008 is largely attributable to an increase in
minority interest in subsidiaries due to FCAs contribution of cash of $125.0
million into FB Holdings during the second, third and fourth quarters of 2008,
as further described in Note 19 to our consolidated financial statements. As of
December 31, 2008, First Bank owned 53.24% of FB Holdings and FCA owned the
remaining 46.76%.

Stockholders equity averaged $812.6 million, $809.8 million and $710.2
million for the years ended December 31, 2008, 2007 and 2006, respectively. Our
stockholders equity was $867.0 million and $842.1 million at December 31, 2008
and 2007, respectively. The increase for 2008 reflects:

Ø
a net loss
 of $287.2 million;Ø
a $6.3 million cumulative effect adjustment, net of tax, of a change
 in accounting principle recorded in conjunction with our election to measure
 servicing rights at fair value as permitted by Statement of Financial Accounting
 Standards Board, or SFAS, No. 156  Accounting for Servicing of Financial Assets,
 as further discussed in Note 1 and Note 6 to our consolidated financial
 statements;Ø
an increase of $11.1 million in accumulated other comprehensive
 income primarily associated with the change in unrealized gains and losses on
 our available-for-sale investment securities and derivative financial
 instruments;Ø
dividends paid of $786,000 on our Class A and Class B preferred
 stock; andØ
the issuance of $295.4 million of preferred stock to the U.S.
 Treasury on December 31, 2008.The increase for 2007 reflects: net income of $49.5 million; a $2.5
million cumulative effect of a change in accounting principle recorded in
conjunction with our adoption of Financial Accounting Standards Board, or FASB,

23

Interpretation No. 48 
Accounting for Uncertainty in Income Taxes,
an Interpretation of SFAS No. 109  Accounting
for Income Taxes, or FIN 48, as further discussed in Note 1 and Note
13 to our consolidated financial statements; and an increase of $8.2 million in
accumulated other comprehensive income, which was primarily comprised of a $9.1
million increase associated with the change in the fair value of our derivative
financial instruments; and dividends paid on our Class A and Class B preferred
stock of $786,000.
The following table sets forth, on a tax-equivalent basis,
certain information 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
years ended December 31, 2008, 2007 and 2006.

Years Ended December 31,2008

2007

2006AverageBalance

Interest
 Income/
 Expense

Yield/Rate

AverageBalance

Interest
 Income/
 Expense

Yield/Rate

AverageBalance

Interest
 Income/
 Expense

Yield/Rate(dollars expressed in thousands)ASSETSInterest-earning
assets:Loans: (1)
(2) (3)Taxable

$
8,908,343


551,645


6.19
%
$
8,039,922


625,947


7.79
%
$
7,451,016


576,579


7.74
%Tax-exempt
(4)


27,670


1,731


6.26


29,681


2,340


7.88


21,073


1,623


7.70Investment
securities:Taxable


763,458


36,681


4.80


1,233,415


61,785


5.01


1,220,785


57,017


4.67Tax-exempt
(4)


31,089


2,022


6.50


39,707


2,468


6.22


47,946


2,885


6.02Short-term
investments


83,221


1,842


2.21


130,283


6,699


5.14


116,630


5,909


5.07Total
interest-earning assets


9,813,781


593,921


6.05


9,473,008


699,239


7.38


8,857,450


644,013


7.27Nonearning assets


992,511








866,907








754,678Total
assets

$
10,806,292







$
10,339,915







$
9,612,128LIABILITIES
 AND STOCKHOLDERS EQUITYInterest-bearing
liabilities:Interest-bearing deposits:Interest-bearing demand

$
963,305


5,453


0.57
%
$
957,454


9,183


0.96
%
$
962,956


8,147


0.85
%Savings and
money market


2,826,957


59,438


2.10


2,613,745


79,804


3.05


2,152,419


53,297


2.48Time


3,853,656


148,035


3.84


3,859,552


183,900


4.76


3,631,516


155,252


4.28Total
interest-bearing deposits


7,643,918


212,926


2.79


7,430,751


272,887


3.67


6,746,891


216,696


3.21Other
borrowings


590,201


14,189


2.40


389,428


16,298


4.19


402,233


17,511


4.35Notes payable
(5)


21,591


1,328


6.15


34,932


2,426


6.94


88,843


5,530


6.22Subordinated
debentures (3)


353,790


21,058


5.95


320,840


25,111


7.83


281,500


25,352


9.01Total
interest-bearing liabilities


8,609,500


249,501


2.90


8,175,951


316,722


3.87


7,519,467


265,089


3.53Noninterest-bearing
liabilities:Demand
deposits


1,232,077








1,232,650








1,267,681Other
liabilities


152,104








121,484








114,735Total
liabilities


9,993,681








9,530,085








8,901,883Stockholders
equity


812,611








809,830








710,245Total
liabilities and stockholders equity

$
10,806,292







$
10,339,915







$
9,612,128Net interest income





344,420








382,517








378,924Interest rate spread








3.15








3.51








3.74Net interest margin
(6)








3.51
%







4.04
%







4.28
%(1)
For purposes of these
 computations, nonaccrual loans are included in the average loan amounts.(2)
Interest income on loans
 includes loan fees.(3)
Interest income and
 interest expense include the effects of interest rate swap agreements.(4)
Information is presented on
 a tax-equivalent basis assuming a tax rate of 35%. The tax-equivalent
 adjustments were approximately $1.3 million, $1.7 million and $1.6 million
 for the years ended December 31, 2008, 2007 and 2006, respectively.(5)
Interest expense on our
 notes payable includes commitment, arrangement and renewal fees. Exclusive of
 these fees, the interest rates paid were 4.42%, 6.41% and 6.11% for the years
 ended December 31, 2008, 2007 and 2006, respectively.(6)
Net interest margin is the
 ratio of net interest income (expressed on a tax-equivalent basis) to average
 interest-earning assets.24

The following
table indicates, on a tax-equivalent basis, the changes in interest income and
interest expense that are attributable to changes in average volume and changes
in average rates, in comparison with the preceding year. The change in interest
due to the combined rate/volume variance has been allocated to rate and volume
changes in proportion to the dollar amounts of the change in each.

Increase
 (Decrease) Attributable to Change in:2008
 Compared to 2007

2007
 Compared to 2006Volume

Rate

Net 
 Change

Volume

Rate

Net
 Change(dollars
 expressed in thousands)Interest earned on:Loans: (1)
 (2) (3)Taxable

$
40,955


(115,257
)

(74,302
)

45,638


3,730


49,368Tax-exempt
(4)


(151
)

(458
)

(609
)

678


39


717Investment
 securities:Taxable


(22,616
)

(2,488
)

(25,104
)

593


4,175


4,768Tax-exempt (4)


(508
)

62


(446
)

(510
)

93


(417
)Short-term
 investments


(1,884
)

(2,973
)

(4,857
)

707


83


790Total interest
 income


15,796


(121,114
)

(105,318
)

47,106


8,120


55,226Interest paid
on:Interest-bearing
 demand deposits


28


(3,758
)

(3,730
)

(46
)

1,082


1,036Savings and
money
 market deposits


3,510


(23,876
)

(20,366
)

12,791


13,716


26,507Time deposits
(3)


(281
)

(35,584
)

(35,865
)

10,283


18,365


28,648Other
borrowings


4,570


(6,679
)

(2,109
)

(563
)

(650
)

(1,213
)Notes payable
(5)


(846
)

(252
)

(1,098
)

(3,681
)

577


(3,104
)Subordinated
 debentures (3)


1,499


(5,552
)

(4,053
)

3,305


(3,546
)

(241
)Total interest
 expense


8,480


(75,701
)

(67,221
)

22,089


29,544


51,633Net interest
 income

$
7,316


(45,413
)

(38,097
)

25,017


(21,424
)

3,593(1)
For purposes of these
 computations, nonaccrual loans are included in the average loan amounts.(2)
Interest income on loans
 includes loan fees.(3)
Interest income and
 interest expense include the effects of interest rate swap agreements.(4)
Information is presented on
 a tax-equivalent basis assuming a tax rate of 35%.(5)
Interest expense on our
 notes payable includes commitment, arrangement and renewal fees.Net Interest Income

The primary source of our income is net interest income. Net
interest
income, expressed on a tax-equivalent basis, was $344.4 million for the year
ended December 31, 2008, compared to $382.5 million and $378.9 million for the
years ended December 31, 2007 and 2006, respectively. Our net interest margin
was 3.51% for the year ended December 31, 2008, compared to 4.04% and 4.28% for
the years ended December 31, 2007 and 2006, respectively. Net interest income
is the difference between the interest earned on our interest-earning assets,
such as loans and investment securities, and the interest paid on our
interest-bearing liabilities, such as deposits and borrowings. Net interest
income is affected by the level and composition of assets, liabilities and
stockholders equity, as well as the general level of interest rates and
changes in interest rates. Interest income on a tax-equivalent basis includes
the additional amount of interest income that would have been earned if our
investment in certain tax-exempt interest-earning assets had been made in
assets subject to federal, state and local income taxes yielding the same
after-tax income. Net interest margin is determined by dividing net interest
income on a tax-equivalent basis by average interest-earning assets. The
interest rate spread is the difference between the average equivalent yield
earned on interest-earning assets and the average rate paid on interest-bearing
liabilities.

We attribute the decrease in net interest margin and net interest
income in 2008 to an increase in the average amount of our nonperforming loans
in addition to the significant decline in the prime lending rate that began in
September 2007 and continued through December 2008 and the decline in average
LIBOR during 2008, as further discussed below. The average yield earned on our
interest-earning assets decreased 133 basis points to 6.05% for the year ended
December 31, 2008, compared to 7.38% in 2007, while the average rate paid on
our interest-bearing liabilities decreased only 97 basis points to 2.90% for
the year ended December 31, 2008, compared to 3.87% in 2007. Our average
interest-bearing assets increased $340.8 million, or 3.6%, during 2008 to $9.81
billion, from $9.47 billion in 2007, primarily attributable to an increase in
average loans, partially offset by decreases in average investment securities
and short-term investments. Our average interest-bearing liabilities increased
$433.5 million, or 5.3%, during 2008 to $8.61 billion, from $8.18 billion in
2007, primarily attributable to an increase in average interest-bearing
deposits, other borrowings and subordinated debentures. Our net interest income
in 2008 was positively impacted by an increase in earnings on our interest rate
swap agreements that were entered into in conjunction with our interest rate
risk management program, as further discussed below. In light of further
weakening economic

25

conditions in our markets, we expect to continue to experience
continued downward pressure on our net interest margin and net interest income.

We attribute the decrease in net interest margin and increase
in net
interest income in 2007 to a shift in our deposit mix that reflects increased
higher-costing average time deposits and savings and money market accounts, in
contrast to demand accounts, coupled with competitive pressures on the rates
paid on our loan portfolio. The average rate paid on interest-bearing deposits
increased 46 basis points to 3.67% for the year ended December 31, 2007,
compared to 3.21% in 2006, while the average yield earned on our
interest-earning assets increased 11 basis points to 7.38% for the year ended
December 31, 2007, compared to 7.27% in 2006. The average rate paid on
interest-bearing liabilities increased 34 basis points to 3.87% for the year
ended December 31, 2007, compared to 3.53% in 2006. Our average
interest-bearing assets increased $615.6 million, or 6.9% during 2007 to $9.47
billion, from $8.86 billion in 2006. The increase is primarily attributable to
continued internal loan growth and interest-earning assets provided by our
acquisitions completed in 2006 and 2007, which provided assets, in aggregate,
of $794.3 million and $867.3 million, respectively. Our average
interest-bearing deposits increased $683.9 million, or 10.1% during 2007 to
$7.43 billion, from $6.75 billion in 2006. Our average interest-bearing
liabilities increased $656.5 million, or 8.7%, during 2007 to $8.18 billion,
from $7.52 billion in 2006.

Derivative financial instruments that were entered into in
conjunction
with our interest rate risk management program to mitigate the effects of
decreasing interest rates increased our net interest income by $11.5 million
for the year ended December 31, 2008, and reduced our net interest income by
$3.1 million and $5.0 million for the years ended December 31, 2007 and 2006,
respectively. The earnings on our interest rate swap agreements increased our
net interest margin by approximately 12 basis points in 2008, and reduced our
net interest margin by approximately three and six basis points in 2007 and
2006, respectively. In late 2006, we expanded our utilization of derivative
financial instruments to reduce our exposure to falling interest rates, as
further described in Note 5 to our consolidated financial statements, and
implemented various methods to reduce the effect of decreasing interest rates
on our net interest income, including the funding of investment security
purchases through the issuance of term repurchase agreements. In December 2008,
we terminated certain of our interest rate swap agreements designated as cash
flow hedges, as further discussed under Interest Rate Risk Management and in
Note 5 to our consolidated financial statements. At the date of termination,
these interest rate swap agreements had a fair value of $20.8 million, which is
being amortized from other comprehensive income to interest and fees on loans
over the remaining terms of the interest rate swap agreements.

Interest income on our loan portfolio, expressed on a
tax-equivalent
basis, was $553.4 million, $628.3 million and $578.2 million for the years
ended December 31, 2008, 2007 and 2006, respectively. The yield on our loan
portfolio was 6.19%, 7.79% and 7.74% for the years ended December 31, 2008,
2007 and 2006, respectively. The yield on our loan portfolio decreased 160
basis points during 2008 as compared to 2007, reflecting the significant
decline in the prime lending rate that began in the latter part of 2007 and
continued throughout 2008 and the significant decline in LIBOR during 2008,
coupled with the significant increase in the average amount of our nonaccrual
loans during 2008 as compared to 2007, as further discussed under Loans and
Allowance for Loan Losses. Our nonaccrual loans decreased our average yield on
loans by approximately 28 basis points in 2008 compared to approximately 11
basis points in 2007. The yield on our loan portfolio increased five basis
points during 2007 primarily as a result of increases in the prime rate
throughout the first half of 2006, partially offset by competitive pressures on
loan yields within our markets, an increase in the average amount of nonaccrual
loans during 2007 as compared to 2006, and a decline in the prime rate during
the latter part of 2007. The prime lending rate increased 100 basis points from
7.25% at December 31, 2005 to 8.25% at December 31, 2006. The prime lending
rate began to decrease in September 2007, decreasing 100 basis points to 7.25%
at December 31, 2007, and decreasing an additional 400 basis points during 2008
to 3.25% at December 31, 2008. Interest income on our loan portfolio also
reflects interest income associated with our interest rate swap agreements of $11.7
million, compared to a reduction of interest income associated with our swap
agreements of $3.1 million and $4.2 million in 2007 and 2006, respectively.

Interest income on our investment securities, expressed on a
tax-equivalent basis, was $38.7 million, $64.2 million and $59.9 million for
the years ended December 31, 2008, 2007 and 2006, respectively. The yield on
our investment securities was 4.87%, 5.05% and 4.72% for the years ended
December 31, 2008, 2007 and 2006, respectively, reflecting the decline in
short-term interest rates throughout the latter half of 2007 and in 2008, and
the rise in short-term interest rates throughout 2006 and the first half of
2007.

Interest income on our short-term investments was $1.8 million,
$6.7
million and $5.9 million for the years ended December 31, 2008, 2007 and 2006,
respectively. The yield on our short-term investments was 2.21%, 5.14% and
5.07% for the years ended December 31, 2008, 2007 and 2006, respectively,
reflecting the significant decline in short-term interest rates, most
significantly the federal funds rate, throughout the latter half of 2007 and in
2008.

Interest expense on interest-bearing deposits was $212.9
million,
$272.9 million and $216.7 million for the years ended December 31, 2008, 2007 and
2006, respectively. For the years ended December 31, 2008, 2007 and 2006,

26

the aggregate weighted average rate paid on our interest-bearing
deposit portfolio was 2.79%, 3.67% and 3.21%, respectively. The decrease in
interest expense and the weighted average rate paid on our deposit portfolio in
2008 is primarily reflective of the declining interest rate environment and an
anticipated run-off of higher rate certificates of deposit, as previously
discussed. Specifically, the weighted average rate paid on our time deposits
declined to 3.84% in 2008 from 4.76% in 2007, and the average rate paid on our
savings and money market deposits declined to 2.10% in 2008 from 3.05% in 2007.
We attribute the increase in interest expense and the weighted average rate
paid on our deposit portfolio in 2007 to higher priced deposits driven by
competitive pricing conditions within our markets, and a change in the mix of
our average deposits to increased time deposits and savings and money market
accounts. While deposit growth continues to provide an adequate source of funds
for liquidity purposes, competitive pressures on deposits within our markets
continue to impact our deposit pricing and our net interest margin.

Interest expense on our other borrowings was $14.2 million,
$16.3
million and $17.5 million for the years ended December 31, 2008, 2007 and 2006,
respectively. The aggregate weighted average rate paid on our other borrowings
was 2.40% for the year ended December 31, 2008, compared to 4.19% and 4.35% for
the years ended December 31, 2007 and 2006, respectively, reflecting the rise
in short-term interest rates during 2006 and the first half of 2007 and a
steady decrease in short-term interest rates that began in late 2007 and
continued throughout 2008. We capitalized interest on certain construction
projects of approximately $400,000, $1.8 million and $400,000 for the years
ended December 31, 2008, 2007 and 2006, respectively, which decreased the
weighted average rate paid on our other borrowings by seven basis points, 46
basis points and 10 basis points for the years ended December 31, 2008, 2007
and 2006, respectively.

Interest expense on our notes payable was $1.3 million, $2.4
million
and $5.5 million for the years ended December 31, 2008, 2007 and 2006, respectively.
The aggregate weighted average rate paid on our notes payable was 6.15%, 6.94%
and 6.22% for the years ended December 31, 2008, 2007 and 2006, respectively.
The aggregate weighted average rates paid reflect changing market interest
rates during these periods, and unused commitment, arrangement and renewal fees
paid in conjunction with the respective financing arrangement. Exclusive of
these fees, the aggregate weighted average rate paid on our notes payable was
4.42%, 6.41% and 6.11% for the years ended December 31, 2008, 2007 and 2006,
respectively. The terms of existing and former financing arrangements during
these periods are further described in Note 11 to our consolidated financial
statements.

Interest expense on our subordinated debentures was $21.1
million, 25.1
million and $25.4 million for the years ended December 31, 2008, 2007 and 2006,
respectively. The aggregate weighted average rate paid on our subordinated
debentures was 5.95%, 7.83% and 9.01% for the years ended December 31, 2008, 2007
and 2006, respectively. The aggregate weighted average rates and the level of
interest expense reflect: (a) the reduction in LIBOR rates, and the impact to
the related spreads to LIBOR, that began in late 2007 and continued through
most of 2008, as $282.5 million, or 79.4% of our subordinated debentures are
variable rate; (b) the entrance into four interest rate swap agreements with a
notional amount of $125.0 million in aggregate during March 2008 that
effectively convert the interest payments on certain of our subordinated
debentures from a variable rate to a fixed rate, as further described under
Interest Rate Risk Management and in Note 5 to our consolidated financial
statements; (c) the issuance of $77.3 million of variable rate subordinated
debentures during 2007 through four newly formed statutory trusts, partially
offset by the repayment of $25.8 million of variable rate subordinated
debentures on April 22, 2007, as further described in Note 12 to our
consolidated financial statements; and (d) the issuance of $139.2 million of
variable rate subordinated debentures during 2006 through four newly formed
statutory trusts, partially offset by the repayment of $56.9 million of 9.0%
fixed rate subordinated debentures on December 31, 2006. Interest expense on
subordinated debentures reflects interest expense associated with our interest
rate swap agreements of $124,000, zero and $814,000 for the years ended
December 31, 2008, 2007 and 2006, respectively.

Comparison
of Results of Operations for 2008 and 2007

Net Income.
We recorded a net loss of $287.2 million for the year ended December 31, 2008,
compared to net income of $49.5 million for 2007. Our return on average assets
and our return on average stockholders equity were (2.66%) and (35.34%),
respectively, compared to 0.48% and 6.11%, respectively, for 2007. Our earnings
levels reflect the following:

Ø
An increase in the provision for loan losses to $368.0 million
for
 the year ended December 31, 2008, compared to $65.1 million in 2007;Ø
A decline in net interest income to $343.1 million for the year
ended
 December 31, 2008, compared to $380.8 million in 2007, which contributed to a
 decline in our net interest margin to 3.51% for the year ended December 31,
 2008, compared to 4.04% in 2007;Ø
Noninterest income of $89.3 million for the year ended December
31,
 2008, compared $83.2 million in 2007;27

Ø
A decrease in our noninterest expense to $334.5 million for the
year
 ended December 31, 2008, compared to $344.4 million in 2007; andØ
A provision for income taxes of $18.2 million for the year ended
 December 31, 2008, compared to $5.1 million in 2007.The increase in the provision for loan losses was primarily
driven by
increased net loan charge-offs, an increase in nonperforming loans and higher
levels of problem loans in our one-to-four family residential mortgage and real
estate construction and development loan portfolios, as further discussed under
Provision for Loan Losses.

The decline in our net interest income and our net interest
margin was
primarily attributable to an increase in nonaccrual loans of $215.6 million
during 2008 and a 500 basis point decrease, in aggregate, in the prime lending
rate from the third quarter of 2007 through December 31, 2008 as well as a substantial
decline in average LIBOR throughout 2008, as further discussed under Net
Interest Income.

The increase in our noninterest income primarily resulted from
an
increase in gain on loans held for sale, service charges on deposit accounts
and customer service fees and a gain on the extinguishment of a term repurchase
agreement, partially offset by an increase in net losses on investment
securities associated with other-than-temporary impairment on equity
investments in two financial institutions, a decline in investment management
incomes and a decrease in the fair value of servicing rights, as further
discussed under Noninterest Income.

The overall decrease in the level of noninterest expense for
2008
reflects reductions in salaries and employee benefits expense attributable to
decreased staffing levels in our mortgage banking division and the completion
of certain other staff reductions in 2007 and 2008, as well as reduced
charitable contributions expense and other profit improvement initiatives that
were implemented in order to reduce our noninterest expense levels. These
decreases were partially offset by increases in occupancy and furniture and
equipment expenses, legal, examination and professional fees, expenses on other
real estate properties and FDIC insurance assessment premiums, as further
discussed under Noninterest
Expense.

The change in the provision for income taxes in 2008 reflects
our
decreased earnings and the recognition of a net deferred tax asset valuation
allowance of approximately $136.8 million against our deferred tax assets
during 2008, which had the effect of increasing our provision for income taxes
by $123.2 million during 2008, as further discussed under Provision
for Income Taxes.

Provision for Loan
Losses. Our net loss for 2008 was primarily driven
by a significant provision for loan losses. We recorded a provision for loan
losses of $368.0 million for the year ended December 31, 2008, compared to
$65.1 million for the year ended December 31, 2007. The increase in the
provision for loan losses was primarily driven by increased net loan
charge-offs and declining asset quality associated with our one-to-four family
residential mortgage and land acquisition, development and construction loan
portfolios, as further discussed under Loans and Allowance for Loan Losses.
Throughout 2008, we encountered considerable distress and declining conditions
within our one-to-four family residential loan portfolio as a result of current
market conditions and the overall deterioration of Alt A and sub-prime
residential mortgage loan products experienced throughout the mortgage banking
industry. We also experienced declining market conditions in our real estate
construction and development loan portfolio, particularly in California, as a
result of continued weak economic conditions and significant declines in real
estate values. We recorded a provision for loan losses of $139.0 million for
the three months ended December 31, 2008 compared to $44.6 million for the
comparable period in 2007. The increase in our provision for loan losses for
the three months ended December 31, 2008 was primarily driven by increased net
loan charge-offs and continued declining market conditions in our one-to-four
family residential mortgage portfolio and certain sectors of our land
acquisition, development and construction loan portfolio, as discussed above.

Our nonperforming loans were $442.4 million at December 31,
2008,
compared to $202.2 million at December 31, 2007. The increase in the overall
level of nonperforming loans during 2008 was primarily driven by a decline in
asset quality related to our one-to-four family residential mortgage and land
acquisition, development and construction loan portfolios, as further discussed
under Loans and Allowance for Loan Losses.

Our net loan charge-offs increased to $316.2 million for the
year ended
December 31, 2008, compared to $56.8 million for the year ended December 31,
2007. Our net loan charge-offs for 2008 were 3.54% of average loans, compared
to 0.70% in 2007. Loan charge-offs were $331.0 million for 2008, compared to
$65.5 million in 2007, and loan recoveries were $14.8 million for 2008,
compared to $8.7 million in 2007. Net loan charge-offs were $129.8 million for
the three months ended December 31, 2008, compared to $27.9 million for the
comparable period in 2007.

Tables summarizing nonperforming assets, past due loans and
charge-off
and recovery experience are presented under Loans and Allowance for Loan
Losses.

28

Noninterest Income
and Expense. The following table summarizes
noninterest income and noninterest expense for the years ended December 31,
2008 and 2007:

December 31,

Increase (Decrease)2008

2007

Amount


%(dollars expressed in thousands)Noninterest
 income:Service
charges on deposit accounts and
 customer service fees

$
54,275


46,834


7,441


15.9
%Gain (loss)
on loans sold and held for sale


4,748


(4,583
)

9,331


203.6Net loss on
investment securities


(8,760
)

(3,077
)

(5,683
)

(184.7
)Bank-owned
life insurance investment income


2,808


3,841


(1,033
)

(26.9
)Investment
management income


3,440


7,111


(3,671
)

(51.6
)Insurance
fee and commission income


7,336


6,860


476


6.9Net gain on
derivative instruments


1,730


1,233


497


40.3Change in
fair value of servicing rights


(11,825
)

(5,445
)

(6,380
)

(117.2
)Loan
servicing fees


9,051


8,292


759


9.2Gain on
extinguishment of term repurchase
 agreement


5,000


―


5,000


100.0Other


21,530


22,121


(591
)

(2.7
)Total
noninterest income

$
89,333


83,187


6,146


7.4Noninterest
 expense:Salaries and
employee benefits

$
144,973


171,018


(26,045
)

(15.2
)%Occupancy,
net of rental income


38,760


33,977


4,783


14.1Furniture
and equipment


21,245


19,683


1,562


7.9Postage,
printing and supplies


6,312


6,747


(435
)

(6.4
)Information
technology fees


35,536


36,305


(769
)

(2.1
)Legal,
examination and professional fees


15,761


9,893


5,868


59.3Amortization
of intangible assets


11,131


12,419


(1,288
)

(10.4
)Advertising
and business development


5,674


6,933


(1,259
)

(18.2
)FDIC
insurance


7,173


1,006


6,167


613.0Expenses on
other real estate


8,242


859


7,383


859.5Charitable
contributions


541


5,942


(5,401
)

(90.9
)Other


39,196


39,570


(374
)

(0.9
)Total
noninterest expense

$
334,544


344,352


(9,808
)

(2.8
)Noninterest Income.Noninterest
income was $89.3 million for the year ended December 31, 2008, in comparison to
$83.2 million for 2007. Noninterest income consists primarily of service
charges on deposit accounts and customer service fees, mortgage-banking
revenues, investment management income, insurance fee and commission income,
net gains (losses) on investment securities and derivative instruments, changes
in the fair value of servicing rights, loan servicing fees and other income.

Service charges on deposit accounts and customer service fees
increased
$7.4 million, or 15.9%, to $54.3 million from $46.8 million for the years ended
December 31, 2008 and 2007, respectively. The increase in service charges and
customer service fees is primarily attributable to: (a) an increase in retail
NSF fees of $3.2 million to $21.6 million in 2008 from $18.4 million in 2007,
primarily as a result of an increase in the fee charged for overdrafts and
further expansion of our overdraft privilege program; (b) an increase in
cardholder interchange income of $1.1 million to $10.1 million in 2008 from
$9.1 million in 2007, primarily due to an increase in debit card usage by our
customer base; and (c) an increase in commercial service charges of $3.4
million to $16.5 million in 2008 from $13.1 million in 2007, primarily
resulting from our efforts to control fee waivers and a decrease in the
earnings credit rate as a result of the decline in short-term interest rates
throughout 2008.

We recorded a gain on loans sold and held for sale of $4.7
million for
the year ended December 31, 2008, compared to a loss of $4.6 million for the
year ended December 31, 2007. The gain in 2008 compared to the loss in 2007 is
primarily attributable to the following:

Ø
The recognition of $11.4 million of losses in 2007 related to
 repurchase obligations on mortgage loans sold with recourse. We were
 obligated to repurchase mortgage loans with a principal balance of
 approximately $31.4 million based on the terms of the underlying sales
 contracts. Our primary recourse risk, attributable to early payment default
 on sub-prime residential mortgage loan products that we previously sold in
 the secondary market, generally expired throughout the first quarter of 2008;Ø
A pre-tax gain of $504,000 recognized in March 2008 on the sale
of
 approximately $10.8 million of our small business loans; partially offset byØ
A decrease in the volume of mortgage loans originated and
 subsequently sold in the secondary market. For the years ended December 31,
 2008 and 2007, we sold residential mortgage loans totaling $210.6 million and
 $512.5 million, respectively; and29

Ø
A pre-tax loss of $804,000 recognized in April 2008 on the sale
of
 approximately $24.0 million of residential real estate mortgage loans, and a
 pre-tax gain of $851,000 recognized in April 2007 on the sale of
 approximately $13.4 million of certain repurchased and other residential
 mortgage loans.We recorded net losses on investment securities of $8.8 million
and
$3.1 million for the years ended December 31, 2008 and 2007, respectively. The
net loss for 2008 is primarily attributable to the recognition of
other-than-temporary impairment of $10.4 million on equity investments in the
common stock of two financial institutions. The other-than-temporary impairment
was primarily caused by economic events impacting the financial services
industry as a whole, and represented the difference between our cost basis and
the fair value of the equity securities. The equity securities are carried at
fair value at December 31, 2008. In addition, in the third quarter of 2008, we
recognized other-than-temporary impairment of $1.0 million on a preferred stock
investment, which represented the full amount of the investment and was
necessitated by bankruptcy proceedings of the underlying financial services
company. The other-than-temporary impairment of $11.4 million, in aggregate,
was partially offset by a pre-tax gain of approximately $867,000 recognized on
the sale of $81.5 million of available-for-sale investment securities in March
2008 and a pre-tax gain of approximately $1.0 million recognized on the sale of
$64.7 million of available-for-sale investment securities in December 2008. The
net loss for 2007 primarily resulted from a net decline of $1.5 million in the
fair value of securities held in our trading portfolio prior the liquidation of
the trading portfolio in July 2007 in addition to other-than-temporary
impairment recognized on an investment in the common stock of a financial
institution of $1.4 million.

Bank-owned life insurance investment income was $2.8 million
and $3.8
million for the years ended December 31, 2008 and 2007, respectively,
reflecting the performance of the underlying investments associated with the
insurance contracts, which is directly correlated to the portfolio mix of
investments, the crediting rate associated with the embedded stable value
protection program, and overall market conditions.

Investment management income generated by MVP, our
institutional money
management subsidiary, was $3.4 million for the year ended December 31, 2008,
in comparison to $7.1 million in 2007, reflecting decreased portfolio
management fee income associated with a decline in assets under management
primarily attributable to the loss of a single large customer in the fourth
quarter of 2007 and current market conditions.

Insurance fee and commission income generated by Adrian Baker,
our
insurance brokerage agency, was $7.3 million for the year ended December 31, 2008,
in comparison to $6.9 million in 2007, primarily reflecting increased customer
volumes partially offset by reduced premium rates attributable to the overall
soft insurance market conditions experienced during 2008.

We recorded net gains on derivative instruments of $1.7 million
and
$1.2 million for the years ended December 31, 2008 and 2007, respectively. The
net gains in 2008 and 2007 are primarily attributable to the net increase in
the fair value of our interest rate floor agreements as a result of the decline
in forward rates resulting from the Federal Reserve interest rate cuts from
September 2007 through April 2008. In May 2008, we terminated our $300.0
million interest rate floor agreements to modify our overall hedge position in
accordance with our interest rate risk management program, as further described
under Interest Rate Risk Management and in Note 5 to our consolidated
financial statements. We did not incur any gains or losses in conjunction with
the termination of our interest rate floor agreements.

We recorded a net loss from changes in the fair value of
mortgage and
SBA servicing rights of $11.8 million and $5.4 million for the years ended
December 31, 2008 and 2007, respectively. As further discussed under Effects
of New Accounting Standards and in Note 1 and Note 6 to our consolidated
financial statements, on January 1, 2008, we opted to measure our servicing
rights at fair value. As such, the fluctuations in 2008, as compared to 2007,
reflect changes in the fair value of our servicing rights in comparison to
amortization and impairment recognized in 2007. The decrease in fair value in
2008 is primarily due to the decrease in mortgage interest rates throughout
2008 and the related increase in prepayment speeds, as well as an increase in
the discount rate.

Loan servicing fees were $9.1 million and $8.3 million for the
years
ended December 31, 2008 and 2007, respectively, and are primarily attributable
to fee income generated for the servicing of real estate mortgage loans owned
by investors and originated by our mortgage banking division, as well as SBA
loans to small business concerns that are originated by SBLS LLC, our
majority-owned subsidiary that originates, sells and services SBA loans. The
increase in 2008 is primarily due to an increase in the unpaid principal
balance of serviced loans.

We recorded a gain of $5.0 million on the extinguishment of our
term
repurchase agreement in the first quarter of 2008. In March 2008, we
restructured our $100.0 million term repurchase agreement, as further discussed
in Note 10 to our consolidated financial statements. The primary modifications
were to: (a) increase the borrowing amount to $120.0 million; (b) extend the
maturity date from October 12, 2010 to April 12, 2012; (c) convert the interest
rate from a variable rate to a fixed rate of 3.36%; and (d) terminate the
embedded interest rate floor agreements

30

contained within the term repurchase agreement. These
modifications
resulted in the recognition of the pre-tax gain of $5.0 million.

Other income was $21.5 million and $22.1 million for the years
ended
December 31, 2008 and 2007, respectively. We primarily attribute the decline in
other income to:

Ø
A decrease of $3.3 million in gains on sales of other assets.
Net
 pre-tax gains on sales of other assets were $1.1 million for the year ended
 December 31, 2008, and included a pre-tax gain of $1.7 million recognized in
 December 2008 on the sale and leaseback of a branch facility. Net pre-tax
 gains on sales of other assets were $4.4 million for the year ended December
 31, 2007, and included a pre-tax gain of $2.6 million recognized on the sale
 and leaseback of a branch building and a pre-tax gain of $1.0 million
 recognized on the sale of our Texas Branch Offices, as further described in
 Note 2 to our consolidated financial statements; partially offset byØ
A gain of $1.8 million recognized on the sale of various state
tax
 credits in April 2008; andØ
A gain recognized in March 2008 on the Visa, Inc., or Visa,
initial
 public offering, or IPO, of $743,000, representing the cash payment received
 in exchange for a portion of our membership interest in Visa as a result of
 Visas IPO.Noninterest Expense. Noninterest
expense was $334.5 million for the year ended December 31, 2008, in comparison
to $344.4 million for 2007. Our efficiency ratio was 77.36% for the year ended
December 31, 2008, compared to 74.21% for 2007. The efficiency ratio represents
the ratio of noninterest expense to the sum of net interest income and
noninterest income. The decrease in noninterest expense was primarily
attributable to certain profit improvement initiatives that we implemented
throughout 2007 and 2008.

Salaries and employee benefits was $145.0 million for the year
ended
December 31, 2008, in comparison to $171.0 million in 2007. We attribute the
overall decrease in salaries and employee benefits expense to reduced staff
levels within our mortgage banking division and the completion of certain other
staff reductions in 2007 and 2008. Our total full-time equivalent employees
(FTEs) decreased to 2,200 at December 31, 2008, from 2,440 at December 31,
2007, representing a decrease of approximately 9.5%. We reduced our FTEs
despite adding an aggregate of 26 additional branch offices through
acquisitions in 2007 and an aggregate of 11 de novo branches that we opened in
2007 and 2008. The decrease in salaries and employee benefits expense is also
reflective of reduced incentive compensation expense resulting from the
significant decline in our financial performance and reduced employee benefit
expense associated with our nonqualified deferred compensation program
resulting from market value declines in the employee investment accounts
underlying this program.

Occupancy, net of rental income, and furniture and equipment
expense
was $60.0 million and $53.7 million for the years ended December 31, 2008 and
2007, respectively. The increase in 2008 reflects higher levels of expense
resulting from our de novo activities and acquisitions in 2007 and 2008, as
discussed above, as well as increased technology equipment expenditures,
continued expansion and renovation of certain branch offices, increased
expenses associated with the purchase and/or lease of properties that are
expected to be utilized for future branch office locations, and depreciation
expense associated with acquisitions and capital expenditures.

Information technology fees were $35.5 million and $36.3
million for
the years ended December 31, 2008 and 2007, respectively. As more fully
described in Note 19 to our consolidated financial statements, First Services,
L.P., a limited partnership indirectly owned by our Chairman and members of his
immediate family, 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 and
trust divisions, our small business lending and institutional money management
subsidiaries, and Adrian Baker and UPAC. The decrease in information technology
fees is primarily due to certain profit improvement initiatives in addition to
substantially reduced acquisition activity in 2008, as compared to 2007, as we
did not complete any acquisitions in 2008 in contrast to two acquisitions that
we completed in 2007, one of which expanded our branch network by 20 branch offices
and required expanded information technology conversion support.

Legal, examination and professional fees were $15.8 million and
$9.9
million for the years ended December 31, 2008 and 2007, respectively. The
increase in legal, examination and professional fees is primarily attributable
to: (a) approximately $1.4 million in professional fees incurred in 2008
resulting from internal investigations, including the investigation
commissioned by our Audit Committee regarding certain matters associated with
the mortgage banking division and the resulting restatement of our consolidated
financial statements; (b) higher legal expenses related to collection and
foreclosure efforts associated with certain problem loans; and (c) ongoing
litigation matters, including those assumed through the acquisition of CFHI. We
anticipate legal, examination and professional fees to remain at higher than
historical levels until economic conditions stabilize primarily as a result of
higher legal and professional fees associated with foreclosures, collection
efforts and other real estate properties.

31

Amortization of intangible assets was $11.1 million and $12.4
million
for the years ended December 31, 2008 and 2007, respectively, primarily
reflecting a decrease in amortization expense on core deposit intangibles
attributable to previous acquisitions. As further discussed in Note 8 to our
consolidated financial statements, our annual measurement date for goodwill
impairment testing is December 31. As a result of our annual impairment
testing, we concluded that the carrying value of our single reporting unit,
First Bank, exceeded its fair value. Based upon the results of an independent,
third-party valuation of First Banks assets and liabilities, management
compared the implied fair value of First Banks goodwill with its carrying
value and concluded that there was no goodwill impairment as of December 31,
2008, as further discussed under Critical Accounting Policies.

Advertising and business development expense was $5.7 million
and $6.9
million for the years ended December 31, 2008 and 2007, respectively. The
decrease in 2008 is primarily a result of certain profit improvement
initiatives and managements increased efforts to reduce these expenditures.

FDIC insurance expense was $7.2 million and $1.0 million for
the years
ended December 31, 2008 and 2007, respectively. We had built up several million
dollars of credits through previous acquisitions that were utilized to offset
FDIC insurance premiums over the past several quarters and have now been
depleted. Our premium rates will increase in the future based on recent
developments within the banking industry, including the failure of certain
financial institutions. Furthermore, on February 27, 2009, the FDIC adopted an
interim rule imposing an emergency special assessment of 20 basis points on
June 30, 2009, as further discussed under Item 1. Business Deposit
Insurance.

Expenses on other real estate were $8.2 million and $859,000
for the
years ended December 31, 2008 and 2007, respectively. The increase in other
real estate expenses is primarily attributable to the increase in the balance
of our other real estate properties to $91.5 million at December 31, 2008 from
$11.2 million at December 31, 2007. We expect the level of write-downs and
expenses on our other real estate properties to remain at elevated levels in
the near term as a result of the increase in our other real estate balances and
the expected transfer of certain of our nonperforming loans into our other real
estate portfolio.

Charitable contributions expense was $541,000 and $5.9 million
for the
years ended December 31, 2008 and 2007, respectively, reflecting a decrease in
charitable contributions made to the Dierberg Educational Foundation, Inc.
(formerly the Dierberg Operating Foundation, Inc.), or the Foundation, a
charitable foundation established by our Chairman and members of his immediate
family, as further described in Note 19 to our consolidated financial
statements.

Other expense was $39.2 million and $39.6 million for the years
ended
December 31, 2008 and 2007, respectively. Other expense encompasses numerous
general and administrative expenses including communications, insurance,
freight and courier services, correspondent bank charges, miscellaneous losses
and recoveries, memberships and subscriptions, transfer agent fees, sales taxes
and travel, meals and entertainment. The decrease in other expense was
primarily attributable to:

Ø
A decrease in fraud losses, net of recoveries, of $5.1 million
from
 $6.8 million in 2007 to $1.7 million in 2008, primarily attributable to a
 single fraud loss of $5.0 million incurred in 2007; partially offset byØ
A litigation settlement of $750,000 during the third quarter of
2008
 pertaining to a matter initially brought against CFHI prior to our
 acquisition, as further described in Note 24 to our consolidated financial
 statements;Ø
An increase in overdraft losses, net of recoveries, of $1.4
million
 to $2.7 million in 2008 compared to $1.3 million in 2007, primarily resulting
 from our overdraft privilege program that we fully implemented in 2008; andØ
An increase in loan expenses of $2.6 million to $6.2 million in
2008
 from $3.6 million in 2007, primarily associated with expenses related to our
 residential mortgage portfolio and attributable to declining asset quality
 throughout 2008.Provision for Income
Taxes. The provision for income taxes was $18.2
million for the year ended December 31, 2008, compared to $5.1 million for the
year ended December 31, 2007. The change in the provision for income taxes
reflects the following:

Ø
Our significantly reduced earnings in 2008, as compared to
2007;Ø
The recognition of a deferred tax asset valuation allowance of
$158.9
 million against our deferred tax assets during the fourth quarter of 2008,
 which had the effect of increasing our provision for income taxes by $144.8
 million during the fourth quarter of 2008. 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, 2008,32

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;Ø
The reversal of a portion of our deferred tax asset valuation
 allowance which had the effect of reducing our provision for income taxes by
 $21.6 million during the third quarter of 2008. On September 30, 2008, the
 Internal Revenue Service, or IRS, issued Notice 2008-83. In accordance with
 Notice 2008-83, any deduction properly allowed after an ownership change to a
 bank with respect to losses on loans or bad debts (including any deduction
 for a reasonable addition to a reserve for bad debts) shall not be treated as
 a built-in loss. As a result of Notice 2008-83, certain loan charge-offs and
 additions to First Banks allowance for loan losses are no longer considered
 built-in losses. Consequently, on September 30, 2008, First Banks concluded
 that $1.8 million and $21.0 million of the deferred tax asset valuation
 allowances related to CIB Bank and CFHI, respectively, were no longer
 required and recorded a reversal of the deferred tax asset allowances in the
 amount of $22.8 million, of which $21.6 million increased the benefit for
 income taxes for the three months ended September 30, 2008; andØ
The reversal of a portion of our deferred tax asset valuation
 allowance which had the effect of reducing the provision for income taxes by
 $10.7 million in 2007. This reversal was necessitated by a reduction in the
 allowance for loan losses allocated to certain loans acquired in 2004 as a
 result of final resolution of the loans through repayment, sale or other
 means.The level of our provision for income taxes and the deferred
tax asset
valuation allowance are more fully described in Note 13 to our consolidated
financial statements.

Comparison
of Results of Operations for 2007 and 2006

Net Income.
Net income was $49.5 million for the year ended December 31, 2007, compared to
$106.8 million for 2006. Our return on average assets and our return on average
stockholders equity were 0.48% and 6.11%, respectively, for the year ended
December 31, 2007, compared to 1.11% and 15.04%, respectively, for 2006. The
decrease in net income for 2007, as compared to 2006, reflects the following:

Ø
a provision for loan losses of $65.1 million for the year ended
 December 31, 2007, compared to $12.0 million in 2006;Ø
net interest income of $380.8 million for the year ended
December 31,
 2007, compared to $377.3 million in 2006, which contributed to a decline in
 our net interest margin to 4.04% for the year ended December 31, 2007,
 compared to 4.28% in 2006;Ø
a loss on loans sold and held for sale of $4.6 million for the
year
 ended December 31, 2007, compared to a gain of $21.4 million in 2006;Ø
noninterest expense of $344.4 million for the year ended
December 31,
 2007, compared to $315.6 million in 2006; andØ
a provision for income taxes of $5.1 million for the year ended
 December 31, 2007, compared to $51.9 million in 2006.The increase in the provision for loan losses was primarily
driven by
increased net loan charge-offs and a decline in asset quality related to our
one-to-four family residential mortgage and real estate construction and
development loan portfolios, as further discussed under Provision for Loan
Losses.

The decline in our net interest income and our net interest
margin
primarily resulted from an increase in higher priced deposit accounts and
pressures on loan yields as a result of competitive conditions within our
markets, as further discussed under Net Interest Income.

The decrease in gain on loans sold and held for sale primarily
resulted
from a decrease in the volume of loans originated and sold in addition to
losses of $11.4 million in 2007 related to repurchase obligations on mortgage
loans sold with recourse. The decrease in volume is primarily attributable to
the discontinuation of the origination and subsequent sale of sub-prime
mortgage loans in February of 2007, as well as overall market disruption, as
further discussed under Noninterest Income.

The overall increase in the level of noninterest expense for
2007
reflects increased salaries and employee benefits expense, occupancy and
furniture and equipment expenses and amortization of intangible assets, commensurate
with the significant expansion of our branch office network resulting from our
acquisitions of an insurance premium financing company and an insurance
brokerage agency in 2006, the addition of 38 branch offices associated with
acquisitions in 2006 and 2007 and the opening of eight de novo offices during
2007, in addition to certain other nonrecurring expenses incurred in 2007,
primarily related to profit improvement initiatives and other items, as further
discussed under Noninterest
Expense.

33

The decrease in the provision for income taxes primarily
resulted from
decreased earnings and the reversal of a portion of our deferred tax asset
valuation allowance, as further discussed under Provision for Income Taxes.

Provision for Loan
Losses. We recorded a provision for loan losses of
$65.1 million for the year ended December 31, 2007 compared to $12.0 million
for the year ended December 31, 2006. The increase in the provision for loan
losses was primarily driven by increased net loan charge-offs and a decline in
asset quality related to our one-to-four family residential mortgage and land
acquisition, development and construction loan portfolios. Throughout 2007, we
encountered considerable distress in our one-to-four family residential loan
portfolio as a result of the unstable market conditions surrounding sub-prime
loan products. We also saw declining market conditions in our land acquisition,
development and construction loan portfolio, particularly in Northern
California, resulting in increased developer inventories, slower lot and home
sales, and declining market values, as well as further deterioration on certain
residential development and construction portfolio credits that began in the
latter part of 2006, as further discussed below. All of these factors led to
increased risk in our loan portfolio thereby contributing to a significant
increase in our provision for loan losses. We recorded a provision for loan
losses of $44.6 million for the three months ended December 31, 2007 compared
to $4.0 million for the comparable period in 2006. The increase in our
provision for loan losses for the three months ended December 31, 2007 was
primarily driven by increased net loan charge-offs and rapidly declining market
conditions in our one-to-four family residential mortgage portfolio and certain
sectors of our land acquisition, development and construction loan portfolio,
as discussed above.

The provision for loan losses recorded during 2006 was
primarily driven
by significant growth within our loan portfolio, coupled with deterioration
within our one-to-four family residential mortgage portfolio in addition to the
deterioration of certain other credits, including four large credit
relationships within our residential development and construction portfolio
during the later part of 2006 that were primarily driven by declining market
conditions, including slowdowns in unit sales.

Our nonperforming loans were $202.2 million at December 31,
2007,
compared to $48.7 million at December 31, 2006. The increase in the overall
level of nonperforming loans during 2007 was primarily driven by a decline in
asset quality related to our one-to-four family residential mortgage and land
acquisition, development and construction loan portfolios, and the acquisition
of CFHI, which added $45.1 million of nonperforming loans, as further discussed
under Loans and Allowance for Loan Losses.

Our net loan charge-offs increased to $56.8 million for the
year ended
December 31, 2007, compared to $6.8 million for the year ended December 31,
2006. Our net loan charge-offs for 2007 were 0.70% of average loans, compared
to 0.09% in 2006. Loan charge-offs were $65.5 million for 2007, compared to
$22.2 million in 2006, and loan recoveries were $8.7 million for 2007, compared
to $15.4 million in 2006. Net loan charge-offs were $27.9 million for the three
months ended December 31, 2007, compared to $7.6 million for the comparable
period in 2006. Net loan charge-offs for the three months and year ended
December 31, 2007 include approximately $16.1 million and $31.0 million of net
charge-offs associated with our one-to-four family residential loan portfolio,
respectively. Net loan charge-offs also include charge-offs of $7.6 million
associated with the sale of certain commercial loans which resulted in sales
proceeds of $33.5 million. Loan charge-offs for 2006 included approximately
$3.3 million of loan charge-offs associated with two significant residential
development project relationships that were placed on nonaccrual status during
2006, in addition to $2.3 million of charge-offs recorded in conjunction with
the transfer of certain portfolio loans to our loans held for sale portfolio
prior to their sale in December 2006. Loan recoveries for 2006 included $5.0
million recorded on the payoff of a single loan that was transferred to our
held for sale portfolio on December 31, 2005.

Tables summarizing nonperforming assets, past due loans and
charge-off
and recovery experience are presented under Loans and Allowance for Loan
Losses.

34

Noninterest Income
and Expense. The following table summarizes
noninterest income and noninterest expense for the years ended December 31,
2007 and 2006:

December 31,

Increase (Decrease)2007

2006

Amount

%(dollars expressed in thousands)Noninterest
 income:Service
charges on deposit accounts and
 customer service fees

$
46,834


43,310


3,524


8.1
%(Loss) gain
on loans sold and held for sale


(4,583
)

21,398


(25,981
)

(121.4
)Net loss on
investment securities


(3,077
)

(1,813
)

(1,264
)

(69.7
)Bank-owned
life insurance investment income


3,841


3,103


738


23.8Investment
management income


7,111


8,412


(1,301
)

(15.5
)Insurance
fee and commission income


6,860


4,848


2,012


41.5Net gain
(loss) on derivative instruments


1,233


(390
)

1,623


416.2Change in
fair value of servicing rights


(5,445
)

(7,109
)

1,664


23.4Loan
servicing fees


8,292


9,264


(972
)

(10.5
)Other


22,121


27,298


(5,177
)

(19.0
)Total
noninterest income

$
83,187


108,321


(25,134
)

(23.2
)Noninterest
 expense:Salaries and
employee benefits

$
171,018


162,523


8,495


5.2
%Occupancy,
net of rental income


33,977


27,643


6,334


22.9Furniture
and equipment


19,683


16,960


2,723


16.1Postage,
printing and supplies


6,747


6,721


26


0.4Information
technology fees


36,305


37,099


(794
)

(2.1
)Legal,
examination and professional fees


9,893


8,783


1,110


12.6Amortization
of intangible assets


12,419


8,195


4,224


51.5Advertising
and business development


6,933


7,128


(195
)

(2.7
)FDIC
insurance


1,006


1,050


(44
)

(4.2
)Expenses on
other real estate


859


520


339


65.2Charitable
contributions


5,942


6,462


(520
)

(8.0
)Other


39,570


32,481


7,089


21.8Total
noninterest expense

$
344,352


315,565


28,787


9.1Noninterest Income.Noninterest
income was $83.2 million for the year ended December 31, 2007, in comparison to
$108.3 million for 2006. Noninterest income consists primarily of service
charges on deposit accounts and customer service fees, mortgage-banking
revenues, investment management income, insurance fee and commission income,
net gains (losses) on investment securities and derivative instruments, changes
in the fair value of servicing rights, loan servicing fees and other income.

Service charges on deposit accounts and customer service fees
increased
to $46.8 million from $43.3 million for the years ended December 31, 2007 and
2006, respectively. The increase in service charges and customer service fees
is primarily attributable to: (a) increased deposit account balances associated
with internal growth and our acquisitions of banks completed in 2006 and 2007,
as further discussed under Financial Condition and Average Balances and in
Note 2 to our consolidated financial statements; (b) increased cardholder
interchange income primarily due to an increase in debit card usage by our
customer base; (c) increased fee income from customer service charges for
non-sufficient funds and returned check fees from our commercial deposit base
primarily as a result of enhanced control of fee waivers; and (d) pricing
increases on certain service charges and customer service fees instituted to
reflect current market conditions.

We recorded a loss on loans sold and held for sale of $4.6
million for
the year ended December 31, 2007 compared to a gain of $21.4 million for the
year ended December 31, 2006. The loss in 2007 compared to the gain in 2006 was
primarily attributable to the following:

Ø
A decrease in the volume of mortgage loans originated and
 subsequently sold in the secondary market. As further discussed under Loans
 and Allowance for Loan Losses and Mortgage Banking Activities, we
 discontinued the origination and sale in the secondary market of sub-prime
 loans in February 2007, and as such, the discontinuation of these activities
 has reduced the amount of gains on loans sold and held for sale, in
 comparison to the level that we had historically generated through the
 origination and sale of these sub-prime loan products. Historically,
 approximately 40% of our origination and sale volume was related to sub-prime
 loan products;Ø
Losses of $11.4 million in 2007 associated with repurchase
 obligations on mortgage loans sold with recourse. We were obligated to
 repurchase mortgage loans with a principal balance of approximately $31.4
 million based on the terms of the underlying sales contracts. Our primary
 recourse risk, attributable to early payment default on sub-prime residential
 mortgage loan products that we previously sold in the secondary market,
 generally expired throughout the first quarter of 2008;35

Ø
A pre-tax gain of $851,000 recognized in April 2007 on the sale
of
 approximately $13.4 million of certain repurchased and other residential
 mortgage loans, compared to a pre-tax gain of $2.4 million recorded on the
 sale of $278.7 million of certain residential mortgage loans during 2006 and
 a $3.7 million gain, before applicable income taxes, recorded on the sale of
 $32.6 million of commercial loans in December 2006, as further discussed
 under Loans and Allowance for Loan Losses and Mortgage Banking
 Activities; andØ
The recognition of $2.1 million of income generated from the
 securitization of $138.9 million in aggregate of residential mortgage loans
 in March and April 2006.We recorded net losses on investment securities of $3.1 million
and
$1.8 million for the years ended December 31, 2007 and 2006, respectively. The
net loss for 2007 primarily resulted from a net decline of $1.5 million in the
fair value of securities held in our trading portfolio prior the liquidation of
the trading portfolio in July 2007 in addition to other-than-temporary
impairment recognized on an investment in the common stock of a financial
institution of $1.4 million. The net loss for 2006 primarily resulted from the
sale of certain available-for-sale investment securities associated with the
termination of $200.0 million, in aggregate, of term repurchase agreements,
partially offset by a gain of $389,000 on the redemption of common stock held
as an available-for-sale investment security.

Bank-owned life insurance investment income was $3.8 million
and $3.1
million for the years ended December 31, 2007 and 2006, respectively,
reflecting the performance of the underlying investments associated with the
insurance contracts, which is directly correlated to the portfolio mix of investments,
the crediting rate associated with the embedded stable value protection
program, and overall market conditions.

Investment management income generated by MVP, our
institutional money
management subsidiary, was $7.1 million for the year ended December 31, 2007,
in comparison to $8.4 million in 2006, reflecting decreased portfolio
management fee income associated with a decline in assets under management and
current market conditions.

Insurance fee and commission income generated by Adrian Baker,
our
insurance brokerage agency acquired on March 31, 2006 was $6.9 million for the
year ended December 31, 2007, in comparison to $4.8 million in 2006, reflecting
a full year of activity in 2007 as compared to nine months in 2006 and
increased customer volumes; partially offset by reductions in premiums
attributable to current market conditions within the insurance industry.

We recorded net gains on derivative instruments of $1.2 million
for the
year ended December 31, 2007, in comparison to net losses on derivative
instruments of $390,000 for the year ended December 31, 2006. The net gain in
2007 is primarily attributable to the net increase in the fair value of our
interest rate floor agreements as a result of the decline in forward rates
resulting from the Federal Reserve interest rate cuts that began in September
2007.

We recorded a net decrease in mortgage and SBA servicing rights
of $5.4
million and $7.1 million for the years ended December 31, 2007 and 2006,
respectively, reflecting amortization and impairment of mortgage and SBA
servicing rights, as further described in Note 6 to our consolidated financial
statements.

Loan servicing fees were $8.3 million and $9.3 million for the
years
ended December 31, 2007 and 2006, respectively, and are primarily attributable
to fee income generated for the servicing of real estate mortgage loans owned
by investors and originated by our mortgage banking division, as well as SBA
loans to small business concerns that are originated by SBLS LLC, our
majority-owned subsidiary that originates, sells and services SBA loans. The
decrease in 2007 is primarily due to a decrease in the unpaid principal balance
of serviced loans.

Other income was $22.1 million and $27.3 million for the years
ended
December 31, 2007 and 2006, respectively. We primarily attribute the decline in
other income to:

Ø
A decrease of $2.2 million in gains on sales of other real
estate,
 primarily attributable to a gain of $1.5 million recognized on the sale of a
 parcel of other real estate in January 2006;Ø
A decrease of $1.7 million attributable to interest due on tax
 refunds associated with the filing of amended federal income tax returns for
 the years from 2000 through 2004 that was recorded in the fourth quarter of
 2006;Ø
A release fee of $938,000 received in the first quarter of 2006
on
 funds collected from a loan previously sold in which First Bank was entitled
 to 25% of any future fees collected on the loan under a defined release fee
 agreement that was entered into in conjunction with the loan sale; partially
 offset byØ
An increase of $569,000 in gains on sales of other assets. Net
 pre-tax gains on sales of other assets were $4.4 million for the year ended
 December 31, 2007, and included a pre-tax gain of $2.6 million recognized in
 November 2007 on the sale of a branch building and a pre-tax gain of $1.0
 million recognized in July 2007 on the sale of our Texas Branch Offices, as
 further described in Note 2 to our36

consolidated financial statements. Net pre-tax gains on sales of
 other assets were $3.8 million for the year ended December 31, 2006 and
 included a pre-tax gain of $2.8 million recognized in September 2006 on the
 sale of an asset that was acquired as settlement in full of a loan previously
 charged-off and a pre-tax gain of $885,000 recognized on the sale of assets
 that were acquired with an acquisition completed in late 2004; andØ
Income associated with continued growth and expansion of our
banking
 franchise, including our de novo branch offices and our acquisitions
 completed during 2006 and 2007.Noninterest Expense. Noninterest
expense was $344.4 million for the year ended December 31, 2007, in comparison
to $315.6 million for 2006. Our efficiency ratio was 74.21% for the year ended
December 31, 2007, compared to 64.98% for 2006. The increase in noninterest
expense was primarily attributable to our 2006 and 2007 acquisitions, including
salaries and employee benefits expense, occupancy and furniture and equipment
expenses, as well as increases in amortization of intangible assets and other
expense.

Salaries and employee benefits increased $8.5 million to $171.0
million
for the year ended December 31, 2007, from $162.5 million in 2006. We attribute
the overall increase to the following:

Ø
Increased salaries and employee benefits expenses associated
with an
 aggregate of 38 additional branches acquired in 2006 and 2007, eight de novo
 branches opened in 2007, and the acquisitions of UPAC and Adrian Baker in
 2006;Ø
Generally higher salary and employee benefit costs associated
with
 employing and retaining qualified personnel; andØ
Approximately $4.6 million of severance expenses associated with
 certain profit improvement initiatives, primarily related to reductions in
 mortgage banking production staff levels following the discontinuation of the
 origination and sale of sub-prime mortgage loans in February 2007; partially
 offset byØ
Lower salaries and employee benefits expenses resulting from
 decreased staffing levels within our mortgage banking division and the
 completion of certain other staff reductions. Our total FTEs decreased to
 approximately 2,440 at December 31, 2007, from 2,630 at December 31, 2006;
 andØ
Lower incentive compensation as a result of the decline in our
 earnings.Occupancy, net of rental income, and furniture and equipment
expense
was $53.7 million and $44.6 million for the years ended December 31, 2007 and
2006, respectively. The increase reflects higher levels of expense resulting
from our de novo activities and acquisitions in 2006 and 2007, as discussed
above, as well as increased technology equipment expenditures, continued
expansion and renovation of certain corporate and branch offices, increased
expenses associated with the purchase and/or lease of properties that will be
utilized for future branch office locations, and depreciation expense
associated with acquisitions and capital expenditures.

Information technology and item processing fees were $36.3
million and
$37.1 million for the years ended December 31, 2007 and 2006, respectively. The
decrease in these fees in 2007 reflects a reduction in the number of
acquisitions completed during 2007, as compared to 2006, and the related
de-conversion costs from other providers associated with bank acquisitions; as
well as enhanced automation of certain services, including remote deposit,
branch capture and electronic image exchange, which has significantly
contributed to reduced manual processes and reduced costs associated with these
services; partially offset by depreciation expense associated with the related
capital expenditures necessary to support the enhanced delivery channels. The
decrease was also partially offset by higher costs associated with the addition
of de novo branch offices and offices provided by our acquisitions, including
the acquisition of CFHI; growth and technological advancements consistent with
our product and service offerings; and continued expansion and upgrades to
technological equipment, networks and communication channels.

Legal, examination and professional fees were $9.9 million and
$8.8
million for the years ended December 31, 2007 and 2006, respectively. The
continued expansion of overall corporate activities, the ongoing professional
services utilized by certain of our acquired entities, and the levels of legal
fees associated with certain litigation matters have all contributed to the
overall expense levels in 2006 and 2007.

Amortization of intangible assets was $12.4 million and $8.2
million
for the years ended December 31, 2007 and 2006, respectively. The increase is
attributable to core deposit intangibles associated with our acquisitions
completed in 2006 and 2007, in addition to the customer list intangibles
associated with our acquisitions of Adrian Baker and UPAC in March 2006 and May
2006, respectively, as further described in Note 2 and Note 8 to our
consolidated financial statements.

37

Charitable contributions expense was $5.9 million and $6.5
million for
the years ended December 31, 2007 and 2006, respectively, reflecting a decrease
in charitable contributions made to the Foundation, a charitable foundation
established by our Chairman and members of his immediate family, as further
described in Note 19 to our consolidated financial statements.

Other expense was $39.6 million and $32.5 million for the years
ended
December 31, 2007 and 2006, respectively. Other expense encompasses numerous
general and administrative expenses including communications, insurance,
freight and courier services, correspondent bank charges, miscellaneous losses
and recoveries, memberships and subscriptions, transfer agent fees, sales taxes
and travel, meals and entertainment. The increase in other expense was
primarily attributable to:

Ø
Expenses associated with continued growth and expansion of our
 banking franchise, including our de novo branch offices and our acquisitions
 completed during 2006 and 2007; andØ
An increase in overdraft, robbery, fraud and other losses of
$6.6
 million from $2.3 million in 2006 to approximately $8.9 million in 2007,
 including a single fraud loss of $5.0 million and an expense of $700,000
 related to our estimated indemnification obligation, as a member bank, to
 share certain litigation costs of Visa. This resulted from revisions in
 October 2007 to Visas by-laws affecting all member banks, as part of an
 overall reorganization in which the member banks indemnified Visa on certain
 covered litigation. The expense related to Visas American Express litigation,
 which was settled by Visa in November 2007, and other Visa litigation that
 had not been settled at that time but was subsequently settled in 2008. As
 part of the reorganization, Visa issued a planned IPO in 2008, and a portion
 of the proceeds of the IPO representing each member banks proportionate
 share was used to fund the litigation settlements. Our proportional share of
 the proceeds of the Visa IPO more than offset our estimated liabilities
 related to the Visa litigation, as further described under Comparison of
 Results of Operations for 2008 and 2007.Provision for Income
Taxes. The provision for income taxes was $5.1
million for the year ended December 31, 2007, representing an effective income
tax rate of 9.3%, in comparison to $51.9 million, representing an effective
income tax rate of 32.8%, for the year ended December 31, 2006. The decrease in
our provision for income taxes primarily reflects our decreased earnings, an
increase in tax exempt income and a partial reduction of our deferred tax asset
valuation allowance. In the fourth quarter of 2007, we reversed a portion of
our deferred tax asset valuation allowance which had the effect of reducing the
provision for income taxes by $10.7 million. This reversal was necessitated by
a reduction in the allowance for loan losses allocated to certain loans
acquired in 2004 as a result of final resolution of the loans through
repayment, sale or other means. In 2006, we reversed a $2.9 million federal tax
reserve and $1.9 million state tax reserve as they were no longer deemed
necessary as a result of the resolution of a potential tax liability. In
addition, we recorded net tax benefits of $1.9 million and $5.6 million
relating to the utilization of certain federal and state tax credits for the
years ended December 31, 2007 and 2006, respectively. Excluding these
transactions, our effective income tax rate was 33.5% and 38.4% for the years
ended December 31, 2007 and 2006, respectively, as further described in Note 13
to our consolidated financial statements.

38

Interest
Rate Risk Management

The maintenance of a satisfactory level of net interest income
is a
primary factor in our achieving acceptable income levels. However, the maturity
and repricing characteristics of our loan and investment portfolios may differ
significantly from those within our deposit structure. The nature of the loan
and deposit markets within which we operate, and our objectives for business
development within those markets at any point in time, influence these
characteristics. In addition, the ability of borrowers to repay loans and the
possibility of depositors withdrawing funds prior to stated maturity dates
introduces divergent option characteristics that fluctuate as interest rates
change. These factors cause various elements of our balance sheet to react in
different manners and at different times relative to changes in interest rates,
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; andØ
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, Chief
Investment Officer, Executive Vice President of Commercial Banking, 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
reprice 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 has 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 3.6% of net interest
income, based on assets and liabilities at December 31, 2008. 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 cuts in interest rates in late 2007 and
throughout 2008, has negatively impacted our net interest income and will
continue to impact the level of our net interest income throughout 2009.

39

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 December 31, 2008, adjusted to account
for anticipated prepayments:

Three
 Months
 or Less

Over
 Three
 through
 Six
 Months

Over
 Six
 through
 Twelve
 Months

OverOnethroughFive
Years

OverFiveYears

Total(dollars expressed in thousands)Interest-earning
assets:Loans (1)

$
5,290,893


546,859


779,330


1,888,599


87,294


8,592,975Investment securities


209,541


92,089


113,819


151,608


55,869


622,926Short-term investments


44,678














44,678Total interest-earning
assets

$
5,545,112


638,948


893,149


2,040,207


143,163


9,260,579Interest-bearing
liabilities:Interest-bearing demand
deposits

$
346,247


215,235


140,371


102,939


131,013


935,805Money market deposits


2,393,672














2,393,672Savings deposits


65,214


53,706


46,034


65,214


153,445


383,613Time deposits


994,236


540,835


1,790,163


459,629


1,651


3,786,514Other borrowings


354,423





100,000


120,710





575,133Subordinated
debentures


282,481











71,347


353,828Total interest-bearing
liabilities


4,436,273


809,776


2,076,568


748,492


357,456


8,428,565Effect of interest rate swap
agreements


(125,000
)







125,000





Total interest-bearing
liabilities after the effect of interest rate
 swap agreements

$
4,311,273


809,776


2,076,568


873,492


357,456


8,428,565Interest-sensitivity
gap:Periodic

$
1,233,839


(170,828
)

(1,183,419
)

1,166,715


(214,293
)

832,014Cumulative


1,233,839


1,063,011


(120,408
)

1,046,307


832,014Ratio of interest-sensitive
assets to interest-sensitive liabilities:Periodic


1.29


0.79


0.43


2.34


0.40


1.10Cumulative


1.29


1.21


0.98


1.13


1.10(1)
Loans are presented net of
 unearned discount.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; andØ
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 $832.0 million, or 7.72% of our total
assets, and $1.23 billion, or 11.25% of our total assets, at December 31, 2008
and 2007, respectively. However, we were in a liability-sensitive position on a
cumulative basis through the twelve-month time horizon of $120.4 million, or
1.12% of our total assets, and $1.09 billion, or 9.97% of our total assets, at
December 31, 2008 and 2007, 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 financial 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.

40

The derivative
financial instruments that we held as of December 31, 2008 and 2007 are
summarized as follows:

December 31,2008

2007Notional
 Amount

Credit
 Exposure

Notional
 Amount

Credit
 Exposure(dollars expressed in thousands)Cash flow hedges

$
125,000





400,000

5,271Customer interest rate swap
contracts


16,000







Interest rate floor
agreements








300,000

1,699Interest rate lock
commitments


48,700

831



3,000

23Forward commitments to sell
mortgage-backed securities


40,300

(325
)


55,000

40The notional
amounts of our derivative financial 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 financial instruments and the
collateral held to support the credit exposure was of no value.

For the year
ended December 31, 2008, we realized net interest income of $11.5 million on
our derivative financial instruments, whereas for the years ended December 31,
2007 and 2006, we realized net interest expense of $3.1 million and $5.0
million, respectively, on our derivative financial instruments. The earnings
associated with our derivative financial instruments reflect the interest rate
environment during these periods as well as the overall level of our derivative
instruments throughout these periods. We also recorded net gains on derivative
instruments, which are included in noninterest income in the consolidated
statements of operations, of $1.7 million and $1.2 million for the years ended
December 31, 2008 and 2007, respectively, in comparison to net losses on
derivative instruments of $390,000 for the year ended December 31, 2006. The
net gains and losses on derivative instruments reflect changes in the value of
our interest rate floor and interest rate cap agreements. In March 2008, we
entered into four interest rate swap agreements with a notional amount of
$125.0 million in aggregate. These swap agreements are designated as cash flow
hedges and effectively convert the interest payments on certain of our
subordinated debentures from variable rate to fixed rate. Additionally, in May
2008, we terminated our interest rate floor agreements, and in December 2008,
we terminated certain of our interest rate swap agreements that were designated
as cash flow hedges in order to appropriately modify our overall hedge position
in accordance with our interest rate risk management program. Information
regarding our derivative financial instruments outlined in the table above is
further described in Note 5 to our consolidated financial statements appearing
elsewhere in this report.

Mortgage Banking Activities

Our mortgage
banking activities consist of the origination, purchase and servicing of
residential mortgage loans. The purchase of loans to be held for sale is
primarily limited to loans that we acquire in conjunction with our acquisition
of other financial institutions. Generally, we sell our production of
residential mortgage loans in the secondary loan markets. However, from time to
time, we retain a portion of new residential mortgage loan production in our
real estate mortgage portfolio. Servicing rights may either be retained or
released with respect to conventional, FHA and VA conforming fixed-rate and
conventional adjustable rate residential mortgage loans.

For the three
years ended December 31, 2008, 2007 and 2006, we originated residential
mortgage loans held for sale and held for portfolio totaling $221.8 million,
$548.0 million and $1.28 billion, respectively, and sold residential mortgage
loans totaling $210.6 million, $512.5 million and $1.11 billion, respectively.
The origination and purchase of residential mortgage loans and the related sale
of the loans provides us with additional sources of income including the gain
or loss realized upon sale, the interest income earned while the loan is held
awaiting sale and the ongoing loan servicing fees from the loans sold with
servicing rights retained. Mortgage loans serviced for investors aggregated
$1.09 billion, $1.10 billion and $1.04 billion at December 31, 2008, 2007 and
2006, respectively.

Gains (losses)
on mortgage loans originated for resale, including loans sold and held for
sale, were $1.8 million, ($8.2) million and $14.0 million for the years ended
December 31, 2008, 2007 and 2006, respectively. Effective July 1, 2008, we
implemented SFAS No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities, for our
mortgage loans held for sale, and as a result, we now recognize our mortgage
loans held for sale at fair value on a recurring basis. For the year ended
December 31, 2008, the net gains reflect the adjustments to current fair values
of loans held for sale; interest rate lock commitments, net of anticipated
fallout; and forward sale commitments to sell mortgage-backed securities. For
the years ended December 31, 2007 and 2006, the net (losses) gains reflect the
adjustments of loans held for sale to lower of cost or fair value, and interest
rate lock commitments, net of anticipated fallout, and forward sale commitments
to sell mortgage-backed securities to current fair values.

41

Fallout
represents loans that are not funded due to issues discovered during the
underwriting process or withdrawal of the loan application by the customer.

We primarily
attribute the gain in 2008 as compared to the loss in 2007 to the following:

Ø
The recognition of $11.4 million of losses in
2007 related to repurchase obligations on mortgage loans sold with recourse,
compared to gains on such repurchase obligations of $369,000 in 2008. We were
obligated to repurchase mortgage loans with a principal balance of
approximately $31.4 million throughout 2007 based on the terms of the
underlying sales contracts, which resulted in losses of $11.4 million. Our
primary recourse risk, attributable to early payment default on sub-prime
residential mortgage loan products that we previously sold in the secondary
market, generally expired throughout the first quarter of 2008. During 2008, we
recognized a gain on repurchase obligations of $369,000 primarily as a result
of the reversal of an established reserve for repurchase obligation losses
established in 2007; partially offset byØ
A decrease in the volume of mortgage loans
 originated and subsequently sold in the secondary market. For the years ended
 December 31, 2008 and 2007, we sold residential mortgage loans totaling
 $210.6 million and $512.5 million, respectively; andØ
A pre-tax
 loss of $804,000 recognized in April 2008 on the sale of approximately $24.0
 million of residential real estate mortgage loans, and a pre-tax gain of
 $851,000 recognized in April 2007 on the sale of approximately $13.4 million
 of certain repurchased and other residential mortgage loans.We primarily
 attribute the loss in 2007 as compared to the gain in 2006 to the following:Ø
Losses of $11.4 million related to the
 repurchase obligations on mortgage loans sold with recourse, compared to zero
 in 2006. We were obligated to repurchase mortgage loans with a principal
 balance of approximately $31.4 million based on the terms of the underlying
 sales contracts;Ø
A decrease in the volume of mortgage loans
 originated and subsequently sold in the secondary market. We discontinued the
 origination and sale in the secondary market of sub-prime loans in February
 2007, and as such, the discontinuation of these activities reduced the amount
 of gains on loans sold and held for sale, in comparison to the level that we
 had historically generated through the origination and sale of these
 sub-prime loan products. Historically, approximately 40% of our origination
 and sale volume was related to sub-prime loan products; andØ
A pre-tax gain of $851,000 recorded on the
 sale of approximately $13.4 million of certain repurchased and other
 residential mortgage loans in April 2007, compared to pre-tax gains of $2.4
 million recorded on the sale of $278.7 million of certain residential
 mortgage loans during 2006 and a $3.7 million gain, before applicable income
 taxes, recorded on the sale of $32.6 million of commercial loans in December
 2006; andØ
The recognition of $2.1 million of income
 generated from the securitization of $138.9 million of residential mortgage
 loans in March and April 2006.Interest
income on mortgage loans held for sale was $2.0 million for the year ended
December 31, 2008, in comparison to $10.1 million and $18.2 million for the
years ended December 31, 2007 and 2006, respectively. The amount of interest
income realized on loans held for sale is a function of the average balance of
loans held for sale, the period for which the loans are held and the prevailing
interest rates when the loans are made. The average balance of loans held for
sale was $32.9 million, $140.7 million and $247.0 million for the years ended
December 31, 2008, 2007 and 2006, respectively. The yield on our portfolio of
loans held for sale was 5.97%, 7.16% and 7.39% for the years ended December 31,
2008, 2007 and 2006, respectively. This compares with our cost of funds, as a
percentage of average interest-bearing liabilities, of 2.90%, 3.88% and 3.49%
for the years ended December 31, 2008, 2007 and 2006, respectively.

We report
mortgage loan servicing fees in noninterest income in our consolidated
statements of operations, net of interest shortfall and mortgage-backed
security guarantee fee expense. Interest shortfall equals the difference
between the interest collected from a loan-servicing customer upon prepayment
of the loan and a full months interest that is required to be remitted to the
security owner. Our gross mortgage loan servicing fees were $2.9 million, $2.8
million and $2.7 million for the years ended December 31, 2008, 2007 and 2006,
respectively.

On January 1,
2008, we opted to measure servicing rights at fair value, as permitted by SFAS
No. 156, Accounting for Servicing of Financial Assets, and
further discussed in Note 1 to our consolidated financial statements. We report
the changes in the fair value of mortgage servicing rights in noninterest
income in our consolidated statements of operations. The fair value of mortgage
servicing rights fluctuates based on changes in mortgage interest rates,
prepayment speed assumptions and certain other assumptions utilized to value
the mortgage servicing rights. We recorded a loss of $9.6 million related to
the change in fair value of mortgage servicing rights for the year ended
December 31, 2008 primarily due to the decrease in mortgage interest rates
throughout 2008 and the related increase

42

in prepayment speeds, as well as an increase
in the discount rate. Prior to January 1, 2008, we amortized our mortgage
servicing rights, which are reflected in the change in fair value of servicing
rights in noninterest income in our consolidated statements of operations.
Amortization of mortgage servicing rights was $2.8 million and $4.1 million for
the years ended December 31, 2007 and 2006, respectively. We attribute the
decrease in amortization of mortgage servicing rights in 2007 to lower levels
of prepayments.

Our interest
rate risk management policy provides certain hedging parameters to reduce the
interest rate risk exposure arising from changes in loan prices from the time
of commitment until the sale of the security or loan. To reduce this exposure,
we use forward commitments to sell fixed-rate mortgage-backed securities at a
specified date in the future. At December 31, 2008, 2007 and 2006, we had $51.0
million, $54.5 million and $56.0 million, respectively, of loans held for sale
and related commitments, net of committed loan sales and estimated underwriting
fallout, of which $40.3 million, $55.0 million and $54.0 million, respectively,
were hedged through the use of such forward commitments.

Investment Securities

We classify
the securities within our investment portfolio as available for sale or held to
maturity. Prior to July 2007, we classified the securities within our
investment portfolio as trading, available for sale or held to maturity. Our
investment security portfolio consists primarily of securities designated as
available for sale. The investment security portfolio was $622.9 million at
December 31, 2008, compared to $1.02 billion and $1.46 billion at December 31,
2007 and 2006, respectively.

We primarily
attribute the decrease in our investment securities portfolio in 2008 to: sales
of investment securities of $417.4 million, and maturities and/or calls of
investment securities of $378.7 million; partially offset by the reinvestment
of funds available from maturities and sales of investment securities of
approximately $424.8 million in higher-yielding securities. The remaining funds
provided by maturities and/or calls and sales of investment securities were
primarily invested in cash and cash equivalents and, to a lesser extent,
utilized to fund internal loan growth.

The decrease
in our investment securities portfolio in 2007 was attributable to: maturities
and sales of investment securities of $1.05 billion and $170.7 million,
respectively; the liquidation of our trading portfolio in July 2007, reflecting
a decrease from the portfolio balance of $81.2 million at December 31, 2006;
partially offset by the reinvestment of funds available from maturities and
sales of investment securities of approximately $770.0 million in
higher-yielding securities; and our acquisitions completed in 2007, which
provided $74.5 million in securities.

Additional
information regarding our investment securities portfolio is more fully
described in Note 3 to our consolidated financial statements.

43

Loans and Allowance for Loan Losses

Interest
earned on our loan portfolio represents the principal source of income for
First Bank. Interest and fees on loans were 93.3%, 90.0% and 89.9% of total interest
income for the years ended December 31, 2008, 2007 and 2006, respectively. We
recognize interest and fees on loans as income using the interest method of
accounting. Loan origination fees are deferred and accreted to interest income
over the estimated life of the loans using the interest method of accounting.
The accrual of interest on loans is discontinued when it appears that interest
or principal may not be paid in a timely manner in the normal course of
business. We generally record payments received on nonaccrual and impaired
loans as principal reductions, and defer the recognition of interest income on
loans until all principal has been repaid or an improvement in the condition of
the loan has occurred that would warrant the resumption of interest accruals.

Loans, net of
unearned discount, represented 79.7% of our assets as of December 31, 2008,
compared to 81.5% of our assets at December 31, 2007. Loans, net of unearned
discount, decreased $293.2 million to $8.59 billion at December 31, 2008 from
$8.89 billion at December 31, 2007. The following table summarizes the
composition of our loan portfolio by major category and the percent of each
category to the total portfolio as of the dates presented:

December
 31,2008

2007

2006


2005

2004Amount

%

Amount

%

Amount

%

Amount

%

Amount

%(dollars
 expressed in thousands)Commercial,
 financial and agricultural

$
2,575,505

30.1
%
$
2,382,067

27.0
%
$
1,934,912

26.0
%
$
1,619,822

24.1
%
$
1,575,232

26.2
%Real estate
 construction and development


1,572,212

18.4


2,141,234

24.3


1,832,504

24.6


1,564,255

23.3


1,318,413

21.9Real estate
 mortgage:One-to-four-family
 residential loans


1,553,366

18.1


1,602,575

18.2


1,270,158

17.0


1,214,121

18.1


870,889

14.5Multi-family
 residential loans


220,404

2.6


177,246

2.0


141,341

1.9


143,663

2.2


102,447

1.7Commercial real
 estate loans


2,562,598

30.0


2,431,464

27.5


2,203,649

29.5


2,112,004

31.5


2,088,245

34.8Consumer and
 installment, net of unearned discount


70,170

0.8


85,519

1.0


72,877

1.0


56,588

0.8


53,397

0.9Total loans,
 excluding loans held for sale


8,554,255

100.0
%

8,820,105

100.0
%

7,455,441

100.0
%

6,710,453

100.0
%

6,008,623

100.0
%Loans held for
 sale


38,720




66,079




216,327




315,134




133,065Total loans

$
8,592,975



$
8,886,184



$
7,671,768



$
7,025,587



$
6,141,688Commercial,
financial and agricultural loans include loans that are made primarily based on
the borrowers general credit strength and ability to generate cash flows for
repayment from income sources even though such loans may also be secured by
real estate or other assets. Real estate construction and development loans,
primarily relating to residential properties and commercial properties,
represent financing secured by real estate under construction. Real estate
mortgage loans consist primarily of loans secured by single-family,
owner-occupied properties and various types of commercial properties on which
the income from the property is the intended source of repayment. Consumer and
installment loans are loans to individuals and consist of a mix of secured and
unsecured loans, including preferred credit and loans secured by automobiles.
Loans held for sale are primarily fixed and adjustable rate residential
mortgage loans pending sale in the secondary mortgage market in the form of a
mortgage-backed security, or to various private third-party investors.

Loans at
December 31, 2008 mature as follows:

Over One Year
 Through Five
 Years

Over Five YearsOne Year
 or Less

Fixed
 Rate

Floating
 Rate

Fixed
 Rate

Floating
 Rate

Total(dollars expressed in thousands)Commercial, financial and
agricultural

$
1,450,727


314,340


583,238


71,043


156,157


2,575,505Real estate construction and
development


1,011,260


111,108


371,145


31,915


46,784


1,572,212Real estate mortgage:One-to-four family residential
loans


101,219


195,127


38,008


168,527


1,050,485


1,553,366Multi-family residential
loans


117,857


48,171


23,433


14,331


16,612


220,404Commercial real estate
loans


569,573


952,341


315,341


376,263


349,080


2,562,598Consumer and installment, net of
unearned discount


29,742


24,305


2,322


12,586


1,215


70,170Loans held for sale


38,720














38,720Total loans

$
3,319,098


1,645,392


1,333,487


674,665


1,620,333


8,592,97544

We seek to maintain a lending strategy that emphasizes quality,
growth
and diversification. Throughout our organization, we employ a common credit
underwriting policy. Our commercial lenders focus principally on small to
middle-market companies. Consumer lenders focus principally on residential
loans, including home equity loans and other consumer financing opportunities
arising out of our branch banking network.

During the five years ended December 31, 2008, loans, net of
unearned
discount, increased from $5.33 billion at December 31, 2003 to $8.59 billion at
December 31, 2008, an increase of $3.26 billion, or 61.2%. Our acquisitions
have contributed to an increase in the portfolios of new loans during the five
years ended December 31, 2008. In certain cases, these acquired portfolios
contained significant loan problems, which we considered in our acquisition
pricing. As we resolved the asset quality issues, the portfolios of the
acquired entities tended to decline due to the elimination of problem loans and
because many of the resources that would otherwise be directed toward
generating new loans were concentrated on improving or eliminating existing
problem relationships. Throughout this period, we have also enhanced our
capabilities for achieving and managing internal growth. A key element of this
process has been the expansion of our corporate business development staff,
which is responsible for the internal development and management of both loan
and deposit relationships with commercial customers.

The following
table summarizes the components of changes in our loan portfolio, net of
unearned discount, for the five years ended December 31, 2008:

Increase (Decrease) For the Year Ended December
31,2008

2007

2006

2005

2004(dollars expressed in thousands)Internal loan volume
(decrease) increase:Commercial
lending

$
(187,661
)

716,168


160,642


204,494


91,760Residential
real estate lending (1)


(52,556
)

(23,421
)

410,181


481,642


32,348Consumer
lending, net of unearned discount


(15,349
)

2,376


13,883


2,479


(8,180
)Loans and leases sold


(37,643
)

(72,166
)

(344,687
)

(14,337
)

(83,216
)Loans provided by
 acquisitions





693,495


545,106


209,621


780,901Securitization of loans





(102,036
)

(138,944
)




Total
(decrease) increase

$
(293,209
)

1,214,416


646,181


883,899


813,613(1)
Includes loans held for
 sale.We attribute
the net decrease in our loan portfolio in 2008 primarily to:

Ø
A decrease of $569.0 million in our real estate construction and
 development portfolio primarily attributable to net loan charge-offs of
 $236.7 million, transfers to other real estate and payments. Throughout 2008,
 we made considerable progress in reducing the exposure in our construction
 and development portfolio in light of the current economic environment within
 our market areas. The following table summarizes the composition of our real
 estate construction and development portfolio by region as of December 31,
 2008 and 2007:December 31,2008

2007(dollars expressed in thousands)Northern California

$
234,942


471,216Florida


37,242


96,891Southern California


504,354


563,145Chicago


185,054


158,436Metropolitan St. Louis,
 Missouri


230,254


366,928Texas


283,993


366,563Other


96,373


118,055Total

$
1,572,212


2,141,234Within our real estate construction and development portfolio,
we
 experienced the most distress in our Northern California region. Our exposure
 to Northern California has been reduced by $236.3 million, or 50.1%, throughout
 2008, primarily as a result of charge-offs of $125.8 million, transfers to
 other real estate, and payments. Of the remaining portfolio balance of $234.9
 million, $66.1 million, or 28.1%, of loans were in a nonperforming status as
 of December 31, 2008.We also experienced significant distress within our Florida,
Southern
 California, Chicago and Metropolitan St. Louis regions and recorded
 significant charge-offs within these regions in 2008 as further discussed
 below. Of the remaining balance in our real estate construction and
 development portfolio of $1.57 billion, $270.4 million, or 17.2%, is on
 nonaccrual at December 31, 2008. We have charged the vast majority of these
 nonaccrual loans down to appraised values based on appraisals dated on or after
 January 1, 2008 and have additional reserves established on these loans as
 further described below;45

Ø
A decrease of $49.2 million in our one-to-four family
residential
 real estate loan portfolio primarily attributable to charge-offs of $67.2
 million, transfers to other real estate, payments and the sale of
 approximately $24.0 million of one-to-four family residential real estate
 loans in April 2008, partially offset by an increase in our home equity loan
 portfolio of $81.2 million. The following table summarizes the composition of
 our one-to-four family residential real estate loan portfolio as of December
 31, 2008 and 2007:December 31,2008

2007(dollars expressed in thousands)One-to-four family residential
 real estate:Non-Mortgage Division
 portfolio

$
450,264


486,389Mortgage Division
 portfolio, excluding Florida


427,821


494,235Florida portfolio


245,187


273,017Home equity portfolio


430,094


348,934Total

$
1,553,366


1,602,575Our Non-Mortgage Division loan portfolio consists of prime
mortgage
 loans originated to customers from our retail branch banking network. We have
 not incurred significant losses or delinquencies within this portfolio of
 loans. Our Mortgage Division portfolio, excluding Florida, consists of both
 prime mortgage loans and Alt A and sub-prime mortgage loans. At December 31,
 2008, approximately 47.2% of the Mortgage Division portfolio consisted of
 prime mortgages and the remaining 52.8% consisted of Alt A and sub-prime
 mortgages. We experienced significant distress within this portfolio in 2008
 and recorded net charge-offs of $43.0 million as a result of charging these
 loans down to between 67.5% and 75.0% of current appraised values at the time
 these loans became nonperforming loans. As of December 31, 2008,
 approximately 20.7% of this portfolio is delinquent or restructured,
 consisting of loans 30-89 days delinquent of $31.5 million, restructured
 loans of $17.7 million, and nonaccrual loans of $38.5 million. Our Florida
 portfolio was acquired in the CFHI acquisition and consists primarily of
 prime and Alt A mortgage loans. We incurred net charge-offs of $11.1 million
 on this portfolio in 2008. As of December 31, 2008, approximately 20.6% of
 this portfolio is delinquent or restructured, consisting of loans 30-89 days
 delinquent of $12.8 million, restructured loans of $7.0 million, and
 nonaccrual loans of $30.7 million. Our home equity portfolio consists of
 prime loans originated to customers from our retail branch banking network.
 We have not incurred significant losses or delinquencies within this
 portfolio of loans; andØ
A decrease of $27.4 million in our loans held for sale portfolio
 primarily resulting from the timing of loan originations and subsequent sales
 in the secondary mortgage market.These decreases were partially offset by:Ø
An increase of $193.4 million in our commercial, financial and
 agricultural portfolio primarily attributable to internal loan production
 growth, consistent with our strategy of decreasing our exposure to real
 estate, specifically real estate construction and development, in the current
 economic environment, and focusing on expanding this segment of our loan
 portfolio;Ø
An increase of $43.2 million in multi-family residential loans
 attributable to internal loan production growth; andØ
An increase of $131.1 million in our commercial real estate loan
 portfolio primarily due to internal loan production growth, the majority of
 which has been originated through our national banking unit, which was
 established to focus on delivering and expanding certain of our national
 lines of business, including specialized lending groups such as leveraged
 finance, healthcare lending, association banking services, religious lending,
 trade finance and treasury management services.Loans, net of unearned discount, increased $1.21 billion to
$8.89
 billion at December 31, 2007 from $7.67 billion at December 31, 2006. The
 overall increase in loans, net of unearned discount, in 2007 is primarily
 attributable to internal loan growth of $695.1 million, repurchases of
 certain residential mortgage loans, and our acquisitions completed in 2007,
 which provided loans, net of unearned discount, of $693.5 million, in
 aggregate. This increase was partially offset by the securitization and sale
 of certain residential mortgage loans, and the sale and/or payoff of certain
 nonperforming and other loans, as further discussed below.We attribute the net increase in our loan portfolio in 2007
primarily
 to:Ø
An increase of $447.2 million in our commercial, financial and
 agricultural portfolio primarily attributable to internal loan production
 growth and $53.4 million associated with our acquisitions completed in 2007;46

Ø
An increase of $308.7 million in our real estate construction
and
 development portfolio primarily attributable to an increase of $152.7 million
 associated with our acquisitions completed in 2007;Ø
An increase of $332.4 million in our one-to-four family
residential
 real estate loan portfolio primarily attributable to an increase of $341.9
 million associated with our acquisitions completed in 2007, and internal loan
 production growth of $131.2 million, including $31.4 million of residential
 mortgage loans sold with recourse that we were required to repurchase based
 on the terms of the underlying sales contracts. Our primary recourse risk
 attributable to early payment default on sub-prime residential mortgage loans
 that we previously sold in the secondary market expired throughout the first
 quarter of 2008. In addition, we transferred approximately $116.4 million of
 one-to-four family residential real estate loans from our loans held for sale
 portfolio, as further discussed below. These increases were partially offset
 by the securitization and subsequent sale of $101.4 million of certain
 residential mortgage loans held in portfolio, and the sale and/or payoff of
 certain nonperforming and other loans, as further discussed below;Ø
An increase of $263.7 million in our commercial real estate loan
 portfolio primarily attributable to internal loan production growth of $146.6
 million and an increase of $134.3 million associated with our acquisitions
 completed in 2007; andØ
A decrease of $150.2 million in loans held for sale resulting
from
 (a) the timing of loan originations and subsequent sales in the secondary
 mortgage market; (b) a decrease in origination volumes primarily due to our
 exit from the sub-prime loan origination business during the first quarter of
 2007, which represented approximately 40% of our mortgage banking loan
 origination and sale volumes; and (c) the transfer of approximately $116.4
 million of one-to-four family residential real estate loans from our held for
 sale portfolio to our loan portfolio. Such loans were originated with the
 intent to sell in the secondary market; however, management elected not to
 sell these loans due to unstable market conditions and reduced bid prices.Nonperforming assets include nonaccrual
loans, restructured loans and other real estate. The following table presents
the categories of nonperforming assets and certain ratios as of the dates
presented:

December 31,2008

2007

2006

2005

2004(dollars expressed in thousands)Commercial, financial and
agricultural:Nonaccrual

$
40,647


5,916


9,879


4,948


11,054Restructured
terms














4Real estate construction and
development:Nonaccrual


270,444


151,812


13,344


11,137


13,435Real estate
mortgage:One-to-four
family residential loans:Nonaccrual


83,140


32,931


18,885


9,576


9,881Restructured
terms


24,641


7


9


10


11Multi-family
residential loans:Nonaccrual


545





272


740


434Commercial
real estate loans:Nonaccrual


23,009


11,294


6,260


70,625


50,671Consumer and
installment:Nonaccrual





263


81


160


310Total
nonperforming loans


442,426


202,223


48,730


97,196


85,800Other real
estate


91,524


11,225


6,433


2,025


4,030Total nonperforming
assets

$
533,950


213,448


55,163


99,221


89,830Loans, net of unearned
discount

$
8,592,975


8,886,184


7,671,768


7,025,587


6,141,688Loans past due 90 days or
more and still accruing

$
7,094


26,753


5,653


5,576


28,689Ratio of:Allowance
for loan losses to loans


2.56
%

1.89
%

1.90
%

1.93
%

2.45
%Nonperforming loans to loans


5.15


2.28


0.64


1.38


1.40Allowance
for loan losses to nonperforming loans


49.77


83.27


299.05


139.23


175.65Nonperforming assets to loans and other real estate


6.15


2.40


0.72


1.41


1.4647

Nonperforming loans, consisting of loans on nonaccrual status
and
certain restructured loans, were $442.4 million, $202.2 million and $48.7
million at December 31, 2008, 2007 and 2006, respectively. Other real estate
owned was $91.5 million, $11.2 million and $6.4 million at December 31, 2008,
2007 and 2006, respectively. Our nonperforming assets, consisting of
nonperforming loans and other real estate owned, were $534.0 million, $213.4
million and $55.2 million at December 31, 2008, 2007 and 2006, respectively.
Our nonperforming assets at December 31, 2008 included $61.0 million of
nonaccrual loans and $51.9 million of other real estate owned, or $112.9
million of nonperforming assets, in aggregate, held by FB Holdings, a
subsidiary of First Bank which is 46.76% owned by FCA, an affiliated entity. As
such, FCA owned approximately 21.1% of our nonperforming assets at December 31,
2008.

Nonperforming loans at December 31, 2008 increased $240.2
million, or
118.8%, from nonperforming loans at December 31, 2007. The following table
summarizes the composition of our nonperforming loans by region / business
segment at December 31, 2008 and 2007:

December 31,2008

2007(dollars expressed in thousands)Northern California real
 estate

$
66,076


99,234Mortgage Division,
 excluding Florida


56,118


20,347Florida


68,522


45,098Southern California real
 estate


69,966


Chicago real estate


46,272


Metropolitan St. Louis, Missouri
 real estate


42,182


5,000Texas real estate


23,161


6,533First Bank Business
 Capital, Inc.


24,501


Other


45,628


26,011Total
nonperforming loans

$
442,426


202,223We attribute the $240.2
million net increase in our nonperforming loans during the year ended
December 31, 2008 to the following:

Ø
An increase in nonaccrual loans of $118.6 million in our real
estate
 construction and development loan portfolio primarily resulting from an
 overall increase in nonaccrual loans throughout our markets, as demonstrated
 in the table above, partially offset by net loan charge-offs of $236.7
 million and transfers to other real estate. We continue to experience
 deterioration in our real estate construction and development portfolio as a
 result of weak economic conditions and significant declines in real estate
 values;Ø
An increase in nonaccrual loans of $50.2 million in our
one-to-four
 family residential real estate loan portfolio primarily driven by current
 market conditions and the overall deterioration of Alt A and sub-prime
 residential mortgage loan products experienced throughout the mortgage
 banking industry. Our one-to-four family residential nonaccrual loans in our
 mortgage banking division, excluding Florida, increased $18.1 million, from
 $20.3 million at December 31, 2007 to $38.5 million at December 31, 2008. Our
 one-to-four family residential nonaccrual loans in our Florida region
 increased $23.3 million, from $7.4 million at December 31, 2007 to $30.7
 million at December 31, 2008. The remaining increase of $8.8 million occurred
 in our non-mortgage division portfolio;Ø
An increase in one-to-four family restructured loans of $24.6
 million, consisting of total restructured loans of $28.6 million, partially
 offset by $3.9 million of restructured loans classified as nonaccrual in the
 one-to-four family residential real estate loan category. At December 31,
 2008, restructured loans in our mortgage banking division and Florida region
 were $17.7 million and $7.0 million, respectively. Throughout 2008, certain
 one-to-four family residential mortgage loans in our Florida region and
 mortgage banking division, primarily located in California, were
 restructured, whereby the contractual interest rate was reduced over a
 certain time period due to concentrated efforts to work with borrowers. At
 the time of the restructuring, the individual loans were in full compliance
 with the terms of the original loan contracts. As of December 31, 2008, we
 had total restructured loans of $28.6 million, of which $3.9 million, or
 13.7%, were nonaccrual and $3.9 million, or 13.7% were delinquent. As such,
 27.4% of our restructured loans were delinquent or on nonaccrual status at
 December 31, 2008; andØ
An increase in nonaccrual loans of $34.7 million in our
commercial,
 financial and agricultural portfolio primarily driven by a single credit in
 our First Bank Business Capital, Inc. subsidiary of $24.5 million.At December 31, 2008, we had approximately $292.7 million of
nonperforming loans with balances equal to or greater than $1.0 million. Of the $292.7 million of nonperforming loans with
balances equal to or greater than $1.0

48

million, we have obtained appraisals dated on
or after January 1, 2008 on approximately $276.3 million, or 94.4%, of these
loans. The aggregate appraised value of the underlying collateral securing
these loans is approximately $338.4 million, representing an aggregate
loan-to-value ratio of approximately 81.7%. After consideration of the
aggregate allowance for loan losses of $32.2 million allocated to these loans,
the remaining aggregate loan-to-value ratio is approximately 72.1%. We also
have approximately $10.0 million of impaired loans acquired in acquisitions not
included in the $292.7 million above. We have written these loans down to
estimated fair value as of December 31, 2008.

At December 31, 2008, we had approximately $66.1 million of
nonaccrual
one-to-four family residential real estate loans in our mortgage banking
division, including Florida, exclusive of approximately $3.0 million of
impaired loans acquired in acquisitions as discussed above. This balance
includes approximately $23.6 million of nonaccrual loans on which we have taken
charge-offs to 75% of appraised value at the time the loans became
nonperforming. We have an additional allowance for loan losses allocated to
these loans of $2.4 million. We also have an additional $42.5 million of
nonaccrual loans in our mortgage banking division on which we have not taken a
charge-off as of December 31, 2008. We have an allowance for loan losses
allocated to these loans of $12.8 million.

At December 31, 2008, we had approximately $63.9 million of
other real
estate with balances equal to or greater than $1.0 million. Of the $63.9
million of other real estate with balances equal to or greater than $1.0
million, we obtained appraisals dated on or after January 1, 2008 on
approximately $60.2 million, or 94.3%, of these properties. The aggregate
appraised value of the underlying collateral on these other real estate
properties is approximately $86.2 million, representing an aggregate
property-to-value ratio of approximately 69.8%.

Consequently, although we experienced a significant increase in
nonperforming assets in 2008, we have written a significant portion of the
balances of these assets down to appraised values based on appraisals obtained
on or after January 1, 2008. We do expect, however, the declining and unstable
market conditions associated with our one-to-four family residential mortgage
loan portfolio and our real estate construction and development portfolio to
continue, which will likely continue to impact the overall level of our
nonperforming loans, loan charge-offs and provision for loan losses associated
with these segments of our loan portfolio.

We are taking several measures to substantially decrease the
level of
our nonperforming assets, including the following initiatives:

Ø
Increasing staffing levels in our special assets groups as well
as in
 mortgage servicing to resolve and dispose of assets in a timely manner;Ø
Establishing a higher designated portion of incentive
compensation
 plans for our commercial and mortgage lending personnel associated with
 achievement of significant reduction in nonperforming assets; andØ
Establishing a process for evaluation of potential pooled sales
of
 certain nonperforming assets, the completion of which will be dependent on
 satisfactory terms and conditions.We attribute the $158.3 million net increase in our
nonperforming
 assets during the year ended December 31, 2007 to the following:Ø
An increase in nonaccrual loans of $138.5 million in our real
estate
 construction and development loan portfolio primarily as a result of the
 increase in nonaccrual loans in our Northern California real estate portfolio
 to $99.2 million at December 31, 2007 from $7.9 million at December 31, 2006.
 We experienced declining market conditions throughout 2007 in this portfolio,
 particularly in Northern California, resulting in increased developer
 inventories, slower lot and home sales, and declining market values. The
 acquisition of CFHI also added $35.5 million of nonaccrual loans to our real
 estate construction and development loan portfolio;Ø
An increase in nonaccrual loans of $14.0 million in our
one-to-four
 family residential real estate loan portfolio primarily driven by current
 market conditions, repurchases of certain sub-prime residential mortgage
 loans sold with recourse, primarily due to early payment default, that were
 placed back into our one-to-four family residential mortgage loan portfolio,
 and the overall deterioration of sub-prime residential mortgage loan products
 experienced throughout the mortgage banking industry;Ø
During the year ended December 31, 2007, we placed approximately
 $87.7 million of one-to-four family residential mortgage loans associated
 with our mortgage banking division on nonaccrual status. This increase in
 nonaccrual loans was partially offset by net loan charge-offs of
 approximately $31.0 million, loan sales resulting in a decrease in
 nonperforming loans of approximately $59.6 million, and other payment
 activity. Of the $87.7 million placed on nonaccrual status, approximately
 $31.4 million represented residential mortgage loans sold with recourse that
 we were required to repurchase based on49

the terms of the underlying sales contracts. Repurchases of
mortgage
 loans sold with recourse declined to $3.5 million for the fourth quarter of
 2007, compared to a high of $17.2 million for the second quarter of 2007. The
 reduced level of repurchase activity is reflective of our exit from the
 sub-prime market in early 2007; andØ
The acquisition of CFHI, which added $7.4 million of nonaccrual
loans
 to our one-to-four family residential real estate loan portfolio.We took measures throughout 2007 to reduce the level of our
nonperforming loans through sales of certain loans. The sales resulted in a
reduction in nonperforming loans of approximately $67.3 million during the year
ended December 31, 2007, as described below.

Ø
In March 2007, we entered into a commitment to sell certain
 repurchased and other residential mortgage loans that were either
 nonperforming loans or were deemed by management to be problem credits.
 Subsequent to recording loan charge-offs to reduce these loans to the lower
 of cost or estimated fair value at the time of transfer, we transferred
 approximately $17.5 million of certain repurchased and other residential
 mortgage loans to our held for sale loan portfolio. In April 2007, we
 completed the sale of approximately $13.4 million of these loans, received
 payoffs on a portion of the loans held for sale of approximately $1.1
 million, and transferred approximately $2.6 million of loans that were not
 ultimately included in the sale back into our residential mortgage loan
 portfolio. These transactions resulted in a decrease in nonperforming loans
 of approximately $11.5 million, in aggregate.Ø
During the third quarter of 2007, we entered into a commitment
to
 sell certain commercial, commercial real estate and real estate construction
 and development loans that were either nonperforming loans or were deemed by
 management to be problem credits. Subsequent to recording loan charge-offs to
 reduce these loans to the lower of cost or estimated fair value at the time
 of transfer, we transferred approximately $36.5 million of these loans to our
 held for sale loan portfolio. We completed the sale of approximately $33.2
 million of these loans in September 2007, resulting in a pre-tax gain of
 $266,000 and a decrease in nonperforming loans of approximately $7.7 million,
 in aggregate. In December 2007, we transferred the remaining $3.3 million of
 these loans back to portfolio.Ø
During the third quarter of 2007, we entered into a commitment
to
 sell certain repurchased and other residential mortgage loans that were
 either nonperforming loans or were deemed by management to be problem
 credits. Subsequent to recording loan charge-offs to reduce these loans to
 the lower of cost or estimated fair value at the time of transfer, we
 transferred approximately $10.5 million of certain repurchased and other
 residential mortgage loans to our held for sale loan portfolio. In October
 2007, we completed the sale of approximately $9.4 million of these loans and
 received payoffs on the remaining portion of the loans held for sale. We did
 not record a gain or loss on the sale of these loans. These transactions
 resulted in a decrease in nonperforming loans of approximately $8.6 million,
 in aggregate.Ø
During the fourth quarter of 2007, we entered into a commitment
to
 sell certain repurchased and other residential mortgage loans that were
 either nonperforming loans or were deemed by management to be problem
 credits. Subsequent to recording loan charge-offs to reduce these loans to
 the lower of cost or estimated fair value at the time of transfer, we transferred
 approximately $21.2 million of certain repurchased and other residential
 mortgage loans to our held for sale loan portfolio. In December 2007, we
 completed the sale of approximately $12.0 million of these loans and received
 payoffs on the remaining portion of the loans held for sale. We did not
 record a gain or loss on the sale of these loans. These transactions resulted
 in a decrease in nonperforming loans of approximately $10.7 million, in
 aggregate.Loans past due 90 days or more and still accruing interest were
$7.1
million and $26.8 million at December 31, 2008 and 2007, respectively. Under
our 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 our 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. Management considers
the nonperforming assets trends in its overall assessment of the adequacy of
the allowance for loan losses. The decrease in 2008 was primarily due to the
timing of resolution of loans past due as to maturity, pending renewal and other
matters, including the resolution of certain loans associated with our CFHI
acquisition that were included in the balance of these loans at December 31,
2007.

50

Our allowance for loan losses as a percentage of loans, net of
unearned
discount, was 2.56%, 1.89% and 1.90% at December 31, 2008, 2007 and 2006,
respectively. The increase in this ratio is directly related to the increase in
nonperforming loans as well as potential problem loans at December 31, 2008
compared to prior periods. Our allowance for loan losses as a percentage of
nonperforming loans was 49.77%, 83.27% and 299.05% at December 31, 2008, 2007
and 2006, respectively. The decrease in this ratio during 2008 is primarily due
to the significant increase in nonperforming loans coupled with the recognition
of charge-offs on these loans to levels reflective of current appraised values,
as previously discussed. Our allowance for loan losses was $220.2 million at
December 31, 2008, compared to $168.4 million and $145.7 million at December
31, 2007 and 2006, respectively. As further described in the table below, the
allowance for loan losses also reflects an increase of $14.4 million and $5.2
million in 2007 and 2006, respectively, of balances acquired in conjunction
with our acquisitions.


The following table is a summary of our loan loss
experience for the five years ended December 31, 2008:

As of or For the Years Ended December 31,2008

2007

2006

2005

2004(dollars expressed in thousands)Allowance for loan losses,
beginning of year

$
168,391


145,729


135,330


150,707


116,451Acquired allowances for loan
losses





14,425


5,208


1,989


33,752Other adjustments














(479
)168,391


160,154


140,538


152,696


149,724Loans charged-off:Commercial,
financial and agricultural


(21,931
)

(13,212
)

(7,512
)

(10,991
)

(31,086
)Real estate
construction and development


(236,715
)

(15,203
)

(6,202
)

(7,838
)

(3,481
)Real estate
mortgage:One-to-four
family residential loans


(67,246
)

(31,849
)

(3,779
)

(3,399
)

(4,891
)Multi-family
residential loans


(19
)

(76
)

(241
)




(139
)Commercial
real estate loans


(3,244
)

(3,764
)

(3,635
)

(9,699
)

(9,995
)Consumer and
installment


(1,866
)

(1,390
)

(834
)

(1,196
)

(1,051
)Total


(331,021
)

(65,494
)

(22,203
)

(33,123
)

(50,643
)Recoveries of loans
previously charged-off:Commercial,
financial and agricultural


7,226


5,176


5,968


12,303


19,861Real estate
construction and development


5,705


307


1,661


1,963


748Real estate
mortgage:One-to-four
family residential loans


1,180


864


1,066


1,953


1,597Multi-family
residential loans


5


9








27Commercial
real estate loans


401


1,588


6,048


2,901


2,659Consumer and
installment


327


731


651


637


984Total


14,844


8,675


15,394


19,757


25,876Net loans
charged-off


(316,177
)

(56,819
)

(6,809
)

(13,366
)

(24,767
)Provision for loan
losses


368,000


65,056


12,000


(4,000
)

25,750Allowance for loan losses,
end of year

$
220,214


168,391


145,729


135,330


150,707Loans outstanding, net of
unearned discount:Average

$
8,936,013


8,069,603


7,472,089


6,436,970


5,509,054End of
year


8,592,975


8,886,184


7,671,768


7,025,587


6,141,688End of year,
excluding loans held for sale


8,554,255


8,820,105


7,455,441


6,710,453


6,008,623Ratio of allowance for loan
losses to loans outstanding:Average


2.46
%

2.09
%

1.95
%

2.10
%

2.74
%End of
year


2.56


1.89


1.90


1.93


2.45End of year,
excluding loans held for sale


2.57


1.91


1.95


2.02


2.51Ratio of net charge-offs to
average loans outstanding


3.54


0.70


0.09


0.21


0.45Ratio of current year
recoveries to preceding years charge-offs


22.66


39.07


46.48


39.01


46.40Our net loan charge-offs were $316.2 million, $56.8 million and
$6.8
million for the years ended December 31, 2008, 2007 and 2006, respectively. Our
net loan charge-offs as a percentage of average loans were 3.54%, 0.70%, and
0.09% for the years ended December 31, 2008, 2007 and 2006, respectively.

51

The following table summarizes the composition of our net loan
charge-offs (recoveries) by region for the years ended December 31, 2008 and
2007:

For the
 Years Ended
 December 31,2008

2007(dollars expressed in thousands)Northern California real
estate

$
125,773


4,514Mortgage division, excluding
Florida


43,022


28,180Florida


37,476


Southern California real
estate


31,453


Chicago real estate


19,640


(357
)Metropolitan St. Louis, Missouri
real estate


30,122


5,287Texas real estate


5,863


63Other


22,828


19,132Net loan
charge-offs

$
316,177


56,819Net loan charge-offs recorded for the year ended December 31, 2008
included $125.8 million of net loan charge-offs associated with our Northern
California real estate construction and development portfolio, compared to $4.5
million in 2007. We experienced significant distress and drastically declining
market conditions within our Northern California real estate market throughout
late 2007 and 2008, resulting in increased developer inventories, slower lot
and home sales, and significantly declining market values. Net loan charge-offs
recorded for the year ended December 31, 2008 also included $43.0 million of net
loan charge-offs associated with our mortgage division, compared to $28.2
million for the comparable period in 2007, and $37.5 million of net loan
charge-offs associated with our Florida region. We continue to experience
deterioration in our one-to-four family residential portfolios as a result of
weak economic conditions in the nationwide housing markets and significant
declines in real estate values in all of our markets generally and, in
particular, Florida and California. Should real estate values further decline
as a result of current economic conditions, we could continue to experience
deterioration within our loan portfolio, and as a result, increased loan
charge-offs.

We continue to closely monitor our loan portfolio and address the
ongoing challenges posed by the severely weakened economic environment,
including reduced loan demand and highly competitive markets within certain
sectors of our loan portfolio. We consider this in our overall assessment of
the adequacy of the allowance for loan losses.

As of December
31, 2008 and 2007, $224.1 million and $157.1 million, respectively, of loans
not included in the nonperforming assets table above were identified by
management as having potential credit problems, or problem loans. The increase
in the level of problem loans during 2008 primarily reflects weak economic
conditions in the nationwide housing markets and significant declines in real
estate values in all of our markets generally and, in particular, Florida and
California. Management continues its efforts to reduce nonperforming and
problem loans and re-define 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.

Our 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 our
experience with each type of loan. We adjust the ratings of the homogeneous
loans based on payment experience subsequent to their origination.

We include adversely rated credits, including loans requiring close
monitoring that would not normally be considered classified credits by
regulators, on our monthly loan watch list. Loans may be added to our 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 our 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 our watch
list. Loans on our watch list require periodic detailed loan status reports
prepared by the responsible officer which are discussed in formal meetings with
credit review and credit administration staff members. Upgrades and downgrades
of loan risk ratings may be initiated by the responsible loan officer. However,
upgrades of risk ratings associated

52

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

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 current economic and
market conditions. These procedures include monthly meetings with our real
estate groups and 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.

The allocation of the allowance for loan losses by loan category
is a
result of the application of our risk rating system augmented by qualitative
analysis. The same procedures we employ to determine the overall risk in our
loan portfolio and our requirements for the allowance for loan losses determine
the distribution of the allowance by loan category. Consequently, the
distribution of the allowance will change from period to period due to (a)
changes in the aggregate loan balances by loan category; (b) changes in the
identified risk in each loan in the 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; and (c) changes in loan concentrations by borrower.

Since the methods of calculating the allowance requirements have
not
significantly changed over time, the reallocations among different categories
of loans that appear between periods are the result of changes in the balances
of the individual loans that comprise the aggregate portfolio due to the
factors listed above. However, the perception of risk with respect to
particular loans within the portfolio will change over time as a result of the
characteristics and performance of those loans, as well as the overall economic
trends and market trends, including our actual and expected trends in
nonperforming loans. Consequently, while there are no specific allocations of
the allowance resulting from economic or market conditions or actual or
expected trends in nonperforming loans, these factors are considered in the
initial assignment of risk ratings to loans and in subsequent changes to those
risk ratings.

The following table
is a summary of the allocation of the allowance for
loan losses for the five years ended December 31, 2008:

2008

2007

2006

2005

2004Amount

Percent
of
Category
of
Loans
to
Total
Loans

Amount

Percent
of
Category
of
Loans
to
Total
Loans

Amount

Percent
of
Category
of
Loans
to
Total
Loans

Amount

Percent
of
Category
of
Loans
to
Total
Loans

Amount

Percent
of
Category
of
Loans
to
Total
Loans(dollars expressed in thousands)Commercial, financial and
agricultural

$
56,592


29.97
%
$
41,513


26.81
%
$
48,060


25.22
%
$
39,560


23.05
%
$
46,823


25.64
%Real estate construction and
development


72,840


18.30


67,034


24.10


40,410


23.89


32,638


22.27


38,525


21.47Real estate mortgage:One-to-four
family residential loans


37,742


18.08


16,312


18.03


13,308


16.56


10,526


17.28


8,466


14.18Multi-family
residential loans


4,243


2.56


2,983


2.00


95


1.84


67


2.04


20


1.67Commercial real
estate loans


47,663


29.82


39,634


27.36


41,833


28.72


51,199


30.06


55,922


34.00Consumer and
installment


342


0.82


835


0.96


1,035


0.95


757


0.81


617


0.87Loans held for sale


792


0.45


80


0.74


988


2.82


583


4.49


334


2.17Total

$
220,214


100.00
%
$
168,391


100.00
%
$
145,729


100.00
%
$
135,330


100.00
%
$
150,707


100.00
%Our allowance for loan losses as a percentage of total loans
increased
from 1.89% at December 31, 2007 to 2.56% at December 31, 2008, primarily as a
result of an increase in nonperforming loans. The allocated allowance for loan
losses as a percentage of real estate construction and development and
one-to-four family residential loans increased

53

from 3.13% and 1.02%, respectively, at December 31, 2007 to 4.63%
and
2.43%, respectively, at December 31, 2008, primarily as a result of an increase
in nonperforming loans in addition to an overall decline in asset quality as
previously discussed. The allocated allowance for loan losses as a percentage
of commercial real estate, multi-family residential and commercial, financial
and agricultural loans also increased at December 31, 2008 as compared to
December 31, 2007 primarily as a result of current economic conditions
resulting in increased nonperforming loans within these segments of our loan
portfolio.

Deposits

Deposits are
the primary source of funds for First Bank. Our deposits consist principally of core deposits from our local market
areas, including individual and corporate customers.

The following
table sets forth the distribution of our average deposit accounts for the years
ended December 31, 2008, 2007 and 2006, and the weighted average interest rates
on each category of deposits:

Year Ended December 31,2008

2007

2006Amount

Percent 
of 
Deposits

Rate

Amount

Percent 
of 
Deposits

Rate

Amount

Percent 
of 
Deposits

Rate(dollars expressed in thousands)Noninterest-bearing demand
deposits

$
1,232,077


13.88
%


%
$
1,232,650


14.23
%


%
$
1,267,681


15.82
%


%Interest-bearing demand
deposits


963,305


10.85


0.57


957,454


11.05


0.96


962,956


12.01


0.85Savings and money market
deposits


2,826,957


31.85


2.10


2,613,745


30.17


3.05


2,152,419


26.86


2.48Time deposits


3,853,656


43.42


3.84


3,859,552


44.55


4.76


3,631,516


45.31


4.28Total average deposits

$
8,875,995


100.00
%



$
8,663,401


100.00
%



$
8,014,572


100.00
%Capital and Dividends

On December 31, 2008, First Banks issued: (a) 295,400 shares of
Class C
Fixed Rate Cumulative Perpetual Preferred Stock, par value $1.00 per share, and
liquidation preference of $1,000.00 per share; and (b) 14,770 shares of Class D
Fixed Rate Cumulative Perpetual Preferred Stock, par value $1.00 per share, and
liquidation preference of $1,000.00 per share, to the U.S. Treasury pursuant to
First Banks participation in the TARP program, as further described in Item 1
Business  Recent Developments and in Note 18 to our consolidated financial
statements. The Class C and Class D cumulative perpetual preferred stock
qualify as Tier 1 capital.

We paid relatively small dividends on our Class A Convertible,
Adjustable Rate Preferred Stock and our Class B Adjustable Rate Preferred
Stock, totaling $786,000 for each of the years ended December 31, 2008, 2007
and 2006. Dividends on our Class C and Class D cumulative perpetual preferred
stock, which currently carry annual dividend rates of 5.00% and 9.00%,
respectively, are payable quarterly, beginning in February 2009.

As previously discussed under Supervision and
Regulation  Regulatory
Matters, under the terms of a Memorandum of Understanding with the FRB, we
have agreed, among other things, not to declare and pay any dividends on our
common or preferred stock or to make any distributions of interest, or other
sums, on our trust preferred securities without the prior approval of the FRB.
In January 2009, we received pre-approval from the FRB to declare and pay the
regular quarterly dividends on our preferred stock to be paid in February and
April 2009 and to pay the regular quarterly interest payments on our
outstanding subordinated debentures for further payment to the individual
holders of the respective underlying trust preferred securities in March and
April 2009. However, we cannot ensure that the FRB will approve future payment
requests.

Management believes as of December 31, 2008, First Bank and we were
well capitalized, as defined in regulations adopted pursuant to the FDIC
Improvement Act of 1991. As of December 31, 2007, we were adequately
capitalized, and First Bank was well capitalized, as defined in regulations
adopted pursuant to the FDIC Improvement Act of 1991. First Banks and our
actual and required capital ratios are further described in Note 21 to our
consolidated financial statements. As further described in Note 21 to our
consolidated financial statements, at December 31, 2008, First Banks Tier 1
capital ratio was 9.75%, or approximately $260.5 million over the minimum level
required under the terms of the informal agreement with the MDOF.

As of December 31, 2008, we had 13 affiliated Delaware or
Connecticut
statutory and business trusts that were created for the sole purpose of issuing
trust preferred securities. As further described in Note 12 to our consolidated
financial statements, the sole assets of the statutory and business trusts are
our subordinated debentures.

54

A summary of the outstanding trust preferred securities issued by
our
affiliated statutory and business trusts, and our related subordinated
debentures issued to the respective trusts in conjunction with the trust
preferred securities offerings as of December 31, 2008, is as follows:

Name of Trust

Date of Trust
 Formation

Type of Offering

Interest
 Rate

Preferred
 Securities

Subordinated
 DebenturesFirst Preferred Capital
 Trust IV

January
 2003

Publicly
 Underwritten

8.15
%

$
46,000,000

$
47,422,700First Bank Statutory Trust

March
 2003

Private
 Placement

8.10
%


25,000,000


25,774,000First Bank Statutory Trust
 II

September
 2004

Private
 Placement

Variable



20,000,000


20,619,000Royal Oaks Capital Trust I

October
 2004

Private
 Placement

Variable



4,000,000


4,124,000First Bank Statutory Trust
 III

November
 2004

Private
 Placement

Variable



40,000,000


41,238,000First Bank Statutory Trust
 IV

February
 2006

Private
 Placement

Variable



40,000,000


41,238,000First Bank Statutory Trust
 V

April
 2006

Private
 Placement

Variable



20,000,000


20,619,000First Bank Statutory Trust
 VI

June
 2006

Private
 Placement

Variable



25,000,000


25,774,000First Bank Statutory Trust
 VII

December
 2006

Private
 Placement

Variable



50,000,000


51,547,000First Bank Statutory Trust
 VIII

February
 2007

Private
 Placement

Variable



25,000,000


25,774,000First Bank Statutory Trust
 X

August
 2007

Private
 Placement

Variable



15,000,000


15,464,000First Bank Statutory Trust
 IX

September
 2007

Private
 Placement

Variable



25,000,000


25,774,000First Bank Statutory Trust
 XI

September
 2007

Private
 Placement

Variable



10,000,000


10,310,000For regulatory reporting purposes, the trust preferred securities
are
eligible for inclusion, subject to certain limitations, in our Tier 1 capital.
Because of these limitations, as of December 31, 2008, $58.1 million of the
trust preferred securities was not eligible for inclusion in our Tier 1
capital; however, this amount was eligible for inclusion in our total
risk-based capital. Effective March 31, 2011, the aggregate amount of
qualifying cumulative perpetual preferred stock and qualifying trust preferred
securities that may be included in Tier 1 capital is limited to 25% of
specified core capital elements, as further described in Note 21 to our
consolidated financial statements. As such, $147.0 million of our trust
preferred securities would not be eligible for inclusion in our Tier 1 capital
if the final rules effective in March 2011 were implemented as of December 31,
2008.

Liquidity

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. We receive funds for liquidity from customer
deposits, loan payments, maturities of loans and investments, sales of
investments and earnings. In addition, we may avail ourselves of other sources
of funds by issuing certificates of deposit in denominations of $100,000 or
more, borrowing federal funds, selling securities under agreements to repurchase
and utilizing borrowings from the FHLB, the FRB and other borrowings. The
aggregate funds acquired from these sources were $1.83 billion and $2.00
billion at December 31, 2008 and 2007, respectively.

The following table presents the maturity structure of these other
sources of funds, which consist of certificates of deposit of $100,000 or more
and other borrowings, at December 31, 2008:

Certificates of Deposit
 of $100,000 or More

Other
 Borrowings

Total(dollars expressed in thousands)Three months or less


$
316,830


354,423



671,253Over three months through
 six months



205,360






205,360Over six months through
 twelve months



602,390


100,000



702,390Over twelve months



130,072


120,710



250,782Total


$
1,254,652


575,133



1,829,785In addition to these sources of funds, First Bank has established a
borrowing relationship with the FRB. This borrowing relationship, which is
secured by commercial loans, provides an additional liquidity facility that may
be utilized for contingency purposes. First Banks borrowing capacity under the
agreement increased to approximately $1.14 billion at December 31, 2008, from
$523.3 million at December 31, 2007, as a result of additional collateral
availability.

In addition, First Banks borrowing capacity through its
relationship
with the FHLB was approximately $911.1 million and $672.3 million at December
31, 2008 and 2007, respectively. We had FHLB advances outstanding of $200.7
million and $857,000 at December 31, 2008 and 2007, respectively. During 2008,
First Bank entered into four $100.0 million FHLB advances with maturities of
November 2008, January 2009, February 2009 and July 2009 to increase our
liquidity in light of uncertain market conditions and increased loan funding
needs. In September 2008, we prepaid the $100.0 million FHLB advance that was
scheduled to mature in November 2008 and incurred a

55

prepayment penalty of $3,000. In November 2008, we prepaid the
$100.0
million FHLB advance that was scheduled to mature in January 2009 and incurred
a prepayment penalty of $117,000. We replaced this higher rate FHLB advance
with a borrowing of $100.0 million from the FRB with a substantially lower
interest rate, as further described in Note 10 to our consolidated financial
statements.

First Banks also has a borrowing relationship with its affiliated
entity, Investors of America, LP, which provides for a $30.0 million secured
revolving line of credit to be utilized for general working capital needs and
capital investments in subsidiaries, as further described in Note 11 and Note
19 to our consolidated financial statements. First Banks did not have any
balances outstanding on this borrowing arrangement at December 31, 2008. In
addition, the Company is currently required to obtain prior approval from the
FRB prior to incurring additional debt obligations, including advancing funds
under this borrowing arrangement, in accordance with the provisions of the
Memorandum of Understanding with the FRB, as further described under
Supervision and Review  Regulatory Matters.

Our loan-to-deposit ratio increased to 98.3% at December 31, 2008
from
97.1% at December 31, 2007. As a result of this increase, we implemented
certain strategies during 2008 to improve our liquidity position, including the
additional FHLB borrowings, as discussed above, increasing the availability of
our borrowing relationship with both the FRB and the FHLB through additional
collateral availability and receiving deposits placed into the CDARS program on
a reciprocal basis, thereby increasing our time deposits. We are continuing to
closely monitor liquidity and implement actions deemed necessary to maintain an
appropriate level of liquidity in light of unstable market conditions,
increased loan funding needs, operating and debt service requirements, and
current deposit trends.

In addition to our owned banking facilities, we have entered into
long-term leasing arrangements to support our ongoing activities. The required
payments under such commitments and other obligations at December 31, 2008 were
as follows:

Less Than
 1 Year

1-3
 Years

3-5
 Years

Over
 5 Years

Total (1)(dollars expressed in thousands)Operating leases

$
16,828


27,303


18,834


46,119


109,084Certificates of deposit (2)


3,322,611


427,164


35,087


1,652


3,786,514Other borrowings (2)


454,423


710


120,000





575,133Subordinated debentures (2)











353,828


353,828Preferred stock issued
 under the TARP (2) (3)











310,170


310,170Other contractual
 obligations


1,836
(4)

379


337


8


2,560Total


3,795,698


455,556


174,258


711,777


5,137,289(1)
Amounts
 exclude FIN 48 unrecognized tax liabilities of $3.3 million and related
 accrued interest expense of $1.0 million for which the timing of payment of
 such liabilities cannot be reasonably estimated as of December 31, 2008.(2)
Amounts
 exclude the related interest expense accrued and dividends declared on these
 obligations as of December 31, 2008. As further described under  Supervision and Review  Regulatory
 Matters, we currently may not make any distributions of dividends or
 interest or other sums on our subordinated debentures and related underlying
 trust preferred securities without the prior approval of the FRB.(3)
Amounts
 payable upon redemption of the Class C preferred stock and Class D preferred
 stock issued under the TARP of $295.4 million and $14.8 million,
 respectively.(4)
Includes
 an accrued expense related to our remaining estimated indemnification
 obligation, as a member bank, to share certain litigation costs of Visa, as
 further described under Noninterest Expense.We agreed, among other things, not to declare or 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 Supervision and Regulation  Regulatory
Matters. In January 2009, we received pre-approval from the FRB to declare and
pay the regular quarterly dividends on our preferred stock to be paid in
February and April 2009 and to pay the regular quarterly interest payments on
our outstanding subordinated debentures for further payment to the individual
holders of the respective underlying trust preferred securities in March and
April 2009. However, we cannot ensure that the FRB will approve future payment
requests.

Management believes the available liquidity will be sufficient to
permit the distribution of dividends to us sufficient to meet our operating and
debt service requirements, both on a short-term and long-term basis, and to pay
interest on the subordinated debentures that we issued to our affiliated
statutory and business financing trusts and the dividends on our preferred
stock that we issued to the Dierberg family and the U.S. Treasury, subject to
regulatory approval.

Critical
Accounting Policies

Our financial condition and results of operations presented in our
consolidated financial statements, accompanying notes to our consolidated
financial statements, selected consolidated and other financial data appearing
elsewhere in this report, and managements discussion and analysis of financial
condition and results of operations are, to a large

56

degree, dependent upon our accounting policies. The selection and
application of our accounting policies involve judgments, estimates and
uncertainties that are susceptible to change.

We have identified the following accounting policies that we
believe
are the most critical to the understanding of our financial condition and
results of operations. These critical accounting policies require managements
most difficult, subjective and complex judgments about matters that are
inherently uncertain. In the event that different assumptions or conditions
were to prevail, and depending upon the severity of such changes, the
possibility of a materially different financial condition and/or results of
operations could be a reasonable likelihood. The impact and any associated
risks related to our critical accounting policies on our business operations is
discussed throughout Managements
Discussion and Analysis of Financial Condition and Results of Operations,
where such policies affect our reported and expected financial results. A
detailed discussion on the application of these and other accounting policies
is summarized in Note 1 to our consolidated financial statements appearing
elsewhere in this report.

Loans and Allowance
for Loan Losses. We maintain an allowance for loan
losses at a level we consider adequate to provide for probable losses in our
loan portfolio. The determination of our allowance for loan losses requires management
to make significant judgments and estimates based upon a periodic analysis of
our loans held for portfolio and held for sale considering, among other
factors, current economic conditions, loan portfolio composition, past loan
loss experience, independent appraisals, the fair value of underlying loan
collateral, our customers ability to repay their loans and selected key
financial ratios. If actual events prove the estimates and assumptions we used
in determining our allowance for loan losses were incorrect, we may need to
make additional provisions for loan losses. Any increases in our allowance for
loan losses will result in a decrease in net income and capital, and may have a
material adverse effect on our financial condition and results of operations.
For further discussion, refer to Loans and Allowance
for Loan Losses, Item 1A ─ Risk Factors and Note 4 to our consolidated
financial statements appearing elsewhere in this report.

Derivative Financial
Instruments. We utilize derivative financial
instruments to assist in our management of interest rate sensitivity by
modifying the repricing, maturity and option characteristics of certain assets
and liabilities. The judgments and assumptions that are most critical to the
application of this critical accounting policy are those affecting the
estimation of fair value and hedge effectiveness. Fair value is based on quoted
market prices where available. If quoted market prices are unavailable, fair
value is based on quoted market prices of comparable derivative instruments.
Factors that affect hedge effectiveness include the initial selection of the
derivative that will be used as a hedge and how well changes in its cash flow
or fair value have correlated and are expected to correlate with changes in the
cash flow or fair value of the underlying hedged asset or liability. Past
correlation is easy to demonstrate, but expected correlation depends upon
projections and trends that may not always hold true within acceptable limits.
Changes in assumptions and conditions could result in greater than expected
inefficiencies that, if large enough, could reduce or eliminate the economic
benefits anticipated when the hedges were established and/or invalidate
continuation of hedge accounting. Greater inefficiency and/or discontinuation
of hedge accounting are likely to result in increased volatility in our
reported earnings. For cash flow hedges, this would result as more or all of
the change in the fair value of the affected derivative being reported in
noninterest income. For fair value hedges, there may be some impact on our
reported earnings as the change in the fair value of the affected derivative
may not be offset by changes in the fair value of the underlying hedged asset
or liability. For further discussion, refer to Effects of New Accounting
Standards, Interest Rate Risk Management and
Note 5 to our
consolidated financial statements appearing elsewhere in this report.

Deferred Tax Assets.We recognize deferred tax assets for the estimated
future tax effects of temporary differences, net operating loss carryforwards
and tax credits. We recognize deferred tax assets subject to managements
judgment based upon available evidence that realization is more likely than
not. Our deferred tax assets are reduced, if necessary, by a deferred tax asset
valuation allowance. In the event that we determine we would not be able to
realize all or part of our deferred tax assets in the future, we would need to
adjust the recorded value of our deferred tax assets, which would result in a
direct charge to our provision for income taxes in the period in which such
determination is made. For further discussion, refer to  Effects of New Accounting Standards, Comparison of
Results of Operations for 2008 and 2007  Provision for Income Taxes, Comparison of Results of Operations for 2007 and 2006  Provision for Income Taxes, and
Note 1 and Note 13 to our consolidated financial statements appearing elsewhere
in this report.

Business Combinations / Goodwill and Other
Intangible Assets. We emphasize acquiring other
financial institutions as one means of achieving our growth objectives. The
determination of the fair value of the assets and liabilities acquired in these
transactions, as well as the returns on investment that may be achieved,
requires management to make significant judgments and estimates based upon
detailed analyses of the existing and future economic value of such assets and
liabilities and/or the related income streams, including the resulting
intangible assets. If actual events prove the estimates and assumptions we used
in determining the fair values of the acquired

57

assets and liabilities or the projected income streams
were
incorrect, we may need to make additional adjustments to the recorded values of
such assets and liabilities, which could result in increased volatility in our
reported earnings. In addition, we may need to make additional adjustments to
the recorded value of our intangible assets, which may impact our reported
earnings and directly impacts our regulatory capital levels. For further
discussion, refer to Effects
of New Accounting Standards, Acquisitions and
Note 2, Note 8 and Note 21 to our consolidated financial statements appearing
elsewhere in this report.

Our annual impairment testing date for goodwill and other
intangible
assets is December 31. In addition, a goodwill impairment assessment is
performed if an event occurs or circumstances change that would make it more
likely than not that the fair value of our single reporting unit is below its
carrying value. The goodwill impairment test is a two-step process which
requires us to make assumptions regarding fair value. Our policy allows
management to make the determination of fair value using internal cash flow
models or by engaging independent third parties. The first step consists of
estimating the fair value of the reporting unit using a number of factors,
including projected future operating results and business plans, economic
projections, anticipated future cash flows, discount rates, and comparable
marketplace fair value data from within a comparable industry grouping. We
compare the estimated fair value of our reporting unit to the carrying value,
which includes allocated goodwill. If the estimated fair value is less than the
carrying value, the second step is completed to compute the impairment amount
by determining the implied fair value of goodwill. This determination
requires the allocation of the estimated fair value of the reporting unit to
the assets and liabilities of the reporting unit. Any remaining unallocated
fair value represents the implied fair value of goodwill, which is compared
to the corresponding carrying value to compute the goodwill impairment amount,
if any. Although we believe our estimates of fair value are reasonable, many of
the factors used in assessing fair value and the allocation of estimated fair
value to the assets and liabilities of our reporting unit are outside the
control of management, and it is reasonably likely that assumptions and estimates
may change in future periods. These changes may result in future impairment
that may materially affect the carrying value of our assets and our operating
results.

Due to the ongoing uncertainty regarding market conditions, which
may
continue to negatively impact the performance of our reporting unit, management
will continue to monitor the goodwill impairment indicators and evaluate the
carrying amount of our goodwill, if necessary. Events and circumstances that
could trigger the need for interim impairment testing include:

Ø
A significant change in legal factors or in the business
climate;Ø
An adverse action or assessment by a regulator;Ø
Unanticipated competition;Ø
A loss of key personnel;Ø
A more-likely-than-not expectation that our reporting unit or a
 significant portion of our reporting unit will be sold or otherwise disposed
 of; andØ
The testing for recoverability under SFAS No. 144 
Accounting
 for the Impairment or Disposal of Long-Lived Assets, of a significant
 asset group within a reporting unit.For further discussion, refer to Notes 1 and 8 to our consolidated
financial statements appearing elsewhere in this report.

Effects of New
Accounting Standards

In March 2006, the FASB issued SFAS No. 156  Accounting
for Servicing of Financial
Assets. SFAS No. 156, an amendment of FASB SFAS No. 140  Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, addresses the recognition and measurement of separately
recognized servicing assets and liabilities and allows mark-to-market
accounting for servicing rights resulting in reporting that is similar to fair
value hedge accounting, but without the effort and system costs needed to
identify effective hedging instruments and document hedging relationships. SFAS
No. 156 is effective for fiscal years beginning after September 15, 2006. Early
adoption is permitted as of the beginning of an entitys fiscal year unless the
entity has already issued interim financial statements during that fiscal year.
We implemented SFAS No. 156 on January 1, 2007, which did not have a material
impact on our financial condition or results of operations. On January 1, 2008,
we opted to measure servicing rights at fair value. The election of this option
resulted in the recognition of a cumulative effect of a change in accounting
principle of $6.3 million, net of tax, which was recorded as an increase to our
retained earnings, as further described in Note 1 and Note 6 to our
consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157  Fair
Value Measurements. SFAS No. 157
defines fair value, establishes a framework for measuring fair value in U.S.
generally accepted accounting principles, and expands disclosures about fair
value measurements. SFAS No. 157 applies under other accounting pronouncements
that

58

require or permit fair value measurements, and does not require
any new
fair value measurements. SFAS No. 157 is effective for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal years, for
financial assets and liabilities and nonfinancial assets and nonfinancial
liabilities that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually). Implementation is deferred
for all nonfinancial assets and nonfinancial liabilities that are recognized or
disclosed at fair value in the financial statements on a nonrecurring basis to
fiscal years beginning after November 15, 2008. Early adoption is permitted as
of the beginning of an entitys fiscal year unless the entity has already
issued interim financial statements during that fiscal year. We implemented
SFAS No. 157 related to financial assets and liabilities and nonfinancial
assets and nonfinancial liabilities that are recognized or disclosed at fair
value in our consolidated financial statements on a recurring basis (at least
annually) on January 1, 2008, which did not have a material impact on our
financial condition or results of operations other than certain additional
disclosure requirements. The application of SFAS No. 157 in situations where
the market for a financial asset is not active was clarified by the issuance of
FASB Staff Position, or FSP, No. SFAS 157-3  Determining the Fair Value of a
Financial Asset When the Market for That Asset is Not Active in
October 2008. FSP No. SFAS 157-3 became effective as of September 30, 2008 and
did not significantly impact the methods by which we determine the fair values
of our financial assets.

In September 2006, the FASB issued SFAS No. 158 
Employers Accounting for Defined
Benefit Pension and Other Postretirement Plans. SFAS No. 158
requires companies to recognize the overfunded or underfunded status of a
defined benefit postretirement plan as a net asset or liability in the balance
sheet and to recognize changes in the funded status of the plan through
comprehensive income in the year in which the changes occur. The funded status
is measured as the difference between the fair value of the plan assets and the
benefit obligation as of the date of the companys fiscal year end. Effective
December 31, 2007, we adopted the recognition and disclosure provisions of SFAS
No. 158, resulting in a cumulative effect of change in accounting principle of
$902,000, which was recorded as a reduction in accumulated other comprehensive
loss as of December 31, 2007. We adopted the measurement date provisions of
SFAS No. 158, which became effective for us as of December 31, 2008 and did not
have a material impact on our consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159  The Fair
Value Option for Financial Assets and
Financial Liabilities, including an amendment of FASB Statement No. 115. SFAS No. 159 provides entities with
an option to report selected financial assets and liabilities at fair value in
an effort to reduce both complexity in accounting for financial instruments and
the volatility in earnings caused by measuring related assets and liabilities
differently. SFAS No. 159 is effective for fiscal years beginning after
November 15, 2007. Retrospective application is not allowed. Early adoption is
permitted as of the beginning of an entitys fiscal year that begins on or
before November 15, 2007, provided the entity also elects to adopt all of the
provisions of SFAS No. 157 at the early adoption date. We implemented SFAS No.
159 on January 1, 2008, which increased the carrying value of our loans held
for sale and gain on loans sold and held for sale by $508,000 as of and for the
year ended December 31, 2008.

In November 2007, the SEC issued SEC Staff Accounting Bulletin, or
SAB,
No. 109  Written Loan Commitments Recorded
at Fair Value Through Earnings. SAB No. 109 requires fair value
measurements of derivative loan commitments or other written loan commitments
recorded through earnings to include the expected net future cash flows related
to the associated servicing of the loan. SAB No. 109 supersedes SAB No. 105  Application
of Accounting Principles to Loan Commitments,which applied only to
derivative loan commitments accounted for at fair value through earnings, and
broadens its application to all written loan commitments that are accounted for
at fair value through earnings. SAB No. 109 also states that internally
developed intangible assets should not be recorded as part of the fair value of
a derivative loan commitment. SAB No. 109 is effective on a prospective basis
to derivative loan commitments issued or modified in fiscal quarters beginning
after December 15, 2007. We implemented SAB No. 109 on January 1, 2008, which
increased our gain on sale of loans by $457,000 for the year ended December 31,
2008.

In December 2007, the FASB issued SFAS No. 141(R) 
Business Combinations. SFAS No.
141(R) will significantly change how entities apply the acquisition method to
business combinations. The most significant changes affecting how entities will
account for business combinations under SFAS No. 141(R) include: (a) the
acquisition date will be the date the acquirer obtains control; (b) all (and
only) identifiable assets acquired, liabilities assumed, and noncontrolling
interests in the acquiree will be stated at fair value on the acquisition date;
(c) assets or liabilities arising from noncontractual contingencies will be
measured at their acquisition date fair value only if it is more likely than
not that they meet the definition of an asset or liability on the acquisition
date; (d) adjustments subsequently made to the provisional amounts recorded on
the acquisition date will be made retroactively during a measurement period not
to exceed one year; (e) acquisition-related restructuring costs that do not
meet the criteria in SFAS No. 146  Accounting
for Costs Associated with Exit or Disposal Activities, will be
expensed as incurred; (f) transaction costs will be expensed as incurred; (g)
reversals of deferred income tax valuation allowances and income tax
contingencies will be recognized in earnings subsequent to the measurement
period; and (h) the allowance for loan losses of an acquiree will not be
permitted to be recognized by the acquirer. Additionally, SFAS No. 141(R)

59

will require new and modified disclosures surrounding subsequent
changes to acquisition-related contingencies, contingent consideration,
noncontrolling interests, acquisition-related transaction costs, fair values
and cash flows not expected to be collected for acquired loans, and an enhanced
goodwill rollforward. SFAS No. 141(R) is effective for all business
combinations completed on or after January 1, 2009. Early adoption is not
permitted. For business combinations in which the acquisition date was before
the effective date, the provisions of SFAS No. 141(R) will apply to the
subsequent accounting for deferred income tax valuation allowances and income
tax contingencies and will require any changes in those amounts to be recorded
in earnings. We are currently evaluating the impact that SFAS No. 141(R)
will have on our financial condition, results of operations and the disclosures
that will be presented in our consolidated financial statements.

In December
2007, the FASB issued SFAS No. 160  Noncontrolling
Interests in Consolidated Financial Statements, an Amendment of ARB 51.
SFAS No. 160 establishes new accounting and reporting standards for
noncontrolling interests in a subsidiary and for the deconsolidation of a
subsidiary. SFAS No. 160 will require entities to classify noncontrolling
interests as a component of stockholders equity and will require subsequent
changes in ownership interests in a subsidiary to be accounted for as an equity
transaction. Additionally, SFAS No. 160 will require entities to recognize
a gain or loss upon the loss of control of a subsidiary and to remeasure any
ownership interest retained at fair value on that date. SFAS No. 160 also requires
expanded disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the noncontrolling owners. SFAS
No. 160 is effective on a prospective basis for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15,
2008, except for the presentation and disclosure requirements, which are
required to be applied retrospectively. Early adoption is not permitted. We
implemented SFAS No. 160 on January 1, 2009, which resulted in our minority
interest in subsidiaries of $129.4 million being reclassified from a liability
to a component of our stockholders equity in our consolidated balance sheets.

In March 2008,
the FASB issued SFAS No. 161  Disclosures
about Derivative Instruments and Hedging Activities, an Amendment of SFAS No.
133  Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 161 requires entities
to provide greater transparency about (a) how and why an entity uses
derivative instruments, (b) how derivative instruments and related hedged
items are accounted for under SFAS No. 133 and its related interpretations, and
(c) how derivative instruments and related hedged items affect an entitys
financial position, results of operations and cash flows. To meet those
objectives, SFAS No. 161 requires (1) qualitative disclosures about
objectives for using derivatives by primary underlying risk exposure and by
purpose or strategy (fair value hedge, cash flow hedge, and non-hedges),
(2) information about the volume of derivative activity in a flexible
format that the preparer believes is the most relevant and practicable,
(3) tabular disclosures about balance sheet location and gross fair value
amounts of derivative instruments, income statement and other comprehensive
income location of gain and loss amounts on derivative instruments by type of
contract, and (4) disclosures about credit-risk related contingent
features in derivative agreements. SFAS No. 161 is effective for financial
statements issued for fiscal years and interim periods beginning after
November 15, 2008. We are currently evaluating the requirements of SFAS
No. 161 to determine their impact on the disclosures that will be presented in
our consolidated financial statements.

In May 2008,
the FASB issued SFAS No. 162  The Hierarchy of Generally Accepted Accounting
Principles. SFAS No. 162 identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformance with U.S. generally accepted accounting principles.
The hierarchical guidance provided by SFAS No. 162 is not expected to have a
significant impact on our consolidated financial statements.

Item 7A.
Quantitative and Qualitative Disclosures
 about Market RiskThe
quantitative and qualitative disclosures about market risk are included under
Item 7  Managements Discussion and Analysis of Financial Condition and
Results of Operations  Interest Rate Risk Management appearing on pages 39
through 41 of this report.

Effects of Inflation

Inflation affects financial
institutions less than other types of companies. Financial institutions make
relatively few significant asset acquisitions that are directly affected by
changing prices. Instead, the assets and liabilities are primarily monetary in
nature. Consequently, interest rates are more significant to the performance of
financial institutions than the effect of general inflation levels. While a
relationship exists between the inflation rate and interest rates, we believe
this is generally manageable through our asset-liability management program.

60

Item 8.
Financial Statements and Supplementary DataThe financial statements and supplementary data appear on pages 76
through 126 of this report.

Item 9.
Changes in and Disagreements with
 Accountants on Accounting and Financial DisclosureNone.

Item 9A.
Controls and ProceduresDisclosure Controls and Procedures

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 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 in recording,
processing, summarizing and reporting, on a timely basis, information required
to be disclosed by the Company in the reports that it files or submits under
the Exchange Act.

Managements Report on Internal Control over Financial Reporting

Management of the Company is responsible for establishing and
maintaining adequate internal control over financial reporting. The Companys
internal control over financial reporting is a process designed under the
supervision of the President and Chief Executive Officer and the Chief
Financial Officer to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with U.S. generally accepted accounting principles, or
GAAP. Our internal control over financial reporting includes policies and
procedures that (1) pertain to the maintenance of records that accurately and
fairly reflect, in reasonable detail, transactions and dispositions of our
assets, (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with GAAP
and that receipts and expenditures are being made only in accordance with
authorizations of management and our directors, and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition,
use, or disposition of our assets that could have a material effect on our
consolidated financial statements.

Because of its inherent limitations, internal control over
financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in circumstances or that the
degree of compliance with the policies and procedures may deteriorate.

Management assessed the effectiveness of the Companys
internal control
over financial reporting as of December 31, 2008, based on the framework set
forth by the Committee of Sponsoring Organizations of the Treadway Commission
in Internal Control  Integrated Framework.
Based on that assessment, management concluded that, as of December 31, 2008, the
Companys internal control over financial reporting is effective based on the
criteria established in COSOs Internal
Control  Integrated Framework.

This annual report does not include an attestation report of the
Companys Independent Registered Public Accounting Firm regarding internal
control over financial reporting. Managements report was not subject to
attestation by the Companys Independent Registered Public Accounting Firm
pursuant to temporary rules of the United States Securities and Exchange
Commission that permit the Company to provide only managements report in this
annual report.

Changes in Internal Control over Financial
Reporting

Except for the changes noted below, 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
quarter ended December 31, 2008 that have materially affected, or are
reasonably likely to materially affect, the Companys internal control over
financial reporting.

As reported in Amendment No. 1 to our 2007 Annual Report on Form
10-K,
management identified material weaknesses in internal control over financial
reporting at our mortgage banking division. Specifically, we did not maintain
sufficient anti-fraud controls for the mortgage banking division which allowed
the former President of our mortgage banking division to intentionally effect
certain transactions and journal entries to omit a repurchase agreement
obligation, including the related interest expense thereon, and overstate
mortgage banking revenues.

The following material weaknesses were identified related to our
internal control over financial reporting:

61

Ø
We did not maintain appropriate oversight and supervision of
certain
 operational and accounting personnel in the mortgage banking division;Ø
We did not maintain a
 sufficient complement of personnel in our mortgage banking division with an
 appropriate level of accounting knowledge, experience and training necessary
 to properly account for certain complex transactions associated with the
 operations of the mortgage banking division; andØ
We did not maintain effective
 controls over the recording of journal entries necessary to properly account
 for certain complex transactions associated with the operations of the
 mortgage banking division. Specifically, effective controls were not designed
 and in place to provide reasonable assurance that journal entries were
 prepared with sufficient supporting documentation and reviewed and approved
 to provide reasonable assurance of the completeness and accuracy of the
 journal entries recorded.The Company has remediated the conditions surrounding the material
weaknesses and believes the material weaknesses no longer exist. Actions taken
to remediate the material weaknesses have been ongoing since the identification
of the material weaknesses in the second quarter of 2008, and certain of these
actions were enhanced and fully tested as of December 31, 2008. Accordingly,
these actions may be considered to be control enhancements which have
materially improved the Companys internal control over financial reporting. In
addition, these actions and control enhancements have been tested for operating
effectiveness and further evaluated by our Internal Audit and Risk Management
Departments. These actions include the following:

Ø
Hired a new President of the
 Companys mortgage banking division and established a direct reporting line
 to the Executive Vice President and Director of Retail Banking;Ø
Changed the oversight and supervision of the operational and
 accounting personnel in the mortgage banking division through the
 establishment of a direct reporting line to the Companys Chief Financial
 Officer;Ø
Centralized and realigned certain areas of responsibility and
 functions previously handled within the mortgage banking division;Ø
Instituted increased
 segregation of duties controls within the Companys mortgage banking
 division;Ø
Examined the methods in which internal controls were circumvented
and
 developed measures to strengthen such controls; andØ
Implemented additional monitoring controls, including certain
 analytical procedures and additional oversight of the mortgage banking
 division.In addition, the individual directly responsible for the omission
of
the repurchase agreement obligation, including the related interest expense
thereon, and an overstatement of mortgage banking revenues was terminated
subsequent to December 31, 2007 and prior to the identification of the material
weaknesses.

Item 9B.
Other InformationNone.

62

PART III

Item 10.
Directors, Executive Officers and Corporate
 GovernanceBoard of Directors and Committees of the
Board

Our Board of Directors consists of eight members. The Board
determined
that Messrs. Cooper, Gundaker, Steward and Yaeger are independent. Each of our
directors identified in the following table was elected or appointed to serve a
one-year term and until his successor has been duly qualified for office.

Name

Age

Director
 Since

Principal Occupation(s) During Last Five Years
 and Directorships of Public CompaniesJames F. Dierberg

71

1979

Chairman
 of the Board of Directors of First Banks, Inc. since 1988; Chief Executive
 Officer of First Banks, Inc. from 1988 to April 2003; President of First
 Banks, Inc. from 1979 to 1992 and from 1994 to October 1999; Chairman of the
 Board of Directors, President and Chief Executive Officer of First Banks
 America, Inc. from 1994 until its merger with First Banks, Inc. in December
 2002.Terrance M. McCarthy

54

2003

President
 and Chief Executive Officer of First Banks, Inc. since April 1, 2007; Senior
 Executive Vice President and Chief Operating Officer of First Banks, Inc.
 from August 2002 to March 31, 2007; Director of First Banks, Inc. since April
 2003; Director of First Banks America, Inc. from July 2001 until its merger
 with First Banks, Inc. in December 2002; Executive Vice President of First
 Banks America, Inc. from 1999 to December 2002; Chairman of the Board of
 Directors of First Bank since January 2003; Executive Vice President of First
 Bank since June 25, 2007; President and Chief Executive Officer of First Bank
 from August 2002 to June 25, 2007; Chairman of the Board of Directors,
 President and Chief Executive Officer of First Bank and Trust from April 2000
 until its merger with and into First Bank in March 2003.Allen H. Blake

66

2008

Director
 of First Banks, Inc. since December 2008 and from 1988 to March 2007; Director
 of First Bank since December 2008; Prior to Mr. Blakes announcement of his
 retirement and resignation of his positions at First Banks, Inc., effective
 March 31, 2007, Mr. Blake served in the following positions: President of
 First Banks, Inc. from October 1999 to March 2007; Chief Executive Officer of
 First Banks, Inc. from April 2003 to March 2007; and Chief Financial Officer
 of First Banks, Inc. from 1984 to September 1999 and from May 2001 to August
 2005.James A. Cooper (1)

53

2008

Managing
 Partner of Thompson Street Capital Partners, a private equity firm with
 investments in middle-market manufacturing, service and distribution
 businesses, in St. Louis, Missouri, since 2000.Steven F. Schepman

36

2004

Director
 of First Banks, Inc. since July 2004; Executive Vice President and Director
 of Corporate Development and Business Segments of First Banks, Inc. since
 April 2, 2007; Senior Vice President and Chief Financial Officer of First
 Banks, Inc. from August 2005 to April 2007; Director of First Bank from April
 2001 to October 2004; Senior Vice President  Private Banking, Wealth
 Management and Trust Services of First Bank from November 2000 to August
 2005; From May 1999 to November 2000, Mr. Schepman was employed in various
 other senior management capacities with First Banks, Inc.Gordon A. Gundaker (1)

75

2001

Chairman
 of the Board of Directors of Gundaker Commercial Group, Inc., a full-service
 commercial real estate firm providing brokerage, development, construction
 and asset management services, in St. Louis, Missouri, since July 2007;
 President and Chief Executive Officer of Coldwell Banker Gundaker from
 September 2001 to July 2007.David L. Steward (1)

57

2000

Chairman
 of the Board of Directors of World Wide Technology Holding Co., Inc., an
 electronic procurement and logistics company in the information technology
 industry, in St. Louis, Missouri; Director of Centene Corporation.Douglas H. Yaeger (1)(2)

60

2000

Chairman
 of the Board of Directors, President and Chief Executive Officer of The
 Laclede Group, Inc., an exempt public utility holding company in St. Louis,
 Missouri since 2001; Chairman of the Board of Directors, President and Chief
 Executive Officer of Laclede Gas Company since 1999; President of Laclede Gas
 Company since 1997; Director and Chief Operating Officer of Laclede Gas
 Company from 1997 to 1999; Executive Vice President  Operations and
 Marketing of Laclede Gas Company from 1995 to 1997.

(1)
Member of the Audit
 Committee.(2)
Mr. Douglas H. Yaeger
 serves as Chairman of the Audit Committee and the Audit Committee financial
 expert.63

Committees and Meetings of the Board of
Directors

Four members of our Board of Directors currently serve on the Audit
Committee, all of whom the Board of Directors determined to be independent;
there are no other committees of the Board of Directors. The Audit Committee
assists the Board of Directors in fulfilling the Boards oversight
responsibilities with respect to the quality and integrity of the consolidated
financial statements, financial reporting process and systems of internal
controls. The Audit Committee also assists the Board of Directors in monitoring
the independence and performance of the independent auditors, the internal
audit department and the operation of ethics programs. The Audit Committee
operates under a written charter adopted by the Board of Directors.

The members of the Audit Committee as of March 25, 2009 were Mr.
James
A. Cooper, Mr. Gordon A. Gundaker, Mr. David L. Steward, and Mr. Douglas H.
Yaeger, who serves as the Chairman of the Audit Committee and the Audit
Committee financial expert.

64

Audit Committee Report

The Audit Committee is responsible for oversight of our financial
reporting process on behalf of the Board of Directors. Management has primary
responsibility for our financial statements and financial reporting, including
internal controls, subject to the oversight of the Audit Committee and the
Board of Directors. In fulfilling its responsibilities, the Audit Committee
reviewed the audited consolidated financial statements with management and
discussed the acceptability of the accounting principles used, the
reasonableness of significant judgments made and the clarity of the
disclosures.

The Audit Committee reviewed with the Independent Registered Public
Accounting Firm, who is responsible for planning and carrying out a proper
audit and expressing an opinion on the conformity of our audited consolidated
financial statements with U.S. generally accepted accounting principles, their
judgments as to the acceptability of the accounting principles we use, and such
other matters as are required to be discussed with the Audit Committee by
Statement on Auditing Standards No. 114, The
Auditors Communication With Those Charged with Governance. In
addition, the Audit Committee discussed with the Independent Registered Public
Accounting Firm its independence from management and the Company, including the
matters required by Public Company Accounting Oversight Board, or PCAOB, Rule
3526, Communication with Audit Committees
Concerning Independence, and the Audit Committee considered the
compatibility of non-audit services provided by the Independent Registered
Public Accounting Firm with the firms independence. KPMG LLP has provided the
Audit Committee with the written disclosures and letter required by Standard
No. 1 of the Independence Standards Board.

The Audit Committee discussed with our Internal Audit Department
and Independent
Registered Public Accounting Firm the overall scope and plans for their
respective audits. The Audit Committee met with the Internal Audit Department
and Independent Registered Public Accounting Firm with and without management
present to discuss the results of their examinations, their evaluations of our
internal controls and the overall quality of our financial reporting.

In reliance on the reviews and discussions referred to above, the
Audit
Committee recommended to the Board of Directors that the audited consolidated
financial statements be included in the Annual Report on Form 10-K as of and
for the year ended December 31, 2008 for filing with the SEC.

Audit
 CommitteeDouglas H.
 Yaeger, Chairman of the Audit CommitteeJames A. CooperGordon A.
 GundakerDavid L.
 StewardCode of Ethics for Principal Executive
Officer and Financial Professionals

The Board of Directors has approved a Code of Ethics for Principal
Executive Officer and Financial Professionals that covers the Principal
Executive Officer, the Chief Financial Officer, the Chief Credit Officer, the
Chief Investment Officer, the Senior Vice President  Controller, the Senior
Vice President  Director of Taxes, and all professionals serving in a
Corporate Finance, Accounting, Treasury, Tax or Investor Relations role. These
individuals are also subject to the policies and procedures adopted by First
Banks that govern the conduct of all of its employees. The Code of Ethics for
Principal Executive Officer and Financial Professionals is included as an
exhibit to this Annual Report on Form 10-K.

Code of Conduct for Employees, Officers and
Directors

The Board of Directors has approved a Code of Conduct applicable
to all
employees, officers and directors of First Banks that addresses conflicts of
interest, honesty and fair dealing, accounting and auditing matters, political
activities and application and enforcement of the Code of Conduct. The Code of
Conduct is available on First Banks website, www.firstbanks.com, under
About us.

65

Executive Officers

Our executive officers, each of whom was elected to the
office(s)
indicated by the Board of Directors, as of March 25, 2009, were as follows:

Name

Age

Current First Banks
 Office(s) Held

Principal Occupation(s)
 During Last Five YearsJames F. Dierberg

71

Chairman
 of the Board of Directors.

See
 Item 10  Directors, Executive Officers and Corporate Governance  Board of
 Directors.Terrance M. McCarthy

54

President,
 Chief Executive Officer and Director; Chairman of the Board of Directors of
 First Bank.

See
 Item 10  Directors, Executive Officers and Corporate Governance  Board of
 Directors.Steven F. Schepman

36

Executive
 Vice President, Director of Corporate Development and Business Segments, and
 Director.

See
 Item 10  Directors, Executive Officers and Corporate Governance  Board of
 Directors.Russell L. Goldammer

52

Executive
 Vice President and Chief Information Officer; Director of First Bank.

Executive
 Vice President and Chief Information Officer since November 2004; Director of
 First Bank since April 2008; Chief Information Officer of Outsourcing
 Solutions, Inc., St. Louis, Missouri, from April 2001 to October 2004.Robert S. Holmes, Jr.

45

Executive
 Vice President  Commercial Banking; President, Chief Executive Officer and
 Director of First Bank.

Executive
 Vice President of First Banks, Inc. since July 2007; President and Chief
 Executive Officer of First Bank since June 2007; Director of First Bank since
 July 2007; Group Senior Vice President  Regional Commercial Banking Group of
 LaSalle Bank N.A. in Chicago, Illinois from March 2007 to June 2007; Senior
 Vice President and Chief Administrative Officer  Commercial Banking Division
 of LaSalle Bank N.A. in Chicago, Illinois from March 2006 to March 2007;
 Senior Vice President and Region Head of LaSalle Bank N.A. in St. Louis,
 Missouri from September 1996 to March 2006.F. Christopher McLaughlin

55

Executive
 Vice President and Director of Retail Banking; Director of First Bank.

Executive
 Vice President and Director of Retail Banking since April 2007; Executive
 Vice President and Director of Sales, Marketing and Products of First Banks,
 Inc. from September 2003 to March 2007; Director of First Bank since October
 2004; Executive Vice President  Personal Banking Division of HSBC Bank USA
 in Buffalo, New York from 1998 to June 2002; Independent Consultant from July
 2002 to August 2003.Steven H. Reynolds

49

Executive
 Vice President and Chief Credit Officer; Executive Vice President, Chief
 Credit Officer and Director of First Bank.

Executive
 Vice President and Chief Credit Officer of First Banks, Inc. since October
 2008; Director of First Bank since January 2009; Executive Vice President and
 Chief Credit Officer of First Bank since November 2008; Senior Vice President
 and Acting Chief Credit Officer of First Bank since September 2008; Senior
 Vice President and Regional Credit Officer of First Bank since April 2008;
 Regional Senior Credit Officer of Marshall & Ilsley Bank N.A. in St.
 Louis, Missouri from April 2006 to April 2008; Chief Credit Officer of
 Missouri State Bank in St. Louis, Missouri from November 2002 to April 2006.Lisa K. Vansickle

41

Senior
 Vice President and Chief Financial Officer; Senior Vice President, Secretary
 and Director of First Bank.

Senior
 Vice President and Chief Financial Officer of First Banks, Inc. since April
 2007; Senior Vice President and Controller of First Banks, Inc. from January
 2001 to April 2007; Vice President and Controller of First Banks, Inc. from
 April 1999 to January 2001; Vice President and Director of Internal Audit
 from December 1997 to March 1999; Senior Vice President, Secretary and
 Director of First Bank since July 2001.66

Item 11.
Executive CompensationCompensation
Discussion and Analysis. As outlined in the stock
ownership table included in Item 12  Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters, all of our voting stock
is owned by various trusts, established by and administered by and for the
benefit of Mr. James F. Dierberg, our Chairman of the Board, and members of his
immediate family. Therefore, we do not use equity awards in our compensation
program.

The objective of our executive compensation policies and
practices is
to attract and retain talented key executives that will contribute to the
achievement of strategic goals and the growth and success of the Company in
order to enhance the long-term value of our Company. Compensation is based upon
the achievement of corporate goals and objectives, as established by key
corporate executives and reported to the Board of Directors. Rewards for
performance are designed to motivate the continued strong performance of key executives
on a long-term basis.

Our executive compensation programs are designed to reward the
achievement of financial results in accordance with our corporate goals and
objectives. The elements of our executive compensation programs include base
salary, annual bonus compensation and the ability to participate in a
nonqualified deferred compensation plan. Our executive compensation programs
are cash-based and do not include any other forms of non-cash compensation. We
do not provide the named executive officers with employment contracts or
severance agreements, and consequently, we are under no obligation to make
additional payments to any of the named executive officers in the event of
severance, change in control, retirement or resignation. The individual
components of compensation to executive officers are periodically evaluated
using various factors, as further discussed below.

Salary. Base salaries of executive officers
are dependent upon the evaluation of certain factors and are based, in part, on
non-quantifiable considerations, at the discretion of the Chairman and/or
certain executive officers. The level of base salaries of executive officers is
designed to reward the officers performance based upon an evaluation of the
following factors: (i) the performance of the Company and the achievement of
corporate goals and objectives, considering general business and industry
conditions, among other factors, and the contributions of specific executives
towards the overall performance; (ii) each executive officers areas of
responsibility and the Companys performance in those areas; and (iii) the
level of compensation paid to comparable executives by other financial
institutions of comparable size in the market areas in which we operate to
ensure we maintain a competitive compensation package. Our corporate goals and
objectives provide particular measurements to which the Board of Directors and executive management assign significance, such as net
income, organic and external growth in target

67

market areas, expense control,
net interest margin, credit quality, and regulatory examination results. These
factors are taken into consideration by the Chairman of the Board, who
evaluates the appropriate base salary and related annual salary increases of
the President and Chief Executive Officer, and by the Chairman of the Board and
certain senior executive officers, who evaluate the appropriate base salary and
related annual salary increases of executive officers and other employees. Base
salaries of executive officers are reviewed on an ongoing basis and are
generally adjusted on an annual basis, and may be further adjusted periodically
as a result of significant changes in responsibility, employment market
conditions, and other factors.

Bonus. We offer our
key executive officers additional compensation through an Executive Incentive
Compensation Plan, or the Plan. The objectives of the Plan are to promote
superior short-term and long-term financial performance of the Company through
its key executives; to reward those key executive officers who deliver solid
results with market-competitive incentives; and to attract, motivate and retain
skilled and experienced individuals who can increase the size and profitability
of the Company. Our Chairman of the Board has full discretion to determine on
an annual basis those executives who are eligible to participate in the Plan.
Each of the named executive officers is a participant in the Plan, along with
certain other executive officers, with the exception of Ms. Vansickle and Mr.
Schepman. Ms. Vansickle received a discretionary bonus in 2007. Mr. Schepman
received a discretionary bonus in 2007 and 2006. As a result of the Companys
performance, no bonuses were awarded in 2008 under the Plan. Mr. Holmes
received a bonus in 2008 in connection with his commencement of employment with
the Company.

The bonus award amounts under the Plan are determined by a
mathematical
formula that is based primarily on our weighted average return on equity
multiplied by a weighting component and the named executive officers annual
salary. Payments under the Plan are made annually based upon the results of the
above-referenced formulas, unless determined otherwise by the Board of
Directors for the Chief Executive Officer or by the Chief Executive Officer for
the other participants. In considering any adjustment to payments to other
executive officers, the Chief Executive Officer will evaluate each executive
officers contribution to improving our return on equity during the plan year.

In connection with its participation in the TARP, the Company is
required for the duration of the period that the U.S. Treasury holds any equity
or debt position in the Company acquired under the TARP, to take the following
actions with respect to its executive compensation arrangements relating to its
Senior Executive Officers, or the SEOs:


Require that SEO bonus and incentive compensation are subject to
 recovery or clawback by the Company if the payments were based on
 materially inaccurate financial statements or any other materially inaccurate
 performance metric criteria;
Prohibit any golden parachute payment to the SEOs,
generally
 meaning any payment in the nature of compensation to (or for the benefit of)
 an SEO made in connection with an applicable severance from employment to the
 extent the aggregate present value of such payments equals or exceeds an
 amount equal to three times the SEOs base amount (generally defined as the
 five-year average of the SEOs compensation); and
Agree that it will be subject to Section 162(m)(5) of the Internal
 Revenue Code, or the Code, which reduces the annual tax deduction limit for
 remuneration paid to the SEOs during any taxable year from $1,000,000 to
 $500,000 and eliminates the availability of the exception to the deduction
 limit for performance-based compensation, as defined in the Code.The Companys current SEOs are Messrs. McCarthy, Goldammer,
Holmes and
McLaughlin and Ms. Vansickle. In order to comply with these requirements, the
Company entered into an Omnibus Amendment Agreement with each of the named
SEOs. The Omnibus Amendment Agreements have the effect of amending each named
SEOs compensation, bonus, incentive and other benefit plans, arrangements and
agreements, as described in this section, as necessary to comply with the TARP
requirements described above for any year in which the U.S. Treasury holds an
equity or debt position in the Company. As a result, all named SEO compensation
arrangements are potentially subject to limitation in accordance with these
requirements. The Omnibus Amendment Agreements also permit the Company to take
any actions necessary to amend the SEOs incentive compensation arrangements in
the event that the Board of Directors determines, pursuant to the analysis
described below, that any such arrangements encourage the SEOs to take
unnecessary and excessive risks that threaten the value of the Company.

In addition, the Board of Directors, acting as the Compensation
Committee, is required to meet at least annually with the Companys senior risk
officers to discuss and review the relationship between the Companys risk
management policies and practices and its SEO incentive compensation
arrangements, identifying and making reasonable efforts to limit any features
in such compensation arrangements that might lead to the SEOs taking
unnecessary or excessive risks that could threaten the value of the Company.
The Board of Directors, on behalf of the Company, must certify that it has
completed the review and taken any necessary actions.

68

In response to this requirement, in January 2009, the Board of
Directors, as the Compensation Committee, met and reviewed the compensation
requirements under the TARP and approved the appointment of the Companys
Director of Risk Management and its General Counsel as senior risk officers
for purposes of the compensation review. At a subsequent meeting, the senior risk
officers presented the Board of Directors with an overview of the Companys
overall risk structure, the top risks identified within the Company and their ongoing
comprehensive review of the compensation program. Based on its analysis and primarily the termination of the
Companys Executive Incentive Compensation Plan, discussed below, the Board of
Directors determined that the Companys executive compensation program does not
encourage the SEOs to take unnecessary and excessive risks that threaten the
value of the Company, and that no further changes to the program were required
for this purpose. The required certification of the Compensation Committee is
provided in the Compensation Committee Report set forth following this
Compensation Discussion and Analysis.

In addition to the requirements under the TARP set forth above, the
recently enacted ARRA contains a number of significant new limitations on
executive compensation for TARP participants. Because the regulations under the
ARRA have not yet been issued, the ultimate impact of these limitations on the
Companys executive compensation program is uncertain. As a result, the Board
of Directors intends to assess what actions may be necessary in response to
these limitations and take any necessary actions including the creation of a
Compensation Committee of the Board of Directors comprised of independent
directors.

Independent of the Companys participation in the TARP, the
Companys
executive management has determined that no SEO will receive any bonus or
incentive compensation in 2009. In addition, in light of current economic
conditions and the newly adopted limitations on compensation under the ARRA that prohibit the payment
of any bonuses or incentive compensation to the Companys SEOs, the Board of
Directors elected to terminate the Executive Incentive Compensation Plan which is the only
incentive compensation plan in which such officers participate.
Although the Board of Directors recognizes the importance and value of
incentive based compensation, it appears its ability to effectively use such
compensation tools will be limited under the forthcoming regulations. As a
result, the Board of Directors intends to continue to review the Companys
overall compensation program to determine what actions may be necessary to
continue to fulfill its objectives while complying with these limitations. As a
family owned company, the Company has historically conservatively compensated
its executive officers while maintaining key talent and has never engaged in
the practice of using extravagant compensation packages or perquisites to
reward executive officers. The Board of Directors intends to continue to apply
these long-held philosophies in setting future compensation within the limits
of the TARP and any other applicable regulations.

Deferred Compensation.
We offer a deferred compensation plan to the executive officers and other key
employees to promote retention by providing a long-term savings opportunity on
a tax-effective basis.

The Board of Directors and President and Chief Executive Officer
periodically review the various components of our executive compensation
programs. Salaries paid, annual bonuses awarded and deferred compensation
balances for the named executives are further described in the Summary
Compensation Table and Nonqualified Deferred Compensation Table below.

69

Executive
Compensation. The following table sets forth
certain information regarding compensation earned by the named executive
officers for the years ended December 31, 2008, 2007 and 2006:

SUMMARY COMPENSATION TABLE

Name and
 Principal Position(s)

Year

Salary(1)

Bonus(1)

All Other
 Compensation(2)

Total(1)Terrance M. McCarthy (3)

2008

500,000




9,200


509,200President and

2007

478,000

374,800


9,000


861,800Chief Executive Officer

2006

409,000

345,000


8,800


762,800Lisa K. Vansickle (4)

2008

183,400




16,000
(5)

199,400Senior Vice President

2007

174,000

24,000


18,300
(5)

216,300and Chief Financial OfficerRussell L. Goldammer

2008

242,800




9,200


252,000Executive Vice President
 and

2007

237,200

222,400


9,000


468,600Chief Information OfficerRobert S. Holmes, Jr.

2008

318,800

125,000


29,900
(6)

473,700Executive Vice President Commercial BankingF. Christopher McLaughlin

2008

236,400




9,200


245,600Executive Vice President
 andDirector of Retail BankingDaniel W. Jasper (7)

2008

283,500




142,200
(8)

425,700(Former Executive Vice
 President

2007

264,800

239,000


9,000


512,800and Chief Credit Officer)

2006

245,600

215,000


8,800


469,400(1)
Salary
 and bonus reported for Messrs. McCarthy and Jasper include amounts deferred
 in our NQDC Plan, as further described below and in Note 17 to our
 consolidated financial statements, of $75,000 and $19,100, respectively, or
 an aggregate of $94,100. Salary reported for Ms. Vansickle and Messrs.
 Goldammer, Holmes, and McLaughlin did not include any amounts deferred in our
 NQDC Plan. Earnings by the named executives on their NQDC Plan balances did not
 include any above-market or preferential earnings.(2)
All
 other compensation reported reflects contributions to our 401(k) Plan, as
 further described in Note 17 to our consolidated financial statements, with
 the exception of the amounts reported for Ms. Vansickle and Messrs. Holmes
 and Jasper, as further described below.(3)
Mr.
 McCarthy became President and Chief Executive Officer of First Banks, Inc. on
 April 1, 2007.(4)
Ms.
 Vansickle became Chief Financial Officer of First Banks, Inc. on April 2,
 2007.(5)
All
 other compensation reported for Ms. Vansickle for 2008 and 2007 reflects a
 contribution to our 401(k) Plan of $5,700 and $8,300, respectively, and the
 payout of $10,300 and $10,000, respectively, of an award previously granted
 under an incentive plan that Ms. Vansickle participated in prior to the time
 she became a named executive officer on April 2, 2007. Ms. Vansickles
 participation in that incentive plan terminated at the time she became a
 named executive officer.(6)
All
 other compensation reported for Mr. Holmes reflects a contribution to our
 401(k) Plan of $9,200 and $20,700 associated with a corporate relocation
 package.(7)
Mr.
 Jasper resigned from the Company on September 5, 2008.(8)
All
 other compensation reported for Mr. Jasper for 2008 reflects a contribution
 to our 401(k) Plan of $7,200 and a payment made in conjunction with Mr.
 Jaspers resignation in the amount of $135,000.Nonqualified
Deferred Compensation. Officers that meet certain
position and base salary criteria and non-employee directors are eligible to
participate in our Nonqualified Deferred Compensation Plan, or NQDC Plan.
Participants are allowed to defer, on an annual basis, up to 25% of their
salary and up to 100% of their bonus payments, and hypothetically invest in
various investment options available in the NQDC Plan that are selected by the
participant and may be changed by the participant at any time. These investment
options mirror the investment options that we offer through our 401(k) plan and
include various investment funds such as equity funds, international stock
funds, capital appreciation funds, money market funds, bond funds, mid-cap
value funds and growth funds.

The NQDC Plan allows for us to credit the deferred compensation
accounts
of any participant with discretionary contributions, however, we have not made
any such discretionary contributions under the NQDC Plan since its inception.
Any such contributions, if made, would vest over a five-year period. Earnings
or losses on participant account balances resulting from the participants
investment choices are credited or charged to the participant accounts on a
monthly basis. We recognize these earnings or losses in our consolidated
statements of operations on a monthly basis. In the event of retirement,
payment of the vested portion of the participants deferred compensation
account balance is either made through a single lump sum payment or annual
payments over five or ten years, subject to election by the participant. Payment
of the vested portion of the participants deferred compensation account
balance is made through a single lump sum payment in the event the participant
terminates

70

his or her employment for reasons other than retirement. With the
exception of Mr. Jasper and Mr. Blake, there were no withdrawals or
distributions from our NQDC Plan for the year ended December 31, 2008.

The following table sets forth certain information regarding
nonqualified deferred compensation earned by the named executive officers for
the year ended December 31, 2008:

NONQUALIFIED DEFERRED COMPENSATION TABLE

Name and
 Principal Position(s)

Executive
 Contributions in
 Last Fiscal Year (1)

Aggregate (Losses)
 Earnings in
 Last Fiscal Year

Aggegrate
 Distributions in
 Last Fiscal Year

Aggregate
 Balance at
 December 31, 2008Terrance M. McCarthy President
and Chief Executive Officer


$
75,000


(156,700
)




499,400
(2)Lisa K. Vansickle Senior Vice
President and Chief Financial Officer






(12,400
)




32,600
(3)Daniel W. Jasper (Former
Executive Vice President and Chief Credit
 Officer)



19,100


(10,100
)

(46,200)
(4)

184,900
(5)(1)
All
 executive contributions represent the deferral of base salary and/or bonus
 payments reflected in the Summary Compensation Table. We did not make any
 discretionary contributions under the NQDC Plan as of and for the year ended
 December 31, 2008.(2)
Of
 this amount, $451,100 represents deferrals of cash consideration from prior
 years. The remaining balance represents the cumulative earnings on the
 original deferred amounts and the participants 2008 activity.(3)
Of
 this amount, $33,200 represents deferrals of cash consideration from prior
 years. The remaining balance represents the cumulative earnings on the
 original deferred amounts and the participants 2008 activity.(4)
Following
 his resignation on September 5, 2008, Mr. Jasper received the first of five
 annual distributions of his NQDC Plan participant account balance, which is
 fully vested.(5)
Of
 this amount, $186,500 represents deferrals of cash consideration from prior
 years that were reflected in the Summary Compensation Table in our Annual
 Report on Form 10-K for the relevant years. The remaining balance represents
 the cumulative earnings on the original deferred amounts and the
 participants 2008 activity.Potential Payments
Upon Termination. Upon termination of employment,
the executive officers will receive payments of their vested portion of the
executives deferred compensation account balance under our NQDC Plan as
described above.

Compensation of
Directors. The following table sets forth compensation
earned by the named non-employee directors for the year ended December 31,
2008:

DIRECTOR COMPENSATION TABLE

Name

Fees Earned or
 Paid in Cash

TotalJames F. Dierberg


$
144,000


144,000Allen H.
 Blake (1)



2,000


2,000James A. Cooper (2)






Gordon A. Gundaker



43,000


43,000David L. Steward (3)



42,000


42,000Douglas H. Yaeger (3) (4)



48,000


48,000(1)
Mr.
 Blake was elected as Director of First Banks by unanimous written consent of
 the Board of Directors on December 16, 2008. Mr. Blake was elected as
 Director of First Bank at the regular meeting of the First Bank Board of
 Directors held on November 24, 2008 and received fees of $2,000 in 2008 for
 First Bank board meetings attended.(2)
Mr.
 Cooper was elected as Director of First Banks by unanimous written consent of
 the Board of Directors on December 16, 2008. At the regular meeting of the
 First Banks Board of Directors held on January 30, 2009, Mr. Cooper was
 elected to the Audit Committee, effective January 30, 2009.(3)
Fees
 paid for Messrs. Steward and Yaeger include payments deferred in our NQDC
 Plan of $42,000 and $48,000, respectively, or an aggregate of $90,000.
 Earnings by the directors on their NQDC Plan balances did not include any
 above-market or preferential earnings.(4)
Mr.
 Yaeger serves as Chairman of the Audit Committee and the Audit Committee
 Financial Expert.71

Our executive officers that are also directors do not receive
remuneration other than salaries and bonuses for serving on our Board of
Directors. Only those directors who are neither our employees nor employees of
any of our subsidiaries receive cash remuneration for their services as
directors. Mr. Dierberg received an annual fee of $144,000, paid semi-monthly,
for his service as Chairman of the Board of Directors during 2008. All other
such non-employee directors received a fee of $3,000 for each Board meeting
attended and $1,000 for each Audit Committee meeting attended. Mr. Yaeger also
received a fee of $1,250 per calendar quarter for his service as Chairman of
the Audit Committee. Messrs. Yaeger, Gundaker and Steward also received a fee
of $3,750 per calendar quarter as a retainer for their service as members of
the Board of Directors. In addition, Mr. Blake, as a non-employee Director of
First Bank, received a fee of $1,000 for each monthly Board meeting attended.

Our non-employee directors are also eligible to participate in our
NQDC
Plan. Our directors do not receive any other compensation, and there are no
arrangements for amounts to be paid to directors upon resignation or any other
termination of such director or a change in control of the Company. The Audit
Committee is currently the only committee of our Board of Directors.

Compensation
Committee Interlocks and Insider Participation. We
do not have a compensation committee, therefore, our Board of Directors
performs the functions of such a committee. Messrs. McCarthy and Schepman serve
as executive officers and members of our Board of Directors. Except for the
foregoing, none of our executive officers served during 2008 as a member of our
compensation committee, or any other committee performing similar functions, or
as a director of another entity, any of whose executive officers or directors
served on our Board of Directors. See further information regarding
transactions with related parties in Note 19 to our consolidated financial
statements appearing on pages 119 through 121 of this report.

Compensation
Committee Report.

Our Board of Directors, which performs the functions of our
compensation committee, has reviewed the Compensation Discussion and Analysis
and discussed such with management. Based on such review and discussions, the
Board of Directors recommended the Compensation Discussion and Analysis be
included in the Companys Annual Report on Form 10-K as of and for the year
ended December 31, 2008.

In addition, the Board of Directors certifies that it has reviewed
with
the Companys senior risk officers the SEO incentive compensation arrangements
and has made reasonable efforts to ensure that such arrangements do not
encourage SEOs to take unnecessary and excessive risks that threaten the value
of the Company.

Board of
 DirectorsJames F.
 Dierberg, Chairman of the Board of DirectorsAllen H.
 BlakeJames A.
 CooperGordon A.
 GundakerTerrance M.
 McCarthySteven F.
 SchepmanDavid L.
 StewardDouglas H.
 Yaeger72

Item 12.
Security Ownership of Certain Beneficial Owners and Management and
 Related Stockholder MattersThe following table sets forth, as of March 25, 2009, certain
information with respect to the beneficial ownership of all classes of our
voting capital stock by each person known to us to be the beneficial owner of
more than five percent of the outstanding shares of the respective classes of
our stock:

Title of Class
 and Name of Owner

Number of
 Shares
 Owned

Percent
 of Class

Percent of
 Total
 Voting
 PowerCommon Stock
 ($250.00 par value)James F.
Dierberg II Family Trust (1)

7,714.677
(2)

32.605
%

*Ellen C.
Dierberg Family Trust (1)

7,714.676
(2)

32.605


*Michael J.
Dierberg Family Trust (1)

4,255.319
(2)

17.985


*Michael J.
Dierberg Irrevocable Trust (1)

3,459.358
(2)

14.621


*First Trust
(Mary W. Dierberg and First
 Bank, Trustees) (1)

516.830
(3)

2.184


*Class A
 Convertible Adjustable Rate Preferred Stock
 ($20.00 par value)James F.
Dierberg, Trustee of the James F.
 Dierberg Living Trust (1)

641,082
(4)(5)

100
%

77.7
%Class B
 Non-Convertible Adjustable Rate Preferred Stock ($1.50 par value)James F.
Dierberg, Trustee of the James F.
 Dierberg Living Trust (1)

160,505
(5)

100
%

19.4
%Class C
 Fixed Rate Cumulative Perpetual Preferred Stock ($1.00 par value)United States
Department of the Treasury

295,400
(6)

100
%

0.0
%Class D
 Fixed Rate Cumulative Perpetual Preferred Stock ($1.00 par value)United States
Department of the Treasury

14,770
(6)

100
%

0.0
%All
 executive officers and directors other than Mr.
James F. Dierberg and members of
his immediate family

0


0
%

0.0
%*
Represents less than 1.0%.(1)
Each
 of the above-named trustees and beneficial owners are United States citizens,
 and the business address for each such individual is 135 North Meramec,
 Clayton, Missouri 63105. Mr. James F. Dierberg, our Chairman of the Board,
 and Mrs. Mary W. Dierberg, are husband and wife, and Messrs. James F.
 Dierberg II and Michael J. Dierberg and Ms. Ellen C. Dierberg are their adult
 children.(2)
Due
 to the relationship between Mr. James F. Dierberg, his wife and their
 children, Mr. Dierberg is deemed to share voting and investment power over
 these shares.(3)
Due
 to the relationship between Mr. James F. Dierberg, his wife and First Bank,
 Mr. Dierberg is deemed to share voting and investment power over these
 shares.(4)
Convertible
 into common stock, based on the appraised value of the common stock at the
 date of conversion. Assuming an appraised value of the common stock equal to
 the book value, the number of shares of common stock into which the Class A
 Preferred Stock is convertible at December 31, 2008 is 543, which shares are
 not included in the above table.(5)
Sole
 voting and investment power.(6)
Shares
 were issued to the U.S. Treasury on December 31, 2008 pursuant to the TARP.
 The holders of the Class C Preferred Stock and the Class D Preferred Stock
 have no voting rights except in certain limited circumstances.73

Item 13.
Certain Relationships and Related Transactions, and Director
 IndependenceReview and Approval of Related Person
Transactions. We review all relationships and
transactions in which we and our directors and executive officers and their
immediate family members and entities in which such persons have a significant
interest are participants to determine whether such persons have a direct or
indirect material interest. Our management collects information from the
executive officers and the directors regarding the related person transactions
and determines whether we or a related person has a direct or indirect material
interest in the transaction. If we determine that a transaction is directly or
indirectly material to us or a related person, then the transaction is disclosed
in accordance with applicable requirements. In addition, the Audit Committee of
our Board of Directors reviews and approves or ratifies any related person
transaction that is required to be so disclosed. In the event that a member of
the Audit Committee is a related person to such a transaction, such member may
not participate in the discussion or vote regarding approval or ratification of
the transaction.

Related Person Transactions.Outside
of normal customer relationships, no directors, executive officers or
shareholders holding over 5% of our voting securities, and no corporations or
firms with which such persons or entities are associated, currently maintain or
have maintained since the beginning of the last full fiscal year, any
significant business or personal relationship with our subsidiaries or us,
other than that which arises by virtue of such position or ownership interest
in our subsidiaries or us, except as set forth in Item 11  Executive
Compensation  Compensation of Directors, or as described in the following
paragraphs.

First Bank has had in the past, and may have in the future, loan
transactions and related banking services in the ordinary course of business
with our 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. First Bank does not extend credit to our officers or to officers of First Bank, except
extensions of credit secured by mortgages on personal residences, loans to
purchase automobiles and personal credit card accounts.

Certain of our shareholders, directors and officers and their
respective affiliates have deposit accounts and related banking services with
First Bank. It is First Banks policy not to permit any of its officers or
directors or their affiliates to overdraw their respective deposit accounts.
Deposit account overdraft protection may be approved for persons or entities
under a plan whereby a credit limit has been established in accordance with
First Banks standard credit criteria.

Transactions with related parties, including transactions with
affiliated persons and entities, are described in Note 19 to our consolidated
financial statements on pages 119 through 121 of this report.

Director Independence.
Our Board of Directors has determined that Messrs. James A. Cooper, Gordon A.
Gundaker, David L. Steward and Douglas H. Yaeger have no material relationship
with us and each is independent. Our Audit Committee of the Board of Directors
is composed only of independent directors. In order to be considered
independent, our Board of Directors must determine that a director does not
have any direct or indirect material relationship with us as provided under the
rules of the NYSE. In making such a determination, the Board of Directors
considers all relationships between us, or any of our subsidiaries, and the
director, or any of his immediate family members, or any entity with which the
director or any of his immediate family members is affiliated by reason of
being a partner, officer or significant shareholder thereof. In assessing the
independence of our directors, the Board of Directors considered all
relationships between us and our directors based primarily upon responses of
the directors to questions posed through a directors and officers
questionnaire. The Board of Directors considered each of the related person
transaction discussed above in making its independence determination.

First Banks has only preferred securities listed on the NYSE and,
pursuant to the General Application section of NYSE Rule 303A, is not subject
to NYSE Rule 303A.01 requiring a majority of independent directors. Messrs.
Dierberg, Blake, McCarthy and Schepman are not independent because they are
each current or former executive officers of the company.



74

Item 14.
Principal Accounting Fees and ServicesFees of Independent Registered Public
Accounting Firm

During 2008 and 2007, KPMG LLP served as our Independent Registered
Public Accounting Firm and provided services to our affiliates and us. The
following table sets forth fees for professional audit services rendered by
KPMG LLP for the audit of our consolidated financial statements and other audit
services in 2008 and 2007:

2008

2007Audit fees (1)

$
430,500


610,500Audit related fees





Tax fees (2)


96,500


All other fees





Total

$
527,000


610,500(1)
For
 2008 and 2007, audit fees include the audits of the consolidated financial
 statements of First Banks and SBLS LLC, as well as services provided for
 reporting requirements under FDICIA and mortgage banking activities, which
 are included in the audit fees of First Banks, as these services are closely
 related to the audit of First Banks consolidated financial statements. Audit
 fees also include other accounting and reporting consultations.(2)
For
 2008, tax fees consist of tax filing, compliance and other advisory services.Policy Regarding the Approval of Independent
Auditor Provision of Audit and Non-Audit Services

Consistent with the Securities and Exchange Commission requirements
regarding auditor independence, the Audit Committee recognizes the importance
of maintaining the independence, in fact and appearance, of our independent
auditors. As such, the Audit Committee has adopted a policy for pre-approval of
all audit and permissible non-audit services provided by our independent
auditors. Under the policy, the Audit Committee, or its designated member, must
pre-approve services prior to commencement of the specified service. The
requests for pre-approval are submitted to the Audit Committee or its
designated member by the Director of Audit with a statement as to whether in
his/her view the request is consistent with the Securities and Exchange
Commissions rules on auditor independence. The Audit Committee reviews the
pre-approval requests and the fees paid for such services at their regularly
scheduled quarterly meetings or at special meetings.

PART IV


Item 15.
Exhibits, Financial Statement Schedules(a)
1.
Financial
 Statements and Supplementary Data  The financial statements and
 supplementary data filed as
 part of this Report are included in Item 8.2.
Financial
 Statement Schedules  These schedules are omitted for the reason they are not
 required or are not
 applicable.3.
Exhibits 
 The exhibits are listed in the index of exhibits required by Item 601 of
 Regulation S-K at Item (b)
 below and are incorporated herein by reference.(b)
The index of
 required exhibits is included beginning on page 130 of this Report.(c)
Not
 Applicable.75

FIRSTBANKS, INC.REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMThe Board of
Directors and Stockholders 
First Banks, Inc.:

We have audited the accompanying consolidated balance sheets of
First
Banks, Inc. and subsidiaries (the Company) as of December 31, 2008 and 2007,
and the related consolidated statements of operations, changes in stockholders
equity and comprehensive income (loss), and cash flows for each of the years in
the three-year period ended December 31, 2008. These consolidated financial
statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

We conducted our audits in accordance with the standards of the
Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to
above
present fairly, in all material respects, the financial position of First
Banks, Inc. and subsidiaries as of December 31, 2008 and 2007, and the results
of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2008, in conformity with U.S. generally
accepted accounting principles.

As discussed in note 1 to the consolidated financial statements,
effective January 1, 2007, the Company adopted Financial Accounting Standards
Board Interpretation No. 48  Accounting for
Uncertainty in Income Taxes, an Interpretation of Statement of
Financial Accounting Standards No. 109  Accounting
for Income Taxes.

As discussed in note 1 to the consolidated financial statements,
effective January 1, 2008, the Company elected to measure its servicing rights
at fair value as permitted by Statement of Financial Accounting Standards No.
156  Accounting for Servicing of Financial
Assets.

/s/ KPMG LLP



St. Louis, Missouri 
March 25, 2009

76

FIRSTBANKS, INC.CONSOLIDATED BALANCE
SHEETS(dollars expressed in thousands, except share and per share
 data)December 31,2008

2007ASSETSCash and cash equivalents:Cash and due
from banks

$
797,638


217,597Short-term
investments


44,678


14,078Total cash and
cash equivalents


842,316


231,675Investment securities:Available for
sale


605,014


1,000,392Held to
maturity (fair value of $18,507 and $19,078, respectively)


17,912


18,879Total
investment securities


622,926


1,019,271Loans:Commercial,
financial and agricultural


2,575,505


2,382,067Real estate
construction and development


1,572,212


2,141,234Real estate
mortgage


4,336,368


4,211,285Consumer and
installment


77,877


97,117Loans held for
sale


38,720


66,079Total
loans


8,600,682


8,897,782Unearned
discount


(7,707
)

(11,598
)Allowance for
loan losses


(220,214
)

(168,391
)Net
loans


8,372,761


8,717,793Bank premises and
 equipment, net


236,528


240,456Goodwill and other
 intangible assets


306,800


315,651Bank-owned life insurance


118,825


116,619Deferred income taxes


36,851


139,277Other real estate


91,524


11,225Other assets


154,623


110,503Total
assets

$
10,783,154


10,902,470LIABILITIESDeposits:Noninterest-bearing demand

$
1,241,916


1,259,123Interest-bearing demand


935,805


980,850Savings and
money market


2,777,285


2,716,726Time deposits
of $100 or more


1,254,652


1,546,857Other time
deposits


2,531,862


2,645,637Total
deposits


8,741,520


9,149,193Other borrowings


575,133


409,616Notes payable





39,000Subordinated debentures


353,828


353,752Deferred income taxes


45,565


48,209Accrued expenses and other
 liabilities


70,753


55,079Minority interest in subsidiaries


129,383


5,544Total
liabilities


9,916,182


10,060,393STOCKHOLDERS EQUITYPreferred stock:$1.00 par
value, 4,689,830 shares authorized, no shares issued and
 outstanding





Class A
convertible, adjustable rate, $20.00 par value, 750,000 shares
 authorized, 641,082 shares issued and outstanding


12,822


12,822Class B
adjustable rate, $1.50 par value, 200,000 shares authorized,
 160,505 shares issued and outstanding


241


241Class C fixed
rate, cumulative, perpetual, $1.00 par value, 295,400
 shares authorized, issued and outstanding


278,057


Class D fixed
rate, cumulative, perpetual, $1.00 par value, 14,770
 shares authorized, issued and outstanding


17,343


Common stock, $250.00 par value,
25,000 shares authorized, 23,661
 shares issued and outstanding


5,915


5,915Additional paid-in capital


9,685


9,685Retained earnings


536,714


818,343Accumulated other
 comprehensive income (loss)


6,195


(4,929
)Total
stockholders equity


866,972


842,077Total
liabilities and stockholders equity

$
10,783,154


10,902,470The accompanying notes are an
integral part of the consolidated financial statements.

77

FIRSTBANKS, INC.CONSOLIDATED STATEMENTS OF
OPERATIONS(dollars expressed in thousands, except share and per share
 data)Years Ended December 31,2008

2007

2006Interest income:Interest and
fees on loans

$
552,770


627,468


577,634Investment
securities:Taxable


36,681


61,785


57,017Nontaxable


1,314


1,604


1,875Short-term
investments


1,842


6,699


5,909Total interest
income


592,607


697,556


642,435Interest expense:Deposits:Interest-bearing demand


5,453


9,183


8,147Savings and
money market


59,438


79,804


53,297Time deposits
of $100 or more


52,902


71,480


59,114Other time
deposits


95,133


112,420


96,138Other
borrowings


14,189


16,298


17,511Notes
payable


1,328


2,426


5,530Subordinated
debentures


21,058


25,111


25,352Total interest
expense


249,501


316,722


265,089Net interest
income


343,106


380,834


377,346Provision for loan losses


368,000


65,056


12,000Net interest
(loss) income after provision for loan losses


(24,894
)

315,778


365,346Noninterest income:Service charges
on deposit accounts and customer service fees


54,275


46,834


43,310Gain (loss) on
loans sold and held for sale


4,748


(4,583
)

21,398Net loss on
investment securities


(8,760
)

(3,077
)

(1,813
)Bank-owned life
insurance investment income


2,808


3,841


3,103Investment
management income


3,440


7,111


8,412Insurance fee
and commission income


7,336


6,860


4,848Net gain (loss)
on derivative instruments


1,730


1,233


(390
)Change in fair
value of servicing rights


(11,825
)

(5,445
)

(7,109
)Loan servicing
fees


9,051


8,292


9,264Gain on
extinguishment of term repurchase agreement


5,000





Other


21,530


22,121


27,298Total
noninterest income


89,333


83,187


108,321Noninterest expense:Salaries and
employee benefits


144,973


171,018


162,523Occupancy, net
of rental income


38,760


33,977


27,643Furniture and
equipment


21,245


19,683


16,960Postage,
printing and supplies


6,312


6,747


6,721Information
technology fees


35,536


36,305


37,099Legal,
examination and professional fees


15,761


9,893


8,783Amortization of
intangible assets


11,131


12,419


8,195Advertising and
business development


5,674


6,933


7,128FDIC
insurance


7,173


1,006


1,050Expenses on
other real estate


8,242


859


520Charitable
contributions


541


5,942


6,462Other


39,196


39,570


32,481Total
noninterest expense


334,544


344,352


315,565(Loss) income
before provision for income taxes and minority interest
 in (loss) income of subsidiaries


(270,105
)

54,613


158,102Provision for income taxes


18,208


5,075


51,872(Loss) income
before minority interest in (loss) income of
 subsidiaries


(288,313
)

49,538


106,230Minority interest in (loss)
 income of subsidiaries


(1,158
)

78


(587
)Net (loss)
income


(287,155
)

49,460


106,817Preferred stock dividends


786


786


786Net (loss)
income available to common stockholders

$
(287,941
)

48,674


106,031Basic (loss) earnings per
 common share

$
(12,169.46
)

2,057.14


4,481.23Diluted (loss) earnings per
 common share

$
(12,169.46
)

2,055.42


4,426.83Weighted average shares of
 common stock outstanding


23,661


23,661


23,661The accompanying notes are an
integral part of the consolidated financial statements.

78

FIRSTBANKS,
INC.CONSOLIDATED STATEMENTSOFCHANGES
IN STOCKHOLDERS EQUITY
AND COMPREHENSIVE
INCOME (LOSS)Three Years Ended December 31, 2008(dollars expressed in thousands, except per share
data)Preferred
 Stock

Common
 Stock

Additional
 Paid-in
 Capital

Retained
 Earnings

Accu-mulated
 Other
 Compre-
 hensive
 Income
 (Loss)

Total
 Stock-
 holders
 EquityBalances, January 1,
2006

$
13,063


5,915


5,910


661,168


(19,906
)

666,150Year ended December 31,
2006:Comprehensive
income:Net
income











106,817





106,817Other
comprehensive income, net of tax:Unrealized
gains on investment securities














3,666


3,666Reclassification adjustment for investment securities losses included
 in net income














1,242


1,242Derivative
instruments:Current
 period transactions














1,906


1,906Total
comprehensive income

















113,631Adjustment for
the utilization of net operating losses associated with
 prior acquisitions








3,775








3,775Class A
preferred stock dividends, $1.20 per share











(769
)




(769
)Class B
preferred stock dividends, $0.11 per share











(17
)




(17
)Balances,
 December 31, 2006


13,063


5,915


9,685


767,199


(13,092
)

782,770Year ended December 31,
2007:Comprehensive
income:Net
income











49,460





49,460Other
comprehensive income, net of tax:Unrealized
losses on investment securities














(205
)

(205
)Reclassification adjustment for investment securities losses included
 in net income














122


122Derivative
instruments:Current
 period transactions














9,148


9,148Total
comprehensive income

















58,525Impact of
adoption of SFAS No. 158














(902
)

(902
)Cumulative
effect of change in accounting principle











2,470





2,470Class A
preferred stock dividends, $1.20 per share











(769
)




(769
)Class B
preferred stock dividends, $0.11 per share











(17
)




(17
)Balances, December 31,
2007


13,063


5,915


9,685


818,343


(4,929
)

842,077Year ended December 31,
2008:Comprehensive
loss:Net
loss











(287,155
)




(287,155
)Other
comprehensive income:Unrealized
gains on investment securities, net of tax














6,043


6,043Reclassification adjustment for investment securities losses included
 in net income, net of tax














5,694


5,694Derivative
instruments:Current
 period transactions, net of tax














1,745


1,745Establishment
 of deferred tax asset valuation allowance














(1,707
)

(1,707
)Pension
 liability adjustment, net of tax














(651
)

(651
)Total
comprehensive loss

















(276,031
)Cumulative
effect of change in accounting principle











6,312





6,312Issuance of
Class C Preferred Stock


278,057














278,057Issuance of
Class D Preferred Stock


17,343














17,343Class A
preferred stock dividends, $1.20 per share











(769
)




(769
)Class B
preferred stock dividends, $0.11 per share











(17
)




(17
)Balances, December 31,
2008

$
308,463


5,915


9,685


536,714


6,195


866,972The accompanying notes are an
integral part of the consolidated financial statements.

79

FIRSTBANKS, INC.CONSOLIDATED STATEMENTSOFCASH FLOWS(dollars expressed in thousands)Years Ended December 31,2008

2007

2006Cash flows from operating
activities:Net (loss)
income

$
(287,155
)

49,460


106,817Adjustments to
reconcile net (loss) income to net cash provided by
 operating activities:Depreciation
and amortization of bank premises and equipment


25,202


21,848


18,927Amortization of
intangible assets


11,131


12,419


8,195Originations of
loans held for sale


(220,890
)

(508,391
)

(1,000,765
)Proceeds from
sales of loans held for sale


281,557


650,920


1,156,602Payments
received on loans held for sale


13,768


16,038


30,312Provision for
loan losses


368,000


65,056


12,000(Benefit)
provision for current income taxes


(79,427
)

23,392


42,448(Benefit)
provision for deferred income taxes


(36,512
)

(7,571
)

9,424Increase
(decrease) in deferred tax asset valuation allowance


134,147


(10,746
)

Decrease
(increase) in accrued interest receivable


15,123


5,542


(9,781
)(Decrease)
increase in accrued interest payable


(3,800
)

(12,854
)

6,230Proceeds from
sales of trading securities





81,038


9,947Maturities of
trading securities





16,651


989Purchases of
trading securities





(17,939
)

(88,494
)(Gain) loss on
loans sold and held for sale


(4,748
)

4,583


(21,398
)Net loss on
investment securities


8,760


3,077


1,813Net (gain) loss
on derivative instruments


(1,730
)

(1,233
)

390Decrease in
fair value of servicing rights


11,825


5,445


7,109Gain on
extinguishment of term repurchase agreement


(5,000
)




Gain on sales
of branches, net of expenses





(1,018
)

Other operating
activities, net


24,843


(22,621
)

(31,819
)Minority
interest in (loss) income of subsidiaries


(1,158
)

78


(587
)Net cash
provided by operating activities


253,936


373,174


258,359Cash flows from investing
activities:Cash received
(paid) for acquired entities, net of cash and cash
 equivalents (paid) received





2,058


(204,690
)Cash paid for
sale of branches, net of cash and cash equivalents sold





(48,926
)

Cash paid for
earn-out consideration to Adrian N. Baker & Company


(2,920
)

(1,513
)

Proceeds from
sales of investment securities available for sale


417,403


170,699


198,061Maturities of
investment securities available for sale


376,250


1,040,690


1,003,970Maturities of
investment securities held to maturity


2,498


5,271


2,887Purchases of
investment securities available for sale


(423,256
)

(769,845
)

(1,065,738
)Purchases of
investment securities held to maturity


(1,557
)

(133
)

(865
)Proceeds from
sales of commercial loans held for sale


3,421


33,471


68,350Net increase in
loans


(194,243
)

(814,430
)

(510,526
)Recoveries of
loans previously charged-off


14,844


8,675


15,394Purchases of
bank premises and equipment


(23,107
)

(54,612
)

(38,304
)Net proceeds
from sales of other real estate owned


16,632


12,621


4,760Net proceeds
received (paid) from termination of derivative
 instruments


27,278





(1,677
)Cash received
for minority interest in FB Holdings, LLC


125,000





Other investing
activities, net


(2,009
)

(2,513
)

(3,071
)Net cash
provided by (used in) investing activities


336,234


(418,487
)

(531,449
)Cash flows from financing
activities:(Decrease)
increase in demand, savings and money market deposits


(1,693
)

204,038


10,185(Decrease)
increase in time deposits


(402,974
)

(232,870
)

415,562Increase in
Federal Reserve advances


100,000





Increase
(decrease) in Federal Home Loan Bank advances


199,853


(36,368
)

(43,410
)(Decrease)
increase in federal funds purchased


(76,500
)

76,500


Decrease in
securities sold under agreements to repurchase


(53,829
)

(71,724
)

(129,734
)Advances drawn
on notes payable


55,000


35,000


Repayments of
notes payable


(94,000
)

(61,000
)

(35,000
)Proceeds from
issuance of subordinated debentures





77,322


139,178Repayments of
subordinated debentures





(82,681
)

Proceeds from
issuance of preferred stock


295,400





Payment of
preferred stock dividends


(786
)

(786
)

(786
)Net cash
provided by (used in) financing activities


20,471


(92,569
)

355,995Net increase
(decrease) in cash and cash equivalents


610,641


(137,882
)

82,905Cash and cash equivalents,
beginning of year


231,675


369,557


286,652Cash and cash equivalents, end
of year

$
842,316


231,675


369,55780

FIRSTBANKS, INC.CONSOLIDATED STATEMENTS OFCASH FLOWS (CONTINUED )(dollars expressed in thousands)Years Ended December 31,2008

2007

2006Supplemental disclosures of
 cash flow information:Cash paid
(received) during the period for:Interest on
liabilities

$
255,587


330,803


256,740Income
taxes


(15,846
)

8,961


45,497Noncash
investing and financing activities:Cumulative
effect of change in accounting principle

$
6,312


2,470


Securitization
and transfer of loans to investment securities





101,869


138,944Loans held for
sale transferred to loan portfolio





116,391


Loans
transferred to other real estate


109,288


16,269


7,542Business
combinations:Fair value of
tangible assets acquired (noncash)

$



810,847


608,123Goodwill and
other intangible assets recorded with net assets acquired


2,920


33,304


111,676Liabilities
assumed





(844,696
)

(515,109
)The accompanying notes are an integral part of
the consolidated financial statements.

81

FIRST BANKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(1)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESThe
following is a summary of the significant accounting policies followed by First
Banks, Inc. and subsidiaries (First Banks or the Company):

Basis of Presentation. The accompanying consolidated
financial
statements of First Banks have been prepared in accordance with U.S. generally
accepted accounting principles and conform to predominant practices within the
banking industry. Management of First Banks 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 U.S. generally accepted accounting
principles. Actual results could differ from those estimates.

Principles of Consolidation. The consolidated
financial statements include
the accounts of the parent company and its subsidiaries, giving effect to
minority interest, as more fully described below, and in Note 19 to the
consolidated financial statements. All significant intercompany accounts and
transactions have been eliminated. Certain reclassifications of 2007 and 2006
amounts have been made to conform to the 2008 presentation.

First
Banks operates through its wholly owned subsidiary bank holding company, The
San Francisco Company (SFC), headquartered in St. Louis, Missouri, and its
wholly owned subsidiary holding company, Coast Financial Holdings, Inc. (CFHI),
headquartered in Bradenton, Florida.

Prior
to First Banks acquisition of CFHI on November 30, 2007, First Bank,
headquartered in St. Louis, Missouri, was a wholly owned banking subsidiary of
SFC. On November 30, 2007, First Banks completed its acquisition of CFHI, and
its wholly owned banking subsidiary, Coast Bank of Florida (Coast Bank). The
issued and outstanding shares of common stock of Coast Bank were exchanged for
the newly issued and outstanding shares of non-voting Series B common stock of
First Bank, and Coast Bank was subsequently merged with and into First Bank. As
a result, SFC is the owner of 100% of the voting Series A outstanding shares of
common stock of First Bank and CFHI is the owner of 100% of the non-voting
Series B outstanding shares of common stock of First Bank. Thus, First Bank is
96.82% owned by SFC and 3.18% owned by CFHI.

First
Bank operates through its branch banking offices and subsidiaries: First Bank
Business Capital, Inc.; Missouri Valley Partners, Inc. (MVP); Adrian N. Baker
& Company (ANB); Universal Premium Acceptance Corporation and its wholly
owned subsidiary, UPAC of California, Inc. (collectively, UPAC); Small Business
Loan Source LLC (SBLS LLC); and FB Holdings, LLC (FB Holdings). All of the
subsidiaries are wholly owned as of December 31, 2008, except: (a) SBLS LLC,
which is 76.0% owned by First Bank and 24.0% owned by First Capital America,
Inc. (FCA), a corporation owned and operated by James F. Dierberg, First Banks
Chairman of the Board, and members of his immediate family; and (b) FB
Holdings, which is 53.24% owned by First Bank and 46.76% owned by FCA, as
further described in Note 19 to the consolidated financial statements.

Regulatory Matters. In connection with the most
recent regular
examinations of the Company and First Bank by the Federal Reserve Bank of St.
Louis (FRB) and the Missouri Division of Finance (MDOF), the Company and First
Bank entered into informal agreements with each regulatory agency. On September
18, 2008, First Bank and its Board of Directors entered into an informal
agreement with the FRB and the MDOF. In addition, on October 2, 2008, the
Company and its Board of Directors entered into a Memorandum of Understanding
with the FRB. Each of the agreements is characterized by regulatory authorities
as an informal action that is neither published nor made publicly available by
the agencies and is used when circumstances warrant a milder form of action
than a formal supervisory action, such as a cease and desist order.

Under
the terms of the 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
declare 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. The Company received the approval of the
FRB to declare the regular quarterly dividends on its preferred stock to be
paid in February and April 2009 and to pay its regular quarterly interest
payments on its outstanding subordinated debentures for further payment to the
individual holders of the respective underlying trust preferred securities in
March and April 2009. However, First Banks cannot ensure that the FRB will
approve future payment requests.

First
Bank, under its agreement with the MDOF and the FRB, has 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

82

FIRST BANKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)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 its Tier 1 capital ratio at no less than 7.00%. As
further described in Note 21 to the consolidated financial statements, at
December 31, 2008, First Banks Tier 1 capital ratio was 9.75%, or
approximately $260.5 million over the minimum level required by the agreement.

The
Company and First Bank were in full compliance with all provisions of the
respective informal agreements as of December 31, 2008 and are committed to
ensuring that the requirements of the agreements are met in a timely manner.

Significant Accounting Policies. On January 1, 2008,
First Banks elected to
measure its servicing rights at fair value as permitted by Statement of
Financial Accounting Standards (SFAS) No. 156  Accounting for Servicing of Financial Assets. The election
of this option resulted in the recognition of a cumulative effect of change in
accounting principle of $6.3 million, net of tax, which was recorded as an
increase in retained earnings, as further described in Note 6 to the
consolidated financial statements. As such, effective January 1, 2008, changes
in the fair value of mortgage and SBA servicing rights are recognized in
earnings in the period in which the change occurs.

On
January 1, 2008, First Banks implemented SFAS No. 157  Fair Value Measurementsfor financial and
nonfinancial assets and liabilities recognized or disclosed at fair value in
the financial statements on a recurring basis and financial assets recognized
on a nonrecurring basis, which did not have a material impact on First Banks
financial condition or results of operations other than certain additional
disclosure requirements. SFAS No.
157 defines fair value, establishes a framework for measuring fair value in
U.S. generally accepted accounting principles, and expands disclosures about
fair value measurements. SFAS No. 157 applies under other accounting
pronouncements that require or permit fair value measurements, and does not
require any new fair value measurements. SFAS No. 157 is effective for fiscal
years beginning after November 15, 2007, and interim periods within those
fiscal years, for financial assets and liabilities and nonfinancial assets and
nonfinancial liabilities that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually). Implementation
is deferred for all nonfinancial assets and nonfinancial liabilities that are
recognized or disclosed at fair value in the financial statements on a
nonrecurring basis to fiscal years beginning after November 15, 2008.
Additional information on the fair value of financial assets is presented in
Note 16 to the consolidated financial statements.

On
January 1, 2008, First Banks implemented SFAS No. 159  The Fair Value Option for Financial Assets and
Financial Liabilities, including an amendment of FASB Statement No. 115.
SFAS No. 159 provides entities with an option to report selected financial
assets and liabilities at fair value in an effort to reduce both complexity in
accounting for financial instruments and the volatility in earnings caused by
measuring related assets and liabilities differently. SFAS No. 159 is effective
for fiscal years beginning after November 15, 2007. Retrospective application
is not allowed. Early adoption is permitted as of the beginning of an entitys
fiscal year that begins on or before November 15, 2007, provided the entity
also elects to adopt all of the provisions of SFAS No. 157 at the early
adoption date. First Banks implemented SFAS No. 159 on January 1, 2008, which
increased the carrying value of loans held for sale and gain on loans sold and
held for sale by $508,000 as of and for the year ended December 31, 2008.

Cash and Cash Equivalents. Cash, due from banks and
short-term
investments, which include federal funds sold and interest-bearing deposits,
are considered to be cash and cash equivalents for purposes of the consolidated
statements of cash flows. Federal funds sold were $2.2 million at December 31,
2008, and interest-bearing deposits were $42.4 million and $14.1 million at
December 31, 2008 and 2007, respectively.

First
Bank is required to maintain certain daily reserve balances on hand in
accordance with regulatory requirements. These reserve balances maintained in
accordance with such requirements were $23.2 million and $26.5 million at
December 31, 2008 and 2007, respectively.

Investment Securities. The classification of
investment securities
as trading, available for sale or held to maturity is determined at the date of
purchase.

Investment
securities designated as trading, which represent any security held for near
term sale, are stated at fair value. Realized and unrealized gains and losses
are included in noninterest income.

Investment
securities designated as available for sale, which represent any security that
First Banks has no immediate plan to sell but which may be sold in the future
under different circumstances, are stated at fair value. Realized gains and
losses are included in noninterest income, based on the amortized cost of the
individual security

83

FIRST BANKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)sold.
Unrealized gains and losses, net of related income tax effects, are recorded in
accumulated other comprehensive income (loss). All previous fair value
adjustments included in the separate component of accumulated other
comprehensive income (loss) are reversed upon sale. Premiums and discounts
incurred relative to the par value of securities purchased are amortized or
accreted, respectively, on the level-yield method taking into consideration the
level of current and anticipated prepayments.

Investment
securities designated as held to maturity, which represent any security that
First Banks has the positive intent and ability to hold to maturity, are stated
at cost, net of amortization of premiums and accretion of discounts computed on
the level-yield method taking into consideration the level of current and
anticipated prepayments.

A
decline in the fair value of any available-for-sale or held-to-maturity
investment security below its carrying value that is deemed to be other than
temporary results in a reduction in the cost basis of the carrying value to
fair value. The other-than-temporary impairment is charged to noninterest
income and a new cost basis is established. When determining
other-than-temporary impairment, consideration is given as to whether First
Banks has the ability and intent to hold the investment security until a market
price recovery and whether evidence indicating the carrying value of the
investment security is recoverable outweighs evidence to the contrary.

Loans Held for Portfolio. Loans held for portfolio
are carried at cost,
adjusted for amortization of premiums and accretion of discounts using the
interest method. Interest and fees on loans are recognized as income using the
interest method. Loan origination fees and costs are deferred and accreted to
interest income over the estimated life of the loans using the interest method.
Loans held for portfolio are stated at cost as First Banks has the ability and
it is managements intention to hold them to maturity.

The
accrual of interest on loans is discontinued when it appears that interest or
principal may not be paid in a timely manner in the normal course of business
or once principal or interest payments become 90 days past due under the
contractual terms of the loan agreement. Generally, payments received on
nonaccrual and impaired loans are recorded as principal reductions. Interest
income is recognized after all delinquent principal has been repaid or an
improvement in the condition of the loan has occurred that warrants resumption
of interest accruals.

A
loan is considered impaired when it is probable that First Banks will be unable
to collect all amounts due, both principal and interest, according to the
contractual terms of the loan agreement. Loans on nonaccrual status are considered
to be impaired loans. When measuring impairment, the expected future cash flows
of an impaired loan are discounted at the loans effective interest rate.
Alternatively, impairment is measured by reference to an observable market
price, if one exists, or the fair value of the collateral for a
collateral-dependent loan. Regardless of the historical measurement method
used, First Banks measures impairment based on the fair value of the collateral
when foreclosure is probable. Additionally, impairment of a restructured loan
is measured by discounting the total expected future cash flows at the loans
effective rate of interest as stated in the original loan agreement.

In
accordance with Statement of Position 03-3, Accounting
for Certain Loans or Debt Securities
Acquired in a Transfer (SOP 03-3), acquired impaired loans are
classified as nonaccrual loans and are initially measured at fair value with no
allocated allowance for loan losses. An allowance for loan losses is recorded
to the extent there is further credit deterioration subsequent to the
acquisition date.

Loans Held for Sale. Loans held for sale are
comprised of
residential mortgage loans held for sale in the secondary mortgage market,
frequently in the form of a mortgage-backed security, U.S. Small Business
Administration (SBA) loans awaiting sale of the guaranteed portion to the SBA,
and commercial real estate loans which may be identified for sale to specific
buyers to achieve credit or loan concentration objectives. Effective July 1,
2008, one-to-four family residential 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, primarily SBA loans, are carried at the
lower of cost or market value, which is determined on an individual loan basis.
The amount by which cost exceeds market value is recorded in a valuation
allowance as a reduction of loans held for sale. Changes in the valuation
allowance are reflected as part of the gain on loans sold and held for sale in
the consolidated statements of operations in the periods in which the changes
occur. Gains or losses on the sale of loans held for sale are determined on a
specific identification basis and reflect the difference between the value
received upon sale and the carrying value of the loans held for sale, including
any recourse reserve established for potential repurchase obligations. Loans
held for sale transferred to loans held for portfolio or available-for-sale
investment securities are transferred at fair value.

84

FIRST BANKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)Loan Servicing Income. Loan servicing income is
included in
noninterest income and represents fees earned for servicing real estate
mortgage loans owned by investors and originated by First Banks mortgage
banking operation, as well as SBA loans to small business concerns that are
originated by SBLS LLC, First Banks majority-owned subsidiary that originates,
sells and services SBA loans. These fees are net of federal agency guarantee
fees and interest shortfall. Such fees are generally calculated on the
outstanding principal balance of the loans serviced and are recorded as income
when earned.

Allowance for Loan Losses. The allowance for loan
losses is maintained
at a level considered adequate to provide for probable losses. The provision
for loan losses is based on a monthly analysis of the loans held for portfolio,
considering, among other factors, current economic conditions, loan portfolio
composition, past loan loss experience, independent appraisals, loan
collateral, payment experience and selected key financial ratios. Adjustments
are reflected in the consolidated statements of operations in the periods in
which they become known. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the allowance
for loan losses. Such agencies may require First Banks to modify its allowance
for loan losses based on their judgment about information available to them at
the time of their examination.

Derivative Instruments and Hedging
Activities. First
Banks utilizes derivative instruments and hedging strategies to assist in the
management of interest rate sensitivity and to modify the repricing, maturity
and option characteristics of certain assets and liabilities. First Banks uses
such derivative instruments solely to reduce its interest rate risk exposure.
First Bank also offers interest rate swap agreement contracts to certain
customers who wish to modify their interest rate sensitivity positions. First
Bank offsets the interest rate risk of these swap agreements by simultaneously
purchasing matching interest rate swap agreements contracts with offsetting
pay/receive rates from other financial institutions.

Derivative
instruments are recorded in the consolidated balance sheets and measured at
fair value. At inception of a non-customer derivative transaction, First Banks
designates the derivative instrument as either a hedge of the fair value of a
recognized asset or liability or of an unrecognized firm commitment (fair value
hedges) or a hedge of a forecasted transaction or the variability of cash flows
to be received or paid related to a recognized asset or liability (cash flow
hedges). For all hedging relationships, First Banks documents the hedging
relationship and its risk-management objectives and strategy for entering into
the hedging relationship including the hedging instrument, the hedged item(s),
the nature of the risk being hedged, how the hedging instruments effectiveness
in offsetting the hedged risk will be assessed and a description of the method
the Company will utilize to measure hedge ineffectiveness. This process also
includes linking all derivative instruments that are designated as fair value
hedges or cash flow hedges to the underlying assets and liabilities or to
specific firm commitments or forecasted transactions. First Banks also
assesses, both at the hedges inception and on an ongoing basis, whether the
derivative instruments that are used in hedging transactions are highly
effective in offsetting changes in fair values or cash flows of the hedged
item(s). First Banks discontinues hedge accounting prospectively when it is
determined that the derivative instrument is no longer effective in offsetting
changes in the fair value or cash flows of the hedged item(s), the derivative
instrument expires or is sold, terminated, or exercised, the derivative
instrument is de-designated as a hedging instrument because it is unlikely that
a forecasted transaction will occur, a hedged firm commitment no longer meets
the definition of a firm commitment, or management determines that designation
of the derivative instrument as a hedging transaction is no longer appropriate.

A
summary of First Banks accounting policies for its derivative instruments and
hedging activities is as follows:

Ø
Interest Rate Swap Agreements  Cash Flow
 Hedges.
 Interest rate swap agreements designated as cash flow hedges are accounted
 for at fair value. The effective portion of the change in the cash flow
 hedges gain or loss is initially reported as a component of other comprehensive
 income (loss) and subsequently reclassified into interest income or interest
 expense when the underlying transaction affects earnings. The ineffective
 portion of the change in the cash flow hedges gain or loss is recorded in
 noninterest income on each monthly measurement date. The net interest
 differential is recognized as an adjustment to interest income or interest
 expense of the related asset or liability being hedged. In the event of early
 termination or ineffectiveness, the gain or loss on the cash flow hedge would
 continue to be reported as a component of other comprehensive income (loss)
 until the underlying transaction affects earnings.Ø
Interest Rate Swap Agreements  Fair
 Value Hedges.
 Interest rate swap agreements designated as fair value hedges are accounted
 for at fair value. Changes in the fair value of the swap agreements are
 recognized currently in noninterest income. The change in the fair value of
 the underlying hedged85

FIRST BANKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)item
 is recognized as an adjustment to the carrying amount of the underlying
 hedged item and is also reflected currently in noninterest income. All
 changes in fair value are measured on a monthly basis. The net interest
 differential is recognized as an adjustment to interest income or interest
 expense of the related asset or liability being hedged. In the event of early
 termination or ineffectiveness, the net proceeds received or paid on the
 interest rate swap agreements are recognized immediately in noninterest
 income and the future net interest differential, if any, is recognized
 prospectively in noninterest income. The cumulative change in the fair value
 of the underlying hedged item is deferred and amortized or accreted to
 interest income or interest expense over the weighted average life of the
 related asset or liability. If, however, the underlying hedged item is
 repaid, the cumulative change in the fair value of the underlying hedged item
 is recognized immediately in noninterest income.Ø
Customer Interest Rate Swap Agreement
 Contracts.
 Derivative instruments are offered to 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 contract
 between First Bank and its customers is offset by a contract between First
 Bank and various counterparties. These contracts do not qualify for hedge
 accounting. Customer interest rate swap agreement contracts are carried at
 fair value. 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).Ø
Interest Rate Cap and Floor Agreements. Interest rate
cap and floor agreements are
 accounted for at fair value. Changes in the fair value of interest rate cap
 and floor agreements are recognized in noninterest income on each monthly
 measurement date.Ø
Interest Rate Lock Commitments. Commitments to
originate loans for
 subsequent sale in the secondary market (interest rate lock commitments),
 which primarily consist of commitments to originate fixed rate residential
 mortgage loans, are recorded at fair value. Fair values are based upon quoted
 market prices and, in 2007 and prior years, fair value measurements exclude
 the value of loan servicing rights or other ancillary values. In accordance
 with new accounting guidance effective January 1, 2008, the value of loan
 servicing rights is incorporated into fair value measurements for mortgage
 loan commitments. Changes in the fair value are recognized in noninterest
 income on a monthly basis.Ø
Forward Commitments to Sell
 Mortgage-Backed Securities. Forward
 commitments to sell mortgage-backed securities are recorded at fair value.
 Changes in the fair value of forward commitments to sell mortgage-backed
 securities are recognized in noninterest income on a monthly basis.Bank Premises and Equipment, Net. Bank premises and
equipment are carried at
cost less accumulated depreciation and amortization. Depreciation is computed
using the straight-line method over the estimated useful lives of the related
assets. Amortization of leasehold improvements is calculated using the
straight-line method over the shorter of the useful life of the related asset
or the term of the lease. Bank premises and improvements are depreciated over
five to 40 years and equipment is depreciated over three to seven years.

Goodwill and Other Intangible Assets. Goodwill and
other intangible assets
primarily consist of goodwill, core deposit intangibles and customer list
intangibles. Goodwill and intangible assets with indefinite useful lives are
not amortized, but instead tested annually for impairment. Intangible assets
with definite useful lives are amortized over their respective estimated useful
lives to their estimated residual values, and reviewed for impairment in
accordance with SFAS No. 144. First Banks amortizes, on a straight-line basis,
its core deposit intangibles, customer list intangibles and other intangibles.
Core deposit intangibles and customer list intangibles are amortized over the
estimated periods to be benefited, which have been estimated at five to seven
years, and seven to 16 years, respectively.

The
goodwill impairment test is a two-step process which requires First Banks to
make assumptions regarding fair value. First Banks policy allows management to
make the determination of fair value using internal cash flow models or by
engaging independent third parties. The first step consists of estimating the
fair value of the reporting unit using a number of factors, including projected
future operating results and business plans, economic projections, anticipated
future cash flows, discount rates, and comparable marketplace fair value data
from within a comparable industry grouping. First Banks compares the estimated
fair value of its reporting unit to the carrying value, which includes
allocated goodwill. If the estimated fair value is less than the carrying
value, the second step

86

FIRST BANKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)is
completed to compute the impairment amount by determining the implied fair
value of goodwill. This determination requires the allocation of the estimated
fair value of the reporting unit to the assets and liabilities of the reporting
unit. Any remaining unallocated fair value represents the implied fair value
of goodwill, which is compared to the corresponding carrying value to compute
the goodwill impairment amount, if any. Based on the results of the goodwill
impairment analyses, First Bank has not recorded any goodwill impairment.
However, adverse changes in the economic environment, operations of the reporting
unit, or other factors could result in a decline in the implied fair value
which could result in future goodwill impairment.

Servicing Rights. First Banks has mortgage servicing
rights and
SBA servicing rights. On January 1, 2008, First Banks elected to measure
servicing rights at fair value as permitted by SFAS No. 156  Accounting for Servicing of Financial Assets,which
resulted in the recognition of a cumulative change in accounting principle of
$6.3 million, net of tax, which was recorded as an increase in retained
earnings. As such, effective January 1, 2008, changes in the fair value of
mortgage and SBA servicing rights are recognized in earnings in the period in
which the change occurs and such changes are reflected in the change in fair
value of servicing rights in other noninterest income in the consolidated
statements of operations. Servicing rights are valued based on valuation models
that utilize assumptions based on the predominant risk characteristics of the
underlying loans, including size, interest rate, weighted average life, cost to
service and estimated prepayment speeds. The valuation models estimate the
present value of estimated future net servicing income. Prior to January 1,
2008, mortgage and SBA servicing rights were amortized and impairment was
recognized, when applicable, which is also reflected in the change in fair
value of servicing rights in other noninterest income in the consolidated
statements of operations.

Effective
January 1, 2008, mortgage and SBA servicing rights are capitalized upon the
sale of the underlying loan at estimated fair value. Prior to January 1, 2008,
mortgage and SBA servicing rights were capitalized by allocating the cost of
the loans to servicing rights and the loans (without the servicing rights) based
on the relative fair values of the two components. The fair value of mortgage
and SBA servicing rights fluctuates based on changes in interest rates and
certain other assumptions utilized to value the mortgage and SBA servicing
rights. The value is adversely affected when interest rates decline which
normally causes loan prepayments to increase. The determination of the fair
value of the mortgage and SBA servicing rights is performed monthly based upon
an independent third party valuation. The valuation analysis is prepared using
stratifications of the mortgage and SBA servicing rights based on the
predominant risk characteristics of the underlying loans, including size,
interest rate, weighted average original term, weighted average remaining term
and estimated prepayment speeds.

Other Real Estate. Other real estate, consisting of
real estate
acquired through foreclosure or deed in lieu of foreclosure, is stated at the
lower of cost or fair value less applicable selling costs. The excess of cost
over fair value of the property at the date of acquisition is charged to the
allowance for loan losses. Subsequent reductions in carrying value, to reflect
current fair value or costs incurred in maintaining the properties, are charged
to noninterest expense as incurred.

Income Taxes. Deferred tax assets and liabilities are
reflected at currently enacted income tax rates applicable to the period in
which the deferred tax assets or liabilities are expected to be realized or
settled. As changes in the tax laws or rates are enacted, deferred tax assets
and liabilities are adjusted through the provision for income taxes. Valuation
allowances are then recorded to reduce deferred tax assets to the amounts
management concludes are more-likely-than-not to be realized. First Banks and
its eligible subsidiaries file a consolidated federal income tax return and
unitary or consolidated state income tax returns in all applicable states.

First
Banks implemented Financial Accounting Standards Board (FASB) Interpretation
No. 48  Accounting for Uncertainty in
Income Taxes, an Interpretation of SFAS No. 109  Accounting for Income Taxes,on January 1,
2007 (FIN 48). The implementation of FIN 48 resulted in the recognition of a
cumulative effect of change in accounting principle of $2.5 million, which was
recorded as an increase to retained earnings, as further described in Note 13
to the consolidated financial statements.

In
accordance with FIN 48, First Banks policy is 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. There were no penalties related to tax matters accrued at
January 1, 2007, nor did the Company recognize any penalties during the years
ended December 31, 2008 and 2007.

First
Banks and its subsidiaries file income tax returns in the U.S. federal
jurisdiction and various states. Management of First Banks believes the accrual
for tax liabilities is adequate for all open audit years based on its

87

FIRST BANKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)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.

Noncontributory Defined Benefit
Pension Plan. First
Banks has a noncontributory defined benefit pension plan covering certain
current and former employees of a bank holding company acquired by First Banks
in 1994 (the Plan) and subsequently merged with and into First Banks on
December 31, 2002. First Banks discontinued the accumulation of benefits under
the Plan in 1994, and as such, there is no longer any service cost being
accrued by Plan participants. First Banks records annual amounts relating to
the Plan based on calculations that incorporate various actuarial and other
assumptions including discount rates, mortality rates, and assumed rates of
return. First Banks reviews these assumptions on an annual basis and makes
modifications to the assumptions based on current rates and trends when deemed
appropriate. Effective December 31, 2007, First Banks adopted the recognition
and disclosure provisions of SFAS No. 158, which required the Company to
recognize the funded status of the Plan and provide the required disclosures as
of and for the year ended December 31, 2007. The funded status of the Plan is
recognized as a net asset or liability and changes in the Plans funded status
are recognized through other comprehensive income to the extent those changes
are not included in the net periodic cost. On December 31, 2007, First Banks
recorded a cumulative effect of change in accounting principle of $902,000,
which was recorded as an increase to accumulated other comprehensive loss, as
further described in Note 17 to the consolidated financial statements.

Financial Instruments With
Off-Balance Sheet Risk. A financial instrument is defined as cash, evidence of an ownership
interest in an entity, or a contract that conveys or imposes on an entity the
contractual right or obligation to either receive or deliver cash or another
financial instrument. First Banks utilizes financial instruments to reduce the
interest rate risk arising from its financial assets and liabilities. These
instruments involve, in varying degrees, elements of interest rate risk and
credit risk in excess of the amount recognized in the consolidated balance
sheets. Interest rate risk is defined as the possibility that interest rates
may move unfavorably from the perspective of First Banks due to maturity and/or
interest rate adjustment timing differences between interest-earning assets and
interest-bearing liabilities. The risk that a counterparty to an agreement
entered into by First Banks may default is defined as credit risk.

First
Banks is a party to commitments to extend credit and commercial and standby
letters of credit in the normal course of business to meet the financing needs of
its customers. These commitments involve, in varying degrees, elements of
interest rate risk and credit risk in excess of the amount reflected in the
consolidated balance sheets.

Earnings Per Common Share. Basic earnings per common
share (EPS) are
computed by dividing the income available to common stockholders (the
numerator) by the weighted average number of shares of common stock outstanding
(the denominator) during the year. The computation of dilutive EPS is similar
except the denominator is increased to include the number of additional shares
of common stock that would have been outstanding if the dilutive potential
shares had been issued. In addition, in computing the dilutive effect of
convertible securities, the numerator is adjusted to add back any convertible
preferred dividends.

(2)
ACQUISITIONS ANDOTHERCORPORATETRANSACTIONSAcquisitions. During the three years ended December 31,
2008, First Banks completed the following acquisitions:

Entity

Date

Total
 Assets

Purchase
 Price

Goodwill
 and Other
 Intangibles(dollars expressed in thousands)2007Coast Financial
Holdings, Inc. Bradenton, Florida


November
 30, 2007

$
660,400


12,100


10,000Royal Oaks Bancshares, Inc. Houston,
Texas


February
 28, 2007


206,900


38,600


27,700$
867,300


50,700


37,7002006MidAmerica
National Bank Peoria and Bloomington, Illinois Branch
 Offices (1)


November
 10, 2006

$
158,300





2,40088

FIRSTBANKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)Entity

Date

Total
 Assets

Purchase
 Price

Goodwill
 and Other
 Intangibles(dollars expressed in thousands)2006
(continued)First Bank of
Beverly HillsBeverly Hills,
CaliforniaBranch Office
(1)

November
 3, 2006



157,500





8,700TeamCo,
Inc.Oak Lawn,
Illinois

August
 31, 2006



67,900


13,900


9,600San Diego
Community BankChula Vista,
California

August
 15, 2006



91,700


25,500


11,200Universal
Premium Acceptance Corporation (2)Lenexa,
Kansas

May
 31, 2006



152,800


52,700


44,700First
Independent National BankPlano,
Texas

May
 1, 2006



68,200


19,200


11,800Pittsfield
Community Bancorp, Inc.Pittsfield,
Illinois

April
 28, 2006



17,600


5,100


1,300Adrian N. Baker
& Company (3)Clayton,
Missouri

March
 31, 2006



3,000


11,800


12,500Dallas National
BankRichardson,
TexasBranch Office
(1)

January
 20, 2006



1,100





First National
Bank of SachseSachse,
Texas

January
 3, 2006



76,200


20,800


12,400$
794,300


149,000


114,600(1)
First
 Bank acquired the branch offices through a purchase of certain assets and
 assumption of certain liabilities of the branch offices. Total assets
 consisted of cash received upon assumption of the deposit liabilities and
 loans.(2)
In
 conjunction with the acquisition of UPAC, First Bank repaid in full the
 outstanding senior and subordinated notes of UPAC, including accumulated
 accrued and unpaid interest, totaling $125.9 million.(3)
The
 purchase price for ANB includes $7.4 million and additional payments totaling
 $4.4 million that were contingent on the future earnings of ANB for each of
 the years in the three-year period following the closing date of the
 transaction.Goodwill
and other intangible assets associated with the acquisitions included in the
table above are not deductible for tax purposes. For 2007 and 2006
acquisitions, goodwill and other intangible assets in the amounts of $37.7
million and $114.6 million, respectively, were assigned to First Bank.

The
consolidated financial statements include the financial position and results of
operations of the aforementioned transactions for the periods subsequent to the
respective acquisition dates, and the assets acquired and liabilities assumed
were recorded at their estimated fair value on the acquisition dates. These
fair value adjustments for the acquisitions completed in 2007 represented
current estimates and were subject to further adjustments as the valuation data
was finalized. The aforementioned acquisitions were funded from available cash reserves,
borrowings under First Banks term loan and revolving credit agreements, and/or
proceeds from the issuance of subordinated debentures.

On
January 3, 2006, First Banks acquired the majority of the outstanding common
stock of First National Bank of Sachse (FNBS), and subsequently acquired the
remaining outstanding common stock of FNBS in January 2006, for $20.8 million
in cash, in aggregate. FNBS was headquartered and operated one banking office
in Sachse, Texas, located in the northeast Dallas metropolitan area. The
acquisition served to expand First Banks banking franchise in Texas. The
transaction was funded through internally generated funds. At the time of the
acquisition, FNBS had assets of $76.2 million, loans, net of unearned discount,
of $49.3 million, deposits of $66.2 million and stockholders equity of $9.9
million. Goodwill was $8.8 million, and the core deposit intangibles, which are
being amortized over five years utilizing the straight-line method, were $3.6
million. FNBS was merged with and into First Bank on January 24, 2006.

On
January 20, 2006, First Bank completed its acquisition of the branch office of
Dallas National Bank in Richardson, Texas (Richardson Branch). At the time of
the acquisition, the Richardson Branch had assets of $1.1 million, including
loans, net of unearned discount, of $144,000, and deposits of $1.1 million.
Total assets consisted primarily of loans, fixed assets and cash received upon
assumption of deposit liabilities and certain assets.

89

FIRSTBANKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)On
March 31, 2006, First Bank completed its acquisition of ANB for $7.4 million in
cash and certain payments contingent on the future earnings of ANB for each of
the years in the three-year period following the closing date of the
transaction. During 2008 and 2007, First Bank paid the ANB shareholders
additional contingent payments in the amount of $2.9 million and $1.5 million,
respectively. ANB is an insurance brokerage agency based in Clayton, Missouri
that provides a comprehensive range of employee benefit and commercial and
personal insurance services on a nationwide basis. The acquisition served to
diversify First Banks products and services in this specialized industry. The
transaction was funded through internally generated funds. At the time of the
acquisition, ANB had assets of $3.0 million and stockholders equity of
$810,000. Goodwill was $8.8 million, and the customer list intangibles, which
are being amortized over 15 years utilizing the straight-line method, were $3.7
million. ANB operates as a wholly owned subsidiary of First Bank.

On
April 28, 2006, First Banks completed its acquisition of Pittsfield Community
Bancorp, Inc. and its wholly owned banking subsidiary, Community Bank of
Pittsfield (collectively, Community Bank) for $5.1 million in cash. Community
Bank was headquartered in Pittsfield, Illinois and operated two banking
offices, one in Pittsfield, Illinois, and one in Mount Sterling, Illinois. On
June 16, 2006, First Bank completed its sale of the Mount Sterling office to
Beardstown Savings, s.b. The acquisition served to expand First Banks banking
franchise in Pittsfield, Illinois. The transaction was funded through
internally generated funds. At the time of the acquisition, after giving effect
to the sale of the Mount Sterling office, Community Bank had assets of $17.6
million, loans, net of unearned discount, of $11.1 million, deposits of $12.3
million and stockholders equity of $3.9 million. Goodwill was $807,000, and
the core deposit intangibles, which are being amortized over five years
utilizing the straight-line method, were $517,000. Community Bank was merged
with and into First Bank at the time of the acquisition.

On
May 1, 2006, First Banks acquired the majority of the outstanding common stock
of First Independent National Bank (FINB), and subsequently acquired the
remaining outstanding common stock in May 2006, for $19.2 million in cash, in
aggregate. FINB was headquartered in Plano, Texas and operated two banking
offices in Plano, Texas, located in Collin County. In addition, at the time of
the acquisition, FINB was in the process of opening a de novo branch banking
office located in the Preston Forest Shopping Center in Dallas County, which
subsequently opened on June 26, 2006. The acquisition served to expand First
Banks banking franchise in Texas. The transaction was funded through
internally generated funds and the issuance of subordinated debentures
associated with a private placement of $40.0 million of trust preferred
securities through a newly formed affiliated statutory trust, as further
described in Note 12 to the consolidated financial statements. At the time of
the acquisition, FINB had assets of $68.2 million, loans, net of unearned
discount, of $59.6 million, deposits of $55.5 million and stockholders equity
of $7.3 million. Goodwill was $9.3 million, and the core deposit intangibles,
which are being amortized over five years utilizing the straight-line method,
were $2.5 million. FINB was merged with and into First Bank on May 16, 2006.

On
May 31, 2006, First Bank completed its acquisition of KIF, Inc., an Iowa
corporation, and its wholly owned subsidiaries, Universal Premium Acceptance
Corporation, a Missouri corporation, and UPAC of California, Inc., a California
corporation (collectively, UPAC), for $52.7 million in cash. In conjunction
with the acquisition of UPAC, First Banks repaid in full the outstanding senior
and subordinated notes of UPAC, which totaled $125.9 million at the time of the
acquisition. UPAC is an insurance premium financing company headquartered in
the Kansas City suburb of Lenexa, Kansas and operates in 49 states. The
acquisition served to diversify First Banks products and services in this
highly-specialized industry. The transaction was funded through internally
generated funds and a $52.0 million short-term Federal Home Loan Bank (FHLB)
advance. At the time of the acquisition, UPAC had assets of $152.8 million,
loans, net of unearned discount, of $149.2 million and stockholders equity of
$18.3 million. Goodwill was $25.4 million, and the customer list intangibles,
which are being amortized over 16 years utilizing the straight-line method,
were $19.3 million. KIF, Inc. was merged with and into Universal Premium Acceptance
Corporation on June 30, 2006. UPAC of California, Inc. operates as a wholly
owned subsidiary of Universal Premium Acceptance Corporation, which operates as
a wholly owned subsidiary of First Bank.

On
August 15, 2006, First Banks completed its acquisition of San Diego Community
Bank (SDCB) for $25.5 million in cash. SDCB was headquartered in Chula Vista,
California, which is located approximately ten miles south of downtown San
Diego, and operated two other banking offices in Kearney Mesa and Otay Mesa.
The acquisition served to expand First Banks banking franchise in southern
California. The transaction was funded through internally generated funds and
the issuance of subordinated debentures associated with the private placement
of $20.0 million of trust preferred securities through a newly formed
affiliated statutory trust, as further described in Note 12 to the consolidated
financial statements. At the time of the acquisition, SDCB had assets of $91.7
million, loans, net of unearned discount, of $78.6 million, deposits of $76.1
million and stockholders equity

90

FIRSTBANKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)of
$12.3 million. Goodwill was $6.9 million and the core deposit intangibles,
which are being amortized over five years utilizing the straight-line method,
were $4.3 million. SDCB was merged with and into First Bank at the time of the
acquisition.

On
August 31, 2006, First Banks completed its acquisition of TeamCo, Inc. and its
wholly owned banking subsidiary, Oak Lawn Bank (collectively, Oak Lawn) for
$13.9 million in cash. Oak Lawn was headquartered in Oak Lawn, Illinois, which
is located approximately 15 miles southwest of the Chicago Loop in Chicago
Southland, and operated a second banking office in Orland Park, Illinois, which
is located approximately 39 miles southwest of downtown Chicago. The
acquisition served to expand First Banks banking franchise in Chicago,
Illinois. The transaction was funded through internally generated funds and the
issuance of subordinated debentures associated with the private placement of
$25.0 million of trust preferred securities through a newly formed affiliated
statutory trust, as further described in Note 12 to the consolidated financial
statements. At the time of the acquisition, Oak Lawn had assets of $67.9
million, loans, net of unearned discount, of $43.1 million, deposits of $60.1
million and stockholders equity of $5.5 million. Goodwill was $7.3 million,
and the core deposit intangibles, which are being amortized over five years
utilizing the straight-line method, were $2.3 million. Oak Lawn was merged with
and into First Bank at the time of the acquisition.

On
November 3, 2006, First Bank completed its acquisition of the First Bank of
Beverly Hills banking office located in Beverly Hills, California (Beverly
Drive Office). At the time of the acquisition, the Beverly Drive Office had
assets of $157.5 million and deposits of $156.1 million. Total assets consisted
primarily of cash received upon assumption of deposit liabilities and certain
assets. The core deposit intangibles, which are being amortized over five years
utilizing the straight-line method, were $8.7 million.

On
November 10, 2006, First Bank completed its acquisition of MidAmerica National
Banks three banking offices located in Peoria and Bloomington, Illinois
(collectively, MidAmerica Offices). At the time of the acquisition, the
MidAmerica Offices had, on a combined basis, assets of $158.3 million including
loans, net of unearned discount, of $154.1 million, and deposits of $48.2
million. The core deposit intangibles, which are being amortized over five
years utilizing the straight-line method, were $2.4 million.

On
February 28, 2007, First Banks completed its acquisition of Royal Oaks
Bancshares, Inc. and its wholly owned banking subsidiary, Royal Oaks Bank, ssb
(collectively, Royal Oaks) for $38.6 million in cash. Royal Oaks was
headquartered in Houston, Texas and operated five banking offices in the
Houston area. In addition, at the time of the acquisition, Royal Oaks was in
the process of opening a de novo branch banking office located in the Heights,
near downtown Houston, which subsequently opened on April 16, 2007. The
acquisition served to expand First Banks banking franchise in Houston, Texas. The
transaction was funded through internally generated funds and the issuance of
subordinated debentures associated with the private placement of $25.0 million
of trust preferred securities through a newly formed affiliated statutory
trust, as further described in Note 12 to the consolidated financial
statements. At the time of the acquisition, Royal Oaks had assets of $206.9
million, loans, net of unearned discount, of $175.5 million, deposits of $159.1
million and stockholders equity of $9.6 million. Goodwill was $23.0 million
and the core deposit intangibles, which are being amortized over five years
utilizing the straight-line method, were $4.7 million. Royal Oaks Bancshares,
Inc. and Royal Oaks Bank, ssb were merged with and into SFC and First Bank, respectively,
at the time of the acquisition.

On
November 30, 2007, First Banks completed its acquisition of CFHI and its wholly
owned banking subsidiary, Coast Bank (collectively, Coast) for $12.1 million in
cash. Coast was headquartered in Bradenton, Florida and operated 20 banking
offices in Floridas Manatee, Pinellas, Hillsborough and Pasco counties. In
addition, at the time of the acquisition, Coast had two planned de novo branch
banking offices, one located in the Pinellas County community of Clearwater,
and the other located in Sarasota County. The acquisition served to establish
First Banks banking franchise in the state of Florida. The transaction was
funded through internally generated funds and the issuance of subordinated
debentures associated with the private placement of $15.0 million of trust
preferred securities through a newly formed affiliated statutory trust, as
further described in Note 12 to the consolidated financial statements. At the
time of the acquisition, Coast had assets of $660.4 million, loans, net of
unearned discount, of $518.0 million, deposits of $628.1 million and
stockholders equity of $14.2 million. Goodwill was $9.5 million, the core
deposit intangibles, which are being amortized over five years utilizing the
straight-line method, were $327,000 and other intangibles associated with
non-compete agreements, which are being amortized over two years utilizing the
straight-line method, were $174,000. CFHI operates as a wholly owned subsidiary
of First Banks and owns 100% of the non-voting Class B common stock of First
Bank. Coast Bank was merged with

91

FIRSTBANKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)and
into First Bank at the time of the acquisition, and accordingly, CFHI became
the owner of 3.18% of First Bank, as further described in Note 1 to the
consolidated financial statements.

Acquisition and Integration Costs.First
Banks accrues certain costs associated
with its acquisitions as of the respective consummation dates. The accrued
costs relate to adjustments to the staffing levels of the acquired entities or
to the anticipated termination of information technology or item processing
contracts of the acquired entities prior to their stated contractual expiration
dates. The most significant costs that First Banks incurs relate to salary
continuation agreements, or other similar agreements, of executive management
and certain other employees of the acquired entities that were in place prior
to the acquisition dates. These agreements provide for payments that are
triggered as a result of the change in control of the acquired entity. Other
severance benefits for employees that are terminated in conjunction with the
integration of the acquired entities into First Banks existing operations are normally
paid to the recipients within 90 days of the respective consummation date and
are expensed in the consolidated statements of operations as incurred. As the
obligation to make payments under these agreements is accrued at the
consummation date, such payments do not have any impact on the consolidated
statements of operations. First Banks also incurs integration costs associated
with acquisitions that are expensed in the consolidated statements of
operations. These costs relate principally to additional costs incurred in
conjunction with the information technology conversions of the respective
entities. As of December 31, 2008 and 2007, the accrued acquisition and
integration costs attributable to the Companys acquisitions were $140,000 and
$1.1 million, respectively, and are reflected in accrued expenses and other
liabilities in the consolidated balance sheets.

Other Corporate Transactions. On July 19,
2007, First Bank completed the
sale of two banking offices located in Denton and Garland, Texas (collectively,
Texas Branch Offices) to Synergy Bank, SSB, a subsidiary of Premier Bancshares,
Inc., resulting in a pre-tax gain of $1.0 million. At the time of the
transaction, the Texas Branch Offices had loans, net of unearned discount, of
$911,000 and deposits of $52.0 million.

During
the three years ended December 31, 2008, First Bank opened the following de
novo branch offices:

Branch
Office Location
Date OpenedSt. Louis, Missouri
January
 22, 2007Katy (Houston), Texas
February
 26, 2007Lincoln (Sacramento),
 California
March
 12, 2007Dardenne Prairie (St.
 Louis), Missouri
May
 9, 2007Chula Vista (San Diego),
 California
June
 25, 2007Brentwood (San Francisco),
 California
September
 24, 2007Shadow Creek Ranch
 (Houston), Texas
October
 15, 2007Valencia (Los Angeles),
 California
October
 29, 2007Naperville (Chicago),
 Illinois
January
 14, 2008Arnold (St. Louis),
 Missouri
May
 13, 2008Blue Oaks Marketplace
 (Rocklin), California
August
 18, 200892

FIRST  BANKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)(3)
INVESTMENTSINDEBTANDEQUITYSECURITIESSecurities Available for Sale. The
amortized cost, contractual maturity,
gross unrealized gains and losses and fair value of investment securities
available for sale at December 31, 2008 and 2007 were as follows:

Gross
 UnrealizedMaturity

Total
 Amortized
 Cost




Weighted
 Average
 Yield1 Year
 or Less

1-5
 Years

5-10
 Years

After
 10 Years



Fair
 ValueGains

Losses(dollars expressed in thousands)December 31,
2008:Carrying
value:U.S.
Government sponsored agencies

$
779


499


485





1,763


83





1,846


5.35
%Mortgage-backed securities


2,376


17,594


35,804


461,634


517,408


3,171


(3,448
)

517,131


5.14State and
political subdivisions


4,687


9,246


6,565


584


21,082


229


(102
)

21,209


4.17Equity
investments











16,984


16,984


12





16,996


4.00FHLB and
Federal Reserve Bank stock (no stated maturity)


47,832











47,832








47,832


4.70Total

$
55,674


27,339


42,854


479,202


605,069


3,495


(3,550
)

605,014


5.04Fair
value:Debt
securities

$
7,918


27,706


43,491


461,071Equity
securities


47,832








16,996Total

$
55,750


27,706


43,491


478,067Weighted
average yield


4.69
%

4.22
%

4.30
%

5.19
%December 31,
2007:Carrying
value:U.S.
Treasury

$
75,116











75,116


19





75,135


2.49
%U.S.
Government sponsored agencies


25,212


19,334





968


45,514


600





46,114


5.30Mortgage-backed securities


3,401


12,706


46,211


736,611


798,929


1,785


(16,755
)

783,959


4.81State and
political subdivisions


7,337


11,191


10,242


1,357


30,127


315


(8
)

30,434


4.06Equity
investments











28,316


28,316


5


(4,166
)

24,155


4.16FHLB and
Federal Reserve Bank stock (no stated maturity)


40,595











40,595








40,595


5.49Total

$
151,661


43,231


56,453


767,252


1,018,597


2,724


(20,929
)

1,000,392


4.65Fair
value:Debt
securities

$
111,211


43,811


56,436


724,184Equity
securities


40,595








24,155Total

$
151,806


43,811


56,436


748,339Weighted
average yield


3.85
%

4.87
%

4.47
%

4.81
%Securities Held to Maturity. The amortized cost,
contractual maturity,
gross unrealized gains and losses and fair value of investment securities held
to maturity at December 31, 2008 and 2007 were as follows:

Gross
 UnrealizedMaturity

Total
 Amortized
 Cost




Weighted
 Average
 Yield1 Year
 or Less

1-5
 Years

5-10
 Years

After
 10 Years



Fair
 ValueGains

Losses(dollars expressed in thousands)December
 31, 2008:Carrying
value:Mortgage-backed securities

$






7,417


4,265


11,682


338





12,020


5.13
%State and
political subdivisions


1,964


1,849


625


1,792


6,230


258


(1
)

6,487


4.97Total

$
1,964


1,849


8,042


6,057


17,912


596


(1
)

18,507


5.07Fair
value:Debt
securities

$
1,974


1,900


8,299


6,334Weighted
average yield


4.19
%

4.12
%

5.10
%

5.62
%December
 31, 2007:Carrying
value:Mortgage-backed securities

$






6,775


6,052


12,827


174


(52
)

12,949


5.15
%State and
political subdivisions


1,081


3,889


821


261


6,052


82


(5
)

6,129


4.29Total

$
1,081


3,889


7,596


6,313


18,879


256


(57
)

19,078


4.87Fair
value:Debt
securities

$
1,083


3,910


7,801


6,284Weighted
average yield


3.71
%

4.32
%

5.13
%

5.10
%93

FIRSTBANKS,
INC.NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)Proceeds
from sales of available-for-sale investment securities were $417.4 million,
$170.7 million and $198.0 million for the years ended December 31, 2008, 2007
and 2006, respectively. Gross gains of $2.4 million, $115,000 and $389,300 were
realized on sales of available-for-sale investment securities for the years
ended December 31, 2008, 2007 and 2006, respectively. Gross gains of $147,000
and $121,000 were realized on the contribution of certain available-for-sale
investment securities for the years ended December 31, 2007 and 2006,
respectively, as further described in Note 19 to the consolidated financial
statements. Gross losses of $126,000, $459,000 and $2.7 million were realized
on sales of available-for-sale investment securities for the years ended
December 31, 2008, 2007 and 2006, respectively. The gross losses for the year
ended December 31, 2006 included a loss of $2.7 million that resulted from the
sale of $197.0 million of available-for-sale investment securities for
liquidity purposes, including the related termination of $200.0 million in
aggregate of term repurchase agreements.

Proceeds
from calls of investment securities were $24.5 million, $7.3 million and $27.5
million for the years ended December 31, 2008, 2007 and 2006, respectively.
Gross gains realized on called securities were $405,000 and $11,700 for the
years ended December 31, 2008 and 2007, respectively. There were no gross gains
realized on called securities in 2006. Gross losses of $600, $500 and $2,100
were realized on called securities during the years ended December 31, 2008,
2007 and 2006, respectively. Net losses on trading securities were $1.5 million
for the year ended December 31, 2007 and net gains on trading securities were
$97,000 for the year ended December 31, 2006. The trading portfolio was
liquidated in July 2007.

First
Banks recorded other-than-temporary impairment of $11.4 million for the year
ended December 31, 2008 consisting of other-than-temporary impairment on equity
investments in the common stock of two companies in the financial services
industry of $10.4 million, caused by economic events impacting the financial
services industry as a whole and other-than-temporary impairment of $1.0
million on a preferred stock investment necessitated by bankruptcy proceedings
of the underlying financial services company. First Banks recorded
other-than-temporary impairment of $1.4 million during the year ended December
31, 2007 on an equity investment. The impairment recorded in 2008 and 2007
represented the difference between the cost basis and fair value of the equity
securities as of the respective impairment recognition dates. There was no
other-than-temporary impairment recorded in 2006.

First
Bank is a member of the FHLB system and the FRB system and maintains
investments in FHLB and FRB stock. These investments are recorded at cost,
which represents redemption value. The investment in FRB stock is maintained at
a minimum of 6% of First Banks capital stock and capital surplus. The
investment in FHLB of Des Moines stock is maintained at an amount equal to
0.12% of First Banks total assets, up to a maximum of $10.0 million, plus
4.45% of advances. First Bank also holds an investment in stock of the FHLB of
Dallas and the FHLB of San Francisco, as a nonmember. The investment in FHLB of
Dallas stock is maintained at a minimum of 4.10% of advances to collateralize
certain FHLB advances assumed in conjunction with certain acquisition
transactions.

Investment
securities with a carrying value of approximately $479.4 million and $596.7
million at December 31, 2008 and 2007, respectively, were pledged in connection
with deposits of public and trust funds, securities sold under agreements to
repurchase and for other purposes as required by law.

Gross
unrealized losses on investment securities and the fair value of the related
securities, aggregated by investment category and length of time that
individual securities have been in a continuous unrealized loss position, at December
31, 2008 and 2007, were as follows:

December 31, 2008Less than 12 months

12 months or more

TotalFair
 Value

Unrealized
 Losses

Fair
 Value

Unrealized
 Losses

Fair
 Value

Unrealized
 Losses(dollars expressed in thousands)Available for sale:Mortgage-backed securities

$
123,944


(1,711
)

114,600


(1,737
)

238,544


(3,448
)State and
political subdivisions


4,479


(101
)

25


(1
)

4,504


(102
)Total

$
128,423


(1,812
)

114,625


(1,738
)

243,048


(3,550
)Held to maturity:State and
political subdivisions

$
202


(1
)







202


(1
)94

FIRSTBANKS, INC.NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)December 31, 2007Less than 12 months

12 months or more

TotalFair
 Value

Unrealized
 Losses

Fair
 Value

Unrealized
 Losses

Fair
 Value

Unrealized
 Losses(dollars expressed in thousands)Available for sale:Mortgage-backed securities

$
59,902


(178
)

511,820


(16,577
)

571,722


(16,755
)State and
political subdivisions


999


(1
)

2,519


(7
)

3,518


(8
)Equity
investments


8,581


(4,166
)







8,581


(4,166
)Total

$
69,482


(4,345
)

514,339


(16,584
)

583,821


(20,929
)Held to maturity:Mortgage-backed securities

$






4,703


(52
)

4,703


(52
)State and
political subdivisions








975


(5
)

975


(5
)Total

$






5,678


(57
)

5,678


(57
)Mortgage-backed
securities  The unrealized losses on investments in mortgage-backed securities
were caused by fluctuations in interest rates. The contractual terms of these
securities are guaranteed by government-sponsored enterprises. It is expected
that the securities would not be settled at a price less than the amortized
cost. Because First Banks has the ability and intent to hold these investments
until a market price recovery or maturity, these investments are not considered
other-than-temporarily impaired. At December 31, 2008 and 2007, the unrealized
losses for mortgage-backed securities for 12 months or more included 25
securities and 111 securities, respectively.

State
and political subdivisions  The unrealized losses on investments in state and
political subdivisions were caused by 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 quality, and because First Banks has the ability
and intent to hold these investments until a market price recovery or maturity,
these investments are not considered other-than-temporarily impaired. At
December 31, 2008 and 2007, the unrealized losses for state and political
subdivisions for 12 months or more included one and 17 securities,
respectively.

Equity
investments  The unrealized losses on investments in equity investments for
the year ended December 31, 2007 consisted of an unrealized loss of $4.2
million on an investment in the common stock of a single company in the
financial services industry caused by economic events affecting the financial
services industry as a whole. First Banks investment in this company was in an
unrealized loss position for approximately seven months through December 31,
2007. First Banks recorded other-than-temporary impairment on this equity
investment in the second quarter of 2008, as previously described.

(4)
LOANSANDALLOWANCEFORLOANLOSSESChanges in the allowance for
loan losses for the years ended December 31, 2008, 2007 and 2006 were as
follows:

2008

2007

2006(dollars expressed in thousands)Balance, beginning of year

$
168,391


145,729


135,330Acquired allowances for
 loan losses





14,425


5,208168,391


160,154


140,538Loans charged-off


(331,021
)

(65,494
)

(22,203
)Recoveries of loans
 previously charged-off


14,844


8,675


15,394Net loans
charged-off


(316,177
)

(56,819
)

(6,809
)Provision for loan losses


368,000


65,056


12,000Balance, end of year

$
220,214


168,391


145,729First
Banks had $442.4 million and $202.2 million of impaired loans, consisting of
loans on nonaccrual status and restructured loans, at December 31, 2008 and
2007, respectively. Interest on impaired loans that would have been recorded
under the original terms of the loans was $38.0 million, $16.2 million and $3.7
million for the years ended December 31, 2008, 2007 and 2006, respectively. Of
these amounts, $19.0 million, $8.0 million and $1.3 million was recorded as
interest income on such loans in 2008, 2007 and 2006, respectively. The
allowance for loan losses includes an allocation for each impaired loan, with
the exception of acquired impaired loans classified as nonaccrual loans, which
are initially measured at fair value with no allocated allowance for loan
losses, in accordance with SOP 03-3, as further discussed below. The aggregate
allocation of the allowance for loan losses related to impaired loans

95

FIRST BANKS, INC.NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)was
approximately $63.2 million and $31.3 million at December 31, 2008 and 2007,
respectively. The average recorded investment in impaired loans was $351.5
million, $88.9 million and $73.6 million for the years ended December 31, 2008,
2007 and 2006, respectively. The amount of interest income recognized using a
cash basis method of accounting during the time these loans were impaired was
$3.9 million, $2.5 million and $3.7 million in 2008, 2007 and 2006,
respectively. At December 31, 2008 and 2007, First Banks had $7.1 million and
$26.8 million, respectively, of loans past due 90 days or more and still
accruing interest.

The
outstanding balance and carrying amount of impaired loans acquired in
acquisitions was $26.5 million and $10.0 million, respectively, at December 31,
2008, and $84.9 million and $46.0 million, respectively, at December 31, 2007.
First Banks recorded impaired loans acquired in acquisitions during the year
ended December 31, 2007 of $45.7 million at the time of acquisition. Changes in
the carrying amount of impaired loans acquired in acquisitions for the years
ended December 31, 2008 and 2007 were as follows:

2008

2007(dollars expressed in thousands)Balance, beginning of period

$
46,003


820Acquired impaired loans





45,681Transfers to other real
 estate


(11,552
)

(487
)Loans charged-off


(13,727
)

Payments and settlements


(10,727
)

(11
)Balance, end of period

$
9,997


46,003There
was no allowance for loan losses related to these loans at December 31, 2008
and 2007 as these loans were written down to estimated fair value at the
respective dates. As these loans were classified as nonaccrual loans, there was
no accretable yield related to these loans at December 31, 2008 and 2007.

First
Banks primary market areas are the states of California, Florida, Illinois,
Missouri and Texas. At December 31, 2008 and 2007, approximately 92% of the
total loan portfolio, and 82% and 83% of the commercial, financial and
agricultural loan portfolio, respectively, were made to borrowers within these
states.

Real
estate lending constituted the only significant concentration of credit risk.
Real estate loans comprised approximately 69% and 72% of the loan portfolio at
December 31, 2008 and 2007, respectively, of which 26% were made to consumers
in the form of residential real estate mortgages and home equity lines of
credit. First Bank also offers residential real estate mortgage loans with
terms that require interest only payments. At December 31, 2008, the balance of
such loans, all of which were held for portfolio, was approximately $168.0
million, of which approximately 24.6% were delinquent. At December 31, 2007,
the balance of such loans was $219.0 million, of which $212.0 million were held
for portfolio and $7.0 million were held for sale.

In
general, First Banks is a secured lender. At December 31, 2008 and 2007, 98% of
the loan portfolio was collateralized. Collateral is required in accordance
with the normal credit evaluation process based upon the creditworthiness of
the customer and the credit risk associated with the particular transaction.

First
Bank originates certain one-to-four family residential mortgage loans for sale
in the secondary market. First Bank has a repurchase obligation on these loans
in the event of fraud or, on certain loans, early payment default. The early
payment default provisions generally range from four months to one year after
sale of the loan in the secondary market.

Loans
to directors, their affiliates and executive officers of First Banks, Inc. were
approximately $49.0 million and $57.7 million at December 31, 2008 and 2007,
respectively, as further described in Note 19 to the consolidated financial
statements.

Loans
with a carrying value of approximately $3.74 billion and $2.24 billion at
December 31, 2008 and 2007, respectively, were pledged as collateral under
borrowing arrangements with the FRB and the FHLB. At December 31, 2008 and
2007, First Bank had aggregate outstanding advances of $300.7 million and $857,000,
respectively, under these borrowing arrangements, as further described
in Note 10 to the consolidated financial statements.

96

FIRST BANKS, INC.NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)(5)
DERIVATIVE INSTRUMENTSFirst
Banks utilizes derivative financial instruments to assist in the management of
interest rate sensitivity by modifying the repricing, maturity and option
characteristics of certain assets and liabilities. Derivative financial
instruments held by First Banks at December 31, 2008 and 2007 are summarized as
follows:

December 31,2008

2007Notional
 Amount

Credit
 Exposure

Notional
 Amount

Credit
 Exposure(dollars expressed in thousands)Cash flow hedges  subordinated
debentures

$
125,000







Cash flow hedges  loans








400,000

5,271Customer interest rate swap contracts


16,000







Interest rate floor agreements








300,000

1,699Interest rate lock commitments


48,700

831



3,000

23Forward commitments to sell mortgage-backed
securities


40,300

(325
)


55,000

40The
notional amounts of derivative financial instruments do not represent amounts
exchanged by the parties and, therefore, are not a measure of First Banks
credit exposure through its use of these instruments. The credit exposure represents
the loss First Banks would incur in the event the counterparties failed
completely to perform according to the terms of the derivative financial
instruments and the collateral held to support the credit exposure was of no
value.

For
the year ended December 31, 2008, First Banks realized net interest income of
$11.5 million on its derivative financial instruments, whereas for the years
ended December 31, 2007 and 2006, First Banks realized net interest expense of
$3.1 million and $5.0 million, respectively, on its derivative financial
instruments. First Banks recorded net gains on derivative instruments, which
are included in noninterest income in the consolidated statements of
operations, of $1.7 million and $1.2 million for the years ended December 31,
2008 and 2007, respectively, in comparison to net losses on derivative
instruments of $390,000 for the year ended December 31, 2006. The net gains and
losses on derivative instruments reflect changes in the fair value of First
Banks interest rate floor agreements.

Cash Flow Hedges  Subordinated
Debentures. First
Banks entered into the following interest rate swap agreements, which have been
designated as cash flow hedges, with the objective of stabilizing long-term
cost of capital and cash flow, and accordingly, interest expense on
subordinated debentures to the respective call dates of certain subordinated
debentures:

Ø
In March 2008, First Banks entered into the
 following four interest rate swap agreements totaling $125.0 million notional
 amount, in aggregate, to effectively convert the interest rate on $125.0
 million of First Banks subordinated debentures from a variable rate to a
 blended fixed rate of interest of approximately 4.90%: (a) $25.0 million
 notional amount with a maturity date of July 7, 2011; (b) $50.0 million
 notional amount with a maturity date of December 15, 2011; (c) $25.0 million
 notional amount with a maturity date of March 30, 2012; and (d) $25.0 million
 notional amount with a maturity date of December 15, 2012. These swap
 agreements provide for First Banks to receive an adjustable rate of interest
 equivalent to the three-month London Interbank Offered Rate, or LIBOR, plus
 1.65%, 1.85%, 1.61% and 2.25%, respectively, and pay a fixed rate of
 interest. The terms of the swap agreements provide for First Banks to pay and
 receive interest on a quarterly basis.The
amount receivable by First Banks under these swap agreements was $528,000 at
December 31, 2008, and the amount payable by First Banks under these swap
agreements was $451,000 at December 31, 2008.

97

FIRST BANKS, INC.NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)The
maturity dates, notional amounts, interest rates paid and received and fair
value of First Banks interest rate swap agreements designated as cash flow
hedges on certain subordinated debentures as of December 31, 2008 were as
follows:

Maturity Date

Notional
 Amount

Interest Rate
 Paid

Interest Rate
 Received

Fair
 Value(dollars expressed in thousands)July 7, 2011

$
25,000

4.40
%

6.40
%

$
(575
)December 15, 2011


50,000

4.91


3.85



(1,945
)March 30, 2012


25,000

4.71


3.08



(1,048
)December 15, 2012


25,000

5.57


4.25



(1,308
)$
125,000

4.90


4.29


$
(4,876
)Cash Flow Hedges. First Banks entered into the following
interest rate swap agreements, which have been designated as cash flow hedges,
to effectively lengthen the repricing characteristics of certain loans to
correspond more closely with their funding source with the objective of
stabilizing cash flow, and accordingly, net interest income over time:

Ø
In September 2006, First Banks entered into
 a $200.0 million notional amount three-year interest rate swap agreement and
 a $200.0 million notional amount four-year interest rate swap agreement. The
 underlying hedged assets were certain variable rate loans within First Banks
 commercial loan portfolio. The swap agreements provided for First Banks to
 receive a fixed rate of interest and pay an adjustable rate of interest
 equivalent to the weighted average prime lending rate minus 2.86%. The terms
 of the swap agreements provided for First Banks to pay and receive interest
 on a quarterly basis. On December 3, 2008, First Banks terminated these swap
 agreements. The pre-tax gain of $20.8 million, in aggregate, is being
 amortized as an increase to interest and fees on loans in the consolidated
 statements of operations over the remaining terms of the respective interest
 rate swap agreements, which had contractual maturity dates of September 18,
 2009 and September 20, 2010.The
amount receivable and payable by First Banks under the swap agreements was $6.0
million and $683,000 at December 31, 2007, respectively.

The
maturity dates, notional amounts, interest rates paid and received and fair
value of First Banks interest rate swap agreements designated as cash flow
hedges as of December 31, 2007 was as follows:

Maturity Date

Notional
 Amount

Interest Rate
 Paid

Interest Rate
 Received

Fair
 Value(dollars expressed in thousands)September 18, 2009

$
200,000

4.39
%

5.20
%

$
4,585September 20, 2010


200,000

4.39


5.20



7,331$
400,000

4.39


5.20


$
11,916Customer Interest Rate Swap
Agreement Contracts. First Bank offers interest rate swap agreement contracts 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 contract between First
Bank and its customers is offset by a contract between First Bank and various
counterparties. These contracts do not qualify for hedge accounting. 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 December 31, 2008 was $16.0 million.
There were no customer interest rate swap agreement contracts at December 31,
2007.

Interest Rate Floor Agreements. In September 2005, First Bank entered into a
$100.0 million notional amount three-year interest rate floor agreement in
conjunction with its interest rate risk management program. The interest rate
floor agreement provides for First Bank to receive a quarterly fixed rate of
interest of 5.00% should the three-month LIBOR equal or fall below the strike
price of 2.00%. In August 2006, First Bank entered into a $200.0 million
notional amount three-year interest rate floor agreement in conjunction with
the restructuring of one of First Banks $100.0 million term repurchase
agreements, as further described below, to further stabilize net interest
income in the event of a declining rate scenario. The interest rate floor
agreement provided for First Bank to receive a quarterly adjustable rate of
interest equivalent to the differential between the strike price of 4.00% and
the three-

98

FIRST BANKS, INC.NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)month
LIBOR should the three-month LIBOR equal or fall below the strike price. On May
9, 2008, First Bank terminated its interest rate floor agreements to modify its
overall hedge position in accordance with its interest rate risk management
program, and did not incur any gains or losses in conjunction with the
termination of these interest rate floor agreements. The fair value of the
interest rate floor agreements, which is included in other assets in the
consolidated balance sheets, was $1.7 million at December 31, 2007.

Interest Rate Floor Agreements
Embedded in Term Repurchase Agreements.First Bank has a term repurchase agreement
under a master repurchase agreement with an unaffiliated third party, as
further described in Note 10 to the consolidated financial statements. The
underlying securities associated with the term repurchase agreement are agency
collateralized mortgage obligation securities and are held by other financial
institutions under safekeeping agreements. The term repurchase agreement was
entered into with the objective of stabilizing net interest income over time,
further protecting the net interest margin against changes in interest rates
and providing funding for security purchases. At December 31, 2007, the term
repurchase agreement, as further described in Note 10 to the consolidated
financial statements, contained an embedded interest rate floor agreement which
was terminated in 2008. The interest rate floor agreement included within the
term repurchase agreement represented an embedded derivative instrument which,
in accordance with existing accounting literature governing derivative
instruments, was not required to be separated from the term repurchase
agreement and accounted for separately as a derivative financial instrument. As
such, the term repurchase agreement is reflected in other borrowings in the consolidated
balance sheets and the related interest expense is reflected as interest
expense on other borrowings in the consolidated statements of operations.

Pledged Collateral.At December 31, 2008, First Banks had pledged
cash of $3.7 million as collateral in connection with its interest rate swap
agreements. At December 31, 2007, First Banks had accepted cash of $21.4
million as collateral in connection with its interest rate swap agreements.

Interest Rate Lock Commitments /
Forward Commitments to Sell Mortgage-Backed Securities. Derivative financial instruments issued by
First Banks 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 March 2009. The fair value of the interest rate lock
commitments, which is included in other assets in the consolidated balance
sheets, was $831,000 and $23,000 at December 31, 2008 and 2007, 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
$(325,000) and $40,000 at December 31, 2008 and 2007, respectively.

99

FIRST BANKS, INC.NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (CONTINUED)(6)
SERVICING RIGHTSOn
January 1, 2008, First Banks elected to measure servicing rights at fair value
as permitted by SFAS No. 156. The election of this option resulted in the
recognition of a cumulative effect of change in accounting principle of $6.3
million, net of tax, which was recorded as an increase to retained earnings, as
further described in Note 1 to the consolidated financial statements.

Mortgage Banking Activities. At
December 31, 2008 and 2007, First Banks serviced mortgage loans for others
totaling $1.09 billion and $1.10 billion, respectively. Borrowers escrow balances held by First Banks on such
loans were $6.5 million and $6.2 million at December 31, 2008 and 2007,
respectively. Changes in mortgage servicing rights for the years ended December
31, 2008 and 2007 were as follows:

2008



2007(dollars
 expressed in thousands)Balance, beginning of
year


$
5,290



5,867Re-measurement to fair value
upon election to measure servicing rights
 at fair value under SFAS No. 156



9,538



Originated mortgage servicing
rights



2,175



2,219Change in fair value resulting
from changes in valuation inputs or
 assumptions used in valuation model(1)



(7,915
)


Other changes in fair
value(2)



(1,670
)


Amortization







(2,796
)Balance, end of year


$
7,418



5,290(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 December 31, 2008 and 2007,
First Banks
serviced SBA loans for others totaling $221.5 million and $149.9 million,
respectively. Changes in SBA servicing rights for the years ended December 31,
2008 and 2007 were as follows:

2008



2007(dollars
 expressed in thousands)Balance, beginning of
year


$
7,468



8,064Re-measurement to fair value
upon election to measure servicing rights
 at fair value under SFAS No. 156



905



Originated SBA servicing
rights



2,830



2,053Change in fair value resulting
from changes in valuation inputs or
 assumptions used in valuation model(1)



(1,336
)


Other changes in fair
value(2)



(904
)


Amortization







(1,830
)Impairment







(819
)Balance, end of year


$
8,963



7,468(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.100

FIRST BANKS, INC.NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (CONTINUED)(7)
BANK PREMISES
AND EQUIPMENT, NETBank
premises and equipment, net of accumulated depreciation and amortization, were
comprised of the following at December 31, 2008 and 2007:

2008



2007(dollars expressed in thousands)Land


$
57,391



52,187Buildings and improvements



185,288



168,135Furniture, fixtures and
 equipment



142,554



144,999Leasehold improvements



31,919



30,825Construction in progress



11,509



27,995Total



428,661



424,141Less: Accumulated
 depreciation and amortization



(192,133
)


(183,685
)Bank premises and equipment,
net


$
236,528



240,456First
Banks capitalized interest cost of $400,000, $1.8 million and $400,000 during
the years ended December 31, 2008, 2007 and 2006, respectively.

Depreciation
and amortization expense for the years ended December 31, 2008, 2007 and 2006
was $25.2 million, $21.8 million and $18.9 million, respectively.

First
Banks leases land, office properties and equipment under operating leases.
Certain of the leases contain renewal options and escalation clauses. Total
rent expense was $23.1 million, $22.8 million and $18.6 million for the years
ended December 31, 2008, 2007 and 2006, respectively. Future minimum lease
payments under noncancellable operating leases extend through 2084 as follows:

(dollars expressed in thousands)Year
 ending December 31:2009


$
16,8282010



14,5942011



12,7092012



10,8972013



7,937Thereafter



46,119Total future minimum lease
 payments


$
109,084First
Banks also leases to unrelated parties a portion of its banking facilities.
Rental income associated with these leases was $6.9 million, $6.4 million and
$5.9 million for the years ended December 31, 2008, 2007 and 2006,
respectively.

101

FIRST BANKS, INC.NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (CONTINUED)(8)
GOODWILLANDOTHER INTANGIBLE ASSETSGoodwill
and other intangible assets, net of amortization, were comprised of the
following at December 31, 2008 and 2007:

2008

2007Gross
 Carrying
 Amount

Accumulated
 Amortization

Gross
 Carrying
 Amount

Accumulated
 Amortization(dollars expressed in thousands)Amortized
 intangible assets:Core deposit intangibles
(1)

$
53,916


(33,251
)


53,916


(23,873
)Customer list
intangibles


23,320


(3,903
)


23,320


(2,408
)Other intangibles


2,385


(1,695
)


2,386


(1,437
)Total

$
79,621


(38,849
)


79,622


(27,718
)Unamortized intangible
assets:Goodwill associated with stock
purchases

$
266,028






263,747(1)
The
 core deposit intangibles gross carrying amount and accumulated amortization
 were reduced by $10.6 million and $4.7 million, respectively, during the
 fourth quarter of 2007, as further described in Note 13 to the consolidated
 financial statements. The core deposit intangibles gross carrying amount and
 accumulated amortization were also reduced by $1.4 million and $1.0 million,
 respectively, during the third quarter of 2007 in conjunction with the sale
 of the Texas Branch Offices on July 19, 2007, as further described in Note 2
 to the consolidated financial statements.Amortization
of intangible assets was $11.1 million, $12.4 million and $8.2 million for the
years ended December 31, 2008, 2007 and 2006, respectively. As of December 31,
2008, the remaining estimated life of the amortization periods for core deposit
intangibles, customer list intangibles and other intangibles was four years, 14
years and six years, respectively. Amortization of intangible assets, including
amortization of core deposit intangibles, customer list intangibles and other
intangibles has been estimated in the following table, and does not take into
consideration any potential future acquisitions or branch office purchases.

(dollars expressed in thousands)Year
 ending December 31:2009


$
9,2802010



8,8522011



6,6742012



2,4592013



1,524Thereafter



11,983Total


$
40,772Changes in the carrying
amount of goodwill for the years ended December 31, 2008 and 2007 were as
follows:

2008



2007(dollars expressed in thousands)Balance, beginning of year


$
263,747



230,036Goodwill acquired during
 the year (1)



2,920



34,586Acquisition-related and
 other adjustments (2)



(639
)


(875
)Balance, end of year


$
266,028



263,747(1)
Goodwill
 acquired during 2008 pertains to additional earn-out consideration associated
 with the acquisition of ANB in March 2006. Goodwill acquired during 2007
 pertains to the acquisitions of CFHI and Royal Oaks in November 2007 and
 February 2007, respectively, and additional earn-out consideration associated
 with the acquisition of ANB.(2)
Acquisition-related
 adjustments include additional purchase accounting adjustments for prior
 years acquisitions necessary to appropriately adjust preliminary goodwill
 recorded at the time of the acquisition, which was based upon current
 estimates available at that time, to reflect the receipt of additional
 valuation data. Acquisition-related adjustments recorded in 2008 primarily
 pertain to the acquisition of CFHI in November 2007. Acquisition-related
 adjustments recorded in 2007 pertain to the acquisition of SDCB in August
 2006 and other adjustments recorded in 2007 pertain to the sale of the Texas
 Branch Offices in July 2007, as further described in Note 2 to the
 consolidated financial statements.102

FIRST BANKS, INC.NOTES
 TO CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)The
Companys annual measurement date for its goodwill impairment test is December
31. First Banks engaged an independent valuation firm to assist 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 fair value for its single reporting unit, First Bank. The
valuation methodologies utilized a comparison of the average price to book
value of comparable businesses and a discounted cash flow valuation technique.
As a result of this independent third party valuation, the Company concluded
that the carrying value of its single reporting unit exceeded its fair value at
December 31, 2008.

Because
the carrying value of First Banks reporting unit exceeded the estimated fair
value at December 31, 2008, First Banks engaged the same independent valuation
firm to assist in computing the fair value of First Banks assets and
liabilities in order to determine the implied fair value of First Banks
goodwill at December 31, 2008. Management compared the implied fair value of
First Banks goodwill, as determined by the independent valuation firm, with
its carrying value, and concluded that there was no goodwill impairment as of
December 31, 2008.

(9)
MATURITIES
 OF TIME DEPOSITSA
summary of maturities of time deposits of $100,000 or more and other time
deposits as of December 31, 2008 is as follows:

Time deposits of
 $100,000 or more

Other time
 deposits

Total(dollars expressed in thousands)Year
 ending December 31:2009


$
1,124,580



2,198,031


3,322,6112010



80,776



212,021


292,7972011



40,422



93,944


134,3662012



5,848



18,446


24,2942013



1,702



9,092


10,794Thereafter



1,324



328


1,652Total


$
1,254,652



2,531,862


3,786,514(10)
OTHER BORROWINGSOther borrowings were
comprised of the following at December 31, 2008 and 2007:

2008

2007(dollars expressed in thousands)Securities sold under
 agreements to repurchase:Daily


$
154,423




198,766Monthly








33,493Term



120,000




100,000Federal funds purchased








76,500FRB borrowings (1)



100,000




FHLB advances (2)



200,710




857Total


$
575,133




409,616(1)
In
 November 2008, First Bank entered into a $100.0 million borrowing with the
 FRB upon termination of a $100.0 million FHLB advance, as discussed below,
 and subsequently renewed the borrowing at maturity in December 2008 with a
 new maturity date of February 2009 and a fixed interest rate of 0.42%.(2)
In
 January 2008, First Bank entered into two $100.0 million FHLB advances that
 mature in January 2009 and July 2009 at fixed interest rates of 3.16% and
 2.53%, respectively. In May 2008, First Bank entered into a $100.0 million
 FHLB advance that was scheduled to mature in November 2008 at a fixed
 interest rate of 2.23%, and in July 2008, First Bank entered into a $100.0
 million FHLB advance that matures in February 2009 at a fixed interest rate
 of 2.92%. In September 2008, First Bank prepaid the $100.0 million FHLB
 advance that was scheduled to mature in November 2008 and incurred a
 prepayment penalty of $3,000. In November 2008, First Bank prepaid the $100.0
 million FHLB advance that was scheduled to mature in January 2009 and incurred
 a prepayment penalty of $117,000. The prepayment penalties were recorded as
 interest expense on other borrowings in the consolidated statement of
 operations.The
average balance of other borrowings was $590.2 million and $389.4 million, and
the maximum month-end balance of other borrowings was $697.0 million and $458.2
million for the years ended December 31, 2008 and 2007, respectively. The
average rates paid on other borrowings during the years ended December 31,
2008, 2007 and 2006 were 2.40%, 4.19% and 4.35%, respectively. Interest expense
on securities sold under agreements to repurchase was $6.8 million, $15.3
million and $16.8 million for the years ended December 31, 2008, 2007 and

103

FIRST BANKS, INC.NOTES
 TO CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)2006,
respectively. Interest expense on FHLB advances was $7.7 million, $348,000 and
$689,000 for the years ended December 31, 2008, 2007 and 2006, respectively.
Interest expense on federal funds purchased was $417,000, $130,000 and $63,000
for the years ended December 31, 2008, 2007 and 2006, respectively. Interest
expense on FRB borrowings was $88,000 for the year ended December 31, 2008. The
assets underlying the daily securities sold under agreements to repurchase, the
FRB borrowings and the FHLB advances are held by First Banks. The underlying
securities associated with the term repurchase agreements are mortgage-backed
securities and callable U.S. Government agency securities and are held by other
financial institutions under safekeeping agreements.

The
maturity dates, par amounts, interest rate spreads and interest rate floor
strike prices on First Banks term repurchase agreements as of December 31,
2008 and 2007 were as follows:

Maturity Date

Par Amount


Interest
 Rate


Interest Rate Floor
 Strike Price(dollars expressedin
 thousands)September
 30, 2008:April 12,
2012 (1)


$
120,000



3.36%


December
 31, 2007:October 12,
2010 (1)


$
100,000



LIBOR
  0.5100%(2)


4.50%(2)(1)
On
 March 31, 2008, First Bank restructured its $100.0 million term repurchase
 agreement. The primary modifications were to: (a) increase the borrowing
 amount to $120.0 million; (b) extend the maturity date from October 12, 2010
 to April 12, 2012; (c) convert the interest rate from a variable rate to a
 fixed rate of 3.36%, with interest to be paid quarterly beginning on April
 12, 2008; and (d) terminate the embedded interest rate floor agreements
 contained within the term repurchase agreement. These modifications resulted
 in a pre-tax gain of $5.0 million, which was recorded as noninterest income
 in the consolidated statements of operations.(2)
The
 interest rate paid on the term repurchase agreement was based on the
 three-month LIBOR plus the spread amount shown minus a floating rate, subject
 to a 0% floor, equal to two times the differential between the three-month
 LIBOR and the strike price shown, if the three-month LIBOR fell below the
 strike price associated with the interest rate floor agreement.(11)
NOTES  PAYABLEOn
May 15, 2008, First Banks entered into a Revolving Credit Note and a Stock
Pledge Agreement with Investors of America Limited Partnership (Investors of
America, LP) (the Credit Agreement), and on August 11, 2008, First Banks
entered into a First Amended Revolving Credit Note (the Amended Credit
Agreement) with Investors of America, LP (collectively, the Credit Agreement),
which modified the existing original Credit Agreement to provide that First
Banks receive the prior written consent of Investors of America, LP for any
advance that would cause the aggregate outstanding principal amount to exceed
$10.0 million. The Credit Agreement provides for a $30.0 million secured
revolving line of credit to be utilized for general working capital needs and
capital investments in subsidiaries. Advances outstanding under the Credit
Agreement bear interest at the three-month LIBOR plus 300 basis points.
Interest is payable on outstanding advances on the first day of each month (in
arrears) and the aggregate principal balance of all outstanding advances and
any accrued interest thereon is due and payable in full on June 30, 2009, the
maturity date of the Credit Agreement. The maturity date of the Credit
Agreement may be accelerated at the option of Investors of America, LP if an
event of default under the Credit Agreement has occurred and has not been cured
to the satisfaction of Investors of America, LP. The default provisions of the
Credit Agreement are normal and customary for agreements of this type. In the
event the maturity date is accelerated, the aggregate principal balance of all
outstanding advances and any accrued interest thereon would become immediately
due and payable in full. The Credit Agreement is secured by First Banks
ownership interest in all of the capital stock of both SFC and CFHI.

First
Banks received an advance of the entire $30.0 million under the Credit
Agreement on May 15, 2008 and utilized the proceeds of the advance to terminate
and repay in full all of the obligations under its then existing Secured Credit
Agreement with a group of unaffiliated financial institutions (the Former
Credit Agreement), as further discussed below. In July 2008, First Banks repaid
in full its outstanding balance under the Credit Agreement in the aggregate
amount of $30.0 million, including the accrued interest thereon, and as such,
there were no balances outstanding on First Banks Credit Agreement at December
31, 2008.

On
May 19, 2008, First Banks entered into a Termination Agreement regarding its
Former Credit Agreement. In accordance with the terms and conditions of the
Termination Agreement, First Banks repaid in full all of its then existing
obligations associated with the Former Credit Agreement in the aggregate amount
of $58.1 million,

104

FIRST BANKS, INC.NOTES
 TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)including
the accrued interest and fees thereon. First Banks repaid in full its obligations
with existing cash reserves, dividends from First Bank, and advances under the
Credit Agreement. First Banks did not incur any significant or unusual early
termination penalties under the terms and conditions of the Termination
Agreement or recognize any gain or loss upon termination.

The
Former Credit Agreement, entered into in August 2007, renewed and modified
First Banks existing $96.0 million First Amendment to its Amended and Restated
Secured Credit Agreement, dated August 10, 2006. The terms and conditions of
the Former Credit Agreement provided for a $125.0 million revolving credit
facility that included: (i) a $5.0 million sub-facility for the issuance of
standby letters of credit; (ii) a $10.0 million sub-facility for swingline
loans (from the Agent as Swingline Lender); and (iii) three-year term loan
conversion options with minimum borrowing amounts of $10.0 million, amortizing
with equal quarterly installments of principal based on a four-year
straight-line amortization schedule and a final maturity of three years from
execution of each term loan, including the existing term loan, which had a
balance of $35.0 million (Existing Term Loan). Each term loan, including the
Existing Term Loan, reduced the availability under the revolving credit facility.
First Banks had the right to request an increase in the Secured Credit
Agreement to $150.0 million, with a minimum increase of $10.0 million and
additional increments of $5.0 million. Interest was payable on outstanding
principal loan balances of the revolving credit loan and each term loan at a
floating rate equal to either the lenders prime rate or, at First Banks
option, LIBOR plus a margin determined by the outstanding principal loan
balances and First Banks net income for the preceding four calendar quarters.
If the outstanding principal loan balances under the revolving credit loan and
each term loan were accruing at the prime rate, interest was payable quarterly
in arrears. If the outstanding principal loan balances under the revolving credit
loan and each term loan were accruing at LIBOR, interest was payable based on
the one, two, three or six-month LIBOR, as selected by First Banks. First Banks
was also subject to a quarterly commitment fee on the unused portion of the
revolving credit facility. Amounts could initially be borrowed under the
revolving credit facility until August 7, 2008, at which time the principal and
interest would be due and payable, excluding the term loans. The maturity date
was subsequently extended to September 1, 2008, as further discussed below.
First Banks Existing Term Loan, which had a balance of $5.0 million at
December 31, 2007, was payable in quarterly installments of $5.0 million, at a
minimum, with the remaining balance to be repaid in full, including any unpaid
interest, upon maturity on March 31, 2009. Interest was payable on outstanding
principal loan balances of the swingline loans at a floating rate equal to the
lenders prime rate. The principal balances of the swingline loans, together
with accrued and unpaid interest, was payable on the next to occur date of
either the fifteenth day of the month or the last business day of the month
following the advance date(s) of the swingline loans. On February 12, 2008,
First Banks entered into First and Second Amendments to its Former Credit
Agreement to modify certain financial covenants, the collateral pledge
agreement and the maturity date of the revolving credit facility.

The
Former Credit Agreement was secured by First Banks ownership interest in the
capital stock of SFC and First Bank, and required maintenance of certain
minimum capital ratios for First Banks and First Bank, certain maximum
nonperforming assets ratios for First Bank and a minimum return on assets ratio
for First Banks. In addition, it contained additional covenants, including a
limitation on the amount of dividends on First Banks common stock that could
be paid to stockholders. First Banks was not in compliance with all
restrictions and requirements of respective credit agreement at December 31,
2007. However, on May 19, 2008, First Banks terminated the Former Credit
Agreement, as discussed above, and repaid the balance of the obligations in
full.

During
the year ended December 31, 2007, First Banks had drawn advances of $20.0
million and $15.0 million on the revolving credit sub-facility and the term
loans, respectively, and made payments of $61.0 million on the outstanding
principal balances of the term loans. Balances outstanding under the Former
Credit Agreement at December 31, 2007 were $39.0 million, comprised of $19.0
million in term loans and $20.0 million in revolving credit advances.

The
end of period balance, average balance and maximum month-end balance of
borrowings outstanding under the respective credit agreements as of and for the
years ended December 31, 2008 and 2007, respectively, were as follows:

2008

2007(dollars expressed in thousands)End of period

$



39,000Average balance


21,591


34,932Maximum month-end balance


58,000


55,000105

FIRST BANKS, INC.NOTES
 TO CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)The
average rates paid on the outstanding borrowings during the years ended
December 31, 2008, 2007 and 2006 were 6.15%, 6.94% and 6.22%, respectively.
Interest expense recognized on borrowings includes commitment, arrangement and
renewal fees. Exclusive of these fees, the average rates paid on the
outstanding borrowings during the years ended December 31, 2008, 2007 and 2006
were 4.42%, 6.41% and 6.11%, respectively.

(12)
SUBORDINATED DEBENTURESFirst
Banks has formed various 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. First
Banks owns all of the common securities of the Trusts. The gross proceeds of
the offerings were used by the Trusts to purchase variable rate or fixed rate
subordinated debentures from First Banks. The subordinated debentures are the
sole asset of the Trusts. In connection with the issuance of the trust
preferred securities, First Banks made certain guarantees and commitments that,
in the aggregate, constitute a full and unconditional guarantee by First Banks
of the obligations of the Trusts under the trust preferred securities. First
Banks distributions accrued on the subordinated debentures were $20.9 million,
$24.4 million and $22.4 million for the years ended December 31, 2008, 2007 and
2006, respectively, and are included in interest expense in the consolidated
statements of operations. Deferred issuance costs associated with First Banks
subordinated debentures are included as a reduction of subordinated debentures
in the consolidated balance sheets and are amortized on a straight-line basis
to the maturity date of the respective subordinated debentures. The structure
of the trust preferred securities currently satisfies the regulatory
requirements for inclusion, subject to certain limitations, in First Banks
capital base.

Under
its agreement with the FRB, First Banks 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. First Banks
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 1 to the consolidated financial statements. The
Company received the approval of the FRB to make its regular quarterly interest
payments in March and April 2009 on its outstanding subordinated debentures for
further payment to the individual holders of the respective underlying trust
preferred securities.

106

FIRST
 BANKS, INC.NOTES TO
 CONSOLIDATED FINANCIAL STATEMENTS
 (CONTINUED)A
summary of the subordinated debentures issued to the Trusts in conjunction with
the trust preferred securities offerings at December 31, 2008 and 2007 were as
follows:

Subordinated
 DebenturesTrust
 Preferred
 SecuritiesMaturity
 Date

Call
 Date(1)

Interest
 Rate (2)Name of
 Trust

Issuance
 Date





2008

2007Variable
 RateFirst Bank Statutory Trust II

September 2004

September 20, 2034

September 20, 2009

+ 205.0 bp

20,000


$
20,619

20,619Royal Oaks Capital Trust I (3)

October 2004

January 7, 2035

January 7, 2010

+ 240.0 bp

4,000



4,124

4,124First Bank Statutory Trust III

November 2004

December 15, 2034

December 15, 2009

+ 218.0 bp

40,000



41,238

41,238First Bank Statutory Trust IV

March 2006

March 15, 2036

March 15, 2011

+ 142.0 bp

40,000



41,238

41,238First Bank Statutory Trust V

April 2006

June 15, 2036

June 15, 2011

+ 145.0 bp

20,000



20,619

20,619First Bank Statutory Trust VI (4a)

June 2006

July 7, 2036

July 7, 2011

+ 165.0 bp

25,000



25,774

25,774First Bank Statutory Trust VII (4b)

December 2006

December 15, 2036

December 15, 2011

+ 185.0 bp

50,000



51,547

51,547First Bank Statutory Trust VIII (4c)(5)

February 2007

March 30, 2037

March 30, 2012

+ 161.0 bp

25,000



25,774

25,774First Bank Statutory Trust X (6)

August 2007

September 15, 2037

September 15, 2012

+ 230.0 bp

15,000



15,464

15,464First Bank Statutory Trust IX (4d)(7)

September 2007

December 15, 2037

December 15, 2012

+ 225.0 bp

25,000



25,774

25,774First Bank Statutory Trust XI (8)

September 2007

December 15, 2037

December 15, 2012

+ 285.0 bp

10,000



10,310

10,310Fixed
 RateFirst Bank Statutory Trust

March 2003

March 20, 2033

March 20, 2008

8.10
%
25,000



25,774

25,774First Preferred Capital Trust IV

April 2003

June 30, 2033

June 30, 2008

8.15
%
46,000



47,423

47,423(1)
The
 subordinated debentures are callable at the option of First Banks 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
 fixed rate or a variable rate. The variable rate is based on the three-month
 LIBOR plus the basis point spread shown.(3)
In
 conjunction with the acquisition of Royal Oaks in February 2007, as further
 described in Note 2 to the consolidated financial statements, First Banks
 assumed the subordinated debentures of Royal Oaks Capital Trust I, a Delaware
 statutory trust.(4)
In
 March 2008, First Banks entered into four interest rate swap agreements,
 which have been designated as cash flow hedges, to effectively convert the
 interest payments on these subordinated debentures from variable rate to
 fixed rate to the respective call dates as follows:(a)
$25.0
 million notional amount with a maturity date of July 7, 2011 that converts
 the interest rate from a variable rate of LIBOR plus 165 basis points to a
 fixed rate of 4.40%;(b)
$50.0
 million notional amount with a maturity date of December 15, 2011 that
 converts the interest rate from a variable rate of LIBOR plus 185 basis
 points to a fixed rate of 4.905%;(c)
$25.0
 million notional amount with a maturity date of March 30, 2012 that converts
 the interest rate from a variable rate of LIBOR plus 161 basis points to a
 fixed rate of 4.71%; and(d)
$25.0
 million notional amount with a maturity date of December 15, 2012 that
 converts the interest rate from a variable rate of LIBOR plus 225 basis
 points to a fixed rate of 5.565%.(5)
On
 February 23, 2007, First Bank Statutory Trust VIII, a newly formed Delaware
 statutory trust, issued 25,000 variable rate trust preferred securities at
 $1,000 per security in a private placement and issued 774 common securities
 to First Banks at $1,000 per security. Interest is payable quarterly in
 arrears, beginning on March 30, 2007.(6)
On
 August 31, 2007, First Bank Statutory Trust X, a newly formed Delaware
 statutory trust, issued 15,000 variable rate trust preferred securities at
 $1,000 per security in a private placement and issued 464 common securities
 to First Banks at $1,000 per security. Interest is payable quarterly in
 arrears, beginning on December 15, 2007.(7)
On
 September 20, 2007, First Bank Statutory Trust IX, a newly formed Delaware
 statutory trust, issued 25,000 variable rate trust preferred securities at
 $1,000 per security in a private placement and issued 774 common securities
 to First Banks at $1,000 per security. Interest is payable quarterly in
 arrears, beginning on December 15, 2007.(8)
On
 September 28, 2007, First Bank Statutory Trust XI, a newly formed Delaware
 statutory trust, issued 10,000 variable rate trust preferred securities at
 $1,000 per security in a private placement and issued 310 common securities
 to First Banks at $1,000 per security. Interest is payable quarterly in
 arrears, beginning on December 15, 2007.107

FIRST
 BANKS, INC.NOTES TO
 CONSOLIDATED FINANCIAL STATEMENTS
 (CONTINUED)(13)
INCOME
TAXESProvision
for income taxes for the years ended December 31, 2008, 2007 and 2006 consists
of the following:

2008

2007

2006(dollars
 expressed in thousands)Current (benefit) provision
 for income taxes:Federal

$
(79,497
)

20,687


39,577State


70


2,705


2,871(79,427
)

23,392


42,448Deferred (benefit)
 provision for income taxes:Federal


(17,728
)

(4,774
)

9,441State


(18,784
)

(2,797
)

(17
)(36,512
)

(7,571
)

9,424Increase (decrease) in
 deferred tax asset valuation allowance


134,147


(10,746
)

Total

$
18,208


5,075


51,872The
effective rates of federal income taxes for the years ended December 31, 2008,
2007 and 2006 differ from the federal statutory rates of taxation as follows:

Years
 Ended December 31,2008

2007

2006Amount

Percent

Amount

Percent

Amount

Percent(dollars
 expressed in thousands)(Loss) income before
provision for income taxes and minority interest
 in income (loss) of subsidiaries

$
(270,105
)



$
54,613




$
158,102Provision for income taxes
calculated at federal statutory income tax
 rates

$
(94,537
)

35.0
%
$
19,115


35.0
%
$
55,336


35.0
%Effects of differences in tax
reporting:Tax-exempt interest income,
net of tax preference adjustment


(768
)

0.3


(961
)

(1.8
)

(908
)

(0.6
)State income
taxes


(12,370
)

4.6


(98
)

(0.2
)

3,120


2.0Reduction in
prior year contingency reserve














(4,154
)

(2.6
)Bank owned
life insurance, net of premium


(952
)

0.4


(1,283
)

(2.3
)

(1,022
)

(0.6
)Increase
(decrease) in deferred tax asset valuation allowance, net of
 federal benefit


123,242


(45.7
)

(10,746
)

(19.7
)




Expiration
of net operating loss carryforwards


2,828


(1.0
)










Other,
net


765


(0.3
)

(952
)

(1.7
)

(500
)

(0.4
)Provision
for income taxes

$
18,208


(6.7
)%
$
5,075


9.3
%
$
51,872


32.8
%The
$4.2 million reduction in the prior year contingency reserve during the year
ended December 31, 2006 resulted from reversals of federal and state tax
reserves no longer deemed necessary.

108

FIRST
 BANKS, INC.NOTES TO
 CONSOLIDATED FINANCIAL STATEMENTS
 (CONTINUED)The
tax effects of temporary differences that give rise to significant portions of
the deferred tax assets and deferred tax liabilities at December 31, 2008 and
2007 were as follows:

December
 31,2008

2007(dollars
 expressed in thousands)Deferred tax assets:Federal net
operating loss carryforwards


$
37,013




23,143State net
operating loss carryforwards



11,933




879Allowance
for loan losses



95,302




88,835Loans held
for sale



1,349




4,663Alternative
minimum and general business tax credits



12,978




3,489Interest on
nonaccrual loans



7,626




6,001Deferred
compensation



5,715




7,842Net fair
value adjustment for available-for-sale investment securities



19




6,356Partnership
and corporate investments



13,541




8,466Overdraft,
robbery and other fraud losses



2,774




5,612Accrued
contingent liabilities



2,017




2,635Other



6,636




4,634Gross
deferred tax assets



196,903




162,555Valuation
allowance



(160,052
)



(23,278
)Deferred tax
assets, net of valuation allowance



36,851




139,277Deferred tax liabilities:Depreciation
on bank premises and equipment



6,861




7,427Servicing
rights



3,490




1,909Net fair
value adjustment for derivative instruments



5,110




4,171Core deposit
intangibles



2,224




5,252Customer
list intangibles



8,084




8,695Discount on
loans



3,228




5,246Equity
investments



5,499




5,707State
taxes



4,362




7,309Deferred
loan fees



5,718




3,644Other



989




(1,151
)Deferred tax
liabilities



45,565




48,209Net deferred
tax (liabilities) assets


$
(8,714
)



91,068At
December 31, 2008 and 2007, First Banks had a deferred tax asset valuation
allowance of $160.1 million and $23.3 million, respectively. The deferred tax
asset valuation allowance was recorded in accordance with SFAS No. 109, Accounting for Income Taxes. Under SFAS
No. 109, the Company is required to assess whether it is more likely than not
that some portion or all of the Companys deferred tax asset will not be
realized. Pursuant to SFAS No. 109, 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. After consideration of these factors as
well as potential tax planning strategies, the Company recorded an increase to
its deferred tax asset valuation allowance during the fourth quarter of 2008.
If, in the future, the Company generates taxable income on a sustained basis,
managements conclusion regarding the need for a deferred tax asset valuation
allowance could change, resulting in the reversal of a portion or all of such
deferred tax asset valuation allowance.

109

FIRST
 BANKS, INC.NOTES TO
 CONSOLIDATED FINANCIAL STATEMENTS
 (CONTINUED)Changes in the deferred tax
asset valuation allowance for the years ended December 31, 2008, 2007 and 2006
were as follows:

2008

2007

2006(dollars
 expressed in thousands)Balance, beginning of year

$
23,278


21,401


17,754Purchase acquisitions





20,177


Reversal of deferred tax
asset valuation allowance 
 to provision for income taxes


(22,938
)

(10,746
)

Reversal of deferred tax
asset valuation allowance 
 to goodwill and other intangible assets





(7,554
)

Increase in deferred tax
asset valuation allowance 
 to provision for income taxes


157,085





Increase in deferred tax
asset valuation allowance 
 to accumulated other comprehensive income


1,707





Adjustment to purchase
acquisitions completed in prior periods


920





3,647Balance, end of year

$
160,052


23,278


21,401Upon
completion of the 2004 acquisition of CIB Bank and the 2007 acquisition of
CFHI, the net deferred tax assets associated with the respective acquisitions
were evaluated to determine whether it was more likely than not that the net
deferred tax assets would be recognized in the future. The ability to utilize
the net deferred tax assets recorded in connection with the acquisitions is
subject to a number of limitations. Among these limitations is the restriction
that any built-in loss (the fair value of the entity was less than the tax
basis) that existed at the date of acquisition, if realized within the first
five years subsequent to the date of acquisition, will be deferred and must be
carried forward and subjected to rules similar to the rules for carrying
forward net operating losses. Based upon these factors, management established
a valuation allowance for CIB Bank in 2004 and CFHI in 2007 in the amount of
$21.4 million and $20.2 million, respectively.

At
December 31, 2007, the deferred tax assets associated with the acquisition of
CIB Bank were evaluated and management concluded that $18.3 million of the
valuation allowance was no longer required as the corresponding net deferred
tax assets no longer existed due to the recognition of temporary differences.
First Banks did not have any goodwill related to the CIB Bank acquisition at
December 31, 2007. In accordance with SFAS No. 141, Business Combinations, First Banks reduced the carrying
values of certain acquired assets to zero, which included a reduction of core deposit
intangibles of $5.9 million and bank premises and equipment of $6.6 million. In
addition, net deferred tax assets were increased by $4.9 million to reflect the
impact of the reductions of the carrying values of the core deposit intangibles
and bank premises and equipment. The remaining amount of $10.7 million was
recorded as a reduction of income tax expense.

On
September 30, 2008, the Internal Revenue Service (IRS) issued Notice 2008-83.
In accordance with Notice 2008-83, any deduction properly allowed after an
ownership change to a bank with respect to losses on loans or bad debts
(including any deduction for a reasonable addition to a reserve for bad debts)
shall not be treated as a built-in loss. As a result of Notice 2008-83, certain
loan charge-offs and additions to First Banks allowance for loan losses are no
longer considered built-in losses. Consequently, on September 30, 2008, First
Banks concluded that $1.8 million and $21.0 million of the deferred tax asset
valuation allowances related to CIB Bank and CFHI, respectively, were no longer
required and recorded a reversal of the deferred tax asset valuation allowances
in the amount of $22.9 million, of which $21.6 million resulted in an increase
to the benefit for income taxes for the three months ended September 30, 2008,
and a corresponding reduction of the provision for income taxes for the year
ended December 31, 2008.

In
the fourth quarter of 2008, First Bank recorded a deferred tax asset valuation
allowance of $158.9 million, which resulted in increases to the provision for
income taxes and accumulated other comprehensive income of $144.8 million and
$1.7 million, respectively. As described above, the deferred tax asset
valuation allowance was primarily established as a result of the Companys
three-year cumulative operating loss for the years ended December 31, 2008,
2007 and 2006, after considering all available objective and verifiable
evidence and potential tax planning strategies related to the amount of the
deferred tax assets that are more likely than not to be realized.

On
January 1, 2007, First Banks implemented FIN 48. The implementation of FIN 48
resulted in the recognition of a cumulative effect of change in accounting
principle of $2.5 million, which was recorded as an increase to retained
earnings.

110

FIRST
 BANKS, INC.NOTES TO
 CONSOLIDATED FINANCIAL STATEMENTS
 (CONTINUED)At
December 31, 2008 and 2007, First Banks had a liability for
uncertain tax positions, excluding interest and penalties, of $3.3 million and
$12.2 million, respectively. A reconciliation of the beginning and ending
balance of the unrecognized tax benefits for the years ended December 31, 2008
and 2007 is as follows:

2008

2007(dollars
 expressed in thousands)Balance, beginning of year


$
12,244




2,559Additions:Tax
positions taken during the current year



301




2,352Tax
positions taken during the prior year



195




9,134Reductions:Tax
positions taken during the prior year



(2,968
)



(6
)Change in
tax law



(4,794
)



Lapse of
statute of limitations



(1,664
)



(1,795
)Balance, end of year


$
3,314




12,244At
December 31, 2008 and 2007, the total amount of unrecognized tax benefits that
would affect the effective income tax rate was $1.6 million and $1.7 million,
respectively.

During
the year ended December 31, 2008, First Banks recorded interest income of
$412,000 related to unrecognized tax benefits, whereas First Banks recorded
interest expense of $527,000 related to unrecognized tax benefits during the
year ended December 31, 2007. At December 31, 2008 and 2007, interest accrued
for unrecognized tax positions was $1.0 million and $1.4 million, respectively.
There were no penalties for unrecognized tax positions accrued at December 31,
2008 and 2007, nor did First Banks recognize any expense for penalties during
2008 and 2007.

As
previously described, Notice 2008-83 was issued on September 30, 2008. When
applying Notice 2008-83 to the acquisition of CIB Bank, a contingency reserve
on the loan charge-offs would not have been required to be established under
FIN 48. Consequently, the full amount of the contingency reserve of $4.5 million,
net of federal benefit, and the related interest reserve of $904,000 that had
been established in accordance with FIN 48 were reversed during 2008.

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 December 31, 2008 could decrease by approximately $1.9
million by December 31, 2009, as a result of the lapse of statutes of
limitations and potential settlements with the federal and state taxing
authorities, of which the impact to the effective income tax rate is estimated
to be approximately $554,000. 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. The Companys federal returns
through 2004 have been examined by the IRS with the examination of the 2004 tax
year being closed in February 2008. 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.

First Banks is no longer subject to U.S. federal, state or
local income
tax examination by tax authorities for the years prior to 2004, with the
exception of certain states where the statute of limitations is four years. In
those circumstances, First Banks is no longer subject to examination for the
years prior to 2003. During 2008, First Banks had a federal tax examination for
the 2004 tax year and a California tax examination for the 2004 and 2005 tax years.
Both examinations were subsequently closed during 2008 with no changes to the
reported tax required.

At December 31, 2008 and 2007, the accumulation of prior
years
earnings representing tax bad debt deductions was approximately $29.8 million.
If these tax bad debt reserves were charged for losses other than bad debt
losses, First Banks would be required to recognize taxable income in the amount
of the charge. It is not contemplated that such tax-restricted retained
earnings will be used in a manner that would create federal income tax
liabilities.

At December 31, 2008 and 2007, for federal income taxes
purposes, First
Banks had net operating loss carryforwards relating to pre-acquisition tax
losses of acquired entities of approximately $56.3 million and $66.1 million,
respectively. Additionally, First Banks incurred a tax loss for the year ended
December 31, 2008 which, after carrying back the tax loss to the preceding two
years, resulted in a net operating loss carryforward of

111

FIRST BANKS, INC.NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (CONTINUED)approximately
$49.5 million. At December 31, 2008, First Banks net operating loss
carryforwards expire as follows:

(dollars expressed in thousands)Year
 ending December 31:2009


$
5,7852010



72011



32012 
2028



99,956Total


$
105,751(14)
EARNINGS (LOSS) PER COMMON SHAREThe
following is a reconciliation of basic and diluted EPS for the years ended
December 31, 2008, 2007 and 2006:

Income
 (Loss)

Shares

Per Share
 Amount(dollars in thousands, except share and per share
data)Year ended December 31,
2008:Basic EPS
 loss available to common stockholders


$
(287,941
)



23,661



$
(12,169.46
)Effect of
dilutive securities:Class A
convertible preferred stock













Diluted EPS
 loss available to common stockholders


$
(287,941
)



23,661



$
(12,169.46
)Year ended December 31,
2007:Basic EPS
 income available to common stockholders


$
48,674




23,661



$
2,057.14Effect of
dilutive securities:Class A
convertible preferred stock



769




394




(1.72
)Diluted EPS
 income available to common stockholders


$
49,443




24,055



$
2,055.42Year ended December 31,
2006:Basic EPS
 income available to common stockholders


$
106,031




23,661



$
4,481.23Effect of
dilutive securities:Class A
convertible preferred stock



769




465




(54.40
)Diluted EPS
 income available to common stockholders


$
106,800




24,126



$
4,426.83(15)
CREDIT COMMITMENTSFirst
Banks is a party to commitments to extend credit and commercial and standby
letters of credit in the normal course of business to meet the financing needs
of its customers. These instruments involve, in varying degrees, elements of
credit risk and interest rate risk in excess of the amount recognized in the
consolidated balance sheets. The interest rate risk associated with these
credit commitments relates primarily to the commitments to originate fixed-rate
loans. As more fully described in Note 5 to the consolidated financial
statements, the interest rate risk of the commitments to originate fixed-rate
loans has been hedged with forward commitments to sell mortgage-backed
securities. The credit risk amounts are equal to the contractual amounts,
assuming the amounts are fully advanced and the collateral or other security is
of no value. First Banks uses the same credit policies in granting commitments
and conditional obligations as it does for on-balance sheet items.

Commitments
to extend fixed and variable rate credit, and commercial and standby letters of
credit at December 31, 2008 and 2007 were as follows:

December 31,2008

2007(dollars expressed in thousands)Commitments to extend
 credit


$
2,140,532




3,057,404Commercial and standby
 letters of credit



181,388




201,436$
2,321,920




3,258,840Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require
payment of a fee. Since many of the commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. Each customers

112

FIRST BANKS, INC.NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)creditworthiness
is evaluated on a case-by-case basis. The amount of collateral obtained, if
deemed necessary upon extension of credit, is based on managements credit
evaluation of the counterparty. Collateral held varies but may include accounts
receivable, inventory, property, plant, equipment, income-producing commercial
properties or single family residential properties. In the event of
nonperformance, First Banks may obtain and liquidate the collateral to recover
amounts paid under its guarantees on these financial instruments.

Commercial
and standby letters of credit are conditional commitments issued to guarantee
the performance of a customer to a third party. The letters of credit are
primarily issued to support public and private borrowing arrangements,
including commercial paper, bond financing and similar transactions. Most
letters of credit extend for less than one year. The credit risk involved in
issuing letters of credit is essentially the same as that involved in extending
loan facilities to customers. Upon issuance of the commitments, First Banks
typically holds marketable securities, certificates of deposit, inventory, real
property or other assets as collateral supporting those commitments for which
collateral is deemed necessary. The standby letters of credit at December 31,
2008 expire, at various dates, within six years.

(16)
FAIR VALUE DISCLOSURESOn
January 1, 2008, First Banks implemented SFAS No. 157 for financial and
nonfinancial assets and liabilities that are recognized or disclosed at fair
value in the consolidated financial statements on a recurring basis (at least
annually). Implementation was deferred for certain nonfinancial assets and
nonfinancial liabilities that are recognized or disclosed at fair value in the
consolidated financial statements on a nonrecurring basis to fiscal years
beginning after November 15, 2008. First Banks applied the deferral to goodwill
and other intangible assets and other real estate owned.

In
accordance with SFAS No. 157, 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
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 different assets
and liabilities at fair value.

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.

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

113

FIRST BANKS, INC.NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)under
the contractual terms of the loan agreement will not be collected. Acquired
impaired loans are classified as nonaccrual loans and are initially measured at
fair value with no allocated allowance for loan losses. An allowance for loan
losses is recorded to the extent there is further credit deterioration subsequent
to acquisition date. In accordance with SFAS No. 157, 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 SFAS No. 114  Accounting by Creditors for Impairment of a
Loan.
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, First Banks 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 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 floor and cap
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. Servicing rights are valued based
on valuation
models that utilize assumptions based on the predominant risk characteristics
of the underlying loans, including principal balance, interest rate, weighted
average life, cost to service and estimated prepayment speeds. The valuation
models estimate the present value of estimated future net servicing income. 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.

Items Measured on a Recurring Basis. Assets and liabilities measured at
fair
value on a recurring basis as of December 31, 2008 are reflected in the
following table:

Fair Value MeasurementsDecember 31, 2008Level 1

Level 2

Level 3

Fair Value(dollars expressed in thousands)Assets:Available-for-sale investment securities

$
6,318


598,696





605,014Mortgage loans
held for sale





18,483





18,483Derivative
instruments





583





583Servicing
rights








16,381


16,381Total

$
6,318


617,762


16,381


640,461Liabilities:Derivative
instruments

$



4,953





4,953Nonqualified
deferred compensation plan


7,676








7,676Total

$
7,676


4,953





12,629114

FIRSTBANKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)The following table presents
the changes in Level 3 assets measured on a recurring basis for year ended
December 31, 2008:

Servicing Rights2008(dollars expressed in thousands)Balance, beginning of
period


$
12,758Impact of
election to measure servicing rights at fair value under
 SFAS No. 156



10,443Total gains
or losses (realized/unrealized):Included in
earnings(1)



(11,825
)Included in
other comprehensive income



Purchases,
issuances and settlements



5,005Transfers in
and/or out of level 3



Balance, end of
period


$
16,381(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, First Banks 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 December 31, 2008 are reflected in the following
table:

Fair Value MeasurementsDecember 31, 2008Level 1

Level 2

Level 3

Fair Value(dollars expressed in thousands)Assets:Loans held
for sale

$



20,237





20,237Impaired
loans








382,105


382,105Total

$



20,237


382,105


402,342Fair 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 servicing assets, deferred income tax assets, bank
premises and equipment and goodwill and other intangible assets. Furthermore,
the income taxes that would be incurred if First Banks 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 methods and
assumptions were 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.

Loans: The fair value of all other loans
held for
portfolio was estimated utilizing discounted cash flow calculations. These cash
flow calculations include assumptions for prepayment estimates over the loans
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 portfolio
and a liquidity adjustment related to the current market environment.

Loans held for sale: The fair value of loans held
for sale, which
is the amount reported in the consolidated balance sheets, 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.

115

FIRSTBANKS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)Bank-owned life insurance: The fair value of bank-owned
life insurance 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.

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.

Other borrowings, notes payable 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.

Subordinated debentures: The fair value of subordinated
debentures 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.

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 estimated fair value of First Banks
financial instruments at December 31, 2008 and 2007 were as follows:

2008

2007Carrying
 Value

Estimated
 Fair Value

Carrying
 Value

Estimated
 Fair Value(dollars expressed in thousands)Financial
Assets:Cash and
cash equivalents

$
842,316


842,316


231,675


231,675Investment
securities:Available
for sale


605,014


605,014


1,000,392


1,000,392Held to
maturity


17,912


18,507


18,879


19,078Loans held
for portfolio


8,334,041


7,683,098


8,651,714


8,570,585Loans held
for sale


38,720


38,720


66,079


65,870Derivative
instruments


583


583


13,728


13,728Bank-owned
life insurance


118,825


118,825


116,619


116,619Accrued
interest receivable


35,773


35,773


55,193


55,193Financial
Liabilities:Deposits:Noninterest-bearing demand

$
1,241,916


1,241,916


1,259,123


1,259,123Interest-bearing demand


935,805


935,805


980,850


980,850Savings and
money market


2,777,285


2,777,285


2,716,726


2,716,726Time
deposits


3,786,514


3,832,495


4,192,494


4,227,747Other
borrowings


575,133


576,021


409,616


409,616Notes
payable








39,000


39,000Derivative
instruments


4,953


4,953





Accrued
interest payable


12,561


12,561


18,639


18,639Subordinated
debentures


353,828


269,946


353,752


353,200Off-Balance Sheet
Financial Instruments:Commitments to extend credit,
standby letters of credit and financial
 guarantees

$
419


419


1,582


1,582116

FIRSTBANKS, INC.NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (CONTINUED)(17)
EMPLOYEEBENEFITSFirst
Banks 401(k) plan is a self-administered savings and incentive plan covering
substantially all employees. Employer match contributions are determined
annually under the plan by First Banks Board of Directors. Employee
contributions were limited to $15,500 of gross compensation for 2008. Total
employer contributions under the plan were $4.0 million, $4.4 million and $3.9
million for the years ended December 31, 2008, 2007 and 2006, respectively. The
plan assets are held and managed under a trust agreement with First Banks
trust department.

First
Banks nonqualified deferred compensation plan, which covers a select group of
employees, is administered by an independent third party. The plan is exempt
from the participation, vesting, funding and fiduciary requirements of the
Employee Retirement Income Security Act of 1974. Participants may contribute
from 1% to 25% of their salary and up to 100% of their bonuses on a pre-tax
basis. Balances outstanding under the plan, which are reflected in accrued and
other liabilities in the consolidated balance sheets, were $7.7 million and $9.2
million at December 31, 2008 and 2007, respectively. First Banks recognized a
decrease in salaries and employee benefits expense related to the plan of $2.0
million for the year ended December 31, 2008 resulting from net losses incurred
by participants on the underlying investments in the plan. First Banks
recognized salaries and employee benefits expense related to the plan of
$682,000 and $845,000 for the years ended December 31, 2007 and 2006,
respectively, resulting from net earnings incurred by participants on the
underlying investments in the plan.

First
Banks has a noncontributory defined benefit pension plan covering certain
current and former employees of a bank holding company acquired by First Banks
in 1994 and subsequently merged with and into First Banks on December 31, 2002.
First Banks discontinued the accumulation of benefits under the Plan in 1994,
and as such, there is no longer any service cost being accrued by Plan
participants. During 2007, First Banks adopted the provisions of SFAS No. 158
which resulted in the recognition of a cumulative effect of change in
accounting principle of $902,000, which was recorded as an increase to
accumulated other comprehensive loss.

At
December 31, 2008 and 2007, First Banks had an accrued pension liability of
$1.8 million and $1.1 million, respectively, which represents the difference
between the fair value of Plan assets and the projected benefit obligation of
the Plan, and is reflected in accrued expenses and other liabilities in the
consolidated balance sheets. At December 31, 2008 and 2007, the projected
benefit obligation of the Plan was $9.9 million and $11.6 million,
respectively, and the fair value of Plan assets was $8.1 million and $10.5
million, respectively. First Banks expects to contribute approximately $130,000
to the Plan in 2009. The following pension benefit payments are expected to be
paid to Plan participants by the Plan for the periods indicated:

(dollars expressed in thousands)Year
 ending December 31:2009


$
8322010



8512011



8572012



8512013



8482014 
2018



4,328(18)
STOCKHOLDERS EQUITYThere
is no established public trading market for First Banks common stock. Various
trusts, which were established by and are administered by and for the benefit
of Mr. James F. Dierberg, First Banks Chairman of the Board, and members of
his immediate family, own all of the voting stock of First Banks.

First
Banks has four classes of preferred stock outstanding at December 31, 2008. 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 First Banks 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. The

117

FIRSTBANKS, INC.NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (CONTINUED)annual
dividend rate was 6.0% for the Class A preferred stock and 7.0% for the Class B
preferred stock for the years ended December 31, 2008, 2007 and 2006,
respectively.

On
December 31, 2008, First Banks issued 295,400 shares of Class C Fixed Rate
Cumulative Perpetual Preferred Stock (Class C 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 Capital Purchase Program (TARP). 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% thereafter, payable quarterly in
arrears beginning February 15, 2009. The Class C Preferred Stock qualifies as
Tier 1 capital. Effective February 17, 2009, the Class C 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.

On
December 31, 2008, First Banks also issued 14,770 shares of Class D Fixed Rate
Cumulative Perpetual Preferred Stock (Class D Preferred Stock) to the U.S.
Treasury in conjunction with the TARP, upon issuance of a warrant (Warrant) to
purchase Class D Preferred Stock by First Banks to the U.S. Treasury and the
immediate exercise of the Warrant by the U.S. Treasury pursuant to the standard
TARP terms and conditions for non-public companies as described and set forth
in a Letter Agreement, including a Securities Purchase Agreement  Standard
Terms (Purchase Agreement) entered into on December 31, 2008 with the U.S.
Treasury. The Class D Preferred Stock has a par value of $1.00 per share and a
liquidation preference of $1,000 per share. Pursuant to the terms of the
Warrant, the U.S. Treasury exercised the Warrant on December 31, 2008 and paid
the exercise price by having the Company withhold, from the shares of Class D
Preferred Stock that would otherwise be delivered to the U.S. Treasury upon
such exercise, shares of Class D Preferred Stock issuable upon exercise of the
Warrant with an aggregate liquidation amount equal in value to the aggregate
exercise price of $14,784.78. 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 D Preferred Stock qualifies as Tier 1
capital. Effective February 17, 2009, 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.

First
Banks allocated the total proceeds received under the TARP 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 will
be amortized to retained earnings on a level-yield basis over five years,
consistent with managements estimates of the life of the preferred stock.

The
redemption of any issue of preferred stock requires the prior approval of the
Board of Governors of the Federal Reserve System (Federal Reserve).
Furthermore, the Purchase Agreement contains limitations on certain actions of
First Banks, including, but not limited to, payment of dividends and
redemptions and acquisitions of First Banks equity securities. In addition,
First Banks, 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. In addition, First Banks agreed not to declare any
dividends on its common or preferred stock without the prior approval of the
FRB, as further described in Note 1 to the consolidated financial statements.
First Banks received the approval of the FRB to declare the regular quarterly
dividends on all four classes of its preferred stock to be paid in February,
March and April 2009 in accordance with the individual terms of each class of
preferred stock.

Other
comprehensive income of $11.1 million, $9.1 million and $6.8 million, as
presented in the consolidated statements of changes in stockholders equity and
comprehensive income, is reflected net of income tax expense of $6.9 million,
$4.9 million and $3.7 million for the years ended December 31, 2008, 2007 and
2006, respectively.

On
January 1, 2008, First Banks elected to measure servicing rights at fair value
as permitted by SFAS No. 156. The election of this option resulted in the
recognition of a cumulative effect of change in accounting principle of $6.3
million, net of tax, which was recorded as an increase to retained earnings, as
further described in Note 1 and Note 6 to the consolidated financial
statements.

118

FIRSTBANKS, INC.NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (CONTINUED)Effective
December 31, 2007, First Banks adopted the recognition and disclosure
provisions of SFAS No. 158, which resulted in the recognition of a cumulative
effect of change in accounting principle of $902,000, which was recorded as a
decrease to other comprehensive income, as further described in Note 1 and Note
17 to the consolidated financial statements.

On
January 1, 2007, First Banks implemented FIN 48. The implementation of FIN 48
resulted in the recognition of a cumulative effect of change in accounting
principle of $2.5 million, which was recorded as an increase to retained
earnings, as further described in Note 1 and Note 13 to the consolidated
financial statements.

In
December 2006, First Banks recorded an increase in additional paid-in capital
of $3.8 million which related to the utilization of net operating losses that
were acquired with the acquisition of First Banks America, Inc. (FBA) and its
wholly-owned subsidiary, BankTEXAS N.A., in 1994. Effective December 1994, the
FBA Board of Directors approved the implementation of a quasi-reorganization.
In accordance with the provisions of SFAS No. 109 and under the requirements
for completing the quasi-reorganization, tax benefits for deductible temporary
differences and net operating loss carryforwards that existed at the date of
the quasi-reorganization and are subsequently recognized are generally reported
as a direct addition to contributed capital.

(19)
TRANSACTIONSWITHRELATEDPARTIESOutside
of normal customer relationships, no directors or officers of First Banks, no
shareholders holding over 5% of First Banks voting securities and no
corporations or firms with which such persons or entities are associated
currently maintain or have maintained, since the beginning of the last full
fiscal year, any significant business or personal relationships with First
Banks or its subsidiaries, other than that which arises by virtue of such
position or ownership interest in First Banks or its subsidiaries, except as
described in the following paragraphs.

First
Services, L.P. (First Services), a limited partnership indirectly owned by
First Banks Chairman and members of his immediate family, provides information
technology, item processing and various related services to First Banks, Inc.
and its subsidiaries. Fees paid under agreements with First Services were $33.6
million, $34.1 million and $34.8 million for the years ended December 31, 2008,
2007 and 2006, respectively. First Services leases information technology and
other equipment from First Bank. First Services paid First Bank rental fees for
the use of that equipment of $3.8 million, $3.7 million and $4.2 million during
the years ended December 31, 2008, 2007 and 2006, respectively. In addition,
First Services paid approximately $1.9 million, $1.8 million and $1.6 million
for the years ended December 31, 2008, 2007 and 2006, respectively, in rental
payments for occupancy of certain First Bank premises from which business is
conducted.

First
Brokerage America, L.L.C. (First Brokerage), a limited liability company
indirectly owned by First Banks Chairman and members of his immediate family,
received approximately $6.2 million, $4.8 million and $3.0 million for the
years ended December 31, 2008, 2007 and 2006, respectively, in gross
commissions paid by unaffiliated third-party companies. The commissions
received were primarily in connection with the sales of annuities, securities
and insurance products to customers of First Bank. First Brokerage paid
approximately $216,000, $183,000 and $114,000 for the years ended December 31,
2008, 2007 and 2006, respectively, in rental payments for occupancy of certain
First Bank premises from which brokerage business is conducted.

First
Title Guaranty LLC D/B/A First Banc Insurors (First Title), a limited liability
company owned by First Banks Chairman and members of his immediate family
prior to its merger with and into First Brokerage, effective April 2, 2007,
received approximately $35,000 and $221,000 for the years ended December 31,
2007 and 2006, respectively, in commissions for insurance policies purchased by
First Banks or customers of First Bank from unaffiliated third-party insurers.
The insurance premiums on which these commissions were earned were
competitively bid, and First Banks deemed the commissions First Title earned
from unaffiliated third-party companies to be comparable to those that would
have been earned by an unaffiliated third-party agent. In May 2006, ANB, a
subsidiary of First Bank, purchased the personal and commercial insurance book
of business from First Title. First Bank engaged an independent third party to
perform a business valuation of the personal and commercial insurance book of
business of First Title, which was determined to be approximately $270,000 and
is being amortized over seven years utilizing the straight-line method.

In
January 2007, First Banks contributed 48,796 shares of common stock held in its
available-for-sale investment securities portfolio with a fair value of $1.7
million to the Dierberg Educational Foundation, Inc. (the Foundation), a
charitable foundation established by First Banks Chairman and members of his
immediate family. In conjunction with this transaction, First Banks recorded
charitable contribution expense of $1.7 million, which was partially

119

FIRSTBANKS, INC.NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (CONTINUED)offset
by a gain on the contribution of these available-for-sale investment securities
of $147,000, representing the difference between the cost basis and the fair
value of the common stock on the date of the contribution. In addition, First
Banks recognized a tax benefit of $1.0 million associated with this
transaction. Furthermore, First Bank contributed $3.5 million in cash to the
Foundation, thereby bringing the total value of charitable contributions to the
Foundation to $5.3 million for the year ended December 31, 2007. During 2006,
First Bank contributed $5.0 million in cash to the Foundation. In addition, in
November 2006, First Banks contributed 26,962 shares of common stock held in
its available-for-sale investment securities portfolio with a fair value of
$1.0 million to the Foundation. In conjunction with this transaction, First
Banks recorded charitable contribution expense of $1.0 million, which was
partially offset by a gain on the contribution of these available-for-sale
investment securities of $121,000. In addition, First Banks recognized a tax
benefit of $522,000 associated with this transaction. There were no charitable
contributions made to the Foundation during the year ended December 31, 2008.

First
Banks periodically purchases various products from Hermannhof, Inc. and
Dierberg Star Lane Vineyards, entities that are owned by First Banks Chairman
and members of his immediate family. First Banks utilizes these products
primarily for customer and employee events and promotions, and business
development functions. During the years ended December 31, 2008, 2007 and 2006,
First Banks purchased products aggregating approximately $258,000, $333,000 and
$376,000, respectively, from these entities.

First
Bank leases certain of its in-store branch offices and automated teller machine
sites from Dierbergs Markets, Inc., a grocery store chain headquartered in St.
Louis, Missouri that is owned and operated by the brother of First Banks
Chairman and members of his immediate family. Total rent expense incurred by
First Bank under the lease obligation contracts was $419,000, $395,000 and
$385,000 for the years ended December 31, 2008, 2007 and 2006, respectively.

In
June 2005, FCA, a corporation owned by First Banks Chairman and members of his
immediate family, became a 49.0% owner of SBLS LLC in exchange for $7.4 million
pursuant to a written option agreement with First Bank. In January and June
2007, First Bank contributed $4.0 million and $7.8 million, respectively, to
SBLS LLC in the form of additional capital contributions, thereby increasing
First Banks ownership of SBLS LLC to 76.0% and decreasing FCAs ownership to
24.0%.

In
June 2005, SBLS LLC executed a Multi-Party Agreement by and among SBLS LLC,
First Bank, Colson Services Corp., fiscal transfer agent for the SBA, and the
SBA, in addition to a Loan and Security Agreement by and among First Bank and
the SBA (collectively, the Agreement) that provided a $50.0 million warehouse
line of credit for loan funding purposes. During the first and third quarters
of 2007, SBLS LLC modified the structure of the Agreement with First Bank. In
September 2007, the existing loan under the Agreement was refinanced by a
Promissory Note entered into between SBLS LLC and First Bank that provided a
$75.0 million unsecured revolving line of credit which was subsequently renewed
at maturity on September 30, 2008 with a new maturity date of September 30,
2009. Interest is payable monthly, in arrears, on the outstanding loan balances
at a current rate equal to the 30-day LIBOR plus 40 basis points. The balance
of advances outstanding under the Promissory Note was $66.2 million and $52.3
million at December 31, 2008 and 2007, respectively. Interest expense recorded
by SBLS LLC under the Promissory Note and Agreement was $2.0 million, $3.4
million and $3.0 million for the years ended December 31, 2008, 2007 and 2006,
respectively. The balance of the advances under the Promissory Note and
Agreement and the related interest expense recognized by SBLS LLC are
eliminated for purposes of the consolidated financial statements.

On
May 14, 2008, First Banks formed FB Holdings, a limited liability company
organized in the state of Missouri. 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. During the
second quarter of 2008, First Bank contributed nonperforming loans and assets
with a fair value of approximately $88.6 million and FCA contributed cash of
$85.0 million to FB Holdings. During the third quarter of 2008, First Bank
contributed cash of $9.0 million and nonperforming loans and assets with a fair
value of approximately $35.6 million and FCA contributed cash of $30.0 million
to FB Holdings. During the fourth quarter of 2008, First Bank contributed
nonperforming loans and assets with a fair value of approximately $9.1 million
and FCA contributed cash of $10.0 million to FB Holdings. As a result, First
Bank owned 53.24% and FCA owned the remaining 46.76% of FB Holdings as of
December 31, 2008. The contribution of cash by FCA is reflected as minority
interest in the

120

FIRSTBANKS, INC.NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (CONTINUED)consolidated
financial statements and, consequently, increased the Companys and First
Banks total risk-based capital ratios.

FB
Holdings entered into a Services Agreement with First Banks and First Bank
effective May 30, 2008. The Services Agreement relates to various services
provided to FB Holdings by First Banks and First Bank, including loan servicing
and special assets services as well as various other financial, legal,
accounting, human resources and property management services. Fees paid under
the Services Agreement by FB Holdings to First Banks and First Bank were
$128,000 and $300,000, respectively, or $428,000 in aggregate, for the year
ended December 31, 2008.

On
May 15, 2008, First Banks entered into a Credit Agreement with Investors of
America, LP, and on August 11, 2008, First Banks entered into an Amended Credit
Agreement with Investors of America, LP, as further described in Note 11 to the
consolidated financial statements. Investors of America, LP is a Nevada limited
partnership that was created by and for the benefit of First Banks Chairman
and members of his immediate family. There were no advances outstanding under
the Credit Agreement at December 31, 2008. Interest expense, including
commitment fees, recorded by First Banks under the Credit Agreement was
$303,000 for the year ended December 31, 2008.

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 First Banks were approximately $49.0
million and $57.7 million at December 31, 2008 and 2007, respectively. First
Bank does not extend credit to its officers or to officers of First Banks
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.

In
August 2005, First Bank entered into a contract with World Wide Technology,
Inc. (WWT), a wholly owned subsidiary of World Wide Technology Holding Co.,
Inc. (WWTHC). WWTHC is an electronic procurement and logistics company in the
information technology industry headquartered in St. Louis, Missouri. The
contract provided for WWT to provide information technology services associated
with the initial phase of a corporate-wide upgrade of personal computers to
First Bank employees in an ongoing effort to further standardize the
technological infrastructure throughout the First Bank branch banking network.
Mr. David L. Steward, a director of First Banks and a member of the Audit
Committee of First Banks, serves as the Chairman of the Board of Directors of
WWTHC. Prior to entering into this contract, the Audit Committee of First Banks
reviewed and approved the utilization of WWT for information technology
services for this phase of the project with fees not to exceed $500,000. First
Bank made payments of $478,000 under the contract for the first phase of the
project, of which $471,000 in payments were made during 2005 and an additional
$7,000 in payments were made during 2006. During 2006, First Bank evaluated the
second phase of its corporate-wide personal computer upgrade project and
entered into a contract with WWT in August 2006 for additional information
technology services. Prior to entering into this contract, the Audit Committee
of First Banks reviewed and approved the utilization of WWT for this phase of
the project with fees not to exceed $500,000. First Bank made payments of
$379,000 under the contract for the now completed second phase of the project,
of which $367,000 in payments were made in 2006 and an additional $12,000 in
payments were made during 2007.

(20)
BUSINESSSEGMENTRESULTSFirst
Banks business segment is First Bank. The reportable business segment is
consistent with the management structure of First Banks, 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, small business lending, asset-based loans,
trade financing and insurance premium financing. Other financial services
include mortgage banking, debit cards, brokerage services, employee benefit and
commercial and personal insurance services, internet banking, remote deposit,
automated teller machines, telephone banking, safe

121

FIRST BANKS, INC.NOTES
TO CONSOLIDATEDFINANCIAL STATEMENTS(CONTINUED)deposit
boxes and trust, private banking and institutional money management 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 First Banks mortgage banking, insurance, and trust, private
banking and institutional money management business units. First Banks
products and services are offered to customers primarily within its geographic
areas, which include eastern Missouri, Illinois, including the Chicago
metropolitan area, southern and northern California, Houston and Dallas, Texas,
and Floridas Manatee, Pinellas, Hillsborough and Pasco counties. Certain loan
products, including small business loans and insurance premium financing loans,
are available nationwide through SBLS LLC and UPAC.


The business segment results are consistent with First Banks internal reporting system and, in all
material respects, with U.S. generally accepted accounting principles and
practices predominant in the banking industry. Such principles and practices
are summarized in Note 1 to the consolidated financial statements. The business
segment results are summarized as follows:

First Bank

Corporate, Other 
 and Intercompany 
 Reclassifications

Consolidated Totals2008

2007

2006

2008

2007

2006

2008

2007

2006(dollars expressed in thousands)Balance sheet
information:Investment securities

$
607,443


997,486


1,439,118


15,483


21,785


25,828


622,926


1,019,271


1,464,946Loans, net of unearned
discount


8,592,975


8,886,184


7,671,768











8,592,975


8,886,184


7,671,768Goodwill and other intangible
assets


306,800


315,651


295,382











306,800


315,651


295,382Total assets


10,756,737


10,872,602


10,120,335


26,417


29,868


42,468


10,783,154


10,902,470


10,162,803Deposits


8,843,901


9,164,868


8,550,062


(102,381
)

(15,675
)

(106,976
)

8,741,520


9,149,193


8,443,086Other borrowings


575,133


409,616


398,639











575,133


409,616


398,639Notes payable














39,000


65,000





39,000


65,000Subordinated
debentures











353,828


353,752


297,369


353,828


353,752


297,369Stockholders
equity


1,111,557


1,203,008


1,068,823


(244,585
)

(360,931
)

(286,053
)

866,972


842,077


782,770Income statement
information:Interest income

$
591,707


696,387


641,231


900


1,169


1,204


592,607


697,556


642,435Interest expense


227,171


289,366


234,690


22,330


27,356


30,399


249,501


316,722


265,089Net interest
income


364,536


407,021


406,541


(21,430
)

(26,187
)

(29,195
)

343,106


380,834


377,346Provision for loan
losses


368,000


65,056


12,000











368,000


65,056


12,000Net interest
(loss) income after provision for loan losses


(3,464
)

341,965


394,541


(21,430
)

(26,187
)

(29,195
)

(24,894
)

315,778


365,346Noninterest income


100,285


84,980


107,927


(10,952
)

(1,793
)

394


89,333


83,187


108,321Amortization of intangible
assets


11,131


12,419


8,195











11,131


12,419


8,195Other noninterest
expense


321,775


328,224


303,817


1,638


3,709


3,553


323,413


331,933


307,370(Loss) income
before provision (benefit) for income taxes and minority
 interest in (loss) income of subsidiaries


(236,085
)

86,302


190,456


(34,020
)

(31,689
)

(32,354
)

(270,105
)

54,613


158,102Provision (benefit) for income
taxes


21,216


16,584


63,444


(3,008
)

(11,509
)

(11,572
)

18,208


5,075


51,872(Loss) income
before minority interest in (loss) income of
 subsidiaries


(257,301
)

69,718


127,012


(31,012
)

(20,180
)

(20,782
)

(288,313
)

49,538


106,230Minority interest in (loss)
income of subsidiaries


(1,158
)

78


(587
)










(1,158
)

78


(587
)Net (loss) income

$
(256,143
)

69,640


127,599


(31,012
)

(20,180
)

(20,782
)

(287,155
)

49,460


106,817(21)
REGULATORY CAPITALFirst
Banks 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 First Banks financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, First
Banks 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. In addition, First Bank is
currently required to maintain its Tier 1 capital ratio at no less than 7.00%
in accordance with the provisions of its agreement recently entered into with
the MDOF and the FRB, as further described in Note 1 to the consolidated
financial statements. At December 31, 2008, First Banks Tier 1 capital ratio
of 9.75% was approximately $260.5 million over the minimum level required by
the agreement.

122

FIRST BANKS, INC.NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS(CONTINUED)Quantitative
measures established by regulation to ensure capital adequacy require First
Banks 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. Management believes First Banks was well capitalized
at December 31, 2008 and adequately capitalized as of December 31, 2007.
Management believes First Bank was well capitalized as of December 31, 2008 and
2007. As of December 31, 2008, the most recent notification from First Banks
primary regulator categorized First Banks and First Bank as well capitalized
under the regulatory framework for prompt corrective action. To be categorized
as well capitalized and adequately capitalized, First Banks and First Bank must
maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios
as set forth in the following table.

At
December 31, 2008 and 2007, First Banks and First Banks required and actual
capital ratios were as follows:

Actual

For
 Capital
 Adequacy
 Purposes

To be Well
 Capitalized Under
 Prompt Corrective
 Action Provisions2008

2007Amount

Ratio

Amount

Ratio(dollars expressed in thousands)Total capital (to
risk-weighted assets):First
Banks

$
1,148,407


12.11
%
$
1,008,253


9.84
%
8.0
%

10.0
%First
Bank


1,042,948


11.01


1,023,990


10.01

8.0


10.0Tier 1 capital (to
risk-weighted assets):First
Banks


841,152


8.87


811,432


7.92

4.0


6.0First
Bank


923,318


9.75


895,571


8.75

4.0


6.0Tier 1 capital (to average
assets):First
Banks


841,152


8.04


811,432


7.99

3.0


5.0First
Bank


923,318


8.85


895,571


8.85

3.0


5.0In
March 2005, the Federal Reserve adopted a final rule, Risk-Based Capital Standards: Trust Preferred
Securities and the Definition of Capital,which allows for the continued
limited inclusion of trust preferred securities in Tier 1 capital. The Federal
Reserves final rule limits restricted core capital elements to 25% of the sum
of all core capital elements, including restricted core capital elements, net
of goodwill less any associated deferred tax liability. Amounts of restricted
core capital elements in excess of these limits may generally be included in
Tier 2 capital. Specifically, amounts of qualifying trust preferred securities
and cumulative perpetual preferred stock in excess of the 25% limit may be
included in Tier 2 capital, but will be limited, together with subordinated
debt and limited-life preferred stock, to 50% of Tier 1 capital. In addition,
the final rule provides that in the last five years before the maturity of the
underlying subordinated note, the outstanding amount of the associated trust
preferred securities is to be excluded from Tier 1 capital and included in Tier
2 capital, subject to one-fifth amortization per year. The final rule provided
for a five-year transition period, ending March 31, 2009, for the application
of the quantitative limits. On March 16, 2009, the Federal Reserve adopted a
final rule that delays the effective date for the application of the
quantitative limits to March 31, 2011. Until March 31, 2011, the aggregate
amount of qualifying cumulative perpetual preferred stock and qualifying trust
preferred securities that may be included in Tier 1 capital is limited to 25%
of the sum of the following core capital elements: qualifying common
stockholders equity, qualifying noncumulative and cumulative perpetual
preferred stock, qualifying minority interest in the equity accounts of
consolidated subsidiaries and qualifying trust preferred securities. First
Banks has determined that the Federal Reserves final rules that will be
effective in March 2011, if implemented as of December 31, 2008, would reduce
First Banks Tier 1 capital (to risk-weighted assets) and Tier 1 capital (to
average assets) to 7.93% and 7.19%, respectively, and would not have an impact
on total capital (to risk-weighted assets).

(22)
DISTRIBUTION OF EARNINGS OF FIRST BANKFirst
Bank is restricted by various state and federal regulations as to the amount of
dividends that are available for payment to First Banks. Under the most
restrictive of these requirements, the payment of dividends is limited in any
calendar year to the net profit of the current year combined with the retained
net profits of the preceding two years. Permission must be obtained for dividends
exceeding these amounts. Based on the current level of earnings, permission
must be obtained for any payment of dividends from First Bank to First Banks,
Inc. Furthermore, First Bank, under its agreement with the MDOF and the FRB,
has agreed, among other things, not to declare or pay any

123

FIRST BANKS, INC.NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS (CONTINUED)dividends
or make certain other payments without the prior consent of the MDOF and the
FRB, as further described in Note 1 to the consolidated financial statements.

(23)
PARENT COMPANY ONLY FINANCIALINFORMATIONFollowing
are condensed balance sheets of First Banks, Inc. as of December 31, 2008 and
2007, and condensed statements of operations and cash flows for the years ended
December 31, 2008, 2007 and 2006:

CONDENSED BALANCE SHEETS

December 31,2008

2007(dollars expressed in thousands)AssetsCash deposited in First
 Bank

$
102,182


14,791Cash deposited in
 unaffiliated financial institutions


3,747


Total
cash


105,929


14,791Investment securities


15,483


21,785Investment in subsidiaries


1,109,706


1,202,855Advances due from CFHI


1,555


1,401Other assets


7,191


8,216Total
assets

$
1,239,864


1,249,048Liabilities and Stockholders EquityNotes payable

$



39,000Subordinated debentures


353,828


353,752Accrued expenses and other
 liabilities


19,064


14,219Total
liabilities


372,892


406,971Stockholders equity


866,972


842,077Total
liabilities and stockholders equity

$
1,239,864


1,249,048CONDENSED STATEMENTS OF OPERATIONS

Years Ended December 31,2008

2007

2006(dollars expressed in thousands)Income:Dividends from
subsidiaries

$
55,182


45,000


70,000Management fees
from subsidiaries


32,039


34,386


35,525(Loss) gain on
available-for-sale investment securities


(10,480
)

(1,286
)

767Other


1,040


1,424


2,284Total
income


77,781


79,524


108,576Expense:Interest


22,386


27,537


30,875Salaries and
employee benefits


19,767


23,829


25,530Legal,
examination and professional fees


3,664


2,979


3,796Charitable
contributions


55


1,905


1,068Other


9,280


10,037


9,660Total
expense


55,152


66,287


70,929Income before
benefit for income taxes and equity in undistributed
 (losses) earnings of subsidiaries


22,629


13,237


37,647Benefit
 for income taxes


(3,057
)

(11,535
)

(11,572
)Income before
equity in undistributed (losses) earnings of
 subsidiaries


25,686


24,772


49,219Equity in undistributed (losses)
earnings of subsidiaries


(312,841
)

24,688


57,598Net (loss)
income

$
(287,155
)

49,460


106,817124

FIRST BANKS, INC.NOTES
TO CONSOLIDATEDFINANCIAL STATEMENTS(CONTINUED)CONDENSED STATEMENTS OF CASH FLOWSYears Ended December 31,2008

2007

2006(dollars expressed in thousands)Cash flows from operating
activities:Net (loss)
income

$
(287,155
)

49,460


106,817Adjustments to
reconcile net (loss) income to net cash provided by
 (used in) operating activities:Net loss
(income) of subsidiaries


257,659


(69,688
)

(127,598
)Dividends from
subsidiaries


55,182


45,000


70,000Decrease
(increase) in advances due from SFC





90,000


(90,000
)Other,
net


10,174


10,057


(8,973
)Net cash
provided by (used in) operating activities


35,860


124,829


(49,754
)Cash flows from investing
activities:Increase in
investment securities


(147
)

(2,616
)

(6,375
)Investment in
common securities of affiliated business and statutory
 trusts





(2,322
)

(4,178
)Payments from
redemption of investment in common securities of
 affiliated business and statutory trusts





2,481


Acquisitions of
subsidiaries





(50,749
)

(85,514
)Capital
contributions to subsidiaries


(200,000
)

(40,000
)

Other,
net


(189
)

(1,401
)

(1,682
)Net cash used
in investing activities


(200,336
)

(94,607
)

(97,749
)Cash flows from financing
activities:Advances drawn
on notes payable


55,000


35,000


Repayments of
notes payable


(94,000
)

(61,000
)

(35,000
)Proceeds from
issuance of subordinated debentures





77,322


139,178Repayments of
subordinated debentures





(82,681
)

Proceeds from
issuance of preferred stock


295,400





Payment of
preferred stock dividends


(786
)

(786
)

(786
)Net cash
provided by (used in) financing activities


255,614


(32,145
)

103,392Net increase
(decrease) in cash


91,138


(1,923
)

(44,111
)Cash, beginning of
year


14,791


16,714


60,825Cash, end of year

$
105,929


14,791


16,714Noncash investing
activities:Cash paid for
interest

$
22,122


28,685


28,843(24)
CONTINGENT LIABILITIESIn
October 2000, First Banks entered into two continuing guaranty contracts. For
value received, and for the purpose of inducing a pension fund and its trustees
and a welfare fund and its trustees (the Funds) to conduct business with MVP,
First Banks institutional investment management subsidiary, First Banks
irrevocably and unconditionally guaranteed payment of and promised to pay to
each of the Funds any amounts up to the sum of $5.0 million to the extent MVP
is liable to the Funds for a breach of the Investment Management Agreements
(including the Investment Policy Statement and Investment Guidelines), by and
between MVP and the Funds and/or any violation of the Employee Retirement
Income Security Act by MVP resulting in liability to the Funds. The guaranties
are continuing guaranties of all obligations that may arise for transactions
occurring prior to termination of the Investment Management Agreements and are
coexistent with the term of the Investment Management Agreements. The Investment
Management Agreements have no specified term but may be terminated at any time
upon written notice by the Trustees or, at First Banks option, upon thirty
days written notice to the Trustees. In the event of termination of the
Investment Management Agreements, such termination shall have no effect on the
liability of First Banks with respect to obligations incurred before such
termination. The obligations of First Banks are joint and several with those of
MVP. First Banks does not have any recourse provisions that would enable it to
recover from third parties any amounts paid under the contracts nor does First
Banks hold any assets as collateral that, upon occurrence of a required payment
under the contract, could be liquidated to recover all or a portion of the
amount(s) paid. At December 31, 2008 and 2007, First Banks had not recorded a
liability for the obligations

125

FIRSTBANKS,
INC.NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED)associated with these guaranty
contracts as the likelihood that
First Banks will be required to make payments under the contracts is remote.

CFHI Securities
Litigation.Prior to acquisition by First Banks, CFHI and certain of
its present and former officers were named as defendants in three purported
class action complaints filed in the United States District Court for the
Middle District of Florida, Tampa Division (the Court) alleging violations of
the federal securities laws, the first of which was filed with the Court on
March 20, 2007 (the Securities Actions). On June 22, 2007, the Court entered an
order pursuant to which the Court (i) consolidated the Securities Actions, with
the matter proceeding under the docket for Grand Lodge of Pennsylvania v.
Brian P. Peters, et al., Case No. 8:07-cv-429-T-26-EAJ and (ii) appointed
Troy Ratcliff and Daniel Altenburg (the Lead Plaintiffs) as lead plaintiffs
pursuant to the provisions of the Private Securities Litigation Reform Act of
1995.

Subsequent to the disposition of
certain preliminary motions filed
by plaintiffs and defendants, on April 2, 2008, the Lead Plaintiffs and an
additional plaintiff, St. Denis J. Villere & Co., LLC, filed a second
consolidated amended class action complaint (the Amended Complaint). The
Amended complaint named as defendants (i) certain former officers and members
of CFHIs board of directors, (ii) the underwriters of CFHIs October 5, 2005
public offering of common stock, and (iii) CFHIs external auditors.

The Amended Complaint was brought on
behalf of a putative class of
purchasers of CFHIs common stock between January 21, 2005 and January 22,
2007. In general, the Amended Complaint alleges that CFHIs United States
Securities and Exchange Commission (SEC) filings and public statements
contained misstatements and omissions regarding its residential
construction-to-permanent lending operations and, more specifically, regarding
a home builder and its affiliates and also alleges that CFHIs financial
statements violated U.S. generally accepted accounting principles. The Amended
Complaint asserts claims under Sections 11 and 15 of the Securities Act of 1933
and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule
10b-5 promulgated thereunder. On August 30, 2007, the Lead Plaintiffs filed a
notice with the Court voluntarily dismissing their claims against Anne V. Lee
and Justin D. Locke without prejudice.

On or about February 17, 2009, CFHI
and the plaintiffs entered
into an agreement for the settlement of the Securities Actions. Pursuant to the
agreement, CFHI and its insurer will pay an amount in settlement of the claims,
and CFHI, the former officer and director defendants, and the underwriter
defendants will be released and dismissed with prejudice from the action. Under
the agreement, the Companys allocation of the settlement amount is $750,000,
and was recorded as other expense in the consolidated statement of operations
for the year ended December 31, 2008. Among other terms and conditions, the
settlement is subject to approval by the Court and will not be consummated if
the Court fails to grant approval.

Other.In the ordinary
course of business, First Banks and its subsidiaries become involved in legal
proceedings other than those discussed above. Management, in consultation with
legal counsel, believes the ultimate resolution of these proceedings will not
have a material adverse effect on the financial condition or results of
operations of First Banks and/or its subsidiaries.

As further described in Note 1 to the
consolidated financial
statements, the Company and First Bank have entered into informal agreements
with the MDOF and the FRB.

(25)
EVENTS (UNAUDITED) SUBSEQUENT TO THE DATE OF THE REPORT OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMOn February 27,
2009, the Federal Deposit Insurance Corporation (FDIC) announced amendments to
the restoration plan for the Deposit Insurance Fund to ensure the continued
strength of the insurance fund by imposing a special assessment on FDIC-insured
institutions of 20 basis points, implementing changes to the risk-based
assessment system, and setting rates beginning in the second quarter of 2009.
The emergency special assessment will be imposed on June 30, 2009, and will be
collected on September 30, 2009. The interim rule will also permit the FDIC to
impose an emergency special assessment after June 30, 2009 of up to 10 basis
points, if necessary, to maintain public confidence in federal deposit
insurance. The emergency special assessment, which will be recorded in the
second quarter of 2009, is estimated to be approximately $17.0 million based on
current deposit levels.

126

FIRSTBANKS,
INC.QUARTERLY CONDENSED
FINANCIAL DATA  UNAUDITED2008 Quarter EndedMarch 31

June 30

September 30

December 31(dollars expressed in thousands,
except per
 share data)Interest
income

$
164,304


147,753


144,297


136,253Interest
expense


74,777


60,970


58,192


55,562Net interest
 income


89,527


86,783


86,105


80,691Provision
for loan losses


45,947


84,053


99,000


139,000Net interest
 income (loss) after provision for loan losses


43,580


2,730


(12,895
)

(58,309
)Noninterest
income


33,111


18,891


18,691


18,640Noninterest
expense


83,424


84,642


83,710


82,768Loss before
 (benefit) provision for income taxes and minority interest in income (loss)
 of subsidiaries


(6,733
)

(63,021
)

(77,914
)

(122,437
)(Benefit)
provision for income taxes


(2,005
)

(23,137
)

(52,799
)

96,149Loss before
 minority interest in income (loss) of subsidiaries


(4,728
)

(39,884
)

(25,115
)

(218,586
)Minority
interest in income (loss) of subsidiaries


145


33


(154
)

(1,182
)Net loss

$
(4,873
)

(39,917
)

(24,961
)

(217,404
)Loss per
common share:Basic

$
(214.26
)

(1,692.61
)

(1,063.24
)

(9,199.35
)Diluted

$
(214.26
)

(1,692.61
)

(1,063.24
)

(9,199.35
)2007 Quarter EndedMarch 31

June 30

September 30

December 31(dollars expressed in thousands,
except per
 share data)Interest
income

$
171,080


176,572


177,532


172,372Interest
expense


77,002


81,104


80,038


78,578Net interest
 income


94,078


95,468


97,494


93,794Provision for
 loan losses


3,500


3,417


13,503


44,636Net interest
 income after provision for loan losses


90,578


92,051


83,991


49,158Noninterest
 income


22,609


19,599


19,851


21,128Noninterest
 expense


85,988


84,711


84,774


88,879Income (loss)
 before provision (benefit) for income taxes and minority interest in income
 (loss) of subsidiary


27,199


26,939


19,068


(18,593
)Provision
 (benefit) for income taxes


9,746


9,537


6,470


(20,678
)Income before
 minority interest in income (loss) of subsidiary


17,453


17,402


12,598


2,085Minority
 interest in income (loss) of subsidiary


70


31


74


(97
)Net income

$
17,383


17,371


12,524


2,182Earnings per
 common share:Basic

$
726.34


728.65


521.02


81.14Diluted

$
722.43


720.40


520.77


81.14127

FIRST BANKS, INC.INVESTOR INFORMATIONFIRST BANKS, INC. PREFERRED SECURITIES

The preferred securities of First Preferred Capital Trust IV are
traded
on the New York Stock Exchange with the ticker symbol FBSPrA. The preferred
securities of First Preferred Capital Trust IV are represented by a global
security that has been deposited with and registered in the name of The
Depository Trust Company, New York, New York (DTC). The beneficial ownership
interests of these preferred securities are recorded through the DTC book-entry
system. The high and low preferred securities prices and the dividends declared
for 2008 and 2007 are summarized as follows:

FIRST PREFERRED CAPITAL TRUST IV (ISSUE DATE
 APRIL 2003)  FBSPrA

2008

2007

Dividend
 DeclaredHigh

Low

High

LowFirst
 quarter

$
25.30


20.00


28.00


25.65

$
0.509375Second
 quarter


24.96


21.50


26.75


25.17


0.509375Third
 quarter


24.85


12.73


25.96


24.30


0.509375Fourth
 quarter


24.50


9.57


25.37


24.29


0.509375$
2.037500FOR INFORMATION CONCERNING FIRST BANKS, PLEASE CONTACT:Terrance M.
 McCarthy

Steven F.
 Schepman

Lisa K.
 VansicklePresident
 and

Executive
 Vice President and

Senior Vice
 PresidentChief Executive
Officer

Director of
Corporate Development

and Chief
Financial Officer135 North
 Meramec

and Business
Segments

600 James S.
 McDonnell Blvd.Mail Code 
 M1-821-014

135 North
 Meramec

Mail Code 
 M1-199-014Clayton,
 Missouri 63105

Mail Code 
 M1-821-014

Hazelwood,
 Missouri 63042Telephone 
 (314) 592-5000

Clayton,
 Missouri 63105

Telephone 
 (314) 592-5000www.firstbanks.com

Telephone 
 (314) 592-5000

www.firstbanks.comwww.firstbanks.comTRANSFER AGENT:Computershare
 Investor Services, LLC2 North
 LaSalle StreetChicago,
 Illinois 60602Telephone 
 (312) 588-4990www.computershare.com128

SIGNATURES

Pursuant to
the requirements of Section 13 or 15(d) 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.

FIRST BANKS, INC.By:
/s/
Terrance M.
 McCarthyTerrance M.
 McCarthyPresident
 and Chief Executive Officer(Principal
 Executive Officer)By:
/s/
Lisa K.
 VansickleLisa K.
 VansickleSenior Vice
 President andChief
 Financial Officer(Principal
 Financial and Accounting Officer)Date:      
March 25, 2009

Pursuant
to the requirements of the Securities Exchange Act of 1934, this Report has
been signed by the following persons on behalf of the Registrant and in the
capacities and on the date indicated.

Signatures

Title

Date/s/
James F.
 Dierberg

Director

March 25, 2009James F.
 Dierberg/s/
Terrance M.
 McCarthy

Director

March 25, 2009Terrance M.
 McCarthy/s/
Steven F. Schepman

Director

March 25, 2009Steven F.
 Schepman/s/
Allen H.
 Blake

Director

March 25, 2009Allen H.
 Blake/s/
James A.
 Cooper

Director

March 25, 2009James A.
 Cooper/s/
Gordon A.
 Gundaker

Director

March 25, 2009Gordon A.
 Gundaker/s/
David L.
 Steward

Director

March 25, 2009David L.
 Steward/s/
Douglas H.
 Yaeger

Director

March 25, 2009Douglas H.
 Yaeger129

INDEX TO EXHIBITS

Exhibit
 Number

Description3.1


Restated
 Articles of Incorporation of the Company, as amended (incorporated herein by
 reference to Exhibit 3(i) to the Companys Annual Report on Form 10-K for the
 year ended December 31, 1993).3.2


Certificate
 of Designation of First Banks, Inc. with respect to Class C Fixed Rate
 Cumulative Perpetual Preferred Stock dated as of December 24, 2008
 (incorporated herein by reference to Exhibit 4.2 to the Companys Current
 Report on Form 8-K dated December 31, 2008).3.3


Certificate
 of Designation of First Banks, Inc. with respect to Class D Fixed Rate
 Cumulative Perpetual Preferred Stock dated as of December 24, 2008
 (incorporated herein by reference to Exhibit 4.3 to the Companys Current
 Report on Form 8-K dated December 31, 2008).3.4


By-Laws
 of the Company (incorporated herein by reference to Exhibit 3.2 to Amendment
 No. 2 to the Companys Registration Statement on Form S-1, File No. 33-50576,
 dated September 15, 1992).4.1


Instruments
 defining the rights of security holders, including indentures. The registrant hereby agrees to furnish to
 the Commission upon request copies of instruments defining the rights of
 holders of long-term debt of the registrant and its consolidated
 subsidiaries; no issuance of debt exceeds 10% of the assets of the registrant
 and its subsidiaries on a consolidated basis.4.2


Warrant
 to Purchase Shares of First Banks, Inc. Class D Fixed Rate Cumulative
 Perpetual Preferred Stock dated as of December 31, 2008 (incorporated herein
 by reference to Exhibit 4.4 to the Companys Current Report on Form 8-K dated
 December 31, 2008).10.1


Shareholders
 Agreement by and among James F. Dierberg II and Mary W. Dierberg, Trustees
 under the Living Trust of James F. Dierberg II, dated July 24, 1989, Michael
 James Dierberg and Mary W. Dierberg, Trustees under the Living Trust of
 Michael James Dierberg, dated July 24, 1989; Ellen C. Dierberg and Mary W.
 Dierberg, Trustees under the Living Trust of Ellen C. Dierberg dated July 17,
 1992, and First Banks, Inc. (incorporated herein by reference to Exhibit 10.3
 to the Companys Registration Statement on Form S-1, File No 33-50576, dated
 August 6, 1992).10.2


Comprehensive
 Banking System License and Service Agreement dated as of July 24, 1991, by
 and between the Company and FiServ CIR, Inc. (incorporated herein by
 reference to Exhibit 10.4 to the Companys Registration Statement on Form
 S-1, File No. 33-50576, dated August 6, 1992).10.3


AFS
 Customer Agreement by and between First Banks, Inc. and Advanced Financial
 Solutions, Inc., dated January 29, 2004 (incorporated herein by reference to
 Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q for the quarter
 ended March 31, 2004).10.4


Management
 Services Agreement by and between First Banks, Inc. and First Bank, dated
 February 28, 2004 (incorporated herein by reference to Exhibit 10.2 to the
 Companys Quarterly Report on Form 10-Q for the quarter ended March 31, 2004).10.5


Service
 Agreement by and between First Services, L.P. and First Banks, Inc., dated
 May 1, 2004 (incorporated herein by reference to Exhibit 10.3 to the
 Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2004).10.6


Service
 Agreement by and between First Services, L.P. and First Bank, dated May 1,
 2004 (incorporated herein by reference to Exhibit 10.4 to the Companys
 Quarterly Report on Form 10-Q for the quarter ended June 30, 2004).10.7


Service
 Agreement by and between First Banks, Inc. and First Services, L.P., dated
 May 1, 2004 (incorporated herein by reference to Exhibit 10.5 to the
 Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2004).10.8
*

First
 Banks, Inc. Executive Incentive Compensation Plan (incorporated herein by
 reference to Exhibit 10.10 to the Companys Annual Report on Form 10-K for
 the year ended December 31, 2004).10.9


Secured
 Credit Agreement ($125.0 million Revolving Credit Facility, including $10.0
 million Swingline Sub-Facility and $5.0 million Letter of Credit
 Sub-Facility), dated as of August 8, 2007, by and among First Banks, Inc. and
 Wells Fargo Bank, National Association, as Agent, JP Morgan Chase Bank, N.A.,
 LaSalle Bank National Association, The Northern Trust Company, Union Bank of
 California, N.A., Fifth Third Bank (Chicago) and U.S. Bank National
 Association (incorporated herein by reference to Exhibit 10 to the Companys
 Quarterly Report on Form 10-Q for the quarter ended September 30, 2007).10.10


First
 Amendment to the Secured Credit Agreement, dated as of February 12, 2008, by
 and among First Banks, Inc. and Wells Fargo Bank, National Association, as
 Agent, and JP Morgan Chase Bank, N.A., LaSalle Bank National Association, The
 Northern Trust Company, Union Bank of California, N.A. and Fifth Third Bank
 (Chicago) (incorporated herein by reference to Exhibit 10.1 to the Companys
 Current Report on Form 8-K dated February 19, 2008).130

10.11


Second
 Amendment to the Secured Credit Agreement, dated as of February 12, 2008, by
 and among First Banks, Inc. and Wells Fargo Bank, National Association, as
 Agent, and JP Morgan Chase Bank, N.A., LaSalle Bank National Association, The
 Northern Trust Company, Union Bank of California, N.A., Fifth Third Bank
 (Chicago) and U.S. Bank National Association (incorporated herein by
 reference to Exhibit 10.2 to the Companys Current Report on Form 8-K dated
 February 19, 2008).10.12


Termination
 Agreement, dated as of May 19, 2008, by and among First Banks, Inc. and Wells
 Fargo Bank, National Association, as Agent, JP Morgan Chase Bank, N.A.,
 LaSalle Bank National Association, The Northern Trust Company, Union Bank of
 California, N.A. and Fifth Third Bank (Chicago) (incorporated herein by
 reference to Exhibit 10.3 to the Companys Quarterly Report on Form 10-Q for
 the quarter ended June 30, 2008).10.13


First
 Amended Revolving Credit Note, dated as of August 11, 2008, by and between
 First Banks, Inc. and Investors of America Limited Partnership (incorporated
 herein by reference to Exhibit 10.1 to the Companys Quarterly Report on Form
 10-Q for the quarter ended June 30, 2008).10.14


Stock
 Pledge Agreement, dated as of May 15, 2008, by and between First Banks, Inc.
 and Investors of America Limited Partnership (incorporated herein by
 reference to Exhibit 10.2 to the Companys Quarterly Report on Form 10-Q for
 the quarter ended June 30, 2008).10.15
*

First
 Banks, Inc. Nonqualified Deferred Compensation Plan, as amended (incorporated
 herein by reference to Exhibit 5.11 to the Companys Quarterly Report on Form
 10-Q for the quarter ended June 30, 2008).10.16


Letter
 Agreement including the Securities Purchase Agreement  Standard Terms
 incorporated therein, between First Banks, Inc. and the United States
 Department of the Treasury, dated as of December 31, 2008 (as amended by the
 Side Letter Agreement between First Banks, Inc. and the United States
 Department of the Treasury, dated as of December 31, 2008, and included
 herein as Exhibit 10.12) (incorporated herein by reference to Exhibit 10.1 to
 the Companys Current Report on Form 8-K dated December 31, 2008).10.17


Side
 Letter Agreement between First Banks, Inc. and the United States Department of
 the Treasury, dated as of December 31, 2008 (incorporated herein by reference
 to Exhibit 10.2 to the Companys Current Report on Form 8-K dated December
 31, 2008).10.18
*

Form
 of Omnibus Amendment Agreement executed by each of Terrance M. McCarthy,
 Russell L. Goldammer, Robert S. Holmes, F. Christopher McLaughlin and Lisa K.
 Vansickle, dated as of December 24, 2008 (incorporated herein by reference to
 Exhibit 10.3 to the Companys Current Report on Form 8-K dated December 31,
 2008).14.1


Code
 of Ethics for Principal Executive Officer and Financial Professionals, as
 amended  filed herewith.21.1


Subsidiaries
 of the Company  filed herewith.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  filed herewith.32.2


Section
 1350 Certifications of Chief Financial Officer  filed herewith.*
Exhibits
 designated by an asterisk in the Index to Exhibits relate to management
 contracts and/or compensatory plans or arrangements.131