UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|
x
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
|
For the
quarterly period ended March 31, 2012
OR
|
¨
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
|
Commission File Number 0-18832
First Financial Service Corporation
(Exact Name of Registrant as specified in
its charter)
Kentucky
|
|
61-1168311
|
(State or other jurisdiction
|
|
(IRS Employer Identification No.)
|
of incorporation or organization)
|
|
|
2323 Ring Road
|
|
(270) 765-2131
|
Elizabethtown, Kentucky 42701
|
|
(Registrant's telephone number,
|
(Address of principal executive offices)
|
|
including area code)
|
(Zip Code)
|
|
|
(270) 765-2131
(Registrant's telephone number, including
area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes
x
No
¨
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files). Yes
x
No
¨
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
Large Accelerated Filer
¨
Accelerated Filer
¨
Non-Accelerated Filer
¨
Smaller
Reporting Company
x
Indicate
by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
¨
No
x
Indicate the number of shares outstanding
of each of the issuer's classes of common stock, as of the latest practicable date.
Class
|
|
Outstanding as of April 30, 2012
|
|
|
|
Common Stock
|
|
4,765,222
shares
|
FIRST FINANCIAL SERVICE CORPORATION
FORM 10-Q
TABLE OF CONTENTS
PART I
–
FINANCIAL INFORMATION
|
|
|
|
|
Preliminary Note Regarding Forward-Looking
Statements
|
3
|
|
|
|
Item 1.
|
Consolidated Financial Statements and Notes to Consolidated Financial
Statements
|
4
|
|
|
|
Item 2.
|
Management's Discussion and Analysis of Financial Condition and
Results of Operations
|
37
|
|
|
|
Item 3.
|
Quantitative and Qualitative Disclosures about Market Risk
|
56
|
|
|
|
Item 4.
|
Controls and Procedures
|
58
|
|
|
|
PART II – OTHER INFORMATION
|
|
|
|
|
Item 1.
|
Legal Proceedings
|
58
|
|
|
|
Item 1A.
|
Risk Factors
|
58
|
|
|
|
Item 2.
|
Unregistered Sales of Equity Securities and Use of Proceeds
|
58
|
|
|
|
Item 3.
|
Defaults upon Senior Securities
|
59
|
|
|
|
Item 4.
|
Mine Safety Disclosures
|
59
|
|
|
|
Item 5.
|
Other Information
|
59
|
|
|
|
Item 6.
|
Exhibits
|
59
|
|
|
|
SIGNATURES
|
60
|
PRELIMINARY
NOTE REGARDING
FORWARD-LOOKING
STATEMENTS
Statements in this report that are not
statements of historical fact are forward-looking statements. First Financial Service Corporation (the “Corporation”)
may make forward-looking statements in future filings with the Securities and Exchange Commission (“SEC”), in press
releases, and in oral and written statements made by or with the approval of the Corporation. Forward-looking statements include,
but are not limited to: (1) projections of revenues, income or loss, earnings or loss per share, capital structure and other financial
items; (2) plans and objectives of the Corporation or its management or Board of Directors; (3) statements regarding future events,
actions or economic performance; and (4) statements of assumptions underlying such statements. Words such as “estimate,”
“strategy,” “believes,” “anticipates,” “expects,” “intends,” “plans,”
“targeted,” and similar expressions are intended to identify forward-looking statements, but are not the exclusive
means of identifying such statements.
Various risks and uncertainties may cause
actual results to differ materially from those indicated by our forward-looking statements. In addition to those risks described
under “Item 1A Risk Factors,” of this report and our Annual Report on Form 10-K, the following factors could cause
such differences: changes in general economic conditions and economic conditions in Kentucky and the markets we serve, any of which
may affect, among other things, our level of non-performing assets, charge-offs, and provision for loan loss expense; changes in
interest rates that may reduce interest margins and impact funding sources; changes in market rates and prices which may adversely
impact the value of financial products including securities, loans and deposits; changes in tax laws, rules and regulations; various
monetary and fiscal policies and regulations, including those determined by the Federal Reserve Board, the Federal Deposit Insurance
Corporation (“FDIC”) and the Kentucky Department of Financial Institutions (“KDFI”); competition with other
local and regional commercial banks, savings banks, credit unions and other non-bank financial institutions; our ability to grow
core businesses; our ability to develop and introduce new banking-related products, services and enhancements and gain market acceptance
of such products; and management’s ability to manage these and other risks.
Our forward-looking statements speak only
as of the date on which they are made, and we undertake no obligation to update any forward-looking statement to reflect events
or circumstances after the date of the statement to reflect the occurrence of unanticipated events.
Item 1.
FIRST FINANCIAL SERVICE CORPORATION
Consolidated Balance Sheets
(Unaudited)
|
|
March 31,
|
|
|
December 31,
|
|
(Dollars in thousands, except per share data)
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
ASSETS:
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
11,810
|
|
|
$
|
12,973
|
|
Interest bearing deposits
|
|
|
70,050
|
|
|
|
79,263
|
|
Total cash and cash equivalents
|
|
|
81,860
|
|
|
|
92,236
|
|
|
|
|
|
|
|
|
|
|
Securities available-for-sale
|
|
|
355,793
|
|
|
|
313,777
|
|
Securities held-to-maturity, fair value of $24 Mar (2012) and $24 Dec (2011)
|
|
|
24
|
|
|
|
24
|
|
Total securities
|
|
|
355,817
|
|
|
|
313,801
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale
|
|
|
40,916
|
|
|
|
56,016
|
|
|
|
|
|
|
|
|
|
|
Loans, net of unearned fees
|
|
|
652,708
|
|
|
|
691,253
|
|
Allowance for loan losses
|
|
|
(17,329
|
)
|
|
|
(17,181
|
)
|
Net loans
|
|
|
635,379
|
|
|
|
674,072
|
|
|
|
|
|
|
|
|
|
|
Federal Home Loan Bank stock
|
|
|
4,805
|
|
|
|
4,805
|
|
Cash surrender value of life insurance
|
|
|
9,791
|
|
|
|
9,702
|
|
Premises and equipment, net
|
|
|
29,377
|
|
|
|
29,694
|
|
Premises and equipment held for sale,net
|
|
|
927
|
|
|
|
946
|
|
Real estate owned:
|
|
|
|
|
|
|
|
|
Acquired through foreclosure
|
|
|
30,081
|
|
|
|
29,083
|
|
Held for development
|
|
|
-
|
|
|
|
45
|
|
Other repossessed assets
|
|
|
49
|
|
|
|
42
|
|
Core deposit intangible
|
|
|
650
|
|
|
|
714
|
|
Accrued interest receivable
|
|
|
2,837
|
|
|
|
3,168
|
|
Accrued income taxes
|
|
|
2,948
|
|
|
|
3,517
|
|
Prepaid FDIC Insurance
|
|
|
909
|
|
|
|
1,302
|
|
Low-income housing investments
|
|
|
7,604
|
|
|
|
7,671
|
|
Other assets
|
|
|
1,602
|
|
|
|
1,964
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
1,205,552
|
|
|
$
|
1,228,778
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
LIABILITIES:
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
Non-interest bearing
|
|
$
|
79,461
|
|
|
$
|
72,675
|
|
Non-interest bearing held for sale
|
|
|
5,551
|
|
|
|
4,954
|
|
Interest bearing
|
|
|
901,213
|
|
|
|
932,915
|
|
Interest bearing held for sale
|
|
|
113,240
|
|
|
|
112,250
|
|
Total deposits
|
|
|
1,099,465
|
|
|
|
1,122,794
|
|
|
|
|
|
|
|
|
|
|
Advances from Federal Home Loan Bank
|
|
|
27,701
|
|
|
|
27,736
|
|
Subordinated debentures
|
|
|
18,000
|
|
|
|
18,000
|
|
Accrued interest payable
|
|
|
2,162
|
|
|
|
1,817
|
|
Accounts payable and other liabilities
|
|
|
5,307
|
|
|
|
4,968
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
1,152,635
|
|
|
|
1,175,315
|
|
Commitments and contingent liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' EQUITY:
|
|
|
|
|
|
|
|
|
Serial preferred stock, $1 par value per share; authorized 5,000,000 shares; issued and outstanding, 20,000 shares with a liquidation preference of $20,000
|
|
|
19,903
|
|
|
|
19,889
|
|
Common stock, $1 par value per share; authorized 35,000,000 shares; issued and outstanding, 4,765,222 shares Mar (2012), and 4,749,415 shares Dec (2011)
|
|
|
4,765
|
|
|
|
4,749
|
|
Additional paid-in capital
|
|
|
35,502
|
|
|
|
35,450
|
|
Retained earnings/(accumulated deficit)
|
|
|
(8,504
|
)
|
|
|
(7,951
|
)
|
Accumulated other comprehensive income
|
|
|
1,251
|
|
|
|
1,326
|
|
|
|
|
|
|
|
|
|
|
TOTAL STOCKHOLDERS' EQUITY
|
|
|
52,917
|
|
|
|
53,463
|
|
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
1,205,552
|
|
|
$
|
1,228,778
|
|
See notes to the unaudited consolidated financial statements.
FIRST FINANCIAL SERVICE CORPORATION
Consolidated Statements of
Operations
(Unaudited)
|
|
Three Months Ended
|
|
(Amounts in thousands, except per share data)
|
|
March 31,
|
|
|
|
2012
|
|
|
2011
|
|
Interest and Dividend Income:
|
|
|
|
|
|
|
|
|
Loans, including fees
|
|
$
|
9,961
|
|
|
$
|
12,343
|
|
Taxable securities
|
|
|
2,571
|
|
|
|
1,566
|
|
Tax exempt securities
|
|
|
213
|
|
|
|
257
|
|
Total interest income
|
|
|
12,745
|
|
|
|
14,166
|
|
|
|
|
|
|
|
|
|
|
Interest Expense:
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
3,945
|
|
|
|
4,914
|
|
Federal Home Loan Bank advances
|
|
|
284
|
|
|
|
295
|
|
Subordinated debentures
|
|
|
341
|
|
|
|
341
|
|
Total interest expense
|
|
|
4,570
|
|
|
|
5,550
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
8,175
|
|
|
|
8,616
|
|
Provision for loan losses
|
|
|
1,012
|
|
|
|
3,465
|
|
Net interest income after provision for loan losses
|
|
|
7,163
|
|
|
|
5,151
|
|
|
|
|
|
|
|
|
|
|
Non-interest Income:
|
|
|
|
|
|
|
|
|
Customer service fees on deposit accounts
|
|
|
1,382
|
|
|
|
1,445
|
|
Gain on sale of mortgage loans
|
|
|
312
|
|
|
|
265
|
|
Gain on sale of investments
|
|
|
-
|
|
|
|
69
|
|
Loss on sale of investments
|
|
|
(150
|
)
|
|
|
-
|
|
Other than temporary impairment loss:
|
|
|
|
|
|
|
|
|
Total other-than-temporary impairment losses
|
|
|
(26
|
)
|
|
|
(37
|
)
|
Portion of loss
recognized in other comprehensive income/(loss) (before taxes)
|
|
|
-
|
|
|
|
-
|
|
Net impairment losses recognized in earnings
|
|
|
(26
|
)
|
|
|
(37
|
)
|
Loss on sale and write downs on real
estate acquired through foreclosure
|
|
|
(1,566
|
)
|
|
|
(235
|
)
|
Gain on sale on real estate acquired through foreclosure
|
|
|
403
|
|
|
|
25
|
|
Gain on sale on real estate held for development
|
|
|
175
|
|
|
|
-
|
|
Brokerage commissions
|
|
|
95
|
|
|
|
107
|
|
Other income
|
|
|
411
|
|
|
|
354
|
|
Total non-interest income
|
|
|
1,036
|
|
|
|
1,993
|
|
|
|
|
|
|
|
|
|
|
Non-interest Expense:
|
|
|
|
|
|
|
|
|
Employee compensation and benefits
|
|
|
3,853
|
|
|
|
4,329
|
|
Office occupancy expense and equipment
|
|
|
768
|
|
|
|
811
|
|
Marketing and advertising
|
|
|
33
|
|
|
|
225
|
|
Outside services and data processing
|
|
|
811
|
|
|
|
797
|
|
Bank franchise tax
|
|
|
342
|
|
|
|
314
|
|
FDIC insurance premiums
|
|
|
415
|
|
|
|
970
|
|
Amortization of core deposit intangible
|
|
|
64
|
|
|
|
77
|
|
Real estate acquired through foreclosure expense
|
|
|
340
|
|
|
|
382
|
|
Loan expense
|
|
|
508
|
|
|
|
52
|
|
Other expense
|
|
|
1,354
|
|
|
|
1,449
|
|
Total non-interest expense
|
|
|
8,488
|
|
|
|
9,406
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) before income taxes
|
|
|
(289
|
)
|
|
|
(2,262
|
)
|
Income taxes/(benefits)
|
|
|
-
|
|
|
|
(192
|
)
|
Net Income/(Loss)
|
|
|
(289
|
)
|
|
|
(2,070
|
)
|
Less:
|
|
|
|
|
|
|
|
|
Dividends on preferred stock
|
|
|
(250
|
)
|
|
|
(250
|
)
|
Accretion on preferred stock
|
|
|
(14
|
)
|
|
|
(14
|
)
|
Net income (loss) attributable to common shareholders
|
|
$
|
(553
|
)
|
|
$
|
(2,334
|
)
|
|
|
|
|
|
|
|
|
|
Shares applicable to basic income per common share
|
|
|
4,761,262
|
|
|
|
4,736,287
|
|
Basic income (loss) per common share
|
|
$
|
(0.12
|
)
|
|
$
|
(0.49
|
)
|
|
|
|
|
|
|
|
|
|
Shares applicable to diluted income per common share
|
|
|
4,761,262
|
|
|
|
4,736,287
|
|
Diluted income (loss) per common share
|
|
$
|
(0.12
|
)
|
|
$
|
(0.49
|
)
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per common share
|
|
$
|
-
|
|
|
$
|
-
|
|
See notes to the unaudited consolidated financial
statements.
FIRST FINANCIAL SERVICE CORPORATION
Consolidated Statements of
Comprehensive Income/(Loss)
(Unaudited)
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
(Dollars in thousands)
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Net Income/(Loss)
|
|
$
|
(289
|
)
|
|
$
|
(2,070
|
)
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Change in unrealized gain (loss) on securities available-for-sale
|
|
|
(245
|
)
|
|
|
1,207
|
|
Change in unrealized gain (loss) on securities available-for-sale for which a portion of other-than-temporary impairment has been recognized into earnings
|
|
|
(6
|
)
|
|
|
393
|
|
Reclassification of realized amount on securities available-for-sale losses (gains)
|
|
|
150
|
|
|
|
(44
|
)
|
Reclassification of unrealized loss on held-to-maturity security recognized in income
|
|
|
26
|
|
|
|
12
|
|
Accretion (amortization) of non-credit component of other-than-temporary impairment on held-to-maturity securities
|
|
|
-
|
|
|
|
(1
|
)
|
Net unrealized gain (loss) recognized in comprehensive income
|
|
|
(75
|
)
|
|
|
1,567
|
|
Tax effect
|
|
|
-
|
|
|
|
(533
|
)
|
Total other comphrehensive income/(loss)
|
|
|
(75
|
)
|
|
|
1,034
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income/(Loss)
|
|
$
|
(364
|
)
|
|
$
|
(1,036
|
)
|
The following is a summary of the accumulated other comprehensive
income balances, net of tax:
|
|
Balance
|
|
|
Current
|
|
|
Balance
|
|
|
|
at
|
|
|
Period
|
|
|
at
|
|
|
|
12/31/2011
|
|
|
Change
|
|
|
3/31/2012
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) on securities available-for-sale
|
|
$
|
139
|
|
|
$
|
(88
|
)
|
|
$
|
51
|
|
Unrealized gains (losses) on available-for-sale securities for which OTTI has been recorded,
|
|
|
1,237
|
|
|
|
(4
|
)
|
|
|
1,233
|
|
Unrealized gains (losses) on held-to-maturity securities for which OTTI has been recorded, net of accretion
|
|
|
(50
|
)
|
|
|
17
|
|
|
|
(33
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,326
|
|
|
$
|
(75
|
)
|
|
$
|
1,251
|
|
See notes to the unaudited consolidated financial
statements.
FIRST FINANCIAL SERVICE CORPORATION
Consolidated Statements of
Changes in Stockholders' Equity
Three Months Ended March 31,
2012
(Dollars In Thousands, Except
Per Share Amounts)
(Unaudited)
|
|
Shares
|
|
|
Amount
|
|
|
Additional Paid-
in
|
|
|
Retained Earnings/
(Accumulated
|
|
|
Accumulated Other
Comprehensive Income, Net of
|
|
|
|
|
|
|
Preferred
|
|
|
Common
|
|
|
Preferred
|
|
|
Common
|
|
|
Capital
|
|
|
Deficit)
|
|
|
Tax
|
|
|
Total
|
|
Balance, January 1, 2012
|
|
|
20,000
|
|
|
|
4,749
|
|
|
$
|
19,889
|
|
|
$
|
4,749
|
|
|
$
|
35,450
|
|
|
$
|
(7,951
|
)
|
|
$
|
1,326
|
|
|
$
|
53,463
|
|
Net income/(loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(289
|
)
|
|
|
|
|
|
|
(289
|
)
|
Shares
issued under dividend reinvestment program
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
Stock
issued for employee benefit plans
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
15
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
23
|
|
Stock-based
compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
43
|
|
Net
change in unrealized gains (losses) on securities available-for-sale,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(88
|
)
|
|
|
(88
|
)
|
Change
in unrealized gains (losses) on held-to-maturity securities for which an other-than-temporary impairment charge has been recorded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
|
|
|
|
17
|
|
Change
in unrealized gains (losses) on securities available-for-sale for which a portion of an other-than-temporary impairment charge
has been recognized into earnings, net of reclassification
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
(4
|
)
|
Dividends on preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(250
|
)
|
|
|
|
|
|
|
(250
|
)
|
Accretion of preferred stock
discount
|
|
|
-
|
|
|
|
-
|
|
|
|
14
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(14
|
)
|
|
|
-
|
|
|
|
-
|
|
Balance, March 31, 2012
|
|
|
20,000
|
|
|
|
4,765
|
|
|
$
|
19,903
|
|
|
$
|
4,765
|
|
|
$
|
35,502
|
|
|
$
|
(8,504
|
)
|
|
$
|
1,251
|
|
|
$
|
52,917
|
|
See notes to the unaudited consolidated financial
statements.
FIRST FINANCIAL SERVICE CORPORATION
Consolidated Statements of
Cash Flows
(Dollars In Thousands)
(Unaudited)
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2012
|
|
|
2011
|
|
Operating Activities:
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
$
|
(289
|
)
|
|
$
|
(2,070
|
)
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
1,012
|
|
|
|
3,465
|
|
Depreciation on premises and equipment
|
|
|
386
|
|
|
|
449
|
|
Core deposit intangible amortization
|
|
|
64
|
|
|
|
77
|
|
Loss on low-income housing investments
|
|
|
91
|
|
|
|
-
|
|
Net amortization (accretion) available-for-sale
|
|
|
(1,731
|
)
|
|
|
439
|
|
Impairment loss on securities available-for-sale
|
|
|
-
|
|
|
|
25
|
|
Impairment loss on securities held-to-maturity
|
|
|
26
|
|
|
|
12
|
|
Gain on sale of investments available-for-sale
|
|
|
-
|
|
|
|
(69
|
)
|
Loss on sale of investments available-for-sale
|
|
|
150
|
|
|
|
-
|
|
Gain on sale of mortgage loans
|
|
|
(312
|
)
|
|
|
(265
|
)
|
Gain on sale of real estate acquired through foreclosure
|
|
|
(403
|
)
|
|
|
(25
|
)
|
Gain on sale of real estate held for development
|
|
|
(175
|
)
|
|
|
-
|
|
Write-downs on real estate acquired through foreclosure
|
|
|
1,565
|
|
|
|
202
|
|
Origination of loans held for sale
|
|
|
(9,086
|
)
|
|
|
(14,572
|
)
|
Proceeds on sale of loans held for sale
|
|
|
18,117
|
|
|
|
17,170
|
|
Stock-based compensation expense
|
|
|
43
|
|
|
|
48
|
|
Prepaid FDIC premium
|
|
|
393
|
|
|
|
933
|
|
Changes in:
|
|
|
|
|
|
|
|
|
Cash surrender value of life insurance
|
|
|
(89
|
)
|
|
|
(85
|
)
|
Interest receivable
|
|
|
331
|
|
|
|
(1,323
|
)
|
Other assets
|
|
|
1,333
|
|
|
|
(259
|
)
|
Interest payable
|
|
|
345
|
|
|
|
241
|
|
Accounts payable and other liabilities
|
|
|
89
|
|
|
|
(482
|
)
|
Net cash from operating activities
|
|
|
11,860
|
|
|
|
3,911
|
|
|
|
|
|
|
|
|
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
Sales of securities available-for-sale
|
|
|
27,854
|
|
|
|
16,271
|
|
Purchases of securities available-for-sale
|
|
|
(95,300
|
)
|
|
|
(70,000
|
)
|
Maturities of securities available-for-sale
|
|
|
26,910
|
|
|
|
7,524
|
|
Maturities of securities held-to-maturity
|
|
|
-
|
|
|
|
3
|
|
Net change in loans
|
|
|
31,710
|
|
|
|
22,096
|
|
Sale of portfolio loans
|
|
|
6,381
|
|
|
|
-
|
|
Investment in low-income housing projects
|
|
|
(24
|
)
|
|
|
(3,367
|
)
|
Net purchases of premises and equipment
|
|
|
(50
|
)
|
|
|
(234
|
)
|
Sales of real estate acquired through foreclosure
|
|
|
3,402
|
|
|
|
646
|
|
Sales of real estate held for development
|
|
|
220
|
|
|
|
-
|
|
Net cash from investing activities
|
|
|
1,103
|
|
|
|
(27,061
|
)
|
|
|
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
Net change in deposits
|
|
|
(23,329
|
)
|
|
|
(7,120
|
)
|
Maturity of Federal Home Loan Bank advance
|
|
|
-
|
|
|
|
(25,000
|
)
|
Repayments to Federal Home Loan Bank
|
|
|
(35
|
)
|
|
|
(32
|
)
|
Issuance of common stock under dividend reinvestment program
|
|
|
2
|
|
|
|
2
|
|
Issuance of common stock for employee benefit plans
|
|
|
23
|
|
|
|
53
|
|
Net cash from financing activities
|
|
|
(23,339
|
)
|
|
|
(32,097
|
)
|
|
|
|
|
|
|
|
|
|
(Decrease) Increase in cash and cash equivalents
|
|
|
(10,376
|
)
|
|
|
(55,247
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
92,236
|
|
|
|
166,176
|
|
Cash and cash equivalents, end of period
|
|
$
|
81,860
|
|
|
$
|
110,929
|
|
|
|
|
|
|
|
|
|
|
Supplemental noncash disclosures:
|
|
|
|
|
|
|
|
|
Transfers from loans to real estate acquired through foreclosure and repossessed assets
|
|
$
|
6,022
|
|
|
$
|
1,967
|
|
Loans to facilitate sales of real estate owned and repossessed assets
|
|
$
|
51
|
|
|
$
|
2,018
|
|
Dividends accrued not paid on preferred stock
|
|
$
|
250
|
|
|
$
|
250
|
|
See notes to the unaudited consolidated financial
statements.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
1.
|
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis of Presentation
– The accompanying unaudited consolidated financial statements include the accounts of First Financial Service Corporation
and its wholly owned subsidiary, First Federal Savings Bank. First Federal Savings Bank has three wholly owned subsidiaries, First
Service Corporation of Elizabethtown, Heritage Properties, LLC and First Federal Office Park, LLC. Unless the text clearly suggests
otherwise, references to "us," "we," or "our" include First Financial Service Corporation and its
direct and indirect wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.
The accompanying unaudited consolidated
financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the quarter ending March 31, 2012 are not necessarily indicative of the results that may occur
for the year ending December 31, 2012. For further information, refer to the consolidated financial statements and footnotes thereto
included in the Corporation’s annual report on Form 10-K for the period ended December 31, 2011.
Adoption of New Accounting
Standards –
In May 2011, the FASB issued ASU No. 2011-04,
Amendments to Achieve Common Fair Value Measurement and
Disclosure Requirements in U.S. GAAP and IFRSs.
The amendments in this ASU generally represent clarifications of Topic 820,
but also include some instances where a particular principle or requirement for measuring fair value or disclosing information
about fair value measurements has changed. This ASU results in common principles and requirements for measuring fair value and
for disclosing information about fair value measurements in accordance with U.S. GAAP and IFRSs. The amendments in this ASU are
to be applied prospectively and are effective for interim and annual periods beginning after December 31, 2011. The effect of adopting
this new standard did not have a material impact on our consolidated financial position or results of operations.
In June 2011, the FASB issued
ASU 2011-05,
Presentation of Comprehensive Income
, which amends existing guidance by allowing only two options for presenting
the components of net income and other comprehensive income: (1) in a single continuous financial statement, statement of
comprehensive income or (2) in two separate but consecutive financial statements, consisting of an income statement followed
by a separate statement of other comprehensive income. There is currently a proposal to defer the requirement to disclose items
that are reclassified from other comprehensive income to net income on the face of the financial statements. ASU No. 2011-05
requires retrospective application of the other requirements, and it is effective for fiscal years, and interim periods within
those years, beginning after December 15, 2011, with early adoption permitted. The adoption of this amendment had no impact
on the consolidated financial statements as the prior presentation of comprehensive income was in compliance with this amendment.
Reclassifications
–
Some items in the prior year financial statements were reclassified to conform to the current presentation. Reclassifications
had no effect on prior year operations or shareholder’s equity.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
In its 2012 Consent Order with
the FDIC and KDFI, the Bank agreed to achieve and maintain a Tier 1 capital ratio of 9.0% and a total risk-based capital ratio
of 12.0% by June 30, 2012. At March 31, 2012, we were not in compliance with the Tier 1 and total risk-based capital requirements.
We notified the bank regulatory agencies that the increased capital levels would not be achieved and anticipate that the FDIC and
KDFI will reevaluate our progress toward achieving the higher capital ratios at June 30, 2012.
The 2012 Consent
Order requires that if the Bank should be unable to reach the required capital levels by June 30, 2012 and if the Bank is in
receipt of written directions by the FDIC and KDFI, then the Bank would within 30 days develop, adopt and
implement a written plan to sell or merge itself into another federally insured financial institution. The 2012 Consent Order
requires the Bank to continue to adhere to the plans implemented in response to the 2011 Consent Order, and includes the
substantive provisions of the 2011 Consent Order. A copy of the March 9, 2012 Consent Order is included as Exhibit 10.8 to
our 2011 Annual Report on Form 10-K filed March 30, 2012.
The Bank’s Consent Order
with the FDIC and KDFI requires us to obtain the consent of the Regional Director of the FDIC and the Commissioner of the KDFI
to declare and pay cash dividends to the Corporation. We are also no longer allowed to accept, renew or rollover brokered deposits
(including deposits through the CDARs program) without prior regulatory approval.
On April 20, 2011, the Corporation
entered into a formal agreement with the Federal Reserve Bank of St. Louis, which requires the Corporation to obtain regulatory
approval before declaring any dividends. We also may not redeem shares or obtain additional borrowings without prior approval.
Bank regulatory agencies can
exercise discretion when an institution does not meet the terms of a consent order. The agencies may initiate changes in management,
issue mandatory directives, impose monetary penalties or refrain from formal sanctions, depending on individual circumstances.
Any action taken by bank regulatory agencies could damage our reputation and have a material adverse effect on our business.
In order to meet these
capital requirements, we engaged an investment banking firm with expertise in the financial services sector to assist with a
review of strategic opportunities available to us. We continue reducing our costs where possible while taking into
consideration the resources necessary to execute our strategies. We have suspended the annual employee stock ownership
contribution, frozen executive management compensation the past three years and into 2012, frozen officer compensation for
the past year and into 2012, eliminated board of director fees, reduced marketing expenses, reduced community donation
expense, reduced compensation expense through reductions in associates, and implemented various other cost savings
initiatives. Expense reductions for 2011 were $1.1 million. Additional cost reductions for 2012 are projected to be in excess
of $1.3 million. We are also evaluating remaining terms on existing contracts and identifying expenses we cannot reduce
currently, but expect to be able to reduce in 2012 and 2013, such as examination fees and loan workout and other real estate
owned expenses. These efforts will remain ongoing.
As part of our ongoing capital
initiatives, on February 9, 2012, we signed a definitive agreement to sell our four Indiana banking centers to First Savings Bank,
F.S.B., the banking subsidiary of First Savings Financial Group, Inc. The purchase price will represent a 3.65% percent premium
based on the actual level of consumer and commercial deposits at closing, which totaled $101.8 million at March 31, 2012. Under
the agreement, First Savings Financial Group, Inc. will also acquire government, corporate, other financial institution deposits
and municipal deposits, which were $17.0 million at March 31, 2012, at book value. A total of $33.7 million of performing loans
will be purchased at a discount of 0.80% based on the actual level of loans at closing. The consummated transaction would result
in a one-time gain of approximately $3.4 million based on information at March 31, 2012. We believe the transaction places us in
a better position to meet the conditions of the regulatory consent order in a manner that is beneficial to our stockholders. This
transaction is projected to increase our Tier I capital ratio from 5.99% to 6.87% and increase our total risk-based capital ratio
from 10.70% to 11.84% based on information at March 31, 2012, and is expected to close early in the third quarter of 2012.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
2.
|
REGULATORY MATTERS – (Continued)
|
On February 10, 2012, we announced
the following changes to our management and the board of directors.
|
·
|
Senator Walter Dee Huddleston stepped down as Chairman
of the Board while continuing to serve as a director.
|
|
·
|
J. Stephen Mouser, President of Mouser Custom Cabinetry,
LLC, and a director since 1997, was appointed as the Board’s new Chairman.
|
|
·
|
B. Keith Johnson, Chief Executive Officer of the Corporation
and the Bank since 1997, stepped down from those positions. Mr. Johnson assumed the position of the Board’s Vice Chairman,
while continuing to work at the Bank in an advisory role.
|
|
·
|
Gregory S. Schreacke, President of the Corporation
and the Bank since 2008, assumed principal management responsibility for the Corporation and the Bank. Mr. Schreacke is also expected
to join the boards of directors of both the Corporation and the Bank.
|
|
·
|
Dann Small was appointed as Chief Lending Officer of
the Bank and will direct the Bank’s lending program and supervise all phases of the lending operation. Mr. Small has over
30 years of experience in finance, lending, credit underwriting, executive management and turnaround experience with troubled
institutions.
|
|
·
|
Robert L. Critchfield was appointed as Chief Credit
Officer of the Bank, with responsibility for the overall management of its loan, credit and risk policies. Mr. Critchfield has
over forty years of experience in the banking industry, including seventeen years as President and CEO of two commercial banks.
|
|
·
|
On May 10, 2012, Frank Perez was appointed as Chief Financial Officer of the Corporation and
the Bank with responsibility for the overall financial functions. Mr. Perez has over fifteen years of experience in the
banking industry as well as experience with publicly traded institutions, capital markets
, and
working with a troubled institution.
|
The Corporation’s and the
Bank’s executive management team has been fully retained with the addition of these executive officers and the new management
structure.
Our plans for 2012
include the following:
|
·
|
Continuing to research and evaluate all available strategic
options to meet and maintain the required capital levels for the Bank. Strategic alternatives include divesting of branch offices
and selling loans in an effort to reduce our asset size and meet the required capital levels. During the first quarter of 2012
we sold of a pool of commercial real estate loans at par, totaling $6.4 million, to First Capital Bank of Kentucky.
|
|
·
|
Continuing to serve our community banking customers
and operate the Corporation and the Bank in a safe and sound manner. We have worked diligently to maintain the strength of our
retail and deposit franchise. The strength of this franchise contributes to earnings to help withstand our credit quality issues.
In addition, the inherent value of the retail franchise will provide value to the Bank to accomplish the various capital initiatives.
|
|
·
|
Continuing to reduce our lending concentration in commercial
real estate by obtaining pay downs and payoffs. In addition to allowing loans in these concentrations to roll off, we have started
initiatives to diversify the Bank’s lending portfolio and change our lending culture. The mortgage and consumer lending
operations have maintained strong credit quality metrics through the economic downturn. These areas are being restructured to
allow for additional fee income, asset generation and an emphasis on retail lending going forward. We will also emphasize small
business lending and will seek resources to add expertise in this area. Our efforts will focus on back to basic community banking
and servicing the entire relationship of the customer. These loans will be used to diversify the loan portfolio of the Bank as
well as provide for profitability as the Bank works through our credit quality issues.
|
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
2.
|
REGULATORY MATTERS – (Continued)
|
|
·
|
Continuing to substantially increase the resources
dedicated to special asset disposition both on a permanent and temporary basis. This will enable more of our problem assets to
be transferred to the workout specialist and allow the commercial lenders more time to begin calling on customers. In addition,
several new commercial lenders are being recruited to enhance the level of expertise of the lending staff. The new lenders will
have real estate lending experience in addition to commercial and industrial lending experience. We are also dedicating lending
associates to small business lending and Small Business Administration (“SBA”) underwriting to become a full SBA lender.
The full SBA lending focus will also enhance fee income through the sale of SBA loans to the secondary market.
|
The disposition of problem assets, returning
to sustained profitability and developing an ongoing business plan is the primary focus for the next year. Progress in these efforts
is important in the effort to provide a return to existing shareholders and attract new equity investors.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The amortized cost basis and fair
values of securities are as follows:
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
(Dollars in thousands)
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
Securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and agencies
|
|
$
|
21,280
|
|
|
$
|
-
|
|
|
$
|
(144
|
)
|
|
$
|
21,136
|
|
Government-sponsored mortgage-backed residential
|
|
|
316,995
|
|
|
|
4,159
|
|
|
|
(528
|
)
|
|
|
320,626
|
|
State and municipal
|
|
|
12,600
|
|
|
|
1,163
|
|
|
|
-
|
|
|
|
13,763
|
|
Trust preferred securities
|
|
|
1,058
|
|
|
|
-
|
|
|
|
(790
|
)
|
|
|
268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
351,933
|
|
|
$
|
5,322
|
|
|
$
|
(1,462
|
)
|
|
$
|
355,793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and agencies
|
|
$
|
24,993
|
|
|
$
|
35
|
|
|
$
|
-
|
|
|
$
|
25,028
|
|
Government-sponsored mortgage-backed residential
|
|
|
261,506
|
|
|
|
3,389
|
|
|
|
(204
|
)
|
|
|
264,691
|
|
State and municipal
|
|
|
22,270
|
|
|
|
1,524
|
|
|
|
-
|
|
|
|
23,794
|
|
Trust preferred securities
|
|
|
1,048
|
|
|
|
-
|
|
|
|
(784
|
)
|
|
|
264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
309,817
|
|
|
$
|
4,948
|
|
|
$
|
(988
|
)
|
|
$
|
313,777
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrecognized
|
|
|
Unrecognized
|
|
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
Securities held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust preferred securities
|
|
$
|
24
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
24
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust preferred securities
|
|
$
|
24
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
24
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
24
|
|
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
3.
|
SECURITIES – (Continued)
|
The amortized cost and fair value
of securities at March 31, 2012, by contractual maturity, are shown below. Securities not due at a single maturity date, primarily
mortgage-backed securities, are shown separately.
|
|
Available for Sale
|
|
|
Held-to-Maturity
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Fair
|
|
|
Fair
|
|
(Dollars in thousands)
|
|
Cost
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due after ten years
|
|
$
|
34,938
|
|
|
$
|
35,167
|
|
|
$
|
24
|
|
|
$
|
24
|
|
Government-sponsored mortgage-backed residential
|
|
|
316,995
|
|
|
|
320,626
|
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
351,933
|
|
|
$
|
355,793
|
|
|
$
|
24
|
|
|
$
|
24
|
|
The following schedule shows
the proceeds from sales of available-for-sale securities and the gross realized gains and losses on those sales:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Proceeds from sales
|
|
$
|
27,854
|
|
|
$
|
16,271
|
|
Gross realized gains
|
|
|
-
|
|
|
|
69
|
|
Gross realized losses
|
|
|
150
|
|
|
|
-
|
|
Investment securities pledged
to secure public deposits and FHLB advances had an amortized cost of $120.6 million and fair value of $123.0 million at March 31,
2012 and a $119.1 million amortized cost and fair value of $121.1 million at December 31, 2011.
Securities with unrealized losses
at March 31, 2012 and December 31, 2011 aggregated by major security type and length of time in a continuous unrealized loss position
are as follows:
March 31, 2012
|
|
Less than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
Description of Securities
|
|
Value
|
|
|
Loss
|
|
|
Value
|
|
|
Loss
|
|
|
Value
|
|
|
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and agencies
|
|
$
|
21,136
|
|
|
$
|
(144
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
21,136
|
|
|
$
|
(144
|
)
|
Government-sponsored mortgage-backed residential
|
|
|
62,686
|
|
|
|
(528
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
62,686
|
|
|
|
(528
|
)
|
Trust preferred securities
|
|
|
-
|
|
|
|
-
|
|
|
|
268
|
|
|
|
(790
|
)
|
|
|
268
|
|
|
|
(790
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired
|
|
$
|
83,822
|
|
|
$
|
(672
|
)
|
|
$
|
268
|
|
|
$
|
(790
|
)
|
|
$
|
84,090
|
|
|
$
|
(1,462
|
)
|
December 31, 2011
|
|
Less than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
Description of Securities
|
|
Value
|
|
|
Loss
|
|
|
Value
|
|
|
Loss
|
|
|
Value
|
|
|
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government-sponsored mortgage-backed residential
|
|
$
|
43,911
|
|
|
$
|
(204
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
43,911
|
|
|
$
|
(204
|
)
|
Trust preferred securities
|
|
|
-
|
|
|
|
-
|
|
|
|
264
|
|
|
|
(784
|
)
|
|
|
264
|
|
|
|
(784
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired
|
|
$
|
43,911
|
|
|
$
|
(204
|
)
|
|
$
|
264
|
|
|
$
|
(784
|
)
|
|
$
|
44,175
|
|
|
$
|
(988
|
)
|
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
3.
|
SECURITIES – (Continued)
|
We evaluate investment securities
with significant declines in fair value on a quarterly basis to determine whether they should be considered other-than-temporarily
impaired under current accounting guidance, which generally provides that if a security is in an unrealized loss position, whether
due to general market conditions or industry or issuer-specific factors, the holder of the securities must assess whether the impairment
is other-than-temporary.
Accounting guidance requires
entities to split other than temporary impairment charges between credit losses (i.e., the loss based on the entity’s estimate
of the decrease in cash flows, including those that result from expected voluntary prepayments), which are charged to earnings,
and the remainder of the impairment charge (non-credit component) to accumulated other comprehensive income. This requirement pertains
to both securities held to maturity and securities available for sale.
The unrealized losses on our
U. S. Treasury and agency securities and our government sponsored mortgage-backed residential securities were a result of changes
in interest rates for fixed-rate securities where the interest rate received is less than the current rate available for new offerings
of similar securities. Because the decline in market value is attributable to changes in interest rates and not credit quality,
and because we do not intend to sell and it is more likely than not that we will not be required to sell these investments until
recovery of fair value, which may be maturity, we do not consider these investments to be other-than-temporarily impaired at March
31, 2012.
As discussed in Note 9 - Fair
Value, the fair value of our portfolio of trust preferred securities, is significantly below the amortized cost. There
is limited trading in trust preferred securities and the majority of holders of such instruments have elected not to participate
in the market unless they are required to sell as a result of liquidation, bankruptcy, or other forced or distressed conditions.
To determine if the five trust
preferred securities were other than temporarily impaired as of March 31, 2012, we used a discounted cash flow analysis. The
cash flow models were used to determine if the current present value of the cash flows expected on each security were still equivalent
to the original cash flows projected on the security when purchased. The cash flow analysis takes into consideration
assumptions for prepayments, defaults and deferrals for the underlying pool of banks, insurance companies and REITs.
Management works with independent
third parties to identify its best estimate of the cash flow expected to be collected. If this estimate results in a present value
of expected cash flows that is less than the amortized cost basis of a security (that is, credit loss exists), an other than temporary
impairment is considered to have occurred. If there is no credit loss, any impairment is considered temporary. The cash flow analysis
we performed included the following general assumptions:
|
·
|
We assume default rates on individual entities behind the pools based on Fitch ratings for financial
institutions and A.M. Best ratings for insurance companies. These ratings are used to predict the default rates for the next several
quarters. Two of the trust preferred securities hold a limited number of real estate investment trusts (REITs) in their pools.
REITs are evaluated on an individual basis to predict future default rates.
|
|
·
|
We assume that annual defaults for the remaining life of each security will be between 37.5 and
100 basis points.
|
|
·
|
We assume a recovery rate of 40% on PreTSL IV and 15% on the remaining trust preferred securities
on deferrals after two years.
|
|
·
|
We assume 1% prepayments through the five year par call and then 1% per annum for the remaining
life of PreTSL IV to account for the potential prepayments of large banks under the new Dodd Frank legislation.
|
|
·
|
Our securities have been modeled using the above assumptions by FTN Financial using the forward
LIBOR curve plus original spread to discount projected cash flows to present values.
|
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
3.
|
SECURITIES – (Continued)
|
Additionally, in making our determination, we considered
all available market information that could be obtained without undue cost and effort, and considered the unique characteristics
of each trust preferred security individually by assessing the available market information and the various risks associated with
that security including:
|
·
|
Valuation estimates provided by our investment broker;
|
|
·
|
The amount of fair value decline;
|
|
·
|
How long the decline in fair value has existed;
|
|
·
|
Significant rating agency changes on the issuer;
|
|
·
|
Level of interest rates and any movement in pricing for credit and other risks;
|
|
·
|
Information about the performance of the underlying institutions that issued the debt instruments, such as net income, return
on equity, capital adequacy, non-performing assets, Texas ratios, etc;
|
|
·
|
Our intent to sell the security or whether it is more likely than not that we will be required to sell the security before
its anticipated recovery; and
|
|
·
|
Other relevant observable inputs.
|
The following table details the
five debt securities with other-than-temporary impairment at March 31, 2012 and the related credit losses recognized in earnings
during the quarter ended March 31, 2012:
|
|
|
|
Moody's
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Current
|
|
|
|
|
|
|
|
|
Credit
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
Deferrals
and
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
Ratings
|
|
Moody's
|
|
|
|
|
|
|
|
Estimated
|
|
|
Deferrals
|
|
|
Defaults
|
|
|
Year to
Date
|
|
|
|
|
|
When
|
|
Credit
|
|
Par
|
|
|
Amortized
|
|
|
Fair
|
|
|
and
|
|
|
to Current
|
|
|
OTTI
|
|
Security
|
|
Tranche
|
|
Purchased
|
|
Ratings
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Defaults
|
|
|
Collateral
|
|
|
Recognized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Term Securities IV
|
|
Mezzanine
|
|
A3
|
|
Ca
|
|
$
|
244
|
|
|
$
|
122
|
|
|
$
|
114
|
|
|
$
|
18,000
|
|
|
|
27
|
%
|
|
$
|
-
|
|
Preferred Term Securities VI
|
|
Mezzanine
|
|
A1
|
|
Ca
|
|
|
267
|
|
|
|
24
|
|
|
|
24
|
|
|
|
30,000
|
|
|
|
74
|
%
|
|
|
26
|
|
Preferred Term Securities XV B1
|
|
Mezzanine
|
|
A2
|
|
C
|
|
|
1,059
|
|
|
|
440
|
|
|
|
124
|
|
|
|
215,200
|
|
|
|
36
|
%
|
|
|
-
|
|
Preferred Term Securities XXI C2
|
|
Mezzanine
|
|
A3
|
|
C
|
|
|
1,152
|
|
|
|
410
|
|
|
|
30
|
|
|
|
209,890
|
|
|
|
29
|
%
|
|
|
-
|
|
Preferred Term Securities
XXII C1
|
|
Mezzanine
|
|
A3
|
|
Ca
|
|
|
524
|
|
|
|
86
|
|
|
|
-
|
|
|
|
395,500
|
|
|
|
30
|
%
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
$
|
3,246
|
|
|
$
|
1,082
|
|
|
$
|
292
|
|
|
|
|
|
|
|
|
|
|
$
|
26
|
|
The table below presents a roll-forward
of the credit losses recognized in earnings since the acquisition of the above trust preferred securities:
(Dollars in thousands)
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
2,078
|
|
|
$
|
1,910
|
|
Increases to the amount related to the credit loss for whichother-than-temporary impairment was previously recognized
|
|
|
26
|
|
|
|
37
|
|
Ending balance
|
|
$
|
2,104
|
|
|
$
|
1,947
|
|
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Loans are summarized as follows:
|
|
March 31,
|
|
|
December 31,
|
|
(Dollars in thousands)
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
27,769
|
|
|
$
|
30,135
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
Land Development
|
|
|
33,441
|
|
|
|
35,924
|
|
Building Lots
|
|
|
2,982
|
|
|
|
3,880
|
|
Other
|
|
|
386,508
|
|
|
|
418,981
|
|
Real estate construction
|
|
|
4,607
|
|
|
|
4,925
|
|
Residential mortgage
|
|
|
147,864
|
|
|
|
151,866
|
|
Consumer and home equity
|
|
|
66,812
|
|
|
|
69,971
|
|
Indirect consumer
|
|
|
20,895
|
|
|
|
21,892
|
|
|
|
|
690,878
|
|
|
|
737,574
|
|
Less:
|
|
|
|
|
|
|
|
|
Loans held for sale in probable branch divestiture and probable loan sale
|
|
|
(38,033
|
)
|
|
|
(46,112
|
)
|
Net deferred loan origination fees
|
|
|
(137
|
)
|
|
|
(209
|
)
|
Allowance for loan losses
|
|
|
(17,329
|
)
|
|
|
(17,181
|
)
|
|
|
|
(55,499
|
)
|
|
|
(63,502
|
)
|
|
|
|
|
|
|
|
|
|
Net Loans
|
|
$
|
635,379
|
|
|
$
|
674,072
|
|
The following tables present
the activity in the allowance for loan losses by portfolio segment for the three months ending March 31, 2012 and 2011:
March 31, 2012
|
|
|
|
|
Commercial
|
|
|
Real Estate
|
|
|
Residential
|
|
|
Consumer &
|
|
|
Indirect
|
|
|
|
|
|
|
Commercial
|
|
|
Real
Estate
|
|
|
Construction
|
|
|
Mortgage
|
|
|
Home
Equity
|
|
|
Consumer
|
|
|
Total
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance
|
|
$
|
1,422
|
|
|
$
|
13,727
|
|
|
$
|
103
|
|
|
$
|
922
|
|
|
$
|
610
|
|
|
$
|
397
|
|
|
$
|
17,181
|
|
Provision for loan losses
|
|
|
477
|
|
|
|
498
|
|
|
|
-
|
|
|
|
(18)
|
|
|
|
75
|
(20)
|
|
|
|
|
|
|
1,012
|
|
Allowance
associated with probable branch divestiture and probable loan sale
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8
|
|
|
|
5
|
|
|
|
-
|
|
|
|
13
|
|
Charge-offs
|
|
|
(187
|
)
|
|
|
(613
|
)
|
|
|
-
|
|
|
|
(31
|
)
|
|
|
(74
|
)
|
|
|
(44
|
)
|
|
|
(949
|
)
|
Recoveries
|
|
|
11
|
|
|
|
16
|
|
|
|
-
|
|
|
|
1
|
|
|
|
27
|
|
|
|
17
|
|
|
|
72
|
|
Total ending allowance balance
|
|
$
|
1,723
|
|
|
$
|
13,628
|
|
|
$
|
103
|
|
|
$
|
882
|
|
|
$
|
643
|
|
|
$
|
350
|
|
|
$
|
17,329
|
|
March 31, 2011
|
|
|
|
|
Commercial
|
|
|
Real Estate
|
|
|
Residential
|
|
|
Consumer &
|
|
|
Indirect
|
|
|
|
|
|
|
Commercial
|
|
|
Real
Estate
|
|
|
Construction
|
|
|
Mortgage
|
|
|
Home
Equity
|
|
|
Consumer
|
|
|
Total
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
Balance
|
|
$
|
1,657
|
|
|
$
|
18,595
|
|
|
$
|
158
|
|
|
$
|
751
|
|
|
$
|
708
|
|
|
$
|
796
|
|
|
$
|
22,665
|
|
Provision for loan losses
|
|
|
22
|
|
|
|
3,351
|
|
|
|
-
|
|
|
|
43
|
|
|
|
84
|
|
|
|
(35
|
)
|
|
|
3,465
|
|
Charge-offs
|
|
|
(42
|
)
|
|
|
(1,616
|
)
|
|
|
(54
|
)
|
|
|
(19
|
)
|
|
|
(98
|
)
|
|
|
(31
|
)
|
|
|
(1,860
|
)
|
Recoveries
|
|
|
42
|
|
|
|
206
|
|
|
|
-
|
|
|
|
1
|
|
|
|
48
|
|
|
|
24
|
|
|
|
321
|
|
Total ending allowance balance
|
|
$
|
1,679
|
|
|
$
|
20,536
|
|
|
$
|
104
|
|
|
$
|
776
|
|
|
$
|
742
|
|
|
$
|
754
|
|
|
$
|
24,591
|
|
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
We did not implement any changes to our allowance
related accounting policies or methodology during the current period.
The following table presents
the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment
method as of March 31, 2012 and December 31, 2011:
March 31, 2012
|
|
|
|
|
Commercial
|
|
|
Real Estate
|
|
|
Residential
|
|
|
Consumer &
|
|
|
Indirect
|
|
|
|
|
|
|
Commercial
|
|
|
Real
Estate
|
|
|
Construction
|
|
|
Mortgage
|
|
|
Home
Equity
|
|
|
Consumer
|
|
|
Total
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending allowance balance attributable to loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
359
|
|
|
$
|
3,708
|
|
|
|
-
|
|
|
$
|
453
|
|
|
$
|
183
|
|
|
$
|
10
|
|
|
$
|
4,713
|
|
Collectively evaluated for impairment
|
|
|
1,364
|
|
|
|
9,919
|
|
|
|
104
|
|
|
|
429
|
|
|
|
460
|
|
|
|
340
|
|
|
|
12,616
|
|
Loans held for sale
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ending allowance balance
|
|
$
|
1,723
|
|
|
$
|
13,627
|
|
|
|
104
|
|
|
$
|
882
|
|
|
$
|
643
|
|
|
$
|
350
|
|
|
$
|
17,329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated for impairment
|
|
$
|
1,444
|
|
|
$
|
52,447
|
|
|
$
|
-
|
|
|
$
|
1,872
|
|
|
$
|
361
|
|
|
$
|
53
|
|
|
$
|
56,177
|
|
Loans collectively evaluated for impairment
|
|
|
26,325
|
|
|
|
370,484
|
|
|
|
4,607
|
|
|
|
145,992
|
|
|
|
66,451
|
|
|
|
20,842
|
|
|
|
634,701
|
|
Loans held for sale
|
|
|
(14
|
)
|
|
|
(4,932
|
)
|
|
|
-
|
|
|
|
(28,571
|
)
|
|
|
(4,516
|
)
|
|
|
-
|
|
|
|
(38,033
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ending loans balance
|
|
$
|
27,755
|
|
|
$
|
417,999
|
|
|
$
|
4,607
|
|
|
$
|
119,293
|
|
|
$
|
62,296
|
|
|
$
|
20,895
|
|
|
$
|
652,845
|
|
December 31, 2011
|
|
|
|
|
Commercial
|
|
|
Real Estate
|
|
|
Residential
|
|
|
Consumer &
|
|
|
Indirect
|
|
|
|
|
|
|
Commercial
|
|
|
Real
Estate
|
|
|
Construction
|
|
|
Mortgage
|
|
|
Home
Equity
|
|
|
Consumer
|
|
|
Total
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending allowance balance attributable to loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
410
|
|
|
$
|
3,403
|
|
|
|
-
|
|
|
$
|
481
|
|
|
$
|
109
|
|
|
$
|
39
|
|
|
$
|
4,442
|
|
Collectively evaluated for impairment
|
|
|
1,012
|
|
|
|
10,324
|
|
|
|
103
|
|
|
|
441
|
|
|
|
501
|
|
|
|
358
|
|
|
|
12,739
|
|
Loans held for sale
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ending allowance balance
|
|
$
|
1,422
|
|
|
$
|
13,727
|
|
|
|
103
|
|
|
$
|
922
|
|
|
$
|
610
|
|
|
$
|
397
|
|
|
$
|
17,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated for impairment
|
|
$
|
3,230
|
|
|
$
|
61,345
|
|
|
$
|
-
|
|
|
$
|
1,681
|
|
|
$
|
193
|
|
|
$
|
123
|
|
|
$
|
66,572
|
|
Loans collectively evaluated for impairment
|
|
|
26,905
|
|
|
|
397,440
|
|
|
|
4,925
|
|
|
|
150,185
|
|
|
|
69,778
|
|
|
|
21,769
|
|
|
|
671,002
|
|
Loans held for sale
|
|
|
(18
|
)
|
|
|
(11,411
|
)
|
|
|
-
|
|
|
|
(29,520
|
)
|
|
|
(5,163
|
)
|
|
|
-
|
|
|
|
(46,112
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ending loans balance
|
|
$
|
30,117
|
|
|
$
|
447,374
|
|
|
$
|
4,925
|
|
|
$
|
122,346
|
|
|
$
|
64,808
|
|
|
$
|
21,892
|
|
|
$
|
691,462
|
|
March 31, 2011
|
|
|
|
|
Commercial
|
|
|
Real Estate
|
|
|
Residential
|
|
|
Consumer &
|
|
|
Indirect
|
|
|
|
|
|
|
Commercial
|
|
|
Real Estate
|
|
|
Construction
|
|
|
Mortgage
|
|
|
Home equity
|
|
|
Consumer
|
|
|
Total
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending allowance balance attributable to loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
827
|
|
|
$
|
14,020
|
|
|
|
-
|
|
|
$
|
385
|
|
|
$
|
191
|
|
|
$
|
37
|
|
|
$
|
15,460
|
|
Collectively evaluated for impairment
|
|
|
852
|
|
|
|
6,516
|
|
|
|
104
|
|
|
|
391
|
|
|
|
551
|
|
|
|
717
|
|
|
|
9,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ending allowance balance
|
|
$
|
1,679
|
|
|
$
|
20,536
|
|
|
|
104
|
|
|
$
|
776
|
|
|
$
|
742
|
|
|
$
|
754
|
|
|
$
|
24,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated for impairment
|
|
$
|
1,927
|
|
|
$
|
97,370
|
|
|
$
|
290
|
|
|
$
|
1,871
|
|
|
$
|
298
|
|
|
$
|
137
|
|
|
$
|
101,893
|
|
Loans collectively evaluated for impairment
|
|
|
33,642
|
|
|
|
454,331
|
|
|
|
7,674
|
|
|
|
158,739
|
|
|
|
75,193
|
|
|
|
27,297
|
|
|
|
756,876
|
|
Loans acquired with deteriorated credit quality
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ending loans balance
|
|
$
|
35,569
|
|
|
$
|
551,701
|
|
|
$
|
7,964
|
|
|
$
|
160,610
|
|
|
$
|
75,491
|
|
|
$
|
27,434
|
|
|
$
|
858,769
|
|
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following table presents
loans individually evaluated for impairment by class of loans as of March 31, 2012 and 2011 and December 31, 2011. The difference
between the unpaid principal balance and recorded investment represents partial write downs/charge offs taken on individual impaired
credits. The recorded investment and average recorded investment in loans excludes accrued interest receivable and loan origination
fees.
March 31, 2012
|
|
Unpaid
|
|
|
|
|
|
Allowance
for
|
|
|
Average
|
|
|
Interest
|
|
|
Cash Basis
|
|
|
|
Principal
|
|
|
Recorded
|
|
|
Loan Losses
|
|
|
Recorded
|
|
|
Income
|
|
|
Interest
|
|
(Dollars in thousands)
|
|
Balance
|
|
|
Investment
|
|
|
Allocated
|
|
|
Investment
|
|
|
Recognized
|
|
|
Recognized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
1,016
|
|
|
$
|
896
|
|
|
$
|
-
|
|
|
$
|
1,525
|
|
|
$
|
67
|
|
|
$
|
67
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land Development
|
|
|
10,175
|
|
|
|
4,580
|
|
|
|
-
|
|
|
|
5,852
|
|
|
|
201
|
|
|
|
201
|
|
Building Lots
|
|
|
849
|
|
|
|
818
|
|
|
|
-
|
|
|
|
1,062
|
|
|
|
12
|
|
|
|
12
|
|
Other
|
|
|
35,478
|
|
|
|
31,781
|
|
|
|
-
|
|
|
|
32,059
|
|
|
|
1,198
|
|
|
|
1,198
|
|
Real Estate Construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Residential Mortgage
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Consumer and Home Equity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Indirect Consumer
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
550
|
|
|
|
548
|
|
|
|
359
|
|
|
|
812
|
|
|
|
35
|
|
|
|
35
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land Development
|
|
|
3,866
|
|
|
|
3,866
|
|
|
|
394
|
|
|
|
3,409
|
|
|
|
117
|
|
|
|
117
|
|
Building Lots
|
|
|
476
|
|
|
|
476
|
|
|
|
265
|
|
|
|
477
|
|
|
|
5
|
|
|
|
5
|
|
Other
|
|
|
11,294
|
|
|
|
10,926
|
|
|
|
3,049
|
|
|
|
14,038
|
|
|
|
525
|
|
|
|
525
|
|
Real Estate Construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Residential Mortgage
|
|
|
1,993
|
|
|
|
1,872
|
|
|
|
453
|
|
|
|
1,777
|
|
|
|
60
|
|
|
|
60
|
|
Consumer and Home Equity
|
|
|
383
|
|
|
|
361
|
|
|
|
183
|
|
|
|
277
|
|
|
|
6
|
|
|
|
6
|
|
Indirect
Consumer
|
|
|
53
|
|
|
|
53
|
|
|
|
10
|
|
|
|
88
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
66,133
|
|
|
$
|
56,177
|
|
|
$
|
4,713
|
|
|
$
|
61,376
|
|
|
$
|
2,227
|
|
|
$
|
2,227
|
|
December 31, 2011
|
|
Unpaid
|
|
|
|
|
|
Allowance
for
|
|
|
|
Principal
|
|
|
Recorded
|
|
|
Loan Losses
|
|
(Dollars in thousands)
|
|
Balance
|
|
|
Investment
|
|
|
Allocated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
2,154
|
|
|
$
|
2,154
|
|
|
$
|
-
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Land Development
|
|
|
12,719
|
|
|
|
7,124
|
|
|
|
-
|
|
Building Lots
|
|
|
3,662
|
|
|
|
1,305
|
|
|
|
-
|
|
Other
|
|
|
36,475
|
|
|
|
32,337
|
|
|
|
-
|
|
Real Estate Construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Residential Mortgage
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Consumer and Home Equity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Indirect Consumer
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
1,076
|
|
|
|
1,076
|
|
|
|
410
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Land Development
|
|
|
2,952
|
|
|
|
2,952
|
|
|
|
442
|
|
Building Lots
|
|
|
477
|
|
|
|
477
|
|
|
|
265
|
|
Other
|
|
|
17,518
|
|
|
|
17,150
|
|
|
|
2,696
|
|
Real Estate Construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Residential Mortgage
|
|
|
1,802
|
|
|
|
1,681
|
|
|
|
481
|
|
Consumer and Home Equity
|
|
|
193
|
|
|
|
193
|
|
|
|
109
|
|
Indirect
Consumer
|
|
|
123
|
|
|
|
123
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
79,151
|
|
|
$
|
66,572
|
|
|
$
|
4,442
|
|
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
|
|
Unpaid
|
|
|
|
|
|
Allowance for
|
|
|
Average
|
|
|
Interest
|
|
|
Cash Basis
|
|
|
|
Principal
|
|
|
Recorded
|
|
|
Loan Losses
|
|
|
Recorded
|
|
|
Income
|
|
|
Interest
|
|
(Dollars in thousands)
|
|
Balance
|
|
|
Investment
|
|
|
Allocated
|
|
|
Investment
|
|
|
Recognized
|
|
|
Recognized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
263
|
|
|
$
|
262
|
|
|
$
|
-
|
|
|
$
|
288
|
|
|
$
|
11
|
|
|
$
|
11
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land Development
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Building Lots
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
|
44,145
|
|
|
|
42,845
|
|
|
|
-
|
|
|
|
38,239
|
|
|
|
1,467
|
|
|
|
1,467
|
|
Real Estate Construction
|
|
|
290
|
|
|
|
290
|
|
|
|
-
|
|
|
|
238
|
|
|
|
7
|
|
|
|
7
|
|
Residential Mortgage
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Consumer and Home Equity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Indirect Consumer
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
1,664
|
|
|
|
1,664
|
|
|
|
827
|
|
|
|
1,611
|
|
|
|
64
|
|
|
|
64
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land Development
|
|
|
23,169
|
|
|
|
23,169
|
|
|
|
7,047
|
|
|
|
23,032
|
|
|
|
411
|
|
|
|
411
|
|
Building Lots
|
|
|
3,430
|
|
|
|
3,430
|
|
|
|
37
|
|
|
|
3,430
|
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
|
26,626
|
|
|
|
26,626
|
|
|
|
6,936
|
|
|
|
27,110
|
|
|
|
1,040
|
|
|
|
1,040
|
|
Real Estate Construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
541
|
|
|
|
37
|
|
|
|
37
|
|
Residential Mortgage
|
|
|
1,871
|
|
|
|
1,871
|
|
|
|
385
|
|
|
|
1,740
|
|
|
|
2
|
|
|
|
2
|
|
Consumer and Home Equity
|
|
|
298
|
|
|
|
298
|
|
|
|
191
|
|
|
|
318
|
|
|
|
-
|
|
|
|
-
|
|
Indirect Consumer
|
|
|
137
|
|
|
|
137
|
|
|
|
37
|
|
|
|
114
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
101,893
|
|
|
$
|
100,592
|
|
|
$
|
15,460
|
|
|
$
|
96,661
|
|
|
$
|
3,039
|
|
|
$
|
3,039
|
|
The following table presents the recorded investment
in restructured, nonaccrual and loans past due over 90 days still on accrual by class of loans as of March 31, 2012 and December
31, 2011.
|
|
Loans Past Due
|
|
|
|
|
March 31, 2012
|
|
|
|
|
|
|
|
Over 90 Days
|
|
|
Non-accrual
|
|
|
|
Restructured on
|
|
|
Restructured on
|
|
|
Still
|
|
|
excluding
|
|
(Dollars in thousands)
|
|
Non-Accrual
Status
|
|
|
Accrual
Status
|
|
|
Accruing
|
|
|
Restructured
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
-
|
|
|
$
|
187
|
|
|
|
-
|
|
|
$
|
436
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land Development
|
|
|
2,361
|
|
|
|
724
|
|
|
|
-
|
|
|
|
3,913
|
|
Building Lots
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
682
|
|
Other
|
|
|
15,880
|
|
|
|
15,925
|
|
|
|
-
|
|
|
|
15,346
|
|
Real Estate Construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Residential Mortgage
|
|
|
333
|
|
|
|
304
|
|
|
|
-
|
|
|
|
424
|
|
Consumer and Home Equity
|
|
|
-
|
|
|
|
25
|
|
|
|
-
|
|
|
|
107
|
|
Indirect Consumer
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
18,574
|
|
|
$
|
17,165
|
|
|
|
-
|
|
|
$
|
20,946
|
|
|
|
Loans Past Due
|
|
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
Over 90 Days
|
|
|
Non-accrual
|
|
|
|
Restructured on
|
|
|
Restructured on
|
|
|
Still
|
|
|
excluding
|
|
(Dollars in thousands)
|
|
Non-Accrual
Status
|
|
|
Accrual
Status
|
|
|
Accruing
|
|
|
Restructured
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
31
|
|
|
$
|
195
|
|
|
|
-
|
|
|
$
|
584
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land Development
|
|
|
1,705
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,184
|
|
Building Lots
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,782
|
|
Other
|
|
|
15,961
|
|
|
|
15,522
|
|
|
|
-
|
|
|
|
14,879
|
|
Real Estate Construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Residential Mortgage
|
|
|
335
|
|
|
|
305
|
|
|
|
-
|
|
|
|
969
|
|
Consumer and Home Equity
|
|
|
-
|
|
|
|
25
|
|
|
|
-
|
|
|
|
234
|
|
Indirect Consumer
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
18,032
|
|
|
$
|
16,047
|
|
|
|
-
|
|
|
$
|
21,718
|
|
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the aging of the unpaid
principal in past due loans as of March 31, 2012 and December 31, 2011 by class of loans:
March 31, 2012
|
|
30-59
|
|
|
60-89
|
|
|
Greater than
|
|
|
|
|
|
|
|
|
|
|
|
|
Days
|
|
|
Days
|
|
|
90 Days
|
|
|
Total
|
|
|
Loans Not
|
|
|
|
|
(Dollars in thousands)
|
|
Past
Due
|
|
|
Past
Due
|
|
|
Past
Due
|
|
|
Past
Due
|
|
|
Past
Due
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
92
|
|
|
$
|
44
|
|
|
$
|
1,192
|
|
|
$
|
1,328
|
|
|
$
|
26,441
|
|
|
$
|
27,769
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land Development
|
|
|
1,160
|
|
|
|
-
|
|
|
|
6,395
|
|
|
|
7,555
|
|
|
|
25,886
|
|
|
|
33,441
|
|
Building Lots
|
|
|
-
|
|
|
|
-
|
|
|
|
682
|
|
|
|
682
|
|
|
|
2,300
|
|
|
|
2,982
|
|
Other
|
|
|
3,625
|
|
|
|
4,373
|
|
|
|
13,368
|
|
|
|
21,366
|
|
|
|
365,142
|
|
|
|
386,508
|
|
Real Estate Construction
|
|
|
-
|
|
|
|
140
|
|
|
|
-
|
|
|
|
140
|
|
|
|
4,467
|
|
|
|
4,607
|
|
Residential Mortgage
|
|
|
1,371
|
|
|
|
12
|
|
|
|
2,316
|
|
|
|
3,699
|
|
|
|
144,165
|
|
|
|
147,864
|
|
Consumer and Home Equity
|
|
|
252
|
|
|
|
260
|
|
|
|
450
|
|
|
|
962
|
|
|
|
65,850
|
|
|
|
66,812
|
|
Indirect
Consumer
|
|
|
188
|
|
|
|
74
|
|
|
|
38
|
|
|
|
300
|
|
|
|
20,595
|
|
|
|
20,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (1)
|
|
$
|
6,688
|
|
|
$
|
4,903
|
|
|
$
|
24,441
|
|
|
$
|
36,032
|
|
|
$
|
654,846
|
|
|
$
|
690,878
|
|
(1) Includes loans held for sale in probable branch
divestiture and probable loan sale
December 31, 2011
|
|
30-59
|
|
|
60-89
|
|
|
Greater than
|
|
|
|
|
|
|
|
|
|
|
|
|
Days
|
|
|
Days
|
|
|
90 Days
|
|
|
Total
|
|
|
Loans Not
|
|
|
|
|
(Dollars in thousands)
|
|
Past
Due
|
|
|
Past
Due
|
|
|
Past
Due
|
|
|
Past
Due
|
|
|
Past
Due
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
424
|
|
|
$
|
469
|
|
|
$
|
1,426
|
|
|
$
|
2,319
|
|
|
$
|
27,816
|
|
|
$
|
30,135
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land Development
|
|
|
-
|
|
|
|
-
|
|
|
|
2,420
|
|
|
|
2,420
|
|
|
|
33,504
|
|
|
|
35,924
|
|
Building Lots
|
|
|
-
|
|
|
|
-
|
|
|
|
1,782
|
|
|
|
1,782
|
|
|
|
2,098
|
|
|
|
3,880
|
|
Other
|
|
|
5,333
|
|
|
|
6,467
|
|
|
|
17,815
|
|
|
|
29,615
|
|
|
|
389,366
|
|
|
|
418,981
|
|
Real Estate Construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,925
|
|
|
|
4,925
|
|
Residential Mortgage
|
|
|
331
|
|
|
|
812
|
|
|
|
3,677
|
|
|
|
4,820
|
|
|
|
147,046
|
|
|
|
151,866
|
|
Consumer and Home Equity
|
|
|
310
|
|
|
|
261
|
|
|
|
638
|
|
|
|
1,209
|
|
|
|
68,762
|
|
|
|
69,971
|
|
Indirect Consumer
|
|
|
327
|
|
|
|
95
|
|
|
|
86
|
|
|
|
508
|
|
|
|
21,384
|
|
|
|
21,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (1)
|
|
$
|
6,725
|
|
|
$
|
8,104
|
|
|
$
|
27,844
|
|
|
$
|
42,673
|
|
|
$
|
694,901
|
|
|
$
|
737,574
|
|
(1) Includes loans held for sale in probable branch
divestiture and probable loan sale
Troubled Debt Restructurings:
We have allocated $1.3 million
and $937,000 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of March
31, 2012 and December 31, 2011. We are not committed to lend additional funds to debtors whose loans have been modified in a troubled
debt restructuring. Specific reserves are generally assessed prior to loans being modified as a TDR, as most of these loans migrate
from our internal watch list and have been specifically reserved for as part of our normal reserving methodology.
During the period ending March
31, 2012, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans
included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity
date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of
the recorded investment in the loan.
Modifications involving a reduction
of the stated interest rate of the loan were for periods ranging from six months to one year. Modifications involving an extension
of the maturity date were for periods ranging from three to six months.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following table presents
loans by class modified as troubled debt restructurings that occurred during the periods ending March 31, 2012 and 2011:
|
|
Three Months
Ended
|
|
|
Three Months
Ended
|
|
|
|
March
31, 2012
|
|
|
March
31, 2011
|
|
|
|
|
|
|
Pre-Modification
|
|
|
Post-Modification
|
|
|
|
|
|
Pre-Modification
|
|
|
Post-Modification
|
|
|
|
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
|
Number
|
|
|
Recorded
|
|
|
Recorded
|
|
|
Number
|
|
|
Recorded
|
|
|
Recorded
|
|
(Dollars in thousands)
|
|
of
Loans
|
|
|
Investment
|
|
|
Investment
|
|
|
of
Loans
|
|
|
Investment
|
|
|
Investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Troubled Debt Restructurings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
2
|
|
|
$
|
1,237
|
|
|
$
|
1,237
|
|
|
|
1
|
|
|
$
|
175
|
|
|
$
|
175
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land Development
|
|
|
2
|
|
|
|
1,398
|
|
|
|
1,398
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Building Lots
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
|
2
|
|
|
|
70
|
|
|
|
70
|
|
|
|
5
|
|
|
|
14,397
|
|
|
|
14,397
|
|
Real Estate Construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Residential Mortgage
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
444
|
|
|
|
444
|
|
Consumer and Home Equity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Indirect
Consumer
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
6
|
|
|
$
|
2,705
|
|
|
$
|
2,705
|
|
|
|
7
|
|
|
$
|
15,016
|
|
|
$
|
15,016
|
|
The troubled debt restructurings
described above increased the allowance for loan losses allocated to troubled debt restructurings by $189,000 and $3.6 million
for the three months ended March 31, 2012 and 2011. Typically, these loans had allocated allowance prior to their formal modification.
There were no charge-offs recorded on the troubled debt restructurings described above for the 2012 and 2011 periods.
The following table presents
loans by class modified as troubled debt restructurings for which there was a payment default within twelve months following the
modification during the periods ending March 31, 2012 and 2011:
|
|
Three
Months Ended
|
|
|
Three
Months Ended
|
|
|
|
March 31, 2012
|
|
|
March 31, 2011
|
|
|
|
Number
|
|
|
Recorded
|
|
|
Number
|
|
|
Recorded
|
|
(Dollars in thousands)
|
|
of
Loans
|
|
|
Investment
|
|
|
of
Loans
|
|
|
Investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Troubled Debt Restructurings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
-
|
|
|
$
|
-
|
|
|
|
1
|
|
|
$
|
8
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land Development
|
|
|
1
|
|
|
|
1,639
|
|
|
|
-
|
|
|
|
-
|
|
Building Lots
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
|
1
|
|
|
|
811
|
|
|
|
-
|
|
|
|
-
|
|
Real Estate Construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Residential Mortgage
|
|
|
1
|
|
|
|
333
|
|
|
|
-
|
|
|
|
-
|
|
Consumer and Home Equity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Indirect
Consumer
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3
|
|
|
$
|
2,783
|
|
|
|
1
|
|
|
$
|
8
|
|
For disclosure purposes, a loan
is considered to be in payment default once it is 90 days contractually past due under the modified terms. The troubled debt restructurings
that subsequently defaulted described above increased the allowance for loan losses by $0 and $4,000. There were no charge-offs
recorded on the troubled debt restructurings described above for the 2012 and 2011 periods.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Credit Quality Indicators:
We categorize loans into risk
categories based on relevant information about the ability of borrowers to service their debt such as: current financial information,
historical payment experience, credit documentation, public information, and current economic trends, among other factors. We analyze
loans individually by classifying the loans as to credit risk. This analysis includes commercial and commercial real estate loans.
We also evaluate credit quality on residential mortgage, consumer and home equity and indirect consumer loans based on the aging
status and payment activity of the loan. This analysis is performed on a monthly basis. We use the following definitions for risk
ratings:
Criticized:
Loans classified
as criticized have a potential weakness that deserves management’s close attention. If left uncorrected, these potential
weaknesses may result in deterioration of the repayment prospects for the loan or in our credit position at some future date.
Substandard:
Loans classified
as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged,
if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized
by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful:
Loans classified
as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses
make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and
improbable.
Loss:
Loans classified
as loss are considered non-collectible and their continuance as bankable assets is not warranted.
Loans not meeting the criteria
above that are analyzed individually as part of the above described process are considered to be pass rated loans. Loans listed
as not rated are included in groups of homogeneous loans. For our residential mortgage, consumer and home equity, and indirect
consumer homogeneous loans, we also evaluate credit quality based on the aging status of the loan, which was previously presented,
and by payment activity.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
As of March 31, 2012 and December 31, 2011, and based
on the most recent analysis performed, the risk category of loans by class of loans is as follows:
March 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Not
Rated
|
|
|
Pass
|
|
|
Criticized
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Loss
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
-
|
|
|
$
|
22,828
|
|
|
$
|
3,211
|
|
|
$
|
1,730
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
27,769
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land Development
|
|
|
-
|
|
|
|
20,237
|
|
|
|
4,758
|
|
|
|
8,446
|
|
|
|
-
|
|
|
|
-
|
|
|
|
33,441
|
|
Building Lots
|
|
|
-
|
|
|
|
1,156
|
|
|
|
531
|
|
|
|
1,295
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,982
|
|
Other
|
|
|
-
|
|
|
|
308,578
|
|
|
|
27,056
|
|
|
|
50,874
|
|
|
|
-
|
|
|
|
-
|
|
|
|
386,508
|
|
Real Estate Construction
|
|
|
-
|
|
|
|
4,607
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,607
|
|
Residential Mortgage
|
|
|
142,086
|
|
|
|
-
|
|
|
|
460
|
|
|
|
5,318
|
|
|
|
-
|
|
|
|
-
|
|
|
|
147,864
|
|
Consumer and Home Equity
|
|
|
65,031
|
|
|
|
-
|
|
|
|
708
|
|
|
|
1,073
|
|
|
|
-
|
|
|
|
-
|
|
|
|
66,812
|
|
Indirect Consumer
|
|
|
20,692
|
|
|
|
-
|
|
|
|
29
|
|
|
|
174
|
|
|
|
-
|
|
|
|
-
|
|
|
|
20,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (1)
|
|
$
|
227,809
|
|
|
$
|
357,406
|
|
|
$
|
36,753
|
|
|
$
|
68,910
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
690,878
|
|
(1) Includes loans held for sale in probable branch
divestiture and probable loan sale
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Not Rated
|
|
|
Pass
|
|
|
Criticized
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Loss
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
-
|
|
|
$
|
24,082
|
|
|
$
|
1,634
|
|
|
$
|
4,389
|
|
|
$
|
30
|
|
|
$
|
-
|
|
|
$
|
30,135
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land Development
|
|
|
-
|
|
|
|
20,656
|
|
|
|
5,192
|
|
|
|
10,076
|
|
|
|
-
|
|
|
|
-
|
|
|
|
35,924
|
|
Building Lots
|
|
|
-
|
|
|
|
1,549
|
|
|
|
549
|
|
|
|
1,782
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,880
|
|
Other
|
|
|
-
|
|
|
|
338,483
|
|
|
|
22,746
|
|
|
|
57,752
|
|
|
|
-
|
|
|
|
-
|
|
|
|
418,981
|
|
Real Estate Construction
|
|
|
-
|
|
|
|
4,925
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,925
|
|
Residential Mortgage
|
|
|
146,003
|
|
|
|
-
|
|
|
|
573
|
|
|
|
5,290
|
|
|
|
-
|
|
|
|
-
|
|
|
|
151,866
|
|
Consumer and Home Equity
|
|
|
68,101
|
|
|
|
-
|
|
|
|
729
|
|
|
|
1,141
|
|
|
|
-
|
|
|
|
-
|
|
|
|
69,971
|
|
Indirect Consumer
|
|
|
21,627
|
|
|
|
-
|
|
|
|
4
|
|
|
|
261
|
|
|
|
-
|
|
|
|
-
|
|
|
|
21,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (1)
|
|
$
|
235,731
|
|
|
$
|
389,695
|
|
|
$
|
31,427
|
|
|
$
|
80,691
|
|
|
$
|
30
|
|
|
$
|
-
|
|
|
$
|
737,574
|
|
(1) Includes loans held for sale in probable branch
divestiture and probable loan sale
The following table presents the unpaid principal
balance in residential mortgage, consumer and home equity and indirect consumer loans based on payment activity as of March 31,
2012 and December 31, 2011:
March 31, 2012
|
|
Residential
|
|
|
Consumer &
|
|
|
Indirect
|
|
(Dollars in thousands)
|
|
Mortgage
|
|
|
Home Equity
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
Performing
|
|
$
|
147,107
|
|
|
$
|
66,705
|
|
|
$
|
20,857
|
|
Restructured on non-accrual
|
|
|
333
|
|
|
|
-
|
|
|
|
-
|
|
Non-accrual
|
|
|
424
|
|
|
|
107
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
147,864
|
|
|
$
|
66,812
|
|
|
$
|
20,895
|
|
December 31, 2011
|
|
Residential
|
|
|
Consumer &
|
|
|
Indirect
|
|
(Dollars in thousands)
|
|
Mortgage
|
|
|
Home Equity
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
Performing
|
|
$
|
150,562
|
|
|
$
|
69,737
|
|
|
$
|
21,806
|
|
Restructured on non-accrual
|
|
|
335
|
|
|
|
-
|
|
|
|
-
|
|
Non-accrual
|
|
|
969
|
|
|
|
234
|
|
|
|
86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
151,866
|
|
|
$
|
69,971
|
|
|
$
|
21,892
|
|
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
5.
|
REAL ESTATE ACQUIRED THROUGH FORECLOSURE
|
A summary of the real
estate acquired through foreclosure activity is as follows:
|
|
March 31,
|
|
|
December 31,
|
|
(Dollars in thousands)
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
29,083
|
|
|
$
|
25,807
|
|
Additions
|
|
|
5,981
|
|
|
|
19,416
|
|
Sales
|
|
|
(3,418
|
)
|
|
|
(6,877
|
)
|
Writedowns
|
|
|
(1,565
|
)
|
|
|
(9,263
|
)
|
Ending balance
|
|
$
|
30,081
|
|
|
$
|
29,083
|
|
The calculation for the income
tax provision or benefit generally does not consider the tax effects of changes in other comprehensive income, or OCI, which is
a component of shareholders’ equity on the balance sheet. However, an exception is provided in certain circumstances,
such as when there is a full valuation allowance against net deferred tax assets, there is a loss from continuing operations and
income in other components of the financial statements. In such a case, pre-tax income from other categories, such as
changes in OCI, must be considered in determining a tax benefit to be allocated to the loss from continuing operations. For
the quarters ended March 31, 2012 and 2011, this resulted in $0 and $192,000 of income tax benefit allocated to continuing operations.
A valuation allowance related
to deferred tax assets is required when it is considered more likely than not that all or part of the benefit related to such assets
will not be realized. In assessing the need for a valuation allowance, we considered various factors including our three year cumulative
loss position and the fact that we did not meet our forecast levels in 2010 and 2011. These factors represent the most significant
negative evidence that we considered in concluding that a valuation allowance was necessary at March 31, 2012 and December 31,
2011.
|
7.
|
EARNINGS (LOSS) PER SHARE
|
The reconciliation
of the numerators and denominators of the basic and diluted EPS is as follows:
|
|
Three Months Ended
|
|
(Amounts in thousands,
|
|
March 31,
|
|
except per share data)
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
$
|
(289
|
)
|
|
$
|
(2,070
|
)
|
Less:
|
|
|
|
|
|
|
|
|
Preferred stock dividends
|
|
|
(250
|
)
|
|
|
(250
|
)
|
Accretion on preferred stock discount
|
|
|
(14
|
)
|
|
|
(14
|
)
|
Net income (loss) available to common shareholders
|
|
$
|
(553
|
)
|
|
$
|
(2,334
|
)
|
Weighted average common shares
|
|
|
4,761
|
|
|
|
4,736
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
Weighted average common shares
|
|
|
4,761
|
|
|
|
4,736
|
|
Dilutive effect of stock options and warrants
|
|
|
31
|
|
|
|
-
|
|
Weighted average common and incremental shares
|
|
|
4,792
|
|
|
|
4,736
|
|
|
|
|
|
|
|
|
|
|
Earnings (Loss) Per Common Share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.12
|
)
|
|
$
|
(0.49
|
)
|
Diluted
|
|
$
|
(0.12
|
)
|
|
$
|
(0.49
|
)
|
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
7.
|
EARNINGS (LOSS) PER SHARE – (Continued)
|
Stock options for 242,940 and
266,521 shares of common stock were not included in the March 31, 2012 and 2011 computation of diluted earnings per share because
their impact was anti-dilutive. Warrants to purchase 215,983 shares at March 31, 2012 and 2011 were not included in the computation
because their impact was also anti-dilutive.
|
8.
|
STOCK BASED COMPENSATION PLAN
|
Under our 2006 Stock Option and
Incentive Compensation Plan, which is shareholder approved, we may grant restricted stock and incentive or non-qualified stock
options to
key employees and directors
for a total of 727,080 shares of our common stock. We believe that the ability
to award stock options and other forms of stock-based incentive compensation can assist us in attracting and retaining key employees.
Stock-based incentive compensation is also a means to align the interests of key employees with those of our stockholders by providing
awards intended to reward recipients for our long-term growth.
The option to purchase shares vest over periods of one to
five years and expire ten years after the date of grant.
We issue new shares of common stock upon the exercise of stock
options.
If options or awards granted under the 2006 Plan expire or terminate for any reason without having been exercised
in full or released from restriction, the corresponding shares shall again be available for option or award for the purposes of
the Plan. At March 31, 2012, options and restricted stock available for future grant under the 2006 Plan totaled 363,840.
Compensation cost related to
options and restricted stock granted under the 2006 Plan that was charged against earnings for the periods ended March 31, 2012
and 2011
was $43,000 and $48,000. As of March 31, 2012 there was $275,000 of total unrecognized compensation cost related
to non-vested share-based compensation arrangements granted under the 2006 Plan.
That cost is expected to be recognized
over a weighted-average period of 2.8 years.
Stock Options
–
The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model that uses
various weighted-average assumptions. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time
of grant. The expected volatility is based on the fluctuation in the price of a share of stock over the period for which the option
is being valued and the expected life of the options granted represents the period of time the options are expected to be outstanding.
There were no stock option grants for the March 31, 2012 period.
A summary of option activity
under the 2006 Plan for the period ended March 31, 2012 is presented below:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
Number
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
Term
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, beginning of period
|
|
|
363,240
|
|
|
$
|
9.62
|
|
|
|
|
|
|
|
|
|
Granted during period
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited during period
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised during period
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding, end of period
|
|
|
363,240
|
|
|
$
|
9.62
|
|
|
|
7.4
|
|
|
$
|
207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eligible for exercise at period end
|
|
|
143,616
|
|
|
$
|
17.79
|
|
|
|
4.8
|
|
|
$
|
-
|
|
There were no options exercised, modified or settled
in cash for the periods ended March 31, 2012 and 2011. Management expects all outstanding unvested options will vest.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
8.
|
STOCK BASED COMPENSATION
PLAN
– (Continued)
|
Restricted Stock
–
In addition to stock options, on December 31, 2010, we granted 36,855 shares of restricted common stock at the weighted average
current market price of $4.07. No restricted stock had been granted prior to December 31, 2010. Restricted stock provides the grantee
with voting, dividend and anti-dilution rights equivalent to common shareholders. The restricted stock vests on December 31, 2012,
provided that the recipient has continued to perform substantial services for the Bank through that date. The restricted
stock will become 100% vested before the vesting date upon the recipient’s death or disability or a change of control event
as defined by federal regulations. Any dividends declared on the restricted stock prior to vesting will be retained and paid only
on the date of vesting. The recipient may not transfer, pledge or dispose of the restricted stock before the date of vesting, and
thereafter only in proportion to percentage of the preferred shares originally issued to the U.S. Treasury that have been redeemed.
As of December 31, 2011 there was $56,000 of total unrecognized compensation cost related to the restricted stock.
That
cost is expected to be recognized over the remaining vesting period of .75 years.
U.S. GAAP defines fair value
as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date and establishes a fair value hierarchy that prioritizes the use of inputs used in valuation methodologies
into the following three levels:
Level 1:
Quoted prices (unadjusted)
for identical assets or liabilities in active markets. A quoted price in an active market provides the most reliable evidence of
fair value and shall be used to measure fair value whenever available.
Level 2:
Significant other
observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that
are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3:
Significant unobservable
inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing
an asset or liability.
We used the following methods
and significant assumptions to estimate the fair value of available-for-sale-securities.
Securities:
The fair values of most debt securities are determined by a matrix pricing, which is a mathematical technique widely used in
the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by
relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). In certain cases, such
as trust preferred securities, where there is limited activity or less transparency around inputs to the valuation,
securities are classified within Level 3 of the valuation hierarchy. For trust preferred securities, discounted cash flows
are calculated using spread to swap and LIBOR curves that are updated to incorporate loss severities, volatility, credit
spread and optionality. Rating agency and industry research reports as well as defaults and deferrals on individual
securities are reviewed and incorporated into the calculations. At least annually, a third party is engaged to validate the
discounted cash flows and resulting fair value.
Impaired Loans:
At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Impaired
loans carried at fair value generally receive specific allocations of the allowance for loan losses. For collateral dependent
loans, fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach
or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal
process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments
are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate
collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted
or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and
management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value
classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
9.
|
FAIR VALUE - (Continued)
|
Other Real Estate Owned:
Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs
to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value
less estimated costs to sell. Fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single
valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely
made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data
available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining
fair value.
Appraisals for both collateral-dependent
impaired loans and other real estate owned are performed by certified general appraisers (for commercial properties) or certified
residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by us. Once
received, a member of the Credit Department reviews the assumptions and approaches utilized in the appraisal as well as the overall
resulting fair value in comparison with via independent data sources such as recent market data or industry-wide statistics.
Loans Held For
Sale:
Loans held for sale associated with a probable branch divestiture and probable loan sale are presented at the
purchase discount and are classified within Level 2 of the valuation hierarchy. Loans held for sale March 31, 2012 include
$33.4 million of loans that we expect to sell in a branch divestiture transaction, $4.3 million of loans which we expect to
sell during 2012 and $3.2 million to be sold in the secondary market.
Assets and Liabilities
Measured at Fair Value on a Recurring Basis
Assets measured at fair value
on a recurring basis are summarized below: There were no transfers between Level 1 and Level 2 during the periods presented.
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
March 31,
|
|
|
Identical Assets
|
|
|
Observable Inputs
|
|
|
Unobservable Inputs
|
|
(Dollars in thousands)
|
|
2012
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and agencies
|
|
$
|
21,136
|
|
|
$
|
-
|
|
|
$
|
21,136
|
|
|
$
|
-
|
|
Government-sponsored mortgage-backed residential
|
|
|
320,626
|
|
|
|
-
|
|
|
|
320,626
|
|
|
|
-
|
|
State and municipal
|
|
|
13,763
|
|
|
|
-
|
|
|
|
13,763
|
|
|
|
-
|
|
Trust preferred securities
|
|
|
268
|
|
|
|
-
|
|
|
|
-
|
|
|
|
268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
355,793
|
|
|
$
|
-
|
|
|
$
|
355,525
|
|
|
$
|
268
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
December 31,
|
|
|
Identical Assets
|
|
|
Observable Inputs
|
|
|
Unobservable Inputs
|
|
(Dollars in thousands)
|
|
2011
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and agencies
|
|
$
|
25,028
|
|
|
$
|
-
|
|
|
$
|
25,028
|
|
|
$
|
-
|
|
Government-sponsored mortgage-backed residential
|
|
|
264,691
|
|
|
|
-
|
|
|
|
264,691
|
|
|
|
-
|
|
State and municipal
|
|
|
23,794
|
|
|
|
-
|
|
|
|
23,794
|
|
|
|
-
|
|
Trust preferred securities
|
|
|
264
|
|
|
|
-
|
|
|
|
-
|
|
|
|
264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
313,777
|
|
|
$
|
-
|
|
|
$
|
313,513
|
|
|
$
|
264
|
|
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
9.
|
FAIR VALUE - (Continued)
|
Between June 2002 and July 2006,
we invested in four available-for-sale and one held-to-maturity investment grade tranches of trust preferred collateralized debt
obligation (“CDO”) securities. The securities were issued and are referred to as Preferred Term Securities
Limited (“PreTSL”). The underlying collateral for the PreTSL is unguaranteed pooled trust preferred securities
issued by banks, insurance companies and REITs geographically dispersed across the United States. We hold five PreTSL
securities, none of which are currently investment grade.
Since late 2007, the markets
for collateralized debt obligations and trust preferred securities have become increasingly inactive. The inactivity
began in late 2007 when new issues of similar securities were discounted in order to complete the offering. Beginning in the second
quarter of 2008, the purchase and sale activity of these securities substantially decreased as investors elected to hold the securities
instead of selling them at substantially depressed prices. Our brokers have indicated that little if any activity is
occurring in this sector and that the PreTSL securities trades that are taking place are primarily distressed sales where the seller
must liquidate as a result of insolvency, redemptions or closure of a fund holding the security, or other distressed conditions. As
a result, the bid-ask spreads have widened significantly and the volume of trades decreased significantly compared to historical
volumes.
During 2008, we concluded that
the market for the trust preferred securities that we hold and for similar CDO securities (such as higher-rated tranches within
the same CDO security) was also not active. That determination was made considering that there are few observable transactions
for the trust preferred securities or similar CDO securities and the observable prices for those transactions have varied substantially
over time. Consequently, we have considered those observable inputs and determined that our trust preferred securities
are classified within Level 3 of the fair value hierarchy.
We have determined that
an income approach valuation technique (using cash flows and present value techniques) that utilizes significant unobservable inputs is equally or more representative of fair
value than relying on the estimation of market value technique used at prior measurement dates, which now has few observable
inputs and relies on an inactive market with distressed sales conditions that would require significant
adjustments.
We received valuation estimates
on our trust preferred securities for March 31, 2012. Those valuation estimates were based on proprietary pricing models
utilizing significant unobservable inputs in an inactive market with distressed sales, Level 3 inputs, rather than actual transactions
in an active market. In accordance with current accounting guidance, we determined that a risk-adjusted discount rate
appropriately reflects the reporting entity’s estimate of the assumptions that market participants would use in an active
market to estimate the selling price of the asset at the measurement date.
We conduct a thorough review
of fair value hierarchy classifications on a quarterly basis. Reclassification of certain financial instruments may occur when
input observability changes.
The table below presents reconciliation
for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the periods ended
March 31, 2012 and 2011:
|
|
Fair Value Measurements
Using Significant
Unobservable Inputs
(Level 3)
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
(Dollars in thousands)
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
264
|
|
|
$
|
346
|
|
Total gains or losses:
|
|
|
|
|
|
|
|
|
Impairment charges on securities
|
|
|
-
|
|
|
|
(25
|
)
|
Included in other comprehensive income
|
|
|
4
|
|
|
|
442
|
|
Transfers in and/or out of Level 3
|
|
|
-
|
|
|
|
-
|
|
Ending balance
|
|
$
|
268
|
|
|
$
|
763
|
|
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
9.
|
FAIR VALUE - (Continued)
|
The following table presents
quantitative information about recurring Level 3 fair value measurements at March 31, 2012.
|
|
|
|
|
|
|
|
|
Range
|
|
|
|
Fair
|
|
Valuation
|
|
Unobservable
|
|
(Weighted
|
(Dollars in thousands)
|
|
|
Value
|
|
Technique
|
|
Inputs
|
|
Average)
|
|
|
|
|
|
|
|
|
|
|
Trust preferred securities
|
|
$
|
268
|
|
Discounted cash flow
|
|
Prepayment rate
|
|
1.00%
|
|
|
|
|
|
|
|
Default rate
|
|
3.75% - 10.00% (7.34%)
|
|
|
|
|
|
|
|
Recovery probability
|
|
15.00% - 40.00% (25.63%)
|
The significant unobservable
inputs used in the fair value measurement of our trust preferred securities are probabilities of specific-issuer prepayment assumptions,
specific-issuer defaults and deferrals and specific-issuer recovery assumptions. Significant increases in specific-issuer prepayment
assumptions, specific-issuer defaults and deferrals and specific-issuer recovery assumptions would result in a significantly lower
fair value measurement. Conversely, decreases in specific-issuer prepayment assumptions, specific-issuer defaults and deferrals
and specific-issuer recovery assumptions would result in a higher fair value measurement.
The table below summarizes changes
in unrealized gains and losses recorded in earnings for the quarter and ended March 31 for Level 3 assets and liabilities that
are still held at March 31.
|
|
Changes in Unrealized Gains/Losses
Recorded in Earnings Relating to Assets Still Held at Reporting Date for the Three Months Ended
|
|
|
|
March 31,
|
|
(Dollars in thousands)
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Interest income on securities
|
|
$
|
-
|
|
|
$
|
-
|
|
Other changes in fair value
|
|
|
-
|
|
|
|
25
|
|
Total
|
|
$
|
-
|
|
|
$
|
25
|
|
Assets and Liabilities
Measured at Fair Value on a Nonrecurring Basis
Assets measured at fair value
on a nonrecurring basis are summarized below:
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
March 31,
|
|
|
Identical Assets
|
|
|
Observable Inputs
|
|
|
Unobservable Inputs
|
|
(Dollars in thousands)
|
|
2012
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
1,068
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,068
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land Development
|
|
|
5,108
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,108
|
|
Building Lots
|
|
|
1,030
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,030
|
|
Other
|
|
|
21,449
|
|
|
|
-
|
|
|
|
-
|
|
|
|
21,449
|
|
Real Estate Construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Residential Mortgage
|
|
|
4,446
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,446
|
|
Consumer and Home Equity
|
|
|
819
|
|
|
|
-
|
|
|
|
-
|
|
|
|
819
|
|
Indirect Consumer
|
|
|
140
|
|
|
|
-
|
|
|
|
-
|
|
|
|
140
|
|
Real estate acquired through foreclosure:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
727
|
|
|
|
-
|
|
|
|
-
|
|
|
|
727
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land Development
|
|
|
4,285
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,285
|
|
Building Lots
|
|
|
6,066
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,066
|
|
Other
|
|
|
7,725
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,725
|
|
Residential Mortgage
|
|
|
242
|
|
|
|
-
|
|
|
|
-
|
|
|
|
242
|
|
Trust preferred security held-to-maturity
|
|
|
24
|
|
|
|
-
|
|
|
|
-
|
|
|
|
24
|
|
Loans held for sale
|
|
|
37,764
|
|
|
|
-
|
|
|
|
37,764
|
|
|
|
-
|
|
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
9.
|
FAIR VALUE - (Continued)
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
December 31,
|
|
|
Identical Assets
|
|
|
Observable Inputs
|
|
|
Unobservable Inputs
|
|
(Dollars in thousands)
|
|
2011
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
2,643
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,643
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land Development
|
|
|
7,929
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,929
|
|
Building Lots
|
|
|
1,517
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,517
|
|
Other
|
|
|
27,668
|
|
|
|
-
|
|
|
|
-
|
|
|
|
27,668
|
|
Real Estate Construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Residential Mortgage
|
|
|
4,384
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,384
|
|
Consumer and Home Equity
|
|
|
937
|
|
|
|
-
|
|
|
|
-
|
|
|
|
937
|
|
Indirect Consumer
|
|
|
194
|
|
|
|
-
|
|
|
|
-
|
|
|
|
194
|
|
Real estate acquired through foreclosure:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
728
|
|
|
|
-
|
|
|
|
-
|
|
|
|
728
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land Development
|
|
|
4,285
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,285
|
|
Building Lots
|
|
|
5,369
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,369
|
|
Other
|
|
|
6,300
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,300
|
|
Residential Mortgage
|
|
|
172
|
|
|
|
-
|
|
|
|
-
|
|
|
|
172
|
|
Trust preferred security held-to-maturity
|
|
|
24
|
|
|
|
-
|
|
|
|
-
|
|
|
|
24
|
|
Loans held for sale
|
|
|
45,829
|
|
|
|
-
|
|
|
|
45,829
|
|
|
|
-
|
|
Impaired loans, which are measured
for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $37.8 million, with
a valuation allowance of $3.8 million, resulting in an additional provision for loan losses of $1.0 million for the 2012 period.
Values for collateral dependent loans are generally based on appraisals obtained from licensed real estate appraisals and in certain
circumstances consideration of offers obtained to purchase properties prior to foreclosure. Appraisals for commercial real estate
generally use three methods to derive value: cost, sales or market comparison and income approach. The cost method bases value
on the estimated cost to replace the current property after considering adjustments for depreciation. Values of the market comparison
approach evaluate the sales price of similar properties in the same market area. The income approach considers net operating income
generated by the property and an investors required return. The final value is a reconciliation of these three approaches and takes
into consideration any other factors management deems relevant to arrive at a representative fair value.
Real estate owned acquired through
foreclosure is recorded at fair value less estimated selling costs at the date of foreclosure. Fair value is based on the appraised
market value of the property based on sales of similar assets. The fair value may be subsequently reduced if the estimated fair
value declines below the original appraised value. Fair value adjustments of $1.6 million were made to real estate owned during
the quarter ended March 31, 2012.
Trust preferred
securities which are held-to-maturity are valued using an income approach valuation technique (using cash flows and present
value techniques) that utilizes significant unobservable inputs. The income approach is equally or more representative of fair value than relying on the estimation of
market value technique used at prior measurement dates, which now has few observable inputs and relies on an inactive market
with distressed sales conditions that would require significant adjustments.
We received valuation estimates
on our trust preferred security for March 31, 2012. Those valuation estimates were based on proprietary pricing models
utilizing significant unobservable inputs in an inactive market with distressed sales, Level 3 inputs, rather than actual transactions
in an active market.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
9.
|
FAIR VALUE - (Continued)
|
The following table
presents quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a
non-recurring basis at March 31, 2012. The discounts applied for sales comparison and income approach include
management’s determinations for selling costs and date of relevant appraisal.
|
|
|
|
|
|
|
|
|
|
|
|
Fair
|
|
Valuation
|
|
Unobservable
|
|
|
|
(Dollars in thousands)
|
|
Value
|
|
Technique
|
|
Inputs
|
|
Discounts
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans:
|
|
|
|
|
|
|
|
|
|
Commercial
|
$
|
1,068
|
|
Sales comparison approach
|
|
Discount of market value
|
|
20.00
|
%
|
|
|
|
|
|
|
Estimated selling costs
|
|
6.00
|
%
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
Land Development
|
|
5,108
|
|
Sales comparison approach
|
|
Discount of market value
|
|
10.00
|
%
|
|
|
|
|
|
|
Estimated selling costs
|
|
6.00
|
%
|
|
|
|
|
|
|
|
|
|
|
Building Lots
|
|
1,030
|
|
Sales comparison approach
|
|
Discount of market value
|
|
10.00
|
%
|
|
|
|
|
|
|
Estimated selling costs
|
|
6.00
|
%
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
21,449
|
|
Sales comparison approach
|
|
Discount of market value
|
|
10.00
|
%
|
|
|
|
|
|
|
Estimated selling costs
|
|
6.00
|
%
|
|
|
|
|
|
|
|
|
|
|
Residential Mortgage
|
|
1,086
|
|
Sales comparison approach
|
|
Discount of market value
|
|
10.00
|
%
|
|
|
|
|
|
|
Estimated selling costs
|
|
6.00
|
%
|
|
|
3,360
|
|
Income approach
|
|
Discount rate
|
|
2.50
|
%
|
|
|
|
|
|
|
|
|
|
|
Consumer and Home Equity
|
|
179
|
|
Sales comparison approach
|
|
Discount of market value
|
|
20.00
|
%
|
|
|
|
|
|
|
Estimated selling costs
|
|
6.00
|
%
|
|
|
640
|
|
Income approach
|
|
Discount rate
|
|
10.00
|
%
|
|
|
|
|
|
|
|
|
|
|
Indirect Consumer
|
|
43
|
|
Sales comparison approach
|
|
Discount of market value
|
|
20.00
|
%
|
|
|
|
|
|
|
Estimated selling costs
|
|
6.00
|
%
|
|
|
97
|
|
Income approach
|
|
Discount rate
|
|
20.00
|
%
|
|
|
|
|
|
|
|
|
|
|
Real estate acquired through foreclosure:
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
727
|
|
Sales comparison approach
|
|
Discount of market value
|
|
20.00
|
%
|
|
|
|
|
|
|
Estimated selling costs
|
|
6.00
|
%
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
Land Development
|
|
4,285
|
|
Sales comparison approach
|
|
Discount of market value
|
|
10.00
|
%
|
|
|
|
|
|
|
Estimated selling costs
|
|
6.00
|
%
|
|
|
|
|
|
|
|
|
|
|
Building Lots
|
|
6,066
|
|
Sales comparison approach
|
|
Discount of market value
|
|
10.00
|
%
|
|
|
|
|
|
|
Estimated selling costs
|
|
6.00
|
%
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
7,725
|
|
Sales comparison approach
|
|
Discount of market value
|
|
10.00
|
%
|
|
|
|
|
|
|
Estimated selling costs
|
|
6.00
|
%
|
|
|
|
|
|
|
|
|
|
|
Residential Mortgage
|
|
242
|
|
Sales comparison approach
|
|
Discount of market value
|
|
10.00
|
%
|
|
|
|
|
|
|
Estimated selling costs
|
|
6.00
|
%
|
|
|
|
|
|
|
|
|
|
|
Trust preferred security held-to-maturity
|
|
24
|
|
Discounted cash flow
|
|
Default rate
|
|
10.00
|
%
|
|
|
|
|
|
|
Recovery probability
|
|
15.00
|
%
|
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
9.
|
FAIR VALUE - (Continued)
|
Fair Value of Financial
Instruments
The estimated fair value of financial instruments,
not previously presented, is as follows:
|
|
|
|
|
March 31, 2012
|
|
(Dollars in thousands)
|
|
Carrying
|
|
|
Fair Value Measurements
|
|
|
|
Value
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
81,860
|
|
|
|
81,860
|
|
|
|
7,611
|
|
|
|
74,249
|
|
|
|
-
|
|
Mortgage loans held for sale
|
|
|
3,153
|
|
|
|
3,193
|
|
|
|
-
|
|
|
|
3,193
|
|
|
|
-
|
|
Loans, net
|
|
|
601,319
|
|
|
|
623,552
|
|
|
|
-
|
|
|
|
-
|
|
|
|
623,552
|
|
FHLB stock
|
|
|
4,805
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
1,099,465
|
|
|
|
1,109,207
|
|
|
|
-
|
|
|
|
1,109,207
|
|
|
|
-
|
|
Advances from Federal Home Loan Bank
|
|
|
27,701
|
|
|
|
30,692
|
|
|
|
-
|
|
|
|
30,692
|
|
|
|
-
|
|
Subordinated debentures
|
|
|
18,000
|
|
|
|
12,448
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12,448
|
|
(Dollars in thousands)
|
|
December 31, 2011
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Value
|
|
|
Value
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
92,236
|
|
|
$
|
92,236
|
|
Mortgage loans held for sale
|
|
|
10,187
|
|
|
|
10,326
|
|
Loans, net
|
|
|
628,800
|
|
|
|
643,797
|
|
FHLB stock
|
|
|
4,805
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
1,122,794
|
|
|
|
1,134,843
|
|
Advances from Federal Home Loan Bank
|
|
|
27,736
|
|
|
|
30,888
|
|
Subordinated debentures
|
|
|
18,000
|
|
|
|
12,448
|
|
The methods and assumptions,
not previously presented, used to estimate fair values are described below:
(a) Cash and due from
banks
The carrying amount of cash on hand approximates fair
value and is classified as a Level 1. The carrying amount of cash due from bank accounts is classified as a Level 2.
(b) Mortgage loans held for sale
The fair value of mortgage loans held for sale is
estimated based upon the binding contracts and quotes from third party investors resulting in a Level 2 classification.
(c) Loans, net
Fair values of loans are estimated
as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based
on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow
analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting
in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously. The methods
utilized to estimate the fair value of loans do not necessarily represent an exit price. The carrying amount of related accrued
interest receivable, due to its short-term nature, approximates its fair value, is not significant and is not disclosed.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
9.
|
FAIR VALUE - (Continued)
|
(d) FHLB Stock
It is not practical to determine
the fair value of FHLB stock due to restrictions placed on its transferability.
(e) Deposits
The fair value disclosed for
fixed rate deposits and variable rate deposits with infrequent re-pricing or re-pricing limits, is calculated using the FHLB advance
curve to discount cash flows using current market rates applied to the estimated life resulting in a Level 2 classification. The
carrying amount of related accrued interest payable, due to its short-term nature, approximates its fair value, is not significant
and is not disclosed.
(f) Advances from Federal Home Loan
Bank
The fair value of the FHLB advances
is obtained from the FHLB and is calculated by discounting contractual cash flow using an estimated interest rate based on the
current rates available to us for debt of similar remaining maturities and collateral terms resulting in a Level 2 classification.
(g) Subordinated debentures
The fair value for subordinated
debentures is calculated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing
arrangements resulting in a Level 3 classification.
(h) Off-balance
Sheet Instruments
Fair values for off-balance sheet,
credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account
the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments is not material.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
On January 9, 2009, we issued
$20 million of cumulative perpetual preferred shares, with a liquidation preference of $1,000 per share (the “Senior
Preferred Shares”) to the United States Treasury under its Capital Purchase Program (“CPP”). The Senior Preferred
Shares constitute Tier 1 capital and rank senior to our common shares. The Senior Preferred Shares pay cumulative dividends quarterly
at a rate of 5% per year for the first five years and will reset to a rate of 9% per year on January 9, 2014. The Senior Preferred
Shares may be redeemed at any time, subject to prior regulatory approval. We also have the ability to defer dividend payments at
any time, at our option.
We also issued a warrant to purchase
215,983 common shares to the U.S. Treasury at a purchase price of $13.89 per share. The aggregate purchase price equals 15% of
the aggregate amount of the Senior Preferred Shares purchased by the U.S. Treasury, which was $3 million. The initial purchase
price per share for the warrant and the number of common shares subject to the warrant were determined by reference to the market
price of the common shares (calculated on a 20-day trailing average) on December 8, 2008, the date the U.S. Treasury approved our
TARP application. The warrant has a term of 10 years and is potentially dilutive to earnings per share.
On October 29, 2010, we
gave written notice to the U.S. Treasury that effective with the fourth quarter of 2010, we were suspending the payment of
regular quarterly cash dividends on our Senior Preferred Shares. Under the CPP provisions, failure to pay dividends for six
quarters would trigger the right of the holder of our Senior Preferred Shares to appoint representatives to our Board of
Directors. A representative from the U.S. Treasury attended Board meetings during the first quarter of 2012. The dividends
will continue to be accrued for payment in the future and reported as a preferred dividend requirement that is deducted
from income to common shareholders for financial statement purposes. As of March 31, 2012, these accrued but unpaid
dividends totaled $1.6 million.
Participation in the CPP requires
a participating institution to comply with a number of restrictions and provisions, including standards for executive compensation
and corporate governance and limitations on share repurchases and the declaration and payment of dividends on common shares. The
standard terms of the CPP require that a participating financial institution limit the payment of dividends to the most recent
quarterly amount prior to October 14, 2008, which is $0.19 per share in our case. This dividend limitation will remain in
effect until the three years ended January 9, 2012 or such time that the preferred shares are redeemed.
On
February 17, 2009, the American Recovery and Reinvestment Act of 2009 (“ARRA”) was enacted. As required by ARRA, the
U.S. Treasury has issued additional compensation standards on companies receiving financial assistance from the U.S. government.
In addition, ARRA imposes certain new executive compensation and corporate expenditure limits on each CPP recipient, until the
recipient has repaid the Treasury. ARRA also permits CPP participants to redeem the preferred shares held by the Treasury Department
without penalty and without the need to raise new capital, subject to the Treasury’s consultation with the recipient’s
appropriate regulatory agency.
Regulatory Capital Requirements
– The Corporation and the Bank are subject to regulatory capital requirements administered by federal banking agencies.
Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations involve quantitative measures of
assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory
action.
Prompt corrective action regulations
provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically
undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory
approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and
expansion, and capital restoration plans are required.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
11.
|
STOCKHOLDERS’ EQUITY - (Continued)
|
Quantitative measures established
by regulation to ensure capital adequacy require the Corporation and the Bank to maintain minimum amounts and ratios (set forth
in the following table) of Total and Tier I capital (as defined in the regulations) to risk weighted assets (as defined) and of
Tier I capital (as defined) to average assets (as defined).
As a result of the Consent Order
the Bank entered into with the FDIC and KDFI described in greater detail in Note 2, the Bank is categorized as a "troubled
institution" by bank regulators, which by definition does not permit the Bank to be considered "well-capitalized".
On March 9, 2012, the Bank entered
into a new Consent Order with the FDIC and KDFI. The 2012 Consent Order requires the Bank to achieve the same minimum capital ratios
set forth in the January 2011 Consent Order by June 30, 2012. See Note 2 for additional information.
Our
actual and required capital amounts and ratios are presented below.
(Dollars in thousands)
|
|
|
|
|
|
|
|
For Capital
|
|
|
|
Actual
|
|
|
Adequacy Purposes
|
|
As of March 31, 2012:
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
Total risk-based capital (to risk- weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
78,673
|
|
|
|
10.28
|
%
|
|
$
|
61,219
|
|
|
|
8.00
|
%
|
Bank
|
|
|
81,829
|
|
|
|
10.70
|
|
|
|
61,208
|
|
|
|
8.00
|
|
Tier I capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
69,008
|
|
|
|
9.02
|
|
|
|
30,609
|
|
|
|
4.00
|
|
Bank
|
|
|
72,157
|
|
|
|
9.43
|
|
|
|
30,604
|
|
|
|
4.00
|
|
Tier I capital (to average assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
69,008
|
|
|
|
5.71
|
|
|
|
48,381
|
|
|
|
4.00
|
|
Bank
|
|
|
72,157
|
|
|
|
5.90
|
|
|
|
48,883
|
|
|
|
4.00
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
For Capital
|
|
|
|
Actual
|
|
|
Adequacy Purposes
|
|
As of December 31, 2011:
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
Total risk-based capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
79,593
|
|
|
|
9.87
|
%
|
|
$
|
64,493
|
|
|
|
8.00
|
%
|
Bank
|
|
|
82,081
|
|
|
|
10.18
|
|
|
|
64,486
|
|
|
|
8.00
|
|
Tier I capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
69,425
|
|
|
|
8.61
|
|
|
|
32,246
|
|
|
|
4.00
|
|
Bank
|
|
|
71,914
|
|
|
|
8.92
|
|
|
|
32,243
|
|
|
|
4.00
|
|
Tier I capital (to average assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
69,425
|
|
|
|
5.71
|
|
|
|
48,666
|
|
|
|
4.00
|
|
Bank
|
|
|
71,914
|
|
|
|
5.86
|
|
|
|
49,111
|
|
|
|
4.00
|
|
The 2012 Consent Order requires
the Bank to achieve the minimum capital ratios presented below by June 30 2012:
|
|
Actual as of
|
|
Ratio Required
|
|
|
3/31/2012
|
|
by Consent Order
|
Total capital to risk-weighted assets
|
|
10.70%
|
|
12.00%
|
Tier 1 capital to total assets
|
|
5.99%
|
|
9.00%
|
We have signed a definitive agreement
to sell our four Indiana banking centers to First Savings Bank, F.S.B. The transaction is expected to increase our Tier I capital
ratio by approximately 88 basis points and increase our total risk-based capital ratio by approximately 114 basis points. The sale
is expected to close early in the third quarter of 2012. See Note 2 for additional information.
Item 2.
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
We operate 22 full-service banking centers
and a commercial private banking center in eight contiguous counties in central Kentucky along the Interstate 65 corridor and within
the Louisville metropolitan area, including southern Indiana. Our markets range from Louisville in Jefferson County, Kentucky approximately
40 miles north of our headquarters in Elizabethtown, Kentucky to Hart County, Kentucky, approximately 30 miles south of Elizabethtown
to Harrison County, Indiana approximately 60 miles northwest of our headquarters. Our markets are supported by a diversified industry
base and have a regional population of over 1 million. We operate in Hardin, Nelson, Hart, Bullitt, Meade and Jefferson counties
in Kentucky and in Harrison and Floyd counties in southern Indiana. We control in the aggregate 23% of the deposit market share
in our central Kentucky markets outside of Louisville. After the sale of our four Indiana banking centers, we will exit the southern
Indiana market.
We serve the needs and cater to the economic
strengths of the local communities in which we operate, and we strive to provide a high level of personal and professional customer
service. We offer a variety of financial services to our retail and commercial banking customers. These services include personal
and corporate banking services and personal investment financial counseling services.
Through
our personal investment
financial counseling services, we offer a wide variety of mutual funds, equity investments, and fixed and variable annuities. We
invest in the wholesale capital markets to manage a portfolio of securities and use various forms of wholesale funding. The security
portfolio contains a variety of instruments, including callable debentures, taxable and non-taxable debentures, fixed and adjustable
rate mortgage backed securities, and collateralized mortgage obligations.
Our results of operations depend primarily
on net interest income, which is the difference between interest income from interest-earning assets and interest expense on interest-bearing
liabilities. Our operations are also affected by non-interest income, such as service charges, loan fees, gains and losses from
the sale of mortgage loans and revenue earned from bank owned life insurance. Our principal operating expenses, aside from interest
expense, consist of compensation and employee benefits, occupancy costs, data processing expense, FDIC insurance premiums and provisions
for loan losses.
The discussion and analysis section covers
material changes in the financial condition since December 31, 2011 and material changes in the results of operations for the three
month period ending March 31, 2012 as compared to 2011. It should be read in conjunction with "Management’s Discussion
and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the period ended
December 31, 2011.
OVERVIEW
Our performance for the first quarter of
2012 continued to be impacted by the unfavorable economic conditions that have persisted since 2007. A new management team is in
place with the focus of restoring the institution to soundness and profitability. We have adjusted our policies, procedures and
allocated additional resources to address credit quality and facilitate the structure and processes to diversify and strengthen
our lending function. We established a board loan committee to meet weekly to address loan approvals and renewals, loan workout
situations and the disposal of large other real estate owned assets. We also added personnel to concentrate on working with struggling
borrowers, work on more efficient asset resolutions, and strengthen the management of other real estate owned. Credit quality impacted
our results during 2012 in the areas of write downs in asset values, the resources allocated to the disposition of assets and loan
workout activities, lost productivity, net interest income and reversals of tax benefits. We are also carrying a substantial amount
of liquidity to prepare for the impending branch sale as the sale will settle in cash. Our net interest margin is expected to improve
slightly after the branch sale closing. The increased level of liquidity is anticipated to remain elevated in the near term as
loan balances continue to decline.
Our net loss attributable to common shareholders
for 2012 was $553,000 or $0.12 per diluted common share compared to net loss attributable to common shareholders of $2.3 million
or $0.49 per diluted common share for the same period in 2011. The 2012 results include a $2.5 million decrease in provision for
loans losses, increased write downs and losses on other real estate owned of $1.3 million, losses of $150,000 on the sale of investments,
gains of $403,000 on the sale of real estate acquired through foreclosure, a gain on the sale of a lot held for development and
a decrease of $555,000 in FDIC insurance premiums.
Although our level of non-performing assets
remains elevated, we experienced improvement in our credit quality metrics as well as indications that credit quality may be stabilizing.
Compared to March 31, 2011, we saw a decline in non-performing loans of 25%, a decline in non-performing assets of 11% and a decline
in classified assets of 35%. We sold ten other real estate owned properties totaling $3.4 million during the 2012 quarter and have
sales contracts in place on nine other real estate owned properties totaling $3.3 million set to close during the second quarter
of 2012, indicating continued improvement in classified credits. The proceeds received from the sale of these properties exceeded
the carry value we had on the books indicating an appropriate market value for these other real estate owned properties.
Our non-performing assets are largely comprised
of residential housing development assets, building lots, an office building and strip centers most of which are located in Jefferson
and Oldham Counties. Non-performing assets were $69.7 million or 5.78% of total assets compared to $68.9 million or 5.61% of total
assets at December 31, 2011. During 2011, we had substantially all of our non-performing assets appraised or reappraised, including
our high end residential development loans and related other real estate owned. The lower values on the appraisals and reviews
of properties appraised within the first quarter of 2012 resulted in $1.6 million in write downs on other real estate owned. We
believe that we have written down other real estate values to levels that will facilitate their liquidation. We also believe we
have appropriately addressed and risk-weighted real estate loans in our portfolio. While deterioration in the portfolio is expected
to continue, we believe it will be at a slower pace than the accelerated pace experienced in 2010 and 2011.
The allowance to total loans (including
loans held for sale and the related discounts allocated to those loans in a probable branch divestiture and probable loan sale)
was 2.55% at March 31, 2012 while net charge-offs totaled 49 basis points for 2012, compared to 71 basis points for 2011. Non-performing
loans were $39.5 million, or 5.72% of total loans (including loans held for sale in probable branch divestiture and probable loan
sale) at March 31, 2012 compared to $39.8 million, or 5.39% of total loans for December 31, 2011. The allowance for loan losses
to non-performing loans was 45% at March 31, 2012 compared to 39% at March 31, 2011. The increase in the coverage ratio for 2012
was due to the decrease in non-accrual loans compared to a year ago.
Net interest
income was $8.2 million for 2012 compared to $8.6 million for 2011, while the net interest margin was 2.95% for 2012 compared
to 2.91% in 2011. Our net interest margin was positively impacted by a decrease in our cost of funds which averaged 1.71% for
2012 compared to an average cost of funds of 1.98% for 2011. We are carrying a substantial amount of liquidity to prepare for
the impending branch sale as the sale will settle in cash. Our net interest margin is expected to improve slightly after the branch
sale closing. The increased level of liquidity is anticipated to remain elevated in the near term as loan balances continue to
decline. Non-interest income decreased $957,000 for 2012, primarily driven by an increase of $1.3 million in the loss on sale
and write downs on real estate acquired through foreclosure. Non-interest expense decreased $918,000 for 2012 compared to 2011.
Employee compensation and benefits decreased as a result of higher insurance claims under our self funded insurance plan recorded
in 2011 and a decrease in the average number of full time equivalent employees for the 2012 period. FDIC insurance premiums decreased
$555,000 mainly due to the change in the FDIC’s assessment base and rate structure that went into effect during the second
quarter of 2011. Loan expense increased due to increases in loan portfolio management expenses such as the cost of obtaining new
appraisals on real estate securing some of our commercial real estate loans. The increase in loan expense reflects our elevated
level of non-performing assets for 2012. Other expense decreased primarily as the result of a decrease in losses recorded on NOW
accounts.
In its 2012 Consent Order with the FDIC
and KDFI, the Bank agreed to achieve and maintain a Tier 1 capital ratio of 9.0% and a total risk-based capital ratio of 12.0%
by June 30, 2012. At March 31, 2012, we were not in compliance with the Tier 1 and total risk-based capital requirements. We notified
the bank regulatory agencies that the increased capital levels would not be achieved and anticipate that the FDIC and KDFI will
reevaluate our progress toward achieving the higher capital ratios at June 30, 2012.
The 2012 Consent Order requires that
if the Bank should be unable to reach the required capital levels by June 30, 2012 and if the Bank is in receipt of written
directions by the FDIC and KDFI, then the Bank would within 30 days develop, adopt and implement a written plan to sell or merge
itself into another federally insured financial institution. The 2012 Consent Order requires the Bank to continue to adhere
to the plans implemented in response to the 2011 Consent Order, and includes the substantive provisions of the 2011
Consent Order. A copy of the March 9, 2012 Consent Order is included as Exhibit 10.8 to our 2011 Annual Report on Form 10-K
filed March 30, 2012.
The Bank’s Consent Order with the
FDIC and KDFI requires us to obtain the consent of the Regional Director of the FDIC and the Commissioner of the KDFI to declare
and pay cash dividends to the Corporation. We are also no longer allowed to accept, renew or rollover brokered deposits (including
deposits through the CDARs program) without prior regulatory approval.
On April 20, 2011, the Corporation entered into a formal agreement
with the Federal Reserve Bank of St. Louis, which requires the Corporation to obtain regulatory approval before declaring any dividends.
We also may not redeem shares or obtain additional borrowings without prior approval.
Bank regulatory agencies can exercise discretion
when an institution does not meet the terms of a consent order. The agencies may initiate changes in management, issue mandatory
directives, impose monetary penalties or refrain from formal sanctions, depending on individual circumstances. Any action taken
by bank regulatory agencies could damage our reputation and have a material adverse effect on our business.
In order to meet these capital
requirements, we engaged an investment banking firm with expertise in the financial services sector to assist with a review
of strategic opportunities available to us. We continue reducing our costs where possible while taking into consideration the
resources necessary to execute our strategies. We have suspended the annual employee stock ownership contribution, frozen
executive management compensation the past three years and into 2012, frozen officer compensation for the past year and into
2012, eliminated board of director fees, reduced marketing expenses, reduced community donation expense, reduced compensation
expense through reductions in associates, and implemented various other cost savings initiatives. Expense reductions for 2011
were $1.1 million. Additional cost reductions for 2012 are projected to be in excess of $1.3 million. We are also evaluating
remaining terms on existing contracts and identifying expenses we cannot reduce currently, but expect to be able to reduce in
2012 and 2013, such as examination fees and loan workout and other real estate owned expenses. These efforts will remain
ongoing.
As part of our ongoing capital initiatives,
on February 9, 2012, we signed a definitive agreement to sell our four Indiana banking centers to First Savings Bank, F.S.B., the
banking subsidiary of First Savings Financial Group, Inc. The purchase price will represent a 3.65% percent premium based on the
actual level of consumer and commercial deposits at closing, which totaled $101.8 million at March 31, 2012. Under the agreement,
First Savings Financial Group, Inc. will also acquire government, corporate, other financial institution deposits and municipal
deposits, which were $17.0 million at March 31, 2012, at book value. A total of $33.7 million of performing loans will be purchased
at a discount of 0.80% based on the actual level of loans at closing. The consummated transaction would result in a one-time gain
of approximately $3.4 million based on information at March 31, 2012. We believe the transaction places us in a better position
to meet the conditions of the regulatory consent order in a manner that is beneficial to our stockholders. This transaction is
projected to increase our Tier I capital ratio from 5.99% to 6.87% and increase our total risk-based capital ratio from 10.70%
to 11.84% based on information at March 31, 2012, and is expected to close early in the third quarter of 2012.
On February 10, 2012, we announced the following changes to
our management and the board of directors.
|
·
|
Senator Walter Dee Huddleston stepped down as Chairman
of the Board while continuing to serve as a director.
|
|
·
|
J. Stephen Mouser, President of Mouser Custom Cabinetry,
LLC, and a director since 1997, was appointed as the Board’s new Chairman.
|
|
·
|
B. Keith Johnson, Chief Executive Officer of the Corporation
and the Bank since 1997, stepped down from those positions. Mr. Johnson assumed the position of the Board’s Vice Chairman,
while continuing to work at the Bank in an advisory role.
|
|
·
|
Gregory S. Schreacke, President of the Corporation
and the Bank since 2008, assumed principal management responsibility for the Corporation and the Bank. Mr. Schreacke is also expected
to join the boards of directors of both the Corporation and the Bank.
|
|
·
|
Dann Small was appointed as Chief Lending Officer of
the Bank and will direct the Bank’s lending program and supervise all phases of the lending operation. Mr. Small has over
30 years of experience in finance, lending, credit underwriting, executive management and turnaround experience with troubled
institutions.
|
|
·
|
Robert L. Critchfield was appointed as Chief Credit
Officer of the Bank, with responsibility for the overall management of its loan, credit and risk policies. Mr. Critchfield has
over forty years of experience in the banking industry, including seventeen years as President and CEO of two commercial banks.
|
|
·
|
On May 10, 2012, Frank Perez was appointed as Chief Financial Officer of the Corporation and
the Bank with responsibility for the overall financial functions. Mr. Perez has over fifteen years of experience in the
banking industry as well as experience with publicly traded institutions, capital markets
, and
working with a troubled institution.
|
The Corporation’s and the Bank’s
executive management team has been fully retained with the addition of these executive officers and the new management structure.
Our plans for 2012 include the following:
|
·
|
Continuing to research and evaluate all available strategic
options to meet and maintain the required capital levels for the Bank. Strategic alternatives include divesting of branch offices
and selling loans in an effort to reduce our asset size and meet the required capital levels. During the first quarter of 2012
we sold of a pool of commercial real estate loans at par, totaling $6.4 million, to First Capital Bank of Kentucky.
|
|
·
|
Continuing to serve our community banking customers and operate the Corporation and the Bank in
a safe and sound manner. We have worked diligently to maintain the strength of our retail and deposit franchise. The strength of
this franchise contributes to earnings to help withstand our credit quality issues. In addition, the inherent value of the retail
franchise will provide value to the Bank to accomplish the various capital initiatives.
|
|
·
|
Continuing to reduce our lending concentration in commercial real estate by obtaining pay downs
and payoffs. In addition to allowing loans in these concentrations to roll off, we have started initiatives to diversify the Bank’s
lending portfolio and change our lending culture. The mortgage and consumer lending operations have maintained strong credit quality
metrics through the economic downturn. These areas are being restructured to allow for additional fee income, asset generation
and an emphasis on retail lending going forward. We will also emphasize small business lending and will seek resources to add expertise
in this area. Our efforts will focus on back to basic community banking and servicing the entire relationship of the customer.
These loans will be used to diversify the loan portfolio of the Bank as well as provide for profitability as the Bank works through
our credit quality issues.
|
|
·
|
Continuing to substantially increase the resources dedicated to special asset disposition both
on a permanent and temporary basis. This will enable more of our problem assets to be transferred to the workout specialist and
allow the commercial lenders more time to begin calling on customers. In addition, several new commercial lenders are being recruited
to enhance the level of expertise of the lending staff. The new lenders will have real estate lending experience in addition to
commercial and industrial lending experience. We are also dedicating lending associates to small business lending and Small Business
Administration (“SBA”) underwriting to become a full SBA lender. The full SBA lending focus will also enhance fee income
through the sale of SBA loans to the secondary market.
|
The disposition of problem assets, returning
to sustained profitability and developing an ongoing business plan is the primary focus for the next year. Progress in these efforts
is important in the effort to provide a return to existing shareholders and attract new equity investors.
CRITICAL ACCOUNTING POLICIES
Our accounting and reporting policies comply
with U.S. generally accepted accounting principles and conform to general practices within the banking industry. The preparation
of financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments
are based on information available as of the date of the financial statements. Accordingly, as this information changes, the financial
statements could change as our estimates, assumptions, and judgments change. Certain policies inherently rely more heavily on the
use of estimates, assumptions, and judgments and as such have a greater possibility of producing results that could be materially
different than originally reported. We consider our critical accounting policies to include the following:
Allowance for Loan Losses
–
We maintain an allowance we believe to be sufficient to absorb probable incurred credit losses existing in the loan portfolio.
Our Allowance for Loan Loss Review Committee, which is comprised of senior officers and certain accounting associates, evaluate
the allowance for loan losses on a monthly basis. We estimate the amount of the allowance using past loan loss experience,
known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, estimated
value of the underlying collateral, and current economic conditions. While we estimate the allowance for loan losses based
in part on historical losses within each loan category, estimates for losses within the commercial real estate portfolio depend
more on credit analysis and recent payment performance. Allocations of the allowance may be made for specific loans or loan categories,
but the entire allowance is available for any loan that, in management’s judgment, should be charged off.
The allowance consists of specific and
general components. The specific component relates to loans that are individually classified as impaired. The general component covers non-classified loans and is based on historical loss experience adjusted
for current factors. Allowance estimates are developed with actual loss experience adjusted for current economic conditions. Allowance
estimates are considered a prudent measurement of the risk in the loan portfolio and are applied to individual loans based on loan
type.
Based on our calculation, an allowance
of $17.3 million
or 2.65% of total loans was our estimate of probable incurred losses within the loan portfolio as of
March 31, 2012.
This estimate required us to record a provision for loan losses on the income statement of
$1.0 million for the 2012 period.
If the mix and amount of future charge off percentages differ significantly
from those assumptions used by management in making its determination, the allowance for loan losses and provision for loan losses
on the income statement could materially increase.
Impairment of Investment Securities
–
We review all unrealized losses on our investment securities to determine whether the losses are other-than-temporary.
We evaluate our investment securities on at least a quarterly basis, and more frequently when economic or market conditions warrant,
to determine whether a decline in their value below amortized cost is other-than-temporary. We evaluate a number of factors including,
but not limited to: valuation estimates provided by investment brokers; how much fair value has declined below amortized cost;
how long the decline in fair value has existed; the financial condition of the issuer; significant rating agency changes on the
issuer; and management’s assessment that we do not intend to sell or will not be required to sell the security for a period
of time sufficient to allow for any anticipated recovery in fair value.
The term “other-than-temporary”
is not intended to indicate that the decline is permanent, but indicates that the possibility for a near-term recovery of value
is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying
value of the investment. Once a decline in value is determined to be other-than-temporary, the cost basis of the security is written
down to fair value and a charge to earnings is recognized for the credit component and the non-credit component is recorded to
other comprehensive income.
Real Estate Owned
–
The
estimation of fair value is significant to real estate owned-acquired through foreclosure. These assets are recorded at fair value
less estimated selling costs at the date of foreclosure. Fair value is based on the appraised market value of the property based
on sales of similar assets when available. The fair value may be subsequently reduced if the estimated fair value declines below
the original appraised value. Appraisals are performed at least annually, if not more frequently. Typically, appraised values are
discounted for the projected sale below appraised value in addition to the selling cost. With certain appraised values where management
believes a solid liquidation value has been established, the appraisal has been discounted by the selling cost. We have dedicated
a team of associates and management to the resolution and work out of other real estate owned as it has become a larger portion
of our assets and a larger area of our risk. Appropriate policies, committees and procedures have been put in place to ensure the
proper accounting treatment and risk management of this area.
Income Taxes
–
The provision for income taxes is based on income or loss as reported in the financial statements. Deferred income tax assets
and liabilities are computed for differences between the financial statement and tax basis of assets and liabilities that will
result in taxable or deductible amounts in the future. The deferred tax assets and liabilities are computed based on enacted tax
laws and rates applicable to the periods in which the differences are expected to affect taxable income. An assessment is made
as to whether it is more likely than not that deferred tax assets will be realized. Valuation allowances are established when necessary
to reduce deferred tax assets to an amount expected to be realized. Income tax expense is the tax payable or refundable for the
period plus or minus the change during the period in deferred tax assets and liabilities. Tax credits are recorded as a reduction
to tax provision in the period for which the credits may be utilized.
In assessing the need for a valuation allowance,
we considered various factors including our three year cumulative loss position and the fact that we did not meet our forecast
levels in 2011 and 2010. These factors represent the most significant negative evidence that we considered in concluding that a
valuation allowance was necessary at March 31, 2012 and December 31, 2011.
RESULTS OF OPERATIONS
Net loss attributable to common shareholders
for the quarter ended March 30, 2012 was $553,000 or $0.12 per diluted common share compared to net loss attributable to common
shareholders of $2.3 million or $.49 per diluted common share for the same period in 2011.
Contributing to the net loss
for 2012 was a decrease in net interest income, a valuation allowance against deferred tax assets of $421,000, and write downs
taken on real estate acquired through foreclosure, Net loss attributable to common shareholders was also impacted by dividends
accrued on preferred shares. Our book value per common share decreased from $10.72 at March 31, 2011 to $6.93 at March 31, 2012.
Net Interest Income
–
The
principal source of our revenue is net interest income. Net interest income is the difference between interest income on interest-earning
assets, such as loans and securities and the interest expense on liabilities used to fund those assets, such as interest-bearing
deposits and borrowings. Net interest income is affected by both changes in the amount and composition of interest-earning assets
and interest-bearing liabilities as well as changes in market interest rates.
The large decline in the volume of interest
earning assets for the quarter and the change in the mix of interest earning assets caused a negative impact on net interest income,
which decreased $1.3 million for 2012 compared to a year ago. Average interest earning assets decreased $76.9 million for 2012
compared to 2011 due to a decrease in average loans and our efforts to increase liquidity by increasing lower yielding investments.
The decrease in average loans was due to loan principal payments, payoffs, charge-offs and the conversion of nonperforming loans
to other real estate owned properties. The average loan yield was 5.56% for 2012 compared to an average loan yield of 5.71% for
2011.
The yield
on earning assets averaged 4.57% for 2012 compared to an average yield on earning assets of 4.76% for 2011. This decrease was
offset by a decrease in our cost of funds which averaged 1.71% for 2012 compared to an average cost of funds of 1.98% for 2011.
Net interest margin as a percent of average earning assets increased
4 basis points to 2.95% for 2012 compared to 2.91%
for 2011.
Going forward, we expect market short-term
interest rates to remain low for an extended period of time. We anticipate that we will be able to take advantage of the low market
rate environment as we continue to favorably re-price term deposits.
AVERAGE BALANCE SHEET
The following table provides information
relating to our average balance sheet and reflects the average yield on assets and average cost of liabilities for the indicated
periods. Yields and costs for the periods presented are derived by dividing income or expense by the average balances of assets
or liabilities, respectively.
|
|
Quarter Ended March 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Yield/Cost
(5)
|
|
|
Balance
|
|
|
Interest
|
|
|
Yield/Cost
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and agencies
|
|
$
|
23,674
|
|
|
$
|
132
|
|
|
|
2.26
|
%
|
|
$
|
137,355
|
|
|
$
|
897
|
|
|
|
2.65
|
%
|
Mortgage-backed securities
|
|
|
280,291
|
|
|
|
2,333
|
|
|
|
3.38
|
|
|
|
53,965
|
|
|
|
507
|
|
|
|
3.81
|
|
Equity securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
294
|
|
|
|
10
|
|
|
|
13.79
|
|
State and political subdivision securities
(1)
|
|
|
19,517
|
|
|
|
323
|
|
|
|
6.71
|
|
|
|
22,616
|
|
|
|
389
|
|
|
|
6.98
|
|
Corporate bonds
|
|
|
1,078
|
|
|
|
13
|
|
|
|
4.89
|
|
|
|
1,106
|
|
|
|
24
|
|
|
|
8.80
|
|
Loans
(2) (3) (4)
|
|
|
727,126
|
|
|
|
9,961
|
|
|
|
5.56
|
|
|
|
877,140
|
|
|
|
12,343
|
|
|
|
5.71
|
|
FHLB stock
|
|
|
4,805
|
|
|
|
46
|
|
|
|
3.88
|
|
|
|
4,909
|
|
|
|
54
|
|
|
|
4.46
|
|
Interest bearing deposits
|
|
|
84,413
|
|
|
|
47
|
|
|
|
0.23
|
|
|
|
120,460
|
|
|
|
74
|
|
|
|
0.25
|
|
Total interest earning assets
|
|
|
1,140,904
|
|
|
|
12,855
|
|
|
|
4.57
|
|
|
|
1,217,845
|
|
|
|
14,298
|
|
|
|
4.76
|
|
Less: Allowance for loan losses
|
|
|
(17,978
|
)
|
|
|
|
|
|
|
|
|
|
|
(21,879
|
)
|
|
|
|
|
|
|
|
|
Non-interest earning assets
|
|
|
93,701
|
|
|
|
|
|
|
|
|
|
|
|
102,234
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,216,627
|
|
|
|
|
|
|
|
|
|
|
$
|
1,298,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings accounts
|
|
$
|
94,537
|
|
|
$
|
72
|
|
|
|
0.31
|
%
|
|
$
|
115,951
|
|
|
$
|
178
|
|
|
|
0.62
|
%
|
NOW and money market accounts
|
|
|
304,880
|
|
|
|
448
|
|
|
|
0.60
|
|
|
|
281,673
|
|
|
|
694
|
|
|
|
1.00
|
|
Certificates of deposit and other time deposits
|
|
|
637,733
|
|
|
|
3,425
|
|
|
|
2.18
|
|
|
|
695,244
|
|
|
|
4,042
|
|
|
|
2.36
|
|
FHLB advances
|
|
|
27,843
|
|
|
|
284
|
|
|
|
4.14
|
|
|
|
28,586
|
|
|
|
295
|
|
|
|
4.19
|
|
Subordinated debentures
|
|
|
18,000
|
|
|
|
341
|
|
|
|
7.68
|
|
|
|
18,000
|
|
|
|
341
|
|
|
|
7.68
|
|
Total interest bearing liabilities
|
|
|
1,082,993
|
|
|
|
4,570
|
|
|
|
1.71
|
|
|
|
1,139,454
|
|
|
|
5,550
|
|
|
|
1.98
|
|
Non-interest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing deposits
|
|
|
75,730
|
|
|
|
|
|
|
|
|
|
|
|
76,785
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
4,647
|
|
|
|
|
|
|
|
|
|
|
|
4,476
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,163,370
|
|
|
|
|
|
|
|
|
|
|
|
1,220,715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
53,257
|
|
|
|
|
|
|
|
|
|
|
|
77,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
1,216,627
|
|
|
|
|
|
|
|
|
|
|
$
|
1,298,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
8,285
|
|
|
|
|
|
|
|
|
|
|
$
|
8,748
|
|
|
|
|
|
Net interest spread
|
|
|
|
|
|
|
|
|
|
|
2.86
|
%
|
|
|
|
|
|
|
|
|
|
|
2.78
|
%
|
Net interest margin
|
|
|
|
|
|
|
|
|
|
|
2.95
|
%
|
|
|
|
|
|
|
|
|
|
|
2.91
|
%
|
(1)
Taxable equivalent yields are calculated
assuming a 34% federal income tax rate.
(2)
Includes loan fees, immaterial in amount,
in both interest income and the calculation of yield on loans.
(3)
Calculations include non-accruing loans
in the average loan amounts outstanding.
(4)
Includes loans held for sale.
(5)
Annualized
RATE/VOLUME ANALYSIS
The table below shows changes in interest
income and interest expense for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (1) changes in rate (changes in rate multiplied by old volume); (2) changes
in volume (change in volume multiplied by old rate); and (3) changes in rate-volume (change in rate multiplied by change in volume).
Changes in rate-volume are proportionately allocated between rate and volume variance.
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2012 vs. 2011
|
|
|
|
Increase (decrease)
|
|
|
|
Due to change in
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
Net
|
|
|
|
Rate
|
|
|
Volume
|
|
|
Change
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and agencies
|
|
$
|
(115
|
)
|
|
$
|
(650
|
)
|
|
$
|
(765
|
)
|
Mortgage-backed securities
|
|
|
(64
|
)
|
|
|
1,890
|
|
|
|
1,826
|
|
Equity securities
|
|
|
(8
|
)
|
|
|
(2
|
)
|
|
|
(10
|
)
|
State and political subdivision securities
|
|
|
(14
|
)
|
|
|
(52
|
)
|
|
|
(66
|
)
|
Corporate bonds
|
|
|
(11
|
)
|
|
|
-
|
|
|
|
(11
|
)
|
Loans
|
|
|
(319
|
)
|
|
|
(2,063
|
)
|
|
|
(2,382
|
)
|
FHLB stock
|
|
|
(7
|
)
|
|
|
(1
|
)
|
|
|
(8
|
)
|
Interest bearing deposits
|
|
|
(7
|
)
|
|
|
(20
|
)
|
|
|
(27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest earning assets
|
|
|
(545
|
)
|
|
|
(898
|
)
|
|
|
(1,443
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings accounts
|
|
|
(78
|
)
|
|
|
(28
|
)
|
|
|
(106
|
)
|
NOW and money market accounts
|
|
|
(299
|
)
|
|
|
53
|
|
|
|
(246
|
)
|
Certificates of deposit and other time deposits
|
|
|
(296
|
)
|
|
|
(321
|
)
|
|
|
(617
|
)
|
FHLB advances
|
|
|
(3
|
)
|
|
|
(8
|
)
|
|
|
(11
|
)
|
Subordinated debentures
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing liabilities
|
|
|
(676
|
)
|
|
|
(304
|
)
|
|
|
(980
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in net interest income
|
|
$
|
131
|
|
|
$
|
(594
|
)
|
|
$
|
(463
|
)
|
Non-Interest Income and Non-Interest
Expense
The following tables compare the components
of non-interest income and expenses for the periods ended March 31, 2012 and 2011. The tables show the dollar and percentage change
from 2011 to 2012. Below each table is a discussion of significant changes and trends.
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
(Dollars in thousands)
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
|
%
|
|
Non-interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer service fees on deposit accounts
|
|
$
|
1,382
|
|
|
$
|
1,445
|
|
|
$
|
(63
|
)
|
|
|
-4.4
|
%
|
Gain on sale of mortgage loans
|
|
|
312
|
|
|
|
265
|
|
|
|
47
|
|
|
|
17.7
|
%
|
Gain on sale of investments
|
|
|
-
|
|
|
|
69
|
|
|
|
(69
|
)
|
|
|
-100.0
|
%
|
Loss on sale of investments
|
|
|
(150
|
)
|
|
|
-
|
|
|
|
(150
|
)
|
|
|
100.0
|
%
|
Net impairment losses recognized in earnings
|
|
|
(26
|
)
|
|
|
(37
|
)
|
|
|
11
|
|
|
|
-29.7
|
%
|
Loss on sale and write downs of real estate acquired through foreclosure
|
|
|
(1,566
|
)
|
|
|
(235
|
)
|
|
|
(1,331
|
)
|
|
|
566.4
|
%
|
Gain on sale on real estate acquired through foreclosure
|
|
|
403
|
|
|
|
25
|
|
|
|
378
|
|
|
|
1512.0
|
%
|
Gain on sale on real estate held for development
|
|
|
175
|
|
|
|
-
|
|
|
|
175
|
|
|
|
100.0
|
%
|
Brokerage commissions
|
|
|
95
|
|
|
|
107
|
|
|
|
(12
|
)
|
|
|
-11.2
|
%
|
Other income
|
|
|
411
|
|
|
|
354
|
|
|
|
57
|
|
|
|
16.1
|
%
|
|
|
$
|
1,036
|
|
|
$
|
1,993
|
|
|
$
|
(957
|
)
|
|
|
-48.0
|
%
|
We originate qualified VA, KHC, RHC and
conventional secondary market loans and sell them into the secondary market with servicing rights released. Gain on sale of mortgage
loans increased for 2012 due to an increase in the volume of loans refinanced, originated and sold.
We invest in various types of liquid assets,
including United States Treasury obligations, securities of various federal agencies, obligations of states and political subdivisions,
corporate bonds, mutual funds, stocks and others. During 2012 we recorded a loss on the sale of debt investment securities of $150,000.
Gains and losses on investment securities are infrequent and are not a consistent recurring core source of income.
We recognized other-than-temporary impairment
charges of $26,000 for the expected credit loss during the 2012 period on one of our trust preferred securities, compared to $37,000
of impairment charges for 2011. Management believes this impairment was primarily attributable to the current economic environment
in which the financial condition of some of the issuers deteriorated.
Further reducing non-interest income for
2012 was an increase of $1.3 million in losses on the sale and write down of real estate owned properties due to the decline in
market value of properties held in this portfolio. Offsetting the losses and write downs were recorded gains of $403,000 on the
sale of real estate owned properties.
Through our subsidiary, First Federal Office
Park, we hold commercial lots adjacent to our home office on Ring Road in Elizabethtown that are available for sale. During the
March 2012 quarter we recorded $175,000 in gains from a lot sale. All of the original nine lots held for sale have now been sold.
The increase in other income for the 2012
period was the result of increases in income received on real estate owned properties.
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
(Dollars in thousands)
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
|
%
|
|
Non-interest expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits
|
|
$
|
3,853
|
|
|
$
|
4,329
|
|
|
$
|
(476
|
)
|
|
|
-11.0
|
%
|
Office occupancy expense and equipment
|
|
|
768
|
|
|
|
811
|
|
|
|
(43
|
)
|
|
|
-5.3
|
%
|
Marketing and advertising
|
|
|
33
|
|
|
|
225
|
|
|
|
(192
|
)
|
|
|
-85.3
|
%
|
Outside services and data processing
|
|
|
811
|
|
|
|
797
|
|
|
|
14
|
|
|
|
1.8
|
%
|
Bank franchise tax
|
|
|
342
|
|
|
|
314
|
|
|
|
28
|
|
|
|
8.9
|
%
|
FDIC insurance premiums
|
|
|
415
|
|
|
|
970
|
|
|
|
(555
|
)
|
|
|
-57.2
|
%
|
Amortization of core deposit intangible
|
|
|
64
|
|
|
|
77
|
|
|
|
(13
|
)
|
|
|
-16.9
|
%
|
Real estate acquired through foreclosure expense
|
|
|
340
|
|
|
|
382
|
|
|
|
(42
|
)
|
|
|
-11.0
|
%
|
Loan expense
|
|
|
508
|
|
|
|
52
|
|
|
|
456
|
|
|
|
876.9
|
%
|
Other expense
|
|
|
1,354
|
|
|
|
1,449
|
|
|
|
(95
|
)
|
|
|
-6.6
|
%
|
|
|
$
|
8,488
|
|
|
$
|
9,406
|
|
|
$
|
(918
|
)
|
|
|
-9.8
|
%
|
Employee compensation and benefits is the
largest component of non-interest expense. The decrease for 2012 was due to higher insurance claims recorded in 2011 under our
self-funded insurance plan and a decrease in the average number of full time equivalent employees. Full time equivalent employees
decreased from 328 at March 31, 2011 to 311 at March 31, 2012.
Office occupancy and equipment expense
and marketing and advertising related expenses decreased due to cost cutting initiatives.
FDIC insurance premiums decreased for the
period mainly due to the change in the FDIC’s assessment base and rate structure that went into effect during the second
quarter of 2011.
Loan expense increased due to increases
in loan portfolio management expenses such as the cost of obtaining new appraisals on real estate securing some of our commercial
real estate loans. The increase in loan expense reflects our elevated level of non-performing assets for 2012.
Other expense decreased primarily as a
result of a decrease in losses recorded on NOW accounts.
Income Taxes
The provision for income taxes includes
federal and state income taxes and in 2012 and 2011 reflects a full valuation allowance against all of our deferred tax assets
that are not currently recoverable through carry back. We did not record any income tax expense or benefit for the quarter ended
March 31, 2012, as an income tax benefit of $421,000 was offset by an increase in valuation allowance for deferred taxes. An income
tax benefit of $192,000 was recorded for the quarter ended March 31, 2011. Our March 31, 2011 tax benefit is entirely due to gains
in other comprehensive income that are presented in current operations in accordance with applicable accounting standards. The
effective tax rate for the quarter ended March 31, 2012 was 0.0% as compared to 8.5% for the quarter ended March 31, 2011. Our
future effective income tax rate will fluctuate based on the mix of taxable and tax free investments we make and, to a greater
extent, the impact of changes in the required amount of valuation allowance recorded against our net deferred tax assets and our
overall level of taxable income.
A valuation allowance related to deferred
tax assets is required when it is considered more likely than not that all or part of the benefit related to such assets will not
be realized. In assessing the need for a valuation allowance, we considered various factors including our three year cumulative
loss position and the fact that we did not meet our forecast levels in 2010, and 2011 primarily due to higher levels of provision
for loan loss expense. These factors represent the most significant negative evidence that we considered in concluding that a valuation
allowance was necessary at March 31, 2012 and December 31, 2011
Recording a valuation allowance does not
have any impact on our liquidity, nor does it preclude us from using the tax losses, tax credits or other timing differences in
the future. To the extent that we generate taxable income in a given quarter, the valuation allowance may be reduced to fully or
partially offset the corresponding income tax expense. Any remaining deferred tax asset valuation allowance may be reversed through
income tax expense once we can demonstrate a sustainable return to profitability and conclude that it is more likely than not the
deferred tax asset will be utilized prior to expiration.
ANALYSIS OF FINANCIAL CONDITION
Total assets at March 31, 2012 decreased
$23.2 million compared to total assets at December 31, 2011. The decrease was primarily due to a decline of $46.7 million in total
loans, including loans held for sale in connection with a probable branch divestiture and probable loan sale, and a decrease in
cash and cash equivalents of $10.4 million. This decrease was mainly offset by building our investment portfolio to $355.8 million,
an increase of $42.0 million since December 31, 2011. This shift in the balance sheet reflects a conscious effort by management
to increase on-balance sheet liquidity to better protect us against adverse changes to our current wholesale funding position.
Loans
Total loans, including loans held
for sale in connection with a probable branch divesture and probable loan sale, decreased $46.7 million to $690.9 million
at March 31, 2012 compared to $737.6 million at December 31, 2011. The decrease in loans held for sale in a probable branch
divesture and probable loan sale was primarily the result of the sale of a pool of commercial real estate loans totaling $6.4
million. Our commercial real estate and commercial portfolios decreased $38.2 million to $450.7 million at March 31, 2012. Our
residential mortgage loan, real estate construction, consumer and home equity and indirect consumer portfolios all decreased
for the 2012 quarter. The decline in our commercial real estate and commercial loan portfolios is a result of pay-offs,
charge-offs on large commercial real estate loans, and commercial loans being transferred to real estate acquired through
foreclosure. Charge-offs made up $949,000 or 2.0 % of this decrease. The decline in the loan portfolio was also due, in part,
to reflect our ongoing efforts to resolve problem loans.
|
|
March 31,
|
|
|
December 31,
|
|
(Dollars in thousands)
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
27,769
|
|
|
$
|
30,135
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
Land Development
|
|
|
33,441
|
|
|
|
35,924
|
|
Building Lots
|
|
|
2,982
|
|
|
|
3,880
|
|
Other
|
|
|
386,508
|
|
|
|
418,981
|
|
Real estate construction
|
|
|
4,607
|
|
|
|
4,925
|
|
Residential mortgage
|
|
|
147,864
|
|
|
|
151,866
|
|
Consumer and home equity
|
|
|
66,812
|
|
|
|
69,971
|
|
Indirect consumer
|
|
|
20,895
|
|
|
|
21,892
|
|
|
|
|
690,878
|
|
|
|
737,574
|
|
Less:
|
|
|
|
|
|
|
|
|
Loans held for sale in probable branch divestiture and probableloan sale
|
|
|
(38,033
|
)
|
|
|
(46,112
|
)
|
Net deferred loan origination fees
|
|
|
(137
|
)
|
|
|
(209
|
)
|
Allowance for loan losses
|
|
|
(17,329
|
)
|
|
|
(17,181
|
)
|
|
|
|
(55,499
|
)
|
|
|
(63,502
|
)
|
|
|
|
|
|
|
|
|
|
Net Loans
|
|
$
|
635,379
|
|
|
$
|
674,072
|
|
Allowance and Provision for Loan
Losses
Our financial performance depends on the
quality of the loans we originate and management’s ability to assess the degree of risk in existing loans when it determines
the allowance for loan losses. An increase in loan charge-offs or non-performing loans or an inadequate allowance for loan losses
could reduce net interest income, net income and capital, and limit the range of products and services we can offer.
The Allowance for Loan Loss Review Committee
evaluates the allowance for loan losses monthly to maintain a level it believes to be sufficient to absorb probable incurred credit
losses existing in the loan portfolio. Periodic provisions to the allowance are made as needed. The Committee determines the allowance
by applying loss estimates to graded loans by categories, as described below. When appropriate, a specific reserve will be established
for individual loans based upon the risk classification and the estimated potential for loss. In accordance with our credit management
processes, we obtain new appraisals on properties securing our non-performing commercial real estate loans and use those appraisals
to determine specific reserves within the allowance for loan losses. As we receive new appraisals on properties securing non-performing
loans, we recognize charge-offs and adjust specific reserves as appropriate. In addition, the Committee analyzes such factors as
changes in lending policies and procedures; underwriting standards; collection; charge-off and recovery history; changes in national
and local economic business conditions and developments; changes in the characteristics of the portfolio; ability and depth of
lending management and staff; changes in the trend of the volume and severity of past due, non-accrual and classified loans; troubled
debt restructuring and other loan modifications; and results of regulatory examinations.
Further declines in collateral values,
including commercial real estate, may impact our ability to collect on certain loans when borrowers are dependent on the values
of the real estate as a source of cash flow. Beginning the second half of 2008 and continuing into 2011, we substantially increased
our provision for loan losses for our general and specific reserves as we identified adverse conditions. While it is anticipated
that there will continue to be challenges in the foreseeable future as we manage the overall level of our credit quality, it appears
that credit quality may be stabilizing.
As discussed in Note 2 to the consolidated
financial statements, we entered into a Consent Order with bank regulatory agencies. In addition to increasing capital ratios,
we agreed to maintain adequate reserves for loan losses, develop and implement a plan to reduce the level of non-performing assets
through collection, disposition, charge-off or improvement in the credit quality of the loans, develop and implement a plan to
reduce concentrations of credit in commercial real estate loans, implement revised credit risk management practices and credit
administration policies and procedures and to report our progress to the regulators.
The following table analyzes our loan loss
experience for the periods indicated.
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
(Dollars in thousands)
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
17,464
|
|
|
$
|
22,665
|
|
|
|
|
|
|
|
|
|
|
Loans charged-off:
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
|
31
|
|
|
|
19
|
|
Consumer & home equity
|
|
|
118
|
|
|
|
129
|
|
Commercial & commercial real estate
|
|
|
800
|
|
|
|
1,712
|
|
Total charge-offs
|
|
|
949
|
|
|
|
1,860
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
|
1
|
|
|
|
-
|
|
Consumer & home equity
|
|
|
44
|
|
|
|
73
|
|
Commercial & commercial real estate
|
|
|
27
|
|
|
|
248
|
|
Total recoveries
|
|
|
72
|
|
|
|
321
|
|
|
|
|
|
|
|
|
|
|
Net loans charged-off
|
|
|
877
|
|
|
|
1,539
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
1,012
|
|
|
|
3,465
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
17,599
|
|
|
|
24,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Allowance allocated to loans held for sale in
probable branch divestiture
|
|
|
(270
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period, net
|
|
$
|
17,329
|
|
|
$
|
24,591
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses to total loans (1) (2)
|
|
|
2.55
|
%
|
|
|
2.86
|
%
|
Net charge-offs to average loans outstanding
|
|
|
0.49
|
%
|
|
|
0.71
|
%
|
Allowance for loan losses to total non-performing loans (2)
|
|
|
45
|
%
|
|
|
39
|
%
|
(1) Includes loans held for sale in
probable branch divestiture and probable loan sale for 2012
(2) Includes allowance allocated to
loans held for sale in probable branch divestiture for 2012
Provision for loan loss decreased $2.5
million to $1.0 million for 2012 compared to 2011. We recorded a smaller provision for 2012 due to a lower level of charge-offs
and an improvement in our security and position of certain classified loans during the period. Our provision for loan loss was
higher in 2011 due to our efforts to ensure the adequacy of the allowance by adding specific reserves to several large commercial
real estate relationships based on updated appraisals of the underlying collateral. We require appraisals and perform evaluations
on impaired assets upon initial identification. Thereafter, we obtain appraisals or perform market value evaluations on impaired
assets at least annually. Recognizing the volatility of certain assets, we assess the transaction and market conditions
to determine if updated appraisals are needed more frequently than annually. Additionally, we evaluate the collateral condition
and value upon foreclosure. The higher provision for 2011 was also due to our increasing the general reserve provisioning levels
for commercial real estate loans due to the general credit quality trend and the higher level of charge-offs.
The allowance for loan losses decreased
$7.3 million to $17.3 million from March 31, 2011 to March 31, 2012.
The decrease was driven by net charge-offs of $25.7
million taken during 2011 and the first quarter of 2012, including specific reserves of $10.2 million on our collateral dependent
loans, in addition to taking other write downs on loans to reflect updated appraisal information obtained as part of our on-going
monitoring of the loan portfolio. This was due to appraisal values declining significantly on one to four family residential developments
during 2011. We believe these values are at or near liquidation value at March 31, 2012. We also believe this concentration has
been fully identified and properly risk rated. The pass loans in this concentration have been separately evaluated for general
allowance allocations. The decline in the specific reserves from charge-offs resulted in a decline in the allowance as a percent
of total loans. The allowance for loan losses as a percent of total loans was 2.55% for March 31, 2012 compared to 2.86% at March
31, 2011. Specific reserves as allocated to substandard loans made up 27% of the total allowance for loan loss at March 31, 2012.
Net charge-offs for the 2012 period included $507,000 in partial charge-offs compared to partial charge-offs of $1.3 million at
March 31, 2011. Allowance for loan losses to total non-performing loans increased to 45% at March 31, 2012 from 39% at March 31,
2011. The increase in the coverage ratio for 2012 was primarily due to the decrease in non-accrual loans for the period.
Federal regulations require banks to classify
their own assets on a regular basis. The regulations provide for three categories of classified loans -- substandard, doubtful
and loss. In addition, we also classify loans as criticized. Loans classified as criticized have a potential weakness that deserves
management’s close attention.
The following table provides information
with respect to criticized and classified loans for the periods indicated:
|
|
March 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
(Dollars in thousands)
|
|
2012
|
|
|
2011
|
|
|
2011
|
|
|
2011
|
|
|
2011
|
|
Criticized Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Criticized
|
|
$
|
36,753
|
|
|
$
|
31,427
|
|
|
$
|
17,893
|
|
|
$
|
26,972
|
|
|
$
|
35,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classified Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Substandard
|
|
$
|
68,910
|
|
|
$
|
80,691
|
|
|
$
|
99,018
|
|
|
$
|
94,688
|
|
|
$
|
105,370
|
|
Doubtful
|
|
|
-
|
|
|
|
30
|
|
|
|
345
|
|
|
|
534
|
|
|
|
638
|
|
Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
178
|
|
Total Classified
|
|
$
|
68,910
|
|
|
$
|
80,721
|
|
|
$
|
99,363
|
|
|
$
|
95,222
|
|
|
$
|
106,186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Criticized and Classified
|
|
$
|
105,663
|
|
|
$
|
112,148
|
|
|
$
|
117,256
|
|
|
$
|
122,194
|
|
|
$
|
141,524
|
|
Total criticized and classified loans declined
$35.9 million or 25% from March 31, 2011 and $6.5 million or 6% from the previous quarter ended December 31, 2011. We have experienced
sequential quarterly declines in each quarter since March 31 2011. Approximately $60.6 million or 88% of the total classified loans
at March 31, 2012 were related to commercial real estate loans in our market area. Several of the non-performing loans that were
added during 2011 were adequately collateralized and therefore did not require additional reserves. Classified consumer loans totaled
$1.2 million, classified mortgage loans totaled $5.3 million and classified commercial loans totaled $1.7 million. The change in
our level of allowance for loan losses is a result of a consistent allowance methodology that is driven by risk ratings. For more
information on collection efforts, evaluation of collateral and how loss amounts are estimated, see “Non-Performing Assets,”
below.
Although we may allocate a portion of the
allowance to specific loans or loan categories, the entire allowance is available for active charge-offs. We develop our allowance
estimates based on actual loss experience adjusted for current economic conditions. Allowance estimates represent a prudent measurement
of the risk in the loan portfolio, which we apply to individual loans based on loan type. If economic conditions continue to put
stress on our borrowers going forward, this may require higher provisions for loan losses in future periods. Credit quality will
continue to be a primary focus during 2012 and going forward.
Non-Performing Assets
Non-performing assets consist of certain
non-accruing restructured loans for which the interest rate or other terms have been renegotiated, loans on which interest is no
longer accrued, real estate acquired through foreclosure and repossessed assets. We do not have any loans longer than 90 days past
due still on accrual. Loans, including impaired loans, are placed on non-accrual status when they become past due 90 days or more
as to principal or interest, unless they are adequately secured and in the process of collection. Loans are considered impaired
when we no longer anticipate full principal or interest payments in accordance with the contractual loan terms. If a loan is impaired,
we allocate a portion of the allowance so that the loan is reported, net, at the present value of estimated future cash flows using
the loan’s existing rate, or at the fair value of collateral if repayment is expected solely from collateral.
Loans that have been restructured are generally
placed on nonaccrual status until we determine the future collection of principal and interest is reasonably assured, which will
require that the borrower demonstrate a period of performance in accordance to the restructured terms of six months or more.
We review our loans on a regular basis
and implement normal collection procedures when a borrower fails to make a required payment on a loan. If the delinquency on a
mortgage loan exceeds 90 days and is not cured through normal collection procedures or an acceptable arrangement is not worked
out with the borrower, we institute measures to remedy the default, including commencing a foreclosure action. We generally charge
off consumer loans when management deems a loan uncollectible and any available collateral has been liquidated. We handle commercial
business and real estate loan delinquencies on an individual basis. These loans are placed on non-accrual status upon becoming
contractually past due 90 days or more as to principal and interest or where substantial doubt about full repayment of principal
and interest is evident.
We recognize interest income on loans on
the accrual basis except for those loans in a non-accrual of income status. We discontinue accruing interest on impaired loans
when management believes, after consideration of economic and business conditions and collection efforts, that the borrowers’
financial condition is such that collection of interest is doubtful, typically after the loan becomes 90 days delinquent. When
we discontinue interest accrual, we reverse existing accrued interest and subsequently recognize interest income only to the extent
we receive cash payments and are assured of repayment of all outstanding principal.
We classify real estate acquired as a result
of foreclosure or by deed in lieu of foreclosure as real estate owned until such time as it is sold. We classify new and used automobile,
motorcycle and all terrain vehicles acquired as a result of foreclosure as repossessed assets until they are sold. When such property
is acquired we record it at the lower of the unpaid principal balance of the related loan or its fair value. We charge any write-down
of the property at the time of acquisition to the allowance for loan losses. Subsequent gains and losses are included in non-interest
income and non-interest expense.
Real estate owned acquired through foreclosure
is recorded at fair value less estimated selling costs at the date of foreclosure. Fair value is based on the appraised market
value of the property based on sales of similar assets. The fair value may be subsequently reduced if the estimated fair value
declines below the original appraised value. We monitor market information and the age of appraisals on existing real estate owned
properties and obtain new appraisals as circumstances warrant. Real estate acquired through foreclosure increased $998,000
to $30.1 million at March 31, 2012. Real estate acquired through foreclosure includes $12.9 million in land development properties
and building lots located primarily in our Jefferson County market. We anticipate that our level of real estate acquired through
foreclosure will remain at elevated levels for some period of time as foreclosures reflecting both weak economic conditions and
soft commercial real estate values continue. We also have sales contracts in place on nine other real estate owned properties totaling
$3.3 million set to close during the second quarter of 2012 indicating continued improvement in classified credits. All properties
held in other real estate owned are listed for sale with various independent real estate agents.
A summary of the real estate acquired through
foreclosure activity is as follows:
|
|
March 31,
|
|
|
December 31,
|
|
(Dollars in thousands)
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
29,083
|
|
|
$
|
25,807
|
|
Additions
|
|
|
5,981
|
|
|
|
19,416
|
|
Sales
|
|
|
(3,418
|
)
|
|
|
(6,877
|
)
|
Writedowns
|
|
|
(1,565
|
)
|
|
|
(9,263
|
)
|
Ending balance
|
|
$
|
30,081
|
|
|
$
|
29,083
|
|
The following table provides information
with respect to non-performing assets for the periods indicated.
|
|
March 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
(Dollar in thousands)
|
|
2012
|
|
|
2011
|
|
|
2011
|
|
|
2011
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructured on non-accrual status
|
|
$
|
18,574
|
|
|
$
|
18,032
|
|
|
$
|
23,302
|
|
|
$
|
12,846
|
|
|
$
|
8,079
|
|
Past due 90 days still on accrual
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Loans on non-accrual status
|
|
|
20,946
|
|
|
|
21,718
|
|
|
|
28,155
|
|
|
|
24,040
|
|
|
|
44,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans
|
|
|
39,520
|
|
|
|
39,750
|
|
|
|
51,457
|
|
|
|
36,886
|
|
|
|
52,978
|
|
Real estate acquired through foreclosure
|
|
|
30,081
|
|
|
|
29,083
|
|
|
|
29,180
|
|
|
|
26,459
|
|
|
|
24,908
|
|
Other repossessed assets
|
|
|
49
|
|
|
|
42
|
|
|
|
36
|
|
|
|
34
|
|
|
|
39
|
|
Total non-performing assets
|
|
$
|
69,650
|
|
|
$
|
68,875
|
|
|
$
|
80,673
|
|
|
$
|
63,379
|
|
|
$
|
77,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income that would have been earned on non-performing loans
|
|
$
|
2,197
|
|
|
$
|
2,238
|
|
|
$
|
2,866
|
|
|
$
|
2,080
|
|
|
$
|
3,025
|
|
Interest income recognized on non-performing loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing loans to total loans (includes loans held for sale in probable branch divestiture and probable loan sale)
|
|
|
5.72
|
%
|
|
|
5.39
|
%
|
|
|
6.72
|
%
|
|
|
4.61
|
%
|
|
|
6.17
|
%
|
Non-performing assets to total loans (includes loans held for sale in probable branch divestiture and probable loan sale)
|
|
|
10.08
|
%
|
|
|
9.34
|
%
|
|
|
10.54
|
%
|
|
|
7.93
|
%
|
|
|
9.08
|
%
|
Non-performing loans remained relatively
flat at March 31, 2012 compared to December 31, 2011. Non-performing loans declined $13.5 million or 25% from March 31, 2011. The
decrease for 2012 was the result of a decrease in non-accrual loans of $772,000 offset by an increase in restructured non-accruing
mortgage, commercial and commercial real estate loans of $542,000. Loans that have been restructured are generally placed on nonaccrual
status until we determine the future collection of principal and interest is reasonably assured, which will require that the borrower
demonstrate a period of performance in accordance to the restructured terms of six months or more. The change in non-accrual loans
resulted from the addition of six non-accrual relationships totaling $5.7 million. Offsetting this increase was a decrease in non-accrual
loans due to write-downs of $507,000 based upon updated appraisals and transfers of four non-accrual relationships totaling $5.9
million to real estate acquired through foreclosure. A concentration in loans for residential subdivision development in Jefferson
and Oldham Counties contributed significantly to the increases in our non-performing loans and our non-performing assets during
the past three years. At March 31, 2012, substantially all of our residential housing development assets in these counties have
been classified as impaired and written down to what we believe to be at or near liquidation value. The remaining residential development
credits are smaller and have strong guarantors. All non-performing loans are considered impaired.
The following table provides information with
respect to restructured loans for the periods indicated.
|
|
March 31,
|
|
|
December 31,
|
|
(Dollar in thousands)
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
Restructured loans on non-accrual
|
|
$
|
18,574
|
|
|
$
|
18,032
|
|
Restructured loans on accrual
|
|
|
17,165
|
|
|
|
16,047
|
|
|
|
|
|
|
|
|
|
|
Total restructured loans
|
|
$
|
35,739
|
|
|
$
|
34,079
|
|
The increase in restructured loans on non-accrual
for 2012 resulted from the restructuring of two commercial real estate loan relationships totaling $817,000. The increase in restructured
loans on accrual resulted from the restructuring of four commercial real estate relationships totaling $1.9 million. The loans
were evaluated as impaired loans and appropriately allocated specific reserve allowances.
The terms of our restructured loans have
been renegotiated to reduce the rate of interest or extend the term, thus reducing the amount of cash flow required from the borrower
to service the loans. The borrowers are currently meeting the terms of the restructured loans. We anticipate that our level of
restructured loans will continue to increase as we identify borrowers in financial difficulty and work with them to modify to more
affordable terms.
We have worked with customers when feasible
to establish “A” and “B” note structures. The “B” note is charged-off on our books but remains
an outstanding balance for the customer. These typically carry a very nominal or low rate of interest. The “A” note
is a note structured on a proper basis meeting internal policy standards for a performing loan. After six months of performance,
the “A” note restructured loan is eligible to be placed back on an accrual basis as a performing troubled debt restructured
loan.
Investment Securities
Interest on securities provides us our
largest source of interest income after interest on loans, constituting 21.8% of the total interest income for the quarter ended
March 31, 2012. The securities portfolio serves as a source of liquidity and earnings, and contributes to the management of interest
rate risk. We have the authority to invest in various types of liquid assets, including short-term United States Treasury obligations
and securities of various federal agencies, obligations of states and political subdivisions, corporate bonds, certificates of
deposit at insured savings and loans and banks, bankers' acceptances, and federal funds. We may also invest a portion of our assets
in certain commercial paper and corporate debt securities. We are also authorized to invest in mutual funds and stocks whose assets
conform to the investments that we are authorized to make directly. The available-for-sale investment portfolio increased by $42.0
million due to the purchase of U.S. Government agency securities and government-sponsored mortgage-backed securities. Recent purchases
have been high cash flow instruments with short average lives in order to decrease the volatility of the investment portfolio as
well as provide cash flow in order to limit interest rate risk.
We evaluate investment securities with
significant declines in fair value on a quarterly basis to determine whether they should be considered other-than-temporarily impaired
under current accounting guidance, which generally provides that if a security is in an unrealized loss position, whether due to
general market conditions or industry or issuer-specific factors, the holder of the securities must assess whether the impairment
is other-than-temporary.
We consider the length of time and the extent to which the fair value has been
less than cost, the financial condition and near-term prospects of the issuer,
and whether management has the intent to
sell the debt security or whether it is more likely than not that we will be required to sell the debt security before its anticipated
recovery.
In analyzing an issuer’s financial condition, we may consider whether the securities
are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results
of reviews of the issuer’s financial condition.
The unrealized losses on our U. S. Treasury
and agency securities and our government sponsored mortgage-backed residential securities were a result of changes in interest
rates for fixed-rate securities where the interest rate received is less than the current rate available for new offerings of similar
securities. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because
we do not intend to sell and it is more likely than not that we will not be required to sell these investments until recovery of
fair value, which may be maturity, we do not consider these investments to be other-than-temporarily impaired at March 31, 2012.
We have evaluated the decline in the fair
value of our trust preferred securities, which are directly related to the credit and liquidity crisis that the financial services
industry has experienced in recent years. The trust preferred securities market is currently inactive, making
the valuation of trust preferred securities very difficult. We value trust preferred securities using unobservable inputs
through a discounted cash flow analysis as permitted under current accounting guidance and using the expected cash flows appropriately
discounted using present value techniques. Refer to Note 9 – Fair Value for more information.
We recognized other-than-temporary impairment
charges of $26,000 for the expected credit loss during the 2012 period and $2.1 million during the time we have held these securities
on five of our trust preferred securities with an original cost basis of $3.0 million. All of our trust preferred securities are
currently rated below investment grade. One of our trust preferred securities continues to pay interest as scheduled through March
31, 2012, and is expected to continue paying interest as scheduled. The other four trust preferred securities are paying either
partial or full interest in kind instead of full cash interest. See Note 3 – Securities for more information. Management
will continue to evaluate these securities for impairment quarterly.
Deposits
We rely primarily
on providing excellent customer service and long-standing relationships with customers to attract and retain deposits. Market interest
rates and rates on deposit products offered by competing financial institutions can significantly affect our ability to attract
and retain deposits. We attract both short-term and long-term deposits from the general public by offering a wide range of deposit
accounts and interest rates. In recent years market conditions have caused us to rely increasingly on short-term certificate accounts
and other deposit alternatives that are more responsive to market interest rates. We use forecasts based on interest rate risk
simulations to assist management in monitoring our use of certificates of deposit and other deposit products as funding sources
and the impact of the use of those products on interest income and net interest margin in various rate environments
.
Total
deposits decreased $23.3 million compared to December 31, 2011. Retail and commercial deposits decreased $8.5 million. Public funds
decreased $6.4 million. Brokered deposits and Certificate of Deposits Account Registry Service (“CDARS”) certificates
decreased $8.4 million. Brokered deposits were $79.0 million at March 31, 2012 compared to $87.3 million at December 31, 2011.
As a result of our Consent Order with bank regulatory agencies, we are no
longer allowed to accept, renew or rollover brokered deposits (including deposits through the CDARs program) without prior regulatory
approval.
We continue to offer attractive certificate
rates for various terms to allow us to retain deposit customers and reduce interest rate risk during the current rate environment,
while protecting the margin. However, the Consent Order resulted in the Bank being categorized as a "troubled institution"
by bank regulators. The "troubled institution" designation restricts the amount of interest the Bank may pay on deposits.
Unless the Bank is granted a waiver because it resides in a market that the FDIC determines is a high rate market, the Bank is
limited to paying deposit interest rates .75% above the average rates computed by the FDIC. The Bank must apply annually to
be granted this waiver, which it has done and was granted for 2012.
The following table breaks down our deposits.
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
Non-interest bearing
|
|
$
|
85,012
|
|
|
$
|
77,629
|
|
NOW demand
|
|
|
161,880
|
|
|
|
160,722
|
|
Savings
|
|
|
96,833
|
|
|
|
91,774
|
|
Money market
|
|
|
144,334
|
|
|
|
138,973
|
|
Certificates of deposit
|
|
|
611,406
|
|
|
|
653,696
|
|
|
|
$
|
1,099,465
|
|
|
$
|
1,122,794
|
|
Non-interest bearing deposits at March
31, 2012 include $5.6 million in deposits held for sale compared to $5.0 million held for sale at December 31, 2011. NOW demand,
savings, money market and certificate of deposit balances at March 31, 2012 include $113.2 million deposits held for sale compared
to $112.3 million at December 31, 2011. We have public funds deposits from school boards, water districts and municipalities within
our markets. These deposits are larger than individual retail depositors. We do not have a deposit relationship that is significant
enough to cause a negative impact on our liquidity position.
Advances from Federal Home Loan Bank
Deposits are the primary source of funds
for our lending and investment activities and for our general business purposes. We can also use advances (borrowings) from the
Federal Home Loan Bank of Cincinnati (FHLB) to compensate for reductions in deposits or deposit inflows at less than projected
levels. At March 31, 2012 we had $27.7 million in advances outstanding from the FHLB. At March 31, 2012, we had sufficient collateral
available to borrow, approximately, an additional $17.0 million in advances from the FHLB. Advances from the FHLB are secured by
our stock in the FHLB, certain securities and substantially all of our first mortgage loans.
Subordinated Debentures
In 2008, an unconsolidated trust subsidiary
of First Financial Service Corporation issued $8.0 million in trust preferred securities. The trust loaned the proceeds of the
offering to us in exchange for junior subordinated deferrable interest debentures, which proceeds we used to finance the purchase
of FSB Bancshares, Inc. The subordinated debentures, which mature on June 24, 2038, can be called at par in whole or in part on
or after June 24, 2018. The subordinated debentures pay a fixed rate of 8% for thirty years. We have the option to defer interest
payments on the subordinated debt from time to time for a period not to exceed five consecutive years. The subordinated debentures
are considered as Tier I capital for the Corporation under current regulatory guidelines.
In 2007, a different trust subsidiary issued
30 year cumulative trust preferred securities totaling $10 million at a 10 year fixed rate of 6.69% adjusting quarterly thereafter
at LIBOR plus 160 basis points. The subordinated debentures, which mature March 22, 2037, can be called at par in whole or in part
on or after March 15, 2017. We have the option to defer interest payments on the subordinated debt from time to time for a period
not to exceed five consecutive years. The subordinated debentures are considered as Tier I capital for the Corporation under current
regulatory guidelines.
Our trust subsidiaries loaned the proceeds
of their offerings of trust preferred securities to us in exchange for junior subordinated deferrable interest debentures. We are
not considered the primary beneficiary of these trusts (variable interest entity), therefore the trusts are not consolidated in
our financial statements, but rather the subordinated debentures are shown as a liability. Our investment in the common stock of
the trusts was $310,000.
On October 29, 2010, we exercised our right
to defer regularly scheduled interest payments on both issues of junior subordinated notes, together having an outstanding principal
amount of $18 million, relating to outstanding trust preferred securities. We have the right to defer payments of interest for
up to 20 consecutive quarterly periods without default or penalty.
After such period, we must pay all
deferred interest and resume quarterly interest payments or we will be in default.
During the deferral period, the statutory
trusts, which are wholly owned subsidiaries of First Financial Service Corporation formed to issue the trust preferred securities,
will likewise suspend the declaration and payment of dividends on the trust preferred securities. The regular scheduled interest
payments will continue to be accrued for payment in the future and reported as an expense for financial statement purposes. As
of March 31, 2012, these accrued but unpaid interest payments totaled $2.0 million.
LIQUIDITY
Liquidity risk arises from the possibility
we may not be able to satisfy current or future financial commitments, or may become unduly reliant on alternative funding sources.
The objective of liquidity risk management is to ensure that we can meet the cash flow requirements of depositors and borrowers,
as well as our operating cash needs, at a reasonable cost, taking into account all on- and off-balance sheet funding demands. Our
investment and funds management policy identifies the primary sources of liquidity, establishes procedures for monitoring and measuring
liquidity, and establishes minimum liquidity requirements in compliance with regulatory guidance. The Asset Liability Committee
continually monitors our liquidity position.
Our banking centers provide access to retail
deposit markets. If large certificate depositors shift to our competitors or other markets in response to interest rate changes,
we have the ability to replenish those deposits through alternative funding sources. In addition to maintaining a stable core deposit
base, we maintain adequate liquidity primarily through the use of investment securities. Traditionally, we have also borrowed from
the FHLB to supplement our funding requirements. At March 31, 2012, we had sufficient collateral available to borrow, approximately,
an additional $17.0 million in advances from the FHLB. We believe that we have adequate funding sources through unpledged investment
securities, loan principal repayments, and potential asset maturities and sales to meet our foreseeable liquidity requirements.
At the holding company level, the Corporation
uses cash to pay dividends to stockholders, repurchase common stock, make selected investments and acquisitions, and service debt.
The main sources of funding for the Corporation include dividends from the Bank, borrowings and access to the capital markets.
The primary source of funding for the Corporation
has been dividends and returns of investment from the Bank. Kentucky banking laws limit the amount of dividends that may be paid
to the Corporation by the Bank without prior approval of the KDFI. Under these laws, the amount of dividends that may be paid in
any calendar year is limited to current year’s net income, as defined in the laws, combined with the retained net income
of the preceding two years, less any dividends declared during those periods.
The Bank’s Consent Order with the FDIC
and KDFI requires us to obtain the consent of the Regional Director of the FDIC and the Commissioner of the KDFI to declare and
pay cash dividends to the Corporation. The Corporation has also entered into a formal agreement with the Federal Reserve to obtain
regulatory approval before declaring any dividends. We may not redeem shares or obtain additional borrowings without prior approval.
Because of these limitations, consolidated cash flows as presented in the consolidated statements of cash flows may not represent
cash immediately available to the Corporation. During the first quarter of 2012, the Bank did not declare or pay any dividends
to the Corporation. Cash held by the Corporation at March 31, 2012 was $427,000 compared to cash of $554,000 at December 31, 2011.
CAPITAL
Stockholders’ equity decreased $546,000
for the period ended March 31, 2012, primarily due to a net loss attributable to common shareholders of $553,000 recorded during
the period. Our average stockholders’ equity to average assets ratio decreased to 4.38% for the quarter ended March 31,
2012 compared to 5.97% for the 2011 quarter.
On January 9, 2009, we sold $20 million
of cumulative perpetual preferred shares, with a liquidation preference of $1,000 per share (the “Senior Preferred Shares”)
to the U.S. Treasury under the terms of its Capital Purchase Program. The Senior Preferred Shares constitute Tier 1 capital and
rank senior to our common shares. The Senior Preferred Shares pay cumulative dividends at a rate of 5% per year for the first
five years and will reset to a rate of 9% per year on January 9, 2014.
Under the terms of our CPP stock purchase
agreement, we also issued the U.S. Treasury a warrant to purchase an amount of our common stock equal to 15% of the aggregate amount
of the Senior Preferred Shares, or $3 million. The warrant entitles the U.S. Treasury to purchase 215,983 common shares at a purchase
price of $13.89 per share. The initial exercise price for the warrant and the number of shares subject to the warrant were determined
by reference to the market price of our common stock calculated on a 20-day trailing average as of December 8, 2008, the date the
U.S. Treasury approved our application. The warrant has a term of 10 years and is potentially dilutive to earnings per share.
On October 29, 2010, we gave written notice
to the U.S. Treasury that effective with the fourth quarter of 2010, we were suspending the payment of regular quarterly cash dividends
on our Senior Preferred Shares. The dividends are cumulative and failure to pay dividends for six quarters would trigger the rights
of the holder of our Senior Preferred Shares to appoint representatives to our Board of Directors. The dividends will continue
to be accrued for payment in the future and reported as a preferred dividend requirement that is deducted from income to common
shareholders for financial statement purposes.
In addition to our agreement with the Federal
Reserve that requires prior written consent to repurchase common shares, the terms of our Senior Preferred Shares do not allow
us to repurchase shares of our common stock without the consent of the holder until the Senior Preferred Shares are redeemed. During
the first quarter of 2012, we did not purchase any shares of our common stock.
Each of the federal bank regulatory agencies
has established minimum leverage capital requirements for banks. Banks must maintain a minimum ratio of Tier 1 capital to adjusted
average quarterly assets ranging from 3% to 5%, subject to federal bank regulatory evaluation of an organization’s overall
safety and soundness.
In its 2012 Consent Order with the FDIC
and KDFI, the Bank has agreed to achieve and maintain a Tier 1 capital ratio of 9.0% and a total risk-based capital ratio of 12.0%
by June 30, 2012. At March 31, 2012, we were not in compliance with the Tier 1 and total risk-based capital requirements. We notified
the bank regulatory agencies that the increased capital levels would not be achieved and anticipate that the FDIC and KDFI will
reevaluate our progress toward achieving the higher capital ratios at June 30, 2012.
The 2012 Consent Order requires that
if the Bank should be unable to reach the required capital levels by June 30, 2012 and if the Bank is in receipt of written
directions by the FDIC and KDFI, then the Bank would within 30 days develop, adopt and implement a written plan to sell or merge
itself into another federally insured financial institution. The 2012 Consent Order requires the Bank to continue to adhere
to the plans implemented in response to the 2011 Consent Order, and includes the substantive provisions of the 2011 Consent
Order. We are working on various specific initiatives to increase our regulatory capital and to reduce our total assets such
as the sale of branch offices and raising common stock.
As part of our ongoing capital initiatives,
on February 9, 2012, we signed a definitive agreement to sell our four Indiana banking centers to First Savings Bank, F.S.B. The
transaction is projected to increase our Tier I capital ratio from 5.99% to 6.87% and increase our total risk-based capital ratio
from 10.70% to 11.84% based on information at March 31, 2012, and is expected to close early in the third quarter of 2012.
The following table shows the ratios of
Tier 1 capital, total capital to risk-adjusted assets and the leverage ratios for the Corporation and the Bank as of March 31,
2012.
|
|
Capital Adequacy Ratios as of
|
|
|
|
March 31, 2012
|
|
|
|
|
|
Risk-Based Capital Ratios
|
|
Regulatory
Minimums
|
|
|
The Bank
|
|
|
The Corporation
|
|
Tier 1 capital
|
|
|
4.00
|
%
|
|
|
9.43
|
%
|
|
|
9.02
|
%
|
Total risk-based capital
|
|
|
8.00
|
%
|
|
|
10.70
|
%
|
|
|
10.28
|
%
|
Tier 1 leverage ratio
|
|
|
4.00
|
%
|
|
|
5.90
|
%
|
|
|
5.71
|
%
|
The 2012 Consent Order requires the Bank
to achieve the minimum capital ratios presented below by June 30 2012:
|
|
Actual as of
|
|
|
Ratio Required
|
|
|
|
3/31/2012
|
|
|
by Consent Order
|
|
Total capital to risk-weighted assets
|
|
|
10.70
|
%
|
|
|
12.00
|
%
|
Tier 1 capital to total assets
|
|
|
5.99
|
%
|
|
|
9.00
|
%
|
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Asset/Liability Management and Market Risk
To minimize the volatility of net interest
income and exposure to economic loss that may result from fluctuating interest rates, we manage our exposure to adverse changes
in interest rates through asset and liability management activities within guidelines established by our Asset Liability Committee
(“ALCO”). Comprised of senior management representatives, the ALCO has the responsibility for approving and ensuring
compliance with asset/liability management policies. Interest rate risk is the exposure to adverse changes in the net interest
income as a result of market fluctuations in interest rates. The ALCO, on an ongoing basis, monitors interest rate and liquidity
risk in order to implement appropriate funding and balance sheet strategies. Management considers interest rate risk to be our
most significant market risk.
We utilize an earnings simulation model
to analyze net interest income sensitivity. We then evaluate potential changes in market interest rates and their subsequent effects
on net interest income. The model projects the effect of instantaneous movements in interest rates of both 100 and 200 basis points.
We also incorporate assumptions based on the historical behavior of our deposit rates and balances in relation to changes in interest
rates into the model. These assumptions are inherently uncertain and, as a result, the model cannot precisely measure future net
interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results
will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes as well as
changes in market conditions and the application and timing of various management strategies.
Our interest sensitivity profile was asset
sensitive at March 31, 2012 and December 31, 2011. Given a sustained 100 basis point decrease in rates, our base net interest income
would decrease by an estimated
2.97% at March 31, 2012 compared to a decrease of 2.39% at December 31, 2011.
Given
a sustained 100 basis point increase in interest rates, our base net interest income would decrease by an
estimated .05%
at March 31, 2012 compared to an increase of .60% at December 31, 2011.
Our interest sensitivity at any point in
time will be affected by a number of factors. These factors include the mix of interest sensitive assets and liabilities, their
relative pricing schedules, market interest rates, deposit growth, loan growth, decay rates and prepayment speed assumptions.
We use various asset/liability strategies
to manage the re-pricing characteristics of our assets and liabilities designed to ensure that exposure to interest rate fluctuations
is limited within our guidelines of acceptable levels of risk-taking. As demonstrated by the March 31, 2012 and December 31, 2011
sensitivity tables, our balance sheet has an asset sensitive position. This means that our earning assets, which consist of loans
and investment securities, will change in price at a faster rate than our deposits and borrowings. Therefore, if short term interest
rates increase, our net interest income will increase. Likewise, if short term interest rates decrease, our net interest income
will decrease.
Our sensitivity to interest rate changes
is presented based on data as of March 31, 2012 and December 31, 2011 annualized to a one year period.
|
|
March 31, 2012
|
|
|
|
Decrease in Rates
|
|
|
|
|
|
Increase in Rates
|
|
|
|
200
|
|
|
100
|
|
|
|
|
|
100
|
|
|
200
|
|
(Dollars in thousands)
|
|
Basis Points
|
|
|
Basis Points
|
|
|
Base
|
|
|
Basis Points
|
|
|
Basis Points
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
39,360
|
|
|
$
|
39,834
|
|
|
$
|
40,741
|
|
|
$
|
41,665
|
|
|
$
|
42,630
|
|
Investments
|
|
|
7,998
|
|
|
|
8,112
|
|
|
|
8,581
|
|
|
|
9,321
|
|
|
|
10,043
|
|
Total interest income
|
|
|
47,358
|
|
|
|
47,946
|
|
|
|
49,322
|
|
|
|
50,986
|
|
|
|
52,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
12,318
|
|
|
|
12,374
|
|
|
|
12,702
|
|
|
|
14,382
|
|
|
|
14,410
|
|
Borrowed funds
|
|
|
1,350
|
|
|
|
1,351
|
|
|
|
1,350
|
|
|
|
1,351
|
|
|
|
1,351
|
|
Total interest expense
|
|
|
13,668
|
|
|
|
13,725
|
|
|
|
14,052
|
|
|
|
15,733
|
|
|
|
15,761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
33,690
|
|
|
$
|
34,221
|
|
|
$
|
35,270
|
|
|
$
|
35,253
|
|
|
$
|
36,912
|
|
Change from base
|
|
$
|
(1,580
|
)
|
|
$
|
(1,049
|
)
|
|
|
|
|
|
$
|
(17
|
)
|
|
$
|
1,642
|
|
% Change from base
|
|
|
(4.48
|
)%
|
|
|
(2.97
|
)%
|
|
|
|
|
|
|
(0.05
|
)%
|
|
|
4.66
|
%
|
|
|
December 31, 2011
|
|
|
|
Decrease in Rates
|
|
|
|
|
|
Increase in Rates
|
|
|
|
200
|
|
|
100
|
|
|
|
|
|
100
|
|
|
200
|
|
(Dollars in thousands)
|
|
Basis Points
|
|
|
Basis Points
|
|
|
Base
|
|
|
Basis Points
|
|
|
Basis Points
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
41,543
|
|
|
$
|
42,096
|
|
|
$
|
43,025
|
|
|
$
|
43,998
|
|
|
$
|
45,002
|
|
Investments
|
|
|
7,183
|
|
|
|
7,237
|
|
|
|
7,505
|
|
|
|
8,269
|
|
|
|
9,019
|
|
Total interest income
|
|
|
48,726
|
|
|
|
49,333
|
|
|
|
50,530
|
|
|
|
52,267
|
|
|
|
54,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
13,910
|
|
|
|
14,047
|
|
|
|
14,414
|
|
|
|
15,940
|
|
|
|
16,156
|
|
Borrowed funds
|
|
|
1,354
|
|
|
|
1,354
|
|
|
|
1,354
|
|
|
|
1,355
|
|
|
|
1,356
|
|
Total interest expense
|
|
|
15,264
|
|
|
|
15,401
|
|
|
|
15,768
|
|
|
|
17,295
|
|
|
|
17,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
33,462
|
|
|
$
|
33,932
|
|
|
$
|
34,762
|
|
|
$
|
34,972
|
|
|
$
|
36,509
|
|
Change from base
|
|
$
|
(1,300
|
)
|
|
$
|
(830
|
)
|
|
|
|
|
|
$
|
210
|
|
|
$
|
1,747
|
|
% Change from base
|
|
|
(3.74
|
)%
|
|
|
(2.39
|
)%
|
|
|
|
|
|
|
0.60
|
%
|
|
|
5.03
|
%
|
Item 4. CONTROLS AND PROCEDURES
Management is responsible for establishing
and maintaining effective disclosure controls and procedures, as defined under Rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934. As of March 31, 2012, an evaluation was performed under the supervision and with the participation of management,
including the Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of
our disclosure controls and procedures. Based on that evaluation, for the reasons described below, management and the Risk Management
Committee of our Board of Directors determined that our internal controls were not effective.
Management is responsible for establishing
and maintaining adequate internal controls over financial reporting that are designed to produce reliable financial statements
in accordance with accounting principles generally accepted in the United States. 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 conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
During our December 31, 2011 review of
the allowance for loan loss the following controls were found to not be operating appropriately:
|
·
|
Review over internal evaluations for impaired
loans
|
|
·
|
Review of the mathematical accuracy of
impaired loan calculations
|
|
·
|
Review of present value cash flow analysis
performed on troubled debt restructuring calculations.
|
To remediate this material weakness described
above and enhance our internal controls over financial reporting, management initiated the following significant changes during
the first quarter of 2012:
The enhanced procedures included:
|
·
|
An independent review was performed and documented by the Chief Credit Officer on all internal
evaluations; and
|
|
·
|
An independent review was performed and documented by the finance department to validate the accuracy
of the calculation on all impaired loans and to validate the accuracy of all present value cash flow calculations performed on
loans classified as troubled debt restructurings.
|
Notwithstanding the evaluation and initiation
of these remediation actions, the identified material weakness in our internal controls over financial reporting will not be considered
remediated until the new controls are fully implemented, in operation for a sufficient period of time, tested and concluded by
management to be operating effectively.
There were no other changes in our internal
control over financial reporting that occurred during the quarter ended March 31, 2012 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
Part II - OTHER INFORMATION
|
Item 1.
|
Legal Proceedings
|
|
|
|
|
|
|
|
Although, from time to time, we are involved in various legal proceedings in the normal course of business, there are no material pending legal proceedings to which we are a party, or to which any of our property is subject.
|
|
|
|
|
|
Item 1A.
|
Risk Factors
|
|
|
|
|
|
|
|
There have been no material changes from the risk factors as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011.
|
|
|
|
|
|
Item 2.
|
Unregistered Sales of Securities and Use of Proceeds
|
|
|
|
|
|
|
We did not repurchase any shares of our common stock during the quarter ended March 31, 2012.
|
|
Item 3.
|
Defaults Upon Senior Securities
|
|
|
|
|
|
|
Not Applicable
|
|
|
|
|
|
Item 4.
|
Mine Safety Disclosures
|
|
|
|
|
|
|
Not Applicable
|
|
|
|
|
|
Item 5.
|
Other Information
|
|
|
|
|
|
|
None
|
|
|
|
|
|
Item 6.
|
Exhibits:
|
|
|
31.1
|
Certification of Principal Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act
|
|
|
|
|
|
|
31.2
|
Certification of Principal Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act
|
|
|
|
|
|
|
32
|
Certification of Principal Executive Officer and Principal Financial Officer Pursuant to Section 18 U.S.C. Section 1350 (As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)
|
|
|
|
|
|
|
101
|
The following financial information from the Quarterly Report of First Financial Service Corporation on Form 10-Q for the quarter ended March 31, 2012, formatted in XBRL: (i) Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011, (ii) Consolidated Statements of Operations for the three months ended March 31, 2012 and 2011, (iii) Consolidated Statements of Comprehensive Income/(Loss) for the three months ended March 31, 2012 and 2011, (iv) Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2012, (v) Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011, and (vi) Notes to the Unaudited Consolidated Financial Statements, tagged as blocks of text.
|
FIRST FINANCIAL SERVICE CORPORATION
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.
Date: May 14, 2012
|
By:
|
/s/ Gregory S. Schreacke
|
|
|
Gregory S. Schreacke
|
|
|
President
|
|
|
Principal Executive Officer and
|
|
|
Principal Financial Officer
|
|
|
Duly Authorized Representative
|
INDEX TO EXHIBITS
Exhibit No.
|
Description
|
|
|
31.1
|
Certification of Principal Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act
|
|
|
31.2
|
Certification of Principal Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act
|
|
|
32
|
Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350 (As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)
|
|
|
101
|
The following financial information from the Quarterly Report of First Financial Service Corporation on Form 10-Q for the quarter ended March 31, 2012, formatted in XBRL: (i) Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011, (ii) Consolidated Statements of Operations for the three months ended March 31, 2012 and 2011, (iii) Consolidated Statements of Comprehensive Income/(Loss) for the three months ended March 31, 2012 and 2011, (iv) Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2012, (v) Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011, and (vi) Notes to the Unaudited Consolidated Financial Statements, tagged as blocks of text.
|
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