Item 7.
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Managements Discussion and Analysis of Financial Condition and Results of Operation
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Managements discussion and analysis of financial condition and results of operations analyzes the consolidated financial condition and
results of operations of Porter Bancorp, Inc. and its wholly owned subsidiary, PBI Bank. Porter Bancorp, Inc. is a Louisville, Kentucky-based bank holding company which operates 18 full-service banking offices in twelve counties through its
wholly-owned subsidiary, PBI Bank. Our markets include metropolitan Louisville in Jefferson County and the surrounding counties of Henry and Bullitt, and extend south along the Interstate 65 corridor to Tennessee. We serve south central Kentucky and
southern Kentucky from banking offices in Butler, Green, Hart, Edmonson, Barren, Warren, Ohio, and Daviess Counties. We also have an office in Lexington, the second largest city in Kentucky. The Bank is a community bank with a wide range of
commercial and personal banking products.
Historically, we have focused on commercial and commercial real estate lending, both in markets
where we have banking offices and other growing markets in our region. Commercial, commercial real estate and real estate construction loans accounted for 56.3% of our total loan portfolio as of December 31, 2013, and 58.6% as of
December 31, 2012. Commercial lending generally produces higher yields than residential lending, but involves greater risk and requires more rigorous underwriting standards and credit quality monitoring.
The following discussion should be read in conjunction with our consolidated financial statements and accompanying notes and other schedules
presented elsewhere in the report.
Overview
For the year ended December 31, 2013, we reported a net loss of $1.6 million compared with net loss of $32.9 million for the year ended
December 31, 2012 and $107.3 million for the year ended December 31, 2011. After deductions for dividends on preferred stock, accretion on preferred stock, and allocating losses to participating securities, the net loss attributable to
common shareholders was $3.4 million for the year ended December 31, 2013, compared with net loss attributable to common shareholders of $33.4 million for the year ended December 31, 2012. Basic and diluted loss per common share were
$(0.29) for the year ended December 31, 2013, compared with loss per common share of $(2.85) for 2012.
Our financial performance in
2013 continued to be negatively impacted by the Banks high level of non-performing assets. Asset quality remediation, capital restoration, and lowering the risk profile of the Company remain our major objectives for 2014.
Non-performing loans were 14.38% of total loans and non-performing assets were 12.35% of total assets at December 31, 2013. We remain
diligent in the management of our portfolio and are striving to improve credit quality by working throughout our markets to balance selective new customer acquisition, customer service for our existing clients and prudent risk management.
The following significant developments occurred during the year ended December 31, 2013:
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Our net loss attributable to common shareholders of $3.4 million for the year ended December 31, 2013 was much improved compared with our net
loss attributable to common shareholders of $33.4 million for the year ended December 31, 2012.
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We have successfully reduced the size of our balance sheet in accordance with our capital plan. Average assets were $1.098 billion as of
December 31, 2013, compared with $1.342 billion at December 31, 2012. This reduction was accomplished primarily by reducing our commercial real estate and construction and development loans within our loan portfolio and through the
redemption of higher cost certificates of deposit accounts.
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Net interest margin decreased 21 basis points to 3.10% for the year ended December 31, 2013 compared with 3.31% for the year ended
December 31, 2012. The decrease in margin between periods was primarily due to a reduction in interest earning assets, coupled with lower rates on those assets and elevated nonaccrual loan levels relative to total loans. Average loans decreased
23.7% to $788.2 million in 2013 compared with $1.0 billion in 2012. Net loans decreased 19.1% to $681.2 million at December 31, 2013, compared with $842.4 million at December 31, 2012.
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Provision for loan losses expense declined to $700,000 for 2013, compared with $40.3 million for the year ended December 31, 2012. The
decrease was primarily attributable to the substantial reduction in the loan portfolio size, declining charge-off trends, and a decline in loans migrating downward in risk grade classification. Net charge-offs were $29.3 million in 2013, compared
with $36.1 million in 2012 and $44.3 million in 2011.
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27
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We continued to execute on our strategy to reduce our commercial real estate and construction and development loans. Construction and development
loans totaled $43.3 million, or 52% of total risk-based capital, at December 31, 2013 compared with $70.3 million, or 82% of total risk-based capital, at December 31, 2012. Non-owner occupied commercial real estate loans, construction
and development loans, and multi-family residential real estate loans as a group totaled $237.0 million, or 284% of total risk-based capital, at December 31, 2013 compared with $311.1 million, or 362% of total risk-based capital, at
December 31, 2012.
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Loan proceeds received from the repayment of our commercial real estate and construction and development loans were used primarily to redeem
maturing certificates of deposit during 2013. Deposits decreased 7.3% to $987.7 million compared with $1.1 billion at December 31, 2012. Certificate of deposit balances declined $80.6 million during 2013 to $680.0 million at December 31,
2013, from $760.6 million at December 31, 2012.
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Total loans past due and nonaccrual loans decreased to $113.5 million at December 31, 2013 from $153.1 million at December 31, 2012.
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Non-performing loans increased $7.4 million to $102.0 million at December 31, 2013, compared with $94.6 million at December 31, 2012. The
increase in non-performing loans was partially offset by net loan charge-offs in 2013 which totaled $29.3 million. The charge-offs resulted primarily from charging off specific reserves for loans deemed to be collateral dependent.
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Loans past due 30-59 days decreased from $38.2 million at December 31, 2012 to $10.7 million at December 31, 2013 and loans past due
60-89 days decreased from $20.3 million at December 31, 2012 to $775,000 at December 31, 2013. This was primarily driven by the migration of two relationships totaling $36.2 million from past due to nonaccrual status in the first quarter
of 2013.
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Foreclosed properties decreased to $30.9 million at December 31, 2013, compared with $43.7 million at December 31, 2012. During
the year ended December 31, 2013, the Company acquired $20.6 million and sold $30.8 million of other real estate owned (OREO). In addition, we recorded fair value write-downs of $2.5 million during the year reflecting declines in
appraisal valuations and changes in pricing strategies. Our ratio of non-performing assets to total assets increased to 12.35% at December 31, 2013, compared with 11.89% at December 31, 2012.
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On July 16, 2013, a jury in Louisville, Kentucky returned a verdict against PBI Bank awarding the plaintiffs compensatory damages of $1.5
million and punitive damages of $5.5 million. After conferring with its legal advisors, PBI Bank believes the findings and damages are excessive and contrary to the law, and that it has meritorious grounds on which it is moving forward to
appeal. Although we have made provisions in our condensed consolidated financial statements for this self-insured matter, the amount of our legal reserve is less than the original amount of the damages awarded, plus accrued interest.
|
These items are discussed in further detail throughout this Managements Discussion and Analysis of
Financial Condition and Results of Operations Section.
Going Concern Considerations and Future Plans
Our consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business for the foreseeable future. However, the events and circumstances described in this discussion create an uncertainty about the Companys ability to continue as a going concern.
For the year ended December 31, 2013, we reported net loss attributable to common shareholders of $3.4 million. This loss was
attributable primarily to loan collection expenses of $4.7 million and OREO expense of $4.5 million resulting from fair value write-downs driven by new appraisals and reduced marketing prices, net loss on sales, and ongoing operating expenses. We
also had lower net interest margin due to lower average loans outstanding, loans re-pricing at lower rates, and the level of non-performing loans in our portfolio. Net loss to common shareholders of $3.4 million for the year ended December 31,
2013, compares with net loss to common shareholders of $33.4 million for year ended December 31, 2012.
28
For the year ended December 31, 2012, we reported net loss attributable to common
shareholders of $33.4 million. This loss was attributable primarily to $40.3 million of provision for loan losses expense due to continued decline in credit trends in our portfolio that resulted in net charge-offs of $36.1 million, OREO expense of
$10.5 million resulting from fair value write-downs driven by new appraisals and reduced marketing prices, net loss on sales, and ongoing operating expense. We also had lower net interest margin due to lower average loans outstanding, loans
re-pricing at lower rates, and the level of non-performing loans in our portfolio. Net loss to common shareholders of $33.4 million, for the year ended December 31, 2012, compares with net loss to common shareholders of $105.2 million for year
ended December 31, 2011.
In June 2011, the Bank entered into a Consent Order with the FDIC and KDFI in which the Bank agreed, among
other things, to improve asset quality, reduce loan concentrations, and maintain a minimum Tier 1 leverage ratio of 9% and a minimum total risk based capital ratio of 12%. The Consent Order was included in our Current Report on 8-K filed on
June 30, 2011. In October 2012, the Bank entered into a new Consent Order with the FDIC and KDFI, again agreeing to maintain a minimum Tier 1 leverage ratio of 9% and a minimum total risk based capital ratio of 12%. The Bank also agreed that if
it should be unable to reach the required capital levels, and if directed in writing by the FDIC, 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 or otherwise immediately obtain a sufficient capital investment into the Bank to fully meet the capital requirements.
We
expect to continue to work with our regulators toward capital ratio compliance as outlined in the written capital plan submitted by the Bank in December 2012. The new Consent Order also requires the Bank to continue to adhere to the plans
implemented in response to the June 2011 Consent Order, and includes the substantive provisions of the June 2011 Consent Order. The new Consent Order was included in our Current Report on 8-K filed on September 19, 2012. As of December 31,
2013, the capital ratios required by the Consent Order were not met.
In order to meet these capital requirements, the Board of Directors
and management are continuing to evaluate strategies to achieve the following objectives:
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Increasing capital through a possible public offering or private placement of common stock to new and existing shareholders. We have engaged a
financial advisor to assist our Board in this evaluation and to assist in evaluating our options for the redemption of our Series A Preferred Stock currently held by the US Treasury.
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Continuing to operate the Company and Bank in a safe and sound manner. This strategy will require us to reduce our lending concentrations,
remediate non-performing loans, and reduce other noninterest expense through the disposition of OREO.
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Continuing with succession planning and adding resources to the management team. In 2012, John T. Taylor was named President and CEO of PBI
Bank. John R. Davis was appointed the Banks Chief Credit Officer, with responsibility for establishing and executing the credit quality policies and overseeing credit administration for the entire organization. In 2013, Mr. Taylor
succeeded Maria L. Bouvette as CEO of Porter Bancorp. We have also augmented our staffing in the commercial lending area, which is now led by Joe C. Seiler.
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Evaluating and implementing improvements to our internal processes and procedures, distribution of labor, and work-flow to ensure we have
adequately and appropriately deployed resources in an efficient manner in the current environment.
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Executing on our commitment to improve credit quality and reduce loan concentrations and balance sheet risk.
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We have reduced the size of our loan portfolio significantly from $1.3 billion at December 31, 2010, to $1.1 billion at December 31, 2011
to $899.1 million at December 31, 2012, and $709.3 million at December 31, 2013. We have significantly improved our credit administration function which is now led by John R. Davis, who joined the management team in August 2012 and serves
as Chief Credit Officer.
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Our Consent Order calls for us to reduce our construction and development loans. At December 31, 2013, we have reduced construction and
development loans to $43.3 million, or 52% of total risk-based capital, and $70.3 million, or 82% of total risk-based capital, at December 31, 2012.
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Our Consent Order also requires us to continue to reduce concentrations in commercial real estate loans. These loans totaled $237.0 million, or
284% of total risk-based capital, at December 31, 2013 compared with $311.1 million, or 362% of total risk-based capital, at December 31, 2012.
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29
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We are working to reduce non-owner occupied commercial real estate loans, construction and development loans, and multi-family residential real
estate loans by being more selective in seeking new construction and development lending and new non-owner occupied commercial real estate lending opportunities. We are also receiving principal reductions from amortizing credits and pay-downs from
our customers who sell properties built for resale. We have reduced the construction loan portfolio from $199.5 million at December 31, 2010 to $43.3 million at December 31, 2013. Our non-owner occupied commercial real estate loans
declined from $293.3 million at December 31, 2010 to $237.0 million at December 31, 2013.
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Executing on our commitment to sell other real estate owned and reinvest in quality income producing assets.
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Our acquisition of real estate assets through the loan remediation process slowed during 2013, as we acquired $20.6 million of OREO in 2013
compared with $33.5 million during 2012. However, nonaccrual loans totaled $101.8 million at December 31, 2013, and we expect to resolve many of these loans by foreclosure which could result in further additions to our OREO portfolio.
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We incurred OREO losses totaling $2.6 million during the 2013, comprised of $132,000 in loss on sale and $2.5 million in fair value write-downs to
reflect declines in appraisal valuations and changes in our pricing strategies.
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We continually evaluate opportunities to maximize the value we receive from the sale of OREO. We pursue multiple sales channels with focus
primarily on internal marketing and the use of brokers.
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Real estate construction represents 62% of the OREO portfolio at December 31, 2013 compared with 51% at December 31, 2012. Commercial
real estate represents 19% of the OREO portfolio at December 31, 2013 compared with 35% at December 31, 2012, and 1-4 family residential properties represent 16% of the portfolio at December 31, 2013 compared with 12% at
December 31, 2012.
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Bank regulatory agencies can exercise discretion when an institution does not meet the terms of
a consent order. Based on individual circumstances, the agencies may issue mandatory directives, impose monetary penalties, initiate changes in management, or take more serious adverse actions.
Our consolidated financial statements do not include any adjustments that may result should the Company be unable to continue as a going
concern.
Application of Critical Accounting Policies
Our accounting and reporting policies comply with GAAP and conform to general practices within the banking industry. We believe that of our
significant accounting policies, the following may involve a higher degree of management assumptions and judgments that could result in materially different amounts to be reported if conditions or underlying circumstances were to change.
Allowance for Loan Losses
PBI Bank maintains an allowance for loan losses believed to be sufficient to absorb probable incurred
credit losses existing in the loan portfolio, and the board of directors evaluates the adequacy of the allowance for loan losses on a quarterly basis. We evaluate the adequacy of the allowance using, among other things, historical loan loss
experience, known and inherent risks in the portfolio, adverse situations that may affect the borrowers ability to repay, estimated value of the underlying collateral and current economic conditions and trends. The allowance may be allocated
for specific loans or loan categories, but the entire allowance is available for any loan that, in managements judgment, should be charged off. The allowance consists of specific and general components. The specific component relates to loans
that are individually deemed impaired. The general component is based on historical loss experience adjusted for environmental factors. We develop allowance estimates based on actual loss experience adjusted for current economic conditions and
trends. Allowance estimates are a prudent measurement of the risk in the loan portfolio which we apply to individual loans based on loan type. If the mix and amount of future charge-off percentages differ significantly from those assumptions used by
management in making its determination, we may be required to materially increase our allowance for loan losses and provision for loan losses, which could adversely affect our results.
30
Other Real Estate Owned
Other real estate owned (OREO) is real estate acquired as a
result of foreclosure or by deed in lieu of foreclosure. It is classified as real estate owned until such time as it is sold. When property is acquired as a result of foreclosure or by deed in lieu of foreclosure, it is recorded at its
fair market value less estimated cost to sell. Any write-down of the property at the time of acquisition is charged to the allowance for loan losses. Subsequent reductions in fair value are recorded as non-interest expense. To
determine the fair value of OREO for smaller dollar single family homes, we consult with internal real estate sales staff and external realtors, investors, and appraisers. If the internally evaluated market price is below our underlying
investment in the property, appropriate write-downs are recorded. For larger dollar commercial real estate properties, we obtain a new appraisal of the subject property in connection with the transfer to other real estate owned. We do not
obtain updated appraisals on a quarterly basis after the receipt of the initial appraisal. Rather, we internally review the fair value of the other real estate owned in our portfolio on a quarterly basis to determine if a new appraisal is
warranted based on the specific circumstances of each property. Generally, we obtain updated appraisals annualluy unless a sale is imminent.
Intangible Assets
We evaluate intangible assets for impairment at least annually and more frequently if circumstances indicate
their value may not be recoverable. Identifiable intangible assets that are subject to amortization are amortized on an accelerated basis over the years expected to be benefited, which we believe is 10 years. We review these amortizable intangible
assets for impairment if circumstances indicate their value may not be recoverable based on a comparison of fair value to carrying value. Based on our annual review, management does not believe our intangible assets are impaired at December 31,
2013.
Stock-based Compensation
Compensation cost is recognized for stock options and restricted stock awards issued to
employees, based on the fair value of these awards at the date of grant. We utilize a Black-Scholes model, which requires the input of highly subjective assumptions, such as volatility, risk-free interest rates and dividend pay-out rates, to
estimate the fair value of stock options, while the market price of the Companys common stock at the date of grant is used for restricted stock awards. Compensation cost is recognized over the required service period, generally defined as the
vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.
Valuation of Deferred Tax Asset
We evaluate deferred tax assets for impairment on a quarterly basis. We established a 100%
deferred tax valuation allowance of $31.7 million in December 2011 based upon the analysis of our past performance and our expected future performance. We considered all evidence currently available, both positive and negative, in determining, based
on the weight of that evidence, the likelihood that the deferred tax asset would be realized. During that review, we determined that the level of our recent historical losses, the level of our non-performing assets, our inability to meet our
forecasted levels of earnings in 2011, our intent to defer payment of dividends on our subordinated debentures and Series A Preferred Stock, and our non-compliance with the capital requirements of our Consent Order outweighed our forecasted taxable
earnings levels for the near and long term. As such, we established a 100% deferred tax valuation allowance. When evaluating our deferred tax assets for realizability during 2012 and 2013, we concluded that a full valuation allowance was still
necessary at December 31, 2012 and 2013, due to the additional losses incurred during those years. A return to profitability would enable us to reduce the valuation allowance and thereby offset income tax expense that would otherwise be
recognized. Examinations of our income tax returns or changes in tax law may impact our deferred tax assets and liabilities as well as our provision for income taxes.
Contingencies
In the normal course of operations, we are defendants in various legal proceedings. We record contingent
liabilities resulting from claims against us when a loss is assessed to be probable and the amount of the loss is reasonably estimable. Assessing probability of loss and estimating probable losses requires analysis of multiple factors, including in
some cases judgments about the potential actions of third party claimants and courts. Recorded contingent liabilities are based on the best information available and actual losses in any future period are inherently uncertain.
31
Results of Operations
The following table summarizes components of income and expense and the change in those components for 2013 compared with 2012:
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For the
Years Ended December 31,
|
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Change from Prior Period
|
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|
2013
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|
|
2012
|
|
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Amount
|
|
|
Percent
|
|
|
|
(dollars in thousands)
|
|
Gross interest income
|
|
$
|
43,228
|
|
|
$
|
57,729
|
|
|
$
|
(14,501
|
)
|
|
|
(25.1
|
)%
|
Gross interest expense
|
|
|
11,143
|
|
|
|
15,774
|
|
|
|
(4,631
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)
|
|
|
(29.4
|
)
|
Net interest income
|
|
|
32,085
|
|
|
|
41,955
|
|
|
|
(9,870
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)
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|
|
(23.5
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)
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Provision for credit losses
|
|
|
700
|
|
|
|
40,250
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|
|
|
(39,550
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)
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|
|
(98.3
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)
|
Non-interest income
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|
|
5,196
|
|
|
|
6,354
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|
|
|
(1,158
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)
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|
|
(18.2
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)
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Gains on sale of securities, net
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|
|
723
|
|
|
|
3,236
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|
|
|
(2,513
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)
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|
|
(77.7
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)
|
Non-interest expense
|
|
|
38,890
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|
|
|
44,292
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|
|
|
(5,402
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)
|
|
|
(12.2
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)
|
Net loss before taxes
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|
|
(1,586
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)
|
|
|
(32,997
|
)
|
|
|
31,411
|
|
|
|
(95.2
|
)
|
Income tax benefit
|
|
|
|
|
|
|
(65
|
)
|
|
|
65
|
|
|
|
(100.0
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)
|
Net loss
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|
|
(1,586
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)
|
|
|
(32,932
|
)
|
|
|
31,346
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|
|
|
(95.2
|
)
|
Dividends on preferred stock
|
|
|
(1,919
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)
|
|
|
(1,750
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)
|
|
|
(169
|
)
|
|
|
9.7
|
|
Accretion on Series A preferred stock
|
|
|
(160
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)
|
|
|
(179
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)
|
|
|
19
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|
|
|
(10.6
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)
|
Losses attributable to participating securities
|
|
|
267
|
|
|
|
1,429
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|
|
|
(1,162
|
)
|
|
|
(81.3
|
)
|
Net loss attributable to common shareholders
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|
|
(3,398
|
)
|
|
|
(33,432
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)
|
|
|
30,034
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|
|
|
(89.8
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)
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Net loss of $1.6 million for the year ended December 31, 2013, improved by $31.4 million from net loss of
$32.9 million for 2012. Net loss to common shareholders of $3.4 million for the year ended December 31, 2013, decreased $30.0 million from net loss to common shareholders of $33.4 million for 2012. This decrease in net loss was
attributable primarily to lower provision for loan losses expense and decreased non-interest expense associated with our OREO, partially offset by lower net gain on sales of securities and lower net interest income.
The following table summarizes components of income and expense and the change in those components for 2012 compared with 2011:
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|
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|
|
|
|
|
|
|
|
|
For the
Years Ended December 31,
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|
|
Change from Prior Period
|
|
|
|
2012
|
|
|
2011
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(dollars in thousands)
|
|
Gross interest income
|
|
$
|
57,729
|
|
|
$
|
73,554
|
|
|
$
|
(15,825
|
)
|
|
|
(21.5
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)%
|
Gross interest expense
|
|
|
15,774
|
|
|
|
22,039
|
|
|
|
(6,265
|
)
|
|
|
(28.4
|
)
|
Net interest income
|
|
|
41,955
|
|
|
|
51,515
|
|
|
|
(9,560
|
)
|
|
|
(18.6
|
)
|
Provision for credit losses
|
|
|
40,250
|
|
|
|
62,600
|
|
|
|
(22,350
|
)
|
|
|
(35.7
|
)
|
Non-interest income
|
|
|
6,354
|
|
|
|
6,766
|
|
|
|
(412
|
)
|
|
|
(6.1
|
)
|
Gains on sale of securities, net
|
|
|
3,236
|
|
|
|
1,108
|
|
|
|
2,128
|
|
|
|
192.1
|
|
Other than temporary impairment on securities
|
|
|
|
|
|
|
(41
|
)
|
|
|
41
|
|
|
|
(100.0
|
)
|
Non-interest expense
|
|
|
44,292
|
|
|
|
104,273
|
|
|
|
(59,981
|
)
|
|
|
(57.5
|
)
|
Net loss before taxes
|
|
|
(32,997
|
)
|
|
|
(107,525
|
)
|
|
|
74,528
|
|
|
|
(69.3
|
)
|
Income tax benefit
|
|
|
(65
|
)
|
|
|
(218
|
)
|
|
|
153
|
|
|
|
(70.2
|
)
|
Net loss
|
|
|
(32,932
|
)
|
|
|
(107,307
|
)
|
|
|
74,375
|
|
|
|
(69.3
|
)
|
Dividends on preferred stock
|
|
|
(1,750
|
)
|
|
|
(1,750
|
)
|
|
|
|
|
|
|
|
|
Accretion on Series A preferred stock
|
|
|
(179
|
)
|
|
|
(177
|
)
|
|
|
(2
|
)
|
|
|
1.1
|
|
Losses attributable to participating securities
|
|
|
1,429
|
|
|
|
4,080
|
|
|
|
(2,651
|
)
|
|
|
(65.0
|
)
|
Net loss attributable to common shareholders
|
|
|
(33,432
|
)
|
|
|
(105,154
|
)
|
|
|
71,722
|
|
|
|
(68.2
|
)
|
Net loss of $32.9 million for the year ended December 31, 2012, decreased $74.4 million from net loss of
$107.3 million for 2011. Net loss to common shareholders of $33.4 million for the year ended December 31, 2012, decreased $71.7 million from net loss to common shareholders of $105.2 million for 2011. This decrease in net loss was
attributable primarily to lower provision for loan losses expense, decreased non-interest expense associated with our OREO, and higher net gain on sales of securities, partially offset by lower net interest income. In addition, the 2011 results
included a one-time goodwill impairment charge of $23.8 million.
32
Net Interest Income
Our net interest income was $32.1 million for the year ended
December 31, 2013, a decrease of $9.9 million, or 23.5%, compared with $42.0 million for the same period in 2012. Net interest spread and margin were 2.97% and 3.10%, respectively, for 2013, compared with 3.16% and 3.31%, respectively, for
2012. Average nonaccrual loans were $107.3 million and $90.8 million in 2013 and 2012, respectively. The decrease in net interest income was primarily the result of lower average earning assets coupled with lower rates on those assets. In addition,
net interest income and net interest margin were adversely affected by $5.6 million and $4.9 million of interest lost on nonaccrual loans during 2013 and 2012, respectively.
Our average interest-earning assets were $1.05 billion for 2013, compared with $1.28 billion for 2012, an 18.1% decrease, primarily
attributable to lower average loans and partially offset by higher average investment securities and interest bearing deposits with financial institutions. Average loans were $788.2 million for 2013, compared with $1.03 billion for 2012, a 23.7%
decrease. Average interest bearing deposits with financial institutions were $65.1 million in 2013, compared with $62.1 million in 2012, a 4.7% increase. Average investment securities were $184.2 million for 2013, compared with $173.1 million for
2012, a 6.4% increase. Our total interest income decreased 25.1% to $43.2 million for 2013, compared with $57.7 million for 2012. The change was due primarily to lower interest rates on loans, lower volume of loans and lower interest rates on
investment securities.
Our average interest-bearing liabilities decreased by 18.1% to $937.4 million for 2013, compared with $1.14
billion for 2012. Our total interest expense decreased by 29.4% to $11.1 million for 2013, compared with $15.8 million during 2011, due primarily to lower interest rates paid on and lower volume of certificates of deposit, NOW and money market
deposits. Our average volume of certificates of deposit decreased 22.8% to $704.0 million for 2013, compared with $912.1 million for 2012. The average interest rate paid on certificates of deposit decreased to 1.35% for 2013, compared with 1.52% for
2012, as the result of continued re-pricing of certificates of deposit at maturity to lower interest rates. Our average volume of NOW and money market deposit accounts increased 1.1% to $154.8 million for 2013, compared with $153.0 million for 2012.
The average interest rate paid on NOW and money market deposit accounts decreased to 0.35% for 2013, compared with 0.42% for 2012.
Our
net interest income was $42.0 million for the year ended December 31, 2012, a decrease of $9.6 million, or 18.6%, compared with $51.5 million for the same period in 2011. Net interest spread and margin were 3.16% and 3.31%, respectively, for
2012, compared with 3.24% and 3.40%, respectively, for 2011. Average nonaccrual loans were $90.8 million and $67.4 million in 2012 and 2011, respectively. The decrease in net interest income was primarily the result of lower average earning assets
coupled with lower rates on those assets. In addition, net interest income and net interest margin were adversely affected by $4.9 million and $4.0 million of interest lost on nonaccrual loans during 2012 and 2011, respectively.
Our average interest-earning assets were $1.28 billion for 2012, compared with $1.53 billion for 2011, a 16.5% decrease, primarily
attributable to lower average loans and interest bearing deposits with financial institutions, partially offset by higher average investment securities. Average loans were $1.03 billion for 2012, compared with $1.24 billion for 2011, a 16.9%
decrease. Average interest bearing deposits with financial institutions were $62.1 million in 2012, compared with $127.1 million in 2011, a 51.1% decrease. Average investment securities were $173.1 million for 2012, compared with $148.5 million for
2011, a 16.6% increase. Our total interest income decreased 21.5% to $57.7 million for 2012, compared with $73.6 million for 2011. The change was due primarily to lower interest rates on and lower volume of loans and interest bearing deposits with
financial institutions, and lower interest rates on investment securities.
Our average interest-bearing liabilities decreased by 17.5% to
$1.14 billion for 2012, compared with $1.39 billion for 2011. Our total interest expense decreased by 28.4% to $15.8 million for 2012, compared with $22.0 million during 2011, due primarily to lower interest rates paid on and lower volume of
certificates of deposit, NOW and money market deposits. Our average volume of certificates of deposit decreased 18.6% to $912.1 million for 2012, compared with $1.12 billion for 2011. The average interest rate paid on certificates of deposit
decreased to 1.52% for 2012, compared with 1.65% for 2011, as the result of continued re-pricing of certificates of deposit at maturity to lower interest rates. Our average volume of NOW and money market deposit accounts decreased 10.5% to $153.0
million for 2012, compared with $171.0 million for 2011. The average interest rate paid on NOW and money market deposit accounts decreased to 0.42% for 2012, compared with 0.85% for 2011.
33
Average Balance Sheets
The following table sets forth the average daily balances, the interest earned or paid on such amounts, and the weighted average yield on
interest-earning assets and weighted average cost of interest-bearing liabilities for the periods indicated. Dividing income or expense by the average daily balance of assets or liabilities, respectively, derives such yields and costs for the
periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
Average
Balance
|
|
|
Interest
Earned/Paid
|
|
|
Average
Yield/Cost
|
|
|
Average
Balance
|
|
|
Interest
Earned/Paid
|
|
|
Average
Yield/Cost
|
|
|
|
(dollars in thousands)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivables (1)(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
|
|
$
|
696,785
|
|
|
$
|
32,591
|
|
|
|
4.68
|
%
|
|
$
|
921,314
|
|
|
$
|
46,179
|
|
|
|
5.01
|
%
|
Commercial
|
|
|
50,990
|
|
|
|
2,772
|
|
|
|
5.44
|
|
|
|
64,252
|
|
|
|
3,510
|
|
|
|
5.46
|
|
Consumer
|
|
|
16,982
|
|
|
|
1,402
|
|
|
|
8.26
|
|
|
|
22,720
|
|
|
|
1,903
|
|
|
|
8.38
|
|
Agriculture
|
|
|
22,639
|
|
|
|
1,229
|
|
|
|
5.43
|
|
|
|
24,196
|
|
|
|
1,304
|
|
|
|
5.39
|
|
Other
|
|
|
780
|
|
|
|
21
|
|
|
|
2.69
|
|
|
|
838
|
|
|
|
22
|
|
|
|
2.63
|
|
U.S. Treasury and agencies
|
|
|
23,685
|
|
|
|
546
|
|
|
|
2.31
|
|
|
|
6,588
|
|
|
|
199
|
|
|
|
3.02
|
|
Mortgage-backed securities
|
|
|
83,160
|
|
|
|
1,552
|
|
|
|
1.87
|
|
|
|
111,637
|
|
|
|
1,986
|
|
|
|
1.78
|
|
State and political subdivision securities (3)
|
|
|
30,292
|
|
|
|
933
|
|
|
|
4.74
|
|
|
|
26,631
|
|
|
|
887
|
|
|
|
5.12
|
|
State and political subdivision securities
|
|
|
24,861
|
|
|
|
787
|
|
|
|
3.17
|
|
|
|
17,363
|
|
|
|
563
|
|
|
|
3.24
|
|
Corporate bonds
|
|
|
20,864
|
|
|
|
745
|
|
|
|
3.57
|
|
|
|
8,957
|
|
|
|
482
|
|
|
|
5.38
|
|
FHLB stock
|
|
|
10,072
|
|
|
|
421
|
|
|
|
4.18
|
|
|
|
10,072
|
|
|
|
447
|
|
|
|
4.44
|
|
Other debt securities
|
|
|
572
|
|
|
|
46
|
|
|
|
8.04
|
|
|
|
572
|
|
|
|
46
|
|
|
|
8.04
|
|
Other equity securities
|
|
|
744
|
|
|
|
30
|
|
|
|
4.03
|
|
|
|
1,359
|
|
|
|
57
|
|
|
|
4.19
|
|
Federal funds sold
|
|
|
2,640
|
|
|
|
3
|
|
|
|
0.11
|
|
|
|
3,109
|
|
|
|
2
|
|
|
|
0.06
|
|
Interest-bearing deposits in other financial institutions
|
|
|
65,076
|
|
|
|
150
|
|
|
|
0.23
|
|
|
|
62,127
|
|
|
|
142
|
|
|
|
0.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
1,050,142
|
|
|
|
43,228
|
|
|
|
4.16
|
%
|
|
|
1,281,735
|
|
|
|
57,729
|
|
|
|
4.54
|
%
|
Less: Allowance for loan losses
|
|
|
(40,343
|
)
|
|
|
|
|
|
|
|
|
|
|
(53,484
|
)
|
|
|
|
|
|
|
|
|
Non-interest-earning assets
|
|
|
88,601
|
|
|
|
|
|
|
|
|
|
|
|
113,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,098,400
|
|
|
|
|
|
|
|
|
|
|
$
|
1,341,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit and other time deposits
|
|
$
|
703,982
|
|
|
$
|
9,482
|
|
|
|
1.35
|
%
|
|
$
|
912,061
|
|
|
$
|
13,828
|
|
|
|
1.52
|
%
|
NOW and money market deposits
|
|
|
154,759
|
|
|
|
541
|
|
|
|
0.35
|
|
|
|
153,032
|
|
|
|
641
|
|
|
|
0.42
|
|
Savings accounts
|
|
|
39,158
|
|
|
|
114
|
|
|
|
0.29
|
|
|
|
38,665
|
|
|
|
154
|
|
|
|
0.40
|
|
Federal funds purchased and repurchase agreements
|
|
|
3,113
|
|
|
|
6
|
|
|
|
0.19
|
|
|
|
2,088
|
|
|
|
7
|
|
|
|
0.34
|
|
FHLB advances
|
|
|
4,990
|
|
|
|
157
|
|
|
|
3.15
|
|
|
|
6,325
|
|
|
|
207
|
|
|
|
3.27
|
|
Junior subordinated debentures
|
|
|
31,404
|
|
|
|
843
|
|
|
|
2.68
|
|
|
|
32,309
|
|
|
|
937
|
|
|
|
2.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
937,406
|
|
|
|
11,143
|
|
|
|
1.19
|
%
|
|
|
1,144,480
|
|
|
|
15,774
|
|
|
|
1.38
|
%
|
Non-interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing deposits
|
|
|
106,153
|
|
|
|
|
|
|
|
|
|
|
|
113,325
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
12,210
|
|
|
|
|
|
|
|
|
|
|
|
8,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,055,769
|
|
|
|
|
|
|
|
|
|
|
|
1,265,886
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
42,631
|
|
|
|
|
|
|
|
|
|
|
|
75,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
1,098,400
|
|
|
|
|
|
|
|
|
|
|
$
|
1,341,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
32,085
|
|
|
|
|
|
|
|
|
|
|
$
|
41,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread
|
|
|
|
|
|
|
|
|
|
|
2.97
|
%
|
|
|
|
|
|
|
|
|
|
|
3.16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin
|
|
|
|
|
|
|
|
|
|
|
3.10
|
%
|
|
|
|
|
|
|
|
|
|
|
3.31
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of average interest-earning assets to average interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
112.03
|
%
|
|
|
|
|
|
|
|
|
|
|
111.99
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes loan fees in both interest income and the calculation of yield on loans.
|
(2)
|
Calculations include non-accruing loans of $107.3 million and $90.8 million in average loan amounts outstanding.
|
(3)
|
Taxable equivalent yields are calculated assuming a 35% federal income tax rate.
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
Average
Balance
|
|
|
Interest
Earned/Paid
|
|
|
Average
Yield/Cost
|
|
|
Average
Balance
|
|
|
Interest
Earned/Paid
|
|
|
Average
Yield/Cost
|
|
|
|
(dollars in thousands)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivables (1)(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
|
|
$
|
921,314
|
|
|
$
|
46,179
|
|
|
|
5.01
|
%
|
|
$
|
1,111,136
|
|
|
$
|
59,450
|
|
|
|
5.35
|
%
|
Commercial
|
|
|
64,252
|
|
|
|
3,510
|
|
|
|
5.46
|
|
|
|
77,098
|
|
|
|
4,362
|
|
|
|
5.66
|
|
Consumer
|
|
|
22,720
|
|
|
|
1,903
|
|
|
|
8.38
|
|
|
|
29,140
|
|
|
|
2,428
|
|
|
|
8.33
|
|
Agriculture
|
|
|
24,196
|
|
|
|
1,304
|
|
|
|
5.39
|
|
|
|
25,175
|
|
|
|
1,407
|
|
|
|
5.59
|
|
Other
|
|
|
838
|
|
|
|
22
|
|
|
|
2.63
|
|
|
|
925
|
|
|
|
32
|
|
|
|
3.46
|
|
U.S. Treasury and agencies
|
|
|
6,588
|
|
|
|
199
|
|
|
|
3.02
|
|
|
|
10,173
|
|
|
|
322
|
|
|
|
3.17
|
|
Mortgage-backed securities
|
|
|
111,637
|
|
|
|
1,986
|
|
|
|
1.78
|
|
|
|
96,221
|
|
|
|
2,967
|
|
|
|
3.08
|
|
State and political subdivision securities (3)
|
|
|
26,631
|
|
|
|
887
|
|
|
|
5.12
|
|
|
|
29,506
|
|
|
|
1,123
|
|
|
|
5.86
|
|
State and political subdivision securities
|
|
|
17,363
|
|
|
|
563
|
|
|
|
3.24
|
|
|
|
3,178
|
|
|
|
172
|
|
|
|
5.41
|
|
Corporate bonds
|
|
|
8,957
|
|
|
|
482
|
|
|
|
5.38
|
|
|
|
7,466
|
|
|
|
452
|
|
|
|
6.05
|
|
FHLB stock
|
|
|
10,072
|
|
|
|
447
|
|
|
|
4.44
|
|
|
|
10,072
|
|
|
|
428
|
|
|
|
4.25
|
|
Other debt securities
|
|
|
572
|
|
|
|
46
|
|
|
|
8.04
|
|
|
|
572
|
|
|
|
46
|
|
|
|
8.04
|
|
Other equity securities
|
|
|
1,359
|
|
|
|
57
|
|
|
|
4.19
|
|
|
|
1,397
|
|
|
|
49
|
|
|
|
3.51
|
|
Federal funds sold
|
|
|
3,109
|
|
|
|
2
|
|
|
|
0.06
|
|
|
|
5,729
|
|
|
|
3
|
|
|
|
0.05
|
|
Interest-bearing deposits in other financial institutions
|
|
|
62,127
|
|
|
|
142
|
|
|
|
0.23
|
|
|
|
127,087
|
|
|
|
313
|
|
|
|
0.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
1,281,735
|
|
|
|
57,729
|
|
|
|
4.54
|
%
|
|
|
1,534,875
|
|
|
|
73,554
|
|
|
|
4.83
|
%
|
Less: Allowance for loan losses
|
|
|
(53,484
|
)
|
|
|
|
|
|
|
|
|
|
|
(37,762
|
)
|
|
|
|
|
|
|
|
|
Non-interest-earning assets
|
|
|
113,314
|
|
|
|
|
|
|
|
|
|
|
|
162,846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,341,565
|
|
|
|
|
|
|
|
|
|
|
$
|
1,659,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit and other time deposits
|
|
$
|
912,061
|
|
|
$
|
13,828
|
|
|
|
1.52
|
%
|
|
$
|
1,120,154
|
|
|
$
|
18,468
|
|
|
|
1.65
|
%
|
NOW and money market deposits
|
|
|
153,032
|
|
|
|
641
|
|
|
|
0.42
|
|
|
|
171,028
|
|
|
|
1,451
|
|
|
|
0.85
|
|
Savings accounts
|
|
|
38,665
|
|
|
|
154
|
|
|
|
0.40
|
|
|
|
36,511
|
|
|
|
228
|
|
|
|
0.62
|
|
Federal funds purchased and repurchase agreements
|
|
|
2,088
|
|
|
|
7
|
|
|
|
0.34
|
|
|
|
10,524
|
|
|
|
440
|
|
|
|
4.18
|
|
FHLB advances
|
|
|
6,325
|
|
|
|
207
|
|
|
|
3.27
|
|
|
|
15,315
|
|
|
|
537
|
|
|
|
3.51
|
|
Junior subordinated debentures
|
|
|
32,309
|
|
|
|
937
|
|
|
|
2.90
|
|
|
|
33,208
|
|
|
|
915
|
|
|
|
2.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
1,144,480
|
|
|
|
15,774
|
|
|
|
1.38
|
%
|
|
|
1,386,740
|
|
|
|
22,039
|
|
|
|
1.59
|
%
|
Non-interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing deposits
|
|
|
113,325
|
|
|
|
|
|
|
|
|
|
|
|
106,769
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
8,081
|
|
|
|
|
|
|
|
|
|
|
|
7,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,265,886
|
|
|
|
|
|
|
|
|
|
|
|
1,500,525
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
75,679
|
|
|
|
|
|
|
|
|
|
|
|
159,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
1,341,565
|
|
|
|
|
|
|
|
|
|
|
$
|
1,659,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
41,955
|
|
|
|
|
|
|
|
|
|
|
$
|
51,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread
|
|
|
|
|
|
|
|
|
|
|
3.16
|
%
|
|
|
|
|
|
|
|
|
|
|
3.24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin
|
|
|
|
|
|
|
|
|
|
|
3.31
|
%
|
|
|
|
|
|
|
|
|
|
|
3.40
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of average interest-earning assets to average interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
111.99
|
%
|
|
|
|
|
|
|
|
|
|
|
110.68
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes loan fees in both interest income and the calculation of yield on loans.
|
(2)
|
Calculations include non-accruing loans of $90.8 million and $67.4 million in average loan amounts outstanding.
|
(3)
|
Taxable equivalent yields are calculated assuming a 35% federal income tax rate.
|
35
Rate/Volume Analysis
The table below sets forth information regarding 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 (changes 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2013 vs. 2012
|
|
|
Year Ended December 31, 2012 vs. 2011
|
|
|
|
Increase (decrease)
due to change in
|
|
|
Increase (decrease)
due to change in
|
|
|
|
Rate
|
|
|
Volume
|
|
|
Net
Change
|
|
|
Rate
|
|
|
Volume
|
|
|
Net
Change
|
|
|
|
(in thousands)
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan receivables
|
|
$
|
(2,935
|
)
|
|
$
|
(11,967
|
)
|
|
$
|
(14,902
|
)
|
|
$
|
(3,824
|
)
|
|
$
|
(10,937
|
)
|
|
$
|
(14,761
|
)
|
U.S. Treasury and agencies
|
|
|
(35
|
)
|
|
|
382
|
|
|
|
347
|
|
|
|
(14
|
)
|
|
|
(109
|
)
|
|
|
(123
|
)
|
Mortgage-backed securities
|
|
|
93
|
|
|
|
(528
|
)
|
|
|
(435
|
)
|
|
|
(1,401
|
)
|
|
|
420
|
|
|
|
(981
|
)
|
State and political subdivision securities
|
|
|
(81
|
)
|
|
|
351
|
|
|
|
270
|
|
|
|
(243
|
)
|
|
|
398
|
|
|
|
155
|
|
Corporate bonds
|
|
|
(206
|
)
|
|
|
469
|
|
|
|
263
|
|
|
|
(54
|
)
|
|
|
84
|
|
|
|
30
|
|
FHLB stock
|
|
|
(26
|
)
|
|
|
|
|
|
|
(26
|
)
|
|
|
19
|
|
|
|
|
|
|
|
19
|
|
Other debt securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other equity securities
|
|
|
(2
|
)
|
|
|
(25
|
)
|
|
|
(27
|
)
|
|
|
9
|
|
|
|
(1
|
)
|
|
|
8
|
|
Federal funds sold
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
Interest-bearing deposits in other financial institutions
|
|
|
1
|
|
|
|
7
|
|
|
|
8
|
|
|
|
(21
|
)
|
|
|
(150
|
)
|
|
|
(171
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total increase (decrease) in interest income
|
|
|
(3,190
|
)
|
|
|
(11,311
|
)
|
|
|
(14,501
|
)
|
|
|
(5,529
|
)
|
|
|
(10,296
|
)
|
|
|
(15,825
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit and other time deposits
|
|
|
(1,427
|
)
|
|
|
(2,919
|
)
|
|
|
(4,346
|
)
|
|
|
(1,402
|
)
|
|
|
(3,238
|
)
|
|
|
(4,640
|
)
|
NOW and money market accounts
|
|
|
(107
|
)
|
|
|
7
|
|
|
|
(100
|
)
|
|
|
(670
|
)
|
|
|
(140
|
)
|
|
|
(810
|
)
|
Savings accounts
|
|
|
(42
|
)
|
|
|
2
|
|
|
|
(40
|
)
|
|
|
(86
|
)
|
|
|
12
|
|
|
|
(74
|
)
|
Federal funds purchased and repurchase agreements
|
|
|
(3
|
)
|
|
|
2
|
|
|
|
(1
|
)
|
|
|
(231
|
)
|
|
|
(202
|
)
|
|
|
(433
|
)
|
FHLB advances
|
|
|
(8
|
)
|
|
|
(42
|
)
|
|
|
(50
|
)
|
|
|
(34
|
)
|
|
|
(296
|
)
|
|
|
(330
|
)
|
Junior subordinated debentures
|
|
|
(69
|
)
|
|
|
(25
|
)
|
|
|
(94
|
)
|
|
|
46
|
|
|
|
(24
|
)
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total increase (decrease) in interest expense
|
|
|
(1,656
|
)
|
|
|
(2,975
|
)
|
|
|
(4,631
|
)
|
|
|
(2,377
|
)
|
|
|
(3,888
|
)
|
|
|
(6,265
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in net interest income
|
|
$
|
(1,534
|
)
|
|
$
|
(8,336
|
)
|
|
$
|
(9,870
|
)
|
|
$
|
(3,152
|
)
|
|
$
|
(6,408
|
)
|
|
$
|
(9,560
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
Non-interest Income
The following table presents for the periods indicated the
major categories of non-interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
|
(in thousands)
|
|
Service charges on deposit accounts
|
|
$
|
2,058
|
|
|
$
|
2,239
|
|
|
$
|
2,609
|
|
Income from fiduciary activities
|
|
|
517
|
|
|
|
1,177
|
|
|
|
993
|
|
Bank card interchange fees
|
|
|
718
|
|
|
|
727
|
|
|
|
668
|
|
Other real estate owned rental income
|
|
|
399
|
|
|
|
420
|
|
|
|
200
|
|
Gain on sales of investment securities, net
|
|
|
723
|
|
|
|
3,236
|
|
|
|
1,108
|
|
Other-than-temporary impairment on securities
|
|
|
|
|
|
|
|
|
|
|
(41
|
)
|
Income from bank owned life insurance
|
|
|
534
|
|
|
|
312
|
|
|
|
314
|
|
Other
|
|
|
970
|
|
|
|
1,479
|
|
|
|
1,982
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest income
|
|
$
|
5,919
|
|
|
$
|
9,590
|
|
|
$
|
7,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income decreased by $3.7 million to $5.9 million for 2013 compared with $9.6 million for 2012.
This was due primarily to decreased gain on sales of investment securities of $2.5 million, or 77.7%, due to lower volume of sales. This decrease was also caused by a reduction in income from fiduciary activities as we transitioned away from
providing trust services, including ESOP and employee benefit plan services throughout our markets. This decrease was offset partially by an increase in income from bank owned life insurance, which increased by 71.2% from 2012.
Non-interest income increased by $1.8 million to $9.6 million for 2012 compared with $7.8 million for 2011. This was due primarily to
increased gain on sales of investment securities of $2.1 million, or 192.1%, due to higher volume of sales. This increase was offset partially by decreased service charges on deposit accounts of $370,000, or 14.2%, and decreased gain on sales of
loans originated for sale of $375,000, or 52.6%. Fewer service charges on deposit account fees were the result of lower transaction volume. Lower gains on sales of loans originated for sale were the result of fewer loans originated for sale during
the year in the USDA and SBA programs.
Non-interest Expense
The following table presents the major categories of non-interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
|
(in thousands)
|
|
Salary and employee benefits
|
|
$
|
15,501
|
|
|
$
|
16,648
|
|
|
$
|
15,218
|
|
Occupancy and equipment
|
|
|
3,583
|
|
|
|
3,642
|
|
|
|
3,729
|
|
Goodwill impairment charge
|
|
|
|
|
|
|
|
|
|
|
23,794
|
|
Other real estate owned expense
|
|
|
4,516
|
|
|
|
10,549
|
|
|
|
47,525
|
|
FDIC insurance
|
|
|
2,378
|
|
|
|
2,835
|
|
|
|
3,470
|
|
Loan collection expense
|
|
|
4,707
|
|
|
|
2,442
|
|
|
|
2,509
|
|
State franchise tax
|
|
|
1,944
|
|
|
|
2,174
|
|
|
|
2,228
|
|
Professional fees
|
|
|
1,892
|
|
|
|
1,985
|
|
|
|
1,392
|
|
Communications
|
|
|
711
|
|
|
|
710
|
|
|
|
678
|
|
Borrowing prepayment fees
|
|
|
|
|
|
|
|
|
|
|
486
|
|
Postage and delivery
|
|
|
423
|
|
|
|
454
|
|
|
|
485
|
|
Insurance expense
|
|
|
648
|
|
|
|
373
|
|
|
|
172
|
|
Other
|
|
|
2,587
|
|
|
|
2,480
|
|
|
|
2,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expense
|
|
$
|
38,890
|
|
|
$
|
44,292
|
|
|
$
|
104,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expense for the year ended December 31, 2013 of $38.9 million represented a 12.2% decrease
from $44.3 million for the same period last year. The decrease in non-interest expense was attributable primarily to decreased other real estate owned expense due to lower loss on sales of OREO and lower valuation write-downs. Expenses related
to other real estate owned include:
37
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
|
(in thousands)
|
|
Net loss on sales
|
|
$
|
132
|
|
|
$
|
1,672
|
|
Provision to allowance for declining market values
|
|
|
2,466
|
|
|
|
7,154
|
|
Operating expense
|
|
|
1,918
|
|
|
|
1,723
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,516
|
|
|
$
|
10,549
|
|
|
|
|
|
|
|
|
|
|
During 2013, we recorded approximately $2.5 million of provision to allowance for declining market values
related to new appraisals received for properties in the portfolio during the year. This compares with $7.2 million of provision related to new appraisals received for properties in the portfolio during 2012.
FDIC insurance assessments decreased $457,000, or 16.1%, to $2.4 million in 2013 from $2.8 million in 2012 due to decreased average total
consolidated assets, less the average tangible equity during the assessment period. Salary and employee benefit expenses decreased by $1.1 million, or 6.9% to $15.5 million from $16.6 million in 2012.
These improvements were offset partially by an increase in loan collection expense of $2.3 million, or 92.8%, due primarily to continued
remediation of problem loans.
Non-interest Expense Comparison 2012 to 2011
Non-interest expense for the year ended December 31, 2012, of $44.3 million represented a 57.5% decrease from $104.3 million for the
same period last year. The decrease in non-interest expense was attributable primarily to decreased other real estate owned expense due to lower loss on sales of OREO, lower valuation write-downs, and lower property maintenance expenses. Expenses
related to other real estate owned include:
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(in thousands)
|
|
Net loss on sales
|
|
$
|
1,672
|
|
|
$
|
8,889
|
|
Provision to allowance for sales strategy change
|
|
|
|
|
|
|
25,613
|
|
Provision to allowance for declining market values
|
|
|
7,154
|
|
|
|
9,261
|
|
Operating expense
|
|
|
1,723
|
|
|
|
3,762
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,549
|
|
|
$
|
47,525
|
|
|
|
|
|
|
|
|
|
|
In 2011, management determined, with the concurrence of the Board of Directors, that certain properties held
in OREO were not likely to be successfully disposed of in an acceptable time-frame using routine marketing efforts. It became apparent due to weakness in the economy and softness in demand for housing that certain land development and residential
condominium projects would require extended holding periods to sell the properties at recent appraised values. Accordingly, in June of 2011, the Company sold, in a single transaction, 54 finished condominium property units from condominium
developments held in our OREO portfolio with a carrying value of approximately $11.0 million, for $5.2 million, resulting in a pre-tax loss of $5.8 million. No similar transaction occurred in 2012.
Although we were carrying our OREO at fair market value less estimated cost to sell in 2011, we subsequently adjusted our valuations for land
development and residential development properties held in OREO that were similar to the properties we sold in 2011. We recorded an allowance totaling approximately $25.6 million to reflect our intent to market these properties more aggressively to
retail and bulk buyers. No similar change in sales strategy was implemented during 2012.
FDIC insurance assessments decreased $635,000,
or 18.3%, to $2.8 million in 2012 from $3.5 million in 2011 due to decreased average total consolidated assets, less the average tangible equity during the assessment period. Borrowing prepayment fees decreased $486,000 as no such fees were incurred
during 2012. Additionally, non-interest expense for 2011 included a non-recurring 100% goodwill impairment charge of $23.8 million.
These
improvements were offset partially by higher salaries and employee benefits expense of $1.4 million, or 9.4%, due primarily to additions to staff in our credit administration and workout divisions, and higher professional fees of $593,000, or 42.6%,
due primarily to increased audit and accounting fees, and loan review fees.
Income Tax Expense
No income tax benefit was
recorded for 2013, compared with $65,000 for 2012. Our deferred tax valuation allowance increased to $47.8 million at December 31, 2013. Our statutory federal tax rate was 35% in both 2013 and 2012. The effective tax rate for 2013 and 2012 is
not meaningful due to the reduction of income tax benefit as the result of the establishment of the deferred tax valuation allowance.
38
The valuation allowance for our deferred tax assets 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 we generate taxable income in a given quarter, the valuation allowance may be reduced to offset fully or partially 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 it is more likely than not the deferred tax
asset will be utilized.
See Note 14, Income Taxes, for additional discussion of our income taxes.
Income tax benefit was $65,000 for 2012, compared with $218,000 for 2011. The 2011 income tax benefit was affected significantly by the
establishment of a 100% valuation allowance for our deferred tax asset of $31.7 million. Our deferred tax valuation allowance increased to $43.9 million at December 31, 2012. Our statutory federal tax rate was 35% in both 2012 and 2011. The
effective tax rate for 2012 and 2011 is not meaningful due to the reduction of income tax benefit as the result of the establishment of the deferred tax valuation allowance.
Analysis of Financial Condition
Total
assets at December 31, 2013 were $1.1 billion compared with $1.2 billion at December 31, 2012, a decrease of $86.5 million or 7.4%. This decrease was attributable primarily to a decrease of $189.8 million in loans. The decrease in loans
was attributable to principal reductions by customers outpacing loan originations and advances, as well as $32.6 million in loan charge-offs and the transfer of loan balances totaling $20.6 million to OREO.
PBI Banks total risk-based capital was $83.1 million at December 31, 2013. PBI Banks consent order with its primary
regulators required its Board of Directors to adopt and implement a plan to reduce its construction and development loans to not more than 75% of total risk-based capital. These loans totaled $43.3 million, or 52% of total risk-based capital, at
December 31, 2013. The consent order also required a plan to reduce non-owner occupied commercial real estate loans, construction and development loans, and multifamily residential real estate loans as a group, to not more than 250% of total
risk-based capital. These loans totaled $237.0 million, or 284% of total risk-based capital, at December 31, 2013.
Total assets at
December 31, 2012 were $1.2 billion compared with $1.5 billion at December 31, 2011, a decrease of $292.8 million or 20.1%. This decrease was attributable primarily to a decrease of $236.9 million in loans. The decrease in loans was
attributable to principal reductions by customers outpacing loan originations and advances, as well as $37.5 million in loan charge-offs and the transfer of loan balances totaling $33.5 million to OREO.
Loans Receivable
Loans receivable decreased $189.8 million, or 21.1%, during the year ended December 31, 2013, to
$709.3 million. Our commercial, commercial real estate and real estate construction portfolios decreased by an aggregate of $126.9 million, or 24.1%, during 2013 and comprised 56.3% of the total loan portfolio at December 31, 2013.
Loans receivable decreased $236.9 million, or 20.9%, during the year ended December 31, 2012, to $899.1 million. Our commercial,
commercial real estate and real estate construction portfolios decreased by an aggregate of $161.1 million, or 23.4%, during 2012 and comprised 58.6% of the total loan portfolio at December 31, 2012.
39
Loan Portfolio Composition
The following table presents a summary of the
loan portfolio at the dates indicated, net of deferred loan fees, by type. There are no foreign loans in our portfolio and other than the categories noted, there is no concentration of loans in any industry exceeding 10% of total loans, with the
exception of loans for retail facilities (included in other commercial real estate below). Those loans totaled $98.5 million at December 31, 2013 and $150.3 million at December 31, 2012.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(dollars in thousands)
|
|
Commercial
|
|
$
|
52,878
|
|
|
|
7.45
|
%
|
|
$
|
52,567
|
|
|
|
5.85
|
%
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
43,326
|
|
|
|
6.11
|
|
|
|
70,284
|
|
|
|
7.82
|
|
Farmland
|
|
|
71,189
|
|
|
|
10.04
|
|
|
|
80,825
|
|
|
|
8.99
|
|
Other
|
|
|
232,026
|
|
|
|
32.71
|
|
|
|
322,687
|
|
|
|
35.89
|
|
Residential Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
46,858
|
|
|
|
6.61
|
|
|
|
50,986
|
|
|
|
5.67
|
|
1-4 Family
|
|
|
228,505
|
|
|
|
32.21
|
|
|
|
278,273
|
|
|
|
30.95
|
|
Consumer
|
|
|
14,365
|
|
|
|
2.03
|
|
|
|
20,383
|
|
|
|
2.27
|
|
Agriculture
|
|
|
19,199
|
|
|
|
2.71
|
|
|
|
22,317
|
|
|
|
2.48
|
|
Other
|
|
|
980
|
|
|
|
0.13
|
|
|
|
770
|
|
|
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
709,326
|
|
|
|
100.00
|
%
|
|
$
|
899,092
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(dollars in thousands)
|
|
Commercial
|
|
$
|
71,216
|
|
|
|
6.27
|
%
|
|
$
|
90,290
|
|
|
|
6.93
|
%
|
|
$
|
89,903
|
|
|
|
6.36
|
%
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
101,471
|
|
|
|
8.93
|
|
|
|
199,524
|
|
|
|
15.32
|
|
|
|
304,230
|
|
|
|
21.53
|
|
Farmland
|
|
|
90,958
|
|
|
|
8.01
|
|
|
|
85,523
|
|
|
|
6.56
|
|
|
|
83,898
|
|
|
|
5.94
|
|
Other
|
|
|
423,844
|
|
|
|
37.31
|
|
|
|
441,844
|
|
|
|
33.92
|
|
|
|
451,945
|
|
|
|
31.99
|
|
Residential Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
60,410
|
|
|
|
5.31
|
|
|
|
74,919
|
|
|
|
5.75
|
|
|
|
65,043
|
|
|
|
4.60
|
|
1-4 Family
|
|
|
337,350
|
|
|
|
29.70
|
|
|
|
353,418
|
|
|
|
27.13
|
|
|
|
354,358
|
|
|
|
25.08
|
|
Consumer
|
|
|
26,011
|
|
|
|
2.29
|
|
|
|
31,913
|
|
|
|
2.45
|
|
|
|
36,989
|
|
|
|
2.62
|
|
Agriculture
|
|
|
23,770
|
|
|
|
2.09
|
|
|
|
24,177
|
|
|
|
1.86
|
|
|
|
25,064
|
|
|
|
1.77
|
|
Other
|
|
|
993
|
|
|
|
0.09
|
|
|
|
1,060
|
|
|
|
0.08
|
|
|
|
1,488
|
|
|
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
1,136,023
|
|
|
|
100.00
|
%
|
|
$
|
1,302,668
|
|
|
|
100.00
|
%
|
|
$
|
1,412,918
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our lending activities are subject to a variety of lending limits imposed by state and federal law. PBI
Banks secured legal lending limit to a single borrower was approximately $20.7 million at December 31, 2013.
At
December 31, 2013, we had four loan relationships each with aggregate extensions of credit in excess of $10.0 million. Two of the four relationships include loans that have been classified as substandard by the Banks internal loan
review process. In 2012, we had eight loan relationships each with aggregate extensions of credit in excess of $10.0 million. For further discussion of classified loans refer to the asset quality discussion in our Allowance for Loan
Losses section.
Our real estate construction portfolio declined approximately $27.0 million from 2012 to 2013 as the result of
construction projects being completed and sold to end users or refinanced under permanent financing arrangements, and also loans in this category being transferred to OREO through the normal progression of collection, workout, and ultimate
disposition.
As of December 31, 2013, we had $7.2 million of loan participations purchased from, and $38.2 million of loan
participations sold to, other banks. As of December 31, 2012, we had $9.4 million of loan participations purchased from, and $61.9 million of loan participations sold to, other banks.
40
Our loan participation totals include participations in loans sold to two affiliate banks, The
Peoples Bank, Mt. Washington and The Peoples Bank, Taylorsville. Our chairman emeritus, J. Chester Porter and his brother and our director, William G. Porter, each own a 50% interest in Lake Valley Bancorp, Inc., the parent holding company of The
Peoples Bank, Taylorsville, Kentucky. J. Chester Porter and William G. Porter serve as directors of The Peoples Bank, Taylorsville. Our chairman emeritus owns an interest of approximately 36.0% and his brother and our director owns an interest of
approximately 3.0% in Crossroads Bancorp, Inc., the parent holding company of The Peoples Bank, Mount Washington, Kentucky. J. Chester Porter serves as director of The Peoples Bank, Mount Washington. Prior to 2013, we entered into management
services agreements with each of these banks. Each agreement provided that our executives and employees provided management and accounting services to the subject bank, including overall responsibility for establishing and implementing policy and
strategic planning. These entities are not consolidated in the financial statements of the Company. We received a $4,000 monthly fee from The Peoples Bank, Taylorsville and a $2,000 monthly fee from The Peoples Bank, Mount Washington for these
services. Beginning in 2013, we did not renew the agreements and ceased providing management services to these affiliate banks.
As of
December 31, 2013, we had $4.9 million of loan participations sold to these affiliate banks. As of December 31, 2012, we had $2.7 million of loan participations purchased from, and $6.5 million of loan participations sold to, these
affiliate banks. At December 31, 2013, $1.0 million and $629,000 of loan participations sold to Peoples Bank, Taylorsville, and Peoples Bank, Mt. Washington, respectively, were on nonaccrual.
We have analyzed our relationship with these affiliates and determined that we do not have the power to direct the activities of the
affiliates in a manner that would significantly impact their economic performance nor do we govern their absorption of losses or the use of their economic resources. As such, these entities are not consolidated in our financial statements.
Loan Maturity Schedule
The following table sets forth information at December 31, 2013, regarding the dollar amount of
loans, net of deferred loan fees, maturing in the loan portfolio based on their contractual terms to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2013
|
|
|
|
Maturing
Within
One Year
|
|
|
Maturing
1 through
5 Years
|
|
|
Maturing
Over 5
Years
|
|
|
Total
Loans
|
|
|
|
(dollars in thousands)
|
|
Loans with fixed rates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
5,469
|
|
|
$
|
12,632
|
|
|
$
|
2,283
|
|
|
$
|
20,384
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
16,700
|
|
|
|
6,513
|
|
|
|
577
|
|
|
|
23,790
|
|
Farmland
|
|
|
7,424
|
|
|
|
21,283
|
|
|
|
4,112
|
|
|
|
32,819
|
|
Other
|
|
|
77,275
|
|
|
|
66,589
|
|
|
|
23,441
|
|
|
|
167,305
|
|
Residential Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
9,003
|
|
|
|
22,222
|
|
|
|
7,624
|
|
|
|
38,849
|
|
1-4 Family
|
|
|
30,136
|
|
|
|
101,480
|
|
|
|
48,597
|
|
|
|
180,213
|
|
Consumer
|
|
|
3,009
|
|
|
|
9,326
|
|
|
|
1,600
|
|
|
|
13,935
|
|
Agriculture
|
|
|
2,285
|
|
|
|
1,883
|
|
|
|
87
|
|
|
|
4,255
|
|
Other
|
|
|
64
|
|
|
|
276
|
|
|
|
106
|
|
|
|
446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed rate loans
|
|
$
|
151,365
|
|
|
$
|
242,204
|
|
|
$
|
88,427
|
|
|
$
|
481,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans with floating rates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
13,142
|
|
|
$
|
14,445
|
|
|
$
|
4,907
|
|
|
$
|
32,494
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
16,626
|
|
|
|
2,764
|
|
|
|
146
|
|
|
|
19,536
|
|
Farmland
|
|
|
5,172
|
|
|
|
4,275
|
|
|
|
28,923
|
|
|
|
38,370
|
|
Other
|
|
|
26,169
|
|
|
|
4,950
|
|
|
|
33,602
|
|
|
|
64,721
|
|
Residential Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
1,148
|
|
|
|
906
|
|
|
|
5,955
|
|
|
|
8,009
|
|
1-4 Family
|
|
|
4,333
|
|
|
|
9,348
|
|
|
|
34,611
|
|
|
|
48,292
|
|
Consumer
|
|
|
150
|
|
|
|
248
|
|
|
|
32
|
|
|
|
430
|
|
Agriculture
|
|
|
11,838
|
|
|
|
2,734
|
|
|
|
372
|
|
|
|
14,944
|
|
Other
|
|
|
510
|
|
|
|
|
|
|
|
24
|
|
|
|
534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total floating rate loans
|
|
$
|
79,088
|
|
|
$
|
39,670
|
|
|
$
|
108,572
|
|
|
$
|
227,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41
Loan Portfolio by Risk Category
The following table
presents a summary of the loan portfolio at the dates indicated, by risk category.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
(in thousands)
|
|
Pass
|
|
$
|
369,529
|
|
|
$
|
437,886
|
|
|
$
|
713,822
|
|
|
$
|
984,636
|
|
|
$
|
1,132,601
|
|
Watch
|
|
|
144,316
|
|
|
|
177,419
|
|
|
|
143,247
|
|
|
|
130,335
|
|
|
|
56,542
|
|
Special Mention
|
|
|
5,865
|
|
|
|
34,700
|
|
|
|
48,922
|
|
|
|
18,988
|
|
|
|
15,455
|
|
Substandard
|
|
|
189,616
|
|
|
|
248,691
|
|
|
|
229,641
|
|
|
|
168,691
|
|
|
|
208,313
|
|
Doubtful
|
|
|
|
|
|
|
396
|
|
|
|
391
|
|
|
|
18
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
709,326
|
|
|
$
|
899,092
|
|
|
$
|
1,136,023
|
|
|
$
|
1,302,668
|
|
|
$
|
1,412,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our loans receivable decreased $189.8 million, or 21.1%, during the year ended December 31, 2013. All
loan risk categories have decreased since December 31, 2012. The pass category declined approximately $68.4 million, the watch category declined approximately $33.1 million, the special mention category declined approximately $28.8 million, and
the substandard category declined approximately $59.1 million.
Loan Delinquency
The following table presents a summary
of loan delinquencies at the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
(in thousands)
|
|
Past Due Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30-59 Days
|
|
$
|
10,696
|
|
|
$
|
38,219
|
|
|
$
|
17,346
|
|
|
$
|
20,956
|
|
|
$
|
12,515
|
|
60-89 Days
|
|
|
775
|
|
|
|
20,303
|
|
|
|
3,947
|
|
|
|
6,148
|
|
|
|
17,010
|
|
90 Days and Over
|
|
|
232
|
|
|
|
86
|
|
|
|
1,350
|
|
|
|
594
|
|
|
|
5,968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loans Past Due 30-90+ Days
|
|
|
11,703
|
|
|
|
58,608
|
|
|
|
22,643
|
|
|
|
27,698
|
|
|
|
35,493
|
|
Nonaccrual Loans
|
|
|
101,767
|
|
|
|
94,517
|
|
|
|
92,020
|
|
|
|
59,799
|
|
|
|
78,888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Past Due and Nonaccrual Loans
|
|
$
|
113,470
|
|
|
$
|
153,125
|
|
|
$
|
114,663
|
|
|
$
|
87,497
|
|
|
$
|
114,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the year ended December 31, 2013, loans past due 30-59 days decreased from $38.2 million at
December 31, 2012 to $10.7 million at December 31, 2013. Loans past due 60-89 days decreased from $20.3 million at December 31, 2012 to $775,000 at December 31, 2013. This represents a $47.1 million decrease from
December 31, 2012 to December 31, 2013, in loans past due 30-89 days. The decrease was primarily driven by the migration of loans for two significant borrowing relationships which together totaled $36.2 million from 30-59 days past
due and 60-89 days past due at December 31, 2012 to nonaccrual status during the first quarter of 2013. We considered this trend in delinquency levels during the evaluation of qualitative trends in the portfolio when establishing the general
component of our allowance for loan losses.
Loans more than 90 days past due increased $146,000, and nonaccrual loans increased $7.3
million, respectively, from December 31, 2012 to December 31, 2013. The $102.0 million in non-performing loans at December 31, 2013, and $94.6 million at December 31, 2012, were primarily construction, land development,
other land, commercial real estate, and residential real estate loans. The protracted slowdown in housing unit sales and loss of tenants or inability to lease vacant office and retail space placed inordinate stress on these borrowers and their
ability to repay according to the contractual terms of the loans. As such, we have placed these credits on nonaccrual and have begun the appropriate collection actions to resolve them. Management believes it has established adequate loan loss
reserves for these credits.
Non-Performing Assets
Non-performing assets consist of certain restructured loans for which
interest rate or other terms have been renegotiated, loans past due 90 days or more still on accrual, loans on which interest is no longer accrued, real estate acquired through foreclosure and repossessed assets. Loans, including impaired loans, are
placed on nonaccrual 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 if full principal or interest payments are not
anticipated in accordance with the contractual loan terms. Impaired loans are carried at the present value of expected future cash flows discounted at the loans effective interest rate or at the fair value of the collateral less cost to sell
if the loan is collateral dependent. Loans are reviewed on a regular basis and normal collection procedures are implemented when a borrower fails to make a required payment on a loan. If the delinquency on a mortgage loan exceeds 120 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. Consumer loans generally are charged off when a loan
is deemed uncollectible by management and any available collateral has been disposed. Commercial business and real estate loan delinquencies are handled on an individual basis by management with the advice of legal counsel.
42
Interest income on loans is recognized on the accrual basis except for those loans placed on
nonaccrual status. The accrual of interest on impaired loans is discontinued 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, which typically occurs after the loan becomes 90 days delinquent. When interest accrual is discontinued, existing accrued interest is reversed and interest income is subsequently recognized only to the extent cash
payments are received on well-secured loans.
Real estate acquired as a result of foreclosure or by deed in lieu of foreclosure is
classified as real estate owned until such time as it is sold. New and used automobiles and other motor vehicles acquired as a result of foreclosure are classified as repossessed assets until they are sold. When such property is acquired it is
recorded at its fair market value less cost to sell. Any write-down of the property at the time of acquisition is charged to the allowance for loan losses. Subsequent gains and losses are included in non-interest expense.
The following table sets forth information with respect to non-performing assets as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
(dollars in thousands)
|
|
Past due 90 days or more still on accrual
|
|
$
|
232
|
|
|
$
|
86
|
|
|
$
|
1,350
|
|
|
$
|
594
|
|
|
$
|
5,968
|
|
Loans on nonaccrual status
|
|
|
101,767
|
|
|
|
94,517
|
|
|
|
92,020
|
|
|
|
59,799
|
|
|
|
78,888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans
|
|
|
101,999
|
|
|
|
94,603
|
|
|
|
93,370
|
|
|
|
60,393
|
|
|
|
84,856
|
|
Real estate acquired through foreclosure
|
|
|
30,892
|
|
|
|
43,671
|
|
|
|
41,449
|
|
|
|
67,635
|
|
|
|
14,548
|
|
Other repossessed assets
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
52
|
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing assets
|
|
$
|
132,891
|
|
|
$
|
138,274
|
|
|
$
|
134,824
|
|
|
$
|
128,080
|
|
|
$
|
99,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing loans to total loans
|
|
|
14.38
|
%
|
|
|
10.52
|
%
|
|
|
8.22
|
%
|
|
|
4.63
|
%
|
|
|
6.00
|
%
|
Non-performing assets to total assets
|
|
|
12.35
|
%
|
|
|
11.89
|
%
|
|
|
9.26
|
%
|
|
|
7.43
|
%
|
|
|
5.42
|
%
|
Allowance for non-performing loans
|
|
$
|
2,285
|
|
|
$
|
13,250
|
|
|
$
|
11,382
|
|
|
$
|
7,977
|
|
|
$
|
7,266
|
|
Allowance for non-performing loans to non-performing loans
|
|
|
2.2
|
%
|
|
|
14.0
|
%
|
|
|
12.2
|
%
|
|
|
13.2
|
%
|
|
|
8.6
|
%
|
Troubled Debt Restructuring
A troubled debt restructuring (TDR) occurs when the Company has
agreed to a loan modification in the form of a concession for a borrower who is experiencing financial difficulty. The majority of the Companys TDRs involve a reduction in interest rate, a deferral of principal for a stated period of time, or
an interest only period. All TDRs are considered impaired, and the Company has allocated reserves for these loans to reflect the present value of the concessionary terms granted to the borrower. If the loan is considered collateral dependent, it is
reported net of allocated reserves, at the fair value of the collateral less cost to sell.
We do not have a formal loan modification
program. Rather, we work with individual borrower on a case-by-case basis to facilitate the orderly collection of our principal and interest before a loan becomes a non-performing loan. If a borrower is unable to make contractual payments, we review
the particular circumstances of that borrowers situation and negotiate a revised payment stream. In other words, we identify performing borrowers experiencing financial difficulties, and through negotiations, we lower their interest rate, most
typically on a short-term basis for three to six months. Our goal when restructuring a credit is to afford the borrower a reasonable period of time to remedy the issue causing cash flow constraints within their business so that they can return to
performing status over time.
Our loan modifications have taken the form of reduction in interest rate and/or curtailment of scheduled
principal payments for a short-term period, usually three to six months, but in some cases until maturity of the loan. In some circumstances we restructure real estate secured loans in a bifurcated fashion whereby we have a fully amortizing
A loan at a market interest rate and an interest-only B loan at a reduced interest rate. The majority of our restructured loans are collateral secured loans. If a borrower fails to perform under the modified terms, we place
the loan(s) on nonaccrual status and begin the process of working with the borrower to liquidate the underlying collateral to satisfy the debt.
At December 31, 2013, we had 98 restructured loans totaling $91.3 million with borrowers who experienced deterioration in financial
condition compared with 123 loans totaling $117.8 million at December 31, 2012. In general, these loans were granted interest rate reductions to provide cash flow relief to borrowers experiencing cash flow difficulties. Of these restructured
loans for 2013, five loans totaling approximately $4.4 million were also granted principal payment deferrals until maturity. There were no concessions made to forgive principal relative to these loans, although we have recorded partial charge-offs
for certain restructured loans. In general, these loans are secured by first liens on 1-4 residential or commercial real estate properties, or farmland. Restructured loans also included $2.8 million of commercial loans for 2013. At December 31,
2013, $44.3 million of TDRs were performing according to their modified terms.
43
The following table sets forth information with respect to TDRs, non-performing loans, real
estate acquired through foreclosure, and other repossessed assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31,
2013
|
|
|
December
31,
2012
|
|
|
December
31,
2011
|
|
|
December
31,
2010
|
|
|
December
31,
2009
|
|
|
|
(dollars in thousands)
|
|
Total non-performing loans
|
|
$
|
101,999
|
|
|
$
|
94,603
|
|
|
$
|
93,370
|
|
|
$
|
60,393
|
|
|
$
|
84,856
|
|
TDRs on accrual
|
|
|
44,346
|
|
|
|
77,344
|
|
|
|
74,144
|
|
|
|
25,543
|
|
|
|
24,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans and TDRs on accrual
|
|
$
|
146,345
|
|
|
$
|
171,947
|
|
|
$
|
167,514
|
|
|
$
|
85,936
|
|
|
$
|
108,991
|
|
Real estate acquired through foreclosure
|
|
|
30,892
|
|
|
|
43,671
|
|
|
|
41,449
|
|
|
|
67,635
|
|
|
|
14,548
|
|
Other repossessed assets
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
52
|
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing assets and TDRs on accrual
|
|
$
|
177,237
|
|
|
$
|
215,618
|
|
|
$
|
208,968
|
|
|
$
|
153,623
|
|
|
$
|
123,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans and TDRs on accrual to total loans
|
|
|
20.63
|
%
|
|
|
19.12
|
%
|
|
|
14.75
|
%
|
|
|
6.60
|
%
|
|
|
7.71
|
%
|
Total non-performing assets and TDRs on accrual to total assets
|
|
|
16.47
|
%
|
|
|
18.55
|
%
|
|
|
14.36
|
%
|
|
|
8.91
|
%
|
|
|
6.74
|
%
|
We consider any loan that is restructured for a borrower experiencing financial difficulties due to a
borrowers potential inability to pay in accordance with contractual terms of the loan to be a troubled debt restructure. Specifically, we consider a concession involving a modification of the loan terms, such as (i) a reduction of the
stated interest rate, (ii) reduction or deferral of principal, or (iii) reduction or deferral of accrued interest at a stated interest rate lower than the current market rate for new debt with similar risk all to be troubled debt
restructurings. When a modification of terms is made for a competitive reason, we do not consider that to be a troubled debt restructuring. A primary example of a competitive modification would be an interest rate reduction for a performing
customers loan to a market rate as the result of a market decline in rates.
We continue to report restructured loans as
restructured until such time as the loan is paid in full, otherwise settled, sold, or charged-off. If the borrower fails to perform, we place the loan on nonaccrual status and seek to liquidate the underlying collateral for these loans. Our
nonaccrual policy for restructured loans is identical to our nonaccrual policy for all loans. Our policy calls for a loan to be reported as nonaccrual if it is maintained on a cash basis because of deterioration in the financial condition of the
borrower, payment in full of principal and interest is not expected, or principal or interest has been in default for a period of 90 days or more unless the assets are both well secured and in the process of collection. Changes in value for
impairment, including the amount attributed to the passage of time, are recorded entirely within the provision for loan losses. Upon determination that a loan is collateral dependent, the loan is charged down to the fair value of collateral less
estimated costs to sell.
See Footnote 4, Loans, to the financial statements for additional disclosure related to troubled
debt restructuring.
Interest income that would have been earned on non-performing loans was $5.6 million, $4.9 million, and $4.0 million
for the years ended December 31, 2013, 2012, and 2011, respectively. Interest income recognized on accruing non-performing loans was $895,000, $460,000, and $611,000 for the years ended December 31, 2013, 2012, and 2011, respectively.
44
Allowance for Loan Losses
The allowance for loan losses is based on
managements continuing review and evaluation of individual loans, loss experience, current economic conditions, risk characteristics of various categories of loans and such other factors that, in managements judgment, require current
recognition in estimating loan losses.
The following table sets forth an analysis of loan loss experience as of and for the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
(dollars in thousands)
|
|
Balances at beginning of period
|
|
$
|
56,680
|
|
|
$
|
52,579
|
|
|
$
|
34,285
|
|
|
$
|
26,392
|
|
|
$
|
19,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans charged-off:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
|
|
|
28,879
|
|
|
|
31,437
|
|
|
|
38,538
|
|
|
|
19,261
|
|
|
|
6,519
|
|
Commercial
|
|
|
2,828
|
|
|
|
3,784
|
|
|
|
4,197
|
|
|
|
2,675
|
|
|
|
301
|
|
Consumer
|
|
|
773
|
|
|
|
1,130
|
|
|
|
1,070
|
|
|
|
496
|
|
|
|
875
|
|
Agriculture
|
|
|
128
|
|
|
|
1,164
|
|
|
|
841
|
|
|
|
29
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charge-offs
|
|
|
32,608
|
|
|
|
37,515
|
|
|
|
44,646
|
|
|
|
22,461
|
|
|
|
7,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
|
|
|
1,622
|
|
|
|
1,040
|
|
|
|
184
|
|
|
|
114
|
|
|
|
133
|
|
Commercial
|
|
|
1,212
|
|
|
|
129
|
|
|
|
69
|
|
|
|
28
|
|
|
|
55
|
|
Consumer
|
|
|
266
|
|
|
|
125
|
|
|
|
87
|
|
|
|
104
|
|
|
|
76
|
|
Agriculture
|
|
|
252
|
|
|
|
72
|
|
|
|
|
|
|
|
8
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries
|
|
|
3,352
|
|
|
|
1,366
|
|
|
|
340
|
|
|
|
254
|
|
|
|
271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
29,256
|
|
|
|
36,149
|
|
|
|
44,306
|
|
|
|
22,207
|
|
|
|
7,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
700
|
|
|
|
40,250
|
|
|
|
62,600
|
|
|
|
30,100
|
|
|
|
14,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
28,124
|
|
|
$
|
56,680
|
|
|
$
|
52,579
|
|
|
$
|
34,285
|
|
|
$
|
26,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses to period-end loans
|
|
|
3.96
|
%
|
|
|
6.30
|
%
|
|
|
4.63
|
%
|
|
|
2.63
|
%
|
|
|
1.87
|
%
|
Net charge-offs to average loans
|
|
|
3.71
|
%
|
|
|
3.50
|
%
|
|
|
3.56
|
%
|
|
|
1.64
|
%
|
|
|
0.54
|
%
|
Allowance for loan losses to non-performing loans
|
|
|
27.57
|
%
|
|
|
59.91
|
%
|
|
|
56.31
|
%
|
|
|
56.77
|
%
|
|
|
31.10
|
%
|
Allowance for loan losses for loans individually evaluated for impairment
|
|
$
|
3,471
|
|
|
$
|
21,034
|
|
|
$
|
12,314
|
|
|
$
|
5,119
|
|
|
$
|
5,453
|
|
Loans individually evaluated for impairment
|
|
|
149,883
|
|
|
|
188,808
|
|
|
|
150,727
|
|
|
|
71,726
|
|
|
|
106,139
|
|
Allowance for loan losses to loans individually evaluated for impairment
|
|
|
2.32
|
%
|
|
|
11.14
|
%
|
|
|
8.17
|
%
|
|
|
7.14
|
%
|
|
|
5.14
|
%
|
Allowance for loan losses for loans collectively evaluated for impairment
|
|
$
|
24,653
|
|
|
$
|
35,646
|
|
|
$
|
40,265
|
|
|
$
|
29,166
|
|
|
$
|
20,939
|
|
Loans collectively evaluated for impairment
|
|
|
559,443
|
|
|
|
710,284
|
|
|
|
985,296
|
|
|
|
1,230,942
|
|
|
|
1,306,779
|
|
Allowance for loan losses to loans collectively evaluated for impairment
|
|
|
4.41
|
%
|
|
|
5.02
|
%
|
|
|
4.09
|
%
|
|
|
2.37
|
%
|
|
|
1.60
|
%
|
Our allowance for loan losses is a reserve established through charges to earnings in the form of a provision
for loan losses. The allowance for loan losses is comprised of general reserves and specific reserves.
We maintain a general reserve for
each loan type in the loan portfolio. In determining the amount of the general reserve portion of our allowance for loan losses, management considers factors such as our historical loan loss experience, the growth, composition and diversification of
our loan portfolio, current delinquency levels, loan quality grades, the results of recent regulatory examinations and general economic conditions. Based on these factors, we apply estimated percentages to the various categories of loans, not
including any loan that has a specific allowance allocated to it, based on our historical experience, portfolio trends and economic and industry trends. This information is used by management to set the general reserve portion of the allowance for
loan losses at a level it deems prudent.
Generally, all loans that have been identified as impaired are reviewed on a quarterly basis in
order to determine whether a specific allowance is required. A loan is considered impaired when based on current information; it is probable that we will not receive all amounts due in accordance with the contractual terms of the loan agreement.
Once a loan has been identified as impaired, management measures impairment in accordance with ASC 310.10,
Impairment of a Loan.
When managements measured value of the impaired loan is less than the recorded investment in
the loan, the amount of the impairment is recorded as a specific reserve. These specific reserves are determined on an individual loan basis based on managements current evaluation of our loss exposure for each credit given the payment status,
financial condition of the borrower and value of any underlying collateral. Loans for which specific reserves have been provided are excluded from the general reserve calculations described below. Changes in specific reserves from period to period
are the result of changes in the circumstances of individual loans such as charge-offs, pay-offs, changes in collateral values or other factors.
45
The allowance for loan losses represents managements estimate of the amount necessary to
provide for known and inherent losses in the loan portfolio in the normal course of business. Due to the uncertainty of risks in the loan portfolio, managements judgment of the amount of the allowance necessary to absorb loan losses is
approximate. The allowance for loan losses is also subject to regulatory examinations and may be adjusted in response to a determination by the regulatory agencies as to its adequacy in comparison with peer institutions.
We make specific allowances for each impaired loan based on its type and classification as discussed above. At year-end 2013, our allowance
for loan losses to total non-performing loans decreased to 27.6% from 59.9% at year-end 2012. It is important to look more closely at this ratio as a significant portion of our impaired loans are collateral dependent and have been charged down to
the estimated fair value of the underlying collateral less cost to sell. Please see the next table for comparison and disclosure of our recorded investment less allocated allowance relative to the unpaid principal balance. We have assessed these
impaired loans for collectability and considered, among other things, the borrowers ability to repay, the value of the underlying collateral, and other market conditions to ensure that the allowance for loan losses is adequate to absorb
probable incurred losses.
The following table presents the unpaid principal balance, recorded investment and allocated allowance related
to loans individually evaluated for impairment in the commercial real estate and residential real estate portfolios as of December 31, 2013 and 2012.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
|
|
Commercial
Real Estate
|
|
|
Residential
Real Estate
|
|
|
Commercial
Real Estate
|
|
|
Residential
Real Estate
|
|
|
|
(in thousands)
|
|
Unpaid principal balance
|
|
$
|
116,740
|
|
|
$
|
56,665
|
|
|
$
|
143,228
|
|
|
$
|
61,923
|
|
Prior charge-offs
|
|
|
(22,410
|
)
|
|
|
(7,153
|
)
|
|
|
(17,306
|
)
|
|
|
(5,124
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded investment
|
|
|
94,330
|
|
|
|
49,512
|
|
|
|
125,922
|
|
|
|
56,799
|
|
Allocated allowance
|
|
|
(2,345
|
)
|
|
|
(827
|
)
|
|
|
(16,046
|
)
|
|
|
(4,641
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded investment, less allocated allowance
|
|
$
|
91,985
|
|
|
$
|
48,685
|
|
|
$
|
109,876
|
|
|
$
|
52,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded investment, less allocated allowance/ Unpaid principal balance
|
|
|
81.09
|
%
|
|
|
89.45
|
%
|
|
|
78.13
|
%
|
|
|
86.77
|
%
|
Based on previous charge-offs, our current recorded investment in the commercial real estate and residential
real estate segments are significantly below the unpaid principal balance for the loans. Consideration of the recorded investment and allocated allowance further indicated, we are at 81.09% and 89.45% of the unpaid principal balance in the
commercial real estate and residential real estate segments of the portfolio, respectively, at December 31, 2013.
The following
table illustrates recent trends in loans collectively evaluated for impairment and the related allowance for loan losses by portfolio segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
|
|
Loans
|
|
|
Allowance
|
|
|
% to Total
|
|
|
Loans
|
|
|
Allowance
|
|
|
% to Total
|
|
Commercial
|
|
$
|
47,883
|
|
|
$
|
2,931
|
|
|
|
6.12
|
%
|
|
$
|
47,271
|
|
|
$
|
4,139
|
|
|
|
8.76
|
%
|
Commercial real estate
|
|
|
252,211
|
|
|
|
14,069
|
|
|
|
5.58
|
|
|
|
347,874
|
|
|
|
18,722
|
|
|
|
5.38
|
|
Residential real estate
|
|
|
225,851
|
|
|
|
6,935
|
|
|
|
3.07
|
|
|
|
272,460
|
|
|
|
11,594
|
|
|
|
4.26
|
|
Consumer
|
|
|
14,272
|
|
|
|
407
|
|
|
|
2.85
|
|
|
|
20,171
|
|
|
|
789
|
|
|
|
3.91
|
|
Agriculture
|
|
|
18,877
|
|
|
|
305
|
|
|
|
1.62
|
|
|
|
22,262
|
|
|
|
398
|
|
|
|
1.79
|
|
Other
|
|
|
349
|
|
|
|
6
|
|
|
|
1.72
|
|
|
|
246
|
|
|
|
4
|
|
|
|
1.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
559,443
|
|
|
$
|
24,653
|
|
|
|
4.41
|
%
|
|
$
|
710,284
|
|
|
$
|
35,646
|
|
|
|
5.02
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46
Loans collectively evaluated for impairment and the related allowance for loan losses trended
downward from 5.02% at December 31, 2012 to 4.41% at December 31, 2013. The residential real estate segment constitutes approximately 40% of total loans collectively evaluated for impairment. The related allowance for the
residential real estate segment trended downward from 4.26% at December 31, 2012 to 3.07% at December 31, 2013 as our net charge-offs declined from approximately $8.9 million in 2012 to $7.2 million in 2013. We also noted that
residential housing prices improved over the past year as residential housing inventories declined. The commercial real estate segment constitutes approximately 45% of total loans collectively evaluated for impairment. The related
allowance for the commercial real estate segment was largely consistent between years. It trended upward slightly from 5.38% at December 31, 2012 to 5.58% at December 31, 2013. This is consistent with our net charge-off
experience in the commercial real estate segment of the portfolio which totaled approximately $21.5 million in 2012 to $20.0 million in 2013.
A significant portion of our portfolio is comprised of loans secured by real estate. A decline in the value of the real estate serving as
collateral for our loans may impact our ability to collect those loans. In general, we obtain updated appraisals on property securing our loans when circumstances are warranted such as at the time of renewal or when market conditions have
significantly changed. We use qualified licensed appraisers approved by our Board of Directors. These appraisers possess prerequisite certifications and knowledge of the local and regional marketplace.
Based on an evaluation of the loan portfolio, management presents a quarterly review of the allowance for loan losses to our Board of
Directors, indicating any change in the allowance for loan losses since the last review and any recommendations as to adjustments in the allowance for loan losses.
This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes
available or as events change. We decreased the allowance for loan losses as a percentage of loans outstanding to 3.96% at December 31, 2013 from 6.30% at December 31, 2012. The level of the allowance is based on estimates and the ultimate
losses may vary from these estimates.
We follow a loan grading program designed to evaluate the credit risk in our loan portfolio.
Through this loan grading process, we maintain an internally classified watch list which helps management assess the overall quality of the loan portfolio and the adequacy of the allowance for loan losses. Loans categorized as watch list loans show
warning elements where the present status exhibits one or more deficiencies that require attention in the short-term or where pertinent ratios of the loan account have weakened to a point where more frequent monitoring is warranted. These loans do
not have all of the characteristics of a classified loan (substandard or doubtful) but do show weakened elements as compared with those of a satisfactory credit. We review these loans to assist in assessing the adequacy of the allowance for loan
losses.
In establishing the appropriate classification for specific assets, management considers, among other factors, the
borrowers ability to repay, the borrowers repayment history, the current delinquent status, and the estimated value of the underlying collateral. -As a result of this process, loans are categorized as special mention, substandard or
doubtful.
Loans classified as special mention do not have all of the characteristics of substandard or doubtful loans. They
have one or more deficiencies which warrant special attention and which corrective action, such as accelerated collection practices, may remedy.
Loans classified as substandard are those loans with clear and defined weaknesses such as a highly leveraged position, unfavorable
financial ratios, uncertain repayment sources or poor financial condition which may jeopardize the repayment of the debt as contractually agreed. They are characterized by the distinct possibility that we will sustain some losses if the deficiencies
are not corrected.
Loans classified as doubtful are those loans which have characteristics similar to substandard loans but
with an increased risk that collection or liquidation in full is highly questionable and improbable.
Specific reserves may be carried for
accruing TDRs in compliance with restructured terms. Once a loan is deemed impaired or uncollectible as contractually agreed (other than performing TDRs), the loan is charged-off either partially or in-full against the allowance for loan losses,
based upon the expected future cash flows discounted at the loans effective interest rate, or the fair value of collateral less estimated cost to sell with respect to collateral-based loans if collateral dependent.
As of December 31, 2013, we had $189.6 million of loans classified as substandard, $5.9 million classified as special mention and none
classified as doubtful or loss. This compares with $248.7 million of loans classified as substandard, $396,000 classified as doubtful, $34.7 million classified as special mention and none classified as loss as of December 31, 2012. The $59.1
million decrease in loans classified as substandard was primarily concentrated in the commercial real estate portfolio. As of December 31, 2013, we had allocations of $12.5 million in the allowance for loan losses related to these
substandard loans. This compares to allocations of $34.0 million in the allowance for loan losses related to substandard loans at December 31, 2012.
47
We recorded a provision for loan losses of $700,000 for the year ended December 31, 2013,
compared with $40.3 million for 2012 and $62.6 million for 2011. The total allowance for loan losses was $28.1 million, or 3.96% of total loans, at December 31, 2013, compared with $56.7 million, or 6.30% of total loans, at
December 31, 2012, and $52.6 million, or 4.63% of total loans, at December 31, 2011. The decreased allowance is consistent with the decrease in our classified loans of $88.3 million from December 31, 2012 to December 31,
2013 and loan charge-off trends. Net charge-offs were $29.3 million for the year ended December 31, 2013, compared with $36.1 million for 2012 and $44.3 million for 2011. Charge-offs for 2013 were concentrated in the loans secured by real
estate category of the portfolio. Real estate net charge-offs represents 93.17% of our net charge-offs for 2013. These net charge-offs consisted of $18.9 million of commercial real estate loans, $7.2 million of residential real estate loans, and
$1.2 million of construction and land development loans.
The following table depicts managements allocation of the allowance
for loan losses by loan type. Allowance funding and allocation is based on managements current evaluation of risk in each category, economic conditions, past loss experience, loan volume, past due history and other factors. Since these factors
and managements assumptions are subject to change, the allocation is not necessarily predictive of future portfolio performance. The allocation is made by analytical purposes and is not necessarily indicative of the categories in which future
losses may occur. The total allowance is available to absorb losses from any segment of loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
Amount of
Allowance
|
|
|
Percent of
Loans to
Total
Loans
|
|
|
Amount of
Allowance
|
|
|
Percent of
Loans to
Total
Loans
|
|
|
|
(dollars in thousands)
|
|
Commercial
|
|
$
|
3,221
|
|
|
|
7.45
|
%
|
|
$
|
4,402
|
|
|
|
5.85
|
%
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
2,149
|
|
|
|
6.11
|
|
|
|
5,989
|
|
|
|
7.82
|
|
Farmland
|
|
|
1,623
|
|
|
|
10.04
|
|
|
|
2,600
|
|
|
|
8.99
|
|
Other
|
|
|
12,642
|
|
|
|
32.71
|
|
|
|
26,179
|
|
|
|
35.89
|
|
Residential Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
1,449
|
|
|
|
6.61
|
|
|
|
2,464
|
|
|
|
5.67
|
|
1-4 Family
|
|
|
6,313
|
|
|
|
32.21
|
|
|
|
13,771
|
|
|
|
30.95
|
|
Consumer
|
|
|
416
|
|
|
|
2.03
|
|
|
|
857
|
|
|
|
2.27
|
|
Agriculture
|
|
|
305
|
|
|
|
2.71
|
|
|
|
403
|
|
|
|
2.48
|
|
Other
|
|
|
6
|
|
|
|
0.13
|
|
|
|
15
|
|
|
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
28,124
|
|
|
|
100.00
|
%
|
|
$
|
56,680
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
Amount of
Allowance
|
|
|
Percent of
Loans to
Total
Loans
|
|
|
Amount of
Allowance
|
|
|
Percent of
Loans to
Total
Loans
|
|
|
Amount of
Allowance
|
|
|
Percent of
Loans to
Total
Loans
|
|
|
|
(dollars in thousands)
|
|
Commercial
|
|
$
|
4,207
|
|
|
|
6.27
|
%
|
|
$
|
2,147
|
|
|
|
6.93
|
%
|
|
$
|
2,040
|
|
|
|
6.36
|
%
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
13,920
|
|
|
|
8.93
|
|
|
|
11,164
|
|
|
|
15.32
|
|
|
|
8,215
|
|
|
|
21.53
|
|
Farmland
|
|
|
2,023
|
|
|
|
8.01
|
|
|
|
702
|
|
|
|
6.56
|
|
|
|
643
|
|
|
|
5.94
|
|
Other
|
|
|
17,081
|
|
|
|
37.31
|
|
|
|
12,209
|
|
|
|
33.92
|
|
|
|
9,266
|
|
|
|
31.99
|
|
Residential Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
1,797
|
|
|
|
5.31
|
|
|
|
517
|
|
|
|
5.75
|
|
|
|
578
|
|
|
|
4.60
|
|
1-4 Family
|
|
|
12,420
|
|
|
|
29.70
|
|
|
|
6,707
|
|
|
|
27.13
|
|
|
|
4,662
|
|
|
|
25.08
|
|
Consumer
|
|
|
792
|
|
|
|
2.29
|
|
|
|
701
|
|
|
|
2.45
|
|
|
|
538
|
|
|
|
2.62
|
|
Agriculture
|
|
|
325
|
|
|
|
2.09
|
|
|
|
134
|
|
|
|
1.86
|
|
|
|
163
|
|
|
|
1.77
|
|
Other
|
|
|
14
|
|
|
|
0.09
|
|
|
|
4
|
|
|
|
0.08
|
|
|
|
5
|
|
|
|
0.11
|
|
Unallocated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
52,579
|
|
|
|
100.0
|
%
|
|
$
|
34,285
|
|
|
|
100.00
|
%
|
|
$
|
26,392
|
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48
Foreclosed Properties
Foreclosed properties at December 31, 2013 were
$30.9 million compared with $43.7 million at December 31, 2012. See Footnote 6, Other Real Estate Owned, to the financial statements. During 2013, we acquired $20.6 million of OREO properties and sold properties totaling
approximately $30.8 million. We value foreclosed properties at fair value less estimated costs to sell when acquired and expect to liquidate these properties to recover our investment in the due course of business.
Other real estate owned (OREO) is recorded at fair market value less estimated cost to sell at time of acquisition. Any write-down of the
property at the time of acquisition is charged to the allowance for loan losses. Subsequent reductions in fair value are recorded as non-interest expense. To determine the fair value of OREO for smaller dollar, single family homes, we
consult with internal real estate sales staff and external realtors, investors, and appraisers. If the internally evaluated market price is below our underlying investment in the property, we record an appropriate write-down.
For larger dollar commercial real estate properties, we obtain a new appraisal of the subject property in connection with the transfer to
OREO. In some of these circumstances, an appraisal is in process at quarter end and we must make our best estimate of the fair value of the underlying collateral based on our internal evaluation of the property, our review of the most recent
appraisal, and discussions with the currently engaged appraiser. Generally, we obtain updated appraisals annually unless a sale is imminent.
The
following table presents the major categories of OREO at the year-ends indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
|
(in thousands)
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction, land development, and other land
|
|
$
|
19,049
|
|
|
$
|
22,323
|
|
|
$
|
31,280
|
|
Farmland
|
|
|
690
|
|
|
|
602
|
|
|
|
715
|
|
Other
|
|
|
4,888
|
|
|
|
15,175
|
|
|
|
6,364
|
|
Residential Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
246
|
|
|
|
195
|
|
|
|
|
|
1-4 Family
|
|
|
6,019
|
|
|
|
5,376
|
|
|
|
3,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
30,892
|
|
|
$
|
43,671
|
|
|
$
|
41,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net activity relating to other real estate owned during the years indicated is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
|
(in thousands)
|
|
OREO Activity
|
|
|
|
|
|
|
|
|
|
|
|
|
OREO as of January 1
|
|
$
|
43,671
|
|
|
$
|
41,449
|
|
|
$
|
67,635
|
|
Real estate acquired
|
|
|
20,606
|
|
|
|
33,528
|
|
|
|
41,917
|
|
Valuation adjustments for sales strategy change
|
|
|
|
|
|
|
|
|
|
|
(25,613
|
)
|
Valuation adjustments for declining market values
|
|
|
(2,466
|
)
|
|
|
(7,154
|
)
|
|
|
(9,261
|
)
|
Improvements
|
|
|
|
|
|
|
1
|
|
|
|
1,650
|
|
Loss on sale
|
|
|
(132
|
)
|
|
|
(1,672
|
)
|
|
|
(8,889
|
)
|
Proceeds from sale of properties
|
|
|
(30,787
|
)
|
|
|
(22,481
|
)
|
|
|
(25,990
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OREO as of December 31
|
|
$
|
30,892
|
|
|
$
|
43,671
|
|
|
$
|
41,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss on sales, write-downs, and operating expenses for OREO totaled $4.5 million for the year ended
December 31, 2013, compared with $10.5 million for the same period of 2012.
We recorded approximately $3.4 million and $7.7 million
of fair value write-downs related to new appraisals received for properties in the OREO portfolio during 2013 and 2012 respectively. We were successful in selling OREO totaling $30.9 million and $24.2 million during 2013 and 2012, respectively. We
continue to have an elevated level of real estate secured non-performing loans. We expect to resolve a significant level of these non-performing loans through the acquisition and sale of the underlying real estate collateral.
Investment Securities
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 investment portfolio increased by $28.5 million, or 16.0%, to $207.0 million at December 31, 2013, compared with $178.5
million at December 31, 2012.
49
The following table sets forth the carrying value of our securities portfolio at the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
|
(dollars in thousands)
|
|
Securities available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and federal agencies
|
|
$
|
31,026
|
|
|
$
|
284
|
|
|
$
|
(1,444
|
)
|
|
$
|
29,866
|
|
|
$
|
5,603
|
|
|
$
|
530
|
|
|
$
|
|
|
|
$
|
6,133
|
|
Agency mortgage-backed: residential
|
|
|
102,435
|
|
|
|
458
|
|
|
|
(1,950
|
)
|
|
|
100,943
|
|
|
|
94,298
|
|
|
|
1,141
|
|
|
|
(257
|
)
|
|
|
95,182
|
|
State and municipal
|
|
|
12,965
|
|
|
|
608
|
|
|
|
(28
|
)
|
|
|
13,545
|
|
|
|
52,485
|
|
|
|
2,335
|
|
|
|
(87
|
)
|
|
|
54,733
|
|
Corporate
|
|
|
18,002
|
|
|
|
769
|
|
|
|
(610
|
)
|
|
|
18,161
|
|
|
|
18,851
|
|
|
|
1,150
|
|
|
|
(37
|
)
|
|
|
19,964
|
|
Other debt
|
|
|
572
|
|
|
|
60
|
|
|
|
|
|
|
|
632
|
|
|
|
572
|
|
|
|
46
|
|
|
|
|
|
|
|
618
|
|
Equity
|
|
|
135
|
|
|
|
62
|
|
|
|
|
|
|
|
197
|
|
|
|
1,359
|
|
|
|
487
|
|
|
|
|
|
|
|
1,846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale
|
|
$
|
165,135
|
|
|
$
|
2,241
|
|
|
$
|
(4,032
|
)
|
|
$
|
163,344
|
|
|
$
|
173,168
|
|
|
$
|
5,689
|
|
|
$
|
(381
|
)
|
|
$
|
178,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held to maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and municipal
|
|
$
|
43,612
|
|
|
$
|
3
|
|
|
$
|
(668
|
)
|
|
$
|
42,947
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total held to maturity
|
|
$
|
43,612
|
|
|
$
|
3
|
|
|
$
|
(668
|
)
|
|
$
|
42,947
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the contractual maturities, fair values and weighted-average yields for our
available for sale securities held at December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due Within
One Year
|
|
|
After One Year
But Within
Five Years
|
|
|
After Five Years
But Within
Ten Years
|
|
|
After Ten Years
|
|
|
Total
|
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
Available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and federal agencies
|
|
$
|
|
|
|
|
|
%
|
|
$
|
3,337
|
|
|
|
2.53
|
%
|
|
$
|
6,293
|
|
|
|
2.82
|
%
|
|
$
|
20,236
|
|
|
|
2.20
|
%
|
|
$
|
29,866
|
|
|
|
2.36
|
%
|
Agency mortgage-backed: residential
|
|
|
|
|
|
|
|
|
|
|
356
|
|
|
|
5.38
|
|
|
|
2,468
|
|
|
|
2.56
|
|
|
|
98,119
|
|
|
|
2.38
|
|
|
|
100,943
|
|
|
|
2.39
|
|
State and municipal
|
|
|
686
|
|
|
|
6.39
|
|
|
|
2,427
|
|
|
|
5.14
|
|
|
|
10,063
|
|
|
|
5.08
|
|
|
|
369
|
|
|
|
6.19
|
|
|
|
13,545
|
|
|
|
5.23
|
|
Corporate bonds
|
|
|
|
|
|
|
|
|
|
|
5,724
|
|
|
|
5.77
|
|
|
|
1,124
|
|
|
|
5.14
|
|
|
|
11,313
|
|
|
|
2.19
|
|
|
|
18,161
|
|
|
|
3.36
|
|
Other debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
632
|
|
|
|
6.50
|
|
|
|
632
|
|
|
|
6.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
686
|
|
|
|
6.39
|
%
|
|
$
|
11,844
|
|
|
|
4.72
|
%
|
|
$
|
19,948
|
|
|
|
4.04
|
%
|
|
$
|
130,669
|
|
|
|
2.36
|
%
|
|
$
|
163,147
|
|
|
|
2.73
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
163,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the contractual maturities, amortized cost and weighted-average yields for our
held to maturity securities held at December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due Within
One Year
|
|
|
After One Year
But Within
Five Years
|
|
|
After Five Years
But Within
Ten Years
|
|
|
After Ten Years
|
|
|
Total
|
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
Held to maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and municipal
|
|
$
|
|
|
|
|
|
%
|
|
$
|
293
|
|
|
|
1.55
|
%
|
|
$
|
20,092
|
|
|
|
3.48
|
%
|
|
$
|
23,227
|
|
|
|
4.48
|
%
|
|
$
|
43,612
|
|
|
|
4.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total held to maturity
|
|
$
|
|
|
|
|
|
%
|
|
$
|
293
|
|
|
|
1.55
|
%
|
|
$
|
20,092
|
|
|
|
3.48
|
%
|
|
$
|
23,227
|
|
|
|
4.48
|
%
|
|
$
|
43,612
|
|
|
|
4.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average yields in the table above were calculated on a tax equivalent basis using a federal income tax rate of 35%. Mortgage-backed securities
are securities that have been developed by pooling a number of real estate mortgages. These securities are issued by federal agencies such as Government National Mortgage Association (Ginnie Mae), Fannie Mae and Freddie Mac, as well as
non-agency company issuers. These securities are deemed to have high credit ratings, and minimum regular monthly cash flows of principal and interest. Cash flows from agency backed mortgage-backed securities are guaranteed by the issuing agencies.
50
Unlike U.S. Treasury and U.S. government agency securities, which have a lump sum payment at
maturity, mortgage-backed securities provide cash flows from regular principal and interest payments and principal prepayments throughout the lives of the securities. Mortgage-backed securities that are purchased at a premium will generally return
decreasing net yields as interest rates drop because home owners tend to refinance their mortgages. Thus, the premium paid must be amortized over a shorter period. Therefore, those securities purchased at a discount will obtain higher net yields in
a decreasing interest rate environment. As interest rates rise, the opposite will generally be true. During a period of increasing interest rates, fixed rate mortgage-backed securities do not tend to experience heavy prepayments of principal and
consequently, average life will not be shortened. If interest rates begin to fall, prepayments will generally increase. Non-agency issuer mortgage-backed securities do not carry a government guarantee. We limit our purchases of these securities to
bank qualified issues with high credit ratings. We regularly monitor the performance and credit ratings of these securities and evaluate these securities, as we do all of our securities, for other-than-temporary impairment on a quarterly basis. At
December 31, 2013, 97.3% of the agency mortgage-backed securities we held had contractual final maturities of more than ten years with a weighted average life of 23.1 years.
In December 2011, based upon relevant market information, we determined that our basis in twelve equity securities with an unrealized loss
position for more the 12 months was not recoverable in the near term. Therefore, during 2011, we recorded an other-than-temporary impairment charge totaling $41,000 for these securities which had an adjusted cost basis of $206,000. No such
impairment charges were recorded in 2012 or 2013.
At December 31, 2013, the Company held one equity security. This security was in
an unrealized gain position as of December 31, 2013. Management monitors the underlying financial condition of the issuers and current market pricing for this equity security monthly.
In 2013, to better manage our interest rate risk, we transferred from available for sale to held to maturity selected municipal securities in
our portfolio having a book value of approximately $44.9 million, a market value of approximately $43.7, and a net unrealized loss of approximately $1.3 million. This transfer was completed after careful consideration of our intent and ability to
hold these securities to maturity.
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, we have been required by market conditions to rely increasingly on short to mid-term certificate accounts and other deposit alternatives, including brokered and wholesale
deposits, which 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 their use on interest income and net interest margin in various rate environments. Our remaining brokered deposits matured during 2013. We are currently restricted from accepting, renewing, or rolling-over brokered deposits without the prior
receipt of a waiver on a case-by-case basis from our regulators.
We primarily rely on our banking office network to attract and retain
deposits in our local markets and leverage our online Ascencia division to attract out-of-market deposits. Market interest rates and rates on deposit products offered by competing financial institutions can significantly affect our ability to
attract and retain deposits. During 2013, total deposits decreased $77.4 million compared with 2012. During 2012, total deposits decreased $258.7 million compared with 2011. The decrease in deposits for 2013 and 2012 was primarily in certificates of
deposit balances and money market accounts.
To evaluate our funding needs in light of deposit trends resulting from continually changing
conditions, we evaluate simulated performance reports that forecast changes in margins along with other pertinent economic data. We continue to offer attractively priced deposit products along our product line to allow us to retain deposit customers
and reduce interest rate risk during various rising and falling interest rate cycles.
We offer savings accounts, NOW accounts, money
market accounts and fixed rate certificates with varying maturities. The flow of deposits is influenced significantly by general economic conditions, changes in interest rates and competition. Our management adjusts interest rates, maturity terms,
service fees and withdrawal penalties on our deposit products periodically. The variety of deposit products allows us to compete more effectively in obtaining funds and to respond with more flexibility to the flow of funds away from depository
institutions into outside investment alternatives. However, our ability to attract and maintain deposits and the costs of these funds has been, and will continue to be, significantly affected by market conditions.
51
The following table sets forth the average daily balances and weighted average rates paid for our
deposits for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
|
Average
Balance
|
|
|
Average
Rate
|
|
|
Average
Balance
|
|
|
Average
Rate
|
|
|
Average
Balance
|
|
|
Average
Rate
|
|
|
|
(dollars in thousands)
|
|
Demand
|
|
$
|
106,153
|
|
|
|
|
|
|
$
|
113,325
|
|
|
|
|
|
|
$
|
106,769
|
|
|
|
|
|
Interest Checking
|
|
|
84,917
|
|
|
|
0.23
|
%
|
|
|
89,820
|
|
|
|
0.37
|
%
|
|
|
89,103
|
|
|
|
0.74
|
%
|
Money Market
|
|
|
69,842
|
|
|
|
0.50
|
|
|
|
63,212
|
|
|
|
0.49
|
|
|
|
81,925
|
|
|
|
0.96
|
|
Savings
|
|
|
39,158
|
|
|
|
0.29
|
|
|
|
38,665
|
|
|
|
0.40
|
|
|
|
36,511
|
|
|
|
0.62
|
|
Certificates of Deposit
|
|
|
703,982
|
|
|
|
1.35
|
|
|
|
912,061
|
|
|
|
1.52
|
|
|
|
1,120,154
|
|
|
|
1.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Deposits
|
|
$
|
1,004,052
|
|
|
|
|
|
|
$
|
1,217,083
|
|
|
|
|
|
|
$
|
1,434,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Rate
|
|
|
|
|
|
|
1.01
|
%
|
|
|
|
|
|
|
1.20
|
%
|
|
|
|
|
|
|
1.40
|
%
|
The following table sets forth the average daily balances and weighted average rates paid for our certificates
of deposit for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
|
Average
Balance
|
|
|
Average
Rate
|
|
|
Average
Balance
|
|
|
Average
Rate
|
|
|
Average
Balance
|
|
|
Average
Rate
|
|
|
|
(dollars in thousands)
|
|
Certificates of Deposit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than $100,000
|
|
$
|
405,758
|
|
|
|
1.28
|
%
|
|
$
|
478,502
|
|
|
|
1.40
|
%
|
|
$
|
569,667
|
|
|
|
1.59
|
%
|
$100,000 or more
|
|
|
298,224
|
|
|
|
1.44
|
|
|
|
433,559
|
|
|
|
1.64
|
|
|
|
550,487
|
|
|
|
1.71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
703,982
|
|
|
|
1.35
|
%
|
|
$
|
912,061
|
|
|
|
1.52
|
%
|
|
$
|
1,120,154
|
|
|
|
1.65
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table shows at December 31, 2013 the amount of our time deposits of $100,000 or more by
time remaining until maturity:
|
|
|
|
|
Maturity Period
|
|
Three months or less
|
|
$
|
38,062
|
|
Three months through six months
|
|
|
30,559
|
|
Six months through twelve months
|
|
|
108,079
|
|
Over twelve months
|
|
|
118,265
|
|
|
|
|
|
|
Total
|
|
$
|
294,965
|
|
|
|
|
|
|
We strive to maintain competitive pricing on our deposit products which we believe allows us to retain a
substantial percentage of our customers when their time deposits mature.
Borrowing
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 FHLB of Cincinnati to supplement our pool of lendable funds, meet deposit withdrawal requirements and manage the terms of
our liabilities. Advances from the FHLB are secured by our stock in the FHLB, and substantially all of our first mortgage residential loans. At December 31, 2013, we had $4.5 million in advances outstanding from the FHLB and the capacity to
increase our borrowings an additional $18.7 million. The FHLB of Cincinnati functions as a central reserve bank providing credit for savings banks and other member financial institutions. As a member, we are required to own capital stock in the FHLB
and are authorized to apply for advances on the security of such stock and certain of our home mortgages and other assets (principally, securities which are obligations of, or guaranteed by, the United States) provided that we meet certain standards
related to creditworthiness.
The following table sets forth information about our FHLB advances as of and for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
|
(dollars in thousands)
|
|
Average balance outstanding
|
|
$
|
4,990
|
|
|
$
|
6,325
|
|
|
$
|
15,315
|
|
Maximum amount outstanding at any month-end during the period
|
|
|
5,517
|
|
|
|
7,015
|
|
|
|
38,937
|
|
End of period balance
|
|
|
4,492
|
|
|
|
5,604
|
|
|
|
7,116
|
|
Weighted average interest rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
At end of period
|
|
|
3.07
|
%
|
|
|
3.21
|
%
|
|
|
3.31
|
%
|
During the period
|
|
|
3.15
|
%
|
|
|
3.27
|
%
|
|
|
3.51
|
%
|
52
Subordinated Capital Note
At December 31, 2013, our bank subsidiary, PBI Bank,
had a subordinated capital note outstanding in the amount of $5.9 million. The note is unsecured, bears interest at the BBA three-month LIBOR floating rate plus 300 basis points, and qualifies as Tier 2 capital. Interest only was due quarterly
through September 30, 2010, at which time quarterly principal payments of $225,000 plus interest commenced. The note matures July 1, 2020. At December 31, 2013, the interest rate on this note was 3.25%.
Junior Subordinated Debentures
At December 31, 2013, we had four issues of junior subordinated debentures outstanding
totaling $25.0 million as shown in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Liquidation
Amount
Trust
Preferred
Securities
|
|
|
Issuance Date
|
|
|
Optional
Prepayment
Date (2)
|
|
|
Interest Rate (1)
|
|
Junior
Subordinated
Debt and
Investment
in Trust
|
|
|
Maturity Date
|
|
(dollars in thousands)
|
|
|
(dollars in thousands)
|
|
Porter Statutory Trust II
|
|
$
|
5,000
|
|
|
|
2/13/2004
|
|
|
|
3/17/2009
|
|
|
3-month LIBOR + 2.85%
|
|
$
|
5,155
|
|
|
|
2/13/2034
|
|
Porter Statutory Trust III
|
|
|
3,000
|
|
|
|
4/15/2004
|
|
|
|
6/17/2009
|
|
|
3-month LIBOR + 2.79%
|
|
|
3,093
|
|
|
|
4/15/2034
|
|
Porter Statutory Trust IV
|
|
|
14,000
|
|
|
|
12/14/2006
|
|
|
|
3/1/2012
|
|
|
3-month LIBOR + 1.67%
|
|
|
14,434
|
|
|
|
3/1/2037
|
|
Asencia Statutory Trust I
|
|
|
3,000
|
|
|
|
2/13/2004
|
|
|
|
3/17/2009
|
|
|
3-month LIBOR + 2.85%
|
|
|
3,093
|
|
|
|
2/13/2034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
25,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
25,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
As of December 31, 2013, the 3-month LIBOR was 0.25%.
|
(2)
|
The debentures are callable on or after the optional prepayment date at their principal amount plus accrued interest.
|
The trust preferred securities are subject to mandatory redemption, in whole or in part, upon repayment of the subordinated debentures at
maturity or their earlier redemption at the liquidation preference. The subordinated debentures, which mature February 13, 2034, April 15, 2034, and March 1, 2037, are redeemable before the maturity date at our option on or after
March 17, 2009, June 17, 2009, and March 1, 2012, respectively, at their principal amount plus accrued interest.
We
have the option to defer interest payments on the subordinated debentures from time to time for a period not to exceed 20 consecutive quarters. After such period, we must pay all deferred interest and resume quarterly interest payments or we will be
in default. Effective with the fourth quarter of 2011, we began deferring interest payments on our junior subordinated debentures.
Deferring interest payments on our junior subordinated notes resulted in the deferral of distributions on our trust preferred securities. We
are prohibited from paying cash dividends on our common stock until such time as we have paid all deferred distributions on our trust preferred securities.
The trust preferred securities issued by our subsidiary trusts are currently included in our Tier 1 capital for regulatory purposes. On
March 1, 2005, the Federal Reserve Board adopted final rules that continue to allow trust preferred securities to be included in Tier 1 capital, subject to quantitative and qualitative limits. Currently, no more than 25% of our Tier 1 capital
can consist of trust preferred securities and qualifying perpetual preferred stock. To the extent the amount of our trust preferred securities exceeds the 25% limit, the excess would be includable in Tier 2 capital. The new quantitative limits were
effective March 31, 2011. As of December 31, 2013, Porter Bancorps trust preferred securities totaled 25% of its Tier 1 capital and 43% of its Tier 2 capital.
Each of the trusts issuing the trust preferred securities holds junior subordinated debentures we issued with a 30 year maturity. The final
rules provide that in the last five years before the junior subordinated debentures mature, the associated trust preferred securities will be excluded from Tier 1 capital and included in Tier 2 capital. In addition, the trust preferred securities
during this five-year period would be amortized out of Tier 2 capital by one-fifth each year and excluded from Tier 2 capital completely during the year before maturity.
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 meet the cash flow requirements of
depositors and borrowers, as well as our operating cash needs, taking into account all on- and off-balance sheet funding demands. Liquidity risk management also involves ensuring that we meet our cash flow needs at a reasonable cost. We maintain an
investment and funds management policy, which identifies the primary sources of liquidity, establishes procedures for monitoring and measuring liquidity, and establishes minimum liquidity requirements in compliance with regulatory guidance. Our
Asset Liability Committee continually monitors and reviews our liquidity position.
53
Funds are available from a number of sources, including the sale of securities in the available
for sale portion of the investment portfolio, principal pay-downs on loans and mortgage-backed securities, customer deposit inflows, brokered deposits and other wholesale funding. Historically, we have utilized brokered and wholesale deposits to
supplement our funding strategy. We are currently restricted from accepting, renewing, or rolling-over brokered deposits without the prior receipt of a waiver on a case-by-case basis from our regulators. At December 31, 2013 we had no brokered
deposits.
Traditionally, we have borrowed from the FHLB to supplement our funding requirements. At December 31, 2013, we had an
unused borrowing capacity with the FHLB of $18.7 million. After December 31, 2011, as a result of our financial results, the FHLB changed our collateral arrangements from a blanket pledge of residential mortgage loans to a detailed loan listing
requirement. Our borrowing capacity under the detailed loan listing requirement is based on the market value of the underlying pledged loans rather than the unpaid principal balance of the pledged loans. The listing requirement also increases the
level of collateral required for borrowings.
We also have available on a secured basis federal funds borrowing lines from correspondent
banks totaling $5.0 million. Management believes our sources of liquidity are adequate to meet expected cash needs for the foreseeable future, however, the availability of these lines could be affected by our financial position. We are also subject
to FDIC interest rate restrictions for deposits. As such, we are permitted to offer up to the national rate plus 75 basis points as published weekly by the FDIC.
We have used cash to pay dividends on common stock, if and when declared by the Board of Directors, and to service debt. Porter Bancorps
main sources of funding include dividends paid by PBI Bank, management fees received from PBI Bank and affiliated banks and financing obtained in the capital markets. During 2011, Porter Bancorp contributed $13.1 million to its subsidiary, PBI Bank,
which substantially decreased its liquid assets. The contribution was made to strengthen the Banks capital in an effort to help it comply with its capital ratio requirements under the consent order. Liquid assets decreased from $20.3 million
at December 31, 2010 to $2.7 million at December 31, 2013. Since the Bank is unlikely to be in a position to pay dividends to the parent company for the foreseeable future, cash inflows for the parent are limited to earnings on investment
securities, sales of investment securities, and interest on deposits with the Bank. These cash inflows along with the liquid assets held at December 31, 2013, are needed to cover ongoing operating expenses of the parent company which have been
reduced and are budgeted at $950,000 for 2014. Parent company liquidity could be improved if a capital raise was accomplished. See the Supervision-Porter Bancorp-Dividends section of Item 1. Business and the
Dividends section of Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities of this Annual Report on Form 10-K.
Capital
In the fourth quarter of 2011,
we began deferring the payment of regular quarterly cash dividends on our Series A Preferred Stock. As a result of the dividend deferral, the holder of our Series A Preferred Stock (currently the U.S. Treasury) has the right to appoint up to two
representatives to our Board of Directors. We will continue to accrue any deferred dividends, which will be deducted from income to common shareholders for financial statement purposes.
In addition, effective with the fourth quarter of 2011, we began deferring interest payments on our junior subordinated notes with resulted in
a deferral of distributions on our trust preferred securities. Therefore, we will not be able to pay cash dividends on our common stock until such time that we have paid all deferred distributions on our trust preferred securities. If we defer
interest payments on our trust preferred securities for 20 consecutive quarters, we must pay all deferred interest and resume quarterly interest payments or we will be in default.
Stockholders equity decreased $11.3 million to $35.9 million at December 31, 2013, compared with $47.2 million at December 31,
2012. The decrease was due to the current year net loss, further reduced by $1.9 million of dividends declared (accrued and unpaid) on cumulative preferred stock and an increase in unrealized loss on available for sale securities.
In 2010, we completed a $32.0 million private placement to accredited investors. Following completion of the transactions involved, Porter
Bancorp had issued (i) 2,465,569 shares of common stock, (ii) 317,042 shares of Series C Preferred Stock and (iii) warrants to purchase to purchase 1,163,045 shares of non-voting common stock at a price of $11.50 per share.
The Series C Preferred Stock has no voting rights (except when required by law), has a liquidation preference over our common stock, and
dividend rights equivalent to our common stock. Each share of Series C Preferred Stock automatically converts into 1.05 shares of common stock at such time as, after giving effect to the automatic conversion, the holder of the Series C Preferred
Stock (together with its affiliates and any other persons with which it is acting in concert or whose holdings would otherwise be required to be aggregated for purposes of federal banking law) beneficially holds, directly or indirectly, less than
9.9% of the number of shares of common stock then issued and outstanding.
54
The warrants are exercisable into non-voting common stock until they expire on September 16,
2015. The non-voting common stock has no voting rights (except when required by law), but otherwise has the same dividend and other rights as our common stock. Upon issuance, each share of non-voting common stock automatically converts into 1.05
shares of common stock at such time as, after giving effect to the automatic conversion, the holder of the non-voting common stock (together with its affiliates and any other persons with which it is acting in concert or whose holdings would
otherwise be required to be aggregated for purposes of federal banking law) holds, directly or indirectly, beneficially less than 9.9% of the number of shares of common stock then issued and outstanding.
On November 21, 2008, we issued to the U.S. Treasury 35,000 shares of our Series A Preferred Stock and a warrant to purchase up to
330,561 shares of our common stock for $15.88 per share in exchange for aggregate consideration of $35.0 million. The warrant is immediately exercisable and has a 10-year term. The Series A Preferred Stock qualifies as Tier 1 capital and pays
cumulative cash dividends quarterly. The annual dividend rate increased from 5% to 9% beginning in November 2013. The Series A Preferred Stock is non-voting (except when required by law) and after issuance may be redeemed by the Company at
$1,000 per share plus accrued unpaid dividends. Accrued and unpaid dividends on our Series A Preferred Stock, plus accrued and unpaid interest on those dividends, totaled $4.3 million at December 31, 2013.
Kentucky banking laws limit the amount of dividends that may be paid to a holding company by its subsidiary banks without prior approval.
These laws limit the amount of dividends that may be paid in any calendar year to current years 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. During 2014, the amount available to be paid by PBI Bank to Porter Bancorp would be 2014 earnings to date. However, PBI Bank has agreed with its primary regulators to obtain their written consent prior to declaring or paying any future
dividends.
Each of the federal bank regulatory agencies has established risk-based capital requirements for banking organizations. See
Item 1. Business Supervision and Regulation Porter Bancorp Capital Adequacy Requirements and PBI Bank Capital Requirements. In addition, PBI Bank has agreed with its primary regulators to maintain a ratio of total
capital to total risk-weighted assets (total risk-based capital ratio) of at least 12.0%, and a ratio of Tier 1 capital to total assets (leverage ratio) of 9.0%.
The following table shows the ratios of Tier 1 capital and total capital to risk-adjusted assets and the leverage ratios for Porter Bancorp
and PBI Bank at December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory
Minimums
|
|
|
Well-
Capitalized
Minimums
|
|
|
Minimum
Capital
Ratios Under
Consent Order
|
|
|
Porter
Bancorp
|
|
|
PBI
Bank
|
|
Tier 1 Capital
|
|
|
4.0
|
%
|
|
|
6.0
|
%
|
|
|
N/A
|
|
|
|
7.34
|
%
|
|
|
9.35
|
%
|
Total risk-based capital
|
|
|
8.0
|
|
|
|
10.0
|
|
|
|
12.0
|
%
|
|
|
11.03
|
|
|
|
11.44
|
|
Tier 1 leverage ratio
|
|
|
4.0
|
|
|
|
5.0
|
|
|
|
9.0
|
|
|
|
4.95
|
|
|
|
6.28
|
|
At December 31, 2013, PBI Banks Tier 1 leverage ratio was 6.28% which is below the 9% minimum
capital ratio required by the Consent Order and its total risk-based capital ratio was 11.44% which is below the 12% minimum capital ratio required by the Consent Order. Bank regulatory agencies can exercise discretion when an institution does not
maintain minimum capital levels or meet the other 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.
Off
Balance Sheet Arrangements
In the normal course of business, we enter into various transactions, which, in accordance with GAAP, are
not included in our consolidated balance sheets. We enter into these transactions to meet the financing needs of our customers. These transactions include commitments to extend credit and standby letters of credit, which involve, to varying degrees,
elements of credit risk and interest rate risk in excess of the amounts recognized in the consolidated balance sheets.
55
Our commitments associated with outstanding standby letters of credit and commitments to extend
credit as of December 31, 2013 are summarized below. Since commitments associated with letters of credit and commitments to extend credit may expire unused, the amounts shown do not necessarily reflect our actual future cash funding
requirements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year
or less
|
|
|
More than 1
year but less
than 3 years
|
|
|
3 years or
more but less
than 5 years
|
|
|
5 years
or more
|
|
|
Total
|
|
|
|
(dollars in thousands)
|
|
Commitments to extend credit
|
|
$
|
24,717
|
|
|
$
|
22,359
|
|
|
$
|
2,235
|
|
|
$
|
12,100
|
|
|
$
|
61,411
|
|
Standby letters of credit
|
|
|
1,998
|
|
|
|
|
|
|
|
500
|
|
|
|
|
|
|
|
2,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
26,715
|
|
|
$
|
22,359
|
|
|
$
|
2,735
|
|
|
$
|
12,100
|
|
|
$
|
63,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standby Letters of Credit
Standby letters of credit are written conditional commitments
we issue to guarantee the performance of a borrower to a third party. If the borrower does not perform in accordance with the terms of the agreement with the third party, we may be required to fund the commitment. The maximum potential amount of
future payments we could be required to make is represented by the contractual amount of the commitment. If the commitment is funded, we would be entitled to seek recovery from the borrower. Our policies generally require that standby letter of
credit arrangements contain security and debt covenants similar to those contained in loan agreements.
Commitments to Extend
Credit
We enter into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes. Substantially all of our commitments to extend credit are contingent
upon borrowers maintaining specific credit standards at the time of loan funding. We minimize our exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures.
Contractual Obligations
The following
table summarizes our contractual obligations and other commitments to make future payments as of December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year
or less
|
|
|
More than 1
year but less
than 3 years
|
|
|
3 years or
more but less
than 5 years
|
|
|
5 years or
more
|
|
|
Total
|
|
|
|
(dollars in thousands)
|
|
Time deposits
|
|
$
|
431,601
|
|
|
$
|
224,846
|
|
|
$
|
23,481
|
|
|
$
|
24
|
|
|
$
|
679,952
|
|
FHLB borrowing (1)
|
|
|
776
|
|
|
|
1,290
|
|
|
|
810
|
|
|
|
1,616
|
|
|
|
4,492
|
|
Subordinated capital note
|
|
|
900
|
|
|
|
1,800
|
|
|
|
1,800
|
|
|
|
1,350
|
|
|
|
5,850
|
|
Junior subordinated debentures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,000
|
|
|
|
25,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
433,277
|
|
|
$
|
227,936
|
|
|
$
|
26,091
|
|
|
$
|
27,990
|
|
|
$
|
715,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Fixed rate mortgage-matched borrowings with rates ranging from 0% to 5.25%, and maturities ranging from 2014 through 2033, averaging 3.07%.
|
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been prepared in accordance with U.S. generally accepted accounting principles,
which require the measurement of financial position and operating results in historical dollars without considering changes in the relative purchasing power of money over time due to inflation.
We have an asset and liability structure that is essentially monetary in nature. As a result, interest rates have a more significant impact on
our performance than the effects of general levels of inflation. Periods of high inflation are often accompanied by relatively higher interest rates, and periods of low inflation are accompanied by relatively lower interest rates. As market interest
rates rise or fall in relation to the rates earned on our loans and investments, the value of these assets decreases or increases respectively.
56
Item 8.
|
Financial Statements and Supplementary Data
|
The following consolidated financial statements and reports
are included in this section:
|
|
|
Managements Report on Internal Control Over Financial Reporting
|
|
|
|
|
Report of Independent Registered Public Accounting Firm
|
|
|
|
|
Consolidated Balance Sheets as of December 31, 2013 and 2012
|
|
|
|
|
Consolidated Statements of Operations for the Years Ended December 31, 2013, 2012, and 2011
|
|
|
|
|
Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 2013, 2012, and 2011
|
|
|
|
|
Consolidated Statements of Change in Stockholders Equity for the Years Ended December 31, 2013, 2012, and 2011
|
|
|
|
|
Consolidated Statements of Cash Flows for the Years Ended December 31, 2013, 2012, and 2011
|
|
|
|
|
Notes to Consolidated Financial Statements
|
|
|
59
MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Porter Bancorp, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting.
Internal control over financial reporting is defined in Rule 13a-15(1) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of; our principal executive and principal financial officers and effected
by the board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted
accounting principles and includes those policies and procedures that:
Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of our assets;
Provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and
directors; and
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of
our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. 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.
Management assessed the effectiveness of our internal control over financial
reporting as of December 31, 2013. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in the 1992 Internal Control-Integrated Framework.
Based on that assessment, we believe that, as of December 31, 2013, our internal control over financial reporting is effective based on those criteria.
|
|
|
|
|
/s/ John T. Taylor
|
|
|
|
/s/ Phillip W. Barnhouse
|
John T. Taylor
Chief Executive Officer
|
|
|
|
Phillip W. Barnhouse
Chief Financial Officer
|
March 14, 2014
60
.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Porter Bancorp, Inc.
Louisville, Kentucky
We have audited the accompanying consolidated balance sheets of Porter Bancorp, Inc. as of December 31, 2013 and 2012, and the related
consolidated statements of operations, changes in stockholders equity and comprehensive loss, and cash flows for each of the three years in the period ended December 31, 2013. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position
of Porter Bancorp, Inc. as of December 31, 2013 and 2012, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2013, in conformity with U.S. generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern.
As discussed in Note 2 to the consolidated financial statements, the Company has incurred substantial losses in 2013, 2012 and 2011, largely as a result of asset impairments. In addition, the Companys bank subsidiary is not in compliance with
a regulatory enforcement order issued by its primary federal regulator requiring, among other things, increased minimum regulatory capital ratios. Additional losses or the continued inability to comply with the regulatory enforcement order may
result in additional adverse regulatory action. These events raise substantial doubt about the Companys ability to continue as a going concern. Managements plans with regard to these matters are also discussed in Note 2 to the
consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Crowe Horwath, LLP
Louisville, Kentucky
March 14, 2014
61
PORTER BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
(Dollar amounts in thousands except share data)
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash and due from financial institutions
|
|
$
|
109,407
|
|
|
$
|
46,512
|
|
Federal funds sold
|
|
|
1,727
|
|
|
|
3,060
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
111,134
|
|
|
|
49,572
|
|
Securities available for sale
|
|
|
163,344
|
|
|
|
178,476
|
|
Securities held to maturity (fair value of $42,947 and $0, respectively)
|
|
|
43,612
|
|
|
|
|
|
Mortgage loans held for sale
|
|
|
149
|
|
|
|
507
|
|
Loans, net of allowance of $28,124 and $56,680, respectively
|
|
|
681,202
|
|
|
|
842,412
|
|
Premises and equipment
|
|
|
19,983
|
|
|
|
20,805
|
|
Other real estate owned
|
|
|
30,892
|
|
|
|
43,671
|
|
Federal Home Loan Bank stock
|
|
|
10,072
|
|
|
|
10,072
|
|
Bank owned life insurance
|
|
|
8,911
|
|
|
|
8,398
|
|
Accrued interest receivable and other assets
|
|
|
6,822
|
|
|
|
8,718
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,076,121
|
|
|
$
|
1,162,631
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
Non-interest bearing
|
|
$
|
107,486
|
|
|
$
|
114,310
|
|
Interest bearing
|
|
|
880,219
|
|
|
|
950,749
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
|
987,705
|
|
|
|
1,065,059
|
|
Repurchase agreements
|
|
|
2,470
|
|
|
|
2,634
|
|
Federal Home Loan Bank advances
|
|
|
4,492
|
|
|
|
5,604
|
|
Accrued interest payable and other liabilities
|
|
|
14,673
|
|
|
|
10,169
|
|
Subordinated capital note
|
|
|
5,850
|
|
|
|
6,975
|
|
Junior subordinated debentures
|
|
|
25,000
|
|
|
|
25,000
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,040,190
|
|
|
|
1,115,441
|
|
Commitments and contingent liabilities (Note 18)
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
|
|
|
|
|
|
Preferred stock, no par, 1,000,000 shares authorized
|
|
|
|
|
|
|
|
|
Series A - 35,000 issued and outstanding; Liquidation preference of $35 million at December 31, 2013 and 2012
|
|
|
35,000
|
|
|
|
34,840
|
|
Series C 317,042 issued and outstanding; Liquidation preference of $3.6 million at December 31, 2013 and 2012
|
|
|
3,283
|
|
|
|
3,283
|
|
|
|
|
|
|
|
|
|
|
Total preferred stockholders equity
|
|
|
38,283
|
|
|
|
38,123
|
|
|
|
|
|
|
|
|
|
|
Common stock, no par, 86,000,000 shares authorized, 12,840,999 and 12,002,421 shares issued and outstanding, respectively
|
|
|
112,236
|
|
|
|
112,236
|
|
Additional paid-in capital
|
|
|
20,887
|
|
|
|
20,283
|
|
Retained deficit
|
|
|
(130,182
|
)
|
|
|
(126,517
|
)
|
Accumulated other comprehensive income (loss)
|
|
|
(5,293
|
)
|
|
|
3,065
|
|
|
|
|
|
|
|
|
|
|
Total common stockholders equity
|
|
|
(2,352
|
)
|
|
|
9,067
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
35,931
|
|
|
|
47,190
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
1,076,121
|
|
|
$
|
1,162,631
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
62
PORTER BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
(Dollar amounts in thousands except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, including fees
|
|
$
|
38,015
|
|
|
$
|
52,918
|
|
|
$
|
67,679
|
|
Taxable securities
|
|
|
3,706
|
|
|
|
3,333
|
|
|
|
4,008
|
|
Tax exempt securities
|
|
|
933
|
|
|
|
887
|
|
|
|
1,123
|
|
Federal funds sold and other
|
|
|
574
|
|
|
|
591
|
|
|
|
744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,228
|
|
|
|
57,729
|
|
|
|
73,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
10,137
|
|
|
|
14,623
|
|
|
|
20,147
|
|
Federal Home Loan Bank advances
|
|
|
157
|
|
|
|
207
|
|
|
|
537
|
|
Junior subordinated debentures
|
|
|
622
|
|
|
|
671
|
|
|
|
632
|
|
Subordinated capital note
|
|
|
221
|
|
|
|
266
|
|
|
|
283
|
|
Federal funds purchased and other
|
|
|
6
|
|
|
|
7
|
|
|
|
440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,143
|
|
|
|
15,774
|
|
|
|
22,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
32,085
|
|
|
|
41,955
|
|
|
|
51,515
|
|
Provision for loan losses
|
|
|
700
|
|
|
|
40,250
|
|
|
|
62,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) after provision for loan losses
|
|
|
31,385
|
|
|
|
1,705
|
|
|
|
(11,085
|
)
|
Non-interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts
|
|
|
2,058
|
|
|
|
2,239
|
|
|
|
2,609
|
|
Income from fiduciary activities
|
|
|
517
|
|
|
|
1,177
|
|
|
|
993
|
|
Bank card interchange fees
|
|
|
718
|
|
|
|
727
|
|
|
|
668
|
|
Other real estate owned rental income
|
|
|
399
|
|
|
|
420
|
|
|
|
200
|
|
Net gain on sales of securities
|
|
|
723
|
|
|
|
3,236
|
|
|
|
1,108
|
|
Income from bank owned life insurance
|
|
|
534
|
|
|
|
312
|
|
|
|
314
|
|
Other
|
|
|
970
|
|
|
|
1,479
|
|
|
|
1,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,919
|
|
|
|
9,590
|
|
|
|
7,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
15,501
|
|
|
|
16,648
|
|
|
|
15,218
|
|
Occupancy and equipment
|
|
|
3,583
|
|
|
|
3,642
|
|
|
|
3,729
|
|
Goodwill impairment
|
|
|
|
|
|
|
|
|
|
|
23,794
|
|
Loan collection expense
|
|
|
4,707
|
|
|
|
2,442
|
|
|
|
2,509
|
|
Other real estate owned expense
|
|
|
4,516
|
|
|
|
10,549
|
|
|
|
47,525
|
|
FDIC insurance
|
|
|
2,378
|
|
|
|
2,835
|
|
|
|
3,470
|
|
State franchise tax
|
|
|
1,944
|
|
|
|
2,174
|
|
|
|
2,228
|
|
Professional fees
|
|
|
1,892
|
|
|
|
1,985
|
|
|
|
1,392
|
|
Communications
|
|
|
711
|
|
|
|
710
|
|
|
|
678
|
|
Borrowing prepayment fees
|
|
|
|
|
|
|
|
|
|
|
486
|
|
Insurance expense
|
|
|
648
|
|
|
|
373
|
|
|
|
172
|
|
Postage and delivery
|
|
|
423
|
|
|
|
454
|
|
|
|
485
|
|
Other
|
|
|
2,587
|
|
|
|
2,480
|
|
|
|
2,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,890
|
|
|
|
44,292
|
|
|
|
104,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(1,586
|
)
|
|
|
(32,997
|
)
|
|
|
(107,525
|
)
|
Income tax expense (benefit)
|
|
|
|
|
|
|
(65
|
)
|
|
|
(218
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(1,586
|
)
|
|
|
(32,932
|
)
|
|
|
(107,307
|
)
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends on preferred stock
|
|
|
1,919
|
|
|
|
1,750
|
|
|
|
1,750
|
|
Accretion on Series A preferred stock
|
|
|
160
|
|
|
|
179
|
|
|
|
177
|
|
(Earnings) loss allocated to participating securities
|
|
|
(267
|
)
|
|
|
(1,429
|
)
|
|
|
(4,080
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common shareholders
|
|
$
|
(3,398
|
)
|
|
$
|
(33,432
|
)
|
|
$
|
(105,154
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per common share
|
|
$
|
(0.29
|
)
|
|
$
|
(2.85
|
)
|
|
$
|
(8.98
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
63
PORTER BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
Years Ended December 31,
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Net income (loss)
|
|
$
|
(1,586
|
)
|
|
$
|
(32,932
|
)
|
|
$
|
(107,307
|
)
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) arising during the period (net of tax of $0, $0, and $1,457, respectively)
|
|
|
(7,635
|
)
|
|
|
2,137
|
|
|
|
2,705
|
|
Reclassification of other than temporary impairment (net of tax of $0, $0, and $14, respectively)
|
|
|
|
|
|
|
|
|
|
|
27
|
|
Reclassification of amount realized through sales (net of tax of $0, $0, and $388, respectively)
|
|
|
(723
|
)
|
|
|
(3,236
|
)
|
|
|
(720
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
(8,358
|
)
|
|
|
(1,099
|
)
|
|
|
2,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(9,944
|
)
|
|
$
|
(34,031
|
)
|
|
$
|
(105,295
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
64
PORTER BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
Years Ended December 31,
(Dollar amounts in thousands except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Series A
Preferred
|
|
|
Series B
Preferred
|
|
|
Series C
Preferred
|
|
|
Common
|
|
|
Series A
Preferred
|
|
|
Series B
Preferred
|
|
|
Series C
Preferred
|
|
|
Additional
Paid-In
Capital
|
|
|
Retained
Earnings
(Deficit)
|
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
|
Total
|
|
Balances, December 31, 2010
|
|
|
11,846,107
|
|
|
|
35,000
|
|
|
|
|
|
|
|
317,042
|
|
|
$
|
112,236
|
|
|
$
|
34,484
|
|
|
$
|
|
|
|
$
|
3,283
|
|
|
$
|
19,438
|
|
|
$
|
17,822
|
|
|
$
|
2,152
|
|
|
$
|
189,415
|
|
Issuance of unvested stock
|
|
|
2,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited unvested stock
|
|
|
(24,435
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
403
|
|
|
|
|
|
|
|
|
|
|
|
403
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(107,307
|
)
|
|
|
|
|
|
|
(107,307
|
)
|
Net change in accumulated other comprehensive income, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,012
|
|
|
|
2,012
|
|
Dividends on Series A preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,750
|
)
|
|
|
|
|
|
|
(1,750
|
)
|
Dividends on Series C preferred stock ($0.02 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
(7
|
)
|
Accretion of Series A preferred stock discount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(177
|
)
|
|
|
|
|
|
|
|
|
Cash dividends declared ($0.02 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(237
|
)
|
|
|
|
|
|
|
(237
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2011
|
|
|
11,824,472
|
|
|
|
35,000
|
|
|
|
|
|
|
|
317,042
|
|
|
$
|
112,236
|
|
|
$
|
34,661
|
|
|
$
|
|
|
|
$
|
3,283
|
|
|
$
|
19,841
|
|
|
$
|
(91,656
|
)
|
|
$
|
4,164
|
|
|
$
|
82,529
|
|
Issuance of unvested stock
|
|
|
191,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited unvested stock
|
|
|
(13,191
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
442
|
|
|
|
|
|
|
|
|
|
|
|
442
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32,932
|
)
|
|
|
|
|
|
|
(32,932
|
)
|
Net change in accumulated other comprehensive income, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,099
|
)
|
|
|
(1,099
|
)
|
Dividends on Series A preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,750
|
)
|
|
|
|
|
|
|
(1,750
|
)
|
Accretion of Series A preferred stock discount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(179
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2012
|
|
|
12,002,421
|
|
|
|
35,000
|
|
|
|
|
|
|
|
317,042
|
|
|
$
|
112,236
|
|
|
$
|
34,840
|
|
|
$
|
|
|
|
$
|
3,283
|
|
|
$
|
20,283
|
|
|
$
|
(126,517
|
)
|
|
$
|
3,065
|
|
|
$
|
47,190
|
|
Issuance of unvested stock
|
|
|
875,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited unvested stock
|
|
|
(36,991
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
604
|
|
|
|
|
|
|
|
|
|
|
|
604
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,586
|
)
|
|
|
|
|
|
|
(1,586
|
)
|
Net change in accumulated other comprehensive income, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,358
|
)
|
|
|
(8,358
|
)
|
Dividends on Series A preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,919
|
)
|
|
|
|
|
|
|
(1,919
|
)
|
Accretion of Series A preferred stock discount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(160
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2013
|
|
|
12,840,999
|
|
|
|
35,000
|
|
|
|
|
|
|
|
317,042
|
|
|
$
|
112,236
|
|
|
$
|
35,000
|
|
|
$
|
|
|
|
$
|
3,283
|
|
|
$
|
20,887
|
|
|
$
|
(130,182
|
)
|
|
$
|
(5,293
|
)
|
|
$
|
35,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
65
PORTER BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,586
|
)
|
|
$
|
(32,932
|
)
|
|
$
|
(107,307
|
)
|
Adjustments to reconcile net loss to net cash from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2,017
|
|
|
|
2,288
|
|
|
|
2,389
|
|
Provision for loan losses
|
|
|
700
|
|
|
|
40,250
|
|
|
|
62,600
|
|
Net amortization on securities
|
|
|
2,132
|
|
|
|
3,335
|
|
|
|
1,552
|
|
Goodwill impairment charge
|
|
|
|
|
|
|
|
|
|
|
23,794
|
|
Stock-based compensation expense
|
|
|
604
|
|
|
|
442
|
|
|
|
436
|
|
Deferred income taxes
|
|
|
|
|
|
|
|
|
|
|
12,958
|
|
Net gain on sales of loans originated for sale
|
|
|
(87
|
)
|
|
|
(338
|
)
|
|
|
(713
|
)
|
Loans originated for sale
|
|
|
(4,035
|
)
|
|
|
(16,365
|
)
|
|
|
(24,881
|
)
|
Proceeds from sales of loans originated for sale
|
|
|
4,469
|
|
|
|
16,827
|
|
|
|
24,649
|
|
Net loss on sales of other real estate owned
|
|
|
132
|
|
|
|
1,672
|
|
|
|
8,889
|
|
Net write-down of other real estate owned
|
|
|
2,466
|
|
|
|
7,154
|
|
|
|
34,874
|
|
Net realized gain on sales of investment securities
|
|
|
(723
|
)
|
|
|
(3,236
|
)
|
|
|
(1,067
|
)
|
Earnings on bank owned life insurance, net of premium expense
|
|
|
(513
|
)
|
|
|
(292
|
)
|
|
|
(301
|
)
|
Net change in accrued interest receivable and other assets
|
|
|
1,364
|
|
|
|
16,150
|
|
|
|
(7,062
|
)
|
Net change in accrued interest payable and other liabilities
|
|
|
2,585
|
|
|
|
791
|
|
|
|
(575
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from operating activities
|
|
|
9,525
|
|
|
|
35,746
|
|
|
|
30,235
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of available for sale securities
|
|
|
(72,814
|
)
|
|
|
(162,840
|
)
|
|
|
(123,609
|
)
|
Sales of available for sale securities
|
|
|
8,061
|
|
|
|
93,199
|
|
|
|
50,318
|
|
Maturities and prepayments of available for sale securities
|
|
|
26,506
|
|
|
|
48,800
|
|
|
|
23,378
|
|
Proceeds from sale of other real estate owned
|
|
|
30,772
|
|
|
|
21,940
|
|
|
|
14,142
|
|
Improvements to other real estate owned
|
|
|
|
|
|
|
(1
|
)
|
|
|
(1,650
|
)
|
Loan originations and payments, net
|
|
|
139,548
|
|
|
|
167,272
|
|
|
|
92,190
|
|
Purchases of premises and equipment, net
|
|
|
(281
|
)
|
|
|
(511
|
)
|
|
|
(332
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from investing activities
|
|
|
131,792
|
|
|
|
167,859
|
|
|
|
54,437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in deposits
|
|
|
(77,354
|
)
|
|
|
(258,704
|
)
|
|
|
(143,905
|
)
|
Net change in repurchase agreements
|
|
|
(164
|
)
|
|
|
896
|
|
|
|
(9,878
|
)
|
Repayment of Federal Home Loan Bank advances
|
|
|
(1,112
|
)
|
|
|
(1,512
|
)
|
|
|
(32,906
|
)
|
Advances from Federal Home Loan Bank
|
|
|
|
|
|
|
|
|
|
|
25,000
|
|
Repayment of subordinated capital note
|
|
|
(1,125
|
)
|
|
|
(675
|
)
|
|
|
(900
|
)
|
Cash dividends paid on preferred stock
|
|
|
|
|
|
|
|
|
|
|
(1,319
|
)
|
Cash dividends paid on common stock
|
|
|
|
|
|
|
|
|
|
|
(237
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from financing activities
|
|
|
(79,755
|
)
|
|
|
(259,995
|
)
|
|
|
(164,145
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
61,562
|
|
|
|
(56,390
|
)
|
|
|
(79,473
|
)
|
Beginning cash and cash equivalents
|
|
|
49,572
|
|
|
|
105,962
|
|
|
|
185,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending cash and cash equivalents
|
|
$
|
111,134
|
|
|
$
|
49,572
|
|
|
$
|
105,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
10,711
|
|
|
$
|
15,402
|
|
|
$
|
22,218
|
|
Income taxes paid (refunded)
|
|
|
|
|
|
|
(12,726
|
)
|
|
|
2,000
|
|
Supplemental non-cash disclosure:
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfer from loans to other real estate
|
|
$
|
20,606
|
|
|
$
|
33,528
|
|
|
$
|
41,917
|
|
Financed sales of other real estate owned
|
|
|
15
|
|
|
|
541
|
|
|
|
11,848
|
|
Transfer from available for sale to held to maturity securities
|
|
|
44,934
|
|
|
|
|
|
|
|
|
|
AOCI component of transfer from available for sale to held to maturity
|
|
|
(1,281
|
)
|
|
|
|
|
|
|
|
|
See accompanying notes.
66
PORTER BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013, 2012 and 2011
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Principles of Consolidation
The consolidated financial statements include Porter
Bancorp, Inc. (Company or PBI) and its subsidiary, PBI Bank (Bank). The Company owns a 100% interest in the Bank.
The Company provides
financial services through its offices in Central Kentucky and Louisville. Its primary deposit products are checking, savings, and term certificate accounts, and its primary lending products are residential mortgage, commercial, and real estate
loans. Substantially all loans are collateralized by specific items of collateral including business assets, commercial real estate, and residential real estate. Commercial loans are expected to be repaid from cash flow from operations of
businesses. There are no significant concentrations of loans to any one industry or customer. However, customers ability to repay their loans is dependent on the real estate and general economic conditions in the area. Other financial
instruments which potentially represent concentrations of credit risk include deposit accounts in other financial institutions and federal funds sold.
Use of Estimates
To prepare financial statements in conformity with U.S. generally accepted accounting principles, management
makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and future results could differ. The allowance for loan losses,
goodwill and other intangible assets, fair value of other real estate owned, stock compensation, deferred tax assets, and fair values of financial instruments are particularly subject to change.
Cash Flows
Cash and cash equivalents include cash, deposits with other financial institutions under 90 days, and federal funds
sold. Net cash flows are reported for customer and loan deposit transactions, interest-bearing deposits in other financial institutions, and federal funds purchased and repurchase agreements.
Securities
Debt securities are classified as held to maturity and carried at amortized cost when management has the positive
intent and ability to hold them to maturity. Debt securities are classified as available for sale when they might be sold before maturity. Equity securities with readily determined fair values are classified as available for sale. Securities
available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income.
Interest
income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level-yield method anticipating prepayments on mortgage backed securities. Gains and losses on sales are recorded on the trade
date and determined using the specific identification method.
Management evaluates securities for other-than-temporary impairment
(OTTI) on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized
loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery
of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not
meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the income statement and 2) other-than-temporary impairment (OTTI) related to other
factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. For equity securities, the entire amount
of impairment is recognized through earnings.
Loans Held for Sale
Mortgage loans originated and intended for sale in the
secondary market are carried at the lower of aggregate cost or fair value, as determined by outstanding commitments from investors. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings.
Mortgage loans held for sale are generally sold with servicing rights released. If sold with servicing retained, the carrying value of
mortgage loans sold is reduced by the amount allocated to the servicing right. Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related loan sold.
Mortgage banking derivatives used in the ordinary course of business consist of mandatory forward sales contracts and rate lock loan
commitments. Forward contracts represent future commitments to deliver loans at a specified price and date and are used to manage interest rate risk on loan commitments and mortgage loans held for sale. Rate lock commitments represent commitments to
fund loans at a specific rate. These derivatives involve underlying items, such as interest rates, and are designed to transfer risk. Substantially all of these instruments expire within 60 days from the date of issuance. Notional amounts are
amounts on which calculations and payments are based, but which do not represent credit exposure, as credit exposure is limited to the amounts required to be received or paid.
67
We adopted FASB ASC topic 815,
Derivative and Hedging
during the first quarter
of 2009. Our commitments to deliver loans and our rate lock loan commitments were insignificant at year end.
Loans
Loans
that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of deferred loan fees and costs, and an allowance for loan losses. Interest income is
accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments. The recorded investment in loans
includes the outstanding principal balance and unamortized deferred origination costs and fees.
Interest income on mortgage and
commercial loans is discontinued at the time the loan is 90 days delinquent unless the loan is well collateralized and in process of collection. Consumer and credit card loans are typically charged off no later than 90 days past due. Past due status
is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is not expected.
All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is
accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are
reasonably assured.
Allowance for Loan Losses
The allowance for loan losses is a valuation allowance for probable incurred
credit losses. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. We estimate the allowance balance required using
past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans,
but the entire allowance is available for any loan that, in our 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. A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due
according to the contractual terms of the loan agreement. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and
classified as impaired.
Factors considered in determining impairment include payment status, collateral value, and the probability of
collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. We determine the significance of payment delays and payment shortfalls
on case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrowers prior payment record, and the amount of the shortfall
in relation to the principal and interest owed.
If a loan is impaired, a portion of the allowance is allocated so that the loan is
reported, net, at the present value of estimated future cash flows using the loans existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Large groups of smaller balance homogeneous loans, such as
consumer and residential real estate loans, are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures. Troubled debt restructurings are separately identified for impairment disclosures
and are measured at the present value of estimated future cash flows using the loans effective rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported at the fair value of the
collateral. For troubled debt restructurings that subsequently default, we determine the amount of reserve in accordance with the accounting policy for the allowance for loan losses.
The general component covers
non-impaired
loans and is based on historical loss experience adjusted
for current factors. The historical loss experience is determined by portfolio segment and is based on our actual loss history experienced over the most recent three years with weighting towards the most recent periods. This actual loss experience
is supplemented with other economic factors based on the risks present for each portfolio segment. These economic factors include consideration of the following: changes in lending policies, procedures, and practices; effects of any change in risk
selection and underwriting standards; national and local economic trends and conditions; industry conditions; trends in volume and terms of loans; experience, ability and depth of lending management and other relevant staff; levels of and trends in
delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; and effects of changes in credit concentrations.
68
A portfolio segment is defined as the level at which an entity develops and documents a
systematic methodology to determine its allowance for loan losses. We identified the following portfolio segments: commercial, commercial real estate, residential real estate, consumer, agricultural, and other.
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Commercial loans are dependent on the strength of the industries of the related borrowers and the success of their businesses. Commercial loans are
advances for equipment purchases, or to provide working capital, or to meet other financing needs of business enterprises. These loans may be secured by accounts receivable, inventory, equipment or other business assets. Financial information is
obtained from the borrowers to evaluate their ability to repay the loans.
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Commercial real estate loans are affected by the local commercial real estate market and the local economy. Commercial real estate loans include
loans on properties occupied by the borrowers and on properties for commercial purposes. Construction and development loans are a component of this segment. These loans are generally secured by land under development or homes and commercial
buildings under construction. Appraisals are obtained to support the loan amount. Financial information is obtained from the borrowers and/or the individual project to evaluate cash flows sufficiency to service the debt.
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Residential real estate loans are affected by the local residential real estate market, local economy, and, for variable rate mortgages, movement
in indices tied to these loans. For owner occupied residential loans, the borrowers repayment ability is evaluated through a review of credit scores and debt to income ratios. For non-owner occupied residential loans, such as rental real
estate, financial information is obtained from the borrowers and/or the individual project to evaluate cash flows sufficiency to service the debt. Appraisals are obtained to support the loan amount.
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Consumer loans are dependent on local economies. Consumer loans are generally secured by consumer assets, but may be unsecured. We evaluate the
borrowers repayment ability through a review of credit scores and an evaluation of debt to income ratios.
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Agriculture loans are dependent on the industries tied to these loans and are generally secured by livestock, crops, and/or equipment, but may be
unsecured. We evaluate the borrowers repayment ability through a review of credit scores and an evaluation of debt to income ratios.
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Other loans include loans to municipalities, loans secured by stock, and overdrafts. For municipal loans, we evaluate the borrowers revenue
streams as well as ability to repay form general funds. For loans secured by stock, we evaluate the market value of the stock securing the loan in relation to the loan amount. Overdrafts are funded based on pre-established criteria related to the
deposit account relationship.
|
We analyze all relevant risk characteristics for each portfolio segment and have
determined that loans in each segment possess similar general risk characteristics that are analyzed in connection with our loan underwriting processes and procedures. In determining the allocated allowance, we utilize weighted average loss rates
for the past three years most heavily weighting the current year. Commercial real estate loans are our largest segment and had the highest level of qualitative adjustments due to trends in our markets for underlying collateral values and risks
related to tenant rents and for economic factors such as decreased sales demand, elevated inventory levels, and declining collateral values. Residential real estate loan considerations include macro factors such as unemployment rates, trends in
vacancy rates, and home value trends. The commercial portfolio qualitative adjustments are related to industry concentrations and geographical market. Our agricultural, consumer, and other portfolios are less significant in terms of size and risk is
assessed based on the smaller dollar size of these loans and the more geographical areas where the collateral is located.
Transfers of
Financial Assets
Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the
Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets
through an agreement to repurchase them before their maturity.
Other Real Estate Owned
Assets acquired through or
instead of loan foreclosure are initially recorded at fair value less estimated costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at the lower of cost or fair value, less estimated costs to sell.
If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Costs after acquisition are expensed.
Premises and Equipment
Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation.
Buildings and related components are depreciated using the straight-line method with useful lives ranging from 5 to 33 years. Furniture, fixtures and equipment are depreciated using the straight-line or accelerated method with useful lives ranging
from 3 to 7 years.
69
Federal Home Loan Bank (FHLB) Stock
The Bank is a member of the FHLB system.
Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for
impairment. Because this stock is viewed as long term investment, impairment is based on ultimate recovery of par value. Both cash and stock dividends are reported as income.
Intangible Assets
Intangible assets with definite useful lives are amortized over their estimated useful lives to their
estimated residual values. Other intangible assets consist of core deposit and trust account intangible assets arising from whole bank and branch acquisitions. They are initially measured at fair value and then are amortized on an accelerated or
straight-line basis over their estimated useful lives, which range from 7 to 10 years.
Bank Owned Life Insurance
The Bank
has purchased life insurance policies on certain key executives. Company owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other
charges or other amounts due that are probable at settlement.
Long-Term Assets
Premises and equipment, other intangible
assets, and other long-term assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.
Repurchase Agreements
Substantially all repurchase agreement liabilities represent amounts advanced by various customers.
Securities are pledged to cover these liabilities, which are not covered by federal deposit insurance.
Benefit Plans
Employee 401(k) and profit sharing plan expense is the amount of matching contributions. Deferred compensation and supplemental retirement plan expense allocates the benefits over years of service.
Stock-Based Compensation
Compensation cost is recognized for stock options and unvested stock awards issued to employees, based
on the fair value of these awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the Corporations common stock at the date of grant is used for restricted stock
awards. Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the
entire award.
Income Taxes
Income tax expense is the total of the current year income tax due or refundable and the change
in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A
valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.
A tax position is recognized as a
benefit only if it is more likely than not that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50%
likely of being realized on examination. For tax positions not meeting the more likely than not test, no tax benefit is recorded. The Company recognizes interest and/or penalties related to income tax matters in income tax expense.
Loan Commitments and Related Financial Instruments
Financial instruments include off-balance sheet credit instruments, such as
commitments to make loans and commercial letters of credit, issued to meet customer-financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial
instruments are recorded when they are funded.
Comprehensive Loss
Comprehensive loss consists of net income and other
comprehensive loss. Other comprehensive loss includes unrealized gains and losses on securities available for sale, which are also recognized as a separate component of equity.
Preferred Stock
Series A Preferred stock was issued in 2008 and is outstanding under the United States Department of the
Treasurys Capital Purchase Program. Issued in conjunction with the Preferred Stock were common stock warrants. See Note 16 for a discussion of the terms and conditions of that transaction. The proceeds received in the offering were allocated
on a pro rata basis to the Preferred Stock and the Warrants based on relative fair values. In estimating the fair value of the Warrants, the Company utilized the Black-Scholes model which includes assumptions regarding the Companys common
stock prices, stock price volatility, dividend yield, the risk free interest rate and the estimated life of the Warrant. The fair value of the Preferred Stock was determined using a discounted cash flow methodology. The value assigned to the
Preferred Stock will be amortized up to the $35.0 million liquidation value of such preferred stock, with the cost of such amortization being reported as additional preferred stock dividends. Dividends are accrued quarterly. Quarterly cash payment
of dividends was deferred effective with the fourth quarter of 2011. (See Note 16 for more specific disclosure.)
Series B and C Preferred
stock were issued in 2010 and Series C Preferred stock remains outstanding. See Note 16 for a discussion of the terms and conditions of this transaction.
70
Earnings (Loss) Per Common Share
Basic earnings (loss) per common share are net
income (loss) available to common shareholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per common share include the dilutive effect of additional potential common shares issuable
under stock options and warrants. Earnings (loss) and dividends per share are restated for all stock splits and dividends through the date of issue of the financial statements.
Earnings (Loss) Allocated to Participating Securities
Our issued and outstanding Series C Preferred Stock is automatically
convertible into common stock at such time as the holder together with its affiliates beneficially own less than 9.9% of the then outstanding common shares of the company. We also have issued and outstanding unvested common shares to employees and
directors through our stock incentive plan. Earnings (loss) are allocated to these participating securities based on their percentage of total issued and outstanding shares.
Loss Contingencies
Loss contingencies, including claims and legal actions arising in the ordinary course of business, are
recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. (See Note 24 for more specific disclosure.)
Dividend Restriction
Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Bank
to the Company or by the Company to shareholders. (See Note 17 for more specific disclosure.)
Fair Value of Financial Instruments
Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 19. Fair value estimates involve uncertainties and matters of significant judgment regarding interest
rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.
Reclassifications
Some items in the prior year financial statements were reclassified to conform to the current presentation.
Reclassifications had no effect on prior year net loss or stockholders equity.
NOTE 2 GOING CONCERN CONSIDERATIONS AND FUTURE PLANS
The consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business for the foreseeable future. However, the events and circumstances described in this Note create substantial doubt about the Companys ability to continue as a going
concern.
For the year ended December 31, 2013, we reported a net loss to common shareholders of $3.4 million. This loss coupled with
the comprehensive loss for the year reduced shareholders equity to $35.9 million, from $47.2 million at the end of 2012. This reduction was attributable primarily to OREO expense of $4.5 million resulting from fair value write-downs driven by new
appraisals and reduced marketing prices, net loss on sales, and ongoing operating expense, along with $4.7 million in loan collection expenses. The reduction was also attributable to a reduction in the fair value of securities of $8.4 million, net,
as well as the accrual of dividends and accretion to preferred shareholders of $2.1 million. We also had lower net interest margin due to lower average loans outstanding, loans re-pricing at lower rates, and the level of non-performing loans in our
portfolio. Net loss to common shareholders of $3.4 million, for the year ended December 31, 2013, compares with net loss to common shareholders of $33.4 million for year ended December 31, 2012. This loss coupled with the other
comprehensive loss on securities of $1.1 million reduced shareholders equity to $47.2 million at December 31, 2012, from $82.5 million at the end of 2011.
At December 31, 2013, we continued to be involved in various legal proceedings in which we dispute the material factual allegations.
After conferring with our legal advisors, we believe we have meritorious grounds on which to prevail. If we do not prevail, the ultimate outcome of any one of these matters could have a material adverse effect on our financial condition, results of
operations, or cash flows. These matters are more fully described in Note 24 Contingencies.
For the year ended
December 31, 2012, we reported net loss to common shareholders of $33.4 million. This loss was attributable primarily to $40.3 million of provision for loan losses expense due to continued decline in credit trends in our portfolio that resulted
in net charge-offs of $36.1 million, OREO expense of $10.5 million resulting from fair value write-downs driven by new appraisals and reduced marketing prices, net loss on sales, and ongoing operating expense. We also had lower net interest margin
due to lower average loans outstanding, loans re-pricing at lower rates, and the level of non-performing loans in our portfolio. Net loss to common shareholders of $33.4 million, for the year ended December 31, 2012, compares with net loss to
common shareholders of $105.2 million for year ended December 31, 2011.
71
In the fourth quarter of 2011, we began deferring the payment of regular quarterly cash dividends
on our Series A Preferred Stock. At December 31, 2013, cumulative accrued and unpaid dividends on this stock totaled $4.3 million. The dividend rate increased from 5% annually to 9% in November 2013. As a result of the dividend deferral,
the holder of our Series A Preferred Stock (currently the U.S. Treasury) has the right to appoint up to two representatives to our Board of Directors. We continue to accrue deferred dividends, which are deducted from income to common shareholders
for financial statement purposes. Dividends are expected to increase to $ 3.2 million for 2014.
In June 2011, the Bank agreed to a
Consent Order with the FDIC and KDFI in which the Bank agreed, among other things, to improve asset quality, reduce loan concentrations, and maintain a minimum Tier 1 leverage ratio of 9% and a minimum total risk based capital ratio of 12%. The
Consent Order was included in our Current Report on 8-K filed on June 30, 2011. In October 2012, the Bank entered into a new Consent Order with the FDIC and KDFI again agreeing to maintain a minimum Tier 1 leverage ratio of 9% and a minimum
total risk based capital ratio of 12%. The Bank also agreed that if it should be unable to reach the required capital levels, and if directed in writing by the FDIC, 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 or otherwise immediately obtain a sufficient capital investment into the Bank to fully meet the capital requirements. We have not been directed by the FDIC to implement such a
plan.
We expect to continue to work with our regulators toward capital ratio compliance as outlined in the written capital plan
previously submitted by the Bank. The new Consent Order also requires the Bank to continue to adhere to the plans implemented in response to the June 2011 Consent Order, and includes the substantive provisions of the June 2011 Consent Order. The new
Consent Order was included in our Current Report on 8-K filed on September 19, 2012. As of December 31, 2013, the capital ratios required by the Consent Order were not met.
In order to meet these capital requirements, the Board of Directors and management are continuing to evaluate strategies to achieve the
following objectives:
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Increasing capital through a possible public offering or private placement of common stock to new and existing shareholders. We have engaged a
financial advisor to assist our Board in evaluating our options for increasing capital and redeeming our Series A Preferred Stock.
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Continuing to operate the Company and Bank in a safe and sound manner. This strategy may require us to continue to reduce the size of our
balance sheet, reduce our lending concentrations, consider selling loans, and reduce other noninterest expense through the disposition of OREO.
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Continuing with succession planning and adding resources to the management team. John T. Taylor was named President and CEO for PBI Bank and
appointed to the Board of Directors in July 2012. Mr. Taylor succeeded Maria Bouvette as CEO of the Company in 2013. John R. Davis was appointed Chief Credit Officer of PBI Bank in August 2012, with responsibility for establishing and
executing the credit quality policies and overseeing credit administration for the organization. We have augmented our staffing in the commercial lending area, now led by Joe C. Seiler.
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Evaluating our internal processes and procedures, distribution of labor, and work-flow to ensure we have adequately and appropriately deployed
resources in an efficient manner in the current environment. To this end, we believe the opportunity exists to centralize key processes that will lead to improved execution and cost savings.
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Executing on our commitment to improve credit quality and reduce loan concentrations and balance sheet risk.
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We have reduced the size of our loan portfolio significantly from $1.3 billion at December 31, 2010, to $1.1 billion at December 31,
2011, to $899.1 million at December 31, 2012, and $709.3 million at December 31, 2013.
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Our Consent Order calls for us to reduce our construction and development loans to not more than 75% of total risk-based capital. We are now in
compliance as construction and development loans totaled $43.3 million, or 52% of total risk-based capital, at December 31, 2013, down from $70.3 million, or 82% of total risk-based capital, at December 31, 2012.
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Our Consent Order also requires us to reduce non-owner occupied commercial real estate loans, construction and development loans, and multi-family
residential real estate loans as a group, to not more than 250% of total risk-based capital. While we have made significant progress over the last year, we were not in compliance with this concentration limit at December 31,
2013. These loans totaled $237.0 million, or 284% of total risk-based capital, at December 31, 2013 and $311.1 million, or 362% of total risk-based capital, at December 31, 2012.
|
72
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We are working to reduce our loan concentrations by curtailing new construction and development lending and new non-owner occupied commercial real
estate lending. We are also receiving principal reductions from amortizing credits and pay-downs from our customers who sell properties built for resale. We have reduced the construction loan portfolio from $199.5 million at
December 31, 2010 to $43.3 million at December 31, 2013. Our non-owner occupied commercial real estate loans declined from $293.3 million at December 31, 2010 to $237.0 million at December 31, 2013.
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Executing on our commitment to sell other real estate owned and reinvest in quality income producing assets.
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The remediation process for loans secured by real estate has led the Bank to acquire significant levels of OREO in 2012, 2011, and 2010. This
trend has continued at a slower pace in 2013. The Bank acquired $33.5 million, $41.9 million, and $90.8 million during 2012, 2011, and 2010, respectively. For the year ended December 31, 2013, we acquired $20.6 million of OREO.
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We have incurred significant losses in disposing of this real estate. We incurred losses totaling $9.3 million, $42.8 million, and $13.9
million in 2012, 2011, and 2010, respectively, from sales at less than carrying values and fair value write-downs attributable to declines in appraisal valuations and changes in our pricing strategies. During the year ended December 31,
2013, we incurred OREO losses totaling $2.6 million, which consisted of $132,000 in loss on sale and $2.5 million from declining values as evidenced by new appraisals and reduced marketing prices in connection with our sales strategies.
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To ensure we maximize the value we receive upon the sale of OREO, we continually evaluate sales opportunities. We are targeting multiple sales
opportunities through internal marketing and the use of brokers, auctions, technology sales platforms, and bulk sale strategies. Proceeds from the sale of OREO totaled $30.8 million during the year ended December 31, 2013 and $22.5
million, $26.0 million and $25.0 million during 2012, 2011, and 2010, respectively.
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At December 31, 2012, the OREO portfolio consisted of 51% construction, development, and land assets. At December 31, 2013, this
concentration increased to 62%; however, the balance decreased from $22.9 million to $19.2 million. This is consistent with our reduction of construction, development and other land loans, which have declined to $43.3 million at
December 31, 2013 compared with $70.3 million at December 31, 2012. Commercial real estate represents 19% of the OREO portfolio at December 31, 2013 compared with 35% at December 31, 2012. 1-4 family residential properties
represent 16% of the OREO portfolio at December 31, 2013 compared with 12% at December 31, 2012.
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Evaluating other strategic alternatives, such as the sale of assets or branches.
|
Bank regulatory agencies can exercise discretion when an institution does not meet the terms of a consent order. Based on individual
circumstances, the agencies may issue mandatory directives, impose monetary penalties, initiate changes in management, or take more serious adverse actions.
These financial statements do not include any adjustments that may result should the Company be unable to continue as a going concern.
73
NOTE 3 SECURITIES
The fair value of available for sale and held to maturity securities and the related gross unrealized gains and losses
recognized in accumulated other comprehensive income (loss) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair Value
|
|
|
|
(in thousands)
|
|
December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and federal agency
|
|
$
|
31,026
|
|
|
$
|
284
|
|
|
$
|
(1,444
|
)
|
|
$
|
29,866
|
|
Agency mortgage-backed: residential
|
|
|
102,435
|
|
|
|
458
|
|
|
|
(1,950
|
)
|
|
|
100,943
|
|
State and municipal
|
|
|
12,965
|
|
|
|
608
|
|
|
|
(28
|
)
|
|
|
13,545
|
|
Corporate bonds
|
|
|
18,002
|
|
|
|
769
|
|
|
|
(610
|
)
|
|
|
18,161
|
|
Other debt securities
|
|
|
572
|
|
|
|
60
|
|
|
|
|
|
|
|
632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities
|
|
|
165,000
|
|
|
|
2,179
|
|
|
|
(4,032
|
)
|
|
|
163,147
|
|
Equity
|
|
|
135
|
|
|
|
62
|
|
|
|
|
|
|
|
197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale
|
|
$
|
165,135
|
|
|
$
|
2,241
|
|
|
$
|
(4,032
|
)
|
|
$
|
163,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and municipal
|
|
$
|
43,612
|
|
|
$
|
3
|
|
|
$
|
(668
|
)
|
|
$
|
42,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total held to maturity
|
|
$
|
43,612
|
|
|
$
|
3
|
|
|
$
|
(668
|
)
|
|
$
|
42,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and federal agency
|
|
$
|
5,603
|
|
|
$
|
530
|
|
|
$
|
|
|
|
$
|
6,133
|
|
Agency mortgage-backed: residential
|
|
|
94,298
|
|
|
|
1,141
|
|
|
|
(257
|
)
|
|
|
95,182
|
|
State and municipal
|
|
|
52,485
|
|
|
|
2,335
|
|
|
|
(87
|
)
|
|
|
54,733
|
|
Corporate bonds
|
|
|
18,851
|
|
|
|
1,150
|
|
|
|
(37
|
)
|
|
|
19,964
|
|
Other debt securities
|
|
|
572
|
|
|
|
46
|
|
|
|
|
|
|
|
618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities
|
|
|
171,809
|
|
|
|
5,202
|
|
|
|
(381
|
)
|
|
|
176,630
|
|
Equity
|
|
|
1,359
|
|
|
|
487
|
|
|
|
|
|
|
|
1,846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
173,168
|
|
|
$
|
5,689
|
|
|
$
|
(381
|
)
|
|
$
|
178,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and calls of available for sale securities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
|
(in thousands)
|
|
Proceeds
|
|
$
|
8,061
|
|
|
$
|
93,199
|
|
|
$
|
50,318
|
|
Gross gains
|
|
|
873
|
|
|
|
3,543
|
|
|
|
1,108
|
|
Gross losses
|
|
|
150
|
|
|
|
307
|
|
|
|
|
|
The tax provision related to these net gains and losses realized on sales were $253,000, $1.1 million, and
$388,000, respectively.
The amortized cost and fair value of our debt securities are shown by contractual maturity. Expected maturities
may differ from actual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date, mortgage-backed, are shown separately.
74
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013
|
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
|
(in thousands)
|
|
Maturity
|
|
|
|
|
|
|
|
|
Available for sale
|
|
|
|
|
|
|
|
|
Within one year
|
|
$
|
15,306
|
|
|
$
|
14,693
|
|
One to five years
|
|
|
13,269
|
|
|
|
14,300
|
|
Five to ten years
|
|
|
33,418
|
|
|
|
32,579
|
|
Beyond ten years
|
|
|
572
|
|
|
|
632
|
|
Agency mortgage-backed: residential
|
|
|
102,435
|
|
|
|
100,943
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
165,000
|
|
|
$
|
163,147
|
|
|
|
|
|
|
|
|
|
|
Held to maturity
|
|
|
|
|
|
|
|
|
One to five years
|
|
$
|
797
|
|
|
$
|
792
|
|
Five to ten years
|
|
|
37,411
|
|
|
|
36,854
|
|
Beyond ten years
|
|
|
5,404
|
|
|
|
5,301
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
43,612
|
|
|
$
|
42,947
|
|
|
|
|
|
|
|
|
|
|
Securities pledged at year-end 2013 and 2012 had carrying values of approximately $84.2 million and $76.4
million, respectively, and were pledged to secure public deposits and repurchase agreements.
At year-end 2013 and 2012, there were no
holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders equity.
Securities with unrealized losses at year-end 2013 and 2012, aggregated by investment category and length of time that individual securities
have been in a continuous unrealized loss position, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
Description of Securities
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
|
(in thousands)
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and federal agency
|
|
$
|
24,129
|
|
|
$
|
(1,444
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
24,129
|
|
|
$
|
(1,444
|
)
|
Agency mortgage-backed: residential
|
|
|
58,257
|
|
|
|
(1,672
|
)
|
|
|
10,344
|
|
|
|
(278
|
)
|
|
|
68,601
|
|
|
|
(1,950
|
)
|
State and municipal
|
|
|
458
|
|
|
|
(28
|
)
|
|
|
|
|
|
|
|
|
|
|
458
|
|
|
|
(28
|
)
|
Corporate bonds
|
|
|
11,313
|
|
|
|
(610
|
)
|
|
|
|
|
|
|
|
|
|
|
11,313
|
|
|
|
(610
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired
|
|
$
|
94,157
|
|
|
$
|
(3,754
|
)
|
|
$
|
10,344
|
|
|
$
|
(278
|
)
|
|
$
|
104,501
|
|
|
$
|
(4,032
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and municipal
|
|
|
39,743
|
|
|
|
(654
|
)
|
|
|
1,031
|
|
|
|
(14
|
)
|
|
|
40,774
|
|
|
|
(668
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired
|
|
$
|
39,743
|
|
|
$
|
(654
|
)
|
|
$
|
1,031
|
|
|
$
|
(14
|
)
|
|
$
|
40,774
|
|
|
$
|
(668
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed: residential
|
|
$
|
23,375
|
|
|
$
|
(257
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
23,375
|
|
|
$
|
(257
|
)
|
State and municipal
|
|
|
7,961
|
|
|
|
(87
|
)
|
|
|
|
|
|
|
|
|
|
|
7,961
|
|
|
|
(87
|
)
|
Corporate bonds
|
|
|
3,777
|
|
|
|
(37
|
)
|
|
|
|
|
|
|
|
|
|
|
3,777
|
|
|
|
(37
|
)
|
Equity securities
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired
|
|
$
|
35,115
|
|
|
$
|
(381
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
35,115
|
|
|
$
|
(381
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more
frequently when economic or market concerns warrant such evaluation. Consideration is given to 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,
underlying credit quality of the issuer, and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuers financial
condition, the Company may consider whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, the sector or industry trends and cycles affecting the issuer, and the results
of reviews of the issuers financial condition. As of December 31, 2013, management does not believe any securities in our portfolio with unrealized losses should be classified as other than temporarily impaired at this time. Management
currently intends to hold all securities with unrealized losses until recovery, which for fixed income securities may be at maturity.
At
December 31, 2013, the Company held one equity security. This security was in an unrealized gain position as of December 31, 2013. Management monitors the underlying financial condition of the issuers and current market pricing for this
equity security monthly.
75
In 2013, to better manage our interest rate risk, we transferred from available for sale to held
to maturity selected municipal securities in our portfolio having a book value of approximately $44.9 million, a market value of approximately $43.7 million, and a net unrealized loss of approximately $1.3 million. This transfer was completed
after careful consideration of our intent and ability to hold these securities to maturity.
NOTE 4 LOANS
Loans at year-end by class were as follows:
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
|
(in thousands)
|
|
Commercial
|
|
$
|
52,878
|
|
|
$
|
52,567
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
Construction
|
|
|
43,326
|
|
|
|
70,284
|
|
Farmland
|
|
|
71,189
|
|
|
|
80,825
|
|
Other
|
|
|
232,026
|
|
|
|
322,687
|
|
Residential Real Estate:
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
46,858
|
|
|
|
50,986
|
|
1-4 Family
|
|
|
228,505
|
|
|
|
278,273
|
|
Consumer
|
|
|
14,365
|
|
|
|
20,383
|
|
Agriculture
|
|
|
19,199
|
|
|
|
22,317
|
|
Other
|
|
|
980
|
|
|
|
770
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
709,326
|
|
|
|
899,092
|
|
Less: Allowance for loan losses
|
|
|
(28,124
|
)
|
|
|
(56,680
|
)
|
|
|
|
|
|
|
|
|
|
Loans, net
|
|
$
|
681,202
|
|
|
$
|
842,412
|
|
|
|
|
|
|
|
|
|
|
Activity in the allowance for loan losses for the years indicated was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
|
(in thousands)
|
|
Beginning balance
|
|
$
|
56,680
|
|
|
$
|
52,579
|
|
|
$
|
34,285
|
|
Provision for loan losses
|
|
|
700
|
|
|
|
40,250
|
|
|
|
62,600
|
|
Loans charged-off
|
|
|
(32,608
|
)
|
|
|
(37,515
|
)
|
|
|
(44,646
|
)
|
Loan recoveries
|
|
|
3,352
|
|
|
|
1,366
|
|
|
|
340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
28,124
|
|
|
$
|
56,680
|
|
|
$
|
52,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the activity in the allowance for loan losses by portfolio segment for the year
ended December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
Commercial
Real Estate
|
|
|
Residential
Real Estate
|
|
|
Consumer
|
|
|
Agriculture
|
|
|
Other
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Beginning balance
|
|
$
|
4,402
|
|
|
$
|
34,768
|
|
|
$
|
16,235
|
|
|
$
|
857
|
|
|
$
|
403
|
|
|
$
|
15
|
|
|
$
|
56,680
|
|
Provision for loan losses
|
|
|
435
|
|
|
|
1,691
|
|
|
|
(1,261
|
)
|
|
|
66
|
|
|
|
(222
|
)
|
|
|
(9
|
)
|
|
|
700
|
|
Loans charged off
|
|
|
(2,828
|
)
|
|
|
(21,176
|
)
|
|
|
(7,703
|
)
|
|
|
(773
|
)
|
|
|
(128
|
)
|
|
|
|
|
|
|
(32,608
|
)
|
Recoveries
|
|
|
1,212
|
|
|
|
1,131
|
|
|
|
491
|
|
|
|
266
|
|
|
|
252
|
|
|
|
|
|
|
|
3,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
3,221
|
|
|
$
|
16,414
|
|
|
$
|
7,762
|
|
|
$
|
416
|
|
|
$
|
305
|
|
|
$
|
6
|
|
|
$
|
28,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the activity in the allowance for loan losses by portfolio segment for the year
ended December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
Commercial
Real Estate
|
|
|
Residential
Real Estate
|
|
|
Consumer
|
|
|
Agriculture
|
|
|
Other
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Beginning balance
|
|
$
|
4,207
|
|
|
$
|
33,024
|
|
|
$
|
14,217
|
|
|
$
|
792
|
|
|
$
|
325
|
|
|
$
|
14
|
|
|
$
|
52,579
|
|
Provision for loan losses
|
|
|
3,850
|
|
|
|
23,275
|
|
|
|
10,884
|
|
|
|
1,070
|
|
|
|
1,170
|
|
|
|
1
|
|
|
|
40,250
|
|
Loans charged off
|
|
|
(3,784
|
)
|
|
|
(22,366
|
)
|
|
|
(9,071
|
)
|
|
|
(1,130
|
)
|
|
|
(1,164
|
)
|
|
|
|
|
|
|
(37,515
|
)
|
Recoveries
|
|
|
129
|
|
|
|
835
|
|
|
|
205
|
|
|
|
125
|
|
|
|
72
|
|
|
|
|
|
|
|
1,366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
4,402
|
|
|
$
|
34,768
|
|
|
$
|
16,235
|
|
|
$
|
857
|
|
|
$
|
403
|
|
|
$
|
15
|
|
|
$
|
56,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76
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 December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
Commercial
Real Estate
|
|
|
Residential
Real Estate
|
|
|
Consumer
|
|
|
Agriculture
|
|
|
Other
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending allowance balance attributable to loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
290
|
|
|
$
|
2,345
|
|
|
$
|
827
|
|
|
$
|
9
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,471
|
|
Collectively evaluated for impairment
|
|
|
2,931
|
|
|
|
14,069
|
|
|
|
6,935
|
|
|
|
407
|
|
|
|
305
|
|
|
|
6
|
|
|
|
24,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ending allowance balance
|
|
$
|
3,221
|
|
|
$
|
16,414
|
|
|
$
|
7,762
|
|
|
$
|
416
|
|
|
$
|
305
|
|
|
$
|
6
|
|
|
$
|
28,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated for impairment
|
|
$
|
4,995
|
|
|
$
|
94,330
|
|
|
$
|
49,512
|
|
|
$
|
93
|
|
|
$
|
322
|
|
|
$
|
631
|
|
|
$
|
149,883
|
|
Loans collectively evaluated for impairment
|
|
|
47,883
|
|
|
|
252,211
|
|
|
|
225,851
|
|
|
|
14,272
|
|
|
|
18,877
|
|
|
|
349
|
|
|
|
559,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ending loans balance
|
|
$
|
52,878
|
|
|
$
|
346,541
|
|
|
$
|
275,363
|
|
|
$
|
14,365
|
|
|
$
|
19,199
|
|
|
$
|
980
|
|
|
$
|
709,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
Commercial
Real Estate
|
|
|
Residential
Real Estate
|
|
|
Consumer
|
|
|
Agriculture
|
|
|
Other
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending allowance balance attributable to loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
263
|
|
|
$
|
16,046
|
|
|
$
|
4,641
|
|
|
$
|
68
|
|
|
$
|
5
|
|
|
$
|
11
|
|
|
$
|
21,034
|
|
Collectively evaluated for impairment
|
|
|
4,139
|
|
|
|
18,722
|
|
|
|
11,594
|
|
|
|
789
|
|
|
|
398
|
|
|
|
4
|
|
|
|
35,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ending allowance balance
|
|
$
|
4,402
|
|
|
$
|
34,768
|
|
|
$
|
16,235
|
|
|
$
|
857
|
|
|
$
|
403
|
|
|
$
|
15
|
|
|
$
|
56,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated for impairment
|
|
$
|
5,296
|
|
|
$
|
125,922
|
|
|
$
|
56,799
|
|
|
$
|
212
|
|
|
$
|
55
|
|
|
$
|
524
|
|
|
$
|
188,808
|
|
Loans collectively evaluated for impairment
|
|
|
47,271
|
|
|
|
347,874
|
|
|
|
272,460
|
|
|
|
20,171
|
|
|
|
22,262
|
|
|
|
246
|
|
|
|
710,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ending loans balance
|
|
$
|
52,567
|
|
|
$
|
473,796
|
|
|
$
|
329,259
|
|
|
$
|
20,383
|
|
|
$
|
22,317
|
|
|
$
|
770
|
|
|
$
|
899,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77
Impaired Loans
Impaired loans include restructured loans and loans on nonaccrual or classified as doubtful, whereby collection of the total amount is
improbable, or loss, whereby all or a portion of the loan has been written off or a specific allowance for loss had been provided.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
|
(in thousands)
|
|
Average of impaired loans during the year
|
|
$
|
169,324
|
|
|
$
|
175,828
|
|
|
$
|
95,331
|
|
Interest income recognized during impairment
|
|
|
3,291
|
|
|
|
3,976
|
|
|
|
2,594
|
|
Cash basis interest income recognized
|
|
|
958
|
|
|
|
355
|
|
|
|
412
|
|
The following table presents information related to loans individually evaluated for impairment by class of
loan as of and for the year ended December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid
Principal
Balance
|
|
|
Recorded
Investment
|
|
|
Allowance
For Loan
Losses
Allocated
|
|
|
Average
Recorded
Investment
|
|
|
Interest
Income
Recognized
|
|
|
Cash
Basis
Income
Recognized
|
|
|
|
(in thousands)
|
|
|
|
|
With No Related Allowance Recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
2,131
|
|
|
$
|
1,533
|
|
|
$
|
|
|
|
$
|
1,622
|
|
|
$
|
30
|
|
|
$
|
30
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
64
|
|
|
|
38
|
|
|
|
|
|
|
|
467
|
|
|
|
164
|
|
|
|
164
|
|
Farmland
|
|
|
4,074
|
|
|
|
3,898
|
|
|
|
|
|
|
|
4,259
|
|
|
|
268
|
|
|
|
268
|
|
Other
|
|
|
1,568
|
|
|
|
1,404
|
|
|
|
|
|
|
|
1,724
|
|
|
|
367
|
|
|
|
366
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
444
|
|
|
|
392
|
|
|
|
|
|
|
|
541
|
|
|
|
3
|
|
|
|
3
|
|
1-4 Family
|
|
|
11,011
|
|
|
|
10,083
|
|
|
|
|
|
|
|
11,533
|
|
|
|
115
|
|
|
|
116
|
|
Consumer
|
|
|
9
|
|
|
|
9
|
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
Agriculture
|
|
|
401
|
|
|
|
322
|
|
|
|
|
|
|
|
213
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
14
|
|
|
|
13
|
|
|
|
|
|
|
|
10
|
|
|
|
11
|
|
|
|
11
|
|
With An Allowance Recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
3,734
|
|
|
|
3,462
|
|
|
|
290
|
|
|
|
3,905
|
|
|
|
99
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
10,409
|
|
|
|
9,264
|
|
|
|
218
|
|
|
|
20,173
|
|
|
|
88
|
|
|
|
|
|
Farmland
|
|
|
6,117
|
|
|
|
4,238
|
|
|
|
65
|
|
|
|
5,579
|
|
|
|
37
|
|
|
|
|
|
Other
|
|
|
94,508
|
|
|
|
75,488
|
|
|
|
2,062
|
|
|
|
77,726
|
|
|
|
1,324
|
|
|
|
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
13,883
|
|
|
|
12,117
|
|
|
|
393
|
|
|
|
13,121
|
|
|
|
208
|
|
|
|
|
|
1-4 Family
|
|
|
31,327
|
|
|
|
26,920
|
|
|
|
434
|
|
|
|
27,755
|
|
|
|
557
|
|
|
|
|
|
Consumer
|
|
|
84
|
|
|
|
84
|
|
|
|
9
|
|
|
|
134
|
|
|
|
3
|
|
|
|
|
|
Agriculture
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
861
|
|
|
|
618
|
|
|
|
|
|
|
|
539
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
180,639
|
|
|
$
|
149,883
|
|
|
$
|
3,471
|
|
|
$
|
169,324
|
|
|
$
|
3,291
|
|
|
$
|
958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78
The following table presents information related to loans individually evaluated for impairment
by class of loan as of and for the year ended December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid
Principal
Balance
|
|
|
Recorded
Investment
|
|
|
Allowance
For Loan
Losses
Allocated
|
|
|
Average
Recorded
Investment
|
|
|
Interest
Income
Recognized
|
|
|
Cash
Basis
Income
Recognized
|
|
|
|
(in thousands)
|
|
|
|
|
With No Related Allowance Recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
1,460
|
|
|
$
|
1,234
|
|
|
$
|
|
|
|
$
|
1,637
|
|
|
$
|
5
|
|
|
$
|
4
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
1,155
|
|
|
|
1,109
|
|
|
|
|
|
|
|
1,745
|
|
|
|
2
|
|
|
|
2
|
|
Farmland
|
|
|
4,448
|
|
|
|
4,448
|
|
|
|
|
|
|
|
4,706
|
|
|
|
57
|
|
|
|
57
|
|
Other
|
|
|
2,134
|
|
|
|
1,892
|
|
|
|
|
|
|
|
3,436
|
|
|
|
3
|
|
|
|
3
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
643
|
|
|
|
643
|
|
|
|
|
|
|
|
910
|
|
|
|
|
|
|
|
|
|
1-4 Family
|
|
|
13,539
|
|
|
|
13,158
|
|
|
|
|
|
|
|
11,291
|
|
|
|
56
|
|
|
|
56
|
|
Consumer
|
|
|
70
|
|
|
|
70
|
|
|
|
|
|
|
|
219
|
|
|
|
8
|
|
|
|
5
|
|
Agriculture
|
|
|
45
|
|
|
|
45
|
|
|
|
|
|
|
|
366
|
|
|
|
2
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With An Allowance Recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
4,108
|
|
|
|
4,062
|
|
|
|
263
|
|
|
|
3,964
|
|
|
|
169
|
|
|
|
27
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
26,645
|
|
|
|
25,455
|
|
|
|
1,543
|
|
|
|
19,514
|
|
|
|
348
|
|
|
|
5
|
|
Farmland
|
|
|
8,557
|
|
|
|
6,456
|
|
|
|
734
|
|
|
|
5,794
|
|
|
|
43
|
|
|
|
2
|
|
Other
|
|
|
100,289
|
|
|
|
86,562
|
|
|
|
13,769
|
|
|
|
83,087
|
|
|
|
2,011
|
|
|
|
185
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
14,906
|
|
|
|
14,906
|
|
|
|
1,643
|
|
|
|
11,187
|
|
|
|
468
|
|
|
|
|
|
1-4 Family
|
|
|
32,835
|
|
|
|
28,092
|
|
|
|
2,998
|
|
|
|
27,404
|
|
|
|
787
|
|
|
|
9
|
|
Consumer
|
|
|
142
|
|
|
|
142
|
|
|
|
68
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
Agriculture
|
|
|
10
|
|
|
|
10
|
|
|
|
5
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
524
|
|
|
|
524
|
|
|
|
11
|
|
|
|
533
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
211,510
|
|
|
$
|
188,808
|
|
|
$
|
21,034
|
|
|
$
|
175,828
|
|
|
$
|
3,976
|
|
|
$
|
355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Troubled Debt Restructuring
A troubled debt restructuring (TDR) is where the Company has agreed to a loan modification in the form of a concession for a borrower who is
experiencing financial difficulty. The majority of the Companys TDRs involve a reduction in interest rate, a deferral of principal for a stated period of time, or an interest only period. All TDRs are considered impaired and the Company has
allocated reserves for these loans to reflect the present value of the concessionary terms granted to the customer.
79
The following table presents the types of TDR loan modifications by portfolio segment outstanding
as of December 31, 2013 and 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TDRs
Performing to
Modified Terms
|
|
|
TDRs Not
Performing to
Modified Terms
|
|
|
Total
TDRs
|
|
|
|
(in thousands)
|
|
December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate reduction
|
|
$
|
1,933
|
|
|
$
|
|
|
|
$
|
1,933
|
|
Principal deferral
|
|
|
|
|
|
|
869
|
|
|
|
869
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate reduction
|
|
|
275
|
|
|
|
6,345
|
|
|
|
6,620
|
|
Principal deferral
|
|
|
499
|
|
|
|
|
|
|
|
499
|
|
Farmland
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate reduction
|
|
|
150
|
|
|
|
|
|
|
|
150
|
|
Principal deferral
|
|
|
|
|
|
|
2,365
|
|
|
|
2,365
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate reduction
|
|
|
22,457
|
|
|
|
21,235
|
|
|
|
43,692
|
|
Principal deferral
|
|
|
691
|
|
|
|
|
|
|
|
691
|
|
Interest only payments
|
|
|
2,439
|
|
|
|
1,489
|
|
|
|
3,928
|
|
Residential Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate reduction
|
|
|
4,354
|
|
|
|
6,655
|
|
|
|
11,009
|
|
Interest only payments
|
|
|
641
|
|
|
|
|
|
|
|
641
|
|
1-4 Family
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate reduction
|
|
|
10,312
|
|
|
|
7,958
|
|
|
|
18,270
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate reduction
|
|
|
84
|
|
|
|
|
|
|
|
84
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate reduction
|
|
|
511
|
|
|
|
|
|
|
|
511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total TDRs
|
|
$
|
44,346
|
|
|
$
|
46,916
|
|
|
$
|
91,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate reduction
|
|
$
|
1,972
|
|
|
$
|
|
|
|
$
|
1,972
|
|
Principal deferral
|
|
|
887
|
|
|
|
|
|
|
|
887
|
|
Interest only payments
|
|
|
|
|
|
|
958
|
|
|
|
958
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate reduction
|
|
|
4,834
|
|
|
|
4,459
|
|
|
|
9,293
|
|
Farmland
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate reduction
|
|
|
150
|
|
|
|
|
|
|
|
150
|
|
Principal deferral
|
|
|
725
|
|
|
|
2,438
|
|
|
|
3,163
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate reduction
|
|
|
36,515
|
|
|
|
22,631
|
|
|
|
59,146
|
|
Principal deferral
|
|
|
1,195
|
|
|
|
|
|
|
|
1,195
|
|
Interest only payments
|
|
|
2,466
|
|
|
|
2,107
|
|
|
|
4,573
|
|
Residential Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate reduction
|
|
|
13,087
|
|
|
|
|
|
|
|
13,087
|
|
Interest only payments
|
|
|
652
|
|
|
|
|
|
|
|
652
|
|
1-4 Family
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate reduction
|
|
|
14,323
|
|
|
|
7,871
|
|
|
|
22,194
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate reduction
|
|
|
14
|
|
|
|
|
|
|
|
14
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate reduction
|
|
|
524
|
|
|
|
|
|
|
|
524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total TDRs
|
|
$
|
77,344
|
|
|
$
|
40,464
|
|
|
$
|
117,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80
At December 31, 2013 and 2012, 49% and 66%, respectively, of the Companys TDRs were
performing according to their modified terms. The Company allocated $2.9 million and $15.1 million as of December 31, 2013 and 2012, respectively, in reserves to customers whose loan terms have been modified in TDRs. The Company has committed
to lend additional amounts totaling $261,000 and $259,000 as of December 31, 2013 and 2012, respectively, to customers with outstanding loans that are classified as TDRs.
The following table presents a summary of the types of TDR loan modifications by portfolio type that occurred during the twelve months ended
December 31, 2013 and 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TDRs
Performing to
Modified Terms
|
|
|
TDRs Not
Performing to
Modified Terms
|
|
|
Total
TDRs
|
|
|
|
(in thousands)
|
|
December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate reduction
|
|
$
|
34
|
|
|
$
|
|
|
|
$
|
34
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate reduction
|
|
|
|
|
|
|
1,291
|
|
|
|
1,291
|
|
Principal deferral
|
|
|
499
|
|
|
|
|
|
|
|
499
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate reduction
|
|
|
385
|
|
|
|
|
|
|
|
385
|
|
Residential Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 Family
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate reduction
|
|
|
2,145
|
|
|
|
|
|
|
|
2,145
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate reduction
|
|
|
84
|
|
|
|
|
|
|
|
84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total TDRs
|
|
$
|
3,147
|
|
|
$
|
1,291
|
|
|
$
|
4,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate reduction
|
|
$
|
1,972
|
|
|
$
|
|
|
|
$
|
1,972
|
|
Interest only payments
|
|
|
|
|
|
|
958
|
|
|
|
958
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate reduction
|
|
|
|
|
|
|
831
|
|
|
|
831
|
|
Farmland
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate reduction
|
|
|
150
|
|
|
|
|
|
|
|
150
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate reduction
|
|
|
16,468
|
|
|
|
1,089
|
|
|
|
17,557
|
|
Principal deferral
|
|
|
1,194
|
|
|
|
|
|
|
|
1,194
|
|
Interest only payments
|
|
|
2,466
|
|
|
|
2,107
|
|
|
|
4,573
|
|
Residential Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate reduction
|
|
|
12,805
|
|
|
|
|
|
|
|
12,805
|
|
1-4 Family
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate reduction
|
|
|
7,514
|
|
|
|
|
|
|
|
7,514
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate reduction
|
|
|
14
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total TDRs
|
|
$
|
42,583
|
|
|
$
|
4,985
|
|
|
$
|
47,568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2013 and 2012, 71% and 90%, respectively, of the Companys TDRs that occurred
during 2013 and 2012, respectively, were performing in accordance with their modified terms. The Company has allocated $345,000 and $4.8 million, respectively, in reserves to customers whose loan terms have been modified during 2013 and 2012,
respectively. For modifications occurring during the twelve months ended December 31, 2013 and 2012, the post-modification balances approximate the pre-modification balances.
During 2013 and 2012, approximately $1.3 million and $12.0 million of TDRs, respectively, defaulted on their restructured loan and the default
occurred within the 12 month period following the loan modification. The defaults in 2013 were all construction loans, while the defaults in 2012 consisted of $6.6 million in commercial real estate loans, $3.2 million in construction loans, $1.2
million in 1-4 family residential real estate loans, and $958,000 in commercial loans. A default is considered to have occurred once the TDR is past due 90 days or more or it has been placed on nonaccrual.
81
Non-performing Loans
Non-performing loans include impaired loans and smaller balance homogeneous loans, such as residential mortgage and consumer loans, that are
collectively evaluated for impairment.
The following table presents the recorded investment in nonaccrual and loans past due 90 days and
still on accrual by class of loan as of December 31, 2013 and 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual
|
|
|
Loans Past
Due 90 Days
And Over Still
Accruing
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
|
|
(in thousands)
|
|
Commercial
|
|
$
|
2,886
|
|
|
$
|
2,437
|
|
|
$
|
|
|
|
$
|
36
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
8,528
|
|
|
|
7,808
|
|
|
|
|
|
|
|
|
|
Farmland
|
|
|
7,844
|
|
|
|
10,030
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
48,447
|
|
|
|
46,036
|
|
|
|
|
|
|
|
|
|
Residential Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
7,513
|
|
|
|
1,516
|
|
|
|
|
|
|
|
|
|
1-4 Family
|
|
|
26,098
|
|
|
|
26,501
|
|
|
|
230
|
|
|
|
50
|
|
Consumer
|
|
|
9
|
|
|
|
135
|
|
|
|
2
|
|
|
|
|
|
Agriculture
|
|
|
322
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
101,767
|
|
|
$
|
94,517
|
|
|
$
|
232
|
|
|
$
|
86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the aging of the recorded investment in past due loans by class as of
December 31, 2013 and 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30 59
Days
Past Due
|
|
|
60 89
Days
Past Due
|
|
|
90 Days
And Over
Past Due
|
|
|
Nonaccrual
|
|
|
Total
Past Due
And
Nonaccrual
|
|
|
|
(in thousands)
|
|
December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
156
|
|
|
$
|
123
|
|
|
$
|
|
|
|
$
|
2,886
|
|
|
$
|
3,165
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
261
|
|
|
|
|
|
|
|
|
|
|
|
8,528
|
|
|
|
8,789
|
|
Farmland
|
|
|
484
|
|
|
|
41
|
|
|
|
|
|
|
|
7,844
|
|
|
|
8,369
|
|
Other
|
|
|
4,375
|
|
|
|
|
|
|
|
|
|
|
|
48,447
|
|
|
|
52,822
|
|
Residential Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
1,181
|
|
|
|
|
|
|
|
|
|
|
|
7,513
|
|
|
|
8,694
|
|
1-4 Family
|
|
|
4,059
|
|
|
|
577
|
|
|
|
230
|
|
|
|
26,098
|
|
|
|
30,964
|
|
Consumer
|
|
|
145
|
|
|
|
34
|
|
|
|
2
|
|
|
|
9
|
|
|
|
190
|
|
Agriculture
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
322
|
|
|
|
357
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
120
|
|
|
|
120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,696
|
|
|
$
|
775
|
|
|
$
|
232
|
|
|
$
|
101,767
|
|
|
$
|
113,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30 59
Days
Past Due
|
|
|
60 89
Days
Past Due
|
|
|
90 Days
And Over
Past Due
|
|
|
Nonaccrual
|
|
|
Total
Past Due
And
Nonaccrual
|
|
|
|
(in thousands)
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
1,279
|
|
|
$
|
90
|
|
|
$
|
36
|
|
|
$
|
2,437
|
|
|
$
|
3,842
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
10,510
|
|
|
|
5,815
|
|
|
|
|
|
|
|
7,808
|
|
|
|
24,133
|
|
Farmland
|
|
|
922
|
|
|
|
58
|
|
|
|
|
|
|
|
10,030
|
|
|
|
11,010
|
|
Other
|
|
|
5,138
|
|
|
|
13,037
|
|
|
|
|
|
|
|
46,036
|
|
|
|
64,211
|
|
Residential Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
8,762
|
|
|
|
|
|
|
|
|
|
|
|
1,516
|
|
|
|
10,278
|
|
1-4 Family
|
|
|
11,145
|
|
|
|
1,221
|
|
|
|
50
|
|
|
|
26,501
|
|
|
|
38,917
|
|
Consumer
|
|
|
310
|
|
|
|
75
|
|
|
|
|
|
|
|
135
|
|
|
|
520
|
|
Agriculture
|
|
|
153
|
|
|
|
7
|
|
|
|
|
|
|
|
54
|
|
|
|
214
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
38,219
|
|
|
$
|
20,303
|
|
|
$
|
86
|
|
|
$
|
94,517
|
|
|
$
|
153,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Quality Indicators
We categorize loans into risk categories at origination based upon
original underwriting. Subsequent to origination, we categorized 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. Loans are analyzed individually by classifying the loans as to credit risk. This analysis includes loans with an outstanding balance greater than $500,000
and non-homogeneous loans, such as commercial and commercial real estate loans. This analysis is performed on a quarterly basis. We do not have any non-rated loans. The following definitions are used for risk ratings:
Watch
Loans classified as watch are those loans which have experienced a potentially adverse development which necessitates
increased monitoring.
Special Mention
Loans classified as special mention do not have all of the characteristics of
substandard or doubtful loans. They have one or more deficiencies which warrant special attention and which corrective action, such as accelerated collection practices, may remedy.
Substandard
Loans classified as substandard are those loans with clear and defined weaknesses such as a highly leveraged
position, unfavorable financial ratios, uncertain repayment sources or poor financial condition which may jeopardize the repayment of the debt as contractually agreed. They are characterized by the distinct possibility that we will sustain some
losses if the deficiencies are not corrected.
Doubtful
Loans classified as doubtful are those loans which have
characteristics similar to substandard loans but with an increased risk that collection or liquidation in full is highly questionable and improbable.
83
Loans not meeting the criteria above that are analyzed individually as part of the above
described process are considered to be Pass rated loans. As of December 31, 2013 and 2012, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
|
Watch
|
|
|
Special
Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Total
|
|
|
|
(in thousands)
|
|
December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
35,438
|
|
|
$
|
8,517
|
|
|
$
|
329
|
|
|
$
|
8,594
|
|
|
$
|
|
|
|
$
|
52,878
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
16,706
|
|
|
|
10,771
|
|
|
|
2,277
|
|
|
|
13,572
|
|
|
|
|
|
|
|
43,326
|
|
Farmland
|
|
|
46,909
|
|
|
|
9,121
|
|
|
|
1,735
|
|
|
|
13,424
|
|
|
|
|
|
|
|
71,189
|
|
Other
|
|
|
93,327
|
|
|
|
51,522
|
|
|
|
734
|
|
|
|
86,443
|
|
|
|
|
|
|
|
232,026
|
|
Residential Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
16,506
|
|
|
|
17,320
|
|
|
|
|
|
|
|
13,032
|
|
|
|
|
|
|
|
46,858
|
|
1-4 Family
|
|
|
130,833
|
|
|
|
43,785
|
|
|
|
784
|
|
|
|
53,103
|
|
|
|
|
|
|
|
228,505
|
|
Consumer
|
|
|
12,718
|
|
|
|
968
|
|
|
|
6
|
|
|
|
673
|
|
|
|
|
|
|
|
14,365
|
|
Agriculture
|
|
|
16,742
|
|
|
|
1,802
|
|
|
|
|
|
|
|
655
|
|
|
|
|
|
|
|
19,199
|
|
Other
|
|
|
350
|
|
|
|
510
|
|
|
|
|
|
|
|
120
|
|
|
|
|
|
|
|
980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
369,529
|
|
|
$
|
144,316
|
|
|
$
|
5,865
|
|
|
$
|
189,616
|
|
|
$
|
|
|
|
$
|
709,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
|
Watch
|
|
|
Special
Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Total
|
|
|
|
(in thousands)
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
27,085
|
|
|
$
|
10,153
|
|
|
$
|
6,495
|
|
|
$
|
8,772
|
|
|
$
|
62
|
|
|
$
|
52,567
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
26,085
|
|
|
|
21,713
|
|
|
|
3,647
|
|
|
|
18,839
|
|
|
|
|
|
|
|
70,284
|
|
Farmland
|
|
|
47,017
|
|
|
|
13,461
|
|
|
|
3,532
|
|
|
|
16,815
|
|
|
|
|
|
|
|
80,825
|
|
Other
|
|
|
122,603
|
|
|
|
66,223
|
|
|
|
14,955
|
|
|
|
118,635
|
|
|
|
271
|
|
|
|
322,687
|
|
Residential Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
18,387
|
|
|
|
14,637
|
|
|
|
|
|
|
|
17,962
|
|
|
|
|
|
|
|
50,986
|
|
1-4 Family
|
|
|
159,975
|
|
|
|
47,030
|
|
|
|
5,167
|
|
|
|
66,101
|
|
|
|
|
|
|
|
278,273
|
|
Consumer
|
|
|
17,232
|
|
|
|
2,211
|
|
|
|
35
|
|
|
|
842
|
|
|
|
63
|
|
|
|
20,383
|
|
Agriculture
|
|
|
19,256
|
|
|
|
1,467
|
|
|
|
869
|
|
|
|
725
|
|
|
|
|
|
|
|
22,317
|
|
Other
|
|
|
246
|
|
|
|
524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
437,886
|
|
|
$
|
177,419
|
|
|
$
|
34,700
|
|
|
$
|
248,691
|
|
|
$
|
396
|
|
|
$
|
899,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 5 PREMISES AND EQUIPMENT
Year-end premises and equipment were as follows:
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
|
(in thousands)
|
|
Land and buildings
|
|
$
|
24,673
|
|
|
$
|
24,860
|
|
Furniture and equipment
|
|
|
17,211
|
|
|
|
18,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,884
|
|
|
|
42,934
|
|
Accumulated depreciation
|
|
|
(21,901
|
)
|
|
|
(22,129
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
19,983
|
|
|
$
|
20,805
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense was $1,043,000, $1,165,000 and $1,205,000 for 2013, 2012 and 2011, respectively.
84
NOTE 6 OTHER REAL ESTATE OWNED
Other real estate owned (OREO) is real estate acquired as a result of foreclosure or by deed in lieu of foreclosure. It
is classified as real estate owned until such time as it is sold. When property is acquired as a result of foreclosure or by deed in lieu of foreclosure, it is recorded at its fair market value less cost to sell. Any write-down of the
property at the time of acquisition is charged to the allowance for loan losses. Subsequent reductions in fair value are recorded as non-interest expense.
To determine the fair value of OREO for smaller dollar single family homes, we consult with internal real estate sales staff and external
realtors, investors, and appraisers. If the internally evaluated market price is below our underlying investment in the property, appropriate write-downs are taken. For larger dollar residential and commercial real estate properties, we obtain
a new appraisal of the subject property in connection with the transfer to other real estate owned. We obtain updated appraisals each year on the anniversary date of ownership unless a sale is imminent
The following table presents the major categories of OREO at the period-ends indicated:
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
|
(in thousands)
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
Construction, land development, and other land
|
|
$
|
19,199
|
|
|
$
|
22,912
|
|
Farmland
|
|
|
695
|
|
|
|
618
|
|
Other
|
|
|
6,064
|
|
|
|
15,577
|
|
Residential Real Estate:
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
248
|
|
|
|
200
|
|
1-4 Family
|
|
|
4,916
|
|
|
|
5,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,122
|
|
|
|
44,825
|
|
Valuation allowance
|
|
|
(230
|
)
|
|
|
(1,154
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
30,892
|
|
|
$
|
43,671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
|
(in thousands)
|
|
OREO Valuation Allowance Activity:
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
1,154
|
|
|
$
|
1,667
|
|
Provision to allowance
|
|
|
2,466
|
|
|
|
7,154
|
|
Write-downs
|
|
|
(3,390
|
)
|
|
|
(7,667
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
230
|
|
|
$
|
1,154
|
|
|
|
|
|
|
|
|
|
|
Activity relating to other real estate owned during the years indicated is as follows:
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
|
(in thousands)
|
|
OREO Activity
|
|
|
|
|
|
|
|
|
OREO as of January 1
|
|
$
|
43,671
|
|
|
$
|
41,449
|
|
Real estate acquired
|
|
|
20,606
|
|
|
|
33,528
|
|
Valuation adjustments for declining market values
|
|
|
(2,466
|
)
|
|
|
(7,154
|
)
|
Improvements
|
|
|
|
|
|
|
1
|
|
Loss on sale
|
|
|
(132
|
)
|
|
|
(1,672
|
)
|
Proceeds from sale of properties
|
|
|
(30,787
|
)
|
|
|
(22,481
|
)
|
|
|
|
|
|
|
|
|
|
OREO as of December 31
|
|
$
|
30,892
|
|
|
$
|
43,671
|
|
|
|
|
|
|
|
|
|
|
Expenses related to other real estate owned include:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
|
(in thousands)
|
|
Net loss on sales
|
|
$
|
132
|
|
|
$
|
1,672
|
|
|
$
|
8,889
|
|
Provision to allowance
|
|
|
2,466
|
|
|
|
7,154
|
|
|
|
34,874
|
|
Operating expense
|
|
|
1,918
|
|
|
|
1,723
|
|
|
|
3,762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,516
|
|
|
$
|
10,549
|
|
|
$
|
47,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85
NOTE 7 INTANGIBLE ASSETS
Acquired intangible assets were as follows as of year-end:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
|
(in thousands)
|
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core deposit intangibles
|
|
$
|
4,183
|
|
|
$
|
3,008
|
|
|
$
|
4,183
|
|
|
$
|
2,581
|
|
Trust account intangibles
|
|
|
100
|
|
|
|
100
|
|
|
|
100
|
|
|
|
53
|
|
Aggregate amortization expense was $428,000, $467,000 and $468,000 for 2013, 2012 and 2011, respectively.
Estimated aggregate amortization expense for intangible assets for each of the next five years is as follows (in thousands):
|
|
|
|
|
2014
|
|
$
|
397
|
|
2015
|
|
|
335
|
|
2016
|
|
|
334
|
|
2017
|
|
|
109
|
|
2018
|
|
|
|
|
NOTE 8 DEPOSITS
The following table shows deposits by category:
|
|
|
|
|
|
|
|
|
|
|
December 31,
2013
|
|
|
December 31,
2012
|
|
|
|
(in thousands)
|
|
Non-interest bearing
|
|
$
|
107,486
|
|
|
$
|
114,310
|
|
Interest checking
|
|
|
84,626
|
|
|
|
87,234
|
|
Money market
|
|
|
79,349
|
|
|
|
63,715
|
|
Savings
|
|
|
36,292
|
|
|
|
39,227
|
|
Certificates of deposit
|
|
|
679,952
|
|
|
|
760,573
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
987,705
|
|
|
$
|
1,065,059
|
|
|
|
|
|
|
|
|
|
|
Time deposits of $100,000 or more were approximately $294,965,000 and $319,527,000 at year-end 2013 and 2012,
respectively.
Scheduled maturities of total time deposits for each of the next five years are as follows (in thousands):
|
|
|
|
|
|
|
Total
|
|
2014
|
|
$
|
431,601
|
|
2015
|
|
|
210,516
|
|
2016
|
|
|
14,330
|
|
2017
|
|
|
10,021
|
|
2018
|
|
|
13,460
|
|
Thereafter
|
|
|
24
|
|
|
|
|
|
|
|
|
$
|
679,952
|
|
|
|
|
|
|
Historically, the Bank has utilized brokered and wholesale deposits to supplement its funding strategy. At
December 31, 2012, the Bank held $15.0 million in brokered deposits, which matured and were redeemed in the second quarter of 2013. As stipulated in the Consent Order, PBI Bank is currently restricted from accepting, renewing, or rolling-over
brokered deposits without the prior receipt of a waiver on a case-by-case basis from our regulators.
86
NOTE 9 SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase are financing arrangements that mature within two years. At maturity, the
securities underlying the agreements are returned to the Company. Securities sold under agreements to repurchase are secured by agency, mortgage-backed, and municipal securities. Information concerning securities sold under agreements to repurchase
is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
|
(in thousands)
|
|
Balance at year-end
|
|
$
|
2,470
|
|
|
$
|
2,634
|
|
Average daily balance during the year
|
|
$
|
3,113
|
|
|
$
|
2,088
|
|
Average interest rate during the year
|
|
|
0.20
|
%
|
|
|
0.35
|
%
|
Maximum month-end balance during the year
|
|
$
|
4,747
|
|
|
$
|
2,634
|
|
Weighted average interest rate at year-end
|
|
|
0.17
|
%
|
|
|
0.23
|
%
|
Fair value of securities sold under agreements to repurchase at year-end
|
|
$
|
2,470
|
|
|
$
|
2,634
|
|
NOTE 10 ADVANCES FROM FEDERAL HOME LOAN BANK
At year-end, advances from the Federal Home Loan Bank were as follows:
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
|
(in thousands)
|
|
Monthly amortizing advances with fixed rates from 0.00% to 5.25% and maturities ranging from 2014 through 2033, averaging 3.07%
for 2013
|
|
$
|
4,492
|
|
|
$
|
5,604
|
|
|
|
|
|
|
|
|
|
|
Each advance is payable per terms on agreement, with a prepayment penalty. No prepayment penalties were
incurred during 2012 or 2013. The advances were collateralized by approximately $138.4 million and $163.3 million of first mortgage loans, under a blanket lien arrangement at year-end 2013 and 2012, respectively. Our borrowing capacity is based on
the market value of the underlying pledged loans rather than the unpaid principal balance of the pledged loans. The availability of our borrowing capacity could be affected by our financial position and the FHLB could require additional collateral
or, among other things, exercise its rights to deny a funding request, at its discretion. Additionally, any new advances are limited to a one year maturity or less. At December 31, 2013, our additional borrowing capacity with the FHLB was $18.7
million.
Scheduled principal payments on the above during the next five years and thereafter (in thousands):
|
|
|
|
|
|
|
Advances
|
|
2014
|
|
$
|
776
|
|
2015
|
|
|
663
|
|
2016
|
|
|
627
|
|
2017
|
|
|
543
|
|
2018
|
|
|
267
|
|
Thereafter
|
|
|
1,616
|
|
|
|
|
|
|
|
|
$
|
4,492
|
|
|
|
|
|
|
At year-end 2013, the Company had approximately $5.0 million of federal funds lines of credit available on a
secured basis from correspondent institutions; however, the availability of these lines could be affected by our financial position.
NOTE 11 SUBORDINATED CAPITAL NOTE
The subordinated capital note issued by PBI Bank totaled $5.9 million at December 31, 2013. The note is unsecured,
bears interest at the BBA three-month LIBOR floating rate plus 300 basis points, and qualifies as Tier 2 capital. Interest only was due quarterly through September 30, 2010, at which time quarterly principal payments of $225,000 plus interest
commenced. Scheduled principal payments of $900,000 per year are due each of the next five years with $1,350,000 due thereafter. The note matures July 1, 2020. At December 31, 2013, the interest rate on this note was 3.25%.
87
NOTE 12 JUNIOR SUBORDINATED DEBENTURES
The junior subordinated debentures are redeemable at par prior to the maturity dates of February 13,
2034, April 15, 2034, and March 1, 2037, at the option of the Company as defined within the trust indenture. The Company has the option to defer interest payments on the junior subordinated debentures from time to time for a period
not to exceed twenty (20) consecutive quarters. If payments are deferred, the Company is prohibited from paying dividends to its common stockholders. Effective with the fourth quarter of 2011, we began deferring interest payments on the junior
subordinated notes which resulted in a deferral of distributions on our trust preferred securities. Therefore, future cash dividends on our common stock are subject to the prior payment of all deferred distributions on our trust preferred
securities. Dividends accrued and unpaid on our junior subordinated debentures totaled $1.5 million at December 31, 2013. A summary of the junior subordinated debentures is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Issuance
Date
|
|
|
Optional
Prepayment
Date (2)
|
|
|
Interest Rate (1)
|
|
Junior
Subordinated
Debt Owed
to
Trust
|
|
|
Maturity
Date
|
Porter Statutory Trust II
|
|
|
02-13-2004
|
|
|
|
03-17-2009
|
|
|
3-month LIBOR + 2.85%
|
|
$
|
5,000,000
|
|
|
02-13-2034
|
Porter Statutory Trust III
|
|
|
04-15-2004
|
|
|
|
06-17-2009
|
|
|
3-month LIBOR + 2.79%
|
|
|
3,000,000
|
|
|
04-15-2034
|
Porter Statutory Trust IV
|
|
|
12-14-2006
|
|
|
|
03-01-2012
|
|
|
3-month LIBOR + 1.67%
|
|
|
14,000,000
|
|
|
03-01-2037
|
Ascencia Statutory Trust I
|
|
|
02-13-2004
|
|
|
|
03-17-2009
|
|
|
3-month LIBOR + 2.85%
|
|
|
3,000,000
|
|
|
02-13-2034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
25,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
As of December 31, 2013, the 3-month LIBOR was 0.25%.
|
(2)
|
The debentures are callable on or after the optional prepayment date at their principal amount plus accrued interest.
|
NOTE 13 OTHER BENEFIT PLANS
401(K) Plan
The Company 401(k) Savings Plan allows employees to contribute up to 15% of their compensation,
which is matched equal to 50% of the first 4% of compensation contributed. The Company, at its discretion, may make an additional contribution. Total contributions made by the Company to the plan amounted to approximately $195,000, $148,000 and
$131,000 in 2013, 2012 and 2011, respectively.
Supplemental Executive Retirement Plan
During 2004, the Company created a
supplemental executive retirement plan covering certain executive officers. Under the plan, the Company pays each participant, or their beneficiary, a specific defined benefit amount over 10 years, beginning with the individuals retirement or
early termination of service for reasons other than cause. A liability is accrued for the obligation under these plans. The expense incurred for the plan was $87,000, $151,000 and $49,000 for the years ended December 31, 2013, 2012 and 2011,
respectively. The related liability was $1,348,000, $1,338,000 and $1,208,000 at December 31, 2013, 2012 and 2011, respectively, and is included in other liabilities on the balance sheets.
The Company purchased life insurance on the participants of the plan. The cash surrender value of all insurance policies was $8,911,000 and
$8,398,000 at December 31, 2013 and 2012, respectively. Income earned from the cash surrender value of life insurance totaled $513,000, $292,000 and $301,000 for the years ended December 31, 2013, 2012 and 2011, respectively. The income is
recorded as other non-interest income.
NOTE 14 INCOME TAXES
Income tax expense (benefit) was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
|
(in thousands)
|
|
Current
|
|
$
|
|
|
|
$
|
(65
|
)
|
|
$
|
(12,093
|
)
|
Deferred
|
|
|
9,489
|
|
|
|
754
|
|
|
|
(17,403
|
)
|
Net operating loss
|
|
|
(10,430
|
)
|
|
|
(12,581
|
)
|
|
|
(2,439
|
)
|
Establishment of valuation allowance
|
|
|
|
|
|
|
|
|
|
|
31,717
|
|
Change in valuation allowance
|
|
|
941
|
|
|
|
11,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
(65
|
)
|
|
$
|
(218
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88
Effective tax rates differ from federal statutory rate of 35% applied to income (loss) before
income taxes due to the following.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
|
(in thousands)
|
|
Federal statutory rate times financial statement income (loss)
|
|
$
|
(555
|
)
|
|
$
|
(11,549
|
)
|
|
$
|
(37,634
|
)
|
Effect of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Establishment of valuation allowance
|
|
|
|
|
|
|
|
|
|
|
31,717
|
|
Change in valuation allowance
|
|
|
941
|
|
|
|
11,827
|
|
|
|
|
|
Goodwill impairment charge
|
|
|
|
|
|
|
|
|
|
|
6,169
|
|
Tax-exempt income
|
|
|
(324
|
)
|
|
|
(314
|
)
|
|
|
(392
|
)
|
Nontaxable life insurance income
|
|
|
(180
|
)
|
|
|
(102
|
)
|
|
|
(105
|
)
|
Federal tax credits
|
|
|
|
|
|
|
|
|
|
|
(45
|
)
|
Other, net
|
|
|
118
|
|
|
|
73
|
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
(65
|
)
|
|
$
|
(218
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year-end deferred tax assets and liabilities were due to the following.
|
|
|
|
|
|
|
|
|
|
|
December
31,
2013
|
|
|
December
31,
2012
|
|
|
|
(in thousands)
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carry-forward
|
|
$
|
25,460
|
|
|
$
|
15,051
|
|
Allowance for loan losses
|
|
|
9,843
|
|
|
|
19,838
|
|
Other real estate owned write-down
|
|
|
9,478
|
|
|
|
10,408
|
|
Alternative minimum tax credit carry-forward
|
|
|
692
|
|
|
|
692
|
|
Net assets from acquisitions
|
|
|
644
|
|
|
|
592
|
|
Other than temporary impairment on securities
|
|
|
89
|
|
|
|
374
|
|
Net unrealized loss on securities
|
|
|
1,067
|
|
|
|
|
|
New market tax credit carry-forward
|
|
|
208
|
|
|
|
208
|
|
Nonaccrual loan interest
|
|
|
911
|
|
|
|
|
|
Amortization of non-compete agreements
|
|
|
16
|
|
|
|
19
|
|
Other
|
|
|
1,640
|
|
|
|
936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,048
|
|
|
|
48,118
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
FHLB stock dividends
|
|
|
1,276
|
|
|
|
1,276
|
|
Fixed assets
|
|
|
333
|
|
|
|
409
|
|
Originated mortgage servicing rights
|
|
|
75
|
|
|
|
98
|
|
Net unrealized gain on securities
|
|
|
|
|
|
|
1,858
|
|
Other
|
|
|
570
|
|
|
|
549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,254
|
|
|
|
4,190
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets before valuation allowance
|
|
|
47,794
|
|
|
|
43,928
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(47,794
|
)
|
|
|
(43,928
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Our estimate of the realizability of the deferred tax asset is dependent on our estimate of projected future
levels of taxable income as all carryback ability was fully absorbed by our tax loss of $40.1 million for 2011. In analyzing future taxable income levels, we considered all evidence currently available, both positive and negative. Based on our
analysis, we established a valuation allowance for all deferred tax assets as of December 31, 2011.
The Company does not have any
beginning and ending unrecognized tax benefits. The Company does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next twelve months. There were no interest and penalties recorded in the income
statement or accrued for the year ended December 31, 2013 related to unrecognized tax benefits.
The Company and its subsidiaries are
subject to U.S. federal income tax and the Company is subject to income tax in the state of Kentucky. The Company is no longer subject to examination by taxing authorities for years before 2010.
89
NOTE 15 RELATED PARTY TRANSACTIONS
Loans to principal officers, directors, and their affiliates in 2013 were as follows (in thousands):
|
|
|
|
|
Beginning balance
|
|
$
|
1,210
|
|
New loans
|
|
|
|
|
Repayments
|
|
|
(117
|
)
|
|
|
|
|
|
Ending balance
|
|
$
|
1,093
|
|
|
|
|
|
|
Deposits from principal officers, directors, and their affiliates at year-end 2013 and 2012 were $1.4 million.
Our loan participation totals include participation loans purchased from and sold to two affiliate banks, The Peoples Bank, Mt.
Washington and The Peoples Bank, Taylorsville. Our chairman emeritus, J. Chester Porter and his brother and our director, William G. Porter, each own a 50% interest in Lake Valley Bancorp, Inc., the parent holding company of The Peoples Bank,
Taylorsville, Kentucky. J. Chester Porter and William G. Porter serve as directors of The Peoples Bank, Taylorsville. Our chairman emeritus, J. Chester Porter owns an interest of approximately 36.0% and his brother and our director, William G.
Porter, owns an interest of approximately 3.0% in Crossroads Bancorp, Inc., the parent holding company of The Peoples Bank, Mount Washington, Kentucky. J. Chester Porter serves as a director of The Peoples Bank, Mount Washington. Prior to 2013, we
were a party to management services agreements with each of these banks. Each agreement provided that our executives and employees would provide management and accounting services to the subject bank, including overall responsibility for
establishing and implementing policy and strategic planning. We received a $4,000 monthly fee from The Peoples Bank, Taylorsville and a $2,000 monthly fee from The Peoples Bank, Mount Washington for these services prior to 2013. Beginning in 2013,
these agreements were not renewed and we ceased providing management services to the two affiliate banks.
As of December 31, 2013,
we had $4.9 million of participations in loans sold to these affiliate banks. As of December 31, 2012, we had $2.7 million of participations in loans purchased from, and $6.5 million of participations in real estate loans sold to, these
affiliate banks. At December 31, 2013, $1.0 million of loan participations sold to Peoples Bank, Taylorsville, and $629,000 sold to Peoples Bank, Mt. Washington were on nonaccrual.
In 2013, PBI Bank entered into a Real Estate Listing and Property Management Agreement with Hogan Development Company, an entity in which our
director, W. Glenn Hogan, has an ownership interest. Under these agreements, Hogan Development Company assists PBI Bank in onboarding, managing, and selling the Banks other real estate owned. The majority of the fees paid under this
agreement are related to sales commissions earned upon the sale of bank-owned real estate. The agreement is periodically reviewed and evaluated by the independent members of our Audit Committee. Payments to Hogan Development Company under
this agreement totaled $776,000 in 2013.
NOTE 16 PREFERRED STOCK AND STOCK PURCHASE WARRANTS
In 2010, we completed a $32.0 million private placement to accredited investors. Following completion of the transactions
involved, Porter Bancorp had issued (i) 2,465,569 shares of common stock, (ii) 317,042 shares of Series C Preferred Stock and (iii) warrants to purchase 1,163,045 shares of non-voting common stock at a price of $11.50 per share.
The Series C Preferred Stock has no voting rights (except when required by law), has a liquidation preference over our common stock, and
dividend rights equivalent to our common stock. Each share of Series C Preferred Stock automatically converts into 1.05 shares of common stock at such time as, after giving effect to the automatic conversion, the holder of such Series C Preferred
Stock (together with its affiliates and any other persons with which it is acting in concert or whose holdings would otherwise be required to be aggregated for purposes of federal banking law) beneficially holds, directly or indirectly, less than
9.9% of the number of shares of common stock then issued and outstanding.
The warrants are exercisable into non-voting common stock until
they expire on September 16, 2015. The non-voting common stock has no voting rights (except when required by law), but otherwise has substantially the same rights as our common stock. Upon issuance, each share of non-voting common stock
automatically converts into 1.05 shares of common stock at such time as, after giving effect to the automatic conversion, the holder of non-voting common stock (together with its affiliates and any other persons with which it is acting in concert or
whose holdings would otherwise be required to be aggregated for purposes of federal banking law) holds, directly or indirectly, beneficially less than 9.9% of the number of shares of common stock then issued and outstanding.
On November 21, 2008, we issued to the U.S. Treasury 35,000 shares of our Series A Preferred Stock and a warrant to purchase up to
330,561 shares of our common stock for $15.88 per share in exchange for aggregate consideration of $35.0 million. The warrant is exercisable and has a 10-year term. The Series A Preferred Stock qualifies as Tier 1 capital and pays cumulative cash
dividends quarterly at an annual rate of 5% for the first five years, and 9% beginning in November 2013. The Series A Preferred Stock is non-voting (except when required by law) and may be redeemed by the Company at $1,000 per share plus
accrued unpaid dividends.
90
In the fourth quarter of 2011, we began deferring the payment of regular quarterly cash dividends
on our Series A Preferred Stock. As a result of the dividend deferral, the holder of our Series A Preferred Stock (currently the U.S. Treasury) has the right to appoint up to two representatives to our Board of Directors. We will continue to accrue
any deferred dividends, which will be deducted from income to common shareholders for financial statement purposes. Dividends accrued and unpaid on our Series A Preferred Stock totaled $4.3 million at December 31, 2013.
NOTE 17 CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS
Banks and bank holding companies 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.
On June 24, 2011, PBI Bank entered into a Consent Order with the FDIC and the Kentucky Department of Financial Institutions. The consent
order requires the Bank to complete a management study, to maintain Tier 1 capital as a percentage of total assets of at least 9% and a total risk based capital ratio of at least 12%, to develop a plan to reduce our risk position in each substandard
asset in excess of $1 million, to complete board review of the adequacy of the allowance for loan losses prior to quarterly Call Report submissions, to adopt procedures which strengthen the loan review function and ensure timely and accurate grading
of credit relationships, to charge-off all assets classified as loss, to develop a plan to reduce concentrations of construction and development loans to not more than 75% of total risk based capital and non-owner occupied commercial real estate
loans to not more than 250% of total risk based capital, to limit asset growth to no more than 5% in any quarter or 10% annually, to not extend additional credit to any borrower classified substandard unless the board of directors adopts prior to
the extension a detailed statement giving reasons why the extension is in the best interest of the bank, and to not declare or pay any dividend without the prior consent of our regulators. We are also restricted from accepting, renewing, or
rolling-over brokered deposits without the prior receipt of a waiver on a case-by-case basis from our regulators.
On September 21,
2011, we entered into a Written Agreement with the Federal Reserve Bank of St. Louis. Pursuant to the Agreement, we made formal commitments to use our financial and management resources to serve as a source of strength for the Bank and to assist the
Bank in addressing weaknesses identified by the FDIC and the KDFI, to pay no dividends without prior written approval, to pay no interest or principal on subordinated debentures or trust preferred securities without prior written approval, and to
submit an acceptable plan to maintain sufficient capital.
In October 2012, the Bank entered into a new Consent Order with the FDIC and
KDFI again agreeing to maintain a minimum Tier 1 leverage ratio of 9% and a minimum total risk based capital ratio of 12%. The Bank cannot be considered well-capitalized while under the Consent Order. The Bank also agreed that if it should be unable
to reach the required capital levels, and if directed in writing by the FDIC, 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 or otherwise
immediately obtain a sufficient capital investment into the Bank to fully meet the capital requirements. We have not been directed by the FDIC to implement such a plan.
The new Consent Order also requires the Bank to continue to adhere to the plans implemented in response to the June 2011 Consent Order, and
includes the substantive provisions of the June 2011 Consent Order. As of December 31, 2013, the capital ratios required by the Consent Order were not met.
91
The following table shows the ratios and amounts of Tier 1 capital and total capital to
risk-adjusted assets and the leverage ratios for Porter Bancorp, Inc. and PBI Bank at the dates indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
|
For Capital Adequacy Purposes
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
As of December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk-based capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
80,203
|
|
|
|
11.03
|
%
|
|
$
|
58,178
|
|
|
|
8.00
|
%
|
Bank
|
|
|
83,055
|
|
|
|
11.44
|
|
|
|
58,064
|
|
|
|
8.00
|
|
Tier I capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
53,371
|
|
|
|
7.34
|
|
|
|
29,089
|
|
|
|
4.00
|
|
Bank
|
|
|
67,897
|
|
|
|
9.35
|
|
|
|
29,032
|
|
|
|
4.00
|
|
Tier I capital (to average assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
53,371
|
|
|
|
4.95
|
|
|
|
43,156
|
|
|
|
4.00
|
|
Bank
|
|
|
67,897
|
|
|
|
6.28
|
|
|
|
43,221
|
|
|
|
4.00
|
|
|
|
|
|
|
Actual
|
|
|
For Capital Adequacy Purposes
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
As of December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk-based capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
85,942
|
|
|
|
9.81
|
%
|
|
$
|
70,111
|
|
|
|
8.00
|
%
|
Bank
|
|
|
85,829
|
|
|
|
9.82
|
|
|
|
69,913
|
|
|
|
8.00
|
|
Tier I capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
56,597
|
|
|
|
6.46
|
|
|
|
35,056
|
|
|
|
4.00
|
|
Bank
|
|
|
67,365
|
|
|
|
7.71
|
|
|
|
34,957
|
|
|
|
4.00
|
|
Tier I capital (to average assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
56,597
|
|
|
|
4.50
|
|
|
|
50,297
|
|
|
|
4.00
|
|
Bank
|
|
|
67,365
|
|
|
|
5.37
|
|
|
|
50,199
|
|
|
|
4.00
|
|
The Consent Order requires the Bank to achieve the minimum capital ratios presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual as of
December 31, 2013
|
|
|
Ratio Required by
Consent Order
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
Total capital to risk-weighted assets
|
|
$
|
83,055
|
|
|
|
11.44
|
%
|
|
$
|
87,096
|
|
|
|
12.00
|
%
|
Tier I capital to average assets
|
|
|
67,987
|
|
|
|
6.28
|
|
|
|
97,247
|
|
|
|
9.00
|
|
At December 31, 2013, PBI Banks Tier 1 leverage ratio improved to 6.28% which is below the 9%
minimum capital ratio required by the Consent Order and its total risk-based capital ratio improved to 11.44% which is below the 12% minimum capital ratio required by the Consent Order. Bank regulatory agencies can exercise discretion when an
institution does not meet the terms of a Consent Order. Based on individual circumstances, the agencies may issue mandatory directives, impose monetary penalties, initiate changes in management, or take more serious adverse actions.
Kentucky banking laws limit the amount of dividends that may be paid to a holding company by its subsidiary banks without prior approval.
These laws limit the amount of dividends that may be paid in any calendar year to current years 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. PBI Bank has agreed with its primary regulators to obtain their written consent prior to declaring or paying any future dividends. As a practical matter, PBI Bank cannot pay dividends for the foreseeable future.
92
NOTE 18 LOAN COMMITMENTS AND OTHER RELATED ACTIVITIES
Some financial instruments, such as loan commitments, lines of credit and letters of credit are issued to meet
customer-financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used.
Off-balance-sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral
at exercise of the commitment.
The Company holds instruments, in the normal course of business, with clients that are considered
financial guarantees. Standby letters of credit guarantees are issued in connection with agreements made by clients to counterparties. Standby letters of credit are contingent upon failure of the client to perform the terms of the underlying
contract. The Company evaluates each credit request of its customers in accordance with established lending policies. Based on these evaluations and the underlying policies, the amount of required collateral (if any) is established. Collateral held
varies but may include negotiable instruments, accounts receivable, inventory, property, plant and equipment, income producing properties, residential real estate, and vehicles. The Companys access to these collateral items is generally
established through the maintenance of recorded liens or, in the case of negotiable instruments, possession. No liability is currently established for the standby letters of credit.
The contractual amounts of financial instruments with off-balance-sheet risk at year end were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
|
Fixed
Rate
|
|
|
Variable
Rate
|
|
|
Fixed
Rate
|
|
|
Variable
Rate
|
|
|
|
(in thousands)
|
|
Commitments to make loans
|
|
$
|
3,125
|
|
|
$
|
5,751
|
|
|
$
|
2,490
|
|
|
$
|
3,546
|
|
Unused lines of credit
|
|
|
11,814
|
|
|
|
40,721
|
|
|
|
11,910
|
|
|
|
34,925
|
|
Standby letters of credit
|
|
|
995
|
|
|
|
1,504
|
|
|
|
1,085
|
|
|
|
1,176
|
|
Commitments to make loans are generally made for periods of one year or less.
NOTE 19 FAIR VALUES
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the
principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. We use various valuation techniques to determine fair value, including market, income and cost
approaches. There are three levels of inputs that may be used to measure fair values:
Level 1:
Quoted prices
(unadjusted) for identical assets or liabilities in active markets that an entity has the ability to access as of the measurement date, or observable inputs.
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, and other inputs that are observable or can be corroborated by observable market data.
Level 3:
Significant unobservable inputs that reflect an entitys own assumptions about the assumptions that market
participants would use in pricing an asset or liability.
In certain cases, the inputs used to measure fair value may fall into different
levels of the fair value hierarchy. When that occurs, we classify the fair value hierarchy on the lowest level of input that is significant to the fair value measurement. We used the following methods and significant assumptions to estimate fair
value.
93
Securities:
The fair values of securities available for sale are
determined by obtaining quoted prices on nationally recognized securities exchanges, if available. This valuation method is classified as Level 1 in the fair value hierarchy. For securities where quoted prices are not available, fair values are
calculated on market prices of similar securities, or matrix pricing, which is a mathematical technique used widely 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. Matrix pricing relies on the securities relationship to similarly traded securities, benchmark curves, and the benchmarking of like securities. Matrix pricing
utilizes observable market inputs such as benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, and industry and economic events. In instances where broker
quotes are used, these quotes are obtained from market makers or broker-dealers recognized to be market participants. This valuation method is classified as Level 2 in the fair value hierarchy. For securities where quoted prices or market prices of
similar securities are not available, fair values are calculated using discounted cash flows or other market indicators. This valuation method is classified as Level 3 in the fair value hierarchy. Discounted cash flows are calculated using spread to
swap and LIBOR curves that are updated to incorporate loss severities, volatility, credit spread and optionality. During times when trading is more liquid, broker quotes are used (if available) to validate the model. Rating agency and industry
research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into the calculations.
Impaired Loans:
An impaired loan is evaluated at the time the loan is identified as impaired and is recorded at fair
value less costs to sell. Fair value is measured based on the value of the collateral securing the loan and is classified as Level 3 in the fair value hierarchy. Fair value is determined using several methods. Generally, the fair value of real
estate is determined based on appraisals by qualified licensed appraisers. 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 appraisers to adjust for differences between the comparable
sales and income data available. These routine adjustments are made to adjust the value of a specific property relative to comparable properties for variations in qualities such as location, size, and income production capacity relative to the
subject property of the appraisal. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.
We routinely apply an internal discount to the value of appraisals used in the fair value evaluation of our impaired loans. The
deductions to the appraisal take into account changing business factors and market conditions, as well as potential value impairment in cases where our appraisal date predates a likely change in market conditions. These deductions range from 10% for
routine real estate collateral to 25% for real estate that is determined (1) to have a thin trading market or (2) to be specialized collateral. This is in addition to estimated discounts for cost to sell of six to ten percent.
We also apply discounts to the expected fair value of collateral for impaired loans where the likely resolution involves
litigation or foreclosure. Resolution of this nature generally results in receiving lower values for real estate collateral in a more aggressive sales environment. We have utilized discounts ranging from 10% to 33% in our impairment evaluations when
applicable.
Impaired loans are evaluated quarterly for additional impairment. We obtain updated appraisals on properties
securing our loans when circumstances are warranted such as at the time of renewal or when market conditions have significantly changed. This determination is made on a property-by-property basis in light of circumstances in the broader economic
climate and our assessment of deterioration of real estate values in the market in which the property is located. The first stage of our assessment involves managements inspection of the property in question. Management also engages in
conversations with local real estate professionals, investors, and market makers to determine the likely marketing time and value range for the property. The second stage involves an assessment of current trends in the regional market. After
thorough consideration of these factors, management will either internally evaluate fair value or order a new appraisal.
Other Real Estate Owned (OREO)
: OREO is evaluated at the time of acquisition and recorded at fair value as determined by
independent appraisal or internal market evaluation less cost to sell. Our quarterly evaluations of OREO for impairment are driven by property type. For smaller dollar single family homes, we consult with internal real estate sales staff and
external realtors, investors, and appraisers. Based on these consultations, we determine asking prices for OREO properties we are marketing for sale. If the internally evaluated fair value is below our recorded investment in the property,
appropriate write-downs are taken.
For larger dollar commercial real estate properties, we obtain a new appraisal of the
subject property in connection with the transfer to other real estate owned. In some of these circumstances, an appraisal is in process at quarter end, and we must make our best estimate of the fair value of the underlying collateral based on our
internal evaluation of the property, review of the most recent appraisal, and discussions with the currently engaged appraiser. We obtain updated appraisals on the anniversary date of ownership unless a sale is imminent.
We routinely apply an internal discount to the value of appraisals used in the fair value evaluation of our OREO. The
deductions to the appraisal take into account changing business factors and market conditions, as well as potential value impairment in cases where our appraisal date predates a likely change in market conditions. These deductions range from 10% for
routine real estate collateral to 25% for real estate that is determined (1) to have a thin trading market or (2) to be specialized collateral. This is in addition to estimated discounts for cost to sell of six to ten percent.
94
Financial assets measured at fair value on a recurring basis are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2013 Using
|
|
|
|
|
|
|
(in thousands)
|
|
Description
|
|
Carrying
Value
|
|
|
Quoted Prices In
Active Markets for
Identical Assets
(Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Available for sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and federal agency
|
|
$
|
29,866
|
|
|
$
|
|
|
|
$
|
29,866
|
|
|
$
|
|
|
Agency mortgage-backed: residential
|
|
|
100,943
|
|
|
|
|
|
|
|
100,943
|
|
|
|
|
|
State and municipal
|
|
|
13,545
|
|
|
|
|
|
|
|
13,545
|
|
|
|
|
|
Corporate bonds
|
|
|
18,161
|
|
|
|
|
|
|
|
18,161
|
|
|
|
|
|
Other debt securities
|
|
|
632
|
|
|
|
|
|
|
|
|
|
|
|
632
|
|
Equity securities
|
|
|
197
|
|
|
|
197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
163,344
|
|
|
$
|
197
|
|
|
$
|
162,515
|
|
|
$
|
632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2012 Using
|
|
|
|
|
|
|
(in thousands)
|
|
Description
|
|
Carrying
Value
|
|
|
Quoted Prices In
Active Markets for
Identical Assets
(Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Available for sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and federal agency
|
|
$
|
6,133
|
|
|
$
|
|
|
|
$
|
6,133
|
|
|
$
|
|
|
Agency mortgage-backed: residential
|
|
|
95,182
|
|
|
|
|
|
|
|
95,182
|
|
|
|
|
|
State and municipal
|
|
|
54,733
|
|
|
|
|
|
|
|
54,733
|
|
|
|
|
|
Corporate bonds
|
|
|
19,964
|
|
|
|
|
|
|
|
19,964
|
|
|
|
|
|
Other debt securities
|
|
|
618
|
|
|
|
|
|
|
|
|
|
|
|
618
|
|
Equity securities
|
|
|
1,846
|
|
|
|
1,846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
178,476
|
|
|
$
|
1,846
|
|
|
$
|
176,012
|
|
|
$
|
618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no transfers between Level 1 and Level 2 during 2013 or 2012.
The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs
(Level 3) for the periods ended December 31, 2013 and 2012:
|
|
|
|
|
|
|
|
|
|
|
Other Debt
Securities
|
|
|
|
2013
|
|
|
2012
|
|
|
|
(in thousands)
|
|
Balances of recurring Level 3 assets at January 1
|
|
$
|
618
|
|
|
$
|
606
|
|
Total gain (loss) for the period:
|
|
|
|
|
|
|
|
|
Included in other comprehensive income (loss)
|
|
|
14
|
|
|
|
12
|
|
Transfers into Level 3
|
|
|
|
|
|
|
|
|
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance of recurring Level 3 assets at December 31
|
|
$
|
632
|
|
|
$
|
618
|
|
|
|
|
|
|
|
|
|
|
95
Our other debt security valuation is determined internally by calculating discounted cash flows
using the securitys coupon rate of 6.5% and an estimated current market rate of 9.0% based upon the current yield curve plus spreads that adjust for volatility, credit risk, and optionality. We also consider the issuer(s) publicly filed
financial information as well as assumptions regarding the likelihood of deferrals and defaults.
Financial assets measured at fair value on a
non-recurring basis are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2013 Using
|
|
|
|
|
|
|
(in thousands)
|
|
Description
|
|
Carrying
Value
|
|
|
Quoted Prices In
Active Markets for
Identical Assets
(Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
3,172
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,172
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
9,046
|
|
|
|
|
|
|
|
|
|
|
|
9,046
|
|
Farmland
|
|
|
4,173
|
|
|
|
|
|
|
|
|
|
|
|
4,173
|
|
Other
|
|
|
73,426
|
|
|
|
|
|
|
|
|
|
|
|
73,426
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
11,724
|
|
|
|
|
|
|
|
|
|
|
|
11,724
|
|
1-4 Family
|
|
|
26,486
|
|
|
|
|
|
|
|
|
|
|
|
26,486
|
|
Consumer
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
75
|
|
Agriculture
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
618
|
|
|
|
|
|
|
|
|
|
|
|
618
|
|
Other real estate owned, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
19,057
|
|
|
|
|
|
|
|
|
|
|
|
19,057
|
|
Farmland
|
|
|
690
|
|
|
|
|
|
|
|
|
|
|
|
690
|
|
Other
|
|
|
6,019
|
|
|
|
|
|
|
|
|
|
|
|
6,019
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
246
|
|
|
|
|
|
|
|
|
|
|
|
246
|
|
1-4 Family
|
|
|
4,880
|
|
|
|
|
|
|
|
|
|
|
|
4,880
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2012 Using
|
|
|
|
|
|
|
(in thousands)
|
|
Description
|
|
Carrying
Value
|
|
|
Quoted Prices In
Active Markets for
Identical Assets
(Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
3,799
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,799
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
23,912
|
|
|
|
|
|
|
|
|
|
|
|
23,912
|
|
Farmland
|
|
|
5,722
|
|
|
|
|
|
|
|
|
|
|
|
5,722
|
|
Other
|
|
|
72,793
|
|
|
|
|
|
|
|
|
|
|
|
72,793
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
13,263
|
|
|
|
|
|
|
|
|
|
|
|
13,263
|
|
1-4 Family
|
|
|
25,094
|
|
|
|
|
|
|
|
|
|
|
|
25,094
|
|
Consumer
|
|
|
74
|
|
|
|
|
|
|
|
|
|
|
|
74
|
|
Agriculture
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
Other
|
|
|
513
|
|
|
|
|
|
|
|
|
|
|
|
513
|
|
Other real estate owned, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
22,323
|
|
|
|
|
|
|
|
|
|
|
|
22,323
|
|
Farmland
|
|
|
602
|
|
|
|
|
|
|
|
|
|
|
|
602
|
|
Other
|
|
|
15,175
|
|
|
|
|
|
|
|
|
|
|
|
15,175
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
195
|
|
|
|
|
|
|
|
|
|
|
|
195
|
|
1-4 Family
|
|
|
5,376
|
|
|
|
|
|
|
|
|
|
|
|
5,376
|
|
96
Impaired loans, which are measured for impairment using the fair value of the collateral for
collateral dependent loans, had a carrying amount of $132.2 million, with a valuation allowance of $3.5 million, at December 31, 2013, resulting in no additional provision for loan losses for the year ended December 31, 2013. At
December 31, 2012, impaired loans had a carrying amount of $152.2 million, with a valuation allowance of $21.0 million, resulting in an additional provision for loan losses of $13.1 million for the year ended December 31, 2012.
Other real estate owned, which is measured at the lower of carrying or fair value less costs to sell, had a net carrying amount of $30.9
million as of December 31, 2013, compared with $43.7 million at December 31, 2012. Write-downs of $2.5 million and $7.2 million were recorded on other real estate owned for the years ended December 31, 2013 and 2012, respectively.
The following table presents qualitative information about level 3 fair value measurements for financial instruments measured at fair
value on a non-recurring basis at December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
Valuation
Technique(s)
|
|
Unobservable Input(s)
|
|
Range (Weighted
Average)
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
Impaired loans Commercial
|
|
$
|
3,172
|
|
|
Market value approach
|
|
Adjustment for receivables and inventory discounts
|
|
16% - 32% (24%)
|
Impaired loans Commercial real estate
|
|
$
|
86,645
|
|
|
Sales comparison approach
|
|
Adjustment for differences between the comparable sales
|
|
0% - 69% (20%)
|
Impaired loans Residential real estate
|
|
$
|
38,210
|
|
|
Sales comparison approach
|
|
Adjustment for differences between the comparable sales
|
|
0% - 68% (15%)
|
Other real estate owned Commercial real estate
|
|
$
|
25,766
|
|
|
Sales comparison approach
|
|
Adjustment for differences between the comparable sales
|
|
3% - 51% (22%)
|
|
|
|
|
|
|
Income approach
|
|
Discount or capitalization rate
|
|
7% - 16% (11%)
|
Other real estate owned Residential real estate
|
|
$
|
5,126
|
|
|
Sales comparison approach
|
|
Adjustment for differences between the comparable sales
|
|
2% - 54% (11%)
|
97
The following table presents qualitative information about level 3 fair value measurements for
financial instruments measured at fair value on a non-recurring basis at December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
Valuation
Technique(s)
|
|
Unobservable Input(s)
|
|
Range (Weighted
Average)
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
Impaired loans Commercial
|
|
$
|
3,799
|
|
|
Market value approach
|
|
Adjustment for receivables and inventory discounts
|
|
16% - 32% (24%)
|
Impaired loans Commercial real estate
|
|
$
|
89,461
|
|
|
Sales comparison approach
|
|
Adjustment for differences between the comparable sales
|
|
0% - 69% (19%)
|
Impaired loans Residential real estate
|
|
$
|
38,357
|
|
|
Sales comparison approach
|
|
Adjustment for differences between the comparable sales
|
|
0% - 38% (15%)
|
Other real estate owned Commercial real estate
|
|
$
|
38,100
|
|
|
Sales comparison approach
|
|
Adjustment for differences between the comparable sales
|
|
3% - 50% (18%)
|
|
|
|
|
|
|
Income approach
|
|
Discount or capitalization rate
|
|
9% - 16% (12%)
|
Other real estate owned Residential real estate
|
|
$
|
5,571
|
|
|
Sales comparison approach
|
|
Adjustment for differences between the comparable sales
|
|
0% - 30% (9%)
|
Carrying amount and estimated fair values of financial instruments were as follows at year-end 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2013 Using
|
|
|
|
Carrying
Amount
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
111,134
|
|
|
$
|
106,885
|
|
|
$
|
4,249
|
|
|
$
|
|
|
|
$
|
111,134
|
|
Securities available for sale
|
|
|
163,344
|
|
|
|
197
|
|
|
|
162,515
|
|
|
|
632
|
|
|
|
163,344
|
|
Securities held to maturity
|
|
|
43,612
|
|
|
|
|
|
|
|
42,947
|
|
|
|
|
|
|
|
42,947
|
|
Federal Home Loan Bank stock
|
|
|
10,072
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Mortgage loans held for sale
|
|
|
149
|
|
|
|
|
|
|
|
149
|
|
|
|
|
|
|
|
149
|
|
Loans, net
|
|
|
681,202
|
|
|
|
|
|
|
|
|
|
|
|
695,999
|
|
|
|
695,999
|
|
Accrued interest receivable
|
|
|
3,891
|
|
|
|
|
|
|
|
1,343
|
|
|
|
2,548
|
|
|
|
3,891
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
987,705
|
|
|
$
|
107,486
|
|
|
$
|
879,707
|
|
|
$
|
|
|
|
$
|
987,193
|
|
Securities sold under agreements to repurchase
|
|
|
2,470
|
|
|
|
|
|
|
|
2,470
|
|
|
|
|
|
|
|
2,470
|
|
Federal Home Loan Bank advances
|
|
|
4,492
|
|
|
|
|
|
|
|
4,495
|
|
|
|
|
|
|
|
4,495
|
|
Subordinated capital notes
|
|
|
5,850
|
|
|
|
|
|
|
|
|
|
|
|
5,586
|
|
|
|
5,586
|
|
Junior subordinated debentures
|
|
|
25,000
|
|
|
|
|
|
|
|
|
|
|
|
13,526
|
|
|
|
13,526
|
|
Accrued interest payable
|
|
|
2,535
|
|
|
|
|
|
|
|
1,042
|
|
|
|
1,493
|
|
|
|
2,535
|
|
98
Carrying amount and estimated fair values of financial instruments were as follows at year-end 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2012 Using
|
|
|
|
Carrying
Amount
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
49,572
|
|
|
$
|
41,938
|
|
|
$
|
7,634
|
|
|
$
|
|
|
|
$
|
49,572
|
|
Securities available for sale
|
|
|
178,476
|
|
|
|
1,846
|
|
|
|
176,012
|
|
|
|
618
|
|
|
|
178,476
|
|
Federal Home Loan Bank stock
|
|
|
10,072
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Mortgage loans held for sale
|
|
|
507
|
|
|
|
|
|
|
|
507
|
|
|
|
|
|
|
|
507
|
|
Loans, net
|
|
|
842,412
|
|
|
|
|
|
|
|
|
|
|
|
853,996
|
|
|
|
853,996
|
|
Accrued interest receivable
|
|
|
5,138
|
|
|
|
|
|
|
|
1,150
|
|
|
|
3,988
|
|
|
|
5,138
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
1,065,059
|
|
|
$
|
114,310
|
|
|
$
|
955,216
|
|
|
$
|
|
|
|
$
|
1,069,526
|
|
Securities sold under agreements to repurchase
|
|
|
2,634
|
|
|
|
|
|
|
|
2,634
|
|
|
|
|
|
|
|
2,634
|
|
Federal Home Loan Bank advances
|
|
|
5,604
|
|
|
|
|
|
|
|
5,607
|
|
|
|
|
|
|
|
5,607
|
|
Subordinated capital notes
|
|
|
6,975
|
|
|
|
|
|
|
|
|
|
|
|
6,599
|
|
|
|
6,599
|
|
Junior subordinated debentures
|
|
|
25,000
|
|
|
|
|
|
|
|
|
|
|
|
13,821
|
|
|
|
13,821
|
|
Accrued interest payable
|
|
|
2,104
|
|
|
|
|
|
|
|
1,173
|
|
|
|
931
|
|
|
|
2,104
|
|
The methods and assumptions used to estimate fair value are described as follows:
(a) Cash and Cash Equivalents
The carrying amounts of cash and short-term instruments approximate fair values and are classified as either Level 1 or Level
2. Noninterest bearing deposits are Level 1 whereas interest bearing due from bank accounts and fed funds sold are Level 2.
(b) FHLB Stock
It is not practical to determine the fair value of FHLB stock due to restrictions placed on its transferability.
(c) Loans, Net
Fair values of loans, excluding loans held for sale, 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.
(d) Mortgage Loans Held for Sale
The fair value of loans held for sale is estimated based upon binding contracts and quotes from third party investors resulting
in a Level 2 classification.
(e) Deposits
The fair values disclosed for non-interest bearing deposits are, by definition, equal to the amount payable on demand at the
reporting date resulting in a Level 1 classification. The carrying amounts of variable rate interest bearing deposits approximate their fair values at the reporting date resulting in a Level 2 classification. Fair values for fixed rate interest
bearing deposits are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2
classification.
(f) Securities Sold Under Agreements to Repurchase
The carrying amounts of borrowings under repurchase agreements approximate their fair values resulting in a Level 2
classification.
(
g) Other Borrowings
The fair values of the Companys FHLB advances are estimated using discounted cash flow analyses based on the current
borrowing rates resulting in a Level 2 classification.
99
The fair values of the Companys subordinated capital notes and junior
subordinated debentures are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 3 classification.
(h) Accrued Interest Receivable/Payable
The carrying amounts of accrued interest approximate fair value resulting in a Level 2 or Level 3 classification based on the
level of the asset or liability with which the accrual is associated.
NOTE 20 STOCK PLANS AND STOCK BASED COMPENSATION
The Company has two stock incentive plans. On February 23, 2006, the Company adopted the Porter Bancorp, Inc. 2006
Stock Incentive Plan. In May 2013, the Board approved an amendment to the plan to increase the number of shares authorized for issuance by 800,000 shares. The 2006 Plan now permits the issuance of up to 1,263,050 shares of the Companys common
stock upon the exercise of stock options or upon the grant of stock awards. As of December 31, 2013, the Company had granted 787,426 unvested shares net of forfeitures and vesting under the stock incentive plan. Shares issued under the
plan vest annually on the anniversary date of the grant over three to ten years. The Company has 349,497 shares remaining available for issue under the plan.
On May 15, 2006, the Board of Directors approved the Porter Bancorp, Inc. 2006 Non-Employee Directors Stock Ownership Incentive Plan,
which was approved by holders of the Companys voting common stock on June 8, 2006. On May 22, 2008, shareholders voted to amend the plan to change the form of incentive award from stock options to unvested shares. Under the
terms of the plan, 100,000 shares are reserved for issuance to non-employee directors upon the exercise of stock options or upon the grant of unvested stock awards granted under the plan. Prior to the amendment, options were granted automatically
under the plan at fair market value on the date of grant. The options vest over a three-year period and have a five year term. Unvested shares are granted automatically under the plan at fair market value on the date of grant and vest
semi-annually on the anniversary date of the grant over three years.
On May 16, 2012, holders of the Companys voting common
stock voted to further amend the 2006 Non-Employee Directors Stock Ownership Incentive Plan to award restricted shares having a fair market value of $25,000 annually to each non-employee director, and to increase the number of shares issuable under
the Directors Plan from 100,000 shares to 400,000 shares. Shares issued under the amended plan vest on December 31 in the year they are granted.
To date, the Company has issued 47,428 unvested shares, net of forfeitures and vesting, to non-employee directors. At December 31, 2013,
113,362 shares remain available for issuance under this plan.
The fair value of the 2013 unvested shares issued to certain employees was
$820,000, or $1.18 per weighted-average share. The fair value of the 2013 unvested shares issued to the directors was $155,000 or $0.85 per weighted average share. The Company recorded $604,000 and $442,000 of stock-based compensation during 2013
and 2012, respectively, to salaries and employee benefits. There was no significant impact on compensation expense resulting from forfeited or expiring shares. We expect substantially all of the unvested shares outstanding at the end of the
period will vest according to the vesting schedule. No deferred tax benefit was recognized related to this expense for either period.
The following table
summarizes unvested share activity as of and for the periods indicated for the Stock Incentive Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
December 31, 2013
|
|
|
Twelve Months Ended
December 31, 2012
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant
|
|
|
|
|
|
Grant
|
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
Outstanding, beginning
|
|
|
153,316
|
|
|
$
|
5.92
|
|
|
|
96,688
|
|
|
$
|
13.40
|
|
Granted
|
|
|
693,214
|
|
|
|
1.18
|
|
|
|
97,197
|
|
|
|
1.74
|
|
Vested
|
|
|
(22,113
|
)
|
|
|
12.19
|
|
|
|
(27,378
|
)
|
|
|
13.04
|
|
Forfeited
|
|
|
(36,991
|
)
|
|
|
6.22
|
|
|
|
(13,191
|
)
|
|
|
15.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, ending
|
|
|
787,426
|
|
|
$
|
1.56
|
|
|
|
153,316
|
|
|
$
|
5.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
The following table summarizes unvested share activity as of and for the periods indicated for
the Non-Employee Directors Stock Ownership Incentive Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
December 31, 2013
|
|
|
Twelve Months Ended
December 31, 2012
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant
|
|
|
|
|
|
Grant
|
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
Outstanding, beginning
|
|
|
80,078
|
|
|
$
|
1.77
|
|
|
|
3,538
|
|
|
$
|
7.91
|
|
Granted
|
|
|
182,355
|
|
|
|
0.85
|
|
|
|
93,943
|
|
|
|
1.65
|
|
Vested
|
|
|
(215,005
|
)
|
|
|
1.01
|
|
|
|
(17,403
|
)
|
|
|
2.37
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, ending
|
|
|
47,428
|
|
|
$
|
1.69
|
|
|
|
80,078
|
|
|
$
|
1.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized stock based compensation expense related to unvested shares for 2014 and beyond is estimated as
follows (in thousands):
|
|
|
|
|
2014
|
|
$
|
518
|
|
2015
|
|
|
394
|
|
2016
|
|
|
238
|
|
2017
|
|
|
41
|
|
2018 & thereafter
|
|
|
|
|
NOTE 21 EARNINGS (LOSS) PER SHARE
The factors used in the basic and diluted earnings per share computation follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
|
(in thousands, except share and per share data)
|
|
Net loss
|
|
$
|
(1,586
|
)
|
|
$
|
(32,932
|
)
|
|
$
|
(107,307
|
)
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends
|
|
|
1,919
|
|
|
|
1,750
|
|
|
|
1,750
|
|
Accretion of Series A preferred stock discount
|
|
|
160
|
|
|
|
179
|
|
|
|
177
|
|
Loss attributable to unvested shares
|
|
|
(171
|
)
|
|
|
(482
|
)
|
|
|
(1,092
|
)
|
Loss attributable to Series C preferred
|
|
|
(96
|
)
|
|
|
(947
|
)
|
|
|
(2,988
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common shareholders, basic and diluted
|
|
$
|
(3,398
|
)
|
|
$
|
(33,432
|
)
|
|
$
|
(105,154
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares including unvested common shares and Series C Preferred outstanding
|
|
|
12,722,782
|
|
|
|
12,248,936
|
|
|
|
12,169,987
|
|
Less: Weighted average unvested common shares
|
|
|
595,150
|
|
|
|
169,323
|
|
|
|
121,632
|
|
Less: Weighted average Series C preferred shares
|
|
|
332,894
|
|
|
|
332,894
|
|
|
|
332,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
11,794,738
|
|
|
|
11,746,719
|
|
|
|
11,715,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per common share
|
|
$
|
(0.29
|
)
|
|
$
|
(2.85
|
)
|
|
$
|
(8.98
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Add: Dilutive effects of assumed exercises of common and Preferred Series C stock warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares and potential common shares
|
|
|
11,794,738
|
|
|
|
11,746,719
|
|
|
|
11,715,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per common share
|
|
$
|
(0.29
|
)
|
|
$
|
(2.85
|
)
|
|
$
|
(8.98
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options for 29,530 shares for common stock for 2011 were not considered in computing diluted earnings
per common share because they were anti-dilutive. The Company had no outstanding stock options at December 31, 2013 or 2012. A warrant for the purchase of 330,561 shares of the Companys common stock at an exercise price of $15.88 was
outstanding at December 31, 2013, 2012 and 2011 but was not included in the diluted EPS computation as inclusion would have been anti-dilutive. Additionally, warrants for the purchase of 1,449,459 shares of non-voting common stock at an
exercise price of $10.95 per share were outstanding at December 31, 2013 and 2012, but were not included in the diluted EPS computation as inclusion would have been anti-dilutive.
101
NOTE 22 PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
Condensed financial information of Porter Bancorp Inc. is presented as follows:
CONDENSED BALANCE SHEETS
December 31,
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
|
(in thousands)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,815
|
|
|
$
|
995
|
|
Securities available for sale
|
|
|
829
|
|
|
|
2,464
|
|
Investment in banking subsidiary
|
|
|
63,815
|
|
|
|
71,711
|
|
Investment in and advances to other subsidiaries
|
|
|
776
|
|
|
|
776
|
|
Other assets
|
|
|
740
|
|
|
|
535
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
67,975
|
|
|
$
|
76,481
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Debt
|
|
$
|
25,775
|
|
|
$
|
25,775
|
|
Accrued expenses and other liabilities
|
|
|
6,269
|
|
|
|
3,516
|
|
Shareholders equity
|
|
|
35,931
|
|
|
|
47,190
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
67,975
|
|
|
$
|
76,481
|
|
|
|
|
|
|
|
|
|
|
CONDENSED STATEMENTS OF OPERATIONS
Years ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
|
(in thousands)
|
|
Interest income
|
|
$
|
82
|
|
|
$
|
114
|
|
|
$
|
215
|
|
Dividends from subsidiaries
|
|
|
20
|
|
|
|
21
|
|
|
|
20
|
|
Other income
|
|
|
966
|
|
|
|
72
|
|
|
|
1,272
|
|
Interest expense
|
|
|
(642
|
)
|
|
|
(692
|
)
|
|
|
(652
|
)
|
Other expense
|
|
|
(2,064
|
)
|
|
|
(1,453
|
)
|
|
|
(3,614
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax and undistributed subsidiary income
|
|
|
(1,638
|
)
|
|
|
(1,938
|
)
|
|
|
(2,759
|
)
|
Income tax expense
|
|
|
|
|
|
|
864
|
|
|
|
468
|
|
Equity in undistributed subsidiary income (loss)
|
|
|
52
|
|
|
|
(30,130
|
)
|
|
|
(104,080
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,586
|
)
|
|
$
|
(32,932
|
)
|
|
$
|
(107,307
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
|
(in thousands)
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,586
|
)
|
|
$
|
(32,932
|
)
|
|
$
|
(107,307
|
)
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in undistributed subsidiary (income) loss
|
|
|
(52
|
)
|
|
|
30,130
|
|
|
|
104,080
|
|
Income tax valuation allowance
|
|
|
|
|
|
|
|
|
|
|
1,095
|
|
Gain on sale of assets
|
|
|
(727
|
)
|
|
|
|
|
|
|
|
|
Change in other assets
|
|
|
(240
|
)
|
|
|
(21
|
)
|
|
|
157
|
|
Change in other liabilities
|
|
|
833
|
|
|
|
776
|
|
|
|
(273
|
)
|
Other
|
|
|
640
|
|
|
|
478
|
|
|
|
1,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) operating activities
|
|
|
(1,132
|
)
|
|
|
(1,569
|
)
|
|
|
(844
|
)
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in subsidiaries
|
|
|
|
|
|
|
|
|
|
|
(13,100
|
)
|
Sales of securities
|
|
|
1,952
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) from investing activities
|
|
|
1,952
|
|
|
|
|
|
|
|
(13,100
|
)
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid on preferred stock
|
|
|
|
|
|
|
|
|
|
|
(1,319
|
)
|
Dividends paid on common stock
|
|
|
|
|
|
|
|
|
|
|
(237
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) financing activities
|
|
|
|
|
|
|
|
|
|
|
(1,556
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
820
|
|
|
|
(1,569
|
)
|
|
|
(15,500
|
)
|
Beginning cash and cash equivalents
|
|
|
995
|
|
|
|
2,564
|
|
|
|
18,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending cash and cash equivalents
|
|
$
|
1,815
|
|
|
$
|
995
|
|
|
$
|
2,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 23 QUARTERLY FINANCIAL DATA (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (Loss)
Per Common Share
|
|
|
|
Interest
Income
|
|
|
Net Interest
Income
|
|
|
Provision
For
Loan Losses
|
|
|
OREO
Expense
|
|
|
Net
Income
(Loss)
|
|
|
Basic
|
|
|
Diluted
|
|
|
|
(in thousands, except per share data)
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
11,258
|
|
|
$
|
8,298
|
|
|
$
|
450
|
|
|
$
|
791
|
|
|
$
|
(69
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.04
|
)
|
Second quarter
|
|
|
11,168
|
|
|
|
8,352
|
|
|
|
|
|
|
|
1,657
|
|
|
|
(1,309
|
)
|
|
|
(0.14
|
)
|
|
|
(0.14
|
)
|
Third quarter
|
|
|
10,543
|
|
|
|
7,849
|
|
|
|
250
|
|
|
|
669
|
|
|
|
298
|
|
|
|
(0.01
|
)
|
|
|
(0.01
|
)
|
Fourth quarter
|
|
|
10,259
|
|
|
|
7,586
|
|
|
|
|
|
|
|
1,399
|
|
|
|
(506
|
)
|
|
|
(0.09
|
)
|
|
|
(0.09
|
)
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
15,755
|
|
|
$
|
11,454
|
|
|
$
|
3,750
|
|
|
$
|
1,257
|
|
|
$
|
1,502
|
|
|
$
|
0.08
|
|
|
$
|
0.08
|
|
Second quarter
|
|
|
14,812
|
|
|
|
10,795
|
|
|
|
4,000
|
|
|
|
1,205
|
|
|
|
151
|
|
|
|
(0.03
|
)
|
|
|
(0.03
|
)
|
Third quarter
|
|
|
13,987
|
|
|
|
10,132
|
|
|
|
25,500
|
|
|
|
5,204
|
|
|
|
(27,732
|
)(1)
|
|
|
(2.29
|
)
|
|
|
(2.29
|
)
|
Fourth quarter
|
|
|
13,175
|
|
|
|
9,574
|
|
|
|
7,000
|
|
|
|
2,883
|
|
|
|
(6,853
|
)
|
|
|
(0.59
|
)
|
|
|
(0.59
|
)
|
(1)
|
Third quarter net income was lower than the previous quarter due to increased provision for loan losses expense during the quarter as a result of
the continued decline in credit trends in our portfolio. The provision was also negatively impacted by a strategy change related to classified loans which we expected to more quickly remediate by litigation or foreclosure.
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NOTE 24 CONTINGENCIES
In the normal course of operations, we are defendants in various legal proceedings. Litigation is subject to inherent
uncertainties and unfavorable rulings could occur. We record contingent liabilities resulting from claims against us when a loss is assessed to be probable and the amount of the loss is reasonably estimable. Assessing probability of loss and
estimating probable losses requires analysis of multiple factors, including in some cases judgments about the potential actions of third party claimants and courts. Recorded contingent liabilities are based on the best information available and
actual losses in any future period are inherently uncertain. Currently, we have accrued approximately $1.8 million related to ongoing litigation matters for which we believe liability is probable and reasonably estimable. Accruals are not made
in cases where liability is not probable or the amount cannot be reasonably estimated. We provide disclosure of matters where we believe liability is reasonably possible and which may be material to our consolidated financial statements.
Signature Point Litigation.
On June 18, 2010, three real estate development companies filed suit in Kentucky state court
against PBI Bank and Managed Assets of Kentucky (MAKY).
Signature Point Condominiums LLC, et al. v. PBI Bank, et al
., Jefferson Circuit Court, Case No 10-CI-04295. On July 16, 2013, a jury in Louisville, Kentucky returned a
verdict against PBI Bank, awarding the plaintiffs compensatory damages of $1,515,000 and punitive damages of $5,500,000. The case arose from a settlement in which PBI Bank agreed to release the plaintiffs and guarantors from obligations of more than
$26 million related to a real estate project in Louisville. The plaintiffs were granted a right of first refusal to repurchase a tract of land within the project. In exchange, the plaintiffs conveyed the real estate securing the loans to PBI Bank.
After plaintiffs declined to exercise their right of first refusal, PBI Bank sold the tract to the third party. Plaintiffs alleged the Bank had knowledge of the third party offer before the conveyance of the land by the Plaintiffs to the Bank.
Plaintiffs asserted claims of fraud, breach of fiduciary duty, breach of the duty of good faith and fair dealing, tortious interference with prospective business advantage and conspiracy to commit fraud, negligence, and conspiracy against PBI Bank.
After conferring with its legal advisors, PBI Bank believes the findings and damages are excessive and contrary to law, and that it has
meritorious grounds on which it is moving forward to appeal. We will continue to defend this matter vigorously. Although we have made provisions in our condensed consolidated financial statements for this self-insured matter, the amount of our legal
accrual is less than the original amount of the damages awarded, plus accrued interest. The ultimate outcome of this matter could have a material adverse effect on our financial condition, results of operations or cash flows.
SBAV LP Litigation.
In 2010, the Company sold common shares, convertible preferred shares and warrants to purchase common shares
to accredited investors for $32 million in a private placement. In the placement, SBAV LP, an affiliate of Clinton Group, Inc. (CGI) purchased common shares and warrants for $5,000,016.
On July 11, 2011, CGI sent a letter to the Company, which was also attached as an exhibit to a Schedule 13D CGI filed with the Securities
and Exchange Commission on the same date. In its letter CGI questioned the Companys executive leadership teams ability to properly manage the Bank's operations, compliance with GAAP, financial disclosures and relationships with
regulators, referencing the consent order PBI Bank entered into with the Federal Deposit Insurance Corporation and the Commonwealth of Kentucky Department of Financial Institutions on June 24, 2011. CGI also stated its belief that it
is likely that a number of representations and warranties made when the CGI affiliate entered into an agreement to purchase shares were false, and demanded that the Company take immediate steps to redress such breaches and make CGI and
the other purchasers whole.
During the third quarter of 2011, the Companys Risk Policy and Oversight Committee, comprised of
independent directors, undertook an investigation of the allegations raised in the CGI 13D to evaluate their merit and to ascertain the reasonableness of the Banks allowance for loan losses and OREO valuations at the time of Clintons
investment. The Oversight Committee reported its conclusions to the Companys Board of Directors in October 2011. While recognizing that opportunities for procedural improvements existed in the Banks lending and non-performing asset
administration, the Oversight Committee concluded that this did not rise to a level that would result in the financial statements, or representations and warranties with respect to the financial statements, being misleading to investors in the
2010 private placement offering of the Companys stock. The Oversight Committee further concluded investors were afforded ample opportunity and access to information for their due diligence, including documentation involving asset
valuation estimates, on-site management discussions and additional inquiries during visits to the Company headquarters, and access to loan files of their choosing and the appraisals contained therein, and the Companys disclosures were adequate
in all material respects.
On January 30, 2012, CGI delivered a demand to inspect the Companys records pursuant to the Kentucky
Business Corporation Act. The Company provided records to CGI in accordance with Kentucky law.
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On December 17, 2012, SBAV LP filed a lawsuit against Porter Bancorp, PBI Bank, J. Chester
Porter and Maria L. Bouvette in New York state court. The proceeding was removed to New York federal district court on January 16, 2013. On July 10, 2013, the New York federal district court granted the defendants motion to transfer
the case to federal district court in Kentucky.
SBAV LP v. Porter Bancorp, et. al
., Civ. Action 3:13-CV-710 (W.D.KY). The complaint alleges violation of the Kentucky Securities Act, negligent misrepresentation and, against defendants Porter
Bancorp and Bouvette, breach of contract. The plaintiff seeks damages in an amount in excess of $4,500,000, or the difference between the $5,000,016 purchase price and the value of the securities when sold by the plaintiff, plus interest at the
applicable statutory rate, costs and reasonable attorneys fees. The Kentucky court has set a trial date for January 20, 2015. On September 13, 2013, defendants filed a motion to dismiss all claims in the complaint for pleading
failures and for failure to state a claim upon which relief may be granted; that motion is currently pending. Discovery is temporarily stayed pending a ruling on defendants request that discovery not proceed pending the courts decision
on the motion to dismiss. We dispute the material factual allegations made in the complaint and intend to defend the plaintiffs claims vigorously.
Thomas E. Perez, Secretary of the United States Department of Labor (DOL) v. PBI Bank, Inc.
On December 26, 2013, DOL
filed a lawsuit in U.S. District Court for the Northern District of Indiana (Civ. Action 3:13-CV-1400-PPS) alleging that PBI Bank, in the capacity of Trustee for the Millers Health Systems Inc. Employee Stock Ownership Plans 2007
acquisition of Millers Health Systems, Inc., authorized the alleged imprudent and disloyal purchase of company stock for $40 million, a price allegedly far in excess of the stocks fair market value. The suit also alleges, among
other things, that PBI approved 100% seller financing for the transaction at an excessive rate of interest.
Millers Health is a
Warsaw, Indiana based company that, at the time of the transaction, managed 31 long-term care facilities and 10 assisted living facilities. Millers Health also provides physical and occupational therapy and speech-language pathology to
residents in its facilities. We dispute the material factual allegations made in the complaint and intend to defend the plaintiffs claims vigorously.
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