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LIMESTONE BANCORP, INC. - Quarter Report: 2013 September (Form 10-Q)

Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2013

Or

 

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number: 001-33033

 

 

PORTER BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Kentucky   61-1142247

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

2500 Eastpoint Parkway, Louisville, Kentucky   40223
(Address of principal executive offices)   (Zip Code)

(502) 499-4800

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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

 

Large accelerated filer

 

¨

  

Accelerated filer

 

¨

Non-accelerated filer

 

¨  

  

Smaller reporting company

 

x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

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

12,846,668 shares of Common Stock, no par value, were outstanding at October 31, 2013.

 

 

 


Table of Contents

INDEX

 

         Page  
PART I –  

FINANCIAL INFORMATION

  
ITEM 1.  

FINANCIAL STATEMENTS

     1   
ITEM 2.  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     37   
ITEM 3.  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     55   
ITEM 4.  

CONTROLS AND PROCEDURES

     55   
PART II –  

OTHER INFORMATION

  
ITEM 1.  

LEGAL PROCEEDINGS

     56   
ITEM 1A.  

RISK FACTORS

     56   
ITEM 2.  

UNREGISTERED SALES ON EQUITY SECURITIES AND USE OF PROCEEDS

     56   
ITEM 3.  

DEFAULTS UPON SENIOR SECURITIES

     56   
ITEM 4.  

MINE SAFETY DISCLOSURES

     56   
ITEM 5.  

OTHER INFORMATION

     56   
ITEM 6.  

EXHIBITS

     56   


Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

The following consolidated financial statements of Porter Bancorp, Inc. and subsidiary, PBI Bank, Inc. are submitted:

 

Unaudited Consolidated Balance Sheets for September 30, 2013 and December 31, 2012

  

Unaudited Consolidated Statements of Operations for the three and nine months ended September 30, 2013 and 2012

  

Unaudited Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2013 and 2012

  

Unaudited Consolidated Statement of Changes in Stockholders’ Equity for the nine months ended September 30, 2013

  

Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 and 2012

  

Notes to Unaudited Consolidated Financial Statements

  

 

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Table of Contents

PORTER BANCORP, INC.

Unaudited Consolidated Balance Sheets

(dollars in thousands except share data)

 

     September 30,
2013
    December 31,
2012
 

Assets

    

Cash and due from financial institutions

   $ 51,444      $ 46,512   

Federal funds sold

     1,989        3,060   
  

 

 

   

 

 

 

Cash and cash equivalents

     53,433        49,572   

Securities available for sale

     193,981        178,476   

Mortgage loans held for sale

     123        507   

Loans, net of allowance of $31,754 and $56,680, respectively

     702,486        842,412   

Premises and equipment

     20,167        20,805   

Other real estate owned

     41,857        43,671   

Federal Home Loan Bank stock

     10,072        10,072   

Bank owned life insurance

     8,841        8,398   

Accrued interest receivable and other assets

     7,167        8,718   
  

 

 

   

 

 

 

Total assets

   $ 1,038,127      $ 1,162,631   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Deposits

    

Non-interest bearing

   $ 101,191      $ 114,310   

Interest bearing

     845,705        950,749   
  

 

 

   

 

 

 

Total deposits

     946,896        1,065,059   

Repurchase agreements

     3,722        2,634   

Federal Home Loan Bank advances

     4,741        5,604   

Accrued interest payable and other liabilities

     14,578        10,169   

Subordinated capital note

     6,075        6,975   

Junior subordinated debentures

     25,000        25,000   
  

 

 

   

 

 

 

Total liabilities

     1,001,012        1,115,441   

Stockholders’ equity

    

Preferred stock, no par, 1,000,000 shares authorized,

    

Series A – 35,000 issued and outstanding;

    

Liquidation preference of $35.0 million at September 30, 2013

     34,975        34,840   

Series C – 317,042 issued and outstanding;

    

Liquidation preference of $3.6 million at September 30, 2013

     3,283        3,283   

Common stock, no par, 86,000,000 shares authorized, 12,846,668 and 12,002,421 shares issued and outstanding, respectively

     112,236        112,236   

Additional paid-in capital

     20,673        20,283   

Retained deficit

     (129,043     (126,517

Accumulated other comprehensive income

     (5,009     3,065   
  

 

 

   

 

 

 

Total stockholders’ equity

     37,115        47,190   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 1,038,127      $ 1,162,631   
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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PORTER BANCORP, INC.

Unaudited Consolidated Statements of Operations

(dollars in thousands, except per share data)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2013     2012     2013     2012  

Interest income

        

Loans, including fees

   $ 9,265      $ 12,797      $ 29,252      $ 40,998   

Taxable securities

     900        837        2,615        2,475   

Tax exempt securities

     239        220        691        666   

Fed funds sold and other

     139        133        411        415   
  

 

 

   

 

 

   

 

 

   

 

 

 
     10,543        13,987        32,969        44,554   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense

      

Deposits

     2,443        3,568        7,707        11,294   

Federal Home Loan Bank advances

     38        50        122        161   

Subordinated capital note

     55        66        169        204   

Junior subordinated debentures

     157        169        468        508   

Federal funds purchased and other

     1        2        4        6   
  

 

 

   

 

 

   

 

 

   

 

 

 
     2,694        3,855        8,470        12,173   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     7,849        10,132        24,499        32,381   

Provision for loan losses

     250        25,500        700        33,250   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (loss) after provision for loan losses

     7,599        (15,368     23,799        (869

Non-interest income

      

Service charges on deposit accounts

     536        563        1,535        1,673   

Income from fiduciary activities

     —          261        517        803   

Bank card interchange fees

     174        180        542        553   

Other real estate owned rental income

     54        180        396        242   

Net gain on sales of securities

     24        —          727        3,530   

Income from bank owned life insurance

     75        79        459        238   

Other

     304        458        786        1,145   
  

 

 

   

 

 

   

 

 

   

 

 

 
     1,167        1,721        4,962        8,184   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest expense

      

Salaries and employee benefits

     3,837        4,264        11,975        12,558   

Occupancy and equipment

     884        971        2,728        2,826   

Loan collection expense

     531        792        3,973        1,738   

Other real estate owned expense

     669        5,204        3,117        7,666   

FDIC Insurance

     578        559        1,867        2,264   

State franchise tax

     537        496        1,611        1,680   

Professional fees

     503        776        1,408        1,699   

Communications

     177        175        531        523   

Insurance expense

     171        98        482        296   

Postage and delivery

     99        108        314        339   

Other

     482        707        1,835        1,870   
  

 

 

   

 

 

   

 

 

   

 

 

 
     8,468        14,150        29,841        33,459   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     298        (27,797     (1,080     (26,144

Income tax benefit

     —          (65     —          (65
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     298        (27,732     (1,080     (26,079

Less:

      

Dividends on preferred stock

     437        437        1,311        1,312   

Accretion on Series A preferred stock

     45        44        135        134   

Earnings (losses) allocated to participating securities

     (16     (1,264     (174     (1,095
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to common shareholders

   $ (168   $ (26,949   $ (2,352   $ (26,430
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings (loss) per common share

   $ (0.01   $ (2.29   $ (0.20   $ (2.25
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings (loss) per common share

   $ (0.01   $ (2.29   $ (0.20   $ (2.25
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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PORTER BANCORP, INC.

Unaudited Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2013     2012     2013     2012  

Net income (loss)

   $ 298      $ (27,732   $ (1,080   $ (26,079 )

Other comprehensive income (loss), net of tax:

        

Unrealized gain (loss) on securities:

        

Unrealized gain (loss) arising during the period (net of tax of $887, $821, $4,093 and $970, respectively)

     (1,647     1,525        (7,601     1,803   

Reclassification of amount realized through sales (net of tax of $8, $0, $254, and $1,235, respectively)

     (16     —          (473     (2,295 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     (1,663     1,525        (8,074     (492
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

   $ (1,365   $ (26,207   $ (9,154   $ (26,571
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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PORTER BANCORP, INC.

Unaudited Consolidated Statement of Changes in Stockholders’ Equity

For Nine Months Ended September 30, 2013

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

 

          Accumulated        
    Shares     Amount     Additional           Other        
          Series A     Series C           Series A     Series C     Paid-In     Retained     Comprehensive        
    Common     Preferred     Preferred     Common     Preferred     Preferred     Capital     Deficit     Income     Total  

Balances, January 1, 2013

    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

    (31,322     —          —          —          —          —          —          —          —          —     

Stock-based compensation expense

    —          —          —          —          —          —          390        —         —          390   

Net loss

    —          —          —          —          —          —          —          (1,080     —          (1,080

Net change in accumulated other comprehensive income, net of taxes

    —          —          —          —          —          —          —          —          (8,074     (8,074

Dividends 5% on Series A preferred stock

    —          —          —          —          —          —          —          (1,311     —          (1,311

Accretion of Series A preferred stock discount

    —          —          —          —          135        —          —          (135     —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances, September 30, 2013

    12,846,668        35,000        317,042      $ 112,236      $ 34,975      $ 3,283      $ 20,673      $ (129,043   $ (5,009   $ 37,115   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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PORTER BANCORP, INC.

Unaudited Consolidated Statements of Cash Flows

For Nine Months Ended September 30, 2013 and 2012

(dollars in thousands)

 

     2013     2012  

Cash flows from operating activities

    

Net loss

   $ (1,080   $ (26,079

Adjustments to reconcile net loss to net cash from operating activities

    

Depreciation and amortization

     1,506        1,819   

Provision for loan losses

     700        33,250   

Net amortization on securities

     1,709        2,610   

Stock-based compensation expense

     390        338   

Net gain on loans originated for sale

     (76     (260

Loans originated for sale

     (3,160     (12,214

Proceeds from sales of loans originated for sale

     3,609        12,910   

Net gain on sales of investment securities

     (727     (3,530

Net loss on sales of other real estate owned

     190        1,481   

Net write-down of other real estate owned

     1,584        5,090   

Earnings on bank owned life insurance

     (443     (222

Net change in accrued interest receivable and other assets

     1,144        5,075   

Net change in accrued interest payable and other liabilities

     3,098        4,027   
  

 

 

   

 

 

 

Net cash from operating activities

     8,444        24,295   
  

 

 

   

 

 

 

Cash flows from investing activities

    

Purchases of available-for-sale securities

     (50,266     (141,232

Sales and calls of available-for-sale securities

     2,712        65,695   

Maturities and prepayments of available-for-sale securities

     22,993        36,649   

Proceeds from sale of other real estate owned

     18,567        17,032   

Improvements to other real estate owned

     —          (1

Loan originations and payments, net

     120,453        120,958   

Purchases of premises and equipment, net

     (204     (399
  

 

 

   

 

 

 

Net cash from investing activities

     114,255        98,702   
  

 

 

   

 

 

 

Cash flows from financing activities

    

Net change in deposits

     (118,163     (146,236

Net change in repurchase agreements

     1,088        665   

Repayment of Federal Home Loan Bank advances

     (863     (1,156

Repayment of subordinated capital note

     (900     (450
  

 

 

   

 

 

 

Net cash from financing activities

     (118,838     (147,177
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     3,861        (24,180

Beginning cash and cash equivalents

     49,572        105,962   
  

 

 

   

 

 

 

Ending cash and cash equivalents

   $ 53,433      $ 81,782   
  

 

 

   

 

 

 

Supplemental cash flow information:

    

Interest paid

   $ 8,156      $ 11,808   

Income taxes paid (refunded)

     —          (2,000

Supplemental non-cash disclosure:

    

Transfer from loans to other real estate

   $ 18,542      $ 31,531   

Financed sales of other real estate owned

     15        541   

See accompanying notes to unaudited consolidated financial statements.

 

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PORTER BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

Note 1 – Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation – 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. All significant inter-company transactions and accounts have been eliminated in consolidation.

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, the financial statements do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for nine months ended September 30, 2013 are not necessarily indicative of the results that may be expected for the entire year. A description of other significant accounting policies is presented in the notes to the Consolidated Financial Statements for the year ended December 31, 2012 included in the Company’s Annual Report on Form 10-K.

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, fair values of financial instruments, stock compensation, deferred tax assets, other intangibles, and fair values of other real estate owned are particularly subject to change.

Reclassifications – Some items in the prior year financial statements were reclassified to conform to the current presentation. The reclassifications did not impact net income 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 raise substantial doubt about the Company’s ability to continue as a going concern.

During the first nine months of 2013, we reported net loss to common shareholders of $2.4 million, compared with net loss to common shareholders of $26.4 million for the first nine months of 2012. This was primarily due to a reduction in provision for loan loss expense of $32.6 million, and a $3.6 million decrease in non-interest expense, countered by a $7.9 million reduction in net interest income, driven by the reduction of the size of our loan portfolio.

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. A decline in credit quality in our portfolio during the year resulted in net charge-offs of $36.1 million, and 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 the year ended December 31, 2011.

In the fourth quarter of 2011, we began deferring the payment of regular quarterly cash dividends on our Series A Preferred Stock issued to the U.S. Treasury. At September 30, 2013, cumulative accrued and unpaid dividends on this stock totaled $3.7 million. We have deferred dividend payments for more than six quarters and 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.

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.

 

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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 September 30, 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:

 

   

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 issued to the US Treasury in 2008 under the Capital Purchase Program.

 

   

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.

 

   

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 has been named to succeed Maria Bouvette as CEO of the Company pending regulatory approval following Ms. Bouvette’s retirement effective July 31, 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.

 

   

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.

 

   

Executing on our commitment to improve credit quality and reduce loan concentrations and balance sheet risk.

 

   

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 $734.2 million at September 30, 2013.

 

   

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 $52.0 million, or 62% of total risk-based capital, at September 30, 2013, down from $70.3 million, or 82% of total risk-based capital, at December 31, 2012.

 

   

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 September 30, 2013. These loans totaled $250.1 million, or 300% of total risk-based capital, at September 30, 2013 and $311.1 million, or 362% of total risk-based capital, at December 31, 2012.

 

   

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 $52.0 million at September 30, 2013. Our non-owner occupied commercial real estate loans declined from $293.3 million at December 31, 2010 to $152.0 million at September 30, 2013.

 

   

Executing on our commitment to sell other real estate owned and reinvest in quality income producing assets.

 

   

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 first nine months of 2013, we acquired $18.5 million of OREO.

 

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Table of Contents
   

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 nine month period ended September 30, 2013, we incurred OREO losses totaling $1.8 million, which consisted of $190,000 in loss on sale and $1.6 million from declining values as evidenced by new appraisals and reduced marketing prices in connection with our sales strategies.

 

   

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 $18.6 million during the nine months ended September 30, 2013 and $22.5 million, $26.0 million and $25.0 million during 2012, 2011, and 2010, respectively.

 

   

At December 31, 2012, the OREO portfolio consisted of 51% construction, development, and land assets. At September 30, 2013 this concentration had declined to 48%. This is consistent with our reduction of construction, development and other land loans, which have declined to $52.0 million at September 30, 2013 compared to $70.3 million at December 31, 2012. Commercial real estate represents 34% of the portfolio at September 30, 2013 compared with 35% at December 31, 2012. 1-4 family residential properties represent 15% of the portfolio at September 30, 2013 compared with 12% at December 31, 2012.

 

   

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.

 

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Note 3 – Securities

The fair value of available for sale 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)  

September 30, 2013:

          

U.S. Government and federal agency

   $ 29,184       $ 328       $ (1,599   $ 27,913   

Agency mortgage-backed: residential

     85,583         519         (1,529     84,573   

State and municipal

     58,150         962         (1,965     57,147   

Corporate bonds

     23,123         915         (473     23,565   

Other

     572         34         —          606   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total debt securities

     196,612         2,758         (5,566     193,804   

Equity

     135         42         —          177   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 196,747       $ 2,800       $ (5,566   $ 193,981   
  

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2012:

          

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

     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:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2013      2012      2013      2012  
     (in thousands)      (in thousands)  

Proceeds

   $ 804       $ —         $ 2,712       $ 65,695   

Gross gains

     24         —           728         3,530   

Gross losses

     —           —           1         —     

The amortized cost and fair value of the debt investment securities portfolio are shown by contractual maturity. Contractual maturities may differ from actual maturities if issuers have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed securities not due at a single maturity date are detailed separately.

 

     September 30, 2013  
     Amortized
Cost
     Fair
Value
 
     (in thousands)  

Maturity

     

Available-for-sale

     

Within one year

   $ 17,229       $ 16,810   

One to five years

     15,513         16,690   

Five to ten years

     69,908         67,557   

Beyond ten years

     8,379         8,174   

Agency mortgage-backed: residential

     85,583         84,573   
  

 

 

    

 

 

 

Total

   $ 196,612       $ 193,804   
  

 

 

    

 

 

 

 

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Table of Contents

Securities pledged at September 30, 2013 and December 31, 2012 had carrying values of approximately $59.3 million and $76.4 million, respectively, and were pledged to secure public deposits and repurchase agreements.

The Company evaluates securities for other than temporary impairment (OTTI) on at least 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 issuer’s 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 issuer’s financial condition. Management currently intends to hold all securities with unrealized losses until recovery, which for fixed income securities may be at maturity. As of September 30, 2013, management does not believe securities within our portfolio with unrealized losses should be classified as other than temporarily impaired.

At September 30, 2013, the Company held one equity security. This security was in an unrealized gain position as of September 30, 2013. Management monitors the underlying financial condition of the issuers and current market pricing for this equity security monthly.

Securities with unrealized losses at September 30, 2013 and December 31, 2012, aggregated by investment category and length of time the 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)  

September 30, 2013:

               

U.S Government & federal agency

   $ 22,104       $ (1,599   $ —         $ —        $ 22,104       $ (1,599

Agency mortgage-backed: residential

     43,799         (1,195     7,864         (334     51,663         (1,529

State and municipal

     34,048         (1,897     1,068         (68     35,116         (1,965

Corporate bonds

     12,822         (473     —           —          12,822         (473
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired

   $ 112,773       $ (5,164   $ 8,932       $ (402   $ 121,705       $ (5,566
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

December 31, 2012:

               

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

     2         —          —           —          2         —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired

   $ 35,115       $ (381   $ —         $ —        $ 35,115       $ (381
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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Table of Contents

Note 4 – Loans

 

     September 30,     December 31,  
     2013     2012  
     (in thousands)  

Loans were as follows:

    

Commercial

   $ 51,572      $ 52,567   

Commercial Real Estate:

    

Construction

     51,994        70,284   

Farmland

     73,159        80,825   

Nonfarm nonresidential

     236,579        322,687   

Residential Real Estate:

    

Multi-family

     46,052        50,986   

1-4 Family

     234,759        278,273   

Consumer

     15,709        20,383   

Agriculture

     23,669        22,317   

Other

     747        770   
  

 

 

   

 

 

 

Subtotal

     734,240        899,092   

Less: Allowance for loan losses

     (31,754     (56,680
  

 

 

   

 

 

 

Loans, net

   $ 702,486      $ 842,412   
  

 

 

   

 

 

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended September 30, 2013 and 2012:

 

     Commercial     Commercial
Real Estate
    Residential
Real Estate
    Consumer     Agriculture     Other     Total  
     (in thousands)  

September 30, 2013:

            

Beginning balance

   $ 4,648      $ 21,022      $ 10,790      $ 594      $ 487      $ 18      $ 37,559   

Provision for loan losses

     (539     196        612        61        (67     (13     250   

Loans charged off

     (965     (4,726     (1,272     (99 )     (9     —          (7,071

Recoveries

     443        456        63        44        10        —          1,016   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 3,587      $ 16,948      $ 10,193      $ 600      $ 421      $ 5      $ 31,754   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

September 30, 2012:

            

Beginning balance

   $ 3,811      $ 31,049      $ 15,587      $ 792      $ 343      $ 12      $ 51,594   

Provision for loan losses

     2,630        17,412        4,326        366        763        3        25,500   

Loans charged off

     (2,400     (16,192     (3,824     (375     (696     —          (23,487

Recoveries

     27        324        16        24        21        —          412   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 4,068      $ 32,593      $ 16,105      $ 807      $ 431      $ 15      $ 54,019   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

The following table presents the activity in the allowance for loan losses by portfolio segment for the nine months ended September 30, 2013 and 2012:

 

     Commercial     Commercial
Real Estate
    Residential
Real Estate
    Consumer     Agriculture     Other     Total  
     (in thousands)  

September 30, 2013:

            

Beginning balance

   $ 4,402      $ 34,768      $ 16,235      $ 857      $ 403      $ 15      $ 56,680   

Provision for loan losses

     94        72        522        140        (118     (10     700   

Loans charged off

     (2,073     (18,904     (6,748     (620 )     (92     —          (28,437

Recoveries

     1,164        1,012        184        223        228        —          2,811   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 3,587      $ 16,948      $ 10,193      $ 600      $ 421      $ 5      $ 31,754   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

September 30, 2012:

            

Beginning balance

   $ 4,207      $ 33,024      $ 14,217      $ 792      $ 325      $ 14      $ 52,579   

Provision for loan losses

     2,641        19,187        9,528        687        1,206        1        33,250   

Loans charged off

     (2,866     (20,055     (7,715     (747     (1,124     —          (32,507

Recoveries

     86        437        75        75        24        —          697   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 4,068      $ 32,593      $ 16,105      $ 807      $ 431      $ 15      $ 54,019   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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 September 30, 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

   $ 381       $ 3,267       $ 1,046       $ 68       $ —         $       —         $ 4,762   

Collectively evaluated for impairment

     3,206         13,681         9,147         532         421         5         26,992   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 3,587       $ 16,948       $ 10,193       $ 600       $ 421       $ 5       $ 31,754   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                    

Loans individually evaluated for impairment

   $ 5,226       $ 99,437       $ 49,741       $ 148       $ 332       $ 533       $ 155,417   

Loans collectively evaluated for impairment

     46,346         262,295         231,070         15,561         23,337         214         578,823   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans balance

   $ 51,572       $ 361,732       $ 280,811       $ 15,709       $ 23,669       $ 747       $ 734,240   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired Loans

Impaired loans include restructured loans and commercial, construction, agriculture and commercial real estate loans on nonaccrual or classified as either 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 has been provided.

The following table presents information related to loans individually evaluated for impairment by class of loans as of and for the three and nine months ended September 30, 2013:

 

                          Three Months Ended
September 30, 2013
     Nine Months Ended
September 30, 2013
 
     Unpaid
Principal
Balance
     Recorded
Investment
     Allowance
For Loan
Losses
Allocated
     Average
Recorded
Investment
     Interest
Income
Recognized
     Average
Recorded
Investment
     Interest
Income
Recognized
     Cash Basis
Income
Recognized
 
     (in thousands)  

With No Related Allowance Recorded:

                       

Commercial

   $ 1,853       $ 1,556       $ —         $ 1,727       $ 30       $ 1,644       $ 30       $ 30   

Commercial real estate:

                       

Construction

     311         195         —           193         153         574         164         164   

Farmland

     4,641         4,575         —           4,439         5         4,349         177         177   

Nonfarm nonresidential

     2,209         1,980         —           1,753         109         1,803         366         366   

Residential real estate:

                       

Multi-family

     447         395         —           516         —           579         —           —     

1-4 Family

     10,953         10,078         —           10,538         33         11,896         90         90   

Consumer

     14         14         —           8         —           25         —           —     

Agriculture

     410         332         —           266         —           186         —           —     

Other

     18         18         —           18         —           9         —           —     

With An Allowance Recorded:

                       

Commercial

     3,776         3,670         381         4,110         19         4,016         80         —     

Commercial real estate:

                       

Construction

     20,462         19,316         388         20,831         10         22,900         78         —     

Farmland

     8,000         5,606         194         5,575         11         5,914         33         —     

Nonfarm nonresidential

     83,138         67,765         2,685         74,620         327         78,285         1,009         —     

Residential real estate:

                       

Multi-family

     14,199         12,490         395         12,713         51         13,372         158         —     

1-4 Family

     28,795         26,778         651         27,283         140         27,963         358         —     

Consumer

     202         134         68         122         1         146         2         —     

Agriculture

     —           —           —           —           —           3         —           —     

Other

     514         515         —           516         5         520         13         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 179,942       $ 155,417       $ 4,762       $ 165,228       $ 894       $ 174,184       $ 2,558       $ 827   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

14


Table of Contents

The following table presents loans individually evaluated for impairment by class of loan as of 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   

Nonfarm nonresidential

     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   

Nonfarm nonresidential

     97,699         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

     31,021         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

   $ 207,106       $ 188,808       $ 21,034       $ 175,828       $ 3,976       $ 355   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 Company’s 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.

 

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Table of Contents

The following table presents the types of TDR loan modifications by portfolio segment outstanding as of September 30, 2013 and December 31, 2012:

 

     TDRs
Performing to
Modified
Terms
     TDRs Not
Performing to
Modified
Terms
     Total
TDRs
 
     (in thousands)  

September 30, 2013

     

Commercial

     

Rate reduction

   $ 1,957       $ —         $ 1,957   

Principal deferral

     —           875         875   

Commercial Real Estate:

        

Construction

        

Rate reduction

     277         6,362         6,639   

Principal deferral

     499         —           499   

Farmland

        

Rate reduction

     150         —           150   

Principal deferral

     701         2,438         3,139   

Nonfarm nonresidential

        

Rate reduction

     23,511         21,678         45,189   

Interest only payments

     2,448         1,489         3,937   

Residential Real Estate:

        

Multi-family

        

Rate reduction

     4,385         6,728         11,113   

Interest only payments

     644         —           644   

1-4 Family

        

Rate reduction

     8,805         9,685         18,490   

Consumer

        

Rate reduction

     77         —           77   

Other

        

Rate reduction

     514         —           514   
  

 

 

    

 

 

    

 

 

 

Total TDRs

   $ 43,968       $ 49,255       $ 93,223   
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     TDRs
Performing to
Modified
Terms
     TDRs Not
Performing to
Modified
Terms
     Total
TDRs
 
     (in thousands)  

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   

Nonfarm nonresidential

        

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   
  

 

 

    

 

 

    

 

 

 

At September 30, 2013 and December 31, 2012, 47% and 66%, respectively, of the Company’s TDRs were performing according to their modified terms. The Company allocated $3.5 million and $15.1 million in reserves to borrowers whose loan terms have been modified in TDRs as of September 30, 2013, and December 31, 2012, respectively. The Company has committed to lend additional amounts totaling $262,000 and $259,000 as of September 30, 2013 and December 31, 2012, respectively, to borrowers with outstanding loans classified as TDRs.

 

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Table of Contents

The following tables present a summary of the types of TDR loan modifications by portfolio type that occurred during the three months ended September 30, 2013 and 2012:

 

     TDRs
Performing to
Modified
Terms
     TDRs Not
Performing to
Modified
Terms
     Total
TDRs
 
     (in thousands)  

September 30, 2013

     

Residential Real Estate:

        

1-4 Family

        

Rate reduction

   $ 363       $ —         $ 363   

Consumer

        

Rate reduction

     26         —           26   
  

 

 

    

 

 

    

 

 

 

Total TDRs

   $ 389       $ —         $ 389   
  

 

 

    

 

 

    

 

 

 

 

     TDRs
Performing to
Modified
Terms
     TDRs Not
Performing to
Modified
Terms
     Total
TDRs
 
     (in thousands)  

September 30, 2012

     

Commercial Real Estate:

        

Farmland

        

Rate reduction

   $ 150       $ —         $ 150   

Nonfarm nonresidential

        

Rate reduction

     5,549         —           5,549   
  

 

 

    

 

 

    

 

 

 

Total TDRs

   $ 5,699       $ —         $ 5,699   
  

 

 

    

 

 

    

 

 

 

As of September 30, 2013 and 2012, 100% of the Company’s TDRs that occurred during the three months ended September 30, 2013 and 2012 were performing according to their modified terms. The Company allocated $36,000 and $489,000 in reserves to borrowers whose loan terms have been modified during the three months ended September 30, 2013 and 2012, respectively. For modifications occurring during the three month period ended September 30, 2013 and 2012, the post-modification balances approximate the pre-modification balances.

The following tables present a summary of the types of TDR loan modifications by portfolio type that occurred during the nine months ended September 30, 2013 and 2012:

 

     TDRs
Performing to
Modified
Terms
     TDRs Not
Performing to
Modified
Terms
     Total
TDRs
 
     (in thousands)  

September 30, 2013

     

Commercial:

        

Rate reduction

   $ 39       $ —         $ 39   

Commercial Real Estate:

        

Construction

        

Rate reduction

     —           1,291         1,291   

Principal deferral

     499         —           499   

Nonfarm nonresidential

        

Rate reduction

     388         —           388   

Residential Real Estate:

        

1-4 Family

        

Rate reduction

     1,254         —           1,254   

Consumer:

        

Rate reduction

     64         —           64   
  

 

 

    

 

 

    

 

 

 

Total TDRs

   $ 2,244       $ 1,291       $ 3,535   
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     TDRs
Performing to
Modified
Terms
     TDRs Not
Performing to
Modified
Terms
     Total
TDRs
 
     (in thousands)  

September 30, 2012

        

Commercial:

        

Interest only payments

   $ —         $ 1,019       $ 1,019   

Commercial Real Estate:

        

Construction

        

Rate reduction

     —           849         849   

Farmland

        

Rate reduction

     150         —           150   

Nonfarm nonresidential

        

Rate reduction

     16,700         —           16,700   

Principal deferral

     1,196         —           1,196   

Interest only payments

     2,467         2,174         4,641   

Residential Real Estate:

        

Multi-family

        

Rate reduction

     12,848         31         12,879   

1-4 Family

        

Rate reduction

     7,440         —          7,440   

Principal deferral

     —           384         384   
  

 

 

    

 

 

    

 

 

 

Total TDRs

   $ 40,801       $ 4,457       $ 45,258   
  

 

 

    

 

 

    

 

 

 

As of September 30, 2013 and 2012, 63% and 90%, respectively, of the Company’s TDRs that occurred during the nine months ended September 30, 2013 and 2012, were performing according to their modified terms. The Company allocated $336,000 and $3.9 million in reserves to borrowers whose loan terms have been modified during the nine months ended September 30, 2013 and 2012, respectively. For modifications occurring during the nine month period ended September 30, 2013 and 2012, the post-modification balances approximate the pre-modification balances.

During the first nine months of 2013, approximately $1.3 million TDRs defaulted on their restructured loan within the 12 month period following the loan modification. These defaults were construction and development 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. During the first nine months of 2012, approximately $9.9 million TDRs defaulted on their restructured loan within the 12 month period following the loan modification. These defaults consisted of $6.9 million in commercial real estate loans, $1.2 million in commercial loans, and $1.7 million in 1-4 family residential real estate loans.

 

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Table of Contents

Nonperforming Loans

Nonperforming loans include impaired loans not on accrual 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 September 30, 2013, and December 31, 2012:

 

     Nonaccrual      Loans Past
Due 90 Days
And Over Still
Accruing
 
     September 30,
2013
     December 31,
2012
     September 30,
2013
     December 31,
2012
 
     (in thousands)  

Commercial

   $ 3,084       $ 2,437       $ —         $ 36   

Commercial Real Estate:

           

Construction

     18,734         7,808         —           —     

Farmland

     9,187         10,030         —           —     

Nonfarm nonresidential

     40,394         46,036         —           —     

Residential Real Estate:

           

Multi-family

     7,647         1,516         —           —     

1-4 Family

     27,455         26,501         —           50   

Consumer

     71         135         —           —     

Agriculture

     332         54         —           —     

Other

     18         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 106,922       $ 94,517       $ —         $ 86   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents the aging of the recorded investment in past due loans as of September 30, 2013 and December 31, 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)  

September 30, 2013

        

Commercial

   $ 4,290       $ 174       $ —         $ 3,084       $ 7,548   

Commercial Real Estate:

              

Construction

     —           —           —           18,734         18,734   

Farmland

     289         97         —           9,187         9,573   

Nonfarm nonresidential

     771         5,968         —           40,394         47,133   

Residential Real Estate:

              

Multi-family

     1,185         —           —           7,647         8,832   

1-4 Family

     3,267         1,219         —           27,455         31,941   

Consumer

     198         35         —           71         304   

Agriculture

     18         89         —           332         439   

Other

     —           —           —           18         18   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 10,018       $ 7,582       $ —         $ 106,922       $ 124,522   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     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   

Nonfarm non residential

     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. Thereafter, we categorize loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. 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 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.

 

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Table of Contents

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 September 30, 2013, and December 31, 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)  

September 30, 2013

                 

Commercial

   $ 33,519       $ 8,203       $ 706       $ 9,100       $ 44       $ 51,572   

Commercial Real Estate:

                 

Construction

     17,072         11,404         2,248         21,270         —           51,994   

Farmland

     45,172         11,568         879         15,540         —           73,159   

Nonfarm nonresidential

     87,574         62,363         2,982         83,414         246         236,579   

Residential Real Estate:

                 

Multi-family

     15,230         15,397         —           15,425         —           46,052   

1-4 Family

     131,240         46,734         2,428         54,357         —           234,759   

Consumer

     13,845         1,079         6         779         —           15,709   

Agriculture

     20,853         2,125         —           691         —           23,669   

Other

     215         514         —           18         —           747   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 364,720       $ 159,387       $ 9,249       $ 200,594       $ 290       $ 734,240   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     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   

Nonfarm nonresidential

     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 – 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 typically obtain updated appraisals each year on the anniversary date of ownership unless a sale is imminent.

 

22


Table of Contents

The following table presents the major categories of OREO at the period-ends indicated:

 

     September 30,
2013
    December 31,
2012
 
     (in thousands)  

Commercial Real Estate:

    

Construction

   $ 20,546      $ 22,912   

Farmland

     545        618   

Other

     14,410        15,577   

Residential Real Estate:

    

Multi-family

     517        200   

1-4 Family

     6,436        5,518   
  

 

 

   

 

 

 
     42,454        44,825   

Valuation allowance

     (597     (1,154
  

 

 

   

 

 

 
   $ 41,857      $ 43,671   
  

 

 

   

 

 

 

 

     For the Three
Months Ended
September 30,
    For the Nine
Months Ended
September 30,
 
     2013     2012     2013     2012  
     (in thousands)     (in thousands)  

OREO Valuation Allowance Activity:

        

Beginning balance

   $ 747      $ 1,724      $ 1,154      $ 1,667   

Provision to allowance

     300        4,260        1,584        5,090   

Write-downs

     (450     (4,189     (2,141     (4,962
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 597      $ 1,795      $ 597      $ 1,795   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net activity relating to other real estate owned during the nine months ended September 30, 2013 and 2012 is as follows:

 

     2013     2012  
     (in thousands)  

OREO Activity

    

OREO as of January 1

   $ 43,671      $ 41,449   

Real estate acquired

     18,542        31,531   

Valuation adjustments for declining market values

     (1,584     (5,090

Improvements

     —          1   

Loss on sale

     (190     (1,481

Proceeds from sale of properties

     (18,582     (17,573
  

 

 

   

 

 

 

OREO as of September 30

   $ 41,857      $ 48,837   
  

 

 

   

 

 

 

Expenses related to other real estate owned include:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2013     2012      2013      2012  
     (in thousands)      (in thousands)  

Net loss (gain) on sales

   $ (169   $ 533       $ 190       $ 1,481   

Provision to allowance

     300        4,260         1,584         5,090   

Operating expense

     538        411         1,343         1,095   
  

 

 

   

 

 

    

 

 

    

 

 

 

Total

   $ 669      $ 5,204       $ 3,117       $ 7,666   
  

 

 

   

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Note 6 – Deposits

The following table shows deposits by category:

 

     September 30,
2013
     December 31,
2012
 
     (in thousands)  

Non-interest bearing

   $ 101,191       $ 114,310   

Interest checking

     71,851         87,234   

Money market

     77,292         63,715   

Savings

     37,622         39,227   

Certificates of deposit

     658,940         760,573   
  

 

 

    

 

 

 

Total

   $ 946,896       $ 1,065,059   
  

 

 

    

 

 

 

Time deposits of $100,000 or more were $279.3 million and $319.5 million at September 30, 2013 and December 31, 2012, respectively.

Scheduled maturities of total time deposits at September 30, 2013 are as follows (in thousands):

 

Year 1

   $ 378,763   

Year 2

     236,022   

Year 3

     25,836   

Year 4

     10,350   

Year 5

     7,930   

Thereafter

     39   
  

 

 

 
   $ 658,940   
  

 

 

 

Historically, the Bank used 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.

Note 7 – Advances from the Federal Home Loan Bank

Advances from the Federal Home Loan Bank were as follows:

 

     September 30,
2013
     December 31,
2012
 
     (in thousands)  

Monthly amortizing advances with fixed rates from 0.00% to 5.25% and maturities ranging from 2013 through 2033, averaging 3.13% for 2013

   $ 4,741       $ 5,604   
  

 

 

    

 

 

 

Each advance is payable per terms on agreement, with a prepayment penalty. The advances are collateralized by first mortgage loans. The borrowing capacity is based on the market value of the underlying pledged loans rather than the unpaid principal balance of the pledged loans. At September 30, 2013, our additional borrowing capacity with the FHLB was $16.4 million. 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 right to deny a funding request, at its discretion. Additionally, any new advances are limited to a one year maturity or less.

Note 8 – Fair Values Measurement

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 an entity has the ability to access as of the measurement date, or observable inputs.

 

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Table of Contents

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 entity’s 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.

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 the date of the appraisal of the collateral predates a likely change in market conditions. These deductions range from 10% for routine real estate collateral to 30% for real estate that is determined (1) to have a thin trading market or (2) to be for unique use. This is in addition to estimated discounts for cost to sell of ten percent.

We also apply discounts to the expected fair value of collateral for impaired loans where the likely resolution involves litigation of 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 management’s 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.

 

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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 fair value based on our internal evaluation of the property, review of the most recent appraisal, and discussions with the currently engaged appraiser. We typically 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 to 30% for real estate that is determined (1) to have a thin trading market or (2) to be for unique use. This is in addition to estimated discounts for cost to sell of ten percent.

Financial assets measured at fair value on a recurring basis at September 30, 2013 and December 31, 2012 are summarized below:

 

            Fair Value Measurements at September 30, 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

   $ 27,913       $ —         $ 27,913       $ —     

Agency mortgage-backed: residential

     84,573         —           84,573         —     

State and municipal

     57,147         —           57,147         —     

Corporate bonds

     23,565         —           23,565         —     

Other debt securities

     606         —           —           606   

Equity securities

     177         177         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 193,981       $ 177       $ 193,198       $ 606   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

            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.

 

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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 September 30, 2013 and 2012:

 

     State and Municipal
Securities
    Other Debt
Securities
 
     2013      2012     2013     2012  
     (in thousands)  

Balances of recurring Level 3 assets at January 1

   $ —         $ 1,173      $ 618      $ 606   

Total gain (loss) for the period:

         

Included in other comprehensive income (loss)

     —           —          (12     (11

Sales

     —           (1,173     —          —     
  

 

 

    

 

 

   

 

 

   

 

 

 

Balance of recurring Level 3 assets at September 30

   $ —         $ —        $ 606      $ 595   
  

 

 

    

 

 

   

 

 

   

 

 

 

Level 3 state and municipal securities valuations are supported by analysis prepared by an independent third party. Their approach to determining fair value involves using recently executed transactions for similar securities and market quotations for similar securities. As securities of this type are not rated by the rating agencies and trading volumes are thin, it was determined these were valued using Level 3 inputs. We sold our Level 3 municipal securities in the second quarter of 2012 and had no securities of this nature at September 30, 2013.

Our other debt security valuation is determined internally by calculating discounted cash flows using the security’s coupon rate of 6.5% and an estimated current market rate of 11.0% 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 September 30, 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

   $ 3,289       $ —         $ —         $ 3,289   

Commercial real estate:

           

Construction

     18,928         —           —           18,928   

Farmland

     5,412         —           —           5,412   

Other

     65,080         —           —           65,080   

Residential real estate:

           

Multi-family

     12,095         —           —           12,095   

1-4 Family

     26,127         —           —           26,127   

Consumer

     66         —           —           66   

Other

     515         —           —           515   

Other real estate owned, net:

           

Commercial real estate:

           

Construction

     20,257         —           —           20,257   

Farmland

     537         —           —           537   

Other

     14,208         —           —           14,208   

Residential real estate:

           

Multi-family

     509         —           —           509   

1-4 Family

     6,346         —           —           6,346   

 

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Table of Contents
            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   

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $136.3 million at September 30, 2013 with a valuation allowance of $4.8 million. This resulted in no additional provision for loan losses for the nine months ended September 30, 2013. At December 31, 2012, impaired loans had a carrying amount of $166.2 million, with a valuation allowance of $21.0 million.

Other real estate owned, which is measured at the lower of carrying or fair value less estimated costs to sell, had a net carrying amount of $41.9 million as of September 30, 2013, compared with $43.7 million at December 31, 2012. Fair value write-downs of $1.6 million were recorded on other real estate owned for the nine months ended September 30, 2013.

 

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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 September 30, 2013:

 

     Fair Value     

Valuation

Technique(s)

  

Unobservable Input(s)

  

Range (Weighted

Average)

     (in thousands)                 

Impaired loans – Commercial

   $ 3,289       Market value approach    Adjustment for receivables and inventory discounts    16% -32%(24%)

Impaired loans – Commercial real estate

   $ 89,420       Sales comparison approach    Adjustment for differences between the comparable sales    0% - 69%(20%)

Impaired loans – Residential real estate

   $ 38,222       Sales comparison approach    Adjustment for differences between the comparable sales    0% - 50%(15%)

Other real estate owned – Commercial real estate

   $ 35,002      

Sales comparison approach

Income approach

  

Adjustment for differences between the comparable sales

Discount or capitalization rate

  

3% - 51%(21%)

7% - 16%(11%)

Other real estate owned – Residential real estate

   $ 6,855       Sales comparison approach    Adjustment for differences between the comparable sales    4% - 34%(12%)

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

Income approach

  

Adjustment for differences between the comparable sales

Discount or capitalization rate

  

3% - 50%(18%)

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%)

 

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Table of Contents

Carrying amount and estimated fair values of financial instruments were as follows for the periods indicated:

 

            Fair Value Measurements at September 30, 2013 Using  
     Carrying
Amount
     Level 1      Level 2      Level 3      Total  
     (in thousands)  

Financial assets

           

Cash and cash equivalents

   $ 53,433       $ 44,674       $ 8,759       $ —            $ 53,433   

Securities available for sale

     193,981         177         193,198         606         193,981   

Federal Home Loan Bank stock

     10,072         N/A         N/A         N/A         N/A   

Mortgage loans held for sale

     123         —              123         —              123   

Loans, net

     702,486         —              —              719,094         719,094   

Accrued interest receivable

     3,964         —              1,198         2,766         3,964   

Financial liabilities

              

Deposits

   $ 946,896       $ 98,885       $ 848,738       $ —         $ 947,623   

Securities sold under agreements to repurchase

     3,722         —           3,722         —           3,722   

Federal Home Loan Bank advances

     4,741         —           4,743         —           4,743   

Subordinated capital notes

     6,075         —           —           5,789         5,789   

Junior subordinated debentures

     25,000         —           —           13,550         13,550   

Accrued interest payable

     2,375         —           1,037         1,338         2,375   

 

            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, not previously presented, used to estimate fair values 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. Non-interest 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.

 

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(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 Company’s FHLB advances are estimated using discounted cash flow analyses based on the current borrowing rates resulting in a Level 2 classification.

The fair values of the Company’s 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 9 – Income Taxes

Deferred tax assets and liabilities were due to the following as of:

 

     September 30,
2013
    December 31,
2012
 
     (in thousands)  

Deferred tax assets:

    

Net operating loss carry-forward

   $ 25,993      $ 15,051   

Allowance for loan losses

     11,114        19,838   

Other real estate owned write-down

     9,854        10,408   

Alternative minimum tax credit carry-forward

     692        692   

Net assets from acquisitions

     635        592   

Other than temporary impairment on securities

     374        374   

Net unrealized loss on securities available for sale

     968        —     

New market tax credit carry-forward

     208        208   

Amortization of non-compete agreements

     17        19   

Other

     981        936   
  

 

 

   

 

 

 
     50,836        48,118   
  

 

 

   

 

 

 

Deferred tax liabilities:

    

FHLB stock dividends

     1,276        1,276   

Fixed assets

     322        409   

Originated mortgage servicing rights

     81        98   

Net unrealized gain on securities available for sale

     —          1,858   

Other

     498        549   
  

 

 

   

 

 

 
     2,177        4,190   
  

 

 

   

 

 

 

Net deferred tax assets before valuation allowance

     48,659        43,928   
  

 

 

   

 

 

 

Valuation allowance

     (48,659     (43,928
  

 

 

   

 

 

 

Net deferred tax asset

   $ —        $ —     
  

 

 

   

 

 

 

 

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Table of Contents

Our estimate of the realizability of the deferred tax asset depends on our estimate of projected future levels of taxable income as all carryback ability was fully absorbed by our tax loss of approximately $40 million for 2011. In analyzing future taxable income levels, we considered all evidence currently available, both positive and negative. Based on our analysis, we continue to maintain a valuation allowance for all deferred tax assets as of September 30, 2013. Our deferred tax assets and the related valuation allowance are analyzed and adjusted on a quarterly basis.

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 nine months ended September 30, 2013 or the year ended December 31, 2012 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 Commonwealth of Kentucky. The Company is no longer subject to examination by taxing authorities for years before 2009.

Note 10 – 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 Company’s common stock upon the exercise of stock options or upon the grant of stock awards. As of September 30, 2013, the Company had granted 793,095 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 343,829 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 Company’s 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 Company’s 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 245,909 unvested shares, net of forfeitures and vesting, to non-employee directors. At September 30, 2013, 113,357 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 $391,000 and $338,000 of stock-based compensation during the first nine months of 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:

 

     Nine Months Ended      Twelve Months Ended  
     September 30, 2013      December 31, 2012  
     Shares     Weighted
Average
Grant
Price
     Shares     Weighted
Average
Grant
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         (27,362     13.04   

Forfeited

     (31,322     6.84         (13,207     15.22   
  

 

 

      

 

 

   

Outstanding, ending

     793,095      $ 1.57         153,316      $ 5.92   
  

 

 

      

 

 

   

 

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The following table summarizes unvested share activity as of and for the periods indicated for the Non-Employee Directors Stock Ownership Incentive Plan:

 

     Nine Months Ended
September 30, 2013
     Twelve Months Ended
December 31, 2012
 
     Shares     Weighted
Average
Grant
Price
     Shares     Weighted
Average
Grant
Price
 

Outstanding, beginning

     80,078      $ 1.77         3,538      $ 7.91   

Granted

     182,355        0.85         93,943        1.65   

Vested

     (16,524     2.02         (17,403     2.37   

Forfeited

     —          —           —          —     
  

 

 

      

 

 

   

Outstanding, ending

     245,909      $ 1.07         80,078      $ 1.77   
  

 

 

      

 

 

   

As of September 30, 2013, all stock options issued to non-employee directors had expired and none were exercised during their grant term. The Company’s stock-based incentive awards have exclusively been restricted stock grants since 2008.

The following table summarizes stock option activity:

 

     Nine Months Ended
September 30, 2013
     Twelve Months Ended
December 31, 2012
 
     Shares      Weighted
Average
Exercise
Price
     Shares     Weighted
Average
Exercise
Price
 

Outstanding, beginning

     —         $ —           29,530      $ 19.88   

Forfeited

     —           —           —          —     

Expired

     —           —           (29,530     19.88   
  

 

 

       

 

 

   

Outstanding, ending

     —         $ —                $ —     
  

 

 

       

 

 

   

No options were issued, outstanding, or exercised during the first nine months of 2013. The Company recorded no stock option compensation expense during the nine months ended September 30, 2013. No options were modified during the period. As of September 30, 2013, no stock options issued by the Company had been exercised, and all granted options had expired.

Unrecognized stock based compensation expense related to unvested shares for the remainder of 2013 and beyond is estimated as follows (in thousands):

 

October 2013 – December 2013

   $ 216   

2014

     522   

2015

     397   

2016

     240   

2017 & thereafter

     41   

 

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Note 11 – Earnings (Loss) per Share

The factors used in the basic and diluted earnings per share computations follow:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2013     2012     2013     2012  
     (in thousands, except share and per share data)  

Net income (loss)

   $ 298      $ (27,732   $ (1,080   $ (26,079

Less:

        

Preferred stock dividends

     437        437        1,311        1,312   

Accretion of Series A preferred stock discount

     45        44        135        134   

Earnings (loss) allocated to unvested shares

     (11     (501     (107     (345

Earnings (loss) allocated to Series C preferred

     (5     (763     (67     (750
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) allocated to common shareholders, basic and diluted

   $ (168   $ (26,949   $ (2,352   $ (26,430
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic

        

Weighted average common shares including unvested common shares outstanding

     12,702,627        12,303,217        12,569,514        12,219,035   

Less: Weighted average unvested common shares

     776,774        218,505        535,224        153,306   

Less: Weighted average Series C preferred

     332,894        332,894        332,894        332,894   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding

     11,592,959        11,751,818        11,701,396        11,732,835   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings (loss) per common share

   $ (0.01   $ (2.29   $ (0.20   $ (2.25
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

        

Add: Dilutive effects of assumed exercises of common and Preferred Series C stock warrants

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares and potential common shares

     11,592,959        11,751,818        11,701,396        11,732,835   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings (loss) per common share

   $ (0.01   $ (2.29   $ (0.20   $ (2.25
  

 

 

   

 

 

   

 

 

   

 

 

 

The Company had no outstanding stock options at September 30, 2013. A warrant for the purchase of 330,561 shares of the Company’s common stock at an exercise price of $15.88 was outstanding at September 30, 2013 and 2012 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 $11.50 per share were outstanding at September 30, 2013 and 2012, but were not included in the diluted EPS computation as inclusion would have been anti-dilutive.

Note 12 – 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 result in 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 required 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 without specific advance board authorization, 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.

 

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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, PBI Bank entered into a new consent order with the FDIC and KDFI. The new consent order requires the Bank to maintain a minimum Tier 1 leverage ratio of 9% and a minimum total risk based capital ratio of 12%. The Bank also agreed 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 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 following table shows the ratios 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:

 

                       September 30, 2013     December 31, 2012  
     Regulatory
Minimums
    Well-Capitalized
Minimums
    Minimum Capital
Ratios Under
Consent Order
    Porter
Bancorp
    PBI
Bank
    Porter
Bancorp
    PBI
Bank
 

Tier 1 Capital

     4.0     6.0     N/A        7.19     8.94     6.46     7.71

Total risk-based capital

     8.0        10.0        12.0     10.78        11.04        9.81        9.82   

Tier 1 leverage ratio

     4.0        5.0        9.0        5.15        6.40        4.50        5.37   

At September 30, 2013, PBI Bank’s Tier 1 leverage ratio was 6.40%, and its total risk-based capital ratio was 11.04%, both of which are below the minimum capital ratios required by the Consent Order. Failure to meet minimum capital requirements could result in additional discretionary actions by regulators that, if undertaken, could have a materially adverse effect on our financial condition.

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 year’s net income, as defined in the laws, combined with the retained net income of the preceding two years, less any dividends declared during those periods. 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 to Porter Bancorp for the foreseeable future.

Note 13 – 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. As disclosed previously, 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.

 

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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 reserve 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 Company’s executive leadership team’s 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 Company’s 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 Bank’s allowance for loan losses and OREO valuations at the time of Clinton’s investment. The Oversight Committee reported its conclusions to the Company’s Board of Directors in October 2011. While recognizing that opportunities for procedural improvements existed in the Bank’s 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 Company’s 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 Company’s disclosures were adequate in all material respects.

On January 30, 2012, CGI delivered a demand to inspect the Company’s records pursuant to the Kentucky Business Corporation Act. The Company provided records to CGI in accordance with Kentucky law.

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. SBAV LP v. Porter Bancorp, et. al., Civ. Action 1:13-CV-0372 (S.D.N.Y). 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. 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). We dispute the material factual allegations made in the complaint and intend to defend the plaintiff’s claims vigorously. We have not accrued liability related to this matter as we believe we have meritorious defenses.

Miller Health Systems Inc. Employee Stock Ownership Plan Regulatory Review. From 2007 until the first quarter of 2013, PBI Bank served as trustee for certain Employee Stock Ownership Plan (ESOP) purchase transactions. These transactions are subject to regular and routine reviews by the United States Department of Labor (DOL) for compliance with ERISA. Failure to fulfill our fiduciary duties under ERISA with respect to any such plan would subject us to certain financial risks such as claims for damages as well as fines and penalties assessable under ERISA.

In 2007, we served as Trustee in the Miller Health Systems, Inc. ESOP transaction. This transaction is under review by the United States Department of Labor (DOL) for compliance with ERISA. The DOL has alleged apparent violations of ERISA in this transaction. While there is no litigation at this time, the ultimate outcome of this matter could have a material adverse effect on our financial condition, results of operations or cash flows. We have not recorded accruals for this matter as we believe we fulfilled our fiduciary duties under ERISA and that liability is not probable nor can the amount be reasonably estimated.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This item analyzes our financial condition, change in financial condition and results of operations. It should be read in conjunction with the unaudited condensed consolidated financial statements and accompanying notes presented in Part I, Item 1 of this report.

Cautionary Note Regarding Forward-Looking Statements

This report contains statements about the future expectations, activities and events that constitute forward-looking statements. Forward-looking statements express our beliefs, assumptions and expectations of our future financial and operating performance and growth plans, taking into account information currently available to us. These statements are not statements of historical fact. The words “believe,” “may,” “should,” “anticipate,” “estimate,” “expect,” “intend,” “objective,” “seek,” “plan,” “strive” or similar words, or the negatives of these words, identify forward-looking statements.

Forward-looking statements involve risks and uncertainties that may cause our actual results to differ materially from the expectations of future results we expressed or implied in any forward-looking statements. These risks and uncertainties can be difficult to predict and may be out of our control. Factors that could contribute to differences in our results include, but are not limited to the following:

 

   

Our inability to increase our capital to the levels required by our agreements with bank regulators could have a material adverse effect on our business.

 

   

A significant percentage of our loan portfolio is comprised of non-owner occupied commercial real estate loans, real estate construction and development loans, and multi-family residential real estate loans, all of which carry a higher degree of risk.

 

   

We continue to hold and acquire a significant amount of OREO properties, which could increase operating expenses and result in future losses.

 

   

Our decisions regarding credit risk may not be accurate, and our allowance for loan losses may not be sufficient to cover actual losses.

 

   

Our ability to pay cash dividends on our common and preferred stock and pay interest on the junior subordinated debentures that relate to our trust preferred securities is currently restricted. Our inability to resume paying dividends and interest on these securities may adversely affect our common shareholders.

 

   

While we believe our provision for legal contingencies is adequate, the outcome of legal proceedings is difficult to predict and we may settle legal claims or be subject to judgments for amounts that exceed our estimates.

We also refer you to Part II, Item 1A – Risk Factors in this report and to the risks identified and the cautionary statements discussed in greater detail in our December 31, 2012 Annual Report on Form 10-K.

Forward-looking statements are not guarantees of performance or results. A forward-looking statement may include a statement of the assumptions or bases underlying the forward-looking statement. The Company believes it has chosen these assumptions or bases in good faith and they are reasonable. We caution you however, assumptions or bases almost always vary from actual results, and the differences between assumptions or bases and actual results can be material. The forward-looking statements included in this report speak only as of the date of the report. We have no duty, and do not intend to, update these statements unless applicable laws require us to do so.

Overview

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 traditional community bank with a wide range of commercial and personal banking products, with an online banking division which delivers competitive deposit products and services under the separate brand of Ascencia.

The Company reported net income of $298,000 and net loss of $1.1 million, respectively, for the three and nine months ended September 30, 2013, compared with net loss of $27.7 and 26.1 million, respectively, for the same periods of 2012. After deductions for dividends on preferred stock, accretion on preferred stock, and loss allocated to participating securities, net loss to common shareholders was $168,000 and $2.4 million, respectively, for the three and nine months ended September 30, 2013, compared with net loss to common shareholders of $26.9 million and $26.4 million for the three and nine months ended September 30, 2012.

 

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Basic and diluted loss per common share were ($0.01) and ($0.20) for the three and nine months ended September 30, 2013 compared with basic and diluted loss per common share of ($2.29) and ($2.25) for the three and nine months ended September 30, 2012.

The following significant developments occurred during the three and nine months ended September 30, 2013:

 

   

We have successfully reduced the size of our balance sheet in accordance with our capital plan. Average assets were $1.056 billion in the third quarter of 2013 compared with $1.105 billion in the second quarter of 2013 and $1.326 billion in the third quarter of 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.

 

   

Net interest margin decreased 20 basis points to 3.15% in the first nine months of 2013 compared with 3.35% in the first nine months of 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. Average loans decreased 24.0% to $811.4 million in the first nine months of 2013 compared with $1.1 billion in the first nine months of 2012. Net loans decreased 21.8% to $702.5 million at September 30, 2013, compared with $897.8 million at September 30, 2012.

 

   

Provision for loan losses expense declined to $250,000 for the third quarter of 2013, and to $700,000 for the nine months ended September 30, 2013, compared to $25.5 million and $33.3 million for the three and nine months ended September 30, 2012. The decrease was primarily attributable to the substantial reduction in the loan portfolio size, declining historical loss rates, a decline in loans migrating downward in risk grade classification, and more stable collateral values for collateral dependent loans. Net charge-offs were $6.1 million for the third quarter of 2013, and total net charge-offs for the nine months ended September 30, 2013 were $25.6 million compared with $23.1 million and $31.8 million for the three and nine months ended September 30, 2012.

 

   

We continued to execute on our strategy to reduce our commercial real estate and construction and development loans. Construction and development loans totaled $52.0 million, or 62% of total risk-based capital, at September 30, 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 $250.1 million, or 300% of total risk-based capital, at September 30, 2013 compared with $311.1 million, or 362% of total risk-based capital, at December 31, 2012.

 

   

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 the quarter. Deposits decreased 11.1% to $946.9 million compared with $1.1 billion at December 31, 2012. Certificate of deposit balances declined $101.6 million during the first nine months of 2013 to $658.9 million at September 30, 2013, from $760.6 million at December 31, 2012. Demand deposits decreased 11.5% during the first nine months of 2013 compared with December 31, 2012.

 

   

Non-performing loans increased $12.3 million to $106.9 million at September 30, 2013, compared with $94.6 million at December 31, 2012 and decreased $5.3 million from $112.3 million at June 30, 2013. The increase from the prior year end was primarily attributable to the placement of two significant borrowing relationships on nonaccrual during the first quarter of 2013. At December 31, 2012, one of these relationships was past due 30-59 days and totaled $23.5 million; the other was past due 60-89 days and totaled $12.7 million. The increase in non-performing loans was partially offset by net loan charge-offs in the first nine months of 2013 which totaled $25.6 million. The charge-offs resulted primarily from charging off specific reserves for loans deemed to be collateral dependent.

 

   

Loans past due 30-59 days decreased from $38.2 million at December 31, 2012 to $10.0 million at September 30, 2013 and loans past due 60-89 days decreased from $20.3 million at December 31, 2012 to $7.6 million at September 30, 2013. Total loans past due and nonaccrual loans decreased to $124.5 million at September 30, 2013 from $153.1 million at December 31, 2012 and increased from $123.8 million at June 30, 2013.

 

   

Foreclosed properties were $41.9 million at September 30, 2013, compared with $43.7 million at December 31, 2012, and $48.8 million at September 30, 2012. During the third quarter of 2013, the Company acquired $3.0 million and sold $7.9 million of other real estate owned (“OREO”). In addition, we recorded fair value write-downs of $300,000 during the third quarter reflecting declines in appraisal valuations and changes in pricing strategies. Our ratio of non-performing assets to total assets increased to 14.33% at September 30, 2013, compared with 11.89% at December 31, 2012, and 10.81% at September 30, 2012.

 

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Our net loss available to common shareholders of $168,000 for the third quarter of 2013 was much improved compared to our net loss available to common shareholders of $1.7 million in the second quarter of 2013. In connection with the recent rise in long-term interest rates, our stockholders’ equity was negatively impacted from June 30, 2013 to September 30, 2013 by an increase in the net unrealized loss in our available for sale securities portfolio from $1.1 million at June 30, 2013 to $2.8 million at September 30, 2013.

Regulatory Matters

Since June 2011, the Bank has operated under the terms of a Consent Order with the Federal Deposit Insurance Company (“FDIC”) and the Kentucky Department of Financial Institutions (“KDFI”). 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%. In September 2012, the Bank also agreed 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.

As of September 30, 2013, the Bank had not met the capital ratios required by the Consent Order. Our current Consent Order was included in our Current Reports on 8-K filed on September 25, 2012.

The Board of Directors and management continue to evaluate and implement strategies to meet the obligations of the Consent Order. These include:

 

   

Engaging a financial advisor to assist our Board in evaluating options to increase capital through the sale of common stock and to redeem the preferred stock we issued to the US Treasury in 2008 under its Capital Purchase Program.

 

   

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 Bank’s Chief Credit Officer, with responsibility for establishing and executing the credit quality policies and overseeing credit administration for the entire organization. Mr. Taylor was also named to succeed Maria L. Bouvette as CEO of Porter Bancorp, pending regulatory approval, following Ms. Bouvette’s retirement effective July 31, 2013. We have also augmented our staffing in the commercial lending area, now led by Joe C. Seiler.

 

   

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 which will lead to improved execution and cost savings.

 

   

Executing on our commitment to improve credit quality and reduce loan concentrations and balance sheet risk.

 

   

We have reduced our loan portfolio significantly from $1.3 billion at December 31, 2010 to $734.2 million at September 30, 2013.

 

   

We have reduced our construction and development loans to less than 75% of total risk-based capital at September 30, 2013, and are now in compliance with the Consent Order.

 

   

We continue to make progress in reducing our non-owner occupied commercial real estate loans, construction and development loans, and multi-family residential real estate loans as a group. These loans represented 300% of total risk-based capital at September 30, 2013, down from 362% at December 31, 2012. Our Consent Order calls for us to reduce this concentration to not more than 250% of total risk-based capital.

 

   

We have curtailed new construction and development lending and new non-owner occupied commercial real estate lending. Outstanding principal balances have also declined due to amortizing credits and pay-downs from borrowers who sell properties built for resale.

 

   

Executing on our commitment to sell OREO in order to reinvest in quality, income-producing assets.

 

   

Our acquisition of real estate assets through the loan remediation process slowed during the first nine months of 2013, as we acquired $18.5 million of OREO compared to $31.5 million during the first nine months of 2012. However, nonaccrual loans totaled $106.9 million at September 30, 2013 and we expect to resolve many of these loans by foreclosure which could result in further additions to our OREO portfolio.

 

   

We incurred OREO losses totaling $1.8 million during the first nine months of 2013, comprised of $190,000 in loss on sale and $1.6 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 through internal marketing and the use of brokers, auctions, technology sales platforms, and bulk sale strategies.

 

   

Commercial real estate represents 34% of the OREO portfolio at September 30, 2013 compared with 35% at December 31, 2012. 1-4 family residential properties represent 15% of the portfolio at September 30, 2013 compared with 12% at December 31, 2012.

 

   

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.

Application of Critical Accounting Policies

We continually review our accounting policies and financial information disclosures. A summary of our more significant accounting policies that require the use of estimates and judgments in preparing the financial statements was provided in “Application of Critical Accounting Policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operation in our Annual Report on Form 10-K for the calendar year ended December 31, 2012. Management has discussed the development, selection, and application of our critical accounting policies with our Audit Committee. During the first nine months of 2013, there were no material changes in the critical accounting policies and assumptions.

Results of Operations

The following table summarizes components of income and expense and the change in those components for the three months ended September 30, 2013, compared with the same period of 2012:

 

     For the Three Months
Ended September 30,
    Change from
Prior Period
 
     2013      2012     Amount     Percent  
     (dollars in thousands)  

Gross interest income

   $ 10,543       $ 13,987      $ (3,444     (24.6 )%

Gross interest expense

     2,694         3,855        (1,161     (30.1 )

Net interest income

     7,849         10,132        (2,283     (22.5

Provision for loan losses

     250         25,500        (25,250     (99.0

Non-interest income

     1,167         1,721        (554     (32.2

Non-interest expense

     8,468         14,150        (5,682     (40.2

Net income (loss) before taxes

     298         (27,797     28,095        (101.1

Income tax expense (benefit)

     —           (65     65        (100.0

Net income (loss)

     298         (27,732     28,030        (101.1

Net income for the three months ended September 30, 2013 totaled $298,000, compared with a net loss of $27.7 million for the comparable period of 2012. Provision for loan losses expense decreased $25.3 million in the third quarter of 2013 compared with the same period in 2012. This decrease in provision expense is primarily attributable to the substantial reduction in the loan portfolio size, declining historical loss rates, the lower pace of loans migrating downward in risk grade classification, and more stable collateral values for collateral dependent loans. We had net charge-offs of $6.1 million in the third quarter of 2013. Those charge-offs were primarily the result of charging-off specific reserves for loans deemed to be collateral dependent. Net interest income decreased $2.3 million from the 2012 third quarter due to a 9 basis point decline in net interest margin due to lower earning asset levels and lower average rates on earning assets. In addition, net interest income and net interest margin were adversely affected by $1.4 million and $1.1 million of interest lost on nonaccrual loans in the third quarters of 2013 and 2012, respectively.

 

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The following table summarizes components of income and expense and the change in those components for the nine months ended September 30, 2013, compared with the same period of 2012:

 

     For the Nine Months
Ended September 30,
    Change from
Prior Period
 
     2013     2012     Amount     Percent  
     (dollars in thousands)  

Gross interest income

   $ 32,969      $ 44,554      $ (11,585     (26.0 )%

Gross interest expense

     8,470        12,173        (3,703     (30.4 )

Net interest income

     24,499        32,381        (7,882     (24.3

Provision for loan losses

     700        33,250        (32,550     (97.9

Non-interest income

     4,962        8,184        (3,222     (39.4

Non-interest expense

     29,841        33,459        (3,618     (10.8

Net income (loss) before taxes

     (1,080     (26,144     25,064        (95.9

Income tax expense (benefit)

     —          (65     65        (100.0

Net income (loss)

     (1,080     (26,079     24,999        (95.9

Net loss for the nine months ended September 30, 2013 was $1.1 million, compared with net loss of $26.1 million for the comparable period of 2012. Provision for loan losses expense decreased $32.6 million in the first nine months of 2013 compared with the same period in 2012. This decrease in provision expense is primarily attributable to the substantial reduction in the loan portfolio size, declining historical loss rates, the lower pace of loans migrating downward in risk grade classification, and more stable collateral values for collateral dependent loans. We had net charge-offs of $25.6 million in the first nine months of 2013. Those charge-offs were primarily the result of charging-off specific reserves for loans deemed to be collateral dependent. Net interest income decreased $7.9 million from the first nine months of 2012 due to a 20 basis point decline in net interest margin, the result of lower earning asset levels and lower average rates on earning assets. In addition, net interest income and net interest margin were adversely affected by $4.3 million and $3.2 million of interest lost on nonaccrual loans in the first nine months of 2013 and 2012, respectively.

Net Interest Income – Our net interest income was $7.8 million for the three months ended September 30, 2013, a decrease of $2.3 million, or 22.5%, compared with $10.1 million for the same period in 2012. Net interest spread and margin were 3.03% and 3.14%, respectively, for the third quarter of 2013, compared with 3.09% and 3.23%, respectively, for the third quarter of 2012. Net average nonaccrual loans were $109.0 million and $86.9 million for the third quarters of 2013 and 2012, respectively. Net interest income was $24.5 million for the nine months ended September 30, 2013, a decrease of $7.9 million, or 24.3%, compared with $32.4 million for the same period of 2012. Net interest spread and margin were 3.02% and 3.15%, respectively, for the first nine months of 2013, compared with 3.19% and 3.35%, respectively, for the first nine months of 2012. Net average nonaccrual loans were $111.0 million and $90.3 million in the first nine months of 2013 and 2012, respectively.

Average loans receivable declined approximately $251.9 million for the quarter ended September 30, 2013 compared with the third quarter of 2012. This resulted in a decline in interest revenue of approximately $3.1 million for the quarter ended September 30, 2013 compared with the prior year period. Average loans receivable declined approximately $256.9 million for the nine months ended September 30, 2013 compared with the first nine months of 2012. This resulted in a decline in interest revenue of approximately $9.3 million for the nine months ended September 30, 2013 compared with the prior year period. The decline in loan volume is attributable to our efforts to reduce concentrations in our construction and development loan portfolio and our non-owner occupied commercial real estate loan portfolio, as well as soft loan demand in our markets.

Net interest margin decreased 9 basis points from our margin of 3.23% in the prior year third quarter. The yield on earning assets declined 24 basis points from the third quarter of 2012, compared with a 18 basis point decline in rates paid on interest-bearing liabilities. This resulted in a net $2.3 million reduction in net interest income. Net interest margin for the first nine months of 2013 decreased 20 basis points from our margin of 3.35% in the first nine months of 2012 due primarily to lower average loans outstanding for 2013 compared to 2012. The yield on earning assets declined 37 basis points from the first nine months of 2012, compared with a 20 basis point decline in rates paid on interest-bearing liabilities.

Net interest margin for the third quarter of 2013 decreased 10 basis points from our margin of 3.24% in the second quarter of 2013, due primarily to lower yield on loans and lower average loan receivables. Average loan receivables declined $50.8 million from the second quarter of 2013, due to our efforts to reduce concentrations in our construction and development loan portfolio and in our non-owner occupied commercial real estate loan portfolio, and increased charge-offs. Yield on loans was adversely affected by an increase in foregone interest on nonaccrual loans. Interest foregone on nonaccrual loans totaled $1.4 million in the third quarter of 2013, compared with $1.5 million in the second quarter of 2013, and $1.1 million in the third quarter of 2012. The decrease in yield on investment securities was the result of our reinvestment of scheduled principal and interest payment proceeds into lower-yielding securities. Yield on average earning assets for the third quarter of 2013 decreased 10 basis points from 4.31% in the second quarter of 2013, compared with a 2 basis points decrease in rates paid on interest-bearing liabilities from 1.20% in the second quarter of 2013.

 

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Average Balance Sheets

The following table presents the average balance sheets for the three month periods ended September 30, 2013 and 2012, along with the related calculations of tax-equivalent net interest income, net interest margin and net interest spread for the related periods.

 

     Three Months Ended September 30,  
     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:

              

Loan receivables (1)(2)

   $ 756,132      $ 9,265         4.86   $ 1,008,053      $ 12,797         5.05

Securities

              

Taxable

     153,412        900         2.33        161,384        823         2.03   

Tax-exempt (3)

     31,261        239         4.67        28,075        220         4.80   

FHLB stock

     10,072        107         4.21        10,072        106         4.19   

Other equity securities

     195                       1,359        14         4.10   

Federal funds sold and other

     55,766        32         0.23        52,921        27         0.20   
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-earning assets

     1,006,838        10,543         4.21     1,261,864        13,987         4.45
    

 

 

        

 

 

    

Less: Allowance for loan losses

     (36,419          (51,594     

Non-interest earning assets

     85,881             116,187        
  

 

 

        

 

 

      

Total assets

   $ 1,056,300           $ 1,326,457        
  

 

 

        

 

 

      

LIABILITIES AND STOCKHOLDERS’ EQUITY

              

Interest-bearing liabilities:

              

Certificates of deposit and other time deposits

   $ 675,726      $ 2,281         1.34   $ 899,118      $ 3,389         1.50

NOW and money market deposits

     149,856        136         0.36        146,913        141         0.38   

Savings accounts

     38,653        26         0.27        39,426        38         0.38   

Repurchase agreements

     3,249        1         0.12        2,260        2         0.35   

FHLB advances

     4,836        38         3.12        6,129        50         3.25   

Junior subordinated debentures

     31,287        212         2.69        32,199        235         2.90   
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing liabilities

     903,607        2,694         1.18     1,126,045        3,855         1.36
    

 

 

        

 

 

    

Non-interest-bearing liabilities:

              

Non-interest-bearing deposits

     101,266             111,123        

Other liabilities

     13,432             8,260        
  

 

 

        

 

 

      

Total liabilities

     1,018,305             1,245,428        

Stockholders’ equity

     37,995             81,029        
  

 

 

        

 

 

      

Total liabilities and stockholders’ equity

   $ 1,056,300           $ 1,326,457        
  

 

 

        

 

 

      

Net interest income

     $ 7,849           $ 10,132      
    

 

 

        

 

 

    

Net interest spread

          3.03          3.09
       

 

 

        

 

 

 

Net interest margin

          3.14          3.23
       

 

 

        

 

 

 

 

(1)

Includes loan fees in both interest income and the calculation of yield on loans.

(2)

Calculations include non-accruing loans averaging $109.0 and $86.9 million, respectively, in average loan amounts outstanding.

(3)

Taxable equivalent yields are calculated assuming a 35% federal income tax rate.

 

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Table of Contents

The following table presents the average balance sheets for the nine month periods ended September 30, 2013 and 2012, along with the related calculations of tax-equivalent net interest income, net interest margin and net interest spread for the related periods.

 

     Nine Months Ended September 30,  
     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:

              

Loan receivables (1)(2)

   $ 811,433      $ 29,252         4.82   $ 1,068,356      $ 40,998         5.13

Securities

              

Taxable

     148,194        2,585         2.33        145,514        2,432         2.23   

Tax-exempt (3)

     29,886        691         4.76        26,059        666         5.25   

FHLB stock

     10,072        320         4.25        10,072        327         4.34   

Other equity securities

     949        30         4.23        1,359        43         4.23   

Federal funds sold and other

     55,357        91         0.22        55,230        88         0.21   
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-earning assets

     1,055,891        32,969         4.22     1,306,590        44,554         4.59
    

 

 

        

 

 

    

Less: Allowance for loan losses

     (43,602          (52,674     

Non-interest earning assets

     91,669             113,402        
  

 

 

        

 

 

      

Total assets

   $ 1,103,958           $ 1,367,318        
  

 

 

        

 

 

      

LIABILITIES AND STOCKHOLDERS’ EQUITY

              

Interest-bearing liabilities:

              

Certificates of deposit and other time deposits

   $ 712,945      $ 7,218         1.35   $ 935,061      $ 10,678         1.53

NOW and money market deposits

     149,939        398         0.35        149,718        496         0.44   

Savings accounts

     40,038        91         0.30        38,567        120         0.42   

Repurchase agreements

     2,857        4         0.19        2,019        6         0.40   

FHLB advances

     5,127        122         3.18        6,523        161         3.30   

Junior subordinated debentures

     31,517        637         2.70        32,421        712         2.93   
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing liabilities

     942,423        8,470         1.20     1,164,309        12,173         1.40
    

 

 

        

 

 

    

Non-interest-bearing liabilities:

              

Non-interest-bearing deposits

     105,917             112,227        

Other liabilities

     11,438             7,565        
  

 

 

        

 

 

      

Total liabilities

     1,059,778             1,284,101        

Stockholders’ equity

     44,180             83,217        
  

 

 

        

 

 

      

Total liabilities and stockholders’ equity

   $ 1,103,958           $ 1,367,318        
  

 

 

        

 

 

      

Net interest income

     $ 24,499           $ 32,381      
    

 

 

        

 

 

    

Net interest spread

          3.02          3.19
       

 

 

        

 

 

 

Net interest margin

          3.15          3.35
       

 

 

        

 

 

 

 

(1)

Includes loan fees in both interest income and the calculation of yield on loans.

(2)

Calculations include non-accruing loans averaging $111.0 and $90.3 million, respectively, in average loan amounts outstanding.

(3)

Taxable equivalent yields are calculated assuming a 35% federal income tax rate.

 

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Table of Contents

Rate/Volume Analysis

The table below sets forth certain 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.

 

     Three Months Ended September 30,
2013 vs. 2012
    Nine Months Ended September 30,
2013 vs. 2012
 
     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

   $ (431   $ (3,101   $ (3,532   $ (2,364   $ (9,382   $ (11,746

Securities

     123        (27     96        59        119        178   

FHLB stock

     1        —          1        (7     —          (7

Other equity securities

     (8     (6     (14     —          (13     (13

Federal funds sold and other

     4        1        5        3        —          3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total increase (decrease) in interest income

     (311     (3,133     (3,444     (2,309     (9,276     (11,585
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest-bearing liabilities:

            

Certificates of deposit and other time deposits

     (328     (780     (1,108     (1,118     (2,342     (3,460

NOW and money market accounts

     (8     3        (5     (99     1        (98

Savings accounts

     (11     (1     (12     (34     5        (29

Federal funds purchased and repurchase agreements

     (2     1        (1     (4     2        (2

FHLB advances

     (2     (10     (12     (6     (33     (39

Junior subordinated debentures

     (16     (7     (23     (56     (19     (75
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total increase (decrease) in interest expense

     (367 )     (794     (1,161     (1,317     (2,386     (3,703
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Increase (decrease) in net interest income

   $ 56      $ (2,339   $ (2,283   $ (992   $ (6,890   $ (7,882
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-Interest Income – The following table presents the major categories of non-interest income for the three and nine months ended September 30, 2013:

 

     For the Three Months      For the Nine Months  
     Ended September 30,      Ended September 30,  
     2013      2012      2013      2012  
     (dollars in thousands)  

Service charges on deposit accounts

   $ 536       $ 563       $ 1,535       $ 1,673   

Income from fiduciary activities

     —           261         517         803   

Bank card interchange fees

     174         180         542         553   

Other real estate owned rental income

     54         180         396         242   

Gains on sales of investment securities, net

     24         —           727         3,530   

Income from bank owned life insurance

     75         79         459         238   

Other

     304         458         786         1,145   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-interest income

   $ 1,167       $ 1,721       $ 4,962       $ 8,184   
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-interest income for the third quarter ended September 30, 2013 decreased by $554,000, or 32.2%, compared with the third quarter of 2012. For the nine months ended September 30, 2013, non-interest income decreased by $3.2 million, or 39.4% to $5.0 million compared with $8.2 million for the same period of 2012.

 

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Table of Contents

The decrease in non-interest income between the three month comparative periods was primarily due to lower income from fiduciary activities as earlier in 2013 we transitioned away from providing trust services, including ESOP and employee benefit plan services, throughout our markets, as well as a decrease in other real estate owned rental income. The decrease in non-interest income between the nine month comparative periods was primarily due to a $2.8 million reduction in gains on sales of investment securities and lower income from fiduciary activities, partially offset by increased other real estate owned rental income and income from bank owned life insurance.

Non-interest ExpenseThe following table presents the major categories of non-interest expense for the three and nine months ended September 30, 2013:

 

     For the Three Months      For the Nine Months  
     Ended September 30,      Ended September 30,  
     2013      2012      2013      2012  
     (dollars in thousands)  

Salary and employee benefits

   $ 3,837       $ 4,264       $ 11,975       $ 12,558   

Occupancy and equipment

     884         971         2,728         2,826   

Other real estate owned expense

     669         5,204         3,117         7,666   

FDIC insurance

     578         559         1,867         2,264   

Loan collection expense

     531         792         3,973         1,738   

Professional fees

     503         776         1,408         1,699   

State franchise tax

     537         496         1,611         1,680   

Communications

     177         175         531         523   

Postage and delivery

     99         108         314         339   

Insurance expense

     171         98         482         296   

Other

     482         707         1,835         1,870   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-interest expense

   $ 8,468       $ 14,150       $ 29,841       $ 33,459   
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-interest expense for the third quarter ended September 30, 2013 decreased $5.7 million, or 40.2%, compared with the third quarter of 2012. For the nine months ended September 30, 2013, non-interest expense decreased $3.6 million, or 10.8% to $29.8 million compared with $33.5 million for the first nine months of 2012. The decrease in non-interest expense for the third quarter is primarily due to a decline in other real estate owned expense, which decreased from $5.2 million in 2012 to $669,000 in 2013, as well as smaller decreases in salary and employee benefits, loan collection expense, and professional fees. The decrease in non-interest expense for the nine months ended was also primarily due to a decrease in other real estate owned expense, which decreased by $4.5 million from 2012 to 2013. FDIC insurance and professional fee expenses also declined over the period, offset by an increase in loan collection expenses.

Income Tax ExpenseNo income taxes were recorded for the first nine months of 2013. The income tax effect on net loss before taxes for the nine months ended September 30, 2013, increased our deferred tax assets and related valuation allowance by $4.7 million. See Footnote 9, “Income Taxes.”

Effective tax rates differ from the federal statutory rate of 35% applied to income before income taxes due to the following:

 

     For the Three Months     For the Nine Months  
     Ended September 30,     Ended September 30,  
     2013     2012     2013     2012  
     (dollars in thousands)  

Federal statutory rate times financial statement income

   $ 104      $ (9,729 )   $ (378   $ (9,150 )

Effect of:

        

Valuation allowance

     (6     9,760        672        9,376   

Tax-exempt income

     (84     (78     (242     (237

Non-taxable life insurance income

     (20     (26     (72     (78

Other, net

     6        8        20        24   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ —        $ (65   $ —        $ (65
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Analysis of Financial Condition

Total assets decreased $124.5 million, or 10.7%, to $1.0 billion at September 30, 2013, from $1.2 billion at December 31, 2012. This decrease was primarily attributable to a decrease of $139.9 million in net loans, and was partially offset by increases of $3.9 million cash and cash equivalents and $15.5 million in securities. The decrease in net loans was due to loan payoffs outpacing loan funding and efforts to move impaired loans through the collection, foreclosure, and disposition process. The increase in cash and cash equivalents was due to cash inflows related to loan payments and maturities of securities.

Loans ReceivableLoans receivable decreased $164.9 million, or 18.3%, during the nine months ended September 30, 2013 to $734.2 million. Our commercial, commercial real estate and real estate construction portfolios decreased by an aggregate of $113.1 million, or 21.5%, during the nine months and comprised 56.2% of the total loan portfolio at September 30, 2013. The decline in loans receivable was attributable to net charge-offs of $25.6 million, transfers to OREO of $18.5 million, and loan payoffs outpacing loan funding by approximately $120.8 million.

Loan Portfolio CompositionThe 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. Except for commercial real estate and 1-4 family residential real estate, there is no concentration of loans in any industry exceeding 10% of total loans.

 

     As of September 30,
2013
    As of December 31,
2012
 
     Amount      Percent     Amount      Percent  
     (dollars in thousands)  

Commercial

   $ 51,572         7.04   $ 52,567         5.85

Commercial Real Estate

          

Construction

     51,994         7.08        70,284         7.82   

Farmland

     73,159         9.96        80,825         8.99   

Nonfarm nonresidential

     236,579         32.22        322,687         35.89   

Residential Real Estate

          

Multi-family

     46,052         6.27        50,986         5.67   

1-4 Family

     234,759         31.97        278,273         30.95   

Consumer

     15,709         2.14        20,383         2.27   

Agriculture

     23,669         3.22        22,317         2.48   

Other

     747         0.10        770         0.08   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total loans

   $ 734,240         100.00   $ 899,092         100.00
  

 

 

    

 

 

   

 

 

    

 

 

 

Loan Portfolio by Risk Category – The following table presents a summary of the loan portfolio at the dates indicated, by risk category.

 

     September 30,
2013
     June 30,
2013
     March 31,
2013
     December 31,
2012
 
     (in thousands)  

Pass

   $ 364,720       $ 376,735       $ 401,384       $ 437,886   

Watch

     159,387         160,965         161,392         177,419   

Special Mention

     9,249         18,760         27,767         34,700   

Substandard

     200,594         218,023         236,210         248,691   

Doubtful

     290         302         323         396   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 734,240       $ 774,785       $ 827,076       $ 899,092   
  

 

 

    

 

 

    

 

 

    

 

 

 

Our loans receivable have decreased $164.9 million, or 18.3%, during the nine months ended September 30, 2013. All loan risk categories have decreased since December 31, 2012. The pass category declined approximately $73.2 million, the watch category declined approximately $18.0 million, the special mention category declined approximately $25.5 million, and the substandard category declined approximately $48.1 million.

 

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Loan Delinquency – The following table presents a summary of loan delinquencies at the dates indicated.

 

     September 30,
2013
     June 30,
2013
     March 31,
2013
     December 31,
2012
 
     (in thousands)  

Past Due Loans:

           

30-59 Days

   $ 10,018       $ 8,600       $ 8,052       $ 38,219   

60-89 Days

     7,582         2,979         2,960         20,303   

90 Days and Over

     —           71         —           86   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Loans Past Due 30-90+ Days

     17,600         11,650         11,012         58,608   

Nonaccrual Loans

     106,922         112,185         120,943         94,517   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Past Due and Nonaccrual Loans

   $ 124,522       $ 123,835       $ 131,955       $ 153,125   
  

 

 

    

 

 

    

 

 

    

 

 

 

During the nine months ended September 30, 2013, loans past due 30-59 days decreased from $38.2 million at December 31, 2012 to $10.0 million at September 30, 2013. Loans past due 60-89 days decreased from $20.3 million at December 31, 2012 to $7.6 million at September 30, 2013. This represents a $40.9 million decrease from December 31, 2012 to September 30, 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. Total early stage delinquencies increased $5.9 million from $11.7 million at June 30, 2013 to $17.6 million at September 30, 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.

Non-Performing AssetsNon-performing assets consist of 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. The following table sets forth information with respect to non-performing assets as of September 30, 2013 and December 31, 2012.

 

     September 30,
2013
    December 31,
2012
 
     (dollars in thousands)  

Loans past due 90 days or more still on accrual

   $ —        $ 86   

Nonaccrual loans

     106,922        94,517   
  

 

 

   

 

 

 

Total non-performing loans

     106,922        94,603   

Real estate acquired through foreclosure

     41,857        43,671   

Other repossessed assets

     11        —     
  

 

 

   

 

 

 

Total non-performing assets

   $ 148,790      $ 138,274   
  

 

 

   

 

 

 

Non-performing loans to total loans

     14.56     10.52

Non-performing assets to total assets

     14.33     11.89

Allowance for non-performing loans

   $ 3,885      $ 13,250   

Allowance for non-performing loans to non-performing loans

     3.63     14.01

Nonperforming loans at September 30, 2013, were $106.9 million, or 14.56% of total loans, compared with $90.1 million, or 9.47% of total loans, at September 30, 2012, and $94.6 million, or 10.52% of total loans at December 31, 2012. The increase from December 31, 2012 to September 30, 2013 was primarily attributable to loans for two significant borrowing relationships, which together totaled $36.2 million, being placed on nonaccrual in the first quarter. At December 31, 2012, these relationships were past due 30-59 days and 60-89 days, respectively. The increase in nonaccrual loans was partially offset by net loan charge-offs in the first nine months of 2013 which totaled $25.6 million. These elevated charge-offs were primarily the result of charging off specific reserves for loans deemed to be collateral dependent, in accordance with regulatory guidance.

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 Company’s 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.

 

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At September 30, 2013, we had 99 restructured loans totaling $93.2 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 loans, 5 loans totaling approximately $4.5 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 include $2.8 million of commercial loans. At September 30, 2013, $44.0 million of our restructured loans were accruing and $49.3 million were on nonaccrual compared with $77.3 million and $40.5 million, respectively, at December 31, 2012. The reduction in accruing TDRs between periods was primarily attributable to migration to non-accrual status. New TDRs during the first nine months of 2013 totaled $3.5 million compared to $45.3 million during the first nine months of 2012.

The following table sets forth information with respect to TDRs, non-performing loans, real estate acquired through foreclosure, and other repossessed assets.

 

     September 30,
2013
    December 31,
2012
 
     (dollars in thousands)  

Total non-performing loans

   $ 106,922      $ 94,603   

TDRs on accrual

     43,968        77,344   
  

 

 

   

 

 

 

Total non-performing loans and TDRs on accrual

   $ 150,890      $ 171,947   

Real estate acquired through foreclosure

     41,857        43,671   

Other repossessed assets

     11        —     
  

 

 

   

 

 

 

Total non-performing assets and TDRs on accrual

   $ 192,758      $ 215,618   
  

 

 

   

 

 

 

Total non-performing loans and TDRs on accrual to total loans

     20.55     19.12

Total non-performing assets and TDRs on accrual to total assets

     18.57     18.55

We do not have a formal loan modification program. Rather, we work with individual borrowers 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 the borrower’s 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 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. Our restructured loans are all 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.

In accordance with current guidance, 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.

We consider any loan that is restructured for a borrower experiencing financial difficulties due to a borrower’s potential inability to pay in accordance with contractual terms 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 borrower’s loan to a market rate as the result of a market decline in rates.

See Footnote 4, “Loans,” to the financial statements for additional disclosure related to troubled debt restructuring.

 

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Table of Contents

Allowance for Loan LossesThe allowance for loan losses is based on management’s 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 management’s judgment, require consideration in estimating loan losses.

Management has established loan grading procedures that result in specific allowance allocations for any estimated inherent risk of loss. For loans not individually evaluated, a general allowance allocation is computed using factors developed over time based on actual loss experience. The specific and general allocations plus consideration of qualitative factors represent management’s best estimate of probable losses contained in the loan portfolio at the evaluation date. Although the allowance for loan losses is comprised of specific and general allocations, the entire allowance is available to absorb any credit losses.

An analysis of changes in the allowance for loan losses and selected ratios for the three and nine month periods ended September 30, 2013 and 2012, and for the year ended December 31, 2012 follows:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
    Year Ended
December 31,
2012
 
     2013     2012     2013     2012    
     (in thousands)  

Balance at beginning of period

   $ 37,559      $ 51,594      $ 56,680      $ 52,579      $ 52,579   

Provision for loan losses

     250        25,500        700        33,250        40,250   

Recoveries

     1,016        412        2,811        697        1,366   

Charge-offs

     (7,071     (23,487     (28,437     (32,507     (37,515
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 31,754      $ 54,019      $ 31,754      $ 54,019      $ 56,680   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan losses to period-end loans

     4.32     5.68     4.32     5.68     6.30

Net charge-offs to average loans

     0.80     2.29     3.16     2.98     3.50

Allowance for loan losses to non-performing loans

     29.70     59.94     29.70     59.94     59.91

Allowance for loan losses for loans individually evaluated for impairment

   $ 4,762      $ 14,555      $ 4,762      $ 14,555      $ 21,034   

Loans individually evaluated for impairment

     155,417        171,595        155,417        171,595        188,808   

Allowance for loan losses to loans individually evaluated for impairment

     3.06     8.48     3.06     8.48     11.14

Allowance for loan losses for loans collectively evaluated for impairment

   $ 26,992      $ 39,464      $ 26,992      $ 39,464      $ 35,646   

Loans collectively evaluated for impairment

     578,823        780,216        578,823        780,216        710,284   

Allowance for loan losses to loans collectively evaluated for impairment

     4.66     5.06     4.66     5.06     5.02

Our loan loss reserve, as a percentage of total loans at September 30, 2013, decreased to 4.32% from 5.68% at September 30, 2012, and from 6.30% at December 31, 2012. The change in our loan loss reserve as a percentage of total loans between periods is attributable to the fluctuation in historical loss experience, qualitative factors, fewer loans migrating downward in risk grade classifications, charge-off levels, and provision expense. Our allowance for loan losses to non-performing loans was 29.70% at September 30, 2013, compared with 59.91% at December 31, 2012, and 59.94% at September 30, 2012. Net charge-offs in the third quarter of 2013 totaled $6.1 million of which $3.7 million were the result of charging off the allowance for individually evaluated loans deemed to be collateral dependent during the quarter. This resulted in the decline in our allowance for loan losses for loans individually evaluated for impairment and our allowance for loan losses to non-performing loans to current levels.

The following table sets forth the net charge-offs (recoveries) for the periods indicated:

 

     Nine Months
Ended

September 30,
2013
    Year Ended
December 31,
2012
     Year Ended
December 31,
2011
 
     (in thousands)  

Commercial

   $ 909      $ 3,655       $ 4,128   

Commercial Real Estate

     17,892        21,531         25,094   

Residential Real Estate

     6,564        8,866         13,260   

Consumer

     397        1,005         983   

Agriculture

     (136     1,092         841   
  

 

 

   

 

 

    

 

 

 

Total Net Charge-offs

   $ 25,626      $ 36,149       $ 44,306   
  

 

 

   

 

 

    

 

 

 

 

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The majority of our nonperforming loans are secured by real estate collateral and the underlying collateral coverage for nonperforming loans supports the likelihood of collection of our principal. We have assessed these loans for collectability and considered, among other things, the borrower’s ability to repay, the value of the underlying collateral, and other market conditions to ensure the allowance for loan losses is adequate to absorb probable incurred losses. Our allowance for non-performing loans to non-performing loans was 3.63% at September 30, 2013 compared with 6.56% at June 30, 2013, 12.32% at September 30, 2012, and 14.01% at December 31, 2012. The decline in this ratio from December 31, 2012 to September 30, 2013 was primarily attributable to net charge-offs of $19.7 million related to specific reserves for loans deemed to be collateral dependent during the period.

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 September 30, 2013 and December 31, 2012.

 

     September 30, 2013     December 31, 2012  
     Commercial
Real Estate
    Residential
Real Estate
    Commercial
Real Estate
    Residential
Real Estate
 
     (in thousands)  

Unpaid principal balance

   $ 118,761      $ 54,394      $ 140,638      $ 60,109   

Prior charge-offs

     (19,324     (4,653     (14,716     (3,310
  

 

 

   

 

 

   

 

 

   

 

 

 

Recorded investment

     99,437        49,741        125,922        56,799   

Allocated allowance

     (3,267     (1,046     (16,046     (4,641
  

 

 

   

 

 

   

 

 

   

 

 

 

Recorded investment, less allocated allowance

   $ 96,170      $ 48,695      $ 109,876      $ 52,158   
  

 

 

   

 

 

   

 

 

   

 

 

 

Recorded investment, less allocated allowance/ Unpaid principal balance

     80.98     89.52     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 80.98% and 89.52% of the unpaid principal balance in the commercial real estate and residential real estate segments of the portfolio, respectively, at September 30, 2013.

The following table illustrates recent trends in loans collectively evaluated for impairment and the related allowance for loan losses by portfolio segment:

 

     September 30, 2013     June 30, 2013     March 31, 2013     December 31, 2012  
     Loans      Allowance      % of
Total
    Loans      Allowance      % to
Total
    Loans      Allowance      % to
Total
    Loans      Allowance      % to
Total
 

Commercial

   $ 46,346       $ 3,206         6.92   $ 44,631       $ 3,260         7.30   $ 44,264       $ 4,295         9.70   $ 47,271       $ 4,139         8.76

Commercial real estate

     262,295         13,681         5.22        271,735         13,425         4.94        312,535         16,031         5.13        347,874         18,722         5.38   

Residential real estate:

     231,070         9,147         3.96        242,142         9,619         3.97        252,660         10,245         4.05        272,460         11,594         4.26   

Consumer

     15,561         532         3.42        16,636         573         3.44        17,917         695         3.88        20,171         789         3.91   

Agriculture

     23,337         421         1.80        24,414         487         1.99        22,044         410         1.86        22,262         398         1.79   

Other

     214         5         2.34        189         5         2.65        184         2         1.09        246         4         1.63   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

   $ 578,823       $ 26,992         4.66   $ 599,747       $ 27,369         4.56   $ 649,604       $ 31,678         4.88   $ 710,284       $ 35,646         5.02
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Our allowance for loan losses for loans collectively evaluated for impairment declined to 4.66% at September 30, 2013 from 5.06% at September 30, 2012 and 5.02% at December 31, 2012. This decline was driven primarily by an improving loan risk category classification mix and volume as well as improving historical loss trends which are key factors for estimating general reserves. Other factors include the consideration of growth, composition and diversification of our loan portfolio, current delinquency levels, the results of recent regulatory communications and general economic conditions.

 

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Table of Contents

Provision for Loan Losses - Provision for loan losses was $250,000 for the third quarter of 2013 compared with $25.5 million for the third quarter of 2012. Provision for loan losses decreased $32.6 million to $700,000 for the first nine months of 2013 compared with $33.3 million for the first nine months of 2012. The decrease in the third quarter was primarily attributable to the $217.6 million reduction in the loan portfolio size, net loan charge-offs of $6.1 million compared with $23.1 million in the third quarter of 2012, the lower pace of loans migrating downward in risk grade classification, and more stable collateral values for collateral dependent loans. Net loan charge-offs for the first nine months of 2013 were $25.6 million, compared with $31.8 million for the first nine months of 2012. While all loan risk categories experienced reductions since December 31, 2012, the pass category declined approximately $73.2 million, the watch category declined approximately $18.0 million, the special mention category declined approximately $25.5 million, and the substandard category declined approximately $48.1 million. We consider the size and volume of our portfolio as well as the credit quality of our loan portfolio based upon risk category classification when determining the loan loss provision for each period and the allowance for loan losses at period end.

Foreclosed Properties – Foreclosed properties at September 30, 2013 were $41.9 million compared with $48.8 million at September 30, 2012 and $43.7 million at December 31, 2012. See Footnote 5, “Other Real Estate Owned,” to the financial statements. During the first nine months of 2013, we acquired $18.5 million of OREO properties, and sold properties totaling approximately $18.8 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, 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 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. We typically obtain updated appraisals on the anniversary date of ownership unless a sale is imminent.

Net loss on sales, write-downs, and operating expenses for OREO totaled $3.1 million for the nine months ended September 30, 2013, compared with $7.7 million for the same period of 2012. During the nine months ended September 30, 2013, fair value write-downs of $1.6 million were recorded to reflect declining values evidenced by new appraisals and our reduction of marketing prices in connection with our sales strategies compared with $5.1 million for the nine months ended September 30, 2012.

LiabilitiesTotal liabilities at September 30, 2013 were $1.0 billion compared with $1.1 billion at December 31, 2012, a decrease of $114.4 million, or 10.3%. This decrease was primarily attributable to a decrease in deposits of $118.2 million, or 11.1%, to $946.9 million at September 30, 2013 from $1.1 billion at December 31, 2012. Certificate of deposit balances declined $101.6 million during the first nine months of 2013 to $658.9 million at September 30, 2013 from $760.6 million at December 31, 2012. The decrease in deposits follows management’s strategy to match liability funding levels with lower loan balances.

Federal Home Loan Bank advances decreased by $863,000, or 15.4%, to $4.7 million at September 30, 2013, from $5.6 million at December 31, 2012. These advances are used from time to time to fund asset growth and manage interest rate risk in accordance with our asset/liability management strategies.

Deposits are our primary source of funds. The following table sets forth the average daily balances and weighted average rates paid for our deposits for the periods indicated:

 

     For the Nine Months     For the Year  
     Ended September 30,     Ended December 31,  
     2013     2012  
     Average
Balance
     Average
Rate
    Average
Balance
     Average
Rate
 
     (dollars in thousands)  

Demand

   $ 105,917         $ 113,325      

Interest checking

     82,293         0.25     89,820         0.37

Money market

     67,646         0.49        63,212         0.49   

Savings

     40,038         0.30        38,665         0.40   

Certificates of deposit

     712,945         1.35        912,061         1.52   
  

 

 

      

 

 

    

Total deposits

   $ 1,008,839         1.02   $ 1,217,083         1.20
  

 

 

      

 

 

    

 

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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 Nine Months     For the Year  
     Ended September 30,     Ended December 31,  
     2013     2012  
     Average      Average     Average      Average  
     Balance      Rate     Balance      Rate  
     (dollars in thousands)  

Less than $100,000

   $ 412,361         1.29   $ 478,502         1.40

$100,000 or more

     300,584         1.45     433,559         1.64
  

 

 

      

 

 

    

Total

   $ 712,945         1.35   $ 912,601         1.52
  

 

 

      

 

 

    

The following table shows at September 30, 2013 the amount of our time deposits of $100,000 or more by time remaining until maturity (in thousands):

 

Maturity Period

 

Three months or less

   $ 42,221   

Three months through six months

     38,244   

Six months through twelve months

     70,630   

Over twelve months

     128,207   
  

 

 

 

Total

   $ 279,302   
  

 

 

 

 

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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 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 we meet our cash flow needs at a reasonable cost. We maintain an investment and funds management policy, which identifies 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 regularly monitors and reviews our liquidity position.

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. Our investment portfolio totaled $194.0 million at September 30, 2013 and within that portfolio, $121.7 million of our securities currently have an unrealized loss of $5.6 million. Historically, we have utilized brokered and wholesale deposits to supplement our funding strategy. The Bank previously held $15.0 million in brokered deposits, which matured in the second quarter of 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.

Traditionally, we have borrowed from the FHLB to supplement our funding requirements. The advances are collateralized by first mortgage residential loans. The borrowing capacity is based on the market value of the underlying pledged loans. At September 30, 2013, our additional borrowing capacity with the FHLB was $16.4 million. Any new advances are limited to a one year maturity or less.

We also have federal funds borrowing lines from major correspondent banks totaling $5.0 million on a secured basis. 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, and our lenders could exercise their right to deny a funding request at their discretion. 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 use cash to pay dividends on common stock, if and when declared by the Board of Directors, and to service debt. The main sources of funding include dividends paid by PBI Bank 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 Bank’s 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 $2.8 million at September 30, 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 September 30, 2013, totaling $2.8 million, are needed for the ongoing cash operating expenses of the parent company which have been reduced and are expected to be approximately $1.1 million for 2013. We have elected to defer payments on our Series A preferred stock and on our trust preferred securities. Parent company liquidity could be improved if a capital raise was completed.

 

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Capital

In the fourth quarter of 2011, we began deferring the payment of regular quarterly cash dividends on our Series A Preferred Stock issued to the U.S. Treasury. At September 30, 2013, cumulative accrued and unpaid dividends on this stock totaled $3.7 million. We have deferred dividend payments for more than six quarters and 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.

In addition, effective with the fourth quarter of 2011, we began deferring interest payments on our junior subordinated notes which resulted in a deferral of distributions on our trust preferred securities. We have the option to defer interest payments from time-to-time for a period not to exceed 20 consecutive quarters. Thereafter, we must pay all deferred interest and resume quarterly interest payments or we will be in default. Future cash dividends on our common stock are subject to the prior payment of all deferred distributions on our trust preferred securities. At September 30, 2013, cumulative accrued and unpaid interest on our junior subordinated notes totaled $1.4 million.

Stockholders’ equity decreased $10.1 million to $37.1 million at September 30, 2013, compared with $47.2 million at December 31, 2012. The decrease was due to the current year net loss, further reduced by dividends declared (accrued and unpaid) on cumulative preferred stock and an increase in unrealized loss on available for sale securities.

Each of the federal bank regulatory agencies has established risk-based capital requirements for banking organizations. 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, Inc. and PBI Bank at the dates indicated:

 

                 Minimum Capital     September 30, 2013     December 31, 2012  
     Regulatory
Minimums
    Well-Capitalized
Minimums
    Ratios Under
Consent Order
    Porter
Bancorp
    PBI
Bank
    Porter
Bancorp
    PBI
Bank
 

Tier 1 Capital

     4.0     6.0     N/A        7.19     8.94     6.46     7.71

Total risk-based capital

     8.0        10.0        12.0     10.78        11.04        9.81        9.82   

Tier 1 leverage ratio

     4.0        5.0        9.0        5.15        6.40        4.50        5.37   

At September 30, 2013, PBI Bank’s Tier 1 leverage ratio was 6.40%, and its total risk-based capital ratio was 11.04%, both of which are below the minimum capital ratios required by the Consent Order. Failure to meet minimum capital requirements could result in additional discretionary actions by regulators that, if undertaken, could have a materially adverse effect on our financial condition.

 

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

The Company’s interest sensitivity profile was asset sensitive at September 30, 2013, and December 31, 2012. Given a 100 basis point increase in interest rates sustained for one year, base net interest income would increase by an estimated 0.74% at September 30, 2013, compared with an increase of 4.11% at December 31, 2012, and is within the risk tolerance parameters of our risk management policy. Given a 200 basis point increase in interest rates sustained for one year, base net interest income would increase by an estimated 1.67% at September 30, 2013, compared with an increase of 8.11% at December 31, 2012, and is within the risk tolerance parameters of our risk management policy.

The following table indicates the estimated impact on net interest income under various interest rate scenarios for the twelve months following September 30, 2013, as calculated using the static shock model approach:

 

     Change in Future
Net Interest Income
 
     Dollar
Change
     Percentage
Change
 
     (dollars in thousands)  

+ 200 basis points

   $ 462         1.67

+ 100 basis points

     206         0.74   

We did not run a model simulation for declining interest rates as of September 30, 2013, because the Federal Reserve effectively lowered the federal funds target rate between 0.00% to 0.25% in December 2008. Therefore, no significant further short-term rate reductions can occur.

Item 4. Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q for the quarter ended September 30, 2013, we carried out an evaluation, under the supervision and with the participation of our management, including our president and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934). Based on this evaluation, our president and chief financial officer concluded that, as of the end of the fiscal quarter covered by this report, these disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is: (a) recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and (b) accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure. Additionally, there was no change in our internal control over financial reporting during the fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, the internal control over financial reporting.

 

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings

In the normal course of operations, we are defendants in various legal proceedings. Except as described in Footnote 13, “Contingencies” in the Notes to our consolidated financial statement, in the opinion of management, there is no known legal proceeding pending which an adverse decision would be expected to result in a material adverse change in our business or consolidated financial position. See Footnote 13, “Contingencies” in the Notes to our consolidated financial statements for additional detail regarding ongoing legal proceedings.

Item 1A. Risk Factors

We refer you to the detailed cautionary statements and discussion of risks that affect our Company and its business in “Item 1A – Risk Factors” of our December 31, 2012 Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q for the quarter ended June 30, 2013. There have been no material changes from the risk factors previously discussed in those reports.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3. Default Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits

(a) Exhibits

The following exhibits are filed or furnished as part of this report:

 

Exhibit Number

  

Description of Exhibit

  31.1    Certification of Principal Executive Officer, pursuant to Rule 13a—14(a).
  31.2    Certification of Principal Financial Officer, pursuant to Rule 13a—14(a).
  32.1    Certification of Principal Executive Officer, pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  32.2    Certification of Principal Financial Officer, pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101    The following financial statements from the Company’s Quarterly Report on Form 10Q for the quarter ended September 30, 2013, formatted in XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income (Loss), (iv) Consolidated Statement of Changes in Stockholders’ Equity, (v) Consolidated Statements of Cash Flows, (vi) Notes to Consolidated Financial Statements.

 

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SIGNATURES

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

 

   

PORTER BANCORP, INC.

   

(Registrant)

November 13, 2013

   

By:

 

/s/ John T. Taylor

     

John T. Taylor

     

President

November 13, 2013

   

By:

 

/s/ Phillip W. Barnhouse

     

Phillip W. Barnhouse

     

Chief Financial Officer and Chief

     

Accounting Officer

 

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