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LIMESTONE BANCORP, INC. - Quarter Report: 2017 March (Form 10-Q)

pbib20170331_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 FORM 10-Q  

 

(Mark One)

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

 

For the Quarterly Period Ended March 31, 2017

 

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      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 No

 

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

 

Large accelerated filer

Accelerated filer     

Non-accelerated filer

   (Do not check if a smaller reporting company)

 
   

Smaller reporting company

   

Emerging growth company

    

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

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

 

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

 

4,655,920 Common Shares and 1,591,600 Non-Voting Common Shares, no par value, were outstanding at April 30, 2017.

 

1

 

 

INDEX

 

  

  

Page

PART I

FINANCIAL INFORMATION

  

ITEM 1.

FINANCIAL STATEMENTS

3

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

  

  

CONDITION AND RESULTS OF OPERATIONS

35

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

49

ITEM 4.

CONTROLS AND PROCEDURES

49

  

  

  

PART II

OTHER INFORMATION

  

ITEM 1.

LEGAL PROCEEDINGS

50

ITEM 1A.

RISK FACTORS

50

ITEM 2.

UNREGISTERED SALES ON EQUITY SECURITIES AND USE OF PROCEEDS

50

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

50

ITEM 4.

MINE SAFETY DISCLOSURES

50

ITEM 5.

OTHER INFORMATION

50

ITEM 6.

EXHIBITS

50

 

2

 

 

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 March 31, 2017 and December 31, 2016

Unaudited Consolidated Statements of Income for the three months ended March 31, 2017 and 2016

Unaudited Consolidated Statements of Comprehensive Income for the three months ended March 31, 2017 and 2016

Unaudited Consolidated Statement of Changes in Stockholders’ Equity for the three months ended March 31, 2017

Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016

Notes to Unaudited Consolidated Financial Statements

 

3

 

 

PORTER BANCORP, INC.

Unaudited Consolidated Balance Sheets

(dollars in thousands except share data)

 

   

March 31,

2017

   

December 31, 2016

 

Assets

               

Cash and due from banks

  $ 5,456     $ 9,449  

Interest bearing deposits in banks

    32,329       56,867  

Cash and cash equivalents

    37,785       66,316  

Securities available for sale

    156,001       152,790  

Securities held to maturity (fair value of $43,469 and $43,072, respectively)

    41,752       41,818  

Loans held for sale

           

Loans, net of allowance of $8,966 and $8,967, respectively

    655,217       630,269  

Premises and equipment

    17,687       17,848  

Other real estate owned

    6,571       6,821  

Federal Home Loan Bank stock

    7,323       7,323  

Bank owned life insurance

    14,935       14,838  

Accrued interest receivable and other assets

    5,083       7,154  

Total assets

  $ 942,354     $ 945,177  
                 

Liabilities and Stockholders’ Equity

               

Deposits

               

Non-interest bearing

  $ 127,049     $ 124,395  

Interest bearing

    733,654       725,530  

Total deposits

    860,703       849,925  

Federal Home Loan Bank advances

    17,313       22,458  

Accrued interest payable and other liabilities

    4,908       15,911  

Subordinated capital note

    2,925       3,150  

Junior subordinated debentures

    21,000       21,000  

Total liabilities

    906,849       912,444  

Stockholders’ equity

               

Preferred stock, no par

               

Series E - 6,198 issued and outstanding; Liquidation preference of $6.2 million

    1,644       1,644  

Series F - 4,304 issued and outstanding; Liquidation preference of $4.3 million

    1,127       1,127  

Total preferred stockholders’ equity

    2,771       2,771  

Common stock, no par, 86,000,000 shares authorized, 4,655,920 and 4,632,933 voting, and 34,380,437 non-voting shares authorized, 1,591,600 and 1,591,600 non-voting issued and outstanding, respectively

    125,729       125,729  

Additional paid-in capital

    24,151       24,097  

Retained deficit

    (111,881

)

    (113,561

)

Accumulated other comprehensive loss

    (5,265

)

    (6,303

)

Total common stockholders’ equity

    32,734       29,962  

Total stockholders' equity

    35,505       32,733  

Total liabilities and stockholders’ equity

  $ 942,354     $ 945,177  

 

 

See accompanying notes to unaudited consolidated financial statements.

 

4

 

 

PORTER BANCORP, INC.

Unaudited Consolidated Statements of Income

(dollars in thousands, except per share data)

 

 

   

Three Months Ended

March 31,

 
   

2017

   

2016

 

Interest income

               

Loans, including fees

  $ 7,829     $ 7,882  

Taxable securities

    1,114       989  

Tax exempt securities

    145       164  

Federal funds sold and other

    137       150  
      9,225       9,185  

Interest expense

               

Deposits

    1,244       1,308  

Federal Home Loan Bank advances

    31       19  

Subordinated capital note

    34       39  

Junior subordinated debentures

    175       168  
      1,484       1,534  

Net interest income

    7,741       7,651  

Negative provision for loan losses

          (550 )

Net interest income after negative provision for loan losses

    7,741       8,201  
                 

Non-interest income

               

Service charges on deposit accounts

    501       429  

Bank card interchange fees

    213       202  

Income from bank owned life insurance

    102       96  

Other real estate owned rental income

          256  

Net gain on sales and calls of investment securities

          203  

Other

    252       205  
      1,068       1,391  

Non-interest expense

               

Salaries and employee benefits

    3,947       3,822  

Occupancy and equipment

    821       854  

Professional fees

    303       385  

FDIC insurance

    342       523  

Data processing expense

    292       297  

State franchise and deposit tax

    225       255  

Other real estate owned expense

    (16

)

    668  

Litigation and loan collection expense

    3       82  

Other

    1,212       1,205  
      7,129       8,091  

Income before income taxes

    1,680       1,501  

Income tax expense

          21  

Net income

    1,680       1,480  

Less:

               

Earnings allocated to participating securities

    44       51  

Net income available to common shareholders

  $ 1,636     $ 1,429  

Basic and diluted income per common share

  $ 0.27     $ 0.27  

 

 

See accompanying notes to unaudited consolidated financial statements.

 

5

 

 

PORTER BANCORP, INC.

Unaudited Consolidated Statements of Comprehensive Income

(in thousands)

                                              

 

   

Three Months Ended

March 31,

 
   

2017

   

2016

 

Net income

  $ 1,680     $ 1,480  

Other comprehensive income (loss):

               

Unrealized gain (loss) on securities:

               

Unrealized gain arising during the period

    1,005       1,209  

Amortization during period of net unrealized loss transferred to held to maturity

    33       32  

Reclassification adjustment for gains included in net income

          (203

)

Net unrealized gain recognized in comprehensive income

    1,038       1,038  

Tax effect

           

Other comprehensive income

    1,038       1,038  
                 

Comprehensive income

  $ 2,718     $ 2,518  

 

 

See accompanying notes to unaudited consolidated financial statements.

 

6

 

 

 

 

PORTER BANCORP, INC.

Unaudited Consolidated Statements of Changes in Stockholders’ Equity

For Three Months Ended March 31, 2017

(Dollar amounts in thousands except share and per share data)

 

    Shares     Amount          
    Common     Preferred             Preferred     Common          
    Common    

Non-Voting

Common

   

Total

Common

    Series E     Series F     Common and Non-Voting Common     Series E     Series F    

Additional

Paid-In

Capital

   

Retained

Deficit

   

Accumulated

Other

Compre-

hensive

Income

(Loss)

    Total  

Balances, January 1, 2017

    4,632,933       1,591,600       6,224,533       6,198       4,304     $ 125,729     $ 1,644     $ 1,127     $ 24,097     $ (113,561

)

  $ (6,303

)

  $ 32,733  

Issuance of unvested stock

    22,787             22,787                                                        

Forfeited unvested stock

                                                                       

Reverse stock split roundup shares

    200             200                                                        

Stock-based compensation expense

                                                    54                   54  

Net income

                                                          1,680             1,680  

Net change

    in accumulated other comprehensive income, net of taxes

                                                                1,038       1,038  

Balances, March 31, 2017

    4,655,920       1,591,600       6,247,520       6,198       4,304     $ 125,729     $ 1,644     $ 1,127     $ 24,151     $ (111,881

)

  $ (5,265

)

  $ 35,505  

 

 

See accompanying notes to unaudited consolidated financial statements.

 

7

 

 

PORTER BANCORP, INC.

Unaudited Consolidated Statements of Cash Flows

For Three Months Ended March 31, 2017 and 2016

(dollars in thousands)

 

   

2017

   

2016

 

Cash flows from operating activities

               

Net income

  $ 1,680     $ 1,480  

Adjustments to reconcile net loss to net cash from operating activities

               

Depreciation and amortization

    374       386  

Negative provision for loan losses

          (550

)

Net amortization on securities

    312       309  

Stock-based compensation expense

    54       73  

Net gain on sales of loans held for sale

          (17

)

Loans originated for sale

          (1,056

)

Proceeds from sales of loans held for sale

          1,146  

Net gain on sales of other real estate owned

    (38

)

    (55

)

Net write-down of other real estate owned

          500  

Net realized gain on sales and calls of investment securities

          (203

)

Earnings on bank owned life insurance, net of premium expense

    (97

)

    (90

)

Net change in accrued interest receivable and other assets

    1,973       (617

)

Net change in accrued interest payable and other liabilities

    (11,003

)

    (396

)

Net cash from operating activities

    (6,745

)

    910  
                 

Cash flows from investing activities

               

Purchases of available for sale securities

    (7,670

)

    (4,114

)

Sales and calls of available for sale securities

          3,486  

Maturities and prepayments of available for sale securities

    5,251       5,077  

Proceeds from sale of other real estate owned

    388       1,349  

Loan originations and payments, net

    (25,096

)

    (1,802

)

Purchases of premises and equipment, net

    (67

)

    (177

)

Purchase of bank owned life insurance

          (5,000

)

Net cash from investing activities

    (27,194

)

    (1,181

)

                 

Cash flows from financing activities

               

Net change in deposits

    10,778       (12,384

)

Repayment of Federal Home Loan Bank advances

    (15,145

)

    (149

)

Advances from Federal Home Loan Bank

    10,000        

Repayment of subordinated capital note

    (225

)

    (225

)

Net cash from financing activities

    5,408       (12,758

)

Net change in cash and cash equivalents

    (28,531

)

    (13,029

)

Beginning cash and cash equivalents

    66,316       93,335  

Ending cash and cash equivalents

  $ 37,785     $ 80,306  
                 

Supplemental cash flow information:

               

Interest paid

  $ 1,316     $ 4,205  

Income taxes paid (refunded)

          21  

Supplemental non-cash disclosure:

               

Transfer from loans to other real estate

  $ 100     $ 441  

 

 

See accompanying notes to unaudited consolidated financial statements.

 

8

 

 

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) 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 the three months ended March 31, 2017 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, 2016 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.

 

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.

 

New Accounting Standards In August 2015, FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606). This ASU is an update to ASU 2014-09, and delays the effective date of ASU 2014-09. The ASU provides guidance on revenue recognition for entities that enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of nonfinancial assets. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additional disclosures are required to provide quantitative and qualitative information regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new guidance is effective for annual reporting periods, and interim reporting periods within those annual periods, beginning after December 15, 2017. Early adoption is not permitted. Based on types of products we offer, a significant portion of the Company's revenue is scoped out of the standard. Therefore, adoption of this new guidance will not have a material impact on the consolidated financial statements.

 

In January 2016, the FASB issued an update ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this update impact public business entities as follows: 1) Require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. 2) Simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value. 3) Eliminate the requirement to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. 4) Require entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. 5) Require an entity to present separately in other comprehensive income the portion of the total change in fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. 6) Require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements. 7) Clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity's other deferred tax assets. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. The impact of adopting the new guidance on the consolidated financial statements is not expected to have a material impact.

 

In February 2016, the FASB issued an update ASU No. 2016-02, Leases (Topic 842). Under the new guidance, lessees will be required to recognize the following for all leases, with the exception of short-term leases, at the commencement date: a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting in largely unchanged. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2018. The impact of adopting the new guidance on the consolidated financial statements will not have a material impact.

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The final standard will change estimates for credit losses related to financial assets measured at amortized cost such as loans, held-to-maturity debt securities, and certain other contracts. For estimating credit losses, the FASB is replacing the incurred loss model with an expected loss model, which is referred to as the current expected credit loss (CECL) model. The largest impact will be on the allowance for loan and lease losses and held-to-maturity securities. The standard is effective for public companies for fiscal years beginning after December 15, 2019. We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements and assessing our data and systems needs.

 

In March 2017, the FASB issued ASU No. 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization of Purchased Callable Debt Securities. The final standard will shorten the amortization period for premiums on callable debt securities by requiring that premiums be amortized to the first (or earliest) call date instead of as an adjustment to the yield over the contractual life. The standard is effective for public companies for fiscal years beginning after December 15, 2018. We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements.

 

9

 

Note 2 – Securities

 

Securities are classified into available-for-sale (AFS) and held-to-maturity (HTM) categories. AFS securities are those that may be sold if needed for liquidity, asset liability management, or other reasons. AFS securities are reported at fair value, with unrealized gains or losses included as a separate component of equity, net of tax. HTM securities are those that we have the intent and ability to hold to maturity and are reported at amortized cost.

 

The amortized cost and fair value of 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)

 

March 31, 2017

                               

Available for sale

                               

U.S. Government and federal agency

  $ 33,434     $ 94     $ (489

)

  $ 33,039  

Agency mortgage-backed: residential

    99,251       701       (1,035

)

    98,917  

Collateralized loan obligations

    18,868       13             18,881  

State and municipal

    2,028       19       (2

)

    2,045  

Corporate bonds

    3,072       47             3,119  

Total available for sale

  $ 156,653     $ 874     $ (1,526

)

  $ 156,001  

 

   

Amortized

Cost

   

Gross

Unrecognized

Gains

   

Gross

Unrecognized

Losses

   

Fair Value

 

Held to maturity

                               

State and municipal

  $ 41,752     $ 1,719     $ (2

)

  $ 43,469  

Total held to maturity

  $ 41,752     $ 1,719     $ (2

)

  $ 43,469  

 

December 31, 2016

 

Amortized

Cost

   

Gross

Unrealized

Gains

   

Gross

Unrealized

Losses

   

Fair Value

 

Available for sale

                               

U.S. Government and federal agency

  $ 34,757     $ 50     $ (708

)

  $ 34,099  

Agency mortgage-backed: residential

    103,390       455       (1,492

)

    102,353  

Collateralized loan obligations

    11,203                   11,203  

State and municipal

    2,028       25       (8

)

    2,045  

Corporate bonds

    3,069       24       (3

)

    3,090  

Total available for sale

  $ 154,447     $ 554     $ (2,211

)

  $ 152,790  

 

   

Amortized

Cost

   

Gross

Unrecognized

Gains

   

Gross

Unrecognized

Losses

   

Fair Value

 

Held to maturity

                               

State and municipal

  $ 41,818     $ 1,272     $ (18

)

  $ 43,072  

Total held to maturity

  $ 41,818     $ 1,272     $ (18

)

  $ 43,072  

 

Sales and calls of securities were as follows:

 

   

Three Months Ended

March 31,

 
   

2017

   

2016

 
   

(in thousands)

 
                 

Proceeds

  $     $ 3,486  

Gross gains

          203  

Gross losses

           

 

10

 

 

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.

 

   

March 31, 2017

 
   

Amortized

Cost

   

Fair

Value

 
   

(in thousands)

 

Maturity

               

Available for sale

               

Within one year

  $ 4,899     $ 4,926  

One to five years

    7,780       7,831  

Five to ten years

    30,943       30,540  

Beyond ten years

    13,780       13,787  

Agency mortgage-backed: residential

    99,251       98,917  

Total

  $ 156,653     $ 156,001  
                 

Held to maturity

               

Within one year

    645       647  

One to five years

  $ 24,177     $ 25,034  

Five to ten years

    16,930       17,788  

Total

  $ 41,752     $ 43,469  

 

                                                                                                

Securities pledged at March 31, 2017 and December 31, 2016 had carrying values of approximately $60.6 million and $61.2 million, respectively, and were pledged to secure public deposits.

 

At March 31, 2017 and December 31, 2016, we held securities issued by the Commonwealth of Kentucky or Kentucky municipalities having a book value of $16.4 million at each period end. Additionally, at March 31, 2017 and December 31, 2016, we held securities issued by the State of Texas or Texas municipalities having a book value of $4.3 million at each period end. At March 31, 2017 and December 31, 2016, there were no other holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders’ equity.

 

11

 

 

The Company evaluates securities for other than temporary impairment (OTTI) on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition, credit quality, and near-term prospects 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. As of March 31, 2017, management does not believe securities within our portfolio with unrealized losses should be classified as other than temporarily impaired.

 

Securities with unrealized losses at March 31, 2017 and December 31, 2016, 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)

 

March 31, 2017

                                               

Available for sale

                                               

U.S. Government and federal Agency

  $ 24,796     $ (489

)

  $     $     $ 24,796     $ (489

)

Agency mortgage-backed: residential

    40,580       (975

)

    3,908       (60

)

    44,488       (1,035

)

State and municipal

    470       (2

)

                470       (2

)

Total temporarily impaired

  $ 65,846     $ (1,466

)

  $ 3,908     $ (60

)

  $ 69,754     $ (1,526

)

                                                 

Held to maturity

                                               

State and municipal

  $ 558     $ (2

)

  $     $     $ 558     $ (2

)

Total

  $ 558     $ (2

)

  $     $     $ 558     $ (2

)

                                                 
                                                 

December 31, 2016

                                               

Available for sale

                                               

U.S. Government and federal agency

  $ 27,738     $ (708

)

  $     $     $ 27,738     $ (708

)

Agency mortgage-backed: residential

    63,460       (1,449

)

    2,745       (43

)

    66,205       (1,492

)

State and municipal

    465       (8

)

                465       (8

)

Corporate bonds

                1,566       (3

)

    1,566       (3

)

Total temporarily impaired

  $ 91,663     $ (2,165

)

  $ 4,311     $ (46

)

  $ 95,974     $ (2,211

)

                                                 

Held to maturity

                                               

State and municipal

  $ 1,540     $ (18

)

  $     $     $ 1,540     $ (18

)

Total

  $ 1,540     $ (18

)

  $     $     $ 1,540     $ (18

)

 

12

 

 

Note 3 – Loans

 

Loans net of unearned income, deferred loan origination costs, and net premiums on acquired loans by class were as follows:

 

 

 

March 31,

   

December 31,

 
   

2017

   

2016

 
   

(in thousands)

 

Commercial

  $ 104,850     $ 97,761  

Commercial Real Estate:

               

Construction

    41,424       36,330  

Farmland

    83,252       71,507  

Nonfarm nonresidential

    151,921       149,546  

Residential Real Estate:

               

Multi-family

    49,350       48,197  

1-4 Family

    185,866       188,092  

Consumer

    9,542       9,818  

Agriculture

    37,515       37,508  

Other

    463       477  

Subtotal

    664,183       639,236  

Less: Allowance for loan losses

    (8,966

)

    (8,967

)

Loans, net

  $ 655,217     $ 630,269  

 

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2017 and 2016:

 

 

   

Commercial

   

Commercial

Real Estate

   

Residential

Real Estate

   

Consumer

   

Agriculture

   

Other

   

Total

 
   

(in thousands)

 

March 31, 2017:

                                                       

Beginning balance

  $ 475     $ 4,894     $ 3,426     $ 8     $ 162     $ 2     $ 8,967  

Provision (negative provision)

    334       (866

)

    394       4       138       (4

)

     

Loans charged off

          (27

)

    (294

)

    (5

)

                (326

)

Recoveries

    5       241       43       25       7       4       325  

Ending balance

  $ 814     $ 4,242     $ 3,569     $ 32     $ 307     $ 2     $ 8,966  
                                                         
                                                         

March 31, 2016:

                                                       

Beginning balance

  $ 818     $ 6,993     $ 3,984     $ 122     $ 122     $ 2     $ 12,041  

Provision (negative provision)

    (199

)

    (375

)

    129       (33

)

    (65

)

    (7

)

    (550

)

Loans charged off

    (12

)

    (118

)

    (595

)

    (13

)

          (11

)

    (749

)

Recoveries

    35       263       165       39       79       17       598  

Ending balance

  $ 642     $ 6,763     $ 3,683     $ 115     $ 136     $ 1     $ 11,340  

 

13

 

 

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method as of March 31, 2017:

 

   

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

  $ 13     $ 33     $ 285     $     $ 1     $     $ 332  

Collectively evaluated for impairment

    801       4,209       3,284       32       306       2       8,634  

Total ending allowance balance

  $ 814     $ 4,242     $ 3,569     $ 32     $ 307     $ 2     $ 8,966  
                                                         

Loans:

                                                       

Loans individually evaluated for impairment

  $ 593     $ 4,837     $ 4,394     $ 7     $ 60     $     $ 9,891  

Loans collectively evaluated for impairment

    104,257       271,760       230,822       9,535       37,455       463       654,292  

Total ending loans balance

  $ 104,850     $ 276,597     $ 235,216     $ 9,542     $ 37,515     $ 463     $ 664,183  

 

 

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, 2016:

 

 

   

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

  $ 13     $ 35     $ 350     $     $ 1     $     $ 399  

Collectively evaluated for impairment

    462       4,859       3,076       8       161       2       8,568  

Total ending allowance balance

  $ 475     $ 4,894     $ 3,426     $ 8     $ 162     $ 2     $ 8,967  
                                                         
                                                         

Loans:

                                                       

Loans individually evaluated for impairment

  $ 595     $ 5,854     $ 8,621     $ 1     $ 60     $     $ 15,131  

Loans collectively evaluated for impairment

    97,166       251,529       227,668       9,817       37,448       477       624,105  

Total ending loans balance

  $ 97,761     $ 257,383     $ 236,289     $ 9,818     $ 37,508     $ 477     $ 639,236  

 

14

 

 

Impaired Loans

 

Impaired loans include restructured loans and loans on nonaccrual or classified as doubtful, whereby collection of the total amount is improbable, or loss, whereby all or a portion of the loan has been written off or a specific allowance for loss has been provided.

 

The following tables present information related to loans individually evaluated for impairment by class of loans as of March 31, 2017 and December 31, 2016 and for the three months ended March 31, 2017 and 2016:

 

   

As of March 31, 2017

   

Three Months Ended March 31, 2017

 
   

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

  $ 704     $ 493     $     $ 494     $     $  

Commercial real estate:

                                               

Construction

                                   

Farmland

    4,421       2,786             3,264       206       206  

Nonfarm nonresidential

    1,868       1,165             1,192       32       30  

Residential real estate:

                                               

Multi-family

                      2,050              

1-4 Family

    4,664       2,968             2,938       8       8  

Consumer

    47       7             4              

Agriculture

                                   

Other

                                   

Subtotal

    11,704       7,419             9,942       246       244  
                                                 

With An Allowance Recorded:

                                               

Commercial

    100       100       13       100       2        

Commercial real estate:

                                               

Construction

                                   

Farmland

    610       586       5       588              

Nonfarm nonresidential

    300       300       28       301       4        

Residential real estate:

                                               

Multi-family

                                   

1-4 Family

    1,426       1,426       285       1,519       17        

Consumer

                                   

Agriculture

    78       60       1       60              

Other

                                   

Subtotal

    2,514       2,472       332       2,568       23        

Total

  $ 14,218     $ 9,891     $ 332     $ 12,510     $ 269     $ 244  

 

15

 

 

   

As of December 31, 2016

   

Three Months Ended March 31, 2016

 
   

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

  $ 707     $ 495     $     $ 987     $ 1     $ 1  

Commercial real estate:

                                               

Construction

                      261       3        

Farmland

    5,566       3,742             4,194       6       5  

Nonfarm nonresidential

    4,502       1,219             7,116       248       190  

Residential real estate:

                                               

Multi-family

    4,100       4,100             1,216       30       1  

1-4 Family

    4,663       2,910             8,795       58       6  

Consumer

    41       1             14       7       8  

Agriculture

                      115              

Other

                                   

Subtotal

    19,579       12,467             22,698       353       211  

With An Allowance Recorded:

                                               

Commercial

    100       100       13                    

Commercial real estate:

                                               

Construction

                                   

Farmland

    614       590       5                    

Nonfarm nonresidential

    303       303       30       438       6        

Residential real estate:

                                               

Multi-family

                      4,186       50        

1-4 Family

    1,676       1,611       350       1,684       20        

Consumer

                                   

Agriculture

    78       60       1                    

Other

                                   

Subtotal

    2,771       2,664       399       6,308       76        

Total

  $ 22,350     $ 15,131     $ 399     $ 29,006     $ 429     $ 211  

 

 

Troubled Debt Restructuring

 

A troubled debt restructuring (TDR) occurs when the Bank 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 Bank has allocated reserves for these loans to reflect the present value of the concessionary terms granted to the customer.

 

16

 

The following table presents the types of TDR loan modifications by portfolio segment outstanding as of March 31, 2017 and December 31, 2016:

 

   

TDRs

Performing to

Modified

Terms

   

TDRs Not

Performing to

Modified

Terms

   

Total

TDRs

 
   

(in thousands)

 

March 31, 2017

                       

Commercial

                       

Rate reduction

  $     $ 33     $ 33  

Principal deferral

          434       434  

Commercial Real Estate:

                       

Farmland

                       

Principal deferral

          2,300       2,300  

Nonfarm nonresidential

                       

Rate reduction

    501             501  

Principal deferral

          607       607  

Residential Real Estate:

                       

1-4 Family

                       

Rate reduction

    743             743  

Total TDRs

  $ 1,244     $ 3,374     $ 4,618  

 

 

   

TDRs

Performing to

Modified Terms

   

TDRs Not

Performing to

Modified Terms

   

Total

TDRs

 
   

(in thousands)

 

December 31, 2016

                       

Commercial

                       

Rate reduction

  $     $ 33     $ 33  

Principal deferral

          434       434  

Commercial Real Estate:

                       

Farmland

                       

Principal deferral

          2,300       2,300  

Nonfarm nonresidential

                       

Rate reduction

    507             507  

Principal deferral

          607       607  

Residential Real Estate:

                       

Multi-family

                       

Rate reduction

    4,100             4,100  

1-4 Family

                       

Rate reduction

    743             743  

Total TDRs

  $ 5,350     $ 3,374     $ 8,724  

 

At March 31, 2017 and December 31, 2016, 27% and 61%, respectively, of the Company’s TDRs were performing according to their modified terms. The Company allocated $196,000 and $197,000 in reserves to borrowers whose loan terms have been modified in TDRs as of March 31, 2017, and December 31, 2016, respectively. The Company has committed to lend no additional amounts as of March 31, 2017 and December 31, 2016 to borrowers with outstanding loans classified as TDRs.

 

Management periodically reviews renewals and modifications of previously identified TDRs, for which there was no principal forgiveness, to consider if it is appropriate to remove the TDR classification. If the borrower is no longer experiencing financial difficulty and the renewal/modification did not contain a concessionary interest rate or other concessionary terms, management considers the potential removal of the TDR classification. If deemed appropriate based upon current underwriting, the TDR classification is removed as the borrower has complied with the terms of the loan at the date of renewal/modification and there was a reasonable expectation that the borrower would continue to comply with the terms of the loan subsequent to the date of the renewal/modification. In this instance, the TDR was originally considered a restructuring in a prior year as a result of a modification with an interest rate that was not commensurate with the risk of the underlying loan. Additionally, TDR classification can be removed in circumstances in which the Company performs a non-concessionary re-modification of the loan at terms that were considered to be at market for loans with comparable risk. Management expects the borrower will continue to perform under the re-modified terms based on the borrower’s past history of performance. As of March 31, 2017, the TDR classification was removed from two loans that met the requirements as discussed above. These loans totaled $4.1 million at December 31, 2016. These loans are no longer evaluated individually for impairment.

 

17

 

 

No TDR loan modifications occurred during the three months ended March 31, 2017 or March 31, 2016. During the first three months of 2017 and 2016, no TDRs defaulted on their restructured loan within the 12 month period following the loan modification. A default is considered to have occurred once the TDR is past due 90 days or more or it has been placed on nonaccrual.

 

Non-performing Loans

 

Non-performing loans include impaired loans and smaller balance homogeneous loans, such as residential mortgage and consumer loans, that are collectively evaluated for impairment. The following table presents the recorded investment in nonaccrual and loans past due 90 days and still on accrual by class of loan as of March 31, 2017, and December 31, 2016: 

 

   

Nonaccrual

   

Loans Past Due 90 Days

And Over Still Accruing

 
   

March 31,

2017

   

December 31,

2016

   

March 31,

2017

   

December 31,

2016

 
   

(in thousands)

 
                                 

Commercial

  $ 493     $ 495     $     $  

Commercial Real Estate:

                               

Construction

                       

Farmland

    3,372       4,332              

Nonfarm nonresidential

    964       1,016              

Residential Real Estate:

                               

Multi-family

                       

1-4 Family

    3,206       3,312              

Consumer

    7       1              

Agriculture

    60       60              

Other

                       

Total

  $ 8,102     $ 9,216     $     $  

 

 

The following table presents the aging of the recorded investment in past due loans as of March 31, 2017 and December 31, 2016:

 

   

30 – 59

Days

Past Due

   

60 – 89

Days

Past Due

   

90 Days

And Over

Past Due

   

 

 

Nonaccrual

   

Total

Past Due

And

Nonaccrual

 
   

(in thousands)

 

March 31, 2017

                                       

Commercial

  $     $     $     $ 493     $ 493  

Commercial Real Estate:

                                       

Construction

                             

Farmland

    262       4             3,372       3,638  

Nonfarm nonresidential

                      964       964  

Residential Real Estate:

                                       

Multi-family

                             

1-4 Family

    691       281             3,206       4,178  

Consumer

    6       4             7       17  

Agriculture

    13                   60       73  

Other

                             

Total

  $ 972     $ 289     $     $ 8,102     $ 9,363  

 

18

 

 

   

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, 2016

                                       

Commercial

  $     $     $     $ 495     $ 495  

Commercial Real Estate:

                                       

Construction

                             

Farmland

    626                   4,332       4,958  

Nonfarm nonresidential

          59             1,016       1,075  

Residential Real Estate:

                                       

Multi-family

                             

1-4 Family

    1,454       256             3,312       5,022  

Consumer

    19                   1       20  

Agriculture

    203                   60       263  

Other

                             

Total

  $ 2,302     $ 315     $     $ 9,216     $ 11,833  

 

Credit Quality Indicators 

 

We categorize all 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. Loans are also analyzed through our internal and external loan review processes. Borrower relationships in excess of $500,000 are routinely analyzed through our credit administration processes which classify the loans as to credit risk. The following definitions are used for risk ratings:

 

Watch Loans classified as watch are those loans which have or may experience a potentially adverse development which necessitates increased monitoring.

 

Special Mention Loans classified as special mention do not have all of the characteristics of substandard or doubtful loans. They have one or more deficiencies which warrant special attention and which corrective action, such as accelerated collection practices, may remedy.

 

Substandard Loans classified as substandard are those loans with clear and defined weaknesses such as a highly leveraged position, unfavorable financial ratios, uncertain repayment sources or poor financial condition which may jeopardize the repayment of the debt as contractually agreed. They are characterized by the distinct possibility that we will sustain some losses if the deficiencies are not corrected.

 

Doubtful – Loans classified as doubtful are those loans which have characteristics similar to substandard loans but with an increased risk that collection or liquidation in full is highly questionable and improbable.

 

19

 

 

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 March 31, 2017, and December 31, 2016, 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)

 

March 31, 2017

                                               

Commercial

  $ 103,597     $ 293     $     $ 960     $     $ 104,850  

Commercial Real Estate:

                                               

Construction

    40,927       497                         41,424  

Farmland

    76,161       1,335             5,756             83,252  

Nonfarm nonresidential

    146,628       3,221       441       1,631             151,921  

Residential Real Estate:

                                               

Multi-family

    39,536       5,991             3,823             49,350  

1-4 Family

    173,463       5,521       51       6,831             185,866  

Consumer

    9,130       314             98             9,542  

Agriculture

    27,456       9,270             789             37,515  

Other

    463                               463  

Total

  $ 617,361     $ 26,442     $ 492     $ 19,888     $     $ 664,183  

 

   

Pass

   

Watch

   

Special

Mention

   

Substandard

   

Doubtful

   

Total

 
   

(in thousands)

 

December 31, 2016

                                               

Commercial

  $ 96,402     $ 294     $     $ 1,065     $     $ 97,761  

Commercial Real Estate:

                                               

Construction

    35,823       507                         36,330  

Farmland

    63,323       1,521             6,663             71,507  

Nonfarm nonresidential

    142,222       5,217       445       1,662             149,546  

Residential Real Estate:

                                               

Multi-family

    38,281       6,080             3,836             48,197  

1-4 Family

    173,565       6,909       52       7,566             188,092  

Consumer

    9,397       348             73             9,818  

Agriculture

    26,940       9,555             1,013             37,508  

Other

    477                               477  

Total

  $ 586,430     $ 30,431     $ 497     $ 21,878     $     $ 639,236  

 

Note 4 – 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 expected cost to sell. Any write-down of the property at the time of acquisition is charged to the allowance for loan losses.

 

Fair value of OREO is determined on an individual property basis. When foreclosed properties are acquired, we obtain a new appraisal of the subject property or have staff from our special assets group or in our centralized appraisal department evaluate the latest in-file appraisal in connection with the transfer to OREO. We typically obtain updated appraisals within five quarters of the anniversary date of ownership unless a sale is imminent. Subsequent reductions in fair value are recorded as non-interest expense when a new appraisal indicates a decline in value or in cases where a listing price is lowered below the appraised amount. 

 

20

 

 

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

 

   

March 31,

2017

   

December 31,

2016

 
   

(in thousands)

 

Commercial Real Estate:

               

Construction

  $ 6,571     $ 6,571  

Residential Real Estate:

               

1-4 Family

          250  
    $ 6,571     $ 6,821  

 

Residential loans secured by 1-4 family residential properties in the process of foreclosure totaled $822,000 and $932,000 at March 31, 2017 and December 31, 2016, respectively. Net activity relating to other real estate owned during the three months ended March 31, 2017 and 2016 is as follows:

 

   

For the Three

Months Ended

March 31,

 
   

2017

   

2016

 
   

(in thousands)

 

OREO Activity

               

OREO as of January 1

  $ 6,821     $ 19,214  

Real estate acquired

    100       441  

Valuation adjustment write-downs

          (500

)

Net gain on sales

    38       55  

Proceeds from sales of properties

    (388

)

    (1,349

)

OREO as of March 31

  $ 6,571     $ 17,861  

 

We recognized no OREO rental income for the three months ended March 31, 2017, and $256,000 for the three months ended March 31, 2016.

 

Expenses related to other real estate owned include:

 

   

For the Three Months Ended March 31,

 
   

2017

   

2016

 
   

(in thousands)

 

Net gain on sales

  $ (38

)

  $ (55

)

Valuation adjustment write-downs

          500  

Operating expense

    22       223  

Total

  $ (16

)

  $ 668  

 

21

 

 

 Note 5 – Deposits

 

The following table shows ending deposit balances by category as of:

 

   

March 31,

2017

   

December 31,

2016

 
   

(in thousands)

 

Non-interest bearing

  $ 127,049     $ 124,395  

Interest checking

    104,811       103,876  

Money market

    122,434       142,497  

Savings

    36,380       34,518  

Certificates of deposit

    470,029       444,639  

Total

  $ 860,703     $ 849,925  

 

Time deposits of $250,000 or more were $34.5 million and $29.1 million at March 31, 2017 and December 31, 2016, respectively.

 

Scheduled maturities of all time deposits at March 31, 2017 were as follows (in thousands):

 

Year 1

  $ 225,126  

Year 2

    155,900  

Year 3

    61,411  

Year 4

    21,374  

Year 5

    6,218  
    $ 470,029  

 

 

Note 6 – Advances from the Federal Home Loan Bank

 

Advances from the Federal Home Loan Bank were as follows:

 

   

March 31,

   

December 31,

 
   

2017

   

2016

 
   

(in thousands)

 

Advances with fixed rates from 0.00% to 5.25% and maturities ranging from 2017 through 2033, averaging 1.04% at March 31, 2017 and 0.85% at December 31, 2016

  $ 17,313     $ 22,458  

 

 

Scheduled principal payments on the above during the next five years and thereafter (in thousands):

 

   

Advances

Year 1

  $ 15,528    

Year 2

    226    

Year 3

    508    

Year 4

    762    

Year 5

    109    

Thereafter

    180    
    $ 17,313    

 

Each advance is payable based upon the terms of agreement, with a prepayment penalty. New advances are limited to a one year maturity or less. No prepayment penalties were incurred during 2017 or 2016. The advances are collateralized by first mortgage-residential loans. The borrowing capacity is based on the market value of the underlying pledged loans. At March 31, 2017, our additional borrowing capacity with the FHLB was $13.9 million. The availability of our borrowing capacity could be affected by our financial condition and the FHLB could require additional collateral or, among other things, exercise its right to deny a funding request, at its discretion.

 

22

 

 

Note 7 – 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 that an entity has the ability to access as of the measurement date, or observable inputs.

 

Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.

 

Level 3: Significant unobservable inputs that reflect an 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 our appraisal date predates a likely change in market conditions. These deductions range from 10% for routine real estate collateral to 25% for real estate that is determined (1) to have a thin trading market or (2) to be specialized collateral. This is in addition to estimated discounts for cost to sell of six to ten percent.

 

We also apply discounts to the expected fair value of collateral for impaired loans where the likely resolution involves litigation or foreclosure. Resolution of this nature generally results in receiving lower values for real estate collateral in a more aggressive sales environment. We have utilized discounts ranging from 10% to 33% in our impairment evaluations when applicable.

 

23

 

 

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 and market participants to determine the likely marketing time and value range for the property. The second stage involves an assessment of current trends in the regional market. After thorough consideration of these factors, management will either internally evaluate fair value or order a new appraisal.

 

Other Real Estate Owned (OREO): OREO is evaluated at the time of acquisition and recorded at fair value as determined by independent appraisal or internal 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 or asking price 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 or have staff in our special assets group or centralized appraisal department evaluate the latest in-file appraisal in connection with the transfer to other real estate owned. We generally obtain updated appraisals within five quarters of the anniversary date of ownership unless a sale is imminent. When an asking price is lowered below the most recent appraised value, appropriate write-downs are taken.

 

We routinely apply an internal discount to the value of appraisals used in the fair value evaluation of our OREO. The deductions to the appraisal take into account changing business factors and market conditions, as well as potential value impairment in cases where our appraisal date predates a likely change in market conditions. These deductions range from 10% for routine real estate collateral to 25% for real estate that is determined (1) to have a thin trading market or (2) to be specialized collateral. This is in addition to estimated discounts for cost to sell of six to ten percent.

 

24

 

 

Financial assets measured at fair value on a recurring basis at March 31, 2017 and December 31, 2016 are summarized below:

 

           

Fair Value Measurements at March 31, 2017 Using

 
           

(in thousands)

 
   

Carrying

   

Quoted Prices In

Active Markets

for

Identical Assets

   

Significant

Other

Observable

Inputs

   

Significant

Unobservable

Inputs

 

Description

 

Value

   

(Level 1)

   

(Level 2)

   

(Level 3)

 

Available for sale securities

                               

U.S. Government and federal agency

  $ 33,039     $     $ 33,039     $  

Agency mortgage-backed: residential

    98,917             98,917        

Collateralized loan obligations

    18,881             18,881        

State and municipal

    2,045             2,045        

Corporate bonds

    3,119             3,119        

Total

  $ 156,001     $     $ 156,001     $  

 

 

           

Fair Value Measurements at December 31, 2016 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

  $ 34,099     $     $ 34,099     $  

Agency mortgage-backed: residential

    102,353             102,353        

Collateralized loan obligations

    11,203             11,203        

State and municipal

    2,045             2,045        

Corporate bonds

    3,090             3,090        

Total

  $ 152,790     $     $ 152,790     $  

 

There were no transfers between Level 1 and Level 2 during 2017 or 2016.

 

25

 

 

Financial assets measured at fair value on a non-recurring basis are summarized below: 

 

           

Fair Value Measurements at March 31, 2017 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

  $ 87     $     $     $ 87  

Commercial real estate:

                               

Construction

                       

Farmland

    581                   581  

Nonfarm nonresidential

                       

Residential real estate:

                               

Multi-family

                       

1-4 Family

    1,141                   1,141  

Consumer

                       

Agriculture

    59                   59  

Other

                       

Other real estate owned, net:

                               

Commercial real estate:

                               

Construction

    6,571                   6,571  

Farmland

                       

Nonfarm nonresidential

                       

Residential real estate:

                               

Multi-family

                       

1-4 Family

                       

 

           

Fair Value Measurements at December 31, 2016 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

  $ 87     $     $     $ 87  

Commercial real estate:

                               

Construction

                       

Farmland

    585                   585  

Nonfarm nonresidential

                       

Residential real estate:

                               

Multi-family

                       

1-4 Family

    1,261                   1,261  

Consumer

                       

Agriculture

    59                   59  

Other

                       

Other real estate owned, net:

                               

Commercial real estate:

                               

Construction

    6,571                   6,571  

Farmland

                       

Nonfarm nonresidential

                       

Residential real estate:

                               

Multi-family

                       

1-4 Family

    250                   250  

 

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $2.2 million at March 31, 2017 with a valuation allowance of $303,000, resulting in no additional provision for loan losses for the three months ended March 31, 2017. Impaired loans had a carrying amount of $1.8 million with a valuation allowance of $383,000, resulting in an additional provision for loan losses of $46,000 for the three months ended March 31, 2016. At December 31, 2016, impaired loans had a carrying amount of $2.4 million, with a valuation allowance of $370,000.

 

OREO, which is measured at the lower of carrying or fair value less costs to sell, had a net carrying amount of $6.6 million as of March 31, 2017, compared with $17.9 million at March 31, 2016 and $6.8 million at December 31, 2016. No write-downs were recorded on OREO for the three months ended March 31, 2017, compared to write-downs of $500,000 for the three months ended March 31, 2016.

 

26

 

 

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 March 31, 2017:

 

   

Fair Value

 

Valuation

Technique(s)

 

Unobservable Input(s)

 

Range (Weighted

Average)

 
   

(in thousands)

                     
                             

Impaired loans – Residential real estate

  $ 1,141  

Sales comparison approach

 

Adjustment for differences between the comparable sales

    0% - 22% (9%)  
                             

Other real estate owned – Commercial real estate

  $ 6,571  

Sales comparison approach

 

Adjustment for differences between the comparable sales

    0% - 20% (9%)  
                             
          Income approach   Discount or capitalization rate     18% - 20% (19%)  

 

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, 2016:

 

   

Fair Value

 

Valuation

Technique(s)

 

Unobservable Input(s)

 

Range (Weighted

Average)

 
   

(in thousands)

                     
                             

Impaired loans – Residential real estate

  $ 1,261  

Sales comparison approach

 

Adjustment for differences between the comparable sales

    0% - 22% (9%)  
                             

Other real estate owned – Commercial real estate

  $ 6,571  

Sales comparison approach

 

Adjustment for differences between the comparable sales

    0% - 20% (9%)  
                             
         

Income approach

 

Discount or capitalization rate

    18% - 20% (19%)  

 

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

 

           

Fair Value Measurements at March 31, 2017 Using

 
   

Carrying

Amount

   

Level 1

   

Level 2

   

Level 3

   

Total

 
   

(in thousands)

 

Financial assets

                                       

Cash and cash equivalents

  $ 37,785     $ 36,094     $ 1,691     $     $ 37,785  

Securities available for sale

    156,001             156,001             156,001  

Securities held to maturity

    41,752             43,469             43,469  

Federal Home Loan Bank stock

    7,323       N/A       N/A       N/A       N/A  

Loans held for sale

                             

Loans, net

    655,217                   652,746       652,746  

Accrued interest receivable

    3,100             1,123       1,977       3,100  

Financial liabilities

                                       

Deposits

  $ 860,703     $ 127,049     $ 720,593     $     $ 847,642  

Federal Home Loan Bank advances

    17,313             17,338             17,338  

Subordinated capital notes

    2,925                   2,846       2,846  

Junior subordinated debentures

    21,000                   16,263       16,263  

Accrued interest payable

    902             362       540       902  

 

27

 

 

           

Fair Value Measurements at December 31, 2016 Using

 
   

Carrying

Amount

   

Level 1

   

Level 2

   

Level 3

   

Total

 
   

(in thousands)

 

Financial assets

                                       

Cash and cash equivalents

  $ 66,316     $ 31,091     $ 35,225     $     $ 66,316  

Securities available for sale

    152,790             152,790             152,790  

Securities held to maturity

    41,818             43,072             43,072  

Federal Home Loan Bank stock

    7,323       N/A       N/A       N/A       N/A  

Loans held for sale

                             

Loans, net

    630,269                   632,528       632,528  

Accrued interest receivable

    3,137             1,203       1,934       3,137  

Financial liabilities

                                       

Deposits

  $ 849,925     $ 124,395     $ 712,458     $     $ 836,853  

Federal Home Loan Bank advances

    22,458             22,475             22,475  

Subordinated capital notes

    3,150                   3,091       3,091  

Junior subordinated debentures

    21,000                   13,263       13,263  

Accrued interest payable

    734             369       365       734  

 

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) Loans Held for Sale

The fair value of loans held for sale is estimated based upon binding contracts and quotes from third party investors resulting in a Level 2 classification.

 

(e) Deposits

The fair values disclosed for non-interest bearing deposits are, by definition, equal to the amount payable on demand at the reporting date resulting in a Level 1 classification. The carrying amounts of variable rate interest bearing deposits approximate their fair values at the reporting date resulting in a Level 2 classification. Fair values for fixed rate interest bearing deposits are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification. 

 

(f) 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.

 

(g) 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.

 

28

 

 

Note 8 – Income Taxes

 

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

 

   

March 31,

   

December 31,

 
   

2017

   

2016

 
   

(in thousands)

 

Deferred tax assets:

               

Net operating loss carry-forward

  $ 44,630     $ 42,094  

Allowance for loan losses

    3,138       3,139  

Other real estate owned write-down

    3,366       3,366  

Alternative minimum tax credit carry-forward

    692       692  

Net assets from acquisitions

    655       674  

Net unrealized loss on securities

    504       867  

New market tax credit carry-forward

    208       208  

Nonaccrual loan interest

    487       481  

Accrued expenses

    241       3,860  

Other

    773       825  
      54,694       56,206  
                 

Deferred tax liabilities:

               

FHLB stock dividends

    928       928  

Fixed assets

    84       89  

Other

    416       1,140  
      1,428       2,157  

Net deferred tax assets before valuation allowance

    53,266       54,049  

Valuation allowance

    (53,266

)

    (54,049

)

Net deferred tax asset

  $     $  

 

Our estimate of our ability to realize the deferred tax asset depends on our estimate of projected future levels of taxable income. In analyzing future taxable income levels, we considered all evidence currently available, both positive and negative. Based on our analysis, we established a valuation allowance for all deferred tax assets as of December 31, 2011. The valuation allowance remains in effect as of March 31, 2017.

 

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 three months ended March 31, 2017 or March 31, 2016 related to unrecognized tax benefits.

 

Under Section 382 of the Internal Revenue Code, as amended (“Section 382”), the Company’s its net operating loss carryforwards (“NOLs”) and other deferred tax assets can generally be used to offset future taxable income and therefore reduce federal income tax obligations. However, the Company's ability to use its NOLs would be limited if there was an “ownership change” as defined by Section 382. This would occur if shareholders owning (or deemed to own under the tax rules) 5% or more of the Company's voting and non-voting common shares increase their aggregate ownership of the Company by more than 50 percentage points over a defined period of time.

 

In 2015, the Company took two measures to preserve the value of its NOLs. First, we adopted a tax benefits preservation plan designed to reduce the likelihood of an “ownership change” occurring as a result of purchases and sales of the Company's common shares. Upon adoption of plan, the Company declared a dividend of one preferred stock purchase right for each common share outstanding as of the close of business on July 10, 2015. Any shareholder or group that acquires beneficial ownership of 5% or more of the Company (an “acquiring person”) could be subject to significant dilution in its holdings if the Company's Board of Directors does not approve such acquisition. Existing shareholders holding 5% or more of the Company will not be considered acquiring persons unless they acquire additional shares, subject to certain exceptions described in the plan. In addition, the Board of Directors has the discretion to exempt certain transactions and certain persons whose acquisition of securities is determined by the Board not to jeopardize the Company's deferred tax assets. The rights will expire upon the earlier of (i) June 29, 2018, (ii) the beginning of a taxable year with respect to which the Board of Directors determines that no tax benefits may be carried forward, (iii) the repeal or amendment of Section 382 or any successor statute, if the Board of Directors determines that the plan is no longer needed to preserve the tax benefits, and (iv) certain other events as described in the plan.

 

29

 

 

On September 23, 2015, our shareholders approved an amendment to the Company’s articles of incorporation to further help protect the long-term value of the Company’s NOLs. The amendment provides a means to block transfers of our common shares that could result in an ownership change under Section 382. The transfer restrictions will expire on the earlier of (i) September 23, 2018, (ii) the beginning of a taxable year with respect to which the Board of Directors determines that no tax benefit may be carried forward, (iii) the repeal of Section 382 or any successor statute if our Board determines that the transfer restrictions are no longer needed to preserve the tax benefits of our NOLs, or (iv) such date as the Board otherwise determines that the transfer restrictions are no longer necessary.

 

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 2013.

 

Note 9 – Stock Plans and Stock Based Compensation

 

Shares available for issuance under the 2016 Omnibus Equity Compensation Plan (“2016 Plan”) total 23,684. Shares issued to employees under the plan vest annually on the anniversary date of the grant generally over three to four years.

 

The Company also maintains the Porter Bancorp, Inc. 2006 Non-Employee Directors Stock Ownership Incentive Plan (“2006 Director Plan”) pursuant to which 17,912 shares remain available for issuance as annual awards of restricted stock to the Company’s non-employee directors. Shares issued annually to non-employee directors have a fair market value of $25,000 and vest on December 31 in the year of grant.

 

The fair value of the 2017 unvested shares issued was $215,000, or $9.44 per weighted-average share. The Company recorded $54,000 and $73,000 of stock-based compensation during the first three months of 2017 and 2016, respectively, to salaries and employee benefits. We expect substantially all of the unvested shares outstanding at the end of the period to 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:

 

   

Three Months Ended

   

Twelve Months Ended

 
   

March 31, 2017

   

December 31, 2016

 
           

Weighted

           

Weighted

 
           

Average

           

Average

 
           

Grant

           

Grant

 
   

Shares

   

Price

   

Shares

   

Price

 

Outstanding, beginning

    179,513     $ 4.89       184,482     $ 4.81  

Granted

    22,787       9.44       35,465       9.10  

Vested

    (53,335

)

    4.45       (38,462

)

    8.32  

Forfeited

                (1,972

)

    6.16  

Outstanding, ending

    148,965     $ 5.74       179,513     $ 4.89  

 

 

Unrecognized stock based compensation expense related to unvested shares for the remainder of 2017 and beyond is estimated as follows (in thousands):

 

April 2017 – December 2017

  $ 199  

2018

    262  

2019

    102  

2020 & thereafter

    25  

 

 

30

 

 

Note 10 – Earnings (Loss) per Share

 

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

 

   

Three Months Ended

 
   

March 31,

 
   

2017

   

2016

 
   

(in thousands, except

share and per share data)

 
                 

Net income

  $ 1,680     $ 1,480  

Less:

               

Earnings allocated to unvested shares

    44       51  

Net income available to common shareholders, basic and diluted

  $ 1,636     $ 1,429  
                 

Basic

               

Weighted average common shares including unvested common shares outstanding

    6,227,265       5,389,062  

Less:

               

Weighted average unvested common shares

    164,239       183,996  

Weighted average common shares outstanding

    6,063,026       5,205,066  

Basic income per common share

  $ 0.27     $ 0.27  
                 

Diluted

               

Add: Dilutive effects of assumed exercises of common stock warrants

           

Weighted average common shares and potential common shares

    6,063,026       5,205,066  

Diluted income per common share

  $ 0.27     $ 0.27  

 

The Company had no outstanding stock options at March 31, 2017 or 2016. A warrant for the purchase of 66,113 shares of the Company’s common stock at an exercise price of $79.41 was outstanding at March 31, 2017 and 2016, but was not included in the diluted EPS computation as inclusion would have been anti-dilutive.

 

Note 11 – Capital Requirements and Restrictions on Retained Earnings

 

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action.

 

The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. Banks (Basel III rules) became effective for the Company and Bank on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule through January 1, 2019. The final rules allowed banks and their holding companies with less than $250 billion in assets a one-time opportunity to opt-out of a requirement to include unrealized gains and losses in accumulated other comprehensive income in their capital calculation. The Company and the Bank opted out of this requirement. The rules also establish a “capital conservation buffer” of 2.5% above the regulatory minimum risk-based capital ratios. Once the capital conservation buffer is fully phased in, the minimum ratios are a common equity Tier 1 risk-based capital ratio of 7.0%, a Tier 1 risk-based capital ratio of 8.5%, and a total risk-based capital ratio of 10.5%. The phase-in of the capital conservation buffer requirement began in January 2016 at 0.625% of risk-weighted assets and increases to 1.25% in 2017, 1.875% in 2018, and 2.5% in 2019. An institution is subject to limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses if capital levels fall below minimum levels plus the buffer amounts. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions.

 

In its Consent Order with the FDIC and the KDFI, the Bank has agreed to maintain a minimum Tier 1 leverage ratio of 9% and a minimum total risk based capital ratio of 12%. The Bank cannot be considered well-capitalized while subject to the Consent Order. We are also restricted from accepting, renewing, or rolling-over brokered deposits without the prior receipt of a waiver on a case-by-case basis from our regulators.

 

On September 21, 2011, we entered into a Written Agreement with the Federal Reserve Bank of St. Louis. Pursuant to the Agreement, we made formal commitments to use our financial and management resources to serve as a source of strength for the Bank and to assist the Bank in addressing weaknesses identified by the FDIC and the KDFI, to pay no dividends without prior written approval, to pay no interest or principal on trust preferred securities without prior written approval, and to submit an acceptable plan to maintain sufficient capital.

 

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The following tables show the ratios (excluding capital conservation buffer) and amounts of common equity Tier 1, Tier 1 capital, and total capital to risk-adjusted assets and the leverage ratios for Porter Bancorp, Inc. and the Bank at the dates indicated (dollars in thousands):

 

   

Actual

   

Regulatory Minimums for Capital Adequacy Purposes

 
   

Amount

   

Ratio

   

Amount

   

Ratio

 

As of March 31, 2017:

                               

Total risk-based capital (to risk- weighted assets)

                               

Consolidated

  $ 72,920       10.15

%

  $ 57,457       8.00

%

Bank

    70,957       9.89       57,402       8.00  

Total common equity Tier 1 risk- based capital (to risk weighted assets)

                               

Consolidated

    37,978       5.29       32,319       4.50  

Bank

    59,786       8.33       32,289       4.50  

Tier I capital (to risk-weighted assets)

                               

Consolidated

    50,936       7.09       43,093       6.00  

Bank

    59,786       8.33       43,052       6.00  

Tier I capital (to average assets)

                               

Consolidated

    50,936       5.43       37,553       4.00  

Bank

    59,786       6.37       37,525       4.00  

 

 

   

Actual

   

Regulatory Minimums for Capital Adequacy Purposes

 
   

Amount

   

Ratio

   

Amount

   

Ratio

 

As of December 31, 2016:

                               

Total risk-based capital (to risk- weighted assets)

                               

Consolidated

  $ 71,109       10.21

%

  $ 55,714       8.00

%

Bank

    68,773       9.88       55,663       8.00  

Total common equity Tier 1risk- based capital (to risk weighted assets)

                               

Consolidated

    36,199       5.20       31,339       4.50

%

Bank

    57,642       8.28       31,311       4.50  

Tier I capital (to risk-weighted assets)

                               

Consolidated

    48,713       6.99       41,786       6.00  

Bank

    57,642       8.28       41,747       6.00  

Tier I capital (to average assets)

                               

Consolidated

    48,713       5.27       36,975       4.00  

Bank

    57,642       6.24       36,949       4.00  

 

 

The Consent Order requires the Bank to achieve the minimum capital ratios presented below:

 

   

Actual as of March 31, 2017

   

Ratio Required by Consent Order

 
   

Amount

   

Ratio

   

Amount

   

Ratio

 
                                 

Total capital to risk-weighted assets

  $ 70,957       9.89

%

  $ 86,103       12.00

%

Tier I capital to average assets

    59,786       6.37       84,431       9.00  

 

32

 

 

Bank regulatory agencies can exercise discretion when an institution does not meet the terms of a Consent Order. Based on individual circumstances, the agencies may issue mandatory directives, impose monetary penalties, initiate changes in management, or take more serious adverse actions.

 

Kentucky banking laws limit the amount of dividends that may be paid to a holding company by its subsidiary banks without prior approval. These laws limit the amount of dividends that may be paid in any calendar year to current year’s net income, as defined in the laws, combined with the retained net income of the preceding two years, less any dividends declared during those periods. The Bank has agreed with its primary regulators to obtain their written consent prior to declaring or paying any future dividends. As a practical matter, the Bank cannot pay dividends to the Company until the Consent Order is lifted or modified and the Bank returns to consistent profitability.

 

Note 12Off Balance Sheet Risks, Commitments, and Contingent Liabilities

 

The Company, in the normal course of business, is party to financial instruments with off balance sheet risk. The financial instruments include commitments to extend credit and standby letters of credit. The contract or notional amounts of these instruments reflect the potential future obligations of the Company pursuant to those financial instruments. Creditworthiness for all instruments is evaluated on a case-by-case basis in accordance with the Company’s credit policies. Collateral from the client may be required based on the Company’s credit evaluation of the client and may include business assets of commercial clients, as well as personal property and real estate of individual clients or guarantors.

 

An approved but unfunded loan commitment represents a potential credit risk and a liquidity risk, since the Company’s client(s) may demand immediate cash that would require funding.  In addition, unfunded loan commitments represent interest rate risk as market interest rates may rise above the rate committed to the Company’s client.  Since a portion of these loan commitments normally expire unused, the total amount of outstanding commitments at any point in time may not require future funding.

 

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a client to a third party. The terms and risk of loss involved in issuing standby letters of credit are similar to those involved in issuing loan commitments and extending credit. In addition to credit risk, the Company also has liquidity risk associated with standby letters of credit because funding for these obligations could be required immediately. The Company does not deem this risk to be material. No liability is currently established for standby letters of credit.

 

The following table presents the contractual amounts of financial instruments with off-balance sheet risk for each period ended:

 

   

March 31, 2017

   

December 31, 2016

 
   

Fixed

Rate

   

Variable

Rate

   

Fixed

Rate

   

Variable

Rate

 
   

(in thousands)

 

Commitments to make loans

  $ 25,462     $ 16,732     $ 19,445     $ 18,347  

Unused lines of credit

    10,356       46,662       7,935       51,407  

Standby letters of credit

    573       373       582       360  

 

 

Commitments to make loans are generally made for periods of one year or less.

 

In connection with the purchase of two loan participations, the Bank entered into two risk participation agreements during the fourth quarter of 2016, which had notional amounts totaling $14.6 million at both March 31, 2017 and December 31, 2016.

 

The Company is subject to claims and lawsuits that arise primarily in the ordinary course of business. Litigation is subject to inherent uncertainties and unfavorable rulings could occur. The Company records contingent liabilities resulting from claims against it when a loss is assessed to be probable and the amount of the loss is reasonably estimable. Accruals are not made in cases where liability is not probable or the amount cannot be reasonably estimated. 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. Based upon current knowledge and after consultation with counsel, the Company believes the pending legal proceedings or claims should not have a material impact on its financial position or results of operations. However, in light of the uncertainties involved in such proceedings, the outcome of a particular matter may be material to the financial position or results of operations for a particular reporting period in the future.

 

33

 

 

On June 18, 2010, three real estate development companies filed suit in Kentucky state court against PBI Bank and Managed Assets of Kentucky. On July 16, 2013, a jury in Louisville, Kentucky returned a verdict against the Bank, awarding the plaintiffs compensatory damages of $1,515,000 and punitive damages of $5,500,000.

 

The Bank filed an appeal with the Kentucky Court of Appeals on October 25, 2013. On December 2, 2016, the Court of Appeals ruled against the Bank and upheld the previous award of $7.015 million in damages, with one dissenting opinion as to the amount of punitive damages awarded.

 

The Bank previously accrued the compensatory damages of the trial court verdict along with interest at the statutory rate. Following the appellate court ruling, the Bank accrued the punitive damages award and statutory interest that totaled approximately $8.0 million, which had a negative impact on earnings and capital for 2016. In March 2017, the parties entered into a settlement agreement , the court entered an agreed order ending the litigation, payment was made, and the Bank withdrew its motion for discretionary review with the Kentucky Supreme Court. As the Company had previously established a reserve for this matter, the settlement did not have a material effect on the Company’s results of operation for 2017.

 

On October 17, 2014, the United States Department of Justice (“DOJ”) notified the Bank that it was the subject of an investigation into possible violations of federal laws, including, among other things, possible violations related to false bank entries, bank fraud and securities fraud. The investigation concerns allegations that Bank personnel engaged in practices intended to delay or avoid disclosure of the Bank’s asset quality at the time of and following the United States Treasury’s purchase of preferred shares from the Company in November 2008. The Bank has cooperated with all requests for information from the DOJ. As of the date of this report, the DOJ has made no determination whether to pursue any action in the matter.

 

34

 

 

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 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 future expectations, actions and events that constitute forward-looking statements. Forward-looking statements express our beliefs, assumptions and expectations about 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 ability 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 other real estate owned (“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 shares and pay interest on the junior subordinated debentures that relate to our trust preferred securities is currently restricted. Our inability to resume paying interest on our trust preferred securities could adversely affect our common and preferred shareholders.

 

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, 2016 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 and bases in good faith and they are reasonable. We caution you however, forward looking statements relying upon such assumptions or bases almost always vary from actual results, and the differences between those statements 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. (the “Company”) is a bank holding company headquartered in Louisville, Kentucky. We operate PBI Bank (“the Bank”), our wholly owned subsidiary and the fourteenth largest bank domiciled in the Commonwealth of Kentucky based on total assets. We operate banking offices in twelve counties in Kentucky. Our markets include metropolitan Louisville in Jefferson County and the surrounding counties of Henry and Bullitt. We serve south central Kentucky and southern Kentucky from banking offices in Butler, Green, Hart, Edmonson, Barren, Warren, Ohio, and Daviess Counties. We also have an office in Lexington, the second largest city in Kentucky. The Bank is a community bank with a wide range of commercial and personal banking products. As of March 31, 2017, we had total assets of $942.4 million, total loans of $664.2 million, total deposits of $860.7 million and stockholders’ equity of $35.5 million.

 

The Company reported net income of $1.7 million for the three months ended March 31, 2017, compared with $1.5 million for the first quarter of 2016. After deductions for earnings allocated to participating securities, net income available to common shareholders was $1.6 million for the three months ended March 31, 2017, compared with $1.4 million for the three months ended March 31, 2016.

 

35

 

 

Basic and diluted net income per common share were $0.27 for the three months ended March 31, 2017 compared with $0.27 for the three months ended March 31, 2016.

 

We note the following significant items during the three months ended March 31, 2017:

 

 

Net interest margin increased two basis points to 3.55% in the first three months of 2017 compared with 3.53% in the first three months of 2016. The cost of interest bearing liabilities decreased from 0.79% in the first quarter of 2016 to 0.78% in the first quarter of 2017.

 

 

Average loans receivable increased approximately $29.2 million or 4.7% to $649.3 million for the quarter ended March 31, 2017, compared with $620.1 million for the first quarter of 2016. This resulted in an increase in interest revenue volume of approximately $363,000 which was offset by decreases due to rate decreases of $416,000 for the quarter ended March 31, 2017, compared with the first quarter of 2016. The decrease in the cost of interest bearing liabilities was primarily driven by volume decline in certificates of deposit.

 

 

During the period, our improving trends in non-performing loans, past due loans, and loan risk categories continued. We recorded no provision for loan losses expense in the first quarter of 2017, compared to negative provision for loan losses expense of $550,000 in the first quarter of 2016. Both were attributable to declining historical loss rates, improvements in asset quality, and management’s assessment of risk in the loan portfolio. Net loan charge-offs were $1,000 for the first quarter of 2017, compared to $151,000 for the first quarter of 2016.

 

 

Non-performing loans decreased $1.1 million to $8.1 million at March 31, 2017, compared with $9.2 million at December 31, 2016. The decrease in non-performing loans was primarily due to $1.5 million in paydowns and $229,000 in charge-offs which were partially offset by $803,000 in loans placed on nonaccrual during the quarter.

 

 

Loans past due 30-59 days decreased from $2.3 million at December 31, 2016 to $972,000 at March 31, 2017, and loans past due 60-89 days decreased from $315,000 at December 31, 2016 to $289,000 at March 31, 2017. Total loans past due and nonaccrual loans decreased to $9.4 million at March 31, 2017, from $11.8 million at December 31, 2016.

 

 

All loan risk categories (other than pass loans) have decreased since December 31, 2016. Pass loans represent 93.0% of the portfolio at March 31, 2017, compared to 91.7% at December 31, 2016. During the three months ended March 31, 2017, the pass category increased approximately $31.0 million, the watch category declined approximately $4.0 million, the special mention category declined approximately $5,000, and the substandard category declined approximately $2.0 million. The $2.0 million decrease in loans classified as substandard was primarily driven by $1.9 million in principal payments received during the three months ended March 31, 2017.

 

 

Foreclosed properties were $6.6 million at March 31, 2017, compared with $6.8 million at December 31, 2016, and $17.9 million at March 31, 2016. During the first three months of 2017, the Company acquired $100,000 and sold $350,000 of OREO. Operating expenses, fair value write downs, and a net gain on sales totaled $668,000 in the first quarter of 2016 compared to a net gain on sales, net of expenses, of $16,000 in the first quarter of 2017

 

 

Our ratio of non-performing assets to total assets decreased to 1.56% at March 31, 2017, compared with 1.70% at December 31, 2016, and 3.09% at March 31, 2016.

 

 

Non-interest income decreased $323,000 to $1.1 million for the first quarter of 2017, compared with $1.4 million for the first quarter of 2016. The decrease was driven primarily by reductions in OREO income of $256,000 and reductions in the gains on sales and calls of securities of $203,000. Non-interest expense decreased $962,000 to $7.1 million for the first quarter of 2017 compared with $8.1 million for the first quarter of 2016, primarily due to a reduction in OREO expenses of approximately $684,000, a reduction of FDIC insurance expense of $181,000, a reduction of professional fees of $82,000, and a reduction of litigation and loan collection expenses of $79,000.

 

 

Deposits increased 1.3% to $860.7 million at March 31, 2017, compared with $849.9 million at December 31, 2016. Certificate of deposit balances increased $25.4 million during the first three months of 2017 to $470.0 million at March 31, 2017, from $444.6 million at December 31, 2016. Money market deposits decreased 14.1% at March 31, 2017 compared with December 31, 2016.

 

36

 

 

Application of Critical Accounting Policies

 

We continually review our accounting policies and financial information disclosures. Our more significant accounting policies that require the use of estimates and judgments in preparing the financial statements are summarized in “Application of Critical Accounting Policies” in Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operation of our Annual Report on Form 10-K for the calendar year ended December 31, 2016. Management has discussed the development, selection, and application of our critical accounting policies with our Audit Committee. During the first three months of 2017, 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 March 31, 2017, compared with the same period of 2016:

 

   

For the Three Months

   

Change from

 
   

Ended March 31,

   

Prior Period

 
   

2017

   

2016

   

Amount

   

Percent

 
   

(dollars in thousands)

 
                                 

Gross interest income

  $ 9,225     $ 9,185     $ 40       0.4

%

Gross interest expense

    1,484       1,534       (50

)

    (3.3

)

Net interest income

    7,741       7,651       90       1.2  

Provision (negative provision) for loan losses

          (550

)

    550       100.0  

Non-interest income

    1,068       1,391       (323

)

    (23.2

)

Non-interest expense

    7,129       8,091       (962

)

    (11.9

)

Net income before taxes

    1,680       1,501       179       11.9  

Income tax expense

          21       (21

)

    (100.0

)

Net income

    1,680       1,480       200       13.5  

 

Net income for the three months ended March 31, 2017 totaled $1.7 million, compared with $1.5 million for the comparable period of 2016. Net interest income increased $90,000 from the 2016 first quarter as a result of an increase in earning assets and net interest margin. Net interest margin increased two basis points to 3.55% in the first three months of 2017 compared with 3.53% in the first three months of 2016. The increase in margin between periods was due in part to a decrease in the cost of interest bearing liabilities from 0.79% in the first quarter of 2016 to 0.78% in the first quarter of 2017. Average earning assets increased from $881.6 million for the first quarter of 2016 to $892.3 for the first quarter of 2017. Non-interest income decreased by $323,000 to $1.1 million from $1.4 million in the first quarter of 2016 primarily due to a decrease in other real estate owned income of $256,000. Non-interest expense decreased from $8.1 million in the first quarter of 2016 to $7.1 million in the first quarter of 2017 primarily due to decreased other real estate owned expense of $684,000, a $181,000 decline in FDIC insurance, and a $82,000 decline in professional fees.

 

Net Interest Income – Our net interest income was $7.7 million for the three months ended March 31, 2017, an increase of $90,000, or 1.2%, compared with $7.7 million for the same period in 2016. Net interest spread and margin were 3.45% and 3.55%, respectively, for the first quarter of 2017, compared with 3.44% and 3.53%, respectively, for the first quarter of 2016. Net average non-accrual loans were $8.7 million and $13.1 million for the first quarters of 2017 and 2016, respectively.

 

Average loans receivable increased approximately $29.2 million for the first quarter of 2017 compared with the first quarter of 2016. This resulted in an increase in interest revenue volume of approximately $363,000 which was offset by interest rate decreases aggregating $416,000 for the quarter ended March 31, 2017, compared with the first quarter of 2016. Interest foregone on non-accrual loans totaled $139,000 in the first quarter of 2017, compared with $161,000 in the fourth quarter of 2016, and $215,000 in the first quarter of 2016.

 

Net interest margin increased two basis points from our margin of 3.53% in the prior year first quarter to 3.55% for the first quarter of 2017. The yield on earning assets remained consistent and rates paid on interest-bearing liabilities declined one basis point from the first quarter of 2016.

 

37

 

 

Average Balance Sheets

 

The following table presents the average balance sheets for the three month periods ended March 31, 2017 and 2016, 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 March 31,

 
   

2017

   

2016

 
   

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)

  $ 649,325     $ 7,829       4.89

%

  $ 620,077     $ 7,882       5.11

%

Securities

                                               

Taxable

    176,113       1,114       2.57       161,459       989       2.46  

Tax-exempt (3)

    19,989       145       4.53       22,052       164       4.60  

FHLB stock

    7,323       83       4.60       7,323       74       4.06  

Federal funds sold and other

    39,542       54       0.55       70,724       76       0.43  

Total interest-earning assets

    892,292       9,225       4.23

%

    881,635       9,185       4.23

%

Less: Allowance for loan losses

    (8,942

)

                    (12,033

)

               

Non-interest earning assets

    54,266                       67,776                  

Total assets

  $ 937,616                     $ 937,378                  
                                                 

LIABILITIES AND STOCKHOLDERS EQUITY

                                               

Interest-bearing liabilities:

                                               

Certificates of deposit and other time deposits

  $ 459,178     $ 1,019       0.90

%

  $ 488,523     $ 1,069       0.88

%

NOW and money market deposits

    237,410       210       0.36       228,226       223       0.39  

Savings accounts

    34,917       15       0.17       34,656       16       0.19  

FHLB advances

    11,808       31       1.06       2,985       19       2.56  

Junior subordinated debentures

    24,148       209       3.51       25,048       207       3.32  

Total interest-bearing liabilities

    767,461       1,484       0.78

%

    779,438       1,534       0.79

%

                                                 

Non-interest-bearing liabilities:

                                               

Non-interest-bearing deposits

    122,051                       113,720                  

Other liabilities

    14,372                       10,674                  

Total liabilities

    903,884                       903,832                  

Stockholders’ equity

    33,732                       33,546                  

Total liabilities and stockholders’ equity

  $ 937,616                     $ 937,378                  
                                                 

Net interest income

          $ 7,741                     $ 7,651          
                                                 

Net interest spread

                    3.45

%

                    3.44

%

Net interest margin

                    3.55

%

                    3.53

%

 


(1)

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

(2)

Calculations include non-accruing loans averaging $8.7 million and $13.1 million, respectively, in average loan amounts outstanding.

(3)

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

 

38

 

 

 

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 March 31,

2017 vs. 2016

 
   

Increase (decrease)

due to change in

   

Net

 
   

Rate

   

Volume

      Change   
   

(in thousands)

 

Interest-earning assets:

                       

Loan receivables

  $ (416

)

  $ 363     $ (53

)

Securities

    25       81       106  

FHLB stock

    9             9  

Federal funds sold and other

    18       (40

)

    (22

)

Total increase (decrease) in interest income

    (364

)

    404       40  
                         

Interest-bearing liabilities:

                       

Certificates of deposit and other time deposits

    15       (65

)

    (50

)

NOW and money market accounts

    (22

)

    9       (13

)

Savings accounts

    (1

)

          (1

)

FHLB advances

    (16

)

    28       12  

Junior subordinated debentures

    9       (7

)

    2  

Total decrease in interest expense

    (15

)

    (35

)

    (50

)

Increase (decrease) in net interest income

  $ (349

)

  $ 439     $ 90  

 

 

Non-Interest Income – The following table presents the major categories of non-interest income for the three months ended March 31, 2017 and 2016:

 

   

For the Three Months

 
   

Ended March 31,

 
   

2017

   

2016

 
   

(in thousands)

 
                 

Service charges on deposit accounts

  $ 501     $ 429  

Bank card interchange fees

    213       202  

Other real estate owned rental income

          256  

Bank owned life insurance income

    102       96  

Net gain on sales of securities

          203  

Other

    252       205  

Total non-interest income

  $ 1,068     $ 1,391  

 

Non-interest income for the first quarter of 2017 decreased by $323,000, or 23.2%, compared with the first quarter of 2016. The decrease in non-interest income was primarily driven by an absence of OREO income in the first quarter of 2017 as income producing foreclosed properties were sold in earlier periods, compared to $256,000 in the first quarter of 2016, as well as no net gain on sales of securities in the first quarter of 2017 compared to $203,000 in the first quarter of 2016 as no securities were sold or called in the first quarter of 2017.

 

39

 

 

Non-interest ExpenseThe following table presents the major categories of non-interest expense for the three months ended March 31, 2017 and 2016:

 

   

For the Three Months

 
   

Ended March 31,

 
   

2017

   

2016

 
   

(in thousands)

 
                 

Salary and employee benefits

  $ 3,947     $ 3,822  

Occupancy and equipment

    821       854  

Professional fees

    303       385  

FDIC insurance

    342       523  

Data processing expense

    292       297  

State franchise and deposit tax

    225       255  

Other real estate owned expense

    (16

)

    668  

Litigation and loan collection expense

    3       82  

Other

    1,212       1,205  

Total non-interest expense

  $ 7,129     $ 8,091  

 

Non-interest expense for the first quarter ended March 31, 2017 decreased $962,000, or 11.9%, compared with the first quarter of 2016. This decrease from the first quarter of 2016 was primarily due to a decrease in OREO expense of $684,000 as the size of the OREO portfolio significantly declined. The improvement was also attributable to a decrease in FDIC insurance of $181,000, a reduction of professional fees of $82,000, and a reduction of litigation and loan collection expenses of $79,000.     

 

Income Tax Expense 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

 
   

Ended March 31,

 
   

2017

   

2016

 
   

(in thousands)

 
                 

Federal statutory rate times financial statement income

  $ 588     $ 525  

Effect of:

               

Valuation allowance

    (419

)

    (450

)

Tax-exempt income

    (49

)

    (56

)

Non-taxable life insurance income

    (36

)

    (33

)

Restricted stock vesting

    (92

)

     

Other, net

    8       35  

Total

  $     $ 21  

 

 

Analysis of Financial Condition

 

Total assets decreased $2.8 million, or 0.3%, to $942.4 million at March 31, 2017, from $945.2 million at December 31, 2016. This decrease was primarily attributable to a decrease in interest bearing deposits in banks of $24.5 million and a decrease in cash and due from banks of $4.0 million, offset by an increase in net loans of $24.9 million and an increase in available for sale securities of $3.2 million.

 

Loans ReceivableLoans receivable increased $24.9 million, or 3.90%, during the three months ended March 31, 2017 to $664.2 million as loan growth outpaced paydowns. Our commercial and commercial real estate portfolios increased by an aggregate of $26.3 million, or 7.4% during the first quarter of 2017 and comprised 57.4% of the loan portfolio at March 31, 2017.

 

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, 1-4 family residential real estate, and loans for retail facilities (included in nonfarm nonresidential commercial real estate below), there is no concentration of loans in any industry exceeding 10% of total loans. Loans for retail facilities totaled $63.0 million at March 31, 2017 and $59.9 million at December 31, 2016.

 

40

 

 

   

As of March 31,

   

As of December 31,

 
   

2017

   

2016

 
   

Amount

   

Percent

   

Amount

   

Percent

 
           

(dollars in thousands)

         
                                 

Commercial

  $ 104,850       15.79

%

  $ 97,761       15.29

%

Commercial Real Estate

                               

Construction

    41,424       6.24       36,330       5.68  

Farmland

    83,252       12.53       71,507       11.19  

Nonfarm nonresidential

    151,921       22.87       149,546       23.39  

Residential Real Estate

                               

Multi-family

    49,350       7.43       48,197       7.54  

1-4 Family

    185,866       27.98       188,092       29.42  

Consumer

    9,542       1.44       9,818       1.54  

Agriculture

    37,515       5.65       37,508       5.87  

Other

    463       0.07       477       0.08  

Total loans

  $ 664,183       100.00

%

  $ 639,236       100.00

%

 

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

 

   

March 31, 2017

   

December 31, 2016

 
   

Loans

   

% to Total

   

Loans

   

% to Total

 
   

(dollars in thousands)

 
                                 

Pass

  $ 617,361       93.0

%

  $ 586,430       91.7

%

Watch

    26,442       4.0       30,431       4.8  

Special Mention

    492       0.1       497       0.1  

Substandard

    19,888       2.9       21,878       3.4  

Doubtful

                       

Total

  $ 664,183       100.0

%

  $ 639,236       100.00

%

 

Our loans receivable have increased $24.9 million, or 3.9%, during the three months ended March 31, 2017. All loan risk categories other than pass loans have decreased since December 31, 2016. The pass category increased approximately $30.9 million, the watch category decreased approximately $4.0 million, the special mention category declined approximately $5,000, and the substandard category declined approximately $2.0 million. The $2.0 million decrease in loans classified as substandard was primarily driven by $1.9 million in principal payments received, $311,000 in loans upgraded from substandard, $260,000 in charge-offs, and $100,000 in loans moved to OREO, offset by $601,000 in loans moved to substandard during the quarter.

 

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

 

   

March 31,

2017

   

December 31,

2016

 
   

(in thousands)

 

Past Due Loans:

               

30-59 Days

  $ 972     $ 2,302  

60-89 Days

    289       315  

90 Days and Over

           

Total Loans Past Due 30-90+ Days

    1,261       2,617  
                 

Nonaccrual Loans

    8,102       9,216  

Total Past Due and Nonaccrual Loans

  $ 9,363     $ 11,833  

 

During the three months ended March 31, 2017, nonaccrual loans decreased by $1.1 million to $8.1 million. This decrease was due primarily to $1.5 million in paydowns and $229,000 in charge-offs, offset by $803,000 in loans placed on nonaccrual status. During the three months ended March 31, 2017, loans past due 30-59 days decreased from $2.3 million at December 31, 2016 to $972,000 at March 31, 2017. Loans past due 60-89 days decreased from $315,000 at December 31, 2016 to $289,000 at March 31, 2017. This represents a $1.4 million decrease from December 31, 2016 to March 31, 2017, in loans past due 30-89 days. 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.

 

41

 

 

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 March 31, 2017 and December 31, 2016.

 

   

March

31,

2017

   

December

31,

2016

 
   

(dollars in thousands)

 
                 

Loans past due 90 days or more still on accrual

  $     $  

Loans on nonaccrual status

    8,102       9,216  

Total non-performing loans

    8,102       9,216  

Real estate acquired through foreclosure

    6,571       6,821  

Other repossessed assets

           

Total non-performing assets

  $ 14,673     $ 16,037  
                 

Non-performing loans to total loans

    1.22

%

    1.44

%

Non-performing assets to total assets

    1.56

%

    1.70

%

Allowance for non-performing loans

  $ 163     $ 241  

Allowance for non-performing loans to non-performing loans

    2.01

%

    2.62

%

 

Nonperforming loans at March 31, 2017, were $8.1 million, or 1.22% of total loans, compared with $9.2 million, or 1.44% of total loans at December 31, 2016, and $11.1 million, or 1.79% of total loans at March 31, 2016. Net loan charge-offs for the first three months of 2017 totaled $1,000 compared to $151,000 for the first three months of 2016.

 

Troubled Debt Restructuring - A troubled debt restructuring (TDR) occurs when the Bank has agreed to a loan modification in the form of a concession to a borrower who is experiencing financial difficulty. The majority of the Bank’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 Bank has allocated reserves for these loans to reflect the present value of the concessionary terms granted to the borrower. If the loan is considered collateral dependent, it is reported net of allocated reserves, at the fair value of the collateral less cost to sell.

 

We do not have a formal loan modification program. If a borrower is unable to make contractual payments, we review the particular circumstances of that borrower’s situation and determine whether or not to negotiate a revised payment stream. Our goal when restructuring a credit is to afford the borrower a reasonable period to remedy the issue causing cash flow constraints within their business so that they may return to performing status over time.

 

Our loan modifications have taken the form of a 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 may restructure real estate secured loans in a bifurcated fashion whereby we have a fully amortizing “A” loan at a market interest rate and an interest-only “B” loan at a reduced interest rate. The majority of our restructured loans are collateral secured loans. If a borrower fails to perform under the modified terms, we place the loan(s) on nonaccrual status and initiate collection actions.

 

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 of the loan to be a troubled debt restructuring. Specifically, we consider a concession involving a modification of the loan terms, such as (i) a reduction of the stated interest rate, (ii) a reduction or deferral of principal, or (iii) a 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 it to be a troubled debt restructuring. A primary example of a competitive modification would be an interest rate reduction for a performing customer’s loan to a market rate as the result of a market decline in rates.

 

Management periodically reviews renewals and modifications of previously identified TDRs for which there was no principal forgiveness, to consider if it is appropriate to remove the TDR classification. If the borrower is no longer experiencing financial difficulty and the renewal/modification did not contain a concessionary interest rate or other concessionary terms, management considers the potential removal of the TDR classification. If deemed appropriate based upon current underwriting, the TDR classification is removed as the borrower has complied with the terms of the loan at the date of renewal/modification and there was a reasonable expectation that the borrower would continue to comply with the terms of the loan after the date of the renewal/modification. In this instance, the TDR was originally considered a restructuring in a prior year as a result of a modification with an interest rate that was not commensurate with the risk of the underlying loan. Additionally, TDR classification can be removed in circumstances in which the Company performs a non-concessionary re-modification of the loan at terms that were considered to be at market for loans with comparable risk. Management expects the borrower will continue to perform under the re-modified terms based on the borrower’s past history of performance.

 

42

 

 

If the borrower fails to perform, we place the loan on nonaccrual status and seek to liquidate the underlying collateral. 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 is past due 90 days or more unless the assets are both well secured and in the process of collection. Changes in value for impairment, including the amount attributed to the passage of time, are recorded entirely within the provision for loan losses. Upon determination that a loan is collateral dependent, the loan is charged down to the fair value of collateral less estimated costs to sell.

 

At March 31, 2017, we had 7 restructured loans totaling $4.6 million with borrowers who experienced deterioration in financial condition compared with 9 loans totaling $8.7 million at December 31, 2016. In general, these loans were granted interest rate reductions to provide cash flow relief to borrowers experiencing cash flow difficulties. At March 31, 2017, three loans totaling approximately $3.3 million had been 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 $467,000 of commercial loans. At March 31, 2017, $1.2 million of our restructured loans were accruing and $3.4 million were on nonaccrual compared with $5.4 million and $3.3 million, respectively, at December 31, 2016.

 

There were no new TDRs during the first three months of 2017 or 2016. During the three months ended March 31, 2017, TDRs were reduced as a result of $6,000 in payments. In addition, the TDR classification was removed from two loans that met the requirements as discussed above. These loans totaled $4.1 million at December 31, 2016. These loans are no longer evaluated individually for impairment. See "Note 3 - Loans," of the notes to the financial statements for additional disclosure related to troubled debt restructuring.

 

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

 

   

March 31,

2017

   

December 31,

2016

 
   

(dollars in thousands)

 
                 

Total non-performing loans

  $ 8,102     $ 9,216  

TDRs on accrual

    1,244       5,350  

Total non-performing loans and TDRs on accrual

  $ 9,346     $ 14,566  

Real estate acquired through foreclosure

    6,571       6,821  

Other repossessed assets

           

Total non-performing assets and TDRs on accrual

  $ 15,917     $ 21,387  
                 

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

    1.41

%

    2.28

%

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

    1.69

%

    2.26

%

 

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 current recognition 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 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.

 

43

 

 

An analysis of changes in the allowance for loan losses and selected ratios for the three month periods ended March 31, 2017 and 2016, and for the year ended December 31, 2016 follows: 

 

   

Three Months Ended

March 31,

   

Year Ended

December 31,

 
   

2017

   

2016

    2016  
   

(dollars in thousands)

 

Balances at beginning of period

  $ 8,967     $ 12,041     $ 12,041  
                         

Loans charged-off:

                       

Real estate

    321       713       2,157  

Commercial

          12       276  

Consumer

    5       13       178  

Agriculture

                18  

Other

          11        

Total charge-offs

    326       749       2,629  
                         

Recoveries:

                       

Real estate

    284       428       1,189  

Commercial

    5       35       334  

Consumer

    25       39       368  

Agriculture

    7       79       114  

Other

    4       17        

Total recoveries

    325       598       2,005  

Net charge-offs

    1       151       624  

Provision (negative provision) for loan losses

          (550

)

    (2,450

)

Balance at end of period

  $ 8,966     $ 11,340     $ 8,967  
                         

Allowance for loan losses to period-end loans

    1.35

%

    1.83

%

    1.40

%

Net charge-offs to average loans

    0.00

%

    0.10

%

    0.10

%

Allowance for loan losses to non-performing loans

    110.66

%

    101.99

%

    97.30

%

                         

Allowance for loan losses for loans individually evaluated for impairment

  $ 332     $ 464     $ 399  

Loans individually evaluated for impairment

    9,891       26,236       15,131  

Allowance for loan losses to loans individually evaluated for impairment

    3.36

%

    1.77

%

    2.64 %
                         

Allowance for loan losses for loans collectively evaluated for impairment

  $ 8,634     $ 10,876     $ 8,568  

Loans collectively evaluated for impairment

    654,292       593,591       624,105  

Allowance for loan losses to loans collectively evaluated for impairment

    1.32

%

    1.83

%

    1.37 %

 

Our loan loss reserve, as a percentage of total loans at March 31, 2017, decreased to 1.35% from 1.40% at December 31, 2016 and from 1.83% at March 31, 2016. The change in our loan loss reserve as a percentage of total loans between periods is attributable to growth in the portfolio, historical loss experience, qualitative factors, fewer loans migrating downward in risk grade classifications and improved charge-off levels. Our allowance for loan losses to non-performing loans was 110.66% at March 31, 2017, compared with 97.30% at December 31, 2016, and 101.99% at March 31, 2016. Net charge-offs in the first three months of 2017 totaled $1,000 compared to $151,000 in the first three months of 2016.   

 

44

 

 

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

 

   

Three Months

Ended

March 31,

2017

   

 

Year Ended

December 31,

2016

   

Year Ended

December 31,

2015

 
   

(in thousands)

 

Commercial

  $ (5

)

  $ (58

)

  $ (27

)

Commercial Real Estate

    (214

)

    (339

)

    1,225  

Residential Real Estate

    251       1,307       1,487  

Consumer

    (20

)

    (200

)

    37  

Agriculture

    (7

)

    (96

)

    110  

Other

    (4

)

    10       (9

)

Total net charge-offs

  $ 1     $ 624     $ 2,823  

 

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 2.01% at March 31, 2017 compared with 2.62% at December 31, 2016, and 2.20% at March 31, 2016. The decrease in this ratio from December 31, 2016 to March 31, 2017 was primarily attributable to the improving non-performing loan trends 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 March 31, 2017 and December 31, 2016.

 

   

March 31, 2017

   

December 31, 2016

 
   

Commercial

Real Estate

   

Residential

Real Estate

   

Commercial

Real Estate

   

Residential

Real Estate

 
   

(in thousands)

 

Unpaid principal balance

  $ 7,199     $ 6,090     $ 10,985     $ 10,439  

Prior charge-offs

    (2,362

)

    (1,696

)

    (5,131

)

    (1,818

)

                                 

Recorded investment

    4,837       4,394       5,854       8,621  

Allocated allowance

    (33

)

    (285

)

    (35

)

    (350

)

                                 

Recorded investment, less allocated allowance

  $ 4,804     $ 4,109     $ 5,819     $ 8,271  
                                 

Recorded investment, less allocated allowance/ Unpaid principal balance

    66.73

%

    67.47

%

    52.97

%

    79.23

%

 

Based on prior charge-offs, our current recorded investment in the commercial real estate and residential real estate segments is significantly below the unpaid principal balance for these loans. The recorded investment net of the allocated allowance was 66.73% and 67.47% of the unpaid principal balance in the commercial real estate and residential real estate segments of the portfolio, respectively, at March 31, 2017.

 

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

 

   

March 31, 2017

   

December 31, 2016

 
   

Loans

   

Allowance

   

% to Total

   

Loans

   

Allowance

   

% to Total

 
                                                 

Commercial

  $ 104,257     $ 801       0.77

%

  $ 97,166     $ 462       0.48

%

Commercial real estate

    271,760       4,209       1.55       251,529       4,859       1.93  

Residential real estate:

    230,822       3,284       1.42       227,668       3,076       1.35  

Consumer

    9,535       32       0.34       9,817       8       0.08  

Agriculture

    37,455       306       0.82       37,448       161       0.43  

Other

    463       2       0.43       477       2       0.42  

Total

  $ 654,292     $ 8,634       1.32

%

  $ 624,105     $ 8,568       1.37

%

 

45

 

 

Our allowance for loan losses for loans collectively evaluated for impairment declined to 1.32% at March 31, 2017 from 1.83% at March 31, 2016 and 1.37% at December 31, 2016. This decline was driven primarily by declining historical loss trends and an improving loan risk category classification mix and volume 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.

 

Provision for Loan Losses No provision for loan losses was recorded for the first quarter of 2017, compared to a negative provision for loan losses of $550,000 for the first quarter of 2016. No provision expense was recorded for the first quarter of 2017 as a result of declining historical loss rates, improvements in asset quality, growth in the portfolio, and management’s assessment of risk within the portfolio. All loan risk categories other than pass loans have decreased since December 31, 2016. The pass category increased approximately $30.9 million, the watch category decreased approximately $4.0 million, the special mention category declined approximately $5,000, and the substandard category declined approximately $2.0 million. Net charge-offs were $1,000 for the three months ended March 31, 2017, compared with $151,000 for the three months ended March 31, 2016. 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 March 31, 2017 were $6.6 million compared with $17.9 million at March 31, 2016 and $6.8 million at December 31, 2016. See “Note 4 - Other Real Estate Owned,” of the notes to the financial statements. During the first three months of 2017, we acquired $100,000 of OREO properties, and sold properties totaling approximately $350,000. 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.

 

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. When OREO is acquired, we obtain a new appraisal of the subject property or have staff in our special assets group or centralized appraisal department evaluate the latest in-file appraisal. We typically obtain updated appraisals within five quarters of the anniversary date of ownership unless a sale is imminent.

 

As the size of the OREO portfolio declined significantly, operating expenses of $22,000 in the first quarter of 2017 were offset by $38,000 in net gains on sales resulting in a net benefit of $16,000 compared to net expenses of $668,000 in the first quarter of 2016 which consisted of $55,000 in net gains on sales offset by $223,000 in operating expenses and $500,000 in fair value write-downs.

 

LiabilitiesTotal liabilities at March 31, 2017 were $906.8 million compared with $912.4 million at December 31, 2016, a decrease of $5.6 million, or 0.6%. This decrease was primarily attributable to a decrease in accrued interest payable and other liabilities of $11.0 million due to the payment of a settlement agreement and a decrease in FHLB advances of $5.1 million, offset by an increase in total deposits of $10.8 million.

 

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 Three Months

   

For the Year

 
   

Ended March 31,

   

Ended December 31,

 
   

2017

   

2016

 
   

Average

   

Average

   

Average

   

Average

 
   

Balance

   

Rate

   

Balance

   

Rate

 
   

(dollars in thousands)

 

Demand

  $ 122,051             $ 119,736          

Interest checking

    105,986       0.13

%

    96,294       0.13

%

Money market

    131,424       0.54       136,423       0.58  

Savings

    34,917       0.17       34,257       0.18  

Certificates of deposit

    459,178       0.90       466,007       0.88  

Total deposits

  $ 853,556       0.59

%

  $ 852,717       0.60

%

 

46

 

 

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 Three Months

   

For the Year

 
   

Ended March 31,

   

Ended December 31,

 
   

2017

   

2016

 
   

Average

   

Average

   

Average

   

Average

 
   

Balance

   

Rate

   

Balance

   

Rate

 
   

(dollars in thousands)

 

Less than $100,000

  $ 250,311       0.88

%

  $ 261,615       0.86

%

$100,000 or more

    208,867       0.93

%

    204,392       0.91

%

Total

  $ 459,178       0.90

%

  $ 466,007       0.88

%

 

The following table shows at March 31, 2017 the amount of our time deposits of $100,000 or more by time remaining until maturity (in thousands):

  

Maturity Period

 
         

Three months or less

  $ 21,640  

Three months through six months

    18,892  

Six months through twelve months

    58,776  

Over twelve months

    118,303  

Total

  $ 217,611  

 

Liquidity

 

Liquidity risk arises from the possibility we may not be able to satisfy current or future financial commitments, or may become unduly reliant on alternative funding sources. The objective of liquidity risk management is to ensure that we meet the cash flow requirements of depositors and borrowers, as well as our operating cash needs, taking into account all on- and off-balance sheet funding demands. Liquidity risk management also involves ensuring that we meet our cash flow needs at a reasonable cost. We maintain an investment and funds management policy, which identifies the primary sources of liquidity, establishes procedures for monitoring and measuring liquidity, and establishes minimum liquidity requirements in compliance with regulatory guidance. Our Asset Liability Committee 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 investment portfolio, principal pay-downs on loans and mortgage-backed securities, customer deposit inflows, and other wholesale funding. Historically, we also utilized brokered and wholesale deposits to supplement our funding strategy. We are currently restricted from accepting, renewing, or rolling-over brokered deposits without the prior receipt of a waiver on a case-by-case basis from our regulators. At March 31, 2017, we had no brokered deposits.

 

We also borrow from the FHLB to supplement our funding requirements. At March 31, 2017, we had an unused borrowing capacity with the FHLB of $13.9 million. Our borrowing capacity is under a detailed loan listing requirement and is based on the market value of the underlying pledged loans.

 

We also have available on a secured basis federal funds borrowing lines from a correspondent bank totaling $5.0 million. Management believes our sources of liquidity are adequate to meet expected cash needs for the foreseeable future. However, the availability of these lines could be affected by our financial position. We are also subject to FDIC interest rate restrictions for deposits. As such, we are permitted to offer up to the “national rate” plus 75 basis points as published weekly by the FDIC.

  

Capital

 

Stockholders’ equity increased $2.8 million to $35.5 million at March 31, 2017, compared with $32.7 million at December 31, 2016 primarily due to current year net income of $1.7 million and an increase in the fair value of our available for sale securities portfolio of $1.0 million.

 

47

 

 

The following table shows the ratios of Tier 1 capital, common equity Tier 1 capital, and total capital to risk-adjusted assets and the leverage ratios (excluding the capital conservation buffer) for the Bank at the dates indicated:

 

   

Regulatory

Minimums

   

Well-Capitalized

Minimums

   

Minimum Capital

Ratios Under

Consent Order

   

March 31, 2017

   

December 31, 2016

 
                                         

Tier 1 Capital

    6.0 %     8.0 %     N/A       8.33 %     8.28 %

Common equity Tier I capital

    4.5       6.5       N/A       8.33       8.28  

Total risk-based capital

    8.0       10.0       12.0 %     9.89       9.88  

Tier 1 leverage ratio

    4.0       5.0       9.0       6.37       6.24  

 

Failure to meet minimum capital requirements could result in additional discretionary actions by regulators that, if taken, could have a materially adverse effect on our financial condition.

 

Each of the federal bank regulatory agencies has established risk-based capital requirements for banking organizations. The Basel III regulatory capital reforms became effective for the Company and Bank on January 1, 2015, and include new minimum risk-based capital and leverage ratios. These rules refine the definition of what constitutes “capital” for purposes of calculating those ratios, including the definitions of Tier 1 capital and Tier 2 capital. The final rules allow banks and their holding companies with less than $250 billion in assets a one-time opportunity to opt-out of a requirement to include unrealized gains and losses in accumulated other comprehensive income in their capital calculation. The Company and the Bank opted out of this requirement. The rules also establish a “capital conservation buffer” of 2.5%, to be phased in over three years, above the regulatory minimum risk-based capital ratios. Once the capital conservation buffer is fully phased in, the minimum ratios are a common equity Tier 1 risk-based capital ratio of 7.0%, a Tier 1 risk-based capital ratio of 8.5%, and a total capital to total risk-weighted assets ("total risk-based capital ratio") of 10.5%. The phase-in of the capital conservation buffer requirement began in January 2016 at 0.625% of risk-weighted assets and increases to 1.25% in 2017, 1.875% in 2018, and 2.5% in 2019. An institution is subject to limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses if capital levels fall below minimum levels plus the buffer amounts. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions. In addition, our Consent Order calls for the Bank to maintain a ratio of 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 Bank cannot be considered “well-capitalized” while subject to the consent order.

 

48

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Given an instantaneous 100 basis point increase in interest rates sustained for one year, our base net interest income would decrease by an estimated 1.2% at March 31, 2017, compared with a decrease of 2.5% at December 31, 2016, 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 decrease by an estimated 2.7% at March 31, 2017, compared with an increase of 5.1% at December 31, 2016, 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 March 31, 2017, as calculated using the static shock model approach:

 

   

Change in Future

Net Interest Income

 
   

Dollar Change

   

Percentage

Change

 
   

(dollars in thousands)

 

+ 200 basis points

  $ (774

)

    (2.68

)%

+ 100 basis points

    (348

)

    (1.21

)

- 100 basis points

    (429

)

    (1.49

)

- 200 basis points

    (1,611

)

    (5.59

)

 

 

Item 4. Controls and Procedures

 

As of the end of the quarterly period covered by this report, an evaluation was carried out under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”)). Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were, to the best of their knowledge, effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms as of such date.

 

There was no change in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

49

 

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

We are defendants in various legal proceedings.  Litigation is subject to inherent uncertainties and unfavorable outcomes could occur. See Footnote 12, “Off Balance Sheet Risks, Commitments, and Contingent Liabilities” 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, 2016 Annual Report on Form 10-K. 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

  

10.1

Porter Bancorp, Inc. 2017 Incentive Compensation Bonus Plan.

   

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 March 31, 2017, formatted in XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (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.

 

50

 

 

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)

  

May 4, 2017

By:

/s/ John T. Taylor

  

  

John T. Taylor

  

  

Chief Executive Officer 

  

May 4, 2017

By:

/s/ Phillip W. Barnhouse

 

 

Phillip W. Barnhouse 

  

  

Chief Financial Officer

  

  

 

 

 

51