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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x

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

For the Quarterly Period Ended June 30, 2014

Or

 

¨

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

For the transition period from                  to                 

Commission file number: 001-33033

 

 

PORTER BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Kentucky   61-1142247

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

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

(502) 499-4800

(Registrant’s telephone number, including area code)

 

 

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

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

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

 

Large accelerated filer

 

¨

  

Accelerated filer

 

¨

Non-accelerated filer

 

¨

  

Smaller reporting company

 

x

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

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

13,104,853 shares of Common Stock, no par value, were outstanding at July 31, 2014.

 

 

 


Table of Contents

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

     53   
ITEM 4.  

CONTROLS AND PROCEDURES

     53   
PART II –  

OTHER INFORMATION

  
ITEM 1.  

LEGAL PROCEEDINGS

     54   
ITEM 1A.  

RISK FACTORS

     54   
ITEM 2.  

UNREGISTERED SALES ON EQUITY SECURITIES AND USE OF PROCEEDS

     54   
ITEM 3.  

DEFAULTS UPON SENIOR SECURITIES

     54   
ITEM 4.  

MINE SAFETY DISCLOSURES

     54   
ITEM 5.  

OTHER INFORMATION

     54   
ITEM 6.  

EXHIBITS

     54   

 

2


Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

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

Unaudited Consolidated Balance Sheets for June 30, 2014 and December 31, 2013

Unaudited Consolidated Statements of Operations for the three and six months ended June 30, 2014 and 2013

Unaudited Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2014 and 2013

Unaudited Consolidated Statement of Changes in Stockholders’ Equity for the six months ended June 30, 2014

Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2014 and 2013

Notes to Unaudited Consolidated Financial Statements

 

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Table of Contents

PORTER BANCORP, INC.

Unaudited Consolidated Balance Sheets

(dollars in thousands except share data)

 

     June 30,
2014
    December 31,
2013
 

Assets

    

Cash and due from financial institutions

   $ 101,078      $ 109,407   

Federal funds sold

     1,188        1,727   
  

 

 

   

 

 

 

Cash and cash equivalents

     102,266        111,134   

Securities available for sale

     180,723        163,344   

Securities held to maturity (fair value of $44,853 and $42,947, respectively)

     43,488        43,612   

Mortgage loans held for sale

     280        149   

Loans, net of allowance of $24,026 and $28,124, respectively

     619,004        681,202   

Premises and equipment

     19,788        19,983   

Other real estate owned

     62,935        30,892   

Federal Home Loan Bank stock

     7,323        10,072   

Bank owned life insurance

     9,039        8,911   

Accrued interest receivable and other assets

     7,181        6,822   
  

 

 

   

 

 

 

Total assets

   $ 1,052,027      $ 1,076,121   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Deposits

    

Non-interest bearing

   $ 109,956      $ 107,486   

Interest bearing

     840,859        880,219   
  

 

 

   

 

 

 

Total deposits

     950,815        987,705   

Repurchase agreements

     2,451        2,470   

Federal Home Loan Bank advances

     14,134        4,492   

Accrued interest payable and other liabilities

     16,453        14,673   

Subordinated capital note

     5,400        5,850   

Junior subordinated debentures

     25,000        25,000   
  

 

 

   

 

 

 

Total liabilities

     1,014,253        1,040,190   

Stockholders’ equity

    

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

    

Series A – 35,000 issued and outstanding;

    

Liquidation preference of $35.0 million at June 30, 2014 and December 31, 2013

     35,000        35,000   

Series C – 317,042 issued and outstanding;

    

Liquidation preference of $3.6 million at June 30, 2014 and December 31, 2013

     3,283        3,283   
  

 

 

   

 

 

 

Total preferred stockholders’ equity

     38,283        38,283   
  

 

 

   

 

 

 

Common stock, no par, 86,000,000 shares authorized, 13,104,853 and 12,840,999 shares issued and outstanding, respectively

     112,236        112,236   

Additional paid-in capital

     21,170        20,887   

Retained deficit

     (132,000     (130,182

Accumulated other comprehensive loss

     (1,915     (5,293
  

 

 

   

 

 

 

Total common stockholders’ deficit

     (509     (2,352
  

 

 

   

 

 

 

Total stockholders’ equity

     37,774        35,931   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 1,052,027      $ 1,076,121   
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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Table of Contents

PORTER BANCORP, INC.

Unaudited Consolidated Statements of Operations

(dollars in thousands, except per share data)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2014     2013     2014     2013  

Interest income

        

Loans, including fees

   $ 8,572      $ 9,954      $ 16,893      $ 19,987   

Taxable securities

     1,215        848        2,388        1,715   

Tax exempt securities

     235        231        476        452   

Fed funds sold and other

     144        135        306        272   
  

 

 

   

 

 

   

 

 

   

 

 

 
     10,166        11,168        20,063        22,426   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense

      

Deposits

     2,319        2,560        4,680        5,264   

Federal Home Loan Bank advances

     32        41        65        84   

Subordinated capital note

     47        56        97        114   

Junior subordinated debentures

     153        157        305        311   

Federal funds purchased and other

     1        2        2        3   
  

 

 

   

 

 

   

 

 

   

 

 

 
     2,552        2,816        5,149        5,776   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     7,614        8,352        14,914        16,650   

Provision for loan losses

     —          —          —          450   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

     7,614        8,352        14,914        16,200   

Non-interest income

      

Service charges on deposit accounts

     487        506        955        999   

Income from fiduciary activities

     —          —          —          517   

Bank card interchange fees

     205        196        366        368   

Other real estate owned rental income

     18        230        25        342   

Net gain on sales of securities

     2        703        46        703   

Income from bank owned life insurance

     62        305        138        384   

Other

     175        208        334        482   
  

 

 

   

 

 

   

 

 

   

 

 

 
     949        2,148        1,864        3,795   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest expense

      

Salaries and employee benefits

     3,949        3,999        7,690        8,138   

Occupancy and equipment

     896        913        1,788        1,844   

Loan collection expense

     389        2,407        928        3,442   

Other real estate owned expense

     774        1,657        1,436        2,448   

FDIC Insurance

     571        650        1,111        1,289   

State franchise tax

     405        537        830        1,074   

Professional fees

     764        499        1,322        905   

Communications

     165        179        400        354   

Insurance expense

     153        160        302        311   

Postage and delivery

     94        102        204        215   

Other

     784        706        1,435        1,353   
  

 

 

   

 

 

   

 

 

   

 

 

 
     8,944        11,809        17,446        21,373   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (381     (1,309     (668     (1,378

Income tax benefit

     (424     —          (424     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     43        (1,309     (244     (1,378

Less:

      

Dividends on preferred stock

     789        437        1,574        875   

Accretion on Series A preferred stock

     —          45        —          90   

Earnings allocated to participating securities

     (74     (110     (173     (131
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common shareholders

   $ (672   $ (1,681   $ (1,645   $ (2,212
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted loss per common share

   $ (0.06   $ (0.14   $ (0.14   $ (0.19
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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Table of Contents

PORTER BANCORP, INC.

Unaudited Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

 

     Three Months
Ended

June 30,
    Six Months Ended
June 30,
 
     2014     2013     2014     2013  

Net income (loss)

   $ 43      $ (1,309   $ (244   $ (1,378

Other comprehensive income (loss):

        

Unrealized gain (loss) on securities:

        

Unrealized gain (loss) arising during the period

     2,411        (7,066     4,000        (7,114

Reclassification of amount realized through sales

     2        703        46        703   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized gain/(loss) recognized in comprehensive income

     2,413        (6,363     4,046        (6,411

Tax effect

     (424     —          (424     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     1,989        (6,363     3,622        (6,411
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ 2,032      $ (7,672   $ 3,378      $ (7,789
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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Table of Contents

PORTER BANCORP, INC.

Unaudited Consolidated Statement of Changes in Stockholders’ Equity

For Six Months Ended June 30, 2014

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

 

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

Balances, January 1, 2014

     12,840,999        35,000         317,042       $ 112,236       $ 35,000       $ 3,283       $ 20,887       $ (130,182   $ (5,293   $ 35,931   

Issuance of unvested stock

     288,888        —           —           —           —           —           —           —          —          —     

Forfeited unvested stock

     (25,034     —           —           —           —           —           —           —          —          —     

Stock-based compensation expense

     —          —           —           —           —           —           283         —          —          283   

Net loss

     —          —           —           —           —           —           —           (244     —          (244

Net change in accumulated other comprehensive loss, net of taxes

     —          —           —           —           —           —           —           —          3,378        3,378   

Dividends accrued on Series A preferred stock

     —          —           —           —           —           —           —           (1,574     —          (1,574
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balances, June 30, 2014

     13,104,853        35,000         317,042       $ 112,236       $ 35,000       $ 3,283       $ 21,170       $ (132,000   $ (1,915   $ 37,774   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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Table of Contents

PORTER BANCORP, INC.

Unaudited Consolidated Statements of Cash Flows

For Six Months Ended June 30, 2014 and 2013

(dollars in thousands)

 

     2014     2013  

Cash flows from operating activities

    

Net loss

   $ (244   $ (1,378

Adjustments to reconcile net loss to net cash from operating activities

    

Depreciation and amortization

     852        1,042   

Provision for loan losses

     —          450   

Net amortization on securities

     773        1,185   

Stock-based compensation expense

     283        226   

Tax benefit from OCI components

     (424     —     

Net gain on loans originated for sale

     (34     (66

Loans originated for sale

     (1,574     (2,095

Proceeds from sales of loans originated for sale

     1,477        2,524   

Net gain on sales of investment securities

     (46     (703

Net (gain) loss on sales of other real estate owned

     (54     359   

Net write-down of other real estate owned

     650        1,284   

Earnings on bank owned life insurance, net of premium expense

     (128     (374

Net change in accrued interest receivable and other assets

     (588     1,095   

Net change in accrued interest payable and other liabilities

     205        1,666   
  

 

 

   

 

 

 

Net cash from operating activities

     1,148        5,215   
  

 

 

   

 

 

 

Cash flows from investing activities

    

Purchases of available for sale securities

     (21,990     (24,929

Sales and calls of available for sale securities

     1,004        1,908   

Maturities and prepayments of available for sale securities

     6,804        17,661   

Proceeds from sale of other real estate owned

     4,281        10,538   

Proceeds from mandatory redemption of Federal Home Loan Bank stock

     2,749        —     

Loan originations and payments, net

     25,137        89,045   

Purchases of premises and equipment, net

     (284     (141
  

 

 

   

 

 

 

Net cash from investing activities

     17,701        94,082   
  

 

 

   

 

 

 

Cash flows from financing activities

    

Net change in deposits

     (36,890     (84,223

Net change in repurchase agreements

     (19     658   

Advances from Federal Home Loan Bank

     10,000        —     

Repayment of Federal Home Loan Bank advances

     (358     (588

Repayment of subordinated capital note

     (450     (450
  

 

 

   

 

 

 

Net cash from financing activities

     (27,717     (84,603
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     (8,868     14,694   

Beginning cash and cash equivalents

     111,134        49,572   
  

 

 

   

 

 

 

Ending cash and cash equivalents

   $ 102,266      $ 64,266   
  

 

 

   

 

 

 

Supplemental cash flow information:

    

Interest paid

   $ 4,872      $ 5,603   

Income taxes paid (refunded)

     —          —     

Supplemental non-cash disclosure:

    

Transfer from loans to other real estate

   $ 36,920      $ 15,555   

Financed sales of other real estate owned

     —          15   

See accompanying notes to unaudited consolidated financial statements.

 

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Table of Contents

PORTER BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

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

Basis of Presentation – The consolidated financial statements include Porter Bancorp, Inc. (Company or PBI) and its subsidiary, PBI Bank (Bank). The Company owns a 100% interest in the Bank. All significant inter-company transactions and accounts have been eliminated in consolidation.

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, the financial statements do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2014 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, 2013 included in the Company’s Annual Report on Form 10-K.

Use of Estimates – To prepare financial statements in conformity with U.S. generally accepted accounting principles, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and future results could differ. The allowance for loan losses, fair values of financial instruments, stock compensation, deferred tax assets, other intangibles, and fair values of other real estate owned are particularly subject to change.

Reclassifications – Some items in the prior year financial statements were reclassified to conform to the current presentation. The reclassifications did not impact net income (loss) or stockholders’ equity.

Adoption of New Accounting Standards – In May 2014, FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606). The ASU creates a new topic, Topic 606, to provide 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, 2016. Early adoption is not permitted. Management is currently evaluating the impact of the adoption of this guidance on the Company’s financial statements.

Note 2 – Going Concern Considerations and Future Plans

The consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business for the foreseeable future. However, the events and circumstances described in this Note create substantial doubt about the Company’s ability to continue as a going concern.

During the first six months of 2014, we reported net loss attributable to common shareholders of $1.6 million, compared with net loss attributable to common shareholders of $2.2 million for the first six months of 2013. The improvement in 2014 compared to 2013 is primarily attributable to reductions in non-interest expense, specifically loan collection expenses and OREO expenses.

At June 30, 2014, we continued to be involved in various legal proceedings in which we dispute the material factual allegations. After conferring with our legal advisors, we believe we have meritorious grounds on which to prevail. If we do not prevail, the ultimate outcome of any one of these matters could have a material adverse effect on our financial condition, results of operations, or cash flows. These matters are more fully described in Note 13 – “Contingencies”.

For the year ended December 31, 2013, we reported a net loss to common shareholders of $3.4 million, compared to a net loss to common shareholders of $33.4 million for the year ended December 31, 2012. This loss coupled with the comprehensive loss for the year reduced shareholders equity to $35.9 million, from $47.2 million at the end of 2012. This reduction was attributable primarily to OREO expense of $4.5 million resulting from fair value write-downs driven by new appraisals and reduced marketing prices, net loss on sales, and ongoing operating expense, along with $4.7 million in loan collection expenses. The reduction was also attributable to a reduction in the fair value of securities of $8.4 million, net, as well as the accrual of dividends and accretion to preferred shareholders of $2.1 million. We also had lower net interest margin due to lower average loans outstanding, loans re-pricing at lower rates, and the level of non-performing loans in our portfolio.

In the fourth quarter of 2011, we began deferring interest payments on our junior subordinated notes, which resulted in a deferral of distributions on our trust preferred securities. If we cannot pay all unpaid deferred distributions on our trust preferred securities for more than twenty consecutive quarters, we will be in default, and the holders of our trust preferred securities would become entitled to payment of the full amount of outstanding principal plus accrued and unpaid interest. At June 30, 2014, cumulative accrued and unpaid interest on our junior subordinated notes totaled $1.9 million. Future cash dividends on our common stock are subject to the prior payment of all deferred distributions on our trust preferred securities.

 

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Table of Contents

In June 2011, the Bank agreed to a Consent Order with the FDIC and KDFI in which the Bank agreed, among other things, to improve asset quality, reduce loan concentrations, and maintain a minimum Tier 1 leverage ratio of 9% and a minimum total risk based capital ratio of 12%. The Consent Order was included in our Current Report on 8-K filed on June 30, 2011. In October 2012, the Bank entered into a new Consent Order with the FDIC and KDFI again agreeing to maintain a minimum Tier 1 leverage ratio of 9% and a minimum total risk based capital ratio of 12%. The Bank also agreed that if it should be unable to reach the required capital levels, and if directed in writing by the FDIC, then the Bank would within 30 days develop, adopt and implement a written plan to sell or merge itself into another federally insured financial institution or otherwise immediately obtain a sufficient capital investment into the Bank to fully meet the capital requirements.

We expect to continue to work with our regulators toward capital ratio compliance as outlined in the written capital plan previously submitted by the Bank. The new Consent Order also requires the Bank to continue to adhere to the plans implemented in response to the June 2011 Consent Order, and includes the substantive provisions of the June 2011 Consent Order. The new Consent Order was included in our Current Report on 8-K filed on September 19, 2012. As of June 30, 2014, the capital ratios required by the Consent Order were not met.

In order to meet these capital requirements, the Board of Directors and management are continuing to evaluate strategies to achieve the following objectives:

 

   

Increasing capital through a possible public offering or private placement of common stock to new and existing shareholders. We have engaged a financial advisor to assist our Board in evaluating our options for increasing capital and redeeming our Series A Preferred Stock.

 

   

Continuing to operate the Company and Bank in a safe and sound manner. This strategy may require us to reduce our lending concentrations, remediate non-performing loans, reduce the size of our balance sheet, and reduce other noninterest expense through the disposition of OREO.

 

   

Management succession and adding resources to the management team. John T. Taylor became CEO of PBI Bank in 2012 and CEO of the Company in 2013. In addition, we appointed new executives to lead key functions of our banking operations. John R. Davis became Chief Credit Officer of PBI Bank in 2012, with responsibility for establishing and executing credit quality policies and overseeing credit administration for the organization. We have also augmented our staffing in the commercial lending area, led by Joe C. Seiler.

 

   

Evaluating our internal processes and procedures, distribution of labor, and work-flow to ensure we have adequately and appropriately deployed resources in an efficient manner in the current environment.

 

   

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

 

   

We have reduced the size of our loan portfolio significantly from $1.3 billion at December 31, 2010 to $643.0 million at June 30, 2014.

 

   

Our Consent Order calls for us to reduce our construction and development loans to not more than 75% of total risk-based capital. We have now been in compliance for nine quarters. Construction and development loans totaled $32.8 million, or 39% of total risk-based capital, at June 30, 2014, down from $43.3 million, or 52% of total risk-based capital, at December 31, 2013.

 

   

Our Consent Order also requires us to reduce non-owner occupied commercial real estate loans, construction and development loans, and multi-family residential real estate loans as a group, to not more than 250% of total risk-based capital. We were also in compliance with this concentration limit at June 30, 2014. These loans totaled $199.8 million, or 241% of total risk-based capital, at June 30, 2014 and $237.0 million, or 284% of total risk-based capital, at December 31, 2013.

 

   

We have reduced the construction loan portfolio from $199.5 million at December 31, 2010 to $32.8 million at June 30, 2014. Our non-owner occupied commercial real estate loans declined from $293.3 million at December 31, 2010 to $123.5 million at June 30, 2014.

 

   

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

 

   

The remediation process for loans secured by real estate has led the Bank to acquire significant levels of OREO since 2010. The Bank acquired $20.6 million, $33.5 million, $41.9 million, and $90.8 million during 2013, 2012, 2011, and 2010, respectively. For the six months ended June 30, 2014, we acquired $36.9 million of OREO.

 

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We have incurred significant losses in disposing of this real estate. We incurred losses totaling $2.6 million, $9.3 million, $42.8 million, and $13.9 million in 2013, 2012, 2011, and 2010, respectively, from sales at less than carrying values and fair value write-downs attributable to declines in appraisal valuations and changes in our pricing strategies. During the six months ended June 30, 2014, we incurred OREO losses totaling $596,000 comprised of $650,000 in fair value write-downs from declining values as evidenced by new appraisals and reduced marketing prices in connection with our sales strategies, offset by $54,000 in net gain on sales of OREO.

 

   

To ensure we maximize the value we receive upon the sale of OREO, we continually evaluate sales opportunities. Proceeds from the sale of OREO totaled $4.3 million during the six months ended June 30, 2014 and $30.8 million, $22.5 million, $26.0 million and $25.0 million during the years ended December 31, 2013, 2012, 2011, and 2010, respectively.

 

   

At December 31, 2013, the OREO portfolio consisted of 62% construction, development, and land assets. At June 30, 2014, this concentration decreased to 35%; however, the balance increased from $19.2 million to $21.8 million. Commercial real estate represents 35% of the OREO portfolio at June 30, 2014 compared with 19% at December 31, 2013. 1-4 family residential properties represent 18% of the OREO portfolio at June 30, 2014 compared with 16% at December 31, 2013, and multi-family properties represent 10% of the OREO portfolio at June 30, 2014, compared to 1% at December 31, 2013.

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.

Note 3 – Securities

The fair value of available for sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows:

 

     Amortized
Cost
     Gross
Unrealized

Gains
     Gross
Unrealized

Losses
    Fair Value  
     (in thousands)  

June 30, 2014

          

Available for sale

          

U.S. Government and federal agency

   $ 30,231       $ 324       $ (948   $ 29,607   

Agency mortgage-backed: residential

     118,104         1,434         (701     118,837   

State and municipal

     11,830         738         (9     12,559   

Corporate bonds

     18,043         1,142         (116     19,069   

Other debt securities

     572         79         —          651   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total available for sale

   $ 178,780       $ 3,717       $ (1,774   $ 180,723   
  

 

 

    

 

 

    

 

 

   

 

 

 

Held to maturity

          

State and municipal

   $ 43,488       $ 1,373       $ (8   $ 44,853   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total held to maturity

   $ 43,488       $ 1,373       $ (8   $ 44,853   
  

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2013

          

Available for sale

          

U.S. Government and federal agency

   $ 31,026       $ 284       $ (1,444   $ 29,866   

Agency mortgage-backed: residential

     102,435         458         (1,950     100,943   

State and municipal

     12,965         608         (28     13,545   

Corporate bonds

     18,002         769         (610     18,161   

Other debt securities

     572         60         —          632   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total debt securities

     165,000         2,179         (4,032     163,147   

Equity

     135         62         —          197   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total available for sale

   $ 165,135       $ 2,241       $ (4,032   $ 163,344   
  

 

 

    

 

 

    

 

 

   

 

 

 

Held to maturity

          

State and municipal

   $ 43,612       $ 3       $ (668   $ 42,947   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total held to maturity

   $ 43,612       $ 3       $ (668   $ 42,947   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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Sales and calls of available for sale securities were as follows:

 

     Three Months
Ended

June 30,
     Six Months Ended
June 30,
 
     2014      2013      2014      2013  
     (in thousands)      (in thousands)  

Proceeds

   $ 675       $ 1,908       $ 1,004       $ 1,908   

Gross gains

     2         704         46         704   

Gross losses

     —           1         —           1   

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

 

     June 30, 2014  
     Amortized
Cost
     Fair
Value
 
     (in thousands)  

Maturity

     

Available for sale

     

Within one year

   $ 15,616       $ 15,948   

One to five years

     12,930         13,953   

Five to ten years

     31,558         31,334   

Beyond ten years

     572         651   

Agency mortgage-backed: residential

     118,104         118,837   
  

 

 

    

 

 

 

Total

   $ 178,780       $ 180,723   
  

 

 

    

 

 

 

Held to maturity

     

One to five years

   $ 5,649       $ 5,755   

Five to ten years

     33,716         34,822   

Beyond ten years

     4,123         4,276   
  

 

 

    

 

 

 

Total

   $ 43,488       $ 44,853   
  

 

 

    

 

 

 

Securities pledged at June 30, 2014 and December 31, 2013 had carrying values of approximately $66.4 million and $84.2 million, respectively, and were pledged to secure public deposits and repurchase agreements.

 

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Table of Contents

Securities with unrealized losses at June 30, 2014 and December 31, 2013, 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)  

June 30, 2014

               

Available for sale

               

U.S. Government and federal agency

   $ —         $ —        $ 18,929       $ (948   $ 18,929       $ (948

Agency mortgage-backed: residential

     9,861         (33     32,822         (668     42,683         (701

State and municipal

     —           —          476         (9     476         (9

Corporate bonds

     2,388         (41     1,710         (75     4,098         (116
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired

   $ 12,249       $ (74   $ 53,937       $ (1,700   $ 66,186       $ (1,774
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Held to maturity

               

State and municipal

   $ 1,111       $ (8   $ —         $ —        $ 1,111       $ (8
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired

   $ 1,111       $ (8   $ —         $ —        $ 1,111       $ (8
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

December 31, 2013

               

Available for sale

               

U.S. Government and federal agency

   $ 24,129       $ (1,444   $ —         $ —        $ 24,129       $ (1,444

Agency mortgage-backed: residential

     58,257         (1,672     10,344         (278     68,601         (1,950

State and municipal

     458         (28     —           —          458         (28

Corporate bonds

     11,313         (610     —           —          11,313         (610
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired

   $ 94,157       $ (3,754   $ 10,344       $ (278   $ 104,501       $ (4,032
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Held to maturity

               

State and municipal

   $ 39,743       $ (654   $ 1,031       $ (14   $ 40,774       $ (668
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired

   $ 39,743       $ (654   $ 1,031       $ (14   $ 40,774       $ (668
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The Company evaluates securities for other than temporary impairment (OTTI) on a quarterly basis. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, underlying credit quality of the issuer, and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer’s financial condition, the Company may consider whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, the sector or industry trends and cycles affecting the issuer, and the results of reviews of the issuer’s financial condition. Management currently intends to hold all securities with unrealized losses until recovery, which for fixed income securities may be at maturity. As of June 30, 2014, management does not believe securities within our portfolio with unrealized losses should be classified as other than temporarily impaired.

Note 4 – Loans

Loans were as follows:

 

     June 30,
2014
    December 31,
2013
 
     (in thousands)  

Commercial

   $ 65,031      $ 52,878   

Commercial Real Estate:

    

Construction

     32,778        43,326   

Farmland

     64,880        71,189   

Nonfarm nonresidential

     190,909        232,026   

Residential Real Estate:

    

Multi-family

     43,496        46,858   

1-4 Family

     205,116        228,505   

Consumer

     12,669        14,365   

Agriculture

     27,477        19,199   

Other

     674        980   
  

 

 

   

 

 

 

Subtotal

     643,030        709,326   

Less: Allowance for loan losses

     (24,026     (28,124
  

 

 

   

 

 

 

Loans, net

   $ 619,004      $ 681,202   
  

 

 

   

 

 

 

 

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Table of Contents

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended June 30, 2014 and 2013:

 

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

June 30, 2014:

            

Beginning balance

   $ 3,608      $ 13,929      $ 7,071      $ 383      $ 415      $ 9      $ 25,415   

Provision for loan losses

     (329     (226     560        (28     38        (15     —     

Loans charged off

     (308     (1,701     (1,048     (51     (21     (1 )     (3,130

Recoveries

     144        1,250        290        35        3        19        1,741   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 3,115      $ 13,252      $ 6,873      $ 339      $ 435      $ 12      $ 24,026   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

June 30, 2013:

            

Beginning balance

   $ 4,990      $ 22,169      $ 11,540      $ 716      $ 410      $ 14      $ 39,839   

Provision for loan losses

     (805     321        360        (7     127        4        —     

Loans charged off

     (132     (1,866     (1,137     (203     (66     —          (3,404

Recoveries

     595        398        27        88        16        —          1,124   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the six months ended June 30, 2014 and 2013:

 

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

June 30, 2014:

            

Beginning balance

   $ 3,221      $ 16,414      $ 7,762      $ 416      $ 305      $ 6      $ 28,124   

Provision for loan losses

     116        (1,353     1,094        (9 )     151        1        —     

Loans charged off

     (454     (3,175     (2,356     (179 )     (30 )     (18 )     (6,212

Recoveries

     232        1,366        373        111        9        23        2,114   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 3,115      $ 13,252      $ 6,873      $ 339      $ 435      $ 12      $ 24,026   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

June 30, 2013:

            

Beginning balance

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

Provision for loan losses

     633        (124     (90     79        (51 )     3        450   

Loans charged off

     (1,108     (14,178     (5,476     (521 )     (83 )     —          (21,366

Recoveries

     721        556        121        179        218        —          1,795   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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 June 30, 2014:

 

     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

   $ 150       $ 1,350       $ 252       $ 1       $ —         $ —         $ 1,753   

Collectively evaluated for impairment

     2,965         11,902         6,621         338         435         12         22,273   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 3,115       $ 13,252       $ 6,873       $ 339       $ 435       $ 12       $ 24,026   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                    

Loans individually evaluated for impairment

   $ 2,150       $ 50,678       $ 26,449       $ 62       $ 229       $ 174       $ 79,742   

Loans collectively evaluated for impairment

     62,881         237,889         222,163         12,607         27,248         500         563,288   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans balance

   $ 65,031       $ 288,567       $ 248,612       $ 12,669       $ 27,477       $ 674       $ 643,030   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method as of December 31, 2013:

 

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

Allowance for loan losses:

                    

Ending allowance balance attributable to loans:

                    

Individually evaluated for impairment

   $ 290       $ 2,345       $ 827       $ 9       $ —         $ —         $ 3,471   

Collectively evaluated for impairment

     2,931         14,069         6,935         407         305         6         24,653   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 3,221       $ 16,414       $ 7,762       $ 416       $ 305       $ 6       $ 28,124   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                    

Loans individually evaluated for impairment

   $ 4,995       $ 94,330       $ 49,512       $ 93       $ 322       $ 631       $ 149,883   

Loans collectively evaluated for impairment

     47,883         252,211         225,851         14,272         18,877         349         559,443   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans balance

   $ 52,878       $ 346,541       $ 275,363       $ 14,365       $ 19,199       $ 980       $ 709,326   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 table presents information related to loans individually evaluated for impairment by class of loans as of and for the three and six months ended June 30, 2014:

 

                          Three Months Ended
June 30, 2014
     Six Months Ended
June 30, 2014
 
     Unpaid
Principal
Balance
     Recorded
Investment
     Allowance
For Loan
Losses
Allocated
     Average
Recorded
Investment
     Interest
Income
Recognized
     Average
Recorded
Investment
     Interest
Income
Recognized
     Cash Basis
Income
Recognized
 
     (in thousands)  

With No Related Allowance Recorded:

                       

Commercial

   $ 1,288       $ 812       $ —         $ 1,142       $ 54       $ 1,272       $ 55       $ 55   

Commercial real estate:

                       

Construction

     100         21         —           11         —           20         —           —     

Farmland

     2,856         2,323         —           2,673         31         3,082         48         48   

Nonfarm nonresidential

     4,367         1,117         —           1,144         127         1,231         127         127   

Residential real estate:

                       

Multi-family

     86         86         —           89         —           190         —           —     

1-4 Family

     9,460         7,578         —           7,980         11         8,681         180         180   

Consumer

     19         19         —           10         —           9         —           —     

Agriculture

     242         229         —           264         —           283         3         3   

Other

     68         68         —           74         2         54         9         9   

With An Allowance Recorded:

                       

Commercial

     1,434         1,338         150         2,332         2         2,709         20         —     

Commercial real estate:

                       

Construction

     4,944         4,486         85         6,142         8         7,183         17         —     

Farmland

     5,630         3,728         —           3,730         —           3,899         —           —     

Nonfarm nonresidential

     49,553         39,003         1,265         55,061         211         61,870         502         —     

Residential real estate:

                          —     

Multi-family

     4,281         4,281         88         4,535         39         7,062         76         —     

1-4 Family

     16,471         14,504         164         15,613         139         19,382         275         —     

Consumer

     43         43         1         44         —           58         1         —     

Agriculture

     —           —           —           —           —           —           —           —     

Other

     351         106         —           106         —           276         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 101,193       $ 79,742       $ 1,753       $ 100,950       $ 624       $ 117,261       $ 1,313       $ 422   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

15


Table of Contents

The following table presents loans individually evaluated for impairment by class of loan as of December 31, 2013:

 

     Unpaid
Principal
Balance
     Recorded
Investment
     Allowance
For Loan
Losses
Allocated
     Average
Recorded
Investment
     Interest
Income
Recognized
     Cash
Basis
Income
Recognized
 
     (in thousands)  

With No Related Allowance Recorded:

                 

Commercial

   $ 2,131       $ 1,533       $ —         $ 1,622       $ 30       $ 30   

Commercial real estate:

                 

Construction

     64         38         —           467         164         164   

Farmland

     4,074         3,898         —           4,259         268         268   

Nonfarm nonresidential

     1,568         1,404         —           1,724         367         366   

Residential real estate:

                 

Multi-family

     444         392         —           541         3         3   

1-4 Family

     11,011         10,083         —           11,533         115         116   

Consumer

     9         9         —           21         —           —     

Agriculture

     401         322         —           213         —           —     

Other

     14         13         —           10         11         11   

With An Allowance Recorded:

                 

Commercial

     3,734         3,462         290         3,905         99         —     

Commercial real estate:

                 

Construction

     10,409         9,264         218         20,173         88         —     

Farmland

     6,117         4,238         65         5,579         37         —     

Nonfarm nonresidential

     94,508         75,488         2,062         77,726         1,324         —     

Residential real estate:

                 

Multi-family

     13,883         12,117         393         13,121         208         —     

1-4 Family

     31,327         26,920         434         27,755         557         —     

Consumer

     84         84         9         134         3         —     

Agriculture

     —           —           —           2         —           —     

Other

     861         618         —           539         17         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 180,639       $ 149,883       $ 3,471       $ 169,324       $ 3,291       $ 958   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Troubled Debt Restructuring

A troubled debt restructuring (TDR) occurs when the Company has agreed to a loan modification in the form of a concession for a borrower who is experiencing financial difficulty. The majority of the Company’s TDRs involve a reduction in interest rate, a deferral of principal for a stated period of time, or an interest only period. All TDRs are considered impaired and the Company has allocated reserves for these loans to reflect the present value of the concessionary terms granted to the borrower.

 

16


Table of Contents

The following table presents the types of TDR loan modifications by portfolio segment outstanding as of June 30, 2014 and December 31, 2013:

 

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

June 30, 2014

        

Commercial

        

Rate reduction

   $ 20       $ —         $ 20   

Principal deferral

     —           869         869   

Commercial Real Estate:

        

Construction

        

Rate reduction

     272         3,409         3,681   

Principal deferral

     355         —           355   

Farmland

        

Principal deferral

     —           2,365         2,365   

Nonfarm nonresidential

        

Rate reduction

     16,569         11,208         27,777   

Principal deferral

     680         —           680   

Interest only payments

     —           649         649   

Residential Real Estate:

        

Multi-family

        

Rate reduction

     4,280         —           4,280   

1-4 Family

        

Rate reduction

     10,170         —           10,170   

Consumer

        

Rate reduction

     43         —           43   
  

 

 

    

 

 

    

 

 

 

Total TDRs

   $ 32,389       $ 18,500       $ 50,889   
  

 

 

    

 

 

    

 

 

 

 

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

December 31, 2013

        

Commercial

        

Rate reduction

   $ 1,933       $ —         $ 1,933   

Principal deferral

     —           869         869   

Commercial Real Estate:

        

Construction

        

Rate reduction

     275         6,345         6,620   

Principal deferral

     499         —           499   

Farmland

        

Rate reduction

     150         —           150   

Principal deferral

     —           2,365         2,365   

Nonfarm nonresidential

        

Rate reduction

     22,457         21,235         43,692   

Principal deferral

     691         —           691   

Interest only payments

     2,439         1,489         3,928   

Residential Real Estate:

        

Multi-family

        

Rate reduction

     4,354         6,655         11,009   

Interest only payments

     641         —           641   

1-4 Family

        

Rate reduction

     10,312         7,958         18,270   

Consumer

        

Rate reduction

     84         —           84   

Other

        

Rate reduction

     511         —           511   
  

 

 

    

 

 

    

 

 

 

Total TDRs

   $ 44,346       $ 46,916       $ 91,262   
  

 

 

    

 

 

    

 

 

 

 

17


Table of Contents

At June 30, 2014 and December 31, 2013, 64% and 49%, respectively, of the Company’s TDRs were performing according to their modified terms. The Company allocated $1.6 million and $2.9 million in reserves to borrowers whose loan terms have been modified in TDRs as of June 30, 2014, and December 31, 2013, respectively. The Company has committed to lend additional amounts totaling $262,000 and $261,000 as of June 30, 2014 and December 31, 2013, respectively, to borrowers with outstanding loans classified as TDRs.

Management periodically reviews renewals/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, 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 June 30, 2014, the TDR classification was removed from two loans that met the requirements as discussed above. These two loans totaled $7.3 million at December 31, 2013. These loans are no longer evaluated individually for impairment.

No TDR loan modifications occurred during the three or six months ended June 30, 2014. The following tables present a summary of the types of TDR loan modifications by portfolio type that occurred during the three months ended June 30, 2013:

 

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

June 30, 2013

     

Commercial Real Estate:

        

Construction

        

Principal deferral

   $ 499       $ —         $ 499   
  

 

 

    

 

 

    

 

 

 

Total TDRs

   $ 499       $ —         $ 499   
  

 

 

    

 

 

    

 

 

 

As of June 30, 2013, 100% of the Company’s TDRs that occurred during the three months ended June 30, 2013, were performing according to their modified terms. The Company allocated $49,000 in reserves to customers whose loan terms have been modified during the three months ended June 30, 2013. For modifications occurring during the three month period ended June 30, 2013, the post-modification balances approximate the pre-modification balances.

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

 

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

June 30, 2013

        

Commercial:

        

Rate reduction

   $ 45       $ —         $ 45   

Commercial Real Estate:

        

Construction

        

Rate reduction

     —           1,291         1,291   

Principal deferral

     499         —           499   

Nonfarm nonresidential

        

Rate reduction

     1,399         —           1,399   

Residential Real Estate:

        

1-4 Family

        

Rate reduction

     897         —           897   

Consumer:

        

Rate reduction

     40         —           40   
  

 

 

    

 

 

    

 

 

 

Total TDRs

   $ 2,880       $ 1,291       $ 4,171   
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

During the first six months of 2013, approximately $1.5 million TDRs defaulted on their restructured loan and the default occurred within the 12 month period following the loan modification. These defaults were construction and development loans. A default is considered to have occurred once the TDR is past due 90 days or more or it has been placed on nonaccrual.

Nonperforming Loans

Nonperforming loans include impaired loans not on accrual and smaller balance homogeneous loans, such as residential mortgage and consumer loans, that are collectively evaluated for impairment.

The following table presents the recorded investment in nonaccrual and loans past due 90 days and still on accrual by class of loan as of June 30, 2014, and December 31, 2013:

 

     Nonaccrual      Loans Past Due 90 Days
And Over Still Accruing
 
     June 30,
2014
     December 31,
2013
     June 30,
2014
     December 31,
2013
 
     (in thousands)  

Commercial

   $ 1,984       $ 2,886       $ —         $ —     

Commercial Real Estate:

           

Construction

     3,880         8,528         —           —     

Farmland

     6,051         7,844         —           —     

Nonfarm nonresidential

     20,039         48,447         —           —     

Residential Real Estate:

           

Multi-family

     86         7,513         —           —     

1-4 Family

     11,912         26,098         —           230   

Consumer

     20         9         —           2   

Agriculture

     229         322         —           —     

Other

     174         120         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 44,375       $ 101,767       $ —         $ 232   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents the aging of the recorded investment in past due loans as of June 30, 2014 and December 31, 2013:

 

     30 – 59
Days
Past Due
     60 – 89
Days
Past Due
     90 Days
And Over
Past Due
     Nonaccrual      Total
Past Due
And
Nonaccrual
 
     (in thousands)  

June 30, 2014

        

Commercial

   $ 430       $ 18       $ —         $ 1,984       $ 2,432   

Commercial Real Estate:

              

Construction

     —           —           —           3,880         3,880   

Farmland

     200         —           —           6,051         6,251   

Nonfarm nonresidential

     550         336         —           20,039         20,925   

Residential Real Estate:

              

Multi-family

     —           —           —           86         86   

1-4 Family

     1,744         593         —           11,912         14,249   

Consumer

     101         44         —           20         165   

Agriculture

     32         —           —           229         261   

Other

     —           —           —           174         174   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,057       $ 991       $ —         $ 44,375       $ 48,423   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     30 – 59
Days
Past Due
     60 – 89
Days
Past Due
     90 Days
And Over
Past Due
     Nonaccrual      Total
Past Due
And
Nonaccrual
 
     (in thousands)  

December 31, 2013

              

Commercial

   $ 156       $ 123       $ —         $ 2,886       $ 3,165   

Commercial Real Estate:

              

Construction

     261         —           —           8,528         8,789   

Farmland

     484         41         —           7,844         8,369   

Nonfarm nonresidential

     4,375         —           —           48,447         52,822   

Residential Real Estate:

              

Multi-family

     1,181         —           —           7,513         8,694   

1-4 Family

     4,059         577         230         26,098         30,964   

Consumer

     145         34         2         9         190   

Agriculture

     35         —           —           322         357   

Other

     —           —           —           120         120   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 10,696       $ 775       $ 232       $ 101,767       $ 113,470   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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. Additionally, loans are analyzed individually by classifying the loans as to credit risk. This analysis includes loans with an outstanding balance greater than $500,000 and non-homogeneous loans, such as commercial and commercial real estate loans. This analysis is performed on a quarterly basis. The following definitions are used for risk ratings:

Watch – Loans classified as watch are those loans which have experienced a potentially adverse development which necessitates increased monitoring.

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

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

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

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 June 30, 2014, and December 31, 2013, 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)  

June 30, 2014

              

Commercial

   $ 54,255       $ 2,859       $ —         $ 7,917       $ —         $ 65,031   

Commercial Real Estate:

                 

Construction

     21,105         6,190         —           5,483         —           32,778   

Farmland

     46,688         8,687         230         9,275         —           64,880   

Nonfarm nonresidential

     108,184         33,632         1,211         47,882         —           190,909   

Residential Real Estate:

                 

Multi-family

     30,124         7,850         —           5,522         —           43,496   

1-4 Family

     136,468         30,384         1,780         36,484         —           205,116   

Consumer

     11,523         612         2         532         —           12,669   

Agriculture

     26,007         994         —           476         —           27,477   

Other

     499         —           —           175         —           674   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 434,853       $ 91,208       $ 3,223       $ 113,746       $ —         $ 643,030   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

20


Table of Contents
     Pass      Watch      Special
Mention
     Substandard      Doubtful      Total  
     (in thousands)  

December 31, 2013

              

Commercial

   $ 35,438       $ 8,517       $ 329       $ 8,594       $ —         $ 52,878   

Commercial Real Estate:

                 

Construction

     16,706         10,771         2,277         13,572         —           43,326   

Farmland

     46,909         9,121         1,735         13,424         —           71,189   

Nonfarm nonresidential

     93,327         51,522         734         86,443         —           232,026   

Residential Real Estate:

                 

Multi-family

     16,506         17,320         —           13,032         —           46,858   

1-4 Family

     130,833         43,785         784         53,103         —           228,505   

Consumer

     12,718         968         6         673         —           14,365   

Agriculture

     16,742         1,802         —           655         —           19,199   

Other

     350         510         —           120         —           980   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 369,529       $ 144,316       $ 5,865       $ 189,616       $ —         $ 709,326   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

During the first quarter of 2014, management instituted a new risk category within its pass classification. The purpose was to better identify certain loans where the borrower’s sustained satisfactory repayment history was deemed a more relevant predictor of future loss than certain underwriting criteria at origination. The establishment of this new pass risk category helps to ensure the watch risk category remains transitory and event driven in nature. A total of $24.2 million in commercial, $8.5 million in residential, and $2.2 million in agriculture loans were reclassified from watch to the new pass risk category during the first quarter.

Note 5 – Other Real Estate Owned

Other real estate owned (OREO) is real estate acquired as a result of foreclosure or by deed in lieu of foreclosure. It is classified as real estate owned until such time as it is sold. When property is acquired as a result of foreclosure or by deed in lieu of foreclosure, it is recorded at its fair market value less cost to sell. Any write-down of the property at the time of acquisition is charged to the allowance for loan losses. Costs incurred in order to perfect the lien prior to foreclosure may be capitalized if the fair value less the cost to sell exceeds the balance of the loan at the time of transfer to OREO. Examples of eligible costs to be capitalized are payments of delinquent property taxes to clear tax liens or payments to contractors and subcontractors to clear mechanics’ liens. Subsequent reductions in fair value are recorded as non-interest expense.

To determine the fair value of OREO for smaller dollar single family homes, we consult with internal real estate sales staff and external realtors, investors, and appraisers. If the internally evaluated market price is below our underlying investment in the property, appropriate write-downs are taken. For larger dollar residential and commercial real estate properties, we obtain a new appraisal of the subject property or have staff in our centralized appraisal department evaluate the latest in-file appraisal in connection with the transfer to other real estate owned. We typically obtain updated appraisals within five quarters of the anniversary date of ownership unless a sale is imminent.

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

 

     June 30,
2014
    December 31,
2013
 
     (in thousands)  

Commercial Real Estate:

    

Construction, land development, and other land

   $ 21,827      $ 19,199   

Farmland

     1,349        695   

Nonfarm nonresidential

     21,956        6,064   

Residential Real Estate:

    

Multi-family

     6,335        248   

1-4 Family

     11,667        4,916   
  

 

 

   

 

 

 
     63,134        31,122   

Valuation allowance

     (199     (230
  

 

 

   

 

 

 
   $ 62,935      $ 30,892   
  

 

 

   

 

 

 

 

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Table of Contents
     For the Three
Months Ended
June 30,
    For the Six
Months Ended
June 30,
 
     2014     2013     2014     2013  
     (in thousands)     (in thousands)  

OREO Valuation Allowance Activity:

        

Beginning balance

   $ 208      $ 928      $ 230      $ 1,154   

Provision to allowance

     400        977        650        1,284   

Write-downs

     (409     (1,158     (681     (1,691
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 199      $ 747      $ 199      $ 747   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net activity relating to other real estate owned during the six months ended June 30, 2014 and 2013 is as follows:

 

     2014     2013  
     (in thousands)  

OREO Activity

    

OREO as of January 1

   $ 30,892      $ 43,671   

Real estate acquired

     36,920        15,555   

Valuation adjustment writedowns

     (650     (1,284

Gain/(Loss) on sale

     54        (359

Proceeds from sale of properties

     (4,281     (10,553
  

 

 

   

 

 

 

OREO as of June 30

   $ 62,935      $ 47,030   
  

 

 

   

 

 

 

Expenses related to other real estate owned include:

 

     Three Months
Ended

June 30,
     Six Months Ended
June 30,
 
     2014     2013      2014     2013  
     (in thousands)      (in thousands)  

Net (gain) loss on sales

   $ (54   $ 162       $ (54   $ 359   

Provision to allowance

     400        977         650        1,284   

Operating expense

     428        518         840        805   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 774      $ 1,657       $ 1,436      $ 2,448   
  

 

 

   

 

 

    

 

 

   

 

 

 

Note 6 – Deposits

The following table shows deposits by category:

 

     June 30,
2014
     December 31,
2013
 
     (in thousands)  

Non-interest bearing

   $ 109,956       $ 107,486   

Interest checking

     76,625         84,626   

Money market

     95,946         79,349   

Savings

     37,178         36,292   

Certificates of deposit

     631,110         679,952   
  

 

 

    

 

 

 

Total

   $ 950,815       $ 987,705   
  

 

 

    

 

 

 

Time deposits of $100,000 or more were $278.3 million and $295.0 million at June 30, 2014 and December 31, 2013, respectively.

Scheduled maturities of total time deposits at June 30, 2014 are as follows (in thousands):

 

Year 1

   $ 473,490   

Year 2

     121,978   

Year 3

     12,177   

Year 4

     7,910   

Year 5

     15,553   

Thereafter

     2   
  

 

 

 
   $ 631,110   
  

 

 

 

 

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Table of Contents

Note 7 – Advances from the Federal Home Loan Bank

Advances from the Federal Home Loan Bank were as follows:

 

     June 30,
2014
     December 31,
2013
 
     (in thousands)  

Monthly amortizing advances with fixed rates from 0.00% to 5.25% and maturities ranging from 2014 through 2033, averaging 2.89% for 2014

   $ 14,134       $ 4,492   
  

 

 

    

 

 

 

Each advance is payable based upon the terms on agreement, with a prepayment penalty. The advances are collateralized by first mortgage loans. The borrowing capacity is based on the market value of the underlying pledged loans. At June 30, 2014, our additional borrowing capacity with the FHLB was $10.6 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. Additionally, any new advances are limited to a one year maturity or less.

Note 8 – Fair Values Measurement

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. We use various valuation techniques to determine fair value, including market, income and cost approaches. There are three levels of inputs that may be used to measure fair values:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets an entity has the ability to access as of the measurement date, or observable inputs.

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.

 

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Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. These routine adjustments are made to adjust the value of a specific property relative to comparable properties for variations in qualities such as location, size, and income production capacity relative to the subject property of the appraisal. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.

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

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

Impaired loans are evaluated quarterly for additional impairment. We obtain updated appraisals on properties securing our loans when circumstances are warranted such as at the time of renewal or when market conditions have significantly changed. This determination is made on a property-by-property basis in light of circumstances in the broader economic climate and our assessment of deterioration of real estate values in the market in which the property is located. The first stage of our assessment involves management’s inspection of the property in question. Management also engages in conversations with local real estate professionals, investors, and market makers to determine the likely marketing time and value range for the property. The second stage involves an assessment of current trends in the regional market. After thorough consideration of these factors, management will either internally evaluate fair value or order a new appraisal.

Other Real Estate Owned (OREO): OREO is evaluated at the time of acquisition and recorded at fair value as determined by independent appraisal or internal market evaluation less cost to sell. Our quarterly evaluations of OREO for impairment are driven by property type. For smaller dollar single family homes, we consult with internal real estate sales staff and external realtors, investors, and appraisers. Based on these consultations, we determine asking prices for OREO properties we are marketing for sale. If the internally evaluated fair value is below our recorded investment in the property, appropriate write-downs are taken.

For larger dollar commercial real estate properties, we obtain a new appraisal of the subject property or have staff in our centralized appraisal department evaluate the latest in-file appraisal in connection with the transfer to other real estate owned. In some of these circumstances, an appraisal is in process at quarter end, and we must make our best estimate of the fair value of the underlying collateral based on our internal evaluation of the property, review of the most recent appraisal, and discussions with the currently engaged appraiser. We generally obtain updated appraisals within five quarters of the anniversary date of ownership unless a sale is imminent.

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

 

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Table of Contents

Financial assets measured at fair value on a recurring basis at June 30, 2014 and December 31, 2013 are summarized below:

 

            Fair Value Measurements at June 30, 2014 Using  
            (in thousands)  

Description

   Carrying
Value
     Quoted Prices In
Active Markets for
Identical Assets
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Available for sale securities

     

U.S. Government and federal agency

   $ 29,607       $ —         $ 29,607       $ —     

Agency mortgage-backed: residential

     118,837         —           118,837         —     

State and municipal

     12,559         —           12,559         —     

Corporate bonds

     19,069         —           19,069         —     

Other debt securities

     651         —           —           651   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 180,723       $ —         $ 180,072       $ 651   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

            Fair Value Measurements at December 31, 2013 Using  
            (in thousands)  

Description

   Carrying
Value
     Quoted Prices In
Active Markets for
Identical Assets
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Available for sale securities

           

U.S. Government and federal agency

   $ 29,866       $ —         $ 29,866       $ —     

Agency mortgage-backed: residential

     100,943         —           100,943         —     

State and municipal

     13,545         —           13,545         —     

Corporate bonds

     18,161         —           18,161         —     

Other debt securities

     632         —           —           632   

Equity securities

     197         197         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 163,344       $ 197       $ 162,515       $ 632   
  

 

 

    

 

 

    

 

 

    

 

 

 

There were no transfers between Level 1 and Level 2 during 2014 or 2013.

The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the periods ended June 30, 2014 and 2013:

 

     Other Debt
Securities
 
     2014      2013  
     (in thousands)  

Balances of recurring Level 3 assets at January 1

   $ 632       $ 618   

Total gain (loss) for the period:

     

Included in other comprehensive income (loss)

     19         13   
  

 

 

    

 

 

 

Balance of recurring Level 3 assets at June 30

   $ 651       $ 631   
  

 

 

    

 

 

 

Our other debt security valuation is determined internally by calculating discounted cash flows using the security’s coupon rate of 6.5% and an estimated current market rate of 8.25% based upon the current yield curve plus spreads that adjust for volatility, credit risk, and optionality. We also consider the issuer’s publicly filed financial information as well as assumptions regarding the likelihood of deferrals and defaults.

 

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Table of Contents

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

 

            Fair Value Measurements at June 30, 2014 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

   $ 1,188       $ —         $ —         $ 1,188   

Commercial real estate:

           

Construction

     4,401         —           —           4,401   

Farmland

     3,728         —           —           3,728   

Nonfarm nonresidential

     37,738         —           —           37,738   

Residential real estate:

           

Multi-family

     4,193         —           —           4,193   

1-4 Family

     14,340         —           —           14,340   

Consumer

     42         —           —           42   

Other

     106         —           —           106   

Other real estate owned, net:

           

Commercial real estate:

           

Construction

     21,758         —           —           21,758   

Farmland

     1,344         —           —           1,344   

Nonfarm nonresidential

     21,887         —           —           21,887   

Residential real estate:

           

Multi-family

     6,316         —           —           6,316   

1-4 Family

     11,630         —           —           11,630   

 

            Fair Value Measurements at December 31, 2013 Using  
            (in thousands)  

Description

   Carrying
Value
     Quoted Prices In
Active Markets for
Identical Assets
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Impaired loans:

        

Commercial

   $ 3,172       $ —         $ —         $ 3,172   

Commercial real estate:

           

Construction

     9,046         —           —           9,046   

Farmland

     4,173         —           —           4,173   

Nonfarm nonresidential

     73,426         —           —           73,426   

Residential real estate:

           

Multi-family

     11,724         —           —           11,724   

1-4 Family

     26,486         —           —           26,486   

Consumer

     75         —           —           75   

Agriculture

     —           —           —           —     

Other

     618         —           —           618   

Other real estate owned, net:

           

Commercial real estate:

           

Construction

     19,057         —           —           19,057   

Farmland

     690         —           —           690   

Nonfarm nonresidential

     6,019         —           —           6,019   

Residential real estate:

           

Multi-family

     246         —           —           246   

1-4 Family

     4,880         —           —           4,880   

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $67.5 million at June 30, 2014 with a valuation allowance of $1.8 million. This resulted in no additional provision for loan losses for the six months ended June 30, 2014. At December 31, 2013, impaired loans had a carrying amount of $132.2 million, with a valuation allowance of $3.5 million.

Other real estate owned, which is measured at the lower of carrying or fair value less estimated costs to sell, had a net carrying amount of $62.9 million as of June 30, 2014, compared with $30.9 million at December 31, 2013. Fair value write-downs of $650,000 were recorded on other real estate owned for the six months ended June 30, 2014.

 

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Table of Contents

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 June 30, 2014:

 

     Fair Value     

Valuation

Technique(s)

  

Unobservable Input(s)

   Range (Weighted
Average)
 
     (in thousands)                   

Impaired loans – Commercial

   $ 1,188       Market value approach   

Adjustment for receivables and inventory discounts

     16% – 32%(24%)   

Impaired loans – Commercial real estate

   $ 45,867       Sales comparison approach   

Adjustment for differences between the comparable sales

     0% – 62%(18%)   

Impaired loans – Residential real estate

   $ 18,533       Sales comparison approach   

Adjustment for differences between the comparable sales

     0% – 68%(17%)   

Other real estate owned – Commercial real estate

   $ 44,989      

Sales comparison approach

Income approach

  

Adjustment for differences between the comparable sales

Discount or capitalization rate

    

 

3% – 45%(17%)

8% – 16%(14%)

  

  

Other real estate owned – Residential real estate

   $ 17,946       Sales comparison approach   

Adjustment for differences between the comparable sales

     2% – 54%(11%)   

The following table presents qualitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at December 31, 2013:

 

     Fair Value     

Valuation

Technique(s)

  

Unobservable Input(s)

   Range (Weighted
Average)
 
     (in thousands)                   

Impaired loans – Commercial

   $ 3,172       Market value approach   

Adjustment for receivables and inventory discounts

     16% –32%(24%)   

Impaired loans – Commercial real estate

   $ 86,645       Sales comparison approach   

Adjustment for differences between the comparable sales

     0% – 69%(20%)   

Impaired loans – Residential real estate

   $ 38,210       Sales comparison approach   

Adjustment for differences between the comparable sales

     0% – 68%(15%)   

Other real estate owned – Commercial real estate

   $ 25,766      

Sales comparison approach

Income approach

  

Adjustment for differences between the comparable sales

Discount or capitalization rate

    

 

3% – 51%(22%)

7% – 16%(11%)

  

  

Other real estate owned – Residential real estate

   $ 5,126       Sales comparison approach   

Adjustment for differences between the comparable sales

     2% – 54%(11%)   

 

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

 

            Fair Value Measurements at June 30, 2014 Using  
     Carrying
Amount
     Level 1      Level 2      Level 3      Total  
     (in thousands)  

Financial assets

           

Cash and cash equivalents

   $ 102,266       $ 78,906       $ 23,360       $ —         $ 102,266   

Securities available for sale

     180,723         —           180,072         651         180,723   

Securities held to maturity

     43,488         —           44,853         —           44,853   

Federal Home Loan Bank stock

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

Mortgage loans held for sale

     280         —           280         —           280   

Loans, net

     619,004         —           —           632,722         632,722   

Accrued interest receivable

     3,461         —           1,365         2,096         3,461   

Financial liabilities

              

Deposits

   $ 950,815       $ 109,956       $ 837,997       $ —         $ 947,953   

Securities sold under agreements to repurchase

     2,451         —           2,451         —           2,451   

Federal Home Loan Bank advances

     14,134         —           14,138         —           14,138   

Subordinated capital notes

     5,400         —           —           5,177         5,177   

Junior subordinated debentures

     25,000         —           —           13,841         13,841   

Accrued interest payable

     2,813         —           1,014         1,799         2,813   

 

            Fair Value Measurements at December 31, 2013
Using
 
     Carrying
Amount
     Level 1      Level 2      Level 3      Total  
     (in thousands)  

Financial assets

           

Cash and cash equivalents

   $ 111,134       $ 106,885       $ 4,249       $ —         $ 111,134   

Securities available for sale

     163,344         197         162,515         632         163,344   

Securities held to maturity

     43,612         —           42,947         —           42,947   

Federal Home Loan Bank stock

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

Mortgage loans held for sale

     149         —           149         —           149   

Loans, net

     681,202         —           —           695,999         695,999   

Accrued interest receivable

     3,891         —           1,343         2,548         3,891   

Financial liabilities

              

Deposits

   $ 987,705       $ 107,486       $ 879,707       $ —         $ 987,193   

Securities sold under agreements to repurchase

     2,470         —           2,470         —           2,470   

Federal Home Loan Bank advances

     4,492         —           4,495         —           4,495   

Subordinated capital notes

     5,850         —           —           5,586         5,586   

Junior subordinated debentures

     25,000         —           —           13,526         13,526   

Accrued interest payable

     2,535         —           1,042         1,493         2,535   

The methods and assumptions, not previously presented, used to estimate fair values are described as follows:

 

  (a)

Cash and Cash Equivalents

The carrying amounts of cash and short-term instruments approximate fair values and are classified as either Level 1 or Level 2. Non-interest bearing deposits are Level 1 whereas interest bearing due from bank accounts and fed funds sold are Level 2.

 

  (b)

FHLB Stock

It is not practical to determine the fair value of FHLB stock due to restrictions placed on its transferability.

 

  (c)

Loans, Net

Fair values of loans, excluding loans held for sale, are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

 

  (d)

Mortgage Loans Held for Sale

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

 

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Table of Contents
  (e)

Deposits

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

 

  (f)

Securities Sold Under Agreements to Repurchase

The carrying amounts of borrowings under repurchase agreements approximate their fair values resulting in a Level 2 classification.

 

  (g)

Other Borrowings

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

The fair values of the Company’s subordinated capital notes and junior subordinated debentures are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 3 classification.

 

  (h)

Accrued Interest Receivable/Payable

The carrying amounts of accrued interest approximate fair value resulting in a Level 2 or Level 3 classification based on the level of the asset or liability with which the accrual is associated.

Note 9 – Income Taxes

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

 

     June 30,
2014
    December 31,
2013
 
     (in thousands)  

Deferred tax assets:

    

Net operating loss carry-forward

   $ 25,943      $ 25,460   

Allowance for loan losses

     8,409        9,843   

Other real estate owned write-down

     9,537        9,478   

Alternative minimum tax credit carry-forward

     692        692   

Net assets from acquisitions

     656        644   

Other than temporary impairment on securities

     46        89   

Net unrealized loss on securities

     —          1,067   

New market tax credit carry-forward

     208        208   

Nonaccrual loan interest

     878        911   

Amortization of non-compete agreements

     15        16   

Other

     1,719        1,640   
  

 

 

   

 

 

 
     48,103        50,048   
  

 

 

   

 

 

 

Deferred tax liabilities:

    

FHLB stock dividends

     928        1,276   

Fixed assets

     291        333   

Net unrealized gain on securities

     263        —     

Originated mortgage servicing rights

     63        75   

Other

     548        570   
  

 

 

   

 

 

 
     2,093        2,254   
  

 

 

   

 

 

 

Net deferred tax assets before valuation allowance

     46,010        47,794   
  

 

 

   

 

 

 

Valuation allowance

     (46,010     (47,794
  

 

 

   

 

 

 

Net deferred tax asset

   $ —        $ —     
  

 

 

   

 

 

 

Our estimate of the realizability of the deferred tax asset depends on our estimate of projected future levels of taxable income as all carryback ability was fully absorbed by our tax loss of approximately $40.1 million for 2011. In analyzing future taxable income levels, we considered all evidence currently available, both positive and negative. Based on our analysis, we continue to maintain a valuation allowance for all deferred tax assets as of June 30, 2014. Our deferred tax assets and the related valuation allowance are analyzed and adjusted on a quarterly basis.

 

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Table of Contents

The calculation for the income tax provision or benefit generally does not consider the tax effects of changes in other comprehensive income, or OCI, which is a component of stockholders’ equity on the balance sheet. However, an exception is provided in certain circumstances, such as when there is a full valuation allowance against net deferred tax assets, there is a loss from continuing operations and there is income in other components of the financial statements. In such a case, pre-tax income from other categories, such as changes in OCI, must be considered in determining a tax benefit to be allocated to the loss from continuing operations. For the quarter ended June 30, 2014, this resulted in $424,000 of income tax benefit allocated to continuing operations. The June 30, 2014 tax benefit is entirely due to gains in other comprehensive income that are presented in current operations in accordance with applicable accounting standards.

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 six months ended June 30, 2014 or the year ended December 31, 2013 related to unrecognized tax benefits.

The Company and its subsidiaries are subject to U.S. federal income tax and the Company is subject to income tax in the Commonwealth of Kentucky. The Company is no longer subject to examination by taxing authorities for years before 2010.

Note 10 – Stock Plans and Stock Based Compensation

The Company has two stock incentive plans. On February 23, 2006, the Company adopted the Porter Bancorp, Inc. 2006 Stock Incentive Plan. In May 2013, shareholders approved an amendment to the plan to increase the number of shares authorized for issuance by 800,000 shares. In May 2014, shareholders approved an amendment to the Plan to increase the number of shares authorized for issuance by 300,000 shares. The 2006 Plan now permits the issuance of up to 1,563,050 shares of the Company’s common stock upon the exercise of stock options or upon the grant of stock awards. As of June 30, 2014, the Company had granted 898,011 unvested shares net of forfeitures and vesting under the stock incentive plan. Shares issued under the plan vest annually on the anniversary date of the grant over three to ten years. The Company has 527,799 shares remaining available for issue under the plan.

On May 15, 2006, the Board of Directors approved the Porter Bancorp, Inc. 2006 Non-Employee Directors Stock Ownership Incentive Plan, which was approved by holders of the Company’s voting common stock on June 8, 2006. On May 16, 2012, holders of the Company’s voting common stock voted to further amend the 2006 Non-Employee Directors Stock Ownership Incentive Plan to award restricted shares having a fair market value of $25,000 annually to each non-employee director, and to increase the number of shares issuable under the Directors’ Plan from 100,000 shares to 400,000 shares. In May 2014, the Plan was further amended to increase the number of shares issuable to 700,000 shares. Unvested shares are granted automatically under the plan at fair market value on the date of grant and vest on December 31 in the year of grant. To date, the Company has issued 181,819 unvested shares, net of forfeitures and vesting, to non-employee directors. At June 30, 2014, 271,211 shares remain available for issuance under this plan.

The fair value of the 2014 unvested shares issued to employees was $113,000, or $0.93 per weighted-average share. The fair value of the 2014 unvested shares issued to directors was $150,000, or $0.90 per weighted-average share. The Company recorded $283,000 and $226,000 of stock-based compensation during the first six months of 2014 and 2013, respectively, to salaries and employee benefits. There was no significant impact on compensation expense resulting from forfeited or expiring shares. We expect substantially all of the unvested shares outstanding at the end of the period will vest according to the vesting schedule. No deferred tax benefit was recognized related to this expense for either period.

The following table summarizes unvested share activity as of and for the periods indicated for the Stock Incentive Plan:

 

     Six Months Ended
June 30, 2014
     Twelve Months Ended
December 31, 2013
 
     Shares     Weighted
Average
Grant
Price
     Shares     Weighted
Average
Grant
Price
 

Outstanding, beginning

     787,426      $ 1.56         153,316      $ 5.92   

Granted

     122,220        0.93         693,214        1.18   

Vested

     (11,121     11.72         (22,113     12.19   

Forfeited

     (514     21.06         (36,991     6.22   
  

 

 

      

 

 

   

Outstanding, ending

     898,011      $ 1.34         787,426      $ 1.56   
  

 

 

      

 

 

   

 

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

 

     Six Months Ended
June 30, 2014
     Twelve Months Ended
December 31, 2013
 
     Shares     Weighted
Average
Grant
Price
     Shares     Weighted
Average
Grant
Price
 

Outstanding, beginning

     47,428      $ 1.69         80,078      $ 1.77   

Granted

     166,668        0.90         182,355        0.85   

Vested

     (7,757     1.74         (215,005     1.01   

Forfeited

     (24,520     1.69         —          —     
  

 

 

      

 

 

   

Outstanding, ending

     181,819      $ 0.96         47,428      $ 1.69   
  

 

 

      

 

 

   

Unrecognized stock based compensation expense related to unvested shares for the remainder of 2014 and beyond is estimated as follows (in thousands):

 

July 2014 – December 2014

   $ 397   

2015

     420   

2016

     275   

2017

     51   

2018 & thereafter

     —     

Note 11 – Earnings (Loss) per Share

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

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2014     2013     2014     2013  
     (in thousands, except share and per share data)  

Net income (loss)

   $ 43      $ (1,309 )   $ (244 )   $ (1,378 )

Less:

        

Preferred stock dividends

     789        437        1,574        875   

Accretion of Series A preferred stock discount

     —          45        —          90   

Earnings allocated to unvested shares

     (55     (62     (128     (69

Earnings allocated to Series C preferred

     (19     (48     (45     (62
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common shareholders, basic and diluted

   $ (672   $ (1,681   $ (1,645   $ (2,212
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic

        

Weighted average common shares including

unvested common shares outstanding

     13,293,226        12,528,932        13,256,911        12,501,854   

Less: Weighted average unvested common shares

     979,211        434,250        931,092        367,297   

Less: Weighted average Series C preferred

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

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding

     11,981,121        11,761,788        11,992,925        11,801,663   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic loss per common share

   $ (0.06   $ (0.14   $ (0.14   $ (0.19
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

        

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

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares and potential common shares

     11,981,121        11,761,788        11,992,925        11,801,663   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted loss per common share

   $ (0.06   $ (0.14   $ (0.14   $ (0.19
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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The Company had no outstanding stock options at June 30, 2014 or 2013. A warrant for the purchase of 330,561 shares of the Company’s common stock at an exercise price of $15.88 was outstanding at June 30, 2014 and 2013 but was not included in the diluted EPS computation as inclusion would have been anti-dilutive. Additionally, warrants for the purchase of 1,449,459 shares of non-voting common stock at an exercise price of $10.95 per share were outstanding at June 30, 2014 and 2013, but were not included in the diluted EPS computation as inclusion would have been anti-dilutive.

Note 12 – Capital Requirements and Restrictions on Retained Earnings

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

On June 24, 2011, PBI Bank entered into a Consent Order with the FDIC and the Kentucky Department of Financial Institutions. The consent order requires the Bank to complete a management study, to maintain Tier 1 capital as a percentage of total assets of at least 9% and a total risk based capital ratio of at least 12%, to develop a plan to reduce our risk position in each substandard asset in excess of $1 million, to complete board review of the adequacy of the allowance for loan losses prior to quarterly Call Report submissions, to adopt procedures which strengthen the loan review function and ensure timely and accurate grading of credit relationships, to charge-off all assets classified as loss, to develop a plan to reduce concentrations of construction and development loans to not more than 75% of total risk based capital and non-owner occupied commercial real estate loans to not more than 250% of total risk based capital, to limit asset growth to no more than 5% in any quarter or 10% annually, to not extend additional credit to any borrower classified substandard unless the board of directors adopts prior to the extension a detailed statement giving reasons why the extension is in the best interest of the bank, and to not declare or pay any dividend without the prior consent of our regulators. We are also restricted from accepting, renewing, or rolling-over brokered deposits without the prior receipt of a waiver on a case-by-case basis from our regulators.

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

In October 2012, the Bank entered into a new Consent Order with the FDIC and KDFI again agreeing to maintain a minimum Tier 1 leverage ratio of 9% and a minimum total risk based capital ratio of 12%. The Bank cannot be considered well-capitalized while under the Consent Order. The Bank also agreed that if it should be unable to reach the required capital levels, and if directed in writing by the FDIC, then the Bank would within 30 days develop, adopt and implement a written plan to sell or merge itself into another federally insured financial institution or otherwise immediately obtain a sufficient capital investment into the Bank to fully meet the capital requirements. We have not been directed by the FDIC to implement such a plan.

The new Consent Order also requires the Bank to continue to adhere to the plans implemented in response to the June 2011 Consent Order, and includes the substantive provisions of the June 2011 Consent Order. As of June 30, 2014, the capital ratios required by the Consent Order were not met.

 

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The following table shows the ratios and amounts of Tier 1 capital and total capital to risk-adjusted assets and the leverage ratios for Porter Bancorp, Inc. and PBI Bank at the dates indicated (dollars in thousands):

 

     Actual     For Capital
Adequacy
Purposes
 
     Amount      Ratio     Amount      Ratio  

As of June 30, 2014:

          

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

          

Consolidated

   $ 78,104         11.07   $ 56,454         8.00

Bank

     83,012         11.79        56,350         8.00   

Tier I capital (to risk-weighted assets)

          

Consolidated

     51,593         7.31        28,227         4.00   

Bank

     68,619         9.74        28,175         4.00   

Tier I capital (to average assets)

          

Consolidated

     51,593         4.89        42,233         4.00   

Bank

     68,619         6.51        42,154         4.00   

 

     Actual     For Capital
Adequacy
Purposes
 
     Amount      Ratio     Amount      Ratio  

As of December 31, 2013:

          

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

          

Consolidated

   $ 80,203         11.03   $ 58,178         8.00

Bank

     83,055         11.44        58,064         8.00   

Tier I capital (to risk-weighted assets)

          

Consolidated

     53,371         7.34        29,089         4.00   

Bank

     67,897         9.35        29,032         4.00   

Tier I capital (to average assets)

          

Consolidated

     53,371         4.95        43,156         4.00   

Bank

     67,897         6.28        43,221         4.00   

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

 

     Actual as of
June 30, 2014
    Ratio Required by
Consent Order
 
     Amount      Ratio     Amount      Ratio  

Total capital to risk-weighted assets

   $ 83,012         11.79   $ 84,526         12.00

Tier I capital to average assets

     68,619         6.51        94,847         9.00   

At June 30, 2014, PBI Bank’s Tier 1 leverage ratio was 6.51%, and its total risk-based capital ratio was 11.79%, both of which are below the minimum capital ratios required by the Consent Order. Bank regulatory agencies can exercise discretion when an institution does not meet the terms of a Consent Order. Based on individual circumstances, the agencies may issue mandatory directives, impose monetary penalties, initiate changes in management, or take more serious adverse actions.

Kentucky banking laws limit the amount of dividends that may be paid to a holding company by its subsidiary banks without prior approval. These laws limit the amount of dividends that may be paid in any calendar year to current year’s net income, as defined in the laws, combined with the retained net income of the preceding two years, less any dividends declared during those periods. PBI Bank has agreed with its primary regulators to obtain their written consent prior to declaring or paying any future dividends. As a practical matter, PBI Bank cannot pay dividends to Porter Bancorp for the foreseeable future.

 

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Note 13 – Contingencies

In the normal course of operations, we are defendants in various legal proceedings. Litigation is subject to inherent uncertainties and unfavorable rulings could occur. We record contingent liabilities resulting from claims against us when a loss is assessed to be probable and the amount of the loss is reasonably estimable. Assessing probability of loss and estimating probable losses requires analysis of multiple factors, including in some cases judgments about the potential actions of third party claimants and courts. Recorded contingent liabilities are based on the best information available and actual losses in any future period are inherently uncertain. Currently, we have accrued approximately $1.9 million related to ongoing litigation matters for which we believe liability is probable and reasonably estimable. Accruals are not made in cases where liability is not probable or the amount cannot be reasonably estimated. We provide disclosure of matters where we believe liability is reasonably possible and which may be material to our consolidated financial statements.

Signature Point Litigation. On June 18, 2010, three real estate development companies filed suit in Kentucky state court against PBI Bank and Managed Assets of Kentucky (“MAKY”). Signature Point Condominiums LLC, et al. v. PBI Bank, et al., Jefferson Circuit Court, Case No 10-CI-04295. On July 16, 2013, a jury in Louisville, Kentucky returned a verdict against PBI Bank, awarding the plaintiffs compensatory damages of $1,515,000 and punitive damages of $5,500,000. The case arose from a settlement in which PBI Bank agreed to release the plaintiffs and guarantors from obligations of more than $26 million related to a real estate project in Louisville. The plaintiffs were granted a right of first refusal to repurchase a tract of land within the project. In exchange, the plaintiffs conveyed the real estate securing the loans to PBI Bank. After plaintiffs declined to exercise their right of first refusal, PBI Bank sold the tract to the third party. Plaintiffs alleged the Bank had knowledge of the third party offer before the conveyance of the land by the Plaintiffs to the Bank. Plaintiffs asserted claims of fraud, breach of fiduciary duty, breach of the duty of good faith and fair dealing, tortious interference with prospective business advantage and conspiracy to commit fraud, negligence, and conspiracy against PBI Bank.

After conferring with its legal advisors, PBI Bank believes the findings and damages are excessive and contrary to law, and that it has meritorious grounds on which it is moving forward to appeal. We will continue to defend this matter vigorously. Although we have made provisions in our condensed consolidated financial statements for this self-insured matter, the amount of our legal accrual is less than the original amount of the damages awarded, plus accrued interest. The ultimate outcome of this matter could have a material adverse effect on our financial condition, results of operations or cash flows.

SBAV LP Litigation. On December 17, 2012, SBAV LP filed a lawsuit against Porter Bancorp, PBI Bank, J. Chester Porter and Maria L. Bouvette in New York state court. The proceeding was removed to New York federal district court on January 16, 2013. On July 10, 2013, the New York federal district court granted the defendants’ motion to transfer the case to federal district court in Kentucky. SBAV LP v. Porter Bancorp, et. al., Civ. Action 3:13-CV-710 (W.D.KY). The complaint alleges violation of the Kentucky Securities Act and negligent misrepresentation against all named defendants, and breach of contract against Porter Bancorp alone. The plaintiff seeks damages in an amount in excess of $4,500,000, or the difference between the $5,000,016 purchase price and the value of the securities when sold by the plaintiff, plus interest at the applicable statutory rate, costs and reasonable attorneys’ fees. On September 13, 2013, defendants filed a motion to dismiss all claims in the complaint for pleading failures and for failure to state a claim upon which relief may be granted. On March 25, 2014, the judge ruled that SBAV had failed to state a claim against PBI Bank and dismissed PBI Bank from the case. The claims against Porter Bancorp, the Estate of J. Chester Porter and Ms. Bouvette remain and have proceeded to discovery. On April 21, 2014, Porter Bancorp filed a third-party complaint for contribution against SBAV’s investment adviser, the Clinton Group, Inc., alleging that, to the extent the Court finds SBAV to have suffered a recoverable loss, the Clinton Group’s failure to exercise due care and negligence in conducting due diligence contributed to that loss. We dispute the material factual allegations made in SBAV’s complaint and intend to defend against SBAV’s claims vigorously.

Thomas E. Perez, Secretary of the United States Department of Labor (DOL) v. PBI Bank, Inc. On December 26, 2013, the United States Department of Labor (“DOL”) filed a lawsuit against PBI Bank in U.S. District Court for the Northern District of Indiana. Thomas E. Perez, Secretary of the United States Department of Labor v. PBI Bank, Inc. (Civ. Action 3:13-CV-1400-PPS). The complaint alleges that in 2007 PBI Bank, in the capacity of trustee for the Miller’s Health System’s Inc. Employee Stock Ownership Plan, authorized the alleged imprudent and disloyal purchase of the stock of Miller’s Health Systems, Inc. (“Miller’s Health”) in 2007 for $40 million, a price allegedly far in excess of the stock’s fair market value. The suit also alleges, among other things, that PBI Bank approved 100% seller financing for the transaction at an excessive rate of interest. On March 31, 2014, PBI Bank filed its answer, disputing the material factual allegations of the complaint. On April 10, 2014, PBI Bank filed a third-party complaint against Miller’s Health seeking to enforce its indemnity rights, as well as third party claims for contribution against named directors and officers of Miller’s Health. On May 19, 2014, PBI Bank filed a motion to dismiss the complaint on the basis of a statute of limitations defense. The parties have submitted briefs on both motions to dismiss and await a ruling. We dispute the material factual allegations made in the complaint and intend to defend against DOL’s claims vigorously.

 

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AIT Laboratories Employee Stock Ownership Plan. The Department of Labor has audited certain transactions between certain former shareholders of AIT Holding Company and the AIT Laboratories Employee Stock Ownership Plan. PBI Bank served as trustee of the AIT ESOP in June 2009 when the AIT ESOP purchased all the stock of AIT Holding Company for $90 million, an amount the DOL alleges was well in excess of the stock’s then-fair market value. On July 24, 2014, the DOL notified the former AIT Holding Company shareholders and PBI Bank that unless an agreement is reached to settle the matter, DOL intended to file a lawsuit against them no later than August 31, 2014. We dispute the material factual allegations that have been made by DOL and intend to vigorously defend against any claims.

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

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

Cautionary Note Regarding Forward-Looking Statements

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

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

We also refer you to Part II, Item 1A – Risk Factors in this report and to the risks identified and the cautionary statements discussed in greater detail in our December 31, 2013 Annual Report on Form 10-K.

Forward-looking statements are not guarantees of performance or results. A forward-looking statement may include a statement of the assumptions or bases underlying the forward-looking statement. The Company believes it has chosen these assumptions or bases in good faith and they are reasonable. We caution you however, 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. is a Louisville, Kentucky-based bank holding company which operates 18 banking offices in twelve counties through its wholly-owned subsidiary, PBI Bank. Our markets include metropolitan Louisville in Jefferson County and the surrounding counties of Henry and Bullitt, and extend south along the Interstate 65 corridor to Tennessee. We serve south central Kentucky and southern Kentucky from banking offices in Butler, Green, Hart, Edmonson, Barren, Warren, Ohio and Daviess Counties. We also have an office in Lexington, the second largest city in Kentucky. The Bank is a community bank with a wide range of commercial and personal banking products.

 

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The Company reported a net income of $43,000 and net loss of $244,000 for the three and six months ended June 30, 2014, compared with net loss of $1.3 million and $1.4 million for the same periods of 2013. After deductions for dividends on preferred stock and loss allocated to participating securities, net loss attributable to common shareholders was $672,000 and $1.6 million, respectively, for the three and six months ended June 30, 2014, compared with net loss to common shareholders of $1.7 million and $2.2 million for the three and six months ended June 30, 2013.

Basic and diluted loss per common share were ($0.06) and ($0.14) for the three and six months ended June 30, 2014 compared with basic and diluted loss per common share of ($0.14) and ($0.19) for the three and six months ended June 30, 2013.

The following significant events occurred during the six months ended June 30, 2014:

 

   

Net interest margin decreased 11 basis points to 3.04% in the first six months of 2014 compared with 3.15% in the first six months of 2013. The decrease in margin between periods was primarily due to a reduction in interest earning assets coupled with lower rates on those assets. Average loans decreased 18.1% to $687.9 million in the first six months of 2014 compared with $839.5 million in the first six months of 2013. Net loans decreased 16.0% to $619.0 million at June 30, 2014, compared with $737.2 million at June 30, 2013.

 

   

No provision for loan losses was recorded in the second quarter of 2014 or 2013, or in the first six months of 2014, compared to a provision of $450,000 for the six months ended June 30, 2013. The decrease was primarily attributable to the reduction in the loan portfolio size, declining historical loss rates, a stabilization in loan risk grade classification, and more stable collateral values for collateral dependent loans. Net charge-offs of $1.4 million were recognized for the second quarter of 2014 and net charge-offs for the six months ended June 30, 2014 were $4.1 million, compared to $2.3 million and $19.6 million for the three and six months ended June 30, 2013, respectively.

 

   

We continued to execute on our strategy to reduce our commercial real estate and construction and development loans. At June 30, 2014, we were compliant with the terms of our Consent Order with respect to both our level of non-owner occupied commercial real estate loans as well as our level of construction and development loans. Construction and development loans totaled $32.8 million, or 39% of total risk-based capital, at June 30, 2014 compared with $43.3 million, or 52% of total risk-based capital, at December 31, 2013. Non-owner occupied commercial real estate loans, construction and development loans, and multi-family residential real estate loans as a group totaled $199.8 million, or 241% of total risk-based capital, at June 30, 2014 compared with $237.0 million, or 284% of total risk-based capital, at December 31, 2013.

 

   

Loan proceeds received from the repayment of our commercial real estate and construction and development loans were used primarily to redeem maturing certificates of deposit during the quarter. Deposits decreased 3.7% to $950.8 million at June 30, 2014 compared with $987.7 million at December 31, 2013. Certificate of deposit balances declined $48.8 million during the first six months of 2014 to $631.1 million at June 30, 2014, from $680.0 million at December 31, 2013. Demand deposits increased 2.3% during the first six months of 2014 compared with December 31, 2013.

 

   

Non-performing loans decreased $57.6 million to $44.4 million at June 30, 2014, compared with $102.0 million at December 31, 2013. The decrease in non-performing loans was due to the migration of non-performing loans to the OREO portfolio, as well as $22.4 million in paydowns. Net charge-offs were $4.1 million for the six months ended June 30, 2014. The charge-offs resulted primarily from charging off specific reserves for loans deemed to be collateral dependent.

 

   

Loans past due 30-59 days decreased from $10.7 million at December 31, 2013 to $3.1 million at June 30, 2014 and loans past due 60-89 days increased from $775,000 at December 31, 2013 to $991,000 at June 30, 2014. Total loans past due and nonaccrual loans decreased to $48.4 million at June 30, 2014 from $113.5 million at December 31, 2013.

 

   

Foreclosed properties were $62.9 million at June 30, 2014, compared with $30.9 million at December 31, 2013, and $47.0 million at June 30, 2013. During the first six months of 2014, the Company acquired $36.9 million and sold $4.3 million of other real estate owned (“OREO”). In addition, we recorded fair value write-downs of $650,000 during the first six months of 2014 reflecting declines in appraisal valuations and changes in pricing strategies. Our ratio of non-performing assets to total assets decreased to 10.20% at June 30, 2014, compared with 12.35% at December 31, 2013, and 14.86% at June 30, 2013.

 

   

Long-term interest rates declined from December 31, 2013 to June 30, 2014 resulting in a decrease in the net unrealized loss in our available for sale securities portfolio between period ends and a similar increase in the shareholders equity component, accumulated other comprehensive loss.

 

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Regulatory Matters

Since June 2011, the Bank has operated under the terms of a Consent Order with the Federal Deposit Insurance Company (“FDIC”) and the Kentucky Department of Financial Institutions (“KDFI”). The Bank agreed, among other things, to improve asset quality, reduce loan concentrations, and maintain a minimum Tier 1 leverage ratio of 9% and a minimum total risk based capital ratio of 12%. In September 2012, the Bank also agreed if it should be unable to reach the required capital levels, and if directed in writing by the FDIC, then the Bank would within 30 days develop, adopt and implement a written plan to sell or merge itself into another federally insured financial institution or otherwise immediately obtain a sufficient capital investment into the Bank to fully meet the capital requirements. As of June 30, 2014, the Bank had not met the capital ratios required by the Consent Order. Our current Consent Order was included in our Current Reports on 8-K filed on September 25, 2012.

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

 

   

Increasing capital through a possible public offering or private placement of common stock to new and existing shareholders. We have engaged a financial advisor to assist our Board in this evaluation and to assist in evaluating our options for increasing capital and redeeming our Series A Preferred Stock.

 

   

Continuing to operate the Company and Bank in a safe and sound manner. This strategy will require us to reduce our lending concentrations, remediate non-performing loans, reduce the size of our balance sheet, and reduce other noninterest expense through the disposition of OREO.

 

   

Management succession and adding resources to the management team. John T. Taylor became CEO of PBI Bank in 2012 and CEO of the Company in 2013. In addition, we appointed new executives to lead key functions of our banking operations. John R. Davis became Chief Credit Officer of PBI Bank in 2012, with responsibility for establishing and executing credit quality policies and overseeing credit administration for the organization. We have also augmented our staffing in the commercial lending area, now led by Joe C. Seiler.

 

   

Evaluating and implementing improvements to our internal processes and procedures, distribution of labor, and work-flow to ensure we have adequately and appropriately deployed resources in an efficient manner in the current environment.

 

   

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

 

   

We have reduced our loan portfolio significantly from $1.3 billion at December 31, 2010 to $643.0 million at June 30, 2014.

 

   

We have reduced our construction and development loans to less than 75% of total risk-based capital at June 30, 2014, and have now been in compliance with the Consent Order for nine quarters.

 

   

We have reduced our non-owner occupied commercial real estate loans, construction and development loans, and multi-family residential real estate loans to less than 250% of total risk-based capital at June 30, 2014, and we are now in compliance with the Consent Order. These loans represented 241% of total risk-based capital at June 30, 2014, down from 284% at December 31, 2013.

 

   

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

 

   

Our acquisition of real estate assets through the loan remediation process slowed during 2013, as we acquired $20.6 million of OREO in 2013 compared with $33.5 million during 2012. We acquired $36.9 million in the first six months of 2014. Additionally, nonaccrual loans totaled $44.4 million at June 30, 2014, and we expect to resolve many of these loans by foreclosure which could result in further additions to our OREO portfolio.

 

   

We incurred OREO losses totaling $596,000 during the first six months of 2014, comprised of $650,000 in fair value write-downs to reflect declines in appraisal valuations and changes in our pricing strategies, offset by $54,000 in net gain on sales of OREO.

 

   

We continually evaluate opportunities to maximize the value we receive from the sale of OREO. We pursue multiple sales channels with focus primarily on internal marketing and the use of brokers.

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

 

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Application of Critical Accounting Policies

We continually review our accounting policies and financial information disclosures. A summary of our more significant accounting policies that require the use of estimates and judgments in preparing the financial statements was provided in “Application of Critical Accounting Policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operation in our Annual Report on Form 10-K for the calendar year ended December 31, 2013. Management has discussed the development, selection, and application of our critical accounting policies with our Audit Committee. During the first six months of 2014, 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 June 30, 2014, compared with the same period of 2013:

 

     For the Three Months
Ended June 30,
    Change from Prior
Period
 
     2014     2013     Amount     Percent  
     (dollars in thousands)  

Gross interest income

   $ 10,166      $ 11,168      $ (1,002     (9.0 )%

Gross interest expense

     2,552        2,816        (264     (9.4 )

Net interest income

     7,614        8,352        (738     (8.8

Provision for loan losses

     —          —          —          —     

Non-interest income

     949        2,148        (1,199     (55.8

Non-interest expense

     8,944        11,809        (2,865     (24.3

Net loss before taxes

     (381     (1,309     928        (70.9

Income tax benefit

     (424     —          (424     100.0   

Net income (loss)

     43        (1,309     1,352        (103.3

Net loss before taxes for the three months ended June 30, 2014 totaled $381,000, compared with a net loss before taxes of $1.3 million for the comparable period of 2013. A tax benefit was recognized in the second quarter of 2014 due to gains in other comprehensive income that are presented in current operations. The calculation for the income tax provision or benefit generally does not consider the tax effects of changes in other comprehensive income, or OCI, which is a component of stockholders’ equity on the balance sheet. However, an exception is provided in certain circumstances, such as when there is a full valuation allowance against net deferred tax assets, there is a loss from continuing operations and there is income in other components of the financial statements. In such a case, pre-tax income from other categories, such as changes in OCI, must be considered in determining a tax benefit to be allocated to the loss from continuing operations. For the quarter ended June 30, 2014, this resulted in $424,000 of income tax benefit allocated to continuing operations. The June 30, 2014 tax benefit is entirely due to gains in other comprehensive income that are presented in current operations in accordance with applicable accounting standards. Net income after recognition of the tax benefit was $43,000 for the second quarter. Net interest income decreased $738,000 from the 2013 second quarter as a result of an 11 basis point decline in net interest margin due to lower earning asset levels and lower average rates on earning assets. In addition, net interest income and net interest margin were adversely affected by $948,000 and $1.5 million of interest lost on nonaccrual loans in the second quarters of 2014 and 2013, respectively. Non-interest income decreased by $1.2 million to $949,000 from $2.1 million in the second quarter of 2013, primarily due to decreases in gains on sales of securities and OREO income. Non-interest expense also decreased during the period from $11.8 million to $8.9 million for the three months ended June 30, 2013 and 2014, respectively. This decrease was primarily due to decreases in OREO expenses of $883,000 and loan collection expenses of $2.0 million. OREO expense may be elevated in future periods based on the transfer of $35.4 million from loans to OREO during the current quarter as we work to sell these properties.

The following table summarizes components of income and expense and the change in those components for the six months ended June 30, 2014, compared with the same period of 2013:

 

     For the Six Months
Ended June 30,
    Change from Prior
Period
 
     2014     2013     Amount     Percent  
     (dollars in thousands)  

Gross interest income

   $ 20,063      $ 22,426      $ (2,363     (10.5 )%

Gross interest expense

     5,149        5,776        (627     (10.9 )

Net interest income

     14,914        16,650        (1,736     (10.4

Provision for loan losses

     —          450        (450     (100.0

Non-interest income

     1,864        3,795        (1,931     (50.9

Non-interest expense

     17,446        21,373        (3,927     (18.4

Net loss before taxes

     (668     (1,378     710        (51.5

Income tax benefit

     (424     —          (424     100.0   

Net loss

     (244     (1,378     1,134        (82.3

 

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Net loss before taxes for the six months ended June 30, 2014 totaled $668,000, compared with a net loss before taxes of $1.4 million for the comparable period of 2013. After the tax benefit recorded in the second quarter as noted above, net loss for the first six months 2014 was $244,000. Provision for loan losses expense decreased $450,000 for the first six months of 2014 compared with the same period in 2013. This decrease in provision expense is primarily attributable to the substantial reduction in the loan portfolio size, declining historical loss rates, the lower pace of loans migrating downward in risk grade classification, and more stable collateral values for collateral dependent loans. Net charge-offs were $4.1 million for the six months ended June 30, 2014, compared to $19.6 million for the same period in 2013. The charge-offs for both periods were primarily the result of charging-off specific reserves for loans deemed to be collateral dependent. Net interest income decreased $1.7 million from the first six months of 2013 as a result of an 11 basis point decline in net interest margin due to lower earning asset levels and lower average rates on earning assets. In addition, net interest income and net interest margin were adversely affected by $2.1 million and $3.0 million of interest lost on nonaccrual loans in the first six months of 2014 and 2013, respectively. Non-interest income decreased by $1.9 million to $1.9 million from $3.8 million for the first six months of 2013, primarily due to decreases in net gains on sales of securities, OREO income, and income from fiduciary activities. Non-interest expense also decreased during the period from $21.4 million to $17.4 million for the six months ended June 30, 2013 and 2014, respectively. This decrease was primarily due to decreases in OREO expenses of $1.0 million and loan collection expenses of $2.5 million.

Net Interest Income – Our net interest income was $7.6 million for the three months ended June 30, 2014, a decrease of $738,000, or 8.8%, compared with $8.4 million for the same period in 2013. Net interest spread and margin were 3.01% and 3.13%, respectively, for the second quarter of 2014, compared with 3.11% and 3.24%, respectively, for the second quarter of 2013. Net average non-accrual loans were $66.7 million and $115.4 million for the second quarters of 2014 and 2013, respectively. Net interest income was $14.9 million for the six months ended June 30, 2014, a decrease of $1.7 million, or 10.4%, compared with $16.7 million for the same period of 2013. Net interest spread and margin were 2.93% and 3.04%, respectively, for the first six months of 2014, compared with 3.02% and 3.15%, respectively, for the first six months of 2013. Net average non-accrual loans were $79.0 million and $112.3 million in the first six months of 2014 and 2013, respectively.

Average loans receivable declined approximately $129.3 million for the quarter ended June 30, 2014 compared with the second quarter of 2013. This resulted in a decline in interest revenue of approximately $1.4 million for the quarter ended June 30, 2014 compared with the prior year period. Average loans receivable declined approximately $151.7 million for the six months ended June 30, 2014 compared with the first six months of 2013. This resulted in a decline in interest revenue of approximately $3.1 million for the six months ended June 30, 2014 compared with the prior year period. The decline in loan volume is attributable to our efforts to reduce concentrations in our construction and development loan portfolio and our non-owner occupied commercial real estate loan portfolio, as well as soft loan demand in our markets. Declines in interest revenue for both periods were offset by the collection of previously charged-off accrued uncollected interest and late charges of approximately $240,000.

Net interest margin decreased 11 basis points from our margin of 3.24% in the prior year second quarter. The yield on earning assets declined 15 basis points from the second quarter of 2013, compared with a five basis point decline in rates paid on interest-bearing liabilities. This resulted in a net $738,000 reduction in net interest income. Net interest margin for the first six months of 2014 decreased 11 basis points from our margin of 3.15% in the first half of 2013 due primarily to lower average earning assets relative to average interest bearing liabilities. The yield on earning assets declined 15 basis points from the first six months of 2013, compared with a six basis point decline in rates paid on interest-bearing liabilities.

Net interest margin for the second quarter of 2014 increased 17 basis points from our margin of 2.96% in the first quarter of 2014, due primarily to higher yield on loans and the collection of previously charged-off accrued uncollected interest and late charges of approximately $240,000, countered by lower average loan receivables and lower yield on investment securities. Average loan receivables declined $20.5 million from the first quarter of 2014, due to our efforts to reduce concentrations in our construction and development loan portfolio and in our non-owner occupied commercial real estate loan portfolio and soft loan demand. Yield on loans was positively affected by a decrease in foregone interest on non-accrual loans. Interest foregone on non-accrual loans totaled $948,000 in the second quarter of 2014, compared with $1.2 million in the first quarter of 2014, and $1.5 million in the second quarter of 2013. The decrease in yield on investment securities was the result of our investment into lower-yielding securities at current market rates. Yield on average earning assets for the second quarter of 2014 increased 17 basis points from 3.99% in the first quarter of 2014, compared with a one basis point decrease in rates paid on interest-bearing liabilities from 1.16% in the first quarter of 2014.

 

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Average Balance Sheets

The following table presents the average balance sheets for the three month periods ended June 30, 2014 and 2013, 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 June 30,  
     2014     2013  
     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)

   $ 677,643      $ 8,572         5.07   $ 806,941      $ 9,954         4.95

Securities

              

Taxable

     181,706        1,215         2.68        145,909        833         2.29   

Tax-exempt (3)

     30,549        235         4.75        29,896        231         4.77   

FHLB stock

     7,323        89         4.87        10,072        105         4.18   

Other equity securities

     —          —           —          1,305        15         4.61   

Federal funds sold and other

     94,195        55         0.23        56,392        30         0.21   
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-earning assets

     991,416        10,166         4.16     1,050,515        11,168         4.31
    

 

 

        

 

 

    

Less: Allowance for loan losses

     (25,314          (39,255     

Non-interest earning assets

     90,786             93,547        
  

 

 

        

 

 

      

Total assets

   $ 1,056,888           $ 1,104,807        
  

 

 

        

 

 

      

LIABILITIES AND STOCKHOLDERS’ EQUITY

              

Interest-bearing liabilities:

              

Certificates of deposit and other time deposits

   $ 642,881      $ 2,133         1.33   $ 714,091      $ 2,400         1.35

NOW and money market deposits

     176,192        163         0.37        146,477        129         0.35   

Savings accounts

     37,277        23         0.25        41,090        31         0.30   

Repurchase agreements

     2,199        1         0.18        2,749        2         0.29   

FHLB advances

     4,751        32         2.70        5,128        41         3.21   

Junior subordinated debentures

     30,621        200         2.62        31,524        213         2.71   
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing liabilities

     893,921        2,552         1.15     941,059        2,816         1.20
    

 

 

        

 

 

    

Non-interest-bearing liabilities:

              

Non-interest-bearing deposits

     109,814             106,444        

Other liabilities

     15,463             10,400        
  

 

 

        

 

 

      

Total liabilities

     1,019,198             1,057,903        

Stockholders’ equity

     37,690             46,904        
  

 

 

        

 

 

      

Total liabilities and stockholders’ equity

   $ 1,056,888           $ 1,104,807        
  

 

 

        

 

 

      

Net interest income

     $ 7,614           $ 8,352      
    

 

 

        

 

 

    

Net interest spread

          3.01          3.11
       

 

 

        

 

 

 

Net interest margin

          3.13          3.24
       

 

 

        

 

 

 

 

(1)

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

(2)

Calculations include non-accruing loans averaging $66.7 million and $115.4 million, respectively, in average loan amounts outstanding.

(3)

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

 

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Table of Contents

The following table presents the average balance sheets for the six month periods ended June 30, 2014 and 2013, along with the related calculations of tax-equivalent net interest income, net interest margin and net interest spread for the related periods.

 

     Six Months Ended June 30,  
     2014     2013  
     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)

   $ 687,857      $ 16,893         4.95   $ 839,542      $ 19,987         4.80

Securities

              

Taxable

     179,654        2,388         2.68        145,542        1,685         2.33   

Tax-exempt (3)

     30,816        476         4.79        29,187        452         4.80   

FHLB stock

     8,204        191         4.69        10,072        213         4.26   

Other equity securities

     43        —           —          1,332        30         4.54   

Federal funds sold and other

     98,644        115         0.24        55,149        59         0.22   
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-earning assets

     1,005,218        20,063         4.08     1,080,824        22,426         4.23
    

 

 

        

 

 

    

Less: Allowance for loan losses

     (26,567          (47,253     

Non-interest earning assets

     86,540             94,611        
  

 

 

        

 

 

      

Total assets

   $ 1,065,191           $ 1,128,182        
  

 

 

        

 

 

      

LIABILITIES AND STOCKHOLDERS’ EQUITY

              

Interest-bearing liabilities:

              

Certificates of deposit and other time deposits

   $ 656,500      $ 4,324         1.33   $ 731,863      $ 4,937         1.36

NOW and money market deposits

     171,335        310         0.36        149,981        262         0.35   

Savings accounts

     37,091        46         0.25        40,742        65         0.32   

Repurchase agreements

     2,277        2         0.18        2,658        3         0.23   

FHLB advances

     4,569        65         2.87        5,275        84         3.21   

Junior subordinated debentures

     30,734        402         2.64        31,634        425         2.71   
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing liabilities

     902,506        5,149         1.15     962,153        5,776         1.21
    

 

 

        

 

 

    

Non-interest-bearing liabilities:

              

Non-interest-bearing deposits

     110,191             108,281        

Other liabilities

     15,151             10,424        
  

 

 

        

 

 

      

Total liabilities

     1,027,848             1,080,858        

Stockholders’ equity

     37,343             47,324        
  

 

 

        

 

 

      

Total liabilities and stockholders’ equity

   $ 1,065,191           $ 1,128,182        
  

 

 

        

 

 

      

Net interest income

     $ 14,914           $ 16,650      
    

 

 

        

 

 

    

Net interest spread

          2.93          3.02
       

 

 

        

 

 

 

Net interest margin

          3.04          3.15
       

 

 

        

 

 

 

 

(1)

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

(2)

Calculations include non-accruing loans averaging $79.0 million and $112.3 million, respectively, in average loan amounts outstanding.

(3)

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

 

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Table of Contents

Rate/Volume Analysis

The table below sets forth certain information regarding changes in interest income and interest expense for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in rate (changes in rate multiplied by old volume); (2) changes in volume (changes in volume multiplied by old rate); and (3) changes in rate-volume (change in rate multiplied by change in volume). Changes in rate-volume are proportionately allocated between rate and volume variance.

 

     Three Months Ended June 30,
2014 vs. 2013
    Six Months Ended June 30
2014 vs. 2013
 
     Increase (decrease)
due to change in
    Increase (decrease)
due to change in
 
     Rate     Volume     Net
Change
    Rate     Volume     Net
Change
 
     (in thousands)  

Interest-earning assets:

            

Loan receivables

   $ 248      $ (1,630   $ (1,382   $ 614      $ (3,708   $ (3,094

Securities

     148        238        386        258        469        727   

FHLB stock

     16        (32     (16     20        (42     (22

Other equity securities

     —          (15     (15     (15     (15     (30

Federal funds sold and other

     3        22        25        5        51        56   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total increase (decrease) in interest income

     415        (1,417     (1,002     882        (3,245     (2,363
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest-bearing liabilities:

            

Certificates of deposit and other time deposits

     (31     (236     (267     (115     (498     (613

NOW and money market accounts

     7        27        34        9        39        48   

Savings accounts

     (5     (3     (8     (13     (6     (19

Federal funds purchased and repurchase agreements

     (1 )     —          (1     (1     —          (1

FHLB advances

     (6     (3     (9     (9     (10     (19

Junior subordinated debentures

     (7     (6     (13     (11     (12     (23
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total increase (decrease) in interest expense

     (43 )     (221     (264     (140     (487     (627
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Increase (decrease) in net interest income

   $ 458      $ (1,196   $ (738   $ 1,022      $ (2,758   $ (1,736
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-Interest Income – The following table presents the major categories of non-interest income for the three and six months ended June 30, 2014 and 2013:

 

     For the Three Months
Ended June 30,
     For the Six Months
Ended June 30,
 
     2014      2013      2014      2013  
     (dollars in thousands)  

Service charges on deposit accounts

   $ 487       $ 506       $ 955       $ 999   

Income from fiduciary activities

     —           —           —           517   

Bank card interchange fees

     205         196         366         368   

Other real estate owned rental income

     18         230         25         342   

Gains on sales of investment securities, net

     2         703         46         703   

Income from bank owned life insurance

     62         305         138         384   

Other

     175         208         334         482   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-interest income

   $ 949       $ 2,148       $ 1,864       $ 3,795   
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-interest income for the second quarter ended June 30, 2014 decreased by $1.2 million, or 55.8%, compared with the second quarter of 2013. For the six months ended June 30, 2014, non-interest income decreased by $1.9 million, or 50.9% to $1.9 million compared with $3.8 million for the same period of 2013.

The decrease in non-interest income between the three month comparative periods was primarily due to a $701,000 reduction in gains on sales of investment securities, as well as decreases in other real estate owned rental income and income from bank owned life insurance. The decrease in non-interest income between the six month comparative periods was primarily due to a $657,000 reduction in gains on sales of investment securities, as well as lower income from fiduciary activities due to our efforts to transition away from non-traditional trust services, such as ESOP and employee benefit plan services, throughout our markets. Other real estate owned income and income from bank owned life insurance also declined during the period.

 

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Table of Contents

Non-interest ExpenseThe following table presents the major categories of non-interest expense for the six months ended June 30, 2014 and 2013:

 

     For the Three Months
Ended June 30,
     For the Six Months
Ended June 30,
 
     2014      2013      2014      2013  
     (dollars in thousands)  

Salary and employee benefits

   $ 3,949       $ 3,999       $ 7,690       $ 8,138   

Occupancy and equipment

     896         913         1,788         1,844   

Other real estate owned expense

     774         1,657         1,436         2,448   

Professional fees

     764         499         1,322         905   

FDIC insurance

     571         650         1,111         1,289   

Loan collection expense

     389         2,407         928         3,442   

State franchise tax

     405         537         830         1,074   

Communications

     165         179         400         354   

Insurance expense

     153         160         302         311   

Postage and delivery

     94         102         204         215   

Other

     784         706         1,435         1,353   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-interest expense

   $ 8,944       $ 11,809       $ 17,446       $ 21,373   
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-interest expense for the second quarter ended June 30, 2014 decreased $2.9 million, or 24.3%, compared with the second quarter of 2013. For the six months ended June 30, 2014, non-interest expense decreased $3.9 million, or 18.4% to $17.4 million compared with $21.4 million for the first six months of 2013. The decreases in non-interest expense for the second quarter and six months ended June 30, 2014 were primarily attributable to reduced loan collection and OREO expenses for both periods.

Income Tax Expense – No income tax expense was recorded for the first six months of 2014; an income tax benefit of $424,000 was recorded for the quarter ended June 30, 2014. Our June 30, 2014 tax benefit is entirely due to gains in other comprehensive income that are presented in current operations in accordance with applicable accounting standards. The income tax effect on net loss before taxes for the six months ended June 30, 2014, increased our deferred tax assets and related valuation allowance by $415,000. See discussion in the results of operations above.

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 June 30,
    For the Six Months
Ended June 30,
 
     2014     2013     2014     2013  
     (dollars in thousands)  

Federal statutory rate times financial statement income

   $ (130   $ (458 )   $ (230   $ (482

Effect of:

        

Valuation allowance

     227        554        415        677   

Tax-exempt income

     (80     (79     (162     (158

Tax benefit from OCI components

     (424     —          (424     —     

Non-taxable life insurance income

     (22 )     (26     (48 )     (52

Other, net

     5        9        25        15   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ (424   $  —        $ (424   $  —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Analysis of Financial Condition

Total assets decreased $24.1 million, or 2.2%, to $1.052 billion at June 30, 2014, from $1.076 billion at December 31, 2013. This decrease was primarily attributable to a decrease of $62.2 million in net loans, partially offset by increases of $32.0 million in other real estate owned and $17.4 million in investment securities. The decrease in net loans was due to loan payoffs outpacing loan funding and efforts to move impaired loans through the collection, foreclosure, and disposition process. The increase in OREO was due to the continued remediation of problem loans.

Loans ReceivableLoans receivable decreased $66.3 million, or 9.3%, during the six months ended June 30, 2014 to $643.0 million. The decline in loans receivable was attributable to net charge-offs of $4.1 million, transfers to OREO of $35.4 million, and loan payoffs outpacing loan funding by approximately $26.8 million.

 

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Loan Portfolio CompositionThe following table presents a summary of the loan portfolio at the dates indicated, net of deferred loan fees, by type. There are no foreign loans in our portfolio. Except for commercial real estate and 1-4 family residential real estate, there is no concentration of loans in any industry exceeding 10% of total loans, with the exception of loans for retail facilities (included in nonfarm nonresidential commercial real estate below). Those loans totaled $70.6 million at June 30, 2014 and $98.5 million at December 31, 2013.

 

     As of June 30,
2014
    As of December 31,
2013
 
     Amount      Percent     Amount      Percent  
     (dollars in thousands)  

Commercial

   $ 65,031         10.12   $ 52,878         7.45

Commercial Real Estate

          

Construction

     32,778         5.10        43,326         6.11   

Farmland

     64,880         10.09        71,189         10.04   

Nonfarm nonresidential

     190,909         29.69        232,026         32.71   

Residential Real Estate

          

Multi-family

     43,496         6.76        46,858         6.61   

1-4 Family

     205,116         31.90        228,505         32.21   

Consumer

     12,669         1.97        14,365         2.03   

Agriculture

     27,477         4.27        19,199         2.71   

Other

     674         0.10        980         0.13   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total loans

   $ 643,030         100.00   $ 709,326         100.00
  

 

 

    

 

 

   

 

 

    

 

 

 

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

 

     June 30,
2014
     March 31,
2014
     December 31,
2013
     September 30,
2013
 
     (in thousands)  

Pass

   $ 434,853       $ 415,144       $ 369,529       $ 364,720   

Watch

     91,208         104,171         144,316         159,387   

Special Mention

     3,223         4,069         5,865         9,249   

Substandard

     113,746         159,207         189,616         200,594   

Doubtful

     —           —           —           290   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 643,030       $ 682,591       $ 709,326       $ 734,240   
  

 

 

    

 

 

    

 

 

    

 

 

 

Our loans receivable have decreased $66.3 million, or 9.3%, during the six months ended June 30, 2014. All loan risk categories have decreased since December 31, 2013, with the exception of pass loans. The pass category increased approximately $65.3 million, the watch category declined approximately $53.1 million, the special mention category declined approximately $2.6 million, and the substandard category declined approximately $75.9 million. During the first quarter of 2014, management instituted a new risk category within its pass classification. The purpose was to better identify certain loans where the borrower’s sustained satisfactory repayment history was deemed a more relevant predictor of future loss than certain underwriting criteria at origination. The establishment of this new pass risk category helps to ensure the watch risk category remains transitory and event driven in nature. A total of $24.2 million in commercial, $8.5 million in residential, and $2.2 million in agriculture loans were reclassified from watch to the new pass risk category during the first quarter of 2014.

 

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

 

     June 30,
2014
     March 31,
2014
     December 31,
2013
     September 30,
2013
 
     (in thousands)  

Past Due Loans:

           

30-59 Days

   $ 3,057       $ 5,667       $ 10,696       $ 10,018   

60-89 Days

     991         1,232         775         7,582   

90 Days and Over

     —           —           232         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Loans Past Due 30-90+ Days

     4,048         6,899         11,703         17,600   

Nonaccrual Loans

     44,375         77,344         101,767         106,922   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Past Due and Nonaccrual Loans

   $ 48,423       $ 84,243       $ 113,470       $ 124,522   
  

 

 

    

 

 

    

 

 

    

 

 

 

During the six months ended June 30, 2014, nonaccrual loans decreased by $57.4 million to $44.4 million. This decrease was due primarily to $22.4 million in paydowns and $35.4 million transferred to OREO, offset by $9.1 million in loans moved to nonaccrual status. During the six months ended June 30, 2014, loans past due 30-59 days decreased from $10.7 million at December 31, 2013 to $3.1 million at June 30, 2014. Loans past due 60-89 days increased from $775,000 at December 31, 2013 to $991,000 at June 30, 2014. This represents a $7.4 million decrease from December 31, 2013 to June 30, 2014, 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.

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 June 30, 2014 and December 31, 2013.

 

     June
30,
2014
    December
31,
2013
 
     (dollars in thousands)  

Loans past due 90 days or more still on accrual

   $ —        $ 232   

Nonaccrual loans

     44,375        101,767   
  

 

 

   

 

 

 

Total non-performing loans

     44,375        101,999   

Real estate acquired through foreclosure

     62,935        30,892   

Other repossessed assets

     —          —     
  

 

 

   

 

 

 

Total non-performing assets

   $ 107,310      $ 132,891   
  

 

 

   

 

 

 

Non-performing loans to total loans

     6.90     14.38

Non-performing assets to total assets

     10.20     12.35

Allowance for non-performing loans

   $ 1,454      $ 2,285   

Allowance for non-performing loans to non-performing loans

     3.28     2.24

Nonperforming loans at June 30, 2014, were $44.4 million, or 6.9% of total loans, compared with $112.3 million, or 14.49% of total loans, at June 30, 2013, and $102.0 million, or 14.38% of total loans at December 31, 2013. Net loan charge-offs in the first six months of 2014 totaled $4.1 million compared to $19.6 million for the first six months of 2013, and were primarily the result of charging off specific reserves for loans deemed to be collateral dependent, in accordance with regulatory guidance.

Troubled Debt Restructuring A troubled debt restructuring (TDR) occurs when the Company has agreed to a loan modification in the form of a concession for a borrower who is experiencing financial difficulty. The majority of the Company’s TDRs involve a reduction in interest rate, a deferral of principal for a stated period of time, or an interest only period. All TDRs are considered impaired, and the Company has allocated reserves for these loans to reflect the present value of the concessionary terms granted to the borrower. If the loan is considered collateral dependent, it is reported net of allocated reserves, at the fair value of the collateral less cost to sell.

We do not have a formal loan modification program. Rather, we work with individual borrowers on a case-by-case basis to facilitate the orderly collection of our principal and interest before a loan becomes a non-performing loan. If a borrower is unable to make contractual payments, we review the particular circumstances of the borrower’s situation and negotiate a revised payment stream. In other words, we identify performing borrowers experiencing financial difficulties, and through negotiations, we lower their interest rate, most typically on a short-term basis for three to six months. Our goal when restructuring a credit is to afford the borrower a reasonable period of time to remedy the issue causing cash flow constraints within their business so they can return to performing status over time.

 

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Our loan modifications have taken the form of reduction in interest rate and/or curtailment of scheduled principal payments for a short-term period, usually three to six months, but in some cases until maturity of the loan. In some circumstances we restructure real estate secured loans in a bifurcated fashion whereby we have a fully amortizing “A” loan at a market interest rate and an interest-only “B” loan at a reduced interest rate. Our restructured loans are all collateral secured loans. If a borrower fails to perform under the modified terms, we place the loan(s) on nonaccrual status and begin the process of working with the borrower to liquidate the underlying collateral to satisfy the debt.

At June 30, 2014, we had 67 restructured loans totaling $50.9 million with borrowers who experienced deterioration in financial condition compared with 98 loans totaling $91.3 million at December 31, 2013. In general, these loans were granted interest rate reductions to provide cash flow relief to borrowers experiencing cash flow difficulties. Of these loans, five loans totaling approximately $4.3 million were also granted principal payment deferrals until maturity. There were no concessions made to forgive principal relative to these loans, although we have recorded partial charge-offs for certain restructured loans. In general, these loans are secured by first liens on 1-4 residential or commercial real estate properties, or farmland. Restructured loans also include $889,000 of commercial loans. At June 30, 2014, $32.4 million of our restructured loans were accruing and $18.5 million were on nonaccrual compared with $44.3 million and $46.9 million, respectively, at December 31, 2013. There were no new TDRs during the first six months of 2014, compared to $4.2 million during the first six months of 2013.

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

 

     June 30,
2014
    December 31,
2013
 
     (dollars in thousands)  

Total non-performing loans

   $ 44,375      $ 101,999   

TDRs on accrual

     32,389        44,346   
  

 

 

   

 

 

 

Total non-performing loans and TDRs on accrual

   $ 76,764      $ 146,345   

Real estate acquired through foreclosure

     62,935        30,892   

Other repossessed assets

     —          —     
  

 

 

   

 

 

 

Total non-performing assets and TDRs on accrual

   $ 139,699      $ 177,237   
  

 

 

   

 

 

 

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

     11.94     20.63

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

     13.26     16.47

We consider any loan that is restructured for a borrower experiencing financial difficulties due to a borrower’s potential inability to pay in accordance with contractual terms to be a troubled debt restructure. Specifically, we consider a concession involving a modification of the loan terms, such as (i) a reduction of the stated interest rate, (ii) reduction or deferral of principal, or (iii) reduction or deferral of accrued interest at a stated interest rate lower than the current market rate for new debt with similar risk all to be troubled debt restructurings. When a modification of terms is made for a competitive reason, we do not consider that to be a troubled debt restructuring. A primary example of a competitive modification would be an interest rate reduction for a performing borrower’s loan to a market rate as the result of a market decline in rates.

Management periodically reviews renewals/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, 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.

At June 30, 2014 and December 31, 2013, TDRs totaled $50.9 million and $91.3 million, respectively. During the six months ended June 30, 2014, TDRs were reduced as a result of $15.9 million in payments along with the transfer of $17.2 million to OREO. In addition, the TDR classification was removed from two loans that met the requirements discussed above. These two loans totaled $7.3 million at December 31, 2013. These loans are no longer evaluated individually for impairment.

 

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If the borrower fails to perform, we place the loan on nonaccrual status and seek to liquidate the underlying collateral for these loans. Our nonaccrual policy for restructured loans is identical to our nonaccrual policy for all loans. Our policy calls for a loan to be reported as nonaccrual if it is maintained on a cash basis because of deterioration in the financial condition of the borrower, payment in full of principal and interest is not expected, or principal or interest has been in default for a period of 90 days or more unless the assets are both well secured and in the process of collection. Changes in value for impairment, including the amount attributed to the passage of time, are recorded entirely within the provision for loan losses. Upon determination that a loan is collateral dependent, the loan is charged down to the fair value of collateral less estimated costs to sell.

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

Allowance for Loan LossesThe allowance for loan losses is based on management’s continuing review and evaluation of individual loans, loss experience, current economic conditions, risk characteristics of various categories of loans and such other factors that, in management’s judgment, require consideration in estimating loan losses.

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

An analysis of changes in the allowance for loan losses and selected ratios for the three and six month periods ended June 30, 2014 and 2013, and for the year ended December 31, 2013 follows:

 

    Three Months Ended
June 30,
    Six Months Ended
June 30,
    Year Ended
December 31,
2013
 
    2014     2013     2014     2013    
    (in thousands)  

Balance at beginning of period

  $ 25,415      $ 39,839      $ 28,124      $ 56,680      $ 56,680   

Loans charged-off:

         

Real estate

    2,749        3,003        5,531        19,654        28,879   

Commercial

    308        132        454        1,108        2,828   

Consumer

    51        203        179        521        773   

Agriculture

    21        66        30        83        128   

Other

    1        —          18        —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total charge-offs

    3,130        3,404        6,212        21,366        32,608   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Recoveries

         

Real estate

    1,540        425        1,739        677        1,622   

Commercial

    144        595        232        721        1,212   

Consumer

    35        88        111        179        266   

Agriculture

    3        16        9        218        252   

Other

    19        —          23        —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recoveries

    1,741        1,124        2,114        1,795        3,352   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs

    1,389        2,280        4,098        19,571        29,256   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Provision for loan losses

    —          —          —          450        700   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

  $ 24,026      $ 37,559      $ 24,026      $ 37,559      $ 28,124   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan losses to period-end loans

    3.74     4.85     3.74     4.85     3.96

Net charge-offs to average loans (annualized)

    0.82     1.13     1.20     4.70     3.71

Allowance for loan losses to non-performing loans

    54.14     33.46     54.14     33.46     27.57

Allowance for loan losses for loans individually evaluated for impairment

  $ 1,753      $ 10,190      $ 1,753      $ 10,190     

$

3,471

  

Loans individually evaluated for impairment

    79,742        175,038        79,742        175,038        149,883   

Allowance for loan losses to loans individually evaluated for impairment

    2.20     5.82     2.20     5.82     2.32

Allowance for loan losses for loans collectively evaluated for impairment

  $ 22,273      $ 27,369      $ 22,273      $ 27,369      $ 24,653   

Loans collectively evaluated for impairment

    563,288        599,747        563,288        599,747        559,443   

Allowance for loan losses to loans collectively evaluated for impairment

    3.95     4.56     3.95     4.56     4.41

 

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Our loan loss reserve, as a percentage of total loans at June 30, 2014, decreased to 3.74% from 4.85% at June 30, 2013, and from 3.96% at December 31, 2013. The change in our loan loss reserve as a percentage of total loans between periods is attributable to the fluctuation in historical loss experience, qualitative factors, fewer loans migrating downward in risk grade classifications, charge-off levels, and provision expense. Our allowance for loan losses to non-performing loans was 54.14% at June 30, 2014, compared with 27.57% at December 31, 2013, and 33.46% at June 30, 2013. Net charge-offs in the first six months of 2014 totaled $4.1 million of which $3.6 million were the result of charging off the allowance for individually evaluated loans deemed to be collateral dependent during the period. This resulted in the decline in our allowance for loan losses for loans individually evaluated for impairment and our allowance for loan losses to non-performing loans to current levels.

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

 

     Six Months
Ended

June 30,
2014
    Year Ended
December 31,
2013
    Year Ended
December 31,
2012
 
     (in thousands)  

Commercial

   $ 222      $ 1,616      $ 3,655   

Commercial Real Estate

     1,809        20,045        21,531   

Residential Real Estate

     1,983        7,212        8,866   

Consumer

     68        507        1,005   

Agriculture

     21        (124     1,092   

Other

     (5     —          —     
  

 

 

   

 

 

   

 

 

 

Total net charge-offs

   $ 4,098      $ 29,256      $ 36,149   
  

 

 

   

 

 

   

 

 

 

The majority of our nonperforming loans are secured by real estate collateral and the underlying collateral coverage for nonperforming loans supports the likelihood of collection of our principal. We have assessed these loans for collectability and considered, among other things, the borrower’s ability to repay, the value of the underlying collateral, and other market conditions to ensure the allowance for loan losses is adequate to absorb probable incurred losses. Our allowance for non-performing loans to non-performing loans was 3.28% at June 30, 2014 compared with 2.24% at December 31, 2013, and 6.56% at June 30, 2013. The increase in this ratio from December 31, 2013 to June 30, 2014 was primarily attributable to the significant decrease in non-performing loans as well as a reduction in net charge-offs related to specific reserves for loans deemed to be collateral dependent during the period.

The following table presents the unpaid principal balance, recorded investment and allocated allowance related to loans individually evaluated for impairment in the commercial real estate and residential real estate portfolios as of June 30, 2014 and December 31, 2013.

 

     June 30, 2014     December 31, 2013  
     Commercial
Real Estate
    Residential
Real Estate
    Commercial
Real Estate
    Residential
Real Estate
 
     (in thousands)  

Unpaid principal balance

   $ 67,450      $ 30,298      $ 116,740      $ 56,665   

Prior charge-offs

     (16,772     (3,849     (22,410     (7,153
  

 

 

   

 

 

   

 

 

   

 

 

 

Recorded investment

     50,678        26,449        94,330        49,512   

Allocated allowance

     (1,350     (252     (2,345     (827
  

 

 

   

 

 

   

 

 

   

 

 

 

Recorded investment, less allocated allowance

   $ 49,328      $ 26,197      $ 91,985      $ 48,685   
  

 

 

   

 

 

   

 

 

   

 

 

 

Recorded investment, less allocated allowance/ Unpaid principal balance

     73.13     86.46     78.79     85.92

Based on previous 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 and allocated allowance were 73.13% and 86.46% of the unpaid principal balance in the commercial real estate and residential real estate segments of the portfolio, respectively, at June 30, 2014.

 

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

 

    June 30, 2014     March 31, 2014     December 31, 2013     September 30, 2013  
    Loans     Allowance     % of
Total
    Loans     Allowance     % to
Total
    Loans     Allowance     % to
Total
    Loans     Allowance     % to
Total
 

Commercial

  $ 62,881      $ 2,965        4.72   $ 56,889      $ 3,156        5.55   $ 47,883      $ 2,931        6.12   $ 46,346      $ 3,206        6.92

Commercial real estate

    237,889        11,902        5.00        244,228        12,383        5.07        252,211        14,069        5.58        262,295        13,681        5.22   

Residential real estate:

    222,163        6,621        2.98        219,456        6,620        3.02        225,851        6,935        3.07        231,070        9,147        3.96   

Consumer

    12,607        338        2.68        13,585        379        2.79        14,272        407        2.85        15,561        532        3.42   

Agriculture

    27,248        435        1.60        26,049        415        1.59        18,877        305        1.62        23,337        421        1.80   

Other

    500        12        2.40        226        9        3.98        349        6        1.72        214        5        2.34   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 563,288      $ 22,273        3.95   $ 560,433      $ 22,962        4.10   $ 559,443      $ 24,653        4.41   $ 578,823      $ 26,992        4.66
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Our allowance for loan losses for loans collectively evaluated for impairment declined to 3.95% at June 30, 2014 from 4.56% at June 30, 2013 and 4.41% at December 31, 2013. This decline was driven primarily by an improving loan risk category classification mix and volume as well as improving historical loss trends which are key factors for estimating general reserves. Other factors include the consideration of growth, composition and diversification of our loan portfolio, current delinquency levels, the results of recent regulatory communications and general economic conditions.

Provision for Loan LossesNo provision for loan losses was recorded in the second quarter of 2014 or 2013, or in the first six months of 2014, compared to $450,000 for the six months ended June 30, 2013. The decrease was primarily attributable to the reduction in the loan portfolio size, declining historical loss rates, a stabilization in loan risk grade classification, and more stable collateral values for collateral dependent loans. All loan risk categories have decreased since December 31, 2013, with the exception of pass loans. The pass category increased approximately $65.3 million, the watch category declined approximately $53.1 million, the special mention category declined approximately $2.6 million, and the substandard category declined approximately $75.9 million. During the first quarter of 2014, management instituted a new risk category within its pass classification. The purpose was to better identify certain loans where the borrower’s sustained satisfactory repayment history was deemed a more relevant predictor of future loss than certain underwriting criteria at origination. The establishment of this new pass risk category helps to ensure the watch risk category remains transitory and event driven in nature. A total of $24.2 million in commercial, $8.5 million in residential, and $2.2 million in agriculture loans were reclassified from watch to the new pass risk category during the first quarter. 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 June 30, 2014 were $62.9 million compared with $47.0 million at June 30, 2013 and $30.9 million at December 31, 2013. See Footnote 5, “Other Real Estate Owned,” to the financial statements. During the first six months of 2014, we acquired $36.9 million of OREO properties, and sold properties totaling approximately $4.3 million. We value foreclosed properties at fair value less estimated costs to sell when acquired and expect to liquidate these properties to recover our investment in the due course of business.

Other real estate owned (OREO) is recorded at fair market value less estimated cost to sell at time of acquisition. Any write-down of the property at the time of acquisition is charged to the allowance for loan losses. Subsequent reductions in fair value are recorded as non-interest expense. To determine the fair value of OREO for smaller dollar single family homes, we consult with internal real estate sales staff and external realtors, investors, and appraisers. If the internally evaluated market price is below our underlying investment in the property, appropriate write-downs are recorded.

For larger dollar commercial real estate properties, we obtain a new appraisal of the subject property or have staff in our centralized appraisal department evaluate the latest in-file appraisal in connection with the transfer to OREO. In some of these circumstances, an appraisal is in process at quarter end and we must make our best estimate of the fair value of the underlying collateral based on our internal evaluation of the property, our review of the most recent appraisal, and discussions with the currently engaged appraiser. We typically obtain updated appraisals on the anniversary date of ownership unless a sale is imminent.

Net gain (loss) on sales, write-downs, and operating expenses for OREO totaled $1.4 million for the six months ended June 30, 2014, compared with $2.4 million for the same period of 2013. During the six months ended June 30, 2014, fair value write-downs of $650,000 were recorded to reflect declining values evidenced by new appraisals and our reduction of marketing prices in connection with our sales strategies compared with $1.3 million for the six months ended June 30, 2013.

 

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LiabilitiesTotal liabilities at June 30, 2014 were $1.014 billion compared with $1.040 billion at December 31, 2013, a decrease of $25.9 million, or 2.5%. This decrease was primarily attributable to a decrease in deposits of $36.9 million, or 3.7%, to $950.8 million at June 30, 2014 from $987.7 million at December 31, 2013. Certificate of deposit balances declined $48.8 million during the first six months of 2014 to $631.1 million at June 30, 2014 from $680.0 million at December 31, 2013. The decrease in deposits follows management’s strategy to match liability funding levels with lower loan balances.

Federal Home Loan Bank advances increased by $9.6 million to $14.1 million at June 30, 2014, from $4.5 million at December 31, 2013. These advances are used from time to time to fund asset growth and manage interest rate risk in accordance with our asset/liability management strategies.

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

 

     For the Six Months
Ended June 30, 2014
    For the Year Ended
December 31, 2013
 
     Average
Balance
     Average
Rate
    Average
Balance
     Average
Rate
 
     (dollars in thousands)  

Demand

   $ 110,191         $ 106,153      

Interest checking

     81,869         0.17     84,917         0.23

Money market

     89,466         0.55        69,842         0.50   

Savings

     37,091         0.25        39,158         0.29   

Certificates of deposit

     656,500         1.33        703,982         1.35   
  

 

 

      

 

 

    

Total deposits

   $ 975,117         0.97   $ 1,004,052         1.01
  

 

 

      

 

 

    

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 Six Months
Ended June 30, 2014
    For the Year Ended
December 31, 2013
 
     Average
Balance
     Average
Rate
    Average
Balance
     Average
Rate
 
     (dollars in thousands)  

Less than $100,000

   $ 369,364         1.26   $ 405,758         1.28

$100,000 or more

     287,136         1.41     298,224         1.44
  

 

 

      

 

 

    

Total

   $ 656,500         1.33   $ 703,982         1.35
  

 

 

      

 

 

    

The following table shows at June 30, 2014 the amount of our time deposits of $100,000 or more by time remaining until maturity (in thousands):

 

Maturity Period

 

Three months or less

   $ 52,523   

Three months through six months

     66,571   

Six months through twelve months

     85,148   

Over twelve months

     74,060   
  

 

 

 

Total

   $ 278,302   
  

 

 

 

 

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Liquidity

Liquidity risk arises from the possibility we may not be able to satisfy current or future financial commitments, or may become unduly reliant on alternative funding sources. The objective of liquidity risk management is to ensure we meet the cash flow requirements of depositors and borrowers, as well as our operating cash needs, taking into account all on- and off-balance sheet funding demands. Liquidity risk management also involves ensuring we meet our cash flow needs at a reasonable cost. We maintain an investment and funds management policy, which identifies primary sources of liquidity, establishes procedures for monitoring and measuring liquidity, and establishes minimum liquidity requirements in compliance with regulatory guidance. Our Asset Liability Committee regularly monitors and reviews our liquidity position.

Funds are available from a number of sources, including the sale of securities in the available for sale portion of the investment portfolio, principal pay-downs on loans and mortgage-backed securities, customer deposit inflows, and other wholesale funding. Our available for sale investment portfolio totaled $180.7 million at June 30, 2014 and within that portfolio, $66.2 million of our securities currently have an unrealized loss of $1.8 million.

Traditionally, we have borrowed from the FHLB to supplement our funding requirements. The advances are collateralized by first mortgage residential loans. The borrowing capacity is based on the market value of the underlying pledged loans. At June 30, 2014, our additional borrowing capacity with the FHLB was $10.6 million. Any new advances are limited to a one year maturity or less.

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

We use cash to pay dividends on common stock, if and when declared by the Board of Directors, and to service debt. The main sources of funding include dividends paid by PBI Bank and financing obtained in the capital markets. During 2011, Porter Bancorp contributed $13.1 million to its subsidiary, PBI Bank, which substantially decreased its liquid assets. The contribution was made to strengthen the Bank’s capital in an effort to help it comply with its capital ratio requirements under the consent order. Liquid assets decreased from $20.3 million at December 31, 2010, to $2.2 million at June 30, 2014. Since the Bank is unlikely to be in a position to pay dividends to the parent company for the foreseeable future, cash inflows for the parent are limited to earnings on investment securities, sales of investment securities, and interest on deposits with the Bank. These cash inflows along with the liquid assets held at June 30, 2014, totaling $2.2 million, are needed for the ongoing cash operating expenses of the parent company which have been reduced and are expected to be approximately $400,000 for rest of 2014. We have elected to defer payments on our Series A preferred stock and on our trust preferred securities.

 

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Capital

In the fourth quarter of 2011, we began deferring the payment of regular quarterly cash dividends on our Series A Preferred Stock issued to the U.S. Treasury. At June 30, 2014, cumulative accrued and unpaid dividends on this stock totaled $5.9 million. As a result of our dividend deferral, the holder of our Series A Preferred Stock (currently the U.S. Treasury) has the right to appoint up to two representatives to our Board of Directors. We will continue to accrue deferred dividends, which will be deducted from income to common shareholders for financial statement purposes.

In addition, effective with the fourth quarter of 2011, we began deferring interest payments on our junior subordinated notes which resulted in a deferral of distributions on our trust preferred securities. We have the option to defer interest payments from time-to-time for a period not to exceed 20 consecutive quarters. Thereafter, we must pay all deferred interest and resume quarterly interest payments or we will be in default. Future cash dividends on our common stock are subject to the prior payment of all deferred distributions on our trust preferred securities. At June 30, 2014, cumulative accrued and unpaid interest on our junior subordinated notes totaled $1.9 million.

Stockholders’ equity increased $1.8 million to $37.8 million at June 30, 2014, compared with $35.9 million at December 31, 2013. The increase was due a decrease in unrealized loss on available for sale securities, offset by the current year net loss and further reduced by dividends declared (accrued and unpaid) on cumulative preferred stock.

Each of the federal bank regulatory agencies has established risk-based capital requirements for banking organizations. In addition, PBI Bank has agreed with its primary regulators to maintain a ratio of total capital to total risk-weighted assets (“total risk-based capital ratio”) of at least 12.0%, and a ratio of Tier 1 capital to total assets (“leverage ratio”) of 9.0%.

The following table shows the ratios of Tier 1 capital and total capital to risk-adjusted assets and the leverage ratios for Porter Bancorp, Inc. and PBI Bank at the dates indicated:

 

                       June 30, 2014     December 31,
2013
 
     Regulatory
Minimums
    Well-Capitalized
Minimums
    Minimum Capital
Ratios Under
Consent Order
    Porter
Bancorp
    PBI
Bank
    Porter
Bancorp
    PBI
Bank
 

Tier 1 Capital

     4.0     6.0     N/A        7.31     9.74     7.34     9.35

Total risk-based capital

     8.0        10.0        12.0     11.07        11.79        11.03        11.44   

Tier 1 leverage ratio

     4.0        5.0        9.0        4.89        6.51        4.95        6.28   

At June 30, 2014, PBI Bank’s Tier 1 leverage ratio was 6.51%, and its total risk-based capital ratio was 11.79%, both of which are below the minimum capital ratios required by the Consent Order. Failure to meet minimum capital requirements could result in additional discretionary actions by regulators that, if undertaken, could have a materially adverse effect on our financial condition.

 

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

The Company’s interest sensitivity profile was asset sensitive at June 30, 2014, and December 31, 2013. Given a 100 basis point increase in interest rates sustained for one year, base net interest income would decrease by an estimated 1.40% at June 30, 2014, compared with an increase of 2.45% at December 31, 2013, 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 2.68% at June 30, 2014, compared with an increase of 4.85% at December 31, 2013, 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 June 30, 2014, as calculated using the static shock model approach:

 

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

+ 200 basis points

   $ (765     (2.68 )% 

+ 100 basis points

     (401 )     (1.40 )

We did not run a model simulation for declining interest rates as of June 30, 2014 because the Federal Reserve effectively lowered the federal funds target rate between 0.00% to 0.25% in December 2008. Therefore, no significant further short-term rate reductions can occur.

Item 4. Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q for the quarter ended June 30, 2014, we carried out an evaluation, under the supervision and with the participation of our management, including our president and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934). Based on this evaluation, our president and chief financial officer concluded that, as of the end of the fiscal quarter covered by this report, these disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is: (a) recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and (b) accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure. Additionally, there was no change in our internal control over financial reporting during the fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, the internal control over financial reporting.

 

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

We refer you to the detailed cautionary statements and discussion of risks that affect our Company and its business in “Item 1A – Risk Factors” of our December 31, 2013 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

  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 June 30, 2014, formatted in XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income (Loss), (iv) Consolidated Statement of Changes in Stockholders’ Equity, (v) Consolidated Statements of Cash Flows, (vi) Notes to Consolidated Financial Statements.

 

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SIGNATURES

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

 

   

PORTER BANCORP, INC.

(Registrant)

August 8, 2014     By:   /s/ John T. Taylor
      John T. Taylor
      Chief Executive Officer
August 8, 2014     By:   /s/ Phillip W. Barnhouse
      Phillip W. Barnhouse
      Chief Financial Officer and Chief Accounting Officer

 

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