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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2013
OR
(cid:1) 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
(State or other jurisdiction of
incorporation or organization)
2500 Eastpoint Parkway, Louisville, Kentucky
(Address of principal executive offices)
61-1142247
(I.R.S. Employer
Identification No.)
40223
(Zip Code)
Registrant’s telephone number, including area code: (502) 499-4800
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, no par value
Name of each exchange on which registered
NASDAQ Global Market
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer (as defined in Rule 405 of the Securities Act). Yes (cid:1) No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes (cid:1) No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes No (cid:1)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes No (cid:1)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-
K. (cid:1)
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
definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer (cid:1)
Non-accelerated filer
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes (cid:1) No
The aggregate market value of the voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as
of the close of business on June 30, 2013, was $10,473,876 based upon the last sales price reported for such date on the NASDAQ Global Market.
The number of shares outstanding of the registrant’s Common Stock, no par value, as of February 28, 2014, was 12,894,759.
(cid:1)
Accelerated filer
Smaller reporting company
(cid:1)
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement for the Annual Meeting of Shareholders to be held May 28, 2014 are incorporated by reference into Part III of this
Form 10-K.
TABLE OF CONTENTS
Table of Contents
PART I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
PART IV
Item 15. Exhibits and Financial Statement Schedules
Signatures
Index to Exhibits
Page No.
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Preliminary Note Concerning Forward-Looking Statements
PART I
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 deterioration in the financial condition of
borrowers resulting in significant increases in loan losses and provisions for those losses; changes in the interest rate environment, which may
reduce our margins or impact the value of securities, loans, deposits and other financial instruments; changes in loan underwriting, credit review
or loss reserve policies associated with economic conditions, examination conclusions, or regulatory developments; general economic or
business conditions, either nationally, regionally or locally in the communities we serve, may be worse than expected, resulting in, among other
things, a deterioration in credit quality or a reduced demand for credit; the results of regulatory examinations; any matter that would cause us to
conclude that there was impairment of any asset, including intangible assets; the continued service of key management personnel; our ability to
attract, motivate and retain qualified employees; factors that increase the competitive pressure among depository and other financial institutions,
including product and pricing pressures; the ability of our competitors with greater financial resources to develop and introduce products and
services that enable them to compete more successfully than us; the impact of governmental restrictions on entities participating in the Capital
Purchase Program of the U.S. Department of the Treasury; inability to comply with regulatory capital requirements and to secure any required
regulatory approvals for capital actions; legislative or regulatory developments, including changes in laws concerning taxes, banking, securities,
insurance and other aspects of the financial services industry; and fiscal and governmental policies of the United States federal government.
Other risks are detailed in Item 1A. “Risk Factors” of this Form 10-K all of which are difficult to predict and many of which are beyond our
control.
Forward-looking statements are not guarantees of performance or results. A forward-looking statement may include the assumptions or bases
underlying the forward-looking statement. We have made our assumptions and bases in good faith and believe they are reasonable. We caution
you however, that estimates based on such assumptions or bases frequently differ from actual results, and the differences can be material. The
forward-looking statements included in this report speak only as of the date of the report. We do not intend to update these statements unless
applicable laws require us to do so.
Item 1.
Business
Overview
We are a bank holding company headquartered in Louisville, Kentucky. We operate the ninth largest bank domiciled in the Commonwealth of
Kentucky based on total assets through our wholly-owned subsidiary PBI Bank. We operate 18 full-service banking offices in twelve counties in
Kentucky. 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. PBI
Bank is a community bank with a wide range of commercial and personal banking products. As of December 31, 2013, we had total assets of
$1.1 billion, total loans of $709.3 million, total deposits of $987.7 million and stockholders’ equity of $35.9 million.
History
We were organized in 1988, and historically conducted our banking business through separate community banks under the common control of J.
Chester Porter, our chairman emeritus, and Maria L. Bouvette, our former chairman and chief executive officer. In 2005, we completed a
reorganization in which we consolidated our subsidiary banks into a single bank. On December 31, 2005, we renamed our consolidated
subsidiary PBI Bank to create a single brand name for our banking operations throughout our market area. We completed our initial public
offering in September 2006.
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On November 21, 2008, we issued to the U.S. Treasury, in exchange for cash consideration of $35.0 million, (i) 35,000 shares of Fixed Rate
Cumulative Perpetual Preferred Stock, Series A, with a liquidation preference of $1,000 per share (the “Series A Preferred Stock”), and (ii) a
warrant to purchase up to 330,561 shares of our common stock for $15.88 per share.
In 2010, we completed a $32.0 million private placement to accredited investors. Following completion of the transactions involved, Porter
Bancorp had issued (i) 2,465,569 shares of common stock, (ii) 317,042 shares of Non–Voting Cumulative Mandatorily Convertible Perpetual
Preferred Shares, Series C (“Series C Preferred Stock”) and (iii) warrants to purchase 1,163,045 shares of non-voting common stock at a price of
$11.50 per share. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation – Capital.
On June 24, 2011, PBI Bank entered into a Consent Order with the Federal Deposit Insurance Corporation (“FDIC”) and the Kentucky
Department of Financial Institutions (“KDFI”). The consent order requires the Bank to improve its asset quality, reduce its loan concentrations,
and maintain a minimum Tier 1 leverage ratio of 9% and a minimum total risk based capital ratio of 12%.
On September 21, 2011, Porter Bancorp entered into a written agreement with the Federal Reserve Bank of St. Louis. Porter Bancorp made
formal commitments to use its resources to serve as a source of strength for PBI Bank, 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 on subordinated debentures or principal on trust
preferred securities without written approval, and to submit a 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 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 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.
Our Markets
We operate in markets that include the four largest cities in Kentucky – Louisville, Lexington, Owensboro and Bowling Green – and in other
communities along the I-65 corridor.
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Louisville/Jefferson, Bullitt and Henry Counties: Our headquarters are in Louisville, the largest city in Kentucky and the
twenty-seventh largest city in the United States. We also have banking offices in Bullitt County, south of Louisville, and
Henry County, east of Louisville. Our six banking offices in these counties also serve the contiguous counties of Spencer,
Shelby and Oldham to the east and northeast of Louisville. The area’s employers are diversified across many industries and
include the air hub for United Parcel Service (“UPS”), two Ford assembly plants, General Electric’s Consumer and Industrial
division, Humana, Norton Healthcare, Brown-Forman, YUM! Brands, Papa John’s Pizza, and Texas Roadhouse.
Lexington/Fayette County: Lexington, located in Fayette County, is the second largest city in Kentucky. Lexington is the
financial, educational, retail, healthcare and cultural hub for Central and Eastern Kentucky. It is known worldwide for its
Bluegrass horse farms and Keeneland Race Track, and proudly boasts of itself as “The Horse Capital of the World.” It is also
the home of the University of Kentucky and Transylvania University. The area’s employers include Toyota, Lexmark, IBM
Global Services and Valvoline.
Southern Kentucky: This market includes Bowling Green, the third largest city in Kentucky, located about 60 miles north of
Nashville, Tennessee. Bowling Green, located in Warren County, is the home of Western Kentucky University and is the
economic hub of the area. This market also includes thriving communities in the contiguous Barren County, including the city
of Glasgow. Major employers in Barren and Warren Counties include GM’s Corvette plant, several other automotive
facilities, and R.R. Donnelley’s regional printing facility.
Owensboro/Daviess County: Owensboro, located on the banks of the Ohio River, is Kentucky’s fourth largest city. The city
is called a festival city, with over 20 annual community celebrations that attract visitors from around the world, including its
world famous Bar-B-Q Festival which attracts over 80,000 visitors giving Owensboro recognition as “The Bar-B-Q Capital of
the World”. It is an industrial, medical, retail and cultural hub for Western Kentucky and the area employers include
Owensboro Medical System, Texas Gas, US Bank Home Mortgage and Toyotetsu.
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South Central Kentucky: South of the Louisville metropolitan area, we have banking offices in Butler, Edmonson, Green,
Hart, and Ohio Counties. This region includes stable community markets comprised primarily of agricultural and service-
based businesses. Each of our banking offices in these markets has a stable customer and core deposit base.
Our Products and Services
We meet our customers’ banking needs with a broad range of financial products and services. Our lending services include real estate,
commercial, mortgage and consumer loans to small to medium-sized businesses, the owners and employees of those businesses, as well as other
executives and professionals. We complement our lending operations with an array of retail and commercial deposit products. In addition, we
offer our customers drive-through banking facilities, automatic teller machines, night depository, personalized checks, credit cards, debit cards,
internet banking, electronic funds transfers through ACH services, domestic and foreign wire transfers, travelers’ checks, cash management,
vault services, lock box services, along with loan and deposit sweep accounts.
Employees
At December 31, 2013, the Company had 260 full-time equivalent employees. Our employees are not subject to a collective bargaining
agreement, and management considers the Company’s relationship with employees to be good.
Competition
The banking business is highly competitive, and we experience competition in our market from many other financial institutions. Competition
among financial institutions is based upon interest rates offered on deposit accounts, interest rates charged on loans, other credit and service
charges relating to loans, the quality and scope of the services offered, the convenience of banking facilities and, in the case of loans to
commercial borrowers, relative lending limits. We compete with commercial banks, credit unions, savings and loan associations, mortgage
banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market funds and other mutual funds, as
well as super-regional, national and international financial institutions that operate offices within our market area and beyond.
Supervision and Regulation
Consent Order and Formal Written Agreement. On June 24, 2011, PBI Bank entered into a Consent Order with the FDIC and the Kentucky
Department of Financial Institutions. PBI Bank agreed to obtain the written consent of both agencies before declaring or paying any future
dividends. As a practical matter, PBI Bank will not be able to pay dividends to Porter Bancorp for the foreseeable future. The Consent Order also
establishes benchmarks for the Bank to improve its asset quality, reduce its loan concentrations, and maintain a minimum Tier 1 leverage ratio of
9% and a minimum total risk based capital ratio of 12%. At December 31, 2013, the Bank’s Tier 1 leverage ratio was 6.3% and its total risk-
based capital ratio was 9.4%, which are below the minimums of 9.0% and 12.0% required by the Bank’s Consent Order. At December 31, 2013,
Porter Bancorp’s leverage ratio was 5.0% and its total risk-based capital ratio was 7.3%. We are continuing our efforts to strengthen our capital
levels and comply with the Consent Order as outlined in the current written capital plan submitted by the Bank to its regulators.
On September 21, 2011, we entered into a formal written agreement with the Federal Bank of St. Louis. Porter Bancorp made formal
commitments in the agreement to use its 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 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 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 obtain a capital investment into the Bank sufficient to recapitalize the bank.
We have not been directed by the FDIC to implement such a plan.
We expect to continue to work with our regulators toward capital ratio compliance as outlined in our written capital 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. While we have substantially complied with the Consent Order, as of December 31, 2013,
the capital ratios required by the Consent Order were not met.
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Bank and Holding Company Laws, Rules and Regulations. The following is a summary description of the relevant laws, rules and
regulations governing banks and bank holding companies. The descriptions of, and references to, the statutes and regulations below are brief
summaries and do not purport to be complete. The descriptions are qualified in their entirety by reference to the specific statutes and regulations
discussed.
The Dodd-Frank Act. On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”) was
signed into law. The Dodd-Frank Act imposes new restrictions and an expanded framework of regulatory oversight for financial institutions,
including depository institutions. Because the Dodd-Frank Act requires various federal agencies to adopt a broad range of regulations with
significant discretion, certain of the details of the law and the effects it will have on the Company are not known at this time.
The Dodd-Frank Act represents a comprehensive overhaul of the financial services industry within the United States. There are a number of
reform provisions that significantly impact the ways in which banks and bank holding companies, including the Company, do business. For
example, the Dodd-Frank Act changes the assessment base for federal deposit insurance premiums by modifying the deposit insurance
assessment base calculation to be based on a depository institution’s consolidated assets less tangible capital instead of deposits, and
permanently increases the standard maximum amount of deposit insurance per customer to $250,000. The Dodd-Frank Act also imposes more
stringent capital requirements on bank holding companies by, among other things, imposing leverage ratios on bank holding companies and
prohibiting new trust preferred security issuances from counting as Tier I capital. The Dodd-Frank Act also repeals the federal prohibition on the
payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts.
The Act codifies and expands the Federal Reserve’s source of strength doctrine, which requires that all bank holding companies serve as a source
of financial strength for its subsidiary banks. Other provisions of the Dodd-Frank Act include, but are not limited to: (i) the creation of a new
financial consumer protection agency that is empowered to promulgate new consumer protection regulations and revise existing regulations in
many areas of consumer protection; (ii) enhanced regulation of financial markets, including derivatives and securitization markets; (iii) reform
related to the regulation of credit rating agencies; (iv) the elimination of certain trading activities by banks; and (v) new disclosure and other
requirements relating to executive compensation and corporate governance.
Many provisions of the Dodd-Frank Act will require interpretation and rule- making by federal agencies. The Company monitors all relevant
sections of the Dodd-Frank Act to ensure continued compliance with laws and regulations. While the ultimate effect of the Dodd-Frank Act on
the Company is not fully known, the law is likely to result in increased compliance costs and fees paid to regulators, along with possible
restrictions on the Company’s operations.
Porter Bancorp. Porter Bancorp is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended, and is
subject to supervision and regulation by the Board of Governors of the Federal Reserve System. As such, we must file with the Federal Reserve
Board annual and quarterly reports and other information regarding our business operations and the business operations of our subsidiaries. We
are also subject to examination by the Federal Reserve Board and to operational guidelines established by the Federal Reserve Board. We are
subject to the Bank Holding Company Act and other federal laws on the types of activities in which we may engage, and to other supervisory
requirements, including regulatory enforcement actions for violations of laws and regulations.
Acquisitions. A bank holding company must obtain Federal Reserve Board approval before acquiring, directly or indirectly, ownership or control
of more than 5% of the voting stock or all or substantially all of the assets of a bank, merging or consolidating with any other bank holding
company and before engaging, or acquiring a company that is not a bank but is engaged in certain non-banking activities. Federal law also
prohibits a person or group of persons from acquiring “control” of a bank holding company without notifying the Federal Reserve Board in
advance, and then only if the Federal Reserve Board does not object to the proposed transaction. The Federal Reserve Board has established a
rebuttable presumptive standard that the acquisition of 10% or more of the voting stock of a bank holding company would constitute an
acquisition of control of the bank holding company. In addition, any company is required to obtain the approval of the Federal Reserve Board
before acquiring 25% (5% in the case of an acquirer that is a bank holding company) or more of any class of a bank holding company’s voting
securities, or otherwise obtaining control or a “controlling influence” over a bank holding company.
Permissible Activities. A bank holding company is generally permitted under the Bank Holding Company Act to engage in or acquire direct or
indirect control of more than 5% of the voting shares of any bank, bank holding company or company engaged in any activity that the Federal
Reserve Board determines to be so closely related to banking as to be a proper incident to the business of banking.
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Under current federal law, a bank holding company may elect to become a financial holding company, which enables the holding company to
conduct activities that are “financial in nature.” Activities that are “financial in nature” include securities underwriting, dealing and market
making; sponsoring mutual funds and investment companies; insurance underwriting and agency; merchant banking activities; and activities that
the Federal Reserve Board has determined to be closely related to banking. No regulatory approval will be required for a financial holding
company to acquire a company, other than a bank or savings association, engaged in activities that are financial in nature or incidental to
activities that are financial in nature, as determined by the Federal Reserve Board. We have not filed an election to become a financial holding
company.
U.S. Treasury Capital Purchase Program . On November 21, 2008, pursuant to the U.S. Department of the Treasury’s (the “U.S. Treasury”)
Capital Purchase Program (the “CPP”) established under the Emergency Economic Stabilization Act of 2008 (“EESA”), Porter Bancorp issued
and sold to the U.S. Treasury in an offering exempt from registration under the Securities Act of 1933, (i) 35,000 shares of Porter Bancorp’s
Fixed Rate Cumulative Perpetual Preferred Stock, Series A, no par value and liquidation preference $1,000 per share ($35.0 million aggregate
liquidation preference) (the “Series A Preferred Stock”) and (ii) a warrant (the “Warrant”) to purchase 330,561 shares (adjusted for stock
dividends) of Porter Bancorp’s common stock, at an exercise price of $15.88 per share (adjusted for stock dividends), subject to certain anti-
dilution and other adjustments for an aggregate purchase price of $35.0 million in cash. The securities purchase agreement, dated November 21,
2008, pursuant to which the securities issued to the U.S. Treasury under the CPP were sold, limits the payment of dividends on Porter Bancorp’s
common stock to the quarterly dividend level at the time of the transaction without prior approval of the U.S. Treasury, limits Porter Bancorp’s
ability to repurchase shares of its common stock (with certain exceptions, including the repurchase of our common stock to offset share dilution
from equity-based compensation awards) and grants registration rights to the holders of the Series A Preferred Stock, the Warrant and the
common stock of Porter Bancorp to be issued upon any exercise of the Warrant. The U.S. Treasury has notified us that it may sell at auction the
shares of Series A Preferred Stock issued by the Company. We do not know, at this time, the U.S. Treasury’s timeline for such a sale.
The American Recovery and Reinvestment Act (“ARRA”) was enacted on February 17, 2009. ARRA imposes certain executive compensation
and corporate governance obligations on all current and future CPP recipients, including Porter Bancorp, until the institution has redeemed the
preferred stock. On June 15, 2009, under the authority granted to it under EESA and ARRA, the U. S. Treasury issued an interim final rule under
Section 111 of EESA, as amended by ARRA, regarding compensation and corporate governance restrictions that would be imposed on CPP
recipients, effective June 15, 2009. As a CPP recipient with currently outstanding CPP obligations, we are subject to the compensation and
corporate governance restrictions and requirements set forth in the interim final rule. The restrictions and requirements provided for in the
implementing regulations are generally as follows: (1) required us to establish an independent compensation committee, (2) required us to adopt
a corporate policy on luxury or excessive expenditures; (3) requires our compensation committee to conduct semi-annual risk assessments to
assure that our compensation arrangements do not encourage “unnecessary and excessive risks” or the manipulation of earnings to increase
compensation; (4) requires us to recoup or “clawback” any bonus, retention award or incentive compensation paid by us to a senior executive
officer or any of our next 20 most highly compensated employees, if the payment was based on financial statements or other performance criteria
that are later found to be materially inaccurate; (5) prohibits us from making severance payments or “golden parachutes” to any of our senior
executive officers or next five most highly compensated employees; (6) prohibits us from paying or accruing bonuses, retention awards or
incentive compensation, except for certain long-term stock awards, to our five most highly compensated employees; (7) prohibits us from
providing tax gross-ups to any of our senior executive officers or next 20 most highly compensated employees; (8) requires us to provide
enhanced disclosure of perquisites to the FDIC and the U.S. Treasury; (9) requires us to disclose to the FDIC and the U.S. Treasury the use and
role of compensation consultants; (10) requires our chief executive officer and chief financial officer to provide period certifications about our
compensation practices and compliance with the interim final rule; and (11) requires us to provide an annual non-binding shareholder vote, or
“say-on-pay” proposal, to approve the compensation of our named executives, consistent with regulations promulgated by the Securities and
Exchange Commission. On January 12, 2010, the SEC adopted final regulations setting forth the parameters for such say-on pay proposals for
public company CPP participants. The U.S. Treasury has notified us that it intends to sell at auction the shares of Series A Preferred Stock issued
by the Company. We do not know the U.S. Treasury’s timeline for that sale. If the U.S. Treasury completes such a sale, most of the
compensation restrictions described above will no longer apply to the Company and the Bank.
Capital Adequacy Requirements. The Federal Reserve Board has adopted a system using risk-based capital guidelines to evaluate the capital
adequacy of bank holding companies. Under the guidelines, specific categories of assets are assigned different risk weights, based generally on
the perceived credit risk of the asset. These risk weights are multiplied by corresponding asset balances to determine a “risk-weighted” asset
base. The guidelines require a minimum total risk-based capital ratio of 8.0%. At least half of the total capital must be composed of common
equity, retained earnings, senior perpetual preferred stock issued to the U. S. Treasury under the CPP and qualifying perpetual preferred stock
and certain hybrid capital instruments, less certain intangible assets (“Tier 1 capital”). The remainder may consist of certain subordinated debt,
certain hybrid capital instruments, qualifying preferred stock and a limited amount of the allowance for loan losses (“Tier 2 capital”). Total
capital is the sum of Tier 1 and Tier 2 capital. To be considered well-capitalized under the risk-based capital guidelines, an institution must
maintain a total capital to total risk-weighted assets ratio of at least 10% and a Tier 1 capital to total risk-weighted assets ratio of 6% or greater.
We are under a Consent Order with our primary regulators as previously discussed, and therefore cannot be considered well-capitalized. Please
see “Supervision and Regulation” above for our capital requirements.
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In addition to the risk-based capital guidelines, the Federal Reserve Board uses a leverage ratio as an additional tool to evaluate the capital
adequacy of bank holding companies. The leverage ratio is a company’s Tier 1 capital divided by its average total consolidated assets. Certain
highly rated bank holding companies may maintain a minimum leverage ratio of 3.0%, but other bank holding companies may be required to
maintain a leverage ratio of 4.0%.
The federal banking agencies’ risk-based and leverage ratios are minimum supervisory ratios generally applicable to banking organizations that
meet certain specified criteria, assuming that they have the highest regulatory rating. Banking organizations not meeting these criteria are
expected to operate with capital positions well above the minimum ratios. The federal bank regulatory agencies may set capital requirements for
a particular banking organization that are higher than the minimum ratios when circumstances warrant. Federal Reserve Board guidelines also
provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain strong capital positions
substantially above the minimum supervisory levels, without significant reliance on intangible assets.
New Capital Requirements – Possible Changes to Capital Requirements Resulting from Basel III. In December 2010 and January 2011, the
Basel Committee on Banking Supervision published the final texts of reforms on capital and liquidity generally referred to as “Basel III.”
Although Basel III is intended to be implemented by participating countries for large, internationally active banks, its provisions are likely to be
considered by United States banking regulators in developing new regulations applicable to other banks in the United States, including the Bank.
For banks in the United States, among the most significant provisions of Basel III concerning capital are the following:
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A minimum ratio of common equity to risk-weighted assets reaching 4.5%, plus an additional 2.5% as a capital conservation buffer,
by 2019 after a phase-in period.
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A minimum ratio of Tier 1 capital to risk-weighted assets reaching 6.0% by 2019 after a phase-in period.
A minimum ratio of total capital to risk-weighted assets, plus the additional 2.5% capital conservation buffer, reaching 10.5% by
2019 after a phase-in period.
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An additional countercyclical capital buffer to be imposed by applicable national banking regulators periodically at their discretion,
with advance notice.
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Restrictions on capital distributions and discretionary bonuses applicable when capital ratios fall within the buffer zone.
Deduction from common equity of deferred tax assets that depend on future profitability to be realized.
Increased capital requirements for counterparty credit risk relating to OTC derivatives, repos and securities financing activities.
For capital instruments issued on or after January 13, 2013 (other than common equity), a loss-absorbency requirement such that the
instrument must be written off or converted to common equity if a trigger event occurs, either pursuant to applicable law or at the
direction of the banking regulator. A trigger event is an event under which the banking entity would become nonviable without the
write-off or conversion, or without an injection of capital from the public sector. The issuer must maintain authorization to issue the
requisite shares of common equity if conversion were required.
The Basel III provisions on liquidity include complex criteria establishing a liquidity coverage ratio (“LCR”) and net stable funding ratio
(“NSFR”). The purpose of the LCR is to ensure that a bank maintains adequate unencumbered, high quality liquid assets to meet its liquidity
needs for 30 days under a severe liquidity stress scenario. The purpose of the NSFR is to promote more medium and long-term funding of assets
and activities, using a one-year horizon. Although Basel III is described as a “final text,” it is subject to the resolution of certain issues and to
further guidance and modification, as well as to adoption by United States banking regulators, including decisions as to whether and to what
extent it will apply to United States banks that are not large, internationally active banks. We are already subject to capital requirements imposed
by our consent order that are higher than Basel III.
Dividends. Under Federal Reserve policy, bank holding companies should pay cash dividends on common stock only out of income available
over the past year and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition.
The policy provides that bank holding companies should not declare a level of cash dividends that undermines the bank holding company’s
ability to serve as a source of strength to its banking subsidiaries.
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Porter Bancorp is a legal entity separate and distinct from PBI Bank. The majority of our revenue is from dividends paid to us by PBI Bank. PBI
Bank is subject to laws and regulations that limit the amount of dividends it can pay. If, in the opinion of a federal regulatory agency, an
institution under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice, the agency may require, after notice and
hearing, that the institution cease such practice. The federal banking agencies have indicated that paying dividends that deplete an institution’s
capital base to an inadequate level would be an unsafe and unsound banking practice. Under the Federal Deposit Insurance Corporation
Improvement Act (FDICIA), an insured institution may not pay any dividend if payment would cause it to become undercapitalized or if it
already is undercapitalized. Moreover, the Federal Reserve and the FDIC have issued policy statements providing that bank holding companies
and banks should generally pay dividends only out of current operating earnings. A bank holding company may still declare and pay a dividend
if it does not have current operating earnings if the bank holding company expects profits for the entire year and the bank holding company
obtains the prior consent of the Federal Reserve. Porter Bancorp and PBI Bank must obtain the prior written consent of each of their primary
regulators prior to declaring or paying any future dividends.
Under Kentucky law, dividends by Kentucky banks may be paid only from current or retained net profits. Before any dividend may be declared
for any period (other than with respect to preferred stock), a bank must increase its capital surplus by at least 10% of the net profits of the bank
for the period until the bank’s capital surplus equals the amount of its stated capital attributable to its common stock. Moreover, the Kentucky
Department of Financial Institutions must approve the declaration of dividends if the total dividends to be declared by a bank for any calendar
year would exceed the bank’s total net profits for such year combined with its retained net profits for the preceding two years, less any required
transfers to surplus or a fund for the retirement of preferred stock or debt. We are also subject to the Kentucky Business Corporation Act, which
generally prohibits dividends to the extent they result in the insolvency of the corporation from a balance sheet perspective or in the corporation
becoming unable to pay its debts as they come due. PBI Bank did not pay any dividends in 2012 or 2013.
Porter Bancorp is in deferral on dividends due on its issued and outstanding Series A Preferred Stock. Until accrued unpaid interest on Series A
Preferred Stock is paid in full and current, no dividends on common may be paid. Additionally, unless Porter Bancorp redeems all of the Series
A Preferred Stock issued to the U.S. Treasury on November 21, 2008 or unless the U.S. Treasury transfers all the preferred securities to a third
party, the consent of the U.S. Treasury is required for Porter Bancorp to declare or pay any dividend or make any distribution on common stock
other than (i) regular quarterly cash dividends of not more than the per share dividend amount at the time of the issuance of the Series A
Preferred Stock, as adjusted for any stock split, stock dividend, reverse stock split, reclassification or similar transaction, (ii) dividends payable
solely in shares of common stock and (iii) dividends or distributions of rights or junior stock in connection with a shareholders’ rights plan.
Imposition of Liability for Undercapitalized Subsidiaries. Bank regulators are required to take “prompt corrective action” to resolve problems
associated with insured depository institutions whose capital declines below certain levels. In the event an institution becomes
“undercapitalized,” it must submit a capital restoration plan. The capital restoration plan will not be accepted by the regulators unless each
company having control of the undercapitalized institution guarantees the subsidiary’s compliance with the capital restoration plan up to a
certain specified amount. Any such guarantee from a depository institution’s holding company is entitled to a priority of payment in bankruptcy.
The aggregate liability of the holding company of an undercapitalized bank is limited to the lesser of 5% of the institution’s assets at the time it
became undercapitalized or the amount necessary to cause the institution to be “adequately capitalized.” The bank regulators have greater power
in situations where an institution becomes “significantly” or “critically” undercapitalized or fails to submit a capital restoration plan. For
example, a bank holding company controlling such an institution can be required to obtain prior Federal Reserve Board approval of proposed
dividends, or might be required to consent to a consolidation or to divest the troubled institution or other affiliates.
Source of Financial Strength. Under Federal Reserve policy, a bank holding company is expected to act as a source of financial strength to, and
to commit resources to support, its bank subsidiaries. This support may be required at times when, absent such a policy, the bank holding
company may not be inclined to provide it. In addition, any capital loans by the bank holding company to its bank subsidiaries are subordinate in
right of payment to deposits and to certain other indebtedness of the bank subsidiary. In the event of a bank holding company’s bankruptcy, any
commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of subsidiary banks will be assumed by
the bankruptcy trustee and entitled to a priority of payment. The Federal Reserve’s “Source of Financial Strength” policy was codified in the
Dodd-Frank Act.
PBI Bank. PBI Bank, a Kentucky chartered commercial bank, is subject to regular bank examinations and other supervision and regulation by
both the FDIC and the Kentucky Department of Financial Institutions (“KDFI”). Kentucky’s banking statutes contain a “super-parity” provision
that permits a well-rated Kentucky banking corporation to engage in any banking activity which could be engaged in by a national bank
operating in any state; a state bank, a thrift or savings bank operating in any other state; or a federal chartered thrift or federal savings association
meeting the qualified thrift lender test and operating in any state could engage, provided the Kentucky bank first obtains a legal opinion
specifying the statutory or regulatory provisions that permit the activity.
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Capital Requirements. Similar to the Federal Reserve Board’s requirements for bank holding companies, the FDIC has adopted risk-based
capital requirements for assessing state non-member banks’ capital adequacy. The FDIC’s risk-based capital guidelines require that all banks
maintain a minimum ratio of total capital to total risk-weighted assets of 8.0% and a minimum ratio of Tier 1 capital to total risk-weighted assets
of 4.0%. To be well-capitalized, a bank must have a ratio of total capital to total risk-weighted assets of at least 10.0% and a ratio of Tier 1
capital to total risk-weighted assets of 6.0%.
PBI Bank has agreed with its primary regulators to maintain a ratio of total capital to total risk-weighted assets of at least 12.0% and a ratio of
Tier 1 capital to total assets of 9%. As of December 31, 2013, PBI Bank’s ratio of total capital to total risk-weighted assets was 11.44% and its
ratio of Tier 1 capital to total assets was 6.28%, both under the ratios required by the Consent Order.
The FDIC also requires a minimum leverage ratio of 3.0% of Tier 1 capital to total assets for the highest rated banks and an additional cushion of
approximately 100-200 basis points for all other banks. The leverage ratio operates in tandem with the FDIC’s risk-based capital guidelines and
places a limit on the amount of leverage a bank can undertake by requiring a minimum level of capital to total assets.
Prompt Corrective Action. Pursuant to the Federal Deposit Insurance Act (“FDIA”), the FDIC must take prompt corrective action to resolve the
problems of undercapitalized institutions. FDIC regulations define the levels at which an insured institution would be considered “well
capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” A “well-
capitalized” bank has a total risk-based capital ratio of 10.0% or higher; a Tier 1 risk- based capital ratio of 6.0% or higher; a leverage ratio of
5.0% or higher; and is not subject to any written agreement, order or directive requiring it to maintain a specific capital level for any capital
measure. An “adequately capitalized” bank has a total risk-based capital ratio of 8.0% or higher; a Tier 1 risk-based capital ratio of 4.0% or
higher; a leverage ratio of 4.0% or higher (3.0% or higher if the bank was rated a composite 1 in its most recent examination report and is not
experiencing significant growth); and does not meet the criteria for a well-capitalized bank. A bank is “undercapitalized” if it fails to meet any
one of the ratios required to be adequately capitalized. A depository institution may be deemed to be in a capitalization category that is lower
than is indicated by its actual capital position if it receives an unsatisfactory examination rating. The degree of regulatory scrutiny increases and
the permissible activities of a bank decreases, as the bank moves downward through the capital categories. Depending on a bank’s level of
capital, the FDIC’s corrective powers include:
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•
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requiring a capital restoration plan;
placing limits on asset growth and restriction on activities;
requiring the bank to issue additional voting or other capital stock or to be acquired;
placing restrictions on transactions with affiliates;
restricting the interest rate the bank may pay on deposits;
ordering a new election of the bank’s board of directors;
requiring that certain senior executive officers or directors be dismissed;
prohibiting the bank from accepting deposits from correspondent banks;
requiring the bank to divest certain subsidiaries;
prohibiting the payment of principal or interest on subordinated debt; and
ultimately, appointing a receiver for the bank.
In the event an institution is required to submit a capital restoration plan, the institution’s holding company must guaranty the subsidiary’s
compliance with the capital restoration plan up to a certain specified amount. Any such guarantee from a depository institution’s holding
company is entitled to a priority of payment in bankruptcy. The aggregate liability of the holding company of an undercapitalized bank is limited
to the lesser of 5% of the institution’s assets at the time it became undercapitalized or the amount necessary to cause the institution to be
“adequately capitalized.” The bank regulators have greater power in situations where an institution becomes “significantly” or “critically”
undercapitalized or fails to submit a capital restoration plan. For example, a bank holding company controlling such an institution can be
required to obtain prior Federal Reserve Board approval of proposed dividends, or might be required to consent to a consolidation or to divest
the troubled institution or other affiliates.
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Deposit Insurance Assessments. The deposits of PBI Bank are insured by the Deposit Insurance Fund (DIF) of the FDIC up to the limits set forth
under applicable law and are subject to the deposit insurance premium assessments of the DIF. The FDIC imposes a risk-based deposit premium
assessment system, which was amended pursuant to the Federal Deposit Insurance Reform Act of 2005 (the “Reform Act”). Under this system,
as amended, the assessment rates for an insured depository institution vary according to the level of risk incurred in its activities. To arrive at an
assessment rate for a banking institution, the FDIC places it in one of four risk categories determined by reference to its capital levels and
supervisory ratings. The assessment rate schedule can change from time to time, at the discretion of the FDIC, subject to certain limits.
On November 12, 2009, the FDIC amended the final rule adopted on May 22, 2009 to restore losses to the DIF. The new rule required insured
institutions to prepay on December 30, 2009, an estimated quarterly risk-based assessment for the fourth quarter of 2009 and for all 2010, 2011,
and 2012. An institution’s assessment is calculated by taking the institution’s actual September 30, 2009 assessment and adjusting it quarterly by
an estimated 5% annual growth rate through the end of 2012. Further, the FDIC incorporated a uniform 3 basis point increase effective
January 1, 2011. On December 30, 2009, PBI Bank prepaid $7.9 million of FDIC insurance premiums for 2010 through 2012. The entire amount
of the prepaid assessment was recorded as a prepaid expense. As of December 31, 2009, and each quarter thereafter, each institution recorded an
expense, or a charge to earnings, for its quarterly assessment invoiced on its quarterly statement and an offsetting credit to the prepaid
assessment until the asset is exhausted. At December 31, 2012, our prepaid assessment was exhausted.
The Dodd-Frank Act imposes additional assessments and costs with respect to deposits. Under the Dodd-Frank Act, the FDIC is directed to
impose deposit insurance assessments based on total assets rather than total deposits, as well as making permanent the increase of deposit
insurance to $250,000 and providing for full insurance of non-interest bearing transaction accounts beginning December 31, 2010, for two years.
In February 2011, the FDIC adopted a final rule on the deposit insurance assessment system. The rule was effective as of April 1, 2011, and
revised the assessment system to comply with Dodd-Frank and also included a revised assessment rate process with the goal of differentiating
insured depository institutions who pose greater risk to the DIF. The first assessments under the new rule were payable in the third quarter of
2011.
Safety and Soundness Standards. The FDIA requires the federal bank regulatory agencies to prescribe standards, by regulations or guidelines,
relating to internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate risk exposure,
asset growth, asset quality, earnings, stock valuation and compensation, fees and benefits, and such other operational and managerial standards
as the agencies deem appropriate. Guidelines adopted by the federal bank regulatory agencies establish general standards relating to internal
controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth and
compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage
the risk and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and
describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive
officer, employee, director or principal stockholder. In addition, the agencies adopted regulations that authorize, but do not require, an agency to
order an institution that has been given notice by an agency that it is not satisfying any of such safety and soundness standards to submit a
compliance plan. If, after being so notified, an institution fails to submit an acceptable compliance plan or fails in any material respect to
implement an acceptable compliance plan, the agency must issue an order directing action to correct the deficiency and may issue an order
directing other actions of the types to which an undercapitalized institution is subject under the “prompt corrective action” provisions of FDIA.
See “Prompt Corrective Actions” above. If an institution fails to comply with such an order, the agency may seek to enforce such order in
judicial proceedings and to impose civil money penalties.
Branching. Kentucky law permits Kentucky chartered banks to establish a banking office in any county in Kentucky. A Kentucky bank may also
establish a banking office outside of Kentucky. Well capitalized Kentucky banks that have been in operation at least three years and that satisfy
certain criteria relating to, among other things, their composite and management ratings, may establish a banking office in Kentucky without the
approval of the KDFI upon notice to the KDFI and any other state bank with its main office located in the county where the new banking office
will be located. Branching by all other banks requires the approval of the KDFI, which must ascertain and determine that the public convenience
and advantage will be served and promoted and that there is reasonable probability of the successful operation of the banking office.
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The transaction must also be approved by the FDIC, which considers a number of factors, including financial history, capital adequacy, earnings
prospects, character of management, needs of the community and consistency with corporate powers.
Section 613 of the Dodd—Frank Act effectively eliminated the interstate branching restrictions set forth in the Riegle-Neal Interstate Banking
and Branching Efficiency Act of 1994. Banks located in any state may now de novo branch in any other state, including Kentucky. Such
unlimited branching power will likely increase competition within the markets in which the Corporation and the Bank operate. Insider Credit
Transactions. The restrictions on loans to directors, executive officers, principal shareholders and their related interests (collectively referred to
herein as “insiders”) contained in the Federal Reserve Act and Regulation O apply to all insured depository institutions and their subsidiaries.
These restrictions include limits on loans to one borrower and conditions that must be met before such a loan can be made. There is also an
aggregate limitation on all loans to insiders and their related interests. These loans cannot exceed the institution’s total unimpaired capital and
surplus.
Automated Overdraft Payment Regulation. The Federal Reserve and FDIC have recently enacted consumer protection regulations related to
automated overdraft payment programs offered by financial institutions. In November 2009, the Federal Reserve amended its Regulation E to
prohibit financial institutions from charging consumers fees for paying overdrafts on automated teller machine and one-time debit card
transactions, unless a consumer consents, or opts in, to the overdraft service for those types of transactions. The Regulation E amendments also
require financial institutions to provide consumers with a notice that explains the financial institution’s overdraft services, including the fees
associated with the service and the consumer’s choices.
In November 2010, the FDIC supplemented the Regulation E amendments by requiring FDIC-supervised institutions to implement additional
changes relating to automated overdraft payment programs by July 1, 2011. One material change requires financial institutions to monitor
overdraft payment programs for “excessive or chronic” customer use and to undertake “meaningful and effective” follow-up action with
customers that overdraw their accounts more than six times during a rolling 12-month period. The new guidance also imposes daily limits on
overdraft charges, requires institutions to review and modify check-clearing procedures, prominently distinguish account balances from available
overdraft coverage amounts and requires increased board and management oversight regarding overdraft payment programs.
Consumer Protection Laws. We are subject to a number of federal and state laws designed to protect borrowers and promote lending to various
sectors of the economy and population. These laws include, among others, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the
Truth in Lending Act, the Home Mortgage Disclosure Act, and the Real Estate Settlement and Procedures Act, and state law counterparts.
Equal Credit Opportunity Act. This statute prohibits discrimination against an applicant in any credit transaction, whether for consumer or
business purposes, on the basis of race, color, religion, national origin, sex, marital status, age (except in limited circumstances), receipt of
income from public assistance programs or good faith exercise of any rights under the Consumer Credit Protection Act. Under the Fair Housing
Act, it is unlawful for any lender to discriminate in its housing-related lending activities against any person because of race, color, religion,
national origin, sex, handicap or familial status. Among other things, these laws prohibit a lender from denying or discouraging credit on a
discriminatory basis, making excessively low appraisals of property based on racial considerations, or charging excessive rates or imposing more
stringent loan terms or conditions on a discriminatory basis. In addition to private actions by aggrieved borrowers or applicants for actual and
punitive damages, the U.S. Department of Justice and other regulatory agencies can take enforcement action seeking injunctive and other
equitable relief or sanctions for alleged violations.
Fair Credit Reporting Act (“FCRA”). FCRA requires the Bank to adopt and implement a written identity theft prevention program, paying
particular attention to several identified “red flag” events. The program must assess the validity of address change requests for card issuers and
for users of consumer reports to verify the subject of a consumer report in the event of notice of an address discrepancy. FCRA gives consumers
the ability to challenge banks with respect to credit reporting information provided by the bank. FCRA also prohibits banks from using certain
information it may acquire from an affiliate to solicit the consumer for marketing purposes unless the consumer has been given notice and an
opportunity to opt out of such solicitation for a period of five years.
Truth in Lending Act (“TILA”). TILA is designed to ensure that credit terms are disclosed in a meaningful way so that consumers may compare
credit terms more readily and knowledgeably. As result of TILA, all creditors must use the same credit terminology and expressions of rates, and
disclose the annual percentage rate, the finance charge, the amount financed, the total of payments and the payment schedule for each proposed
loan. Violations of TILA may result in regulatory sanctions and in the imposition of both civil and, in the case of willful violations, criminal
penalties. Under certain circumstances, TILA also provides a consumer with a right of rescission, which if exercised within three business days
would require the creditor to reimburse any amount paid by the consumer to the creditor or to a third party in connection with the loan, including
finance charges, application fees, commitment fees, title search fees and appraisal fees. Consumers may also seek actual and punitive damages
for violations of TILA.
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Home Mortgage Disclosure Act (“HMDA”). HMDA has grown out of public concern over credit shortages in certain urban neighborhoods. One
purpose of HMDA is to provide public information that will help show whether financial institutions are serving the housing credit needs of the
neighborhoods and communities in which they are located. HMDA also includes a “fair lending” aspect that requires the collection and
disclosure of data about applicant and borrower characteristics, as a way of identifying possible discriminatory lending patterns and enforcing
anti-discrimination statutes. HMDA requires institutions to report data regarding applications for loans for the purchase or improvement of
single family and multi-family dwellings, as well as information concerning originations and purchases of such loans. Federal bank regulators
rely, in part, upon data provided under HMDA to determine whether depository institutions engage in discriminatory lending practices. The
appropriate federal banking agency, or in some cases the Department of Housing and Urban Development, enforces compliance with HMDA
and implements its regulations. Administrative sanctions, including civil money penalties, may be imposed by supervisory agencies for
violations of HMDA.
Real Estate Settlement Procedures Act (“RESPA”). RESPA requires lenders to provide borrowers with disclosures regarding the nature and cost
of real estate settlements. RESPA also prohibits certain abusive practices, such as kickbacks, and places limitations on the amount of escrow
accounts. Violations of RESPA may result in imposition of penalties, including: (1) civil liability equal to three times the amount of any charge
paid for the settlement services or civil liability of up to $1,000 per claimant, depending on the violation; (2) awards of court costs and attorneys’
fees; and (3) fines of not more than $10,000 or imprisonment for not more than one year, or both.
Loans to One Borrower. Under current limits, loans and extensions of credit outstanding at one time to a single borrower and not fully secured
generally may not exceed 15% of an institution’s unimpaired capital and unimpaired surplus. Loans and extensions of credit fully secured by
certain readily marketable collateral may represent an additional 10% of unimpaired capital and unimpaired surplus.
Federal law currently contains extensive customer privacy protection provisions. Under these provisions, a financial institution must provide to
its customers, at the inception of the customer relationship and annually thereafter, the institution’s policies and procedures regarding the
handling of customers’ nonpublic personal financial information. These provisions also provide that, except for certain limited exceptions, an
institution may not provide such personal information to unaffiliated third parties unless the institution discloses to the customer that such
information may be so provided and the customer is given the opportunity to opt out of such disclosure. Federal law makes it a criminal offense,
except in limited circumstances, to obtain or attempt to obtain customer information of a financial nature by fraudulent or deceptive means.
Consumer Financial Protection Bureau (“CFPB”). The Dodd-Frank Act created a new, independent federal agency called the Consumer
Financial Protection Bureau, which is granted broad rulemaking, supervisory and enforcement powers under various federal consumer financial
protection laws. The CFPB has examination and primary enforcement authority with respect to depository institutions with $10 billion or more
in assets. Smaller institutions will be subject to rules promulgated by the CFPB, but will continue to be examined and supervised by federal
banking regulators for consumer compliance purposes. The CFPB has authority to prevent unfair, deceptive or abusive acts or practices in
connection with the offering of consumer financial products. The Dodd-Frank Act authorizes the CFPB to establish certain minimum standards
for the origination of residential mortgages including a determination of the borrower’s ability to repay. In addition, the Dodd-Frank Act will
allow borrowers to raise certain defenses to foreclosure if they receive any loan other than a “qualified mortgage” as defined by the CFPB.
The Dodd-Frank Act also permits states to adopt consumer protection laws and standards that are more stringent than those adopted at the
federal level and, in certain circumstances, permits state attorneys general to enforce compliance with both the state and federal laws and
regulations. Federal preemption of state consumer protection law requirements, traditionally an attribute of the federal savings association
charter, has also been modified by the Dodd-Frank Act and now requires a case-by-case determination of preemption by the Office of the
Comptroller of the Currency (“OCC”) and eliminates preemption for subsidiaries of a bank. Depending on the implementation of this revised
federal preemption standard, the operations of the Bank could become subject to additional compliance burdens in the states in which it operates.
Privacy. Federal law currently contains extensive customer privacy protection provisions. Under these provisions, a financial institution must
provide to its customers, at the inception of the customer relationship and annually thereafter, the institution’s policies and procedures regarding
the handling of customers’ nonpublic personal financial information. These provisions also provide that, except for certain limited exceptions, an
institution may not provide such personal information to unaffiliated third parties unless the institution discloses to the customer that such
information may be so provided and the customer is given the opportunity to opt out of such disclosure. Federal law makes it a criminal offense,
except in limited circumstances, to obtain or attempt to obtain customer information of a financial nature by fraudulent or deceptive means.
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Community Reinvestment Act. The Community Reinvestment Act (“CRA”) requires the FDIC to assess our record in meeting the credit needs of
the communities we serve, including low- and moderate-income neighborhoods and persons. The FDIC’s assessment of our record is made
available to the public. The assessment also is part of the Federal Reserve Board’s consideration of applications to acquire, merge or consolidate
with another banking institution or its holding company, to establish a new banking office or to relocate an office.
Bank Secrecy Act. The Bank Secrecy Act of 1970 (“BSA”) was enacted to deter money laundering, establish regulatory reporting standards for
currency transactions and improve detection and investigation of criminal, tax and other regulatory violations. BSA and subsequent laws and
regulations require us to take steps to prevent the use of PBI Bank in the flow of illegal or illicit money, including, without limitation, ensuring
effective management oversight, establishing sound policies and procedures, developing effective monitoring and reporting capabilities, ensuring
adequate training and establishing a comprehensive internal audit of BSA compliance activities. In recent years, federal regulators have
increased the attention paid to compliance with the provisions of BSA and related laws, with particular attention paid to “Know Your Customer”
practices. Banks have been encouraged by regulators to enhance their identification procedures prior to accepting new customers in order to
deter criminal elements from using the banking system to move and hide illegal and illicit activities.
USA Patriot Act. The USA Patriot Act of 2001 (the “Patriot Act”) contains anti-money laundering measures affecting insured depository
institutions, broker-dealers and certain other financial institutions. The Patriot Act requires financial institutions to implement policies and
procedures to combat money laundering and the financing of terrorism. This includes standards for verifying customer identification at account
opening, as well as rules to promote cooperation among financial institutions, regulators and law enforcement entities in identifying parties that
may be involved in terrorism or money laundering. It grants the Secretary of the Treasury broad authority to establish regulations and to impose
requirements and restrictions on financial institutions’ operations. In addition, the Patriot Act requires the federal bank regulatory agencies to
consider the effectiveness of a financial institution’s anti-money laundering activities when reviewing bank mergers and bank holding company
acquisitions.
Effect on Economic Environment. The policies of regulatory authorities, including the monetary policy of the Federal Reserve Board, have a
significant effect on the operating results of bank holding companies and their subsidiaries. Among the means available to the Federal Reserve
Board to affect the money supply are open market operations in U.S. government securities, changes in the discount rate on member bank
borrowings and changes in reserve requirements against member bank deposits. These means are used in varying combinations to influence
overall growth and distribution of bank loans, investments and deposits. Their use may affect interest rates charged on loans or paid for deposits.
Federal Reserve Board monetary policies have materially affected the operating results of commercial banks in the past and are expected to
continue to do so in the future. The nature of future monetary policies and the effect of such policies on our business and earnings and those of
our subsidiaries cannot be predicted.
Recently Enacted and Future Legislation. Various laws, regulations and governmental programs affecting financial institutions and the
financial industry are from time to time introduced in Congress or otherwise promulgated by regulatory agencies. Such measures may change the
operating environment of Porter Bancorp and its subsidiaries in substantial and unpredictable ways. The nature and extent of future legislative,
regulatory or other changes affecting financial institutions is unpredictable at this time.
We cannot predict what other legislation or economic policies of the various regulatory authorities might be enacted or adopted or what other
regulations might be adopted or the effects thereof. Future legislation, policies and the effects thereof might have a significant influence on
overall growth and distribution of loans, investments and deposits, as well as affect interest rates charged on loans or paid on time and savings
deposits. Such legislation and policies have had a significant effect on the operating results of commercial banks in the past and are expected to
continue to do so in the future.
Available Information
We file periodic reports with the SEC including our annual report on Form 10-K, quarterly reports on Form 10-Q, current event reports on Form
8-K and proxy statements. The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F
Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-
800-SEC-0330. The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding
issuers that file electronically with the SEC at http://www.sec.gov . Our SEC reports filed are accessible at no cost on our web site at
http://www.pbibank.com , under the Investors Relations section, once they are electronically filed with or furnished to the SEC. A shareholder
may also request a copy of our Annual Report on Form 10-K free of charge upon written request to: Chief Financial Officer, Porter Bancorp,
Inc., 2500 Eastpoint Parkway, Louisville, Kentucky 40223.
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Item 1A. Risk Factors
An investment in our common stock involves a number of risks. Realization of any of the risks described below could have a material adverse
effect on our business, financial condition, results of operations, cash flow and/or future prospects.
We are subject to a Consent Order with the FDIC and the KDFI and a formal agreement with the Federal Reserve that restrict the
conduct of our operations and may have a material adverse effect on our business.
Our good standing with bank regulatory agencies is of fundamental importance to the continuation of our businesses. In June 2011, PBI 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.
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, among other things, 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 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. 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. While we substantially complied with the
Consent Order, we did not meet the capital ratios required by the Consent Order as of December 31, 2013.
Bank regulatory agencies can exercise discretion when an institution does not meet minimum regulatory capital levels and the other terms of a
consent order. The agencies may initiate changes in management, issue mandatory directives, impose monetary penalties or refrain from formal
sanctions, depending on individual circumstances. Any action taken by bank regulatory agencies could damage our reputation and have a
material adverse effect on our business. Compliance with the Consent Order also increases our operating expense, and adversely affects our
financial performance.
We have made commitments to the banking regulators to raise additional capital. Our inability to increase our capital to the levels
required by our bank regulatory agreements could have a material adverse effect on our business.
We recorded a net loss attributable to common shareholders of $3.4 million in 2013. The net loss for 2013 was due in part to $4.7 million of loan
collection expense, and $4.5 million of expense related to other real estate owned and the accrual of dividends due and payable on our Series A
Preferred Stock which totaled $4.3 million in 2013.
Our losses, non-performing loan costs, other real estate owned expenses, and asset impairments, have reduced our capital below the levels
agreed upon with our banking regulators. While we believe we have recognized the probable losses in our portfolio, further credit deterioration
could result in additional losses and a reduction in capital levels.
In its consent order with the FDIC and the KDFI, PBI Bank has agreed to maintain a ratio of total capital to total risk-weighted assets of at least
12.0% and a ratio of Tier 1 capital to total assets of 9.0%. As of December 31, 2013, PBI Bank’s ratio of total capital to total risk-weighted
assets was 11.44% and its ratio of Tier 1 capital to total assets was 6.28%, both below the ratios required by the consent order.
We have agreed with and submitted to the FDIC, the KDFI and the Federal Reserve Bank of St. Louis a plan to restore our capital ratios to levels
that comply with our regulatory agreements. We are evaluating various specific initiatives to increase our regulatory capital and reduce our total
assets. Strategic alternatives include divesting of branch offices, selling loans and raising capital by selling stock.
Our ability to raise additional capital will depend on, among other things, conditions in the capital markets at that time (which are outside of our
control) and our financial performance, including the management of our revenue, expenses, levels of average assets, credit quality, levels of
other real estate owned, and contingent liability risks. We may not have access to capital on acceptable terms or at all. Our inability to raise
additional capital on acceptable terms when needed could have a material adverse effect on our businesses, financial condition and results of
operations. In addition, if we are unable to comply with our regulatory capital requirements, it could result in more stringent enforcement actions
by the bank regulatory agencies, which could damage our reputation and have a material adverse effect on our business.
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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 distributions on these
securities may adversely affect our common shareholders.
We historically paid quarterly cash dividends on our common stock until we suspended dividend payments in October 2011. Effective with the
fourth quarter of 2011, we began deferring cash dividends on the Series A Preferred Stock held by the U.S. Treasury and interest payments on
the junior subordinated notes relating to our trust preferred securities. Deferring interest payments on the junior subordinated notes resulted in a
deferral of distributions on our trust preferred securities. We will be prohibited from paying cash dividends on our common stock until such time
as we have paid all deferred dividends on our Series A Preferred Stock and all deferred distributions on our trust preferred securities. At
December 31, 2013, we have accrued and unpaid dividends on Series A Preferred Stock totaling $4.3 million.
If we defer interest payments on our trust preferred securities for 20 consecutive quarters, we must pay all deferred interest and resume quarterly
interest payments or we will be in default. We have deferred dividend payments on our Series A Preferred Stock for nine quarters and the holder
(currently the U.S. Treasury) has the right to appoint up to two representatives to our Board of Directors. Dividends on the Series A preferred
stock and deferred distributions on our trust preferred securities are cumulative and therefore unpaid dividends and distributions will accrue and
compound on each subsequent payment date. If we become subject to any liquidation, dissolution or winding up of affairs, holders of the trust
preferred securities and then holders of the preferred stock will be entitled to receive the liquidation amounts to which they are entitled including
the amount of any accrued and unpaid distributions and dividends, before any distribution to the holders of common stock.
As a bank holding company, we depend on dividends and distributions paid by our banking subsidiary.
Porter Bancorp is a legal entity separate and distinct from PBI Banks and our other subsidiaries. Our principal source of cash flow, from which
we would fund any dividends paid to our shareholders, has historically been dividends Porter Bancorp receives from PBI Bank. Regulations of
the FDIC and the KDFI govern the ability of PBI Bank to pay dividends and other distributions to us, and regulations of the Federal Reserve
govern our ability to pay dividends or make other distributions to our shareholders. In its consent order with the FDIC and the KDFI, PBI Bank
agreed not to pay dividends to us without the prior consent of those regulators. During 2011, Porter Bancorp contributed $13.1 million to PBI
Bank. The contribution, which was made to strengthen PBI Bank’s capital in an effort to help it comply with its capital ratio requirements under
the consent order, also substantially decreased the liquid assets of Porter Bancorp. Liquid assets decreased from $20.3 million at December 31,
2010 to $2.7 million at December 31, 2013. Since PBI Bank is unlikely to be in a position to pay dividends to Porter Bancorp for the foreseeable
future, cash inflows for Porter Bancorp are limited to earnings on investment securities, sales of investment securities, and interest on its deposits
held at PBI Bank. These cash inflows, along with the liquid assets held at December 31, 2013, are needed to cover ongoing operating expenses
of Porter Bancorp, which have been reduced and are budgeted at approximately $950,000 for 2014. See the “Supervision-Porter Bancorp-
Dividends” section of Item 1. “Business” and the “Dividends” section of Item 5. “Market for Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities” of this Annual Report on Form 10-K.
We may not pay dividends on your common stock and we have agreed with the Federal Reserve to obtain its written consent before
declaring or paying any future dividends.
We are currently unable to pay dividends. Holders of shares of our common stock are only entitled to receive such dividends as our board of
directors may declare from funds legally available for such payments. Although we have historically declared cash dividends on our common
stock, we currently do not pay a cash dividend and we are not required to do so. Also, our ability to increase our dividend or to repurchase our
common stock is limited for so long as any of our Series A Preferred Stock remains outstanding, as discussed in greater detail in the “Dividends”
section of Item 5. “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” of this
Annual Report on Form 10-K. There can be no assurance that we will pay dividends to our shareholders in the future, or if dividends are paid,
that we will increase our dividend to historical levels or otherwise. Our ability to pay dividends to our shareholders is not only subject to
limitations imposed by the terms of our Series A Preferred Stock, but also by limitations and guidance issued by the Federal Reserve. For
example, under Federal Reserve guidance, bank holding companies generally are advised to consult in advance with the Federal Reserve before
declaring dividends, and to strongly consider reducing, deferring or eliminating dividends in certain situations, such as when declaring or paying
a dividend would exceed earnings for the fiscal quarter for which the dividend is being paid, or when declaring or paying a dividend could result
in a material adverse change to the organization’s capital structure. In addition, Porter Bancorp has agreed with the Federal Reserve to obtain its
written consent prior to declaring or paying any future dividends. As a practical matter, Porter Bancorp cannot pay dividends for the foreseeable
future.
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Our holding company debt (TRUPS) and preferred stock (TARP) could make it difficult to raise capital.
At December 31, 2013, we had an aggregate obligation of $26.5 million relating to the principal and accrued unpaid interest on our four issues of
junior subordinate debentures (TRUPS). Although we are permitted to defer payments on these securities for up to five years (and we
commenced doing so in 2011), the deferred interest payments continue to accrue until paid in full.
In addition, in November 2008, we issued shares of preferred stock and common stock purchase warrants to the U. S. Treasury Department
under the TARP/Capital Purchase Plan. The preferred stock has an aggregate liquidation preference of $35.0 million. TARP carries a cumulative
dividend of 5% per annum which increased to 9% in 2013. We stopped paying dividends on the TARP in 2011. Like the holding company debt,
unpaid dividends on the TARP continue to accrue until the preferred stock is repaid or restructured and total $4.3 million at December 31, 2013.
Our holding company debt and TARP could make it difficult to recapitalize or enter into a business combination transaction because any
investor or purchaser would effectively assume the outstanding liability on the debt and be required to repay or restructure the TARP in addition
to the amount of funds such investors or purchaser would need to provide in order to recapitalize the Bank and the Company.
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. 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. If we do not
prevail, the ultimate outcome of litigation matter could have a material adverse effect on our financial condition, results of operations, or cash
flows.
PBI Bank has served as trustee for ESOPs under review by the Department of Labor, subjecting us to certain financial risks.
From 2007 until the first quarter of 2013, PBI Bank served as trustee for certain Employee Stock Ownership Plan (ESOP) purchase
transactions. These transactions are subject to regular and routine reviews by the DOL for compliance with ERISA. Failure to fulfill our
fiduciary duties under ERISA with respect to any such plan would subject us to certain financial risks such as claims for damages as well as fines
and penalties assessable under ERISA.
Our business has been and may continue to be adversely affected by conditions in the financial markets and by economic conditions
generally.
Ongoing weakness in business and economic conditions generally or specifically in our markets has had, and could continue to have one or more
of the following adverse effects on our business:
•
•
•
•
A decrease in the demand for loans and other products and services offered by us;
A decrease in the value of collateral securing our loans;
An impairment of certain intangible assets, such as core deposit intangibles; and
An increase in the number of customers who become delinquent, file for protection under bankruptcy laws or default on their loans.
The general business environment has had an adverse effect on our business during the past five years. Although the general business
environment has shown some improvement, there can be no assurance that such improvement can be sustained. In addition, the improvement of
certain economic indicators, such as real estate asset values and rents and unemployment, may vary between geographic markets and may
continue to lag behind improvement in the overall economy. These economic indicators typically affect the real estate and financial services
industries, in which we have a significant number of customers, more significantly than other economic sectors. Furthermore, we have a
substantial lending business that depends upon the ability of borrowers to make debt service payments on loans. Should unemployment or real
estate asset values fail to recover for an extended period of time, or if economic conditions worsen or remain volatile, our business, financial
condition or results of operations could be adversely affected.
A large percentage of our loans are collateralized by real estate, and prolonged weakness in the real estate market may result in losses
and adversely affect our profitability.
Approximately 87.7% of our loan portfolio as of December 31, 2013, was comprised of commercial and residential loans collateralized by real
estate. While we are seeing recent improvements, adverse economic conditions since 2008 have decreased demand for real estate which has
depressed real estate values in our markets. Persistent weakness in the real estate market could continue to significantly impair the value of our
collateral and our ability to sell the collateral upon foreclosure. The real estate collateral in each case provides an alternate source of repayment
in the event of default by the borrower and may deteriorate in value during the time the credit is extended. If real estate values decline further, it
will become more likely that we would be required to increase our allowance for loan losses. If during a period of reduced real estate values, we
are required to liquidate the collateral securing a loan to satisfy the debt or to increase our allowance for loan losses, it could materially reduce
our profitability and adversely affect our financial condition.
We offer real estate construction and development loans, which carry a higher degree of risk than other real estate loans. Persistent
weakness in the residential construction and commercial development real estate markets has increased the non-performing assets in
our loan portfolio and our provision expense for losses on loans. These impacts have had, and could continue to have a material adverse
effect on our capital, financial condition and results of operations.
Approximately 6.1% of our loan portfolio as of December 31, 2013 consisted of real estate construction and development loans, down from
7.8% at December 31, 2012. These loans generally carry a higher degree of risk than long-term financing of existing properties because
repayment depends on the ultimate completion of the project and usually on the sale of the property. If we are forced to foreclose on a project
prior to its completion, we may not be able to recover the entire unpaid portion of the loan or we may be required to fund additional money to
complete the project, or hold the property for an indeterminate period of time. Any of these outcomes may result in losses and adversely affect
our profitability.
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Residential construction and commercial development real estate activity in our markets were affected by challenging economic conditions
following the financial crisis of 2008. Prolonged weakness in these sectors may lead to additional valuation adjustments to our loan portfolios
and real estate owned as we continue to reassess the fair value of our non-performing assets, the loss severity of loans in default and the fair
value of real estate owned. We also may realize additional losses in connection with our disposition of non-performing assets. A weak real estate
market could further reduce demand for residential housing, which, in turn, could adversely affect real estate development and construction
activities. Consequently, the longer challenging economic conditions persist, the more likely they are to adversely affect the ability of residential
real estate developer borrowers to repay these loans and the value of property used as collateral for such loans. These economic conditions and
market factors have negatively affected some of our larger loans, causing our total net-charge offs to increase and requiring us to significantly
increase our allowance for loan losses. If adverse economic conditions persist, these trends could continue to worsen. Any further increase in our
non-performing assets and related increases in our provision expense for losses on loans could negatively affect our business and could have a
material adverse effect on our capital, financial condition and results of operations.
Our decisions regarding credit risk may not be accurate, and our allowance for loan losses may not be sufficient to cover actual losses,
which could adversely affect our business, financial condition and results of operations.
We maintain an allowance for loan losses at a level we believe is adequate to absorb probable incurred losses in our loan portfolio based on
historical loan loss experience, specific problem loans, value of underlying collateral and other relevant factors. If our assessment of these factors
is ultimately inaccurate, the allowance may not be sufficient to cover actual future loan losses, which would adversely affect our operating
results. Our estimates are subjective, and their accuracy depends on the outcome of future events. Changes in economic, operating and other
conditions that are generally beyond our control could cause actual loan losses to increase significantly. In addition, bank regulatory agencies, as
an integral part of their supervisory functions, periodically review the adequacy of our allowance for loan losses. Regulatory agencies have from
time to time required us to increase our provision for loan losses or to recognize additional loan charge-offs when their judgment has differed
from ours. Any of these events could have a material negative impact on our operating results.
Our levels of additional classified loans and non-performing assets may increase in the foreseeable future if economic conditions remain weak
and cause more borrowers to default. Further, the value of the collateral underlying a given loan, and the realizable value of such collateral in a
foreclosure sale, are likely to decline if the real estate markets remain weak, making us less likely to realize a full recovery if a borrower defaults
on a loan. Any additional increases in the level of our non-performing assets, loan charge-offs or provision for loan losses, or our inability to
realize the full value of underlying collateral in the event of a loan default, could negatively affect our business, financial condition, results of
operations and the trading price of our securities.
If we experience greater credit losses than anticipated, our operating results may be adversely affected.
As a lender, we are exposed to the risk that our customers will be unable to repay their loans according to their terms and that any collateral
securing the payment of their loans may not be sufficient to assure repayment. Credit losses are inherent in the business of making loans and
could have a material adverse effect on our operating results. Our credit risk with respect to our real estate and construction loan portfolio will
relate principally to the creditworthiness of borrowers and the value of the real estate serving as security for the repayment of loans. Our credit
risk with respect to our commercial and consumer loan portfolio will relate principally to the general creditworthiness of businesses and
individuals within our local markets.
We make various assumptions and judgments about the collectability of our loan portfolio and provide an allowance for estimated credit losses
based on a number of factors. We believe that our allowance for credit losses is adequate. However, if our assumptions or judgments are wrong,
our allowance for credit losses may not be sufficient to cover our actual credit losses. We may have to increase our allowance in the future in
response to the request of one of our primary banking regulators, to adjust for changing conditions and assumptions, or as a result of any
deterioration in the quality of our loan portfolio. The actual amount of future provisions for credit losses cannot be determined at this time and
may vary from the amounts of past provisions.
We continue to hold and acquire a significant amount of OREO properties, which could increase operating expenses and result in future
losses to the Company.
During recent years, we have acquired a significant amount of real estate as a result of foreclosure or by deed in lieu of foreclosure that is listed
on our balance sheet as other real estate owned (OREO). This increase in our OREO portfolio has increased the expenses we have incurred to
manage and dispose of these properties, which sometimes includes funding construction required to facilitate sale. We expect that our operating
results in 2014 will continue to be adversely affected by expenses associated with OREO, including insurance and taxes, completion and repair
costs, as well as by the funding costs associated with OREO assets.
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Properties in our OREO portfolio are recorded at the lower of the recorded investment in the loans for which the properties previously served as
collateral or “fair value,” which represents the estimated sales price of the properties on the date acquired less estimated selling costs. Generally,
in determining “fair value” an orderly disposition of the property is assumed, except where a different disposition strategy is expected.
Significant judgment is required in estimating the fair value of OREO, and the period of time within which such estimates can be considered
current may change during periods of market volatility, such as we have experienced since 2008.
Any further decreases in market prices of real estate in our market areas may lead to additional OREO write downs, with a corresponding
expense in our income statement. We evaluate OREO property values periodically and write down the carrying value of the properties if and
when the results of our analysis require it.
In response to market conditions and other economic factors, we may utilize alternative sale strategies other than orderly disposition as part of
our OREO disposition strategy, such as bulk sales. In this event, as a result of the significant judgments required in estimating fair value and the
variables involved in different methods of disposition, the net proceeds realized from such sales transactions could differ significantly from
appraisals, comparable sales, and other estimates used to determine the fair value of our OREO properties. In addition, our disposition of OREO
through alternative sales strategies could impact the fair value of comparable OREO properties remaining in our portfolio.
Our profitability depends significantly on local economic conditions.
Because most of our business activities are conducted in central Kentucky and most of our credit exposure is in that region, we are at risk from
adverse economic or business developments affecting this area, including declining regional and local business and employment activity, a
downturn in real estate values and agricultural activities and natural disasters. To the extent the central Kentucky economy remains weak, the
rates of delinquencies, foreclosures, bankruptcies and losses in our loan portfolio will likely increase. Moreover, the value of real estate or other
collateral that secures our loans could be adversely affected by the economic downturn or a localized natural disaster. Events that adversely
affect business activity and real estate values in Central Kentucky have had and may continue to have a negative impact on our business,
financial condition, results of operations and future prospects.
Our small to medium-sized business portfolio may have fewer resources to weather the downturn in the economy.
Our portfolio includes loans to small and medium-sized businesses and other commercial enterprises. Small and medium-sized businesses
frequently have smaller market shares than their competitors, may be more vulnerable to economic downturns, often need substantial additional
capital to expand or compete and may experience substantial variations in operating results, any of which may impair a borrower’s ability to
repay a loan. In addition, the success of a small or medium-sized business often depends on the management talents and efforts of one or two
persons or a small group of persons, and the death, disability or resignation of one or more of these persons could have a material adverse impact
on the business and its ability to repay our loan. A continued economic downturn may have a more pronounced negative impact on our target
market, causing us to incur substantial credit losses that could materially harm our operating results.
Our profitability is vulnerable to fluctuations in interest rates.
Changes in interest rates could harm our financial condition or results of operations. Our results of operations depend substantially on net interest
income, the difference between interest earned on interest-earning assets (such as investments and loans) and interest paid on interest-bearing
liabilities (such as deposits and borrowings). Interest rates are highly sensitive to many factors, including governmental monetary policies and
domestic and international economic and political conditions. Factors beyond our control, such as inflation, recession, unemployment and money
supply may also affect interest rates. If, as a result of decreasing interest rates, our interest-earning assets mature or reprice more quickly than our
interest-bearing liabilities in a given period, our net interest income may decrease. Likewise, our net interest income may decrease if interest-
bearing liabilities mature or reprice more quickly than interest-earning assets in a given period as a result of increasing interest rates.
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Fixed-rate loans increase our exposure to interest rate risk in a rising rate environment because interest-bearing liabilities would be subject to
repricing before assets become subject to repricing. Adjustable-rate loans decrease the risk associated with changes in interest rates but involve
other risks, such as the inability of borrowers to make higher payments in an increasing interest rate environment. At the same time, for secured
loans, the marketability of the underlying collateral may be adversely affected by higher interest rates. In a declining interest rate environment,
there may be an increase in prepayments on loans as the borrowers refinance their loans at lower interest rates, which could reduce net interest
income and harm our results of operations.
If we cannot obtain adequate funding, we may not be able to meet the cash flow requirements of our depositors and borrowers, or meet
the operating cash needs of the Company to fund corporate expansion or other activities.
Our liquidity policies and limits are established by the Board of Directors of PBI Bank, with operating limits set by the Asset Liability
Committee (“ALCO”), based upon analyses of the ratio of loans to deposits and the percentage of assets funded with non-core or wholesale
funding. The ALCO regularly monitors the overall liquidity position of PBI Bank and the Company to ensure that various alternative strategies
exist to cover unanticipated events that could affect liquidity. Liquidity is the ability to meet cash flow needs on a timely basis at a reasonable
cost. If our liquidity policies and strategies don’t work as well as intended, then we may be unable to make loans and to repay deposit liabilities
as they become due or are demanded by customers. The ALCO follows established board approved policies and monitors guidelines to diversify
our wholesale funding sources to avoid concentrations in any one-market source. Wholesale funding sources include Federal funds purchased,
securities sold under repurchase agreements, and Federal Home Loan Bank (“FHLB”) advances that are collateralized with mortgage-related
assets.
We maintain a portfolio of securities that can be used as a secondary source of liquidity. There are other available sources of liquidity, including
additional collateralized borrowings such as FHLB advances, the issuance of debt securities, and the issuance of preferred or common securities
in public or private transactions. If we were unable to access any of these funding sources when needed, we might not be able to meet the needs
of our customers, which could adversely impact our financial condition, our results of operations, cash flows and our level of regulatory-
qualifying capital.
We may need to raise additional capital in the future by selling capital stock. Future sales or other dilution of our equity may adversely
affect the market price of our common stock.
We are not restricted from issuing additional common stock, including securities that are convertible into or exchangeable for, or that represent
the right to receive, common stock. The issuance of additional shares of common stock or the issuance of convertible securities would dilute the
ownership interest of our existing common shareholders. The market price of our common stock could decline as a result of such an offering as
well as other sales of a large block of shares of our common stock or similar securities in the market after such an offering, or the perception that
such sales could occur.
Our stock has traded from time-to-time at a price below our book value per share. Accordingly, a sale of common shares at or below our stock
price would be dilutive to current shareholders.
We may not be able to realize the value of our tax losses and deductions.
Due to our losses, we have a net operating loss carry-forward of $28.8 million, credit carry-forwards of $900,000, and other net deferred tax
assets of $18.1 million. In order to realize the benefit of these tax losses, credits and deductions, we will need to generate substantial taxable
income in future periods. We established a 100% valuation allowance for all deferred tax assets in 2011. Should the Company issue new shares
to raise additional capital, a change in control could be triggered, as defined by Section 382 of the Internal Revenue Code, which could
negatively impact or limit the ability to utilize our net operating loss carry-forwards, credit loss carry-forwards, and other net deferred tax assets.
Our Series A Preferred Stock limits our ability to return capital to our shareholders and is dilutive to our common shares. In addition,
the dividend rate on the Series A Preferred Stock has increased to 9% per annum.
When we had not redeemed our Series A Preferred Stock by November 21, 2013, the annual dividend rate on this capital increased substantially
from 5% (approximately $1.75 million annually) to 9% (approximately $3.15 million annually). Depending on market conditions and our
financial performance at the time, this increase in dividends could significantly impact our capital, liquidity and earnings available to common
shareholders.
The terms of our Series A Preferred Stock limit our ability to pay dividends and repurchase our shares. We will not be able to pay any dividends
on our common stock unless and until we are current on our quarterly dividend payments on the Series A Preferred Stock, which we began
deferring effective with the fourth quarter of 2011. At December 31, 2013, we have accrued and unpaid dividends on Series A Preferred Stock
totaling $4.3 million. These restrictions may have an adverse effect on the market price of our common stock.
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The U.S. Treasury has the unilateral ability to change some of the restrictions imposed on us by virtue of our sale of securities to it.
In addition to the restrictions our ability to pay dividends or repurchase our stock, our preferred stock purchase agreement with the U.S. Treasury
authorizes the U.S. Treasury to unilaterally amend the agreement to the extent required to comply with any future changes in federal statutes.
Following our November 21, 2008 issuance of Series A Preferred stock to the U.S. Treasury, the agreement was amended to impose restrictions
on the conduct of our business, including restrictions on the compensation we can pay to executive officers and corporate governance
requirements. These restrictions could have an adverse impact on the conduct of our business, as could any additional amendments in the future
that impose further requirements or amend existing requirements.
Our former chairman and chairman emeritus together have sufficient voting power to significantly influence election of our directors,
and the vote on any matter that requires shareholder approval. In exercising their voting power, they may act according to their own
interests, which may be adverse to your interests.
As of December 31, 2013, J. Chester Porter and Maria L. Bouvette together beneficially owned approximately 6,076,758 shares, or 47.3% of our
outstanding common stock. Accordingly, Mr. Porter and Ms. Bouvette currently have the power to exercise significant influence over the
outcome of any matter submitted to a vote of our shareholders, including the election and removal of a majority of our board of directors, any
amendment of our articles of incorporation (including any amendment that changes the rights of our common stock) and any merger,
consolidation or sale of all or substantially all of our assets. Mr. Porter and Ms. Bouvette could take actions or make decisions in their self-
interest that are opposed to your best interests. They may be less receptive to the desires communicated by shareholders. Neither our articles of
incorporation, our bylaws, nor Kentucky law requires the vote of more than a simple majority of our outstanding shares of common stock to
approve a matter submitted for shareholder approval, subject to the general statutory requirement that any transaction in which one or more
directors have a direct or indirect interest (other than as a shareholder) must be “fair” to the corporation. Mr. Porter and Ms. Bouvette have a
level of concentrated ownership that could discourage others from initiating any potential merger, takeover or other change of control transaction
that may otherwise give you the opportunity to realize a premium over the then-prevailing market price of our common stock. As a result, the
market price of our common stock could be adversely affected.
Higher FDIC deposit insurance premiums and assessments could significantly increase our non-interest expense.
Our deposits are insured by the FDIC up to legal limits and, accordingly, we are subject to FDIC deposit insurance premiums and assessments.
High levels of bank failures over the past five years and increases in the statutory deposit insurance limits have increased resolution costs to the
FDIC and put pressure on the DIF. In order to maintain a strong funding position and restore the reserve ratios of the DIF, the FDIC increased
assessment rates on insured institutions, charged a special assessment to all insured institutions as of June 30, 2009 and required banks to prepay
three years’ worth of premiums on December 30, 2009. If there are additional financial institution failures, we may be required to pay even
higher FDIC premiums than the recently increased levels, or the FDIC may charge additional special assessments. Further, the FDIC recently
increased the DIF’s target reserve ratio to 2.0 percent of insured deposits following the Dodd-Frank Act’s elimination of the 1.5 percent cap on
the DIF’s reserve ratio. Additional increases in our assessment rate may be required in the future to achieve this targeted reserve ratio. These
recent increases in deposit assessments and any future increases, required prepayments or special assessments of FDIC insurance premiums may
adversely affect our business, financial condition or results of operations.
Additionally, pursuant to the Dodd-Frank Act, the FDIC amended its regulations regarding assessment for federal deposit insurance to base such
assessments on the average total consolidated assets of the insured institution during the assessment period, less the average tangible equity of
the institution during the assessment period. Prior to this change, we were assessed only on deposit balances. The FDIC adopted a rule
implementing this change, as well as adopting a revised risk-based assessment calculation in February 2011. The FDIC has also proposed a rule
tying assessment rates of FDIC-insured institutions to the institution’s employee compensation programs. The exact nature and cumulative effect
of these recent changes are not yet known, but they are expected to increase the amount of premiums we must pay for FDIC insurance. Any such
increase may adversely affect our business, financial condition or results of operations.
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We face strong competition from other financial institutions and financial service companies, which could adversely affect our results of
operations and financial condition.
We compete with other financial institutions in attracting deposits and making loans. Our competition in attracting deposits comes principally
from other commercial banks, credit unions, savings and loan associations, securities brokerage firms, insurance companies, money market
funds and other mutual funds. Our competition in making loans comes principally from other commercial banks, credit unions, savings and loan
associations, mortgage banking firms and consumer finance companies. In addition, competition for business in the Louisville and Lexington
metropolitan area has grown in recent years as changes in banking law have allowed several banks to enter the market by establishing new
branches. Likewise, competition is increasing in the other growing markets we have targeted, which may adversely affect our ability to execute
our plans for expansion.
Competition in the banking industry may also limit our ability to attract and retain banking clients. We maintain smaller staffs of associates and
have fewer financial and other resources than larger institutions with which we compete. Financial institutions that have far greater resources and
greater efficiencies than we do may have several marketplace advantages resulting from their ability to:
•
•
•
•
offer higher interest rates on deposits and lower interest rates on loans than we can;
offer a broader range of services than we do;
maintain more branch locations than we do; and
mount extensive promotional and advertising campaigns.
In addition, banks and other financial institutions with larger capitalization and other financial intermediaries may not be subject to the same
regulatory restrictions as we are and may have larger lending limits than we do. Some of our current commercial banking clients may seek
alternative banking sources as they develop needs for credit facilities larger than we can accommodate. If we are unable to attract and retain
customers, we may not be able to maintain growth and our results of operations and financial condition may otherwise be negatively impacted.
We depend on our senior management team, and the unexpected loss of one or more of our senior executives could impair our
relationship with customers and adversely affect our business and financial results.
Our future success significantly depends on the continued services and performance of our key management personnel. Our future performance
will depend on our ability to motivate and retain these and other key officers. The Dodd-Frank Act, legislation governing issuers of preferred
stock held by the U.S. Treasury and the policies of bank regulatory agencies have placed restrictions on our executive compensation practices.
Such restrictions and standards may further impact our company’s ability to compete for talent with other businesses and financial institutions
that are not subject to the same limitations as we are. The loss of the services of members of our senior management or other key officers or our
inability to attract additional qualified personnel as needed could materially harm our business.
Our reported financial results depend on management’s selection of accounting methods and certain assumptions and estimates.
Our accounting policies and assumptions are fundamental to our reported financial condition and results of operations. Our management must
exercise judgment in selecting and applying many of these accounting policies and methods so they comply with generally accepted accounting
principles and reflect management’s judgment of the most appropriate manner to report our financial condition and results. In some cases,
management must select the accounting policy or method to apply from two or more alternatives, any of which may be reasonable under the
circumstances, yet may result in our reporting materially different results than would have been reported under a different alternative.
Certain accounting policies are critical to presenting our reported financial condition and results. They require management to make difficult,
subjective or complex judgments about matters that are uncertain. Materially different amounts could be reported under different conditions or
using different assumptions or estimates. These critical accounting policies include the allowance for loan losses, valuation of OREO, valuation
of securities and valuation of deferred income taxes. Because of the uncertainty of estimates involved in these matters, we may be required to do
one or more of the following: significantly increase the allowance for credit losses and/or sustain credit losses that are significantly higher than
the reserve provided; recognize significant impairment on our other intangible assets or significantly increase our accrued income taxes.
While management continually monitors and improves our system of internal controls, data processing systems, and corporate wide
processes and procedures, we may suffer losses from operational risk in the future.
Management maintains internal operational controls, and we have invested in technology to help us process large volumes of transactions.
However, we may not be able to continue processing at the same or higher levels of transactions. If our systems of internal controls should fail to
work as expected, if our systems were to be used in an unauthorized manner, or if employees were to subvert the system of internal controls,
significant losses could occur.
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We process large volumes of transactions on a daily basis and are exposed to numerous types of operational risk, which could cause us to incur
substantial losses. Operational risk resulting from inadequate or failed internal processes, people, and systems includes the risk of fraud by
employees or persons outside of our company, the execution of unauthorized transactions by employees, errors relating to transaction processing
and systems, and breaches of the internal control system and compliance requirements. This risk of loss also includes potential legal actions that
could arise as a result of the operational deficiency or as a result of noncompliance with applicable regulatory standards.
We establish and maintain systems of internal operational controls that provide management with timely and accurate information about our
level of operational risk. While not foolproof, these systems have been designed to manage operational risk at appropriate, cost effective levels.
We have also established procedures that are designed to ensure that policies relating to conduct, ethics and business practices are followed.
Nevertheless, we experience loss from operational risk from time to time, including the effects of operational errors, and these losses may be
substantial.
Our information systems may experience an interruption or security breach.
Failure in or breach of our operational or security systems or infrastructure, or those of our third party vendors and other service providers,
including as a result of cyber attacks, could disrupt our businesses, result in the disclosure or misuse of confidential or proprietary information,
damage our reputation, increase our costs and cause losses. As a large financial institution, we depend on our ability to process, record and
monitor a large number of customer transactions on a continuous basis. As customer, public and regulatory expectations regarding operational
and information security have increased, our operational systems and infrastructure must continue to be safeguarded and monitored for potential
failures, disruptions and breakdowns. Our business, financial, accounting, data processing systems or other operating systems and facilities may
stop operating properly or become disabled or damaged as a result of a number of factors including events that are wholly or partially beyond
our control. For example, there could be sudden increases in customer transaction volume; electrical or telecommunications outages; natural
disasters such as earthquakes, tornadoes, and hurricanes; disease pandemics; events arising from local or larger scale political or social matters,
including terrorist acts; and, as described below, cyber attacks. Although we have business continuity plans and other safeguards in place, our
business operations may be adversely affected by significant and widespread disruption to our physical infrastructure or operating systems that
support our businesses and customers.
Information security risks for financial institutions have generally increased in recent years in part because of the proliferation of new
technologies, the use of the Internet and telecommunications technologies to conduct financial transactions, and the increased sophistication and
activities of organized crime, hackers, terrorists, activists, and other external parties. As noted above, our operations rely on the secure
processing, transmission and storage of confidential information in our computer systems and networks. In addition, to access our products and
services, our customers may use personal smartphones, tablet PC’s, and other mobile devices that are beyond our control systems. Although we
believe we have robust information security procedures and controls, our technologies, systems, networks, and our customers’ devices may
become the target of cyber attacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse,
loss or destruction of our customers’ confidential, proprietary and other information or that of our customers, or otherwise disrupt the business
operations of ourselves, our customers or other third parties.
Third parties with which we do business or that facilitate our business activities, could also be sources of operational and information security
risk to us, including from breakdowns or failures of their own systems or capacity constraints. Although to date we have not experienced any
material losses relating to cyber attacks or other information security breaches, there can be no assurance that we will not suffer such losses in
the future. Our risk and exposure to these matters remains heightened because of, among other things, the evolving nature of these threats and
the prevalence of Internet and mobile banking. As cyber threats continue to evolve, we may be required to expend significant additional
resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities.
Disruptions or failures in the physical infrastructure or operating systems that support our businesses and customers, or cyber attacks or security
breaches of the networks, systems or devices that our customers use to access our products and services could result in customer attrition,
regulatory fines, penalties or intervention, reputational damage, reimbursement or other compensation costs, and/or additional compliance costs,
any of which could materially adversely affect our business, results of operations or financial condition.
We operate in a highly regulated environment and, as a result, are subject to extensive regulation and supervision that could adversely
affect our financial performance and our ability to implement our growth and operating strategies.
We are subject to examination, supervision and comprehensive regulation by federal and state regulatory agencies, which is described under
“Item 1 – Business—Supervision and Regulation.” Regulatory oversight of banks is primarily intended to protect depositors, the federal deposit
insurance funds, and the banking system as a whole, not our shareholders. Compliance with these regulations is costly and may make it more
difficult to operate profitably.
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Federal and state banking laws and regulations govern numerous matters including the payment of dividends, the acquisition of other banks and
the establishment of new banking offices. We must also meet specific regulatory capital requirements. Our failure to comply with these laws,
regulations and policies or to maintain our capital requirements could affect our ability to pay dividends on common stock, our ability to grow
through the development of new offices and our ability to make acquisitions. These limitations may prevent us from successfully implementing
our growth and operating strategies.
In addition, the laws and regulations applicable to banks could change at any time, which could significantly impact our business and
profitability. For example, new legislation or regulation could limit the manner in which we may conduct our business, including our ability to
attract deposits and make loans. Events that may not have a direct impact on us, such as the bankruptcy or insolvency of a prominent U.S.
corporation, can cause legislators and banking regulators and other agencies such as the Financial Accounting Standards Board, the SEC, the
Public Company Accounting Oversight Board and various taxing authorities to respond by adopting and or proposing substantive revisions to
laws, regulations, rules, standards, policies and interpretations. The nature, extent, and timing of the adoption of significant new laws and
regulations, or changes in or repeal of existing laws and regulations may have a material impact on our business and results of operations.
Changes in regulation may cause us to devote substantial additional financial resources and management time to compliance, which may
negatively affect our operating results.
Changes in banking laws could have a material adverse effect on us.
We are subject to changes in federal and state laws as well as changes in banking and credit regulations, and governmental economic and
monetary policies. We cannot predict whether any of these changes may adversely and materially affect us. The current regulatory environment
for financial institutions entails significant potential increases in compliance requirements and associated costs. Federal and state banking
regulators also possess broad powers to take supervisory actions as they deem appropriate. These supervisory actions may result in higher capital
requirements, higher insurance premiums and limitations on our activities that could have a material adverse effect on our business and
profitability.
Recent legislation regarding the financial services industry may have a significant adverse effect on our operations.
The Dodd-Frank Act was signed into law on July 21, 2010. The Dodd-Frank Act has impacted the U.S. financial system, including among
others:
•
new requirements on banking, derivative and investment activities, including the repeal of the prohibition on the payment of interest
on business demand accounts, and debit card interchange fee requirements;
•
the creation of the Consumer Financial Protection Bureau with supervisory authority, including the power to conduct examinations
and take enforcement actions with respect to financial institutions with assets of $10 billion or more and implement regulations that
will affect all financial institutions;
•
provisions affecting corporate governance and executive compensation of all companies subject to the reporting requirements of the
Securities and Exchange Act of 1934, as amended; and
•
a provision that would require bank regulators to set minimum capital levels for bank holding companies that are as strong as those
required for their insured depository subsidiaries, subject to a grandfather clause for holding companies with less than $15 billion in
assets as of December 31, 2009.
Many provisions in the Dodd-Frank Act remain subject to regulatory rule-making, implementation, and interpretation, the effects of which are
not yet known. As a result, it is difficult to gauge the ultimate impact of certain provisions of the Dodd-Frank Act because the implementation of
many concepts is left to regulatory agencies. For example, the CFPB is given the power to adopt new regulations to protect consumers and is
given control over existing consumer protection regulations adopted by federal banking regulators. The CFPB has begun the rule-making
process but it is not known at this time when all rules will be finalized and implemented.
The provisions of the Dodd-Frank Act and any rules adopted to implement those provisions as well as any additional legislative or regulatory
changes may impact the profitability of our business activities and costs of operations, require that we change certain of our business practices,
materially affect our business model or affect retention of key personnel, require us to raise additional regulatory capital, including additional
Tier 1 capital, and could expose us to additional costs (including increased compliance costs). These and other changes may also require us to
invest significant management attention and resources to make any necessary changes and may adversely affect our ability to conduct our
business as previously conducted or our results of operations or financial condition.
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Item 1B. Unresolved Staff Comments
Not applicable.
Item 2.
Properties
PBI Bank has 18 full-service banking offices. The following table shows the location, square footage and ownership of each property. We
believe that each of these locations is adequately insured. Support operations are located in the Main office in Louisville and the Glasgow office
building on Columbia Avenue.
Markets
Louisville/Jefferson, Bullitt and Henry Counties
Main Office: 2500 Eastpoint Parkway, Louisville
Eminence Office: 645 Elm Street, Eminence
Hillview Office: 11998 Preston Highway, Hillview
Pleasureville Office: 5440 Castle Highway, Pleasureville
Shepherdsville Office: 340 South Buckman Street,
Shepherdsville
Conestoga Office: 155 Conestoga Parkway, Shepherdsville
Lexington/Fayette County
Lexington Office: 2424 Harrodsburg Road, Suite 100,
Lexington
South Central Kentucky
Brownsville Office: 113 East Main, Brownsville
Greensburg Office: 202-04 North Main Street, Greensburg
Horse Cave Office: 210 East Main Street, Horse Cave
Morgantown Office: 112 West Logan Street, Morgantown
Munfordville Office: 949 South Dixie Highway, Munfordville
Northside Office: 1300 North Main Street, Beaver Dam
Wal-Mart Office: 1701 North Main Street, Beaver Dam
Owensboro/Daviess County
Owensboro Office: 1819 Frederica Street, Owensboro
Southern Kentucky
Fairview Office: 1042 Fairview Avenue, Suite A, Bowling
Green
Campbell Lane Office: 751 Campbell Lane, Bowling Green
Glasgow Office: 1006 West Main Street, Glasgow
Other Properties
Office Building: 701 Columbia Avenue, Glasgow
Square Footage
Owned/Leased
30,000
1,500
3,500
10,000
10,000
3,900
8,500
8,500
11,000
5,000
7,500
9,000
3,200
500
3,000
3,000
7,500
12,000
19,000
Owned
Owned
Owned
Owned
Owned
Owned
Leased
Owned
Owned
Owned
Owned
Owned
Owned
Leased
Owned
Leased
Owned
Owned
Owned
Item 3.
Legal Proceedings
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 recorded a reserve 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. See Footnote 24, “Contingencies” in the Notes to our consolidated financial
statements for additional detail regarding ongoing legal proceedings and other matters.
Item 4.
Mine Safety Disclosures
Not applicable.
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PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is traded on the NASDAQ Global Market under the ticker symbol “PBIB”. The following table presents the high and low
sales prices for our common stock reported on the NASDAQ Global Market for the periods indicated. Market prices and dividends paid have
been restated to reflect stock dividends.
Quarter Ended
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Quarter Ended
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
2013
Market Value
High
Low
Dividend
$ 1.24
2.23
0.90
1.59
$ 0.97
0.80
0.79
0.66
$ 0.00
0.00
0.00
0.00
2012
Market Value
High
Low
Dividend
$ 1.99
2.25
2.40
3.05
$ 0.70
1.48
1.50
1.69
$ 0.00
0.00
0.00
0.00
As of January 31, 2014, we had approximately 1,156 shareholders, including 366 shareholders of record and approximately 790 beneficial
owners whose shares are held in “street” name by securities broker-dealers or other nominees.
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Dividends
We will not be able to pay dividends on our common stock for the foreseeable future. We historically paid quarterly cash dividends on our
common stock until we suspended dividend payments in October 2011. As a bank holding company, Porter Bancorp’s ability to declare and pay
dividends depends on certain federal regulatory considerations, including the guidelines of the Federal Reserve regarding capital adequacy and
dividends. Porter Bancorp has agreed with the Federal Reserve to obtain its written consent prior to declaring or paying any future dividends.
Our principal source of revenue with which to pay dividends on our common stock is the dividends that PBI Bank may declare and pay to us out
of funds legally available for payment of dividends. PBI Bank must obtain the prior written consent of its primary regulators prior to declaring or
paying any future dividends. In addition to this current restriction, various laws applicable to PBI Bank also limit its payment of dividends to us.
A Kentucky chartered bank may declare a dividend of an amount of the bank’s net profits as the board deems appropriate. The approval of the
KDFI is required if the total of all dividends declared by the bank in any calendar year exceeds the total of its net profits for that year combined
with its retained net profits for the preceding two years, less any required transfers to surplus or a fund for the retirement of preferred stock or
debt. As a practical matter, PBI Bank will not be able to pay dividends to us for the foreseeable future.
Effective with the fourth quarter of 2011, we began deferring cash dividends on our Series A Preferred Stock and interest payments on the junior
subordinated notes relating to our trust preferred securities. Deferring interest payments on the junior subordinated notes resulted in the deferral
of distributions on our trust preferred securities. If we defer interest payments on our trust preferred securities for 20 consecutive quarters, we
must pay all deferred interest and resume quarterly interest payments or we will be in default. At December 31, 2013, we have accrued and
unpaid dividends on Series A Preferred Stock totaling $4.3 million.
We will not be able to pay cash dividends on our common stock in the future until we have paid all accrued and unpaid dividends on our Series
A Preferred Stock and all deferred distributions on our trust preferred securities. Dividends on the Series A Preferred Stock and deferred
distributions on our trust preferred securities are cumulative and therefore unpaid dividends and distributions will accrue and compound on each
subsequent payment date. If we become subject to any liquidation, dissolution or winding up of affairs, holders of the trust preferred securities
and then holders of the preferred stock will be entitled to receive the liquidation amounts to which they are entitled including the amount of any
accrued and unpaid distributions and dividends, before any distribution can be made to the holders of our common stock.
Purchase of Equity Securities by Issuer
The Company did not repurchase any of its issued and outstanding equity securities in 2012 or 2013.
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Item 6.
Selected Financial Data
The following table summarizes our selected historical consolidated financial data from 2009 to 2013. You should read this information in
conjunction with Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 8. “Financial
Statements and Supplementary Data.”
Selected Consolidated Financial Data
(Dollars in thousands except per share data)
Income Statement Data:
Interest income
Interest expense
Net interest income
Provision for loan losses
Non-interest income
Non-interest expense
Income (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
Less:
Dividends on preferred stock
Accretion on Series A preferred stock
Earnings (loss) allocated to participating securities
Net income (loss) available to common
Common Share Data (1):
Basic earnings (loss) per common share
Diluted earnings (loss) per common share
Cash dividends declared per common share
Book value per common share
Tangible book value per common share
Balance Sheet Data (at period end):
Total assets
Debt obligations:
FHLB advances
Junior subordinated debentures
Subordinated capital note
Average Balance Data:
Average assets
Average loans
Average deposits
Average FHLB advances
Average junior subordinated debentures
Average subordinated capital note
Average stockholders’ equity
2013
$ 43,228 $
11,143
32,085
700
5,919
38,890
(1,586 )
—
(1,586 )
As of and for the Years Ended December 31,
2011
2012
2010
57,729 $
15,774
41,955
40,250
9,590
44,292
(32,997 )
(65 )
(32,932 )
73,554 $
22,039
51,515
62,600
7,833
104,273
(107,525 )
(218 )
(107,307 )
86,407 $
28,841
57,566
30,100
11,582
46,478
(7,430 )
(3,046 )
(4,384 )
$
$
1,919
160
(267 )
(3,398 ) $
1,750
179
(1,429 )
(33,432 ) $ (105,154 ) $
1,750
177
(4,080 )
1,810
177
(184 )
(6,187 ) $
(0.29 ) $
(0.29 )
0.00
(0.18 )
(0.29 )
(2.85 ) $
(2.85 )
0.00
0.74
0.58
(8.98 ) $
(8.98 )
0.02
3.74
3.54
(0.60 ) $
(0.60 )
0.49
12.76
10.33
2009
94,466
40,412
54,054
14,200
7,094
30,456
16,492
5,424
11,068
1,750
176
97
9,045
1.00
1.00
0.76
14.61
11.44
$ 1,076,121 $ 1,162,631 $ 1,455,424 $ 1,723,952 $ 1,835,090
4,492
25,000
5,850
5,604
25,000
6,975
7,116
25,000
7,650
15,022
25,000
8,550
82,980
25,000
9,000
$ 1,098,400 $ 1,341,565 $ 1,659,959 $ 1,747,648 $ 1,714,131
1,371,034
1,385,572
106,259
25,000
9,000
168,752
1,353,295
1,459,041
47,800
25,000
8,941
188,015
1,243,474
1,434,462
15,315
25,000
8,208
159,434
1,033,320
1,217,083
6,325
25,000
7,309
75,679
788,176
1,004,052
4,990
25,000
6,404
42,631
(1) Common share data has been adjusted to reflect 5% stock dividends effective December 14, 2010 and November 19, 2009.
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Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operation
Management’s discussion and analysis of financial condition and results of operations analyzes the consolidated financial condition and results
of operations of Porter Bancorp, Inc. and its wholly owned subsidiary, PBI Bank. Porter Bancorp, Inc. is a Louisville, Kentucky-based bank
holding company which operates 18 full-service banking offices in twelve counties through its wholly-owned subsidiary, PBI Bank. Our markets
include metropolitan Louisville in Jefferson County and the surrounding counties of Henry and Bullitt, and extend south along the Interstate 65
corridor to Tennessee. We serve south central Kentucky and southern Kentucky from banking offices in Butler, Green, Hart, Edmonson, Barren,
Warren, Ohio, and Daviess Counties. We also have an office in Lexington, the second largest city in Kentucky. The Bank is a community bank
with a wide range of commercial and personal banking products.
Historically, we have focused on commercial and commercial real estate lending, both in markets where we have banking offices and other
growing markets in our region. Commercial, commercial real estate and real estate construction loans accounted for 56.3% of our total loan
portfolio as of December 31, 2013, and 58.6% as of December 31, 2012. Commercial lending generally produces higher yields than residential
lending, but involves greater risk and requires more rigorous underwriting standards and credit quality monitoring.
The following discussion should be read in conjunction with our consolidated financial statements and accompanying notes and other schedules
presented elsewhere in the report.
Overview
For the year ended December 31, 2013, we reported a net loss of $1.6 million compared with net loss of $32.9 million for the year ended
December 31, 2012 and $107.3 million for the year ended December 31, 2011. After deductions for dividends on preferred stock, accretion on
preferred stock, and allocating losses to participating securities, the net loss attributable to common shareholders was $3.4 million for the year
ended December 31, 2013, compared with net loss attributable to common shareholders of $33.4 million for the year ended December 31, 2012.
Basic and diluted loss per common share were $(0.29) for the year ended December 31, 2013, compared with loss per common share of $(2.85)
for 2012.
Our financial performance in 2013 continued to be negatively impacted by the Bank’s high level of non-performing assets. Asset quality
remediation, capital restoration, and lowering the risk profile of the Company remain our major objectives for 2014.
Non-performing loans were 14.38% of total loans and non-performing assets were 12.35% of total assets at December 31, 2013. We remain
diligent in the management of our portfolio and are striving to improve credit quality by working throughout our markets to balance selective
new customer acquisition, customer service for our existing clients and prudent risk management.
The following significant developments occurred during the year ended December 31, 2013:
•
Our net loss attributable to common shareholders of $3.4 million for the year ended December 31, 2013 was much improved
compared with our net loss attributable to common shareholders of $33.4 million for the year ended December 31, 2012.
•
•
•
We have successfully reduced the size of our balance sheet in accordance with our capital plan. Average assets were $1.098 billion as
of December 31, 2013, compared with $1.342 billion at December 31, 2012. This reduction was accomplished primarily by reducing
our commercial real estate and construction and development loans within our loan portfolio and through the redemption of higher
cost certificates of deposit accounts.
Net interest margin decreased 21 basis points to 3.10% for the year ended December 31, 2013 compared with 3.31% for the year
ended December 31, 2012. The decrease in margin between periods was primarily due to a reduction in interest earning assets,
coupled with lower rates on those assets and elevated nonaccrual loan levels relative to total loans. Average loans decreased 23.7% to
$788.2 million in 2013 compared with $1.0 billion in 2012. Net loans decreased 19.1% to $681.2 million at December 31, 2013,
compared with $842.4 million at December 31, 2012.
Provision for loan losses expense declined to $700,000 for 2013, compared with $40.3 million for the year ended December 31,
2012. The decrease was primarily attributable to the substantial reduction in the loan portfolio size, declining charge-off trends, and a
decline in loans migrating downward in risk grade classification. Net charge-offs were $29.3 million in 2013, compared with $36.1
million in 2012 and $44.3 million in 2011.
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•
•
We continued to execute on our strategy to reduce our commercial real estate and construction and development loans. Construction
and development loans totaled $43.3 million, or 52% of total risk-based capital, at December 31, 2013 compared with $70.3 million,
or 82% of total risk-based capital, at December 31, 2012. Non-owner occupied commercial real estate loans, construction and
development loans, and multi-family residential real estate loans as a group totaled $237.0 million, or 284% of total risk-based
capital, at December 31, 2013 compared with $311.1 million, or 362% of total risk-based capital, at December 31, 2012.
Loan proceeds received from the repayment of our commercial real estate and construction and development loans were used
primarily to redeem maturing certificates of deposit during 2013. Deposits decreased 7.3% to $987.7 million compared with $1.1
billion at December 31, 2012. Certificate of deposit balances declined $80.6 million during 2013 to $680.0 million at December 31,
2013, from $760.6 million at December 31, 2012.
•
Total loans past due and nonaccrual loans decreased to $113.5 million at December 31, 2013 from $153.1 million at December 31,
2012.
•
•
•
•
Non-performing loans increased $7.4 million to $102.0 million at December 31, 2013, compared with $94.6 million at December 31,
2012. The increase in non-performing loans was partially offset by net loan charge-offs in 2013 which totaled $29.3 million. The
charge-offs resulted primarily from charging off specific reserves for loans deemed to be collateral dependent.
Loans past due 30-59 days decreased from $38.2 million at December 31, 2012 to $10.7 million at December 31, 2013 and loans past
due 60-89 days decreased from $20.3 million at December 31, 2012 to $775,000 at December 31, 2013. This was primarily driven by
the migration of two relationships totaling $36.2 million from past due to nonaccrual status in the first quarter of 2013.
Foreclosed properties decreased to $30.9 million at December 31, 2013, compared with $43.7 million at December 31, 2012. During
the year ended December 31, 2013, the Company acquired $20.6 million and sold $30.8 million of other real estate owned
(“OREO”). In addition, we recorded fair value write-downs of $2.5 million during the year reflecting declines in appraisal valuations
and changes in pricing strategies. Our ratio of non-performing assets to total assets increased to 12.35% at December 31, 2013,
compared with 11.89% at December 31, 2012.
On July 16, 2013, a jury in Louisville, Kentucky returned a verdict against PBI Bank awarding the plaintiffs compensatory damages
of $1.5 million and punitive damages of $5.5 million. After conferring with its legal advisors, PBI Bank believes the findings and
damages are excessive and contrary to the law, and that it has meritorious grounds on which it is moving forward to appeal. Although
we have made provisions in our condensed consolidated financial statements for this self-insured matter, the amount of our legal
reserve is less than the original amount of the damages awarded, plus accrued interest.
These items are discussed in further detail throughout this “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” Section.
Going Concern Considerations and Future Plans
Our consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business for the foreseeable future. However, the events and circumstances described in this
discussion create an uncertainty about the Company’s ability to continue as a going concern.
For the year ended December 31, 2013, we reported net loss attributable to common shareholders of $3.4 million. This loss was attributable
primarily to loan collection expenses of $4.7 million and OREO expense of $4.5 million resulting from fair value write-downs driven by new
appraisals and reduced marketing prices, net loss on sales, and ongoing operating expenses. We also had lower net interest margin due to lower
average loans outstanding, loans re-pricing at lower rates, and the level of non-performing loans in our portfolio. Net loss to common
shareholders of $3.4 million for the year ended December 31, 2013, compares with net loss to common shareholders of $33.4 million for year
ended December 31, 2012.
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For the year ended December 31, 2012, we reported net loss attributable to common shareholders of $33.4 million. This loss was attributable
primarily to $40.3 million of provision for loan losses expense due to continued decline in credit trends in our portfolio that resulted in net
charge-offs of $36.1 million, OREO expense of $10.5 million resulting from fair value write-downs driven by new appraisals and reduced
marketing prices, net loss on sales, and ongoing operating expense. We also had lower net interest margin due to lower average loans
outstanding, loans re-pricing at lower rates, and the level of non-performing loans in our portfolio. Net loss to common shareholders of $33.4
million, for the year ended December 31, 2012, compares with net loss to common shareholders of $105.2 million for year ended December 31,
2011.
In June 2011, the Bank entered into a Consent Order with the FDIC and KDFI in which the Bank agreed, among other things, to improve asset
quality, reduce loan concentrations, and maintain a minimum Tier 1 leverage ratio of 9% and a minimum total risk based capital ratio of 12%.
The Consent Order was included in our Current Report on 8-K filed on June 30, 2011. In October 2012, the Bank entered into a new Consent
Order with the FDIC and KDFI, again agreeing to maintain a minimum Tier 1 leverage ratio of 9% and a minimum total risk based capital ratio
of 12%. The Bank also agreed that if it should be unable to reach the required capital levels, and if directed in writing by the FDIC, then the
Bank would within 30 days develop, adopt and implement a written plan to sell or merge itself into another federally insured financial institution
or otherwise immediately obtain a sufficient capital investment into the Bank to fully meet the capital requirements.
We expect to continue to work with our regulators toward capital ratio compliance as outlined in the written capital plan submitted by the Bank
in December 2012. The new Consent Order also requires the Bank to continue to adhere to the plans implemented in response to the June 2011
Consent Order, and includes the substantive provisions of the June 2011 Consent Order. The new Consent Order was included in our Current
Report on 8-K filed on September 19, 2012. As of December 31, 2013, the capital ratios required by the Consent Order were not met.
In order to meet these capital requirements, the Board of Directors and management are continuing to evaluate strategies to achieve the
following objectives:
•
Increasing capital through a possible public offering or private placement of common stock to new and existing shareholders. We
have engaged a financial advisor to assist our Board in this evaluation and to assist in evaluating our options for the redemption of
our Series A Preferred Stock currently held by the US Treasury.
•
Continuing to operate the Company and Bank in a safe and sound manner. This strategy will require us to reduce our lending
concentrations, remediate non-performing loans, and reduce other noninterest expense through the disposition of OREO.
•
Continuing with succession planning and adding resources to the management team. In 2012, John T. Taylor was named President
and CEO of PBI Bank. John R. Davis was appointed the Bank’s Chief Credit Officer, with responsibility for establishing and
executing the credit quality policies and overseeing credit administration for the entire organization. In 2013, Mr. Taylor succeeded
Maria L. Bouvette as CEO of Porter Bancorp. We have also augmented our staffing in the commercial lending area, which is now led
by Joe C. Seiler.
•
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 the size of our loan portfolio significantly from $1.3 billion at December 31, 2010, to $1.1 billion at
December 31, 2011 to $899.1 million at December 31, 2012, and $709.3 million at December 31, 2013. We have
significantly improved our credit administration function which is now led by John R. Davis, who joined the
management team in August 2012 and serves as Chief Credit Officer.
Our Consent Order calls for us to reduce our construction and development loans. At December 31, 2013, we have
reduced construction and development loans to $43.3 million, or 52% of total risk-based capital, and $70.3 million, or
82% of total risk-based capital, at December 31, 2012.
Our Consent Order also requires us to continue to reduce concentrations in commercial real estate loans. These loans
totaled $237.0 million, or 284% of total risk-based capital, at December 31, 2013 compared with $311.1 million, or
362% of total risk-based capital, at December 31, 2012.
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•
We are working to reduce non-owner occupied commercial real estate loans, construction and development loans, and
multi-family residential real estate loans by being more selective in seeking new construction and development lending
and new non-owner occupied commercial real estate lending opportunities. We are also receiving principal reductions
from amortizing credits and pay-downs from our customers who sell properties built for resale. We have reduced the
construction loan portfolio from $199.5 million at December 31, 2010 to $43.3 million at December 31, 2013. Our non-
owner occupied commercial real estate loans declined from $293.3 million at December 31, 2010 to $237.0 million at
December 31, 2013.
•
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. However, nonaccrual loans totaled $101.8 million
at December 31, 2013, and we expect to resolve many of these loans by foreclosure which could result in further
additions to our OREO portfolio.
•
We incurred OREO losses totaling $2.6 million during the 2013, comprised of $132,000 in loss on sale and $2.5 million
in fair value write-downs to reflect declines in appraisal valuations and changes in our pricing strategies.
•
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.
•
Real estate construction represents 62% of the OREO portfolio at December 31, 2013 compared with 51% at
December 31, 2012. Commercial real estate represents 19% of the OREO portfolio at December 31, 2013 compared
with 35% at December 31, 2012, and 1-4 family residential properties represent 16% of the portfolio at December 31,
2013 compared with 12% at December 31, 2012.
Bank regulatory agencies can exercise discretion when an institution does not meet the terms of a consent order. Based on individual
circumstances, the agencies may issue mandatory directives, impose monetary penalties, initiate changes in management, or take more serious
adverse actions.
Our consolidated financial statements do not include any adjustments that may result should the Company be unable to continue as a going
concern.
Application of Critical Accounting Policies
Our accounting and reporting policies comply with GAAP and conform to general practices within the banking industry. We believe that of our
significant accounting policies, the following may involve a higher degree of management assumptions and judgments that could result in
materially different amounts to be reported if conditions or underlying circumstances were to change.
Allowance for Loan Losses – PBI Bank maintains an allowance for loan losses believed to be sufficient to absorb probable incurred credit
losses existing in the loan portfolio, and the board of directors evaluates the adequacy of the allowance for loan losses on a quarterly basis. We
evaluate the adequacy of the allowance using, among other things, historical loan loss experience, known and inherent risks in the portfolio,
adverse situations that may affect the borrower’s ability to repay, estimated value of the underlying collateral and current economic conditions
and trends. The allowance may be allocated for specific loans or loan categories, but the entire allowance is available for any loan that, in
management’s judgment, should be charged off. The allowance consists of specific and general components. The specific component relates to
loans that are individually deemed impaired. The general component is based on historical loss experience adjusted for environmental factors.
We develop allowance estimates based on actual loss experience adjusted for current economic conditions and trends. Allowance estimates are a
prudent measurement of the risk in the loan portfolio which we apply to individual loans based on loan type. If the mix and amount of future
charge-off percentages differ significantly from those assumptions used by management in making its determination, we may be required to
materially increase our allowance for loan losses and provision for loan losses, which could adversely affect our results.
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Other Real Estate Owned – Other real estate owned (OREO) is real estate acquired as a result of foreclosure or by deed in lieu of
foreclosure. It is classified as real estate owned until such time as it is sold. When property is acquired as a result of foreclosure or by deed in
lieu of foreclosure, it is recorded at its fair market value less estimated cost to sell. Any write-down of the property at the time of acquisition is
charged to the allowance for loan losses. Subsequent reductions in fair value are recorded as non-interest expense. To determine the fair value of
OREO for smaller dollar single family homes, we consult with internal real estate sales staff and external realtors, investors, and appraisers. If
the internally evaluated market price is below our underlying investment in the property, appropriate write-downs are recorded. For larger dollar
commercial real estate properties, we obtain a new appraisal of the subject property in connection with the transfer to other real estate
owned. We do not obtain updated appraisals on a quarterly basis after the receipt of the initial appraisal. Rather, we internally review the fair
value of the other real estate owned in our portfolio on a quarterly basis to determine if a new appraisal is warranted based on the specific
circumstances of each property. Generally, we obtain updated appraisals annualluy unless a sale is imminent.
Intangible Assets – We evaluate intangible assets for impairment at least annually and more frequently if circumstances indicate their value may
not be recoverable. Identifiable intangible assets that are subject to amortization are amortized on an accelerated basis over the years expected to
be benefited, which we believe is 10 years. We review these amortizable intangible assets for impairment if circumstances indicate their value
may not be recoverable based on a comparison of fair value to carrying value. Based on our annual review, management does not believe our
intangible assets are impaired at December 31, 2013.
Stock-based Compensation – Compensation cost is recognized for stock options and restricted stock awards issued to employees, based on the
fair value of these awards at the date of grant. We utilize a Black-Scholes model, which requires the input of highly subjective assumptions, such
as volatility, risk-free interest rates and dividend pay-out rates, to estimate the fair value of stock options, while the market price of the
Company’s common stock at the date of grant is used for restricted stock awards. Compensation cost is recognized over the required service
period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the
requisite service period for the entire award.
Valuation of Deferred Tax Asset – We evaluate deferred tax assets for impairment on a quarterly basis. We established a 100% deferred tax
valuation allowance of $31.7 million in December 2011 based upon the analysis of our past performance and our expected future performance.
We considered all evidence currently available, both positive and negative, in determining, based on the weight of that evidence, the likelihood
that the deferred tax asset would be realized. During that review, we determined that the level of our recent historical losses, the level of our non-
performing assets, our inability to meet our forecasted levels of earnings in 2011, our intent to defer payment of dividends on our subordinated
debentures and Series A Preferred Stock, and our non-compliance with the capital requirements of our Consent Order outweighed our forecasted
taxable earnings levels for the near and long term. As such, we established a 100% deferred tax valuation allowance. When evaluating our
deferred tax assets for realizability during 2012 and 2013, we concluded that a full valuation allowance was still necessary at December 31, 2012
and 2013, due to the additional losses incurred during those years. A return to profitability would enable us to reduce the valuation allowance
and thereby offset income tax expense that would otherwise be recognized. Examinations of our income tax returns or changes in tax law may
impact our deferred tax assets and liabilities as well as our provision for income taxes.
Contingencies – In the normal course of operations, we are defendants in various legal proceedings. We record contingent liabilities resulting
from claims against us when a loss is assessed to be probable and the amount of the loss is reasonably estimable. Assessing probability of loss
and estimating probable losses requires analysis of multiple factors, including in some cases judgments about the potential actions of third party
claimants and courts. Recorded contingent liabilities are based on the best information available and actual losses in any future period are
inherently uncertain.
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Table of Contents
Results of Operations
The following table summarizes components of income and expense and the change in those components for 2013 compared with 2012:
For the
Years Ended December 31,
Gross interest income
Gross interest expense
Net interest income
Provision for credit losses
Non-interest income
Gains on sale of securities, net
Non-interest expense
Net loss before taxes
Income tax benefit
Net loss
Dividends on preferred stock
Accretion on Series A preferred stock
Losses attributable to participating securities
Net loss attributable to common shareholders
2013
$ 43,228
11,143
32,085
700
5,196
723
38,890
(1,586 )
—
(1,586 )
(1,919 )
(160 )
267
(3,398 )
2012
(dollars in thousands)
Change from Prior Period
Amount
Percent
$ 57,729
15,774
41,955
40,250
6,354
3,236
44,292
(32,997 )
(65 )
(32,932 )
(1,750 )
(179 )
1,429
(33,432 )
$ (14,501 )
(4,631 )
(9,870 )
(39,550 )
(1,158 )
(2,513 )
(5,402 )
31,411
65
31,346
(169 )
19
(1,162 )
30,034
(25.1 )%
(29.4 )
(23.5 )
(98.3 )
(18.2 )
(77.7 )
(12.2 )
(95.2 )
(100.0 )
(95.2 )
9.7
(10.6 )
(81.3 )
(89.8 )
Net loss of $1.6 million for the year ended December 31, 2013, improved by $31.4 million from net loss of $32.9 million for 2012. Net loss to
common shareholders of $3.4 million for the year ended December 31, 2013, decreased $30.0 million from net loss to common shareholders of
$33.4 million for 2012. This decrease in net loss was attributable primarily to lower provision for loan losses expense and decreased non-interest
expense associated with our OREO, partially offset by lower net gain on sales of securities and lower net interest income.
The following table summarizes components of income and expense and the change in those components for 2012 compared with 2011:
For the
Years Ended December 31,
Gross interest income
Gross interest expense
Net interest income
Provision for credit losses
Non-interest income
Gains on sale of securities, net
Other than temporary impairment on securities
Non-interest expense
Net loss before taxes
Income tax benefit
Net loss
Dividends on preferred stock
Accretion on Series A preferred stock
Losses attributable to participating securities
Net loss attributable to common shareholders
2012
$ 57,729
15,774
41,955
40,250
6,354
3,236
—
44,292
(32,997 )
(65 )
(32,932 )
(1,750 )
(179 )
1,429
(33,432 )
2011
(dollars in thousands)
Change from Prior Period
Amount
Percent
$ 73,554
22,039
51,515
62,600
6,766
1,108
(41 )
104,273
(107,525 )
(218 )
(107,307 )
(1,750 )
(177 )
4,080
(105,154 )
$ (15,825 )
(6,265 )
(9,560 )
(22,350 )
(412 )
2,128
41
(59,981 )
74,528
153
74,375
—
(2 )
(2,651 )
71,722
(21.5 )%
(28.4 )
(18.6 )
(35.7 )
(6.1 )
192.1
(100.0 )
(57.5 )
(69.3 )
(70.2 )
(69.3 )
—
1.1
(65.0 )
(68.2 )
Net loss of $32.9 million for the year ended December 31, 2012, decreased $74.4 million from net loss of $107.3 million for 2011. Net loss to
common shareholders of $33.4 million for the year ended December 31, 2012, decreased $71.7 million from net loss to common shareholders of
$105.2 million for 2011. This decrease in net loss was attributable primarily to lower provision for loan losses expense, decreased non-interest
expense associated with our OREO, and higher net gain on sales of securities, partially offset by lower net interest income. In addition, the 2011
results included a one-time goodwill impairment charge of $23.8 million.
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Table of Contents
Net Interest Income – Our net interest income was $32.1 million for the year ended December 31, 2013, a decrease of $9.9 million, or 23.5%,
compared with $42.0 million for the same period in 2012. Net interest spread and margin were 2.97% and 3.10%, respectively, for 2013,
compared with 3.16% and 3.31%, respectively, for 2012. Average nonaccrual loans were $107.3 million and $90.8 million in 2013 and 2012,
respectively. The decrease in net interest income was primarily the result of lower average earning assets coupled with lower rates on those
assets. In addition, net interest income and net interest margin were adversely affected by $5.6 million and $4.9 million of interest lost on
nonaccrual loans during 2013 and 2012, respectively.
Our average interest-earning assets were $1.05 billion for 2013, compared with $1.28 billion for 2012, an 18.1% decrease, primarily attributable
to lower average loans and partially offset by higher average investment securities and interest bearing deposits with financial institutions.
Average loans were $788.2 million for 2013, compared with $1.03 billion for 2012, a 23.7% decrease. Average interest bearing deposits with
financial institutions were $65.1 million in 2013, compared with $62.1 million in 2012, a 4.7% increase. Average investment securities were
$184.2 million for 2013, compared with $173.1 million for 2012, a 6.4% increase. Our total interest income decreased 25.1% to $43.2 million
for 2013, compared with $57.7 million for 2012. The change was due primarily to lower interest rates on loans, lower volume of loans and lower
interest rates on investment securities.
Our average interest-bearing liabilities decreased by 18.1% to $937.4 million for 2013, compared with $1.14 billion for 2012. Our total interest
expense decreased by 29.4% to $11.1 million for 2013, compared with $15.8 million during 2011, due primarily to lower interest rates paid on
and lower volume of certificates of deposit, NOW and money market deposits. Our average volume of certificates of deposit decreased 22.8% to
$704.0 million for 2013, compared with $912.1 million for 2012. The average interest rate paid on certificates of deposit decreased to 1.35% for
2013, compared with 1.52% for 2012, as the result of continued re-pricing of certificates of deposit at maturity to lower interest rates. Our
average volume of NOW and money market deposit accounts increased 1.1% to $154.8 million for 2013, compared with $153.0 million for
2012. The average interest rate paid on NOW and money market deposit accounts decreased to 0.35% for 2013, compared with 0.42% for 2012.
Our net interest income was $42.0 million for the year ended December 31, 2012, a decrease of $9.6 million, or 18.6%, compared with $51.5
million for the same period in 2011. Net interest spread and margin were 3.16% and 3.31%, respectively, for 2012, compared with 3.24% and
3.40%, respectively, for 2011. Average nonaccrual loans were $90.8 million and $67.4 million in 2012 and 2011, respectively. The decrease in
net interest income was primarily the result of lower average earning assets coupled with lower rates on those assets. In addition, net interest
income and net interest margin were adversely affected by $4.9 million and $4.0 million of interest lost on nonaccrual loans during 2012 and
2011, respectively.
Our average interest-earning assets were $1.28 billion for 2012, compared with $1.53 billion for 2011, a 16.5% decrease, primarily attributable
to lower average loans and interest bearing deposits with financial institutions, partially offset by higher average investment securities. Average
loans were $1.03 billion for 2012, compared with $1.24 billion for 2011, a 16.9% decrease. Average interest bearing deposits with financial
institutions were $62.1 million in 2012, compared with $127.1 million in 2011, a 51.1% decrease. Average investment securities were $173.1
million for 2012, compared with $148.5 million for 2011, a 16.6% increase. Our total interest income decreased 21.5% to $57.7 million for
2012, compared with $73.6 million for 2011. The change was due primarily to lower interest rates on and lower volume of loans and interest
bearing deposits with financial institutions, and lower interest rates on investment securities.
Our average interest-bearing liabilities decreased by 17.5% to $1.14 billion for 2012, compared with $1.39 billion for 2011. Our total interest
expense decreased by 28.4% to $15.8 million for 2012, compared with $22.0 million during 2011, due primarily to lower interest rates paid on
and lower volume of certificates of deposit, NOW and money market deposits. Our average volume of certificates of deposit decreased 18.6% to
$912.1 million for 2012, compared with $1.12 billion for 2011. The average interest rate paid on certificates of deposit decreased to 1.52% for
2012, compared with 1.65% for 2011, as the result of continued re-pricing of certificates of deposit at maturity to lower interest rates. Our
average volume of NOW and money market deposit accounts decreased 10.5% to $153.0 million for 2012, compared with $171.0 million for
2011. The average interest rate paid on NOW and money market deposit accounts decreased to 0.42% for 2012, compared with 0.85% for 2011.
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Table of Contents
Average Balance Sheets
The following table sets forth the average daily balances, the interest earned or paid on such amounts, and the weighted average yield on interest-
earning assets and weighted average cost of interest-bearing liabilities for the periods indicated. Dividing income or expense by the average daily
balance of assets or liabilities, respectively, derives such yields and costs for the periods presented.
ASSETS
Interest-earning assets:
Loans receivables (1)(2)
Real estate
Commercial
Consumer
Agriculture
Other
U.S. Treasury and agencies
Mortgage-backed securities
State and political subdivision securities (3)
State and political subdivision securities
Corporate bonds
FHLB stock
Other debt securities
Other equity securities
Federal funds sold
Interest-bearing deposits in other financial
institutions
Total interest-earning assets
Less: Allowance for loan losses
Non-interest-earning assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities
For the Years Ended December 31,
Average
Balance
2013
Interest
Earned/Paid
Average
Yield/Cost
Average
Balance
(dollars in thousands)
2012
Interest
Earned/Paid
Average
Yield/Cost
$ 696,785 $ 32,591
2,772
1,402
1,229
21
546
1,552
933
787
745
421
46
30
3
50,990
16,982
22,639
780
23,685
83,160
30,292
24,861
20,864
10,072
572
744
2,640
4.68 % $ 921,314 $ 46,179
3,510
5.44
1,903
8.26
1,304
5.43
22
2.69
199
2.31
1,986
1.87
887
4.74
563
3.17
482
3.57
447
4.18
46
8.04
57
4.03
2
0.11
64,252
22,720
24,196
838
6,588
111,637
26,631
17,363
8,957
10,072
572
1,359
3,109
5.01 %
5.46
8.38
5.39
2.63
3.02
1.78
5.12
3.24
5.38
4.44
8.04
4.19
0.06
65,076
1,050,142
(40,343 )
88,601
$ 1,098,400
150
43,228
0.23
4.16 %
62,127
1,281,735
(53,484 )
113,314
$ 1,341,565
142
57,729
0.23
4.54 %
Certificates of deposit and other time deposits
NOW and money market deposits
Savings accounts
Federal funds purchased and repurchase agreements
FHLB advances
Junior subordinated debentures
$ 703,982 $
154,759
39,158
3,113
4,990
31,404
937,406
9,482
541
114
6
157
843
11,143
1.35 % $ 912,061 $ 13,828
641
0.35
154
0.29
7
0.19
207
3.15
937
2.68
15,774
1.19 %
153,032
38,665
2,088
6,325
32,309
1,144,480
1.52 %
0.42
0.40
0.34
3.27
2.90
1.38 %
Total interest-bearing liabilities
Non-interest-bearing liabilities
Non-interest-bearing deposits
Other liabilities
Total liabilities
Stockholders’ equity
Total liabilities and stockholders’ equity
Net interest income
Net interest spread
Net interest margin
Ratio of average interest-earning assets to average
interest-bearing liabilities
106,153
12,210
1,055,769
42,631
$ 1,098,400
113,325
8,081
1,265,886
75,679
$ 1,341,565
$ 32,085
$ 41,955
2.97 %
3.10 %
3.16 %
3.31 %
112.03 %
111.99 %
Includes loan fees in both interest income and the calculation of yield on loans.
(1)
(2) Calculations include non-accruing loans of $107.3 million and $90.8 million in average loan amounts outstanding.
(3) Taxable equivalent yields are calculated assuming a 35% federal income tax rate.
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Table of Contents
ASSETS
Interest-earning assets:
Loans receivables (1)(2)
Real estate
Commercial
Consumer
Agriculture
Other
U.S. Treasury and agencies
Mortgage-backed securities
State and political subdivision securities (3)
State and political subdivision securities
Corporate bonds
FHLB stock
Other debt securities
Other equity securities
Federal funds sold
Interest-bearing deposits in other financial
institutions
Total interest-earning assets
Less: Allowance for loan losses
Non-interest-earning assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities
For the Years Ended December 31,
Average
Balance
2012
Interest
Earned/Paid
Average
Yield/Cost
Average
Balance
(dollars in thousands)
2011
Interest
Earned/Paid
Average
Yield/Cost
$ 921,314 $ 46,179
3,510
1,903
1,304
22
199
1,986
887
563
482
447
46
57
2
64,252
22,720
24,196
838
6,588
111,637
26,631
17,363
8,957
10,072
572
1,359
3,109
5.01 % $ 1,111,136 $ 59,450
4,362
5.46
2,428
8.38
1,407
5.39
32
2.63
322
3.02
2,967
1.78
1,123
5.12
172
3.24
452
5.38
428
4.44
46
8.04
49
4.19
3
0.06
77,098
29,140
25,175
925
10,173
96,221
29,506
3,178
7,466
10,072
572
1,397
5,729
5.35 %
5.66
8.33
5.59
3.46
3.17
3.08
5.86
5.41
6.05
4.25
8.04
3.51
0.05
62,127
1,281,735
(53,484 )
113,314
$ 1,341,565
142
57,729
0.23
4.54 %
127,087
1,534,875
(37,762 )
162,846
$ 1,659,959
313
73,554
0.25
4.83 %
Certificates of deposit and other time deposits
NOW and money market deposits
Savings accounts
Federal funds purchased and repurchase agreements
FHLB advances
Junior subordinated debentures
$ 912,061 $ 13,828
641
153,032
154
38,665
2,088
7
207
6,325
937
32,309
15,774
1,144,480
1.52 % $ 1,120,154 $ 18,468
1,451
0.42
228
0.40
440
0.34
537
3.27
915
2.90
22,039
1.38 %
171,028
36,511
10,524
15,315
33,208
1,386,740
1.65 %
0.85
0.62
4.18
3.51
2.76
1.59 %
Total interest-bearing liabilities
Non-interest-bearing liabilities
Non-interest-bearing deposits
Other liabilities
Total liabilities
Stockholders’ equity
Total liabilities and stockholders’ equity
Net interest income
Net interest spread
Net interest margin
Ratio of average interest-earning assets to average
interest-bearing liabilities
113,325
8,081
1,265,886
75,679
$ 1,341,565
106,769
7,016
1,500,525
159,434
$ 1,659,959
$ 41,955
$ 51,515
3.16 %
3.31 %
3.24 %
3.40 %
111.99 %
110.68 %
Includes loan fees in both interest income and the calculation of yield on loans.
(1)
(2) Calculations include non-accruing loans of $90.8 million and $67.4 million in average loan amounts outstanding.
(3) Taxable equivalent yields are calculated assuming a 35% federal income tax rate.
35
Table of Contents
Rate/Volume Analysis
The table below sets forth information regarding changes in interest income and interest expense for the periods indicated. For each category of
interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in rate (changes in rate
multiplied by old volume); (2) changes in volume (changes in volume multiplied by old rate); and (3) changes in rate-volume (change in rate
multiplied by change in volume). Changes in rate-volume are proportionately allocated between rate and volume variance.
Year Ended December 31, 2013 vs. 2012 Year Ended December 31, 2012 vs. 2011
Increase (decrease)
due to change in
Increase (decrease)
due to change in
Rate
Volume
Net
Change
Rate
Volume
Net
Change
(in thousands)
Interest-earning assets:
Loan receivables
U.S. Treasury and agencies
Mortgage-backed securities
State and political subdivision securities
Corporate bonds
FHLB stock
Other debt securities
Other equity securities
Federal funds sold
Interest-bearing deposits in other financial institutions
Total increase (decrease) in interest income
Interest-bearing liabilities:
Certificates of deposit and other time deposits
NOW and money market accounts
Savings accounts
Federal funds purchased and repurchase agreements
FHLB advances
Junior subordinated debentures
Total increase (decrease) in interest expense
Increase (decrease) in net interest income
(35 )
93
(81 )
(206 )
(26 )
—
(2 )
1
1
$ (2,935 ) $ (11,967 ) $ (14,902 ) $ (3,824 ) $ (10,937 ) $ (14,761 )
(123 )
(14 )
347
(981 )
(435 ) (1,401 )
155
(243 )
270
30
(54 )
263
19
(26 )
19
—
— —
8
9
(27 )
(1 )
1 —
(171 )
(21 )
8
(3,190 ) (11,311 ) (14,501 ) (5,529 ) (10,296 ) (15,825 )
(109 )
420
398
84
—
—
(1 )
(1 )
(150 )
382
(528 )
351
469
—
—
(25 )
—
7
(1,427 )
(107 )
(42 )
(3 )
(8 )
(69 )
(1,656 )
$ (1,534 ) $
(2,919 )
7
2
2
(42 )
(25 )
(2,975 )
(8,336 ) $
(100 )
(40 )
(1 )
(50 )
(94 )
(4,346 ) (1,402 )
(670 )
(86 )
(231 )
(34 )
46
(4,631 ) (2,377 )
(9,870 ) $ (3,152 ) $
(3,238 )
(140 )
12
(202 )
(296 )
(24 )
(3,888 )
(6,408 ) $
(4,640 )
(810 )
(74 )
(433 )
(330 )
22
(6,265 )
(9,560 )
36
Table of Contents
Non-interest Income – The following table presents for the periods indicated the major categories of non-interest income:
Service charges on deposit accounts
Income from fiduciary activities
Bank card interchange fees
Other real estate owned rental income
Gain on sales of investment securities, net
Other-than-temporary impairment on securities
Income from bank owned life insurance
Other
Total non-interest income
2013
For the Years Ended
December 31,
2012
(in thousands)
$ 2,239
1,177
727
420
3,236
—
312
1,479
$ 9,590
$ 2,058
517
718
399
723
—
534
970
$ 5,919
2011
$ 2,609
993
668
200
1,108
(41 )
314
1,982
$ 7,833
Non-interest income decreased by $3.7 million to $5.9 million for 2013 compared with $9.6 million for 2012. This was due primarily to
decreased gain on sales of investment securities of $2.5 million, or 77.7%, due to lower volume of sales. This decrease was also caused by a
reduction in income from fiduciary activities as we transitioned away from providing trust services, including ESOP and employee benefit plan
services throughout our markets. This decrease was offset partially by an increase in income from bank owned life insurance, which increased by
71.2% from 2012.
Non-interest income increased by $1.8 million to $9.6 million for 2012 compared with $7.8 million for 2011. This was due primarily to
increased gain on sales of investment securities of $2.1 million, or 192.1%, due to higher volume of sales. This increase was offset partially by
decreased service charges on deposit accounts of $370,000, or 14.2%, and decreased gain on sales of loans originated for sale of $375,000, or
52.6%. Fewer service charges on deposit account fees were the result of lower transaction volume. Lower gains on sales of loans originated for
sale were the result of fewer loans originated for sale during the year in the USDA and SBA programs.
Non-interest Expense – The following table presents the major categories of non-interest expense:
Salary and employee benefits
Occupancy and equipment
Goodwill impairment charge
Other real estate owned expense
FDIC insurance
Loan collection expense
State franchise tax
Professional fees
Communications
Borrowing prepayment fees
Postage and delivery
Insurance expense
Other
Total non-interest expense
2013
For the Years Ended
December 31,
2012
(in thousands)
$ 16,648
3,642
—
10,549
2,835
2,442
2,174
1,985
710
—
454
373
2,480
$ 44,292
$ 15,501
3,583
—
4,516
2,378
4,707
1,944
1,892
711
—
423
648
2,587
$ 38,890
2011
$ 15,218
3,729
23,794
47,525
3,470
2,509
2,228
1,392
678
486
485
172
2,587
$ 104,273
Non-interest expense for the year ended December 31, 2013 of $38.9 million represented a 12.2% decrease from $44.3 million for the same
period last year. The decrease in non-interest expense was attributable primarily to decreased other real estate owned expense due to lower loss
on sales of OREO and lower valuation write-downs. Expenses related to other real estate owned include:
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Table of Contents
Net loss on sales
Provision to allowance for declining market values
Operating expense
Total
2013
2012
(in thousands)
$ 132
2,466
1,918
$ 4,516
$ 1,672
7,154
1,723
$ 10,549
During 2013, we recorded approximately $2.5 million of provision to allowance for declining market values related to new appraisals received
for properties in the portfolio during the year. This compares with $7.2 million of provision related to new appraisals received for properties in
the portfolio during 2012.
FDIC insurance assessments decreased $457,000, or 16.1%, to $2.4 million in 2013 from $2.8 million in 2012 due to decreased average total
consolidated assets, less the average tangible equity during the assessment period. Salary and employee benefit expenses decreased by $1.1
million, or 6.9% to $15.5 million from $16.6 million in 2012.
These improvements were offset partially by an increase in loan collection expense of $2.3 million, or 92.8%, due primarily to continued
remediation of problem loans.
Non-interest Expense Comparison – 2012 to 2011
Non-interest expense for the year ended December 31, 2012, of $44.3 million represented a 57.5% decrease from $104.3 million for the same
period last year. The decrease in non-interest expense was attributable primarily to decreased other real estate owned expense due to lower loss
on sales of OREO, lower valuation write-downs, and lower property maintenance expenses. Expenses related to other real estate owned include:
Net loss on sales
Provision to allowance for sales strategy change
Provision to allowance for declining market values
Operating expense
Total
2012
2011
(in thousands)
$ 1,672
—
7,154
1,723
$ 10,549
$ 8,889
25,613
9,261
3,762
$ 47,525
In 2011, management determined, with the concurrence of the Board of Directors, that certain properties held in OREO were not likely to be
successfully disposed of in an acceptable time-frame using routine marketing efforts. It became apparent due to weakness in the economy and
softness in demand for housing that certain land development and residential condominium projects would require extended holding periods to
sell the properties at recent appraised values. Accordingly, in June of 2011, the Company sold, in a single transaction, 54 finished condominium
property units from condominium developments held in our OREO portfolio with a carrying value of approximately $11.0 million, for $5.2
million, resulting in a pre-tax loss of $5.8 million. No similar transaction occurred in 2012.
Although we were carrying our OREO at fair market value less estimated cost to sell in 2011, we subsequently adjusted our valuations for land
development and residential development properties held in OREO that were similar to the properties we sold in 2011. We recorded an
allowance totaling approximately $25.6 million to reflect our intent to market these properties more aggressively to retail and bulk buyers. No
similar change in sales strategy was implemented during 2012.
FDIC insurance assessments decreased $635,000, or 18.3%, to $2.8 million in 2012 from $3.5 million in 2011 due to decreased average total
consolidated assets, less the average tangible equity during the assessment period. Borrowing prepayment fees decreased $486,000 as no such
fees were incurred during 2012. Additionally, non-interest expense for 2011 included a non-recurring 100% goodwill impairment charge of
$23.8 million.
These improvements were offset partially by higher salaries and employee benefits expense of $1.4 million, or 9.4%, due primarily to additions
to staff in our credit administration and workout divisions, and higher professional fees of $593,000, or 42.6%, due primarily to increased audit
and accounting fees, and loan review fees.
Income Tax Expense – No income tax benefit was recorded for 2013, compared with $65,000 for 2012. Our deferred tax valuation allowance
increased to $47.8 million at December 31, 2013. Our statutory federal tax rate was 35% in both 2013 and 2012. The effective tax rate for 2013
and 2012 is not meaningful due to the reduction of income tax benefit as the result of the establishment of the deferred tax valuation allowance.
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Table of Contents
The valuation allowance for our deferred tax assets does not have any impact on our liquidity, nor does it preclude us from using the tax losses,
tax credits or other timing differences in the future. To the extent we generate taxable income in a given quarter, the valuation allowance may be
reduced to offset fully or partially the corresponding income tax expense. Any remaining deferred tax asset valuation allowance may be reversed
through income tax expense once we can demonstrate a sustainable return to profitability and conclude it is more likely than not the deferred tax
asset will be utilized.
See Note 14, “Income Taxes”, for additional discussion of our income taxes.
Income tax benefit was $65,000 for 2012, compared with $218,000 for 2011. The 2011 income tax benefit was affected significantly by the
establishment of a 100% valuation allowance for our deferred tax asset of $31.7 million. Our deferred tax valuation allowance increased to $43.9
million at December 31, 2012. Our statutory federal tax rate was 35% in both 2012 and 2011. The effective tax rate for 2012 and 2011 is not
meaningful due to the reduction of income tax benefit as the result of the establishment of the deferred tax valuation allowance.
Analysis of Financial Condition
Total assets at December 31, 2013 were $1.1 billion compared with $1.2 billion at December 31, 2012, a decrease of $86.5 million or 7.4%. This
decrease was attributable primarily to a decrease of $189.8 million in loans. The decrease in loans was attributable to principal reductions by
customers outpacing loan originations and advances, as well as $32.6 million in loan charge-offs and the transfer of loan balances totaling $20.6
million to OREO.
PBI Bank’s total risk-based capital was $83.1 million at December 31, 2013. PBI Bank’s consent order with its primary regulators required its
Board of Directors to adopt and implement a plan to reduce its construction and development loans to not more than 75% of total risk-based
capital. These loans totaled $43.3 million, or 52% of total risk-based capital, at December 31, 2013. The consent order also required a plan to
reduce non-owner occupied commercial real estate loans, construction and development loans, and multifamily residential real estate loans as a
group, to not more than 250% of total risk-based capital. These loans totaled $237.0 million, or 284% of total risk-based capital, at December 31,
2013.
Total assets at December 31, 2012 were $1.2 billion compared with $1.5 billion at December 31, 2011, a decrease of $292.8 million or 20.1%.
This decrease was attributable primarily to a decrease of $236.9 million in loans. The decrease in loans was attributable to principal reductions
by customers outpacing loan originations and advances, as well as $37.5 million in loan charge-offs and the transfer of loan balances totaling
$33.5 million to OREO.
Loans Receivable – Loans receivable decreased $189.8 million, or 21.1%, during the year ended December 31, 2013, to $709.3 million. Our
commercial, commercial real estate and real estate construction portfolios decreased by an aggregate of $126.9 million, or 24.1%, during 2013
and comprised 56.3% of the total loan portfolio at December 31, 2013.
Loans receivable decreased $236.9 million, or 20.9%, during the year ended December 31, 2012, to $899.1 million. Our commercial,
commercial real estate and real estate construction portfolios decreased by an aggregate of $161.1 million, or 23.4%, during 2012 and comprised
58.6% of the total loan portfolio at December 31, 2012.
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Table of Contents
Loan Portfolio Composition – The following table presents a summary of the loan portfolio at the dates indicated, net of deferred loan fees, by
type. There are no foreign loans in our portfolio and other than the categories noted, there is no concentration of loans in any industry exceeding
10% of total loans, with the exception of loans for retail facilities (included in other commercial real estate below). Those loans totaled $98.5
million at December 31, 2013 and $150.3 million at December 31, 2012.
Commercial
Commercial Real Estate:
Construction
Farmland
Other
Residential Real Estate:
Multi-family
1-4 Family
Consumer
Agriculture
Other
Total loans
Commercial
Commercial Real Estate:
Construction
Farmland
Other
Residential Real Estate:
Multi-family
1-4 Family
Consumer
Agriculture
Other
Total loans
As of December 31,
2013
Amount Percent
2012
Amount Percent
(dollars in thousands)
$ 52,878
7.45 % $ 52,567
5.85 %
43,326
71,189
232,026
6.11
10.04
32.71
70,284
80,825
322,687
7.82
8.99
35.89
46,858
228,505
14,365
19,199
980
$ 709,326
6.61
50,986
32.21
278,273
2.03
20,383
2.71
22,317
770
0.13
100.00 % $ 899,092
5.67
30.95
2.27
2.48
0.08
100.00 %
2011
Amount
Percent
As of December 31,
2010
Amount
(dollars in thousands)
Percent
2009
Amount
Percent
$ 71,216 6.27 % $
90,290 6.93 % $
89,903 6.36 %
101,471 8.93 199,524 15.32 304,230 21.53
83,898 5.94
423,844 37.31 441,844 33.92 451,945 31.99
85,523 6.56
90,958 8.01
60,410 5.31
65,043 4.60
337,350 29.70 353,418 27.13 354,358 25.08
36,989 2.62
25,064 1.77
1,488 0.11
31,913 2.45
24,177 1.86
1,060 0.08
26,011 2.29
23,770 2.09
993 0.09
74,919 5.75
$ 1,136,023 100.00 % $ 1,302,668 100.00 % $ 1,412,918 100.00 %
Our lending activities are subject to a variety of lending limits imposed by state and federal law. PBI Bank’s secured legal lending limit to a
single borrower was approximately $20.7 million at December 31, 2013.
At December 31, 2013, we had four loan relationships each with aggregate extensions of credit in excess of $10.0 million. Two of the four
relationships include loans that have been classified as substandard by the Bank’s internal loan review process. In 2012, we had eight loan
relationships each with aggregate extensions of credit in excess of $10.0 million. For further discussion of classified loans refer to the asset
quality discussion in our “Allowance for Loan Losses” section.
Our real estate construction portfolio declined approximately $27.0 million from 2012 to 2013 as the result of construction projects being
completed and sold to end users or refinanced under permanent financing arrangements, and also loans in this category being transferred to
OREO through the normal progression of collection, workout, and ultimate disposition.
As of December 31, 2013, we had $7.2 million of loan participations purchased from, and $38.2 million of loan participations sold to, other
banks. As of December 31, 2012, we had $9.4 million of loan participations purchased from, and $61.9 million of loan participations sold to,
other banks.
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Table of Contents
Our loan participation totals include participations in loans sold to two affiliate banks, The Peoples Bank, Mt. Washington and The Peoples
Bank, Taylorsville. Our chairman emeritus, J. Chester Porter and his brother and our director, William G. Porter, each own a 50% interest in
Lake Valley Bancorp, Inc., the parent holding company of The Peoples Bank, Taylorsville, Kentucky. J. Chester Porter and William G. Porter
serve as directors of The Peoples Bank, Taylorsville. Our chairman emeritus owns an interest of approximately 36.0% and his brother and our
director owns an interest of approximately 3.0% in Crossroads Bancorp, Inc., the parent holding company of The Peoples Bank, Mount
Washington, Kentucky. J. Chester Porter serves as director of The Peoples Bank, Mount Washington. Prior to 2013, we entered into
management services agreements with each of these banks. Each agreement provided that our executives and employees provided management
and accounting services to the subject bank, including overall responsibility for establishing and implementing policy and strategic planning.
These entities are not consolidated in the financial statements of the Company. We received a $4,000 monthly fee from The Peoples Bank,
Taylorsville and a $2,000 monthly fee from The Peoples Bank, Mount Washington for these services. Beginning in 2013, we did not renew the
agreements and ceased providing management services to these affiliate banks.
As of December 31, 2013, we had $4.9 million of loan participations sold to these affiliate banks. As of December 31, 2012, we had $2.7 million
of loan participations purchased from, and $6.5 million of loan participations sold to, these affiliate banks. At December 31, 2013, $1.0 million
and $629,000 of loan participations sold to Peoples Bank, Taylorsville, and Peoples Bank, Mt. Washington, respectively, were on nonaccrual.
We have analyzed our relationship with these affiliates and determined that we do not have the power to direct the activities of the affiliates in a
manner that would significantly impact their economic performance nor do we govern their absorption of losses or the use of their economic
resources. As such, these entities are not consolidated in our financial statements.
Loan Maturity Schedule – The following table sets forth information at December 31, 2013, regarding the dollar amount of loans, net of
deferred loan fees, maturing in the loan portfolio based on their contractual terms to maturity:
Loans with fixed rates:
Commercial
Commercial Real Estate:
Construction
Farmland
Other
Residential Real Estate:
Multi-family
1-4 Family
Consumer
Agriculture
Other
Total fixed rate loans
Loans with floating rates:
Commercial
Commercial Real Estate:
Construction
Farmland
Other
Residential Real Estate:
Multi-family
1-4 Family
Consumer
Agriculture
Other
Total floating rate loans
41
Maturing
Within
One Year
As of December 31, 2013
Maturing
1 through
5 Years
Maturing
Over 5
Years
(dollars in thousands)
Total
Loans
$ 5,469 $ 12,632 $ 2,283 $ 20,384
16,700
7,424
77,275
6,513
21,283
66,589
577
4,112
23,441
23,790
32,819
167,305
9,003
30,136
3,009
2,285
64
38,849
180,213
13,935
4,255
446
$ 151,365 $ 242,204 $ 88,427 $ 481,996
22,222
101,480
9,326
1,883
276
7,624
48,597
1,600
87
106
$ 13,142 $ 14,445 $ 4,907 $ 32,494
16,626
5,172
26,169
2,764
4,275
4,950
146
28,923
33,602
19,536
38,370
64,721
1,148
4,333
150
11,838
510
8,009
48,292
430
14,944
534
$ 79,088 $ 39,670 $ 108,572 $ 227,330
906
9,348
248
2,734
—
5,955
34,611
32
372
24
Table of Contents
Loan Portfolio by Risk Category – The following table presents a summary of the loan portfolio at the dates indicated, by risk category.
2013
2012
2011
2010
2009
As of December 31,
Pass
Watch
Special Mention
Substandard
Doubtful
Total
(in thousands)
$ 369,529 $ 437,886 $ 713,822 $ 984,636 $ 1,132,601
56,542
144,316 177,419 143,247 130,335
15,455
18,988
189,616 248,691 229,641 168,691 208,313
—
7
$ 709,326 $ 899,092 $ 1,136,023 $ 1,302,668 $ 1,412,918
5,865 34,700
48,922
396
391
18
Our loans receivable decreased $189.8 million, or 21.1%, during the year ended December 31, 2013. All loan risk categories have decreased
since December 31, 2012. The pass category declined approximately $68.4 million, the watch category declined approximately $33.1 million,
the special mention category declined approximately $28.8 million, and the substandard category declined approximately $59.1 million.
Loan Delinquency – The following table presents a summary of loan delinquencies at the dates indicated.
2013
2012
As of December 31,
2011
(in thousands)
2010
2009
Past Due Loans:
30-59 Days
60-89 Days
90 Days and Over
Total Loans Past Due 30-90+ Days
Nonaccrual Loans
Total Past Due and Nonaccrual Loans
$ 10,696 $ 38,219 $ 17,346 $ 20,956 $ 12,515
3,947 6,148 17,010
775 20,303
5,968
1,350
232
86
35,493
11,703 58,608
101,767 94,517
78,888
$ 113,470 $ 153,125 $ 114,663 $ 87,497 $ 114,381
22,643
92,020
27,698
59,799
594
During the year ended December 31, 2013, loans past due 30-59 days decreased from $38.2 million at December 31, 2012 to $10.7 million at
December 31, 2013. Loans past due 60-89 days decreased from $20.3 million at December 31, 2012 to $775,000 at December 31, 2013. This
represents a $47.1 million decrease from December 31, 2012 to December 31, 2013, in loans past due 30-89 days. The decrease was primarily
driven by the migration of loans for two significant borrowing relationships which together totaled $36.2 million from 30-59 days past due and
60-89 days past due at December 31, 2012 to nonaccrual status during the first quarter of 2013. We considered this trend in delinquency levels
during the evaluation of qualitative trends in the portfolio when establishing the general component of our allowance for loan losses.
Loans more than 90 days past due increased $146,000, and nonaccrual loans increased $7.3 million, respectively, from December 31, 2012 to
December 31, 2013. The $102.0 million in non-performing loans at December 31, 2013, and $94.6 million at December 31, 2012, were
primarily construction, land development, other land, commercial real estate, and residential real estate loans. The protracted slowdown in
housing unit sales and loss of tenants or inability to lease vacant office and retail space placed inordinate stress on these borrowers and their
ability to repay according to the contractual terms of the loans. As such, we have placed these credits on nonaccrual and have begun the
appropriate collection actions to resolve them. Management believes it has established adequate loan loss reserves for these credits.
Non-Performing Assets – Non-performing assets consist of certain restructured loans for which interest rate or other terms have been
renegotiated, loans past due 90 days or more still on accrual, loans on which interest is no longer accrued, real estate acquired through
foreclosure and repossessed assets. Loans, including impaired loans, are placed on nonaccrual status when they become past due 90 days or more
as to principal or interest, unless they are adequately secured and in the process of collection. Loans are considered impaired if full principal or
interest payments are not anticipated in accordance with the contractual loan terms. Impaired loans are carried at the present value of expected
future cash flows discounted at the loan’s effective interest rate or at the fair value of the collateral less cost to sell if the loan is collateral
dependent. Loans are reviewed on a regular basis and normal collection procedures are implemented when a borrower fails to make a required
payment on a loan. If the delinquency on a mortgage loan exceeds 120 days and is not cured through normal collection procedures or an
acceptable arrangement is not worked out with the borrower, we institute measures to remedy the default, including commencing a foreclosure
action. Consumer loans generally are charged off when a loan is deemed uncollectible by management and any available collateral has been
disposed. Commercial business and real estate loan delinquencies are handled on an individual basis by management with the advice of legal
counsel.
42
Table of Contents
Interest income on loans is recognized on the accrual basis except for those loans placed on nonaccrual status. The accrual of interest on
impaired loans is discontinued when management believes, after consideration of economic and business conditions and collection efforts, that
the borrowers’ financial condition is such that collection of interest is doubtful, which typically occurs after the loan becomes 90 days
delinquent. When interest accrual is discontinued, existing accrued interest is reversed and interest income is subsequently recognized only to the
extent cash payments are received on well-secured loans.
Real estate acquired as a result of foreclosure or by deed in lieu of foreclosure is classified as real estate owned until such time as it is sold. New
and used automobiles and other motor vehicles acquired as a result of foreclosure are classified as repossessed assets until they are sold. When
such property is acquired it is recorded at its fair market value less cost to sell. Any write-down of the property at the time of acquisition is
charged to the allowance for loan losses. Subsequent gains and losses are included in non-interest expense.
The following table sets forth information with respect to non-performing assets as of the dates indicated:
2013
2012
2010
2009
As of December 31,
2011
(dollars in thousands)
86 $ 1,350 $
Past due 90 days or more still on accrual
Loans on nonaccrual status
Total non-performing loans
Real estate acquired through foreclosure
Other repossessed assets
Total non-performing assets
Non-performing loans to total loans
Non-performing assets to total assets
Allowance for non-performing loans
Allowance for non-performing loans to non-performing loans
$
232 $
594 $ 5,968
78,888
84,856
14,548
80
$ 132,891 $ 138,274 $ 134,824 $ 128,080 $ 99,484
92,020
93,370
41,449
5
101,767
101,999
30,892
—
94,517
94,603
43,671
—
59,799
60,393
67,635
52
14.38 %
12.35 %
10.52 %
11.89 %
8.22 %
9.26 %
4.63 %
7.43 %
6.00 %
5.42 %
$ 2,285 $ 13,250 $ 11,382 $ 7,977 $ 7,266
2.2 %
14.0 %
12.2 %
13.2 %
8.6 %
Troubled Debt Restructuring – A troubled debt restructuring (TDR) occurs when the Company has agreed to a loan modification in the form
of a concession for a borrower who is experiencing financial difficulty. The majority of the 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 borrower on a case-by-case basis to facilitate the orderly
collection of our principal and interest before a loan becomes a non-performing loan. If a borrower is unable to make contractual payments, we
review the particular circumstances of that 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 that they can return to performing status over time.
Our loan modifications have taken the form of reduction in interest rate and/or curtailment of scheduled principal payments for a short-term
period, usually three to six months, but in some cases until maturity of the loan. In some circumstances we restructure real estate secured loans in
a bifurcated fashion whereby we have a fully amortizing “A” loan at a market interest rate and an interest-only “B” loan at a reduced interest
rate. The majority of our restructured loans are collateral secured loans. If a borrower fails to perform under the modified terms, we place the
loan(s) on nonaccrual status and begin the process of working with the borrower to liquidate the underlying collateral to satisfy the debt.
At December 31, 2013, we had 98 restructured loans totaling $91.3 million with borrowers who experienced deterioration in financial condition
compared with 123 loans totaling $117.8 million at December 31, 2012. In general, these loans were granted interest rate reductions to provide
cash flow relief to borrowers experiencing cash flow difficulties. Of these restructured loans for 2013, five loans totaling approximately $4.4
million were also granted principal payment deferrals until maturity. There were no concessions made to forgive principal relative to these loans,
although we have recorded partial charge-offs for certain restructured loans. In general, these loans are secured by first liens on 1-4 residential or
commercial real estate properties, or farmland. Restructured loans also included $2.8 million of commercial loans for 2013. At December 31,
2013, $44.3 million of TDRs were performing according to their modified terms.
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Table of Contents
The following table sets forth information with respect to TDRs, non-performing loans, real estate acquired through foreclosure, and other
repossessed assets.
Total non-performing loans
TDRs on accrual
Total non-performing loans and TDRs on accrual
Real estate acquired through foreclosure
Other repossessed assets
Total non-performing assets and TDRs on accrual
December
31,
2010
December
31,
2012
December
31,
2013
December
31,
2011
(dollars in thousands)
$ 101,999 $ 94,603 $ 93,370 $ 60,393 $ 84,856
44,346
24,135
$ 146,345 $ 171,947 $ 167,514 $ 85,936 $ 108,991
14,548
30,892
—
80
$ 177,237 $ 215,618 $ 208,968 $ 153,623 $ 123,619
67,635
52
43,671
—
41,449
5
December
31,
2009
25,543
77,344
74,144
Total non-performing loans and TDRs on accrual to total loans
Total non-performing assets and TDRs on accrual to total assets
20.63 %
16.47 %
19.12 %
18.55 %
14.75 %
14.36 %
6.60 %
8.91 %
7.71 %
6.74 %
We consider any loan that is restructured for a borrower experiencing financial difficulties due to a borrower’s potential inability to pay in
accordance with contractual terms of the loan to be a troubled debt 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 customer’s loan to a market rate as the result of a market decline in
rates.
We continue to report restructured loans as restructured until such time as the loan is paid in full, otherwise settled, sold, or charged-off. If the
borrower fails to perform, we place the loan on nonaccrual status and seek to liquidate the underlying collateral for these loans. Our nonaccrual
policy for restructured loans is identical to our nonaccrual policy for all loans. Our policy calls for a loan to be reported as nonaccrual if it is
maintained on a cash basis because of deterioration in the financial condition of the borrower, payment in full of principal and interest is not
expected, or principal or interest has been in default for a period of 90 days or more unless the assets are both well secured and in the process of
collection. Changes in value for impairment, including the amount attributed to the passage of time, are recorded entirely within the provision for
loan losses. Upon determination that a loan is collateral dependent, the loan is charged down to the fair value of collateral less estimated costs to
sell.
See Footnote 4, “Loans”, to the financial statements for additional disclosure related to troubled debt restructuring.
Interest income that would have been earned on non-performing loans was $5.6 million, $4.9 million, and $4.0 million for the years ended
December 31, 2013, 2012, and 2011, respectively. Interest income recognized on accruing non-performing loans was $895,000, $460,000, and
$611,000 for the years ended December 31, 2013, 2012, and 2011, respectively.
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Allowance for Loan Losses – The allowance for loan losses is based on management’s continuing review and evaluation of individual loans,
loss experience, current economic conditions, risk characteristics of various categories of loans and such other factors that, in management’s
judgment, require current recognition in estimating loan losses.
The following table sets forth an analysis of loan loss experience as of and for the periods indicated:
Balances at beginning of period
Loans charged-off:
Real estate
Commercial
Consumer
Agriculture
Total charge-offs
Recoveries:
Real estate
Commercial
Consumer
Agriculture
Total recoveries
Net charge-offs
Provision for loan losses
Balance at end of period
Allowance for loan losses to period-end loans
Net charge-offs to average loans
Allowance for loan losses to non-performing loans
Allowance for loan losses for loans individually evaluated
for impairment
Loans individually evaluated for impairment
Allowance for loan losses to loans individually evaluated for
2013
2012
2011
2010
2009
$ 56,680
$ 52,579
(dollars in thousands)
$ 34,285
$
26,392
$
19,652
As of December 31,
28,879
2,828
773
128
32,608
31,437
3,784
1,130
1,164
37,515
38,538
4,197
1,070
841
44,646
1,622
1,212
266
252
3,352
29,256
700
$ 28,124
3.96 %
3.71 %
27.57 %
1,040
129
125
72
1,366
36,149
40,250
$ 56,680
6.30 %
3.50 %
59.91 %
184
69
87
—
340
44,306
62,600
$ 52,579
4.63 %
3.56 %
56.31 %
19,261
2,675
496
29
22,461
114
28
104
8
254
22,207
30,100
34,285
2.63 %
1.64 %
56.77 %
6,519
301
875
36
7,731
133
55
76
7
271
7,460
14,200
26,392
1.87 %
0.54 %
31.10 %
$
$
$ 3,471
149,883
$ 21,034
188,808
$ 12,314
150,727
$
5,119
71,726
$
5,453
106,139
impairment
2.32 %
11.14 %
8.17 %
7.14 %
5.14 %
Allowance for loan losses for loans collectively evaluated
for impairment
Loans collectively evaluated for impairment
Allowance for loan losses to loans collectively evaluated for
impairment
$ 24,653
559,443
$ 35,646
710,284
$ 40,265
985,296
$
29,166
1,230,942
$
20,939
1,306,779
4.41 %
5.02 %
4.09 %
2.37 %
1.60 %
Our allowance for loan losses is a reserve established through charges to earnings in the form of a provision for loan losses. The allowance for
loan losses is comprised of general reserves and specific reserves.
We maintain a general reserve for each loan type in the loan portfolio. In determining the amount of the general reserve portion of our allowance
for loan losses, management considers factors such as our historical loan loss experience, the growth, composition and diversification of our loan
portfolio, current delinquency levels, loan quality grades, the results of recent regulatory examinations and general economic conditions. Based
on these factors, we apply estimated percentages to the various categories of loans, not including any loan that has a specific allowance allocated
to it, based on our historical experience, portfolio trends and economic and industry trends. This information is used by management to set the
general reserve portion of the allowance for loan losses at a level it deems prudent.
Generally, all loans that have been identified as impaired are reviewed on a quarterly basis in order to determine whether a specific allowance is
required. A loan is considered impaired when based on current information; it is probable that we will not receive all amounts due in accordance
with the contractual terms of the loan agreement. Once a loan has been identified as impaired, management measures impairment in accordance
with ASC 310.10, “Impairment of a Loan.” When management’s measured value of the impaired loan is less than the recorded investment in the
loan, the amount of the impairment is recorded as a specific reserve. These specific reserves are determined on an individual loan basis based on
management’s current evaluation of our loss exposure for each credit given the payment status, financial condition of the borrower and value of
any underlying collateral. Loans for which specific reserves have been provided are excluded from the general reserve calculations described
below. Changes in specific reserves from period to period are the result of changes in the circumstances of individual loans such as charge-offs,
pay-offs, changes in collateral values or other factors.
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Table of Contents
The allowance for loan losses represents management’s estimate of the amount necessary to provide for known and inherent losses in the loan
portfolio in the normal course of business. Due to the uncertainty of risks in the loan portfolio, management’s judgment of the amount of the
allowance necessary to absorb loan losses is approximate. The allowance for loan losses is also subject to regulatory examinations and may be
adjusted in response to a determination by the regulatory agencies as to its adequacy in comparison with peer institutions.
We make specific allowances for each impaired loan based on its type and classification as discussed above. At year-end 2013, our allowance for
loan losses to total non-performing loans decreased to 27.6% from 59.9% at year-end 2012. It is important to look more closely at this ratio as a
significant portion of our impaired loans are collateral dependent and have been charged down to the estimated fair value of the underlying
collateral less cost to sell. Please see the next table for comparison and disclosure of our recorded investment less allocated allowance relative to
the unpaid principal balance. We have assessed these impaired loans for collectability and considered, among other things, the borrower’s ability
to repay, the value of the underlying collateral, and other market conditions to ensure that the allowance for loan losses is adequate to absorb
probable incurred losses.
The following table presents the unpaid principal balance, recorded investment and allocated allowance related to loans individually evaluated
for impairment in the commercial real estate and residential real estate portfolios as of December 31, 2013 and 2012.
Unpaid principal balance
Prior charge-offs
Recorded investment
Allocated allowance
Recorded investment, less allocated allowance
Recorded investment, less allocated allowance/ Unpaid
principal balance
December 31, 2013
December 31, 2012
Commercial
Residential
Commercial
Residential
Real Estate
Real Estate
Real Estate
Real Estate
$ 116,740
(22,410 )
94,330
(2,345 )
$ 91,985
(in thousands)
$ 56,665
(7,153 )
49,512
(827 )
$ 48,685
$ 143,228
(17,306 )
125,922
(16,046 )
$ 109,876
$ 61,923
(5,124 )
56,799
(4,641 )
$ 52,158
81.09 %
89.45 %
78.13 %
86.77 %
Based on previous charge-offs, our current recorded investment in the commercial real estate and residential real estate segments are
significantly below the unpaid principal balance for the loans. Consideration of the recorded investment and allocated allowance further
indicated, we are at 81.09% and 89.45% of the unpaid principal balance in the commercial real estate and residential real estate segments of the
portfolio, respectively, at December 31, 2013.
The following table illustrates recent trends in loans collectively evaluated for impairment and the related allowance for loan losses by portfolio
segment:
Commercial
Commercial real estate
Residential real estate
Consumer
Agriculture
Other
Total
Loans
December 31, 2013
Allowance % to Total
Loans
December 31, 2012
Allowance % to Total
$ 47,883 $ 2,931
252,211 14,069
225,851 6,935
407
14,272
305
18,877
6
349
$ 559,443 $ 24,653
6.12 % $ 47,271 $ 4,139
5.58 347,874 18,722
3.07 272,460 11,594
789
2.85 20,171
398
1.62 22,262
1.72
4
246
4.41 % $ 710,284 $ 35,646
8.76 %
5.38
4.26
3.91
1.79
1.63
5.02 %
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Table of Contents
Loans collectively evaluated for impairment and the related allowance for loan losses trended downward from 5.02% at December 31, 2012 to
4.41% at December 31, 2013. The residential real estate segment constitutes approximately 40% of total loans collectively evaluated for
impairment. The related allowance for the residential real estate segment trended downward from 4.26% at December 31, 2012 to 3.07% at
December 31, 2013 as our net charge-offs declined from approximately $8.9 million in 2012 to $7.2 million in 2013. We also noted that
residential housing prices improved over the past year as residential housing inventories declined. The commercial real estate segment
constitutes approximately 45% of total loans collectively evaluated for impairment. The related allowance for the commercial real estate segment
was largely consistent between years. It trended upward slightly from 5.38% at December 31, 2012 to 5.58% at December 31, 2013. This is
consistent with our net charge-off experience in the commercial real estate segment of the portfolio which totaled approximately $21.5 million in
2012 to $20.0 million in 2013.
A significant portion of our portfolio is comprised of loans secured by real estate. A decline in the value of the real estate serving as collateral for
our loans may impact our ability to collect those loans. In general, we obtain updated appraisals on property securing our loans when
circumstances are warranted such as at the time of renewal or when market conditions have significantly changed. We use qualified licensed
appraisers approved by our Board of Directors. These appraisers possess prerequisite certifications and knowledge of the local and regional
marketplace.
Based on an evaluation of the loan portfolio, management presents a quarterly review of the allowance for loan losses to our Board of Directors,
indicating any change in the allowance for loan losses since the last review and any recommendations as to adjustments in the allowance for loan
losses.
This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available
or as events change. We decreased the allowance for loan losses as a percentage of loans outstanding to 3.96% at December 31, 2013 from
6.30% at December 31, 2012. The level of the allowance is based on estimates and the ultimate losses may vary from these estimates.
We follow a loan grading program designed to evaluate the credit risk in our loan portfolio. Through this loan grading process, we maintain an
internally classified watch list which helps management assess the overall quality of the loan portfolio and the adequacy of the allowance for
loan losses. Loans categorized as watch list loans show warning elements where the present status exhibits one or more deficiencies that require
attention in the short-term or where pertinent ratios of the loan account have weakened to a point where more frequent monitoring is warranted.
These loans do not have all of the characteristics of a classified loan (substandard or doubtful) but do show weakened elements as compared with
those of a satisfactory credit. We review these loans to assist in assessing the adequacy of the allowance for loan losses.
In establishing the appropriate classification for specific assets, management considers, among other factors, the borrower’s ability to repay, the
borrower’s repayment history, the current delinquent status, and the estimated value of the underlying collateral. -As a result of this process,
loans are categorized as special mention, substandard or doubtful.
Loans classified as “special mention” do not have all of the characteristics of substandard or doubtful loans. They have one or more deficiencies
which warrant special attention and which corrective action, such as accelerated collection practices, may remedy.
Loans classified as “substandard” are those loans with clear and defined weaknesses such as a highly leveraged position, unfavorable financial
ratios, uncertain repayment sources or poor financial condition which may jeopardize the repayment of the debt as contractually agreed. They are
characterized by the distinct possibility that we will sustain some losses if the deficiencies are not corrected.
Loans classified as “doubtful” are those loans which have characteristics similar to substandard loans but with an increased risk that collection or
liquidation in full is highly questionable and improbable.
Specific reserves may be carried for accruing TDRs in compliance with restructured terms. Once a loan is deemed impaired or uncollectible as
contractually agreed (other than performing TDRs), the loan is charged-off either partially or in-full against the allowance for loan losses, based
upon the expected future cash flows discounted at the loan’s effective interest rate, or the fair value of collateral less estimated cost to sell with
respect to collateral-based loans if collateral dependent.
As of December 31, 2013, we had $189.6 million of loans classified as substandard, $5.9 million classified as special mention and none
classified as doubtful or loss. This compares with $248.7 million of loans classified as substandard, $396,000 classified as doubtful, $34.7
million classified as special mention and none classified as loss as of December 31, 2012. The $59.1 million decrease in loans classified as
substandard was primarily concentrated in the commercial real estate portfolio. As of December 31, 2013, we had allocations of $12.5 million in
the allowance for loan losses related to these substandard loans. This compares to allocations of $34.0 million in the allowance for loan losses
related to substandard loans at December 31, 2012.
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Table of Contents
We recorded a provision for loan losses of $700,000 for the year ended December 31, 2013, compared with $40.3 million for 2012 and $62.6
million for 2011. The total allowance for loan losses was $28.1 million, or 3.96% of total loans, at December 31, 2013, compared with $56.7
million, or 6.30% of total loans, at December 31, 2012, and $52.6 million, or 4.63% of total loans, at December 31, 2011. The decreased
allowance is consistent with the decrease in our classified loans of $88.3 million from December 31, 2012 to December 31, 2013 and loan
charge-off trends. Net charge-offs were $29.3 million for the year ended December 31, 2013, compared with $36.1 million for 2012 and $44.3
million for 2011. Charge-offs for 2013 were concentrated in the loans secured by real estate category of the portfolio. Real estate net charge-offs
represents 93.17% of our net charge-offs for 2013. These net charge-offs consisted of $18.9 million of commercial real estate loans, $7.2 million
of residential real estate loans, and $1.2 million of construction and land development loans.
The following table depicts management’s allocation of the allowance for loan losses by loan type. Allowance funding and allocation is based on
management’s current evaluation of risk in each category, economic conditions, past loss experience, loan volume, past due history and other
factors. Since these factors and management’s assumptions are subject to change, the allocation is not necessarily predictive of future portfolio
performance. The allocation is made by analytical purposes and is not necessarily indicative of the categories in which future losses may occur.
The total allowance is available to absorb losses from any segment of loans.
Commercial
Commercial Real Estate:
Construction
Farmland
Other
Residential Real Estate:
Multi-family
1-4 Family
Consumer
Agriculture
Other
Total
Commercial
Commercial Real Estate:
Construction
Farmland
Other
Residential Real Estate:
Multi-family
1-4 Family
Consumer
Agriculture
Other
Unallocated
Total
As of December 31,
2013
2012
Amount of
Allowance
Percent of
Loans to
Total
Loans
Amount of
Allowance
Percent of
Loans to
Total
Loans
(dollars in thousands)
$ 3,221
7.45 %
$ 4,402
5.85 %
2,149
1,623
12,642
6.11
10.04
32.71
5,989
2,600
26,179
7.82
8.99
35.89
1,449
6,313
416
305
6
$ 28,124
6.61
32.21
2.03
2.71
0.13
100.00 %
2,464
13,771
857
403
15
$ 56,680
5.67
30.95
2.27
2.48
0.08
100.00 %
2011
Percent of
Loans to
Total
Loans
Amount of
Allowance
As of December 31,
2010
Percent of
Amount of
Loans to
Total
Loans
(dollars in thousands)
Allowance
2009
Percent of
Loans to
Total
Loans
Amount of
Allowance
$ 4,207
6.27 % $ 2,147
6.93 % $ 2,040
6.36 %
8.93 11,164 15.32 8,215 21.53
13,920
5.94
8.01
702
2,023
17,081 37.31 12,209 33.92 9,266 31.99
6.56
643
5.31
5.75
1,797
4.60
517
12,420 29.70 6,707 27.13 4,662 25.08
2.62
701
1.77
134
0.11
4
282 —
2.45
1.86
0.08
— — — —
$ 52,579 100.0 % $ 34,285 100.00 % $ 26,392 100.00 %
2.29
2.09
0.09
792
325
14
538
163
5
578
48
Table of Contents
Foreclosed Properties – Foreclosed properties at December 31, 2013 were $30.9 million compared with $43.7 million at December 31, 2012.
See Footnote 6, “Other Real Estate Owned”, to the financial statements. During 2013, we acquired $20.6 million of OREO properties and sold
properties totaling approximately $30.8 million. We value foreclosed properties at fair value less estimated costs to sell when acquired and
expect to liquidate these properties to recover our investment in the due course of business.
Other real estate owned (OREO) is recorded at fair market value less estimated cost to sell at time of acquisition. Any write-down of the property
at the time of acquisition is charged to the allowance for loan losses. Subsequent reductions in fair value are recorded as non-interest expense. To
determine the fair value of OREO for smaller dollar, single family homes, we consult with internal real estate sales staff and external realtors,
investors, and appraisers. If the internally evaluated market price is below our underlying investment in the property, we record an appropriate
write-down.
For larger dollar commercial real estate properties, we obtain a new appraisal of the subject property in connection with the transfer to OREO. In
some of these circumstances, an appraisal is in process at quarter end and we must make our best estimate of the fair value of the underlying
collateral based on our internal evaluation of the property, our review of the most recent appraisal, and discussions with the currently engaged
appraiser. Generally, we obtain updated appraisals annually unless a sale is imminent.
The following table presents the major categories of OREO at the year-ends indicated:
2013
2012
(in thousands)
2011
Commercial Real Estate:
Construction, land development, and other land
Farmland
Other
Residential Real Estate:
Multi-family
1-4 Family
$ 19,049 $ 22,323 $ 31,280
715
6,364
602
15,175
690
4,888
246
6,019
—
3,090
$ 30,892 $ 43,671 $ 41,449
195
5,376
Net activity relating to other real estate owned during the years indicated is as follows:
OREO Activity
OREO as of January 1
Real estate acquired
Valuation adjustments for sales strategy change
Valuation adjustments for declining market values
Improvements
Loss on sale
Proceeds from sale of properties
OREO as of December 31
2013
2012
(in thousands)
2011
$ 43,671
20,606
—
(2,466 )
—
(132 )
(30,787 )
$ 30,892
$ 41,449
33,528
—
(7,154 )
1
(1,672 )
(22,481 )
$ 43,671
$ 67,635
41,917
(25,613 )
(9,261 )
1,650
(8,889 )
(25,990 )
$ 41,449
Net loss on sales, write-downs, and operating expenses for OREO totaled $4.5 million for the year ended December 31, 2013, compared with
$10.5 million for the same period of 2012.
We recorded approximately $3.4 million and $7.7 million of fair value write-downs related to new appraisals received for properties in the
OREO portfolio during 2013 and 2012 respectively. We were successful in selling OREO totaling $30.9 million and $24.2 million during 2013
and 2012, respectively. We continue to have an elevated level of real estate secured non-performing loans. We expect to resolve a significant
level of these non-performing loans through the acquisition and sale of the underlying real estate collateral.
Investment Securities – The securities portfolio serves as a source of liquidity and earnings and contributes to the management of interest rate
risk. We have the authority to invest in various types of liquid assets, including short-term United States Treasury obligations and securities of
various federal agencies, obligations of states and political subdivisions, corporate bonds, certificates of deposit at insured savings and loans and
banks, bankers’ acceptances and federal funds. We may also invest a portion of our assets in certain commercial paper and corporate debt
securities. We are also authorized to invest in mutual funds and stocks whose assets conform to the investments that we are authorized to make
directly. The investment portfolio increased by $28.5 million, or 16.0%, to $207.0 million at December 31, 2013, compared with $178.5 million
at December 31, 2012.
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Table of Contents
The following table sets forth the carrying value of our securities portfolio at the dates indicated.
Securities available for sale
U.S. Government and federal
agencies
Agency mortgage-backed:
residential
State and municipal
Corporate
Other debt
Equity
December 31, 2013
Gross
Unrealized
Gross
Unrealized
Amortized
Cost
Gains
Losses
Amortized
Fair
Cost
Value
(dollars in thousands)
December 31, 2012
Gross
Unrealized
Gross
Unrealized
Gains
Losses
Fair
Value
$ 31,026 $
284 $ (1,444 ) $ 29,866 $ 5,603 $
530 $ — $ 6,133
102,435
12,965
18,002
572
135
458 (1,950 ) 100,943 94,298 1,141
(28 ) 13,545 52,485 2,335
608
769
(610 ) 18,161 18,851 1,150
60 —
62 —
572
1,359
632
197
46 —
487 —
(257 ) 95,182
(87 ) 54,733
(37 ) 19,964
618
1,846
(381 ) $ 178,476
Total available for sale
$ 165,135 $ 2,241 $ (4,032 ) $ 163,344 $ 173,168 $ 5,689 $
Securities held to maturity
State and municipal
Total held to maturity
$ 43,612 $
$ 43,612 $
3 $
3 $
(668 ) $ 42,947 $ — $ — $ — $ —
(668 ) $ 42,947 $ — $ — $ — $ —
The following table sets forth the contractual maturities, fair values and weighted-average yields for our available for sale securities held at
December 31, 2013:
Available for sale
U.S. Government and federal
agencies
Agency mortgage-backed:
residential
State and municipal
Corporate bonds
Other debt
Total
Equity
Total available for sale
Due Within
One Year
Amount Yield
After One Year
But Within
Five Years
Amount Yield
After Five Years
But Within
Ten Years
Amount Yield
After Ten Years
Amount Yield
Total
Amount Yield
$ — — % $ 3,337 2.53 % $ 6,293 2.82 % $ 20,236 2.20 % $ 29,866 2.36 %
356 5.38 2,468 2.56 98,119 2.38 100,943 2.39
— —
686 6.39 2,427 5.14 10,063 5.08
369 6.19 13,545 5.23
— — 5,724 5.77 1,124 5.14 11,313 2.19 18,161 3.36
— — — — — —
632 6.50
$ 686 6.39 % $ 11,844 4.72 % $ 19,948 4.04 % $ 130,669 2.36 % $ 163,147 2.73 %
632 6.50
197
$ 163,344
The following table sets forth the contractual maturities, amortized cost and weighted-average yields for our held to maturity securities held at
December 31, 2013:
Held to maturity
State and municipal
Total held to maturity
Due Within
One Year
Amount Yield
After One Year
But Within
Five Years
Amount Yield
After Five Years
But Within
Ten Years
Amount Yield
After Ten Years
Amount Yield
Total
Amount Yield
$ — — % $ 293 1.55 % $ 20,092 3.48 % $ 23,227 4.48 % $ 43,612 4.00 %
$ — — % $ 293 1.55 % $ 20,092 3.48 % $ 23,227 4.48 % $ 43,612 4.00 %
Average yields in the table above were calculated on a tax equivalent basis using a federal income tax rate of 35%. Mortgage-backed securities are securities that have been
developed by pooling a number of real estate mortgages. These securities are issued by federal agencies such as Government National Mortgage Association (“Ginnie Mae”), Fannie
Mae and Freddie Mac, as well as non-agency company issuers. These securities are deemed to have high credit ratings, and minimum regular monthly cash flows of principal and
interest. Cash flows from agency backed mortgage-backed securities are guaranteed by the issuing agencies.
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Unlike U.S. Treasury and U.S. government agency securities, which have a lump sum payment at maturity, mortgage-backed securities provide
cash flows from regular principal and interest payments and principal prepayments throughout the lives of the securities. Mortgage-backed
securities that are purchased at a premium will generally return decreasing net yields as interest rates drop because home owners tend to
refinance their mortgages. Thus, the premium paid must be amortized over a shorter period. Therefore, those securities purchased at a discount
will obtain higher net yields in a decreasing interest rate environment. As interest rates rise, the opposite will generally be true. During a period
of increasing interest rates, fixed rate mortgage-backed securities do not tend to experience heavy prepayments of principal and consequently,
average life will not be shortened. If interest rates begin to fall, prepayments will generally increase. Non-agency issuer mortgage-backed
securities do not carry a government guarantee. We limit our purchases of these securities to bank qualified issues with high credit ratings. We
regularly monitor the performance and credit ratings of these securities and evaluate these securities, as we do all of our securities, for other-
than-temporary impairment on a quarterly basis. At December 31, 2013, 97.3% of the agency mortgage-backed securities we held had
contractual final maturities of more than ten years with a weighted average life of 23.1 years.
In December 2011, based upon relevant market information, we determined that our basis in twelve equity securities with an unrealized loss
position for more the 12 months was not recoverable in the near term. Therefore, during 2011, we recorded an other-than-temporary impairment
charge totaling $41,000 for these securities which had an adjusted cost basis of $206,000. No such impairment charges were recorded in 2012 or
2013.
At December 31, 2013, the Company held one equity security. This security was in an unrealized gain position as of December 31, 2013.
Management monitors the underlying financial condition of the issuers and current market pricing for this equity security monthly.
In 2013, to better manage our interest rate risk, we transferred from available for sale to held to maturity selected municipal securities in our
portfolio having a book value of approximately $44.9 million, a market value of approximately $43.7, and a net unrealized loss of approximately
$1.3 million. This transfer was completed after careful consideration of our intent and ability to hold these securities to maturity.
Deposits – We attract both short-term and long-term deposits from the general public by offering a wide range of deposit accounts and interest
rates. In recent years, we have been required by market conditions to rely increasingly on short to mid-term certificate accounts and other deposit
alternatives, including brokered and wholesale deposits, which are more responsive to market interest rates. We use forecasts based on interest
rate risk simulations to assist management in monitoring our use of certificates of deposit and other deposit products as funding sources and the
impact of their use on interest income and net interest margin in various rate environments. Our remaining brokered deposits matured during
2013. We are currently restricted from accepting, renewing, or rolling-over brokered deposits without the prior receipt of a waiver on a case-by-
case basis from our regulators.
We primarily rely on our banking office network to attract and retain deposits in our local markets and leverage our online Ascencia division to
attract out-of-market deposits. Market interest rates and rates on deposit products offered by competing financial institutions can significantly
affect our ability to attract and retain deposits. During 2013, total deposits decreased $77.4 million compared with 2012. During 2012, total
deposits decreased $258.7 million compared with 2011. The decrease in deposits for 2013 and 2012 was primarily in certificates of deposit
balances and money market accounts.
To evaluate our funding needs in light of deposit trends resulting from continually changing conditions, we evaluate simulated performance
reports that forecast changes in margins along with other pertinent economic data. We continue to offer attractively priced deposit products along
our product line to allow us to retain deposit customers and reduce interest rate risk during various rising and falling interest rate cycles.
We offer savings accounts, NOW accounts, money market accounts and fixed rate certificates with varying maturities. The flow of deposits is
influenced significantly by general economic conditions, changes in interest rates and competition. Our management adjusts interest rates,
maturity terms, service fees and withdrawal penalties on our deposit products periodically. The variety of deposit products allows us to compete
more effectively in obtaining funds and to respond with more flexibility to the flow of funds away from depository institutions into outside
investment alternatives. However, our ability to attract and maintain deposits and the costs of these funds has been, and will continue to be,
significantly affected by market conditions.
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The following table sets forth the average daily balances and weighted average rates paid for our deposits for the periods indicated:
Demand
Interest Checking
Money Market
Savings
Certificates of Deposit
Total Deposits
Weighted Average Rate
2013
Average
Balance
Average
Rate
For the Years Ended December 31,
2012
Average
Average
Rate
Balance
(dollars in thousands)
2011
Average
Balance
Average
Rate
$ 106,153
$ 113,325
$ 106,769
84,917 0.23 %
69,842 0.50
39,158 0.29
89,103 0.74 %
81,925 0.96
36,511 0.62
703,982 1.35 912,061 1.52 1,120,154 1.65
$ 1,004,052
89,820 0.37 %
63,212 0.49
38,665 0.40
$ 1,434,462
$ 1,217,083
1.01 %
1.20 %
1.40 %
The following table sets forth the average daily balances and weighted average rates paid for our certificates of deposit for the periods indicated:
Certificates of Deposit
Less than $100,000
$100,000 or more
Total
2013
Average
Average
Balance
Rate
For the Years Ended December 31,
2012
2011
Average
Average
Balance
(dollars in thousands)
Rate
Average
Balance
Average
Rate
$ 405,758 1.28 % $ 478,502 1.40 % $ 569,667 1.59 %
298,224 1.44 433,559 1.64 550,487 1.71
$ 703,982 1.35 % $ 912,061 1.52 % $ 1,120,154 1.65 %
The following table shows at December 31, 2013 the amount of our time deposits of $100,000 or more by time remaining until maturity:
Maturity Period
Three months or less
Three months through six months
Six months through twelve months
Over twelve months
Total
$ 38,062
30,559
108,079
118,265
$ 294,965
We strive to maintain competitive pricing on our deposit products which we believe allows us to retain a substantial percentage of our customers
when their time deposits mature.
Borrowing – Deposits are the primary source of funds for our lending and investment activities and for our general business purposes. We can
also use advances (borrowings) from the FHLB of Cincinnati to supplement our pool of lendable funds, meet deposit withdrawal requirements
and manage the terms of our liabilities. Advances from the FHLB are secured by our stock in the FHLB, and substantially all of our first
mortgage residential loans. At December 31, 2013, we had $4.5 million in advances outstanding from the FHLB and the capacity to increase our
borrowings an additional $18.7 million. The FHLB of Cincinnati functions as a central reserve bank providing credit for savings banks and other
member financial institutions. As a member, we are required to own capital stock in the FHLB and are authorized to apply for advances on the
security of such stock and certain of our home mortgages and other assets (principally, securities which are obligations of, or guaranteed by, the
United States) provided that we meet certain standards related to creditworthiness.
The following table sets forth information about our FHLB advances as of and for the periods indicated:
Average balance outstanding
Maximum amount outstanding at any month-end during the period
End of period balance
Weighted average interest rate:
At end of period
During the period
52
2013
$ 4,990
5,517
4,492
December 31,
2012
(dollars in thousands)
$ 6,325
7,015
5,604
2011
$ 15,315
38,937
7,116
3.07 %
3.15 %
3.21 %
3.27 %
3.31 %
3.51 %
Table of Contents
Subordinated Capital Note – At December 31, 2013, our bank subsidiary, PBI Bank, had a subordinated capital note outstanding in the amount
of $5.9 million. The note is unsecured, bears interest at the BBA three-month LIBOR floating rate plus 300 basis points, and qualifies as Tier 2
capital. Interest only was due quarterly through September 30, 2010, at which time quarterly principal payments of $225,000 plus interest
commenced. The note matures July 1, 2020. At December 31, 2013, the interest rate on this note was 3.25%.
Junior Subordinated Debentures – At December 31, 2013, we had four issues of junior subordinated debentures outstanding totaling $25.0
million as shown in the table below.
Description
Porter Statutory Trust II
Porter Statutory Trust III
Porter Statutory Trust IV
Asencia Statutory Trust I
Liquidation
Amount
Trust
Preferred
Securities Issuance Date
Optional
Prepayment
Date (2)
(dollars in thousands)
Junior
Subordinated
Interest Rate (1)
Debt and
Investment
in Trust
(dollars in thousands)
Maturity Date
$
5,000 2/13/2004 3/17/2009 3-month LIBOR + 2.85% $
3,000 4/15/2004 6/17/2009 3-month LIBOR + 2.79%
14,000 12/14/2006 3/1/2012 3-month LIBOR + 1.67%
3,000 2/13/2004 3/17/2009 3-month LIBOR + 2.85%
$
$ 25,000
5,155 2/13/2034
3,093 4/15/2034
14,434 3/1/2037
3,093 2/13/2034
25,775
(1) As of December 31, 2013, the 3-month LIBOR was 0.25%.
(2) The debentures are callable on or after the optional prepayment date at their principal amount plus accrued interest.
The trust preferred securities are subject to mandatory redemption, in whole or in part, upon repayment of the subordinated debentures at
maturity or their earlier redemption at the liquidation preference. The subordinated debentures, which mature February 13, 2034, April 15, 2034,
and March 1, 2037, are redeemable before the maturity date at our option on or after March 17, 2009, June 17, 2009, and March 1, 2012,
respectively, at their principal amount plus accrued interest.
We have the option to defer interest payments on the subordinated debentures from time to time for a period not to exceed 20 consecutive
quarters. After such period, we must pay all deferred interest and resume quarterly interest payments or we will be in default. Effective with the
fourth quarter of 2011, we began deferring interest payments on our junior subordinated debentures.
Deferring interest payments on our junior subordinated notes resulted in the deferral of distributions on our trust preferred securities. We are
prohibited from paying cash dividends on our common stock until such time as we have paid all deferred distributions on our trust preferred
securities.
The trust preferred securities issued by our subsidiary trusts are currently included in our Tier 1 capital for regulatory purposes. On March 1,
2005, the Federal Reserve Board adopted final rules that continue to allow trust preferred securities to be included in Tier 1 capital, subject to
quantitative and qualitative limits. Currently, no more than 25% of our Tier 1 capital can consist of trust preferred securities and qualifying
perpetual preferred stock. To the extent the amount of our trust preferred securities exceeds the 25% limit, the excess would be includable in Tier
2 capital. The new quantitative limits were effective March 31, 2011. As of December 31, 2013, Porter Bancorp’s trust preferred securities
totaled 25% of its Tier 1 capital and 43% of its Tier 2 capital.
Each of the trusts issuing the trust preferred securities holds junior subordinated debentures we issued with a 30 year maturity. The final rules
provide that in the last five years before the junior subordinated debentures mature, the associated trust preferred securities will be excluded from
Tier 1 capital and included in Tier 2 capital. In addition, the trust preferred securities during this five-year period would be amortized out of Tier
2 capital by one-fifth each year and excluded from Tier 2 capital completely during the year before maturity.
Liquidity
Liquidity risk arises from the possibility we may not be able to satisfy current or future financial commitments, or may become unduly reliant on
alternative funding sources. The objective of liquidity risk management is to ensure that we meet the cash flow requirements of depositors and
borrowers, as well as our operating cash needs, taking into account all on- and off-balance sheet funding demands. Liquidity risk management
also involves ensuring that we meet our cash flow needs at a reasonable cost. We maintain an investment and funds management policy, which
identifies the primary sources of liquidity, establishes procedures for monitoring and measuring liquidity, and establishes minimum liquidity
requirements in compliance with regulatory guidance. Our Asset Liability Committee continually monitors and reviews our liquidity position.
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Funds are available from a number of sources, including the sale of securities in the available for sale portion of the investment portfolio,
principal pay-downs on loans and mortgage-backed securities, customer deposit inflows, brokered deposits and other wholesale funding.
Historically, we have utilized brokered and wholesale deposits to supplement our funding strategy. We are currently restricted from accepting,
renewing, or rolling-over brokered deposits without the prior receipt of a waiver on a case-by-case basis from our regulators. At December 31,
2013 we had no brokered deposits.
Traditionally, we have borrowed from the FHLB to supplement our funding requirements. At December 31, 2013, we had an unused borrowing
capacity with the FHLB of $18.7 million. After December 31, 2011, as a result of our financial results, the FHLB changed our collateral
arrangements from a blanket pledge of residential mortgage loans to a detailed loan listing requirement. Our borrowing capacity under the
detailed loan listing requirement is based on the market value of the underlying pledged loans rather than the unpaid principal balance of the
pledged loans. The listing requirement also increases the level of collateral required for borrowings.
We also have available on a secured basis federal funds borrowing lines from correspondent banks totaling $5.0 million. Management believes
our sources of liquidity are adequate to meet expected cash needs for the foreseeable future, however, the availability of these lines could be
affected by our financial position. We are also subject to FDIC interest rate restrictions for deposits. As such, we are permitted to offer up to the
“national rate” plus 75 basis points as published weekly by the FDIC.
We have used cash to pay dividends on common stock, if and when declared by the Board of Directors, and to service debt. Porter Bancorp’s
main sources of funding include dividends paid by PBI Bank, management fees received from PBI Bank and affiliated banks and financing
obtained in the capital markets. During 2011, Porter Bancorp contributed $13.1 million to its subsidiary, PBI Bank, which substantially
decreased its liquid assets. The contribution was made to strengthen the 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 $2.7 million at December 31, 2013.
Since the Bank is unlikely to be in a position to pay dividends to the parent company for the foreseeable future, cash inflows for the parent are
limited to earnings on investment securities, sales of investment securities, and interest on deposits with the Bank. These cash inflows along with
the liquid assets held at December 31, 2013, are needed to cover ongoing operating expenses of the parent company which have been reduced
and are budgeted at $950,000 for 2014. Parent company liquidity could be improved if a capital raise was accomplished. See the “Supervision-
Porter Bancorp-Dividends” section of Item 1. “Business” and the “Dividends” section of Item 5. “Market for Registrant’s Common Equity,
Related Stockholder Matters and Issuer Purchases of Equity Securities” of this Annual Report on Form 10-K.
Capital
In the fourth quarter of 2011, we began deferring the payment of regular quarterly cash dividends on our Series A Preferred Stock. As a result of
the dividend deferral, the holder of our Series A Preferred Stock (currently the U.S. Treasury) has the right to appoint up to two representatives
to our Board of Directors. We will continue to accrue any deferred dividends, which will be deducted from income to common shareholders for
financial statement purposes.
In addition, effective with the fourth quarter of 2011, we began deferring interest payments on our junior subordinated notes with resulted in a
deferral of distributions on our trust preferred securities. Therefore, we will not be able to pay cash dividends on our common stock until such
time that we have paid all deferred distributions on our trust preferred securities. If we defer interest payments on our trust preferred securities
for 20 consecutive quarters, we must pay all deferred interest and resume quarterly interest payments or we will be in default.
Stockholders’ equity decreased $11.3 million to $35.9 million at December 31, 2013, compared with $47.2 million at December 31, 2012. The
decrease was due to the current year net loss, further reduced by $1.9 million of dividends declared (accrued and unpaid) on cumulative
preferred stock and an increase in unrealized loss on available for sale securities.
In 2010, we completed a $32.0 million private placement to accredited investors. Following completion of the transactions involved, Porter
Bancorp had issued (i) 2,465,569 shares of common stock, (ii) 317,042 shares of Series C Preferred Stock and (iii) warrants to purchase to
purchase 1,163,045 shares of non-voting common stock at a price of $11.50 per share.
The Series C Preferred Stock has no voting rights (except when required by law), has a liquidation preference over our common stock, and
dividend rights equivalent to our common stock. Each share of Series C Preferred Stock automatically converts into 1.05 shares of common
stock at such time as, after giving effect to the automatic conversion, the holder of the Series C Preferred Stock (together with its affiliates and
any other persons with which it is acting in concert or whose holdings would otherwise be required to be aggregated for purposes of federal
banking law) beneficially holds, directly or indirectly, less than 9.9% of the number of shares of common stock then issued and outstanding.
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The warrants are exercisable into non-voting common stock until they expire on September 16, 2015. The non-voting common stock has no
voting rights (except when required by law), but otherwise has the same dividend and other rights as our common stock. Upon issuance, each
share of non-voting common stock automatically converts into 1.05 shares of common stock at such time as, after giving effect to the automatic
conversion, the holder of the non-voting common stock (together with its affiliates and any other persons with which it is acting in concert or
whose holdings would otherwise be required to be aggregated for purposes of federal banking law) holds, directly or indirectly, beneficially less
than 9.9% of the number of shares of common stock then issued and outstanding.
On November 21, 2008, we issued to the U.S. Treasury 35,000 shares of our Series A Preferred Stock and a warrant to purchase up to 330,561
shares of our common stock for $15.88 per share in exchange for aggregate consideration of $35.0 million. The warrant is immediately
exercisable and has a 10-year term. The Series A Preferred Stock qualifies as Tier 1 capital and pays cumulative cash dividends quarterly. The
annual dividend rate increased from 5% to 9% beginning in November 2013. The Series A Preferred Stock is non-voting (except when required
by law) and after issuance may be redeemed by the Company at $1,000 per share plus accrued unpaid dividends. Accrued and unpaid dividends
on our Series A Preferred Stock, plus accrued and unpaid interest on those dividends, totaled $4.3 million at December 31, 2013.
Kentucky banking laws limit the amount of dividends that may be paid to a holding company by its subsidiary banks without prior approval.
These laws limit the amount of dividends that may be paid in any calendar year to current 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. During 2014, the amount available to
be paid by PBI Bank to Porter Bancorp would be 2014 earnings to date. However, PBI Bank has agreed with its primary regulators to obtain
their written consent prior to declaring or paying any future dividends.
Each of the federal bank regulatory agencies has established risk-based capital requirements for banking organizations. See Item 1. Business –
Supervision and Regulation – Porter Bancorp – Capital Adequacy Requirements and PBI Bank – Capital Requirements. In addition, PBI Bank
has agreed with its primary regulators to maintain a ratio of total capital to total risk-weighted assets (“total risk-based capital ratio”) of at least
12.0%, and a ratio of Tier 1 capital to total assets (“leverage ratio”) of 9.0%.
The following table shows the ratios of Tier 1 capital and total capital to risk-adjusted assets and the leverage ratios for Porter Bancorp and PBI
Bank at December 31, 2013:
Tier 1 Capital
Total risk-based capital
Tier 1 leverage ratio
Regulatory
Well-
Capitalized
Minimums
Minimums
Minimum
Capital
Ratios Under
Consent Order
4.0 %
8.0
4.0
6.0 %
10.0
5.0
N/A
12.0 %
9.0
Porter
Bancorp
7.34 %
11.03
4.95
PBI
Bank
9.35 %
11.44
6.28
At December 31, 2013, PBI Bank’s Tier 1 leverage ratio was 6.28% which is below the 9% minimum capital ratio required by the Consent Order
and its total risk-based capital ratio was 11.44% which is below the 12% minimum capital ratio required by the Consent Order. Bank regulatory
agencies can exercise discretion when an institution does not maintain minimum capital levels or meet the other terms of a consent order. The
agencies may initiate changes in management, issue mandatory directives, impose monetary penalties or refrain from formal sanctions,
depending on individual circumstances. Any action taken by bank regulatory agencies could damage our reputation and have a material adverse
effect on our business.
Off Balance Sheet Arrangements
In the normal course of business, we enter into various transactions, which, in accordance with GAAP, are not included in our consolidated
balance sheets. We enter into these transactions to meet the financing needs of our customers. These transactions include commitments to extend
credit and standby letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts
recognized in the consolidated balance sheets.
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Table of Contents
Our commitments associated with outstanding standby letters of credit and commitments to extend credit as of December 31, 2013 are
summarized below. Since commitments associated with letters of credit and commitments to extend credit may expire unused, the amounts
shown do not necessarily reflect our actual future cash funding requirements:
Commitments to extend credit
Standby letters of credit
Total
More than 1
One year
year but less
3 years or
more but less
or less
than 3 years
than 5 years
(dollars in thousands)
5 years
or more
Total
$ 24,717 $ 22,359 $
1,998
—
$ 26,715 $ 22,359 $
2,235 $ 12,100 $ 61,411
2,498
—
2,735 $ 12,100 $ 63,909
500
Standby Letters of Credit – Standby letters of credit are written conditional commitments we issue to guarantee the performance of a borrower
to a third party. If the borrower does not perform in accordance with the terms of the agreement with the third party, we may be required to fund
the commitment. The maximum potential amount of future payments we could be required to make is represented by the contractual amount of
the commitment. If the commitment is funded, we would be entitled to seek recovery from the borrower. Our policies generally require that
standby letter of credit arrangements contain security and debt covenants similar to those contained in loan agreements.
Commitments to Extend Credit – We enter into contractual commitments to extend credit, normally with fixed expiration dates or termination
clauses, at specified rates and for specific purposes. Substantially all of our commitments to extend credit are contingent upon borrowers
maintaining specific credit standards at the time of loan funding. We minimize our exposure to loss under these commitments by subjecting them
to credit approval and monitoring procedures.
Contractual Obligations
The following table summarizes our contractual obligations and other commitments to make future payments as of December 31, 2013:
More than 1
year but less
3 years or
more but less
5 years or
One year
or less
than 3 years
than 5 years
(dollars in thousands)
more
Total
Time deposits
FHLB borrowing (1)
Subordinated capital note
Junior subordinated debentures
Total
$ 431,601 $ 224,846 $
776
1,290
900
1,800
—
—
$ 433,277 $ 227,936 $
23,481 $
810 1,616
1,800 1,350
24 $ 679,952
4,492
5,850
— 25,000 25,000
26,091 $ 27,990 $ 715,294
(1) Fixed rate mortgage-matched borrowings with rates ranging from 0% to 5.25%, and maturities ranging from 2014 through 2033, averaging
3.07%.
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been prepared in accordance with U.S. generally accepted accounting principles,
which require the measurement of financial position and operating results in historical dollars without considering changes in the relative
purchasing power of money over time due to inflation.
We have an asset and liability structure that is essentially monetary in nature. As a result, interest rates have a more significant impact on our
performance than the effects of general levels of inflation. Periods of high inflation are often accompanied by relatively higher interest rates, and
periods of low inflation are accompanied by relatively lower interest rates. As market interest rates rise or fall in relation to the rates earned on
our loans and investments, the value of these assets decreases or increases respectively.
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk
To minimize the volatility of net interest income and exposure to economic loss that may result from fluctuating interest rates, we manage our
exposure to adverse changes in interest rates through asset and liability management activities within guidelines established by our Asset
Liability Committee (“ALCO”). The ALCO, which is comprised of senior management representatives, has the responsibility for approving and
ensuring compliance with asset/liability management policies. Interest rate risk is the exposure to adverse changes in the net interest income as a
result of market fluctuations in interest rates. The ALCO, on an ongoing basis, monitors interest rate and liquidity risk in order to implement
appropriate funding and balance sheet strategies. Management considers interest rate risk to be our most significant market risk.
We utilize an earnings simulation model to analyze net interest income sensitivity. We then evaluate potential changes in market interest rates
and their subsequent effects on net interest income. The model projects the effect of instantaneous movements in interest rates of both 100 and
200 basis points that are sustained for one year. Assumptions based on the historical behavior of our deposit rates and balances in relation to
changes in interest rates are also incorporated into the model. These assumptions are inherently uncertain and, as a result, the model cannot
precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual
results will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in
market conditions and the application and timing of various management strategies.
Our interest sensitivity profile was asset sensitive at December 31, 2013 and December 31, 2012. Given an instantaneous 100 basis point
increase in interest rates our base net interest income would increase by an estimated 2.5% at December 31, 2013 compared with an increase of
4.0% at December 31, 2012.
The following table indicates the estimated impact on net interest income under various interest rate scenarios for the year ended December 31,
2013, as calculated using the static shock model approach:
Change in Interest Rates
+ 200 basis points
+ 100 basis points
Change in Future
Net Interest Income
Dollar Change
Percentage Change
(dollars in thousands)
$
1,317
666
4.85 %
2.45
We did not run a model simulation for declining interest rates as of December 31, 2013, because the Federal Reserve’s federal funds target rate
currently stands between 0.00% to 0.25%. Therefore, further short-term rate reductions are not practical. As we implement strategies to mitigate
the risk of rising interest rates in the future, these strategies will lessen our forecasted “base case” net interest income in the event of no interest
rate changes.
Our interest sensitivity at any point in time will be affected by a number of factors. These factors include the mix of interest sensitive assets and
liabilities as well as their relative pricing schedules. It is also influenced by market interest rates, deposit growth, loan growth, decay rates and
prepayment speed assumptions.
The following table sets forth the amounts of our interest-earning assets and interest-bearing liabilities outstanding at December 31, 2013, which
we anticipate, based upon certain assumptions, to reprice or mature in each of the future time periods shown. The projected repricing of assets
and liabilities anticipates prepayments and scheduled rate adjustments, as well as contractual maturities under an interest rate unchanged scenario
within the selected time intervals. While we believe such assumptions are reasonable, we cannot assure you that assumed repricing rates will
approximate our actual future activity.
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Table of Contents
Assets:
Federal funds sold and short-term
investments
Investment securities
FHLB stock
Loans held for sale
Loans, net of allowance
Fixed and other assets
Total assets
Liabilities and Stockholders’ Equity
Interest-bearing checking, savings, and
Volume Subject to Repricing Within
0 – 90
Days
91 – 181
Days
182 – 365
Days
1 – 5
Years
(dollars in thousands)
Over 5
Years
Non-
Interest
Sensitive
Total
$ 103,669 $ —
22,949 4,496
10,072 —
149 —
245,336 55,836
— —
$ 382,175 $ 60,332
$ —
8,075
—
—
81,536
—
$ 89,611
$ —
65,237
—
—
206,152
—
$ 271,389
$ — $ — $ 103,669
3,122 206,956
103,077
10,072
— —
149
— —
120,466 (28,124 ) 681,202
— 74,072
74,072
$ 223,543 $ 49,071 $ 1,076,121
money market accounts
Certificates of deposit
Borrowed funds
Other liabilities
Stockholders’ equity
$ 200,267 $ —
92,791 93,567
33,508
186
— —
— —
Total liabilities and stockholders’ equity $ 326,566 $ 93,753
$ 55,609 $ (33,421 )
$ 55,609 $ 22,188
$ —
242,368
363
—
—
$ 242,731
$ (153,120 )
$ (130,932 )
$ —
249,501
2,683
—
—
$ 252,184
$ 19,205
$ (111,727 )
Period gap
Cumulative gap
Period gap to total assets
Cumulative gap to total assets
Cumulative interest-earning assets to
5.17 %
5.17 %
(3.11 )%
2.06 %
(14.23 )%
(12.17 )%
1.78 %
(10.38 )%
$ — $ — $ 200,267
1,725 — 679,952
37,812
1,072 —
— 122,159 122,159
— 35,931
35,931
$ 2,490 $ 158,397 $ 1,076,121
$ 220,746
$ 109,019
20.51 %
10.13 %
cumulative interest-bearing liabilities
117.03 % 105.28 %
80.25 %
87.79 % 111.88 %
Our one-year cumulative gap position as of December 31, 2013 was negative $130.9 million or 12.2% of assets. This is a one-day position that is
continually changing and is not necessarily indicative of our position at any other time. Any gap analysis has inherent shortcomings because
certain assets and liabilities may not move proportionally as interest rates change.
58
Table of Contents
Item 8.
Financial Statements and Supplementary Data
The following consolidated financial statements and reports are included in this section:
Management’s Report on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2013 and 2012
Consolidated Statements of Operations for the Years Ended December 31, 2013, 2012, and 2011
Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 2013, 2012, and 2011
Consolidated Statements of Change in Stockholders’ Equity for the Years Ended December 31, 2013, 2012, and 2011
Consolidated Statements of Cash Flows for the Years Ended December 31, 2013, 2012, and 2011
Notes to Consolidated Financial Statements
59
Table of Contents
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Porter Bancorp, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting.
Internal control over financial reporting is defined in Rule 13a-15(1) promulgated under the Securities Exchange Act of 1934 as a process
designed by, or under the supervision of; our principal executive and principal financial officers and effected by the board of directors,
management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with U.S. generally accepted accounting principles and includes those policies and procedures
that:
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S.
generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our
management and directors; and
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could
have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2013. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in the 1992
Internal Control-Integrated Framework. Based on that assessment, we believe that, as of December 31, 2013, our internal control over financial
reporting is effective based on those criteria.
/s/ John T. Taylor
John T. Taylor
Chief Executive Officer
March 14, 2014
/s/ Phillip W. Barnhouse
Phillip W. Barnhouse
Chief Financial Officer
60
Table of Contents
Porter Bancorp, Inc.
Louisville, Kentucky
.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have audited the accompanying consolidated balance sheets of Porter Bancorp, Inc. as of December 31, 2013 and 2012, and the related
consolidated statements of operations, changes in stockholders’ equity and comprehensive loss, and cash flows for each of the three years in the
period ended December 31, 2013. These consolidated financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.
Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Porter
Bancorp, Inc. as of December 31, 2013 and 2012, and the results of its operations and its cash flows for each of the three years in the period
ended December 31, 2013, in conformity with U.S. generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed
in Note 2 to the consolidated financial statements, the Company has incurred substantial losses in 2013, 2012 and 2011, largely as a result of
asset impairments. In addition, the Company’s bank subsidiary is not in compliance with a regulatory enforcement order issued by its primary
federal regulator requiring, among other things, increased minimum regulatory capital ratios. Additional losses or the continued inability to
comply with the regulatory enforcement order may result in additional adverse regulatory action. These events raise substantial doubt about the
Company’s ability to continue as a going concern. Management’s plans with regard to these matters are also discussed in Note 2 to the
consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of
this uncertainty.
Crowe Horwath, LLP
Louisville, Kentucky
March 14, 2014
61
Table of Contents
PORTER BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
(Dollar amounts in thousands except share data)
2013
2012
Assets
Cash and due from financial institutions
Federal funds sold
Cash and cash equivalents
Securities available for sale
Securities held to maturity (fair value of $42,947 and $0, respectively)
Mortgage loans held for sale
Loans, net of allowance of $28,124 and $56,680, respectively
Premises and equipment
Other real estate owned
Federal Home Loan Bank stock
Bank owned life insurance
Accrued interest receivable and other assets
Total assets
Liabilities and Stockholders’ Equity
Deposits
Non-interest bearing
Interest bearing
Total deposits
Repurchase agreements
Federal Home Loan Bank advances
Accrued interest payable and other liabilities
Subordinated capital note
Junior subordinated debentures
Total liabilities
Commitments and contingent liabilities (Note 18)
Stockholders’ equity
Preferred stock, no par, 1,000,000 shares authorized
Series A - 35,000 issued and outstanding; Liquidation preference of $35 million at December 31, 2013
and 2012
Series C – 317,042 issued and outstanding; Liquidation preference of $3.6 million at December 31,
2013 and 2012
Total preferred stockholders’ equity
Common stock, no par, 86,000,000 shares authorized, 12,840,999 and 12,002,421 shares issued and
outstanding, respectively
Additional paid-in capital
Retained deficit
Accumulated other comprehensive income (loss)
Total common stockholders’ equity
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes.
62
$ 109,407 $
1,727
111,134
163,344
43,612
149
681,202
19,983
30,892
10,072
8,911
6,822
46,512
3,060
49,572
178,476
—
507
842,412
20,805
43,671
10,072
8,398
8,718
$ 1,076,121 $ 1,162,631
$ 107,486 $ 114,310
950,749
880,219
1,065,059
987,705
2,634
2,470
5,604
4,492
10,169
14,673
6,975
5,850
25,000
25,000
1,115,441
1,040,190
—
—
35,000
34,840
3,283
38,283
3,283
38,123
112,236
20,887
(130,182 )
(5,293 )
(2,352 )
35,931
112,236
20,283
(126,517 )
3,065
9,067
47,190
$ 1,076,121 $ 1,162,631
Table of Contents
PORTER BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
(Dollar amounts in thousands except per share data)
Interest income
Loans, including fees
Taxable securities
Tax exempt securities
Federal funds sold and other
Interest expense
Deposits
Federal Home Loan Bank advances
Junior subordinated debentures
Subordinated capital note
Federal funds purchased and other
Net interest income
Provision for loan losses
Net interest income (loss) after provision for loan losses
Non-interest income
Service charges on deposit accounts
Income from fiduciary activities
Bank card interchange fees
Other real estate owned rental income
Net gain on sales of securities
Income from bank owned life insurance
Other
Non-interest expense
Salaries and employee benefits
Occupancy and equipment
Goodwill impairment
Loan collection expense
Other real estate owned expense
FDIC insurance
State franchise tax
Professional fees
Communications
Borrowing prepayment fees
Insurance expense
Postage and delivery
Other
Loss before income taxes
Income tax expense (benefit)
Net loss
Less:
Dividends on preferred stock
Accretion on Series A preferred stock
(Earnings) loss allocated to participating securities
Net loss attributable to common shareholders
Basic and diluted loss per common share
See accompanying notes.
63
2013
2012
2011
$ 38,015 $ 52,918 $ 67,679
4,008
3,333
3,706
1,123
887
933
744
591
574
73,554
57,729
43,228
10,137
157
622
221
6
11,143
32,085
700
31,385
2,058
517
718
399
723
534
970
5,919
15,501
3,583
—
4,707
4,516
2,378
1,944
1,892
711
—
648
423
2,587
38,890
(1,586 )
—
(1,586 )
14,623
207
671
266
7
15,774
41,955
40,250
1,705
2,239
1,177
727
420
3,236
312
1,479
9,590
16,648
3,642
—
2,442
10,549
2,835
2,174
1,985
710
—
373
454
2,480
44,292
(32,997 )
(65 )
(32,932 )
20,147
537
632
283
440
22,039
51,515
62,600
(11,085 )
2,609
993
668
200
1,108
314
1,941
7,833
15,218
3,729
23,794
2,509
47,525
3,470
2,228
1,392
678
486
172
485
2,587
104,273
(107,525 )
(218 )
(107,307 )
1,919
160
(267 )
1,750
1,750
177
179
(4,080 )
(1,429 )
$ (3,398 ) $ (33,432 ) $ (105,154 )
(8.98 )
$ (0.29 ) $
(2.85 ) $
Table of Contents
PORTER BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
Years Ended December 31,
(in thousands)
Net income (loss)
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on securities:
2013
2012
$ (1,586 ) $ (32,932 ) $ (107,307 )
2011
Reclassification of other than temporary impairment (net of tax of $0, $0, and $14, respectively)
Reclassification of amount realized through sales (net of tax of $0, $0, and $388, respectively)
2,705
2,137
Unrealized gain (loss) arising during the period (net of tax of $0, $0, and $1,457, respectively) (7,635 )
27
—
—
(720 )
(3,236 )
(723 )
(8,358 )
2,012
(1,099 )
$ (9,944 ) $ (34,031 ) $ (105,295 )
Other comprehensive income (loss)
Comprehensive loss
See accompanying notes.
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Table of Contents
PORTER BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Years Ended December 31,
(Dollar amounts in thousands except share and per share data)
Shares
Amount
Additional
Retained
Earnings
Accumulated
Other
Comprehensive
Common
Series A
Preferred
Series B
Preferred
Series C
Preferred Common
Series A
Preferred
Series B
Preferred
Series C
Preferred
Paid-In
Capital
(Deficit)
Income (Loss) Total
Balances,
December 31,
2010
Issuance of
11,846,107 35,000
— 317,042 $ 112,236 $ 34,484 $ — $
3,283 $
19,438 $ 17,822 $
2,152 $ 189,415
unvested stock
2,800
—
—
— —
—
—
—
—
—
—
—
Forfeited unvested
stock
Stock-based
compensation
expense
Net loss
Net change in
accumulated
other
comprehensive
income, net of
taxes
Dividends on
Series A
preferred stock
Dividends on
Series C
preferred stock
($0.02 per
share)
Accretion of Series
A preferred
stock discount
Cash dividends
declared ($0.02
per share)
(24,435 )
—
—
— —
—
—
—
—
—
—
—
—
—
—
—
—
—
— —
— —
—
—
—
—
—
—
403
—
— (107,307 )
—
403
— (107,307 )
—
—
—
— —
—
—
—
—
—
2,012
2,012
—
—
—
— —
—
—
—
—
(1,750 )
—
(1,750 )
—
—
—
— —
—
—
—
—
(7 )
—
(7 )
—
—
—
— —
177
—
—
—
(177 )
—
—
—
—
—
— —
—
—
—
—
(237 )
—
(237 )
Balances,
December 31,
2011
Issuance of
11,824,472 35,000
— 317,042 $ 112,236 $ 34,661 $ — $
3,283 $
19,841 $ (91,656 ) $
4,164 $ 82,529
unvested stock 191,140
—
—
— —
—
—
—
—
—
—
—
Forfeited unvested
stock
Stock-based
compensation
expense
Net loss
Net change in
accumulated
other
comprehensive
income, net of
taxes
Dividends on
Series A
preferred stock
Accretion of Series
A preferred
stock discount
(13,191 )
—
—
— —
—
—
—
—
—
—
—
—
—
—
—
—
—
— —
— —
—
—
—
—
—
—
442
—
— (32,932 )
—
442
— (32,932 )
—
—
—
— —
—
—
—
—
—
(1,099 )
(1,099 )
—
—
—
— —
—
—
—
—
(1,750 )
—
(1,750 )
—
—
—
— —
179
—
—
—
(179 )
—
—
Balances,
December 31,
2012
Issuance of
12,002,421 35,000
— 317,042 $ 112,236 $ 34,840 $ — $
3,283 $
20,283 $ (126,517 ) $
3,065 $ 47,190
unvested stock 875,569
—
—
— —
—
—
—
—
—
—
—
Forfeited unvested
stock
Stock-based
compensation
expense
Net loss
Net change in
accumulated
(36,991 )
—
—
— —
—
—
—
—
—
—
—
—
—
—
—
—
—
— —
— —
—
—
—
—
—
—
604
—
—
(1,586 )
—
—
604
(1,586 )
other
comprehensive
income, net of
taxes
Dividends on
Series A
preferred stock
Accretion of Series
A preferred
stock discount
—
—
—
— —
—
—
—
—
—
(8,358 )
(8,358 )
—
—
—
— —
—
—
—
—
(1,919 )
—
(1,919 )
—
—
—
— —
160
—
—
—
(160 )
—
—
Balances,
December 31,
2013
12,840,999 35,000
— 317,042 $ 112,236 $ 35,000 $ — $
3,283 $
20,887 $ (130,182 ) $
(5,293 ) $ 35,931
See accompanying notes.
65
Table of Contents
PORTER BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
(in thousands)
Cash flows from operating activities
Net loss
Adjustments to reconcile net loss to net cash from operating activities
Depreciation and amortization
Provision for loan losses
Net amortization on securities
Goodwill impairment charge
Stock-based compensation expense
Deferred income taxes
Net gain on sales of loans originated for sale
Loans originated for sale
Proceeds from sales of loans originated for sale
Net loss on sales of other real estate owned
Net write-down of other real estate owned
Net realized gain on sales of investment securities
Earnings on bank owned life insurance, net of premium expense
Net change in accrued interest receivable and other assets
Net change in accrued interest payable and other liabilities
Net cash from operating activities
Cash flows from investing activities
Purchases of available for sale securities
Sales of available for sale securities
Maturities and prepayments of available for sale securities
Proceeds from sale of other real estate owned
Improvements to other real estate owned
Loan originations and payments, net
Purchases of premises and equipment, net
Net cash from investing activities
Cash flows from financing activities
Net change in deposits
Net change in repurchase agreements
Repayment of Federal Home Loan Bank advances
Advances from Federal Home Loan Bank
Repayment of subordinated capital note
Cash dividends paid on preferred stock
Cash dividends paid on common stock
Net cash from financing activities
Net change in cash and cash equivalents
Beginning cash and cash equivalents
Ending cash and cash equivalents
Supplemental cash flow information:
Interest paid
Income taxes paid (refunded)
Supplemental non-cash disclosure:
Transfer from loans to other real estate
Financed sales of other real estate owned
Transfer from available for sale to held to maturity securities
AOCI component of transfer from available for sale to held to maturity
See accompanying notes.
66
2013
2012
2011
$ (1,586 ) $ (32,932 ) $ (107,307 )
2,017
700
2,132
—
604
—
(87 )
(4,035 )
4,469
132
2,466
(723 )
(513 )
1,364
2,585
9,525
2,288
40,250
3,335
—
442
—
(338 )
(16,365 )
16,827
1,672
7,154
(3,236 )
(292 )
16,150
791
35,746
(72,814 )
8,061
26,506
30,772
—
139,548
(281 )
131,792
(162,840 )
93,199
48,800
21,940
(1 )
167,272
(511 )
167,859
2,389
62,600
1,552
23,794
436
12,958
(713 )
(24,881 )
24,649
8,889
34,874
(1,067 )
(301 )
(7,062 )
(575 )
30,235
(123,609 )
50,318
23,378
14,142
(1,650 )
92,190
(332 )
54,437
(143,905 )
(258,704 )
(77,354 )
(9,878 )
896
(164 )
(32,906 )
(1,512 )
(1,112 )
25,000
—
—
(900 )
(675 )
(1,125 )
(1,319 )
—
—
(237 )
—
—
(164,145 )
(259,995 )
(79,755 )
(79,473 )
(56,390 )
61,562
49,572
185,435
105,962
$ 111,134 $ 49,572 $ 105,962
$ 10,711 $ 15,402 $ 22,218
2,000
(12,726 )
—
$ 20,606 $ 33,528 $ 41,917
11,848
—
—
15
44,934
(1,281 )
541
—
—
Table of Contents
PORTER BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013, 2012 and 2011
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Principles of Consolidation – The consolidated financial statements include Porter Bancorp, Inc. (Company or PBI)
and its subsidiary, PBI Bank (Bank). The Company owns a 100% interest in the Bank.
The Company provides financial services through its offices in Central Kentucky and Louisville. Its primary deposit products are checking,
savings, and term certificate accounts, and its primary lending products are residential mortgage, commercial, and real estate loans. Substantially
all loans are collateralized by specific items of collateral including business assets, commercial real estate, and residential real estate.
Commercial loans are expected to be repaid from cash flow from operations of businesses. There are no significant concentrations of loans to
any one industry or customer. However, customers’ ability to repay their loans is dependent on the real estate and general economic conditions
in the area. Other financial instruments which potentially represent concentrations of credit risk include deposit accounts in other financial
institutions and federal funds sold.
Use of Estimates – To prepare financial statements in conformity with U.S. generally accepted accounting principles, management makes
estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial
statements and the disclosures provided, and future results could differ. The allowance for loan losses, goodwill and other intangible assets, fair
value of other real estate owned, stock compensation, deferred tax assets, and fair values of financial instruments are particularly subject to
change.
Cash Flows – Cash and cash equivalents include cash, deposits with other financial institutions under 90 days, and federal funds sold. Net cash
flows are reported for customer and loan deposit transactions, interest-bearing deposits in other financial institutions, and federal funds
purchased and repurchase agreements.
Securities – Debt securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability
to hold them to maturity. Debt securities are classified as available for sale when they might be sold before maturity. Equity securities with
readily determined fair values are classified as available for sale. Securities available for sale are carried at fair value, with unrealized holding
gains and losses reported in other comprehensive income.
Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level-yield
method anticipating prepayments on mortgage backed securities. Gains and losses on sales are recorded on the trade date and determined using
the specific identification method.
Management evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently when
economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and
duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to
sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost
basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is
recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split
into two components as follows: 1) OTTI related to credit loss, which must be recognized in the income statement and 2) other-than-temporary
impairment (OTTI) related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference
between the present value of the cash flows expected to be collected and the amortized cost basis. For equity securities, the entire amount of
impairment is recognized through earnings.
Loans Held for Sale – Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or fair
value, as determined by outstanding commitments from investors. Net unrealized losses, if any, are recorded as a valuation allowance and
charged to earnings.
Mortgage loans held for sale are generally sold with servicing rights released. If sold with servicing retained, the carrying value of mortgage
loans sold is reduced by the amount allocated to the servicing right. Gains and losses on sales of mortgage loans are based on the difference
between the selling price and the carrying value of the related loan sold.
Mortgage banking derivatives used in the ordinary course of business consist of mandatory forward sales contracts and rate lock loan
commitments. Forward contracts represent future commitments to deliver loans at a specified price and date and are used to manage interest rate
risk on loan commitments and mortgage loans held for sale. Rate lock commitments represent commitments to fund loans at a specific rate.
These derivatives involve underlying items, such as interest rates, and are designed to transfer risk. Substantially all of these instruments expire
within 60 days from the date of issuance. Notional amounts are amounts on which calculations and payments are based, but which do not
represent credit exposure, as credit exposure is limited to the amounts required to be received or paid.
67
Table of Contents
We adopted FASB ASC topic 815, “Derivative and Hedging” during the first quarter of 2009. Our commitments to deliver loans and our rate
lock loan commitments were insignificant at year end.
Loans – Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the
principal balance outstanding, net of deferred loan fees and costs, and an allowance for loan losses. Interest income is accrued on the unpaid
principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-
yield method without anticipating prepayments. The recorded investment in loans includes the outstanding principal balance and unamortized
deferred origination costs and fees.
Interest income on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the loan is well collateralized
and in process of collection. Consumer and credit card loans are typically charged off no later than 90 days past due. Past due status is based on
the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest
is not expected.
All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is
accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the
principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Allowance for Loan Losses – The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are
charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are
credited to the allowance. We estimate the allowance balance required using past loan loss experience, the nature and volume of the portfolio,
information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the
allowance may be made for specific loans, but the entire allowance is available for any loan that, in our judgment, should be charged off.
The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired.
A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due
according to the contractual terms of the loan agreement. Loans for which the terms have been modified resulting in a concession, and for which
the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired.
Factors considered in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and
interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.
We determine the significance of payment delays and payment shortfalls on case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the
amount of the shortfall in relation to the principal and interest owed.
If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows
using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Large groups of smaller balance
homogeneous loans, such as consumer and residential real estate loans, are collectively evaluated for impairment, and accordingly, they are not
separately identified for impairment disclosures. Troubled debt restructurings are separately identified for impairment disclosures and are
measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a troubled debt restructuring is
considered to be a collateral dependent loan, the loan is reported at the fair value of the collateral. For troubled debt restructurings that
subsequently default, we determine the amount of reserve in accordance with the accounting policy for the allowance for loan losses.
The general component covers non-impaired loans and is based on historical loss experience adjusted for current factors. The historical loss
experience is determined by portfolio segment and is based on our actual loss history experienced over the most recent three years with
weighting towards the most recent periods. This actual loss experience is supplemented with other economic factors based on the risks present
for each portfolio segment. These economic factors include consideration of the following: changes in lending policies, procedures, and
practices; effects of any change in risk selection and underwriting standards; national and local economic trends and conditions; industry
conditions; trends in volume and terms of loans; experience, ability and depth of lending management and other relevant staff; levels of and
trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; and effects of changes in credit concentrations.
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A portfolio segment is defined as the level at which an entity develops and documents a systematic methodology to determine its allowance for
loan losses. We identified the following portfolio segments: commercial, commercial real estate, residential real estate, consumer, agricultural,
and other.
•
•
•
Commercial loans are dependent on the strength of the industries of the related borrowers and the success of their businesses.
Commercial loans are advances for equipment purchases, or to provide working capital, or to meet other financing needs of business
enterprises. These loans may be secured by accounts receivable, inventory, equipment or other business assets. Financial information
is obtained from the borrowers to evaluate their ability to repay the loans.
Commercial real estate loans are affected by the local commercial real estate market and the local economy. Commercial real estate
loans include loans on properties occupied by the borrowers and on properties for commercial purposes. Construction and
development loans are a component of this segment. These loans are generally secured by land under development or homes and
commercial buildings under construction. Appraisals are obtained to support the loan amount. Financial information is obtained from
the borrowers and/or the individual project to evaluate cash flows sufficiency to service the debt.
Residential real estate loans are affected by the local residential real estate market, local economy, and, for variable rate mortgages,
movement in indices tied to these loans. For owner occupied residential loans, the borrowers’ repayment ability is evaluated through
a review of credit scores and debt to income ratios. For non-owner occupied residential loans, such as rental real estate, financial
information is obtained from the borrowers and/or the individual project to evaluate cash flows sufficiency to service the debt.
Appraisals are obtained to support the loan amount.
•
Consumer loans are dependent on local economies. Consumer loans are generally secured by consumer assets, but may be unsecured.
We evaluate the borrowers’ repayment ability through a review of credit scores and an evaluation of debt to income ratios.
•
•
Agriculture loans are dependent on the industries tied to these loans and are generally secured by livestock, crops, and/or equipment,
but may be unsecured. We evaluate the borrowers’ repayment ability through a review of credit scores and an evaluation of debt to
income ratios.
Other loans include loans to municipalities, loans secured by stock, and overdrafts. For municipal loans, we evaluate the borrowers’
revenue streams as well as ability to repay form general funds. For loans secured by stock, we evaluate the market value of the stock
securing the loan in relation to the loan amount. Overdrafts are funded based on pre-established criteria related to the deposit account
relationship.
We analyze all relevant risk characteristics for each portfolio segment and have determined that loans in each segment possess similar general
risk characteristics that are analyzed in connection with our loan underwriting processes and procedures. In determining the allocated allowance,
we utilize weighted average loss rates for the past three years most heavily weighting the current year. Commercial real estate loans are our
largest segment and had the highest level of qualitative adjustments due to trends in our markets for underlying collateral values and risks related
to tenant rents and for economic factors such as decreased sales demand, elevated inventory levels, and declining collateral values. Residential
real estate loan considerations include macro factors such as unemployment rates, trends in vacancy rates, and home value trends. The
commercial portfolio qualitative adjustments are related to industry concentrations and geographical market. Our agricultural, consumer, and
other portfolios are less significant in terms of size and risk is assessed based on the smaller dollar size of these loans and the more geographical
areas where the collateral is located.
Transfers of Financial Assets – Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished.
Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the
right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does
not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
Other Real Estate Owned – Assets acquired through or instead of loan foreclosure are initially recorded at fair value less estimated costs to sell
when acquired, establishing a new cost basis. These assets are subsequently accounted for at the lower of cost or fair value, less estimated costs
to sell. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Costs after acquisition are expensed.
Premises and Equipment – Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Buildings and
related components are depreciated using the straight-line method with useful lives ranging from 5 to 33 years. Furniture, fixtures and equipment
are depreciated using the straight-line or accelerated method with useful lives ranging from 3 to 7 years.
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Federal Home Loan Bank (FHLB) Stock – The Bank is a member of the FHLB system. Members are required to own a certain amount of
stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at cost, classified as a
restricted security, and periodically evaluated for impairment. Because this stock is viewed as long term investment, impairment is based on
ultimate recovery of par value. Both cash and stock dividends are reported as income.
Intangible Assets – Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values.
Other intangible assets consist of core deposit and trust account intangible assets arising from whole bank and branch acquisitions. They are
initially measured at fair value and then are amortized on an accelerated or straight-line basis over their estimated useful lives, which range from
7 to 10 years.
Bank Owned Life Insurance – The Bank has purchased life insurance policies on certain key executives. Company owned life insurance is
recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for
other charges or other amounts due that are probable at settlement.
Long-Term Assets – Premises and equipment, other intangible assets, and other long-term assets are reviewed for impairment when events
indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.
Repurchase Agreements – Substantially all repurchase agreement liabilities represent amounts advanced by various customers. Securities are
pledged to cover these liabilities, which are not covered by federal deposit insurance.
Benefit Plans – Employee 401(k) and profit sharing plan expense is the amount of matching contributions. Deferred compensation and
supplemental retirement plan expense allocates the benefits over years of service.
Stock-Based Compensation – Compensation cost is recognized for stock options and unvested stock awards issued to employees, based on the
fair value of these awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options, while the market
price of the Corporation’s common stock at the date of grant is used for restricted stock awards. Compensation cost is recognized over the
required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-
line basis over the requisite service period for the entire award.
Income Taxes – Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and
liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax
bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount
expected to be realized.
A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a
tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being
realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The Company recognizes
interest and/or penalties related to income tax matters in income tax expense.
Loan Commitments and Related Financial Instruments – Financial instruments include off-balance sheet credit instruments, such as
commitments to make loans and commercial letters of credit, issued to meet customer-financing needs. The face amount for these items
represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are
funded.
Comprehensive Loss – Comprehensive loss consists of net income and other comprehensive loss. Other comprehensive loss includes unrealized
gains and losses on securities available for sale, which are also recognized as a separate component of equity.
Preferred Stock – Series A Preferred stock was issued in 2008 and is outstanding under the United States Department of the Treasury’s Capital
Purchase Program. Issued in conjunction with the Preferred Stock were common stock warrants. See Note 16 for a discussion of the terms and
conditions of that transaction. The proceeds received in the offering were allocated on a pro rata basis to the Preferred Stock and the Warrants
based on relative fair values. In estimating the fair value of the Warrants, the Company utilized the Black-Scholes model which includes
assumptions regarding the Company’s common stock prices, stock price volatility, dividend yield, the risk free interest rate and the estimated life
of the Warrant. The fair value of the Preferred Stock was determined using a discounted cash flow methodology. The value assigned to the
Preferred Stock will be amortized up to the $35.0 million liquidation value of such preferred stock, with the cost of such amortization being
reported as additional preferred stock dividends. Dividends are accrued quarterly. Quarterly cash payment of dividends was deferred effective
with the fourth quarter of 2011. (See Note 16 for more specific disclosure.)
Series B and C Preferred stock were issued in 2010 and Series C Preferred stock remains outstanding. See Note 16 for a discussion of the terms
and conditions of this transaction.
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Earnings (Loss) Per Common Share – Basic earnings (loss) per common share are net income (loss) available to common shareholders
divided by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per common share include the
dilutive effect of additional potential common shares issuable under stock options and warrants. Earnings (loss) and dividends per share are
restated for all stock splits and dividends through the date of issue of the financial statements.
Earnings (Loss) Allocated to Participating Securities – Our issued and outstanding Series C Preferred Stock is automatically convertible into
common stock at such time as the holder together with its affiliates beneficially own less than 9.9% of the then outstanding common shares of
the company. We also have issued and outstanding unvested common shares to employees and directors through our stock incentive plan.
Earnings (loss) are allocated to these participating securities based on their percentage of total issued and outstanding shares.
Loss Contingencies – Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities
when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. (See Note 24 for more specific disclosure.)
Dividend Restriction – Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Bank to the
Company or by the Company to shareholders. (See Note 17 for more specific disclosure.)
Fair Value of Financial Instruments – Fair values of financial instruments are estimated using relevant market information and other
assumptions, as more fully disclosed in Note 19. Fair value estimates involve uncertainties and matters of significant judgment regarding interest
rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in
market conditions could significantly affect the estimates.
Reclassifications – Some items in the prior year financial statements were reclassified to conform to the current presentation. Reclassifications
had no effect on prior year net loss or stockholders’ equity.
NOTE 2 – GOING CONCERN CONSIDERATIONS AND FUTURE PLANS
The consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business for the foreseeable future. However, the events and circumstances described in this
Note create substantial doubt about the Company’s ability to continue as a going concern.
For the year ended December 31, 2013, we reported a net loss to common shareholders of $3.4 million. This loss coupled with the
comprehensive loss for the year reduced shareholders equity to $35.9 million, from $47.2 million at the end of 2012. This reduction was
attributable primarily to OREO expense of $4.5 million resulting from fair value write-downs driven by new appraisals and reduced marketing
prices, net loss on sales, and ongoing operating expense, along with $4.7 million in loan collection expenses. The reduction was also attributable
to a reduction in the fair value of securities of $8.4 million, net, as well as the accrual of dividends and accretion to preferred shareholders of
$2.1 million. We also had lower net interest margin due to lower average loans outstanding, loans re-pricing at lower rates, and the level of non-
performing loans in our portfolio. Net loss to common shareholders of $3.4 million, for the year ended December 31, 2013, compares with net
loss to common shareholders of $33.4 million for year ended December 31, 2012. This loss coupled with the other comprehensive loss on
securities of $1.1 million reduced shareholders equity to $47.2 million at December 31, 2012, from $82.5 million at the end of 2011.
At December 31, 2013, we continued to be involved in various legal proceedings in which we dispute the material factual allegations. After
conferring with our legal advisors, we believe we have meritorious grounds on which to prevail. If we do not prevail, the ultimate outcome of
any one of these matters could have a material adverse effect on our financial condition, results of operations, or cash flows. These matters are
more fully described in Note 24 – “Contingencies”.
For the year ended December 31, 2012, we reported net loss to common shareholders of $33.4 million. This loss was attributable primarily to
$40.3 million of provision for loan losses expense due to continued decline in credit trends in our portfolio that resulted in net charge-offs of
$36.1 million, OREO expense of $10.5 million resulting from fair value write-downs driven by new appraisals and reduced marketing prices, net
loss on sales, and ongoing operating expense. We also had lower net interest margin due to lower average loans outstanding, loans re-pricing at
lower rates, and the level of non-performing loans in our portfolio. Net loss to common shareholders of $33.4 million, for the year ended
December 31, 2012, compares with net loss to common shareholders of $105.2 million for year ended December 31, 2011.
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In the fourth quarter of 2011, we began deferring the payment of regular quarterly cash dividends on our Series A Preferred Stock. At
December 31, 2013, cumulative accrued and unpaid dividends on this stock totaled $4.3 million. The dividend rate increased from 5% annually
to 9% in November 2013. As a result of the dividend deferral, the holder of our Series A Preferred Stock (currently the U.S. Treasury) has the
right to appoint up to two representatives to our Board of Directors. We continue to accrue deferred dividends, which are deducted from income
to common shareholders for financial statement purposes. Dividends are expected to increase to $ 3.2 million for 2014.
In June 2011, the Bank agreed to a Consent Order with the FDIC and KDFI in which the Bank agreed, among other things, to improve asset
quality, reduce loan concentrations, and maintain a minimum Tier 1 leverage ratio of 9% and a minimum total risk based capital ratio of
12%. The Consent Order was included in our Current Report on 8-K filed on June 30, 2011. In October 2012, the Bank entered into a new
Consent Order with the FDIC and KDFI again agreeing to maintain a minimum Tier 1 leverage ratio of 9% and a minimum total risk based
capital ratio of 12%. The Bank also agreed that if it should be unable to reach the required capital levels, and if directed in writing by the FDIC,
then the Bank would within 30 days develop, adopt and implement a written plan to sell or merge itself into another federally insured financial
institution or otherwise immediately obtain a sufficient capital investment into the Bank to fully meet the capital requirements. We have not been
directed by the FDIC to implement such a plan.
We expect to continue to work with our regulators toward capital ratio compliance as outlined in the written capital plan previously submitted by
the Bank. The new Consent Order also requires the Bank to continue to adhere to the plans implemented in response to the June 2011 Consent
Order, and includes the substantive provisions of the June 2011 Consent Order. The new Consent Order was included in our Current Report on
8-K filed on September 19, 2012. As of December 31, 2013, the capital ratios required by the Consent Order were not met.
In order to meet these capital requirements, the Board of Directors and management are continuing to evaluate strategies to achieve the
following objectives:
•
•
•
•
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 continue to reduce the size
of our balance sheet, reduce our lending concentrations, consider selling loans, and reduce other noninterest expense through the
disposition of OREO.
Continuing with succession planning and adding resources to the management team. John T. Taylor was named President and CEO
for PBI Bank and appointed to the Board of Directors in July 2012. Mr. Taylor succeeded Maria Bouvette as CEO of the Company in
2013. John R. Davis was appointed Chief Credit Officer of PBI Bank in August 2012, with responsibility for establishing and
executing the credit quality policies and overseeing credit administration for the organization. We have augmented our staffing in the
commercial lending area, now led by Joe C. Seiler.
Evaluating our internal processes and procedures, distribution of labor, and work-flow to ensure we have adequately and
appropriately deployed resources in an efficient manner in the current environment. To this end, we believe the opportunity exists to
centralize key processes that will lead to improved execution and cost savings.
•
Executing on our commitment to improve credit quality and reduce loan concentrations and balance sheet risk.
•
We have reduced the size of our loan portfolio significantly from $1.3 billion at December 31, 2010, to $1.1 billion at
December 31, 2011, to $899.1 million at December 31, 2012, and $709.3 million at December 31, 2013.
•
•
Our Consent Order calls for us to reduce our construction and development loans to not more than 75% of total risk-
based capital. We are now in compliance as construction and development loans totaled $43.3 million, or 52% of total
risk-based capital, at December 31, 2013, down from $70.3 million, or 82% of total risk-based capital, at December 31,
2012.
Our Consent Order also requires us to reduce non-owner occupied commercial real estate loans, construction and
development loans, and multi-family residential real estate loans as a group, to not more than 250% of total risk-based
capital. While we have made significant progress over the last year, we were not in compliance with this concentration
limit at December 31, 2013. These loans totaled $237.0 million, or 284% of total risk-based capital, at December 31,
2013 and $311.1 million, or 362% of total risk-based capital, at December 31, 2012.
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•
We are working to reduce our loan concentrations by curtailing new construction and development lending and new
non-owner occupied commercial real estate lending. We are also receiving principal reductions from amortizing credits
and pay-downs from our customers who sell properties built for resale. We have reduced the construction loan portfolio
from $199.5 million at December 31, 2010 to $43.3 million at December 31, 2013. Our non-owner occupied
commercial real estate loans declined from $293.3 million at December 31, 2010 to $237.0 million at December 31,
2013.
•
Executing on our commitment to sell other real estate owned and reinvest in quality income producing assets.
•
•
•
•
The remediation process for loans secured by real estate has led the Bank to acquire significant levels of OREO in 2012,
2011, and 2010. This trend has continued at a slower pace in 2013. The Bank acquired $33.5 million, $41.9 million, and
$90.8 million during 2012, 2011, and 2010, respectively. For the year ended December 31, 2013, we acquired $20.6
million of OREO.
We have incurred significant losses in disposing of this real estate. We incurred losses totaling $9.3 million, $42.8
million, and $13.9 million in 2012, 2011, and 2010, respectively, from sales at less than carrying values and fair value
write-downs attributable to declines in appraisal valuations and changes in our pricing strategies. During the year ended
December 31, 2013, we incurred OREO losses totaling $2.6 million, which consisted of $132,000 in loss on sale and
$2.5 million from declining values as evidenced by new appraisals and reduced marketing prices in connection with our
sales strategies.
To ensure we maximize the value we receive upon the sale of OREO, we continually evaluate sales opportunities. We
are targeting multiple sales opportunities through internal marketing and the use of brokers, auctions, technology sales
platforms, and bulk sale strategies. Proceeds from the sale of OREO totaled $30.8 million during the year ended
December 31, 2013 and $22.5 million, $26.0 million and $25.0 million during 2012, 2011, and 2010, respectively.
At December 31, 2012, the OREO portfolio consisted of 51% construction, development, and land assets. At
December 31, 2013, this concentration increased to 62%; however, the balance decreased from $22.9 million to $19.2
million. This is consistent with our reduction of construction, development and other land loans, which have declined to
$43.3 million at December 31, 2013 compared with $70.3 million at December 31, 2012. Commercial real estate
represents 19% of the OREO portfolio at December 31, 2013 compared with 35% at December 31, 2012. 1-4 family
residential properties represent 16% of the OREO portfolio at December 31, 2013 compared with 12% at December 31,
2012.
•
Evaluating other strategic alternatives, such as the sale of assets or branches.
Bank regulatory agencies can exercise discretion when an institution does not meet the terms of a consent order. Based on individual
circumstances, the agencies may issue mandatory directives, impose monetary penalties, initiate changes in management, or take more serious
adverse actions.
These financial statements do not include any adjustments that may result should the Company be unable to continue as a going concern.
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NOTE 3 – SECURITIES
The fair value of available for sale and held to maturity securities and the related gross unrealized gains and losses recognized in accumulated
other comprehensive income (loss) were as follows:
December 31, 2013
Available for sale
U.S. Government and federal agency
Agency mortgage-backed: residential
State and municipal
Corporate bonds
Other debt securities
Total debt securities
Equity
Total available for sale
Held to maturity
State and municipal
Total held to maturity
December 31, 2012
Available for sale
U.S. Government and federal agency
Agency mortgage-backed: residential
State and municipal
Corporate bonds
Other debt securities
Total debt securities
Equity
Total
Sales and calls of available for sale securities were as follows:
Proceeds
Gross gains
Gross losses
Amortized
Gross
Unrealized
Gross
Unrealized
Cost
Gains
Losses
Fair Value
(in thousands)
$ 31,026
102,435
12,965
18,002
572
165,000
135
$ 165,135
$
284
458
608
769
60
2,179
62
$ 2,241
$ (1,444 )
(1,950 )
(28 )
(610 )
—
(4,032 )
—
$ (4,032 )
$ 29,866
100,943
13,545
18,161
632
163,147
197
$ 163,344
$ 43,612
$ 43,612
$
$
3
3
$
$
(668 )
(668 )
$ 42,947
$ 42,947
$ 5,603
94,298
52,485
18,851
572
171,809
1,359
$ 173,168
$
530
1,141
2,335
1,150
46
5,202
487
$ 5,689
$ —
(257 )
(87 )
(37 )
—
(381 )
—
(381 )
$
$ 6,133
95,182
54,733
19,964
618
176,630
1,846
$ 178,476
2013
$ 8,061
873
150
2012
(in thousands)
$ 93,199
3,543
307
2011
$ 50,318
1,108
—
The tax provision related to these net gains and losses realized on sales were $253,000, $1.1 million, and $388,000, respectively.
The amortized cost and fair value of our debt securities are shown by contractual maturity. Expected maturities may differ from actual maturities
if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date,
mortgage-backed, are shown separately.
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Maturity
Available for sale
Within one year
One to five years
Five to ten years
Beyond ten years
Agency mortgage-backed: residential
Total
Held to maturity
One to five years
Five to ten years
Beyond ten years
Total
December 31, 2013
Amortized
Cost
Fair
Value
(in thousands)
$ 15,306 $ 14,693
14,300
32,579
632
100,943
$ 163,147
13,269
33,418
572
102,435
$ 165,000
797
$
37,411
5,404
$ 43,612
792
$
36,854
5,301
$ 42,947
Securities pledged at year-end 2013 and 2012 had carrying values of approximately $84.2 million and $76.4 million, respectively, and were
pledged to secure public deposits and repurchase agreements.
At year-end 2013 and 2012, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an
amount greater than 10% of stockholders’ equity.
Securities with unrealized losses at year-end 2013 and 2012, aggregated by investment category and length of time that individual securities have
been in a continuous unrealized loss position, are as follows:
Description of Securities
2013
Available for sale
U.S. Government and federal agency
Agency mortgage-backed: residential
State and municipal
Corporate bonds
Total temporarily impaired
Held to maturity
State and municipal
Total temporarily impaired
2012
Available for sale
Agency mortgage-backed: residential
State and municipal
Corporate bonds
Equity securities
Total temporarily impaired
Less than 12 Months
12 Months or More
Total
Unrealized
Unrealized
Unrealized
Fair
Value
Loss
Fair
Value
Loss
(in thousands)
Fair
Value
Loss
$ 24,129 $ (1,444 ) $ — $ — $ 24,129 $ (1,444 )
(278 ) 68,601 (1,950 )
58,257 (1,672 ) 10,344
(28 )
(610 )
(278 ) $ 104,501 $ (4,032 )
458
11,313
$ 94,157 $ (3,754 ) $ 10,344 $
458
(28 ) — —
(610 ) — — 11,313
39,743
$ 39,743 $
1,031
(654 )
(654 ) $ 1,031 $
40,774
(14 )
(14 ) $ 40,774 $
(668 )
(668 )
$ 23,375 $
7,961
3,777
(257 ) $ — $ — $ 23,375 $
7,961
(87 )
3,777
(37 )
2 —
— —
— —
— —
$ 35,115 $
(381 ) $ — $ — $ 35,115 $
(257 )
(87 )
(37 )
2 —
(381 )
The Company evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or
market concerns warrant such evaluation. Consideration is given to the length of time and the extent to which the fair value has been less than
cost, the financial condition and near-term prospects of the issuer, underlying credit quality of the issuer, and the intent and ability of the
Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an
issuer’s financial condition, the Company may consider whether the securities are issued by the federal government or its agencies, whether
downgrades by bond rating agencies have occurred, the sector or industry trends and cycles affecting the issuer, and the results of reviews of the
issuer’s financial condition. As of December 31, 2013, management does not believe any securities in our portfolio with unrealized losses should
be classified as other than temporarily impaired at this time. Management currently intends to hold all securities with unrealized losses until
recovery, which for fixed income securities may be at maturity.
At December 31, 2013, the Company held one equity security. This security was in an unrealized gain position as of December 31, 2013.
Management monitors the underlying financial condition of the issuers and current market pricing for this equity security monthly.
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In 2013, to better manage our interest rate risk, we transferred from available for sale to held to maturity selected municipal securities in our
portfolio having a book value of approximately $44.9 million, a market value of approximately $43.7 million, and a net unrealized loss of
approximately $1.3 million. This transfer was completed after careful consideration of our intent and ability to hold these securities to maturity.
NOTE 4 – LOANS
Loans at year-end by class were as follows:
Commercial
Commercial Real Estate:
Construction
Farmland
Other
Residential Real Estate:
Multi-family
1-4 Family
Consumer
Agriculture
Other
Subtotal
Less: Allowance for loan losses
Loans, net
Activity in the allowance for loan losses for the years indicated was as follows:
Beginning balance
Provision for loan losses
Loans charged-off
Loan recoveries
Ending balance
2013
2012
(in thousands)
$ 52,878
$ 52,567
43,326
71,189
232,026
70,284
80,825
322,687
46,858
228,505
14,365
19,199
980
709,326
(28,124 )
$ 681,202
50,986
278,273
20,383
22,317
770
899,092
(56,680 )
$ 842,412
2013
$ 56,680
700
(32,608 )
3,352
$ 28,124
2012
(in thousands)
$ 52,579
40,250
(37,515 )
1,366
$ 56,680
2011
$ 34,285
62,600
(44,646 )
340
$ 52,579
The following table presents the activity in the allowance for loan losses by portfolio segment for the year ended December 31, 2013:
Commercial
Residential
Commercial
Real Estate
Real Estate Consumer Agriculture Other
Total
(in thousands)
Beginning balance
Provision for loan losses
Loans charged off
Recoveries
Ending balance
$
4,402 $ 34,768 $ 16,235 $
435
(2,828 )
1,212
3,221 $ 16,414 $ 7,762 $
1,691
(21,176 )
1,131
(1,261 )
(7,703 )
491
$
857 $
66
(773 )
266
416 $
403 $ 15 $ 56,680
700
(9 )
(222 )
(32,608 )
—
(128 )
252
3,352
—
305 $ 6 $ 28,124
The following table presents the activity in the allowance for loan losses by portfolio segment for the year ended December 31, 2012:
Commercial
Residential
Commercial
Real Estate
Real Estate Consumer Agriculture Other
Total
(in thousands)
Beginning balance
Provision for loan losses
Loans charged off
Recoveries
Ending balance
$
$
4,207 $ 33,024 $ 14,217 $
3,850
(3,784 )
129
23,275
(22,366 )
835
4,402 $ 34,768 $ 16,235 $
10,884
(9,071 )
205
1,070
(1,130 )
125
857 $
792 $
325 $ 14 $ 52,579
40,250
1
1,170
(37,515 )
—
(1,164 )
72
1,366
—
403 $ 15 $ 56,680
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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:
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment
Collectively evaluated for impairment
Total ending allowance balance
Loans:
Commercial
Residential
Commercial
Real Estate
Real Estate Consumer Agriculture Other
Total
(in thousands)
$
$
290 $
827 $
2,345 $
6,935
2,931 14,069
3,221 $ 16,414 $ 7,762 $
9 $ — $ — $ 3,471
6 24,653
305
305 $ 6 $ 28,124
407
416 $
Loans individually evaluated for impairment $
322 $ 631 $ 149,883
Loans collectively evaluated for impairment 47,883 252,211 225,851 14,272 18,877 349 559,443
$ 52,878 $ 346,541 $ 275,363 $ 14,365 $ 19,199 $ 980 $ 709,326
Total ending loans balance
4,995 $ 94,330 $ 49,512 $
93 $
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on
the impairment method as of December 31, 2012:
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment
Collectively evaluated for impairment
Total ending allowance balance
Loans:
Commercial
Residential
Commercial
Real Estate
Real Estate Consumer Agriculture Other
Total
(in thousands)
$
$
263 $ 16,046 $ 4,641 $
4,139 18,722 11,594
4,402 $ 34,768 $ 16,235 $
68 $
789
857 $
5 $ 11 $ 21,034
398
4 35,646
403 $ 15 $ 56,680
Loans individually evaluated for impairment $
55 $ 524 $ 188,808
Loans collectively evaluated for impairment 47,271 347,874 272,460 20,171 22,262 246 710,284
$ 52,567 $ 473,796 $ 329,259 $ 20,383 $ 22,317 $ 770 $ 899,092
Total ending loans balance
5,296 $ 125,922 $ 56,799 $
212 $
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Impaired Loans
Impaired loans include restructured loans and loans on nonaccrual or classified as doubtful, whereby collection of the total amount is
improbable, or loss, whereby all or a portion of the loan has been written off or a specific allowance for loss had been provided.
Average of impaired loans during the year
Interest income recognized during impairment
Cash basis interest income recognized
2013
2012
(in thousands)
2011
$ 169,324
3,291
958
$ 175,828
3,976
355
$ 95,331
2,594
412
The following table presents information related to loans individually evaluated for impairment by class of loan as of and for the year ended
December 31, 2013:
With No Related Allowance Recorded:
Commercial
Commercial real estate:
Construction
Farmland
Other
Residential real estate:
Multi-family
1-4 Family
Consumer
Agriculture
Other
With An Allowance Recorded:
Commercial
Commercial real estate:
Construction
Farmland
Other
Residential real estate:
Multi-family
1-4 Family
Consumer
Agriculture
Other
Total
Unpaid
Principal
Balance
Recorded
Investment
Allowance
For Loan
Losses
Allocated
(in thousands)
Average
Recorded
Investment
Interest
Income
Recognized
Cash
Basis
Income
Recognized
$ 2,131 $ 1,533 $ — $ 1,622 $
30 $
30
64
4,074
1,568
38 —
3,898 —
1,404 —
467
4,259
1,724
164
268
367
164
268
366
444
541
11,011 10,083 — 11,533
392 —
9
401
14
9 —
322 —
13 —
3
3
116
115
21 — —
213 — —
11
11
10
3,734
3,462
290
3,905
99 —
10,409
6,117
218 20,173
5,579
94,508 75,488 2,062 77,726
9,264
4,238
65
88 —
37 —
1,324 —
13,883 12,117
31,327 26,920
84
84
9
— — —
618 —
861
393 13,121
434 27,755
134
539
208 —
557 —
3 —
2 — —
17 —
958
$ 180,639 $ 149,883 $ 3,471 $ 169,324 $ 3,291 $
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The following table presents information related to loans individually evaluated for impairment by class of loan as of and for the year ended
December 31, 2012:
With No Related Allowance Recorded:
Commercial
Commercial real estate:
Construction
Farmland
Other
Residential real estate:
Multi-family
1-4 Family
Consumer
Agriculture
Other
With An Allowance Recorded:
Commercial
Commercial real estate:
Construction
Farmland
Other
Residential real estate:
Multi-family
1-4 Family
Consumer
Agriculture
Other
Total
Troubled Debt Restructuring
Unpaid
Principal
Balance
Recorded
Investment
Allowance
For Loan
Losses
Allocated
(in thousands)
Average
Recorded
Investment
Interest
Income
Recognized
Cash
Basis
Income
Recognized
$ 1,460 $ 1,234 $ — $ 1,637 $
5 $
1,155
4,448
2,134
1,109 —
4,448 —
1,892 —
1,745
4,706
3,436
2
57
3
4
2
57
3
643
643 —
910 — —
56
56
8
5
2 —
— — — — — —
13,539 13,158 — 11,291
219
366
70 —
45 —
70
45
4,108
4,062
263
3,964
169
27
26,645 25,455 1,543 19,514
5,794
100,289 86,562 13,769 83,087
8,557
6,456
734
348
43
2,011
5
2
185
14,906 14,906 1,643 11,187
32,835 28,092 2,998 27,404
142
10
524
142
10
524
68
5
11
468 —
9
787
29 — —
6 — —
17 —
355
533
$ 211,510 $ 188,808 $ 21,034 $ 175,828 $ 3,976 $
A troubled debt restructuring (TDR) is where the Company has agreed to a loan modification in the form of a concession for a borrower who is
experiencing financial difficulty. The majority of the 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 customer.
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The following table presents the types of TDR loan modifications by portfolio segment outstanding as of December 31, 2013 and 2013:
December 31, 2013
Commercial
Rate reduction
Principal deferral
Commercial Real Estate:
Construction
Rate reduction
Principal deferral
Farmland
Rate reduction
Principal deferral
Other
Rate reduction
Principal deferral
Interest only payments
Residential Real Estate:
Multi-family
Rate reduction
Interest only payments
1-4 Family
Rate reduction
Consumer
Other
Rate reduction
Rate reduction
Total TDRs
December 31, 2012
Commercial
Rate reduction
Principal deferral
Interest only payments
Commercial Real Estate:
Construction
Rate reduction
Farmland
Rate reduction
Principal deferral
Other
Rate reduction
Principal deferral
Interest only payments
Residential Real Estate:
Multi-family
Rate reduction
Interest only payments
1-4 Family
Rate reduction
Consumer
Rate reduction
Other
Rate reduction
Total TDRs
TDRs
Performing to
Modified Terms
TDRs Not
Performing to
Modified Terms
(in thousands)
Total
TDRs
$
1,933
—
$
—
869
$ 1,933
869
275
499
150
—
22,457
691
2,439
4,354
641
6,345
—
—
2,365
6,620
499
150
2,365
21,235
—
1,489
43,692
691
3,928
6,655
—
11,009
641
10,312
7,958
18,270
84
—
84
$
$
511
44,346
1,972
887
—
4,834
150
725
36,515
1,195
2,466
13,087
652
14,323
—
46,916
511
$ 91,262
—
—
958
$ 1,972
887
958
4,459
—
2,438
22,631
—
2,107
9,293
150
3,163
59,146
1,195
4,573
—
—
13,087
652
7,871
22,194
$
$
14
—
14
524
77,344
$
—
40,464
524
$ 117,808
$
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At December 31, 2013 and 2012, 49% and 66%, respectively, of the Company’s TDRs were performing according to their modified terms. The
Company allocated $2.9 million and $15.1 million as of December 31, 2013 and 2012, respectively, in reserves to customers whose loan terms
have been modified in TDRs. The Company has committed to lend additional amounts totaling $261,000 and $259,000 as of December 31, 2013
and 2012, respectively, to customers with outstanding loans that are classified as TDRs.
The following table presents a summary of the types of TDR loan modifications by portfolio type that occurred during the twelve months ended
December 31, 2013 and 2012:
December 31, 2013
Commercial
Rate reduction
Commercial Real Estate:
Construction
Rate reduction
Principal deferral
Other
Rate reduction
Residential Real Estate:
1-4 Family
Rate reduction
Consumer
Rate reduction
Total TDRs
December 31, 2012
Commercial
Rate reduction
Interest only payments
Commercial Real Estate:
Construction
Rate reduction
Farmland
Rate reduction
Other
Rate reduction
Principal deferral
Interest only payments
Residential Real Estate:
Multi-family
Rate reduction
1-4 Family
Rate reduction
Consumer
Rate reduction
Total TDRs
TDRs
Performing to
Modified Terms
TDRs Not
Performing to
Modified Terms
(in thousands)
Total
TDRs
$
34
$
—
$
34
—
499
385
2,145
84
3,147
1,972
—
—
150
16,468
1,194
2,466
12,805
7,514
14
42,583
$
$
$
$
$
1,291
—
1,291
499
—
385
—
2,145
—
1,291
84
$ 4,438
—
958
$ 1,972
958
831
—
1,089
—
2,107
831
150
17,557
1,194
4,573
—
12,805
—
7,514
—
4,985
14
$ 47,568
$
As of December 31, 2013 and 2012, 71% and 90%, respectively, of the Company’s TDRs that occurred during 2013 and 2012, respectively,
were performing in accordance with their modified terms. The Company has allocated $345,000 and $4.8 million, respectively, in reserves to
customers whose loan terms have been modified during 2013 and 2012, respectively. For modifications occurring during the twelve months
ended December 31, 2013 and 2012, the post-modification balances approximate the pre-modification balances.
During 2013 and 2012, approximately $1.3 million and $12.0 million of TDRs, respectively, defaulted on their restructured loan and the default
occurred within the 12 month period following the loan modification. The defaults in 2013 were all construction loans, while the defaults in
2012 consisted of $6.6 million in commercial real estate loans, $3.2 million in construction loans, $1.2 million in 1-4 family residential real
estate loans, and $958,000 in commercial loans. A default is considered to have occurred once the TDR is past due 90 days or more or it has
been placed on nonaccrual.
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Non-performing Loans
Non-performing loans include impaired loans and smaller balance homogeneous loans, such as residential mortgage and consumer loans, that are
collectively evaluated for impairment.
The following table presents the recorded investment in nonaccrual and loans past due 90 days and still on accrual by class of loan as of
December 31, 2013 and 2012:
Commercial
Commercial Real Estate:
Construction
Farmland
Other
Residential Real Estate:
Multi-family
1-4 Family
Consumer
Agriculture
Other
Total
Nonaccrual
Loans Past
Due 90 Days
And Over Still
Accruing
2013
2012
2013
2012
(in thousands)
$ 2,886 $ 2,437 $ — $ 36
8,528
7,844
48,447
7,808
10,030
46,036
—
—
—
—
—
—
7,513
26,098
9
322
120
—
1,516
50
26,501
—
135
—
54
—
—
$ 101,767 $ 94,517 $ 232 $ 86
—
230
2
—
—
The following table presents the aging of the recorded investment in past due loans by class as of December 31, 2013 and 2012:
December 31, 2013
Commercial
Commercial Real Estate:
Construction
Farmland
Other
Residential Real Estate:
Multi-family
1-4 Family
Consumer
Agriculture
Other
Total
30 – 59
Days
Past Due
60 – 89
Days
Past Due
90 Days
And Over
Past Due Nonaccrual
(in thousands)
Total
Past Due
And
Nonaccrual
$
156 $ 123 $ — $ 2,886 $ 3,165
261
484
4,375
—
41
—
—
—
—
8,528
7,844
48,447
8,789
8,369
52,822
1,181
4,059
145
35
—
—
577
34
—
—
—
230
2
—
—
8,694
7,513
30,964
26,098
190
9
357
322
120
120
232 $ 101,767 $ 113,470
$ 10,696 $ 775 $
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December 31, 2012
Commercial
Commercial Real Estate:
Construction
Farmland
Other
Residential Real Estate:
Multi-family
1-4 Family
Consumer
Agriculture
Other
Total
30 – 59
Days
Past Due
60 – 89
Days
Past Due
90 Days
And Over
Past Due Nonaccrual
(in thousands)
Total
Past Due
And
Nonaccrual
$ 1,279 $
90 $
36 $ 2,437 $ 3,842
10,510
922
5,138
5,815
58
13,037
—
—
—
7,808
10,030
46,036
24,133
11,010
64,211
8,762
11,145
310
153
—
—
1,221
75
7
—
—
50
—
—
—
1,516
26,501
135
54
—
10,278
38,917
520
214
—
86 $ 94,517 $ 153,125
$ 38,219 $ 20,303 $
Credit Quality Indicators – We categorize loans into risk categories at origination based upon original underwriting. Subsequent to origination,
we categorized loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current
financial information, historical payment experience, credit documentation, public information, and current economic trends, among other
factors. Loans are analyzed individually by classifying the loans as to credit risk. This analysis includes loans with an outstanding balance
greater than $500,000 and non-homogeneous loans, such as commercial and commercial real estate loans. This analysis is performed on a
quarterly basis. We do not have any non-rated loans. The following definitions are used for risk ratings:
Watch – Loans classified as watch are those loans which have experienced a potentially adverse development which necessitates increased
monitoring.
Special Mention – Loans classified as special mention do not have all of the characteristics of substandard or doubtful loans. They have one or
more deficiencies which warrant special attention and which corrective action, such as accelerated collection practices, may remedy.
Substandard – Loans classified as substandard are those loans with clear and defined weaknesses such as a highly leveraged position,
unfavorable financial ratios, uncertain repayment sources or poor financial condition which may jeopardize the repayment of the debt as
contractually agreed. They are characterized by the distinct possibility that we will sustain some losses if the deficiencies are not corrected.
Doubtful – Loans classified as doubtful are those loans which have characteristics similar to substandard loans but with an increased risk that
collection or liquidation in full is highly questionable and improbable.
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Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be “Pass” rated
loans. As of December 31, 2013 and 2012, and based on the most recent analysis performed, the risk category of loans by class of loans is as
follows:
December 31, 2013
Commercial
Commercial Real Estate:
Construction
Farmland
Other
Residential Real Estate:
Multi-family
1-4 Family
Consumer
Agriculture
Other
Total
December 31, 2012
Commercial
Commercial Real Estate:
Construction
Farmland
Other
Residential Real Estate:
Multi-family
1-4 Family
Consumer
Agriculture
Other
Total
Pass
Watch
Special
Mention Substandard Doubtful
Total
(in thousands)
$ 35,438 $ 8,517 $ 329 $
8,594 $ — $ 52,878
16,706 10,771 2,277
9,121 1,735
46,909
734
93,327 51,522
13,572 — 43,326
13,424 — 71,189
86,443 — 232,026
16,506 17,320 —
784
130,833 43,785
12,718
6
968
1,802 —
16,742
510 —
350
13,032 — 46,858
53,103 — 228,505
673 — 14,365
655 — 19,199
980
120 —
$ 369,529 $ 144,316 $ 5,865 $ 189,616 $ — $ 709,326
Pass
Watch
Special
Mention Substandard Doubtful
Total
(in thousands)
$ 27,085 $ 10,153 $ 6,495 $
8,772 $
62 $ 52,567
26,085 21,713 3,647
47,017 13,461 3,532
122,603 66,223 14,955 118,635
18,839 — 70,284
16,815 — 80,825
271 322,687
18,387 14,637 —
159,975 47,030 5,167
35
17,232
19,256
869
524 —
246
17,962 — 50,986
66,101 — 278,273
842
63 20,383
725 — 22,317
770
— —
$ 437,886 $ 177,419 $ 34,700 $ 248,691 $ 396 $ 899,092
2,211
1,467
NOTE 5 – PREMISES AND EQUIPMENT
Year-end premises and equipment were as follows:
Land and buildings
Furniture and equipment
Accumulated depreciation
2013
2012
(in thousands)
$ 24,673
17,211
41,884
(21,901 )
$ 19,983
$ 24,860
18,074
42,934
(22,129 )
$ 20,805
Depreciation expense was $1,043,000, $1,165,000 and $1,205,000 for 2013, 2012 and 2011, respectively.
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NOTE 6 – OTHER REAL ESTATE OWNED
Other real estate owned (OREO) is real estate acquired as a result of foreclosure or by deed in lieu of foreclosure. It is classified as real estate
owned until such time as it is sold. When property is acquired as a result of foreclosure or by deed in lieu of foreclosure, it is recorded at its fair
market value less cost to sell. Any write-down of the property at the time of acquisition is charged to the allowance for loan losses. Subsequent
reductions in fair value are recorded as non-interest expense.
To determine the fair value of OREO for smaller dollar single family homes, we consult with internal real estate sales staff and external realtors,
investors, and appraisers. If the internally evaluated market price is below our underlying investment in the property, appropriate write-downs
are taken. For larger dollar residential and commercial real estate properties, we obtain a new appraisal of the subject property in connection with
the transfer to other real estate owned. We obtain updated appraisals each year on the anniversary date of ownership unless a sale is imminent
The following table presents the major categories of OREO at the period-ends indicated:
Commercial Real Estate:
Construction, land development, and other land
Farmland
Other
Residential Real Estate:
Multi-family
1-4 Family
Valuation allowance
OREO Valuation Allowance Activity:
Beginning balance
Provision to allowance
Write-downs
Ending balance
Activity relating to other real estate owned during the years indicated is as follows:
OREO Activity
OREO as of January 1
Real estate acquired
Valuation adjustments for declining market values
Improvements
Loss on sale
Proceeds from sale of properties
OREO as of December 31
Expenses related to other real estate owned include:
2013
2012
(in thousands)
$ 19,199
695
6,064
$ 22,912
618
15,577
248
4,916
31,122
(230 )
$ 30,892
200
5,518
44,825
(1,154 )
$ 43,671
2013
2012
(in thousands)
$ 1,154
2,466
(3,390 )
230
$
$ 1,667
7,154
(7,667 )
$ 1,154
2013
2012
(in thousands)
$ 43,671
20,606
(2,466 )
—
(132 )
(30,787 )
$ 30,892
$ 41,449
33,528
(7,154 )
1
(1,672 )
(22,481 )
$ 43,671
Net loss on sales
Provision to allowance
Operating expense
Total
2013
$ 132
2,466
1,918
$ 4,516
2012
(in thousands)
$ 1,672
7,154
1,723
$ 10,549
2011
$ 8,889
34,874
3,762
$ 47,525
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NOTE 7 – INTANGIBLE ASSETS
Acquired intangible assets were as follows as of year-end:
Amortized intangible assets:
Core deposit intangibles
Trust account intangibles
2013
2012
Gross
Carrying
Accumulated
Gross
Carrying
Accumulated
Amount
Amortization
Amount
Amortization
(in thousands)
$ 4,183
100
$
3,008
100
$ 4,183
100
$
2,581
53
Aggregate amortization expense was $428,000, $467,000 and $468,000 for 2013, 2012 and 2011, respectively.
Estimated aggregate amortization expense for intangible assets for each of the next five years is as follows (in thousands):
2014
2015
2016
2017
2018
NOTE 8 – DEPOSITS
The following table shows deposits by category:
Non-interest bearing
Interest checking
Money market
Savings
Certificates of deposit
Total
$ 397
335
334
109
—
December 31,
December 31,
2013
2012
(in thousands)
$ 107,486
84,626
79,349
36,292
679,952
$ 987,705
$ 114,310
87,234
63,715
39,227
760,573
$ 1,065,059
Time deposits of $100,000 or more were approximately $294,965,000 and $319,527,000 at year-end 2013 and 2012, respectively.
Scheduled maturities of total time deposits for each of the next five years are as follows (in thousands):
2014
2015
2016
2017
2018
Thereafter
Total
$ 431,601
210,516
14,330
10,021
13,460
24
$ 679,952
Historically, the Bank has utilized brokered and wholesale deposits to supplement its funding strategy. At December 31, 2012, the Bank held
$15.0 million in brokered deposits, which matured and were redeemed in the second quarter of 2013. As stipulated in the Consent Order, PBI
Bank is currently restricted from accepting, renewing, or rolling-over brokered deposits without the prior receipt of a waiver on a case-by-case
basis from our regulators.
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NOTE 9 – SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase are financing arrangements that mature within two years. At maturity, the securities underlying
the agreements are returned to the Company. Securities sold under agreements to repurchase are secured by agency, mortgage-backed, and
municipal securities. Information concerning securities sold under agreements to repurchase is summarized as follows:
Balance at year-end
Average daily balance during the year
Average interest rate during the year
Maximum month-end balance during the year
Weighted average interest rate at year-end
Fair value of securities sold under agreements to repurchase at year-end
NOTE 10 – ADVANCES FROM FEDERAL HOME LOAN BANK
At year-end, advances from the Federal Home Loan Bank were as follows:
2013
2012
(in thousands)
$ 2,470
$ 3,113
0.20 %
$ 4,747
0.17 %
$ 2,470
$ 2,634
$ 2,088
0.35 %
$ 2,634
0.23 %
$ 2,634
2013
2012
(in thousands)
Monthly amortizing advances with fixed rates from 0.00% to 5.25% and maturities
ranging from 2014 through 2033, averaging 3.07% for 2013
$ 4,492
$ 5,604
Each advance is payable per terms on agreement, with a prepayment penalty. No prepayment penalties were incurred during 2012 or 2013. The
advances were collateralized by approximately $138.4 million and $163.3 million of first mortgage loans, under a blanket lien arrangement at
year-end 2013 and 2012, respectively. Our borrowing capacity is based on the market value of the underlying pledged loans rather than the
unpaid principal balance of the pledged loans. The availability of our borrowing capacity could be affected by our financial position and the
FHLB could require additional collateral or, among other things, exercise its rights to deny a funding request, at its discretion. Additionally, any
new advances are limited to a one year maturity or less. At December 31, 2013, our additional borrowing capacity with the FHLB was $18.7
million.
Scheduled principal payments on the above during the next five years and thereafter (in thousands):
2014
2015
2016
2017
2018
Thereafter
Advances
776
$
663
627
543
267
1,616
$ 4,492
At year-end 2013, the Company had approximately $5.0 million of federal funds lines of credit available on a secured basis from correspondent
institutions; however, the availability of these lines could be affected by our financial position.
NOTE 11 – SUBORDINATED CAPITAL NOTE
The subordinated capital note issued by PBI Bank totaled $5.9 million at December 31, 2013. The note is unsecured, bears interest at the BBA
three-month LIBOR floating rate plus 300 basis points, and qualifies as Tier 2 capital. Interest only was due quarterly through September 30,
2010, at which time quarterly principal payments of $225,000 plus interest commenced. Scheduled principal payments of $900,000 per year are
due each of the next five years with $1,350,000 due thereafter. The note matures July 1, 2020. At December 31, 2013, the interest rate on this
note was 3.25%.
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NOTE 12 – JUNIOR SUBORDINATED DEBENTURES
The junior subordinated debentures are redeemable at par prior to the maturity dates of February 13, 2034, April 15, 2034, and March 1, 2037, at
the option of the Company as defined within the trust indenture. The Company has the option to defer interest payments on the junior
subordinated debentures from time to time for a period not to exceed twenty (20) consecutive quarters. If payments are deferred, the Company is
prohibited from paying dividends to its common stockholders. Effective with the fourth quarter of 2011, we began deferring interest payments
on the junior subordinated notes which resulted in a deferral of distributions on our trust preferred securities. Therefore, future cash dividends on
our common stock are subject to the prior payment of all deferred distributions on our trust preferred securities. Dividends accrued and unpaid
on our junior subordinated debentures totaled $1.5 million at December 31, 2013. A summary of the junior subordinated debentures is as
follows:
Description
Porter Statutory Trust II
Porter Statutory Trust III
Porter Statutory Trust IV
Ascencia Statutory Trust I
Issuance
Date
Optional
Prepayment
Date (2)
Interest Rate (1)
Junior
Subordinated
Debt Owed
to
Trust
Maturity
Date
02-13-2004 03-17-2009 3-month LIBOR + 2.85% $ 5,000,000 02-13-2034
04-15-2004 06-17-2009 3-month LIBOR + 2.79% 3,000,000 04-15-2034
12-14-2006 03-01-2012 3-month LIBOR + 1.67% 14,000,000 03-01-2037
02-13-2004 03-17-2009 3-month LIBOR + 2.85% 3,000,000 02-13-2034
$ 25,000,000
(1) As of December 31, 2013, the 3-month LIBOR was 0.25%.
(2) The debentures are callable on or after the optional prepayment date at their principal amount plus accrued interest.
NOTE 13 – OTHER BENEFIT PLANS
401(K) Plan – The Company 401(k) Savings Plan allows employees to contribute up to 15% of their compensation, which is matched equal to
50% of the first 4% of compensation contributed. The Company, at its discretion, may make an additional contribution. Total contributions made
by the Company to the plan amounted to approximately $195,000, $148,000 and $131,000 in 2013, 2012 and 2011, respectively.
Supplemental Executive Retirement Plan – During 2004, the Company created a supplemental executive retirement plan covering certain
executive officers. Under the plan, the Company pays each participant, or their beneficiary, a specific defined benefit amount over 10 years,
beginning with the individual’s retirement or early termination of service for reasons other than cause. A liability is accrued for the obligation
under these plans. The expense incurred for the plan was $87,000, $151,000 and $49,000 for the years ended December 31, 2013, 2012 and
2011, respectively. The related liability was $1,348,000, $1,338,000 and $1,208,000 at December 31, 2013, 2012 and 2011, respectively, and is
included in other liabilities on the balance sheets.
The Company purchased life insurance on the participants of the plan. The cash surrender value of all insurance policies was $8,911,000 and
$8,398,000 at December 31, 2013 and 2012, respectively. Income earned from the cash surrender value of life insurance totaled $513,000,
$292,000 and $301,000 for the years ended December 31, 2013, 2012 and 2011, respectively. The income is recorded as other non-interest
income.
NOTE 14 – INCOME TAXES
Income tax expense (benefit) was as follows:
Current
Deferred
Net operating loss
Establishment of valuation allowance
Change in valuation allowance
2013
$ —
9,489
(10,430 )
—
941
—
$
$
2012
(in thousands)
(65 )
754
(12,581 )
—
11,827
(65 )
$
2011
$ (12,093 )
(17,403 )
(2,439 )
31,717
—
(218 )
$
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Effective tax rates differ from federal statutory rate of 35% applied to income (loss) before income taxes due to the following.
Federal statutory rate times financial statement income (loss)
Effect of:
Establishment of valuation allowance
Change in valuation allowance
Goodwill impairment charge
Tax-exempt income
Nontaxable life insurance income
Federal tax credits
Other, net
Total
Year-end deferred tax assets and liabilities were due to the following.
Deferred tax assets:
Net operating loss carry-forward
Allowance for loan losses
Other real estate owned write-down
Alternative minimum tax credit carry-forward
Net assets from acquisitions
Other than temporary impairment on securities
Net unrealized loss on securities
New market tax credit carry-forward
Nonaccrual loan interest
Amortization of non-compete agreements
Other
Deferred tax liabilities:
FHLB stock dividends
Fixed assets
Originated mortgage servicing rights
Net unrealized gain on securities
Other
Net deferred tax assets before valuation allowance
Valuation allowance
Net deferred tax asset
2013
2012
2011
$ (555 )
—
941
—
(324 )
(180 )
—
118
$ —
(in thousands)
$ (11,549 )
—
11,827
—
(314 )
(102 )
—
73
(65 )
$
$ (37,634 )
31,717
—
6,169
(392 )
(105 )
(45 )
72
(218 )
$
December
December
31,
2013
31,
2012
(in thousands)
$ 25,460
9,843
9,478
692
644
89
1,067
208
911
16
1,640
50,048
1,276
333
75
—
570
2,254
47,794
(47,794 )
$ —
$ 15,051
19,838
10,408
692
592
374
—
208
—
19
936
48,118
1,276
409
98
1,858
549
4,190
43,928
(43,928 )
$ —
Our estimate of the realizability of the deferred tax asset is dependent on our estimate of projected future levels of taxable income as all
carryback ability was fully absorbed by our tax loss of $40.1 million for 2011. In analyzing future taxable income levels, we considered all
evidence currently available, both positive and negative. Based on our analysis, we established a valuation allowance for all deferred tax assets
as of December 31, 2011.
The Company does not have any beginning and ending unrecognized tax benefits. The Company does not expect the total amount of
unrecognized tax benefits to significantly increase or decrease in the next twelve months. There were no interest and penalties recorded in the
income statement or accrued for the year ended December 31, 2013 related to unrecognized tax benefits.
The Company and its subsidiaries are subject to U.S. federal income tax and the Company is subject to income tax in the state of Kentucky. The
Company is no longer subject to examination by taxing authorities for years before 2010.
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NOTE 15 – RELATED PARTY TRANSACTIONS
Loans to principal officers, directors, and their affiliates in 2013 were as follows (in thousands):
Beginning balance
New loans
Repayments
Ending balance
$ 1,210
—
(117 )
$ 1,093
Deposits from principal officers, directors, and their affiliates at year-end 2013 and 2012 were $1.4 million.
Our loan participation totals include participation loans purchased from and sold to two affiliate banks, The Peoples Bank, Mt. Washington and
The Peoples Bank, Taylorsville. Our chairman emeritus, J. Chester Porter and his brother and our director, William G. Porter, each own a 50%
interest in Lake Valley Bancorp, Inc., the parent holding company of The Peoples Bank, Taylorsville, Kentucky. J. Chester Porter and William
G. Porter serve as directors of The Peoples Bank, Taylorsville. Our chairman emeritus, J. Chester Porter owns an interest of approximately
36.0% and his brother and our director, William G. Porter, owns an interest of approximately 3.0% in Crossroads Bancorp, Inc., the parent
holding company of The Peoples Bank, Mount Washington, Kentucky. J. Chester Porter serves as a director of The Peoples Bank, Mount
Washington. Prior to 2013, we were a party to management services agreements with each of these banks. Each agreement provided that our
executives and employees would provide management and accounting services to the subject bank, including overall responsibility for
establishing and implementing policy and strategic planning. We received a $4,000 monthly fee from The Peoples Bank, Taylorsville and a
$2,000 monthly fee from The Peoples Bank, Mount Washington for these services prior to 2013. Beginning in 2013, these agreements were not
renewed and we ceased providing management services to the two affiliate banks.
As of December 31, 2013, we had $4.9 million of participations in loans sold to these affiliate banks. As of December 31, 2012, we had $2.7
million of participations in loans purchased from, and $6.5 million of participations in real estate loans sold to, these affiliate banks. At
December 31, 2013, $1.0 million of loan participations sold to Peoples Bank, Taylorsville, and $629,000 sold to Peoples Bank, Mt. Washington
were on nonaccrual.
In 2013, PBI Bank entered into a Real Estate Listing and Property Management Agreement with Hogan Development Company, an entity in
which our director, W. Glenn Hogan, has an ownership interest. Under these agreements, Hogan Development Company assists PBI Bank in
onboarding, managing, and selling the Bank’s other real estate owned. The majority of the fees paid under this agreement are related to sales
commissions earned upon the sale of bank-owned real estate. The agreement is periodically reviewed and evaluated by the independent members
of our Audit Committee. Payments to Hogan Development Company under this agreement totaled $776,000 in 2013.
NOTE 16 – PREFERRED STOCK AND STOCK PURCHASE WARRANTS
In 2010, we completed a $32.0 million private placement to accredited investors. Following completion of the transactions involved, Porter
Bancorp had issued (i) 2,465,569 shares of common stock, (ii) 317,042 shares of Series C Preferred Stock and (iii) warrants to purchase
1,163,045 shares of non-voting common stock at a price of $11.50 per share.
The Series C Preferred Stock has no voting rights (except when required by law), has a liquidation preference over our common stock, and
dividend rights equivalent to our common stock. Each share of Series C Preferred Stock automatically converts into 1.05 shares of common
stock at such time as, after giving effect to the automatic conversion, the holder of such Series C Preferred Stock (together with its affiliates and
any other persons with which it is acting in concert or whose holdings would otherwise be required to be aggregated for purposes of federal
banking law) beneficially holds, directly or indirectly, less than 9.9% of the number of shares of common stock then issued and outstanding.
The warrants are exercisable into non-voting common stock until they expire on September 16, 2015. The non-voting common stock has no
voting rights (except when required by law), but otherwise has substantially the same rights as our common stock. Upon issuance, each share of
non-voting common stock automatically converts into 1.05 shares of common stock at such time as, after giving effect to the automatic
conversion, the holder of non-voting common stock (together with its affiliates and any other persons with which it is acting in concert or whose
holdings would otherwise be required to be aggregated for purposes of federal banking law) holds, directly or indirectly, beneficially less than
9.9% of the number of shares of common stock then issued and outstanding.
On November 21, 2008, we issued to the U.S. Treasury 35,000 shares of our Series A Preferred Stock and a warrant to purchase up to 330,561
shares of our common stock for $15.88 per share in exchange for aggregate consideration of $35.0 million. The warrant is exercisable and has a
10-year term. The Series A Preferred Stock qualifies as Tier 1 capital and pays cumulative cash dividends quarterly at an annual rate of 5% for
the first five years, and 9% beginning in November 2013. The Series A Preferred Stock is non-voting (except when required by law) and may be
redeemed by the Company at $1,000 per share plus accrued unpaid dividends.
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In the fourth quarter of 2011, we began deferring the payment of regular quarterly cash dividends on our Series A Preferred Stock. As a result of
the dividend deferral, the holder of our Series A Preferred Stock (currently the U.S. Treasury) has the right to appoint up to two representatives
to our Board of Directors. We will continue to accrue any deferred dividends, which will be deducted from income to common shareholders for
financial statement purposes. Dividends accrued and unpaid on our Series A Preferred Stock totaled $4.3 million at December 31, 2013.
NOTE 17 – CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS
Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy
guidelines and, additionally for banks, prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-
balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative
judgments by regulators. Failure to meet capital requirements can initiate regulatory action.
On June 24, 2011, PBI Bank entered into a Consent Order with the FDIC and the Kentucky Department of Financial Institutions. The consent
order requires the Bank to complete a management study, to maintain Tier 1 capital as a percentage of total assets of at least 9% and a total risk
based capital ratio of at least 12%, to develop a plan to reduce our risk position in each substandard asset in excess of $1 million, to complete
board review of the adequacy of the allowance for loan losses prior to quarterly Call Report submissions, to adopt procedures which strengthen
the loan review function and ensure timely and accurate grading of credit relationships, to charge-off all assets classified as loss, to develop a
plan to reduce concentrations of construction and development loans to not more than 75% of total risk based capital and non-owner occupied
commercial real estate loans to not more than 250% of total risk based capital, to limit asset growth to no more than 5% in any quarter or 10%
annually, to not extend additional credit to any borrower classified substandard unless the board of directors adopts prior to the extension a
detailed statement giving reasons why the extension is in the best interest of the bank, and to not declare or pay any dividend without the prior
consent of our regulators. We are also restricted from accepting, renewing, or rolling-over brokered deposits without the prior receipt of a waiver
on a case-by-case basis from our regulators.
On September 21, 2011, we entered into a Written Agreement with the Federal Reserve Bank of St. Louis. Pursuant to the Agreement, we made
formal commitments to use our financial and management resources to serve as a source of strength for the Bank and to assist the Bank in
addressing weaknesses identified by the FDIC and the KDFI, to pay no dividends without prior written approval, to pay no interest or principal
on subordinated debentures or trust preferred securities without prior written approval, and to submit an acceptable plan to maintain sufficient
capital.
In October 2012, the Bank entered into a new Consent Order with the FDIC and KDFI again agreeing to maintain a minimum Tier 1 leverage
ratio of 9% and a minimum total risk based capital ratio of 12%. The Bank cannot be considered well-capitalized while under the Consent Order.
The Bank also agreed that if it should be unable to reach the required capital levels, and if directed in writing by the FDIC, then the Bank would
within 30 days develop, adopt and implement a written plan to sell or merge itself into another federally insured financial institution or otherwise
immediately obtain a sufficient capital investment into the Bank to fully meet the capital requirements. We have not been directed by the FDIC
to implement such a plan.
The new Consent Order also requires the Bank to continue to adhere to the plans implemented in response to the June 2011 Consent Order, and
includes the substantive provisions of the June 2011 Consent Order. As of December 31, 2013, the capital ratios required by the Consent Order
were not met.
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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):
As of December 31, 2013:
Total risk-based capital (to risk-weighted assets)
Consolidated
Bank
Tier I capital (to risk-weighted assets)
Consolidated
Bank
Tier I capital (to average assets)
Consolidated
Bank
As of December 31, 2012:
Total risk-based capital (to risk-weighted assets)
Consolidated
Bank
Tier I capital (to risk-weighted assets)
Consolidated
Bank
Tier I capital (to average assets)
Consolidated
Bank
Actual
Amount
Ratio
For Capital Adequacy Purposes
Ratio
Amount
$ 80,203
83,055
11.03 %
11.44
$
58,178
58,064
53,371
67,897
7.34
9.35
53,371
67,897
4.95
6.28
29,089
29,032
43,156
43,221
8.00 %
8.00
4.00
4.00
4.00
4.00
Actual
Amount
Ratio
For Capital Adequacy Purposes
Ratio
Amount
$ 85,942
85,829
9.81 %
9.82
$
70,111
69,913
56,597
67,365
6.46
7.71
56,597
67,365
4.50
5.37
35,056
34,957
50,297
50,199
8.00 %
8.00
4.00
4.00
4.00
4.00
The Consent Order requires the Bank to achieve the minimum capital ratios presented below:
Total capital to risk-weighted assets
Tier I capital to average assets
Actual as of
December 31, 2013
Amount Ratio
$ 83,055
67,987
Ratio Required by
Consent Order
Amount Ratio
11.44 % $ 87,096
97,247
6.28
12.00 %
9.00
At December 31, 2013, PBI Bank’s Tier 1 leverage ratio improved to 6.28% which is below the 9% minimum capital ratio required by the
Consent Order and its total risk-based capital ratio improved to 11.44% which is below the 12% minimum capital ratio required by the Consent
Order. Bank regulatory agencies can exercise discretion when an institution does not meet the terms of a Consent Order. Based on individual
circumstances, the agencies may issue mandatory directives, impose monetary penalties, initiate changes in management, or take more serious
adverse actions.
Kentucky banking laws limit the amount of dividends that may be paid to a holding company by its subsidiary banks without prior approval.
These laws limit the amount of dividends that may be paid in any calendar year to current 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
for the foreseeable future.
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NOTE 18 – LOAN COMMITMENTS AND OTHER RELATED ACTIVITIES
Some financial instruments, such as loan commitments, lines of credit and letters of credit are issued to meet customer-financing needs. These
are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have
expiration dates. Commitments may expire without being used. Off-balance-sheet risk to credit loss exists up to the face amount of these
instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans,
including obtaining collateral at exercise of the commitment.
The Company holds instruments, in the normal course of business, with clients that are considered financial guarantees. Standby letters of credit
guarantees are issued in connection with agreements made by clients to counterparties. Standby letters of credit are contingent upon failure of the
client to perform the terms of the underlying contract. The Company evaluates each credit request of its customers in accordance with
established lending policies. Based on these evaluations and the underlying policies, the amount of required collateral (if any) is established.
Collateral held varies but may include negotiable instruments, accounts receivable, inventory, property, plant and equipment, income producing
properties, residential real estate, and vehicles. The Company’s access to these collateral items is generally established through the maintenance
of recorded liens or, in the case of negotiable instruments, possession. No liability is currently established for the standby letters of credit.
The contractual amounts of financial instruments with off-balance-sheet risk at year end were as follows:
Commitments to make loans
Unused lines of credit
Standby letters of credit
Commitments to make loans are generally made for periods of one year or less.
NOTE 19 – FAIR VALUES
2013
2012
Fixed
Rate
Variable
Rate
Fixed
Rate
Variable
Rate
(in thousands)
$ 3,125
11,814
995
$ 5,751
40,721
1,504
$ 2,490
11,910
1,085
$ 3,546
34,925
1,176
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. We use various
valuation techniques to determine fair value, including market, income and cost approaches. There are three levels of inputs that may be used to
measure fair values:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that an entity has the ability to access as of the
measurement date, or observable inputs.
Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in
markets that are not active, and other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect an entity’s own assumptions about the assumptions that market participants would use
in pricing an asset or liability.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. When that occurs, we classify the
fair value hierarchy on the lowest level of input that is significant to the fair value measurement. We used the following methods and significant
assumptions to estimate fair value.
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Securities: The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities
exchanges, if available. This valuation method is classified as Level 1 in the fair value hierarchy. For securities where quoted prices are not
available, fair values are calculated on market prices of similar securities, or matrix pricing, which is a mathematical technique used widely
in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the
securities’ relationship to other benchmark quoted securities. Matrix pricing relies on the securities’ relationship to similarly traded
securities, benchmark curves, and the benchmarking of like securities. Matrix pricing utilizes observable market inputs such as benchmark
yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, and
industry and economic events. In instances where broker quotes are used, these quotes are obtained from market makers or broker-dealers
recognized to be market participants. This valuation method is classified as Level 2 in the fair value hierarchy. For securities where quoted
prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market
indicators. This valuation method is classified as Level 3 in the fair value hierarchy. Discounted cash flows are calculated using spread to
swap and LIBOR curves that are updated to incorporate loss severities, volatility, credit spread and optionality. During times when trading
is more liquid, broker quotes are used (if available) to validate the model. Rating agency and industry research reports as well as defaults
and deferrals on individual securities are reviewed and incorporated into the calculations.
Impaired Loans: An impaired loan is evaluated at the time the loan is identified as impaired and is recorded at fair value less costs to sell.
Fair value is measured based on the value of the collateral securing the loan and is classified as Level 3 in the fair value hierarchy. Fair
value is determined using several methods. Generally, the fair value of real estate is determined based on appraisals by qualified licensed
appraisers. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the
income approach.
Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and
income data available. These routine adjustments are made to adjust the value of a specific property relative to comparable properties for
variations in qualities such as location, size, and income production capacity relative to the subject property of the appraisal. Such
adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.
We routinely apply an internal discount to the value of appraisals used in the fair value evaluation of our impaired loans. The deductions to
the appraisal take into account changing business factors and market conditions, as well as potential value impairment in cases where our
appraisal date predates a likely change in market conditions. These deductions range from 10% for routine real estate collateral to 25% for
real estate that is determined (1) to have a thin trading market or (2) to be specialized collateral. This is in addition to estimated discounts
for cost to sell of six to ten percent.
We also apply discounts to the expected fair value of collateral for impaired loans where the likely resolution involves litigation or
foreclosure. Resolution of this nature generally results in receiving lower values for real estate collateral in a more aggressive sales
environment. We have utilized discounts ranging from 10% to 33% in our impairment evaluations when applicable.
Impaired loans are evaluated quarterly for additional impairment. We obtain updated appraisals on properties securing our loans when
circumstances are warranted such as at the time of renewal or when market conditions have significantly changed. This determination is
made on a property-by-property basis in light of circumstances in the broader economic climate and our assessment of deterioration of real
estate values in the market in which the property is located. The first stage of our assessment involves 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 in connection with the transfer to
other real estate owned. In some of these circumstances, an appraisal is in process at quarter end, and we must make our best estimate of
the fair value of the underlying collateral based on our internal evaluation of the property, review of the most recent appraisal, and
discussions with the currently engaged appraiser. We obtain updated appraisals on the anniversary date of ownership unless a sale is
imminent.
We routinely apply an internal discount to the value of appraisals used in the fair value evaluation of our OREO. The deductions to the
appraisal take into account changing business factors and market conditions, as well as potential value impairment in cases where our
appraisal date predates a likely change in market conditions. These deductions range from 10% for routine real estate collateral to 25% for
real estate that is determined (1) to have a thin trading market or (2) to be specialized collateral. This is in addition to estimated discounts
for cost to sell of six to ten percent.
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Financial assets measured at fair value on a recurring basis are summarized below:
Description
Available for sale securities
U.S. Government and federal agency
Agency mortgage-backed: residential
State and municipal
Corporate bonds
Other debt securities
Equity securities
Total
Description
Available for sale securities
U.S. Government and federal agency
Agency mortgage-backed: residential
State and municipal
Corporate bonds
Other debt securities
Equity securities
Total
Fair Value Measurements at December 31, 2013 Using
(in thousands)
Quoted Prices In
Active Markets for
Carrying
Value
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$ 29,866
100,943
13,545
18,161
632
197
$ 163,344
$
$
—
—
—
—
—
197
197
$
$
29,866
100,943
13,545
18,161
—
—
162,515
$
$
—
—
—
—
632
—
632
Fair Value Measurements at December 31, 2012 Using
(in thousands)
Quoted Prices In
Active Markets for
Carrying
Value
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$ 6,133
95,182
54,733
19,964
618
1,846
$ 178,476
$
$
—
—
—
—
—
1,846
1,846
$
$
6,133
95,182
54,733
19,964
—
—
176,012
$
$
—
—
—
—
618
—
618
There were no transfers between Level 1 and Level 2 during 2013 or 2012.
The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3)
for the periods ended December 31, 2013 and 2012:
Balances of recurring Level 3 assets at January 1
Total gain (loss) for the period:
Included in other comprehensive income (loss)
Transfers into Level 3
Sales
Balance of recurring Level 3 assets at December 31
95
Other Debt
Securities
2013
2012
(in thousands)
$ 618 $ 606
14
—
—
$ 632
12
—
—
$ 618
Table of Contents
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 9.0% based upon the current yield curve plus spreads that adjust for volatility, credit risk, and optionality. We
also consider the issuer(s) publicly filed financial information as well as assumptions regarding the likelihood of deferrals and defaults.
Financial assets measured at fair value on a non-recurring basis are summarized below:
Description
Impaired loans:
Commercial
Commercial real estate:
Construction
Farmland
Other
Residential real estate:
Multi-family
1-4 Family
Consumer
Agriculture
Other
Other real estate owned, net:
Commercial real estate:
Construction
Farmland
Other
Residential real estate:
Multi-family
1-4 Family
Description
Impaired loans:
Commercial
Commercial real estate:
Construction
Farmland
Other
Residential real estate:
Multi-family
1-4 Family
Consumer
Agriculture
Other
Other real estate owned, net:
Commercial real estate:
Construction
Farmland
Other
Residential real estate:
Multi-family
1-4 Family
Fair Value Measurements at December 31, 2013 Using
(in thousands)
Quoted Prices In
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Carrying
Value
$ 3,172
$
—
$
—
$
3,172
9,046
4,173
73,426
11,724
26,486
75
—
618
19,057
690
6,019
246
4,880
Carrying
Value
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
9,046
4,173
73,426
11,724
26,486
75
—
618
19,057
690
6,019
246
4,880
Fair Value Measurements at December 31, 2012 Using
(in thousands)
Quoted Prices In
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$ 3,799
$
—
$
—
$
3,799
23,912
5,722
72,793
13,263
25,094
74
5
513
22,323
602
15,175
195
5,376
96
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
23,912
5,722
72,793
13,263
25,094
74
5
513
22,323
602
15,175
195
5,376
Table of Contents
Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of
$132.2 million, with a valuation allowance of $3.5 million, at December 31, 2013, resulting in no additional provision for loan losses for the year
ended December 31, 2013. At December 31, 2012, impaired loans had a carrying amount of $152.2 million, with a valuation allowance of $21.0
million, resulting in an additional provision for loan losses of $13.1 million for the year ended December 31, 2012.
Other real estate owned, which is measured at the lower of carrying or fair value less costs to sell, had a net carrying amount of $30.9 million as
of December 31, 2013, compared with $43.7 million at December 31, 2012. Write-downs of $2.5 million and $7.2 million were recorded on
other real estate owned for the years ended December 31, 2013 and 2012, respectively.
The following table presents qualitative information about level 3 fair value measurements for financial instruments measured at fair value on a
non-recurring basis at December 31, 2013:
Impaired loans – Commercial
Fair Value
(in thousands)
3,172
$
Valuation
Technique(s)
Unobservable Input(s)
Range (Weighted
Average)
Market value approach
Adjustment for receivables
16% - 32% (24%)
Impaired loans – Commercial
$
86,645
real estate
Impaired loans – Residential real
$
38,210
estate
Sales comparison
approach
Sales comparison
approach
Other real estate owned –
Commercial real estate
$
25,766
Sales comparison
approach
Other real estate owned –
Residential real estate
$
5,126
Sales comparison
approach
Income approach
97
and inventory discounts
Adjustment for differences
between the comparable
sales
Adjustment for differences
between the comparable
sales
Adjustment for differences
between the comparable
sales
Discount or capitalization
rate
Adjustment for differences
between the comparable
sales
0% - 69% (20%)
0% - 68% (15%)
3% - 51% (22%)
7% - 16% (11%)
2% - 54% (11%)
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 December 31, 2012:
Impaired loans – Commercial
Fair Value
(in thousands)
3,799
$
Valuation
Technique(s)
Unobservable Input(s)
Range (Weighted
Average)
Market value approach
Adjustment for receivables
16% - 32% (24%)
Impaired loans – Commercial
$
89,461
real estate
Impaired loans – Residential real
$
38,357
estate
Sales comparison
approach
Sales comparison
approach
Other real estate owned –
Commercial real estate
$
38,100
Sales comparison
approach
Other real estate owned –
Residential real estate
$
5,571
Sales comparison
approach
Income approach
and inventory discounts
Adjustment for differences
between the comparable
sales
Adjustment for differences
between the comparable
sales
Adjustment for differences
between the comparable
sales
Discount or capitalization
rate
Adjustment for differences
between the comparable
sales
0% - 69% (19%)
0% - 38% (15%)
3% - 50% (18%)
9% - 16% (12%)
0% - 30% (9%)
Carrying amount and estimated fair values of financial instruments were as follows at year-end 2013:
Fair Value Measurements at December 31, 2013 Using
Carrying
Amount
Level 1
Level 2
(in thousands)
Level 3
Total
Financial assets
Cash and cash equivalents
Securities available for sale
Securities held to maturity
Federal Home Loan Bank stock
Mortgage loans held for sale
Loans, net
Accrued interest receivable
Financial liabilities
Deposits
Securities sold under agreements to repurchase
Federal Home Loan Bank advances
Subordinated capital notes
Junior subordinated debentures
Accrued interest payable
98
197 162,515
$ 111,134 $ 106,885 $ 4,249 $ — $ 111,134
163,344
632 163,344
43,612 — 42,947 — 42,947
N/A
10,072
149
681,202 — — 695,999 695,999
3,891
N/A
N/A
149 —
N/A
149 —
3,891 —
2,548
1,343
2,470 —
4,492 —
5,850 — —
$ 987,705 $ 107,486 $ 879,707 $ — $ 987,193
2,470
4,495
5,586
25,000 — — 13,526 13,526
2,535
2,470 —
4,495 —
5,586
2,535 —
1,493
1,042
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Carrying amount and estimated fair values of financial instruments were as follows at year-end 2012:
Fair Value Measurements at December 31, 2012 Using
Carrying
Amount
Level 1
Level 2
Level 3
Total
(in thousands)
Financial assets
Cash and cash equivalents
Securities available for sale
Federal Home Loan Bank stock
Mortgage loans held for sale
Loans, net
Accrued interest receivable
Financial liabilities
Deposits
Securities sold under agreements to repurchase
Federal Home Loan Bank advances
Subordinated capital notes
Junior subordinated debentures
Accrued interest payable
$
178,476
10,072
49,572
49,572 $ 41,938 $ 7,634 $ — $
618 178,476
1,846 176,012
N/A
N/A
N/A
507
507 —
842,412 — — 853,996 853,996
5,138
N/A
507 —
5,138 —
1,150
3,988
2,634 —
5,604 —
6,975 — —
$ 1,065,059 $ 114,310 $ 955,216 $ — $ 1,069,526
2,634
5,607
6,599
13,821
2,104
2,634 —
5,607 —
6,599
25,000 — — 13,821
931
2,104 —
1,173
The methods and assumptions used to estimate fair value are described as follows:
(a) Cash and Cash Equivalents
The carrying amounts of cash and short-term instruments approximate fair values and are classified as either Level 1 or Level 2.
Noninterest bearing deposits are Level 1 whereas interest bearing due from bank accounts and fed funds sold are Level 2.
(b) FHLB Stock
It is not practical to determine the fair value of FHLB stock due to restrictions placed on its transferability.
(c) Loans, Net
Fair values of loans, excluding loans held for sale, are estimated as follows: For variable rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are
estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of
similar credit quality resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described
previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.
(d) Mortgage Loans Held for Sale
The fair value of loans held for sale is estimated based upon binding contracts and quotes from third party investors resulting in a Level 2
classification.
(e) Deposits
The fair values disclosed for non-interest bearing deposits are, by definition, equal to the amount payable on demand at the reporting date
resulting in a Level 1 classification. The carrying amounts of variable rate interest bearing deposits approximate their fair values at the
reporting date resulting in a Level 2 classification. Fair values for fixed rate interest bearing deposits are estimated using a discounted cash
flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities
on time deposits resulting in a Level 2 classification.
(f) Securities Sold Under Agreements to Repurchase
The carrying amounts of borrowings under repurchase agreements approximate their fair values resulting in a Level 2 classification.
( g) Other Borrowings
The fair values of the Company’s FHLB advances are estimated using discounted cash flow analyses based on the current borrowing rates
resulting in a Level 2 classification.
99
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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 20 – STOCK PLANS AND STOCK BASED COMPENSATION
The Company has two stock incentive plans. On February 23, 2006, the Company adopted the Porter Bancorp, Inc. 2006 Stock Incentive Plan.
In May 2013, the Board approved an amendment to the plan to increase the number of shares authorized for issuance by 800,000 shares. The
2006 Plan now permits the issuance of up to 1,263,050 shares of the Company’s common stock upon the exercise of stock options or upon the
grant of stock awards. As of December 31, 2013, the Company had granted 787,426 unvested shares net of forfeitures and vesting under the
stock incentive plan. Shares issued under the plan vest annually on the anniversary date of the grant over three to ten years. The Company has
349,497 shares remaining available for issue under the plan.
On May 15, 2006, the Board of Directors approved the Porter Bancorp, Inc. 2006 Non-Employee Directors Stock Ownership Incentive Plan,
which was approved by holders of the Company’s voting common stock on June 8, 2006. On May 22, 2008, shareholders voted to amend the
plan to change the form of incentive award from stock options to unvested shares. Under the terms of the plan, 100,000 shares are reserved for
issuance to non-employee directors upon the exercise of stock options or upon the grant of unvested stock awards granted under the plan. Prior
to the amendment, options were granted automatically under the plan at fair market value on the date of grant. The options vest over a three-year
period and have a five year term. Unvested shares are granted automatically under the plan at fair market value on the date of grant and vest
semi-annually on the anniversary date of the grant over three years.
On May 16, 2012, holders of the Company’s voting common stock voted to further amend the 2006 Non-Employee Directors Stock Ownership
Incentive Plan to award restricted shares having a fair market value of $25,000 annually to each non-employee director, and to increase the
number of shares issuable under the Directors’ Plan from 100,000 shares to 400,000 shares. Shares issued under the amended plan vest on
December 31 in the year they are granted.
To date, the Company has issued 47,428 unvested shares, net of forfeitures and vesting, to non-employee directors. At December 31, 2013,
113,362 shares remain available for issuance under this plan.
The fair value of the 2013 unvested shares issued to certain employees was $820,000, or $1.18 per weighted-average share. The fair value of the
2013 unvested shares issued to the directors was $155,000 or $0.85 per weighted average share. The Company recorded $604,000 and $442,000
of stock-based compensation during 2013 and 2012, respectively, to salaries and employee benefits. There was no significant impact on
compensation expense resulting from forfeited or expiring shares. We expect substantially all of the unvested shares outstanding at the end of the
period will vest according to the vesting schedule. No deferred tax benefit was recognized related to this expense for either period.
The following table summarizes unvested share activity as of and for the periods indicated for the Stock Incentive Plan:
Outstanding, beginning
Granted
Vested
Forfeited
Outstanding, ending
100
Twelve Months Ended
December 31, 2013
Weighted
Average
Grant
Price
Shares
153,316
693,214
(22,113 )
(36,991 )
787,426
$ 5.92
1.18
12.19
6.22
$ 1.56
Twelve Months Ended
December 31, 2012
Weighted
Average
Grant
Price
$ 13.40
1.74
13.04
15.22
$ 5.92
Shares
96,688
97,197
(27,378 )
(13,191 )
153,316
Table of Contents
The following table summarizes unvested share activity as of and for the periods indicated for the Non-Employee Directors Stock Ownership
Incentive Plan:
Outstanding, beginning
Granted
Vested
Forfeited
Outstanding, ending
Twelve Months Ended
December 31, 2013
Weighted
Average
Grant
Price
Shares
80,078
182,355
(215,005 )
—
47,428
$ 1.77
0.85
1.01
—
$ 1.69
Twelve Months Ended
December 31, 2012
Weighted
Average
Grant
Price
$ 7.91
1.65
2.37
—
$ 1.77
Shares
3,538
93,943
(17,403 )
—
80,078
Unrecognized stock based compensation expense related to unvested shares for 2014 and beyond is estimated as follows (in thousands):
2014
2015
2016
2017
2018 & thereafter
$ 518
394
238
41
—
NOTE 21 – EARNINGS (LOSS) PER SHARE
The factors used in the basic and diluted earnings per share computation follow:
Net loss
Less:
Preferred stock dividends
Accretion of Series A preferred stock discount
Loss attributable to unvested shares
Loss attributable to Series C preferred
Net loss attributable to common shareholders, basic
$
2013
2012
(in thousands, except share and per share data)
(1,586 )
(32,932 )
$
$
2011
(107,307 )
1,919
160
(171 )
(96 )
1,750
179
(482 )
(947 )
1,750
177
(1,092 )
(2,988 )
and diluted
Basic
Weighted average common shares including unvested
common shares and Series C Preferred outstanding
Less: Weighted average unvested common shares
Less: Weighted average Series C preferred shares
Weighted average common shares outstanding
Basic loss per common share
Diluted
Add: Dilutive effects of assumed exercises of
common and Preferred Series C stock warrants
Weighted average common shares and potential
common shares
Diluted loss per common share
$
(3,398 )
$
(33,432 )
$
(105,154 )
12,722,782
595,150
332,894
11,794,738
(0.29 )
$
12,248,936
169,323
332,894
11,746,719
(2.85 )
$
12,169,987
121,632
332,894
11,715,461
(8.98 )
$
—
—
—
11,794,738
(0.29 )
$
11,746,719
(2.85 )
$
11,715,461
(8.98 )
$
Stock options for 29,530 shares for common stock for 2011 were not considered in computing diluted earnings per common share because they
were anti-dilutive. The Company had no outstanding stock options at December 31, 2013 or 2012. A warrant for the purchase of 330,561 shares
of the Company’s common stock at an exercise price of $15.88 was outstanding at December 31, 2013, 2012 and 2011 but was not included in
the diluted EPS computation as inclusion would have been anti-dilutive. Additionally, warrants for the purchase of 1,449,459 shares of non-
voting common stock at an exercise price of $10.95 per share were outstanding at December 31, 2013 and 2012, but were not included in the
diluted EPS computation as inclusion would have been anti-dilutive.
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NOTE 22 – PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
Condensed financial information of Porter Bancorp Inc. is presented as follows:
CONDENSED BALANCE SHEETS
December 31,
ASSETS
Cash and cash equivalents
Securities available for sale
Investment in banking subsidiary
Investment in and advances to other subsidiaries
Other assets
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Debt
Accrued expenses and other liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
CONDENSED STATEMENTS OF OPERATIONS
Years ended December 31,
Interest income
Dividends from subsidiaries
Other income
Interest expense
Other expense
Loss before income tax and undistributed subsidiary income
Income tax expense
Equity in undistributed subsidiary income (loss)
Net loss
102
2013
2012
(in thousands)
$ 1,815 $
995
829 2,464
63,815 71,711
776
776
740
535
$ 67,975 $ 76,481
$ 25,775 $ 25,775
3,516
47,190
$ 67,975 $ 76,481
6,269
35,931
2013
2012
2011
(in thousands)
$
82 $
20
966
(642 )
(2,064 )
(1,638 )
—
52
114 $
215
21
20
72
1,272
(692 )
(652 )
(1,453 )
(3,614 )
(1,938 )
(2,759 )
864
468
(104,080 )
(30,130 )
$ (1,586 ) $ (32,932 ) $ (107,307 )
Table of Contents
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31,
Cash flows from operating activities
Net loss
Adjustments:
Equity in undistributed subsidiary (income) loss
Income tax valuation allowance
Gain on sale of assets
Change in other assets
Change in other liabilities
Other
Net cash (used in) operating activities
Cash flows from investing activities
Investments in subsidiaries
Sales of securities
Net cash (used in) from investing activities
Cash flows from financing activities
Dividends paid on preferred stock
Dividends paid on common stock
Net cash (used in) financing activities
Net change in cash and cash equivalents
Beginning cash and cash equivalents
Ending cash and cash equivalents
NOTE 23 – QUARTERLY FINANCIAL DATA (UNAUDITED)
Net Interest
Interest
Income
Income
2013
2012
2011
(in thousands)
$ (1,586 ) $ (32,932 ) $ (107,307 )
(52 )
—
(727 )
(240 )
833
640
(1,132 )
30,130
—
—
(21 )
776
478
(1,569 )
104,080
1,095
—
157
(273 )
1,404
(844 )
—
1,952
1,952
—
—
—
(13,100 )
—
(13,100 )
—
—
—
820
995
—
—
—
(1,569 )
2,564
$ 1,815 $
995 $
(1,319 )
(237 )
(1,556 )
(15,500 )
18,064
2,564
Provision
For
Loan Losses
(in thousands, except per share data)
Net
Income
(Loss)
OREO
Expense
Earnings (Loss)
Per Common Share
Basic Diluted
2013
First quarter
Second quarter
Third quarter
Fourth quarter
2012
First quarter
Second quarter
Third quarter
Fourth quarter
$ 11,258 $
11,168
10,543
10,259
8,298 $
8,352
7,849
7,586
450 $ 791 $
(69 )
— 1,657 (1,309 )
298
250 669
(506 )
— 1,399
$ (0.04 ) $ (0.04 )
(0.14 ) (0.14 )
(0.01 ) (0.01 )
(0.09 ) (0.09 )
$ 0.08 $ 0.08
$ 15,755 $ 11,454 $
14,812 10,795
(0.03 ) (0.03 )
13,987 10,132 25,500 5,204 (27,732 )(1) (2.29 ) (2.29 )
(0.59 ) (0.59 )
13,175
3,750 $ 1,257 $ 1,502
151
4,000 1,205
7,000 2,883 (6,853 )
9,574
(1) Third quarter net income was lower than the previous quarter due to increased provision for loan losses expense during the quarter as a result of the continued decline in credit
trends in our portfolio. The provision was also negatively impacted by a strategy change related to classified loans which we expected to more quickly remediate by litigation
or foreclosure.
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NOTE 24 – CONTINGENCIES
In the normal course of operations, we are defendants in various legal proceedings. Litigation is subject to inherent uncertainties and unfavorable
rulings could occur. We record contingent liabilities resulting from claims against us when a loss is assessed to be probable and the amount of
the loss is reasonably estimable. Assessing probability of loss and estimating probable losses requires analysis of multiple factors, including in
some cases judgments about the potential actions of third party claimants and courts. Recorded contingent liabilities are based on the best
information available and actual losses in any future period are inherently uncertain. Currently, we have accrued approximately $1.8 million
related to ongoing litigation matters for which we believe liability is probable and reasonably estimable. Accruals are not made in cases where
liability is not probable or the amount cannot be reasonably estimated. We provide disclosure of matters where we believe liability is reasonably
possible and which may be material to our consolidated financial statements.
Signature Point Litigation. On June 18, 2010, three real estate development companies filed suit in Kentucky state court against PBI Bank and
Managed Assets of Kentucky (“MAKY”). Signature Point Condominiums LLC, et al. v. PBI Bank, et al ., Jefferson Circuit Court, Case No 10-
CI-04295. On July 16, 2013, a jury in Louisville, Kentucky returned a verdict against PBI Bank, awarding the plaintiffs compensatory damages
of $1,515,000 and punitive damages of $5,500,000. The case arose from a settlement in which PBI Bank agreed to release the plaintiffs and
guarantors from obligations of more than $26 million related to a real estate project in Louisville. The plaintiffs were granted a right of first
refusal to repurchase a tract of land within the project. In exchange, the plaintiffs conveyed the real estate securing the loans to PBI Bank. After
plaintiffs declined to exercise their right of first refusal, PBI Bank sold the tract to the third party. Plaintiffs alleged the Bank had knowledge of
the third party offer before the conveyance of the land by the Plaintiffs to the Bank. Plaintiffs asserted claims of fraud, breach of fiduciary duty,
breach of the duty of good faith and fair dealing, tortious interference with prospective business advantage and conspiracy to commit fraud,
negligence, and conspiracy against PBI Bank.
After conferring with its legal advisors, PBI Bank believes the findings and damages are excessive and contrary to law, and that it has
meritorious grounds on which it is moving forward to appeal. We will continue to defend this matter vigorously. Although we have made
provisions in our condensed consolidated financial statements for this self-insured matter, the amount of our legal accrual is less than the original
amount of the damages awarded, plus accrued interest. The ultimate outcome of this matter could have a material adverse effect on our financial
condition, results of operations or cash flows.
SBAV LP Litigation. In 2010, the Company sold common shares, convertible preferred shares and warrants to purchase common shares to
accredited investors for $32 million in a private placement. In the placement, SBAV LP, an affiliate of Clinton Group, Inc. (“CGI”) purchased
common shares and warrants for $5,000,016.
On July 11, 2011, CGI sent a letter to the Company, which was also attached as an exhibit to a Schedule 13D CGI filed with the Securities and
Exchange Commission on the same date. In its letter CGI questioned the Company’s executive leadership team’s ability to properly manage the
Bank's operations, compliance with GAAP, financial disclosures and relationships with regulators, referencing the consent order PBI Bank
entered into with the Federal Deposit Insurance Corporation and the Commonwealth of Kentucky Department of Financial Institutions on
June 24, 2011. CGI also stated its belief “that it is likely that a number of representations and warranties made when the CGI affiliate entered
into an agreement to purchase shares were false,” and demanded that the Company take immediate steps to “redress such breaches and make
CGI and the other purchasers whole.”
During the third quarter of 2011, the Company’s Risk Policy and Oversight Committee, comprised of independent directors, undertook an
investigation of the allegations raised in the CGI 13D to evaluate their merit and to ascertain the reasonableness of the Bank’s allowance for loan
losses and OREO valuations at the time of Clinton’s investment. The Oversight Committee reported its conclusions to the Company’s Board of
Directors in October 2011. While recognizing that opportunities for procedural improvements existed in the Bank’s lending and non-performing
asset administration, the Oversight Committee concluded that this did not rise to a level that would result in the financial statements, or
representations and warranties with respect to the financial statements, being misleading to investors in the 2010 private placement offering of
the Company’s stock. The Oversight Committee further concluded investors were afforded ample opportunity and access to information for their
due diligence, including documentation involving asset valuation estimates, on-site management discussions and additional inquiries during
visits to the Company headquarters, and access to loan files of their choosing and the appraisals contained therein, and the Company’s
disclosures were adequate in all material respects.
On January 30, 2012, CGI delivered a demand to inspect the Company’s records pursuant to the Kentucky Business Corporation Act. The
Company provided records to CGI in accordance with Kentucky law.
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On December 17, 2012, SBAV LP filed a lawsuit against Porter Bancorp, PBI Bank, J. Chester Porter and Maria L. Bouvette in New York state
court. The proceeding was removed to New York federal district court on January 16, 2013. On July 10, 2013, the New York federal district
court granted the defendants’ motion to transfer the case to federal district court in Kentucky. SBAV LP v. Porter Bancorp, et. al ., Civ. Action
3:13-CV-710 (W.D.KY). The complaint alleges violation of the Kentucky Securities Act, negligent misrepresentation and, against defendants
Porter Bancorp and Bouvette, breach of contract. The plaintiff seeks damages in an amount in excess of $4,500,000, or the difference between
the $5,000,016 purchase price and the value of the securities when sold by the plaintiff, plus interest at the applicable statutory rate, costs and
reasonable attorneys’ fees. The Kentucky court has set a trial date for January 20, 2015. On September 13, 2013, defendants filed a motion to
dismiss all claims in the complaint for pleading failures and for failure to state a claim upon which relief may be granted; that motion is currently
pending. Discovery is temporarily stayed pending a ruling on defendants’ request that discovery not proceed pending the court’s decision on the
motion to dismiss. We dispute the material factual allegations made in the complaint and intend to defend the plaintiff’s claims vigorously.
Thomas E. Perez, Secretary of the United States Department of Labor (DOL) v. PBI Bank, Inc. On December 26, 2013, DOL filed a lawsuit
in U.S. District Court for the Northern District of Indiana (Civ. Action 3:13-CV-1400-PPS) alleging that PBI Bank, in the capacity of Trustee for
the Miller’s Health System’s Inc. Employee Stock Ownership Plan’s 2007 acquisition of Miller’s Health Systems, Inc., authorized the alleged
imprudent and disloyal purchase of company stock 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 approved 100% seller financing for the transaction at an excessive rate of interest.
Miller’s Health is a Warsaw, Indiana based company that, at the time of the transaction, managed 31 long-term care facilities and 10 assisted
living facilities. Miller’s Health also provides physical and occupational therapy and speech-language pathology to residents in its facilities. We
dispute the material factual allegations made in the complaint and intend to defend the plaintiff’s claims vigorously.
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Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None
Item 9A. Controls and Procedures
Our management, under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the
effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange
Act of 1934) as of December 31, 2013. Based on that evaluation, management, including our Chief Executive Officer and our Chief Financial
Officer, concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report. Management’s
Report on Internal Control Over Financial Reporting is set forth under Item 8 “Financial Statements and Supplementary Data.
There was no change in our internal control over financial reporting during the fourth quarter of 2013 that has materially affected, or is
reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B. Other Information
None
PART III
Item 10.
Directors, Executive Officers and Corporate Governance.
We have adopted a code of ethics applicable to our Chief Executive Officer and our senior financial officers, which is posted on our website at
http://www.pbibank.com . If we amend or waive any of the provisions of the Code of Ethics applicable to our Chief Executive Officer or senior
financial officers, we intend to disclose the amendment or waiver on our website. We will provide to any person without charge, upon request, a
copy of this Code of Ethics. You can request a copy by contacting Porter Bancorp, Inc., Chief Financial Officer, 2500 Eastpoint Parkway,
Louisville, Kentucky, 40223, (telephone) 502-499-4800.
Additional information required by this Item 10 is omitted because we are filing a definitive proxy statement pursuant to Regulation 14A on or
before April 30, 2014, which includes the required information. The required information contained in our proxy statement is incorporated
herein by reference.
Item 11.
Executive Compensation.
The information required by this Item 11 is omitted because we are filing a definitive proxy statement pursuant to Regulation 14A on or before
April 30, 2014, which includes the required information. The required information contained in our proxy statement is incorporated herein by
reference.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item 12 is omitted because we are filing a definitive proxy statement pursuant to Regulation 14A on or before
April 30, 2014, which includes the required information. The required information contained in our proxy statement is incorporated herein by
reference.
Item 13.
Certain Relationships and Related Transactions, and Director Independence.
The information required by this Item 13 is omitted because we are filing a definitive proxy statement pursuant to Regulation 14A on or before
April 30, 2014, which includes the required information. The required information contained in our proxy statement is incorporated herein by
reference.
Item 14.
Principal Accounting Fees and Services.
The information required by this Item 14 is omitted because we are filing a definitive proxy statement pursuant to Regulation 14A on or before
April 30, 2014, which includes the required information. The required information contained in our proxy statement is incorporated herein by
reference.
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Item 15.
Exhibits and Financial Statement Schedules
(a) 1. The following financial statements are included in this Form 10-K:
PART IV
Consolidated Balance Sheets as of December 31, 2013 and 2012
Consolidated Statements of Operations for the Years Ended December 31, 2013, 2012, and 2011
Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 2013, 2012, and 2011
Consolidated Statements of Change in Stockholders’ Equity for the Years Ended December 31, 2013, 2012, and 2011
Consolidated Statements of Cash Flows for the Years Ended December 31, 2013, 2012, and 2011
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
(a) 2. List of Financial Statement Schedules
Financial statement schedules are omitted because the information is not applicable.
(a) 3. List of Exhibits
The Exhibit Index of this report is incorporated by reference. The compensatory plans or arrangement required to be filed as exhibits
to this Form 10-K pursuant to Item 15(c) are noted with an asterisk in the Exhibit Index.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
March 14, 2014
PORTER BANCORP, INC.
By: /s/ John T. Taylor
John T. Taylor
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated.
/s/ John T. Taylor
John T. Taylor
/s/ Phillip W. Barnhouse
Phillip W. Barnhouse
/s/ David L. Hawkins
David L. Hawkins
/s/ W. Glenn Hogan
W. Glenn Hogan
/s/ Sidney L. Monroe
Sidney L. Monroe
/s/ William G. Porter
William G. Porter
/s/ Stephen A. Williams
Stephen A. Williams
/s/ W. Kirk Wycoff
W. Kirk Wycoff
Chief Executive Officer
March 14, 2014
Chief Financial Officer
March 14, 2014
Director
Director
Director
Director
Director
Director
108
March 14, 2014
March 14, 2014
March 14, 2014
March 14, 2014
March 14, 2014
March 14, 2014
Table of Contents
EXHIBIT INDEX
Exhibit No. (1)
3.1
Description
Amended and Restated Articles of Incorporation of Registrant, dated December 7, 2005. Exhibit 3.1 to Form S-1
Registration Statement (Reg. No. 333-133198) filed April 11, 2006 is hereby incorporated by reference.
3.2
3.3
3.4
3.5
3.6
4.1
4.2
4.3
4.4
10.1+
10.2+
10.3+
10.4+
10.5+
10.6+
10.7+
10.8
10.9
Articles of Amendment to the Amended and Restated Articles of Incorporation, dated November 18, 2008. Exhibit 3.1 to
Form 8-K filed November 24, 2008 is hereby incorporated by reference.
Articles of Amendment to the Amended and Restated Articles of Incorporation, dated June 29, 2010. Exhibit 3.1 to the
Registrant’s Current Report on Form 8-K filed with the SEC on July 7, 2010 is hereby incorporated by reference.
Articles of Amendment to the Amended and Restated Articles of Incorporation, dated June 30, 2010. Exhibit 3.2 to the
Registrant’s Current Report on Form 8-K filed with the SEC on July 7, 2010 is hereby incorporated by reference.
Articles of Amendment to the Amended and Restated Articles of Incorporation, dated October 22, 2010. Exhibit 4.8 to
Form S-3 Registration Statement (Reg. No. 333-170678) filed November 18, 2010 is hereby incorporated by reference.
Bylaws of the Registrant, dated November 30, 2005. Exhibit 3.2 to Form S-1 Registration Statement (Reg. No. 333-133198)
filed April 11, 2006 is hereby incorporated by reference.
Warrant to purchase up to 299,829 shares. Exhibit 4.1 to Form 8-K filed November 24, 2008 is hereby incorporated by
reference.
Securities Purchase Agreement between the Registrant and the Purchasers thereto, dated as of June 30, 2010. Exhibit 10.1 to
the Registrant’s Current Report on Form 8-K filed with the SEC on July 7, 2010 is hereby incorporated by reference.
Registration Rights Agreement between the Registrant and the Purchasers thereto, dated as of June 30, 2010. Exhibit 10.2 to
the Registrant’s Current Report on Form 8-K filed with the SEC on July 7, 2010 is hereby incorporated by reference.
Letter Agreement between the Registrant and SBAV LP, dated as of July 23, 2010. Exhibit 10 to the Registrant’s Current
Report on Form 8-K filed with the SEC on July 29, 2010 is hereby incorporated by reference.
Porter Bancorp, Inc. Amended and Restated 2006 Stock Incentive Plan. Exhibit 10.2 to Form S-1 Registration Statement
(Reg. No. 333-133198) filed April 11, 2006 is hereby incorporated by reference.
Form of Porter Bancorp, Inc. Stock Option Award Agreement. Exhibit 10.3 to Form S-1 Registration Statement (Reg.
No. 333-133198) filed April 11, 2006 is hereby incorporated by reference.
Form of Porter Bancorp, Inc. Restricted Stock Award Agreement. Exhibit 10.4 to Form S-1 Registration Statement (Reg.
No. 333-133198) filed April 11, 2006 is hereby incorporated by reference.
Form of Ascencia Bank (now known as PBI Bank) Supplemental Executive Retirement Plan. Exhibit 10.5 to Form S-1
Registration Statement (Reg. No. 333-133198) filed April 11, 2006 is hereby incorporated by reference.
Form of Amendment to PBI Bank Supplemental Executive Retirement Plan. Exhibit 10.7 to Form 10-K filed March 26,
2009 is hereby incorporated by reference.
Porter Bancorp, Inc. 2006 Non-Employee Directors Stock Ownership Incentive Plan, as amended May 22, 2008. Annex A
Definitive Proxy Statement filed April 17, 2008 is hereby incorporated by reference.
Amendment to Porter Bancorp, Inc. 2006 Non-Employee Directors Stock Ownership Incentive Plan, as amended May 22,
2008.
Promissory Installment Note of Maria L. Bouvette and J. Chester Porter, as borrowers, to David L. Hawkins, as lender.
Exhibit 10.7 to Form S-1/A Registration Statement (Reg. No. 333-133198) filed May 24, 2006 is hereby incorporated by
reference.
Letter Agreement, dated November 21, 2008 including the Securities Purchase Agreement – Standard Terms incorporated by
reference therein, between the Company and the U.S. Treasury. Exhibit 10.1 to Form 8-K filed November 24, 2008 is hereby
incorporated by reference.
109
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Exhibit No. (1)
10.10
Description
Form of Waiver of Senior Executive Officers. Exhibit 10.2 to Form 8-K filed November 24, 2008 is hereby incorporated by
reference.
10.11+
10.12
10.13
10.14
10.15
10.16
21.1
23.1
31.1
31.2
32.1
32.2
99.1
99.2
101
Porter Bancorp, Inc. 2011 Incentive Compensation Bonus Plan (incorporated by reference to Exhibit 10.14 to 2011 Form
10K).
Consent with Federal Deposit Insurance Corporation and Kentucky Department of Financial Institutions dated June 24, 2011.
Exhibit 99.1 to Form 8-K filed June 30, 2011.
Employment Agreement with John T. Taylor (Exhibit 10 to Form 8-K filed August 6, 2012 is hereby incorporated by
reference).
Employment Agreement with John R. Davis (Exhibit 10.1 to Form 8-K filed September 25, 2012 is hereby incorporated by
reference).
Employment Agreement with Joseph C. Seiler (Exhibit 10.1 to Form 10-Q filed August 8, 2013 is hereby incorporated by
reference).
Employment Agreement with Phillip W. Barnhouse (Exhibit 10.2 to Form 10-Q filed August 8, 2013 is hereby incorporated
by reference).
List of Subsidiaries of Porter Bancorp, Inc.
Consent of Crowe Horwath LLP, Independent Registered Public Accounting Firm
Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14 or 15d-14
Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14 or 15d-14
Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(b) or 15d-14(b) and 18 U.S.C. Section 1350
Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(b) or 15d-14(b) and U.S.C. Section 1350
Certification of Principal Executive Officer pursuant to Section 30.15 of the U.S. Treasury’s Interim Final Rule on TARP
Standards for Compensation and Corporate Governance.
Certification of Principal Executive Officer pursuant to Section 30.15 of the U.S. Treasury’s Interim Final Rule on TARP
Standards for Compensation and Corporate Governance.
The following financial statements from the Company’s Annual Report on Form 10K for the year ended December 31, 2011,
formatted in XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated
Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Stockholders’ Equity, (v) Consolidated
Statements of Cash Flows, (vi) Notes to Consolidated Financial Statements.
+ Management contract or compensatory plan or arrangement.
(1) The Company has other long-term debt agreements that meet the exclusion set forth in Section 601(b)(4)(iii)(A) of Regulation S-K. The
Company hereby agrees to furnish a copy of such agreements to the Securities and Exchange Commission upon request.
110
Exhibit 21.1
Direct Subsidiary
PBI Bank
Ascencia Statutory Trust I
Porter Statutory Trust II
Porter Statutory Trust III
Porter Statutory Trust IV
PBIB Corporation, Inc.
Indirect Subsidiary
PBI Title Services, LLC
Durham-Mudd Insurance
Agency, Inc.
SUBSIDIARIES OF PORTER BANCORP, INC.
Jurisdiction of Organization
Does Business As
Kentucky
Connecticut
Connecticut
Connecticut
Connecticut
Kentucky
PBI Bank
Ascencia Statutory Trust I
Porter Statutory Trust II
Porter Statutory Trust III
Porter Statutory Trust IV
PBIB Corporation, Inc.
Jurisdiction of Organization
Kentucky
Kentucky
Does Business As
PBI Title Services, LLC
Durham-Mudd Insurance
Agency, Inc.
Parent Entity
PBI Bank
PBI Bank
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos. 333-189005 and 333-188988 on Form S-8 of Porter Bancorp, Inc.
of our report dated March 14, 2014 with respect to the consolidated financial statements of Porter Bancorp, Inc., which report appears in this
Annual Report on Form 10-K of Porter Bancorp, Inc. for the year ended December 31, 2013.
Exhibit 23.1
Crowe Horwath LLP
Louisville, Kentucky
March 14, 2014
PORTER BANCORP, INC.
RULE 13A-14(A) CERTIFICATION OF CHIEF EXECUTIVE OFFICER
Exhibit 31.1
I, John T. Taylor, Chief Executive Officer of Porter Bancorp, Inc. (the “Company”), certify that:
1. I have reviewed this Annual Report on Form 10-K of the Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15
(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant’s most
recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Dated: March 14, 2014
/s/ John T. Taylor
John T. Taylor
Chief Executive Officer
PORTER BANCORP, INC.
RULE 13A-14(A) CERTIFICATION OF CHIEF FINANCIAL OFFICER
Exhibit 31.2
I, Phillip W. Barnhouse, Chief Financial Officer of Porter Bancorp, Inc. (the “Company”), certify that:
1. I have reviewed this Annual Report on Form 10-K of the Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15
(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant’s most
recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Dated: March 14, 2014
/s/ Phillip W. Barnhouse
Phillip W. Barnhouse
Chief Financial Officer
SECTION 906 CERTIFICATION
Exhibit 32.1
In connection with the Annual Report on Form 10-K of Porter Bancorp, Inc. (the “Company”) for the annual period ended December 31,
2013, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John T. Taylor, Chief Executive Officer of the
Company, do hereby certify, in accordance with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as
amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of
the Company.
Dated: March 14, 2014
PORTER BANCORP, INC.
By: /s/ John T. Taylor
John T. Taylor
Chief Executive Officer
SECTION 906 CERTIFICATION
Exhibit 32.2
In connection with the Annual Report on Form 10-K of Porter Bancorp, Inc. (the “Company”) for the annual period ended December 31,
2013, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Phillip W. Barnhouse, Chief Financial Officer
of the Company, do hereby certify, in accordance with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as
amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of
the Company.
Dated: March 14, 2014
PORTER BANCORP, INC.
By: /s/ Phillip W. Barnhouse
Phillip W. Barnhouse
Chief Financial Officer
PORTER BANCORP, INC.
TARP CERTIFICATION OF CHIEF EXECUTIVE OFFICER
Exhibit 99.1
I, John T. Taylor, Chief Executive Officer of Porter Bancorp, Inc. (the “Company”), certify that:
(1) The compensation committee (the “Compensation Committee”) of the Board of Directors (the “Board”) of the Company has met at least
every six months during the prior fiscal year with the senior risk officers of the Company to discuss and evaluate senior executive officer
compensation plans and employee compensation plans and the risks these plans pose to the Company;
(2) The Compensation Committee has identified and limited the features in the senior executive officer compensation plans that could lead
senior executive officers to take unnecessary and excessive risks that could threaten the value of the Company, has identified any features in the
employee compensation plans that pose risks to the Company, and has limited those features to ensure that the Company is not unnecessarily
exposed to risks;
(3) The Compensation Committee has reviewed at least every six months the terms of each employee compensation plan and identified and
limited the features in the plan that could encourage the manipulation of reported earnings of the Company to enhance the compensation of an
employee;
(4) The Compensation Committee will certify to these reviews;
(5) The Compensation Committee will provide a narrative description of how it limited the features in (i) senior executive officer compensation
plans that could lead senior executive officers to take unnecessary and excessive risks that could threaten the value of the Company,
(ii) employee compensation plans to ensure that the Company is not unnecessarily exposed to risks, and (iii) employee compensation plans that
could encourage the manipulation of reported earnings of the Company to enhance the compensation of an employee;
(6) The Company has required that all bonuses, retention awards, and incentive compensation of the senior executive officers and next twenty
most highly compensated employees be subject to a provision for recovery or “clawback” by the Company if the payments were based on
materially inaccurate financial statements or any other materially inaccurate performance metric criteria;
(7) The Company has prohibited any golden parachute payment to the senior executive officers and the next five most highly compensated
employees. For this purpose, a golden parachute payment is any payment triggered by involuntary termination with or without cause;
bankruptcy, insolvency or receivership of the Company; or a change in control of the Company;
(8) The Company has limited bonuses, retention awards, and incentive compensation paid to or accrued by employees to whom the bonus
payment limitation applies;
(9) The Company will permit a non-binding shareholder resolution on the senior executive officer compensation disclosures provided under the
Federal securities laws in accordance with any guidance, rules, and regulations promulgated by the SEC;
(10) The Company and its employees have complied with the excessive or luxury expenditures policy, as defined in the regulations and guidance
established under section 111 of EESA; and any expenses that, pursuant to the policy, required approval of the Board of Directors, a committee
of the Board of Directors, a senior executive officer, or an executive officer with a similar level of responsibility were properly approved;
(11) The Company will disclose the amount, nature, and justification for the offering of any perquisites whose total value exceeds $25,000 for
each of the employees subject to the bonus payment limitations;
(12) The Company will disclose whether the Company, the Board, or the Compensation Committee has engaged a compensation consultant, and
the services the compensation consultant or any affiliate provided;
(13) The Company has prohibited any tax gross-ups on compensation to the senior executive officers and the next twenty most highly
compensated employees;
(14) The Company has substantially complied with any compensation requirements set forth in the agreement between the Company and the
Treasury, as may have been amended;
(15) The Company has submitted to Treasury a complete and accurate list of the senior executive officers and the twenty next most highly
compensated employees for the current fiscal year with the non-senior executive officers ranked in descending order of level of annual
compensation, and with the name, title, and employer of each senior executive officer and most highly compensated employee identified; and,
(16) The officer certifying understands that a knowing and willful false or fraudulent statement made in connection with the certification may be
punished by fine, imprisonment or both.
Dated: March 14, 2014
By: /s/ John T. Taylor
John T. Taylor
Chief Executive Officer
PORTER BANCORP, INC.
TARP CERTIFICATION OF CHIEF FINANCIAL OFFICER
Exhibit 99.2
I, Phillip W. Barnhouse, Chief Financial Officer of Porter Bancorp, Inc. (the “Company”), certify that:
(1) The compensation committee (the “Compensation Committee”) of the Board of Directors (the “Board”) of the Company has met at least
every six months during the prior fiscal year with the senior risk officers of the Company to discuss and evaluate senior executive officer
compensation plans and employee compensation plans and the risks these plans pose to the Company;
(2) The Compensation Committee has identified and limited the features in the senior executive officer compensation plans that could lead
senior executive officers to take unnecessary and excessive risks that could threaten the value of the Company, has identified any features in the
employee compensation plans that pose risks to the Company, and has limited those features to ensure that the Company is not unnecessarily
exposed to risks;
(3) The Compensation Committee has reviewed at least every six months the terms of each employee compensation plan and identified and
limited the features in the plan that could encourage the manipulation of reported earnings of the Company to enhance the compensation of an
employee;
(4) The Compensation Committee will certify to these reviews;
(5) The Compensation Committee will provide a narrative description of how it limited the features in (i) senior executive officer compensation
plans that could lead senior executive officers to take unnecessary and excessive risks that could threaten the value of the Company,
(ii) employee compensation plans to ensure that the Company is not unnecessarily exposed to risks, and (iii) employee compensation plans that
could encourage the manipulation of reported earnings of the Company to enhance the compensation of an employee;
(6) The Company has required that all bonuses, retention awards, and incentive compensation of the senior executive officers and next twenty
most highly compensated employees be subject to a provision for recovery or “clawback” by the Company if the payments were based on
materially inaccurate financial statements or any other materially inaccurate performance metric criteria;
(7) The Company has prohibited any golden parachute payment to the senior executive officers and the next five most highly compensated
employees. For this purpose, a golden parachute payment is any payment triggered by involuntary termination with or without cause;
bankruptcy, insolvency or receivership of the Company; or a change in control of the Company;
(8) The Company has limited bonuses, retention awards, and incentive compensation paid to or accrued by employees to whom the bonus
payment limitation applies;
(9) The Company will permit a non-binding shareholder resolution on the senior executive officer compensation disclosures provided under the
Federal securities laws in accordance with any guidance, rules, and regulations promulgated by the SEC;
(10) The Company and its employees have complied with the excessive or luxury expenditures policy, as defined in the regulations and guidance
established under section 111 of EESA; and any expenses that, pursuant to the policy, required approval of the Board of Directors, a committee
of the Board of Directors, a senior executive officer, or an executive officer with a similar level of responsibility were properly approved;
(11) The Company will disclose the amount, nature, and justification for the offering of any perquisites whose total value exceeds $25,000 for
each of the employees subject to the bonus payment limitations;
(12) The Company will disclose whether the Company, the Board, or the Compensation Committee has engaged a compensation consultant, and
the services the compensation consultant or any affiliate provided;
(13) The Company has prohibited any tax gross-ups on compensation to the senior executive officers and the next twenty most highly
compensated employees;
(14) The Company has substantially complied with any compensation requirements set forth in the agreement between the Company and the
Treasury, as may have been amended;
(15) The Company has submitted to Treasury a complete and accurate list of the senior executive officers and the twenty next most highly
compensated employees for the current fiscal year, with the non-senior executive officers ranked in descending order of level of annual
compensation, and with the name, title, and employer of each senior executive officer and most highly compensated employee identified; and,
(16) The officer certifying understands that a knowing and willful false or fraudulent statement made in connection with the certification may be
punished by fine, imprisonment or both.
Dated: March 14, 2014
By: /s/ Phillip W. Barnhouse
Phillip W. Barnhouse
Chief Financial Officer