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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, 2016
OR
☐☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 001-33033
PORTER BANCORP, INC.
(Exact name of registrant as specified in its charter)
Kentucky
(State or other jurisdiction of incorporation or organization)
61-1142247
(I.R.S. Employer Identification No.)
2500 Eastpoint Parkway, Louisville, Kentucky
(Address of principal executive offices)
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 Capital Market
Indicate by check mark if the registrant is a well-known seasoned issuer (as defined in Rule 405 of the Securities Act). Yes ☐ 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 ☐ No ☒
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to
submit and post such files). Yes ☒ No ☐
Indicate by check mark 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. ☐
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 ☐ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ 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, 2016, was $16,097,309 based upon the last sales price reported for such date on the NASDAQ Capital Market.
4,632,933 Common Shares and 1,591,600 Non-Voting Common Shares were outstanding as of February 28, 2017.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement for the Annual Meeting of Shareholders to be held May 24, 2017 are incorporated by reference into Part III of this Form 10-K.
TABLE OF CONTENTS
Table of Contents
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operation
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
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 beyond 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; 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
Porter Bancorp, Inc. (the “Company”) is a bank holding company headquartered in Louisville, Kentucky. We operate PBI Bank (the “Bank”), our wholly owned subsidiary
and the fourteenth largest bank domiciled in the Commonwealth of Kentucky based on total assets. We operate banking offices in twelve counties in Kentucky. Our markets
include metropolitan Louisville in Jefferson County and the surrounding counties of Henry and Bullitt. We serve south central Kentucky and southern Kentucky from banking
offices in Butler, Green, Hart, Edmonson, Barren, Warren, Ohio, and Daviess Counties. We also have an office in Lexington, the second largest city in Kentucky. The Bank is
a community bank with a wide range of commercial and personal banking products. As of December 31, 2016, we had total assets of $945.2 million, total loans of $639.2
million, total deposits of $849.9 million and stockholders’ equity of $32.7 million.
Our Markets
We operate in markets that include the four largest cities in Kentucky – Louisville, Lexington, Bowling Green and Owensboro – and in other communities along the I-65
corridor.
■ Louisville/Jefferson, Bullitt and Henry Counties: Our headquarters are in Louisville, the largest city in Kentucky. We also have banking offices in
Bullitt County, south of Louisville, and Henry County, east of Louisville. Our 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 major employers are diversified across many industries and include the air hub for United
Parcel Service (“UPS”), two Ford assembly plants, GE Appliances and Lighting, 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 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 major employers include
Toyota, Lexmark, IBM Global Services and Valvoline.
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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 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. It
is an industrial, medical, retail and cultural hub for Western Kentucky and the area employers include Owensboro Medical System, US Bank Home Mortgage,
Titan Contracting and Specialty Food Group.
■
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, agriculture, 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, mobile banking, treasury management services, remote deposit services, electronic funds
transfers through ACH services, domestic and foreign wire transfers, cash management, vault services, along with loan and deposit sweep accounts.
Employees
At December 31, 2016, the Company had 238 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 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 Written Agreement. On June 24, 2011, the Bank entered into a consent order (the “Consent Order”) with the Federal Deposit Insurance Corporation
(“FDIC”) and the Kentucky Department of Financial Institutions (“KDFI”). The Bank agreed to obtain the written consent of both agencies before declaring or paying any
future dividends. The Consent Order established 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%.
On September 21, 2011, we entered into a written agreement (“Written Agreement”) with the Federal Reserve Bank of St. Louis. The Company made formal commitments in
the Written 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.
The Consent Order with the FDIC and KDFI was subsequently revised in October 2012 and November 2015. In the most recent revision, the Bank continues to agree to
maintain a minimum Tier 1 leverage ratio of 9% and a minimum total risk based capital ratio of 12%. The Bank also agrees that if it should be unable to reach the required
capital levels, and if directed in writing by the FDIC and KDFI, 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. The Bank has not been directed by the
FDIC to implement such a plan. The most recent Consent Order includes several of the substantive provisions of the prior Consent Orders, but omits previous provisions
related to reducing loan concentrations, which the Bank has satisfied. It also requires the Bank to continue to adhere to the plans implemented in response to the prior Consent
Orders.
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We continue to work towards achieving capital ratio compliance. At December 31, 2016, the Bank’s Tier 1 leverage ratio was 6.24% and its total risk-based capital ratio was
9.88%, which are below the minimums of 9.0% and 12.0% required by the Consent Order.
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 imposed new restrictions and an expanded framework of regulatory oversight for financial institutions, including depository institutions.
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 and the Bank, do business. For example, regulations issued under the
Dodd-Frank Act changed the assessment base for federal deposit insurance premiums by modifying the assessment base calculation to be based on a depository institution’s
consolidated assets less tangible capital instead of deposits, and permanently increased the standard maximum amount of deposit insurance per customer to $250,000. The
Dodd-Frank Act also imposed 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 repealed 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 Dodd-Frank Act codified and expanded 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 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, which results in greater compliance costs and higher fees paid to regulators. Future implementation of the Dodd-
Frank Act may result in restrictions on the Company’s operations.
Porter Bancorp. The Company 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 (the “Federal Reserve Board”). 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 and 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 may only do so 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, approval of the Federal Reserve Board is required 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,” incidental to financial activity, or complementary to financial activity that do not pose a substantial risk to the safety and soundness of depository
institutions or the financial system generally. Activities that are “financial in nature” include securities underwriting, dealing and market making in securities; 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 is 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.
Capital Adequacy Requirements. Both the Company and the Bank are required to comply with capital adequacy guidelines. Guidelines are established by the Federal Reserve
Board for the Company and the FDIC for the Bank. Both the Federal Reserve Board and the FDIC have substantially similar risk based and leverage ratio guidelines for
banking organizations, which are intended to ensure that banking organizations have adequate capital related to the risk levels of assets and off-balance sheet instruments. The
capital adequacy guidelines are minimum supervisory ratios generally applicable to banking organizations that meet certain specified criteria, assuming 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. The Bank is subject to a Consent Order with its primary regulators and therefore
cannot be considered well-capitalized. The Consent Order calls for a Tier 1 leverage ratio of 9.0% and a total risk-based capital ratio of 12.0%. The Bank’s Tier 1 leverage
ratio and total-risk based capital ratios were 6.24% and 9.88%, respectively at December 31, 2016.
In July 2013, the Federal Reserve Board and the FDIC approved final rules that substantially amended the regulatory risk-based capital rules applicable to the Company and
Bank. The final rules implement the regulatory capital reforms of the Basel Committee on Banking Supervision reflected in “Basel III: A Global Regulatory Framework for
More Resilient Banks and Banking Systems” (“Basel III”) and changes required by the Dodd-Frank Act. The final rules implementing the Basel III regulatory capital reforms
became effective for the Company and Bank on January 1, 2015, and include new minimum risk-based capital and leverage ratios. These rules refine the definition of what
constitutes “capital” for purposes of calculating the capital ratios.
The Basel III minimum capital level requirements applicable to bank holding companies and banks subject to the rules are a common equity Tier 1 capital ratio of 4.5%, a
Tier 1 risk-based capital ratio of 6%, a total risk-based capital ratio of 8%, and a Tier 1 leverage ratio of 4% for all institutions. The rules also establish a “capital conservation
buffer” of 2.5%, to be phased in over three years, above the regulatory minimum risk-based capital ratios. Once the capital conservation buffer is fully phased in, the
minimum ratios area common equity Tier 1 risk-based capital ratio of 7.0%, a Tier 1 risk-based capital ratio of 8.5%, and a total risk-based capital ratio of 10.5%.
The phase-in of the capital conservation buffer requirement began in January 2016 at 0.625% of risk-weighted assets and increases each year until fully implemented in
January 2019. An institution is subject to limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses if capital levels fall below
minimum levels plus the buffer amounts. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions.
Under these new rules, Tier 1 capital generally consists of common stock (plus related surplus) and retained earnings, limited amounts of minority interest in the form of
additional Tier 1 capital instruments, and non-cumulative preferred stock and related surplus, subject to certain eligibility standards, less goodwill and other specified
intangible assets and other regulatory deductions. Tier 2 capital may consist of subordinated debt, certain hybrid capital instruments, qualifying preferred stock and a limited
amount of the allowance for loan losses. Proceeds of trust preferred securities are excluded from Tier 1 capital unless issued before 2010 by an institution with less than $15
billion of assets. Total capital is the sum of Tier 1 and Tier 2 capital.
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 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 decrease, 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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requiring a capital restoration plan;
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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.
If an institution is required to submit a capital restoration plan, the institution’s holding company must guarantee 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.
Dividends. Under Federal Reserve Board 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.
The Company is a legal entity separate and distinct from the Bank. Historically, the majority of our revenue has been from dividends paid to us by the Bank. The 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. The Company and the 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. The KDFI 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. The Bank did not pay any dividends in 2016 or 2015.
With respect to the payment of dividends, Porter Bancorp’s issued and outstanding Series E and Series F Preferred Shares rank senior to its common shares and non-voting
common shares.
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.
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PBI Bank. The Bank, a Kentucky chartered commercial bank, is subject to regular bank examinations and other supervision and regulation by both the FDIC and the 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 Kentucky; 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.
Capital Requirements. Please see capital adequacy requirements discussion above. As previously discussed, the 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 Tier 1 leverage ratio of 9%. As of December 31, 2016, the Bank’s ratio of total capital to total risk-
weighted assets was 9.88% and its Tier I leverage ratio was 6.24%, both below the ratios required by the Consent Order.
Deposit Insurance Assessments. The deposits of the 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.
The Dodd-Frank Act imposed additional assessments and costs with respect to deposits. Under the Dodd-Frank Act, the FDIC imposes deposit insurance assessments based
on total assets rather than total deposits. Pursuant to the Dodd-Frank Act, the FDIC revised the deposit insurance assessment system and implemented a revised assessment
rate process with the goal of differentiating insured depository institutions who pose greater risk to the DIF.
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 these matters. 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 shareholder. 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 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.
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 may increase competition within the
markets in which the Company and the Bank operate.
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Insider Credit Transactions. The restrictions on loans to directors, executive officers, principal shareholders and their related interests (collectively referred to 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, which may
not exceed the institution’s total unimpaired capital and surplus.
Consumer Protection Laws. The Bank is subject to federal consumer protection statues and regulations promulgated under those laws, including, but not limited to, the:
Truth-In-Lending Act and Regulation Z, governing disclosures of credit terms to consumer borrowers;
●
● Home Mortgage Disclosure Act and Regulation C, requiring financial institutions to provide certain information about home mortgage and refinanced loans;
● Real Estate Settlement Procedures Act (“RESPA”), requiring lenders to provide borrowers with disclosures regarding the nature and cost of real estate settlements
●
and prohibiting certain abusive practices;
Secure and Fair Enforcement for Mortgage Licensing Act (“S.A.F.E. Act”), requiring residential loan originators who are employees of financial institutions to meet
registration requirements;
Fair Credit Reporting Act and Regulation V, governing the provision of consumer information to credit reporting agencies and the use of consumer information;
●
Equal Credit Opportunity Act and Regulation B, prohibiting discrimination on the basis of race, religion or other prohibited factors in the extension of credit;
●
Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;
●
●
Truth in Savings Act, which requires disclosure of deposit terms to consumers;
● Regulation CC, which relates to the availability of deposit funds to consumers;
● Right to Financial Privacy Act, which imposes a duty to maintain the confidentiality of consumer financial records and prescribes procedures for complying with
●
administrative subpoenas of financial records;
Electronic Funds Transfer Act, governing automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of
automated teller machines and other electronic banking services;
● Automated Overdraft Payment Regulations and Regulation E, requiring financial institutions to provide customer notices, monitor overdraft payment programs, and
prohibiting financial institutions from charging consumer fees for paying overdrafts on automated teller machine and one time debit card transactions unless a
consumer consents, or opts in to the service for those types of transactions.
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 allows 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.
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.
Volcker Rule. On December 10, 2013, the final Volcker Rule under the Dodd-Frank Act was approved and implemented by the Federal Reserve Board, the FDIC, the
Securities and Exchange Commission (“SEC”), and the Commodity Futures Trading Commission. The Volcker Rule attempts to reduce risk and banking system instability by
restricting U.S. banks from investing in or engaging in proprietary trading and speculation and imposing a strict framework to justify exemptions for underwriting, market-
making and hedging activities. U.S. banks will be restricted from investing in funds with collateral comprised of less than 100% loans that are not registered with the SEC and
from engaging in hedging activities that do not hedge a specific identified risk. The Volcker Rule does not have a significant effect on the Bank’s operations.
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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.
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 the
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 the operations of financial institutions. 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 bank 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. From time to time various laws, regulations and governmental programs affecting financial institutions and the financial industry
are introduced in Congress or otherwise promulgated by regulatory agencies. Such measures may change the environment in which the Company and its subsidiaries operate
in substantial and unpredictable ways. The nature and extent of future legislative, regulatory or other changes affecting financial institutions are unpredictable at this
time. Future legislation, policies and the effects thereof might have a significant influence on overall growth and distribution of loans, investments and deposits. They also
may affect interest rates charged on loans or paid on time and savings deposits. New 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.
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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 are accessible at no cost on our
web site at http://www.pbibank.com, under the Investors Relations section, once they have been electronically filed with 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.
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 Written Agreement with the Federal Reserve that restrict the conduct of our operations and
may have a material adverse effect on our business.
Our Consent Order with the FDIC and the KDFI requires the Bank to maintain a minimum Tier 1 leverage ratio of 9% and a minimum total risk based capital ratio of 12%.
We continue to work towards achieving capital ratio compliance. At December 31, 2016, the Bank’s Tier 1 leverage ratio was 6.24% and its total risk-based capital ratio was
9.88%, which are below the minimums of 9.0% and 12.0% required by the Bank’s Consent Order.
The Consent Order requires the Bank to obtain the written consent of both agencies before declaring or paying any future dividends to the Company. The most recent Consent
Order requires the Bank to continue to adhere to the plans implemented in response to prior Consent Orders, but omits previous provisions related to reducing loan
concentrations, which the Bank has satisfied. The Bank has also agreed that if it should be unable to reach the required capital levels, and if directed in writing by the FDIC,
the Bank will develop, adopt and implement within 30 days 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. The Bank has not been directed by the FDIC to implement such a plan.
In a Written Agreement with the Federal Reserve Bank of St. Louis, the Company 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.
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 our 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.
In its Consent Order with the FDIC and the KDFI, the 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 average assets of 9.0%. As of December 31, 2016, the Bank’s ratio of total capital to total risk-weighted assets was 9.88% and its ratio of Tier 1 capital to average
assets was 6.24%, both below the ratios required by the Consent Order.
We have agreed to restore our capital ratios to levels that comply with our regulatory agreements. We have implemented several initiatives to increase our regulatory capital.
We continue to evaluate other specific initiatives to attain these objectives, such as selling assets and raising capital by selling stock.
Our ability to raise additional capital will depend on, among other things, conditions in the capital markets (which are outside of our control) and our financial performance,
including the management of our revenue, expenses, levels of average assets, asset quality, preservation of deferred tax assets 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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As a bank holding company, we depend on dividends and distributions paid to us by our banking subsidiary.
The Company is a legal entity separate and distinct from the Bank 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 the Company receives from the Bank. Regulations of the FDIC and the KDFI govern the ability of the 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, the Bank agreed not to pay dividends to us without the prior consent of those regulators. Liquid assets were $2.0 million at
December 31, 2016. Since the Bank is unlikely to be in a position to pay dividends to the Company until the Consent Order is satisfied and the Bank returns to profitability,
cash inflows for the Company are limited to common stock or debt issuances. Ongoing operating expenses of the Company are forecasted at approximately $800,000 for
2017. See the “Item 1. Business” “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities – Dividends.”
We are currently precluded from paying any dividends.
Our agreement with the holders of our trust preferred securities provides that we cannot pay dividends until we pay all deferred distributions in full and resume paying
quarterly distributions. We have also agreed with the Federal Reserve to obtain its written consent prior to declaring or paying any future dividends. As a practical matter, we
cannot pay dividends until the Consent Order is satisfied and we return to consistent profitability. In addition, the dividend preferences of our Series E and Series F Preferred
Shares entitle our preferred shareholders to receive an annual, noncumulative 2% dividend before we can pay a dividend on our non-voting common shares and voting
common shares.
Our holding company debt could make it difficult to raise capital.
At December 31, 2016, we had an aggregate obligation of $21.4 million relating to the principal and accrued unpaid interest on our four issues of junior subordinated
debentures, which has resulted in a deferral of distributions on our trust preferred securities. Although we are permitted to defer payments on these securities for up to five
years (and we commenced doing so in 2016), the deferred interest payments continue to accrue until paid in full. Our deferral period expires after the second quarter of 2021.
Our holding company debt 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 in addition to the amount of funds such investors or purchaser would need to provide in order to recapitalize the Bank and the Company.
We are defendants in various legal proceedings.
The Company and the Bank are involved in judicial proceedings and regulatory investigations concerning matters arising from our business activities. Although we believe
we have a meritorious defense in all significant litigation pending against us, we cannot predict the ultimate outcome. 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 matters could have
a material adverse effect on our financial condition, results of operations, or cash flows. For more information about ongoing legal proceedings, see “Note 22 –
Contingencies” of the Notes to Consolidated Financial Statements.
Regulatory restrictions have limited our ability to pay interest on the junior subordinated debentures that underlie our trust preferred securities. If we cannot pay
accrued and unpaid interest on these securities for more than twenty consecutive quarters, we will be in default.
Effective with the third quarter of 2016, we resumed deferring interest payments on the junior subordinated debentures relating to our trust preferred securities. Deferring
interest payments on the junior subordinated debentures resulted in a deferral of distributions on our trust preferred securities. If we defer distributions on our trust preferred
securities for 20 consecutive quarters, we must pay all deferred distributions in full or we will be in default. Our deferral period expires after the second quarter of 2021.
Deferred distributions on our trust preferred securities, which totaled $378,000 as of December 31, 2016, are cumulative, and unpaid distributions accrue and compound on
each subsequent payment date. If as a result of a default we become subject to any liquidation, dissolution or winding up, holders of the trust preferred securities will be
entitled to receive the liquidation amounts to which they are entitled, including all accrued and unpaid distributions, before any distribution can be made to our shareholders.
In addition, the holders of our Series E and Series F Preferred Shares will be entitled to receive liquidation distributions totaling more than $10.5 million before any
distribution can be made to the holders of our common shares.
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In the past, the Bank served as trustee for employee stock ownership plans (“ESOPs”) which engaged in transactions that are under review by the U. S. Department
of Labor (“DOL”), subjecting us to certain legal risks.
From 2007 until the first quarter of 2013, the Bank served as trustee for certain ESOPs that purchased the stock of companies from prior owners in purchase transactions.
Stock purchase transactions by ESOPs 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. The Bank was a
defendant in legal proceedings initiated by the DOL with respect to two stock purchase transactions by ESOPs for which the Bank served as trustee. Both matters have been
settled. A ruling in any future litigation that the Bank failed to fulfill its fiduciary duties under ERISA with respect to an ESOP, including stock purchases by the ESOP, could
subject us to claims for damages as well as fines and penalties assessable under ERISA. See “Note 22 – Contingencies” of the Notes to Consolidated Financial Statements.
Investigations into and heightened scrutiny of our operations could result in additional costs and damage our reputation.
In October 2014, the Department of Justice (“DOJ”) initiated an investigation concerning possible violations of federal laws, including, among other things, possible
violations related to false bank entries, bank fraud and securities fraud. The investigation concerns allegations that Bank personnel engaged in practices intended to delay or
avoid disclosure of the Bank’s asset quality at the time of and following the United States Treasury’s purchase of preferred shares from the Company in November 2008. We
are cooperating with the investigation. To date, DOJ has made no determination whether to pursue any action in the matter. Heightened scrutiny of the operations of the
Company and the Bank by federal and state officials may subject us to governmental or regulatory inquiries, investigations, actions, penalties and fines, which could
adversely affect our reputation and result in costs to us in excess of current reserves and management’s estimate of the aggregate range of possible loss for litigation matters.
Our business may be adversely affected by conditions in the financial markets and by economic conditions generally.
Weakness in business and economic conditions generally or specifically in our markets may have one or more of the following adverse effects on our business:
● A decrease in the demand for loans and other products and services we offer;
● 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.
Adverse conditions in the general business environment have had an adverse effect on our business in the past. Although the general business environment has improved, we
cannot predict how long such improvement can be sustained. In addition, the improvement of certain economic indicators, such as real estate asset values, 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 economic conditions worsen, 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 77.2% of our loan portfolio as of December 31, 2016, was comprised of commercial and residential loans collateralized by real estate. Adverse economic
conditions could decrease demand for real estate and depress real estate values in our markets. Persistent weakness in the real estate market could 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, it will become more likely that we would be required
to increase our allowance for loan losses. If during a period of depressed real estate values, we were 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.
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We offer real estate construction and development loans, which carry a higher degree of risk than other real estate loans. Weakness in the residential construction
and commercial development real estate markets has in the past increased the non-performing assets in our loan portfolio and our provision for loan loss expense.
These impacts have had, and could have in the future, a material adverse effect on our capital, financial condition and results of operations.
Approximately 5.7% of our loan portfolio as of December 31, 2016 consisted of real estate construction and development loans, up slightly from 5.4% at December 31, 2015
and 5.3% at December 31, 2014. 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 permanent financing or 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 and financial condition.
Residential construction and commercial development real estate activity in our markets were affected by the challenging economic conditions that followed the financial
crisis of 2008. Weakness in these sectors could 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 development 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 in the past, causing our total net-charge offs to increase and requiring us to significantly increase our allowance for loan
losses. Any further increase in our non-performing assets and related increases in our provision for loan loss expense 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,
economic and environmental factors, 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 classified loans and non-performing assets may increase in the foreseeable future if economic conditions 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, may decline, 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
estimated net 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 would 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 loss losses based on a number of factors.
We believe that our allowance for loan losses is adequate. However, if our assumptions or judgments are wrong, our allowance for loan losses may not be sufficient to cover
our actual loan 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 loan losses cannot be determined
at this time and may vary from the amounts of past provisions.
We continue to hold and from time to time acquire 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”). An increase in our OREO portfolio increases the expenses incurred to manage and dispose of these properties, which sometimes includes
funding construction required to facilitate sale.
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Properties in our OREO portfolio are recorded at 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.
Any decreases in market prices of real estate in our market areas may lead to additional OREO write downs, with a corresponding expense in our statement of operations. 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 auctions or 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 weakens, 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 a 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. 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 or international economic or 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.
Fixed-rate loans increase our exposure to interest rate risk in a rising rate environment because interest-bearing liabilities may be subject to repricing before assets become
subject to repricing. Fixed rate investment securities are subject to fair value declines as interest rates rise. 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.
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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.
Our liquidity policies and limits are established by the Board of Directors of the Bank, with operating limits managed and monitored 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 the Bank and the Company to ensure that various alternative strategies exist to meet 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 do not work as well as intended, we may be unable to make
loans and 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 are currently prohibited from accepting
brokered deposits. 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 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 shares 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 not be able to realize the value of our tax losses and deductions.
Due to historic losses, we have a net operating loss carry-forward of $42.1 million, credit carry-forwards of $900,000, and other net deferred tax assets of $11.1 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. Our deferred tax assets are calculated using a federal corporate tax rate of 35%. Changes in tax laws and rates may affect our
deferred tax assets in the future. If lower federal corporate tax rates are enacted, our net deferred tax assets would be reduced commensurate with the rate reduction.
Additionally, should the Company need to raise additional capital by issuing new common shares or securities convertible into common shares, then depending on the number
of common share equivalents issued, it could trigger a “change in control,” as defined by Section 382 of the Internal Revenue Code. Such an event 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.
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 shares.
Our issuance of additional common shares or securities convertible into common shares would dilute the ownership interest of our existing common shareholders. The market
price of our common shares could decline as a result of such an offering as well as other sales of a large block of shares of our common shares or similar securities in the
market after such an offering, or the perception that such sales could occur. Our common shares have traded from time-to-time at a price below our book value per share.
Accordingly, a sale of common shares at or below our book value would be dilutive to current shareholders.
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. FDIC assessments for deposit
insurance are based 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. Any increase in assessment rules may adversely affect our business, financial condition or results of operations.
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 areas has grown in recent years as changes in banking law have allowed several banks to enter those
markets by establishing new branches.
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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, 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 in which 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, valuation of stock based compensation and valuation of deferred
income taxes. Because of the uncertainty of estimates involved in these matters, we may be required, among other things, to significantly increase the allowance for credit
losses, sustain credit losses that are significantly higher than the reserve provided, recognize significant impairment on our OREO, or permanently impair deferred tax assets.
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.
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.
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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 appropriate information security procedures and controls, our technologies, systems, networks, and our customers’ devices may become the
target of cyber attacks or information security breaches. These events 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, we can give 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, as 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, and not our
shareholders. Compliance with these regulations is costly and may make it more difficult to operate profitably.
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 required capital
could affect our ability to pay dividends on common shares, our ability to grow through the development of new offices, make acquisitions, and remain independent. 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
Consumer Financial Protection Bureau, 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.
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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 could 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.
Enacted in July 2010, the Dodd-Frank Act has had a significant impact the U.S. financial system, including among other things:
●
●
●
●
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.
Some 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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Table of Contents
Item 1B.
Unresolved Staff Comments
Not applicable.
Item 2.
Properties
The Bank operates 15 banking offices in Kentucky. 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 our main office in Louisville and in Glasgow.
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
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
Beaver Dam Office: 1300 North Main Street, Beaver Dam
Owensboro/Daviess County
Owensboro Office: 1819 Frederica Street, Owensboro
Southern Kentucky
Campbell Lane Office: 751 Campbell Lane, Bowling Green
Glasgow Office: 1006 West Main Street, Glasgow
Other Properties
Office Building: 701 Columbia Avenue, Glasgow
Item 3.
Legal Proceedings
Square Footage
Owned/Leased
30,000
1,500
3,500
10,000
3,900
Owned
Owned
Owned
Owned
Owned
8,500
Leased
8,500
11,000
5,000
7,500
9,000
3,200
Owned
Owned
Owned
Owned
Owned
Owned
3,000
Owned
7,500
12,000
Owned
Owned
19,000
Owned
We are defendants in various legal proceedings. Litigation is subject to inherent uncertainties and unfavorable outcomes could occur. See Note 22, “Contingencies” in the
Notes to our consolidated financial statements for detail regarding ongoing legal proceedings and other matters.
Item 4.
Mine Safety Disclosures
Not applicable.
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Table of Contents
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
PART II
Our common shares are traded on the NASDAQ Capital Market under the ticker symbol “PBIB”. The following table presents the high and low market closing prices per
share for our common shares reported on the NASDAQ Capital Market for the periods indicated. The per share prices shown in the table have been adjusted for the 1-for-5
reverse stock split of our common shares that took effect on December 16, 2016.
Quarter Ended
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Quarter Ended
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Market Value
High
12.90 $
8.55
11.25
7.10
Market Value
High
2016
Low
2015
Low
8.80 $
8.75
9.30
4.80
Dividend
Dividend
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
8.05 $
7.70
5.95
5.45
6.90 $
6.95
4.50
2.30
$
$
As of February 15, 2017, we had approximately 1,336 shareholders, including 212 shareholders of record and approximately 1,124 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 shares until the Consent Order has been lifted or modified and we return to consistent profitability. As a bank holding
company, our ability to declare and pay dividends depends on various federal regulatory considerations, including the guidelines of the Federal Reserve regarding capital
adequacy and dividends. We have 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 shares is the dividends that the Bank may declare and pay to us out of funds legally available for
payment of dividends. Currently, the Bank must obtain the prior written consent of its primary regulators prior to declaring or paying any dividends. In addition to this current
restriction, various laws applicable to the 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 a 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.
Effective with the third quarter of 2016, we resumed deferring interest payments on the junior subordinated notes underlying 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 or we will be in default. Our deferral period expires after the second quarter of 2021.
We will not be able to pay cash dividends on our common shares until we have paid all deferred distributions on our trust preferred securities. Deferred distributions on our
trust preferred securities are cumulative, and distributions 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 our preferred shares 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 shares or preferred
shares. Our Series E and Series F Preferred Shares have priority over our common shares and non-voting common shares with respect to any payment of dividends.
Purchase of Equity Securities by Issuer
During the fourth quarter of 2016, the Company did not repurchase any of its common shares, which is its only registered class of equity securities.
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Table of Contents
Item 6.
Selected Financial Data
The following table summarizes our selected historical consolidated financial data from 2012 to 2016. 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)
2016
As of and for the Years Ended December 31,
2013
2014
2015
2012
Income Statement Data:
Interest income
Interest expense
Net interest income
Provision for loan losses
Non-interest income
Non-interest expense
Loss before income taxes
Income tax benefit
Net loss
Less:
Dividends and accretion on preferred stock
Effect of exchange of preferred stock for common stock
Earnings (loss) allocated to participating securities
Net income (loss) attributable 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 (2)
Tangible book value per common share (2)
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
$
$
$
$
35,602
5,981
29,621
(2,450)
4,764
39,567
(2,732)
21
(2,753)
—
—
(88)
(2,665) $
(0.46) $
(0.46)
0.00
4.81
4.79
36,574 $
7,023
29,551
(4,500)
7,695
44,959
(3,213)
—
(3,213)
—
—
(336)
(2,877) $
(0.62) $
(0.62)
0.00
5.43
5.33
39,513 $
9,795
29,718
7,100
4,079
39,435
(12,738)
(1,583)
(11,155)
2,362
(36,104)
3,159
19,428 $
7.94 $
7.94
0.00
8.37
8.05
43,228 $
11,143
32,085
700
5,919
38,890
(1,586)
—
(1,586)
2,079
—
(267)
(3,398) $
(1.44) $
(1.44)
0.00
(0.92)
(1.46)
57,729
15,774
41,955
40,250
9,590
44,292
(32,997)
(65)
(32,932)
1,929
—
(1,429)
(33,432)
(14.23)
(14.23)
0.00
3.71
2.91
$
945,177
$
948,722 $
1,017,989 $
1,076,121 $
1,162,631
$
22,458
21,000
3,150
929,140
621,275
852,717
2,967
21,000
3,708
39,423
$
3,081
21,000
4,050
15,752
25,000
4,950
4,492
25,000
5,850
5,604
25,000
6,975
984,419 $
635,948
907,785
3,473
23,981
4,608
33,083
1,049,232 $
662,442
961,671
4,473
25,000
5,508
33,881
1,098,400 $
788,176
1,004,052
4,990
25,000
6,404
42,631
1,341,565
1,033,320
1,217,083
6,325
25,000
7,309
75,679
(1) On December 16, 2016, the Company completed a 1-for-5 reverse stock split of its issued and outstanding common and non-voting common shares. As a result of the
reverse stock split, all share and per share data has been adjusted in the accompanying tables. Preferred shares were not impacted by the 1-for-5 reverse stock split.
(2) After shareholder approval on February 25, 2015, our two series of mandatorily convertible preferred shares converted into a total of 810,720 common shares and
1,291,600 non-voting common shares.
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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. (the “Company”) and its wholly owned subsidiary, PBI Bank (the “Bank”). The Company is a Louisville, Kentucky-based bank holding company that operates
banking offices of the Bank in twelve Kentucky counties. Our markets include metropolitan Louisville in Jefferson County and the surrounding counties of Henry and Bullitt.
We serve south central Kentucky and southern Kentucky from banking offices in Butler, Green, Hart, Edmonson, Barren, Warren, Ohio, and Daviess Counties. We also have
an office in Lexington, the second largest city in Kentucky. The Bank is a community bank with a wide range of commercial and personal banking products.
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 55.6% of our total loan portfolio as of December 31, 2016, and 54.4% as of
December 31, 2015. 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, 2016, we reported a net loss of $2.8 million compared with net loss of $3.2 million for the year ended December 31, 2015 and a net loss of
$11.2 million for the year ended December 31, 2014. After deductions for dividends and accretion on preferred stock, allocating losses to participating securities, and the
effect of the exchange of preferred stock for common stock, net loss attributable to common shareholders was $2.7 million for the year ended December 31, 2016, compared
with net loss attributable to common shareholders of $2.9 million for the year ended December 31, 2015, and a net income attributable to common shareholders of $19.4
million for the year ended December 31, 2014. Basic and diluted loss per common share were ($0.46) for the year ended December 31, 2016, compared with net loss per
common share of ($0.62) for 2015, and net income per common share of $7.94 for 2014.
While operating results for 2016 improved as a result of the reduction in non-performing asset expenses, our results for the year were negatively impacted by $8.0 million in
litigation expenses connected to the Kentucky Court of Appeals ruling against the Bank. While we continue to appeal the ruling, the damages award and all interest due
thereon have been accrued. Funds to retire this obligation are on hand and available with no material impact to liquidity should a decision be made to retire the accrued
liability.
Non-performing loans were 1.44% of total loans and non-performing assets were 1.70% of total assets, at December 31, 2016 compared to 2.28% and 3.51%, respectively, at
December 31, 2015. We remain diligent in the management of our loan portfolio and are striving to continue improving 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 items are of note for the year ended December 31, 2016:
● Net interest margin increased 15 basis points to 3.42% for the year ended 2016 compared with 3.27% in the year ended December 31, 2015. The increase in margin
between periods was primarily due to a decrease in the cost of interest bearing liabilities from 0.85% in 2015 to 0.79% in 2016. The decrease in cost of interest
bearing liabilities was primarily driven by the continued repricing of certificates of deposit at lower rates. Average loans decreased 2.3% to $621.3 million in 2016
compared with $635.9 million in 2015.
● We recorded negative provision for loan losses expense of $2.5 million in 2016, compared to a negative provision for loan losses expense of $4.5 million for 2015,
because of declining historical loss rates, improvements in loan quality, and management’s assessment of risk in the loan portfolio. Net loan charge-offs were
$624,000 for 2016, compared to $2.8 million for 2015 and $15.9 million for 2014. In the following paragraphs, we discuss our improving trends in non-performing
loans, past due loans, and loan risk categories during the period, factors that led to the negative provision expense.
● Non-performing loans decreased $4.9 million to $9.2 million at December 31, 2016, compared with $14.1 million at December 31, 2015. The decrease in non-
performing loans was due to $5.3 million in paydowns, $1.7 million in charge-offs, $1.0 million in loans returned to accrual status, and $1.3 million in transfers to
OREO, offset by $4.4 million in loans placed on non-accrual.
22
Table of Contents
●
Loans past due 30-59 days decreased from $3.1 million at December 31, 2015 to $2.3 million at December 31, 2016, and loans past due 60-89 days increased from
$241,000 at December 31, 2015 to $315,000 at December 31, 2016. Total loans past due and nonaccrual loans decreased to $11.8 million at December 31, 2016
from $17.5 million at December 31, 2015.
● All loan risk categories (other than pass loans) have decreased since December 31, 2015. Pass loans represent 91.7% of the portfolio at December 31, 2016,
compared to 83.6% at December 31, 2015 and 73.8% at December 31, 2014. During 2016, the pass category increased approximately $68.9 million, the watch
category declined approximately $32.9 million, the special mention category declined approximately $898,000, and the substandard category declined approximately
$14.5 million. The $14.5 million decrease in loans classified as substandard was driven by $9.8 million in principal payments received, $1.3 million in migration to
OREO, $9.2 million in loans upgraded from substandard, and $2.4 million in charge-offs, offset by $8.1 million in loans moved to substandard during 2016.
●
Foreclosed properties were $6.8 million at December 31, 2016, compared with $19.2 million at December 31, 2015. During the year ended December 31, 2016, the
Company acquired $1.3 million and sold $12.7 million of OREO. We incurred OREO losses totaling $1.2 million during the year ended December 31, 2016,
reflecting fair value write-downs for reductions in listing prices for certain properties, updated appraisals, and certain properties liquidated through auctions, and
$222,000 in net gain on sales of OREO.
● Our non-performing assets decreased to $16.0 million or 1.70% of total assets at December 31, 2016, compared with $33.3 million or 3.51% of total assets at
December 31, 2015. In addition, accruing troubled debt restructurings declined to $5.4 million at December 31, 2016 from $17.4 million at December 31, 2015.
● Non-interest income decreased $2.9 million in 2016 to $4.8 million compared with $7.7 million for the year ended December 31, 2015. The difference was driven
primarily by gains on the sales of securities totaling $216,000 in 2016, compared to $1.8 million for 2015, as well as a decrease in OREO rental income of $890,000
between the two periods as a result of income producing properties being sold. The results for 2015 were also positively impacted by an $883,000 gain on
extinguishment of junior subordinated debt.
● Non-interest expense decreased $5.4 million in 2016 to $39.6 million compared with $45.0 million for 2015, due to a decrease in OREO expenses of $10.8 million,
partially offset by an increase in litigation and loan collection expense of $7.7 million. The latter increased primarily due to the accrual of the punitive damages and
statutory interest totaling $8.0 million following the adverse Kentucky Court of Appeals decision in 2016.
● Deposits decreased $28.1 million or 3.2% to $849.9 million at December 31, 2016 compared with $878.0 million at December 31, 2015. Certificate of deposit
balances decreased $55.2 million during 2016 to $444.6 million at December 31, 2016, from $499.8 million at December 31, 2015. Demand deposits increased $4.4
million or 3.6% during 2016 to $124.4 million compared with $120.0 million at December 31, 2015.
● On April 15, 2016, we completed a private placement of common shares and non-voting common shares to accredited investors for a total purchase price of $5.0
million. The investors in the private placement directed a portion of purchase price to pay all deferred interest payments on our junior subordinated debentures,
bringing our interest payments current through the second quarter of 2016. The remaining proceeds from the private placement totaled approximately $2.2 million
and were retained for general corporate purposes and to support the Bank.
● On June 29, 2016, we notified the trustees of our election to again defer our interest payments effective with the third quarter 2016 payment. We have the ability to
defer distributions on our trust preferred securities for 20 consecutive quarters or through the second quarter of 2021.
●
The Consent Order requires the Bank to obtain the written consent of both the FDIC and the KDFI before declaring or paying any future dividends to the Company,
which are the Company’s principal source of revenue. Since the Bank is unlikely to be able to pay dividends to the Company until the Consent Order is lifted or
modified, the Company’s sources of cash are limited to issuing new debt or capital securities. The Company’s liquid assets were $2.0 million as of December 31,
2016. Ongoing operating expenses of the Company are forecast at approximately $800,000 for the next twelve months.
● On December 16, 2016, we completed a 1-for-5 reverse stock split of our issued and outstanding common and non-voting common shares. The reverse stock split
was intended to increase the trading price per share of the common shares, with the objective to make the common shares a more attractive and cost effective
investment and enhance liquidity for our shareholders. As a result of the reverse stock split, all share and per share data has been adjusted in this report. Preferred
shares were not affected by the 1-for-5 reverse stock split.
These items are discussed in further detail throughout this Item 7.
23
Table of Contents
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 the following significant accounting
policies 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 – The Bank maintains an allowance for loan losses believed to be sufficient to absorb probable incurred credit losses existing in the loan
portfolio. 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 evaluated and measured for impairment. The general component is based on historical loss experience adjusted for qualitative 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 that 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.
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. Costs incurred in order to perfect the lien prior to foreclosure may be capitalized if the
fair value less the cost to sell exceeds the balance of the loan at the time of transfer to OREO. Examples of eligible costs to be capitalized are payments of delinquent property
taxes to clear tax liens or payments to contractors and subcontractors to clear mechanics’ liens. Fair value of OREO is determined on an individual property basis. To
determine the fair value of OREO for smaller dollar single family homes, we consult with internal real estate sales staff and external realtors, investors, and appraisers. If the
internally evaluated market price is below our underlying investment in the property, appropriate write-downs are taken. For larger dollar residential and commercial real
estate properties, we obtain a new appraisal of the subject property or have staff from our special assets group or in our centralized appraisal department evaluate the latest in-
file appraisal in connection with the transfer to other real estate owned. We typically obtain updated appraisals within five quarters of the anniversary date of ownership
unless a sale is imminent. Subsequent reductions in fair value are recorded as non-interest expense when a new appraisal indicates a decline in value or in cases where a
listing price is lowered below the appraised amount.
Stock-based Compensation – Compensation cost is recognized for restricted stock awards issued to employees, based on the fair value of these awards at the date of grant.
The market price of the Company’s common shares 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 in
December 2011 based upon the analysis of our past performance and our expected future performance. When evaluating our deferred tax assets for realizability during 2016
and 2015, we concluded that although trend improvements were noted, a full valuation allowance was still necessary at December 31, 2016 and 2015, 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 – 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.
24
Table of Contents
Results of Operations
The following table summarizes components of income and expense and the change in those components for 2016 compared with 2015:
Gross interest income
Gross interest expense
Net interest income
Provision (negative provision) for loan losses
Non-interest income
Gains on sale of securities, net
Non-interest expense
Net loss before taxes
Income tax expense
Net loss
Losses attributable to participating securities
Net loss attributable to common shareholders
$
For the
Years Ended December 31,
2016
2015
Change from Prior Period
Percent
Amount
(dollars in thousands)
35,602 $
5,981
29,621
(2,450)
4,548
216
39,567
(2,732)
21
(2,753)
88
(2,665)
36,574 $
7,023
29,551
(4,500)
5,929
1,766
44,959
(3,213)
—
(3,213)
336
(2,877)
(972)
(1,042)
70
(2,050)
(1,381)
(1,550)
(5,392)
481
21
(460)
(248)
(212)
(2.7)%
(14.8)
0.2
(45.6)
(23.3)
(87.8)
(12.0)
15.0
100.0
(14.3)
(73.8)
(7.4)
Net loss of $2.8 million for the year ended December 31, 2016 decreased by $460,000 from a net loss of $3.2 million for 2015. A negative provision for loan losses expense
of $2.5 million was recorded for 2016 due to improvements in loan quality and management’s assessment of risk within the portfolio as compared to $4.5 million negative
provision for loan losses expense for 2015. Non-interest income decreased $2.9 million during 2016 due primarily to a decrease in OREO rental income of $890,000 driven
by the sale of income producing properties and a $1.6 million decrease in gains on the sale of securities compared to 2015. Non-interest expense decreased $5.4 million
during 2016. OREO expense decreased by $10.8 million, but was offset by a $7.7 million increase in litigation and loan collection expense primarily resulting from the
adverse Kentucky Court of Appeals ruling. After consideration of losses attributable to participating securities, net loss attributable to common shareholders was $2.7 million
for the year ended December 31, 2016, as compared to net loss attributable to common shareholders of $2.9 million for 2015.
The following table summarizes components of income and expense and the change in those components for 2015 compared with 2014:
Gross interest income
Gross interest expense
Net interest income
Provision (negative provision) for loan losses
Non-interest income
Gains on sale of securities, net
Non-interest expense
Net loss before taxes
Income tax benefit
Net loss
Dividends and accretion on preferred stock
Effect of exchange of preferred stock for common stock
Losses (earnings) attributable to participating securities
Net income (loss) attributable to common shareholders
$
For the
Years Ended December 31,
2015
2014
Change from Prior Period
Percent
Amount
(dollars in thousands)
36,574 $
7,023
29,551
(4,500)
5,929
1,766
44,959
(3,213)
—
(3,213)
—
—
336
(2,877)
39,513 $
9,795
29,718
7,100
3,987
92
39,435
(12,738)
(1,583)
(11,155)
(2,362)
36,104
(3,159)
19,428
(2,939)
(2,772)
(167)
(11,600)
1,942
1,674
5,524
9,525
1,583
7,942
2,362
(36,104)
3,495
(22,305)
(7.4)%
(28.3)
(0.6)
(163.4)
48.7
1819.6
14.0
(74.8)
(100.0)
(71.2)
(100.0)
(100.0)
(110.6)
(114.8)
Net loss of $3.2 million for the year ended December 31, 2015 decreased by $7.9 million from a net loss of $11.2 million for 2014. A negative provision for loan losses
expense of $4.5 million was recorded for 2015 due to improvements in loan quality and management’s assessment of risk within the portfolio as compared to $7.1 million in
provision for loan losses expense for 2014. Non-interest income improved $1.9 million during 2015 due to an increase in OREO rental income of $1.1 million and an
$883,000 gain on extinguishment of junior subordinated debt. Non-interest expense increased $5.5 million during 2015 due to increased OREO expense of $6.5 million, offset
by a reduction in loan collection expense of $1.9 million.
25
Table of Contents
A tax benefit was recognized in 2014 due to gains in other comprehensive income that are presented in current operations. The calculation for the income tax provision or
benefit generally does not consider the tax effects of changes in other comprehensive income, or OCI, which is a component of stockholders’ equity on the balance sheet.
However, an exception is provided in certain circumstances, such as when there is a full valuation allowance against net deferred tax assets, there is a loss from continuing
operations and there is income in other components of the financial statements. In such a case, pre-tax income from other categories, such as changes in OCI, must be
considered in determining a tax benefit to be allocated to the loss from continuing operations. The tax benefit recorded in 2014 was entirely due to gains in other
comprehensive income that are presented in current operations in accordance with applicable accounting standards. No tax benefit was recorded during the 2015.
Net loss attributable to common shareholders was $2.9 million for the year ended December 31, 2015, as compared to net income attributable to common shareholders of
$19.4 million for 2014. This decrease was primarily attributable to the $36.1 million effect of the exchange of preferred shares for common shares recorded during 2014.
Net Interest Income – Our net interest income was $29.6 million for the year ended December 31, 2016, an increase of $70,000, or 0.2%, compared with $29.6 million for
the same period in 2015. Net interest spread and margin were 3.32% and 3.42%, respectively, for 2016, compared with 3.18% and 3.27%, respectively, for 2015. Average
nonaccrual loans were $11.4 million and $29.0 million in 2016 and 2015, respectively.
Our average interest-earning assets were $875.3 million for 2016, compared with $917.5 million for 2015, a 4.6% decrease, primarily attributable to lower average loans,
investment securities and interest bearing deposits with financial institutions. Average loans were $621.3 million for 2016, compared with $635.9 million for 2015, a 2.3%
decrease. Average investment securities were $183.7 million for 2016, compared with $194.1 million for 2015, an 5.3% decrease. Average interest bearing deposits with
financial institutions were $62.3 million in 2016, compared with $78.9 million in 2015, a 21.0% decrease. Our total interest income decreased 2.7% to $35.6 million for 2016,
compared with $36.6 million for 2015.
Our average interest-bearing liabilities decreased by 8.0% to $760.7 million for 2016, compared with $826.9 million for 2015. Our total interest expense decreased by 14.8%
to $6.0 million for 2016, compared with $7.0 million during 2015, due primarily to lower interest rates paid on and lower volume of certificates of deposit. Our average
volume of certificates of deposit decreased 16.4% to $466.0 million for 2016, compared with $557.4 million for 2015. The average interest rate paid on certificates of deposit
decreased to 0.88% for 2016, compared with 0.96% for 2015, 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 15.7% to $232.7 million for 2016, compared with $201.2 million for 2015. The average interest rate paid on
NOW and money market deposit accounts increased to 0.40% for 2016, compared with 0.38% for 2015.
Our net interest income was $29.6 million for the year ended December 31, 2015, a decrease of $167,000, or 0.6%, compared with $29.7 million for the same period in 2014.
Net interest spread and margin were 3.18% and 3.27%, respectively, for 2015, compared with 2.98% and 3.09%, respectively, for 2014. Average nonaccrual loans were $29.0
million and $63.1 million in 2015 and 2014, 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 $1.7 million and $3.3 million of interest lost on nonaccrual loans
during 2015 and 2014, respectively.
Our average interest-earning assets were $917.5 million for 2015, compared with $979.2 million for 2014, a 6.3% decrease, primarily attributable to lower average loans,
investment securities and interest bearing deposits with financial institutions. Average loans were $635.9 million for 2015, compared with $662.4 million for 2014, a 4.0%
decrease. Average investment securities were $194.6 million for 2015, compared with $220.5 million for 2014, an 11.7% decrease. Average interest bearing deposits with
financial institutions were $78.9 million in 2015, compared with $87.0 million in 2014, a 9.3% decrease. Our total interest income decreased 7.4% to $36.6 million for 2015,
compared with $39.5 million for 2014.
Our average interest-bearing liabilities decreased by 6.6% to $826.9 million for 2015, compared with $885.8 million for 2014. Our total interest expense decreased by 28.3%
to $7.0 million for 2015, compared with $9.8 million during 2014, due primarily to lower interest rates paid on and lower volume of certificates of deposit. Our average
volume of certificates of deposit decreased 11.8% to $557.4 million for 2015, compared with $632.0 million for 2014. The average interest rate paid on certificates of deposit
decreased to 0.96% for 2015, compared with 1.29% for 2014, 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 11.9% to $21.5 million for 2015, compared with $179.7 million for 2014. The average interest rate paid on
NOW and money market deposit accounts increased to 0.38% for 2015, compared with 0.36% for 2014.
26
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.
Average
Balance
2016
Interest
Earned/Paid
For the Years Ended December 31,
Average
Yield/Cost
Average
Balance
(dollars in thousands)
2015
Interest
Earned/Paid
Average
Yield/Cost
ASSETS
Interest-earning assets:
Loans receivables (1)(2)
Real estate
Commercial
Consumer
Agriculture
Other
$
U.S. Treasury and agencies
Mortgage-backed securities
Collateralized loan obligations
State and political subdivision securities (3)
State and political subdivision securities
Corporate bonds
FHLB stock
Other debt 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
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
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
24,486
3,471
826
1,733
21
757
2,240
28
620
768
93
293
—
3
263
35,602
4,111
921
61
—
70
818
5,981
493,068 $
81,110
9,818
36,811
468
34,049
101,249
802
21,041
23,921
2,656
7,323
—
639
62,307
875,262
(10,719)
64,597
929,140
466,007 $
232,717
34,257
—
2,967
24,708
760,656
119,736
9,325
889,717
39,423
929,140
25,423
3,475
856
1,470
27
684
2,420
—
764
774
155
293
43
1
189
36,574
5,329
756
75
1
95
767
7,023
4.97% $
4.28
8.41
4.71
4.49
2.22
2.21
3.49
4.53
3.21
3.50
4.00
—
0.47
0.42
4.11%
$
0.88% $
0.40
0.18
—
2.36
3.31
0.79%
$
516,605 $
78,993
10,432
29,395
523
31,269
107,277
—
25,354
24,059
6,116
7,323
544
752
78,904
917,546
(17,154)
84,027
984,419
557,441 $
201,164
35,604
587
3,473
28,589
826,858
113,576
10,902
951,336
33,083
984,419
$
29,621
$
29,551
3.32%
3.42%
115.07%
4.92%
4.40
8.21
5.00
5.16
2.19
2.26
—
4.64
3.22
2.53
4.00
7.90
0.13
0.24
4.03%
0.96%
0.38
0.21
0.17
2.74
2.68
0.85%
3.18%
3.27%
110.97%
Includes loan fees in both interest income and the calculation of yield on loans.
(1)
(2) Calculations include non-accruing loans of $11.4 million and $29.0 million in average loan amounts outstanding.
(3)
Taxable equivalent yields are calculated assuming a 35% federal income tax rate.
27
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
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
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
Average
Balance
2015
Interest
Earned/Paid
For the Years Ended December 31,
Average
Yield/Cost
Average
Balance
(dollars in thousands)
2014
Interest
Earned/Paid
Average
Yield/Cost
25,423
3,475
856
1,470
27
684
2,420
764
774
155
293
43
—
1
189
36,574
5,329
756
75
1
95
767
7,023
516,605 $
78,993
10,432
29,395
523
31,269
107,277
25,354
24,059
6,116
7,323
544
—
752
78,904
917,546
(17,154)
84,027
984,419
557,441 $
201,164
35,604
587
3,473
28,589
826,858
113,576
10,902
951,336
33,083
984,419
27,654
3,002
1,087
1,321
26
755
2,780
936
757
607
337
46
—
2
203
39,513
8,125
653
89
3
124
801
9,795
4.92% $
4.40
8.21
5.00
5.16
2.19
2.26
4.64
3.22
2.53
4.00
7.90
—
0.13
0.24
4.03%
$
0.96% $
0.38
0.21
0.17
2.74
2.68
0.85%
$
562,829 $
60,419
12,786
25,806
602
32,459
114,103
30,428
24,873
18,041
7,760
572
21
1,502
86,986
979,187
(25,390)
95,435
1,049,232
632,020 $
179,698
36,803
2,255
4,473
30,508
885,757
113,150
16,444
1,015,351
33,881
1,049,232
$
29,551
$
29,718
3.18%
3.27%
110.97%
4.91%
4.97
8.50
5.12
4.32
2.33
2.44
4.73
3.04
3.36
4.34
8.04
—
0.13
0.23
4.09%
1.29%
0.36
0.24
0.13
2.77
2.63
1.11%
2.98%
3.09%
110.55%
Includes loan fees in both interest income and the calculation of yield on loans.
(1)
(2) Calculations include non-accruing loans of $29.0 million and $63.1 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
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, 2016 vs. 2015
Increase (decrease)
due to change in
Rate
Volume
Net
Change
(in thousands)
Year Ended December 31, 2015 vs. 2014
Increase (decrease)
due to change in
Rate
Volume
Net
Change
$
Interest-earning assets:
Loan receivables
U.S. Treasury and agencies
Mortgage-backed securities
Collateralized loan obligations
State and political subdivision securities
Corporate bonds
FHLB stock
Other debt 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
$
$
7
11
(46)
—
(13)
126
—
—
2
102
189
(390)
42
(11)
—
(12)
164
(207)
396
$
(721) $
62
(134)
28
(137)
(188)
—
(43)
—
(28)
(1,161)
(828)
123
(3)
(1)
(13)
(113)
(835)
(326) $
(714) $
73
(180)
28
(150)
(62)
—
(43)
2
74
(972)
(1,218)
165
(14)
(1)
(25)
51
(1,042)
70 $
(531) $
(44)
(199)
—
28
(123)
(25)
(1)
—
5
(890)
(1,915)
23
(11)
1
(1)
18
(1,885)
995 $
(1,308) $
(27)
(161)
—
(183)
(329)
(19)
(2)
(1)
(19)
(2,049)
(881)
80
(3)
(3)
(28)
(52)
(887)
(1,162) $
Non-interest Income – The following table presents for the periods indicated the major categories of non-interest income:
Service charges on deposit accounts
Bank card interchange fees
Other real estate owned rental income
Net gain on sales of securities
Gain on extinguishment of junior subordinated debt
Income from bank owned life insurance
Other
Total non-interest income
2016
For the Years Ended
December 31,
2015
(in thousands)
2014
$
$
1,958 $
849
456
216
—
417
868
4,764 $
1,851 $
839
1,346
1,766
883
295
715
7,695 $
(1,839)
(71)
(360)
—
(155)
(452)
(44)
(3)
(1)
(14)
(2,939)
(2,796)
103
(14)
(2)
(29)
(34)
(2,772)
(167)
1,988
765
256
92
—
276
702
4,079
Non-interest income decreased by $2.9 million in 2016 to $4.8 million compared with $7.7 million for the year ended December 31, 2015 driven primarily by a decline in
gains on the sales of securities from $1.8 million in 2015 to $216,000 in 2016, as well as a decrease in OREO rental income of $890,000 between the two periods as a result
of income producing properties being sold. Non-interest income for 2015 was also positively impacted by an $883,000 gain on extinguishment of junior subordinated debt.
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Non-interest income increased by $3.6 million to $7.7 million for 2015 compared with $4.1 million for 2014. This was due primarily to increased gain on sales of available
for sale securities of $1.7 million, due to increased volume of security sales. Additionally, OREO income increased $1.1 million due to several larger, income producing
properties being held in the portfolio for all of 2015 after being transferred to OREO in the second quarter of 2014. Non-interest income also increased due to an $883,000
gain on the extinguishment of junior subordinated debt related to the common debt for equity exchange completed on September 30, 2015.
Non-interest Expense – The following table presents the major categories of non-interest expense:
Salary and employee benefits
Other real estate owned expense
Occupancy and equipment
Professional fees
FDIC insurance
Litigation and loan collection expense
Data processing expense
State franchise tax
Communications
Insurance expense
Advertising
Postage and delivery
Other
Total non-interest expense
For the Years Ended
December 31,
2015
(in thousands)
2014
15,508 $
1,541
3,517
1,568
1,660
8,805
1,185
965
706
565
973
359
2,215
39,567 $
15,857 $
12,302
3,449
2,885
2,212
1,141
1,128
1,120
663
589
560
400
2,653
44,959 $
15,658
5,839
3,497
1,665
2,272
2,994
1,106
1,445
752
575
563
407
2,662
39,435
2016
$
$
Non-interest expense for the year ended December 31, 2016 of $39.6 million represented a 12.0% decrease from $45.0 million for 2015. The decrease in non-interest expense
was attributable primarily to decreases in OREO expenses and professional fees, offset by increases in litigation and loan collection expense as a result of the Kentucky Court
of Appeals ruling against the Bank. As shown below, expenses related to OREO trended lower as the size of the portfolio significantly declined.
Net (gain) loss on sales
Provision to allowance for declining market values
Operating expense
Total
2016
2015
(in thousands)
(222) $
1,180
583
1,541 $
74
9,855
2,373
12,302
$
$
During the year ended December 31, 2016, fair value write-downs of $1.2 million were recorded compared with $9.9 million for the year ended December 31, 2015. The
2016 write-downs reflect declines in the fair value and include reductions in listing prices for certain properties, updated appraisals, and sales of certain properties through
auctions. We were successful in selling OREO totaling $12.7 million and $22.6 million during 2016 and 2015, respectively.
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Non-interest Expense Comparison – 2015 to 2014
Non-interest expense for the year ended December 31, 2015 of $45.0 million represented a 14.0% increase from $39.4 million for 2014. The increase in non-interest expense
was attributable primarily to increases in OREO expenses and professional fees, offset by decreases in loan collection expenses. Professional fees were elevated for 2015 as a
result of legal fees and litigation expenses as described in Note 22 – “Contingencies.” Expenses related to OREO include:
Net (gain) loss on sales
Provision to allowance for declining market values
Operating expense
Total
2015
2014
(in thousands)
74 $
9,855
2,373
12,302 $
(306)
4,255
1,890
5,839
$
$
During the year ended December 31, 2015, fair value write-downs of $9.9 million were recorded compared with $4.3 million for the year ended December 31, 2014. The
write-downs recorded during 2015 reflect declines in the fair value and include $5.5 million related to reductions in listing prices for certain properties, $3.7 million related to
properties liquidated through auctions, and $637,000 related to updated appraisals. We had OREO sales totaling $22.6 million and $13.1 million during 2015 and 2014,
respectively.
Income Tax Expense – Income tax expense of $21,000 was recorded for 2016, with no income tax expense or benefit recorded for 2015. Our deferred tax valuation
allowance increased to $54.0 million at December 31, 2016. Our statutory federal tax rate was 35% in both 2016 and 2015. The effective tax rate for 2016 and 2015 is not
meaningful due to the reduction of income tax benefit as the result of the deferred tax valuation allowance.
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 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 12, “Income Taxes”, for additional discussion of our income taxes.
No income tax expense or benefit was recorded for 2015, with an income tax benefit of $1.6 million recorded for 2014. The December 31, 2014 tax benefit was entirely due
to gains in other comprehensive income that are presented in current operations in accordance with the applicable accounting standards. Our deferred tax valuation allowance
increased to $52.1 million at December 31, 2015. Our statutory federal tax rate was 35% in both 2015 and 2014. The effective tax rate for 2015 and 2014 is not meaningful
due to the reduction of income tax benefit as the result of the deferred tax valuation allowance.
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Table of Contents
Analysis of Financial Condition
Total assets at December 31, 2016 were $945.2 million compared with $948.7 million at December 31, 2015, a decrease of $3.5 million or 0.4%. This decrease was primarily
attributable to a decrease in cash and cash equivalents of $27.0 million which funded the redemption of interest bearing deposits of $128.1 million. There was also a decrease
in OREO of $12.4 million offset by an increase in net loans of $23.6 million, an increase in available for sale securities of $7.8 million, and an increase in FHLB advances of
$19.4 million.
The Bank’s total risk-based capital was $68.8 million at December 31, 2016. Construction and development loans totaled $36.3 million, or 53% of total risk-based capital, at
December 31, 2016. Non-owner occupied commercial real estate loans, construction and development loans, and multi-family residential real estate loans as a group totaled
$170.4 million, or 248% of total risk-based capital, at December 31, 2016.
Total assets at December 31, 2015 were $948.7 million compared with $1.018 billion at December 31, 2014, a decrease of $69.3 million or 6.8%. This decrease was
attributable primarily to a $45.8 million decrease in available for sale securities due to sales activity and principal payment receipts, and a $27.0 million decrease in OREO as
the result of sales of OREO outpacing new foreclosures for the period. These decreases were offset by a $13.2 million increase in cash and cash equivalents.
Loans Receivable – Loans receivable increased $20.6 million, or 3.3%, during the year ended December 31, 2016, to $639.2 million. Our commercial, commercial real estate
and real estate construction portfolios increased by an aggregate of $18.8 million, or 5.6%, during 2016 and comprised 55.6% of the total loan portfolio at December 31,
2016.
Loans receivable decreased $6.3 million, or 1.0%, during the year ended December 31, 2015, to $618.7 million. Our commercial, commercial real estate and real estate
construction portfolios decreased by an aggregate of $10.7 million, or 3.1%, during 2015 and comprised 54.4% of the total loan portfolio at December 31, 2015.
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 $59.9 million at December 31, 2016 and $59.1 million at December 31, 2015.
Commercial
Commercial Real Estate:
Construction
Farmland
Nonfarm nonresidential
Residential Real Estate:
Multi-family
1-4 Family
Consumer
Agriculture
Other
Total loans
As of December 31,
2016
2015
Amount
Percent
Amount
Percent
(dollars in thousands)
$
97,761
15.29% $
86,176
13.93%
36,330
71,507
149,546
48,197
188,092
9,818
37,508
477
639,236
5.68
11.19
23.39
7.54
29.42
1.54
5.87
0.08
100.0% $
33,154
76,412
140,570
44,131
201,478
10,010
26,316
419
618,666
5.36
12.35
22.72
7.13
32.57
1.62
4.25
0.07
100.0%
$
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Table of Contents
Commercial
Commercial Real Estate:
Construction
Farmland
Nonfarm nonresidential
Residential Real Estate:
Multi-family
1-4 Family
Consumer
Agriculture
Other
Total loans
2014
As of December 31,
2013
2012
Amount
Percent
Amount
Percent
Amount
Percent
(dollars in thousands)
$
60,936
9.75% $
52,878
7.45% $
52,567
5.85%
33,173
77,419
175,452
41,891
197,278
11,347
26,966
537
624,999
$
5.31
12.39
28.07
6.70
31.56
1.82
4.31
0.09
100.0% $
43,326
71,189
232,026
46,858
228,505
14,365
19,199
980
709,326
6.11
10.04
32.71
6.61
32.21
2.03
2.71
0.13
100.00% $
70,284
80,825
322,687
50,986
278,273
20,383
22,317
770
899,092
7.82
8.99
35.89
5.67
30.95
2.27
2.48
0.08
100.00%
Our lending activities are subject to a variety of lending limits imposed by state and federal law. The Bank’s secured legal lending limit to a single borrower or guarantor was
approximately $17.3 million at December 31, 2016.
At December 31, 2016, we had four loan relationships each with aggregate extensions of credit in excess of $10.0 million, all of which were classified as pass by the Bank’s
internal loan review process. In 2015, we had two loan relationships each with aggregate extensions of credit in excess of $10.0 million.
As of December 31, 2016, we had $33.4 million of loan participations purchased from, and $26.0 million of loan participations sold to, other banks. As of December 31,
2015, we had $6.1 million of loan participations purchased from, and $25.5 million of loan participations sold to, other banks.
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Table of Contents
Loan Maturity Schedule – The following table sets forth at December 31, 2016, 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
Nonfarm nonresidential
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
Nonfarm nonresidential
Residential Real Estate:
Multi-family
1-4 Family
Consumer
Agriculture
Other
Total floating rate loans
Maturing
Within
One Year
As of December 31, 2016
Maturing
1 through
5 Years
Maturing
Over 5
Years
(dollars in thousands)
Total
Loans
$
6,578
$
40,629 $
17,423 $
64,630
1,354
5,458
12,924
6,557
20,261
1,173
2,956
—
57,261
$
7,462
13,544
64,587
20,745
39,009
6,305
5,118
314
197,713 $
4,109
8,814
36,913
15,229
52,535
1,001
680
65
136,769 $
12,925
27,816
114,424
42,531
111,805
8,479
8,754
379
391,743
8,904
$
17,560 $
6,667 $
33,131
8,117
1,959
4,179
21
1,800
1,252
9,794
—
36,026
$
15,252
6,716
7,073
2,950
4,163
58
18,893
—
72,665 $
36
35,016
23,870
2,695
70,324
29
67
98
138,802 $
23,405
43,691
35,122
5,666
76,287
1,339
28,754
98
247,493
$
$
$
Loan Portfolio by Risk Category – The following table presents a summary of the loan portfolio at the dates indicated, by risk category.
Pass
Watch
Special Mention
Substandard
Doubtful
Total
2016
2015
As of December 31,
2014
(in thousands)
2013
2012
$
$
586,430
30,431
497
21,878
—
517,484 $
63,363
1,395
36,424
—
461,126 $
68,200
4,189
91,484
—
369,529 $
144,316
5,865
189,616
—
437,886
177,419
34,700
248,691
396
$
639,236
$
618,666 $
624,999 $
709,326 $
899,092
Our loans receivable increased $20.6 million, or 3.3%, during the year ended December 31, 2016. All loan risk categories have decreased since December 31, 2015, with the
exception of pass graded loans. The pass category increased approximately $68.9 million, the watch category declined approximately $32.9 million, the special mention
category declined approximately $898,000, and the substandard category declined approximately $14.5 million.
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Table of Contents
Loan Delinquency – The following table presents a summary of loan delinquencies at the dates indicated.
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
2016
2015
As of December 31,
2014
(in thousands)
2013
2012
$
$
$
2,302
315
—
2,617
9,216
11,833
$
3,133 $
241
—
3,374
14,087
17,461 $
3,960 $
980
151
5,091
10,696 $
775
232
11,703
47,175
52,266 $
101,767
113,470 $
38,219
20,303
86
58,608
94,517
153,125
Loans past due 30-59 days decreased from $3.1 million at December 31, 2015 to $2.3 million at December 31, 2016, and loans past due 60-89 days increased from $241,000
at December 31, 2015 to $315,000 at December 31, 2016. This represents a $757,000 decrease in loans past due 30-89 days. We considered this trend in delinquency levels
during the evaluation of qualitative trends in the portfolio when establishing the general component of our allowance for loan losses.
Nonaccrual loans decreased $4.9 million, respectively, from December 31, 2015 to December 31, 2016. The $4.9 million decrease in nonaccrual loans was primarily driven
by $5.3 million in paydowns, $1.7 million in charge-offs, $1.3 million in transfers to OREO, and $1.0 million in loans returned to accrual status, offset by $4.4 million in
loans placed on non-accrual. The $9.2 million in nonaccrual loans at December 31, 2016, and $14.1 million at December 31, 2015, were secured by farmland, other
commercial real estate, and other residential real estate loans. 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 and often before any available
collateral has been disposed. Commercial business and real estate loan delinquencies are handled on an individual basis with the advice of legal counsel.
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.
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Table of Contents
The following table sets forth information with respect to non-performing assets as of the dates indicated:
2016
2015
As of December 31,
2014
2013
2012
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
$
$
$
—
9,216
9,216
6,821
—
16,037
$
$
1.44%
1.70%
241
$
2.62%
(dollars in thousands)
$
$
151
47,175
47,326
46,197
—
93,523
—
14,087
14,087
19,214
—
33,301
$
$
2.28%
3.51%
295
$
2.09%
7.57%
9.19%
$
2.65%
1,253
232
101,767
101,999
30,892
—
132,891
$
$
14.38%
12.35%
2,285
$
2.24%
86
94,517
94,603
43,671
—
138,274
10.52%
11.89%
13,250
14.01%
Troubled Debt Restructuring – A troubled debt restructuring (TDR) occurs when the Bank has agreed to a loan modification in the form of a concession to a borrower who
is experiencing financial difficulty. The majority of the Bank’s TDRs involve a reduction in interest rate, a deferral of principal for a stated period of time, or an interest only
period. All TDRs are considered impaired, and the Bank has allocated reserves for these loans to reflect the present value of the concessionary terms granted to the borrower.
If the loan is considered collateral dependent, it is reported net of allocated reserves, at the fair value of the collateral less cost to sell.
We do not have a formal loan modification program. If a borrower is unable to make contractual payments, we review the particular circumstances of that borrower’s
situation and determine whether or not to negotiate a revised payment stream. Our goal when restructuring a credit is to afford the borrower a reasonable period of time to
remedy the issue causing cash flow constraints within their business so that they may return to performing status over time.
Our loan modifications have taken the form of a reduction in interest rate and/or curtailment of scheduled principal payments for a short-term period, usually three to six
months, but in some cases until maturity of the loan. In some circumstances we 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.
We consider any loan that is restructured for a borrower experiencing financial difficulties due to a borrower’s potential inability to pay in accordance with contractual terms
of the loan to be a troubled debt restructuring. Specifically, we consider a concession involving a modification of the loan terms, such as (i) a reduction of the stated interest
rate, (ii) a reduction or deferral of principal, or (iii) a reduction or deferral of accrued interest at a stated interest rate lower than the current market rate for new debt with
similar risk all to be troubled debt restructurings. When a modification of terms is made for a competitive reason, we do not consider it to be a troubled debt restructuring. A
primary example of a competitive modification would be an interest rate reduction for a performing customer’s loan to a market rate as the result of a market decline in rates.
Management periodically reviews renewals and modifications of previously identified TDRs for which there was no principal forgiveness, to consider if it is appropriate to
remove the TDR classification. If the borrower is no longer experiencing financial difficulty and the renewal/modification did not contain a concessionary interest rate or
other concessionary terms, management considers the potential removal of the TDR classification. If deemed appropriate based upon current underwriting, the TDR
classification is removed as the borrower has complied with the terms of the loan at the date of renewal/modification and there was a reasonable expectation that the borrower
would continue to comply with the terms of the loan after the date of the renewal/modification. In this instance, the TDR was originally considered a restructuring in a prior
year as a result of a modification with an interest rate that was not commensurate with the risk of the underlying loan. Additionally, TDR classification can be removed in
circumstances in which the Company performs a non-concessionary re-modification of the loan at terms that were considered to be at market for loans with comparable risk.
Management expects the borrower will continue to perform under the re-modified terms based on the borrower’s past history of performance.
If the borrower fails to perform, we place the loan on nonaccrual status and seek to liquidate the underlying collateral. Our nonaccrual policy for restructured loans is identical
to our nonaccrual policy for all loans. Our policy calls for a loan to be reported as nonaccrual if it is maintained on a cash basis because of deterioration in the financial
condition of the borrower, payment in full of principal and interest is not expected, or principal or interest is past due 90 days or more unless the assets are both well secured
and in the process of collection. Changes in value for impairment, including the amount attributed to the passage of time, are recorded entirely within the provision for loan
losses. Upon determination that a loan is collateral dependent, the loan is charged down to the fair value of collateral less estimated costs to sell.
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At December 31, 2016, we had 9 restructured loans totaling $8.7 million with borrowers who experienced deterioration in financial condition compared with 30 restructured
loans totaling $21.0 million at December 31, 2015. In general, these loans were granted interest rate reductions to provide cash flow relief to borrowers experiencing cash
flow difficulties. At December 31, 2016, three loans totaling approximately $3.3 million had been granted principal payment deferrals until maturity. There were no
concessions made to forgive principal relative to these loans, although we have recorded partial charge-offs for certain restructured loans. In general, these loans are secured
by first liens on 1-4 residential or commercial real estate properties, or farmland. Restructured loans also included $467,000 of commercial loans at December 31, 2016. At
December 31, 2016, $5.4 million of TDRs were performing according to their modified terms.
There were no modifications granted during 2016 or 2015 that resulted in loans being identified as TDRs. During the twelve months ended December 31, 2016, TDRs were
reduced as a result of $6.5 million in payments and charge-offs of $70,000. In addition, the TDR classification was removed from one loan that met the requirements
discussed above in 2016. This loan totaled $5.0 million at December 31, 2015, and is no longer evaluated individually for impairment.
The following table sets forth information with respect to TDRs, non-performing loans, real estate acquired through foreclosure, and other repossessed assets.
2016
2015
As of December 31,
2014
(dollars in thousands)
2013
2012
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
$
$
$
Total non-performing loans and TDRs on accrual to total loans
Total non-performing assets and TDRs on accrual to total assets
9,216
5,350
14,566
6,821
—
21,387
$
$
$
2.28%
2.26%
14,087
17,440
31,527
19,214
—
50,741
$
$
$
5.10%
5.35%
47,326
21,985
69,311
46,197
—
115,508
$
$
$
101,999
44,346
146,345
30,892
—
177,237
$
$
$
94,603
77,344
171,947
43,671
—
215,618
11.09%
11.35%
20.63%
16.47%
19.12%
18.55%
See Footnote 3, “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 $738,000, $1.7 million, and $3.3 million for the years ended December 31, 2016, 2015, and 2014,
respectively. Interest income recognized on accruing non-performing loans was $445,000, $710,000, and $785,000 for the years ended December 31, 2016, 2015, and 2014,
respectively.
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.
Management has established loan grading procedures that result in specific allowance allocations for any estimated inherent risk of loss. For loans not individually evaluated,
a general allowance allocation is computed using factors developed over time based on actual loss experience. The specific and general allocations plus consideration of
qualitative factors represent management’s estimate of probable losses contained in the loan portfolio at the evaluation date. Although the allowance for loan losses is
comprised of specific and general allocations, the entire allowance is available to absorb any credit losses.
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The following table sets forth an analysis of loan loss experience as of and for the periods indicated:
Balances at beginning of period
$
12,041
$
19,364
2016
2015
As of December 31,
2014
(dollars in thousands)
$
28,124
$
2013
2012
56,680
$
52,579
Loans charged-off:
Real estate
Commercial
Consumer
Agriculture
Total charge-offs
Recoveries:
Real estate
Commercial
Consumer
Agriculture
Total recoveries
Net charge-offs
Provision (negative 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
impairment
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
$
$
$
2,157
276
178
18
2,629
1,189
334
368
114
2,005
624
(2,450)
$
8,967
1.40%
0.10%
97.30%
5,050
696
268
118
6,132
2,338
723
240
8
3,309
2,823
(4,500)
$
12,041
1.95%
0.44%
85.48%
17,943
1,099
354
30
19,426
2,726
614
213
13
3,566
15,860
7,100
19,364
$
28,879
2,828
773
128
32,608
1,622
1,212
266
252
3,352
29,256
700
28,124
$
31,437
3,784
1,130
1,164
37,515
1,040
129
125
72
1,366
36,149
40,250
56,680
3.10%
2.39%
40.92%
3.96%
3.71%
27.57%
6.30%
3.50%
59.91%
$
399
15,131
$
428
31,776
$
752
71,993
3,471
149,883
$
21,034
188,808
2.64%
1.35%
1.04%
2.32%
11.14%
8,568
624,105
$
11,613
586,890
$
18,612
553,006
$
24,653
559,443
$
35,646
710,284
1.37%
1.98%
3.37%
4.41%
5.02%
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. Our loan loss reserve, as a percentage of total loans at December 31, 2016, decreased to 1.40% from 1.95% at December 31, 2015. The
change in our loan loss reserve as a percentage of total loans between periods is attributable to the improving historical loss experience, qualitative factors, improvement in
risk grade classification metrics, improving charge-off levels, and improving past due trends. Our allowance for loan losses to non-performing loans was 97.30% at December
31, 2016, compared with 85.48% at December 31, 2015. Net charge-offs in 2016 totaled $624,000. This resulted in the decline in our allowance for loan losses for loans
individually evaluated for impairment.
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The following table sets forth the net charge-offs (recoveries) for the periods indicated:
Commercial
Commercial Real Estate
Residential Real Estate
Consumer
Agriculture
Other
Total net charge-offs
Year Ended
December 31,
2016
Year Ended
December 31,
2015
(in thousands)
Year Ended
December 31,
2014
$
$
(58) $
(339)
1,307
(200)
(96)
10
624 $
(27) $
1,225
1,487
37
110
(9)
2,823 $
485
11,878
3,339
167
17
(26)
15,860
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 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 or charged-off if the loan is deemed collateral
dependent. 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.
The allowance for loan losses represents management’s estimate of the amount necessary to provide for probable 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 risk classification as discussed above. At year-end 2016, our allowance for loan losses to total non-
performing loans increased to 97.30% from 85.48% at year-end 2015. 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.
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Table of Contents
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, 2016 and 2015.
December 31, 2016
December 31, 2015
Commercial
Real Estate
Residential
Real Estate
Commercial
Real Estate
Residential
Real Estate
Unpaid principal balance
Prior charge-offs
Recorded investment
Allocated allowance
$
$
10,985
(5,131)
5,854
(35)
(in thousands)
$
10,439
(1,818)
8,621
(350)
$
18,112
(5,293)
12,819
(43)
Recorded investment, less allocated allowance
$
5,819
$
8,271
$
12,776
$
19,983
(2,310)
17,673
(385)
17,288
Recorded investment, less allocated allowance/ Unpaid principal balance
52.97%
79.23%
70.54%
86.51%
Based on prior charge-offs, our current recorded investments in loans individually evaluated for impairment in the commercial real estate and residential real estate segments
of the portfolio are significantly below the unpaid principal balances of those loans. The recorded investment net of the allocated allowance was 52.97% and 79.23% of the
unpaid principal balance in the commercial real estate and residential real estate segments, respectively, at December 31, 2016.
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, 2016
Allowance
% to Total
Loans
December 31, 2015
Allowance
% to Total
$
$
97,166 $
251,529
227,668
9,817
37,448
477
624,105 $
462
4,859
3,076
8
161
2
8,568
(dollars in thousands)
0.48% $
1.93
1.35
0.08
0.43
0.42
1.37% $
85,064 $
237,317
227,936
9,990
26,164
419
586,890 $
818
6,950
3,599
122
122
2
11,613
0.96%
2.93
1.58
1.22
0.47
0.48
1.98%
The allowance for those loan losses related to loans collectively evaluated for impairment trended downward from 1.98% at December 31, 2015 to 1.37% at December 31,
2016 as a result of declining historical charge-off levels and improving trends in loan category risk ratings. The residential real estate segment constitutes approximately
36.5% of total loans collectively evaluated for impairment. The related allowance for the residential real estate segment trended downward from 1.58% at December 31, 2015
to 1.35% at December 31, 2016 as our net charge-offs declined from approximately $1.5 million in 2015 to $1.3 million in 2016. The commercial real estate segment
constitutes approximately 40.3% of total loans collectively evaluated for impairment. The related allowance for the commercial real estate segment trended downward from
2.93% at December 31, 2015 to 1.93% at December 31, 2016. This is consistent with our net charge-off experience in the commercial real estate segment of the portfolio,
which totaled approximately $1.2 million in 2015 compared to net recoveries of $339,000 in 2016. The decreasing allowance also reflects improving historical loss
experience, qualitative factors, improvement in risk grade classification metrics, improving charge-off levels, and improving past due trends.
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.
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Based on its assessment 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 assessment 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 1.40% at December 31, 2016 from 1.95% at December 31, 2015. This decline is the result of
improving historical loss experience, qualitative factors, improvement in risk grade classification metrics, improving charge-off levels, and improving past due trends. The
level of the allowance is based on estimates, and losses may ultimately 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 risk rating for specific assets, management considers, among other factors, the borrower’s ability to repay, the borrower’s repayment history,
the current delinquent status, the estimated value of the underlying collateral, and the capacity and willingness of a guarantor to satisfy the obligation. 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 that 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 that 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, 2016, we had $21.9 million of loans classified as substandard, $497,000 classified as special mention and no loans classified as doubtful or loss. This
compares with $36.4 million of loans classified as substandard, $1.4 million classified as special mention and no loans classified as doubtful or loss as of December 31, 2015.
The $14.5 million decrease in loans classified as substandard was primarily driven by $9.8 million in principal payments received, $1.3 million in migration to OREO, $9.2
million in loans upgraded from substandard, and $2.4 million in charge-offs, offset by $8.1 million in loans moved to substandard during 2016. Substandard loans are
primarily concentrated in the residential real estate portfolio. As of December 31, 2016, we had allocations of $600,000 in the allowance for loan losses related to these
substandard loans. This compares to allocations of $1.3 million in the allowance for loan losses related to substandard loans at December 31, 2015.
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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 for analytical purposes and is not
necessarily indicative of the categories in which future losses may occur. The total allowance is available to absorb losses from any segment of loans.
As of December 31,
2016
2015
Amount of
Allowance
Percent of
Loans to Total
Loans
Amount of
Allowance
Percent of
Loans to Total
Loans
(dollars in thousands)
$
475
15.29% $
818
13.93%
470
288
4,136
610
2,816
8
162
2
8,967
5.68
11.19
23.39
7.54
29.42
1.54
5.87
0.08
100.0% $
424
364
6,205
422
3,562
122
122
2
12,041
5.36
12.35
22.72
7.13
32.57
1.62
4.25
0.07
100.0%
$
2014
Amount of
Allowance
Percent of
Loans to Total
Loans
As of December 31,
2013
Amount of
Allowance
Percent of
Loans to Total
Loans
(dollars in thousands)
2012
Amount of
Allowance
Percent of
Loans to Total
Loans
$
2,046
9.75% $
3,221
7.45% $
4,402
5.85%
739
1,094
9,098
886
4,901
274
319
7
19,364
5.31
12.39
28.07
6.70
31.56
1.82
4.31
0.09
100.0% $
2,149
1,623
12,642
1,449
6,313
416
305
6
28,124
6.11
10.04
32.71
6.61
32.21
2.03
2.71
0.13
100.00% $
5,989
2,600
26,179
2,464
13,771
857
403
15
56,680
7.82
8.99
35.89
5.67
30.95
2.27
2.48
0.08
100.0%
$
Commercial
Commercial Real Estate:
Construction
Farmland
Nonfarm nonresidential
Residential Real Estate:
Multi-family
1-4 Family
Consumer
Agriculture
Other
Total
Commercial
Commercial Real Estate:
Construction
Farmland
Nonfarm nonresidential
Residential Real Estate:
Multi-family
1-4 Family
Consumer
Agriculture
Other
Total
Provision for Loan Losses – A negative provision for loan losses of $2.5 million was recorded for the year ended December 31, 2016, compared with a negative provision for
loan losses of $4.5 million for 2015 and a provision for loan losses of $7.1 million for 2014. The negative provision in 2016 was driven by declining historical loss rates,
improvements in loan quality, and management’s assessment of risk within the portfolio. The total allowance for loan losses was $9.0 million, or 1.40% of total loans, at
December 31, 2016, compared with $12.0 million, or 1.95% of total loans, at December 31, 2015, and $19.4 million, or 3.10% of total loans, at December 31, 2014. The
decreased allowance is consistent with the overall trends within the portfolio. Substandard loans decreased by $14.5 million or 39.9% during 2016, net charge-offs were
$624,000 for 2016 compared to $2.8 million in 2015 and $15.9 million in 2014, and nonaccrual loans decreased by $4.9 million or 34.6% during 2016. Charge-offs for 2016
were concentrated in the loans secured by the residential real estate category of the portfolio. These net charge-offs consisted of $1.3 million of residential real estate loans.
We consider the size and volume of our portfolio as well as the credit quality of our loan portfolio based upon risk category classification when determining the loan loss
provision for each period and the allowance for loan losses at period end.
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Foreclosed Properties – Foreclosed properties at December 31, 2016 were $6.8 million compared with $19.2 million at December 31, 2015. See Note 5, “Other Real Estate
Owned”, to the financial statements. During 2016, we acquired $1.3 million of OREO properties and sold properties totaling approximately $12.7 million. We value
foreclosed properties at fair value less estimated cost to sell when acquired and expect to liquidate these properties to recover our investment in the due course of business.
OREO is recorded at fair market value less estimated cost to sell at time of acquisition. Any write-down of the property at the time of acquisition is charged to the allowance
for loan losses. Subsequent reductions in fair value are recorded as non-interest expense. To determine the fair value of OREO for smaller dollar single family homes, we
consult with internal real estate sales staff and external realtors, investors, and appraisers. If the internally evaluated market price is below our underlying investment in the
property, appropriate write-downs are recorded.
For larger dollar commercial real estate properties, we obtain a new appraisal of the subject property or have staff in our special assets group or centralized appraisal
department evaluate the latest in-file appraisal in connection with the transfer to OREO. In some of these circumstances, an appraisal is in process at quarter end and we must
make our best estimate of the fair value of the underlying collateral based on our internal evaluation of the property, our review of the most recent appraisal, and discussions
with the currently engaged appraiser. We typically obtain updated appraisals within five quarters of the anniversary date of ownership unless a sale is imminent. When an
asking price is lowered below the most recent appraised value, appropriate write-downs are taken.
The following table presents the major categories of OREO at the year-ends indicated:
Commercial Real Estate:
Construction, land development, and other land
Farmland
Nonfarm nonresidential
Residential Real Estate:
Multi-family
1-4 Family
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 declining market values
Net gain (loss) on sale
Proceeds from sale of properties
OREO as of December 31
2016
2015
(in thousands)
2014
6,571 $
—
—
—
250
6,821 $
12,344 $
—
6,746
—
124
19,214 $
2016
2015
(in thousands)
2014
19,214 $
1,273
(1,180)
222
(12,708)
6,821 $
46,197 $
5,513
(9,855)
(74)
(22,567)
19,214 $
18,325
654
14,525
4,875
7,818
46,197
30,892
32,338
(4,255)
306
(13,084)
46,197
$
$
$
$
Net gain on sales, write-downs, and operating expenses for OREO totaled $1.5 million for the year ended December 31, 2016, compared with $12.3 million for the same
period of 2015.
During the year ended December 31, 2016, fair value write-downs of $1.2 million were recorded compared with $9.9 million for the year ended December 31, 2015. The
write-downs recorded during 2016 reflect fair value write-downs for reductions in listing prices for certain properties, updated appraisals, and certain properties liquidated
through auctions. We were successful in selling OREO totaling $12.7 million and $22.6 million during 2016 and 2015, respectively. We expect to resolve certain nonaccrual
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 $7.6 million, or 4.0%, to $194.6 million at December 31, 2016, compared with $187.1 million at
December 31, 2015.
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Table of Contents
The following table sets forth the carrying value of our securities portfolio at the dates indicated.
December 31, 2016
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Amortized
Cost
Amortized
Fair
Value
Cost
(dollars in thousands)
December 31, 2015
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Securities available for sale
U.S. Government and federal
agencies
$
34,757 $
50 $
(708) $
34,099 $
33,491 $
146 $
(375) $
33,262
Agency mortgage-backed:
residential
Collateralized loan obligations
State and municipal
Corporate bonds
Total available for sale
$
103,390
11,203
2,028
3,069
154,447 $
455
—
25
24
554 $
(1,492)
—
(8)
(3)
(2,211) $
102,353
11,203
2,045
3,090
152,790 $
102,135
—
6,555
2,321
144,502 $
907
—
306
—
1,359 $
(380)
—
—
(128)
(883) $
102,662
—
6,861
2,193
144,978
Amortized
Cost
Gross
Unrecognized
Gains
Gross
Unrecognized
Losses
Fair
Value
Amortized
Cost
Gross
Unrecognized
Gains
Gross
Unrecognized
Losses
Fair
Value
Securities held to maturity
State and municipal
Total held to maturity
$
$
41,818 $
41,818 $
1,272 $
1,272 $
(18) $
(18) $
43,072 $
43,072 $
42,075 $
42,075 $
2,178 $
2,178 $
— $
— $
44,253
44,253
The following table sets forth the contractual maturities, fair values and weighted-average yields for our available for sale securities held at December 31, 2016:
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
Available for sale
U.S. Government and federal
agencies
$
—
—% $
6,830
2.04% $
6,899
2.18% $ 20,370
2.36% $ 34,099
2.26%
Agency mortgage-backed:
residential
Collateralized loan obligations
State and municipal
Corporate bonds
Total available for sale
$
31
—
753
—
784
4.70
—
6.13
—
6.07% $
40
—
827
—
7,697
4.65
—
5.84
—
12,007
—
465
1,524
2.46% $ 20,895
90,275
2.38
11,203
—
—
2.81
5.75
1,566
2.56% $ 123,414
102,353
2.24
11,203
3.38
2,045
—
2.90
3,090
2.37% $ 152,790
2.26
3.38
5.24
4.29
2.42%
The following table sets forth the contractual maturities, amortized cost and weighted-average yields for our held to maturity securities held at December 31, 2016:
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
Held to maturity
State and municipal
Total held to maturity
$
$
145
145
1.26% $
1.26% $
9,306
9,306
3.29% $ 23,397
3.29% $ 23,397
3.92% $
3.92% $
8,970
8,970
4.95% $ 41,818
4.95% $ 41,818
3.99%
3.99%
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 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.
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, 2016, 88.1% of the agency
mortgage-backed securities we held had contractual final maturities of more than ten years with a weighted average life of 22.5 years.
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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, which are more responsive to market interest
rates. 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 have in the past leveraged 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 2016, total deposits decreased $28.1 million compared with 2015. During 2015, total deposits decreased $48.8 million compared with 2014. The decrease in
deposits for 2016 and 2015 was primarily in higher cost certificates of deposit balances.
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 cost of these funds have been, and
will continue to be, significantly affected by market conditions.
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
2016
Average
Balance
Average
Rate
For the Years Ended December 31,
2015
Average
Balance
Average
Rate
(dollars in thousands)
2014
Average
Balance
Average
Rate
$
$
119,736
96,294
136,423
34,257
466,007
852,717
$
0.13%
0.58
0.18
0.88
$
0.60%
113,576
88,814
112,350
35,604
557,441
907,785
$
0.13%
0.57
0.21
0.96
$
0.68%
113,150
83,504
96,194
36,803
632,020
961,671
0.15%
0.55
0.24
1.29
0.92%
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
2016
Average
Balance
Average
Rate
For the Years Ended December 31,
2015
Average
Balance
Average
Rate
(dollars in thousands)
2014
Average
Balance
Average
Rate
$
$
261,615
204,392
466,007
0.86% $
0.91
0.88% $
306,941
250,500
557,441
0.93% $
0.99
0.96% $
354,250
277,770
632,020
1.22%
1.37
1.29%
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The following table shows at December 31, 2016 the amount of our time deposits of $100,000 or more by time remaining until maturity:
Maturity Period
(in thousands)
Three months or less
Three months through six months
Six months through twelve months
Over twelve months
Total
$
$
64,496
21,006
40,818
73,315
199,635
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, 2016, we had $22.5 million in advances
outstanding from the FHLB and the capacity to increase our borrowings by an additional $9.6 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 that 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
$
2016
December 31,
2015
(dollars in thousands)
3,473
8,705
3,081
$
$
2,967
22,458
22,458
0.85%
2.34%
2.65%
2.73%
2014
4,473
16,940
15,752
1.02%
2.77%
Subordinated Capital Note – At December 31, 2016, the Bank had a subordinated capital note outstanding in the principal amount of $3.2 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 until five years before the note matures on July 1, 2020.
Beginning on July 1, 2015, one-fifth of the principal amount of the subordinated note is excluded from Tier 2 capital each year until fully excluded during the year before
maturity. At December 31, 2016, a total of $2.4 million of the outstanding balance was included in Tier 2 capital. Quarterly principal payments of $225,000 plus interest
commenced on October 1, 2010. At December 31, 2016, the interest rate on this note was 3.85%.
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Junior Subordinated Debentures – At December 31, 2016, we had four issues of junior subordinated debentures outstanding totaling $21.0 million as shown in the table
below.
Description
Porter Statutory Trust II
Porter Statutory Trust III
Porter Statutory Trust IV
Ascencia Statutory Trust I
Liquidation
Amount
Trust
Preferred
Securities
Issuance Date
Interest Rate (1)
Junior
Subordinated
Debt and
Investment
in Trust
Maturity Date
(dollars in thousands)
$
$
5,000
3,000
10,000
3,000
21,000
2/13/2004
4/15/2004
12/14/2006
2/13/2004
3-month LIBOR + 2.85%
3-month LIBOR + 2.79%
3-month LIBOR + 1.67%
3-month LIBOR + 2.85%
$
$
5,155
3,093
10,310
3,093
21,651
2/13/2034
4/15/2034
3/1/2037
2/13/2034
(1) As of December 31, 2016, the 3-month LIBOR was 1.00%.
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 are redeemable before the maturity date at our option at their principal amount plus accrued interest.
On September 30, 2015, we completed a common equity for debt exchange with holders of $4.0 million of the capital securities (the “Trust Securities”) of Porter Statutory
Trust IV, a trust subsidiary of the Company. Accrued and unpaid interest on the Trust Securities totaled of approximately $330,000. In exchange for the $4.3 million debt and
interest liability, the Company issued a total of 160,000 common shares and 80,000 non-voting common shares. See Note 10 – “Junior Subordinated Debentures” for
additional discussion.
On April 15, 2016, we completed the private placement of 580,000 common shares and 220,000 non-voting common shares to accredited investors resulting in total proceeds
of $5.0 million. The investors in the private placement directed a portion of purchase price to pay all deferred interest payments on junior subordinated debentures, bringing
our interest payments current through the second quarter of 2016.
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. Since the third quarter of
2016, we have been deferring interest payments on the junior subordinated debentures held by our trust subsidiaries, requiring our trust subsidiaries to defer distributions on
our trust preferred securities held by investors. Deferred distributions on our $21.0 million of trust preferred securities outstanding totaled $378,000 as of December 31, 2016.
Our deferral period expires after the second quarter of 2021, at which time we will be required to pay all accrued interest or be in default. We are prohibited from paying cash
dividends on our preferred and common shares until such time as we have paid all deferred distributions on our trust preferred securities.
The Federal Reserve Board rules 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. As of December 31, 2016, the Company’s trust preferred securities totaled 20% of its Tier 1 capital and 50% of its Tier
2 capital.
Each of the trusts issuing the trust preferred securities holds junior subordinated debentures we issued with an original maturity of 30 years. In the last five years before the
junior subordinated debentures mature, the associated trust preferred securities are excluded from Tier 1 capital and included in Tier 2 capital. In addition, the trust preferred
securities during this five-year period are 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 regularly 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 investment portfolio, principal pay-downs on loans and mortgage-
backed securities, customer deposit inflows, and other wholesale funding. Historically, we also utilized brokered and wholesale deposits to supplement our funding strategy.
We are currently restricted from accepting, renewing, or rolling-over brokered deposits without the prior receipt of a waiver on a case-by-case basis from our regulators. At
December 31, 2016, we had no brokered deposits.
Traditionally, we have borrowed from the FHLB to supplement our funding requirements. At December 31, 2016, we had an unused borrowing capacity with the FHLB of
$9.6 million. Our borrowing capacity is under a detailed loan listing requirement and is based on the market value of the underlying pledged loans.
We also have available on a secured basis federal funds borrowing lines from a correspondent bank totaling $5.0 million. Management believes our sources of liquidity are
adequate to meet expected cash needs for the foreseeable future. However, the availability of these lines could be affected by our financial position. We are also subject to
FDIC interest rate restrictions for deposits. As such, we are permitted to offer up to the “national rate” plus 75 basis points as published weekly by the FDIC.
The Company has used cash to service debt and, prior to 2011, to pay dividends on common shares when declared by the Board of Directors. The Company’s main sources of
funding include dividends paid by the Bank and financing obtained in the capital markets. In its consent order with the FDIC and the KDFI, the Bank agreed not to pay
dividends to the Company without the prior consent of those regulators. Liquid assets were $2.0 million at December 31, 2016. Since the Bank is unlikely to be in a position
to pay dividends to the Company until the Consent Order is lifted or modified and the Bank returns to profitability, cash inflows for the Company are limited to common
stock or debt issuances. Ongoing operating expenses of the Company are forecasted at approximately $800,000 for 2017. Parent company liquidity has been, and in the future
could be, improved through a sale of common or preferred shares. See “Item 1 – Business” and “Item 5. Market for Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities – Dividends.”
Capital
Stockholders’ equity increased $716,000 to $32.7 million at December 31, 2016, compared with $32.0 million at December 31, 2015. The increase was due primarily to the
issuance of common equity partially offset by the current year net loss of $2.8 million and a decrease in the fair value of our securities portfolio of $2.0 million.
On December 16, 2016, we completed a 1-for-5 reverse stock split of our issued and outstanding common and non-voting common shares. The reverse stock split was
intended to increase the trading price per share of our common shares, with the objective to make the common shares a more attractive and cost effective investment and
enhance liquidity for our shareholders. All share and per share data in this annual report has been adjusted to reflect the reverse stock split. Preferred shares were not affected
by the 1-for-5 reverse stock split. A total of 6,224,533 common shares and non-voting common shares were issued and outstanding at December 31, 2016.
On April 15, 2016, we completed the private placement of 580,000 common shares and 220,000 non-voting common shares to accredited investors, raising total proceeds of
$5.0 million. The investors in the private placement directed a portion of purchase price to pay all deferred interest payments on our junior subordinated debentures, bringing
our interest payments current through the second quarter of 2016. The remaining proceeds totaled approximately $2.2 million and will be used for general corporate purposes
and to support the Bank.
On September 30, 2015, we completed a common equity for debt exchange to acquire (and subsequently retire) $4.0 million of our Trust Securities. Accrued and unpaid
interest on the Trust Securities totaled approximately $330,000. In exchange for the $4.3 million debt and interest liability, the Company issued a total of 160,000 common
shares and 80,000 non-voting common shares. In the transaction, a wholly owned subsidiary of the Company acquired one-third of the Trust Securities directly from the
unrelated holder in exchange for 80,000 newly issued common shares, resulting in an $883,000 gain on extinguishment of debt. The $883,000 gain was determined based
upon the difference in the $560,000 fair value of the common shares issued and the $1.4 million book value of the debt securities and accrued interest thereon tendered to the
Company by the unrelated holder on the date of closing. The fair value of the shares issued to the unrelated holder was computed by multiplying the 80,000 shares issued by
$7.00 per share, which was the NASDAQ closing price of the Company’s common shares on September 30, 2015. The subsidiary also acquired the other two-thirds of the
Trust Securities having a book value of $2.9 million in exchange for 80,000 common shares and 80,000 non-voting common shares issued to related parties who purchased
the remaining Trust Securities from the unrelated holder. In accordance with ASC 470-50-40-2 and SEC Guidance 405-20-40-1.J, the debt and interest liability exchanged
with the related parties was treated as a capital transaction.
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On February 25, 2015, we completed the final step in the retirement of our preferred shares originally issued to the U.S. Treasury when shareholders approved the conversion
of two series of mandatorily convertible preferred shares into 810,720 common shares and 1,291,600 non-voting common shares. The conversion reduced preferred
stockholders’ equity by $5.8 million and increased common stockholders’ equity by the same amount.
Each of the federal bank regulatory agencies has established risk-based capital requirements for banking organizations. The Basel III regulatory capital reforms became
effective for the Company and Bank on January 1, 2015, and include new minimum risk-based capital and leverage ratios. These rules refine the definition of what constitutes
“capital” for purposes of calculating those ratios, including the definitions of Tier 1 capital and Tier 2 capital. The final rules allowed banks and their holding companies with
less than $250 billion in assets a one-time opportunity to opt-out of a requirement to include unrealized gains and losses in accumulated other comprehensive income in their
capital calculation. The Company and the Bank opted out of this requirement. The rules also establish a “capital conservation buffer” of 2.5% above the regulatory minimum
risk-based capital ratios. Once the capital conservation buffer is fully phased in, the minimum ratios are a common equity Tier 1 risk-based capital ratio of 7.0%, a Tier 1 risk-
based capital ratio of 8.5%, and a total risk-based capital ratio of 10.5%. The phase-in of the capital conservation buffer requirement began in January 2016 at 0.625% of risk-
weighted assets and increases each year until fully implemented in January 2019. An institution is subject to limitations on paying dividends, engaging in share repurchases
and paying discretionary bonuses if capital levels fall below minimum levels plus the buffer amounts. These limitations establish a maximum percentage of eligible retained
income that could be utilized for such actions.
The following table shows the ratios of Tier 1 capital, common equity Tier 1, and total capital to risk-adjusted assets and the leverage ratios (excluding the capital
conservation buffer) for the Bank at December 31, 2016:
Tier 1 capital
Common equity Tier 1 capital
Total risk-based capital
Tier 1 leverage ratio
Regulatory
Minimums
Well-
Capitalized
Minimums
Minimum
Capital
Ratios Under
Consent Order
PBI
Bank
6.0%
4.5
8.0
4.0
8.0%
6.5
10.0
5.0
N/A
N/A
12.0%
9.0
8.28%
8.28
9.88
6.24
At December 31, 2016, the Bank’s Tier 1 leverage ratio was 6.24% and its total risk-based capital ratio was 9.88%, which are both below the minimum capital ratios required
by the Consent Order. 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.
Our commitments associated with outstanding standby letters of credit and commitments to extend credit as of December 31, 2016 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
One year
or less
More than 1
year but less
than 3 years
3 years or
more but less
than 5 years
(dollars in thousands)
5 years
or more
Total
$
$
28,891
932
29,823
$
$
36,790 $
10
36,800 $
5,718 $
—
5,718 $
25,735 $
—
25,735 $
97,134
942
98,076
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 be underwritten in a manner consistent with a loan of similar
characteristics.
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Table of Contents
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.
Risk Participation Agreements – In connection with the purchase of two loan participations, the Bank entered into two risk participation agreements during the fourth
quarter of 2016, which had notional amounts totaling $14.6 million at December 31, 2016.
Contractual Obligations
The following table summarizes our contractual obligations and other commitments to make future payments as of December 31, 2016:
Time deposits
FHLB borrowing (1)
Subordinated capital note
Junior subordinated debentures
Total
One year
or less
More than 1
year but less
than 3 years
3 years or
more but less
than 5 years
(dollars in thousands)
5 years or
more
Total
$
$
278,459
20,586
900
—
299,945
$
$
127,094 $
450
1,800
—
129,344 $
39,086 $
1,215
450
—
40,751 $
— $
207
—
21,000
21,207 $
444,639
22,458
3,150
21,000
491,247
(1)
Fixed rate borrowings with rates ranging from 0% to 5.25%, and maturities ranging from 2017 through 2033, averaging 0.85%.
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.
50
Table of Contents
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 officers, 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.
Given an instantaneous 100 basis point increase in interest rates, our base net interest income would decrease by an estimated 2.5% at December 31, 2016 compared with a
increase of 0.6% at December 31, 2015. The following table indicates the estimated impact on net interest income under various interest rate scenarios for the year ended
December 31, 2016, as calculated using the static shock model approach:
+ 200 basis points
+ 100 basis points
- 100 basis points
- 200 basis points
Change in Future
Net Interest Income
Dollar Change
Percentage Change
(dollars in thousands)
$
(1,463)
(732)
(307)
(1,392)
(5.1)%
(2.5)
(1.1)
(4.8)
Implementation of strategies to mitigate the risk of rising interest rates in the future, could 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, deposit decay rates and asset prepayment speed assumptions.
The following table sets forth the amounts of our interest-earning assets and interest-bearing liabilities outstanding at December 31, 2016, 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
Volume Subject to Repricing Within
0 – 90
Days
91 – 181
Days
182 – 366
Days
1 – 5
Years
Over 5
Years
(dollars in thousands)
Non-
Interest
Sensitive
Total
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 money
market accounts
Certificates of deposit
Borrowed funds
Other liabilities
Stockholders’ equity
Total liabilities and stockholders’ equity
Period gap
Cumulative gap
Period gap to total assets
Cumulative gap to total assets
Cumulative interest-earning assets to
$
$
$
$
$
$
56,867
27,149
7,323
—
214,932
—
306,271
280,891
131,485
44,215
—
—
456,591
(150,320)
(150,320)
$
$
$
$
$
$
—
5,081
—
—
51,453
—
56,534
—
55,286
314
—
—
55,600
934
(149,386)
$
$
$
$
$
$
—
14,237
—
—
89,271
—
103,508
—
90,524
349
—
—
90,873
12,635
(136,751)
$
$
$
$
$
$
—
75,399
—
—
247,470
—
322,869
—
167,138
1,456
—
—
168,594
154,275
17,524
$
$
$
$
$
$
$
$
$
$
—
70,861
—
—
36,110
—
106,971
—
206
274
—
—
480
106,491
124,015
(15.90)%
(15.90)%
0.10%
(15.81)%
1.34%
(14.47)%
16.32%
1.85%
11.27%
13.12%
cumulative interest-bearing liabilities
67.08%
70.83%
77.32%
102.27%
116.06%
— $
1,881
—
—
(8,967)
56,110
49,024 $
56,867
194,608
7,323
—
630,269
56,110
945,177
— $
—
—
140,306
32,733
173,039 $
280,891
444,639
46,608
140,306
32,733
945,177
Our one-year cumulative gap position as of December 31, 2016 was negative $136.81 million or 14.5% of total 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.
52
Table of Contents
Item 8.
Financial Statements and Supplementary Data
The following consolidated financial statements and reports are included in this section:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2016 and 2015
Consolidated Statements of Operations for the Years Ended December 31, 2016, 2015, and 2014
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2016, 2015, and 2014
Consolidated Statements of Change in Stockholders’ Equity for the Years Ended December 31, 2016, 2015, and 2014
Consolidated Statements of Cash Flows for the Years Ended December 31, 2016, 2015, and 2014
Notes to Consolidated Financial Statements
53
Table of Contents
Porter Bancorp, Inc.
Louisville, Kentucky
Crowe Horwath LLP
Independent Member Crowe Horwath International
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have audited the accompanying consolidated balance sheets of Porter Bancorp, Inc. as of December 31, 2016 and 2015 and the related statements of operations,
comprehensive income (loss), stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2016. 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 consolidated 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 in accordance with the standards of the Public Company Accounting Oversight Board
(United States). 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 in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Accordingly, we express no such opinion. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 the Company as of December 31, 2016
and 2015, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2016, in conformity with U.S. generally accepted
accounting principles.
Louisville, Kentucky
February 28, 2017
/s/ Crowe Horwath, LLP
54
Table of Contents
PORTER BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
(Dollar amounts in thousands except share data)
2016
2015
Assets
Cash and due from banks
Interest bearing deposits in banks
Cash and cash equivalents
Securities available for sale
Securities held to maturity (fair value of $43,072 and $44,253, respectively)
Loans held for sale
Loans, net of allowance of $8,967 and $12,041, 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
Federal Home Loan Bank advances
Accrued interest payable and other liabilities
Subordinated capital note
Junior subordinated debentures
Total liabilities
Commitments and contingent liabilities (Note 16)
Stockholders’ equity
Preferred stock, no par
Series E - 6,198 issued and outstanding; Liquidation preference of $6.2 million
Series F - 4,304 issued and outstanding; Liquidation preference of $4.3 million
Total preferred stockholders’ equity
Common stock, no par, 17,200,000 shares authorized, 4,632,933 and 4,017,907 voting, and 1,591,600 and 1,371,600
non-voting shares issued and outstanding, respectively
Additional paid-in capital
Retained deficit
Accumulated other comprehensive loss
Total common stockholders’ equity
Total stockholders' equity
Total liabilities and stockholders’ equity
See accompanying notes.
55
$
$
$
$
9,449 $
56,867
66,316
152,790
41,818
—
630,269
17,848
6,821
7,323
14,838
7,154
945,177 $
124,395 $
725,530
849,925
22,458
15,911
3,150
21,000
912,444
—
1,644
1,127
2,771
125,729
24,097
(113,561)
(6,303)
29,962
32,733
945,177 $
8,006
85,329
93,335
144,978
42,075
186
606,625
18,812
19,214
7,323
9,441
6,733
948,722
120,043
757,954
877,997
3,081
10,577
4,050
21,000
916,705
—
1,644
1,127
2,771
120,699
23,654
(110,808)
(4,299)
29,246
32,017
948,722
Table of Contents
PORTER BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
(Dollar amounts in thousands except per share data)
2016
2015
2014
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 (negative provision) for loan losses
Net interest income after provision for loan losses
Non-interest income
Service charges on deposit accounts
Bank card interchange fees
Income from bank owned life insurance
Other real estate owned rental income
Net gain on sales of securities
Gain on extinguishment of junior subordinated debt
Other
Non-interest expense
Salaries and employee benefits
Occupancy and equipment
Litigation and loan collection expense
Other real estate owned expense
FDIC insurance
State franchise and deposit tax
Professional fees
Communications
Insurance expense
Postage and delivery
Data processing expense
Advertising
Other
Loss before income taxes
Income tax expense (benefit)
Net loss
Less:
Dividends and accretion on preferred stock
Effect of exchange of preferred stock for common stock
Earnings (loss) allocated to participating securities
Net income (loss) attributable to common shareholders
Basic and diluted income (loss) per common share
$
$
$
See accompanying notes.
56
30,537 $
3,886
620
559
35,602
5,093
70
671
147
—
5,981
29,621
(2,450)
32,071
1,958
849
417
456
216
—
868
4,764
15,508
3,517
8,805
1,541
1,660
965
1,568
706
565
359
1,185
973
2,215
39,567
(2,732)
21
(2,753)
—
—
(88)
(2,665) $
(0.46) $
31,251 $
4,076
764
483
36,574
6,160
95
606
161
1
7,023
29,551
(4,500)
34,051
1,851
839
295
1,346
1,766
883
715
7,695
15,857
3,449
1,141
12,302
2,212
1,120
2,885
663
589
400
1,128
560
2,653
44,959
(3,213)
—
(3,213)
—
—
(336)
(2,877) $
(0.62) $
33,090
4,945
936
542
39,513
8,867
124
612
189
3
9,795
29,718
7,100
22,618
1,988
765
276
256
92
—
702
4,079
15,658
3,497
2,994
5,839
2,272
1,445
1,665
752
575
407
1,106
563
2,662
39,435
(12,738)
(1,583)
(11,155)
2,362
(36,104)
3,159
19,428
7.94
Table of Contents
PORTER BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Years Ended December 31,
(in thousands)
Net income (loss)
Other comprehensive income (loss):
Unrealized gain (loss) on securities:
2016
2015
2014
$
(2,753) $
(3,213) $
(11,155)
Unrealized gain (loss) arising during the period
Amortization during the period of net unrealized loss
transferred to held to maturity
Reclassification of adjustment for gains included in net income
Net unrealized gain/(loss) recognized in comprehensive income
Tax effect
Other comprehensive income (loss)
(1,917)
129
(216)
(2,004)
—
(2,004)
(490)
129
(1,766)
(2,127)
—
(2,127)
Comprehensive income (loss)
$
(4,757) $
(5,340) $
4,615
181
(92)
4,704
(1,583)
3,121
(8,034)
See accompanying notes.
57
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
Preferred
Amount
Preferred
Common
Voting
and
Non-
voting
Common
Series
A
Series
B
Series
Series C
D
Series
E
Series
F Common
Series
A
Series
Series
Series
Series
Series
B
C
D
E
F
Accumulated
Other
Compre-
hensive
Income
(Loss)
Total
Additional
Paid-In
Capital
Retained
Deficit
Balances,
December 31,
2013
Issuance of
2,568,200 35,000
— 317,042
— — — $ 112,236 $ 35,000 $ — $ 3,283 $ — $ — $ — $
20,887 $(130,182) $
(5,293) $ 35,931
unvested stock
57,778
—
—
—
— — —
—
— — — — — —
Forfeited
unvested stock
(12,161)
—
—
—
— — —
—
— — — — — —
—
—
—
—
—
—
—
—
Stock-based
compensation
expense
Net loss
Net change in
accumulated
other
comprehensive
income, net of
taxes
Effect of
exchange of
preferred stock
for common
stock
—
—
—
—
—
—
—
—
— — —
— — —
—
—
— — — — — —
— — — — — —
555
—
—
(11,155)
—
555
— (11,155)
—
—
—
—
— — —
—
— — — — — —
—
—
3,121
3,121
364,286 (35,000) 40,536 (317,042) 64,580 6,198 4,304
1,002 (35,000) 2,229 (3,283) 3,552 1,644 1,127
—
36,104
—
7,375
Dividends on
Series A
preferred stock
—
—
—
—
— — —
—
— — — — — —
—
(2,362)
—
(2,362)
Balances,
December 31,
2014
Issuance of
2,978,103
— 40,536
— 64,580 6,198 4,304 $ 113,238 $
— $ 2,229 $ — $ 3,552 $1,644 $1,127 $
21,442 $(107,595) $
(2,172) $ 33,465
unvested stock 183,148
Terminated stock (107,696)
Forfeited
unvested stock
(6,368)
—
—
—
—
—
—
— — —
— — —
—
—
— — — — — —
— — — — — —
—
—
—
— — —
—
— — — — — —
—
—
—
—
—
—
—
—
—
—
—
—
Stock-based
compensation
expense
Net loss
Net change in
accumulated
other
comprehensive
income, net of
taxes
Debt to equity
exchange
Conversion of
—
—
—
—
—
—
—
—
— — —
— — —
—
—
— — — — — —
— — — — — —
445
—
—
(3,213)
—
—
445
(3,213)
—
—
—
—
— — —
—
— — — — — —
—
240,000
—
—
—
— — —
1,680
— — — — — —
1,767
—
—
(2,127)
(2,127)
—
3,447
preferred stock
to common
and non-voting
common stock 2,102,320
— (40,536)
— (64,580) — —
5,781
— (2,229) — (3,552) — —
—
—
—
—
Balances,
December 31,
2015
Issuance of
5,389,507
—
—
—
— 6,198 4,304 $ 120,699 $
— $ — $ — $ — $1,644 $1,127 $
23,654 $(110,808) $
(4,299) $ 32,017
unvested stock
35,465
—
—
—
— — —
—
— — — — — —
Forfeited
unvested stock
(1,972)
—
—
—
— — —
—
— — — — — —
—
—
—
—
—
—
—
—
Reverse stock
split roundup
shares
Stock-based
compensation
expense
Net loss
Net change in
1,533
—
—
—
— — —
—
— — — — — —
—
—
—
—
—
—
—
—
—
—
—
—
— — —
— — —
—
—
— — — — — —
— — — — — —
443
—
—
(2,753)
—
—
443
(2,753)
accumulated
other
comprehensive
income, net of
taxes
—
Issuance of stock 800,000
Balances,
—
—
—
—
—
—
— — —
— — —
—
5,030
— — — — — —
— — — — — —
—
—
—
—
(2,004)
—
(2,004)
5,030
December 31,
2016
6,224,533
—
—
—
— 6,198 4,304 $ 125,729 $
— $ — $ — $ — $1,644 $1,127 $
24,097 $(113,561) $
(6,303) $ 32,733
See accompanying notes.
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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 (negative provision) for loan losses
Net amortization on securities
Stock-based compensation expense
Gain on extinguishment of junior subordinated debt
Tax benefit from OCI components
Net gain on sales of loans held for sale
Loans originated for sale
Proceeds from sales of loans held for sale
Net (gain) loss on sales of other real estate owned
Net write-down of other real estate owned
Net realized gain on sales and calls 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 and calls of available for sale securities
Maturities and prepayments of available for sale securities
Calls of held to maturity securities
Proceeds from mandatory redemption of Federal Home Loan Bank stock
Proceeds from sales of loans not originated for sale
Proceeds from sale of other real estate owned
Loan originations and payments, net
Purchases of premises and equipment, net
Purchase of bank owned life insurance
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
Issuance of 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:
Proceeds from common stock issuance directed by investors to pay junior subordinated
debt interest
Transfer from loans to other real estate
Financed sales of other real estate owned
Transfer of loans to loans held for sale at fair value
Effect of accrued and unpaid dividends on preferred stock redemption
Effect of junior subordinated debt to equity exchange
2016
2015
2014
$
(2,753) $
(3,213) $
(11,155)
1,725
(2,450)
1,297
443
—
—
(86)
(5,145)
5,417
(222)
1,180
(216)
(397)
(814)
8,133
6,112
(41,827)
8,311
22,876
—
—
—
12,438
(22,368)
(197)
(5,000)
(25,767)
(28,072)
—
(623)
20,000
(900)
2,231
(7,364)
(27,019)
93,335
66,316 $
5,253 $
21
2,799
1,273 $
270
—
—
—
1,711
(4,500)
1,434
445
(883)
—
204
(6,652)
6,548
74
9,855
(1,766)
(274)
810
267
4,060
(21,828)
45,012
21,084
—
—
8,640
22,567
(2,239)
(385)
—
72,851
(48,844)
(1,341)
(17,671)
5,000
(900)
—
(63,756)
13,155
80,180
93,335 $
7,076 $
—
—
5,513 $
—
—
—
4,330
1,738
7,100
1,614
555
—
(1,583)
(53)
(2,528)
2,730
(306)
4,255
(92)
(256)
(1,574)
980
1,425
(45,803)
6,251
15,573
1,000
2,749
—
13,084
26,923
(523)
—
19,254
(60,864)
(1,129)
(23,765)
35,025
(900)
—
(51,633)
(30,954)
111,134
80,180
9,475
—
—
32,338
—
8,926
7,375
—
$
$
$
See accompanying notes.
59
Table of Contents
PORTER BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016, 2015 and 2014
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Principles of Consolidation – The consolidated financial statements include Porter Bancorp, Inc. (Company) 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 and South Central Kentucky, Lexington and Louisville. Its primary deposit products are checking,
savings, and term certificate accounts, and its primary lending products are residential mortgage, commercial, agricultural, 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, federal funds sold, and bank owned life insurance.
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.
Cash and Cash Equivalents – For the purpose of presentation in the statements of cash flows, the Company considers all cash and amounts due from depository institutions
as well as interest bearing deposits in banks that mature within one year and are carried at cost to be cash equivalents. The Bank is required to maintain average reserve
balances with the Federal Reserve Bank of St. Louis.
Interest Bearing Deposits in Banks – Interest bearing deposits in banks mature within one year and are carried at cost. At December 31, 2016, approximately $9.8 million of
interest bearing deposits in banks were pledged for the benefit of the Bank to a secure letter of credit issued by a third party related to litigation as more fully described in
Note 22 – “Contingencies”.
Securities – Debt securities are classified as held to maturity and carried at amortized cost when management has the intent and ability to hold them to maturity. Debt
securities are classified as available for sale when they might be sold before maturity. 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 1) OTTI
related to credit loss, which is recognized in the income statement and 2) 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.
Loans Held for Sale – Loans held for sale include residential mortgage loans originated for sale into the secondary market and 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. Our commitments to deliver loans and our rate lock loan
commitments were insignificant at year end.
60
Table of Contents
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 recognition 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 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 deemed 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 treated 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 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.
A portfolio segment is defined as the level at which an entity develops and documents a systematic methodology to determine its allowance for loan losses. We identified the
following portfolio segments: commercial, commercial real estate, residential real estate, consumer, agricultural, and other.
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● Commercial loans are made to businesses and depend on the strength of the industries, related borrowers, and cash flow from the 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
commercial properties occupied by borrowers and/or tenants. 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 depend 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 depend 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 key 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 over the most
recent three years with weighting towards the most recent periods. Commercial real estate qualitative adjustment considerations include trends in our markets for underlying
collateral values, risks related to tenant rents, and economic factors such as decreased sales demand, elevated inventory levels, and declining collateral values. Residential real
estate loan considerations include macro economic 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 (“OREO”) – 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 50 years. Furniture, fixtures and equipment are depreciated using the straight-line or accelerated
method with useful lives ranging from 2 to 10 years.
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.
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Intangible Assets – Intangible assets with definite useful lives are included with other assets and amortized over their estimated useful lives to their estimated residual values,
if any. Other intangible assets consist of core deposit 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 through a charge to earnings.
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 unvested stock awards issued to employees, based on the fair value of these awards at the date of grant.
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 (loss) 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 Shares – In December 2014, we completed a non-cash equity exchange transaction with the accredited investors who acquired all of our issued and outstanding
Series A Preferred Shares from UST in a public auction. We acquired and cancelled all of the issued and outstanding Series A Preferred Shares, the accrued dividends
thereon, all of the issued and outstanding Series C Preferred Shares, and warrants to purchase 159,783 shares of common stock together having an aggregate book value of
approximately $45.7 million. In exchange, we issued common and preferred shares having a fair value of approximately $9.6 million. The effect of this exchange transaction
was to increase common stockholders’ equity by approximately $36.1 million, and total stockholders’ equity by $7.4 million.
In the exchange transaction, we issued 364,286 common shares, 40,536 mandatorily convertible Series B Preferred Shares and 64,580 mandatorily convertible Series D
Preferred Shares, which automatically converted into 810,720 common shares and 1,291,600 non-voting common shares after shareholder approval on February 25, 2015. We
also issued 6,198 Series E Preferred Shares and 4,304 Series F Preferred Shares, both of which series are not convertible into common shares, have a liquidation preference of
$1,000 per share, and are entitled to a 2% noncumulative annual dividend if and when declared. Series E and Series F Preferred Shares rank senior to, and have liquidation
and dividend preferences over, our common shares and non-voting common shares.
Earnings (Loss) Per Common Share – Basic earnings (loss) per common share are net income (loss) attributable 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, if any, 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.
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Earnings (Loss) Allocated to Participating Securities – Our issued and outstanding Series C Preferred Shares were automatically convertible into common stock at such
time as the holder together with its affiliates beneficially owned less than 9.9% of the then outstanding common shares of the company. Our Series B and Series D
mandatorily convertible preferred shares converted to common and nonvoting common shares after shareholder approval on February 25, 2015. 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 22 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 15 for more specific disclosure.)
Fair Value of Financial Instruments – Fair values of financial instruments are estimated using relevant market information and other assumptions. 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. (See Note 17 for more specific disclosure.)
Derivative Instruments – Derivative Instruments are carried at the fair value of the derivatives and reflects the estimated amounts that would have been received to terminate
these contracts at the reporting date based upon pricing or valuation models applied to current market information.
As part of the asset/liability management program, the Company will utilize, from time to time, risk participation agreements to reduce its sensitivity to interest rate
fluctuations. These are derivative instruments, which are recorded as assets or liabilities in the consolidated balance sheets at fair value. Changes in the fair values of
derivatives are reported in the consolidated statements of operations or other comprehensive income (“OCI”) depending on the use of the derivative and whether the
instrument qualifies for hedge accounting. The key criterion for the hedge accounting is that the hedged relationship must be highly effective in achieving offsetting changes
in those cash flows that are attributable to the hedged risk, both at inception of the hedge and on an ongoing basis.
Derivatives that qualify for the hedge accounting treatment are designated as either: a hedge of the fair value of the recognized asset or liability or of an unrecognized firm
commitment (a fair value hedge) or a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (a cash
flow hedge). To date, the Company has not entered into a cash flow hedge. For cash flow hedges, changes in the fair values of the derivative instruments are reported in OCI
to the extent the hedge is effective. The gains and losses on derivative instruments that are reported in OCI are reflected in the consolidated statements of income in the
periods in which the results of operations are impacted by the variability of the cash flows of the hedged item. Generally, net interest income is increased or decreased by
amounts receivable or payable with respect to the derivatives, which qualify for hedge accounting. At inception of the hedge, a Company must establish the method it uses for
assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective aspect of the hedge. The ineffective portion of the hedge,
if any, is recognized currently in the consolidated statements of operations and time value expiration of the hedge when measuring ineffectiveness is excluded.
The risk participation agreements are not designated against specific assets or liabilities under ASC 815, Derivatives and Hedging, and, therefore, do not qualify for hedge
accounting. The derivatives are recorded on the balance sheet at fair value and changes in fair value of both the borrower and the offsetting swap agreements are recorded
(and essentially offset) in non-interest income. The fair value of the derivative instruments incorporates a consideration of credit risk (in accordance with ASC 820), resulting
in some volatility in earnings each period.
Adoption of New Accounting Standards – In August 2014, the FASB issue ASU No. 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40):
Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The objective of the amendments in this ASU is to define management’s responsibility
to evaluate whether substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. The amendments in this ASU
are effective for annual periods ending after December 15, 2016, and for interim periods within annual periods beginning after December 15, 2016. We adopted this guidance
as of December 15, 2016.
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In August 2015, FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606). This ASU is an update to ASU 2014-09, and delays the effective date of
ASU 2014-09. The ASU provides guidance on revenue recognition for entities that enter into contracts with customers to transfer goods or services or enter into contracts for
the transfer of nonfinancial assets. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to
customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additional disclosures are required to
provide quantitative and qualitative information regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The
new guidance is effective for annual reporting periods, and interim reporting periods within those annual periods, beginning after December 15, 2017. Early adoption is not
permitted. Based on types of products we offer, adoption of this new guidance is not expected to have a material impact on the consolidated financial statements.
In January 2016, the FASB issued an update ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and
Financial Liabilities. The amendments in this update impact public business entities as follows: 1) Require equity investments (except those accounted for under the equity
method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. 2) Simplify the
impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative
assessment indicates that impairment exists, an entity is required to measure the investment at fair value. 3) Eliminate the requirement to disclose the methods and significant
assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. 4) Require entities to use
the exit price notion when measuring the fair value of financial instruments for disclosure purposes. 5) Require an entity to present separately in other comprehensive income
the portion of the total change in fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair
value in accordance with the fair value option for financial instruments. 6) Require separate presentation of financial assets and financial liabilities by measurement category
and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements. 7) Clarify that an entity
should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The
amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. We are currently
evaluating the impact of adopting the new guidance on the consolidated financial statements, but it is not expected to have a material impact.
In February 2016, the FASB issued an update ASU No. 2016-02, Leases (Topic 842). Under the new guidance, lessees will be required to recognize the following for all
leases, with the exception of short-term leases, at the commencement date: a lease liability, which is a lessee’s obligation to make lease payments arising from a lease,
measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.
Under the new guidance, lessor accounting in largely unchanged. The amendments in this update become effective for annual periods and interim periods within those annual
periods beginning after December 15, 2018. We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements, but it is not
expected to have a material impact.
In March 2016, the FASB issued ASU No. 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting
Relationships. The amendments apply to all reporting entities for which there is a change in the counterparty to a derivative instrument that has been designated as a hedging
instrument. The amendments clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument does not, in and of itself,
require de-designation of that hedging relationship provided that all other hedge accounting criteria continue to be met. The amendments in this update became effective for
annual periods and interim periods within those annual periods beginning after December 15, 2016, and did not have a material impact on the consolidated financial
statements.
In March 2016, the FASB issued ASU No. 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments. The amendments apply to
all entities that are issuers of or investors in debt instruments (or hybrid financial instruments that are determined to have a debt host) with embedded call (put) options. Topic
815, Derivatives and Hedging, requires that embedded derivatives be separated from the host contract and accounted for separately as derivatives if certain criteria are met.
One of those criteria is that the economic characteristics and risks of the embedded derivatives are not clearly and closely related to the economic characteristics and risks of
the host contract. The amendments clarify what steps are required when assessing “clearly and closely related”. The amendments in this update became effective January 1,
2017 and did not have a material impact on the consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The
amendments are intended to improve the accounting for employee share-based payments and affects all organizations that issue share-based payment awards to their
employees. Several aspects of the accounting for share-based payment award transactions are simplified, including the income tax consequences, the classification of awards
as either equity or liabilities, and the classification on the statement of cash flows. The amendments in this update became effective for annual periods and interim periods
within those annual periods beginning after December 15, 2016, and did not have a material impact on the consolidated financial statements.
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In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The final
standard will change estimates for credit losses related to financial assets measured at amortized cost such as loans, held-to-maturity debt securities, and certain other
contracts. For estimating credit losses, the FASB is replacing the incurred loss model with an expected loss model, which is referred to as the current expected credit loss
(CECL) model. The largest impact will be on the allowance for loan and lease losses and held-to-maturity securities. The standard is effective for public companies for fiscal
years beginning after December 15, 2019. We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230). This update addresses eight specific cash flow issues with the objective of
reducing the existing diversity in practice of how certain cash receipts and cash payments are presented and classified in the statement of cash flow. In November 2016, the
FASB issued ASU No. 2016-18, which gave clarification on how restricted cash was to be presented in the cash flow statement. The Company elected to adopt these updates
as of December 31, 2016, and there was no material impact on the consolidated financial statements.
NOTE 2 – 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, 2016
Available for sale
U.S. Government and federal agency
Agency mortgage-backed: residential
Collateralized loan obligations
State and municipal
Corporate bonds
Total available for sale
Held to maturity
State and municipal
Total held to maturity
December 31, 2015
Available for sale
U.S. Government and federal agency
Agency mortgage-backed: residential
State and municipal
Corporate bonds
Total available for sale
Held to maturity
State and municipal
Total held to maturity
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(in thousands)
Fair Value
$
$
34,757 $
103,390
11,203
2,028
3,069
154,447 $
50 $
455
—
25
24
554 $
(708) $
(1,492)
—
(8)
(3)
(2,211) $
34,099
102,353
11,203
2,045
3,090
152,790
Amortized
Cost
Gross
Unrecognized
Gains
Gross
Unrecognized
Losses
Fair Value
$
$
41,818 $
41,818 $
1,272 $
1,272 $
(18) $
(18) $
43,072
43,072
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(in thousands)
Fair Value
$
$
33,491 $
102,135
6,555
2,321
144,502 $
146 $
907
306
—
1,359 $
(375) $
(380)
—
(128)
(883) $
33,262
102,662
6,861
2,193
144,978
Amortized
Cost
Gross
Unrecognized
Gains
Gross
Unrecognized
Losses
Fair Value
42,075 $
42,075 $
2,178 $
2,178 $
— $
— $
44,253
44,253
$
$
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Sales and calls of available for sale securities were as follows:
Proceeds
Gross gains
Gross losses
2016
2015
(in thousands)
2014
$
8,311 $
245
29
45,012 $
1,902
136
6,251
132
—
The tax provision related to these net gains and losses realized on sales were $76,000, $618,000, and $46,000, 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.
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
Within one year
One to five years
Five to ten years
Beyond ten years
Total
December 31, 2016
Amortized
Cost
Fair
Value
(in thousands)
$
$
$
$
4,894 $
7,043
29,962
9,158
103,390
154,447 $
646
22,898 $
17,228
1,046
41,818 $
4,917
7,049
29,313
9,158
102,353
152,790
648
23,497
17,822
1,105
43,072
Securities pledged at year-end 2016 and 2015 had carrying values of approximately $61.2 million and $68.0 million, respectively, and were pledged to secure public deposits.
At December 31, 2016 and 2015, we held securities issued by the Commonwealth of Kentucky or Kentucky municipalities having a book value of $16.4 million and $17.7
million, respectively. Additionally, at December 31, 2016 and 2015, we held securities issued by the State of Texas or Texas municipalities having a book value of $4.3
million. At year-end 2016 and 2015, there were no other holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than
10% of stockholders’ equity.
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Securities with unrealized losses at year-end 2016 and 2015, 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
2016
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
Description of Securities
2015
Available for sale
U.S. Government and federal agency
Agency mortgage-backed: residential
Corporate bonds
Total temporarily impaired
$
$
$
$
$
Less than 12 Months
12 Months or More
Total
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
(in thousands)
27,738 $
63,460
465
—
91,663 $
(708) $
(1,449)
(8)
—
(2,165) $
— $
2,745
—
1,566
4,311 $
1,540
1,540 $
(18)
(18) $
—
— $
— $
(43)
—
(3)
(46) $
—
— $
27,738 $
66,205
465
1,566
95,974 $
1,540
1,540 $
(708)
(1,492)
(8)
(3)
(2,211)
(18)
(18)
Less than 12 Months
12 Months or More
Total
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
Fair
Value
Unrealized
Loss
(in thousands)
7,058 $
36,325
747
44,130 $
(44) $
(271)
(18)
(333) $
14,527 $
3,856
1,446
19,829 $
(331) $
(109)
(110)
(550) $
21,585 $
40,181
2,193
63,959 $
(375)
(380)
(128)
(883)
There were no held to maturity securities in an unrealized loss position at December 31, 2015.
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, 2016, management does not believe any securities in our portfolio with unrealized losses should be classified as other than
temporarily impaired. Management currently intends to hold all securities with unrealized losses until recovery, which for fixed income securities may be at maturity.
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NOTE 3 – LOANS
Loans at year-end by class were as follows:
Commercial
Commercial Real Estate:
Construction
Farmland
Nonfarm nonresidential
Residential Real Estate:
Multi-family
1-4 Family
Consumer
Agriculture
Other
Subtotal
Less: Allowance for loan losses
Loans, net
2016
2015
$
(in thousands)
97,761 $
36,330
71,507
149,546
48,197
188,092
9,818
37,508
477
639,236
(8,967)
630,269 $
$
86,176
33,154
76,412
140,570
44,131
201,478
10,010
26,316
419
618,666
(12,041)
606,625
The following table presents the activity in the allowance for loan losses by portfolio segment for the year ended December 31, 2016, 2015, and 2014:
Commercial
Commercial
Real Estate
Residential
Real Estate Consumer Agriculture
Other
Total
(in thousands)
December 31, 2016:
Beginning balance
Provision (negative provision)
Loans charged off
Recoveries
Ending balance
December 31, 2015:
Beginning balance
Provision (negative provision)
Loans charged off
Recoveries
Ending balance
December 31, 2014:
Beginning balance
Provision (negative provision)
Loans charged off
Recoveries
Ending balance
$
$
818 $
(401)
(276)
334
475 $
6,993 $
(2,438)
(505)
844
4,894 $
3,984 $
749
(1,652)
345
3,426 $
122 $
(314)
(99)
299
8 $
$
$
$
$
$
2,046
(1,255)
(696)
723
818
$
$
$
3,221
(690)
(1,099)
614
2,046
5,787 $
(316)
(2,171)
684
3,984 $
7,762 $
1,364
(4,097)
758
5,787 $
274 $
(115)
(221)
184
122 $
416 $
25
(335)
168
274 $
10,931 $
(2,713)
(2,879)
1,654
6,993 $
16,414 $
6,395
(13,846)
1,968
10,931 $
69
122 $
(56)
(18 )
114
162 $
319 $
(87)
(118 )
8
122 $
305 $
31
(30)
13
319 $
2 $
10
(79)
69
2 $
7 $
(14)
(47)
56
2 $
6 $
(25)
(19)
45
7 $
12,041
(2,450)
(2,629)
2,005
8,967
19,364
(4,500)
(6,132)
3,309
12,041
28,124
7,100
(19,426)
3,566
19,364
Table of Contents
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method as of
December 31, 2016:
Commercial
Commercial
Real Estate
Residential
Real Estate Consumer Agriculture
Other
Total
(in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment
Collectively evaluated for impairment
Total ending allowance balance
Loans:
Loans individually evaluated for impairment
Loans collectively evaluated for impairment
Total ending loans balance
$
$
$
$
13 $
462
475 $
35 $
4,859
4,894 $
350 $
3,076
3,426 $
– $
8
8 $
1 $
161
162 $
– $
2
2 $
399
8,568
8,967
595 $
97,166
97,761 $
5,854 $
251,529
257,383 $
8,621 $
227,668
236,289 $
1 $
9,817
9,818 $
60 $
37,448
37,508 $
– $
477
477 $
15,131
624,105
639,236
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, 2015:
Commercial
Commercial
Real Estate
Residential
Real Estate Consumer Agriculture
Other
Total
(in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment
Collectively evaluated for impairment
Total ending allowance balance
Loans:
Loans individually evaluated for impairment
Loans collectively evaluated for impairment
Total ending loans balance
$
$
$
$
– $
818
818 $
43 $
6,950
6,993 $
385 $
3,599
3,984 $
– $
122
122 $
– $
122
122 $
– $
2
2 $
428
11,613
12,041
1,112 $
85,064
86,176 $
12,819 $
237,317
250,136 $
17,673 $
227,936
245,609 $
20 $
9,990
10,010 $
152 $
26,164
26,316 $
– $
419
419 $
31,776
586,890
618,666
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.
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Table of Contents
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, 2016:
Unpaid
Principal
Balance
Recorded
Investment
Allowance
For Loan
Losses
Allocated
(in thousands)
Average
Recorded
Investment
Interest
Income
Recognized
Cash
Basis
Income
Recognized
With No Related Allowance Recorded:
Commercial
Commercial real estate:
Construction
Farmland
Nonfarm nonresidential
Residential real estate:
Multi-family
1-4 Family
Consumer
Agriculture
Other
Subtotal
With An Allowance Recorded:
Commercial
Commercial real estate:
Construction
Farmland
Nonfarm nonresidential
Residential real estate:
Multi-family
1-4 Family
Consumer
Agriculture
Other
Subtotal
Total
$
707 $
495 $
— $
758 $
39 $
—
5,566
4,502
4,100
4,663
41
—
—
19,579
100
—
614
303
—
1,676
—
78
—
2,771
22,350 $
$
—
3,742
1,219
4,100
2,910
1
—
—
12,467
100
—
590
303
—
1,611
—
60
—
2,664
15,131 $
71
—
—
—
—
—
—
—
—
—
13
—
5
30
—
350
—
1
—
399
399 $
156
4,188
4,699
2,608
5,509
7
73
—
17,998
20
—
358
398
2,506
1,659
—
39
—
4,980
22,978 $
9
94
310
287
162
8
28
—
937
6
—
—
23
101
111
—
—
—
241
1,178 $
39
—
95
189
1
94
8
28
—
454
—
—
—
—
—
—
—
—
—
—
454
Table of Contents
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, 2015:
Unpaid
Principal
Balance
Recorded
Investment
Allowance
For Loan
Losses
Allocated
(in thousands)
Average
Recorded
Investment
Interest
Income
Recognized
Cash
Basis
Income
Recognized
With No Related Allowance Recorded:
Commercial
Commercial real estate:
Construction
Farmland
Nonfarm nonresidential
Residential real estate:
Multi-family
1-4 Family
Consumer
Agriculture
Other
Subtotal
With An Allowance Recorded:
Commercial
Commercial real estate:
Construction
Farmland
Nonfarm nonresidential
Residential real estate:
Multi-family
1-4 Family
Consumer
Agriculture
Other
Subtotal
Total
$
1,558 $
1,112 $
— $
1,526 $
5 $
278
6,004
11,256
32
14,066
118
260
—
33,572
—
—
—
574
4,195
1,690
—
—
—
6,459
40,031 $
262
4,263
7,829
32
11,756
20
152
—
25,426
—
—
—
465
4,195
1,690
—
—
—
6,350
31,776 $
72
$
—
—
—
—
—
—
—
—
—
—
—
—
43
57
328
—
—
—
428
428 $
1,993
4,497
16,073
35
13,584
23
206
49
37,986
13
—
63
4,591
4,229
1,705
8
—
—
10,609
48,595 $
14
114
263
—
456
—
—
5
857
—
—
—
25
204
89
—
—
—
318
1,175 $
5
1
114
9
—
99
—
—
5
233
—
—
—
—
—
—
—
—
—
—
233
Table of Contents
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, 2014:
Unpaid
Principal
Balance
Recorded
Investment
Allowance
For Loan
Losses
Allocated
(in thousands)
Average
Recorded
Investment
Interest
Income
Recognized
Cash
Basis
Income
Recognized
With No Related Allowance Recorded:
Commercial
Commercial real estate:
Construction
Farmland
Nonfarm nonresidential
Residential real estate:
Multi-family
1-4 Family
Consumer
Agriculture
Other
Subtotal
With An Allowance Recorded:
Commercial
Commercial real estate:
Construction
Farmland
Nonfarm nonresidential
Residential real estate:
Multi-family
1-4 Family
Consumer
Agriculture
Other
Subtotal
Total
$
2,546 $
1,978 $
— $
2,256 $
64 $
4,714
6,636
34,437
81
18,496
93
276
367
67,646
4,100
4,739
22,418
81
15,266
29
263
122
48,996
145
44
—
658
19,454
4,266
1,791
32
—
—
26,346
93,992 $
$
—
315
16,569
4,266
1,771
32
—
—
22,997
71,993 $
73
—
—
—
—
—
—
—
—
—
33
—
38
453
91
136
1
—
—
752
752 $
5,446
6,150
39,852
1,664
22,670
14
277
255
78,584
961
589
112
13,933
4,426
1,840
49
—
—
21,910
100,494 $
12
75
693
—
676
—
3
16
1,539
23
16
—
360
180
78
3
—
—
660
2,199 $
55
—
75
128
—
226
—
3
13
500
—
—
—
—
—
—
—
—
—
—
500
Table of Contents
Troubled Debt Restructuring
A troubled debt restructuring (TDR) occurs when the Bank has agreed to a loan modification in the form of a concession for a borrower who is experiencing financial
difficulty. The majority of the Bank’s TDRs involve a reduction in interest rate, a deferral of principal for a stated period of time, or an interest only period. All TDRs are
considered impaired and the Bank has allocated reserves for these loans to reflect the present value of the concessionary terms granted to the customer.
The following table presents the types of TDR loan modifications by portfolio segment outstanding as of December 31, 2016 and 2015:
December 31, 2016
Commercial
Rate reduction
Principal deferral
Commercial Real Estate:
Farmland
Principal deferral
Nonfarm nonresidential
Rate reduction
Principal deferral
Residential Real Estate:
Multi-family
Rate reduction
1-4 Family
Rate reduction
Total TDRs
December 31, 2015
Commercial
Rate reduction
Principal deferral
Commercial Real Estate:
Construction
Rate reduction
Farmland
Principal deferral
Nonfarm nonresidential
Rate reduction
Principal deferral
Residential Real Estate:
Multi-family
Rate reduction
1-4 Family
Rate reduction
Total TDRs
TDRs
Performing to
Modified Terms
TDRs Not
Performing to
Modified Terms
(in thousands)
Total
TDRs
$
$
$
$
— $
—
—
507
—
4,100
743
5,350 $
— $
—
262
—
5,637
—
4,195
7,346
17,440 $
33 $
434
2,300
—
607
—
—
3,374 $
68 $
439
—
2,365
50
622
—
—
3,544 $
33
434
2,300
507
607
4,100
743
8,724
68
439
262
2,365
5,687
622
4,195
7,346
20,984
At December 31, 2016 and 2015, 61% and 83%, respectively, of the Company’s TDRs were performing according to their modified terms. The Company allocated $197,000
and $179,000 as of December 31, 2016 and 2015, respectively, in reserves to customers whose loan terms have been modified in TDRs. The Company has committed to lend
no additional amounts to customers as of December 31, 2016 or 2015 with outstanding loans that are classified as TDRs.
74
Table of Contents
Management periodically reviews renewals and modifications of previously identified TDRs, for which there was no principal forgiveness, to consider if it is appropriate to
remove the TDR classification. If the borrower is no longer experiencing financial difficulty and the renewal/modification did not contain a concessionary interest rate or
other concessionary terms, management considers the potential removal of the TDR classification. If deemed appropriate based upon current underwriting, the TDR
classification is removed as the borrower has complied with the terms of the loan at the date of renewal/modification and there was a reasonable expectation that the borrower
would continue to comply with the terms of the loan subsequent to the date of the renewal/modification. In this instance, the TDR was originally considered a restructuring in
a prior year as a result of a modification with an interest rate that was not commensurate with the risk of the underlying loan. Additionally, TDR classification can be removed
in circumstances in which the Company performs a non-concessionary re-modification of the loan at terms that were considered to be at market for loans with comparable
risk. Management expects the borrower will continue to perform under the re-modified terms based on the borrower’s past history of performance.
During 2016, the TDR classification was removed from one loan that met the requirements as discussed above. This loan totaled $5.0 million at December 31, 2015. This loan
is no longer evaluated individually for impairment. No TDR loan modifications occurred during the twelve months ended December 31, 2016 or 2015.
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, 2016 and 2015:
Commercial
Commercial Real Estate:
Construction
Farmland
Nonfarm nonresidential
Residential Real Estate:
Multi-family
1-4 Family
Consumer
Agriculture
Other
Total
Nonaccrual
Loans Past
Due 90 Days
And Over Still
Accruing
2016
2015
2016
2015
(in thousands)
$
495
$
1,112 $
—
4,332
1,016
—
3,312
1
60
—
9,216
$
—
4,263
2,657
32
5,851
20
152
—
14,087 $
$
— $
—
—
—
—
—
—
—
—
— $
—
—
—
—
—
—
—
—
—
—
The following table presents the aging of the recorded investment in past due loans by class as of December 31, 2016 and 2015:
December 31, 2016
Commercial
Commercial Real Estate:
Construction
Farmland
Nonfarm nonresidential
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
Total
Past Due
And
Nonaccrual
(in thousands)
— $
—
—
59
—
256
—
—
—
315 $
— $
—
—
—
—
—
—
—
—
— $
495 $
—
4,332
1,016
—
3,312
1
60
—
9,216 $
495
—
4,958
1,075
—
5,022
20
263
—
11,833
$
— $
—
626
—
—
1,454
19
203
—
2,302 $
75
$
Table of Contents
December 31, 2015
Commercial
Commercial Real Estate:
Construction
Farmland
Nonfarm nonresidential
Residential Real Estate:
Multi-family
1-4 Family
Consumer
Agriculture
Other
Total
Credit Quality Indicators
30 – 59
Days
Past Due
60 – 89
Days
Past Due
90 Days
And Over
Past Due
Nonaccrual
Total
Past Due
And
Nonaccrual
(in thousands)
$
78 $
—
456
326
—
2,225
41
7
—
3,133 $
$
— $
—
—
—
—
241
—
—
—
241 $
— $
1,112 $
—
—
—
—
—
—
—
—
— $
—
4,263
2,657
32
5,851
20
152
—
14,087 $
1,190
—
4,719
2,983
32
8,317
61
159
—
17,461
We categorize all loans into risk categories at origination based upon original underwriting. Thereafter, we categorize loans into risk categories based on relevant information
about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current
economic trends. Additionally, loans are analyzed through our internal and external loan review processes. Borrower relationships in excess of $500,000 are routinely
analyzed through our credit administration processes which classify the loans as to credit risk. The following definitions are used for risk ratings:
Watch – Loans classified as watch are those loans which have or may experience a potentially adverse development which necessitates increased monitoring.
Special Mention – Loans classified as special mention do not have all of the characteristics of substandard or doubtful loans. They have one or more deficiencies which
warrant special attention and which corrective action, such as accelerated collection practices, may remedy.
Substandard – Loans classified as substandard are those loans with clear and defined weaknesses such as a highly leveraged position, unfavorable financial ratios, uncertain
repayment sources or poor financial condition which may jeopardize the repayment of the debt as contractually agreed. They are characterized by the distinct possibility that
we will sustain some losses if the deficiencies are not corrected.
Doubtful – Loans classified as doubtful are those loans which have characteristics similar to substandard loans but with an increased risk that collection or liquidation in full
is highly questionable and improbable.
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Table of Contents
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be “Pass” rated loans. As of December 31, 2016
and 2015, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:
December 31, 2016
Commercial
Commercial Real Estate:
Construction
Farmland
Nonfarm nonresidential
Residential Real Estate:
Multi-family
1-4 Family
Consumer
Agriculture
Other
Total
December 31, 2015
Commercial
Commercial Real Estate:
Construction
Farmland
Nonfarm nonresidential
Residential Real Estate:
Multi-family
1-4 Family
Consumer
Agriculture
Other
Total
Pass
Watch
Special
Mention
Substandard
Doubtful
Total
(in thousands)
$
96,402 $
294 $
— $
1,065 $
— $
97,761
35,823
63,323
142,222
38,281
173,565
9,397
26,940
477
586,430 $
507
1,521
5,217
6,080
6,909
348
9,555
—
30,431 $
$
—
—
445
—
52
—
—
—
497 $
—
6,663
1,662
3,836
7,566
73
1,013
—
21,878 $
—
—
—
—
—
—
—
—
— $
36,330
71,507
149,546
48,197
188,092
9,818
37,508
477
639,236
Pass
Watch
Special
Mention
Substandard
Doubtful
Total
(in thousands)
$
81,570 $
2,953 $
— $
1,653 $
— $
86,176
27,603
65,476
111,901
35,300
164,490
9,323
21,402
419
517,484 $
5,289
4,844
22,687
4,879
17,636
474
4,601
—
63,363 $
—
—
1,328
—
67
—
—
—
1,395 $
262
6,092
4,654
3,952
19,285
213
313
—
36,424 $
$
—
—
—
—
—
—
—
—
— $
33,154
76,412
140,570
44,131
201,478
10,010
26,316
419
618,666
NOTE 4 – PREMISES AND EQUIPMENT
Year-end premises and equipment were as follows:
Land and buildings
Furniture and equipment
Accumulated depreciation
Depreciation expense was $1,103,000, $1,023,000 and $940,000 for 2016, 2015 and 2014, respectively.
77
2016
2015
(in thousands)
23,515 $
10,050
33,565
(15,717)
17,848 $
24,651
10,719
35,370
(16,558)
18,812
$
$
Table of Contents
NOTE 5 – OTHER REAL ESTATE OWNED
Other real estate owned (OREO) is real estate acquired as a result of foreclosure or by deed in lieu of foreclosure. It is classified as real estate owned until such time as it is
sold. When property is acquired as a result of foreclosure or by deed in lieu of foreclosure, it is recorded at its fair market value less cost to sell. Any write-down of the
property at the time of acquisition is charged to the allowance for loan losses. Costs incurred in order to perfect the lien prior to foreclosure may be capitalized if the fair value
less the cost to sell exceeds the balance of the loan at the time of transfer to OREO. Examples of eligible costs to be capitalized are payments of delinquent property taxes to
clear tax liens or payments to contractors and subcontractors to clear mechanics’ liens.
Fair value of OREO is determined on an individual property basis. To determine the fair value of OREO for smaller dollar single family homes, we consult with internal real
estate sales staff and external realtors, investors, and appraisers. If the internally evaluated market price is below our underlying investment in the property, appropriate write-
downs are taken. For larger dollar residential and commercial real estate properties, we obtain a new appraisal of the subject property or have staff from our special assets
group or in our centralized appraisal department evaluate the latest in-file appraisal in connection with the transfer to OREO. We typically obtain updated appraisals within
five quarters of the anniversary date of ownership unless a sale is imminent. Subsequent reductions in fair value are recorded as non-interest expense when a new appraisal
indicates a decline in value or in cases where a listing price is lowered below the appraised amount.
The following table presents the major categories of OREO at the period-ends indicated:
Commercial Real Estate:
Construction, land development, and other land
Nonfarm nonresidential
Residential Real Estate:
1-4 Family
Valuation allowance
2016
2015
(in thousands)
$
$
6,571 $
—
250
6,821
—
6,821 $
Activity relating to the other real estate owned valuation allowance during the years indicated is as follows:
Beginning balance
Provision to allowance
Write-downs
Ending balance
2016
2015
(in thousands)
2014
$
$
630 $
1,180
(1,810)
— $
1,066 $
9,855
(10,291)
630 $
12,749
6,967
128
19,844
(630)
19,214
230
4,255
(3,419)
1,066
Residential loans secured by 1-4 family residential properties in the process of foreclosure totaled $932,000 and $934,000 at December 31, 2016 and December 31, 2015,
respectively.
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
Net gain (loss) on sale
Proceeds from sale of properties
OREO as of December 31
2016
2015
(in thousands)
2014
$
$
19,214 $
1,273
(1,180)
222
(12,708)
6,821 $
46,197 $
5,513
(9,855)
(74)
(22,567)
19,214 $
30,892
32,338
(4,255)
306
(13,084)
46,197
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Table of Contents
OREO rental income totaled $456,000, $1.3 million, and $256,000 for the years ended December 31, 2016, 2015, and 2014, respectively.
Expenses related to other real estate owned include:
Net (gain) loss on sales
Provision to allowance
Operating expense
Total
NOTE 6 – INTANGIBLE ASSETS
Acquired intangible assets were as follows as of year-end:
Amortized intangible assets:
Core deposit intangibles
2016
2015
(in thousands)
2014
$
$
(222) $
1,180
583
1,541 $
74 $
9,855
2,373
12,302 $
(306)
4,255
1,890
5,839
2016
2015
Gross
Carrying
Amount
Accumulated
Amortization
Gross
Carrying
Amount
(in thousands)
Accumulated
Amortization
$
4,183 $
4,074 $
4,183 $
3,740
Aggregate amortization expense was $334,000, $335,000 and $397,000 for 2016, 2015 and 2014, respectively. Estimated aggregate amortization expense for intangible assets
for 2017 is $109,000.
NOTE 7 – DEPOSITS
The following table shows deposits by category:
Non-interest bearing
Interest checking
Money market
Savings
Certificates of deposit
Total
December 31,
2016
December 31,
2015
(in thousands)
$
$
124,395 $
103,876
142,497
34,518
444,639
849,925 $
120,043
97,515
125,935
34,677
499,827
877,997
Time deposits of $250,000 or more were approximately $29.1 million and $28.4 million at year-end 2016 and 2015, respectively.
Scheduled maturities of total time deposits for each of the next five years are as follows (in thousands):
2017
2018
2019
2020
2021
Thereafter
Total
278,459
97,471
29,623
32,782
6,304
—
444,639
$
$
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NOTE 8 – ADVANCES FROM FEDERAL HOME LOAN BANK
At year-end, advances from the Federal Home Loan Bank were as follows:
Advances with fixed rates from 0.00% to 5.25% and maturities ranging from 2017 through 2033, averaging 0.85% for
2016 and 2.65% for 2015
2016
2015
(in thousands)
$
22,458 $
3,081
Each advance is payable per terms on agreement, with a prepayment penalty. No prepayment penalties were incurred during 2016 or 2015. The advances were collateralized
by approximately $124.2 million and $128.8 million of first mortgage loans, under a blanket lien arrangement at year-end 2016 and 2015, 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, 2016, our additional borrowing capacity with the FHLB was $9.6
million.
Scheduled principal payments on the above during the next five years and thereafter (in thousands):
2017
2018
2019
2020
2021
Thereafter
Advances
20,586
265
185
486
729
207
22,458
$
$
At year-end 2016, the Company had a $5.0 million federal funds line of credit available on a secured basis from a correspondent institution.
NOTE 9 – SUBORDINATED CAPITAL NOTE
The outstanding principal amount of the subordinated capital note issued by the Bank totaled $3.2 million at December 31, 2016. The note is unsecured, bears interest at the
BBA three-month LIBOR floating rate plus 300 basis points, and qualifies as Tier 2 capital until five years before maturity on July 1, 2020. During this five-year period, one-
fifth of principal amount of the subordinated note is excluded from Tier 2 capital each year and until fully excluded from Tier 2 capital during the year before maturity.
Principal payments of $225,000 plus interest are due quarterly. Scheduled principal payments of $900,000 per year are due each of the next three years with $450,000 due
thereafter. The interest rate on this note was 3.85% and 3.28% at December 31, 2016 and 2015, respectively.
NOTE 10 – JUNIOR SUBORDINATED DEBENTURES
The junior subordinated debentures are redeemable at par prior to maturity 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 20 consecutive quarters. If payments are deferred, the Company is
prohibited from paying dividends on its preferred and common shares.
On April 15, 2016, we completed the private placement of 580,000 common shares and 220,000 non-voting common shares to accredited investors resulting in total proceeds
of $5.0 million. The investors in the private placement directed a portion of purchase price to pay all deferred interest payments on junior subordinated debentures, bringing
our interest payments current through the second quarter of 2016. The remaining proceeds totaled approximately $2.2 million and will be used for general corporate purposes
and to support the Bank.
On June 29, 2016, the Company notified the trustees of its election to again defer interest payments effective with the third quarter 2016 payment. The deferral period ends
after the second quarter of 2021. After 20 consecutive quarters, we must pay all deferred distributions or we will be in default. Dividends accrued and unpaid on our junior
subordinated debentures totaled $378,000 at December 31, 2016.
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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
Interest Rate (1)
2/13/2004 3-month LIBOR + 2.85% $
4/15/2004 3-month LIBOR + 2.79%
12/14/2006 3-month LIBOR + 1.67%
2/13/2004 3-month LIBOR + 2.85%
$
Junior
Subordinated
Debt Owed
To Trust
5,000,000
3,000,000
10,000,000
3,000,000
21,000,000
Maturity
Date (2)
2/13/2034
4/15/2034
3/01/2037
2/13/2034
(1) As of December 31, 2016, the 3-month LIBOR was 1.00%.
(2)
The debentures are callable at our option at their principal amount plus accrued interest.
On September 30, 2015, we completed a common equity for debt exchange with holders of $4.0 million of the capital securities (the “Trust Securities”) of Porter Statutory
Trust IV, a trust subsidiary of the Company. Accrued and unpaid interest on the Trust Securities totaled of approximately $330,000. In exchange for the $4.3 million debt and
interest liability, the Company issued 160,000 common shares and 80,000 non-voting common shares, for a total of 240,000 shares. In the transaction, a wholly owned
subsidiary of the Company received a one-third portion of the Trust Securities directly from an unrelated third party in exchange for the issuance of 80,000 common shares
resulting in an $883,000 gain on extinguishment of debt. The $883,000 gain was determined based upon the difference in the $560,000 fair value of the common shares issued
and the $1.4 million book value of the debt securities and accrued interest thereon tendered to the Company by the unrelated third party on the date of closing. The fair value
of the shares issued to the unrelated third party was computed by multiplying the 80,000 shares issued by $7.00 per share, which was the NASDAQ closing price of the
Company’s common stock on September 30, 2015. The subsidiary also received two-thirds of the Trust Securities having a book value of $2.9 million from related parties in
exchange for the issuance of 80,000 common shares and 80,000 non-voting common shares. In accordance with ASC 470-50-40-2 and SEC Guidance 405-20-40-1.J, the debt
and interest liability exchanged with related parties was treated as a capital transaction.
NOTE 11 – OTHER BENEFIT PLANS
401(k) Plan – The Company 401(k) Savings Plan allows employees to contribute up to the annual limits as determined by the Internal Revenue Service, 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 totaled approximately $189,000, $160,000 and $187,000 in 2016, 2015 and 2014, respectively.
Supplemental Executive Retirement Plan – The Company has 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 $121,000, $121,000 and $122,000 for
the years ended December 31, 2016, 2015 and 2014, respectively. The related liability was $1,328,000, $1,335,000 and $1,341,000 at December 31, 2016, 2015, and 2014,
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 $14,838,000 and $9,441,000 at December 31,
2016 and 2015, respectively. Income earned from the cash surrender value of life insurance totaled $417,000, $295,000 and $276,000 for the years ended December 31, 2016,
2015, and 2014, respectively. The income is recorded as other non-interest income.
NOTE 12 – INCOME TAXES
Income tax expense (benefit) was as follows:
Current
Deferred
Net operating loss
Change in valuation allowance
2016
2015
(in thousands)
2014
$
$
21 $
2,771
(4,009)
1,238
21 $
— $
5,258
(5,975)
717
— $
—
2,151
(6,651)
2,917
(1,583)
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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:
Valuation allowance
Tax-exempt income
Nontaxable life insurance income
Other, net
Total
Year-end deferred tax assets and liabilities were due to the following:
2016
2015
(in thousands)
2014
$
(956) $
(1,125) $
1,238
(211)
(146)
96
21 $
717
(264)
(103)
775
— $
$
(4,458)
2,917
(319)
(97)
374
(1,583)
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
Net unrealized loss on securities
New market tax credit carry-forward
Nonaccrual loan interest
Accrued expenses
Other
Deferred tax liabilities:
FHLB stock dividends
Fixed assets
Other
Net deferred tax assets before valuation allowance
Valuation allowance
Net deferred tax asset
2016
2015
(in thousands)
$
$
42,094 $
3,139
3,366
692
674
867
208
481
3,860
825
56,206
928
89
1,140
2,157
54,049
(54,049)
— $
38,085
4,214
7,619
692
671
166
208
549
990
885
54,079
928
176
865
1,969
52,110
(52,110)
—
Our estimate of the realizability of the deferred tax asset is dependent on our estimate of projected future levels of taxable income. In analyzing future taxable income levels,
we considered all evidence currently available, both positive and negative. Based on our analysis, we established a valuation allowance for all deferred tax assets as of
December 31, 2011. The valuation allowance remains in effect as of December 31, 2016.
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 2016 or 2015 related to unrecognized tax
benefits.
Under Section 382 of the Internal Revenue Code, as amended (“Section 382”), the Company’s net operating loss carryforwards (“NOLs”) and other deferred tax assets can
generally be used to offset future taxable income and therefore reduce federal income tax obligations. However, the Company's ability to use its NOLs would be limited if
there was an “ownership change” as defined by Section 382. This would occur if shareholders owning (or deemed to own under the tax rules) 5% or more of the Company's
voting and non-voting common shares increase their aggregate ownership of the Company by more than 50 percentage points over a defined period of time.
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In 2015, the Company took two measures to preserve the value of its NOLs. First, we adopted a tax benefits preservation plan designed to reduce the likelihood of an
“ownership change” occurring as a result of purchases and sales of the Company's common shares. Upon adoption of this plan, the Company declared a dividend of one
preferred stock purchase right for each common share outstanding as of the close of business on July 10, 2015. Any shareholder or group that acquires beneficial ownership of
5% or more of the Company (an “acquiring person”) could be subject to significant dilution in its holdings if the Company's Board of Directors does not approve such
acquisition. Existing shareholders holding 5% or more of the Company will not be considered acquiring persons unless they acquire additional shares, subject to certain
exceptions described in the plan. In addition, the Board of Directors has the discretion to exempt certain transactions and certain persons whose acquisition of securities is
determined by the Board not to jeopardize the Company's deferred tax assets. The rights will expire upon the earlier of (i) June 29, 2018, (ii) the beginning of a taxable year
with respect to which the Board of Directors determines that no tax benefits may be carried forward, (iii) the repeal or amendment of Section 382 or any successor statute, if
the Board of Directors determines that the plan is no longer needed to preserve the tax benefits, and (iv) certain other events as described in the plan.
On September 23, 2015, the Company’s shareholders approved an amendment to its articles of incorporation to further help protect the long-term value of the Company’s
NOLs. The amendment provides a means to block transfers of our common shares that could result in an ownership change under Section 382. The transfer restrictions will
expire on the earlier of (i) September 23, 2018, (ii) the beginning of a taxable year with respect to which the Board of Directors determines that no tax benefit may be carried
forward, (iii) the repeal of Section 382 or any successor statute if our Board determines that the transfer restrictions are no longer needed to preserve the tax benefits of our
NOLs, or (iv) such date as the Board otherwise determines that the transfer restrictions are no longer necessary.
The Company and its subsidiaries are subject to U.S. federal income tax and the Company is subject to income tax in the Commonwealth of Kentucky. The Company is no
longer subject to examination by taxing authorities for years before 2013.
NOTE 13 – RELATED PARTY TRANSACTIONS
Loans to principal officers, directors, significant shareholders, and their affiliates in 2016 were as follows (in thousands):
Beginning balance
New loans
Repayments
Ending balance
$
$
—
997
(997)
—
Deposits from principal officers, directors, significant shareholders, and their affiliates at year-end 2016 and 2015 were $321,000 and $382,000, respectively.
Hogan Development Company assists the Bank in onboarding, managing, and selling the Bank’s OREO. Hogan Development Company is owned by W. Glenn Hogan, a
director. Our agreement with Hogan Development Company is periodically reviewed and evaluated by our Audit Committee. The Bank paid real estate management fees of
$56,000 and $175,000 and real estate sales and leasing commissions of $478,000 and $637,000 to Hogan Development Company in 2016 and 2015, respectively.
In December 2014, we completed a non-cash equity exchange transaction with the accredited investors who acquired all of our issued and outstanding Series A Preferred
Shares from the United States Treasury in a public auction. The investors included W. Glenn Hogan and Michael T. Levy, both directors of the Company, as well as Patriot
Financial Partners L.P. and Patriot Financial Partners Parallel L.P. (the “Patriot Funds”), funds for whom a director of the Company, W. Kirk Wycoff, serves as general
partner. Mr. Hogan exchanged 5,000 Series A Preferred Shares, and was issued 17,143 mandatorily convertible Series B Preferred Shares, 885 Series E Preferred Shares, and
1,405 Series F Preferred Shares. Mr. Levy exchanged 750 Series A Preferred Shares, and was issued 51,429 common shares, 133 Series E Preferred Shares, and 211 Series F
Preferred Shares. The Patriot Funds exchanged 19,688 Series A Preferred Shares, 317,042 Series C Preferred Shares, and 150,653 warrants to purchase non-voting common
shares, and was issued 6,250 mandatorily convertible Series B Preferred Shares, 64,580 mandatorily convertible Series D Preferred Shares, and 3,486 Series E Preferred
Shares. After shareholder approval on February 25, 2015, Mr. Hogan’s 17,143 Series B Preferred Shares converted into 342,860 common shares and the Patriot Funds’ Series
B Preferred Shares converted into 125,000 common shares, and their Series D Preferred Shares converted into 1,291,600 non-voting common shares.
On September 30, 2015, we completed a common equity for debt exchange to acquire (and subsequently retire) $4.0 million of our Trust Securities. Accrued and unpaid
interest on the Trust Securities totaled approximately $330,000. In exchange for the $4.3 million debt and interest liability, the Company issued a total of 160,000 common
shares and 80,000 non-voting common shares. In the transaction, a whollyowned subsidiary of the Company acquired one-third of the Trust Securities directly from the
unrelated holder in exchange for 80,000 newly issued common shares, resulting in an $883,000 gain on extinguishment of debt. The $883,000 gain was determined based
upon the difference in the $560,000 fair value of the common shares issued and the $1.4 million book value of the debt securities and accrued interest thereon tendered to the
Company by the unrelated holder on the date of closing. The fair value of the shares issued to the unrelated holder was computed by multiplying the 80,000 shares issued by
$7.00 per share, which was the NASDAQ closing price of the Company’s common shares on September 30, 2015. The subsidiary also acquired the other two-thirds of the
Trust Securities having a book value of $2.9 million in exchange for 80,000 common shares and 80,000 non-voting common shares issued to related parties who purchased
the remaining Trust Securities from the unrelated holder. In accordance with ASC 470-50-40-2 and SEC Guidance 405-20-40-1.J, the debt and interest liability exchanged
with the related parties was treated as a capital transaction.
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On April 15, 2016, we completed the private placement of 580,000 common shares and 220,000 non-voting common shares to accredited investors resulting in total proceeds
of $5.0 million. The investors in the private placement directed a portion of purchase price to pay all deferred interest payments on junior subordinated debentures, bringing
our interest payments current through the second quarter of 2016. The investors included three directors of the Company, including President and CEO John T. Taylor, who
purchased common shares on the same terms and conditions as the other investors.
NOTE 14 – PREFERRED STOCK AND STOCK PURCHASE WARRANTS
On November 21, 2008, we issued 35,000 Series A preferred shares and a warrant to purchase up to 66,113 of our common shares for $79.41 per share to the U.S. Treasury
(“UST”) for an aggregate purchase price of $35.0 million. The warrant is exercisable, has a 10-year term and has not been transferred by UST.
In December 2014, we completed a non-cash equity exchange transaction with the accredited investors who acquired all of the issued and outstanding Series A Preferred
Shares from UST in a public auction. We acquired and cancelled all of the issued and outstanding Series A Preferred Shares, the accrued dividends thereon, all of our issued
and outstanding Series C preferred shares which were held by the accredited investors, and related warrants to purchase 159,783 of our common shares, which together had an
aggregate book value of approximately $45.7 million. In exchange, we issued common and preferred shares having a fair value of approximately $9.6 million. The effect of
this exchange transaction was to increase common stockholders’ equity by approximately $36.1 million, and total stockholders’ equity by $7.4 million.
In the exchange transaction, we issued 364,286 common shares, 40,536 mandatorily convertible Series B preferred shares and 64,580 mandatorily convertible Series D
preferred shares, which automatically converted into 810,720 common shares and 1,291,600 non-voting common shares after shareholder approval on February 25, 2015. We
also issued 6,198 Series E preferred shares and 4,304 Series F preferred shares, both of which series are not convertible into common shares, have a liquidation preference of
$1,000 per share, and are entitled to a 2% noncumulative annual dividend if and when declared. Series E and Series F preferred shares rank senior to, and have liquidation and
dividend preferences over, our common shares and non-voting common shares.
NOTE 15 – CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS
Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for
banks, prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting
practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action.
The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. Banks (Basel III rules) became effective for the Company and Bank on
January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule through January 1, 2019. The final rules allowed banks and their
holding companies with less than $250 billion in assets a one-time opportunity to opt-out of a requirement to include unrealized gains and losses in accumulated other
comprehensive income in their capital calculation. The Company and the Bank opted out of this requirement. The rules also establish a “capital conservation buffer” of 2.5%
above the regulatory minimum risk-based capital ratios. Once the capital conservation buffer is fully phased in, the minimum ratios are a common equity Tier 1 risk-based
capital ratio of 7.0%, a Tier 1 risk-based capital ratio of 8.5%, and a total risk-based capital ratio of 10.5%. The phase-in of the capital conservation buffer requirement began
in January 2016 at 0.625% of risk-weighted assets and increases each year until fully implemented in January 2019. An institution is subject to limitations on paying
dividends, engaging in share repurchases and paying discretionary bonuses if capital levels fall below minimum levels plus the buffer amounts. These limitations establish a
maximum percentage of eligible retained income that could be utilized for such actions.
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In its Consent Orders with the FDIC and the KDFI, the Bank has agreed to maintain a minimum Tier 1 leverage ratio of 9% and a minimum total risk based capital ratio of
12%. The Bank cannot be considered well-capitalized while subject to the Consent Order. We are also restricted from accepting, renewing, or rolling-over brokered deposits
without the prior receipt of a waiver on a case-by-case basis from our regulators.
On September 21, 2011, we entered into a Written Agreement with the Federal Reserve Bank of St. Louis. Pursuant to the Agreement, we made formal commitments to use
our financial and management resources to serve as a source of strength for the Bank and to assist the Bank in addressing weaknesses identified by the FDIC and the KDFI, to
pay no dividends without prior written approval, to pay no interest or principal on subordinated debentures or trust preferred securities without prior written approval, and to
submit an acceptable plan to maintain sufficient capital.
The following tables show the ratios (excluding capital conservation buffer) and amounts of common equity Tier 1, Tier 1 capital, and total capital to risk-adjusted assets and
the leverage ratios for Porter Bancorp, Inc. and the Bank at the dates indicated (dollars in thousands):
As of December 31, 2016:
Total risk-based capital (to risk-weighted assets)
Consolidated
Bank
Total common equity Tier I 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, 2015:
Total risk-based capital (to risk-weighted assets)
Consolidated
Bank
Total common equity Tier 1 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
Regulatory Minimums for Capital
Adequacy Purposes
Amount
Ratio
Amount
Ratio
71,109
68,773
36,199
57,642
48,713
57,642
48,713
57,642
10.21% $
9.88
5.20
8.28
6.99
8.28
5.27
6.24
55,714
55,663
31,339
31,311
41,786
41,747
36,975
36,949
8.00%
8.00
4.50
4.50
6.00
6.00
4.00
4.00
Actual
Regulatory Minimums for Capital
Adequacy Purposes
Amount
Ratio
Amount
Ratio
68,530
69,250
33,368
57,873
45,174
57,873
45,174
57,873
10.46% $
10.58
5.09
8.84
6.89
8.84
4.74
6.08
52,436
52,347
29,495
29,445
39,327
39,260
38,131
38,085
8.00%
8.00
4.50
4.50
6.00
6.00
4.00
4.00
$
$
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The Consent Order requires the Bank to achieve the minimum capital ratios presented below:
Actual as of December 31, 2016
Ratio Required by Consent Order
Amount
Ratio
Amount
Ratio
Total capital to risk-weighted assets
Tier I capital to average assets
$
68,773
57,642
9.88% $
6.24
83,495
83,135
12.00%
9.00
Bank regulatory agencies can exercise discretion when an institution does not meet the terms of a Consent Order. Based on individual circumstances, the agencies may issue
mandatory directives, impose monetary penalties, initiate changes in management, or take more serious adverse actions.
Kentucky banking laws limit the amount of dividends that may be paid to a holding company by its subsidiary banks without prior approval. These laws limit the amount of
dividends that may be paid in any calendar year to current year’s net income, as defined in the laws, combined with the retained net income of the preceding two years, less
any dividends declared during those periods. The Bank has agreed with its primary regulators to obtain their written consent prior to declaring or paying any future dividends.
As a practical matter, the Bank cannot pay dividends to the Company until the Consent Order is lifted or modified and the Bank returns to consistent profitability.
NOTE 16 – LOAN COMMITMENTS AND FINANCIAL GUARANTEES
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.
2016
2015
Fixed
Rate
Variable
Rate
Fixed
Rate
Variable
Rate
$
$
19,445
7,935
582
(in thousands)
18,347 $
51,407
360
2,475 $
12,212
950
9,763
48,648
1,220
In connection with the purchase of two loan participations, the Bank entered into two risk participation agreements during the fourth quarter of 2016, which had notional
amounts totaling $14.6 million at December 31, 2016.
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NOTE 17 – FAIR VALUES
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or
liability in an orderly transaction between market participants on the measurement date. We use various valuation techniques to determine fair value, including market,
income and cost approaches. There are three levels of inputs that may be used to measure fair values:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that an entity has the ability to access as of the measurement date, or
observable inputs.
Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not
active, and other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing an asset or
liability.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. When that occurs, we classify the fair value hierarchy on the
lowest level of input that is significant to the fair value measurement. We used the following methods and significant assumptions to estimate fair value.
Securities: The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges, if available. This
valuation method is classified as Level 1 in the fair value hierarchy. For securities where quoted prices are not available, fair values are calculated on market prices
of similar securities, or matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted
prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. Matrix pricing relies on the securities’
relationship to similarly traded securities, benchmark curves, and the benchmarking of like securities. Matrix pricing utilizes observable market inputs such as
benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, and industry and
economic events. In instances where broker quotes are used, these quotes are obtained from market makers or broker-dealers recognized to be market participants.
This valuation method is classified as Level 2 in the fair value hierarchy. For securities where quoted prices or market prices of similar securities are not available,
fair values are calculated using discounted cash flows or other market indicators. This valuation method is classified as Level 3 in the fair value hierarchy.
Discounted cash flows are calculated using spread to swap and LIBOR curves that are updated to incorporate loss severities, volatility, credit spread and optionality.
During times when trading is more liquid, broker quotes are used (if available) to validate the model. Rating agency and industry research reports as well as defaults
and deferrals on individual securities are reviewed and incorporated into the calculations.
Impaired Loans: An impaired loan is evaluated at the time the loan is identified as impaired and is recorded at fair value less costs to sell. Fair value is measured
based on the value of the collateral securing the loan and is classified as Level 3 in the fair value hierarchy. Fair value is determined using several methods.
Generally, the fair value of real estate is determined based on appraisals by qualified licensed appraisers. These appraisals may utilize a single valuation approach or
a combination of approaches including comparable sales and the income approach.
Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. These
routine adjustments are made to adjust the value of a specific property relative to comparable properties for variations in qualities such as location, size, and income
production capacity relative to the subject property of the appraisal. Such adjustments are typically significant and result in a Level 3 classification of the inputs for
determining fair value.
We routinely apply an internal discount to the value of appraisals used in the fair value evaluation of our impaired loans. The deductions to the appraisal take into
account changing business factors and market conditions, as well as potential value impairment in cases where our appraisal date predates a likely change in market
conditions. These deductions range from 10% for routine real estate collateral to 25% for real estate that is determined (1) to have a thin trading market or (2) to be
specialized collateral. This is in addition to estimated discounts for cost to sell of six to ten percent.
We also apply discounts to the expected fair value of collateral for impaired loans where the likely resolution involves litigation or foreclosure. Resolution of this
nature generally results in receiving lower values for real estate collateral in a more aggressive sales environment. We have utilized discounts ranging from 10% to
33% in our impairment evaluations when applicable.
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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 participants to determine the likely marketing time and value range for the property. The second stage involves an assessment of current trends
in the regional market. After thorough consideration of these factors, management will either internally evaluate fair value or order a new appraisal.
Other Real Estate Owned (OREO): OREO is evaluated at the time of acquisition and recorded at fair value as determined by independent appraisal or internal
evaluation less cost to sell. Our quarterly evaluations of OREO for impairment are driven by property type. For smaller dollar single family homes, we consult with
internal real estate sales staff and external realtors, investors, and appraisers. Based on these consultations, we determine asking prices for OREO properties we are
marketing for sale. If the internally evaluated fair value or asking price is below our recorded investment in the property, appropriate write-downs are taken.
For larger dollar commercial real estate properties, we obtain a new appraisal of the subject property or have staff in our special assets group or centralized appraisal
department evaluate the latest in-file appraisal in connection with the transfer to other real estate owned. In some of these circumstances, an appraisal is in process at
quarter end, and we must make our best estimate of the fair value of the underlying collateral based on our internal evaluation of the property, review of the most
recent appraisal, and discussions with the currently engaged appraiser. We generally obtain updated appraisals within five quarters of the anniversary date of
ownership unless a sale is imminent. When an asking price is lowered below the most recent appraised value, appropriate write-downs are taken.
We routinely apply an internal discount to the value of appraisals used in the fair value evaluation of our OREO. The deductions to the appraisal take into account
changing business factors and market conditions, as well as potential value impairment in cases where our appraisal date predates a likely change in market
conditions. These deductions range from 10% for routine real estate collateral to 25% for real estate that is determined (1) to have a thin trading market or (2) to be
specialized collateral. This is in addition to estimated discounts for cost to sell of six to ten percent.
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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
Collateralized loan obligations
State and municipal
Corporate bonds
Total
Description
Available for sale securities
U.S. Government and federal agency
Agency mortgage-backed: residential
State and municipal
Corporate bonds
Total
$
$
$
$
There were no transfers between Level 1 and Level 2 during 2016 or 2015.
Financial assets measured at fair value on a non-recurring basis are summarized below:
Fair Value Measurements at December 31, 2016 Using
(in thousands)
Significant
Other
Observable
Inputs
(Level 2)
Quoted Prices In
Active Markets
for Identical
Assets
(Level 1)
Significant
Unobservable
Inputs
(Level 3)
Carrying
Value
34,099 $
102,353
11,203
2,045
3,090
152,790 $
— $
—
—
—
—
— $
34,099 $
102,353
11,203
2,045
3,090
152,790 $
Fair Value Measurements at December 31, 2015 Using
(in thousands)
Significant
Other
Observable
Inputs
(Level 2)
Quoted Prices In
Active Markets
for Identical
Assets
(Level 1)
Significant
Unobservable
Inputs
(Level 3)
Carrying
Value
33,262 $
102,662
6,861
2,193
144,978 $
— $
—
—
—
— $
33,262 $
102,662
6,861
2,193
144,978 $
—
—
—
—
—
—
—
—
—
—
—
Description
Impaired loans:
Commercial
Commercial real estate:
Construction
Farmland
Nonfarm nonresidential
Residential real estate:
Multi-family
1-4 Family
Consumer
Agriculture
Other
Other real estate owned, net:
Commercial real estate:
Construction
Farmland
Nonfarm nonresidential
Residential real estate:
Multi-family
1-4 Family
Fair Value Measurements at December 31, 2016 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
$
87 $
— $
— $
—
585
—
—
1,261
—
59
—
6,571
—
—
—
250
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
87
—
585
—
—
1,261
—
59
—
6,571
—
—
—
250
89
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Description
Impaired loans:
Commercial
Commercial real estate:
Construction
Farmland
Nonfarm nonresidential
Residential real estate:
Multi-family
1-4 Family
Consumer
Agriculture
Other
Other real estate owned, net:
Commercial real estate:
Construction
Farmland
Nonfarm nonresidential
Residential real estate:
Multi-family
1-4 Family
Fair Value Measurements at December 31, 2015 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
$
— $
— $
— $
—
—
139
—
1,362
—
—
—
12,344
—
6,746
—
124
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
139
—
1,362
—
—
—
12,344
—
6,746
—
124
Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $2.4 million, with a
valuation allowance of $370,000, at December 31, 2016, resulting in no additional provision for loan losses for the year ended December 31, 2016. At December 31, 2015,
impaired loans had a carrying amount of $1.8 million, with a valuation allowance of $337,000, at December 31, 2015, resulting in no additional provision for loan losses for
the year ended December 31, 2015.
OREO, which is measured at the lower of carrying or fair value less costs to sell, had a net carrying amount of $6.8 million as of December 31, 2016, compared with $19.2
million at December 31, 2015. Write-downs of $1.2 million and $9.9 million were recorded on OREO for the years ended December 31, 2016 and 2015, 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, 2016:
Fair Value
(in thousands)
Valuation
Technique(s)
Unobservable Input(s)
Range (Weighted
Average)
Impaired loans – Residential real estate
Sales comparison approach
Adjustment for differences between the
comparable sales
0% - 22% (9%)
Other real estate owned – Commercial real
estate
$
$
1,261
6,571
Sales comparison approach
Adjustment for differences between the
comparable sales
Income approach
Discount or capitalization rate
90
0% - 20%
18% - 20% (19%)
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, 2015:
Fair Value
(in thousands)
Valuation
Technique(s)
Unobservable Input(s)
Range (Weighted
Average)
Impaired loans – Residential real estate
Sales comparison approach
Adjustment for differences between the
$
1,362
comparable sales
1% - 16% (7%)
Other real estate owned – Commercial real
estate
$
Sales comparison approach
Adjustment for differences between the
19,090
comparable sales
Income approach
Discount or capitalization rate
0% - 30% (12%)
10% - 20% (17%)
Carrying amount and estimated fair values of financial instruments were as follows at year-end 2016:
Financial assets
Cash and cash equivalents
Securities available for sale
Securities held to maturity
Federal Home Loan Bank stock
Loans held for sale
Loans, net
Accrued interest receivable
Financial liabilities
Deposits
Federal Home Loan Bank advances
Subordinated capital notes
Junior subordinated debentures
Accrued interest payable
Carrying
Amount
Fair Value Measurements at December 31, 2016 Using
Level 1
Level 2
(in thousands)
Level 3
Total
$
$
$
$
66,316
152,790
41,818
7,323
—
630,269
3,137
849,925
22,458
3,150
21,000
734
31,091 $
—
—
N/A
—
—
—
124,395 $
—
—
—
—
35,225 $
152,790
43,072
N/A
—
—
1,203
712,458 $
22,475
—
—
369
— $
—
—
N/A
—
632,528
1,934
— $
—
3,091
13,263
365
66,316
152,790
43,072
N/A
—
632,528
3,137
836,853
22,475
3,091
13,263
734
Carrying amount and estimated fair values of financial instruments were as follows at year-end 2015:
Financial assets
Cash and cash equivalents
Securities available for sale
Securities held to maturity
Federal Home Loan Bank stock
Loans held for sale
Loans, net
Accrued interest receivable
Financial liabilities
Deposits
Federal Home Loan Bank advances
Subordinated capital notes
Junior subordinated debentures
Accrued interest payable
Carrying
Amount
Fair Value Measurements at December 31, 2015 Using
Level 1
Level 2
(in thousands)
Level 3
Total
$
$
$
$
93,335
144,978
42,075
7,323
186
606,625
3,116
877,997
3,081
4,050
21,000
2,805
91
79,498 $
—
—
N/A
—
—
—
120,043 $
—
—
—
—
13,837 $
144,978
44,253
N/A
186
—
1,111
739,152 $
3,076
—
—
422
— $
—
—
N/A
—
614,162
2,005
— $
—
3,933
12,810
2,383
93,335
144,978
44,253
N/A
186
614,162
3,116
859,195
3,076
3,933
12,810
2,805
Table of Contents
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) Loans Held for Sale
The fair value of loans held for sale is estimated based upon binding contracts and quotes from third party investors resulting in a Level 2 classification.
(e) Deposits
The fair values disclosed for non-interest bearing deposits are, by definition, equal to the amount payable on demand at the reporting date resulting in a Level 1
classification. The carrying amounts of variable rate interest bearing deposits approximate their fair values at the reporting date resulting in a Level 2 classification. Fair
values for fixed rate interest bearing deposits are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a
schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.
(f) Other Borrowings
The fair values of the Company’s FHLB advances are estimated using discounted cash flow analyses based on the current borrowing rates resulting in a Level 2
classification.
The fair values of the Company’s subordinated capital notes and junior subordinated debentures are estimated using discounted cash flow analyses based on the current
borrowing rates for similar types of borrowing arrangements resulting in a Level 3 classification.
(g) Accrued Interest Receivable/Payable
The carrying amounts of accrued interest approximate fair value resulting in a Level 2 or Level 3 classification based on the level of the asset or liability with which the
accrual is associated.
NOTE 18 – STOCK PLANS AND STOCK BASED COMPENSATION
At the annual meeting on May 25, 2016, shareholders approved the Porter Bancorp, Inc. 2016 Omnibus Equity Compensation Plan (“2016 Plan”), which replaces the Porter
Bancorp, Inc. 2006 Stock Incentive Plan (“2006 Employee Plan”) that had expired earlier in 2016. The shares available for issuance under the 2016 Plan total 46,467 shares
which represents the number of shares that had previously been authorized by shareholders for issuance under the 2006 Employee Plan. Shares issued to employees under the
plan vest annually on the anniversary date of the grant over three to ten years.
The Company also maintains the Porter Bancorp, Inc. 2006 Non-Employee Directors Stock Ownership Incentive Plan (“2006 Director Plan”) pursuant to which 17,912 shares
remain available for issuance as annual awards of restricted stock to the Company’s non-employee directors. Shares issued annually to non-employee directors have a fair
market value of $25,000 and vest on December 31 in the year of grant.
On December 4, 2014, the U.S. Treasury sold our Series A preferred shares at a discount to face amount. As a result, restricted shares previously granted to senior executives
became subject to permanent transfer restrictions. On March 25, 2015, the Compensation Committee modified the equity compensation arrangements with our four named
executive officers to restore the incentive that was intended by including equity grants in their employment agreements. The Compensation Committee and our four named
executive officers mutually agreed to terminate 107,696 restricted shares that were subject to permanent restrictions on transfer. We then awarded 160,000 new service-based
restricted shares to those executive officers. The new awards are accounted for as a modification and vest over four years, with one-third of the shares vesting on each of the
second, third and fourth anniversaries of the date of grant. The modification resulted in incremental compensation expense of approximately $233,000, which is being
amortized in accordance with the vesting schedule.
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The fair value of the 2016 unvested shares issued was $323,000, or $9.10 per weighted-average share. The Company recorded $443,000 and $445,000 of stock-based
compensation during 2016 and 2015, respectively, to salaries and employee benefits. We expect substantially all of the unvested shares outstanding at the end of the period to
vest according to the vesting schedule. No deferred tax benefit was recognized related to this expense for either period.
The following table summarizes unvested share activity as of and for the periods indicated for the Stock Incentive Plan:
Twelve Months Ended
December 31, 2016
Twelve Months Ended
December 31, 2015
Outstanding, beginning
Granted
Vested
Terminated
Forfeited
Outstanding, ending
Weighted
Average
Grant
Price
4.81
9.10
8.32
—
6.16
4.89
Shares
184,482 $
35,465
(38,462)
—
(1,972)
179,513 $
Unrecognized stock based compensation expense related to unvested shares for 2017 and beyond is estimated as follows (in thousands):
2017
2018
2019
2020 & thereafter
93
Shares
155,097 $
183,148
(57,196)
(90,199)
(6,368)
184,482 $
$
Weighted
Average
Grant
Price
6.65
4.57
6.65
6.26
5.63
4.81
197
190
30
9
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NOTE 19 – EARNINGS (LOSS) PER SHARE
The factors used in the basic and diluted earnings per share computation follow:
Net income (loss)
Less:
Preferred stock dividends
Effect of preferred stock exchange
Earnings (losses) allocated to unvested shares
Earnings (losses) allocated to participating preferred shares
Net income (loss) attributable to common shareholders, basic and diluted
$
Basic
Weighted average common shares including unvested common shares and participating
2016
2015
(in thousands, except share and per share data)
2014
$
(2,753) $
(3,213) $
—
—
(88)
—
(2,665) $
—
—
(122)
(214)
(2,877) $
(11,155)
2,362
(36,104)
1,435
1,724
19,428
preferred shares outstanding
Less:
Weighted average unvested common shares
Weighted average Series B Preferred Shares
Weighted average Series C Preferred Shares
Weighted average Series D Preferred Shares
Weighted average common shares outstanding
Basic income (loss) per common share
Diluted
Add: Dilutive effects of assumed exercises of common stock warrants
Weighted average common shares and potential common shares
Diluted income (loss) per common share
5,980,945
5,191,944
2,846,188
192,232
—
—
—
5,788,713
(0.46) $
—
5,788,713
(0.46) $
197,355
133,269
—
212,318
4,649,002
(0.62) $
—
4,649,002
(0.62) $
180,842
59,971
61,654
95,543
2,448,178
7.94
—
2,448,178
7.94
$
$
The Company had no outstanding stock options at December 31, 2016, 2015 or 2014. A warrant for the purchase of 66,113 shares of the Company’s common stock at an
exercise price of $79.41 was outstanding at December 31, 2016, 2015 and 2014, but was not included in the diluted EPS computation as inclusion would have been anti-
dilutive. Additionally, warrants for the purchase of 130,109 shares of non-voting common stock at an exercise price of $54.76 per share were outstanding at December 31,
2014, but were not included in the diluted EPS computation as inclusion would have been anti-dilutive. The 130,109 warrants outstanding as of December 31, 2014 expired in
September 2015.
NOTE 20 – 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
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
2016
2015
(in thousands)
$
$
$
$
2,048 $
51,528
776
645
54,997 $
21,775 $
489
32,733
54,997 $
986
55,642
3,360
734
60,722
25,775
2,930
32,017
60,722
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Table of Contents
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
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31,
Cash flows from operating activities
Net loss
Adjustments:
Equity in undistributed subsidiary (income) loss
Gain on sale of assets
Tax expense from OCI components
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
Proceeds from issuance of common stock
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
2016
2015
(in thousands)
2014
$
$
5 $
23
17
(694)
(1,240)
(1,889)
21
(843)
(2,753) $
46 $
20
102
(647)
(1,457)
(1,936)
—
(1,277)
(3,213) $
53
19
44
(631)
(1,765)
(2,280)
13
(8,862)
(11,155)
2016
2015
(in thousands)
2014
$
(2,753) $
(3,213) $
(11,155)
843
—
—
(95)
358
978
(669)
(500)
—
(500)
2,231
—
—
2,231
1,062
986
2,048 $
1,277
(70)
—
(40)
634
481
(931)
—
642
642
—
—
—
—
(289)
1,275
986 $
8,862
(44)
13
(26)
1,040
591
(719)
—
179
179
—
—
—
—
(540)
1,815
1,275
$
95
Table of Contents
NOTE 21 – QUARTERLY FINANCIAL DATA (UNAUDITED)
Interest
Income
Net Interest
Income
Provision
For
Net
Income
(Loss)
(in thousands, except per share data)
OREO
Expense
Loan Losses
Earnings (Loss)
Per Common Share
Basic (1)
Diluted (1)
2016
First quarter
Second quarter
Third quarter
Fourth quarter
2015
First quarter
Second quarter
Third quarter
Fourth quarter
$
$
9,185 $
8,705
8,931
8,781
9,203 $
9,167
9,179
9,025
7,651 $
7,196
7,458
7,316
7,290 $
7,339
7,482
7,440
(550) $
(600)
(750)
(550)
668 $
294
322
257
$
1,480
1,012
1,393
(6,638) (2)
— $
—
(2,200)
(2,300)
733 $
2,932
5,131
3,506
$
594
(2,130) (3)
(1,076) (4)
(601) (4)
0.27 $
0.17
0.22
(1.07)
0.12 $
(0.41)
(0.21)
(0.11)
0.27
0.17
0.22
(1.07)
0.12
(0.41)
(0.21)
(0.11)
(1) The sum of the quarterly net income (loss) per share (basic and diluted) differs from the annual net income (loss) per share (basic and diluted) because of the
differences in the weighted average number of common shares outstanding and the common shares used in the quarterly and annual computations as well as
differences in rounding.
(2) The $6.6 million loss for the fourth quarter of 2016 was due to the $8.0 million in litigation expenses accrued as a result of the Kentucky Court of Appeals ruling
against the Bank.
(3) The $2.1 million loss for the second quarter of 2015 was primarily due to OREO expenses.
(4) The net loss for the third and fourth quarters of 2015 was positively impacted by a $2.2 million and $2.3 million negative provision for loans losses, respectively, and
negatively impacted by OREO expenses of $5.1 million and $3.5 million, respectively.
NOTE 22 – CONTINGENCIES
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 $10.2 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. Aside from the amounts currently accrued, there is nothing that is reasonably possible. We disclose legal matters when we believe liability is
reasonably possible and 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 the 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 the 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 the 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 the Bank. After
plaintiffs declined to exercise their right of first refusal, the 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 the Bank.
After conferring with its legal advisors, the Bank believed that the findings and damages were excessive and contrary to law, and that it had meritorious grounds on which it
moved to appeal. The Bank filed an appeal with the Kentucky Court of Appeals on October 25, 2013. Oral arguments were heard on November 16, 2015. On December 2,
2016, the Appellate Court ruled against the Bank and upheld the previous award of $7.015 million in damages, with one dissenting opinion as to the amount of punitive
damages awarded.
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The Bank previously accrued the compensatory damages of the trial court verdict along with interest at the statutory rate. Following the Appellate Court ruling, the Bank
accrued the punitive damages award and statutory interest that together currently total approximately $8.0 million, which had a negative impact on earnings and capital for
2016. On December 30, 2016, the Bank filed a motion for discretionary review with the Kentucky Supreme Court. Funds to retire all amounts due are on hand and available
to meet this obligation with no material impact to liquidity should a decision be made to retire the accrued liability.
AIT Laboratories Employee Stock Ownership Plan. On August 29, 2014, the United States Department of Labor (“DOL”) filed a lawsuit against the Bank and Michael A.
Evans in the U.S. District Court for the Southern District of Indiana. Thomas E. Perez, Secretary of the United States Department of Labor v. PBI Bank, Inc. and Michael A.
Evans (Case No. 1:14-CV-01429-SEB-MJD). The complaint alleged that in 2009, the Bank, in the capacity of trustee for the AIT Laboratories Employee Stock Ownership
Plan, authorized the alleged imprudent and disloyal purchase of the stock of AIT Holdings, Inc. in 2009 for $90 million, a price allegedly far in excess of the stock’s fair
market value. On May 12, 2016, the parties entered into a settlement agreement, and the court entered an agreed order ending the litigation on May 13, 2016. The Bank
agreed to a settlement payment, which, to the extent not paid from insurance proceeds, had been previously reserved for.
United States Department of Justice Investigation. On October 17, 2014, the United States Department of Justice (the “DOJ”) notified the Bank that it was the subject of an
investigation into possible violations of federal laws, including, among other things, possible violations related to false bank entries, bank fraud and securities fraud. The
investigation concerns allegations that Bank personnel engaged in practices intended to delay or avoid disclosure of the Bank’s asset quality at the time of and following the
United States Treasury’s purchase of preferred shares from the Company in November 2008. The Bank has cooperated with all requests for information from DOJ. At this
time the investigation is ongoing, and DOJ has made no determination whether to pursue any action in the matter.
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Table of Contents
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None
Item 9A.
Controls and Procedures
Disclosure Controls and Procedures
Management is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934. 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 of December 31, 2016. Based on that evaluation, we believe that our disclosure controls
and procedures were effective to collect, process, and disclose the information required to be disclosed in the reports filed with the SEC within the required time periods as of
the end of the period covered by this report.
There was no change in our internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially
affect, the Company’s internal control over financial reporting.
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, 2016. In making this assessment, management used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in the 2013 Internal Control-Integrated Framework. Based on that assessment,
we believe that, as of December 31, 2016, our internal control over financial reporting is effective based on those criteria.
This annual report does not include an attestation report of our registered public accounting firm regarding internal controls over financial reporting. Management’s report
was not subject to attestation by our registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit us to provide only
management’s report in this annual report.
/s/ John T. Taylor
John T. Taylor
President and Chief Executive Officer
/s/ Phillip W. Barnhouse
Phillip W. Barnhouse
Chief Financial Officer
Item 9B.
Other Information
None
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Table of Contents
Item 10. Directors, Executive Officers and Corporate Governance.
PART III
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, 2017, 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, 2017, 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, 2017, 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, 2017, 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, 2017, which includes
the required information. The required information contained in our proxy statement is incorporated herein by reference.
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Table of Contents
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, 2016 and 2015
Consolidated Statements of Operations for the Years Ended December 31, 2016, 2015, and 2014
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2016, 2015, and 2014
Consolidated Statements of Change in Stockholders’ Equity for the Years Ended December 31, 2016, 2015, and 2014
Consolidated Statements of Cash Flows for the Years Ended December 31, 2016, 2015, and 2014
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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Table of Contents
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.
SIGNATURES
February 28, 2017
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/ W. Glenn Hogan
W. Glenn Hogan
/s/ Michael T. Levy
Michael T. Levy
/s/ Bradford T. Ray
Bradford T. Ray
/s/ W. Kirk Wycoff
W. Kirk Wycoff
/s/ James M. Parsons
James M. Parsons
/s/ Dr. Edmond J. Seifried
Dr. Edmond J. Seifried
Chief Executive Officer
February 28, 2017
Chief Financial Officer
February 28, 2017
Director
Director
Director
Director
Director
Director
101
February 28, 2017
February 28, 2017
February 28, 2017
February 28, 2017
February 28, 2017
February 28, 2017
Table of Contents
Exhibit No. (1)
Description
EXHIBIT INDEX
3.1
3.2
3.3
4.1
4.2
Amended and Restated Articles of Incorporation, dated March 25, 2016. Exhibit 3.1 to Form 8-K filed May 26, 2016 is incorporated by reference.
Amendment to Articles of Incorporation, dated December 6, 2016, effecting reverse stock split. Exhibit 3.1 to Form 8-K filed December 21, 2016 is
incorporated by reference.
Amended and Restated Bylaws of Porter Bancorp, Inc. Exhibit 3.1 to Form 8-K filed May 22, 2014 is hereby incorporated by reference. Bylaws dated
November 30, 2005. Exhibit 3.2 to Form S-1 Registration Statement (Reg. No. 333-133198) filed April 11, 2006 is incorporated by reference.
Warrant to purchase up to 299,829 shares. Exhibit 4.1 to Form 8-K filed November 24, 2008 is incorporated by reference.
Securities Purchase Agreement between Porter Bancorp, Inc. and Patriot Financial Partners, L.P. and other purchasers named therein, dated as of June 30,
2010. Exhibit 10.1 to Form 8-K filed July 7, 2010 is incorporated by reference.
10.1+
Porter Bancorp, Inc. 2016 Omnibus Equity Compensation Plan. Appendix A to Schedule 14A proxy statement (DEF 14A) filed April 25, 2016 is
incorporated by reference.
10.2+
10.3+
10.4+
10.5+
Form of Porter Bancorp, Inc. Restricted Stock Award Agreement. Exhibit 10.3 to 8-K filed June 22, 2016 is incorporated by reference.
Porter Bancorp, Inc. 2006 Non-Employee Directors Stock Ownership Incentive Plan, as amended and restated as of March 26, 2014. Exhibit 10.1 to Form
S-8 Registration Statement (Reg. No. 333-202746) filed March 13, 2015 is incorporated by reference. Appendix A to Definitive Proxy Statement filed
April 28, 2014 is incorporated by reference.
Non-Executive Director Stock Incentive Program. Exhibit 10.1 to Form 8-K filed June 22, 2016 is incorporated by reference.
Porter Bancorp, Inc. 2016 Incentive Compensation Bonus Plan incorporated by reference to Schedule 14A proxy statement (DEF 14A) filed April 25,
2016.
10.6+
Form of Ascencia Bank (now PBI Bank) Supplemental Executive Retirement Plan. Exhibit 10.5 to Form S-1 Registration Statement (Reg. No. 333-
133198) filed April 11, 2006 is incorporated by reference.
10.7+
10.8
10.8
10.9
10.10
10.11
21.1
23.1
31.1
31.2
Form of Amendment to PBI Bank Supplemental Executive Retirement Plan. Exhibit 10.7 to Form 10-K filed March 29, 2009 is incorporated by reference.
Consent Order with Federal Deposit Insurance Corporation and Kentucky Department of Financial Institutions dated November 12, 2015. Exhibit 10.3 to
Form 10-Q filed November 12, 2015 is incorporated by reference.
Employment Agreement with John T. Taylor (Exhibit 10.1 to Form 8-K filed September 27, 2016 is incorporated by reference.
Employment Agreement with John R. Davis (Exhibit 10.2 to Form 8-K filed September 27, 2016 is incorporated by reference.
Employment Agreement with Joseph C. Seiler (Exhibit 10.3 to Form 8-K filed September 27, 2016 is incorporated by reference.
Employment Agreement with Phillip W. Barnhouse (Exhibit 10.4 to Form 8-K filed September 27, 2016 is 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.
102
Table of Contents
Exhibit No. (1)
Description
32.1
32.2
101
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.
The following financial statements from the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, 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.
+
(1)
Management contract or compensatory plan or arrangement.
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.
103
SUBSIDIARIES OF PORTER BANCORP, INC.
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
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
Does Business As
Parent Entity
PBI Title Services, LLC
PBI Bank
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Exhibit 23.1
We consent to the incorporation by reference in Registration Statement Nos. 333-188988; 333-189005; 333-202746 and 333-202749 on Form S-8 of Porter Bancorp, Inc. of
our report dated February 28, 2017 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, 2016.
Louisville, Kentucky
February 28, 2017
/s/ Crowe Horwath LLP
Exhibit 31.1
PORTER BANCORP, INC.
RULE 13A-14(A) CERTIFICATION OF CHIEF EXECUTIVE OFFICER
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: February 28, 2017
/s/ John T. Taylor
John T. Taylor
Chief Executive Officer
Exhibit 31.2
PORTER BANCORP, INC.
RULE 13A-14(A) CERTIFICATION OF CHIEF FINANCIAL OFFICER
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: February 28, 2017
/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, 2016, 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: February 28, 2017
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, 2016, 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: February 28, 2017
PORTER BANCORP, INC.
By:
/s/ Phillip W. Barnhouse
Phillip W. Barnhouse
Chief Financial Officer