10-Q 1 a50468111.htm PORTER BANCORP, INC. 10-Q a50468111.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

 FORM 10-Q  
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended September 30, 2012
 
Or
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from              to             
 
Commission file number: 001-33033

PORTER BANCORP, INC.
(Exact name of registrant as specified in its charter)
 
     
Kentucky
 
61-1142247
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
   
2500 Eastpoint Parkway, Louisville, Kentucky
 
40223
(Address of principal executive offices)
 
(Zip Code)
 
(502) 499-4800
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x     No  ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer  ¨    
Accelerated filer  ¨    
Non-accelerated filer  ¨
Smaller reporting company  x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨    No  x

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

12,007,127 shares of Common Stock, no par value, were outstanding at October 27, 2012.

 
 
 

 
 

 
 
 
 

 
 

 
 
PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

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

Unaudited Consolidated Balance Sheets for September 30, 2012 and December 31, 2011
Unaudited Consolidated Statements of Operations for the three and nine months ended September 30, 2012 and 2011
Unaudited Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2012 and 2011
Unaudited Consolidated Statement of Changes in Stockholders’ Equity for the nine months ended September 30, 2012
Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011
Notes to Unaudited Consolidated Financial Statements
 
 
1

 
 
PORTER BANCORP, INC.
Unaudited Consolidated Balance Sheets
(dollars in thousands except share data)
 
   
September 30,
2012
   
December 31,
2011
 
Assets
               
Cash and due from financial institutions
  $ 78,688     $ 104,680  
Federal funds sold
    3,094       1,282  
Cash and cash equivalents
    81,782       105,962  
Securities available for sale
    198,148       158,833  
Mortgage loans held for sale
    210       694  
Loans, net of allowance of $54,019 and $52,579, respectively
    897,792       1,083,444  
Premises and equipment
    20,955       21,541  
Other real estate owned
    48,837       41,449  
Federal Home Loan Bank stock
    10,072       10,072  
Bank owned life insurance
    8,328       8,106  
Accrued interest receivable and other assets
    19,917       25,323  
Total assets
  $ 1,286,041     $ 1,455,424  
                 
Liabilities and Stockholders’ Equity
               
Deposits
               
Non-interest bearing
  $ 111,403     $ 111,118  
Interest bearing
    1,066,124       1,212,645  
Total deposits
    1,177,527       1,323,763  
Repurchase agreements
    2,403       1,738  
Federal Home Loan Bank advances
    5,960       7,116  
Accrued interest payable and other liabilities
    12,967       7,628  
Subordinated capital note
    7,200       7,650  
Junior subordinated debentures
    25,000       25,000  
Total liabilities
    1,231,057       1,372,895  
                 
Stockholders’ equity
               
Preferred stock, no par, 1,000,000 shares authorized,
               
Series A – 35,000 issued and outstanding;
               
Liquidation preference of $35 million at September 30, 2012
    34,795       34,661  
Series C – 317,042 issued and outstanding;
               
Liquidation preference of $3.6 million at September 30, 2012
    3,283       3,283  
Common stock, no par, 86,000,000 shares authorized, 12,007,127
and 11,824,472 shares issued and outstanding, respectively
    112,236       112,236  
Additional paid-in capital
    20,179       19,841  
Retained deficit
    (119,181 )     (91,656 )
Accumulated other comprehensive income
    3,672       4,164  
Total stockholders' equity
    54,984       82,529  
Total liabilities and stockholders’ equity
  $ 1,286,041     $ 1,455,424  
 
 
See accompanying notes to unaudited consolidated financial statements.
 
 
2

 
 
PORTER BANCORP, INC.
Unaudited Consolidated Statements of Operations
(dollars in thousands, except per share data)
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
Interest income
Loans, including fees
  $ 12,797     $ 16,652     $ 40,998     $ 52,351  
Taxable securities
    837       987       2,475       3,168  
Tax exempt securities
    220       298       666       826  
Fed funds sold and other
    133       166       415       572  
      13,987       18,103       44,554       56,917  
Interest expense
                               
Deposits
    3,568       4,966       11,294       15,598  
Federal Home Loan Bank advances
    50       138       161       419  
Subordinated capital note
    66       69       204       213  
Junior subordinated debentures
    169       156       508       468  
Federal funds purchased and other
    2       119       6       355  
      3,855       5,448       12,173       17,053  
Net interest income
    10,132       12,655       32,381       39,864  
Provision for loan losses
    25,500       8,000       33,250       26,800  
Net interest income (loss) after provision for loan losses
    (15,368 )     4,655       (869 )     13,064  
                                 
Non-interest income
                               
Service charges on deposit accounts
    563       690       1,673       1,979  
Income from fiduciary activities
    261       237       803       738  
Bank card interchange fees
    180       168       553       500  
Other real estate owned rental income
    180       93       242       147  
Secondary market brokerage fees
    27       32       75       184  
Net gain on sales of loans originated for sale
    138       123       260       664  
Net gain on sales of securities
                3,530       1,108  
Other
    372       357       1,048       1,032  
      1,721       1,700       8,184       6,352  
Non-interest expense
                               
Salaries and employee benefits
    4,264       3,780       12,558       12,084  
Occupancy and equipment
    971       957       2,826       2,910  
Goodwill impairment
                      23,794  
Other real estate owned expense
    5,204       17,029       7,666       40,505  
FDIC Insurance
    559       930       2,264       2,640  
Loan collection expense
    792       802       1,738       1,989  
Professional fees
    776       329       1,699       963  
State franchise tax
    496       582       1,680       1,746  
Communications
    175       176       523       509  
Postage and delivery
    108       117       339       368  
Advertising
    44       93       105       282  
Other
    761       628       2,061       1,787  
      14,150       25,423       33,459       89,577  
Loss before income taxes
    (27,797 )     (19,068 )     (26,144 )     (70,161 )
Income tax benefit
    (65 )     (6,906 )     (65 )     (18,809 )
Net loss
    (27,732 )     (12,162 )     (26,079 )     (51,352 )
Less:
                               
Dividends on preferred stock
    437       437       1,312       1,312  
Accretion on Series A preferred stock
    44       45       134       133  
Earnings (losses) allocated to participating securities
    (1,264 )     (463 )     (1,095 )     (1,995 )
Net loss attributable to common shareholders
  $ (26,949 )   $ (12,181 )   $ (26,430 )   $ (50,802 )
Basic earnings (loss) per common share
  $ (2.29 )   $ (1.04 )   $ (2.25 )   $ (4.34 )
Diluted earnings (loss) per common share
  $ (2.29 )   $ (1.04 )   $ (2.25 )   $ (4.34 )
 
See accompanying notes to unaudited consolidated financial statements.
 
 
3

 
 
PORTER BANCORP, INC.
Unaudited Consolidated Statements of Comprehensive Loss
(in thousands)
 
   
Three Months Ended
September 30,
   
Nine Month Ended
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
Net loss
  $ (27,732 )   $ (12,162 )   $ (26,079 )   $ (51,352 )
Other comprehensive income (loss), net of tax:                                
   Unrealized gain (loss) on securities:                                
      Unrealized gain (loss) arising in period                                
         (net of tax of $821, $676,                                 
         $970, and $1,681, respectively)
    1,525       1,257       1,803       3,122  
      Reclassification of amount realized through sales                                
         (net of tax of $0, $0,                                
         $1,235 and $388, respectively)
                (2,295 )     (720 )
      Net unrealized gain (loss) on securities
    1,525       1,257       (492 )     2,402  
                                 
Comprehensive loss
  $ (26,207 )   $ (10,905 )   $ (26,571 )   $ (48,950 )

 
See accompanying notes to unaudited consolidated financial statements.
 
 
4

 
 
PORTER BANCORP, INC.
Unaudited Consolidated Statement of Changes in Stockholders’ Equity
For Nine Months Ended September 30, 2012
(dollars in thousands, except share and per share data)
 
 
                                                    Accumulated        
      Shares       Amount    
Additional
          Other        
         
Series A
   
Series C
         
Series A
   
Series C
   
Paid-In
   
Retained
    Comprehensive        
   
Common
   
Preferred
   
Preferred
   
Common
   
Preferred
   
Preferred
   
Capital
   
Deficit
   
Income
   
Total
 
                                                             
Balances, January 1, 2012
    11,824,472       35,000       317,042     $ 112,236     $ 34,661     $ 3,283     $ 19,841     $ (91,656 )   $ 4,164     $ 82,529  
Issuance of unvested stock
    191,140                                                        
Forfeited unvested stock
    (8,485 )                                                      
Stock-based compensation
expense
                                        338                     338  
Net loss
                                              (26,079 )           (26,079 )
Net change in accumulated
other
comprehensive
income, net of taxes
                                                    (492 )     (492 )
Dividends 5% on Series A
preferred stock
                                              (1,312 )           (1,312 )
Accretion of Series A preferred
stock discount
                            134                   (134 )            
                                                                                 
Balances, September 30, 2012
    12,007,127       35,000       317,042     $ 112,236     $ 34,795     $ 3,283     $ 20,179     $ (119,181 )   $ 3,672     $ 54,984  

 
See accompanying notes to unaudited consolidated financial statements.
 
 
5

 
 
PORTER BANCORP, INC.
Unaudited Consolidated Statements of Cash Flows
For Nine Months Ended September 30, 2012 and 2011
(dollars in thousands)
 
    2012     2011  
Cash flows from operating activities
           
Net loss
  $ (26,079   $ (51,352 )
Adjustments to reconcile net loss to
  net cash from operating activities
               
Depreciation and amortization
    1,819       1,838  
Provision for loan losses
    33,250       26,800  
Net amortization on securities
    2,610       1,036  
Goodwill impairment charge
          23,794  
Stock-based compensation expense
    338       342  
Deferred income taxes (benefit)
          (11,047 )
Net gain on loans originated for sale
    (260 )     (664 )
Loans originated for sale
    (12,214 )     (21,682 )
Proceeds from sales of loans originated for sale
    12,910       21,851  
Net gain on sales of investment securities
    (3,530 )     (1,108 )
Net loss on sales of other real estate owned
    1,481       7,549  
Net write-down of other real estate owned
    5,090       30,702  
Earnings on bank owned life insurance
    (222 )     (224 )
Net change in accrued interest receivable and other assets
    5,075       (4,767 )
Net change in accrued interest payable and other liabilities
    4,027       27  
Net cash from operating activities
    24,295       23,095  
Cash flows from investing activities
Purchases of available-for-sale securities
    (141,232 )     (113,779 )
Sales of available-for-sale securities
    65,695       50,023  
Maturities and prepayments of available-for-sale securities
    36,649       15,018  
Proceeds from sale of other real estate owned
    17,032       9,323  
Improvements to other real estate owned
    (1 )     (1,596 )
Loan originations and payments, net
    120,958       51,793  
Purchases of premises and equipment, net
    (399 )     (324 )
Net cash from investing activities
    98,702       10,458  
Cash flows from financing activities                
Net change in deposits
    (146,236 )     (94,221 )
Net change in repurchase agreements
    665       (288 )
Repayment of Federal Home Loan Bank advances
    (1,156 )     (26,867 )
Advances from Federal Home Loan Bank
          25,000  
Repayment of subordinated capital note
    (450 )     (675 )
Cash dividends paid on preferred stock
          (1,319 )
Cash dividends paid on common stock
          (237 )
Net cash from financing activities
    (147,177 )     (98,607 )
Net change in cash and cash equivalents
    (24,180 )     (65,054 )
Beginning cash and cash equivalents
    105,962       185,435  
Ending cash and cash equivalents
  $ 81,782     $ 120,381  
Supplemental cash flow information:
               
Interest paid
  $ 11,808     $ 17,183  
Income taxes paid (refunded)
    (2,000 )     2,000  
Supplemental non-cash disclosure:                
Transfer from loans to other real estate
  $ 31,531     $ 31,232  
Financed sales of other real estate owned
    541       7,956  

 
See accompanying notes to unaudited consolidated financial statements.
 
 
6

 
 
PORTER BANCORP, INC.
Notes to Unaudited Consolidated Financial Statements


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

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

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, the financial statements do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  Operating results for nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the entire year.  A description of other significant accounting policies is presented in the notes to the Consolidated Financial Statements for the year ended December 31, 2011 included in the Company’s Annual Report on Form 10-K.

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

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

New Accounting Standards – In July 2012, the FASB issued ASU No. 2012-02, “Testing Indefinite-Lived Intangible Assets for Impairment.” The provisions of ASU No. 2012-02 provide the option to first assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, it is concluded that it is not more likely than not that the indefinite-lived intangible asset is impaired, then no further action is required. However, if the conclusion is otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount in accordance with Subtopic 350-30. The provisions of this new guidance are effective for fiscal years beginning after September 15, 2012. The adoption of ASU No. 2012-02 is not expected to have a material impact on the Company’s statements of operations and condition.
 
Note 2 – Recent Developments and Future Plans
 
During the first nine months of 2012, we reported net loss to common shareholders of $26.4 million.  This loss was primarily attributable to $33.3 million of provision for loan losses expense due to continued decline in credit trends in our portfolio that resulted in net charge-offs of $31.8 million, OREO expense of $7.7 million resulting from fair value write-downs driven by new appraisals and reduced marketing prices, net loss on sales, and ongoing operating expense. We also had  lower net interest margin due to lower average loans outstanding, loans repricing at lower rates, and the level of non-performing loans in our portfolio. Net loss to common shareholders of $26.4 million, for the first nine months of 2012, compares with net loss to common shareholders of $50.8 million for the first nine months of 2011.
 
During the year ended December 31, 2011, we recorded a net loss to common shareholders of $105.2 million.  This loss was attributable to a $23.8 million goodwill impairment charge, the establishment of a $31.7 million valuation allowance on our deferred tax assets, OREO expense of $47.5 million related to valuation adjustments for our change in strategy related to certain properties, fair value write-downs related to new appraisals received for properties in the portfolio during 2011, net loss on the sale of OREO properties, and increase in carrying costs associated with carrying these higher levels of assets. We also recorded a provision for loan losses expense of $62.6 million due to the continued decline in credit trends within our portfolio.
 
 
7

 
 
In June 2011, the Bank agreed to a Consent Order with the FDIC and KDFI in which the Bank agreed, among other things, to improve asset quality, reduce loan concentrations, and maintain a minimum Tier 1 leverage ratio of 9% and a minimum total risk based capital ratio of 12%.  The Consent Order was included in our Current Report on 8-K filed on June 30, 2011. In October 2012, the Bank entered into a new Consent Order with the FDIC and KDFI again agreeing to maintain a minimum Tier 1 leverage ratio of 9% and a minimum total risk based capital ratio of 12%. The Bank also agreed that if it should be unable to reach the required capital levels, and if directed in writing by the FDIC, then the Bank would within 30 days develop, adopt and implement a written plan to sell or merge itself into another federally insured financial institution or otherwise immediately obtain a sufficient capital investment into the Bank to fully meet the capital requirements.
 
We expect to continue to work with our regulators toward capital ratio compliance as outlined in the written capital plan previously submitted by the Bank. The new Consent Order also requires the Bank to continue to adhere to the plans implemented in response to the June 2011 Consent Order, and includes the substantive provisions of the June 2011 Consent Order. The new Consent Order was included in our Current Report on 8-K filed on September 19, 2012. As of September 30, 2012, the capital ratios required by the Consent Order were not met.
 
In order to meet these capital requirements, the Board of Directors and management are continuing to evaluate strategies to achieve the following objectives:
 
 
·
Continuing to operate the Company and Bank in a safe and sound manner.  This strategy will require us to continue to reduce the size of our balance sheet, reduce our lending concentrations, consider selling loans, and reduce other noninterest expense through the disposition of OREO.
 
 
·
Continuing with succession planning and adding resources to the management team.  In March 2012, the Board of Directors formed a search committee comprised of its five independent directors to identify and hire a President and CEO for PBI Bank.   John T. Taylor was named to these positions and appointed to the board of directors in July 2012.   Additionally, John R. Davis was appointed Chief Credit Officer of PBI Bank, with responsibility for establishing and executing the credit quality policies and overseeing credit administration for the organization.
 
 
·
Evaluating our internal processes and procedures, distribution of labor, and work-flow to ensure we have adequately and appropriately deployed resources in an efficient manner in the current environment.  To this end, we believe the opportunity exists for the centralization of key processes which will lead to improved execution and cost savings.
 
 
·
Raising capital by selling common stock through a public offering or private placement to existing and new investors.  At our 2012 annual meeting of shareholders, our shareholders approved an increase in our common shares authorized for issuance from 19 million shares to 86 million shares.  We continue to evaluate our opportunities to improve our capital structure and to increase common equity through the sale of additional common shares.  The Board of Directors has engaged an investment banking firm to assist in this evaluation and to explore options for the redemption of our Series A preferred stock issued to the US Treasury in 2008 under the Capital Purchase Program.
 
 
·
Executing on our commitment to improve credit quality and reduce loan concentrations and balance sheet risk.
 
 
o
We have reduced the size of our loan portfolio significantly from $1.3 billion at December 31, 2010 to $1.1 billion at December 31, 2011, and $952 million at September 30, 2012.   We have significantly improved our staffing in the commercial lending area which is now led by John R. Davis, who joined the team in August and now serves as Chief Credit Officer.
 
 
o
Our Consent Order calls for us to reduce our construction and development loans to not more than 75% of total risk-based capital. We were in compliance at September 30, 2012 with construction and development loans representing 75% of total risk-based capital.  These loans totaled $69.3 million, or 75% of total risk-based capital, at September 30, 2012 and $101.5 million, or 85% of total risk-based capital, at December 31, 2011.
 
 
8

 
 
 
o
Our Consent Order also requires us to reduce non-owner occupied commercial real estate loans, construction and development loans, and multi-family residential real estate loans as a group, to not more than 250% of total risk-based capital.  While we have made significant improvements over the last year, we were not in compliance with this concentration limit at September 30, 2012.  These loans totaled $339.9 million, or 368% of total risk-based capital, at September 30, 2012 and $414.6 million, or 349% of total risk-based capital, at December 31, 2011.
 
 
o
We are working to reduce these loans by curtailing new construction and development lending and new non-owner occupied commercial real estate lending.  We are also receiving principal reductions from amortizing credits and pay-downs from our customers who sell properties built for resale.  We have reduced the construction loan portfolio from $199.5 million at December 31, 2010 to $69.3 million at September 30, 2012.  Our non-owner occupied commercial real estate loans declined from $293.3 million at December 31, 2010 to $214.5 million at September 30, 2012.
 
 
·
Executing on our commitment to sell other real estate owned and reinvest in quality income producing assets.
 
 
o
The remediation process for loans secured by real estate has led the Bank to acquire significant levels of OREO in 2010 and 2011.  This trend has continued into 2012.  The Bank acquired $90.8 million and $41.9 million during 2010 and 2011, respectively.  For the first nine months of 2012, we acquired $31.5 million of OREO.
 
 
o
We have incurred significant losses in disposing of this real estate.   We incurred losses totaling $13.9 million and $42.8 million in 2010 and 2011, respectively, from sales and fair value write-downs attributable to declining valuations as evidenced by new appraisals and from changes in our sales strategies.  During the nine month period ended September 30, 2012, we incurred OREO losses totaling $6.6 million, which consisted of $1.5 million in loss on sale and $5.1 million from declining values as evidenced by new appraisals and reduced marketing prices in connection with our sales strategies.
 
 
o
To ensure that we maximize the value we receive upon the sale of OREO, we continue to evaluate sales opportunities and channels.  We are targeting multiple sales opportunities and channels through internal marketing and the use of brokers, auctions, technology sales platforms, and bulk sale strategies.  Proceeds from the sale or OREO totaled $17.6 million during the nine months ended September 30, 2012 and $25.0 and $26.0 million during fiscal 2010 and 2011, respectively.
 
 
o
At December 31, 2011 the OREO portfolio consisted of 75% construction, development, and land assets.  At September 30, 2012 this concentration had declined to 54%.  This is consistent with our reduction of construction, development and other land loans,  which have declined to $69.3 million at September 30, 2012 compared to $101.5 million at December 31, 2011.  Over the past nine months, the composition of our OREO portfolio has shifted to be more heavily weighted towards commercial real estate properties with a cash flow opportunity and 1-4 family residential properties, which we have found to be more liquid than construction, development, and land assets.  Commercial real estate of this nature represents 31% of the portfolio at September 30, 2012 compared with 15% at December 31, 2011.  1-4 family residential properties represent 14% of the portfolio at September 30, 2012 compared with 7% at December 31, 2011.
 
 
·
Evaluating other strategic alternatives, such as the sale of assets or branches.

Bank regulatory agencies can exercise discretion when an institution does not meet the terms of a consent order.  Based on individual circumstances, the agencies may issue mandatory directives, impose monetary penalties, initiate changes in management, or take more serious adverse actions.
 
 
9

 
 
Note 3 Securities

The fair value of available for sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income were as follows:
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
    (in thousands)  
September 30, 2012
                       
U.S. Government and federal agency
  $ 5,647     $ 556     $     $ 6,203  
Agency mortgage-backed: residential
    125,722       1,738       (293 )     127,167  
State and municipal
    51,663       2,431       (71 )     54,023  
Corporate bonds
    7,271       999             8,270  
Other
    572       23             595  
Total debt securities
    190,875       5,747       (364 )     196,258  
Equity
    1,359       531             1,890  
Total
  $ 192,234     $ 6,278     $ (364 )   $ 198,148  
 
December 31, 2011
  $ 10,494     $ 1,149     $     $ 11,643  
U.S. Government and federal agency
Agency mortgage-backed: residential
    97,286       2,211       (22 )     99,475  
State and municipal
    35,456       2,610       (4 )     38,062  
Corporate bonds
    7,259       315       (242 )     7,332  
Other
    572       34             606  
Total debt securities
    151,067       6,319       (268 )     157,118  
Equity
    1,359       356             1,715  
Total
  $ 152,426     $ 6,675     $ (268 )   $ 158,833  

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

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
     
2012
       2011        2012        2011  
   
(in thousands)
 
Proceeds
  $     $ 370     $ 65,695     $ 50,023  
Gross gains
                3,530       1,108  
Gross losses
     —        —        —        —  
 
The amortized cost and fair value of the debt investment securities portfolio are shown by contractual maturity.  Contractual maturities may differ from actual maturities if issuers have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed securities not due at a single maturity date are detailed separately.
 
   
September 30, 2012
 
   
Amortized
Cost
   
Fair
Value
 
   
(in thousands)
 
Maturity
               
Available-for-sale                 
Within one year
   879      909  
One to five years
    12,436       13,578  
Five to ten years
    42,412       44,838  
Beyond ten years
    9,426       9,766  
Agency mortgage-backed: residential
    125,722       127,167  
Total     $ 190,875     $ 196,258  
 
 
10

 
                                                                                                              
Securities pledged at September 30, 2012 and December 31, 2011 had carrying values of approximately $56.9 million and $57.7 million, respectively, and were pledged to secure public deposits and repurchase agreements.

The Company evaluates securities for other than temporary impairment (OTTI) 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.  Management currently intends to hold all securities with unrealized losses until recovery, which for fixed income securities may be at maturity.

At September 30, 2012, the Company held 40 equity securities.  Of these securities, one security had an unrealized loss less than $1,000 and had been in an unrealized loss position for less than twelve months. All other equity securities were in an unrealized gain position at September 30, 2012.  Management monitors the underlying financial condition of the issuers and current market pricing for these equity securities monthly. As of September 30, 2012, 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.

Securities with unrealized losses at September 30, 2012 and December 31, 2011, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows:

   
Less than 12 Months
   
12 Months or More
   
Total
 
Description of Securities
 
Fair
Value
   
Unrealized
Loss
   
Fair
Value
   
Unrealized
Loss
   
Fair
Value
   
Unrealized
Loss
 
   
(in thousands)
 
September 30, 2012
                                   
State and municipal
  $ 6,418     $ (71 )   $     $     $ 6,418     $ (71 )
Agency mortgage-backed: residential
    30,324       (293 )                 30,324       (293 )
Equity
    2                         2        
Total temporarily impaired
  $ 36,744     $ (364 )   $     $     $ 36,744     $ (364 )
                                                 
                                                 
December 31, 2011
                                               
State and municipal
  $ 508     $ (4 )   $     $     $ 508     $ (4 )
Agency mortgage-backed: residential
    2,159       (22 )                 2,159       (22 )
Corporate bonds
    2,805       (242 )                 2,805       (242 )
Total temporarily impaired
  $ 5,472     $ (268 )   $     $     $ 5,472     $ (268 )
 
 
11

 

Note 4 – Loans

 
 
 
 
Loans were as follows:
  September 30,      December 31,   
   
2012
   
2011
 
   
(in thousands)
 
Commercial
  $ 56,050     $ 71,216  
Commercial Real Estate:                 
Construction
    69,306       101,471  
Farmland
    84,426       90,958  
Other
    350,129       423,844  
Residential Real Estate:                 
Multi-family
    56,065       60,410  
1-4 Family
    287,613       337,350  
Consumer
    21,813       26,011  
Agriculture
    25,661       23,770  
Other
    748       993  
Subtotal
    951,811       1,136,023  
Less: Allowance for loan losses
    (54,019 )     (52,579 )
Loans, net
  $ 897,792     $ 1,083,444  
 
The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended September 30, 2012 and 2011:
 
   
Commercial
   
Commercial
Real Estate
   
Residential
Real Estate
   
Consumer
   
Agriculture
   
Other
   
Total
 
   
(in thousands)
 
September 30, 2012:
                                         
Beginning balance
  $ 3,811     $ 31,049     $ 15,587     $ 792     $ 343     $ 12     $ 51,594  
Provision for loan losses
    2,630       17,412       4,326       366       763       3       25,500  
Loans charged off
    (2,400 )     (16,192 )     (3,824 )     (375 )       (696           (23,487 )
Recoveries
    27       324       16       24       21             412  
Ending balance
  $ 4,068     $ 32,593     $ 16,105     $ 807     $ 431     $ 15     $ 54,019  
                                                         
                                                         
September 30, 2011:
                                                       
Beginning balance
  $ 2,668     $ 26,021     $ 9,260     $ 616     $ 143     $ 9     $ 38,717  
Provision for loan losses
    819       2,723       3,995       290       176       (3 )       8,000  
Loans charged off
    (764 )     (3,640 )     (2,560 )     (294 )     (109           (7,367 )
Recoveries
    15       99       8       20                   142  
Ending balance
  $ 2,738     $ 25,203     $ 10,703     $ 632     $ 210     $ 6     $ 39,492  
 
 
12

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the nine months ended September 30, 2012 and 2011:
 
   
Commercial
   
Commercial
Real Estate
   
Residential
Real Estate
   
Consumer
   
Agriculture
   
Other
   
Total
 
   
(in thousands)
 
September 30, 2012:
                                         
Beginning balance
  $ 4,207     $ 33,024     $ 14,217     $ 792     $ 325     $ 14     $ 52,579  
Provision for loan losses
    2,641       19,187       9,528       687       1,206       1       33,250  
Loans charged off
    (2,866 )     (20,055 )     (7,715 )     (747 )       (1,124           (32,507 )
Recoveries
    86       437       75       75       24             697  
Ending balance
  $ 4,068     $ 32,593     $ 16,105     $ 807     $ 431     $ 15     $ 54,019  
                                                         
                                                         
September 30, 2011:
                                                       
Beginning balance
  $ 2,147     $ 24,075     $ 7,224     $ 701     $ 134     $ 4     $ 34,285  
Provision for loan losses
    3,251       14,144       8,702       508       193       2       26,800  
Loans charged off
    (2,699 )     (13,134 )     (5,253 )     (627 )     (117 )           (21,830 )
Recoveries
    39       118       30       50                   237  
Ending balance
  $ 2,738     $ 25,203     $ 10,703     $ 632     $ 210     $ 6     $ 39,492  
 
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method as of September 30, 2012:
 
   
Commercial
   
Commercial
Real Estate
   
Residential
Real Estate
   
Consumer
   
Agriculture
   
Other
   
Total
 
   
(in thousands)
 
Allowance for loan losses:
                                         
Ending allowance balance
attributable to loans:
                                         
Individually evaluated for
impairment
  $ 202     $ 10,242     $ 4,091     $     $ 9     $ 11     $ 14,555  
Collectively evaluated for
impairment
    3,866       22,351       12,014       807       422       4       39,464  
Total ending allowance
balance
  $ 4,068     $ 32,593     $ 16,105     $ 807     $ 431     $ 15     $ 54,019  
                                                         
                                                         
Loans:
                                                       
Loans individually evaluated
for impairment
  $ 3,671     $ 109,008     $ 58,012     $ 293     $ 82     $ 529     $ 171,595  
Loans collectively evaluated|
for impairment
    52,379       394,853       285,666       21,520       25,579       219       780,216  
Total ending loans balance
  $ 56,050     $ 503,861     $ 343,678     $ 21,813     $ 25,661     $ 748     $ 951,811  
 
 
13

 
 
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method as of December 31, 2011:
 
   
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
  $ 554     $ 9,580     $ 2,172     $     $     $ 8     $ 12,314  
Collectively evaluated for
impairment
    3,653       23,443       12,045       792       326       6        40,265  
Total ending allowance
balance
  $ 4,207     $ 33,023     $ 14,217     $ 792     $ 326     $ 14     $ 52,579  
                                                         
                                                         
Loans:
                                                       
Loans individually evaluated
for impairment
  $ 5,032     $ 116,676     $ 27,848     $     $ 631     $ 540     $ 150,727  
Loans collectively evaluated
for impairment
    66,184       499,598       369,911       26,011       23,139       453       985,296  
Total ending loans balance
  $ 71,216     $ 616,274     $ 397,759     $ 26,011     $ 23,770     $ 993     $ 1,136,023  

In the current period, the allowance for loans subject to a troubled debt restructure is presented as individually evaluated for impairment.  Amounts presented in the preceding table have been reclassified to conform to our current period presentation because the allowance for loans subject to a troubled debt restructure had historically been presented as collectively evaluated for impairment.

Impaired Loans
 
Impaired loans include restructured loans and commercial, commercial real estate, construction, residential real estate, and agriculture loans, 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.
 
The following table presents information related to loans individually evaluated for impairment by class of loans as of and for the three and nine months ended September 30, 2012:

                     
Three Months Ended
September 30, 2012
   
Nine Months Ended
September 30, 2012
 
   
Unpaid
Principal
Balance
   
Recorded Investment
   
Allowance
For Loan
Losses
Allocated
   
Average Recorded Investment
   
Interest
Income Recognized
   
Average Recorded Investment
   
Interest
Income Recognized
   
Cash
Basis
Income
Recognized
 
   
(in thousands)
 
With No Related Allowance Recorded:
                                               
Commercial
  $ 1,641     $ 1,434     $     $ 1,539     $     $ 1,738     $     $  
Commercial real estate:
                                                               
Construction
    1,240       1,195             1,525             1,904       2       1  
Farmland
    5,585       5,584             5,594             4,771       5       5  
Other
    2,981       2,606             3,424             3,822       3       3  
Residential real estate:
                                                               
Multi-family
    997       997             1,212             977              
1-4 Family
    15,797       15,152             13,888       15       10,824       42       42  
Consumer
    292       292             312       1       256       4       2  
Agriculture
    61       61             324             447              
Other
                                               
 
 
14

 

                     
Three Months Ended
September 30, 2012
   
Nine Months Ended
September 30, 2012
 
   
Unpaid
Principal
Balance
   
Recorded Investment
   
Allowance
For Loan
Losses
Allocated
   
Average Recorded Investment
   
Interest
Income Recognized
   
Average Recorded Investment
   
Interest
Income Recognized
   
Cash
Basis
Income
Recognized
 
    (in thousands)   
With An Allowance Recorded:
                                                 
Commercial
    2,237       2,237       202       3,686       32       3,940       120       27  
Commercial real estate:
                                                               
Construction
    12,713