10-Q 1 a50627738.htm PORTER BANCORP, INC. 10-Q a50627738.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 March 31, 2013
 
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.

12,139,975 shares of Common Stock, no par value, were outstanding at April 30, 2013.
 
 
1

 
 

INDEX
 

 
 
2

 

 


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

Unaudited Consolidated Balance Sheets for March 31, 2013 and December 31, 2012
Unaudited Consolidated Statements of Operations for the three months ended March 31, 2013 and 2012
Unaudited Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2013 and 2012
Unaudited Consolidated Statement of Changes in Stockholders’ Equity for the three months ended March 31, 2013
Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2013 and 2012
Notes to Unaudited Consolidated Financial Statements
 
 
3

 
 
PORTER BANCORP, INC.
Unaudited Consolidated Balance Sheets
(dollars in thousands except share data)
 
   
March 31,
2013
   
December 31,
2012
 
Assets
               
Cash and due from financial institutions
 
$
68,497
   
$
46,512
 
Federal funds sold
   
2,691
     
3,060
 
Cash and cash equivalents
   
71,188
     
49,572
 
Securities available for sale
   
183,247
     
178,476
 
Mortgage loans held for sale
   
     
507
 
Loans, net of allowance of $39,839 and $56,680, respectively
   
787,237
     
842,412
 
Premises and equipment
   
20,667
     
20,805
 
Other real estate owned
   
44,192
     
43,671
 
Federal Home Loan Bank stock
   
10,072
     
10,072
 
Bank owned life insurance
   
8,472
     
8,398
 
Accrued interest receivable and other assets
   
7,794
     
8,718
 
Total assets
 
$
1,132,869
   
$
1,162,631
 
                 
Liabilities and Stockholders’ Equity
               
Deposits
               
Non-interest bearing
 
$
108,841
   
$
114,310
 
Interest bearing
   
927,519
     
950,749
 
Total deposits
   
1,036,360
     
1,065,059
 
Repurchase agreements
   
2,853
     
2,634
 
Federal Home Loan Bank advances
   
5,324
     
5,604
 
Accrued interest payable and other liabilities
   
10,069
     
10,169
 
Subordinated capital note
   
6,525
     
6,975
 
Junior subordinated debentures
   
25,000
     
25,000
 
Total liabilities
   
1,086,131
     
1,115,441
 
                 
Stockholders’ equity
               
Preferred stock, no par, 1,000,000 shares authorized,
               
Series A – 35,000 issued and outstanding;
               
Liquidation preference of $35 million at March 31, 2013
   
34,885
     
34,840
 
Series C – 317,042 issued and outstanding;
               
Liquidation preference of $3.6 million at March 31, 2013
   
3,283
     
3,283
 
    Common stock, no par, 86,000,000 shares authorized, 12,139,975
     and 12,002,421 shares issued and outstanding, respectively
   
112,236
     
112,236
 
Additional paid-in capital
   
20,386
     
20,283
 
Retained deficit
   
(127,069
)
   
(126,517
)
Accumulated other comprehensive income
   
3,017
     
3,065
 
Total stockholders' equity
   
46,738
     
47,190
 
Total liabilities and stockholders’ equity
 
$
1,132,869
   
$
1,162,631
 
 
See accompanying notes to unaudited consolidated financial statements.
 
 
4

 
 
PORTER BANCORP, INC.
Unaudited Consolidated Statements of Operations
(dollars in thousands, except per share data)
 
   
Three Months Ended
March 31,
 
   
2013
   
2012
 
Interest income
               
Loans, including fees
 
$
10,033
   
$
14,512
 
Taxable securities
   
867
     
841
 
Tax exempt securities
   
221
     
250
 
Fed funds sold and other
   
137
     
152
 
     
11,258
     
15,755
 
Interest expense
               
Deposits
   
2,704
     
4,000
 
Federal Home Loan Bank advances
   
43
     
57
 
Subordinated capital note
   
58
     
71
 
Junior subordinated debentures
   
154
     
171
 
Federal funds purchased and other
   
1
     
2
 
     
2,960
     
4,301
 
Net interest income
   
8,298
     
11,454
 
Provision for loan losses
   
450
     
3,750
 
Net interest income after provision for loan losses
   
7,848
     
7,704
 
                 
Non-interest income
               
Service charges on deposit accounts
   
493
     
554
 
Income from fiduciary activities
   
517
     
251
 
Bank card interchange fees
   
172
     
177
 
Other real estate owned rental income
   
112
     
37
 
Title insurance commissions
   
13
     
22
 
Secondary market brokerage fees
   
15
     
17
 
Net gain on sales of loans originated for sale
   
58
     
45
 
Net gain on sales of securities
   
     
2,019
 
Other
   
267
     
323
 
     
1,647
     
3,445
 
Non-interest expense
               
Salaries and employee benefits
   
4,139
     
4,312
 
Occupancy and equipment
   
931
     
886
 
Other real estate owned expense
   
791
     
1,257
 
FDIC Insurance
   
639
     
873
 
Loan collection expense
   
853
     
360
 
Professional fees
   
406
     
356
 
State franchise tax
   
537
     
592
 
Communications
   
175
     
180
 
Postage and delivery
   
113
     
122
 
Insurance expense
   
333
     
97
 
Other
   
647
     
612
 
     
9,564
     
9,647
 
Income (loss) before income taxes
   
(69
)
   
1,502
 
Income tax benefit
   
     
 
Net income (loss)
   
(69
)
   
1,502
 
Less:
               
Dividends on preferred stock
   
438
     
437
 
Accretion on Series A preferred stock
   
45
     
45
 
Earnings (losses) allocated to participating securities
   
(28
)
   
35
 
Net income (loss) attributable to common shareholders
 
$
(524
)
 
$
985
 
Basic earnings (loss) per common share
 
$
(0.04
)
 
$
0.08
 
Diluted earnings (loss) per common share
 
$
(0.04
)
 
$
0.08
 
 
See accompanying notes to unaudited consolidated financial statements.
 
 
5

 
 
PORTER BANCORP, INC.
Unaudited Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
 
   
Three Months Ended
March 31,
 
   
2013
   
2012
 
Net income (loss)
 
$
(69
)
 
$
1,502
 
Other comprehensive income (loss), net of tax:
               
   Unrealized gain (loss) on securities:
               
      Unrealized gain (loss) arising during the period
   
(74
)
   
622 
 
    Reclassification of amount realized through sales
   
     
(2,019)
 
      Included in net loss
   
(74
)
   
(1,397)
 
    Tax effect
   
26
     
489 
 
      Net of tax
   
(48
)
   
(908)
 
                 
Comprehensive income (loss)
 
$
(117
)
 
$
594
 
 
See accompanying notes to unaudited consolidated financial statements.
 
 
6

 
 
 
PORTER BANCORP, INC.
Unaudited Consolidated Statement of Changes in Stockholders’ Equity
For Three Months Ended March 31, 2013
(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, 2013
 
12,002,421
     
35,000
     
317,042
   
$
112,236
   
$
34,840
   
$
3,283
   
$
20,283
   
$
(126,517
)
 
$
3,065
   
$
47,190
 
Issuance of unvested stock
 
142,663
     
     
     
     
     
     
     
     
     
 
Forfeited unvested stock
 
(5,109
)
   
     
     
     
     
     
     
     
     
 
Stock-based compensation expense
 
     
     
     
     
     
     
103
             
     
103
 
Net loss
 
     
     
     
     
     
     
     
(69
)
   
     
(69
)
Net change in accumulated other comprehensive income, net of taxes
 
     
     
     
     
     
     
     
     
(48
)
   
(48
)
Dividends 5% on Series A preferred stock
 
     
     
     
     
     
     
     
(438
)
   
     
(438
)
Accretion of Series A preferred stock discount
 
     
     
     
     
45
     
     
     
(45
)
   
     
 
                                                                               
Balances, March 31, 2013
 
12,139,975
     
35,000
     
317,042
   
$
112,236
   
$
34,885
   
$
3,283
   
$
20,386
   
$
(127,069
)
 
$
3,017
   
$
46,738
 
 
See accompanying notes to unaudited consolidated financial statements.
 
 
7

 
 
PORTER BANCORP, INC.
Unaudited Consolidated Statements of Cash Flows
For Three Months Ended March 31, 2013 and 2012
(dollars in thousands)
 
   
2013
   
2012
 
Cash flows from operating activities
           
Net income (loss)
 
$
(69
 
$
1,502
 
Adjustments to reconcile net loss to
  net cash from operating activities
               
Depreciation and amortization
   
548
     
570
 
Provision for loan losses
   
450
     
3,750
 
Net amortization on securities
   
610
     
632
 
Stock-based compensation expense
   
103
     
105
 
Net gain on loans originated for sale
   
(58
   
(45
)
Loans originated for sale
   
(1,190
   
(2,328
)
Proceeds from sales of loans originated for sale
   
1,744
     
2,802
 
Net gain on sales of investment securities
   
     
(2,019
)
Net loss on sales of other real estate owned
   
197
     
402
 
Net write-down of other real estate owned
   
307
     
480
 
Earnings on bank owned life insurance
   
(74
   
(74
)
Net change in accrued interest receivable and other assets
   
762
     
3,231
 
Net change in accrued interest payable and other liabilities
   
(537
)    
3,881
 
Net cash from operating activities
   
2,793
     
12,889
 
Cash flows from investing activities
               
Purchases of available-for-sale securities
   
(15,294
   
(45,048
)
Sales of available-for-sale securities
   
     
21,385
 
Maturities and prepayments of available-for-sale securities
   
9,864
     
8,056
 
Proceeds from sale of other real estate owned
   
2,640
     
9,018
 
Improvements to other real estate owned
   
     
(1
)
Loan originations and payments, net
   
50,983
     
30,798
 
Purchases of premises and equipment, net
   
(160
   
(72
)
Net cash from investing activities
   
48,033
     
24,136
 
Cash flows from financing activities
               
Net change in deposits
   
(28,699
   
(70,016
)
Net change in repurchase agreements
   
219
     
188
 
Repayment of Federal Home Loan Bank advances
   
(280
   
(327
)
Repayment of subordinated capital note
   
(450
   
(225
)
Net cash from financing activities
   
(29,210
)    
(70,380
)
Net change in cash and cash equivalents
   
21,616
     
(33,355
)
Beginning cash and cash equivalents
   
49,572
     
105,962
 
Ending cash and cash equivalents
 
$
71,188
   
$
72,607
 
Supplemental cash flow information:
               
Interest paid
 
$
4,992
   
$
4,296
 
Income taxes paid (refunded)
   
     
(2,000
)
Supplemental non-cash disclosure:
               
Transfer from loans to other real estate
 
$
3,680
   
$
4,216
 
Financed sales of other real estate owned
   
15
     
192
 
 
See accompanying notes to unaudited consolidated financial statements.
 
 
8

 
 
PORTER BANCORP, INC.
Notes to Unaudited Consolidated Financial Statements


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

Basis of Presentation – The consolidated financial statements include Porter Bancorp, Inc. (Company 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 three months ended March 31, 2013 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, 2012 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 February 2013, the FASB issued ASU No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.”  The provisions of ASU No. 2013-02 require an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income.  For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about these amounts.  The provisions of this new guidance are effective for fiscal years beginning after December 15, 2012.  The adoption of ASU No. 2013-02 did not have a material impact on the Company’s statements of operations and condition.
 
Note 2 – Going Concern Considerations and Future Plans
 
The consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business for the foreseeable future. However, the events and circumstances described in this Note raise substantial doubt about the Company’s ability to continue as a going concern.

During the first three months of 2013, we reported net loss to common shareholders of $524,000, compared with net income to common shareholders of $985,000 for the first three months of 2012.  The decrease in net income compared to the first quarter of 2012 was primarily attributable to a $2.0 million gain on sale of investment securities in the first quarter of 2012. The decrease was also attributable to lower net interest margin due to lower average loans outstanding, loans repricing at lower rates, and the level of non-performing assets in our portfolio. These items were offset by a significant decrease in provision expense, which decreased from $3.8 million to $450,000.
 
For the year ended December 31, 2012, we reported net loss to common shareholders of $33.4 million.  This loss was attributable primarily to $40.3 million of provision for loan losses expense.  A continued decline in credit quality in our portfolio resulted in net charge-offs of $36.1 million, and OREO expense of $10.5 million resulting from fair value write-downs driven by new appraisals and reduced marketing prices, net loss on sales, and ongoing operating expense.  We also had lower net interest margin due to lower average loans outstanding, loans re-pricing at lower rates, and the level of non-performing loans in our portfolio.  Net loss to common shareholders of $33.4 million, for the year ended December 31, 2012, compares with net loss to common shareholders of $105.2 million for the year ended December 31, 2011.
 
In the fourth quarter of 2011, we began deferring the payment of regular quarterly cash dividends on our Series A Preferred Stock issued to the U.S. Treasury. At March 31, 2013, cumulative accrued and unpaid dividends on this stock totaled $3.0 million. If we defer dividend payments for six quarters, the holder of our Series A Preferred Stock (currently the U.S. Treasury) would then have the right to appoint up to two representatives to our Board of Directors. We will continue to accrue any deferred dividends, which will be deducted from income to common shareholders for financial statement purposes.
 
In 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.
 
 
9

 
 
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 March 31, 2013, the capital ratios required by the Consent Order were not met.
 
In order to meet these capital requirements, the Board of Directors and management are continuing to evaluate strategies to achieve the following objectives:
 
 
Increasing capital through a possible public offering or private placement of common stock to new and existing shareholders.  We have engaged a financial advisor to assist our Board in evaluating our options for increasing capital and redeeming our Series A preferred stock issued to the US Treasury in 2008 under the Capital Purchase Program.

 
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.  John T. Taylor was named President and CEO for PBI Bank and appointed to the board of directors in July 2012.   Additionally, John R. Davis was appointed Chief Credit Officer of PBI Bank in August 2012, with responsibility for establishing and executing the credit quality policies and overseeing credit administration for the organization.

 
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.

 
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, to $899.1 million at December 31, 2012, and $827.1 million at March 31, 2013.   We have significantly improved our staffing in the commercial lending area which is now led by John R. Davis.
 
 
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 are now in compliance with construction and development loans totaling $62.5 million, or 73% of total risk-based capital, at March 31, 2013, down from $70.3 million, or 82% of total risk-based capital, at December 31, 2012.
 
 
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 March 31, 2013.  These loans totaled $299.4 million, or 351% of total risk-based capital, at March 31, 2013 and $311.1 million, or 362% of total risk-based capital, at December 31, 2012.
 
 
o
We are working to reduce our loan concentrations by curtailing new construction and development lending and new non-owner occupied commercial real estate lending.  We are also receiving principal reductions from amortizing credits and pay-downs from our customers who sell properties built for resale.  We have reduced the construction loan portfolio from $199.5 million at December 31, 2010 to $62.5 million at March 31, 2013.  Our non-owner occupied commercial real estate loans declined from $293.3 million at December 31, 2010 to $187.2 million at March 31, 2013.

 
10

 
 
 
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 2012, 2011, and 2010.  This trend has continued at a slower pace in 2013.  The Bank acquired $33.5 million, $41.9 million, and $90.8 million during 2012, 2011, and 2010, respectively.  For the first three months of March 31, 2013, we acquired $3.7 million of OREO.
 
 
o
We have incurred significant losses in disposing of this real estate.   We incurred losses totaling $9.3 million, $42.8 million, and $13.9 million in 2012, 2011, and 2010, respectively, from sales and fair value write-downs attributable to declining valuations as evidenced by new appraisals and from changes in our sales strategies.  During the three month period ended March 31, 2013, we incurred OREO losses totaling $504,000, which consisted of $197,000 in loss on sale and $307,000 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 continually 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 of OREO totaled $2.7 million during the three months ended March 31, 2013 and $22.5 million, $26.0 million and $25.0 million during 2012, 2011, and 2010, respectively.
 
 
o
At December 31, 2012 the OREO portfolio consisted of 51% construction, development, and land assets.  At March 31, 2013 this concentration had declined to 49%.  This is consistent with our reduction of construction, development and other land loans, which have declined to $62.5 million at March 31, 2013 compared to $70.3 million at December 31, 2012.  Over the past three months, the composition of our OREO portfolio has shifted toward 1-4 family residential properties, which we have found to be more liquid than construction, development, and land assets, while commercial real estate has declined slightly as a percentage of the portfolio.  Commercial real estate of this nature represents 34% of the portfolio at March 31, 2013 compared with 35% at December 31, 2012.  1-4 family residential properties represent 15% of the portfolio at March 31, 2013 compared with 12% at December 31, 2012.
 
 
Evaluating other strategic alternatives, such as the sale of assets or branches.

Bank regulatory agencies can exercise discretion when an institution does not meet the terms of a consent order.  Based on individual circumstances, the agencies may issue mandatory directives, impose monetary penalties, initiate changes in management, or take more serious adverse actions.
 
 
11

 
 
Note 3 – Securities

The fair value of available for sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows:
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
   
(in thousands)
 
March 31, 2013
                       
U.S. Government and federal agency
 
$
23,697
   
$
511
   
$
(41
)
 
$
24,167
 
Agency mortgage-backed: residential
   
79,937
     
868
     
(472
)
   
80,333
 
State and municipal
   
53,542
     
2,277
     
(146
)
   
55,673
 
Corporate bonds
   
18,880
     
1,510
     
(8
)
   
20,382
 
Other
   
572
     
71
     
     
643
 
Total debt securities
   
176,628
     
5,237
     
(667
)
   
181,198
 
Equity
   
1,359
     
691
     
(1
)
   
2,049
 
Total
 
$
177,987
   
$
5,928
   
$
(668
)
 
$
183,247
 
 
December 31, 2012
                               
U.S. Government and federal agency
 
$
5,603
   
$
530
   
$
   
$
 6,133  
Agency mortgage-backed: residential
   
94,298
     
1,141
     
(257
)
   
95,182
 
State and municipal
   
52,485
     
2,335
     
(87
)
   
54,733
 
Corporate bonds
   
18,851
     
1,150
     
(37
)
   
19,964
 
Other
   
572
     
46
     
     
618
 
Total debt securities
   
171,809
     
5,202
     
(381
)
   
176,630
 
Equity
   
1,359
     
487
     
     
1,846
 
Total
 
$
173,168
   
$
5,689
   
$
(381
)
 
$
178,476
 

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

         
Three Months Ended
March 31,
 
                     
 2013
     
 2012
 
     
(in thousands)
 
Proceeds
                 
$
 —
   
$
21,385
 
Gross gains
                   
 —
     
2,019
 
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.
 
   
March 31, 2013
 
   
Amortized
 Cost
   
Fair
 Value
 
   
(in thousands)
 
Maturity
           
Available-for-sale
           
Within one year
 
$
13,105
   
$
13,517
 
One to five years
   
14,663
     
16,123
 
Five to ten years
   
59,149
     
61,044
 
Beyond ten years
   
9,774
     
10,181
 
Agency mortgage-backed: residential
   
79,937
     
80,333
 
Total
 
$
176,628
   
$
181,198
 
                                                                                                              
 
12

 
 
Securities pledged at March 31, 2013 and December 31, 2012 had carrying values of approximately $60.4 million and $76.4 million, respectively, and were pledged to secure public deposits and repurchase agreements.

The Company evaluates securities for other than temporary impairment (OTTI) on at least 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 March 31, 2013, the Company held 40 equity securities.  Of these securities, two securities had an unrealized loss less than $1,000.  One had been in an unrealized loss position for less than twelve months, and one for more than twelve months. All other equity securities were in an unrealized gain position at March 31, 2013.  Management monitors the underlying financial condition of the issuers and current market pricing for these equity securities monthly. As of March 31, 2013, 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 March 31, 2013 and December 31, 2012, 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)
 
March 31, 2013
                                   
U.S government & agency
 
$
6,499
   
$
(41
)
 
$
   
$
   
$
6,499
   
$
(41
)
Agency mortgage-backed: residential
   
30,351
     
(472
)
   
     
     
30,351
     
(472
)
State and municipal
   
11,225
     
(146
)
   
     
     
11,225
     
(146
)
Corporate bonds
   
1,284
     
(8
)
   
     
     
1,284
     
(8
)
Equity
   
2
     
(1
)
   
8
     
     
10
     
(1
)
Total temporarily impaired
 
$
49,361
   
$
(668
)
 
$
8
   
$
   
$
49,369
   
$
(668
)
                                                 
                                                 
December 31, 2012
                                               
Agency mortgage-backed: residential
 
$
23,375
   
$
(257
)
 
$
   
$
   
$
23,375
   
$
(257
)
State and municipal
   
7,961
     
(87
)
   
     
     
7,961
     
(87
)
Corporate bonds
   
3,777
     
(37
)
   
     
     
3,777
     
(37
)
Equity
   
2
     
     
     
     
2
     
 
Total temporarily impaired
 
$
35,115
   
$
(381
)
 
$
   
$
   
$
35,115
   
$
(381
)
 
 
13

 
 
Note 4 – Loans

Loans were as follows:
 
March
 31, 
   
December
31, 
 
   
2013
   
2012
 
   
(in thousands)
 
Commercial
 
$
49,932
   
$
52,567
 
Commercial Real Estate: 
               
Construction
   
62,535
     
70,284
 
Farmland
   
75,347
     
80,825
 
Other
   
289,211
     
322,687
 
Residential Real Estate: 
               
Multi-family
   
49,590
     
50,986
 
1-4 Family
   
259,412
     
278,273
 
Consumer
   
18,129
     
20,383
 
Agriculture
   
22,214
     
22,317
 
Other
   
706
     
770
 
Subtotal
   
827,076
     
899,092
 
Less: Allowance for loan losses
   
(39,839
)
   
(56,680
)
Loans, net
 
$
787,237
   
$
842,412
 
 
The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2013 and 2012:
 
    Commercial  
Commercial
Real Estate
 
Residential
Real Estate
  Consumer   Agriculture   Other   Total
     
(in thousands)
March 31, 2013:
   
 
                                 
 
Beginning balance
 
$
4,402
   
$
34,768
   
$
16,235
   
$
857
   
$
403
   
$
15
   
$
56,680
 
Provision for loan losses
   
1,438
     
(445
)
   
(450
)
   
86
     
(178
   
(1
   
450
 
Loans charged off
   
(976
)
   
(12,312
)
   
(4,339
)
   
(318
)  
   
(17
   
     
(17,962
)
Recoveries
   
126
     
158
     
94
     
91
     
202
     
     
671
 
Ending balance
 
$
4,990
   
$
22,169
   
$
11,540
   
$
716
   
$
410
   
$
14
   
$
39,839
 
                                                         
                                                         
March 31, 2012:
                                                       
Beginning balance
 
$
4,207
   
$
33,024
   
$
14,217
   
$
792
   
$
325
   
$
14
   
$
52,579
 
Provision for loan losses
   
89
     
772
     
2,506
     
224
     
161
     
(2
)  
   
3,750
 
Loans charged off
   
(256
)
   
(919
)
   
(1,029
)
   
(237
)
   
(141
   
     
(2,582
)
Recoveries
   
42
     
105
     
26
     
33
     
     
     
206
 
Ending balance
 
$
4,082
   
$
32,982
   
$
15,720
   
$
812
   
$
345
   
$
12
   
$
53,953
 
 
 
14

 
 
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method as of March 31, 2013:
 
   
Commercial
   
Commercial
Real Estate
   
Residential
Real Estate
   
Consumer
   
Agriculture
   
Other
   
Total
 
   
(in thousands)
 
Allowance for loan losses:
                                         
Ending allowance balance attributable to loans:
                                         
Individually evaluated for impairment
 
$
695
   
$
6,138
   
$
1,295
   
$
21
   
$
   
$
12
   
$
8,161
 
Collectively evaluated for impairment
   
4,295
     
16,031
     
10,245
     
695
     
410
     
2
     
31,678
 
Total ending allowance balance
 
$
4,990
   
$
22,169
   
$
11,540
   
$
716
   
$
410
   
$
14
   
$
39,839
 
                                                         
                                                         
Loans:
                                                       
Loans individually evaluated for impairment
 
$
5,668
   
$
114,558
   
$
56,342
   
$
212
   
$
170
   
$
522
   
$
177,472
 
Loans collectively evaluated for impairment
   
44,264
     
312,535
     
252,660
     
17,917
     
22,044
     
184
     
649,604
 
Total ending loans balance
 
$
49,932
   
$
427,093
   
$
309,002
   
$
18,129
   
$
22,214
   
$
706
   
$
827,076
 
 
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method as of December 31, 2012:
 
   
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
 
$
263
   
$
16,046
   
$
4,641
   
$
68
   
$
5
   
$
11
   
$
21,034
 
Collectively evaluated for impairment
   
4,139
     
18,722
     
11,594
     
789
     
398
     
4
     
 35,646
 
Total ending allowance balance
 
$
4,402
   
$
34,768
   
$
16,235
   
$
857
   
$
403
   
$
15
   
$
56,680
 
                                                         
                                                         
Loans:
                                                       
Loans individually evaluated for impairment
 
$
5,296
   
$
125,922
   
$
56,799
   
$
212
   
$
55
   
$
524
   
$
188,808
 
Loans collectively evaluated for impairment
   
47,271
     
347,874
     
272,460
     
20,171
     
22,262
     
246
     
710,284
 
Total ending loans balance
 
$
52,567
   
$
473,796
   
$
329,259
   
$
20,383
   
$
22,317
   
$
770
   
$
899,092
 

 
15

 
 
Impaired Loans
 
Impaired loans include restructured loans and commercial, construction, agriculture and commercial real estate loans on nonaccrual or classified as doubtful, whereby collection of the total amount is improbable, or loss, whereby all or a portion of the loan has been written off or a specific allowance for loss has been provided.
 
The following table presents information related to loans individually evaluated for impairment by class of loans as of and for the three months ended March 31, 2013:
 
   
Unpaid
Principal
Balance
   
Recorded
Investment
   
Allowance
For Loan
Losses
Allocated
   
Average
Recorded
Investment
   
Interest
 Income
Recognized
   
Cash
Basis
Income
Recognized
 
   
(in thousands)
       
With No Related Allowance Recorded:
                                   
Commercial
  $ 2,197     $ 1,887     $     $ 1,561     $     $  
Commercial real estate:
                                               
Construction
    948       800             955       5       5  
Farmland
    4,070       4,071             4,259       67       67  
Other
    1,930       1,816             1,854       4       4  
Residential real estate:
                                               
Multi-family
    640       640             641              
1-4 Family
    13,695       13,352             13,255       19       19  
Consumer
    13       13             41              
Agriculture
    170       170             107              
Other
                                   
With An Allowance Recorded:
                                               
Commercial
    4,303       3,781       695       3,921       30        
Commercial real estate:
                                               
Construction
    26,693       24,481       154       24,968       34        
Farmland
    8,362       6,050       270       6,253       11        
Other
    97,688       77,340       5,714       81,951       330        
Residential real estate:
                                               
Multi-family
    14,864       13,155       587       14,031       56        
1-4 Family
    33,389       29,195       708       28,644       103        
Consumer
    268       199       21       171              
Agriculture
                      5              
Other
    522       522       12       523       4        
Total
  $ 209,752     $ 177,472     $ 8,161     $ 183,140     $ 663     $ 95  

The following table presents loans individually evaluated for impairment by class of loan as of December 31, 2012:
 
   
Unpaid
Principal
Balance
   
Recorded
Investment
   
Allowance
For Loan
Losses
Allocated
   
Average
Recorded
Investment
   
Interest
 Income
Recognized
   
Cash
Basis
Income
Recognized
 
   
(in thousands)
       
With No Related Allowance Recorded:
                                   
Commercial
  $ 1,460     $ 1,234     $     $ 1,637     $ 5     $ 4  
Commercial real estate:
                                               
Construction
    1,155       1,109             1,745       2       2  
Farmland
    4,448       4,448             4,706       57       57  
Other
    2,134       1,892             3,436       3       3  
Residential real estate:
                                               
Multi-family
    643       643             910              
1-4 Family
    13,539       13,158             11,291       56       56  
Consumer
    70       70             219       8       5  
Agriculture
    45       45             366       2        
Other
                                   
 
 
16

 
 
   
Unpaid
Principal
Balance
   
Recorded
Investment
   
Allowance
For Loan
Losses
Allocated
   
Average
Recorded
Investment
   
Interest
 Income
Recognized
   
Cash
Basis
Income
Recognized
 
   
(in thousands)
       
With An Allowance Recorded:
                                   
Commercial
    4,108       4,062       263       3,964       169       27  
Commercial real estate:
                                               
Construction
    26,645       25,455       1,543       19,514       348       5  
Farmland
    8,557       6,456       734       5,794       43       2  
Other
    97,699       86,562       13,769       83,087       2,011       185  
Residential real estate:
                                               
Multi-family
    14,906       14,906       1,643       11,187       468        
1-4 Family
    31,021       28,092       2,998       27,404       787       9  
Consumer
    142       142       68       29              
Agriculture
    10       10       5       6