UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|
x
|
QUARTERLY
REPORT PURSUANT TO
SECTION 13 OR 15(d)
OF THE SECURITIES
EXCHANGE ACT OF 1934.
|
For the
quarterly period ended June 30, 2012
OR
|
¨
|
TRANSITION
REPORT PURSUANT
TO SECTION 13
OR 15(d) OF THE
SECURITIES EXCHANGE
ACT OF 1934.
|
Commission File Number 0-18832
First Financial Service Corporation
(Exact Name of Registrant as specified
in its charter)
Kentucky
|
|
61-1168311
|
(State or other jurisdiction
|
|
(IRS Employer Identification No.)
|
of incorporation or organization)
|
|
|
|
|
|
2323 Ring Road
|
|
(270) 765-2131
|
Elizabethtown, Kentucky 42701
|
|
(Registrant’s telephone number,
|
(Address of principal executive offices)
|
|
including area code)
|
(Zip Code)
|
|
|
(270) 765-2131
(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 such 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.
Large Accelerated
Filer
¨
Accelerated Filer
¨
Non-Accelerated Filer
¨
Smaller Reporting Company
x
Indicate
by a 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 classes of common stock, as of the latest practicable date.
Class
|
|
Outstanding as of July
31, 2012
|
|
|
|
Common Stock
|
|
4,772,649
shares
|
FIRST FINANCIAL SERVICE CORPORATION
FORM 10-Q
TABLE OF CONTENTS
PART I
–
FINANCIAL INFORMATION
|
|
|
|
Preliminary Note Regarding Forward-Looking
Statements
|
|
|
|
|
Item 1.
|
Consolidated Financial Statements and Notes to Consolidated Financial Statements
|
4
|
|
|
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
42
|
|
|
|
Item 3.
|
Quantitative and Qualitative Disclosures about Market Risk
|
62
|
|
|
|
Item 4.
|
Controls and Procedures
|
64
|
|
|
|
PART II – OTHER INFORMATION
|
|
|
|
|
Item 1.
|
Legal Proceedings
|
64
|
|
|
|
Item 1A.
|
Risk Factors
|
64
|
|
|
|
Item 2.
|
Unregistered Sales of Equity Securities and Use of Proceeds
|
64
|
|
|
|
Item 3.
|
Defaults upon Senior Securities
|
65
|
|
|
|
Item 4.
|
Mine Safety Disclosures
|
65
|
|
|
|
Item 5.
|
Other Information
|
65
|
|
|
|
Item 6.
|
Exhibits
|
65
|
|
|
|
SIGNATURES
|
66
|
PRELIMINARY
NOTE REGARDING
FORWARD-LOOKING
STATEMENTS
Statements in this report that are not
statements of historical fact are forward-looking statements. First Financial Service Corporation (the “Corporation”)
may make forward-looking statements in future filings with the Securities and Exchange Commission (“SEC”), in press
releases, and in oral and written statements made by or with the approval of the Corporation. Forward-looking statements include,
but are not limited to: (1) projections of revenues, income or loss, earnings or loss per share, capital structure and other financial
items; (2) plans and objectives of the Corporation or its management or Board of Directors; (3) statements regarding future events,
actions or economic performance; and (4) statements of assumptions underlying such statements. Words such as “estimate,”
“strategy,” “believes,” “anticipates,” “expects,” “intends,” “plans,”
“targeted,” and similar expressions are intended to identify forward-looking statements, but are not the exclusive
means of identifying such statements.
Various risks and uncertainties may cause
actual results to differ materially from those indicated by our forward-looking statements. In addition to those risks described
under “Item 1A Risk Factors,” of this report and our Annual Report on Form 10-K, the following factors could cause
such differences: changes in general economic conditions and economic conditions in Kentucky and the markets we serve, any of
which may affect, among other things, our level of non-performing assets, charge-offs, and provision for loan loss expense; changes
in interest rates that may reduce interest margins and impact funding sources; changes in market rates and prices which may adversely
impact the value of financial products including securities, loans and deposits; changes in tax laws, rules and regulations; various
monetary and fiscal policies and regulations, including those determined by the Federal Reserve Board, the Federal Deposit Insurance
Corporation (“FDIC”) and the Kentucky Department of Financial Institutions (“KDFI”); competition with
other local and regional commercial banks, savings banks, credit unions and other non-bank financial institutions; our ability
to grow core businesses; our ability to develop and introduce new banking-related products, services and enhancements and gain
market acceptance of such products; and management’s ability to manage these and other risks.
Our forward-looking statements speak only
as of the date on which they are made, and we undertake no obligation to update any forward-looking statement to reflect events
or circumstances after the date of the statement to reflect the occurrence of unanticipated events.
Item 1.
FIRST FINANCIAL SERVICE CORPORATION
Consolidated Balance Sheets
(Unaudited)
|
|
June 30,
|
|
|
December 31,
|
|
(Dollars in thousands, except per share data)
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
ASSETS:
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
15,331
|
|
|
$
|
12,973
|
|
Interest bearing deposits
|
|
|
138,783
|
|
|
|
79,263
|
|
Total cash and cash equivalents
|
|
|
154,114
|
|
|
|
92,236
|
|
|
|
|
|
|
|
|
|
|
Securities available-for-sale
|
|
|
317,288
|
|
|
|
313,777
|
|
Securities held-to-maturity, fair value of $16 Jun (2012) and $24 Dec (2011)
|
|
|
16
|
|
|
|
24
|
|
Total securities
|
|
|
317,304
|
|
|
|
313,801
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale
|
|
|
103,593
|
|
|
|
56,016
|
|
|
|
|
|
|
|
|
|
|
Loans, net of unearned fees
|
|
|
536,166
|
|
|
|
691,253
|
|
Allowance for loan losses
|
|
|
(15,300
|
)
|
|
|
(17,181
|
)
|
Net loans
|
|
|
520,866
|
|
|
|
674,072
|
|
|
|
|
|
|
|
|
|
|
Federal Home Loan Bank stock
|
|
|
4,805
|
|
|
|
4,805
|
|
Cash surrender value of life insurance
|
|
|
9,880
|
|
|
|
9,702
|
|
Premises and equipment, net
|
|
|
21,931
|
|
|
|
29,694
|
|
Premises and equipment held for sale,net
|
|
|
6,771
|
|
|
|
946
|
|
Real estate owned:
|
|
|
|
|
|
|
|
|
Acquired through foreclosure
|
|
|
36,529
|
|
|
|
29,083
|
|
Held for development
|
|
|
-
|
|
|
|
45
|
|
Other repossessed assets
|
|
|
30
|
|
|
|
42
|
|
Core deposit intangible
|
|
|
587
|
|
|
|
714
|
|
Accrued interest receivable
|
|
|
2,466
|
|
|
|
3,168
|
|
Accrued income taxes
|
|
|
2,948
|
|
|
|
3,517
|
|
Prepaid FDIC Insurance
|
|
|
247
|
|
|
|
1,302
|
|
Low-income housing investments
|
|
|
7,512
|
|
|
|
7,671
|
|
Other assets
|
|
|
2,105
|
|
|
|
1,964
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
1,191,688
|
|
|
$
|
1,228,778
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
LIABILITIES:
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
Non-interest bearing
|
|
$
|
69,199
|
|
|
$
|
72,675
|
|
Non-interest bearing held for sale
|
|
|
13,397
|
|
|
|
4,954
|
|
Interest bearing
|
|
|
694,502
|
|
|
|
932,915
|
|
Interest bearing held for sale
|
|
|
312,204
|
|
|
|
112,250
|
|
Total deposits
|
|
|
1,089,302
|
|
|
|
1,122,794
|
|
|
|
|
|
|
|
|
|
|
Advances from Federal Home Loan Bank
|
|
|
27,666
|
|
|
|
27,736
|
|
Subordinated debentures
|
|
|
18,000
|
|
|
|
18,000
|
|
Accrued interest payable
|
|
|
2,499
|
|
|
|
1,817
|
|
Accounts payable and other liabilities
|
|
|
5,735
|
|
|
|
4,968
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
1,143,202
|
|
|
|
1,175,315
|
|
Commitments and contingent liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY:
|
|
|
|
|
|
|
|
|
Serial preferred stock, $1 par value per share; authorized 5,000,000 shares; issued and outstanding, 20,000 shares with a liquidation preference of $20,000
|
|
|
19,916
|
|
|
|
19,889
|
|
Common stock, $1 par value per share; authorized 35,000,000 shares; issued and outstanding, 4,772,649 shares Jun (2012), and 4,749,415 shares Dec (2011)
|
|
|
4,773
|
|
|
|
4,749
|
|
Additional paid-in capital
|
|
|
35,561
|
|
|
|
35,450
|
|
Retained earnings/(accumulated deficit)
|
|
|
(12,907
|
)
|
|
|
(7,951
|
)
|
Accumulated other comprehensive income
|
|
|
1,143
|
|
|
|
1,326
|
|
|
|
|
|
|
|
|
|
|
TOTAL STOCKHOLDERS’ EQUITY
|
|
|
48,486
|
|
|
|
53,463
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
1,191,688
|
|
|
$
|
1,228,778
|
|
See
notes
to the unaudited consolidated financial statements.
FIRST FINANCIAL SERVICE CORPORATION
Consolidated Statements of Operations
(Unaudited)
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
(Dollars in thousands, except per share data)
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and Dividend Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, including fees
|
|
$
|
8,868
|
|
|
$
|
11,692
|
|
|
$
|
18,829
|
|
|
$
|
24,035
|
|
Taxable securities
|
|
|
1,726
|
|
|
|
1,703
|
|
|
|
3,436
|
|
|
|
3,269
|
|
Tax exempt securities
|
|
|
144
|
|
|
|
265
|
|
|
|
357
|
|
|
|
522
|
|
Total interest income
|
|
|
10,738
|
|
|
|
13,660
|
|
|
|
22,622
|
|
|
|
27,826
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
3,444
|
|
|
|
4,674
|
|
|
|
7,389
|
|
|
|
9,588
|
|
Federal Home Loan Bank advances
|
|
|
283
|
|
|
|
280
|
|
|
|
567
|
|
|
|
575
|
|
Subordinated debentures
|
|
|
341
|
|
|
|
350
|
|
|
|
682
|
|
|
|
691
|
|
Total interest expense
|
|
|
4,068
|
|
|
|
5,304
|
|
|
|
8,638
|
|
|
|
10,854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
6,670
|
|
|
|
8,356
|
|
|
|
13,984
|
|
|
|
16,972
|
|
Provision for loan losses
|
|
|
915
|
|
|
|
9,517
|
|
|
|
1,927
|
|
|
|
12,982
|
|
Net interest income after provision for loan losses
|
|
|
5,755
|
|
|
|
(1,161
|
)
|
|
|
12,057
|
|
|
|
3,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer service fees on deposit accounts
|
|
|
1,399
|
|
|
|
1,554
|
|
|
|
2,782
|
|
|
|
2,999
|
|
Gain on sale of mortgage loans
|
|
|
384
|
|
|
|
291
|
|
|
|
695
|
|
|
|
556
|
|
Gain on sale of investments
|
|
|
598
|
|
|
|
162
|
|
|
|
1,309
|
|
|
|
231
|
|
Loss on sale of investments
|
|
|
(303
|
)
|
|
|
(38
|
)
|
|
|
(303
|
)
|
|
|
(38
|
)
|
Other than temporary impairment loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other-than-temporary impairment losses
|
|
|
-
|
|
|
|
(67
|
)
|
|
|
(26
|
)
|
|
|
(104
|
)
|
Portion of loss recognized in other comprehensive income/(loss) (before taxes)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net impairment losses recognized in earnings
|
|
|
-
|
|
|
|
(67
|
)
|
|
|
(26
|
)
|
|
|
(104
|
)
|
Loss on sale and write downs on real estate acquired through foreclosure
|
|
|
(2,016
|
)
|
|
|
(4,651
|
)
|
|
|
(3,582
|
)
|
|
|
(4,886
|
)
|
Gain on sale of premises and equipment
|
|
|
322
|
|
|
|
-
|
|
|
|
322
|
|
|
|
-
|
|
Gain on sale on real estate acquired through foreclosure
|
|
|
210
|
|
|
|
96
|
|
|
|
613
|
|
|
|
121
|
|
Gain on sale on real estate held for development
|
|
|
-
|
|
|
|
-
|
|
|
|
175
|
|
|
|
-
|
|
Brokerage commissions
|
|
|
112
|
|
|
|
108
|
|
|
|
207
|
|
|
|
215
|
|
Other income
|
|
|
617
|
|
|
|
380
|
|
|
|
1,028
|
|
|
|
734
|
|
Total non-interest income
|
|
|
1,323
|
|
|
|
(2,165
|
)
|
|
|
3,220
|
|
|
|
(172
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits
|
|
|
3,822
|
|
|
|
3,958
|
|
|
|
7,675
|
|
|
|
8,287
|
|
Office occupancy expense and equipment
|
|
|
782
|
|
|
|
832
|
|
|
|
1,550
|
|
|
|
1,643
|
|
Marketing and advertising
|
|
|
135
|
|
|
|
164
|
|
|
|
168
|
|
|
|
389
|
|
Outside services and data processing
|
|
|
893
|
|
|
|
1,056
|
|
|
|
1,704
|
|
|
|
1,853
|
|
Bank franchise tax
|
|
|
402
|
|
|
|
342
|
|
|
|
744
|
|
|
|
656
|
|
FDIC insurance premiums
|
|
|
682
|
|
|
|
906
|
|
|
|
1,097
|
|
|
|
1,876
|
|
Amortization of core deposit intangible
|
|
|
62
|
|
|
|
76
|
|
|
|
127
|
|
|
|
153
|
|
Real estate acquired through foreclosure expense
|
|
|
2,336
|
|
|
|
646
|
|
|
|
2,676
|
|
|
|
1,028
|
|
Loan expense
|
|
|
656
|
|
|
|
557
|
|
|
|
1,164
|
|
|
|
609
|
|
Other expense
|
|
|
1,446
|
|
|
|
1,379
|
|
|
|
2,800
|
|
|
|
2,828
|
|
Total non-interest expense
|
|
|
11,216
|
|
|
|
9,916
|
|
|
|
19,705
|
|
|
|
19,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) before income taxes
|
|
|
(4,138
|
)
|
|
|
(13,242
|
)
|
|
|
(4,428
|
)
|
|
|
(15,504
|
)
|
Income taxes/(benefits)
|
|
|
1
|
|
|
|
(1,338
|
)
|
|
|
1
|
|
|
|
(1,530
|
)
|
Net Income/(Loss)
|
|
|
(4,139
|
)
|
|
|
(11,904
|
)
|
|
|
(4,429
|
)
|
|
|
(13,974
|
)
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends on preferred stock
|
|
|
(250
|
)
|
|
|
(250
|
)
|
|
|
(500
|
)
|
|
|
(500
|
)
|
Accretion on preferred stock
|
|
|
(13
|
)
|
|
|
(13
|
)
|
|
|
(27
|
)
|
|
|
(27
|
)
|
Net income (loss) attributable to common shareholders
|
|
$
|
(4,402
|
)
|
|
$
|
(12,167
|
)
|
|
$
|
(4,956
|
)
|
|
$
|
(14,501
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares applicable to basic income per common share
|
|
|
4,767,464
|
|
|
|
4,739,700
|
|
|
|
4,764,240
|
|
|
|
4,737,761
|
|
Basic income (loss) per common share
|
|
$
|
(0.92
|
)
|
|
$
|
(2.57
|
)
|
|
$
|
(1.04
|
)
|
|
$
|
(3.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares applicable to diluted income per common share
|
|
|
4,767,464
|
|
|
|
4,739,700
|
|
|
|
4,764,240
|
|
|
|
4,737,761
|
|
Diluted income (loss) per common share
|
|
$
|
(0.92
|
)
|
|
$
|
(2.57
|
)
|
|
$
|
(1.04
|
)
|
|
$
|
(3.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per common share
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
See
notes to the unaudited consolidated financial
statements.
FIRST FINANCIAL SERVICE CORPORATION
Consolidated Statements of Comprehensive
Income/(Loss)
(Unaudited)
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
(Dollars in thousands)
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income/(Loss)
|
|
$
|
(4,139
|
)
|
|
$
|
(11,904
|
)
|
|
$
|
(4,429
|
)
|
|
$
|
(13,974
|
)
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gain (loss) on securities available-for-sale
|
|
|
152
|
|
|
|
4,716
|
|
|
|
768
|
|
|
|
5,923
|
|
Change in unrealized gain (loss) on securities available-for-sale for which a portion of other-than-temporary impairment has been recognized into earnings
|
|
|
(15
|
)
|
|
|
(100
|
)
|
|
|
(21
|
)
|
|
|
293
|
|
Reclassification of realized amount on securities available-for-sale losses (gains)
|
|
|
(295
|
)
|
|
|
(124
|
)
|
|
|
(1,006
|
)
|
|
|
(168
|
)
|
Reclassification of unrealized loss on held-to-maturity security recognized in income
|
|
|
-
|
|
|
|
67
|
|
|
|
26
|
|
|
|
79
|
|
Accretion (amortization) of non-credit component of other-than-temporary impairment on held-to-maturity securities
|
|
|
50
|
|
|
|
-
|
|
|
|
50
|
|
|
|
(1
|
)
|
Net unrealized gain (loss) recognized in comprehensive income
|
|
|
(108
|
)
|
|
|
4,559
|
|
|
|
(183
|
)
|
|
|
6,126
|
|
Tax effect
|
|
|
-
|
|
|
|
(1,550
|
)
|
|
|
-
|
|
|
|
(2,083
|
)
|
Total other comphrehensive income/(loss)
|
|
|
(108
|
)
|
|
|
3,009
|
|
|
|
(183
|
)
|
|
|
4,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income/(Loss)
|
|
$
|
(4,247
|
)
|
|
$
|
(8,895
|
)
|
|
$
|
(4,612
|
)
|
|
$
|
(9,931
|
)
|
The following is a summary of the accumulated other comprehensive
income balances, net of tax:
|
|
Balance
|
|
|
Current
|
|
|
Balance
|
|
|
|
at
|
|
|
Period
|
|
|
at
|
|
|
|
12/31/2011
|
|
|
Change
|
|
|
6/30/2012
|
|
Unrealized gains (losses) on securities available-for-sale
|
|
$
|
139
|
|
|
$
|
(219
|
)
|
|
$
|
(80
|
)
|
Unrealized gains (losses) on available-for-sale securities for which OTTI has been recorded,
|
|
|
1,237
|
|
|
|
(14
|
)
|
|
|
1,223
|
|
Unrealized gains (losses) on held-to-maturity securities for which OTTI has been recorded, net of accretion
|
|
|
(50
|
)
|
|
|
50
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,326
|
|
|
$
|
(183
|
)
|
|
$
|
1,143
|
|
See notes to the unaudited consolidated financial statements.
FIRST FINANCIAL SERVICE CORPORATION
Consolidated Statements of Changes in
Stockholders’ Equity
Six Months Ended June 30, 2012
(Dollars In Thousands, Except Per Share
Amounts
(Unaudited)
|
|
Shares
|
|
|
Amount
|
|
|
Additional
Paid-in
|
|
|
Retained
Earnings/
(Accumulated
|
|
|
Accumulated
Other
Comprehensive
Income, Net of
|
|
|
|
|
|
|
Preferred
|
|
|
Common
|
|
|
Preferred
|
|
|
Common
|
|
|
Capital
|
|
|
Deficit)
|
|
|
Tax
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2012
|
|
|
20,000
|
|
|
|
4,749,415
|
|
|
$
|
19,889
|
|
|
$
|
4,749
|
|
|
$
|
35,450
|
|
|
$
|
(7,951
|
)
|
|
$
|
1,326
|
|
|
$
|
53,463
|
|
Net income/(loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,429
|
)
|
|
|
|
|
|
|
(4,429
|
)
|
Shares issued under dividend
reinvestment program
|
|
|
|
|
|
|
1,599
|
|
|
|
|
|
|
|
2
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
Stock issued for employee
benefit plans
|
|
|
|
|
|
|
21,635
|
|
|
|
|
|
|
|
22
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
39
|
|
Stock-based compensation
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92
|
|
|
|
|
|
|
|
|
|
|
|
92
|
|
Net change in unrealized
gains (losses) on securities available-for-sale,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(219
|
)
|
|
|
(219
|
)
|
Change in unrealized gains
(losses) on held-to-maturity securities for which an other-than-temporary impairment charge has been recorded
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
|
|
|
|
50
|
|
Change in unrealized gains
(losses) on securities available-for-sale for which a portion of an other-than-temporary impairment charge has been recognized
into earnings, net of reclassification
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14
|
)
|
|
|
(14
|
)
|
Dividends on preferred
stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(500
|
)
|
|
|
|
|
|
|
(500
|
)
|
Accretion
of preferred stock discount
|
|
|
-
|
|
|
|
-
|
|
|
|
27
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(27
|
)
|
|
|
-
|
|
|
|
-
|
|
Balance,
June 30, 2012
|
|
|
20,000
|
|
|
|
4,772,649
|
|
|
$
|
19,916
|
|
|
$
|
4,773
|
|
|
$
|
35,561
|
|
|
$
|
(12,907
|
)
|
|
$
|
1,143
|
|
|
$
|
48,486
|
|
See
notes to the unaudited consolidated financial
statements.
FIRST FINANCIAL SERVICE CORPORATION
Consolidated Statements of Cash Flows
(Dollars In Thousands)
(Unaudited)
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2012
|
|
|
2011
|
|
Operating Activities:
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
$
|
(4,429
|
)
|
|
$
|
(13,974
|
)
|
Adjustments to reconcile net loss to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
1,927
|
|
|
|
12,982
|
|
Depreciation on premises and equipment
|
|
|
771
|
|
|
|
862
|
|
Core deposit intangible amortization
|
|
|
127
|
|
|
|
153
|
|
Loss on low-income housing investments
|
|
|
183
|
|
|
|
-
|
|
Net amortization (accretion) on securities available-for-sale
|
|
|
(904
|
)
|
|
|
(2,873
|
)
|
Impairment loss on securities available-for-sale
|
|
|
-
|
|
|
|
25
|
|
Impairment loss on securities held-to-maturity
|
|
|
26
|
|
|
|
79
|
|
Gain on sale of investments available-for-sale
|
|
|
(1,309
|
)
|
|
|
(231
|
)
|
Loss on sale of investments available-for-sale
|
|
|
303
|
|
|
|
35
|
|
Loss on sale of investments held-to-maturity
|
|
|
-
|
|
|
|
3
|
|
Gain on sale of mortgage loans
|
|
|
(695
|
)
|
|
|
(556
|
)
|
Gain on sale of premises and equipment
|
|
|
(322
|
)
|
|
|
-
|
|
Gain on sale of real estate acquired through foreclosure
|
|
|
(613
|
)
|
|
|
(121
|
)
|
Gain on sale of real estate held for development
|
|
|
(175
|
)
|
|
|
-
|
|
Write-downs on real estate acquired through foreclosure
|
|
|
3,543
|
|
|
|
4,649
|
|
Origination of loans held for sale
|
|
|
(27,572
|
)
|
|
|
(34,232
|
)
|
Proceeds on sale of loans held for sale
|
|
|
35,289
|
|
|
|
35,468
|
|
Stock-based compensation expense
|
|
|
92
|
|
|
|
95
|
|
Prepaid FDIC premium
|
|
|
1,055
|
|
|
|
1,806
|
|
Changes in:
|
|
|
|
|
|
|
|
|
Cash surrender value of life insurance
|
|
|
(178
|
)
|
|
|
(171
|
)
|
Interest receivable
|
|
|
702
|
|
|
|
(1,545
|
)
|
Other assets
|
|
|
1,040
|
|
|
|
170
|
|
Interest payable
|
|
|
682
|
|
|
|
576
|
|
Accounts payable and other liabilities
|
|
|
267
|
|
|
|
309
|
|
Net cash from operating activities
|
|
|
9,810
|
|
|
|
3,509
|
|
|
|
|
|
|
|
|
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
Sales of securities available-for-sale
|
|
|
87,454
|
|
|
|
88,197
|
|
Sales of securities held-to-maturity
|
|
|
-
|
|
|
|
92
|
|
Purchases of securities available-for-sale
|
|
|
(140,232
|
)
|
|
|
(180,139
|
)
|
Maturities of securities available-for-sale
|
|
|
50,919
|
|
|
|
15,500
|
|
Maturities of securities held-to-maturity
|
|
|
58
|
|
|
|
7
|
|
Net change in loans
|
|
|
70,654
|
|
|
|
57,119
|
|
Sale of portfolio loans
|
|
|
10,693
|
|
|
|
-
|
|
Redemption of Federal Home Loan Bank stock
|
|
|
-
|
|
|
|
104
|
|
Investment in low-income housing projects
|
|
|
(24
|
)
|
|
|
(5,724
|
)
|
Net purchases of premises and equipment
|
|
|
(86
|
)
|
|
|
(292
|
)
|
Sales of premises and equipment
|
|
|
1,575
|
|
|
|
-
|
|
Sales of real estate acquired through foreclosure
|
|
|
4,356
|
|
|
|
2,036
|
|
Sales of real estate held for development
|
|
|
220
|
|
|
|
-
|
|
Net cash from investing activities
|
|
|
85,587
|
|
|
|
(23,100
|
)
|
|
|
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
Net change in deposits
|
|
|
(33,492
|
)
|
|
|
(46,726
|
)
|
Advance from Federal Home Loan Bank
|
|
|
-
|
|
|
|
337
|
|
Maturity of Federal Home Loan Bank advance
|
|
|
-
|
|
|
|
(25,000
|
)
|
Repayments to Federal Home Loan Bank
|
|
|
(70
|
)
|
|
|
(64
|
)
|
Issuance of common stock under dividend reinvestment program
|
|
|
4
|
|
|
|
2
|
|
Issuance of common stock for employee benefit plans
|
|
|
39
|
|
|
|
54
|
|
Net cash from financing activities
|
|
|
(33,519
|
)
|
|
|
(71,397
|
)
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) in cash and cash equivalents
|
|
|
61,878
|
|
|
|
(90,988
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
92,236
|
|
|
|
166,176
|
|
Cash and cash equivalents, end of period
|
|
$
|
154,114
|
|
|
$
|
75,188
|
|
|
|
|
|
|
|
|
|
|
Supplemental noncash disclosures:
|
|
|
|
|
|
|
|
|
Transfers from loans to real estate acquired through foreclosure and repossessed assets
|
|
$
|
15,541
|
|
|
$
|
9,438
|
|
Loans to facilitate sales of real estate owned and repossessed assets
|
|
$
|
208
|
|
|
$
|
2,101
|
|
Dividends accrued not paid on preferred stock
|
|
$
|
500
|
|
|
$
|
500
|
|
Transfers from loans to loans
held for sale in probable branch divestiture
|
|
$
|
65,242
|
|
|
$
|
-
|
|
See
notes to the unaudited consolidated financial
statements.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
|
1.
|
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
|
Basis of Presentation
– The accompanying unaudited consolidated financial statements include the accounts of First Financial Service Corporation
and its wholly owned subsidiary, First Federal Savings Bank. First Federal Savings Bank has three wholly owned subsidiaries, First
Service Corporation of Elizabethtown, Heritage Properties, LLC and First Federal Office Park, LLC. Unless the text clearly suggests
otherwise, references to “us,” “we,” or “our” include First Financial Service Corporation and its
direct and indirect wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated in
consolidation.
The accompanying unaudited consolidated
financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the three and six month periods ending June 30, 2012 are not necessarily indicative
of the results that may occur for the year ending December 31, 2012. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Corporation’s annual report on Form 10-K for the period ended December
31, 2011.
Reclassifications
–
Some items in the prior year financial statements were reclassified to conform to the current presentation. Reclassifications
had no effect on prior year operations or shareholder’s equity.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
2. REGULATORY MATTERS
In its 2012 Consent Order with
the FDIC and KDFI, the Bank agreed to achieve and maintain a Tier 1 capital ratio of 9.0% and a total risk-based capital ratio
of 12.0% by June 30, 2012. At June 30, 2012, we were not in compliance with the Tier 1 and total risk-based capital requirements.
We notified the bank regulatory agencies that the increased capital levels would not be achieved and anticipate that the FDIC and
KDFI will reevaluate our progress toward achieving the higher capital ratios at September 30, 2012.
The 2012 Consent Order requires
that if the Bank should be unable to reach the required capital levels by June 30, 2012, and the Bank receives written directions
from the FDIC and KDFI to do so, then the Bank would develop, adopt and implement within 30 days a written plan to sell or merge
itself into another federally insured financial institution. The 2012 Consent Order requires the Bank to continue to adhere to
the plans implemented in response to the 2011 Consent Order, and includes the substantive provisions of the 2011 Consent Order.
A copy of the March 9, 2012 Consent Order is included as Exhibit 10.8 to our 2011 Annual Report on Form 10-K filed March 30, 2012.
While the Bank did not
meet the mandated capital ratios by June 30, 2012, we have not received any written communications from the FDIC or KDFI
directing the Bank to develop, adopt and implement within 30 days a written plan to sell or merge itself into another
federally insured financial institution.
The Bank’s Consent Orders
with the FDIC and KDFI require us to obtain the consent of the Regional Director of the FDIC and the Commissioner of the KDFI to
declare and pay cash dividends to the Corporation. The Bank is also no longer allowed to accept, renew or rollover brokered deposits,
including deposits through the Certificate of Deposit Account Registry Service (CDARs) without first obtaining a written waiver
from our regulators.
On April 20, 2011, the Corporation
entered into a formal agreement with the Federal Reserve Bank of St. Louis, which requires the Corporation to obtain regulatory
approval before declaring any dividends. We also may not redeem shares or obtain additional borrowings without prior approval.
Bank regulatory agencies can
exercise discretion when an institution does not meet the 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.
In response to the 2011 Consent
Order, we engaged an investment banking firm with expertise in the financial services sector to assist with a review of all of
our strategic alternatives as we work to achieve the higher regulatory capital ratios.
One of these strategic alternatives
involved the sale of eight branches located outside of our core market. Effective after the close of business on July 6, 2012,
we have successfully executed the sale of four banking centers located in Corydon, Elizabeth, Lanesville and Georgetown, Indiana
to First Savings Bank, F.S.B. We received a 3.65% percent premium on the $102.3 million of consumer and commercial deposits at
closing. They assumed a total of approximately $115.4 million in non-brokered deposits, which included $13.1 million of government,
corporate, other financial institution and municipal deposits for which we received zero premium or discount. We also sold approximately
$30.4 million in performing loans at a discount of 0.80%. The consummated transaction resulted in a one-time gain of approximately
$2.9 million.
We entered into a Branch
Purchase Agreement with First Security Bank of Owensboro, Inc., the banking subsidiary of First Security, Inc., headquartered
in Owensboro, Kentucky on May 15, 2012. The agreement provides for the sale of our four banking centers in Louisville,
Kentucky to First Security. Under the terms of the Agreement, First Security will assume approximately $210.2 million of
deposit liabilities. First Security will pay a deposit premium of approximately $2.9 million comprised of a premium of 2.00%
on approximately $153.2 million of deposits and a premium ranging from 0% to 1.00% on approximately $57.0 million of other
deposits. First Security will also assume performing loans related to the four branches at a 1.00% discount. The loans being
assumed totaled approximately $70.9 million at June 30, 2012. The sale is expected to be completed in the third quarter of
2012 subject to First Security raising additional capital, regulatory approval and other customary closing conditions.
The divestiture of our Indiana
franchise, combined with the impending sale of our four Louisville banking centers, is projected to increase our Tier I capital
ratio from 5.73% to over 8.50% and increase our total risk-based capital ratio from 10.68% to over 12.00% based on June 30, 2012
financial information. The sale of our four Louisville banking centers is expected to close late in the third quarter of 2012.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
2. REGULATORY MATTERS – (Continued)
Additionally, we
continue reducing our non-interest costs where possible to offset the increased credit costs associated with other real
estate and non-performing loans while taking into consideration the resources necessary to execute our strategies. We have
suspended the annual employee stock ownership contribution, frozen most executive management compensation the past three
years and into 2012, frozen most officer compensation for the past year and into 2012, eliminated board of director fees,
reduced marketing expenses, community donation expenses, compensation expense through reductions in associates, and
implemented various other cost savings initiatives. Expense reductions for 2011 were $1.1 million and were approximately
$600,000 for the 2012 six month period. We are also in the process of evaluating the remaining terms on existing contracts in an
effort to identify expenses that can be eliminated in the near future. These efforts will remain ongoing.
On February 10, 2012, we announced
several changes to our management and the board of directors. In addition, on May 15, 2012 we announced the appointment of Frank
Perez as Chief Financial Officer of the Corporation and the Bank with responsibility for the overall financial functions. Mr. Perez
has over fifteen years of experience in the banking industry as well as experience with publicly traded institutions, capital markets,
and working with a troubled institution.
Our plans for 2012
include the following:
|
·
|
Continuing to research and evaluate all available strategic options to meet and maintain the required
regulatory capital levels and all of the other consent order issues for the Bank. Strategic alternatives include divesting of branch
offices, as noted earlier we have already sold four banking centers in the Indiana market and have a Branch Purchase Agreement
to sell our four banking centers in the Louisville market. Selling loans as an additional measure to reduce our asset size and
as a result improving our regulatory capital ratios. We have sold commercial real estate loans totaling $10.7 million, at par,
to First Capital Bank of Kentucky during the first half of 2012.
|
|
·
|
Continuing to serve our community banking customers and operate the Corporation and the Bank in
a safe and sound manner. We have worked diligently to maintain the strength of our retail and deposit franchise. The strength of
this franchise contributes to earnings to help withstand our credit quality issues. In addition, the inherent value of the retail
franchise will provide value to the Bank to accomplish the various capital initiatives. As of June 30, 2011 data, we rank in the
top three in four of the five counties that we serve. This excludes the Indiana market where we no longer have a presence and the
Louisville market in anticipation of the pending sale of those branch centers in September. We rank first in Hardin County and
Meade County with market share of approximately 26% and 51%, respectively.
|
|
·
|
Continuing to reduce our lending concentration in commercial real estate through natural roll off
and we have loan diversification initiatives in place that should improve the Bank’s loan portfolio. The mortgage and consumer
lending operations continue to maintain strong credit quality metrics throughout the economic downturn. The diversification of
the loan portfolio includes an increased emphasis on retail lending, small business lending, and Small Business Administration
(“SBA”) lending which should provide a boost to non-interest fee income. We have already allocated and reallocated
resources that should contribute to the successful execution of all of these efforts.
|
|
·
|
We have enhanced the resources dedicated to special asset dispositions both on a permanent and
temporary basis. This is a necessary step as we increase our ongoing efforts to speed up the disposal of our problem assets. This
will significantly reduce the involvement of our commercial lenders in the special asset area allowing them to shift their focus
to their existing loan customer base and to generate new business that will support our diversification efforts while stemming
off some of the loan roll off. The new lenders that have been hired this year bring a significant amount of experience in real
estate and commercial and industrial lending.
|
|
·
|
We have added an experienced asset liability
management consultant as an additional resource to support our efforts as we restructure the balance sheet, minimize our interest rate risk,
and improve the net interest margin.
|
|
·
|
Subsequent to the quarter ending June 30, 2012, we entered into sales contracts on nine other real
estate owned properties totaling $20.5 million set to close during the third quarter of 2012, indicating a continued interest in
our other real estate owned properties. One of these sales consists of a bulk sale of fourteen properties which we are carrying
at a value of $16.2 million. The net proceeds after sales expenses will be $15.1 million, resulting in a $1.1 million
charge against these properties for the quarter ending June 30, 2012. We incurred higher than usual commission and closing
costs due to the size of the transaction. If sold on an individual basis, it is unlikely that we would have taken this type
of charge against these properties. However, if this transaction goes through under these terms, it would represent a 56%
decrease to our other real estate owned properties balance of $36.5 million as of June 30, 2012.
|
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
The amortized cost basis and fair
values of securities are as follows:
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
(Dollars in thousands)
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair
Value
|
|
Securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
and agencies
|
|
$
|
12,994
|
|
|
$
|
32
|
|
|
$
|
-
|
|
|
$
|
13,026
|
|
Government-sponsored mortgage-backed residential
|
|
|
278,751
|
|
|
|
3,498
|
|
|
|
(401
|
)
|
|
|
281,848
|
|
State and municipal
|
|
|
12,575
|
|
|
|
1,391
|
|
|
|
-
|
|
|
|
13,966
|
|
Corporate bonds
|
|
|
8,196
|
|
|
|
-
|
|
|
|
(14
|
)
|
|
|
8,182
|
|
Trust
preferred securities
|
|
|
1,071
|
|
|
|
-
|
|
|
|
(805
|
)
|
|
|
266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
313,587
|
|
|
$
|
4,921
|
|
|
$
|
(1,220
|
)
|
|
$
|
317,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and agencies
|
|
$
|
24,993
|
|
|
$
|
35
|
|
|
$
|
-
|
|
|
$
|
25,028
|
|
Government-sponsored mortgage-backed residential
|
|
|
261,506
|
|
|
|
3,389
|
|
|
|
(204
|
)
|
|
|
264,691
|
|
State and municipal
|
|
|
22,270
|
|
|
|
1,524
|
|
|
|
-
|
|
|
|
23,794
|
|
Trust
preferred securities
|
|
|
1,048
|
|
|
|
-
|
|
|
|
(784
|
)
|
|
|
264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
309,817
|
|
|
$
|
4,948
|
|
|
$
|
(988
|
)
|
|
$
|
313,777
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrecognized
|
|
|
Unrecognized
|
|
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair
Value
|
|
Securities held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust preferred
securities
|
|
$
|
16
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
16
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust preferred securities
|
|
$
|
24
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
24
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
24
|
|
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
|
3.
|
SECURITIES – (Continued)
|
The amortized cost and fair
value of securities at June 30, 2012, by contractual maturity, are shown below. Securities not due at a single maturity date,
primarily mortgage-backed securities, are shown separately.
|
|
Available
for Sale
|
|
|
Held-to-Maturity
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
(Dollars in thousands)
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due after
one year through five years
|
|
$
|
8,196
|
|
|
$
|
8,182
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Due after ten years
|
|
|
26,640
|
|
|
|
27,258
|
|
|
|
16
|
|
|
|
16
|
|
Government-sponsored
mortgage-backed residential
|
|
|
278,751
|
|
|
|
281,848
|
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
313,587
|
|
|
$
|
317,288
|
|
|
$
|
16
|
|
|
$
|
16
|
|
The following schedule shows
the proceeds from sales of available-for-sale securities and the gross realized gains and losses on those sales:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from
sales
|
|
$
|
57,733
|
|
|
$
|
72,018
|
|
|
$
|
87,454
|
|
|
$
|
88,289
|
|
Gross realized gains
|
|
|
598
|
|
|
|
162
|
|
|
|
1,309
|
|
|
|
231
|
|
Gross realized losses
|
|
|
303
|
|
|
|
38
|
|
|
|
303
|
|
|
|
38
|
|
Investment securities pledged
to secure public deposits and FHLB advances had an amortized cost of $131.9 million and fair value of $134.3 million at June 30,
2012 and a $119.1 million amortized cost and fair value of $121.1 million at December 31, 2011.
Securities with unrealized losses
at June 30, 2012 and December 31, 2011 aggregated by major security type and length of time in a continuous unrealized loss position
are as follows:
June 30, 2012
|
|
Less
than 12 Months
|
|
|
12
Months or More
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
Description of Securities
|
|
Value
|
|
|
Loss
|
|
|
Value
|
|
|
Loss
|
|
|
Value
|
|
|
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government-sponsored mortgage-backed
residential
|
|
$
|
83,877
|
|
|
$
|
(401
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
83,877
|
|
|
$
|
(401
|
)
|
Corporate bonds
|
|
|
8,182
|
|
|
|
(14
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
8,182
|
|
|
|
(14
|
)
|
Trust
preferred securities
|
|
|
-
|
|
|
|
-
|
|
|
|
266
|
|
|
|
(805
|
)
|
|
|
266
|
|
|
|
(805
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
temporarily impaired
|
|
$
|
92,059
|
|
|
$
|
(415
|
)
|
|
$
|
266
|
|
|
$
|
(805
|
)
|
|
$
|
92,325
|
|
|
$
|
(1,220
|
)
|
December 31, 2011
|
|
Less than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
Description of Securities
|
|
Value
|
|
|
Loss
|
|
|
Value
|
|
|
Loss
|
|
|
Value
|
|
|
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government-sponsored mortgage-backed
residential
|
|
$
|
43,911
|
|
|
$
|
(204
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
43,911
|
|
|
$
|
(204
|
)
|
Trust
preferred securities
|
|
|
-
|
|
|
|
-
|
|
|
|
264
|
|
|
|
(784
|
)
|
|
|
264
|
|
|
|
(784
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
temporarily impaired
|
|
$
|
43,911
|
|
|
$
|
(204
|
)
|
|
$
|
264
|
|
|
$
|
(784
|
)
|
|
$
|
44,175
|
|
|
$
|
(988
|
)
|
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
|
3.
|
SECURITIES – (Continued)
|
We evaluate investment securities
with significant declines in fair value on a quarterly basis to determine whether they should be considered other-than-temporarily
impaired under current accounting guidance, which generally provides that if a security is in an unrealized loss position, whether
due to general market conditions or industry or issuer-specific factors, the holder of the securities must assess whether the
impairment is other-than-temporary.
Accounting guidance requires
entities to split other than temporary impairment charges between credit losses (i.e., the loss based on the entity’s estimate
of the decrease in cash flows, including those that result from expected voluntary prepayments), which are charged to earnings,
and the remainder of the impairment charge (non-credit component) to accumulated other comprehensive income. This requirement
pertains to both securities held to maturity and securities available for sale.
The unrealized losses on our
government sponsored mortgage-backed residential securities and corporate bonds were a result of changes in interest rates for
fixed-rate securities where the interest rate received is less than the current rate available for new offerings of similar securities.
Because the decline in market value is attributable to changes in interest rates and not credit quality, and because we do not
intend to sell and it is more likely than not that we will not be required to sell these investments until recovery of fair value,
which may be maturity, we do not consider these investments to be other-than-temporarily impaired at June 30, 2012.
As discussed in Note 9 - Fair
Value, the fair value of our portfolio of trust preferred securities, is significantly below the amortized cost. There
is limited trading in trust preferred securities and the majority of holders of such instruments have elected not to participate
in the market unless they are required to sell as a result of liquidation, bankruptcy, or other forced or distressed conditions.
To determine if the five trust
preferred securities were other than temporarily impaired as of June 30, 2012, we used a discounted cash flow analysis. The
cash flow models were used to determine if the current present value of the cash flows expected on each security were still equivalent
to the original cash flows projected on the security when purchased. The cash flow analysis takes into consideration
assumptions for prepayments, defaults and deferrals for the underlying pool of banks, insurance companies and REITs.
Management works with independent
third parties to identify its best estimate of the cash flow expected to be collected. If this estimate results in a present value
of expected cash flows that is less than the amortized cost basis of a security (that is, credit loss exists), an other than temporary
impairment is considered to have occurred. If there is no credit loss, any impairment is considered temporary. The cash flow analysis
we performed included the following general assumptions:
|
·
|
We
assume default rates
on individual entities
behind the pools
based on Fitch ratings
for financial institutions
and A.M. Best ratings
for insurance companies.
These ratings are
used to predict
the default rates
for the next several
quarters. Two of
the trust preferred
securities hold
a limited number
of real estate investment
trusts (REITs) in
their pools. REITs
are evaluated on
an individual basis
to predict future
default rates.
|
|
·
|
We
assume that annual
defaults for the
remaining life of
each security will
be between 37.5
and 100 basis points.
|
|
·
|
We
assume a recovery
rate of 40% on PreTSL
IV and 15% on the
remaining trust
preferred securities
on deferrals after
two years.
|
|
·
|
We
assume 1% prepayments
through the five
year par call and
then 1% per annum to account for the
potential prepayments
of large banks under
the new Dodd Frank
legislation.
|
|
·
|
Our
securities have
been modeled using
the above assumptions
by FTN Financial
using the forward
LIBOR curve plus
original spread
to discount projected
cash flows to present
values.
|
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
|
3.
|
SECURITIES – (Continued)
|
Additionally, in making our determination, we considered
all available market information that could be obtained without undue cost and effort, and considered the unique characteristics
of each trust preferred security individually by assessing the available market information and the various risks associated with
that security including:
|
·
|
Valuation estimates
provided by our
investment broker;
|
|
·
|
The amount of
fair value decline;
|
|
·
|
How long the
decline in fair
value has existed;
|
|
·
|
Significant
rating agency changes
on the issuer;
|
|
·
|
Level of interest
rates and any movement
in pricing for credit
and other risks;
|
|
·
|
Information
about the performance
of the underlying
institutions that
issued the debt
instruments, such
as net income, return
on equity, capital
adequacy, non-performing
assets, Texas ratios,
etc;
|
|
·
|
Our intent to
sell the security
or whether it is
more likely than
not that we will
be required to sell
the security before
its anticipated
recovery; and
|
|
·
|
Other relevant
observable inputs.
|
The following table details
the five debt securities with other-than-temporary impairment at June 30, 2012 and the related credit losses recognized in earnings
during the six months ended June 30, 2012:
|
|
|
|
|
Moody’s
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Current
|
|
|
|
|
|
|
|
|
|
Credit
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
Deferrals and
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
Ratings
|
|
|
Moody’s
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
Deferrals
|
|
|
Defaults
|
|
|
Year to Date
|
|
|
|
|
|
|
When
|
|
|
Credit
|
|
|
Par
|
|
|
Amortized
|
|
|
Fair
|
|
|
and
|
|
|
to Current
|
|
|
OTTI
|
|
Security
|
|
Tranche
|
|
|
Purchased
|
|
|
Ratings
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
Defaults
|
|
|
Collateral
|
|
|
Recognized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Term Securities IV
|
|
Mezzanine
|
|
|
A3
|
|
|
Ca
|
|
|
$
|
244
|
|
|
$
|
122
|
|
|
$
|
111
|
|
|
$
|
18,000
|
|
|
|
27
|
%
|
|
$
|
-
|
|
Preferred Term Securities
VI
|
|
Mezzanine
|
|
|
A1
|
|
|
Ca
|
|
|
|
208
|
|
|
|
16
|
|
|
|
16
|
|
|
|
30,000
|
|
|
|
74
|
%
|
|
|
26
|
|
Preferred Term Securities
XV B1
|
|
Mezzanine
|
|
|
A2
|
|
|
C
|
|
|
|
1,065
|
|
|
|
445
|
|
|
|
125
|
|
|
|
195,200
|
|
|
|
34
|
%
|
|
|
-
|
|
Preferred Term Securities
XXI C2
|
|
Mezzanine
|
|
|
A3
|
|
|
C
|
|
|
|
1,156
|
|
|
|
415
|
|
|
|
30
|
|
|
|
209,890
|
|
|
|
29
|
%
|
|
|
-
|
|
Preferred
Term Securities XXII C1
|
|
Mezzanine
|
|
|
A3
|
|
|
Ca
|
|
|
|
527
|
|
|
|
89
|
|
|
|
-
|
|
|
|
388,000
|
|
|
|
30
|
%
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,200
|
|
|
$
|
1,087
|
|
|
$
|
282
|
|
|
|
|
|
|
|
|
|
|
$
|
26
|
|
Preferred Term Security VI
was called for early redemption in July 2012. We received principal and interest of $209,000 and recorded a gain on sale of $192,000.
The table below presents a roll-forward
of the credit losses recognized in earnings since the acquisition of the above trust preferred securities:
(Dollars in thousands)
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$
|
2,104
|
|
|
$
|
1,947
|
|
|
$
|
2,078
|
|
|
$
|
1,910
|
|
Increases
to the amount related to the credit loss for which other-than-temporary impairment was previously recognized
|
|
|
-
|
|
|
|
67
|
|
|
|
26
|
|
|
|
104
|
|
Ending balance
|
|
$
|
2,104
|
|
|
$
|
2,014
|
|
|
$
|
2,104
|
|
|
$
|
2,014
|
|
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
Loans are summarized as follows:
|
|
June 30,
|
|
|
December 31,
|
|
(Dollars in thousands)
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
24,865
|
|
|
$
|
30,135
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
Land Development
|
|
|
29,772
|
|
|
|
35,924
|
|
Building Lots
|
|
|
2,742
|
|
|
|
3,880
|
|
Other
|
|
|
349,301
|
|
|
|
418,981
|
|
Real estate construction
|
|
|
3,950
|
|
|
|
4,925
|
|
Residential mortgage
|
|
|
143,273
|
|
|
|
151,866
|
|
Consumer and home equity
|
|
|
64,197
|
|
|
|
69,971
|
|
Indirect consumer
|
|
|
19,500
|
|
|
|
21,892
|
|
|
|
|
637,600
|
|
|
|
737,574
|
|
Less:
|
|
|
|
|
|
|
|
|
Loans held for sale in probable branch divestiture
|
|
|
(101,325
|
)
|
|
|
(46,112
|
)
|
Net deferred loan origination fees
|
|
|
(109
|
)
|
|
|
(209
|
)
|
Allowance for loan losses
|
|
|
(15,300
|
)
|
|
|
(17,181
|
)
|
|
|
|
(116,734
|
)
|
|
|
(63,502
|
)
|
|
|
|
|
|
|
|
|
|
Net Loans
|
|
$
|
520,866
|
|
|
$
|
674,072
|
|
The following tables present
the activity in the allowance for loan losses by portfolio segment for the quarter and six months ending June 30, 2012 and 2011:
Three Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2012
|
|
|
|
|
Commercial
|
|
|
Real Estate
|
|
|
Residential
|
|
|
Consumer &
|
|
|
Indirect
|
|
|
|
|
|
|
Commercial
|
|
|
Real
Estate
|
|
|
Construction
|
|
|
Mortgage
|
|
|
Home
Equity
|
|
|
Consumer
|
|
|
Total
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
Balance
|
|
$
|
1,723
|
|
|
$
|
13,628
|
|
|
$
|
103
|
|
|
$
|
882
|
|
|
$
|
643
|
|
|
$
|
350
|
|
|
$
|
17,329
|
|
Provision for loan losses
|
|
|
(255
|
)
|
|
|
1,189
|
|
|
|
(14
|
)
|
|
|
(34
|
)
|
|
|
23
|
|
|
|
6
|
|
|
|
915
|
|
Allowance associated
with probable branch divestitures
|
|
|
(25
|
)
|
|
|
(581
|
)
|
|
|
-
|
|
|
|
(14
|
)
|
|
|
(62
|
)
|
|
|
-
|
|
|
|
(682
|
)
|
Charge-offs
|
|
|
-
|
|
|
|
(2,191
|
)
|
|
|
-
|
|
|
|
(31
|
)
|
|
|
(102
|
)
|
|
|
(55
|
)
|
|
|
(2,379
|
)
|
Recoveries
|
|
|
40
|
|
|
|
35
|
|
|
|
-
|
|
|
|
-
|
|
|
|
23
|
|
|
|
19
|
|
|
|
117
|
|
Total
ending allowance balance
|
|
$
|
1,483
|
|
|
$
|
12,080
|
|
|
$
|
89
|
|
|
$
|
803
|
|
|
$
|
525
|
|
|
$
|
320
|
|
|
$
|
15,300
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2012
|
|
|
|
|
Commercial
|
|
|
Real Estate
|
|
|
Residential
|
|
|
Consumer &
|
|
|
Indirect
|
|
|
|
|
|
|
Commercial
|
|
|
Real
Estate
|
|
|
Construction
|
|
|
Mortgage
|
|
|
Home
Equity
|
|
|
Consumer
|
|
|
Total
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
Balance
|
|
$
|
1,422
|
|
|
$
|
13,727
|
|
|
$
|
103
|
|
|
$
|
922
|
|
|
$
|
610
|
|
|
$
|
397
|
|
|
$
|
17,181
|
|
Provision for loan losses
|
|
|
222
|
|
|
|
1,687
|
|
|
|
(14
|
)
|
|
|
(52
|
)
|
|
|
98
|
|
|
|
(14
|
)
|
|
|
1,927
|
|
Allowance associated
with probable branch divestitures
|
|
|
(25
|
)
|
|
|
(581
|
)
|
|
|
-
|
|
|
|
(6
|
)
|
|
|
(57
|
)
|
|
|
-
|
|
|
|
(669
|
)
|
Charge-offs
|
|
|
(187
|
)
|
|
|
(2,804
|
)
|
|
|
-
|
|
|
|
(62
|
)
|
|
|
(176
|
)
|
|
|
(99
|
)
|
|
|
(3,328
|
)
|
Recoveries
|
|
|
51
|
|
|
|
51
|
|
|
|
-
|
|
|
|
1
|
|
|
|
50
|
|
|
|
36
|
|
|
|
189
|
|
Total
ending allowance balance
|
|
$
|
1,483
|
|
|
$
|
12,080
|
|
|
$
|
89
|
|
|
$
|
803
|
|
|
$
|
525
|
|
|
$
|
320
|
|
|
$
|
15,300
|
|
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
Three Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011
|
|
|
|
|
Commercial
|
|
|
Real Estate
|
|
|
Residential
|
|
|
Consumer &
|
|
|
Indirect
|
|
|
|
|
|
|
Commercial
|
|
|
Real
Estate
|
|
|
Construction
|
|
|
Mortgage
|
|
|
Home
Equity
|
|
|
Consumer
|
|
|
Total
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
Balance
|
|
$
|
1,679
|
|
|
$
|
20,536
|
|
|
$
|
104
|
|
|
$
|
776
|
|
|
$
|
742
|
|
|
$
|
754
|
|
|
$
|
24,591
|
|
Provision for loan losses
|
|
|
(225
|
)
|
|
|
9,655
|
|
|
|
-
|
|
|
|
131
|
|
|
|
(29
|
)
|
|
|
(15
|
)
|
|
|
9,517
|
|
Charge-offs
|
|
|
(100
|
)
|
|
|
(16,068
|
)
|
|
|
(9
|
)
|
|
|
(205
|
)
|
|
|
(38
|
)
|
|
|
(56
|
)
|
|
|
(16,476
|
)
|
Recoveries
|
|
|
17
|
|
|
|
10
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15
|
|
|
|
34
|
|
|
|
76
|
|
Total
ending allowance balance
|
|
$
|
1,371
|
|
|
$
|
14,133
|
|
|
$
|
95
|
|
|
$
|
702
|
|
|
$
|
690
|
|
|
$
|
717
|
|
|
$
|
17,708
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011
|
|
|
|
|
Commercial
|
|
|
Real Estate
|
|
|
Residential
|
|
|
Consumer &
|
|
|
Indirect
|
|
|
|
|
|
|
Commercial
|
|
|
Real
Estate
|
|
|
Construction
|
|
|
Mortgage
|
|
|
Home
Equity
|
|
|
Consumer
|
|
|
Total
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
Balance
|
|
$
|
1,657
|
|
|
$
|
18,595
|
|
|
$
|
158
|
|
|
$
|
751
|
|
|
$
|
708
|
|
|
$
|
796
|
|
|
$
|
22,665
|
|
Provision for loan losses
|
|
|
(203
|
)
|
|
|
13,006
|
|
|
|
-
|
|
|
|
174
|
|
|
|
55
|
|
|
|
(50
|
)
|
|
|
12,982
|
|
Charge-offs
|
|
|
(142
|
)
|
|
|
(17,684
|
)
|
|
|
(63
|
)
|
|
|
(224
|
)
|
|
|
(136
|
)
|
|
|
(87
|
)
|
|
|
(18,336
|
)
|
Recoveries
|
|
|
59
|
|
|
|
216
|
|
|
|
-
|
|
|
|
1
|
|
|
|
63
|
|
|
|
58
|
|
|
|
397
|
|
Total
ending allowance balance
|
|
$
|
1,371
|
|
|
$
|
14,133
|
|
|
$
|
95
|
|
|
$
|
702
|
|
|
$
|
690
|
|
|
$
|
717
|
|
|
$
|
17,708
|
|
We did not implement any changes
to our allowance related accounting policies or methodology during the current period.
The following table presents
the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment
method as of June 30, 2012 and 2011 and December 31, 2011:
June 30, 2012
|
|
|
|
|
Commercial
|
|
|
Real Estate
|
|
|
Residential
|
|
|
Consumer &
|
|
|
Indirect
|
|
|
|
|
|
|
Commercial
|
|
|
Real
Estate
|
|
|
Construction
|
|
|
Mortgage
|
|
|
Home
Equity
|
|
|
Consumer
|
|
|
Total
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending allowance balance
attributable to loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually
evaluated for impairment
|
|
$
|
332
|
|
|
$
|
4,609
|
|
|
|
-
|
|
|
$
|
383
|
|
|
$
|
126
|
|
|
$
|
6
|
|
|
$
|
5,456
|
|
Collectively evaluated
for impairment
|
|
|
1,151
|
|
|
|
7,471
|
|
|
|
89
|
|
|
|
420
|
|
|
|
399
|
|
|
|
314
|
|
|
|
9,844
|
|
Loans
held for sale
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
ending allowance balance
|
|
$
|
1,483
|
|
|
$
|
12,080
|
|
|
|
89
|
|
|
$
|
803
|
|
|
$
|
525
|
|
|
$
|
320
|
|
|
$
|
15,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated
for impairment
|
|
$
|
1,396
|
|
|
$
|
56,493
|
|
|
$
|
-
|
|
|
$
|
1,098
|
|
|
$
|
302
|
|
|
$
|
38
|
|
|
$
|
59,327
|
|
Loans collectively evaluated
for impairment
|
|
|
23,469
|
|
|
|
325,322
|
|
|
|
3,950
|
|
|
|
142,175
|
|
|
|
63,895
|
|
|
|
19,462
|
|
|
|
578,273
|
|
Loans
held for sale
|
|
|
(2,520
|
)
|
|
|
(58,767
|
)
|
|
|
-
|
|
|
|
(29,232
|
)
|
|
|
(10,806
|
)
|
|
|
-
|
|
|
|
(101,325
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
ending loans balance
|
|
$
|
22,345
|
|
|
$
|
323,048
|
|
|
$
|
3,950
|
|
|
$
|
114,041
|
|
|
$
|
53,391
|
|
|
$
|
19,500
|
|
|
$
|
536,275
|
|
December 31, 2011
|
|
|
|
|
Commercial
|
|
|
Real Estate
|
|
|
Residential
|
|
|
Consumer &
|
|
|
Indirect
|
|
|
|
|
|
|
Commercial
|
|
|
Real
Estate
|
|
|
Construction
|
|
|
Mortgage
|
|
|
Home
Equity
|
|
|
Consumer
|
|
|
Total
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending allowance balance attributable to loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
410
|
|
|
$
|
3,403
|
|
|
|
-
|
|
|
$
|
481
|
|
|
$
|
109
|
|
|
$
|
39
|
|
|
$
|
4,442
|
|
Collectively evaluated for impairment
|
|
|
1,012
|
|
|
|
10,324
|
|
|
|
103
|
|
|
|
441
|
|
|
|
501
|
|
|
|
358
|
|
|
|
12,739
|
|
Loans held for sale
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ending allowance
balance
|
|
$
|
1,422
|
|
|
$
|
13,727
|
|
|
|
103
|
|
|
$
|
922
|
|
|
$
|
610
|
|
|
$
|
397
|
|
|
$
|
17,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated
for impairment
|
|
$
|
3,230
|
|
|
$
|
61,345
|
|
|
$
|
-
|
|
|
$
|
1,681
|
|
|
$
|
193
|
|
|
$
|
123
|
|
|
$
|
66,572
|
|
Loans collectively evaluated
for impairment
|
|
|
26,905
|
|
|
|
397,440
|
|
|
|
4,925
|
|
|
|
150,185
|
|
|
|
69,778
|
|
|
|
21,769
|
|
|
|
671,002
|
|
Loans
held for sale
|
|
|
(18
|
)
|
|
|
(11,411
|
)
|
|
|
-
|
|
|
|
(29,520
|
)
|
|
|
(5,163
|
)
|
|
|
-
|
|
|
|
(46,112
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ending loans balance
|
|
$
|
30,117
|
|
|
$
|
447,374
|
|
|
$
|
4,925
|
|
|
$
|
122,346
|
|
|
$
|
64,808
|
|
|
$
|
21,892
|
|
|
$
|
691,462
|
|
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
June 30, 2011
|
|
|
|
|
Commercial
|
|
|
Real Estate
|
|
|
Residential
|
|
|
Consumer &
|
|
|
Indirect
|
|
|
|
|
|
|
Commercial
|
|
|
Real
Estate
|
|
|
Construction
|
|
|
Mortgage
|
|
|
Home
Equity
|
|
|
Consumer
|
|
|
Total
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending allowance balance attributable to loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
566
|
|
|
$
|
6,796
|
|
|
|
-
|
|
|
$
|
220
|
|
|
$
|
130
|
|
|
$
|
33
|
|
|
$
|
7,745
|
|
Collectively evaluated
for impairment
|
|
|
805
|
|
|
|
7,337
|
|
|
|
95
|
|
|
|
482
|
|
|
|
560
|
|
|
|
684
|
|
|
|
9,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ending allowance
balance
|
|
$
|
1,371
|
|
|
$
|
14,133
|
|
|
|
95
|
|
|
$
|
702
|
|
|
$
|
690
|
|
|
$
|
717
|
|
|
$
|
17,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated for impairment
|
|
$
|
4,102
|
|
|
$
|
78,005
|
|
|
$
|
998
|
|
|
$
|
1,311
|
|
|
$
|
247
|
|
|
$
|
176
|
|
|
$
|
84,839
|
|
Loans collectively evaluated for impairment
|
|
|
27,331
|
|
|
|
425,295
|
|
|
|
6,358
|
|
|
|
156,084
|
|
|
|
74,278
|
|
|
|
25,563
|
|
|
|
714,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total ending loans balance
|
|
$
|
31,433
|
|
|
$
|
503,300
|
|
|
$
|
7,356
|
|
|
$
|
157,395
|
|
|
$
|
74,525
|
|
|
$
|
25,739
|
|
|
$
|
799,748
|
|
The following table presents
loans individually evaluated for impairment by class of loans as of June 30, 2012 and 2011 and December 31, 2011. The difference
between the unpaid principal balance and recorded investment represents partial write downs/charge offs taken on individual impaired
credits. The recorded investment and average recorded investment in loans excludes accrued interest receivable and loan origination
fees.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2012
|
|
|
June 30, 2012
|
|
June 30, 2012
|
|
Unpaid
|
|
|
|
|
|
Allowance for
|
|
|
Average
|
|
|
Interest
|
|
|
Cash Basis
|
|
|
Average
|
|
|
Interest
|
|
|
Cash Basis
|
|
|
|
Principal
|
|
|
Recorded
|
|
|
Loan Losses
|
|
|
Recorded
|
|
|
Income
|
|
|
Interest
|
|
|
Recorded
|
|
|
Income
|
|
|
Interest
|
|
(Dollars in thousands)
|
|
Balance
|
|
|
Investment
|
|
|
Allocated
|
|
|
Investment
|
|
|
Recognized
|
|
|
Recognized
|
|
|
Investment
|
|
|
Recognized
|
|
|
Recognized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With no related allowance
recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
1,111
|
|
|
$
|
991
|
|
|
$
|
-
|
|
|
$
|
944
|
|
|
$
|
31
|
|
|
$
|
31
|
|
|
$
|
1,347
|
|
|
$
|
53
|
|
|
$
|
53
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land Development
|
|
|
11,532
|
|
|
|
5,771
|
|
|
|
-
|
|
|
|
5,176
|
|
|
|
185
|
|
|
|
185
|
|
|
|
5,825
|
|
|
|
214
|
|
|
|
214
|
|
Building Lots
|
|
|
1,061
|
|
|
|
1,030
|
|
|
|
-
|
|
|
|
924
|
|
|
|
26
|
|
|
|
26
|
|
|
|
1,051
|
|
|
|
17
|
|
|
|
17
|
|
Other
|
|
|
32,183
|
|
|
|
28,726
|
|
|
|
-
|
|
|
|
30,254
|
|
|
|
1,120
|
|
|
|
1,120
|
|
|
|
30,948
|
|
|
|
1,173
|
|
|
|
1,173
|
|
Real Estate Construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Residential Mortgage
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Consumer and Home Equity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Indirect Consumer
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
407
|
|
|
|
405
|
|
|
|
332
|
|
|
|
477
|
|
|
|
16
|
|
|
|
16
|
|
|
|
676
|
|
|
|
27
|
|
|
|
27
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land Development
|
|
|
786
|
|
|
|
740
|
|
|
|
190
|
|
|
|
2,303
|
|
|
|
82
|
|
|
|
82
|
|
|
|
2,519
|
|
|
|
93
|
|
|
|
93
|
|
Building Lots
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
238
|
|
|
|
7
|
|
|
|
7
|
|
|
|
318
|
|
|
|
5
|
|
|
|
5
|
|
Other
|
|
|
20,226
|
|
|
|
20,226
|
|
|
|
4,419
|
|
|
|
15,576
|
|
|
|
576
|
|
|
|
576
|
|
|
|
16,101
|
|
|
|
610
|
|
|
|
610
|
|
Real Estate Construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Residential Mortgage
|
|
|
1,219
|
|
|
|
1,098
|
|
|
|
383
|
|
|
|
1,485
|
|
|
|
50
|
|
|
|
50
|
|
|
|
1,550
|
|
|
|
47
|
|
|
|
47
|
|
Consumer and Home Equity
|
|
|
324
|
|
|
|
302
|
|
|
|
126
|
|
|
|
332
|
|
|
|
10
|
|
|
|
10
|
|
|
|
285
|
|
|
|
6
|
|
|
|
6
|
|
Indirect
Consumer
|
|
|
38
|
|
|
|
38
|
|
|
|
6
|
|
|
|
46
|
|
|
|
-
|
|
|
|
-
|
|
|
|
71
|
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
68,887
|
|
|
$
|
59,327
|
|
|
$
|
5,456
|
|
|
$
|
57,755
|
|
|
$
|
2,103
|
|
|
$
|
2,103
|
|
|
$
|
60,691
|
|
|
$
|
2,246
|
|
|
$
|
2,246
|
|
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2011
|
|
Unpaid
|
|
|
|
|
|
Allowance for
|
|
|
|
Principal
|
|
|
Recorded
|
|
|
Loan Losses
|
|
(Dollars in thousands)
|
|
Balance
|
|
|
Investment
|
|
|
Allocated
|
|
|
|
|
|
|
|
|
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
2,154
|
|
|
$
|
2,154
|
|
|
$
|
-
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Land Development
|
|
|
12,719
|
|
|
|
7,124
|
|
|
|
-
|
|
Building Lots
|
|
|
3,662
|
|
|
|
1,305
|
|
|
|
-
|
|
Other
|
|
|
36,475
|
|
|
|
32,337
|
|
|
|
-
|
|
Real Estate Construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Residential Mortgage
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Consumer and Home Equity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Indirect Consumer
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
1,076
|
|
|
|
1,076
|
|
|
|
410
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Land Development
|
|
|
2,952
|
|
|
|
2,952
|
|
|
|
442
|
|
Building Lots
|
|
|
477
|
|
|
|
477
|
|
|
|
265
|
|
Other
|
|
|
17,518
|
|
|
|
17,150
|
|
|
|
2,696
|
|
Real Estate Construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Residential Mortgage
|
|
|
1,802
|
|
|
|
1,681
|
|
|
|
481
|
|
Consumer and Home Equity
|
|
|
193
|
|
|
|
193
|
|
|
|
109
|
|
Indirect Consumer
|
|
|
123
|
|
|
|
123
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
79,151
|
|
|
$
|
66,572
|
|
|
$
|
4,442
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011
|
|
|
June 30, 2011
|
|
June 30, 2011
|
|
Unpaid
|
|
|
|
|
|
Allowance for
|
|
|
Average
|
|
|
Interest
|
|
|
Cash Basis
|
|
|
Average
|
|
|
Interest
|
|
|
Cash Basis
|
|
|
|
Principal
|
|
|
Recorded
|
|
|
Loan Losses
|
|
|
Recorded
|
|
|
Income
|
|
|
Interest
|
|
|
Recorded
|
|
|
Income
|
|
|
Interest
|
|
(Dollars in thousands)
|
|
Balance
|
|
|
Investment
|
|
|
Allocated
|
|
|
Investment
|
|
|
Recognized
|
|
|
Recognized
|
|
|
Investment
|
|
|
Recognized
|
|
|
Recognized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
3,115
|
|
|
$
|
3,114
|
|
|
$
|
-
|
|
|
$
|
1,689
|
|
|
$
|
80
|
|
|
$
|
80
|
|
|
$
|
1,230
|
|
|
$
|
58
|
|
|
$
|
58
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land Development
|
|
|
22,165
|
|
|
|
13,012
|
|
|
|
-
|
|
|
|
9,019
|
|
|
|
188
|
|
|
|
188
|
|
|
|
7,869
|
|
|
|
164
|
|
|
|
164
|
|
Building Lots
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
|
40,640
|
|
|
|
38,311
|
|
|
|
-
|
|
|
|
41,228
|
|
|
|
1,680
|
|
|
|
1,680
|
|
|
|
38,263
|
|
|
|
1,593
|
|
|
|
1,593
|
|
Real Estate Construction
|
|
|
1,717
|
|
|
|
998
|
|
|
|
-
|
|
|
|
644
|
|
|
|
8
|
|
|
|
8
|
|
|
|
491
|
|
|
|
17
|
|
|
|
17
|
|
Residential Mortgage
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Consumer and Home Equity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Indirect Consumer
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
988
|
|
|
|
988
|
|
|
|
566
|
|
|
|
1,326
|
|
|
|
63
|
|
|
|
63
|
|
|
|
1,403
|
|
|
|
67
|
|
|
|
67
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land Development
|
|
|
817
|
|
|
|
817
|
|
|
|
1,042
|
|
|
|
9,481
|
|
|
|
198
|
|
|
|
198
|
|
|
|
12,096
|
|
|
|
253
|
|
|
|
253
|
|
Building Lots
|
|
|
3,663
|
|
|
|
1,654
|
|
|
|
348
|
|
|
|
2,542
|
|
|
|
7
|
|
|
|
7
|
|
|
|
2,838
|
|
|
|
5
|
|
|
|
5
|
|
Other
|
|
|
24,211
|
|
|
|
24,211
|
|
|
|
5,406
|
|
|
|
25,419
|
|
|
|
1,036
|
|
|
|
1,036
|
|
|
|
26,143
|
|
|
|
1,088
|
|
|
|
1,088
|
|
Real Estate Construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
361
|
|
|
|
13
|
|
|
|
13
|
|
Residential Mortgage
|
|
|
1,406
|
|
|
|
1,311
|
|
|
|
220
|
|
|
|
1,591
|
|
|
|
24
|
|
|
|
24
|
|
|
|
1,597
|
|
|
|
3
|
|
|
|
3
|
|
Consumer and Home Equity
|
|
|
247
|
|
|
|
247
|
|
|
|
130
|
|
|
|
273
|
|
|
|
-
|
|
|
|
-
|
|
|
|
294
|
|
|
|
-
|
|
|
|
-
|
|
Indirect Consumer
|
|
|
176
|
|
|
|
176
|
|
|
|
33
|
|
|
|
157
|
|
|
|
1
|
|
|
|
1
|
|
|
|
135
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
99,145
|
|
|
$
|
84,839
|
|
|
$
|
7,745
|
|
|
$
|
93,369
|
|
|
$
|
3,285
|
|
|
$
|
3,285
|
|
|
$
|
92,720
|
|
|
$
|
3,261
|
|
|
$
|
3,261
|
|
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
The following table presents the recorded investment
in restructured, nonaccrual and loans past due over 90 days still on accrual by class of loans as of June 30, 2012 and December
31, 2011.
|
|
|
|
|
|
|
|
Loans Past Due
|
|
|
|
|
June 30, 2012
|
|
|
|
|
|
|
|
Over 90 Days
|
|
|
Non-accrual
|
|
|
|
Restructured on
|
|
|
Restructured on
|
|
|
Still
|
|
|
excluding
|
|
(Dollars in thousands)
|
|
Non-Accrual Status
|
|
|
Accrual Status
|
|
|
Accruing
|
|
|
Restructured
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
-
|
|
|
$
|
1,273
|
|
|
|
-
|
|
|
$
|
672
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land Development
|
|
|
679
|
|
|
|
3,577
|
|
|
|
-
|
|
|
|
1,084
|
|
Building Lots
|
|
|
-
|
|
|
|
613
|
|
|
|
-
|
|
|
|
417
|
|
Other
|
|
|
21,165
|
|
|
|
4,326
|
|
|
|
-
|
|
|
|
13,138
|
|
Real Estate Construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Residential Mortgage
|
|
|
-
|
|
|
|
303
|
|
|
|
-
|
|
|
|
681
|
|
Consumer and Home Equity
|
|
|
-
|
|
|
|
24
|
|
|
|
-
|
|
|
|
183
|
|
Indirect Consumer
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
21,844
|
|
|
$
|
10,116
|
|
|
|
-
|
|
|
$
|
16,217
|
|
|
|
|
|
|
|
|
|
Loans Past Due
|
|
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
Over 90 Days
|
|
|
Non-accrual
|
|
|
|
Restructured on
|
|
|
Restructured on
|
|
|
Still
|
|
|
excluding
|
|
(Dollars in thousands)
|
|
Non-Accrual Status
|
|
|
Accrual Status
|
|
|
Accruing
|
|
|
Restructured
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
31
|
|
|
$
|
195
|
|
|
|
-
|
|
|
$
|
584
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land Development
|
|
|
1,705
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,184
|
|
Building Lots
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,782
|
|
Other
|
|
|
15,961
|
|
|
|
15,522
|
|
|
|
-
|
|
|
|
14,879
|
|
Real Estate Construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Residential Mortgage
|
|
|
335
|
|
|
|
305
|
|
|
|
-
|
|
|
|
969
|
|
Consumer and Home Equity
|
|
|
-
|
|
|
|
25
|
|
|
|
-
|
|
|
|
234
|
|
Indirect Consumer
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
18,032
|
|
|
$
|
16,047
|
|
|
|
-
|
|
|
$
|
21,718
|
|
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
The following table presents the aging of the unpaid
principal in past due loans as of June 30, 2012 and December 31, 2011 by class of loans:
June 30, 2012
|
|
30-59
|
|
|
60-89
|
|
|
Greater than
|
|
|
|
|
|
|
|
|
|
|
|
|
Days
|
|
|
Days
|
|
|
90 Days
|
|
|
Total
|
|
|
Loans Not
|
|
|
|
|
(Dollars in thousands)
|
|
Past Due
|
|
|
Past Due
|
|
|
Past Due
|
|
|
Past Due
|
|
|
Past Due
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
148
|
|
|
$
|
-
|
|
|
$
|
837
|
|
|
$
|
985
|
|
|
$
|
23,880
|
|
|
$
|
24,865
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land Development
|
|
|
1,950
|
|
|
|
352
|
|
|
|
1,617
|
|
|
|
3,919
|
|
|
|
25,853
|
|
|
|
29,772
|
|
Building Lots
|
|
|
-
|
|
|
|
-
|
|
|
|
417
|
|
|
|
417
|
|
|
|
2,325
|
|
|
|
2,742
|
|
Other
|
|
|
2,837
|
|
|
|
5,303
|
|
|
|
26,061
|
|
|
|
34,201
|
|
|
|
315,100
|
|
|
|
349,301
|
|
Real Estate Construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,950
|
|
|
|
3,950
|
|
Residential Mortgage
|
|
|
1,133
|
|
|
|
736
|
|
|
|
2,028
|
|
|
|
3,897
|
|
|
|
139,376
|
|
|
|
143,273
|
|
Consumer and Home Equity
|
|
|
341
|
|
|
|
93
|
|
|
|
322
|
|
|
|
756
|
|
|
|
63,441
|
|
|
|
64,197
|
|
Indirect Consumer
|
|
|
221
|
|
|
|
71
|
|
|
|
39
|
|
|
|
331
|
|
|
|
19,169
|
|
|
|
19,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (1)
|
|
$
|
6,630
|
|
|
$
|
6,555
|
|
|
$
|
31,321
|
|
|
$
|
44,506
|
|
|
$
|
593,094
|
|
|
$
|
637,600
|
|
(1) Includes loans held for sale in probable branch divestiture
December 31, 2011
|
|
30-59
|
|
|
60-89
|
|
|
Greater than
|
|
|
|
|
|
|
|
|
|
|
|
|
Days
|
|
|
Days
|
|
|
90 Days
|
|
|
Total
|
|
|
Loans Not
|
|
|
|
|
(Dollars in thousands)
|
|
Past Due
|
|
|
Past Due
|
|
|
Past Due
|
|
|
Past Due
|
|
|
Past Due
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
424
|
|
|
$
|
469
|
|
|
$
|
1,426
|
|
|
$
|
2,319
|
|
|
$
|
27,816
|
|
|
$
|
30,135
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land Development
|
|
|
-
|
|
|
|
-
|
|
|
|
2,420
|
|
|
|
2,420
|
|
|
|
33,504
|
|
|
|
35,924
|
|
Building Lots
|
|
|
-
|
|
|
|
-
|
|
|
|
1,782
|
|
|
|
1,782
|
|
|
|
2,098
|
|
|
|
3,880
|
|
Other
|
|
|
5,333
|
|
|
|
6,467
|
|
|
|
17,815
|
|
|
|
29,615
|
|
|
|
389,366
|
|
|
|
418,981
|
|
Real Estate Construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,925
|
|
|
|
4,925
|
|
Residential Mortgage
|
|
|
331
|
|
|
|
812
|
|
|
|
3,677
|
|
|
|
4,820
|
|
|
|
147,046
|
|
|
|
151,866
|
|
Consumer and Home Equity
|
|
|
310
|
|
|
|
261
|
|
|
|
638
|
|
|
|
1,209
|
|
|
|
68,762
|
|
|
|
69,971
|
|
Indirect Consumer
|
|
|
327
|
|
|
|
95
|
|
|
|
86
|
|
|
|
508
|
|
|
|
21,384
|
|
|
|
21,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (1)
|
|
$
|
6,725
|
|
|
$
|
8,104
|
|
|
$
|
27,844
|
|
|
$
|
42,673
|
|
|
$
|
694,901
|
|
|
$
|
737,574
|
|
(1) Includes loans held for sale in probable branch divestiture
and probable loan sale
Troubled Debt Restructurings:
We have allocated $859,000 and
$937,000 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of June 30,
2012 and December 31, 2011. We are not committed to lend additional funds to debtors whose loans have been modified in a troubled
debt restructuring. Specific reserves are generally assessed prior to loans being modified as a TDR, as most of these loans migrate
from our internal watch list and have been specifically reserved for as part of our normal reserving methodology.
During the quarter and
six month periods ending June 30, 2012, the terms of certain loans were modified as troubled debt restructurings. The
modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest
rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new
debt with similar risk; or a permanent reduction of the recorded investment in the loan.
Modifications involving a reduction
of the stated interest rate of the loan were for periods ranging from six months to one year. Modifications involving an extension
of the maturity date were for periods ranging from three to six months.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
The following tables present
loans by class modified as troubled debt restructurings that occurred during the periods ending June 30, 2012 and 2011:
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
June 30, 2012
|
|
|
June 30, 2011
|
|
|
|
|
|
|
Pre-Modification
|
|
|
Post-Modification
|
|
|
|
|
|
Pre-Modification
|
|
|
Post-Modification
|
|
|
|
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
|
Number
|
|
|
Recorded
|
|
|
Recorded
|
|
|
Number
|
|
|
Recorded
|
|
|
Recorded
|
|
(Dollars in thousands)
|
|
of Loans
|
|
|
Investment
|
|
|
Investment
|
|
|
of Loans
|
|
|
Investment
|
|
|
Investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Troubled Debt Restructurings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land Development
|
|
|
1
|
|
|
|
2,853
|
|
|
|
2,853
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Building Lots
|
|
|
2
|
|
|
|
613
|
|
|
|
613
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
|
3
|
|
|
|
1,088
|
|
|
|
1,088
|
|
|
|
2
|
|
|
|
10,133
|
|
|
|
10,133
|
|
Real Estate Construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Residential Mortgage
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
197
|
|
|
|
197
|
|
Consumer and Home Equity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Indirect Consumer
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
6
|
|
|
$
|
4,554
|
|
|
$
|
4,554
|
|
|
|
3
|
|
|
$
|
10,330
|
|
|
$
|
10,330
|
|
|
|
Six Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30, 2012
|
|
|
June 30, 2011
|
|
|
|
|
|
|
Pre-Modification
|
|
|
Post-Modification
|
|
|
|
|
|
Pre-Modification
|
|
|
Post-Modification
|
|
|
|
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
|
Number
|
|
|
Recorded
|
|
|
Recorded
|
|
|
Number
|
|
|
Recorded
|
|
|
Recorded
|
|
(Dollars in thousands)
|
|
of Loans
|
|
|
Investment
|
|
|
Investment
|
|
|
of Loans
|
|
|
Investment
|
|
|
Investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Troubled Debt Restructurings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
1
|
|
|
$
|
1,094
|
|
|
$
|
1,094
|
|
|
|
1
|
|
|
$
|
175
|
|
|
$
|
175
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land Development
|
|
|
3
|
|
|
|
4,251
|
|
|
|
4,110
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Building Lots
|
|
|
2
|
|
|
|
613
|
|
|
|
613
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
|
5
|
|
|
|
1,139
|
|
|
|
1,139
|
|
|
|
7
|
|
|
|
24,349
|
|
|
|
24,205
|
|
Real Estate Construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Residential Mortgage
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
652
|
|
|
|
557
|
|
Consumer and Home Equity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Indirect Consumer
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
11
|
|
|
$
|
7,097
|
|
|
$
|
6,956
|
|
|
|
10
|
|
|
$
|
25,176
|
|
|
$
|
24,937
|
|
The troubled
debt restructurings described above increased the allowance for loan losses allocated to troubled debt restructurings by
$67,000 and $316,000 for the three months ended June 30, 2012 and 2011, and by $256,000 and $3.9 million for the six months
ended June 30, 2012 and 2011. Typically, these loans have been allocated an allowance prior to their formal modification.
The troubled debt restructurings described above resulted in charge-offs of $141,000 for the three and six month
periods ended June 30, 2012 and $239,000 for the three and six month
periods ended June 30, 2011.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
The following tables present
loans by class modified as troubled debt restructurings for which there was a payment default within twelve months following the
modification during the periods ending June 30, 2012 and 2011:
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
June 30, 2012
|
|
|
June 30, 2011
|
|
|
|
Number
|
|
|
Recorded
|
|
|
Number
|
|
|
Recorded
|
|
(Dollars in thousands)
|
|
of Loans
|
|
|
Investment
|
|
|
of Loans
|
|
|
Investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Troubled Debt Restructurings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land Development
|
|
|
1
|
|
|
|
533
|
|
|
|
-
|
|
|
|
-
|
|
Building Lots
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
|
1
|
|
|
|
10,068
|
|
|
|
1
|
|
|
|
844
|
|
Real Estate Construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Residential Mortgage
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
361
|
|
Consumer and Home Equity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Indirect Consumer
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2
|
|
|
$
|
10,601
|
|
|
|
2
|
|
|
$
|
1,205
|
|
|
|
Six Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30, 2012
|
|
|
June 30, 2011
|
|
|
|
Number
|
|
|
Recorded
|
|
|
Number
|
|
|
Recorded
|
|
(Dollars in thousands)
|
|
of Loans
|
|
|
Investment
|
|
|
of Loans
|
|
|
Investment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Troubled Debt Restructurings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
-
|
|
|
$
|
-
|
|
|
|
1
|
|
|
$
|
8
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land Development
|
|
|
2
|
|
|
|
3,386
|
|
|
|
-
|
|
|
|
-
|
|
Building Lots
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
|
1
|
|
|
|
10,068
|
|
|
|
1
|
|
|
|
844
|
|
Real Estate Construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Residential Mortgage
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
361
|
|
Consumer and Home Equity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Indirect Consumer
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3
|
|
|
$
|
13,454
|
|
|
|
3
|
|
|
$
|
1,213
|
|
For disclosure purposes, a
loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. The troubled
debt restructurings that subsequently defaulted described above increased the allowance for loan losses by $309,000 and
$9,000 for the three months ended June 30, 2012 and 2011, and by $309,000 and $13,000 for the six months ended June 30, 2012
and 2011. The troubled debt restructurings described above resulted in charge-offs of $141,000 for the three and six
months periods ended June 30, 2012 and $220,000 for the three and six month periods ended June 30, 2011.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
Credit Quality Indicators:
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, among other factors. We
analyze loans individually by classifying the loans as to credit risk. This analysis includes commercial and commercial real estate
loans. We also evaluate credit quality on residential mortgage, consumer and home equity and indirect consumer loans based on
the aging status and payment activity of the loan. This analysis is performed on a monthly basis. We use the following definitions
for risk ratings:
Criticized:
Loans classified
as criticized have a potential weakness that deserves management’s close attention. If left uncorrected, these potential
weaknesses may result in deterioration of the repayment prospects for the loan or in our credit position at some future date.
Substandard:
Loans classified
as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged,
if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized
by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful:
Loans classified
as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses
make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable
and improbable.
Loss:
Loans classified
as loss are considered non-collectible and their continuance as bankable assets is not warranted.
Loans not meeting the criteria
above that are analyzed individually as part of the above described process are considered to be pass rated loans. Loans listed
as not rated are included in groups of homogeneous loans. For our residential mortgage, consumer and home equity, and indirect
consumer homogeneous loans, we also evaluate credit quality based on the aging status of the loan, which was previously presented,
and by payment activity.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
As of June 30, 2012 and December 31, 2011, and based
on the most recent analysis performed, the risk category of loans by class of loans is as follows:
June 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Not Rated
|
|
|
Pass
|
|
|
Criticized
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Loss
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
-
|
|
|
$
|
19,855
|
|
|
$
|
3,614
|
|
|
$
|
1,396
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
24,865
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land Development
|
|
|
-
|
|
|
|
18,505
|
|
|
|
4,756
|
|
|
|
6,511
|
|
|
|
-
|
|
|
|
-
|
|
|
|
29,772
|
|
Building Lots
|
|
|
-
|
|
|
|
1,190
|
|
|
|
522
|
|
|
|
1,030
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,742
|
|
Other
|
|
|
-
|
|
|
|
278,806
|
|
|
|
16,658
|
|
|
|
53,837
|
|
|
|
-
|
|
|
|
-
|
|
|
|
349,301
|
|
Real Estate Construction
|
|
|
-
|
|
|
|
3,950
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,950
|
|
Residential Mortgage
|
|
|
138,069
|
|
|
|
-
|
|
|
|
457
|
|
|
|
4,747
|
|
|
|
-
|
|
|
|
-
|
|
|
|
143,273
|
|
Consumer and Home Equity
|
|
|
62,587
|
|
|
|
-
|
|
|
|
696
|
|
|
|
914
|
|
|
|
-
|
|
|
|
-
|
|
|
|
64,197
|
|
Indirect Consumer
|
|
|
19,346
|
|
|
|
-
|
|
|
|
20
|
|
|
|
134
|
|
|
|
-
|
|
|
|
-
|
|
|
|
19,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (1)
|
|
$
|
220,002
|
|
|
$
|
322,306
|
|
|
$
|
26,723
|
|
|
$
|
68,569
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
637,600
|
|
(1) Includes loans held for sale in probable branch divestiture
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Not Rated
|
|
|
Pass
|
|
|
Criticized
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Loss
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
-
|
|
|
$
|
24,082
|
|
|
$
|
1,634
|
|
|
$
|
4,389
|
|
|
$
|
30
|
|
|
$
|
-
|
|
|
$
|
30,135
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land Development
|
|
|
-
|
|
|
|
20,656
|
|
|
|
5,192
|
|
|
|
10,076
|
|
|
|
-
|
|
|
|
-
|
|
|
|
35,924
|
|
Building Lots
|
|
|
-
|
|
|
|
1,549
|
|
|
|
549
|
|
|
|
1,782
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,880
|
|
Other
|
|
|
-
|
|
|
|
338,483
|
|
|
|
22,746
|
|
|
|
57,752
|
|
|
|
-
|
|
|
|
-
|
|
|
|
418,981
|
|
Real Estate Construction
|
|
|
-
|
|
|
|
4,925
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,925
|
|
Residential Mortgage
|
|
|
146,003
|
|
|
|
-
|
|
|
|
573
|
|
|
|
5,290
|
|
|
|
-
|
|
|
|
-
|
|
|
|
151,866
|
|
Consumer and Home Equity
|
|
|
68,101
|
|
|
|
-
|
|
|
|
729
|
|
|
|
1,141
|
|
|
|
-
|
|
|
|
-
|
|
|
|
69,971
|
|
Indirect Consumer
|
|
|
21,627
|
|
|
|
-
|
|
|
|
4
|
|
|
|
261
|
|
|
|
-
|
|
|
|
-
|
|
|
|
21,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (1)
|
|
$
|
235,731
|
|
|
$
|
389,695
|
|
|
$
|
31,427
|
|
|
$
|
80,691
|
|
|
$
|
30
|
|
|
$
|
-
|
|
|
$
|
737,574
|
|
(1) Includes loans held for sale in probable branch divestiture
and probable loan sale
The following table presents the unpaid principal
balance in residential mortgage, consumer and home equity and indirect consumer loans based on payment activity as of June 30,
2012 and December 31, 2011:
June 30, 2012
|
|
Residential
|
|
|
Consumer &
|
|
|
Indirect
|
|
(Dollars in thousands)
|
|
Mortgage
|
|
|
Home Equity
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
Performing
|
|
$
|
142,592
|
|
|
$
|
64,014
|
|
|
$
|
19,458
|
|
Restructured on non-accrual
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Non-accrual
|
|
|
681
|
|
|
|
183
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
143,273
|
|
|
$
|
64,197
|
|
|
$
|
19,500
|
|
December 31, 2011
|
|
Residential
|
|
|
Consumer &
|
|
|
Indirect
|
|
(Dollars in thousands)
|
|
Mortgage
|
|
|
Home Equity
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
Performing
|
|
$
|
150,562
|
|
|
$
|
69,737
|
|
|
$
|
21,806
|
|
Restructured on non-accrual
|
|
|
335
|
|
|
|
-
|
|
|
|
-
|
|
Non-accrual
|
|
|
969
|
|
|
|
234
|
|
|
|
86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
151,866
|
|
|
$
|
69,971
|
|
|
$
|
21,892
|
|
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
|
5.
|
REAL ESTATE ACQUIRED THROUGH FORECLOSURE
|
A summary of the real
estate acquired through foreclosure activity is as follows:
|
|
June 30,
|
|
|
December 31,
|
|
(Dollars in thousands)
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
29,083
|
|
|
$
|
25,807
|
|
Additions
|
|
|
15,361
|
|
|
|
19,416
|
|
Sales
|
|
|
(4,372
|
)
|
|
|
(6,877
|
)
|
Writedowns
|
|
|
(3,543
|
)
|
|
|
(9,263
|
)
|
Ending balance
|
|
$
|
36,529
|
|
|
$
|
29,083
|
|
The increase in real estate
acquired through foreclosure expense for the three and six month periods ended June 30, 2012 was primarily due to a $1.5
million termination fee paid that was related to the termination of a property investment and management agreement on a
residential development held in other real estate owned.
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 shareholders’ 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 income in other components of the financial statements. In such a case, pre-tax income
from other categories, such as changes in OCI, must be considered in determining a tax benefit to be allocated to the loss
from continuing operations. For the quarter ended June 30, 2012 and June 30, 2011, this resulted in $0 and $1.3
million of income tax benefit allocated to continuing operations. For the six month period ended June 30, 2012 and 2011,
this resulted in $0 and $1.5 million of income tax benefit allocated to continuing operations.
A valuation allowance related
to deferred tax assets is required when it is considered more likely than not that all or part of the benefit related to such
assets will not be realized. In assessing the need for a valuation allowance, we considered various factors including our three
year cumulative loss position and the fact that we did not meet our forecast levels in 2010 and 2011. These factors represent
the most significant negative evidence that we considered in concluding that a valuation allowance was necessary at June 30, 2012
and December 31, 2011.
|
7.
|
EARNINGS (LOSS) PER SHARE
|
The reconciliation of the numerators
and denominators of the basic and diluted EPS is as follows:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
(Amounts in thousands,
|
|
June 30,
|
|
|
June 30,
|
|
except per share data)
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
$
|
(4,139
|
)
|
|
$
|
(11,904
|
)
|
|
$
|
(4,429
|
)
|
|
$
|
(13,974
|
)
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends
|
|
|
(250
|
)
|
|
|
(250
|
)
|
|
|
(500
|
)
|
|
|
(500
|
)
|
Accretion on preferred stock discount
|
|
|
(13
|
)
|
|
|
(13
|
)
|
|
|
(27
|
)
|
|
|
(27
|
)
|
Net income (loss) available to common shareholders
|
|
$
|
(4,402
|
)
|
|
$
|
(12,167
|
)
|
|
$
|
(4,956
|
)
|
|
$
|
(14,501
|
)
|
Weighted average common shares
|
|
|
4,767
|
|
|
|
4,740
|
|
|
|
4,764
|
|
|
|
4,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
|
|
|
4,767
|
|
|
|
4,740
|
|
|
|
4,764
|
|
|
|
4,738
|
|
Dilutive effect of stock options and warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Weighted average common and incremental shares
|
|
|
4,767
|
|
|
|
4,740
|
|
|
|
4,764
|
|
|
|
4,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (Loss) Per Common Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.92
|
)
|
|
$
|
(2.57
|
)
|
|
$
|
(1.04
|
)
|
|
$
|
(3.06
|
)
|
Diluted
|
|
$
|
(0.92
|
)
|
|
$
|
(2.57
|
)
|
|
$
|
(1.04
|
)
|
|
$
|
(3.06
|
)
|
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
|
7.
|
EARNINGS (LOSS) PER SHARE – (Continued)
|
Stock options for 276,940 and
266,521 shares of common stock were not included in the June 30, 2012 and 2011 computation of diluted earnings per share for the
quarter and year to date because their impact was anti-dilutive. Warrants to purchase 215,983 shares at June 30, 2012 and 2011
were not included in the computation because their impact was also anti-dilutive.
|
8.
|
STOCK BASED COMPENSATION PLAN
|
Under our 2006 Stock Option
and Incentive Compensation Plan, which is shareholder approved, we may grant restricted stock and incentive or non-qualified stock
options to
key employees and directors
for a total of 727,080 shares of our common stock. We believe that the ability
to award stock options and other forms of stock-based incentive compensation can assist us in attracting and retaining key employees.
Stock-based incentive compensation is also a means to align the interests of key employees with those of our stockholders by providing
awards intended to reward recipients for our long-term growth.
The option to purchase shares vest over periods of one to
five years and expire ten years after the date of grant.
We issue new shares of common stock upon the exercise of stock
options.
If options or awards granted under the 2006 Plan expire or terminate for any reason without having been exercised
in full or released from restriction, the corresponding shares shall again be available for option or award for the purposes of
the Plan. At June 30, 2012, options and restricted stock available for future grant under the 2006 Plan totaled 334,840.
Compensation cost related to
options and restricted stock granted under the 2006 Plan that was charged against earnings for the six month periods ended June
30, 2012 and 2011
was $92,000 and $95,000. As of June 30, 2012 there was $447,000 of total unrecognized compensation cost
related to non-vested share-based compensation arrangements granted under the 2006 Plan.
That cost is expected to be recognized
over a weighted-average period of 3.2 years.
Stock Options
– The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model that
uses various weighted-average assumptions. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at
the time of grant. The expected volatility is based on the fluctuation in the price of a share of stock over the period for which
the option is being valued and the expected life of the options granted represents the period of time the options are expected
to be outstanding.
The weighted-average
assumptions for options granted during the three month period ended June 30, 2012 and the resulting estimated weighted
average fair value per share is presented below. No other options have been granted during 2012.
|
|
June 30,
|
|
|
|
2012
|
|
Assumptions:
|
|
|
|
|
Risk-free interest rate
|
|
|
1.82
|
%
|
Expected dividend yield
|
|
|
-
|
%
|
Expected life (years)
|
|
|
10
|
|
Expected common stock market price volatility
|
|
|
53
|
%
|
Estimated fair value per share
|
|
$
|
1.95
|
|
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
|
8.
|
STOCK BASED COMPENSATION
PLAN
– (Continued)
|
A summary of option activity
under the 2006 Plan for the six month period ended June 30, 2012 is presented below:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
Number
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
Term
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, beginning of period
|
|
|
363,240
|
|
|
$
|
9.62
|
|
|
|
|
|
|
|
|
|
Granted during period
|
|
|
35,000
|
|
|
|
3.08
|
|
|
|
|
|
|
|
|
|
Forfeited during period
|
|
|
(6,000
|
)
|
|
|
1.95
|
|
|
|
|
|
|
|
|
|
Exercised during period
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding, end of period
|
|
|
392,240
|
|
|
$
|
9.15
|
|
|
|
7.3
|
|
|
$
|
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eligible for exercise at period end
|
|
|
143,416
|
|
|
$
|
17.81
|
|
|
|
4.6
|
|
|
$
|
-
|
|
There were no options exercised, modified or
settled in cash for the six month periods ended June 30, 2012 and 2011. Management expects all outstanding unvested options
will vest.
Restricted Stock
–
In addition to stock options, on December 31, 2010, we granted 36,855 shares of restricted common stock at the weighted average
current market price of $4.07. No restricted stock had been granted prior to December 31, 2010. The restricted stock vests on December
31, 2012, provided that the recipient has continued to perform substantial services for the Bank through that date. The
restricted stock will become 100% vested before the vesting date upon the recipient’s death or disability or a change of
control event as defined by federal regulations. Any dividends declared on the restricted stock prior to vesting will be retained
and paid only on the date of vesting. The recipient may not transfer, pledge or dispose of the restricted stock before the date
of vesting, and thereafter only in proportion to percentage of the preferred shares originally issued to the U.S. Treasury that
have been redeemed. As of June 30, 2012 there was $37,000 of total unrecognized compensation cost related to the restricted stock.
That cost is expected to be recognized over the remaining vesting period of .50 years.
U.S. GAAP defines fair value
as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date and establishes a fair value hierarchy that prioritizes the use of inputs used in valuation
methodologies into the following three levels:
Level 1:
Quoted prices
(unadjusted) for identical assets or liabilities in active markets. A quoted price in an active market provides the most reliable
evidence of fair value and shall be used to measure fair value whenever available.
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; or other inputs that are observable or can be corroborated by observable market data.
Level 3:
Significant unobservable
inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing
an asset or liability.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
|
9.
|
FAIR VALUE - (Continued)
|
We used the following methods
and significant assumptions to estimate fair value.
Securities:
The fair values of most debt securities are determined by a matrix pricing, which is a mathematical technique widely used 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 (Level 2 inputs). In certain cases, such
as trust preferred securities, where there is limited activity or less transparency around inputs to the valuation,
securities are classified within Level 3 of the valuation hierarchy. The fair values of Level 3 trust preferred securities
are determined by an independent third party. These valuations are then reviewed by certain accounting associates and the
CFO. For trust preferred securities, discounted cash flows are calculated using spread to swap and LIBOR curves that
are updated to incorporate loss severities, volatility, credit spread and optionality. Rating agency and industry
research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into the
calculations. At least annually, a third party is engaged to validate the discounted cash flows and resulting fair value.
Impaired
Loans:
At the time a loan is considered impaired, it is valued at the lower of cost
or fair value. Impaired loans carried at fair value generally receive specific allocations of the allowance for loan losses.
For collateral dependent loans, fair value is commonly based on recent real estate appraisals. 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 independent appraisers to adjust for differences between the comparable
sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of
the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per
the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s
historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and
knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Once a loan is
considered impaired, it is evaluated by a member of the Credit Department on a quarterly basis for additional impairment and
adjusted accordingly.
Other Real Estate
Owned:
Assets acquired through or instead of loan foreclosure are initially recorded at
fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at
lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals.
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 independent appraisers to adjust for
differences between the comparable sales and income data available. Such adjustments are usually significant and typically
result in a Level 3 classification of the inputs for determining fair value.
Appraisals for both collateral-dependent
impaired loans and other real estate owned are performed by certified general appraisers (for commercial properties) or certified
residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by us. Once
received, a member of the Credit Department reviews the assumptions and approaches utilized in the appraisal as well as the overall
resulting fair value in comparison with via independent data sources such as recent market data or industry-wide statistics.
Loans Held
For Sale:
Loans held for sale associated with a probable branch divestiture and probable loan sale are presented less
the purchase discount and are classified within Level 2 of the valuation hierarchy. Loans held for sale at June 30, 2012
include $100.4 million of loans that we expect to sell in branch divestiture transactions and $3.2 million to be sold in
the secondary market. The fair value of loans to be sold in the secondary market is estimated based upon the binding contracts
and quotes from the third party investors.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
|
9.
|
FAIR VALUE - (Continued)
|
Assets and Liabilities
Measured at Fair Value on a Recurring Basis
Assets measured at fair value
on a recurring basis are summarized below: There were no transfers between Level 1 and Level 2 during the periods presented.
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
June 30,
|
|
|
Identical Assets
|
|
|
Observable Inputs
|
|
|
Unobservable Inputs
|
|
(Dollars in thousands)
|
|
2012
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and agencies
|
|
$
|
13,026
|
|
|
$
|
-
|
|
|
$
|
13,026
|
|
|
$
|
-
|
|
Government-sponsored mortgage-backed residential
|
|
|
281,848
|
|
|
|
-
|
|
|
|
281,848
|
|
|
|
-
|
|
State and municipal
|
|
|
13,966
|
|
|
|
-
|
|
|
|
13,966
|
|
|
|
-
|
|
Corporate bonds
|
|
|
8,182
|
|
|
|
-
|
|
|
|
8,182
|
|
|
|
-
|
|
Trust preferred securities
|
|
|
266
|
|
|
|
-
|
|
|
|
-
|
|
|
|
266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
317,288
|
|
|
$
|
-
|
|
|
$
|
317,022
|
|
|
$
|
266
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
December 31,
|
|
|
Identical Assets
|
|
|
Observable Inputs
|
|
|
Unobservable Inputs
|
|
(Dollars in thousands)
|
|
2011
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and agencies
|
|
$
|
25,028
|
|
|
$
|
-
|
|
|
$
|
25,028
|
|
|
$
|
-
|
|
Government-sponsored mortgage-backed residential
|
|
|
264,691
|
|
|
|
-
|
|
|
|
264,691
|
|
|
|
-
|
|
State and municipal
|
|
|
23,794
|
|
|
|
-
|
|
|
|
23,794
|
|
|
|
-
|
|
Trust preferred securities
|
|
|
264
|
|
|
|
-
|
|
|
|
-
|
|
|
|
264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
313,777
|
|
|
$
|
-
|
|
|
$
|
313,513
|
|
|
$
|
264
|
|
Between June 2002 and July 2006,
we invested in four available-for-sale and one held-to-maturity investment grade tranches of trust preferred collateralized debt
obligation (“CDO”) securities. The securities were issued and are referred to as Preferred Term Securities
Limited (“PreTSL”). The underlying collateral for the PreTSL is unguaranteed pooled trust preferred securities
issued by banks, insurance companies and REITs geographically dispersed across the United States. We hold five PreTSL
securities, none of which are currently investment grade.
Since late 2007, the markets
for collateralized debt obligations and trust preferred securities have become increasingly inactive. The inactivity
began in late 2007 when new issues of similar securities were discounted in order to complete the offering. Beginning in the second
quarter of 2008, the purchase and sale activity of these securities substantially decreased as investors elected to hold the securities
instead of selling them at substantially depressed prices. Our brokers have indicated that little if any activity is
occurring in this sector and that the PreTSL securities trades that are taking place are primarily distressed sales where the
seller must liquidate as a result of insolvency, redemptions or closure of a fund holding the security, or other distressed conditions. As
a result, the bid-ask spreads have widened significantly and the volume of trades decreased significantly compared to historical
volumes.
During 2008, we concluded that
the market for the trust preferred securities that we hold and for similar CDO securities (such as higher-rated tranches within
the same CDO security) was also not active. That determination was made considering that there are few observable transactions
for the trust preferred securities or similar CDO securities and the observable prices for those transactions have varied substantially
over time. Consequently, we have considered those observable inputs and determined that our trust preferred securities
are classified within Level 3 of the fair value hierarchy.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
|
9.
|
FAIR VALUE - (Continued)
|
We have determined that an income
approach valuation technique (using cash flows and present value techniques) is equally or more representative of fair value than
relying on the estimation of market value technique used at prior measurement dates, which now has few observable inputs and relies
on an inactive market with distressed sales conditions that would require significant adjustments.
We received valuation estimates
on our trust preferred securities for June 30, 2012. Those valuation estimates were based on proprietary pricing models
utilizing significant unobservable inputs in an inactive market with distressed sales, Level 3 inputs, rather than actual transactions
in an active market. In accordance with current accounting guidance, we determined that a risk-adjusted discount rate
appropriately reflects the reporting entity’s estimate of the assumptions that market participants would use in an active
market to estimate the selling price of the asset at the measurement date.
We conduct a thorough review
of fair value hierarchy classifications on a quarterly basis. Reclassification of certain financial instruments may occur when
input observability changes.
The table below presents reconciliation
for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the periods ended
June 30, 2012 and 2011:
|
|
Fair Value Measurements
|
|
|
Fair Value Measurements
|
|
|
|
Using Significant
|
|
|
Using Significant
|
|
|
|
Unobservable Inputs
|
|
|
Unobservable Inputs
|
|
|
|
(Level 3)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
(Dollars in thousands)
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
268
|
|
|
$
|
763
|
|
|
$
|
264
|
|
|
$
|
346
|
|
Total gains or losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment charges on securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(25
|
)
|
Included in other comprehensive income
|
|
|
(2
|
)
|
|
|
(95
|
)
|
|
|
2
|
|
|
|
347
|
|
Transfers in and/or out of Level 3
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Ending balance
|
|
$
|
266
|
|
|
$
|
668
|
|
|
$
|
266
|
|
|
$
|
668
|
|
The following table presents
quantitative information about recurring Level 3 fair value measurements at June 30, 2012.
|
|
|
|
|
|
|
|
|
Range
|
|
|
Fair
|
|
|
Valuation
|
|
Unobservable
|
|
(Weighted
|
(Dollars in thousands)
|
|
Value
|
|
|
Technique
|
|
Inputs
|
|
Average)
|
Trust preferred securities
|
|
$
|
266
|
|
|
Discounted cash flow
|
|
Discount rate
|
|
0.00% - 34.73%
|
|
|
|
|
|
|
|
|
|
|
(21.31%)
|
The significant unobservable
inputs used in the fair value measurement of our trust preferred securities are probabilities of specific-issuer prepayment assumptions,
specific-issuer defaults and deferrals and specific-issuer recovery assumptions. Significant increases in specific-issuer prepayment
assumptions, specific-issuer defaults and deferrals and specific-issuer recovery assumptions would result in a significantly lower
fair value measurement. Conversely, decreases in specific-issuer prepayment assumptions, specific-issuer defaults and deferrals
and specific-issuer recovery assumptions would result in a higher fair value measurement.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
|
9.
|
FAIR VALUE - (Continued
|
The table below summarizes changes
in unrealized gains and losses recorded in earnings for the quarter and six months ended June 30 for Level 3 assets and liabilities
that are still held at June 30.
|
|
Changes in Unrealized Gains/Losses
|
|
|
Changes in Unrealized Gains/Losses
|
|
|
|
Relating to Assets Still Held at Reporting
|
|
|
Relating to Assets Still Held at Reporting
|
|
|
|
Date for the Three Months Ended
|
|
|
Date for the Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
(Dollars in thousands)
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income on securities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Other changes in fair value
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
25
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
25
|
|
Assets and Liabilities
Measured at Fair Value on a Nonrecurring Basis
Assets measured at fair value
on a nonrecurring basis are summarized below:
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
June 30,
|
|
|
Identical Assets
|
|
|
Observable Inputs
|
|
|
Unobservable Inputs
|
|
(Dollars in thousands)
|
|
2012
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
1,037
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,037
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land Development
|
|
|
2,789
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,789
|
|
Building Lots
|
|
|
417
|
|
|
|
-
|
|
|
|
-
|
|
|
|
417
|
|
Other
|
|
|
19,314
|
|
|
|
-
|
|
|
|
-
|
|
|
|
19,314
|
|
Real Estate Construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Residential Mortgage
|
|
|
4,272
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,272
|
|
Consumer and Home Equity
|
|
|
727
|
|
|
|
-
|
|
|
|
-
|
|
|
|
727
|
|
Indirect Consumer
|
|
|
109
|
|
|
|
-
|
|
|
|
-
|
|
|
|
109
|
|
Real estate acquired through foreclosure:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
559
|
|
|
|
-
|
|
|
|
-
|
|
|
|
559
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land Development
|
|
|
4,285
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,285
|
|
Building Lots
|
|
|
5,882
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,882
|
|
Other
|
|
|
9,418
|
|
|
|
-
|
|
|
|
-
|
|
|
|
9,418
|
|
Residential Mortgage
|
|
|
153
|
|
|
|
-
|
|
|
|
-
|
|
|
|
153
|
|
Trust preferred security held-to-maturity
|
|
|
16
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16
|
|
Loans held for sale related to probable branch divestiture
|
|
|
100,372
|
|
|
|
-
|
|
|
|
100,372
|
|
|
|
-
|
|
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
|
9.
|
FAIR VALUE - (Continued)
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
December 31,
|
|
|
Identical Assets
|
|
|
Observable Inputs
|
|
|
Unobservable Inputs
|
|
(Dollars in thousands)
|
|
2011
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
2,643
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,643
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land Development
|
|
|
7,929
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,929
|
|
Building Lots
|
|
|
1,517
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,517
|
|
Other
|
|
|
27,668
|
|
|
|
-
|
|
|
|
-
|
|
|
|
27,668
|
|
Real Estate Construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Residential Mortgage
|
|
|
4,384
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,384
|
|
Consumer and Home Equity
|
|
|
937
|
|
|
|
-
|
|
|
|
-
|
|
|
|
937
|
|
Indirect Consumer
|
|
|
194
|
|
|
|
-
|
|
|
|
-
|
|
|
|
194
|
|
Real estate acquired through
foreclosure:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
728
|
|
|
|
-
|
|
|
|
-
|
|
|
|
728
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land Development
|
|
|
4,285
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,285
|
|
Building Lots
|
|
|
5,369
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,369
|
|
Other
|
|
|
6,300
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,300
|
|
Residential Mortgage
|
|
|
172
|
|
|
|
-
|
|
|
|
-
|
|
|
|
172
|
|
Trust preferred security
held-to-maturity
|
|
|
24
|
|
|
|
-
|
|
|
|
-
|
|
|
|
24
|
|
Loans held for sale
|
|
|
45,829
|
|
|
|
-
|
|
|
|
45,829
|
|
|
|
-
|
|
Impaired loans, which are measured
for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $33.4 million,
with a valuation allowance of $4.8 million, resulting in an additional provision for loan losses of $1.4 million and $1.9 million
for the three and six month periods ended June 30, 2012. Values for collateral dependent loans are generally based on appraisals
obtained from licensed real estate appraisals and in certain circumstances consideration of offers obtained to purchase properties
prior to foreclosure. Appraisals for commercial real estate generally use three methods to derive value: cost, sales or market
comparison and income approach. The cost method bases value on the estimated cost to replace the current property after considering
adjustments for depreciation. Values of the market comparison approach evaluate the sales price of similar properties in the same
market area. The income approach considers net operating income generated by the property and an investors required return. The
final value is a reconciliation of these three approaches and takes into consideration any other factors management deems relevant
to arrive at a representative fair value.
Real estate owned acquired through
foreclosure is recorded at fair value less estimated selling costs at the date of foreclosure. Fair value is based on the appraised
market value of the property based on sales of similar assets. The fair value may be subsequently reduced if the estimated fair
value declines below the original appraised value. Fair value adjustments of $1.9 million and $3.5 million were made to real
estate owned during the quarter and six months ended June 30, 2012.
Trust preferred securities which
are held-to-maturity are valued using an income approach valuation technique (using cash flows and present value techniques) that
utilizes significant unobservable inputs. The income approach is equally or more representative of fair value than relying on
the estimation of market value technique used at prior measurement dates, which now has few observable inputs and relies on an
inactive market with distressed sales conditions that would require significant adjustments.
We received
valuation estimates on our trust preferred security for June 30, 2012. Those valuation estimates were based on
proprietary pricing models utilizing significant unobservable inputs in an inactive market with distressed sales, Level 3
inputs, rather than actual transactions in an active market. In accordance with current accounting guidance, we
determined that a risk-adjusted discount rate appropriately reflects the reporting entity’s estimate of the
assumptions that market participants would use in an active market to estimate the selling price of the asset at the
measurement date. The discount rate is calculated using spread to swap and LIBOR curves that are updated to incorporate loss
severities, volatility, credit spread and optionality.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
|
9.
|
FAIR VALUE - (Continued)
|
The following table presents quantitative
information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at
June 30, 2012.
(Dollars in thousands)
|
|
Fair
Value
|
|
|
Valuation Technique(s)
|
|
Unobservable Input(s)
|
|
Range
(Weighted Average)
(1)
|
Impaired loans:
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
1,037
|
|
|
Sales comparison approach
|
|
Adjustment for differences between comparable sales
|
|
6.43%
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
Land Development
|
|
|
2,789
|
|
|
Income approach
|
|
Capitalization rate
|
|
20.00% – 24.50% (23.03%)
|
|
|
|
|
|
|
Sales comparison approach
|
|
Adjustment for differences between comparable sales
|
|
0.00%
|
|
|
|
|
|
|
|
|
|
|
|
Building Lots
|
|
|
417
|
|
|
Sales comparison approach
|
|
Adjustment for differences between comparable sales
|
|
2.49%
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
19,314
|
|
|
Income approach
|
|
Capitalization rate
|
|
7.70% – 16.00% (11.30%)
|
|
|
|
|
|
|
Sales comparison approach
|
|
Adjustment for differences between comparable sales
|
|
0.00% – 21.87% (12.25%)
|
|
|
|
|
|
|
|
|
|
|
|
Residential Mortgage
|
|
|
4,272
|
|
|
Sales comparison approach
|
|
Adjustment for differences between comparable sales
|
|
0.00% – 19.00% (14.90%)
|
|
|
|
|
|
|
|
|
|
|
|
Consumer and Home Equity
|
|
|
727
|
|
|
Sales comparison approach
|
|
Adjustment for differences between comparable sales
|
|
0.00% – 8.29% (2.10%)
|
|
|
|
|
|
|
|
|
|
|
|
Indirect Consumer
|
|
|
109
|
|
|
NADA value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate acquired through foreclosure:
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
559
|
|
|
Sales comparison approach
|
|
Adjustment for differences between comparable sales
|
|
9.62% – 9.67% (9.62%)
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land Development
|
|
|
4,285
|
|
|
Income approach
|
|
Capitalization rate
|
|
8.50%
|
|
|
|
|
|
|
Sales comparison approach
|
|
Adjustment for differences between comparable sales
|
|
3.44% – 25.00% (11.78%)
|
|
|
|
|
|
|
|
|
|
|
|
Building Lots
|
|
|
5,882
|
|
|
Income approach
|
|
Capitalization rate
|
|
24.00% – 28.00% (26.23%)
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
9,418
|
|
|
Income approach
|
|
Capitalization rate
|
|
8.50% – 10.50% (9.75%)
|
|
|
|
|
|
|
Sales comparison approach
|
|
Adjustment for differences between comparable sales
|
|
2.75% – 5.19% (3.20%)
|
|
|
|
|
|
|
|
|
|
|
|
Residential Mortgage
|
|
|
153
|
|
|
Sales comparison approach
|
|
Adjustment for differences between comparable sales
|
|
1.11% – 3.00% (2.63%)
|
|
|
|
|
|
|
|
|
|
|
|
Trust preferred security held-to-maturity
|
|
|
16
|
|
|
Discounted cash flow
|
|
Discount rate
|
|
15.47%
|
|
(1)
|
Unobservable inputs with a single discount listed include
only one property.
|
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
|
9.
|
FAIR VALUE - (Continued)
|
Fair Value of Financial
Instruments
The estimated fair value of financial instruments,
not previously presented, is as follows:
|
|
|
|
|
June 30, 2012
|
|
(Dollars in thousands)
|
|
Carrying
|
|
|
Fair Value Measurements
|
|
|
|
Value
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
154,114
|
|
|
|
154,114
|
|
|
|
7,116
|
|
|
|
146,998
|
|
|
|
-
|
|
Mortgage loans held for sale
|
|
|
3,220
|
|
|
|
3,282
|
|
|
|
-
|
|
|
|
3,282
|
|
|
|
-
|
|
Loans, net
|
|
|
492,201
|
|
|
|
532,823
|
|
|
|
-
|
|
|
|
-
|
|
|
|
532,823
|
|
FHLB stock
|
|
|
4,805
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
1,089,302
|
|
|
|
1,107,732
|
|
|
|
-
|
|
|
|
1,107,732
|
|
|
|
-
|
|
Advances from Federal Home Loan Bank
|
|
|
27,666
|
|
|
|
30,601
|
|
|
|
-
|
|
|
|
30,601
|
|
|
|
-
|
|
Subordinated debentures
|
|
|
18,000
|
|
|
|
12,719
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12,719
|
|
(Dollars in thousands)
|
|
December 31, 2011
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Value
|
|
|
Value
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
92,236
|
|
|
$
|
92,236
|
|
Mortgage loans held for sale
|
|
|
10,187
|
|
|
|
10,326
|
|
Loans, net
|
|
|
628,800
|
|
|
|
643,797
|
|
FHLB stock
|
|
|
4,805
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
1,122,794
|
|
|
|
1,134,843
|
|
Advances from Federal Home Loan Bank
|
|
|
27,736
|
|
|
|
30,888
|
|
Subordinated debentures
|
|
|
18,000
|
|
|
|
12,448
|
|
The methods and assumptions,
not previously presented, used to estimate fair values are described below:
(a) Cash and due from banks
The carrying amount of cash on hand approximates
fair value and is classified as a Level 1. The carrying amount of cash due from bank accounts is classified as a Level 2.
(b) Mortgage loans held for sale
The fair value of mortgage loans held for sale is
estimated based upon the binding contracts and quotes from third party investors resulting in a Level 2 classification.
(c) Loans, net
Fair values of loans 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. The carrying amount of related accrued
interest receivable, due to its short-term nature, approximates its fair value, is not significant and is not disclosed.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
|
9.
|
FAIR VALUE - (Continued)
|
(d) FHLB Stock
It is not practical to determine
the fair value of FHLB stock due to restrictions placed on its transferability.
(e) Deposits
The fair value disclosed for
fixed rate deposits and variable rate deposits with infrequent re-pricing or re-pricing limits, is calculated using the FHLB advance
curve to discount cash flows using current market rates applied to the estimated life resulting in a Level 2 classification. The
carrying amount of related accrued interest payable, due to its short-term nature, approximates its fair value, is not significant
and is not disclosed.
(f) Advances from Federal
Home Loan Bank
The fair value of the FHLB advances
is obtained from the FHLB and is calculated by discounting contractual cash flow using an estimated interest rate based on the
current rates available to us for debt of similar remaining maturities and collateral terms resulting in a Level 2 classification.
(g) Subordinated debentures
The fair value for subordinated
debentures is calculated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing
arrangements resulting in a Level 3 classification.
(h) Off-balance Sheet
Instruments
Fair values for off-balance
sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments is
not material.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
On January 9, 2009, we issued
$20 million of cumulative perpetual preferred shares, with a liquidation preference of $1,000 per share (the “Senior
Preferred Shares”) to the United States Treasury under its Capital Purchase Program (“CPP”). The Senior Preferred
Shares constitute Tier 1 capital and rank senior to our common shares. The Senior Preferred Shares pay cumulative dividends quarterly
at a rate of 5% per year for the first five years and will reset to a rate of 9% per year on January 9, 2014. The Senior Preferred
Shares may be redeemed at any time, subject to prior regulatory approval. We also have the ability to defer dividend payments
at any time, at our option.
We also issued a warrant to
purchase 215,983 common shares to the U.S. Treasury at a purchase price of $13.89 per share. The aggregate purchase price equals
15% of the aggregate amount of the Senior Preferred Shares purchased by the U.S. Treasury, which was $3 million. The initial purchase
price per share for the warrant and the number of common shares subject to the warrant were determined by reference to the market
price of the common shares (calculated on a 20-day trailing average) on December 8, 2008, the date the U.S. Treasury approved
our TARP application. The warrant has a term of 10 years and is potentially dilutive to earnings per share.
On October 29, 2010, we gave
written notice to the U.S. Treasury that effective with the fourth quarter of 2010, we were suspending the payment of regular
quarterly cash dividends on our Senior Preferred Shares. Under the CPP provisions, failure to pay dividends for six quarters would
trigger the right of the holder of our Senior Preferred Shares to appoint representatives to our Board of Directors. A representative
from the U.S. Treasury attended Board meetings during the first half of 2012. The dividends will continue to be accrued for payment
in the future and reported as a preferred dividend requirement that is deducted from income to common shareholders for financial
statement purposes. As of June 30, 2012, these accrued but unpaid dividends totaled $1.9 million.
Participation in the CPP requires
a participating institution to comply with a number of restrictions and provisions, including standards for executive compensation
and corporate governance and limitations on share repurchases and the declaration and payment of dividends on common shares. The
standard terms of the CPP require that a participating financial institution limit the payment of dividends to the most recent
quarterly amount prior to October 14, 2008, which is $0.19 per share in our case. This dividend limitation will remain in
effect until the preferred shares are redeemed.
On
February 17, 2009, the American Recovery and Reinvestment Act of 2009 (“ARRA”) was enacted. As required by ARRA, the
U.S. Treasury has issued additional compensation standards on companies receiving financial assistance from the U.S. government.
In addition, ARRA imposes certain new executive compensation and corporate expenditure limits on each CPP recipient, until the
recipient has repaid the Treasury. ARRA also permits CPP participants to redeem the preferred shares held by the Treasury Department
without penalty and without the need to raise new capital, subject to the Treasury’s consultation with the recipient’s
appropriate regulatory agency.
On June 19, 2012, the U.S. Treasury
(“Treasury”) notified us that the Company’s Series A Preferred Stock would be included in one of a series of
pooled auctions of the securities of financial institutions purchased by Treasury under its Capital Purchase Program, which were
scheduled to be conducted in the fall of 2012. Treasury also informed us that we could submit a bid to purchase all of our Series
A Preferred Stock in advance of the pooled auction, either by us directly or by one or more qualified investors designated by us.
Acceptance of any bid is at the discretion of the Treasury, assuming the bid meets a minimum price established internally by Treasury.
Our Board of Directors engaged a financial advisor to assist it in identifying, selecting and negotiating with qualified accredited
investors regarding the terms of a possible bid. On August 6, 2012, we submitted to Treasury a bid by a group of investors designated
by us. Treasury has acknowledged receipt of the bid, which is currently under review. If Treasury accepts the bid and completes
a sale to the bidders, the full $20 million stated value of our Series A Preferred Stock would remain outstanding and our obligation
to pay dividends, currently at an annual rate of 5% and increasing to 9% in January 2014, would continue until the securities are
retired. If the bid is not accepted, Treasury has the option to give us and our designated bidders an opportunity to negotiate
a higher purchase price or to include our Series A Preferred Stock in a future pooled or individual auction.
Regulatory Capital Requirements
– The Corporation and the Bank 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.
Prompt corrective action regulations
provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and
critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized,
regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset
growth and expansion, and capital restoration plans are required.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
|
11.
|
STOCKHOLDERS’ EQUITY
- (Continued)
|
Quantitative measures established
by regulation to ensure capital adequacy require the Corporation and the Bank to maintain minimum amounts and ratios (set forth
in the following table) of Total and Tier I capital (as defined in the regulations) to risk weighted assets (as defined) and of
Tier I capital (as defined) to average assets (as defined).
As a result of the Consent Order
the Bank entered into with the FDIC and KDFI described in greater detail in Note 2, the Bank is categorized as a “troubled
institution” by bank regulators, which by definition does not permit the Bank to be considered “well-capitalized”.
On March 9, 2012, the Bank entered
into a new Consent Order with the FDIC and KDFI. The 2012 Consent Order requires the Bank to achieve the same minimum capital
ratios set forth in the January 2011 Consent Order by June 30, 2012. See Note 2 for additional information.
Our actual and required capital amounts and ratios
to be considered adequately capitalized are presented below.
(Dollars in thousands)
|
|
|
|
|
|
|
|
For Capital
|
|
|
|
Actual
|
|
|
Adequacy Purposes
|
|
As of June 30, 2012:
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
Total risk-based capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
73,946
|
|
|
|
10.16
|
%
|
|
$
|
58,241
|
|
|
|
8.00
|
%
|
Bank
|
|
|
77,742
|
|
|
|
10.68
|
|
|
|
58,237
|
|
|
|
8.00
|
|
Tier I capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
64,757
|
|
|
|
8.89
|
|
|
|
29,121
|
|
|
|
4.00
|
|
Bank
|
|
|
68,545
|
|
|
|
9.42
|
|
|
|
29,119
|
|
|
|
4.00
|
|
Tier I capital (to average assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
64,757
|
|
|
|
5.43
|
|
|
|
47,698
|
|
|
|
4.00
|
|
Bank
|
|
|
68,545
|
|
|
|
5.73
|
|
|
|
47,886
|
|
|
|
4.00
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
For Capital
|
|
|
|
Actual
|
|
|
Adequacy Purposes
|
|
As of December 31, 2011:
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
Total risk-based capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
79,593
|
|
|
|
9.87
|
%
|
|
$
|
64,493
|
|
|
|
8.00
|
%
|
Bank
|
|
|
82,081
|
|
|
|
10.18
|
|
|
|
64,486
|
|
|
|
8.00
|
|
Tier I capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
69,425
|
|
|
|
8.61
|
|
|
|
32,246
|
|
|
|
4.00
|
|
Bank
|
|
|
71,914
|
|
|
|
8.92
|
|
|
|
32,243
|
|
|
|
4.00
|
|
Tier I capital (to average assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
69,425
|
|
|
|
5.71
|
|
|
|
48,666
|
|
|
|
4.00
|
|
Bank
|
|
|
71,914
|
|
|
|
5.86
|
|
|
|
49,111
|
|
|
|
4.00
|
|
The 2012 Consent Order requires
the Bank to achieve the minimum capital ratios presented below by June 30, 2012:
|
|
Actual as of
|
|
|
Ratio Required
|
|
|
|
6/30/2012
|
|
|
by Consent Order
|
|
Total capital to risk-weighted assets
|
|
|
10.68
|
%
|
|
|
12.00
|
%
|
Tier 1 capital to average total assets
|
|
|
5.73
|
%
|
|
|
9.00
|
%
|
The divestiture of our Indiana franchise, combined with the impending sale of our four Louisville banking centers, is projected to increase our Tier
I capital ratio from 5.73% to over 8.50% and increase our total risk-based capital ratio from 10.68% to over 12.00% based on June
30, 2012 financial information. See Note 2 for additional information.
Item 2.
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
We operate 17 full-service banking centers
and a commercial private banking center in six contiguous counties in central Kentucky along the Interstate 65 corridor and within
the Louisville metropolitan area. Our markets range from Louisville in Jefferson County, Kentucky approximately 40 miles north
of our headquarters in Elizabethtown, Kentucky to Hart County, Kentucky, approximately 30 miles south of Elizabethtown. Our markets
are supported by a diversified industry base and have a regional population of over 1 million. We operate in Hardin, Nelson, Hart,
Bullitt, Meade and Jefferson counties in Kentucky. In aggregate, 23% of our deposit market share is in our central
Kentucky markets outside of Louisville.
We serve the needs and cater to the economic
strengths of the local communities in which we operate, and we strive to provide a high level of personal and professional customer
service. We offer a variety of financial services to our retail and commercial banking customers. These services include personal
and corporate banking services and personal investment financial counseling services.
Through
our personal investment
financial counseling services, we offer a wide variety of mutual funds, equity investments, and fixed and variable annuities.
We invest in the wholesale capital markets to manage a portfolio of securities and use various forms of wholesale funding. The
security portfolio contains a variety of instruments, including callable debentures, taxable and non-taxable debentures, fixed
and adjustable rate mortgage backed securities, and collateralized mortgage obligations.
Our results of operations depend
primarily on net interest income, which is the difference between interest income from interest-earning assets and interest
expense on interest-bearing liabilities. Our operations are also affected by non-interest income, such as service charges,
loan fees, gains and losses from the sale of mortgage loans and revenue earned from bank owned life insurance. Our principal
operating expenses, aside from interest expense, consist of compensation and employee benefits, occupancy costs, data
processing expense, FDIC insurance premiums, costs associated with other real estate, and provisions for loan losses.
The discussion and analysis section covers
material changes in the financial condition since December 31, 2011 and material changes in the results of operations for the
three and six month periods ending June 30, 2012 as compared to 2011. It should be read in conjunction with “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for
the period ended December 31, 2011.
OVERVIEW
Our performance for the first six months
of 2012 continued to be impacted by the unfavorable economic conditions that have persisted since 2007. A new management team is
in place with the objective of restoring the institution to soundness and profitability. We have adjusted our policies, procedures
and allocated additional resources to address credit quality and facilitate the structure and processes to diversify and strengthen
our lending function. We also added personnel to concentrate on working with struggling borrowers, work on more efficient asset
resolutions, and strengthen the management of other real estate owned. Credit quality impacted our results during 2012 in the areas
of write downs in asset values, resources allocated to the disposition of assets and loan workout activities, lost productivity,
net interest income and reversals of tax benefits. We were also carrying substantially more liquid assets as of June 30, 2012 to
prepare for the impending branch sales which will settle in cash. We anticipate modest improvement in the net interest margin over
the next several quarters once the branch sales are consummated and we continue to restructure the composition of the balance sheet.
The increased level of liquidity is anticipated to remain elevated in the near term as loan balances continue to decline.
Our net loss attributable to
common shareholders for the quarter ended June 30, 2012 was $4.4 million or $0.92 per diluted common share compared to net
loss attributable to common shareholders of $12.2 million or $2.57 per diluted common share for the same period in 2011. Our
net loss attributable to common shareholders for the six month period ended June 30, 2012 was $5.0 million or $1.04 per
diluted common share compared to a net loss of $14.5 million or $3.06 per diluted common share for the same period a year
ago. The six month 2012 results include an $11.1 million decrease in provision for loans losses, write downs and losses on
other real estate owned of $3.6 million,
a $1.5 million termination fee paid that was related to
the termination of a property investment and management agreement on a residential development,
a net gain of $1.0
million on the sale of available for sale securities, gains of $613,000 on the sale of real estate acquired through
foreclosure, a gain of $175,000 on the sale of a lot held for development and a decrease of $779,000 in FDIC insurance
premiums.
The sale of securities is mainly a result of a combination of increasing our cash position as we prepare
for the sale of the branches as well as our focus to restructure the composition of the balance sheet.
The level of non-performing assets has
remained relatively stable over the last six quarters and we continue to see indications that credit quality may be stabilizing.
Compared to December 31, 2011, we saw a decline in non-performing loans of 4% and a decline in classified assets of 15%. We sold
twenty-three other real estate owned properties totaling $4.4 million during the 2012 period. The net proceeds received from the
sale of the majority of these properties exceeded the carrying value we had on the books, indicating an appropriate market value
for these other real estate owned properties.
Subsequent to the quarter ending June
30, 2012, we entered into sales contracts on nine other real estate owned properties totaling $20.5 million set to close during
the third quarter of 2012, indicating a continued interest in our other real estate owned properties. One of these sales
consists of a bulk sale of fourteen properties which we are carrying at a value of $16.2 million. The net proceeds after
sales expenses will be $15.1 million, resulting in a $1.1 million charge against these properties for the quarter ending
June 30, 2012. We incurred higher than usual commission and closing costs due to the size of the transaction. If sold
on an individual basis, it is unlikely that we would have taken this type of charge against these properties. However, if
this transaction goes through under these terms, it would represent a 56% decrease to our other real estate owned properties balance
of $36.5 million as of June 30, 2012. As with all sales contracts, the final sale is subject to both parties meeting all of the
terms and conditions of the contracts. In the event that the terms and conditions are not met, by either of the parties, it is
possible that the contracts on these sales will be terminated.
Our non-performing assets are largely
comprised of residential housing development assets, building lots, an office building and strip centers most of which are located
in Jefferson and Oldham Counties. Non-performing assets were $74.6 million or 6.26% of total assets at June 30, 2012 compared
to $68.9 million or 5.61% of total assets at December 31, 2011. The increase in non-performing assets is mainly attributable to
an increase of $7.4 million in real estate acquired through foreclosure. We anticipate that our level of real estate acquired
through foreclosure will remain at elevated levels for some period of time as foreclosures reflecting both weak economic conditions
and soft commercial real estate values continue. During 2011, we had substantially all of our non-performing assets appraised
or reappraised, including our high end residential development loans and related other real estate owned and recorded substantial
valuation adjustment and charge offs based on those appraisals. The lower values on the appraisals and reviews of properties appraised
within the first half of 2012 resulted in $3.6 million in write downs on other real estate owned compared to $9.3 million in total
write downs recorded during the first six months of 2011. We believe that we have written down other real estate values to levels
that will facilitate their liquidation as indicated by recent sales. We also believe we have appropriately addressed and risk-weighted
real estate loans in our portfolio. While deterioration in the portfolio is expected to continue, we believe it will continue
to be at a slower pace than the accelerated pace experienced in 2010 and 2011.
The allowance to total loans (including
loans held for sale and the related discounts allocated to those loans in probable branch divestitures) was 2.50% at June 30, 2012
while net charge-offs totaled 91 basis points annualized for 2012, compared to 421 basis points for 2011. Excluding loans held
for sale and related discounts, the allowance to total loans is approximately 2.85% at June 30, 2012. We attribute the decrease
in net charge-offs for 2012 to our aggressive approach of charging off loans to their liquidation value in 2011 and the relative
stabilization of collateral values in 2012 compared to 2011. Non-performing loans were $38.1 million or 5.97% of total loans (including
loans held for sale in probable branch divestitures) at June 30, 2012 compared to $39.8 million, or 5.39% of total loans for December
31, 2011. The allowance for loan losses to non-performing loans was 42% at June 30, 2012 compared to 32% at June 30, 2011. The
increase in the coverage ratio for 2012 was due to the decrease in non-accrual loans.
Net interest
income was $14.0 million for the six month 2012 period compared to $17.0 million for the same 2011 period, while the net interest
margin was 2.53% for 2012 compared to 2.88% in 2011
.
The net interest margin continues to
be compressed due to the level of non-performing assets, a decline in average loan balances outstanding, increased liquidity levels
and assets being placed into lower yielding investments other than loans. We were carrying substantially more liquid assets as
of June 30, 2012 to prepare for the impending branch sales which will settle in cash. We anticipate modest improvement to the net
interest margin over the next several quarters as we will not need to carry high levels of liquidity after the branch sales and
our focus on restructuring the balance sheet that should result in a decrease to our cost of funds and an improvement to interest
income. However, the levels of liquidity may be impacted by acceleration of loan repayments. As a result, we have hired a full
time consultant to assist us in being proactive in our efforts to restructure the balance sheet.
Non-interest income increased $3.4 million
for the six months ended June 30, 2012, primarily driven by net gains on the sale of investments, gains on the sale of premises
and equipment and income earned on other real estate owned properties. Non-interest expense increased $383,000 for the 2012 six
month period compared to the 2011 six month period. FDIC insurance premiums decreased $779,000 mainly due to the change in the
FDIC’s assessment base and rate structure that went into effect during the second quarter of 2011. The increase in real estate
acquired through foreclosure expense was primarily due to
a $1.5 million termination fee paid that was
related to the termination of a property investment and management agreement on a residential development held in other real estate
owned.
Loan expense increased due to increases in loan portfolio management expenses and expenses incurred in connection
with loan workout activities. The increase in loan expense reflects our elevated level of non-performing assets for 2012.
In its 2012 Consent Order with the FDIC
and KDFI, the Bank agreed to achieve and maintain a Tier 1 capital ratio of 9.0% and a total risk-based capital ratio of 12.0%
by June 30, 2012. At June 30, 2012, we were not in compliance with the Tier 1 and total risk-based capital requirements. We notified
the bank regulatory agencies that the increased capital levels would not be achieved and anticipate that the FDIC and KDFI will
reevaluate our progress toward achieving the higher capital ratios at September 30, 2012. We have also provided them with the pro
forma information regarding the Tier 1 and total risk based capital which we are projecting to be over 8.50% and 12.00%, respectively
based on June 30, 2012 information and on the consummation of the branch sales.
The 2012 Consent Order requires that if
the Bank should be unable to reach the required capital levels by June 30, 2012, and the Bank receives written directions from
the FDIC and KDFI to do so, then the Bank would develop, adopt and implement within 30 days a written plan to sell or merge itself
into another federally insured financial institution. The 2012 Consent Order requires the Bank to continue to adhere to the plans
implemented in response to the 2011 Consent Order, and includes the substantive provisions of the 2011 Consent Order. A copy of
the March 9, 2012 Consent Order is included as Exhibit 10.8 to our 2011 Annual Report on Form 10-K filed March 30, 2012.
While the Bank did not
meet the mandated capital ratios by June 30, 2012, we have not received any written communications from the FDIC or KDFI
directing the Bank to develop, adopt and implement within 30 days a written plan to sell or merge itself into another
federally insured financial institution.
The Bank’s Consent Orders with the
FDIC and KDFI require us to obtain the consent of the Regional Director of the FDIC and the Commissioner of the KDFI to declare
and pay cash dividends to the Corporation. The Bank is also no longer allowed to accept, renew or rollover brokered deposits, including
deposits through the Certificate of Deposit Account Registry Service (CDARs) without first obtaining a written waiver from our
regulators.
On April 20, 2011, the Corporation entered
into a formal agreement with the Federal Reserve Bank of St. Louis, which requires the Corporation to obtain regulatory approval
before declaring any dividends. We also may not redeem shares or obtain additional borrowings without prior approval.
Bank regulatory agencies can exercise discretion
when an institution does not meet the 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.
In response to the 2011 Consent Order,
we engaged an investment banking firm with expertise in the financial services sector to assist with a review of all of our strategic
alternatives as we work to achieve the higher regulatory capital ratios.
One of these strategic alternatives involved
the sale of eight branches located outside of our core market. Effective after the close of business on July 6, 2012, we have successfully
executed the sale of four banking centers located in Corydon, Elizabeth, Lanesville and Georgetown, Indiana to First Savings Bank,
F.S.B. We received a 3.65% percent premium on the $102.3 million of consumer and commercial deposits at closing. They assumed a
total of approximately $115.4 million in non-brokered deposits, which included $13.1 million of government, corporate, other financial
institution and municipal deposits for which we received zero premium or discount. We also sold approximately $30.4 million in
performing loans at a discount of 0.80%. The consummated transaction resulted in a one-time gain of approximately $2.9 million.
We entered into a Branch Purchase
Agreement with First Security Bank of Owensboro, Inc., the banking subsidiary of First Security, Inc., headquartered in
Owensboro, Kentucky on May 15, 2012. The agreement provides for the sale of our four banking centers in Louisville, Kentucky
to First Security. Under the terms of the Agreement, First Security will assume approximately $210.2 million of deposit
liabilities. First Security will pay a deposit premium of approximately $2.9 million comprised of a premium of 2.00% on
approximately $153.2 million of deposits and a premium ranging from 0% to 1.00% on approximately $57.0 million of other
deposits. First Security will also assume performing loans related to the four branches at a 1.00% discount. The loans being
assumed totaled approximately $70.9 million at June 30, 2012. The sale is expected to be completed in the third quarter of
2012 subject to First Security raising additional capital, regulatory approval and other customary closing conditions.
The divestiture of our Indiana
franchise, combined with the impending sale of our four Louisville banking centers, is projected to increase our Tier I
capital ratio from 5.73% to over 8.50% and increase our total risk-based capital ratio from 10.68% to over 12.00% based on
June 30, 2012 financial information. The sale of our four Louisville banking centers is expected to close late in the third
quarter of 2012.
Additionally, we continue reducing our
non-interest costs where possible to offset the increased credit costs associated with other real estate and non-performing loans
while taking into consideration the resources necessary to execute our strategies. We have suspended the annual employee stock
ownership contribution, frozen most executive management compensation the past three years and into 2012, frozen most officer compensation
for the past year and into 2012, eliminated board of director fees, reduced marketing expenses, community donation expenses, compensation
expense through reductions in associates, and implemented various other cost savings initiatives. Expense reductions for 2011 were
$1.1 million. We are also in the process of evaluating the remaining terms on existing contracts in an effort to identify expenses
that can be eliminated in the near future. These efforts will remain ongoing.
On February 10, 2012, we announced several
changes to our management and the board of directors. In addition, on May 15, 2012 we announced the appointment of Frank Perez
as Chief Financial Officer of the Corporation and the Bank with responsibility for the overall financial functions. Mr. Perez has
over fifteen years of experience in the banking industry as well as experience with publicly traded institutions, capital markets
,
and working with a troubled institution.
Our plans for 2012 include the following:
|
·
|
Continuing to research and evaluate all available strategic options to meet and maintain the required
regulatory capital levels and all of the other consent order issues for the Bank. Strategic alternatives include divesting of branch
offices, as noted earlier we have already sold four banking centers in the Indiana market and have a Branch Purchase Agreement
to sell our four banking centers in the Louisville market. Selling loans as an additional measure to reduce our asset size and
as a result improving our regulatory capital ratios. We have sold commercial real estate loans totaling $10.7 million, at par,
to First Capital Bank of Kentucky during the first half of 2012.
|
|
·
|
Continuing to serve our community banking customers and operate the Corporation and the Bank in
a safe and sound manner. We have worked diligently to maintain the strength of our retail and deposit franchise. The strength of
this franchise contributes to earnings to help withstand our credit quality issues. In addition, the inherent value of the retail
franchise will provide value to the Bank to accomplish the various capital initiatives. As of June 30, 2011 data, we rank in the
top three in four of the five counties that we serve. This excludes the Indiana market where we no longer have a presence and the
Louisville market in anticipation of the pending sale of those branch centers in September. We rank first in Hardin County and
Meade County with market share of approximately 26% and 51%, respectively.
|
|
·
|
Continuing to reduce our lending concentration in commercial real estate through natural roll off
and we have loan diversification initiatives in place that should improve the Bank’s loan portfolio. The mortgage and consumer
lending operations continue to maintain strong credit quality metrics throughout the economic downturn. The diversification of
the loan portfolio includes an increased emphasis on retail lending, small business lending, and Small Business Administration
(“SBA”) lending which should provide a boost to non-interest fee income. We have already allocated and reallocated
resources that should contribute to the successful execution of all of these efforts.
|
|
·
|
We have enhanced the resources dedicated to special asset dispositions both on a permanent and
temporary basis. This is a necessary step as we increase our ongoing efforts to speed up the disposal of our problem assets. This
will significantly reduce the involvement of our commercial lenders in the special asset area allowing them to shift their focus
to their existing loan customer base and to generate new business that will support our diversification efforts while stemming
off some of the loan roll off. The new lenders that have been hired this year bring a significant amount of experience in real
estate and commercial and industrial lending.
|
|
·
|
We have added an experienced asset liability
management consultant as an additional resource to support our efforts as we restructure the balance sheet, minimize our interest rate risk,
and improve the net interest margin.
|
CRITICAL ACCOUNTING POLICIES
Our accounting and reporting policies
comply with U.S. generally accepted accounting principles and conform to general practices within the banking industry. The preparation
of financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments
are based on information available as of the date of the financial statements. Accordingly, as this information changes, the financial
statements could change as our estimates, assumptions, and judgments change. Certain policies inherently rely more heavily on
the use of estimates, assumptions, and judgments and as such have a greater possibility of producing results that could be materially
different than originally reported. We consider our critical accounting policies to include the following:
Allowance for Loan Losses
–
We maintain an allowance we believe to be sufficient to absorb probable incurred credit losses existing in the loan portfolio.
Our Allowance for Loan Loss Review Committee, which is comprised of senior officers and certain accounting associates, evaluate
the allowance for loan losses on a monthly basis. We estimate the amount of the allowance using past 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. While we estimate the allowance for loan losses based
in part on historical losses within each loan category, estimates for losses within the commercial real estate portfolio depend
more on credit analysis and recent payment performance. Allocations of the allowance may be made 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 classified as impaired. The general component
covers non-classified loans and is based on historical loss experience adjusted for current factors. Allowance estimates are developed
with actual loss experience adjusted for current economic conditions. Allowance estimates are considered a prudent measurement
of the risk in the loan portfolio and are applied to individual loans based on loan type.
Based on our calculation,
an allowance of $16.0 million
or 2.50% of total loans was our estimate of probable incurred losses within the
loan portfolio as of
June 30, 2012. Approximately $669,000 of this allowance is allocated to the loans held for
sale in our branch divestiture transactions and is based upon the discounts agreed to in those transactions. This estimate
required us to record a provision for loan losses on the income statement of
$1.9 million for the 2012
period.
If the mix and amount of future charge off percentages differ significantly from those assumptions used
by management in making its determination, the allowance for loan losses and provision for loan losses on the income
statement could materially increase.
Impairment of Investment Securities
–
We review all unrealized losses on our investment securities to determine whether the losses are other-than-temporary.
We evaluate our investment securities on at least a quarterly basis, and more frequently when economic or market conditions warrant,
to determine whether a decline in their value below amortized cost is other-than-temporary. We evaluate a number of factors including,
but not limited to: valuation estimates provided by investment brokers; how much fair value has declined below amortized cost;
how long the decline in fair value has existed; the financial condition of the issuer; significant rating agency changes on the
issuer; and management’s assessment that we do not intend to sell or will not be required to sell the security for a period
of time sufficient to allow for any anticipated recovery in fair value.
The term “other-than-temporary”
is not intended to indicate that the decline is permanent, but indicates that the possibility for a near-term recovery of value
is not necessarily favorable, or that there is a lack of evidence to support a realizable value equal to or greater than the carrying
value of the investment. Once a decline in value is determined to be other-than-temporary, the cost basis of the security is written
down to fair value and a charge to earnings is recognized for the credit component and the non-credit component is recorded to
other comprehensive income.
Real Estate Owned
–
The
estimation of fair value is significant to real estate owned-acquired through foreclosure. These assets are recorded at fair value
less estimated selling costs at the date of foreclosure. Fair value is based on the appraised market value of the property based
on sales of similar assets when available. The fair value may be subsequently reduced if the estimated fair value declines below
the original appraised value. Appraisals are performed at least annually, if not more frequently. Typically, appraised values
are discounted for the projected sale below appraised value in addition to the selling cost. With certain appraised values where
management believes a solid liquidation value has been established, the appraisal has been discounted by the selling cost. We
have dedicated a team of associates and management to the resolution and work out of other real estate owned as it has become
a larger portion of our assets and a larger area of our risk. Appropriate policies, committees and procedures have been put in
place to ensure the proper accounting treatment and risk management of this area.
Income Taxes
–
The provision for income taxes is based on income or loss as reported in the financial statements. Deferred income tax
assets and liabilities are computed for differences between the financial statement and tax basis of assets and liabilities that
will result in taxable or deductible amounts in the future. The deferred tax assets and liabilities are computed based on enacted
tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. An assessment is
made as to whether it is more likely than not that deferred tax assets will be realized. Valuation allowances are established
when necessary to reduce deferred tax assets to an amount expected to be realized. Income tax expense is the tax payable or refundable
for the period plus or minus the change during the period in deferred tax assets and liabilities. Tax credits are recorded as
a reduction to tax provision in the period for which the credits may be utilized.
In assessing the need for a valuation
allowance, we considered various factors including our three year cumulative loss position and the fact that we did not meet our
forecast levels in 2011 and 2010. These factors represent the most significant negative evidence that we considered in concluding
that a valuation allowance was necessary at June 30, 2012 and December 31, 2011.
RESULTS OF OPERATIONS
Net loss attributable to common shareholders
for the quarter ended June 30, 2012 was $4.4 million or $0.92 per diluted common share compared to $12.2 million or $2.57 per
diluted common share for the same period in 2011. Net loss attributable to common shareholders for the six month period ended
June 30, 2012 was $5.0 million or $1.04 per diluted common share compared to $14.5 million or $3.06 per diluted common share for
the same period a year ago. The six month 2012 results include a $11.1 million decrease in provision for loans losses, write downs
and losses on other real estate owned of $3.6 million,
a $1.5 million termination fee paid that was
related to the termination of a property investment and management agreement on a residential development,
a net gain of
$1.0 million on the sale of available for sale securities, gains of $613,000 on the sale of real estate acquired through foreclosure,
a gain of $175,000 on the sale of a lot held for development and a decrease of $779,000 in FDIC insurance premiums. The sale of
securities is mainly a result of a combination of increasing our cash position as we prepare for the sale of the branches as well
as our focus to restructure the composition of the balance sheet. Net loss attributable to common shareholders was also impacted
by dividends accrued on preferred shares.
Net Interest Income
–
The principal source of our revenue is net interest income. Net interest income is the difference between interest income
on interest-earning assets, such as loans and securities and the interest expense on liabilities used to fund those assets, such
as interest-bearing deposits and borrowings. Net interest income is affected by both changes in the amount and composition of
interest-earning assets and interest-bearing liabilities as well as changes in market interest rates.
The large decline in the volume of interest
earning assets and the change in the mix of interest earning assets caused a negative impact on net interest income, which decreased
$1.7 million and $3.0 million for the three and six month 2012 periods compared to the prior year periods. Average interest earning
assets decreased $81.2 million and $79.1 million for the quarter and six month 2012 periods compared to 2011 due to a decrease
in average loans and our efforts to increase liquidity by increasing lower yielding investments. The decrease in average loans
was due to loan principal payments, payoffs, charge-offs and the conversion of nonperforming loans to other real estate owned
properties. Average loan yields were 5.37% and 5.47% for the three and six month 2012 periods compared to average loan yields
of 5.57% and 5.64% for the 2011 periods. Additionally, due to the increased regulatory capital ratios requirement as a result
of our written agreement with the FDIC and KDFI, we have intentionally not replaced much of this loan run-off as we continue our
efforts to reduce our asset size.
The yield on earning assets averaged
3.88% and 4.07% for the three and six month 2012 periods compared to an average yield on earning assets of 4.61% and 4.69%
for 2011. This decrease partially was offset by a decrease in our cost of funds which averaged 1.55% and 1.63% for the
quarter and six month 2012 periods compared to an average cost of funds of 1.89% and 1.93% for the same periods in 2011. Net
interest margin as a percent of average earning assets decreased
42 basis points to 2.42% for the quarter ended June
30, 2012 and 35 basis points to 2.53% for the six months ended June 30, 2012 compared to 2.84% and 2.88% for the 2011
periods.
We anticipate that we will be able
to take advantage of the continued low interest rate environment to reduce our cost of funds as term deposits will be
re-priced at more favorable terms.
AVERAGE BALANCE SHEET
The following table provides information
relating to our average balance sheet and reflects the average yield on assets and average cost of liabilities for the indicated
periods. Yields and costs for the periods presented are derived by dividing income or expense by the average balances of assets
or liabilities, respectively.
|
|
Quarter Ended June 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
(Dollars in thousands)
|
|
Balance
|
|
|
Interest
|
|
|
Yield/Cost(5)
|
|
|
Balance
|
|
|
Interest
|
|
|
Yield/Cost(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and agencies
|
|
$
|
19,399
|
|
|
$
|
98
|
|
|
|
2.03
|
%
|
|
$
|
114,807
|
|
|
$
|
683
|
|
|
|
2.39
|
%
|
Mortgage-backed securities
|
|
|
309,475
|
|
|
|
1,498
|
|
|
|
1.94
|
|
|
|
113,726
|
|
|
|
880
|
|
|
|
3.10
|
|
Equity securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
294
|
|
|
|
11
|
|
|
|
15.01
|
|
State and political subdivision securities
(1)
|
|
|
13,755
|
|
|
|
218
|
|
|
|
6.36
|
|
|
|
22,987
|
|
|
|
402
|
|
|
|
7.01
|
|
Trust preferred securities
|
|
|
1,032
|
|
|
|
16
|
|
|
|
6.22
|
|
|
|
1,100
|
|
|
|
11
|
|
|
|
4.01
|
|
Corporate bonds
|
|
|
412
|
|
|
|
1
|
|
|
|
0.97
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Loans
(2) (3) (4)
|
|
|
662,340
|
|
|
|
8,868
|
|
|
|
5.37
|
|
|
|
842,611
|
|
|
|
11,692
|
|
|
|
5.57
|
|
FHLB stock
|
|
|
4,805
|
|
|
|
56
|
|
|
|
4.67
|
|
|
|
4,884
|
|
|
|
52
|
|
|
|
4.27
|
|
Interest bearing deposits
|
|
|
107,296
|
|
|
|
57
|
|
|
|
0.21
|
|
|
|
99,341
|
|
|
|
66
|
|
|
|
0.27
|
|
Total interest earning assets
|
|
|
1,118,514
|
|
|
|
10,812
|
|
|
|
3.88
|
|
|
|
1,199,750
|
|
|
|
13,797
|
|
|
|
4.61
|
|
Less: Allowance for loan losses
|
|
|
(17,759
|
)
|
|
|
|
|
|
|
|
|
|
|
(24,762
|
)
|
|
|
|
|
|
|
|
|
Non-interest earning assets
|
|
|
92,289
|
|
|
|
|
|
|
|
|
|
|
|
97,298
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,193,044
|
|
|
|
|
|
|
|
|
|
|
$
|
1,272,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings accounts
|
|
$
|
98,445
|
|
|
$
|
72
|
|
|
|
0.29
|
%
|
|
$
|
118,243
|
|
|
$
|
165
|
|
|
|
0.56
|
%
|
NOW and money market
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accounts
|
|
|
305,064
|
|
|
|
390
|
|
|
|
0.51
|
|
|
|
281,395
|
|
|
|
582
|
|
|
|
0.83
|
|
Certificates of deposit and other time deposits
|
|
|
605,531
|
|
|
|
2,983
|
|
|
|
1.98
|
|
|
|
681,842
|
|
|
|
3,927
|
|
|
|
2.31
|
|
FHLB advances
|
|
|
27,678
|
|
|
|
282
|
|
|
|
4.09
|
|
|
|
27,645
|
|
|
|
280
|
|
|
|
4.06
|
|
Subordinated debentures
|
|
|
18,000
|
|
|
|
341
|
|
|
|
7.60
|
|
|
|
18,000
|
|
|
|
350
|
|
|
|
7.80
|
|
Total interest bearing liabilities
|
|
|
1,054,718
|
|
|
|
4,068
|
|
|
|
1.55
|
|
|
|
1,127,125
|
|
|
|
5,304
|
|
|
|
1.89
|
|
Non-interest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing deposits
|
|
|
82,698
|
|
|
|
|
|
|
|
|
|
|
|
75,518
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
5,069
|
|
|
|
|
|
|
|
|
|
|
|
1,729
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,142,485
|
|
|
|
|
|
|
|
|
|
|
|
1,204,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
50,559
|
|
|
|
|
|
|
|
|
|
|
|
67,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
1,193,044
|
|
|
|
|
|
|
|
|
|
|
$
|
1,272,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
6,744
|
|
|
|
|
|
|
|
|
|
|
$
|
8,493
|
|
|
|
|
|
Net interest spread
|
|
|
|
|
|
|
|
|
|
|
2.33
|
%
|
|
|
|
|
|
|
|
|
|
|
2.72
|
%
|
Net interest margin
|
|
|
|
|
|
|
|
|
|
|
2.42
|
%
|
|
|
|
|
|
|
|
|
|
|
2.84
|
%
|
(1)
Taxable equivalent yields are calculated assuming
a 34% federal income tax rate.
(2)
Includes loan fees, immaterial in amount, in both
interest income and the calculation of yield on loans.
(3)
Calculations include non-accruing loans in the average
loan amounts outstanding.
(4)
Includes loans held for sale.
(5)
Annualized
|
|
Six Months Ended June 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
(Dollars in thousands)
|
|
Balance
|
|
|
Interest
|
|
|
Yield/Cost (5)
|
|
|
Balance
|
|
|
Interest
|
|
|
Yield/Cost (5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and agencies
|
|
$
|
21,537
|
|
|
$
|
230
|
|
|
|
2.15
|
%
|
|
$
|
126,081
|
|
|
$
|
1,580
|
|
|
|
2.53
|
%
|
Mortgage-backed securities
|
|
|
294,883
|
|
|
|
2,969
|
|
|
|
2.03
|
|
|
|
83,846
|
|
|
|
1,387
|
|
|
|
3.34
|
|
Equity securities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
294
|
|
|
|
21
|
|
|
|
14.40
|
|
State and political subdivision securities
(1)
|
|
|
16,636
|
|
|
|
541
|
|
|
|
6.56
|
|
|
|
22,802
|
|
|
|
791
|
|
|
|
7.00
|
|
Trust preferred securities
|
|
|
1,055
|
|
|
|
29
|
|
|
|
5.54
|
|
|
|
1,103
|
|
|
|
35
|
|
|
|
6.40
|
|
Corporate bonds
|
|
|
206
|
|
|
|
1
|
|
|
|
0.98
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Loans
(2) (3) (4)
|
|
|
694,733
|
|
|
|
18,829
|
|
|
|
5.47
|
|
|
|
859,876
|
|
|
|
24,035
|
|
|
|
5.64
|
|
FHLB stock
|
|
|
4,805
|
|
|
|
103
|
|
|
|
4.32
|
|
|
|
4,896
|
|
|
|
106
|
|
|
|
4.37
|
|
Interest bearing deposits
|
|
|
95,855
|
|
|
|
104
|
|
|
|
0.22
|
|
|
|
109,900
|
|
|
|
140
|
|
|
|
0.26
|
|
Total interest earning assets
|
|
|
1,129,710
|
|
|
|
22,806
|
|
|
|
4.07
|
|
|
|
1,208,798
|
|
|
|
28,095
|
|
|
|
4.69
|
|
Less: Allowance for loan losses
|
|
|
(17,868
|
)
|
|
|
|
|
|
|
|
|
|
|
(23,320
|
)
|
|
|
|
|
|
|
|
|
Non-interest earning assets
|
|
|
92,995
|
|
|
|
|
|
|
|
|
|
|
|
99,766
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,204,837
|
|
|
|
|
|
|
|
|
|
|
$
|
1,285,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings accounts
|
|
$
|
96,491
|
|
|
$
|
143
|
|
|
|
0.30
|
%
|
|
$
|
117,097
|
|
|
$
|
343
|
|
|
|
0.59
|
%
|
NOW and money market accounts
|
|
|
304,972
|
|
|
|
838
|
|
|
|
0.55
|
|
|
|
281,534
|
|
|
|
1,276
|
|
|
|
0.91
|
|
Certificates of deposit and other time deposits
|
|
|
621,632
|
|
|
|
6,408
|
|
|
|
2.08
|
|
|
|
688,543
|
|
|
|
7,969
|
|
|
|
2.33
|
|
FHLB advances
|
|
|
27,761
|
|
|
|
567
|
|
|
|
4.12
|
|
|
|
28,116
|
|
|
|
575
|
|
|
|
4.12
|
|
Subordinated debentures
|
|
|
18,000
|
|
|
|
682
|
|
|
|
7.64
|
|
|
|
18,000
|
|
|
|
691
|
|
|
|
7.74
|
|
Total interest bearing liabilities
|
|
|
1,068,856
|
|
|
|
8,638
|
|
|
|
1.63
|
|
|
|
1,133,290
|
|
|
|
10,854
|
|
|
|
1.93
|
|
Non-interest bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing deposits
|
|
|
79,215
|
|
|
|
|
|
|
|
|
|
|
|
76,152
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
4,858
|
|
|
|
|
|
|
|
|
|
|
|
3,103
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,152,929
|
|
|
|
|
|
|
|
|
|
|
|
1,212,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
51,908
|
|
|
|
|
|
|
|
|
|
|
|
72,699
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
1,204,837
|
|
|
|
|
|
|
|
|
|
|
$
|
1,285,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
14,168
|
|
|
|
|
|
|
|
|
|
|
$
|
17,241
|
|
|
|
|
|
Net interest spread
|
|
|
|
|
|
|
|
|
|
|
2.44
|
%
|
|
|
|
|
|
|
|
|
|
|
2.76
|
%
|
Net interest margin
|
|
|
|
|
|
|
|
|
|
|
2.53
|
%
|
|
|
|
|
|
|
|
|
|
|
2.88
|
%
|
(1)
Taxable equivalent yields are calculated assuming
a 34% federal income tax rate.
(2)
Includes loan fees, immaterial in amount, in both
interest income and the calculation of yield on loans.
(3)
Calculations include non-accruing loans in the average
loan amounts outstanding.
(4)
Includes loans held for sale.
(5)
Annualized
RATE/VOLUME ANALYSIS
The table below shows 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 (change in volume multiplied by old rate); and (3) changes in rate-volume (change in rate multiplied by change in volume).
Changes in rate-volume are proportionately allocated between rate and volume variance.
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2012 vs. 2011
|
|
|
2012 vs. 2011
|
|
|
|
Increase (decrease)
|
|
|
Increase (decrease)
|
|
|
|
Due to change in
|
|
|
Due to change in
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
|
|
Net
|
|
(Dollars in thousands)
|
|
Rate
|
|
|
Volume
|
|
|
Change
|
|
|
Rate
|
|
|
Volume
|
|
|
Change
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and agencies
|
|
$
|
(90
|
)
|
|
$
|
(495
|
)
|
|
$
|
(585
|
)
|
|
$
|
(204
|
)
|
|
$
|
(1,146
|
)
|
|
$
|
(1,350
|
)
|
Mortgage-backed securities
|
|
|
(431
|
)
|
|
|
1,049
|
|
|
|
618
|
|
|
|
(727
|
)
|
|
|
2,309
|
|
|
|
1,582
|
|
Equity securities
|
|
|
(8
|
)
|
|
|
(3
|
)
|
|
|
(11
|
)
|
|
|
(11
|
)
|
|
|
(10
|
)
|
|
|
(21
|
)
|
State and political subdivision securities
|
|
|
(35
|
)
|
|
|
(149
|
)
|
|
|
(184
|
)
|
|
|
(47
|
)
|
|
|
(203
|
)
|
|
|
(250
|
)
|
Trust preferred securities
|
|
|
6
|
|
|
|
(1
|
)
|
|
|
5
|
|
|
|
(5
|
)
|
|
|
(1
|
)
|
|
|
(6
|
)
|
Corporate bonds
|
|
|
1
|
|
|
|
-
|
|
|
|
1
|
|
|
|
1
|
|
|
|
-
|
|
|
|
1
|
|
Loans
|
|
|
(398
|
)
|
|
|
(2,426
|
)
|
|
|
(2,824
|
)
|
|
|
(711
|
)
|
|
|
(4,495
|
)
|
|
|
(5,206
|
)
|
FHLB stock
|
|
|
5
|
|
|
|
(1
|
)
|
|
|
4
|
|
|
|
(1
|
)
|
|
|
(2
|
)
|
|
|
(3
|
)
|
Interest bearing deposits
|
|
|
(14
|
)
|
|
|
5
|
|
|
|
(9
|
)
|
|
|
(19
|
)
|
|
|
(17
|
)
|
|
|
(36
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest earning assets
|
|
|
(964
|
)
|
|
|
(2,021
|
)
|
|
|
(2,985
|
)
|
|
|
(1,724
|
)
|
|
|
(3,565
|
)
|
|
|
(5,289
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings accounts
|
|
|
(69
|
)
|
|
|
(24
|
)
|
|
|
(93
|
)
|
|
|
(147
|
)
|
|
|
(53
|
)
|
|
|
(200
|
)
|
NOW and money market accounts
|
|
|
(238
|
)
|
|
|
46
|
|
|
|
(192
|
)
|
|
|
(537
|
)
|
|
|
99
|
|
|
|
(438
|
)
|
Certificates of deposit and other time deposits
|
|
|
(532
|
)
|
|
|
(412
|
)
|
|
|
(944
|
)
|
|
|
(827
|
)
|
|
|
(734
|
)
|
|
|
(1,561
|
)
|
FHLB advances
|
|
|
2
|
|
|
|
-
|
|
|
|
2
|
|
|
|
(1
|
)
|
|
|
(7
|
)
|
|
|
(8
|
)
|
Subordinated debentures
|
|
|
(9
|
)
|
|
|
-
|
|
|
|
(9
|
)
|
|
|
(9
|
)
|
|
|
-
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing liabilities
|
|
|
(846
|
)
|
|
|
(390
|
)
|
|
|
(1,236
|
)
|
|
|
(1,521
|
)
|
|
|
(695
|
)
|
|
|
(2,216
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in net interest income
|
|
$
|
(118
|
)
|
|
$
|
(1,631
|
)
|
|
$
|
(1,749
|
)
|
|
$
|
(203
|
)
|
|
$
|
(2,870
|
)
|
|
$
|
(3,073
|
)
|
Non-Interest Income and Non-Interest
Expense
The following tables compare the components
of non-interest income and expenses for the periods ended June 30, 2012 and 2011. The tables show the dollar and percentage change
from 2011 to 2012. Below each table is a discussion of significant changes and trends.
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
(Dollars in thousands)
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
|
%
|
|
Non-interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer service fees on deposit accounts
|
|
$
|
1,399
|
|
|
$
|
1,554
|
|
|
$
|
(155
|
)
|
|
|
-10.0
|
%
|
Gain on sale of mortgage loans
|
|
|
384
|
|
|
|
291
|
|
|
|
93
|
|
|
|
32.0
|
%
|
Gain on sale of investments
|
|
|
598
|
|
|
|
162
|
|
|
|
436
|
|
|
|
269.1
|
%
|
Loss on sale of investments
|
|
|
(303
|
)
|
|
|
(38
|
)
|
|
|
(265
|
)
|
|
|
697.4
|
%
|
Net impairment losses recognized in earnings
|
|
|
-
|
|
|
|
(67
|
)
|
|
|
67
|
|
|
|
-100.0
|
%
|
Loss on sale and write downs of real estate acquired through foreclosure
|
|
|
(2,016
|
)
|
|
|
(4,651
|
)
|
|
|
2,635
|
|
|
|
-56.7
|
%
|
Gain on sale of premises and equipment
|
|
|
322
|
|
|
|
-
|
|
|
|
322
|
|
|
|
100.0
|
%
|
Gain on sale on real estate acquired through foreclosure
|
|
|
210
|
|
|
|
96
|
|
|
|
114
|
|
|
|
118.8
|
%
|
Brokerage commissions
|
|
|
112
|
|
|
|
108
|
|
|
|
4
|
|
|
|
3.7
|
%
|
Other income
|
|
|
617
|
|
|
|
380
|
|
|
|
237
|
|
|
|
62.4
|
%
|
|
|
$
|
1,323
|
|
|
$
|
(2,165
|
)
|
|
$
|
3,488
|
|
|
|
161.1
|
%
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
(Dollars in thousands)
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
|
%
|
|
Non-interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer service fees on deposit accounts
|
|
$
|
2,782
|
|
|
$
|
2,999
|
|
|
$
|
(217
|
)
|
|
|
-7.2
|
%
|
Gain on sale of mortgage loans
|
|
|
695
|
|
|
|
556
|
|
|
|
139
|
|
|
|
25.0
|
%
|
Gain on sale of investments
|
|
|
1,309
|
|
|
|
231
|
|
|
|
1,078
|
|
|
|
466.7
|
%
|
Loss on sale of investments
|
|
|
(303
|
)
|
|
|
(38
|
)
|
|
|
(265
|
)
|
|
|
697.4
|
%
|
Net impairment losses recognized in earnings
|
|
|
(26
|
)
|
|
|
(104
|
)
|
|
|
78
|
|
|
|
-75.0
|
%
|
Loss on sale and write downs of real estate acquired through foreclosure
|
|
|
(3,582
|
)
|
|
|
(4,886
|
)
|
|
|
1,304
|
|
|
|
-26.7
|
%
|
Gain on sale of premises and equipment
|
|
|
322
|
|
|
|
-
|
|
|
|
322
|
|
|
|
100.0
|
%
|
Gain on sale on real estate acquired through foreclosure
|
|
|
613
|
|
|
|
121
|
|
|
|
492
|
|
|
|
406.6
|
%
|
Gain on sale on real estate held for development
|
|
|
175
|
|
|
|
-
|
|
|
|
175
|
|
|
|
100.0
|
%
|
Brokerage commissions
|
|
|
207
|
|
|
|
215
|
|
|
|
(8
|
)
|
|
|
-3.7
|
%
|
Other income
|
|
|
1,028
|
|
|
|
734
|
|
|
|
294
|
|
|
|
40.1
|
%
|
|
|
$
|
3,220
|
|
|
$
|
(172
|
)
|
|
$
|
3,392
|
|
|
|
1972.1
|
%
|
We originate qualified VA, KHC, RHC and
conventional secondary market loans and sell them into the secondary market with servicing rights released. Gain on sale of mortgage
loans increased for 2012 due to an increase in the volume of loans refinanced, originated and sold.
We invest in various types of liquid assets,
including United States Treasury obligations, securities of various federal agencies, obligations of states and political subdivisions,
corporate bonds, mutual funds, stocks and others. During 2012 we recorded a gain on the sale of debt investment securities of
$1.3 million. Offsetting this gain was a loss on the sales of debt investment securities of $303,000. Gains and losses on investment
securities are infrequent and are not a consistent recurring core source of income. The sale of debt investment securities during
2012 is mainly related to the branch sales as the sale of the branches will be settled in cash. The first sale closed on July
6, 2012 and the second branch sale is expected to close late in the third quarter of 2012.
We recognized
other-than-temporary impairment charges of $26,000 for the expected credit loss during the 2012 period on one of our trust
preferred securities, compared to $104,000 of impairment charges for 2011. Management believes this impairment was primarily
attributable to the current economic environment in which the financial condition of some of the issuers deteriorated.
Preferred Term Security VI was called for early redemption in July 2012. We received principal and interest of $209,000
and recorded a gain on sale of $192,000.
Further reducing non-interest income for
2012 was an increase of $1.3 million in losses on the sale and write down of real estate owned properties due to the decline in
market value of properties held in this portfolio. Offsetting the losses and write downs were recorded gains of $613,000 on the
sale of real estate owned properties.
Through our subsidiary, First Federal
Office Park, we hold commercial lots adjacent to our home office on Ring Road in Elizabethtown that are available for sale. During
the June 2012 period we recorded $175,000 in gains from a lot sale. All of the original nine lots held for sale have now been
sold. We also recorded a gain of $322,000 on the sale of two properties held by the Bank as possible new banking center
locations. One lot was located in Clarksville, Indiana and the other in Elizabethtown.
The increase in other income for the 2012
period was the result of increases in income received on real estate owned properties.
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
(Dollars in thousands)
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
|
%
|
|
Non-interest expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits
|
|
$
|
3,822
|
|
|
$
|
3,958
|
|
|
$
|
(136
|
)
|
|
|
-3.4
|
%
|
Office occupancy expense and equipment
|
|
|
782
|
|
|
|
832
|
|
|
|
(50
|
)
|
|
|
-6.0
|
%
|
Marketing and advertising
|
|
|
135
|
|
|
|
164
|
|
|
|
(29
|
)
|
|
|
-17.7
|
%
|
Outside services and data processing
|
|
|
893
|
|
|
|
1,056
|
|
|
|
(163
|
)
|
|
|
-15.4
|
%
|
Bank franchise tax
|
|
|
402
|
|
|
|
342
|
|
|
|
60
|
|
|
|
17.5
|
%
|
FDIC insurance premiums
|
|
|
682
|
|
|
|
906
|
|
|
|
(224
|
)
|
|
|
-24.7
|
%
|
Amortization of core deposit intangible
|
|
|
62
|
|
|
|
76
|
|
|
|
(14
|
)
|
|
|
-18.4
|
%
|
Real estate acquired through foreclosure expense
|
|
|
2,336
|
|
|
|
646
|
|
|
|
1,690
|
|
|
|
261.6
|
%
|
Loan expense
|
|
|
656
|
|
|
|
557
|
|
|
|
99
|
|
|
|
17.8
|
%
|
Other expense
|
|
|
1,446
|
|
|
|
1,379
|
|
|
|
67
|
|
|
|
4.9
|
%
|
|
|
$
|
11,216
|
|
|
$
|
9,916
|
|
|
$
|
1,300
|
|
|
|
13.1
|
%
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
(Dollars in thousands)
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
|
%
|
|
Non-interest expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits
|
|
$
|
7,675
|
|
|
$
|
8,287
|
|
|
$
|
(612
|
)
|
|
|
-7.4
|
%
|
Office occupancy expense and equipment
|
|
|
1,550
|
|
|
|
1,643
|
|
|
|
(93
|
)
|
|
|
-5.7
|
%
|
Marketing and advertising
|
|
|
168
|
|
|
|
389
|
|
|
|
(221
|
)
|
|
|
-56.8
|
%
|
Outside services and data processing
|
|
|
1,704
|
|
|
|
1,853
|
|
|
|
(149
|
)
|
|
|
-8.0
|
%
|
Bank franchise tax
|
|
|
744
|
|
|
|
656
|
|
|
|
88
|
|
|
|
13.4
|
%
|
FDIC insurance premiums
|
|
|
1,097
|
|
|
|
1,876
|
|
|
|
(779
|
)
|
|
|
-41.5
|
%
|
Amortization of core deposit intangible
|
|
|
127
|
|
|
|
153
|
|
|
|
(26
|
)
|
|
|
-17.0
|
%
|
Real estate acquired through foreclosure expense
|
|
|
2,676
|
|
|
|
1,028
|
|
|
|
1,648
|
|
|
|
160.3
|
%
|
Loan expense
|
|
|
1,164
|
|
|
|
609
|
|
|
|
555
|
|
|
|
91.1
|
%
|
Other expense
|
|
|
2,800
|
|
|
|
2,828
|
|
|
|
(28
|
)
|
|
|
-1.0
|
%
|
|
|
$
|
19,705
|
|
|
$
|
19,322
|
|
|
$
|
383
|
|
|
|
2.0
|
%
|
Employee compensation and benefits is
the largest component of non-interest expense. The decrease for 2012 was due to higher insurance claims recorded in 2011 under
our self-funded insurance plan and a decrease in the average number of full time equivalent employees. Full time equivalent employees
decreased from 333 at June 30, 2011 to 306 at June 30, 2012.
Office occupancy and equipment expense,
marketing and advertising related expenses and outside services and data processing related expenses decreased due to cost cutting
initiatives.
FDIC insurance premiums decreased for
the period mainly due to the change in the FDIC’s assessment base and rate structure that went into effect during the second
quarter of 2011.
The increase in real estate acquired through
foreclosure expense was primarily due to
a $1.5 million termination fee paid that was related to the
termination of a property investment and management agreement on a residential development held in other real estate owned.
Loan expense increased due to increases
in loan portfolio management expenses and expenses incurred in connection with loan workout activities. The increase in loan expense
reflects our elevated level of non-performing assets for 2012.
Income Taxes
The provision for income taxes includes
federal and state income taxes and in 2012 and 2011 reflects a full valuation allowance against all of our deferred tax assets
that are not currently recoverable through carry back. We did not record any income tax expense or benefit for the six month period
ended June 30, 2012, as an income tax benefit of $2.1 million was offset by an increase in valuation allowance for deferred taxes.
An income tax benefit of $1.5 million was recorded for the six months ended June 30, 2011. Our June 30, 2011 tax benefit is entirely
due to gains in other comprehensive income that are presented in current operations in accordance with applicable accounting standards.
The effective tax rate for the six month period ended June 30, 2012 was 0.0% as compared to 10.0% for 2011. Our future effective
income tax rate will fluctuate based on the mix of taxable and tax free investments we make and, to a greater extent, the impact
of changes in the required amount of valuation allowance recorded against our net deferred tax assets and our overall level of
taxable income.
A valuation allowance related to deferred
tax assets is required when it is considered more likely than not that all or part of the benefit related to such assets will
not be realized. In assessing the need for a valuation allowance, we considered various factors including our three year cumulative
loss position and the fact that we did not meet our forecast levels in 2010, and 2011, primarily due to higher levels of provision
for loan loss expense. These factors represent the most significant negative evidence that we considered in concluding that a
valuation allowance was necessary at June 30, 2012 and December 31, 2011.
Recording a valuation allowance 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 that we generate taxable income in a given quarter, the valuation allowance may be reduced to fully
or partially offset the corresponding income tax expense. Any remaining deferred tax asset valuation allowance may be reversed
through income tax expense once we can demonstrate a sustainable return to profitability and conclude that it is more likely than
not the deferred tax asset will be utilized prior to expiration.
ANALYSIS OF FINANCIAL CONDITION
Total assets at June 30, 2012
decreased $37.1 million compared to total assets at December 31, 2011. The decrease was primarily due to a decline of $100.0
million in total loans, including loans held for sale in connection with two probable branch divestitures. This decrease was
mainly offset by an increase in cash and cash equivalents of $61.9 million. At quarter end we had increased our liquid assets
substantially in anticipation of the impending branch sales
which will settle in cash.
Loans
Total loans, including loans held
for sale in connection with a probable branch divesture and a probable loan sale, decreased $100.0 million to $637.6 million
at June 30, 2012 compared to $737.6 million at December 31, 2011. Our commercial real estate and commercial portfolios
decreased $82.2 million to $406.7 million at June 30, 2012. Our residential mortgage loan, real estate construction, consumer
and home equity and indirect consumer portfolios all decreased for the 2012 period. The decline in our commercial real estate
and commercial loan portfolios is a result of pay-offs, charge-offs on large commercial real estate loans, and commercial
loans being transferred to real estate acquired through foreclosure. Charge-offs made up $3.3 million or 3.3 % of this
decrease. The decline in the loan portfolio was also due, in part, to our ongoing efforts to resolve problem loans.
Additionally, due to the increased regulatory capital ratios requirement as a result of our written agreement with the FDIC
and KDFI, we have intentionally not replaced much of this loan run-off as we continue our efforts to reduce our asset
size.
|
|
June 30,
|
|
|
December 31,
|
|
(Dollars in thousands)
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
24,865
|
|
|
$
|
30,135
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
Land Development
|
|
|
29,772
|
|
|
|
35,924
|
|
Building Lots
|
|
|
2,742
|
|
|
|
3,880
|
|
Other
|
|
|
349,301
|
|
|
|
418,981
|
|
Real estate construction
|
|
|
3,950
|
|
|
|
4,925
|
|
Residential mortgage
|
|
|
143,273
|
|
|
|
151,866
|
|
Consumer and home equity
|
|
|
64,197
|
|
|
|
69,971
|
|
Indirect consumer
|
|
|
19,500
|
|
|
|
21,892
|
|
|
|
|
637,600
|
|
|
|
737,574
|
|
Less:
|
|
|
|
|
|
|
|
|
Loans held for sale in probable branch divestiture
|
|
|
(101,325
|
)
|
|
|
(46,112
|
)
|
Net deferred loan origination fees
|
|
|
(109
|
)
|
|
|
(209
|
)
|
Allowance for loan losses
|
|
|
(15,300
|
)
|
|
|
(17,181
|
)
|
|
|
|
(116,734
|
)
|
|
|
(63,502
|
)
|
|
|
|
|
|
|
|
|
|
Net Loans
|
|
$
|
520,866
|
|
|
$
|
674,072
|
|
Allowance and Provision for Loan
Losses
Our financial performance depends on the
quality of the loans we originate and management’s ability to assess the degree of risk in existing loans when it determines
the allowance for loan losses. An increase in loan charge-offs or non-performing loans or an inadequate allowance for loan losses
could reduce net interest income, net income and capital, and limit the range of products and services we can offer.
The Allowance for Loan Loss Review
Committee evaluates the allowance for loan losses monthly to maintain a level it believes to be sufficient to absorb probable
incurred credit losses existing in the loan portfolio. Periodic provisions to the allowance are made as needed. The Committee
determines the allowance by applying loss estimates to graded loans by categories, as described below. When appropriate, a
specific reserve will be established for individual loans based upon the risk classification and the estimated potential for
loss. In accordance with our credit management processes, we obtain new appraisals on properties securing our non-performing
commercial real estate loans and use those appraisals to determine specific reserves within the allowance for loan losses. As
we receive new appraisals on properties securing non-performing loans, we recognize charge-offs and adjust specific reserves
as appropriate. In addition, the Committee analyzes such factors as changes in lending policies and procedures; real estate
market conditions; underwriting standards; collection; charge-off and recovery history; changes in national and local
economic business conditions and developments; changes in the characteristics of the portfolio; ability and depth of lending
management and staff; changes in the trend of the volume and severity of past due, non-accrual and classified loans; troubled
debt restructuring and other loan modifications; and results of regulatory examinations.
Further declines in collateral values,
including commercial real estate, may impact our ability to collect on certain loans when borrowers are dependent on the values
of the real estate as a source of cash flow. Beginning the second half of 2008 and continuing into 2011, we substantially increased
our provision for loan losses for our general and specific reserves as we identified adverse conditions. While it is anticipated
that there will continue to be challenges in the foreseeable future as we manage the overall level of our credit quality, it appears
that credit quality may be stabilizing.
As discussed in Note 2 to the consolidated
financial statements, we entered into a Consent Order with bank regulatory agencies. In addition to increasing capital ratios,
we agreed to maintain adequate reserves for loan losses, develop and implement a plan to reduce the level of non-performing assets
through collection, disposition, charge-off or improvement in the credit quality of the loans, develop and implement a plan to
reduce concentrations of credit in commercial real estate loans, implement revised credit risk management practices and credit
administration policies and procedures and to report our progress to the regulators.
The following table analyzes our
allowance for loan losses and loan loss experience for the periods indicated.
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
(Dollars in thousands)
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
17,329
|
|
|
$
|
24,591
|
|
|
$
|
17,181
|
|
|
$
|
22,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans charged-off:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
|
31
|
|
|
|
204
|
|
|
|
62
|
|
|
|
223
|
|
Consumer & home equity
|
|
|
158
|
|
|
|
93
|
|
|
|
276
|
|
|
|
222
|
|
Commercial & commercial real estate
|
|
|
2,190
|
|
|
|
16,178
|
|
|
|
2,990
|
|
|
|
17,890
|
|
Total charge-offs
|
|
|
2,379
|
|
|
|
16,475
|
|
|
|
3,328
|
|
|
|
18,335
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
Consumer & home equity
|
|
|
42
|
|
|
|
48
|
|
|
|
86
|
|
|
|
121
|
|
Commercial & commercial real estate
|
|
|
75
|
|
|
|
27
|
|
|
|
102
|
|
|
|
275
|
|
Total recoveries
|
|
|
117
|
|
|
|
75
|
|
|
|
189
|
|
|
|
396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loans charged-off
|
|
|
2,262
|
|
|
|
16,400
|
|
|
|
3,139
|
|
|
|
17,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
915
|
|
|
|
9,517
|
|
|
|
1,927
|
|
|
|
12,982
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
|
15,982
|
|
|
|
17,708
|
|
|
|
15,969
|
|
|
|
17,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Allowance allocated to loans held for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
sale in probable branch divestiture
|
|
|
(682
|
)
|
|
|
-
|
|
|
|
(669
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period, net
|
|
$
|
15,300
|
|
|
$
|
17,708
|
|
|
$
|
15,300
|
|
|
$
|
17,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses to total loans (1) (2)
|
|
|
|
|
|
|
|
|
|
|
2.50
|
%
|
|
|
2.22
|
%
|
Annualized net charge-offs to average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
loans outstanding
|
|
|
|
|
|
|
|
|
|
|
0.91
|
%
|
|
|
4.21
|
%
|
Allowance for loan losses to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
total non-performing loans (2)
|
|
|
|
|
|
|
|
|
|
|
42
|
%
|
|
|
32
|
%
|
(1) Includes loans held for sale in probable branch divestiture
for 2012
(2) Includes allowance allocated to loans held for sale in probable
branch divestiture for 2012
Provision
for loan loss expense decreased $8.6 million to $915,000 for the three months ended June 30, 2012, compared to the same period
ended June 30, 2011.
Provision for loan loss decreased $11.1 million to $1.9 million for
the six months ended June 30, 2012, compared to the same six month period in 2011. We recorded a smaller provision for 2012 due
to a lower level of charge-offs and an improvement in our security and position of certain classified loans during the period.
Our provision for loan loss was higher in 2011 due to our efforts to ensure the adequacy of the allowance by adding specific reserves
to several large commercial real estate relationships based on updated appraisals of the underlying collateral. We require appraisals
and perform evaluations on impaired assets upon initial identification. Thereafter, we obtain appraisals or perform market
value evaluations on impaired assets at least annually. Recognizing the volatility of certain assets, we assess the transaction
and market conditions to determine if updated appraisals are needed more frequently than annually. Additionally, we evaluate the
collateral condition and value upon foreclosure. The higher provision for 2011 was also due to our increasing the general reserve
provisioning levels for commercial real estate loans due to the general credit quality trend and the higher level of charge-offs.
The allowance for loan losses
decreased $2.4 million to $15.3 million from June 30, 2011 to June 30, 2012.
The decrease was driven by net
charge-offs of $11.6 million taken during 2011 and the first half of 2012. These included specific reserves of $3.2 million
on our collateral dependent loans of which $1.9 million was previously reserved for at December 31, 2011, in addition to
taking other write downs on loans to reflect updated appraisal information obtained as part of our on-going monitoring of the
loan portfolio. Appraisal values declined significantly on one to four family residential developments during 2011.
We believe these values are at or near liquidation value at June 30, 2012. We also believe this concentration has been
fully identified and properly risk rated. The pass loans in this concentration have been separately evaluated for general
allowance allocations. The allowance for loan losses as a percent of total loans was 2.50% for June 30, 2012 compared to
2.22% at June 30, 2011. Specific reserves as allocated to impaired loans made up 33% of the total allowance for loan loss at
June 30, 2012 compared to 42% at June 30, 2011. Net charge-offs for the 2012 period included $1.4 million in partial
charge-offs compared to partial charge-offs of $14.2 million at June 30, 2011. Allowance for loan losses to total
non-performing loans increased to 42% at June 30, 2012 from 32% during the same 2011 period. The increase in the coverage ratio
for 2012 was primarily due to the decrease in non-accrual loans for the period.
Federal regulations require banks to classify
their own assets on a regular basis. The regulations provide for three categories of classified loans — substandard, doubtful
and loss. In addition, we also classify loans as criticized. Loans classified as criticized have a potential weakness that deserves
management’s close attention.
The following table provides information
with respect to criticized and classified loans for the periods indicated:
|
|
June 30,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
(Dollars in thousands)
|
|
2012
|
|
|
2012
|
|
|
2011
|
|
|
2011
|
|
|
2011
|
|
Criticized Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Criticized
|
|
$
|
26,723
|
|
|
$
|
36,753
|
|
|
$
|
31,427
|
|
|
$
|
17,893
|
|
|
$
|
26,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classified Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Substandard
|
|
$
|
68,569
|
|
|
$
|
68,910
|
|
|
$
|
80,691
|
|
|
$
|
99,018
|
|
|
$
|
94,688
|
|
Doubtful
|
|
|
-
|
|
|
|
-
|
|
|
|
30
|
|
|
|
345
|
|
|
|
534
|
|
Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total Classified
|
|
$
|
68,569
|
|
|
$
|
68,910
|
|
|
$
|
80,721
|
|
|
$
|
99,363
|
|
|
$
|
95,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Criticized and Classified
|
|
$
|
95,292
|
|
|
$
|
105,663
|
|
|
$
|
112,148
|
|
|
$
|
117,256
|
|
|
$
|
122,194
|
|
Total criticized and classified loans
declined $26.9 million or 22% from June 31, 2011 and $10.4 million or 10% from the previous quarter ended March 31, 2012. We have
experienced sequential quarterly declines in each quarter since June 30, 2011. Approximately $61.5 million or 90% of the total
classified loans at June 30, 2012 were related to commercial real estate loans in our market area. Several of the non-performing
loans that were added during 2012 were adequately collateralized and therefore did not require additional reserves. Classified
consumer loans totaled $1.0 million, classified mortgage loans totaled $4.7 million and classified commercial loans totaled $1.4
million. The change in our level of allowance for loan losses is a result of a consistent allowance methodology that is driven
by risk ratings. For more information on collection efforts, evaluation of collateral and how loss amounts are estimated, see
“Non-Performing Assets,” below.
Although we may allocate a portion of
the allowance to specific loans or loan categories, the entire allowance is available for active charge-offs. We develop our allowance
estimates based on actual loss experience adjusted for current economic conditions. Allowance estimates represent a prudent measurement
of the risk in the loan portfolio, which we apply to individual loans based on loan type. If economic conditions continue to put
stress on our borrowers going forward, this may require higher provisions for loan losses in future periods. Credit quality will
continue to be a primary focus during 2012 and going forward.
Non-Performing Assets
Non-performing assets consist of certain
non-accruing restructured loans for which the interest rate or other terms have been renegotiated, loans on which interest is
no longer accrued, real estate acquired through foreclosure and repossessed assets. We do not have any loans longer than 90 days
past due still on accrual. Loans, including impaired loans, are placed on non-accrual 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 when we no longer anticipate full principal or interest payments in accordance with the contractual loan terms. If a
loan is impaired, we allocate a portion of the allowance 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
collateral.
Loans that have been restructured are
generally placed on nonaccrual status until we determine the future collection of principal and interest is reasonably assured,
which will require that the borrower demonstrate a period of performance in accordance to the restructured terms of six months
or more.
We review our loans on a regular basis
and implement normal collection procedures when a borrower fails to make a required payment on a loan. If the delinquency on a
mortgage loan exceeds 90 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. We generally charge
off consumer loans when management deems a loan uncollectible and any available collateral has been liquidated. We handle commercial
business and real estate loan delinquencies on an individual basis. These loans are placed on non-accrual status upon becoming
contractually past due 90 days or more as to principal and interest or where substantial doubt about full repayment of principal
and interest is evident.
We recognize interest income on loans
on the accrual basis except for those loans in a non-accrual of income status. We discontinue accruing interest on impaired loans
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, typically after the loan becomes 90 days delinquent. When
we discontinue interest accrual, we reverse existing accrued interest and subsequently recognize interest income only to the extent
we receive cash payments and are assured of repayment of all outstanding principal.
We classify real estate acquired as
a result of foreclosure or by deed in lieu of foreclosure as real estate owned until such time as it is sold. We classify new
and used automobile, motorcycle and all terrain vehicles acquired as a result of foreclosure as repossessed assets until they
are sold. When such property is acquired we record it at fair value less estimated selling costs. We charge any write-down of
the property at the time of acquisition to the allowance for loan losses. Subsequent gains and losses are included
in non-interest income and non-interest expense.
Real estate owned acquired through
foreclosure is recorded at fair value less estimated selling costs at the date of foreclosure. Fair value is based on the
appraised market value of the property based on sales of similar assets. The fair value may be subsequently reduced if the
estimated fair value declines below the original appraised value. We monitor market information and the age of appraisals on
existing real estate owned properties and obtain new appraisals as circumstances warrant. Real estate acquired through
foreclosure increased $7.4 million to $36.5 million at June 30, 2012. Real estate acquired through foreclosure includes $12.7
million in land development properties and building lots, which are located primarily in our Jefferson County market. We
anticipate that our level of real estate acquired through foreclosure will remain at elevated levels for some period of time
as foreclosures reflecting both weak economic conditions and soft commercial real estate values continue. We also have sales
contracts in place on nine other real estate owned properties totaling $20.5 million set to close during the third quarter of
2012, indicating a continued interest in our other real estate owned properties. This includes a bulk sale agreement for the sale of
properties for an aggregate price of $16.2 million. Approximately $1.1 million of other real estate write downs and the
previously mentioned $1.5 million termination fee were recorded during the quarter ended June 30, 2012 as the terms of this
agreement were negotiated. All properties held in other real estate owned are listed for sale with various independent real
estate agents.
A summary of the real estate acquired
through foreclosure activity at the period ends is as follows:
|
|
June 30,
|
|
|
December 31,
|
|
(Dollars in thousands)
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
29,083
|
|
|
$
|
25,807
|
|
Additions
|
|
|
15,361
|
|
|
|
19,416
|
|
Sales
|
|
|
(4,372
|
)
|
|
|
(6,877
|
)
|
Writedowns
|
|
|
(3,543
|
)
|
|
|
(9,263
|
)
|
Ending balance
|
|
$
|
36,529
|
|
|
$
|
29,083
|
|
The following table provides information
with respect to non-performing assets for the periods indicated.
|
|
June 30,
|
|
|
March 31,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
(Dollar in thousands)
|
|
2012
|
|
|
2012
|
|
|
2011
|
|
|
2011
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructured on non-accrual status
|
|
$
|
21,844
|
|
|
$
|
18,574
|
|
|
$
|
18,032
|
|
|
$
|
23,302
|
|
|
$
|
12,846
|
|
Past due 90 days still on accrual
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Loans on non-accrual status
|
|
|
16,217
|
|
|
|
20,946
|
|
|
|
21,718
|
|
|
|
28,155
|
|
|
|
24,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans
|
|
|
38,061
|
|
|
|
39,520
|
|
|
|
39,750
|
|
|
|
51,457
|
|
|
|
36,886
|
|
Real estate acquired through foreclosure
|
|
|
36,529
|
|
|
|
30,081
|
|
|
|
29,083
|
|
|
|
29,180
|
|
|
|
26,459
|
|
Other repossessed assets
|
|
|
30
|
|
|
|
49
|
|
|
|
42
|
|
|
|
36
|
|
|
|
34
|
|
Total non-performing assets
|
|
$
|
74,620
|
|
|
$
|
69,650
|
|
|
$
|
68,875
|
|
|
$
|
80,673
|
|
|
$
|
63,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income that would have
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
been earned on non-performing loans
|
|
$
|
2,082
|
|
|
$
|
2,197
|
|
|
$
|
2,238
|
|
|
$
|
2,866
|
|
|
$
|
2,080
|
|
Interest income recognized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
on non-performing loans
|
|
|
1,035
|
|
|
|
899
|
|
|
|
904
|
|
|
|
940
|
|
|
|
642
|
|
Ratios: Non-performing loans to total loans (includes loans held for sale in probable branch divestiture)
|
|
|
5.97
|
%
|
|
|
5.72
|
%
|
|
|
5.39
|
%
|
|
|
6.72
|
%
|
|
|
4.61
|
%
|
Non-performing assets to total loans (includes loans held for sale in probable branch divestiture)
|
|
|
11.71
|
%
|
|
|
10.08
|
%
|
|
|
9.34
|
%
|
|
|
10.54
|
%
|
|
|
7.93
|
%
|
Non-performing loans decreased $1.7
million at June 30, 2012 compared to December 31, 2011. The decrease for 2012 was the result of a decrease in non-accrual
loans of $5.5 million offset by an increase in restructured non-accruing mortgage, commercial and commercial real estate
loans of $3.8 million. Loans that have been restructured are generally placed on nonaccrual status until we determine the
future collection of principal and interest is reasonably assured, which will require that the borrower demonstrate improved
financial position and a period of performance in accordance to the restructured terms of six months or more. The change
in non-accrual loans resulted from the addition of seven non-accrual relationships totaling $8.8 million. Offsetting
this increase was a decrease in non-accrual loans due to write-downs of $3.0 million based upon updated appraisals and
transfers of seven non-accrual relationships totaling $11.6 million to real estate acquired through foreclosure. A
concentration in loans for residential subdivision development in Jefferson and Oldham Counties contributed significantly to
the increases in our non-performing loans and our non-performing assets during the past three years. At June 30, 2012,
substantially all of our residential housing development assets in these counties have been classified as impaired and
written down to what we believe to be at or near liquidation value. The remaining residential development credits are smaller
and have strong guarantors. All non-performing loans are considered impaired.
The following table provides information
with respect to restructured loans for the periods indicated.
|
|
June 30,
|
|
|
December 31,
|
|
(Dollar in thousands)
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Restructured loans on non-accrual
|
|
$
|
21,844
|
|
|
$
|
18,032
|
|
Restructured loans on accrual
|
|
|
10,116
|
|
|
|
16,047
|
|
|
|
|
|
|
|
|
|
|
Total restructured loans
|
|
$
|
31,960
|
|
|
$
|
34,079
|
|
The increase in restructured loans on
non-accrual for 2012 resulted from the transfer of a commercial real estate loan relationship totaling $10.1 million that had
previously been restructured on accrual. Offsetting this increase was the transfer of one non-accrual relationship totaling $4.9
million to real estate acquired through foreclosure and the transfer of one non-accrual relationship of $1.2 million to accrual
status. Five commercial real estate relationships totaling $2.9 million were added to restructured loans on accrual. The loans
were evaluated as impaired loans and appropriately allocated specific reserve allowances.
The terms of our restructured loans have
been renegotiated to reduce the rate of interest or extend the term, thus reducing the amount of cash flow required from the borrower
to service the loans. We anticipate that our level of
restructured loans will continue to increase as we identify borrowers in financial difficulty and work with them to modify to
more affordable terms. We have worked with customers when feasible to establish “A” and “B” note structures.
The “B” note is charged-off on our books but remains an outstanding balance for the customer. These typically carry
a very nominal or low rate of interest. The “A” note is a note structured on a proper basis meeting internal policy
standards for a performing loan. After six months of performance, the “A” note restructured loan is eligible to be
placed back on an accrual basis as a performing troubled debt restructured loan.
Investment Securities
Interest on securities provides us our
largest source of interest income after interest on loans, constituting 16.8% of the total interest income for the six months
ended June 30, 2012. 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 available-for-sale investment portfolio increased
by $3.5 million due to the purchase of government-sponsored mortgage-backed securities offset by the sales of lower yielding investments.
Recent purchases have been high cash flow instruments with short average lives in order to decrease the volatility of the investment
portfolio as well as provide cash flow in order to limit interest rate risk.
We evaluate investment securities with
significant declines in fair value on a quarterly basis to determine whether they should be considered other-than-temporarily
impaired under current accounting guidance, which generally provides that if a security is in an unrealized loss position, whether
due to general market conditions or industry or issuer-specific factors, the holder of the securities must assess whether the
impairment is other-than-temporary.
We consider 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,
and whether management has
the intent to sell the debt security or whether it is more likely than not that we will be required to sell the debt security
before its anticipated recovery.
In analyzing an issuer’s financial condition, we may consider
whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred,
and the results of reviews of the issuer’s financial condition.
The unrealized losses on our government
sponsored mortgage-backed residential securities and corporate bonds were a result of changes in interest rates for fixed-rate
securities where the interest rate received is less than the current rate available for new offerings of similar securities. Because
the decline in market value is attributable to changes in interest rates and not credit quality, and because we do not intend
to sell and it is more likely than not that we will not be required to sell these investments until recovery of fair value, which
may be maturity, we do not consider these investments to be other-than-temporarily impaired at June 30, 2012.
We have evaluated the decline in the fair
value of our trust preferred securities, which are directly related to the credit and liquidity crisis that the financial services
industry has experienced in recent years. The trust preferred securities market is currently inactive, making
the valuation of trust preferred securities very difficult. We value trust preferred securities using unobservable
inputs through a discounted cash flow analysis as permitted under current accounting guidance and using the expected cash flows
appropriately discounted using present value techniques. Refer to Note 9 – Fair Value for more information.
We recognized other-than-temporary
impairment charges of $26,000 for the expected credit loss during the 2012 period and $2.1 million during the time we have
held these securities on five of our trust preferred securities with an original cost basis of $3.0 million. All of our trust
preferred securities are currently rated below investment grade. One of our trust preferred securities continues to pay
interest as scheduled through June 30, 2012, and is expected to continue paying interest as scheduled. The other four trust
preferred securities are paying either partial or full interest in kind instead of full cash interest. Preferred Term
Security VI was called for early redemption in July 2012. We received principal and interest of $209,000 and recorded a gain
on sale of $192,000. See Note 3 – Securities for more information. Management will continue to evaluate
these securities for impairment quarterly.
Deposits
We rely
primarily on providing excellent customer service and on our long-standing relationships with customers to attract and retain deposits.
Market interest rates and rates on deposit products offered by competing financial institutions can significantly affect our ability
to attract and retain 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 market conditions have caused us to rely increasingly on short-term certificate
accounts and other deposit alternatives that are more responsive to market interest rates. We use forecasts based on interest
rate risk simulations to assist management in monitoring our use of certificates of deposit and other deposit products as funding
sources and the impact of the use of those products on interest income and net interest margin in various rate environments
.
Total
deposits decreased $33.5 million compared to December 31, 2011.
Offsetting this decrease were increases in non-interest
bearing, NOW demand and savings deposits compared to December 31, 2011. Public funds decreased $12.6 million while retail and
commercial deposits decreased $7.6 million. B
rokered deposits and Certificate
of Deposits Account Registry Service (“CDARS”) certificates decreased $13.3 million. Brokered deposits were $75.4
million at June 30, 2012 compared to $87.3 million at December 31, 2011. As a result of our Consent Order with bank regulatory
agencies, we are no longer allowed to accept, renew or rollover brokered deposits (including deposits through the CDARs program)
without prior regulatory approval.
Additionally, in 2012 we became a member of Quickrate, a premier non-brokered market
place that we use as an additional low cost funding source. We do not anticipate a negative impact as a result of not being able
to renew the $75.4 million of brokered deposits due to additional funding sources such as Qwickrate, decreased loan generation,
continued loan pay downs, and our highly liquid and mostly short-term investment portfolio.
We have deployed additional
resources to try to reduce our cost of funds in this low rate environment. The Consent Order resulted in the Bank being
categorized as a “troubled institution” by bank regulators and as a result limits the interest rate the Bank can
pay on interest bearing deposits. Unless the Bank is granted a waiver because it resides in a market that the FDIC determines
is a high rate market, the Bank is limited to paying deposit interest rates .75% above the average rates computed by the
FDIC. The Bank has applied and has been granted the waiver for 2012. However, the Bank has elected to adhere to average rates
computed by the FDIC plus the .75% rate cap.
The following table breaks down our deposits.
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
Non-interest bearing
|
|
$
|
82,596
|
|
|
$
|
77,629
|
|
NOW demand
|
|
|
168,947
|
|
|
|
160,722
|
|
Savings
|
|
|
96,867
|
|
|
|
91,774
|
|
Money market
|
|
|
138,246
|
|
|
|
138,973
|
|
Certificates of deposit
|
|
|
602,646
|
|
|
|
653,696
|
|
|
|
$
|
1,089,302
|
|
|
$
|
1,122,794
|
|
Non-interest bearing deposits at
June 30, 2012 include $13.4 million in deposits held for sale compared to $5.0 million held for sale at December 31, 2011.
NOW demand, savings, money market and certificate of deposit balances at June 30, 2012 include $312.2 million in deposits
held for sale compared to $112.3 million at December 31, 2011. We have public funds deposits from school boards, water
districts and municipalities within our markets. These deposits are larger than individual retail depositors. We do not have
a deposit relationship that is significant enough to cause a negative impact on our liquidity position.
Advances from Federal Home Loan Bank
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
Federal Home Loan Bank of Cincinnati (FHLB) to compensate for reductions in deposits or deposit inflows at less than projected
levels. At June 30, 2012 we had $27.7 million in advances outstanding from the FHLB. At June 30, 2012, we had sufficient collateral
available to borrow, approximately, an additional $14.9 million in advances from the FHLB. Advances from the FHLB are secured
by our stock in the FHLB, certain securities and substantially all of our first mortgage loans.
Subordinated Debentures
In 2008, an unconsolidated trust subsidiary
of First Financial Service Corporation issued $8.0 million in trust preferred securities. The trust loaned the proceeds of the
offering to us in exchange for junior subordinated deferrable interest debentures, which proceeds we used to finance the purchase
of FSB Bancshares, Inc. The subordinated debentures, which mature on June 24, 2038, can be called at par in whole or in part on
or after June 24, 2018. The subordinated debentures pay a fixed rate of 8% for thirty years. We have the option to defer interest
payments on the subordinated debt from time to time for a period not to exceed five consecutive years. The subordinated debentures
are considered as Tier I capital for the Corporation under current regulatory guidelines.
In 2007, a different trust subsidiary
issued 30 year cumulative trust preferred securities totaling $10 million at a 10 year fixed rate of 6.69% adjusting quarterly
thereafter at LIBOR plus 160 basis points. The subordinated debentures, which mature March 22, 2037, can be called at par in whole
or in part on or after March 15, 2017. We have the option to defer interest payments on the subordinated debt from time to time
for a period not to exceed five consecutive years. The subordinated debentures are considered as Tier I capital for the Corporation
under current regulatory guidelines.
Our trust subsidiaries loaned the
proceeds of their offerings of trust preferred securities to us in exchange for junior subordinated deferrable interest
debentures. We are not considered the primary beneficiary of these trusts which are variable interest entities. Therefore the trusts
are not consolidated in our financial statements, but rather the subordinated debentures are shown as a liability. Our
investment in the common stock of the trusts was $310,000.
On October 29, 2010, we exercised our
right to defer regularly scheduled interest payments on both issues of junior subordinated notes relating to
outstanding trust preferred securities. Together, the junior subordinated notes had an outstanding principal amount of $18
million. We have the right to defer payments of interest for up to 20 consecutive quarterly periods without default or
penalty.
After such period, we must pay all deferred interest and resume quarterly interest
payments or we will be in default.
During the deferral period, the statutory trusts, which are wholly owned
subsidiaries of First Financial Service Corporation formed to issue the trust preferred securities, will likewise suspend the
declaration and payment of dividends on the trust preferred securities. The regular scheduled interest payments will continue
to be accrued for payment in the future and reported as an expense for financial statement purposes. As of June 30, 2012,
these accrued but unpaid interest payments totaled $2.4 million.
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 can meet the cash
flow requirements of depositors and borrowers, as well as our operating cash needs, at a reasonable cost, taking into account
all on- and off-balance sheet funding demands. Our investment and funds management policy identifies the primary sources
of liquidity, establishes procedures for monitoring and measuring liquidity, and establishes minimum liquidity requirements
in compliance with regulatory guidance. Bank management continually monitors the Bank’s liquidity position with oversight from
the Asset Liability Committee.
Our banking centers provide access to
retail deposit markets. If large certificate depositors shift to our competitors or other markets in response to
interest rate changes, we have the ability to replenish those deposits through alternative funding sources. In addition to
maintaining a stable core deposit base, we maintain adequate liquidity primarily through the use of investment securities.
Traditionally, we have also borrowed from the FHLB to supplement our funding requirements. At June 30, 2012, we had
sufficient collateral available to borrow, approximately, an additional $14.9 million in advances from the FHLB. We believe
that we have adequate funding sources through unpledged investment securities, loan principal repayments, investment
securities pay downs, and potential asset maturities and sales to meet our foreseeable liquidity requirements.
At the holding company level, the Corporation
uses cash to pay dividends to stockholders, repurchase common stock, make selected investments and acquisitions, and service debt.
The main sources of funding for the Corporation include dividends from the Bank, borrowings and access to the capital markets.
The primary source of funding for the
Corporation has been dividends and returns of investment from the Bank. Kentucky banking laws limit the amount of dividends that
may be paid to the Corporation by the Bank without prior approval of the KDFI. Under these laws, the amount of dividends that
may be paid in any calendar year is limited 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’s Consent Order
with the FDIC and KDFI requires us to obtain the consent of the Regional Director of the FDIC and the Commissioner of the KDFI
to declare and pay cash dividends to the Corporation. The Corporation has also entered into a formal agreement with the Federal
Reserve to obtain regulatory approval before declaring any dividends. We may not redeem shares or obtain additional borrowings
without prior approval. Because of these limitations, consolidated cash flows as presented in the consolidated statements of cash
flows may not represent cash immediately available to the Corporation. During the first six months of 2012, the Bank did not declare
or pay any dividends to the Corporation. Cash held by the Corporation at June 30, 2012 was $387,000 compared to cash of $554,000
at December 31, 2011.
CAPITAL
Stockholders’ equity decreased $5.0
million for the period ended June 30, 2012 compared to December 31, 2011, primarily due to a net loss attributable to common shareholders
recorded during the period. Our average stockholders’ equity to average assets ratio decreased to 4.31% for the six months
ended June 30, 2012 compared to 5.66% for the 2011 period.
On January 9, 2009, we sold $20 million
of cumulative perpetual preferred shares, with a liquidation preference of $1,000 per share (the “Senior Preferred Shares”)
to the U.S. Treasury under the terms of its Capital Purchase Program. The Senior Preferred Shares constitute Tier 1 capital and
rank senior to our common shares. The Senior Preferred Shares pay cumulative dividends at a rate of 5% per year for the first
five years and will reset to a rate of 9% per year on January 9, 2014.
Under the terms of our CPP stock purchase
agreement, we also issued the U.S. Treasury a warrant to purchase an amount of our common stock equal to 15% of the aggregate
amount of the Senior Preferred Shares, or $3 million. The warrant entitles the U.S. Treasury to purchase 215,983 common shares
at a purchase price of $13.89 per share. The initial exercise price for the warrant and the number of shares subject to the warrant
were determined by reference to the market price of our common stock calculated on a 20-day trailing average as of December 8,
2008, the date the U.S. Treasury approved our application. The warrant has a term of 10 years and is potentially dilutive
to earnings per share.
On October 29, 2010, we gave written notice
to the U.S. Treasury that effective with the fourth quarter of 2010, we were suspending the payment of regular quarterly cash
dividends on our Senior Preferred Shares. The dividends are cumulative and failure to pay dividends for six quarters would trigger
the rights of the holder of our Senior Preferred Shares to appoint representatives to our Board of Directors. The dividends will
continue to be accrued for payment in the future and reported as a preferred dividend requirement that is deducted from income
to common shareholders for financial statement purposes.
On June 19, 2012, the U.S. Treasury
(“Treasury”) notified us that the Company’s Series A Preferred Stock would be included in one of a series of
pooled auctions of the securities of financial institutions purchased by Treasury under its Capital Purchase Program, which were
scheduled to be conducted in the fall of 2012. Treasury also informed us that we could submit a bid to purchase all of our Series
A Preferred Stock in advance of the pooled auction, either by us directly or by one or more qualified investors designated by us.
Acceptance of any bid is at the discretion of the Treasury, assuming the bid meets a minimum price established internally by Treasury.
Our Board of Directors engaged a financial advisor to assist it in identifying, selecting and negotiating with qualified accredited
investors regarding the terms of a possible bid. On August 6, 2012, we submitted to Treasury a bid by a group of investors designated
by us. Treasury has acknowledged receipt of the bid, which is currently under review. If Treasury accepts the bid and completes
a sale to the bidders, the full $20 million stated value of our Series A Preferred Stock would remain outstanding and our obligation
to pay dividends, currently at an annual rate of 5% and increasing to 9% in January 2014, would continue until the securities are
retired. If the bid is not accepted, Treasury has the option to give us and our designated bidders an opportunity to negotiate
a higher purchase price or to include our Series A Preferred Stock in a future pooled or individual auction.
In addition to our agreement with the
Federal Reserve that requires prior written consent to repurchase common shares, the terms of our Senior Preferred Shares do not
allow us to repurchase shares of our common stock without the consent of the holder until the Senior Preferred Shares are redeemed.
During the first six months of 2012, we did not purchase any shares of our common stock.
Each of the federal bank regulatory agencies
has established minimum leverage capital requirements for banks. Banks must maintain a minimum ratio of Tier 1 capital to adjusted
average quarterly assets ranging from 3% to 5%, subject to federal bank regulatory evaluation of an organization’s overall
safety and soundness.
In its 2012 Consent Order with the
FDIC and KDFI, the Bank has agreed to achieve and maintain a Tier 1 capital ratio of 9.0% and a total risk-based capital
ratio of 12.0% by June 30, 2012. We were not in compliance with the Tier 1 and total risk-based capital requirements at June
30, 2012. We notified the bank regulatory agencies that the increased capital levels would not be achieved. We anticipate
that the FDIC and KDFI will reevaluate our progress toward achieving the higher capital ratios at September 30, 2012.
The 2012 Consent Order requires that
if the Bank should be unable to reach the required capital levels by June 30, 2012, and the Bank receives written directions
from the FDIC and KDFI to do so, then the Bank would develop, adopt and implement within 30 days a written plan to sell or
merge itself into another federally insured financial institution. The 2012 Consent Order requires the Bank to continue to
adhere to the plans implemented in response to the 2011 Consent Order, and includes the substantive provisions of the 2011
Consent Order. They are working on various specific initiatives to increase our regulatory capital and to reduce our total
assets such as the sale of branch offices. We have also provided them with the pro forma information regarding Tier 1 and
total risk based capital which we are projecting to be over 8.50% and 12.00%, respectively, based on June 30, 2012 information
and on the consummation of the branch sales.
In response to the 2011
Consent Order, we engaged an investment banking firm with expertise in the financial services sector to assist with a review
of all of our strategic alternatives as we work to achieve the higher regulatory capital ratios.
We have successfully executed the sale of our four Indiana banking centers to First Savings Bank, F.S.B. The sale of the four retail banking
centers, which are located in Corydon, Elizabeth, Lanesville and Georgetown, Indiana, became effective after the close of
business on July 6, 2012. We received a 3.65% percent premium on the $102.3 million of consumer and commercial deposits at
closing. They assumed a total of approximately $115.4 million in non-brokered deposits, which included $13.1 million of
government, corporate, other financial institution and municipal deposits for which we received zero premium or discount. We
also sold approximately $30.4 million in performing loans at a discount of 0.80%. The consummated transaction resulted in a
one-time gain of approximately $2.9 million.
On May 15, 2012, we entered into a
Branch Purchase Agreement with First Security Bank of Owensboro, Inc., the banking subsidiary of First Security, Inc.,
headquartered in Owensboro, Kentucky. The agreement provides for the sale of our four banking centers in Louisville, Kentucky
to First Security. Under the terms of the Agreement, First Security will assume approximately $210.2 million of deposit
liabilities. First Security will pay a deposit premium of approximately $2.9 million comprised of a premium of 2.00% on
approximately $153.2 million of deposits and a premium ranging from 0% to 1.00% on approximately $57.0 million of other
deposits. First Security will also assume performing loans related to the four branches at a 1.00% discount. The loans being
assumed totaled approximately $70.9 million at June 30, 2012. The sale is expected to be completed in the third quarter of
2012 subject to First Security raising additional capital, regulatory approval and other customary closing conditions.
The divestiture of our
Indiana franchise, combined with the impending sale of our four Louisville banking centers, is projected to increase our Tier I
capital ratio from 5.73% to over 8.50% and increase our total risk-based capital ratio from 10.68% to over 12.00% based on
June 30, 2012 financial information. The sale of our four Louisville banking centers is expected to close late in the third
quarter of 2012.
The following table shows the ratios of
Tier 1 capital, total capital to risk-adjusted assets and the leverage ratios for the Corporation and the Bank as of June 30,
2012.
|
|
Capital Adequacy Ratios as of
|
|
|
|
June 30, 2012
|
|
|
|
Regulatory
|
|
|
|
|
|
|
|
Risk-Based Capital Ratios
|
|
Minimums
|
|
|
The Bank
|
|
|
The Corporation
|
|
Tier 1 capital
|
|
|
4.00
|
%
|
|
|
9.42
|
%
|
|
|
8.89
|
%
|
Total risk-based capital
|
|
|
8.00
|
%
|
|
|
10.68
|
%
|
|
|
10.16
|
%
|
Tier 1 leverage ratio
|
|
|
4.00
|
%
|
|
|
5.73
|
%
|
|
|
5.43
|
%
|
The 2012 Consent Order requires the Bank
to achieve the minimum capital ratios presented below by June 30 2012:
|
|
Actual as of
|
|
|
Ratio Required
|
|
|
|
6/30/2012
|
|
|
by Consent Order
|
|
Total capital to risk-weighted assets
|
|
|
10.68
|
%
|
|
|
12.00
|
%
|
Tier 1 capital to average total assets
|
|
|
5.73
|
%
|
|
|
9.00
|
%
|
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Asset/Liability Management and 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”). Comprised of senior management representatives, the ALCO 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.
We also incorporate assumptions based on the historical behavior of our deposit rates and balances in relation to changes in interest
rates into the model. These assumptions are inherently uncertain and, as a result, the model cannot precisely measure future net
interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results
will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes as well as
changes in market conditions and the application and timing of various management strategies.
Our interest sensitivity profile was asset
sensitive at June 30, 2012 and December 31, 2011. Given a sustained 100 basis point decrease in rates, our base net interest income
would decrease by an estimated
9.75% at June 30, 2012 compared to a decrease of 2.39% at December 31, 2011.
Given
a sustained 100 basis point increase in interest rates, our base net interest income would increase by an
estimated 6.57
% at June 30, 2012 compared to an increase of .60% at December 31, 2011.
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, their
relative pricing schedules, market interest rates, deposit growth, loan growth, decay rates and prepayment speed assumptions.
We use various asset/liability strategies
to manage the re-pricing characteristics of our assets and liabilities designed to ensure that exposure to interest rate fluctuations
is limited within our guidelines of acceptable levels of risk-taking. As demonstrated by the June 30, 2012 and December 31, 2011
sensitivity tables, our balance sheet has an asset sensitive position. This means that our earning assets, which consist of loans
and investment securities, will change in price at a faster rate than our deposits and borrowings. Therefore, if short term interest
rates increase, our net interest income will increase. Likewise, if short term interest rates decrease, our net interest income
will decrease.
Our sensitivity to interest rate changes
is presented based on data as of June 30, 2012 and December 31, 2011 annualized to a one year period.
|
|
June 30, 2012
|
|
|
|
Decrease in Rates
|
|
|
|
|
|
Increase in Rates
|
|
|
|
200
|
|
|
100
|
|
|
|
|
|
100
|
|
|
200
|
|
(Dollars in thousands)
|
|
Basis Points
|
|
|
Basis Points
|
|
|
Base
|
|
|
Basis Points
|
|
|
Basis Points
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
35,575
|
|
|
$
|
37,245
|
|
|
$
|
39,260
|
|
|
$
|
41,145
|
|
|
$
|
42,908
|
|
Investments
|
|
|
6,739
|
|
|
|
7,016
|
|
|
|
8,790
|
|
|
|
11,193
|
|
|
|
12,941
|
|
Total interest income
|
|
|
42,314
|
|
|
|
44,261
|
|
|
|
48,050
|
|
|
|
52,338
|
|
|
|
55,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
12,520
|
|
|
|
12,525
|
|
|
|
13,141
|
|
|
|
15,293
|
|
|
|
17,464
|
|
Borrowed funds
|
|
|
2,376
|
|
|
|
2,376
|
|
|
|
2,376
|
|
|
|
2,376
|
|
|
|
2,376
|
|
Total interest expense
|
|
|
14,896
|
|
|
|
14,901
|
|
|
|
15,517
|
|
|
|
17,669
|
|
|
|
19,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
27,418
|
|
|
$
|
29,360
|
|
|
$
|
32,533
|
|
|
$
|
34,669
|
|
|
$
|
36,009
|
|
Change from base
|
|
$
|
(5,115
|
)
|
|
$
|
(3,173
|
)
|
|
|
|
|
|
$
|
2,136
|
|
|
$
|
3,476
|
|
% Change from base
|
|
|
(15.72
|
)%
|
|
|
(9.75
|
)%
|
|
|
|
|
|
|
6.57
|
%
|
|
|
10.68
|
%
|
|
|
December 31, 2011
|
|
|
|
Decrease in Rates
|
|
|
|
|
|
Increase in Rates
|
|
|
|
200
|
|
|
100
|
|
|
|
|
|
100
|
|
|
200
|
|
(Dollars in thousands)
|
|
Basis Points
|
|
|
Basis Points
|
|
|
Base
|
|
|
Basis Points
|
|
|
Basis Points
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
41,543
|
|
|
$
|
42,096
|
|
|
$
|
43,025
|
|
|
$
|
43,998
|
|
|
$
|
45,002
|
|
Investments
|
|
|
7,183
|
|
|
|
7,237
|
|
|
|
7,505
|
|
|
|
8,269
|
|
|
|
9,019
|
|
Total interest income
|
|
|
48,726
|
|
|
|
49,333
|
|
|
|
50,530
|
|
|
|
52,267
|
|
|
|
54,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
13,910
|
|
|
|
14,047
|
|
|
|
14,414
|
|
|
|
15,940
|
|
|
|
16,156
|
|
Borrowed funds
|
|
|
1,354
|
|
|
|
1,354
|
|
|
|
1,354
|
|
|
|
1,355
|
|
|
|
1,356
|
|
Total interest expense
|
|
|
15,264
|
|
|
|
15,401
|
|
|
|
15,768
|
|
|
|
17,295
|
|
|
|
17,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
33,462
|
|
|
$
|
33,932
|
|
|
$
|
34,762
|
|
|
$
|
34,972
|
|
|
$
|
36,509
|
|
Change from base
|
|
$
|
(1,300
|
)
|
|
$
|
(830
|
)
|
|
|
|
|
|
$
|
210
|
|
|
$
|
1,747
|
|
% Change from base
|
|
|
(3.74
|
)%
|
|
|
(2.39
|
)%
|
|
|
|
|
|
|
0.60
|
%
|
|
|
5.03
|
%
|
During the second quarter of 2012 we conservatively
revised some of our interest rate risk assumptions and measures resulting in an increased exposure to net interest income in a
decreased rate environment, mainly due to a decrease in total interest income when compared to December 31, 2011.
In an increased rate environment, net interest
income at risk, in terms of dollars remained relatively stable as of June 30, 2012 when compared to December 31, 2011. The increase
in percentage change from base during this period is due to a decrease in base at June 30, 2012 when compared to December 31, 2011.
Item 4. 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. As of June 30, 2012, an evaluation was performed under the supervision and with the participation of management,
including the Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of
our disclosure controls and procedures. Based on that evaluation, for the reasons described below, management and the Risk Management
Committee of our Board of Directors determined that our internal controls were not effective.
Management is responsible for establishing
and maintaining adequate internal controls over financial reporting that are designed to produce reliable financial statements
in accordance with accounting principles generally accepted in the United States. Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Also, 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.
During our December 31, 2011 review of
the allowance for loan loss, the following controls were found to not be operating appropriately:
|
·
|
Review
over internal evaluations
for impaired loans
|
|
·
|
Review
of the mathematical
accuracy of impaired
loan calculations
|
|
·
|
Review
of present value
cash flow analysis
performed on troubled
debt restructuring
calculations.
|
To remediate this material weakness described
above and enhance our internal controls over financial reporting, management initiated significant changes during
the first quarter of 2012. The enhanced procedures included:
|
·
|
An
independent review
was performed and
documented by the
Chief Credit Officer
on all internal
evaluations; and
|
|
·
|
An
independent review
was performed and
documented by the
finance department
to validate the
accuracy of the
calculation on
all impaired loans
and to validate
the accuracy of
all present value
cash flow calculations
performed on loans
classified as troubled
debt restructurings.
|
Notwithstanding the evaluation and
initiation of these remediation actions, the identified material weakness in our internal controls over financial reporting
will not be considered remediated until the new controls are fully implemented, operate for a sufficient period of time, and
are tested and determined by management to be operating effectively.
There were no other changes in our internal
control over financial reporting that occurred during the quarter ended June 30, 2012 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
Part II - OTHER INFORMATION
Item 1.
|
Legal Proceedings
|
|
|
|
On June 21, 2012, a lawsuit was filed in the Jefferson County
Circuit Court, State of Kentucky styled River Glen KHLB, LLC and Keith T. Eberenz vs. First Federal Savings Bank of Elizabethtown,
Civil Action No. 12CI03473. The Complaint seeks compensatory and punitive damages, trial by jury, pre-judgment interest, costs
including reasonable attorneys’ fees, and further relief. In the Complaint, the Plaintiff pleads ten claims against
First Federal Savings Bank of Elizabethtown, alleging: Fraud (Count I), negligent misrepresentation (Count II), failure to fund
KHLB Note (Count III), failure to fund executive suites loan (Count IV), failure to fund tenant improvement loan (Count V), failure
to fund capital loan (Count VI), failure to fund new loan note (Count VII), breach of fiduciary duty (Count VIII), breach of duty
of good faith and fair dealing (Count IX), and equitable relief (Count X). First Federal Savings Bank of Elizabethtown
filed an answer to Plaintiff’s Complaint and Counterclaim on June 29, 2012 denying the allegations in the Complaint.
The Counterclaim pleads six claims against River Glen KHLB, LLC and Keith T. Eberenz alleging: judgment for balance due on
Promissory note (Count I), enforcement of guaranty contract (Count II), foreclosure of mortgage (Count III), enforcement of assignment
of rents (Count IV), appointment of receiver (Count V), and applicable to all counts (Count VI).
|
|
|
|
Dover Realty Advisors LLC and Paragon Dover Kentucky, LLC were
appointed managers to preserve and manage the property, including the collection of rent, paying operating expenses, property
taxes, insurance premiums, utilities, FFSB monthly loan payment, and an escrow fund.
First
Federal Savings Bank of Elizabethtown intends to vigorously defend this case. Management continues to closely monitor this case,
but is unable to estimate, at this time, the possible loss or range of possible loss, if any, that may result from this lawsuit.
|
|
|
Item 1A.
|
Risk Factors
|
|
|
|
There have been no material changes from the risk factors as previously disclosed in our Annual
Report on Form 10-K for the year ended December 31, 2011.
|
|
|
Item 2.
|
Unregistered Sales of Securities and Use of Proceeds
|
|
|
|
We did not repurchase any shares of our common stock during the quarter ended June 30, 2012.
|
Item 3.
|
Defaults Upon Senior Securities
|
|
|
|
Not Applicable
|
|
|
Item 4.
|
Mine Safety Disclosures
|
|
|
|
Not Applicable
|
|
|
Item 5.
|
Other Information
|
|
|
|
None
|
|
|
Item 6.
|
Exhibits:
|
|
10.1
|
Branch Purchase Agreement dated as of May 15, 2012, between First Federal Savings Bank of
Elizabethtown and First Security Bank of Owensboro, Inc. (incorporated by reference to Exhibit 10.1 to Current Report Form
8-K filed May 21, 2012).
|
|
|
|
|
31.1
|
Certification of Principal Executive Officer Pursuant to Section 302 of Sarbanes-Oxley
Act
|
|
|
|
|
31.2
|
Certification of Principal Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act
|
|
|
|
|
32
|
Certification of Principal Executive Officer and Principal Financial Officer Pursuant to Section
18 U.S.C. Section 1350 (As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)
|
|
|
|
|
101
|
The following financial information from the Quarterly Report of First Financial Service Corporation
on Form 10-Q for the quarter ended June 30, 2012, formatted in XBRL: (i) Consolidated Balance Sheets as of June 30, 2012 and
December 31, 2011, (ii) Consolidated Statements of Operations for the three and six months ended June 30, 2012 and 2011, (iii)
Consolidated Statements of Comprehensive Income/(Loss) for the three and six months ended June 30, 2012 and 2011, (iv) Consolidated
Statements of Changes in Stockholders’ Equity for the six months ended June 30, 2012, (v) Consolidated Statements of
Cash Flows for the six months ended June 30, 2012 and 2011, and (vi) Notes to the Unaudited Consolidated Financial Statements.
|
FIRST FINANCIAL SERVICE CORPORATION
SIGNATURES
Pursuant to the requirements of Section
13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: August 14, 2012
|
By:
|
/s/ Gregory S. Schreacke
|
|
|
|
Gregory S. Schreacke
|
|
|
|
President
|
|
|
|
Principal Executive Officer
|
|
|
|
Duly Authorized Representative
|
|
Date: August 14, 2012
|
By:
|
/s/ Frank Perez
|
|
|
|
Frank Perez
|
|
|
|
Chief Financial Officer
|
|
|
|
Principal Financial Officer
|
|
INDEX TO EXHIBITS
Exhibit No.
|
|
Description
|
10.1
|
|
Branch Purchase Agreement dated as of May 15, 2012, between First Federal Savings Bank of
Elizabethtown and First Security Bank of Owensboro, Inc. (incorporated by reference to Exhibit 10.1 to Current Report Form
8-K filed May 21, 2012).
|
|
|
|
31.1
|
|
Certification of Principal Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act
|
|
|
|
31.2
|
|
Certification of Principal Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act
|
|
|
|
32
|
|
Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18
U.S.C. Section 1350 (As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)
|
|
|
|
101
|
|
The following financial information from the Quarterly Report of First Financial Service Corporation
on Form 10-Q for the quarter ended June 30, 2012, formatted in XBRL: (i) Consolidated Balance Sheets as of June 30, 2012 and
December 31, 2011, (ii) Consolidated Statements of Operations for the three and six months ended June 30, 2012 and 2011, (iii)
Consolidated Statements of Comprehensive Income/(Loss) for the three and six months ended June 30, 2012 and 2011, (iv) Consolidated
Statements of Changes in Stockholders’ Equity for the six months ended June 30, 2012, (v) Consolidated Statements of
Cash Flows for the six months ended June 30, 2012 and 2011, and (vi) Notes to the Unaudited Consolidated Financial Statements.
|
First Financial Service Corp. (NASDAQ:FFKY)
Graphique Historique de l'Action
De Avr 2024 à Mai 2024
First Financial Service Corp. (NASDAQ:FFKY)
Graphique Historique de l'Action
De Mai 2023 à Mai 2024