UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended December31, 2020 |
For the Fiscal Year Ended December 31, 2017OR
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to |
Commission file number: 001-33033
PORTERLIMESTONE BANCORP, INC.
(Exact name of registrant as specified in its charter)
Kentucky | 61-1142247 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
2500 Eastpoint Parkway, Louisville, Kentucky | 40223 | |
(Address of principal executive offices) |
| (Zip Code) |
(502) 499-4800
(Registrant’s’s telephone number, including area code: (502) 499-4800code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | |
Common shares | LMST | The Nasdaq Stock |
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Securities registered pursuant to Section12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer (as defined in Rule 405 of the Securities Act). Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company,, or an emerging growth company. See definitionthe definitions of “accelerated“large accelerated filer,” “large accelerated“accelerated filer,” “smaller reporting company,” and “emerging growth company”company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ☐ | Accelerated filer ☐ | |
Non-accelerated filer ☒ | Smaller reporting company ☒ | |
Emerging growth company ☐ |
Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☒ Emerging growth company ☐
If an emerging growth company, indicateindicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Exchange Act. Yes ☐ No ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report Yes ☐ No ☒
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of the close of business on June 30, 2017,2020, was $22,183,313$68,641,698 based upon the last sales price reported for such date(for purposes of this calculation, the market value of non-voting common shares was based on the Nasdaq Capital Market.market value of the common shares into which they are convertible upon transfer).
6,039,8646,594,499 Common Shares and 220,0001,000,000 Non-Voting Common Shares were outstanding as of February 28, 2018.26, 2021.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’sregistrant’s Proxy Statement for the Annual Meeting of Shareholders to be held May 23, 201819, 2021 are incorporated by reference into Part III of this Form 10-K.
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Changes in and Disagreements With Accountants on Accounting and Financial Disclosure |
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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
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Certain Relationships and Related Transactions, and Director Independence |
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As used in this report, references to “the Company,” “we,” “our,” “us,” and similar terms refer to the consolidated entity consisting of Limestone Bancorp, Inc. and its wholly-owned subsidiary, Limestone Bank, Inc., which is referred to in this report as “the Bank.”
Preliminary Note Concerning Forward-Looking Statements
This report contains statements about the future expectations, activities and events that constitute forward-looking statements. Forward-looking statements express ourthe Company’s beliefs, assumptions and expectations of ourits future financial and operating performance and growth plans, taking into account information currently available to us. These statements are not statements of historical fact. The words “believe,” “may,” “should,” “anticipate,” “estimate,” “expect,” “intend,” “objective,” “seek,” “plan,” “strive” or similar words, or the negatives of these words, identify forward-looking statements.
Forward-looking statements involve risks and uncertainties that may cause ourthe Company’s actual results to differ materially from the expectations of future results wemanagement expressed or implied in any forward-looking statements. These risks and uncertainties can be difficult to predict and may be beyond ourthe Company’s control. Factors that could contribute to differences in ourthe Company’s results include, but are not limited to deterioration in the financial condition of borrowers resulting in significant increases in loan losses and provisions for those losses; changes in the interest rate environment, which may reduce our margins or impact the value of securities, loans, deposits and other financial instruments; changes in loan underwriting, credit review or loss reserve policies associated with economic conditions, examination conclusions, or regulatory developments; general economic or business conditions, either nationally, regionally or locally in the communities we serve, may be worse than expected, resulting in, among other things, a deterioration in credit quality or a reduced demand for credit; the results of regulatory examinations; any matter that would cause us to conclude that there was impairment of any asset, including intangible assets; the continued service of key management personnel; our ability to attract, motivate and retain qualified employees; factors that increase the competitive pressure among depository and other financial institutions, including product and pricing pressures; the ability of our competitors with greater financial resources to develop and introduce products and services that enable them to compete more successfully than us; inability to comply with regulatory capital requirements and to secure any required regulatory approvals for capital actions; legislative or regulatory developments, including changes in laws concerning taxes, banking, securities, insurance and other aspects of the financial services industry; and fiscal and governmental policies of the United States federal government.to:
● | the impact and duration of the novel coronavirus disease 2019 (“COVID-19”) pandemic and national, state and local emergency conditions the pandemic has produced; |
● | deterioration in the financial condition of borrowers resulting in significant increases in loan losses and provisions for those losses; |
● | changes in the interest rate environment, which may reduce the Company’s margins or impact the value of securities, loans, deposits and other financial instruments; |
● | changes in loan underwriting, credit review or loss reserve policies associated with economic conditions, examination conclusions, or regulatory developments; |
● | general economic or business conditions, either nationally, regionally or locally in the communities the Bank serves, may be worse than expected, resulting in, among other things, a deterioration in credit quality or a reduced demand for credit; |
● | the results of regulatory examinations; |
● | any matter that would cause the Bank to conclude that there was impairment of any asset, including intangible assets; |
● | the continued service of key management personnel, the Company’s ability to attract, motivate and retain qualified employees; |
● | factors that increase the competitive pressure among depository and other financial institutions, including product and pricing pressures; the ability of the Company’s competitors with greater financial resources to develop and introduce products and services that enable them to compete more successfully |
● | inability to comply with regulatory capital requirements and to secure any required regulatory approvals for capital actions; |
● | legislative or regulatory developments, including changes in laws concerning taxes, banking, securities, insurance and other aspects of the financial services industry; |
● | future acquisitions, integrations and performance of acquired businesses; and |
● | fiscal and governmental policies of the United States federal government. |
Other risks are detailed in Item 1A. “Risk Factors” of this Form 10-K all of which are difficult to predict and many of which are beyond ourthe Company’s control.
Forward-looking statements are not guarantees of performance or results. A forward-looking statement may include the assumptions or bases underlying the forward-looking statement. We haveManagement has made our assumptions and bases in good faith and believe they are reasonable. We caution you however, thatHowever, estimates based on such assumptions or bases frequently differ from actual results, and the differences can be material. The forward-looking statements included in this report speak only as of the date of the report. We doManagement does not intend to update these statements unless required by applicable laws require us to do so.laws.
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As used in this report, references to “the Company,” “we,” “our,” “us,” and similar terms refer to the consolidated entity consisting of Porter Bancorp, Inc. and its wholly-owned subsidiary. The “Bank” refers to Porter Bancorp, Inc.’s bank subsidiary, Limestone Bank, Inc.Item1.Business
The CompanyOrganized in 1988, Limestone Bancorp, Inc. (the Company) is a bank holding company headquartered in Louisville, Kentucky. The Company’s common stock is traded on Nasdaq’s Capital Market under the symbol PBIB. We operateLMST. The Company operates Limestone Bank, Inc. (the Bank), the Bank, our wholly owned subsidiary and the fifteentheleventh largest bank domiciled in the Commonwealth of Kentucky based on total assets (formerly known as PBI Bank). We operateassets. The Bank operates banking offices in twelve14 counties in Kentucky. OurThe Bank’s markets include metropolitan Louisville in Jefferson County and the surrounding counties of HenryBullitt and Bullitt. We serveHenry. The Bank serves south central, Kentuckysouthern, and southernwestern Kentucky from banking officescenters in Barren, Butler, Daviess, Edmonson, Green, Hardin, Hart, Edmonson, Barren, Warren, Ohio, and Daviess Counties. WeWarren counties. The Bank also have an officehas banking centers in Lexington, Kentucky, the second largest city in Kentucky.the state, and Frankfort, Kentucky, the state capital. The Bank is a traditional community bank with a wide range of commercialpersonal and personalbusiness banking products.products and services. As of December 31, 2017, we2020, the Company had total assets of $970.8 million,$1.31 billion, total loans of $712.1$962.1 million, total deposits of $847.0 million$1.12 billion and stockholders’ equity of $72.7$116.0 million.
Website Access to Reports
Our The Company files reports with the SEC including the Annual Report on Form 10-K, quarterly reports on Form 10-Q, current event reports on Form 8-K, and proxy statements, as well as any amendments to those reports. The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at http://www.sec.gov. The Company’s Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to section 13(a) or 15(d) of the Exchange Act are also accessible at no cost on the Company’s web site at http://www.limestonebank.com after they are electronically filed with the SEC.
Markets
We operateThe Bank operates in markets that include the four largest cities in Kentucky – Louisville, Lexington, Bowling Green and Owensboro – and in other communities along the I-65, Western Kentucky Parkway, and Natcher Parkway corridors.
■ | Louisville/Jefferson, Bullitt and Henry |
■ | Lexington/Fayette |
■ | Frankfort/Franklin County: Frankfort, located along Interstate 64 in Franklin County, is the capital of the Commonwealth of Kentucky and the seat of Franklin County. Frankfort is home to Kentucky’s General Assembly or Legislature which consists of the Kentucky Senate and the Kentucky House of Representatives. Frankfort is also the home of the Kentucky State University and major employers including Montaplast of North America, Inc., Buffalo Trace Distillery, Topy Corporation, Beam, Inc., and Nashville Wire Products. |
■ | Southern |
■ | Owensboro/Daviess |
■ | South Central Kentucky: South of the Louisville metropolitan area, |
Our Products and Services
We meet our customers’The Bank meets its customers’ banking needs with a broad range of financial products and services. OurIts lending services include real estate, commercial, mortgage, agriculture and equine, and consumer loans to those in ourits communities and to small to medium-sized businesses, the owners and employees of those businesses, as well as other executives and professionals. We complement our lendingLending operations are complemented with an array of retail and commercial deposit products. In addition, we offer ourthe Bank offers customers drive-through banking facilities, curbside banking services, automatic teller machines, night depository, personalized checks, credit cards, debit cards, internet banking, mobile banking, curbside banking, treasury management services, remote deposit services, electronic funds transfers through ACH services, domestic and foreign wire transfers, cash management and vault services, along withand loan and deposit sweep accounts.
EmployeesHuman Capital Resources
At December 31, 2017,2020, the Company had 217219 full-time equivalent employees. Our employees and a total of 226 employees (“team members”). The Bank’s team members are instrumental in building, maintaining, and servicing the customer relationships that make the community banking model a success. The Bank strives to attract and retain a well-qualified, enthusiastic workforce by offering competitive compensation packages, comprehensive benefits, training, and opportunities for professional development and advancement. Team members are held accountable to the Bank’s core values, which are:
● | Commitment to honesty and integrity; |
● | Commitment to have a positive and constructive attitude; |
● | Commitment to be a team player; |
● | Commitment to conduct oneself in a professional manner; and |
● | Commitment to celebrate successes. |
The Company’s team members are not subject to a collective bargaining agreement, and management considers the Company’s relationship with employeesits team members to be good. The Bank was recognized as one of the “Best Places to Work in Kentucky” in 2014, 2015, 2016, 2017, 2018, and 2020.
Acquisitions
On November 15, 2019, the Bank completed the acquisition of four branch banking centers located in the Kentucky cities of Elizabethtown, Frankfort, and Owensboro. The purchase included approximately $126.8 million in performing loans and $1.5 million in premises and equipment, as well as approximately $131.8 million in customer deposits. This acquisition has allowed the Bank to further optimize its branch footprint regionally and to better serve customers in Daviess, Hardin, and Franklin counties.
Competition
The banking business is highly competitive, and we experiencethe Bank experiences competition from manya number of other financial institutions.institutions and non-bank financial competitors, many of whom may not be subject to the same extensive regulatory regime as the Bank. Competition among financial institutions is based upon relationships, the quality and scope of services levels, interest rates offered on deposit accounts, interest rates charged on loans, other credit and service charges relating to loans, the quality and scope of the services offered, the convenience of banking facilities, the availability of technology channels, and, in the case of loans to commercial borrowers, relative lending limits. We competeThe Bank competes with commercial banks, credit unions, savings and loan associations, mortgage banking firms, consumer finance companies, farm credit organizations, securities brokerage firms, insurance companies, money market funds and other mutual funds, as well as super-regional, national, and international financial institutions that operate offices within ourthe Company’s market area and beyond.
Supervision and Regulation
Written Agreement. On September 21, 2011, we entered into a written agreement (“Written Agreement”) with the Federal Reserve Bank of St. Louis. The Company made formal commitments in the Written Agreement to use its financial and management resources to serve as a source of strength for the Bank and to assist the Bank in addressing weaknesses identified by the FDIC and the KDFI, to pay no dividends without prior written approval, to pay no interest or principal on subordinated debentures or trust preferred securities without written approval, and to submit an acceptable plan to maintain sufficient capital.
Bank and Holding Company Laws,, Rules and Regulations. The following is a summary descriptionCompany and the Bank are subject to an extensive system of the relevant laws, rules, and regulations governing banksthat are intended primarily for the protection of customers, the Deposit Insurance Fund (DIF), and bank holding companies. The descriptionsthe banking system in general and not for the protection of shareholders and references to, the statutescreditors. These laws and regulations belowgovern areas such as capital, permissible activities, allowance for loan and lease losses, loans and investments, interest rates that can be charged on loans, and consumer protection communications and disclosures. Certain elements of selected laws, rules, and regulations are brief summaries and dodescribed in the sections that follow. These descriptions are not purportintended to be complete. The descriptionscomplete and are qualified in their entirety by reference to the specific statutesfull text of the laws, rules, and regulations discussed.regulations.
The Dodd-Frank Act.On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”) was signed into law. The Dodd-Frank Act imposed new restrictions and an expanded framework of regulatory oversight for financial institutions, including depository institutions.
The Dodd-Frank Act represents a comprehensive overhaul of the financial services industry within the United States. There are a number of reform provisions that significantly impact the ways in which banks and bank holding companies, including the Company and the Bank, do business. For example, regulations issued under the Dodd-Frank Act changed the assessment base for federal deposit insurance premiums by modifying the assessment base calculation to be based on a depository institution’s consolidated assets less tangible capital instead of deposits, and permanently increased the standard maximum amount of deposit insurance per customer to $250,000. The Dodd-Frank Act also imposed more stringent capital requirements on bank holding companies by, among other things, imposing leverage ratios on bank holding companies and prohibiting new trust preferred security issuances from counting as Tier I capital. The Dodd-Frank Act also repealed the federal prohibition on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts. The Dodd-Frank Act codified and expanded the Federal Reserve’s source of strength doctrine, which requires that all bank holding companies serve as a source of financial strength for its subsidiary banks. Other provisions of the Dodd-Frank Act include, but are not limited to: (i) the creation of a financial consumer protection agency that is empowered to promulgate new consumer protection regulations and revise existing regulations in many areas of consumer protection; (ii) enhanced regulation of financial markets, including derivatives and securitization markets; (iii) reform related to the regulation of credit rating agencies; (iv) the elimination of certain trading activities by banks; and (v) new disclosure and other requirements relating to executive compensation and corporate governance.
Many provisions of the Dodd-Frank Act require interpretation and rule-making by federal agencies. The Company monitors all relevant sections of the Dodd-Frank Act to ensure continued compliance with laws and regulations, which results in greater compliance costs and higher fees paid to regulators. Future implementation of the Dodd-Frank Act may result in restrictions on the Company’s operations.
Porter Bancorp.Limestone Bancorp. The Company is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended, and is subject to supervision and regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). As such, wethe Company must file with the Federal Reserve Board annual and quarterly reports and other information regarding ourthe Company’s business operations and the business operations of ourthe Company’s subsidiaries. We areThe Company is also subject to examination by the Federal Reserve Board and to operational guidelines established by the Federal Reserve Board. We areThe Company is subject to the Bank Holding Company Act and other federal laws on the types of activities in which weit may engage, and to other supervisory requirements, including regulatory enforcement actions for violations of laws and regulations.
Acquisitions. AAs a bank holding company, the Company must obtain Federal Reserve Board approval before acquiring, directly or indirectly, ownership or control of more than 5% of theany class of voting stock or all or substantially all of the assets of a bank, before merging or consolidating with any other bank holding company, and before engaging, or acquiring a company that is not a bank and is engaged in certain non-banking activities. For any acquisition transaction structured as a merger of the Bank, the approval of the Federal law also prohibitsDeposit Insurance Corporation (“FDIC”) and the Kentucky Department of Financial Institutions (“KDFI”) would be required.
The Bank Holding Company Act and the Change in Bank Control Act prohibit a person or group of persons from acquiring “control” of a bank holding company without notifying the Federal Reserve Board in advance and then may only do so ifobtaining the Federal Reserve Board does not objectBoard’s approval of, or non-objection to, the proposed transaction. The Federal Reserve Board has established a rebuttable presumptive standard that the acquisition of 10% or more of theany class of voting stocksecurities of a bank holding company would constitutethat has registered securities under Section 12 of the Securities Exchange Act of 1934 (such as the Company) constitutes an acquisition of control of the bank holding company. In addition, approvalcompany for purposes of the Federal Reserve Board is required before acquiringChange in Bank Control Act. An acquisition of 25% (5% in the case of an acquirer that is a bank holding company) or more of any class of voting securities of a bank holding company’s voting securities, or otherwise obtainingcompany will conclusively be deemed to be an acquisition of control or a “controlling influence” over a bank holding company.under the Change in Bank Control Act.
Permissible Activities.Activities. A bank holding companyThe Company is generally permitted under the Bank Holding Company Act to own up to 5% of the voting shares of a company and, subject to the receipt of any required approval by the Federal Reserve Board, to engage in or acquire direct or indirect control of more than 5% of the voting shares of any bank, bank holding company or company engaged in any activity that the Federal Reserve Board determines to be so closely related to banking as to be a proper incident to the business of banking.
Under current federal law, a bank holding company may elect to become a financial holding company, which enables the holding company to conduct activities that are “financial in nature,,” incidental to financial activity, or complementary to financial activity that do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. Activities that are “financial in nature” include securities underwriting, dealing and market making in securities; sponsoring mutual funds and investment companies; insurance underwriting and agency; merchant banking activities; and activities that the Federal Reserve Board has determined to be closely related to banking. No prior regulatory approval or notice is required for a financial holding company to acquire a company, other than a bank or savings association, engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve Board. We haveThe Company has not filed an election to become a financial holding company.
Source of Financial Strength. Under Federal Reserve policy, a bank holding company is expected to act as a source of financial strength to, and to commit resources to support, its bank subsidiaries. This support may be required at times when, absent such a policy, the bank holding company may not be inclined to provide it. In addition, any capital loans by the bank holding company to its bank subsidiaries are subordinate in right of payment to depositors and to certain other indebtedness of the bank subsidiary. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of subsidiary banks will be assumed by the bankruptcy trustee and entitled to a priority of payment. The Federal Reserve’s “Source of Financial Strength” policy was codified in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”).
Dividends. Under Federal Reserve Board policy, bank holding companies should pay cash dividends on common stock only out of income available over the past year and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition. The policy provides that bank holding companies should not declare a level of cash dividends that undermines the bank holding company’s ability to serve as a source of strength to its banking subsidiaries.
The Company is a legal entity separate and distinct from the Bank. Historically, the majority of the Company’s revenue has been from dividends paid to it by the Bank. The Bank is subject to laws and regulations that limit the amount of dividends it can pay. If, in the opinion of a federal regulatory agency, an institution under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice, the agency may require, after notice and hearing, that the institution cease such practice. The federal banking agencies have indicated that paying dividends that deplete an institution’s capital base to an inadequate level would be an unsafe and unsound banking practice. The Bank is prohibited from paying any dividend if payment would cause it to become undercapitalized or if it already is undercapitalized, and it must maintain a sufficient capital conservation buffer under the capital adequacy guidelines in order to avoid limitations on dividends. Moreover, the Federal Reserve and the FDIC have issued policy statements providing that bank holding companies and banks should generally pay dividends only out of current operating earnings. A bank holding company may still declare and pay a dividend if it does not have current operating earnings if the bank holding company expects profits for the entire year and the bank holding company obtains the prior consent of the Federal Reserve.
Under Kentucky law, dividends by Kentucky banks may be paid only from current or retained net profits. The KDFI must approve the declaration of dividends if the total dividends to be declared by a bank for any calendar year would exceed the bank’s total net profits for such year combined with its retained net profits for the preceding two years, less any required transfers to surplus or a fund for the retirement of preferred stock or debt. Additionally, retained earnings must be positive. The Company is also subject to the Kentucky Business Corporation Act, which generally prohibits dividends to the extent they result in the insolvency of the corporation from a balance sheet perspective or if the corporation is unable to pay its debts as they come due. The Bank did not pay any dividends in 2020 or 2019. The Bank has negative retained earnings of $9.0 million at December 31, 2020 and, as such, cannot pay dividends without prior regulatory approval until retained earnings are restored through profits.
Limestone Bank. The Bank, a Kentucky chartered commercial bank, is subject to regular bank examinations and other supervision and regulation by both the FDIC and the KDFI. Kentucky’s banking statutes contain a “super-parity” provision that permits a well-rated Kentucky banking corporation to engage in any banking activity which could be engaged in by a national bank operating in Kentucky; a state bank, a thrift or savings bank operating in any other state; or a federal chartered thrift or federal savings association meeting the qualified thrift lender test and operating in any state could engage, provided the Kentucky bank first obtains a legal opinion specifying the statutory or regulatory provisions that permit the activity.
Capital Adequacy Requirements.Requirements. Both theThe Company and the Bank are required to comply with capital adequacy guidelines. Guidelines are established by the Federal Reserve Board for the Company and the FDIC for the Bank. Both the Federal Reserve Board and the FDIC have substantially similar risk based and leverage ratio guidelines for banking organizations, which are intended to ensure that banking organizations have adequate capital related to the risk levels of assets and off-balance sheet instruments. The capital adequacy guidelines are minimum supervisory ratios generally applicable to banking organizations that meet certain specified criteria, assuming they have the highest regulatory rating. Banking organizations not meeting these criteria are expected to operate with capital positions well above the minimum ratios. The federal bank regulatory agencies may set capital requirements for a particular banking organization that are higher than the minimum ratios when circumstances warrant. Federal Reserve Board guidelines also provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets.
In July 2013, the Federal Reserve Board and the FDIC approved final rules that substantially amended the regulatory risk-based capital rules applicable to the Company and Bank. The final rules implement the regulatory capital reforms of the Basel Committee on Banking Supervision reflected in “Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems” (“Basel III”) and changes required by the Dodd-Frank Act. The final rules implementing the Basel III regulatory capital reforms became effective for the Company and Bank on January 1, 2015, and include new minimum risk-based capital and leverage ratios. These rules refine the definition of what constitutes “capital” for purposes of calculating the capital ratios.
The Basel III minimum capital level requirements applicable to bank holding companiesthe Company and banks subject to the rulesBank are a common equity Tier 1 capital ratio of 4.5%, a Tier 1 risk-based capital ratio of 6%, a total risk-based capital ratio of 8%, and a Tier 1 leverage ratio of 4% for all institutions. The rules also establishrequire a “capital conservation buffer” of 2.5%, to be phased in over three years, above the regulatory minimum risk-based capital ratios. OnceIncluding this buffer, the capital conservation buffer is fully phased in, the minimumrequired ratios areaare: a common equity Tier 1 risk-based capital ratio of 7.0%, a Tier 1 risk-based capital ratio of 8.5%, and a total risk-based capital ratio of 10.5%.
The phase-in of the capital conservation buffer requirement began in January 2016 at 0.625% of risk-weighted assets and increases each year until fully implemented in January 2019. An institution is subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if capital levels fall below minimum levels plus the buffer amounts. These limitations establish a maximum percentage of eligible retained incomecapital that couldcan be utilized for such actions.
Under these newthe capital rules, Tier 1 capital generally consistsconsists of common stock (plus related surplus) and retained earnings, limited amounts of minority interest in the form of additional Tier 1 capital instruments, and non-cumulative preferred stock and related surplus, subject to certain eligibility standards, less goodwill and other specified intangible assets and other regulatory deductions. Tier 2 capital may consist of subordinated debt, certain hybrid capital instruments, qualifying preferred stock, and a limited amount of the allowance for loan losses. Proceeds of trust preferred securities are excluded from Tier 1 capital unless issued before 2010 by an institution with less than $15 billion of assets. Total capital is the sum of Tier 1 and Tier 2 capital.
Prompt Corrective Action. Pursuant to the Federal Deposit Insurance Act (“FDIA”), the FDIC must take prompt corrective action to resolve the problems of undercapitalized institutions. FDIC regulations define the levels at which an insured institution would be considered “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized”undercapitalized,” and “critically undercapitalized”. A bank is “undercapitalized” if it fails to meet any one of the ratios required to be adequately capitalized. A depository institution may be deemed to be in a capitalization category that is lower than is indicated by its actual capital position if it receives an unsatisfactory examination rating. The degree of regulatory scrutiny increases and the permissible activities of a bank decrease as the bank moves downward through the capital categories. Depending on a bank’s level of capital, the FDIC’s corrective powers include:
requiring a capital restoration plan;
placing limits on asset growth and restriction on activities;
requiring the bank to issue additional voting or other capital stock or to be acquired;
placing restrictions on transactions with affiliates;
restricting the interest rate the bank may pay on deposits;
ordering a new election of the bank’s board of directors;
requiring that certain senior executive officers or directors be dismissed;
prohibiting the bank from accepting deposits from correspondent banks;
requiring the bank to divest certain subsidiaries;
prohibiting the payment of principal or interest on subordinated debt; and
ultimately, appointing a receiver for the bank.
If an institution ismay be required to submit a capital restoration plan, the institution’sand its holding company must guarantee the subsidiary’s compliance with the capital restoration plan up to a certain specified amount. Any such guarantee from a depository institution’s holding company is entitled to a priority of payment in bankruptcy. The aggregate liability of the holding company of an undercapitalized bank is limited to the lesser of 5% of the institution’s assets at the time it became undercapitalized or the amount necessary to cause the institution to be “adequately capitalized.” The bank regulators have greater power in situations where an institution becomes “significantly” or “critically” undercapitalized or fails to submit a capital restoration plan. For example, a bank holding company controlling such an institution can be required to obtain prior Federal Reserve Board approval of proposed dividends, or might be required to consent to a consolidation or to divest the troubled institution or other affiliates.
Dividends.Under Federal Reserve Board policy, bank holding companies should pay cash dividends on common stock only out of income available over the past year and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition. The policy provides that bank holding companies should not declare a level of cash dividends that undermines the bank holding company’s ability to serve as a source of strength to its banking subsidiaries.
The Company is a legal entity separate and distinct from the Bank. Historically, the majority of the Company’s revenue has been from dividends paid to it by the Bank. The Bank is subject to laws and regulations that limit the amount of dividends it can pay. If, in the opinion of a federal regulatory agency, an institution under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice, the agency may require, after notice and hearing, that the institution cease such practice. The federal banking agencies have indicated that paying dividends that deplete an institution’s capital base to an inadequate level would be an unsafe and unsound banking practice. Under the Federal Deposit Insurance Corporation Improvement Act (“FDICIA”), an insured institution may not pay any dividend if payment would cause it to become undercapitalized or if it already is undercapitalized. Moreover, the Federal Reserve and the FDIC have issued policy statements providing that bank holding companies and banks should generally pay dividends only out of current operating earnings. A bank holding company may still declare and pay a dividend if it does not have current operating earnings if the bank holding company expects profits for the entire year and the bank holding company obtains the prior consent of the Federal Reserve.
Under Kentucky law, dividends by Kentucky banks may be paid only from current or retained net profits. The KDFI must approve the declaration of dividends if the total dividends to be declared by a bank for any calendar year would exceed the bank’s total net profits for such year combined with its retained net profits for the preceding two years, less any required transfers to surplus or a fund for the retirement of preferred stock or debt. Additionally, retained earnings must be positive. We are also subject to the Kentucky Business Corporation Act, which generally prohibits dividends to the extent they result in the insolvency of the corporation from a balance sheet perspective or in the corporation becoming unable to pay its debts as they come due. The Bank did not pay any dividends in 2017 or 2016 and cannot currently pay any dividends without prior regulatory approval.
With respect to the payment of dividends, Porter Bancorp’s issued and outstanding Series E and Series F Preferred Shares rank senior to its common shares and non-voting common shares.
Source of Financial Strength. Under Federal Reserve policy, a bank holding company is expected to act as a source of financial strength to, and to commit resources to support, its bank subsidiaries. This support may be required at times when, absent such a policy, the bank holding company may not be inclined to provide it. In addition, any capital loans by the bank holding company to its bank subsidiaries are subordinate in right of payment to deposits and to certain other indebtedness of the bank subsidiary. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of subsidiary banks will be assumed by the bankruptcy trustee and entitled to a priority of payment. The Federal Reserve’s “Source of Financial Strength” policy was codified in the Dodd-Frank Act.
Limestone Bank.The Bank, a Kentucky chartered commercial bank, is subject to regular bank examinations and other supervision and regulation by both the FDIC and the KDFI. Kentucky’s banking statutes contain a “super-parity” provision that permits a well-rated Kentucky banking corporation to engage in any banking activity which could be engaged in by a national bank operating in Kentucky; a state bank, a thrift or savings bank operating in any other state; or a federal chartered thrift or federal savings association meeting the qualified thrift lender test and operating in any state could engage, provided the Kentucky bank first obtains a legal opinion specifying the statutory or regulatory provisions that permit the activity.
Capital Requirements. Please see capital adequacy requirements discussion above.
Deposit Insurance Assessments. The deposits of the Bank are insured by the Deposit Insurance Fund (“DIF”) of the FDIC up to the limits set forth under applicable law and are subject to the deposit insurance premium assessments of the DIF. The FDIC imposes a risk-based deposit premium assessment system, which was amended pursuant to the Federal Deposit Insurance Reform Act of 2005 (the “Reform Act”). Under this system, as amended, thecalculates a bank’s premium assessment rates for an insured depository institution vary according to the level of risk incurred inby multiplying its activities. To arrive at anrisk-based assessment rate for a banking institution, the FDIC places it in one of four risk categories determined by reference to its capital levels and supervisory ratings. The assessment rate schedule can change from time to time, at the discretion of the FDIC, subject to certain limits.
The Dodd-Frank Act imposed additional assessments and costs with respect to deposits. Underbase. As required by the Dodd-Frank Act, the FDIC imposes deposit insurance assessments based ona bank’s assessment base is determined by its consolidated total assets less average tangible equity rather than total deposits. Pursuant to the Dodd-Frank Act, the FDIC revised the deposit insurance assessment system and implemented a revised assessment rate process with the goal of differentiating insured depository institutions who pose greater risk to the DIF.
Safety and Soundness Standards. The FDIA requires the federal bank regulatory agencies to prescribe standards, by regulations or guidelines, relating to internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, asset quality, earnings, stock valuation and compensation, fees and benefits, and such other operational and managerial standards as the agencies deem appropriate. Guidelines adopted by the federal bank regulatory agencies establish general standards relating to these matters. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risk and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal shareholder. In addition, the agencies adopted regulations that authorize, but do not require, an agency to order an institution that has been given notice by an agency that it is not satisfying any of such safety and soundness standards to submit a compliance plan. If, after being so notified, an institution fails to submit an acceptable compliance plan or fails in any material respect to implement an acceptable compliance plan, the agency must issue an order directing action to correct the deficiency and may issue an order directing other actions of the types to which an undercapitalized institution is subject under the “prompt corrective action” provisions of FDIA. See “Prompt Corrective Actions” above. If an institution fails to comply with such an order, the agency may seek to enforce such order in judicial proceedings and to impose civil money penalties.
Incentive Compensation. The Dodd-Frank Act requires the federal bank regulatory agencies and the SEC to establish joint regulations or guidelines prohibiting incentive-based payment arrangements at specified regulated entities having at least $1 billion in total assets, such as the Company and the Bank, that encourage inappropriate risks by providing an executive officer, employee, director, or principal shareholder with excessive compensation, fees, or benefits or that could lead to material financial loss to the entity. In addition, these regulators must establish regulations or guidelines requiring enhanced disclosure to regulators of incentive-based compensation arrangements. The agencies proposed such regulations in April 2011, but the regulations have not been finalized. If the regulations are adopted in the form initially proposed, they will impose limitations on the manner in which the Company may structure compensation for its executives.
In June 2010, the Federal Reserve, OCC, and FDIC issued comprehensive final guidance on incentive compensation policies of banking organizations intended to ensure that these policies do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The guidance, which covers all employees who have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors. These three principles are incorporated into the proposed joint compensation regulations under the Dodd-Frank Act, discussed above.
The Federal Reserve will review, as part of the regular, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as the Company, that are not “large, complex banking organizations.” These reviews will be tailored to each organization based on the scope and complexity of the organization’s activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the organization’s supervisory ratings, which can affect the organization’s ability to make acquisitions and take other actions.
Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.
Branching. Kentucky law permits Kentucky chartered banks to establish a banking office in any county in Kentucky. A Kentucky bank may also establish a banking office outside of Kentucky. Well capitalized Kentucky banks that have been in operation at least three years and satisfy certain criteria relating to, among other things, their composite and management ratings, may establish a banking office in Kentucky without the approval of the KDFI upon notice to the KDFI and any other state bank with its main office located in the county where the new banking office will be located. Otherwise, branching requires the approval of the KDFI, which must ascertain and determine that the public convenience and advantage will be served and promoted and that there is reasonable probability of the successful operation of the banking office. The transaction must also be approved by the FDIC, which considers a number of factors, including financial history, capital adequacy, earnings prospects, character of management, needs of the community, and consistency with corporate powers.
Section 613 of the Dodd-FrankDodd-Frank Act effectively eliminated the interstate branching restrictions set forth in the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. Banks located in any state may now de novo branch in any other state, including Kentucky. Such unlimited branching power may increase competition within the markets in which the Company and the Bank operate.
Insider Credit Transactions.Transactions. The restrictions on loans to directors, executive officers, principal shareholders and their related interests (collectively referred to as “insiders”) contained in the Federal Reserve Act and Regulation O apply to all insured depository institutions and their subsidiaries. These restrictions include limits on loans to one borrower and conditions that must be met before such a loan can be made. There is also an aggregate limitation on all loans to insiders and their related interests, which may not exceed the institution’s total unimpaired capital and surplus.
Consumer Protection Laws. The Bank is subject to federal consumer protection statues and regulations promulgated under those laws, including, but not limited to, the:
● | Truth-In-Lending Act and Regulation Z, governing disclosures of credit terms to consumer borrowers; |
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● | Secure and Fair Enforcement for Mortgage Licensing Act (“S.A.F.E. Act”), requiring residential loan originators who are employees of financial institutions to meet registration requirements; |
● | Fair Credit Reporting Act and Regulation V, governing the provision of consumer information to credit reporting agencies and the use of consumer |
● | Equal Credit Opportunity Act and Regulation B, and the Fair Housing Act, prohibiting discrimination on the basis of race, religion, |
● | Fair Debt Collection Act, governing the manner in |
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● | Electronic Funds Transfer Act |
● | Automated Overdraft Payment Regulations, |
The Dodd-Frank Act created the Consumer Financial Protection Bureau (“CFPB”), which is grantedhas broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws. The CFPB has examination and primary enforcement authorityAs a bank with respect to depository institutions withless than $10 billion or more in assets. Smaller institutions areassets, the Bank is subject to rules promulgated by the CFPB, but continuecontinues to be examined and supervised by the FDIC, its federal banking regulatorsregulator for consumer compliance purposes. The CFPB has authority to prevent unfair, deceptive, or abusive acts or practices in connection with the offering of consumer financial products. The Dodd-Frank Act authorizes the CFPB to establishhas established certain minimum standards for the origination of residential mortgages including a determination of the borrower’s ability to repay. In addition, theThe Dodd-Frank Act allows borrowers to raise certain defenses to foreclosure if they receive any loan other than a “qualified mortgage” as defined by the CFPB. The Economic Growth, Regulatory Relief and Consumer Protection Act created a qualified mortgage safe harbor for eligible loans that are originated and retained by a bank with total assets of less than $10 billion.
The Dodd-Frank Act also permits states to adopt consumer protection laws and standards that are more stringent than those adopted at the federal level and, in certain circumstances, permits state attorneys general to enforce compliance with both the state and federal laws andand regulations. Federal preemption
Loans to One Borrower.Under current limits, loans and extensions of credit outstanding at one time to a single borrower and not fully secured generally may not exceed 20% of an institution’sinstitution’s unimpaired capital and unimpaired surplus. Loans and extensions of credit fully secured by collateral may represent an additional 10% of unimpaired capital and unimpaired surplus.
Volcker Rule. On December 10, 2013, the final Volcker Rule under the Dodd-Frank Act was approved and implemented by the Federal Reserve Board, the FDIC, the Securities and Exchange Commission (“SEC”), and the Commodity Futures Trading Commission. The Volcker Rule attempts to reduce risk and banking system instability by restricting U.S. banks from investing in or engaging in proprietary trading and speculation and imposing a strict framework to justify exemptions for underwriting, market-making and hedging activities. U.S. banks are restricted from investing in funds with collateral comprised of less than 100% loans that are not registered with the SEC and from engaging in hedging activities that do not hedge a specific identified risk. The Volcker Rule does not have a significant effect on the Bank’s operations.
Privacy. Federal law currently contains extensive customer privacy protection provisions. Under these provisions, a financial institutionthe Bank must provide to its customers, at the inception of the customer relationship and annually thereafter, the institution’sits policies and procedures regarding the handling of customers’ nonpublic personal financial information. These provisions also provide that, exceptExcept for certain limited exceptions, an institutionthe Bank may not provide such personal information to unaffiliated third parties unless the institutionit discloses to the customer that such information may be so provided and the customer is given the opportunity to opt out of such disclosure. Federal law makes it a criminal offense, except in limited circumstances, to obtain or attempt to obtain customer information of a financial nature by fraudulent or deceptive means.
Community Reinvestment Act. The Community Reinvestment Act (“CRA”) requires the FDIC to assess ourthe Company’s record in meeting the credit needs of the communities we serve,the Bank serves, including low- and moderate-income neighborhoods and persons. The FDIC’s assessment of ourthe Company’s record is made available to the public. The assessment also is part of the Federal Reserve Board’s and the FDIC’s consideration of applications to acquire, merge or consolidate with another banking institution or its holding company, to establish a new banking office or to relocate an office.
Bank Secrecy Act. The Bank Secrecy Act of 1970 (“BSA”) was enacted to deter money laundering, establish regulatory reporting standards for currency transactions, and improve detection and investigation of criminal, tax, and other regulatory violations. BSA and subsequent laws and regulations require ussteps to take stepsbe taken to prevent the use of the Bank in the flow of illegal or illicit money, including, without limitation, ensuring effective management oversight, establishing sound policies and procedures, developing effective monitoring and reporting capabilities, ensuring adequate training, and establishing a comprehensive internal audit of BSA compliance activities. In recent years, federal regulators have increasedRules issued under the attention paidBSA require the Bank to compliance withidentify the provisions of BSAbeneficial owners who own or control certain legal entity customers at the time an account is opened and related laws, with particular attention paid to “Know Your Customer” practices. Banks have been encouraged by regulators to enhance their identificationinclude in its anti-money laundering program risk-based procedures prior to accepting new customers in order to deter criminal elements from using the banking system to move and hide illegal and illicit activities.for conducting ongoing customer due diligence.
USA Patriot Act. The USA Patriot Act of 2001 (the “Patriot Act”) contains anti-money laundering measures affecting insured depository institutions, broker-dealers, and certain other financial institutions. The Patriot Act requires financial institutions to implement policies and procedures to combat money laundering and the financing of terrorism. This includes standards for verifying customer identification at account opening, as well as rules to promote cooperation among financial institutions, regulators, and law enforcement entities in identifying parties that may be involved in terrorism or money laundering. It grants the Secretary of the Treasury broad authority to establish regulations and to impose requirements and restrictions on the operations of financial institutions. In addition, the Patriot Act requires the federal bank regulatory agencies to consider the effectiveness of a financial institution’s anti-money laundering activities when reviewing bank mergers and bank holding company acquisitions.
The Dodd-Frank Act. The Dodd-Frank Act imposed new restrictions and requirements and an expanded framework of regulatory oversight for financial institutions, including depository institutions and their holding companies. The implementation of the Dodd-Frank Act has resulted in greater compliance costs and higher fees paid to regulators. The Economic Growth, Regulatory Relief and Consumer Protection Act of 2018 provided some regulatory relief to banking organizations, primarily small, community banking organizations, by adjusting thresholds at which certain increased regulatory requirements imposed under the Dodd-Frank Act begin to apply. As a result, traditional community banking organizations with assets of less than $10 billion, such as the Company, are exempt from the Volker Rule under the Dodd-Frank Act, which places limits and restrictions on trading and hedging activities. In addition, community banking organizations with assets of less than $10 billion are now subject to reduced reporting requirements and, effective January 1, 2020, an optional simplified capital adequacy measure is available to those that have a leverage ratio greater than 9%. The Bank has not elected to use this optional capital adequacy measure.
Effect on Economic Environment. The policies of regulatory authorities, including the monetary policy of the Federal Reserve Board, have a significant effect on the operating results of bank holding companies and bank subsidiaries. Among the means available to the Federal Reserve Board to affect the money supply are open market operations in U.S. government securities, changes in the discount rate on member bank borrowings, and changes in reserve requirements against member bank deposits. These means are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits. Their use may affect interest rates charged on loans or paid for deposits.
Federal Reserve Board monetary policies have materially affected the operating results of commercial banks in the past and are expected to continue to do so in the future. The nature of future monetary policies and the effect of such policies on ourthe Company’s business and earnings and those of ourthe Company’s subsidiaries cannot be predicted.
Legislative and Regulatory Initiatives.Initiatives. From time to time various laws, regulations, and governmental programs affecting financial institutions and the financial industry are introduced in Congress or otherwise promulgated by regulatory agencies. Such measures may change the environment in which the Company and its subsidiaries operate in substantial and unpredictable ways. The nature and extent of future legislative, regulatory, or other changes affecting financial institutions are unpredictable at this time. Future legislation, policies, and the effects thereof might have a significant influence on overall growth and distribution of loans, investments, and deposits. They also may affect interest rates charged on loans or paid on time and savings deposits. New legislation and policies have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future.
Available Information
The Company files periodic reports with the SEC including its annual report on Form 10-K, quarterly reports on Form 10-Q, current event reports on Form 8-K and proxy statements. The public may read and copy any materials filed with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at http://www.sec.gov. Our SEC reports are accessible at no cost on our web site at http://www.limestonebank.com, under the Investors Relations section of the About Us tab, once they have been electronically filed with the SEC. A shareholder may also request a copy of our Annual Report on Form 10-K free of charge upon written request to: Chief Financial Officer, Porter Bancorp, Inc., 2500 Eastpoint Parkway, Louisville, Kentucky 40223.
FACTORS THAT MAY AFFECT FUTURE RESULTS
An investment in the Company’s common stock involves a numberis subject to certain risks, which are particular to the Company, as well as the industry and markets in which the Company operates. Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all of risks. Realizationthe other information included in this filing. In addition to the risks and uncertainties described below, other risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially and adversely affect its business, financial condition, and results of operations in the future. The value or market price of the Company’s common stock could decline due to any of these identified or other risks, and an investor could lose all or part of their investment.
There are factors, many beyond the risksCompany’s control, which may significantly change the results or expectations of the Company. Some of these factors are described below, however, many are described in the other sections of this Annual Report on Form 10-K.
Pandemic
The COVID-19 pandemic creates significant risks and uncertainties for the Company’s business.
In March 2020, the World Health Organization declared COVID-19 as a global pandemic. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains, lowered equity market valuations, created significant volatility and disruption in financial markets, and increased unemployment levels. In addition, the pandemic has resulted in temporary closures of many businesses and the institution of social distancing and sheltering in place requirements in many states and communities, including those in markets in which the Company is located or does business.
As a result, the demand for the Company’s products and services has been, and will continue to be, significantly impacted. Furthermore, the pandemic could influence the recognition of credit losses in the Company’s loan portfolio and increase its allowance for loan losses as both businesses and consumers are negatively impacted by the economic downturn. In addition, governmental actions are meaningfully influencing the interest-rate environment, which could adversely affect the Company’s results of operations and financial condition. The business operations of the Bank may also be disrupted if significant portions of its workforce are unable to work effectively, including because of illness, quarantines, government actions, or other restrictions in connection with the pandemic, travel restrictions, technology limitations, and/or disruptions. Furthermore, the business operations of the Company and Bank have a material adversebeen, and may again in the future be, disrupted due to vendors and third-party service providers being unable to work or provide services effectively, including because of illness, quarantines, government actions, or other restrictions in connection with the pandemic.
In response to the pandemic, the Bank has made certain accommodations to customers, which may negatively impact revenue and other results of operations of the Company in the near term and, if not effective in mitigating the effect of COVID-19 on the Company’s customers, may adversely affect the Company’s business financial condition,and results of operations cash flow and/or future prospects.more substantially over a longer period of time.
The extent to which the COVID-19 pandemic impacts the Company’s business, liquidity, asset valuations such as goodwill, loan collections, results of operations, and financial condition, as well as its regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic.
Bank Lending, Allowance for Loan Losses and Other Real Estate Owned
The Companyis subject to a Written Agreement with the Federal Reserve that restrict’s the conduct of the Company’s operations and business may have a material adverse effect on its business.
In a Written Agreement with the Federal Reserve Bank of St. Louis, the Company made formal commitments in the agreement to use its financial and management resources to serve as a source of strength for the Bank and to assist the Bank in addressing weaknesses identified by the FDIC and the KDFI, to pay no dividends without prior written approval, to pay no interest or principal on subordinated debentures or trust preferred securities without written approval, and to submit an acceptable plan to maintain sufficient capital.
Bank regulatory agencies can exercise discretion when an institution does not meet minimum regulatory capital levels and the other terms of a consent order. The agencies may initiate changes in management, issue mandatory directives, impose monetary penalties or refrain from formal sanctions, depending on individual circumstances. Any action taken by regulatory agencies could damage our reputation and have a material adverse effect on the Company’s business.
As a bank holding company, we depend on dividends and distributions paid to us by our banking subsidiary.
The Company is a legal entity separate and distinct from the Bank and our other subsidiaries. Our principal source of cash flow, from which we would fund any dividends paid to our shareholders, has historically been dividends the Company receives from the Bank. Regulations of the FDIC and the KDFI govern the ability of the Bank to pay dividends and other distributions to the Company, and regulations of the Federal Reserve govern our ability to pay dividends or make other distributions to shareholders. Since the Bank is unlikely to be in a position to pay dividends to the Company without prior regulatory approval until retained earnings are positive, cash inflows for the Company are limited to common stock or debt issuances. See the “Item 1. Business” “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities – Dividends.”
We are currently precluded from paying any dividends.
Our agreement with the holders of our trust preferred securities provides that we cannot pay dividends until we pay all deferred distributions in full and resume paying quarterly distributions. We have also agreed with the Federal Reserve to obtain its written consent prior to declaring or paying any future dividends. In addition, the dividend preferences of our Series E and Series F Preferred Shares entitle our preferred shareholders to receive an annual, noncumulative 2% dividend before we can pay a dividend on our non-voting common shares and voting common shares.
Interest on junior subordinated debt is in deferral.
At December 31, 2017, we had an aggregate obligation of $22.2 million relating to the principal and accrued unpaid interest on our four issues of junior subordinated debentures, which has resulted in a deferral of distributions on our trust preferred securities. Although we are permitted to defer payments on these securities for up to five years (and we commenced doing so in 2016), the deferred interest payments continue to accrue until paid in full. Our deferral period expires after the second quarter of 2021.
The Company’s senior debt is secured by the Bank’s common stock and contains financial covenants that must be maintained to avoid default.
The Company’s senior secured loan agreement is with a commercial bank. The loan matures on June 30, 2022. Interest is payable quarterly at a rate of three-month LIBOR plus 250 basis points through June 30, 2020, at which time quarterly principal payments of $250,000 plus interest will commence. The loan is secured by a first priority pledge of 100% of the issued and outstanding stock of the Bank. The Company may prepay any amount due under the promissory note at any time without premium or penalty.
The loan agreement contains customary representations, warranties, covenants and events of default, including the following financial covenants: (i) the Company must maintain minimum cash on hand of not less than $750,000 through June 30, 2018, and not less than $2,500,000 thereafter, (ii) the Company must maintain a total risk based capital ratio at least equal to 9% of risk-weighted assets to June 30, 2018, and 10% thereafter, (iii) the Bank must maintain a total risk based capital ratio at least equal to 10% of risk-weighted assets to June 30, 2018, and 11% thereafter, and (iv) non-performing assets of the Bank may not exceed 2.5% of the Bank’s total assets. Both the Company and Bank were in compliance with the covenants as of December 31, 2017.
We are defendants in various legal proceedings.
The Company and the Bank are involved in judicial proceedings and regulatory investigations concerning matters arising from our business activities. Although we believe we have a meritorious defense in all significant litigation pending against us, we cannot predict the ultimate outcome. Litigation is subject to inherent uncertainties and unfavorable rulings could occur. We record contingent liabilities resulting from claims against us when a loss is assessed to be probable and the amount of the loss is reasonably estimable. Assessing probability of loss and estimating probable losses requires analysis of multiple factors, including in some cases judgments about the potential actions of third party claimants and courts. Recorded contingent liabilities are based on the best information available and actual losses in any future period are inherently uncertain. Accruals are not made in cases where liability is not probable or the amount cannot be reasonably estimated. We provide disclosure of matters where we believe liability is reasonably possible and which may be material to our consolidated financial statements. If we do not prevail, the ultimate outcome of litigation matters could have a material adverse effect on our financial condition, results of operations, or cash flows. For more information about ongoing legal proceedings, see the Notes to Consolidated Financial Statements.
In the past, the Bank served as trustee for employee stock ownership plans (“ESOPs”)which engaged in transactions that are under review by the U. S. Department of Labor (“DOL”), subjecting us to certain legal risks.
From 2007 until the first quarter of 2013, the Bank served as trustee for certain ESOPs that purchased the stock of companies from prior owners in purchase transactions. Stock purchase transactions by ESOPs are subject to regular and routine reviews by the DOL for compliance with ERISA. Failure to fulfill fiduciary duties under ERISA with respect to any such plan would subject the Bank to certain financial risks such as claims for damages as well as fines and penalties assessable under ERISA. The Bank was a defendant in legal proceedings initiated by the DOL with respect to two stock purchase transactions by ESOPs for which the Bank served as trustee. Both matters were settled. A ruling in any future litigation that the Bank failed to fulfill its fiduciary duties under ERISA with respect to an ESOP, including stock purchases by the ESOP, could subject the Bank to claims for damages as well as fines and penalties assessable under ERISA.
Investigations into and heightened scrutiny of our operations could result in additional costs and damage our reputation.
In October 2014, the Department of Justice (“DOJ”) initiated an investigation concerning possible violations of federal laws, including, among other things, possible violations related to false bank entries, bank fraud and securities fraud. The investigation concerns allegations that Bank personnel engaged in practices intended to delay or avoid disclosure of the Bank’s asset quality at the time of and following the United States Treasury’s purchase of preferred shares from the Company in November 2008. The Bank has cooperated with all requests for information from the DOJ. At this time, the DOJ has not indicated whether it intends to pursue any action in the matter. Heightened scrutiny of the operations of the Company and the Bank by federal officials may subject us to governmental or regulatory inquiries, investigations, actions, penalties and fines, which could adversely affect our reputation and result in costs to us in excess of current reserves and management’s estimate of the aggregate range of possible loss for such matters.
Our business may be adversely affected by conditions in the financial markets and by economic conditions generally.
WeaknessWeakness in business and economic conditions generally or specifically in ourthe Company’s markets may have one or more of the following adverse effects on ourthe Company’s business:
● | A decrease in the demand for loans and other products and services |
● | A decrease in the value of collateral securing |
● | An increase in the number of customers who become delinquent, file for protection under bankruptcy laws, or default on their loans. |
Adverse conditions in the general business environment have had an adverse effect on ourthe Company’s business in the past. Although the general business environment has improved, we cannot predict how long such improvement can be sustained. In addition, the improvement of certainCertain economic indicators, such as real estate asset values, rents, and unemployment, may vary between geographic markets and may continue to lag behind improvement in the overall economy.markets. These economic indicators typically affect the real estate and financial services industries, in which we havethe Bank has a significant number of customers, more significantly than other economic sectors. Furthermore, we havethe Bank has a substantial lending business that depends upon the ability of borrowers to make debt service payments on loans. Should economic conditions worsen, ourexperience stress, the Company’s business, financial condition, or results of operations could be adversely affected.
A large percentage of our loans are collateralized by real estate, and prolonged weakness in the real estatemarket may result in losses and adversely affect our profitability.
Approximately 73.7% of our loan portfolio as of December 31, 2017, was comprised of commercial and residential loans collateralized by real estate. Adverse economic conditions could decrease demand for real estate and depress real estate values in our markets. Persistent weakness in the real estate market could significantly impair the value of our collateral and our ability to sell the collateral upon foreclosure. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. If real estate values decline, it will become more likely that we would be required to increase our allowance for loan losses. If during a period of depressed real estate values, we were required to liquidate the collateral securing a loan to satisfy the debt or to increase our allowance for loan losses, it could materially reduce our profitability and adversely affect our financial condition.
We offer real estate construction and development loans, which carry a higher degree of risk than other real estate loans. Weakness in the residential construction and commercial development real estate markets has in the past increased the non-performing assets in our loan portfolio and our provision for loan loss expense. These impacts have had, and could havein the future, a material adverse effect on capital, financial condition and results of operations.
Approximately 8.1% of our loan portfolio as of December 31, 2017 consisted of real estate construction and development loans, up from 5.7% at December 31, 2016 and 5.4% at December 31, 2015. These loans generally carry a higher degree of risk than long-term financing of existing properties because repayment depends on the ultimate completion of the project and permanent financing or sale of the property. If the Bank is forced to foreclose on a project prior to its completion, it may not be able to recover the entire unpaid portion of the loan or it may be required to fund additional money to complete the project, or hold the property for an indeterminate period of time. Any of these outcomes may result in losses and adversely affect profitability and financial condition.
Residential construction and commercial development real estate activity in our markets were affected by the challenging economic conditions that followed the financial crisis of 2008. Weakness in these sectors could lead to valuation adjustments to the loan portfolios and real estate owned. A weak real estate market could reduce demand for residential housing, which, in turn, could adversely affect real estate development and construction activities. Consequently, the longer challenging economic conditions persist, the more likely they are to adversely affect the ability of residential real estate development borrowers to repay loans and the value of property used as collateral for such loans.
Our decisions regarding credit risk may not be accurate, and our allowance for loan losses may not besufficient to cover actual losses, which could adversely affect our business, financial condition and resultsof operations.
The Bank maintains an allowance for loan losses at a level we believe is adequate to absorb probable incurred losses in the loan portfolio based on historical loan loss experience, economic and environmental factors, specific problem loans, value of underlying collateral and other relevant factors. If our assessment of these factors is ultimately inaccurate, the allowance may not be sufficient to cover actual future loan losses, which would adversely affect operating results. Management’s estimates are subjective, and their accuracy depends on the outcome of future events. Changes in economic, operating, and other conditions that are generally beyond our control could cause actual loan losses to increase significantly. In addition, bank regulatory agencies, as an integral part of their supervisory functions, periodically review the adequacy of our allowance for loan losses. Regulatory agencies may require an increase in provision for loan losses or to recognize additional loan charge-offs when their judgment differed from ours. Any of these events could have a material negative impact on our operating results.
Our levels of classified loans and non-performing assets may increase in the foreseeable future if economic conditions cause borrowers to default. Further, the value of the collateral underlying a given loan, and the realizable value of such collateral in a foreclosure sale, may decline, making it less likely to realize a full recovery if a borrower defaults on a loan. Any additional increases in the level of our non-performing assets, loan charge-offs or provision for loan losses, or our inability to realize the estimated net value of underlying collateral in the event of a loan default, could negatively affect our business, financial condition, results of operations and the trading price of our securities.
’If we experience greater credit losses than anticipated, our operating resultswouldbe adversely affected.
As a lender, the Bank is exposed to the risk that borrowers will be unable to repay their loans according to their terms and that any collateral securing the payment of their loans may not be sufficient to assure repayment. Credit losses are inherent in the business of making loans and could have a material adverse effect on our operating results. Our credit risk with respect to our real estate and construction loan portfolio will relate principally to the creditworthiness of borrowers and the value of the real estate serving as security for the repayment of loans. Our credit risk with respect to our commercial and consumer loan portfolio will relate principally to the general creditworthiness of businesses and individuals within our local markets.
We make various assumptions and judgments about the collectability of our loan portfolio and provide an allowance for estimated loss losses based on a number of factors. We believe that our allowance for loan losses is adequate. However, if our assumptions or judgments are wrong, our allowance for loan losses may not be sufficient to cover our actual loan losses. We may have to increase our allowance in the future at the request of one of our primary banking regulators, to adjust for changing conditions and assumptions, or as a result of any deterioration in the quality of our loan portfolio. The actual amount of future provisions for loan losses cannot be determined at this time and may vary from the amounts of past provisions.
We continue to hold and from time to time acquire OREO properties, which could increase operating expenses and result in future losses to the Company.
During recent years, the Bank has acquired and disposed of a significant amount of real estate as a result of foreclosure or by deed in lieu of foreclosure that is listed on our balance sheet as other real estate owned (“OREO”). An increase in our OREO portfolio increases the expenses incurred to manage and dispose of these properties, which sometimes includes funding construction required to facilitate sale.
Properties in our OREO portfolio are recorded at fair value, which represents the estimated sales price of the properties on the date acquired less estimated selling costs. Generally, in determining “fair value” an orderly disposition of the property is assumed, except where a different disposition strategy is expected. Significant judgment is required in estimating the fair value of OREO, and the period of time within which such estimates can be considered current may change during periods of market volatility. Any decreases in market prices of real estate in our market areas may lead to additional OREO write downs, with a corresponding expense in our statement of operations. We evaluate OREO property values periodically and write down the carrying value of the properties if and when the results of our analysis require it.
In response to market conditions and other economic factors, we may utilize alternative sale strategies other than orderly disposition as part of our OREO disposition strategy, such as auctions or bulk sales. In this event, as a result of the significant judgments required in estimating fair value and the variables involved in different methods of disposition, the net proceeds realized from such sales transactions could differ significantly from appraisals, comparable sales, and other estimates used to determine the fair value of our OREO properties. In addition, our disposition of OREO through alternative sales strategies could impact the fair value of comparable OREO properties remaining in our portfolio.
Ours profitability depends significantly on local economic conditions.
MostMost of ourthe Bank’s business activities are conducted in central Kentucky and contiguous states with most of ourits credit exposure is in that region. We areThe Bank is at risk from adverse economic or business developments affecting this area, including declining regional and local business and employment activity, a downturn in real estate values and agricultural activities, and natural disasters. To the extent the central Kentucky economy weakens, delinquency rates, foreclosures, bankruptcies, and losses in ourthe Bank’s loan portfolio will likely increase. Moreover, the value of real estate or other collateral that secures ourthe loans could be adversely affected by the economic downturn or a localized natural disaster. Events that adversely affect business activity and real estate values in central Kentucky have had in the past and may continuein the future to have a negative impact on ourthe Bank’s business, financial condition, results of operations, and future prospects.
Our smallSmall to medium-sized business portfolio may have fewer resources to weather a downturn in theeconomy.
Our The loan portfolio includes loans to small and medium-sized businesses and other commercial enterprises. Small and medium-sized businesses frequently have smaller market shares than their competitors, may be more vulnerable to economic downturns, often need additional capital to expand or compete, and may experience variations in operating results, any of which may impair a borrower’s ability to repay a loan. In addition, the success of a small or medium-sized business often depends on the management talents and efforts of one or two persons or a small group of persons. The death, disability, or resignation of one or more of these persons could have a material adverse impact on the business and its ability to repay ourthe loan. A continued economic downturn may have a more pronounced negative impact on ourthe target market, causing usthe Bank to incur substantial credit losses that could materially harm our operating results.
OurThe Bank’s decisions regarding credit risk may not be accurate, and its allowance for loan losses may not be sufficient to cover actual losses, which could adversely affect its business, financial condition, and results of operations.
The Bank maintains an allowance for loan losses at a level management believes is adequate to absorb probable incurred losses in the loan portfolio based on historical loan loss experience, economic and environmental factors, specific problem loans, value of underlying collateral, and other relevant factors. If management’s assessment of these factors is ultimately inaccurate, the allowance may not be sufficient to cover actual future loan losses, which would adversely affect operating results. Management’s estimates are subjective, and their accuracy depends on the outcome of future events. Changes in economic, operating, and other conditions that are generally beyond the Bank’s control could cause actual loan losses to increase significantly. In addition, bank regulatory agencies, as an integral part of their supervisory functions, periodically review the adequacy of the allowance for loan losses. Regulatory agencies may require an increase in provision for loan losses or to recognize additional loan charge-offs when their judgment differs. Any of these events could have a material negative impact on operating results.
Levels of classified loans and non-performing assets may increase in the future if economic conditions cause borrowers to default. Furthermore, the value of the collateral underlying a given loan, and the realizable value of such collateral in a foreclosure sale, may decline, making it less likely to realize a full recovery if a borrower defaults on a loan. Any increases in the level of non-performing assets, loan charge-offs or provision for loan losses, or the inability to realize the estimated net value of underlying collateral in the event of a loan default, could negatively affect the Bank’s business, financial condition, results of operations, and the trading price of the Company’s common shares.
If the Bank experiences greater credit losses than anticipated, its operating results would be adversely affected.
As a lender, the Bank is exposed to the risk that borrowers will be unable to repay their loans according to their terms and that any collateral securing the payment of their loans may not be sufficient to assure repayment. Credit losses are inherent in the business of making loans and could have a material adverse effect on operating results. Credit risk with respect to the real estate and construction loan portfolio will relate principally to the creditworthiness of borrowers and the value of the real estate serving as security for the repayment of loans. Credit risk with respect to the commercial and consumer loan portfolio will relate principally to the general creditworthiness of businesses and individuals within the local markets.
Management makes various assumptions and judgments about the collectability of its loan portfolio and provides an allowance for estimated loss losses based on a number of factors. Management believes the Bank’s allowance for loan losses is adequate. However, if assumptions or judgments are wrong, the allowance for loan losses may not be sufficient to cover actual loan losses. Management may have to increase the allowance in the future at the request of one of the Bank’s primary regulators, to adjust for changing conditions and assumptions, or as a result of any deterioration in the quality of the loan portfolio. The actual amount of future provisions for loan losses cannot be determined at this time and may vary from the amounts of past provisions.
A large percentage of the Bank’s loans are collateralized by real estate, and any prolonged weakness in the real estate market may result in losses and adversely affect profitability.
Approximately 70.7% of the Bank’s loan portfolio as of December 31, 2020, was comprised of commercial and residential loans collateralized by real estate. Adverse economic conditions could decrease demand for real estate and depress real estate values in the Company’s markets. Persistent weakness in the real estate market could significantly impair the value of loan collateral and the ability to sell the collateral upon foreclosure. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. If real estate values decline, it will become more likely that management would be required to increase the Bank’s allowance for loan losses. If during a period of depressed real estate values, management was required to liquidate the collateral securing a loan to satisfy the debt or to increase the allowance for loan losses, it could materially reduce the Bank’s profitability and adversely affect its financial condition.
The Bank offers real estate construction and development loans, which carry a higher degree of risk than other real estate loans.
Approximately 9.7% of the Company’s loan portfolio as of December 31, 2020 consisted of real estate construction and development loans, up from 7.0% at December 31, 2019 and down from 11.4% at December 31, 2018. These loans generally carry a higher degree of risk than long-term financing of existing properties because repayment depends on the ultimate completion of the project and permanent financing or sale of the property. If the Bank is forced to foreclose on a project prior to its completion, it may not be able to recover the entire unpaid portion of the loan or it may be required to fund additional money to complete the project, or hold the property for an indeterminate period of time. Any of these outcomes may result in losses and adversely affect profitability and financial condition.
TheCECL accounting standard will result in a significant change in howthe Companyrecognizescredit losses and may have a material impact onthe Company’sfinancial condition or results of operations.
In June 2016, the FASB issued ASU, “Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments,” which replaces the current “incurred loss” model for recognizing credit losses with an “expected loss” model. Whereas the incurred loss model delays recognition of loss on financial instruments until it is probable a loss has occurred, the expected loss model will recognize a loss at the time the loan is first added to the balance sheet. As result of this differing methodology, the Company expects adoption of the CECL model will materially affect the determination of the allowance and could require a significant increase to the allowance. Any material increase to the required level of loan loss allowance could adversely affect the Company’s business, financial condition, and results of operations. The CECL standard will become effective for the Company for fiscal years beginning January 1, 2023. See Note 1, “New Accounting Standards” for discussion regarding the standard. Adoption will likely result in a one-time cumulative-effect adjustment to the allowance and stockholders’ equity. Interagency guidance issued in December 2018 allows for a three-year phase-in of the cumulative-effect adjustment for regulatory capital reporting.
The Bank may acquire or hold from time to time OREO properties, which could increase operating expenses and result in future losses to the Company.
In the past, the Bank has acquired and disposed of a significant amount of real estate as a result of foreclosure or by deed in lieu of foreclosure that is listed on the balance sheet as other real estate owned (“OREO”). An increase in the OREO portfolio increases the expenses incurred to manage and dispose of these properties, which sometimes includes funding construction required to facilitate sale.
Properties in the Company’s OREO portfolio are recorded at fair value, which represents the estimated sales price of the properties on the date acquired less estimated selling costs. Generally, in determining “fair value” an orderly disposition of the property is assumed, except where a different disposition strategy is expected. Significant judgment is required in estimating the fair value of OREO, and the period of time within which such estimates can be considered current may change during periods of market volatility. Any decreases in market prices of real estate may lead to additional OREO write downs, with a corresponding expense in the statement of operations. Management evaluates OREO property values periodically and writes down the carrying value of the properties if and when the results of the Company’s analysis require it.
In response to market conditions and other economic factors, management may utilize alternative sale strategies other than orderly disposition as part of the Bank’s OREO disposition strategy, such as auctions or bulk sales. In this event, as a result of the significant judgments required in estimating fair value and the variables involved in different methods of disposition, the net proceeds realized from such sales transactions could differ significantly from appraisals, comparable sales, and other estimates used to determine the fair value of OREO properties. In addition, the disposition of OREO through alternative sales strategies could impact the fair value of comparable OREO properties remaining in the portfolio. Generally, state regulatory requirements limit the period a Bank is permitted to hold OREO to ten years. All OREO properties held by the Bank at December 31, 2020 are currently under contract for sale.
Interest Rates, Asset-Liability Management, Liquidity, and Common Stock
Profitability is vulnerable to fluctuations in interest rates.
Changes in interest rates could harm our financial condition or results of operations. OurThe results of operations depend substantially on net interest income, the difference between interest earned on interest-earning assets (such as investments and loans) and interest paid on interest-bearing liabilities (such as deposits and borrowings). Interest rates are highly sensitive to many factors, including governmental monetary policies and domestic or international economic or political conditions. Factors beyond ourthe Company’s control, such as inflation, recession, unemployment, and money supply may also affect interest rates. If, as a result of decreasing interest rates, our interest-earning assets mature or reprice more quickly than our interest-bearing liabilities in a given period, our net interest income may decrease. Likewise, our net interest income may decrease if interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a given period as a result of increasing interest rates.
Fixed-rate loans increase ourthe exposure to interest rate risk in a rising rate environment because interest-bearinginterest-bearing liabilities may be subject to repricing before assets become subject to repricing. Fixed rate investment securities are subject to fair value declines as interest rates rise. Adjustable-rate loans decrease the risk associated with changes inrising interest rates but involve other risks, such as the inability of borrowers to make higher payments in an increasing interest rate environment. At the same time, for secured loans, the marketability of the underlying collateral may be adversely affected by higher interest rates. In a declining interest rate environment, there may be an increase in prepayments on loans as the borrowers refinance their loans at lower interest rates, which could reduce net interest income and harm our results of operations.
The planned phasing out of the LIBOR as a financial benchmark presents risks to the financial instruments originated or held by the Company.
The LIBOR is the reference rate used for many transactions, including lending and borrowing, as well as the derivatives that may be used to manage risk related to such transactions. LIBOR will cease to exist as a published rate after 2021. The expected discontinuation of LIBOR could have a significant impact on the financial markets and market participants such as the Company. As of December 31, 2020, the Company had approximately $138.5 million in variable rate loans with interest rates tied to LIBOR, of which approximately $121.5 million have maturity dates beyond December 31, 2021.
The Federal Reserve Bank, through the Alternative Reference Rate Committee, has recommended a replacement benchmark rate, the Secured Overnight Financing Rate (SOFR). All loan contracts extending beyond 2021 will need to be managed effectively to ensure appropriate benchmark rate replacements are provided for and adopted.
Failure to identify a replacement benchmark rate and/or update data processing systems could result in future interest rate changes not being correctly captured, which could result in interest rate risk not being mitigated as intended, or interest earned being miscalculated, which could adversely impact the Company’s business, financial condition, and results of operations. Uncertainty regarding LIBOR and the taking of discretionary actions or negotiations of fall-back provisions could result in pricing volatility, adverse tax or accounting impacts, or additional compliance, legal and operational costs.
If wethe Bank cannot obtain adequate funding, weit may not be able to meet the cash flow requirements of ourits depositors and borrowers, or meet the operating cash needs of the Company.
OurThe Company’s liquidity policies and limits are established by the Board of Directors of the Bank, with operating limits managed and monitored by the Asset Liability Committee (“ALCO”), based upon analyses of the ratio of loans to deposits and the percentage of assets funded with non-core or wholesale funding. The ALCO regularly monitors the overall liquidity position of the Bank and the Company to ensure that various alternative strategies exist to meet unanticipated events that could affect liquidity. Liquidity is the ability to meet cash flow needs on a timely basis at a reasonable cost. If ourthe Company’s liquidity policies and strategies do not work as well as intended, wethe Bank may be unable to make loans and repay deposit liabilities as they become due or are demanded by customers. The ALCO follows established board approved policies and monitors guidelines to diversify ourthe Company’s wholesale funding sources to avoid concentrations in any one-market source. Wholesale funding sources include Federal funds purchased, securities sold under repurchase agreements, and Federal Home Loan Bank (“FHLB”) advances that are collateralized with mortgage-related assets.
We maintainThe Bank maintains a portfolio of securities that can be used as a secondary source of liquidity. There are other available sources of liquidity, including additional collateralized borrowings such as FHLB advances, the issuance of debt securities, and the issuance of preferred or common shares in public or private transactions. If we arethe Bank is unable to access any of these funding sources when needed, weit might not be able to meet the needs of our customers, which could adversely impact ourits financial condition, ourits results of operations, cash flows, and ourits level of regulatory-qualifying capital.
As a bank holding company, the Company depends on dividends and distributions paid to it by its banking subsidiary.
The Company is a legal entity separate and distinct from the Bank and its other subsidiaries. The principal source of cash flow, from which it would fund any dividends paid to shareholders, has historically been dividends the Company receives from the Bank. Regulations of the FDIC and the KDFI govern the ability of the Bank to pay dividends and other distributions to the Company, and regulations of the Federal Reserve govern the ability to pay dividends or make other distributions to shareholders. Since the Bank will not be in a position to pay dividends to the Company without prior regulatory approval until retained earnings are positive, cash inflows for the Company are limited to proceeds from common stock, preferred stock, or debt issuances. See the “Item 1. Business” “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities – Dividends.”
WeThe Company may sell capital stock in the future to raise additional capital or for additional liquidity. Future sales or other dilution of equity may adversely affect the market price of the Company’s common shares.
The issuance of additional common shares or securities convertible into common shares would dilute the ownership interest of the Company’s existing common shareholders. The market price of the Company’s common shares could decline as a result of such an offering as well as other sales of a large block of shares of common shares or similar securities in the market after such an offering, or the perception that such sales could occur. The Company’s common shares have traded from time-to-time at a price below book value per share. A sale of common shares at or below book value would be dilutive to current shareholders. The sale of shares at a price below market value could negatively impact the market price of the Company’s common shares.
Deferred Tax Assets
The Company may not be able to realize the value of ourits deferred tax losses and deductions.assets.
Due to historic losses we havein prior years, the Company has a net operating loss carry-forward of $25.6$22.0 million, credit carry-forwards of $900,000,$208,000, and other net deferred tax assets of $4.8$3.5 million. In order to realize the benefit of these tax losses, credits, and deductions, we will need tothe Company must generate substantial taxable income in future periods. Our deferredDeferred tax assets are calculated using a federal corporate tax rate of 21%. Changes in tax laws and rates may affect our deferred tax assets in the future. If lowerhigher federal corporate tax rates are enacted, our net deferred tax assets would be reducedincreased commensurate with the rate reduction.increase. Additionally, should the Company need to raise additional capital by issuing new common shares or securities convertible into common shares, then depending on the number of common share equivalents issued, it could trigger a “change in control,” as defined by Section 382 of the Internal Revenue Code. Such an event could negatively impact or limit the ability to utilize our net operating loss carry-forwards, credit loss carry-forwards, and other net deferred tax assets.
WeAcquisitions
Acquisitions may sell capital stocknot produce revenue enhancements or cost savings at levels or within timeframes originally anticipated and may result in the futureunforeseen integration difficulties.
The Company regularly explores opportunities to raise additional capital or for additional liquidity at the holding company. Future salesacquire banks, branches, financial institutions, or other dilutionfinancial services businesses or assets. The Company cannot predict the number, size, or timing of our equityacquisitions. Difficulty in integrating an acquired business or company may cause the Company not to realize expected revenue increases, cost savings, increases in geographic or product presence, and/or other projected benefits from the acquisition. The integration could result in higher than expected deposit attrition (run-off), loss of key employees, disruption of the Company’s business or the business of the acquired company, or otherwise adversely affect the market priceCompany’s ability to maintain relationships with customers and employees or achieve the anticipated benefits of our common shares.the acquisition. Also, the negative effect of any divestitures required by regulatory authorities in acquisitions or business combinations may be greater than expected. The Company may also issue equity securities in connection with acquisitions, which could cause ownership and economic dilution to current shareholders.
Our issuanceLitigation
Risk related to legal proceedings.
From time to time, the Company is involved in judicial, regulatory, and arbitration proceedings concerning matters arising from the Company’s business activities and fiduciary responsibilities. The Company establishes reserves for legal claims when payments associated with the claims become probable and the costs can be reasonably estimated. The Company may still incur legal costs for a matter even if a reserve has not been established. In addition, the actual cost of additional common shares or securities convertible into common shares would dilute the ownership interest of our existing common shareholders.resolving a legal claim may be substantially higher than any amounts reserved for that matter. The market price of our common shares could decline as a result of such an offering as well as other salesultimate resolution of a large blockpending or future legal proceeding, depending on the remedy sought and granted, could materially adversely affect results of shares of our common shares or similar securities in the market after such an offering, or the perception that such sales could occur. Our common shares have traded from time-to-time at a price below our book value per share. A sale of common shares at or below our book value would be dilutive to current shareholders. The sale of shares at a price below market value could negatively impact the market price of our common shares.operations and financial condition.
Higher Deposit Insurance Expense
FDIC deposit insurance premiums and assessments could significantly increase ourcan impact non-interest expense.
OurThe Bank’s deposits are insured by the FDIC up to legal limits and, accordingly, we arethe Bank is subject to FDIC deposit insurance premiums and assessments. FDIC assessments for deposit insurance are based on the average total consolidated assets of the insured institution during the assessment period, less the average tangible equity of the institution during the assessment period. Any increase in assessment rates may adversely affect ourthe Bank’s business, financial condition, or results of operations.
We faceCompetition, Management
The Bank faces strong competition from other financial institutions and financial service companies, which couldadversely affect ourthe results of operations and financial condition.
We competeThe Bank competes with other financial institutions in attracting deposits and making loans. OurThe competition in attracting deposits comes principally from other commercial banks, credit unions, savings and loan associations, securities brokerage firms, insurance companies, money market funds, and other mutual funds. OurThe competition in making loans comes principally from other commercial banks, credit unions, farm credit associations, savings and loan associations, mortgage banking firms, and consumer finance companies. In addition, competition for business in the Louisville and Lexington metropolitan areas has grown in recent years as changes in banking law have allowed banks to enter those markets by establishing new branches.
Competition in the banking industry may also limit ourthe ability to attract and retain banking clients. We maintainThe Bank maintains smaller staffs of associates and have fewer financial and other resources than larger institutions with which we compete.it competes. Financial institutions that have far greater resources and greater efficiencies than we dothe Bank may have several marketplace advantages resulting from their ability to:
● | offer higher interest rates on deposits and lower interest rates on loans than |
● | offer a broader range of services than |
● | maintain more branch locations than |
● | mount extensive promotional and advertising campaigns. |
In addition, banks and other financial institutions with larger capitalization and other financial intermediaries may not be subject to the same regulatory restrictions as we are and may have larger lending limits than we do.limits. Some of ourthe Company’s current commercial banking clients may seek alternative banking sources as they develop needs for credit facilities larger than wethe Bank can accommodate. If we arethe Bank is unable to attract and retain customers, weit may not be able to maintain growth and ourthe results of operations and financial condition may otherwise be negatively impacted.
We depend
The Company depends on ourits senior management team, and the unexpected loss of one or more of ourthe seniorexecutives could impair our relationshiprelationships with customers and adversely affect our business and financialresults.
Our futureFuture success significantly depends on the continued services and performance of our key management personnel. Our futureFuture performance will depend on ourthe ability to motivate and retain these and other key officers. The Dodd-Frank Act, and the policies of bank regulatory agencies have placed restrictions on executive compensation practices. Such restrictions and standards may further impact ourthe ability to compete for talent with other businesses that are not subject to the same limitations as we are.limitations. The loss of the services of members of senior management or other key officers or ourthe inability to attract additional qualified personnel as needed could materially harm ourits business.
Our reportedAccounting Estimates, Internal Controls, Cybersecurity
Reported financial results depend on management’s’s selection of accounting methods and certain assumptions and estimates.
AccountingAccounting policies and assumptions are fundamental to the reported financial condition and results of operations. Management must exercise judgment in selecting and applying many of these accounting policies and methods so they comply with generally accepted accounting principles and reflect management’s judgment of the most appropriate manner in which to report ourthe financial condition and results. In some cases, management must select the accounting policy or method to apply from two or more alternatives, any of which may be reasonable under the circumstances, yet may result in reporting materially different results than would have been reported under a different alternative.
Certain accounting policies are critical to presenting our reported financial condition and results. They require management to make difficult, subjective, or complex judgments about matters that are uncertain. Materially different amounts could be reported under different conditions or using different assumptions or estimates. These critical accounting policies include the valuation of securities, allowance for loan losses, valuation of OREO, valuation of stock based compensation,and valuation of net deferred income tax asset, assessing and estimating contingencies, and revenue recognition.asset. Because of the uncertainty of estimates involved in these matters, wethe Company may be required, among other things, to recognize other-than-temporary impairment on securities, significantly increase the allowance for credit losses, sustain credit losses that are significantly higher than the reserve provided, recognize significant impairment on OREO, or permanently impair deferred tax assets.
While management continually monitors and improves ourthe system of internal controls, data processingsystems, and corporate wide processes and procedures, we the Company may sufferlosses from operational risk in the future.
Management maintains internal operational controls, and we havehas invested in technology to help us process large volumes of transactions. However, wethe Company may not be able to continue processing at the same or higher levels of transactions. If our systems of internal controls should fail to work as expected, if our systems were to be used in an unauthorized manner, or if employees were to subvert the system of internal controls, significant losses could occur.
We processThe Company processes large volumes of transactions on a daily basis and are exposedexposing it to numerous types of operationaloperational risk, which could cause usit to incur substantial losses. Operational risk resulting from inadequate or failed internal processes, people, and systems includes the risk of fraud by employees or persons outside of ourthe company, the execution of unauthorized transactions by employees, errors relating to transaction processing and systems, and breaches of the internal control system and compliance requirements. This risk of loss also includes potential legal actions that could arise as a result of the operational deficiency or as a result of noncompliance with applicable regulatory standards.
We establishThe Company establishes and maintainmaintains systems of internal operational controls that provide management with timely and accurate information about ourits level of operational risk. While not foolproof, these systems have been designed to manage operational risk at appropriate, cost effective levels. We haveThe Company has also established procedures that are designed to ensure that policies relating to conduct, ethics and business practices are followed. Nevertheless, we experiencethe Company experiences loss from operational risk from time to time, including the effects of operational errors, and these losses may be substantial.
Our informationInformation systems may experience an interruption or security breach.
Failure in or breach of our operational or security systems or infrastructure, or those of our third party vendors and other service providers, including as a result of cyber attacks,cyber-attacks, could disrupt ourthe Bank’s businesses, result in the disclosure or misuse of confidential or proprietary information, damage ourits reputation, increase our costs, and cause losses. As a financial institution, we dependthe Bank depends on ourits ability to process, record, and monitor a large number of customer transactions on a continuous basis. As customer, public and regulatory expectations regarding operational and information security have increased, our operational systems and infrastructure must continue to be safeguarded and monitored for potential failures, disruptions,, and breakdowns. Our business,Business, financial, accounting, data processing systems, or other operating systems and facilities may stop operating properly or become disabled or damaged as a result of a number of factors including events that are wholly or partially beyond ourthe Bank’s control. For example, there could be sudden increases in customer transaction volume, electrical or telecommunications outages, natural disasters such as earthquakes, tornadoes, and hurricanes; disease pandemics, events arising from local or larger scale political or social matters, including terrorist acts, and, as described below, cyber attacks.cyber-attacks. Although we havethe Bank has business continuity plans and other safeguards in place, ourits business operations may be adversely affected by significant and widespread disruption to ourits physical infrastructure or operating systems that support ourits businesses and customers.
Information security risks for financial institutions have generally increased in recent years in part because of the proliferation of new technologies, the use of the Internet and telecommunications technologies to conduct financial transactions, and the increased sophistication and activities of organized crime, hackers, terrorists, activists, and other external parties. As noted above, ourthe Bank’s operations rely on the secure processing, transmission, and storage of confidential information in ourits computer systems and networks. In addition, to access ourthe Bank’s products and services, ourits customers may use personal smartphones, tablet PC’s, and other mobile devices that are beyond ourits control systems. Although we believe we havethe Bank believes it has appropriate information security procedures and controls, ourits technologies, systems, networks, and ourits customers’ devices may become the target of cyber attackscyber-attacks or information security breaches. These events could result in the unauthorized release, gathering, monitoring, misuse, loss, or destruction of ourthe Bank’s customers’ confidential, proprietary, and other information or that of ourits customers, or otherwise disrupt the business operations of ourselves, ourthe Bank, its customers, or other third parties.
Third parties with which we dothe Bank does business or that facilitate ourits business activities could also be sources of operational and information security risk to us,the Bank, including from breakdowns or failures of their own systems or capacity constraints. Although to date we havethe Bank has not experienced any material losses relating to cyber attackscyber-attacks or other information security breaches, wethe Bank can give no assurance that weit will not suffer such losses in the future. Our riskRisk and exposure to these matters remains heightened because of, among other things, the evolving nature of these threats and the prevalence of Internet and mobile banking. As cyber threats continue to evolve, wethe Bank may be required to expend significant additional resources to continue to modify or enhance ourits protective measures or to investigate and remediate any information security vulnerabilities. Disruptions or failures in the physical infrastructure or operating systems that support ourthe Bank’s businesses and customers, or cyber attackscyber-attacks or security breaches of the networks, systems, or devices that ourthe Bank’s customers use to access ourits products and services could result in customer attrition, regulatory fines, penalties or intervention, reputational damage, reimbursement or other compensation costs, and/or additional compliance costs, any of which could materially adversely affect ourthe Bank’s business, results of operations, or financial condition.
We operateBank Regulation
The Company operates in a highly regulated environment and, as a result, areis subject to extensive regulation andsupervision that could adversely affect financial performance and ability to implement growthand operating strategies.
We areThe Company is subject to examination, supervision, and comprehensive regulation by federal and state regulatory agencies, as described under “Item 1 – Business-Supervision and Regulation.” Regulatory oversight of banks is primarily intended to protect depositors, the federal deposit insurance funds, and the banking system as a whole, and not our shareholders. Compliance with these regulations is costly and may make it more difficult to operate profitably.
Federal and state banking laws and regulations govern numerous matters including the payment of dividends, the acquisition of other banks, and the establishment of new banking offices. WeThe Company must also meet specific regulatory capital requirements. Our failureFailure to comply with these laws, regulations, and policies or to maintain required capital could affect ourthe ability to pay dividends on common shares, ourthe ability to grow through the development of new offices, make acquisitions, and remain independent. These limitations may prevent usthe Company from successfully implementing our growth and operating strategies.
In addition, the laws and regulations applicable to banks could change at any time, which could significantly impact ourthe Company’s business and profitability. For example, new legislation or regulation could limit the manner in which wethe Company may conduct ourits business, including ourits ability to attract deposits and make loans. Events that may not have a direct impact on us, such as the bankruptcy or insolvency of a prominent U.S. corporation, can cause legislators and banking regulators and other agencies such as the Consumer Financial Protection Bureau, the SEC, the Public Company Accounting Oversight Board, and various taxing authorities to respond by adopting and or proposing substantive revisions to laws, regulations, rules, standards, policies, and interpretations. The nature, extent, and timing of the adoption of significant new laws and regulations, or changes in or repeal of existing laws and regulations may have a material impact on ourthe Company’s business and results of operations. Changes in regulation may cause usthe Company to devote substantial additional financial resources and management time to compliance, which may negatively affect our operating results.
Changes in banking laws could have a material adverse effect on us.effect.
We areThe Bank is subject to changes in federal and state laws as well as changes in banking and credit regulations, and governmental economic and monetary policies. WeManagement cannot predict whether any of these changes could adversely and materially affect us. The current regulatory environment for financial institutions entails significant potential increases in compliance requirements and associated costs. Federal and state banking regulators also possess broad powers to take supervisory actions as they deem appropriate. These supervisory actions may result in higher capital requirements, higher insurance premiums, and limitations on ourthe Bank’s activities that could have a material adverse effect on ourits business and profitability.
Recent legislation regarding the financial services industry may have a significant adverse effect on operations.
Enacted in July 2010, the Dodd-Frank Act has had a significant impact the U.S. financial system, including among other things:
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Some provisions in the Dodd-Frank Act remain subject to regulatory rule-making, implementation, and interpretation, the effects of which are not yet known. As a result, it is difficult to gauge the ultimate impact of certain provisions of the Dodd-Frank Act because the implementation of many concepts is left to regulatory agencies. For example, the CFPB is given the power to adopt new regulations to protect consumers and is given control over existing consumer protection regulations adopted by federal banking regulators. The CFPB has already adopted a number of regulations but it is not known at this time when additional rules will be finalized and implemented.
The provisions of the Dodd-Frank Act and any rules adopted to implement those provisions, as well as any additional legislative or regulatory changes may impact the profitability of our business activities and costs of operations, require that we change certain of our business practices, materially affect our business model or affect retention of key personnel, require us to raise additional regulatory capital, including additional Tier 1 capital, and could expose us to additional costs (including increased compliance costs). These and other changes may also require us to invest significant management attention and resources to make any necessary changes and may adversely affect our ability to conduct our business as previously conducted or our results of operations or financial condition.
Not applicable.
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The Bank operates 1520 banking offices in Kentucky. The following table shows the location, square footage, and ownership of each property. We believeManagement believes that each of these locations is adequately insured. Support operations are located in ourat the main office in Louisville and in Glasgow.Canmer.
Markets |
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Frankfort/Franklin County | |||||||
Frankfort Office: 100 Highway 676, Frankfort | 3,000 | Leased | |||||
Elizabethtown/Hardin County | |||||||
Elizabethtown Office: 1690 Ring Road, Suite 100, Elizabethtown | 4,000 | Leased | |||||
Louisville/Jefferson, Bullitt and Henry Counties | |||||||
Main Office: 2500 Eastpoint Parkway, Louisville | 30,000 | Owned | |||||
Eminence Office: 646 Elm Street, Eminence |
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Hillview Office: 6890 North Preston Highway, Hillview |
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Pleasureville Office: 5440 Castle Highway, Pleasureville |
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Conestoga Office: 155 Conestoga Parkway, Shepherdsville |
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3,900 | Owned | ||||||
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Lexington/Fayette County | |||||||
Lexington Office: 2424 Harrodsburg Road, Suite 100, Lexington |
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8,500 | Leased | ||||||
City Center Office: 130 West Main Street, Lexington | 2,400 | Leased | |||||
South Central Kentucky | |||||||
Brownsville Office: 113 East Main Cross Street, Brownsville |
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Greensburg Office: 202 North Main Street, Greensburg |
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Horse Cave Office: |
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Morgantown Office: 112 West G.L. Smith Street, Morgantown |
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Munfordville Office: 949 South Dixie Highway, Munfordville |
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Beaver Dam Office: 1300 North Main Street, Beaver Dam |
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3,200 | Owned | ||||||
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Owensboro/Daviess County | |||||||
Owensboro Frederica Office: |
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5,000 | Owned | ||||||
| Owensboro Villa Point: 3332 Villa Point Drive, Owensboro | 2,000 | Leased | ||||
Southern Kentucky | |||||||
Campbell Lane Office: 751 Campbell Lane, Bowling Green |
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Glasgow Office: 1006 West Main Street, Glasgow |
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12,000 | Owned | ||||||
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Other Properties | |||||||
Office Building: 2708 North Jackson Highway, Canmer | 3,500 | Owned | |||||
Other Properties - Held for Sale | |||||||
Office Building: 701 Columbia Avenue, Glasgow |
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Owensboro Office: 1819 Frederica Street, Owensboro | 3,000 | Owned |
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We are
In the normal course of business, the Company and its subsidiaries have been named, from time to time, as defendants in various legal proceedings.actions. Certain of the actual or threatened legal actions may include claims for substantial compensatory and/or punitive damages or claims for indeterminate amount of damages. Litigation is subject to inherent uncertainties and unfavorable outcomes could occur. See Note 16, “Off Balance Sheet Risks, Commitments, and Contingent Liabilities” in the Notes to our consolidated financial statements for detail regarding ongoing legal proceedings and other matters.
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Not applicable.
The Company contests liability and/or the amount of damages as appropriate in each pending matter. In view of the inherent difficulty of predicting the outcome of such matters, particularly in cases where claimants seek substantial or indeterminate damages or where investigations and proceedings are in the early stages, the Company cannot predict with certainty the loss or range of loss, if any, related to such matters, how or if such matters will be resolved, when they will ultimately be resolved, or what the eventual settlement, or other relief, if any, might be. Subject to the foregoing, the Company believes, based on current knowledge and after consultation with counsel, that the outcome of such pending matters will not have a material adverse effect on the consolidated financial condition of the Company, although the outcome of such matters could be material to the Company’s operating results and cash flows for a particular future period, depending on, among other things, the level of the Company’s revenues or income for such period. The Company will accrue for a loss contingency if (1) it is probable that a future event will occur and confirm the loss and (2) the amount of the loss can be reasonably estimated.
The Company is not currently involved in any material litigation.
PART IIItem4.Mine Safety Disclosure
Market Information
OurThe Company’s common shares are traded on the Nasdaq Capital Market under the ticker symbol “PBIB”“LMST”. The following table presents the high and low market closing prices per share for our common shares reported on the Nasdaq Capital Market for the periods indicated. The per share prices shown in the table have been adjusted for the 1-for-5 reverse stock split of our common shares that took effect on December 16, 2016.
2017 | ||||||||||||
Market Value | ||||||||||||
Quarter Ended | High | Low | Dividend | |||||||||
Fourth Quarter | $ | 15.45 | $ | 11.42 | $ | 0.00 | ||||||
Third Quarter | 11.81 | 9.98 | 0.00 | |||||||||
Second Quarter | 10.49 | 8.73 | 0.00 | |||||||||
First Quarter | 12.75 | 9.14 | 0.00 |
2016 | ||||||||||||
Market Value | ||||||||||||
Quarter Ended | High | Low | Dividend | |||||||||
Fourth Quarter | $ | 12.90 | $ | 8.05 | $ | 0.00 | ||||||
Third Quarter | 8.55 | 7.70 | 0.00 | |||||||||
Second Quarter | 11.25 | 5.95 | 0.00 | |||||||||
First Quarter | 7.10 | 5.45 | 0.00 |
As of January 31, 2018, we had2021, the Company’s common shares were held by approximately 1,6641,384 shareholders, including 470330 shareholders of record and approximately 1,1941,054 beneficial owners whose shares are held in “street”“street” name by securities broker-dealers or other nominees.nominees, and the Company’s non-voting common shares were held by one holder.
Dividends
As a bank holding company, ourthe Company’s ability to declare and pay dividends depends on various federal regulatory considerations, including the guidelines of the Federal Reserve regarding capital adequacy and dividends.
OurThe principal source of revenue with which to pay dividends on our common shares are dividends the Bank may declare and pay out of funds legally available for payment of dividends. Currently, the Bank must obtain the prior written consent of its primary regulators prior to declaring or paying any dividends until retained earnings are positive. A Kentucky chartered bank may declare a dividend of an amount of the bank’s net profits as the board deems appropriate. The approval of the KDFI is required if the total of all dividends declared by a bank in any calendar year exceeds the total of its net profits for that year combined with its retained net profits for the preceding two years, less any required transfers to surplus or a fund for the retirement of preferred stock or debt. Under our Written Agreement, the prior approval of the Federal Reserve Bank of St. Louis is also required for the payment of any Bank dividends.
Purchase of Equity Securities by Issuer During the fourth quarter of Equity Compensation Plan Information The following table provides information about the Company’s equity compensation plans as of December 31, 2020: Plan category Numberofsecuritiesto Weighted-average Numberofsecurities column 1) Equity compensation plans approved by shareholders Equity compensation plans not approved by shareholders Total At December 31, 2020, 262,374 common shares remain available for issuance under the Company’s 2018 Omnibus Equity Compensation Plan. The following table summarizes Selected Consolidated Financial Data As of and for the Years Ended December 31, As of and for the Years Ended December 31, (Dollars in thousands except per share data) 2017 2016 2015 2014 2013 2020 2019 2018 2017 2016 Income Statement Data: Interest income Interest expense Net interest income Provision (negative provision) for loan losses ) ) ) ) ) ) Non-interest income Non-interest expense Income (loss) before income taxes ) ) ) ) Income (loss) before income taxes ) Income tax expense (benefit) ) ) ) Net income (loss) ) ) ) ) ) Less: Dividends and accretion on preferred stock Effect of exchange of preferred stock for common stock ) Earnings (loss) allocated to participating securities ) ) ) ) Net income (loss) attributable to common ) ) ) ) Common Share Data: (1) Common Share Data: (3) Basic earnings (loss) per common share ) ) ) ) Diluted earnings (loss) per common share ) ) ) ) Cash dividends declared per common share Book value per common share (2) ) Tangible book value per common share (2) ) Book value per common share Tangible book value per common share (4) Balance Sheet Data (at period end): Balance Sheet Data (at period end): (1) Total assets Debt obligations: FHLB advances Junior subordinated debentures Subordinated capital note Subordinated capital notes Senior debt Average Balance Data: Average Balance Data: (1) Average assets Average loans Average deposits Average FHLB advances Average junior subordinated debentures Average subordinated capital note Average subordinated capital notes Average senior debt Average stockholders’ equity Average stockholders’ equity On November 15, 2019, the Company completed a four branch acquisition. The purchase included $126.8 million in performing loans and $1.5 million in premises and equipment, as well as $131.8 million in customer deposits. Acquisition related costs totaled $775,000, or $0.08 per common share after taxes. For 2020 and 2019, income tax expense benefitted from the establishment of a net deferred tax asset related to a change in Kentucky tax law enacted during 2019. Income tax expense benefitted $478,000 and $1.6 million for the years ended December 31, 2020 and 2019, respectively, or $0.06 per basic and diluted share, and $0.21 per basic and diluted share, respectively. Income tax expense for 2017 benefitted $54.0 million from the reversal of the deferred tax valuation allowance offset by $20.3 million of income tax expense related to the revaluation of the deferred tax asset to 21%. (3) On December 16, 2016, the Company completed a 1-for-5 reverse stock split of its issued and outstanding common and non-voting common shares. As a result of the reverse stock split, all share and per share data has been As of and for the Years Ended December 31, 2020 2019 2018 2017 2016 (in thousands, except share and per share data) Common stockholder’s equity Less: Goodwill Less: Intangible assets Tangible common equity Shares outstanding Tangible book value per common share Book value per common share Item7.Effective with the third quarterWe will not be able to pay cash dividends on our common shares until we have paid all deferred distributions on our trust preferred securities. Deferred distributions on trust preferred securities are cumulative, and distributions accrue and compound on each subsequent payment date. If we become subject to any liquidation, dissolution or winding up of affairs, holders of the trust preferred securities and then holders of our preferred shares will be entitled to receive the liquidation amounts to which they are entitled including the amount of any accrued and unpaid distributions and dividends, before any distribution can be made to the holders of common shares or preferred shares. Series E and Series F Preferred Shares have priority over our common shares and non-voting common shares with respect to any payment of dividends.2017,2020, the Company did not repurchase any of its common shares, which is its only registered class of equity securities.
beissueduponexercise
ofoutstandingoptions,
warrants and rights
exercise price of
outstandingoptions,
warrants and rights
remainingavailablefor
future issuance under
equity compensation
plans (excluding
securities reflected in— — 262,374 — — — — — 262,374 Item 6.ourthe Company’s selected historical consolidated financial data from 20132016 to 2017.2020. You should read this information in conjunction with Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 8. “Financial Statements and Supplementary Data.” $ 37,522 $ 35,602 $ 36,574 $ 39,513 $ 43,228 $ 50,753 $ 49,584 $ 43,461 $ 37,522 $ 35,602 6,405 5,981 7,023 9,795 11,143 10,152 14,234 9,790 6,405 5,981 31,117 29,621 29,551 29,718 32,085 40,601 35,350 33,671 31,117 29,621 (800 (2,450 (4,500 7,100 700 4,400 — (500 (800 (2,450 4,855 4,764 7,695 4,079 5,919 6,844 5,918 5,779 5,404 5,218 (1) 30,218 39,567 44,959 39,435 38,890 32,416 30,270 29,126 30,767 40,021 6,554 (2,732 (3,213 (12,738 (1,586 10,629 10,998 10,824 6,554 (2,732 (2) (31,899 21 — (1,583 — 1,624 480 2,030 (31,899 21 38,453 (2,753 (3,213 (11,155 (1,586 9,005 10,518 8,794 38,453 (2,753 — — — 2,362 2,079 — — — (36,104 — 967 (88 (336 3,159 (267 68 106 144 967 (88 $ 37,486 $ (2,665 $ (2,877 $ 19,428 $ (3,398 $ 8,937 $ 10,412 $ 8,650 $ 37,486 $ (2,665 $ 6.15 $ (0.46 $ (0.62 $ 7.94 $ (1.44 $ 1.20 $ 1.41 $ 1.23 $ 6.15 $ (0.46 6.15 (0.46 (0.62 7.94 (1.44 1.20 1.41 1.23 6.15 (0.46 — — — — — — — — — — 11.17 4.81 5.43 8.37 (0.92 11.17 4.79 5.33 8.05 (1.46 15.47 14.15 12.34 11.17 4.81 14.34 12.98 12.34 11.17 4.79 $ 970,801 $ 945,177 $ 948,722 $ 1,017,989 $ 1,076,121 $ 1,312,302 $ 1,245,779 $ 1,069,692 $ 970,801 $ 945,177 11,797 22,458 3,081 15,752 4,492 20,623 61,389 46,549 11,797 22,458 21,000 21,000 21,000 25,000 25,000 21,000 21,000 21,000 21,000 21,000 2,250 3,150 4,050 4,950 5,850 25,000 17,000 — 2,250 3,150 10,000 — — — — — 5,000 10,000 10,000 — $ 947,961 $ 929,140 $ 984,419 $ 1,049,232 $ 1,098,400 $ 1,294,934 $ 1,112,388 $ 1,026,310 $ 947,961 $ 929,140 667,474 621,275 635,948 662,442 788,176 964,088 801,813 743,352 667,474 621,275 864,278 852,717 907,785 961,671 1,004,052 1,099,383 936,243 860,825 864,278 852,717 9,184 2,967 3,473 4,473 4,990 34,101 35,038 43,363 9,184 2,967 21,000 21,000 23,981 25,000 25,000 21,000 21,000 21,000 21,000 21,000 2,805 3,708 4,608 5,508 6,404 20,366 7,545 791 2,805 3,708 5,068 — — — — 2,896 7,781 10,000 5,068 — 37,851 39,423 33,083 33,881 42,631 109,958 100,126 84,860 37,851 39,423 (1) (1)(2)adjustedadjusted in the accompanying tables. Preferred shares were not impacted by the 1-for-5 reverse stock split.(2)(4)After shareholder approval on February 25, 2015, our two seriesTangible book value per common share is a non-GAAP financial measure derived from GAAP based amounts. Tangible book value is calculated by excluding the balance of mandatorily convertible preferred shares converted into a total of 810,720intangible assets from common stockholders’ equity. Tangible book value per common share is calculated by dividing tangible common equity by common shares and 1,291,600 non-votingoutstanding, as compared to book value per common shares. share, which is calculated by dividing common stockholders’ equity by common shares outstanding. Management believes this is consistent with bank regulatory agency treatment, which excludes tangible assets from the calculation of risk-based capital. Tangible Book Value Per Share $ 116,024 $ 105,750 $ 92,097 $ 69,902 $ 29,962 6,252 6,252 — — — 2,244 2,500 — — 140 107,528 96,998 92,097 69,902 29,822 7,498,865 7,471,975 7,462,720 6,259,864 6,224,533 $ 14.34 $ 12.98 $ 12.34 $ 11.17 $ 4.81 15.47 14.15 12.34 11.17 4.79 Management’sManagement’s Discussion
Management’sManagement’s discussion and analysis of financial condition and results of operations analyzes the consolidated financial condition and results of operations of PorterLimestone Bancorp, Inc. (the “Company”) and its wholly owned subsidiary, Limestone Bank, Inc. (the “Bank”). The Bank completed a name change from PBI Bank to Limestone Bank on February 20, 2018. The Company is a Louisville, Kentucky-based bank holding company that operates banking offices of the Bank in twelvefourteen Kentucky counties. OurThe Bank’s markets include metropolitan Louisville in Jefferson County and the surrounding counties of HenryBullitt and Bullitt. We serveHenry. The Bank serves south central, Kentuckysouthern, and southernwestern Kentucky from banking offices in Barren, Butler, Daviess, Edmonson, Green, Hardin, Hart, Edmonson, Barren, Warren, Ohio, and DaviessWarren Counties. WeThe Bank also havehas an office in Lexington, the second largest city in Kentucky.the state, and Frankfort, the state capital. The Bank is a traditional community bank with a wide range of commercialpersonal and personalbusiness banking products.
Historically, we have focused on commercialproducts and commercial real estate lending, both in markets where we have banking offices and other growing markets in our region. Commercial, commercial real estate and real estate construction loans accounted for 58.4% of our total loan portfolio as of December 31, 2017, and 55.6% as of December 31, 2016. Commercial lending generally produces higher yields than residential lending, but involves greater risk and requires more rigorous underwriting standards and credit quality monitoring.services.
The following discussion should be read in conjunction with ourthe Company’s consolidated financial statements and accompanying notes and other schedules presented elsewhere in the report.
Overview
For the year ended December 31, 2017,2020, the Company reported net income of $38.5$9.0 million compared with net lossincome of $2.8$10.5 million for the year ended December 31, 20162019 and a net lossincome of $3.2$8.8 million for the year ended December 31, 2015. After allocating earnings to participating securities, net income attributable to common shareholders was $37.5 million for the year ended December 31, 2017, compared with net loss attributable to common shareholders of $2.7 million for the year ended December 31, 2016, and a net loss attributable to common shareholders of $2.9 million for the year ended December 31, 2015.2018. Basic and diluted income per common share were $6.15$1.20 for the year ended December 31, 2017,2020, compared with net lossincome per common share of ($0.46)$1.41 for 2016,2019, and net lossincome per common share of ($0.62)$1.23 for 2015.2018.
Net income before taxes was $10.6 million for the year ended December 31, 2020 compared to $11.0 million for the year ended December 31, 2019. Income tax expense was $1.6 million for 2020 and $480,000 for 2019. For 2020 and 2019, income tax expense benefitted from the establishment of a net deferred tax assets related to a change in Kentucky tax law enacted during 2019. Income tax expense benefitted $478,000 and $1.6 million for the years ended December 31, 2020 and 2019, respectively, or $0.06 per basic and diluted common share, and $0.21 per basic and diluted common share, respectively. The new law eliminates the Kentucky bank franchise tax, which is assessed at a rate of 1.1% of average capital, and implements a state income tax for the Bank at a statutory rate of 5%. The new Kentucky income tax went into effect on January 1, 2021.
The following significant items are of note for the year ended December 31, 2017:2020:
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These items are discussed in further detail throughout this Item 7.
Application of Critical Accounting Policies
The Company’sCompany’s accounting and reporting policies comply with GAAP and conform to general practices within the banking industry. We believe thatManagement believes the following significant accounting policies may involve a higher degree of management assumptions and judgments that could result in materially different amounts to be reported if conditions or underlying circumstances were to change.
Allowance for Loan Losses – The Bank maintains an allowance for loan losses believed to be sufficient to absorb probable incurred credit losses existing in the loan portfolio. The Board of Directors evaluates the adequacy of the allowance for loan losses on a quarterly basis. We evaluateManagement evaluates the adequacy of the allowance using, among other things, historical loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of the underlying collateral, and current economic conditions and trends. The allowance may be allocated for specific loans or loan categories, but the entire allowance is also available for any loan. The allowance consists of specific and general components. The specific component relates to loans that are individually evaluated and measured for impairment. The general component is based on historical loss experience adjusted for qualitative environmental factors. We developManagement develops allowance estimates based on actual loss experience adjusted for current economic conditions and trends. Allowance estimates are a prudent measurement of the risk in the loan portfolio applied to individual loans based on loan type. If the mix and amount of future charge-off percentages differ significantly from the assumptions used by management in making its determination, wemanagement may be required to materially increase ourits allowance for loan losses and provision for loan losses, which could adversely affect our results.
Other Real Estate Owned – OREO is real estate acquired as a result of foreclosure or by deed in lieu of foreclosure. It is classified as real estate owned until such time as it is sold. OREO is recorded at its fair market value less estimated cost to sell. Any write-down of the property at the time of acquisition is charged to the allowance for loan losses. Costs incurred in order to perfect the lien prior to foreclosure may be capitalized if the fair value less the cost to sell exceeds the balance of the loan at the time of transfer to OREO. Examples of eligible costs to be capitalized are payments of delinquent property taxes to clear tax liens or payments to contractors and subcontractors to clear mechanics’ liens. Fair value of OREO is determined on an individual property basis. To determine the fair value of OREO for smaller dollar single family homes, we consult with staff from the Bank’s special assets group as well as external realtors and appraisers. If the internally evaluated market price is below our underlying investment in the property, appropriate write-downs are taken. For larger dollar residential and commercial real estate properties, we obtain a new appraisal of the subject property or have staff from our special assets group evaluate the latest in-file appraisal in connection with the transfer to OREO. We typically obtain updated appraisals within five quarters of the anniversary date of ownership unless a sale is imminent. Subsequent reductions in fair value are recorded as non-interest expense when a new appraisal indicates a decline in value or in cases where a listing price is lowered below the appraised amount.
Stock-based Compensation – Compensation cost is recognized for restricted stock awards issued to employees, based on the fair value of these awards at the date of grant. The market price of the Company’s common shares at the date of grant is used for restricted stock awards. Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.
Valuation of Deferred Tax Asset – We evaluate deferred tax assets for impairment on a quarterly basis. We established a 100% deferred tax valuation allowance in December 2011 based upon the analysis of our past performance and our expected future performance. The Company’s ability to utilize the net deferred tax asset depends upon generating suffient future levels of taxable income. The determination to restore a deferred tax asset and eliminate a valuation allowance depends upon the evaluation of both positive and negative evidence regarding the likelihood of achieving future taxable income levels. In 2017, management concluded it was more-likely-than-not the asset would be utilized to reduce future taxes payable related to the future taxable income of the Company, and as such, reversed the valuation allowance.
Contingencies – We are defendants in various legal proceedings. We record contingent liabilities resulting from claims against us when a loss is assessed to be probable and the amount of the loss is reasonably estimable. Assessing probability of loss and estimating probable losses requires analysis of multiple factors, including in some cases judgments about the potential actions of third party claimants and courts. Recorded contingent liabilities are based on the best information available and actual losses in any future period are inherently uncertain.
Results of Operations
The following table summarizes components of income and expense and the change in those components for 20172020 compared with 2016:2019:
For the Years Ended December 31, | Change from Prior Period | |||||||||||||||
2017 | 2016 | Amount | Percent | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Gross interest income | $ | 37,522 | $ | 35,602 | $ | 1,920 | 5.4 | % | ||||||||
Gross interest expense | 6,405 | 5,981 | 424 | 7.1 | ||||||||||||
Net interest income | 31,117 | 29,621 | 1,496 | 5.1 | ||||||||||||
Provision (negative provision) for loan losses | (800 | ) | (2,450 | ) | 1,650 | 67.3 | ||||||||||
Non-interest income | 4,567 | 4,548 | 19 | 0.4 | ||||||||||||
Gains on sale of securities, net | 288 | 216 | 72 | 33.3 | ||||||||||||
Non-interest expense | 30,218 | 39,567 | (9,349 | ) | (23.6 | ) | ||||||||||
Net income (loss) before taxes | 6,554 | (2,732 | ) | 9,286 | 339.9 | |||||||||||
Income tax expense (benefit) | (31,899 | ) | 21 | (31,920 | ) | NM | ||||||||||
Net income (loss) | 38,453 | (2,753 | ) | 41,206 | NM | |||||||||||
Earnings (losses) attributable to participating securities | 967 | (88 | ) | 1,055 | NM | |||||||||||
Net income (loss) attributable to common shareholders | 37,486 | (2,665 | ) | 40,151 | NM |
NM: Not Meaningful
For the Years Ended December 31, | Change from Prior Period | |||||||||||||||
2020 | 2019 | Amount | Percent | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Gross interest income | $ | 50,753 | $ | 49,584 | $ | 1,169 | 2.4 | % | ||||||||
Gross interest expense | 10,152 | 14,234 | (4,082 | ) | (28.7 | ) | ||||||||||
Net interest income | 40,601 | 35,350 | 5,251 | 14.9 | ||||||||||||
Provision for loan losses | 4,400 | — | 4,400 | 100.0 | ||||||||||||
Non-interest income | 6,849 | 5,923 | 926 | 15.6 | ||||||||||||
Gains on sale of securities, net | (5 | ) | (5 | ) | — | — | ||||||||||
Non-interest expense | 32,416 | 30,270 | 2,146 | 7.1 | ||||||||||||
Net income before taxes | 10,629 | 10,998 | (369 | ) | (3.4 | ) | ||||||||||
Income tax expense | 1,624 | 480 | 1,144 | 238.3 | ||||||||||||
Net income | 9,005 | 10,518 | (1,513 | ) | (14.4 | ) |
Net income of $38.5$9.0 million for the year ended December 31, 2017 increased2020 decreased by $41.2$1.5 million from a net lossincome of $2.8$10.5 million for 2016. During2019. Income tax expense for 2020 and 2019 benefitted $478,000 and $1.6 million, respectively, from the period, improving trends in non-performing loans, past due loans, and loan risk categories continued. In addition,establishment of a state net income for 2017 was impacted by the reversal of the Company’s deferred tax asset valuation allowancerelated to the 2019 tax law enactments. The new laws eliminate the Kentucky bank franchise tax, which is assessed at a rate of 1.1% of average capital, and the change in federal corporate tax rates in connection with the enactment of the Tax Cuts and Jobs Act of 2017. The net result of these two items, as well asimplements a state income tax expense for the year, was anBank at a statutory rate of 5%. The new Kentucky income tax benefitwent into effect on January 1, 2021. A provision for loan losses of $31.9$4.4 million for 2017. A negativewas recorded in 2020, compared to no provision for loan losses expense of $800,000in 2019. The 2020 loan loss provision was recordedattributable to the net loan charge-offs during 2017, comparedthe year, trends within the portfolio during the year, and primarily to $2.5 million negative provision for loan losses expense for 2016. changes in the economic and business environment attributable to COVID-19.
Non-interest income increased $19,000$926,000 during 2017.2020. There was an increase of $295,000 in service charges on deposit accounts, $123,000$938,000 in bank card interchange fees, and $62,000primarily as a result of the deposit accounts acquired in other non-interest income which was offset by no OREO income during 2017, compared to $456,000 during 2016. the branch purchase transaction.
Non-interest expense decreased $9.3increased $2.1 million during 20172020 due primarily to a decreasean increase in litigationsalaries and loan collectionemployee benefits of $1.5 million, $666,000 in deposit account related expense, and $479,000 in occupancy expense. The Bank added sales talent and customer facing associates during the latter half of $8.6 million2019 and branch staff in connection with the branch purchase transaction in November 2019. These increases were muted somewhat by efforts in 2020 to reduce FTEs from 248 at March 31, 2020 to 219 as 2016 was negatively impacted by a ruling from the Kentucky Court of Appeals against the Bank that approximated $8.0 million. After consideration of earnings attributable to participating securities, net income attributable to common shareholders was $37.5 million for the year ended December 31, 2017, as compared to net loss attributable to common shareholders2020 through attrition and workforce reduction. The increase in deposit account related expense and occupancy expense is the result of $2.7 million for 2016.the branch purchase transaction.
The following table summarizes components of income and expense and the change in those components for 20162019 compared with 2015:2018:
For the Years Ended December 31, | Change from Prior Period | For the Years Ended December 31, | Change from Prior Period | |||||||||||||||||||||||||||||
2016 | 2015 | Amount | Percent | 2019 | 2018 | Amount | Percent | |||||||||||||||||||||||||
(dollars in thousands) | (dollars in thousands) | |||||||||||||||||||||||||||||||
Gross interest income | $ | 35,602 | $ | 36,574 | $ | (972 | ) | (2.7 | )% | $ | 49,584 | $ | 43,461 | $ | 6,123 | 14.1 | % | |||||||||||||||
Gross interest expense | 5,981 | 7,023 | (1,042 | ) | (14.8 | ) | 14,234 | 9,790 | 4,444 | 45.4 | ||||||||||||||||||||||
Net interest income | 29,621 | 29,551 | 70 | 0.2 | 35,350 | 33,671 | 1,679 | 5.0 | ||||||||||||||||||||||||
Provision (negative provision) for loan losses | (2,450 | ) | (4,500 | ) | (2,050 | ) | (45.6 | ) | — | (500 | ) | 500 | (100.0 | ) | ||||||||||||||||||
Non-interest income | 4,548 | 5,929 | (1,381 | ) | (23.3 | ) | 5,923 | 5,785 | 138 | 2.4 | ||||||||||||||||||||||
Gains on sale of securities, net | 216 | 1,766 | (1,550 | ) | (87.8 | ) | (5 | ) | (6 | ) | 1 | (16.7 | ) | |||||||||||||||||||
Non-interest expense | 39,567 | 44,959 | (5,392 | ) | (12.0 | ) | 30,270 | 29,126 | 1,144 | 3.9 | ||||||||||||||||||||||
Net loss before taxes | (2,732 | ) | (3,213 | ) | 481 | 15.0 | ||||||||||||||||||||||||||
Net income before taxes | 10,998 | 10,824 | 174 | 1.6 | ||||||||||||||||||||||||||||
Income tax expense | 21 | — | 21 | 100.0 | 480 | 2,030 | (1,550 | ) | (76.4 | ) | ||||||||||||||||||||||
Net loss | (2,753 | ) | (3,213 | ) | (460 | ) | (14.3 | ) | ||||||||||||||||||||||||
Earnings (losses) attributable to participating securities | (88 | ) | (336 | ) | 248 | (73.8 | ) | |||||||||||||||||||||||||
Net loss attributable to common shareholders | (2,665 | ) | (2,877 | ) | (212 | ) | (7.4 | ) | ||||||||||||||||||||||||
Net income | 10,518 | 8,794 | 1,724 | 19.6 |
Net lossincome of $2.8$10.5 million for the year ended December 31, 2016 decreased2019 increased by $460,000$1.7 million from a net lossincome of $3.2$8.8 million for 2015. A negative provision2018. Income tax expense for loan losses expense2019 benefitted $1.6 million from the establishment of $2.5 million was recordeda state net deferred tax asset related to the 2019 tax law enactments. The new laws eliminate the Kentucky bank franchise tax, which is assessed at a rate of 1.1% of average capital, and implements a state income tax for 2016 due to improvementsthe Bank at a statutory rate of 5%. The new Kentucky income tax went into effect on January 1, 2021. Based upon historically strong trends in loanasset quality and management’s assessment of risk within the portfolio, asthe Company recorded no provision for loan losses expense in 2019, compared to $4.5 million$500,000 negative provision for loan losses expense for 2015.2018. Non-interest income decreased $2.9increased $139,000 million during 2016 due primarily to2019. There was an increase of $607,000 in bank card interchange fees, partially offset by a decrease in OREO rentalother non-interest income of $890,000 driven by$468,000 related to the sale of income producing properties and a $1.6 million decrease in gains$150,000 one-time gain on the sale of securities comparedthe secondary market residential servicing rights portfolio in the third quarter of 2018 and a $632,000 gain on the sale of a subdivided lot at the Company’s headquarters offset by a $392,000 impairment charge associated with the transfer of the Bank’s former data processing center to 2015. Premises Held for Sale in the fourth quarter of 2018.
Non-interest expense decreased $5.4increased $1.1 million during 2016. OREO2019 due primarily to $775,000 of expenses attributable to the branch purchase transaction. There was also an increase of $744,000 in salary and employee benefits, as the Bank added sales talent and customer facing associates during 2019, and branch staff added in connection with the branch purchase transaction. Deposit account related expense decreased by $10.8 million, butincreased $401,000, which was offset by a $7.7 million increasedecreases in litigationOREO expenses of $500,000, and loan collectionFDIC insurance expense primarily resulting from the adverse Kentucky Court of Appeals ruling. After consideration of losses attributable to participating securities, net loss attributable to common shareholders$346,000.
Net Interest Income – Net interest income was $2.7$40.6 million for the year ended December 31, 2016,2020, an increase of $5.3 million, or 14.9%, compared with $35.4 million for the same period in 2019. Net interest spread and margin were 3.15% and 3.36%, respectively, for 2020, compared with 3.10% and 3.40%, respectively, for 2019.
The interest rate environment was challenging during 2020 as the Federal Reserve, after lowering rates 75 basis points in the latter half of 2019, lowered the federal funds target rate by 50 basis points on March 6, 2020 and 100 basis points on March 15, 2020. In particular, the Federal Reserve’s actions served to lower rates on the short end of the yield curve impacting yields on fed funds, certain floating rate investment securities, and loans with variable rate pricing features.
The yield on earning assets decreased to 4.20% for the year ended December 31, 2020, as compared to net loss attributable to common shareholders4.76% for the year ended December 31, 2019. The yield on earning assets was negatively impacted by falling interest rates on the Bank’s fed funds, certain floating rate investment securities, loans with variable rate repricing features, and new loan production during the year. Average loans increased approximately $162.3 million during 2020. Average loans were positively impacted from the branch purchase transaction on November 15, 2019, along with loan growth during 2019 and 2020, as well as PPP loan originations. The increase in average loans resulted in an increase in interest revenue volume of $2.9approximately $7.9 million for 2015.2020, which was partially offset by a decrease in interest revenue to due declining rates of $5.0 million, as compared to 2019. Loan fee income can meaningfully impact net interest income, loan yields, and net interest margin. The amount of loan fee income included in total interest income represents 18 basis points of yield on earning assets and net interest margin for the year ended December 31, 2020 as compared to 11 basis points for the year ended December 31, 2019. Loan fee income for 2020 included $1.1 million in fees earned on PPP loans. Total interest income increased 2.4%, or $1.2 million, for 2020 as compared 2019.
Net Interest Income – NetThe cost of interest-bearing liabilities decreased to 1.05% for the year ended December 31, 2020, as compared to 1.66% for the year ended December 31, 2019 primarily based on the downward repricing of time deposits. Average interest-bearing liabilities increased by $106.3 million during 2020 due to deposit growth and the completion of the branch purchase transaction in 2019. Total interest income was $31.1expense decreased by 28.7% to $10.2 million for the year ended December 31, 2017,2020 as compared to $14.2 million for the year ended December 31, 2019. The cost of interest-bearing liabilities for 2020 was also impacted by the subordinated debt issuances and senior debt repayments in July 2019 and July 2020. As of December 31, 2020, time deposits comprise $367.6 million of the Company’s liabilities with $272.0 million, or 74%, set to reprice or mature within one year of which, $104.9 million with a current average rate of 0.99% reprice or mature within the first quarter of 2021.
Net interest income was $35.4 million for the year ended December 31, 2019, an increase of $1.5$1.7 million, or 5.1%5.0%, compared with $29.6$33.7 million for the same period in 2016.2018. Net interest spread and margin were 3.35%3.10% and 3.48%3.40%, respectively, for 2017,2019, compared with 3.32% and 3.42%3.53%, respectively, for 2016. Average nonaccrual loans were $7.1 million and $11.4 million in 2017 and 2016, respectively.2018.
AverageThe Federal Reserve lowered the federal funds target rate by 25 basis points on July 31, 2019, September 18, 2019, and October 31, 2019. This represented a change in direction as the Federal Reserve had increased rates by 25 basis points on four occasions in 2018.
Average interest-earning assets were $904.1$1.04 billion for 2019, compared with $957.5 million for 2017, compared with $875.3 million for 2016, a 3.3%2018, an 8.9% increase, primarily attributable to higher average loans and average investment securities, partially offset by a decrease in interest bearing deposits with financial institutions.securities. Average loans were $667.5$801.8 million for 2017,2019, compared with $621.3$743.4 million for 2016,2018, a 7.4% increase.7.9% increase due to loan growth, as well as the completion of the branch purchase transaction on November 15, 2019. This resulted in an increase in interest revenue volume of approximately $3.0 million and an increase of $1.8 million attributable to increasing interest rates for 2019 as compared to 2018. Average investment securities were $193.1$206.2 million for 2017,2019, compared with $183.7$178.9 million for 2016,2018, a 5.1%15.2% increase. Average interest bearing deposits with financial institutions and fed funds sold were $36.2 million in 2017, compared with $62.9 million in 2016, a 42.4% decrease. Total interest income increased 5.4%14.1% to $37.5$49.6 million for 2017,2019, compared with $35.6$43.5 million for 2016.2018.
AverageAverage interest-bearing liabilities increased by 1.7%7.2% to $773.2$856.3 million for 2017,2019, compared with $760.7$799.0 million for 2016. Our total2018 due to deposit growth, as well as the completion of the branch purchase transaction on November 15, 2019. Total interest expense increased by 7.1%45.4% to $6.4$14.2 million for 2017,2019, compared with $6.0$9.8 million during 2016,2018, due primarily to the completionincreases in rates paid on certificates of a $10.0 million senior debt transaction during 2017 as well as an increasedeposits and other time deposits in FHLB advances outstanding during 2017.2019 compared to 2018. Average volume of certificates of deposit decreased 2.9%increased 9.9% to $452.4$483.2 million for 2017,2019, compared with $466.0$439.6 million for 2016.2018. The average interest rate paid on certificates of deposit increased to 0.93%1.98% for 2017,2019, compared with 0.88%1.35% for 2016.2018. Average volume of interest checking and money market deposit accounts increased 6.2%6.5% to $247.3$265.7 million for 2017,2019, compared with $232.7$249.4 million for 2016. The average interest rate paid on interest checking and money market deposit accounts decreased to 0.38% for 2017, compared with 0.40% for 2016.
Net interest income was $29.6 million for the year ended December 31, 2016, an increase of $70,000, or 0.2%, compared with $29.6 million for the same period in 2015. Net interest spread and margin were 3.32% and 3.42%, respectively, for 2016, compared with 3.18% and 3.27%, respectively, for 2015. Average nonaccrual loans were $11.4 million and $29.0 million in 2016 and 2015, respectively.
Average interest-earning assets were $875.3 million for 2016, compared with $917.5 million for 2015, a 4.6% decrease, primarily attributable to lower average loans, investment securities and interest bearing deposits with financial institutions. Average loans were $621.3 million for 2016, compared with $635.9 million for 2015, a 2.3% decrease. Average investment securities were $183.7 million for 2016, compared with $194.1 million for 2015, a 5.3% decrease. Average interest bearing deposits with financial institutions were $62.3 million in 2016, compared with $78.9 million in 2015, a 21.0% decrease. Our total interest income decreased 2.7% to $35.6 million for 2016, compared with $36.6 million for 2015.
Average interest-bearing liabilities decreased by 8.0% to $760.7 million for 2016, compared with $826.9 million for 2015. Total interest expense decreased by 14.8% to $6.0 million for 2016, compared with $7.0 million during 2015, due primarily to lower interest rates paid on and lower volume of certificates of deposit. Average volume of certificates of deposit decreased 16.4% to $466.0 million for 2016, compared with $557.4 million for 2015. The average interest rate paid on certificates of deposit decreased to 0.88% for 2016, compared with 0.96% for 2015, as the result of continued re-pricing of certificates of deposit at maturity to lower interest rates. The average volume of interest checking and money market deposit accounts increased 15.7% to $232.7 million for 2016, compared with $201.2 million for 2015.2018. The average interest rate paid on interest checking and money market deposit accounts increased to 0.40%0.76% for 2016,2019, compared with 0.38%0.62% for 2015.2018. The cost of interest-bearing liabilities for 2019 was also impacted by the subordinated debt issuance at a fixed rate of 5.75%.
Average Balance Sheets
The following table sets forth the average daily balances, the interest earned or paid on such amounts, and the weighted average yield on interest-earning assets and weighted average cost of interest-bearing liabilities for the periods indicated. Dividing income or expense by the average daily balance of assets or liabilities, respectively, derives such yields and costs for the periods presented.
For the Years Ended December 31, | For the Years Ended December 31, | |||||||||||||||||||||||||||||||||||||||||||||||
2017 | 2016 | 2020 | 2019 | |||||||||||||||||||||||||||||||||||||||||||||
Average Balance | Interest Earned/Paid | Average Yield/Cost | Average Balance | Interest Earned/Paid | Average Yield/Cost | Average Balance | Interest Earned/Paid | Average Yield/Cost | Average Balance | Interest Earned/Paid | Average Yield/Cost | |||||||||||||||||||||||||||||||||||||
(dollars in thousands) | (dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
ASSETS | ||||||||||||||||||||||||||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||||||||||||||||||||||||||
Loans receivables (1)(2) | ||||||||||||||||||||||||||||||||||||||||||||||||
Real estate | $ | 509,133 | $ | 24,544 | 4.82 | % | $ | 493,068 | $ | 24,486 | 4.97 | % | $ | 684,447 | $ | 32,572 | 4.76 | % | $ | 576,441 | $ | 30,139 | 5.23 | % | ||||||||||||||||||||||||
Commercial | 107,188 | 4,403 | 4.11 | 81,110 | 3,471 | 4.28 | 200,260 | 8,398 | 4.19 | 134,735 | 6,660 | 4.94 | ||||||||||||||||||||||||||||||||||||
Consumer | 10,790 | 843 | 7.81 | 9,818 | 826 | 8.41 | 39,931 | 2,051 | 5.14 | 51,001 | 2,863 | 5.61 | ||||||||||||||||||||||||||||||||||||
Agriculture | 39,839 | 2,047 | 5.14 | 36,811 | 1,733 | 4.71 | 38,833 | 2,058 | 5.30 | 39,116 | 2,480 | 6.34 | ||||||||||||||||||||||||||||||||||||
Other | 524 | 29 | 5.53 | 468 | 21 | 4.49 | 617 | 14 | 2.27 | 520 | 11 | 2.12 | ||||||||||||||||||||||||||||||||||||
U.S. Treasury and agencies | 31,440 | 694 | 2.21 | 34,049 | 757 | 2.22 | 20,239 | 491 | 2.43 | 23,263 | 558 | 2.40 | ||||||||||||||||||||||||||||||||||||
Mortgage-backed securities | 94,451 | 2,240 | 2.37 | 101,249 | 2,240 | 2.21 | 82,330 | 1,863 | 2.26 | 91,609 | 2,495 | 2.72 | ||||||||||||||||||||||||||||||||||||
Collateralized loan obligations | 20,242 | 541 | 2.67 | 802 | 28 | 3.49 | 45,595 | 1,234 | 2.71 | 49,881 | 2,015 | 4.04 | ||||||||||||||||||||||||||||||||||||
State and political subdivision securities (non-taxable) (3) | 19,617 | 571 | 4.48 | 21,041 | 620 | 4.53 | 14,139 | 370 | 3.31 | 11,759 | 326 | 3.51 | ||||||||||||||||||||||||||||||||||||
State and political subdivision securities (taxable) | 23,689 | 757 | 3.20 | 23,921 | 768 | 3.21 | 16,301 | 494 | 3.03 | 18,270 | 583 | 3.19 | ||||||||||||||||||||||||||||||||||||
Corporate bonds | 3,651 | 167 | 4.57 | 2,656 | 93 | 3.50 | 23,572 | 960 | 4.07 | 11,376 | 618 | 5.43 | ||||||||||||||||||||||||||||||||||||
FHLB stock | 7,323 | 366 | 5.00 | 7,323 | 293 | 4.00 | 6,208 | 143 | 2.30 | 6,691 | 348 | 5.20 | ||||||||||||||||||||||||||||||||||||
Federal funds sold | 960 | 10 | 1.04 | 639 | 3 | 0.47 | 72 | — | — | 182 | 4 | 2.20 | ||||||||||||||||||||||||||||||||||||
Interest-bearing deposits in other financial institutions | 35,222 | 310 | 0.88 | 62,307 | 263 | 0.42 | 38,525 | 105 | 0.27 | 27,809 | 484 | 1.74 | ||||||||||||||||||||||||||||||||||||
Total interest-earning assets | 904,069 | 37,522 | 4.18 | % | 875,262 | 35,602 | 4.11 | % | 1,211,069 | 50,753 | 4.20 | % | 1,042,653 | 49,584 | 4.76 | % | ||||||||||||||||||||||||||||||||
Less: Allowance for loan losses | (8,961 | ) | (10,719 | ) | (9,819 | ) | (8,786 | ) | ||||||||||||||||||||||||||||||||||||||||
Non-interest-earning assets | 52,853 | 64,597 | 93,684 | 78,521 | ||||||||||||||||||||||||||||||||||||||||||||
Total assets | $ | 947,961 | $ | 929,140 | $ | 1,294,934 | $ | 1,112,388 | ||||||||||||||||||||||||||||||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||||||||||||||||||||||||||||||||||
Interest-bearing liabilities | ||||||||||||||||||||||||||||||||||||||||||||||||
Certificates of deposit and other time deposits | $ | 452,443 | $ | 4,191 | 0.93 | % | $ | 466,007 | $ | 4,111 | 0.88 | % | $ | 436,083 | $ | 5,802 | 1.33 | % | $ | 483,222 | $ | 9,564 | 1.98 | % | ||||||||||||||||||||||||
Interest checking and money market deposits | 247,261 | 940 | 0.38 | 232,717 | 921 | 0.40 | 336,596 | 1,464 | 0.43 | 265,687 | 2,026 | 0.76 | ||||||||||||||||||||||||||||||||||||
Savings accounts | 35,486 | 59 | 0.17 | 34,257 | 61 | 0.18 | 111,559 | 530 | 0.48 | 36,035 | 67 | 0.19 | ||||||||||||||||||||||||||||||||||||
FHLB advances | 9,184 | 120 | 1.31 | 2,967 | 70 | 2.36 | 34,101 | 371 | 1.09 | 35,038 | 810 | 2.31 | ||||||||||||||||||||||||||||||||||||
Junior subordinated debentures | 23,805 | 901 | 3.78 | 24,708 | 818 | 3.31 | 21,000 | 660 | 3.14 | 21,000 | 1,005 | 4.79 | ||||||||||||||||||||||||||||||||||||
Subordinated capital notes | 20,366 | 1,206 | 5.92 | 7,545 | 433 | 5.74 | ||||||||||||||||||||||||||||||||||||||||||
Senior debt | 5,068 | 194 | 3.83 | — | — | — | 2,896 | 119 | 4.11 | 7,781 | 329 | 4.23 | ||||||||||||||||||||||||||||||||||||
Total interest-bearing liabilities | 773,247 | 6,405 | 0.83 | % | 760,656 | 5,981 | 0.79 | % | 962,601 | 10,152 | 1.05 | % | 856,308 | 14,234 | 1.66 | % | ||||||||||||||||||||||||||||||||
Non-interest-bearing liabilities | ||||||||||||||||||||||||||||||||||||||||||||||||
Non-interest-bearing deposits | 129,088 | 119,736 | 215,145 | 151,299 | ||||||||||||||||||||||||||||||||||||||||||||
Other liabilities | 7,775 | 9,325 | 7,230 | 4,655 | ||||||||||||||||||||||||||||||||||||||||||||
Total liabilities | 910,110 | 889,717 | 1,184,976 | 1,012,262 | ||||||||||||||||||||||||||||||||||||||||||||
Stockholders’ equity | 37,851 | 39,423 | ||||||||||||||||||||||||||||||||||||||||||||||
Stockholders’ equity | 109,958 | 100,126 | ||||||||||||||||||||||||||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 947,961 | $ | 929,140 | $ | 1,294,934 | $ | 1,112,388 | ||||||||||||||||||||||||||||||||||||||||
Net interest income | $ | 31,117 | $ | 29,621 | $ | 40,601 | $ | 35,350 | ||||||||||||||||||||||||||||||||||||||||
Net interest spread | 3.35 | % | 3.32 | % | 3.15 | % | 3.10 | % | ||||||||||||||||||||||||||||||||||||||||
Net interest margin | 3.48 | % | 3.42 | % | 3.36 | % | 3.40 | % | ||||||||||||||||||||||||||||||||||||||||
Ratio of average interest-earning assets to average interest-bearing liabilities | 116.92 | % | 115.07 | % | 125.81 | % | 121.76 | % |
(1) Includes loan fees in both interest income and the calculation of yield on loans.
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(2) Calculations include non-accruing loans of $1.7 million and $2.2 million in average loan amounts outstanding. (3) Taxable equivalent yields are calculated assuming a 21% federal income tax rate. |
For the Years Ended December 31, | ||||||||||||||||||||||||
2019 | 2018 | |||||||||||||||||||||||
Average Balance | Interest Earned/Paid | Average Yield/Cost | Average Balance | Interest Earned/Paid | Average Yield/Cost | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
ASSETS | ||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Loans receivables (1)(2) | ||||||||||||||||||||||||
Real estate | $ | 576,441 | $ | 30,139 | 5.23 | % | $ | 548,877 | $ | 27,296 | 4.97 | % | ||||||||||||
Commercial | 134,735 | 6,660 | 4.94 | 123,044 | 5,934 | 4.82 | ||||||||||||||||||
Consumer | 51,001 | 2,863 | 5.61 | 32,049 | 1,765 | 5.51 | ||||||||||||||||||
Agriculture | 39,116 | 2,480 | 6.34 | 38,796 | 2,334 | 6.02 | ||||||||||||||||||
Other | 520 | 11 | 2.12 | 586 | 13 | 2.22 | ||||||||||||||||||
U.S. Treasury and agencies | 23,263 | 558 | 2.40 | 23,732 | 549 | 2.31 | ||||||||||||||||||
Mortgage-backed securities | 91,609 | 2,495 | 2.72 | 81,771 | 2,142 | 2.62 | ||||||||||||||||||
Collateralized loan obligations | 49,881 | 2,015 | 4.04 | 32,163 | 1,177 | 3.66 | ||||||||||||||||||
State and political subdivision securities (non-taxable) (3) | 11,759 | 326 | 3.51 | 14,189 | 383 | 3.42 | ||||||||||||||||||
State and political subdivision securities (taxable) | 18,270 | 583 | 3.19 | 18,890 | 570 | 3.02 | ||||||||||||||||||
Corporate bonds | 11,376 | 618 | 5.43 | 8,162 | 442 | 5.42 | ||||||||||||||||||
FHLB stock | 6,691 | 348 | 5.20 | 7,280 | 429 | 5.89 | ||||||||||||||||||
Federal funds sold | 182 | 4 | 2.20 | 1,152 | 22 | 1.91 | ||||||||||||||||||
Interest-bearing deposits in other financial institutions | 27,809 | 484 | 1.74 | 26,763 | 405 | 1.51 | ||||||||||||||||||
Total interest-earning assets | 1,042,653 | 49,584 | 4.76 | % | 957,454 | 43,461 | 4.55 | % | ||||||||||||||||
Less: Allowance for loan losses | (8,786 | ) | (8,692 | ) | ||||||||||||||||||||
Non-interest-earning assets | 78,521 | 77,548 | ||||||||||||||||||||||
Total assets | $ | 1,112,388 | $ | 1,026,310 | ||||||||||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||||||||||
Interest-bearing liabilities | ||||||||||||||||||||||||
Certificates of deposit and other time deposits | $ | 483,222 | $ | 9,564 | 1.98 | % | $ | 439,597 | $ | 5,949 | 1.35 | % | ||||||||||||
Interest checking and money market deposits | 265,687 | 2,026 | 0.76 | 249,415 | 1,543 | 0.62 | ||||||||||||||||||
Savings accounts | 36,035 | 67 | 0.19 | 34,866 | 57 | 0.16 | ||||||||||||||||||
FHLB advances | 35,038 | 810 | 2.31 | 43,363 | 867 | 2.00 | ||||||||||||||||||
Junior subordinated debentures | 21,000 | 1,005 | 4.79 | 21,000 | 946 | 4.50 | ||||||||||||||||||
Subordinated capital notes | 7,545 | 433 | 5.74 | 791 | 39 | 4.93 | ||||||||||||||||||
Senior debt | 7,781 | 329 | 4.23 | 10,000 | 389 | 3.89 | ||||||||||||||||||
Total interest-bearing liabilities | 856,308 | 14,234 | 1.66 | % | 799,032 | 9,790 | 1.23 | % | ||||||||||||||||
Non-interest-bearing liabilities | ||||||||||||||||||||||||
Non-interest-bearing deposits | 151,299 | 136,947 | ||||||||||||||||||||||
Other liabilities | 4,655 | 5,471 | ||||||||||||||||||||||
Total liabilities | 1,012,262 | 941,450 | ||||||||||||||||||||||
Stockholders’ equity | 100,126 | 84,860 | ||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 1,112,388 | $ | 1,026,310 | ||||||||||||||||||||
Net interest income | $ | 35,350 | $ | 33,671 | ||||||||||||||||||||
Net interest spread | 3.10 | % | 3.32 | % | ||||||||||||||||||||
Net interest margin | 3.40 | % | 3.53 | % | ||||||||||||||||||||
Ratio of average interest-earning assets to average interest-bearing liabilities | 121.76 | % | 119.83 | % |
For the Years Ended December 31, | ||||||||||||||||||||||||
2016 | 2015 | |||||||||||||||||||||||
Average Balance | Interest Earned/Paid | Average Yield/Cost | Average Balance | Interest Earned/Paid | Average Yield/Cost | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
ASSETS | ||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Loans receivables (1)(2) | ||||||||||||||||||||||||
Real estate | $ | 493,068 | $ | 24,486 | 4.97 | % | $ | 516,605 | $ | 25,423 | 4.92 | % | ||||||||||||
Commercial | 81,110 | 3,471 | 4.28 | 78,993 | 3,475 | 4.40 | ||||||||||||||||||
Consumer | 9,818 | 826 | 8.41 | 10,432 | 856 | 8.21 | ||||||||||||||||||
Agriculture | 36,811 | 1,733 | 4.71 | 29,395 | 1,470 | 5.00 | ||||||||||||||||||
Other | 468 | 21 | 4.49 | 523 | 27 | 5.16 | ||||||||||||||||||
U.S. Treasury and agencies | 34,049 | 757 | 2.22 | 31,269 | 684 | 2.19 | ||||||||||||||||||
Mortgage-backed securities | 101,249 | 2,240 | 2.21 | 107,277 | 2,420 | 2.26 | ||||||||||||||||||
Collateralized loan obligations | 802 | 28 | 3.49 | — | — | — | ||||||||||||||||||
State and political subdivision securities (non-taxable) (3) | 21,041 | 620 | 4.53 | 25,354 | 764 | 4.64 | ||||||||||||||||||
State and political subdivision securities (taxable) | 23,921 | 768 | 3.21 | 24,059 | 774 | 3.22 | ||||||||||||||||||
Corporate bonds | 2,656 | 93 | 3.50 | 6,116 | 155 | 2.53 | ||||||||||||||||||
FHLB stock | 7,323 | 293 | 4.00 | 7,323 | 293 | 4.00 | ||||||||||||||||||
Other debt securities | — | — | — | 544 | 43 | 7.90 | ||||||||||||||||||
Federal funds sold | 639 | 3 | 0.47 | 752 | 1 | 0.13 | ||||||||||||||||||
Interest-bearing deposits in other financial institutions | 62,307 | 263 | 0.42 | 78,904 | 189 | 0.24 | ||||||||||||||||||
Total interest-earning assets | 875,262 | 35,602 | 4.11 | % | 917,546 | 36,574 | 4.03 | % | ||||||||||||||||
Less: Allowance for loan losses | (10,719 | ) | (17,154 | ) | ||||||||||||||||||||
Non-interest-earning assets | 64,597 | 84,027 | ||||||||||||||||||||||
Total assets | $ | 929,140 | $ | 984,419 | ||||||||||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||||||||||
Interest-bearing liabilities | ||||||||||||||||||||||||
Certificates of deposit and other time deposits | $ | 466,007 | $ | 4,111 | 0.88 | % | $ | 557,441 | $ | 5,329 | 0.96 | % | ||||||||||||
Interest checking and money market deposits | 232,717 | 921 | 0.40 | 201,164 | 756 | 0.38 | ||||||||||||||||||
Savings accounts | 34,257 | 61 | 0.18 | 35,604 | 75 | 0.21 | ||||||||||||||||||
Federal funds purchased and repurchase agreements | — | — | — | 587 | 1 | 0.17 | ||||||||||||||||||
FHLB advances | 2,967 | 70 | 2.36 | 3,473 | 95 | 2.74 | ||||||||||||||||||
Junior subordinated debentures | 24,708 | 818 | 3.31 | 28,589 | 767 | 2.68 | ||||||||||||||||||
Total interest-bearing liabilities | 760,656 | 5,981 | 0.79 | % | 826,858 | 7,023 | 0.85 | % | ||||||||||||||||
Non-interest-bearing liabilities | ||||||||||||||||||||||||
Non-interest-bearing deposits | 119,736 | 113,576 | ||||||||||||||||||||||
Other liabilities | 9,325 | 10,902 | ||||||||||||||||||||||
Total liabilities | 889,717 | 951,336 | ||||||||||||||||||||||
Stockholders’ equity | 39,423 | 33,083 | ||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 929,140 | $ | 984,419 | ||||||||||||||||||||
Net interest income | $ | 29,621 | $ | 29,551 | ||||||||||||||||||||
Net interest spread | 3.32 | % | 3.18 | % | ||||||||||||||||||||
Net interest margin | 3.42 | % | 3.27 | % | ||||||||||||||||||||
Ratio of average interest-earning assets to average interest-bearing liabilities | 115.07 | % | 110.97 | % |
(1) Includes loan fees in both interest income and the calculation of yield on loans.
(2) Calculations include non-accruing loans of $2.2 million and $3.5 million in average loan amounts outstanding.
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(3) Taxable equivalent yields are calculated assuming a 21% federal income tax rate. |
Rate/Volume Analysis
The table below sets forth information regarding changes in interest income and interest expense for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in rate (changes in rate multiplied by old volume); (2) changes in volume (changes in volume multiplied by old rate); and (3) changes in rate-volume (change in rate multiplied by change in volume). Changes in rate-volume are proportionately allocated between rate and volume variance.
Year Ended December 31, 2017 vs. 2016 | Year Ended December 31, 2016 vs. 2015 | Year Ended December 31, 2020 vs. 2019 | Year Ended December 31, 2019 vs. 2018 | |||||||||||||||||||||||||||||||||||||||||||||
Increase (decrease) due to change in | Increase (decrease) due to change in | Increase (decrease) due to change in | Increase (decrease) due to change in | |||||||||||||||||||||||||||||||||||||||||||||
Rate | Volume | Net Change | Rate | Volume | Net Change | Rate | Volume | Net Change | Rate | Volume | Net Change | |||||||||||||||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||||||||||||||||||||||||||
Loan receivables | $ | (895 | ) | $ | 2,224 | $ | 1,329 | $ | 7 | $ | (721 | ) | $ | (714 | ) | $ | (4,982 | ) | $ | 7,922 | $ | 2,940 | $ | 1,789 | $ | 3,022 | $ | 4,811 | ||||||||||||||||||||
U.S. Treasury and agencies | (5 | ) | (58 | ) | (63 | ) | 11 | 62 | 73 | 6 | (73 | ) | (67 | ) | 20 | (11 | ) | 9 | ||||||||||||||||||||||||||||||
Mortgage-backed securities | 155 | (155 | ) | — | (46 | ) | (134 | ) | (180 | ) | (395 | ) | (237 | ) | (632 | ) | 87 | 266 | 353 | |||||||||||||||||||||||||||||
Collateralized loan obligations | (9 | ) | 522 | 513 | — | 28 | 28 | (620 | ) | (161 | ) | (781 | ) | 133 | 705 | 838 | ||||||||||||||||||||||||||||||||
State and political subdivision securities | (9 | ) | (51 | ) | (60 | ) | (13 | ) | (137 | ) | (150 | ) | (57 | ) | 12 | (45 | ) | 47 | (91 | ) | (44 | ) | ||||||||||||||||||||||||||
Corporate bonds | 33 | 41 | 74 | 126 | (188 | ) | (62 | ) | (186 | ) | 528 | 342 | 1 | 175 | 176 | |||||||||||||||||||||||||||||||||
FHLB stock | 73 | — | 73 | — | — | — | (182 | ) | (23 | ) | (205 | ) | (48 | ) | (33 | ) | (81 | ) | ||||||||||||||||||||||||||||||
Other debt securities | — | — | — | — | (43 | ) | (43 | ) | ||||||||||||||||||||||||||||||||||||||||
Federal funds sold | 4 | 3 | 7 | 2 | — | 2 | (3 | ) | (1 | ) | (4 | ) | 3 | (21 | ) | (18 | ) | |||||||||||||||||||||||||||||||
Interest-bearing deposits in other financial institutions | 196 | (149 | ) | 47 | 102 | (28 | ) | 74 | (516 | ) | 137 | (379 | ) | 63 | 16 | 79 | ||||||||||||||||||||||||||||||||
Total increase (decrease) in interest income | (457 | ) | 2,377 | 1,920 | 189 | (1,161 | ) | (972 | ) | (6,935 | ) | 8,104 | 1,169 | 2,095 | 4,028 | 6,123 | ||||||||||||||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||||
Certificates of deposit and other time deposits | 202 | (122 | ) | 80 | (390 | ) | (828 | ) | (1,218 | ) | (2,899 | ) | (863 | ) | (3,762 | ) | 2,977 | 638 | 3,615 | |||||||||||||||||||||||||||||
Interest checking and money market accounts | (37 | ) | 56 | 19 | 42 | 123 | 165 | (1,014 | ) | 452 | (562 | ) | 377 | 106 | 483 | |||||||||||||||||||||||||||||||||
Savings accounts | (4 | ) | 2 | (2 | ) | (11 | ) | (3 | ) | (14 | ) | 197 | 266 | 463 | 8 | 2 | 10 | |||||||||||||||||||||||||||||||
Federal funds purchased and repurchase agreements | — | — | — | — | (1 | ) | (1 | ) | ||||||||||||||||||||||||||||||||||||||||
FHLB advances | (42 | ) | 92 | 50 | (12 | ) | (13 | ) | (25 | ) | (418 | ) | (21 | ) | (439 | ) | 123 | (180 | ) | (57 | ) | |||||||||||||||||||||||||||
Junior subordinated debentures | 114 | (31 | ) | 83 | 164 | (113 | ) | 51 | (345 | ) | — | (345 | ) | 59 | — | 59 | ||||||||||||||||||||||||||||||||
Subordinated capital notes | 14 | 759 | 773 | 7 | 387 | 394 | ||||||||||||||||||||||||||||||||||||||||||
Senior debt | — | 194 | 194 | — | — | — | (9 | ) | (201 | ) | (210 | ) | 32 | (92 | ) | (60 | ) | |||||||||||||||||||||||||||||||
Total increase (decrease) in interest expense | 233 | 191 | 424 | (207 | ) | (835 | ) | (1,042 | ) | (4,474 | ) | 392 | (4,082 | ) | 3,583 | 861 | 4,444 | |||||||||||||||||||||||||||||||
Increase (decrease) in net interest income | $ | (690 | ) | $ | 2,186 | $ | 1,496 | $ | 396 | $ | (326 | ) | $ | 70 | $ | (2,461 | ) | $ | 7,712 | $ | 5,251 | $ | (1,488 | ) | $ | 3,167 | $ | 1,679 |
Non-interestNon-interest Income – The following table presents for the periods indicated the major categories of non-interest income:
For the Years Ended December 31, | For the Years Ended December 31, | |||||||||||||||||||||||
2017 | 2016 | 2015 | 2020 | 2019 | 2018 | |||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||
Service charges on deposit accounts | $ | 2,253 | $ | 1,958 | $ | 1,851 | $ | 2,268 | $ | 2,381 | $ | 2,355 | ||||||||||||
Bank card interchange fees | 972 | 849 | 839 | 3,376 | 2,438 | 1,831 | ||||||||||||||||||
Income from bank owned life insurance | 412 | 417 | 295 | 424 | 410 | 437 | ||||||||||||||||||
Net gain on sales and calls of securities | 288 | 216 | 1,766 | |||||||||||||||||||||
Other real estate owned rental income | — | 456 | 1,346 | |||||||||||||||||||||
Gain on extinguishment of junior subordinated debt | — | — | 883 | |||||||||||||||||||||
Net gain (loss) on sales and calls of securities | (5 | ) | (5 | ) | (6 | ) | ||||||||||||||||||
Other | 930 | 868 | 715 | 781 | 694 | 1,162 | ||||||||||||||||||
Total non-interest income | $ | 4,855 | $ | 4,764 | $ | 7,695 | $ | 6,844 | $ | 5,918 | $ | 5,779 |
Non-interestNon-interest Income Comparison – 2020 to 2019
Non-interest income increased by $91,000 in 2017$926,000 for 2020 to $4.9$6.8 million compared with $4.8$5.9 million for the year ended December 31, 2016.2019. This increase was primarily attributablerelated to a $295,000 increase in service charges on deposit accounts, a $123,000 increase in bank card interchange fees andof $938,000 as a $72,000 increaseresult of the deposit accounts acquired in net gainthe branch purchase transaction on sale of securities partially offset by no OREO income during 2017, compared to $456,000 during 2016.November 15, 2019.
Non-interest Income Comparison – 2019 to 2018
Non-interest income decreased increased by $2.9 million in 2016$139,000 for 2019 to $4.8$5.9 million compared with $7.7$5.8 million for the year ended December 31, 2015 driven2018. This increase was primarily by a declinedue to growth in gains on the salesbank card interchange fees of securities from $1.8 million in 2015 to $216,000 in 2016, as well as$607,000 partially offset by a decrease in OREO rentalother non-interest income of $890,000 between$468,000 related to the two periods as a result of income producing properties being sold. Non-interest income for 2015 was also positively impacted by an $883,000$150,000 one-time gain on extinguishmentthe sale of junior subordinated debt.the secondary market residential servicing rights portfolio in the third quarter of 2018 and a $632,000 gain on the sale of a subdivided lot at the Company’s headquarters offset by a $392,000 impairment charge associated with the transfer of the Bank’s former data processing center to held for sale in the fourth quarter of 2018.
Non-interest Expense –The following table presents the major categories of non-interest expense:
For the Years Ended December 31, | For the Years Ended December 31, | |||||||||||||||||||||||
2017 | 2016 | 2015 | 2020 | 2019 | 2018 | |||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||
Salary and employee benefits | $ | 15,090 | $ | 15,508 | $ | 15,857 | $ | 17,751 | $ | 16,233 | $ | 15,489 | ||||||||||||
Occupancy and equipment | 3,420 | 3,517 | 3,449 | 4,001 | 3,522 | 3,586 | ||||||||||||||||||
FDIC insurance | 1,412 | 1,660 | 2,212 | 229 | 211 | 557 | ||||||||||||||||||
Data processing expense | 1,256 | 1,185 | 1,128 | 1,502 | 1,259 | 1,192 | ||||||||||||||||||
Marketing expense | 1,098 | 973 | 560 | 629 | 908 | 1,114 | ||||||||||||||||||
State franchise and deposit tax | 956 | 965 | 1,120 | 1,475 | 1,210 | 1,118 | ||||||||||||||||||
Deposit account related expense | 1,890 | 1,224 | 823 | |||||||||||||||||||||
Professional fees | 978 | 1,568 | 2,885 | 937 | 769 | 814 | ||||||||||||||||||
Communications | 722 | 706 | 663 | 856 | 772 | 701 | ||||||||||||||||||
Insurance expense | 540 | 565 | 589 | 428 | 444 | 478 | ||||||||||||||||||
Postage and delivery | 395 | 359 | 400 | 627 | 544 | 364 | ||||||||||||||||||
Litigation and loan collection expense | 179 | 8,805 | 1,141 | 200 | 189 | 245 | ||||||||||||||||||
Other real estate owned expense | 1,973 | 1,541 | 12,302 | 63 | 368 | 868 | ||||||||||||||||||
Acquisition costs | — | 775 | — | |||||||||||||||||||||
Other | 2,199 | 2,215 | 2,653 | 1,828 | 1,842 | 1,777 | ||||||||||||||||||
Total non-interest expense | $ | 30,218 | $ | 39,567 | $ | 44,959 | $ | 32,416 | $ | 30,270 | $ | 29,126 |
Non-interest Expense Comparison – 2020 to 2019
Non-interest expense for the year ended December 31, 20172020 of $30.2$32.4 million represented a 23.6% decrease$2.1 million, or 7.1%, increase from $39.6$30.3 million for 2016.2019. The increase in non-interest expense was primarily due to an increase in salaries and employee benefits of $1.5 million. The Bank added sales talent and customer facing associates during the latter half of 2019 and branch staff in connection with the branch purchase transaction in November 2019. These increases were muted somewhat by efforts in 2020 to reduce FTEs from 248 at March 31, 2020 to 219 as of December 31, 2020 through attrition and workforce reduction. Deposit account related expense increased by $666,000 and occupancy expense increased by $479,000 as a result of the branch purchase transaction. Franchise tax expense increased by $265,000 as a function of growth in the Bank’s taxable capital. These increases were offset by a decrease in OREO expenses of $305,000 due to lower valuation write-downs and operating expenses in 2020 compared to 2019. Non-interest expense for 2019 also included $775,000 of acquisition expenses associated with the branch purchase transaction.
Non-interest Expense Comparison – 2019 to 2018
Non-interest expense for the year ended December 31, 2019 of $30.3 million represented a 3.9% increase from $29.1 million for 2018. The increase in non-interest expense was attributable primarily to a decrease$775,000 of expenses related to the branch purchase transaction. There was also an increase of $744,000 in litigation and loan collection expense, which decreased $8.6 million. Litigation expense was negatively impacted in 2016 by a ruling from the Kentucky Court of Appeals against the Bank that approximated $8.0 million. Non-interest expense also benefited from a $590,000 decrease in professional fees, a $418,000 decrease in salariessalary and employee benefits, as the Bank added sales talent and a $248,000 decreasecustomer facing associates during 2019, and branch staff added in connection with the branch purchase transaction. Deposit account related expense increased $401,000, which correlated to growth in card interchange income, and was offset by decreases in OREO expenses of $500,000, and FDIC insurance. As shown below, expenses related toinsurance expense of $346,000. OREO trended higherexpense decreased due to higherlower valuation adjustment writedownswrite-downs during 20172019 compared to 2016.
2017 | 2016 | |||||||
(in thousands) | ||||||||
Net gain on sales | $ | (74 | ) | $ | (222 | ) | ||
Provision to allowance for declining market values | 1,963 | 1,180 | ||||||
Operating expense | 84 | 583 | ||||||
Total | $ | 1,973 | $ | 1,541 |
2018. During the year ended December 31, 2017,2019, fair value write-downs of $2.0 million$260,000 were recorded compared with $1.2 million$850,000 for the year ended December 31, 2016.2018. The 2017 write-downs reflect declines in the fair value due to updated appraisals, changes in marketing strategies, and reductionsstrategies. There were no OREO sales in listing prices for certain properties. We were successful in selling OREO totaling $793,000 and $12.7 million2019 compared to $876,000 during 2017 and 2016, respectively.2018.
Non-interest Expense Comparison – 2016to 2015
Non-interest expense for the year ended December 31, 2016 of $39.6 million represented a 12.0% decrease from $45.0 million for 2015. The decrease in non-interest expense was attributable primarily to decreases in OREO expenses and professional fees, offset by increases in litigation and loan collection expense as a result of the Kentucky Court of Appeals ruling against the Bank. As shown below, expenses related to OREO trended lower as the size of the portfolio significantly declined.
2016 | 2015 | |||||||
(in thousands) | ||||||||
Net (gain) loss on sales | $ | (222 | ) | $ | 74 | |||
Provision to allowance for declining market values | 1,180 | 9,855 | ||||||
Operating expense | 583 | 2,373 | ||||||
Total | $ | 1,541 | $ | 12,302 |
During the year ended December 31, 2016, fair value write-downs of $1.2 million were recorded compared with $9.9 million for the year ended December 31, 2015. The write-downs reflect declines in the fair value and include reductions in listing prices for certain properties, updated appraisals, and sales of certain properties through auctions. We were successful in selling OREO totaling $12.7 million and $22.6 million during 2016 and 2015, respectively.
Income Tax Expense and Benefit – Effective tax rates differ from the federal statutory rate of 35% applied to income (loss) before income taxes due to the following:
2017 | 2016 | 2015 | 2020 | 2019 | 2018 | |||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||
Federal statutory rate times financial statement income (loss) | $ | 2,294 | $ | (956 | ) | $ | (1,125 | ) | ||||||||||||||||
Statutory tax rate | 21 | % | 21 | % | 21 | % | ||||||||||||||||||
Federal statutory rate times financial statement income | $ | 2,232 | $ | 2,310 | $ | 2,273 | ||||||||||||||||||
Effect of: | ||||||||||||||||||||||||
Valuation allowance | (54,049 | ) | 1,238 | 717 | ||||||||||||||||||||
Tax-exempt income | (196 | ) | (211 | ) | (264 | ) | (73 | ) | (66 | ) | (80 | ) | ||||||||||||
Non-taxable life insurance income | (144 | ) | (146 | ) | (103 | ) | ||||||||||||||||||
Establish state deferred tax asset | (478 | ) | (1,577 | ) | — | |||||||||||||||||||
Non-taxable life insurance income | (89 | ) | (86 | ) | (92 | ) | ||||||||||||||||||
Restricted stock vesting | (121 | ) | — | — | 7 | (137 | ) | (115 | ) | |||||||||||||||
Change in federal statutory rate | 20,274 | — | — | |||||||||||||||||||||
Other, net | 43 | 96 | 775 | 25 | 36 | 44 | ||||||||||||||||||
Total | $ | (31,899 | ) | $ | 21 | $ | — | $ | 1,624 | $ | 480 | $ | 2,030 |
The Company has hadFor 2020 and 2019, income tax expense benefitted from the establishment of a full valuation allowance against its net deferred tax asset since 2011. The Company’s ability to utilize the net deferred tax asset depends upon generating sufficient future levels of taxable income. The determination to restore a deferred tax asset and eliminate a valuation allowance depends upon the evaluation of both positive and negative evidence regarding the likelihood of achieving sufficient future taxable income levels. During the fourth quarter of 2017, management concluded it was more-likely-than-not the asset would be utilized to reduce future taxes payableassets related to the future taxable income of the Company,a change in Kentucky tax law enacted during 2019. Income tax expense benefitted $478,000 and as such, reversed the valuation allowance. As a result of the conclusion to reverse the valuation allowance, the Company recorded an income tax benefit of $54.0$1.6 million for the yearyears ended December 31, 2017.
On December 22, 2017, the Tax Cuts2020 and Jobs Act of 2017 was signed into law. Among other significant changes to the tax code, the2019, respectively, or $0.06 per basic and diluted common share, and $0.21 per basic and diluted common share, respectively. The new law loweredeliminates the federal corporateKentucky bank franchise tax, which is assessed at a rate from 35% to 21% beginning in 2018. Asof 1.1% of average capital, and implements a result, the Company revalued its net deferred tax asset at the new 21% rate. Due to this revaluation, the Company recorded a $20.3 million charge tostate income tax expense for the year ended December 31, 2017.
Bank at a statutory rate of 5%. The combination of the reversal of the valuation allowance and the change in federal corporate tax rates, as well asnew Kentucky income tax expense for the year, resulted in an income tax benefit of $31.9 million for the year ended December 31, 2017.went into effect on January 1, 2021.
See Note 12,12, “Income Taxes”, to the financial statements for additional discussion of ourthe Company’s income taxes.
Income tax expense of $21,000 was recorded for 2016, with no income tax expense or benefit recorded for 2015. Our deferred tax valuation allowance increased to $54.0 million at December 31, 2016. Our statutory federal tax rate was 35% in both 2016 and 2015. The effective tax rate for 2016 and 2015 is not meaningful due to the reduction of income tax benefit as the result of the deferred tax valuation allowance.
Analysis of Financial Condition
Total assets at December 31, 20172020 were $970.8 million$1.31 billion compared with $945.2 million$1.25 billion at December 31, 2016,2019, an increase of $25.6$66.5 million or 2.7%5.3%. This increase was primarily attributable to an increase in net loans of $73.6$31.7 million, as well as the restoration of a net deferred tax asset of $31.3 million. These increases were partially offset by a decrease$34.9 million in investment securities of $41.9 million as well as a $30.9 million decrease in interest bearinginterest-bearing deposits in banks.
Total assetsassets at December 31, 20162019 were $945.2 million$1.25 billion compared with $948.7 million$1.07 billion at December 31, 2015, a decrease2018, an increase of $3.5$176.1 million or 0.4%16.5%. This decreaseincrease was primarily attributable to a decrease in cash and cash equivalents of $27.0 million which funded the redemption of deposits of $28.1 million. There was also a decrease in OREO of $12.4 million offset by an increase in net loans of $23.6$161.5 million, an increasewhich resulted from $124.7 million in available for sale securities of $7.8 million, and an increase in FHLB advances of $19.4 million.
Reversal of Deferred Tax Asset Valuation Allowance and Change in Federal Tax Rate – The Company had a full valuation allowance against its net deferred tax asset since 2011. The Company’s ability to utilize the net deferred tax asset depends upon generating sufficient future levels of taxable income. The determination to restore a deferred tax asset and eliminate a valuation allowance depends upon the evaluation of both positive and negative evidence regarding the likelihood of achieving sufficient future taxable income levels. During the fourth quarter of 2017, management concluded it was more-likely-than-not the asset would be utilized to reduce future taxes payable related to the future taxable income of the Company, and as such, reversed the valuation allowance.
As a result of the conclusion to reverse the valuation allowance and the reduction of the federal tax rate from 35% to 21%, the Company has a net deferred tax asset of $31.3 millionoutstanding loans at December 31, 2017.2019 associated with the branch purchase transaction, as well as loan growth.
Loans Receivable –Loans receivable increased $72.9$35.8 million, or 11.4%3.9%, during the year ended December 31, 2017,2020, to $712.1$962.1 million. OurAt December 31, 2020, the Bank had $20.3 million in loans outstanding under the SBA Paycheck Protection Program. The Bank’s commercial and commercial real estate and real estate construction portfolios increased by an aggregate of $61.0$92.8 million, or 17.2%17.0%, during 20172020 and comprised 58.4%66.3% of the total loan portfolio at December 31, 2017.2020.
Loans receivable increased $20.6$161.0 million, or 3.3%21.0%, during the year ended December 31, 2016,2019, to $639.2$926.3 million. OurThe Bank’s commercial and commercial real estate and real estate construction portfolios increased by an aggregate of $18.8$78.7 million, or 5.6%16.9%, during 20162019 and comprised 55.6%58.8% of the total loan portfolio at December 31, 2016.2019.
Loan Portfolio Composition– – The following table presents a summary of the loan portfolio at the dates indicated, net of deferred loan fees, by type. There are no foreign loans in ourthe Bank’s portfolio and other than the categories noted, there is no concentration of loans in any industry exceeding 10% of total loans.
As of December 31, | As of December 31, | |||||||||||||||||||||||||||||||
2017 | 2016 | 2020 | 2019 | |||||||||||||||||||||||||||||
Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | |||||||||||||||||||||||||
(dollars in thousands) | (dollars in thousands) | |||||||||||||||||||||||||||||||
Commercial | $ | 113,771 | 15.98 | % | $ | 97,761 | 15.29 | % | $ | 208,244 | 21.65 | % | $ | 145,551 | 15.71 | % | ||||||||||||||||
Commercial Real Estate: | ||||||||||||||||||||||||||||||||
Construction | 57,342 | 8.05 | 36,330 | 5.68 | 92,916 | 9.66 | 64,911 | 7.01 | ||||||||||||||||||||||||
Farmland | 88,320 | 12.40 | 71,507 | 11.19 | 70,272 | 7.30 | 79,118 | 8.54 | ||||||||||||||||||||||||
Nonfarm nonresidential | 156,724 | 22.01 | 149,546 | 23.39 | 266,394 | 27.69 | 255,459 | 27.58 | ||||||||||||||||||||||||
Residential Real Estate: | ||||||||||||||||||||||||||||||||
Multi-family | 56,588 | 7.94 | 48,197 | 7.54 | 61,180 | 6.36 | 70,950 | 7.66 | ||||||||||||||||||||||||
1-4 Family | 179,222 | 25.17 | 188,092 | 29.42 | 188,955 | 19.64 | 226,629 | 24.47 | ||||||||||||||||||||||||
Consumer | 18,439 | 2.59 | 9,818 | 1.54 | 31,429 | 3.27 | 47,790 | 5.16 | ||||||||||||||||||||||||
Agriculture | 41,154 | 5.78 | 37,508 | 5.87 | 42,044 | 4.37 | 35,064 | 3.79 | ||||||||||||||||||||||||
Other | 555 | 0.08 | 477 | 0.08 | 647 | 0.06 | 799 | 0.08 | ||||||||||||||||||||||||
Total loans | $ | 712,115 | 100.00 | % | $ | 639,236 | 100.00 | % | $ | 962,081 | 100.00 | % | $ | 926,271 | 100.00 | % |
$20.3 million at December 31, 2020.
As of December 31, | ||||||||||||||||||||||||
2015 | 2014 | 2013 | ||||||||||||||||||||||
Amount | Percent | Amount | Percent | Amount | Percent | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Commercial | $ | 86,176 | 13.93 | % | $ | 60,936 | 9.75 | % | $ | 52,878 | 7.45 | % | ||||||||||||
Commercial Real Estate: | ||||||||||||||||||||||||
Construction | 33,154 | 5.36 | 33,173 | 5.31 | 43,326 | 6.11 | ||||||||||||||||||
Farmland | 76,412 | 12.35 | 77,419 | 12.39 | 71,189 | 10.04 | ||||||||||||||||||
Nonfarm nonresidential | 140,570 | 22.72 | 175,452 | 28.07 | 232,026 | 32.71 | ||||||||||||||||||
Residential Real Estate: | ||||||||||||||||||||||||
Multi-family | 44,131 | 7.13 | 41,891 | 6.70 | 46,858 | 6.61 | ||||||||||||||||||
1-4 Family | 201,478 | 32.57 | 197,278 | 31.56 | 228,505 | 32.21 | ||||||||||||||||||
Consumer | 10,010 | 1.62 | 11,347 | 1.82 | 14,365 | 2.03 | ||||||||||||||||||
Agriculture | 26,316 | 4.25 | 26,966 | 4.31 | 19,199 | 2.71 | ||||||||||||||||||
Other | 419 | 0.07 | 537 | 0.09 | 980 | 0.13 | ||||||||||||||||||
Total loans | $ | 618,666 | 100.00 | % | $ | 624,999 | 100.00 | % | $ | 709,326 | 100.00 | % |
Lending
As of December 31, | ||||||||||||||||||||||||
2018 | 2017 | 2016 | ||||||||||||||||||||||
Amount | Percent | Amount | Percent | Amount | Percent | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Commercial | $ | 129,368 | 16.91 | % | $ | 113,771 | 15.98 | % | $ | 97,761 | 15.29 | % | ||||||||||||
Commercial Real Estate: | ||||||||||||||||||||||||
Construction | 86,867 | 11.35 | 57,342 | 8.05 | 36,330 | 5.68 | ||||||||||||||||||
Farmland | 77,937 | 10.18 | 88,320 | 12.40 | 71,507 | 11.19 | ||||||||||||||||||
Nonfarm nonresidential | 172,177 | 22.50 | 156,724 | 22.01 | 149,546 | 23.39 | ||||||||||||||||||
Residential Real Estate: | ||||||||||||||||||||||||
Multi-family | 49,757 | 6.50 | 56,588 | 7.94 | 48,197 | 7.54 | ||||||||||||||||||
1-4 Family | 175,761 | 22.97 | 179,222 | 25.17 | 188,092 | 29.42 | ||||||||||||||||||
Consumer | 39,104 | 5.11 | 18,439 | 2.59 | 9,818 | 1.54 | ||||||||||||||||||
Agriculture | 33,737 | 4.41 | 41,154 | 5.78 | 37,508 | 5.87 | ||||||||||||||||||
Other | 536 | 0.07 | 555 | 0.08 | 477 | 0.08 | ||||||||||||||||||
Total loans | $ | 765,244 | 100.00 | % | $ | 712,115 | 100.00 | % | $ | 639,236 | 100.00 | % |
Lending activities are subject to a variety of lending limits imposed by state and federal law. The Bank’s secured legal lending limit to a single borrower or guarantor was approximately $31.4$46.0 million at December 31, 2017.2020.
At December 31, 2017, weThe Bank had 1218 and 14 loan relationships each with aggregate extensions of credit in excess of $10.0 million allat year end 2020 and 2019, respectively, 17 of which were classified as pass and one classified as watch by the Bank’s internal loan review process. In 2016, we had four loan relationships each with aggregate extensions of credit in excess of $10.0 million.process at December 31, 2020 and all 14 classified as pass at December 31, 2019.
As of December 31, 2017, we2020, the Bank had $46.2$74.3 million of loan participations purchased from, and $19.1$21.3 million of loan participations sold to, other banks. As of December 31, 2016, we2019, the Bank had $33.4$64.1 million of loan participations purchased from, and $26.0$15.7 million of loan participations sold to, other banks.
Loan Maturity Schedule – The following table sets forth at December 31, 2017,2020, the dollar amount of loans, net of deferred loan fees, maturing in the loan portfolio based on their contractual terms to maturity:
As of December 31, 2017 | As of December 31, 2020 | |||||||||||||||||||||||||||||||
Maturing Within One Year | Maturing 1 through 5 Years | Maturing Over 5 Years | Total Loans | Maturing Within One Year | Maturing 1 through 5 Years | Maturing Over 5 Years | Total Loans | |||||||||||||||||||||||||
(dollars in thousands) | (dollars in thousands) | |||||||||||||||||||||||||||||||
Loans with fixed rates: | ||||||||||||||||||||||||||||||||
Commercial | $ | 4,509 | $ | 25,481 | $ | 4,707 | $ | 34,697 | $ | 30,489 | $ | 43,091 | $ | 29,282 | $ | 102,862 | ||||||||||||||||
Commercial Real Estate: | ||||||||||||||||||||||||||||||||
Construction | 5,602 | 17,765 | 10,177 | 33,544 | 10,163 | 6,681 | 4,950 | 21,794 | ||||||||||||||||||||||||
Farmland | 5,273 | 16,985 | 21,075 | 43,333 | 3,529 | 16,899 | 7,983 | 28,411 | ||||||||||||||||||||||||
Nonfarm nonresidential | 14,801 | 77,138 | 22,287 | 114,226 | 38,436 | 40,568 | 75,979 | 154,983 | ||||||||||||||||||||||||
Residential Real Estate: | ||||||||||||||||||||||||||||||||
Multi-family | 5,038 | 28,337 | 15,449 | 48,824 | 2,242 | 19,573 | 11,238 | 33,053 | ||||||||||||||||||||||||
1-4 Family | 14,028 | 27,730 | 58,034 | 99,792 | 7,870 | 21,941 | 67,439 | 97,250 | ||||||||||||||||||||||||
Consumer | 1,172 | 5,951 | 1,275 | 8,398 | 23,830 | 4,586 | 730 | 29,146 | ||||||||||||||||||||||||
Agriculture | 3,143 | 5,582 | 779 | 9,504 | 3,474 | 7,490 | 360 | 11,324 | ||||||||||||||||||||||||
Other | 90 | 316 | 59 | 465 | 282 | 293 | — | 575 | ||||||||||||||||||||||||
Total fixed rate loans | $ | 53,656 | $ | 205,285 | $ | 133,842 | $ | 392,783 | $ | 120,315 | $ | 161,122 | $ | 197,961 | $ | 479,398 | ||||||||||||||||
Loans with floating rates: | ||||||||||||||||||||||||||||||||
Commercial | $ | 10,169 | $ | 45,673 | $ | 23,232 | $ | 79,074 | $ | 32,728 | $ | 61,439 | $ | 11,215 | $ | 105,382 | ||||||||||||||||
Commercial Real Estate: | ||||||||||||||||||||||||||||||||
Construction | 9,790 | 13,976 | 32 | 23,798 | 51,438 | 15,189 | 4,495 | 71,122 | ||||||||||||||||||||||||
Farmland | 1,127 | 5,665 | 38,195 | 44,987 | 4,960 | 6,955 | 29,946 | 41,861 | ||||||||||||||||||||||||
Nonfarm nonresidential | 1,598 | 7,170 | 33,730 | 42,498 | 1,751 | 45,271 | 64,389 | 111,411 | ||||||||||||||||||||||||
Residential Real Estate: | ||||||||||||||||||||||||||||||||
Multi-family | 208 | 4,956 | 2,600 | 7,764 | 3,331 | 18,216 | 6,580 | 28,127 | ||||||||||||||||||||||||
1-4 Family | 1,885 | 5,096 | 72,449 | 79,430 | 6,249 | 8,649 | 76,807 | 91,705 | ||||||||||||||||||||||||
Consumer | 10,013 | — | 28 | 10,041 | 1,999 | 134 | 150 | 2,283 | ||||||||||||||||||||||||
Agriculture | 22,087 | 9,349 | 214 | 31,650 | 30,121 | 466 | 133 | 30,720 | ||||||||||||||||||||||||
Other | — | — | 90 | 90 | — | — | 72 | 72 | ||||||||||||||||||||||||
Total floating rate loans | $ | 56,877 | $ | 91,885 | $ | 170,570 | $ | 319,332 | $ | 132,577 | $ | 156,319 | $ | 193,787 | $ | 482,683 |
Loan Portfolio by Risk Category – The following table presents a summary of the loan portfolio at the dates indicated, by risk category.
As of December 31, | As of December 31, | ||||||||||||||||||||||||||||||||||||||||
2017 | 2016 | 2015 | 2014 | 2013 | 2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||||||||||||||||||
(in thousands) | (in thousands) | ||||||||||||||||||||||||||||||||||||||||
Pass | Pass | $ | 673,033 | $ | 586,430 | $ | 517,484 | $ | 461,126 | $ | 369,529 | $ | 926,025 | $ | 888,707 | $ | 745,604 | $ | 673,033 | $ | 586,430 | ||||||||||||||||||||
Watch | Watch | 25,715 | 30,431 | 63,363 | 68,200 | 144,316 | 18,879 | 27,522 | 13,164 | 25,715 | 30,431 | ||||||||||||||||||||||||||||||
Special Mention | Special Mention | 164 | 497 | 1,395 | 4,189 | 5,865 | — | — | 113 | 164 | 497 | ||||||||||||||||||||||||||||||
Substandard | Substandard | 13,203 | 21,878 | 36,424 | 91,484 | 189,616 | 17,177 | 10,042 | 6,363 | 13,203 | 21,878 | ||||||||||||||||||||||||||||||
Doubtful | Doubtful | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
Total | Total | $ | 712,115 | $ | 639,236 | $ | 618,666 | $ | 624,999 | $ | 709,326 | $ | 962,081 | $ | 926,271 | $ | 765,244 | $ | 712,115 | $ | 639,236 |
LoansLoans receivable increased $72.9$35.8 million, or 11.4%3.9%, during the year ended December 31, 2017. All loan risk categories have decreased since2020. Since December 31, 2016, with2019, the exception of pass graded loans. The pass category increased approximately $86.6$37.3 million, the watch category declineddecreased approximately $4.7$8.6 million, the special mention category declined approximately $333,000, and the substandard category declinedincreased approximately $8.7$7.1 million. The $7.1 million increase in loans classified as substandard was primarily driven by $11.7 million in loans moved to substandard, offset by $3.9 million in principal payments received and $643,000 in charge-offs during 2020. These trends were considered during the evaluation of qualitative trends in the portfolio when establishing the general component of the allowance for loan losses.
Loan Delinquency – The following table presents a summary of loan delinquencies at the dates indicated.
As of December 31, | As of December 31, | ||||||||||||||||||||||||||||||||||||||||
2017 | 2016 | 2015 | 2014 | 2013 | 2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||||||||||||||||||
(in thousands) | (in thousands) | ||||||||||||||||||||||||||||||||||||||||
Past Due Loans: | Past Due Loans: | ||||||||||||||||||||||||||||||||||||||||
30-59 Days | 30-59 Days | $ | 1,478 | $ | 2,302 | $ | 3,133 | $ | 3,960 | $ | 10,696 | $ | 1,537 | $ | 1,747 | $ | 1,593 | $ | 1,478 | $ | 2,302 | ||||||||||||||||||||
60-89 Days | 60-89 Days | 171 | 315 | 241 | 980 | 775 | 372 | 670 | 331 | 171 | 315 | ||||||||||||||||||||||||||||||
90 Days and Over | 90 Days and Over | 1 | — | — | 151 | 232 | — | — | — | 1 | — | ||||||||||||||||||||||||||||||
Total Loans Past Due 30-90+ Days | Total Loans Past Due 30-90+ Days | 1,650 | 2,617 | 3,374 | 5,091 | 11,703 | 1,909 | 2,417 | 1,924 | 1,650 | 2,617 | ||||||||||||||||||||||||||||||
Nonaccrual Loans | Nonaccrual Loans | 5,457 | 9,216 | 14,087 | 47,175 | 101,767 | 1,676 | 1,528 | 1,991 | 5,457 | 9,216 | ||||||||||||||||||||||||||||||
Total Past Due and Nonaccrual Loans | Total Past Due and Nonaccrual Loans | $ | 7,107 | $ | 11,833 | $ | 17,461 | $ | 52,266 | $ | 113,470 | $ | 3,585 | $ | 3,945 | $ | 3,915 | $ | 7,107 | $ | 11,833 |
LoansLoans past due 30-59 days decreased from $2.3$1.7 million at December 31, 20162019 to $1.5 million at December 31, 2017,2020, and loans past due 60-89 days decreased from $315,000$670,000 at December 31, 20162019 to $171,000$372,000 at December 31, 2017.2020. This represents a $968,000$508,000 decrease in loans past due 30-89 days. We considered thisThis trend in delinquency levels is considered during the evaluation of qualitative trends in the portfolio when establishing the general component of the Bank’s allowance for loan losses.
NonaccrualNonaccrual loans decreased $3.8 millionincreased $148,000 from December 31, 20162019 to December 31, 2017. The $3.8 million decrease in nonaccrual loans2020. This increase was primarily driven by $5.0$1.3 million in paydowns $665,000and $569,000 in charge-offs, $270,000 in transfers to OREO, and $199,000 in loans returned to accrual status, offset by $2.3$2.0 million in loans placed on non-accrual. The $5.5$1.7 million in nonaccrual loans at December 31, 2017,2020, and $9.2$1.5 million at December 31, 2016,2019, were generally secured by farmland other commercial real estate, and other1-4 family residential real estate loans. Management believes it has established adequate loan loss reserves for these credits.
Troubled Debt Restructuring – A troubled debt restructuring (TDR) occurs when the Bank has agreed to a loan modification in the form of a concession to a borrower who is experiencing financial difficulty. The Bank’s TDRs typically involve a reduction in interest rate, a deferral of principal for a stated period of time, or an interest only period. TDRs are considered to be impaired loans, and the Bank has allocated reserves for these loans to reflect the present value of the concessionary terms granted to the borrower. If the loan is considered collateral dependent, it is reported net of allocated reserves, at the fair value of the collateral less cost to sell.
The Bank generally does not have a formal loan modification program. If a borrower is unable to make contractual payments, management reviews the particular circumstances of that borrower’s situation and determine whether or not to negotiate a revised payment stream. The goal when restructuring a credit is to afford the borrower a reasonable period of time to remedy the issue causing cash flow constraints so that the credit may return to performing status over time. If a borrower fails to perform under the modified terms, the loan(s) are placed on nonaccrual status and collection actions are initiated.
At December 31, 2020, the Bank had four restructured loans totaling $480,000 with borrowers who experienced deterioration in financial condition compared with three restructured loans totaling $475,000 at December 31, 2019. In general, these loans were granted interest rate reductions to provide cash flow relief to borrowers experiencing cash flow difficulties. At December 31, 2020 and December 31, 2019, the Bank had no restructured loans that had been granted principal payment deferrals until maturity. There were no concessions made to forgive principal relative to these loans, although partial charge-offs have been recorded for certain restructured loans. In general, these loans are secured by first liens on 1-4 residential properties or commercial real estate properties. At December 31, 2020 and December 31, 2019, all TDRs were performing according to their modified terms.
There was one modification granted during 2020 that resulted in a loan being identified as TDRs. There were two modifications granted during 2019 that resulted in loans being identified as TDRs. See “Note 3 – Loans,” to the financial statements for additional disclosure related to troubled debt restructuring.
COVID-19 Short-term Loan Concessions – The Bank has elected to account for eligible loan modifications under Section 4013 of the Coronavirus Aid Relief and Economic Security Act (“CARES Act”). To be an eligible loan under Section 4013 of the CARES Act, a loan modification must be (1) related to the COVID-19 pandemic; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020 and the earlier of (A) 60 days after the date of termination of the national emergency declared by the President on March 13, 2020 concerning the COVID-19 outbreak (the “national emergency”) or (B) January 1, 2022. Eligible loan modifications are not required to be classified as TDRs and will not be reported as past due provided that they are performing in accordance with the modified terms. Interest income will continue to be recognized in accordance with GAAP unless the loan is placed on nonaccrual status.
Short-term loan modifications declined to $15.3 million as of December 31, 2020, as compared to $160.4 million at June 30, 2020. The following table details the status of the Bank’s short-term loan modifications by loan category or type as of December 31, 2020:
First Modification Active | Subsequent Modification Active | Modification Ended | Total Modified Loans | Total Loan Portfolio | % Modified to Total Portfolio | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Hotel, Motel, & Lodging | $ | — | $ | — | $ | 7,822 | $ | 7,822 | $ | 51,822 | 15.1 | % | ||||||||||||
Retail Facility | — | 4,355 | — | 4,355 | 67,785 | 6.4 | ||||||||||||||||||
Commercial Real Estate | — | 346 | — | 346 | 160,433 | 0.2 | ||||||||||||||||||
1-4 Family Residential | — | — | — | — | 188,955 | — | ||||||||||||||||||
Restaurant Full Service | — | — | — | — | 15,094 | — | ||||||||||||||||||
Restaurant Limited Service | 2,303 | — | — | 2,303 | 15,780 | 14.6 | ||||||||||||||||||
Multi-family | — | — | — | — | 61,180 | — | ||||||||||||||||||
Construction and Development | — | — | — | — | 48,396 | — | ||||||||||||||||||
Commercial & Industrial | — | — | — | — | 208,244 | — | ||||||||||||||||||
Farmland | — | — | — | — | 70,272 | — | ||||||||||||||||||
Consumer, Agriculture & Other | — | — | 486 | 486 | 74,120 | 0.7 | ||||||||||||||||||
Total | $ | 2,303 | $ | 4,701 | $ | 8,308 | $ | 15,312 | $ | 962,081 | 1.6 | % |
First Modification Active includes loans within the terms of the original modification agreement. Subsequent Modification Active includes loans with a matured original modification that have been further modified within the short-term parameters. Modification Ended includes loans that have reached final deferred payment and have yet to make a payment in accordance with the loan’s original terms or have yet to request a subsequent modification. Loans that returned to original contracted terms with a verified payment are considered cured and are no longer included as modified loans in the table above.
The table above includes one commercial real estate loan secured by a retail facility totaling $4.4 million that remains subject to and is performing in accordance with an interest only short-term subsequent COVID-19 modification. The loan is graded substandard, has been evaluated under ASC-310-10, and allocated a specific reserve of $2.2 million as of December 31, 2020.
Subsequent to December 31, 2020, $8.3 million of the loans categorized as Modification Ended in the table above have received a verified payment and are now considered cured.
Non-Performing Assets – Non-performing assets consist of certain restructured loans for which interest rate or other terms have been renegotiated, loans past due 90 days or more still on accrual, loans on which interest is no longer accrued, real estate acquired through foreclosure and repossessed assets. Loans, including impaired loans, are placed on nonaccrual status when they become past due 90 days or more as to principal or interest, unless they are adequately secured and in the process of collection. Loans are considered impaired if full principal or interest payments are not anticipated in accordance with the contractual loan terms. Impaired loans are carried at the present value of expected future cash flows discounted at the loan’s effective interest rate or at the fair value of the collateral less cost to sell if the loan is collateral dependent. Loans are reviewed on a regular basis and normal collection procedures are implemented when a borrower fails to make a required payment on a loan. If the delinquency on a mortgage loan exceeds 120 days and is not cured through normal collection procedures or an acceptable arrangement is not agreed to with the borrower, we institutemanagement institutes measures to remedy the default, including commencing a foreclosure action. Consumer loans generally are charged off when a loan is deemed uncollectible and often before any available collateral has been disposed. Commercial business and real estate loan delinquencies are handled on an individual basis, generally with the advice of legal counsel.
Interest income on loans is recognized on the accrual basis exceptexcept for those loans placed on nonaccrual status. The accrual of interest on impaired loans is discontinued when management believes, after consideration of economic and business conditions and collection efforts, that the borrowers’ financial condition is such that collection of interest is doubtful, which typically occurs after the loan becomes 90 days delinquent. When interest accrual is discontinued, existing accrued interest is reversed and interest income is subsequently recognized only to the extent cash payments are received on well-secured loans.
Real estate acquired as a result of foreclosure or by deed in lieu of foreclosure is classified as real estate owned until such time as it is sold. New and used automobilesautomobiles and other motor vehicles acquired as a result of foreclosure are classified as repossessed assets until they are sold. When such property is acquired it is recorded at its fair market value less cost to sell. Any write-down of the property at the time of acquisition is charged to the allowance for loan losses. Subsequent gains and losses are included in non-interest expense.
TheThe following table sets forth information with respect to non-performing assets as of the dates indicated:
As of December 31, | ||||||||||||||||||||
2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
Past due 90 days or more still on accrual | $ | 1 | $ | — | $ | — | $ | 151 | $ | 232 | ||||||||||
Loans on nonaccrual status | 5,457 | 9,216 | 14,087 | 47,175 | 101,767 | |||||||||||||||
Total non-performing loans | 5,458 | 9,216 | 14,087 | 47,326 | 101,999 | |||||||||||||||
Real estate acquired through foreclosure | 4,409 | 6,821 | 19,214 | 46,197 | 30,892 | |||||||||||||||
Other repossessed assets | — | — | — | — | — | |||||||||||||||
Total non-performing assets | $ | 9,867 | $ | 16,037 | $ | 33,301 | $ | 93,523 | $ | 132,891 | ||||||||||
Non-performing loans to total loans | 0.77 | % | 1.44 | % | 2.28 | % | 7.57 | % | 14.38 | % | ||||||||||
Non-performing assets to total assets | 1.02 | % | 1.70 | % | 3.51 | % | 9.19 | % | 12.35 | % | ||||||||||
Allowance for non-performing loans | $ | 108 | $ | 241 | $ | 295 | $ | 1,253 | $ | 2,285 | ||||||||||
Allowance for non-performing loans to non-performing loans | 1.98 | % | 2.62 | % | 2.09 | % | 2.65 | % | 2.24 | % |
Troubled Debt Restructuring – A troubled debt restructuring (TDR) occurs when the Bank has agreed to a loan modification in the form of a concession to a borrower who is experiencing financial difficulty. The Bank’s TDRs typically involve a reduction in interest rate, a deferral of principal for a stated period of time, or an interest only period. All TDRs are considered impaired, and the Bank has allocated reserves for these loans to reflect the present value of the concessionary terms granted to the borrower. If the loan is considered collateral dependent, it is reported net of allocated reserves, at the fair value of the collateral less cost to sell.
The Bank does not have a formal loan modification program. If a borrower is unable to make contractual payments, we review the particular circumstances of that borrower’s situation and determine whether or not to negotiate a revised payment stream. The goal when restructuring a credit is to afford the borrower a reasonable period of time to remedy the issue causing cash flow constraints so that they may return to performing status over time.
Loan modifications have taken the form of a reduction in interest rate and/or curtailment of scheduled principal payments for a short-term period, usually three to six months, but in some cases until maturity of the loan. In some circumstances we may restructure real estate secured loans in a bifurcated fashion whereby there is a fully amortizing “A” loan at a market interest rate and an interest-only “B” loan at a reduced interest rate. The majority of restructured loans are collateral secured loans. If a borrower fails to perform under the modified terms, the loan(s) are placed on nonaccrual status and collection actions are intiated.
We consider any loan that is restructured for a borrower experiencing financial difficulties due to a borrower’s potential inability to pay in accordance with contractual terms of the loan to be a troubled debt restructuring. Specifically, we consider a concession involving a modification of the loan terms, such as (i) a reduction of the stated interest rate, (ii) a reduction or deferral of principal, or (iii) a reduction or deferral of accrued interest at a stated interest rate lower than the current market rate for new debt with similar risk all to be troubled debt restructurings. When a modification of terms is made for a competitive reason, we do not consider it to be a troubled debt restructuring. A primary example of a competitive modification would be an interest rate reduction for a performing customer’s loan to a market rate as the result of a market decline in rates.
Management periodically reviews renewals and modifications of previously identified TDRs for which there was no principal forgiveness, to consider if it is appropriate to remove the TDR classification. If the borrower is no longer experiencing financial difficulty and the renewal/modification did not contain a concessionary interest rate or other concessionary terms, management considers the potential removal of the TDR classification. If deemed appropriate based upon current underwriting, the TDR classification is removed as the borrower has complied with the terms of the loan at the date of renewal/modification and there was a reasonable expectation that the borrower would continue to comply with the terms of the loan after the date of the renewal/modification. Additionally, the TDR classification may be removed in circumstances in which the Company performs a non-concessionary re-modification of the loan at terms that were considered to be at market for loans with comparable risk. Management expects the borrower will continue to perform under the re-modified terms based on the borrower’s past history of performance.
If the borrower fails to perform, we place the loan on nonaccrual status and seek to liquidate the underlying collateral. The nonaccrual policy for restructured loans is identical to the nonaccrual policy for all loans. The policy calls for a loan to be reported as nonaccrual if it is maintained on a cash basis because of deterioration in the financial condition of the borrower, payment in full of principal and interest is not expected, or principal or interest is past due 90 days or more unless the assets are both well secured and in the process of collection. Changes in value for impairment, including the amount attributed to the passage of time, are recorded entirely within the provision for loan losses. Upon determination that a loan is collateral dependent, the loan is charged down to the fair value of collateral less estimated costs to sell.
At December 31, 2017, we had six restructured loans totaling $3.0 million with borrowers who experienced deterioration in financial condition compared with nine restructured loans totaling $8.7 million at December 31, 2016. In general, these loans were granted interest rate reductions to provide cash flow relief to borrowers experiencing cash flow difficulties. At December 31, 2017, two loans totaling approximately $1.8 million had been granted principal payment deferrals until maturity. There were no concessions made to forgive principal relative to these loans, although we have recorded partial charge-offs for certain restructured loans. In general, these loans are secured by first liens on 1-4 residential or commercial real estate properties, or farmland. Restructured loans also included $467,000 of commercial loans at December 31, 2017. At December 31, 2017, $1.2 million of TDRs were performing according to their modified terms.
There were no modifications granted during 2017 or 2016 that resulted in loans being identified as TDRs. During the twelve months ended December 31, 2017, TDRs were reduced as a result of $1.6 million in payments. In addition, the TDR classification was removed from two loans that met the requirements discussed above in 2017. These loans totaled $4.1 million at December 31, 2016, and are no longer evaluated individually for impairment.
The following table sets forth information with respect to TDRs, non-performing loans, real estate acquired through foreclosure, and other repossessed assets.
As of December 31, | ||||||||||||||||||||
2017 | 2016 |
2015 |
2014 |
2013 | ||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
Total non-performing loans | $ | 5,458 | $ | 9,216 | $ | 14,087 | $ | 47,326 | $ | 101,999 | ||||||||||
TDRs on accrual | 1,217 | 5,350 | 17,440 | 21,985 | 44,346 | |||||||||||||||
Total non-performing loans and TDRs on accrual | $ | 6,675 | $ | 14,566 | $ | 31,527 | $ | 69,311 | $ | 146,345 | ||||||||||
Real estate acquired through foreclosure | 4,409 | 6,821 | 19,214 | 46,197 | 30,892 | |||||||||||||||
Other repossessed assets | — | — | — | — | — | |||||||||||||||
Total non-performing assets and TDRs on accrual | $ | 11,084 | $ | 21,387 | $ | 50,741 | $ | 115,508 | $ | 177,237 | ||||||||||
Total non-performing loans and TDRs on accrual to total loans | 0.94 | % | 2.28 | % | 5.10 | % | 11.09 | % | 20.63 | % | ||||||||||
Total non-performing assets and TDRs on accrual to total assets | 1.14 | % | 2.26 | % | 5.35 | % | 11.35 | % | 16.47 | % |
See Footnote 3, “Loans”, to the financial statements for additional disclosure related to troubled debt restructuring.
As of December 31, | ||||||||||||||||||||
2020 | 2019 | 2018 | 2017 | 2016 | ||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
Loans on nonaccrual status | $ | 1,676 | 1,528 | 1,991 | 5,457 | 9,216 | ||||||||||||||
Troubled debt restructurings on accrual | 480 | 475 | 910 | 1,217 | 5,350 | |||||||||||||||
Past due 90 days or more still on accrual | — | — | — | 1 | — | |||||||||||||||
Total non-performing loans and TDRs on accrual | 2,156 | 2,003 | 2,901 | 6,675 | 14,566 | |||||||||||||||
Real estate acquired through foreclosure | 1,765 | 3,225 | 3,485 | 4,409 | 6,821 | |||||||||||||||
Other repossessed assets | — | — | — | — | — | |||||||||||||||
Total non-performing assets and TDRs on accrual | $ | 3,921 | $ | 5,228 | $ | 6,386 | $ | 11,084 | $ | 21,387 | ||||||||||
Non-performing loans and TDRs on accrual to total loans | 0.22 | % | 0.22 | % | 0.38 | % | 0.94 | % | 2.28 | % | ||||||||||
Non-performing assets and TDRs on accrual to total assets | 0.30 | % | 0.42 | % | 0.60 | % | 1.14 | % | 2.26 | % | ||||||||||
Allowance for non-performing loans | $ | 22 | $ | 48 | $ | 83 | $ | 108 | $ | 241 | ||||||||||
Allowance for non-performing loans to non-performing loans and TDRs on accrual | 1.02 | % | 2.40 | % | 2.86 | % | 1.62 | % | 1.65 | % |
Interest income that would have been earnedrecorded if nonaccrual loans were on non-performing loansa current basis in accordance with their original terms was $465,000, $738,000,$288,000, $315,000, and $1.7 million$274,000 for the years ended December 31, 2017, 2016,2020, 2019, and 2015,2018, respectively. Interest income recognized on accruing non-performing loans was $135,000, $445,000, and $710,000 for the years ended December 31, 2017, 2016, and 2015, respectively.
Allowance for Loan Losses –The allowance for loan losses is established to provide for probable losses on loans that may not be fully repaid. It is based on management’s continuing review and evaluation of individual loans, loss experience, current economic conditions, risk characteristics of various categories of loans and such other factors that, in management’s judgment, require current recognition in estimating loan losses. The allowance is an estimate and loss may vary from this estimate.
Management has establishedutilizes loan grading procedures that result in specific allowance allocations for any estimated inherentthe estimated risk of loss. For loans not individually evaluated, a general allowance allocation is computed using factors developed over time based on actual loss experience. Prior to June 2017, the look-back period for historical losses was 12 quarters, weighted 40% for the most recent eight quarters and 20% for the previous four quarter period. Effective June 30, 2017, the Company extended the look-back period to 16 quarters on a prospective basis, weighted 40% for the most recent four quarters, then declining one tenth for each of the remaining annual periods. Management determined the four-year look-back period was appropriate as the four-year period more appropriately correlates to the period in which the current portfolio was underwritten and originated. The specific and general allocations plus consideration of qualitative factors represent management’s estimate of probable losses contained in the loan portfolio at the evaluation date. Although the allowance for loan losses is comprised of specific and general allocations, the entire allowance is available to absorb any credit losses.
The following table sets forth an analysis of loan loss experience as of and for the periods indicated:
As of December 31, | As of December 31, | |||||||||||||||||||||||||||||||||||||||
2017 | 2016 | 2015 | 2014 | 2013 | 2020 | 2019 | 2018 | 2017 | 2016 | |||||||||||||||||||||||||||||||
(dollars in thousands) | (dollars in thousands) | |||||||||||||||||||||||||||||||||||||||
Balances at beginning of period | $ | 8,967 | $ | 12,041 | $ | 19,364 | $ | 28,124 | $ | 56,680 | $ | 8,376 | $ | 8,880 | $ | 8,202 | $ | 8,967 | $ | 12,041 | ||||||||||||||||||||
Loans charged-off: | ||||||||||||||||||||||||||||||||||||||||
Real estate | 750 | 2,157 | 5,050 | 17,943 | 28,879 | 231 | 322 | 450 | 750 | 2,157 | ||||||||||||||||||||||||||||||
Commercial | 5 | 276 | 696 | 1,099 | 2,828 | 32 | 37 | 50 | 5 | 276 | ||||||||||||||||||||||||||||||
Consumer | 51 | 178 | 268 | 354 | 773 | 493 | 663 | 95 | 51 | 99 | ||||||||||||||||||||||||||||||
Agriculture | 95 | 18 | 118 | 30 | 128 | 46 | 266 | 13 | 95 | 18 | ||||||||||||||||||||||||||||||
Other | — | — | 8 | — | 79 | |||||||||||||||||||||||||||||||||||
Total charge-offs | 901 | 2,629 | 6,132 | 19,426 | 32,608 | 802 | 1,288 | 616 | 901 | 2,629 | ||||||||||||||||||||||||||||||
Recoveries: | ||||||||||||||||||||||||||||||||||||||||
Real estate | 714 | 1,189 | 2,338 | 2,726 | 1,622 | 352 | 597 | 1,437 | 714 | 1,189 | ||||||||||||||||||||||||||||||
Commercial | 59 | 334 | 723 | 614 | 1,212 | 29 | 106 | 261 | 59 | 334 | ||||||||||||||||||||||||||||||
Consumer | 130 | 368 | 240 | 213 | 266 | 45 | 75 | 69 | 115 | 299 | ||||||||||||||||||||||||||||||
Agriculture | 33 | 114 | 8 | 13 | 252 | 30 | 3 | 15 | 33 | 114 | ||||||||||||||||||||||||||||||
Other | 13 | 3 | 12 | 15 | 69 | |||||||||||||||||||||||||||||||||||
Total recoveries | 936 | 2,005 | 3,309 | 3,566 | 3,352 | 469 | 784 | 1,794 | 936 | 2,005 | ||||||||||||||||||||||||||||||
Net charge-offs (recoveries) | (35 | ) | 624 | 2,823 | 15,860 | 29,256 | 333 | 504 | (1,178 | ) | (35 | ) | 624 | |||||||||||||||||||||||||||
Provision (negative provision) for loan losses | (800 | ) | (2,450 | ) | (4,500 | ) | 7,100 | 700 | 4,400 | — | (500 | ) | (800 | ) | (2,450 | ) | ||||||||||||||||||||||||
Balance at end of period | $ | 8,202 | $ | 8,967 | $ | 12,041 | $ | 19,364 | $ | 28,124 | $ | 12,443 | $ | 8,376 | $ | 8,880 | $ | 8,202 | $ | 8,967 | ||||||||||||||||||||
Allowance for loan losses to period-end loans | 1.15 | % | 1.40 | % | 1.95 | % | 3.10 | % | 3.96 | % | 1.29 | % | 0.90 | % | 1.16 | % | 1.15 | % | 1.40 | % | ||||||||||||||||||||
Net charge-offs (recoveries) to average loans | (0.01 | %) | 0.10 | % | 0.44 | % | 2.39 | % | 3.71 | % | 0.03 | % | 0.06 | % | (0.16 | )% | (0.01 | )% | 0.10 | % | ||||||||||||||||||||
Allowance for loan losses to non-performing loans | 150.27 | % | 97.30 | % | 85.48 | % | 40.92 | % | 27.57 | % | ||||||||||||||||||||||||||||||
Allowance for loan losses for loans individually evaluated for impairment | $ | 219 | $ | 399 | $ | 428 | $ | 752 | $ | 3,471 | ||||||||||||||||||||||||||||||
Loans individually evaluated for impairment | 7,173 | 15,131 | 31,776 | 71,993 | 149,883 | |||||||||||||||||||||||||||||||||||
Allowance for loan losses to loans individually evaluated for impairment | 3.05 | % | 2.64 | % | 1.35 | % | 1.04 | % | 2.32 | % | ||||||||||||||||||||||||||||||
Allowance for loan losses for loans collectively evaluated for impairment | $ | 7,983 | $ | 8,568 | $ | 11,613 | $ | 18,612 | $ | 24,653 | ||||||||||||||||||||||||||||||
Loans collectively evaluated for impairment | 704,942 | 624,105 | 586,890 | 553,006 | 559,443 | |||||||||||||||||||||||||||||||||||
Allowance for loan losses to loans collectively evaluated for impairment | 1.13 | % | 1.37 | % | 1.98 | % | 3.37 | % | 4.41 | % | ||||||||||||||||||||||||||||||
Allowance for loan losses to non-performing loans and TDRs on accrual | 577.13 | % | 418.17 | % | 306.10 | % | 122.88 | % | 61.16 | % |
The allowance for loan losses is a reserve established through charges to earnings in the form of a provision for loan losses. The allowance for loan losses is comprised of general reserves and specific reserves. The loan loss reserve, as a percentage of total loans at December 31, 2017, decreased to 1.15% from 1.40% at December 31, 2016. The change in loan loss reserve, as a percentage of total loans between periods is attributableat December 31, 2020, was 1.29% compared to growth0.90% at December 31, 2019. Loans acquired in the portfolio drivenNovember 2019 branch transaction totaled $85.9 million at December 31, 2020 and $124.7 million at December 31, 2019. These loans were recorded at fair value as determined by newan independent third party. The remaining discount associated with the fair value purchase accounting adjustments on the acquired loans underwritten with lower loss expectations, improving historical loss experience, improvement in risk grade classification metrics, improved charge-off levels, and improved past due trends.was $288,000 at December 31, 2020, compared to $480,000 at December 31, 2019. Additionally, management added a qualitative environmental adjustment for these loans as the fair value assessment at the time of purchase did not contemplate COVID-19. Any subsequent deterioration of these acquired loans may require an adjustment through the allowance for loan loss. The allowance for loan losses to non-performing loans was 150.27%577.13% at December 31, 2017,2020, compared with 97.30%418.17% at December 31, 2016.2019. Net recoveries in 2017charge-offs totaled $35,000.
The following table sets forth the$333,000 for 2020 compared to net charge-offs (recoveries)of $504,000 for the periods indicated:2019.
Year Ended December 31, 2017 | Year Ended December 31, 2016 | Year Ended December 31, 2015 | ||||||||||
(in thousands) | ||||||||||||
Commercial | $ | (54 | ) | $ | (58 | ) | $ | (27 | ) | |||
Commercial Real Estate | (361 | ) | (339 | ) | 1,225 | |||||||
Residential Real Estate | 397 | 1,307 | 1,487 | |||||||||
Consumer | (64 | ) | (200 | ) | 37 | |||||||
Agriculture | 62 | (96 | ) | 110 | ||||||||
Other | (15 | ) | 10 | (9 | ) | |||||||
Total net charge-offs (recoveries) | $ | (35 | ) | $ | 624 | $ | 2,823 |
A general reserve is maintained for each loan type in the loan portfolio. In determining the amount of the general reserve portion of the allowance for loan losses, management considers factors such as ourthe Bank’s historical loan loss experience, the growth, composition and diversification of ourits loan portfolio, current delinquency levels, loan quality grades, the results of recent regulatory examinations, and general economic conditions. Based on these factors, we applymanagement applies estimated loss percentages to the various categories of loans, not including any loan that has a specific allowance allocated to it, based on our historical experience, portfolio trends and economic and industry trends. This information is used by management to set the general reserve portion of the allowance for loan losses at a level it deems prudent.it.
Generally, all loans identified as impaired are reviewed individually on a quarterly basis in order to determine whether a specific allowance is required. A loan is considered impaired when,, based on current information, it is probable that wethe Bank will not receive all amounts due in accordance with the contractual terms of the loan agreement. Once a loan has been identified as impaired, management measures impairment in accordance with ASC 310-10, ““Impairment of a LoanLoan..” When management’s measured value of the impaired loan is less than the recorded investment in the loan, the amount of the impairment is recorded as a specific reserve or charged-off if the loan is deemed collateral dependent. These specific reserves are determined on an individual loan basis based on management’s current evaluation of our loss exposure for each credit given the payment status, financial condition of the borrower and value of any underlying collateral. Loans for which specific reserves have been provided are excluded from the general reserve calculations described below. Changes in specific reserves from period to period are the result of changes in the circumstances of individual loans such as charge-offs, pay-offs, changes in collateral values or other factors.
The allowance for loan losses represents management’s estimate of the amount necessary to provide for probable losses in the loan portfolio in the normal course of business. Due to the uncertainty of risks in the loan portfolio, management’s judgment of the amount of the allowance necessary to absorb loan losses is approximate. The allowance for loan losses is also subject to regulatory examinations and may be adjusted in response to a determination by the regulatory agencies as to its adequacy in comparison with peer institutions.
We makeManagement makes specific allowances for each impaired loan based on its type and risk classification as discussed above. At year-end 2017, the allowance for loan losses to total non-performing loans increased to 150.27% from 97.30% at year-end 2016. It is important to look more closely at this ratio as a significant portion of impaired loans are collateral dependent and have been charged down to the estimated fair value of the underlying collateral less cost to sell. Please see the next table for comparison and disclosure of recorded investment less allocated allowance relative to the unpaid principal balance. Impaired loans have been assessed for collectability which considered, among other things, the borrower’s ability to repay, the value of the underlying collateral, and other market conditions to ensure that the allowance for loan losses is adequate to absorb probable incurred losses.
The following table presents the unpaid principal balance, recorded investment and allocated allowance related to loans individually evaluated for impairment in the commercial real estate and residential real estate portfolios as of December 31, 2017 and 2016.
December 31, 2017 | December 31, 2016 | |||||||||||||||
Commercial Real Estate | Residential Real Estate | Commercial Real Estate | Residential Real Estate | |||||||||||||
(in thousands) | ||||||||||||||||
Unpaid principal balance | $ | 4,734 | $ | 5,456 | $ | 10,985 | $ | 10,439 | ||||||||
Prior charge-offs | (2,099 | ) | (1,506 | ) | (5,131 | ) | (1,818 | ) | ||||||||
Recorded investment | 2,635 | 3,950 | 5,854 | 8,621 | ||||||||||||
Allocated allowance | — | (206 | ) | (35 | ) | (350 | ) | |||||||||
Recorded investment, less allocated allowance | $ | 2,635 | $ | 3,744 | $ | 5,819 | $ | 8,271 | ||||||||
Recorded investment, less allocated allowance/ Unpaid principal balance | 55.66 | % | 68.62 | % | 52.97 | % | 79.23 | % |
Based on prior charge-offs, the current recorded investments in loans individually evaluated for impairment in the commercial real estate and residential real estate segments of the portfolio are significantly below the unpaid principal balances of those loans. The recorded investment net of the allocated allowance was 55.66% and 68.62% of the unpaid principal balance in the commercial real estate and residential real estate segments, respectively, at December 31, 2017.
The following table illustrates recent trends in loans collectively evaluated for impairment and the related allowance for loan losses by portfolio segment:
December 31, 2017 | December 31, 2016 | |||||||||||||||||||||||
Loans | Allowance | % to Total | Loans | Allowance | % to Total | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Commercial | $ | 113,184 | $ | 879 | 0.78 | % | $ | 97,166 | $ | 462 | 0.48 | % | ||||||||||||
Commercial real estate | 299,751 | 4,032 | 1.35 | 251,529 | 4,859 | 1.93 | ||||||||||||||||||
Residential real estate | 231,860 | 2,694 | 1.16 | 227,668 | 3,076 | 1.35 | ||||||||||||||||||
Consumer | 18,438 | 64 | 0.35 | 9,817 | 8 | 0.08 | ||||||||||||||||||
Agriculture | 41,154 | 313 | 0.76 | 37,448 | 161 | 0.43 | ||||||||||||||||||
Other | 555 | 1 | 0.18 | 477 | 2 | 0.42 | ||||||||||||||||||
Total | $ | 704,942 | $ | 7,983 | 1.13 | % | $ | 624,105 | $ | 8,568 | 1.37 | % |
The allowance for those loan losses related to loans collectively evaluated for impairment trended downward from 1.37% at December 31, 2016 to 1.13% at December 31, 2017 as a result of declining historical charge-off levels and improving trends in loan category risk ratings. The residential real estate segment constitutes approximately 32.9% of total loans collectively evaluated for impairment. The related allowance for the residential real estate segment trended downward from 1.35% at December 31, 2016 to 1.16% at December 31, 2017 as net charge-offs declined from approximately $1.3 million in 2016 to $397,000 in 2017. The commercial real estate segment constitutes approximately 42.5% of total loans collectively evaluated for impairment. The related allowance for the commercial real estate segment trended downward from 1.93% at December 31, 2016 to 1.35% at December 31, 2017. This is consistent with the decline in historical rates and improvement in loan quality within the commercial real estate segment. The overall decrease in the allowance also reflects improving historical loss experience, qualitative factors, improvement in risk grade classification metrics, improved charge-off levels, improved past due trends, and the negative provision.
A significant portion of the portfolio is comprised of loans secured by real estate. A decline in the value of the real estate serving as collateral for loans may impact ourthe Bank’s ability to collect those loans. In general, we obtainmanagement obtains updated appraisals on property securing ourthe Bank’s loans when circumstances are warranted such as at the time of renewal or when market conditions have significantly changed. We useManagement uses qualified licensed appraisers approved by ourthe Company’s Board of Directors. These appraisers possess prerequisite certifications and knowledge of the local and regional marketplace.
Based on its assessment of the loan portfolio, management presents a quarterly review of the allowance for loan losses to the Bank’s Board of Directors, indicating any change in the allowance for loan losses since the last review and any recommendations as to adjustments in the allowance for loan losses.
This assessment is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available or as events change. The allowance for loan losses has decreased as a percentage of loans outstanding to 1.15% at December 31, 2017 from 1.40% at December 31, 2016. This decline is the result of growth in the portfolio driven by new loans underwritten with lowerHistorical loss expectations, improving historical loss experience, improvement in risk grade classification metrics, improved charge-off levels, and improved past due trends. The level of the allowance is based on estimates, and losses may ultimately vary from these estimates.trends remained stable between periods.
The Bank follows a loan grading program designed to evaluate the credit risk in the loan portfolio. Through this loan grading process, an internally classified watch list is maintained which helps management assess the overall quality of the loan portfolio and the adequacy of the allowance for loan losses. Loans categorized as watch list loans show warning elements where the present status exhibits one or more deficiencies that require attention in the short-term or where pertinent ratios of the loan account have weakened to a point wherewarranting more frequent monitoring is warranted.monitoring. These loans do not have all of the characteristics of a classified loan (substandard or doubtful), but show weakened elements as compared with those of a satisfactory credit. These loans are reviewed to assistconsidered in assessingthe assessment of the adequacy of the allowance for loan losses.
In establishing the appropriate risk rating for specific assets,loans, management considers, among other factors, the borrower’s ability to repay, the borrower’s repayment history, the current delinquency status, the estimated value of the underlying collateral, and the capacity and willingness of a guarantor to satisfy the obligation. As a result of this process, loans are categorized as special mention, substandard or doubtful.
Loans classified as “special mention” do not have all of the characteristics of substandard or doubtful loans. They have one or more deficiencies that warrant special attention and which corrective action, such as accelerated collection practices, may remedy.
Loans classified as “substandard” are those loans with clear and defined weaknesses such as a highly leveraged position, unfavorable financial ratios, uncertain repayment sources or poor financial condition that may jeopardize the repayment of the debt as contractually agreed. They are characterized by the distinct possibility that wethe Bank will sustain some losses if the deficiencies are not corrected.
Loans classified as “doubtful” are those loans which have characteristics similar to substandard loans but with an increased risk that collection or liquidation in full is highly questionable and improbable.
Specific reserves may be carried for accruing TDRs in compliancecompliance with restructured terms. Once a loan is deemed impaired or uncollectible as contractually agreed (other than performing TDRs), the loan is charged-off either partially or in-full against the allowance for loan losses, based upon the expected future cash flows discounted at the loan’s effective interest rate, or the fair value of collateral less estimated cost to sell with respect to collateral-based loans if collateral dependent.
As of December 31, 2017, $13.22020, $17.2 million of loans were classified as substandard, $164,000there were no loans classified as special mention, and no loans classified as doubtful or loss. This compares with $21.9$10.0 million of loans classified as substandard, $497,000no loans classified as special mention, and no loans classified as doubtful or loss as of December 31, 2016.2019. The $8.7$7.1 million decreaseincrease in loans classified as substandard was primarily driven by $6.8 million in principal payments received, $270,000 in migration to OREO, $4.6 million in loans upgraded from substandard, and $790,000 in charge-offs, offset by $3.7$11.7 million in loans moved to substandard, offset by $3.9 million in principal payments received and $643,000 in charge-offs during 2017.2020. Substandard loans are primarily concentrated in the residentialcommercial and commercial real estate portfolio.portfolios. As of December 31, 2017, $418,0002020, $2.8 million of the allowance for loan losses was allocated to substandard loans. This comparesloans, compared to allocationsan allocation of $600,000 in the allowance for loan losses related to substandard loans$401,000 at December 31, 2016.2019. The increase in allocation between years is primarily related to one commercial real estate loan secured by a retail facility totaling $4.4 million that remains subject to and is performing in accordance with an interest only, short-term subsequent COVID-19 modification. The loan is graded substandard, has been evaluated under ASC-310-10, and allocated a specific reserve of $2.2 million at December 31, 2020.
The following table depicts management’s allocation of the allowance for loan losses by loan type. Allowance funding and allocation istype based on management’s current evaluation of risk in each category, economic conditions, past loss experience, loan volume, past due history and other factors.the factors previously discussed. Since these factors and management’s assumptions are subject to change, the allocation is not necessarily predictive of future portfolio performance. The allocation is made for analytical purposes and is not necessarily indicative of the categories in which future losses may occur. The total allowance is available to absorb losses from any segment of loans.
As of December 31, | ||||||||||||||||
2017 | 2016 | |||||||||||||||
Amount of Allowance | Percent of Loans to Total Loans | Amount of Allowance | Percent of Loans to Total Loans | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Commercial | $ | 892 | 15.98 | % | $ | 475 | 15.29 | % | ||||||||
Commercial Real Estate: | ||||||||||||||||
Construction | 301 | 8.05 | 470 | 5.68 | ||||||||||||
Farmland | 449 | 12.40 | 288 | 11.19 | ||||||||||||
Nonfarm nonresidential | 3,282 | 22.01 | 4,136 | 23.39 | ||||||||||||
Residential Real Estate: | ||||||||||||||||
Multi-family | 627 | 7.94 | 610 | 7.54 | ||||||||||||
1-4 Family | 2,273 | 25.17 | 2,816 | 29.42 | ||||||||||||
Consumer | 64 | 2.59 | 8 | 1.54 | ||||||||||||
Agriculture | 313 | 5.78 | 162 | 5.87 | ||||||||||||
Other | 1 | 0.08 | 2 | 0.08 | ||||||||||||
Total | $ | 8,202 | 100.0 | % | $ | 8,967 | 100.0 | % |
Allocation of Allowance for Credit Losses
As of December 31, | ||||||||||||||||
2020 | 2019 | |||||||||||||||
Amount of Allowance | Percent of Loans to Total Loans | Amount of Allowance | Percent of Loans to Total Loans | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Commercial | $ | 2,529 | 21.65 | % | $ | 1,710 | 15.71 | % | ||||||||
Commercial Real Estate: | ||||||||||||||||
Construction | 1,158 | 9.66 | 363 | 7.01 | ||||||||||||
Farmland | 775 | 7.30 | 654 | 8.54 | ||||||||||||
Nonfarm nonresidential | 5,117 | 27.69 | 3,063 | 27.58 | ||||||||||||
Residential Real Estate: | ||||||||||||||||
Multi-family | 482 | 6.36 | 478 | 7.66 | ||||||||||||
1-4 Family | 1,417 | 19.64 | 1,265 | 24.47 | ||||||||||||
Consumer | 361 | 3.27 | 485 | 5.16 | ||||||||||||
Agriculture | 600 | 4.37 | 355 | 3.79 | ||||||||||||
Other | 4 | 0.06 | 3 | 0.08 | ||||||||||||
Total | $ | 12,443 | 100.0 | % | $ | 8,376 | 100.0 | % |
As of December 31, | As of December 31, | |||||||||||||||||||||||||||||||||||||||||||||||
2015 | 2014 | 2013 | 2018 | 2017 | 2016 | |||||||||||||||||||||||||||||||||||||||||||
Amount of Allowance | Percent of Loans to Total Loans | Amount of Allowance | Percent of Loans to Total Loans | Amount of Allowance | Percent of Loans to Total Loans | Amount of Allowance | Percent of Loans to Total Loans | Amount of Allowance | Percent of Loans to Total Loans | Amount of Allowance | Percent of Loans to Total Loans | |||||||||||||||||||||||||||||||||||||
(dollars in thousands) | (dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
Commercial | $ | 818 | 13.93 | % | $ | 2,046 | 9.75 | % | $ | 3,221 | 7.45 | % | $ | 1,299 | 16.91 | % | $ | 892 | 15.98 | % | $ | 475 | 15.29 | % | ||||||||||||||||||||||||
Commercial Real Estate: | ||||||||||||||||||||||||||||||||||||||||||||||||
Construction | 424 | 5.36 | 739 | 5.31 | 2,149 | 6.11 | 419 | 11.35 | 301 | 8.05 | 470 | 5.68 | ||||||||||||||||||||||||||||||||||||
Farmland | 364 | 12.35 | 1,094 | 12.39 | 1,623 | 10.04 | 543 | 10.18 | 449 | 12.40 | 288 | 11.19 | ||||||||||||||||||||||||||||||||||||
Nonfarm nonresidential | 6,205 | 22.72 | 9,098 | 28.07 | 12,642 | 32.71 | 3,714 | 22.50 | 3,282 | 22.01 | 4,136 | 23.39 | ||||||||||||||||||||||||||||||||||||
Residential Real Estate: | ||||||||||||||||||||||||||||||||||||||||||||||||
Multi-family | 422 | 7.13 | 886 | 6.70 | 1,449 | 6.61 | 403 | 6.50 | 627 | 7.94 | 610 | 7.54 | ||||||||||||||||||||||||||||||||||||
1-4 Family | 3,562 | 32.57 | 4,901 | 31.56 | 6,313 | 32.21 | 2,049 | 22.97 | 2,273 | 25.17 | 2,816 | 29.42 | ||||||||||||||||||||||||||||||||||||
Consumer | 122 | 1.62 | 274 | 1.82 | 416 | 2.03 | 130 | 5.11 | 64 | 2.59 | 8 | 1.54 | ||||||||||||||||||||||||||||||||||||
Agriculture | 122 | 4.25 | 319 | 4.31 | 305 | 2.71 | 321 | 4.41 | 313 | 5.78 | 162 | 5.87 | ||||||||||||||||||||||||||||||||||||
Other | 2 | 0.07 | 7 | 0.09 | 6 | 0.13 | 2 | 0.07 | 1 | 0.08 | 2 | 0.08 | ||||||||||||||||||||||||||||||||||||
Total | $ | 12,041 | 100.0 | % | $ | 19,364 | 100.0 | % | $ | 28,124 | 100.00 | % | $ | 8,880 | 100.0 | % | $ | 8,202 | 100.0 | % | $ | 8,967 | 100.0 | % |
Provision for Loan Losses – A negative provision for loan lossesloss of $800,000$4.4 million was recorded for the year ended December 31, 2017,2020, compared with a negativeno provision for loan losses of $2.5 million for 20162019 and a negative provision for loan losses of $4.5 million$500,000 for 2015.2018. The negative2020 loan loss provision in 2017 was driven by declining historical loss rates, improvements inattributable to the net loan quality, and management’s assessment of risk withincharge-offs during the portfolio. The total allowance for loan losses was $8.2 million, or 1.15% of total loans, at December 31, 2017, compared with $9.0 million, or 1.40% of total loans, at December 31, 2016, and $12.0 million, or 1.95% of total loans, at December 31, 2015. The decreased allowance is consistent with the overallyear, trends within the portfolio. Substandard loans decreased by $8.7 million or 39.7%portfolio during 2017, net recoveriesthe year, and primarily to changes in the economic and business environment attributable to COVID-19. Net charge-offs were $35,000$333,000 for 20172020 compared to net charge-offs of $624,000$504,000 in 20162019 and $2.8net recoveries of $1.2 million in 2015,2018.
While the Company expects the U.S. Government’s economic responses to the COVID-19 pandemic through monetary policy and nonaccrual loans decreased by $3.8 million or 40.8% during 2017. Charge-offs for 2017 were concentrated infiscal stimulus have provided meaningful support to the loans secured by the residential real estate category of the portfolio. These net charge-offs consisted of $397,000 of residential real estate loans. We consider the size and volume of our portfolio as well as the credit quality of our loan portfolio based upon risk category classification when determining the loan loss provision for each period andeconomy, management deemed it prudent to increase the allowance for loan losses at period end.through its qualitative environmental factors and individual analysis to account for the pandemic risk.
Foreclosed Properties – Foreclosed properties at December 31, 20172020 were $4.4$1.8 million compared with $6.8$3.2 million at December 31, 2016.2019. See Note 5, “Other“Note 6 - Other Real Estate Owned”,Owned,” to the financial statements. All OREO properties held by the Bank at December 31, 2020 are currently under contract for sale. During 2017, we acquired $270,0002020, there were no acquisitions of OREO properties and the Bank sold properties totaling approximately $793,000. We value foreclosed properties at fair value less estimated cost to sell when acquired and expect to liquidate these properties to recover our investment in the due course$1.6 million. There were no acquisitions or sales of business.OREO during 2019.
OREO is recorded at fair market value less estimated cost toto sell at time of acquisition. Any write-down of the property at the time of acquisition is charged to the allowance for loan losses. When foreclosed properties are acquired, management obtains a new appraisal or has staff from the Bank’s special assets group evaluate the latest in-file appraisal in connection with the transfer to OREO. WeManagement typically obtainobtains updated appraisals within five quarters of the anniversary date of ownership unless a sale is imminent. Subsequent reductions in fair value are recorded as non-interest expense when a new appraisal indicates a decline in value or in cases where a listing price is lowered below the appraisal amount.
The following table presents the major categories of OREO at the year-ends indicated:
2017 | 2016 | 2015 | ||||||||||
(in thousands) | ||||||||||||
Commercial Real Estate: | ||||||||||||
Construction, land development, and other land | $ | 4,335 | $ | 6,571 | $ | 12,344 | ||||||
Farmland | 74 | — | — | |||||||||
Nonfarm nonresidential | — | — | 6,746 | |||||||||
Residential Real Estate: | ||||||||||||
1-4 Family | — | 250 | 124 | |||||||||
$ | 4,409 | $ | 6,821 | $ | 19,214 |
NetNet activity relating to other real estate ownedOREO during the years indicated is as follows:
2017 | 2016 | 2015 | ||||||||||
(in thousands) | ||||||||||||
OREO Activity | ||||||||||||
OREO as of January 1 | $ | 6,821 | $ | 19,214 | $ | 46,197 | ||||||
Real estate acquired | 270 | 1,273 | 5,513 | |||||||||
Valuation adjustment write-downs | (1,963 | ) | (1,180 | ) | (9,855 | ) | ||||||
Net gain (loss) on sale | 74 | 222 | (74 | ) | ||||||||
Proceeds from sale of properties | (793 | ) | (12,708 | ) | (22,567 | ) | ||||||
OREO as of December 31 | $ | 4,409 | $ | 6,821 | $ | 19,214 |
| 2020 | 2019 | 2018 | ||||||
| (in thousands) | ||||||||
OREO Activity | |||||||||
OREO as of January 1 | $ | 3,225 | $ | 3,485 | $ | 4,409 | |||
Real estate acquired | — | — | 730 | ||||||
Valuation adjustment write-downs | — | (260 | ) | (850 | ) | ||||
Net gain on sale | — | — | 72 | ||||||
Proceeds from sale of properties | (1,600 | ) | — | (876 | ) | ||||
Improvements | 140 | — | — | ||||||
OREO as of December 31 | $ | 1,765 | $ | 3,225 | $ | 3,485 |
Net gain on sales, write-downs, and operatingOperating expenses for OREO totaled $2.0 million$63,000 for the year ended December 31, 2017,2020, compared with $1.5 millionwrite-downs and operating expenses of $368,000 in 20162019 and $12.3 million$868,000 in 2015.2018.
During the year ended December 31, 2017,2020, there were no fair value write-downs of $2.0 million were recorded compared with $1.2 millionto $260,000 for 20162019 and $9.9 million$850,000 for 2015.2018. The write-downs recorded in each year reflect fair value write-downs due to updated appraisals, changes in marketing strategies, and reductions in listing prices for certain properties. OREO sales totaled $793,000, $12.7 million, and $22.6$1.6 million during 2017, 2016,in 2020, compared with no OREO sales and 2015,$876,000 during 2019, and 2018, respectively. We expectManagement expects to resolve certain nonaccrual loans through the acquisition and sale of the underlying real estate collateral.
Investment Securities – The securities portfolio serves as a source of liquidity and earnings and contributes to the management of interest rate risk. Investments are made in various types of liquid assets, including short-term United StatesU.S. Treasury obligations and securities of various federal agencies, obligations of states and political subdivisions, corporate bonds, and collateralized loan obligations, certificates of deposit at insured savings and loans and banks, bankers’ acceptances and federal funds. The investment policy also authorizes investment in mutual funds and stocks whose assets conform to the investments that we are authorized to make directly.obligations. The investment portfolio decreased by $41.9$5.1 million, or 21.5%2.5%, to $152.7$203.9 million at December 31, 2017,2020, compared with $194.6$209.0 million at December 31, 2016 as the Bank sold selected securities to manage liquidity and interest rate risk.2019.
The following table sets forth the carrying value of ourthe Bank’s securities portfolio at the dates indicated.
December 31, 2017 | December 31, 2016 | December 31, 2020 | December 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||||||||||||||||||||||||||||||||||||||
(dollars in thousands) | (dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Securities available for sale | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
U.S. Government and federal agencies | $ | 22,105 | $ | 2 | $ | (483 | ) | $ | 21,624 | $ | 34,757 | $ | 50 | $ | (708 | ) | $ | 34,099 | $ | 18,811 | $ | 806 | $ | — | $ | 19,617 | $ | 22,281 | $ | 196 | $ | (147 | ) | $ | 22,330 | |||||||||||||||||||||||||||||
Agency mortgage-backed: residential | 65,935 | 117 | (1,087 | ) | 64,965 | 103,390 | 455 | (1,492 | ) | 102,353 | 71,582 | 2,777 | (26 | ) | 74,333 | 91,269 | 1,186 | (255 | ) | 92,200 | ||||||||||||||||||||||||||||||||||||||||||||
Collateralized loan obligations | 25,343 | 182 | (20 | ) | 25,505 | 11,203 | — | — | 11,203 | 44,730 | — | (1,578 | ) | 43,152 | 49,831 | — | (412 | ) | 49,419 | |||||||||||||||||||||||||||||||||||||||||||||
State and municipal | 33,303 | 508 | (101 | ) | 33,710 | 2,028 | 25 | (8 | ) | 2,045 | 34,759 | 1,296 | — | 36,055 | 27,819 | 550 | (3 | ) | 28,366 | |||||||||||||||||||||||||||||||||||||||||||||
Corporate bonds | 6,838 | 78 | — | 6,916 | 3,069 | 24 | (3 | ) | 3,090 | 31,635 | 472 | (1,402 | ) | 30,705 | 16,472 | 213 | — | 16,685 | ||||||||||||||||||||||||||||||||||||||||||||||
Total available for sale | $ | 153,524 | $ | 887 | $ | (1,691 | ) | $ | 152,720 | $ | 154,447 | $ | 554 | $ | (2,211 | ) | $ | 152,790 | $ | 201,517 | $ | 5,351 | $ | (3,006 | ) | $ | 203,862 | $ | 207,672 | $ | 2,145 | $ | (817 | ) | $ | 209,000 |
Amortized Cost | Gross Unrecognized Gains | Gross Unrecognized Losses | Fair Value | Amortized Cost | Gross Unrecognized Gains | Gross Unrecognized Losses | Fair Value | |||||||||||||||||||||||||
Securities held to maturity | ||||||||||||||||||||||||||||||||
State and municipal | $ | — | $ | — | $ | — | $ | — | $ | 41,818 | $ | 1,272 | $ | (18 | ) | $ | 43,072 | |||||||||||||||
Total held to maturity | $ | — | $ | — | $ | — | $ | — | $ | 41,818 | $ | 1,272 | $ | (18 | ) | $ | 43,072 |
In 2013, the Bank transferred a portion
The following table sets forth the contractual maturities, fair values and weighted-average yields for our the Bank’s available for sale securities held at December 31, 2017:2020:
Due Within One Year | After One Year But Within Five Years | After Five Years But Within Ten Years | After Ten Years | Total | Due Within One Year | After One Year But Within Five Years | After Five Years But Within Ten Years | After Ten Years | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Available for sale | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
U.S. Government and federal agencies | $ | — | — | % | $ | — | — | % | $ | 5,788 | 2.19 | % | $ | 15,836 | 2.18 | % | $ | 21,624 | 2.18 | % | $ | — | — | % | $ | 952 | 2.36 | % | $ | 7,954 | 2.70 | % | $ | 10,711 | 2.26 | % | $ | 19,617 | 2.44 | % | ||||||||||||||||||||||||||||||||||||||||
Agency mortgage-backed: residential | — | — | 2,956 | 2.64 | 9,415 | 2.31 | 52,594 | 2.46 | 64,965 | 2.45 | — | — | 5,556 | 2.27 | 14,712 | 2.40 | 54,065 | 2.01 | 74,333 | 2.11 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Collateralized loan obligations | — | — | — | — | 10,631 | 0.28 | 14,874 | 2.59 | 25,505 | 1.63 | — | — | — | — | 17,902 | 2.35 | 25,250 | 1.73 | 43,152 | 1.99 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
State and municipal | 145 | 2.10 | 19,612 | 3.31 | 11,539 | 3.27 | 2,414 | 5.19 | 33,710 | 3.42 | 4,358 | 3.54 | 11,810 | 2.98 | 3,115 | 2.98 | 16,772 | 2.90 | 36,055 | 3.01 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Corporate bonds | — | — | — | — | 3,160 | 4.54 | 3,756 | 5.11 | 6,916 | 4.86 | — | — | 1,658 | 4.02 | 19,187 | 4.27 | 9,860 | 2.80 | 30,705 | 3.74 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total available for sale | $ | 145 | 2.10 | % | $ | 22,568 | 3.22 | % | $ | 40,533 | 2.20 | % | $ | 89,474 | 2.61 | % | $ | 152,720 | 2.59 | % | $ | 4,358 | 3.54 | % | $ | 19,976 | 2.84 | % | $ | 62,870 | 3.02 | % | $ | 116,658 | 2.17 | % | $ | 203,862 | 2.52 | % |
Average yields in the table above were calculated on a tax equivalent basis using a federal income tax rate of 35%21%. Mortgage-backed securities are securities that have been developed by pooling a number of real estate mortgages. These securities are issued by federal agencies such as Ginnie Mae, Fannie Mae and Freddie Mac, as well as non-agency company issuers. These securities are deemed to have high credit ratings, and minimum regular monthly cash flows of principal and interest. Cash flows from agency backed mortgage-backed securities are guaranteed by the issuing agencies.
Unlike U.S. Treasury and U.S. government agency securities, which have a lump sum payment at maturity, mortgage-backed securities provide cash flows from regular principal and interest payments and principal prepayments throughout the lives of the securities. Mortgage-backed securities that are purchased at a premium will generally return decreasing net yields as interest rates drop because home owners tend to refinance their mortgages. Thus, the premium paid must be amortized over a shorter period. Therefore, those securities purchased at a discount will obtain higher net yields in a decreasing interest rate environment. As interest rates rise, the opposite will generally be true. During a period of increasing interest rates, fixed rate mortgage-backed securities generally do not tend to experience heavyincreasing prepayments of principal and, consequently, average life will not be shortened. IfWhen interest rates begin to fall, prepayments will generally increase. Non-agency issuer mortgage-backed securities do not carry a government guarantee. We limit ourManagement limits purchases of these securities to bank qualified issues with high credit ratings. We regularly monitorAt this time, there are no holdings of this type in the performance and credit ratings of these securities and evaluate these securities, as we do all of our securities, for other-than-temporary impairment on a quarterly basis.portfolio. At December 31, 2017, 81.0%2020, 72.7% of the Bank’s agency mortgage-backed securities we held had contractual final maturities of more than ten years with a weighted average life of 23.922.3 years.
The Bank owns Collateralized Loan Obligations (CLOs), which are debt securities secured by professionally managed portfolios of senior-secured loans to corporations. CLO are typically $300 million to $1 billion in size, contain one hundred or more loans and have five to six credit tranches ranging from AAA, AA, A, BBB, BB, B and equity tranche. Interest and principal are paid first to the AAA tranche then to the next lower rated tranche. Losses are borne first by the equity tranche then by the subsequently higher rated tranche. CLOs may be less liquid than government securities from time to time and volatility in the CLO market may cause the value of these investments to decline.
The market value of CLOs may be affected by, among other things, changes in composition of the underlying loans, changes in the market values of the underlying loans, changes in the cash flows from the underlying loans, defaults and recoveries on the underlying loans, capital gains and losses on the underlying loans, prepayments on the underlying loans, and other conditions or economic factors. During the first quarter of 2020, the fair value of the Bank’s CLO portfolio declined as the market was disrupted by COVID-19. At March 31, 2020, the CLO portfolio had an unrealized loss of $4.0 million, or 9.0% of amortized cost. At December 31, 2020, the CLO portfolio had improved to a net unrealized loss of $1.6 million, or 3.5% of amortized cost.
Although the Bank attempts to mitigate the credit and liquidity risks associated with CLOs by purchasing CLOs with credit ratings of A or higher, completing pre-purchase due diligence, and through ongoing monitoring, no assurance can be given that these risk mitigation efforts will be successful. At December 31, 2020, $27.1 million, $13.6 million, and $2.4 million of the Bank’s CLOs were AA, A, and BBB rated, respectively. There was one CLO rated below A at BBB, which was downgraded during the third quarter of 2020. Stress testing was completed on each security in the CLO portfolio as of year-end to determine the conditions necessary for the Bank’s investment to incur the first dollar of loss. Each security in the portfolio passed, without dollar loss, a stress scenario characterized as severe, which assumed a ten percent per annum constant prepayment rate, a twelve percent per annum constant default rate for four years followed by a four percent rate thereafter, and a forty-five percent recovery rate on a one-year lag. The Bank’s CLOs are all floating rate with rates set on a quarterly basis at three-month LIBOR plus a spread.
The fair value of the Bank’s corporate bond portfolio was also impacted by market disruption and declining rates in 2020. At December 31, 2020, the portfolio had a net unrealized loss of $930,000, or 3% of amortized cost which was improved from an unrealized loss of 6% of amortized cost at March 31, 2020. The corporate bond portfolio consists of 13 subordinated debt securities and one senior debt security of U.S. banks and bank holding companies with maturities ranging from 2024 to 2037. The securities are either initially fixed for five years converting to floating at an index over LIBOR, or SOFR, or floating at an index over LIBOR, or SOFR, from inception. Management regularly monitors the financial condition of these corporate issuers by reviewing their regulatory and public filings.
The Bank has the intent and ability to hold its CLO and corporate debt securities to maturity and, at this juncture, has determined the value declines are temporary in nature.
Deposits – We attractThe Bank attracts both short-term and long-term deposits from the general public by offering a wide range of deposit accounts and interest rates. In recent years, we have been required by market conditions to rely increasingly on short to mid-term certificate accounts and other deposit alternatives, which are more responsive to market interest rates.
WeThe Bank primarily relyrelies on ourits banking office network to attract and retain deposits in ourits local markets, as well as deposit listing services, deposit gathering networks, andhave in the past leveraged the online channel to attract both in and out-of-market deposits. Market interest rates and rates on deposit products offered by competing financial institutions can significantly affect ourthe Bank’s ability to attract and retain deposits. During 2017,2020, total deposits decreased $2.9increased $92.6 million compared with 2016.2019. The increase in deposits for 2020 was primarily in savings account balances, as well as non-interest and interest-bearing demand deposit accounts. During 2016,2019, total deposits decreased $28.1increased $132.7 million compared with 2015.2018. The decreaseincrease in deposits for 2017 and 20162019 was primarily in higher cost certificates of deposit balances.related to the branch purchase transaction.
To evaluate our funding needs in light of deposit trends resulting from continually changing conditions, we evaluate simulated performance reports that forecast changes in margins along with other pertinent economic data. We continueThe Bank continues to offer attractively priced deposit products along ourits product line to allow usit to retain deposit customers and reduce interest rate risk during various rising and falling interest rate cycles.
We offer The Bank offers savings accounts, interest checking accounts, money market accounts and fixed rate certificates with varying maturities. The flow of deposits is influenced significantly by general economic conditions, changes in interest rates and competition. Management adjusts interest rates, maturity terms, service fees and withdrawal penalties on the Bank’s deposit products periodically. The variety of deposit products allows the Bank to compete more effectively in obtaining funds and to respond with more flexibility to the flow of funds away from depository institutions into outside investment alternatives. However, the ability to attract and maintain deposits and the cost of these funds have been, andat acceptable rates will continue to be significantly affected by market conditions.
The following table sets forth the average daily balances and weighted average rates paid for our deposits for the periods indicated:
For the Years Ended December 31, | ||||||||||||||||||||||||
2017 | 2016 | 2015 | ||||||||||||||||||||||
Average Balance | Average Rate | Average Balance | Average Rate | Average Balance | Average Rate | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Demand | $ | 129,088 | $ | 119,736 | $ | 113,576 | ||||||||||||||||||
Interest Checking | 101,980 | 0.13 | % | 96,294 | 0.13 | % | 88,814 | 0.13 | % | |||||||||||||||
Money Market | 145,281 | 0.55 | 136,423 | 0.58 | 112,350 | 0.57 | ||||||||||||||||||
Savings | 35,486 | 0.17 | 34,257 | 0.18 | 35,604 | 0.21 | ||||||||||||||||||
Certificates of Deposit | 452,443 | 0.93 | 466,007 | 0.88 | 557,441 | 0.96 | ||||||||||||||||||
Total Deposits | $ | 864,278 | $ | 852,717 | $ | 907,785 | ||||||||||||||||||
Weighted Average Rate | 0.60 | % | 0.60 | % | 0.68 | % |
The following table sets forth the average daily balances and weighted average rates paid for our certificates of depositdeposits for the periods indicated:
For the Years Ended December 31, | ||||||||||||||||||||||||
2017 | 2016 | 2015 | ||||||||||||||||||||||
Average Balance | Average Rate | Average Balance | Average Rate | Average Balance | Average Rate | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Certificates of Deposit | ||||||||||||||||||||||||
Less than $250,000 | $ | 419,816 | 1.01 | % | $ | 437,955 | 0.88 | % | $ | 524,279 | 0.95 | % | ||||||||||||
$250,000 or more | 32,627 | 0.92 | 28,052 | 0.97 | 33,162 | 1.12 | ||||||||||||||||||
Total | $ | 452,443 | 0.93 | % | $ | 466,007 | 0.88 | % | $ | 557,441 | 0.96 | % |
For the Years Ended December 31, | ||||||||||||||||||||||||
2020 | 2019 | 2018 | ||||||||||||||||||||||
Average Balance | Average Rate | Average Balance | Average Rate | Average Balance | Average Rate | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Demand | $ | 215,145 | $ | 151,299 | $ | 136,947 | ||||||||||||||||||
Interest Checking | 169,808 | 0.32 | % | 104,077 | 0.30 | % | 90,583 | 0.13 | % | |||||||||||||||
Money Market | 166,788 | 0.55 | 161,610 | 1.06 | 158,832 | 0.90 | ||||||||||||||||||
Savings | 111,559 | 0.48 | 36,035 | 0.19 | 34,866 | 0.16 | ||||||||||||||||||
Certificates of Deposit | 436,083 | 1.33 | 483,222 | 1.98 | 439,597 | 1.35 | ||||||||||||||||||
Total Deposits | $ | 1,099,383 | $ | 936,243 | $ | 860,825 | ||||||||||||||||||
Weighted Average Rate | 0.71 | % | 1.25 | % | 0.88 | % |
The following table shows at December 31, 20172020 the amount of ourthe Bank’s time deposits of $250,000 or more by time remaining until maturity:
Maturity Period | Maturity Period | Maturity Period | ||||||||
(in thousands) | (in thousands) | |||||||||
Three months or less | $ | 5,276 | $ | 13,491 | ||||||
Three months through six months | 1,995 | 14,856 | ||||||||
Six months through twelve months | 3,497 | 7,605 | ||||||||
Over twelve months | 20,963 | 14,737 | ||||||||
Total | $ | 31,731 | $ | 50,689 |
The Bank maintains competitive pricing on its deposit products, which we believemanagement believes allows it to retain a substantial percentage of ourthe Bank’s customers when their time deposits mature.
Borrowing – Deposits are the primary source of funds for lending andactivities, investment activities, and for general business purposes. We canThe Bank also use advances (borrowings)uses borrowings from the FHLB of Cincinnati to supplement the pool of lendable funds, meet deposit withdrawal requirements and manage the terms of liabilities. Advances from the FHLB borrowings are secured by the Bank’s stock in the FHLB, and substantially all of its first mortgage residential loans, as well as its outstanding PPP loans. At December 31, 2017,2020, the Bank had $11.8$20.6 million in advances outstanding borrowings from the FHLB and the capacity to increase borrowings by an additional $79.0$93.9 million. The FHLB of Cincinnati functions as a central reserve bank providing credit for savings banks and other member financial institutions. As a member, the Bank is required to own capital stock in the FHLB and is authorized to apply for advancesborrow on the security of such stock and certain of ourits home mortgages and other assets (principally, securities that are obligations of, or guaranteed by, the United States) provided that it meets certain standards related to creditworthiness.
The following table sets forth information about ourthe Bank’s FHLB advancesborrowings as of and for the periods indicated:
December 31, | December 31, | |||||||||||||||||||||||
2017 | 2016 | 2015 | 2020 | 2019 | 2018 | |||||||||||||||||||
(dollars in thousands) | (dollars in thousands) | |||||||||||||||||||||||
Average balance outstanding | $ | 9,184 | $ | 2,967 | $ | 3,473 | $ | 34,101 | $ | 35,038 | $ | 43,363 | ||||||||||||
Maximum amount outstanding at any month-end during the period | 26,830 | 22,458 | 8,705 | 71,376 | 61,389 | 71,630 | ||||||||||||||||||
End of period balance | 11,797 | 22,458 | 3,081 | 20,623 | 61,389 | 46,549 | ||||||||||||||||||
Weighted average interest rate: | ||||||||||||||||||||||||
At end of period | 1.48 | % | 0.85 | % | 2.65 | % | 0.75 | % | 1.70 | % | 2.45 | % | ||||||||||||
During the period | 1.31 | % | 2.34 | % | 2.73 | % | 1.09 | % | 2.31 | % | 2.00 | % |
Subordinated Capital Note – At December 31, 2017, the Bank had a subordinated capital note outstanding in the principal amount of $2.3 million. The note is unsecured, bears interest at three-month LIBOR plus 300 basis points adjusting quarterly, and qualifies as Tier 2 capital until five years before the note matures on July 1, 2020. Beginning on July 1, 2015, one-fifth of the principal amount of the subordinated note was excluded from Tier 2 capital each year until fully excluded during the year before maturity. At December 31, 2017, a total of $1.7 million of the outstanding balance was included in Tier 2 capital. The note requires quarterly principal payments of $225,000 plus interest. At December 31, 2017, the interest rate on this note was 4.34%.
Junior Subordinated Debentures – At December 31, 2017,2020, the Company had four issues of junior subordinated debentures outstanding totaling $21.0 million as shown in the table below.
Description | Liquidation Amount Trust Preferred Securities | Issuance Date | Interest Rate (1) | Junior Subordinated Debt and Investment in Trust | Maturity Date | |||||||
(dollars in thousands) | ||||||||||||
Porter Statutory Trust II | $ | 5,000 | 2/13/2004 | 3-month LIBOR + 2.85% | $ | 5,155 | 2/13/2034 | |||||
Porter Statutory Trust III | 3,000 | 4/15/2004 | 3-month LIBOR + 2.79% | 3,093 | 4/15/2034 | |||||||
Porter Statutory Trust IV | 10,000 | 12/14/2006 | 3-month LIBOR + 1.67% | 10,433 | 3/1/2037 | |||||||
Ascencia Statutory Trust I | 3,000 | 2/13/2004 | 3-month LIBOR + 2.85% | 3,093 | 2/13/2034 | |||||||
$ | 21,000 | $ | 21,774 |
Description | Liquidation Amount Trust Preferred Securities | Issuance Date | Interest Rate (1) | Junior Subordinated Debt and Investment in Trust | Maturity Date | |||||||
(dollars in thousands) | ||||||||||||
Statutory Trust I | $ | 3,000 | 2/13/2004 | 3-month LIBOR + 2.85% | $ | 3,093 | 2/13/2034 | |||||
Statutory Trust II | 5,000 | 2/13/2004 | 3-month LIBOR + 2.85% | 5,155 | 2/13/2034 | |||||||
Statutory Trust III | 3,000 | 4/15/2004 | 3-month LIBOR + 2.79% | 3,093 | 4/15/2034 | |||||||
Statutory Trust IV | 10,000 | 12/14/2006 | 3-month LIBOR + 1.67% | 10,435 | 3/1/2037 | |||||||
$ | 21,000 | $ | 21,776 |
(1) | As of December 31, |
The trust preferred securities are subject to mandatory redemption, in whole or in part, upon repayment of the subordinated debentures at maturity or their earlier redemption at the liquidation preference. The subordinated debentures are redeemable before the maturity date at ourthe Company’s option at their principal amount plus accrued interest.
On April 15, 2016, the Company completed the private placement of 580,000 common shares and 220,000 non-voting common shares to accredited investors resulting in total proceeds of $5.0 million. The investors in the private placement directed a portion of the purchase price to pay all deferred interest payments on junior subordinated debentures, bringing interest payments current through the second quarter of 2016.
The Company has the option to defer interest payments on the subordinated debentures from time to time for a period not to exceed 20 consecutive quarters. Since the third quarter of 2016, we have been deferring interest payments on the junior subordinated debentures held by our trust subsidiaries, requiring the trust subsidiaries to defer distributions on the trust preferred securities held by investors. Deferred distributions on the $21.0 million of trust preferred securities outstanding totaled $1.2 million as of December 31, 2017. The deferral period expires after the second quarter of 2021, at which time we will be required to pay all accrued interest or be in default. A deferral period may begin at the Company’s discressiondiscretion so long as interest payments are current. We are prohibited from paying cash dividendsAt December 31, 2020, the Company is current on our preferred and common shares until such time as we have paid all deferred distributions on our trust preferred securities. So long as the Written Agreement remains in effect, we will be required to obtain the approval of the Federal Reserve Bank of St. Louis before making any interest payments on the subordinated debentures.payments.
TheThe Federal Reserve Board rules allow trust preferred securities issued prior to May 19, 2010 to be included in Tier 1 capital, subject to quantitative and qualitative limits. Currently, no more than 25% of ourthe Company’s Tier 1 capital can consist of trust preferred securities and qualifying perpetual preferred stock. To the extent the amount of ourthe Company’s trust preferred securities exceeds the 25% limit, the excess would be includable in Tier 2 capital. As of December 31, 2017,2020, all of the Company’s trust preferred securities totaled 22%were included in and comprised 20% of its Tier 1 capital and 40% of its Tier 2 capital.
Each of the trusts issuing the trust preferred securities holds junior subordinated debentures issued with anan original maturity of 30 years. In the last five years before the junior subordinated debentures mature, the associated trust preferred securities are excluded from Tier 1 capital and included in Tier 2 capital. In addition, the trust preferred securities during this five-year period are amortized out of Tier 2 capital by one-fifth each year and excluded from Tier 2 capital completely during the year before maturity.
Senior DebtSubordinated Capital Notes – On June 30, 2017, the Company entered into a $10.0 million senior secured loan agreement with a commercial bank. The loan maturesCompany’s subordinated notes mature on June 30, 2022. Interest is payable quarterlyJuly 31, 2029. The notes carry interest at a fixed rate of 5.75% until July 30, 2024 and then convert to variable at three-month LIBOR plus 250395 basis points through June 30,until maturity. The subordinated capital notes qualify as Tier 2 regulatory capital. On July 31, 2020, at which time quarterly principal paymentsthe Company completed the issuance of $250,000 plus interest will commence.an additional $8.0 million in subordinated notes under the July 23, 2019 indenture with the same terms and with the additional commitment by the Company to extend the optional prepayment date to July 31, 2025 so long as the additional notes qualify as Tier 2 regulatory capital. The loan is secured by a first priority pledge of 100%Company used the net proceeds from the issuance of the issuedadditional notes to retire its senior debt and outstanding stock ofretained the Bank.remaining balance for general corporate purposes. The Company may prepay any amount due under the promissory note at any time without premium or penalty.subordinated capital notes qualify as Tier 2 regulatory capital.
The Company contributed $9.0 million of the borrowing proceeds to the Bank as common equity Tier 1 capital. The remaining $1.0 million of the borrowing proceeds were retained by the lender in escrow to service quarterly interest payments. At December 31, 2017, the escrow account had a balance of $806,000.
The loan agreement contains customary representations, warranties, covenants and events of default, including the following financial covenants: (i) the Company must maintain minimum cash on hand of not less than $750,000 through June 30, 2018, and not less than $2,500,000 thereafter, (ii) the Company must maintain a total risk based capital ratio at least equal to 9% of risk-weighted assets to June 30, 2018, and 10% thereafter, (iii) the Bank must maintain a total risk based capital ratio at least equal to 10% of risk-weighted assets to June 30, 2018, and 11% thereafter, and (iv) non-performing assets of the Bank may not exceed 2.5% of the Bank’s total assets. Both the Company and Bank were in compliance with the covenants as of December 31, 2017.
Liquidity
Liquidity risk arises from the possibility the Company 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 meetthe Company meets the cash flow requirements of depositors and borrowers, as well as operating cash needs, taking into account all on- and off-balance sheet funding demands. Liquidity risk management also involves ensuring that we meet our cash flow needs are met at a reasonable cost. We maintainManagement maintains an investment and funds management policy, which identifies the primary sources of liquidity, establishes procedures for monitoring and measuring liquidity, and establishes minimum liquidity requirements in compliance with regulatory guidance. The Asset Liability Committee regularly monitors and reviews ourthe Company’s liquidity position.
Funds are available to the Bank from a number of sources, including the sale of securities in the available for sale investment portfolio, principal pay-downs on loans and mortgage-backed securities, customer deposit inflows, and other wholesale funding.
The Bank also borrows from the FHLB to supplement funding requirements. At December 31, 2017,2020, the Bank had an unused borrowing capacity with the FHLB was $79.0of $93.9 million. Advances are collateralized by first mortgage residential loans, and borrowingas well as its outstanding PPP loans. Borrowing capacity is based on the underlying book value of eligible pledged loans.
The Bank also has available on an unsecured basis federal funds borrowing linesline from a correspondent bank totaling $5.0 million. Management believes the sources of liquidity are adequate to meet expected cash needs for the foreseeable future. However,Historically, the availability of these lines could be affected by our financial position.
Historically, we haveBank has also utilized brokered and wholesale deposits to supplement ourits funding strategy. At December 31, 2017, we2020, the Bank had no brokered deposits.
The Company uses cash on hand to service senior debtthe subordinated capital notes, junior subordinated debentures, and to provide for operating cash flow needs. The Company also may issue common equity, preferred equity and debt to support cash flow needs and liquidity requirements. At December 31, 2017, cash on hand totaled $2.0 million, of which, $806,000 is held in escrow by the Company’s senior debt holder to service interest payments.
Capital
Stockholders’Stockholders’ equity increased $39.9$10.3 million to $72.7$116.0 million at December 31, 2017,2020, compared with $32.7$105.8 million at December 31, 2016.2019. The increase was due primarily to current year net income $38.5of $9.0 million.
The Company had a full valuation allowance against its net deferred tax asset since 2011. Duringfollowing table shows the fourth quarterratios of 2017, management concluded it was more-likely-than-not the asset would be utilized to reduce future taxes payable related to the future taxable income of the Company, and as such, reversed the valuation allowance. On December 22, 2017, the Tax Cuts and Jobs Act of 2017 was signed into law. Among other significant changes to the tax code, the new law lowered the federal corporate tax rate from 35% to 21% beginning in 2018. As a result, the Company revalued its net deferred tax asset at the new 21% rate. The combination of the reversal of the valuation allowance and the change in federal corporate tax rates, as well as income tax expense for the year, resulted in an income tax benefit of $31.9 million for the year ended December 31, 2017.
On June 30, 2017, the Company entered into a $10.0 million senior secured loan agreement with a commercial bank. The loan matures on June 30, 2022. Interest is payable quarterly at a rate of three-month LIBOR plus 250 basis points through June 30, 2020, at which time quarterly principal payments of $250,000 plus interest will commence. The loan is secured by a first priority pledge of 100% of the issued and outstanding stock of the Bank. The Company may prepay any amount due under the promissory note at any time without premium or penalty. A total of $9.0 million of loan proceeds was injected to the Bank as common equity Tier 1, capital.Tier 1 capital, total capital to risk-adjusted assets, and Tier 1 leverage for the Bank at December 31, 2020:
Regulatory Minimums | Well-Capitalized Minimums | Basel III Plus Conservation Buffer | Limestone Bank | |||||||||||||
Common equity Tier 1 capital | 4.5 | % | 6.5 | % | 7.0 | % | 12.05 | % | ||||||||
Tier 1 capital | 6.0 | 8.0 | 8.5 | 12.05 | ||||||||||||
Total risk-based capital | 8.0 | 10.0 | 10.5 | 13.20 | ||||||||||||
Tier 1 leverage ratio | 4.0 | 5.0 | — | 10.21 |
Failure to meet minimum capital requirements could result in discretionary actions by regulators that, if taken, could have a materially adverse effect on the Company’s financial condition.
On December 16, 2016, the Company completed a 1-for-5 reverse stock split of its issued and outstanding common and non-voting common shares. The reverse stock split was intended to increase the trading price per share of the common shares, with the objective to make the common shares a more attractive and cost effective investment and enhance liquidity for shareholders. All share and per share data in this annual report has been adjusted to reflect the reverse stock split. Preferred shares were not affected by the 1-for-5 reverse stock split.
On April 15, 2016, the Company completed the private placement of 580,000 common shares and 220,000 non-voting common shares to accredited investors, raising total proceeds of $5.0 million. The investors in the private placement directed a portion of purchase price to pay all deferred interest payments on our junior subordinated debentures, bringing interest payments current through the second quarter of 2016. The remaining proceeds were retained for general corporate purposes and to support the Bank.
Each of the federal bank regulatory agencies has established risk-based capital requirements for banking organizations. The Basel III regulatory capital reforms became effective for the Company and Bank on January 1, 2015, and include new minimum risk-based capital and leverage ratios. These rules refine the definition of what constitutes “capital” for purposes of calculating those ratios, including the definitions of Tier 1 capital and Tier 2 capital. The final rules allowed banks and their holding companies with less than $250 billion in assets a one-time opportunity to opt-out of a requirement to include unrealized gains and losses in accumulated other comprehensive income in their capital calculation. The Company and the Bank opted out of this requirement. The rules also establishrequire a “capital conservation buffer” of 2.5% above the regulatory minimum risk-based capital ratios. Once the capital conservation buffer is fully phased in, the minimum ratios are a common equity Tier 1 risk-based capital ratio of 7.0%, a Tier 1 risk-based capital ratio of 8.5%, and a total risk-based capital ratio of 10.5%. The phase-in of the capital conservation buffer requirement began in January 2016 at 0.625% of risk-weighted assets and increases each year until fully implemented in January 2019. An institution is subject to limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses if capital levels fall below minimum Basel III levels plus the buffer amounts. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions.actions without prior regulatory approval.
The following table shows the ratios of Tier 1 capital, common equity Tier 1, and total capital to risk-adjusted assets and the leverage ratios (excluding the capital conservation buffer) for the Bank at December 31, 2017:
Regulatory Minimums | Well-Capitalized Minimums | Limestone Bank | ||||||||||
Tier 1 capital | 6.0 | % | 8.0 | % | 10.35 | % | ||||||
Common equity Tier 1 capital | 4.5 | 6.5 | 10.35 | |||||||||
Total risk-based capital | 8.0 | 10.0 | 11.61 | |||||||||
Tier 1 leverage ratio | 4.0 | 5.0 | 8.70 |
Failure to meet minimum capital requirements could result in additional discretionary actions by regulators that, if taken, could have a materially adverse effect on our financial condition.
Off Balance Sheet Arrangements
In the normal course of business, we enterthe Bank enters into various transactions, which, in accordance with GAAP, are not included in ourthe Company’s consolidated balance sheets. We enterThe Bank enters into these transactions to meet the financing needs of ourits customers. These transactions include commitments to extend credit and standby letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the consolidated balance sheets.
The commitments associated with outstanding standby letters of credit and commitments to extend credit as of December 31, 20172020 are summarized below. Since commitments associated with letters of credit and commitments to extend credit may expire unused, the amounts shown do not necessarily reflect ourthe Bank’s actual future cash funding requirements:
One year or less | More than 1 year but less than 3 years | 3 years or more but less than 5 years | 5 years or more | Total | One year or less | More than 1 year but less than 3 years | 3 years or more but less than 5 years | 5 years or more | Total | |||||||||||||||||||||||||||||||
(dollars in thousands) | (dollars in thousands) | |||||||||||||||||||||||||||||||||||||||
Commitments to extend credit | $ | 37,862 | $ | 36,699 | $ | 19,542 | $ | 33,419 | $ | 127,522 | $ | 63,996 | $ | 59,391 | $ | 19,929 | $ | 45,894 | $ | 189,210 | ||||||||||||||||||||
Standby letters of credit | 2,588 | — | 1 | — | 2,589 | 1,502 | 11 | 4 | — | 1,517 | ||||||||||||||||||||||||||||||
Total | $ | 40,450 | $ | 36,699 | $ | 19,543 | $ | 33,419 | $ | 130,111 | $ | 65,498 | $ | 59,402 | $ | 19,933 | $ | 45,894 | $ | 190,727 |
Standby Letters of Credit – Standby letters of credit are written conditional commitments we issue to guarantee the performance of a borrower to a third party. If the borrower does not perform in accordance with the terms of the agreement with the third party, we may be required to fund the commitment. The maximum potential amount of future payments we could be required to make is represented by the contractual amount of the commitment. If the commitment is funded, we would be entitled to seek recovery from the borrower. Our policies generally require that standby letter of credit arrangements be underwritten in a manner consistent with a loan of similar characteristics.
Commitments to Extend Credit – We enterThe Bank enters into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes. Substantially all of ourthe Bank’s commitments to extend credit are contingent upon borrowers maintaining specific credit standards at the time of loan funding. We minimize ourThe Bank minimizes its exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures.
Standby Letters of Credit –Standby letters of credit are written conditional commitments the Bank issues to guarantee the performance of a borrower to a third party. If the borrower does not perform in accordance with the terms of the agreement with the third party, the Bank may be required to fund the commitment. The maximum potential amount of future payments the Bank could be required to make is represented by the contractual amount of the commitment. If the commitment is funded, the Bank would be entitled to seek recovery from the borrower. The Bank’s policies generally require that standby letter of credit arrangements be underwritten in a manner consistent with a loan of similar characteristics.
Risk Participation Agreements – In connection with the purchase of loan participations, the Bank has entered into risk participation agreements, which had notional amounts totaling $19.8$26.6 million at December 31, 20172020 and $14.6 million at December 31, 2016.2019.
Contractual Obligations
The following table summarizes ourthe Company’s contractual obligations by maturity date or scheduled payment date and other commitments to make future payments as of December 31, 2017:2020:
One year or less | More than 1 year but less than 3 years | 3 years or more but less than 5 years | 5 years or more | Total | ||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
Time deposits | $ | 204,018 | $ | 205,986 | $ | 14,231 | $ | — | $ | 424,235 | ||||||||||
FHLB borrowing (1) | 10,200 | 665 | 836 | 96 | 11,797 | |||||||||||||||
Subordinated capital note | 900 | 1,350 | — | — | 2,250 | |||||||||||||||
Junior subordinated debentures | — | — | — | 21,000 | 21,000 | |||||||||||||||
Senior debt | — | 500 | 2,000 | 7,500 | 10,000 | |||||||||||||||
Total | $ | 215,118 | $ | 208,501 | $ | 17,067 | $ | 28,596 | $ | 469,282 |
One year or less | More than 1 year but less than 3 years | 3 years or more but less than 5 years | 5 years or more | Total | ||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
Time deposits | $ | 272,031 | $ | 57,295 | $ | 37,749 | $ | 477 | $ | 367,552 | ||||||||||
FHLB borrowing (1) | 623 | — | — | 20,000 | 20,623 | |||||||||||||||
Operating leases | 279 | 369 | 347 | 3,503 | 4,498 | |||||||||||||||
Junior subordinated debentures | — | — | — | 21,000 | 21,000 | |||||||||||||||
Subordinated capital notes | — | — | — | 25,000 | 25,000 | |||||||||||||||
Total | $ | 272,933 | $ | 57,664 | $ | 38,096 | $ | 69,980 | $ | 438,673 |
| Fixed rate borrowings with rates ranging from 0% to |
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been prepared in accordance with U.S. generally accepted accounting principles, which require the measurement of financial position and operating results in historical dollars without considering changes in the relative purchasing power of money over time due to inflation.
We haveThe Bank has an asset and liability structure that is essentially monetary in nature. As a result, interest rates have a more significant impact on performance than the effects of general levels of inflation. Periods of high inflation are often accompanied by relatively higher interest rates, and periods of low inflation are accompanied by relatively lower interest rates. As market interest rates rise or fall in relation to the rates earned on loans and investments, the value of these assets decreases or increases respectively.
Item7A.Quantitative and Qualitative Disclosures About Market Risk |
To minimize the volatility of net interest income and exposure to economic loss that may result from fluctuating interest rates, we manage ourthe Bank manages its exposure to adverse changes in interest rates through asset and liability management activities within guidelines established by ourthe Asset Liability Committee (“ALCO”). The ALCO, which is comprised of senior officers, has the responsibility for approving and ensuring compliance with asset/liability management policies. Interest rate risk is the exposure to adverse changes in the net interest income as a result of market fluctuations in interest rates. The ALCO, on an ongoing basis, monitors interest rate and liquidity risk in order to implement appropriate funding and balance sheet strategies. Management considers interest rate risk to be ourthe Bank’s most significant market risk.
The Company utilizes an earnings simulation model to analyze net interest income sensitivity. It then evaluates potential changes in market interest rates and their subsequent effects on net interest income. The model projects the effect of instantaneous movements in interest rates of both 100 and 200 basis points that are sustained for one year. Assumptions based on the historical behavior of ourthe Company’s deposit rates and balances in relation to changes in interest rates are also incorporated into the model. These assumptions are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results may differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and the application and timing of various management strategies.
Given an instantaneousinstantaneous 100 basis point increase in interest rates, the base net interest income would increase by an estimated 0.9%0.8% at December 31, 20172020 compared with a decrease of 2.3% at December 31, 2019. Given an instantaneous 100 basis point decrease in interest rates, the base net interest income would decrease by an estimated 2.9% at December 31, 2020 compared with an decreaseincrease of 2.5%0.2% at December 31, 2016. 2019.
The following table indicates the estimated impact on net interest income under various interest rate scenarios for the year ended December 31, 2017,2020, as calculated using the static shock model approach:
Change in Future Net Interest Income | Change in Future Net Interest Income | |||||||||||||||
Dollar Change | Percentage Change | Dollar Change | Percentage Change | |||||||||||||
(dollars in thousands) | (dollars in thousands) | |||||||||||||||
+ 200 basis points | $ | 545 | 1.7 | % | $ | 923 | 2.2 | % | ||||||||
+ 100 basis points | 271 | 0.9 | 345 | 0.8 | ||||||||||||
- 100 basis points | (1,061 | ) | (3.3 | ) | (1,184 | ) | (2.9 | ) | ||||||||
- 200 basis points | (2,384 | ) | (7.5 | ) | (2,057 | ) | (5.0 | ) |
ImplementationImplementation of strategies to mitigate the risk of changing interest rates in the future, could lessen ourthe Company’s forecasted “base case” net interest income in the event of no interest rate changes. Interest sensitivity at any point in time will be affected by a number of factors. These factors include the mix of interest sensitive assets and liabilities as well as their relative pricing schedules. It is also influenced by market interest rates, deposit growth, loan growth, deposit decay rates and asset prepayment speed assumptions.
The following table sets forth the amounts of ourthe Company’s interest-earning assets and interest-bearing liabilities outstanding at December 31, 2017,2020, which we anticipate,management anticipates, based upon certain assumptions, to reprice or mature in each of the future time periods shown. The projected repricing of assets and liabilities anticipates prepayments and scheduled rate adjustments, as well as contractual maturities under an interest rate unchanged scenario within the selected time intervals. While we believemanagement believes such assumptions are reasonable, wemanagement cannot provide assurance that assumed repricing rates will approximate actual future activity.
Volume Subject to Repricing Within | Volume Subject to Repricing Within | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
0 – 90 Days | 91 – 181 Days | 182 – 365 Days | 1 – 5 Years | Over 5 Years | Non- Interest Sensitive | Total | 0 – 90 Days | 91 – 181 Days | 182 – 365 Days |
1 – 5 Years |
Over 5 Years | Non- Interest Sensitive | Total | |||||||||||||||||||||||||||||||||||||||||||
(dollars in thousands) | (dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Federal funds sold and short-term investments | $ | 25,966 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 25,966 | ||||||||||||||||||||||||||||||||||||||||||
Interest bearing deposits in banks | $ | 56,863 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 56,863 | ||||||||||||||||||||||||||||||||||||||||||
Investment securities | 46,712 | 2,726 | 7,649 | 58,131 | 37,056 | 516 | 152,790 | 89,993 | 6,944 | 15,004 | 57,406 | 32,637 | 1,878 | 203,862 | ||||||||||||||||||||||||||||||||||||||||||
FHLB stock | 7,323 | — | — | — | — | — | 7,323 | 5,887 | — | — | — | — | — | 5,887 | ||||||||||||||||||||||||||||||||||||||||||
Loans held for sale | 70 | — | — | — | — | — | 70 | |||||||||||||||||||||||||||||||||||||||||||||||||
Loans, net of allowance | 272,599 | 48,677 | 84,009 | 260,961 | 45,869 | (8,202 | ) | 703,913 | 405,063 | 77,430 | 129,385 | 331,801 | 18,402 | (12,443 | ) | 949,638 | ||||||||||||||||||||||||||||||||||||||||
Fixed and other assets | — | — | — | — | — | 80,739 | 80,739 | — | — | — | — | — | 96,052 | 96,052 | ||||||||||||||||||||||||||||||||||||||||||
Total assets | $ | 352,670 | $ | 51,403 | $ | 91,658 | $ | 319,092 | $ | 82,925 | $ | 73,053 | $ | 970,801 | $ | 557,806 | $ | 84,374 | $ | 144,389 | $ | 389,207 | $ | 51,039 | $ | 85,487 | $ | 1,312,302 | ||||||||||||||||||||||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest-bearing checking, savings, and money market accounts | $ | 285,403 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 285,403 | $ | 509,033 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 509,033 | ||||||||||||||||||||||||||||
Certificates of deposit | 74,560 | 52,197 | 76,126 | 221,184 | 168 | — | 424,235 | 105,067 | 102,624 | 64,339 | 95,043 | 479 | — | 367,552 | ||||||||||||||||||||||||||||||||||||||||||
Borrowed funds | 43,274 | 208 | 233 | 1,187 | 145 | — | 45,047 | 41,000 | 623 | — | 25,000 | — | — | 66,623 | ||||||||||||||||||||||||||||||||||||||||||
Other liabilities | — | — | — | — | — | 143,443 | 143,443 | — | — | — | — | — | 253,070 | 253,070 | ||||||||||||||||||||||||||||||||||||||||||
Stockholders’ equity | — | — | — | — | — | 72,673 | 72,673 | |||||||||||||||||||||||||||||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 403,237 | $ | 52,405 | $ | 76,359 | $ | 222,371 | $ | 313 | $ | 216,116 | $ | 970,801 | ||||||||||||||||||||||||||||||||||||||||||
Stockholders’ equity | — | — | — | — | — | 116,024 | 116,024 | |||||||||||||||||||||||||||||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 655,100 | $ | 103,247 | $ | 64,339 | $ | 120,043 | $ | 479 | $ | 369,094 | $ | 1,312,302 | ||||||||||||||||||||||||||||||||||||||||||
Period gap | $ | (50,567 | ) | $ | (1,002 | ) | $ | 15,299 | $ | 96,721 | $ | 82,612 | $ | (97,294 | ) | $ | (18,873 | ) | $ | 80,050 | $ | 269,164 | $ | 50,560 | ||||||||||||||||||||||||||||||||
Cumulative gap | $ | (50,567 | ) | $ | (51,569 | ) | $ | (36,270 | ) | $ | 60,451 | $ | 143,063 | $ | (97,294 | ) | $ | (116,167 | ) | $ | (36,117 | ) | $ | 233,047 | $ | 283,607 | ||||||||||||||||||||||||||||||
Period gap to total assets | (5.21 | )% | (0.10 | )% | 1.58 | % | 9.96 | % | 8.51 | % | (7.41 | )% | (1.44 | )% | 6.10 | % | 20.51 | % | 3.85 | % | ||||||||||||||||||||||||||||||||||||
Cumulative gap to total assets | (5.21 | )% | (5.31 | )% | (3.74 | )% | 6.23 | % | 14.74 | % | (7.41 | )% | (8.85 | )% | (2.75 | )% | 17.76 | % | 21.61 | % | ||||||||||||||||||||||||||||||||||||
Cumulative interest-earning assets to cumulative interest-bearing liabilities | 87.46 | % | 88.68 | % | 93.18 | % | 108.01 | % | 118.96 | % | 85.15 | % | 84.68 | % | 95.61 | % | 124.72 | % | 130.07 | % |
The one-year cumulative gap position as of December 31, 20172020 was negative $36.3$36.1 million or 3.7%2.8% of total assets. This is a one-day position that is continually changing and is not necessarily indicative of the Company’s position at any other time. Any gap analysis has inherent shortcomings because certain assets and liabilities may not move proportionally as interest rates change.
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The following consolidated financial statements and reports are included in this section:
Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets as of December 31, 2020 and 2019 Consolidated Statements of Operations for the Years Ended December 31, 2020, 2019, and 2018 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2020, 2019, and 2018 Consolidated Statements of Change in Stockholders’ Equity for the Years Ended December 31, 2020, 2019, and 2018 Consolidated Statements of Cash Flows for the Years Ended December 31, 2020, 2019, and 2018 |
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Notes to Consolidated Financial Statements |
| Crowe Independent Member Crowe |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and the Board of Directors of PorterLimestone Bancorp, Inc.
Louisville, Kentucky
OpinionOpinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of PorterLimestone Bancorp, Inc. (the "Company") as of December 31, 20172020 and 2016,2019, the related consolidated statements of operations, comprehensive income, (loss), changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2017,2020, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20172020 and 2016,2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017,2020, in conformity with accounting principles generally accepted in the United States of America.
Basis for OpinionOpinions
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting in accordance with the standards of the PCAOB. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion in accordance with the standards of the PCAOB.
Our audits included performing procedures to assess the risksrisks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Loan Losses - Qualitative Risk Factors
As described in Notes 1 and 3 to the consolidated financial statements, the Company’s allowance for loan losses represents management’s best estimate of probable incurred credit losses inherent in the held for investment loan portfolio as of the balance sheet date. Management assesses the risk inherent in the loan portfolio based on qualitative and quantitative risk factors. The allowance for loan losses consists of two components: the valuation allowance for loans that are individually classified as impaired and separately identified for impairment (“specific component”), totaling $2,177,000 (or 17.5% of the reserve) and the valuation allowance for loans not considered impaired and collectively evaluated for impairment (“general component”), totaling $10,266,000 (or 82.5% of the reserve).
The general component is based on historical loss rates adjusted for current factors. The historical loss rates are determined by loan portfolio segment and are based on actual loss history realized over the most recent five years with equal weighting. This actual loss experience is supplemented with other economic or qualitative factors based on the risks present for each portfolio segment. The qualitative risk factor identification and analysis requires significant judgment and allows management to adjust the estimate of losses based on the most recent information available and to address other limitations in the quantitative component that is based on historical loss rates. The Company’s risk adjustments include the changes in lending policies, procedures and practices, effects of any change in risk selection and underwriting standards, national and local economic trends and conditions, industry conditions, trends in volume and terms of loans, experience, ability and depth of lending management and other relevant staff, levels of and trends in delinquencies and impaired loans, levels of and trends in charge-offs and recoveries, and effects of changes in credit concentrations. The evaluation of these risk factor adjustments contributes significantly to the general reserve component of the estimate of the allowance for loan losses.
We identified auditing the general component as a critical audit matter because of the necessary judgment applied by us to evaluate management’s significant estimates and subjective assumptions related to the following:
● | Adjustments to the historical loss ratios for qualitative factors including the selection of qualitative factors and the magnitude of such adjustments based on management’s judgments regarding factors which impact asset quality. |
● | Accuracy of the loan risk ratings as different allocations are applied based on risk rating. |
/s/ Crowe Horwath, LLPThe primary procedures performed to address the critical audit matter included:
● | Testing the effectiveness of controls over the evaluation of the allowance related to the general component, including controls addressing: |
o | Problem loan identification and delinquency monitoring. |
o | Management’s review of the allowance for loan loss calculation, including data used as the basis for adjustments related to the quantitative and qualitative factors. |
o | Data inputs including the completeness and accuracy of loan data used in the computations. |
● | Substantively testing management’s process, including evaluating their judgments and assumptions for developing the general component, which included: |
o | Evaluation of the reasonableness of management’s judgments related to the qualitative factors including assessing the relevance of data used to develop factors. Our evaluation considered the weight of evidence from internal and external sources and loan portfolio performance. |
o | Evaluation of management’s methodology to ensure it was consistently applied year over year. |
o | Evaluation of the allowance related to loans collectively evaluated for impairment by loan segment year over year for directional consistency. |
We have served as the Company's auditor since 1998.
Louisville, Kentucky
February 28, 2018 26, 2021
PORTERLIMESTONE BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
December31,
(Dollar amounts in thousands except share data)
2017 | 2016 | 2020 | 2019 | |||||||||||||
Assets | ||||||||||||||||
Cash and due from banks | $ | 8,137 | $ | 9,449 | $ | 10,830 | $ | 8,241 | ||||||||
Interest bearing deposits in banks | 25,966 | 56,867 | 56,863 | 21,962 | ||||||||||||
Cash and cash equivalents | 34,103 | 66,316 | 67,693 | 30,203 | ||||||||||||
Securities available for sale | 152,720 | 152,790 | 203,862 | 209,000 | ||||||||||||
Securities held to maturity (fair value of $0 and $43,072, respectively) | — | 41,818 | ||||||||||||||
Loans held for sale | 70 | — | ||||||||||||||
Loans, net of allowance of $8,202 and $8,967, respectively | 703,913 | 630,269 | ||||||||||||||
Premises and equipment, net | 16,789 | 17,848 | ||||||||||||||
Loans, net of allowance of $12,443 and $8,376, respectively | 949,638 | 917,895 | ||||||||||||||
Premises and equipment, net | 18,533 | 19,658 | ||||||||||||||
Premises held for sale | 1,060 | 900 | ||||||||||||||
Other real estate owned | 4,409 | 6,821 | 1,765 | 3,225 | ||||||||||||
Federal Home Loan Bank stock | 7,323 | 7,323 | 5,887 | 6,237 | ||||||||||||
Bank owned life insurance | 15,229 | 14,838 | 23,441 | 16,037 | ||||||||||||
Deferred taxes, net | 31,313 | — | 25,714 | 27,765 | ||||||||||||
Goodwill | 6,252 | 6,252 | ||||||||||||||
Other intangible assets, net | 2,244 | 2,500 | ||||||||||||||
Accrued interest receivable and other assets | 4,932 | 7,154 | 6,213 | 6,107 | ||||||||||||
Total assets | $ | 970,801 | $ | 945,177 | $ | 1,312,302 | $ | 1,245,779 | ||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||
Deposits | ||||||||||||||||
Non-interest bearing | $ | 137,386 | $ | 124,395 | $ | 243,022 | $ | 187,551 | ||||||||
Interest bearing | 709,638 | 725,530 | 876,585 | 839,424 | ||||||||||||
Total deposits | 847,024 | 849,925 | 1,119,607 | 1,026,975 | ||||||||||||
Federal Home Loan Bank advances | 11,797 | 22,458 | 20,623 | 61,389 | ||||||||||||
Accrued interest payable and other liabilities | 6,057 | 15,911 | 10,048 | 8,665 | ||||||||||||
Subordinated capital note | 2,250 | 3,150 | ||||||||||||||
Junior subordinated debentures | 21,000 | 21,000 | 21,000 | 21,000 | ||||||||||||
Senior debt | 10,000 | — | ||||||||||||||
Subordinated capital notes | 25,000 | 17,000 | ||||||||||||||
Senior debt | 0 | 5,000 | ||||||||||||||
Total liabilities | 898,128 | 912,444 | 1,196,278 | 1,140,029 | ||||||||||||
Commitments and contingent liabilities (Note 16) | — | — | ||||||||||||||
Stockholders’ equity | ||||||||||||||||
Preferred stock, no par | ||||||||||||||||
Series E - 6,198 issued and outstanding; Liquidation preference of $6.2 million | 1,644 | 1,644 | ||||||||||||||
Series F - 4,304 issued and outstanding; Liquidation preference of $4.3 million | 1,127 | 1,127 | ||||||||||||||
Total preferred stockholders’ equity | 2,771 | 2,771 | ||||||||||||||
Common stock, no par, 39,000,000 shares authorized, 6,039,864 and 4,632,933 voting, and 220,000 and 1,591,600 non-voting shares issued and outstanding, respectively | 125,729 | 125,729 | ||||||||||||||
Commitments and contingent liabilities (Note 15) | — | — | ||||||||||||||
Stockholders’ equity | ||||||||||||||||
Common stock, no par, 39,000,000 shares authorized, 6,498,865 and 6,251,975 voting, and 1,000,000 and 1,220,000 non-voting shares issued and outstanding, respectively | 140,639 | 140,639 | ||||||||||||||
Additional paid-in capital | 24,497 | 24,097 | 25,013 | 24,508 | ||||||||||||
Retained deficit | (75,108 | ) | (113,561 | ) | (46,678 | ) | (55,683 | ) | ||||||||
Accumulated other comprehensive loss | (5,216 | ) | (6,303 | ) | ||||||||||||
Total common stockholders’ equity | 69,902 | 29,962 | ||||||||||||||
Total stockholders' equity | 72,673 | 32,733 | ||||||||||||||
Total liabilities and stockholders’ equity | $ | 970,801 | $ | 945,177 | ||||||||||||
Accumulated other comprehensive loss | (2,950 | ) | (3,714 | ) | ||||||||||||
Total common stockholders’ equity | 116,024 | 105,750 | ||||||||||||||
Total liabilities and stockholders’ equity | $ | 1,312,302 | $ | 1,245,779 |
See accompanying notes.
PORTERLIMESTONE BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONSOPERATIONS
Years Ended December31,
(Dollar amounts in thousands except per share data)
2017 | 2016 | 2015 | 2020 | 2019 | 2018 | |||||||||||||||||||
Interest income | ||||||||||||||||||||||||
Loans, including fees | $ | 31,866 | $ | 30,537 | $ | 31,251 | $ | 45,093 | $ | 42,153 | $ | 37,342 | ||||||||||||
Taxable securities | 4,399 | 3,886 | 4,076 | 5,042 | 6,269 | 4,880 | ||||||||||||||||||
Tax exempt securities | 571 | 620 | 764 | 370 | 326 | 383 | ||||||||||||||||||
Federal funds sold and other | 686 | 559 | 483 | |||||||||||||||||||||
Interest-bearing deposits and other | 248 | 836 | 856 | |||||||||||||||||||||
37,522 | 35,602 | 36,574 | 50,753 | 49,584 | 43,461 | |||||||||||||||||||
Interest expense | ||||||||||||||||||||||||
Deposits | 5,190 | 5,093 | 6,160 | 7,796 | 11,657 | 7,549 | ||||||||||||||||||
Federal Home Loan Bank advances | 120 | 70 | 95 | 371 | 810 | 867 | ||||||||||||||||||
Senior debt | 194 | — | — | |||||||||||||||||||||
Junior subordinated debentures | 753 | 671 | 606 | 660 | 1,005 | 946 | ||||||||||||||||||
Subordinated capital note | 148 | 147 | 161 | |||||||||||||||||||||
Federal funds purchased and other | — | — | 1 | |||||||||||||||||||||
6,405 | 5,981 | 7,023 | ||||||||||||||||||||||
Subordinated capital notes | 1,206 | 433 | 39 | |||||||||||||||||||||
Senior debt | 119 | 329 | 389 | |||||||||||||||||||||
10,152 | 14,234 | 9,790 | ||||||||||||||||||||||
Net interest income | 31,117 | 29,621 | 29,551 | 40,601 | 35,350 | 33,671 | ||||||||||||||||||
Negative provision for loan losses | (800 | ) | (2,450 | ) | (4,500 | ) | ||||||||||||||||||
Net interest income after negative provision for loan losses | 31,917 | 32,071 | 34,051 | |||||||||||||||||||||
Provision (negative provision) for loan losses | 4,400 | 0 | (500 | ) | ||||||||||||||||||||
Net interest income after provision for loan losses | 36,201 | 35,350 | 34,171 | |||||||||||||||||||||
Non-interest income | ||||||||||||||||||||||||
Service charges on deposit accounts | 2,253 | 1,958 | 1,851 | 2,268 | 2,381 | 2,355 | ||||||||||||||||||
Bank card interchange fees | 972 | 849 | 839 | 3,376 | 2,438 | 1,831 | ||||||||||||||||||
Income from bank owned life insurance | 412 | 417 | 295 | 424 | 410 | 437 | ||||||||||||||||||
Other real estate owned rental income | — | 456 | 1,346 | |||||||||||||||||||||
Net gain on sales of securities | 288 | 216 | 1,766 | |||||||||||||||||||||
Gain on extinguishment of junior subordinated debt | — | — | 883 | |||||||||||||||||||||
Net gain (loss) on sales and calls of investment securities | (5 | ) | (5 | ) | (6 | ) | ||||||||||||||||||
Other | 930 | 868 | 715 | 781 | 694 | 1,162 | ||||||||||||||||||
4,855 | 4,764 | 7,695 | 6,844 | 5,918 | 5,779 | |||||||||||||||||||
Non-interest expense | ||||||||||||||||||||||||
Salaries and employee benefits | 15,090 | 15,508 | 15,857 | 17,751 | 16,233 | 15,489 | ||||||||||||||||||
Occupancy and equipment | 3,420 | 3,517 | 3,449 | 4,001 | 3,522 | 3,586 | ||||||||||||||||||
Professional fees | 937 | 769 | 814 | |||||||||||||||||||||
Marketing expense | 629 | 908 | 1,114 | |||||||||||||||||||||
FDIC insurance | 1,412 | 1,660 | 2,212 | 229 | 211 | 557 | ||||||||||||||||||
Data processing expense | 1,256 | 1,185 | 1,128 | 1,502 | 1,259 | 1,192 | ||||||||||||||||||
Marketing expense | 1,098 | 973 | 560 | |||||||||||||||||||||
State franchise and deposit tax | 956 | 965 | 1,120 | 1,475 | 1,210 | 1,118 | ||||||||||||||||||
Professional fees | 978 | 1,568 | 2,885 | |||||||||||||||||||||
Communications | 722 | 706 | 663 | |||||||||||||||||||||
Deposit account related expense | 1,890 | 1,224 | 823 | |||||||||||||||||||||
Other real estate owned expense | 63 | 368 | 868 | |||||||||||||||||||||
Litigation and loan collection expense | 200 | 189 | 245 | |||||||||||||||||||||
Communications expense | 856 | 772 | 701 | |||||||||||||||||||||
Insurance expense | 540 | 565 | 589 | 428 | 444 | 478 | ||||||||||||||||||
Postage and delivery | 395 | 359 | 400 | 627 | 544 | 364 | ||||||||||||||||||
Litigation and loan collection expense | 179 | 8,805 | 1,141 | |||||||||||||||||||||
Other real estate owned expense | 1,973 | 1,541 | 12,302 | |||||||||||||||||||||
Acquisition costs | 0 | 775 | 0 | |||||||||||||||||||||
Other | 2,199 | 2,215 | 2,653 | 1,828 | 1,842 | 1,777 | ||||||||||||||||||
30,218 | 39,567 | 44,959 | 32,416 | 30,270 | 29,126 | |||||||||||||||||||
Income (loss) before income taxes | 6,554 | (2,732 | ) | (3,213 | ) | |||||||||||||||||||
Income tax expense (benefit) | (31,899 | ) | 21 | — | ||||||||||||||||||||
Net income (loss) | 38,453 | (2,753 | ) | (3,213 | ) | |||||||||||||||||||
Less: | ||||||||||||||||||||||||
Earnings (loss) allocated to participating securities | 967 | (88 | ) | (336 | ) | |||||||||||||||||||
Net income (loss) attributable to common shareholders | $ | 37,486 | $ | (2,665 | ) | $ | (2,877 | ) | ||||||||||||||||
Basic and diluted income (loss) per common share | $ | 6.15 | $ | (0.46 | ) | $ | (0.62 | ) | ||||||||||||||||
Income before income taxes | 10,629 | 10,998 | 10,824 | |||||||||||||||||||||
Income tax expense | 1,624 | 480 | 2,030 | |||||||||||||||||||||
Net income | 9,005 | 10,518 | 8,794 | |||||||||||||||||||||
Basic and diluted income per common share | $ | 1.20 | $ | 1.41 | $ | 1.23 |
See accompanying notes.
PORTERLIMESTONE BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Years Ended December 31,
(in thousands)
2017 | 2016 | 2015 | ||||||||||
Net income (loss) | $ | 38,453 | $ | (2,753 | ) | $ | (3,213 | ) | ||||
Other comprehensive income (loss): | ||||||||||||
Unrealized gain (loss) on securities: | ||||||||||||
Unrealized gain (loss) arising during the period | 1,141 | (1,917 | ) | (490 | ) | |||||||
Transfer of investment securities from held to maturity to available for sale | 702 | — | — | |||||||||
Amortization during the period of net unrealized loss transferred to held to maturity | 119 | 129 | 129 | |||||||||
Reclassification of adjustment for gains included in net income | (288 | ) | (216 | ) | (1,766 | ) | ||||||
Net unrealized gain/(loss) recognized in comprehensive income | 1,674 | (2,004 | ) | (2,127 | ) | |||||||
Tax effect | (587 | ) | — | — | ||||||||
Other comprehensive income (loss) | 1,087 | (2,004 | ) | (2,127 | ) | |||||||
Comprehensive income (loss) | $ | 39,540 | $ | (4,757 | ) | $ | (5,340 | ) |
2020 | 2019 | 2018 | ||||||||||
Net income | $ | 9,005 | $ | 10,518 | $ | 8,794 | ||||||
Other comprehensive income (loss): | ||||||||||||
Unrealized gain (loss) on securities: | ||||||||||||
Unrealized gain (loss) arising during the period | 1,012 | 3,773 | (1,652 | ) | ||||||||
Less reclassification adjustment for losses included in net income | (5 | ) | (5 | ) | (6 | ) | ||||||
Net unrealized gain (loss) recognized in comprehensive income | 1,017 | 3,778 | (1,646 | ) | ||||||||
Tax effect | (253 | ) | (864 | ) | 347 | |||||||
Other comprehensive income (loss) | 764 | 2,914 | (1,299 | ) | ||||||||
Comprehensive income | $ | 9,769 | $ | 13,432 | $ | 7,495 |
See accompanying notes.
PORTERLIMESTONE BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Years Ended December31, 2020
(Dollar amounts in thousands except share and per share data)
Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Preferred | Preferred | Common | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Voting and Non-voting Common | Series B | Series D | Series E | Series F | Common | Series B | Series D | Series E | Series F | Additional Paid-In Capital | Retained Earnings (Deficit) | Accumulated Other Compre- hensive Income (Loss) | Total | ||||||||||||||||||||||||||||||||||||||||||||
Balances, December 31, 2014 | 2,978,103 | 40,536 | 64,580 | 6,198 | 4,304 | $ | 113,238 | $ | 2,229 | $ | 3,552 | $ | 1,644 | $ | 1,127 | $ | 21,442 | $ | (107,595 | ) | $ | (2,172 | ) | $ | 33,465 | ||||||||||||||||||||||||||||||||
Issuance of unvested stock | 183,148 | — | — | — | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
Terminated stock | (107,696 | ) | — | — | — | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Forfeited unvested stock | (6,368 | ) | — | — | — | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation expense | — | — | — | �� | — | — | — | — | — | — | 445 | — | — | 445 | |||||||||||||||||||||||||||||||||||||||||||
Net loss | — | — | — | — | — | — | — | — | — | — | — | (3,213 | ) | — | (3,213 | ) | |||||||||||||||||||||||||||||||||||||||||
Net change in accumulated other comprehensive income, net of taxes | — | — | — | — | — | — | — | — | — | — | — | — | (2,127 | ) | (2,127 | ) | |||||||||||||||||||||||||||||||||||||||||
Debt to equity exchange | 240,000 | — | — | — | — | 1,680 | — | — | — | — | 1,767 | — | — | 3,447 | |||||||||||||||||||||||||||||||||||||||||||
Conversion of preferred stock to common and non-voting common stock | 2,102,320 | (40,536 | ) | (64,580 | ) | — | — | 5,781 | (2,229 | ) | (3,552 | ) | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
Balances, December 31, 2015 | 5,389,507 | — | — | 6,198 | 4,304 | $ | 120,699 | $ | — | $ | — | $ | 1,644 | $ | 1,127 | $ | 23,654 | $ | (110,808 | ) | $ | (4,299 | ) | $ | 32,017 | ||||||||||||||||||||||||||||||||
Issuance of unvested stock | 35,465 | — | — | — | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
Forfeited unvested stock | (1,972 | ) | — | — | — | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Reverse stock split rounding shares | 1,533 | — | — | — | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation expense | — | — | — | — | — | — | — | — | — | — | 443 | — | — | 443 | |||||||||||||||||||||||||||||||||||||||||||
Net loss | — | — | — | — | — | — | — | — | — | — | — | (2,753 | ) | — | (2,753 | ) | |||||||||||||||||||||||||||||||||||||||||
Net change in accumulated other comprehensive income, net of taxes | — | — | — | — | — | — | — | — | — | — | — | — | (2,004 | ) | (2,004 | ) | |||||||||||||||||||||||||||||||||||||||||
Issuance of stock | 800,000 | — | — | — | — | 5,030 | — | — | — | — | — | — | — | 5,030 | |||||||||||||||||||||||||||||||||||||||||||
Balances, December 31, 2016 | 6,224,533 | — | — | 6,198 | 4,304 | $ | 125,729 | $ | — | $ | — | $ | 1,644 | $ | 1,127 | $ | 24,097 | $ | (113,561 | ) | $ | (6,303 | ) | $ | 32,733 | ||||||||||||||||||||||||||||||||
Issuance of unvested stock | 37,865 | — | — | — | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
Forfeited unvested stock | (1,316 | ) | — | — | — | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Reverse stock split rounding shares | (1,218 | ) | — | — | — | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation expense | — | — | — | — | — | — | — | — | — | — | 400 | — | — | 400 | |||||||||||||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | — | — | — | — | — | — | 38,453 | — | 38,453 | |||||||||||||||||||||||||||||||||||||||||||
Net change in accumulated other comprehensive income, net of taxes | — | — | — | — | — | — | — | — | — | — | — | — | 1,087 | 1,087 |
| ||||||||||||||||||||||||||||||||||||||||||
Balances, December 31, 2017 | 6,259,864 | — | — | 6,198 | 4,304 | $ | 125,729 | $ | — | $ | — | $ | 1,644 | $ | 1,127 | $ | 24,497 | $ | (75,108 | ) | $ | (5,216 | ) | $ | 72,673 |
| Shares | Amount | |||||||||||||||||||||||||||||||||||||||||||||||
| Preferred | Common | Preferred | Common | |||||||||||||||||||||||||||||||||||||||||||||
| Series E | Series F | Common | Non-Voting Common | Total Common | Series E | Series F | Common and Non-Voting Common | Additional Paid-In Capital | Retained Deficit | Accumulated Other Comprehensive Loss | Total | |||||||||||||||||||||||||||||||||||||
Balances, December 31, 2017 | 6,198 | 4,304 | 6,039,864 | 220,000 | 6,259,864 | $ | 1,644 | $ | 1,127 | $ | 125,729 | $ | 24,497 | $ | (75,108 | ) | $ | (5,216 | ) | $ | 72,673 | ||||||||||||||||||||||||||||
Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations upon award | 0 | 0 | 52,856 | 0 | 52,856 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||||||||||||
Issuance of stock | 0 | 0 | 150,000 | 1,000,000 | 1,150,000 | 0 | 0 | 14,910 | 0 | 0 | 0 | 14,910 | |||||||||||||||||||||||||||||||||||||
Redemption and retirement of preferred shares | (6,198 | ) | (4,304 | ) | 0 | 0 | 0 | (1,644 | ) | (1,127 | ) | 0 | (734 | ) | 0 | 0 | (3,505 | ) | |||||||||||||||||||||||||||||||
Stock-based compensation expense | — | — | — | — | — | 0 | 0 | 0 | 524 | 0 | 0 | 524 | |||||||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | 0 | 0 | 0 | 0 | 8,794 | 0 | 8,794 | |||||||||||||||||||||||||||||||||||||
Reclassification of disproportionate tax effect | |||||||||||||||||||||||||||||||||||||||||||||||||
due to change in federal tax rate | — | — | — | — | — | 0 | 0 | 0 | 0 | 113 | (113 | ) | 0 | ||||||||||||||||||||||||||||||||||||
Net change in accumulated other comprehensive loss, net of taxes | — | — | — | — | — | 0 | 0 | 0 | 0 | 0 | (1,299 | ) | (1,299 | ) | |||||||||||||||||||||||||||||||||||
Balances, December 31, 2018 | 0 | 0 | 6,242,720 | 1,220,000 | 7,462,720 | $ | 0 | $ | 0 | $ | 140,639 | $ | 24,287 | $ | (66,201 | ) | $ | (6,628 | ) | $ | 92,097 | ||||||||||||||||||||||||||||
Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations upon award | 0 | 0 | 13,503 | 0 | 13,503 | 0 | 0 | 0 | (314 | ) | 0 | 0 | (314 | ) | |||||||||||||||||||||||||||||||||||
Forfeited unvested stock | 0 | 0 | (4,248 | ) | 0 | (4,248 | ) | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||||||||||
Stock-based compensation expense | — | — | — | — | — | 0 | 0 | 0 | 535 | 0 | 0 | 535 | |||||||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | 0 | 0 | 0 | 0 | 10,518 | 0 | 10,518 | |||||||||||||||||||||||||||||||||||||
Net change in accumulated other comprehensive loss, net of taxes | — | — | — | — | — | 0 | 0 | 0 | 0 | 0 | 2,914 | 2,914 | |||||||||||||||||||||||||||||||||||||
Balances, December 31, 2019 | 0 | 0 | 6,251,975 | 1,220,000 | 7,471,975 | $ | 0 | $ | 0 | $ | 140,639 | $ | 24,508 | $ | (55,683 | ) | $ | (3,714 | ) | $ | 105,750 | ||||||||||||||||||||||||||||
Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations upon award | 0 | 0 | 28,248 | 0 | 28,248 | 0 | 0 | 0 | (75 | ) | 0 | 0 | (75 | ) | |||||||||||||||||||||||||||||||||||
Forfeited unvested stock | 0 | 0 | (1,358 | ) | 0 | (1,358 | ) | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||||||||||
Stock-based compensation expense | — | — | — | — | — | 0 | 0 | 0 | 580 | 0 | 0 | 580 | |||||||||||||||||||||||||||||||||||||
Non-voting shares converted to voting | 0 | 0 | 220,000 | (220,000 | ) | 0 | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | 0 | 0 | 0 | 0 | 9,005 | 0 | 9,005 | |||||||||||||||||||||||||||||||||||||
Net change in accumulated other comprehensive loss, net of taxes | — | — | — | — | — | 0 | 0 | 0 | 0 | 0 | 764 | 764 | |||||||||||||||||||||||||||||||||||||
Balances, December 31, 2020 | 0 | 0 | 6,498,865 | 1,000,000 | 7,498,865 | $ | 0 | $ | 0 | $ | 140,639 | $ | 25,013 | $ | (46,678 | ) | $ | (2,950 | ) | $ | 116,024 |
See accompanying notes to unaudited consolidated financial statements.
LIMESTONE BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December31,
(in thousands)
2020 | 2019 | 2018 | ||||||||||
Cash flows from operating activities | ||||||||||||
Net income | $ | 9,005 | $ | 10,518 | $ | 8,794 | ||||||
Adjustments to reconcile net income (loss) to net cash from operating activities | ||||||||||||
Depreciation and amortization | 2,986 | 1,669 | 1,080 | |||||||||
Provision (negative provision) for loan losses | 4,400 | 0 | (500 | ) | ||||||||
Net amortization on securities | 655 | 700 | 865 | |||||||||
Stock-based compensation expense | 580 | 535 | 524 | |||||||||
Deferred taxes, net | 1,798 | 653 | 2,376 | |||||||||
Net gain on sales of loans held for sale | 0 | 0 | (1 | ) | ||||||||
Proceeds from sales of loans held for sale | 0 | 0 | 71 | |||||||||
Net gain on sales of other real estate owned | 0 | 0 | (72 | ) | ||||||||
Net write-down of other real estate owned | 0 | 260 | 850 | |||||||||
Net realized (gain) loss on sales and calls of investment securities | 5 | 5 | 6 | |||||||||
Net (gain) loss on sale of premises and equipment | 0 | (1 | ) | (692 | ) | |||||||
Net write-down of premises held for sale | 150 | 150 | 392 | |||||||||
Increase in cash surrender value of life insurance, net of premium expense | (404 | ) | (391 | ) | (417 | ) | ||||||
Amortization of operating lease right-of-use assets | 593 | 185 | 0 | |||||||||
Net change in accrued interest receivable and other assets | (106 | ) | (302 | ) | (491 | ) | ||||||
Net change in accrued interest payable and other liabilities | 1,383 | (763 | ) | (155 | ) | |||||||
Net cash from operating activities | 21,045 | 13,218 | 12,630 | |||||||||
Cash flows from investing activities | ||||||||||||
Purchases of available for sale securities | (38,416 | ) | (29,169 | ) | (77,159 | ) | ||||||
Proceeds from sales and calls of available for sale securities | 9,030 | 5,351 | 6,054 | |||||||||
Proceeds from maturities and prepayments of available for sale securities | 34,881 | 19,083 | 20,116 | |||||||||
Proceeds from sale of other real estate owned | 1,600 | 0 | 876 | |||||||||
Improvements to other real estate owned | (140 | ) | 0 | 0 | ||||||||
Purchases of Federal Home Loan Bank stock | (600 | ) | 0 | 0 | ||||||||
Proceeds from mandatory redemption of Federal Home Loan Bank stock | 950 | 996 | 90 | |||||||||
Net changes in loans | (37,772 | ) | (35,538 | ) | (52,885 | ) | ||||||
Proceeds from sale of premises and equipment | 0 | 1 | 1,590 | |||||||||
Purchases of premises and equipment | (879 | ) | (1,321 | ) | (1,168 | ) | ||||||
Net cash paid for acquisition | 0 | (5,280 | ) | 0 | ||||||||
Purchase of bank owned life insurance | (7,000 | ) | 0 | 0 | ||||||||
Net cash from investing activities | (38,346 | ) | (45,877 | ) | (102,486 | ) | ||||||
Cash flows from financing activities | ||||||||||||
Net change in deposits | 92,632 | 975 | 47,207 | |||||||||
Repayment of Federal Home Loan Bank advances | (145,766 | ) | (160,160 | ) | (120,248 | ) | ||||||
Advances from Federal Home Loan Bank | 105,000 | 175,000 | 155,000 | |||||||||
Repayment of subordinated capital note | 0 | 0 | (2,250 | ) | ||||||||
Proceeds from issuance of subordinated capital notes | 8,000 | 17,000 | 0 | |||||||||
Repayment of senior debt | (5,000 | ) | (5,000 | ) | 0 | |||||||
Proceeds from issuance of common stock, net | 0 | 0 | 14,910 | |||||||||
Common shares withheld for taxes | (75 | ) | (314 | ) | 0 | |||||||
Redemption of preferred stock | 0 | 0 | (3,505 | ) | ||||||||
Net cash from financing activities | 54,791 | 27,501 | 91,114 | |||||||||
Net change in cash and cash equivalents | 37,490 | (5,158 | ) | 1,258 | ||||||||
Beginning cash and cash equivalents | 30,203 | 35,361 | 34,103 | |||||||||
Ending cash and cash equivalents | $ | 67,693 | $ | 30,203 | $ | 35,361 | ||||||
Supplemental cash flow information: | ||||||||||||
Interest paid | $ | 10,422 | $ | 13,763 | $ | 10,607 | ||||||
Income taxes paid (refunded) | (346 | ) | (346 | ) | 0 | |||||||
Supplemental non-cash disclosure: | ||||||||||||
Transfer from loans to other real estate | 0 | $ | 0 | $ | 730 | |||||||
Transfer from premises and equipment to premises held for sale | 310 | 0 | 1,050 | |||||||||
Financed sales of other real estate owned | 1,360 | 0 | 0 | |||||||||
Initial recognition of right-of-use lease assets | 0 | 507 | 0 |
See accompanying notes.
PORTER BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
(in thousands)
2017 | 2016 | 2015 | ||||||||||
Cash flows from operating activities | ||||||||||||
Net income (loss) | $ | 38,453 | $ | (2,753 | ) | $ | (3,213 | ) | ||||
Adjustments to reconcile net income (loss) to net cash from operating activities | ||||||||||||
Depreciation and amortization | 1,239 | 1,725 | 1,711 | |||||||||
Negative provision for loan losses | (800 | ) | (2,450 | ) | (4,500 | ) | ||||||
Net amortization on securities | 1,246 | 1,297 | 1,434 | |||||||||
Stock-based compensation expense | 400 | 443 | 445 | |||||||||
Deferred taxes, net | (31,899 | ) | — | — | ||||||||
Gain on extinguishment of junior subordinated debt | — | — | (883 | ) | ||||||||
Net (gain) loss on sales of loans held for sale | (46 | ) | (86 | ) | 204 | |||||||
Loans originated for sale | (2,859 | ) | (5,145 | ) | (6,652 | ) | ||||||
Proceeds from sales of loans held for sale | 2,835 | 5,417 | 6,548 | |||||||||
Net (gain) loss on sales of other real estate owned | (74 | ) | (222 | ) | 74 | |||||||
Net write-down of other real estate owned | 1,963 | 1,180 | 9,855 | |||||||||
Net realized (gain) loss on sales and calls of investment securities | (288 | ) | (216 | ) | (1,766 | ) | ||||||
Net (gain) loss on sale of premises and equipment | 3 | (1 | ) | — | ||||||||
Increase in cash surrender value of owned life insurance, net of premium expense | (391 | ) | (397 | ) | (274 | ) | ||||||
Net change in accrued interest receivable and other assets | 2,079 | (814 | ) | 810 | ||||||||
Net change in accrued interest payable and other liabilities | (9,854 | ) | 8,133 | 267 | ||||||||
Net cash from operating activities | 2,007 | 6,111 | 4,060 | |||||||||
Cash flows from investing activities | ||||||||||||
Purchases of available for sale securities | (21,112 | ) | (41,827 | ) | (21,828 | ) | ||||||
Sales and calls of available for sale securities | 41,686 | 8,311 | 45,012 | |||||||||
Maturities and prepayments of available for sale securities | 21,838 | 22,876 | 21,084 | |||||||||
Proceeds from calls of held to maturity securities | 47 | — | — | |||||||||
Proceeds from maturities of held to maturity securities | 145 | |||||||||||
Proceeds from sales of loans not originated for sale | — | — | 8,640 | |||||||||
Proceeds from sale of other real estate owned | 793 | 12,438 | 22,567 | |||||||||
Loan originations and payments, net | (73,202 | ) | (22,368 | ) | (2,239 | ) | ||||||
Proceeds from sale of premises and equipment | 331 | 268 | — | |||||||||
Purchases of premises and equipment | (284 | ) | (464 | ) | (385 | ) | ||||||
Purchase of bank owned life insurance | — | (5,000 | ) | — | ||||||||
Net cash from investing activities | (29,758 | ) | (25,766 | ) | 72,851 | |||||||
Cash flows from financing activities | ||||||||||||
Net change in deposits | (2,901 | ) | (28,072 | ) | (48,844 | ) | ||||||
Net change in repurchase agreements | — | — | (1,341 | ) | ||||||||
Repayment of Federal Home Loan Bank advances | (55,661 | ) | (623 | ) | (17,671 | ) | ||||||
Advances from Federal Home Loan Bank | 45,000 | 20,000 | 5,000 | |||||||||
Repayment of subordinated capital note | (900 | ) | (900 | ) | (900 | ) | ||||||
Proceeds from senior debt | 10,000 | — | — | |||||||||
Issuance of common stock | — | 2,231 | — | |||||||||
Net cash from financing activities | (4,462 | ) | (7,364 | ) | (63,756 | ) | ||||||
Net change in cash and cash equivalents | (32,213 | ) | (27,019 | ) | 13,155 | |||||||
Beginning cash and cash equivalents | 66,316 | 93,335 | 80,180 | |||||||||
Ending cash and cash equivalents | $ | 34,103 | $ | 66,316 | $ | 93,335 | ||||||
Supplemental cash flow information: | ||||||||||||
Interest paid | $ | 5,665 | $ | 5,253 | $ | 7,076 | ||||||
Income taxes paid (refunded) | — | 21 | — | |||||||||
Supplemental non-cash disclosure: | ||||||||||||
Proceeds from common stock issuance directed by investors to pay junior subordinated debt interest | $ | — | 2,799 | — | ||||||||
Transfer from loans to other real estate | 270 | $ | 1,273 | $ | 5,513 | |||||||
Financed sales of other real estate owned | — | 270 | — | |||||||||
Effect of junior subordinated debt to equity exchange | — | — | 4,330 | |||||||||
Transfer from held to maturity to available for sale securities | 41,380 | — | — | |||||||||
AOCI component of transfer from held to maturity to available for sale, net of tax | 456 | — | — |
See accompanying notes.
PORTERLIMESTONE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December31, 2017, 20162020, 2019 and 20182015
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Nature of Operations and Principles of Consolidation – The consolidated financial statements include PorterLimestone Bancorp, Inc. (Company) and its wholly-owned subsidiary, PBILimestone Bank, Inc. (Bank). The Bank completed a name change to Limestone Bank on February 20, 2018. The Company owns a 100% interestAll significant intercompany transactions and accounts have been eliminated in the Bank.consolidation.
The Company providesBank, established in 1902, is a state chartered non-member financial institution providing financial services through its officesbanking center locations in Centralsouth central, southern, and South Centralwestern Kentucky, as well as Lexington, Louisville, and Louisville. Its primary deposit products are checking, savings, and term certificate accounts, and its primary lending products are residential mortgage, commercial, agricultural, and real estate loans. Substantially all loans are collateralized by specific items of collateral including business assets and real estate. Commercial loans are expected to be repaid from cash flow from operations of businesses. There are no significant concentrations of loans to any one industry or customer. However, borrowers’ ability to repay their loans is dependent on the real estate and general economic conditions in the area. Other financial instruments which potentially represent concentrations of credit risk include deposit accounts in other financial institutions, federal funds sold, municipal securities, collateralized loan obligations, corporate securities, and bank owned life insurance.Frankfort.
Use of Estimates – To prepare financial statements in conformity with U.S. generally accepted accounting principles, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and future results could differ.
In March 2020, the World Health Organization declared novel coronavirus disease 2019 (“COVID-19”) as a global pandemic. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains, created significant volatility and disruption in financial markets, and increased unemployment levels. In addition, the pandemic has resulted in temporary closures of many businesses and the institution of social distancing and sheltering in place requirements in many states and communities, including those in markets in which the Company is located or does business.
The extent to which the COVID-19 pandemic impacts the Company’s business, liquidity, asset valuations, results of operations, and financial condition, as well as its regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic. Moreover, the effects of the COVID- 19 pandemic may have a material adverse effect on all or a combination of valuation impairments on the Company’s intangible assets, investments, loans, or deferred tax assets.
Cash and Cash Equivalents – For the purpose of presentation in the statements of cash flows, the Company considers all cash and amounts due from depository institutions as well as interest bearing deposits in banks that mature within one year and are carried at cost to be cash equivalents. The Bank isIncluded in cash and due from banks and interest bearing deposits are amounts required to maintain average reserve balances withbe held at the Federal Reserve Bank of St. Louis.Louis or maintained in vault cash in accordance with regulatory reserve requirements. There were 0 balance requirements as of December 31, 2020 and $10.1 million as of December 31, 2019.
Securities – Debt securities are classified as held to maturity and carried at amortized cost when management has the intent and ability to hold them to maturity. Debt securities are classified as available for sale when they might be sold before maturity. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income.income, net of tax.
Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level-yield method anticipating prepayments on mortgage backed securities. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.
Management evaluatesIn evaluating securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position,, management considers the length of time and extent and duration of the unrealized loss, andto which fair value has been less than cost, the financial condition, and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into 1) OTTI related to credit loss, which is recognized in the income statement and 2) OTTI related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis.
Loans Held for Sale – Loans held for sale include residential mortgage loans originated for sale into the secondary market and are carried at the lower of aggregate cost or fair value, as determined by outstanding commitments from investors. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings.
Mortgage loans held for sale are generally sold with servicing rights released. If sold with servicing retained, the carrying value of mortgage loans sold is reduced by the amount allocated to the servicing right. Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related loan sold.
Mortgage banking derivatives used in the ordinary course of business consist of mandatory forward sales contracts and rate lock loan commitments. Forward contracts represent future commitments to deliver loans at a specified price and date and are used to manage interest rate risk on loan commitments and mortgage loans held for sale. Rate lock commitments represent commitments to fund loans at a specific rate. These derivatives involve underlying items, such as interest rates, and are designed to transfer risk. Substantially all of these instruments expire within 60 days from the date of issuance. Notional amounts are amounts on which calculations and payments are based, but which do not represent credit exposure, as credit exposure is limited to the amounts required to be received or paid. Commitments to deliver loans and rate lock loan commitments were insignificant at year end.
Loans – Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of deferred loan fees and costs, and an allowance for loan losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments. The recorded investment in loans includes the outstanding principal balance and unamortized deferred origination costs and fees.
Interest income recognition on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the loan is well collateralized and in process of collection. Consumer loans are typically charged off no later than 90 days past due. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is not expected.
All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
The Bank participated in the SBA Paycheck Protection Program (“PPP”) as a lender to provide loans to small businesses for payroll and other basic expenses during the COVID-19 pandemic. These loans are eligible to be forgiven if certain conditions are satisfied and are fully guaranteed by the SBA. Additionally, loan payments are deferred for the firstsix months of the loan term. No collateral or personal guarantees were required. PPP loans were considered in the provision for loan losses in 2020, however, due to SBA guaranty the provision for loan losses impact was insignificant.
Loans purchased in a business acquisition are accounted for using one of the following accounting standards. 1) ASC Topic 310-20, Non Refundable Fees and Other Costs, is used to value loans that have not demonstrated post origination credit quality deterioration and the acquirer expects to collect all contractually required payments from the borrower. For these loans, the difference between the loan’s day-one fair value and amortized cost would be amortized or accreted into income using the interest method or 2) ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, is used to value purchased credit impaired (PCI) loans. For these loans, it is probable the acquirer will be unable to collect all contractually required payments from the borrower. Under ASC Topic 310-30, the expected cash flows that exceed the initial investment in the loan, or fair value, represent the “accretable yield,” which is recognized as interest income on a level-yield basis over the expected cash flow periods of the loans. Additionally, the difference between contractual cash flows and expected cash flows of PCI loans is referred to as the “non-accretable discount.”
Allowance for Loan Losses – The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in ourmanagement’s judgment, should be charged off.
The allowance consists of specificspecific and general components. The specific component relates to loans that are individually classified as impaired. A loan is deemed impaired when, based on current information and events, it is probable that the CompanyBank will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and treated as impaired.
Factors considered in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. The significance of payment delays and payment shortfalls is determined on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’sloan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans, are collectively evaluated for impairment and are not separately identified for impairment disclosures. Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported at the fair value of the collateral. For troubled debt restructurings that subsequently default, the amount of reserve is determined in accordance with the accounting policy for the allowance for loan losses.
The general component covers non-impairednon‑impaired loans and is based on historical loss experience adjusted for current factors. The historical loss experience is determined by portfolio segment and is based on actual loss history experienced over the most recent fourfive years with weighting towards the most recent periods.equal weighting. This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment. These economic factors include consideration of the following: changes in lending policies, procedures, and practices; effects of any change in risk selection and underwriting standards; national and local economic trends and conditions; industry conditions; trends in volume and terms of loans; experience, ability and depth of lending management and other relevant staff; levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; and effects of changes in credit concentrations.
A portfolio segment is defined as the level at which an entity develops and documents a systematic methodology to determine its allowance for loan losses. Management identified the following portfolio segments: commercial, commercial real estate, residential real estate, consumer, agricultural, and other.
● | Commercial loans are made to businesses and depend on the strength of the industries, related borrowers, and cash flow from the businesses. Commercial loans are advances for equipment purchases, or to provide working capital, or to meet other financing needs of business enterprises. These loans may be secured by accounts receivable, inventory, equipment or other business assets. Financial information is obtained from the borrowers to evaluate their ability to repay the loans. |
● | Commercial real estate loans are affected by the local commercial real estate market and the local economy. Commercial real estate loans include loans on commercial properties occupied by borrowers and/or tenants. Construction and development loans are a component of this segment. These loans are generally secured by land under development or homes and commercial buildings under construction. Loans secured by farmland are also a component of this segment. Appraisals are obtained to support the loan amount. Financial information is obtained from the borrowers and/or the individual project to evaluate cash flows sufficiency to service the debt. |
● | Residential real estate loans are affected by the local residential real estate market, local economy, and, for variable rate mortgages, movement in indices tied to these loans. For owner occupied residential loans, |
● | Consumer loans depend on local economies. Consumer loans are generally |
● | Agriculture loans depend on the industries tied to these loans and are generally secured by livestock, crops, and/or equipment, but may be unsecured. Management evaluates the borrowers’ repayment ability through financial and business performance review. |
● | Other loans include loans to municipalities, loans secured by stock, and overdrafts. For municipal loans, |
Management analyzes key relevant risk characteristics for each portfolio segment having determined that loans in each segment possess similar general risk characteristics that are analyzed in connection with loan underwriting processes and procedures. In determining the allocated allowance, the weighted average loss rates over the most recent fourfive years are used with weighting towards the most recent periods.equal weighting. Commercial real estate qualitative adjustment considerations include trends in the markets for underlying collateral values, risks related to tenant rents, and economic factors such as decreased sales demand, elevated inventory levels, and declining collateral values. Residential real estate loan considerations include macro economicmacro-economic factors such as unemployment rates, trends in vacancy rates, and home value trends. The commercial and agricultural portfolio qualitative adjustments are related to economic and portfolio performance trends. The agricultural, consumer and other portfolios are less significant in terms of size and risk is assessed based on the smaller dollar size of these loans and the more geographical areas where the collateral is located.
Transfers of Financial Assets – Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
Other Real Estate Owned (“OREO”) – Assets acquired through or instead of loan foreclosure are initially recorded at fair value less estimated costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at the lower of cost or fair value, less estimated costs to sell. If fair value declines subsequent to foreclosure, a write-down is recorded through expense. Costs after acquisition are expensed.expensed unless the expenditure is for a recoverable improvement, which may be capitalized.
Premises and Equipment – Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Buildingsdepreciation and related components are depreciated using the straight-line method with useful lives generally ranging from 53 to 40 years. Furniture, fixtures and equipmentLeasehold improvements are depreciatedamortized using the straight-line or accelerated method withover terms of the related leases, including expected renewals, or over the useful lives generally ranging from 2 to 10 years.of the improvements, whichever is shorter. Maintenance and repairs are expensed as incurred while major additions and improvements are capitalized.
Premises and equipment held for sale are recorded at fair value less estimated cost to sell at the time of transfer based upon independent third party appraisal. If fair value declines subsequent to transfer, write-downs are recorded through expense.
Premises and equipment are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value through a charge to earnings.
Federal Home Loan Bank (FHLB) Stock – The Bank is a member of the FHLB system. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment. Because this stock is viewed as long term investment, impairment is based on ultimate recovery of par value. Both cash and stock dividends are reported as income.
Intangible Assets – Intangible assets with definite useful lives are included with other assets and amortized over their estimated useful lives to their estimated residual values, if any. Other intangible assets consist of core deposit intangible assets arising from whole bank and branch acquisitions. They are initially measured at fair value and then are amortized on an accelerated or straight-line basis over their estimated useful lives, which range from 7 to 10 years.
Bank Owned Life Insurance – The Bank has purchased life insurance policies on certain key executives. Company owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.
Long-TermGoodwill and Other Intangible Assets– PremisesGoodwill arises from business combinations and equipment, otheris generally determined as the excess of the fair value of the consideration transferred, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase business combination and other long-term assetsdetermined to have an indefinite useful life are reviewednot amortized, but tested for impairment whenat least annually or more frequently if events and circumstances exists that indicate that a goodwill impairment test should be performed. The Bank has selected November 30 as the date to perform the annual impairment test. Intangible assets with definite useful lives are amortized over their carrying amount may not be recoverableestimated useful lives to their estimated residual values. Goodwill is the only intangible asset with an indefinite life on the Bank’s balance sheet.
Other intangible assets consist of core deposit intangible assets arising from future undiscounted cash flows. If impaired, the assets are recordeda branch acquisition, which were initially measured at fair value through a charge to earnings.and then amortized on an accelerated method over the estimated useful life.
Benefit Plans – Employee 401(k) and profit sharing plan expense is the amount of matching contributions. Deferred compensation and supplemental retirement plan expense allocates the benefits over years of service.
Stock-Based Compensation – Compensation cost is recognized for unvested stock awards issued to employees, based on the fair value of these awards at the date of grant. The market price of the Corporation’sCompany’s common stock at the date of grant is used for restricted stock awards. Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. The Company’s accounting policy is to recognize compensation cost net of forfeitures as they occur.
Income Taxes – Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.
A tax position is recognized as a benefit only if it is "more likely than not" that the tax position would be sustained in a tax examination, with a tax examinationexamination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the "more likely than not" test, no tax benefit is recorded. The Company recognizes interest and/or penalties related to income tax matters in income tax expense.
Loan Commitments and Related Financial Instruments – Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer-financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.upon funding.
Comprehensive Income (Loss)(Loss) – Comprehensive loss consists of net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains and losses on securities available for sale, which are also recognized as a separate component of equity.
Earnings (Loss) Per Common Share – Basic earnings (loss) per common share areis net income (loss) attributable to common shareholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per common share include the dilutive effect, if any, of additional potential common shares issuable under stock options, warrants, and warrants.any convertible securities. Earnings (loss) and dividends per share are restated for all stock splits and dividends through the date of issue of the financial statements.
Earnings (Loss) Allocated to Participating Securities – The Company has issued and outstanding unvested common shares to employees and directors through the stock incentiveits equity compensation plan. Earnings (loss) are allocated to these participating securities based on their percentage of total issued and outstanding shares.
Loss Contingencies – Loss contingencies, including claims and legal actions arising in the ordinarynormal course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated.
Dividend RestrictionsRestrictions – Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Bank to the Company or by the Company to shareholders.
Fair Value of Financial Instruments – Fair values of financial instruments are estimated using relevant market information and other assumptions. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.
DDerivatives –erivative Instruments – Derivative Instrumentsfinancial instruments are carried at fair value and reflect the estimated amounts that would have been received to terminate these contracts at the reporting date based upon pricing or valuation models applied to current market information.
As part of the asset/liability management program, the Company utilizes,utilizes, from time to time, risk participation agreements to reduce its sensitivity to changing interest rates. These are derivative instruments, which are recorded as assets or liabilities in the consolidated balance sheets at fair value. Changes in the fair values of derivatives are reported in the consolidated statements of operations or other comprehensive income (“OCI”) depending on the use of the derivative and whether the instrument qualifies for hedge accounting. The key criterion for the hedge accounting is that the hedged relationship must be highlyfound to be effective in achieving offsettingas determined by FASB ASC 815 Derivatives and Hedging.
The risk participation agreements are not designated against specific assets or liabilities under ASC 815, and, therefore, do not qualify for hedge accounting. The derivatives are recorded on the balance sheet at fair value and changes in those cash flows thatfair value of both the borrower and the offsetting swap agreements are attributable to the hedged risk, both at inception of the hedge and on an ongoing basis.
Derivatives that qualify for the hedge accounting treatment are designated as either: a hedge of therecorded (and essentially offset) in non-interest income. The fair value of the recognized asset or liability orderivative instruments incorporates a consideration of an unrecognized commitment (a fair value hedge) or a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (a cash flow hedge). credit risk in accordance with ASC 820, resulting in some volatility in earnings each period.
To date, the Company has not entered into a cash flow hedge. For cash flow hedges, changes in the fair values of the derivative instruments are reported in OCI to the extent the hedge is effective. The gains and losses on derivative instruments that are reported in OCI are reflected in the consolidated statements of income in the periods in which the results of operations are impacted by the variability of the cash flows of the hedged item. Generally, net interest income is increased or decreased by amounts receivable or payable with respect to the derivatives, which qualify for hedge accounting. At inception of the hedge, a Company must establish the method it uses for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective aspect of the hedge. The ineffective portion of the hedge, if any, is recognized currently in the consolidated statements of operations and time value expiration of the hedge when measuring ineffectiveness is excluded.
The risk participation agreements are not designated against specific assets or liabilities under ASC 815, Derivatives and Hedging, and, therefore, do not qualify for hedge accounting. The derivatives are recorded on the balance sheet at fair value and changes in fair value of both the borrower and the offsetting swap agreements are recorded (and essentially offset) in non-interest income. The fair value of the derivative instruments incorporates a consideration of credit risk in accordance with ASC 820, resulting in some volatility in earnings each period.
Adoption of New Accounting Standards –In August 2015, FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606). This ASU is an update to ASU 2014-09, and delays the effective date of ASU 2014-09. The ASU provides guidance on revenue recognition for entities that enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of nonfinancial assets. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additional disclosures are required to provide quantitative and qualitative information regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new guidance is effective for annual reporting periods, and interim reporting periods within those annual periods, beginning after December 15, 2017. The Company’s revenue is comprised of net interest income on financial assets and liabilities, which is explicitly excluded from the scope of this guidance, and non-interest income. Based on the evaluation of the Company’s non-interest income revenue streams, adoption of this new guidance will not have a material impact on the consolidated financial statements. Changes to the related disclosures are still being finalized.
In January 2016, the FASB issued an update ASU No.2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this update impact public business entities as follows: 1) Require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. 2) Simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value. 3) Eliminate the requirement to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. 4) Require entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. 5) Require an entity to present separately in other comprehensive income the portion of the total change in fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. 6) Require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements. 7) Clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15,2017. The impact of adopting the new guidance did not have a material impact on the consolidated financial statements, but will require additional disclosures. The Company currently does not have any equity investments.
In February 2016, the FASB issued an update ASU No.2016-02, Leases (Topic 842). Under the new guidance, lessees will be required to recognize the following for all leases, with the exception of short-term leases, at the commencement date: a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting in largely unchanged. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2018. The impact of adopting the new guidance on the consolidated financial statements will not have a material impact.
In June 2016, the FASB issued ASU No. 2016-13, –Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The final standard will change estimates for credit losses related to financial assets measured at amortized cost such as loans, held-to-maturity debt securities, and certain other contracts. For estimating credit losses, the FASB is replacing the incurred loss model with an expected loss model, which is referred to as the current expected credit loss (CECL) model. Under the CECL model, certain financial assets that are carried at amortized cost, such as loans held for investment and held-to-maturity debt securities, are required to be presented at the net amount expected to be collected. The measurement of expected credit losses is to be based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This measurement will take place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs significantly from the “incurred loss” model required under current GAAP, which delays recognition until it is probable a loss has been incurred. The change could materially affect how the allowance for loan losses is determined. The standard is effective for public companies for fiscal years beginning after December 15, 2019. Management is currently gathering loan level data, and assessing our data and system needs. The impact of CECL model implementation is being evaluated, but it is expected that a one-time cumulative-effect adjustment to the allowance for loan losses will be recognized in retained earnings on the consolidated balance sheet as of the beginning of the first reporting period in which the new standard is effective, as is consistent with regulatory expectations set forth in interagency guidance. In December 2018, the OCC, The magnitudeBoard of any adjustment orGovernors of the overall impactFederal Reserve System, and the FDIC approved a final rule to address changes to the credit loss accounting under GAAP, including banking organizations’ implementation of CECL. The final rule provides banking organizations the option to phase in over a three-year period the day-one adverse effects on regulatory capital that may result from adoption of the new standard on financial condition or resultsaccounting standard. In October 2019, the FASB voted to delay implementation for smaller reporting companies, private companies, and not-for-profit entities. The Company currently qualifies as a smaller reporting company and, as such, will be required to implement CECL for fiscal year and interim periods beginning after December 15, 2022.
In March 2017,December 2019, the FASB issued ASU No.20172019-08,12, –Receivables – Nonrefundable Fees and Other Costs (Subtopic 310Income Taxes -20): Premium Amortization of Purchased Callable Debt Securities. Simplifying the Accounting for Income Taxes. The final standard will shorten the amortization period for premiums on callable debt securities by requiring that premiums be amortizedremoves specific exceptions to the general principles in Topic first740, (or earliest) call date insteadimproves financial statement preparers’ application of as an adjustmentincome tax-related guidance, and simplifies GAAP. Certain provisions under ASU 2019-12 require prospective application, some require modified retrospective adoption, while other provisions require retrospective application to all periods presented in the yield over the contractual life. The standardconsolidated financial statements upon adoption. ASU 2019-12 is effective for public companies for fiscal years beginning after December 15, 2018.2020, The Company is currently evaluating the impactwith early adoption permitted. Adoption of adopting thethis new guidance on the consolidated financial statements.
In February 2018, the FASB issued ASU No. 2018-02, –Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects From Other Comprehensive Income. The final standard allows institutions to elect to reclassify the stranded tax effects from AOCI to retained earnings, limited to amounts in AOCI that are affected by the tax reform law. This includes remeasuring deferred tax assets and liabilities related to items presented in AOCI at the newly enacted tax rate and on other income tax effects of items remaining in AOCI. The standard is effective for public companies for fiscal years beginning after December 15, 2018, and interim periods during 2018. Early adoption is permitted. The Company will adopt the standard in the first quarter of 2018 and adoption will not have a material impact on the consolidated financial statements.
NOTE NOTE 2– – SECURITIES
Securities are classified intoas available for sale (AFS) and held to maturity (HTM) categories.. AFS securities are those that may be sold if needed for liquidity, asset liability management, or other reasons. AFS securities are reported at fair value, with unrealized gains or losses included as a separate component of equity, net of tax. HTM securities are those that the Bank has the intent and ability to hold to maturity and are reported at amortized cost.
The amortized cost and fair value of securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows:
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||||||||||||||
December 31, 2017 | (in thousands) | |||||||||||||||||||||||||||||||
December 31, 2020 | (in thousands) | |||||||||||||||||||||||||||||||
Available for sale | ||||||||||||||||||||||||||||||||
U.S. Government and federal agency | $ | 22,105 | $ | 2 | $ | (483 | ) | $ | 21,624 | $ | 18,811 | $ | 806 | $ | 0 | $ | 19,617 | |||||||||||||||
Agency mortgage-backed: residential | 65,935 | 117 | (1,087 | ) | 64,965 | 71,582 | 2,777 | (26 | ) | 74,333 | ||||||||||||||||||||||
Collateralized loan obligations | 25,343 | 182 | (20 | ) | 25,505 | 44,730 | 0 | (1,578 | ) | 43,152 | ||||||||||||||||||||||
State and municipal | 33,303 | 508 | (101 | ) | 33,710 | 34,759 | 1,296 | 0 | 36,055 | |||||||||||||||||||||||
Corporate bonds | 6,838 | 78 | — | 6,916 | 31,635 | 472 | (1,402 | ) | 30,705 | |||||||||||||||||||||||
Total available for sale | $ | 153,524 | $ | 887 | $ | (1,691 | ) | $ | 152,720 | $ | 201,517 | $ | 5,351 | $ | (3,006 | ) | $ | 203,862 |
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||||
December 31, 2016 | (in thousands) | ||||||||||||||||
Available for sale | |||||||||||||||||
U.S. Government and federal agency | $ | 34,757 | $ | 50 | $ | (708 | ) | $ | 34,099 | ||||||||
Agency mortgage-backed: residential | 103,390 | 455 | (1,492 | ) | 102,353 | ||||||||||||
Collateralized loan obligations | 11,203 | — | — | 11,203 | |||||||||||||
State and municipal | 2,028 | 25 | (8 | ) | 2,045 | ||||||||||||
Corporate bonds | 3,069 | 24 | (3 | ) | 3,090 | ||||||||||||
Total available for sale | $ | 154,447 | $ | 554 | $ | (2,211 | ) | $ | 152,790 |
Amortized Cost | Gross Unrecognized Gains | Gross Unrecognized Losses | Fair Value | |||||||||||||
Held to maturity | ||||||||||||||||
State and municipal | $ | 41,818 | $ | 1,272 | $ | (18 | ) | $ | 43,072 | |||||||
Total held to maturity | $ | 41,818 | $ | 1,272 | $ | (18 | ) | $ | 43,072 |
In 2013, the Bank transferred a portion of its tax-free municipal and taxable municipal bond portfolios from AFS to HTM. At that time, the transfer occurred at fair value with the unrealized loss of $1.3 million remaining in other comprehensive income. That unrealized loss has subsequently been amortized on the level yield method out of other comprehensive income with an offsetting entry reducing interest income as a yield adjustment through earnings. No gain or loss was recorded at the time of transfer in 2013. Given the Bank’s current balance sheet composition, interest rate risk profile, the current tax environment, and the Bank’s strategic plan, management reassessed the classification of the held to maturity securities and, effective December 1, 2017, transferred $41.4 million of tax-free municipals and taxable municipals from HTM to AFS. As a result, the $702,000 in remaining unamortized loss from the 2013 transfer was reclassified through a book value adjustment of these securities. At December 31, 2017, these securities were carried at fair value with unrealized holding gains and losses reported in other comprehensive income, net of tax, with the remaining securities classified as AFS.
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
December 31, 2019 | (in thousands) | |||||||||||||||
Available for sale | ||||||||||||||||
U.S. Government and federal agency | $ | 22,281 | $ | 196 | $ | (147 | ) | $ | 22,330 | |||||||
Agency mortgage-backed: residential | 91,269 | 1,186 | (255 | ) | 92,200 | |||||||||||
Collateralized loan obligations | 49,831 | 0 | (412 | ) | 49,419 | |||||||||||
State and municipal | 27,819 | 550 | (3 | ) | 28,366 | |||||||||||
Corporate bonds | 16,472 | 213 | 0 | 16,685 | ||||||||||||
Total available for sale | $ | 207,672 | $ | 2,145 | $ | (817 | ) | $ | 209,000 |
Sales and calls of securities were as follows:
2020 | 2019 | 2018 | ||||||||||
(in thousands) | ||||||||||||
Proceeds | $ | 9,030 | $ | 5,351 | $ | 6,054 | ||||||
Gross gains | 0 | 1 | 0 | |||||||||
Gross losses | 5 | 6 | 6 |
2017 | 2016 | 2015 | ||||||||||
(in thousands) | ||||||||||||
Proceeds | $ | 41,733 | $ | 8,311 | $ | 45,012 | ||||||
Gross gains | 449 | 245 | 1,902 | |||||||||
Gross losses | 161 | 29 | 136 |
The tax provision related to net gains and losses realized on sales was $101,000,$76,000, and $618,000, respectively.
TheThe amortized cost and fair value of our debt securities are shown by contractual maturity. Expected maturities may differ from actual maturities when borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed securities not due at a single maturity date are shown separately.
December 31, 2017 | December 31, 2020 | |||||||||||||||
Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Maturity | ||||||||||||||||
Available for sale | ||||||||||||||||
Within one year | $ | 14,648 | $ | 14,682 | $ | 19,141 | $ | 18,217 | ||||||||
One to five years | 40,197 | 40,675 | 44,757 | 46,185 | ||||||||||||
Five to ten years | 32,744 | 32,398 | 44,902 | 45,148 | ||||||||||||
Beyond ten years | 21,135 | 19,979 | ||||||||||||||
Agency mortgage-backed: residential | 65,935 | 64,965 | 71,582 | 74,333 | ||||||||||||
Total | $ | 153,524 | $ | 152,720 | $ | 201,517 | $ | 203,862 |
Securities pledged at year-end 20172020 and 20162019 had carrying values of approximately $76.8$81.4 million and $61.2$75.8 million, respectively, and were pledged to secure public deposits.
At December 31, 20172020 and 2016,2019, the Bank held securities issued by the Commonwealth of Kentucky or Kentucky municipalities having a book value of $15.4$23.0 million and $16.4$14.5 million, respectively. At year-end 2017,2020, there were no other holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders’ equity.
The Company evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation.basis. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, underlying credit quality of the issuer, and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer’sissuer’s financial condition, the Company may consider whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, the sector or industry trends and cycles affecting the issuer, and the results of reviews of the issuer’s financial condition. As of December 31, 2017,2020, management does not believe any securities in the portfolio with unrealized losses should be classified as other than temporarily impaired.
The Bank owns Collateralized Loan Obligations (CLOs), which are debt securities secured by professionally managed portfolios of senior-secured loans to corporations. CLOs are typically $300 million to $1 billion in size, contain one hundred or more loans, have five to six credit tranches ranging from AAA, AA, A, BBB, BB, B and equity tranche. Interest and principal are paid first to the AAA tranche then to the next lower rated tranche. Losses are borne first by the equity tranche then by the subsequently higher rated tranche. CLOs may be less liquid than government securities from time to time and volatility in the CLO market may cause the value of these investments to decline.
The market value of CLOs may be affected by, among other things, changes in composition of the underlying loans, changes in the market values of the underlying loans, changes in the cash flows from the underlying loans, defaults and recoveries on the underlying loans, capital gains and losses on the underlying loans, prepayments on the underlying loans, and other conditions or economic factors.
At December 31, 2020, $27.1 million, $13.6 million, and $2.4 million of the Bank’s CLOs were AA, A, and BBB rated, respectively. There was one CLO rated below A at BBB, which was downgraded during the third quarter of 2020. Stress testing was completed on each security in the CLO portfolio as of year-end to determine the conditions necessary for the Bank’s investment to incur the first dollar of loss. Each security in the portfolio passed, without dollar loss, a stress scenario characterized as severe, which assumed a ten percent per annum constant prepayment rate, a twelve percent per annum constant default rate for four years followed by a four percent rate thereafter, and a forty-five percent recovery rate on a one-year lag.
The corporate bond portfolio consists of 13 subordinated debt securities and one senior debt security of U.S. banks and bank holding companies with maturities ranging from 2024 to 2037. The securities are either initially fixed for five years converting to floating at an index over LIBOR, or SOFR, or floating at an index over LIBOR, or SOFR, from inception. Management regularly monitors the financial condition of these corporate issuers by reviewing their regulatory and public filings.
Securities with unrealized losses at December 31, 20172020 and December 31, 2016,2019, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position, are as follows:
Less than 12 Months 12 Months or More Total Description of Securities Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss (in thousands) 2020 Available for sale U.S. Government and federal agency Agency mortgage-backed: residential ) ) Collateralized loan obligations ) ) ) State and municipal Corporate bonds ) ) Total temporarily impaired ) ) )
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Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
Description of Securities | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | ||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
2016 | ||||||||||||||||||||||||
Available for sale | ||||||||||||||||||||||||
U.S. Government and federal agency | $ | 27,738 | $ | (708 | ) | $ | — | $ | — | $ | 27,738 | $ | (708 | ) | ||||||||||
Agency mortgage-backed: residential | 63,460 | (1,449 | ) | 2,745 | (43 | ) | 66,205 | (1,492 | ) | |||||||||||||||
State and municipal | 465 | (8 | ) | — | — | 465 | (8 | ) | ||||||||||||||||
Corporate bonds | — | — | 1,566 | (3 | ) | 1,566 | (3 | ) | ||||||||||||||||
Total temporarily impaired | $ | 91,663 | $ | (2,165 | ) | $ | 4,311 | $ | (46 | ) | $ | 95,974 | $ | (2,211 | ) | |||||||||
Held to maturity | ||||||||||||||||||||||||
State and municipal | 1,540 | (18 | ) | — | — | 1,540 | (18 | ) | ||||||||||||||||
Total | $ | 1,540 | $ | (18 | ) | $ | — | $ | — | $ | 1,540 | $ | (18 | ) |
NOTE NOTE 3 –– LOANS
Loans net of unearned income, deferred loan origination costs, and net premiums on acquired loans by class were as follows:
2017 | 2016 | 2020 | 2019 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Commercial | $ | 113,771 | $ | 97,761 | $ | 208,244 | $ | 145,551 | ||||||||
Commercial Real Estate: | ||||||||||||||||
Construction | 57,342 | 36,330 | 92,916 | 64,911 | ||||||||||||
Farmland | 88,320 | 71,507 | 70,272 | 79,118 | ||||||||||||
Nonfarm nonresidential | 156,724 | 149,546 | 266,394 | 255,459 | ||||||||||||
Residential Real Estate: | ||||||||||||||||
Multi-family | 56,588 | 48,197 | 61,180 | 70,950 | ||||||||||||
1-4 Family | 179,222 | 188,092 | 188,955 | 226,629 | ||||||||||||
Consumer | 18,439 | 9,818 | 31,429 | 47,790 | ||||||||||||
Agriculture | 41,154 | 37,508 | 42,044 | 35,064 | ||||||||||||
Other | 555 | 477 | 647 | 799 | ||||||||||||
Subtotal | 712,115 | 639,236 | 962,081 | 926,271 | ||||||||||||
Less: Allowance for loan losses | (8,202 | ) | (8,967 | ) | (12,443 | ) | (8,376 | ) | ||||||||
Loans, net | $ | 703,913 | $ | 630,269 | $ | 949,638 | $ | 917,895 |
(1) | Includes PPP loans of $20.3 million at December 31, 2020. |
The following table presents the activity in the allowance for loan losses by portfolio segment for the yearyears ended December 31, 2020, 2017,2016,2019, and 2015:2018:
Commercial | Commercial Real Estate | Residential Real Estate | Consumer | Agriculture | Other | Total | Commercial | Commercial Real Estate | Residential Real Estate | Consumer | Agriculture | Other | Total | |||||||||||||||||||||||||||||||||||||||||||
December 31, 2017: | (in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
December 31, 2020: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Beginning balance | $ | 475 | $ | 4,894 | $ | 3,426 | $ | 8 | $ | 162 | $ | 2 | $ | 8,967 | $ | 1,710 | $ | 4,080 | $ | 1,743 | $ | 485 | $ | 355 | $ | 3 | $ | 8,376 | ||||||||||||||||||||||||||||
Provision (negative provision) | 363 | (1,223 | ) | (129 | ) | (8 | ) | 213 | (16 | ) | (800 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Provision (negative provision) | 822 | 2,870 | 135 | 324 | 261 | (12 | ) | 4,400 | ||||||||||||||||||||||||||||||||||||||||||||||||
Loans charged off | (5 | ) | (58 | ) | (692 | ) | (51 | ) | (95 | ) | – | (901 | ) | (32 | ) | (101 | ) | (130 | ) | (493 | ) | (46 | ) | 0 | (802 | ) | ||||||||||||||||||||||||||||||
Recoveries | 59 | 419 | 295 | 115 | 33 | 15 | 936 | 29 | 201 | 151 | 45 | 30 | 13 | 469 | ||||||||||||||||||||||||||||||||||||||||||
Ending balance | $ | 892 | $ | 4,032 | $ | 2,900 | $ | 64 | $ | 313 | $ | 1 | $ | 8,202 | $ | 2,529 | $ | 7,050 | $ | 1,899 | $ | 361 | $ | 600 | $ | 4 | $ | 12,443 |
Commercial | Commercial Real Estate | Residential Real Estate | Consumer | Agriculture | Other | Total | ||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||
December 31, 2019: | ||||||||||||||||||||||||||||
Beginning balance | $ | 1,299 | $ | 4,676 | $ | 2,452 | $ | 130 | $ | 321 | $ | 2 | $ | 8,880 | ||||||||||||||
Provision (negative provision) | 342 | (622 | ) | (958 | ) | 943 | 297 | (2 | ) | 0 | ||||||||||||||||||
Loans charged off | (37 | ) | (47 | ) | (275 | ) | (663 | ) | (266 | ) | 0 | (1,288 | ) | |||||||||||||||
Recoveries | 106 | 73 | 524 | 75 | 3 | 3 | 784 | |||||||||||||||||||||
Ending balance | $ | 1,710 | $ | 4,080 | $ | 1,743 | $ | 485 | $ | 355 | $ | 3 | $ | 8,376 |
Commercial | Commercial Real Estate | Residential Real Estate | Consumer | Agriculture | Other | Total | ||||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||
December 31, 2018: | ||||||||||||||||||||||||||||
Beginning balance | $ | 892 | $ | 4,032 | $ | 2,900 | $ | 64 | $ | 313 | $ | 1 | $ | 8,202 | ||||||||||||||
Provision (negative provision) | 196 | (192 | ) | (599 | ) | 92 | 6 | (3 | ) | (500 | ) | |||||||||||||||||
Loans charged off | (50 | ) | (198 | ) | (252 | ) | (95 | ) | (13 | ) | (8 | ) | (616 | ) | ||||||||||||||
Recoveries | 261 | 1,034 | 403 | 69 | 15 | 12 | 1,794 | |||||||||||||||||||||
Ending balance | $ | 1,299 | $ | 4,676 | $ | 2,452 | $ | 130 | $ | 321 | $ | 2 | $ | 8,880 |
December 31, 2016: | ||||||||||||||||||||||||||||
Beginning balance | $ | 818 | $ | 6,993 | $ | 3,984 | $ | 122 | $ | 122 | $ | 2 | $ | 12,041 | ||||||||||||||
Provision (negative provision) | (401 | ) | (2,438 | ) | 749 | (314 | ) | (56 | ) | 10 | (2,450 | ) | ||||||||||||||||
Loans charged off | (276 | ) | (505 | ) | (1,652 | ) | (99 | ) | (18 | ) | (79 | ) | (2,629 | ) | ||||||||||||||
Recoveries | 334 | 844 | 345 | 299 | 114 | 69 | 2,005 | |||||||||||||||||||||
Ending balance | $ | 475 | $ | 4,894 | $ | 3,426 | $ | 8 | $ | 162 | $ | 2 | $ | 8,967 |
December 31, 2015: | ||||||||||||||||||||||||||||
Beginning balance | $ | 2,046 | $ | 10,931 | $ | 5,787 | $ | 274 | $ | 319 | $ | 7 | $ | 19,364 | ||||||||||||||
Provision (negative provision) | (1,255 | ) | (2,713 | ) | (316 | ) | (115 | ) | (87 | ) | (14 | ) | (4,500 | ) | ||||||||||||||
Loans charged off | (696 | ) | (2,879 | ) | (2,171 | ) | (221 | ) | (118 | ) | (47 | ) | (6,132 | ) | ||||||||||||||
Recoveries | 723 | 1,654 | 684 | 184 | 8 | 56 | 3,309 | |||||||||||||||||||||
Ending balance | $ | 818 | $ | 6,993 | $ | 3,984 | $ | 122 | $ | 122 | $ | 2 | $ | 12,041 |
TheThe following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method as of December 31, 2017:2020:
Commercial | Commercial Real Estate | Residential Real Estate | Consumer | Agriculture | Other | Total | Commercial | Commercial Real Estate | Residential Real Estate | Consumer | Agriculture | Other | Total | |||||||||||||||||||||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Ending allowance balance attributable to loans: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 13 | $ | – | $ | 206 | $ | – | $ | – | $ | – | $ | 219 | $ | 0 | $ | 2,176 | $ | 1 | $ | 0 | $ | 0 | $ | 0 | $ | 2,177 | ||||||||||||||||||||||||||||
Collectively evaluated for impairment | 879 | 4,032 | 2,694 | 64 | 313 | 1 | 7,983 | 2,529 | 4,874 | 1,898 | 361 | 600 | 4 | 10,266 | ||||||||||||||||||||||||||||||||||||||||||
Total ending allowance balance | $ | 892 | $ | 4,032 | $ | 2,900 | $ | 64 | $ | 313 | $ | 1 | $ | 8,202 | $ | 2,529 | $ | 7,050 | $ | 1,899 | $ | 361 | $ | 600 | $ | 4 | $ | 12,443 | ||||||||||||||||||||||||||||
Loans: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loans individually evaluated for impairment | $ | 587 | $ | 2,635 | $ | 3,950 | $ | 1 | $ | – | $ | – | $ | 7,173 | $ | 0 | $ | 5,361 | $ | 1,060 | $ | 0 | $ | 91 | $ | 0 | $ | 6,512 | ||||||||||||||||||||||||||||
Loans collectively evaluated for impairment | 113,184 | 299,751 | 231,860 | 18,438 | 41,154 | 555 | 704,942 | 208,244 | 424,221 | 249,075 | 31,429 | 41,953 | 647 | 955,569 | ||||||||||||||||||||||||||||||||||||||||||
Total ending loans balance | $ | 113,771 | $ | 302,386 | $ | 235,810 | $ | 18,439 | $ | 41,154 | $ | 555 | $ | 712,115 | $ | 208,244 | $ | 429,582 | $ | 250,135 | $ | 31,429 | $ | 42,044 | $ | 647 | $ | 962,081 |
TheThe following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method as of December 31, 2016:2019:
Commercial | Commercial Real Estate | Residential Real Estate | Consumer | Agriculture | Other | Total | Commercial | Commercial Real Estate | Residential Real Estate | Consumer | Agriculture | Other | Total | |||||||||||||||||||||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Ending allowance balance attributable to loans: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 13 | $ | 35 | $ | 350 | $ | – | $ | 1 | $ | – | $ | 399 | $ | 3 | $ | 37 | $ | 2 | $ | 0 | $ | 0 | $ | 0 | $ | 42 | ||||||||||||||||||||||||||||
Collectively evaluated for impairment | 462 | 4,859 | 3,076 | 8 | 161 | 2 | 8,568 | 1,707 | 4,043 | 1,741 | 485 | 355 | 3 | 8,334 | ||||||||||||||||||||||||||||||||||||||||||
Total ending allowance balance | $ | 475 | $ | 4,894 | $ | 3,426 | $ | 8 | $ | 162 | $ | 2 | $ | 8,967 | $ | 1,710 | $ | 4,080 | $ | 1,743 | $ | 485 | $ | 355 | $ | 3 | $ | 8,376 | ||||||||||||||||||||||||||||
Loans: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loans individually evaluated for impairment | $ | 595 | $ | 5,854 | $ | 8,621 | $ | 1 | $ | 60 | $ | – | $ | 15,131 | $ | 74 | $ | 1,064 | $ | 892 | $ | 98 | $ | 42 | $ | 0 | $ | 2,170 | ||||||||||||||||||||||||||||
Loans collectively evaluated for impairment | 97,166 | 251,529 | 227,668 | 9,817 | 37,448 | 477 | 624,105 | 145,477 | 398,424 | 296,687 | 47,692 | 35,022 | 799 | 924,101 | ||||||||||||||||||||||||||||||||||||||||||
Total ending loans balance | $ | 97,761 | $ | 257,383 | $ | 236,289 | $ | 9,818 | $ | 37,508 | $ | 477 | $ | 639,236 | $ | 145,551 | $ | 399,488 | $ | 297,579 | $ | 47,790 | $ | 35,064 | $ | 799 | $ | 926,271 |
ImpairedImpaired Loans
ImpairedImpaired loans include restructured loans and loans on nonaccrual or classified as doubtful, whereby collection of the total amount is improbable, or loss, whereby all or a portion of the loan has been written off or a specific allowance for loss had been provided.
The following table presents information related to loans individually evaluated for impairment by class of loan as of and for the year ended December 31, 2017:2020:
Unpaid Principal Balance | Recorded Investment | Allowance For Loan Losses Allocated | Average Recorded Investment | Interest Income Recognized | Cash Basis Income Recognized | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
With No Related Allowance Recorded: | ||||||||||||||||||||||||
Commercial | $ | 703 | $ | 487 | $ | — | $ | 495 | $ | 7 | $ | 7 | ||||||||||||
Commercial real estate: | ||||||||||||||||||||||||
Construction | — | — | — | — | — | — | ||||||||||||||||||
Farmland | 3,687 | 2,059 | — | 2,651 | 210 | 210 | ||||||||||||||||||
Nonfarm nonresidential | 1,047 | 576 | — | 716 | 59 | 47 | ||||||||||||||||||
Residential real estate: | ||||||||||||||||||||||||
Multi-family | — | — | — | 820 | — | — | ||||||||||||||||||
1-4 Family | 4,293 | 2,787 | — | 2,884 | 143 | 143 | ||||||||||||||||||
Consumer | 9 | 1 | — | 2 | 2 | 2 | ||||||||||||||||||
Agriculture | — | — | — | 24 | 1 | 1 | ||||||||||||||||||
Other | — | — | — | — | — | — | ||||||||||||||||||
Subtotal | 9,739 | 5,910 | — | 7,592 | 422 | 410 | ||||||||||||||||||
With An Allowance Recorded: | ||||||||||||||||||||||||
Commercial | 100 | 100 | 13 | 100 | 7 | — | ||||||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||
Construction | — | — | — | — | — | — | ||||||||||||||||||
Farmland | — | — | — | 235 | — | — | ||||||||||||||||||
Nonfarm nonresidential | — | — | — | 238 | 14 | — | ||||||||||||||||||
Residential real estate: | ||||||||||||||||||||||||
Multi-family | — | — | — | — | — | — | ||||||||||||||||||
1-4 Family | 1,163 | 1,163 | 206 | 1,404 | 68 | — | ||||||||||||||||||
Consumer | — | — | — | — | — | — | ||||||||||||||||||
Agriculture | — | — | — | 24 | — | — | ||||||||||||||||||
Other | — | — | — | — | — | — | ||||||||||||||||||
Subtotal | 1,263 | 1,263 | 219 | 2,001 | 89 | — | ||||||||||||||||||
Total | $ | 11,002 | $ | 7,173 | $ | 219 | $ | 9,593 | $ | 511 | $ | 410 |
Unpaid Principal Balance | Recorded Investment | Allowance For Loan Losses Allocated | Average Recorded Investment | Interest Income Recognized | Cash Basis Income Recognized | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
With No Related Allowance Recorded: | ||||||||||||||||||||||||
Commercial | $ | 308 | $ | 0 | $ | — | $ | 82 | $ | 16 | $ | 16 | ||||||||||||
Commercial real estate: | ||||||||||||||||||||||||
Construction | 0 | 0 | — | 0 | 0 | 0 | ||||||||||||||||||
Farmland | 555 | 456 | — | 326 | 45 | 45 | ||||||||||||||||||
Nonfarm nonresidential | 1,323 | 549 | — | 501 | 44 | 15 | ||||||||||||||||||
Residential real estate: | ||||||||||||||||||||||||
Multi-family | 0 | 0 | — | 0 | 0 | 0 | ||||||||||||||||||
1-4 Family | 1,883 | 954 | — | 894 | 86 | 83 | ||||||||||||||||||
Consumer | 259 | 0 | — | 55 | 3 | 3 | ||||||||||||||||||
Agriculture | 393 | 91 | — | 27 | 0 | 0 | ||||||||||||||||||
Other | 0 | 0 | — | 0 | 0 | 0 | ||||||||||||||||||
Subtotal | 4,721 | 2,050 | — | 1,885 | 194 | 162 | ||||||||||||||||||
With An Allowance Recorded: | ||||||||||||||||||||||||
Commercial | 0 | 0 | 0 | 5 | 0 | 0 | ||||||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||
Construction | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Farmland | 0 | 0 | 0 | 198 | 4 | 0 | ||||||||||||||||||
Nonfarm nonresidential | 6,465 | 4,356 | 2,176 | 901 | 263 | 0 | ||||||||||||||||||
Residential real estate: | ||||||||||||||||||||||||
Multi-family | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
1-4 Family | 106 | 106 | 1 | 102 | 9 | 0 | ||||||||||||||||||
Consumer | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Agriculture | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Other | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Subtotal | 6,571 | 4,462 | 2,177 | 1,206 | 276 | 0 | ||||||||||||||||||
Total | $ | 11,292 | $ | 6,512 | $ | 2,177 | $ | 3,091 | $ | 470 | $ | 162 |
The following table presents information related to loans individually evaluated for impairment by class of loan as of and for the year ended December 31, 2019:2016:
Unpaid Principal Balance | Recorded Investment | Allowance For Loan Losses Allocated | Average Recorded Investment | Interest Income Recognized | Cash Basis Income Recognized | Unpaid Principal Balance | Recorded Investment | Allowance For Loan Losses Allocated | Average Recorded Investment | Interest Income Recognized | Cash Basis Income Recognized | |||||||||||||||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
With No Related Allowance Recorded: | ||||||||||||||||||||||||||||||||||||||||||||||||
Commercial | $ | 707 | $ | 495 | $ | — | $ | 758 | $ | 39 | $ | 39 | $ | 138 | $ | 50 | $ | — | $ | 57 | $ | 3 | $ | 3 | ||||||||||||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||||||||||||||||||||||||||
Construction | — | — | — | 156 | 9 | — | 0 | 0 | — | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||||||
Farmland | 5,566 | 3,742 | — | 4,188 | 94 | 95 | 380 | 293 | — | 179 | 23 | 23 | ||||||||||||||||||||||||||||||||||||
Nonfarm nonresidential | 4,502 | 1,219 | — | 4,699 | 310 | 189 | 1,057 | 489 | — | 295 | 34 | 3 | ||||||||||||||||||||||||||||||||||||
Residential real estate: | ||||||||||||||||||||||||||||||||||||||||||||||||
Multi-family | 4,100 | 4,100 | — | 2,608 | 287 | 1 | 0 | 0 | — | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||||||
1-4 Family | 4,663 | 2,910 | — | 5,509 | 162 | 94 | 1,679 | 745 | — | 1,402 | 219 | 191 | ||||||||||||||||||||||||||||||||||||
Consumer | 41 | 1 | — | 7 | 8 | 8 | 309 | 98 | — | 56 | 6 | 6 | ||||||||||||||||||||||||||||||||||||
Agriculture | — | — | — | 73 | 28 | 28 | 304 | 42 | — | 47 | 3 | 3 | ||||||||||||||||||||||||||||||||||||
Other | — | — | — | — | — | — | 0 | 0 | — | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||||||
Subtotal | 19,579 | 12,467 | — | 17,998 | 937 | 454 | 3,867 | 1,717 | — | 2,036 | 288 | 229 | ||||||||||||||||||||||||||||||||||||
With An Allowance Recorded: | ||||||||||||||||||||||||||||||||||||||||||||||||
Commercial | 100 | 100 | 13 | 20 | 6 | — | 24 | 24 | 3 | 15 | 2 | 0 | ||||||||||||||||||||||||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||||||||||||||||||||||||||
Construction | — | — | — | — | — | — | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||||||
Farmland | 614 | 590 | 5 | 358 | — | — | 282 | 282 | 37 | 236 | 9 | 0 | ||||||||||||||||||||||||||||||||||||
Nonfarm nonresidential | 303 | 303 | 30 | 398 | 23 | — | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||||||
Residential real estate: | ||||||||||||||||||||||||||||||||||||||||||||||||
Multi-family | — | — | — | 2,506 | 101 | — | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||||||
1-4 Family | 1,676 | 1,611 | 350 | 1,659 | 111 | — | 183 | 147 | 2 | 459 | 6 | 0 | ||||||||||||||||||||||||||||||||||||
Consumer | — | — | — | — | — | — | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||||||
Agriculture | 78 | 60 | 1 | 39 | — | — | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||||||
Other | — | — | — | — | — | — | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||||||||
Subtotal | 2,771 | 2,664 | 399 | 4,980 | 241 | — | 489 | 453 | 42 | 710 | 17 | 0 | ||||||||||||||||||||||||||||||||||||
Total | $ | 22,350 | $ | 15,131 | $ | 399 | $ | 22,978 | $ | 1,178 | $ | 454 | $ | 4,356 | $ | 2,170 | $ | 42 | $ | 2,746 | $ | 305 | $ | 229 |
The following table presents information related to loans individually evaluated for impairment by class of loan as of and for the year ended December 31, 2015:2018:
Unpaid Principal Balance | Recorded Investment | Allowance For Loan Losses Allocated | Average Recorded Investment | Interest Income Recognized | Cash Basis Income Recognized | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
With No Related Allowance Recorded: | ||||||||||||||||||||||||
Commercial | $ | 1,558 | $ | 1,112 | $ | — | $ | 1,526 | $ | 5 | $ | 5 | ||||||||||||
Commercial real estate: | ||||||||||||||||||||||||
Construction | 278 | 262 | — | 1,993 | 14 | 1 | ||||||||||||||||||
Farmland | 6,004 | 4,263 | — | 4,497 | 114 | 114 | ||||||||||||||||||
Nonfarm nonresidential | 11,256 | 7,829 | — | 16,073 | 263 | 9 | ||||||||||||||||||
Residential real estate: | ||||||||||||||||||||||||
Multi-family | 32 | 32 | — | 35 | — | — | ||||||||||||||||||
1-4 Family | 14,066 | 11,756 | — | 13,584 | 456 | 99 | ||||||||||||||||||
Consumer | 118 | 20 | — | 23 | — | — | ||||||||||||||||||
Agriculture | 260 | 152 | — | 206 | — | — | ||||||||||||||||||
Other | — | — | — | 49 | 5 | 5 | ||||||||||||||||||
Subtotal | 33,572 | 25,426 | — | 37,986 | 857 | 233 | ||||||||||||||||||
With An Allowance Recorded: | ||||||||||||||||||||||||
Commercial | — | — | — | 13 | — | — | ||||||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||
Construction | — | — | — | — | — | — | ||||||||||||||||||
Farmland | — | — | — | 63 | — | — | ||||||||||||||||||
Nonfarm nonresidential | 574 | 465 | 43 | 4,591 | 25 | — | ||||||||||||||||||
Residential real estate: | ||||||||||||||||||||||||
Multi-family | 4,195 | 4,195 | 57 | 4,229 | 204 | — | ||||||||||||||||||
1-4 Family | 1,690 | 1,690 | 328 | 1,705 | 89 | — | ||||||||||||||||||
Consumer | — | — | — | 8 | — | — | ||||||||||||||||||
Agriculture | — | — | — | — | — | — | ||||||||||||||||||
Other | — | — | — | — | — | — | ||||||||||||||||||
Subtotal | 6,459 | 6,350 | 428 | 10,609 | 318 | — | ||||||||||||||||||
Total | $ | 40,031 | $ | 31,776 | $ | 428 | $ | 48,595 | $ | 1,175 | $ | 233 |
Unpaid Principal Balance | Recorded Investment | Allowance For Loan Losses Allocated | Average Recorded Investment | Interest Income Recognized | Cash Basis Income Recognized | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
With No Related Allowance Recorded: | ||||||||||||||||||||||||
Commercial | $ | 120 | $ | 53 | $ | — | $ | 125 | $ | 0 | $ | 0 | ||||||||||||
Commercial real estate: | ||||||||||||||||||||||||
Construction | 0 | 0 | — | 0 | 0 | 0 | ||||||||||||||||||
Farmland | 1,860 | 89 | — | 1,156 | 360 | 360 | ||||||||||||||||||
Nonfarm nonresidential | 402 | 262 | — | 327 | 19 | 0 | ||||||||||||||||||
Residential real estate: | ||||||||||||||||||||||||
Multi-family | 0 | 0 | — | 0 | 0 | 0 | ||||||||||||||||||
1-4 Family | 2,678 | 1,628 | — | 1,964 | 0 | 0 | ||||||||||||||||||
Consumer | 12 | 0 | — | 1 | 0 | 0 | ||||||||||||||||||
Agriculture | 0 | 0 | — | 0 | 0 | 0 | ||||||||||||||||||
Other | 0 | 0 | — | 0 | 0 | 0 | ||||||||||||||||||
Subtotal | 5,072 | 2,032 | — | 3,573 | 379 | 360 | ||||||||||||||||||
With An Allowance Recorded: | ||||||||||||||||||||||||
Commercial | 0 | 0 | 0 | 60 | 3 | 0 | ||||||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||
Construction | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Farmland | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Nonfarm nonresidential | 159 | 159 | 35 | 100 | 0 | 0 | ||||||||||||||||||
Residential real estate: | ||||||||||||||||||||||||
Multi-family | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
1-4 Family | 720 | 720 | 168 | 1,111 | 0 | 0 | ||||||||||||||||||
Consumer | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Agriculture | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Other | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||
Subtotal | 879 | 879 | 203 | 1,271 | 3 | 0 | ||||||||||||||||||
Total | $ | 5,951 | $ | 2,911 | $ | 203 | $ | 4,844 | $ | 382 | $ | 360 |
Troubled Debt Restructuring
A troubled debt restructuring (TDR) occurs when the Bank has agreed to a loan modification in the form of a concession for a borrower who is experiencing financial difficulty. The Bank’s TDRs typically involve a reduction in interest rate, a deferral of principal for a stated period of time, or an interest only period. All TDRs are considered impaired and the Bank has allocated reserves for these loans to reflect the present value of the concessionary terms granted to the borrower.
The following table presents the types of TDR loan modifications by portfolio segment outstanding as of December 31, 20172020 and 2016:2019:
TDRs Performing to Modified Terms | TDRs Not Performing to Modified Terms | Total TDRs | ||||||||||
(in thousands) | ||||||||||||
December 31, 2020 | ||||||||||||
Commercial Real Estate: | ||||||||||||
Nonfarm nonresidential | $ | 374 | $ | 0 | $ | 374 | ||||||
Residential Real Estate: | ||||||||||||
1-4 Family | 106 | 0 | 106 | |||||||||
Total TDRs | $ | 480 | $ | 0 | $ | 480 |
TDRs Performing to Modified Terms | TDRs Not Performing to Modified Terms | Total TDRs | ||||||||||
(in thousands) | ||||||||||||
December 31, 2017 | ||||||||||||
Commercial | ||||||||||||
Rate reduction | $ | — | $ | 33 | $ | 33 | ||||||
Principal deferral | — | 434 | 434 | |||||||||
Commercial Real Estate: | ||||||||||||
Farmland | ||||||||||||
Principal deferral | — | 1,362 | 1,362 | |||||||||
Nonfarm nonresidential | ||||||||||||
Rate reduction | 483 | — | 483 | |||||||||
Residential Real Estate: | ||||||||||||
1-4 Family | ||||||||||||
Rate reduction | 734 | — | 734 | |||||||||
Total TDRs | $ | 1,217 | $ | 1,829 | $ | 3,046 | ||||||
December 31, 2016 | ||||||||||||
Commercial | ||||||||||||
Rate reduction | $ | — | $ | 33 | $ | 33 | ||||||
Principal deferral | — | 434 | 434 | |||||||||
Commercial Real Estate: | ||||||||||||
Farmland | ||||||||||||
Principal deferral | — | 2,300 | 2,300 | |||||||||
Nonfarm nonresidential | ||||||||||||
Rate reduction | 507 | — | 507 | |||||||||
Principal deferral | — | 607 | 607 | |||||||||
Residential Real Estate: | ||||||||||||
Multi-family | ||||||||||||
Rate reduction | 4,100 | — | 4,100 | |||||||||
1-4 Family | ||||||||||||
Rate reduction | 743 | — | 743 | |||||||||
Total TDRs | $ | 5,350 | $ | 3,374 | $ | 8,724 |
TDRs Performing to Modified Terms | TDRs Not Performing to Modified Terms | Total TDRs | ||||||||||
(in thousands) | ||||||||||||
December 31, 2019 | ||||||||||||
Commercial Real Estate: | ||||||||||||
Nonfarm nonresidential | $ | 400 | $ | 0 | $ | 400 | ||||||
Residential Real Estate: | ||||||||||||
1-4 Family | 75 | 0 | 75 | |||||||||
Total TDRs | $ | 475 | $ | 0 | $ | 475 |
At December 31, 20172020 and 2016,2019, 40% and 61%, respectively,100% of the Company’s TDRs were performing according to their modified terms. The Company allocated $122,000 and $197,000$1,000 as of December 31, 20172020 and 2016,2019, respectively, in reserves to customers whose loan terms have been modified in TDRs. The Company has committed to lend no0 additional amounts to customers as of December 31, 20172020 or 2016December 31, 2019 to customers with outstanding loans that are classified as TDRs.
Management periodically reviews renewals and modifications of previously identified TDRs, for which there was no principal forgiveness, to consider if it is appropriate to removeDuring the TDR classification. If the borrower is no longer experiencing financial difficulty and the renewal/modification did not contain a concessionary interest rate or other concessionary terms, management considers the potential removal of the TDR classification. If deemed appropriate based upon current underwriting, the TDR classification is removed as the borrower has complied with the terms of the loan at the date of renewal/modification and there was a reasonable expectation that the borrower would continue to comply with the terms of the loan subsequent to the date of the renewal/modification. In this instance, the TDR was originally considered a restructuring in a prior year as a result of a modification with an interest rate that was not commensurate with the risk of the underlying loan. Additionally, TDR classification can be removed in circumstances in which the Company performs a non-concessionary re-modification of the loan at terms that were considered to be at market for loans with comparable risk. Management expects the borrower will continue to perform under the re-modified terms based on the borrower’s past history of performance. During 2017, the TDR classification was removed from two loans that met the requirements as discussed above. These loans totaled $4.1 million at December 31, 2016. These loans are no longer evaluated individually for impairment.
No TDR loan modifications occurred during the twelve monthsyears ended December 31, 20172020, or 2016.2019, During the year ended December, 31 2017 and 2016,2018, no0 TDRs defaulted on their restructured loan within the twelve-month period following the loan modification. A default is considered to have occurred once the TDR is past due 90 days or more or it has been placed on nonaccrual.
The following table presents a summary of the TDR loan modifications by portfolio segment that occurred during the year ended December 31, 2020:
TDRs Performing to Modified Terms | TDRs Not Performing to Modified Terms | Total TDRs | ||||||||||
(in thousands) | ||||||||||||
December 31, 2020 | ||||||||||||
Residential Real Estate: | ||||||||||||
1-4 Family | 33 | 0 | 33 | |||||||||
Total TDRs | $ | 33 | $ | 0 | $ | 33 |
The Company has not allocated any reserves to customers whose loan terms have been modified during 2020. For modifications occurring during the twelve months ended December 31, 2020, the post-modification balances approximate the pre-modification balances. There were no TDR loan modifications during the year ended December 31, 2019.
NonNon-TDR Loan Modifications due to COVID-19-performing Loans
Non-performingThe Company has elected to account for eligible loan modifications under Section 4013 of the Coronavirus Aid Relief and Economic Security Act (“CARES Act”). To be an eligible loan under Section 4013 of the CARES Act, a loan modification must be (1) related to the COVID-19 pandemic; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020 and the earlier of (A) 60 days after the date of termination of the national emergency declared by the President on March 13, 2020 concerning the COVID-19 outbreak (the “national emergency”) or (B) January 1, 2022. Eligible loan modifications are not required to be classified as TDRs and will not be reported as past due provided that they are performing in accordance with the modified terms. Interest income will continue to be recognized in accordance with GAAP unless the loan is placed on nonaccrual status. Short-term loan modifications totaled $15.3 million at December 31, 2020.
Non-performing Loans
Non-performing loans include impaired loans and smaller balance homogeneous loans, such as residential mortgage and consumer loans, that are collectively evaluated for impairment. The following table presents the recorded investment in nonaccrual and loans past due 90 days and still on accrual by class of loan as of December 31, 20172020 and 2016:2019:
Nonaccrual | Loans Past Due 90 Days And Over Still Accruing | Nonaccrual | Loans Past Due 90 Days And Over Still Accruing | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||
Commercial | $ | 487 | $ | 495 | $ | — | $ | — | $ | 0 | $ | 50 | $ | 0 | $ | 0 | ||||||||||||||||
Commercial Real Estate: | ||||||||||||||||||||||||||||||||
Construction | — | — | — | — | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||
Farmland | 2,059 | 4,332 | — | — | 456 | 431 | 0 | 0 | ||||||||||||||||||||||||
Nonfarm nonresidential | 93 | 1,016 | — | — | 175 | 90 | 0 | 0 | ||||||||||||||||||||||||
Residential Real Estate: | ||||||||||||||||||||||||||||||||
Multi-family | — | — | — | — | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||
1-4 Family | 2,817 | 3,312 | — | — | 954 | 817 | 0 | 0 | ||||||||||||||||||||||||
Consumer | 1 | 1 | 1 | — | 0 | 98 | 0 | 0 | ||||||||||||||||||||||||
Agriculture | — | 60 | — | — | 91 | 42 | 0 | 0 | ||||||||||||||||||||||||
Other | — | — | — | — | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||
Total | $ | 5,457 | $ | 9,216 | $ | 1 | $ | — | $ | 1,676 | $ | 1,528 | $ | 0 | $ | 0 |
TheThe following table presents the aging of the recorded investment in past due loans by class as of December 31, 20172020 and 2016:2019:
30 – 59 Days Past Due | 60 – 89 Days Past Due | 90 Days And Over Past Due |
Nonaccrual | Total Past Due And Nonaccrual | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
December 31, 2017 | ||||||||||||||||||||
Commercial | $ | — | $ | — | $ | — | $ | 487 | $ | 487 | ||||||||||
Commercial Real Estate: | ||||||||||||||||||||
Construction | — | — | — | — | — | |||||||||||||||
Farmland | 593 | — | — | 2,059 | 2,652 | |||||||||||||||
Nonfarm nonresidential | — | — | — | 93 | 93 | |||||||||||||||
Residential Real Estate: | ||||||||||||||||||||
Multi-family | — | — | — | — | — | |||||||||||||||
1-4 Family | 850 | 126 | — | 2,817 | 3,793 | |||||||||||||||
Consumer | 30 | 45 | — | 1 | 76 | |||||||||||||||
Agriculture | 5 | — | 1 | — | 6 | |||||||||||||||
Other | — | — | — | — | — | |||||||||||||||
Total | $ | 1,478 | $ | 171 | $ | 1 | $ | 5,457 | $ | 7,107 |
30 – 59 Days Past Due | 60 – 89 Days Past Due | 90 Days And Over Past Due | Nonaccrual | Total Past Due And Nonaccrual | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
December 31, 2020 | ||||||||||||||||||||
Commercial | $ | 20 | $ | 0 | $ | 0 | $ | 0 | $ | 20 | ||||||||||
Commercial Real Estate: | ||||||||||||||||||||
Construction | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Farmland | 325 | 53 | 0 | 456 | 834 | |||||||||||||||
Nonfarm nonresidential | 0 | 26 | 0 | 175 | 201 | |||||||||||||||
Residential Real Estate: | ||||||||||||||||||||
Multi-family | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
1-4 Family | 1,110 | 217 | 0 | 954 | 2,281 | |||||||||||||||
Consumer | 59 | 49 | 0 | 0 | 108 | |||||||||||||||
Agriculture | 23 | 27 | 0 | 91 | 141 | |||||||||||||||
Other | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Total | $ | 1,537 | $ | 372 | $ | 0 | $ | 1,676 | $ | 3,585 |
30 – 59 Days Past Due | 60 – 89 Days Past Due | 90 Days And Over Past Due |
Nonaccrual | Total Past Due And Nonaccrual | 30 – 59 Days Past Due | 60 – 89 Days Past Due |
90 Days And Over Past Due
|
Nonaccrual | Total Past Due And Nonaccrual | |||||||||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||||||||||
December 31, 2016 | ||||||||||||||||||||||||||||||||||||||||
December 31, 2019 | ||||||||||||||||||||||||||||||||||||||||
Commercial | $ | — | $ | — | $ | — | $ | 495 | $ | 495 | $ | 14 | $ | 3 | $ | 0 | $ | 50 | $ | 67 | ||||||||||||||||||||
Commercial Real Estate: | ||||||||||||||||||||||||||||||||||||||||
Construction | — | — | — | — | — | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||
Farmland | 626 | — | — | 4,332 | 4,958 | 274 | 0 | 0 | 431 | 705 | ||||||||||||||||||||||||||||||
Nonfarm nonresidential | — | 59 | — | 1,016 | 1,075 | 206 | 0 | 0 | 90 | 296 | ||||||||||||||||||||||||||||||
Residential Real Estate: | ||||||||||||||||||||||||||||||||||||||||
Multi-family | — | — | — | — | — | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||
1-4 Family | 1,454 | 256 | — | 3,312 | 5,022 | 1,162 | 503 | 0 | 817 | 2,482 | ||||||||||||||||||||||||||||||
Consumer | 19 | — | — | 1 | 20 | 91 | 164 | 0 | 98 | 353 | ||||||||||||||||||||||||||||||
Agriculture | 203 | — | — | 60 | 263 | 0 | 0 | 0 | 42 | 42 | ||||||||||||||||||||||||||||||
Other | — | — | — | — | — | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||||||||
Total | $ | 2,302 | $ | 315 | $ | — | $ | 9,216 | $ | 11,833 | $ | 1,747 | $ | 670 | $ | 0 | $ | 1,528 | $ | 3,945 |
Credit Quality Indicators
Management categorizes all loans into risk categories at origination based upon original underwriting. Thereafter, management categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends. Additionally, loans are analyzed through internal and external loan review processes. Borrower relationships in excess of $500,000processes and are routinely analyzed through the credit administration processes which classify the loans as to credit risk. The following definitions are used for risk ratings:ratings:
Watch –Loans Loans classified as watch are those loans which have experienced or may experience a potentially adverse development which necessitates increased monitoring.
Special Mention –Loans classified as special mention do not have all of the characteristics of substandard or doubtful loans. They have one or more deficiencies which warrant special attention and which corrective action, such as accelerated collection practices, may remedy.
Substandard –Loans classified as substandard are those loans with clear and defined weaknesses such as a highly leveraged position, unfavorable financial ratios, uncertain repayment sources or poor financial condition which may jeopardize the repayment of the debt as contractually agreed. They are characterized by the distinct possibility ofthat the Bank will sustain some lossesloss if the deficiencies are not corrected.
Doubtful – Loans classified as doubtful are those loans which have characteristics similar to substandard loans but with an increased risk that collection or liquidation in full is highly questionable and improbable.
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. As of December 31, 20172020 and 2016,2019, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:
Pass | Watch | Special Mention | Substandard | Doubtful | Total | Pass | Watch | Special Mention | Substandard | Doubtful | Total | |||||||||||||||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
December 31, 2017 | ||||||||||||||||||||||||||||||||||||||||||||||||
December 31, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||
Commercial | $ | 112,978 | $ | 84 | $ | — | $ | 709 | $ | — | $ | 113,771 | $ | 201,240 | $ | 192 | $ | 0 | $ | 6,812 | $ | 0 | $ | 208,244 | ||||||||||||||||||||||||
Commercial Real Estate: | ||||||||||||||||||||||||||||||||||||||||||||||||
Construction | 57,342 | — | — | — | — | 57,342 | 92,916 | 0 | 0 | 0 | 0 | 92,916 | ||||||||||||||||||||||||||||||||||||
Farmland | 76,563 | 7,607 | — | 4,150 | — | 88,320 | 65,556 | 3,714 | 0 | 1,002 | 0 | 70,272 | ||||||||||||||||||||||||||||||||||||
Nonfarm nonresidential | 152,004 | 2,906 | — | 1,814 | — | 156,724 | 258,665 | 1,605 | 0 | 6,124 | 0 | 266,394 | ||||||||||||||||||||||||||||||||||||
Residential Real Estate: | ||||||||||||||||||||||||||||||||||||||||||||||||
Multi-family | 47,121 | 9,467 | — | — | — | 56,588 | 50,732 | 10,448 | 0 | 0 | 0 | 61,180 | ||||||||||||||||||||||||||||||||||||
1-4 Family | 169,774 | 3,535 | 164 | 5,749 | — | 179,222 | 183,379 | 2,831 | 0 | 2,745 | 0 | 188,955 | ||||||||||||||||||||||||||||||||||||
Consumer | 18,042 | 306 | — | 91 | — | 18,439 | 31,387 | 3 | 0 | 39 | 0 | 31,429 | ||||||||||||||||||||||||||||||||||||
Agriculture | 38,654 | 1,810 | — | 690 | — | 41,154 | 41,503 | 86 | 0 | 455 | 0 | 42,044 | ||||||||||||||||||||||||||||||||||||
Other | 555 | — | — | — | — | 555 | 647 | 0 | 0 | 0 | 0 | 647 | ||||||||||||||||||||||||||||||||||||
Total | $ | 673,033 | $ | 25,715 | $ | 164 | $ | 13,203 | $ | — | $ | 712,115 | $ | 926,025 | $ | 18,879 | $ | 0 | $ | 17,177 | $ | 0 | $ | 962,081 |
Pass | Watch | Special Mention | Substandard | Doubtful | Total | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
December 31, 2019 | ||||||||||||||||||||||||
Commercial | $ | 130,312 | $ | 11,280 | $ | 0 | $ | 3,959 | $ | 0 | $ | 145,551 | ||||||||||||
Commercial Real Estate: | ||||||||||||||||||||||||
Construction | 64,911 | 0 | 0 | 0 | 0 | 64,911 | ||||||||||||||||||
Farmland | 71,503 | 6,663 | 0 | 952 | 0 | 79,118 | ||||||||||||||||||
Nonfarm nonresidential | 245,995 | 6,986 | 0 | 2,478 | 0 | 255,459 | ||||||||||||||||||
Residential Real Estate: | ||||||||||||||||||||||||
Multi-family | 70,950 | 0 | 0 | 0 | 0 | 70,950 | ||||||||||||||||||
1-4 Family | 221,727 | 2,420 | 0 | 2,482 | 0 | 226,629 | ||||||||||||||||||
Consumer | 47,657 | 5 | 0 | 128 | 0 | 47,790 | ||||||||||||||||||
Agriculture | 34,853 | 168 | 0 | 43 | 0 | 35,064 | ||||||||||||||||||
Other | 799 | 0 | 0 | 0 | 0 | 799 | ||||||||||||||||||
Total | $ | 888,707 | $ | 27,522 | $ | 0 | $ | 10,042 | $ | 0 | $ | 926,271 |
Pass | Watch | Special Mention | Substandard | Doubtful | Total | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
December 31, 2016 | ||||||||||||||||||||||||
Commercial | $ | 96,402 | $ | 294 | $ | — | $ | 1,065 | $ | — | $ | 97,761 | ||||||||||||
Commercial Real Estate: | ||||||||||||||||||||||||
Construction | 35,823 | 507 | — | — | — | 36,330 | ||||||||||||||||||
Farmland | 63,323 | 1,521 | — | 6,663 | — | 71,507 | ||||||||||||||||||
Nonfarm nonresidential | 142,222 | 5,217 | 445 | 1,662 | — | 149,546 | ||||||||||||||||||
Residential Real Estate: | ||||||||||||||||||||||||
Multi-family | 38,281 | 6,080 | — | 3,836 | — | 48,197 | ||||||||||||||||||
1-4 Family | 173,565 | 6,909 | 52 | 7,566 | — | 188,092 | ||||||||||||||||||
Consumer | 9,397 | 348 | — | 73 | — | 9,818 | ||||||||||||||||||
Agriculture | 26,940 | 9,555 | — | 1,013 | — | 37,508 | ||||||||||||||||||
Other | 477 | — | — | — | — | 477 | ||||||||||||||||||
Total | $ | 586,430 | $ | 30,431 | $ | 497 | $ | 21,878 | $ | — | $ | 639,236 |
NOTE NOTE 4 –– PREMISES AND EQUIPMENT
Year-end premises and equipment were as follows:
2017 | 2016 | 2020 | 2019 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Land and buildings | $ | 23,124 | $ | 23,515 | $ | 21,214 | $ | 21,228 | ||||||||
Furniture and equipment | 10,151 | 10,050 | 9,323 | 8,884 | ||||||||||||
Leased right-of-use asset | 2,477 | 3,070 | ||||||||||||||
33,275 | 33,565 | 33,014 | 33,182 | |||||||||||||
Accumulated depreciation | (16,486 | ) | (15,717 | ) | (14,481 | ) | (13,524 | ) | ||||||||
$ | 16,789 | $ | 17,848 | $ | 18,533 | $ | 19,658 |
See ‘Note 5 – Leases’ for additional details regarding the Bank’s leased right-of-use asset and lease liability.
Depreciation expense was $1.1 million, $801,000 and $833,000 for $955,000,2020, $1.1 million and $1.0 million for 2017,20162019 and 2015,2018, respectively.
NOTE NOTE 5– LEASES
As of December 31, 2020, the Company leases real estate for six branch offices or offsite ATM machines under various operating lease agreements. The lease agreements have maturity dates ranging from 2021 to 2045, including all expected extension periods. The weighted average remaining life of the lease term for these leases was 21 years as of December 31, 2020.
In determining the present value of lease payments, the Bank uses the implicit lease rate when readily determinable. As most of the Bank’s leases do not provide an implicit rate, the incremental borrowing rate based on the information available at commencement date is used. The incremental borrowing rate is the estimated rate of interest that the Bank would have to pay to borrow on a collateralized basis over a similar term in an amount equal to the lease payments in a similar economic environment. The weighted average discount rate for the leases was 5.47% as of December 31, 2020.
Total rental expense was $551,000 and $294,000 for the years ended December 31, 2020 and December 31, 2019, respectively. During 2019, the Company assumed three leases as a result of the branch purchase transaction, and also commenced the lease for a new branch in Lexington. The right-of-use asset, included in premises and equipment, and lease liability, included in other liabilities, was $2.5 million as of December 31, 2020 and $3.1 million as of December 31, 2019.
Total estimated rental commitments for the operating leases were as follows as of December 31, 2020 (in thousands):
2020 | ||||
2021 | 279 | |||
2022 | 183 | |||
2023 | 186 | |||
2024 | 185 | |||
2025 | 162 | |||
Thereafter | 3,503 | |||
Total minimum lease payments | 4,498 | |||
Discount effect of cash flows | (2,021 | ) | ||
Present value of lease liabilities | $ | 2,477 |
At December 31, 2020, the Company has entered into two additional leases for new branch offices that have yet to commence. The right of use asset and lease liability for the leases yet to commence are estimated to be approximately $3.3 million and are expected to be recorded in the first quarter of 2021.
NOTE 6– OTHER REAL ESTATE OWNED
Other real estate owned (OREO) is real estate acquired as a result of foreclosure or by deed in lieu of foreclosure. It is classified as real estate owned until such time as it is sold. When property is acquired as a result of foreclosure or by deed in lieu of foreclosure, it is recorded at its fair market value less estimated cost to sell. Any write-down of the property at the time of acquisition is charged to the allowance for loan losses.
Fair value of OREO is determined on an individual property basis. When foreclosed properties are acquired, management obtains a new appraisal of the subject property or has staff from the Bank’s special assets group evaluate the latest in-file appraisal in connection with the transfer to OREO. Updated appraisals are typically obtained within five quarters of the anniversary date of ownership unless a sale is imminent. Subsequent reductions in fair value are recorded as non-interest expense when a new appraisal indicates a decline in value or in cases where a listing price is lowered below the appraised amount.
The following table presents the major categories of OREO at the period-ends indicated:
2017 | 2016 | |||||||
(in thousands) | ||||||||
Commercial Real Estate: | ||||||||
Construction, land development, and other land | $ | 4,335 | $ | 6,571 | ||||
Farmland | 74 | — | ||||||
Residential Real Estate: | ||||||||
1-4 Family | — | 250 | ||||||
$ | 4,409 | $ | 6,821 |
2020 | 2019 | |||||||
(in thousands) | ||||||||
Commercial Real Estate: | ||||||||
Construction, land development, and other land | 1,765 | 3,225 | ||||||
$ | 1,765 | $ | 3,225 |
Residential loans secured by 1-4 family residential properties in the process of foreclosure totaled $616,000totaled $35,000 and $932,000$172,000 at December 31, 20172020 and December 31, 2016,2019, respectively.
Activity
Activity relating to OREO owned during the years indicated is as follows:
2017 | 2016 | 2015 | ||||||||||
(in thousands) | ||||||||||||
OREO Activity | ||||||||||||
OREO as of January 1 | $ | 6,821 | $ | 19,214 | $ | 46,197 | ||||||
Real estate acquired | 270 | 1,273 | 5,513 | |||||||||
Valuation adjustment write-downs | (1,963 | ) | (1,180 | ) | (9,855 | ) | ||||||
Net gain (loss) on sale | 74 | 222 | (74 | ) | ||||||||
Proceeds from sale of properties | (793 | ) | (12,708 | ) | (22,567 | ) | ||||||
OREO as of December 31 | $ | 4,409 | $ | 6,821 | $ | 19,214 |
There was noOREO rental income for the year ended December 31, 2017, compared to $456,000, and $1.3 million for the years ended December 31, 2016, and 2015, respectively.
2020 | 2019 | 2018 | ||||||||||
(in thousands) | ||||||||||||
OREO Activity | ||||||||||||
OREO as of January 1 | $ | 3,225 | $ | 3,485 | $ | 4,409 | ||||||
Real estate acquired | 0 | 0 | 730 | |||||||||
Valuation adjustment write-downs | 0 | (260 | ) | (850 | ) | |||||||
Net gain on sale | 0 | 0 | 72 | |||||||||
Proceeds from sale of properties | (1,600 | ) | 0 | (876 | ) | |||||||
Improvements | 140 | 0 | 0 | |||||||||
OREO as of December 31 | $ | 1,765 | $ | 3,225 | $ | 3,485 |
Expenses related to OREO owned include:
2017 | 2016 | 2015 | ||||||||||
(in thousands) | ||||||||||||
Net (gain) loss on sales | $ | (74 | ) | $ | (222 | ) | $ | 74 | ||||
Valuation adjustment write-downs | 1,963 | 1,180 | 9,855 | |||||||||
Operating expense | 84 | 583 | 2,373 | |||||||||
Total | $ | 1,973 | $ | 1,541 | $ | 12,302 |
2020 | 2019 | 2018 | ||||||||||
(in thousands) | ||||||||||||
Net gain on sale | $ | 0 | $ | 0 | $ | (72 | ) | |||||
Valuation adjustment write-downs | 0 | 260 | 850 | |||||||||
Operating expense | 63 | 108 | 90 | |||||||||
Total | $ | 63 | $ | 368 | $ | 868 |
NNOTE 7OTE 6– GOODWILL AND INTANGIBLE ASSETS– DEPOSITS
The following table summarizes the Company’s acquired goodwill and intangible assets as of December 31, 2020 and December 31, 2019:
2020 | 2019 | |||||||||||||||
Gross Carrying Amount | Accumulated Amortization | Gross Carrying Amount | Accumulated Amortization | |||||||||||||
(in thousands) | ||||||||||||||||
Goodwill | $ | 6,252 | $ | — | $ | 6,252 | $ | — | ||||||||
Core deposit intangibles | 2,500 | 256 | 2,500 | 0 | ||||||||||||
Outstanding, ending | $ | 8,752 | $ | 256 | $ | 8,752 | $ | 0 |
During 2019, the Company recorded $6.3 million of goodwill related to a branch purchase transaction. Goodwill represents the excess of the total purchase price paid over the fair value of the identifiable assets acquired, net of the fair value of the liabilities assumed. Goodwill is not amortized but is evaluated for impairment on an annual basis or whenever events or changes in circumstances indicate the carrying value may not be recoverable. Impairment exists when a reporting unit’s carrying amount exceeds its fair value. Given the current economic environment, the Company engaged an independent third party expert to perform a quantitative assessment as of November 30, 2020 to determine if it was more likely than not that the fair value of the reporting unit exceeded its carrying value, including goodwill. The assessment indicated that the fair value of the reporting unit exceeded its carrying value, resulting in no impairment. Goodwill is the only intangible asset with an indefinite life on the Company’s balance sheet.
The Company recorded $256,000 intangible amortization expense during 2020. During 2019, the Company did not record any intangible amortization expense.
The estimated amortization expense of the core deposit intangible for the years ending December 31 is as follows (in thousands):
Amortization Expense | ||||
2021 | $ | 256 | ||
2022 | 256 | |||
2023 | 256 | |||
2024 | 256 | |||
2025 | 256 | |||
Thereafter | 964 | |||
$ | 2,244 |
NOTE 8– DEPOSITS
The following table details deposits by category:
December 31, 2017 | December 31, 2016 | |||||||
(in thousands) | ||||||||
Non-interest bearing | $ | 137,386 | $ | 124,395 | ||||
Interest checking | 99,383 | 103,876 | ||||||
Money market | 151,388 | 142,497 | ||||||
Savings | 34,632 | 34,518 | ||||||
Certificates of deposit | 424,235 | 444,639 | ||||||
Total | $ | 847,024 | $ | 849,925 |
December 31, 2020 | December 31, 2019 | |||||||
(in thousands) | ||||||||
Non-interest bearing | $ | 243,022 | $ | 187,551 | ||||
Interest checking | 190,625 | 146,038 | ||||||
Money market | 175,785 | 160,837 | ||||||
Savings | 142,623 | 56,015 | ||||||
Certificates of deposit | 367,552 | 476,534 | ||||||
Total | $ | 1,119,607 | $ | 1,026,975 |
Time deposits of $250,000 or more were approximately $31.7$50.7 million and $29.1$51.2 million at year-end 20172020 and 2016,2019, respectively.
Scheduled maturities of total time deposits for each of the next five years are as follows (in thousands):
Total | ||||
2018 | $ | 204,018 | ||
2019 | 178,479 | |||
2020 | 27,507 | |||
2021 | 5,316 | |||
2022 | 8,915 | |||
$ | 424,235 |
Total | ||||
2021 | $ | 272,031 | ||
2022 | 39,876 | |||
2023 | 17,419 | |||
2024 | 11,092 | |||
2025 | 26,657 | |||
Thereafter | 477 | |||
$ | 367,552 |
NOTE 97– –ADVANCES FROM FEDERAL HOME LOAN BANK
At year-end, advances from the Federal Home Loan Bank were as follows:
2017 | 2016 | |||||||
(in thousands) | ||||||||
Advances with fixed rates from 0.00% to 5.24% and maturities ranging from 2018 through 2033, averaging 1.48% for 2017 and 0.85% for 2016 | $ | 11,797 | $ | 22,458 |
December 31, | December 31, | |||||||
2020 | 2019 | |||||||
(in thousands) | ||||||||
Short term advance (fixed rate 0.00%) maturing April 2021 | $ | 623 | $ | 60,000 | ||||
Long term advance (fixed rate 0.77%) maturing February 2030 | 20,000 | 1,389 | ||||||
Total advances from the Federal Home Loan Bank | $ | 20,623 | $ | 61,389 |
FHLB advances had a weighted-average rate of 0.75% at December 31, 2020 and 1.70% at December 31, 2019. Each advance is payable per terms on agreement, with a prepayment penalty. No prepayment penalties were incurred during 20172020 or 2016.2019. The $20.0 million long term advance is callable quarterly at the FHLB’s option. The advances were collateralized by approximately $130.9$133.7 million and $124.2$166.0 million of first mortgage loans, under a blanket lien arrangement at year-end 2017December 31, 2020 and 2016,December 31, 2019, respectively. respectively and $20.3 million of loans originated under the SBA Payment Protection Plan at December 31, 2020. At December 31, 2017,2020, ourthe Bank’s additional borrowing capacity with the FHLB was $93.9 million.
Scheduled principal payments during the next five years and thereafter (in thousands):
Advances | ||||
2018 | $ | 10,200 | ||
2019 | 180 | |||
2020 | 485 | |||
2021 | 728 | |||
2022 | 108 | |||
Thereafter | 96 | |||
$ | 11,797 |
Advances | ||||
2021 | $ | 623 | ||
2022 | 0 | |||
2023 | 0 | |||
2024 | 0 | |||
2025 | 0 | |||
Thereafter | 20,000 | |||
$ | 20,623 |
At year-end 2017,2020, the Company had a $5.0$5.0 million federal funds line of credit available on an unsecured basis from a correspondent institution.
NOTE 108– BORROWINGS– SUBORDINATED CAPITAL NOTE
The outstanding principal amount of the Bank’s subordinated capital note totaled $2.3 million at December 31, 2017. The note is unsecured, bears interest at the BBA three-month LIBOR floating rate plus 300 basis points, and qualifies as Tier 2 capital until five years before maturity on July 1, 2020. During the final five-year period to maturity, oneJunior Subordinated Debentures -fifth of principal amount of the subordinated note is excluded from Tier 2 capital each year and until fully excluded from Tier 2 capital during the year before maturity. Principal payments of $225,000 plus interest are due quarterly. Scheduled principal payments of $900,000 per year are due each of the next two years with $450,000 due thereafter. The interest rate was 4.34% and 3.85% at December 31, 2017 and 2016, respectively.
NOTE 9– JUNIOR SUBORDINATED DEBENTURES
The junior subordinated debentures are redeemable at par prior to maturity at the option of the Company as defined within the trust indenture. The Company has the option to defer interest payments on the junior subordinated debentures from time to time for a period not to exceed 20 consecutive quarters. A deferral period may begin at the Company’s discressiondiscretion so long as interest payments are current. The Company is prohibited from paying dividends on its preferred and common shares when interest payments are in deferral.
On April 15, 2016, the Company completed the private placement of 580,000 common shares and 220,000 non-voting common shares to accredited investors resulting in total proceeds of $5.0 million. The investors in the private placement directed a portion of purchase price to pay all deferred interest payments on junior subordinated debentures, bringing our interest payments current through the second quarter of 2016.
On June 29, 2016, the Company notified the trustees of its election to again defer interest payments effective with the third quarter 2016 payment. The deferral period ends after the second quarter of 2021. After 20 consecutive quarters, the Company must pay all deferred distributions to avoid default. Dividends accrued and unpaid on our junior subordinated debentures totaled $1.2 million at At December 31, 2017.2020, the Company is current on all interest payments.
A summarysummary of the junior subordinated debentures is as follows:
Description | Issuance Date | Interest Rate (1) | Junior Subordinated Debt Owed To Trust | Maturity Date (2) | |||||
Porter Statutory Trust II | 2/13/2004 | 3-month LIBOR + 2.85% | $ | 5,000,000 | 2/13/2034 | ||||
Porter Statutory Trust III | 4/15/2004 | 3-month LIBOR + 2.79% | 3,000,000 | 4/15/2034 | |||||
Porter Statutory Trust IV | 12/14/2006 | 3-month LIBOR + 1.67% | 10,000,000 | 3/01/2037 | |||||
Ascencia Statutory Trust I | 2/13/2004 | 3-month LIBOR + 2.85% | 3,000,000 | 2/13/2034 | |||||
$ | 21,000,000 |
Description | Issuance Date | Interest Rate (1) | Junior Subordinated Debt Owed To Trust | Maturity Date (2) | ||||||||||||
Statutory Trust I | 2/13/2004 | 3-month LIBOR + 2.85% | $ | 3,000,000 | 2/13/2034 | |||||||||||
Statutory Trust II | 2/13/2004 | 3-month LIBOR + 2.85% | 5,000,000 | 2/13/2034 | ||||||||||||
Statutory Trust III | 4/15/2004 | 3-month LIBOR + 2.79% | 3,000,000 | 4/15/2034 | ||||||||||||
Statutory Trust IV | 12/14/2006 | 3-month LIBOR + 1.67% | 10,000,000 | 3/01/2037 | ||||||||||||
$ | 21,000,000 |
(1) | As of December 31, 2020, |
(2) | The debentures are callable at |
On September 30, 2015, the Company completed a common equity for debt exchange with holders of $4.0 million of the capital securities (the “Trust Securities”) of Porter Statutory Trust IV, a trust subsidiary of the Company. Accrued and unpaid interest on the Trust Securities totaled of approximately $330,000. In exchange for the $4.3 million debt and interest liability, the Company issued 160,000 common shares and 80,000 non-voting common shares, for a total of 240,000 shares. In the transaction, a wholly owned subsidiary of the Company received a oneSubordinated Capital Notes -third portion of the Trust Securities directly from an unrelated third party in exchange for the issuance of 80,000 common shares resulting in an $883,000 gain on extinguishment of debt. The $883,000 gain was determined based upon the difference in the $560,000 fair value of the common shares issued and the $1.4 million book value of the debt securities and accrued interest thereon tendered to the Company by the unrelated third party on the date of closing. The fair value of the shares issued to the unrelated third party was computed by multiplying the 80,000 shares issued by $7.00 per share, which was the NASDAQ closing price of the Company’s common stocksubordinated notes mature on September 30, 2015.July 31, 2029. The subsidiary also received two-thirds of the Trust Securities having a book value of $2.9 million from related parties in exchange for the issuance of 80,000 common shares and 80,000 non-voting common shares. In accordance with ASC 470-50-40-2 and SEC Guidance 405-20-40-1.J, the debt andnotes carry interest liability exchanged with related parties was treated as a capital transaction.
NOTE10 – SENIOR DEBT
On June 30, 2017, the Company entered into a $10.0 million senior secured loan agreement with a commercial bank. The loan matures on June 30, 2022. Interest is payable quarterly at a fixed rate of 5.75% until July 30, 2024 and then convert to variable at three-month LIBOR plus 250395 basis points throughuntil maturity. The subordinated capital notes qualify as Tier June 30,2 regulatory capital. On July 31, 2020, at which time quarterly principal paymentsthe Company completed the issuance of an additional $8.0 million in subordinated notes under the $250,000July 23, 2019 indenture with the same terms and with the additional commitment by the Company to extend the optional prepayment date to July 31, 2025 so long as the additional notes qualify as Tier 2 plus interest will commence.regulatory capital. The loan is secured by a first priority pledge of 100%Company used the net proceeds from the issuance of the issuedadditional notes to retire its senior debt and outstanding stock ofretained the Bank.remaining balance for general corporate purposes. The Company may prepay any amount due under the promissory note at any time without premium or penalty.
The Company contributed $9.0 million of the borrowing proceeds to the Banksubordinated capital notes qualify as common equity Tier 12 regulatory capital. The remaining $1.0 million of the borrowing proceeds were retained by the lender in escrow to service quarterly interest payments. At December 31, 2017, the escrow account had a balance of $806,000.
The loan agreement contains customary representations, warranties, covenants and events of default, including the following financial covenants: (i) the Company must maintain minimum cash on hand of not less than $750,000 through June 30, 2018, and not less than $2,500,000 thereafter, (ii) the Company must maintain a total risk based capital ratio at least equal to 9% of risk-weighted assets to June 30, 2018, and 10% thereafter, (iii) the Bank must maintain a total risk based capital ratio at least equal to 10% of risk-weighted assets to June 30, 2018, and 11% thereafter, and (iv) non-performing assets of the Bank may not exceed 2.5% of the Bank’s total assets. Both the Company and Bank were in compliance with the covenants as of December 31, 2017.
NOTE 11–11– OTHER BENEFIT PLANS
401(k)(k) Plan – The CompanyCompany’s 401(k) Savings Plan allows employees to contribute up to the annual limits as determined by the Internal Revenue Service, which is matched equal to 50%100% of the first 4%1% of compensation contributed.contributed and 50% of the next 5% contributed by employees. The Company, at its discretion, may make an additional contribution.contributions. Total contributions made by the Company to the plan totaled approximately $399,000, $362,000 and $347,000 in $200,000,2020, $189,0002019 and $160,0002018, in respectively.
NOTE 12 – INCOME TAXES
Income tax expense was as follows:
2020 | 2019 | 2018 | ||||||||||
(in thousands) | ||||||||||||
Current | $ | (173 | ) | $ | (173 | ) | $ | (346 | ) | |||
Deferred | 1,372 | 505 | 121 | |||||||||
Net operating loss | 903 | 1,725 | 2,255 | |||||||||
Establish state deferred tax asset | (478 | ) | (1,577 | ) | 0 | |||||||
$ | 1,624 | $ | 480 | $ | 2,030 |
For 20162020 and 2015,2019, respectively.
Supplemental Executive Retirement Plan – The Company hasincome tax expense benefitted from the establishment of a supplemental executive retirement plan covering certain executive officers. Under the plan, the Company pays each participant, or their beneficiary,net deferred tax assets related to a specific defined benefit amount overchange in Kentucky tax law enacted during 102019. years, beginning with the individual’s retirement or early termination of service for reasons other than cause. A liability is accrued for the obligation under these plans. TheIncome tax expense incurred for the plan was $121,000,$121,000benefitted $478,000 and $121,000$1.6 million for the years ended December 31, 2020 31,2017,2016and 2015,2019, respectively, or $0.06 per basic and diluted common share, and $0.21 per basic and diluted common share, respectively. The related liability was $1.3 millionnew law eliminates the Kentucky bank franchise tax, which is assessed at December 31,2017a rate of 1.1% of average capital, and 2016 and is included in other liabilities on the balance sheets.
The Company purchased life insurance on the participants of the plan. The cash surrender value of all insurance policies was $15.2 million and $14.8 million at December 31,2017 and 2016, respectively. Income earned from the cash surrender value of life insurance totaled $412,000,$417,000 and $295,000implements a state income tax for the years ended December 31,2017,2016, and 2015, respectively.Bank at a statutory rate of 5%. The income is recorded as other non-interest income.
NOTE 12– INCOME TAXES
The Company has had a full valuation allowance against its net deferred tax asset since 2011. The Company’s ability to utilize the net deferred tax asset depends upon generating sufficient future levels of taxable income. The determination to restore a deferred tax asset and eliminate a valuation allowance depends upon the evaluation of both positive and negative evidence regarding the likelihood of achieving sufficient future taxable income levels. During the fourth quarter of 2017, management concluded it was more-likely-than-not the asset would be utilized to reduce future taxes payable related to the future taxable income of the Company, and as such, reversed the valuation allowance. The positive evidence that outweighed the negative evidence evaluated by management in arriving at the conclusion to remove the valuation allowance included, but was not limited to, the following:
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As a result of the conclusion to reverse the valuation allowance, the Company recorded annew Kentucky income tax benefit of $54.0 million for the year ended December 31, 2017.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 was signedwent into law. Among other significant changes to the tax code, the new law lowered the federal corporate tax rate fromeffect on 35% to 21% beginning in 2018. As a result, the Company revalued its net deferred tax asset at the new 21% rate. Due to this revaluation, the Company recorded a $20.3 million charge to income tax expense for the year ended December 31, 2017.January 1, 2021.
The combination of the reversal of the valuation allowance and the change in federal corporate tax rates, as well as income tax expense for the year, resulted in an income tax benefit of $31.9 million for the year ended December 31, 2017.
Income tax expense (benefit) was as follows:
2017 | 2016 | 2015 | ||||||||||
(in thousands) | ||||||||||||
Current | $ | — | $ | 21 | $ | — | ||||||
Deferred | 2,523 | 2,771 | 5,258 | |||||||||
Net operating loss | (647 | ) | (4,009 | ) | (5,975 | ) | ||||||
Change in federal statutory rate | 20,274 | — | — | |||||||||
Change in valuation allowance | (54,049 | ) | 1,238 | 717 | ||||||||
$ | (31,899 | ) | $ | 21 | $ | — |
Effective tax rates differ from federal statutory rate of 35%applied to income(loss) before income taxes due to the following:
2017 | 2016 | 2015 | 2020 | 2019 | 2018 | |||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||
Federal statutory rate times financial statement income (loss) | $ | 2,294 | $ | (956 | ) | $ | (1,125 | ) | ||||||||||||||||
Federal statutory rate | 21 | % | 21 | % | 21 | % | ||||||||||||||||||
Federal statutory rate times financial statement income | $ | 2,232 | $ | 2,310 | $ | 2,273 | ||||||||||||||||||
Effect of: | ||||||||||||||||||||||||
Valuation allowance | (54,049 | ) | 1,238 | 717 | ||||||||||||||||||||
Tax-exempt income | (196 | ) | (211 | ) | (264 | ) | (73 | ) | (66 | ) | (80 | ) | ||||||||||||
Non-taxable life insurance income | (144 | ) | (146 | ) | (103 | ) | ||||||||||||||||||
Establish state deferred tax asset | (478 | ) | (1,577 | ) | 0 | |||||||||||||||||||
Non-taxable life insurance income | (89 | ) | (86 | ) | (92 | ) | ||||||||||||||||||
Restricted stock vesting | (121 | ) | — | — | 7 | (137 | ) | (115 | ) | |||||||||||||||
Change in federal statutory rate | 20,274 | — | — | |||||||||||||||||||||
Other, net | 43 | 96 | 775 | 25 | 36 | 44 | ||||||||||||||||||
Total | $ | (31,899 | ) | $ | 21 | $ | — | $ | 1,624 | $ | 480 | $ | 2,030 |
Year-end deferred tax assets and liabilitiesliabilities were due to the following:
2020 | 2019 | |||||||
(in thousands) | ||||||||
Deferred tax assets: | ||||||||
Net operating loss carry-forward | $ | 22,012 | $ | 22,915 | ||||
Allowance for loan losses | 3,104 | 2,090 | ||||||
OREO write-down | 914 | 2,665 | ||||||
Alternative minimum tax credit carry-forward | 0 | 173 | ||||||
Net assets from acquisitions | 72 | 228 | ||||||
New market tax credit carry-forward | 208 | 208 | ||||||
Nonaccrual loan interest | 315 | 303 | ||||||
Accrued expenses | 131 | 102 | ||||||
Lease liability | 618 | 766 | ||||||
Other | 332 | 309 | ||||||
27,706 | 29,759 | |||||||
Deferred tax liabilities: | ||||||||
FHLB stock dividends | 478 | 563 | ||||||
Fixed assets | 71 | 57 | ||||||
Deferred loan costs | 172 | 170 | ||||||
Net unrealized gain on securities | 585 | 331 | ||||||
Lease right-of-use assets | 618 | 766 | ||||||
Other | 68 | 107 | ||||||
1,992 | 1,994 | |||||||
Net deferred tax assets | $ | 25,714 | $ | 27,765 |
2017 | 2016 | |||||||
(in thousands) | ||||||||
Deferred tax assets: | ||||||||
Net operating loss carry-forward | $ | 25,645 | $ | 42,094 | ||||
Allowance for loan losses | 1,723 | 3,139 | ||||||
OREO write-down | 2,432 | 3,366 | ||||||
Alternative minimum tax credit carry-forward | 692 | 692 | ||||||
Net assets from acquisitions | 358 | 674 | ||||||
Net unrealized loss on securities | 169 | 867 | ||||||
New market tax credit carry-forward | 208 | 208 | ||||||
Nonaccrual loan interest | 271 | 481 | ||||||
Accrued expenses | 172 | 3,860 | ||||||
Deferred compensation | 277 | 465 | ||||||
Other | 241 | 360 | ||||||
32,188 | 56,206 | |||||||
Deferred tax liabilities: | ||||||||
FHLB stock dividends | 557 | 928 | ||||||
Fixed assets | 68 | 89 | ||||||
Deferred loan costs | 152 | 274 | ||||||
Other | 98 | 866 | ||||||
875 | 2,157 | |||||||
Net deferred tax assets before valuation allowance | 31,313 | 54,049 | ||||||
Valuation allowance | — | (54,049 | ) | |||||
Net deferred tax asset | $ | 31,313 | $ | — |
At December 31, 2017, 2020, the Company had net federal net operating loss carryforwards ("NOLs") of $122.1$98.2 million, which will begin to expire in 2031.2032, and state net operating loss carryforwards of $35.0 million, which will begin to expire in 2025. During 2020, the $173,000 alternative minimum tax credit carry-forward was refunded due to the enactment of CARES Act.
The Company does not have any beginning and ending unrecognized tax benefits.benefits. The Company does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next twelve months. There were no0 interest and penalties recorded in the income statement or accrued for the years ended 2017December 31, 2020 or 2016December 31, 2019 related to unrecognized tax benefits.
UnderUnder Section 382 of the Internal Revenue Code, as amended (“Section 382”), the Company’s net operating loss carryforwards and other deferred tax assets can generally be used to offset future taxable income and therefore reduce federal income tax obligations. However, the Company's ability to use its NOLs would be limited if there was an “ownership change” as defined by Section 382. This would occur if shareholders owning (or deemed to own under the tax rules) 5% or more of the Company's voting and non-voting common shares increase their aggregate ownership of the Company by more than 50 percentage points over a defined period of time.
In 2015, the Company took two measures to preserve the value of its NOLs. First, the Company adopted a tax benefits preservation plan designed to reduce the likelihood of an “ownership change” occurring as a result of purchases and sales of the Company's common shares. Upon adoption of this plan, the Company declared a dividend of one preferred stock purchase right for each common share outstanding as of the close of business on July 10, 2015. Any shareholder or group that acquires beneficial ownership of 5% or more of the Company (an “acquiring person”) could be subject to significant dilution in its holdings if the Company's Board of Directors does not approve such acquisition. Existing shareholders holding 5% or more of the Company will not be considered acquiring persons unless they acquire additional shares, subject to certain exceptions described in the plan. In addition, as amended November 25, 2019, the Board of Directors has the discretion to exempt certain transactions and certain persons whose acquisition of securities is determined by the Board not to jeopardize the Company's deferred tax assets. The rights willplan was extended in May 2018 to expire upon the earlier of (i) June 29, 2018,30, 2021, (ii) the beginning of a taxable year with respect to which the Board of Directors determines that no tax benefits may be carried forward, (iii) the repeal or amendment of Section 382 or any successor statute, if the Board of Directors determines that the plan is no longer needed to preserve the tax benefits, and (iv) certain other events as described in the plan.
On September 23, 2015, the Company’sCompany’s shareholders approved an amendment to its articles of incorporation to further help protect the long-term value of the Company’s NOLs. The amendment provides a means to block transfers of ourthe Company’s common shares that could result in an ownership change under Section 382. The transfer restrictions were extended in May 2018 by shareholder vote and will expire on the earlier of (i) SeptemberMay 23, 2018,2021, (ii) the beginning of a taxable year with respect to which the Board of Directors determines that no tax benefit may be carried forward, (iii) the repeal of Section 382 or any successor statute if ourthe Company’s Board determines that the transfer restrictions are no longer needed to preserve the tax benefits of ourits NOLs, or (iv) such date as the Board otherwise determines that the transfer restrictions are no longer necessary.
The Company and its subsidiaries are subject to U.S. federal income tax and the Company is subject to incomeincome tax in the Commonwealth of Kentucky. The Company is no longer subject to examination by taxing authorities for years before 2014.2017.
NOTE 13–13– RELATED PARTY TRANSACTIONS
Loans to principal officers, directors, significant shareholders, and their affiliates in 20172020 were as follows (in thousands):
Beginning balance | $ | — | $ | 13,045 | ||||
New loans | 9,400 | |||||||
New loans and advances | 4,750 | |||||||
Repayments | — | (3,500 | ) | |||||
Ending balance | $ | 9,400 | $ | 14,295 |
DepositsDeposits from principal officers, directors, significant shareholders, and their affiliates at year-end 20172020 and 20162019 were $401,000$1.3 million and $321,000,$505,000, respectively.
Hogan Development Company assists the Bank in onboarding, managing,managing, and selling the Bank’s OREO. Hogan Development Company is owned by W. Glenn Hogan, a director. The agreement with Hogan Development Company is periodically reviewed and evaluated by the Audit Committee. The Bank paid real estate management fees of $26,000 in $20,0002020 and $20,000 in $56,0002019. andThe Bank paid no real estate sales and leasing commissions of $6,000 and $478,000 to Hogan Development Company in 20172020 andor 2016,2019. respectively.
On April 15, 2016, the Company completed the private placement of 580,000 common shares and 220,000 non-voting common shares to accredited investors resulting in total proceeds of $5.0 million. The investors in the private placement directed a portion of purchase price to pay all deferred interest payments on junior subordinated debentures, bringing our interest payments current through the second quarter of 2016. The investors included three directors of the Company, including President and CEO John T. Taylor, who purchased common shares on the same terms and conditions as the other investors.
NOTE 1414– – PREFERRED STOCK
The Company has issued and outstanding 6,198 Series E preferred shares and 4,304 Series F preferred shares, both of which series are not convertible into common shares, have a liquidation preference of $1,000 per share, and are entitled to a 2% noncumulative annual dividend if and when declared. Series E and Series F preferred shares rank senior to, and have liquidation and dividend preferences over, the common shares and non-voting common shares.
NOTE 15–REGULATORY CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGSMATTERS
Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can result in regulatory action.
The finalBasel III rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. Banks (Basel III rules) became effective for the Company and Bank on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule through January 1, 2019. The final rules allowed banks and their holding companies with less than $250 billion in assets a one-time opportunity to opt-out of a requirement to include unrealized gains and losses in accumulated other comprehensive income in their capital calculation. The Company and the Bank opted out of this requirement. The rules also establishestablished a “capital conservation buffer” of 2.5% above the regulatory minimum risk-based capital ratios. OnceIncluding the capital conservation buffer, is fully phased in, the minimum ratios are a common equity Tier 1 risk-based capital ratio of 7.0%, a Tier 1 risk-based capital ratio of 8.5%, and a total risk-based capital ratio of 10.5%. The capital conservation buffer for 2017 is 1.25% and 0.625% for 2016. An institution is subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if capital levels fall below minimum levels plus the buffer amounts. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions. actions without prior regulatory approval.
The Company’s capital ratios were positively impacted by the additional $8.0 million of subordinated notes issued on July 21, 2020, as the subordinated notes meet the requirements to qualify as Tier 2 capital.
As of December 31, 2020, the Company and Bank ismeet all capital adequacy requirements to which they are subject. At year end 2020 and 2019, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no longer subject to a consent order withconditions or events since the Federal Deposit Insurance Corporation and Kentucky Department of Financial Institutions. The Bank’s prior consent order was terminated effective October 31, 2017.
On September 21, 2011, notification that management believes have changed the Company entered into a Written Agreement with the Federal Reserve Bank of St. Louis. Pursuant to the Agreement, management made formal commitments to use the Company’s financial and management resources to serve as a source of strength for the Bank and to assist the Bank in addressing weaknesses identified by the FDIC and the KDFI (which has since been terminated), to pay no dividends without prior written approval, to pay no interest or principal on subordinated debentures or trust preferred securities without prior written approval, and to submit an acceptable plan to maintain sufficient capital.
institution’s category.
The following tables show the ratios (excluding capital conservation buffer) and amounts of common equity Tier 1, Tier 1 capital, and total capital to risk-adjusted assets and the leverage ratios for Porter Bancorp, Inc. and the Bank at the dates indicated (dollars in thousands):
Actual | Minimum Requirement for Capital Adequacy Purposes | Minimum Requirement to be Well Capitalized Under Prompt Corrective Action Provisions | ||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
As of December 31, 2017: | ||||||||||||||||||||||||
Total risk-based capital (to risk-weighted assets) | ||||||||||||||||||||||||
Consolidated | $ | 83,072 | 10.55 | % | $ | 63,014 | 8.00 | % | N/A | N/A | ||||||||||||||
Bank | 91,305 | 11.61 | 62,938 | 8.00 | $ | 78,672 | 10.00 | % | ||||||||||||||||
Total common equity Tier 1 risk- based capital (to risk-weighted assets) | ||||||||||||||||||||||||
Consolidated | 54,535 | 6.92 | 35,445 | 4.50 | N/A | N/A | ||||||||||||||||||
Bank | 81,393 | 10.35 | 35,403 | 4.50 | 51,137 | 6.50 | ||||||||||||||||||
Tier 1 capital (to risk-weighted assets) | ||||||||||||||||||||||||
Consolidated | 66,487 | 8.44 | 47,260 | 6.00 | N/A | N/A | ||||||||||||||||||
Bank | 81,393 | 10.35 | 47,203 | 6.00 | 62,938 | 8.00 | ||||||||||||||||||
Tier 1 capital (to average assets) | ||||||||||||||||||||||||
Consolidated | 66,487 | 7.11 | 37,392 | 4.00 | N/A | N/A | ||||||||||||||||||
Bank | 81,393 | 8.70 | 37,421 | 4.00 | 46,777 | 5.00 |
Actual | Minimum Requirement for Capital Adequacy Purposes | Minimum Requirement to be Well Capitalized Under Prompt Corrective Action Provisions | ||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
As of December 31, 2016: | ||||||||||||||||||||||||
Total risk-based capital (to risk-weighted assets) | ||||||||||||||||||||||||
Consolidated | $ | 71,109 | 10.21 | % | $ | 55,714 | 8.00 | % | N/A | N/A | ||||||||||||||
Bank | 68,773 | 9.88 | 55,663 | 8.00 | $ | 69,579 | 10.00 | % | ||||||||||||||||
Total common equity Tier 1 risk- based capital (to risk-weighted assets) | ||||||||||||||||||||||||
Consolidated | 36,199 | 5.20 | 31,339 | 4.50 | N/A | N/A | ||||||||||||||||||
Bank | 57,642 | 8.28 | 31,311 | 4.50 | 45,226 | 6.50 | ||||||||||||||||||
Tier 1 capital (to risk-weighted assets) | ||||||||||||||||||||||||
Consolidated | 48,713 | 6.99 | 41,786 | 6.00 | N/A | N/A | ||||||||||||||||||
Bank | 57,642 | 8.28 | 41,747 | 6.00 | 55,663 | 8.00 | ||||||||||||||||||
Tier 1 capital (to average assets) | ||||||||||||||||||||||||
Consolidated | 48,713 | 5.27 | 36,975 | 4.00 | N/A | N/A | ||||||||||||||||||
Bank | 57,642 | 6.24 | 36,949 | 4.00 | 46,186 | 5.00 |
Actual | Minimum Requirement for Capital Adequacy Purposes | Minimum Requirement to be Well Capitalized Under Prompt Corrective Action Provisions | ||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
As of December 31, 2020: | ||||||||||||||||||||||||
Total risk-based capital (to risk-weighted assets) | $ | 142,449 | 13.20 | % | $ | 86,302 | 8.00 | % | $ | 107,878 | 10.00 | % | ||||||||||||
Total common equity Tier 1 risk-based capital (to risk-weighted assets) | 130,006 | 12.05 | 48,545 | 4.50 | 70,120 | 6.50 | ||||||||||||||||||
Tier 1 capital (to risk-weighted assets) | 130,006 | 12.05 | 64,727 | 6.00 | 86,302 | 8.00 | ||||||||||||||||||
Tier 1 capital (to average assets) | 130,006 | 10.21 | 50,908 | 4.00 | 63,636 | 5.00 |
N/A: Not applicable. Regulatory framework does not define well capitalized for holding companies.
Actual | Minimum Requirement for Capital Adequacy Purposes | Minimum Requirement to be Well Capitalized Under Prompt Corrective Action Provisions | ||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
As of December 31, 2019: | ||||||||||||||||||||||||
Total risk-based capital (to risk-weighted assets) | $ | 121,335 | 12.08 | % | $ | 80,341 | 8.00 | % | $ | 100,426 | 10.00 | % | ||||||||||||
Total common equity Tier 1 risk-based capital (to risk-weighted assets) | 112,959 | 11.25 | 45,192 | 4.50 | 65,277 | 6.50 | ||||||||||||||||||
Tier 1 capital (to risk-weighted assets) | 112,959 | 11.25 | 60,256 | 6.00 | 80,341 | 8.00 | ||||||||||||||||||
Tier 1 capital (to average assets) | 112,959 | 9.99 | 45,208 | 4.00 | 56,510 | 5.00 |
Kentucky banking laws limit the amount of dividends that may be paid to a holding company by its subsidiary banks without prior approval. These laws limit the amount of dividends that may be paid in any calendar year to current year’syear’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. In addition, a bank must have positive retained earnings.
NOTE 1516– – OFF BALANCE SHEET RISKS, COMMITMENTS, AND CONTINGENT LIABILITIES
The Company, in the normal course of business, is party to financial instruments with off balance sheet risk. The financial instruments include commitments to extend credit and standby letters of credit. The contract or notional amounts of these instruments reflect the potential future obligations of the Company pursuant to those financial instruments. Creditworthiness for all instruments is evaluated on a case-by-case basis in accordance with the Company’sCompany’s credit policies. Collateral from the client may be required based on the Company’s credit evaluation of the client and may include business assets of commercial clients, as well as personal property and real estate of individual clients or guarantors.
An approved but unfunded loan commitment represents a potential credit risk and a liquidity risk, since the Company’sCompany’s client(s) may demand immediate cash that would require funding. In addition, unfunded loan commitments represent interest rate risk as market interest rates may rise above the rate committed to the Company’s client. Since a portion of these loan commitments normally expire unused, the total amount of outstanding commitments at any point in time may not require future funding. Commitments to make loans are generally made for periods of one year or less.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a client to a third party. The terms and risk of loss involved in issuing standby letters of credit are similar to those involved in issuing loan commitments and extending credit. In addition to credit risk, the Company also has liquidity risk associated with standby letters of credit because funding for these obligations could be required immediately. The Company does not deem this risk to be material. NoNaN liability is currently established for standby letters of credit.
The following table presents the contractual amounts of financial instruments with off-balance sheet risk for each year
ended:
2017 | 2016 | 2020 | 2019 | |||||||||||||||||||||||||||||
Fixed Rate | Variable Rate | Fixed Rate | Variable Rate | Fixed Rate | Variable Rate | Fixed Rate | Variable Rate | |||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||
Commitments to make loans | $ | 27,349 | $ | 31,412 | $ | 19,445 | $ | 18,347 | $ | 20,990 | $ | 17,466 | $ | 11,577 | $ | 20,415 | ||||||||||||||||
Unused lines of credit | 11,034 | 57,727 | 7,935 | 51,407 | 5,964 | 144,790 | 7,916 | 111,230 | ||||||||||||||||||||||||
Standby letters of credit | 2,216 | 373 | 582 | 360 | 175 | 1,342 | 531 | 3,164 |
Commitments to make loans are generally made for periods of one year or less.
InIn connection with the purchase of loan participations, the Bank entered into risk participation agreements, which had notional amounts totaling $19.8$26.6 million at December 31, 20172020 and $14.6December 31, 2019. The risk participation agreements are not milliondesignated against specific assets or liabilities under ASC 815, Derivatives and Hedging, and, therefore, do not qualify for hedge accounting. The derivatives are recorded in other liabilities on the balance sheet at fair value and changes in fair value of both the borrower and the offsetting swap agreements are recorded (and essentially offset) in non-interest income. The fair value of the derivative instruments incorporates a consideration of credit risk in accordance with ASC 820, resulting in some volatility in earnings each period.At December 31, 2016.2020 and December 31, 2019, the fair value of the risk participation agreements were $188,000 and $87,000, respectively.
In the normal course of business, the Company and its subsidiaries have been named, from time to time, as defendants in various legal actions. Certain of the actual or threatened legal actions may include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages.
The Company is subject to claims and lawsuits that arise primarily in the ordinary course of business. Litigation is subject to inherent uncertainties and unfavorable rulings could occur. The Company records contingent liabilities resulting from claims against it when a loss is assessed to be probable andcontests liability and/or the amount of damages as appropriate in each pending matter. In view of the loss is reasonably estimable. Accruals are not madeinherent difficulty of predicting the outcome of such matters, particularly in cases where liability is not probableclaimants seek substantial or indeterminate damages or where investigations and proceedings are in the amountearly stages, the Company cannot be reasonably estimated. Assessing probabilitypredict with certainty the loss or range of loss, and estimating probable losses requires analysis of multiple factors, including in some cases judgments aboutif any, related to such matters, how or if such matters will be resolved, when they will ultimately be resolved, or what the potential actions of third party claimants and courts. Recorded contingent liabilities areeventual settlement, or other relief, if any, might be. Subject to the foregoing, the Company believes, based on the best information available and actual losses in any future period are inherently uncertain. Based upon current knowledge and after consultation with counsel, that the Company believesoutcome of such pending legal proceedings or claims shouldmatters will not have a material impactadverse effect on itsthe consolidated financial position or results of operations. However, in lightcondition of the uncertainties involved in such proceedings,Company, although the outcome of a particular matter may such matters could be material to the financial position orCompany’s operating results of operationsand cash flows for a particular reportingfuture period, in the future.
On October 17, 2014, the United States Department of Justice (the “DOJ”) notified the Bank that it was the subject of an investigation into possible violations of federal laws, including,depending on, among other things, possible violations related to false bank entries, bank fraud and securities fraud. The investigation concerns allegations that Bank personnel engaged in practices intended to delay or avoid disclosurethe level of the Bank’s asset quality atCompany’s revenues or income for such period. The Company will accrue for a loss contingency if (1) it is probable that a future event will occur and confirm the timeloss and (2) the amount of and following the United States Treasury’s purchase of preferred shares from theloss can be reasonably estimated. The Company in November 2008. The Bank has cooperated with all requests for information from DOJ. At this time, the DOJ hasis not indicated whether it intends to pursuecurrently involved in any action in this matter.material litigation.
NOTE 16–17– FAIR VALUES
FairFair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Various valuation techniques are used to determine fair value, including market, income and cost approaches. There are three levels of inputs that may be used to measure fair values:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that an entity has the ability to access as of the measurement date, or observable inputs.
Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. When that occurs, the fair value hierarchy is classified on the lowest level of input that is significant to the fair value measurement. The following methods and significant assumptions are used to estimate fair value.
Securities: The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges, if available. This valuation method is classified as Level 1 in the fair value hierarchy. For securities where quoted prices are not available, fair values are calculated on market prices of similar securities, or matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. Matrix pricing relies on the securities’ relationship to similarly traded securities, benchmark curves, and the benchmarking of like securities. Matrix pricing utilizes observable market inputs such as benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, and industry and economic events. In instances where broker quotes are used, these quotes are obtained from market makers or broker-dealers recognized to be market participants. This valuation method is classified as Level 2 in the fair value hierarchy. For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators. This valuation method is classified as Level 3 in the fair value hierarchy. Discounted cash flows are calculated using spread to swap and LIBOR curves that are updated to incorporate loss severities, volatility, credit spread and optionality. During times when trading is more liquid, broker quotes are used (if available) to validate the model. Rating agency and industry research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into the calculations.
Impaired Loans: An impaired loan is evaluated at the time the loan is identified as impaired and is recorded at fair value less costs to sell. Fair value is measured based on the value of the collateral securing the loan and is classified as Level 3 in the fair value hierarchy. Fair value is determined using several methods. Generally, the fair value of real estate is determined based on appraisals by qualified licensed appraisers. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach.
Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. These routine adjustments are made to adjust the value of a specific property relative to comparable properties for variations in qualities such as location, size, and income production capacity relative to the subject property of the appraisal. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.
Management routinely apply anapplies internal discountdiscounts to the value of appraisals used in the fair value evaluation of ourthe Bank’s impaired loans. The deductions to the appraisal take into account changing business factors and market conditions, as well as potential value impairment in cases where ourthe Bank’s appraisal date predates a likely change in market conditions. These deductions range from 10% for routine real estate collateral to 25% for real estate that is determined (1) to have a thin trading market or (2) to be specialized collateral. This is in addition to estimated discounts for cost to sell of six6 to ten10 percent.
Management also applyapplies discounts to the expected fair value of collateral for impaired loans where the likely resolution involves litigation or foreclosure. Resolution of this nature generally results in receiving lower values for real estate collateral in a more aggressive sales environment. Discounts ranging from 10% to 33% have been utilized in ourthe Bank’s impairment evaluations when applicable.
Impaired loans are evaluated quarterlyquarterly for additional impairment. Management obtains updated appraisals on properties securing ourthe Bank’s loans when circumstances are warranted such as at the time of renewal or when market conditions have significantly changed. This determination is made on a property-by-property basis in light of circumstances in the broader economic climate and the assessment of deterioration of real estate values in the market in which the property is located. The first stage of management’s assessment involves management’s inspection of the property in question. Management also engages in conversations with local real estate professionals, investors, and market participants to determine the likely marketing time and value range for the property. The second stage involves an assessment of current trends in the regional market. After thorough consideration of these factors, management will either internally evaluate fair value or order a new appraisal.
Other Real Estate Owned (OREO): OREO is evaluated at the time of acquisition and recorded at fair value as determined by independent appraisal or internal evaluation less estimated cost to sell. Quarterly evaluations of OREO for impairment are driven by property type. For smaller dollar single family homes, management consults with staff from the Bank’s special assets group as well as external realtors and appraisers. Based on these consultations, management determines asking prices for OREO properties being marketed for sale. If the internally evaluated fair value or asking price is below the recorded investment in the property, appropriate write-downs are taken.
For larger dollar commercial real estate properties, management obtains a new appraisal of the subject property or has staff in the special assets group evaluate the latest in-file appraisal in connection with the transfer to OREO. Management generally obtains updated appraisals within five quarters of the anniversary date of ownership unless a sale is imminent. When an asking price is lowered below the most recent appraised value, appropriate write-downs are taken.
Management routinely applies an internal discount to the value of appraisals used in the fair value evaluation of OREO. The deductions to the appraisal take into account changing business factors and market conditions, as well as potential value impairment in cases where our appraisal date predates a likely change in market conditions. These deductions range from 10% for routine real estate collateral to 25% for real estate that is determined (1) to have a thin trading market or (2) to be specialized collateral. This is in addition to estimated discounts for cost to sell of six to ten percent.
Financial assets measured at fair value on a recurring basis are summarized below:
Fair Value Measurements at December 31, 2017 Using | Fair Value Measurements at December 31, 2020 Using | |||||||||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||
Description | Carrying Value | Quoted Prices In Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Carrying Value | Quoted Prices In Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||||||
Available for sale securities | ||||||||||||||||||||||||||||||||
U.S. Government and federal agency | $ | 21,624 | $ | — | $ | 21,624 | $ | — | $ | 19,617 | $ | 0 | $ | 19,617 | $ | 0 | ||||||||||||||||
Agency mortgage-backed: residential | 64,965 | — | 64,965 | — | ||||||||||||||||||||||||||||
Agency mortgage-backed: residential | 74,333 | 0 | 74,333 | 0 | ||||||||||||||||||||||||||||
Collateralized loan obligations | 25,505 | — | 25,505 | — | 43,152 | 0 | 40,764 | 2,388 | ||||||||||||||||||||||||
State and municipal | 33,710 | — | 33,710 | — | 36,055 | 0 | 36,055 | 0 | ||||||||||||||||||||||||
Corporate bonds | 6,916 | — | 6,916 | — | 30,705 | 0 | 18,789 | 11,916 | ||||||||||||||||||||||||
Total | $ | 152,720 | $ | — | $ | 152,720 | $ | — | $ | 203,862 | $ | 0 | $ | 189,558 | $ | 14,304 |
Fair Value Measurements at December 31, 2016 Using | Fair Value Measurements at December 31, 2019 Using | |||||||||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||
Description | Carrying Value | Quoted Prices In Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Carrying Value | Quoted Prices In Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||||||
Available for sale securities | ||||||||||||||||||||||||||||||||
U.S. Government and federal agency | $ | 34,099 | $ | — | $ | 34,099 | $ | — | $ | 22,330 | $ | 0 | $ | 22,330 | $ | 0 | ||||||||||||||||
Agency mortgage-backed: residential | 102,353 | — | 102,353 | — | ||||||||||||||||||||||||||||
Agency mortgage-backed: residential | 92,200 | 0 | 92,200 | 0 | ||||||||||||||||||||||||||||
Collateralized loan obligations | 11,203 | — | 11,203 | — | 49,419 | 0 | 49,419 | 0 | ||||||||||||||||||||||||
State and municipal | 2,045 | — | 2,045 | — | 28,366 | 0 | 28,366 | 0 | ||||||||||||||||||||||||
Corporate bonds | 3,090 | — | 3,090 | — | 16,685 | 0 | 16,685 | 0 | ||||||||||||||||||||||||
Total | $ | 152,790 | $ | — | $ | 152,790 | $ | — | $ | 209,000 | $ | 0 | $ | 209,000 | $ | 0 |
There were no transfers between Level 1 and Level 2 during 20172020 or 2016.2019.
The Company’s policy is to transfer assets or liabilities from one level to another when the methodology to obtain the fair value changes such that there are more or fewer unobservable inputs as of the end of the reporting period. During the year ended December 31, 2020, the Company reclassified one collateralized loan obligation and six corporate bonds from Level 2 to Level 3. The Company’s collateralized loan obligations and corporate bond valuations were supported by an analysis prepared by an independent third party and approved by management.
The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the year ended December 31, 2020:
Collateralized Loan Obligations | Corporate Bonds | |||||||
(in thousands) | ||||||||
Balance of recurring Level 3 assets at January 1, 2020 | $ | 0 | $ | 0 | ||||
Total gains or losses for the year: | ||||||||
Included in other comprehensive income | 0 | 0 | ||||||
Transfers into Level 3 | 2,388 | 11,916 | ||||||
Balance of recurring Level 3 assets at December 31, 2020 | $ | 2,388 | $ | 11,916 |
The following table presents quantitative information about recurring level 3 fair value measurements at December 31, 2020:
Fair Value | Valuation Technique(s) | Unobservable Input(s) | Range (Weighted Average) | |||||||||||
(in thousands) | ||||||||||||||
Collateralized loan obligations | $ | 2,388 | Discounted cash flow | Constant prepayment rate | 0% | |||||||||
Additional asset defaults | 2% | (2%) | ||||||||||||
Expected asset recoveries | 49% | (49%) | ||||||||||||
Corporate bonds | $ | 11,916 | Discounted cash flow | Constant prepayment rate | 0% | |||||||||
Spread to benchmark yield | 322% | - | 497% | (381%) | ||||||||||
Indicative broker bid | 72% | - | 107% | (80%) |
Financial assets measured at fair value on a non-recurring basis are summarized below:
Fair Value Measurements at December 31, 2017 Using | ||||||||||||||||
(in thousands) | ||||||||||||||||
Description | Carrying Value | Quoted Prices In Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
Impaired loans: | ||||||||||||||||
Commercial | $ | 87 | $ | — | $ | — | $ | 87 | ||||||||
Commercial real estate: | ||||||||||||||||
Construction | — | — | — | — | ||||||||||||
Farmland | — | — | — | — | ||||||||||||
Nonfarm nonresidential | — | — | — | — | ||||||||||||
Residential real estate: | ||||||||||||||||
Multi-family | — | — | — | — | ||||||||||||
1-4 Family | 957 | — | — | 957 | ||||||||||||
Consumer | — | — | — | — | ||||||||||||
Agriculture | — | — | — | — | ||||||||||||
Other | — | — | — | — | ||||||||||||
Other real estate owned, net: | ||||||||||||||||
Commercial real estate: | ||||||||||||||||
Construction | 4,335 | — | — | 4,335 | ||||||||||||
Farmland | 74 | — | — | 74 | ||||||||||||
Nonfarm nonresidential | — | — | — | — | ||||||||||||
Residential real estate: | ||||||||||||||||
Multi-family | — | — | — | — | ||||||||||||
1-4 Family | — | — | — | — |
Fair Value Measurements at December 31, 2020 Using | ||||||||||||||||
(in thousands) | ||||||||||||||||
Carrying Value | Quoted Prices In Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
Description | ||||||||||||||||
Impaired loans: | ||||||||||||||||
Commercial real estate: | ||||||||||||||||
Nonfarm nonresidential | $ | 2,180 | $ | 0 | $ | 0 | $ | 2,180 | ||||||||
Residential real estate: | ||||||||||||||||
1-4 Family | 105 | 0 | 0 | 105 |
Fair Value Measurements at December 31, 2019 Using | ||||||||||||||||||||||||||||||||
Fair Value Measurements at December 31, 2016 Using | (in thousands) | |||||||||||||||||||||||||||||||
(in thousands) | Carrying Value | Quoted Prices In Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||||||||||
Description | Carrying Value | Quoted Prices In Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||||||||||
Impaired loans: | ||||||||||||||||||||||||||||||||
Commercial | $ | 87 | $ | — | $ | — | $ | 87 | $ | 21 | $ | 0 | $ | 0 | $ | 21 | ||||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||||||||||
Construction | — | — | — | — | ||||||||||||||||||||||||||||
Farmland | 585 | — | — | 585 | 245 | 0 | 0 | 245 | ||||||||||||||||||||||||
Nonfarm nonresidential | — | — | — | — | ||||||||||||||||||||||||||||
Residential real estate: | ||||||||||||||||||||||||||||||||
Multi-family | — | — | — | — | ||||||||||||||||||||||||||||
1-4 Family | 1,261 | — | — | 1,261 | 145 | 0 | 0 | 145 | ||||||||||||||||||||||||
Consumer | — | — | — | — | ||||||||||||||||||||||||||||
Agriculture | 59 | — | — | 59 | ||||||||||||||||||||||||||||
Other | — | — | — | — | ||||||||||||||||||||||||||||
Other real estate owned, net: | ||||||||||||||||||||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||||||||||
Construction | 6,571 | — | — | 6,571 | ||||||||||||||||||||||||||||
Farmland | — | — | — | — | ||||||||||||||||||||||||||||
Nonfarm nonresidential | — | — | — | — | ||||||||||||||||||||||||||||
Residential real estate: | ||||||||||||||||||||||||||||||||
Multi-family | — | — | — | — | ||||||||||||||||||||||||||||
1-4 Family | 250 | — | — | 250 |
Impaired loans,, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $1.3$4.5 million, with a valuation allowance of $219,000,$2.2 million, at December 31, 2017,2020, resulting in $2.1 million provision for loan losses for the year ended December 31, 2020. At December 31, 2019, impaired loans had a carrying amount of $453,000, with a valuation allowance of $42,000, at December 31, 2019, resulting in no additional provision for loan losses for the year ended December 31, 2017. 2019.At December 31, 2016, impaired loans had a carrying amount of $2.4 million, with a valuation allowance of $370,000, at December 31, 2016, resulting in no additional provision for loan losses for the year ended December 31, 2016.
OREO, which is measured at the lower of carrying or fair value less costs to sell, had a net carrying amount of $4.4 million as of December 31, 2017, compared with $6.8 million at December 31, 2016. Write-downs of $2.0 million and $1.2 million were recorded on OREO for the years ended December 31, 2017 and 2016, respectively.
The following table presents qualitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at December 31, 2020:2017:
Fair Value | Valuation Technique(s) | Unobservable Input(s) | Range (Weighted Average) | |||||||||
(in thousands) | ||||||||||||
Impaired loans – Residential real estate | $ | 957 | Sales comparison approach | Adjustment for differences between the comparable sales | 0% | - | 26% | (9%) | ||||
Other real estate owned – Commercial real estate | $ | 4,409 | Sales comparison approach | Adjustment for differences between the comparable sales | 0% | - | 35% | (18%) | ||||
Income approach | Discount or capitalization rate | 25% | (25%) |
Fair Value | Valuation Technique(s) | Unobservable Input(s) | Range (Weighted Average) | |||||||||||
(in thousands) | ||||||||||||||
Impaired loans - Commercial real estate | $ | 2,180 | Sales comparison approach | Adjustment for differences between the comparable sales | 0% | - | 65% | (33%) | ||||||
Income approach | Discount or capitalization rate | 12% | (12%) |
The following table presents qualitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at December 31, 2016:
Fair Value | Valuation Technique(s) | Unobservable Input(s) | Range (Weighted Average) | |||||||||
(in thousands) | ||||||||||||
Impaired loans – Residential real estate | $ | 1,261 | Sales comparison approach | Adjustment for differences between the comparable sales | 0% | - | 22% | (9%) | ||||
Other real estate owned – Commercial real estate | $ | 6,571 | Sales comparison approach | Adjustment for differences between the comparable sales | 0% | - | 20% | (9%) | ||||
Income approach | Discount or capitalization rate | 18% | - | 20% | (19%) |
CarryingCarrying amount and estimated fair values of financial instruments were as follows at year-end 2017:2020:
Fair Value Measurements at December 31, 2017 Using | Fair Value Measurements at December 31, 2020 Using | |||||||||||||||||||||||||||||||||||||||
Carrying Amount | Level 1 | Level 2 | Level 3 | Total | Carrying Amount | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||||||||||
Financial assets | ||||||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 34,103 | $ | 29,898 | $ | 4,205 | $ | — | $ | 34,103 | $ | 67,693 | $ | 67,693 | $ | 0 | $ | 0 | $ | 67,693 | ||||||||||||||||||||
Securities available for sale | 152,720 | — | 152,720 | — | 152,720 | 203,862 | 0 | 189,558 | 14,304 | 203,862 | ||||||||||||||||||||||||||||||
Federal Home Loan Bank stock | 7,323 | N/A | N/A | N/A | N/A | 5,887 | N/A | N/A | N/A | N/A | ||||||||||||||||||||||||||||||
Loans held for sale | 70 | — | 70 | — | 70 | |||||||||||||||||||||||||||||||||||
Loans, net | 703,913 | — | — | 703,263 | 703,263 | 949,638 | 0 | 0 | 941,330 | 941,330 | ||||||||||||||||||||||||||||||
Accrued interest receivable | 3,136 | — | 925 | 2,211 | 3,136 | 4,444 | 0 | 925 | 3,519 | 4,444 | ||||||||||||||||||||||||||||||
Financial liabilities | ||||||||||||||||||||||||||||||||||||||||
Deposits | $ | 847,024 | $ | 137,386 | $ | 693,320 | $ | — | $ | 830,706 | $ | 1,119,607 | $ | 243,022 | $ | 878,309 | $ | 0 | $ | 1,121,331 | ||||||||||||||||||||
Federal Home Loan Bank advances | 11,797 | — | 11,799 | — | 11,799 | 20,623 | 0 | 20,665 | 0 | 20,665 | ||||||||||||||||||||||||||||||
Junior subordinated debentures | 21,000 | 0 | 0 | 16,194 | 16,194 | |||||||||||||||||||||||||||||||||||
Subordinated capital notes | 2,250 | — | — | 2,246 | 2,246 | 25,000 | 0 | 0 | 25,207 | 25,207 | ||||||||||||||||||||||||||||||
Junior subordinated debentures | 21,000 | — | — | 19,090 | 19,090 | |||||||||||||||||||||||||||||||||||
Senior debt | 10,000 | — | — | 10,000 | 10,000 | |||||||||||||||||||||||||||||||||||
Accrued interest payable | 1,475 | — | 357 | 1,118 | 1,475 | 859 | 0 | 231 | 628 | 859 |
CarryingCarrying amount and estimated fair values of financial instruments were as follows at year-end 2016:2019:
Fair Value Measurements at December 31, 2016 Using | Fair Value Measurements at December 31, 2019 Using | |||||||||||||||||||||||||||||||||||||||
Carrying Amount | Level 1 | Level 2 | Level 3 | Total | Carrying Amount | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||||||||||
Financial assets | ||||||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | $ | 66,316 | $ | 31,091 | $ | 35,225 | $ | — | $ | 66,316 | $ | 30,203 | $ | 30,203 | $ | 0 | $ | 0 | $ | 30,203 | ||||||||||||||||||||
Securities available for sale | 152,790 | — | 152,790 | — | 152,790 | 209,000 | 0 | 209,000 | 0 | 209,000 | ||||||||||||||||||||||||||||||
Securities held to maturity | 41,818 | — | 43,072 | — | 43,072 | |||||||||||||||||||||||||||||||||||
Federal Home Loan Bank stock | 7,323 | N/A | N/A | N/A | N/A | 6,237 | N/A | N/A | N/A | N/A | ||||||||||||||||||||||||||||||
Loans, net | 630,269 | — | — | 632,528 | 632,528 | 917,895 | 0 | 0 | 925,388 | 925,388 | ||||||||||||||||||||||||||||||
Accrued interest receivable | 3,137 | — | 1,203 | 1,934 | 3,137 | 4,257 | 0 | 1,118 | 3,139 | 4,257 | ||||||||||||||||||||||||||||||
Financial liabilities | ||||||||||||||||||||||||||||||||||||||||
Deposits | $ | 849,925 | $ | 124,395 | $ | 712,458 | $ | — | $ | 836,853 | $ | 1,026,975 | $ | 187,551 | $ | 839,882 | $ | 0 | $ | 1,027,433 | ||||||||||||||||||||
Federal Home Loan Bank advances | 22,458 | — | 22,475 | — | 22,475 | 61,389 | 0 | 61,395 | 0 | 61,395 | ||||||||||||||||||||||||||||||
Junior subordinated debentures | 21,000 | 0 | 0 | 17,466 | 17,466 | |||||||||||||||||||||||||||||||||||
Subordinated capital notes | 3,150 | — | — | 3,091 | 3,091 | 17,000 | 0 | 0 | 17,003 | 17,003 | ||||||||||||||||||||||||||||||
Junior subordinated debentures | 21,000 | — | — | 13,263 | 13,263 | |||||||||||||||||||||||||||||||||||
Senior debt | 5,000 | 0 | 0 | 5,022 | 5,022 | |||||||||||||||||||||||||||||||||||
Accrued interest payable | 734 | — | 369 | 365 | 734 | 1,129 | 0 | 647 | 482 | 1,129 |
The methods and assumptions used to estimate fair value are described as follows:
(a) Cash and Cash Equivalents
The carrying amounts of cash and short-term instruments approximate fair values and are classified as either Level 1 or Level 2. Noninterest bearing deposits are Level1 whereas interest bearing due from bank accounts and fed funds sold are Level 2.
(b) FHLB Stock
It is not practical to determine the fair value of FHLB stock due to restrictions placed on its transferability.
(c) Loans, Net
Fair values of loans, excluding loans held for sale, are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.
(d) Loans Held for Sale
The fair value of loans held for sale is estimated based upon binding contracts and quotes from third party investors resulting in a Level 2 classification.
(e) Deposits
The fair values disclosed for non-interest bearing deposits are, by definition, equal to the amount payable on demand at the reporting date resulting in a Level 1 classification. The carrying amounts of variable rate interest bearing deposits approximate their fair values at the reporting date resulting in a Level 2 classification. Fair values for fixed rate interest bearing deposits are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.
(f) Other Borrowings
The fair values of FHLB advances are estimated using discounted cash flow analyses based on the current borrowing rates resulting in a Level 2 classification.
The fair values of subordinated capital notes, junior subordinated debentures, and senior debt are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 3 classification.
(g) Accrued Interest Receivable/Payable
The carrying amounts of accrued interest approximate fair value resulting in a Level 2 or Level 3 classification based on the level of the asset or liability with which the accrual is associated.
NNOTE 17–OTE 18– STOCK PLANS AND STOCK BASED COMPENSATION
SharesShares available for issuance under the 20162018 Omnibus Equity Compensation Plan (“20162018 Plan”) total 25,000.262,374. Shares issued to employees under the plan vest annually on the anniversary date of the grant generally over three to four years.
The Company also maintains the Porter Bancorp, Inc. 2006 Non-Employee Directors Stock Ownership Incentive Plan (“2006 Director Plan”) pursuant to which 2,834 shares remain available for issuance as annual awards of restricted stock to the Company’s non-employee directors. Shares issued annually to each non-employee directorsdirector have a fair market value of $25,000$25,000 and vest on December 31 in the year of grant.
The fair value of thethe 20172020 unvested shares issued was $365,000,$534,000, or $9.64$15.33 per weighted-average share. The Company recorded $400,000$580,000, $535,000, and $443,000$524,000 of stock-based compensation during 20172020,2019, and 2016,2018, respectively, to salaries and employee benefits. Management expects substantially all of the unvested shares outstanding at the end of the period to vest according to the vesting schedule. A deferred tax benefit of $140,000$122,000, $112,000, and $110,000 was recognized in 2017 related to this expense whereas no deferred tax benefit was recognized in 2016.2020,2019, and 2018, respectively.
The following table summarizes unvested share activity as of and for the periods indicated for the Stock Incentive Plan:Company’s equity compensation plan:
Twelve Months Ended | Twelve Months Ended | Twelve Months Ended | Twelve Months Ended | |||||||||||||||||||||||||||||
December 31, 2017 | December 31, 2016 | December 31, 2020 | December 31, 2019 | |||||||||||||||||||||||||||||
Weighted | Weighted | Weighted | Weighted | |||||||||||||||||||||||||||||
Average | Average | Average | Average | |||||||||||||||||||||||||||||
Grant | Grant | Grant | Grant | |||||||||||||||||||||||||||||
Shares | Price | Shares | Price | Shares | Price | Shares | Price | |||||||||||||||||||||||||
Outstanding, beginning | 179,513 | $ | 4.89 | 184,482 | $ | 4.81 | 57,774 | $ | 13.35 | 116,909 | $ | 8.69 | ||||||||||||||||||||
Granted | 37,865 | 9.64 | 35,465 | 9.10 | 34,858 | 15.33 | 34,501 | 14.81 | ||||||||||||||||||||||||
Vested | (73,728 | ) | 5.75 | (38,462 | ) | 8.32 | (43,836 | ) | 12.69 | (89,388 | ) | 7.83 | ||||||||||||||||||||
Forfeited | (1,316 | ) | 9.35 | (1,972 | ) | 6.16 | (1,358 | ) | 15.95 | (4,248 | ) | 13.07 | ||||||||||||||||||||
Outstanding, ending | 142,334 | $ | 5.67 | 179,513 | $ | 4.89 | 47,438 | $ | 15.34 | 57,774 | $ | 13.35 |
Unrecognized stock based compensation expense related to unvested shares for 20182021 and beyond is estimated as follows (in thousands):
2018 | $ | 258 | ||
2019 | 99 | |||
2020 | 25 | |||
2021 & thereafter | — |
2021 | $ | 305 | ||
2022 | 134 | |||
2023 | 16 | |||
2024 & thereafter | 0 |
NNOTE 18OTE 19– – EARNINGS (LOSS) PER SHARE
The factors used in the basic and diluted earnings per share computation follow:
2020 | 2019 | 2018 | ||||||||||
(in thousands, except share and per share data) | ||||||||||||
Net income | $ | 9,005 | $ | 10,518 | $ | 8,794 | ||||||
Less: | ||||||||||||
Earnings allocated to unvested shares | 68 | 106 | 144 | |||||||||
Net income attributable to common shareholders, basic and diluted | $ | 8,937 | $ | 10,412 | $ | 8,650 | ||||||
Basic | ||||||||||||
Weighted average common shares including unvested common shares and participating preferred shares outstanding | 7,492,190 | 7,468,215 | 7,159,723 | |||||||||
Less: | ||||||||||||
Weighted average unvested common shares | 56,809 | 75,084 | 117,030 | |||||||||
Weighted average common shares outstanding | 7,435,381 | 7,393,131 | 7,042,693 | |||||||||
Basic income per common share | $ | 1.20 | $ | 1.41 | $ | 1.23 | ||||||
Diluted | ||||||||||||
Add: Dilutive effects of assumed exercises of common stock warrants | 0 | 0 | 0 | |||||||||
Weighted average common shares and potential common shares | 7,435,381 | 7,393,131 | 7,042,693 | |||||||||
Diluted income per common share | $ | 1.20 | $ | 1.41 | $ | 1.23 |
2017 | 2016 | 2015 | ||||||||||
(in thousands, except share and per share data) | ||||||||||||
Net income (loss) | $ | 38,453 | $ | (2,753 | ) | $ | (3,213 | ) | ||||
Less: | ||||||||||||
Earnings (losses) allocated to unvested shares | 967 | (88 | ) | (122 | ) | |||||||
Earnings (losses) allocated to participating preferred shares | — | — | (214 | ) | ||||||||
Net income (loss) attributable to common shareholders, basic and diluted | $ | 37,486 | $ | (2,665 | ) | $ | (2,877 | ) | ||||
Basic | ||||||||||||
Weighted average common shares including unvested common shares and participating preferred shares outstanding | 6,249,059 | 5,980,945 | 5,191,944 | |||||||||
Less: | ||||||||||||
Weighted average unvested common shares | 157,127 | 192,232 | 197,355 | |||||||||
Weighted average Series B Preferred Shares | — | — | 133,269 | |||||||||
Weighted average Series D Preferred Shares | — | — | 212,318 | |||||||||
Weighted average common shares outstanding | 6,091,932 | 5,788,713 | 4,649,002 | |||||||||
Basic income (loss) per common share | $ | 6.15 | $ | (0.46 | ) | $ | (0.62 | ) | ||||
Diluted | ||||||||||||
Add: Dilutive effects of assumed exercises of common stock warrants | — | — | — | |||||||||
Weighted average common shares and potential common shares | 6,091,932 | 5,788,713 | 4,649,002 | |||||||||
Diluted income (loss) per common share | $ | 6.15 | $ | (0.46 | ) | $ | (0.62 | ) |
The Company had no0 outstanding stock options at December 31, 2017,2020, 20162019 or 2015.2018.
NOTE 19 A warrant for the purchase of 66,113 shares– REVENUE FROM CONTRACTS WITH CUSTOMERS
All of the Company’s common stockrevenue from customers in the scope of ASC 606 is recognized within non-interest income. A description of the Company’s revenue streams accounted for under ASC 606 follows:
Service Charges on Deposit Accounts: The Company earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which include services such as ATM use fees, stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Company fulfills the customer’s request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges are withdrawn from the customer’s account balance.
Bank Card Interchange Income: The Company earns interchange fees from bank cardholder transactions conducted through a third party payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder.
Gains/Losses on Sales of OREO: The Company records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an exerciseexecuted deed. When the Company finances the sale of OREO to the buyer, the Company assess whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon transfer of control of the property to the buyer. In determining the gain or loss on the sale, the Company adjusts the transaction price and related gain (loss) on sale if a significant financing component is present. Gains and losses on sales of OREO are netted with OREO expense and reported in non-interest expense.
Other Non-interest Income: Other non-interest income includes revenue from several sources that are within the scope of ASC $79.41606, was outstanding atincluding title insurance commissions, income from secondary market loan sales, gains on sales of premises and equipment, and other transaction-based revenue that is individually immaterial. Other non-interest income included approximately $558,000, $501,000, and $660,000 of revenue for the years ended December 31, 2017,2020, 20162019, and 2015,2018, but wasrespectively, within the scope of ASC not606. included inThe remaining other non-interest income for the diluted EPS computation as inclusion would have been anti-dilutive. The warrantyear is exercisable atexcluded from the holder’s option throughscope of ASC November 21, 2018.606.
NOTE20–20– PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
Condensed financial information of PorterLimestone Bancorp Inc. is presented as follows:
CONDENSED BALANCE SHEETS
December31,
December 31, | ||||||||||||||||
2017 | 2016 | 2020 | 2019 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
ASSETS | ||||||||||||||||
Cash and cash equivalents (1) | $ | 2,045 | $ | 2,048 | ||||||||||||
Cash and cash equivalents | $ | 5,037 | $ | 4,769 | ||||||||||||
Investment in banking subsidiary | 99,651 | 51,528 | 150,560 | 138,321 | ||||||||||||
Investment in and advances to other subsidiaries | 776 | 776 | 776 | 776 | ||||||||||||
Deferred taxes, net | 2,497 | — | ||||||||||||||
Deferred taxes, net | 5,953 | 5,138 | ||||||||||||||
Other assets | 711 | 645 | 1,180 | 1,083 | ||||||||||||
Total assets | $ | 105,680 | $ | 54,997 | $ | 163,506 | $ | 150,087 | ||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||
Debt | $ | 31,775 | $ | 21,775 | $ | 46,775 | $ | 43,775 | ||||||||
Accrued expenses and other liabilities | 1,232 | 489 | 707 | 562 | ||||||||||||
Shareholders’ equity | 72,673 | 32,733 | ||||||||||||||
Shareholders’ equity | 116,024 | 105,750 | ||||||||||||||
Total liabilities and shareholders’ equity | $ | 105,680 | $ | 54,997 | $ | 163,506 | $ | 150,087 |
|
|
CONDENSED STATEMENTS OF OPERATIONS
Years ended December31,
Years ended December 31, | ||||||||||||||||||||||||
2017 | 2016 | 2015 | 2020 | 2019 | 2018 | |||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||
Interest income | $ | 4 | $ | 5 | $ | 46 | $ | 37 | $ | 83 | $ | 45 | ||||||||||||
Dividends from subsidiaries | 26 | 23 | 20 | 23 | 36 | 35 | ||||||||||||||||||
Other income | — | 17 | 102 | 20 | 19 | 38 | ||||||||||||||||||
Interest expense | (973 | ) | (694 | ) | (647 | ) | (2,008 | ) | (1,803 | ) | (1,370 | ) | ||||||||||||
Other expense | (1,137 | ) | (1,240 | ) | (1,457 | ) | (1,357 | ) | (1,179 | ) | (1,290 | ) | ||||||||||||
Income (loss) before income tax and undistributed subsidiary income | (2,080 | ) | (1,889 | ) | (1,936 | ) | ||||||||||||||||||
Loss before income tax and undistributed subsidiary income | (3,285 | ) | (2,844 | ) | (2,542 | ) | ||||||||||||||||||
Income tax expense (benefit) | (2,497 | ) | 21 | — | (815 | ) | (1,997 | ) | (645 | ) | ||||||||||||||
Equity in undistributed subsidiary income (loss) | 38,036 | (843 | ) | (1,277 | ) | |||||||||||||||||||
Net income (loss) | $ | 38,453 | $ | (2,753 | ) | $ | (3,213 | ) | ||||||||||||||||
Equity in undistributed subsidiary income | 11,475 | 11,365 | 10,691 | |||||||||||||||||||||
Net income | $ | 9,005 | $ | 10,518 | $ | 8,794 |
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December31,
2017 | 2016 | 2015 | ||||||||||
(in thousands) | ||||||||||||
Cash flows from operating activities | ||||||||||||
Net income (loss) | $ | 38,453 | $ | (2,753 | ) | $ | (3,213 | ) | ||||
Adjustments: | ||||||||||||
Equity in undistributed subsidiary (income) loss | (38,036 | ) | 843 | 1,277 | ||||||||
Deferred taxes, net | (2,497 | ) | — | — | ||||||||
Gain on sale of assets | — | — | (70 | ) | ||||||||
Change in other assets | 743 | (95 | ) | (40 | ) | |||||||
Change in other liabilities | (128 | ) | 358 | 634 | ||||||||
Other | 462 | 978 | 481 | |||||||||
Net cash (used in) operating activities | (1,003 | ) | (669 | ) | (931 | ) | ||||||
Cash flows from investing activities | ||||||||||||
Investments in subsidiaries | (9,000 | ) | (500 | ) | — | |||||||
Sales of securities | — | — | 642 | |||||||||
Net cash (used in) from investing activities | (9,000 | ) | (500 | ) | 642 | |||||||
Cash flows from financing activities | ||||||||||||
Proceeds from issuance of common stock | — | 2,231 | — | |||||||||
Proceeds from senior debt | 10,000 | — | — | |||||||||
Net cash (used in) financing activities | 10,000 | 2,231 | — | |||||||||
Net change in cash and cash equivalents | (3 | ) | 1,062 | (289 | ) | |||||||
Beginning cash and cash equivalents | 2,048 | 986 | 1,275 | |||||||||
Ending cash and cash equivalents | $ | 2,045 | $ | 2,048 | $ | 986 |
Years ended December 31, | ||||||||||||
2020 | 2019 | 2018 | ||||||||||
(in thousands) | ||||||||||||
Cash flows from operating activities | ||||||||||||
Net income | $ | 9,005 | $ | 10,518 | $ | 8,794 | ||||||
Adjustments: | ||||||||||||
Equity in undistributed subsidiary income | (11,475 | ) | (11,365 | ) | (10,691 | ) | ||||||
Deferred taxes, net | (815 | ) | (1,996 | ) | (645 | ) | ||||||
Stock-based compensation expense | 580 | 535 | 524 | |||||||||
Net change in other assets | (97 | ) | (401 | ) | 30 | |||||||
Net change in other liabilities | 145 | 423 | (1,093 | ) | ||||||||
Net cash used in operating activities | (2,657 | ) | (2,286 | ) | (3,081 | ) | ||||||
Cash flows from investing activities | ||||||||||||
Investments in subsidiaries | 0 | (10,000 | ) | (5,000 | ) | |||||||
Net cash used in investing activities | 0 | (10,000 | ) | (5,000 | ) | |||||||
Cash flows from financing activities | ||||||||||||
Proceeds from issuance of common stock | 0 | 0 | 14,910 | |||||||||
Redemption of preferred stock | 0 | 0 | (3,505 | ) | ||||||||
Proceeds from issuance of subordinated capital notes | 8,000 | 17,000 | 0 | |||||||||
Repayment of senior debt | (5,000 | ) | (5,000 | ) | 0 | |||||||
Common shares withheld for taxes | (75 | ) | (314 | ) | 0 | |||||||
Net cash provided by financing activities | 2,925 | 11,686 | 11,405 | |||||||||
Net change in cash and cash equivalents | 268 | (600 | ) | 3,324 | ||||||||
Beginning cash and cash equivalents | 4,769 | 5,369 | 2,045 | |||||||||
Ending cash and cash equivalents | $ | 5,037 | $ | 4,769 | $ | 5,369 |
NOTE 21–21– QUARTERLY FINANCIAL DATA (UNAUDITED)
Earnings (Loss) Per Common Share | ||||||||||||||||||||||||||||
Interest Income | Net Interest Income | Provision For Loan Losses | OREO Expense | Net Income (Loss) | Basic (1) | Diluted (1) | ||||||||||||||||||||||
(in thousands, except per share data) | ||||||||||||||||||||||||||||
2017 | ||||||||||||||||||||||||||||
First quarter | $ | 9,225 | $ | 7,741 | $ | — | $ | (16 | ) | $ | 1,680 | $ | 0.27 | $ | 0.27 | |||||||||||||
Second quarter | 9,134 | 7,588 | — | (3 | ) | 1,709 | 0.27 | 0.27 | ||||||||||||||||||||
Third quarter | 9,446 | 7,787 | — | 111 | 1,794 | 0.29 | 0.29 | |||||||||||||||||||||
Fourth quarter | 9,717 | 8,001 | (800 | ) | 1,881 | 33,270 | (2) | 5.31 | 5.31 | |||||||||||||||||||
2016 | ||||||||||||||||||||||||||||
First quarter | $ | 9,185 | $ | 7,651 | $ | (550 | ) | $ | 668 | $ | 1,480 | $ | 0.27 | $ | 0.27 | |||||||||||||
Second quarter | 8,705 | 7,196 | (600 | ) | 294 | 1,012 | 0.17 | 0.17 | ||||||||||||||||||||
Third quarter | 8,931 | 7,458 | (750 | ) | 322 | 1,393 | 0.22 | 0.22 | ||||||||||||||||||||
Fourth quarter | 8,781 | 7,316 | (550 | ) | 257 | (6,638 | ) | (3) | (1.07 | ) | (1.07 | ) |
Earnings Per Common Share | ||||||||||||||||||||||||||||
Interest Income | Net Interest Income | Provision For Loan Losses | Income Before Income Taxes | Net Income | Basic (1) | Diluted (1) | ||||||||||||||||||||||
(in thousands, except per share data) | ||||||||||||||||||||||||||||
2020 | ||||||||||||||||||||||||||||
First quarter (2) | $ | 13,267 | $ | 9,762 | $ | 1,050 | $ | 2,201 | $ | 1,840 | $ | 0.25 | $ | 0.25 | ||||||||||||||
Second quarter (2)(3) | 12,786 | 10,110 | 1,100 | 2,375 | 1,982 | 0.26 | 0.26 | |||||||||||||||||||||
Third quarter (2)(3) | 12,094 | 9,943 | 1,350 | 2,256 | 2,066 | 0.28 | 0.28 | |||||||||||||||||||||
Fourth quarter (2)(3) | 12,606 | 10,786 | 900 | 3,797 | 3,117 | 0.42 | 0.42 | |||||||||||||||||||||
2019 | ||||||||||||||||||||||||||||
First quarter (2) | $ | 12,186 | $ | 8,959 | $ | 0 | $ | 2,962 | $ | 2,839 | $ | 0.38 | $ | 0.38 | ||||||||||||||
Second quarter (2) | 12,376 | 8,800 | 0 | 3,022 | 3,633 | 0.49 | 0.49 | |||||||||||||||||||||
Third quarter (2) | 12,485 | 8,730 | 0 | 2,813 | 2,282 | 0.31 | 0.31 | |||||||||||||||||||||
Fourth quarter (2)(4) | 12,537 | 8,861 | 0 | 2,201 | 1,764 | 0.24 | 0.24 |
(1) | The sum of the quarterly net income |
(2) |
|
Income Tax Benefit (Expense) | Basic and Diluted per Share Impact | |||||||
2020: | ||||||||
First quarter | $ | 72,000 | $ | 0.01 | ||||
Second quarter | 79,000 | 0.01 | ||||||
Third quarter | 245,000 | 0.03 | ||||||
Fourth quarter | 82,000 | 0.01 | ||||||
2019: | ||||||||
First quarter | $ | 341,000 | $ | 0.05 | ||||
Second quarter | 1,209,000 | 0.16 | ||||||
Third quarter | 34,000 | NM | ||||||
Fourth quarter | (7,000 | ) | NM |
(3) |
|
(4) | On November 15, 2019, the Company completed a four branch acquisition. Acquisition related costs totaled $775,000, or $0.08 per common share after taxes. |
Item9.Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None
|
Disclosure Controls and Procedures
Management is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rulesin Rule 13a-15(e) and 15d-15(e) ofunder the Securities Exchange Act of 1934. Our The Company’s management, under the supervision and with the participation of ourits Chief Executive Officer and ourits Chief Financial Officer, evaluated the effectiveness of the design and operation of ourthe Company’s disclosure controls and procedures as of December 31, 2017.2020. Based on that evaluation, management believes that ourthe Company’s disclosure controls and procedures were effective to collect, process, and disclose the information required to be disclosed in the reports filed withor submitted under the SECSecurities Exchange Act of 1934 within the required time periods as of the end of the period covered by this report.
There was no change in the internal control over financial reporting, as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Management’sManagement’s Report on Internal Control Over Financial Reporting
The management of PorterLimestone Bancorp, Inc. (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of; the principal executive and principal financial officers and effected by the board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation, integrity, and fair presentation of the Company’s annual consolidated financial statements for external purposesstatements. All information has been prepared in accordance with U.S. generally accepted accounting principles and, as such, includes certain amounts that are based on management’s best estimates and judgments.
Management is responsible for establishing and maintaining adequate internal control over financial reporting presented in conformity with U.S. generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that:
Pertainthat (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
Providethe assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that our receipts and expenditures of the Company are being made only in accordance with authorizations of our management and directors;directors of the Company; and
Provide (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of ourthe Company’s assets that could have a material effect on the financial statements.
BecauseTwo of itsthe objectives of internal control are to provide reasonable assurance to management and the Board of Directors that transactions are properly authorized and recorded in the Company’s financial records, and that the preparation of the Company’s financial statements and other financial reporting is done in accordance with U.S. generally accepted accounting principles. There are inherent limitations in the effectiveness of internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even effective internal control can provide only reasonable assurance with respect to reliability of financial statements. Furthermore, internal control can vary with changes in circumstances.
Management has made its own assessment of the effectiveness of the Company’s internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2017. In making this assessment, management used2020, in relation to the criteria set forthdescribed in the report, Internal Control — Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"(“COSO”) in the 2013 Internal Control-Integrated Framework. .
Based on thatits assessment, management believes that as of December 31, 2017, our2020, the Company’s internal control over financial reporting iswas effective based on those criteria.in achieving the objectives stated above.
This annual report does not include an attestation report of our registered public accounting firm regarding internal controlscontrols over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.
/s/ John T. TaylorItem9B.Other Information
John T. Taylor
PresidentNone
Item 10. Directors, Executive Officers and Corporate Governance.
The Company has adopted a code of ethics applicable to the Chief Executive Officer and the senior financial officers, which is posted on the Bank’s website at http://www.limestonebank.comunder the Investors Relations section of the ‘About Us’ tab. If the Company amends or waives any of the provisions of the Code of Ethics applicable to its Chief Executive Officer or senior financial officers, management intends to disclose the amendment or waiver on its website. The Company will provide to any person without charge, upon request, a copy of this Code of Ethics. You can request a copy by contacting Limestone Bancorp, Inc., Chief Financial Officer, 2500 Eastpoint Parkway, Louisville, Kentucky, 40223, (telephone) 502-499-4800.
Additional information required by this Item 10 is omitted because the Company is filing a definitive proxy statement pursuant to Regulation 14A on or before April 30, 2021, which includes the required information. The required information contained in the Company’s proxy statement under the headings “Proposal 1: Election of Directors,” “Corporate Governance,” and “Certain Relationships and Related Transactions – Delinquent Section 16(a) Reports” is incorporated herein by reference.
Item 11. Executive Compensation.
The information required by this Item 11 is omitted because the Company is filing a definitive proxy statement pursuant to Regulation 14A on or before April 30, 2021, which includes the required information. The required information contained in the Company’s proxy statement under the headings “Corporate Governance,” “Compensation Discussion and Analysis,” “Executive Compensation,” and “Compensation Committee Report” is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain information required by this Item 12 is omitted because the Company is filing a definitive proxy statement pursuant to Regulation 14A on or before April 30, 2021, which includes the required information. The required information contained in the Company’s proxy statement under the heading “Stock Ownership of Directors, Officers, and Principal Shareholders” is incorporated herein by reference.
Certain information required by this Item 12 appears under the heading “Equity Compensation Plan Information” in Item 5 of this report and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this Item 13 is omitted because the Company is filing a definitive proxy statement pursuant to Regulation 14A on or before April 30, 2021, which includes the required information. The required information contained in the Company’s proxy statement under the headings “Corporate Governance” and “Certain Relationships and Related Transactions” is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services.
The information required by this Item 14 is omitted because the Company is filing a definitive proxy statement pursuant to Regulation 14A on or before April 30, 2021, which includes the required information. The required information contained in the Company’s proxy statement under the heading “Principal Accountant Fees and Services” is incorporated herein by reference.
Item15.Exhibits and Financial Statement Schedules
(a) 1. | The following financial statements are included in this Form 10-K: | |
Consolidated Balance Sheets as of December 31, 2020 and 2019 | ||
Consolidated Statements of Operations for the Years Ended December 31, 2020, 2019, and 2018 | ||
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2020, 2019, and 2018 | ||
Consolidated Statements of Change in Stockholders’ Equity for the Years Ended December 31, 2020, 2019, and 2018 | ||
Consolidated Statements of Cash Flows for the Years Ended December 31, 2020, 2019, and 2018 | ||
Notes to Consolidated Financial Statements | ||
Report of Independent Registered Public Accounting Firm |
(a) 2. | List of Financial Statement Schedules | |
Financial statement schedules are omitted because the information is not applicable. | ||
(a) 3. | List of Exhibits | |
The Exhibit Index appearing before the required signatures in this report is incorporated by reference. The compensatory plans or arrangement required to be filed as exhibits to this Form 10-K pursuant to Item 15(c) are noted with an asterisk in the Exhibit Index as noted therein. |
None
ExhibitNo.(1) | Description | |
2.1+ | ||
3.1 | ||
3.3 | ||
4.1 | ||
4.2 | ||
4.3+ | ||
4.4 | ||
4.5 | ||
4.6 | ||
4.7 | ||
4.8 | ||
4.9 | ||
10.1 | ||
10.2 |
ExhibitNo.(1) | Description | |
10.3* | ||
10.4* | ||
10.5* | ||
10.6* | ||
10.7* | ||
10.8* | ||
10.9 | ||
10.10 | ||
10.11* | ||
21.1 | ||
23.1 | Consent of Crowe LLP, Independent Registered Public Accounting Firm. | |
31.1 | Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14 or 15d-14. | |
31.2 | Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14 or 15d-14. | |
32.1 | ||
32.2 | ||
101 | The following financial statements from the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, formatted in Inline XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Stockholders’ Equity, (v) Consolidated Statements of Cash Flows, (vi) Notes to Consolidated Financial Statements. | |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
* | Management contract or compensatory plan or arrangement. |
(1) | The Company has other long-term debt agreements that meet the exclusion set forth in Section 601(b)(4)(iii)(A) of Regulation S-K. The Company hereby agrees to furnish a copy of such agreements to the Securities and Exchange Commission upon request. |
+ | Schedules and similar attachments to the Purchase and Assumption Agreement have been omitted pursuant to Item 601(a)(5) of Regulation S-K. A copy of any omitted schedule or similar attachment will be furnished to the Securities |
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.
LIMESTONE BANCORP, INC. | ||
February 26, 2021 | By: | /s/ John T. Taylor |
John T. Taylor | ||
Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated.
/s/ John T. Taylor | Chief Executive Officer | February 26, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
John T. Taylor | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
/s/ Phillip W. Barnhouse | Chief Financial Officer |
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/s/ Celia P. Catlett | Director
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Celia P. Catlett | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
/s/ W. Glenn Hogan
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Kevin J. Kooman | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
/s/ Michael T. Levy | Director |
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Michael T. Levy | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
/s/ James M. Parsons |
| February 26, 2021
94 |