Table of Contents


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 FORM 10-Q  

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended SeptemberJune 30, 20178

 

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 itsits charter)

 

Kentucky

  

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’sRegistrant’s telephone number, including area code)

 


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒     No  ☐

 

Indicate by check mark whether the registrant has submitted electronicallyelectronically 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 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 the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  ☐    

Accelerated filer  ☐    

Non-accelerated filer  ☐    (Do not check if a smaller reporting company)

Smaller reporting company  ☒

 

Emerging growth company  ☐

 

If an emerging growth company, indicate 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 provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ☐    No  ☒

 

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

 

4,668,2646,235,243 Common Shares and 1,591,6001,220,000 Non-Voting Common Shares, no par value, were outstanding at OctoberJuly 31, 2017.2018.

 

1

 


INDEX

 

 

  

  

Page

PART I

FINANCIAL INFORMATION

  

ITEM 1.

FINANCIAL STATEMENTS

3

ITEM 2.

MANAGEMENT’SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSOPERATIONS

34  33

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURESDISCLOSURES ABOUT MARKET RISK

5048

ITEM 4.

CONTROLS AND PROCEDURES

50

48

  

  

  

PART II

OTHER INFORMATION

  

ITEM 1.

LEGAL PROCEEDINGS

LEGAL PROCEEDINGS

5149

ITEM 1A.

RISK FACTORS

5149

ITEM 2.

UNREGISTEREDUNREGISTERED SALES ON EQUITY SECURITIES AND USE OF PROCEEDS

5149

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

5149

ITEM 4.

MINE SAFETY DISCLOSURES

5149

ITEM 5.

OTHER INFORMATION

5149

ITEM 6.

EXHIBITS

5149

 


2


 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

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

 

Unaudited Consolidated Balance Sheets for SeptemberJune 30, 20172018 and December 31, 20162017

Unaudited Consolidated Statements of Income for the three and ninesix months ended SeptemberJune 30, 20172018 and 20162017

Unaudited Consolidated Statements of Comprehensive Income for the three and ninesix months ended SeptemberJune 30, 20172018 and 20162017

Unaudited Consolidated Statement of Changes in StockholdersStockholders’ Equity for the ninesix months ended SeptemberJune 30, 20172018

Unaudited Consolidated Statements of Cash Flows for the ninesix months ended SeptemberJune 30, 20172018 and 20162017

Notes to Unaudited Consolidated Financial Statements

 


3

Table of Contents

 

PORTERLIMESTONE BANCORP, INC.

Unaudited Consolidated Balance Sheets

(dollars in thousands except share data)

 

  

September 30,

2017

  

December 31,

2016

 

Assets

        

Cash and due from banks

 $9,557  $9,449 

Interest bearing deposits in banks

  37,812   56,867 

Cash and cash equivalents

  47,369   66,316 

Securities available for sale

  149,797   152,790 

Securities held to maturity (fair value of $43,397 and $43,072, respectively)

  41,424   41,818 

Loans, net of allowance of $8,977 and $8,967, respectively

  673,534   630,269 

Premises and equipment, net

  16,975   17,848 

Other real estate owned

  6,330   6,821 

Federal Home Loan Bank stock

  7,323   7,323 

Bank owned life insurance

  15,131   14,838 

Accrued interest receivable and other assets

  5,082   7,154 

Total assets

 $962,965  $945,177 
         

Liabilities and Stockholders’ Equity

        

Deposits

        

Non-interest bearing

 $133,896  $124,395 

Interest bearing

  732,951   725,530 

Total deposits

  866,847   849,925 

Federal Home Loan Bank advances

  16,847   22,458 

Accrued interest payable and other liabilities

  5,728   15,911 

Subordinated capital note

  2,475   3,150 

Junior subordinated debentures

  21,000   21,000 

Senior debt

  10,000    

Total liabilities

  922,897   912,444 

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, 86,000,000 shares authorized, 4,668,264 and 4,632,933 voting, and 34,380,437 non-voting shares authorized, 1,591,600 and 1,591,600 non-voting issued and outstanding, respectively

  125,729   125,729 

Additional paid-in capital

  24,368   24,097 

Retained deficit

  (108,378

)

  (113,561

)

Accumulated other comprehensive loss

  (4,422

)

  (6,303

)

Total common stockholders’ equity

  37,297   29,962 

Total stockholders' equity

  40,068   32,733 

Total liabilities and stockholders’ equity

 $962,965  $945,177 

See accompanying notes to unaudited consolidated financial statements.


  

June 30,

2018

  

December 31,

2017

 

Assets

        

Cash and due from banks

 $7,013  $8,137 

Interest bearing deposits in banks

  33,534   25,966 

Cash and cash equivalents

  40,547   34,103 

Securities available for sale

  178,896   152,720 

Loans held for sale

     70 

Loans, net of allowance of $8,580 and $8,202, respectively

  740,654   703,913 

Premises and equipment, net

  16,813   16,789 

Other real estate owned

  4,510   4,409 

Federal Home Loan Bank stock

  7,323   7,323 

Bank owned life insurance

  15,456   15,229 

Deferred taxes, net

  30,623   31,313 

Accrued interest receivable and other assets

  5,699   4,932 

Total assets

 $1,040,521  $970,801 
         

Liabilities and Stockholders’ Equity

        

Deposits

        

Non-interest bearing

 $136,553  $137,386 

Interest bearing

  709,677   709,638 

Total deposits

  846,230   847,024 

Federal Home Loan Bank advances

  71,630   11,797 

Accrued interest payable and other liabilities

  5,262   6,057 

Subordinated capital note

     2,250 

Junior subordinated debentures

  21,000   21,000 

Senior debt

  10,000   10,000 

Total liabilities

  954,122   898,128 

Commitments and contingent liabilities (Note 13)

      

Stockholders’ equity

        

Preferred stock, no par

        

Series E - none and 6,198 issued and outstanding, respectively; Liquidation preference of $6.2 million

     1,644 

Series F - none and 4,304 issued and outstanding, respectively; Liquidation preference of $4.3 million

     1,127 

Total preferred stockholders’ equity

     2,771 

Common stock, no par, 39,000,000 shares authorized, 6,234,993 and 6,039,864 voting, and 1,220,000 and 220,000 non-voting issued and outstanding, respectively

  140,639   125,729 

Additional paid-in capital

  23,926   24,497 

Retained deficit

  (71,078

)

  (75,108

)

Accumulated other comprehensive loss

  (7,088

)

  (5,216

)

Total common stockholders’ equity

  86,399   69,902 

Total stockholders' equity

  86,399   72,673 

Total liabilities and stockholders’ equity

 $1,040,521  $970,801 

PORTER BANCORP, INC.

Unaudited Consolidated Statements of Income

(dollars in thousands, except per share data)

  

Three Months Ended

September 30,

  

Nine Months Ended

September 30,

 
  

2017

  

2016

  

2017

  

2016

 

Interest income

                

Loans, including fees

 $8,021  $7,699  $23,493  $23,036 

Taxable securities

  1,088   956   3,370   2,895 

Tax exempt securities

  143   153   432   475 

Federal funds sold and other

  194   123   510   415 
   9,446   8,931   27,805   26,821 

Interest expense

 

Deposits

  1,324   1,262   3,877   3,850 

Federal Home Loan Bank advances

  13   17   64   54 

Subordinated capital note

  32   35   98   112 

Senior Debt

  97      97     

Junior subordinated debentures

  193   159   553   500 
   1,659   1,473   4,689   4,516 

Net interest income

  7,787   7,458   23,116   22,305 

Negative provision for loan losses

     (750

)

     (1,900

)

Net interest income after negative provision for loan losses

  7,787   8,208   23,116   24,205 
                 

Non-interest income

 

Service charges on deposit accounts

  568   520   1,617   1,422 

Bank card interchange fees

  245   214   713   637 

Other real estate owned rental income

     46      451 

Income from bank owned life insurance

  103   101   309   316 

Net gain (loss) on sales and calls of investment securities

     (16

)

  (5

)

  187 

Other

  266   240   723   635 
   1,182   1,105   3,357   3,648 

Non-interest expense

 

Salaries and employee benefits

  3,683   3,945   11,433   11,624 

Occupancy and equipment

  836   842   2,501   2,504 

Professional fees

  232   374   776   1,251 

Marketing expense

  364   289   880   706 

FDIC Insurance

  356   442   1,055   1,458 

Data processing expense

  321   295   931   887 

State franchise and deposit tax

  225   255   675   765 

Other real estate owned expense

  111   322   92   1,284 

Litigation and loan collection expense

  78   222   121   575 

Other

  969   934   2,826   2,893 
   7,175   7,920   21,290   23,947 

Income before income taxes

  1,794   1,393   5,183   3,906 

Income tax expense

           21 

Net income

  1,794   1,393   5,183   3,885 

Less:

 

Earnings allocated to participating securities

  45   46   133   129 

Net income available to common shareholders

 $1,749  $1,347  $5,050  $3,756 

Basic and diluted income per common share

 $0.29  $0.22  $0.83  $0.66 

 

See accompanying notes to unaudited consolidated financial statements.

 


4

Table of Contents

 

PORTERLIMESTONE BANCORP, INC.

Unaudited Consolidated Statements of Comprehensive Income

(dollars in thousands)thousands, except per share data)

 

  

Three Months Ended

September 30,

  

Nine Months Ended

September 30,

 
  

2017

  

2016

  

2017

  

2016

 

Net income

 $1,794  $1,393  $5,183  $3,885 

Other comprehensive income:

                

Unrealized gain (loss) on securities:

                

Unrealized gain (loss) arising during the period

  (280

)

  597   1,783   2,465 

Amortization during the period of net unrealized loss transferred to held to maturity

  32   32   98   96 

Reclassification adjustment for (gains) losses included in net income

     16      (187

)

Net unrealized gain recognized in comprehensive income

  (248

)

  645   1,881   2,374 

Tax effect

            

Other comprehensive income (loss)

  (248

)

  645   1,881   2,374 
                 

Comprehensive income

 $1,546  $2,038  $7,064  $6,259 
  

Three Months Ended

June 30,

  

Six Months Ended

June 30,

 
  

2018

  

2017

  

2018

  

2017

 
Interest income                

Loans, including fees

 $9,094  $7,643  $17,884  $15,472 

Taxable securities

  1,198   1,168   2,141   2,282 

Tax exempt securities

  96   144   192   289 

Federal funds sold and other

  197   179   383   316 
   10,585   9,134   20,600   18,359 

Interest expense

                

Deposits

  1,649   1,309   2,993   2,553 

Federal Home Loan Bank advances

  216   20   372   51 

Senior debt

  98      194    

Junior subordinated debentures

  236   185   447   360 

Subordinated capital note

  12   32   39   66 
   2,211   1,546   4,045   3,030 

Net interest income

  8,374   7,588   16,555   15,329 

Provision (negative) for loan losses

  (150

)

     (150

)

   

Net interest income after provision for loan losses

  8,524   7,588   16,705   15,329 
                 

Non-interest income

                

Service charges on deposit accounts

  591   548   1,159   1,049 

Bank card interchange fees

  446   394   847   731 

Income from bank owned life insurance

  138   104   237   206 

Net gain (loss) on sales and calls of investment securities

  (6

)

  (5

)

  (6

)

  (5

)

Other

  178   205   361   457 
   1,347   1,246   2,598   2,438 

Non-interest expense

                

Salaries and employee benefits

  3,885   3,803   7,673   7,750 

Occupancy and equipment

  880   844   1,775   1,665 

Professional fees

  222   241   427   544 

Marketing expense

  308   262   608   516 

FDIC Insurance

  139   357   321   699 

Data processing expense

  307   318   631   610 

State franchise and deposit tax

  282   225   564   450 

Deposit account related expense

  221   219   440   424 

Other real estate owned expense

  237   (3

)

  319   (19

)

Litigation and loan collection expense

  48   40   101   43 

Other

  876   819   1,715   1,696 
   7,405   7,125   14,574   14,378 

Income before income taxes

  2,466   1,709   4,729   3,389 

Income tax expense

  483      812    

Net income

  1,983   1,709   3,917   3,389 

Less:

                

Earnings allocated to participating securities

  27   42   66   88 

Net income available to common shareholders

 $1,956  $1,667  $3,851  $3,301 

Basic and diluted income per common share

 $0.27  $0.27  $0.57  $0.54 

 

See accompanying notes to unaudited consolidated financial statements.

 


5

Table of Contents

 

PORTERLIMESTONE BANCORP, INC.

Unaudited Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

  

Three Months Ended

June 30,

  

Six Months Ended

June 30,

 
  

2018

  

2017

  

2018

  

2017

 

Net income

 $1,983  $1,709  $3,917  $3,389 

Other comprehensive income (loss):

                

Unrealized gain (loss) on securities:

                

Unrealized gain (loss) arising during the period

  (517

)

  1,058   (2,228

)

  2,063 

Amortization during the period of net unrealized loss transferred to held to maturity

     33      66 

Net unrealized gain (loss) recognized in comprehensive income

  (517

)

  1,091   (2,228

)

  2,129 

Tax effect

  109      469    

Other comprehensive income (loss)

  (408

)

  1,091   (1,759

)

  2,129 
                 

Comprehensive income

 $1,575  $2,800  $2,158  $5,518 

See accompanying notes to unaudited consolidated financial statements.

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LIMESTONE BANCORP, INC.

Unaudited Consolidated Statements of Changes in Stockholders’ Equity

For NineSix Months Ended SeptemberJune 30, 20178

(Dollar amounts in thousands except share and per share data)

 

  Shares   Amount     
  Common  Preferred      

Preferred

  Common     
  

 

Common

  

Non-Voting

Common

  

 

Total

Common

  

 

 

 

 

 

 

Series E

  

 

 

 

 

 

 

Series F

  

Common and

Non-Voting Common

  

 

 

 

 

 

 

Series E

  

 

 

 

 

 

 

Series F

  

 

Additional

Paid-In

Capital

  

 

Retained

Deficit

  

Accumulated

Other

Compre-

hensive

Income

(Loss)

  

 

 

Total

 
                                                 

Balances, January 1, 2017

  4,632,933   1,591,600   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      37,865                            

Forfeited unvested stock

  (1,316)     (1,316)                           

Reverse stock split rounding shares

  (1,218)     (1,218)                           

Stock-based compensation expense

                          271         271 

Net income

                             5,183      5,183 

Net change in accumulated other

comprehensive income, net of taxes

                                1,881   1,881 

Balances, September 30, 2017

  4,668,264   1,591,600   6,259,864   6,198   4,304  $125,729  $1,644  $1,127  $24,368  $(108,378) $(4,422) $40,068 

See accompanying notes to unaudited consolidated financial statements.


  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 Income (Loss)

  

Total

 
                                                 

Balances, January 1, 2018

  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 

Issuance of unvested stock

        45,129      45,129                      

Issuance of stock

        150,000   1,000,000   1,150,000         14,910            14,910 

Redemption and retirement of preferred shares

  (6,198

)

  (4,304

)

           (1,644

)

  (1,127

)

     (734

)

        (3,505

)

Stock-based compensation expense

                          163         163 

Net income

                             3,917      3,917 

Reclassification of disproportionate tax effect due to change in federal tax rate

                             113   (113

)

   

Net change in accumulated other comprehensive income, net of taxes

                                (1,759

)

  (1,759

)

Balances, June 30, 2018

        6,234,993   1,220,000   7,454,993  $  $  $140,639  $23,926  $(71,078

)

 $(7,088

)

 $86,399 

PORTER BANCORP, INC.

Unaudited Consolidated Statements of Cash Flows

For Nine Months Ended September 30, 2017 and 2016

(dollars in thousands)

  

2017

  

2016

 

Cash flows from operating activities

        

Net income

 $5,183  $3,885 

Adjustments to reconcile net loss to net cash from operating activities

        

Depreciation and amortization

  896   1,141 

Negative provision for loan losses

     (1,900

)

Net amortization on securities

  931   965 

Stock-based compensation expense

  271   315 

Net gain on sales of loans held for sale

  (39

)

  (61

)

Origination of loans for sale

  (2,179

)

  (3,830

)

Proceeds from sales of loans held for sale

  2,218   3,943 

Net gain on sales of other real estate owned

  (75

)

  (221

)

Write-down of other real estate owned

  98   970 

Net realized (gain) loss on sales and calls of investment securities

  5   (187

)

Increase in cash surrender value of owned life insurance, net of premium expense

  (293

)

  (300

)

Net change in accrued interest receivable and other assets

  1,929   (701

)

Net change in accrued interest payable and other liabilities

  (10,183

)

  (57

)

Net cash from operating activities

  (1,238

)

  3,962 
         

Cash flows from investing activities

        

Purchases of available for sale securities

  (15,340

)

  (18,868

)

Proceeds from sales and calls of available for sale securities

  2,000   6,276 

Proceeds from maturities and prepayments of available for sale securities

  17,480   16,925 

Proceeds from calls of held to maturity securities

  47    

Proceeds from maturities of held to maturity securities

  145    

Proceeds from sale of other real estate owned

  738   12,340 

Loan originations and payments, net

  (43,590

)

  (4,781

)

Sales (purchases) of premises and equipment, net

  175   (386

)

Purchase of bank owned life insurance

     (5,000

)

Net cash from investing activities

  (38,345

)

  6,506 
         

Cash flows from financing activities

        

Net change in deposits

  16,922   (41,053

)

Payments of Federal Home Loan Bank advances

  (30,611

)

  (462

)

Advances from Federal Home Loan Bank

  25,000    

Payments of subordinated capital note

  (675

)

  (675

)

Proceeds from senior debt

  10,000    

Proceeds from issuance of common stock

     2,231 

Net cash from financing activities

  20,636   (39,959

)

Net change in cash and cash equivalents

  (18,947

)

  (29,491

)

Beginning cash and cash equivalents

  66,316   93,335 

Ending cash and cash equivalents

 $47,369  $63,844 
         

Supplemental cash flow information:

        

Interest paid

 $4,140  $3,933 

Income taxes paid (refunded)

     21 

Supplemental non-cash disclosure:

        

Proceeds from common stock issuance directed by investors for junior subordinated debenture interest

 $  $2,799 

Transfer from loans to other real estate

  270   1,243 

Financed sales of other real estate owned

     270 

 

See accompanying notes to unaudited consolidated financial statements.

 


7

Table of Contents

LIMESTONE BANCORP, INC.

Unaudited Consolidated Statements of Cash Flows

For Six Months Ended June 30, 2018 and 2017

(dollars in thousands)

  

2018

  

2017

 

Cash flows from operating activities

        

Net income

 $3,917  $3,389 

Adjustments to reconcile net loss to net cash from operating activities

        

Depreciation and amortization

  477   640 

Provision (negative provision) for loan losses

  (150

)

   

Net amortization on securities

  444   586 

Stock-based compensation expense

  163   142 

Deferred taxes, net

  1,158    

Net gain on sales of loans held for sale

  (1

)

  (15

)

Origination of loans held for sale

     (810

)

Proceeds from sales of loans held for sale

  71   825 

Net gain on sales of other real estate owned

  (50

)

  (65

)

Net write-down of other real estate owned

  325    

Net realized gain on sales and calls of investment securities

  6   5 

Earnings on bank owned life insurance, net of premium expense

  (227

)

  (195

)

Net change in accrued interest receivable and other assets

  (767

)

  1,783 

Net change in accrued interest payable and other liabilities

  (795

)

  (10,523

)

Net cash from operating activities

  4,571   (4,238

)

         

Cash flows from investing activities

        

Purchases of available for sale securities

  (41,911

)

  (10,188

)

Proceeds from sales and calls of available for sale securities

  6,054    

Proceeds from maturities and prepayments of available for sale securities

  7,003   9,659 

Proceeds from calls of held to maturity securities

     47 

Proceeds from sale of other real estate owned

  354   708 

Loan originations and payments, net

  (37,372

)

  (15,967

)

Sales (purchases) of premises and equipment, net

  (449

)

  230 

Net cash from investing activities

  (66,321

)

  (15,511

)

         

Cash flows from financing activities

        

Net change in deposits

  (794

)

  24,893 

Payments of Federal Home Loan Bank advances

  (40,167

)

  (30,300

)

Advances from Federal Home Loan Bank

  100,000   10,000 

Payments of subordinated capital note

  (2,250

)

  (450

)

Proceeds from senior debt

     10,000 

Proceeds from issuance of common stock

  14,910    

Redemption of preferred stock

  (3,505

)

   

Net cash from financing activities

  68,194   14,143 

Net change in cash and cash equivalents

  6,444   (5,606

)

Beginning cash and cash equivalents

  34,103   66,316 

Ending cash and cash equivalents

 $40,547  $60,710 
         

Supplemental cash flow information:

        

Interest paid

 $4,973  $2,685 

Supplemental non-cash disclosure:

        

Transfer from loans to other real estate

  730   140 

See accompanying notes to unaudited consolidated financial statements.

8

Table of Contents

 

PORTERLIMESTONE BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

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

 

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

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q andand Rule 10-01 of Regulation S-X. Accordingly, the financial statements do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the ninethree and six months ended SeptemberJune 30, 20172018 are not necessarily indicative of the results that may be expected for the entire year. A description of other significant accounting policies is presented in the notes to the Consolidated Financial Statements for the year ended December 31, 20162017 included in the Company’s Annual Report on Form 10-K.

 

Use of Estimates – To prepare financial statements in conformity with U.S. generally accepted accounting principles, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and future results could differ.

 

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

 

New Accounting StandardsIn August 2015,May 2014, FASB issued ASU 2015-14,2014-09, Revenue from Contracts with Customers (Topic 606) (“ASC 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. The majority of the Company’s revenues come from interest income and other sources, including loans and securities that are outside the scope of ASC 606. The Company’s services that fall within the scope of ASC 606 are presented in non-interest income and are recognized as revenue as the Company satisfies its obligation to the customer. Services within the scope of ASC 606 include service charges on deposit accounts, bank card interchange income, and the sale of OREO. 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 isbecame effective for annual reporting periods, and interim reporting periods within those annual periods, beginning after December 15, 2017. Early adoption is not permitted.the Company on January 1, 2018. The Company’s revenue is comprisedimpact 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 ofadopting this new guidance willdid not have a material impact on the consolidated financial statements.statements, but did result in additional disclosures, which have been incorporated into “Note 14 Revenue from Contracts with Customers.”

 

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 becomebecame effective for annual periods and interim periods within those annual periods beginning after December 15, 2017.the Company on January 1, 2018. The impact of adopting the new guidance did not have a material impact on the consolidated financial statements, is not expected tobut did require additional disclosures. The additional disclosures have a material impact. The Company currently does not have any equity investments.been incorporated into “Note 8 Fair Value Measurements.”

 

In February 2016, the FASB issued an update ASU No.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. TheBased on the Company's current lease agreements, the impact of adopting the new guidance on the consolidated financial statements will not have a material impact.impact on the consolidated financial statements.

 


9

 

In JuneJune 2016, the FASB issued ASU No. 2016-13, Financial–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. We are currently gatheringManagement has formed a cross functional committee that has overseen the enhancement of existing technology required to source and model data for the purpose of meeting this standard. The committee has selected a vendor to assist in generating loan level data,cash flows and assessing our data and system needs.disclosures. 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. The magnitude of any adjustment or the overall impact of the new standard on financial condition or results of operation cannot yet be determined.

 

In March 2017, the FASB issued ASU No. 2017-08, Receivables–Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization of Purchased Callable Debt Securities. The final standard will shorten the amortization period for premiums on callable debt securities by requiring that premiums be amortized to the first (or earliest) call date instead of as an adjustment to the yield over the contractual life. The standard is effective for public companies for fiscal years beginning after December 15, 2018. We are currently evaluating the impactAdoption of adopting thethis new guidance will not have a material impact 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 adopted the standard on January 1, 2018 and adoption did not have a material impact on the consolidated financial statements as it resulted in a $113,000 entry between AOCI and retained deficit.

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 we have 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

 
  

(in thousands)

 

September 30, 2017

                

Available for sale

                

U.S. Government and federal agency

 $29,954  $106  $(352

)

 $29,708 

Agency mortgage-backed: residential

  91,546   808   (619

)

  91,735 

Collateralized loan obligations

  23,444   82      23,526 

State and municipal

  1,648   13      1,661 

Corporate bonds

  3,079   88      3,167 

Total available for sale

 $149,671  $1,097  $(971

)

 $149,797 

  

Amortized

Cost

  

Gross Unrecognized

Gains

  

Gross Unrecognized

Losses

  

Fair Value

 

Held to maturity

                

State and municipal

 $41,424  $1,973  $  $43,397 

Total held to maturity

 $41,424  $1,973  $  $43,397 
  

Amortized

Cost

  

Gross

Unrealized

Gains

  

Gross

Unrealized

Losses

  

Fair Value

 
  

(in thousands)

 

June 30, 2018

                

Available for sale

                

U.S. Government and federal agency

 $24,896  $  $(810

)

 $24,086 

Agency mortgage-backed: residential

  85,176   102   (2,375

)

  82,903 

Collateralized loan obligations

  29,923   15   (33

)

  29,905 

State and municipal

  33,068   274   (271

)

  33,071 

Corporate bonds

  8,865   71   (5

)

  8,931 

Total available for sale

 $181,928  $462  $(3,494

)

 $178,896 

 


10

 

 

 

Amortized

Cost

  

Gross

Unrealized

Gains

  

Gross

Unrealized

Losses

  

Fair Value

 
  (in thousands) 

December 31, 2016

                

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 

December 31, 2017

 

Amortized

Cost

  

Gross

Unrealized

Gains

  

Gross

Unrealized

Losses

  

Fair Value

 

Available for sale

                

U.S. Government and federal agency

 $22,105  $2  $(483

)

 $21,624 

Agency mortgage-backed: residential

  65,935   117   (1,087

)

  64,965 

Collateralized loan obligations

  25,343   182   (20

)

  25,505 

State and municipal

  33,303   508   (101

)

  33,710 

Corporate bonds

  6,838   78      6,916 

Total available for sale

 $153,524  $887  $(1,691

)

 $152,720 

 

Sales and calls of securities were as follows:

  

Three Months Ended

September 30,

  

Nine Months Ended

September 30,

 
  

2017

  

2016

  

2017

  

2016

 
  

(in thousands)

(in thousands) 

Proceeds

 $2,000  $2,555  $2,047  $6,276 

Gross gains

     13      216 

Gross losses

     29   5   29 

  

Three Months Ended

June 30,

  

Six Months Ended

June 30,

 
  

2018

  

2017

  

2018

  

2017

 
  

(in thousands) (in thousands)

 

Proceeds

 $6,054  $47  $6,054  $47 

Gross gains

            

Gross losses

  6   5   6   5 

 

The amortized cost and fair value of theour debt investment securities portfolio are shown by contractualcontractual maturity. ContractualExpected maturities may differ from actual maturities if issuerswhen 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 detailedshown separately.

 

 

September 30, 2017

  

June 30, 2018

 
 

Amortized

Cost

  

Fair

Value

  

Amortized

Cost

  

Fair

Value

 
 

(in thousands)

  

(in thousands)

 

Maturity

                

Available for sale

                

Within one year

 $7,340  $7,432  $24,696  $24,752 

One to five years

  15,019   15,102   45,674   45,450 

Five to ten years

  32,715   32,464   26,382   25,791 

Beyond ten years

  3,051   3,064 

Agency mortgage-backed: residential

  91,546   91,735   85,176   82,903 

Total

 $149,671  $149,797  $181,928  $178,896 
        

Held to maturity

        

Within one year

 $646  $646 

One to five years

  27,619   28,729 

Five to ten years

  13,159   14,022 

Total

 $41,424  $43,397 

 

Securities pledged at SeptemberJune 30, 20172018 and December 31, 20162017 had carrying values of approximately $85.3$56.6 million and $61.2$76.8 million, respectively, and were pledged to secure public deposits.

 

At SeptemberJune 30, 20172018 and December 31, 2016, we2017, the Bank held securities issued by the Commonwealth of Kentucky or Kentucky municipalities having a book value of $15.8 million and $16.4 million, respectively. Additionally, at September$16.0 million. At June 30, 20172018 and December 31, 2016, we held securities issued by the State of Texas or Texas municipalities having a book value of $4.3 million at each period end. At September 30, 2017, and December 31, 2016, 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 temporaryother-than-temporary impairment (OTTI) on a quarterly basis,, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition credit quality, and near-term prospects of the issuer, underlying credit quality of the issuer, and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer’s financial condition, the Company may consider whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, the sector or industry trends and cycles affecting the issuer, and the results of reviews of the issuer’s financial condition. As of SeptemberJune 30, 2017,2018, management does not believe any securities in ourthe portfolio with unrealized losses should be classified as other than temporarily impaired.

11

 

Securities with unrealized losses at SeptemberJune 30, 20172018 and December 31, 2016,2017, 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)

 

September 30, 2017

                        

Available for sale

                        

U.S. Government and federal Agency

 $19,543  $(324

)

 $1,125  $(28

)

 $20,668  $(352

)

Agency mortgage-backed: residential

  29,928   (489

)

  7,261   (130

)

  37,189   (619

)

Total temporarily impaired

 $49,471  $(813

)

 $8,386  $(158

)

 $57,857  $(971

)

                         
                         

December 31, 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

)

There were no held to maturity securities in an unrecognized loss position at September 30, 2017.

 


  

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)

 

June 30, 2018

                        

Available for sale

                        

U.S. Government and federal agency

 $7,104  $(195

)

 $14,977  $(615

)

 $22,081  $(810

)

Agency mortgage-backed: residential

  47,685   (1,000

)

  24,587   (1,375

)

  72,272   (2,375

)

Collateralized loan obligations

  17,803   (33

)

        17,803   (33

)

State and municipal

  16,903   (271

)

        16,903   (271

)

Corporate bonds

  1,995   (5

)

        1,995   (5

)

Total temporarily impaired

 $91,490  $(1,504

)

 $39,564  $(1,990

)

 $131,054  $(3,494

)

                         
                         

December 31, 2017

                        

Available for sale

                        

U.S. Government and federal agency

 $5,788  $(97

)

 $14,121  $(386

)

 $19,909  $(483

)

Agency mortgage-backed: residential

  21,104   (172

)

  27,158   (915

)

  48,262   (1,087

)

Collateralized loan obligations

  6,038   (20

)

        6,038   (20

)

State and municipal

  7,492   (101

)

        7,492   (101

)

Total temporarily impaired

 $40,422  $(390

)

 $41,279  $(1,301

)

 $81,701  $(1,691

)

 

Note 3 – Loans

 

Loans net of unearned income, deferred loan origination costs, and net premiums on acquired loans by class were as follows:

 

 

September 30,

  

December 31,

  

June 30,

  

December 31,

 
 

2017

  

2016

  

2018

  

2017

 
 

(in thousands)

  (in thousands) 

Commercial

 $107,616  $97,761  $124,139  $113,771 

Commercial Real Estate:

                

Construction

  44,956   36,330   79,608   57,342 

Farmland

  88,370   71,507   84,972   88,320 

Nonfarm nonresidential

  157,956   149,546   161,395   156,724 

Residential Real Estate:

                

Multi-family

  55,684   48,197   50,541   56,588 

1-4 Family

  173,213   188,092   178,320   179,222 

Consumer

  8,474   9,818   30,711   18,439 

Agriculture

  45,675   37,508   38,960   41,154 

Other

  567   477   588   555 

Subtotal

  682,511   639,236   749,234   712,115 

Less: Allowance for loan losses

  (8,977

)

  (8,967

)

  (8,580

)

  (8,202

)

Loans, net

 $673,534  $630,269  $740,654  $703,913 

 

12

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended SeptemberJune 30, 20172018 and 2016:2017:

 

  

Commercial

  

Commercial

Real Estate

  

Residential

Real Estate

  

Consumer

  

Agriculture

  

Other

  

Total

 
  

(in thousands)

 

September 30, 2017:

                            

Beginning balance

 $956  $4,223  $3,317  $53  $335  $1  $8,885 

Provision (negative provision)

  (41

)

  206   (147

)

  (31

)

  15   (2

)

   

Loans charged off

  (5

)

     (57

)

  (5

)

        (67

)

Recoveries

  3   9   103   25   16   3   159 

Ending balance

 $913  $4,438  $3,216  $42  $366  $2  $8,977 
                             
                             

September 30, 2016:

                            

Beginning balance

 $730  $5,429  $3,778  $47  $119  $1  $10,104 

Provision (negative provision)

  (195

)

  (436

)

  (142

)

  (26

)

  79   (30

)

  (750

)

Loans charged off

  (15

)

  (232

)

  (131

)

  (21

)

  (5

)

  (1

)

  (405

)

Recoveries

  102   354   27   23   1   33   540 

Ending balance

 $622  $5,115  $3,532  $23  $194  $3  $9,489 


  

Commercial

  

Commercial

Real Estate

  

Residential

Real Estate

  

Consumer

  

Agriculture

  

Other

  

Total

 
  

(in thousands)

 

June 30, 2018:

                            

Beginning balance

 $1,077  $4,112  $2,833  $84  $419  $1  $8,526 

Provision (negative provision)

  51   (83

)

  (48

)

  (27

)

  (40

)

  (3

)

  (150

)

Loans charged off

     (197

)

  (69

)

  (7

)

  (12

)

  (8

)

  (293

)

Recoveries

  5   402   62   16      12   497 

Ending balance

 $1,133  $4,234  $2,778  $66  $367  $2  $8,580 
                             
                             

June 30, 2017:

                            

Beginning balance

 $814  $4,242  $3,569  $32  $307  $2  $8,966 

Provision (negative provision)

  106   (131

)

  (113

)

  22   121   (5

)

   

Loans charged off

     (31

)

  (161

)

  (20

)

  (95

)

     (307

)

Recoveries

  36   143   22   19   2   4   226 

Ending balance

 $956  $4,223  $3,317  $53  $335  $1  $8,885 

 

The following table presents the activity in the allowance for loan losses by portfolioportfolio segment for the ninesix months ended SeptemberJune 30, 20172018 and 2016: 2017: 

 

 

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)

 

September 30, 2017:

                            

June 30, 2018:

                            

Beginning balance

 $475  $4,894  $3,426  $8  $162  $2  $8,967  $892  $4,032  $2,900  $64  $313  $1  $8,202 

Provision (negative provision)

  399   (791

)

  134   (5

)

  274   (11

)

   

Provision (negative provision)

  (4

)

  (20

)

  (164

)

  (14

)

  55   (3

)

  (150

)

Loans charged off

  (5

)

  (58

)

  (512

)

  (30

)

  (95

)

     (700

)

     (198

)

  (88

)

  (34

)

  (12

)

  (8

)

  (340

)

Recoveries

  44   393   168   69   25   11   710   245   420   130   50   11   12   868 

Ending balance

 $913  $4,438  $3,216  $42  $366  $2  $8,977  $1,133  $4,234  $2,778  $66  $367  $2  $8,580 
                                                        
                                                        

September 30, 2016:

                            

June 30, 2017:

                            

Beginning balance

 $818  $6,993  $3,984  $122  $122  $2  $12,041  $475  $4,894  $3,426  $8  $162  $2  $8,967 

Provision (negative provision)

  (89

)

  (2,024

)

  458   (259

)

  (1

)

  15   (1,900

)

  440   (997

)

  281   26   259   (9

)

   

Loans charged off

  (276

)

  (477

)

  (1,181

)

  (56

)

  (13

)

  (79

)

  (2,082

)

     (58

)

  (455

)

  (25

)

  (95

)

     (633

)

Recoveries

  169   623   271   216   86   65   1,430   41   384   65   44   9   8   551 

Ending balance

 $622  $5,115  $3,532  $23  $194  $3  $9,489  $956  $4,223  $3,317  $53  $335  $1  $8,885 

13

 

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 SeptemberJune 30, 2017:2018:

 

  

Commercial

  

Commercial

Real Estate

  

Residential

Real Estate

  

Consumer

  

Agriculture

  

Other

  

Total

 
  

(in thousands)

 

Allowance for loan losses:

                            

Ending allowance balance attributable to loans:

                            

Individually evaluated for impairment

 $13  $26  $386  $  $  $  $425 

Collectively evaluated for impairment

  900   4,412   2,830   42   366   2   8,552 

Total ending allowance balance

 $913  $4,438  $3,216  $42  $366  $2  $8,977 
                             

Loans:

                            

Loans individually evaluated for impairment

 $608  $2,749  $4,092  $  $60  $  $7,509 

Loans collectively evaluated for impairment

  107,008   288,533   224,805   8,474   45,615   567   675,002 

Total ending loans balance

 $107,616  $291,282  $228,897  $8,474  $45,675  $567  $682,511 


  

Commercial

  

Commercial

Real Estate

  

Residential

Real Estate

  

Consumer

  

Agriculture

  

Other

  

Total

 
  

(in thousands)

 

Allowance for loan losses:

                            

Ending allowance balance attributable to loans:

                            

Individually evaluated for impairment

 $13  $48  $258  $  $  $  $319 

Collectively evaluated for impairment

  1,120   4,186   2,520   66   367   2   8,261 

Total ending allowance balance

 $1,133  $4,234  $2,778  $66  $367  $2  $8,580 
                             

Loans:

                            

Loans individually evaluated for impairment

 $109  $1,433  $3,015  $  $  $  $4,557 

Loans collectively evaluated for impairment

  124,030   324,542   225,846   30,711   38,960   588   744,677 

Total ending loans balance

 $124,139  $325,975  $228,861  $30,711  $38,960  $588  $749,234 

 

The following tabletable 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, 2016:2017:

 

  

Commercial

  

Commercial

Real Estate

  

Residential

Real Estate

  

Consumer

  

Agriculture

  

Other

  

Total

 
  

(in thousands)

 

Allowance for loan losses:

                            

Ending allowance balance attributable to loans:

                            

Individually evaluated for impairment

 $13  $  $206  $  $  $  $219 

Collectively evaluated for impairment

  879   4,032   2,694   64   313   1   7,983 

Total ending allowance balance

 $892  $4,032  $2,900  $64  $313  $1  $8,202 
                             
                             

Loans:

                            

Loans individually evaluated for impairment

 $587  $2,635  $3,950  $1  $  $  $7,173 

Loans collectively evaluated for impairment

  113,184   299,751   231,860   18,438   41,154   555   704,942 

Total ending loans balance

 $113,771  $302,386  $235,810  $18,439  $41,154  $555  $712,115 

 

  

Commercial

  

Commercial

Real Estate

  

Residential

Real Estate

  

Consumer

  

Agriculture

  

Other

  

Total

 
  

(in thousands)

 

Allowance for loan losses:

                            

Ending allowance balance attributable to loans:

                            

Individually evaluated for impairment

 $13  $35  $350  $  $1  $  $399 

Collectively evaluated for impairment

  462   4,859   3,076   8   161   2   8,568 

Total ending allowance balance

 $475  $4,894  $3,426  $8  $162  $2  $8,967 
                             
                             

Loans:

                            

Loans individually evaluated for impairment

 $595  $5,854  $8,621  $1  $60  $  $15,131 

Loans collectively evaluated for impairment

  97,166   251,529   227,668   9,817   37,448   477   624,105 

Total ending loans balance

 $97,761  $257,383  $236,289  $9,818  $37,508  $477  $639,236 

14

 

Impaired Loans

 

Impaired loans include restructured loans and loans on nonaccrual or classified as doubtful, whereby collection of the total amount is improbable, or loss, whereby all or a portion of the loan has been written off or a specific allowance for loss has been provided.

 

The following tablestables present information related to loans individually evaluated for impairment by class of loans as of SeptemberJune 30, 20172018 and December 31, 20162017 and for the ninesix months ended SeptemberJune 30, 20172018 and 2016:2017:

 

             

Three Months Ended

September 30, 2017

  

Nine Months Ended

September 30, 2017

  

As of June 30, 2018

  

Three Months Ended

June 30, 2018

  

Six Months Ended

June 30, 2018

 
 

Unpaid

Principal

Balance

  

Recorded

Investment

  

Allowance

For Loan

Losses

Allocated

  

Average

Recorded

Investment

  

Interest

Income

Recognized

  

 

Average

Recorded

Investment

  

 

Interest

Income

Recognized

  

Unpaid

Principal

Balance

  

Recorded

Investment

  

Allowance

For Loan

Losses

Allocated

  

Average

Recorded

Investment

  

Interest

Income

Recognized

  

 

Average

Recorded

Investment

  

 

Interest

Income

Recognized

 
 

(in thousands)

  

(in thousands)

 

With No Related Allowance Recorded:

                                                        

Commercial

 $724  $508  $  $499  $  $497  $  $25  $9  $  $14  $1  $172  $1 

Commercial real estate:

                                                        

Construction

                                          

Farmland

  3,783   2,155      2,336      2,800   209   2,798   997      1,340   83   1,580   281 

Nonfarm nonresidential

  773   301      311   1   752   53   725   264      271   3   373   8 

Residential real estate:

                                                        

Multi-family

                 1,025                         

1-4 Family

  3,858   2,470      2,879   22   2,909   50   2,754   1,563      1,894   27   2,191   35 

Consumer

  8            2   2   2   8         1      1    

Agriculture

  130   60      60   1   30   1                      

Other

                                          

Subtotal

  9,276   5,494      6,085   26   8,015   315   6,310   2,833      3,520   114   4,317   325 

With A Related Allowance Recorded:

                            

With An Allowance Recorded:

                            

Commercial

  100   100   13   100   1   100   5   100   100   13   100   2   100   4 

Commercial real estate:

                                                        

Construction

                                          

Farmland

                 294      172   172   48   86      57    

Nonfarm nonresidential

  293   293   26   294   5   298   14                      

Residential real estate:

                                                        

Multi-family

                                          

1-4 Family

  1,183   1,622   386   1,412   17   1,465   51   1,549   1,452   258   1,460   16   1,361   32 

Consumer

                                          

Agriculture

                 30                         

Other

                                          

Subtotal

  1,576   2,015   425   1,806   23   2,187   70   1,821   1,724   319   1,646   18   1,518   36 

Total

 $10,852  $7,509  $425  $7,891  $49  $10,202  $385  $8,131  $4,557  $319  $5,166  $132  $5,835  $361 

 


15

 

 

As of December 31, 2016

  

Three Months Ended

September 30, 2016

  

Nine Months Ended

September 30, 2016

  

As of December 31, 2017

  

Three Months Ended

June 30, 2017

  

Six Months Ended

June 30, 2017

 
 

Unpaid

Principal

Balance

  

Recorded

Investment

  

Allowance

For Loan

Losses

Allocated

  

Average

Recorded

Investment

  

Interest

Income

Recognized

  

 

Average

Recorded

Investment

  

 

Interest

Income

Recognized

  

Unpaid

Principal

Balance

  

Recorded

Investment

  

Allowance

For Loan

Losses

Allocated

  

Average

Recorded

Investment

  

Interest

Income

Recognized

  

 

Average

Recorded

Investment

  

 

Interest

Income

Recognized

 
 

(in thousands)

  

(in thousands)

 

With No Related Allowance Recorded:

                                                        

Commercial

 $707  $495  $  $659  $  $824  $1  $703  $487  $  $492  $  $493  $ 

Commercial real estate:

                                                        

Construction

           129   3   195   9                      

Farmland

  5,566   3,742      4,404   79   4,299   87   3,687   2,059      2,651   3   3,015   209 

Nonfarm nonresidential

  4,502   1,219      4,023   2   5,569   308   1,047   576      743   20   902   52 

Residential real estate:

                                                        

Multi-family

  4,100   4,100      3,254   179   2,235   237                  1,367    

1-4 Family

  4,663   2,910      3,523   14   6,159   85   4,293   2,787      3,127   20   3,055   28 

Consumer

  41   1      4      8   8   9   1      4      3    

Agriculture

           69      92               30      20    

Other

                                          

Subtotal

  19,579   12,467      16,065   277   19,381   735   9,739   5,910      7,047   43   8,855   289 

With A Related Allowance Recorded:

                            

With An Allowance Recorded:

                            

Commercial

  100   100   13               100   100   13   100   2   100   4 

Commercial real estate:

                                                        

Construction

                                          

Farmland

  614   590   5   600      300               293      392    

Nonfarm nonresidential

  303   303   30   405   6   421   18            298   5   300   9 

Residential real estate:

                                                        

Multi-family

           2,080      3,133   101                      

1-4 Family

  1,676   1,611   350   1,656   20   1,671   74   1,163   1,163   206   1,314   17   1,413   34 

Consumer

                                          

Agriculture

  78   60   1   68      34               30      40    

Other

                                          

Subtotal

  2,771   2,664   399   4,809   26   5,559   193   1,263   1,263   219   2,035   24   2,245   47 

Total

 $22,350  $15,131  $399  $20,874  $303  $24,940  $928  $11,002  $7,173  $219  $9,082  $67  $11,100  $336 

 

Cash basis income recognized for the three and ninesix months ended SeptemberJune 30, 20172018 was $24,000$111,000 and $309,000,$317,000, respectively, compared to $87,000$41,000 and $377,000$285,000 for the three and ninesix months ended SeptemberJune 30, 2016,2017, respectively.

 

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 allocateshas 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 portfolioportfolio segment outstanding as of SeptemberJune 30, 20172018 and December 31, 2016:2017:

 

 

TDRs

Performing to

Modified

Terms

  

TDRs Not

Performing to

Modified

Terms

  

Total

TDRs

  

TDRs

Performing to

Modified Terms

  

TDRs Not

Performing to

Modified Terms

  

Total

TDRs

 
 

(in thousands)

  

(in thousands)

 

September 30, 2017

            

Commercial

            

Rate reduction

 $  $33  $33 

Principal deferral

     434   434 

June 30, 2018

            

Commercial Real Estate:

                        

Farmland

                        

Principal deferral

     1,465   1,465      700   700 

Nonfarm nonresidential

                        

Rate reduction

  489      489   189      189 

Residential Real Estate:

                        

1-4 Family

                        

Rate reduction

  737      737   727      727 

Total TDRs

 $1,226  $1,932  $3,158  $916  $700  $1,616 

 


16

 

 

TDRs

Performing to

Modified Terms

  

TDRs Not

Performing to

Modified Terms

  

Total

TDRs

  

TDRs

Performing to

Modified Terms

  

TDRs Not

Performing to

Modified Terms

  

Total

TDRs

 
 

(in thousands)

  

(in thousands)

 

December 31, 2016

            

December 31, 2017

            

Commercial

                        

Rate reduction

 $  $33  $33  $  $33  $33 

Principal deferral

     434   434      434   434 

Commercial Real Estate:

                        

Farmland

                        

Principal deferral

     2,300   2,300      1,362   1,362 

Nonfarm nonresidential

                        

Rate reduction

  507      507   483      483 

Principal deferral

     607   607 

Residential Real Estate:

                        

Multi-family

            

Rate reduction

  4,100      4,100 

1-4 Family

                        

Rate reduction

  743      743   734      734 

Total TDRs

 $5,350  $3,374  $8,724  $1,217  $1,829  $3,046 

 

At SeptemberJune 30, 20172018 and December 31, 2016, 39%2017, 57% and 61%40%, respectively, of the Company’s TDRs were performing according to their modified terms. The Company allocated $141,000$107,000 and $197,000$122,000 in reserves to borrowers whose loan terms have been modified in TDRs as of SeptemberJune 30, 2017,2018, and December 31, 2016,2017, respectively. The Company has committed to lend no additional amounts as of SeptemberJune 30, 20172018 and December 31, 20162017 to borrowers with outstanding loans 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 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 willwould continue to comply with the terms of the loan aftersubsequent 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 and managementrisk. Management expects the borrower will continue to perform under the re-modified terms based on the borrower’s past history of performance. In March 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 modificationsmodifications occurred during the three or nineand six months ended SeptemberJune 30, 20172018 or SeptemberJune 30, 2016.2017. During the first ninesix months of 20172018 and 2016,2017, no TDRs defaulted on their restructured loan within the twelve-month12 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.


 

Non-performing Loans

 

Non-performingNon-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 SeptemberJune 30, 2017,2018, and December 31, 2016: 2017: 

 

 

Nonaccrual

  

Loans Past Due 90 Days

And Over Still Accruing

  

Nonaccrual

  

Loans Past Due 90 Days

And Over Still Accruing

 
 

September 30,

2017

  

December 31,

2016

  

September 30,

2017

  

December 31,

2016

  

June 30,

2018

  

December 31,

2017

  

June 30,

2018

  

December 31,

2017

 
 

(in thousands)

  

(in thousands)

 
                                

Commercial

 $508  $495  $  $  $9  $487  $  $ 

Commercial Real Estate:

                                

Construction

                        

Farmland

  2,155   4,332         1,169   2,059       

Nonfarm nonresidential

  105   1,016         75   93       

Residential Real Estate:

                                

Multi-family

                        

1-4 Family

  2,941   3,312         1,916   2,817       

Consumer

     1         1   1      1 

Agriculture

  60   60                   

Other

                        

Total

 $5,769  $9,216  $  $  $3,170  $5,457  $  $1 

 


17

 

The following table presents the aging of the recorded investment in past due loans as of SeptemberJune 30, 20172018 and December 31, 2016:2017:

 

 

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)

 

September 30, 2017

                    

June 30, 2018

                    

Commercial

 $2  $  $  $508  $510  $  $  $  $9  $9 

Commercial Real Estate:

                                        

Construction

                              

Farmland

  281   19      2,155   2,455   11   52      1,169   1,232 

Nonfarm nonresidential

  239         105   344   125         75   200 

Residential Real Estate:

                    

Residential Real Estate:

                    

Multi-family

                              

1-4 Family

  300   593      2,941   3,834   970   239      1,916   3,125 

Consumer

  50            50   28         1   29 

Agriculture

           60   60      247         247 

Other

                              

Total

 $872  $612  $  $5,769  $7,253  $1,134  $538  $  $3,170  $4,842 

 

 

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, 2017

                    

Commercial

 $  $  $  $495  $495  $  $  $  $487  $487 

Commercial Real Estate:

                                        

Construction

                              

Farmland

  626         4,332   4,958   593         2,059   2,652 

Nonfarm nonresidential

     59      1,016   1,075            93   93 

Residential Real Estate:

                                        

Multi-family

                              

1-4 Family

  1,454   256      3,312   5,022   850   126      2,817   3,793 

Consumer

  19         1   20   30   45      1   76 

Agriculture

  203         60   263   5      1      6 

Other

                              

Total

 $2,302  $315  $  $9,216  $11,833  $1,478  $171  $1  $5,457  $7,107 

 

Credit Quality Indicators 

 

We categorizeManagement categorizes all loans into risk categories at origination based upon original underwriting. Thereafter, we categorizemanagement 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. LoansAdditionally, loans are also analyzed through our internal and external loan review processes. Borrower relationships in excess of $500,000 are routinely analyzed through ourthe credit administration processes which classify the loans as to credit risk. The following definitions are used for risk ratings:

 

WatchWatchLoans classified as watch are those loans which have or may experience a potentially adverse development which necessitates increased monitoring.

 

Special Mention Loans classified as special mention do not have all of the characteristics of substandard or doubtful loans. They have one or more deficiencies which warrant special attention and which corrective action, such as accelerated collection practices, may remedy.

 

Substandard Loans classified as substandard are those loans with clear and defined weaknesses such as a highly leveraged position, unfavorable financial ratios, uncertain repayment sources or poor financial condition which may jeopardize the repayment of the debt as contractually agreed. They are characterized by the distinct possibility that wethe Bank will sustain some losses if the deficiencies are not corrected.

 


18

 

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 consideredconsidered to be “Pass” rated loans. As of SeptemberJune 30, 2017,2018, and December 31, 2016,2017, 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)

 

September 30, 2017

                        
June 30, 2018
                        

Commercial

 $106,645  $228  $  $743  $  $107,616  $123,814  $138  $  $187  $  $124,139 

Commercial Real Estate:

                                                

Construction

  44,956               44,956   79,608               79,608 

Farmland

  78,156   5,935      4,279      88,370   76,397   5,044      3,531      84,972 

Nonfarm nonresidential

  153,026   2,948   432   1,550      157,956   158,169   2,554      672      161,395 

Residential Real Estate:

                                                

Multi-family

  46,100   9,584            55,684   41,856   8,685            50,541 

1-4 Family

  162,476   4,473   166   6,098      173,213   170,837   2,583   115   4,785      178,320 

Consumer

  8,062   323      89      8,474   30,366   6      339      30,711 

Agriculture

  33,215   11,676      784      45,675   38,811   81      68      38,960 

Other

  567               567   588               588 

Total

 $633,203  $35,167  $598  $13,543  $  $682,511  $720,446  $19,091  $115  $9,582  $  $749,234 

 

 

Pass

  

Watch

  

Special

Mention

  

Substandard

  

Doubtful

  

Total

  

Pass

  

Watch

  

Special

Mention

  

Substandard

  

Doubtful

  

Total

 
 

(in thousands)

  

(in thousands)

 

December 31, 2016

                        

December 31, 2017

                        

Commercial

 $96,402  $294  $  $1,065  $  $97,761  $112,978  $84  $  $709  $  $113,771 

Commercial Real Estate:

                                                

Construction

  35,823   507            36,330   57,342               57,342 

Farmland

  63,323   1,521      6,663      71,507   76,563   7,607      4,150      88,320 

Nonfarm nonresidential

  142,222   5,217   445   1,662      149,546   152,004   2,906      1,814      156,724 

Residential Real Estate:

                                                

Multi-family

  38,281   6,080      3,836      48,197   47,121   9,467            56,588 

1-4 Family

  173,565   6,909   52   7,566      188,092   169,774   3,535   164   5,749      179,222 

Consumer

  9,397   348      73      9,818   18,042   306      91      18,439 

Agriculture

  26,940   9,555      1,013      37,508   38,654   1,810      690      41,154 

Other

  477               477   555               555 

Total

 $586,430  $30,431  $497  $21,878  $  $639,236  $673,033  $25,715  $164  $13,203  $  $712,115 

Note 4 – 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 lieulieu of foreclosure, it is recorded at its fair market value less expected 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.basis. When foreclosed properties are acquired, we obtainmanagement obtains a new appraisal of the subject property or havehas staff from ourthe Bank’s special assets group evaluate the latest in-file appraisal in connection with the transfer to OREO. WeUpdated appraisals are typically obtain updated appraisalsobtained 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 listingmarketing price is lowered below the appraised amount. 


 

The following table presents the major categories of OREO at the period-ends indicated:

 

 


September 30,

2017

  

December 31,

2016

  

June 30,

2018

  

December 31,

2017

 
 

(in thousands)

  

(in thousands)

 

Commercial Real Estate:

                

Construction, land development, and other land

 $6,200  $6,571  $4,010  $4,335 

Farmland

  74      500   74 

Residential Real Estate:

        

1-4 Family

  56   250 
 $6,330  $6,821  $4,510  $4,409 

19

 

ResidentialResidential loans secured by 1-4 family residential properties in the process of foreclosure totaled $643,000$94,000 and $932,000$616,000 at SeptemberJune 30, 20172018 and December 31, 2016,2017, respectively.

Activity relating to OREO during the ninesix months ended SeptemberJune 30, 20172018 and 20162017 is as follows:

 

  

For the Nine

Months Ended

September 30,

 
  

2017

  

2016

 
  

(in thousands)

 

OREO Activity

        

OREO as of January 1

 $6,821  $19,214 

Real estate acquired

  270   1,243 

Valuation adjustment write-downs

  (98

)

  (970

)

Net gain on sales

  75   221 

Proceeds from sales of properties

  (738

)

  (12,610

)

OREO as of September 30

 $6,330  $7,098 

We recognized no OREO rental income for the three and nine months ended September 30, 2017, respectively, and $46,000 and $451,000 for the three and nine months ended September 30, 2016, respectively.

  

For the Six

Months Ended

June 30,

 
  

2018

  

2017

 
  

(in thousands)

 

OREO Activity

        

OREO as of January 1

 $4,409  $6,821 

Real estate acquired

  730   140 

Valuation adjustment write-downs

  (325

)

   

Net gain on sales

  50   65 

Proceeds from sales of properties

  (354

)

  (708

)

OREO as of June 30

 $4,510  $6,318 

 

Expenses related to other real estate owned include:

 

 

Three Months Ended

September 30,

  

Nine Months Ended

September 30,

  

Three Months Ended

June 30,

  

Six Months Ended

June 30,

 
 

2017

  

2016

  

2017

  

2016

  

2018

  

2017

  

2018

  

2017

 
 (in thousands) (in thousands)  

(in thousands) (in thousands)

 

Net gain on sales

 $(10

)

 $(52

)

 $(75

)

 $(221

)

 $(54

)

 $(27

)

 $(50

)

 $(65

)

Valuation adjustment write-downs

  98   320   98   970   265      325    

Operating expense

  23   54   69   535   26   24   44   46 

Total

 $111  $322  $92  $1,284  $237  $(3

)

 $319  $(19

)

 

Note 5 – Deposits

 

The following table shows ending deposit balancesdetails deposits by category as of:category:

 

  

September 30,

2017

  

December 31,

2016

 
  

(in thousands)

 

Non-interest bearing

 $133,896  $124,395 

Interest checking

  94,523   103,876 

Money market

  156,905   142,497 

Savings

  35,946   34,518 

Certificates of deposit

  445,577   444,639 

Total

 $866,847  $849,925 


  

June 30,

2018

  

December 31,

2017

 
  

(in thousands)

 

Non-interest bearing

 $136,553  $137,386 

Interest checking

  88,955   99,383 

Money market

  150,048   151,388 

Savings

  35,220   34,632 

Certificates of deposit

  435,454   424,235 

Total

 $846,230  $847,024 

 

Time deposits of $250,000$250,000 or more were $33.1$28.6 million and $29.1$31.7 million at SeptemberJune 30, 20172018 and December 31, 2016,2017, respectively.

 

Scheduled maturities of alltotal time deposits at SeptemberJune 30, 2017 were2018 for each of the next five years are as follows (in thousands):

 

Year 1

 $221,600  $246,092 

Year 2

  174,906   158,562 

Year 3

  35,418   13,752 

Year 4

  6,626   4,828 

Year 5

  7,027   12,220 
 $445,577  $435,454 

 

20

Note 6 – Advances from the Federal Home Loan Bank

 

Advances from the Federal Home Loan Bank (FHLB) were as follows:

 

  

September 30,

  

December 31,

 
  

2017

  

2016

 
  

(in thousands)

 

Advances with fixed rates from 0.00% to 5.24% and maturities ranging from 2017 through 2033, averaging 1.24% at September 30, 2017 and 0.85% at December 31, 2016

 $16,847  $22,458 
  

June 30,

  

December 31,

 
  

2018

  

2017

 
  

(in thousands)

 
Short term advances (fixed rates 1.93% to 2.05%) maturing July 2018 to August 2018 $70,000  $10,000 

Long term advances (fixed rates 0.00% to 5.24%) maturing April 2020 to August 2033

  1,630   1,797 
   Total advances from the Federal Home Loan Bank $71,630  $11,797 

 

Scheduled principal payments on FHLB advances during the next five yearshad weighted-average rates of 1.98% at June 30, 2018 and thereafter (in thousands):

  

Advances

 

Year 1

 $15,203 

Year 2

  182 

Year 3

  492 

Year 4

  739 

Year 5

  108 

Thereafter

  123 
  $16,847 

1.48% at December 31, 2017. Each advance is payable based upon theper terms ofon agreement, with a prepayment penalty. No prepayment penalties were incurred during 20172018 or 2016.2017. The advances arewere collateralized by approximately $131.4 million and $130.9 million of first mortgage residential loans. In Septemberloans, under a blanket lien arrangement at June 30, 2018 and December 31, 2017, the FHLB notified the Bank of an upgrade to its collateral reporting status from physical delivery status to blanket summary status whereby the FHLB determines borrowing capacity from the eligible book value of qualifying residential loans pledged rather than the discounted market value of loans delivered to physical custody.respectively. At SeptemberJune 30, 2017,2018, our additional borrowing capacity with the FHLB was $74.8$19.4 million.

 

Scheduled principal payments on the above during the next five years and thereafter (in thousands):

  

Advances

Year 1

 $70,173 

Year 2

  481 

Year 3

  738 

Year 4

  99 

Year 5

  93 

Thereafter

  46 
  $71,630 

Note 7 – Senior Debt

 

On June 30, 2017, theThe Company entered intohas a $10.0 million senior secured loan agreement with a commercial bank. The loan matures on June 30,30, 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 Company contributed $9.0 million lender retained a portion 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 SeptemberJune 30, 2017,2018, the escrow account had a balance of $903,000.$612,000.

 

The loan agreement contains customary representations,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 SeptemberJune 30, 2017.2018.

 


Note 8 – Fair Values Measurement

 

Fair value is the exchangeexchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. We use variousVarious 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.

21

Table of Contents

 

In certain cases, the inputs used to measure fair value may fall into different levelslevels of the fair value hierarchy. When that occurs, we classify the fair value hierarchy is classified on the lowest level of input that is significant to the fair value measurement. We used theThe 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 relativerelative 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.

 

WeManagement routinely apply an internal discount to the value of appraisals used in the fair value evaluation of our impaired loans. The deductions to the appraisal take into account changing business factors and market conditions, as well as potential value impairment in cases where our appraisal date predates a likely change in market conditions. These deductions range from 10% for routine real estate collateral to 25% for real estate that is determined (1) to have a thin trading market or (2) to be specialized collateral. This is in addition to estimated discounts for cost to sell of six to ten percent.

 

WeManagement also apply discounts to the expected fair value of collateral for impaired loans where the likely resolution involves litigationlitigation or foreclosure. Resolution of this nature generally results in receiving lower values for real estate collateral in a more aggressive sales environment. We have utilized discountsDiscounts ranging from 10% to 33% have been utilized in our impairment evaluations when applicable.

 


ImpairedImpaired loans are evaluated quarterly for additional impairment. We obtainManagement obtains updated appraisals on properties securing our loans when circumstances are warranted such as at the time of renewal or when market conditions have significantly changed. This determination is made on a property-by-property basis in light of circumstances in the broader economic climate and ourthe assessment of deterioration of real estate values in the market in which the property is located. The first stage of ourmanagement’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 cost to sell. Our quarterlyQuarterly evaluations of OREO for impairment are driven by property type. For smaller dollar single family homes, we consultmanagement consults with staff from ourthe Bank’s special assets group as well as external realtors and appraisers. Based on these consultations, we determinemanagement determines asking prices for OREO properties we are marketingbeing marketed for sale. If the internally evaluated fair value or asking price is below ourthe recorded investment in the property, appropriate write-downs are taken.

 

For larger dollar commercial real estate properties, we obtainmanagement obtains a new appraisal of the subject property or havehas staff in ourthe special assets group evaluate the latest in-file appraisal in connection withwith the transfer to other real estate owned. WeOREO. Management generally obtainobtains 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.

 

22

Table of Contents

We

Management routinely applyapplies an internal discount to the value of appraisals used in the fair value evaluation of our OREO. The deductions to the appraisal take into account changing business factors and market conditions, as well as potential value impairment in cases where our appraisal date predates a likely change in market conditions. These deductions range from 10% for routine real estate collateral to 25% for real estate that is determined (1) to have a thin trading market or (2) to be specialized collateral. This is in addition to estimated discounts for cost to sell of six to ten percent.


 

Financial assets measured at fair value on a recurring basis at SeptemberJune 30, 20172018 and December 31, 20162017 are summarized below:

 

     

Fair Value Measurements at September 30, 2017 Using

      

Fair Value Measurements at June 30, 2018 Using

 
     

(in thousands)

      

(in thousands)

 
     

Quoted Prices In

      

Significant

      

Quoted Prices In

      

Significant

 
     

Active Markets for

  

Significant Other

  

Unobservable

      

Active Markets for

  

Significant Other

  

Unobservable

 
 

Carrying

  

Identical Assets

  

Observable Inputs

  

Inputs

  

Carrying

  

Identical Assets

  

Observable Inputs

  

Inputs

 

Description

 

Value

  

(Level 1)

  

(Level 2)

  

(Level 3)

  

Value

  

(Level 1)

  

(Level 2)

  

(Level 3)

 

Available for sale securities

                
Available for sale securities                

U.S. Government and federal agency

 $29,708  $  $29,708  $  $24,086  $  $24,086  $ 

Agency mortgage-backed: residential

  91,735      91,735      82,903      82,903    

Collateralized loan obligations

  23,526      23,526      29,905      29,905    

State and municipal

  1,661      1,661      33,071      33,071    

Corporate bonds

  3,167      3,167      8,931      8,931    

Total

 $149,797  $  $149,797  $  $178,896  $  $178,896  $ 

 

      

Fair Value Measurements at December 31, 2016 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)

 

Available for sale securities

                

U.S. Government and federal agency

 $34,099  $  $34,099  $ 

Agency mortgage-backed: residential

  102,353      102,353    

Collateralized loan obligations

  11,203      11,203    

State and municipal

  2,045      2,045    

Corporate bonds

  3,090      3,090    

Total

 $152,790  $  $152,790  $ 

      

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)

 

Available for sale securities

                

U.S. Government and federal agency

 $21,624  $  $21,624  $ 

Agency mortgage-backed: residential

  64,965      64,965    

Collateralized loan obligations

  25,505      25,505    

State and municipal

  33,710      33,710    

Corporate bonds

  6,916      6,916    

Total

 $152,720  $  $152,720  $ 

 

There were no transfers between Level 1 and Level 2 during 20172018 or 2016.2017.

 


23

Table of Contents

 

Financial assets measured at fair value on a non-recurring basis are summarized below: 

 

     

Fair Value Measurements at September 30, 2017 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)

 
                     

Fair Value Measurements at June 30, 2018 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  $87  $  $  $87 

Commercial real estate:

                                

Construction

                        

Farmland

              124         124 

Nonfarm nonresidential

                        

Residential real estate:

                                

Multi-family

                        

1-4 Family

  1,236         1,236   1,194         1,194 

Consumer

                        

Agriculture

                        

Other

                        

Other real estate owned:

                                

Commercial real estate:

                                

Construction, land development, and other land

  6,200         6,200 

Construction, land development, and other land

  4,010         4,010 

Farmland

  74         74             

Nonfarm nonresidential

                        

Residential real estate:

                                

Multi-family

                        

1-4 Family

  56         56   500         500 

 

      

Fair Value Measurements at December 31, 2016 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

 $87  $  $  $87 

Commercial real estate:

                

Construction

            

Farmland

  585         585 

Nonfarm nonresidential

            

Residential real estate:

                

Multi-family

            

1-4 Family

  1,261         1,261 

Consumer

            

Agriculture

  59         59 

Other

            

Other real estate owned:

                

Commercial real estate:

                

Construction, land development, and other land

  6,571         6,571 

Farmland

            

Nonfarm nonresidential

            

Residential real estate:

                

Multi-family

            

1-4 Family

  250         250 

      

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

            

 

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $1.7 million at SeptemberJune 30, 20172018 with a valuation allowance of $399,000,$319,000, resulting in $171,000 and $29,000 in additional provision for loan losses of $37,000 and $91,000, respectively, for the three and ninesix months ended SeptemberJune 30, 2017, respectively.2018. Impaired loans had a carrying amount of $2.5$1.3 million with a valuation allowance of $309,000,$228,000, resulting in $220,000 and no additional provision for loan losses for the three and ninesix months ended SeptemberJune 30, 2016.2017. At December 31, 2016,2017, impaired loans had a carrying amount of $2.4$1.3 million, with a valuation allowance of $370,000.$219,000.

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Table of Contents

 

OREO,, which is measured at the lower of carrying or fair value less costs to sell, had a net carrying amount of $6.3$4.5 million as of SeptemberJune 30, 2018, compared with $6.3 million at June 30, 2017 compared with $6.8and $4.4 million at December 31, 2016.2017. Write-downs of $98,000$265,000 and $325,000, respectively, were recorded on OREO for the three and ninesix months ended SeptemberJune 30, 2017,2018, compared to no write-downs of $761,000 and $1.6 million for the three and ninesix months ended SeptemberJune 30, 2016, respectively.2017.


 

The followingfollowing table presents qualitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at SeptemberJune 30, 2017:2018:

 

  

Fair Value

 

Valuation

Technique(s)

 

Unobservable Input(s)

 

Range (Weighted

Average)

 
  

(in thousands)

          
              

Impaired loans – Residential real estate

 $1,236 

Sales comparison approach

 

Adjustment for differences between the comparable sales

 0%-34%(11%) 
              

Other real estate owned – Commercial real estate

 $6,274 

Sales comparison approach

 

Adjustment for differences between the comparable sales

 0%-11%(5%) 
              
     Income approach Discount or capitalization rate  18% (18%) 

  

Fair Value

 

Valuation

Technique(s)

 

Unobservable Input(s)

 

Range (Weighted

Average)

 
  

(in thousands)

          
              

Impaired loans – Residential real estate

 $1,194 

Sales comparison approach

 

Adjustment for differences between the comparable sales

 0% -26%(9%) 
              

Other real estate owned – Commercial real estate

 $4,010 

Sales comparison approach

 

Adjustment for differences between the comparable sales

 0% -35%(18%) 
              
     Income approach Discount or capitalization rate   25% (25%) 

 

The followingfollowing 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, 2016:2017:

 

  

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%) 

  

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%) 

 

Carrying amount and estimated fair values of financial instruments were as follows for the periods indicated:

 

     

Fair Value Measurements at September 30, 2017 Using

      

Fair Value Measurements at June 30, 2018 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

 $47,369  $27,815  $19,554  $  $47,369  $40,547  $7,013  $33,534  $  $40,547 

Securities available for sale

  149,797      149,797      149,797   178,896      178,896      178,896 

Securities held to maturity

  41,424      43,397      43,397 

Federal Home Loan Bank stock

  7,323   N/A   N/A   N/A   N/A   7,323   N/A   N/A   N/A   N/A 

Loans, net

  673,534         673,616   673,616   740,654         727,191   727,191 

Accrued interest receivable

  3,285      1,137   2,148   3,285   3,200      1,100   2,100   3,200 

Financial liabilities

                                        

Deposits

 $866,847  $133,896  $719,827  $  $853,723  $846,230  $136,553  $709,201  $  $845,754 

Federal Home Loan Bank advances

  16,847      16,865      16,865   71,630      71,586      71,586 

Subordinated capital note

  2,475         2,458   2,458 

Junior subordinated debentures

  21,000         19,087   19,087   21,000         15,271   15,271 

Senior debt

  10,000         10,000   10,000   10,000         9,788   9,788 

Accrued interest payable

  1,284      366   918   1,284   547      493   54   547 

 


25

Table of Contents

 

     

Fair Value Measurements at December 31, 2016 Using

      

Fair Value Measurements at December 31, 2017 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  $34,103  $8,137  $25,966  $  $34,103 

Securities available for sale

  152,790      152,790      152,790   152,720      152,720      152,720 

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   7,323   N/A   N/A   N/A   N/A 

Loans held for sale

  70      70      70 

Loans, net

  630,269         632,528   632,528   703,913         703,263   703,263 

Accrued interest receivable

  3,137      1,203   1,934   3,137   3,136      925   2,211   3,136 

Financial liabilities

                                        

Deposits

 $849,925  $124,395  $712,458  $  $836,853  $847,024  $137,386  $693,320  $  $830,706 

Federal Home Loan Bank advances

  22,458      22,475      22,475   11,797      11,799      11,799 

Subordinated capital note

  3,150         3,091   3,091 

Subordinated capital notes

  2,250         2,246   2,246 

Junior subordinated debentures

  21,000         13,263   13,263   21,000         19,090   19,090 

Senior Debt

  10,000         10,000   10,000 

Accrued interest payable

  734      369   365   734   1,475      357   1,118   1,475 

 

The methods and assumptions, not previously presented, used to estimate fair values are described as follows:

 

(a)(a) Cash and Cash Equivalents

The carrying amountsamounts of cash and short-term instruments approximate fair values and are classified as either Level 1 or Level 2. Non-interestNoninterest bearing deposits are Level 1 whereas interest bearing due from bank accounts and fed funds sold are Level 2.

 

(b) FHLB Stock

It is not practical to determine the fair value of FHLB stock due to restrictions placed on its transferability.

 

(c) Loans, Net

FairAt June 30, 2018, fair values of loans, excluding loans held for sale, are determined using an estimated exit price. Contractual cash flow estimates are projected using a loan’s balance, interest rate, repricing characteristics, maturity and payment amounts. Loans are grouped into homogenous pools for valuation purposes based on type and credit risk metrics. Contractual cash flows are adjusted for potential prepayment estimates, as well as potential defaults over the expected life of each pool. A discount rate is determined based upon current financial conditions and the nature of the cash flow forecast. The resulting exit price for the portfolio is a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously.

At December 31, 2017, fair values of loans, excluding loans held for sale, was estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values arewere based on carrying values resulting in a Level 3 classification. Fair values for other loans arewere 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 dodid not necessarily represent an exit price.

 

(d)(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 non-maturity 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 non-maturity deposits approximate their fair values at the reporting date resulting in a Level 2 classification. Fair values for fixed rate interest bearing time deposits are estimated using a discounted cash flows calculationflow calculations that applies interestutilize the contract rate of the deposits discounted at current market rates currently being offered on certificates to a schedule of aggregated expected monthlyfor like maturities on time deposits resulting in a Level 2 classification.

 

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Table of Contents

(e)(f) Other Borrowings

TheAt June 30, 2018, fair values of the Company’s FHLB advances are determined using an estimated exit price. Contractual cash flow estimates are projected for each advance utilizing contractual interest rates, repricing characteristics, maturities and payment amounts. Contractual cash flows are adjusted for potential prepayment estimates. A discount rate is determined based upon current market conditions and the nature of the cash flow forecast. The resulting exit price for FHLB advances is a Level 2 classification. At December 31, 2017, the fair values of FHLB advances were estimated using discounted cash flow analyses based on the current borrowing rates resulting in a Level 2 classification.

 

TheAt June 30, 2018, fair values of junior subordinated debentures and senior debt are determined using an estimated exit price. Contractual cash flow estimates are projected for each instrument utilizing contractual interest rates, repricing characteristics, maturities and payment amounts. Contractual cash flows are adjusted for potential prepayment estimates and credit risk. A discount rate is determined based upon current market conditions and the Company’snature of the cash flow forecast. The resulting exit price is a Level 3 classification. At December 31, 2017, the fair values of subordinated capital notes, junior subordinated debentures, and senior debt arewere estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 3 classification.

 

(f)(g) Accrued Interest Receivable/Payable

The carrying amounts of accrued interest approximate fair value resulting in a Level 2 or Level 3 classificationclassification based on the level of the asset or liability with which the accrual is associated.

 


Note 9 – Income Taxes

 

Deferred tax assets and liabilities were due to the following as of:

 

 

September

30,

  

December

31,

  

June

30,

  

December

31,

 
 

2017

  

2016

  

2018

  

2017

 
 

(in thousands)

  

(in thousands)

 

Deferred tax assets:

                

Net operating loss carry-forward

 $43,515  $42,094  $24,795  $25,645 

Allowance for loan losses

  3,142   3,139   1,802   1,723 

Other real estate owned write-down

  3,401   3,366 

OREO write-down

  2,500   2,432 

Alternative minimum tax credit carry-forward

  692   692   346   692 

Net assets from acquisitions

  617   674   324   358 

Net unrealized loss on securities

  209   867   637   169 

New market tax credit carry-forward

  208   208   208   208 

Nonaccrual loan interest

  477   481   265   271 

Accrued expenses

  193   3,860 

Accrued expenses

  138   172 

Deferred compensation

  463   465   272   277 

Other

  394   360   203   241 
  53,311   56,206   31,490   32,188 
                

Deferred tax liabilities:

                

FHLB stock dividends

  928   928   557   557 

Fixed assets

  70   89   67   68 

Deferred loan costs

  266   274   144   152 

Other

  145   866   99   98 
  1,409   2,157   867   875 

Net deferred tax assets before valuation allowance

  51,902   54,049 

Valuation allowance

  (51,902

)

  (54,049

)

Net deferred tax asset

 $  $  $30,623  $31,313 

 

Our estimateAt June 30, 2018, the Company had net operating loss carryforwards (“NOLs”) of our ability$118.1 million, which will begin to realize the deferredexpire in 2031. As of June 30, 2018, a total of $346,000 in alternative minimum tax asset depends on our estimate of projected future levels of taxable income. In analyzing future taxable income levels, we considered all evidence currently available, both positive and negative. Based on our analysis, we established a valuation allowance for all deferred taxcredit carry-forward was reclassified to other assets as of December 31, 2011. The valuation allowance remains in effect as of September 30, 2017.it is currently refundable for the 2018 tax year.

 

The Company does not have any beginning and ending unrecognized tax benefits. The CompanyCompany does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next twelve months. There were no interest and penalties recorded in the income statement or accrued for the three or ninesix months ended SeptemberJune 30, 20172018 or SeptemberJune 30, 20162017 related to unrecognized tax benefits.

 

Under Section 382 of the Internal Revenue Code, as amended (“Section 382”), the Company’s its net operating loss carryforwards (“NOLs”) and other deferred tax assets can generally be used to offset future taxable income and therefore reduce federal income tax obligations. However, the Company's ability to use its NOLs would be limited if there was an “ownership change” as defined by Section 382. This would occur if shareholders owning (or deemed to own under the tax rules) 5% or more of the Company's voting and non-voting common shares increase their aggregate ownership of the Company by more than 50 percentage points over a defined period of time.

27

Table of Contents

 

In 2015, the Company took two measures to preserve the value of its NOLs. First, wethe 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, 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, our the Company’s shareholders approved an amendment to the Company’sits articles of incorporation to further help protect the long-term value of the Company’s NOLs. The amendment provides a means to block transfers of our common shares that could result in an ownership change under Section 382. The transfer restrictions 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 our Board determines that the transfer restrictions are no longer needed to preserve the tax benefits of our NOLs, or (iv) such date as the Board otherwise determines that the transfer restrictions are no longer necessary.

 

The Company and its subsidiariessubsidiaries are subject to U.S. federal income tax and the Company is subject to income tax in the Commonwealth of Kentucky. The Company is no longer subject to examination by taxing authorities for years before 2014.

 

Note 10 – Stock Plans and Stock Based Compensation

 

SharesShares available for issuance under the 20162018 Omnibus Equity Compensation Plan (“20162018 Plan”) total 25,000.329,871. 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 non-employee directors have a fair market value of $25,000 and vest on December 31 in the year of grant.

 

The fair value of the 2017the 2018 unvested shares issued was $365,000,$629,000, or $9.64$13.93 per weighted-average share. The Company recorded $129,000$99,000 and $271,000$163,000 of stock-based compensation to salaries and employee benefits for the three and ninesix months ended SeptemberJune 30, 2017,2018, respectively, and $148,000$88,000 and $315,000$142,000 for the three and ninesix months ended SeptemberJune 30, 2016,2017, respectively. We expectManagement expects substantially all of the unvested shares outstanding at the end of the period to vest according to the vesting schedule. NoA deferred tax benefit of $21,000 and $34,000 was recognized related to this expense for either period.during the three and six months ended June 30, 2018, respectively, and no deferred tax benefit during the three and six months ended June 30, 2017.

 

The following table summarizes unvested shareshare activity as of and for the periods indicated for the Stock IncentiveCompensation Plan:

 

  

Nine Months Ended

  

Twelve Months Ended

 
  

September 30, 2017

  

December 31, 2016

 
      

Weighted

      

Weighted

 
      

Average

      

Average

 
      

Grant

      

Grant

 
  

Shares

  

Price

  

Shares

  

Price

 

Outstanding, beginning

  179,513  $4.89   184,482  $4.81 

Granted

  37,865   9.64   35,465   9.10 

Vested

  (58,650

)

  4.67   (38,462

)

  8.32 

Forfeited

  (1,316

)

  9.35   (1,972

)

  6.16 

Outstanding, ending

  157,412  $6.08   179,513  $4.89 

  

Six Months Ended

  

Twelve Months Ended

 
  

June 30, 2018

  

December 31, 2017

 
      

Weighted

      

Weighted

 
      

Average

      

Average

 
      

Grant

      

Grant

 
  

Shares

  

Price

  

Shares

  

Price

 

Outstanding, beginning

  142,334  $5.67   179,513  $4.89 

Granted

  45,129   13.93   37,865   9.64 

Vested

  (66,164

)

  5.39   (73,728

)

  5.75 

Forfeited

        (1,316

)

  9.35 

Outstanding, ending

  121,299  $8.89   142,334  $5.67 

 

Unrecognized stock based compensation expense related to unvested shares for the remainder of 20172018 and beyond is estimated as follows (in thousands):

 

October 2017 – December 2017

 $129 

2018

  258 

2019

  99 

2020 & thereafter

  25 

July 2018 – December 2018

 $338 

2019

  258 

2020

  184 

2021

  66 

 


28

 

Note 11 – Earnings per Share

 

The factors used in the basic and diluted earnings per share computations follow:

 

 

Three Months Ended

  

Nine Months Ended

  

Three Months Ended

  

Six Months Ended

 
 

September 30,

  

September 30,

  

June 30,

  

June 30,

 
 

2017

  

2016

  

2017

  

2016

  

2018

  

2017

  

2018

  

2017

 
 

(in thousands, except share and per share data)

  

(in thousands, except share and per share data)

 
                                

Net income

 $1,794  $1,393  $5,183  $3,885  $1,983  $1,709  $3,917  $3,389 

Less:

                                

Earnings allocated to unvested shares

  45   46   133   129   27   42   66   88 

Net income available to common shareholders, basic and diluted

 $1,749  $1,347  $5,050  $3,756 

Net income available to common shareholders, basic and diluted

 $1,956  $1,667  $3,851  $3,301 
                                

Basic

                                

Weighted average common shares including unvested common shares outstanding

  6,259,864   6,223,045   6,245,418   5,897,617   7,424,742   6,250,169   6,858,228   6,238,075 

Less:

                                

Weighted average unvested common shares

  157,412   206,829   160,825   195,412   101,505   153,188   115,115   161,963 

Weighted average common shares outstanding

  6,102,452   6,016,216   6,084,593   5,702,205   7,323,237   6,096,981   6,743,113   6,076,112 

Basic income per common share

 $0.29  $0.22  $0.83  $0.66  $0.27  $0.27  $0.57  $0.54 
                                

Diluted

                                

Add: Dilutive effects of assumed exercises of common stock warrants

                        

Weighted average common shares and potential common shares

  6,102,452   6,016,216   6,084,593   5,702,205   7,323,237   6,096,981   6,743,113   6,076,112 

Diluted income per common share

 $0.29  $0.22  $0.83  $0.66  $0.27  $0.27  $0.57  $0.54 

 

The Company had no outstanding stock options at SeptemberJune 30, 20172018 or 2016.2017. A warrant for the purchase of 66,113 shares of the Company’s common stock at an exercise price of $79.41 was outstanding at SeptemberJune 30, 20172018 and 2016,2017, but was not included in the diluted EPS computation as inclusion would have been anti-dilutive. The warrant is exercisable at the holder’s option through November 21, 2018.

 

Note 12Regulatory 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 initiateresult in regulatory action.

 

The final rules implementing Basel Committee on Banking Supervision’sSupervision’s capital guidelines for U.S. Banks (Basel III rules) became effective for the Company and Bank on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule through January 1, 2019. The final rules allowed banks and their holding companies with less than $250 billion in assets a one-time opportunity to opt-out of a requirement to include unrealized gains and losses in accumulated other comprehensive income in their capital calculation. The Company and the Bank opted out of this requirement. The rules also establish a “capital conservation buffer” of 2.5% above the regulatory minimum risk-based capital ratios. Once the capital conservation buffer is fully phased in, the minimum ratios are a common equity Tier 1 risk-based capital ratio of 7.0%, a Tier 1 risk-based capital ratio of 8.5%, and a total risk-based capital ratio of 10.5%. The phase-in of the capital conservation buffer requirement began in January 2016 at 0.625% of risk-weighted assets with increases tofor 2018 is 1.875% and 1.25% in 2017, 1.875% in 2018, and 2.5% in 2019.for 2017. An institution is subject to limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses if capital levels fall below minimum levels plus the buffer amounts. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions.

The Bank is no longer subject to a consent order with the Federal Deposit Insurance Corporation and Kentucky Department of Financial Institutions. We were notified that the Bank’s prior consent order was terminated, effective October 31, 2017.

On September 21, 2011, we entered into a Written Agreement with the Federal Reserve Bank of St. Louis. In the Agreement, we made formal commitments to use our financial and management resources to serve as a source of strength for the Bank, to assist the Bank in addressing weaknesses identified in a consent order with the FDIC and KDFI (which has since been terminated), to pay no dividends without prior written approval, to pay no interest or principal on trust preferred securities without prior written approval, and to submit an acceptable plan to maintain sufficient capital.

 


29

 

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 the Company and the Bank at the dates indicated. Regulatory minimums for capital adequacy purposes are prompt corrective action standards. Dollars areindicated (dollars in thousands:thousands):

 

 

Actual

 

 

Minimum Requirement for Capital Adequacy Purposes

 

 

Minimum Requirement to be Well Capitalized Under Prompt Corrective Action Provisions

 

 

Actual

  

Minimum Requirement

for Capital Adequacy

Purposes

  

Minimum Requirement

to be Well Capitalized

Under Prompt Corrective

Action Provisions

 

 

Amount

 

Ratio

 

 

Amount

 

Ratio

 

 

Amount

 

Ratio

 

 

Amount

  

Ratio

  

Amount

  

Ratio

  

Amount

  

Ratio

 

As of September 30, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total risk-based capital (to risk-weighted assets)

                     

As of June 30, 2018:

                        

Total risk-based capital (to risk- weighted assets)

                        

Consolidated

 $97,321   11.76

%

 $66,220   8.00

%

  N/A   N/A 

Bank

  101,397   12.26   66,143   8.00  $82,679   10.00

%

Tier 1 capital (to risk-weighted assets)

                        

Consolidated

 

$

76,402

  

10.05

%

 

$

60,833

  

8.00

%

  

N/A

  

N/A

   86,201   10.41   49,665   6.00   N/A   N/A 

Bank

  

84,299

  

11.10

   

60,761

  

8.00

  

$

75,951

  

10.00

%

  92,817   11.23   49,608   6.00   66,143   8.00 

Total common equity Tier 1 risk-based capital (to risk-weighted assets)

                                             

Consolidated

  

41,719

  

5.49

   

34,219

  

4.50

   

N/A

  

N/A

   73,838   8.92   37,249   4.50   N/A   N/A 

Bank

  

73,387

  

9.66

   

34,178

  

4.50

   

49,368

  

6.50

   92,817   11.23   37,206   4.50   53,742   6.50 

Tier 1 capital (to risk-weighted assets)

                     

Consolidated

  

55,613

  

7.31

   

45,625

  

6.00

   

N/A

  

N/A

 

Bank

  

73,387

  

9.66

   

45,571

  

6.00

   

60,761

  

8.00

 

Tier 1 capital (to average assets)

                                             

Consolidated

  

55,613

  

5.85

   

38,056

  

4.00

   

N/A

  

N/A

   86,201   8.70   39,612   4.00   N/A   N/A 

Bank

  

73,387

  

7.73

   

37,986

  

4.00

   

47,482

  

5.00

   92,817   9.37   39,604   4.00   49,505   5.00 

 

 

Actual

 

 

Minimum Requirement for Capital Adequacy Purposes

 

 

Minimum Requirement to be Well Capitalized Under Prompt Corrective Action Provisions

 

 

Actual

  

Minimum Requirement

for Capital Adequacy

Purposes

  

Minimum Requirement

to be Well Capitalized

Under Prompt Corrective

Action Provisions

 

 

Amount

 

Ratio

 

 

Amount

 

Ratio

 

 

Amount

 

Ratio

 

 

Amount

  

Ratio

  

Amount

  

Ratio

  

Amount

  

Ratio

 

As of December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total risk-based capital (to risk-weighted assets)

                     

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

%

Tier 1 capital (to risk-weighted assets)

                        

Consolidated

 

$

71,109

  

10.21

%

 

$

55,714

  

8.00

%

  

N/A

  

N/A

   66,487   8.44   47,260   6.00   N/A   N/A 

Bank

  

68,773

  

9.88

   

55,663

  

8.00

  

$

69,579

  

10.00

%

  81,393   10.35   47,203   6.00   62,938   8.00 

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

   54,535   6.92   35,445   4.50   N/A   N/A 

Bank

  

57,642

  

8.28

   

31,311

  

4.50

   

45,226

  

6.50

   81,393   10.35   35,403   4.50   51,137   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

   66,487   7.11   37,392   4.00   N/A   N/A 

Bank

  

57,642

  

6.24

   

36,949

  

4.00

   

46,186

  

5.00

   81,393   8.70   37,421   4.00   46,777   5.00 

 

N/A: Not applicable. Regulatory framework does not define well capitalized for holding companies.

 


Kentucky banking laws limit the amount of dividends that may be paid to a holding company by its subsidiary banks without prior approval. TheThese 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.

30

Note 13Off Balance Sheet Risks, Commitments, and Contingent Liabilities

 

The Company, in the normal course of business, is party to financial instrumentsinstruments 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’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 andand 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. No liability is currently established for standby letters of credit.

 

The following table presents the contractual amounts of financial instrumentsinstruments with off-balance sheet risk for each period ended:

 

 

September 30, 2017

  

December 31, 2016

  

June 30, 2018

  

December 31, 2017

 
 

Fixed

Rate

  

Variable

Rate

  

Fixed

Rate

  

Variable

Rate

  

Fixed

Rate

  

Variable

Rate

  

Fixed

Rate

  

Variable

Rate

 
 

(in thousands)

  

(in thousands)

 

Commitments to make loans

 $32,645  $30,764  $19,445  $18,347  $10,036  $17,075  $27,349  $31,412 

Unused lines of credit

  7,252   58,107   7,935   51,407   8,193   55,967   11,034   57,727 

Standby letters of credit

  527   372   582   360   527   1,748   2,216   373 

 

Commitments to make loans are generally made for periods of one year or less.

 

In connection with the purchase of three loan participations, the Bank entered into three risk participation agreements, which had notional amounts totaling $19.8 million at SeptemberJune 30, 20172018 and $14.6 million at December 31, 2016.2017.

 

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 and the amount of the loss is reasonably estimable. Accruals are not made in cases where liability is not probable or the amount cannot be reasonably estimated. 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. Based upon current knowledge and after consultation with counsel, the Company believes pending legal proceedings or claims should not have a material impact on its financial position or results of operations. However, in light of the uncertainties involved in such proceedings, the outcome of a particular matter may be material to the financial position or results of operations for a particular reporting period in the future.

 

On October 17, 2014, the United States DepartmentStates Attorney’s Office for the Eastern District of JusticeVirginia (the “DOJ”) notified the Bank that it was the subject of an investigation into possible violations of federal laws, including, among other things, possible violations related to false bank entries, bank fraud and securities fraud. The investigation concernsconcerned allegations that Bank personnel engaged in practices intended to delay or avoid disclosure of the Bank’s asset quality at the time of and following the United States Treasury’s purchase of preferred shares from the Company in November 2008. The Bank has cooperated with all requests for information from DOJ and was informed during the DOJ. At this time,second quarter of 2018 that it is no longer the DOJ has not indicated whether it intends to pursue any action in the matter.subject of investigation.

 


31

 

Note 14Revenue from Contracts with Customers

The Company adopted ASC 606 using the full retrospective method. The adoption of ASC 606 for in-scope revenue streams did not result in a cumulative effect adjustment. Bank card interchange income and expenses were previously reported net in non-interest income. The income statement impact of adopting ASC 606 resulted in a reclassification adjustment of $139,000 and $263,000 related to the three and six months ended June 30, 2017, respectively, between bank card interchange income and deposit account related expense in order to report debit card interchange income gross and provide a comparable disclosure for 2018 and 2017 results. This reclassification adjustment had no impact on previously reported net income for the three or six months ended June 30, 2017.

All of the Company’s revenue 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 the Shazam 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. Prior to adopting ASC 606, the Company reported bank card interchange fees net of expenses. Under ASC 606, bank card interchange fees are reported gross.

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 executed 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. The Company did not finance any OREO sale during 2018 or 2017. 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 606, including title insurance commissions, income from secondary market loan sales, and other transaction-based revenue that is individually immaterial. Other non-interest income included approximately $115,000 and $154,000 of revenue for the three and six months ended June 30, 2018, respectively, within the scope of ASC 606. Other non-interest income included approximately $245,000 and $336,000 of revenue for the three and six months ended June 30, 2017, respectively, within the scope of ASC 606. The remaining other non-interest income for the three and six months is excluded from the scope of ASC 606.

32

Item 2. Management’sManagement’s Discussion and Analysis of Financial Condition and Results of Operations

 

This item analyzes ourthe Company’s financial condition, change in financial condition and results of operations. It should be read in conjunction with the unaudited consolidated financial statements and accompanying notes presented in Part I, Item 1 of this report.

 

CautionaryPreliminary Note RegardingConcerning Forward-Looking Statements

 

This reportreport contains statements about the future expectations, actionsactivities and events that constitute forward-looking statements. Forward-looking statements express our beliefs, assumptions and expectations aboutof our future financial and operating performance and growth plans, taking into account information currently available to us. These statements are not statements of historical fact. The words “believe,” “may,” “should,” “anticipate,” “estimate,” “expect,” “intend,” “objective,” “seek,” “plan,” “strive” or similar words, or the negatives of these words, identify forward-looking statements.

Forward-looking statements are not guarantees of performance or results. A forward-looking statement may include the assumptions or bases underlying the forward-looking statement. Management has made assumptions and bases in good faith and believe they are reasonable. However, that estimates based on such assumptions or bases frequently differ from actual results, and the differences can be material. The forward-looking statements included in this report speak only as of the date of the report. Management does not intend to update these statements unless required by applicable laws.

 

Forward-looking statements involve risks and uncertainties that may cause our actual results to differ materially from the expectations of future results we expressed or implied in any forward-looking statements. These risks and uncertainties can be difficult to predict and may be out of ourmanagement’s control. Factors that could contribute to differences in our results include, but are not limited to the following:

 

 

A significant percentage of our loan portfolio is comprised of non-owner occupied commercial real estate loans, real estate constructionChanges in fiscal, monetary, regulatory and development loans, and multi-family residential real estate loans, all of which carry a higher degree of risk.tax policies;

 

We continue to hold other real estate owned (“OREO”) properties, which could increase operating expensesChanges in political and result in future losses.economic conditions;

 

Our decisions regarding credit risk may not be accurate,The magnitude and our allowance for loan losses may not be sufficientfrequency of changes to cover actual losses.the Federal Funds Target Rate implemented by the Federal Open Market Committee of the Federal Reserve Bank;

Long-term and short-term interest rate fluctuations as well as the overall steepness of the yield curve;

 

Our ability to pay cash dividends on our commonCompetitive product and preferred shares and pay interest on the junior subordinated debentures that relate to our trust preferred securities is currently restricted. Our inability to resume paying interest on our trust preferred securities could adversely affect our common and preferred shareholders.pricing pressures;

We also refer you to Part II, Item 1A – Risk Factors in this report and to the risks identified and the cautionary statements discussed in greater detail in our December 31, 2016 Annual Report on Form 10-K.

Equity and fixed income market fluctuations;

Client bankruptcies and loan defaults;

Inflation;

Recession;

Natural disasters impacting Company operations;

Future acquisitions;

Integrations of acquired businesses;

Changes in technology and regulations or the interpretation and enforcement thereof;

Changes in accounting standards;

Changes to the Company’s overall internal control environment;

Success in gaining regulatory approvals when required;

Information security breaches or cyber security attacks involving either the Company or one of the Company’s third-party service providers; and

Other risks and uncertainties reported from time to time in the Company’s filings with the Securities and Exchange Commission (“SEC”), including Part 1 Item 1A “RiskFactors” of the Company’s December 31, 2017 Annual Report on Form 10-K for the year ended December 31, 2017.

 

Forward-looking statements are not guarantees of performance or results. A forward-looking statement may include a statement of the assumptions or bases underlying the forward-looking statement. The Company believes itstatement. Management has chosen thesemade assumptions and bases in good faith and believe they are reasonable. We caution you however, forward looking statements relying uponHowever, that estimates based on such assumptions or bases almost always varyfrequently differ from actual results, and the differences between those statements and actual results can be material. The forward-looking statements included in this report speak only as of the date of the report. We have no duty, and doManagement does not intend to update these statements unless required by applicable laws require us to do so.laws.

 

Overview

 

Porter Bancorp, Inc. (the “Company”)The Company is a bank holding company headquartered in Louisville, Kentucky. We operate PBIThe Company’s common stock is traded on Nasdaq’s Capital Market under the symbol LMST. The Company operates Limestone Bank (“the Bank”)(the Bank), our wholly owned subsidiary and the fourteenththirteenth largest bank domiciled in the Commonwealth of Kentucky based on total assets. We operateThe Bank operates banking offices in twelve counties in Kentucky. OurThe Bank’s markets include metropolitan Louisville in Jefferson County and the surrounding counties of Henry and Bullitt. We serveThe Bank serves south central Kentucky and southern Kentucky from banking offices in Butler, Green, Hart, Edmonson, Barren, Warren, Ohio, and Daviess Counties. WeThe Bank also havehas an office in Lexington, the second largest city in Kentucky. The Bank is a community bank with a wide range of commercial and personal banking products. As of SeptemberJune 30, 2017, we2018, the Company had total assets of $963.0 million,$1.04 billion, total loans of $682.5$749.2 million, total deposits of $866.8$846.2 million and stockholders’ equity of $40.1$86.4 million.

33

Table of Contents

 

The Company reported net income of $1.8 million and $5.2 million for the three and nine months ended September 30, 2017, compared with net income of $1.4$2.0 million and $3.9 million for the three and six months ended June 30, 2018, compared with net income of $1.7 million and $3.4 million for the same periods of 2016.2017. After deductions forallocating earnings allocated to participating securities, net income available to common shareholders was $1.7$2.0 million and $5.1$3.9 million for the three and ninesix months ended SeptemberJune 30, 2017,2018, respectively, compared with net income available to common shareholders of $1.3$1.7 million and $3.8$3.3 million for the three and ninesix months ended September 30, 2016, respectively.


Basic and diluted net income per common share were $0.29 and $0.83 for the three and nine months ended SeptemberJune 30, 2017, respectively, compared with basic and diluted net income per common share of $0.22 and $0.66 for the three and nine months ended September 30, 2016, respectively.

 

We note the following significant itemsHighlights for the ninesix months ended SeptemberJune 30, 2017:2018 are as follows:

The Bank is no longer subject to a consent order with the Federal Deposit Insurance Corporation and Kentucky Department of Financial Institutions. We were notified that the Bank’s prior consent order was terminated, effective October 31, 2017.

 

 

Loan growth outpaced paydowns during the period. Average loans receivable increased approximately $36.2$77.4 million or 5.8%11.9% to $658.0$729.5 million for the ninesix months ended SeptemberJune 30, 2017,2018, compared with $621.8$652.1 million for the first ninesix months of 2016.2017. This resulted in an increase in interest revenue volume of approximately $1.3$1.9 million which was offset by rate decreases of $852,000 for the ninesix months SeptemberJune 30, 2017,2018 compared with the ninesix months of 2016.2017.

 

 

Net interest margin decreased threeincreased 11 basis points to 3.44%3.60% in the third quarterfirst six months of 20172018 compared to 3.47%with 3.49% in the third quarterfirst six months of 2016.2017. The cost of interest bearing liabilities increased seven basis points to 0.85% in the third quarter of 2017 compared to 0.78% in the third quarter of 2016. Net interest margin increased two basis points to 3.47% in the first nine months of 2017 compared with 3.45% in the first nine months of 2016. The cost of interest bearing liabilities increased two basis points to 0.81% in the first nine months of 2017 compared withfrom 0.79% in the first ninesix months of 2016.2017 to 1.05% in the first six months of 2018 as a result of increases in short-term interest rates during 2017 and 2018.

 

 

During the period, our improving trends in non-performing loans past due loans, and loan risk categories continued. WeThe Company recorded negative provision for loan losses expense of $150,000 during the first six months of 2018, compared to no provision for loan losses expense during the first nine months of 2017, compared to negative provisions for loan losses expense of $1.9 million for the first ninesix months of 2016 and $750,000 for the third quarter of 2016. Both were2017. The negative provision was attributable to declining historical loss rates, improvements in asset quality, and management’s assessment of risk in the loan portfolio. Net loan recoveries were $10,000$528,000 for the first ninesix months of 2017,2018, compared to net loan charge-offs of $652,000$82,000 for the first ninesix months of 2016.2017.

 

 

Non-performing loans decreased by $3.4$2.3 million to $5.8$3.2 million at SeptemberJune 30, 2017,2018, compared with $9.2$5.5 million at December 31, 2016.2017. The decrease in non-performing loans was primarily due to $4.5$1.7 million in paydowns and $528,000$730,000 in charge-offsloans moved to OREO which were partially offset by $2.0 million$307,000 in loans placed on nonaccrual.

 

 

Loans past due 30-59 days decreased from $2.3$1.5 million at December 31, 20162017 to $872,000$1.1 million at SeptemberJune 30, 2017,2018, and loans past due 60-89 days increased from $315,000$171,000 at December 31, 20162017 to $612,000$538,000 at SeptemberJune 30, 2017.2018. Total loans past due and nonaccrual loans decreased to $7.3$4.8 million at SeptemberJune 30, 2017,2018, from $11.8$7.1 million at December 31, 2016.

Pass loans represent 92.8% of the portfolio at September 30, 2017, compared to 91.7% at December 31, 2016. During the nine months ended September 30, 2017, the pass category increased approximately $46.8 million, the watch category increased approximately $4.7 million, the special mention category increased approximately $101,000, and the substandard category declined approximately $8.3 million. The $8.3 million decrease in loans classified as substandard was primarily driven by $5.8 million in principal payments received , $4.5 million in loans upgraded from substandard, $623,000 in charge-offs, and $270,000 in loans moved to OREO, offset by $2.8 million in loans moved to substandard during the period.2017.

 

 

Foreclosed properties were $6.3$4.5 million at SeptemberJune 30, 2017,2018, compared with $6.8$4.4 million at December 31, 2016,2017, and $7.1$6.3 million at SeptemberJune 30, 2016.2017. During the first ninesix months of 2017,2018, the Company acquired $270,000$730,000 and sold $738,000$354,000 of OREO. Operating expenses, and fair value write downs, net ofand a net gain on sales totaled $1.3 million$319,000 for the first ninesix months of 20162018 compared to $92,000a net gain on sales, net of expenses, of $19,000 for the first ninesix months of 2017.

 

 

OurThe ratio of non-performing assets to total assets including accruing TDRs, decreased to 1.38%0.74% at SeptemberJune 30, 2017,2018, compared with 2.26%1.02% at December 31, 2016,2017, and 2.55%1.47% at SeptemberJune 30, 2016.

Non-interest income decreased $291,000 to $3.4 million for the first nine months of 2017, compared with $3.6 million for the first nine months of 2016. The decrease was driven primarily by reductions in OREO income of $451,000, partially offset by a $195,000 increase in service charges on deposits.

Non-interest expense decreased $2.7 million to $21.3 million for the first nine months of 2017 compared with $23.9 million for the first nine months of 2016, primarily due to a reduction in OREO expenses of approximately $1.2 million, a reduction of professional fees of $475,000, a reduction of litigation and loan collection expense of $454,000, and a reduction of FDIC insurance expense of $403,000.2017.

 

 

Deposits increased 2.0% to $866.8were $846.2 million at SeptemberJune 30, 2017,2018, compared with $849.9$847.0 million at December 31, 2016. Noninterest-bearing demand deposits increased 7.6% from $124.4 million at December 31, 206 to $133.9 million at September 30, 2017. Certificate of deposit balances increased $938,000$11.2 million during the first ninesix months of 20172018 to $446.6$435.5 million at SeptemberJune 30, 2017,2018, from $444.6$424.2 million at December 31, 2016. Money market deposits increased 10.1% at September 30, 20172017. Interest checking accounts decreased $10.4 million during the first six months of 2018 compared with December 31, 2016.2017.

 


During the second quarter of 2018, the Company paid all deferred interest payments on the junior subordinated debentures totaling $1.5 million, bringing interest current through the second quarter of 2018.

The Company completed a private placement of common stock on March 30, 2018. In the transaction, the Company issued 150,000 common shares and 1.0 million non-voting common shares to Patriot Financial Partners III, L.P. at $13.00 per share resulting in net proceeds of $14.9 million of which $5.0 million was contributed as capital to the Bank. The balance of the proceeds will be used for general corporate purposes and to support the growth of the Bank.

 

 

On June 30, 2017,26, 2018, 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 ratecompleted the purchase and retirement of three-month LIBOR plus 250 basis points through June 30, 2020, at which time quarterly principal paymentsall of $250,000 plus interest will commence. The loan is secured by a first priority pledge of 100% of theits issued and outstanding stockSeries E and Series F Non-Voting Perpetual Preferred Shares for an aggregate price of the Bank.$3.5 million paid in cash.  The Company may prepay any amount due under the promissory note at any time without premium or penalty. The Company contributed $9.0 millionSeries E and Series F Shares had an aggregate liquidation preference of the borrowing proceeds to the Bank as common equity Tier 1 capital. The remaining $1.0 million of the borrowing proceeds was retained by the lender in escrow to service quarterly interest payments. At September 30, 2017, the escrow account had a balance of $903,000.$10.5 million.

34

Table of Contents

 

Application of Critical Accounting Policies

 

WeManagement continually review ourreviews accounting policies and financial information disclosures. OurThe Company’s more significant accounting policies that require the use of estimates and judgments in preparing the financial statements are summarized in “Application of Critical Accounting Policies” in Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operation of our Annual Report on Form 10-K for the calendar year ended December 31, 2016.2017. Management has discussed the development, selection, and application of our critical accounting policies with our Audit Committee. During the first ninesix months of 2017,2018, there were no material changes in the critical accounting policies and assumptions.

 

Results of Operations

 

The following table summarizes components of income and expense and the change in those componentscomponents for the three months ended SeptemberJune 30, 2017,2018, compared with the same period of 2016:2017:

 

 

For the Three Months

  

Change from

  

For the Three Months

  

Change from

 
 

Ended September 30,

  

Prior Period

  

Ended June 30,

  

Prior Period

 
 

2017

  

2016

  

Amount

  

Percent

  

2018

  

2017

  

Amount

  

Percent

 
 

(dollars in thousands)

  

(dollars in thousands)

 
                                

Gross interest income

 $9,446  $8,931  $515   5.8

%

 $10,585  $9,134  $1,451   15.9

%

Gross interest expense

  1,659   1,473   186   12.6   2,211   1,546   665   43.0 

Net interest income

  7,787   7,458   329   4.4   8,374   7,588   786   10.4 

Provision (negative provision) for loan losses

     (750

)

  750   100.0   (150

)

     (150

)

  100.0 

Non-interest income

  1,182   1,105   77   7.0   1,347   1,246   101   8.1 

Non-interest expense

  7,175   7,920   (745

)

  (9.4

)

  7,405   7,125   280   3.9 

Net income before taxes

  1,794   1,393   401   28.8   2,466   1,709   757   44.3 

Income tax expense

              483      483   100.0 

Net income

  1,794   1,393   401   28.8   1,983   1,709   274   16.1 

 

Net income for the three months ended SeptemberJune 30, 20172018 totaled $1.8$2.0 million, compared with $1.4$1.7 million for the comparable period of 2016.2017. Net interest income increased $329,000$786,000 from the 2016 third2017 second quarter as a result of an increase in earning assets. Average earning assets and an improvement in net interest margin. Net interest margin increased from $864.3 million for15 basis points to 3.57% in the thirdsecond quarter of 2016 to $907.7 for2018 compared with 3.42% in the thirdsecond quarter of 2017. While net interest income increased, net interest margin decreased three basis points to 3.44% in the third quarter of 2017 compared with 3.47% for the comparable period of 2016. The decreaseincrease in margin between periods was due in part to an increase in the costyield of interest bearing liabilitiesearning assets from 0.78%4.11% in the thirdsecond quarter of 20162017 to 0.85%4.51% in the thirdsecond quarter of 2017.

The third2018. Average earning assets increased from $899.4 million for the second quarter of 2016 benefited from a $750,000 negative loan loss provision. There was no loan loss provisioning in2017 to $943.0 for the thirdsecond quarter of 2017.2018. Non-interest income increased by $77,000$101,000 to $1.2$1.347 million from $1.1$1.246 million in the thirdsecond quarter of 20162017 primarily due to an increase in bankcard interchange fees of $52,000 and an increase in service charges incharge on deposit accounts of $48,000.$43,000. Non-interest expense decreasedincreased from $7.9$7.1 million in the thirdsecond quarter of 20162017 to $7.2$7.4 million in the thirdsecond quarter of 20172018 primarily due to decreased salaries and employee benefitsincreased OREO expense of $262,000,$240,000 which was attributable to a $211,000 declinereduction in OREO expense, a $144,000 decline in loan collection and litigation expense, and a $142,000 decline in professional fees.marketing prices.

 


Tax expense was $483,000 for the three months ended June 30, 2018 compared to no tax expense for the comparable period 2017. The Company previously had a full valuation against its deferred tax asset and therefore, the effective tax rate was 0% for the three months ended June 30, 2017.

 

The following table summarizes components of income and expense and the change in those componentscomponents for the ninesix months ended SeptemberJune 30, 2017,2018, compared with the same period of 2016:2017:

 

 

For the Nine Months

  

Change from

  

For the Six Months

  

Change from

 
 

Ended September 30,

  

Prior Period

  

Ended June 30,

  

Prior Period

 
 

2017

  

2016

  

Amount

  

Percent

  

2018

  

2017

  

Amount

  

Percent

 
 

(dollars in thousands)

  

(dollars in thousands)

 
                                

Gross interest income

 $27,805  $26,821  $984   3.7

%

 $20,600  $18,359  $2,241   12.2

%

Gross interest expense

  4,689   4,516   173   3.8   4,045   3,030   1,015   33.5 

Net interest income

  23,116   22,305   811   3.6   16,555   15,329   1,226   8.0 

Provision (negative provision) for loan losses

     (1,900

)

  1,900   100.0   (150

)

     (150

)

  100.0 

Non-interest income

  3,357   3,648   (291

)

  (8.0

)

  2,598   2,438   160   6.6 

Non-interest expense

  21,290   23,947   (2,657

)

  (11.1

)

  14,574   14,378   196   1.4 

Net income before taxes

  5,183   3,906   1,277   32.7   4,729   3,389   1,340   39.5 

Income tax expense

     21   (21

)

  (100.0

)

  812      812   100.0 

Net income

  5,183   3,885   1,298   33.4   3,917   3,389   528   15.6 

35

Table of Contents

 

Net incomeincome for the ninesix months ended SeptemberJune 30, 20172018 totaled $5.2$3.9 million, compared with net income of $3.9$3.4 million for the comparable period of 2016.2017. Net interest income increased $811,000$1.2 million from the first ninesix months of 20162017 as a result of an increase in earning assets and an improvement in net interest margin. Net interest margin increased two11 basis points to 3.47%3.60% in the first ninesix months of 20172018 compared with 3.45%3.49% in the first ninesix months of 2016.2017. The increase in margin between periods was due to an increase in the yield on earning assets from 4.14% for the first nine months of 2016 to 4.17% for the first ninesix months of 2017 partially offset by an increase into 4.48% for the first six months of 2018. The cost of interest bearing liabilities increased from 0.79% for the first ninesix months of 20162017 to 0.81%1.05% for the first ninesix months of 2017.2018. Average earning assets increased from $874.2$895.9 million for the first ninesix months of 20162017 to $899.9 million$929.5 for the first ninesix months of 2017.

The nine months ended September 30, 2016 benefited from a $1.9 million negative loan loss provision. There was no loan loss provisioning in the first nine months of 2017. 2018. Non-interest income decreasedincreased by $291,000$160,000 to $3.4$2.6 million from $3.6$2.4 million in the first ninesix months of 20162017 primarily due to a decreasean increase in OREO incomebankcard interchange fees of $451,000$116,000 and a $192,000 decrease in gains on sales of securities. This was partially offset by an increase in service charges on deposit accounts of $195,000$110,000. Non-interest expense increased from $14.4 million in the first six months of 2017 to $14.6 million in the first six months of 2018 primarily due to an increase in OREO expense of $338,000 attributable to a reduction in marketing prices, a $114,000 increase in state franchise tax attributable to increasing capital, and an increase in bank card interchange fees of $76,000. Non-interest expense decreased from $23.9 million in the first nine months of 2016 to $21.3 million in the first nine months of 2017 primarily due to a decrease in OREOoccupancy expense of $1.2 million,$110,000, partially offset by a $475,000 decline in professional fees, a $454,000 decline in litigation and loan collection expense, and a $403,000 decline in FDIC insurance.insurance of $378,000 reflecting the Bank’s lower risk profile.

Tax expense was $812,000 for the six months ended June 30, 2018 compared to no tax expense for the comparable period 2017. The Company previously had a full valuation against its deferred tax asset and therefore, the effective tax rate was 0% for the six months ended June 30, 2017.

 

Net Interest Income – Net interest income was $7.8$8.4 million for the three months ended SeptemberJune 30, 2017,2018, an increase of $329,000,$786,000, or 4.4%10.4%, compared with $7.5$7.6 million for the same period in 2016.2017. Net interest spread and margin were 3.31%3.38% and 3.44%3.57%, respectively, for the thirdsecond quarter of 2017,2018, compared with 3.37%3.31% and 3.47%3.42%, respectively, for the thirdsecond quarter of 2016.2017. Net average non-accrual loans were $6.2$3.9 million and $11.0$7.5 million for the thirdsecond quarters of 2018 and 2017, and 2016, respectively.

 

Average loans receivable increased approximately $43.5$79.9 million for the thirdsecond quarter of 20172018 compared with the thirdsecond quarter of 2016.2017. This resulted in an increase in interest revenue volume of approximately $525,000 which was offset by a decrease in$970,000 attributable to volume and an increase of $481,000 attributable to increasing interest income driven by interest rate decreases aggregating $203,000rates for the quarter ended SeptemberJune 30, 2017,2018, compared with the thirdsecond quarter of 2016.2017. Interest foregone on non-accrual loans totaled $105,000$74,000 for the thirdsecond quarter of 2017,2018, compared with $180,000$124,000 for the thirdsecond quarter of 2016.2017.

 

Net interest margin decreased threeincreased 15 basis points from our margin of 3.47%3.42% in the prior year thirdsecond quarter to 3.44%3.57% for the thirdsecond quarter of 2017.2018. The yield on earning assets increased one40 basis pointpoints and rates paid on interest-bearing liabilities increased seven33 basis pointpoints from the thirdsecond quarter of 2016.2017. Both the yield on earning assets and cost of interest-bearing liabilities were impacted by increases in short-term interest rates during 2017 and 2018.

 

Net interest income was $23.1$16.6 million for the ninesix months ended SeptemberJune 30, 2017,2018, an increase of $811,000,$1.2 million, or 3.6%8.0%, compared with $22.3$15.3 million for the same period in 2016.2017. Net interest spread and margin were 3.36%3.43% and 3.47%3.60%, respectively, for the first ninesix months of 2017,2018, compared with 3.35%3.38% and 3.45%3.49%, respectively, for the first ninesix months of 2016.2017. Net average non-accrual loans were $7.5$4.4 million and $12.0$8.1 million for the first ninesix months of 2018 and 2017, and 2016, respectively. Cost of interest-bearing liabilities was 0.81% for the first nine months of 2017 compared to 0.79% for the first nine months of 2016.

 

Average loans receivable increased approximately $36.2$77.4 million for the ninesix months ended SeptemberJune 30, 20172018 compared with the first ninesix months of 2016.2017. This resulted in an increase in interest revenue volume of approximately $1.3$1.9 million which was offset by a decreaseattributable to volume and an increase of $527,000 attributable to increasing in interest income driven by interest rate decreases aggregating $852,000rates for the ninesix months ended SeptemberJune 30, 20172018 compared with the prior year period. Interest foregone on non-accrual loans totaled $368,000$162,000 for the ninesix months ended SeptemberJune 30, 2017,2018, compared with $576,000$262,000 for the ninesix months ended SeptemberJune 30, 2016.2017.

 

Net interest margin increased two11 basis points to 3.47%3.60% for the first ninesix months of 20172018 from our margin of 3.45%3.49% in the first ninesix months of 2016.2017. The yield on earning assets increased three31 basis points for the first ninesix months of 2018 from the first six months of 2017, from the first nine months of 2016, compared with an increase of two basis points in rates paid on interest-bearing liabilities.liabilities of 26 basis points between the two periods. Both the yield on earning assets and cost of interest-bearing liabilities were impacted by increases in short-term interest rates during 2017 and 2018.

 


36

Table of Contents

 

Average Balance Sheets

 

The following table presents the average balance sheets for the three month periods ended SeptemberJune 30, 20172018 and 2016,2017, along with the related calculations of tax-equivalent net interest income, net interest margin and net interest spread for the related periods.

 

 

Three Months Ended September 30,

  

Three Months Ended June 30,

 
 

2017

  

2016

  

2018

  

2017

 
 

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:

                                                

Loan receivables (1)(2)

 $669,592  $8,021   4.75

%

 $626,095  $7,699   4.89

%

 $734,709  $9,094   4.96

%

 $654,801  $7,643   4.68

%

Securities

                                                

Taxable

  174,776   1,088   2.47   160,130   956   2.38   161,232   1,198   2.98   176,640   1,168   2.65 

Tax-exempt (3)

  19,547   143   4.47   20,779   153   4.51   14,183   96   3.44   19,884   144   4.47 

FHLB stock

  7,323   95   5.15   7,323   72   3.91   7,323   104   5.70   7,323   86   4.71 

Federal funds sold and other

  36,485   99   1.08   49,980   51   0.41   25,576   93   1.46   40,745   93   0.92 

Total interest-earning assets

  907,723   9,446   4.16

%

  864,307   8,931   4.15

%

  943,023   10,585   4.51

%

  899,393   9,134   4.11

%

Less: Allowance for loan losses

  (8,964

)

          (10,135

)

          (8,886

)

          (8,944

)

        

Non-interest earning assets

  52,928           63,453           78,871           51,533         

Total assets

 $951,687          $917,625          $1,013,008          $941,982         
                                                

LIABILITIES AND STOCKHOLDERSEQUITY

                        

LIABILITIES AND STOCKHOLDERS’ EQUITY

                        

Interest-bearing liabilities:

                                                

Certificates of deposit and other time deposits

 $451,948  $1,059   0.93

%

 $455,840  $1,009   0.88

%

 $429,123  $1,308   1.22

%

 $465,149  $1,071   0.92

%

NOW and money market deposits

  253,699   250   0.39   231,601   238   0.41   241,826   327   0.54   242,275   223   0.37 

Savings accounts

  35,904   15   0.17   33,874   15   0.18   35,965   14   0.16   36,118   15   0.17 

FHLB advances

  2,350   13   2.19   2,672   17   2.53   44,252   216   1.96   5,728   20   1.40 

Junior subordinated debentures

  23,696   225   3.77   24,598   194   3.14   21,957   248   4.53   23,921   217   3.64 

Senior debt

  10,000   97   3.85            10,000   98   3.93          

Total interest-bearing liabilities

  777,597   1,659   0.85

%

  748,585   1,473   0.78

%

Total interest-bearing liabilities

  783,123   2,211   1.13

%

  773,191   1,546   0.80

%

                                                

Non-interest-bearing liabilities:

                                                

Non-interest-bearing deposits

  129,072           118,611           135,843           126,596         

Other liabilities

  5,859           8,259           5,341           5,177         

Total liabilities

  912,528           875,455           924,307           904,964         

Stockholders’ equity

  39,159           42,170         

Total liabilities and stockholders’ equity

 $951,687          $917,625         

Stockholders’ equity

  88,701           37,018         

Total liabilities and stockholders’ equity

 $1,013,008          $941,982         
                                                

Net interest income

     $7,787          $7,458          $8,374          $7,588     
                                                

Net interest spread

          3.31

%

          3.37

%

          3.38

%

          3.31

%

Net interest margin

          3.44

%

          3.47

%

          3.57

%

          3.42

%

 


(1)

Includes loan fees in both interest income and the calculation of yield on loans.

(2)

Calculations include non-accruing loans averaging $6.2$3.9 million and $11.0$7.5 million, respectively, in average loan amounts outstanding.

(3)

Taxable equivalent yields are calculated assuming a 35% federal income tax rate.rate of 21% and 35% for 2018 and 2017, respectively.

 


37

Table of Contents

 

The following table presents the averageaverage balance sheets for the ninesix month periods ended SeptemberJune 30, 20172018 and 2016,2017, along with the related calculations of tax-equivalent net interest income, net interest margin and net interest spread for the related periods.

 

 

Nine Months Ended September 30,

  

Six Months Ended June 30,

 
 

2017

  

2016

  

2018

  

2017

 
 

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:

                                                

Loan receivables (1)(2)

 $657,980  $23,493   4.77

%

 $621,824  $23,036   4.95

%

 $729,485  $17,884   4.94

%

 $652,078  $15,472   4.78

%

Securities

                                                

Taxable

  175,838   3,370   2.56   161,232   2,895   2.40   152,585   2,141   2.83   176,378   2,282   2.61 

Tax-exempt (3)

  19,805   432   4.49   21,355   475   4.57   14,203   192   3.45   19,936   289   4.50 

FHLB stock

  7,323   264   4.82   7,323   219   3.99   7,323   210   5.78   7,323   169   4.65 

Federal funds sold and other

  38,913   246   0.85   62,451   196   0.42   25,872   173   1.35   40,147   147   0.74 

Total interest-earning assets

  899,859   27,805   4.17

%

  874,185   26,821   4.14

%

  929,468   20,600   4.48

%

  895,862   18,359   4.17

%

Less: Allowance for loan losses

  (8,950

)

          (11,138

)

          (8,611

)

          (8,943

)

        

Non-interest earning assets

  52,904           67,241           79,413           52,892         

Total assets

 $943,813          $930,288          $1,000,270          $939,811         
                                                

LIABILITIES AND STOCKHOLDERS’ EQUITY

                        

LIABILITIES AND STOCKHOLDERS’ EQUITY

                        

Interest-bearing liabilities:

                                                

Certificates of deposit and other time deposits

 $458,732  $3,149   0.92

%

 $471,530  $3,108   0.88

%

 $425,703  $2,370   1.12

%

 $462,180  $2,090   0.91

%

NOW and money market deposits

  244,521   683   0.37   231,213   696   0.40   243,857   595   0.49   239,856   433   0.36 

Savings accounts

  35,650   45   0.17   34,460   46   0.18   35,446   28   0.16   35,521   30   0.17 

FHLB advances

  6,594   64   1.30   2,827   54   2.55   42,547   372   1.76   8,751   51   1.18 

Junior subordinated debentures

  23,920   651   3.64   24,822   612   3.29   22,595   486   4.34   24,034   426   3.57 

Senior debt

  3,407   97   3.81          

Senior debt

  10,000   194   3.91          

Total interest-bearing liabilities

  772,824   4,689   0.81

%

  764,852   4,516   0.79

%

  780,148   4,045   1.05

%

  770,342   3,030   0.79

%

                         ��                      

Non-interest-bearing liabilities:

                                                

Non-interest-bearing deposits

  125,932           117,377           133,742           124,336         

Other liabilities

  8,401           9,735           5,384           9,749         

Total liabilities

  907,157           891,964           919,274           904,427         

Stockholders’ equity

  36,656           38,324         

Total liabilities and stockholders’ equity

 $943,813          $930,288         

Stockholders’ equity

  80,996           35,384         

Total liabilities and stockholders’ equity

 $1,000,270          $939,811         
                                                

Net interest income

     $23,116          $22,305          $16,555          $15,329     
                                                

Net interest spread

          3.36

%

          3.35

%

          3.43

%

          3.38

%

                                                

Net interest margin

          3.47

%

          3.45

%

          3.60

%

          3.49

%

 


(1)

Includes loan fees in both interest income and the calculation of yield on loans.

(2)

Calculations include non-accruing loans averaging $7.5$4.4 million and $12.0$8.1 million, respectively, in average loan amounts outstanding.

(3)

Taxable equivalent yields are calculated assuming a 35% federal income tax rate.rate of 21% and 35% for 2018 and 2017, respectively.

 


38

Table of Contents

 

Rate/Volume Analysis 

 

The table below sets forth certain information regarding changes in interest income and interest expense for the periods indicated. For each categorycategory 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.

 

  

Three Months Ended September 30,

2017 vs. 2016

  

Nine Months Ended September 30,

2017 vs. 2016

 
  

Increase (decrease)

due to change in

  

Increase (decrease)

due to change in

 
  

Rate

  

Volume

  

Net

Change

  

Rate

  

Volume

  

Net

Change

 
  

(in thousands)

 

Interest-earning assets:

                        

Loan receivables

 $(203

)

 $525  $322  $(852

)

 $1,309  $457 

Securities

  38   84   122   184   248   432 

FHLB stock

  23      23   45      45 

Federal funds sold and other

  65   (17

)

  48   144   (94

)

  50 

Total increase (decrease) in interest income

  (77

)

  592   515   (479

)

  1,463   984 
                         

Interest-bearing liabilities:

                        

Certificates of deposit and other time deposits

  59   (9

)

  50   127   (86

)

  41 

NOW and money market accounts

  (10

)

  22   12   (52

)

  39   (13

)

Savings accounts

  (1

)

  1      (3

)

  2   (1

)

FHLB advances

  (2

)

  (2

)

  (4

)

  (37

)

  47   10 

Junior subordinated debentures

  38   (7

)

  31   62   (23

)

  39 

Senior debt

     97   97      97   97 

Total increase (decrease) in interest expense

  84   102   186   97   76   173 

Increase (decrease) in net interest income

 $(161

)

 $490  $329  $(576

)

 $1,387  $811 

  

Three Months Ended June 30,

2018 vs. 2017

  

Six Months Ended June 30,

2018 vs. 2017

 
  

Increase (decrease)

due to change in

  

Increase (decrease)

due to change in

 
  

Rate

  

Volume

  

Net

Change

  

Rate

  

Volume

  

Net

Change

 
  

(in thousands)

 

Interest-earning assets:

                        

Loan receivables

 $481  $970  $1,451  $527  $1,885  $2,412 

Securities

  131   (149

)

  (18

)

  167   (405

)

  (238

)

FHLB stock

  18      18   41      41 

Federal funds sold and other

  43   (43

)

     91   (65

)

  26 

Total increase (decrease) in interest income

  673   778   1,451   826   1,415   2,241 
                         

Interest-bearing liabilities:

                        

Certificates of deposit and other time deposits

  325   (88

)

  237   455   (175

)

  280 

NOW and money market accounts

  104      104   155   7   162 

Savings accounts

  (1

)

     (1

)

  (2

)

     (2

)

FHLB advances

  11   185   196   37   284   321 

Junior subordinated debentures

  50   (19

)

  31   87   (27

)

  60 

Senior debt

     98   98      194   194 

Total increase (decrease) in interest expense

  489   176   665   732   283   1,015 

Increase (decrease) in net interest income

 $184  $602  $786  $94  $1,132  $1,226 

 

Non-Interest Income – The following table presents the major categories of non-interest income for the three and ninesix months ended SeptemberJune 30, 20172018 and 2016:2017:

 

 

For the Three Months

  

For the Nine Months

  

For the Three Months

  

For the Six Months

 
 

Ended September 30,

  

Ended September 30,

  

Ended June 30,

  

Ended June 30,

 
 

2017

  

2016

  

2017

  

2016

  

2018

  

2017

  

2018

  

2017

 
 

(dollars in thousands)

  

(dollars in thousands)

 
                                

Service charges on deposit accounts

 $568  $520  $1,617  $1,422  $591  $548  $1,159  $1,049 

Bank card interchange fees

  245   214   713   637   446   394   847   731 

Other real estate owned rental income

     46      451 

Bank owned life insurance income

  103   101   309   316 

Income from bank owned life insurance

  138   104   237   206 

Net gain (loss) on sales and calls of securities

     (16

)

  (5

)

  187   (6

)

  (5

)

  (6

)

  (5

)

Other

  266   240   723   635   178   205   361   457 

Total non-interest income

 $1,182  $1,105  $3,357  $3,648  $1,347  $1,246  $2,598  $2,438 

 

Non-interest income for the thirdsecond quarter of 20172018 increased by $77,000,$101,000, or 7.0%8.1%, compared with the thirdsecond quarter of 2016.2017. The increase in non-interest income for the second quarter of 2018 compared to the second quarter of 2017 was primarily driven by an increase in bankcard interchange fees of $52,000 due to an increase in transaction volume, as well as an increase in service charges on deposit accounts of $48,000 as well as an increase in bank card interchange fees of $31,000.$43,000. For the ninesix months ended SeptemberJune 30, 2017,2018, non-interest income decreasedincreased by $291,000,$160,000, or 8.0%6.6% to $3.4$2.6 million compared with $3.6$2.4 million for the same period of 2016.2017. The decreaseincrease in non-interest income between the nine-monthsix month comparative periods was primarily due to a $451,000 decrease in OREO rental income and a $192,000 decrease in gains on sales of securities. This was partially offset by an$116,000 increase in service charges on deposit accounts of $195,000 and bank cardbankcard interchange fees of $76,000.fees.

 


39

Table of Contents

 

Non-interest ExpenseThe following table presents the major categories of non-interest expense for the three and ninesix months ended SeptemberJune 30, 20172018 and 2016:2017:

 

 

For the Three Months

  

For the Nine Months

  

For the Three Months

  

For the Six Months

 
 

Ended September 30,

  

Ended September 30,

  

Ended June 30,

  

Ended June 30,

 
 

2017

  

2016

  

2017

  

2016

  

2018

  

2017

  

2018

  

2017

 
 

(dollars in thousands)

  

(dollars in thousands)

 
                                

Salary and employee benefits

 $3,683  $3,945  $11,433  $11,624  $3,885  $3,803  $7,673  $7,750 

Occupancy and equipment

  836   842   2,501   2,504   880   844   1,775   1,665 

Professional fees

  232   374   776   1,251   222   241   427   544 

Marketing expense

  364   289   880   706   308   262   608   516 

FDIC insurance

  356   442   1,055   1,458   139   357   321   699 

Data processing expense

  321   295   931   887   307   318   631   610 

State franchise and deposit tax

  225   255   675   765   282   225   564   450 

Deposit account related expenses

  221   219   440   424 

Other real estate owned expense

  111   322   92   1,284   237   (3

)

  319   (19

)

Litigation and loan collection expense

  78   222   121   575   48   40   101   43 

Other

  969   934   2,826   2,893   876   819   1,715   1,696 

Total non-interest expense

 $7,175  $7,920  $21,290  $23,947  $7,405  $7,125  $14,574  $14,378 

 

Non-interest expense for the thirdsecond quarter ended SeptemberJune 30, 2017 decreased $745,000,2018 increased $280,000, or 9.4%3.9%, compared with the thirdsecond quarter of 2016.2017. This decreaseincrease was primarily due to a decrease in salary and employee benefits expense of $262,000, a $211,000 decreasean increase in OREO expense as the OREO portfolio was significantly reduced,of $240,000 due to a $144,000 declinereduction in loan collection and litigation expenses, and a $142,000 decline in professional fees.marketing prices. For the ninesix months ended SeptemberJune 30, 2017,2018, non-interest expense decreased $2.7 million,increased $196,000, or 11.1%1.4% to $21.3$14.6 million compared with $23.9$14.4 million for the first ninesix months of 2016.2017. The decreasesincrease in non-interest expense for the ninesix months ended SeptemberJune 30, 2017 were2018 was primarily attributable to decreasedincreases in OREO expenses of $1.2 million$338,000 due to the smaller OREO portfolio. The improvement was also attributable to a reduction in professional feesmarketing prices, state franchise tax of $475,000,$114,000 attributable to increasing capital, and occupancy and equipment of $110,000, partially offset by a decrease of $454,000 in litigation and loan collection expense, and a reduction in FDIC insurance of $403,000.

$378,000 reflecting the Bank’s lower risk profile.

  

Income Tax Expense Effective tax rates differ from the federal statutory rate of 21% for 2018 and 35% for 2017 applied to income before income taxes due to the following:

 

 

For the Three Months

  

For the Nine Months

  

For the Three Months

  

For the Six Months

 
 

Ended September 30,

  

Ended September 30,

  

Ended June 30,

  

Ended June 30,

 
 

2017

  

2016

  

2017

  

2016

  

2018

  

2017

  

2018

  

2017

 
 

(dollars in thousands)

  

(dollars in thousands)

 
                                

Federal statutory rate times financial statement income

 $628  $487  $1,814  $1,367  $518  $598  $993  $1,186 

Effect of:

                                

Valuation allowance

  (551

)

  (465

)

  (1,488

)

  (1,197

)

     (518

)

     (937

)

Tax-exempt income

  (50

)

  (52

)

  (147

)

  (161

)

  (20

)

  (48

)

  (40

)

  (97

)

Non-taxable life insurance income

  (36

)

  (35

)

  (108

)

  (110

)

  (29

)

  (36

)

  (50

)

  (72

)

Restricted stock vesting

        (98

)

     (5

)

  (6

)

  (116

)

  (98

)

Other, net

  9   65   27   122   19   10   25   18 

Total

 $  $  $  $21 

Total

 $483  $  $812  $ 

 

Analysis of Financial Condition

Total assets increased $17.8 million, or 1.9%, to $963.0 million at September 30, 2017, from $945.2 million at December 31, 2016. This increase was primarily attributable to an increase in net loans of $43.3 million offset by a decrease in interest bearing deposits in banks of $19.1 million and a decrease in available for sale securities of $3.0 million.

Deferred Tax Asset Valuation Allowance The Company haspreviously had a full valuation allowance against its net deferred tax asset of $51.9 million subject to a full valuation allowance at Septemberand therefore, the effective tax rate was 0% for the six months ended June 30, 2017. Our ability to utilize deferred tax assets depends upon generating sufficient future levelsDuring the fourth quarter 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. A key element of the evaluation is the achievement of pre-tax net income rather than pre-tax net loss on a cumulative basis for the trailing three-year period. At September 30, 2017, our trailing three-year cumulative pre-tax net loss had declined to $762,000. We continue to monitor and evaluate the positive and negative evidence and will reverse the valuation allowance when we determinemanagement concluded it iswas more-likely-than-not the asset willwould be utilized to reduce future taxes payable related to the future taxable income of the Company.Company, and as such, reversed the valuation allowance and recorded an income tax benefit.

 


Analysis of Financial Condition

Total assets increased $69.7 million, or 7.2%, to $1.04 billion at June 30, 2018, from $970.8 million at December 31, 2017. This increase was primarily attributable to an increase in net loans of $36.7 million as well as an increase in securities available for sale of $26.2 million.

 

Loans ReceivableLoans receivable increased $43.3$37.1 million, or 6.8%5.2%, during the ninesix months ended SeptemberJune 30, 20172018 to $682.5$749.2 million as loan growth outpaced paydowns. Our commercial and commercial real estate portfolios increased by an aggregate of $43.8$34.0 million, or 12.3%8.2% during the first ninesix months of 20172018 and comprised 58.4%60.1% of the loan portfolio at SeptemberJune 30, 2017.2018.

 

40

Table of Contents

Loan Portfolio CompositionThe following table presents a summary of the loan portfolio at the dates indicated, net of deferred loan fees, by type.

  

As of September 30,

  

As of December 31,

 
  

2017

  

2016

 
  

Amount

  

Percent

  

Amount

  

Percent

 
      

(dollars in thousands)

     
                 

Commercial

 $107,616   15.77

%

 $97,761   15.29

%

Commercial Real Estate

                

Construction

  44,956   6.59   36,330   5.68 

Farmland

  88,370   12.95   71,507   11.19 

Nonfarm nonresidential

  157,956   23.14   149,546   23.39 

Residential Real Estate

                

Multi-family

  55,684   8.16   48,197   7.54 

1-4 Family

  173,213   25.38   188,092   29.42 

Consumer

  8,474   1.24   9,818   1.54 

Agriculture

  45,675   6.69   37,508   5.87 

Other

  567   0.08   477   0.08 

Total loans

 $682,511   100.00

%

 $639,236   100.00

%

There are no foreign loans in our portfolio. Except for commercial real estate, 1-4 family residential real estate,portfolio and loans for retail facilities (included in nonfarm nonresidential commercial real estate below),other than the categories noted, there is no concentration of loans in any industry exceeding 10% of total loans.

  

As of June 30,

  

As of December 31,

 
  

2018

  

2017

 
  

Amount

  

Percent

  

Amount

  

Percent

 
      

(dollars in thousands)

     
                 

Commercial

 $124,139   16.57

%

 $113,771   15.98

%

Commercial Real Estate

                

Construction

  79,608   10.63   57,342   8.05 

Farmland

  84,972   11.34   88,320   12.40 

Nonfarm nonresidential

  161,395   21.54   156,724   22.01 

Residential Real Estate

                

Multi-family

  50,541   6.74   56,588   7.94 

1-4 Family

  178,320   23.80   179,222   25.17 

Consumer

  30,711   4.10   18,439   2.59 

Agriculture

  38,960   5.20   41,154   5.78 

Other

  588   0.08   555   0.08 

Total loans

 $749,234   100.00

%

 $712,115   100.00

%

 

Loan Portfolio by Risk Category The following table presents a summary of the loan portfolio at the dates indicated, by risk category.

 

 September 30, 2017  December 31, 2016  

June 30, 2018

  

December 31, 2017

 
 

Loans

  

% to

Total

  

 

 

Loans

  

 

% to

Total

  

Loans

  

%

Total

  

Loans

  

% to

Total

 
 

(dollars in thousands)

  

(dollars in thousands)

 
                                

Pass

 $633,203   92.8

%

 $586,430   91.7

%

 $720,446   96.2

%

 $673,033   94.5

%

Watch

  35,167   5.1   30,431   4.8   19,091   2.5   25,715   3.6 

Special Mention

  598   0.1   497   0.1   115   0.0   164   0.0 

Substandard

  13,543   2.0   21,878   3.4   9,582   1.3   13,203   1.9 

Doubtful

                        

Total

 $682,511   100.0

%

 $639,236   100.0

%

 $749,234   100.0

%

 $712,115   100.00

%

 

Our loansLoans receivable have increased $43.3$37.1 million, or 6.8%5.2%, during the ninesix months ended SeptemberJune 30, 2017. The2018. Since December 31, 2017, the pass loan category increased approximately $46.8$47.4 million, the watch category increaseddecreased approximately $4.7$6.6 million, the special mention category increaseddecreased approximately $101,000,$49,000, and the substandard category declined approximately $8.3$3.6 million. The $8.3$3.6 million decrease in loans classified as substandard was primarily driven by $5.8$8.6 million in principal payments received, $4.5 million$730,000 in loans upgraded from substandard, $623,000transferred to OREO, and $269,000 in charge-offs, and $270,000 in loans moved to OREO, offset by $2.8$6.0 million in loans moved to substandard during the first ninesix months of 2017.2018.


Loan Delinquency The following table presents a summary of loan delinquencies at the dates indicated.

 

 

September 30,

2017

  

December 31,

2016

  

June 30,

2018

  

December 31,

2017

 
 (in thousands)  

(in thousands)

 

Past Due Loans:

                

30-59 Days

 $872  $2,302  $1,134  $1,478 

60-89 Days

  612   315   538   171 

90 Days and Over

           1 

Total Loans Past Due 30-90+ Days

  1,484   2,617   1,672   1,650 
                

Nonaccrual Loans

  5,769   9,216   3,170   5,457 

Total Past Due and Nonaccrual Loans

 $7,253  $11,833  $4,842  $7,107 

 

During the ninesix months ended SeptemberJune 30, 2017,2018, nonaccrual loans decreased by $3.4$2.3 million to $5.8$3.2 million. This decrease was due primarily to $4.5$1.7 million in paydowns, $730,000 in loans transferred to OREO, and $528,000$210,000 in charge-offs, offset by $2.0 million$307,000 in loans placed on nonaccrual status. During the ninesix months ended SeptemberJune 30, 2017,2018, loans past due 30-59 days decreased from $2.3$1.5 million at December 31, 20162017 to $872,000$1.1 million at SeptemberJune 30, 2017.2018. Loans past due 60-89 days increased from $315,000$171,000 at December 31, 20162017 to $612,000$538,000 at SeptemberJune 30, 2017.2018. This represents a $1.1 million decrease$23,000 increase from December 31, 20162017 to SeptemberJune 30, 2017,2018 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 our allowance for loan losses.

 

41

Table of Contents

Non-Performing AssetsNon-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. The following table sets forth information with respect to non-performing assets as of SeptemberJune 30, 20172018 and December 31, 2016.2017.

 

 

September

30,

2017

  

December

31,

2016

  

June

30,

2018

  

December

31,

2017

 
 

(dollars in thousands)

  

(dollars in thousands)

 
                

Loans past due 90 days or more still on accrual

 $  $  $  $1 

Loans on nonaccrual status

  5,769   9,216 

Loans on nonaccrual status

  3,170   5,457 

Total non-performing loans

  5,769   9,216   3,170   5,458 

Real estate acquired through foreclosure

  6,330   6,821   4,510   4,409 

Other repossessed assets

            

Total non-performing assets

 $12,099  $16,037  $7,680  $9,867 
                

Non-performing loans to total loans

  0.85

%

  1.44

%

  0.42

%

  0.77

%

Non-performing assets to total assets

  1.26

%

  1.70

%

Non-performing assets to total assets

  0.74

%

  1.02

%

Allowance for non-performing loans

 $288  $241  $210  $108 

Allowance for non-performing loans to non-performing loans

  4.99

%

  2.62

%

  6.62

%

  1.98

%

 

Nonperforming loans at SeptemberJune 30, 2017,2018, were $5.8$3.2 million, or 0.85%0.42% of total loans, compared with $9.2$5.5 million, or 1.44%0.77% of total loans at December 31, 2016,2017, and $10.1$6.5 million, or 1.62%0.99% of total loans at SeptemberJune 30, 2016. Net loan recoveries for the first nine months of 2017 totaled $10,000 compared to net charge-offs of $652,000 for the first nine months of 2016.2017.

 

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 allocateshas allocated reserves for these loans to reflect the present value of the concessionary terms granted to the borrower. If the loan is considered collateral dependent, it is reported net of allocated reserves, at the fair value of the collateral less cost to sell.

 

We doThe Bank does not have a formal loan modification program. If a borrower is unable to make contractualcontractual payments, we reviewmanagement reviews the particular circumstances of that borrower’s situation and determine whether or not to negotiate a revised payment stream. OurThe goal when restructuring a credit is to afford the borrower a reasonable period of time to remedy the issue causing cash flow constraints within their business so that they may return to performing status over time.

 

Our loanLoan modifications have taken the form of a reduction in interest rate and/or curtailment of scheduled principal payments for a short-term period,period, usually three to six months, but in some cases until maturity of the loan. In some circumstances wemanagement may restructure real estate secured loans in a bifurcated fashion whereby we havethere 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 our restructured loans are collateral secured loans. If a borrower fails to perform under the modified terms, we place the loan(s) are placed on nonaccrual status and initiate collection actions.actions are intiated.

 


We consider Management considers 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, wemanagement 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 domanagement does 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 willwould continue to comply with the terms of the loan after the date of the renewal/modification. Additionally, the TDR classification canmay 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, and managementrisk. Management expects the borrower will continue to perform under the re-modified terms based on the borrower’s past history of performance.

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Table of Contents

 

If the borrower fails to perform,, we place management places the loan on nonaccrual status and seekseeks to liquidate the underlying collateral. OurThe nonaccrual policy for restructured loans is identical to ourthe nonaccrual policy for all loans. OurThe 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 SeptemberJune 30, 2017, we2018, the Bank had sixthree restructured loans totaling $3.2$1.6 million with borrowers who experienced deterioration in financial condition compared with ninesix loans totaling $8.7$3.0 million at December 31, 2016.2017. In general, these loans were granted interest rate reductions to provide cash flow relief to borrowers experiencing cash flow difficulties. Two of these loansAt June 30, 2018, one loan totaling approximately $1.9 million$700,000 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 include $467,000At June 30, 2018, $916,000 of commercial loans. At September 30, 2017, $1.2 million of our restructured loansTDRs were accruing and $1.9 million were on nonaccrual compared with $5.4 million and $3.3 million, respectively, at December 31, 2016.performing according to their modified terms.

 

There were no new TDRsmodifications granted during the first ninesix months of 2018 or during all of 2017 or 2016.that resulted in loans being identified as TDRs. During the ninesix months ended SeptemberJune 30, 2017,2018, TDRs were reduced as a result of $1.5 million$768,000 in payments. In addition, the TDR classification was removed in the first quarterpayments and $500,000 due to a transfer of 2017 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.a loan to OREO. See “Note 3 - Loans,” of the notes to the financial statements for additional disclosure related to troubled debt restructuring.

 

The following table sets forth information with respect to TDRs, non-performing loans, real estate acquired through foreclosure, and other repossessed assets.

 

 

September

30,

2017

  

December

31,

2016

  

June

30,

2018

  

December

31,

2017

 
 

(dollars in thousands)

  

(dollars in thousands)

 
                

Total non-performing loans

 $5,769  $9,216  $3,170  $5,458 

TDRs on accrual

  1,226   5,350   916   1,217 

Total non-performing loans and TDRs on accrual

 $6,995  $14,566  $4,086  $6,675 

Real estate acquired through foreclosure

  6,330   6,821   4,510   4,409 

Other repossessed assets

            

Total non-performing assets and TDRs on accrual

 $13,325  $21,387  $8,596  $11,084 
                

Total non-performing loans and TDRs on accrual to total loans

  1.02

%

  2.28

%

Total non-performing loans and TDRs on accrual to total loans

  0.55

%

  0.94

%

Total non-performing assets and TDRs on accrual to total assets

  1.38

%

  2.26

%

  0.83

%

  1.14

%

 


See “Note 3 - Loans,” of the notes to the financial statements for additional disclosure related to troubled debt restructuring.

 

Allowance for Loan LossesThe allowance for loan losses is based on management’s continuing review and evaluation of individual loans, loss experience, current economic conditions, risk characteristics of various categories of loans and such other factors that, in management’s judgment, require current recognition in estimating loan losses.

 

Management has established loan grading procedures that resultresult in specific allowance allocations for any estimated inherent risk of loss. For loans not individually evaluated, a general allowance allocation is computed using factors developed over time based on actual loss experience. Prior to June 30, 2017, the look-back period for historical losses was 12 quarters, weighted 40% for the most recent eight quarters and 20% for previous four-quarter period. Effective June 30, 2017, the Company extended the look-back period to 16 quarters on a prospective basis, weighted 40% to the most recent four quarters, and 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.

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Table of Contents

 

An analysis of changes in the allowance for loan losses and selected ratios for the three and nine-monthsix month periods ended SeptemberJune 30, 20172018 and 2016,2017, and for the year ended December 31, 20162017 follows: 

 

                 

Year Ended

 
 

Three Months Ended

September 30,

  

Nine Months Ended

September 30,

  

Year Ended

December 31,

  

Three Months Ended

June 30,

  

Six Months Ended

June 30,

  

December

31,

 
 

2017

  

2016

  

2017

  

2016

  2016  

2018

  

2017

  

2018

  

2017

   2017 
 

(in thousands)

  

(in thousands)

 

Balance at beginning of period

 $8,885  $10,104  $8,967  $12,041  $12,041  $8,526  $8,966  $8,202  $8,967  $8,967 
                                        

Loans charged-off:

                                        

Real estate

  57   363   570   1,658   2,157   266   192   286   513   750 

Commercial

  5   15   5   276   276               5 

Consumer

  5   21   30   56   178   7   20   34   25   51 

Agriculture

     5   95   13   18   12   95   12   95   95 

Other

     1      79      8      8       

Total charge-offs

  67   405   700   2,082   2,629   293   307   340   633   901 
                                        

Recoveries

                                        

Real estate

  112   381   561   894   1,189   464   165   550   449   714 

Commercial

  3   102   44   169   334   5   36   245   41   59 

Consumer

  25   23   69   216   368   16   19   50   44   115 

Agriculture

  16   1   25   86   114      2   11   9   33 

Other

  3   33   11   65      12   4   12   8   15 

Total recoveries

  159   540   710   1,430   2,005   497   226   868   551   936 

Net charge-offs (recoveries)

  (92

)

  (135

)

  (10

)

  652   624 

Net charge-offs (recoveries)

  (204

)

  81   (528

)

  82   (35

)

Provision (negative provision) for loan losses

     (750

)

     (1,900

)

  (2,450

)

  (150

)

     (150

)

     (800

)

Balance at end of period

 $8,977  $9,489  $8,977  $9,489  $8,967  $8,580  $8,885  $8,580  $8,885  $8,202 
                                        

Allowance for loan losses to period-end loans

  1.32

%

  1.53

%

  1.32

%

  1.53

%

  1.40

%

  1.15

%

  1.36

%

  1.15

%

  1.36

%

  1.15

%

Net charge-offs (recoveries) to average loans

  (0.05

 

 

)%

  (0.09)%  0.00

%

  0.14

%

  0.10

%

  (0.11

%)

  0.05

%

  (0.16

%)

  0.03

%

  (0.01

%)

Allowance for loan losses to non-performing loans

  155.61

%

  93.96

%

  155.61

%

  93.96

%

  97.30

%

  270.66

%

  136.50

%

  270.66

%

  136.50

%

  150.27

%

                                        

Allowance for loan losses for loans individually evaluated for impairment

 $425  $339  $425  $339  $399  $319  $254  $319  $254  $219 

Loans individually evaluated for impairment

  7,509   16,214   7,509   16,214   15,131   4,557   8,273   4,557   8,273   7,173 

Allowance for loan losses to loans individually evaluated for impairment

  5.66

%

  2.09

%

  5.66

%

  2.09

%

  2.64

%

  7.00

%

  3.07

%

  7.00

%

  3.07

%

  3.05

%

                                        

Allowance for loan losses for loans collectively evaluated for impairment

 $8,552  $9,150  $8,552  $9,150  $8,568  $8,261  $8,631  $8,261  $8,631  $7,983 

Loans collectively evaluated for impairment

  675,002   605,483   675,002   605,483   624,105   744,677   646,665   744,677   646,665   704,942 

Allowance for loan losses to loans collectively evaluated for impairment

  1.27

%

  1.51

%

  1.27

%

  1.51

%

  1.37

%

Allowance for loan losses to loans collectively evaluated for impairment

  1.11

%

  1.33

%

  1.11

%

  1.33

%

  1.13

%

 

OurThe 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 SeptemberJune 30, 2017, decreased to 1.32% from 1.40% at2018, remained consistent with December 31, 20162017 at 1.15% and changed from 1.53%1.36% at SeptemberJune 30, 2016.2017. The change in our loan loss reserve as a percentage of total loans between periods is attributable to growth in the portfolio driven by new loans underwritten with lower loss expectations, improving historical loss experience, qualitative factors, fewer loans migrating downwardimprovement in risk grade classificationsclassification metrics, and improved charge-off levels. OurThe allowance for loan losses to non-performing loans was 155.61%270.66% at SeptemberJune 30, 2017,2018, compared with 97.30%150.27% at December 31, 2016,2017, and 93.96%136.50% at SeptemberJune 30, 2016.2017. Net recoveries forin the first ninesix months of 20172018 totaled $10,000$528,000 compared to net loan charge-offs of $652,000 for$82,000 in the first ninesix months of 2016.   2017.   


The following table sets forth the net charge-offs (recoveries) for the periods indicated: 

  

Nine Months

Ended

September 30,

2017

  

 

Year Ended

December 31,

2016

  

Year Ended

December 31,

2015

 
  

(in thousands)

 

Commercial

 $(39

)

 $(58

)

 $(27

)

Commercial Real Estate

  (335

)

  (339

)

  1,225 

Residential Real Estate

  344   1,307   1,487 

Consumer

  (39

)

  (200

)

  37 

Agriculture

  70   (96

)

  110 

Other

  (11

)

  10   (9

)

Total net charge-offs (recoveries)

 $(10

)

 $624  $2,823 

 

The majority of our nonperforming loans are secured by real estate collateral,, and the underlying collateral coverage for nonperforming loans supports the likelihood of collection of our principal. We haveManagement has assessed these loans for collectability and considered, among other things, the borrower’s ability to repay, the value of the underlying collateral, and other market conditions to ensure the allowance for loan losses is adequate to absorb probable incurred losses. OurThe allowance for non-performing loans to non-performing loans was 4.99%6.62% at SeptemberJune 30, 20172018 compared with 2.62%1.98% at December 31, 2016,2017, and 2.88%2.00% at SeptemberJune 30, 2016.2017. The increase in this ratio from December 31, 20162017 to SeptemberJune 30, 20172018 was primarily attributable to an allocated allowance for an individually evaluated loan.the improving non-performing loan trends during the period.

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Table of Contents

 

The following table presents the unpaid principal balance, recorded investment and allocated allowance related to loans individually evaluated for impairment in the commercial real estate and residential real estate portfolios as of SeptemberJune 30, 20172018 and December 31, 2016.2017.

 

 

September 30, 2017

  

December 31, 2016

  

June 30, 2018

  

December 31, 2017

 
 

Commercial

Real Estate

  

Residential

Real Estate

  

Commercial

Real Estate

  

Residential

Real Estate

  

Commercial

Real Estate

  

Residential

Real Estate

  

Commercial

Real Estate

  

Residential

Real Estate

 
 

(in thousands)

  

(in thousands)

 

Unpaid principal balance

 $4,849  $5,041  $10,985  $10,439  $3,695  $4,303  $4,734  $5,456 

Prior charge-offs

  (2,100

)

  (949

)

  (5,131

)

  (1,818

)

Prior charge-offs

  (2,262

)

  (1,288

)

  (2,099

)

  (1,506

)

                                

Recorded investment

  2,749   4,092   5,854   8,621   1,433   3,015   2,635   3,950 

Allocated allowance

  (26

)

  (386

)

  (35

)

  (350

)

Allocated allowance

  (48

)

  (258

)

     (206

)

                                

Recorded investment, less allocated allowance

 $2,723  $3,706  $5,819  $8,271  $1,385  $2,757  $2,635  $3,744 
                                

Recorded investment, less allocated allowance/ Unpaid principal balance

  56.16

%

  73.52

%

  52.97

%

  79.23

%

  37.48

%

  64.07

%

  55.66

%

  68.62

%

 

Based on prior charge-offs, ourthe current recorded investment in loans individually evaluated for impairment in the commercial real estate and residential real estate segments isof the portfolio are significantly below the unpaid principal balance for these loans. The recorded investment net of the allocated allowance was 56.16%37.48% and 73.52%64.07% of the unpaid principal balance in the commercial real estate and residential real estate segments of the portfolio, respectively, at SeptemberJune 30, 2017.


The following table illustrates recent trends in loans collectively evaluated for impairment and the related allowance for loan losses by portfolio segment (dollars in thousands):

  

September 30, 2017

  

December 31, 2016

 
  

Loans

  

Allowance

  

% to

Total

  

Loans

  

Allowance

  

% to

Total

 
                         

Commercial

 $107,008  $900   0.84

%

 $97,166  $462   0.48

%

Commercial real estate

  288,533   4,412   1.53   251,529   4,859   1.93 

Residential real estate

  224,805   2,830   1.26   227,668   3,076   1.35 

Consumer

  8,474   42   0.50   9,817   8   0.08 

Agriculture

  45,615   366   0.80   37,448   161   0.43 

Other

  567   2   0.35   477   2   0.42 

Total

 $675,002  $8,552   1.27

%

 $624,105  $8,568   1.37

%

Our allowance for loan losses for loans collectively evaluated for impairment declined to 1.27% at September 30, 2017 from 1.51% at September 30, 2016 and 1.37% at December 31, 2016. This decline was driven primarily by declining historical loss trends and an improving loan risk category classification mix and volume which are key factors for estimating general reserves. Other factors include the consideration of growth, composition and diversification of our loan portfolio, current delinquency levels, the results of recent regulatory communications and general economic conditions.2018.

 

Provision for Loan Losses No provision for loan losses was recorded for the first nine months of 2017, compared to aA negative provision for loan losses of $1.9 million for the first nine months of 2016. No provision expense$150,000 was recorded for the second quarter and first ninesix months of 2017 due to2018 and no provision was recorded for the same periods in 2017. This was a result of declining historical loss rates, net recoveries for the six-month period, improvements in asset quality, growthchanges in the composition of the portfolio, and management’s assessment of risk within the portfolio. Since December 31, 2016, theThe pass category increased approximately $46.8$47.4 million, the watch category increaseddecreased approximately $4.7$6.6 million, the special mention category increaseddecreased approximately $101,000,$49,000, and the substandard category declined approximately $8.3$3.6 million. Net recoveries were $10,000$528,000 for the ninesix months ended SeptemberJune 30, 2017,2018, compared with net charge-offs of $652,000$82,000 for the ninesix months ended SeptemberJune 30, 2016. We consider2017. Management considers the size and volume of our portfolio as well as the credit quality of ourthe loan portfolio based upon risk category classification when determining the loan loss provision for each period and the allowance for loan losses at period end.

 

ForeclosedForeclosed Properties – Foreclosed properties at SeptemberJune 30, 20172018 were $6.3$4.5 million compared with $6.8$6.3 million at June 30, 2017 and $4.4 million at December 31, 2016.2017. See “NoteNote 4 - Other– “Other Real Estate Owned,” of the notes to the financial statements. During the first ninesix months of 2017, we2018, the Bank acquired $270,000$730,000 of OREO properties, and sold properties totaling approximately $738,000. We value$354,000. Management values foreclosed properties at fair value less estimated costs to sell when acquired and expectexpects to liquidate these properties to recover our investment in the due course of business.

 

OREO is recorded at fair market value less estimated cost to sell at time of acquisition. Any write-down of the property at the time of acquisition is charged to the allowance forfor loan losses. Subsequent reductions in fair valueWhen foreclosed properties are recorded as non-interest expense. When OREO is acquired, we obtainmanagement obtains a new appraisal ofor has staff from the subject property or have staff in ourBank’s special assets group evaluate the latest in-file appraisal. Weappraisal in connection with the transfer to OREO. Management 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.

 

Net gain (loss) on sales, write-downs, and operating expenses for OREO totaled $92,000$319,000 for the ninesix months ended SeptemberJune 30, 2017,2018, compared to netincome of $19,000 after considering gains on sales and operating expenses of $1.3 million infor the same period of 2016.six months ending June 30, 2017. During the ninesix months ended SeptemberJune 30, 2017,2018, fair value write-downs of $98,000$325,000 were recorded to reflect declines in fair value driven by reductions in listingmarketing prices and new appraisals compared with $970,000no write-downs for the ninesix months ended SeptemberJune 30, 2016.2017.

 

LiabilitiesTotal liabilities at SeptemberJune 30, 20172018 were $922.9$954.1 million compared with $912.4$898.1 million at December 31, 2016,2017, an increase of $10.5$56.0 million, or 1.1%6.2%. This increase was primarily attributable to an increase in total depositsFHLB advances of $16.9$59.8 million, and the issuance of $10.0 million in senior debt, offset by a decrease in FHLB advancesjunior subordinated debentures of $5.6 million and a decrease in accrued interest payable and other liabilities of $10.2 million due to payment of a litigation settlement.$2.3 million.

 


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Table of Contents

 

Deposits are our primary source of funds. The following table sets forth the average daily balances and weighted average rates paid for our deposits for the periods indicated:

 

 

For the Nine Months

  

For the Year

  

For the Six Months

  

For the Year

 
 

Ended September 30,

  

Ended December 31,

  

Ended June 30,

  

Ended December 31,

 
 

2017

  

2016

  

2018

  

2017

 
 

Average

  

Average

  

Average

  

Average

  

Average

  

Average

  

Average

  

Average

 
 

Balance

  

Rate

  

Balance

  

Rate

  

Balance

  

Rate

  

Balance

  

Rate

 
 

(dollars in thousands)

  

(dollars in thousands)

 

Demand

 $125,932      $119,736      $133,742      $129,088     

Interest checking

  102,744   0.13

%

  96,294   0.13

%

  92,565   0.13

%

  101,980   0.13

%

Money market

  141,777   0.55   136,423   0.58   151,292   0.71   145,281   0.55 

Savings

  35,650   0.17   34,257   0.18   35,446   0.16   35,486   0.17 

Certificates of deposit

  458,732   0.92   466,007   0.88   425,703   1.12   452,443   0.93 

Total deposits

 $864,835   0.60

%

 $852,717   0.60

%

 $838,748   0.72

%

 $864,278   0.60

%

 

The following table sets forth the average daily balances and weighted average rates paid for our certificates of deposit for the periods indicated:

 

 

For the Nine Months

  

For the Year

  

For the Six Months

  

For the Year

 
 

Ended September 30,

  

Ended December 31,

  

Ended June 30,

  

Ended December 31,

 
 

2017

  

2016

  

2018

  

2017

 
 

Average

  

Average

  

Average

  

Average

  

Average

  

Average

  

Average

  

Average

 
 

Balance

  

Rate

  

Balance

  

Rate

  

Balance

  

Rate

  

Balance

  

Rate

 
 

(dollars in thousands)

  

(dollars in thousands)

 

Less than $250,000

 $425,828   0.91

%

 $437,955   0.88

%

$250,000 or more

  32,904   0.99

%

  28,052   0.97

%

Less than $250,000

 $396,691   1.11

%

 $419,816   0.92

%

$250,000 or more

  29,012   1.25

%

  32,627   1.01

%

Total

 $458,732   0.92

%

 $466,007   0.88

%

 $425,703   1.12

%

 $452,443   0.93

%

 

The following table shows at SeptemberJune 30, 20172018 the amount of our time deposits of $250,000 or more by time remaining until maturity (in thousands):

  

Maturity Period

Maturity Period

 

Maturity Period

 
        

Three months or less

 $5,227  $1,558 

Three months through six months

  5,264   2,704 

Six months through twelve months

  3,026   10,059 

Over twelve months

  19,567   14,244 

Total

 $33,084  $28,565 

 

Liquidity

 

Liquidity risk arises from the possibility we 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 meet the cash flow requirements of depositors and borrowers, as well as our operating cash needs, taking into account all on- and off-balance sheet funding demands. Liquidity risk management also involves ensuring that we meet our cash flow needs 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. OurThe Asset Liability Committee regularly monitors and reviews ourthe liquidity position.

 

Funds are available to the Bank from severala 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.

 

WeThe Bank also borrowborrows from the FHLB to supplement our funding requirements. At SeptemberJune 30, 2017, we2018, the Bank had an unused borrowing capacity with the FHLB of $74.8$19.4 million. Advances are collateralized by first mortgage residential loans and borrowing capacity is based on the underlying book value of eligible pledged loans.

 

WeThe Bank also havehas available on an una secured basis federal funds borrowing lines from a correspondent bank totaling $5.0 million. Management believes ourthe 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 ourit’s funding strategy. At SeptemberJune 30, 2017, we2018, the Bank had no brokered deposits.

 

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Table of Contents

The Company uses cash on hand to service senior debt, service 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 June 30, 2018, cash on hand totaled $6.3 million, of which, $612,000 is held in escrow by the Company’s senior debt holder to service interest payments.

Capital

 

Stockholders’Stockholders’ equity increased $7.3$13.7 million to $40.1$86.4 million at SeptemberJune 30, 2017,2018, compared with $32.7$72.7 million at December 31, 20162017 primarily due to the $14.9 million private placement of common stock completed during the first quarter of 2018, as well as current year net income of $5.1$3.9 million, offset by the $3.5 million repurchase of the Company’s series E and F preferred shares and the other comprehensive loss for the first six months of 2018 of $1.8 million.

The Company completed a private placement of common stock on March 30, 2018. In the transaction, the Company issued 150,000 common shares and 1.0 million non-voting common shares to Patriot Financial Partners III, L.P. at $13.00 per share resulting in net proceeds of $14.9 million of which $5.0 million was contributed as capital to the Bank. The balance of the proceeds will be used for general corporate purposes and to support the growth of the Bank.

On June 26, 2018, the Company completed the purchase and retirement of all of its issued and outstanding Series E and Series F Non-Voting Perpetual Preferred Shares for an increaseaggregate price of $3.5 million paid in the fair valuecash.  The Series E and Series F Shares had an aggregate liquidation preference of our available for sale securities portfolio of $1.9$10.5 million.

 

The following table shows the ratios of Tier 1 capital, common equity Tier 1 capital, and total capital to risk-adjusted assets and the leverage ratios (excluding the capital conservation buffer) for the Bank at the dates indicated. Regulatory minimums and well-capitalized minimums are prompt corrective action standards.indicated:

 

  

Regulatory Minimums

  

Well-Capitalized

Minimums

  

September 30, 2017

  

December 31, 2016

 
                 

Tier 1 Capital

  6.0%  8.0%  9.66%  8.28%

Common equity Tier 1 capital

  4.5   6.5   9.66   8.28 

Total risk-based capital

  8.0   10.0   11.10   9.88 

Tier 1 leverage ratio

  4.0   5.0   7.73   6.24 

  

Regulatory

Minimums

  

Well-Capitalized

Minimums

  

June 30, 2018

  

December 31, 2017

 
                 

Tier 1 Capital

  6.0%  8.0%  11.23%  10.35%

Common equity Tier 1 capital

  4.5   6.5   11.23   10.35 

Total risk-based capital

  8.0   10.0   12.26   11.61 

Tier 1 leverage ratio

  4.0   5.0   9.37   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.

 

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 allow banks and their holding companies with less than $250 billion in assets a one-time opportunity to opt-out of a requirement to include unrealized gains and losses in accumulated other comprehensive income in their capital calculation. The Company and the Bank opted out of this requirement. The rules also establish a “capital conservation buffer” of 2.5%, to be phased in over three years, above the regulatory minimum risk-based capital ratios. Once the capital conservation buffer is fully phased in, the minimum ratios 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 capital to total risk-weighted assets (“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 assetsfor 2018 is 1.875% and increases to 1.25% in 2017, 1.875% in 2018, and 2.5% in 2019.for 2017. An institution is subject to limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses if capital levels fall below minimum levels plus the buffer amounts. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions.

 


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Table of Contents

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Given an instantaneous 100 basis point increase in interest rates, sustained for one year, ourthe base net interest income would increase by an estimated 0.11%0.9% at Septemberboth June 30, 2017, compared with a decrease of 2.5% at2018 and December 31, 2016, and is within the risk tolerance parameters of our risk management policy.2017. Given a 200 basis point increase in interest rates, sustained for one year, base net interest income would increase by an estimated 0.10%1.6% at SeptemberJune 30, 2017,2018, compared with a decreasean increase of 5.1%1.7% at December 31, 2016, and is within the risk tolerance parameters of our risk management policy.2017.

 

The following table indicates the estimated impact on net interest income under various interest rate scenarios for the twelve months following September June 30, 2017,2018, 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

 $30   0.10

%

 $520   1.57

%

+ 100 basis points

  35   0.11   287   0.87 

- 100 basis points

  (1,290

)

  (4.16

)

- 200 basis points

  (2,184

)

  (7.03

)

- 100 basis points

  (487

)

  (1.47

)

- 200 basis points

  (1,235

)

  (3.73

)

 

Item 4. Controls and Procedures

 

As of the end of the quarterly period covered by this report, an evaluation was carried out under the supervision and with the participation of the Company’sCompany’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”)). Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were, to the best of their knowledge, effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms as of such date.

 

There was no change in the Company’sCompany’s internal control over financial reporting that occurred during the Company’s fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 


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Table of Contents

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

WeThe Company and Bank are subject to claims and lawsuits that arise primarily in the ordinary course of business. Litigation is subject to inherent uncertainties and unfavorable outcomes could occur. See FootnoteNote 13, “Off Balance Sheet Risks, Commitments, and Contingent Liabilities” into the Notes to our consolidated financial statements for additional detail regarding our involvement in legal proceedings.

 

Item 1A. Risk Factors

 

We refer youRefer to the detailed cautionary statements and discussion of risks that affect ourthe Company and its business in “Item 1A – Risk Factors” of ourthe Annual Report on Form 10-K, for the year ended December 31, 2016.2017. There have been no material changes from the risk factors previously discussed in those reports.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

Not applicable.

 

Item 3. Default Upon Senior Securities

 

Not applicable.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

Not applicable

 

Item 6. Exhibits

 

(a)           Exhibits

The following exhibits are filed or furnished as part of this report:

 

Exhibit Number

Description of Exhibit

3.1Articles of Incorporation of the Company, restated to reflect all amendments to date.
3.2Amended and Restated Bylaws of the Company dated June 18, 2018, incorporated by reference to Exhibit 3.2 of the Current Report on Form 8-K dated June 18, 2018.

4.1

Tax Benefits Preservation Plan, dated as of June 25, 2015, between the Company and American Stock Transfer Company, as Rights Agent. Exhibit 3.1 to Form 8-K filed June 29, 2015 is incorporated by reference.

4.2

Amendment No. 1 to the Tax Benefits Preservation Plan, dated August 4, 2015. Exhibit 4.2 to the Quarterly Report on 10-Q filed August 5, 2015 is incorporated by reference.

4.3Amendment No. 2 to the Tax Benefits Preservation Plan dated May 23, 2018, incorporated by reference to Exhibit 4 of the Current Report on Form 8-K dated May 23, 2018.
10.1Limestone Bancorp, Inc. 2018 Omnibus Equity Compensation Plan, Appendix B to Schedule 14A Proxy Statement (DEF 14A) filed April 13, 2018 is incorporated by reference. 

10.2

Offer to Purchase Issued and Outstanding Series E Preferred Shares and Series F Preferred Shares dated June 25, 2018, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K dated June 25, 2018.

31.1

Certification of Principal Executive Officer, pursuant to Rule 13a - 14(a).

31.2

Certification of Principal Financial Officer, pursuant to Rule 13a - 14(a).

32.1

Certification of Principal Executive Officer, pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

CertificationCertification of Principal Financial Officer, pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

101

The following financial statements from the Company’sCompany’s Quarterly Report on Form 10Q for the quarter ended SeptemberJune 30, 2017,2018, formatted in XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income (Loss), (iv) Consolidated Statement of Changes in Stockholders’ Equity, (v) Consolidated Statements of Cash Flows, (vi) Notes to Consolidated Financial Statements.

 


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Table of Contents

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act ofif 1934, the Registrant had duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

  

PORTERLIMESTONE BANCORP, INC.

  

(Registrant)

  

NovemberAugust 2,, 2017 2018

By:

/s/ John T. Taylor

  

  

John T. Taylor

  

  

Chief Executive Officer 

  

NovemberAugust 2,, 2017 2018

By:

/s/ Phillip W. Barnhouse

 

 

Phillip W. Barnhouse 

  

  

Chief Financial Officer

 

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