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, 20179
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 | 61-1142247 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
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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 electronically and posted on its corporate Web site, if any,electronically 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 ☐
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common shares | LMST | Nasdaq |
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 ☐ | 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.
4,668,2646,250,593 Common Shares and 1,591,6001,220,000 Non-Voting Common Shares no par value, were outstanding at OctoberJuly 31, 2017.2019.
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QUANTITATIVE AND QUALITATIVE |
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PART I – FINANCIAL INFORMATION
The following consolidated financial statements of PorterLimestone Bancorp,, Inc. and subsidiary, PBILimestone Bank, Inc. are submitted:
Unaudited Consolidated Balance Sheets for SeptemberJune 30, 20172019 and December 31, 20162018
Unaudited Consolidated Statements of Income for the three and ninesix months ended SeptemberJune 30, 20172019 and 20162018
Unaudited Consolidated Statements of Comprehensive Income for the three and ninesix months ended SeptemberJune 30, 20172019 and 20162018
Unaudited Consolidated Statement of Changes in Stockholders’Stockholders’ Equity for the ninethree and six months ended SeptemberJune 30, 20172019 and 2018
Unaudited Consolidated Statements of Cash Flows for the ninesix months ended SeptemberJune 30, 20172019 and 20162018
Notes to Unaudited Consolidated Financial Statements
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, 2019 | December 31, 2018 | |||||||
Assets | ||||||||
Cash and due from banks | $ | 6,860 | $ | 6,963 | ||||
Interest bearing deposits in banks | 40,755 | 28,398 | ||||||
Cash and cash equivalents | 47,615 | 35,361 | ||||||
Securities available for sale | 208,614 | 201,192 | ||||||
Loans, net of allowance of $8,832 and $8,880, respectively | 794,282 | 756,364 | ||||||
Premises and equipment, net | 14,827 | 14,655 | ||||||
Premises held for sale | 995 | 1,050 | ||||||
Other real estate owned | 3,225 | 3,485 | ||||||
Federal Home Loan Bank stock | 6,693 | 7,233 | ||||||
Bank owned life insurance | 15,853 | 15,646 | ||||||
Deferred taxes, net | 28,708 | 29,282 | ||||||
Accrued interest receivable and other assets | 5,976 | 5,424 | ||||||
Total assets | $ | 1,126,788 | $ | 1,069,692 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Deposits | ||||||||
Non-interest bearing | $ | 141,448 | $ | 142,618 | ||||
Interest bearing | 797,029 | 751,613 | ||||||
Total deposits | 938,477 | 894,231 | ||||||
Federal Home Loan Bank advances | 51,470 | 46,549 | ||||||
Accrued interest payable and other liabilities | 4,419 | 5,815 | ||||||
Junior subordinated debentures | 21,000 | 21,000 | ||||||
Senior debt | 10,000 | 10,000 | ||||||
Total liabilities | 1,025,366 | 977,595 | ||||||
Commitments and contingent liabilities (Note 13) | — | — | ||||||
Stockholders’ equity | ||||||||
Common stock, no par, 39,000,000 shares authorized, 6,237,832 and 6,242,720 voting, and 1,220,000 and 1,220,000 non-voting issued and outstanding, respectively | 140,639 | 140,639 | ||||||
Additional paid-in capital | 24,147 | 24,287 | ||||||
Retained deficit | (59,729 | ) | (66,201 | ) | ||||
Accumulated other comprehensive loss | (3,635 | ) | (6,628 | ) | ||||
Total stockholders' equity | 101,422 | 92,097 | ||||||
Total liabilities and stockholders’ equity | $ | 1,126,788 | $ | 1,069,692 |
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.
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, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Interest income | ||||||||||||||||
Loans, including fees | $ | 10,465 | $ | 9,094 | $ | 20,719 | $ | 17,884 | ||||||||
Taxable securities | 1,608 | 1,198 | 3,181 | 2,141 | ||||||||||||
Tax exempt securities | 88 | 96 | 181 | 192 | ||||||||||||
Federal funds sold and other | 215 | 197 | 481 | 383 | ||||||||||||
12,376 | 10,585 | 24,562 | 20,600 | |||||||||||||
Interest expense | ||||||||||||||||
Deposits | 2,965 | 1,649 | 5,552 | 2,993 | ||||||||||||
Federal Home Loan Bank advances | 255 | 216 | 536 | 372 | ||||||||||||
Senior debt | 98 | 98 | 194 | 194 | ||||||||||||
Junior subordinated debentures | 258 | 236 | 521 | 447 | ||||||||||||
Subordinated capital note | — | 12 | — | 39 | ||||||||||||
3,576 | 2,211 | 6,803 | 4,045 | |||||||||||||
Net interest income | 8,800 | 8,374 | 17,759 | 16,555 | ||||||||||||
Provision (negative provision) for loan losses | — | (150 | ) | — | (150 | ) | ||||||||||
Net interest income after provision for loan losses | 8,800 | 8,524 | 17,759 | 16,705 | ||||||||||||
Non-interest income | ||||||||||||||||
Service charges on deposit accounts | 571 | 591 | 1,067 | 1,159 | ||||||||||||
Bank card interchange fees | 596 | 446 | 1,104 | 847 | ||||||||||||
Income from bank owned life insurance | 118 | 138 | 217 | 237 | ||||||||||||
Net loss on sales and calls of investment securities | (5 | ) | (6 | ) | (5 | ) | (6 | ) | ||||||||
Other | 166 | 178 | 347 | 361 | ||||||||||||
1,446 | 1,347 | 2,730 | 2,598 | |||||||||||||
Non-interest expense | ||||||||||||||||
Salaries and employee benefits | 3,915 | 3,885 | 7,830 | 7,673 | ||||||||||||
Occupancy and equipment | 854 | 880 | 1,752 | 1,775 | ||||||||||||
Professional fees | 179 | 222 | 344 | 427 | ||||||||||||
Marketing expense | 212 | 308 | 439 | 608 | ||||||||||||
FDIC Insurance | 103 | 139 | 211 | 321 | ||||||||||||
Data processing expense | 315 | 307 | 628 | 631 | ||||||||||||
State franchise and deposit tax | 315 | 282 | 630 | 564 | ||||||||||||
Deposit account related expense | 310 | 221 | 591 | 440 | ||||||||||||
Other real estate owned expense | 142 | 237 | 308 | 319 | ||||||||||||
Litigation and loan collection expense | 34 | 48 | 80 | 101 | ||||||||||||
Other | 845 | 876 | 1,692 | 1,715 | ||||||||||||
7,224 | 7,405 | 14,505 | 14,574 | |||||||||||||
Income before income taxes | 3,022 | 2,466 | 5,984 | 4,729 | ||||||||||||
Income tax expense (benefit) | (611 | ) | 483 | (488 | ) | 812 | ||||||||||
Net income | 3,633 | 1,983 | 6,472 | 3,917 | ||||||||||||
Basic and diluted income per common share | $ | 0.49 | $ | 0.27 | $ | 0.87 | $ | 0.57 |
See accompanying notes to unaudited consolidated financial statements.
PORTERLIMESTONE BANCORP, INC.
Unaudited CConsolidated Statements of Comprehensive onsolidated StatementsIncome (Loss)
(in thousands)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Net income | $ | 3,633 | $ | 1,983 | $ | 6,472 | $ | 3,917 | ||||||||
Other comprehensive income (loss): | ||||||||||||||||
Unrealized gain (loss) on securities: | ||||||||||||||||
Unrealized gain (loss) arising during the period | 1,882 | (523 | ) | 3,877 | (2,234 | ) | ||||||||||
Reclassification adjustment for gains (losses) included in net income | (5 | ) | (6 | ) | (5 | ) | (6 | ) | ||||||||
Net unrealized gain (loss) recognized in comprehensive income | 1,887 | (517 | ) | 3,882 | (2,228 | ) | ||||||||||
Tax effect | (471 | ) | 109 | (889 | ) | 469 | ||||||||||
Other comprehensive income (loss) | 1,416 | (408 | ) | 2,993 | (1,759 | ) | ||||||||||
Comprehensive income | $ | 5,049 | $ | 1,575 | $ | 9,465 | $ | 2,158 |
See accompanying notes to unaudited consolidated financial statements.
ofLIMESTONE CBANCORP, INC.hanges
Unaudited Consolidated Statements of Changes in Stockholders’ Equity Stockholders’ Equity
For NineThree and Six Months Ended SeptemberJune 30, 20179 and 2018
(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, 2019 | — | — | 6,242,720 | 1,220,000 | 7,462,720 | $ | — | $ | — | $ | 140,639 | $ | 24,287 | $ | (66,201 | ) | $ | (6,628 | ) | $ | 92,097 | |||||||||||||||||||||||||||
Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations upon award | — | — | 1,642 | — | 1,642 | — | — | — | (276 | ) | — | — | (276 | ) | ||||||||||||||||||||||||||||||||||
Forfeited unvested stock | — | — | (3,748 | ) | — | (3,748 | ) | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
Stock-based compensation expense | — | — | — | — | — | — | — | — | 82 | — | — | 82 | ||||||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | — | — | — | — | 2,839 | — | 2,839 | ||||||||||||||||||||||||||||||||||||
Net change in accumulated other comprehensive income, net of taxes | — | — | — | — | — | — | — | — | — | — | 1,577 | 1,577 | ||||||||||||||||||||||||||||||||||||
Balances, March 31, 2019 | — | — | 6,240,614 | 1,220,000 | 7,460,614 | $ | — | $ | — | $ | 140,639 | $ | 24,093 | $ | (63,362 | ) | $ | (5,051 | ) | $ | 96,319 | |||||||||||||||||||||||||||
Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations upon award | — | — | (2,532 | ) | — | (2,532 | ) | — | — | — | (39 | ) | — | — | (39 | ) | ||||||||||||||||||||||||||||||||
Forfeited unvested stock | — | — | (250 | ) | — | (250 | ) | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
Stock-based compensation expense | — | — | — | — | — | — | — | — | 93 | — | — | 93 | ||||||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | — | — | — | — | 3,633 | — | 3,633 | ||||||||||||||||||||||||||||||||||||
Net change in accumulated other comprehensive income, net of taxes | — | — | — | — | — | — | — | — | — | — | 1,416 | 1,416 | ||||||||||||||||||||||||||||||||||||
Balances, June 30, 2019 | — | — | 6,237,832 | 1,220,000 | 7,457,832 | $ | — | $ | — | $ | 140,639 | $ | 24,147 | $ | (59,729 | ) | $ | (3,635 | ) | $ | 101,422 |
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.
PORTERLIMESTONE BANCORP, INC.
Unaudited Consolidated Statements of Changes in Stockholders’ Equity
For Three and Six Months Ended June 30, 2019 and 2018
(Dollar amounts in thousands except share and per share data)
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 | |||||||||||||||||||||||||||
Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations upon award | — | — | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
Forfeited unvested stock | — | — | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
Issuance of stock | — | — | 150,000 | 1,000,000 | 1,150,000 | — | — | 14,910 | — | — | — | 14,910 | ||||||||||||||||||||||||||||||||||||
Stock-based compensation expense | — | — | — | — | — | — | — | — | 64 | — | — | 64 | ||||||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | — | — | — | — | 1,934 | — | 1,934 | ||||||||||||||||||||||||||||||||||||
Reclassification of disproportionate tax effect | ||||||||||||||||||||||||||||||||||||||||||||||||
due to change in federal tax rate | — | — | — | — | — | — | — | — | — | 113 | (113 | ) | — | |||||||||||||||||||||||||||||||||||
Net change in accumulated other comprehensive income, net of taxes | — | — | — | — | — | — | — | — | — | — | (1,351 | ) | (1,351 | ) | ||||||||||||||||||||||||||||||||||
Balances, March 31, 2018 | 6,198 | 4,304 | 6,189,864 | 1,220,000 | 7,409,864 | $ | 1,644 | $ | 1,127 | $ | 140,639 | $ | 24,561 | $ | (73,061 | ) | $ | (6,680 | ) | $ | 88,230 | |||||||||||||||||||||||||||
Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations upon award | — | — | 45,129 | — | 45,129 | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
Forfeited unvested stock | — | — | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||
Redemption and retirement of preferred shares | (6,198 | ) | (4,304 | ) | — | — | — | (1,644 | ) | (1,127 | ) | — | (734 | ) | — | — | (3,505 | ) | ||||||||||||||||||||||||||||||
Stock-based compensation expense | — | — | — | — | — | — | — | — | 99 | — | — | 99 | ||||||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | — | — | — | — | 1,983 | — | 1,983 | ||||||||||||||||||||||||||||||||||||
Net change in accumulated other comprehensive income, net of taxes | — | — | — | — | — | — | — | — | — | — | (408 | ) | (408 | ) | ||||||||||||||||||||||||||||||||||
Balances, June 30, 2018 | — | — | 6,234,993 | 1,220,000 | 7,454,993 | $ | — | $ | — | $ | 140,639 | $ | 23,926 | $ | (71,078 | ) | $ | (7,088 | ) | $ | 86,399 |
See accompanying notes to unaudited consolidated financial statements.
LIMESTONE BANCORP, INC.
Unaudited Consolidated Statements of Cash Flows
For Six Months Ended June 30, 2019 and 2018
(dollars in thousands)
2019 | 2018 | |||||||
Cash flows from operating activities | ||||||||
Net income | $ | 6,472 | $ | 3,917 | ||||
Adjustments to reconcile net income to net cash from operating activities | ||||||||
Depreciation and amortization | 979 | 477 | ||||||
Provision (negative provision) for loan losses | — | (150 | ) | |||||
Net amortization on securities | 363 | 444 | ||||||
Stock-based compensation expense | 175 | 163 | ||||||
Deferred taxes, net | (317 | ) | 1,158 | |||||
Net gain on sales of loans held for sale | — | (1 | ) | |||||
Proceeds from sales of loans held for sale | — | 71 | ||||||
Net gain on sales of other real estate owned | — | (50 | ) | |||||
Net write-down of other real estate owned | 260 | 325 | ||||||
Net realized loss on sales and calls of investment securities | 5 | 6 | ||||||
Net write-down on premises held for sale | 55 | — | ||||||
Earnings on bank owned life insurance, net of premium expense | (207 | ) | (227 | ) | ||||
Net change in accrued interest receivable and other assets | (552 | ) | (767 | ) | ||||
Net change in accrued interest payable and other liabilities | (1,780 | ) | (795 | ) | ||||
Net cash from operating activities | 5,453 | 4,571 | ||||||
Cash flows from investing activities | ||||||||
Purchases of available for sale securities | (13,894 | ) | (41,911 | ) | ||||
Sales and calls of available for sale securities | 2,452 | 6,054 | ||||||
Maturities and prepayments of available for sale securities | 7,534 | 7,003 | ||||||
Proceeds from mandatory redemptions of FHLB stock | 540 | — | ||||||
Proceeds from sale of other real estate owned | — | 354 | ||||||
Loan originations and payments, net | (38,476 | ) | (37,372 | ) | ||||
Purchases of premises and equipment, net | (208 | ) | (449 | ) | ||||
Proceeds from sale of premises and equipment | 1 | — | ||||||
Net cash from investing activities | (42,051 | ) | (66,321 | ) | ||||
Cash flows from financing activities | ||||||||
Net change in deposits | 44,246 | (794 | ) | |||||
Repayment of Federal Home Loan Bank advances | (65,079 | ) | (40,167 | ) | ||||
Advances from Federal Home Loan Bank | 70,000 | 100,000 | ||||||
Repayment of subordinated capital note | — | (2,250 | ) | |||||
Issuance of common stock | — | 14,910 | ||||||
Common shares withheld for taxes | (315 | ) | — | |||||
Redemption of preferred stock | — | (3,505 | ) | |||||
Net cash from financing activities | 48,852 | 68,194 | ||||||
Net change in cash and cash equivalents | 12,254 | 6,444 | ||||||
Beginning cash and cash equivalents | 35,361 | 34,103 | ||||||
Ending cash and cash equivalents | $ | 47,615 | $ | 40,547 | ||||
Supplemental cash flow information: | ||||||||
Interest paid | $ | 6,771 | $ | 4,973 | ||||
Supplemental non-cash disclosure: | ||||||||
Transfer from loans to other real estate | — | 730 | ||||||
Initial recognition of right-of-use lease assets | 507 | — |
See accompanying notes to unaudited consolidated financial statements.
LIMESTONE 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, 20172019 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, 20162018 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 Standards– In August 2015, FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606). This ASU is an update to ASU 2014-09, and delays the effective date of ASU 2014-09. The ASU provides guidance on revenue recognition for entities that enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of nonfinancial assets. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additional disclosures are required to provide quantitative and qualitative information regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new guidance is effective for annual reporting periods, and interim reporting periods within those annual periods, beginning after December 15, 2017. Early adoption is not permitted. The Company’s revenue is comprised of net interest income on financial assets and liabilities, which is explicitly excluded from the scope of this guidance, and non-interest income. Based on the evaluation of the Company’s non-interest income revenue streams, adoption of this new guidance will not have a material impact on the consolidated financial statements.
In January 2016, the FASB issued an update ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this update impact public business entities as follows: 1) Require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. 2) Simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value. 3) Eliminate the requirement to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. 4) Require entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. 5) Require an entity to present separately in other comprehensive income the portion of the total change in fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. 6) Require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements. 7) Clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. The impact of adopting the new guidance on the consolidated financial statements is not expected to have a material impact. The Company currently does not have any equity investments.
In February 2016, the FASB issued an update ASU No.No. 2016-02, Leases (Topic 842). Under the new guidance, lessees will beare 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 inis largely unchanged. The amendments in this update becomebecame effective for annual periods and interim periods within those annual periods beginning after December 15, 2018. TheBased on the Company’s existing lease agreements, the impact of adopting the new guidance on the consolidated financial statements willwas the recording of a $507,000 lease liability and a right of use asset, which is included in other liabilities and premises and equipment, respectively, on the consolidated balance sheet. The adoption of this ASU did not have a material impact.meaningful impact on the Company’s performance metrics, including regulatory capital ratios and return on average assets. The Company’s leases mature through 2024 and have a weighted average discount rate of 6%. The operating lease cost was approximately $65,000 and $130,000 for the three and six months ended June 30, 2019. At June 30, 2019, the Company had entered into one lease that has yet to commence. The right of use asset and lease liability for the lease yet to commence are estimated to be approximately $1.1 million.
In JuneJune 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The final standard will change estimates for credit losses related to financial assets measured at amortized cost such as loans, held-to-maturity debt securities, and certain other contracts. For estimating credit losses, the FASB is replacing the incurred loss model with an expected loss model, which is referred to as the current expected credit loss (CECL) model. Under the CECL model, certain financial assets that are carried at amortized cost, such as loans held for investment and held-to-maturity debt securities, are required to be presented at the net amount expected to be collected. The measurement of expected credit losses is to be based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This measurement will take place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs significantly from the “incurred loss” model required under current GAAP, which delays recognition until it is probable a loss has been incurred. The change could materially affect how the allowance for loan losses is determined. The standard is effective for public companies for fiscal years beginning after December 15, 2019. We are currently gatheringAs previously disclosed, management 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 cash flows and disclosures. The project plan involved data and assessing our datamodel validation during the first half of 2019, with parallel processing the existing model with the CECL model for two to three quarters prior to implementation, depending on how model completion and system needs.validation occurs. During 2019, management is focused on refining assumptions and continued review of the model. Additionally, management is researching and resolving interpretive accounting issues in the ASU, contemplating various accounting policies, developing processes and related controls, and considering various reporting 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. In December 2018, the OCC, The magnitudeBoard of any adjustment orGovernors of the overall impactFederal Reserve System, and the FDIC approved a final rule to address changes to the credit loss accounting under GAAP, including banking organizations’ implementation of CECL. The final rule provides banking organizations the option to phase in over a three-year period the day-one adverse effects on regulatory capital that may result from adoption of the new standard on financial condition or resultsaccounting standard. In July 2019, the FASB voted for a proposal to delay implementation for smaller reporting companies, private companies, and not-for-profit entities. The Company currently qualifies as a smaller reporting company. Companies benefiting from the delay will have to implement CECL for fiscal year and interim periods beginning after December 15, 2022. The proposal will undergo a 30-day public comment period in August 2019.
In March 2017, the FASB issued ASU No. 2017-08, 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 iswas effective for public companies for fiscal years beginning after December 15, 2018. We are currently evaluating the impactAdoption of adopting thethis new guidance did not have a material impact on the consolidated financial statements.
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 | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||
September 30, 2017 | ||||||||||||||||||||||||||||||||
June 30, 2019 | ||||||||||||||||||||||||||||||||
Available for sale | ||||||||||||||||||||||||||||||||
U.S. Government and federal agency | $ | 29,954 | $ | 106 | $ | (352 | ) | $ | 29,708 | $ | 23,920 | $ | 293 | $ | (118 | ) | $ | 24,095 | ||||||||||||||
Agency mortgage-backed: residential | 91,546 | 808 | (619 | ) | 91,735 | 93,238 | 1,008 | (288 | ) | 93,958 | ||||||||||||||||||||||
Collateralized loan obligations | 23,444 | 82 | — | 23,526 | 49,875 | 7 | (200 | ) | 49,682 | |||||||||||||||||||||||
State and municipal | 1,648 | 13 | — | 1,661 | ||||||||||||||||||||||||||||
State and municipal | 30,236 | 565 | (4 | ) | 30,797 | |||||||||||||||||||||||||||
Corporate bonds | 3,079 | 88 | — | 3,167 | 9,913 | 179 | (10 | ) | 10,082 | |||||||||||||||||||||||
Total available for sale | $ | 149,671 | $ | 1,097 | $ | (971 | ) | $ | 149,797 | $ | 207,182 | $ | 2,052 | $ | (620 | ) | $ | 208,614 |
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 |
December 31, 2018 | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
Available for sale | ||||||||||||||||
U.S. Government and federal agency | $ | 23,280 | $ | 2 | $ | (722 | ) | $ | 22,560 | |||||||
Agency mortgage-backed: residential | 87,689 | 192 | (1,891 | ) | 85,990 | |||||||||||
Collateralized loan obligations | 49,942 | — | (103 | ) | 49,839 | |||||||||||
State and municipal | 32,841 | 230 | (259 | ) | 32,812 | |||||||||||
Corporate bonds | 9,890 | 127 | (26 | ) | 9,991 | |||||||||||
Total available for sale | $ | 203,642 | $ | 551 | $ | (3,001 | ) | $ | 201,192 |
| 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 |
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, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Proceeds | $ | 1,452 | $ | 6,054 | $ | 2,452 | $ | 6,054 | ||||||||
Gross gains | 1 | — | 1 | — | ||||||||||||
Gross losses | 6 | 6 | 6 | 6 |
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, 2019 | |||||||||||||||
Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Maturity | ||||||||||||||||
Available for sale | ||||||||||||||||
Within one year | $ | 7,340 | $ | 7,432 | $ | 49,728 | $ | 49,643 | ||||||||
One to five years | 15,019 | 15,102 | 39,779 | 40,287 | ||||||||||||
Five to ten years | 32,715 | 32,464 | 24,437 | 24,726 | ||||||||||||
Beyond ten years | 3,051 | 3,064 | ||||||||||||||
Agency mortgage-backed: residential | 91,546 | 91,735 | 93,238 | 93,958 | ||||||||||||
Total | $ | 149,671 | $ | 149,797 | $ | 207,182 | $ | 208,614 | ||||||||
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, 20172019 and December 31, 20162018 had carrying values of approximately $85.3$69.9 million and $61.2$64.4 million, respectively, and were pledged to secure public deposits.
At SeptemberJune 30, 20172019 and December 31, 2016, we2018, 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$14.9 million. At June 30, 20172019 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, 2016,2018, 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 Bank owns Collateralized Loan Obligations (CLOs), which are debt securities secured by professionally managed portfolios of senior-secured loans to corporations. CLO managers are typically large non-bank financial institutions or banks and are typically $300 million to $1 billion in size, contain one hundred or more loans, have five to six credit tranches ranging from AAA, AA, A, BBB, BB, B and equity tranche. Interest and principal are paid first to the AAA tranche then to the next lower rated tranche. Losses are borne first by the equity tranche then by the subsequently higher rated tranche. CLOs may be less liquid than government securities from time to time and volatility in the CLO market may cause the value of these investments to decline.
The market value of CLOs may be affected by, among other things, changes in composition of the underlying loans, changes in the cash flows from the underlying loans, defaults and recoveries on the underlying loans, capital gains and losses on the underlying loans, and prepayments on the underlying loans.
At June 30, 2019, $33.0 million and $16.7 million of our CLOs were AA and A rated, respectively. There were no CLOs rated below A and none of the CLOs were subject to ratings downgrade in the six months ended June 30, 2019. All of our CLOs are floating rate, with rates set on a quarterly basis at three month LIBOR plus a spread.
The Company evaluates securities for other than temporaryother-than-temporary impairment (OTTI)at least on a quarterly basis,, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition 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, 2017,2019, management does not believe any securities in ourthe portfolio with unrealized losses should be classified as other than temporarily impaired.
Securities with unrealized losses at SeptemberJune 30, 20172019 and December 31, 2016,2018, 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, 2019 | ||||||||||||||||||||||||
Available for sale | ||||||||||||||||||||||||
U.S. Government and federal agency | $ | — | $ | — | $ | 11,818 | $ | (118 | ) | $ | 11,818 | $ | (118 | ) | ||||||||||
Agency mortgage-backed: | ||||||||||||||||||||||||
residential | — | — | 26,788 | (288 | ) | 26,788 | (288 | ) | ||||||||||||||||
Collateralized loan obligations | 27,933 | (161 | ) | 9,612 | (39 | ) | 37,545 | (200 | ) | |||||||||||||||
State and municipal | 429 | (1 | ) | 1,457 | (3 | ) | 1,886 | (4 | ) | |||||||||||||||
Corporate bonds | 1,592 | (10 | ) | — | — | 1,592 | (10 | ) | ||||||||||||||||
Total temporarily impaired | $ | 29,954 | $ | (172 | ) | $ | 49,675 | $ | (448 | ) | $ | 79,629 | $ | (620 | ) | |||||||||
December 31, 2018 | ||||||||||||||||||||||||
Available for sale | ||||||||||||||||||||||||
U.S. Government and federal agency | $ | 3,431 | $ | (57 | ) | $ | 17,212 | $ | (665 | ) | $ | 20,643 | $ | (722 | ) | |||||||||
Agency mortgage-backed: | ||||||||||||||||||||||||
residential | 30,229 | (343 | ) | 40,932 | (1,548 | ) | 71,161 | (1,891 | ) | |||||||||||||||
Collateralized loan obligations | 48,294 | (103 | ) | — | — | 48,294 | (103 | ) | ||||||||||||||||
State and municipal | 6,133 | (29 | ) | 7,252 | (230 | ) | 13,385 | (259 | ) | |||||||||||||||
Corporate Bonds | 3,569 | (26 | ) | — | — | 3,569 | (26 | ) | ||||||||||||||||
Total temporarily impaired | $ | 91,656 | $ | (558 | ) | $ | 65,396 | $ | (2,443 | ) | $ | 157,052 | $ | (3,001 | ) |
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 | 2019 | 2018 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Commercial | $ | 107,616 | $ | 97,761 | $ | 140,666 | $ | 129,368 | ||||||||
Commercial Real Estate: | ||||||||||||||||
Construction | 44,956 | 36,330 | 64,472 | 86,867 | ||||||||||||
Farmland | 88,370 | 71,507 | 78,634 | 77,937 | ||||||||||||
Nonfarm nonresidential | 157,956 | 149,546 | 187,217 | 172,177 | ||||||||||||
Residential Real Estate: | ||||||||||||||||
Multi-family | 55,684 | 48,197 | 63,107 | 49,757 | ||||||||||||
1-4 Family | 173,213 | 188,092 | 171,687 | 175,761 | ||||||||||||
Consumer | 8,474 | 9,818 | 55,252 | 39,104 | ||||||||||||
Agriculture | 45,675 | 37,508 | 41,586 | 33,737 | ||||||||||||
Other | 567 | 477 | 493 | 536 | ||||||||||||
Subtotal | 682,511 | 639,236 | 803,114 | 765,244 | ||||||||||||
Less: Allowance for loan losses | (8,977 | ) | (8,967 | ) | (8,832 | ) | (8,880 | ) | ||||||||
Loans, net | $ | 673,534 | $ | 630,269 | $ | 794,282 | $ | 756,364 |
The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended SeptemberJune 30, 20172019 and 2016:2018:
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, 2019: | ||||||||||||||||||||||||||||
Beginning balance | $ | 1,447 | $ | 4,498 | $ | 2,227 | $ | 159 | $ | 353 | $ | 2 | $ | 8,686 | ||||||||||||||
Provision (negative provision) | (45 | ) | (46 | ) | 52 | (16 | ) | 55 | – | – | ||||||||||||||||||
Loans charged off | – | – | (35 | ) | (34 | ) | (3 | ) | – | (72 | ) | |||||||||||||||||
Recoveries | 90 | 1 | 83 | 44 | – | – | 218 | |||||||||||||||||||||
Ending balance | $ | 1,492 | $ | 4,453 | $ | 2,327 | $ | 153 | $ | 405 | $ | 2 | $ | 8,832 | ||||||||||||||
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 |
The following table presents the activity in the allowance for loan losses by portfolioportfolio segment for the ninesix months ended SeptemberJune 30, 20172019 and 2016: 2018:
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, 2019: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Beginning balance | $ | 475 | $ | 4,894 | $ | 3,426 | $ | 8 | $ | 162 | $ | 2 | $ | 8,967 | $ | 1,299 | $ | 4,676 | $ | 2,452 | $ | 130 | $ | 321 | $ | 2 | $ | 8,880 | ||||||||||||||||||||||||||||
Provision (negative provision) | 399 | (791 | ) | 134 | (5 | ) | 274 | (11 | ) | – | ||||||||||||||||||||||||||||||||||||||||||||||
Provision (negative provision) | 98 | (211 | ) | (152 | ) | 177 | 88 | – | – | |||||||||||||||||||||||||||||||||||||||||||||||
Loans charged off | (5 | ) | (58 | ) | (512 | ) | (30 | ) | (95 | ) | – | (700 | ) | – | (15 | ) | (117 | ) | (214 | ) | (4 | ) | – | (350 | ) | |||||||||||||||||||||||||||||||
Recoveries | 44 | 393 | 168 | 69 | 25 | 11 | 710 | 95 | 3 | 144 | 60 | – | – | 302 | ||||||||||||||||||||||||||||||||||||||||||
Ending balance | $ | 913 | $ | 4,438 | $ | 3,216 | $ | 42 | $ | 366 | $ | 2 | $ | 8,977 | $ | 1,492 | $ | 4,453 | $ | 2,327 | $ | 153 | $ | 405 | $ | 2 | $ | 8,832 | ||||||||||||||||||||||||||||
September 30, 2016: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
June 30, 2018: | �� | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Beginning balance | $ | 818 | $ | 6,993 | $ | 3,984 | $ | 122 | $ | 122 | $ | 2 | $ | 12,041 | $ | 892 | $ | 4,032 | $ | 2,900 | $ | 64 | $ | 313 | $ | 1 | $ | 8,202 | ||||||||||||||||||||||||||||
Provision (negative provision) | (89 | ) | (2,024 | ) | 458 | (259 | ) | (1 | ) | 15 | (1,900 | ) | (4 | ) | (20 | ) | (164 | ) | (14 | ) | 55 | (3 | ) | (150 | ) | |||||||||||||||||||||||||||||||
Loans charged off | (276 | ) | (477 | ) | (1,181 | ) | (56 | ) | (13 | ) | (79 | ) | (2,082 | ) | – | (198 | ) | (88 | ) | (34 | ) | (12 | ) | (8 | ) | (340 | ) | |||||||||||||||||||||||||||||
Recoveries | 169 | 623 | 271 | 216 | 86 | 65 | 1,430 | 245 | 420 | 130 | 50 | 11 | 12 | 868 | ||||||||||||||||||||||||||||||||||||||||||
Ending balance | $ | 622 | $ | 5,115 | $ | 3,532 | $ | 23 | $ | 194 | $ | 3 | $ | 9,489 | $ | 1,133 | $ | 4,234 | $ | 2,778 | $ | 66 | $ | 367 | $ | 2 | $ | 8,580 |
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, 2017:2019:
Commercial | Commercial Real Estate | Residential Real Estate | Consumer | Agriculture | Other | Total | Commercial | Commercial Real Estate | Residential Real Estate | Consumer | Agriculture | Other | Total | |||||||||||||||||||||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Allowance for loan losses: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Ending allowance balance attributable to loans: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Individually evaluated for impairment | $ | 13 | $ | 26 | $ | 386 | $ | – | $ | – | $ | – | $ | 425 | $ | 1 | $ | 37 | $ | 157 | $ | – | $ | – | $ | – | $ | 195 | ||||||||||||||||||||||||||||
Collectively evaluated for impairment | 900 | 4,412 | 2,830 | 42 | 366 | 2 | 8,552 | 1,491 | 4,416 | 2,170 | 153 | 405 | 2 | 8,637 | ||||||||||||||||||||||||||||||||||||||||||
Total ending allowance balance | $ | 913 | $ | 4,438 | $ | 3,216 | $ | 42 | $ | 366 | $ | 2 | $ | 8,977 | $ | 1,492 | $ | 4,453 | $ | 2,327 | $ | 153 | $ | 405 | $ | 2 | $ | 8,832 | ||||||||||||||||||||||||||||
Loans: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loans individually evaluated for impairment | $ | 608 | $ | 2,749 | $ | 4,092 | $ | – | $ | 60 | $ | – | $ | 7,509 | $ | 109 | $ | 738 | $ | 2,150 | $ | – | $ | 65 | $ | – | $ | 3,062 | ||||||||||||||||||||||||||||
Loans collectively evaluated for impairment | 107,008 | 288,533 | 224,805 | 8,474 | 45,615 | 567 | 675,002 | 140,557 | 329,585 | 232,644 | 55,252 | 41,521 | 493 | 800,052 | ||||||||||||||||||||||||||||||||||||||||||
Total ending loans balance | $ | 107,616 | $ | 291,282 | $ | 228,897 | $ | 8,474 | $ | 45,675 | $ | 567 | $ | 682,511 | $ | 140,666 | $ | 330,323 | $ | 234,794 | $ | 55,252 | $ | 41,586 | $ | 493 | $ | 803,114 |
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, 2016:2018:
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 | $ | 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 |
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 | $ | – | $ | 35 | $ | 168 | $ | – | $ | – | $ | – | $ | 203 | ||||||||||||||
Collectively evaluated for impairment | 1,299 | 4,641 | 2,284 | 130 | 321 | 2 | 8,677 | |||||||||||||||||||||
Total ending allowance balance | $ | 1,299 | $ | 4,676 | $ | 2,452 | $ | 130 | $ | 321 | $ | 2 | $ | 8,880 | ||||||||||||||
Loans: | ||||||||||||||||||||||||||||
Loans individually evaluated for impairment | $ | 53 | $ | 510 | $ | 2,348 | $ | – | $ | – | $ | – | $ | 2,911 | ||||||||||||||
Loans collectively evaluated for impairment | 129,315 | 336,471 | 223,170 | 39,104 | 33,737 | 536 | 762,333 | |||||||||||||||||||||
Total ending loans balance | $ | 129,368 | $ | 336,981 | $ | 225,518 | $ | 39,104 | $ | 33,737 | $ | 536 | $ | 765,244 |
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, 20172019 and December 31, 20162018 and for the ninethree and six months ended SeptemberJune 30, 20172019 and 2016:2018:
Three Months Ended September 30, 2017 | Nine Months Ended September 30, 2017 | As of June 30, 2019 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
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 | $ | — | $ | 171 | $ | 82 | $ | — | $ | 66 | $ | — | $ | 62 | $ | — | ||||||||||||||||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Construction | — | — | — | — | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Farmland | 3,783 | 2,155 | — | 2,336 | — | 2,800 | 209 | 346 | 205 | — | 156 | 3 | 134 | 8 | ||||||||||||||||||||||||||||||||||||||||||
Nonfarm nonresidential | 773 | 301 | — | 311 | 1 | 752 | 53 | 701 | 240 | — | 246 | 4 | 251 | 7 | ||||||||||||||||||||||||||||||||||||||||||
Residential real estate: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Multi-family | — | — | — | — | — | 1,025 | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
1-4 Family | 3,858 | 2,470 | — | 2,879 | 22 | 2,909 | 50 | 2,605 | 1,437 | — | 1,448 | 28 | 1,508 | 50 | ||||||||||||||||||||||||||||||||||||||||||
Consumer | 8 | — | — | — | 2 | 2 | 2 | 179 | — | — | 14 | 2 | 9 | 2 | ||||||||||||||||||||||||||||||||||||||||||
Agriculture | 130 | 60 | — | 60 | 1 | 30 | 1 | 65 | 65 | — | 65 | — | 43 | — | ||||||||||||||||||||||||||||||||||||||||||
Other | — | — | — | — | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Subtotal | 9,276 | 5,494 | — | 6,085 | 26 | 8,015 | 315 | 4,067 | 2,029 | — | 1,995 | 37 | 2,007 | 67 | ||||||||||||||||||||||||||||||||||||||||||
With A Related Allowance Recorded: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
With An Allowance Recorded: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commercial | 100 | 100 | 13 | 100 | 1 | 100 | 5 | 27 | 27 | 1 | 13 | 1 | 9 | 1 | ||||||||||||||||||||||||||||||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Construction | — | — | — | — | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Farmland | — | — | — | — | — | 294 | — | 293 | 293 | 37 | 225 | — | 203 | — | ||||||||||||||||||||||||||||||||||||||||||
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 | 713 | 713 | 157 | 715 | 10 | 717 | 21 | ||||||||||||||||||||||||||||||||||||||||||
Consumer | — | — | — | — | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Agriculture | — | — | — | — | — | 30 | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Other | — | — | — | — | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Subtotal | 1,576 | 2,015 | 425 | 1,806 | 23 | 2,187 | 70 | 1,033 | 1,033 | 195 | 953 | 11 | 929 | 22 | ||||||||||||||||||||||||||||||||||||||||||
Total | $ | 10,852 | $ | 7,509 | $ | 425 | $ | 7,891 | $ | 49 | $ | 10,202 | $ | 385 | $ | 5,100 | $ | 3,062 | $ | 195 | $ | 2,948 | $ | 48 | $ | 2,936 | $ | 89 |
As of December 31, 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 | ||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
With No Related Allowance Recorded: | ||||||||||||||||||||||||||||
Commercial | $ | 120 | $ | 53 | $ | — | $ | 14 | $ | 1 | $ | 172 | $ | 1 | ||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||||||
Construction | — | — | — | — | — | — | — | |||||||||||||||||||||
Farmland | 1,860 | 89 | — | 1,340 | 83 | 1,580 | 281 | |||||||||||||||||||||
Nonfarm nonresidential | 402 | 262 | — | 271 | 3 | 373 | 8 | |||||||||||||||||||||
Residential real estate: | ||||||||||||||||||||||||||||
Multi-family | — | — | — | — | — | — | — | |||||||||||||||||||||
1-4 Family | 2,678 | 1,628 | — | 1,894 | 27 | 2,191 | 35 | |||||||||||||||||||||
Consumer | 12 | — | — | 1 | — | 1 | — | |||||||||||||||||||||
Agriculture | — | — | — | — | — | — | — | |||||||||||||||||||||
Other | — | — | — | — | — | — | — | |||||||||||||||||||||
Subtotal | 5,072 | 2,032 | — | 3,520 | 114 | 4,317 | 325 | |||||||||||||||||||||
With An Allowance Recorded: | ||||||||||||||||||||||||||||
Commercial | — | — | — | 100 | 2 | 100 | 4 | |||||||||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||||||
Construction | — | — | — | — | — | — | — | |||||||||||||||||||||
Farmland | — | — | — | 86 | — | 57 | — | |||||||||||||||||||||
Nonfarm nonresidential | 159 | 159 | 35 | — | — | — | — | |||||||||||||||||||||
Residential real estate: | ||||||||||||||||||||||||||||
Multi-family | — | — | — | — | — | — | — | |||||||||||||||||||||
1-4 Family | 720 | 720 | 168 | 1,460 | 16 | 1,361 | 32 | |||||||||||||||||||||
Consumer | — | — | — | — | — | — | — | |||||||||||||||||||||
Agriculture | — | — | — | — | — | — | — | |||||||||||||||||||||
Other | — | — | — | — | — | — | — | |||||||||||||||||||||
Subtotal | 879 | 879 | 203 | 1,646 | 18 | 1,518 | 36 | |||||||||||||||||||||
Total | $ | 5,951 | $ | 2,911 | $ | 203 | $ | 5,166 | $ | 132 | $ | 5,835 | $ | 361 |
As of December 31, 2016 | Three Months Ended September 30, 2016 | Nine Months Ended September 30, 2016 | ||||||||||||||||||||||||||
Unpaid Principal Balance | Recorded Investment | Allowance For Loan Losses Allocated | Average Recorded Investment | Interest Income Recognized |
Average Recorded Investment |
Interest Income Recognized | ||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
With No Related Allowance Recorded: | ||||||||||||||||||||||||||||
Commercial | $ | 707 | $ | 495 | $ | — | $ | 659 | $ | — | $ | 824 | $ | 1 | ||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||||||
Construction | — | — | — | 129 | 3 | 195 | 9 | |||||||||||||||||||||
Farmland | 5,566 | 3,742 | — | 4,404 | 79 | 4,299 | 87 | |||||||||||||||||||||
Nonfarm nonresidential | 4,502 | 1,219 | — | 4,023 | 2 | 5,569 | 308 | |||||||||||||||||||||
Residential real estate: | ||||||||||||||||||||||||||||
Multi-family | 4,100 | 4,100 | — | 3,254 | 179 | 2,235 | 237 | |||||||||||||||||||||
1-4 Family | 4,663 | 2,910 | — | 3,523 | 14 | 6,159 | 85 | |||||||||||||||||||||
Consumer | 41 | 1 | — | 4 | — | 8 | 8 | |||||||||||||||||||||
Agriculture | — | — | — | 69 | — | 92 | — | |||||||||||||||||||||
Other | — | — | — | — | — | — | — | |||||||||||||||||||||
Subtotal | 19,579 | 12,467 | — | 16,065 | 277 | 19,381 | 735 | |||||||||||||||||||||
With A Related Allowance Recorded: | ||||||||||||||||||||||||||||
Commercial | 100 | 100 | 13 | — | — | — | — | |||||||||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||||||
Construction | — | — | — | — | — | — | — | |||||||||||||||||||||
Farmland | 614 | 590 | 5 | 600 | — | 300 | — | |||||||||||||||||||||
Nonfarm nonresidential | 303 | 303 | 30 | 405 | 6 | 421 | 18 | |||||||||||||||||||||
Residential real estate: | ||||||||||||||||||||||||||||
Multi-family | — | — | — | 2,080 | — | 3,133 | 101 | |||||||||||||||||||||
1-4 Family | 1,676 | 1,611 | 350 | 1,656 | 20 | 1,671 | 74 | |||||||||||||||||||||
Consumer | — | — | — | — | — | — | — | |||||||||||||||||||||
Agriculture | 78 | 60 | 1 | 68 | — | 34 | — | |||||||||||||||||||||
Other | — | — | — | — | — | — | — | |||||||||||||||||||||
Subtotal | 2,771 | 2,664 | 399 | 4,809 | 26 | 5,559 | 193 | |||||||||||||||||||||
Total | $ | 22,350 | $ | 15,131 | $ | 399 | $ | 20,874 | $ | 303 | $ | 24,940 | $ | 928 |
Cash basis income recognized for the three and ninesix months ended SeptemberJune 30, 20172019 was $24,000$30,000 and $309,000,$60,000, respectively, compared to $87,000$111,000 and $377,000$317,000 for the three and ninesix months ended SeptemberJune 30, 2016,2018, 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 typicallymay 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, 20172019 and December 31, 2016:2018:
TDRs Performing to Modified Terms | TDRs Not Performing to Modified Terms | Total TDRs | ||||||||||
(in thousands) | ||||||||||||
September 30, 2017 | ||||||||||||
Commercial | ||||||||||||
Rate reduction | $ | — | $ | 33 | $ | 33 | ||||||
Principal deferral | — | 434 | 434 | |||||||||
Commercial Real Estate: | ||||||||||||
Farmland | ||||||||||||
Principal deferral | — | 1,465 | 1,465 | |||||||||
Nonfarm nonresidential | ||||||||||||
Rate reduction | 489 | — | 489 | |||||||||
Residential Real Estate: | ||||||||||||
1-4 Family | ||||||||||||
Rate reduction | 737 | — | 737 | |||||||||
Total TDRs | $ | 1,226 | $ | 1,932 | $ | 3,158 |
TDRs Performing to Modified Terms | TDRs Not Performing to Modified Terms | Total TDRs | ||||||||||
(in thousands) | ||||||||||||
June 30, 2019 | ||||||||||||
Commercial Real Estate: | ||||||||||||
Nonfarm nonresidential | ||||||||||||
Rate reduction | $ | 190 | — | $ | 190 | |||||||
Residential Real Estate: | ||||||||||||
1-4 Family | ||||||||||||
Rate reduction | 715 | — | 715 | |||||||||
Total TDRs | $ | 905 | $ | — | $ | 905 |
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 | ||||||||||||||||||||||||
Commercial | ||||||||||||||||||||||||
Rate reduction | $ | — | $ | 33 | $ | 33 | ||||||||||||||||||
Principal deferral | — | 434 | 434 | |||||||||||||||||||||
December 31, 2018 | ||||||||||||||||||||||||
Commercial Real Estate: | ||||||||||||||||||||||||
Farmland | ||||||||||||||||||||||||
Principal deferral | — | 2,300 | 2,300 | |||||||||||||||||||||
Nonfarm nonresidential | ||||||||||||||||||||||||
Rate reduction | 507 | — | 507 | $ | 190 | $ | — | $ | 190 | |||||||||||||||
Principal deferral | — | 607 | 607 | |||||||||||||||||||||
Residential Real Estate: | ||||||||||||||||||||||||
Multi-family | ||||||||||||||||||||||||
Rate reduction | 4,100 | — | 4,100 | |||||||||||||||||||||
1-4 Family | ||||||||||||||||||||||||
Rate reduction | 743 | — | 743 | 720 | — | 720 | ||||||||||||||||||
Total TDRs | $ | 5,350 | $ | 3,374 | $ | 8,724 | $ | 910 | $ | — | $ | 910 |
At SeptemberJune 30, 20172019 and December 31, 2016, 39% and 61%, respectively,2018, 100% of the Company’s TDRs were performing according to their modified terms. The Company allocated $141,000$157,000 and $197,000$168,000 in reserves to borrowers whose loan terms have been modified in TDRs as of SeptemberJune 30, 2017,2019, and December 31, 2016,2018, respectively. The Company has committed to lend no additional amounts as of SeptemberJune 30, 20172019 and December 31, 20162018 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 will continue to comply with the terms of the loan after the date of the renewal/modification. Additionally, TDR classification can be removed in circumstances in which the Company performs a non-concessionary re-modification of the loan at terms considered to be at market for loans with comparable risk and 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 ninesix months ended SeptemberJune 30, 20172019 or SeptemberJune 30, 2016.2018. During the first ninesix months of 20172019 and 2016,2018, 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, 2017,2019, and December 31, 2016: 2018:
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, 2019 | December 31, 2018 | June 30, 2019 | December 31, 2018 | |||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||
Commercial | $ | 508 | $ | 495 | $ | — | $ | — | $ | 82 | $ | 53 | $ | — | $ | — | ||||||||||||||||
Commercial Real Estate: | ||||||||||||||||||||||||||||||||
Construction | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Farmland | 2,155 | 4,332 | — | — | 498 | 249 | — | — | ||||||||||||||||||||||||
Nonfarm nonresidential | 105 | 1,016 | — | — | 48 | 61 | — | — | ||||||||||||||||||||||||
Residential Real Estate: | ||||||||||||||||||||||||||||||||
Multi-family | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
1-4 Family | 2,941 | 3,312 | — | — | 1,335 | 1,628 | — | — | ||||||||||||||||||||||||
Consumer | — | 1 | — | — | — | — | — | — | ||||||||||||||||||||||||
Agriculture | 60 | 60 | — | — | 65 | — | — | — | ||||||||||||||||||||||||
Other | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Total | $ | 5,769 | $ | 9,216 | $ | — | $ | — | $ | 2,028 | $ | 1,991 | $ | — | $ | — |
The following table presents the aging of the recorded investment in past due loans as of SeptemberJune 30, 20172019 and December 31, 2016:2018:
30 – 59 Days Past Due | 60 – 89 Days Past Due | 90 Days And Over Past Due |
Nonaccrual | Total Past Due And Nonaccrual | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
September 30, 2017 | ||||||||||||||||||||
Commercial | $ | 2 | $ | — | $ | — | $ | 508 | $ | 510 | ||||||||||
Commercial Real Estate: | ||||||||||||||||||||
Construction | — | — | — | — | — | |||||||||||||||
Farmland | 281 | 19 | — | 2,155 | 2,455 | |||||||||||||||
Nonfarm nonresidential | 239 | — | — | 105 | 344 | |||||||||||||||
Residential Real Estate: | ||||||||||||||||||||
Multi-family | — | — | — | — | — | |||||||||||||||
1-4 Family | 300 | 593 | — | 2,941 | 3,834 | |||||||||||||||
Consumer | 50 | — | — | — | 50 | |||||||||||||||
Agriculture | — | — | — | 60 | 60 | |||||||||||||||
Other | — | — | — | — | — | |||||||||||||||
Total | $ | 872 | $ | 612 | $ | — | $ | 5,769 | $ | 7,253 |
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 | ||||||||||||||||||||||||||||||||||||||||
June 30, 2019 | ||||||||||||||||||||||||||||||||||||||||
Commercial | $ | — | $ | — | $ | — | $ | 495 | $ | 495 | $ | 19 | $ | — | $ | — | $ | 82 | $ | 101 | ||||||||||||||||||||
Commercial Real Estate: | ||||||||||||||||||||||||||||||||||||||||
Construction | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
Farmland | 626 | — | — | 4,332 | 4,958 | 221 | 274 | — | 498 | 993 | ||||||||||||||||||||||||||||||
Nonfarm nonresidential | — | 59 | — | 1,016 | 1,075 | 26 | — | — | 48 | 74 | ||||||||||||||||||||||||||||||
Residential Real Estate: | ||||||||||||||||||||||||||||||||||||||||
Multi-family | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
1-4 Family | 1,454 | 256 | — | 3,312 | 5,022 | 545 | 741 | — | 1,335 | 2,621 | ||||||||||||||||||||||||||||||
Consumer | 19 | — | — | 1 | 20 | 40 | — | — | — | 40 | ||||||||||||||||||||||||||||||
Agriculture | 203 | — | — | 60 | 263 | 7 | — | — | 65 | 72 | ||||||||||||||||||||||||||||||
Other | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
Total | $ | 2,302 | $ | 315 | $ | — | $ | 9,216 | $ | 11,833 | $ | 858 | $ | 1,015 | $ | — | $ | 2,028 | $ | 3,901 |
30 – 59 Days Past Due | 60 – 89 Days Past Due | 90 Days And Over Past Due |
Nonaccrual | Total Past Due And Nonaccrual | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
December 31, 2018 | ||||||||||||||||||||
Commercial | $ | 39 | $ | — | $ | — | $ | 53 | $ | 92 | ||||||||||
Commercial Real Estate: | ||||||||||||||||||||
Construction | — | — | — | — | — | |||||||||||||||
Farmland | 244 | 107 | — | 249 | 600 | |||||||||||||||
Nonfarm nonresidential | — | 52 | — | 61 | 113 | |||||||||||||||
Residential Real Estate: | ||||||||||||||||||||
Multi-family | — | — | — | — | — | |||||||||||||||
1-4 Family | 1,299 | 137 | — | 1,628 | 3,064 | |||||||||||||||
Consumer | 8 | 35 | — | — | 43 | |||||||||||||||
Agriculture | 3 | — | — | — | 3 | |||||||||||||||
Other | — | — | — | — | — | |||||||||||||||
Total | $ | 1,593 | $ | 331 | $ | — | $ | 1,991 | $ | 3,915 |
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 our credit administration processes which classify the loans as to credit risk. The following definitions are used for risk ratings:
WatchWatch – Loans 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 lossesloss if the deficiencies are not corrected.
Doubtful – Loans classified as doubtful are those loans which have characteristics similar to substandard loans but with an increased risk that collection or liquidation in full is highly questionable and improbable.
Loans not meeting the criteria above that are analyzed individually as part of the above described process are consideredconsidered to be “Pass” rated loans. As of SeptemberJune 30, 2017,2019, and December 31, 2016,2018, 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, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||
Commercial | $ | 106,645 | $ | 228 | $ | — | $ | 743 | $ | — | $ | 107,616 | $ | 127,849 | $ | 8,339 | $ | — | $ | 4,478 | $ | — | $ | 140,666 | ||||||||||||||||||||||||
Commercial Real Estate: | ||||||||||||||||||||||||||||||||||||||||||||||||
Construction | 44,956 | — | — | — | — | 44,956 | 64,472 | — | — | — | — | 64,472 | ||||||||||||||||||||||||||||||||||||
Farmland | 78,156 | 5,935 | — | 4,279 | — | 88,370 | 73,219 | 4,114 | — | 1,301 | — | 78,634 | ||||||||||||||||||||||||||||||||||||
Nonfarm nonresidential | 153,026 | 2,948 | 432 | 1,550 | — | 157,956 | 179,475 | 4,996 | — | 2,746 | — | 187,217 | ||||||||||||||||||||||||||||||||||||
Residential Real Estate: | ||||||||||||||||||||||||||||||||||||||||||||||||
Multi-family | 46,100 | 9,584 | — | — | — | 55,684 | 60,869 | 2,034 | — | 204 | — | 63,107 | ||||||||||||||||||||||||||||||||||||
1-4 Family | 162,476 | 4,473 | 166 | 6,098 | — | 173,213 | 165,434 | 2,587 | — | 3,666 | — | 171,687 | ||||||||||||||||||||||||||||||||||||
Consumer | 8,062 | 323 | — | 89 | — | 8,474 | 55,182 | 8 | — | 62 | — | 55,252 | ||||||||||||||||||||||||||||||||||||
Agriculture | 33,215 | 11,676 | — | 784 | — | 45,675 | 40,669 | 851 | — | 66 | — | 41,586 | ||||||||||||||||||||||||||||||||||||
Other | 567 | — | — | — | — | 567 | 493 | — | — | — | — | 493 | ||||||||||||||||||||||||||||||||||||
Total | $ | 633,203 | $ | 35,167 | $ | 598 | $ | 13,543 | $ | — | $ | 682,511 | $ | 767,662 | $ | 22,929 | $ | — | $ | 12,523 | $ | — | $ | 803,114 |
Pass | Watch | Special Mention | Substandard | Doubtful | Total | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
December 31, 2016 | ||||||||||||||||||||||||
Commercial | $ | 96,402 | $ | 294 | $ | — | $ | 1,065 | $ | — | $ | 97,761 | ||||||||||||
Commercial Real Estate: | ||||||||||||||||||||||||
Construction | 35,823 | 507 | — | — | — | 36,330 | ||||||||||||||||||
Farmland | 63,323 | 1,521 | — | 6,663 | — | 71,507 | ||||||||||||||||||
Nonfarm nonresidential | 142,222 | 5,217 | 445 | 1,662 | — | 149,546 | ||||||||||||||||||
Residential Real Estate: | ||||||||||||||||||||||||
Multi-family | 38,281 | 6,080 | — | 3,836 | — | 48,197 | ||||||||||||||||||
1-4 Family | 173,565 | 6,909 | 52 | 7,566 | — | 188,092 | ||||||||||||||||||
Consumer | 9,397 | 348 | — | 73 | — | 9,818 | ||||||||||||||||||
Agriculture | 26,940 | 9,555 | — | 1,013 | — | 37,508 | ||||||||||||||||||
Other | 477 | — | — | — | — | 477 | ||||||||||||||||||
Total | $ | 586,430 | $ | 30,431 | $ | 497 | $ | 21,878 | $ | — | $ | 639,236 |
Pass | Watch | Special Mention | Substandard | Doubtful | Total | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
December 31, 2018 | ||||||||||||||||||||||||
Commercial | $ | 129,106 | $ | 141 | $ | — | $ | 121 | $ | — | $ | 129,368 | ||||||||||||
Commercial Real Estate: | ||||||||||||||||||||||||
Construction | 86,867 | — | — | — | — | 86,867 | ||||||||||||||||||
Farmland | 74,054 | 2,741 | — | 1,142 | — | 77,937 | ||||||||||||||||||
Nonfarm nonresidential | 169,551 | 1,983 | — | 643 | — | 172,177 | ||||||||||||||||||
Residential Real Estate: | ||||||||||||||||||||||||
Multi-family | 44,697 | 5,060 | — | — | — | 49,757 | ||||||||||||||||||
1-4 Family | 169,342 | 2,209 | 113 | 4,097 | — | 175,761 | ||||||||||||||||||
Consumer | 38,768 | 11 | — | 325 | — | 39,104 | ||||||||||||||||||
Agriculture | 32,683 | 1,019 | — | 35 | — | 33,737 | ||||||||||||||||||
Other | 536 | — | — | — | — | 536 | ||||||||||||||||||
Total | $ | 745,604 | $ | 13,164 | $ | 113 | $ | 6,363 | $ | — | $ | 765,244 |
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 expectedestimated 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:
2017 | December 31, 2016 | |||||||
(in thousands) | ||||||||
Commercial Real Estate: | ||||||||
Construction, land development, and other land | $ | 6,200 | $ | 6,571 | ||||
Farmland | 74 | — | ||||||
Residential Real Estate: | ||||||||
1-4 Family | 56 | 250 | ||||||
$ | 6,330 | $ | 6,821 |
June 30, 2019 | December 31, 2018 | |||||||
(in thousands) | ||||||||
Commercial Real Estate: | ||||||||
Construction, land development, and other land | $ | 3,225 | $ | 3,485 | ||||
$ | 3,225 | $ | 3,485 |
ResidentialResidential loans secured by 1-4 family residential properties in the process of foreclosure totaled $643,000$401,000 and $932,000$771,000 at SeptemberJune 30, 20172019 and December 31, 2016,2018, respectively.
Activity relating to OREO during the ninesix months ended SeptemberJune 30, 20172019 and 20162018 is as follows:
For the Nine Months Ended September 30, | For the Six Months Ended June 30, | |||||||||||||||
2017 | 2016 | 2019 | 2018 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
OREO Activity | ||||||||||||||||
OREO as of January 1 | $ | 6,821 | $ | 19,214 | $ | 3,485 | $ | 4,409 | ||||||||
Real estate acquired | 270 | 1,243 | — | 730 | ||||||||||||
Valuation adjustment write-downs | (98 | ) | (970 | ) | (260 | ) | (325 | ) | ||||||||
Net gain on sales | 75 | 221 | — | 50 | ||||||||||||
Proceeds from sales of properties | (738 | ) | (12,610 | ) | — | (354 | ) | |||||||||
OREO as of September 30 | $ | 6,330 | $ | 7,098 | ||||||||||||
OREO as of June 30 | $ | 3,225 | $ | 4,510 |
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.
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 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||
(in thousands) | (in thousands) | (in thousands) | (in thousands) | |||||||||||||||||||||||||||||
Net gain on sales | $ | (10 | ) | $ | (52 | ) | $ | (75 | ) | $ | (221 | ) | $ | — | $ | (54 | ) | $ | — | $ | (50 | ) | ||||||||||
Valuation adjustment write-downs | 98 | 320 | 98 | 970 | 110 | 265 | 260 | 325 | ||||||||||||||||||||||||
Operating expense | 23 | 54 | 69 | 535 | 32 | 26 | 48 | 44 | ||||||||||||||||||||||||
Total | $ | 111 | $ | 322 | $ | 92 | $ | 1,284 | $ | 142 | $ | 237 | $ | 308 | $ | 319 |
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, 2019 | December 31, 2018 | |||||||
(in thousands) | ||||||||
Non-interest bearing | $ | 141,448 | $ | 142,618 | ||||
Interest checking | 95,296 | 94,269 | ||||||
Money market | 162,917 | 171,924 | ||||||
Savings | 33,553 | 34,534 | ||||||
Certificates of deposit | 505,263 | 450,886 | ||||||
Total | $ | 938,477 | $ | 894,231 |
Time deposits of $250,000$250,000 or more were $33.1$28.9 million and $29.1$28.1 million at SeptemberJune 30, 20172019 and December 31, 2016,2018, respectively.
Scheduled maturities of alltotal time deposits at SeptemberJune 30, 2017 were2019 for each of the next five years are as follows (in thousands):
Year 1 | $ | 221,600 | $ | 436,467 | ||||
Year 2 | 174,906 | 43,768 | ||||||
Year 3 | 35,418 | 4,717 | ||||||
Year 4 | 6,626 | 10,710 | ||||||
Year 5 | 7,027 | 9,250 | ||||||
Thereafter | 351 | |||||||
$ | 445,577 | $ | 505,263 |
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, | |||||||
2019 | 2018 | |||||||
(in thousands) | ||||||||
Short term advances (fixed rates 2.37% to 2.41%) maturing July 2019 | $ | 50,000 | $ | 45,000 | ||||
Long term advances (fixed rates 0.00% to 5.24%) maturing April 2021 to August 2033 | 1,470 | 1,549 | ||||||
Total advances from the Federal Home Loan Bank | $ | 51,470 | $ | 46,549 |
Scheduled principal payments on FHLB advances during the next five yearshad a weighted-average rate of 2.37% at June 30, 2019 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 |
2.45% at December 31, 2018. Each advance is payable based upon theper terms ofon agreement, with a prepayment penalty. No prepayment penalties were incurred during 20172019 or 2016.2018. The advances arewere collateralized by approximately $126.8 million and $130.4 million of first mortgage residential loans. In September 2017, the FHLB notified the Bank of an upgrade to its collateral reporting status from physical delivery status toloans, under a 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.lien arrangement at June 30, 2019 and December 31, 2018, respectively. At SeptemberJune 30, 2017,2019, our additional borrowing capacity with the FHLB was $74.8$38.3 million.
Scheduled principal payments on the above during the next five years and thereafter (in thousands):
Advances | ||||
Year 1 | $ | 50,495 | ||
Year 2 | 738 | |||
Year 3 | 99 | |||
Year 4 | 93 | |||
Year 5 | 30 | |||
Thereafter | 15 | |||
$ | 51,470 |
Note 7 – Senior Debt
Note 7 – Senior Debt
On June 30, 2017, the Company entered into aThe Company’s $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 Subsequent to quarter end, the Company contributed $9.0made a $5.0 million of the borrowing proceeds to the Bank as common equity Tier 1 capital. The remaining $1.0 million of the borrowing proceeds were retained by the lender in escrow to service quarterly interest payments. At September 30, 2017, the escrow account had a balance of $903,000.principal reduction on this loan.
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, (iii) the Bank must maintain a total risk based capital ratio at least equal to June 30, 2018, and 11% thereafter,of risk-weighted assets, 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, 2017.2019.
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.
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 anapplies internal discountdiscounts 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 applyapplies 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 our assessment involves management’s inspection of the property in question. Management also engages in conversations with local real estate professionals and market participants to determine the likely marketing time and value range for the property. The second stage involves an assessment of current trends in the regional market. After thorough consideration of these factors, management will either internally evaluate fair value or order a new appraisal.
Other Real Estate Owned (OREO): OREO is evaluated at the time of acquisition and recorded at fair value as determined by independent appraisal or internal evaluation less estimated cost to sell. 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.
We routinely apply 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, 20172019 and December 31, 20162018 are summarized below:
Fair Value Measurements at September 30, 2017 Using | Fair Value Measurements at June 30, 2019 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 | $ | — | $ | 24,095 | $ | — | $ | 24,095 | $ | — | ||||||||||||||||
Agency mortgage-backed: residential | 91,735 | — | 91,735 | — | 93,958 | — | 93,958 | — | ||||||||||||||||||||||||
Collateralized loan obligations | 23,526 | — | 23,526 | — | 49,682 | — | 49,682 | — | ||||||||||||||||||||||||
State and municipal | 1,661 | — | 1,661 | — | 30,797 | — | 30,797 | — | ||||||||||||||||||||||||
Corporate bonds | 3,167 | — | 3,167 | — | 10,082 | — | 10,082 | — | ||||||||||||||||||||||||
Total | $ | 149,797 | $ | — | $ | 149,797 | $ | — | $ | 208,614 | $ | — | $ | 208,614 | $ | — |
Fair Value Measurements at December 31, 2016 Using | Fair Value Measurements at December 31, 2018 Using | |||||||||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||
Description | Carrying Value | Quoted Prices In Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Carrying Value | Quoted Prices In Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||||||
Available for sale securities | ||||||||||||||||||||||||||||||||
Available for sale securities | ||||||||||||||||||||||||||||||||
U.S. Government and federal agency | $ | 34,099 | $ | — | $ | 34,099 | $ | — | $ | 22,560 | $ | — | $ | 22,560 | $ | — | ||||||||||||||||
Agency mortgage-backed: residential | 102,353 | — | 102,353 | — | 85,990 | — | 85,990 | — | ||||||||||||||||||||||||
Collateralized loan obligations | 11,203 | — | 11,203 | — | 49,839 | — | 49,839 | — | ||||||||||||||||||||||||
State and municipal | 2,045 | — | 2,045 | — | 32,812 | — | 32,812 | — | ||||||||||||||||||||||||
Corporate bonds | 3,090 | — | 3,090 | — | 9,991 | — | 9,991 | — | ||||||||||||||||||||||||
Total | $ | 152,790 | $ | — | $ | 152,790 | $ | — | $ | 201,192 | $ | — | $ | 201,192 | $ | — |
There were no transfers between Level 1 and Level 2 during 20172019 or 2016.2018.
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, 2019 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 | $ | 26 | $ | — | $ | — | $ | 26 | ||||||||||||||||
Commercial real estate: | ||||||||||||||||||||||||||||||||
Construction | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Farmland | — | — | — | — | 256 | — | — | 256 | ||||||||||||||||||||||||
Nonfarm nonresidential | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
Residential real estate: | ||||||||||||||||||||||||||||||||
Multi-family | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
1-4 Family | 1,236 | — | — | 1,236 | 556 | — | — | 556 | ||||||||||||||||||||||||
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 | 3,225 | — | — | 3,225 | ||||||||||||||||||||||||||||
Farmland | 74 | — | — | 74 | — | — | — | — | ||||||||||||||||||||||||
Nonfarm nonresidential | — | — | — | — | — | �� | — | — | — | |||||||||||||||||||||||
Residential real estate: | ||||||||||||||||||||||||||||||||
Multi-family | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
1-4 Family | 56 | — | — | 56 | — | — | — | — |
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, 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 | $ | — | $ | — | $ | — | $ | — | ||||||||
Commercial real estate: | ||||||||||||||||
Construction | — | — | — | — | ||||||||||||
Farmland | — | — | — | — | ||||||||||||
Nonfarm nonresidential | 124 | — | — | 124 | ||||||||||||
Residential real estate: | ||||||||||||||||
Multi-family | — | — | — | — | ||||||||||||
1-4 Family | 552 | — | — | 552 | ||||||||||||
Consumer | — | — | — | — | ||||||||||||
Agriculture | — | — | — | — | ||||||||||||
Other | — | — | — | — | ||||||||||||
Other real estate owned, net: | ||||||||||||||||
Commercial real estate: | ||||||||||||||||
Construction | 3,485 | — | — | 3,485 | ||||||||||||
Farmland | — | — | — | — | ||||||||||||
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$1.0 million at SeptemberJune 30, 20172019 with a valuation allowance of $399,000,$195,000, resulting in $171,000 and $29,000 in additional provision for loan losses for the three and nine months ended September 30, 2017, respectively. Impaired loans had a carrying amount of $2.5 million with a valuation allowance of $309,000, resulting in $220,000$2,000 and no additional provision for loan losses for the three and ninesix months ended SeptemberJune 30, 2016.2019, respectively. Impaired loans had a carrying amount of $1.7 million with a valuation allowance of $319,000, resulting in additional provision for loan losses of $37,000 and $91,000, respectively, for the three and six months ended June 30, 2018. At December 31, 2016,2018, impaired loans had a carrying amount of $2.4 million,$879,000, with a valuation allowance of $370,000.$203,000.
OREO,, which is measured at the lower of carrying or fair value less costs to sell, had a net carrying amount of $6.3$3.2 million as of SeptemberJune 30, 2017,2019, compared with $6.8$4.5 million at June 30, 2018 and $3.5 million at December 31, 2016.2018. Write-downs of $98,000$110,000 and $260,000, respectively, were recorded on OREO for the three and ninesix months ended SeptemberJune 30, 2017,2019, compared to write-downs of $761,000$265,000 and $1.6 million$325,000 for the three and ninesix months ended SeptemberJune 30, 2016, respectively.2018.
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, 2017:2019:
Fair Value | Valuation Technique(s) | Unobservable Input(s) | Range (Weighted Average) | Fair Value | Valuation Technique(s) | Unobservable Input(s) | Range (Weighted Average) | |||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||
Impaired loans – Residential real estate | $ | 1,236 | Sales comparison approach | Adjustment for differences between the comparable sales | 0% | - | 34% | (11%) | $ | 556 | Sales comparison approach | Adjustment for differences between the comparable sales | 0% | - | 26% | (11%) | ||||||||||
Other real estate owned – Commercial real estate | $ | 6,274 | Sales comparison approach | Adjustment for differences between the comparable sales | 0% | - | 11% | (5%) | $ | 3,225 | Sales comparison approach | Adjustment for differences between the comparable sales | 0% | - | 35% | (18%) | ||||||||||
Income approach | Discount or capitalization rate | 18% | (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, 2016:2018:
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 | $ | 552 | Sales comparison approach | Adjustment for differences between the comparable sales | 0% | - | 26% | (11%) | |||||
Other real estate owned – Commercial real estate | $ | 3,485 | 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 | ||||||||||||||||||||
Carrying Amount | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Financial assets | ||||||||||||||||||||
Cash and cash equivalents | $ | 47,369 | $ | 27,815 | $ | 19,554 | $ | — | $ | 47,369 | ||||||||||
Securities available for sale | 149,797 | — | 149,797 | — | 149,797 | |||||||||||||||
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 | |||||||||||||||
Loans, net | 673,534 | — | — | 673,616 | 673,616 | |||||||||||||||
Accrued interest receivable | 3,285 | — | 1,137 | 2,148 | 3,285 | |||||||||||||||
Financial liabilities | ||||||||||||||||||||
Deposits | $ | 866,847 | $ | 133,896 | $ | 719,827 | $ | — | $ | 853,723 | ||||||||||
Federal Home Loan Bank advances | 16,847 | — | 16,865 | — | 16,865 | |||||||||||||||
Subordinated capital note | 2,475 | — | — | 2,458 | 2,458 | |||||||||||||||
Junior subordinated debentures | 21,000 | — | — | 19,087 | 19,087 | |||||||||||||||
Senior debt | 10,000 | — | — | 10,000 | 10,000 | |||||||||||||||
Accrued interest payable | 1,284 | — | 366 | 918 | 1,284 |
Fair Value Measurements at June 30, 2019 Using | ||||||||||||||||||||
Carrying Amount | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Financial assets | ||||||||||||||||||||
Cash and cash equivalents | $ | 47,615 | $ | 47,615 | $ | — | $ | — | $ | 47,615 | ||||||||||
Securities available for sale | 208,614 | — | 208,614 | — | 208,614 | |||||||||||||||
Federal Home Loan Bank stock | 6,693 | N/A | N/A | N/A | N/A | |||||||||||||||
Loans, net | 794,282 | — | — | 799,642 | 799,642 | |||||||||||||||
Accrued interest receivable | 4,045 | — | 1,224 | 2,821 | 4,045 | |||||||||||||||
Financial liabilities | ||||||||||||||||||||
Deposits | $ | 938,477 | $ | 141,448 | $ | 795,928 | $ | — | $ | 937,376 | ||||||||||
Federal Home Loan Bank advances | 51,470 | — | 51,467 | — | 51,467 | |||||||||||||||
Junior subordinated debentures | 21,000 | — | — | 16,933 | 16,933 | |||||||||||||||
Senior Debt | 10,000 | — | — | 9,830 | 9,830 | |||||||||||||||
Accrued interest payable | 690 | — | 636 | 54 | 690 |
Fair Value Measurements at December 31, 2016 Using | ||||||||||||||||||||
Carrying Amount | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Financial assets | ||||||||||||||||||||
Cash and cash equivalents | $ | 66,316 | $ | 31,091 | $ | 35,225 | $ | — | $ | 66,316 | ||||||||||
Securities available for sale | 152,790 | — | 152,790 | — | 152,790 | |||||||||||||||
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 | |||||||||||||||
Loans, net | 630,269 | — | — | 632,528 | 632,528 | |||||||||||||||
Accrued interest receivable | 3,137 | — | 1,203 | 1,934 | 3,137 | |||||||||||||||
Financial liabilities | ||||||||||||||||||||
Deposits | $ | 849,925 | $ | 124,395 | $ | 712,458 | $ | — | $ | 836,853 | ||||||||||
Federal Home Loan Bank advances | 22,458 | — | 22,475 | — | 22,475 | |||||||||||||||
Subordinated capital note | 3,150 | — | — | 3,091 | 3,091 | |||||||||||||||
Junior subordinated debentures | 21,000 | — | — | 13,263 | 13,263 | |||||||||||||||
Accrued interest payable | 734 | — | 369 | 365 | 734 |
The methods and assumptions, not previously presented, used to estimate fair values are described as follows:
(a) Cash and Cash Equivalents
The carrying amounts of cash and short-term instruments approximate fair values and are classified as either Level 1 or Level 2. Non-interest bearing deposits are Level 1 whereas interest bearing due from bank accounts and fed funds sold are Level 2.
Fair Value Measurements at December 31, 2018 Using | ||||||||||||||||||||
Carrying Amount | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Financial assets | ||||||||||||||||||||
Cash and cash equivalents | $ | 35,361 | $ | 35,361 | $ | — | $ | — | $ | 35,361 | ||||||||||
Securities available for sale | 201,192 | — | 201,192 | — | 201,192 | |||||||||||||||
Federal Home Loan Bank stock | 7,233 | N/A | N/A | N/A | N/A | |||||||||||||||
Loans, net | 756,364 | — | — | 744,076 | 744,076 | |||||||||||||||
Accrued interest receivable | 3,665 | — | 1,222 | 2,443 | 3,665 | |||||||||||||||
Financial liabilities | ||||||||||||||||||||
Deposits | $ | 894,231 | $ | 142,618 | $ | 750,015 | $ | — | $ | 892,633 | ||||||||||
Federal Home Loan Bank advances | 46,549 | — | 46,519 | — | 46,519 | |||||||||||||||
Junior subordinated debentures | 21,000 | — | — | 16,226 | 16,226 | |||||||||||||||
Senior Debt | 10,000 | — | — | 9,585 | 9,585 | |||||||||||||||
Accrued interest payable | 658 | — | 598 | 60 | 658 |
(b) FHLB Stock
It is not practicalIn accordance with the Company’s adoption of ASU 2016-01 as of January 1, 2018, the methods utilized to determinemeasure the fair value of FHLB stock due to restrictions placed on its transferability.
(c) Loans, Net
Fair values of loans, excluding loans held for sale, are estimated as follows: For variable rate loans that reprice frequentlyfinancial instruments at June 30, 2019 and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarilyDecember 31, 2018 represent an approximation of exit price.
(d) Deposits
The fair values disclosed for non-interest bearing deposits are, by definition, equal to the amount payable on demand at the reporting date resulting in a Level 1 classification. The carrying amounts of variable rate interest bearing deposits approximate their fair values at the reporting date resulting in a Level 2 classification. Fair values for fixed rate interest bearing deposits are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.
(e) Other Borrowings
The fair values of the Company’s FHLB advances are estimated using discounted cash flow analyses based on the current borrowing rates resulting in a Level 2 classification.
The fair values of the Company’s subordinated capital notes, junior subordinated debentures, and senior debt are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 3 classification.
(f) Accrued Interest Receivable/Payable
The carrying amounts of accrued interest approximate fair value resulting in a Level 2 or Level 3 classification based on the level of the asset or liability with which the accrual is associated.price; however, an actual exit price may differ.
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 | 2019 | 2018 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Deferred tax assets: | ||||||||||||||||
Net operating loss carry-forward | $ | 43,515 | $ | 42,094 | $ | 23,743 | $ | 23,390 | ||||||||
Allowance for loan losses | 3,142 | 3,139 | 2,204 | 1,865 | ||||||||||||
Other real estate owned write-down | 3,401 | 3,366 | ||||||||||||||
OREO write-down | 2,665 | 2,611 | ||||||||||||||
Alternative minimum tax credit carry-forward | 692 | 692 | 173 | 346 | ||||||||||||
Net assets from acquisitions | 617 | 674 | 286 | 290 | ||||||||||||
Net unrealized loss on securities | 209 | 867 | — | 515 | ||||||||||||
New market tax credit carry-forward | 208 | 208 | 208 | 208 | ||||||||||||
Nonaccrual loan interest | 477 | 481 | 291 | 235 | ||||||||||||
Accrued expenses | 193 | 3,860 | ||||||||||||||
Accrued expenses | 195 | 239 | ||||||||||||||
Deferred compensation | 463 | 465 | — | 267 | ||||||||||||
Other | 394 | 360 | 385 | 241 | ||||||||||||
53,311 | 56,206 | 30,150 | 30,207 | |||||||||||||
Deferred tax liabilities: | ||||||||||||||||
FHLB stock dividends | 928 | 928 | 605 | 557 | ||||||||||||
Fixed assets | 70 | 89 | 88 | 94 | ||||||||||||
Deferred loan costs | 266 | 274 | 159 | 136 | ||||||||||||
Net unrealized gain on securities | 357 | — | ||||||||||||||
Other | 145 | 866 | 233 | 138 | ||||||||||||
1,409 | 2,157 | 1,442 | 925 | |||||||||||||
Net deferred tax assets before valuation allowance | 51,902 | 54,049 | ||||||||||||||
Valuation allowance | (51,902 | ) | (54,049 | ) | ||||||||||||
Net deferred tax asset | $ | — | $ | — | $ | 28,708 | $ | 29,282 |
Our estimateDuring the first quarter of our ability to realize2019, the Company benefited $341,000, or approximately $0.05 per basic and diluted share, from the establishment of a net deferred tax asset dependsrelated to a change in Kentucky tax law enacted during the first quarter. The new law eliminates the Kentucky bank franchise tax, which is assessed at a rate of 1.1% of average capital, and implements a state income tax for the Bank at a statutory rate of 5%. The new Kentucky income tax will go into effect on our estimateJanuary 1, 2021.
In addition, the Company has state net operating loss carryforwards (“NOLs”) 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$30.2 million, which were previously subject to a full valuation allowance and will begin to expire in 2025. In April 2019, tax legislation was enacted which allowed for all deferredcertain Kentucky NOLs to be utilized in a combined filing return. Therefore, the Company will begin filing a Kentucky combined filing in 2021 and, as a result, a state NOL tax benefit, net of federal impact, of $1.2 million, or approximately $0.16 per basic and diluted share, was recognized in the second quarter of 2019.
At June 30, 2019, the Company had net federal operating loss carryforwards of $107.4 million, which will begin to expire in 2031. As of June 30, 2019, a total of $173,000 in alternative minimum tax credit 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 2019 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, 20172019 or SeptemberJune 30, 20162018 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.
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 2014.2015.
Note 10 – Stock Plans and Stock Based Compensation
SharesShares available for issuance under the 20162018 Omnibus Equity Compensation Plan (“20162018 Plan”) total 25,000.306,640. 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 2019 unvested shares issued was $365,000,$292,000, or $9.64$14.53 per weighted-average share. The Company recorded $129,000$93,000 and $271,000$175,000 of stock-based compensation to salaries and employee benefits for the three and ninesix months ended SeptemberJune 30, 2017,2019, respectively, and $148,000$99,000 and $315,000$163,000 for the three and ninesix months ended SeptemberJune 30, 2016,2018, 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 $19,000 and $37,000 was recognized related to this expense during the three and six months ended June 30, 2019, respectively, and $21,000 and $34,000 for either period.the three and six months ended June 30, 2018.
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 | Six Months Ended | Twelve Months Ended | |||||||||||||||||||||||||||||
September 30, 2017 | December 31, 2016 | June 30, 2019 | December 31, 2018 | |||||||||||||||||||||||||||||
Weighted | Weighted | Weighted | Weighted | |||||||||||||||||||||||||||||
Average | Average | Average | Average | |||||||||||||||||||||||||||||
Grant | Grant | Grant | Grant | |||||||||||||||||||||||||||||
Shares | Price | Shares | Price | Shares | Price | Shares | Price | |||||||||||||||||||||||||
Outstanding, beginning | 179,513 | $ | 4.89 | 184,482 | $ | 4.81 | ||||||||||||||||||||||||||
Outstanding, beginning | 116,909 | $ | 8.69 | 142,334 | $ | 5.67 | ||||||||||||||||||||||||||
Granted | 37,865 | 9.64 | 35,465 | 9.10 | 20,108 | 14.53 | 52,856 | 13.94 | ||||||||||||||||||||||||
Vested | (58,650 | ) | 4.67 | (38,462 | ) | 8.32 | (75,981 | ) | 6.57 | (78,281 | ) | 6.75 | ||||||||||||||||||||
Forfeited | (1,316 | ) | 9.35 | (1,972 | ) | 6.16 | (3,998 | ) | 13.04 | — | — | |||||||||||||||||||||
Outstanding, ending | 157,412 | $ | 6.08 | 179,513 | $ | 4.89 | 57,038 | $ | 13.26 | 116,909 | $ | 8.69 |
Unrecognized stock based compensation expense related to unvested shares for the remainder of 20172019 and beyond is estimated as follows (in thousands):
October 2017 – December 2017 | $ | 129 | ||
2018 | 258 | |||
2019 | 99 | |||
2020 & thereafter | 25 |
July 2019 – December 2019 | $ | 180 | ||
2020 | 295 | |||
2021 | 181 | |||
2022 | 11 |
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 | 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||||||||
(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 | $ | 3,633 | $ | 1,983 | $ | 6,472 | $ | 3,917 | ||||||||||||||||
Less: | ||||||||||||||||||||||||||||||||
Earnings allocated to unvested shares | 45 | 46 | 133 | 129 | 32 | 27 | 71 | 66 | ||||||||||||||||||||||||
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 | $ | 3,601 | $ | 1,956 | $ | 6,401 | $ | 3,851 | ||||||||||||||||||||||||
Basic | ||||||||||||||||||||||||||||||||
Weighted average common shares including unvested common shares outstanding | 6,259,864 | 6,223,045 | 6,245,418 | 5,897,617 | 7,459,631 | 7,424,742 | 7,464,743 | 6,858,228 | ||||||||||||||||||||||||
Less: | ||||||||||||||||||||||||||||||||
Weighted average unvested common shares | 157,412 | 206,829 | 160,825 | 195,412 | 64,974 | 101,505 | 82,285 | 115,115 | ||||||||||||||||||||||||
Weighted average common shares outstanding | 6,102,452 | 6,016,216 | 6,084,593 | 5,702,205 | 7,394,657 | 7,323,237 | 7,382,458 | 6,743,113 | ||||||||||||||||||||||||
Basic income per common share | $ | 0.29 | $ | 0.22 | $ | 0.83 | $ | 0.66 | $ | 0.49 | $ | 0.27 | $ | 0.87 | $ | 0.57 | ||||||||||||||||
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 | 7,394,657 | 7,323,237 | 7,382,458 | 6,743,113 | ||||||||||||||||||||||||
Diluted income per common share | $ | 0.29 | $ | 0.22 | $ | 0.83 | $ | 0.66 | $ | 0.49 | $ | 0.27 | $ | 0.87 | $ | 0.57 |
The Company had no outstanding stock options at SeptemberJune 30, 20172019 or 2016.2018. 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, 2017 and 2016,2018, but was not included in the diluted EPS computation as inclusion would have been anti-dilutive. The warrant expired on November 21, 2018.
Note 12 – Regulatory Capital Requirements and Restrictions on Retained EarningsMatters
Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can 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. OnceWith the capital conservation buffer is fully phased in as of January 1, 2019, 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 to 1.25% in 2017,for 2019 is 2.5% and was 1.875% in 2018, and 2.5% in 2019.for 2018. An institution is subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if capital levels fall below minimum levels plus the buffer amounts. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions.actions without prior regulatory approval.
TheAs of June 30, 2019, Management believes the Company and Bank is no longer subjectmeet all capital adequacy requirements to a consent order withwhich they are subject. As of June 30, 2019, 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 formost recent regulatory notifications categorized the Bank to assistas well capitalized under the Bank in addressing weaknesses identified in a consent order withregulatory framework for prompt corrective action. There are no conditions or events since 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.notification that management believes have changed the institution’s category.
The following tables show the ratios (excluding capital conservation buffer) and amounts of common equity Tier 1, Tier 1 capital, and total capital to risk-adjusted assets and the leverage ratios for 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:
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Total risk-based capital (to risk-weighted assets) | ||||||||||||||||||||||||
Consolidated | $ | 76,402 | 10.05 | % | $ | 60,833 | 8.00 | % | N/A | N/A | ||||||||||||||
Bank | 84,299 | 11.10 | 60,761 | 8.00 | $ | 75,951 | 10.00 | % | ||||||||||||||||
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 | ||||||||||||||||||
Bank | 73,387 | 9.66 | 34,178 | 4.50 | 49,368 | 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 | ||||||||||||||||||
Bank | 73,387 | 7.73 | 37,986 | 4.00 | 47,482 | 5.00 |
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As of December 31, 2016: |
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Total risk-based capital (to risk-weighted assets) | ||||||||||||||||||||||||
Consolidated | $ | 71,109 | 10.21 | % | $ | 55,714 | 8.00 | % | N/A | N/A | ||||||||||||||
Bank | 68,773 | 9.88 | 55,663 | 8.00 | $ | 69,579 | 10.00 | % | ||||||||||||||||
Total common equity Tier 1 risk-based capital (to risk-weighted assets) | ||||||||||||||||||||||||
Consolidated | 36,199 | 5.20 | 31,339 | 4.50 | N/A | N/A | ||||||||||||||||||
Bank | 57,642 | 8.28 | 31,311 | 4.50 | 45,226 | 6.50 | ||||||||||||||||||
Tier 1 capital (to risk-weighted assets) | ||||||||||||||||||||||||
Consolidated | 48,713 | 6.99 | 41,786 | 6.00 | N/A | N/A | ||||||||||||||||||
Bank | 57,642 | 8.28 | 41,747 | 6.00 | 55,663 | 8.00 | ||||||||||||||||||
Tier 1 capital (to average assets) | ||||||||||||||||||||||||
Consolidated | 48,713 | 5.27 | 36,975 | 4.00 | N/A | N/A | ||||||||||||||||||
Bank | 57,642 | 6.24 | 36,949 | 4.00 | 46,186 | 5.00 |
N/A: Not applicable. Regulatory framework does not define well capitalized for holding companies.thousands):
Actual | Minimum Requirement for Capital Adequacy Purposes | Minimum Requirement to be Well Capitalized Under Prompt Corrective Action Provisions | ||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
As of June 30, 2019: | ||||||||||||||||||||||||
Total risk-based capital (to risk-weighted assets) | $ | 116,730 | 13.26 | $ | 70,424 | 8.00 | $ | 88,030 | 10.00 | % | ||||||||||||||
Total common equity Tier 1 risk-based capital (to risk-weighted assets) | 107,898 | 12.26 | 39,613 | 4.50 | 57,219 | 6.50 | ||||||||||||||||||
Tier 1 capital (to risk-weighted assets) | 107,898 | 12.26 | 52,818 | 6.00 | 70,424 | 8.00 | ||||||||||||||||||
Tier 1 capital (to average assets) | 107,898 | 10.01 | 43,111 | 4.00 | 53,889 | 5.00 |
Actual | Minimum Requirement for Capital Adequacy Purposes | Minimum Requirement to be Well Capitalized Under Prompt Corrective Action Provisions | ||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
As of December 31, 2018: | ||||||||||||||||||||||||
Total risk-based capital (to risk-weighted assets) | $ | 109,309 | 12.88 | % | $ | 67,920 | 8.00 | % | $ | 84,900 | 10.00 | % | ||||||||||||
Total common equity Tier 1 risk-based capital (to risk-weighted assets) | 100,429 | 11.83 | 38,205 | 4.50 | 55,185 | 6.50 | ||||||||||||||||||
Tier 1 capital (to risk-weighted assets) | 100,429 | 11.83 | 50,940 | 6.00 | 67,920 | 8.00 | ||||||||||||||||||
Tier 1 capital (to average assets) | 100,429 | 9.60 | 41,837 | 4.00 | 52,297 | 5.00 |
Kentucky banking laws limit the amount of dividends that may be paid to a holding company by its subsidiary banks without prior approval. 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.
Note 13 – Off 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, 2019 | December 31, 2018 | |||||||||||||||||||||||||||||
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 | $ | 6,977 | $ | 14,850 | $ | 5,317 | $ | 11,236 | ||||||||||||||||
Unused lines of credit | 7,252 | 58,107 | 7,935 | 51,407 | 9,863 | 70,779 | 7,410 | 73,024 | ||||||||||||||||||||||||
Standby letters of credit | 527 | 372 | 582 | 360 | 377 | 1,752 | 541 | 1,752 |
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$26.6 million at SeptemberJune 30, 20172019 and $14.6 million at December 31, 2016.2018. The risk participation agreements are not designated against specific assets or liabilities under ASC 815, Derivatives and Hedging, and, therefore, do not qualify for hedge accounting. The derivatives are recorded in other liabilities on the balance sheet at fair value and changes in fair value of both the borrower and the offsetting swap agreements are recorded (and essentially offset) in non-interest income.
In the normal course of business, the Company and its subsidiaries have been named, from time to time, as defendants in various legal actions. Certain of the actual or threatened legal actions may include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages.
The Company is subject to claims and lawsuits that arise primarily in the ordinary course of business. Litigation is subject to inherent uncertainties and unfavorable rulings could occur. The Company records contingent liabilities resulting from claims against it when a loss is assessed to be probable andcontests liability and/or the amount of damages as appropriate in each pending matter. In view of the loss is reasonably estimable. Accruals are not madeinherent difficulty of predicting the outcome of such matters, particularly in cases where liability is not probableclaimants seek substantial or indeterminate damages or where investigations and proceedings are in the amountearly stages, the Company cannot be reasonably estimated. Assessing probabilitypredict with certainty the loss or range of loss, and estimating probable losses requires analysis of multiple factors, including in some cases judgments aboutif any, related to such matters, how or if such matters will be resolved, when they will ultimately be resolved, or what the potential actions of third party claimants and courts. Recorded contingent liabilities areeventual settlement, or other relief, if any, might be. Subject to the foregoing, the Company believes, based on the best information available and actual losses in any future period are inherently uncertain. Based upon current knowledge and after consultation with counsel, that the Company believesoutcome of such pending legal proceedings or claims shouldmatters will not have a material impactadverse effect on itsthe consolidated financial position or results of operations. However, in lightcondition of the uncertainties involved in such proceedings,Company, although the outcome of a particular matter maysuch matters could be material to the financial position orCompany’s operating results of operationsand cash flows for a particular reportingfuture period, in the future.
On October 17, 2014, the United States Department of Justice (the “DOJ”) notified the Bank that it was the subject of an investigation into possible violations of federal laws, including,depending on, among other things, possible violations related to false bank entries, bank fraud and securities fraud. The investigation concerns allegations that Bank personnel engaged in practices intended to delay or avoid disclosurethe level of the Bank’s asset qualityCompany’s revenues or income for such period. The Company will accrue for a loss contingency if (1) it is probable that a future event will occur and confirm the loss and (2) the amount of the loss can be reasonably estimated. The Company is not currently involved in any material litigation.
Note 14 – Revenue from Contracts with Customers
All of the Company’s revenue from customers within the scope of ASC 606 is recognized as non-interest income. A description of the Company’s revenue streams accounted for under ASC 606 follows:
Service Charges on Deposit Accounts: The Company earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which include services such as ATM use fees, stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Company fulfills the customer’s request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges are withdrawn from the customer’s account balance.
Bank Card Interchange Income: The Company earns interchange fees from bank cardholder transactions conducted through a third party payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. 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 assesses whether the buyer is committed to perform their obligations under the contract and followingwhether collectability of the United States Treasury’s purchasetransaction 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 preferred sharescontrol of the property to the buyer. In determining the gain or loss on the sale, the Company adjusts the transaction price and related gain (loss) on sale if a significant financing component is present. Gains and losses on sales of OREO are netted with OREO expense and reported in non-interest expense.
Other Non-interest Income: Other non-interest income includes revenue from several sources that are within the scope of ASC 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 $119,000 and $255,000 of revenue for the three and six months ended June 30, 2019, respectively, within the scope of ASC 606. Other non-interest income included approximately $115,000 and $245,000 of revenue for the three and six months ended June 30, 2018, respectively, within the scope of ASC 606. The remaining other non-interest income for the three and six months is excluded from the Company in November 2008. The Bank has cooperated with all requests for information from the DOJ. At this time, the DOJ has not indicated whether it intends to pursue any action in the matter.scope of ASC 606.
Note 15 – Subsequent Events
On July 23, 2019, the Company completed the issuance of a $17.0 million 10-year subordinated note. The note carries interest at a fixed rate of 5.75% for the first five years and qualifies as Tier 2 regulatory capital. The Company contributed $10.0 million of the proceeds to the Bank as Tier 1 capital, used $5.0 million to reduce senior debt, and retained the remaining proceeds for general corporate purposes.
On July 24, 2019, the Bank entered into a Branch Purchase and Assumption Agreement to acquire four branch banking centers located in the Kentucky cities of Elizabethtown, Frankfort, and Owensboro from Louisville, Kentucky based Republic Bank and Trust. Under the terms of the agreement, the Bank will acquire the four branch offices, which includes $153 million in deposits and $112 million in loans. In addition, the Bank will acquire substantially all the fixed assets of these locations. The transaction has received approvals from each party’s board of directors and is expected to close in the fourth quarter of 2019, subject to regulatory approvals and other customary closing conditions.
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:
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The magnitude and frequency of changes to 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;
Competitive product and pricing pressures;
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;
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● | 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, 2018 Annual Report on |
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.
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 fourteenthtwelfth 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, we2019, the Company had total assets of $963.0 million,$1.1 billion, total loans of $682.5$803.1 million, total deposits of $866.8$938.5 million and stockholders’ equity of $40.1$101.4 million.
The Company reported net income of $1.8$3.6 million and $5.2$6.5 million for the three and ninesix months ended SeptemberJune 30, 2017,2019, compared with net income of $1.4$2.0 million and $3.9 million for the same periods of 2016. After deductions for earnings allocated to participating securities, net income available to common shareholders2018. Income tax benefit was $1.7 million$611,000 and $5.1 million$488,000 for the threesecond quarter of 2019 and ninefor the first six months ended September 30, 2017,of 2019, respectively, compared with netto income available to common shareholderstax expense of $1.3 million$483,000 and $3.8 million$812,000 for the threesecond quarter of 2018 and ninefor the first six months ended September 30, 2016,of 2018, respectively.
Basic and diluted net income per common share were $0.29 and $0.83 forDuring the three and nine months ended September 30, 2017, respectively, compared withfirst quarter of 2019, the Company benefited $341,000, or approximately $0.05 per basic and diluted share, from the establishment of a net deferred tax asset related to a change in Kentucky tax law enacted during the first quarter. The new law eliminates the Kentucky bank franchise tax, which is assessed at a rate of 1.1% of average capital, and implements a state income per common share of $0.22 and $0.66tax for the threeBank at a statutory rate of 5%. The new Kentucky income tax will go into effect on January 1, 2021.
In addition, the Company has state net operating loss carryforwards (“NOLs”) of $30.2 million, which were previously subject to a full valuation allowance and ninewill begin to expire in 2025. In April 2019, tax legislation was enacted which allowed for certain Kentucky NOLs to be utilized in a combined filing return. Therefore, the Company will begin filing a Kentucky combined filing in 2021 and, as a result, a state NOL tax benefit, net of federal impact, of $1.2 million, or approximately $0.16 per basic and diluted share, was recognized in the second quarter of 2019.
Highlights for the six months ended SeptemberJune 30, 2016, respectively.2019 are as follows:
We note the following significant items for the nine months ended September 30, 2017:
● | Loan growth outpaced paydowns during the period. Average loans receivable increased approximately |
● | Net interest margin decreased |
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● | Loans past due 30-59 days decreased from |
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● | Foreclosed properties were |
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● | Deposits were $938.5 million at June 30, 2019, compared with $894.2 million at December 31, 2018. Certificate of deposit balances increased $54.4 million during the first six months of 2019 to $505.3 million at June 30, 2019, from $450.9 million at December 31, 2018. Interest checking accounts increased $1.0 million and money market declined $9.0 million during the first six months of 2019 compared with December 31, 2018. |
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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, 2016.2018. Management has discussed the development, selection, and application of our critical accounting policies with our Audit Committee. During the first ninesix months of 2017,2019, 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, 2017,2019, compared with the same period of 2016:2018:
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 | 2019 | 2018 | Amount | Percent | |||||||||||||||||||||||||
(dollars in thousands) | (dollars in thousands) | |||||||||||||||||||||||||||||||
Gross interest income | $ | 9,446 | $ | 8,931 | $ | 515 | 5.8 | % | $ | 12,376 | $ | 10,585 | $ | 1,791 | 16.9 | % | ||||||||||||||||
Gross interest expense | 1,659 | 1,473 | 186 | 12.6 | 3,576 | 2,211 | 1,365 | 61.7 | ||||||||||||||||||||||||
Net interest income | 7,787 | 7,458 | 329 | 4.4 | 8,800 | 8,374 | 426 | 5.1 | ||||||||||||||||||||||||
Provision (negative provision) for loan losses | — | (750 | ) | 750 | 100.0 | — | (150 | ) | 150 | 100.0 | ||||||||||||||||||||||
Non-interest income | 1,182 | 1,105 | 77 | 7.0 | 1,446 | 1,347 | 99 | 7.3 | ||||||||||||||||||||||||
Non-interest expense | 7,175 | 7,920 | (745 | ) | (9.4 | ) | 7,224 | 7,405 | (181 | ) | (2.4 | ) | ||||||||||||||||||||
Net income before taxes | 1,794 | 1,393 | 401 | 28.8 | 3,022 | 2,466 | 556 | 22.5 | ||||||||||||||||||||||||
Income tax expense | — | — | — | — | ||||||||||||||||||||||||||||
Income tax (benefit) expense | (611 | ) | 483 | (1,094 | ) | (226.5 | ) | |||||||||||||||||||||||||
Net income | 1,794 | 1,393 | 401 | 28.8 | 3,633 | 1,983 | 1,650 | 83.2 |
Net income for the three months ended SeptemberJune 30, 20172019 totaled $1.8$3.6 million, compared with $1.4$2.0 million for the comparable period of 2016. 2018. Net income before taxes and income tax benefit was $3.0 million and $611,000, respectively for the second quarter of 2019, compared with $2.5 million and income tax expense of $483,000, respectively for the second quarter of 2018. The Company has state net operating loss carryforwards (“NOLs”) of $30.2 million, which were previously subject to a full valuation allowance and will begin to expire in 2025. In April 2019, tax legislation was enacted which allowed for certain Kentucky NOLs to be utilized in a combined filing return. Therefore, the Company will begin filing a Kentucky combined filing in 2021 and, as a result, a state NOL tax benefit, net of federal impact, of $1.2 million, or approximately $0.16 per basic and diluted share, was recognized in the second quarter of 2019.
Net interest income increased $329,000$426,000 from the 2016 third2018 second quarter as a result of an increase in earning assets. Net interest margin decreased 15 basis points to 3.42% in the second quarter of 2019 compared with 3.57% in the second quarter of 2018. The cost of interest bearing liabilities increased from 1.13% for the second quarter of 2018 to 1.68% for the second quarter of 2019. Average earning assets increased from $864.3$943.0 million for the thirdsecond quarter of 20162018 to $907.7$1.0 billion for 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 decrease in margin between periods was due to an increase in the cost of interest bearing liabilities from 0.78% in the third quarter of 2016 to 0.85% in the third quarter of 2017.
The third quarter of 2016 benefited from a $750,000 negative loan loss provision. There was no loan loss provisioning in the third quarter of 2017.2019. Non-interest income increased by $77,000$99,000 to $1.2$1.4 million from $1.1$1.3 million in the thirdsecond quarter of 20162018 primarily due to an increase in service charges in deposit accountsbankcard interchange fees of $48,000.$150,000. Non-interest expense decreased from $7.9$7.4 million in the thirdsecond quarter of 20162018 to $7.2 million in the thirdsecond quarter of 20172019 primarily due to decreased salaries and employee benefitsdecreases in marketing expense of $262,000, a $211,000 decline in$96,000 and OREO expense a $144,000 decline in loan collection and litigation expense, and a $142,000 decline in professional fees.of $95,000.
The following table summarizes components of income and expense and the change in those componentscomponents for the ninesix months ended SeptemberJune 30, 2017,2019, compared with the same period of 2016:2018:
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 | 2019 | 2018 | Amount | Percent | |||||||||||||||||||||||||
(dollars in thousands) | (dollars in thousands) | |||||||||||||||||||||||||||||||
Gross interest income | $ | 27,805 | $ | 26,821 | $ | 984 | 3.7 | % | $ | 24,562 | $ | 20,600 | $ | 3,962 | 19.2 | % | ||||||||||||||||
Gross interest expense | 4,689 | 4,516 | 173 | 3.8 | 6,803 | 4,045 | 2,758 | 68.2 | ||||||||||||||||||||||||
Net interest income | 23,116 | 22,305 | 811 | 3.6 | 17,759 | 16,555 | 1,204 | 7.3 | ||||||||||||||||||||||||
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 | ) | 2,730 | 2,598 | 132 | 5.1 | ||||||||||||||||||||||
Non-interest expense | 21,290 | 23,947 | (2,657 | ) | (11.1 | ) | 14,505 | 14,574 | (69 | ) | (0.5 | ) | ||||||||||||||||||||
Net income before taxes | 5,183 | 3,906 | 1,277 | 32.7 | 5,984 | 4,729 | 1,255 | 26.5 | ||||||||||||||||||||||||
Income tax expense | — | 21 | (21 | ) | (100.0 | ) | ||||||||||||||||||||||||||
Income tax (benefit) expense | (488 | ) | 812 | (1,300 | ) | (160.1 | ) | |||||||||||||||||||||||||
Net income | 5,183 | 3,885 | 1,298 | 33.4 | 6,472 | 3,917 | 2,555 | 65.2 |
Net incomeincome for the ninesix months ended SeptemberJune 30, 20172019 totaled $5.2$6.5 million, compared with net income of $3.9 million for the comparable period of 2016. 2018. Net income before taxes and income tax benefit was $6.0 million and $488,000, respectively, for the six months ended June 30, 2019, compared with $4.7 million and income tax expense of $812,000, respectively, for the six months ended June 30, 2018. Income tax expense for the first six months of 2019 benefitted $1.2 million from the establishment of a state net deferred tax asset related to the April 2019 tax law enactment discussed previously. In addition, during the first quarter of 2019, the Company benefited $341,000, or approximately $0.05 per basic and diluted share, from the establishment of a net deferred tax asset related to a change in Kentucky tax law enacted during the first quarter. The new law eliminates the Kentucky bank franchise tax, which is assessed at a rate of 1.1% of average capital, and implements a state income tax for the Bank at a statutory rate of 5%. The new Kentucky income tax will go into effect on January 1, 2021.
Net interest income increased $811,000$1.2 million from the first ninesix months of 20162018 as a result of an increase in earning assets and net interest margin.assets. Net interest margin increased twodecreased nine basis points to 3.47%3.51% in the first ninesix months of 20172019 compared with 3.45%3.60% in the first ninesix months of 2016.2018. The increasecost of interest bearing liabilities increased from 1.05% for the first six months of 2018 to 1.62% for the first six months of 2019. Average earning assets increased from $929.5 million for the first six months of 2018 to $1.0 billion for the first six months of 2019. Non-interest income increased by $132,000 to $2.7 million from $2.6 million in margin between periods wasthe first six months of 2018 primarily due to an increase in the yield on earning assets from 4.14% for the first nine monthsbankcard interchange fees of 2016 to 4.17% for the first nine months of 2017,$257,000, partially offset by an increase in the cost of interest bearing liabilities from 0.79% for the first nine months of 2016 to 0.81% for the first nine months of 2017. Average earning assets increased from $874.2 million for the first nine months of 2016 to $899.9 million for the first nine 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. Non-interest income decreased by $291,000 to $3.4 million from $3.6 million in the first nine months of 2016 primarily due to a decrease in OREO income of $451,000 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 and an increase in bank card interchange fees of $76,000.$92,000. Non-interest expense decreased from $23.9$14.6 million in the first ninesix months of 20162018 to $21.3$14.5 million in the first ninesix months of 20172019 primarily due to a decreasedecreases in OREOmarketing expense of $1.2 million, a $475,000 decline in professional fees, a $454,000 decline in litigation$169,000 and loan collection expense, and a $403,000 decline in FDIC insurance.insurance of $110,000 reflecting the Bank’s lower risk profile, partially offset by a $157,000 increase in salaries and employee benefits, as well as an increase in deposit account related expense of $151,000.
Net Interest Income – Net interest income was $7.8$8.8 million for the three months ended SeptemberJune 30, 2017,2019, an increase of $329,000,$426,000, or 4.4%5.1%, compared with $7.5$8.4 million for the same period in 2016.2018. Net interest spread and margin were 3.31%3.13% and 3.44%3.42%, respectively, for the thirdsecond quarter of 2017,2019, compared with 3.37%3.38% and 3.47%3.57%, respectively, for the thirdsecond quarter of 2016.2018. Net average non-accrual loans were $6.2$2.1 million and $11.0$3.9 million for the thirdsecond quarters of 20172019 and 2016,2018, respectively.
Average loans receivable increased approximately $43.5$58.8 million for the thirdsecond quarter of 20172019 compared with the thirdsecond quarter of 2016.2018. This resulted in an increase in interest revenue volume of approximately $525,000 which was offset by a decrease in$753,000 attributable to volume and an increase of $618,000 attributable to increasing interest income driven by interest rate decreases aggregating $203,000rates for the quarter ended SeptemberJune 30, 2017,2019, compared with the thirdsecond quarter of 2016.2018. Interest foregone on non-accrual loans totaled $105,000$86,000 for the thirdsecond quarter of 2017,2019, compared with $180,000$74,000 for the thirdsecond quarter of 2016.2018.
Net interest margin decreased three15 basis points from our margin of 3.47%3.57% in the prior year thirdsecond quarter to 3.44%3.42% for the thirdsecond quarter of 2017.2019. The yield on earning assets increased one30 basis pointpoints and rates paid on interest-bearing liabilities increased seven55 basis pointpoints from the thirdsecond quarter of 2016.2018. Both the yield on earning assets and cost of interest-bearing liabilities were impacted by increases in short-term interest rates during 2018.
Net interest income was $23.1$17.8 million for the ninesix months ended SeptemberJune 30, 2017,2019, an increase of $811,000,$1.2 million, or 3.6%7.3%, compared with $22.3$16.6 million for the same period in 2016.2018. Net interest spread and margin were 3.36%3.24% and 3.47%3.51%, respectively, for the first ninesix months of 2017,2019, compared with 3.35%3.43% and 3.45%3.60%, respectively, for the first ninesix months of 2016.2018. Net average non-accrual loans were $7.5$2.1 million and $12.0$4.4 million for the first ninesix months of 20172019 and 2016,2018, 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$50.6 million for the ninesix months ended SeptemberJune 30, 20172019 compared with the first ninesix months of 2016.2018. This resulted in an increase in interest revenue volume of approximately $1.3 million which was offset by a decreaseattributable to volume and an increase of $1.5 million attributable to increasing in interest income driven by interest rate decreases aggregating $852,000rates for the ninesix months ended SeptemberJune 30, 20172019 compared with the prior year period. Interest foregone on non-accrual loans totaled $368,000$164,000 for the ninesix months ended SeptemberJune 30, 2017,2019, compared with $576,000$162,000 for the ninesix months ended SeptemberJune 30, 2016.2018.
Net interest margin increased twodecreased nine basis points to 3.47%3.51% for the first ninesix months of 20172019 from our margin of 3.45%3.60% in the first ninesix months of 2016.2018. The yield on earning assets increased three38 basis points for the first ninesix months of 20172019 from the first ninesix months of 2016,2018, compared with an increase of two basis points in rates paid on interest-bearing liabilities.liabilities of 57 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 2018.
Average Balance Sheets
The following table presents the average balance sheets for the three month periods ended SeptemberJune 30, 20172019 and 2016,2018, 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 | 2019 | 2018 | |||||||||||||||||||||||||||||||||||||||||||||
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 | % | $ | 793,460 | $ | 10,465 | 5.29 | % | $ | 734,709 | $ | 9,094 | 4.96 | % | ||||||||||||||||||||||||
Securities | ||||||||||||||||||||||||||||||||||||||||||||||||
Taxable | 174,776 | 1,088 | 2.47 | 160,130 | 956 | 2.38 | 195,379 | 1,608 | 3.30 | 161,232 | 1,198 | 2.98 | ||||||||||||||||||||||||||||||||||||
Tax-exempt (3) | 19,547 | 143 | 4.47 | 20,779 | 153 | 4.51 | 12,710 | 88 | 3.52 | 14,183 | 96 | 3.44 | ||||||||||||||||||||||||||||||||||||
FHLB stock | 7,323 | 95 | 5.15 | 7,323 | 72 | 3.91 | 6,778 | 96 | 5.68 | 7,323 | 104 | 5.70 | ||||||||||||||||||||||||||||||||||||
Federal funds sold and other | 36,485 | 99 | 1.08 | 49,980 | 51 | 0.41 | 25,254 | 119 | 1.89 | 25,576 | 93 | 1.46 | ||||||||||||||||||||||||||||||||||||
Total interest-earning assets | 907,723 | 9,446 | 4.16 | % | 864,307 | 8,931 | 4.15 | % | 1,033,581 | 12,376 | 4.81 | % | 943,023 | 10,585 | 4.51 | % | ||||||||||||||||||||||||||||||||
Less: Allowance for loan losses | (8,964 | ) | (10,135 | ) | (8,730 | ) | (8,886 | ) | ||||||||||||||||||||||||||||||||||||||||
Non-interest earning assets | 52,928 | 63,453 | 75,608 | 78,871 | ||||||||||||||||||||||||||||||||||||||||||||
Total assets | $ | 951,687 | $ | 917,625 | $ | 1,100,459 | $ | 1,013,008 | ||||||||||||||||||||||||||||||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||||||||||||||||||||||||||||||||||
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 | % | $ | 487,651 | $ | 2,416 | 1.99 | % | $ | 429,123 | $ | 1,308 | 1.22 | % | ||||||||||||||||||||||||
NOW and money market deposits | 253,699 | 250 | 0.39 | 231,601 | 238 | 0.41 | 261,579 | 536 | 0.82 | 241,826 | 327 | 0.54 | ||||||||||||||||||||||||||||||||||||
Savings accounts | 35,904 | 15 | 0.17 | 33,874 | 15 | 0.18 | 33,881 | 13 | 0.15 | 35,965 | 14 | 0.16 | ||||||||||||||||||||||||||||||||||||
FHLB advances | 2,350 | 13 | 2.19 | 2,672 | 17 | 2.53 | 40,989 | 255 | 2.50 | 44,252 | 216 | 1.96 | ||||||||||||||||||||||||||||||||||||
Junior subordinated debentures | 23,696 | 225 | 3.77 | 24,598 | 194 | 3.14 | 21,000 | 258 | 4.93 | 21,957 | 248 | 4.53 | ||||||||||||||||||||||||||||||||||||
Senior debt | 10,000 | 97 | 3.85 | — | — | — | 10,000 | 98 | 3.93 | 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 | 855,100 | 3,576 | 1.68 | % | 783,123 | 2,211 | 1.13 | % | ||||||||||||||||||||||||||||||||||||||||
Non-interest-bearing liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||||
Non-interest-bearing deposits | 129,072 | 118,611 | 143,619 | 135,843 | ||||||||||||||||||||||||||||||||||||||||||||
Other liabilities | 5,859 | 8,259 | 4,010 | 5,341 | ||||||||||||||||||||||||||||||||||||||||||||
Total liabilities | 912,528 | 875,455 | 1,002,729 | 924,307 | ||||||||||||||||||||||||||||||||||||||||||||
Stockholders’ equity | 39,159 | 42,170 | ||||||||||||||||||||||||||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 951,687 | $ | 917,625 | ||||||||||||||||||||||||||||||||||||||||||||
Stockholders’ equity | 97,730 | 88,701 | ||||||||||||||||||||||||||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 1,100,459 | $ | 1,013,008 | ||||||||||||||||||||||||||||||||||||||||||||
Net interest income | $ | 7,787 | $ | 7,458 | $ | 8,800 | $ | 8,374 | ||||||||||||||||||||||||||||||||||||||||
Net interest spread | 3.31 | % | 3.37 | % | 3.13 | % | 3.38 | % | ||||||||||||||||||||||||||||||||||||||||
Net interest margin | 3.44 | % | 3.47 | % | 3.42 | % | 3.57 | % |
(1) | Includes loan fees in both interest income and the calculation of yield on loans. |
(2) | Calculations include non-accruing loans averaging $2.1 million and $3.9 million, respectively, in average loan amounts outstanding. |
(3) | Taxable equivalent yields are calculated assuming a federal income tax rate of 21%. |
The following table presents the average balance sheets for the six month periods ended June 30, 2019 and 2018, along with the related calculations of tax-equivalent net interest income, net interest margin and net interest spread for the related periods.
Six Months Ended June 30, | ||||||||||||||||||||||||
2019 | 2018 | |||||||||||||||||||||||
Average Balance | Interest Earned/Paid | Average Yield/Cost | Average Balance | Interest Earned/Paid | Average Yield/Cost | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
ASSETS | ||||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Loan receivables (1)(2) | $ | 780,057 | $ | 20,719 | 5.36 | % | $ | 729,485 | $ | 17,884 | 4.94 | % | ||||||||||||
Securities | ||||||||||||||||||||||||
Taxable | 193,528 | 3,181 | 3.31 | 152,585 | 2,141 | 2.83 | ||||||||||||||||||
Tax-exempt (3) | 13,109 | 181 | �� | 3.52 | 14,203 | 192 | 3.45 | |||||||||||||||||
FHLB stock | 6,922 | 205 | 5.97 | 7,323 | 210 | 5.78 | ||||||||||||||||||
Federal funds sold and other | 28,214 | 276 | 1.97 | 25,872 | 173 | 1.35 | ||||||||||||||||||
Total interest-earning assets | 1,021,830 | 24,562 | 4.86 | % | 929,468 | 20,600 | 4.48 | % | ||||||||||||||||
Less: Allowance for loan losses | (8,792 | ) | (8,611 | ) | ||||||||||||||||||||
Non-interest earning assets | 75,037 | 79,413 | ||||||||||||||||||||||
Total assets | $ | 1,088,075 | $ | 1,000,270 | ||||||||||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Certificates of deposit and other time deposits | $ | 473,757 | $ | 4,464 | 1.90 | % | $ | 425,703 | $ | 2,370 | 1.12 | % | ||||||||||||
NOW and money market deposits | 263,204 | 1,061 | 0.81 | 243,857 | 595 | 0.49 | ||||||||||||||||||
Savings accounts | 33,720 | 27 | 0.16 | 35,446 | 28 | 0.16 | ||||||||||||||||||
FHLB advances | 43,244 | 536 | 2.50 | 42,547 | 372 | 1.76 | ||||||||||||||||||
Junior subordinated debentures | 21,000 | 521 | 5.00 | 22,595 | 486 | 4.34 | ||||||||||||||||||
Senior debt | 10,000 | 194 | 3.91 | 10,000 | 194 | 3.91 | ||||||||||||||||||
Total interest-bearing liabilities | 844,925 | 6,803 | 1.62 | % | 780,148 | 4,045 | 1.05 | % | ||||||||||||||||
Non-interest-bearing liabilities: | ||||||||||||||||||||||||
Non-interest-bearing deposits | 143,170 | 133,742 | ||||||||||||||||||||||
Other liabilities | 4,358 | 5,384 | ||||||||||||||||||||||
Total liabilities | 992,453 | 919,274 | ||||||||||||||||||||||
Stockholders’ equity | 95,622 | 80,996 | ||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 1,088,075 | $ | 1,000,270 | ||||||||||||||||||||
Net interest income | $ | 17,759 | $ | 16,555 | ||||||||||||||||||||
Net interest spread | 3.24 | % | 3.43 | % | ||||||||||||||||||||
Net interest margin | 3.51 | % | 3.60 | % |
(1) | Includes loan fees in both interest income and the calculation of yield on loans. |
(2) | Calculations include non-accruing loans averaging |
(3) | Taxable equivalent yields are calculated assuming a |
Nine Months Ended September 30, 2017 2016 Average Balance Interest Earned/Paid Average Yield/Cost Average Balance Interest Earned/Paid Average Yield/Cost (dollars in thousands) ASSETS Interest-earning assets: Loan receivables (1)(2) % % Securities Taxable Tax-exempt (3) FHLB stock Federal funds sold and other Total interest-earning assets % % Less: Allowance for loan losses ) ) Non-interest earning assets Total assets LIABILITIES AND STOCKHOLDERS’ EQUITY Interest-bearing liabilities: Certificates of deposit and other time deposits % % NOW and money market deposits Savings accounts FHLB advances Junior subordinated debentures Senior debt Total interest-bearing liabilities % % Non-interest-bearing liabilities: Non-interest-bearing deposits Other liabilities Total liabilities Stockholders’ equity Total liabilities and stockholders’ equity Net interest income Net interest spread % % Net interest margin % % Rate/Volume Analysis The table below sets forth certain information regarding changes in interest income and interest expense for the periods indicated. For each Three Months Ended September 30, 2017 vs. 2016 Nine Months Ended September 30, 2017 vs. 2016 Three Months Ended June 30, 2019 vs. 2018 Six Months Ended June 30, 2019 vs. 2018 Increase (decrease) due to change in Increase (decrease) due to change in Increase (decrease) due to change in Increase (decrease) due to change in Rate Volume Net Change Rate Volume Net Change Rate Volume Net Change Rate Volume Net Change (in thousands) (in thousands) Interest-earning assets: Loan receivables ) ) Securities FHLB stock ) ) ) ) Federal funds sold and other ) ) ) Total increase (decrease) in interest income ) ) Interest-bearing liabilities: Certificates of deposit and other time deposits ) ) NOW and money market accounts ) ) ) Savings accounts ) ) ) ) ) ) ) FHLB advances ) ) ) ) ) Junior subordinated debentures ) ) ) ) Senior debt Total increase (decrease) in interest expense Increase (decrease) in net interest income ) ) ) ) Non-Interest Income – The following table presents the major categories of non-interest income for the three and 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 2019 2018 2019 2018 (dollars in thousands) (dollars in thousands) Service charges on deposit accounts Bank card interchange fees Other real estate owned rental income Bank owned life insurance income Income from bank owned life insurance Net gain (loss) on sales and calls of securities ) ) ) ) ) ) Other Total non-interest income Non-interest income for the Non-interest Expense – The following table presents the major categories of non-interest expense for the three and 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 2019 2018 2019 2018 (dollars in thousands) (dollars in thousands) Salary and employee benefits Occupancy and equipment Professional fees Marketing expense FDIC insurance Data processing expense State franchise and deposit tax Deposit account related expenses Other real estate owned expense Litigation and loan collection expense Other Total non-interest expense Non-interest expense for the Income Tax Expense – 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 2019 2018 2019 2018 (dollars in thousands) (dollars in thousands) Federal statutory rate times financial statement income Effect of: Valuation allowance ) ) ) ) Tax-exempt income ) ) ) ) ) ) ) ) Establish state deferred tax asset ) ) Non-taxable life insurance income ) ) ) ) ) ) ) ) Restricted stock vesting ) ) ) ) ) Other, net Total Total ) ) Net income before taxes and income tax benefit was $3.0 million and $611,000, respectively for the three months ended June 30, 2019, compared with $2.5 million and income tax expense of $483,000, respectively for the three months ended June 30, 2018. The Company had state net operating loss carryforwards (“NOLs”) of $30.2 million, which were previously subject to a full valuation allowance and will begin to expire in 2025. In April 2019, tax legislation was enacted which allowed for certain Kentucky NOLs to be utilized in a combined filing return. Therefore, the Company will begin filing a Kentucky combined filing in 2021 and, as a result, a state NOL tax benefit, net of federal impact, of $1.2 million, or $0.16 per basic and diluted share, was recognized in the second quarter of 2019. Net income before taxes and income tax benefit was $6.0 million and $488,000, respectively for the six months ended June 30, 2019, compared with $4.7 million and income tax expense of $812,000, respectively for the six months ended June 30, 2018. Income tax expense for the first six months of 2019 benefitted $1.2 million from the establishment of a state net deferred tax asset related to the April 2019 tax law enactment discussed above. In addition, during the first quarter of 2019, the Company benefited $341,000, or approximately $0.05 per basic and diluted share, from the establishment of a net deferred tax asset related to a change in Kentucky tax law enacted during the first quarter. The new law eliminates the Kentucky bank franchise tax, which is assessed at a rate of 1.1% of average capital, and implements a state income tax for the Bank at a statutory rate of 5%. The new Kentucky income tax will go into effect on January 1, 2021. Analysis of Financial Condition Total assets increased Loans Receivable – Loans receivable increased Loan Portfolio Composition – The 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 % % Commercial Real Estate Construction Farmland Nonfarm nonresidential Residential Real Estate Multi-family 1-4 Family Consumer Agriculture Other Total loans % % There are no foreign loans in our As of June 30, As of December 31, 2019 2018 Amount Percent Amount Percent (dollars in thousands) Commercial % % Commercial Real Estate Construction Farmland Nonfarm nonresidential Residential Real Estate Multi-family 1-4 Family Consumer Agriculture Other Total loans % % Loan Portfolio by Risk Category – The following table presents a summary of the loan portfolio at the dates indicated, by risk category. Loans % to Total Loans % to Total (dollars in thousands) Pass % % Watch Special Mention Substandard Doubtful Total % % Loans % to Total Loans % to Total (dollars in thousands) Pass % % Watch Special Mention Substandard Doubtful Total % % Loan Delinquency – The following table presents a summary of loan delinquencies at the dates indicated. September 30, 2017 December 31, 2016 June 30, 2019 December 31, 2018 (in thousands) Past Due Loans: 30-59 Days 60-89 Days 90 Days and Over Total Loans Past Due 30-90+ Days Nonaccrual Loans Total Past Due and Nonaccrual Loans During the September 30, 2017 December 31, 2016 (dollars in thousands) Loans past due 90 days or more still on accrual Loans on nonaccrual status Total non-performing loans Real estate acquired through foreclosure Other repossessed assets Total non-performing assets Non-performing loans to total loans % % Non-performing assets to total assets % % Allowance for non-performing loans Allowance for non-performing loans to non-performing loans % % 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 At There were no Non-Performing Assets – Non-performing assets consist of certain restructured loans for which interest rate or other terms have been renegotiated, loans past due 90 days or more still on accrual, loans on which interest is no longer accrued, real estate acquired through foreclosure and repossessed assets. The following table sets forth information with respect to September 30, 2017 December 31, 2016 (dollars in thousands) Total non-performing loans TDRs on accrual Total non-performing loans and TDRs on accrual Real estate acquired through foreclosure Other repossessed assets Total non-performing assets and TDRs on accrual Total non-performing loans and TDRs on accrual to total loans % % Total non-performing assets and TDRs on accrual to total assets % % June 30, 2019 December 31, 2018 (dollars in thousands) Loans on nonaccrual status Troubled debt restructurings on accrual Past due 90 days or more still on accrual Total non-performing loans Real estate acquired through foreclosure Other repossessed assets Total non-performing assets Non-performing loans to total loans % % Non-performing assets to total assets % % Allowance for non-performing loans Allowance for non-performing loans to non-performing loans % % Nonperforming loans at June 30, 2019, were $2.9 million, or 0.37% of total loans, compared with $2.9 million, or 0.38% of total loans at December 31, 2018, and $3.2 million, or 0.42% of total loans at June 30, 2018. Allowance for Loan Losses – The 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 An analysis of changes in the allowance for loan losses and selected ratios for the three and 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 2019 2018 2019 2018 (in thousands) (in thousands) Balance at beginning of period Loans charged-off: Real estate Commercial Consumer Agriculture Other Total charge-offs Recoveries Real estate Commercial Consumer Agriculture Other Total recoveries Net charge-offs (recoveries) ) ) ) Net charge-offs (recoveries) ) ) ) ) Provision (negative provision) for loan losses ) ) ) ) ) ) Balance at end of period Allowance for loan losses to period-end loans % % % % % % % % % % Net charge-offs (recoveries) to average loans )% % % % )% )% % )% )% Allowance for loan losses to non-performing loans % % % % % % % % % % Allowance for loan losses for loans individually evaluated for impairment Loans individually evaluated for impairment Allowance for loan losses to loans individually evaluated for impairment % % % % % Allowance for loan losses for loans collectively evaluated for impairment Loans collectively evaluated for impairment Allowance for loan losses to loans collectively evaluated for impairment % % % % % Nine Months Ended September 30, 2017 Year Ended December 31, 2016 Year Ended December 31, 2015 (in thousands) Commercial ) ) ) Commercial Real Estate ) ) Residential Real Estate Consumer ) ) Agriculture ) Other ) ) Total net charge-offs (recoveries) ) The majority of Based on prior charge-offs, the September 30, 2017 December 31, 2016 Commercial Real Estate Residential Real Estate Commercial Real Estate Residential Real Estate (in thousands) Unpaid principal balance Prior charge-offs ) ) ) ) Recorded investment Allocated allowance ) ) ) ) Recorded investment, less allocated allowance Recorded investment, less allocated allowance/ Unpaid principal balance % % % % September 30, 2017 December 31, 2016 Loans Allowance % to Total Loans Allowance % to Total Commercial % % Commercial real estate Residential real estate Consumer Agriculture Other Total % % Provision for Loan Losses – 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 Liabilities – Total liabilities at Deposits are 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 2019 2018 Average Average Average Average Average Average Average Average Balance Rate Balance Rate Balance Rate Balance Rate (dollars in thousands) (dollars in thousands) Demand Interest checking % % % % Money market Savings Certificates of deposit Total deposits % % % % 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 2019 2018 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 % % $250,000 or more % % Less than $250,000 % % $250,000 or more % % Total % % % % The following table shows at Maturity Period Maturity Period Maturity Period Three months or less Three months through six months Six months through twelve months Over twelve months Total Liquidity Liquidity risk arises from the possibility Funds are available to the Bank from The Company uses cash on hand to service senior debt, 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, 2019, cash on hand totaled $4.1 million, of which, $223,000 is held in escrow by the Company’s senior debt holder to service interest payments. Capital 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 Regulatory Minimums Well-Capitalized Minimums September 30, 2017 December 31, 2016 Regulatory Minimums Well-Capitalized Minimums June 30, 2019 December 31, 2018 Tier 1 Capital Common equity Tier 1 capital Total risk-based capital Tier 1 leverage ratio Failure to meet minimum capital requirements could result in 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. Item 3. Quantitative and Qualitative Disclosures about Market Risk Given an instantaneous 100 basis point increase in interest rates, The following table indicates the estimated impact on net interest income under various interest rate scenarios for the twelve months following 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 % % + 100 basis points - 100 basis points ) ) - 200 basis points ) ) - 100 basis points ) ) - 200 basis points ) ) 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 There was no change in the The Company contests liability and/or the amount of damages as appropriate in each pending matter. In view of the inherent difficulty of predicting the outcome of such matters, particularly in cases where claimants seek substantial or indeterminate damages or where investigations and The Company is not currently involved in Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Period Total Shares Purchased (Withheld) Average Price Paid (Credited) Per Share March 2019 18,466 $14.95 June 2019 2,532 $14.98 The Company does not have a publicly announced share plan or program. Item 3. Default Upon Senior Securities Not applicable. Item 4. Mine Safety Disclosures Not applicable. Not applicable (a) Exhibits The following exhibits are filed or furnished as part of this report: Exhibit Number Description of Exhibit 3.1 3.3 4.1 4.2 4.3 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 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 32.2 101 The following financial statements from the The Company has other long-term debt agreements that meet the exclusion set forth in Section 601 (b)(4)(iii)(A) of Regulation S-K. The Company hereby agrees to furnish a copy of such agreements to the Securities and Exchange Commission upon request. SIGNATURES Pursuant to the requirements of the Securities Exchange Act (Registrant) By: /s/ John T. Taylor John T. Taylor Chief Executive Officer By: /s/ Phillip W. Barnhouse Phillip W. Barnhouse Chief Financial Officer The following table presents the average balance sheets for the nine month periods ended September 30, 2017 and 2016, along with the related calculationstax-equivalent net interest income, net interest margin and net interest spread for the related periods. $ 657,980 $ 23,493 4.77 $ 621,824 $ 23,036 4.95 175,838 3,370 2.56 161,232 2,895 2.40 19,805 432 4.49 21,355 475 4.57 7,323 264 4.82 7,323 219 3.99 38,913 246 0.85 62,451 196 0.42 899,859 27,805 4.17 874,185 26,821 4.14 (8,950 (11,138 52,904 67,241 $ 943,813 $ 930,288 $ 458,732 $ 3,149 0.92 $ 471,530 $ 3,108 0.88 244,521 683 0.37 231,213 696 0.40 35,650 45 0.17 34,460 46 0.18 6,594 64 1.30 2,827 54 2.55 23,920 651 3.64 24,822 612 3.29 3,407 97 3.81 — — — 772,824 4,689 0.81 764,852 4,516 0.79 125,932 117,377 8,401 9,735 907,157 891,964 36,656 38,324 $ 943,813 $ 930,288 $ 23,116 $ 22,305 3.36 3.35 3.47 3.45 (1)Includes loan fees in both interest income and the calculation of yield on loans.(2)Calculations include non-accruing loans averaging $7.5 million and $12.0 million, respectively, in average loan amounts outstanding.(3)Taxable equivalent yields are calculated assuming a 35% federal income tax rate.
Contentscategorycategory 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. $ (203 $ 525 $ 322 $ (852 $ 1,309 $ 457 $ 618 $ 753 $ 1,371 $ 1,548 $ 1,287 $ 2,835 38 84 122 184 248 432 145 257 402 418 611 1,029 23 — 23 45 — 45 — (8 (8 7 (12 (5 65 (17 48 144 (94 50 27 (1 26 86 17 103 (77 592 515 (479 1,463 984 790 1,001 1,791 2,059 1,903 3,962 59 (9 50 127 (86 41 910 198 1,108 1,800 294 2,094 (10 22 12 (52 39 (13 180 29 209 416 50 466 (1 1 — (3 2 (1 — (1 (1 — (1 (1 (2 (2 (4 (37 47 10 56 (17 39 158 6 164 38 (7 31 62 (23 39 21 (11 10 71 (36 35 — 97 97 — 97 97 — — — — — — 84 102 186 97 76 173 1,167 198 1,365 2,445 313 2,758 $ (161 $ 490 $ 329 $ (576 $ 1,387 $ 811 $ (377 $ 803 $ 426 $ (386 $ 1,590 $ 1,204 ninesix months ended SeptemberJune 30, 20172019 and 2016:2018: $ 568 $ 520 $ 1,617 $ 1,422 $ 571 $ 591 $ 1,067 $ 1,159 245 214 713 637 596 446 1,104 847 — 46 — 451 103 101 309 316 118 138 217 237 — (16 (5 187 (5 (6 (5 (6 266 240 723 635 166 178 347 361 $ 1,182 $ 1,105 $ 3,357 $ 3,648 $ 1,446 $ 1,347 $ 2,730 $ 2,598 thirdsecond quarter of 20172019 increased by $77,000,$99,000, or 7.0%7.3%, compared with the thirdsecond quarter of 2016.2018. The increase in non-interest income for the second quarter of 2019 compared to the second quarter of 2018 was primarily driven by an increase in service charges on deposit accountsbankcard interchange fees of $48,000 as well as$150,000 due to an increase in bank card interchange fees of $31,000.transaction volume. For the ninesix months ended SeptemberJune 30, 2017,2019, non-interest income decreasedincreased by $291,000,$132,000, or 8.0%5.1% to $3.4$2.7 million compared with $3.6$2.6 million for the same period of 2016.2018. The decreaseincrease in non-interest income between the nine-monthsix month comparative periods was primarily due to a $451,000 decrease$257,000 increase in OREO rental income and a $192,000 decrease in gains on sales of securities. This wasbankcard interchange fees partially offset by an increasea decrease in service charges on deposit accounts of $195,000 and bank card interchange fees$92,000.$76,000.
Contentsninesix months ended SeptemberJune 30, 20172019 and 2016:2018: $ 3,683 $ 3,945 $ 11,433 $ 11,624 $ 3,915 $ 3,885 $ 7,830 $ 7,673 836 842 2,501 2,504 854 880 1,752 1,775 232 374 776 1,251 179 222 344 427 364 289 880 706 212 308 439 608 356 442 1,055 1,458 103 139 211 321 321 295 931 887 315 307 628 631 225 255 675 765 315 282 630 564 310 221 591 440 111 322 92 1,284 142 237 308 319 78 222 121 575 34 48 80 101 969 934 2,826 2,893 845 876 1,692 1,715 $ 7,175 $ 7,920 $ 21,290 $ 23,947 $ 7,224 $ 7,405 $ 14,505 $ 14,574 thirdsecond quarter ended SeptemberJune 30, 20172019 decreased $745,000,$181,000, or 9.4%2.4%, compared with the thirdsecond quarter of 2016.2018. This decrease was primarily due to a decreasedecreases in salary and employee benefitsmarketing expense of $262,000, a $211,000 decrease in$96,000 and OREO expense as the OREO portfolio was significantly reduced, a $144,000 decline in loan collection and litigation expenses, and a $142,000 decline in professional fees.of $95,000. For the ninesix months ended SeptemberJune 30, 2017,2019, non-interest expense decreased $2.7 million,$69,000, or 11.1%0.5% to $21.3$14.5 million compared with $23.9$14.6 million for the first ninesix months of 2016.2018. The decreasesdecrease in non-interest expense for the ninesix months ended SeptemberJune 30, 2017 were2019 was primarily attributable to decreased OREO expenses of $1.2 million due to the smaller OREO portfolio. The improvement was also attributable to a reduction in professional fees of $475,000, a decrease in marketing expense of $454,000 in litigation and loan collection expense,$169,000 and a reductiondecrease in FDIC insurance of $403,000.$110,000 reflecting the Bank’s lower risk profile, partially offset by a $157,000 increase in salaries and employee benefits, as well as, an increase of $151,000 in deposit account related expense. –Effective tax rates differ from the federal statutory rate of 35%21% applied to income before income taxes due to the following: $ 628 $ 487 $ 1,814 $ 1,367 $ 634 $ 518 $ 1,256 $ 993 (551 (465 (1,488 (1,197 (50 (52 (147 (161 (18 (20 (37 (40 (1,209 — (1,550 — (36 (35 (108 (110 (25 (29 (46 (50 — — (98 — (2 (5 (128 (116 9 65 27 122 9 19 17 25 $ — $ — $ — $ 21 $ (611 $ 483 $ (488 $ 812 $17.8$57.1 million, or 1.9%5.3%, to $963.0 million$1.13 billion at SeptemberJune 30, 2017,2019, from $945.2 million$1.07 billion at December 31, 2016.2018. This increase was primarily attributable to an increase in net loans of $43.3$37.9 million, offset by a decreaseas well as an increase in interest bearing deposits in bankscash and cash equivalents of $19.1 million and a decrease in available for sale securities of $3.0$12.3 million.Deferred Tax Asset Valuation Allowance – The Company has a net deferred tax asset of $51.9 million subject to a full valuation allowance at September 30, 2017. Our ability to utilize deferred tax assets depends upon generating sufficient future levels of taxable income. The determination to restore a deferred tax asset and eliminate a valuation allowance depends upon the evaluation of both positive and negative evidence regarding the likelihood of achieving sufficient future taxable income levels. 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 determine it is more-likely-than-not the asset will be utilized to reduce future taxes payable related to the future taxable income of the Company.$43.3$37.9 million, or 6.8%4.9%, during the ninesix months ended SeptemberJune 30, 20172019 to $682.5$803.1 million as loan growth outpaced paydowns. Our commercial and commercial real estate portfolios increased by an aggregate of $43.8$4.6 million, or 12.3%1.0% during the first ninesix months of 20172019 and comprised 58.4%58.7% of the loan portfolio at SeptemberJune 30, 2017.2019. Residential real estate and consumer portfolios increased by an aggregate of $25.4 million, or 9.6% during the first six months of 2019 and comprised 36.1% of the loan portfolio at June 30, 2019. Construction loans decreased $22.4 million as several commercial construction projects were completed and sold or migrated to permanent financing. $ 107,616 15.77 $ 97,761 15.29 44,956 6.59 36,330 5.68 88,370 12.95 71,507 11.19 157,956 23.14 149,546 23.39 55,684 8.16 48,197 7.54 173,213 25.38 188,092 29.42 8,474 1.24 9,818 1.54 45,675 6.69 37,508 5.87 567 0.08 477 0.08 $ 682,511 100.00 $ 639,236 100.00 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. $ 140,666 17.52 $ 129,368 16.91 64,472 8.03 86,867 11.35 78,634 9.79 77,937 10.18 187,217 23.31 172,177 22.50 63,107 7.86 49,757 6.50 171,687 21.38 175,761 22.97 55,252 6.88 39,104 5.11 41,586 5.18 33,737 4.41 493 0.05 536 0.07 $ 803,114 100.00 $ 765,244 100.00 June 30, 2019 December 31, 2018 $ 767,662 95.6 $ 745,604 97.4 22,929 2.9 13,164 1.8 — — 113 — 12,523 1.5 6,363 0.8 — — — — $ 803,114 100.0 $ 765,244 100.00 September 30, 2017 December 31, 2016 $ 633,203 92.8 $ 586,430 91.7 35,167 5.1 30,431 4.8 598 0.1 497 0.1 13,543 2.0 21,878 3.4 — — — — $ 682,511 100.0 $ 639,236 100.0 Our loansLoans receivable have increased $43.3$37.9 million, or 6.8%4.9%, during the ninesix months ended SeptemberJune 30, 2017. The2019. Since December 31, 2018, the pass loan category increased approximately $46.8$22.1 million, the watch category increased approximately $4.7$9.8 million, the special mention category increased approximately $101,000, and the substandard category declinedincreased approximately $8.3$6.2 million. The $8.3$6.2 million decreaseincrease 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$8.3 million in loans moved to substandard, offset by $473,000 in loans upgraded from substandard, $1.3 million in payments, and $328,000 in charge-offs during the first ninesix months of 2017.2019. (in thousands) $ 872 $ 2,302 $ 858 $ 1,593 612 315 1,015 331 — — — — 1,484 2,617 1,873 1,924 5,769 9,216 2,028 1,991 $ 7,253 $ 11,833 $ 3,901 $ 3,915 ninesix months ended SeptemberJune 30, 2017,2019, nonaccrual loans decreasedincreased by $3.4 million$37,000 to $5.8$2.0 million. This decrease was due primarily to $4.5 million in paydowns and $528,000 in charge-offs, offset by $2.0 million in loans placed on nonaccrual status. During the ninesix months ended SeptemberJune 30, 2017,2019, loans past due 30-59 days decreased from $2.3$1.6 million at December 31, 20162018 to $872,000$858,000 at SeptemberJune 30, 2017.2019. Loans past due 60-89 days increased from $315,000$331,000 at December 31, 20162018 to $612,000$1.0 million at SeptemberJune 30, 2017.2019. This represents a $1.1 million$51,000 decrease from December 31, 20162018 to SeptemberJune 30, 2017,2019 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.Non-Performing Assets – Non-performing assets consist of 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 September 30, 2017 and December 31, 2016. $ — $ — 5,769 9,216 5,769 9,216 6,330 6,821 — — $ 12,099 $ 16,037 0.85 1.44 1.26 1.70 $ 288 $ 241 4.99 2.62 Nonperforming loans at September 30, 2017, were $5.8 million, or 0.85% of total loans, compared with $9.2 million, or 1.44% of total loans at December 31, 2016, and $10.1 million, or 1.62% of total loans at September 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.typicallymay 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 do not have a formal loan modification program. If a borrower is unable to make contractual payments, we review the particular circumstances of that borrower’s situation and determine whether or not to negotiate a revised payment stream. Our goal when restructuring a credit is to afford the borrower a reasonable period to remedy the issue causing cash flow constraints within their business so that they may return to performing status over time.Our loan modifications have taken the form of a reduction in interest rate and/or curtailment of scheduled principal payments for a short-term period, usually three to six months, but in some cases until maturity of the loan. In some circumstances we may restructure real estate secured loans in a bifurcated fashion whereby we have 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) on nonaccrual status and initiate collection actions.We consider any loan that is restructured for a borrower experiencing financial difficulties due to a borrower’s potential inability to pay in accordance with contractual terms of the loan to be a troubled debt restructuring. Specifically, we consider a concession involving a modification of the loan terms, such as (i) a reduction of the stated interest rate, (ii) a reduction or deferral of principal, or (iii) a reduction or deferral of accrued interest at a stated interest rate lower than the current market rate for new debt with similar risk all to be troubled debt restructurings. When a modification of terms is made for a competitive reason, we do not consider it to be a troubled debt restructuring. A primary example of a competitive modification would be an interest rate reduction for a performing customer’s loan to a market rate as the result of a market decline in rates.Management periodically reviews renewals and modifications of previously identified TDRs for which there was no principal forgiveness, to consider if it is appropriate to remove the TDR classification. If the borrower is no longer experiencing financial difficulty and the renewal/modification did not contain a concessionary interest rate or other concessionary terms, management considers the potential removal of the TDR classification. If deemed appropriate based upon current underwriting, the TDR classification is removed as the borrower has complied with the terms of the loan at the date of renewal/modification and there was a reasonable expectation that the borrower will continue to comply with the terms of the loan after the date of the renewal/modification. 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 management expects the borrower will continue to perform under the re-modified terms based on the borrower’s past history of performance.If the borrower fails to perform, we place the loan on nonaccrual status and seek to liquidate the underlying collateral. Our nonaccrual policy for restructured loans is identical to our nonaccrual policy for all loans. Our 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.SeptemberJune 30, 2017, we2019 and December 31, 2018, the Bank had sixtwo restructured loans totaling $3.2 million$905,000 and $910,000, respectively, with borrowers who experienced deterioration in financial condition compared with nine loans totaling $8.7 million at December 31, 2016.condition. In general, these loans were granted interest rate reductions to provide cash flow relief to borrowers experiencing cash flow difficulties. Two of theseThe Bank had no restructured loans totaling approximately $1.9 millionthat had been granted principal payment deferrals until maturity.maturity at June 30, 2019 or December 31, 2018. There were no concessions made to forgive principal relative to these loans, although wepartial charge-offs have been recorded partial charge-offs for certain restructured loans. In general, these loans are secured by first liens on 1-4 residential orproperties, commercial real estate properties, or farmland. Restructured loans also include $467,000 of commercial loans. At SeptemberBoth TDRs were performing according to their modified terms at June 30, 2017, $1.2 million of our restructured loans were accruing2019 and $1.9 million were on nonaccrual compared with $5.4 million and $3.3 million, respectively, at December 31, 2016.2018.new TDRsmodifications granted during the first nine months of 20172019 or 2016. During the nine months ended September 30, 2017, TDRs were reduced2018 that resulted in loans being identified as a result of $1.5 million in payments. In addition, the TDR classification was removed in the first quarter 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.TDRs. See “Note 3 -– Loans,” of the notes to the financial statements for additional disclosure related to troubled debt restructuring.TDRs, non-performing loans, real estate acquired through foreclosure, assets as of June 30, 2019 and other repossessed assets.December 31, 2018. $ 5,769 $ 9,216 1,226 5,350 $ 6,995 $ 14,566 6,330 6,821 — — $ 13,325 $ 21,387 1.02 2.28 1.38 2.26 $ 2,028 $ 1,991 905 910 — — 2,933 2,901 3,225 3,485 — — $ 6,158 $ 6,386 0.37 0.38 0.55 0.60 $ 76 $ 83 2.59 2.86 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.nine-monthsix month periods ended SeptemberJune 30, 20172019 and 2016,2018, and for the year ended December 31, 20162018 follows: 2016 2018 $ 8,885 $ 10,104 $ 8,967 $ 12,041 $ 12,041 $ 8,686 $ 8,526 $ 8,880 $ 8,202 $ 8,202 57 363 570 1,658 2,157 35 266 132 286 450 5 15 5 276 276 — — — — 50 5 21 30 56 178 34 7 214 34 95 — 5 95 13 18 3 12 4 12 13 — 1 — 79 — — 8 — 8 8 67 405 700 2,082 2,629 72 293 350 340 616 112 381 561 894 1,189 84 464 147 550 1,437 3 102 44 169 334 90 5 95 245 261 25 23 69 216 368 44 16 60 50 69 16 1 25 86 114 — — — 11 15 3 33 11 65 — — 12 — 12 12 159 540 710 1,430 2,005 218 497 302 868 1,794 (92 (135 (10 652 624 (146 (204 48 (528 (1,178 — (750 — (1,900 (2,450 — (150 — (150 (500 $ 8,977 $ 9,489 $ 8,977 $ 9,489 $ 8,967 $ 8,832 $ 8,580 $ 8,832 $ 8,580 $ 8,880 1.32 1.53 1.32 1.53 1.40 1.10 1.15 1.10 1.15 1.16 (0.05 (0.09 )% 0.00 0.14 0.10 (0.07 (0.11 0.01 (0.16 (0.16 155.61 93.96 155.61 93.96 97.30 301.13 209.99 301.13 209.99 306.10 $ 425 $ 339 $ 425 $ 339 $ 399 7,509 16,214 7,509 16,214 15,131 5.66 2.09 5.66 2.09 2.64 $ 8,552 $ 9,150 $ 8,552 $ 9,150 $ 8,568 675,002 605,483 675,002 605,483 624,105 1.27 1.51 1.27 1.51 1.37 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, 2017,2019, decreased to 1.32%1.10% from 1.40%1.16% at December 31, 20162018 and from 1.53%1.15% at SeptemberJune 30, 2016. The change in our loan2018. New loans continue to be underwritten with lower loss reserve as a percentage of total loans between periods is attributable to growth in the portfolio, historicalexpectations. Historical loss experience, qualitative factors, fewer loans migrating downward in risk grade classificationsclassification metrics, charge-off levels, and improved charge-off levels. Ourpast due trends remain at historically strong levels and were stable between periods. The allowance for loan losses to non-performing loans was 155.61%301.13% at SeptemberJune 30, 2017,2019, compared with 97.30%306.10% at December 31, 2016,2018, and 93.96%209.99% at SeptemberJune 30, 2016.2018. Net recoveries forloan charge-offs in the first ninesix months of 20172019 totaled $10,000$48,000 compared to net charge-offsrecoveries of $652,000 for$528,000 in the first ninesix months of 2016. 2018. The following table sets forth the net charge-offs (recoveries) for the periods indicated: $ (39 $ (58 $ (27 (335 (339 1,225 344 1,307 1,487 (39 (200 37 70 (96 110 (11 10 (9 $ (10 $ 624 $ 2,823 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 loansloan losses to non-performing loans and TDRs on accrual was 4.99%301.13% at SeptemberJune 30, 20172019 compared with 2.62%306.10% at December 31, 2016,2018, and 2.88%270.66% at SeptemberJune 30, 2016.2018. The increasedecrease in this ratio from December 31, 20162018 to SeptemberJune 30, 20172019 was primarily attributable to an allocated allowance for an individually evaluated loan.the improving non-performing loan trends during the period.The following table presentsunpaid principal balance,current recorded investment and allocated allowance related toin loans individually evaluated for impairment in the commercial real estate and residential real estate portfolios assegments of September 30, 2017 and December 31, 2016. $ 4,849 $ 5,041 $ 10,985 $ 10,439 (2,100 (949 (5,131 (1,818 2,749 4,092 5,854 8,621 (26 (386 (35 (350 $ 2,723 $ 3,706 $ 5,819 $ 8,271 56.16 73.52 52.97 79.23 Based on prior charge-offs, our current recorded investment in the commercial real estate and residential real estate segments isportfolio are significantly below the unpaid principal balance for thesethose loans. The recorded investment net of the allocated allowance was 56.16%52.31% and 73.52%60.07% of the unpaid principal balance in the commercial real estate and residential real estate segments of the portfolio, respectively, at SeptemberJune 30, 2017.2019.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): $ 107,008 $ 900 0.84 $ 97,166 $ 462 0.48 288,533 4,412 1.53 251,529 4,859 1.93 224,805 2,830 1.26 227,668 3,076 1.35 8,474 42 0.50 9,817 8 0.08 45,615 366 0.80 37,448 161 0.43 567 2 0.35 477 2 0.42 $ 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.NoBased upon historically strong trends in asset quality and management’s assessment of risk in the loan portfolio, no provision for loan losses was recorded for the second quarter or the first ninesix months of 2017, compared to a2019. A 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 to declining historical loss rates, improvements in asset quality, growth in the portfolio, and management’s assessment of risk within the portfolio. Since December 31, 2016, the2018. The pass category increased approximately $46.8$22.1 million, the watch category increased approximately $4.7$9.8 million, the special mention category increased approximately $101,000, and the substandard category declinedincreased approximately $8.3$6.2 million. Net recoveriesloan charge-offs were $10,000$48,000 for the ninesix months ended SeptemberJune 30, 2017,2019, compared with net charge-offsrecoveries of $652,000$528,000 for the ninesix months ended SeptemberJune 30, 2016. We consider2018. 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, 20172019 were $6.3$3.2 million compared with $6.8$4.5 million at June 30, 2018 and $3.5 million at December 31, 2016.2018. See “NoteNote 4 - Other– “Other Real Estate Owned,” of the notes to the financial statements. During the first nine months of 2017, we acquired $270,000 of OREO properties, and sold properties totaling approximately $738,000. We valueManagement values foreclosed properties at fair value less estimated costs to sell when acquired and expectexpects to liquidate these properties to recover ourthe investment in the due course of business.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.NetWrite-downs and operating expenses for OREO totaled $308,000 for the six months ended June 30, 2019, compared to net gain (loss) on sales, write-downs, and operating expenses for OREO totaled $92,000of $319,000 for the ninesix months ending June 30, 2018. During the six months ended SeptemberJune 30, 2017, compared to net expenses of $1.3 million in the same period of 2016. During the nine months ended September 30, 2017,2019, fair value write-downs of $98,000$260,000 were recorded due to reflect declines in fair value driven by reductions in listing prices and new appraisalschanging marketing strategies compared with $970,000write-downs of $325,000 for the ninesix months ended SeptemberJune 30, 2016.2018.SeptemberJune 30, 20172019 were $922.9 million$1.0 billion compared with $912.4$977.6 million at December 31, 2016,2018, an increase of $10.5$47.8 million, or 1.1%4.9%. This increase was primarily attributable to an increase in totalcertificate of deposits of $16.9$54.4 million, and the issuance of $10.0 million in senior debt, offset by a decrease in FHLB advancesmoney market accounts 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.$9.0 million.ourthe Bank’s 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: $ 125,932 $ 119,736 $ 143,170 $ 136,947 102,744 0.13 96,294 0.13 96,368 0.23 90,583 0.13 141,777 0.55 136,423 0.58 166,836 1.15 158,832 0.90 35,650 0.17 34,257 0.18 33,720 0.16 34,866 0.16 458,732 0.92 466,007 0.88 473,757 1.90 439,597 1.35 $ 864,835 0.60 $ 852,717 0.60 $ 913,851 1.23 $ 860,825 0.88 $ 425,828 0.91 $ 437,955 0.88 32,904 0.99 28,052 0.97 $ 445,109 1.89 $ 410,942 1.34 28,648 2.09 28,655 1.51 $ 458,732 0.92 $ 466,007 0.88 $ 473,757 1.90 $ 439,597 1.35 SeptemberJune 30, 20172019 the amount of our time deposits of $250,000 or more by time remaining until maturity (in thousands): $ 5,227 $ 2,732 5,264 6,315 3,026 15,808 19,567 4,023 $ 33,084 $ 28,878 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 our liquidity position.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, we2019, the Bank had an unused borrowing capacity with the FHLB of $74.8$38.3 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 unsecuredunsecured 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,The Bank has also in the availability of these lines could be affected by our financial position.Historically, we have alsopast utilized brokered and wholesale deposits to supplement ourits funding strategy. At SeptemberJune 30, 2017, we2019, the Bank had no brokered deposits.Stockholders’Stockholders’ equity increased $7.3$9.3 million to $40.1$101.4 million at SeptemberJune 30, 2017,2019, compared with $32.7$92.1 million at December 31, 20162018 primarily due to current year net income of $5.1$6.5 million and an increase inother comprehensive income for the fair valuefirst six months of our available for sale securities portfolio2019 of $1.9$3.0 million.indicated. Regulatory minimums and well-capitalized minimums are prompt corrective action standards.indicated: 6.0 % 8.0 % 9.66 % 8.28 % 6.0 % 8.0 % 12.26 % 11.83 % 4.5 6.5 9.66 8.28 4.5 6.5 12.26 11.83 8.0 10.0 11.10 9.88 8.0 10.0 13.26 12.88 4.0 5.0 7.73 6.24 4.0 5.0 10.01 9.60 additional discretionary actions by regulators that, if taken, could have a materially adverse effect on our financial condition.OnceWith the capital conservation buffer isas fully phased in effective January 1, 2019, 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 2019 is 2.50% and increases to 1.25% in 2017,was 1.875% in 2018, and 2.5% in 2019.for 2018. 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.sustained for one year, ourthe base net interest income would increase by an estimated 0.11%1.5% at SeptemberJune 30, 2017,2019, compared with a decreasean increase of 2.5%2.0% at December 31, 2016, and is within the risk tolerance parameters of our risk management policy.2018. Given a 200 basis point increase in interest rates, sustained for one year, base net interest income would increase by an estimated 0.10%2.6% at SeptemberJune 30, 2017,2019, compared with a decreasean increase of 5.1%3.9% at December 31, 2016, and is within the risk tolerance parameters of our risk management policy.2018. September June 30, 2017,2019, as calculated using the static shock model approach: $ 30 0.10 $ 918 2.64 35 0.11 510 1.47 (1,290 (4.16 (2,184 (7.03 (1,100 (3.17 (1,632 (4.70 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.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.We are subject to claims and lawsuits that arise primarily inIn the ordinarynormal course of business.business, the Company and its subsidiaries have been named, from time to time, as defendants in various legal actions. Certain of the actual or threatened legal actions may include claims for substantial compensatory and/or punitive damages or claims for indeterminate amount of damages. Litigation is subject to inherent uncertainties and unfavorable outcomes could occur. See Footnote 13, “Off Balance Sheet Risks, Commitments,Contingent Liabilities”proceedings are in the Notesearly stages, the Company cannot predict with certainty the loss or range of loss, if any, related to oursuch matters, how or if such matters will be resolved, when they will ultimately be resolved, or what the eventual settlement, or other relief, if any, might be. Subject to the foregoing, the Company believes, based on current knowledge and after consultation with counsel, that the outcome of such pending matters will not have a material adverse effect on the consolidated financial statementscondition of the Company, although the outcome of such matters could be material to the Company’s operating results and cash flows for additional detail regarding our involvementa particular future period, depending on, among other things, the level of the Company’s revenues or income for such period. The Company will accrue for a loss contingency if (1) it is probable that a future event will occur and confirm the loss and (2) the amount of the loss can be reasonably estimated.legal proceedings.any material litigation.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, 2016.2018. There have been no material changes from the risk factors previously discussed in those reports.Not applicable.The following chart depicts information regarding the shares of restricted stock that were withheld to satisfy required tax withholdings upon vesting of restricted stock awarded under the Company’s equity compensation plan.(a) Exhibits Company’sCompany’s Quarterly Report on Form 10Q for the quarter ended SeptemberJune 30, 2017,2019, 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.ofif 1934, the Registrant had duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.PORTERLIMESTONE BANCORP, INC.NovemberAugust 2,, 2017 2019NovemberAugust 2,, 2017 2019 5248