Table of Contents


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

         


FORM 10-Q  

 

(Mark One)

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

 

For the Quarterly Period Ended September 30, 2017 30, 2022

 

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.)

 

 

2500 Eastpoint Parkway, Louisville, Kentucky

40223

(Address of principal executive offices)

(Zip Code)

 

(502) 499-4800

(Registrant’ss telephone number, including area code)

 


Securities registered pursuant to Section 12(b) of the Exchange Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common shares

LMST

The Nasdaq Stock Market

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 ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company,, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  ☐    

Accelerated filer  ☐    

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

Smaller reporting company  ☒

 

Emerging growth company  ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

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

 

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

 

4,668,2646,638,883 Common Shares and 1,591,6001,000,000 Non-Voting Common Shares no par value, were outstanding at October 31, 2017.28, 2022.          

 

1


 

INDEX

 

 

 

 

Page

PART I

FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS

3

ITEM 2.

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

3431

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURESDISCLOSURES ABOUT MARKET RISK

5045

ITEM 4.

CONTROLS AND PROCEDURES

5045

 

 

 

PART II

OTHER INFORMATION

 

ITEM 1.

LEGAL PROCEEDINGS

LEGAL PROCEEDINGS

5146

ITEM 1A.

RISK FACTORS

5146

ITEM 2.

UNREGISTEREDUNREGISTERED SALES ON EQUITY SECURITIES AND USE OF PROCEEDS

5147

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

5148

ITEM 4.

MINE SAFETY DISCLOSURES

5148

ITEM 5.

OTHER INFORMATION

5148

ITEM 6.

EXHIBITS

5148

         


2

 


PART I FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

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

 

Unaudited Consolidated Balance Sheets for September 30, 2017 and December 31, 2016

Unaudited Consolidated Statements of Income for the three and nine months ended September 30, 2017 and 2016

Unaudited Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2017 and 2016(Loss)

Unaudited Consolidated Statement of Changes in StockholdersStockholders’ Equity for the nine months ended September 30, 2017

Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016

Notes to Unaudited Consolidated Financial Statements

 


3

 

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.


  

September 30,

2022

  

December 31,

2021

 

Assets

        

Cash and due from banks

 $6,430  $10,493 

Interest bearing deposits in banks

  50,940   67,110 

Cash and cash equivalents

  57,370   77,603 

Securities available for sale

  181,292   214,213 

Securities held to maturity (fair value of $33,768 and $46,280, respectively)

  43,350   46,460 

Loans, net of allowance of $13,031 and $11,531, respectively

  1,114,914   990,309 

Premises and equipment, net

  22,503   21,575 

Premises held for sale

     310 

Federal Home Loan Bank stock

  5,176   5,116 

Bank owned life insurance

  31,032   23,946 

Deferred taxes, net

  23,002   21,583 

Goodwill

  6,252   6,252 

Other intangible assets, net

  1,797   1,989 

Accrued interest receivable and other assets

  7,007   6,336 

Total assets

 $1,493,695  $1,415,692 
         

Liabilities and Stockholders Equity

        

Deposits

        

Non-interest bearing

 $287,938  $274,083 

Interest bearing

  930,642   934,585 

Total deposits

  1,218,580   1,208,668 

Federal Home Loan Bank advances

  90,000   20,000 

Accrued interest payable and other liabilities

  10,744   10,065 

Junior subordinated debentures

  21,000   21,000 

Subordinated capital notes

  25,000   25,000 

Total liabilities

  1,365,324   1,284,733 

Commitments and contingent liabilities (Note 13)

      

Stockholders’ equity

        

Common stock, no par, 39,000,000 shares authorized, 6,639,033 and 6,594,749 voting, and 1,000,000 and 1,000,000 non-voting issued and outstanding, respectively

  140,639   140,639 

Additional paid-in capital

  26,101   25,625 

Retained deficit

  (19,486

)

  (31,769

)

Accumulated other comprehensive loss

  (18,883

)

  (3,536

)

Total stockholders' equity

  128,371   130,959 

Total liabilities and stockholders’ equity

 $1,493,695  $1,415,692 

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.

 


4

 

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

September 30,

  

Nine Months Ended

September 30,

 
  

2022

  

2021

  

2022

  

2021

 
Interest income                

Loans, including fees

 $13,179  $11,565  $35,537  $33,573 

Taxable securities

  1,592   1,183   4,338   3,402 

Tax exempt securities

  166   168   495   476 

Interest-bearing deposits and other

  184   59   300   150 
   15,121   12,975   40,670   37,601 

Interest expense

                

Deposits

  1,242   812   2,790   2,755 

Federal Home Loan Bank advances

  354   39   502   115 

Junior subordinated debentures

  239   128   546   390 

Subordinated capital notes

  374   375   1,126   1,126 
   2,209   1,354   4,964   4,386 

Net interest income

  12,912   11,621   35,706   33,215 

Provision (negative provision) for loan losses

  (1,250

)

  300   (50

)

  650 

Net interest income after provision for loan losses

  14,162   11,321   35,756   32,565 
                 

Non-interest income

                

Service charges on deposit accounts

  748   583   2,072   1,651 

Bank card interchange fees

  1,061   1,044   3,151   3,077 

Income from bank owned life insurance

  148   112   599   420 

Gain on sale of other real estate owned

           191 

Gain (loss) on sales and calls of securities, net

     465   (3

)

  460 

Gain on sale of premises held for sale

        163    

Other

  271   232   740   656 
   2,228   2,436   6,722   6,455 

Non-interest expense

                

Salaries and employee benefits

  4,959   4,582   14,174   13,531 

Occupancy and equipment

  1,134   1,024   3,218   3,063 

Deposit account related expense

  571   545   1,692   1,592 

Data processing expense

  402   378   1,191   1,133 

Professional fees

  206   219   663   701 

Marketing expense

  159   200   464   561 

FDIC Insurance

  90   90   270   315 

Deposit tax

  99   90   297   270 

Communications expense

  108   153   293   520 

Insurance expense

  104   105   318   324 

Postage and delivery

  156   169   469   460 

Other

  709   495   1,846   1,518 
   8,697   8,050   24,895   23,988 

Income before income taxes

  7,693   5,707   17,583   15,032 

Income tax expense

  1,880   1,366   4,155   3,568 

Net income

  5,813   4,341   13,428   11,464 

Basic and diluted income per common share

 $0.76  $0.57  $1.76  $1.51 

 

See accompanying notes to unaudited consolidated financial statements.

 


5

 

PORTERLIMESTONE BANCORP, INC.

Unaudited Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

  

Three Months Ended

September 30,

  

Nine Months Ended

September 30,

 
  

2022

  

2021

  

2022

  

2021

 

Net income

 $5,813  $4,341  $13,428  $11,464 

Other comprehensive income (loss):

                

Unrealized gain (loss) on securities:

                

Unrealized gain (loss) arising during the period

  (5,126

)

  756   (20,245

)

  1,718 

Amortization during period of net unrealized gain transferred to held to maturity

  (57

)

  (91

)

  (207

)

  (261

)

Less reclassification adjustment for gains (losses) included in net income

     465   (3

)

  460 

Net unrealized gain (loss) recognized in comprehensive income (loss)

  (5,183

)

  200   (20,449

)

  997 

Tax effect

  1,293   (50

)

  5,102   (249

)

Other comprehensive income (loss)

  (3,890

)

  150   (15,347

)

  748 
                 

Comprehensive income (loss)

 $1,923  $4,491  $(1,919

)

 $12,212 

See accompanying notes to unaudited consolidated financial statements.

6

LIMESTONE BANCORP, INC.

Unaudited Consolidated Statements of Changes in StockholdersConsolidated Statements Equityof Changesin Stockholders’ Equity

For Three and Nine Months Ended September 30,, 2017 2022

(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 
  Common  

Non-Voting

Common

  

Total

Common

  

Common and

Non-Voting

Common

  

Additional

Paid-In Capital

  Retained Deficit  Accumulated Other Comprehensive Loss  Total 

Balances, January 1, 2022

  6,594,749   1,000,000   7,594,749  $140,639  $25,625  $(31,769

)

 $(3,536

)

 $130,959 

Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations upon vesting

  27,722      27,722      (197

)

        (197

)

Forfeited unvested stock

  (314

)

     (314

)

               

Stock-based compensation expense

              305         305 

Net income

          ��      3,579      3,579 

Dividends declared on common stock ($0.05 per share)

                 (381

)

     (381

)

Net change in accumulated other comprehensive loss, net of taxes

                    (6,045

)

  (6,045

)

Balances, March 31, 2022

  6,622,157   1,000,000   7,622,157  $140,639  $25,733  $(28,571

)

 $(9,581

)

 $128,220 

Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations upon vesting

  26,671      26,671                

Forfeited unvested stock

  (8,148

)

     (8,148

)

               

Stock-based compensation expense

              156         156 

Net income

                 4,036      4,036 

Dividends declared on common stock ($0.05 per share)

                 (382

)

     (382

)

Net change in accumulated other comprehensive loss, net of taxes

                    (5,412

)

  (5,412

)

Balances, June 30, 2022

  6,640,680   1,000,000   7,640,680  $140,639  $25,889  $(24,917

)

 $(14,993

)

 $126,618 

Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations upon vesting

                        

Forfeited unvested stock

  (1,647

)

     (1,647

)

               

Stock-based compensation expense

              212         212 

Net income

                 5,813      5,813 

Dividends declared on common stock ($0.05 per share)

                 (382

)

     (382

)

Net change in accumulated other comprehensive loss, net of taxes

                    (3,890

)

  (3,890

)

Balances, September 30, 2022

  6,639,033   1,000,000   7,639,033  $140,639  $26,101  $(19,486

)

 $(18,883

)

 $128,371 

PORTER BANCORP, INC.

Unaudited Consolidated Statements of Cash Flows

For Nine Months Ended September 30, 2017 and 2016

(dollars in thousands)

  

2017

  

2016

 

Cash flows from operating activities

        

Net income

 $5,183  $3,885 

Adjustments to reconcile net loss to net cash from operating activities

        

Depreciation and amortization

  896   1,141 

Negative provision for loan losses

     (1,900

)

Net amortization on securities

  931   965 

Stock-based compensation expense

  271   315 

Net gain on sales of loans held for sale

  (39

)

  (61

)

Origination of loans for sale

  (2,179

)

  (3,830

)

Proceeds from sales of loans held for sale

  2,218   3,943 

Net gain on sales of other real estate owned

  (75

)

  (221

)

Write-down of other real estate owned

  98   970 

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

  5   (187

)

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

  (293

)

  (300

)

Net change in accrued interest receivable and other assets

  1,929   (701

)

Net change in accrued interest payable and other liabilities

  (10,183

)

  (57

)

Net cash from operating activities

  (1,238

)

  3,962 
         

Cash flows from investing activities

        

Purchases of available for sale securities

  (15,340

)

  (18,868

)

Proceeds from sales and calls of available for sale securities

  2,000   6,276 

Proceeds from maturities and prepayments of available for sale securities

  17,480   16,925 

Proceeds from calls of held to maturity securities

  47    

Proceeds from maturities of held to maturity securities

  145    

Proceeds from sale of other real estate owned

  738   12,340 

Loan originations and payments, net

  (43,590

)

  (4,781

)

Sales (purchases) of premises and equipment, net

  175   (386

)

Purchase of bank owned life insurance

     (5,000

)

Net cash from investing activities

  (38,345

)

  6,506 
         

Cash flows from financing activities

        

Net change in deposits

  16,922   (41,053

)

Payments of Federal Home Loan Bank advances

  (30,611

)

  (462

)

Advances from Federal Home Loan Bank

  25,000    

Payments of subordinated capital note

  (675

)

  (675

)

Proceeds from senior debt

  10,000    

Proceeds from issuance of common stock

     2,231 

Net cash from financing activities

  20,636   (39,959

)

Net change in cash and cash equivalents

  (18,947

)

  (29,491

)

Beginning cash and cash equivalents

  66,316   93,335 

Ending cash and cash equivalents

 $47,369  $63,844 
         

Supplemental cash flow information:

        

Interest paid

 $4,140  $3,933 

Income taxes paid (refunded)

     21 

Supplemental non-cash disclosure:

        

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

 $  $2,799 

Transfer from loans to other real estate

  270   1,243 

Financed sales of other real estate owned

     270 

 

See accompanying notes to unaudited consolidated financial statements.

 


7

LIMESTONE BANCORP, INC.

Unaudited Consolidated Statements of Changes in Stockholders Equity

For Three and Nine Months Ended September 30, 2021

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

  Shares  Amount 
  Common  

Non-Voting

Common

  

Total

Common

  

Common and

Non-Voting

Common

  

Additional

Paid-In Capital

  Retained Deficit  Accumulated Other Comprehensive Loss  Total 

Balances, January 1, 2021

  6,498,865   1,000,000   7,498,865  $140,639  $25,013  $(46,678

)

 $(2,950

)

 $116,024 

Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations upon vesting

  95,634      95,634      (48

)

        (48

)

Forfeited unvested stock

                        

Stock-based compensation expense

              149         149 

Net income

                 3,222      3,222 

Net change in accumulated other comprehensive loss, net of taxes

                    173   173 

Balances, March 31, 2021

  6,594,499   1,000,000   7,594,499  $140,639  $25,114  $(43,456

)

 $(2,777

)

 $119,520 

Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations upon vesting

  8,586      8,586      (39

)

        (39

)

Forfeited unvested stock

  (399

)

     (399

)

               

Stock-based compensation expense

              152         152 

Net income

                 3,901      3,901 

Net change in accumulated other comprehensive income, net of taxes

                    425   425 

Balances, June 30, 2021

  6,602,686   1,000,000   7,602,686  $140,639  $25,227  $(39,555

)

 $(2,352

)

 $123,959 

Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations upon vesting

                        

Forfeited unvested stock

                        

Stock-based compensation expense

              214         214 

Net income

                 4,341      4,341 

Net change in accumulated other comprehensive income, net of taxes

                    150   150 

Balances, September 30, 2021

  6,602,686   1,000,000   7,602,686  $140,639  $25,441  $(35,214

)

 $(2,202

)

 $128,664 

See accompanying notes to unaudited consolidated financial statements.

8

LIMESTONE BANCORP, INC.

Unaudited Consolidated Statements of Cash Flows

For Nine Months Ended September 30, 2022 and 2021

(dollars in thousands)

  

2022

  

2021

 

Cash flows from operating activities

        

Net income

 $13,428  $11,464 

Adjustments to reconcile net income to net cash from operating activities

        

Depreciation, amortization and accretion, net

  1,435   3,878 

Provision (negative provision) for loan losses

  (50

)

  650 

Net amortization on securities

  291   422 

Stock-based compensation expense

  673   515 

Deferred taxes, net

  3,682   3,304 

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

  3   (460

)

Net realized gain on sales of other real estate owned

     (191

)

Net realized loss on sales of premises and equipment

     1 

Net write-down on premises held for sale

     80 

Net gain on sale of premises held for sale

  (163

)

   

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

  (586

)

  (404

)

Amortization of operating lease right-of-use assets

  301   269 

Net change in accrued interest receivable and other assets

  (2,068

)

  (3,138

)

Net change in accrued interest payable and other liabilities

  679   145 

Net cash from operating activities

  17,625   16,535 
         

Cash flows from investing activities

        

Purchases of available for sale securities

  (9,924

)

  (68,827

)

Proceeds from sales and calls of available for sale securities

     6,500 

Proceeds from maturities and prepayments of available for sale securities

  22,362   28,182 

Purchases of held to maturity securities

  (658

)

  (15,414

)

Proceeds from calls of held to maturity securities

  1,314   704 

Proceeds from maturities and prepayments of held to maturity securities

  2,195   2,665 

Purchases of Federal Home Loan Bank stock

  (727

)

   

Proceeds from mandatory redemptions of Federal Home Loan Bank stock

  667   771 

Proceeds from sale of other real estate owned

     1,956 

Net change in loans

  (124,958

)

  (8,998

)

Purchases of premises and equipment

  (672

)

  (953

)

Proceeds from sale of premises held for sale

  473    

Purchase of bank owned life insurance

  (6,500

)

   

Net cash from investing activities

  (116,428

)

  (53,414

)

         

Cash flows from financing activities

        

Net change in deposits

  9,912   28,384 

Repayment of Federal Home Loan Bank advances

  (70,000

)

  (623

)

Advances from Federal Home Loan Bank

  140,000    

Common shares withheld for taxes

  (197

)

  (87

)

Cash dividends paid on common stock

  (1,145

)

   

Net cash from financing activities

  78,570   27,674 

Net change in cash and cash equivalents

  (20,233

)

  (9,205

)

Beginning cash and cash equivalents

  77,603   67,693 

Ending cash and cash equivalents

 $57,370  $58,488 
         

Supplemental cash flow information:

        

Interest paid

 $5,142  $4,837 

Income taxes paid

  310   220 

Supplemental non-cash disclosure:

        

Transfer from available for sale to held to maturity securities

     34,741 

AOCI component of transfer from available for sale to held to maturity

     1,081 

See accompanying notes to unaudited consolidated financial statements.

9

 

PORTERLIMESTONE BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

 

 

Note 1 Basis of Presentation and Summary of Significant Accounting Policies

 

Basis of Presentation – The consolidated financial statements include PorterLimestone Bancorp, Inc. (Company) and its subsidiary, PBILimestone Bank, Inc. (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 and10-Q and Rule 10-0110-01 of Regulation S-X.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 nine months ended September 30, 2017 2022 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, 2016 2021 included in the Company’s Annual Report on Form 10-K.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.

 

In March 2020, the World Health Organization declared novel coronavirus disease 2019 (“COVID-19”) as a global pandemic. The COVID-19 pandemic has created economic and financial disruptions that have adversely affected, and are likely to continue to adversely affect, the business, financial condition, and results of operations of the Company and its customers. The COVID-19 pandemic caused changes in the behavior of customers, businesses, and their employees, as well as supply chain interruptions, and overall economic and financial market instability.

Future effects, including further actions taken by federal, state, and local governments in response to the disruptions and economic and geopolitical instabilities that have followed COVID-19 or their impact, are unknown. In addition, federal governmental actions are meaningfully influencing the interest-rate environment. If these actions are sustained, it may adversely impact several industries within the Company’s geographic footprint and impair the ability of the Company’s customers to fulfill their contractual obligations. This could cause the Company to experience a material adverse effect on business operations, liquidity, asset valuations, results of operations, and financial condition, as well as its regulatory capital and liquidity ratios. Material adverse impacts may include all or a combination of valuation impairments on the Company’s intangible assets, investments, loans, or deferred tax assets.

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 JanuaryJune 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. 2016-02, Leases (Topic 842). Under the new guidance, lessees will be required to recognize the following for all leases, with the exception of short-term leases, at the commencement date: a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting in largely unchanged. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2018. The impact of adopting the new guidance on the consolidated financial statements will not have a material impact.


In June 2016, the FASB issued ASU No. 2016-13,2016-13, Financial Instruments – Credit Losses (Topic 326)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, and off-balance sheet credit exposures 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 standardManagement is effective for public companies for fiscal years beginning after December 15, 2019. We are currently gathering loan level data,focused on refining assumptions, reviewing challenges to the model, analyzing forecast scenarios, and assessing our datastress testing the volatility of the model. Additionally, management is implementing various accounting policies, developing processes and system needs. The impact of CECL model implementation is being evaluated, but it is expected that a one-timerelated controls, and considering various reporting disclosures. 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 (Federal Reserve), 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 results of operation cannot yetaccounting standard. In October 2019, the FASB voted to delay implementation for smaller reporting companies, private companies, and not-for-profit entities. The Company currently qualifies as a smaller reporting company and, as such, will be determined.required to implement CECL for fiscal year and interim periods beginning after December 15, 2022.

 

10

In March 2017, 2022, the FASB issued ASU No. 2017-08, Receivables2022-02, Financial InstrumentsNonrefundable FeesCredit Losses (Topic 326): Troubled Debt Restructurings and Other Costs (Subtopic 310-20): Premium Amortization of Purchased Callable Debt Securities.Vintage Disclosures. The final standard affects all entities after adoption of ASU 2016-13 (Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments) and eliminates the accounting guidance for TDRs by creditors in Subtopic 310-40, Receivables – Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. The Company currently qualifies as a smaller reporting company and, as such, will shorten the amortization period for premiums on callable debt securities by requiring that premiums be amortizedrequired to the first (or earliest) call date instead of as an adjustment to the yield over the contractual life. The standard is effective for public companiesimplement CECL and ASU 2022-02 for fiscal yearsyear and interim periods beginning after December 15, 2018. We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements.2022.

 

Note 22 Securities

 

Securities are classified intoas available for sale (AFS) and(“AFS”) or held to maturity (HTM) categories.(“HTM”). 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 havesecurities the Bank has the intent and ability to hold tountil maturity and are reported at amortized cost.

 

The following table summarizes the amortized cost and fair value of AFS and HTM securities at September 30, 2022 and December 31, 2021 and the relatedcorresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows:and gross unrecognized gains and losses (in thousands):

 

 

Amortized

Cost

  

Gross

Unrealized

Gains

  

Gross

Unrealized

Losses

  

Fair Value

  

Amortized

Cost

  

Gross

Unrealized

Gains

  

Gross

Unrealized

Losses

  

Fair Value

 
 

(in thousands)

  

September 30, 2017

                

September 30, 2022

        

Available for sale

                 

U.S. Government and federal agency

 $29,954  $106  $(352

)

 $29,708  $24,810  $  $(2,864

)

 $21,946 

Agency mortgage-backed: residential

  91,546   808   (619

)

  91,735  82,193  16  (11,777

)

 70,432 

Collateralized loan obligations

  23,444   82      23,526  48,209    (2,221

)

 45,988 

State and municipal

  1,648   13      1,661 

Corporate bonds

  3,079   88      3,167   45,493   9   (2,576

)

  42,926 

Total available for sale

 $149,671  $1,097  $(971

)

 $149,797  $200,705  $25  $(19,438

)

 $181,292 

 

  

Amortized

Cost

  

Gross

Unrecognized

Gains

  

Gross

Unrecognized

Losses

  

Fair Value

 

Held to maturity

                

State and municipal

 $43,350  $  $(9,582

)

 $33,768 

Total held to maturity

 $43,350  $  $(9,582

)

 $33,768 

 

  

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, 2021

 

Amortized

Cost

  

Gross

Unrealized

Gains

  

Gross

Unrealized

Losses

  

Fair Value

 

Available for sale

                

U.S. Government and federal agency

 $26,075  $301  $(133

)

 $26,243 

Agency mortgage-backed: residential

  93,650   1,339   (970

)

  94,019 

Collateralized loan obligations

  50,227      (78

)

  50,149 

Corporate bonds

  43,432   572   (202

)

  43,802 

Total available for sale

 $213,384  $2,212  $(1,383

)

 $214,213 

 


 

 

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 

  

Amortized

Cost

  

Gross

Unrecognized

Gains

  

Gross

Unrecognized

Losses

  

Fair Value

 

Held to maturity

                

State and municipal

 $46,460  $158  $(338

)

 $46,280 

Total held to maturity

 $46,460  $158  $(338

)

 $46,280 

 

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

September 30,

  

Nine Months Ended

September 30,

 
  

2022

  

2021

  

2022

  

2021

 
  

(in thousands) (in thousands)

 

Proceeds

 $350  $6,500  $1,314  $7,204 

Gross gains

     465      465 

Gross losses

        3   5 

11

The amortized cost and fair value of the 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

  

September 30, 2022

 
 

Amortized

Cost

  

Fair

Value

  

Amortized

Cost

  

Fair

Value

 
 

(in thousands)

  

(in thousands)

 

Maturity

         

Available for sale

         

Within one year

 $7,340  $7,432  $  $ 

One to five years

  15,019   15,102  4,658  4,504 

Five to ten years

  32,715   32,464  84,522  79,322 

Beyond ten years

  3,051   3,064  29,332  27,034 

Agency mortgage-backed: residential

  91,546   91,735   82,193   70,432 

Total

 $149,671  $149,797  $200,705  $181,292 
         

Held to maturity

         

Within one year

 $646  $646  $1,147  1,114 

One to five years

  27,619   28,729  7,740  $7,386 

Five to ten years

  13,159   14,022  4,121  3,459 

Beyond ten years

  30,342   21,809 

Total

 $41,424  $43,397  $43,350  $33,768 

 

Securities pledged at September 30, 2017 2022 and December 31, 2016 2021 had carrying values of approximately $85.3$117.8 million and $61.2$155.4 million, respectively, and were pledged to secure public deposits.

 

At September 30, 2017 2022 and December 31, 2016, we2021, 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 $35.2 million. At September 30, 2017 2022 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, 2021, there were no other holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders’ equity.


 

The Company evaluates securities for other than temporaryother-than-temporary impairment (OTTI)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 September 30, 2017,2022, management does not believe any securities in ourthe portfolio with unrealized losses should be classified as other than temporarily impaired.

The Bank owns Collateralized Loan Obligations (CLOs), which are debt securities secured by professionally managed portfolios of senior-secured loans to corporations. CLOs are typically managed by 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, prepayments on the underlying loans, and other conditions or economic factors. At September 30, 2022, $27.0 million and $19.0 million of the Bank’s CLOs were AA and A rated, respectively. None of the CLOs were subject to ratings downgrade during the nine months ended September 30, 2022.

Stress testing was completed on each security in the CLO portfolio as of September 30, 2022. Each security in the portfolio passed, without dollar loss, a stress scenario characterized as severe, which assumed a ten percent per annum constant prepayment rate, a twelve percent per annum constant default rate for four years followed by a four percent rate thereafter, and a forty-five percent recovery rate on a one-year lag.

12

The corporate bond portfolio consists of 16 subordinated debt securities and two senior debt securities of U.S. banks and bank holding companies with maturities ranging from 2024 to 2037. The securities have either initially a fixed rate for five years converting to floating rate at an index over LIBOR or SOFR, or a floating rate at an index over LIBOR or SOFR from inception. Management regularly monitors the financial condition of these corporate issuers by reviewing their regulatory and public filings.

 

Securities with unrealized and unrecognized losses at September 30, 2017 2022 and December 31, 2016, 2021, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position, are as follows:follows (in thousands):

 

 

Less than 12 Months

  

12 Months or More

  

Total

  

Less than 12 Months

  

12 Months or More

  

Total

 

Description of Securities

 

Fair

Value

  

Unrealized

Loss

  

Fair

Value

  

Unrealized

Loss

  

Fair

Value

  

Unrealized

Loss

  

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

                        

September 30, 2022

            

Available for sale

                         

U.S. Government and federal agency

 $27,738  $(708

)

 $  $  $27,738  $(708

)

 $21,946  $(2,864

)

 $  $  $21,946  $(2,864

)

Agency mortgage-backed: residential

  63,460   (1,449

)

  2,745   (43

)

  66,205   (1,492

)

 43,291  (5,944

)

 24,894  (5,833

)

 68,185  (11,777

)

State and municipal

  465   (8

)

        465   (8

)

Collateralized loan obligations

 30,210  (1,414

)

 15,778  (807

)

 45,988  (2,221

)

Corporate bonds

        1,566   (3

)

  1,566   (3

)

  23,240   (1,666

)

  15,711   (910

)

  38,951   (2,576

)

Total temporarily impaired

 $91,663  $(2,165

)

 $4,311  $(46

)

 $95,974  $(2,211

)

 $118,687  $(11,888

)

 $56,383  $(7,550

)

 $175,070  $(19,438

)

                        

Held to maturity

                        

State and municipal

 $1,540  $(18

)

 $  $  $1,540  $(18

)

Total

 $1,540  $(18

)

 $  $  $1,540  $(18

)

 

  

Less than 12 Months

  

12 Months or More

  

Total

 
  

Fair

Value

  

Unrecognized Loss

  

Fair

Value

  

Unrecognized Loss

  

Fair

Value

  

Unrecognized Loss

 
                         

Held to maturity

                        

State and municipal

 $15,420   (3,932

)

  17,018   (5,650

)

  32,438   (9,582

)

Total temporarily impaired

 $15,420  $(3,932

)

 $17,018  $(5,650

)

 $32,438  $(9,582

)

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

 
                         

December 31, 2021

                        

Available for sale

                        

U.S. Government and federal agency

 $11,645  $(133

)

 $  $  $11,645  $(133

)

Agency mortgage-backed: residential

  53,733   (960

)

  642   (10

)

  54,375   (970

)

Collateralized loan obligations

  10,036   (7

)

  16,514   (71

)

  26,550   (78

)

Corporate bonds

  22,548   (202

)

        22,548   (202

)

Total temporarily impaired

 $97,962  $(1,302

)

 $17,156  $(81

)

 $115,118  $(1,383

)

  

Less than 12 Months

  

12 Months or More

  

Total

 
  

Fair

Value

  

Unrecognized Loss

  

Fair

Value

  

Unrecognized Loss

  

Fair

Value

  

Unrecognized Loss

 
                         

Held to maturity

                        

State and municipal

 $26,829   (338

)

        26,829   (338

)

Total temporarily impaired

 $26,829  $(338

)

 $  $  $26,829  $(338

)

 


13


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,

  

September 30,

 

December 31,

 
 

2017

  

2016

  

2022

  

2021

 
 

(in thousands)

  

(in thousands)

 

Commercial(1)

 $107,616  $97,761  $240,182  $220,826 

Commercial Real Estate:

         

Construction

  44,956   36,330  127,302  74,806 

Farmland

  88,370   71,507  66,820  68,388 

Nonfarm nonresidential

  157,956   149,546  399,958  345,893 

Residential Real Estate:

         

Multi-family

  55,684   48,197  45,903  50,224 

1-4 Family

  173,213   188,092  166,715  168,873 

Consumer

  8,474   9,818  33,894  36,440 

Agriculture

  45,675   37,508  46,689  35,924 

Other

  567   477   482   466 

Subtotal

  682,511   639,236  1,127,945  1,001,840 

Less: Allowance for loan losses

  (8,977

)

  (8,967

)

  (13,031

)

  (11,531

)

Loans, net

 $673,534  $630,269  $1,114,914  $990,309 

 


(1)

Includes SBA Paycheck Protection Program (“PPP”) loans of $150,000 and $1.2 million at September 30, 2022 and December 31, 2021, respectively.

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended September 30, 2017 2022 and 2016:2021:

 

 

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:

                            

September 30, 2022:

              

Beginning balance

 $956  $4,223  $3,317  $53  $335  $1  $8,885  $2,988  $7,131  $1,397  $537  $493  $4  $12,550 

Provision (negative provision)

  (41

)

  206   (147

)

  (31

)

  15   (2

)

    (46

)

 (1,132

)

 (254

)

 43  140  (1

)

 (1,250

)

Loans charged off

  (5

)

     (57

)

  (5

)

        (67

)

 (6

)

   (43

)

 (37

)

     (86

)

Recoveries

  3   9   103   25   16   3   159   28   1,492   267   30         1,817 

Ending balance

 $913  $4,438  $3,216  $42  $366  $2  $8,977  $2,964  $7,491  $1,367  $573  $633  $3  $13,031 
                             
                             

September 30, 2016:

                            

September 30, 2021:

              

Beginning balance

 $730  $5,429  $3,778  $47  $119  $1  $10,104  $2,304  $7,799  $1,646  $385  $500  $3  $12,637 

Provision (negative provision)

  (195

)

  (436

)

  (142

)

  (26

)

  79   (30

)

  (750

)

 371  (80

)

 (124

)

 146  (13

)

   300 

Loans charged off

  (15

)

  (232

)

  (131

)

  (21

)

  (5

)

  (1

)

  (405

)

     (18

)

 (7

)

     (25

)

Recoveries

  102   354   27   23   1   33   540   10   3   34   7   7      61 

Ending balance

 $622  $5,115  $3,532  $23  $194  $3  $9,489  $2,685  $7,722  $1,538  $531  $494  $3  $12,973 

 


14


The following table presents the activity in the allowance for loan losses by portfolioportfolio segment for the nine months ended September 30, 2017 2022 and 2016: 2021:

 

 

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:

                            

September 30, 2022:

              

Beginning balance

 $475  $4,894  $3,426  $8  $162  $2  $8,967  $2,888  $6,179  $1,443  $538  $480  $3  $11,531 

Provision (negative provision)

  399   (791

)

  134   (5

)

  274   (11

)

   

Provision (negative provision)

 70  (244

)

 (76

)

 92  108    (50

)

Loans charged off

  (5

)

  (58

)

  (512

)

  (30

)

  (95

)

     (700

)

 (31

)

 (158

)

 (369

)

 (122

)

     (680

)

Recoveries

  44   393   168   69   25   11   710   37   1,714   369   65   45      2,230 

Ending balance

 $913  $4,438  $3,216  $42  $366  $2  $8,977  $2,964  $7,491  $1,367  $573  $633  $3  $13,031 
                             
                             

September 30, 2016:

                            

September 30, 2021:

              

Beginning balance

 $818  $6,993  $3,984  $122  $122  $2  $12,041  $2,529  $7,050  $1,899  $361  $600  $4  $12,443 

Provision (negative provision)

  (89

)

  (2,024

)

  458   (259

)

  (1

)

  15   (1,900

)

 155  788  (403

)

 187  (76

)

 (1

)

 650 

Loans charged off

  (276

)

  (477

)

  (1,181

)

  (56

)

  (13

)

  (79

)

  (2,082

)

 (19

)

 (129

)

 (30

)

 (58

)

 (44

)

   (280

)

Recoveries

  169   623   271   216   86   65   1,430   20   13   72   41   14      160 

Ending balance

 $622  $5,115  $3,532  $23  $194  $3  $9,489  $2,685  $7,722  $1,538  $531  $494  $3  $12,973 

 

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 September 30, 2017:2022:

 

 

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  $  $  $  $1 

Collectively evaluated for impairment

  900   4,412   2,830   42   366   2   8,552   2,964   7,491   1,366   573   633   3   13,030 

Total ending allowance balance

 $913  $4,438  $3,216  $42  $366  $2  $8,977  $2,964  $7,491  $1,367  $573  $633  $3  $13,031 
                             

Loans:

                                          

Loans individually evaluated for impairment

 $608  $2,749  $4,092  $  $60  $  $7,509  $  $477  $509  $214  $  $  $1,200 

Loans collectively evaluated for impairment

  107,008   288,533   224,805   8,474   45,615   567   675,002   240,182   593,603   212,109   33,680   46,689   482   1,126,745 

Total ending loans balance

 $107,616  $291,282  $228,897  $8,474  $45,675  $567  $682,511  $240,182  $594,080  $212,618  $33,894  $46,689  $482  $1,127,945 

 


15


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, 2016:2021:

 

  

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

 $  $  $2  $  $  $  $2 

Collectively evaluated for impairment

  2,888   6,179   1,441   538   480   3   11,529 

Total ending allowance balance

 $2,888  $6,179  $1,443  $538  $480  $3  $11,531 
                             
                             

Loans:

                            

Loans individually evaluated for impairment

 $  $2,878  $566  $12  $9  $  $3,465 

Loans collectively evaluated for impairment

  220,826   486,209   218,531   36,428   35,915   466   998,375 

Total ending loans balance

 $220,826  $489,087  $219,097  $36,440  $35,924  $466  $1,001,840 

 

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 September 30, 2017 2022 and December 31, 2016 2021 and for the three and nine months ended September 30, 2017 2022 and 2016:2021:

 

             

Three Months Ended

September 30, 2017

  

Nine Months Ended

September 30, 2017

  

As of September 30, 2022

  

Three Months Ended

September 30, 2022

  

Nine Months Ended

September 30, 2022

 
 

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  $  $265  $  $  $  $1  $  $1 

Commercial real estate:

                             

Construction

                                   

Farmland

  3,783   2,155      2,336      2,800   209  81  29    29    112  53 

Nonfarm nonresidential

  773   301      311   1   752   53  1,048  448    1,482  2  2,129  148 

Residential real estate:

                             

Multi-family

                 1,025                  

1-4 Family

  3,858   2,470      2,879   22   2,909   50  1,355  450    489  20  501  119 

Consumer

  8            2   2   2  446  214    118    70  1 

Agriculture

  130   60      60   1   30   1  315          4  23 

Other

                                          

Subtotal

  9,276   5,494      6,085   26   8,015   315  3,510  1,141    2,118  23  2,816  345 

With A Related Allowance Recorded:

                            

With An Allowance Recorded:

              

Commercial

  100   100   13   100   1   100   5               

Commercial real estate:

                             

Construction

                                   

Farmland

                 294                  

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  59  59  1  60    84   

Consumer

                                   

Agriculture

                 30                  

Other

                                          

Subtotal

  1,576   2,015   425   1,806   23   2,187   70   59   59   1   60      84    

Total

 $10,852  $7,509  $425  $7,891  $49  $10,202  $385  $3,569  $1,200  $1  $2,178  $23  $2,900  $345 

 


16

  

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 

 
  

As of December 31, 2021

  

Three Months Ended

September 30, 2021

  

Nine Months Ended

September 30, 2021

 
  

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

 $290  $  $  $  $  $  $ 

Commercial real estate:

                            

Construction

                     

Farmland

  302   215      616   26   596   26 

Nonfarm nonresidential

  7,755   2,663      492   12   517   39 

Residential real estate:

                            

Multi-family

                     

1-4 Family

  1,408   501      716   74   829   112 

Consumer

  272   12      28      21   1 

Agriculture

  366   9      101      99    

Other

                     

Subtotal

  10,393   3,400      1,953   112   2,062   178 

With An Allowance Recorded:

                            

Commercial

                     

Commercial real estate:

                            

Construction

                     

Farmland

                     

Nonfarm nonresidential

           4,356   66   4,356   196 

Residential real estate:

                            

Multi-family

                     

1-4 Family

  65   65   2   100   1   102   2 

Consumer

                     

Agriculture

                     

Other

                     

Subtotal

  65   65   2   4,456   67   4,458   198 

Total

 $10,458  $3,465  $2  $6,409  $179  $6,520  $376 

 

Cash basis income recognized on impaired loans for the three and nine months ended September 30, 2017 2022 was $24,000$21,000 and $309,000,$333,000, respectively, compared to $87,000$96,000 and $377,000$148,000 for the three and nine months ended September 30, 2016, 2021, respectively.

 

Troubled Debt Restructuring

 

A troubled debt restructuring (TDR) occurs when the Bank has agreed to a loan modification in the form of a concession for a borrower who is experiencing financial difficulty. The Bank’s TDRs typically involve a reduction in interest rate, a deferral of principal for a stated period of time, or an interest only period. All TDRs are considered impaired and the Bank allocateshas allocated reserves for these loans to reflect the present value of the concessionary terms granted to the borrower.

 

The following table presents the types of TDR loan modifications by portfolioportfolio segment outstanding as of September 30, 2017 2022 and December 31, 2016:2021:

 

  

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)

 

September 30, 2022

            

Commercial Real Estate:

            

Nonfarm nonresidential

 $146  $  $146 

Residential Real Estate:

            

1-4 Family

     59   59 

Total TDRs

 $146  $59  $205 

 


17

  

TDRs

Performing to

Modified Terms

  

TDRs Not

Performing to

Modified Terms

  

Total

TDRs

 
  

(in thousands)

 

December 31, 2016

            

Commercial

            

Rate reduction

 $  $33  $33 

Principal deferral

     434   434 

Commercial Real Estate:

            

Farmland

            

Principal deferral

     2,300   2,300 

Nonfarm nonresidential

            

Rate reduction

  507      507 

Principal deferral

     607   607 

Residential Real Estate:

            

Multi-family

            

Rate reduction

  4,100      4,100 

1-4 Family

            

Rate reduction

  743      743 

Total TDRs

 $5,350  $3,374  $8,724 

 
  

TDRs

Performing to

Modified Terms

  

TDRs Not

Performing to

Modified Terms

  

Total

TDRs

 
  

(in thousands)

 

December 31, 2021

            

Commercial Real Estate:

            

Nonfarm nonresidential

 $340  $  $340 

Residential Real Estate:

            

1-4 Family

     65   65 

Total TDRs

 $340  $65  $405 

 

At September 30, 2017 2022 and December 31, 2016, 39%2021, 71% and 61%84%, respectively, of the Company’s TDRs were performing according to their modified terms. The Company allocated $141,000$1,000 and $197,000$2,000 in reserves to borrowers whose loan terms have been modified in TDRs as of September 30, 2017, 2022 and December 31, 2016, 2021, respectively. The Company has committedno commitment to lend no additional amounts as of September 30, 2017 2022 and December 31, 2016 2021 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 and nine months ended September 30, 2017 or 2022. The following table presents a summary of the TDR loan modification by portfolio segment that occurred during the three and nine months ended September 30, 2016. 2021:

  

TDRs

Performing to

Modified Terms

  

TDRs Not

Performing to

Modified Terms

  

Total

TDRs

 
  

(in thousands)

 

September 30, 2021

            

Residential Real Estate:

            

1-4 Family

 $180  $  $180 

Total TDRs

 $180  $  $180 

During the first three and nine months of 2017 ended September 30, 2022 and 2016, September 30, 2021, 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-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 September 30, 2017, and December 31, 2016: Past Due Loans

  

Nonaccrual

  

Loans Past Due 90 Days

And Over Still Accruing

 
  

September 30,

2017

  

December 31,

2016

  

September 30,

2017

  

December 31,

2016

 
  

(in thousands)

 
                 

Commercial

 $508  $495  $  $ 

Commercial Real Estate:

                

Construction

            

Farmland

  2,155   4,332       

Nonfarm nonresidential

  105   1,016       

Residential Real Estate:

                

Multi-family

            

1-4 Family

  2,941   3,312       

Consumer

     1       

Agriculture

  60   60       

Other

            

Total

 $5,769  $9,216  $  $ 


 

The following table presents the aging of the recorded investment in past due loans as of September 30, 2017 2022 and December 31, 2016:2021:

 

 

30 – 59

Days

Past Due

  

60 – 89

Days

Past Due

  

90 Days

And Over

Past Due

  

 

 

Nonaccrual

  

Total

Past Due

And

Nonaccrual

  

30 59

Days

Past Due

  

60 89

Days

Past Due

  

90 Days

And Over

Past Due

  

Nonaccrual

  

Total

Past Due

And

Nonaccrual

 
 

(in thousands)

  

(in thousands)

 

September 30, 2017

                    

September 30, 2022

          

Commercial

 $2  $  $  $508  $510  $  $22  $  $  $22 

Commercial Real Estate:

                     

Construction

                         

Farmland

  281   19      2,155   2,455        29  29 

Nonfarm nonresidential

  239         105   344  31      302  333 

Residential Real Estate:

                    

Residential Real Estate:

 

Multi-family

                         

1-4 Family

  300   593      2,941   3,834  213  14    509  736 

Consumer

  50            50  30  3    214  247 

Agriculture

           60   60  26  18      44 

Other

                              

Total

 $872  $612  $  $5,769  $7,253  $300  $57  $  $1,054  $1,411 

18

 
  

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, 2021

                    

Commercial

 $6  $  $  $  $6 

Commercial Real Estate:

                    

Construction

               

Farmland

           215   215 

Nonfarm nonresidential

     34      2,323   2,357 

Residential Real Estate:

                    

Multi-family

               

1-4 Family

  513   148      566   1,227 

Consumer

  37   28      12   77 

Agriculture

           8   8 

Other

               

Total

 $556  $210  $  $3,124  $3,890 

 

  

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, 2016

                    

Commercial

 $  $  $  $495  $495 

Commercial Real Estate:

                    

Construction

               

Farmland

  626         4,332   4,958 

Nonfarm nonresidential

     59      1,016   1,075 

Residential Real Estate:

                    

Multi-family

               

1-4 Family

  1,454   256      3,312   5,022 

Consumer

  19         1   20 

Agriculture

  203         60   263 

Other

               

Total

 $2,302  $315  $  $9,216  $11,833 

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 $500,000processes and are routinely analyzed through our credit administration processes which classify the loans as to credit risk. The following definitions are used for risk ratings:

 

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

 

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

 

Substandard Loans classified as substandard are those loans with clear and defined weaknesses such as a highly leveraged position, unfavorable financial ratios, uncertain repayment sources or poor financial condition which may jeopardize the repayment of the debt as contractually agreed. They are characterized by the distinct possibility 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 considered to be “Pass” rated loans. As of September 30, 2017, 2022, and December 31, 2016, 2021, 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

                        

September 30, 2022

            

Commercial

 $106,645  $228  $  $743  $  $107,616  $235,779  $41  $  $4,362  $  $240,182 

Commercial Real Estate:

                         

Construction

  44,956               44,956  127,302          127,302 

Farmland

  78,156   5,935      4,279      88,370  64,845  167    1,808    66,820 

Nonfarm nonresidential

  153,026   2,948   432   1,550      157,956  398,464  1,174    320    399,958 

Residential Real Estate:

                         

Multi-family

  46,100   9,584            55,684  45,903          45,903 

1-4 Family

  162,476   4,473   166   6,098      173,213  163,329  1,773    1,613    166,715 

Consumer

  8,062   323      89      8,474  33,270  7    617    33,894 

Agriculture

  33,215   11,676      784      45,675  46,635  15    39    46,689 

Other

  567               567   482               482 

Total

 $633,203  $35,167  $598  $13,543  $  $682,511  $1,116,009  $3,177  $  $8,759  $  $1,127,945 

 

  

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 
19

 
  Pass  Watch  

Special

Mention

  Substandard  Doubtful  Total 
  (in thousands) 

December 31, 2021

                        

Commercial

 $207,729  $5,207  $  $7,890  $  $220,826 

Commercial Real Estate:

                        

Construction

  74,806               74,806 

Farmland

  65,836   170      2,382      68,388 

Nonfarm nonresidential

  341,780   413      3,700      345,893 

Residential Real Estate:

                        

Multi-family

  50,224               50,224 

1-4 Family

  164,850   2,038      1,985      168,873 

Consumer

  36,408   5      27      36,440 

Agriculture

  35,863   23      38      35,924 

Other

  466               466 

Total

 $977,962  $7,856  $  $16,022  $  $1,001,840 

 

Note 4 Leases

 

Note 4 – Other Real Estate OwnedAs of September 30, 2022, the Company leases real estate for seven branch offices or offsite ATM machines under various operating lease agreements. The lease agreements have maturity dates ranging from 2024 to 2046, including all expected extension periods. The weighted average remaining life of the lease term for these leases was 21 years as of September 30, 2022.

 

Other real estate owned (OREO) is real estate acquired as a resultIn determining the present value of foreclosure or by deed in lieu of foreclosure. It is classified as real estate owned until such time as it is sold. When property is acquired as a result of foreclosure or by deed in lieu of foreclosure, it is recorded at its fair market value less expected cost to sell. Any write-downlease payments, the Bank uses the implicit lease rate when readily determinable. As most of the propertyBank’s leases do not provide an implicit rate, the incremental borrowing rate based on the information available at commencement date is used. The incremental borrowing rate is the timerate of acquisition is chargedinterest that the Bank estimates it would pay to borrow on a collateralized basis over a similar term in an amount equal to the allowancelease payments in a similar economic environment. The weighted average discount rate for loan losses.the leases was 4.20% as of September 30, 2022.

 

Fair valueTotal rental expense was $125,000 and $375,000, respectively, for the three and nine months ended September 30, 2022, compared to $78,000 and $326,000, respectively, for the three and nine months ended September 30, 2021. The right-of-use asset, included in premises and equipment, and lease liability, included in other liabilities, was $6.4 million as of OREO is determined on an individual property basis. When foreclosed properties are acquired, we obtain a new appraisalSeptember 30, 2022 and $5.3 million as of December 31, 2021.

Total estimated rental commitments for the subject property or have staff from our special assets group evaluate the latest in-file appraisal operating leases were as follows as of September 30, 2022 (in connection with the transfer to OREO. We typically obtain updated appraisals within five quarters of the anniversary date of ownership unless a sale is imminent. Subsequent reductions in fair value are recorded as non-interest expense when a new appraisal indicates a decline in value or in cases where a listing price is lowered below the appraised amount. thousands):

  

September 30,

2022

 
     

October – December 2022

 $114 

2023

  457 

2024

  458 

2025

  438 

2026

  408 

Thereafter

  8,899 

Total minimum lease payments

  10,774 

Discount effect of cash flows

  (4,352

)

Present value of lease liabilities

 $6,422 

 


20

The following table presents the major categories


Note 5 Deposits

 

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

 

 

September 30,

2017

  

December 31,

2016

  

September 30,

2022

  

December 31,

2021

 
 

(in thousands)

  

(in thousands)

 

Non-interest bearing

 $133,896  $124,395  $287,938  $274,083 

Interest checking

  94,523   103,876  286,867  287,208 

Money market

  156,905   142,497  215,450  217,943 

Savings

  35,946   34,518  154,545  163,423 

Certificates of deposit(1)

  445,577   444,639   273,780   266,011 

Total

 $866,847  $849,925  $1,218,580  $1,208,668 

 



(1)

Includes brokered deposits of $29.0 million at September 30, 2022. There were no brokered deposits at December 31, 2021.

 

Time deposits of $250,000 or more were $33.1$65.3 million and $29.1$33.4 million at September 30, 2017 2022 and December 31, 2016, 2021, respectively.

 

Scheduled maturities of alltotal time deposits at September 30, 2017 were2022 for each of the next five years are as follows (in thousands):

 

Year 1

 $221,600  $209,169 

Year 2

  174,906  37,577 

Year 3

  35,418  17,358 

Year 4

  6,626  5,918 

Year 5

  7,027  2,819 

Thereafter

  939 
 $445,577  $273,780 

 

Note 6 – AdvancesAdvances 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 
  

September 30,

  

December 31,

 
  

2022

  

2021

 
  

(in thousands)

 
         

Short term advances (fixed rates 3.04% to 4.02%) maturing October 2022 to January 2023

 $90,000  $ 

Long term advances

     20,000 

Total advances from the Federal Home Loan Bank

 $90,000  $20,000 

 

Scheduled principal payments on FHLB advances during the next five years had a weighted-average rate of 3.33% at September 30, 2022 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 

0.77% at December 31, 2021. Each advance is payable based upon theper terms ofon agreement, with a prepayment penalty. The $20.0 million long-term advance outstanding at December 31, 2021 was called by the FHLB in May 2022. No prepayment penalties were incurred during 20172022 or 2016.2021. The advances arewere collateralized by approximately $351.7 million of commercial real estate and first mortgage residential loans. In loans, under a blanket lien arrangement at September 2017, 30, 2022. At December 31, 2021, the FHLB notified the Bankadvances were collateralized by approximately $121.8 million of an upgrade to its collateral reporting status from physical delivery status to blanket summary status whereby the FHLB determines borrowing capacity from the eligible book value of qualifyingfirst mortgage residential loans pledged rather thanunder a blanket lien arrangement and loans originated under the discounted market value of loans delivered to physical custody.SBA Payment Protection Plan. At September 30, 2017, our2022, the Bank’s additional borrowing capacity with the FHLB was $74.8$71.5 million.

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

  

Advances

 

Year 1

  90,000 
  $90,000 

Note 7 Borrowings

 

Note 7 Junior Subordinated Debentures Senior Debt

On June 30, 2017,The junior subordinated debentures are redeemable at par prior to maturity at the option of the Company entered into a $10.0 million senior secured loan agreement with a commercial bank. The loan matures on June 30, 2022. Interest is payable quarterly at a rate of three-month LIBOR plus 250 basis points through June 30, 2020, at which time quarterly principal payments of $250,000 plus interest will commence. The loan is secured by a first priority pledge of 100% ofas defined within the issued and outstanding stock of the Bank. The Company may prepay any amount due under the promissory note at any time without premium or penalty.

The Company contributed $9.0 million 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.trust indenture. At September 30, 2017, the escrow account had a balance of $903,000.

The loan agreement contains customary representations, warranties, covenants and events of default, including the following financial covenants: (i) 2022, the Company must maintain minimum cashis current on hand of not less than $750,000 through June 30, 2018, and not less than $2,500,000 thereafter, (ii) the Company must maintain a total risk based capital ratio at least equal to 9% of risk-weighted assets to June 30, 2018, and 10% thereafter, (iii) the Bank must maintain a total risk based capital ratio at least equal to 10% of risk-weighted assets to June 30, 2018, and 11% thereafter, and (iv) non-performing assets of the Bank may not exceed 2.5% of the Bank’s total assets. Both the Company and Bank were in compliance with the covenants as of September 30, 2017.all interest payments.

 


21

A summary of the junior subordinated debentures is as follows:

Description 

Issuance

Date

 Interest Rate (1) 

Junior Subordinated Debt Owed

To Trust

 

Maturity

Date (2)

Statutory Trust I

 

2/13/2004

 

3-month LIBOR + 2.85%

 $3,000,000 

2/13/2034

Statutory Trust II

 

2/13/2004

 

3-month LIBOR + 2.85%

  5,000,000 

2/13/2034

Statutory Trust III

 

4/15/2004

 

3-month LIBOR + 2.79%

  3,000,000 

4/15/2034

Statutory Trust IV

 

12/14/2006

 

3-month LIBOR + 1.67%

  10,000,000 

3/01/2037

      $21,000,000  


(1)

As of September 30, 2022, 3-month LIBOR was 3.75%.

(2)

The debentures are callable at the Company’s option at their principal amount plus accrued interest.

 

Subordinated Capital Notes – The Company’s subordinated notes mature on July 31, 2029. The notes carry interest at a fixed rate of 5.75% until July 30, 2024 and then convert to variable at three-month LIBOR plus 395 basis points until maturity. The subordinated capital notes qualify as Tier 2 regulatory capital.

Federal Funds Line – At September 30, 2022, the Company had a $5.0 million federal funds line of credit available on an unsecured basis from a correspondent institution.

Note 88 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-sidedtwo-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 LIBORrelative index 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.

 

22

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 ourthe Bank’s impaired loans. The deductions to the appraisal take into account changing business factors and market conditions, as well as potential value impairment in cases where ourthe Bank’s appraisal date predates a likely change in market conditions. These deductions range from 10% for routine real estate collateral to 25% for real estate that is determined (1) to have a thin trading market or (2) to be specialized collateral. This is in addition to estimated discounts for cost to sell of 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 discounts ranging from 10% to 33% in our impairment evaluations when applicable.

 


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

For larger dollar commercial real estate properties, we obtain a new appraisal of the subject property or have staff in our special assets group evaluate the latest in-file appraisal in connection with the transfer to other real estate owned. We generally obtain 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 September 30, 2017 2022 and December 31, 2016 2021 are summarized below:

 

     

Fair Value Measurements at September 30, 2017 Using

      

Fair Value Measurements at September 30, 2022 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  $  $21,946  $  $21,946  $ 

Agency mortgage-backed: residential

  91,735      91,735     70,432    70,432   

Collateralized loan obligations

  23,526      23,526     45,988    45,988   

State and municipal

  1,661      1,661    

Corporate bonds

  3,167      3,167      42,926      29,594   13,332 

Total

 $149,797  $  $149,797  $  $181,292  $  $167,960  $13,332 

 

      

Fair Value Measurements at December 31, 2016 Using

 
      

(in thousands)

 

Description

 

Carrying

Value

  

Quoted Prices In

Active Markets for

Identical Assets

(Level 1)

  

Significant Other

Observable Inputs

(Level 2)

  

Significant

Unobservable

Inputs

(Level 3)

 

Available for sale securities

                

U.S. Government and federal agency

 $34,099  $  $34,099  $ 

Agency mortgage-backed: residential

  102,353      102,353    

Collateralized loan obligations

  11,203      11,203    

State and municipal

  2,045      2,045    

Corporate bonds

  3,090      3,090    

Total

 $152,790  $  $152,790  $ 

      

Fair Value Measurements at December 31, 2021 Using

 
      

(in thousands)

 

Description

 

Carrying

Value

  

Quoted Prices In

Active Markets for

Identical Assets

(Level 1)

  

Significant Other

Observable Inputs

(Level 2)

  

Significant

Unobservable

Inputs

(Level 3)

 

Available for sale securities

                

U.S. Government and federal agency

 $26,243  $  $26,243  $ 

Agency mortgage-backed: residential

  94,019      94,019    

Collateralized loan obligations

  50,149      50,149    

Corporate bonds

  43,802  $  $29,761  $14,041 

Total

 $214,213  $  $200,172  $14,041 

 

There were no transfers between Level 1 and Level 2 during 20172022 or 2016.2021.

The Company’s policy is to transfer assets or liabilities from one level to another when the methodology to obtain the fair value changes such that there are more or fewer unobservable inputs as of the end of the reporting period. There were no transfers between Level 2 and Level 3 during 2022.

 


23

The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended September 30, 2022 and 2021:

  

September 30,

2022

 
  

Corporate

Bonds

 
  

(in thousands)

 

Balance of recurring Level 3 assets at January 1, 2022

 $14,041 

Total gains or losses for the year:

    

Included in other comprehensive income

  (709

)

Transfers into Level 3

   

Balance of recurring Level 3 assets at September 30, 2022

 $13,332 

  

September 30, 2021

 
  

Collateralized

Loan Obligations

  

Corporate

Bonds

 
  

(in thousands)

 

Balance of recurring Level 3 assets at January 1, 2021

 $2,388  $11,916 

Total gains or losses for the year:

        

Included in earnings

     465 

Included in other comprehensive income

  106   1,479 

Calls

     (5,000

)

Transfers into Level 3

      

Balance of recurring Level 3 assets at September 30, 2021

 $2,494  $8,860 

The following table presents quantitative information about recurring level 3 fair value measurements are summarized below (in thousands):

  

Fair Value Measurements at September 30, 2022

 
  

Fair Value

 

Valuation

Technique(s)

 

Unobservable Input(s)

 

Range (Weighted

Average)

 
              
              

Corporate bonds

 $13,332 

Discounted cash flow

 

Constant prepayment rate

  0%

 

 
       Spread to benchmark yield 224%-377%(288%) 
       Indicative broker bid 80%-97%(89%) 

  

Fair Value Measurements at December 31, 2021

 
  

Fair Value

 

Valuation

Technique(s)

 

Unobservable Input(s)

 

Range (Weighted

Average)

 
              
              

Corporate bonds

 $14,041 

Discounted cash flow

 

Constant prepayment rate

  0%

 

 
       Spread to benchmark yield 200%-298%(235%) 
       Indicative broker bid 99%-106%(103%) 

 

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

 

      

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)

 
                 
  

 

             

Description

                

Impaired loans:

                

Commercial

 $87  $  $  $87 

Commercial real estate:

                

Construction

            

Farmland

            

Nonfarm nonresidential

            

Residential real estate:

                

Multi-family

            

1-4 Family

  1,236         1,236 

Consumer

            

Agriculture

            

Other

            

Other real estate owned:

                

Commercial real estate:

                

Construction, land development, and other land

  6,200         6,200 

Farmland

  74         74 

Nonfarm nonresidential

            

Residential real estate:

                

Multi-family

            

1-4 Family

  56         56 
      

Fair Value Measurements at September 30, 2022 Using

 
                 
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:

                

Residential real estate:

                

1-4 Family

 $58  $  $  $58 

 

      

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 

24

 
      

Fair Value Measurements at December 31, 2021 Using

 
                 
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:

                

Residential real estate:

                

1-4 Family

 $63  $  $  $63 

 

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $1.7 million$59,000 at September 30, 2017 2022 with a valuation allowance of $399,000,$1,000, resulting in $171,000 and $29,000 in additionalno provision for loan losses for the three and months or nine months ended September 30, 2017, respectively. 2022. Impaired loans had a carrying amount of $2.5$4.5 million at September 30, 2021 with a valuation allowance of $309,000,$2.2 million, resulting in $220,000 and no additional provision for loan losses for the three and nine months ended September 30, 2016.2021 and $1,000 provision for loan losses for the nine months ended September 30, 2021, respectively. At December 31, 2016, 2021, impaired loans had a carrying amount of $2.4 million,$65,000, with a valuation allowance of $370,000.

OREO, which is measured at the lower of carrying or fair value less costs to sell, had a net carrying amount of $6.3 million as of September 30, 2017, compared with $6.8 million at December 31, 2016. Write-downs of $98,000 were recorded on OREO for the three and nine months ended September 30, 2017, compared to write-downs of $761,000 and $1.6 million for the three and nine months ended September 30, 2016, respectively.


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

  

Fair Value

 

Valuation

Technique(s)

 

Unobservable Input(s)

 

Range (Weighted

Average)

 
  

(in thousands)

          
              

Impaired loans – Residential real estate

 $1,236 

Sales comparison approach

 

Adjustment for differences between the comparable sales

 0%-34%(11%) 
              

Other real estate owned – Commercial real estate

 $6,274 

Sales comparison approach

 

Adjustment for differences between the comparable sales

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

The following table presents qualitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at December 31, 2016:

  

Fair Value

 

Valuation

Technique(s)

 

Unobservable Input(s)

 

Range (Weighted

Average)

  
  

(in thousands)

          
              

Impaired loans – Residential real estate

 $1,261 

Sales comparison approach

 

Adjustment for differences between the comparable sales

 0%-22%(9%) 
              

Other real estate owned – Commercial real estate

 $6,571 

Sales comparison approach

 

Adjustment for differences between the comparable sales

  0%-20%(9%) 
              
     Income approach Discount or capitalization rate 18%-20%(19%) 

$2,000.

 

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

 

     

Fair Value Measurements at September 30, 2017 Using

      

Fair Value Measurements at September 30, 2022 Using

 
 

Carrying

Amount

  

Level 1

  

Level 2

  

Level 3

  

Total

  

Carrying

Amount

  

Level 1

  

Level 2

  

Level 3

  

Total

 
 

(in thousands)

  

(in thousands)

 

Financial assets

                     

Cash and cash equivalents

 $47,369  $27,815  $19,554  $  $47,369  $57,370  $57,370  $  $  $57,370 

Securities available for sale

  149,797      149,797      149,797  181,292    167,960  13,332  181,292 

Securities held to maturity

  41,424      43,397      43,397  43,350    33,768    33,768 

Federal Home Loan Bank stock

  7,323   N/A   N/A   N/A   N/A  5,176  N/A  N/A  N/A  N/A 

Loans, net

  673,534         673,616   673,616  1,114,914      1,043,243  1,043,243 

Accrued interest receivable

  3,285      1,137   2,148   3,285  4,351    1,094  3,257  4,351 

Financial liabilities

                     

Deposits

 $866,847  $133,896  $719,827  $  $853,723  $1,218,580  $287,938  $926,278  $  $1,214,216 

Federal Home Loan Bank advances

  16,847      16,865      16,865  90,000    90,009    90,009 

Subordinated capital note

  2,475         2,458   2,458 

Junior subordinated debentures

  21,000         19,087   19,087  21,000      18,498  18,498 

Senior debt

  10,000         10,000   10,000 

Subordinated capital notes

 25,000      23,791  23,791 

Accrued interest payable

  1,284      366   918   1,284  586    285  301  586 

 


     

Fair Value Measurements at December 31, 2016 Using

      

Fair Value Measurements at December 31, 2021 Using

 
 

Carrying

Amount

  

Level 1

  

Level 2

  

Level 3

  

Total

  

Carrying

Amount

  

Level 1

  

Level 2

  

Level 3

  

Total

 
 

(in thousands)

  

(in thousands)

 

Financial assets

                     

Cash and cash equivalents

 $66,316  $31,091  $35,225  $  $66,316  $77,603  $77,603  $  $  $77,603 

Securities available for sale

  152,790      152,790      152,790  214,213    200,172  14,041  214,213 

Securities held to maturity

  41,818      43,072      43,072  46,460    46,280    46,280 

Federal Home Loan Bank stock

  7,323   N/A   N/A   N/A   N/A  5,116  N/A  N/A  N/A  N/A 

Loans, net

  630,269         632,528   632,528  990,309      981,995  981,995 

Accrued interest receivable

  3,137      1,203   1,934   3,137  3,870    1,022  2,848  3,870 

Financial liabilities

                     

Deposits

 $849,925  $124,395  $712,458  $  $836,853  $1,208,668  $274,083  $935,768  $  $1,209,851 

Federal Home Loan Bank advances

  22,458      22,475      22,475  20,000    20,046    20,046 

Subordinated capital note

  3,150         3,091   3,091 

Junior subordinated debentures

  21,000         13,263   13,263  21,000      19,500  19,500 

Subordinated capital notes

 25,000      26,149  26,149 

Accrued interest payable

  734      369   365   734  764    136  628  764 

 

TheIn accordance with ASU 2016-01, the methods and assumptions, not previously presented, usedutilized 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.

(b) FHLB Stock

It is not practical to determinemeasure the fair value of FHLB stock due to restrictions placed on its transferability.financial instruments represent an approximation of exit price; however, an actual exit price may differ.

 

(c) Loans, Net

Fair valuesvalue estimates are made at a specific point in time based on relevant market information and information about financial instruments. Because no market exists for a portion of loans, excluding loans held for sale, are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk,the Company’s financial instruments, fair valuesvalue estimates are based on carrying values resultingjudgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Therefore, calculated fair value estimates in many instances cannot be substantiated by comparison to independent markets and, in many cases, may not be realizable in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

(d) 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 valuescurrent sale of the Company’s FHLB advances are estimated using discounted cash flow analyses based on the current borrowing rates resultinginstrument. Changes 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.assumptions could significantly impact estimates.

 


25


Note 99 Income Taxes

 

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

 

 

September

30,

  

December

31,

  

September

30,

 

December

31,

 
 

2017

  

2016

  

2022

  

2021

 
 

(in thousands)

  

(in thousands)

 

Deferred tax assets:

         

Net operating loss carry-forward

 $43,515  $42,094  $15,329  $19,335 

Allowance for loan losses

  3,142   3,139  3,252  2,877 

Other real estate owned write-down

  3,401   3,366 

Alternative minimum tax credit carry-forward

  692   692 

Net assets from acquisitions

  617   674 

Net unrealized loss on securities

  209   867  4,711   

New market tax credit carry-forward

  208   208  208  208 

Nonaccrual loan interest

  477   481  328  321 

Accrued expenses

  193   3,860 

Deferred compensation

  463   465 

Accrued expenses

 94  138 

Lease liability

 1,603  1,328 

Other

  394   360   179   202 
  53,311   56,206   25,704   24,409 
         

Deferred tax liabilities:

         

FHLB stock dividends

  928   928  361  415 

Fixed assets

  70   89  120  133 

Deferred loan costs

  266   274  165  176 

Net unrealized gain on securities

   390 

Lease right-of-use assets

 1,603  1,328 

Net assets from acquisitions

 249  108 

Other

  145   866   204   276 
  1,409   2,157   2,702   2,826 

Net deferred tax assets before valuation allowance

  51,902   54,049 

Valuation allowance

  (51,902

)

  (54,049

)

Net deferred tax asset

 $  $  $23,002  $21,583 

 

Our estimate of our ability to realize the deferred tax asset depends on our estimate of projected future levels of taxable income. In analyzing future taxable income levels, we considered all evidence currently available, both positive and negative. Based on our analysis, we established a valuation allowance for all deferred tax assets as of December 31, 2011. The valuation allowance remains in effect as of At September 30, 2017.2022, the Company had net federal operating loss carryforwards of $68.6 million, which will begin to expire in 2033, and state net operating loss carryforwards of $23.2 million, which begin to expire in 2029.

 

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 nine months ended September 30, 2017 2022 or September 30, 2016 2021 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, as amended November 25, 2019, the Board of Directors has the discretion to exempt certain transactions and certain persons whose acquisition of securities is determined by the Board not to jeopardize the Company's deferred tax assets. The rights willplan was extended in May 2021 to expire upon the earlier of (i) June 29, 2018, (ii)30, 2024, (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 October 24, 2022, with the unanimous approval of the Company’s Board of Directors, the Company amended the rights plan to accelerate its final expiration date to October 24, 2022, effectively terminating the tax benefits preservation plan as of that date.

 


26


On September 23, 2015, ourthe 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 ourthe Company’s common shares that could result in an ownership change under Section 382. The transfer restrictions were extended in May 2021 by shareholder vote and will expire on the earlier of (i) September 23, 2018, (ii)May 19, 2024, (ii) the beginning of a taxable year with respect to which the Board of Directors determines that no tax benefit may be carried forward, (iii) the repeal of Section 382 or any successor statute if ourthe Board determines that the transfer restrictions are no longer needed to preserve the tax benefits of ourthe 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 2014.2019.

 

Note 1010 Stock Plans and Stock Based Compensation

 

SharesShares available for issuance under the 20162018 Omnibus Equity Compensation Plan (“2016(“2018 Plan”) total 25,000.122,203. Shares issued to employees under the plan vest annually on the anniversary dateover periods of the grant generally over threeup to fourseven 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 2022 unvested shares issued was $365,000,$1.3 million, or $9.64$19.61 per weighted-average share. The Company recorded $129,000$212,000 and $271,000$673,000 of stock-based compensation to salaries and employee benefitsexpense for the three and nine months ended September 30, 2017, 2022, respectively, and $148,000$214,000 and $315,000$515,000 for the three and nine months ended September 30, 2016, 2021, 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 $53,000 and $168,000 was recognized related to this expense during the three and nine months ended September 30, 2022, respectively, and $54,000 and $129,000 for either period.the three and nine months ended September 30, 2021, respectively.

 

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

 

  

Nine Months Ended

  

Twelve Months Ended

 
  

September 30, 2017

  

December 31, 2016

 
      

Weighted

      

Weighted

 
      

Average

      

Average

 
      

Grant

      

Grant

 
  

Shares

  

Price

  

Shares

  

Price

 

Outstanding, beginning

  179,513  $4.89   184,482  $4.81 

Granted

  37,865   9.64   35,465   9.10 

Vested

  (58,650

)

  4.67   (38,462

)

  8.32 

Forfeited

  (1,316

)

  9.35   (1,972

)

  6.16 

Outstanding, ending

  157,412  $6.08   179,513  $4.89 

  

Nine Months Ended

  

Twelve Months Ended

 
  

September 30, 2022

  

December 31, 2021

 
      

Weighted

      

Weighted

 
      

Average

      

Average

 
      

Grant

      

Grant

 
  

Shares

  

Price

  

Shares

  

Price

 

Outstanding, beginning

  111,536  $13.73   47,438  $15.34 

Granted

  64,600   19.61   110,024   13.52 

Vested

  (30,827

)

  16.06   (37,590

)

  15.13 

Forfeited

  (10,109

)

  15.20   (8,336

)

  13.66 

Outstanding, ending

  135,200  $15.90   111,536  $13.73 

 

Unrecognized stock basedstock-based compensation expense related to unvested shares for the remainder of 2017 and beyond is estimated as follows (in thousands):

 

October 2017 – December 2017

 $129 

2018

  258 

2019

  99 

2020 & thereafter

  25 

October 2022 – December 2022

 $211 

2023

  467 

2024

  339 

2025

  197 

2026

  189 

Thereafter

  175 

 


27


Note 1111 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

 

Nine Months Ended

 
 

September 30,

  

September 30,

  

September 30,

  

September 30,

 
 

2017

  

2016

  

2017

  

2016

  

2022

  

2021

  

2022

  

2021

 
 

(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  $5,813  $4,341  $13,428  $11,464 

Less:

                 

Earnings allocated to unvested shares

  45   46   133   129   104   76   221   169 

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

 $5,709  $4,265  $13,207  $11,295 
                 

Basic

                

Basic and Diluted

 

Weighted average common shares including unvested common shares outstanding

  6,259,864   6,223,045   6,245,418   5,897,617  7,639,492  7,602,686  7,628,677  7,591,800 

Less:

                 

Weighted average unvested common shares

  157,412   206,829   160,825   195,412   136,283   133,073   125,736   111,790 

Weighted average common shares outstanding

  6,102,452   6,016,216   6,084,593   5,702,205   7,503,209   7,469,613   7,502,941   7,480,010 

Basic income per common share

 $0.29  $0.22  $0.83  $0.66 
                

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 

Diluted income per common share

 $0.29  $0.22  $0.83  $0.66 

Basic and diluted income per common share

 $0.76  $0.57  $1.76  $1.51 

 

The Company had no outstanding stock options or warrants at September 30, 2017 2022 or 2016. 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 September 30, 2017 and 2016, but was not included in the diluted EPS computation as inclusion would have been anti-dilutive.2021.

 

Note 1122 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 finalBasel III rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. Banks (Basel III rules) became effective for the Company and Bank on January 1, 2015 with full compliance with all the requirements being phased in over a multi-year schedule through January 1, 2019. The final rules allowed banks and their holding companies with less than $250 billion in assets a one-time opportunity to opt-out of a requirement to include unrealized gains and losses in accumulated other comprehensive income in their capital calculation. The Company and the Bank opted out of this requirement. The rules also establishestablished a “capital conservation buffer” of 2.5% above the regulatory minimum risk-based capital ratios. OnceIncluding the capital conservation buffer, is fully phased in, the minimum ratios are a common equity Tier 1 risk-based capital ratio of 7.0%, a Tier 1 risk-based capital ratio of 8.5%, and a total risk-based capital ratio of 10.5%. The 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, 1.875% in 2018, and 2.5% in 2019. An institution is subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if capital levels fall below minimum levels plus the buffer amounts. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions.actions without prior regulatory approval.

 

TheAs of September 30, 2022, Management believes the Company and Bank is no longer subjectmet all capital adequacy requirements to a consent order with which they are subject. As of September 30, 2022, 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: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 September 30, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   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

 

  

 

Actual

 

 

Minimum Requirement for Capital Adequacy Purposes

 

 

Minimum Requirement to be Well Capitalized Under Prompt Corrective Action Provisions

 

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

As of December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

                        

       Consolidated

 

$

71,109

   

10.21

%

 

$

55,714

   

8.00

%

  

N/A

   

N/A

 

       Bank

  

68,773

   

9.88

   

55,663

   

8.00

  

$

69,579

   

10.00

%

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

                        

       Consolidated

  

36,199

   

5.20

   

31,339

   

4.50

   

N/A

   

N/A

 

       Bank

  

57,642

   

8.28

   

31,311

   

4.50

   

45,226

   

6.50

 

   Tier 1 capital (to risk-weighted assets)

                        

       Consolidated

  

48,713

   

6.99

   

41,786

   

6.00

   

N/A

   

N/A

 

       Bank

  

57,642

   

8.28

   

41,747

   

6.00

   

55,663

   

8.00

 

   Tier 1 capital (to average assets)

                        

       Consolidated

  

48,713

   

5.27

   

36,975

   

4.00

   

N/A

   

N/A

 

       Bank

  

57,642

   

6.24

   

36,949

   

4.00

   

46,186

   

5.00

 

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

  

Actual

  

Minimum Requirement

for Capital Adequacy

Purposes

  

Minimum Requirement

to be Well Capitalized

Under Prompt Corrective

Action Provisions

 
  

Amount

  

Ratio

  

Amount

  

Ratio

  

Amount

  

Ratio

 

As of September 30, 2022:

                        

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

 $179,662   13.53

%

 $106,196   8.00

%

 $132,745   10.00

%

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

  166,631   12.55   59,735   4.50   86,284   6.50 

Tier 1 capital (to risk-weighted assets)

  166,631   12.55   79,647   6.00   106,196   8.00 

Tier 1 capital (to average assets)

  166,631   11.56   57,662   4.00   72,078   5.00 

 


28

  

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, 2021:

                        

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

 $160,700   13.31

%

 $96,591   8.00

%

 $120,738   10.00

%

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

  149,169   12.35   54,332   4.50   78,480   6.50 

Tier 1 capital (to risk-weighted assets)

  149,169   12.35   72,443   6.00   96,591   8.00 

Tier 1 capital (to average assets)

  149,169   10.84   55,057   4.00   68,822   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.Based on these regulations, the Bank was eligible to pay $19.6 million in dividends as of September 30, 2022. The Bank paid the Company $2.4 million in dividends during the nine months ended September 30, 2022.

Note 1133 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’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.less except for home equity loans, which generally have a term of 10 years.

 

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

 
  

Fixed

Rate

  

Variable

Rate

  

Fixed

Rate

  

Variable

Rate

 
  

(in thousands)

 

Commitments to make loans

 $32,645  $30,764  $19,445  $18,347 

Unused lines of credit

  7,252   58,107   7,935   51,407 

Standby letters of credit

  527   372   582   360 

  

September 30, 2022

  

December 31, 2021

 
  

Fixed

Rate

  

Variable

Rate

  

Fixed

Rate

  

Variable

Rate

 
  

(in thousands)

 

Commitments to make loans

 $56,136  $41,637  $85,294  $60,683 

Unused lines of credit

  9,311   114,960   12,828   108,635 

Standby letters of credit

  365   346   566   326 

 

In connection with the purchase of three loan participations, the Bank entered into three risk participation agreements, which had notional amounts totaling $19.8$12.1 million at September 30, 2017 2022 and $14.6 million at December 31, 2016.2021. 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. The fair value of the derivative instruments incorporates a consideration of credit risk in accordance with ASC 820, resulting in some volatility in earnings each period. At September 30, 2022 and December 31, 2021, the fair value of the risk participation agreements were $5,000 and $67,000, respectively.

 

In the normal course of business, the Company and its subsidiaries have been named, from time to time, as defendants in various legal actions. Certain of the actual or threatened legal actions may include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages.

29

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 should matters 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, and other transaction-based revenue that is individually immaterial. Other non-interest income included approximately $195,000 and $512,000 of revenue for the three and nine months ended September 30, 2022, respectively, within the scope of ASC 606. Other non-interest income included approximately $162,000 and $460,000 of revenue for the three and nine months ended September 30, 2021, respectively, within the scope of ASC 606. The remaining other non-interest income for the three and nine months is excluded from the scope of ASC 606.

Note 15 Subsequent Events

Merger Agreement – On October 24, 2022, the Company in November 2008.entered into an Agreement and Plan of Merger ("Merger Agreement") with Peoples Bancorp, Inc. (“Peoples”). The Bank has cooperatedMerger Agreement provides for a business combination whereby the Company will merge with all requests for information fromand into Peoples (the “Merger”), with Peoples as the DOJ. At this time, the DOJ has not indicated whether it intends to pursue any actionsurviving corporation in the matter.Merger. Under the terms and subject to the conditions of the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each share of the Company’s common stock, issued and outstanding immediately prior to the Effective Time (except for Dissenting Shares, as provided for in the Merger Agreement), will be converted, in accordance with the procedures set forth in the Merger Agreement, into 0.90 of common shares, no par value, of Peoples (“Peoples Common Shares”). The Merger Agreement contains certain termination rights for both Peoples and the Company, and further provides that, upon termination of the Merger Agreement under specified circumstances, the Company may be required to pay Peoples a termination fee of $8.3 million. The Merger is expected to close in the second quarter of 2023, pending satisfaction of various closing conditions, including, but not limited to: (1) adoption of the Merger Agreement by the shareholders of Peoples and the Company; (2) authorization for listing on Nasdaq of the Peoples Common Shares to be issued in the Merger; (3) the receipt of required regulatory approvals, including the approval of the Board of Governors of the Federal Reserve System, the Ohio Division of Financial Institutions, and the Kentucky Department of Financial Institutions; (4) effectiveness of the registration statement on Form S-4 for the Peoples Common Shares to be issued in the Merger; and (5) the absence of any order, injunction or other legal restraint preventing or making illegal the completion of the Merger or any of the other transactions contemplated by the Merger Agreement.

Tax Benefit Preservation Plan Termination – In 2015, the Company adopted a Tax Benefits Preservation Plan designed to reduce the likelihood of an “ownership change” occurring as a result of purchases and sales of the Company's common shares. See “Note 9 – Income Taxes,” to the financial statements for additional disclosure related to the Tax Benefits Preservation Plan. On October 24, 2022, with the unanimous approval of the Company’s Board of Directors, the Company amended the Tax Benefits Preservation Plan to accelerate its final expiration date to October 24, 2022, effectively terminating the Tax Benefits Preservation Plan as of that date.

 


30


Item 2. Management’ss Discussion and Analysis of Financial Conditionand 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 ourthe Company’s beliefs, assumptions and expectations about ourof its future financial and operating performance and growth plans, taking into account information currently available to us. These statements are not statements of historical fact. The words “believe,” “may,” “should,” “anticipate,” “estimate,” “expect,” “intend,” “objective,” “seek,” “plan,” “strive” or similar words, or the negatives of these words, identify forward-looking statements.

 

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

 

 

A significant percentagethe impact of our loan portfolio is comprised of non-owner occupied commercial real estate loans, real estate constructionthe novel coronavirus disease 2019 (COVID-19) pandemic and development loans,the economic and multi-family residential real estate loans, all of which carry a higher degree of risk.financial disruptions and instabilities that have followed it;

 

We continue to hold other real estate owned (“OREO”) properties, which could increase operating expensesdeterioration in the financial condition of borrowers resulting in significant increases in loan losses and result in future losses.provisions for those losses;

 

Our decisions regarding credit risk may not be accurate,changes in inflation and our allowance for loan losses may not be sufficientefforts to cover actual losses.control it;

 

Ourchanges in the interest rate environment, which may reduce the Companys margins or impact the value of securities, loans, deposits and other financial instruments;

changes in loan underwriting, credit review or loss reserve policies associated with economic conditions, examination conclusions, or regulatory developments;

general economic or business conditions, either nationally, regionally or locally in the communities the Bank serves, may be worse than expected, resulting in, among other things, a deterioration in credit quality or a reduced demand for credit;

the results of regulatory examinations;

any matter that would cause the Bank to conclude that there was impairment of any asset, including intangible assets;

the continued service of key management personnel, the Companys ability to pay cash dividends on our commonattract, motivate and preferred sharesretain qualified employees;

factors that increase the competitive pressure among depository and pay interestother financial institutions, including product and pricing pressures and the ability of the Companys competitors with greater financial resources to develop and introduce products and services that enable them to compete more successfully;

inability to comply with regulatory capital requirements and to secure any required regulatory approvals for capital actions;

failure in or breach of operational or security systems or infrastructure, or those of third-party vendors and other service providers, including as a result of cyber-attacks;

legislative or regulatory developments, including changes in laws concerning taxes, banking, securities, insurance and other aspects of the financial services industry;

risks related to the pending Merger with Peoples Bancorp, including risks if the Company is unable to complete the Merger due to the failure of the Company’s shareholders or Peoples’ shareholders to approve the Merger Agreement, the failure to satisfy other conditions to completion of the Merger, including receipt of required regulatory and other approvals, the failure of the proposed Merger to close for any other reason, the diversion of management’s attention from ongoing business operations and opportunities due to the Merger, and the effect of the announcement of the Merger on the junior subordinated debentures that relateCompany’s customer and employee relationships and operating results;

fiscal and governmental policies of the United States federal government; and

other risks and uncertainties reported from time to our trust preferred securities is currently restricted. Our inability to resume paying interesttime in the Company’s filings with the Securities and Exchange Commission (“SEC”), including Part II Item 1A “Risk Factors” of this report, as well as Part I Item 1A “Risk Factors” of the Company’s Annual Report on our trust preferred securities could adversely affect our common and preferred shareholders.Form 10-K for the year ended December 31, 2021.

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, 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 uslaws.

Cautionary Statement

The statements in this quarterly report regarding the Company’s Merger Agreement with Peoples are qualified by the detailed terms and conditions of the Merger Agreement, which is Exhibit 2.1 to this report. The Merger Agreement is the contractual document that establishes and governs the legal relations of the Company and Peoples with respect to the Merger and is not intended to be, and should not be relied on as, a source of factual, business or operational information about either the Company or Peoples. The representations, warranties, covenants and agreements made by the parties to the Merger Agreement are made as of specific dates and are qualified and limited, including by information in disclosure schedules that the parties exchanged in connection with the execution of such Merger Agreement. Moreover, certain of the representations and warranties are subject to a contractual standard of materiality that may be different from what may be viewed as material to an investor. Representations and warranties may be used as a tool to allocate risks between the parties to the Merger Agreement, including where the parties do so.not have complete knowledge of all facts. The Merger Agreement should not be read alone, but should instead be read in conjunction with the other information regarding Peoples, the Company, their respective affiliates or their respective businesses, the Merger Agreement and the Merger that will be contained in, or incorporated by reference into, the Registration Statement on Form S-4 to be filed by Peoples that will include a proxy statement of the Company and Peoples and a prospectus of Peoples, as well as in the Forms 10-K, Forms 10-Q and other filings that each of Peoples and the Company make with the SEC. INVESTORS ARE URGED TO READ THE REGISTRATION STATEMENT AND THE CORRESPONDING PROXY STATEMENT/PROSPECTUS REGARDING THE MERGER WHEN IT BECOMES AVAILABLE, AS WELL AS ANY OTHER RELEVANT DOCUMENTS FILED WITH THE SEC, TOGETHER WITH ALL AMENDMENTS AND SUPPLEMENTS TO THOSE DOCUMENTS, AS THEY WILL CONTAIN IMPORTANT INFORMATION. Investors and security holders may obtain a free copy of these documents (when available) through the website maintained by the SEC at www.sec.gov or by accessing Peoples' website (http://www.peoplesbancorp.com) under the tab "Investor Relations" and then under the heading "SEC Filings." and the Company’s website (https://www.limestonebank.com) under the tab “About Us – Investor Relations” and then under the tab “Documents – SEC Filings.” Shareholders of the Company also will be able to obtain copies of the proxy statement/prospectus and the filings with the SEC that will be incorporated by reference in the proxy statement/prospectus, without charge, by directing a request to Phil W. Barnhouse, Chief Financial Officer, Limestone Bancorp, Inc., 2500 Eastpoint Parkway, Louisville, Kentucky 40223-4156, telephone 502-499-4800.

This quarterly report is not intended to and shall not constitute an offer to sell or the solicitation of an offer to buy securities. This quarterly report is also not a solicitation of any vote in connection with the Merger. No offer of securities or solicitation will be made except by means of a prospectus meeting the requirements of Section 10 of the Securities Act of 1933, as amended.

31

 

Overview

 

PorterOrganized in 1988, Limestone Bancorp, Inc. (the Company”)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, (“Inc. (the Bank), the Bank”), our wholly owned subsidiary and the fourteenththirteenth largest bank domiciled in the Commonwealth of Kentucky based on total assets. We operateThe Bank operates banking offices in twelve14 counties in Kentucky. OurThe Bank’s markets include metropolitan Louisville in Jefferson County and the surrounding counties of HenryBullitt and Bullitt. We serveHenry. The Bank serves south central, Kentuckysouthern, and southernwestern Kentucky from banking officescenters in Barren, Butler, Daviess, Edmonson, Green, Hardin, Hart, Edmonson, Barren, Warren, Ohio, and Daviess Counties. WeWarren counties. The Bank also have an officehas banking centers in Lexington, Kentucky, the second largest city in Kentucky.the state, and Frankfort, Kentucky, the state capital. The Bank is a traditional community bank with a wide range of commercialpersonal and personalbusiness banking products.products and services. As of September 30, 2017, we2022, the Company had total assets of $963.0 million,$1.49 billion, total loans of $682.5 million,$1.13 billion, total deposits of $866.8 million$1.22 billion and stockholders’ equity of $40.1$128.4 million.

On October 24, 2022, the Company entered into an Agreement and Plan of Merger ("Merger Agreement") with Peoples Bancorp, Inc. (“Peoples”). The Merger Agreement provides for a business combination whereby the Company will merge with and into Peoples (the “Merger”), with Peoples as the surviving corporation in the Merger. Under the terms and subject to the conditions of the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each share of the Company’s common stock, issued and outstanding immediately prior to the Effective Time (except for Dissenting Shares, as provided for in the Merger Agreement), will be converted, in accordance with the procedures set forth in the Merger Agreement, into 0.90 of common shares, no par value, of Peoples. Upon the terms and subject to the conditions set forth in the Merger Agreement, the Merger is expected to close in the second quarter of 2023.

In conjunction with the Merger Agreement discussed above, the Company, with the unanimous approval of the Board of Directors, terminated its Tax Benefit Preservation Plan on October 24, 2022. The Tax Benefit Preservation Plan was originally put in place in 2015 and designed to preserve the benefits of the Company’s substantial tax assets. Restrictions on transfer designed to protect the Company’s tax assets remain in effect under the Company’s Articles of Incorporation, as approved by shareholders.

 

The Company reported net income of $1.8$5.8 million, or $0.76 per basic and $5.2diluted common share, and $13.4 million, or $1.76 per basic and diluted common share, for the three and nine months ended September 30, 2017,2022, compared with net income of $1.4$4.3 million, or $0.57 per basic and $3.9diluted common share, and $11.5 million, or $1.51 per basic and diluted common share, for the same periods of 2016. After deductions for earnings allocated to participating securities, net income available to common shareholders was $1.7 million and $5.1 million for the three and nine months ended September 30, 2017, respectively, compared with net income available to common shareholders of $1.3 million and $3.8 million for the three and nine months ended September 30, 2016, respectively.


Basic and diluted net income per common share were $0.29 and $0.83 for the three and nine months ended September 30, 2017, respectively, compared with basic and diluted net income per common share of $0.22 and $0.66 for the three and nine months ended September 30, 2016, respectively.2021.

 

We note the following significant itemsHighlights for the nine months ended September 30, 2017:2022 are as follows:

 

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

 

Loan growth outpaced paydowns during the period. Average loans receivable increased approximately $36.2$100.0 million, or 5.8%10.4%, to $658.0 million$1.06 billion for the nine months ended September 30, 2017,2022, compared with $621.8$959.6 million for the first nine months of 2016. This2021. SBA Paycheck Protection Program (“PPP”) loans averaged $340,000 and $19.4 million for the first nine months of 2022 and 2021, respectively.

Net interest margin increased three basis points to 3.56% in the first nine months of 2022 compared with 3.53% in the first nine months of 2021. The Federal Reserve increased the fed funds target by 25 basis points on March 16, 2022, 50 basis points on May 4, 2022, 75 basis points on June 15, 2022, 75 basis points on July 26, 2022, and 75 basis points on September 20, 2022. During the second and third quarters of 2022, the Bank’s fed funds sold, floating rate investment securities, loans with variable rate pricing features, and new loan originations benefitted from the upward movement in short-term rates and are expected to continue to benefit as rates continue to rise. The cost of interest-bearing liabilities has also been impacted to a lesser extent but is also expected to continue to increase as short-term interest rates continue to rise.

The yield on earning assets increased to 4.05% for the first nine months of 2022, compared to 4.00% for the first nine months of 2021. The yield on earning assets for the first nine months of 2021 was significantly impacted by $2.5 million in PPP fees, compared to $45,000 for the first nine months of 2022. During the first nine months of 2022, PPP fees represented approximately one basis point of earning asset yield and net interest margin, compared to 27 basis points for the first nine months of 2021. The reduction in PPP fee income was offset by an increase in interest revenue due to an increase in average loans between periods. The increase in average loans resulted in an increase in interest revenue volume of approximately $1.3$3.4 million for nine months ended September 30, 2022, which was offset by rate decreasesa decrease in interest revenue attributable to rates of $852,000 for the nine months September 30, 2017,$1.4 million due primarily to lower PPP fees between periods, as compared with the nine months of 2016.ended September 30, 2021.

 

The cost of interest-bearing liabilities increased from 0.62% in the first nine months of 2021 to 0.66% in the first nine months of 2022 as a result of increases in short-term interest rates during 2022.

 

Net interest margin decreased three basis points to 3.44% in the third quarter of 2017 compared to 3.47% in the third quarter of 2016. The cost of interest bearing liabilities increased seven basis points to 0.85% in the third quarter of 2017 compared to 0.78% in the third quarter of 2016. Net interest margin increased two basis points to 3.47% in the first nine months of 2017 compared with 3.45% in the first nine months of 2016. The cost of interest bearing liabilities increased two basis points to 0.81% in the first nine months of 2017 compared with 0.79% in the first nine months of 2016.

During the period, our improving trends in non-performing loans, past due loans, and loan risk categories continued. We recorded no provision for loan losses expense during the first nine months of 2017, compared to negative provisions for loan losses expense of $1.9recoveries were $1.6 million for the first nine months of 2016 and $750,000 for the third quarter2022, compared to net loan charge-offs of 2016. Both were attributable to declining historical loss rates, improvements in asset quality, and management’s assessment of risk in the loan portfolio. Net loan recoveries were $10,000$120,000 for the first nine months of 2017,2021. During the third quarter of 2022, the Bank received a payoff of $2.0 million on a nonaccrual commercial real estate loan resulting in a recovery of $1.5 million.

A negative provision for loan losses of $1.3 million and $50,000 was recorded in the third quarter and first nine months of 2022, respectively, compared to neta provision for loan charge-offslosses of $652,000 for$300,000 and $650,000 in the third quarter and the first nine months of 2016.2021, respectively. The 2022 negative loan loss provisions were primarily attributable to the significant recovery recognized during the third quarter and its impact on the historical loss percentages, offset by the additional reserve required by the growth trends within the portfolio during the period. The 2021 loan loss provisions were attributable to growth trends within the portfolio and net loan charge-offs impacting historical loss percentages during the period.

 

Non-performing loans decreased by $3.4 million to $5.8 million at September 30, 2017, compared with $9.2 million at December 31, 2016. The decrease in non-performing loans was primarily due to $4.5 million in paydowns and $528,000 in charge-offs which were partially offset by $2.0 million in loans placed on nonaccrual.

 

Loans past due 30-59 days decreased from $2.3 million$556,000 at December 31, 20162021 to $872,000$300,000 at September 30, 2017,2022, and loans past due 60-89 days increaseddecreased from $315,000$210,000 at December 31, 20162021 to $612,000$57,000 at September 30, 2017.2022. Total loans past due and nonaccrual loans decreased to $7.3$1.4 million at September 30, 2017,2022 from $11.8$3.9 million at December 31, 2016.2021.

 

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

Foreclosed properties were $6.3 million at September 30, 2017, compared with $6.8 million at December 31, 2016, and $7.1 million at September 30, 2016. During the first nine months of 2017, the Company acquired $270,000 and sold $738,000 of OREO. Operating expenses and fair value write downs, net of net gain on sales totaled $1.3 million for the first nine months of 2016 compared to $92,000 for the first nine months of 2017.

Our ratio of non-performing assets to total assets, including accruing TDRs, decreased to 1.38% at September 30, 2017, compared with 2.26% at December 31, 2016, and 2.55% at September 30, 2016.

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

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

 

Deposits increased 2.0% to $866.8 millionwere $1.22 billion at September 30, 2017,2022, compared with $849.9 million$1.21 billion at December 31, 2016. Noninterest-bearing demand deposits increased 7.6% from $124.4 million at December 31, 206 to $133.9 million at September 30, 2017.2021. Certificate of deposit balances increased $938,000$7.8 million during the first nine months of 20172022 to $446.6$273.8 million at September 30, 2017,2022, from $444.6$266.0 million at December 31, 2016. Money2021. Non-interest bearing accounts increased $13.9 million, savings accounts decreased $8.9 million, money market deposits increased 10.1% at September 30, 2017accounts decreased $2.5 million, and interest checking accounts decreased $341,000 during the first nine months of 2022 compared with December 31, 2016.2021.

 


32

 

 

On June 30, 2017,October 1, 2022, the Company entered intopaid a $10.0 million senior secured loan agreement with a commercial bank. The loan matures on June 30, 2022. Interest is payable quarterly at a rate$0.05 per common share cash dividend to shareholders 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%record as of the issued and outstanding stockclose of the Bank. The Company may prepay any amount due under the promissory note at any time without premium or penalty. The Company contributed $9.0 million of the borrowing proceeds to the Bank as common equity Tier 1 capital. The remaining $1.0 million of the borrowing proceeds was retained by the lender in escrow to service quarterly interest payments. Atbusiness on September 30, 2017, the escrow account had a balance of $903,000.16, 2022.

 

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 ourthe Company’s Annual Report on Form 10-K for the calendar year ended December 31, 2016.2021. Management has discussed the development, selection, and application of ourthe Company’s critical accounting policies with ourits Audit Committee. During the first nine months of 2017,2022, 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 September 30, 2017,2022, compared with the same period of 2016:2021:

 

 

For the Three Months

  

Change from

  

For the Three Months

 

Change from

 
 

Ended September 30,

  

Prior Period

  

Ended September 30,

  

Prior Period

 
 

2017

  

2016

  

Amount

  

Percent

  

2022

  

2021

  

Amount

  

Percent

 
 

(dollars in thousands)

  

(dollars in thousands)

 
                 

Gross interest income

 $9,446  $8,931  $515   5.8

%

 $15,121  $12,975  $2,146  16.5

%

Gross interest expense

  1,659   1,473   186   12.6  2,209  1,354  855  63.1 

Net interest income

  7,787   7,458   329   4.4  12,912  11,621  1,291  11.1 

Provision (negative provision) for loan losses

     (750

)

  750   100.0  (1,250

)

 300  (1,550

)

 (516.7

)

Non-interest income

  1,182   1,105   77   7.0  2,228  2,436  (208

)

 (8.5

)

Non-interest expense

  7,175   7,920   (745

)

  (9.4

)

 8,697  8,050  647  8.0 

Net income before taxes

  1,794   1,393   401   28.8  7,693  5,707  1,986  34.8 

Income tax expense

             1,880  1,366  514  37.6 

Net income

  1,794   1,393   401   28.8  5,813  4,341  1,472  33.9 

 

Net income for the three months ended September 30, 20172022 totaled $1.8$5.8 million, compared with $1.4$4.3 million for the comparable period of 2016.2021. Net interest income increased $329,000$2.1 million from the 20162021 third quarter primarily as a result of an increase in earning assets. Average earning assets increasedaverage loans as compared to the prior period. A negative provision for loan losses of $1.3 million was recorded in the third quarter of 2022, as compared to a provision for loan losses of $300,000 in the third quarter of 2021. The 2022 negative loan loss provision was primarily attributable to the significant recovery recognized during the third quarter and its impact on the historical loss percentages, offset by the additional reserve required by the growth trends within the portfolio during the period. The 2021 loan loss provision was attributable to growth trends within the portfolio and net loan charge-offs impacting historical loss percentages during the period.

Non-interest income decreased $208,000 from $864.3$2.4 million in the third quarter of 2021 to $2.2 million for the third quarter of 20162022. The third quarter of 2021 included a $465,000 gain on the call of a corporate bond from the Bank’s available for sale securities portfolio. Service charges on deposit accounts increased $165,000 as compared to $907.7 for the third 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 was2021 due to an increase in the cost of interest bearing liabilitiestransaction volumes. Non-interest expense increased $647,000 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. Non-interest income increased by $77,000 to $1.2 million from $1.1$8.1 million in the third quarter of 2016 primarily due2021 to an increase in service charges in deposit accounts of $48,000. Non-interest expense decreased from $7.9$8.7 million in the third quarter of 2016 to $7.2 million in2022. Salaries and benefits expense increased $377,000 from the third quarter of 2017 primarily due to decreased salaries2021 as a result of the inflationary impact on talent acquisition and employee benefits expensethe administration of $262,000, a $211,000 decline in OREO expense, a $144,000 decline in loan collection and litigation expense,annual salary adjustments, increased health care utilization costs, and a $142,000 declinemodest increase in professional fees.performance-based incentive compensation. Other non-interest expense increased $214,000 from the third quarter of 2021 primarily related to an increase in losses associated with demand deposit charge-offs and fraudulent check and debit card activity during the period.


 

The following table summarizes components of income and expense and the change in those componentscomponents for the nine months ended September 30, 2017,2022, compared with the same period of 2016:2021:

 

 

For the Nine Months

  

Change from

  

For the Nine Months

 

Change from

 
 

Ended September 30,

  

Prior Period

  

Ended September 30,

  

Prior Period

 
 

2017

  

2016

  

Amount

  

Percent

  

2022

  

2021

  

Amount

  

Percent

 
 

(dollars in thousands)

  

(dollars in thousands)

 
                 

Gross interest income

 $27,805  $26,821  $984   3.7

%

 $40,670  $37,601  $3,069  8.2

%

Gross interest expense

  4,689   4,516   173   3.8  4,964  4,386  578  13.2 

Net interest income

  23,116   22,305   811   3.6  35,706  33,215  2,491  7.5 

Provision (negative provision) for loan losses

     (1,900

)

  1,900   100.0  (50

)

 650  (700

)

 (107.7

)

Non-interest income

  3,357   3,648   (291

)

  (8.0

)

 6,722  6,455  267  4.1 

Non-interest expense

  21,290   23,947   (2,657

)

  (11.1

)

 24,895  23,988  907  3.8 

Net income before taxes

  5,183   3,906   1,277   32.7  17,583  15,032  2,551  17.0 

Income tax expense

     21   (21

)

  (100.0

)

 4,155  3,568  587  16.5 

Net income

  5,183   3,885   1,298   33.4  13,428  11,464  1,964  17.1 

 

Net incomeincome for the nine months ended September 30, 20172022 totaled $5.2$13.4 million, compared with net income of $3.9$11.5 million for the comparable period of 2016.2021. Net interest income increased $811,000$2.5 million from the first nine months of 20162021 as a result of an increase in earning assetsaverage loans and net interest margin. Net interest margin increased two basis points to 3.47%average investment securities. A negative provision for loan losses of $50,000 was recorded in the first nine months of 20172022, as compared with 3.45%to $650,000 provision for loan losses in the first nine months of 2016.2021. The increase in margin between periods was due to an increase in the yield on earning assets from 4.14% for the first nine months of 2016 to 4.17% for the first nine months of 2017, 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 million2022 negative loan loss provision. Thereprovision was noprimarily attributable to the significant recovery recognized during the third quarter and its impact on the historical loss percentages, offset by the additional reserve required by the growth trends within the portfolio during the period. The 2021 loan loss provisioning inprovision was attributable to growth trends within the first nine monthsportfolio and net loan charge-offs impacting historical loss percentages during the period.

33

Non-interest income decreasedincreased by $291,000$267,000 to $3.4$6.7 million from $3.6$6.5 million in the first nine months of 20162021. The increase was 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 serviceservices charges on deposit accounts of $195,000 and$421,000 due to an increase in transaction volumes, as well as a $179,000 increase in bank card interchange feesowned life insurance income due to additional policies being purchased in March 2022. Non-interest income for the first nine months of $76,000.2022 also included a $163,000 gain on sale of premises held for sale from the first quarter of 2022, while the first nine months of 2021 included a $191,000 gain on sale of OREO from the second quarter of 2021, as well as a $465,000 gain on the call of a corporate bond from the third quarter of 2021. Non-interest expense decreasedincreased $907,000 from $23.9$24.0 million in the first nine months of 20162021 to $21.3$24.9 million in the first nine months of 20172022. The increase was primarily due to a decreasean increase of $643,000 in OREO expense of $1.2 million, a $475,000 decline in professional fees, a $454,000 decline in litigationsalaries and loan collection expense,benefits as discussed above, and a $403,000 decline$328,000 increase in FDIC insurance.other non-interest expense primarily related to losses associated with demand deposit charge-offs and fraudulent check and debit card activity during the period.

 

Net Interest Income – Net interest income was $7.8$12.9 million for the three months ended September 30, 2017,2022, an increase of $329,000,$1.3 million, or 4.4%11.1%, compared with $7.5$11.6 million for the same period in 2016.2021. Net interest spread and margin were 3.31%3.52% and 3.44%3.73%, respectively, for the third quarter of 2017,2022, compared with 3.37%3.47% and 3.47%3.61%, respectively, for the third quarter of 2016. Net average non-accrual2021.

The Federal Reserve increased the fed funds target by 25 basis points on March 16, 2022, 50 basis points on May 4, 2022, 75 basis points on June 15, 2022, 75 basis points on July 26, 2022, and 75 basis points on September 20, 2022. During the second and third quarters of 2022, the Bank’s fed funds sold, floating rate investment securities, loans were $6.2 millionwith variable rate pricing features, and $11.0 millionnew loan originations benefitted from the upward movement in short-term rates and are expected to continue to benefit as rates continue to rise. The cost of interest-bearing liabilities has also been impacted to a lesser extent but is also expected to continue to increase as short-term interest rates continue to rise.

The yield on earning assets increased to 4.37% for the third quartersquarter of 2017 and 2016, respectively.

2022, as compared to 4.03% in the third quarter of 2021. Average interest-earning assets were $1.38 billion for the third quarter of 2022, compared with $1.28 billion for the third quarter of 2021, a 7.4% increase. Average loans receivable increased approximately $43.5$143.9 million and average investment securities increased $7.4 million, while average lower yielding fed funds sold decreased $56.2 million for the third quarter of 20172022, compared with the third quarter of 2016. This2021. PPP loans averaged $157,000 and $12.6 million for the third quarter of 2022 and 2021, respectively. The increase in average loans resulted in an increase in interest revenue volume of approximately $525,000$1.7 million for the quarter ended September 30, 2022, which was partially offset by a decrease in interest income driven by interest rate decreases aggregating $203,000 for the quarter ended September 30, 2017,revenue attributable to rates of $117,000 due primarily to lower PPP fees between periods, as compared with the third quarter of 2016. Interest foregone on non-accrual loans totaled $105,0002021. Total interest income increased 16.5%, or $2.1 million, for the third quarter of 2017,2022 compared with $180,000to the third quarter of 2021.

Loan fee income can meaningfully impact net interest income, loan yields, and net interest margin. The amount of loan fee income included in total interest income was $279,000 and $1.5 million for the quarters ended September 30, 2022 and September 30, 2021, respectively. This represents eight basis points and 48 basis points of yield on earning assets and net interest margin for the third quarter ended September 30, 2022 and 2021, respectively. Loan fee income for the third quarter of 2016.2022 did not include any fees earned on PPP loans, compared to $1.4 million in the third quarter of 2021, which represented 43 basis points of earning asset yield and net interest margin for the third quarter of 2021.

 

Net interest margin decreased three basis points from our marginThe cost of 3.47% ininterest-bearing liabilities increased to 0.85% for the third quarter of 2022, as compared to 0.56% for the third quarter of 2021. While deposit mix has continued to improve as compared to the prior year third quarter, the cost of interest-bearing liabilities was impacted by recent increases in short-term interest rates. Future short-term rate increases are expected to 3.44%further impact the cost of interest-bearing liabilities. Average interest-bearing liabilities increased by 7.9% to $1.03 billion for the third quarter of 2017. The yield on earning assets increased one basis point and rates paid on interest-bearing liabilities increased seven basis point from2022, as compared to $954.0 million for the third quarter of 2016.2021 primarily due to an increase of $42.2 million in average FHLB advances and a $32.9 million increase in average interest-bearing deposits. Total interest expense increased by 63.1% to $2.2 million for the third quarter of 2022 as compared to $1.4 million for the third quarter of 2021.

 

Net interest income was $23.1$35.7 million for the nine months ended September 30, 2017,2022, an increase of $811,000,$2.5 million, or 3.6%7.5%, compared with $22.3$33.2 million for the same period in 2016.2021. Net interest spread and margin were 3.36%3.39% and 3.47%3.56%, respectively, for the first nine months of 2017,2022, compared with 3.35%3.38% and 3.45%3.53%, respectively, for the first nine months of 2016. Net average non-accrual loans were $7.5 million and $12.0 million2021.

The yield on earning assets increased to 4.05% for the first nine months of 2017 and 2016, respectively. Cost of interest-bearing liabilities was 0.81% for2022, as compared to 4.00% in the first nine months of 2017 compared to 0.79% for the first nine months of 2016.

2021. Average loans receivable interest-earning assets increased approximately $36.2$84.8 million for the nine months ended September 30, 20172022, compared with the first nine months of 2016. This2021. Average loans for the first nine months of 2022 increased approximately $100.0 million and average investment securities increased $30.8 million, while average lower yielding fed funds sold decreased $45.4 million compared with the first nine months of 2021. PPP loans averaged $340,000 and $19.4 million for the first nine months of 2022 and 2021, respectively. The increase in average loans resulted in an increase in interest revenue volume of approximately $1.3$3.4 million for nine months ended September 30, 2022, which was offset by a decrease in interest revenue attributable to rates of $1.4 million due primarily to lower PPP fees between periods, as compared with the nine months ended September 30, 2021. The increase in average investment securities also resulted in $565,000 in additional interest income driven byas compared to the prior period. Total interest rate decreases aggregating $852,000income increased 8.2%, or $3.1 million, for the first nine months of 2022 compared to the first nine months of 2021.

The amount of loan fee income included in total interest income was $776,000 and $3.3 million for the nine months ended September 30, 2017 compared with the prior year period. Interest foregone2022 and 2021, respectively. This represents eight basis points and 35 basis points of yield on non-accrual loans totaled $368,000earning assets and net interest margin for the nine months ended September 30, 2017, compared with $576,0002022 and 2021, respectively. Loan fee income included PPP fees of $45,000 and $2.5 million for the nine months ended September 30, 2016.2022 and 2021, respectively, which represents approximately one basis point and 27 basis points of earning asset yield and net interest margin for those nine-month periods, respectively.

 

Net interest marginThe cost of interest-bearing liabilities increased two basis points to 3.47%0.66% for the first nine months of 2017 from our margin of 3.45% in the first nine months of 2016. The yield on earning assets increased three basis points2022, as compared to 0.62% for the first nine months of 2017 from2021. While deposit mix has continued to improve as compared to the prior year, the cost of interest-bearing liabilities was impacted by the recent increases in short-term interest rates and is expected to continue to increase as short-term interest rates continue to rise. Average interest-bearing liabilities increased by $58.3 million for the nine months ended September 30, 2022 compared with the first nine months of 2016,2021 primarily due to a $94.3 million increase in average money market accounts, offset by a decrease of $67.4 million in average certificate of deposits. Total interest expense increased by 13.2% to $5.0 million for the nine months ended September 30, 2022 as compared with an increaseto $4.4 million for the first nine months of two basis points in rates paid on interest-bearing liabilities.2021.

 


34

 

Average Balance Sheets

 

The following table presents the average balance sheets for the three monththree-month periods ended September 30, 20172022 and 2016,2021, 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 September 30,

 
 

2017

  

2016

  

2022

  

2021

 
 

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

%

 $1,096,478  $13,179  4.77

%

 $952,567  $11,565  4.82

%

Securities

                         

Taxable

  174,776   1,088   2.47   160,130   956   2.38  219,410  1,592  2.88  213,173  1,183  2.20 

Tax-exempt (3)

  19,547   143   4.47   20,779   153   4.51  29,615  166  2.96  28,464  168  3.12 

FHLB stock

  7,323   95   5.15   7,323   72   3.91  4,718  63  5.30  5,247  28  2.12 

Federal funds sold and other

  36,485   99   1.08   49,980   51   0.41   28,550   121  1.68   84,737   31  0.15 

Total interest-earning assets

  907,723   9,446   4.16

%

  864,307   8,931   4.15

%

 1,378,771   15,121  4.37

%

 1,284,188   12,975  4.03

%

Less: Allowance for loan losses

  (8,964

)

          (10,135

)

         (12,915

)

      (12,659

)

     

Non-interest earning assets

  52,928           63,453           85,791         97,843       

Total assets

 $951,687          $917,625          $1,451,647        $1,369,372       
                         

LIABILITIES AND STOCKHOLDERSEQUITY

                                    

Interest-bearing liabilities:

                         

Certificates of deposit and other time deposits

 $451,948  $1,059   0.93

%

 $455,840  $1,009   0.88

%

 $251,608  $381  0.60

%

 $290,062  $384  0.53

%

NOW and money market deposits

  253,699   250   0.39   231,601   238   0.41  510,914  729  0.57  436,146  322  0.29 

Savings accounts

  35,904   15   0.17   33,874   15   0.18  158,380  132  0.33  161,799  106  0.26 

FHLB advances

  2,350   13   2.19   2,672   17   2.53  62,229  354  2.26  20,000  39  0.77 

Junior subordinated debentures

  23,696   225   3.77   24,598   194   3.14  21,000  239  4.52  21,000  128  2.42 

Senior debt

  10,000   97   3.85          

Total interest-bearing liabilities

  777,597   1,659   0.85

%

  748,585   1,473   0.78

%

Subordinated capital notes

  25,000   374  5.94   25,000   375  5.95 

Total interest-bearing liabilities

 1,029,131   2,209  0.85

%

 954,007   1,354  0.56

%

                         

Non-interest-bearing liabilities:

                         

Non-interest-bearing deposits

  129,072           118,611          282,196       278,778      

Other liabilities

  5,859           8,259           10,974         10,031       

Total liabilities

  912,528           875,455          1,322,301       1,242,816      

Stockholders’ equity

  39,159           42,170         

Stockholders’ equity

  129,346         126,556       

Total liabilities and stockholders’ equity

 $951,687          $917,625          $1,451,647        $1,369,372       
                         

Net interest income

     $7,787          $7,458         $12,912        $11,621    
                         

Net interest spread

          3.31

%

          3.37

%

        3.52

%

        3.47

%

Net interest margin

          3.44

%

          3.47

%

        3.73

%

        3.61

%

      


(1)

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

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

(2)

Calculations include non-accruing loans averaging $6.2Loan fee income included no PPP fees in the three months ended September 30, 2022 and $1.4 million, and $11.0 million, respectively,or 43 basis points, in average loan amounts outstanding.

(3)

Taxable equivalent yields are calculated assuming a 35% federal income tax rate.the three months ended September 30, 2021.

 


35

 

The following table presents the averageaverage balance sheets for the nine monthnine-month periods ended September 30, 20172022 and 2016,2021, along with the related calculations of tax-equivalent net interest income, net interest margin and net interest spread for the related periods.

 

 

Nine Months Ended September 30,

  

Nine Months Ended September 30,

 
 

2017

  

2016

  

2022

  

2021

 
 

Average

Balance

  

Interest

Earned/Paid

  

Average

Yield/Cost

  

Average

Balance

  

Interest

Earned/Paid

  

Average

Yield/Cost

  

Average

Balance

  

Interest

Earned/Paid

  

Average

Yield/Cost

  

Average

Balance

  

Interest

Earned/Paid

  

Average

Yield/Cost

 
 

(dollars in thousands)

  

(dollars in thousands)

 

ASSETS

                                    

Interest-earning assets:

                         

Loan receivables (1)(2)

 $657,980  $23,493   4.77

%

 $621,824  $23,036   4.95

%

 $1,059,609  $35,537  4.48

%

 $959,571  $33,573  4.68

%

Securities

                         

Taxable

  175,838   3,370   2.56   161,232   2,895   2.40  223,648  4,338  2.59  197,318  3,402  2.31 

Tax-exempt (3)

  19,805   432   4.49   21,355   475   4.57  29,906  495  2.95  25,476  476  3.33 

FHLB stock

  7,323   264   4.82   7,323   219   3.99  4,982  127  3.41  5,619  87  2.07 

Federal funds sold and other

  38,913   246   0.85   62,451   196   0.42   30,234   173  0.77   75,600   63  0.11 

Total interest-earning assets

  899,859   27,805   4.17

%

  874,185   26,821   4.14

%

 1,348,379   40,670  4.05

%

 1,263,584   37,601  4.00

%

Less: Allowance for loan losses

  (8,950

)

          (11,138

)

         (12,291

)

      (12,620

)

     

Non-interest earning assets

  52,904           67,241           89,330         98,339       

Total assets

 $943,813          $930,288          $1,425,418        $1,349,303       
                         

LIABILITIES AND STOCKHOLDERS’ EQUITY

                                    

Interest-bearing liabilities:

                         

Certificates of deposit and other time deposits

 $458,732  $3,149   0.92

%

 $471,530  $3,108   0.88

%

 $256,320  $999  0.52

%

 $323,748  $1,451  0.60

%

NOW and money market deposits

  244,521   683   0.37   231,213   696   0.40  499,568  1,471  0.39  405,238  961  0.32 

Savings accounts

  35,650   45   0.17   34,460   46   0.18  162,864  320  0.26  155,364  343  0.30 

FHLB advances

  6,594   64   1.30   2,827   54   2.55  44,103  502  1.52  20,203  115  0.76 

Junior subordinated debentures

  23,920   651   3.64   24,822   612   3.29  21,000  546  3.48  21,000  390  2.48 

Senior debt

  3,407   97   3.81          

Subordinated capital notes

  25,000   1,126  6.02   25,000   1,126  6.02 

Total interest-bearing liabilities

  772,824   4,689   0.81

%

  764,852   4,516   0.79

%

 1,008,855   4,964  0.66

%

 950,553   4,386  0.62

%

                         

Non-interest-bearing liabilities:

                         

Non-interest-bearing deposits

  125,932           117,377          276,829       268,217      

Other liabilities

  8,401           9,735           10,317         8,632       

Total liabilities

  907,157           891,964          1,296,001       1,227,402      

Stockholders’ equity

  36,656           38,324         

Stockholders’ equity

  129,417         121,901       

Total liabilities and stockholders’ equity

 $943,813          $930,288          $1,425,418        $1,349,303       
                         

Net interest income

     $23,116          $22,305         $35,706        $33,215    
                         

Net interest spread

          3.36

%

          3.35

%

        3.39

%

        3.38

%

                         

Net interest margin

          3.47

%

          3.45

%

        3.56

%

        3.53

%

 


(1)

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

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

(2)

Calculations include non-accruing loans averaging $7.5Loan fee income included PPP fees of $45,000, or approximately one basis point, for the nine months ended September 30, 2022 and $2.5 million, and $12.0 million, respectively, in average loan amounts outstanding.

(3)

Taxable equivalent yields are calculated assuming a 35% federal income tax rate.or 27 basis points, for the nine months ended September 30, 2021.

 


36

 

Rate/Volume Analysis

 

The table below sets forth certain information regarding changes in interest income and interest expense for the periods indicated. For each categorycategory of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in rate (changes in rate multiplied by old volume); (2) changes in volume (changes in volume multiplied by old rate); and (3) changes in rate-volume (change in rate multiplied by change in volume). Changes in rate-volume are proportionately allocated between rate and volume variance.

 

 

Three Months Ended September 30,

2017 vs. 2016

  

Nine Months Ended September 30,

2017 vs. 2016

  

Three Months Ended September 30,

2022 vs. 2021

  

Nine Months Ended September 30,

2022 vs. 2021

 
 

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

 $(203

)

 $525  $322  $(852

)

 $1,309  $457  $(117

)

 $1,731  $1,614  $(1,432

)

 $3,396  $1,964 

Securities

  38   84   122   184   248   432  365  42  407  390  565  955 

FHLB stock

  23      23   45      45  38  (3

)

 35  51  (11

)

 40 

Federal funds sold and other

  65   (17

)

  48   144   (94

)

  50   124   (34

)

  90   169   (59

)

  110 

Total increase (decrease) in interest income

  (77

)

  592   515   (479

)

  1,463   984   410   1,736   2,146   (822

)

  3,891   3,069 
                         

Interest-bearing liabilities:

                                    

Certificates of deposit and other time deposits

  59   (9

)

  50   127   (86

)

  41  51  (54

)

 (3

)

 (174

)

 (278

)

 (452

)

NOW and money market accounts

  (10

)

  22   12   (52

)

  39   (13

)

 344  63  407  259  251  510 

Savings accounts

  (1

)

  1      (3

)

  2   (1

)

 28  (2

)

 26  (39

)

 16  (23

)

FHLB advances

  (2

)

  (2

)

  (4

)

  (37

)

  47   10  150  165  315  177  210  387 

Junior subordinated debentures

  38   (7

)

  31   62   (23

)

  39  111    111  156    156 

Senior debt

     97   97      97   97 

Subordinated capital notes

  (1

)

     (1

)

         

Total increase (decrease) in interest expense

  84   102   186   97   76   173   683   172   855   379   199   578 

Increase (decrease) in net interest income

 $(161

)

 $490  $329  $(576

)

 $1,387  $811  $(273

)

 $1,564  $1,291  $(1,201

)

 $3,692  $2,491 

 

Non-Interest Income – The following table presents the major categories of non-interest income for the three and nine months ended September 30, 20172022 and 2016:2021:

 

 

For the Three Months

  

For the Nine Months

  

For the Three Months

 

For the Nine Months

 
 

Ended September 30,

  

Ended September 30,

  

Ended September 30,

  

Ended September 30,

 
 

2017

  

2016

  

2017

  

2016

  

2022

  

2021

  

2022

  

2021

 
 

(dollars in thousands)

  

(dollars in thousands)

 
                 

Service charges on deposit accounts

 $568  $520  $1,617  $1,422  $748  $583  $2,072  $1,651 

Bank card interchange fees

  245   214   713   637  1,061  1,044  3,151  3,077 

Other real estate owned rental income

     46      451 

Bank owned life insurance income

  103   101   309   316 

Net gain (loss) on sales and calls of securities

     (16

)

  (5

)

  187 

Income from bank owned life insurance

 148  112  599  420 

Net gain on sale of other real estate owned

       191 

Gain (loss) on sales and calls of securities, net

   465  (3

)

 460 

Gain on sale of premises held for sale

     163   

Other

  266   240   723   635   271   232   740   656 

Total non-interest income

 $1,182  $1,105  $3,357  $3,648  $2,228  $2,436  $6,722  $6,455 

 

Non-interest income for the third quarter of 2017 increased2022 decreased by $77,000,$208,000, or 7.0%8.5%, compared with the third quarter of 2016.2021. The increase in non-interest income was primarily driven by an increase inthird quarter of 2021 included a $465,000 gain on the call of a corporate bond from the Bank’s available for sale securities portfolio. Compared to the third quarter of 2021, service charges on deposit accounts of $48,000 as well asincreased $165,000 due to an increase in bank card interchange fees of $31,000. transaction volumes.

For the nine months ended September 30, 2017,2022, non-interest income decreasedincreased by $291,000,$267,000, or 8.0%4.1%, to $3.4$6.7 million compared with $3.6$6.5 million for the same period of 2016.2021. The decrease in non-interest income between the nine-month comparative periodsincrease was primarily due to a $451,000 decrease in OREO rental income and a $192,000 decrease in gains on sales of securities. This was partially offset by an increase in serviceservices charges on deposit accounts of $195,000 and$421,000 due to an increase in transaction volumes, as well as a $179,000 increase in bank card interchange feesowned life insurance income due to additional policies being purchased in March 2022. Non-interest income for the first nine months of $76,000.2022 also included a $163,000 gain on sale of premises held for sale from the first quarter of 2022, while the first nine months of 2021 included a $191,000 gain on sale of OREO from the second quarter of 2021, as well as, a $465,000 gain on the call of a corporate bond from the third quarter of 2021.


37

 

Non-interest Expense The following table presents the major categories of non-interest expense for the three and nine months ended September 30, 20172022 and 2016:2021:

 

 

For the Three Months

  

For the Nine Months

  

For the Three Months

 

For the Nine Months

 
 

Ended September 30,

  

Ended September 30,

  

Ended September 30,

  

Ended September 30,

 
 

2017

  

2016

  

2017

  

2016

  

2022

  

2021

  

2022

  

2021

 
 

(dollars in thousands)

  

(dollars in thousands)

 
                 

Salary and employee benefits

 $3,683  $3,945  $11,433  $11,624  $4,959  $4,582  $14,174  $13,531 

Occupancy and equipment

  836   842   2,501   2,504  1,134  1,024  3,218  3,063 

Deposit account related expenses

 571  545  1,692  1,592 

Data processing expense

 402  378  1,191  1,133 

Professional fees

  232   374   776   1,251  206  219  663  701 

Marketing expense

  364   289   880   706  159  200  464  561 

FDIC insurance

  356   442   1,055   1,458  90  90  270  315 

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 

Deposit tax

 99  90  297  270 

Communications expense

 108  153  293  520 

Insurance expense

 104  105  318  324 

Postage and delivery

 156  169  469  460 

Other

  969   934   2,826   2,893   709   495   1,846   1,518 

Total non-interest expense

 $7,175  $7,920  $21,290  $23,947  $8,697  $8,050  $24,895  $23,988 

 

Non-interest expense for the third quarter ended September 30, 2017 decreased $745,000,2022 increased $647,000, or 9.4%8.0%, compared with the third quarter of 2016. This decrease was primarily due to a decrease in salary2021. Salaries and employee benefits expense increased $377,000 from the third quarter of $262,000,2021 as a $211,000 decrease in OREO expense asresult of the OREO portfolio was significantly reduced, a $144,000 decline in loan collectioninflationary impact on talent acquisition and litigation expenses,the administration of annual salary adjustments, increased health care utilization costs, and a $142,000 declinemodest increase in professional fees. performance-based incentive compensation. Other non-interest expense increased $214,000 from the third quarter of 2021 primarily related to an increase in losses associated with demand deposit charge-offs and fraudulent check and debit card activity during the period.

For the nine months ended September 30, 2017,2022, non-interest expense decreased $2.7 million,increased $907,000, or 11.1%3.8% to $21.3$24.9 million compared with $23.9$24.0 million for the first nine months of 2016.2021. The decreasesincrease was primarily due to an increase of $643,000 in salaries and benefits as discussed above, and a $328,000 increase in other non-interest expense forprimarily related to losses associated with demand deposit charge-offs and fraudulent check and debit card activity during the nine months ended September 30, 2017 were 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 of $454,000 in litigation and loan collection expense, and a reduction in FDIC insurance of $403,000.period.

 

Income Tax ExpenseEffective tax rates differ from the federal statutory rate of 35%21% applied to income before income taxes due to the following:

 

  

For the Three Months

  

For the Nine Months

 
  

Ended September 30,

  

Ended September 30,

 
  

2017

  

2016

  

2017

  

2016

 
  

(dollars in thousands)

 
                 

Federal statutory rate times financial statement income

 $628  $487  $1,814  $1,367 

Effect of:

                

Valuation allowance

  (551

)

  (465

)

  (1,488

)

  (1,197

)

Tax-exempt income

  (50

)

  (52

)

  (147

)

  (161

)

Non-taxable life insurance income

  (36

)

  (35

)

  (108

)

  (110

)

Restricted stock vesting

        (98

)

   

Other, net

  9   65   27   122 

Total

 $  $  $  $21 

  

For the Three Months

  

For the Nine Months

 
  

Ended September 30,

  

Ended September 30,

 
  

2022

  

2021

  

2022

  

2021

 
  

(dollars in thousands)

 
                 

Federal statutory tax rate

  21

%

  21

%

  21

%

  21

%

Federal statutory rate times financial statement income

 $1,615  $1,199  $3,692  $3,157 

Effect of:

                

State income taxes

  294   224   657   607 

Tax-exempt interest income

  (32

)

  (38

)

  (95

)

  (108

)

Non-taxable life insurance income

  (31

)

  (28

)

  (126

)

  (105

)

Restricted stock vesting

     (1

)

  (21

)

  (1

)

Other, net

  34   10   48   18 

Total

 $1,880  $1,366  $4,155  $3,568 

 

Analysis of Financial Condition

 

Total assets increased $17.8$78.0 million, or 1.9%5.5%, to $963.0 million$1.49 billion at September 30, 2017,2022, from $945.2 million$1.42 billion at December 31, 2016.2021. This increase was primarily attributable to an increase in net loans receivable of $43.3$126.1 million and bank owned life insurance of $7.1 million, offset by decreases of $36.0 million in the securities portfolio and $20.2 million in cash and cash equivalents.

Investment SecuritiesThe securities portfolio serves as a decreasesource of liquidity and earnings and contributes to the management of interest rate risk. Investments are made in interest bearing deposits in banksvarious types of $19.1 millionliquid assets, including U.S. Treasury obligations and a decrease in available for sale securities of $3.0 million.

Deferred Tax Asset Valuation Allowance various federal agencies, obligations of states and political subdivisions, corporate bonds, and collateralized loan obligations. The Company has a net deferred tax asset of $51.9investment portfolio decreased by $36.0 million, subjector 13.8%, to a full valuation allowance$224.6 million at September 30, 2017. Our ability2022, compared with $260.7 million at December 31, 2021. The decrease was comprised primarily of $25.9 million in payment proceeds and $20.2 million in fair value declines attributable to utilize deferred tax assets depends upon generating sufficient future levelsthe rising interest rate environment, partially offset by purchases of taxable income. $10.6 million.

The determination to restore a deferred tax asset and eliminate a valuation allowance depends uponfollowing table sets forth the evaluation of both positive and negative evidence regarding the likelihood of achieving sufficient future taxable income levels. A key elementcarrying value of the evaluation issecurities portfolio at the achievementdates indicated (in thousands):

  

September 30, 2022

  December 31, 2021 
  

Amortized

Cost

  

Gross

Unrealized

Gains

  

Gross

Unrealized

Losses

  

Fair

Value

  

Amortized

Cost

  

Gross

Unrealized

Gains

  

Gross

Unrealized

Losses

  

Fair

Value

 
                                 

Available for sale

                                

U.S. Government and federal agencies

 $24,810  $  $(2,864

)

 $21,946  $26,075  $301  $(133

)

 $26,243 

Agency mortgage-backed residential

  82,193   16   (11,777

)

  70,432   93,650   1,339   (970

)

  94,019 

Collateralized loan obligations

  48,209      (2,221

)

  45,988   50,227      (78

)

  50,149 

Corporate bonds

  45,493   9   (2,576

)

  42,926   43,432   572   (202

)

  43,802 

Total available for sale

 $200,705  $25  $(19,438

)

 $181,292  $213,384  $2,212  $(1,383

)

 $214,213 

  

Amortized

Cost

  

Gross

Unrecognized

Gains

  

Gross

Unrecognized

Losses

  

Fair

Value

  

Amortized

Cost

  

Gross

Unrecognized

Gains

  

Gross

Unrecognized

Losses

  

Fair

Value

 
                                 

Held to maturity

                                

State and municipal

 $43,350  $  $(9,582

)

 $33,768  $46,460  $158  $(338

)

 $46,280 

Total held to maturity

 $43,350  $  $(9,582

)

 $33,768  $46,460  $158  $(338

)

 $46,280 

The Bank owns Collateralized Loan Obligations (CLOs), which are debt securities secured by professionally managed portfolios of pre-tax net income rathersenior-secured loans to corporations. CLO are typically $300 million to $1 billion in size, contain one hundred or more loans and have five to six credit tranches with credit ratings 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 pre-tax net lossgovernment 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 a cumulative basis for the trailing three-year period.underlying loans, capital gains and losses on the underlying loans, prepayments on the underlying loans, and other conditions or economic factors. At September 30, 2017, our trailing three-year cumulative pre-tax net2022, $27.0 million and $19.0 million of the Bank’s CLOs were risk rated AA and A rated, respectively. None of the CLOs were subject to ratings downgrade during the nine months ended September 30, 2022.

Stress testing was completed on each security in the CLO portfolio as of September 30, 2022. Each security in the portfolio passed, without dollar loss, had declineda stress scenario characterized as severe, which assumed a ten percent per annum constant prepayment rate, a twelve percent per annum constant default rate for four years followed by a four percent rate thereafter, and a forty-five percent recovery rate on a one-year lag.

The corporate bond portfolio consists of 16 subordinated debt securities and two senior debt securities of U.S. banks and bank holding companies with maturities ranging from 2024 to $762,000. We continue2037. The securities have either initially a fixed rate for five years converting to monitorfloating rate at an index over LIBOR or SOFR, or a floating rate at an index over LIBOR or SOFR from inception. Management regularly monitors the financial condition of these corporate issuers by reviewing their regulatory and evaluate the positivepublic filings.

The Company evaluates securities for other-than-temporary impairment at least on a quarterly basis, and negative evidence and will reverse the valuation allowancemore frequently when we determine iteconomic or market concerns warrant such evaluation. Consideration is more-likely-than-not the asset will be utilized to reduce future taxes payable relatedgiven to the future taxable incomelength of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the Company.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 September 30, 2022, management does not believe any securities in the portfolio with unrealized losses should be classified as other than temporarily impaired.

 

 

Loans Receivable Loans receivable increased $43.3$126.1 million, or 6.8%12.6%, during the nine months ended September 30, 20172022 to $682.5 million$1.13 billion as loan growth outpaced paydowns. OurThe commercial and commercial real estate portfolios increased by an aggregate of $43.8$124.3 million, or 12.3%17.5%, during the first nine months of 20172022 and comprised 58.4%74.0% of the loan portfolio at September 30, 2017.2022. Residential real estate and consumer portfolios decreased by an aggregate of $9.0 million, or 3.5%, during the first nine months of 2022 and comprised 21.9% of the loan portfolio at September 30, 2022.

 

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

 $107,616   15.77

%

 $97,761   15.29

%

Commercial Real Estate

                

Construction

  44,956   6.59   36,330   5.68 

Farmland

  88,370   12.95   71,507   11.19 

Nonfarm nonresidential

  157,956   23.14   149,546   23.39 

Residential Real Estate

                

Multi-family

  55,684   8.16   48,197   7.54 

1-4 Family

  173,213   25.38   188,092   29.42 

Consumer

  8,474   1.24   9,818   1.54 

Agriculture

  45,675   6.69   37,508   5.87 

Other

  567   0.08   477   0.08 

Total loans

 $682,511   100.00

%

 $639,236   100.00

%

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

 

  

As of September 30,

  

As of December 31,

 
  

2022

  

2021

 
  

Amount

  

Percent

  

Amount

  

Percent

 
      

(dollars in thousands)

     
                 

Commercial (1)

 $240,182   21.29

%

 $220,826   22.04

%

Commercial Real Estate

                

Construction

  127,302   11.29   74,806   7.47 

Farmland

  66,820   5.92   68,388   6.83 

Nonfarm nonresidential

  399,958   35.46   345,893   34.53 

Residential Real Estate

                

Multi-family

  45,903   4.07   50,224   5.01 

1-4 Family

  166,715   14.78   168,873   16.86 

Consumer

  33,894   3.00   36,440   3.64 

Agriculture

  46,689   4.14   35,924   3.59 

Other

  482   0.05   466   0.03 

Total loans

 $1,127,945   100.00

%

 $1,001,840   100.00

%


(1)

Includes PPP loans of $150,000 and $1.2 million at September 30, 2022 and December 31, 2021, respectively.

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

 September 30, 2017  December 31, 2016  September 30, 2022  December 31, 2021 
 

Loans

  

% to

Total

  

 

 

Loans

  

 

% to

Total

  

Loans

  

% to

Total

  

Loans

  

% to

Total

 
 

(dollars in thousands)

  

(dollars in thousands)

 
                 

Pass

 $633,203   92.8

%

 $586,430   91.7

%

 $1,116,009  98.9

%

 $977,962  97.6

%

Watch

  35,167   5.1   30,431   4.8  3,177  0.3  7,856  0.8 

Special Mention

  598   0.1   497   0.1         

Substandard

  13,543   2.0   21,878   3.4  8,759  0.8  16,022  1.6 

Doubtful

                        

Total

 $682,511   100.0

%

 $639,236   100.0

%

 $1,127,945   100.0

%

 $1,001,840   100.00

%

Our loansLoans receivable have increased $43.3$126.1 million, or 6.8%12.6%, during the nine months ended September 30, 2017. The2022 primarily as a result of loan growth outpacing loan payoffs during the period. Since December 31, 2021, the pass loan category increased approximately $46.8$138.0 million, the watch category increaseddecreased approximately $4.7 million, the special mention category increased approximately $101,000, and the substandard category declineddecreased approximately $8.3$7.3 million. The $8.3$7.3 million decrease in loans classified as substandard was primarily driven by $5.8$7.8 million in principal payments, received, $4.5 million$331,000 in charge-offs, and $262,000 in loans upgraded from substandard, $623,000 in charge-offs, and $270,000 in loans moved to OREO, offset by $2.8$1.1 million in loans movedmigrating to substandard during the first nine months of 2017.substandard.

 

 

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

 

 

September 30,

2017

  

December 31,

2016

  

September 30,

2022

  

December 31,

2021

 
 (in thousands)  

(in thousands)

 

Past Due Loans:

         

30-59 Days

 $872  $2,302  $300  $556 

60-89 Days

  612   315  57  210 

90 Days and Over

            

Total Loans Past Due 30-90+ Days

  1,484   2,617  357  766 
         

Nonaccrual Loans

  5,769   9,216   1,054   3,124 

Total Past Due and Nonaccrual Loans

 $7,253  $11,833  $1,411  $3,890 

 

During the nine months ended September 30, 2017, nonaccrual loans decreased by $3.4 million to $5.8 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 nine months ended September 30, 2017,2022, nonaccrual loans decreased by $2.1 million to $1.1 million. Loans past due 30-59 days decreased from $2.3 million$556,000 at December 31, 20162021 to $872,000$300,000 at September 30, 2017.2022. Loans past due 60-89 days increaseddecreased from $315,000$210,000 at December 31, 20162021 to $612,000$57,000 at September 30, 2017.2022. This represents a $1.1 million$409,000 decrease in accruing past due loans from December 31, 20162021 to September 30, 2017,2022 in loans past due 30-89 days. We considered thisThe $2.1 million decrease in nonaccrual loans was primarily due to a payoff of a $2.0 million commercial real estate loan, which resulted in a recovery of $1.5 million. This trend in delinquency levels is considered during the evaluation of qualitative trends in the portfolio when establishing the general component of ourthe allowance for loan losses.

Non-Performing AssetsNon-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.

  

September

30,

2017

  

December

31,

2016

 
  

(dollars in thousands)

 
         

Loans past due 90 days or more still on accrual

 $  $ 

Loans on nonaccrual status

  5,769   9,216 

Total non-performing loans

  5,769   9,216 

Real estate acquired through foreclosure

  6,330   6,821 

Other repossessed assets

      

Total non-performing assets

 $12,099  $16,037 
         

Non-performing loans to total loans

  0.85

%

  1.44

%

Non-performing assets to total assets

  1.26

%

  1.70

%

Allowance for non-performing loans

 $288  $241 

Allowance for non-performing loans to non-performing loans

  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.

 

Troubled Debt Restructuring - A troubled debt restructuring (TDR) occurs when the Bank has agreed to a loan modification in the form of a concession to a borrower who is experiencing financial difficulty. The Bank’s TDRs typically involve a reduction in interest rate, a deferral of principal for a stated period of time, or an interest only period. All TDRs are considered impaired, and the Bank allocateshas allocated reserves for these loans to reflect the present value of the concessionary terms granted to the borrower. If the loan is considered collateral dependent, it is reported net of allocated reserves, at the fair value of the collateral less cost to sell.

 

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

 

At September 30, 2017, we2022 and December 31, 2021, the Bank had sixtwo and three restructured loans totaling $3.2 million$205,000 and $405,000, 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 September 30, 2022 or December 31, 2021. 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 or commercial real estate properties or farmland. Restructured loans also include $467,000 of commercial loans.1-4 residential properties. At September 30, 2017, $1.2 million of our restructured loans were accruing2022 and $1.9 million were on nonaccrual compared with $5.4 million and $3.3 million, respectively, at December 31, 2016.2021, 71% and 84%, respectively, of the TDRs were performing according to their modified terms.

 

There were no new TDRsmodifications granted during the first nine months of 2017 or 2016. During the nine months ended September 30, 2017, TDRs were reduced2022 and one modification granted during the third quarter and nine months ended September 30, 2021 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.

 

Non-Performing AssetsNon-performing assets consist of certain restructured loans for which interest rate or other terms have been renegotiated, loans past due 90 days or more still on accrual, loans on which interest is no longer accrued, real estate acquired through foreclosure and repossessed assets. The following table sets forth information with respect to TDRs, non-performing loans, real estate acquired through foreclosure, assets as of September 30, 2022 and other repossessed assets.December 31, 2021:

 

  

September

30,

2017

  

December

31,

2016

 
  

(dollars in thousands)

 
         

Total non-performing loans

 $5,769  $9,216 

TDRs on accrual

  1,226   5,350 

Total non-performing loans and TDRs on accrual

 $6,995  $14,566 

Real estate acquired through foreclosure

  6,330   6,821 

Other repossessed assets

      

Total non-performing assets and TDRs on accrual

 $13,325  $21,387 
         

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

  1.02

%

  2.28

%

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

  1.38

%

  2.26

%

  

September 30,

2022

  

December 31,

2021

 
  

(dollars in thousands)

 
         

Loans on nonaccrual status

 $1,054  $3,124 

Troubled debt restructurings on accrual

  146   340 

Past due 90 days or more still on accrual

      

Total non-performing loans

  1,200   3,464 

Real estate acquired through foreclosure

      

Other repossessed assets

      

Total non-performing assets

 $1,200  $3,464 
         

Nonaccrual loans to total loans

  0.09

%

  0.31

%

Non-performing loans and TDRs on accrual to total loans

  0.11

%

  0.35

%

Non-performing assets and TDRs on accrual to total assets

  0.08

%

  0.24

%

Allowance for loan losses to nonaccrual loans

  1,236.34

%

  369.11

%

Allowance for non-performing loans

 $22  $12 

Allowance for non-performing loans to non-performing loans and TDRs on accrual

  1.83

%

  0.35

%

 

 

Allowance for Loan Losses and Provision for Loan LossesThe Bank maintains an allowance for loan losses believed to be sufficient to absorb probable incurred losses existing in the loan portfolio. Management evaluates the adequacy of the allowance using, among other things, historical loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of the underlying collateral and current economic conditions and trends. The allowance may be allocated for specific loans or loan categories, but the entire allowance is available for any loan. The allowance consists of specific and general components. The specific component relates to loans that are individually evaluated and measured for impairment. The general component is based on historical loss experience adjusted for qualitative environmental factors. Management develops allowance estimates based on actual loss experience adjusted for current economic conditions and trends. This assessment is an estimate and is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available or as events change.

Net loan recoveries were $1.7 million and $1.6 million, for the three and nine months ended September 30, 2022, compared to net loan recoveries of $36,000 and net loan charge-offs of $120,000, for the three and nine months ended September 30, 2021. During the third quarter of 2022, the Bank received a payoff of $2.0 million on a nonaccrual commercial real estate loan resulting in a recovery of $1.5 million.

A negative provision for loan losses of $1.3 million and $50,000 was recorded in the third quarter and first nine months of 2022, respectively, compared to a provision for loan losses of $300,000 and $650,000 in the third quarter and the first nine months of 2021, respectively. The 2022 negative loan loss provisions were primarily attributable to the significant recovery during the third quarter and its impact on the historical loss percentages, offset by the additional reserve required by the growth trends within the portfolio during the period. The 2021 loan loss provisions were attributable to growth trends within the portfolio and net loan charge-offs impacting historical loss percentages during the period.

The following table sets forth an analysis of loan loss experience as of and for the periods indicated:

  

Three Months Ended

September 30,

  

Nine Months Ended

September 30,

  

December

31,

 
  

2022

  

2021

  

2022

  

2021

  2021 
  

(in thousands)

 

Balance at beginning of period

 $12,550  $12,637  $11,531  $12,443  $12,443 
                     

Loans charged-off:

                    

Real estate

  43   18   527   159   2,332 

Commercial

  6      31   19   19 

Consumer

  37   7   122   58   131 

Agriculture

           44   44 

Other

               

Total charge-offs

  86   25   680   280   2,526 
                     

Recoveries

                    

Real estate

  1,759   37   2,083   85   228 

Commercial

  28   10   37   20   172 

Consumer

  30   7   65   41   49 

Agriculture

     7   45   14   15 

Other

               

Total recoveries

  1,817   61   2,230   160   464 

Net charge-offs (recoveries)

  (1,731

)

  (36

)

  (1,550

)

  120   2,062 

Provision (negative provision) for loan losses

  (1,250

)

  300   (50

)

  650   1,150 

Balance at end of period

 $13,031  $12,973  $13,031  $12,973  $11,531 
                     

Allowance for loan losses to period-end loans

  1.16

%

  1.34

%

  1.16

%

  1.34

%

  1.15

%

Net charge-offs to average loans

  (0.63

)%

  (0.01

)%

  (0.20

)%

  0.02

%

  0.22

%

Allowance for loan losses to non-performing loans

  1,085.92

%

  592.92

%

  1,085.92

%

  592.92

%

  332.88

%

The allowance for loan losses is based on management’s continuing review and evaluation of individualto total 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 result 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 portfolio1.16% 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.

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

  

Three Months Ended

September 30,

  

Nine Months Ended

September 30,

  

Year Ended

December 31,

 
  

2017

  

2016

  

2017

  

2016

  2016 
  

(in thousands)

 

Balance at beginning of period

 $8,885  $10,104  $8,967  $12,041  $12,041 
                     

Loans charged-off:

                    

Real estate

  57   363   570   1,658   2,157 

Commercial

  5   15   5   276   276 

Consumer

  5   21   30   56   178 

Agriculture

     5   95   13   18 

Other

     1      79    

Total charge-offs

  67   405   700   2,082   2,629 
                     

Recoveries

                    

Real estate

  112   381   561   894   1,189 

Commercial

  3   102   44   169   334 

Consumer

  25   23   69   216   368 

Agriculture

  16   1   25   86   114 

Other

  3   33   11   65    

Total recoveries

  159   540   710   1,430   2,005 

Net charge-offs (recoveries)

  (92

)

  (135

)

  (10

)

  652   624 

Provision (negative provision) for loan losses

     (750

)

     (1,900

)

  (2,450

)

Balance at end of period

 $8,977  $9,489  $8,977  $9,489  $8,967 
                     

Allowance for loan losses to period-end loans

  1.32

%

  1.53

%

  1.32

%

  1.53

%

  1.40

%

Net charge-offs (recoveries) to average loans

  (0.05

 

 

)%

  (0.09)%  0.00

%

  0.14

%

  0.10

%

Allowance for loan losses to non-performing loans

  155.61

%

  93.96

%

  155.61

%

  93.96

%

  97.30

%

                     

Allowance for loan losses for loans individually evaluated for impairment

 $425  $339  $425  $339  $399 

Loans individually evaluated for impairment

  7,509   16,214   7,509   16,214   15,131 

Allowance for loan losses to loans individually evaluated for impairment

  5.66

%

  2.09

%

  5.66

%

  2.09

%

  2.64

%

                     

Allowance for loan losses for loans collectively evaluated for impairment

 $8,552  $9,150  $8,552  $9,150  $8,568 

Loans collectively evaluated for impairment

  675,002   605,483   675,002   605,483   624,105 

Allowance for loan losses to loans collectively evaluated for impairment

  1.27

%

  1.51

%

  1.27

%

  1.51

%

  1.37

%

Our loan loss reserve, as a percentage of total loans at September 30, 2017, decreased2022, compared to 1.32% from 1.40%1.15% at December 31, 20162021, and from 1.53%1.34% at September 30, 2016.2021. The change in our loan loss reserve as a percentage of total loans between periods is attributable to growth in the portfolio, historical loss experience, qualitative factors, fewer loans migrating downward in risk grade classifications and improved charge-off levels. Our allowance for loan losses to non-performing loans was 155.61%1,085.92% at September 30, 2017,2022, compared with 97.30%332.88% at December 31, 2016,2021, and 93.96%592.92% at September 30, 2016. Net 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.   


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

  

Nine Months

Ended

September 30,

2017

  

 

Year Ended

December 31,

2016

  

Year Ended

December 31,

2015

 
  

(in thousands)

 

Commercial

 $(39

)

 $(58

)

 $(27

)

Commercial Real Estate

  (335

)

  (339

)

  1,225 

Residential Real Estate

  344   1,307   1,487 

Consumer

  (39

)

  (200

)

  37 

Agriculture

  70   (96

)

  110 

Other

  (11

)

  10   (9

)

Total net charge-offs (recoveries)

 $(10

)

 $624  $2,823 

The majority of our nonperforming loans are secured by real estate collateral, and the underlying collateral coverage for nonperforming loans supports the likelihood of collection of our principal. We have 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. Our allowance for non-performing loans to non-performing loans was 4.99% at September 30, 2017 compared with 2.62% at December 31, 2016, and 2.88% at September 30, 2016. The increase in this ratio from December 31, 2016 to September 30, 2017 was primarily attributable to an allocated allowance for an individually evaluated loan.2021.

 

The following table presents the unpaid principal balance, recorded investment and allocated allowance related to loans individually evaluated for impairment in the commercial real estate and residential real estate portfolios as of September 30, 2017 and December 31, 2016.

  

September 30, 2017

  

December 31, 2016

 
  

Commercial

Real Estate

  

Residential

Real Estate

  

Commercial

Real Estate

  

Residential

Real Estate

 
  

(in thousands)

 

Unpaid principal balance

 $4,849  $5,041  $10,985  $10,439 

Prior charge-offs

  (2,100

)

  (949

)

  (5,131

)

  (1,818

)

                 

Recorded investment

  2,749   4,092   5,854   8,621 

Allocated allowance

  (26

)

  (386

)

  (35

)

  (350

)

                 

Recorded investment, less allocated allowance

 $2,723  $3,706  $5,819  $8,271 
                 

Recorded investment, less allocated allowance/ Unpaid principal balance

  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 is significantly below the unpaid principal balance for these loans. The recorded investment net of the allocated allowance was 56.16% and 73.52% of the unpaid principal balance in the commercial real estate and residential real estate segments of the portfolio, respectively, at September 30, 2017.


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

  

September 30, 2017

  

December 31, 2016

 
  

Loans

  

Allowance

  

% to

Total

  

Loans

  

Allowance

  

% to

Total

 
                         

Commercial

 $107,008  $900   0.84

%

 $97,166  $462   0.48

%

Commercial real estate

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

Residential real estate

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

Consumer

  8,474   42   0.50   9,817   8   0.08 

Agriculture

  45,615   366   0.80   37,448   161   0.43 

Other

  567   2   0.35   477   2   0.42 

Total

 $675,002  $8,552   1.27

%

 $624,105  $8,568   1.37

%

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

Liabilities

Provision for Loan LossesNo provision for loan losses was recorded for the first nine months of 2017, compared to a negative provision for loan losses of $1.9 million for the first nine months of 2016. No provision expense was recorded for the first nine 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, the pass category increased approximately $46.8 million, the watch category increased approximately $4.7 million, the special mention category increased approximately $101,000, and the substandard category declined approximately $8.3 million. Net recoveries were $10,000 for the nine months ended September 30, 2017, compared with net charge-offs of $652,000 for the nine months ended September 30, 2016. We consider the size and volume of our portfolio as well as the credit quality of our loan portfolio based upon risk category classification when determining the loan loss provision for each period and the allowance for loan losses at period end.

Foreclosed Properties – Foreclosed properties at September 30, 2017 were $6.3 million compared with $6.8 million at December 31, 2016. See “Note 4 - 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 value foreclosed properties at fair value less estimated costs to sell when acquired and expect to liquidate these properties to recover our investment in the due course of business.

OREO is recorded at fair market value less estimated cost to sell at time of acquisition. Any write-down of the property at the time of acquisition is charged to the allowance for loan losses. Subsequent reductions in fair value are recorded as non-interest expense. When OREO is acquired, we obtain a new appraisal of the subject property or have staff in our special assets group evaluate the latest in-file appraisal. We typically obtain updated appraisals within five quarters of the anniversary date of ownership unless a sale is imminent.

Net gain (loss) on sales, write-downs, and operating expenses for OREO totaled $92,000 for the nine months ended September 30, 2017, compared to net expenses of $1.3 million in the same period of 2016. During the nine months ended September 30, 2017, fair value write-downs of $98,000 were recorded to reflect declines in fair value driven by reductions in listing prices and new appraisals compared with $970,000 for the nine months ended September 30, 2016.

Liabilities Total liabilities at September 30, 20172022 were $922.9 million$1.37 billion compared with $912.4 million$1.28 billion at December 31, 2016,2021, an increase of $10.5$80.6 million, or 1.1%6.3%. This increase was primarily attributable to an increase in total deposits of $16.9 million and the issuance of $10.0 million in senior debt, offset by a decrease in FHLB advances of $5.6$60.0 million and a decrease$19.9 million in accrued interest payable and other liabilities of $10.2 million due to payment of a litigation settlement.deposits.


 

Deposits are 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:

 

  

For the Nine Months

  

For the Year

 
  

Ended September 30,

  

Ended December 31,

 
  

2017

  

2016

 
  

Average

  

Average

  

Average

  

Average

 
  

Balance

  

Rate

  

Balance

  

Rate

 
  

(dollars in thousands)

 

Demand

 $125,932      $119,736     

Interest checking

  102,744   0.13

%

  96,294   0.13

%

Money market

  141,777   0.55   136,423   0.58 

Savings

  35,650   0.17   34,257   0.18 

Certificates of deposit

  458,732   0.92   466,007   0.88 

Total deposits

 $864,835   0.60

%

 $852,717   0.60

%

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

  

For the Nine Months

  

For the Year

 
  

Ended September 30,

  

Ended December 31,

 
  

2017

  

2016

 
  

Average

  

Average

  

Average

  

Average

 
  

Balance

  

Rate

  

Balance

  

Rate

 
  

(dollars in thousands)

 

Less than $250,000

 $425,828   0.91

%

 $437,955   0.88

%

$250,000 or more

  32,904   0.99

%

  28,052   0.97

%

Total

 $458,732   0.92

%

 $466,007   0.88

%

  

For the Nine Months

  

For the Year

 
  

Ended September 30,

  

Ended December 31,

 
  

2022

  

2021

 
  

Average

  

Average

  

Average

  

Average

 
  

Balance

  

Rate

  

Balance

  

Rate

 
  

(dollars in thousands)

 

Demand

 $276,829      $271,994     

Interest checking

  283,494   0.39

%

  233,844   0.27

%

Money market

  216,074   0.39   190,094   0.34 

Savings

  162,864   0.26   157,283   0.28 

Certificates of deposit

  256,320   0.52   311,140   0.57 

Total deposits

 $1,195,581   0.31

%

 $1,164,355   0.30

%

 

The following table shows at September 30, 20172022 the amount of our time deposits of $250,000 or more by time remaining until maturity (in thousands):

 

Maturity Period

Maturity Period

 

Maturity Period

 
     

Three months or less

 $5,227  $11,971 

Three months through six months

  5,264  10,659 

Six months through twelve months

  3,026  32,883 

Over twelve months

  19,567   9,770 

Total

 $33,084  $65,283 

Capital

Stockholders’ equity decreased $2.6 million to $128.4 million at September 30, 2022, compared with $131.0 million at December 31, 2021 due primarily to the other comprehensive loss for the period of $15.3 million attributable to the fair value decline in the available for sale investment portfolio and $1.1 million in dividends paid to common shareholders, offset by current year net income of $13.4 million.

The following table shows the ratios of Tier 1 capital, common equity Tier 1 capital, and total capital to risk-adjusted assets and the leverage ratios for the Bank as of September 30, 2022:

  

Regulatory

Minimums

  

Well-Capitalized

Minimums

  

Basel III Plus

Conservation

Buffer

  

Limestone Bank

 
                 

Tier 1 Capital

  6.0%  8.0%  7.0%  12.6%

Common equity Tier 1 capital

  4.5   6.5   8.5   12.6 

Total risk-based capital

  8.0   10.0   10.5   13.5 

Tier 1 leverage ratio

  4.0   5.0      11.6 

Failure to meet minimum capital requirements could result in discretionary actions by regulators that, if taken, could have a materially adverse effect on the Company’s financial condition.

The Basel III rules require a “capital conservation buffer” of 2.5% above the regulatory minimum risk-based capital ratios. An institution is subject to limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses if capital levels fall below minimum Basel III levels plus the buffer amounts. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions without prior regulatory approval.

 

Liquidity and Capital Resource Management

 

Liquidity risk arises from the possibility we the Company may not be able to satisfy current or future financial commitments, or may become unduly reliant on alternative funding sources. The objective of liquidity risk management is to ensure that we meetthe Company meets the cash flow requirements of depositors and borrowers, as well as our operating cash needs, taking into account all on- and off-balance sheet funding demands. Liquidity risk management also involves ensuring that we meet our cash flow needs are met at a reasonable cost. We maintainManagement maintains an investment and funds management policy, which identifies the primary sources of liquidity, establishes procedures for monitoring and measuring liquidity, and establishes minimum liquidity requirements in compliance with regulatory guidance. OurThe Asset Liability Committee regularly monitors and reviews ourthe Company’s liquidity position.

 

Funds are available to the Bank from severala number of sources, including the sale of securities in the available for sale investment portfolio, principal pay-downs on loans and mortgage-backed securities, customer deposit inflows, and other wholesale funding.

 

WeThe Bank also borrowborrows from the FHLB to supplement our funding requirements. At September 30, 2017, we2022, the Bank had an unused borrowing capacity with the FHLB of $74.8$71.5 million. Advances are collateralized by commercial real estate and first mortgage residential loans and borrowingloans. 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,Historically, the availability of these lines could be affected by our financial position.


Historically, we haveBank has also utilized brokered and wholesale deposits to supplement ourits funding strategy. At September 30, 2017, we2022, the Bank had $29.0 million in brokered deposits. The Bank had no brokered deposits.

Capital

Stockholders’ equity increased $7.3 million to $40.1 million at September 30, 2017, compared with $32.7 milliondeposits at December 31, 2016 primarily due to current year net income of $5.1 million and an increase in the fair value of our available for sale securities portfolio of $1.9 million.2021.

 

The following table showsCompany uses cash on hand to service the ratiossubordinated capital notes, junior subordinated debentures, and to provide for operating cash flow needs. The Company’s primary source of Tier 1 capital,funding to meet its obligations is dividends from the Bank. At September 30, 2022, the Bank was eligible to pay $19.6 million in dividends. The Bank paid the Company $2.4 million in dividends during the nine months ended September 30, 2022.

Additionally, the Company also may issue common equity, Tier 1 capital,preferred equity and total capitaldebt to risk-adjusted assetssupport cash flow needs and the leverage ratios for the Bank at the dates indicated. Regulatory minimums and well-capitalized minimums are prompt corrective action standards.

  

Regulatory Minimums

  

Well-Capitalized

Minimums

  

September 30, 2017

  

December 31, 2016

 
                 

Tier 1 Capital

  6.0%  8.0%  9.66%  8.28%

Common equity Tier 1 capital

  4.5   6.5   9.66   8.28 

Total risk-based capital

  8.0   10.0   11.10   9.88 

Tier 1 leverage ratio

  4.0   5.0   7.73   6.24 

liquidity requirements.

 

FailureImpact of Inflation and Changing Prices

The financial statements and related data presented herein have been prepared in accordance with U.S. generally accepted accounting principles, which require the measurement of financial position and operating results in historical dollars without considering changes in the relative purchasing power of money over time due to meet minimum capital requirements couldinflation.

The Bank has an asset and liability structure that is essentially monetary in nature. As a result, in additional discretionary actions by regulators that, if taken, couldinterest rates have a materially adverse effectmore significant impact on our financial condition.

Eachperformance than the effects of general levels of inflation. Periods of high inflation are often accompanied by relatively higher interest rates, and periods of low inflation are accompanied by relatively lower interest rates. As market interest rates rise or fall in relation to the federal bank regulatory agenciesrates earned on loans and investments, the value of these assets decreases or increases respectively. Inflation has established risk-based capital requirements for banking organizations. The Basel III regulatory capital reforms became effective forand is expected to continue to impact core non-interest expenses associated with delivering the Company and Bank on January 1, 2015, and include new minimum risk-based capital and leverage ratios. These rules refine the definition of what constitutes “capital” for purposes of calculating those ratios, including the definitions of Tier 1 capital and Tier 2 capital. The final rules allow banks and their holding companies with less than $250 billion in assets a one-time opportunity to opt-out of a requirement to include unrealized gains and losses in accumulated other comprehensive income in their capital calculation. The Company and the Bank opted out of this requirement. The rules also establish a “capital conservation buffer” of 2.5%, to be phased in over three years, above the regulatory minimum risk-based capital ratios. Once the capital conservation buffer is fully phased in, the minimum ratios are a common equity Tier 1 risk-based capital ratio of 7.0%, a Tier 1 risk-based capital ratio of 8.5%, and a total capital to total risk-weighted assets (“total risk-based capital ratio”) of 10.5%. The phase-in of the capital conservation buffer requirement began in January 2016 at 0.625% of risk-weighted assets and increases to 1.25% in 2017, 1.875% in 2018, and 2.5% in 2019. An institution is subject to limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses if capital levels fall below minimum levels plus the buffer amounts. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions.Bank’s services.

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Given an instantaneous 100 basis point increase in interest rates, sustained for one year, ourthe base net interest income would increasedecrease by an estimated 0.11%0.5% at September 30, 2017,2022, compared with a decrease of 2.5%1.3% at December 31, 2016, and is within the risk tolerance parameters of our risk management policy.2021. Given a 200 basis point increase in interest rates, sustained for one year, base net interest income would increasedecrease by an estimated 0.10%1.2% at September 30, 2017,2022, compared with a decrease of 5.1%2.0% at December 31, 2016, and is within the risk tolerance parameters of our risk management policy.2021.

 

The following table indicates the estimated impact on net interest income under various interest rate scenarios for the twelve months following September 30, 2017,2022, as calculated using the static shock model approach:

 

 

Change in Future

Net Interest Income

  

Change in Future

Net Interest Income

 
 

Dollar

Change

  

Percentage

Change

  

Dollar Change

  

Percentage

Change

 
 

(dollars in thousands)

  

(dollars in thousands)

 

+ 200 basis points

 $30   0.10

%

 $(661

)

 (1.20

)%

+ 100 basis points

  35   0.11  (259

)

 (0.47

)

- 100 basis points

  (1,290

)

  (4.16

)

- 200 basis points

  (2,184

)

  (7.03

)

- 100 basis points

 (299

)

 (0.54

)

- 200 basis points

 (2,181

)

 (3.95

)

 

 

Item 4. Controls and Procedures

 

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

 

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

 

 

PART II OTHER INFORMATION

 

Item 1. Legal Proceedings

 

WeIn 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 contests liability and/or the amount of damages as appropriate in each pending matter. In view of the inherent difficulty of predicting the outcome of such matters, particularly in cases where claimants seek substantial or indeterminate damages or where investigations and proceedings are subject to claims and lawsuits that arise primarily in the ordinary courseearly stages, the Company cannot predict with certainty the loss or range of business.  Litigation is subjectloss, if any, related to inherent uncertaintiessuch 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 unfavorable outcomes could occur. See Footnote 13, “Off Balance Sheet Risks, Commitments, and Contingent Liabilities” inafter consultation with counsel, that the Notes to ouroutcome 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. The Company is not currently involved in legal proceedings.any material litigation.

 

Item 1A. Risk Factors

 

We refer youRefer to the detailed cautionary statements and discussion of risks that affect ourthe Company and its business in “Item 1A – Risk Factors” of ourthe Annual Report on Form 10-K, for the year ended December 31, 2016. There2021. The following risk factors supplement the "Item 1A - Risk Factors" section of the Annual Report on Form 10-K for the year ended December 31, 2021.

Risks Related to the Companys Pending Merger Transaction

Failure to complete the Companys proposed Merger with Peoples could negatively impact the Companys business, financial results and stock price.

If the Merger is not completed for any reason, the Company’s ongoing business may be adversely affected, and, without realizing any of the benefits of having completed the Merger, the Company will be subject to a number of risks, including the following:

the Company may experience negative reactions from the financial markets, including negative impacts on its stock price;

the market price of the Company’s common stock could decline to the extent that the current market prices reflect a market assumption that the Merger will be completed;

the Company may experience negative reactions from the Company’s customers, vendors and team members;

the Company will have incurred substantial expenses and will be required to pay certain costs relating to the Merger, whether or not the Merger is completed, such as legal, accounting, investment banking and advisory and printing fees;

the Merger Agreement places certain restrictions on the conduct of the Company’s business prior to completion of the Merger, such restrictions, the waiver of which is subject to the consent of Peoples, may adversely affect the Company’s ability to execute certain of its business strategies; and

matters relating to the Merger may require substantial commitments of time and resources by the Company’s management (including integration planning), which could otherwise have been devoted to other opportunities that may have been beneficial to the Company, as an independent company.

In addition to the above risks, if the Merger Agreement is terminated and the Company’s Board of Directors seeks another merger or business combination, the market price of the Company’s common stock could decline, which could make it more difficult to find a party willing to offer equivalent or more attractive consideration than the consideration Peoples has agreed to provide. If the Merger Agreement is terminated under certain circumstances, the Company may be required to pay a termination fee of $8.3 million to Peoples, which may adversely affect the price of the Company’s common stock. Any of the above risks could materially affect the Company’s business, financial results and stock price.

Because the market price of Peoples common stock may fluctuate, the Companys shareholders cannot be certain of the precise value of the Merger consideration they may receive in the Merger.

At the time the Merger is completed, each issued and outstanding share of the Company’s common stock will be converted into the right to receive 0.90 of a share of Peoples common stock.

The market value of Peoples common stock may fluctuate prior to closing of the Merger as a result of a variety of factors, including general market and economic conditions, changes in Peoples’ businesses, operations and prospects, and regulatory considerations. Many of these factors are outside of the Company’s and Peoples’ control. Consequently, while the Merger Agreement includes a termination right designed to protect against a greater than 17.5% decline in the market price of Peoples common stock prior to the closing that exceeds the change in the Nasdaq Bank Index plus 17.5%, the Company’s shareholders will not know in advance the actual market value of the shares of Peoples common stock that they are to receive in the Merger. The actual market value of the shares of Peoples common stock received by the Company’s shareholders will depend on the market value of shares of Peoples common stock at the time the Merger is completed. This market value may be less or more than the value used to determine the exchange ratio stated in the Merger Agreement.

The Company faces risks and uncertainties related to its proposed Merger with Peoples.

Uncertainty about the effect of the Merger on the Company’s team members and customers may have an adverse effect on the Company. These uncertainties may impair the Company’s ability to attract, retain and motivate key personnel until the Merger is consummated and for a period of time thereafter, and could cause customers and others that deal with the Company to seek to change their existing business relationships with the Company. Team member retention may be particularly challenging during the pendency of the Merger, as team members may experience uncertainty about their roles with the surviving corporation following the Merger.

In addition, the Merger Agreement contains provisions that restrict the Company’s ability to, among other things, solicit, knowingly encourage or facilitate inquiries or proposals or enter into any agreement with respect to, or initiate or participate in any negotiations or discussions with any person concerning any alternative business combination proposals, subject to a limited exception when required by the Company’s Board of Directors’ exercise of its fiduciary duties in response to an unsolicited acquisition proposal that is, or is reasonably capable of becoming, a superior proposal. These provisions, which include a $8.3 million termination fee payable under certain circumstances, might discourage a potential competing acquirer that might have an interest in engaging in a superior transaction from considering or proposing that acquisition, or might result in lower value received by the Company’s shareholders than would have otherwise been received.

The Company and Peoples have operated and, until the completion of the Merger, will continue to operate, independently. The success of the Merger, including anticipated benefits and cost savings among other things, will depend, in part, on the Company’s and Peoples’ ability to successfully combine and integrate the Company’s and Peoples’ businesses in a manner that facilitates growth opportunities and realizes cost savings. It is possible that the integration process could result in the loss of key employees, the loss of customers, the disruption of either company’s or both companies’ ongoing business, inconsistencies in standards, controls, procedures and policies, unexpected integration issues, higher than expected integration costs and an overall post-completion integration process that takes longer than originally anticipated. If the combined companies experience difficulties with the integration process, the anticipated benefits of the Merger may not be realized fully or at all or may take longer to realize than expected.

The Merger Agreement may be terminated in accordance with its terms and the Merger may not be completed.

The Merger Agreement is subject to a number of conditions which must be fulfilled in order to complete the Merger. Those conditions include: the approval of the Merger by the Company’s shareholders; the effectiveness of the registration statement on Form S-4 for the shares of Peoples common stock to be issued in the Merger; the receipt of authorization for listing on Nasdaq of the shares of Peoples common stock to be issued in the Merger; the receipt of all required regulatory approvals; the absence of any order, decree or injunction enjoining or prohibiting the Merger; the receipt of a fairness opinion by the Company’s financial advisor; subject to certain exceptions, the accuracy of representations and warranties under the Merger Agreement; the Company’s and Peoples’ performance of the Company’s and their respective obligations under the Merger Agreement in all material respects; the absence of a material adverse effect on the Company or Peoples while the transaction is pending; and the Company’s receipt of a tax opinion to the effect that the Merger will be treated as a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended. These conditions to the closing of the Merger may not be fulfilled in a timely manner or at all, and, accordingly, the Merger may be delayed or may not be completed.

The Company and Peoples may elect to terminate the Merger Agreement under certain circumstances. Among other situations, if the Merger is not completed by July 31, 2023, either the Company or Peoples may choose not to proceed with the Merger, subject to certain exceptions. The Company and Peoples can also mutually decide to terminate the Merger Agreement at any time. If the Merger Agreement is terminated, under certain limited circumstances, the Company may be required to pay a termination fee of $8.3 million to Peoples.

The Companys ability to complete the Merger is subject to the receipt of approval from various regulatory agencies, which may impose conditions that could adversely affect the Company or cause the Merger to be abandoned.

Before the transactions contemplated in the Merger Agreement can be completed, the Company and Peoples must obtain various regulatory approvals. The terms and conditions of the approvals that are granted may impose conditions, limitations, obligations or costs, or place restrictions on the conduct of the combined company’s business or require changes to the terms of the transactions contemplated by the Merger Agreement. Although the Company and Peoples do not currently expect that any such conditions or changes would be imposed, there can be no assurance that the regulators will not impose any such conditions, obligations or restrictions, and that such conditions, limitations, obligations or restrictions will not have the effect of delaying or preventing completion of any of the transactions contemplated by the Merger Agreement, imposing additional material changescosts on or materially limiting the revenues of the combined company following the Merger or otherwise reduce the anticipated benefits of the Merger if the Merger were consummated successfully within the expected timeframe, any of which might have an adverse effect on the combined company following the Merger. Neither Peoples nor the Company will be required to complete the Merger if Peoples determines any required regulatory approval contains an unduly burdensome provision.

Shareholder litigation could prevent or delay the closing of the proposed Merger or otherwise negatively impact the Companys business and operations.

In connection with the Merger, lawsuits may be filed against the Company, Peoples, or the directors and officers of either company in connection with the Merger. Litigation filed against the Company, the Company’s Board of Directors or Peoples and its Board of Directors could prevent or delay the completion of the Merger or result in the payment of damages following completion of the Merger. The defense or settlement of any lawsuit or claim that remains unresolved at the Effective Time of the Merger may adversely affect the combined company’s business, financial condition, results of operations, cash flows and market price.

Global Economic and Geopolitical Instability and Inflationary Risks

Instability in global economic conditions and geopolitical matters, as well as volatility in financial markets, could have a material adverse effect on the Company’s results of operations and financial condition. The macroeconomic environment in the United States is susceptible to global events and volatility in financial markets. For example, global demand for products continues to exceed supply during the economic recovery from the risk factors previously discussedCOVID-19 pandemic, creating significant inflationary pressures which, in those reports.turn, may adversely impact regional and global economic conditions, as well as the Company’s financial condition and results of operations.

The risks described above and in our 2021 Form 10-K are not the only risks that we encounter. Additional risks and uncertainties not currently known to us or that we currently do not deem to be material to the Company also may materially adversely affect our business, results of operations, financial condition and/or liquidity.

 

 

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

 

Not applicable.On October 20, 2021, the Board of Directors approved a share repurchase program authorizing the Company to purchase up to $3.0 million of the Company’s Common Shares over time in the open market or in privately negotiated transactions. The repurchase program may be modified, terminated, or suspended at any time at the Company’s discretion and will expire on December 31, 2022. To date, no shares have been repurchased under the plan. The Company’s Merger Agreement with Peoples prohibits the Company from repurchasing any of its shares while the Merger transaction is pending.

 

Item 3. Default Upon Senior Securities

 

Not applicable.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

Not applicableapplicable.

 

Item 6. Exhibits

 

(a)

Exhibits

(a)           Exhibits

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

 

Exhibit Number

Description of Exhibit

2.1*Agreement and Plan of Merger by and between Peoples Bancorp, Inc. and Limestone Bancorp, Inc. dated October 24, 2022. Exhibit 2.1 to Form 8-K filed October 25, 2022 is incorporated by reference.

3.1

Articles of Incorporation of the Company, restated to reflect amendments. Filed as Exhibit 3.1 to the Quarterly Report on Form 10-Q filed July 30, 2021 and incorporated by reference.

3.2

Amended and Restated Bylaws of Limestone Bancorp, Inc. dated June 18, 2018. Exhibit 3.2 to Form 8-K filed June 18, 2018 is hereby incorporated by reference.

4.1

Tax Benefits Preservation Plan, dated as of June 25, 2015, between the Company and American Stock Transfer Company, as Rights Agent. Exhibit 4.1 to Form 8-K filed June 29, 2015 is incorporated by reference.

4.2

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

4.3

Amendment No. 2 to the Tax Benefits Preservation Plan dated May 23, 2018. Exhibit 4 to the Form 8-K filed May 23, 2018 is incorporated by reference.

4.4

Amendment No. 3 to the Limestone Bancorp, Inc. Tax Benefits Preservation Plan, dated November 25, 2019. Exhibit 4.4 to the Form 8-K filed November 27, 2019 is incorporated herein by reference.

4.5

Amendment No. 4 to the Limestone Bancorp, Inc. Tax Benefits Preservation Plan, dated May 19, 2021. Exhibit 4 to the Form 8-K filed May 19, 2021 is incorporated by reference.

4.6Amendment No. 5 to the Limestone Bancorp, Inc. Tax Benefits Preservation Plan, dated October 24, 2022. Exhibit 4.6 to the Form 8-K filed October 25, 2022 is incorporated by reference.

31.1

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

 

31.2

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

 

32.1

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

 

32.2

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

  

101

The following financial statements from the Company’sCompany’s Quarterly Report on Form 10Q10-Q for the quarter ended September 30, 2017,2022, formatted in inline 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.

104

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

*Schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K but Limestone Bancorp, Inc. will provide them to the Securities and Exchange Commission upon request.

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 of 1934, the Registrant had duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

PORTERLIMESTONE BANCORP, INC.

 

(Registrant)

 

November 2, 2017October 28, 2022

By:

/s/ John T. Taylor

 

 

John T. Taylor

 

 

Chief Executive Officer

 

November 2, 2017October 28, 2022

By:

/s/ Phillip W. Barnhouse

Phillip W. Barnhouse 

 

 

Phillip W. Barnhouse Chief Financial Officer

 

 

Chief Financial Officer

 

52

49