The following consolidated financial statements of Limestone Bancorp, Inc. and subsidiary, Limestone Bank, Inc. are submitted:
Unaudited Consolidated Balance Sheets for September 30, 2018 and December 31, 2017
Unaudited Consolidated Statements of Income for the three and nine months ended September 30, 2018 and 2017
Unaudited Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2018 and 2017
Unaudited Consolidated Statement of Changes in Stockholders’ Equity for the nine months ended September 30, 2018
Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017
Notes to Unaudited Consolidated Financial Statements
LIMESTONE BANCORP, INC.
Unaudited Consolidated Balance Sheets
(dollars in thousands except share data)
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
5,770
|
|
|
$
|
8,137
|
|
Interest bearing deposits in banks
|
|
|
31,761
|
|
|
|
25,966
|
|
Cash and cash equivalents
|
|
|
37,531
|
|
|
|
34,103
|
|
Securities available for sale
|
|
|
184,870
|
|
|
|
152,720
|
|
Loans held for sale
|
|
|
—
|
|
|
|
70
|
|
Loans, net of allowance of $8,634 and $8,202, respectively
|
|
|
748,417
|
|
|
|
703,913
|
|
Premises and equipment, net
|
|
|
17,027
|
|
|
|
16,789
|
|
Other real estate owned
|
|
|
3,750
|
|
|
|
4,409
|
|
Federal Home Loan Bank stock
|
|
|
7,233
|
|
|
|
7,323
|
|
Bank owned life insurance
|
|
|
15,551
|
|
|
|
15,229
|
|
Deferred taxes, net
|
|
|
30,230
|
|
|
|
31,313
|
|
Accrued interest receivable and other assets
|
|
|
5,882
|
|
|
|
4,932
|
|
Total assets
|
|
$
|
1,050,491
|
|
|
$
|
970,801
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
Non-interest bearing
|
|
$
|
135,561
|
|
|
$
|
137,386
|
|
Interest bearing
|
|
|
738,465
|
|
|
|
709,638
|
|
Total deposits
|
|
|
874,026
|
|
|
|
847,024
|
|
Federal Home Loan Bank advances
|
|
|
51,591
|
|
|
|
11,797
|
|
Accrued interest payable and other liabilities
|
|
|
5,662
|
|
|
|
6,057
|
|
Subordinated capital note
|
|
|
—
|
|
|
|
2,250
|
|
Junior subordinated debentures
|
|
|
21,000
|
|
|
|
21,000
|
|
Senior debt
|
|
|
10,000
|
|
|
|
10,000
|
|
Total liabilities
|
|
|
962,279
|
|
|
|
898,128
|
|
Commitments and contingent liabilities (Note 13)
|
|
|
—
|
|
|
|
—
|
|
Stockholders’ equity
|
|
|
|
|
|
|
|
|
Preferred stock, no par
|
|
|
|
|
|
|
|
|
Series E - none and 6,198 issued and outstanding, respectively; Liquidation preference of $6.2 million
|
|
|
—
|
|
|
|
1,644
|
|
Series F - none and 4,304 issued and outstanding, respectively; Liquidation preference of $4.3 million
|
|
|
—
|
|
|
|
1,127
|
|
Total preferred stockholders’ equity
|
|
|
—
|
|
|
|
2,771
|
|
Common stock, no par, 39,000,000 shares authorized, 6,236,590 and 6,039,864 voting, and 1,220,000 and 220,000 non-voting issued and outstanding, respectively
|
|
|
140,639
|
|
|
|
125,729
|
|
Additional paid-in capital
|
|
|
24,097
|
|
|
|
24,497
|
|
Retained deficit
|
|
|
(68,641
|
)
|
|
|
(75,108
|
)
|
Accumulated other comprehensive loss
|
|
|
(7,883
|
)
|
|
|
(5,216
|
)
|
Total common stockholders’ equity
|
|
|
88,212
|
|
|
|
69,902
|
|
Total stockholders' equity
|
|
|
88,212
|
|
|
|
72,673
|
|
Total liabilities and stockholders’ equity
|
|
$
|
1,050,491
|
|
|
$
|
970,801
|
|
See accompanying notes to unaudited consolidated financial statements.
LIMESTONE BANCORP, INC.
Unaudited Consolidated Statements of
Income
(dollars in thousands, except per share data)
|
|
Three Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
201
8
|
|
|
201
7
|
|
|
201
8
|
|
|
201
7
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, including fees
|
|
$
|
9,539
|
|
|
$
|
8,021
|
|
|
$
|
27,423
|
|
|
$
|
23,493
|
|
Taxable securities
|
|
|
1,245
|
|
|
|
1,088
|
|
|
|
3,386
|
|
|
|
3,370
|
|
Tax exempt securities
|
|
|
95
|
|
|
|
143
|
|
|
|
287
|
|
|
|
432
|
|
Federal funds sold and other
|
|
|
241
|
|
|
|
194
|
|
|
|
624
|
|
|
|
510
|
|
|
|
|
11,120
|
|
|
|
9,446
|
|
|
|
31,720
|
|
|
|
27,805
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
2,130
|
|
|
|
1,324
|
|
|
|
5,123
|
|
|
|
3,877
|
|
Federal Home Loan Bank advances
|
|
|
233
|
|
|
|
13
|
|
|
|
605
|
|
|
|
64
|
|
Senior debt
|
|
|
98
|
|
|
|
97
|
|
|
|
292
|
|
|
|
97
|
|
Junior subordinated debentures
|
|
|
247
|
|
|
|
193
|
|
|
|
694
|
|
|
|
553
|
|
Subordinated capital note
|
|
|
—
|
|
|
|
32
|
|
|
|
39
|
|
|
|
98
|
|
|
|
|
2,708
|
|
|
|
1,659
|
|
|
|
6,753
|
|
|
|
4,689
|
|
Net interest income
|
|
|
8,412
|
|
|
|
7,787
|
|
|
|
24,967
|
|
|
|
23,116
|
|
Provision (negative) provision for loan losses
|
|
|
(350
|
)
|
|
|
—
|
|
|
|
(500
|
)
|
|
|
—
|
|
Net interest income after provision for loan losses
|
|
|
8,762
|
|
|
|
7,787
|
|
|
|
25,467
|
|
|
|
23,116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts
|
|
|
608
|
|
|
|
568
|
|
|
|
1,767
|
|
|
|
1,617
|
|
Bank card interchange fees
|
|
|
411
|
|
|
|
387
|
|
|
|
1,258
|
|
|
|
1,118
|
|
Income from bank owned life insurance
|
|
|
100
|
|
|
|
103
|
|
|
|
337
|
|
|
|
309
|
|
Net gain (loss) on sales and calls of investment securities
|
|
|
—
|
|
|
|
—
|
|
|
|
(6
|
)
|
|
|
(5
|
)
|
Other
|
|
|
390
|
|
|
|
266
|
|
|
|
751
|
|
|
|
723
|
|
|
|
|
1,509
|
|
|
|
1,324
|
|
|
|
4,107
|
|
|
|
3,762
|
|
Non-interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
3,893
|
|
|
|
3,683
|
|
|
|
11,566
|
|
|
|
11,433
|
|
Occupancy and equipment
|
|
|
896
|
|
|
|
836
|
|
|
|
2,671
|
|
|
|
2,501
|
|
Professional fees
|
|
|
186
|
|
|
|
232
|
|
|
|
613
|
|
|
|
776
|
|
Marketing expense
|
|
|
259
|
|
|
|
364
|
|
|
|
867
|
|
|
|
880
|
|
FDIC Insurance
|
|
|
118
|
|
|
|
356
|
|
|
|
439
|
|
|
|
1,055
|
|
Data processing expense
|
|
|
281
|
|
|
|
321
|
|
|
|
912
|
|
|
|
931
|
|
State franchise and deposit tax
|
|
|
282
|
|
|
|
225
|
|
|
|
846
|
|
|
|
675
|
|
Deposit account related expense
|
|
|
213
|
|
|
|
222
|
|
|
|
653
|
|
|
|
646
|
|
Other real estate owned expense
|
|
|
271
|
|
|
|
111
|
|
|
|
590
|
|
|
|
92
|
|
Litigation and loan collection expense
|
|
|
61
|
|
|
|
78
|
|
|
|
162
|
|
|
|
121
|
|
Other
|
|
|
770
|
|
|
|
889
|
|
|
|
2,485
|
|
|
|
2,585
|
|
|
|
|
7,230
|
|
|
|
7,317
|
|
|
|
21,804
|
|
|
|
21,695
|
|
Income before income taxes
|
|
|
3,041
|
|
|
|
1,794
|
|
|
|
7,770
|
|
|
|
5,183
|
|
Income tax expense
|
|
|
604
|
|
|
|
—
|
|
|
|
1,416
|
|
|
|
—
|
|
Net income
|
|
|
2,437
|
|
|
|
1,794
|
|
|
|
6,354
|
|
|
|
5,183
|
|
Basic and diluted income per common share
|
|
$
|
0.33
|
|
|
$
|
0.29
|
|
|
$
|
0.90
|
|
|
$
|
0.83
|
|
See accompanying notes to unaudited consolidated financial statements.
LIMESTONE BANCORP, INC.
Unaudited Consolidated Statements of Comprehensive
Income
(Loss)
(in thousands)
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Net income
|
|
$
|
2,437
|
|
|
$
|
1,794
|
|
|
$
|
6,354
|
|
|
$
|
5,183
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) arising during the period
|
|
|
(1,006
|
)
|
|
|
(280
|
)
|
|
|
(3,234
|
)
|
|
|
1,783
|
|
Amortization during the period of net unrealized loss transferred to held to maturity
|
|
|
—
|
|
|
|
32
|
|
|
|
—
|
|
|
|
98
|
|
Net unrealized gain (loss) recognized in comprehensive income
|
|
|
(1,006
|
)
|
|
|
(248
|
)
|
|
|
(3,234
|
)
|
|
|
1,881
|
|
Tax effect
|
|
|
211
|
|
|
|
—
|
|
|
|
680
|
|
|
|
—
|
|
Other comprehensive income (loss)
|
|
|
(795
|
)
|
|
|
(248
|
)
|
|
|
(2,554
|
)
|
|
|
1,881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
1,642
|
|
|
$
|
1,546
|
|
|
$
|
3,800
|
|
|
$
|
7,064
|
|
See accompanying notes to unaudited consolidated financial statements.
LIMESTONE BANCORP, INC.
Unaudited Consolidated Statements of Changes in Stockholders’ Equity
For
Nine
Months Ended
September
30
,
201
8
(Dollar amounts in thousands except share and per share data)
|
|
Shares
|
|
|
Amount
|
|
|
|
Preferred
|
|
|
Common
|
|
|
Preferred
|
|
|
Common
|
|
|
|
Series E
|
|
|
Series F
|
|
|
Common
|
|
|
Non-Voting
Common
|
|
|
Total
Common
|
|
|
Series E
|
|
|
Series F
|
|
|
Common and
Non-Voting
Common
|
|
|
Additional
Paid-In Capital
|
|
|
Retained
Deficit
|
|
|
Accumulated
Other
Comprehensive Income (Loss)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, January 1, 2018
|
|
|
6,198
|
|
|
|
4,304
|
|
|
|
6,039,864
|
|
|
|
220,000
|
|
|
|
6,259,864
|
|
|
$
|
1,644
|
|
|
$
|
1,127
|
|
|
$
|
125,729
|
|
|
$
|
24,497
|
|
|
$
|
(75,108
|
)
|
|
$
|
(5,216
|
)
|
|
$
|
72,673
|
|
Issuance of unvested stock
|
|
|
—
|
|
|
|
—
|
|
|
|
46,726
|
|
|
|
—
|
|
|
|
46,726
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Issuance of stock
|
|
|
—
|
|
|
|
—
|
|
|
|
150,000
|
|
|
|
1,000,000
|
|
|
|
1,150,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
14,910
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
14,910
|
|
Redemption and retirement of preferred shares
|
|
|
(6,198
|
)
|
|
|
(4,304
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,644
|
)
|
|
|
(1,127
|
)
|
|
|
—
|
|
|
|
(734
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,505
|
)
|
Stock-based compensation expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
334
|
|
|
|
—
|
|
|
|
—
|
|
|
|
334
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,354
|
|
|
|
—
|
|
|
|
6,354
|
|
Reclassification of disproportionate tax effect
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
due to change in federal tax rate
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
113
|
|
|
|
(113
|
)
|
|
|
—
|
|
Net change in accumulated other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,554
|
)
|
|
|
(2,554
|
)
|
comprehensive income, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, September 30, 2018
|
|
|
—
|
|
|
|
—
|
|
|
|
6,236,590
|
|
|
|
1,220,000
|
|
|
|
7,456,590
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
140,639
|
|
|
$
|
24,097
|
|
|
$
|
(68,641
|
)
|
|
$
|
(7,883
|
)
|
|
$
|
88,212
|
|
See accompanying notes to unaudited consolidated financial statements.
LIMESTONE BANCORP
, INC.
Unaudited Consolidated Statements of Cash Flows
For
Nine
Months Ended
September
30
, 201
8
and 201
7
(dollars in thousands)
|
|
201
8
|
|
|
201
7
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
6,354
|
|
|
$
|
5,183
|
|
Adjustments to reconcile net income to net cash from operating activities
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
739
|
|
|
|
896
|
|
Provision (negative provision) for loan losses
|
|
|
(500
|
)
|
|
|
—
|
|
Net amortization on securities
|
|
|
669
|
|
|
|
931
|
|
Stock-based compensation expense
|
|
|
334
|
|
|
|
271
|
|
Deferred taxes, net
|
|
|
1,762
|
|
|
|
—
|
|
Net gain on sales of loans held for sale
|
|
|
(1
|
)
|
|
|
(39
|
)
|
Origination of loans for sale
|
|
|
—
|
|
|
|
(2,179
|
)
|
Proceeds from sales of loans held for sale
|
|
|
71
|
|
|
|
2,218
|
|
Net gain on sales of other real estate owned
|
|
|
(72
|
)
|
|
|
(75
|
)
|
Net write-down of other real estate owned
|
|
|
585
|
|
|
|
98
|
|
Net (gain) loss on sale of premises and equipment
|
|
|
(46
|
)
|
|
|
—
|
|
Net realized loss on sales and calls of investment securities
|
|
|
6
|
|
|
|
5
|
|
Earnings on bank owned life insurance, net of premium expense
|
|
|
(322
|
)
|
|
|
(293
|
)
|
Net change in accrued interest receivable and other assets
|
|
|
(950
|
)
|
|
|
1,929
|
|
Net change in accrued interest payable and other liabilities
|
|
|
(395
|
)
|
|
|
(10,183
|
)
|
Net cash from operating activities
|
|
|
8,234
|
|
|
|
(1,238
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Purchases of available for sale securities
|
|
|
(58,965
|
)
|
|
|
(15,340
|
)
|
Proceeds from sales and calls of available for sale securities
|
|
|
6,054
|
|
|
|
2,000
|
|
Proceeds from maturities and prepayments of available for sale securities
|
|
|
16,852
|
|
|
|
17,480
|
|
Proceeds from calls of held to maturity securities
|
|
|
—
|
|
|
|
47
|
|
Proceeds from maturities of held to maturity securities
|
|
|
—
|
|
|
|
145
|
|
Proceeds from redemptions of Federal Home Loan Bank stock
|
|
|
90
|
|
|
|
—
|
|
Proceeds from sale of other real estate owned
|
|
|
876
|
|
|
|
738
|
|
Net change in loans
|
|
|
(44,823
|
)
|
|
|
(43,590
|
)
|
Proceeds from sale of premises and equipment
|
|
|
141
|
|
|
|
328
|
|
Purchases of premises and equipment
|
|
|
(982
|
)
|
|
|
(153
|
)
|
Net cash from investing activities
|
|
|
(80,757
|
)
|
|
|
(38,345
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Net change in deposits
|
|
|
27,002
|
|
|
|
16,922
|
|
Payments of Federal Home Loan Bank advances
|
|
|
(85,206
|
)
|
|
|
(30,611
|
)
|
Advances from Federal Home Loan Bank
|
|
|
125,000
|
|
|
|
25,000
|
|
Payments of subordinated capital note
|
|
|
(2,250
|
)
|
|
|
(675
|
)
|
Proceeds from senior debt
|
|
|
—
|
|
|
|
10,000
|
|
Proceeds from issuance of common stock
|
|
|
14,910
|
|
|
|
—
|
|
Redemption of preferred stock
|
|
|
(3,505
|
)
|
|
|
—
|
|
Net cash from financing activities
|
|
|
75,951
|
|
|
|
20,636
|
|
Net change in cash and cash equivalents
|
|
|
3,428
|
|
|
|
(18,947
|
)
|
Beginning cash and cash equivalents
|
|
|
34,103
|
|
|
|
66,316
|
|
Ending cash and cash equivalents
|
|
$
|
37,531
|
|
|
$
|
47,369
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
7,631
|
|
|
$
|
4,140
|
|
Supplemental non-cash disclosure:
|
|
|
|
|
|
|
|
|
Transfer from loans to other real estate
|
|
$
|
730
|
|
|
$
|
270
|
|
See accompanying notes to unaudited consolidated financial statements.
LIMESTONE BANCORP, INC.
Notes to Unaudited Consolidated Financial Statements
Note 1 – Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
– The consolidated financial statements include Limestone Bancorp, Inc. (Company) and its subsidiary, Limestone Bank (Bank). The Company owns a 100% interest in the Bank. All significant inter-company transactions and accounts have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, the financial statements do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2018 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, 2017 included in the Company’s Annual Report on Form 10-K.
Use of Estimates
– To prepare financial statements in conformity with U.S. generally accepted accounting principles, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and future results could differ.
Reclassifications
– Some items in the prior year financial statements were reclassified to conform to the current presentation. The reclassifications did not impact net income or stockholders’ equity.
New Accounting Standards –
In May 2014, FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASC 606”). 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 non-financial assets. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The majority of the Company’s revenues come from interest income and other sources, including loans and securities that are outside the scope of ASC 606. The Company’s services that fall within the scope of ASC 606 are presented in non-interest income and are recognized as revenue as the Company satisfies its obligation to the customer. Services within the scope of ASC 606 include service charges on deposit accounts, bank card interchange income, and the sale of OREO. Additional disclosures are required to provide quantitative and qualitative information regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new guidance became effective for the Company on January 1, 2018. The impact of adopting this new guidance did not have a material impact on the consolidated financial statements, but did result in additional disclosures, which have been incorporated into
“Note 14 – Revenue from Contracts with Customers.”
In January 2016, the FASB issued an update ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this update impact public business entities as follows: 1) Require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. 2) Simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value. 3) Eliminate the requirement to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. 4) Require entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. 5) Require an entity to present separately in other comprehensive income the portion of the total change in fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. 6) Require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements. 7) Clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The amendments in this update became effective for the Company on January 1, 2018. The impact of adopting the new guidance did not have a material impact on the consolidated financial statements, but did require additional disclosures. The additional disclosures have been incorporated into
“Note 8 – Fair Value Measurements.”
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. Based on the Company’s current lease agreements, the impact of adopting the new guidance on the consolidated financial statements will not have a material impact on the consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, –Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The final standard will change estimates for credit losses related to financial assets measured at amortized cost such as loans, held-to-maturity debt securities, and certain other contracts. For estimating credit losses, the FASB is replacing the incurred loss model with an expected loss model, which is referred to as the current expected credit loss (CECL) model. Under the CECL model, certain financial assets that are carried at amortized cost, such as loans held for investment and held-to-maturity debt securities, are required to be presented at the net amount expected to be collected. The measurement of expected credit losses is to be based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This measurement will take place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs significantly from the “incurred loss” model required under current GAAP, which delays recognition until it is probable a loss has been incurred. The change could materially affect how the allowance for loan losses is determined. The standard is effective for public companies for fiscal years beginning after December 15, 2019. Management has formed a cross functional committee that has overseen the enhancement of existing technology required to source and model data for the purpose of meeting this standard. The committee has selected a vendor to assist in generating loan level cash flows and disclosures. The impact of CECL model implementation is being evaluated, but it is expected that a one-time cumulative-effect adjustment to the allowance for loan losses will be recognized in retained earnings on the consolidated balance sheet as of the beginning of the first reporting period in which the new standard is effective, as is consistent with regulatory expectations set forth in interagency guidance. The magnitude of any adjustment or the overall impact of the new standard on financial condition or results of operation cannot yet be determined.
In March 2017, the FASB issued ASU No. 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization of Purchased Callable Debt Securities. The final standard will shorten the amortization period for premiums on callable debt securities by requiring that premiums be amortized to the first (or earliest) call date instead of as an adjustment to the yield over the contractual life. The standard is effective for public companies for fiscal years beginning after December 15, 2018. Adoption of this new guidance will not have a material impact on the consolidated financial statements.
In February 2018, the FASB issued ASU No. 2018-02, –Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects From Other Comprehensive Income. The final standard allows institutions to elect to reclassify the stranded tax effects from AOCI to retained earnings, limited to amounts in AOCI that are affected by the tax reform law. This includes remeasuring deferred tax assets and liabilities related to items presented in AOCI at the newly enacted tax rate and on other income tax effects of items remaining in AOCI. The standard is effective for public companies for fiscal years beginning after December 15, 2018, and interim periods during 2018. Early adoption is permitted. The Company adopted the standard on January 1, 2018 and adoption did not have a material impact on the consolidated financial statements as it resulted in a $113,000 entry between AOCI and retained deficit.
Note
2
– Securities
Securities are classified as available for sale (AFS). AFS securities 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.
The amortized cost and fair value of securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows:
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair Value
|
|
|
|
(in thousands)
|
|
September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and federal agency
|
|
$
|
23,762
|
|
|
$
|
—
|
|
|
$
|
(1,112
|
)
|
|
$
|
22,650
|
|
Agency mortgage-backed: residential
|
|
|
88,526
|
|
|
|
79
|
|
|
|
(2,793
|
)
|
|
|
85,812
|
|
Collateralized loan obligations
|
|
|
34,908
|
|
|
|
4
|
|
|
|
(36
|
)
|
|
|
34,876
|
|
State and municipal
|
|
|
32,835
|
|
|
|
194
|
|
|
|
(381
|
)
|
|
|
32,648
|
|
Corporate bonds
|
|
|
8,877
|
|
|
|
32
|
|
|
|
(25
|
)
|
|
|
8,884
|
|
Total available for sale
|
|
$
|
188,908
|
|
|
$
|
309
|
|
|
$
|
(4,347
|
)
|
|
$
|
184,870
|
|
December 31, 2017
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair Value
|
|
Available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and federal agency
|
|
$
|
22,105
|
|
|
$
|
2
|
|
|
$
|
(483
|
)
|
|
$
|
21,624
|
|
Agency mortgage-backed: residential
|
|
|
65,935
|
|
|
|
117
|
|
|
|
(1,087
|
)
|
|
|
64,965
|
|
Collateralized loan obligations
|
|
|
25,343
|
|
|
|
182
|
|
|
|
(20
|
)
|
|
|
25,505
|
|
State and municipal
|
|
|
33,303
|
|
|
|
508
|
|
|
|
(101
|
)
|
|
|
33,710
|
|
Corporate bonds
|
|
|
6,838
|
|
|
|
78
|
|
|
|
—
|
|
|
|
6,916
|
|
Total available for sale
|
|
$
|
153,524
|
|
|
$
|
887
|
|
|
$
|
(1,691
|
)
|
|
$
|
152,720
|
|
Sales and calls of securities were as follows:
|
|
Three Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
201
8
|
|
|
201
7
|
|
|
201
8
|
|
|
201
7
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Proceeds
|
|
$
|
—
|
|
|
$
|
2,000
|
|
|
$
|
6,054
|
|
|
$
|
2,047
|
|
Gross gains
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Gross losses
|
|
|
—
|
|
|
|
—
|
|
|
|
6
|
|
|
|
5
|
|
The amortized cost and fair value of our debt securities are shown by contractual maturity. Expected maturities may differ from actual maturities when borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed securities not due at a single maturity date are shown separately.
|
|
September 30, 2018
|
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
|
(in thousands)
|
|
Maturity
|
|
|
|
|
|
|
|
|
Available for sale
|
|
|
|
|
|
|
|
|
Within one year
|
|
$
|
25,700
|
|
|
$
|
25,720
|
|
One to five years
|
|
|
55,798
|
|
|
|
54,962
|
|
Five to ten years
|
|
|
15,877
|
|
|
|
15,370
|
|
Beyond ten years
|
|
|
3,007
|
|
|
|
3,006
|
|
Agency mortgage-backed: residential
|
|
|
88,526
|
|
|
|
85,812
|
|
Total
|
|
$
|
188,908
|
|
|
$
|
184,870
|
|
Securities pledged at September 30, 2018 and December 31, 2017 had carrying values of approximately $55.7 million and $76.8 million, respectively, and were pledged to secure public deposits.
At September 30, 2018 and December 31, 2017, the Bank held securities issued by the Commonwealth of Kentucky or Kentucky municipalities having a book value of $15.2 million and $15.4 million, respectively. At September 30, 2018 and December 31, 2017, there were no other holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders’ equity.
The Company evaluates securities for other-than-temporary impairment 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 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, 2018, management does not believe any securities in the portfolio with unrealized losses should be classified as other than temporarily impaired.
Securities with unrealized losses at September 30, 2018 and December 31, 2017, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position, are as follows:
|
|
Less than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
Description of Securities
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
|
(in thousands)
|
|
September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and federal agency
|
|
$
|
7,191
|
|
|
$
|
(206
|
)
|
|
$
|
15,459
|
|
|
$
|
(906
|
)
|
|
$
|
22,650
|
|
|
$
|
(1,112
|
)
|
Agency mortgage-backed: residential
|
|
|
50,542
|
|
|
|
(1,172
|
)
|
|
|
27,602
|
|
|
|
(1,621
|
)
|
|
|
78,144
|
|
|
|
(2,793
|
)
|
Collateralized loan obligations
|
|
|
25,808
|
|
|
|
(36
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
25,808
|
|
|
|
(36
|
)
|
State and municipal
|
|
|
18,591
|
|
|
|
(381
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
18,591
|
|
|
|
(381
|
)
|
Corporate bonds
|
|
|
1,975
|
|
|
|
(25
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
1,975
|
|
|
|
(25
|
)
|
Total temporarily impaired
|
|
$
|
104,107
|
|
|
$
|
(1,820
|
)
|
|
$
|
43,061
|
|
|
$
|
(2,527
|
)
|
|
$
|
147,168
|
|
|
$
|
(4,347
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and federal agency
|
|
$
|
5,788
|
|
|
$
|
(97
|
)
|
|
$
|
14,121
|
|
|
$
|
(386
|
)
|
|
$
|
19,909
|
|
|
$
|
(483
|
)
|
Agency mortgage-backed: residential
|
|
|
21,104
|
|
|
|
(172
|
)
|
|
|
27,158
|
|
|
|
(915
|
)
|
|
|
48,262
|
|
|
|
(1,087
|
)
|
Collateralized loan obligations
|
|
|
6,038
|
|
|
|
(20
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
6,038
|
|
|
|
(20
|
)
|
State and municipal
|
|
|
7,492
|
|
|
|
(101
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
7,492
|
|
|
|
(101
|
)
|
Total temporarily impaired
|
|
$
|
40,422
|
|
|
$
|
(390
|
)
|
|
$
|
41,279
|
|
|
$
|
(1,301
|
)
|
|
$
|
81,701
|
|
|
$
|
(1,691
|
)
|
Note 3
– Loans
Loans net of unearned income, deferred loan origination costs, and net premiums on acquired loans by class were as follows:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(in thousands)
|
|
Commercial
|
|
$
|
125,699
|
|
|
$
|
113,771
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
Construction
|
|
|
83,368
|
|
|
|
57,342
|
|
Farmland
|
|
|
83,917
|
|
|
|
88,320
|
|
Nonfarm nonresidential
|
|
|
163,346
|
|
|
|
156,724
|
|
Residential Real Estate:
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
46,144
|
|
|
|
56,588
|
|
1-4 Family
|
|
|
173,674
|
|
|
|
179,222
|
|
Consumer
|
|
|
40,242
|
|
|
|
18,439
|
|
Agriculture
|
|
|
40,144
|
|
|
|
41,154
|
|
Other
|
|
|
517
|
|
|
|
555
|
|
Subtotal
|
|
|
757,051
|
|
|
|
712,115
|
|
Less: Allowance for loan losses
|
|
|
(8,634
|
)
|
|
|
(8,202
|
)
|
Loans, net
|
|
$
|
748,417
|
|
|
$
|
703,913
|
|
The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended September 30, 2018 and 2017:
|
|
Commercial
|
|
|
Commercial
Real Estate
|
|
|
Residential
Real Estate
|
|
|
Consumer
|
|
|
Agriculture
|
|
|
Other
|
|
|
Total
|
|
|
|
(in thousands)
|
|
September
30
, 201
8
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
1,133
|
|
|
$
|
4,234
|
|
|
$
|
2,778
|
|
|
$
|
66
|
|
|
$
|
367
|
|
|
$
|
2
|
|
|
$
|
8,580
|
|
Provision (negative provision)
|
|
|
65
|
|
|
|
(48
|
)
|
|
|
(393
|
)
|
|
|
21
|
|
|
|
5
|
|
|
|
–
|
|
|
|
(350
|
)
|
Loans charged off
|
|
|
(50
|
)
|
|
|
–
|
|
|
|
(78
|
)
|
|
|
(15
|
)
|
|
|
–
|
|
|
|
–
|
|
|
|
(143
|
)
|
Recoveries
|
|
|
10
|
|
|
|
295
|
|
|
|
231
|
|
|
|
9
|
|
|
|
2
|
|
|
|
–
|
|
|
|
547
|
|
Ending balance
|
|
$
|
1,158
|
|
|
$
|
4,481
|
|
|
$
|
2,538
|
|
|
$
|
81
|
|
|
$
|
374
|
|
|
$
|
2
|
|
|
$
|
8,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30
, 201
7
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
956
|
|
|
$
|
4,223
|
|
|
$
|
3,317
|
|
|
$
|
53
|
|
|
$
|
335
|
|
|
$
|
1
|
|
|
$
|
8,885
|
|
Provision (negative provision)
|
|
|
(41
|
)
|
|
|
206
|
|
|
|
(147
|
)
|
|
|
(31
|
)
|
|
|
15
|
|
|
|
(2
|
)
|
|
|
–
|
|
Loans charged off
|
|
|
(5
|
)
|
|
|
–
|
|
|
|
(57
|
)
|
|
|
(5
|
)
|
|
|
–
|
|
|
|
–
|
|
|
|
(67
|
)
|
Recoveries
|
|
|
3
|
|
|
|
9
|
|
|
|
103
|
|
|
|
25
|
|
|
|
16
|
|
|
|
3
|
|
|
|
159
|
|
Ending balance
|
|
$
|
913
|
|
|
$
|
4,438
|
|
|
$
|
3,216
|
|
|
$
|
42
|
|
|
$
|
366
|
|
|
$
|
2
|
|
|
$
|
8,977
|
|
The following table presents the activity in the allowance for loan losses by portfolio segment for the nine months ended September 30, 2018 and 2017:
|
|
Commercial
|
|
|
Commercial
Real Estate
|
|
|
Residential
Real Estate
|
|
|
Consumer
|
|
|
Agriculture
|
|
|
Other
|
|
|
Total
|
|
|
|
(in thousands)
|
|
September
30, 201
8
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
892
|
|
|
$
|
4,032
|
|
|
$
|
2,900
|
|
|
$
|
64
|
|
|
$
|
313
|
|
|
$
|
1
|
|
|
$
|
8,202
|
|
Provision (negative provision)
|
|
|
61
|
|
|
|
(68
|
)
|
|
|
(557
|
)
|
|
|
7
|
|
|
|
60
|
|
|
|
(3
|
)
|
|
|
(500
|
)
|
Loans charged off
|
|
|
(50
|
)
|
|
|
(198
|
)
|
|
|
(166
|
)
|
|
|
(49
|
)
|
|
|
(12
|
)
|
|
|
(8
|
)
|
|
|
(483
|
)
|
Recoveries
|
|
|
255
|
|
|
|
715
|
|
|
|
361
|
|
|
|
59
|
|
|
|
13
|
|
|
|
12
|
|
|
|
1,415
|
|
Ending balance
|
|
$
|
1,158
|
|
|
$
|
4,481
|
|
|
$
|
2,538
|
|
|
$
|
81
|
|
|
$
|
374
|
|
|
$
|
2
|
|
|
$
|
8,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 201
7
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
475
|
|
|
$
|
4,894
|
|
|
$
|
3,426
|
|
|
$
|
8
|
|
|
$
|
162
|
|
|
$
|
2
|
|
|
$
|
8,967
|
|
Provision (negative provision)
|
|
|
399
|
|
|
|
(791
|
)
|
|
|
134
|
|
|
|
(5
|
)
|
|
|
274
|
|
|
|
(11
|
)
|
|
|
–
|
|
Loans charged off
|
|
|
(5
|
)
|
|
|
(58
|
)
|
|
|
(512
|
)
|
|
|
(30
|
)
|
|
|
(95
|
)
|
|
|
–
|
|
|
|
(700
|
)
|
Recoveries
|
|
|
44
|
|
|
|
393
|
|
|
|
168
|
|
|
|
69
|
|
|
|
25
|
|
|
|
11
|
|
|
|
710
|
|
Ending balance
|
|
$
|
913
|
|
|
$
|
4,438
|
|
|
$
|
3,216
|
|
|
$
|
42
|
|
|
$
|
366
|
|
|
$
|
2
|
|
|
$
|
8,977
|
|
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method as of September 30, 2018:
|
|
Commercial
|
|
|
Commercial
Real Estate
|
|
|
Residential
Real Estate
|
|
|
Consumer
|
|
|
Agriculture
|
|
|
Other
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending allowance balance attributable to loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
–
|
|
|
$
|
46
|
|
|
$
|
190
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
236
|
|
Collectively evaluated for impairment
|
|
|
1,158
|
|
|
|
4,435
|
|
|
|
2,348
|
|
|
|
81
|
|
|
|
374
|
|
|
|
2
|
|
|
|
8,398
|
|
Total ending allowance balance
|
|
$
|
1,158
|
|
|
$
|
4,481
|
|
|
$
|
2,538
|
|
|
$
|
81
|
|
|
$
|
374
|
|
|
$
|
2
|
|
|
$
|
8,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated for impairment
|
|
$
|
56
|
|
|
$
|
1,377
|
|
|
$
|
2,371
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
3,804
|
|
Loans collectively evaluated for impairment
|
|
|
125,643
|
|
|
|
329,254
|
|
|
|
217,447
|
|
|
|
40,242
|
|
|
|
40,144
|
|
|
|
517
|
|
|
|
753,247
|
|
Total ending loans balance
|
|
$
|
125,699
|
|
|
$
|
330,631
|
|
|
$
|
219,818
|
|
|
$
|
40,242
|
|
|
$
|
40,144
|
|
|
$
|
517
|
|
|
$
|
757,051
|
|
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method as of December 31, 2017:
|
|
Commercial
|
|
|
Commercial
Real Estate
|
|
|
Residential
Real Estate
|
|
|
Consumer
|
|
|
Agriculture
|
|
|
Other
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending allowance balance attributable to loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
13
|
|
|
$
|
–
|
|
|
$
|
206
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
219
|
|
Collectively evaluated for impairment
|
|
|
879
|
|
|
|
4,032
|
|
|
|
2,694
|
|
|
|
64
|
|
|
|
313
|
|
|
|
1
|
|
|
|
7,983
|
|
Total ending allowance balance
|
|
$
|
892
|
|
|
$
|
4,032
|
|
|
$
|
2,900
|
|
|
$
|
64
|
|
|
$
|
313
|
|
|
$
|
1
|
|
|
$
|
8,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated for impairment
|
|
$
|
587
|
|
|
$
|
2,635
|
|
|
$
|
3,950
|
|
|
$
|
1
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
7,173
|
|
Loans collectively evaluated for impairment
|
|
|
113,184
|
|
|
|
299,751
|
|
|
|
231,860
|
|
|
|
18,438
|
|
|
|
41,154
|
|
|
|
555
|
|
|
|
704,942
|
|
Total ending loans balance
|
|
$
|
113,771
|
|
|
$
|
302,386
|
|
|
$
|
235,810
|
|
|
$
|
18,439
|
|
|
$
|
41,154
|
|
|
$
|
555
|
|
|
$
|
712,115
|
|
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 tables present information related to loans individually evaluated for impairment by class of loans as of September 30, 2018 and December 31, 2017 and for the nine months ended September 30, 2018 and 2017:
|
|
As of September 30, 2018
|
|
|
Three Months Ended
September 30, 2018
|
|
|
Nine Months Ended
September 30, 2018
|
|
|
|
Unpaid
Principal
Balance
|
|
|
Recorded
Investment
|
|
|
Allowance
For Loan
Losses
Allocated
|
|
|
Average
Recorded
Investment
|
|
|
Interest
Income
Recognized
|
|
|
Average
Recorded
Investment
|
|
|
Interest
Income
Recognized
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
With No Related Allowance Recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
122
|
|
|
$
|
56
|
|
|
$
|
—
|
|
|
$
|
33
|
|
|
$
|
—
|
|
|
$
|
143
|
|
|
$
|
1
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Farmland
|
|
|
2,753
|
|
|
|
952
|
|
|
|
—
|
|
|
|
974
|
|
|
|
27
|
|
|
|
1,423
|
|
|
|
308
|
|
Nonfarm nonresidential
|
|
|
714
|
|
|
|
255
|
|
|
|
—
|
|
|
|
259
|
|
|
|
11
|
|
|
|
343
|
|
|
|
19
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
1-4 Family
|
|
|
2,761
|
|
|
|
1,619
|
|
|
|
—
|
|
|
|
1,591
|
|
|
|
116
|
|
|
|
2,048
|
|
|
|
151
|
|
Consumer
|
|
|
8
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
Agriculture
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Subtotal
|
|
|
6,358
|
|
|
|
2,882
|
|
|
|
—
|
|
|
|
2,857
|
|
|
|
154
|
|
|
|
3,958
|
|
|
|
479
|
|
With An Allowance Recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
50
|
|
|
|
—
|
|
|
|
75
|
|
|
|
4
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Farmland
|
|
|
170
|
|
|
|
170
|
|
|
|
46
|
|
|
|
171
|
|
|
|
—
|
|
|
|
86
|
|
|
|
—
|
|
Nonfarm nonresidential
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
1-4 Family
|
|
|
752
|
|
|
|
752
|
|
|
|
190
|
|
|
|
1,102
|
|
|
|
—
|
|
|
|
1,208
|
|
|
|
32
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Agriculture
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Subtotal
|
|
|
922
|
|
|
|
922
|
|
|
|
236
|
|
|
|
1,323
|
|
|
|
—
|
|
|
|
1,369
|
|
|
|
36
|
|
Total
|
|
$
|
7,280
|
|
|
$
|
3,804
|
|
|
$
|
236
|
|
|
$
|
4,180
|
|
|
$
|
154
|
|
|
$
|
5,327
|
|
|
$
|
515
|
|
|
|
As of December 31, 2017
|
|
|
Three Months Ended
September 30, 201
7
|
|
|
Nine Months Ended
September 30, 2017
|
|
|
|
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
|
|
$
|
703
|
|
|
$
|
487
|
|
|
$
|
—
|
|
|
$
|
499
|
|
|
$
|
—
|
|
|
$
|
497
|
|
|
$
|
—
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Farmland
|
|
|
3,687
|
|
|
|
2,059
|
|
|
|
—
|
|
|
|
2,336
|
|
|
|
—
|
|
|
|
2,800
|
|
|
|
209
|
|
Nonfarm nonresidential
|
|
|
1,047
|
|
|
|
576
|
|
|
|
—
|
|
|
|
311
|
|
|
|
1
|
|
|
|
752
|
|
|
|
53
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,025
|
|
|
|
—
|
|
1-4 Family
|
|
|
4,293
|
|
|
|
2,787
|
|
|
|
—
|
|
|
|
2,879
|
|
|
|
22
|
|
|
|
2,909
|
|
|
|
50
|
|
Consumer
|
|
|
9
|
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2
|
|
|
|
2
|
|
|
|
2
|
|
Agriculture
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
60
|
|
|
|
1
|
|
|
|
30
|
|
|
|
1
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Subtotal
|
|
|
9,739
|
|
|
|
5,910
|
|
|
|
—
|
|
|
|
6,085
|
|
|
|
26
|
|
|
|
8,015
|
|
|
|
315
|
|
With An Allowance Recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
100
|
|
|
|
100
|
|
|
|
13
|
|
|
|
100
|
|
|
|
1
|
|
|
|
100
|
|
|
|
5
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Farmland
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
294
|
|
|
|
—
|
|
Nonfarm nonresidential
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
294
|
|
|
|
5
|
|
|
|
298
|
|
|
|
14
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
1-4 Family
|
|
|
1,163
|
|
|
|
1,163
|
|
|
|
206
|
|
|
|
1,412
|
|
|
|
17
|
|
|
|
1,465
|
|
|
|
51
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Agriculture
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
30
|
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Subtotal
|
|
|
1,263
|
|
|
|
1,263
|
|
|
|
219
|
|
|
|
1,806
|
|
|
|
23
|
|
|
|
2,187
|
|
|
|
70
|
|
Total
|
|
$
|
11,002
|
|
|
$
|
7,173
|
|
|
$
|
219
|
|
|
$
|
7,891
|
|
|
$
|
49
|
|
|
$
|
10,202
|
|
|
$
|
385
|
|
Cash basis income recognized for the three and nine months ended September 30, 2018 was $93,000 and $410,000, respectively, compared to $24,000 and $309,000 for the three and nine months ended September 30, 2017, respectively.
Troubled Debt Restructuring
A troubled debt restructuring (TDR) occurs when the Bank has agreed to a loan modification in the form of a concession for a borrower who is experiencing financial difficulty. The Bank’s TDRs typically involve a reduction in interest rate, a deferral of principal for a stated period of time, or an interest only period. All TDRs are considered impaired and the Bank has allocated reserves for these loans to reflect the present value of the concessionary terms granted to the borrower.
The following table presents the types of TDR loan modifications by portfolio segment outstanding as of September 30, 2018 and December 31, 2017:
|
|
TDRs
Performing to
Modified Terms
|
|
|
TDRs Not
Performing to
Modified Terms
|
|
|
Total
TDRs
|
|
|
|
(in thousands)
|
|
September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Farmland
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal deferral
|
|
|
—
|
|
|
|
700
|
|
|
|
700
|
|
Nonfarm nonresidential
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate reduction
|
|
|
186
|
|
|
|
—
|
|
|
|
186
|
|
Residential Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 Family
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate reduction
|
|
|
724
|
|
|
|
—
|
|
|
|
724
|
|
Total TDRs
|
|
$
|
910
|
|
|
$
|
700
|
|
|
$
|
1,610
|
|
|
|
TDRs
Performing to
Modified Terms
|
|
|
TDRs Not
Performing to
Modified Terms
|
|
|
Total
TDRs
|
|
|
|
(in thousands)
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate reduction
|
|
$
|
—
|
|
|
$
|
33
|
|
|
$
|
33
|
|
Principal deferral
|
|
|
—
|
|
|
|
434
|
|
|
|
434
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Farmland
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal deferral
|
|
|
—
|
|
|
|
1,362
|
|
|
|
1,362
|
|
Nonfarm nonresidential
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate reduction
|
|
|
483
|
|
|
|
—
|
|
|
|
483
|
|
Residential Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 Family
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate reduction
|
|
|
734
|
|
|
|
—
|
|
|
|
734
|
|
Total TDRs
|
|
$
|
1,217
|
|
|
$
|
1,829
|
|
|
$
|
3,046
|
|
At September 30, 2018 and December 31, 2017, 57% and 40%, respectively, of the Company’s TDRs were performing according to their modified terms. The Company allocated $162,000 and $122,000 in reserves to borrowers whose loan terms have been modified in TDRs as of September 30, 2018, and December 31, 2017, respectively. The Company has committed to lend no additional amounts as of September 30, 2018 and December 31, 2017 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 would continue to comply with the terms of the loan subsequent to the date of the renewal/modification. In this instance, the TDR was originally considered a restructuring in a prior year as a result of a modification with an interest rate that was not commensurate with the risk of the underlying loan. Additionally, TDR classification can be removed in circumstances in which the Company performs a non-concessionary re-modification of the loan at terms that were considered to be at market for loans with comparable risk. Management expects the borrower will continue to perform under the re-modified terms based on the borrower’s past history of performance.
No TDR loan modifications occurred during the three or nine months ended September 30, 2018 or September 30, 2017. During the first nine months of 2018 and 2017, no TDRs defaulted on their restructured loan within the twelve-month period following the loan modification. A default is considered to have occurred once the TDR is past due 90 days or more or it has been placed on nonaccrual.
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, 2018, and December 31, 2017:
|
|
Nonaccrual
|
|
|
Loans Past
Due 90 Days
And Over Still
Accruing
|
|
|
|
September
30
,
201
8
|
|
|
December 31,
201
7
|
|
|
September
30
,
201
8
|
|
|
December 31,
201
7
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
56
|
|
|
$
|
487
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Farmland
|
|
|
1,122
|
|
|
|
2,059
|
|
|
|
—
|
|
|
|
—
|
|
Nonfarm nonresidential
|
|
|
69
|
|
|
|
93
|
|
|
|
—
|
|
|
|
—
|
|
Residential Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
1-4 Family
|
|
|
1,445
|
|
|
|
2,817
|
|
|
|
—
|
|
|
|
—
|
|
Consumer
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
Agriculture
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
2,692
|
|
|
$
|
5,457
|
|
|
$
|
—
|
|
|
$
|
1
|
|
The following table presents the aging of the recorded investment in past due loans as of September 30, 2018 and December 31, 2017:
|
|
30 – 59
Days
Past Due
|
|
|
60 – 89
Days
Past Due
|
|
|
90 Days
And Over
Past Due
|
|
|
Nonaccrual
|
|
|
Total
Past Due
And
Nonaccrual
|
|
|
|
(in thousands)
|
|
September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
56
|
|
|
$
|
56
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Farmland
|
|
|
369
|
|
|
|
372
|
|
|
|
—
|
|
|
|
1,122
|
|
|
|
1,863
|
|
Nonfarm nonresidential
|
|
|
128
|
|
|
|
—
|
|
|
|
—
|
|
|
|
69
|
|
|
|
197
|
|
Residential Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
1-4 Family
|
|
|
808
|
|
|
|
147
|
|
|
|
—
|
|
|
|
1,445
|
|
|
|
2,400
|
|
Consumer
|
|
|
43
|
|
|
|
8
|
|
|
|
—
|
|
|
|
—
|
|
|
|
51
|
|
Agriculture
|
|
|
144
|
|
|
|
402
|
|
|
|
—
|
|
|
|
—
|
|
|
|
546
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
1,492
|
|
|
$
|
929
|
|
|
$
|
—
|
|
|
$
|
2,692
|
|
|
$
|
5,113
|
|
|
|
30 – 59
Days
Past Due
|
|
|
60 – 89
Days
Past Due
|
|
|
90 Days
And Over
Past Due
|
|
|
Nonaccrual
|
|
|
Total
Past Due
And
Nonaccrual
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
487
|
|
|
$
|
487
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Farmland
|
|
|
593
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,059
|
|
|
|
2,652
|
|
Nonfarm nonresidential
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
93
|
|
|
|
93
|
|
Residential Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
1-4 Family
|
|
|
850
|
|
|
|
126
|
|
|
|
—
|
|
|
|
2,817
|
|
|
|
3,793
|
|
Consumer
|
|
|
30
|
|
|
|
45
|
|
|
|
—
|
|
|
|
1
|
|
|
|
76
|
|
Agriculture
|
|
|
5
|
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
|
|
6
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
1,478
|
|
|
$
|
171
|
|
|
$
|
1
|
|
|
$
|
5,457
|
|
|
$
|
7,107
|
|
Credit Quality Indicators
Management categorizes all loans into risk categories at origination based upon original underwriting. Thereafter, management categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends. Additionally, loans are analyzed through internal and external loan review processes. Borrower relationships in excess of $500,000 are routinely analyzed through the credit administration processes which classify the loans as to credit risk. The following definitions are used for risk ratings:
Watch –
Loans
classified as watch are those loans which have or may experience a potentially adverse development which necessitates increased monitoring.
Special Mention –
Loans classified as special mention do not have all of the characteristics of substandard or doubtful loans. They have one or more deficiencies which warrant special attention and which corrective action, such as accelerated collection practices, may remedy.
Substandard –
Loans classified as substandard are those loans with clear and defined weaknesses such as a highly leveraged position, unfavorable financial ratios, uncertain repayment sources or poor financial condition which may jeopardize the repayment of the debt as contractually agreed. They are characterized by the distinct possibility that the Bank will sustain some losses 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, 2018, and December 31, 2017, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:
|
|
Pass
|
|
|
Watch
|
|
|
Special
Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Total
|
|
|
|
(in thousands)
|
|
September
30
, 201
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
125,392
|
|
|
$
|
180
|
|
|
$
|
—
|
|
|
$
|
127
|
|
|
$
|
—
|
|
|
$
|
125,699
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
83,368
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
83,368
|
|
Farmland
|
|
|
77,827
|
|
|
|
2,796
|
|
|
|
—
|
|
|
|
3,294
|
|
|
|
—
|
|
|
|
83,917
|
|
Nonfarm nonresidential
|
|
|
160,671
|
|
|
|
2,017
|
|
|
|
—
|
|
|
|
658
|
|
|
|
—
|
|
|
|
163,346
|
|
Residential Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
40,992
|
|
|
|
5,152
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
46,144
|
|
1-4 Family
|
|
|
167,620
|
|
|
|
1,965
|
|
|
|
114
|
|
|
|
3,975
|
|
|
|
—
|
|
|
|
173,674
|
|
Consumer
|
|
|
39,890
|
|
|
|
23
|
|
|
|
—
|
|
|
|
329
|
|
|
|
—
|
|
|
|
40,242
|
|
Agriculture
|
|
|
39,916
|
|
|
|
181
|
|
|
|
—
|
|
|
|
47
|
|
|
|
—
|
|
|
|
40,144
|
|
Other
|
|
|
517
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
517
|
|
Total
|
|
$
|
736,193
|
|
|
$
|
12,314
|
|
|
$
|
114
|
|
|
$
|
8,430
|
|
|
$
|
—
|
|
|
$
|
757,051
|
|
|
|
Pass
|
|
|
Watch
|
|
|
Special
Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
112,978
|
|
|
$
|
84
|
|
|
$
|
—
|
|
|
$
|
709
|
|
|
$
|
—
|
|
|
$
|
113,771
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
57,342
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
57,342
|
|
Farmland
|
|
|
76,563
|
|
|
|
7,607
|
|
|
|
—
|
|
|
|
4,150
|
|
|
|
—
|
|
|
|
88,320
|
|
Nonfarm nonresidential
|
|
|
152,004
|
|
|
|
2,906
|
|
|
|
—
|
|
|
|
1,814
|
|
|
|
—
|
|
|
|
156,724
|
|
Residential Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
47,121
|
|
|
|
9,467
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
56,588
|
|
1-4 Family
|
|
|
169,774
|
|
|
|
3,535
|
|
|
|
164
|
|
|
|
5,749
|
|
|
|
—
|
|
|
|
179,222
|
|
Consumer
|
|
|
18,042
|
|
|
|
306
|
|
|
|
—
|
|
|
|
91
|
|
|
|
—
|
|
|
|
18,439
|
|
Agriculture
|
|
|
38,654
|
|
|
|
1,810
|
|
|
|
—
|
|
|
|
690
|
|
|
|
—
|
|
|
|
41,154
|
|
Other
|
|
|
555
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
555
|
|
Total
|
|
$
|
673,033
|
|
|
$
|
25,715
|
|
|
$
|
164
|
|
|
$
|
13,203
|
|
|
$
|
—
|
|
|
$
|
712,115
|
|
Note 4
– Other Real Estate Owned
Other real estate owned (OREO) is real estate acquired as a result of foreclosure or by deed in lieu of foreclosure. It is classified as real estate owned until such time as it is sold. When property is acquired as a result of foreclosure or by deed in lieu of foreclosure, it is recorded at its fair market value less cost to sell. Any write-down of the property at the time of acquisition is charged to the allowance for loan losses.
Fair value of OREO is determined on an individual property basis. When foreclosed properties are acquired, management obtains a new appraisal of the subject property or has staff from the Bank’s special assets group evaluate the latest in-file appraisal in connection with the transfer to OREO. Updated appraisals are typically obtained within five quarters of the anniversary date of ownership unless a sale is imminent. Subsequent reductions in fair value are recorded as non-interest expense when a new appraisal indicates a decline in value or in cases where a marketing price is lowered below the appraised amount.
The following table presents the major categories of OREO at the period-ends indicated:
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
|
|
(in thousands)
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
Construction, land development, and other land
|
|
$
|
3,750
|
|
|
$
|
4,335
|
|
Farmland
|
|
|
—
|
|
|
|
74
|
|
|
|
$
|
3,750
|
|
|
$
|
4,409
|
|
Residential loans secured by 1-4 family residential properties in the process of foreclosure totaled $813,000 and $616,000 at September 30, 2018 and December 31, 2017, respectively.
Activity relating to OREO during the nine months ended September 30, 2018 and 2017 is as follows:
|
|
For the
Nine
Months Ended
September
3
0
,
|
|
|
|
201
8
|
|
|
201
7
|
|
|
|
(in thousands)
|
|
OREO Activity
|
|
|
|
|
|
|
|
|
OREO as of January 1
|
|
$
|
4,409
|
|
|
$
|
6,821
|
|
Real estate acquired
|
|
|
730
|
|
|
|
270
|
|
Valuation adjustment write-downs
|
|
|
(585
|
)
|
|
|
(98
|
)
|
Net gain on sales
|
|
|
72
|
|
|
|
75
|
|
Proceeds from sales of properties
|
|
|
(876
|
)
|
|
|
(738
|
)
|
OREO as of September 30
|
|
$
|
3,750
|
|
|
$
|
6,330
|
|
Expenses related to other real estate owned include:
|
|
Three Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
201
8
|
|
|
201
7
|
|
|
201
8
|
|
|
201
7
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Net gain on sales
|
|
$
|
(22
|
)
|
|
$
|
(10
|
)
|
|
$
|
(72
|
)
|
|
$
|
(75
|
)
|
Valuation adjustment write-downs
|
|
|
260
|
|
|
|
98
|
|
|
|
585
|
|
|
|
98
|
|
Operating expense
|
|
|
33
|
|
|
|
23
|
|
|
|
77
|
|
|
|
69
|
|
Total
|
|
$
|
271
|
|
|
$
|
111
|
|
|
$
|
590
|
|
|
$
|
92
|
|
Note 5
– Deposits
The following table details deposits by category:
|
|
September
30
,
201
8
|
|
|
December 31,
201
7
|
|
|
|
(in thousands)
|
|
Non-interest bearing
|
|
$
|
135,561
|
|
|
$
|
137,386
|
|
Interest checking
|
|
|
87,407
|
|
|
|
99,383
|
|
Money market
|
|
|
159,499
|
|
|
|
151,388
|
|
Savings
|
|
|
34,320
|
|
|
|
34,632
|
|
Certificates of deposit
|
|
|
457,239
|
|
|
|
424,235
|
|
Total
|
|
$
|
874,026
|
|
|
$
|
847,024
|
|
Time deposits of $250,000 or more were $29.2 million and $31.7 million at September 30, 2018 and December 31, 2017, respectively.
Scheduled maturities of total time deposits at September 30, 2018 for each of the next five years are as follows (in thousands):
Year 1
|
|
$
|
233,009
|
|
Year 2
|
|
|
200,558
|
|
Year 3
|
|
|
6,832
|
|
Year 4
|
|
|
6,714
|
|
Year 5
|
|
|
10,126
|
|
|
|
$
|
457,239
|
|
Note 6
– Advance
s
from the Federal Home Loan Bank
Advances from the Federal Home Loan Bank were as follows:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Short term advances (fixed rates 2.18% to 2.29%) maturing October 2018
|
|
$
|
50,000
|
|
|
$
|
10,000
|
|
Long term advances (fixed rates 0.00% to 5.24%) maturing April 2020 to August 2033
|
|
|
1,591
|
|
|
|
1,797
|
|
Total advances from the Federal Home Loan Bank
|
|
$
|
51,591
|
|
|
$
|
11,797
|
|
FHLB advances had a weighted-average rate of 2.24% at September 30, 2018 and 1.48% at December 31, 2017. Each advance is payable per terms on agreement, with a prepayment penalty. No prepayment penalties were incurred during 2018 or 2017. The advances were collateralized by approximately $127.4 million and $130.9 million of first mortgage loans, under a blanket lien arrangement at September 30, 2018 and December 31, 2017, respectively. At September 30, 2018, our additional borrowing capacity with the FHLB was $41.1 million.
Scheduled principal payments on FHLB advances during the next five years and thereafter (in thousands):
|
|
Advances
|
|
Year 1
|
|
$
|
50,174
|
|
Year 2
|
|
|
476
|
|
Year 3
|
|
|
728
|
|
Year 4
|
|
|
100
|
|
Year 5
|
|
|
77
|
|
Thereafter
|
|
|
36
|
|
|
|
$
|
51,591
|
|
Note 7 – Senior Debt
The Company has a $10.0 million senior secured loan agreement with a commercial bank. The loan matures on June 30, 2022. Interest is payable quarterly at a rate of three-month LIBOR plus 250 basis points through June 30, 2020, at which time quarterly principal payments of $250,000 plus interest will commence. The loan is secured by a first priority pledge of 100% of the issued and outstanding stock of the Bank. The Company may prepay any amount due under the promissory note at any time without premium or penalty. The lender retained a portion of the proceeds in escrow to service quarterly interest payments. At September 30, 2018, the escrow account had a balance of $514,000.
The loan agreement contains customary representations, warranties, covenants and events of default, including the following financial covenants: (i) the Company must maintain minimum cash on hand of not less than $750,000 through June 30, 2018, and not less than $2,500,000 thereafter, (ii) the Company must maintain a total risk based capital ratio at least equal to 9% of risk-weighted assets to June 30, 2018, and 10% thereafter, (iii) the Bank must maintain a total risk based capital ratio at least equal to 10% of risk-weighted assets to June 30, 2018, and 11% thereafter, and (iv) non-performing assets of the Bank may not exceed 2.5% of the Bank’s total assets. Both the Company and Bank were in compliance with the covenants as of September 30, 2018.
Note
8
– Fair Values Measurement
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Various valuation techniques are used to determine fair value, including market, income and cost approaches. There are three levels of inputs that may be used to measure fair values:
Level 1:
Quoted prices (unadjusted) for identical assets or liabilities in active markets that an entity has the ability to access as of the measurement date, or observable inputs.
Level 2:
Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.
Level 3:
Significant unobservable inputs that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. When that occurs, the fair value hierarchy is classified on the lowest level of input that is significant to the fair value measurement. The following methods and significant assumptions are used to estimate fair value.
Securities:
The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges, if available. This valuation method is classified as Level 1 in the fair value hierarchy. For securities where quoted prices are not available, fair values are calculated on market prices of similar securities, or matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. Matrix pricing relies on the securities’ relationship to similarly traded securities, benchmark curves, and the benchmarking of like securities. Matrix pricing utilizes observable market inputs such as benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, and industry and economic events. In instances where broker quotes are used, these quotes are obtained from market makers or broker-dealers recognized to be market participants. This valuation method is classified as Level 2 in the fair value hierarchy. For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators. This valuation method is classified as Level 3 in the fair value hierarchy. Discounted cash flows are calculated using spread to swap and LIBOR curves that are updated to incorporate loss severities, volatility, credit spread and optionality. During times when trading is more liquid, broker quotes are used (if available) to validate the model. Rating agency and industry research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into the calculations.
Impaired Loans:
An impaired loan is evaluated at the time the loan is identified as impaired and is recorded at fair value less costs to sell. Fair value is measured based on the value of the collateral securing the loan and is classified as Level 3 in the fair value hierarchy. Fair value is determined using several methods. Generally, the fair value of real estate is determined based on appraisals by qualified licensed appraisers. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach.
Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. These routine adjustments are made to adjust the value of a specific property relative to comparable properties for variations in qualities such as location, size, and income production capacity relative to the subject property of the appraisal. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.
Management routinely apply an internal discount to the value of appraisals used in the fair value evaluation of our impaired loans. The deductions to the appraisal take into account changing business factors and market conditions, as well as potential value impairment in cases where our appraisal date predates a likely change in market conditions. These deductions range from 10% for routine real estate collateral to 25% for real estate that is determined (1) to have a thin trading market or (2) to be specialized collateral. This is in addition to estimated discounts for cost to sell of six to ten percent.
Management also apply discounts to the expected fair value of collateral for impaired loans where the likely resolution involves litigation or foreclosure. Resolution of this nature generally results in receiving lower values for real estate collateral in a more aggressive sales environment. Discounts ranging from 10% to 33% have been utilized in our impairment evaluations when applicable.
Impaired loans are evaluated quarterly for additional impairment. Management obtains updated appraisals on properties securing our loans when circumstances are warranted such as at the time of renewal or when market conditions have significantly changed. This determination is made on a property-by-property basis in light of circumstances in the broader economic climate and the assessment of deterioration of real estate values in the market in which the property is located. The first stage of management’s assessment involves management’s inspection of the property in question. Management also engages in conversations with local real estate professionals, investors, and market participants to determine the likely marketing time and value range for the property. The second stage involves an assessment of current trends in the regional market. After thorough consideration of these factors, management will either internally evaluate fair value or order a new appraisal.
Other Real Estate Owned (OREO)
: OREO is evaluated at the time of acquisition and recorded at fair value as determined by independent appraisal or internal evaluation less estimated cost to sell. Quarterly evaluations of OREO for impairment are driven by property type. For smaller dollar single family homes, management consults with staff from the Bank’s special assets group as well as external realtors and appraisers. Based on these consultations, management determines asking prices for OREO properties being marketed for sale. If the internally evaluated fair value or asking price is below the recorded investment in the property, appropriate write-downs are taken.
For larger dollar commercial real estate properties, management obtains a new appraisal of the subject property or has staff in the special assets group evaluate the latest in-file appraisal in connection with the transfer to OREO. Management generally obtains updated appraisals within five quarters of the anniversary date of ownership unless a sale is imminent. When an asking price is lowered below the most recent appraised value, appropriate write-downs are taken.
Financial assets measured at fair value on a recurring basis at September 30, 2018 and December 31, 2017 are summarized below:
|
|
|
|
|
|
Fair Value Measurements at
September
30
, 201
8
Using
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
Quoted Prices In
|
|
|
|
|
|
|
Significant
|
|
|
|
|
|
|
|
Active Markets for
|
|
|
Significant Other
|
|
|
Unobservable
|
|
|
|
Carrying
|
|
|
Identical Assets
|
|
|
Observable Inputs
|
|
|
Inputs
|
|
Description
|
|
Value
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Available for sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and federal agency
|
|
$
|
22,650
|
|
|
$
|
—
|
|
|
$
|
22,650
|
|
|
$
|
—
|
|
Agency mortgage-backed: residential
|
|
|
85,812
|
|
|
|
—
|
|
|
|
85,812
|
|
|
|
—
|
|
Collateralized loan obligations
|
|
|
34,876
|
|
|
|
—
|
|
|
|
34,876
|
|
|
|
—
|
|
State and municipal
|
|
|
32,648
|
|
|
|
—
|
|
|
|
32,648
|
|
|
|
—
|
|
Corporate bonds
|
|
|
8,884
|
|
|
|
—
|
|
|
|
8,884
|
|
|
|
—
|
|
Total
|
|
$
|
184,870
|
|
|
$
|
—
|
|
|
$
|
184,870
|
|
|
$
|
—
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2017 Using
|
|
|
|
|
|
|
|
(in thousands)
|
|
Description
|
|
Carrying
Value
|
|
|
Quoted Prices In
Active Markets for
Identical Assets
(Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Available for sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and federal agency
|
|
$
|
21,624
|
|
|
$
|
—
|
|
|
$
|
21,624
|
|
|
$
|
—
|
|
Agency mortgage-backed: residential
|
|
|
64,965
|
|
|
|
—
|
|
|
|
64,965
|
|
|
|
—
|
|
Collateralized loan obligations
|
|
|
25,505
|
|
|
|
—
|
|
|
|
25,505
|
|
|
|
—
|
|
State and municipal
|
|
|
33,710
|
|
|
|
—
|
|
|
|
33,710
|
|
|
|
—
|
|
Corporate bonds
|
|
|
6,916
|
|
|
|
—
|
|
|
|
6,916
|
|
|
|
—
|
|
Total
|
|
$
|
152,720
|
|
|
$
|
—
|
|
|
$
|
152,720
|
|
|
$
|
—
|
|
There were no transfers between Level 1 and Level 2 during 2018 or 2017.
Financial assets measured at fair value on a non-recurring basis are summarized below:
|
|
|
|
|
|
Fair Value Measurements at
September
30
, 201
8
Using
|
|
|
|
|
|
|
|
(in thousands)
|
|
Description
|
|
|
Carrying
Value
|
|
|
Quoted Prices In
Active Markets for
Identical Assets
(Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Farmland
|
|
|
124
|
|
|
|
—
|
|
|
|
—
|
|
|
|
124
|
|
Nonfarm nonresidential
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
1-4 Family
|
|
|
562
|
|
|
|
—
|
|
|
|
—
|
|
|
|
562
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Agriculture
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other real estate owned:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
3,750
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,750
|
|
Farmland
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Nonfarm nonresidential
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
1-4 Family
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2017 Using
|
|
|
|
|
|
|
|
(in thousands)
|
|
Description
|
|
|
Carrying
Value
|
|
|
Quoted Prices In
Active Markets for
Identical Assets
(Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
87
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
87
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Farmland
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Nonfarm nonresidential
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
1-4 Family
|
|
|
957
|
|
|
|
—
|
|
|
|
—
|
|
|
|
957
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Agriculture
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other real estate owned, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
4,335
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,335
|
|
Farmland
|
|
|
74
|
|
|
|
—
|
|
|
|
—
|
|
|
|
74
|
|
Nonfarm nonresidential
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
1-4 Family
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $922,000 at September 30, 2018 with a valuation allowance of $236,000, resulting in no additional provision for loan losses for the three months ended September 30, 2018 and an additional provision for loan losses of $18,000 for the nine months ended September 30, 2018. Impaired loans had a carrying amount of $1.7 million at September 30, 2017 with a valuation allowance of $399,000, resulting in additional provision for loan losses of $171,000 and $29,000, respectively, for the three and nine months ended September 30, 2017. At December 31, 2017, impaired loans had a carrying amount of $1.3 million, with a valuation allowance of $219,000.
OREO, which is measured at the lower of carrying or fair value less costs to sell, had a net carrying amount of $3.8 million as of September 30, 2018, compared with $6.3 million at September 30, 2017 and $4.4 million at December 31, 2017. Write-downs of $260,000 and $585,000 were recorded on OREO for the three and nine months ended September 30, 2018, compared to write-downs of $98,000 for the three and nine months ended September 30, 2017, 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, 2018:
|
|
Fair Value
|
|
Valuation
Technique(s)
|
|
Unobservable Input(s)
|
|
Range (Weighted
Average)
|
|
|
|
(in thousands
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans – Residential real estate
|
|
$
|
562
|
|
Sales comparison approach
|
|
Adjustment for differences between the comparable sales
|
|
|
0%
|
-
|
26%
|
(9%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate owned – Commercial real estate
|
|
$
|
3,750
|
|
Sales comparison approach
|
|
Adjustment for differences between the comparable sales
|
|
|
0%
|
-
|
35%
|
(18%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income approach
|
|
Discount or capitalization rate
|
|
|
|
25%
|
|
(25%)
|
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, 2017:
|
|
Fair Value
|
|
Valuation
Technique(s)
|
|
Unobservable Input(s)
|
|
Range (Weighted
Average)
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans – Residential real estate
|
|
$
|
957
|
|
Sales comparison approach
|
|
Adjustment for differences between the comparable sales
|
|
|
0%
|
-
|
26%
|
(9%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate owned – Commercial real estate
|
|
$
|
4,409
|
|
Sales comparison approach
|
|
Adjustment for differences between the comparable sales
|
|
|
0%
|
-
|
35%
|
(18%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income approach
|
|
Discount or capitalization rate
|
|
|
|
25%
|
|
(25%)
|
Carrying amount and estimated fair values of financial instruments were as follows for the periods indicated:
|
|
|
|
|
|
Fair Value Measurements at September 30, 2018 Using
|
|
|
|
Carrying
Amount
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
37,531
|
|
|
$
|
5,770
|
|
|
$
|
31,761
|
|
|
$
|
—
|
|
|
$
|
37,531
|
|
Securities available for sale
|
|
|
184,870
|
|
|
|
—
|
|
|
|
184,870
|
|
|
|
—
|
|
|
|
184,870
|
|
Federal Home Loan Bank stock
|
|
|
7,233
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Loans, net
|
|
|
748,417
|
|
|
|
—
|
|
|
|
—
|
|
|
|
733,877
|
|
|
|
733,877
|
|
Accrued interest receivable
|
|
|
3,707
|
|
|
|
—
|
|
|
|
1,119
|
|
|
|
2,588
|
|
|
|
3,707
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
874,026
|
|
|
$
|
135,561
|
|
|
$
|
737,570
|
|
|
$
|
—
|
|
|
$
|
873,131
|
|
Federal Home Loan Bank advances
|
|
|
51,591
|
|
|
|
—
|
|
|
|
51,549
|
|
|
|
—
|
|
|
|
51,549
|
|
Junior subordinated debentures
|
|
|
21,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
16,344
|
|
|
|
16,344
|
|
Senior debt
|
|
|
10,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9,908
|
|
|
|
9,908
|
|
Accrued interest payable
|
|
|
597
|
|
|
|
—
|
|
|
|
544
|
|
|
|
53
|
|
|
|
597
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2017 Using
|
|
|
|
Carrying
Amount
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
34,103
|
|
|
$
|
8,137
|
|
|
$
|
25,966
|
|
|
$
|
—
|
|
|
$
|
34,103
|
|
Securities available for sale
|
|
|
152,720
|
|
|
|
—
|
|
|
|
152,720
|
|
|
|
—
|
|
|
|
152,720
|
|
Federal Home Loan Bank stock
|
|
|
7,323
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Loans held for sale
|
|
|
70
|
|
|
|
—
|
|
|
|
70
|
|
|
|
—
|
|
|
|
70
|
|
Loans, net
|
|
|
703,913
|
|
|
|
—
|
|
|
|
—
|
|
|
|
703,263
|
|
|
|
703,263
|
|
Accrued interest receivable
|
|
|
3,136
|
|
|
|
—
|
|
|
|
925
|
|
|
|
2,211
|
|
|
|
3,136
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
847,024
|
|
|
$
|
137,386
|
|
|
$
|
693,320
|
|
|
$
|
—
|
|
|
$
|
830,706
|
|
Federal Home Loan Bank advances
|
|
|
11,797
|
|
|
|
—
|
|
|
|
11,799
|
|
|
|
—
|
|
|
|
11,799
|
|
Subordinated capital notes
|
|
|
2,250
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,246
|
|
|
|
2,246
|
|
Junior subordinated debentures
|
|
|
21,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
19,090
|
|
|
|
19,090
|
|
Senior Debt
|
|
|
10,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,000
|
|
|
|
10,000
|
|
Accrued interest payable
|
|
|
1,475
|
|
|
|
—
|
|
|
|
357
|
|
|
|
1,118
|
|
|
|
1,475
|
|
The methods and assumptions, not previously presented, used to estimate fair values are described as follows:
(
a) Cash and Cash Equivalents
The carrying amounts of cash and short-term instruments approximate fair values and are classified as either Level 1 or Level 2. Noninterest bearing deposits are Level 1 whereas interest bearing due from bank accounts and fed funds sold are Level 2.
(b) FHLB Stock
It is not practical to determine the fair value of FHLB stock due to restrictions placed on its transferability.
(c) Loans, Net
At September 30, 2018, fair values of loans, excluding loans held for sale, are determined using an estimated exit price. Contractual cash flow estimates are projected using a loan’s balance, interest rate, repricing characteristics, maturity and payment amounts. Loans are grouped into homogenous pools for valuation purposes based on type and credit risk metrics. Contractual cash flows are adjusted for potential prepayment estimates, as well as potential defaults over the expected life of each pool. A discount rate is determined based upon current financial conditions and the nature of the cash flow forecast. The resulting exit price for the portfolio is a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously.
At December 31, 2017, fair values of loans, excluding loans held for sale, was estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values were based on carrying values resulting in a Level 3 classification. Fair values for other loans were estimated using discounted cash flow analyses, using interest rates 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 did not necessarily represent an exit price.
(d) Loans Held for Sale
The fair value of loans held for sale is estimated based upon binding contracts and quotes from third party investors resulting in a Level 2 classification.
(e) Deposits
The fair values for non-interest bearing non-maturity deposits are, by definition, equal to the amount payable on demand at the reporting date resulting in a Level 1 classification. The carrying amounts of interest bearing non-maturity deposits approximate their fair values at the reporting date resulting in a Level 2 classification. Fair values for interest bearing time deposits are estimated using discounted cash flow calculations that utilize the contract rate of the deposits discounted at current market rates for like maturities resulting in a Level 2 classification.
(f) Other Borrowings
At September 30, 2018, fair values of FHLB advances are determined using an estimated exit price. Contractual cash flow estimates are projected for each advance utilizing contractual interest rates, repricing characteristics, maturities and payment amounts. Contractual cash flows are adjusted for potential prepayment estimates. A discount rate is determined based upon current market conditions and the nature of the cash flow forecast. The resulting exit price for FHLB advances is a Level 2 classification. At December 31, 2017, the fair values of FHLB advances were estimated using discounted cash flow analyses based on the current borrowing rates resulting in a Level 2 classification.
At September 30, 2018, fair values of junior subordinated debentures and senior debt are determined using an estimated exit price. Contractual cash flow estimates are projected for each instrument utilizing contractual interest rates, repricing characteristics, maturities and payment amounts. Contractual cash flows are adjusted for potential prepayment estimates and credit risk. A discount rate is determined based upon current market conditions and the nature of the cash flow forecast. The resulting exit price is a Level 3 classification. At December 31, 2017, the fair values of subordinated capital notes, junior subordinated debentures, and senior debt were estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 3 classification.
(g) Accrued Interest Receivable/Payable
The carrying amounts of accrued interest approximate fair value resulting in a Level 2 or Level 3 classification based on the level of the asset or liability with which the accrual is associated.
Note
9
– Income Taxes
Deferred tax assets and liabilities were due to the following as of:
|
|
September
30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(in thousands)
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carry-forward
|
|
$
|
24,079
|
|
|
$
|
25,645
|
|
Allowance for loan losses
|
|
|
1,813
|
|
|
|
1,723
|
|
OREO write-down
|
|
|
2,555
|
|
|
|
2,432
|
|
Alternative minimum tax credit carry-forward
|
|
|
346
|
|
|
|
692
|
|
Net assets from acquisitions
|
|
|
307
|
|
|
|
358
|
|
Net unrealized loss on securities
|
|
|
848
|
|
|
|
169
|
|
New market tax credit carry-forward
|
|
|
208
|
|
|
|
208
|
|
Nonaccrual loan interest
|
|
|
234
|
|
|
|
271
|
|
Accrued expenses
|
|
|
204
|
|
|
|
172
|
|
Deferred compensation
|
|
|
269
|
|
|
|
277
|
|
Other
|
|
|
241
|
|
|
|
241
|
|
|
|
|
31,104
|
|
|
|
32,188
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
FHLB stock dividends
|
|
|
557
|
|
|
|
557
|
|
Fixed assets
|
|
|
77
|
|
|
|
68
|
|
Deferred loan costs
|
|
|
141
|
|
|
|
152
|
|
Other
|
|
|
99
|
|
|
|
98
|
|
|
|
|
874
|
|
|
|
875
|
|
Net deferred tax asset
|
|
$
|
30,230
|
|
|
$
|
31,313
|
|
At September 30, 2018, the Company had net operating loss carryforwards (“NOLs”) of $114.7 million, which will begin to expire in 2031. As of September 30, 2018, a total of $346,000 in alternative minimum tax credit carry-forward was reclassified to other assets as it is currently refundable for the 2018 tax year.
The Company does not have any beginning and ending unrecognized tax benefits. The Company does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next twelve months. There were no interest and penalties recorded in the income statement or accrued for the three or nine months ended September 30, 2018 or September 30, 2017 related to unrecognized tax benefits.
Under Section 382 of the Internal Revenue Code, as amended (“Section 382”), the Company’s net operating loss carryforwards and other deferred tax assets can generally be used to offset future taxable income and therefore reduce federal income tax obligations. However, the Company's ability to use its NOLs would be limited if there was an “ownership change” as defined by Section 382. This would occur if shareholders owning (or deemed to own under the tax rules) 5% or more of the Company's voting and non-voting common shares increase their aggregate ownership of the Company by more than 50 percentage points over a defined period of time.
In 2015, the Company took two measures to preserve the value of its NOLs. First, the Company adopted a tax benefits preservation plan designed to reduce the likelihood of an “ownership change” occurring as a result of purchases and sales of the Company's common shares. Upon adoption of this plan, the Company declared a dividend of one preferred stock purchase right for each common share outstanding as of the close of business on July 10, 2015. Any shareholder or group that acquires beneficial ownership of 5% or more of the Company (an “acquiring person”) could be subject to significant dilution in its holdings if the Company's Board of Directors does not approve such acquisition. Existing shareholders holding 5% or more of the Company will not be considered acquiring persons unless they acquire additional shares, subject to certain exceptions described in the plan. In addition, 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 plan was extended in May 2018 to expire upon the earlier of (i) June 30, 2021, (ii) the beginning of a taxable year with respect to which the Board of Directors determines that no tax benefits may be carried forward, (iii) the repeal or amendment of Section 382 or any successor statute, if the Board of Directors determines that the plan is no longer needed to preserve the tax benefits, and (iv) certain other events as described in the plan.
On September 23, 2015, the Company’s shareholders approved an amendment to its articles of incorporation to further help protect the long-term value of the Company’s NOLs. The amendment provides a means to block transfers of our common shares that could result in an ownership change under Section 382. The transfer restrictions were extended in May 2018 by shareholder vote and will expire on the earlier of (i) May 23, 2021, (ii) the beginning of a taxable year with respect to which the Board of Directors determines that no tax benefit may be carried forward, (iii) the repeal of Section 382 or any successor statute if our Board determines that the transfer restrictions are no longer needed to preserve the tax benefits of our NOLs, or (iv) such date as the Board otherwise determines that the transfer restrictions are no longer necessary.
The Company and its subsidiaries 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 2015.
Note
10
– Stock Plans
and Stock Based Compensation
Shares available for issuance under the 2018 Omnibus Equity Compensation Plan (“2018 Plan”) total 328,274. Shares issued to employees under the plan vest annually on the anniversary date of the grant over three years.
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 2018 unvested shares issued was $654,000, or $13.99 per weighted-average share. The Company recorded $171,000 and $334,000 of stock-based compensation to salaries and employee benefits for the three and nine months ended September 30, 2018, respectively, and $129,000 and $271,000 for the three and nine months ended September 30, 2017, respectively. Management expects substantially all of the unvested shares outstanding at the end of the period to vest according to the vesting schedule. A deferred tax benefit of $36,000 and $70,000 was recognized related to this expense during the three and nine months ended September 30, 2018, respectively, and no deferred tax benefit during the three and nine months ended September 30, 2017.
The following table summarizes unvested share activity as of and for the periods indicated for the Stock Incentive Plan:
|
|
Nine
Months Ended
|
|
|
Twelve Months Ended
|
|
|
|
September
30
, 201
8
|
|
|
December 31, 201
7
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Grant
|
|
|
|
|
|
|
Grant
|
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
Outstanding, beginning
|
|
|
142,334
|
|
|
$
|
5.67
|
|
|
|
179,513
|
|
|
$
|
4.89
|
|
Granted
|
|
|
46,726
|
|
|
|
13.99
|
|
|
|
37,865
|
|
|
|
9.64
|
|
Vested
|
|
|
(66,164
|
)
|
|
|
5.39
|
|
|
|
(73,728
|
)
|
|
|
5.75
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,316
|
)
|
|
|
9.35
|
|
Outstanding, ending
|
|
|
122,896
|
|
|
$
|
8.98
|
|
|
|
142,334
|
|
|
$
|
5.67
|
|
Unrecognized stock based compensation expense related to unvested shares for the remainder of 2018 and beyond is estimated as follows (in thousands):
October 2018 – December 2018
|
|
$
|
190
|
|
2019
|
|
|
259
|
|
2020
|
|
|
185
|
|
2021
|
|
|
67
|
|
Note 1
1
– Earnings per Share
The factors used in the basic and diluted earnings per share computations follow:
|
|
Three Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30
,
|
|
|
September
30
,
|
|
|
|
201
8
|
|
|
201
7
|
|
|
201
8
|
|
|
201
7
|
|
|
|
(in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,437
|
|
|
$
|
1,794
|
|
|
$
|
6,354
|
|
|
$
|
5,183
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings allocated to unvested shares
|
|
|
40
|
|
|
|
45
|
|
|
|
105
|
|
|
|
133
|
|
Net income available to common shareholders, basic and diluted
|
|
$
|
2,397
|
|
|
$
|
1,749
|
|
|
$
|
6,249
|
|
|
$
|
5,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares including unvested common shares outstanding
|
|
|
7,455,316
|
|
|
|
6,259,864
|
|
|
|
7,059,472
|
|
|
|
6,245,418
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average unvested common shares
|
|
|
122,097
|
|
|
|
157,412
|
|
|
|
117,060
|
|
|
|
160,825
|
|
Weighted average common shares outstanding
|
|
|
7,333,219
|
|
|
|
6,102,452
|
|
|
|
6,942,412
|
|
|
|
6,084,593
|
|
Basic income per common share
|
|
$
|
0.33
|
|
|
$
|
0.29
|
|
|
$
|
0.90
|
|
|
$
|
0.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add: Dilutive effects of assumed exercises of common stock warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Weighted average common shares and potential common shares
|
|
|
7,333,219
|
|
|
|
6,102,452
|
|
|
|
6,942,412
|
|
|
|
6,084,593
|
|
Diluted income per common share
|
|
$
|
0.33
|
|
|
$
|
0.29
|
|
|
$
|
0.90
|
|
|
$
|
0.83
|
|
The Company had no outstanding stock options at September 30, 2018 or 2017. A warrant for the purchase of 66,113 shares of the Company’s common stock at an exercise price of $79.41 was outstanding at September 30, 2018 and 2017, but was not included in the diluted EPS computation as inclusion would have been anti-dilutive. The warrant is exercisable at the holder’s option through November 21, 2018.
Note 1
2
–
Regulatory Capital Matters
Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can result in regulatory action.
The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. Banks (Basel III rules) became effective for the Company and Bank on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule through January 1, 2019. The final rules allowed banks and their holding companies with less than $250 billion in assets a one-time opportunity to opt-out of a requirement to include unrealized gains and losses in accumulated other comprehensive income in their capital calculation. The Company and the Bank opted out of this requirement. The rules also establish a “capital conservation buffer” of 2.5% above the regulatory minimum risk-based capital ratios. Once the capital conservation buffer is fully phased in, the minimum ratios are a common equity Tier 1 risk-based capital ratio of 7.0%, a Tier 1 risk-based capital ratio of 8.5%, and a total risk-based capital ratio of 10.5%. The capital conservation buffer for 2018 is 1.875% and 1.25% for 2017. An institution is subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if capital levels fall below minimum levels plus the buffer amounts. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions.
The 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 (dollars in thousands):
|
|
Actual
|
|
|
Minimum Requirement
for Capital Adequacy Purposes
|
|
|
Minimum Requirement to be Well Capitalized Under Prompt Corrective Action Provisions
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
As of September 30, 201
8
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk-based capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
100,936
|
|
|
|
12.07
|
%
|
|
$
|
66,910
|
|
|
|
8.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Bank
|
|
|
105,243
|
|
|
|
12.60
|
|
|
|
66,836
|
|
|
|
8.00
|
|
|
$
|
83,545
|
|
|
|
10.00
|
%
|
Tier 1 capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
90,555
|
|
|
|
10.83
|
|
|
|
50,183
|
|
|
|
6.00
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Bank
|
|
|
96,609
|
|
|
|
11.56
|
|
|
|
50,127
|
|
|
|
6.00
|
|
|
|
66,836
|
|
|
|
8.00
|
|
Total common equity Tier 1 risk-based capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
77,013
|
|
|
|
9.21
|
|
|
|
37,637
|
|
|
|
4.50
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Bank
|
|
|
96,609
|
|
|
|
11.56
|
|
|
|
37,595
|
|
|
|
4.50
|
|
|
|
54,304
|
|
|
|
6.50
|
|
Tier 1 capital (to average assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
90,555
|
|
|
|
8.91
|
|
|
|
40,638
|
|
|
|
4.00
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Bank
|
|
|
96,609
|
|
|
|
9.51
|
|
|
|
40,622
|
|
|
|
4.00
|
|
|
|
50,778
|
|
|
|
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, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk-based capital (to risk- weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
83,072
|
|
|
|
10.55
|
%
|
|
$
|
63,014
|
|
|
|
8.00
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
Bank
|
|
|
91,305
|
|
|
|
11.61
|
|
|
|
62,938
|
|
|
|
8.00
|
|
|
$
|
78,672
|
|
|
|
10.00
|
%
|
Tier 1 capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
66,487
|
|
|
|
8.44
|
|
|
|
47,260
|
|
|
|
6.00
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Bank
|
|
|
81,393
|
|
|
|
10.35
|
|
|
|
47,203
|
|
|
|
6.00
|
|
|
|
62,938
|
|
|
|
8.00
|
|
Total common equity Tier 1 risk- based capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
54,535
|
|
|
|
6.92
|
|
|
|
35,445
|
|
|
|
4.50
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Bank
|
|
|
81,393
|
|
|
|
10.35
|
|
|
|
35,403
|
|
|
|
4.50
|
|
|
|
51,137
|
|
|
|
6.50
|
|
Tier 1 capital (to average assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
66,487
|
|
|
|
7.11
|
|
|
|
37,392
|
|
|
|
4.00
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Bank
|
|
|
81,393
|
|
|
|
8.70
|
|
|
|
37,421
|
|
|
|
4.00
|
|
|
|
46,777
|
|
|
|
5.00
|
|
N/A: Not applicable. Regulatory framework does not define well capitalized for holding companie
s.
Kentucky banking laws limit the amount of dividends that may be paid to a holding company by its subsidiary banks without prior approval. These laws limit the amount of dividends that may be paid in any calendar year to current year’s net income, as defined in the laws, combined with the retained net income of the preceding two years, less any dividends declared during those periods. In addition, a bank must have positive retained earnings.
Note 1
3
–
Off Balance Sheet Risks, Commitments, and Contingent Liabilities
The Company, in the normal course of business, is party to financial instruments with off balance sheet risk. The financial instruments include commitments to extend credit and standby letters of credit. The contract or notional amounts of these instruments reflect the potential future obligations of the Company pursuant to those financial instruments. Creditworthiness for all instruments is evaluated on a case-by-case basis in accordance with the Company’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.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a client to a third party. The terms and risk of loss involved in issuing standby letters of credit are similar to those involved in issuing loan commitments and extending credit. In addition to credit risk, the Company also has liquidity risk associated with standby letters of credit because funding for these obligations could be required immediately. The Company does not deem this risk to be material. No liability is currently established for standby letters of credit.
The following table presents the contractual amounts of financial instruments with off-balance sheet risk for each period ended:
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
|
|
Fixed
Rate
|
|
|
Variable
Rate
|
|
|
Fixed
Rate
|
|
|
Variable
Rate
|
|
|
|
(in thousands)
|
|
Commitments to make loans
|
|
$
|
6,609
|
|
|
$
|
11,436
|
|
|
$
|
27,349
|
|
|
$
|
31,412
|
|
Unused lines of credit
|
|
|
5,505
|
|
|
|
63,887
|
|
|
|
11,034
|
|
|
|
57,727
|
|
Standby letters of credit
|
|
|
542
|
|
|
|
1,749
|
|
|
|
2,216
|
|
|
|
373
|
|
Commitments to make loans are generally made for periods of one year or less.
In connection with the purchase of loan participations, the Bank is party to risk participation agreements, which had notional amounts totaling $26.6 million at September 30, 2018 and $19.8 million at December 31, 2017. The risk participation agreements are not designated against specific assets or liabilities under ASC 815, Derivatives and Hedging, and, therefore, do not qualify for hedge accounting. The derivatives are recorded on the balance sheet at fair value and changes in fair value of both the borrower and the offsetting swap agreements are recorded (and essentially offset) in non-interest income. The fair value of the derivative instruments incorporates a consideration of credit risk in accordance with ASC 820, resulting in some volatility in earnings each period.
At September 30, 2018 and December 31, 2017, the fair value of the risk participation agreements were $26.6 million and $19.8 million, respectively.
The Company is subject to claims and lawsuits that arise primarily in the ordinary course of business. Litigation is subject to inherent uncertainties and unfavorable rulings could occur. The Company records contingent liabilities resulting from claims against it when a loss is assessed to be probable and the amount of the loss is reasonably estimable. Accruals are not made in cases where liability is not probable or the amount cannot be reasonably estimated. Assessing probability of loss and estimating probable losses requires analysis of multiple factors, including in some cases judgments about the potential actions of third party claimants and courts. Recorded contingent liabilities are based on the best information available and actual losses in any future period are inherently uncertain. Based upon current knowledge and after consultation with counsel, the Company believes pending legal proceedings or claims should not have a material impact on its financial position or results of operations. However, in light of the uncertainties involved in such proceedings, the outcome of a particular matter may be material to the financial position or results of operations for a particular reporting period in the future.
Note 14 – Revenue from Contracts with Customers
The Company adopted ASC 606 using the full retrospective method. The adoption of ASC 606 for in-scope revenue streams did not result in a cumulative effect adjustment. Bank card interchange income and expenses were previously reported net in non-interest income. The income statement impact of adopting ASC 606 resulted in a reclassification adjustment of $142,000 and $405,000 related to the three and nine months ended September 30, 2017, respectively, between bank card interchange income and deposit account related expense in order to report debit card interchange income gross and provide a comparable disclosure for 2018 and 2017 results. This reclassification adjustment had no impact on previously reported net income for the three or nine months ended September 30, 2017.
All of the Company’s revenue from customers in the scope of ASC 606 is recognized within non-interest income. A description of the Company’s revenue streams accounted for under ASC 606 follows:
Service Charges on Deposit Accounts:
The Company earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which include services such as ATM use fees, stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Company fulfills the customer’s request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges are withdrawn from the customer’s account balance.
Bank Card Interchange Income:
The Company earns interchange fees from bank cardholder transactions conducted through the Shazam payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. Prior to adopting ASC 606, the Company reported bank card interchange fees net of expenses. Under ASC 606, bank card interchange fees are reported gross.
Gains/Losses on Sales of OREO:
The Company records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the Company finances the sale of OREO to the buyer, the Company assess whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon transfer of control of the property to the buyer. In determining the gain or loss on the sale, the Company adjusts the transaction price and related gain (loss) on sale if a significant financing component is present. The Company did not finance any OREO sale during 2018 or 2017. Gains and losses on sales of OREO are netted with OREO expense and reported in non-interest expense.
Other Non-interest Income
: Other non-interest income includes revenue from several sources that are within the scope of ASC 606, including title insurance commissions, income from secondary market loan sales, and other transaction-based revenue that is individually immaterial. Other non-interest income included approximately $301,000 and $546,000 of revenue for the three and nine months ended September 30, 2018, respectively, within the scope of ASC 606. Other non-interest income included approximately $195,000 and $531,000 of revenue for the three and nine months ended September 30, 2017, 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.