Management’s discussion and analysis of financial condition and results of operations analyzes the consolidated financial condition and results of operations of Limestone Bancorp, Inc. (the “Company”) and its wholly owned subsidiary, Limestone Bank, Inc. (the “Bank”). The Company is a Louisville, Kentucky-based bank holding company that operates banking offices in twelve Kentucky counties. Our markets include metropolitan Louisville in Jefferson County and the surrounding counties of Henry and Bullitt. The Bank serves south central Kentucky and southern Kentucky from banking offices in Butler, Green, Hart, Edmonson, Barren, Warren, Ohio, and Daviess Counties. The Bank also has an office in Lexington, the second largest city in Kentucky. The Bank is a community bank with a wide range of commercial and personal banking products.
Historically, the Bank has focused on commercial and commercial real estate lending, both in markets where we have banking offices and other growing markets in our region. Commercial, commercial real estate and real estate construction loans accounted for 60.9% of our total loan portfolio as of December 31, 2018, and 58.4% as of December 31, 2017. Commercial lending generally produces higher yields than residential lending, but involves greater risk and requires more rigorous underwriting standards and credit quality monitoring.
The following discussion should be read in conjunction with our consolidated financial statements and accompanying notes and other schedules presented elsewhere in the report.
Net income before taxes was $10.8 million for the year ended December 31, 2018 compared to $6.6 million for the year ended December 31, 2017. Income tax expense was $2.0 million for 2018 and income tax benefit was $31.9 million for 2017 due to the reversal of the Company’s deferred tax asset valuation allowance and the change in federal corporate tax rates in connection with the enactment of the Tax Cuts and Jobs Act of 2017.
For the year ended December 31, 2018, the Company reported net income of $8.8 million compared with net income of $38.5 million for the year ended December 31, 2017 and a net loss of $2.8 million for the year ended December 31, 2016. After allocating earnings to participating securities, net income attributable to common shareholders was $8.7 million for the year ended December 31, 2018, compared with net income attributable to common shareholders of $37.5 million for the year ended December 31, 2017, and a net loss attributable to common shareholders of $2.7 million for the year ended December 31, 2016. Basic and diluted income per common share were $1.23 for the year ended December 31, 2018, compared with net income per common share of $6.15 for 2017, and net loss per common share of ($0.46) for 2016.
The following significant items are of note for the year ended December 31, 2018:
The Company’s accounting and reporting policies comply with GAAP and conform to general practices within the banking industry. Management believes the following significant accounting policies may involve a higher degree of management assumptions and judgments that could result in materially different amounts to be reported if conditions or underlying circumstances were to change.
There can be no assurance that future events, such as court decisions or positions of federal and state taxing authorities, will not differ from management’s current assessment, the impact of which could be significant to the consolidated results of operations and reported earnings. The Company believes its tax assets and liabilities are adequate and are properly recorded in the consolidated financial statements at December 31, 2018 and 2017.
Results of Operations
The following table summarizes components of income and expense and the change in those components for 2018 compared with 2017:
|
|
For the
Years Ended December 31,
|
|
|
Change from Prior Period
|
|
|
|
201
8
|
|
|
201
7
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(dollars in thousands)
|
|
Gross interest income
|
|
$
|
43,461
|
|
|
$
|
37,522
|
|
|
$
|
5,939
|
|
|
|
15.8
|
%
|
Gross interest expense
|
|
|
9,790
|
|
|
|
6,405
|
|
|
|
3,385
|
|
|
|
52.8
|
|
Net interest income
|
|
|
33,671
|
|
|
|
31,117
|
|
|
|
2,554
|
|
|
|
8.2
|
|
Provision (negative provision) for loan losses
|
|
|
(500
|
)
|
|
|
(800
|
)
|
|
|
300
|
|
|
|
37.5
|
|
Non-interest income
|
|
|
5,785
|
|
|
|
5,116
|
|
|
|
669
|
|
|
|
13.1
|
|
Gains on sale of securities, net
|
|
|
(6
|
)
|
|
|
288
|
|
|
|
(294
|
)
|
|
|
(102.1
|
)
|
Non-interest expense
|
|
|
29,126
|
|
|
|
30,767
|
|
|
|
(1,641
|
)
|
|
|
(5.3
|
)
|
Net income before taxes
|
|
|
10,824
|
|
|
|
6,554
|
|
|
|
4,270
|
|
|
|
65.2
|
|
Income tax expense (benefit)
|
|
|
2,030
|
|
|
|
(31,899
|
)
|
|
|
33,929
|
|
|
|
NM
|
|
Net income
|
|
|
8,794
|
|
|
|
38,453
|
|
|
|
(29,659
|
)
|
|
|
NM
|
|
NM: Not Meaningful
Net income of $8.8 million for the year ended December 31, 2018 decreased by $29.7 million from net income of $38.5 million for 2017. Net income for 2017 was impacted by the reversal of the Company’s deferred tax asset valuation allowance and the change in federal corporate tax rates in connection with the enactment of the Tax Cuts and Jobs Act of 2017. This resulted in an income tax benefit of $31.9 million for 2017. During 2018, improving trends in non-performing loans, past due loans, and loan risk categories continued. A negative provision for loan losses expense of $500,000 was recorded during 2018, compared to $800,000 negative provision for loan losses expense for 2017. Non-interest income increased $669,000 during 2018. There was an increase of $310,000 in bank card interchange fees, $232,000 in other non-interest income, and $102,000 in service charges on deposit accounts. Non-interest expense decreased $1.6 million during 2018 due primarily to decreases in OREO expense of $1.1 million and FDIC insurance of $855,000 offset by an increase in salaries and employee benefits of $399,000.
The following table summarizes components of income and expense and the change in those components for 2017 compared with 2016:
|
|
For the
Years Ended December 31,
|
|
|
Change from Prior Period
|
|
|
|
201
7
|
|
|
201
6
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(dollars in thousands)
|
|
Gross interest income
|
|
$
|
37,522
|
|
|
$
|
35,602
|
|
|
$
|
1,920
|
|
|
|
5.4
|
%
|
Gross interest expense
|
|
|
6,405
|
|
|
|
5,981
|
|
|
|
424
|
|
|
|
7.1
|
|
Net interest income
|
|
|
31,117
|
|
|
|
29,621
|
|
|
|
1,496
|
|
|
|
5.1
|
|
Provision (negative provision) for loan losses
|
|
|
(800
|
)
|
|
|
(2,450
|
)
|
|
|
1,650
|
|
|
|
67.3
|
|
Non-interest income
|
|
|
5,116
|
|
|
|
5,002
|
|
|
|
114
|
|
|
|
2.3
|
|
Gains on sale of securities, net
|
|
|
288
|
|
|
|
216
|
|
|
|
72
|
|
|
|
33.3
|
|
Non-interest expense
|
|
|
30,767
|
|
|
|
40,021
|
|
|
|
(9,254
|
)
|
|
|
(23.1
|
)
|
Net income (loss) before taxes
|
|
|
6,554
|
|
|
|
(2,732
|
)
|
|
|
9,286
|
|
|
|
339.9
|
|
Income tax expense (benefit)
|
|
|
(31,899
|
)
|
|
|
21
|
|
|
|
(31,920
|
)
|
|
|
NM
|
|
Net income (loss)
|
|
|
38,453
|
|
|
|
(2,753
|
)
|
|
|
41,206
|
|
|
|
NM
|
|
NM: Not Meaningful
Net income of $38.5 million for the year ended December 31, 2017 increased by $41.2 million from a net loss of $2.8 million for 2016. During the period, improving trends in non-performing loans, past due loans, and loan risk categories continued. In addition, net income for 2017 was impacted by the reversal of the Company’s deferred tax asset valuation allowance and the change in federal corporate tax rates in connection with the enactment of the Tax Cuts and Jobs Act of 2017. The net result of these two items, as well as income tax expense for the year, was an income tax benefit of $31.9 million for 2017. A negative provision for loan losses expense of $800,000 was recorded during 2017, compared to $2.5 million negative provision for loan losses expense for 2016. Non-interest income increased $114,000 during 2017. There was an increase of $295,000 in service charges on deposit accounts, $218,000 in bank card interchange fees, and $62,000 in other non-interest income which was offset by no OREO income during 2017, compared to $456,000 during 2016. Non-interest expense decreased $9.3 million during 2017 due primarily to a decrease in litigation and loan collection expense of $8.6 million as 2016 was negatively impacted by a ruling from the Kentucky Court of Appeals against the Bank that approximated $8.0 million. After consideration of earnings attributable to participating securities, net income attributable to common shareholders was $37.5 million for the year ended December 31, 2017, as compared to net loss attributable to common shareholders of $2.7 million for 2016.
Net I
nterest Income
– Net interest income was $33.7 million for the year ended December 31, 2018, an increase of $2.6 million, or 8.2%, compared with $31.1 million for the same period in 2017. Net interest spread and margin were 3.32% and 3.53%, respectively, for 2018, compared with 3.35% and 3.48%, respectively, for 2017. Average nonaccrual loans were $3.5 million and $7.1 million in 2018 and 2017, respectively.
Average interest-earning assets were $957.5 million for 2018, compared with $904.1 million for 2017, a 5.9% increase, primarily attributable to higher average loans, partially offset by a decrease in average investment securities. Average loans were $743.4 million for 2018, compared with $667.5 million for 2017, an 11.4% increase. Average investment securities were $178.9 million for 2018, compared with $193.1 million for 2017, a 7.3% decrease. Average interest bearing deposits with financial institutions and fed funds sold were $27.9 million in 2018, compared with $36.2 million in 2017, a 22.8% decrease. Total interest income increased 15.8% to $43.5 million for 2018, compared with $37.5 million for 2017.
Average interest-bearing liabilities increased by 3.3% to $799.0 million for 2018, compared with $773.2 million for 2017. Total interest expense increased by 52.8% to $9.8 million for 2018, compared with $6.4 million during 2017, due primarily to increases in rates paid on certificates of deposits and other time deposits as well as increases in average balances of FHLB advances in 2018 compared to 2017. Average volume of certificates of deposit decreased 2.8% to $439.6 million for 2018, compared with $452.4 million for 2017. The average interest rate paid on certificates of deposit increased to 1.35% for 2018, compared with 0.93% for 2017. Average volume of interest checking and money market deposit accounts increased 0.9% to $249.4 million for 2018, compared with $247.3 million for 2017. The average interest rate paid on interest checking and money market deposit accounts increased to 0.62% for 2018, compared with 0.38% for 2017. Both the yield on earning assets and cost of interest-bearing liabilities were impacted by increases in short-term interest rates during 2017 and 2018.
Net interest income was $31.1 million for the year ended December 31, 2017, an increase of $1.5 million, or 5.1%, compared with $29.6 million for the same period in 2016. Net interest spread and margin were 3.35% and 3.48%, respectively, for 2017, compared with 3.32% and 3.42%, respectively, for 2016. Average nonaccrual loans were $7.1 million and $11.4 million in 2017 and 2016, respectively.
Average interest-earning assets were $904.1 million for 2017, compared with $875.3 million for 2016, a 3.3% increase, primarily attributable to higher average loans and investment securities, partially offset by a decrease in interest bearing deposits with financial institutions. Average loans were $667.5 million for 2017, compared with $621.3 million for 2016, a 7.4% increase. Average investment securities were $193.1 million for 2017, compared with $183.7 million for 2016, a 5.1% increase. Average interest bearing deposits with financial institutions and fed funds sold were $36.2 million in 2017, compared with $62.9 million in 2016, a 42.4% decrease. Total interest income increased 5.4% to $37.5 million for 2017, compared with $35.6 million for 2016.
Average interest-bearing liabilities increased by 1.7% to $773.2 million for 2017, compared with $760.7 million for 2016. Total interest expense increased by 7.1% to $6.4 million for 2017, compared with $6.0 million during 2016, due primarily to the completion of a $10.0 million senior debt transaction during 2017 as well as an increase in FHLB advances outstanding during 2017. Average volume of certificates of deposit decreased 2.9% to $452.4 million for 2017, compared with $466.0 million for 2016. The average interest rate paid on certificates of deposit increased to 0.93% for 2017, compared with 0.88% for 2016. Average volume of interest checking and money market deposit accounts increased 6.2% to $247.3 million for 2017, compared with $232.7 million for 2016. The average interest rate paid on interest checking and money market deposit accounts decreased to 0.38% for 2017, compared with 0.40% for 2016.
Average Balance Sheets
The following table sets forth the average daily balances, the interest earned or paid on such amounts, and the weighted average yield on interest-earning assets and weighted average cost of interest-bearing liabilities for the periods indicated. Dividing income or expense by the average daily balance of assets or liabilities, respectively, derives such yields and costs for the periods presented.
|
|
For the Years Ended December 31,
|
|
|
|
201
8
|
|
|
201
7
|
|
|
|
Average
Balance
|
|
|
Interest
Earned/Paid
|
|
|
Average
Yield/Cost
|
|
|
Average
Balance
|
|
|
Interest
Earned/Paid
|
|
|
Average
Yield/Cost
|
|
|
|
(dollars in thousands)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivables (1)(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
|
|
$
|
548,877
|
|
|
$
|
27,296
|
|
|
|
4.97
|
%
|
|
$
|
509,133
|
|
|
$
|
24,544
|
|
|
|
4.82
|
%
|
Commercial
|
|
|
123,044
|
|
|
|
5,934
|
|
|
|
4.82
|
|
|
|
107,188
|
|
|
|
4,403
|
|
|
|
4.11
|
|
Consumer
|
|
|
32,049
|
|
|
|
1,765
|
|
|
|
5.51
|
|
|
|
10,790
|
|
|
|
843
|
|
|
|
7.81
|
|
Agriculture
|
|
|
38,796
|
|
|
|
2,334
|
|
|
|
6.02
|
|
|
|
39,839
|
|
|
|
2,047
|
|
|
|
5.14
|
|
Other
|
|
|
586
|
|
|
|
13
|
|
|
|
2.22
|
|
|
|
524
|
|
|
|
29
|
|
|
|
5.53
|
|
U.S. Treasury and agencies
|
|
|
23,732
|
|
|
|
549
|
|
|
|
2.31
|
|
|
|
31,440
|
|
|
|
694
|
|
|
|
2.21
|
|
Mortgage-backed securities
|
|
|
81,771
|
|
|
|
2,142
|
|
|
|
2.62
|
|
|
|
94,451
|
|
|
|
2,240
|
|
|
|
2.37
|
|
Collateralized loan obligations
|
|
|
32,163
|
|
|
|
1,177
|
|
|
|
3.66
|
|
|
|
20,242
|
|
|
|
541
|
|
|
|
2.67
|
|
State and political subdivision securities (non-taxable) (3)
|
|
|
14,189
|
|
|
|
383
|
|
|
|
3.42
|
|
|
|
19,617
|
|
|
|
571
|
|
|
|
4.48
|
|
State and political subdivision securities (taxable)
|
|
|
18,890
|
|
|
|
570
|
|
|
|
3.02
|
|
|
|
23,689
|
|
|
|
757
|
|
|
|
3.20
|
|
Corporate bonds
|
|
|
8,162
|
|
|
|
442
|
|
|
|
5.42
|
|
|
|
3,651
|
|
|
|
167
|
|
|
|
4.57
|
|
FHLB stock
|
|
|
7,280
|
|
|
|
429
|
|
|
|
5.89
|
|
|
|
7,323
|
|
|
|
366
|
|
|
|
5.00
|
|
Federal funds sold
|
|
|
1,152
|
|
|
|
22
|
|
|
|
1.91
|
|
|
|
960
|
|
|
|
10
|
|
|
|
1.04
|
|
Interest-bearing deposits in other financial institutions
|
|
|
26,763
|
|
|
|
405
|
|
|
|
1.51
|
|
|
|
35,222
|
|
|
|
310
|
|
|
|
0.88
|
|
Total interest-earning assets
|
|
|
957,454
|
|
|
|
43,461
|
|
|
|
4.55
|
%
|
|
|
904,069
|
|
|
|
37,522
|
|
|
|
4.18
|
%
|
Less: Allowance for loan losses
|
|
|
(8,692
|
)
|
|
|
|
|
|
|
|
|
|
|
(8,961
|
)
|
|
|
|
|
|
|
|
|
Non-interest-earning assets
|
|
|
77,548
|
|
|
|
|
|
|
|
|
|
|
|
52,853
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,026,310
|
|
|
|
|
|
|
|
|
|
|
$
|
947,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit and other time deposits
|
|
$
|
439,597
|
|
|
$
|
5,949
|
|
|
|
1.35
|
%
|
|
$
|
452,443
|
|
|
$
|
4,191
|
|
|
|
0.93
|
%
|
Interest checking and money market deposits
|
|
|
249,415
|
|
|
|
1,543
|
|
|
|
0.62
|
|
|
|
247,261
|
|
|
|
940
|
|
|
|
0.38
|
|
Savings accounts
|
|
|
34,866
|
|
|
|
57
|
|
|
|
0.16
|
|
|
|
35,486
|
|
|
|
59
|
|
|
|
0.17
|
|
FHLB advances
|
|
|
43,363
|
|
|
|
867
|
|
|
|
2.00
|
|
|
|
9,184
|
|
|
|
120
|
|
|
|
1.31
|
|
Junior subordinated debentures and subordinated capital note
|
|
|
21,791
|
|
|
|
985
|
|
|
|
4.52
|
|
|
|
23,805
|
|
|
|
901
|
|
|
|
3.78
|
|
Senior debt
|
|
|
10,000
|
|
|
|
389
|
|
|
|
3.89
|
|
|
|
5,068
|
|
|
|
194
|
|
|
|
3.83
|
|
Total interest-bearing liabilities
|
|
|
799,032
|
|
|
|
9,790
|
|
|
|
1.23
|
%
|
|
|
773,247
|
|
|
|
6,405
|
|
|
|
0.83
|
%
|
Non-interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing deposits
|
|
|
136,947
|
|
|
|
|
|
|
|
|
|
|
|
129,088
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
5,471
|
|
|
|
|
|
|
|
|
|
|
|
7,775
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
941,450
|
|
|
|
|
|
|
|
|
|
|
|
910,110
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
84,860
|
|
|
|
|
|
|
|
|
|
|
|
37,851
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
1,026,310
|
|
|
|
|
|
|
|
|
|
|
$
|
947,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
33,671
|
|
|
|
|
|
|
|
|
|
|
$
|
31,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread
|
|
|
|
|
|
|
|
|
|
|
3.32
|
%
|
|
|
|
|
|
|
|
|
|
|
3.35
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin
|
|
|
|
|
|
|
|
|
|
|
3.53
|
%
|
|
|
|
|
|
|
|
|
|
|
3.48
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of average interest-earning assets to average
interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
119.83
|
%
|
|
|
|
|
|
|
|
|
|
|
116.92
|
%
|
(1)
|
Includes loan fees in both interest income and the calculation of yield on loans.
|
(2)
|
Calculations include non-accruing loans of $3.5 million and $7.1 million in average loan amounts outstanding.
|
(3)
|
Taxable equivalent yields are calculated assuming a 21% and 35% federal income tax rate for 2018 and 2017, respectively.
|
|
|
For the Years Ended December 31,
|
|
|
|
201
7
|
|
|
201
6
|
|
|
|
Average
Balance
|
|
|
Interest
Earned/Paid
|
|
|
Average
Yield/Cost
|
|
|
Average
Balance
|
|
|
Interest
Earned/Paid
|
|
|
Average
Yield/Cost
|
|
|
|
(dollars in thousands)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivables (1)(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
|
|
$
|
509,133
|
|
|
$
|
24,544
|
|
|
|
4.82
|
%
|
|
$
|
493,068
|
|
|
$
|
24,486
|
|
|
|
4.97
|
%
|
Commercial
|
|
|
107,188
|
|
|
|
4,403
|
|
|
|
4.11
|
|
|
|
81,110
|
|
|
|
3,471
|
|
|
|
4.28
|
|
Consumer
|
|
|
10,790
|
|
|
|
843
|
|
|
|
7.81
|
|
|
|
9,818
|
|
|
|
826
|
|
|
|
8.41
|
|
Agriculture
|
|
|
39,839
|
|
|
|
2,047
|
|
|
|
5.14
|
|
|
|
36,811
|
|
|
|
1,733
|
|
|
|
4.71
|
|
Other
|
|
|
524
|
|
|
|
29
|
|
|
|
5.53
|
|
|
|
468
|
|
|
|
21
|
|
|
|
4.49
|
|
U.S. Treasury and agencies
|
|
|
31,440
|
|
|
|
694
|
|
|
|
2.21
|
|
|
|
34,049
|
|
|
|
757
|
|
|
|
2.22
|
|
Mortgage-backed securities
|
|
|
94,451
|
|
|
|
2,240
|
|
|
|
2.37
|
|
|
|
101,249
|
|
|
|
2,240
|
|
|
|
2.21
|
|
Collateralized loan obligations
|
|
|
20,242
|
|
|
|
541
|
|
|
|
2.67
|
|
|
|
802
|
|
|
|
28
|
|
|
|
3.49
|
|
State and political subdivision securities (non-taxable) (3)
|
|
|
19,617
|
|
|
|
571
|
|
|
|
4.48
|
|
|
|
21,041
|
|
|
|
620
|
|
|
|
4.53
|
|
State and political subdivision securities (taxable)
|
|
|
23,689
|
|
|
|
757
|
|
|
|
3.20
|
|
|
|
23,921
|
|
|
|
768
|
|
|
|
3.21
|
|
Corporate bonds
|
|
|
3,651
|
|
|
|
167
|
|
|
|
4.57
|
|
|
|
2,656
|
|
|
|
93
|
|
|
|
3.50
|
|
FHLB stock
|
|
|
7,323
|
|
|
|
366
|
|
|
|
5.00
|
|
|
|
7,323
|
|
|
|
293
|
|
|
|
4.00
|
|
Federal funds sold
|
|
|
960
|
|
|
|
10
|
|
|
|
1.04
|
|
|
|
639
|
|
|
|
3
|
|
|
|
0.47
|
|
Interest-bearing deposits in other financial institutions
|
|
|
35,222
|
|
|
|
310
|
|
|
|
0.88
|
|
|
|
62,307
|
|
|
|
263
|
|
|
|
0.42
|
|
Total interest-earning assets
|
|
|
904,069
|
|
|
|
37,522
|
|
|
|
4.18
|
%
|
|
|
875,262
|
|
|
|
35,602
|
|
|
|
4.11
|
%
|
Less: Allowance for loan losses
|
|
|
(8,961
|
)
|
|
|
|
|
|
|
|
|
|
|
(10,719
|
)
|
|
|
|
|
|
|
|
|
Non-interest-earning assets
|
|
|
52,853
|
|
|
|
|
|
|
|
|
|
|
|
64,597
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
947,961
|
|
|
|
|
|
|
|
|
|
|
$
|
929,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit and other time deposits
|
|
$
|
452,443
|
|
|
$
|
4,191
|
|
|
|
0.93
|
%
|
|
$
|
466,007
|
|
|
$
|
4,111
|
|
|
|
0.88
|
%
|
Interest checking and money market deposits
|
|
|
247,261
|
|
|
|
940
|
|
|
|
0.38
|
|
|
|
232,717
|
|
|
|
921
|
|
|
|
0.40
|
|
Savings accounts
|
|
|
35,486
|
|
|
|
59
|
|
|
|
0.17
|
|
|
|
34,257
|
|
|
|
61
|
|
|
|
0.18
|
|
FHLB advances
|
|
|
9,184
|
|
|
|
120
|
|
|
|
1.31
|
|
|
|
2,967
|
|
|
|
70
|
|
|
|
2.36
|
|
Junior subordinated debentures and subordinated capital note
|
|
|
23,805
|
|
|
|
901
|
|
|
|
3.78
|
|
|
|
24,708
|
|
|
|
818
|
|
|
|
3.31
|
|
Senior debt
|
|
|
5,068
|
|
|
|
194
|
|
|
|
3.83
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total interest-bearing liabilities
|
|
|
773,247
|
|
|
|
6,405
|
|
|
|
0.83
|
%
|
|
|
760,656
|
|
|
|
5,981
|
|
|
|
0.79
|
%
|
Non-interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing deposits
|
|
|
129,088
|
|
|
|
|
|
|
|
|
|
|
|
119,736
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
7,775
|
|
|
|
|
|
|
|
|
|
|
|
9,325
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
910,110
|
|
|
|
|
|
|
|
|
|
|
|
889,717
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
37,851
|
|
|
|
|
|
|
|
|
|
|
|
39,423
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
947,961
|
|
|
|
|
|
|
|
|
|
|
$
|
929,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
31,117
|
|
|
|
|
|
|
|
|
|
|
$
|
29,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread
|
|
|
|
|
|
|
|
|
|
|
3.35
|
%
|
|
|
|
|
|
|
|
|
|
|
3.32
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin
|
|
|
|
|
|
|
|
|
|
|
3.48
|
%
|
|
|
|
|
|
|
|
|
|
|
3.42
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of average interest-earning assets to average
interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
116.92
|
%
|
|
|
|
|
|
|
|
|
|
|
115.07
|
%
|
(1)
|
Includes loan fees in both interest income and the calculation of yield on loans.
|
(2)
|
Calculations include non-accruing loans of $7.1 million and $11.4 million in average loan amounts outstanding.
|
(3)
|
Taxable equivalent yields are calculated assuming a 35% federal income tax rate for 2017 and 2016.
|
Rate/Volume Analysis
The table below sets forth information regarding changes in interest income and interest expense for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in rate (changes in rate multiplied by old volume); (2) changes in volume (changes in volume multiplied by old rate); and (3) changes in rate-volume (change in rate multiplied by change in volume). Changes in rate-volume are proportionately allocated between rate and volume variance.
|
|
Year Ended December 31, 201
8
vs. 201
7
|
|
|
Year Ended December 31, 201
7
vs. 20
1
6
|
|
|
|
Increase (decrease)
due to change in
|
|
|
Increase (decrease)
due to change in
|
|
|
|
Rate
|
|
|
Volume
|
|
|
Net
Change
|
|
|
Rate
|
|
|
Volume
|
|
|
Net
Change
|
|
|
|
(in thousands)
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan receivables
|
|
$
|
1,723
|
|
|
$
|
3,753
|
|
|
$
|
5,476
|
|
|
$
|
(895
|
)
|
|
$
|
2,224
|
|
|
$
|
1,329
|
|
U.S. Treasury and agencies
|
|
|
32
|
|
|
|
(177
|
)
|
|
|
(145
|
)
|
|
|
(5
|
)
|
|
|
(58
|
)
|
|
|
(63
|
)
|
Mortgage-backed securities
|
|
|
220
|
|
|
|
(318
|
)
|
|
|
(98
|
)
|
|
|
155
|
|
|
|
(155
|
)
|
|
|
—
|
|
Collateralized loan obligations
|
|
|
245
|
|
|
|
391
|
|
|
|
636
|
|
|
|
(9
|
)
|
|
|
522
|
|
|
|
513
|
|
State and political subdivision securities
|
|
|
(76
|
)
|
|
|
(299
|
)
|
|
|
(375
|
)
|
|
|
(9
|
)
|
|
|
(51
|
)
|
|
|
(60
|
)
|
Corporate bonds
|
|
|
36
|
|
|
|
239
|
|
|
|
275
|
|
|
|
33
|
|
|
|
41
|
|
|
|
74
|
|
FHLB stock
|
|
|
65
|
|
|
|
(2
|
)
|
|
|
63
|
|
|
|
73
|
|
|
|
—
|
|
|
|
73
|
|
Federal funds sold
|
|
|
9
|
|
|
|
3
|
|
|
|
12
|
|
|
|
4
|
|
|
|
3
|
|
|
|
7
|
|
Interest-bearing deposits in other financial institutions
|
|
|
182
|
|
|
|
(87
|
)
|
|
|
95
|
|
|
|
196
|
|
|
|
(149
|
)
|
|
|
47
|
|
Total increase (decrease) in interest income
|
|
|
2,436
|
|
|
|
3,503
|
|
|
|
5,939
|
|
|
|
(457
|
)
|
|
|
2,377
|
|
|
|
1,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit and other time deposits
|
|
|
1,880
|
|
|
|
(122
|
)
|
|
|
1,758
|
|
|
|
202
|
|
|
|
(122
|
)
|
|
|
80
|
|
Interest checking and money market accounts
|
|
|
595
|
|
|
|
8
|
|
|
|
603
|
|
|
|
(37
|
)
|
|
|
56
|
|
|
|
19
|
|
Savings accounts
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
(2
|
)
|
|
|
(4
|
)
|
|
|
2
|
|
|
|
(2
|
)
|
FHLB advances
|
|
|
94
|
|
|
|
653
|
|
|
|
747
|
|
|
|
(42
|
)
|
|
|
92
|
|
|
|
50
|
|
Junior subordinated debentures
|
|
|
165
|
|
|
|
(81
|
)
|
|
|
84
|
|
|
|
114
|
|
|
|
(31
|
)
|
|
|
83
|
|
Senior debt
|
|
|
3
|
|
|
|
192
|
|
|
|
195
|
|
|
|
—
|
|
|
|
194
|
|
|
|
194
|
|
Total increase (decrease) in interest expense
|
|
|
2,736
|
|
|
|
649
|
|
|
|
3,385
|
|
|
|
233
|
|
|
|
191
|
|
|
|
424
|
|
Increase (decrease) in net interest income
|
|
$
|
(300
|
)
|
|
$
|
2,854
|
|
|
$
|
2,554
|
|
|
$
|
(690
|
)
|
|
$
|
2,186
|
|
|
$
|
1,496
|
|
Non-
i
nterest Income
– The following table presents for the periods indicated the major categories of non-interest income:
|
|
For the Years Ended
December 31,
|
|
|
|
201
8
|
|
|
201
7
|
|
|
20
1
6
|
|
|
|
(in thousands)
|
|
Service charges on deposit accounts
|
|
$
|
2,355
|
|
|
$
|
2,253
|
|
|
$
|
1,958
|
|
Bank card interchange fees
|
|
|
1,831
|
|
|
|
1,521
|
|
|
|
1,303
|
|
Income from bank owned life insurance
|
|
|
437
|
|
|
|
412
|
|
|
|
417
|
|
Net gain (loss) on sales and calls of securities
|
|
|
(6
|
)
|
|
|
288
|
|
|
|
216
|
|
Other real estate owned rental income
|
|
|
—
|
|
|
|
—
|
|
|
|
456
|
|
Other
|
|
|
1,162
|
|
|
|
930
|
|
|
|
868
|
|
Total non-interest income
|
|
$
|
5,779
|
|
|
$
|
5,404
|
|
|
$
|
5,218
|
|
Non-interest income increased by $375,000 for 2018 to $5.8 million compared with $5.4 million for the year ended December 31, 2017. This increase was primarily attributable to a $310,000 increase in bank card interchange fees, a $232,000 increase in other non-interest income, and a $102,000 increase in service charges on deposit accounts partially offset by a $6,000 net loss on sale of securities for 2018 compared to a $288,000 net gain during 2017.
The $232,000 net increase in other non-interest income for 2018 includes a $150,000 third quarter gain on sale of the Bank’s secondary market residential mortgage servicing rights portfolio, as well as a $632,000 fourth quarter gain on sale of a subdivided lot at the Company’s headquarters, partially offset by a $392,000 fourth quarter impairment charge associated with the transfer of the Bank’s data processing center to Premises Held for Sale.
In December 2018, the Bank completed a core system conversion, which Management believes will provide opportunities for work flow efficiencies and improvements in customer experience. In connection with the completion of the core systems conversion, Management approved the closure of its central data processing facility. Support services personnel will be relocated from the bank-owned data processing facility to other nearby facilities in 2019. In December 2018, the data processing facility was transferred to Premises Held For Sale at fair value, as determined by an independent third party appraisal, less estimated cost to sell. The transfer to held for sale resulted in the $392,000 impairment charge noted above, which is included in other non-interest income. Upon sale of the facility, Management expects to realize annual occupancy expense savings of approximately $200,000.
Non-interest income increased by $186,000 in 2017 to $5.4 million compared with $5.2 million for the year ended December 31, 2016. This increase was primarily attributable to a $295,000 increase in service charges on deposit accounts, a $218,000 increase in bank card interchange fees, and a $72,000 increase in net gain on sale of securities partially offset by no OREO income during 2017, compared to $456,000 during 2016.
Non-interest Expense –
The following table presents the major categories of non-interest expense:
|
|
For the Years Ended
December 31,
|
|
|
|
201
8
|
|
|
201
7
|
|
|
20
1
6
|
|
|
|
(in thousands)
|
|
Salary and employee benefits
|
|
$
|
15,489
|
|
|
$
|
15,090
|
|
|
$
|
15,508
|
|
Occupancy and equipment
|
|
|
3,586
|
|
|
|
3,420
|
|
|
|
3,517
|
|
FDIC insurance
|
|
|
557
|
|
|
|
1,412
|
|
|
|
1,660
|
|
Data processing expense
|
|
|
1,192
|
|
|
|
1,256
|
|
|
|
1,185
|
|
Marketing expense
|
|
|
1,114
|
|
|
|
1,098
|
|
|
|
973
|
|
State franchise and deposit tax
|
|
|
1,118
|
|
|
|
956
|
|
|
|
965
|
|
Deposit account related expense
|
|
|
823
|
|
|
|
896
|
|
|
|
787
|
|
Professional fees
|
|
|
814
|
|
|
|
978
|
|
|
|
1,568
|
|
Communications
|
|
|
701
|
|
|
|
722
|
|
|
|
706
|
|
Insurance expense
|
|
|
478
|
|
|
|
540
|
|
|
|
565
|
|
Postage and delivery
|
|
|
364
|
|
|
|
395
|
|
|
|
359
|
|
Litigation and loan collection expense
|
|
|
245
|
|
|
|
179
|
|
|
|
8,805
|
|
Other real estate owned expense
|
|
|
868
|
|
|
|
1,973
|
|
|
|
1,541
|
|
Other
|
|
|
1,777
|
|
|
|
1,852
|
|
|
|
1,882
|
|
Total non-interest expense
|
|
$
|
29,126
|
|
|
$
|
30,767
|
|
|
$
|
40,021
|
|
Non-interest expense for the year ended December 31, 2018 of $29.1 million represented a 3.1% decrease from $30.8 million for 2017. The decrease in non-interest expense was attributable primarily to a decrease in OREO expense of $1.1 million. Non-interest expense also benefited from a $855,000 decrease in FDIC insurance as a result of the Bank’s improved risk profile, partially offset by a $399,000 increase in salaries and employee benefits. As shown below, expenses related to OREO decreased due to lower valuation adjustment write-downs during 2018 compared to 2017.
|
|
201
8
|
|
|
201
7
|
|
|
|
(in thousands)
|
|
Net gain on sales
|
|
$
|
(72
|
)
|
|
$
|
(74
|
)
|
Valuation adjustment write-downs
|
|
|
850
|
|
|
|
1,963
|
|
Operating expense
|
|
|
90
|
|
|
|
84
|
|
Total
|
|
$
|
868
|
|
|
$
|
1,973
|
|
During the year ended December 31, 2018, fair value write-downs of $850,000 were recorded compared with $2.0 million for the year ended December 31, 2017. The 2018 write-downs reflect declines in the fair value due to changes in marketing strategies and new appraisals. OREO sales totaled $876,000 and $793,000 during 2018 and 2017, respectively.
Non-interest Expense Comparison –
201
7
to
201
6
Non-interest expense for the year ended December 31, 2017 of $30.8 million represented a 23.1% decrease from $40.0 million for 2016. The decrease in non-interest expense was attributable primarily to a decrease in litigation and loan collection expense, which decreased $8.6 million. Litigation expense was negatively impacted in 2016 by a ruling from the Kentucky Court of Appeals against the Bank that approximated $8.0 million. Non-interest expense also benefited from a $590,000 decrease in professional fees, a $418,000 decrease in salaries and employee benefits, and a $248,000 decrease in FDIC insurance. As shown below, expenses related to OREO trended higher due to higher valuation adjustment write-downs during 2017 compared to 2016.
|
|
201
7
|
|
|
201
6
|
|
|
|
(in thousands)
|
|
Net gain on sales
|
|
$
|
(74
|
)
|
|
$
|
(222
|
)
|
Valuation adjustment write-downs
|
|
|
1,963
|
|
|
|
1,180
|
|
Operating expense
|
|
|
84
|
|
|
|
583
|
|
Total
|
|
$
|
1,973
|
|
|
$
|
1,541
|
|
During the year ended December 31, 2017, fair value write-downs totaled $2.0 million compared with $1.2 million for the year ended December 31, 2016. The write-downs reflect declines in fair value due to updated appraisals, changes in marketing strategies, and reductions in listing prices for certain properties. The Bank was successful in selling OREO totaling $793,000 and $12.7 million during 2017 and 2016, respectively.
Income Tax
Expense and
Benefit
– Effective tax rates differ from the federal statutory rate applied to income (loss) before income taxes due to the following:
|
|
201
8
|
|
|
201
7
|
|
|
20
1
6
|
|
|
|
(in thousands)
|
|
Statutory tax rate
|
|
|
21
|
%
|
|
|
35
|
%
|
|
|
35
|
%
|
Federal statutory rate times financial statement income (loss)
|
|
$
|
2,273
|
|
|
$
|
2,294
|
|
|
$
|
(956
|
)
|
Effect of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
—
|
|
|
|
(54,049
|
)
|
|
|
1,238
|
|
Tax-exempt income
|
|
|
(80
|
)
|
|
|
(196
|
)
|
|
|
(211
|
)
|
Non-taxable life insurance income
|
|
|
(92
|
)
|
|
|
(144
|
)
|
|
|
(146
|
)
|
Restricted stock vesting
|
|
|
(115
|
)
|
|
|
(121
|
)
|
|
|
—
|
|
Change in federal statutory rate
|
|
|
—
|
|
|
|
20,274
|
|
|
|
—
|
|
Other, net
|
|
|
44
|
|
|
|
43
|
|
|
|
96
|
|
Total
|
|
$
|
2,030
|
|
|
$
|
(31,899
|
)
|
|
$
|
21
|
|
The Company had a full valuation allowance against its net deferred tax asset since 2011. During the fourth quarter of 2017, management concluded it was more-likely-than-not the asset would be utilized to reduce future taxes payable related to the future taxable income of the Company, and as such, reversed the valuation allowance. As a result of the conclusion to reverse the valuation allowance, the Company recorded an income tax benefit of $54.0 million for the year ended December 31, 2017.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 was signed into law. Among other significant changes to the tax code, the new law lowered the federal corporate tax rate from 35% to 21% beginning in 2018. As a result, the Company revalued its net deferred tax asset at the new 21% rate for 2017. Due to this revaluation, the Company recorded a $20.3 million charge to income tax expense for the year ended December 31, 2017.
The combination of the reversal of the valuation allowance and the change in federal corporate tax rates, as well as income tax expense for the year, resulted in an income tax benefit of $31.9 million for the year ended December 31, 2017.
See Note 11, “Income Taxes”, for additional discussion of our income taxes.
Analysis of Financial Condition
Total assets at December 31, 2018 were $1.07 billion compared with $970.8 million at December 31, 2017, an increase of $98.9 million or 10.2%. This increase was primarily attributable to an increase in net loans of $52.5 million as well as an increase in securities available for sale of $48.5 million.
Total assets at December 31, 2017 were $970.8 million compared with $945.2 million at December 31, 2016, an increase of $25.6 million or 2.7%. This increase was primarily attributable to an increase in net loans of $73.6 million as well as the restoration of a net deferred tax asset of $31.3 million. These increases were partially offset by a decrease in investment securities of $41.9 million as well as a $30.9 million decrease in interest bearing deposits in banks.
Loans Receivable –
Loans receivable increased $53.1 million, or 7.5%, during the year ended December 31, 2018, to $765.2 million. Our commercial, commercial real estate and real estate construction portfolios increased by an aggregate of $50.2 million, or 12.1%, during 2018 and comprised 60.9% of the total loan portfolio at December 31, 2018.
Loans receivable increased $72.9 million, or 11.4%, during the year ended December 31, 2017, to $712.1 million. Our commercial, commercial real estate and real estate construction portfolios increased by an aggregate of $61.0 million, or 17.2%, during 2017 and comprised 58.4% of the total loan portfolio at December 31, 2017.
Loan Portfolio Composition
–
The following table presents a summary of the loan portfolio at the dates indicated, net of deferred loan fees, by type. There are no foreign loans in our portfolio and other than the categories noted, there is no concentration of loans in any industry exceeding 10% of total loans.
|
|
As of December 31,
|
|
|
|
201
8
|
|
|
201
7
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
129,368
|
|
|
|
16.91
|
%
|
|
$
|
113,771
|
|
|
|
15.98
|
%
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
86,867
|
|
|
|
11.35
|
|
|
|
57,342
|
|
|
|
8.05
|
|
Farmland
|
|
|
77,937
|
|
|
|
10.18
|
|
|
|
88,320
|
|
|
|
12.40
|
|
Nonfarm nonresidential
|
|
|
172,177
|
|
|
|
22.50
|
|
|
|
156,724
|
|
|
|
22.01
|
|
Residential Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
49,757
|
|
|
|
6.50
|
|
|
|
56,588
|
|
|
|
7.94
|
|
1-4 Family
|
|
|
175,761
|
|
|
|
22.97
|
|
|
|
179,222
|
|
|
|
25.17
|
|
Consumer
|
|
|
39,104
|
|
|
|
5.11
|
|
|
|
18,439
|
|
|
|
2.59
|
|
Agriculture
|
|
|
33,737
|
|
|
|
4.41
|
|
|
|
41,154
|
|
|
|
5.78
|
|
Other
|
|
|
536
|
|
|
|
0.07
|
|
|
|
555
|
|
|
|
0.08
|
|
Total loans
|
|
$
|
765,244
|
|
|
|
100.00
|
%
|
|
$
|
712,115
|
|
|
|
100.00
|
%
|
|
|
As of December 31,
|
|
|
|
20
16
|
|
|
20
15
|
|
|
2014
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
97,761
|
|
|
|
15.29
|
%
|
|
$
|
86,176
|
|
|
|
13.93
|
%
|
|
$
|
60,936
|
|
|
|
9.75
|
%
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
36,330
|
|
|
|
5.68
|
|
|
|
33,154
|
|
|
|
5.36
|
|
|
|
33,173
|
|
|
|
5.31
|
|
Farmland
|
|
|
71,507
|
|
|
|
11.19
|
|
|
|
76,412
|
|
|
|
12.35
|
|
|
|
77,419
|
|
|
|
12.39
|
|
Nonfarm nonresidential
|
|
|
149,546
|
|
|
|
23.39
|
|
|
|
140,570
|
|
|
|
22.72
|
|
|
|
175,452
|
|
|
|
28.07
|
|
Residential Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
48,197
|
|
|
|
7.54
|
|
|
|
44,131
|
|
|
|
7.13
|
|
|
|
41,891
|
|
|
|
6.70
|
|
1-4 Family
|
|
|
188,092
|
|
|
|
29.42
|
|
|
|
201,478
|
|
|
|
32.57
|
|
|
|
197,278
|
|
|
|
31.56
|
|
Consumer
|
|
|
9,818
|
|
|
|
1.54
|
|
|
|
10,010
|
|
|
|
1.62
|
|
|
|
11,347
|
|
|
|
1.82
|
|
Agriculture
|
|
|
37,508
|
|
|
|
5.87
|
|
|
|
26,316
|
|
|
|
4.25
|
|
|
|
26,966
|
|
|
|
4.31
|
|
Other
|
|
|
477
|
|
|
|
0.08
|
|
|
|
419
|
|
|
|
0.07
|
|
|
|
537
|
|
|
|
0.09
|
|
Total loans
|
|
$
|
639,236
|
|
|
|
100.00
|
%
|
|
$
|
618,666
|
|
|
|
100.00
|
%
|
|
$
|
624,999
|
|
|
|
100.00
|
%
|
Lending activities are subject to a variety of lending limits imposed by state and federal law. The Bank’s secured legal lending limit to a single borrower or guarantor was approximately $36.2 million at December 31, 2018.
The Bank had 13 and 12 loan relationships each with aggregate extensions of credit in excess of $10.0 million, all of which were classified as pass by the Bank’s internal loan review process at December 31, 2018 and 2017, respectively.
As of December 31, 2018, the Bank had $57.5 million of loan participations purchased from, and $20.1 million of loan participations sold to, other banks. As of December 31, 2017, the Bank had $46.2 million of loan participations purchased from, and $19.1 million of loan participations sold to, other banks.
Loan Maturity Schedule
– The following table sets forth at December 31, 2018, the dollar amount of loans, net of deferred loan fees, maturing in the loan portfolio based on their contractual terms to maturity:
|
|
As of December 31, 201
8
|
|
|
|
Maturing
Within
One Year
|
|
|
Maturing
1 through
5 Years
|
|
|
Maturing
Over 5
Years
|
|
|
Total
Loans
|
|
|
|
(dollars in thousands)
|
|
Loans with fixed rates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
2,464
|
|
|
$
|
31,085
|
|
|
$
|
6,759
|
|
|
$
|
40,308
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
8,594
|
|
|
|
11,091
|
|
|
|
23,563
|
|
|
|
43,248
|
|
Farmland
|
|
|
20,268
|
|
|
|
13,858
|
|
|
|
3,482
|
|
|
|
37,608
|
|
Nonfarm nonresidential
|
|
|
27,314
|
|
|
|
67,042
|
|
|
|
8,861
|
|
|
|
103,217
|
|
Residential Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
13,022
|
|
|
|
26,526
|
|
|
|
3,922
|
|
|
|
43,470
|
|
1-4 Family
|
|
|
69,543
|
|
|
|
23,345
|
|
|
|
6,730
|
|
|
|
99,618
|
|
Consumer
|
|
|
29,392
|
|
|
|
6,406
|
|
|
|
1,214
|
|
|
|
37,012
|
|
Agriculture
|
|
|
583
|
|
|
|
5,262
|
|
|
|
2,246
|
|
|
|
8,091
|
|
Other
|
|
|
54
|
|
|
|
336
|
|
|
|
64
|
|
|
|
454
|
|
Total fixed rate loans
|
|
$
|
171,234
|
|
|
$
|
184,951
|
|
|
$
|
56,841
|
|
|
$
|
413,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans with floating rates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
18,547
|
|
|
$
|
59,701
|
|
|
$
|
10,812
|
|
|
$
|
89,060
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
13,417
|
|
|
|
24,917
|
|
|
|
5,285
|
|
|
|
43,619
|
|
Farmland
|
|
|
32,188
|
|
|
|
7,021
|
|
|
|
1,120
|
|
|
|
40,329
|
|
Nonfarm nonresidential
|
|
|
43,791
|
|
|
|
20,515
|
|
|
|
4,654
|
|
|
|
68,960
|
|
Residential Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
1,208
|
|
|
|
4,878
|
|
|
|
201
|
|
|
|
6,287
|
|
1-4 Family
|
|
|
67,496
|
|
|
|
5,342
|
|
|
|
3,305
|
|
|
|
76,143
|
|
Consumer
|
|
|
27
|
|
|
|
—
|
|
|
|
2,065
|
|
|
|
2,092
|
|
Agriculture
|
|
|
546
|
|
|
|
9,161
|
|
|
|
15,939
|
|
|
|
25,646
|
|
Other
|
|
|
78
|
|
|
|
4
|
|
|
|
—
|
|
|
|
82
|
|
Total floating rate loans
|
|
$
|
177,298
|
|
|
$
|
131,539
|
|
|
$
|
43,381
|
|
|
$
|
352,218
|
|
Loan Portfolio by Risk Category
–
The following table presents a summary of the loan portfolio at the dates indicated, by risk category.
|
|
As of December 31,
|
|
|
|
201
8
|
|
|
201
7
|
|
|
201
6
|
|
|
201
5
|
|
|
20
1
4
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
745,604
|
|
|
$
|
673,033
|
|
|
$
|
586,430
|
|
|
$
|
517,484
|
|
|
$
|
461,126
|
|
Watch
|
|
|
13,164
|
|
|
|
25,715
|
|
|
|
30,431
|
|
|
|
63,363
|
|
|
|
68,200
|
|
Special Mention
|
|
|
113
|
|
|
|
164
|
|
|
|
497
|
|
|
|
1,395
|
|
|
|
4,189
|
|
Substandard
|
|
|
6,363
|
|
|
|
13,203
|
|
|
|
21,878
|
|
|
|
36,424
|
|
|
|
91,484
|
|
Doubtful
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
765,244
|
|
|
$
|
712,115
|
|
|
$
|
639,236
|
|
|
$
|
618,666
|
|
|
$
|
624,999
|
|
Loans receivable increased $53.1 million, or 7.5%, during the year ended December 31, 2018. All loan risk categories have decreased since December 31, 2017, with the exception of pass graded loans. The pass category increased approximately $72.6 million, the watch category declined approximately $12.6 million, the special mention category declined approximately $51,000, and the substandard category declined approximately $6.8 million. The $6.8 million decrease in loans classified as substandard was primarily driven by $12.6 million in principal payments received, $730,000 in loans moved to OREO, $480,000 in charge-offs, and $92,000 in loans upgraded from substandard, offset by $7.1 million in loans moved to substandard during 2018.
Loan Delinquency
–
The following table presents a summary of loan delinquencies at the dates indicated.
|
|
As of December 31,
|
|
|
|
201
8
|
|
|
201
7
|
|
|
201
6
|
|
|
201
5
|
|
|
20
1
4
|
|
|
|
(in thousands)
|
|
Past Due Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30-59 Days
|
|
$
|
1,593
|
|
|
$
|
1,478
|
|
|
$
|
2,302
|
|
|
$
|
3,133
|
|
|
$
|
3,960
|
|
60-89 Days
|
|
|
331
|
|
|
|
171
|
|
|
|
315
|
|
|
|
241
|
|
|
|
980
|
|
90 Days and Over
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
151
|
|
Total Loans Past Due 30-90+ Days
|
|
|
1,924
|
|
|
|
1,650
|
|
|
|
2,617
|
|
|
|
3,374
|
|
|
|
5,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual Loans
|
|
|
1,991
|
|
|
|
5,457
|
|
|
|
9,216
|
|
|
|
14,087
|
|
|
|
47,175
|
|
Total Past Due and Nonaccrual Loans
|
|
$
|
3,915
|
|
|
$
|
7,107
|
|
|
$
|
11,833
|
|
|
$
|
17,461
|
|
|
$
|
52,266
|
|
Loans past due 30-59 days increased from $1.5 million at December 31, 2017 to $1.6 million at December 31, 2018, and loans past due 60-89 days increased from $171,000 at December 31, 2017 to $331,000 at December 31, 2018. This represents a $274,000 increase in loans past due 30-89 days. This trend in delinquency levels is considered during the evaluation of qualitative trends in the portfolio when establishing the general component of our allowance for loan losses.
Nonaccrual loans decreased $3.5 million from December 31, 2017 to December 31, 2018. This decrease was primarily driven by $3.6 million in paydowns, $293,000 in charge-offs, $730,000 in transfers to OREO, and $77,000 in loans returned to accrual status, offset by $1.2 million in loans placed on non-accrual. The $2.0 million in nonaccrual loans at December 31, 2018, and $5.5 million at December 31, 2017, were generally secured by farmland and 1-4 family residential real estate loans. Management believes it has established adequate loan loss reserves for these credits.
Troubled Debt Restructuring
– A troubled debt restructuring (TDR) occurs when the Bank has agreed to a loan modification in the form of a concession to a borrower who is experiencing financial difficulty. The Bank’s TDRs typically involve a reduction in interest rate, a deferral of principal for a stated period of time, or an interest only period. All TDRs are considered impaired, and the Bank has allocated reserves for these loans to reflect the present value of the concessionary terms granted to the borrower. If the loan is considered collateral dependent, it is reported net of allocated reserves, at the fair value of the collateral less cost to sell.
The Bank does not have a formal loan modification program. If a borrower is unable to make contractual payments, management reviews the particular circumstances of that borrower’s situation and determine whether or not to negotiate a revised payment stream. The goal when restructuring a credit is to afford the borrower a reasonable period of time to remedy the issue causing cash flow constraints so that the credit may return to performing status over time. If a borrower fails to perform under the modified terms, the loan(s) are placed on nonaccrual status and collection actions are initiated.
Management periodically reviews renewals and modifications of previously identified TDRs for which there was no principal forgiveness, to consider if it is appropriate to remove the TDR classification. If the borrower is no longer experiencing financial difficulty and the renewal/modification did not contain a concessionary interest rate or other concessionary terms, management considers the potential removal of the TDR classification. If deemed appropriate based upon current underwriting, the TDR classification is removed as the borrower has complied with the terms of the loan at the date of renewal/modification and there was a reasonable expectation that the borrower would continue to comply with the terms of the loan after the date of the renewal/modification. Additionally, the TDR classification may be removed in circumstances in which the Company performs a non-concessionary re-modification of the loan at terms that were considered to be at market for loans with comparable risk. Management expects the borrower will continue to perform under the re-modified terms based on the borrower’s past performance.
If the borrower fails to perform, management places the loan on nonaccrual status and seeks to liquidate the underlying collateral. The nonaccrual policy for restructured loans is identical to the nonaccrual policy for all loans. The policy calls for a loan to be reported as nonaccrual if it is maintained on a cash basis because of deterioration in the financial condition of the borrower, payment in full of principal and interest is not expected, or principal or interest is past due 90 days or more unless the assets are both well secured and in the process of collection. Changes in value for impairment, including the amount attributed to the passage of time, are recorded entirely within the provision for loan losses. Upon determination that a loan is collateral dependent, the loan is charged down to the fair value of collateral less estimated costs to sell.
At December 31, 2018, the Bank had two restructured loans totaling $910,000 with borrowers who experienced deterioration in financial condition compared with six restructured loans totaling $3.0 million at December 31, 2017. In general, these loans were granted interest rate reductions to provide cash flow relief to borrowers experiencing cash flow difficulties. At December 31, 2018, the Bank had no restructured loans that had been granted principal payment deferrals until maturity compared with two loans totaling approximately $1.8 million at December 31, 2017. There were no concessions made to forgive principal relative to these loans, although partial charge-offs have been recorded for certain restructured loans. In general, these loans are secured by first liens on 1-4 residential properties, commercial real estate properties, or farmland. At December 31, 2018 both TDRs were performing according to their modified terms, compared to $1.2 million at December 31, 2017.
There were no modifications granted during 2018 or 2017 that resulted in loans being identified as TDRs. During the twelve months ended December 31, 2018, TDRs were reduced as a result of $1.5 million in payments and $500,000 due to the transfer of a loan to OREO. See “Note 3 – Loans,” to the financial statements for additional disclosure related to troubled debt restructuring.
Non-Performing Assets
– Non-performing assets consist of certain restructured loans for which interest rate or other terms have been renegotiated, loans past due 90 days or more still on accrual, loans on which interest is no longer accrued, real estate acquired through foreclosure and repossessed assets. Loans, including impaired loans, are placed on nonaccrual status when they become past due 90 days or more as to principal or interest, unless they are adequately secured and in the process of collection. Loans are considered impaired if full principal or interest payments are not anticipated in accordance with the contractual loan terms. Impaired loans are carried at the present value of expected future cash flows discounted at the loan’s effective interest rate or at the fair value of the collateral less cost to sell if the loan is collateral dependent. Loans are reviewed on a regular basis and normal collection procedures are implemented when a borrower fails to make a required payment on a loan. If the delinquency on a mortgage loan exceeds 120 days and is not cured through normal collection procedures or an acceptable arrangement is not agreed to with the borrower, management institutes measures to remedy the default, including commencing a foreclosure action. Consumer loans generally are charged off when a loan is deemed uncollectible and often before any available collateral has been disposed. Commercial business and real estate loan delinquencies are handled on an individual basis with the advice of legal counsel.
Interest income on loans is recognized on the accrual basis except for those loans placed on nonaccrual status. The accrual of interest on impaired loans is discontinued when management believes, after consideration of economic and business conditions and collection efforts, that the borrowers’ financial condition is such that collection of interest is doubtful, which typically occurs after the loan becomes 90 days delinquent. When interest accrual is discontinued, existing accrued interest is reversed and interest income is subsequently recognized only to the extent cash payments are received on well-secured loans.
Real estate acquired as a result of foreclosure or by deed in lieu of foreclosure is classified as real estate owned until such time as it is sold. New and used automobiles and other motor vehicles acquired as a result of foreclosure are classified as repossessed assets until they are sold. When such property is acquired it is recorded at its fair market value less cost to sell. Any write-down of the property at the time of acquisition is charged to the allowance for loan losses. Subsequent gains and losses are included in non-interest expense.
The following table sets forth information with respect to non-performing assets as of the dates indicated:
|
|
As of December 31,
|
|
|
|
201
8
|
|
|
201
7
|
|
|
201
6
|
|
|
20
1
5
|
|
|
20
1
4
|
|
|
|
(dollars in thousands)
|
|
Loans on nonaccrual status
|
|
$
|
1,991
|
|
|
|
5,457
|
|
|
|
9,216
|
|
|
|
14,087
|
|
|
|
47,175
|
|
Troubled debt restructurings on accrual
|
|
|
910
|
|
|
|
1,217
|
|
|
|
5,350
|
|
|
|
17,440
|
|
|
|
21,985
|
|
Past due 90 days or more still on accrual
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
151
|
|
Total non-performing loans and TDRs on accrual
|
|
|
2,901
|
|
|
|
6,675
|
|
|
|
14,566
|
|
|
|
31,527
|
|
|
|
69,311
|
|
Real estate acquired through foreclosure
|
|
|
3,485
|
|
|
|
4,409
|
|
|
|
6,821
|
|
|
|
19,214
|
|
|
|
46,197
|
|
Other repossessed assets
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total non-performing assets and TDRs on accrual
|
|
$
|
6,386
|
|
|
$
|
11,084
|
|
|
$
|
21,387
|
|
|
$
|
50,741
|
|
|
$
|
115,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing loans and TDRs on accrual to total loans
|
|
|
0.38
|
%
|
|
|
0.94
|
%
|
|
|
2.28
|
%
|
|
|
5.10
|
%
|
|
|
11.09
|
%
|
Non-performing assets and TDRs on accrual to total assets
|
|
|
0.60
|
%
|
|
|
1.14
|
%
|
|
|
2.26
|
%
|
|
|
5.35
|
%
|
|
|
11.35
|
%
|
Allowance for non-performing loans
|
|
$
|
83
|
|
|
$
|
108
|
|
|
$
|
241
|
|
|
$
|
295
|
|
|
$
|
1,253
|
|
Allowance for non-performing loans to non-performing loans and TDRs on accrual
|
|
|
2.86
|
%
|
|
|
1.62
|
%
|
|
|
1.65
|
%
|
|
|
0.94
|
%
|
|
|
1.81
|
%
|
Interest income that would have been earned on non-performing loans was $274,000, $465,000, and $738,000 for the years ended December 31, 2018, 2017, and 2016, respectively. Interest income recognized on non-performing loans was $452,000, $135,000, and $445,000 for the years ended December 31, 2018, 2017, and 2016, respectively.
Allowance for Loan Losses –
The allowance for loan losses is based on management’s continuing review and evaluation of individual loans, loss experience, current economic conditions, risk characteristics of various categories of loans and such other factors that, in management’s judgment, require current recognition in estimating loan losses.
Management has established loan grading procedures that result in specific allowance allocations for any estimated inherent risk of loss. For loans not individually evaluated, a general allowance allocation is computed using factors developed over time based on actual loss experience. The specific and general allocations plus consideration of qualitative factors represent management’s estimate of probable losses contained in the loan portfolio at the evaluation date. Although the allowance for loan losses is comprised of specific and general allocations, the entire allowance is available to absorb any credit losses.
The following table sets forth an analysis of loan loss experience as of and for the periods indicated:
|
|
As of December 31,
|
|
|
|
201
8
|
|
|
201
7
|
|
|
201
6
|
|
|
20
15
|
|
|
20
14
|
|
|
|
(dollars in thousands)
|
|
Balances at beginning of period
|
|
$
|
8,202
|
|
|
$
|
8,967
|
|
|
$
|
12,041
|
|
|
$
|
19,364
|
|
|
$
|
28,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans charged-off:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
|
|
|
450
|
|
|
|
750
|
|
|
|
2,157
|
|
|
|
5,050
|
|
|
|
17,943
|
|
Commercial
|
|
|
50
|
|
|
|
5
|
|
|
|
276
|
|
|
|
696
|
|
|
|
1,099
|
|
Consumer
|
|
|
95
|
|
|
|
51
|
|
|
|
99
|
|
|
|
221
|
|
|
|
335
|
|
Agriculture
|
|
|
13
|
|
|
|
95
|
|
|
|
18
|
|
|
|
118
|
|
|
|
30
|
|
Other
|
|
|
8
|
|
|
|
—
|
|
|
|
79
|
|
|
|
47
|
|
|
|
19
|
|
Total charge-offs
|
|
|
616
|
|
|
|
901
|
|
|
|
2,629
|
|
|
|
6,132
|
|
|
|
19,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
|
|
|
1,437
|
|
|
|
714
|
|
|
|
1,189
|
|
|
|
2,338
|
|
|
|
2,726
|
|
Commercial
|
|
|
261
|
|
|
|
59
|
|
|
|
334
|
|
|
|
723
|
|
|
|
614
|
|
Consumer
|
|
|
69
|
|
|
|
115
|
|
|
|
299
|
|
|
|
184
|
|
|
|
168
|
|
Agriculture
|
|
|
15
|
|
|
|
33
|
|
|
|
114
|
|
|
|
8
|
|
|
|
13
|
|
Other
|
|
|
12
|
|
|
|
15
|
|
|
|
69
|
|
|
|
56
|
|
|
|
45
|
|
Total recoveries
|
|
|
1,794
|
|
|
|
936
|
|
|
|
2,005
|
|
|
|
3,309
|
|
|
|
3,566
|
|
Net charge-offs (recoveries)
|
|
|
(1,178
|
)
|
|
|
(35
|
)
|
|
|
624
|
|
|
|
2,823
|
|
|
|
15,860
|
|
Provision (negative provision) for loan losses
|
|
|
(500
|
)
|
|
|
(800
|
)
|
|
|
(2,450
|
)
|
|
|
(4,500
|
)
|
|
|
7,100
|
|
Balance at end of period
|
|
$
|
8,880
|
|
|
$
|
8,202
|
|
|
$
|
8,967
|
|
|
$
|
12,041
|
|
|
$
|
19,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses to period-end loans
|
|
|
1.16
|
%
|
|
|
1.15
|
%
|
|
|
1.40
|
%
|
|
|
1.95
|
%
|
|
|
3.10
|
%
|
Net charge-offs (recoveries) to average loans
|
|
|
(0.16
|
)%
|
|
|
(0.01
|
)%
|
|
|
0.10
|
%
|
|
|
0.44
|
%
|
|
|
2.39
|
%
|
Allowance for loan losses to non-performing loans and TDRs on accrual
|
|
|
306.10
|
%
|
|
|
122.88
|
%
|
|
|
61.16
|
%
|
|
|
38.19
|
%
|
|
|
27.94
|
%
|
The allowance for loan losses is a reserve established through charges to earnings in the form of a provision for loan losses. The allowance for loan losses is comprised of general reserves and specific reserves. The loan loss reserve, as a percentage of total loans at December 31, 2018, was stable at 1.16% and 1.15% at December 31, 2017. New loans continue to be underwritten with lower loss expectations. Historical loss experience, risk grade classification metrics, charge-off levels, and past due trends remained stable between periods. The allowance for loan losses to non-performing loans was 306.10% at December 31, 2018, compared with 122.88% at December 31, 2017. Net recoveries totaled $1.2 million for 2018 compared to $35,000 for 2017.
A general reserve is maintained for each loan type in the loan portfolio. In determining the amount of the general reserve portion of the allowance for loan losses, management considers factors such as our historical loan loss experience, the growth, composition and diversification of our loan portfolio, current delinquency levels, loan quality grades, the results of recent regulatory examinations and general economic conditions. Based on these factors, management applies estimated percentages to the various categories of loans, not including any loan that has a specific allowance allocated to it, based on our historical experience, portfolio trends and economic and industry trends. This information is used by management to set the general reserve portion of the allowance for loan losses at a level it deems prudent.
Generally, all loans identified as impaired are reviewed on a quarterly basis in order to determine whether a specific allowance is required. A loan is considered impaired when, based on current information, it is probable that the Bank will not receive all amounts due in accordance with the contractual terms of the loan agreement. Once a loan has been identified as impaired, management measures impairment in accordance with ASC 310-10,
“Impairment of a Loan
.
”
When management’s measured value of the impaired loan is less than the recorded investment in the loan, the amount of the impairment is recorded as a specific reserve or charged-off if the loan is deemed collateral dependent. These specific reserves are determined on an individual loan basis based on management’s current evaluation of our loss exposure for each credit given the payment status, financial condition of the borrower and value of any underlying collateral. Loans for which specific reserves have been provided are excluded from the general reserve calculations described below. Changes in specific reserves from period to period are the result of changes in the circumstances of individual loans such as charge-offs, pay-offs, changes in collateral values or other factors.
The allowance for loan losses represents management’s estimate of the amount necessary to provide for probable losses in the loan portfolio in the normal course of business. Due to the uncertainty of risks in the loan portfolio, management’s judgment of the amount of the allowance necessary to absorb loan losses is approximate. The allowance for loan losses is also subject to regulatory examinations and may be adjusted in response to a determination by the regulatory agencies as to its adequacy in comparison with peer institutions.
Management makes specific allowances for each impaired loan based on its type and risk classification as discussed above. At year-end 2018, the allowance for loan losses to total non-performing loans and TDRs on accrual increased to 306.10% from 122.88% at year-end 2017. It is important to look more closely at this ratio as a significant portion of impaired loans are collateral dependent and have been charged down to the estimated fair value of the underlying collateral less cost to sell. Please see the next table for comparison and disclosure of recorded investment less allocated allowance relative to the unpaid principal balance. Impaired loans have been assessed for collectability which considered, among other things, the borrower’s ability to repay, the value of the underlying collateral, and other market conditions to ensure that the allowance for loan losses is adequate to absorb probable incurred losses.
The following table presents the unpaid principal balance, recorded investment and allocated allowance related to loans individually evaluated for impairment in the commercial real estate and residential real estate portfolios as of December 31, 2018 and 2017.
|
|
December 31
, 201
8
|
|
|
December 31, 201
7
|
|
|
|
Commercial
Real Estate
|
|
|
Residential
Real Estate
|
|
|
Commercial
Real Estate
|
|
|
Residential
Real Estate
|
|
|
|
(in thousands)
|
|
Unpaid principal balance
|
|
$
|
2,421
|
|
|
$
|
3,398
|
|
|
$
|
4,734
|
|
|
$
|
5,456
|
|
Prior charge-offs
|
|
|
(1,911
|
)
|
|
|
(1,050
|
)
|
|
|
(2,099
|
)
|
|
|
(1,506
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded investment
|
|
|
510
|
|
|
|
2,348
|
|
|
|
2,635
|
|
|
|
3,950
|
|
Allocated allowance
|
|
|
(35
|
)
|
|
|
(168
|
)
|
|
|
—
|
|
|
|
(206
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded investment, less allocated allowance
|
|
$
|
475
|
|
|
$
|
2,180
|
|
|
$
|
2,635
|
|
|
$
|
3,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded investment, less allocated allowance/ Unpaid principal balance
|
|
|
19.62
|
%
|
|
|
64.16
|
%
|
|
|
55.66
|
%
|
|
|
68.62
|
%
|
Based on prior charge-offs, the current recorded investments in loans individually evaluated for impairment in the commercial real estate and residential real estate segments of the portfolio are significantly below the unpaid principal balances of those loans. The recorded investment net of the allocated allowance was 19.62% and 64.16% of the unpaid principal balance in the commercial real estate and residential real estate segments, respectively, at December 31, 2018.
A significant portion of the portfolio is comprised of loans secured by real estate. A decline in the value of the real estate serving as collateral for loans may impact our ability to collect those loans. In general, management obtains updated appraisals on property securing our loans when circumstances are warranted such as at the time of renewal or when market conditions have significantly changed. Management uses qualified licensed appraisers approved by our Board of Directors. These appraisers possess prerequisite certifications and knowledge of the local and regional marketplace.
Based on its assessment of the loan portfolio, management presents a quarterly review of the allowance for loan losses to the Bank’s Board of Directors, indicating any change in the allowance for loan losses since the last review and any recommendations as to adjustments in the allowance for loan losses.
This assessment is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available or as events change. The allowance for loan losses was stable as a percentage of loans outstanding at 1.16% at December 31, 2018 and 1.15% at December 31, 2017. New loans continue to be underwritten with lower loss expectations. Historical loss experience, risk grade classification metrics, charge-off levels, and past due trends remained stable between periods. The level of the allowance is based on estimates, and losses may ultimately vary from these estimates.
The Bank follows a loan grading program designed to evaluate the credit risk in the loan portfolio. Through this loan grading process, an internally classified watch list is maintained which helps management assess the overall quality of the loan portfolio and the adequacy of the allowance for loan losses. Loans categorized as watch list loans show warning elements where the present status exhibits one or more deficiencies that require attention in the short-term or where pertinent ratios of the loan account have weakened to a point where more frequent monitoring is warranted. These loans do not have all of the characteristics of a classified loan (substandard or doubtful) but show weakened elements as compared with those of a satisfactory credit. These loans are reviewed to assist in assessing the adequacy of the allowance for loan losses.
In establishing the appropriate risk rating for specific assets, management considers, among other factors, the borrower’s ability to repay, the borrower’s repayment history, the current delinquency status, the estimated value of the underlying collateral, and the capacity and willingness of a guarantor to satisfy the obligation. As a result of this process, loans are categorized as special mention, substandard or doubtful.
Loans classified as “special mention” do not have all of the characteristics of substandard or doubtful loans. They have one or more deficiencies that warrant special attention and which corrective action, such as accelerated collection practices, may remedy.
Loans classified as “substandard” are those loans with clear and defined weaknesses such as a highly leveraged position, unfavorable financial ratios, uncertain repayment sources or poor financial condition that may jeopardize the repayment of the debt as contractually agreed. They are characterized by the distinct possibility that the Bank will sustain some losses if the deficiencies are not corrected.
Loans classified as “doubtful” are those loans which have characteristics similar to substandard loans but with an increased risk that collection or liquidation in full is highly questionable and improbable.
Specific reserves may be carried for accruing TDRs in compliance with restructured terms. Once a loan is deemed impaired or uncollectible as contractually agreed (other than performing TDRs), the loan is charged-off either partially or in-full against the allowance for loan losses, based upon the expected future cash flows discounted at the loan’s effective interest rate, or the fair value of collateral less estimated cost to sell with respect to collateral-based loans if collateral dependent.
As of December 31, 2018, $6.4 million of loans were classified as substandard, $113,000 classified as special mention and no loans classified as doubtful or loss. This compares with $13.2 million of loans classified as substandard, $164,000 classified as special mention and no loans classified as doubtful or loss as of December 31, 2017. The $6.8 million decrease in loans classified as substandard was primarily driven by $12.6 million in principal payments received, $730,000 in migration to OREO, $92,000 in loans upgraded from substandard, and $480,000 in charge-offs, offset by $7.1 million in loans moved to substandard during 2018. Substandard loans are primarily concentrated in the residential real estate portfolio. As of December 31, 2018, $266,000 of the allowance for loan losses was allocated to substandard loans. This compares to allocations of $418,000 in the allowance for loan losses related to substandard loans at December 31, 2017.
The following table depicts management’s allocation of the allowance for loan losses by loan type. Allowance funding and allocation is based on management’s current evaluation of risk in each category, economic conditions, past loss experience, loan volume, past due history and other factors. Since these factors and management’s assumptions are subject to change, the allocation is not necessarily predictive of future portfolio performance. The allocation is made for analytical purposes and is not necessarily indicative of the categories in which future losses may occur. The total allowance is available to absorb losses from any segment of loans.
|
|
As of December 31,
|
|
|
|
201
8
|
|
|
201
7
|
|
|
|
Amount of
Allowance
|
|
|
Percent of
Loans to Total
Loans
|
|
|
Amount of
Allowance
|
|
|
Percent of
Loans to Total
Loans
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
1,299
|
|
|
|
16.91
|
%
|
|
$
|
892
|
|
|
|
15.98
|
%
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
419
|
|
|
|
11.35
|
|
|
|
301
|
|
|
|
8.05
|
|
Farmland
|
|
|
543
|
|
|
|
10.18
|
|
|
|
449
|
|
|
|
12.40
|
|
Nonfarm nonresidential
|
|
|
3,714
|
|
|
|
22.50
|
|
|
|
3,282
|
|
|
|
22.01
|
|
Residential Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
403
|
|
|
|
6.50
|
|
|
|
627
|
|
|
|
7.94
|
|
1-4 Family
|
|
|
2,049
|
|
|
|
22.97
|
|
|
|
2,273
|
|
|
|
25.17
|
|
Consumer
|
|
|
130
|
|
|
|
5.11
|
|
|
|
64
|
|
|
|
2.59
|
|
Agriculture
|
|
|
321
|
|
|
|
4.41
|
|
|
|
313
|
|
|
|
5.78
|
|
Other
|
|
|
2
|
|
|
|
0.07
|
|
|
|
1
|
|
|
|
0.08
|
|
Total
|
|
$
|
8,880
|
|
|
|
100.0
|
%
|
|
$
|
8,202
|
|
|
|
100.0
|
%
|
|
|
As of December 31,
|
|
|
|
20
1
6
|
|
|
20
1
5
|
|
|
20
1
4
|
|
|
|
Amount of
Allowance
|
|
|
Percent of
Loans to Total
Loans
|
|
|
Amount of
Allowance
|
|
|
Percent of
Loans to Total
Loans
|
|
|
Amount of
Allowance
|
|
|
Percent of
Loans to Total
Loans
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
475
|
|
|
|
15.29
|
%
|
|
$
|
818
|
|
|
|
13.93
|
%
|
|
$
|
2,046
|
|
|
|
9.75
|
%
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
470
|
|
|
|
5.68
|
|
|
|
424
|
|
|
|
5.36
|
|
|
|
739
|
|
|
|
5.31
|
|
Farmland
|
|
|
288
|
|
|
|
11.19
|
|
|
|
364
|
|
|
|
12.35
|
|
|
|
1,094
|
|
|
|
12.39
|
|
Nonfarm nonresidential
|
|
|
4,136
|
|
|
|
23.39
|
|
|
|
6,205
|
|
|
|
22.72
|
|
|
|
9,098
|
|
|
|
28.07
|
|
Residential Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
610
|
|
|
|
7.54
|
|
|
|
422
|
|
|
|
7.13
|
|
|
|
886
|
|
|
|
6.70
|
|
1-4 Family
|
|
|
2,816
|
|
|
|
29.42
|
|
|
|
3,562
|
|
|
|
32.57
|
|
|
|
4,901
|
|
|
|
31.56
|
|
Consumer
|
|
|
8
|
|
|
|
1.54
|
|
|
|
122
|
|
|
|
1.62
|
|
|
|
274
|
|
|
|
1.82
|
|
Agriculture
|
|
|
162
|
|
|
|
5.87
|
|
|
|
122
|
|
|
|
4.25
|
|
|
|
319
|
|
|
|
4.31
|
|
Other
|
|
|
2
|
|
|
|
0.08
|
|
|
|
2
|
|
|
|
0.07
|
|
|
|
7
|
|
|
|
0.09
|
|
Total
|
|
$
|
8,967
|
|
|
|
100.0
|
%
|
|
$
|
12,041
|
|
|
|
100.0
|
%
|
|
$
|
19,364
|
|
|
|
100.0
|
%
|
Provision for Loan Losses
–
A negative provision for loan losses of $500,000 was recorded for the year ended December 31, 2018, compared with a negative provision for loan losses of $800,000 for 2017 and a negative provision for loan losses of $2.5 million for 2016. The negative provision in 2018 was driven by declining historical loss rates, net recoveries for the year, improvements in asset quality, changes on the composition of the portfolio, and management’s assessment of risk within the portfolio. Asset quality improvement is evidenced by, among other things, improvements in loan risk category migration. The pass category increased approximately $72.6 million, the watch category declined approximately $12.6 million, the special mention category declined approximately $51,000 and the substandard category declined approximately $6.8 million. Additionally, non-accrual loans decreased $3.5 million or 63.5% during 2018. Net recoveries were $1.2 million for 2018 compared to net recoveries of $35,000 in 2017 and net charge-offs of $624,000 in 2016. Management considers the size and volume of our portfolio as well as the credit quality of our loan portfolio based upon risk category classification when determining the loan loss provision for each period and the allowance for loan losses at period end.
Foreclosed Properties
– Foreclosed properties at December 31, 2018 were $3.5 million compared with $4.4 million at December 31, 2017. See “Note 5 - Other Real Estate Owned,” to the financial statements. During 2018, the Bank acquired $730,000 of OREO properties and sold properties totaling approximately $876,000. Management values foreclosed properties at fair value less estimated cost to sell when acquired and expects to liquidate these properties to recover our investment in the due course of business.
OREO is recorded at fair market value less estimated cost to sell at time of acquisition. Any write-down of the property at the time of acquisition is charged to the allowance for loan losses. When foreclosed properties are acquired, management obtains a new appraisal or has staff from the Bank’s special assets group evaluate the latest in-file appraisal in connection with the transfer to OREO. Management typically obtains updated appraisals within five quarters of the anniversary date of ownership unless a sale is imminent. Subsequent reductions in fair value are recorded as non-interest expense when a new appraisal indicates a decline in value or in cases where a listing price is lowered below the appraisal amount.
The following table presents the major categories of OREO at the year-ends indicated:
|
|
201
8
|
|
|
201
7
|
|
|
201
6
|
|
|
|
(in thousands)
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction, land development, and other land
|
|
$
|
3,485
|
|
|
$
|
4,335
|
|
|
$
|
6,571
|
|
Farmland
|
|
|
—
|
|
|
|
74
|
|
|
|
—
|
|
Residential Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 Family
|
|
|
—
|
|
|
|
—
|
|
|
|
250
|
|
|
|
$
|
3,485
|
|
|
$
|
4,409
|
|
|
$
|
6,821
|
|
Net activity relating to other real estate owned during the years indicated is as follows:
|
|
201
8
|
|
|
201
7
|
|
|
201
6
|
|
|
|
(in thousands)
|
|
OREO Activity
|
|
|
|
|
|
|
|
|
|
|
|
|
OREO as of January 1
|
|
$
|
4,409
|
|
|
$
|
6,821
|
|
|
$
|
19,214
|
|
Real estate acquired
|
|
|
730
|
|
|
|
270
|
|
|
|
1,273
|
|
Valuation adjustment write-downs
|
|
|
(850
|
)
|
|
|
(1,963
|
)
|
|
|
(1,180
|
)
|
Net gain on sale
|
|
|
72
|
|
|
|
74
|
|
|
|
222
|
|
Proceeds from sale of properties
|
|
|
(876
|
)
|
|
|
(793
|
)
|
|
|
(12,708
|
)
|
OREO as of December 31
|
|
$
|
3,485
|
|
|
$
|
4,409
|
|
|
$
|
6,821
|
|
Net gain on sales, write-downs, and operating expenses for OREO totaled $868,000 for the year ended December 31, 2018, compared with $2.0 million in 2017 and $1.5 million in 2016.
During the year ended December 31, 2018, fair value write-downs of $850,000 were recorded compared with $2.0 million for 2017 and $1.2 million for 2016. The write-downs recorded in each year reflect fair value write-downs due to updated appraisals, changes in marketing strategies, and reductions in listing prices for certain properties. OREO sales totaled $876,000, $793,000, and $12.7 million during 2018, 2017, and 2016, respectively. Management expects to resolve certain nonaccrual loans through the acquisition and sale of the underlying real estate collateral.
Investment Securities
– The securities portfolio serves as a source of liquidity and earnings and contributes to the management of interest rate risk. Investments are made in various types of liquid assets, including U.S. Treasury obligations and securities of various federal agencies, obligations of states and political subdivisions, corporate bonds, collateralized loan obligations, certificates of deposit at insured savings and loans and banks, bankers’ acceptances and federal funds. The investment portfolio increased by $48.5 million, or 31.7%, to $201.2 million at December 31, 2018, compared with $152.7 million at December 31, 2017.
The following table sets forth the carrying value of our securities portfolio at the dates indicated.
|
|
December 31, 201
8
|
|
|
December 31, 201
7
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
|
(dollars in thousands)
|
|
Securities available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and federal agencies
|
|
$
|
23,280
|
|
|
$
|
2
|
|
|
$
|
(722
|
)
|
|
$
|
22,560
|
|
|
$
|
22,105
|
|
|
$
|
2
|
|
|
$
|
(483
|
)
|
|
$
|
21,624
|
|
Agency mortgage-backed: residential
|
|
|
87,689
|
|
|
|
192
|
|
|
|
(1,891
|
)
|
|
|
85,990
|
|
|
|
65,935
|
|
|
|
117
|
|
|
|
(1,087
|
)
|
|
|
64,965
|
|
Collateralized loan obligations
|
|
|
49,942
|
|
|
|
—
|
|
|
|
(103
|
)
|
|
|
49,839
|
|
|
|
25,343
|
|
|
|
182
|
|
|
|
(20
|
)
|
|
|
25,505
|
|
State and municipal
|
|
|
32,841
|
|
|
|
230
|
|
|
|
(259
|
)
|
|
|
32,812
|
|
|
|
33,303
|
|
|
|
508
|
|
|
|
(101
|
)
|
|
|
33,710
|
|
Corporate bonds
|
|
|
9,890
|
|
|
|
127
|
|
|
|
(26
|
)
|
|
|
9,991
|
|
|
|
6,838
|
|
|
|
78
|
|
|
|
—
|
|
|
|
6,916
|
|
Total available for sale
|
|
$
|
203,642
|
|
|
$
|
551
|
|
|
$
|
(3,001
|
)
|
|
$
|
201,192
|
|
|
$
|
153,524
|
|
|
$
|
887
|
|
|
$
|
(1,691
|
)
|
|
$
|
152,720
|
|
The following table sets forth the contractual maturities, fair values and weighted-average yields for our available for sale securities held at December 31, 2018:
|
|
Due Within
One Year
|
|
|
After One Year
But Within
Five Years
|
|
|
After Five Years
But Within
Ten Years
|
|
|
After Ten Years
|
|
|
Total
|
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
Available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and federal agencies
|
|
$
|
—
|
|
|
|
—
|
%
|
|
$
|
—
|
|
|
|
—
|
%
|
|
$
|
8,981
|
|
|
|
2.54
|
%
|
|
$
|
13,579
|
|
|
|
2.20
|
%
|
|
$
|
22,560
|
|
|
|
2.33
|
%
|
Agency mortgage-backed: residential
|
|
|
—
|
|
|
|
—
|
|
|
|
5,540
|
|
|
|
2.49
|
|
|
|
11,020
|
|
|
|
2.33
|
|
|
|
69,430
|
|
|
|
3.02
|
|
|
|
85,990
|
|
|
|
2.89
|
|
Collateralized loan obligations
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,048
|
|
|
|
4.42
|
|
|
|
45,791
|
|
|
|
3.77
|
|
|
|
49,839
|
|
|
|
3.82
|
|
State and municipal
|
|
|
5,173
|
|
|
|
2.89
|
|
|
|
19,225
|
|
|
|
3.04
|
|
|
|
5,968
|
|
|
|
3.34
|
|
|
|
2,446
|
|
|
|
4.36
|
|
|
|
32,812
|
|
|
|
3.17
|
|
Corporate bonds
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,099
|
|
|
|
5.18
|
|
|
|
3,892
|
|
|
|
6.55
|
|
|
|
9,991
|
|
|
|
5.71
|
|
Total available for sale
|
|
$
|
5,173
|
|
|
|
2.89
|
%
|
|
$
|
24,765
|
|
|
|
2.92
|
%
|
|
$
|
36,116
|
|
|
|
3.25
|
%
|
|
$
|
135,138
|
|
|
|
3.31
|
%
|
|
$
|
201,192
|
|
|
|
3.24
|
%
|
Average yields in the table above were calculated on a tax equivalent basis using a federal income tax rate of 21%. Mortgage-backed securities are securities that have been developed by pooling a number of real estate mortgages. These securities are issued by federal agencies such as Ginnie Mae, Fannie Mae and Freddie Mac, as well as non-agency company issuers. These securities are deemed to have high credit ratings, and minimum regular monthly cash flows of principal and interest. Cash flows from agency backed mortgage-backed securities are guaranteed by the issuing agencies.
Unlike U.S. Treasury and U.S. government agency securities, which have a lump sum payment at maturity, mortgage-backed securities provide cash flows from regular principal and interest payments and principal prepayments throughout the lives of the securities. Mortgage-backed securities that are purchased at a premium will generally return decreasing net yields as interest rates drop because home owners tend to refinance their mortgages. Thus, the premium paid must be amortized over a shorter period. Therefore, those securities purchased at a discount will obtain higher net yields in a decreasing interest rate environment. As interest rates rise, the opposite will generally be true. During a period of increasing interest rates, fixed rate mortgage-backed securities do not tend to experience heavy prepayments of principal and consequently, average life will not be shortened. If interest rates begin to fall, prepayments will generally increase. Non-agency issuer mortgage-backed securities do not carry a government guarantee. Management limits purchases of these securities to bank qualified issues with high credit ratings. At this time, there are no holdings of this type in the portfolio. At December 31, 2018, 80.7% of the Bank’s agency mortgage-backed securities had contractual final maturities of more than ten years with a weighted average life of 20.5 years.
The Bank owns Collateralized Loan Obligations (CLOs), which are debt securities secured by professionally managed portfolios of senior-secured loans to corporations. CLO managers are typically large non-bank financial institutions or banks and are typically $300 million to $1 billion in size, contain one hundred or more loans and have five to six credit tranches ranging from AAA, AA, A, BBB, BB, B and equity tranche. Interest and principal are paid first to the AAA tranche then to the next lower rated tranche. Losses are borne first by the equity tranche then by the subsequently higher rated tranche. CLOs may be less liquid than government securities from time to time and volatility in the CLO market may cause the value of these investments to decline.
The market value of CLOs may be affected by, among other things, changes in composition of the underlying loans, changes in the cash flows from the underlying loans, defaults and recoveries on the underlying loans, capital gains and losses on the underlying loans, and prepayments on the underlying loans. Although we attempt to mitigate the credit and liquidity risks associated with CLOs by purchasing CLOs with credit ratings of A or higher, completing pre-purchase due diligence, and through ongoing monitoring, no assurance can be given that these risk mitigation efforts will be successful.
At December 31, 2018, $33.1 million and $16.7 million of our CLOs were AA and A rated, respectively. There were no CLOs rated below A and none of the CLOs were subject to ratings downgrade in 2018. All of our CLOs are floating rate, with rates set on a quarterly basis at three month LIBOR plus a spread.
Deposits
– The Bank attracts both short-term and long-term deposits from the general public by offering a wide range of deposit accounts and interest rates. In recent years, the Bank has been required by market conditions to rely increasingly on short to mid-term certificate accounts and other deposit alternatives, which are more responsive to market interest rates.
The Bank primarily relies on its banking office network to attract and retain deposits in its local markets and has in the past leveraged the online channel to attract out-of-market deposits. Market interest rates and rates on deposit products offered by competing financial institutions can significantly affect our ability to attract and retain deposits. During 2018, total deposits increased $47.2 million compared with 2017. During 2017, total deposits decreased $2.9 million compared with 2016. The increase in deposits for 2018 and 2017 was primarily in certificates of deposit balances as well as money market accounts.
To evaluate our funding needs in light of deposit trends resulting from continually changing conditions, management evaluates simulated performance reports that forecast changes in margins along with other pertinent economic data. The Bank continues to offer attractively priced deposit products along its product line to allow it to retain deposit customers and reduce interest rate risk during various rising and falling interest rate cycles.
The Bank offers savings accounts, interest checking accounts, money market accounts and fixed rate certificates with varying maturities. The flow of deposits is influenced significantly by general economic conditions, changes in interest rates and competition. Management adjusts interest rates, maturity terms, service fees and withdrawal penalties on the Bank’s deposit products periodically. The variety of deposit products allows the Bank to compete more effectively in obtaining funds and to respond with more flexibility to the flow of funds away from depository institutions into outside investment alternatives. However, the ability to attract and maintain deposits and the cost of these funds have been, and will continue to be, significantly affected by market conditions.
The following table sets forth the average daily balances and weighted average rates paid for deposits for the periods indicated:
|
|
For the Years Ended December 31,
|
|
|
|
201
8
|
|
|
201
7
|
|
|
20
1
6
|
|
|
|
Average
Balance
|
|
|
Average
Rate
|
|
|
Average
Balance
|
|
|
Average
Rate
|
|
|
Average
Balance
|
|
|
Average
Rate
|
|
|
|
(dollars in thousands)
|
|
Demand
|
|
$
|
136,947
|
|
|
|
|
|
|
$
|
129,088
|
|
|
|
|
|
|
$
|
119,736
|
|
|
|
|
|
Interest Checking
|
|
|
90,583
|
|
|
|
0.13
|
%
|
|
|
101,980
|
|
|
|
0.13
|
%
|
|
|
96,294
|
|
|
|
0.13
|
%
|
Money Market
|
|
|
158,832
|
|
|
|
0.90
|
|
|
|
145,281
|
|
|
|
0.55
|
|
|
|
136,423
|
|
|
|
0.58
|
|
Savings
|
|
|
34,866
|
|
|
|
0.16
|
|
|
|
35,486
|
|
|
|
0.17
|
|
|
|
34,257
|
|
|
|
0.18
|
|
Certificates of Deposit
|
|
|
439,597
|
|
|
|
1.35
|
|
|
|
452,443
|
|
|
|
0.93
|
|
|
|
466,007
|
|
|
|
0.88
|
|
Total Deposits
|
|
$
|
860,825
|
|
|
|
|
|
|
$
|
864,278
|
|
|
|
|
|
|
$
|
852,717
|
|
|
|
|
|
Weighted Average Rate
|
|
|
|
|
|
|
0.88
|
%
|
|
|
|
|
|
|
0.60
|
%
|
|
|
|
|
|
|
0.60
|
%
|
The following table sets forth the average daily balances and weighted average rates paid for our certificates of deposit for the periods indicated:
|
|
For the Years Ended December 31,
|
|
|
|
201
8
|
|
|
201
7
|
|
|
20
1
6
|
|
|
|
Average
Balance
|
|
|
Average
Rate
|
|
|
Average
Balance
|
|
|
Average
Rate
|
|
|
Average
Balance
|
|
|
Average
Rate
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than $250,000
|
|
$
|
410,942
|
|
|
|
1.34
|
%
|
|
$
|
419,816
|
|
|
|
0.92
|
%
|
|
$
|
437,955
|
|
|
|
0.88
|
%
|
$250,000 or more
|
|
|
28,655
|
|
|
|
1.51
|
|
|
|
32,627
|
|
|
|
1.01
|
|
|
|
28,052
|
|
|
|
0.97
|
|
Total
|
|
$
|
439,597
|
|
|
|
1.35
|
%
|
|
$
|
452,443
|
|
|
|
0.93
|
%
|
|
$
|
466,007
|
|
|
|
0.88
|
%
|
The following table shows at December 31, 2018 the amount of our time deposits of $250,000 or more by time remaining until maturity:
Maturity Period
|
|
(in thousands)
|
|
|
|
|
Three months or less
|
|
$
|
3,799
|
|
Three months through six months
|
|
|
4,002
|
|
Six months through twelve months
|
|
|
8,490
|
|
Over twelve months
|
|
|
11,820
|
|
Total
|
|
$
|
28,111
|
|
The Bank maintains competitive pricing on its deposit products, which Management believes allows it to retain a substantial percentage of our customers when their time deposits mature.
Borrowing
– Deposits are the primary source of funds for lending and investment activities and for general business purposes. The Bank also uses advances (borrowings) from the FHLB of Cincinnati to supplement the pool of lendable funds, meet deposit withdrawal requirements and manage the terms of liabilities. Advances from the FHLB are secured by the Bank’s stock in the FHLB, and substantially all of its first mortgage residential loans. At December 31, 2018, the Bank had $46.5 million in advances outstanding from the FHLB and the capacity to increase borrowings by an additional $42.7 million. The FHLB of Cincinnati functions as a central reserve bank providing credit for member financial institutions. As a member, the Bank is required to own capital stock in the FHLB and is authorized to apply for advances on the security of such stock and certain of our home mortgages and other assets (principally, securities that are obligations of, or guaranteed by, the United States) provided that it meets certain standards related to creditworthiness.
The following table sets forth information about our FHLB advances as of and for the periods indicated:
|
|
December 31,
|
|
|
|
201
8
|
|
|
201
7
|
|
|
20
1
6
|
|
|
|
(dollars in thousands)
|
|
Average balance outstanding
|
|
$
|
43,363
|
|
|
$
|
9,184
|
|
|
$
|
2,967
|
|
Maximum amount outstanding at any month-end during the period
|
|
|
71,630
|
|
|
|
26,830
|
|
|
|
22,458
|
|
End of period balance
|
|
|
46,549
|
|
|
|
11,797
|
|
|
|
22,458
|
|
Weighted average interest rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
At end of period
|
|
|
2.45
|
%
|
|
|
1.48
|
%
|
|
|
0.85
|
%
|
During the period
|
|
|
2.00
|
%
|
|
|
1.31
|
%
|
|
|
2.34
|
%
|
Junior Subordinated Debentures
– At December 31, 2018, the Company had four issues of junior subordinated debentures outstanding totaling $21.0 million as shown in the table below.
Description
|
|
Liquidation
Amount
Trust
Preferred
Securities
|
|
Issuance Date
|
|
Interest Rate (
1
)
|
|
Junior
Subordinated
Debt and
Investment
in Trust
|
|
Maturity Date
|
(dollars in thousands)
|
|
|
|
|
|
Statutory Trust I
|
|
$
|
3,000
|
|
2/13/2004
|
|
3-month LIBOR + 2.85%
|
|
$
|
3,093
|
|
2/13/2034
|
Statutory Trust II
|
|
|
5,000
|
|
2/13/2004
|
|
3-month LIBOR + 2.85%
|
|
|
5,155
|
|
2/13/2034
|
Statutory Trust III
|
|
|
3,000
|
|
4/15/2004
|
|
3-month LIBOR + 2.79%
|
|
|
3,093
|
|
4/15/2034
|
Statutory Trust IV
|
|
|
10,000
|
|
12/14/2006
|
|
3-month LIBOR + 1.67%
|
|
|
10,435
|
|
3/1/2037
|
|
|
$
|
21,000
|
|
|
|
|
|
$
|
21,776
|
|
|
|
(1)
|
As of December 31, 2018, the 3-month LIBOR was 2.80%.
|
The trust preferred securities are subject to mandatory redemption, in whole or in part, upon repayment of the subordinated debentures at maturity or their earlier redemption at the liquidation preference. The subordinated debentures are redeemable before the maturity date at our option at their principal amount plus accrued interest.
The Company has the option to defer interest payments on the subordinated debentures from time to time for a period not to exceed 20 consecutive quarters. A deferral period may begin at the Company’s discretion so long as interest payments are current.
On June 29, 2016, the Company began deferring interest payments on the junior subordinated debentures held by our trust subsidiaries, requiring the trust subsidiaries to defer distributions on the trust preferred securities held by investors. Deferred distributions on the $21.0 million of trust preferred securities outstanding totaled $1.2 million at December 31, 2017. In June 2018, the Company paid all deferred interest payments and brought interest current. At December 31, 2018, the Company is current on all interest payments.
The Federal Reserve Board rules allow trust preferred securities issued prior to May 19, 2010 to be included in Tier 1 capital, subject to quantitative and qualitative limits. Currently, no more than 25% of our Tier 1 capital can consist of trust preferred securities and qualifying perpetual preferred stock. To the extent the amount of our trust preferred securities exceeds the 25% limit, the excess would be includable in Tier 2 capital. As of December 31, 2018, the Company’s trust preferred securities totaled 21% of its Tier 1 capital and 10% of its Tier 2 capital.
Each of the trusts issuing the trust preferred securities holds junior subordinated debentures issued with an original maturity of 30 years. In the last five years before the junior subordinated debentures mature, the associated trust preferred securities are excluded from Tier 1 capital and included in Tier 2 capital. In addition, the trust preferred securities during this five-year period are amortized out of Tier 2 capital by one-fifth each year and excluded from Tier 2 capital completely during the year before maturity.
Senior Debt
– On June 30, 2017, the Company entered into a $10.0 million senior secured loan agreement with a commercial bank. The loan matures on June 30, 2022. Interest is payable quarterly at a rate of three-month LIBOR plus 250 basis points through June 30, 2020, at which time quarterly principal payments of $250,000 plus interest will commence. The loan is secured by a first priority pledge of 100% of the issued and outstanding stock of the Bank. The Company may prepay any amount due under the promissory note at any time without premium or penalty.
The Company contributed $9.0 million of the borrowing proceeds to the Bank as common equity Tier 1 capital. The remaining $1.0 million of the borrowing proceeds were retained by the lender in escrow to service quarterly interest payments. At December 31, 2018, the escrow account had a balance of $417,000.
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 $2,500,000, (ii) the Company must maintain a total risk based capital ratio at least equal to 10% of risk-weighted assets, (iii) the Bank must maintain a total risk based capital ratio at least equal to 11% of risk-weighted assets, and (iv) non-performing assets of the Bank may not exceed 2.5% of the Bank’s total assets. Both the Company and Bank were in compliance with the covenants as of December 31, 2018.
Liquidity
Liquidity risk arises from the possibility the Company may not be able to satisfy current or future financial commitments, or may become unduly reliant on alternative funding sources. The objective of liquidity risk management is to ensure that we meet the cash flow requirements of depositors and borrowers, as well as operating cash needs, taking into account all on- and off-balance sheet funding demands. Liquidity risk management also involves ensuring that cash flow needs are met at a reasonable cost. Management maintains an investment and funds management policy, which identifies the primary sources of liquidity, establishes procedures for monitoring and measuring liquidity, and establishes minimum liquidity requirements in compliance with regulatory guidance. The Asset Liability Committee regularly monitors and reviews our liquidity position.
Funds are available to the Bank from a number of sources, including the sale of securities in the available for sale investment portfolio, principal pay-downs on loans and mortgage-backed securities, customer deposit inflows, and other wholesale funding.
The Bank also borrows from the FHLB to supplement funding requirements. At December 31, 2018, the unused borrowing capacity with the FHLB was $42.7 million. Advances are collateralized by first mortgage residential loans and borrowing capacity is based on the underlying book value of eligible pledged loans.
The Bank also has available on an unsecured basis federal funds borrowing line from a correspondent bank totaling $5.0 million. Management believes the sources of liquidity are adequate to meet expected cash needs for the foreseeable future. Historically, the Bank has also utilized brokered and wholesale deposits to supplement its funding strategy. At December 31, 2018, the Bank had no brokered deposits.
The Company uses cash on hand to service senior debt, service junior subordinated debentures, and to provide for operating cash flow needs. The Company also may issue common equity, preferred equity and debt to support cash flow needs and liquidity requirements. At December 31, 2018, cash on hand totaled $5.4 million, of which, $417,000 is held in escrow by the Company’s senior debt holder to service interest payments.
Capital
Stockholders’ equity increased $19.4 million to $92.1 million at December 31, 2018, compared with $72.7 million at December 31, 2017. The increase was due primarily to the $14.9 million issuance of common stock completed during the first quarter of 2018, as well as current year net income $8.8 million, offset by the $3.5 million repurchase of the Company’s series E and F preferred shares and the other comprehensive loss for the year of $1.3 million.
The Company completed a private placement of common stock on March 30, 2018. In the transaction, the Company issued 150,000 common shares and 1.0 million non-voting common shares to Patriot Financial Partners III, L.P. at $13.00 per share resulting in net proceeds of $14.9 million of which $5.0 million was contributed as capital to the Bank. The balance of proceeds was maintained by the Company for general corporate purposes and to support the growth of the Bank.
The following table shows the ratios of Tier 1 capital, common equity Tier 1, and total capital to risk-adjusted assets and the leverage ratios (excluding the capital conservation buffer) for the Bank at December 31, 2018:
|
|
Regulatory
Minimums
|
|
|
Well-Capitalized
Minimums
|
|
|
Limestone
Bank
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 capital
|
|
|
6.0
|
%
|
|
|
8.0
|
%
|
|
|
11.83
|
%
|
Common equity Tier 1 capital
|
|
|
4.5
|
|
|
|
6.5
|
|
|
|
11.83
|
|
Total risk-based capital
|
|
|
8.0
|
|
|
|
10.0
|
|
|
|
12.88
|
|
Tier 1 leverage ratio
|
|
|
4.0
|
|
|
|
5.0
|
|
|
|
9.60
|
|
Failure to meet minimum capital requirements could result in additional discretionary actions by regulators that, if taken, could have a materially adverse effect on our financial condition.
Each of the federal bank regulatory agencies has established risk-based capital requirements for banking organizations. The Basel III regulatory capital reforms became effective for the Company and Bank on January 1, 2015, and include new minimum risk-based capital and leverage ratios. These rules refine the definition of what constitutes “capital” for purposes of calculating those ratios, including the definitions of Tier 1 capital and Tier 2 capital. The final rules allowed banks and their holding companies with less than $250 billion in assets a one-time opportunity to opt-out of a requirement to include unrealized gains and losses in accumulated other comprehensive income in their capital calculation. The Company and the Bank opted out of this requirement. The rules also establish a “capital conservation buffer” of 2.5% above the regulatory minimum risk-based capital ratios. Once the capital conservation buffer is fully phased in, the minimum ratios are a common equity Tier 1 risk-based capital ratio of 7.0%, a Tier 1 risk-based capital ratio of 8.5%, and a total risk-based capital ratio of 10.5%. The phase-in of the capital conservation buffer requirement began in January 2016 at 0.625% of risk-weighted assets and increases each year until fully implemented at 2.5% of risk-weighted assets in January 2019. An institution is subject to limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses if capital levels fall below minimum levels plus the buffer amounts. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions.
Off Balance Sheet Arrangements
In the normal course of business, the Bank enters into various transactions, which, in accordance with GAAP, are not included in the Company’s consolidated balance sheets. The Bank enter into these transactions to meet the financing needs of its customers. These transactions include commitments to extend credit and standby letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the consolidated balance sheets.
The commitments associated with outstanding standby letters of credit and commitments to extend credit as of December 31, 2018 are summarized below. Since commitments associated with letters of credit and commitments to extend credit may expire unused, the amounts shown do not necessarily reflect our actual future cash funding requirements:
|
|
One year
or less
|
|
|
More than 1
year but less
than 3 years
|
|
|
3 years or
more but less
than 5 years
|
|
|
5 years
or more
|
|
|
Total
|
|
|
|
(dollars in thousands)
|
|
Commitments to extend credit
|
|
$
|
41,109
|
|
|
$
|
28,102
|
|
|
$
|
7,854
|
|
|
$
|
19,922
|
|
|
$
|
96,987
|
|
Standby letters of credit
|
|
|
916
|
|
|
|
1,376
|
|
|
|
1
|
|
|
|
—
|
|
|
|
2,293
|
|
Total
|
|
$
|
42,025
|
|
|
$
|
29,478
|
|
|
$
|
7,855
|
|
|
$
|
19,922
|
|
|
$
|
99,280
|
|
Standby Letters of Credit –
Standby letters of credit are written conditional commitments the Bank issues to guarantee the performance of a borrower to a third party. If the borrower does not perform in accordance with the terms of the agreement with the third party, the Bank may be required to fund the commitment. The maximum potential amount of future payments the Bank could be required to make is represented by the contractual amount of the commitment. If the commitment is funded, the Bank would be entitled to seek recovery from the borrower. The Bank’s policies generally require that standby letter of credit arrangements be underwritten in a manner consistent with a loan of similar characteristics.
Commitments to Extend Credit
– The Bank enters into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes. Substantially all of the Bank’s commitments to extend credit are contingent upon borrowers maintaining specific credit standards at the time of loan funding. The Bank minimizes our exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures.
Risk Participation Agreements
– In connection with the purchase of loan participations, the Bank has entered into risk participation agreements, which had notional amounts totaling $26.6 million at December 31, 2018 and $19.8 million at December 31, 2017.
Contractual Obligations
The following table summarizes our contractual obligations and other commitments to make future payments as of December 31, 2018:
|
|
One year
or less
|
|
|
More than 1
year but less
than 3 years
|
|
|
3 years or
more but less
than 5 years
|
|
|
5 years or
more
|
|
|
Total
|
|
|
|
(dollars in thousands)
|
|
Time deposits
|
|
$
|
256,745
|
|
|
$
|
176,682
|
|
|
$
|
17,459
|
|
|
$
|
—
|
|
|
$
|
450,886
|
|
FHLB borrowing (1)
|
|
|
45,172
|
|
|
|
1,190
|
|
|
|
159
|
|
|
|
28
|
|
|
|
46,549
|
|
Junior subordinated debentures
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
21,000
|
|
|
|
21,000
|
|
Senior debt
|
|
|
—
|
|
|
|
500
|
|
|
|
9,500
|
|
|
|
—
|
|
|
|
10,000
|
|
Total
|
|
$
|
301,917
|
|
|
$
|
178,372
|
|
|
$
|
27,118
|
|
|
$
|
21,028
|
|
|
$
|
528,435
|
|
(1)
|
Fixed rate borrowings with rates ranging from 0% to 5.24%, and maturities ranging from 2019 through 2033, averaging 2.45%.
|
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been prepared in accordance with U.S. generally accepted accounting principles, which require the measurement of financial position and operating results in historical dollars without considering changes in the relative purchasing power of money over time due to inflation.
The Bank has an asset and liability structure that is essentially monetary in nature. As a result, interest rates have a more significant impact on performance than the effects of general levels of inflation. Periods of high inflation are often accompanied by relatively higher interest rates, and periods of low inflation are accompanied by relatively lower interest rates. As market interest rates rise or fall in relation to the rates earned on loans and investments, the value of these assets decreases or increases respectively.