Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This item analyzes the Company’s financial condition, change in financial condition and results of operations. It should be read in conjunction with the unaudited consolidated financial statements and accompanying notes presented in Part I, Item 1 of this report.
Preliminary Note Concerning Forward-Looking Statements
This report contains statements about the future expectations, activities and events that constitute forward-looking statements. Forward-looking statements express our beliefs, assumptions and expectations of our future financial and operating performance and growth plans, taking into account information currently available to us. These statements are not statements of historical fact. The words “believe,” “may,” “should,” “anticipate,” “estimate,” “expect,” “intend,” “objective,” “seek,” “plan,” “strive” or similar words, or the negatives of these words, identify forward-looking statements.
Forward-looking statements are not guarantees of performance or results. A forward-looking statement may include the assumptions or bases underlying the forward-looking statement. Management has made assumptions and bases in good faith and believe they are reasonable. However, that estimates based on such assumptions or bases frequently differ from actual results, and the differences can be material. The forward-looking statements included in this report speak only as of the date of the report. Management does not intend to update these statements unless required by applicable laws.
Forward-looking statements involve risks and uncertainties that may cause our actual results to differ materially from the expectations of future results we expressed or implied in any forward-looking statements. These risks and uncertainties can be difficult to predict and may be out of management’s control. Factors that could contribute to differences in results include, but are not limited to the following:
|
●
|
Changes in fiscal, monetary, regulatory and tax policies;
|
|
●
|
Changes in political and economic conditions;
|
|
•
|
The magnitude and frequency of changes to the Federal Funds Target Rate implemented by the Federal Open Market Committee of the Federal Reserve Bank;
|
|
•
|
Long-term and short-term interest rate fluctuations as well as the overall steepness of the yield curve;
|
|
•
|
Competitive product and pricing pressures;
|
|
•
|
Equity and fixed income market fluctuations;
|
|
•
|
Client bankruptcies and loan defaults;
|
|
•
|
Epidemics and pandemics
|
|
•
|
Natural disasters impacting Company operations;
|
|
●
|
Integrations and performance of acquired businesses;
|
|
●
|
Changes in technology and regulations or the interpretation and enforcement thereof;
|
|
●
|
Changes in accounting standards;
|
|
●
|
Changes to the Company’s overall internal control environment;
|
|
●
|
Success in gaining regulatory approvals when required;
|
|
●
|
Information security breaches or cyber security attacks involving either the Company or one of the Company’s third-party service providers; and
|
|
●
|
Other risks and uncertainties reported from time to time in the Company’s filings with the Securities and Exchange Commission (“SEC”), including Part II Item 1A “Risk Factors” of this report, as well as Part I Item 1A "Risk Factors” of the Company’s December 31, 2019 Annual Report on Form 10-K for the year ended December 31, 2019.
|
Forward-looking statements are not guarantees of performance or results. A forward-looking statement may include the assumptions or bases underlying the forward-looking statement. Management has made assumptions and bases in good faith and believe they are reasonable. However, estimates based on such assumptions or bases frequently differ from actual results, and the differences can be material. The forward-looking statements included in this report speak only as of the date of the report. Management does not intend to update these statements unless required by applicable laws.
Overview
The Company is a bank holding company headquartered in Louisville, Kentucky. The Company’s common stock is traded on Nasdaq’s Capital Market under the symbol LMST. The Company operates Limestone Bank (the Bank), its wholly owned subsidiary and the eighth largest bank domiciled in the Commonwealth of Kentucky based on total assets. The Bank operates banking offices in 14 counties in Kentucky. The Bank’s markets include metropolitan Louisville in Jefferson County and the surrounding counties of Bullitt and Henry. The Bank serves south central, southern, and western Kentucky from banking centers in Barren, Butler, Daviess, Edmonson, Green, Hardin, Hart, Ohio, and Warren counties. The Bank also has banking centers in Lexington, Kentucky, the second largest city in the state, and Frankfort, Kentucky, the state capital. The Bank is a traditional community bank with a wide range of personal and business banking products and services. As of March 31, 2020, the Company had total assets of $1.27 billion, total loans of $961.6 million, total deposits of $1.06 billion and stockholders’ equity of $104.5 million.
The coronavirus pandemic (“COVID-19”) currently impacting the nation has caused a setback to the country’s economy. Since early March, the Company and Bank have felt the impact alongside thousands of businesses across the nation. In response to the global pandemic, and the declarations of emergency at the state and national levels the pandemic has triggered, the Bank has implemented several temporary operational changes to serve customers during the COVID-19 health crisis. Lobby services have been amended to appointment only while drive thru, mobile, and online banking have become the Bank’s primary channels of serving customers. Customer facing employees have been divided into two teams working separate ‘ten day on’ and ‘ten day off’ shifts to ensure a healthy workforce remains available to serve customers. Additionally, operational and support staff have been assigned to work from home where circumstances permit.
The Company reported net income of $1.8 million for the three months ended March 31, 2020, compared with $2.8 million for the first quarter of 2019. Net income before taxes and income tax expense was $2.2 million and $361,000, respectively for the first quarter of 2020, compared with $3.0 million and $123,000, respectively for the first quarter of 2019. Income tax expense for the first quarter of 2019 benefitted $341,000 or $0.05 per basic and diluted common share, from the establishment of a net deferred tax asset related to a change in Kentucky tax law enacted during the first quarter of 2019. The new law eliminates the Kentucky bank franchise tax, which is assessed at a rate of 1.1% of average capital and implements a state income tax for the Bank at a statutory rate of 5%. The new Kentucky income tax will go into effect on January 1, 2021.
Significant items for the three months ended March 31, 2020 are as follows:
|
●
|
Loan growth outpaced paydowns during the period. Average loans receivable increased approximately $182.7 million or 23.8% to $949.2 million for the quarter ended March 31, 2020, compared with $766.5 million for the first quarter of 2019. This resulted in an increase in interest revenue volume of approximately $2.3 million for the quarter ended March 31, 2020, compared with the first quarter of 2019. Average loans were positively impacted from the branch purchase acquisition, which included approximately $126.8 million in loans at the time of the purchase, as well as loan growth during 2019 and the first quarter of 2020.
|
|
●
|
Net interest margin was 3.31% for the first three months of 2020 compared with 3.61% for the first three months of 2019. The yield on earning assets decreased to 4.50% in the first quarter of 2020 as compared to 4.90% in the first quarter of 2019. The decline in yield on earning assets was driven by the impact of falling interest rates on the Bank’s fed funds, certain floating rate investment securities, and loans with variable rate pricing features as the Federal Reserve lowered the federal funds target rate by 75 basis points in the latter half of 2019, 50 basis points on March 6, 2020, and 100 basis points on March 15, 2020. The cost of interest-bearing liabilities decreased from 1.57% in the first quarter of 2019 to 1.45% in the first quarter of 2020 as a result of decreases in short-term interest rates during 2019 and 2020.
|
|
●
|
While the Company has experienced historically strong trends in asset quality over the last several quarters and management’s assessment of risk within the portfolio has been low, the Company recorded provision for loan losses expense of $1.1 million in the first quarter of 2020, compared to no provision for loan losses expense in the first quarter of 2019. The first quarter 2020 loan loss provision was attributable to the level of net loan charge-offs for the quarter, to the impact of the increase in loan volume within the portfolio over the quarter, and to changes in the economic and business environment attributable to COVID-19 and the resultant risk it poses for business disruptions for the Bank’s borrowers. Net loan charge-offs were $276,000 for the first quarter of 2020, compared to net loan charge-offs of $194,000 for the first quarter of 2019.
|
|
●
|
Loans past due 30-59 days decreased from $1.7 million at December 31, 2019 to $1.2 million at March 31, 2020, and loans past due 60-89 days decreased from $670,000 at December 31, 2019 to $248,000 at March 31, 2020. Total loans past due and nonaccrual loans decreased to $2.9 million at March 31, 2020, from $3.9 million at December 31, 2019.
|
|
●
|
In response to requests from borrowers who have been impacted by COVID-19 through business and cash flow interruption, the Bank made short-term loan modifications involving principal deferrals (interest only) and, in other cases, principal and interest deferrals. See the table under “COVID-19 Short-term Loan Concessions” section for detailed discussion.
|
|
●
|
At March 31, 2020, foreclosed properties remained unchanged at $3.2 million compared to December 31, 2019, and declined from $3.3 million at March 31, 2019. Operating expenses totaled $16,000 in the first quarter of 2020 compared to operating expenses and fair value write-downs of $166,000 in the first quarter of 2019.
|
|
●
|
The ratio of non-performing assets to total assets decreased to 0.41% at March 31, 2020, compared with 0.42% at December 31, 2019, and 0.57% at March 31, 2019.
|
|
●
|
Deposits were $1.06 billion at March 31, 2020, compared with $1.03 billion at December 31, 2019. Certificate of deposit balances decreased $9.0 million during the first three months of 2020 to $467.5 million at March 31, 2020, from $476.5 million at December 31, 2019. Interest checking accounts increased $11.6 million, non-interest bearing accounts decreased $1.9 million, money market declined $6.0 million, and savings accounts increased $36.2 million during the quarter ended March 31, 2020.
|
Application of Critical Accounting Policies
Management continually reviews accounting policies and financial information disclosures. The Company’s more significant accounting policies that require the use of estimates and judgments in preparing the financial statements are summarized in “Application of Critical Accounting Policies” in Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operation of our Annual Report on Form 10-K for the calendar year ended December 31, 2019. Management has discussed the development, selection, and application of our critical accounting policies with our Audit Committee. During the first three months of 2020, there were no material changes in the critical accounting policies and assumptions.
Results of Operations
The following table summarizes components of income and expense and the change in those components for the three months ended March 31, 2020, compared with the same period of 2019:
|
|
For the Three Months
|
|
|
Change from
|
|
|
|
Ended March 31,
|
|
|
Prior Period
|
|
|
|
2020
|
|
|
2019
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross interest income
|
|
$
|
13,267
|
|
|
$
|
12,186
|
|
|
$
|
1,081
|
|
|
|
8.9
|
%
|
Gross interest expense
|
|
|
3,505
|
|
|
|
3,227
|
|
|
|
278
|
|
|
|
8.6
|
|
Net interest income
|
|
|
9,762
|
|
|
|
8,959
|
|
|
|
803
|
|
|
|
9.0
|
|
Provision for loan losses
|
|
|
1,050
|
|
|
|
—
|
|
|
|
1,050
|
|
|
|
100
|
|
Non-interest income
|
|
|
1,724
|
|
|
|
1,284
|
|
|
|
440
|
|
|
|
34.3
|
|
Non-interest expense
|
|
|
8,235
|
|
|
|
7,281
|
|
|
|
954
|
|
|
|
13.1
|
|
Net income before taxes
|
|
|
2,201
|
|
|
|
2,962
|
|
|
|
(761
|
)
|
|
|
(25.7
|
)
|
Income tax expense
|
|
|
361
|
|
|
|
123
|
|
|
|
238
|
|
|
|
193.5
|
|
Net income
|
|
|
1,840
|
|
|
|
2,839
|
|
|
|
(999
|
)
|
|
|
(35.2
|
)
|
Net income for the three months ended March 31, 2020 totaled $1.8 million, compared with $2.8 million for the comparable period of 2019. Net interest income increased $803,000 from the 2019 first quarter as a result of an increase in earning assets from the branch transaction as well as loan growth. Provision expense of $1.1 million was recorded in the first quarter of 2020 as compared to no provision expense the first quarter of 2019 primarily in response to the level of net loan charge-offs for the quarter, to the impact of the increase in loan volume within the portfolio over the quarter, and to changes in the economic and business environment attributable to COVID-19. Non-interest income increased $440,000 from $1.3 million in the first quarter of 2019 to $1.7 million for the first quarter of 2020 primarily related to service charges on deposit accounts and interchange fee volume increases. Non-interest expense increased $954,000 from $7.3 million in the first quarter of 2019 to $8.2 million in the first quarter of 2020 primarily due to an increase in salaries and benefits connected to the addition of sales talent and associates acquired in the branch transaction.
Net income before taxes and income tax expense was $2.2 million and $361,000, respectively for the first quarter of 2020, compared with $3.0 million and $123,000, respectively for the first quarter of 2019. Income tax expense for the first quarter of 2019 benefitted $341,000 from the establishment of a net deferred tax asset related to a change in Kentucky tax law enacted during the first quarter of 2019. The new law eliminates the Kentucky bank franchise tax, which is assessed at a rate of 1.1% of average capital and implements a state income tax for the Bank at a statutory rate of 5%. The new Kentucky income tax will go into effect on January 1, 2021.
Net Interest Income – Net interest income was $9.8 million for the three months ended March 31, 2020, an increase of $803,000, or 9.0%, compared with $9.0 million for the same period in 2019. Net interest spread and margin were 3.05% and 3.31%, respectively, for the first quarter of 2020, compared with 3.33% and 3.61%, respectively, for the first quarter of 2019.
The interest rate environment remained challenging in the first quarter of 2020 as the Federal Reserve, after lowering rates 75 basis points in the latter half of 2019, lowered the federal funds target rate by 50 basis points on March 6, 2020 and 100 basis points on March 15, 2020. In particular, the Federal Reserve’s actions served to lower rates on the short end of the yield curve impacting yields on fed funds, certain floating rate investment securities, and loans with variable rate pricing features.
The yield on earning assets decreased to 4.50% for the first quarter of 2020, as compared to 4.90% in the first quarter of 2019. Average interest-earning assets were $1.18 billion for the first quarter of 2020, compared with $1.01 billion for the first quarter of 2019, a 17.7% increase, primarily attributable to higher average loans. Average loans receivable increased approximately $182.7 million for the first quarter of 2020 compared with the first quarter of 2019. Average loans were positively impacted from the branch purchase transaction on November 15, 2019, which included approximately $126.8 million of loans at the time of purchase, as well as loan growth during 2019 and the first three months of 2020. The increase in average loans resulted in an increase in interest revenue volume of approximately $2.3 million for the quarter ended March 31, 2020, which was offset by a decrease in interest revenue to due declining rate of $933,000, as compared with the first quarter of 2019. Loan fee income can meaningfully impact net interest income, loan yields, and net interest income. The amount of loan fee income included in total interest income represents eight basis points and 22 basis points of yield on earning assets and net interest margin for the first quarter ended March 31, 2020 and 2019, respectively. Total interest income increased 8.9%, or $1.1 million, for the first quarter of 2020 compared to the first quarter of 2019.
The cost of interest-bearing liabilities decreased to 1.45% for the first quarter of 2020, as compared to 1.57% for the first quarter of 2019. Average interest-bearing liabilities increased by 16.4% to $971.6 million for the first quarter of 2020, as compared to $834.6 million for the first quarter of 2019 due to deposit growth and the completion of the branch acquisition on November 15, 2019, which included approximately $131.8 million in deposits at the time of purchase. Total interest expense increased by 8.6% to $3.5 million for the first quarter of 2020 as compared to the first quarter of 2019. The cost of interest-bearing liabilities for the first quarter of 2020 was also impacted by the subordinated debt issuance at a fixed rate of 5.75% in July 2019. As of March 31, 2020, time deposits comprise $467.5 million of the Company’s liabilities with $311.6 million, or 67%, set to mature in 2020.
Average Balance Sheets
The following table presents the average balance sheets for the three-month periods ended March 31, 2020 and 2019, along with the related calculations of tax-equivalent net interest income, net interest margin and net interest spread for the related periods.
|
|
Three Months Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
Average
Balance
|
|
|
Interest
Earned/Paid
|
|
|
Average
Yield/Cost
|
|
|
Average
Balance
|
|
|
Interest
Earned/Paid
|
|
|
Average
Yield/Cost
|
|
|
|
(dollars in thousands)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan receivables (1)(2)
|
|
$
|
949,204
|
|
|
$
|
11,611
|
|
|
|
4.92
|
%
|
|
$
|
766,505
|
|
|
$
|
10,254
|
|
|
|
5.43
|
%
|
Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
193,260
|
|
|
|
1,467
|
|
|
|
3.05
|
|
|
|
191,656
|
|
|
|
1,573
|
|
|
|
3.33
|
|
Tax-exempt (3)
|
|
|
9,989
|
|
|
|
70
|
|
|
|
3.57
|
|
|
|
13,512
|
|
|
|
93
|
|
|
|
3.53
|
|
FHLB stock
|
|
|
6,283
|
|
|
|
40
|
|
|
|
2.56
|
|
|
|
7,068
|
|
|
|
109
|
|
|
|
6.25
|
|
Federal funds sold and other
|
|
|
29,578
|
|
|
|
79
|
|
|
|
1.07
|
|
|
|
31,207
|
|
|
|
157
|
|
|
|
2.04
|
|
Total interest-earning assets
|
|
|
1,188,314
|
|
|
|
13,267
|
|
|
|
4.50
|
%
|
|
|
1,009,948
|
|
|
|
12,186
|
|
|
|
4.90
|
%
|
Less: Allowance for loan losses
|
|
|
(8,287
|
)
|
|
|
|
|
|
|
|
|
|
|
(8,855
|
)
|
|
|
|
|
|
|
|
|
Non-interest earning assets
|
|
|
93,140
|
|
|
|
|
|
|
|
|
|
|
|
74,460
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,273,167
|
|
|
|
|
|
|
|
|
|
|
$
|
1,075,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit and other time deposits
|
|
$
|
481,797
|
|
|
$
|
2,233
|
|
|
|
1.86
|
%
|
|
$
|
459,709
|
|
|
$
|
2,048
|
|
|
|
1.81
|
%
|
NOW and money market deposits
|
|
|
310,046
|
|
|
|
428
|
|
|
|
0.56
|
|
|
|
264,847
|
|
|
|
525
|
|
|
|
0.80
|
|
Savings accounts
|
|
|
74,304
|
|
|
|
111
|
|
|
|
0.60
|
|
|
|
33,557
|
|
|
|
14
|
|
|
|
0.17
|
|
FHLB advances
|
|
|
62,407
|
|
|
|
220
|
|
|
|
1.42
|
|
|
|
45,524
|
|
|
|
281
|
|
|
|
2.50
|
|
Junior subordinated debentures
|
|
|
21,000
|
|
|
|
215
|
|
|
|
4.12
|
|
|
|
21,000
|
|
|
|
263
|
|
|
|
5.08
|
|
Subordinated capital note
|
|
|
17,000
|
|
|
|
242
|
|
|
|
5.73
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Senior debt
|
|
|
5,000
|
|
|
|
56
|
|
|
|
4.50
|
|
|
|
10,000
|
|
|
|
96
|
|
|
|
3.89
|
|
Total interest-bearing liabilities
|
|
|
971,554
|
|
|
|
3,505
|
|
|
|
1.45
|
%
|
|
|
834,637
|
|
|
|
3,227
|
|
|
|
1.57
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing deposits
|
|
|
186,797
|
|
|
|
|
|
|
|
|
|
|
|
142,716
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
7,184
|
|
|
|
|
|
|
|
|
|
|
|
4,709
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,165,535
|
|
|
|
|
|
|
|
|
|
|
|
982,062
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
107,632
|
|
|
|
|
|
|
|
|
|
|
|
93,491
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
1,273,167
|
|
|
|
|
|
|
|
|
|
|
$
|
1,075,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
9,762
|
|
|
|
|
|
|
|
|
|
|
$
|
8,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread
|
|
|
|
|
|
|
|
|
|
|
3.05
|
%
|
|
|
|
|
|
|
|
|
|
|
3.33
|
%
|
Net interest margin
|
|
|
|
|
|
|
|
|
|
|
3.31
|
%
|
|
|
|
|
|
|
|
|
|
|
3.61
|
%
|
(1)
|
Includes loan fees in both interest income and the calculation of yield on loans.
|
(2)
|
Calculations include non-accruing loans averaging $1.5 million and $2.1 million, respectively, in average loan amounts outstanding.
|
(3)
|
Taxable equivalent yields are calculated assuming a federal income tax rate of 21%.
|
Rate/Volume Analysis
The table below sets forth certain 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.
|
|
Three Months Ended March 31,
2020 vs. 2019
|
|
|
|
Increase (decrease)
due to change in
|
|
|
Net
|
|
|
|
Rate
|
|
|
Volume
|
|
|
Change
|
|
|
|
(in thousands)
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan receivables
|
|
$
|
(933
|
)
|
|
$
|
2,290
|
|
|
$
|
1,357
|
|
Securities
|
|
|
(113
|
)
|
|
|
(16
|
)
|
|
|
(129
|
)
|
FHLB stock
|
|
|
(58
|
)
|
|
|
(11
|
)
|
|
|
(69
|
)
|
Federal funds sold and other
|
|
|
(70
|
)
|
|
|
(8
|
)
|
|
|
(78
|
)
|
Total increase (decrease) in interest income
|
|
|
(1,174
|
)
|
|
|
2,255
|
|
|
|
1,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit and other time deposits
|
|
|
85
|
|
|
|
100
|
|
|
|
185
|
|
NOW and money market accounts
|
|
|
(177
|
)
|
|
|
80
|
|
|
|
(97
|
)
|
Savings accounts
|
|
|
66
|
|
|
|
31
|
|
|
|
97
|
|
FHLB advances
|
|
|
(145
|
)
|
|
|
84
|
|
|
|
(61
|
)
|
Junior subordinated debentures
|
|
|
(48
|
)
|
|
|
—
|
|
|
|
(48
|
)
|
Subordinated capital note
|
|
|
—
|
|
|
|
242
|
|
|
|
242
|
|
Senior debt
|
|
|
14
|
|
|
|
(54
|
)
|
|
|
(40
|
)
|
Total decrease in interest expense
|
|
|
(205
|
)
|
|
|
483
|
|
|
|
278
|
|
Increase (decrease) in net interest income
|
|
$
|
(969
|
)
|
|
$
|
1,772
|
|
|
$
|
803
|
|
Non-Interest Income – The following table presents the major categories of non-interest income for the three months ended March 31, 2020 and 2019:
|
|
For the Three Months
|
|
|
|
Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts
|
|
$
|
668
|
|
|
$
|
496
|
|
Bank card interchange fees
|
|
|
750
|
|
|
|
508
|
|
Income from bank owned life insurance
|
|
|
96
|
|
|
|
99
|
|
Other
|
|
|
210
|
|
|
|
181
|
|
Total non-interest income
|
|
$
|
1,724
|
|
|
$
|
1,284
|
|
Non-interest income for the first quarter of 2020 increased by $440,000, or 34.3%, to $1.7 million compared with $1.3 million for the first quarter of 2019. The increase was primarily related to services charges on deposit accounts and bank card interchange fees. The service charges on deposit accounts and interchange fee volume increases are primarily attributable to the deposit accounts acquired in the branch acquisition transaction on November 15, 2019.
Non-interest Expense – The following table presents the major categories of non-interest expense for the three months ended March 31, 2020 and 2019:
|
|
For the Three Months
|
|
|
|
Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Salary and employee benefits
|
|
$
|
4,538
|
|
|
$
|
3,915
|
|
Occupancy and equipment
|
|
|
999
|
|
|
|
898
|
|
Professional fees
|
|
|
208
|
|
|
|
165
|
|
Marketing expense
|
|
|
214
|
|
|
|
227
|
|
FDIC insurance
|
|
|
—
|
|
|
|
108
|
|
Data processing expense
|
|
|
359
|
|
|
|
313
|
|
State franchise and deposit tax
|
|
|
360
|
|
|
|
315
|
|
Deposit account related expenses
|
|
|
451
|
|
|
|
281
|
|
Other real estate owned expense
|
|
|
16
|
|
|
|
166
|
|
Litigation and loan collection expense
|
|
|
65
|
|
|
|
46
|
|
Communications expense
|
|
|
218
|
|
|
|
190
|
|
Insurance expense
|
|
|
103
|
|
|
|
114
|
|
Postage and delivery
|
|
|
168
|
|
|
|
141
|
|
Other
|
|
|
536
|
|
|
|
402
|
|
Total non-interest expense
|
|
$
|
8,235
|
|
|
$
|
7,281
|
|
Non-interest expense for the first quarter ended March 31, 2020 increased $954,000, or 13.1%, to $8.2 million compared with $7.3 million for the first quarter of 2019. The increase from the first quarter of 2019 was primarily due to an increase in salaries and employee benefits of $623,000, as the Bank added sales talent and customer facing associates during the latter half of 2019 and branch staff added in connection with the branch purchase transaction. Deposit account related expense increased $170,000, which correlated to the growth in interchange fees. OREO expense decreased $150,000 as the first quarter of 2020 had no valuation write-downs as compared to write-downs of $150,000 in the first quarter of 2019. No FDIC insurance premium expense was recorded in the first quarter of 2020 as the Bank utilized assessment credits. FDIC insurance expense is expected to return to normalized levels in the second quarter of 2020.
Income Tax Expense – Effective tax rates differ from the federal statutory rate of 21% applied to income before income taxes due to the following:
|
|
For the Three Months
|
|
|
|
Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Federal statutory rate times financial statement income
|
|
$
|
462
|
|
|
$
|
622
|
|
Effect of:
|
|
|
|
|
|
|
|
|
Tax-exempt income
|
|
|
(14
|
)
|
|
|
(19
|
)
|
Establish state deferred tax asset
|
|
|
(72
|
)
|
|
|
(341
|
)
|
Non-taxable life insurance income
|
|
|
(20
|
)
|
|
|
(21
|
)
|
Restricted stock vesting
|
|
|
(1
|
)
|
|
|
(126
|
)
|
Other, net
|
|
|
6
|
|
|
|
8
|
|
Total
|
|
$
|
361
|
|
|
$
|
123
|
|
Net income before taxes and income tax expense was $2.2 million and $361,000, respectively for the first quarter of 2020, compared with $3.0 million and $123,000, respectively for the first quarter of 2019. Income tax expense for the first quarter of 2019 benefitted $341,000 from the establishment of a net deferred tax asset related to a change in Kentucky tax law enacted during the first quarter of 2019. The new law eliminates the Kentucky bank franchise tax, which is assessed at a rate of 1.1% of average capital and implements a state income tax for the Bank at a statutory rate of 5%. The new Kentucky income tax will go into effect on January 1, 2021.
Analysis of Financial Condition
Total assets increased $28.4 million, or 2.3%, to $1.27 billion at March 31, 2020, from $1.25 billion at December 31, 2019. This increase was primarily attributable to an increase in loans receivable of $35.3 million, partially offset by a decrease in securities available for sale of $10.3 million.
Loans Receivable – Loans receivable increased $35.3 million, or 3.8%, during the three months ended March 31, 2020 to $961.6 million as loan growth outpaced paydowns. Our commercial and commercial real estate portfolios increased by an aggregate of $37.8 million, or 6.9% during the first quarter of 2020 and comprised 60.6% of the loan portfolio at March 31, 2020. Residential real estate and consumer portfolios decreased by an aggregate of $4.3 million, or 1.3% during the first quarter of 2020 and comprised 35.5% of the loan portfolio at March 31, 2020.
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 March 31,
|
|
|
As of December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
169,176
|
|
|
|
17.59
|
%
|
|
$
|
145,551
|
|
|
|
15.71
|
%
|
Commercial Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
71,267
|
|
|
|
7.41
|
|
|
|
64,911
|
|
|
|
7.01
|
|
Farmland
|
|
|
80,579
|
|
|
|
8.38
|
|
|
|
79,118
|
|
|
|
8.54
|
|
Nonfarm nonresidential
|
|
|
261,807
|
|
|
|
27.23
|
|
|
|
255,459
|
|
|
|
27.58
|
|
Residential Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
75,525
|
|
|
|
7.85
|
|
|
|
70,950
|
|
|
|
7.66
|
|
1-4 Family
|
|
|
220,701
|
|
|
|
22.95
|
|
|
|
226,629
|
|
|
|
24.47
|
|
Consumer
|
|
|
44,814
|
|
|
|
4.66
|
|
|
|
47,790
|
|
|
|
5.16
|
|
Agriculture
|
|
|
36,977
|
|
|
|
3.85
|
|
|
|
35,064
|
|
|
|
3.79
|
|
Other
|
|
|
715
|
|
|
|
0.08
|
|
|
|
799
|
|
|
|
0.08
|
|
Total loans
|
|
$
|
961,561
|
|
|
|
100.00
|
%
|
|
$
|
926,271
|
|
|
|
100.00
|
%
|
Loan Portfolio by Risk Category – The following table presents a summary of the loan portfolio at the dates indicated, by risk category.
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
|
|
Loans
|
|
|
% to
Total
|
|
|
Loans
|
|
|
% to
Total
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
915,985
|
|
|
|
95.3
|
%
|
|
$
|
888,707
|
|
|
|
95.9
|
%
|
Watch
|
|
|
38,464
|
|
|
|
4.0
|
|
|
|
27,522
|
|
|
|
3.0
|
|
Special Mention
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Substandard
|
|
|
7,112
|
|
|
|
0.7
|
|
|
|
10,042
|
|
|
|
1.1
|
|
Doubtful
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
961,561
|
|
|
|
100.0
|
%
|
|
$
|
926,271
|
|
|
|
100.00
|
%
|
Loans receivable increased $35.3 million, or 3.8%, during the three months ended March 31, 2020. Since December 31, 2019, the pass category increased approximately $27.3 million, the watch category increased approximately $10.9 million, and the substandard category decreased approximately $2.9 million. The increase in watch category primarily related to $9.6 million in commercial loans migrating during the first quarter of 2020. The $2.9 million decrease in loans classified as substandard was primarily driven by $3.2 million in payments, $305,000 in charge-offs, and $27,000 in loans upgraded from substandard offset by $563,000 in loans moved to substandard during the quarter.
Loan Delinquency – The following table presents a summary of loan delinquencies at the dates indicated.
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
|
|
(in thousands)
|
|
Past Due Loans:
|
|
|
|
|
|
|
|
|
30-59 Days
|
|
$
|
1,158
|
|
|
$
|
1,747
|
|
60-89 Days
|
|
|
248
|
|
|
|
670
|
|
90 Days and Over
|
|
|
—
|
|
|
|
—
|
|
Total Loans Past Due 30-90+ Days
|
|
|
1,406
|
|
|
|
2,417
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual Loans
|
|
|
1,500
|
|
|
|
1,528
|
|
Total Past Due and Nonaccrual Loans
|
|
$
|
2,906
|
|
|
$
|
3,945
|
|
During the three months ended March 31, 2020, nonaccrual loans decreased by $28,000 to $1.5 million. During the three months ended March 31, 2020, loans past due 30-59 days decreased from $1.7 million at December 31, 2019 to $1.2 million at March 31, 2020. Loans past due 60-89 days decreased from $670,000 at December 31, 2019 to $248,000 at March 31, 2020. This represents a $1.0 million decrease from December 31, 2019 to March 31, 2020, 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 the allowance for loan losses.
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 March 31, 2020 and December 31, 2019, the Bank had three restructured loans totaling $466,000 and $475,000, respectively, with borrowers who experienced deterioration in financial condition. In general, these loans were granted interest rate reductions to provide cash flow relief to borrowers experiencing cash flow difficulties. The Bank had no restructured loans that had been granted principal payment deferrals until maturity at March 31, 2020 or December 31, 2019. 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 or commercial real estate properties. At March 31, 2020 and December 31, 2019, all TDRs were performing according to their modified terms.
There were no modifications granted during 2020 and two modifications granted during 2019 that resulted in loans being identified as TDRs. See “Note 3 – Loans,” to the financial statements for additional disclosure related to troubled debt restructuring.
COVID-19 Short-term Loan Concessions - In response to requests from borrowers who have been impacted by COVID-19 through business and cash flow interruption, the Bank made short-term loan modifications as defined under section 4013 of the Coronavirus Aid Relief and Economic Security Act ("CARES Act") involving principal deferrals (interest only) and, in other cases, principal and interest deferrals. The following table details those modifications by loan category and type as of March 31, 2020 and April 29, 2020:
|
|
March 31, 2020
|
|
|
April 29, 2020
|
|
|
|
Amount
|
|
|
Number
|
|
|
Amount
|
|
|
Number
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest only
|
|
$
|
103
|
|
|
|
4
|
|
|
$
|
392
|
|
|
|
7
|
|
Principal and interest deferral
|
|
|
413
|
|
|
|
6
|
|
|
|
10,578
|
|
|
|
25
|
|
Commercial Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest only
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Principal and interest deferral
|
|
|
—
|
|
|
|
—
|
|
|
|
7,052
|
|
|
|
4
|
|
Farmland:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest only
|
|
|
—
|
|
|
|
—
|
|
|
|
9
|
|
|
|
1
|
|
Principal and interest deferral
|
|
|
498
|
|
|
|
4
|
|
|
|
2,296
|
|
|
|
14
|
|
Nonfarm nonresidential:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest only
|
|
|
4,796
|
|
|
|
15
|
|
|
|
18,217
|
|
|
|
31
|
|
Principal and interest deferral
|
|
|
3,877
|
|
|
|
7
|
|
|
|
86,534
|
|
|
|
59
|
|
Residential Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest only
|
|
|
—
|
|
|
|
—
|
|
|
|
1,740
|
|
|
|
2
|
|
Principal and interest deferral
|
|
|
188
|
|
|
|
1
|
|
|
|
619
|
|
|
|
2
|
|
1-4 Family:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest only
|
|
|
143
|
|
|
|
2
|
|
|
|
4,450
|
|
|
|
17
|
|
Principal and interest deferral
|
|
|
2,046
|
|
|
|
11
|
|
|
|
11,291
|
|
|
|
66
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest only
|
|
|
50
|
|
|
|
5
|
|
|
|
74
|
|
|
|
8
|
|
Principal and interest deferral
|
|
|
7
|
|
|
|
2
|
|
|
|
41
|
|
|
|
5
|
|
Agriculture:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest only
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Principal and interest deferral
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest only
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Principal and interest deferral
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total modified loans
|
|
$
|
12,121
|
|
|
|
57
|
|
|
$
|
143,293
|
|
|
|
241
|
|
Retail purpose commercial real estate operators, as well as hotel and restaurant operators, have been disproportionately impacted by COVID-19. As of March 31, 2020, the Bank had loans totaling $63.9 million secured by retail purpose commercial real estate, $50.4 million secured by hotel and lodging real estate, and $30.9 million secured by limited and full-service restaurant real estate, or 6.6%, 5.2%, and 3.2% of total loans, respectively. As of April 29, 2020, loans with outstanding principal balances of $22.9 million for retail purpose commercial real estate, $49.2 million for hotel and lodging real estate, and $21.9 million for limited and full-service restaurant real estate were granted principal and interest deferrals.
The Bank is also working with borrowers to secure SBA guaranteed financing for those who qualify through the SBA Paycheck Protection Program, which became available in early April through the CARES Act. As of April 29, 2020, the Bank had secured loan guarantees for 414 borrowers totaling approximately $40.5 million.
Non-Performing Assets – Non-performing assets consist of certain restructured loans for which interest rate or other terms have been renegotiated, loans past due 90 days or more still on accrual, loans on which interest is no longer accrued, real estate acquired through foreclosure and repossessed assets. The following table sets forth information with respect to non-performing assets as of March 31, 2020 and December 31, 2019.
|
|
March
31,
2020
|
|
|
December
31,
2019
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Loans on nonaccrual status
|
|
$
|
1,500
|
|
|
$
|
1,528
|
|
Troubled debt restructurings on accrual
|
|
|
466
|
|
|
|
475
|
|
Past due 90 days or more still on accrual
|
|
|
—
|
|
|
|
—
|
|
Total non-performing loans
|
|
|
1,966
|
|
|
|
2,003
|
|
Real estate acquired through foreclosure
|
|
|
3,225
|
|
|
|
3,225
|
|
Other repossessed assets
|
|
|
—
|
|
|
|
—
|
|
Total non-performing assets
|
|
$
|
5,191
|
|
|
$
|
5,228
|
|
|
|
|
|
|
|
|
|
|
Non-performing loans to total loans
|
|
|
0.20
|
%
|
|
|
0.22
|
%
|
Non-performing assets to total assets
|
|
|
0.41
|
%
|
|
|
0.42
|
%
|
Allowance for non-performing loans
|
|
$
|
33
|
|
|
$
|
48
|
|
Allowance for non-performing loans to non-performing loans
|
|
|
1.68
|
%
|
|
|
2.40
|
%
|
Nonperforming loans at March 31, 2020, were $2.0 million, or 0.20% of total loans, compared with $2.0 million, or 0.22% of total loans at December 31, 2019, and $2.8 million, or 0.36% of total loans at March 31, 2019.
Provision and Allowance for Loan Losses – The Bank maintains an allowance for loan losses believed to be sufficient to absorb probable incurred losses existing in the loan portfolio. Management evaluates the adequacy of the allowance using, among other things, historical loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of the underlying collateral and current economic conditions and trends. The allowance may be allocated for specific loans or loan categories, but the entire allowance is available for any loan. The allowance consists of specific and general components. The specific component relates to loans that are individually evaluated and measured for impairment. The general component is based on historical loss experience adjusted for qualitative environmental factors. Management develops allowance estimates based on actual loss experience adjusted for current economic conditions and trends. Allowance estimates are a prudent measurement of the risk in the loan portfolio applied to individual loans based on loan type. If the mix and amount of future charge-off percentages differ significantly from the assumptions used by management in making its determination, management may be required to materially increase its allowance for loan losses and provision for loan losses, which could adversely affect results.
While the Company has experienced historically strong trends in asset quality over the last several quarters and management’s assessment of risk in the loan portfolio has been low, a provision of $1.05 million was recorded in the first quarter of 2020 compared to no provision for loan losses in the first quarter of 2019. The first quarter 2020 loan loss provision was attributable to the level of net loan charge-offs for the quarter, the impact of the increase in loan volume within the portfolio over the quarter, and to changes in the economic and business environment attributable to COVID-19, the state and national emergencies that have been declared and the resultant risk the pandemic poses for business disruptions for the Bank’s borrowers.
While the Company expects the U.S. Government’s economic response to the COVID-19 pandemic through monetary policy and fiscal stimulus will provide meaningful support to the economy, management deemed it prudent to increase the allowance for loan losses through its qualitative environmental factors to account for the pandemic risk.
The following table sets forth an analysis of loan loss experience as of and for the periods indicated:
|
|
Three Months Ended
March 31,
|
|
|
Year Ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2019
|
|
|
|
(dollars in thousands)
|
|
Balances at beginning of period
|
|
$
|
8,376
|
|
|
$
|
8,880
|
|
|
$
|
8,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans charged-off:
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
|
|
|
104
|
|
|
|
97
|
|
|
|
322
|
|
Commercial
|
|
|
29
|
|
|
|
—
|
|
|
|
37
|
|
Consumer
|
|
|
161
|
|
|
|
180
|
|
|
|
663
|
|
Agriculture
|
|
|
41
|
|
|
|
1
|
|
|
|
266
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total charge-offs
|
|
|
335
|
|
|
|
278
|
|
|
|
1,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
|
|
|
41
|
|
|
|
63
|
|
|
|
597
|
|
Commercial
|
|
|
5
|
|
|
|
5
|
|
|
|
106
|
|
Consumer
|
|
|
4
|
|
|
|
16
|
|
|
|
75
|
|
Agriculture
|
|
|
8
|
|
|
|
—
|
|
|
|
3
|
|
Other
|
|
|
1
|
|
|
|
—
|
|
|
|
3
|
|
Total recoveries
|
|
|
59
|
|
|
|
84
|
|
|
|
784
|
|
Net charge-offs (recoveries)
|
|
|
276
|
|
|
|
194
|
|
|
|
504
|
|
Provision (negative provision) for loan losses
|
|
|
1,050
|
|
|
|
—
|
|
|
|
—
|
|
Balance at end of period
|
|
$
|
9,150
|
|
|
$
|
8,686
|
|
|
$
|
8,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses to period-end loans
|
|
|
0.95
|
%
|
|
|
1.10
|
%
|
|
|
0.90
|
%
|
Net charge-offs (recoveries) to average loans
|
|
|
0.12
|
%
|
|
|
0.10
|
%
|
|
|
0.06
|
%
|
Allowance for loan losses to non-performing loans
|
|
|
465.41
|
%
|
|
|
306.82
|
%
|
|
|
418.17
|
%
|
The allowance for loan losses to total loans was 0.95% at March 31, 2020, compared to 0.90% at December 31, 2019, and 1.10% at March 31, 2019. Loans acquired in the November 2019 branch transaction totaled $118.0 million at March 31, 2020 and $124.7 million at December 31, 2019. These loans were recorded at fair value as determined by an independent third party. The remaining discount associated with the fair value purchase accounting adjustments on the acquired loans was $427,000 at March 31, 2020, compared to $480,000 at December 31, 2019. Any subsequent deterioration of these acquired loans may require an adjustment through the allowance for loan loss. Excluding loans acquired in the November 2019 branch transaction, the allowance for loan losses to total loans was 1.08% and 1.04% at March 31, 2020 and December 31, 2019, respectively. Net loan charge-offs were $276,000 for the first quarter of 2020, compared to $194,000 for the first quarter of 2019. The allowance for loan losses to non-performing loans was 465.41% at March 31, 2020, compared with 418.17% at December 31, 2019, and 306.82% at March 31, 2019. Net charge-offs in the first three months of 2019 totaled $276,000 compared to net charge-offs of $194,000 in the first three months of 2019.
The majority of nonperforming loans are secured by real estate collateral, and the underlying collateral coverage for nonperforming loans supports the likelihood of collection of principal. Management has assessed these loans for collectability and considered, among other things, the borrower’s ability to repay, the value of the underlying collateral, and other market conditions to ensure the allowance for loan losses is adequate to absorb probable incurred losses. Based on prior charge-offs, the current recorded investment 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 balance for those loans. The recorded investment net of the allocated allowance was 56.44% and 47.50% of the unpaid principal balance in the commercial real estate and residential real estate segments of the portfolio, respectively, at March 31, 2020.
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, and collateralized loan obligations. The investment portfolio decreased by $10.3 million, or 4.9%, to $198.7 million at March 31, 2020, compared with $209.0 million at December 31, 2019.
The following table sets forth the carrying value of our securities portfolio at the dates indicated:
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
|
|
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 andfederal agencies
|
|
$
|
20,751
|
|
|
$
|
353
|
|
|
$
|
—
|
|
|
$
|
21,104
|
|
|
$
|
22,281
|
|
|
$
|
196
|
|
|
$
|
(147
|
)
|
|
$
|
22,330
|
|
Agency mortgage-backed residential
|
|
|
86,840
|
|
|
|
2,428
|
|
|
|
(167
|
)
|
|
|
89,101
|
|
|
|
91,269
|
|
|
|
1,186
|
|
|
|
(255
|
)
|
|
|
92,200
|
|
Collateralized loan obligations
|
|
|
44,732
|
|
|
|
—
|
|
|
|
(3,978
|
)
|
|
|
40,754
|
|
|
|
49,831
|
|
|
|
—
|
|
|
|
(412
|
)
|
|
|
49,419
|
|
State and municipal
|
|
|
28,301
|
|
|
|
346
|
|
|
|
(493
|
)
|
|
|
28,154
|
|
|
|
27,819
|
|
|
|
550
|
|
|
|
(3
|
)
|
|
|
28,366
|
|
Corporate bonds
|
|
|
20,831
|
|
|
|
199
|
|
|
|
(1,486
|
)
|
|
|
19,544
|
|
|
|
16,472
|
|
|
|
213
|
|
|
|
—
|
|
|
|
16,685
|
|
Total available for sale
|
|
$
|
201,455
|
|
|
$
|
3,326
|
|
|
$
|
(6,124
|
)
|
|
$
|
198,657
|
|
|
$
|
207,672
|
|
|
$
|
2,145
|
|
|
$
|
(817
|
)
|
|
$
|
209,000
|
|
The Bank owns Collateralized Loan Obligations (CLOs), which are debt securities secured by professionally managed portfolios of senior-secured loans to corporations. CLOs are typically managed 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, prepayments on the underlying loans, and other conditions or economic factors. The fair value of the Bank’s CLOs declined by approximately $3.6 million, or 8% of amortized cost, during the first quarter of 2020 as market liquidity within the CLO sector was disrupted by COVID-19.
Although the Bank attempts 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 March 31, 2020, $25.7 million and $15.0 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 2019 or in the first quarter of 2020. Stress testing was completed on each security in the CLO portfolio as of quarter-end. Each security in the portfolio passed, without dollar loss, a stress scenario characterized as severe, which assumed a ten percent per annum constant prepayment rate, a twelve percent per annum constant default rate for four years followed by a four percent rate thereafter, and a forty-five percent recovery rate on a one-year lag. During the first quarter, one of the CLOs in the investment portfolio rated AA with a book value of $5.0 million was called and redeemed at par value or $5.0 million by the issuer. The Bank’s CLOs are all floating rate with rates set on a quarterly basis at three-month LIBOR plus a spread.
The fair value of the Bank’s corporate bond portfolio was also impacted by market disruption and declining rates, resulting in a fair value decline of approximately $1.5 million, or 7% of amortized cost, during the first quarter. The corporate bond portfolio consists of ten subordinated debt securities of U.S. banks and bank holding companies with maturities ranging from 2024 to 2037. The securities are either fixed for five years converting to floating at an index over LIBOR or floating at an index over LIBOR from inception. Management regularly monitors the financial condition of these corporate issuers by reviewing their regulatory and public filings.
The Bank has the intent and ability to hold its CLO and corporate debt securities to maturity and, at this juncture, has determined the value decline is temporary in nature.
Foreclosed Properties – Foreclosed properties at March 31, 2020 were $3.2 million compared with $3.3 million at March 31, 2019 and $3.2 million at December 31, 2019. See Note 5, “Other Real Estate Owned,” to the financial statements. Management values foreclosed properties at fair value less estimated costs to sell when acquired and expects to liquidate these properties to recover the 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.
Operating expenses for OREO totaled $16,000 for the three months ended March 31, 2020, compared to write-downs and operating expenses of $166,000 for the three months ended March 31, 2019. There were no fair value write-downs recorded during the three months ended March 31, 2020, compared with write-downs of $150,000 for the three months ended March 31, 2019.
Liabilities – Total liabilities at March 31, 2020 were $1.2 billion compared with $1.1 billion at December 31, 2019, an increase of $29.7 million, or 2.6%. This increase was primarily attributable to an increase in total deposits of $30.9 million.
Deposits are the primary source of funds. The following table sets forth the average daily balances and weighted average rates paid for deposits for the periods indicated:
|
|
For the Three Months
|
|
|
For the Year
|
|
|
|
Ended March 31,
|
|
|
Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
|
Balance
|
|
|
Rate
|
|
|
Balance
|
|
|
Rate
|
|
|
|
(dollars in thousands)
|
|
Demand
|
|
$
|
186,797
|
|
|
|
|
|
|
$
|
151,299
|
|
|
|
|
|
Interest checking
|
|
|
153,965
|
|
|
|
0.36
|
%
|
|
|
104,077
|
|
|
|
0.30
|
%
|
Money market
|
|
|
156,081
|
|
|
|
0.74
|
|
|
|
161,610
|
|
|
|
1.06
|
|
Savings
|
|
|
74,304
|
|
|
|
0.60
|
|
|
|
36,035
|
|
|
|
0.19
|
|
Certificates of deposit
|
|
|
481,797
|
|
|
|
1.86
|
|
|
|
483,222
|
|
|
|
1.98
|
|
Total deposits
|
|
$
|
1,052,944
|
|
|
|
1.06
|
%
|
|
$
|
936,243
|
|
|
|
1.25
|
%
|
The following table shows at March 31, 2020 the amount of time deposits of $250,000 or more by time remaining until maturity (in thousands):
Maturity Period
|
|
(in thousands)
|
|
|
|
|
Three months or less
|
|
$
|
29,235
|
|
Three months through six months
|
|
|
13,076
|
|
Six months through twelve months
|
|
|
15,633
|
|
Over twelve months
|
|
|
6,956
|
|
Total
|
|
$
|
64,900
|
|
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 the Company meets 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 March 31, 2020, the Bank had an unused borrowing capacity with the FHLB of $53.6 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 lines 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 March 31, 2020, the Bank had no brokered deposits.
The Company uses cash on hand to service senior debt, the subordinated capital note, 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. The senior debt loan agreement requires the Company to maintain a minimum of $2.5 million in cash on hand. At March 31, 2020, cash on hand totaled $3.8 million.
Capital
Stockholders’ equity decreased $1.2 million to $104.5 million at March 31, 2020, compared with $105.8 million at December 31, 2019 primarily due to the other comprehensive loss for the quarter of $3.1 million, offset by current year net income of $1.8 million.
The following table shows the ratios of Tier 1 capital, common equity Tier 1 capital, and total capital to risk-adjusted assets and the leverage ratios (excluding the capital conservation buffer) for the Bank at the dates indicated:
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Regulatory Minimums
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Well-Capitalized
Minimums
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March 31, 2020
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December 31, 2019
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Tier 1 Capital
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6.0
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%
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8.0
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%
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11.50
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%
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11.25
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%
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Common equity Tier 1 capital
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4.5
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6.5
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11.50
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11.25
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Total risk-based capital
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8.0
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10.0
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12.38
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12.08
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Tier 1 leverage ratio
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4.0
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5.0
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9.67
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9.99
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Failure to meet minimum capital requirements could result in discretionary actions by regulators that, if taken, could have a materially adverse effect on our financial condition.
The Basel III rules also established a “capital conservation buffer” of 2.5% above the regulatory minimum risk-based capital ratios. 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%. 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.