Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation
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 fourteen Kentucky counties. 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 offices in Barren, Butler, Daviess, Edmonson, Green, Hardin, Hart, Ohio, and Warren Counties. The Bank also has an office in Lexington, the second largest city in the state, and Frankfort, the state capital. The Bank is a traditional community bank with a wide range of personal and business banking products and services.
The following discussion should be read in conjunction with the Company’s consolidated financial statements and accompanying notes and other schedules presented elsewhere in the report.
Overview
For the year ended December 31, 2020, the Company reported net income of $9.0 million compared with net income of $10.5 million for the year ended December 31, 2019 and net income of $8.8 million for the year ended December 31, 2018. Basic and diluted income per common share were $1.20 for the year ended December 31, 2020, compared with net income per common share of $1.41 for 2019, and net income per common share of $1.23 for 2018.
Net income before taxes was $10.6 million for the year ended December 31, 2020 compared to $11.0 million for the year ended December 31, 2019. Income tax expense was $1.6 million for 2020 and $480,000 for 2019. For 2020 and 2019, income tax expense benefitted from the establishment of a net deferred tax assets related to a change in Kentucky tax law enacted during 2019. Income tax expense benefitted $478,000 and $1.6 million for the years ended December 31, 2020 and 2019, respectively, or $0.06 per basic and diluted common share, and $0.21 per basic and diluted common share, respectively. 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 went into effect on January 1, 2021.
The following significant items are of note for the year ended December 31, 2020:
|
●
|
Loan growth outpaced paydowns during 2020. Average loans receivable increased approximately $162.3 million, or 20.2%, to $964.1 million for the year ended December 31, 2020, compared with $801.8 million for the year ended December 31, 2019. Loan interest income benefited from an increase in interest revenue volume of approximately $7.9 million, which was offset by a decrease in interest revenue of $5.0 million due to declining rates for the year ended December 31, 2020, compared with the year ended December 31, 2019. Average loans for 2020 were positively impacted by the branch purchase transaction on November 15, 2019, which included $126.8 million in loans at the time of purchase, along with loan growth during 2020 and 2019, as well as $42.4 million of loans originated under the SBA Paycheck Protection Program (“PPP”) in 2020. After forgiveness and paydowns, PPP loans declined to $20.3 million at December 31, 2020.
|
|
●
|
Net interest margin decreased four basis points to 3.36% for the year ended 2020 compared with 3.40% in the year ended December 31, 2019. The yield on earning assets decreased to 4.20% in 2020, compared to 4.76% in 2019. The yield on earning assets was negatively impacted by 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 and an additional 150 basis points in March 2020. The negative impact of falling rates was offset by $1.1 million in fees earned on PPP loans during 2020. The cost of interest-bearing liabilities decreased to 1.05% in 2020 from 1.66% in 2019 as a result of decreases in short-term interest rates during 2019 and 2020 and an improvement in deposit mix.
|
|
●
|
A provision for loan losses of $4.4 million was recorded in 2020, compared to no provision for loan losses in 2019. The 2020 loan loss provisions were attributable to the net loan charge-offs during the year, trends within the portfolio during the year, and primarily 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 which may lead to credit quality deterioration. Net loan charge-offs were $333,000 for 2020, compared to net loan charge-offs of $504,000 for 2019 and net loan recoveries of $1.2 million for 2018.
|
|
●
|
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. Deferrals were 16.6% of the total loan portfolio at June 30, 2020 and declined to 1.6% at December 31, 2020. See the table under the “COVID-19 Short-term Loan Concessions” section for detailed discussion.
|
|
●
|
The ratio of non-performing assets to total assets decreased to 0.30% at December 31, 2020, compared with 0.42% at December 31, 2019, and 0.60% at December 31, 2018.
|
|
●
|
The Bank made significant progress improving deposit mix throughout 2020. Deposits were $1.12 billion at December 31, 2020, compared with $1.03 billion at December 31, 2019. Non-interest bearing demand deposits increased $55.5 million, or 29.6%, to $243.0 million compared with $187.6 million at December 31, 2019. Interest checking accounts increased $44.6 million, or 30.5%, to $190.6 million at December 31, 2020, compared with $146.0 million at December 31, 2019. Money market accounts increased $14.9 million or 9.3% to $175.8 million compared with $160.8 million at December 31, 2019. Savings accounts increased $86.6 million to $142.6 million compared to $56.0 million at December 31, 2019. Certificate of deposit balances decreased $109.0 million, or 22.9%, to $367.6 million at December 31, 2020, from $476.5 million at December 31, 2019.
|
|
●
|
On July 31, 2020, the Company completed the issuance of an additional $8.0 million in subordinated notes pursuant to the July 23, 2019 indenture under which the Company’s outstanding subordinated notes were previously issued. The Company used $5.0 million of the net proceeds from the offering to retire its senior secured debt and retained the remaining balance for general corporate purposes. The subordinated capital notes qualify as Tier 2 regulatory capital.
|
These items are discussed in further detail throughout this Item 7.
Application of Critical Accounting Policies
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.
Allowance for Loan Losses – The Bank maintains an allowance for loan losses believed to be sufficient to absorb probable incurred credit losses existing in the loan portfolio. The Board of Directors evaluates the adequacy of the allowance for loan losses on a quarterly basis. 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 also 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.
Results of Operations
The following table summarizes components of income and expense and the change in those components for 2020 compared with 2019:
|
|
For the
Years Ended December 31,
|
|
|
Change from Prior Period
|
|
|
|
2020
|
|
|
2019
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(dollars in thousands)
|
|
Gross interest income
|
|
$
|
50,753
|
|
|
$
|
49,584
|
|
|
$
|
1,169
|
|
|
|
2.4
|
%
|
Gross interest expense
|
|
|
10,152
|
|
|
|
14,234
|
|
|
|
(4,082
|
)
|
|
|
(28.7
|
)
|
Net interest income
|
|
|
40,601
|
|
|
|
35,350
|
|
|
|
5,251
|
|
|
|
14.9
|
|
Provision for loan losses
|
|
|
4,400
|
|
|
|
—
|
|
|
|
4,400
|
|
|
|
100.0
|
|
Non-interest income
|
|
|
6,849
|
|
|
|
5,923
|
|
|
|
926
|
|
|
|
15.6
|
|
Gains on sale of securities, net
|
|
|
(5
|
)
|
|
|
(5
|
)
|
|
|
—
|
|
|
|
—
|
|
Non-interest expense
|
|
|
32,416
|
|
|
|
30,270
|
|
|
|
2,146
|
|
|
|
7.1
|
|
Net income before taxes
|
|
|
10,629
|
|
|
|
10,998
|
|
|
|
(369
|
)
|
|
|
(3.4
|
)
|
Income tax expense
|
|
|
1,624
|
|
|
|
480
|
|
|
|
1,144
|
|
|
|
238.3
|
|
Net income
|
|
|
9,005
|
|
|
|
10,518
|
|
|
|
(1,513
|
)
|
|
|
(14.4
|
)
|
Net income of $9.0 million for the year ended December 31, 2020 decreased by $1.5 million from net income of $10.5 million for 2019. Income tax expense for 2020 and 2019 benefitted $478,000 and $1.6 million, respectively, from the establishment of a state net deferred tax asset related to the 2019 tax law enactments. The new laws eliminate 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 went into effect on January 1, 2021. A provision for loan losses of $4.4 million was recorded in 2020, compared to no provision for loan losses expense in 2019. The 2020 loan loss provision was attributable to the net loan charge-offs during the year, trends within the portfolio during the year, and primarily to changes in the economic and business environment attributable to COVID-19.
Non-interest income increased $926,000 during 2020. There was an increase of $938,000 in bank card interchange fees, primarily as a result of the deposit accounts acquired in the branch purchase transaction.
Non-interest expense increased $2.1 million during 2020 due primarily to an increase in salaries and employee benefits of $1.5 million, $666,000 in deposit account related expense, and $479,000 in occupancy expense. The Bank added sales talent and customer facing associates during the latter half of 2019 and branch staff in connection with the branch purchase transaction in November 2019. These increases were muted somewhat by efforts in 2020 to reduce FTEs from 248 at March 31, 2020 to 219 as of December 31, 2020 through attrition and workforce reduction. The increase in deposit account related expense and occupancy expense is the result of the branch purchase transaction.
The following table summarizes components of income and expense and the change in those components for 2019 compared with 2018:
|
|
For the
Years Ended December 31,
|
|
|
Change from Prior Period
|
|
|
|
2019
|
|
|
2018
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(dollars in thousands)
|
|
Gross interest income
|
|
$
|
49,584
|
|
|
$
|
43,461
|
|
|
$
|
6,123
|
|
|
|
14.1
|
%
|
Gross interest expense
|
|
|
14,234
|
|
|
|
9,790
|
|
|
|
4,444
|
|
|
|
45.4
|
|
Net interest income
|
|
|
35,350
|
|
|
|
33,671
|
|
|
|
1,679
|
|
|
|
5.0
|
|
Provision (negative provision) for loan losses
|
|
|
—
|
|
|
|
(500
|
)
|
|
|
500
|
|
|
|
(100.0
|
)
|
Non-interest income
|
|
|
5,923
|
|
|
|
5,785
|
|
|
|
138
|
|
|
|
2.4
|
|
Gains on sale of securities, net
|
|
|
(5
|
)
|
|
|
(6
|
)
|
|
|
1
|
|
|
|
(16.7
|
)
|
Non-interest expense
|
|
|
30,270
|
|
|
|
29,126
|
|
|
|
1,144
|
|
|
|
3.9
|
|
Net income before taxes
|
|
|
10,998
|
|
|
|
10,824
|
|
|
|
174
|
|
|
|
1.6
|
|
Income tax expense
|
|
|
480
|
|
|
|
2,030
|
|
|
|
(1,550
|
)
|
|
|
(76.4
|
)
|
Net income
|
|
|
10,518
|
|
|
|
8,794
|
|
|
|
1,724
|
|
|
|
19.6
|
|
Net income of $10.5 million for the year ended December 31, 2019 increased by $1.7 million from net income of $8.8 million for 2018. Income tax expense for 2019 benefitted $1.6 million from the establishment of a state net deferred tax asset related to the 2019 tax law enactments. The new laws eliminate 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 went into effect on January 1, 2021. Based upon historically strong trends in asset quality and management’s assessment of risk within the portfolio, the Company recorded no provision for loan losses expense in 2019, compared to $500,000 negative provision for loan losses expense for 2018. Non-interest income increased $139,000 million during 2019. There was an increase of $607,000 in bank card interchange fees, partially offset by a decrease in other non-interest income of $468,000 related to the $150,000 one-time gain on the sale of the secondary market residential servicing rights portfolio in the third quarter of 2018 and a $632,000 gain on the sale of a subdivided lot at the Company’s headquarters offset by a $392,000 impairment charge associated with the transfer of the Bank’s former data processing center to Premises Held for Sale in the fourth quarter of 2018.
Non-interest expense increased $1.1 million during 2019 due primarily to $775,000 of expenses attributable to the branch purchase transaction. There was also an increase of $744,000 in salary and employee benefits, as the Bank added sales talent and customer facing associates during 2019, and branch staff added in connection with the branch purchase transaction. Deposit account related expense increased $401,000, which was offset by decreases in OREO expenses of $500,000, and FDIC insurance expense of $346,000.
Net Interest Income – Net interest income was $40.6 million for the year ended December 31, 2020, an increase of $5.3 million, or 14.9%, compared with $35.4 million for the same period in 2019. Net interest spread and margin were 3.15% and 3.36%, respectively, for 2020, compared with 3.10% and 3.40%, respectively, for 2019.
The interest rate environment was challenging during 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 4.20% for the year ended December 31, 2020, as compared to 4.76% for the year ended December 31, 2019. The yield on earning assets was negatively impacted by falling interest rates on the Bank’s fed funds, certain floating rate investment securities, loans with variable rate repricing features, and new loan production during the year. Average loans increased approximately $162.3 million during 2020. Average loans were positively impacted from the branch purchase transaction on November 15, 2019, along with loan growth during 2019 and 2020, as well as PPP loan originations. The increase in average loans resulted in an increase in interest revenue volume of approximately $7.9 million for 2020, which was partially offset by a decrease in interest revenue to due declining rates of $5.0 million, as compared to 2019. Loan fee income can meaningfully impact net interest income, loan yields, and net interest margin. The amount of loan fee income included in total interest income represents 18 basis points of yield on earning assets and net interest margin for the year ended December 31, 2020 as compared to 11 basis points for the year ended December 31, 2019. Loan fee income for 2020 included $1.1 million in fees earned on PPP loans. Total interest income increased 2.4%, or $1.2 million, for 2020 as compared 2019.
The cost of interest-bearing liabilities decreased to 1.05% for the year ended December 31, 2020, as compared to 1.66% for the year ended December 31, 2019 primarily based on the downward repricing of time deposits. Average interest-bearing liabilities increased by $106.3 million during 2020 due to deposit growth and the completion of the branch purchase transaction in 2019. Total interest expense decreased by 28.7% to $10.2 million for the year ended December 31, 2020 as compared to $14.2 million for the year ended December 31, 2019. The cost of interest-bearing liabilities for 2020 was also impacted by the subordinated debt issuances and senior debt repayments in July 2019 and July 2020. As of December 31, 2020, time deposits comprise $367.6 million of the Company’s liabilities with $272.0 million, or 74%, set to reprice or mature within one year of which, $104.9 million with a current average rate of 0.99% reprice or mature within the first quarter of 2021.
Net interest income was $35.4 million for the year ended December 31, 2019, an increase of $1.7 million, or 5.0%, compared with $33.7 million for the same period in 2018. Net interest spread and margin were 3.10% and 3.40%, respectively, for 2019, compared with 3.32% and 3.53%, respectively, for 2018.
The Federal Reserve lowered the federal funds target rate by 25 basis points on July 31, 2019, September 18, 2019, and October 31, 2019. This represented a change in direction as the Federal Reserve had increased rates by 25 basis points on four occasions in 2018.
Average interest-earning assets were $1.04 billion for 2019, compared with $957.5 million for 2018, an 8.9% increase, primarily attributable to higher average loans and average investment securities. Average loans were $801.8 million for 2019, compared with $743.4 million for 2018, a 7.9% increase due to loan growth, as well as the completion of the branch purchase transaction on November 15, 2019. This resulted in an increase in interest revenue volume of approximately $3.0 million and an increase of $1.8 million attributable to increasing interest rates for 2019 as compared to 2018. Average investment securities were $206.2 million for 2019, compared with $178.9 million for 2018, a 15.2% increase. Total interest income increased 14.1% to $49.6 million for 2019, compared with $43.5 million for 2018.
Average interest-bearing liabilities increased by 7.2% to $856.3 million for 2019, compared with $799.0 million for 2018 due to deposit growth, as well as the completion of the branch purchase transaction on November 15, 2019. Total interest expense increased by 45.4% to $14.2 million for 2019, compared with $9.8 million during 2018, due primarily to increases in rates paid on certificates of deposits and other time deposits in 2019 compared to 2018. Average volume of certificates of deposit increased 9.9% to $483.2 million for 2019, compared with $439.6 million for 2018. The average interest rate paid on certificates of deposit increased to 1.98% for 2019, compared with 1.35% for 2018. Average volume of interest checking and money market deposit accounts increased 6.5% to $265.7 million for 2019, compared with $249.4 million for 2018. The average interest rate paid on interest checking and money market deposit accounts increased to 0.76% for 2019, compared with 0.62% for 2018. The cost of interest-bearing liabilities for 2019 was also impacted by the subordinated debt issuance at a fixed rate of 5.75%.
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,
|
|
|
|
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivables (1)(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
|
|
$
|
684,447
|
|
|
$
|
32,572
|
|
|
|
4.76
|
%
|
|
$
|
576,441
|
|
|
$
|
30,139
|
|
|
|
5.23
|
%
|
Commercial
|
|
|
200,260
|
|
|
|
8,398
|
|
|
|
4.19
|
|
|
|
134,735
|
|
|
|
6,660
|
|
|
|
4.94
|
|
Consumer
|
|
|
39,931
|
|
|
|
2,051
|
|
|
|
5.14
|
|
|
|
51,001
|
|
|
|
2,863
|
|
|
|
5.61
|
|
Agriculture
|
|
|
38,833
|
|
|
|
2,058
|
|
|
|
5.30
|
|
|
|
39,116
|
|
|
|
2,480
|
|
|
|
6.34
|
|
Other
|
|
|
617
|
|
|
|
14
|
|
|
|
2.27
|
|
|
|
520
|
|
|
|
11
|
|
|
|
2.12
|
|
U.S. Treasury and agencies
|
|
|
20,239
|
|
|
|
491
|
|
|
|
2.43
|
|
|
|
23,263
|
|
|
|
558
|
|
|
|
2.40
|
|
Mortgage-backed securities
|
|
|
82,330
|
|
|
|
1,863
|
|
|
|
2.26
|
|
|
|
91,609
|
|
|
|
2,495
|
|
|
|
2.72
|
|
Collateralized loan obligations
|
|
|
45,595
|
|
|
|
1,234
|
|
|
|
2.71
|
|
|
|
49,881
|
|
|
|
2,015
|
|
|
|
4.04
|
|
State and political subdivision securities (non-taxable) (3)
|
|
|
14,139
|
|
|
|
370
|
|
|
|
3.31
|
|
|
|
11,759
|
|
|
|
326
|
|
|
|
3.51
|
|
State and political subdivision securities (taxable)
|
|
|
16,301
|
|
|
|
494
|
|
|
|
3.03
|
|
|
|
18,270
|
|
|
|
583
|
|
|
|
3.19
|
|
Corporate bonds
|
|
|
23,572
|
|
|
|
960
|
|
|
|
4.07
|
|
|
|
11,376
|
|
|
|
618
|
|
|
|
5.43
|
|
FHLB stock
|
|
|
6,208
|
|
|
|
143
|
|
|
|
2.30
|
|
|
|
6,691
|
|
|
|
348
|
|
|
|
5.20
|
|
Federal funds sold
|
|
|
72
|
|
|
|
—
|
|
|
|
—
|
|
|
|
182
|
|
|
|
4
|
|
|
|
2.20
|
|
Interest-bearing deposits in other financial institutions
|
|
|
38,525
|
|
|
|
105
|
|
|
|
0.27
|
|
|
|
27,809
|
|
|
|
484
|
|
|
|
1.74
|
|
Total interest-earning assets
|
|
|
1,211,069
|
|
|
|
50,753
|
|
|
|
4.20
|
%
|
|
|
1,042,653
|
|
|
|
49,584
|
|
|
|
4.76
|
%
|
Less: Allowance for loan losses
|
|
|
(9,819
|
)
|
|
|
|
|
|
|
|
|
|
|
(8,786
|
)
|
|
|
|
|
|
|
|
|
Non-interest-earning assets
|
|
|
93,684
|
|
|
|
|
|
|
|
|
|
|
|
78,521
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,294,934
|
|
|
|
|
|
|
|
|
|
|
$
|
1,112,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit and other time deposits
|
|
$
|
436,083
|
|
|
$
|
5,802
|
|
|
|
1.33
|
%
|
|
$
|
483,222
|
|
|
$
|
9,564
|
|
|
|
1.98
|
%
|
Interest checking and money market deposits
|
|
|
336,596
|
|
|
|
1,464
|
|
|
|
0.43
|
|
|
|
265,687
|
|
|
|
2,026
|
|
|
|
0.76
|
|
Savings accounts
|
|
|
111,559
|
|
|
|
530
|
|
|
|
0.48
|
|
|
|
36,035
|
|
|
|
67
|
|
|
|
0.19
|
|
FHLB advances
|
|
|
34,101
|
|
|
|
371
|
|
|
|
1.09
|
|
|
|
35,038
|
|
|
|
810
|
|
|
|
2.31
|
|
Junior subordinated debentures
|
|
|
21,000
|
|
|
|
660
|
|
|
|
3.14
|
|
|
|
21,000
|
|
|
|
1,005
|
|
|
|
4.79
|
|
Subordinated capital notes
|
|
|
20,366
|
|
|
|
1,206
|
|
|
|
5.92
|
|
|
|
7,545
|
|
|
|
433
|
|
|
|
5.74
|
|
Senior debt
|
|
|
2,896
|
|
|
|
119
|
|
|
|
4.11
|
|
|
|
7,781
|
|
|
|
329
|
|
|
|
4.23
|
|
Total interest-bearing liabilities
|
|
|
962,601
|
|
|
|
10,152
|
|
|
|
1.05
|
%
|
|
|
856,308
|
|
|
|
14,234
|
|
|
|
1.66
|
%
|
Non-interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing deposits
|
|
|
215,145
|
|
|
|
|
|
|
|
|
|
|
|
151,299
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
7,230
|
|
|
|
|
|
|
|
|
|
|
|
4,655
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,184,976
|
|
|
|
|
|
|
|
|
|
|
|
1,012,262
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
109,958
|
|
|
|
|
|
|
|
|
|
|
|
100,126
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
1,294,934
|
|
|
|
|
|
|
|
|
|
|
$
|
1,112,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
40,601
|
|
|
|
|
|
|
|
|
|
|
$
|
35,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread
|
|
|
|
|
|
|
|
|
|
|
3.15
|
%
|
|
|
|
|
|
|
|
|
|
|
3.10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin
|
|
|
|
|
|
|
|
|
|
|
3.36
|
%
|
|
|
|
|
|
|
|
|
|
|
3.40
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of average interest-earning assets to average interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
125.81
|
%
|
|
|
|
|
|
|
|
|
|
|
121.76
|
%
|
(1) Includes loan fees in both interest income and the calculation of yield on loans.
(2) Calculations include non-accruing loans of $1.7 million and $2.2 million in average loan amounts outstanding.
(3) Taxable equivalent yields are calculated assuming a 21% federal income tax rate.
|
|
For the Years Ended December 31,
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
|
2018
|
|
|
|
Average
Balance
|
|
|
Interest
Earned/Paid
|
|
|
|
Average
Yield/Cost
|
|
|
Average
Balance
|
|
|
Interest
Earned/Paid
|
|
|
Average
Yield/Cost
|
|
|
|
(dollars in thousands)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivables (1)(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
|
|
$
|
576,441
|
|
|
$
|
30,139
|
|
|
|
5.23
|
%
|
|
$
|
548,877
|
|
|
$
|
27,296
|
|
|
|
4.97
|
%
|
Commercial
|
|
|
134,735
|
|
|
|
6,660
|
|
|
|
4.94
|
|
|
|
123,044
|
|
|
|
5,934
|
|
|
|
4.82
|
|
Consumer
|
|
|
51,001
|
|
|
|
2,863
|
|
|
|
5.61
|
|
|
|
32,049
|
|
|
|
1,765
|
|
|
|
5.51
|
|
Agriculture
|
|
|
39,116
|
|
|
|
2,480
|
|
|
|
6.34
|
|
|
|
38,796
|
|
|
|
2,334
|
|
|
|
6.02
|
|
Other
|
|
|
520
|
|
|
|
11
|
|
|
|
2.12
|
|
|
|
586
|
|
|
|
13
|
|
|
|
2.22
|
|
U.S. Treasury and agencies
|
|
|
23,263
|
|
|
|
558
|
|
|
|
2.40
|
|
|
|
23,732
|
|
|
|
549
|
|
|
|
2.31
|
|
Mortgage-backed securities
|
|
|
91,609
|
|
|
|
2,495
|
|
|
|
2.72
|
|
|
|
81,771
|
|
|
|
2,142
|
|
|
|
2.62
|
|
Collateralized loan obligations
|
|
|
49,881
|
|
|
|
2,015
|
|
|
|
4.04
|
|
|
|
32,163
|
|
|
|
1,177
|
|
|
|
3.66
|
|
State and political subdivision securities (non-taxable) (3)
|
|
|
11,759
|
|
|
|
326
|
|
|
|
3.51
|
|
|
|
14,189
|
|
|
|
383
|
|
|
|
3.42
|
|
State and political subdivision securities (taxable)
|
|
|
18,270
|
|
|
|
583
|
|
|
|
3.19
|
|
|
|
18,890
|
|
|
|
570
|
|
|
|
3.02
|
|
Corporate bonds
|
|
|
11,376
|
|
|
|
618
|
|
|
|
5.43
|
|
|
|
8,162
|
|
|
|
442
|
|
|
|
5.42
|
|
FHLB stock
|
|
|
6,691
|
|
|
|
348
|
|
|
|
5.20
|
|
|
|
7,280
|
|
|
|
429
|
|
|
|
5.89
|
|
Federal funds sold
|
|
|
182
|
|
|
|
4
|
|
|
|
2.20
|
|
|
|
1,152
|
|
|
|
22
|
|
|
|
1.91
|
|
Interest-bearing deposits in other financial institutions
|
|
|
27,809
|
|
|
|
484
|
|
|
|
1.74
|
|
|
|
26,763
|
|
|
|
405
|
|
|
|
1.51
|
|
Total interest-earning assets
|
|
|
1,042,653
|
|
|
|
49,584
|
|
|
|
4.76
|
%
|
|
|
957,454
|
|
|
|
43,461
|
|
|
|
4.55
|
%
|
Less: Allowance for loan losses
|
|
|
(8,786
|
)
|
|
|
|
|
|
|
|
|
|
|
(8,692
|
)
|
|
|
|
|
|
|
|
|
Non-interest-earning assets
|
|
|
78,521
|
|
|
|
|
|
|
|
|
|
|
|
77,548
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,112,388
|
|
|
|
|
|
|
|
|
|
|
$
|
1,026,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit and other time deposits
|
|
$
|
483,222
|
|
|
$
|
9,564
|
|
|
|
1.98
|
%
|
|
$
|
439,597
|
|
|
$
|
5,949
|
|
|
|
1.35
|
%
|
Interest checking and money market deposits
|
|
|
265,687
|
|
|
|
2,026
|
|
|
|
0.76
|
|
|
|
249,415
|
|
|
|
1,543
|
|
|
|
0.62
|
|
Savings accounts
|
|
|
36,035
|
|
|
|
67
|
|
|
|
0.19
|
|
|
|
34,866
|
|
|
|
57
|
|
|
|
0.16
|
|
FHLB advances
|
|
|
35,038
|
|
|
|
810
|
|
|
|
2.31
|
|
|
|
43,363
|
|
|
|
867
|
|
|
|
2.00
|
|
Junior subordinated debentures
|
|
|
21,000
|
|
|
|
1,005
|
|
|
|
4.79
|
|
|
|
21,000
|
|
|
|
946
|
|
|
|
4.50
|
|
Subordinated capital notes
|
|
|
7,545
|
|
|
|
433
|
|
|
|
5.74
|
|
|
|
791
|
|
|
|
39
|
|
|
|
4.93
|
|
Senior debt
|
|
|
7,781
|
|
|
|
329
|
|
|
|
4.23
|
|
|
|
10,000
|
|
|
|
389
|
|
|
|
3.89
|
|
Total interest-bearing liabilities
|
|
|
856,308
|
|
|
|
14,234
|
|
|
|
1.66
|
%
|
|
|
799,032
|
|
|
|
9,790
|
|
|
|
1.23
|
%
|
Non-interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing deposits
|
|
|
151,299
|
|
|
|
|
|
|
|
|
|
|
|
136,947
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
4,655
|
|
|
|
|
|
|
|
|
|
|
|
5,471
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,012,262
|
|
|
|
|
|
|
|
|
|
|
|
941,450
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
100,126
|
|
|
|
|
|
|
|
|
|
|
|
84,860
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
1,112,388
|
|
|
|
|
|
|
|
|
|
|
$
|
1,026,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
35,350
|
|
|
|
|
|
|
|
|
|
|
$
|
33,671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread
|
|
|
|
|
|
|
|
|
|
|
3.10
|
%
|
|
|
|
|
|
|
|
|
|
|
3.32
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin
|
|
|
|
|
|
|
|
|
|
|
3.40
|
%
|
|
|
|
|
|
|
|
|
|
|
3.53
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of average interest-earning assets to average interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
121.76
|
%
|
|
|
|
|
|
|
|
|
|
|
119.83
|
%
|
(1) Includes loan fees in both interest income and the calculation of yield on loans.
(2) Calculations include non-accruing loans of $2.2 million and $3.5 million in average loan amounts outstanding.
(3) Taxable equivalent yields are calculated assuming a 21% federal income tax rate.
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, 2020 vs. 2019
|
|
|
Year Ended December 31, 2019 vs. 2018
|
|
|
|
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
|
|
$
|
(4,982
|
)
|
|
$
|
7,922
|
|
|
$
|
2,940
|
|
|
$
|
1,789
|
|
|
$
|
3,022
|
|
|
$
|
4,811
|
|
U.S. Treasury and agencies
|
|
|
6
|
|
|
|
(73
|
)
|
|
|
(67
|
)
|
|
|
20
|
|
|
|
(11
|
)
|
|
|
9
|
|
Mortgage-backed securities
|
|
|
(395
|
)
|
|
|
(237
|
)
|
|
|
(632
|
)
|
|
|
87
|
|
|
|
266
|
|
|
|
353
|
|
Collateralized loan obligations
|
|
|
(620
|
)
|
|
|
(161
|
)
|
|
|
(781
|
)
|
|
|
133
|
|
|
|
705
|
|
|
|
838
|
|
State and political subdivision securities
|
|
|
(57
|
)
|
|
|
12
|
|
|
|
(45
|
)
|
|
|
47
|
|
|
|
(91
|
)
|
|
|
(44
|
)
|
Corporate bonds
|
|
|
(186
|
)
|
|
|
528
|
|
|
|
342
|
|
|
|
1
|
|
|
|
175
|
|
|
|
176
|
|
FHLB stock
|
|
|
(182
|
)
|
|
|
(23
|
)
|
|
|
(205
|
)
|
|
|
(48
|
)
|
|
|
(33
|
)
|
|
|
(81
|
)
|
Federal funds sold
|
|
|
(3
|
)
|
|
|
(1
|
)
|
|
|
(4
|
)
|
|
|
3
|
|
|
|
(21
|
)
|
|
|
(18
|
)
|
Interest-bearing deposits in other financial institutions
|
|
|
(516
|
)
|
|
|
137
|
|
|
|
(379
|
)
|
|
|
63
|
|
|
|
16
|
|
|
|
79
|
|
Total increase (decrease) in interest income
|
|
|
(6,935
|
)
|
|
|
8,104
|
|
|
|
1,169
|
|
|
|
2,095
|
|
|
|
4,028
|
|
|
|
6,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit and other time deposits
|
|
|
(2,899
|
)
|
|
|
(863
|
)
|
|
|
(3,762
|
)
|
|
|
2,977
|
|
|
|
638
|
|
|
|
3,615
|
|
Interest checking and money market accounts
|
|
|
(1,014
|
)
|
|
|
452
|
|
|
|
(562
|
)
|
|
|
377
|
|
|
|
106
|
|
|
|
483
|
|
Savings accounts
|
|
|
197
|
|
|
|
266
|
|
|
|
463
|
|
|
|
8
|
|
|
|
2
|
|
|
|
10
|
|
FHLB advances
|
|
|
(418
|
)
|
|
|
(21
|
)
|
|
|
(439
|
)
|
|
|
123
|
|
|
|
(180
|
)
|
|
|
(57
|
)
|
Junior subordinated debentures
|
|
|
(345
|
)
|
|
|
—
|
|
|
|
(345
|
)
|
|
|
59
|
|
|
|
—
|
|
|
|
59
|
|
Subordinated capital notes
|
|
|
14
|
|
|
|
759
|
|
|
|
773
|
|
|
|
7
|
|
|
|
387
|
|
|
|
394
|
|
Senior debt
|
|
|
(9
|
)
|
|
|
(201
|
)
|
|
|
(210
|
)
|
|
|
32
|
|
|
|
(92
|
)
|
|
|
(60
|
)
|
Total increase (decrease) in interest expense
|
|
|
(4,474
|
)
|
|
|
392
|
|
|
|
(4,082
|
)
|
|
|
3,583
|
|
|
|
861
|
|
|
|
4,444
|
|
Increase (decrease) in net interest income
|
|
$
|
(2,461
|
)
|
|
$
|
7,712
|
|
|
$
|
5,251
|
|
|
$
|
(1,488
|
)
|
|
$
|
3,167
|
|
|
$
|
1,679
|
|
Non-interest Income – The following table presents for the periods indicated the major categories of non-interest income:
|
|
For the Years Ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
|
(in thousands)
|
|
Service charges on deposit accounts
|
|
$
|
2,268
|
|
|
$
|
2,381
|
|
|
$
|
2,355
|
|
Bank card interchange fees
|
|
|
3,376
|
|
|
|
2,438
|
|
|
|
1,831
|
|
Income from bank owned life insurance
|
|
|
424
|
|
|
|
410
|
|
|
|
437
|
|
Net gain (loss) on sales and calls of securities
|
|
|
(5
|
)
|
|
|
(5
|
)
|
|
|
(6
|
)
|
Other
|
|
|
781
|
|
|
|
694
|
|
|
|
1,162
|
|
Total non-interest income
|
|
$
|
6,844
|
|
|
$
|
5,918
|
|
|
$
|
5,779
|
|
Non-interest Income Comparison – 2020 to 2019
Non-interest income increased by $926,000 for 2020 to $6.8 million compared with $5.9 million for the year ended December 31, 2019. This increase was primarily related to bank card interchange fees of $938,000 as a result of the deposit accounts acquired in the branch purchase transaction on November 15, 2019.
Non-interest Income Comparison – 2019 to 2018
Non-interest income increased by $139,000 for 2019 to $5.9 million compared with $5.8 million for the year ended December 31, 2018. This increase was primarily due to growth in bank card interchange fees of $607,000 partially offset by a decrease in other non-interest income of $468,000 related to the $150,000 one-time gain on the sale of the secondary market residential servicing rights portfolio in the third quarter of 2018 and a $632,000 gain on the sale of a subdivided lot at the Company’s headquarters offset by a $392,000 impairment charge associated with the transfer of the Bank’s former data processing center to held for sale in the fourth quarter of 2018.
Non-interest Expense – The following table presents the major categories of non-interest expense:
|
|
For the Years Ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
|
(in thousands)
|
|
Salary and employee benefits
|
|
$
|
17,751
|
|
|
$
|
16,233
|
|
|
$
|
15,489
|
|
Occupancy and equipment
|
|
|
4,001
|
|
|
|
3,522
|
|
|
|
3,586
|
|
FDIC insurance
|
|
|
229
|
|
|
|
211
|
|
|
|
557
|
|
Data processing expense
|
|
|
1,502
|
|
|
|
1,259
|
|
|
|
1,192
|
|
Marketing expense
|
|
|
629
|
|
|
|
908
|
|
|
|
1,114
|
|
State franchise and deposit tax
|
|
|
1,475
|
|
|
|
1,210
|
|
|
|
1,118
|
|
Deposit account related expense
|
|
|
1,890
|
|
|
|
1,224
|
|
|
|
823
|
|
Professional fees
|
|
|
937
|
|
|
|
769
|
|
|
|
814
|
|
Communications
|
|
|
856
|
|
|
|
772
|
|
|
|
701
|
|
Insurance expense
|
|
|
428
|
|
|
|
444
|
|
|
|
478
|
|
Postage and delivery
|
|
|
627
|
|
|
|
544
|
|
|
|
364
|
|
Litigation and loan collection expense
|
|
|
200
|
|
|
|
189
|
|
|
|
245
|
|
Other real estate owned expense
|
|
|
63
|
|
|
|
368
|
|
|
|
868
|
|
Acquisition costs
|
|
|
—
|
|
|
|
775
|
|
|
|
—
|
|
Other
|
|
|
1,828
|
|
|
|
1,842
|
|
|
|
1,777
|
|
Total non-interest expense
|
|
$
|
32,416
|
|
|
$
|
30,270
|
|
|
$
|
29,126
|
|
Non-interest Expense Comparison – 2020 to 2019
Non-interest expense for the year ended December 31, 2020 of $32.4 million represented a $2.1 million, or 7.1%, increase from $30.3 million for 2019. The increase in non-interest expense was primarily due to an increase in salaries and employee benefits of $1.5 million. The Bank added sales talent and customer facing associates during the latter half of 2019 and branch staff in connection with the branch purchase transaction in November 2019. These increases were muted somewhat by efforts in 2020 to reduce FTEs from 248 at March 31, 2020 to 219 as of December 31, 2020 through attrition and workforce reduction. Deposit account related expense increased by $666,000 and occupancy expense increased by $479,000 as a result of the branch purchase transaction. Franchise tax expense increased by $265,000 as a function of growth in the Bank’s taxable capital. These increases were offset by a decrease in OREO expenses of $305,000 due to lower valuation write-downs and operating expenses in 2020 compared to 2019. Non-interest expense for 2019 also included $775,000 of acquisition expenses associated with the branch purchase transaction.
Non-interest Expense Comparison – 2019 to 2018
Non-interest expense for the year ended December 31, 2019 of $30.3 million represented a 3.9% increase from $29.1 million for 2018. The increase in non-interest expense was attributable primarily to $775,000 of expenses related to the branch purchase transaction. There was also an increase of $744,000 in salary and employee benefits, as the Bank added sales talent and customer facing associates during 2019, and branch staff added in connection with the branch purchase transaction. Deposit account related expense increased $401,000, which correlated to growth in card interchange income, and was offset by decreases in OREO expenses of $500,000, and FDIC insurance expense of $346,000. OREO expense decreased due to lower valuation adjustment write-downs during 2019 compared to 2018. During the year ended December 31, 2019, fair value write-downs of $260,000 were recorded compared with $850,000 for the year ended December 31, 2018. The write-downs reflect declines in the fair value due to changes in marketing strategies. There were no OREO sales in 2019 compared to $876,000 during 2018.
Income Tax Expense – Effective tax rates differ from the federal statutory rate applied to income before income taxes due to the following:
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
|
(in thousands)
|
|
Statutory tax rate
|
|
|
21
|
%
|
|
|
21
|
%
|
|
|
21
|
%
|
Federal statutory rate times financial statement income
|
|
$
|
2,232
|
|
|
$
|
2,310
|
|
|
$
|
2,273
|
|
Effect of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt income
|
|
|
(73
|
)
|
|
|
(66
|
)
|
|
|
(80
|
)
|
Establish state deferred tax asset
|
|
|
(478
|
)
|
|
|
(1,577
|
)
|
|
|
—
|
|
Non-taxable life insurance income
|
|
|
(89
|
)
|
|
|
(86
|
)
|
|
|
(92
|
)
|
Restricted stock vesting
|
|
|
7
|
|
|
|
(137
|
)
|
|
|
(115
|
)
|
Other, net
|
|
|
25
|
|
|
|
36
|
|
|
|
44
|
|
Total
|
|
$
|
1,624
|
|
|
$
|
480
|
|
|
$
|
2,030
|
|
For 2020 and 2019, income tax expense benefitted from the establishment of a net deferred tax assets related to a change in Kentucky tax law enacted during 2019. Income tax expense benefitted $478,000 and $1.6 million for the years ended December 31, 2020 and 2019, respectively, or $0.06 per basic and diluted common share, and $0.21 per basic and diluted common share, respectively. 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 went into effect on January 1, 2021.
See Note 12, “Income Taxes”, to the financial statements for additional discussion of the Company’s income taxes.
Analysis of Financial Condition
Total assets at December 31, 2020 were $1.31 billion compared with $1.25 billion at December 31, 2019, an increase of $66.5 million or 5.3%. This increase was primarily attributable to an increase in net loans of $31.7 million, as well as $34.9 million in interest-bearing deposits in banks.
Total assets at December 31, 2019 were $1.25 billion compared with $1.07 billion at December 31, 2018, an increase of $176.1 million or 16.5%. This increase was primarily attributable to an increase in net loans of $161.5 million, which resulted from $124.7 million in outstanding loans at December 31, 2019 associated with the branch purchase transaction, as well as loan growth.
Loans Receivable – Loans receivable increased $35.8 million, or 3.9%, during the year ended December 31, 2020, to $962.1 million. At December 31, 2020, the Bank had $20.3 million in loans outstanding under the SBA Paycheck Protection Program. The Bank’s commercial and commercial real estate portfolios increased by an aggregate of $92.8 million, or 17.0%, during 2020 and comprised 66.3% of the total loan portfolio at December 31, 2020.
Loans receivable increased $161.0 million, or 21.0%, during the year ended December 31, 2019, to $926.3 million. The Bank’s commercial and commercial real estate portfolios increased by an aggregate of $78.7 million, or 16.9%, during 2019 and comprised 58.8% of the total loan portfolio at December 31, 2019.
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 the Bank’s 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,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial (1)
|
|
$
|
208,244
|
|
|
|
21.65
|
%
|
|
$
|
145,551
|
|
|
|
15.71
|
%
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
92,916
|
|
|
|
9.66
|
|
|
|
64,911
|
|
|
|
7.01
|
|
Farmland
|
|
|
70,272
|
|
|
|
7.30
|
|
|
|
79,118
|
|
|
|
8.54
|
|
Nonfarm nonresidential
|
|
|
266,394
|
|
|
|
27.69
|
|
|
|
255,459
|
|
|
|
27.58
|
|
Residential Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
61,180
|
|
|
|
6.36
|
|
|
|
70,950
|
|
|
|
7.66
|
|
1-4 Family
|
|
|
188,955
|
|
|
|
19.64
|
|
|
|
226,629
|
|
|
|
24.47
|
|
Consumer
|
|
|
31,429
|
|
|
|
3.27
|
|
|
|
47,790
|
|
|
|
5.16
|
|
Agriculture
|
|
|
42,044
|
|
|
|
4.37
|
|
|
|
35,064
|
|
|
|
3.79
|
|
Other
|
|
|
647
|
|
|
|
0.06
|
|
|
|
799
|
|
|
|
0.08
|
|
Total loans
|
|
$
|
962,081
|
|
|
|
100.00
|
%
|
|
$
|
926,271
|
|
|
|
100.00
|
%
|
(1) Includes PPP loans of $20.3 million at December 31, 2020.
|
|
As of December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
129,368
|
|
|
|
16.91
|
%
|
|
$
|
113,771
|
|
|
|
15.98
|
%
|
|
$
|
97,761
|
|
|
|
15.29
|
%
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
86,867
|
|
|
|
11.35
|
|
|
|
57,342
|
|
|
|
8.05
|
|
|
|
36,330
|
|
|
|
5.68
|
|
Farmland
|
|
|
77,937
|
|
|
|
10.18
|
|
|
|
88,320
|
|
|
|
12.40
|
|
|
|
71,507
|
|
|
|
11.19
|
|
Nonfarm nonresidential
|
|
|
172,177
|
|
|
|
22.50
|
|
|
|
156,724
|
|
|
|
22.01
|
|
|
|
149,546
|
|
|
|
23.39
|
|
Residential Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
49,757
|
|
|
|
6.50
|
|
|
|
56,588
|
|
|
|
7.94
|
|
|
|
48,197
|
|
|
|
7.54
|
|
1-4 Family
|
|
|
175,761
|
|
|
|
22.97
|
|
|
|
179,222
|
|
|
|
25.17
|
|
|
|
188,092
|
|
|
|
29.42
|
|
Consumer
|
|
|
39,104
|
|
|
|
5.11
|
|
|
|
18,439
|
|
|
|
2.59
|
|
|
|
9,818
|
|
|
|
1.54
|
|
Agriculture
|
|
|
33,737
|
|
|
|
4.41
|
|
|
|
41,154
|
|
|
|
5.78
|
|
|
|
37,508
|
|
|
|
5.87
|
|
Other
|
|
|
536
|
|
|
|
0.07
|
|
|
|
555
|
|
|
|
0.08
|
|
|
|
477
|
|
|
|
0.08
|
|
Total loans
|
|
$
|
765,244
|
|
|
|
100.00
|
%
|
|
$
|
712,115
|
|
|
|
100.00
|
%
|
|
$
|
639,236
|
|
|
|
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 $46.0 million at December 31, 2020.
The Bank had 18 and 14 loan relationships each with aggregate extensions of credit in excess of $10.0 million at year end 2020 and 2019, respectively, 17 of which were classified as pass and one classified as watch by the Bank’s internal loan review process at December 31, 2020 and all 14 classified as pass at December 31, 2019.
As of December 31, 2020, the Bank had $74.3 million of loan participations purchased from, and $21.3 million of loan participations sold to, other banks. As of December 31, 2019, the Bank had $64.1 million of loan participations purchased from, and $15.7 million of loan participations sold to, other banks.
Loan Maturity Schedule – The following table sets forth at December 31, 2020, 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, 2020
|
|
|
|
Maturing
Within
One Year
|
|
|
Maturing
1 through
5 Years
|
|
|
Maturing
Over 5
Years
|
|
|
Total
Loans
|
|
|
|
(dollars in thousands)
|
|
Loans with fixed rates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
30,489
|
|
|
$
|
43,091
|
|
|
$
|
29,282
|
|
|
$
|
102,862
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
10,163
|
|
|
|
6,681
|
|
|
|
4,950
|
|
|
|
21,794
|
|
Farmland
|
|
|
3,529
|
|
|
|
16,899
|
|
|
|
7,983
|
|
|
|
28,411
|
|
Nonfarm nonresidential
|
|
|
38,436
|
|
|
|
40,568
|
|
|
|
75,979
|
|
|
|
154,983
|
|
Residential Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
2,242
|
|
|
|
19,573
|
|
|
|
11,238
|
|
|
|
33,053
|
|
1-4 Family
|
|
|
7,870
|
|
|
|
21,941
|
|
|
|
67,439
|
|
|
|
97,250
|
|
Consumer
|
|
|
23,830
|
|
|
|
4,586
|
|
|
|
730
|
|
|
|
29,146
|
|
Agriculture
|
|
|
3,474
|
|
|
|
7,490
|
|
|
|
360
|
|
|
|
11,324
|
|
Other
|
|
|
282
|
|
|
|
293
|
|
|
|
—
|
|
|
|
575
|
|
Total fixed rate loans
|
|
$
|
120,315
|
|
|
$
|
161,122
|
|
|
$
|
197,961
|
|
|
$
|
479,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans with floating rates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
32,728
|
|
|
$
|
61,439
|
|
|
$
|
11,215
|
|
|
$
|
105,382
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
51,438
|
|
|
|
15,189
|
|
|
|
4,495
|
|
|
|
71,122
|
|
Farmland
|
|
|
4,960
|
|
|
|
6,955
|
|
|
|
29,946
|
|
|
|
41,861
|
|
Nonfarm nonresidential
|
|
|
1,751
|
|
|
|
45,271
|
|
|
|
64,389
|
|
|
|
111,411
|
|
Residential Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
3,331
|
|
|
|
18,216
|
|
|
|
6,580
|
|
|
|
28,127
|
|
1-4 Family
|
|
|
6,249
|
|
|
|
8,649
|
|
|
|
76,807
|
|
|
|
91,705
|
|
Consumer
|
|
|
1,999
|
|
|
|
134
|
|
|
|
150
|
|
|
|
2,283
|
|
Agriculture
|
|
|
30,121
|
|
|
|
466
|
|
|
|
133
|
|
|
|
30,720
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
72
|
|
|
|
72
|
|
Total floating rate loans
|
|
$
|
132,577
|
|
|
$
|
156,319
|
|
|
$
|
193,787
|
|
|
$
|
482,683
|
|
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,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass
|
|
$
|
926,025
|
|
|
$
|
888,707
|
|
|
$
|
745,604
|
|
|
$
|
673,033
|
|
|
$
|
586,430
|
|
Watch
|
|
|
18,879
|
|
|
|
27,522
|
|
|
|
13,164
|
|
|
|
25,715
|
|
|
|
30,431
|
|
Special Mention
|
|
|
—
|
|
|
|
—
|
|
|
|
113
|
|
|
|
164
|
|
|
|
497
|
|
Substandard
|
|
|
17,177
|
|
|
|
10,042
|
|
|
|
6,363
|
|
|
|
13,203
|
|
|
|
21,878
|
|
Doubtful
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
962,081
|
|
|
$
|
926,271
|
|
|
$
|
765,244
|
|
|
$
|
712,115
|
|
|
$
|
639,236
|
|
Loans receivable increased $35.8 million, or 3.9%, during the year ended December 31, 2020. Since December 31, 2019, the pass category increased approximately $37.3 million, the watch category decreased approximately $8.6 million, and the substandard category increased approximately $7.1 million. The $7.1 million increase in loans classified as substandard was primarily driven by $11.7 million in loans moved to substandard, offset by $3.9 million in principal payments received and $643,000 in charge-offs during 2020. These trends were considered during the evaluation of qualitative trends in the portfolio when establishing the general component of the allowance for loan losses.
Loan Delinquency – The following table presents a summary of loan delinquencies at the dates indicated.
|
|
As of December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
Past Due Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30-59 Days
|
|
$
|
1,537
|
|
|
$
|
1,747
|
|
|
$
|
1,593
|
|
|
$
|
1,478
|
|
|
$
|
2,302
|
|
60-89 Days
|
|
|
372
|
|
|
|
670
|
|
|
|
331
|
|
|
|
171
|
|
|
|
315
|
|
90 Days and Over
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
Total Loans Past Due 30-90+ Days
|
|
|
1,909
|
|
|
|
2,417
|
|
|
|
1,924
|
|
|
|
1,650
|
|
|
|
2,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual Loans
|
|
|
1,676
|
|
|
|
1,528
|
|
|
|
1,991
|
|
|
|
5,457
|
|
|
|
9,216
|
|
Total Past Due and Nonaccrual Loans
|
|
$
|
3,585
|
|
|
$
|
3,945
|
|
|
$
|
3,915
|
|
|
$
|
7,107
|
|
|
$
|
11,833
|
|
Loans past due 30-59 days decreased from $1.7 million at December 31, 2019 to $1.5 million at December 31, 2020, and loans past due 60-89 days decreased from $670,000 at December 31, 2019 to $372,000 at December 31, 2020. This represents a $508,000 decrease 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 Bank’s allowance for loan losses.
Nonaccrual loans increased $148,000 from December 31, 2019 to December 31, 2020. This increase was primarily driven by $1.3 million in paydowns and $569,000 in charge-offs, offset by $2.0 million in loans placed on non-accrual. The $1.7 million in nonaccrual loans at December 31, 2020, and $1.5 million at December 31, 2019, 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. TDRs are considered to be impaired loans, 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 generally 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.
At December 31, 2020, the Bank had four restructured loans totaling $480,000 with borrowers who experienced deterioration in financial condition compared with three restructured loans totaling $475,000 at December 31, 2019. In general, these loans were granted interest rate reductions to provide cash flow relief to borrowers experiencing cash flow difficulties. At December 31, 2020 and December 31, 2019, the Bank had no restructured loans that had been granted principal payment deferrals until maturity. 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 December 31, 2020 and December 31, 2019, all TDRs were performing according to their modified terms.
There was one modification granted during 2020 that resulted in a loan being identified as TDRs. There were 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 – The Bank has elected to account for eligible loan modifications under Section 4013 of the Coronavirus Aid Relief and Economic Security Act (“CARES Act”). To be an eligible loan under Section 4013 of the CARES Act, a loan modification must be (1) related to the COVID-19 pandemic; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020 and the earlier of (A) 60 days after the date of termination of the national emergency declared by the President on March 13, 2020 concerning the COVID-19 outbreak (the “national emergency”) or (B) January 1, 2022. Eligible loan modifications are not required to be classified as TDRs and will not be reported as past due provided that they are performing in accordance with the modified terms. Interest income will continue to be recognized in accordance with GAAP unless the loan is placed on nonaccrual status.
Short-term loan modifications declined to $15.3 million as of December 31, 2020, as compared to $160.4 million at June 30, 2020. The following table details the status of the Bank’s short-term loan modifications by loan category or type as of December 31, 2020:
|
|
First
Modification
Active
|
|
|
Subsequent
Modification
Active
|
|
|
Modification
Ended
|
|
|
Total
Modified
Loans
|
|
|
Total
Loan
Portfolio
|
|
|
% Modified
to Total
Portfolio
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotel, Motel, & Lodging
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,822
|
|
|
$
|
7,822
|
|
|
$
|
51,822
|
|
|
|
15.1
|
%
|
Retail Facility
|
|
|
—
|
|
|
|
4,355
|
|
|
|
—
|
|
|
|
4,355
|
|
|
|
67,785
|
|
|
|
6.4
|
|
Commercial Real Estate
|
|
|
—
|
|
|
|
346
|
|
|
|
—
|
|
|
|
346
|
|
|
|
160,433
|
|
|
|
0.2
|
|
1-4 Family Residential
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
188,955
|
|
|
|
—
|
|
Restaurant Full Service
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
15,094
|
|
|
|
—
|
|
Restaurant Limited Service
|
|
|
2,303
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,303
|
|
|
|
15,780
|
|
|
|
14.6
|
|
Multi-family
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
61,180
|
|
|
|
—
|
|
Construction and Development
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
48,396
|
|
|
|
—
|
|
Commercial & Industrial
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
208,244
|
|
|
|
—
|
|
Farmland
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
70,272
|
|
|
|
—
|
|
Consumer, Agriculture & Other
|
|
|
—
|
|
|
|
—
|
|
|
|
486
|
|
|
|
486
|
|
|
|
74,120
|
|
|
|
0.7
|
|
Total
|
|
$
|
2,303
|
|
|
$
|
4,701
|
|
|
$
|
8,308
|
|
|
$
|
15,312
|
|
|
$
|
962,081
|
|
|
|
1.6
|
%
|
First Modification Active includes loans within the terms of the original modification agreement. Subsequent Modification Active includes loans with a matured original modification that have been further modified within the short-term parameters. Modification Ended includes loans that have reached final deferred payment and have yet to make a payment in accordance with the loan’s original terms or have yet to request a subsequent modification. Loans that returned to original contracted terms with a verified payment are considered cured and are no longer included as modified loans in the table above.
The table above includes one commercial real estate loan secured by a retail facility totaling $4.4 million that remains subject to and is performing in accordance with an interest only short-term subsequent COVID-19 modification. The loan is graded substandard, has been evaluated under ASC-310-10, and allocated a specific reserve of $2.2 million as of December 31, 2020.
Subsequent to December 31, 2020, $8.3 million of the loans categorized as Modification Ended in the table above have received a verified payment and are now considered cured.
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, generally 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,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
(dollars in thousands)
|
|
Loans on nonaccrual status
|
|
$
|
1,676
|
|
|
|
1,528
|
|
|
|
1,991
|
|
|
|
5,457
|
|
|
|
9,216
|
|
Troubled debt restructurings on accrual
|
|
|
480
|
|
|
|
475
|
|
|
|
910
|
|
|
|
1,217
|
|
|
|
5,350
|
|
Past due 90 days or more still on accrual
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
Total non-performing loans and TDRs on accrual
|
|
|
2,156
|
|
|
|
2,003
|
|
|
|
2,901
|
|
|
|
6,675
|
|
|
|
14,566
|
|
Real estate acquired through foreclosure
|
|
|
1,765
|
|
|
|
3,225
|
|
|
|
3,485
|
|
|
|
4,409
|
|
|
|
6,821
|
|
Other repossessed assets
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total non-performing assets and TDRs on accrual
|
|
$
|
3,921
|
|
|
$
|
5,228
|
|
|
$
|
6,386
|
|
|
$
|
11,084
|
|
|
$
|
21,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing loans and TDRs on accrual to total loans
|
|
|
0.22
|
%
|
|
|
0.22
|
%
|
|
|
0.38
|
%
|
|
|
0.94
|
%
|
|
|
2.28
|
%
|
Non-performing assets and TDRs on accrual to total assets
|
|
|
0.30
|
%
|
|
|
0.42
|
%
|
|
|
0.60
|
%
|
|
|
1.14
|
%
|
|
|
2.26
|
%
|
Allowance for non-performing loans
|
|
$
|
22
|
|
|
$
|
48
|
|
|
$
|
83
|
|
|
$
|
108
|
|
|
$
|
241
|
|
Allowance for non-performing loans to non-performing loans and TDRs on accrual
|
|
|
1.02
|
%
|
|
|
2.40
|
%
|
|
|
2.86
|
%
|
|
|
1.62
|
%
|
|
|
1.65
|
%
|
Interest income that would have been recorded if nonaccrual loans were on a current basis in accordance with their original terms was $288,000, $315,000, and $274,000 for the years ended December 31, 2020, 2019, and 2018, respectively.
Allowance for Loan Losses – The allowance for loan losses is established to provide for probable losses on loans that may not be fully repaid. It 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. The allowance is an estimate and loss may vary from this estimate.
Management utilizes loan grading procedures that result in specific allowance allocations for the estimated 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,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
(dollars in thousands)
|
|
Balances at beginning of period
|
|
$
|
8,376
|
|
|
$
|
8,880
|
|
|
$
|
8,202
|
|
|
$
|
8,967
|
|
|
$
|
12,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans charged-off:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
|
|
|
231
|
|
|
|
322
|
|
|
|
450
|
|
|
|
750
|
|
|
|
2,157
|
|
Commercial
|
|
|
32
|
|
|
|
37
|
|
|
|
50
|
|
|
|
5
|
|
|
|
276
|
|
Consumer
|
|
|
493
|
|
|
|
663
|
|
|
|
95
|
|
|
|
51
|
|
|
|
99
|
|
Agriculture
|
|
|
46
|
|
|
|
266
|
|
|
|
13
|
|
|
|
95
|
|
|
|
18
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
8
|
|
|
|
—
|
|
|
|
79
|
|
Total charge-offs
|
|
|
802
|
|
|
|
1,288
|
|
|
|
616
|
|
|
|
901
|
|
|
|
2,629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
|
|
|
352
|
|
|
|
597
|
|
|
|
1,437
|
|
|
|
714
|
|
|
|
1,189
|
|
Commercial
|
|
|
29
|
|
|
|
106
|
|
|
|
261
|
|
|
|
59
|
|
|
|
334
|
|
Consumer
|
|
|
45
|
|
|
|
75
|
|
|
|
69
|
|
|
|
115
|
|
|
|
299
|
|
Agriculture
|
|
|
30
|
|
|
|
3
|
|
|
|
15
|
|
|
|
33
|
|
|
|
114
|
|
Other
|
|
|
13
|
|
|
|
3
|
|
|
|
12
|
|
|
|
15
|
|
|
|
69
|
|
Total recoveries
|
|
|
469
|
|
|
|
784
|
|
|
|
1,794
|
|
|
|
936
|
|
|
|
2,005
|
|
Net charge-offs (recoveries)
|
|
|
333
|
|
|
|
504
|
|
|
|
(1,178
|
)
|
|
|
(35
|
)
|
|
|
624
|
|
Provision (negative provision) for loan losses
|
|
|
4,400
|
|
|
|
—
|
|
|
|
(500
|
)
|
|
|
(800
|
)
|
|
|
(2,450
|
)
|
Balance at end of period
|
|
$
|
12,443
|
|
|
$
|
8,376
|
|
|
$
|
8,880
|
|
|
$
|
8,202
|
|
|
$
|
8,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses to period-end loans
|
|
|
1.29
|
%
|
|
|
0.90
|
%
|
|
|
1.16
|
%
|
|
|
1.15
|
%
|
|
|
1.40
|
%
|
Net charge-offs (recoveries) to average loans
|
|
|
0.03
|
%
|
|
|
0.06
|
%
|
|
|
(0.16
|
)%
|
|
|
(0.01
|
)%
|
|
|
0.10
|
%
|
Allowance for loan losses to non-performing loans and TDRs on accrual
|
|
|
577.13
|
%
|
|
|
418.17
|
%
|
|
|
306.10
|
%
|
|
|
122.88
|
%
|
|
|
61.16
|
%
|
The allowance for loan losses is a reserve established through charges to earnings in the form of a provision for loan losses. The loan loss reserve, as a percentage of total loans at December 31, 2020, was 1.29% compared to 0.90% at December 31, 2019. Loans acquired in the November 2019 branch transaction totaled $85.9 million at December 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 $288,000 at December 31, 2020, compared to $480,000 at December 31, 2019. Additionally, management added a qualitative environmental adjustment for these loans as the fair value assessment at the time of purchase did not contemplate COVID-19. Any subsequent deterioration of these acquired loans may require an adjustment through the allowance for loan loss. The allowance for loan losses to non-performing loans was 577.13% at December 31, 2020, compared with 418.17% at December 31, 2019. Net charge-offs totaled $333,000 for 2020 compared to net charge-offs of $504,000 for 2019.
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 the Bank’s historical loan loss experience, the growth, composition and diversification of its 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 loss percentages to the various categories of loans, not including any loan that has a specific allowance allocated to it.
Generally, all loans identified as impaired are reviewed individually 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. Loans for which specific reserves have been provided are excluded from the general reserve calculations described below.
Management makes specific allowances for each impaired loan based on its type and risk classification as discussed above. 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.
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 the Bank’s ability to collect those loans. In general, management obtains updated appraisals on property securing the Bank’s 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 the Company’s 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. Historical loss experience, risk grade classification metrics, charge-off levels, and past due trends remained stable between periods.
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 warranting more frequent monitoring. 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 considered in the assessment of the adequacy of the allowance for loan losses.
In establishing the appropriate risk rating for loans, 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, 2020, $17.2 million of loans were classified as substandard, there were no loans classified as special mention, and no loans classified as doubtful or loss. This compares with $10.0 million of loans classified as substandard, no loans classified as special mention, and no loans classified as doubtful or loss as of December 31, 2019. The $7.1 million increase in loans classified as substandard was primarily driven by $11.7 million in loans moved to substandard, offset by $3.9 million in principal payments received and $643,000 in charge-offs during 2020. Substandard loans are primarily concentrated in the commercial and commercial real estate portfolios. As of December 31, 2020, $2.8 million of the allowance for loan losses was allocated to substandard loans, compared to an allocation of $401,000 at December 31, 2019. The increase in allocation between years is primarily related to one commercial real estate loan secured by a retail facility totaling $4.4 million that remains subject to and is performing in accordance with an interest only, short-term subsequent COVID-19 modification. The loan is graded substandard, has been evaluated under ASC-310-10, and allocated a specific reserve of $2.2 million at December 31, 2020.
The following table depicts management’s allocation of the allowance for loan losses by loan type based on the factors previously discussed. 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.
Allocation of Allowance for Credit Losses
|
|
As of December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
Amount of
Allowance
|
|
|
Percent of
Loans to
Total
Loans
|
|
|
Amount of
Allowance
|
|
|
Percent of
Loans to
Total
Loans
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
2,529
|
|
|
|
21.65
|
%
|
|
$
|
1,710
|
|
|
|
15.71
|
%
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
1,158
|
|
|
|
9.66
|
|
|
|
363
|
|
|
|
7.01
|
|
Farmland
|
|
|
775
|
|
|
|
7.30
|
|
|
|
654
|
|
|
|
8.54
|
|
Nonfarm nonresidential
|
|
|
5,117
|
|
|
|
27.69
|
|
|
|
3,063
|
|
|
|
27.58
|
|
Residential Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
482
|
|
|
|
6.36
|
|
|
|
478
|
|
|
|
7.66
|
|
1-4 Family
|
|
|
1,417
|
|
|
|
19.64
|
|
|
|
1,265
|
|
|
|
24.47
|
|
Consumer
|
|
|
361
|
|
|
|
3.27
|
|
|
|
485
|
|
|
|
5.16
|
|
Agriculture
|
|
|
600
|
|
|
|
4.37
|
|
|
|
355
|
|
|
|
3.79
|
|
Other
|
|
|
4
|
|
|
|
0.06
|
|
|
|
3
|
|
|
|
0.08
|
|
Total
|
|
$
|
12,443
|
|
|
|
100.0
|
%
|
|
$
|
8,376
|
|
|
|
100.0
|
%
|
|
|
As of December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
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
|
|
$
|
1,299
|
|
|
|
16.91
|
%
|
|
$
|
892
|
|
|
|
15.98
|
%
|
|
$
|
475
|
|
|
|
15.29
|
%
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
419
|
|
|
|
11.35
|
|
|
|
301
|
|
|
|
8.05
|
|
|
|
470
|
|
|
|
5.68
|
|
Farmland
|
|
|
543
|
|
|
|
10.18
|
|
|
|
449
|
|
|
|
12.40
|
|
|
|
288
|
|
|
|
11.19
|
|
Nonfarm nonresidential
|
|
|
3,714
|
|
|
|
22.50
|
|
|
|
3,282
|
|
|
|
22.01
|
|
|
|
4,136
|
|
|
|
23.39
|
|
Residential Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
403
|
|
|
|
6.50
|
|
|
|
627
|
|
|
|
7.94
|
|
|
|
610
|
|
|
|
7.54
|
|
1-4 Family
|
|
|
2,049
|
|
|
|
22.97
|
|
|
|
2,273
|
|
|
|
25.17
|
|
|
|
2,816
|
|
|
|
29.42
|
|
Consumer
|
|
|
130
|
|
|
|
5.11
|
|
|
|
64
|
|
|
|
2.59
|
|
|
|
8
|
|
|
|
1.54
|
|
Agriculture
|
|
|
321
|
|
|
|
4.41
|
|
|
|
313
|
|
|
|
5.78
|
|
|
|
162
|
|
|
|
5.87
|
|
Other
|
|
|
2
|
|
|
|
0.07
|
|
|
|
1
|
|
|
|
0.08
|
|
|
|
2
|
|
|
|
0.08
|
|
Total
|
|
$
|
8,880
|
|
|
|
100.0
|
%
|
|
$
|
8,202
|
|
|
|
100.0
|
%
|
|
$
|
8,967
|
|
|
|
100.0
|
%
|
Provision for Loan Losses – A provision for loan loss of $4.4 million was recorded for the year ended December 31, 2020, compared with no provision for loan losses for 2019 and a negative provision for loan losses of $500,000 for 2018. The 2020 loan loss provision was attributable to the net loan charge-offs during the year, trends within the portfolio during the year, and primarily to changes in the economic and business environment attributable to COVID-19. Net charge-offs were $333,000 for 2020 compared to net charge-offs of $504,000 in 2019 and net recoveries of $1.2 million in 2018.
While the Company expects the U.S. Government’s economic responses to the COVID-19 pandemic through monetary policy and fiscal stimulus have provided meaningful support to the economy, management deemed it prudent to increase the allowance for loan losses through its qualitative environmental factors and individual analysis to account for the pandemic risk.
Foreclosed Properties – Foreclosed properties at December 31, 2020 were $1.8 million compared with $3.2 million at December 31, 2019. See “Note 6 - Other Real Estate Owned,” to the financial statements. All OREO properties held by the Bank at December 31, 2020 are currently under contract for sale. During 2020, there were no acquisitions of OREO properties and the Bank sold properties totaling approximately $1.6 million. There were no acquisitions or sales of OREO during 2019.
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.
Net activity relating to OREO during the years indicated is as follows:
|
2020
|
|
2019
|
|
|
2018
|
|
|
(in thousands)
|
|
OREO Activity
|
|
|
|
|
|
|
|
OREO as of January 1
|
$
|
3,225
|
|
$
|
3,485
|
|
$
|
4,409
|
|
Real estate acquired
|
|
—
|
|
|
—
|
|
|
730
|
|
Valuation adjustment write-downs
|
|
—
|
|
|
(260
|
)
|
|
(850
|
)
|
Net gain on sale
|
|
—
|
|
|
—
|
|
|
72
|
|
Proceeds from sale of properties
|
|
(1,600
|
)
|
|
—
|
|
|
(876
|
)
|
Improvements
|
|
140
|
|
|
—
|
|
|
—
|
|
OREO as of December 31
|
$
|
1,765
|
|
$
|
3,225
|
|
$
|
3,485
|
|
Operating expenses for OREO totaled $63,000 for the year ended December 31, 2020, compared with write-downs and operating expenses of $368,000 in 2019 and $868,000 in 2018.
During the year ended December 31, 2020, there were no fair value write-downs recorded compared to $260,000 for 2019 and $850,000 for 2018. 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 $1.6 million during in 2020, compared with no OREO sales and $876,000 during 2019, and 2018, 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, and collateralized loan obligations. The investment portfolio decreased by $5.1 million, or 2.5%, to $203.9 million at December 31, 2020, compared with $209.0 million at December 31, 2019.
The following table sets forth the carrying value of the Bank’s securities portfolio at the dates indicated.
|
|
December 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 and federal agencies
|
|
$
|
18,811
|
|
|
$
|
806
|
|
|
$
|
—
|
|
|
$
|
19,617
|
|
|
$
|
22,281
|
|
|
$
|
196
|
|
|
$
|
(147
|
)
|
|
$
|
22,330
|
|
Agency mortgage-backed: residential
|
|
|
71,582
|
|
|
|
2,777
|
|
|
|
(26
|
)
|
|
|
74,333
|
|
|
|
91,269
|
|
|
|
1,186
|
|
|
|
(255
|
)
|
|
|
92,200
|
|
Collateralized loan obligations
|
|
|
44,730
|
|
|
|
—
|
|
|
|
(1,578
|
)
|
|
|
43,152
|
|
|
|
49,831
|
|
|
|
—
|
|
|
|
(412
|
)
|
|
|
49,419
|
|
State and municipal
|
|
|
34,759
|
|
|
|
1,296
|
|
|
|
—
|
|
|
|
36,055
|
|
|
|
27,819
|
|
|
|
550
|
|
|
|
(3
|
)
|
|
|
28,366
|
|
Corporate bonds
|
|
|
31,635
|
|
|
|
472
|
|
|
|
(1,402
|
)
|
|
|
30,705
|
|
|
|
16,472
|
|
|
|
213
|
|
|
|
—
|
|
|
|
16,685
|
|
Total available for sale
|
|
$
|
201,517
|
|
|
$
|
5,351
|
|
|
$
|
(3,006
|
)
|
|
$
|
203,862
|
|
|
$
|
207,672
|
|
|
$
|
2,145
|
|
|
$
|
(817
|
)
|
|
$
|
209,000
|
|
The following table sets forth the contractual maturities, fair values and weighted-average yields for the Bank’s available for sale securities held at December 31, 2020:
|
|
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
|
|
$
|
—
|
|
|
|
—
|
%
|
|
$
|
952
|
|
|
|
2.36
|
%
|
|
$
|
7,954
|
|
|
|
2.70
|
%
|
|
$
|
10,711
|
|
|
|
2.26
|
%
|
|
$
|
19,617
|
|
|
|
2.44
|
%
|
Agency mortgage-backed: residential
|
|
|
—
|
|
|
|
—
|
|
|
|
5,556
|
|
|
|
2.27
|
|
|
|
14,712
|
|
|
|
2.40
|
|
|
|
54,065
|
|
|
|
2.01
|
|
|
|
74,333
|
|
|
|
2.11
|
|
Collateralized loan obligations
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
17,902
|
|
|
|
2.35
|
|
|
|
25,250
|
|
|
|
1.73
|
|
|
|
43,152
|
|
|
|
1.99
|
|
State and municipal
|
|
|
4,358
|
|
|
|
3.54
|
|
|
|
11,810
|
|
|
|
2.98
|
|
|
|
3,115
|
|
|
|
2.98
|
|
|
|
16,772
|
|
|
|
2.90
|
|
|
|
36,055
|
|
|
|
3.01
|
|
Corporate bonds
|
|
|
—
|
|
|
|
—
|
|
|
|
1,658
|
|
|
|
4.02
|
|
|
|
19,187
|
|
|
|
4.27
|
|
|
|
9,860
|
|
|
|
2.80
|
|
|
|
30,705
|
|
|
|
3.74
|
|
Total available for sale
|
|
$
|
4,358
|
|
|
|
3.54
|
%
|
|
$
|
19,976
|
|
|
|
2.84
|
%
|
|
$
|
62,870
|
|
|
|
3.02
|
%
|
|
$
|
116,658
|
|
|
|
2.17
|
%
|
|
$
|
203,862
|
|
|
|
2.52
|
%
|
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 generally do not experience increasing prepayments of principal and, consequently, average life will not be shortened. When interest rates 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, 2020, 72.7% of the Bank’s agency mortgage-backed securities had contractual final maturities of more than ten years with a weighted average life of 22.3 years.
The Bank owns Collateralized Loan Obligations (CLOs), which are debt securities secured by professionally managed portfolios of senior-secured loans to corporations. CLO are typically $300 million to $1 billion in size, contain one hundred or more loans and have five to six credit tranches 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 market values 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. During the first quarter of 2020, the fair value of the Bank’s CLO portfolio declined as the market was disrupted by COVID-19. At March 31, 2020, the CLO portfolio had an unrealized loss of $4.0 million, or 9.0% of amortized cost. At December 31, 2020, the CLO portfolio had improved to a net unrealized loss of $1.6 million, or 3.5% of amortized cost.
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 December 31, 2020, $27.1 million, $13.6 million, and $2.4 million of the Bank’s CLOs were AA, A, and BBB rated, respectively. There was one CLO rated below A at BBB, which was downgraded during the third quarter of 2020. Stress testing was completed on each security in the CLO portfolio as of year-end to determine the conditions necessary for the Bank’s investment to incur the first dollar of loss. 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. 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 in 2020. At December 31, 2020, the portfolio had a net unrealized loss of $930,000, or 3% of amortized cost which was improved from an unrealized loss of 6% of amortized cost at March 31, 2020. The corporate bond portfolio consists of 13 subordinated debt securities and one senior debt security of U.S. banks and bank holding companies with maturities ranging from 2024 to 2037. The securities are either initially fixed for five years converting to floating at an index over LIBOR, or SOFR, or floating at an index over LIBOR, or SOFR, from inception. Management regularly monitors the financial condition of these corporate issuers by reviewing their regulatory and public filings.
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 declines are temporary in nature.
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.
The Bank primarily relies on its banking office network to attract and retain deposits in its local markets, as well as deposit listing services, deposit gathering networks, and the online channel to attract both in and out-of-market deposits. Market interest rates and rates on deposit products offered by competing financial institutions can significantly affect the Bank’s ability to attract and retain deposits. During 2020, total deposits increased $92.6 million compared with 2019. The increase in deposits for 2020 was primarily in savings account balances, as well as non-interest and interest-bearing demand deposit accounts. During 2019, total deposits increased $132.7 million compared with 2018. The increase in deposits for 2019 was primarily related to the branch purchase transaction.
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 at acceptable rates 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,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
|
Average
Balance
|
|
|
Average
Rate
|
|
|
Average
Balance
|
|
|
Average
Rate
|
|
|
Average
Balance
|
|
|
Average
Rate
|
|
|
|
(dollars in thousands)
|
|
Demand
|
|
$
|
215,145
|
|
|
|
|
|
|
$
|
151,299
|
|
|
|
|
|
|
$
|
136,947
|
|
|
|
|
|
Interest Checking
|
|
|
169,808
|
|
|
|
0.32
|
%
|
|
|
104,077
|
|
|
|
0.30
|
%
|
|
|
90,583
|
|
|
|
0.13
|
%
|
Money Market
|
|
|
166,788
|
|
|
|
0.55
|
|
|
|
161,610
|
|
|
|
1.06
|
|
|
|
158,832
|
|
|
|
0.90
|
|
Savings
|
|
|
111,559
|
|
|
|
0.48
|
|
|
|
36,035
|
|
|
|
0.19
|
|
|
|
34,866
|
|
|
|
0.16
|
|
Certificates of Deposit
|
|
|
436,083
|
|
|
|
1.33
|
|
|
|
483,222
|
|
|
|
1.98
|
|
|
|
439,597
|
|
|
|
1.35
|
|
Total Deposits
|
|
$
|
1,099,383
|
|
|
|
|
|
|
$
|
936,243
|
|
|
|
|
|
|
$
|
860,825
|
|
|
|
|
|
Weighted Average Rate
|
|
|
|
|
|
|
0.71
|
%
|
|
|
|
|
|
|
1.25
|
%
|
|
|
|
|
|
|
0.88
|
%
|
The following table shows at December 31, 2020 the amount of the Bank’s time deposits of $250,000 or more by time remaining until maturity:
Maturity Period
|
|
(in thousands)
|
|
|
|
|
Three months or less
|
|
$
|
13,491
|
|
Three months through six months
|
|
|
14,856
|
|
Six months through twelve months
|
|
|
7,605
|
|
Over twelve months
|
|
|
14,737
|
|
Total
|
|
$
|
50,689
|
|
The Bank maintains competitive pricing on its deposit products, which management believes allows it to retain a substantial percentage of the Bank’s customers when their time deposits mature.
Borrowing – Deposits are the primary source of funds for lending activities, investment activities, and for general business purposes. The Bank also uses borrowings from the FHLB of Cincinnati to supplement the pool of lendable funds, meet deposit withdrawal requirements and manage the terms of liabilities. FHLB borrowings are secured by the Bank’s stock in the FHLB, substantially all of its first mortgage residential loans, as well as its outstanding PPP loans. At December 31, 2020, the Bank had $20.6 million in outstanding borrowings from the FHLB and the capacity to increase borrowings by an additional $93.9 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 borrow on the security of such stock and certain of its 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 the Bank’s FHLB borrowings as of and for the periods indicated:
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
|
(dollars in thousands)
|
|
Average balance outstanding
|
|
$
|
34,101
|
|
|
$
|
35,038
|
|
|
$
|
43,363
|
|
Maximum amount outstanding at any month-end during the period
|
|
|
71,376
|
|
|
|
61,389
|
|
|
|
71,630
|
|
End of period balance
|
|
|
20,623
|
|
|
|
61,389
|
|
|
|
46,549
|
|
Weighted average interest rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
At end of period
|
|
|
0.75
|
%
|
|
|
1.70
|
%
|
|
|
2.45
|
%
|
During the period
|
|
|
1.09
|
%
|
|
|
2.31
|
%
|
|
|
2.00
|
%
|
Junior Subordinated Debentures – At December 31, 2020, 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, 2020, the 3-month LIBOR was 0.24%.
|
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 the Company’s 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. At December 31, 2020, 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 the Company’s Tier 1 capital can consist of trust preferred securities and qualifying perpetual preferred stock. To the extent the amount of the Company’s trust preferred securities exceeds the 25% limit, the excess would be includable in Tier 2 capital. As of December 31, 2020, all of the Company’s trust preferred securities were included in and comprised 20% of Tier 1 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.
Subordinated Capital Notes – The Company’s subordinated notes mature on July 31, 2029. The notes carry interest at a fixed rate of 5.75% until July 30, 2024 and then convert to variable at three-month LIBOR plus 395 basis points until maturity. The subordinated capital notes qualify as Tier 2 regulatory capital. On July 31, 2020, the Company completed the issuance of an additional $8.0 million in subordinated notes under the July 23, 2019 indenture with the same terms and with the additional commitment by the Company to extend the optional prepayment date to July 31, 2025 so long as the additional notes qualify as Tier 2 regulatory capital. The Company used the net proceeds from the issuance of the additional notes to retire its senior debt and retained the remaining balance for general corporate purposes. The subordinated capital notes qualify as Tier 2 regulatory capital.
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 the Company’s 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, 2020, the Bank had an unused borrowing capacity with the FHLB of $93.9 million. Advances are collateralized by first mortgage residential loans, as well as its outstanding PPP loans. 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, 2020, the Bank had no brokered deposits.
The Company uses cash on hand to service the subordinated capital notes, 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.
Capital
Stockholders’ equity increased $10.3 million to $116.0 million at December 31, 2020, compared with $105.8 million at December 31, 2019. The increase was due primarily to current year net income of $9.0 million.
The following table shows the ratios of common equity Tier 1, Tier 1 capital, total capital to risk-adjusted assets, and Tier 1 leverage for the Bank at December 31, 2020:
|
|
Regulatory
Minimums
|
|
|
Well-Capitalized
Minimums
|
|
|
Basel III Plus
Conservation
Buffer
|
|
|
Limestone
Bank
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common equity Tier 1 capital
|
|
|
4.5
|
%
|
|
|
6.5
|
%
|
|
|
7.0
|
%
|
|
|
12.05
|
%
|
Tier 1 capital
|
|
|
6.0
|
|
|
|
8.0
|
|
|
|
8.5
|
|
|
|
12.05
|
|
Total risk-based capital
|
|
|
8.0
|
|
|
|
10.0
|
|
|
|
10.5
|
|
|
|
13.20
|
|
Tier 1 leverage ratio
|
|
|
4.0
|
|
|
|
5.0
|
|
|
|
—
|
|
|
|
10.21
|
|
Failure to meet minimum capital requirements could result in discretionary actions by regulators that, if taken, could have a materially adverse effect on the Company’s financial condition.
The Basel III rules require a “capital conservation buffer” of 2.5% above the regulatory minimum risk-based capital ratios. An institution is subject to limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses if capital levels fall below minimum Basel III levels plus the buffer amounts. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions without prior regulatory approval.
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 enters 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, 2020 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 the Bank’s 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
|
|
$
|
63,996
|
|
|
$
|
59,391
|
|
|
$
|
19,929
|
|
|
$
|
45,894
|
|
|
$
|
189,210
|
|
Standby letters of credit
|
|
|
1,502
|
|
|
|
11
|
|
|
|
4
|
|
|
|
—
|
|
|
|
1,517
|
|
Total
|
|
$
|
65,498
|
|
|
$
|
59,402
|
|
|
$
|
19,933
|
|
|
$
|
45,894
|
|
|
$
|
190,727
|
|
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 its exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures.
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.
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, 2020 and December 31, 2019.
Contractual Obligations
The following table summarizes the Company’s contractual obligations by maturity date or scheduled payment date and other commitments to make future payments as of December 31, 2020:
|
|
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
|
|
$
|
272,031
|
|
|
$
|
57,295
|
|
|
$
|
37,749
|
|
|
$
|
477
|
|
|
$
|
367,552
|
|
FHLB borrowing (1)
|
|
|
623
|
|
|
|
—
|
|
|
|
—
|
|
|
|
20,000
|
|
|
|
20,623
|
|
Operating leases
|
|
|
279
|
|
|
|
369
|
|
|
|
347
|
|
|
|
3,503
|
|
|
|
4,498
|
|
Junior subordinated debentures
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
21,000
|
|
|
|
21,000
|
|
Subordinated capital notes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
25,000
|
|
|
|
25,000
|
|
Total
|
|
$
|
272,933
|
|
|
$
|
57,664
|
|
|
$
|
38,096
|
|
|
$
|
69,980
|
|
|
$
|
438,673
|
|
(1)
|
Fixed rate borrowings with rates ranging from 0% to 0.77%, and maturities ranging from 2021 through 2030, averaging 0.75%. The $20.0 million FHLB borrowing is callable quarterly at the option of the FHLB.
|
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.
Item 8. Financial Statements and Supplementary Data
The following consolidated financial statements and reports are included in this section:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2020 and 2019
Consolidated Statements of Operations for the Years Ended December 31, 2020, 2019, and 2018
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2020, 2019, and 2018
Consolidated Statements of Change in Stockholders’ Equity for the Years Ended December 31, 2020, 2019, and 2018
Consolidated Statements of Cash Flows for the Years Ended December 31, 2020, 2019, and 2018
Notes to Consolidated Financial Statements
|
Crowe LLP
Independent Member Crowe Global
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and the Board of Directors of Limestone Bancorp, Inc.
Louisville, Kentucky
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Limestone Bancorp, Inc. (the "Company") as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinions
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Loan Losses - Qualitative Risk Factors
As described in Notes 1 and 3 to the consolidated financial statements, the Company’s allowance for loan losses represents management’s best estimate of probable incurred credit losses inherent in the held for investment loan portfolio as of the balance sheet date. Management assesses the risk inherent in the loan portfolio based on qualitative and quantitative risk factors. The allowance for loan losses consists of two components: the valuation allowance for loans that are individually classified as impaired and separately identified for impairment (“specific component”), totaling $2,177,000 (or 17.5% of the reserve) and the valuation allowance for loans not considered impaired and collectively evaluated for impairment (“general component”), totaling $10,266,000 (or 82.5% of the reserve).
The general component is based on historical loss rates adjusted for current factors. The historical loss rates are determined by loan portfolio segment and are based on actual loss history realized over the most recent five years with equal weighting. This actual loss experience is supplemented with other economic or qualitative factors based on the risks present for each portfolio segment. The qualitative risk factor identification and analysis requires significant judgment and allows management to adjust the estimate of losses based on the most recent information available and to address other limitations in the quantitative component that is based on historical loss rates. The Company’s risk adjustments include the changes in lending policies, procedures and practices, effects of any change in risk selection and underwriting standards, national and local economic trends and conditions, industry conditions, trends in volume and terms of loans, experience, ability and depth of lending management and other relevant staff, levels of and trends in delinquencies and impaired loans, levels of and trends in charge-offs and recoveries, and effects of changes in credit concentrations. The evaluation of these risk factor adjustments contributes significantly to the general reserve component of the estimate of the allowance for loan losses.
We identified auditing the general component as a critical audit matter because of the necessary judgment applied by us to evaluate management’s significant estimates and subjective assumptions related to the following:
|
●
|
Adjustments to the historical loss ratios for qualitative factors including the selection of qualitative factors and the magnitude of such adjustments based on management’s judgments regarding factors which impact asset quality.
|
|
●
|
Accuracy of the loan risk ratings as different allocations are applied based on risk rating.
|
The primary procedures performed to address the critical audit matter included:
|
●
|
Testing the effectiveness of controls over the evaluation of the allowance related to the general component, including controls addressing:
|
|
|
o
|
Problem loan identification and delinquency monitoring.
|
|
|
o
|
Management’s review of the allowance for loan loss calculation, including data used as the basis for adjustments related to the quantitative and qualitative factors.
|
|
|
o
|
Data inputs including the completeness and accuracy of loan data used in the computations.
|
|
●
|
Substantively testing management’s process, including evaluating their judgments and assumptions for developing the general component, which included:
|
|
|
o
|
Evaluation of the reasonableness of management’s judgments related to the qualitative factors including assessing the relevance of data used to develop factors. Our evaluation considered the weight of evidence from internal and external sources and loan portfolio performance.
|
|
|
o
|
Evaluation of management’s methodology to ensure it was consistently applied year over year.
|
|
|
o
|
Evaluation of the allowance related to loans collectively evaluated for impairment by loan segment year over year for directional consistency.
|
We have served as the Company's auditor since 1998.
Louisville, Kentucky
February 26, 2021
LIMESTONE BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
(Dollar amounts in thousands except share data)
|
|
2020
|
|
|
2019
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
10,830
|
|
|
$
|
8,241
|
|
Interest bearing deposits in banks
|
|
|
56,863
|
|
|
|
21,962
|
|
Cash and cash equivalents
|
|
|
67,693
|
|
|
|
30,203
|
|
Securities available for sale
|
|
|
203,862
|
|
|
|
209,000
|
|
Loans, net of allowance of $12,443 and $8,376, respectively
|
|
|
949,638
|
|
|
|
917,895
|
|
Premises and equipment, net
|
|
|
18,533
|
|
|
|
19,658
|
|
Premises held for sale
|
|
|
1,060
|
|
|
|
900
|
|
Other real estate owned
|
|
|
1,765
|
|
|
|
3,225
|
|
Federal Home Loan Bank stock
|
|
|
5,887
|
|
|
|
6,237
|
|
Bank owned life insurance
|
|
|
23,441
|
|
|
|
16,037
|
|
Deferred taxes, net
|
|
|
25,714
|
|
|
|
27,765
|
|
Goodwill
|
|
|
6,252
|
|
|
|
6,252
|
|
Other intangible assets, net
|
|
|
2,244
|
|
|
|
2,500
|
|
Accrued interest receivable and other assets
|
|
|
6,213
|
|
|
|
6,107
|
|
Total assets
|
|
$
|
1,312,302
|
|
|
$
|
1,245,779
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
Non-interest bearing
|
|
$
|
243,022
|
|
|
$
|
187,551
|
|
Interest bearing
|
|
|
876,585
|
|
|
|
839,424
|
|
Total deposits
|
|
|
1,119,607
|
|
|
|
1,026,975
|
|
Federal Home Loan Bank advances
|
|
|
20,623
|
|
|
|
61,389
|
|
Accrued interest payable and other liabilities
|
|
|
10,048
|
|
|
|
8,665
|
|
Junior subordinated debentures
|
|
|
21,000
|
|
|
|
21,000
|
|
Subordinated capital notes
|
|
|
25,000
|
|
|
|
17,000
|
|
Senior debt
|
|
|
—
|
|
|
|
5,000
|
|
Total liabilities
|
|
|
1,196,278
|
|
|
|
1,140,029
|
|
Commitments and contingent liabilities (Note 15)
|
|
|
—
|
|
|
|
—
|
|
Stockholders’ equity
|
|
|
|
|
|
|
|
|
Common stock, no par, 39,000,000 shares authorized, 6,498,865 and 6,251,975 voting, and 1,000,000 and 1,220,000 non-voting shares issued and outstanding, respectively
|
|
|
140,639
|
|
|
|
140,639
|
|
Additional paid-in capital
|
|
|
25,013
|
|
|
|
24,508
|
|
Retained deficit
|
|
|
(46,678
|
)
|
|
|
(55,683
|
)
|
Accumulated other comprehensive loss
|
|
|
(2,950
|
)
|
|
|
(3,714
|
)
|
Total common stockholders’ equity
|
|
|
116,024
|
|
|
|
105,750
|
|
Total liabilities and stockholders’ equity
|
|
$
|
1,312,302
|
|
|
$
|
1,245,779
|
|
See accompanying notes.
LIMESTONE BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
(Dollar amounts in thousands except per share data)
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, including fees
|
|
$
|
45,093
|
|
|
$
|
42,153
|
|
|
$
|
37,342
|
|
Taxable securities
|
|
|
5,042
|
|
|
|
6,269
|
|
|
|
4,880
|
|
Tax exempt securities
|
|
|
370
|
|
|
|
326
|
|
|
|
383
|
|
Interest-bearing deposits and other
|
|
|
248
|
|
|
|
836
|
|
|
|
856
|
|
|
|
|
50,753
|
|
|
|
49,584
|
|
|
|
43,461
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
7,796
|
|
|
|
11,657
|
|
|
|
7,549
|
|
Federal Home Loan Bank advances
|
|
|
371
|
|
|
|
810
|
|
|
|
867
|
|
Junior subordinated debentures
|
|
|
660
|
|
|
|
1,005
|
|
|
|
946
|
|
Subordinated capital notes
|
|
|
1,206
|
|
|
|
433
|
|
|
|
39
|
|
Senior debt
|
|
|
119
|
|
|
|
329
|
|
|
|
389
|
|
|
|
|
10,152
|
|
|
|
14,234
|
|
|
|
9,790
|
|
Net interest income
|
|
|
40,601
|
|
|
|
35,350
|
|
|
|
33,671
|
|
Provision (negative provision) for loan losses
|
|
|
4,400
|
|
|
|
—
|
|
|
|
(500
|
)
|
Net interest income after provision for loan losses
|
|
|
36,201
|
|
|
|
35,350
|
|
|
|
34,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts
|
|
|
2,268
|
|
|
|
2,381
|
|
|
|
2,355
|
|
Bank card interchange fees
|
|
|
3,376
|
|
|
|
2,438
|
|
|
|
1,831
|
|
Income from bank owned life insurance
|
|
|
424
|
|
|
|
410
|
|
|
|
437
|
|
Net gain (loss) on sales and calls of investment securities
|
|
|
(5
|
)
|
|
|
(5
|
)
|
|
|
(6
|
)
|
Other
|
|
|
781
|
|
|
|
694
|
|
|
|
1,162
|
|
|
|
|
6,844
|
|
|
|
5,918
|
|
|
|
5,779
|
|
Non-interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
17,751
|
|
|
|
16,233
|
|
|
|
15,489
|
|
Occupancy and equipment
|
|
|
4,001
|
|
|
|
3,522
|
|
|
|
3,586
|
|
Professional fees
|
|
|
937
|
|
|
|
769
|
|
|
|
814
|
|
Marketing expense
|
|
|
629
|
|
|
|
908
|
|
|
|
1,114
|
|
FDIC insurance
|
|
|
229
|
|
|
|
211
|
|
|
|
557
|
|
Data processing expense
|
|
|
1,502
|
|
|
|
1,259
|
|
|
|
1,192
|
|
State franchise and deposit tax
|
|
|
1,475
|
|
|
|
1,210
|
|
|
|
1,118
|
|
Deposit account related expense
|
|
|
1,890
|
|
|
|
1,224
|
|
|
|
823
|
|
Other real estate owned expense
|
|
|
63
|
|
|
|
368
|
|
|
|
868
|
|
Litigation and loan collection expense
|
|
|
200
|
|
|
|
189
|
|
|
|
245
|
|
Communications expense
|
|
|
856
|
|
|
|
772
|
|
|
|
701
|
|
Insurance expense
|
|
|
428
|
|
|
|
444
|
|
|
|
478
|
|
Postage and delivery
|
|
|
627
|
|
|
|
544
|
|
|
|
364
|
|
Acquisition costs
|
|
|
—
|
|
|
|
775
|
|
|
|
—
|
|
Other
|
|
|
1,828
|
|
|
|
1,842
|
|
|
|
1,777
|
|
|
|
|
32,416
|
|
|
|
30,270
|
|
|
|
29,126
|
|
Income before income taxes
|
|
|
10,629
|
|
|
|
10,998
|
|
|
|
10,824
|
|
Income tax expense
|
|
|
1,624
|
|
|
|
480
|
|
|
|
2,030
|
|
Net income
|
|
|
9,005
|
|
|
|
10,518
|
|
|
|
8,794
|
|
Basic and diluted income per common share
|
|
$
|
1.20
|
|
|
$
|
1.41
|
|
|
$
|
1.23
|
|
See accompanying notes.
LIMESTONE BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31,
(in thousands)
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Net income
|
|
$
|
9,005
|
|
|
$
|
10,518
|
|
|
$
|
8,794
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) arising during the period
|
|
|
1,012
|
|
|
|
3,773
|
|
|
|
(1,652
|
)
|
Less reclassification adjustment for losses included in net income
|
|
|
(5
|
)
|
|
|
(5
|
)
|
|
|
(6
|
)
|
Net unrealized gain (loss) recognized in comprehensive income
|
|
|
1,017
|
|
|
|
3,778
|
|
|
|
(1,646
|
)
|
Tax effect
|
|
|
(253
|
)
|
|
|
(864
|
)
|
|
|
347
|
|
Other comprehensive income (loss)
|
|
|
764
|
|
|
|
2,914
|
|
|
|
(1,299
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
9,769
|
|
|
$
|
13,432
|
|
|
$
|
7,495
|
|
See accompanying notes.
LIMESTONE BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Years Ended December 31, 2020
(Dollar amounts in thousands except share and per share data)
|
|
Shares
|
|
|
Amount
|
|
|
|
Preferred
|
|
|
Common
|
|
|
Preferred
|
|
|
Common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series E
|
|
|
Series F
|
|
|
Common
|
|
|
Non-Voting Common
|
|
|
|
Total Common
|
|
|
|
Series E
|
|
|
Series F
|
|
|
Common and Non-Voting Common
|
|
|
Additional Paid-In Capital
|
|
|
Retained Deficit
|
|
|
|
Accumulated Other Comprehensive Loss
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2017
|
|
|
6,198
|
|
|
|
4,304
|
|
|
|
6,039,864
|
|
|
|
220,000
|
|
|
|
6,259,864
|
|
|
$
|
1,644
|
|
|
$
|
1,127
|
|
|
$
|
125,729
|
|
|
$
|
24,497
|
|
|
$
|
(75,108
|
)
|
|
$
|
(5,216
|
)
|
|
$
|
72,673
|
|
Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations upon award
|
|
|
—
|
|
|
|
—
|
|
|
|
52,856
|
|
|
|
—
|
|
|
|
52,856
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Issuance of stock
|
|
|
—
|
|
|
|
—
|
|
|
|
150,000
|
|
|
|
1,000,000
|
|
|
|
1,150,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
14,910
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
14,910
|
|
Redemption and retirement of preferred shares
|
|
|
(6,198
|
)
|
|
|
(4,304
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,644
|
)
|
|
|
(1,127
|
)
|
|
|
—
|
|
|
|
(734
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,505
|
)
|
Stock-based compensation expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
524
|
|
|
|
—
|
|
|
|
—
|
|
|
|
524
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8,794
|
|
|
|
—
|
|
|
|
8,794
|
|
Reclassification of disproportionate tax effect
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
due to change in federal tax rate
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
113
|
|
|
|
(113
|
)
|
|
|
—
|
|
Net change in accumulated other comprehensive loss, net of taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,299
|
)
|
|
|
(1,299
|
)
|
Balances, December 31, 2018
|
|
|
—
|
|
|
|
—
|
|
|
|
6,242,720
|
|
|
|
1,220,000
|
|
|
|
7,462,720
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
140,639
|
|
|
$
|
24,287
|
|
|
$
|
(66,201
|
)
|
|
$
|
(6,628
|
)
|
|
$
|
92,097
|
|
Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations upon award
|
|
|
—
|
|
|
|
—
|
|
|
|
13,503
|
|
|
|
—
|
|
|
|
13,503
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(314
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(314
|
)
|
Forfeited unvested stock
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,248
|
)
|
|
|
—
|
|
|
|
(4,248
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Stock-based compensation expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
535
|
|
|
|
—
|
|
|
|
—
|
|
|
|
535
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,518
|
|
|
|
—
|
|
|
|
10,518
|
|
Net change in accumulated other comprehensive loss, net of taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,914
|
|
|
|
2,914
|
|
Balances, December 31, 2019
|
|
|
—
|
|
|
|
—
|
|
|
|
6,251,975
|
|
|
|
1,220,000
|
|
|
|
7,471,975
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
140,639
|
|
|
$
|
24,508
|
|
|
$
|
(55,683
|
)
|
|
$
|
(3,714
|
)
|
|
$
|
105,750
|
|
Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations upon award
|
|
|
—
|
|
|
|
—
|
|
|
|
28,248
|
|
|
|
—
|
|
|
|
28,248
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(75
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(75
|
)
|
Forfeited unvested stock
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,358
|
)
|
|
|
—
|
|
|
|
(1,358
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Stock-based compensation expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
580
|
|
|
|
—
|
|
|
|
—
|
|
|
|
580
|
|
Non-voting shares converted to voting
|
|
|
—
|
|
|
|
—
|
|
|
|
220,000
|
|
|
|
(220,000
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9,005
|
|
|
|
—
|
|
|
|
9,005
|
|
Net change in accumulated other comprehensive loss, net of taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
764
|
|
|
|
764
|
|
Balances, December 31, 2020
|
|
|
—
|
|
|
|
—
|
|
|
|
6,498,865
|
|
|
|
1,000,000
|
|
|
|
7,498,865
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
140,639
|
|
|
$
|
25,013
|
|
|
$
|
(46,678
|
)
|
|
$
|
(2,950
|
)
|
|
$
|
116,024
|
|
See accompanying notes to unaudited consolidated financial statements.
LIMESTONE BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
(in thousands)
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
9,005
|
|
|
$
|
10,518
|
|
|
$
|
8,794
|
|
Adjustments to reconcile net income (loss) to net cash from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2,986
|
|
|
|
1,669
|
|
|
|
1,080
|
|
Provision (negative provision) for loan losses
|
|
|
4,400
|
|
|
|
—
|
|
|
|
(500
|
)
|
Net amortization on securities
|
|
|
655
|
|
|
|
700
|
|
|
|
865
|
|
Stock-based compensation expense
|
|
|
580
|
|
|
|
535
|
|
|
|
524
|
|
Deferred taxes, net
|
|
|
1,798
|
|
|
|
653
|
|
|
|
2,376
|
|
Net gain on sales of loans held for sale
|
|
|
—
|
|
|
|
—
|
|
|
|
(1
|
)
|
Proceeds from sales of loans held for sale
|
|
|
—
|
|
|
|
—
|
|
|
|
71
|
|
Net gain on sales of other real estate owned
|
|
|
—
|
|
|
|
—
|
|
|
|
(72
|
)
|
Net write-down of other real estate owned
|
|
|
—
|
|
|
|
260
|
|
|
|
850
|
|
Net realized (gain) loss on sales and calls of investment securities
|
|
|
5
|
|
|
|
5
|
|
|
|
6
|
|
Net (gain) loss on sale of premises and equipment
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
(692
|
)
|
Net write-down of premises held for sale
|
|
|
150
|
|
|
|
150
|
|
|
|
392
|
|
Increase in cash surrender value of life insurance, net of premium expense
|
|
|
(404
|
)
|
|
|
(391
|
)
|
|
|
(417
|
)
|
Amortization of operating lease right-of-use assets
|
|
|
593
|
|
|
|
185
|
|
|
|
—
|
|
Net change in accrued interest receivable and other assets
|
|
|
(106
|
)
|
|
|
(302
|
)
|
|
|
(491
|
)
|
Net change in accrued interest payable and other liabilities
|
|
|
1,383
|
|
|
|
(763
|
)
|
|
|
(155
|
)
|
Net cash from operating activities
|
|
|
21,045
|
|
|
|
13,218
|
|
|
|
12,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of available for sale securities
|
|
|
(38,416
|
)
|
|
|
(29,169
|
)
|
|
|
(77,159
|
)
|
Proceeds from sales and calls of available for sale securities
|
|
|
9,030
|
|
|
|
5,351
|
|
|
|
6,054
|
|
Proceeds from maturities and prepayments of available for sale securities
|
|
|
34,881
|
|
|
|
19,083
|
|
|
|
20,116
|
|
Proceeds from sale of other real estate owned
|
|
|
1,600
|
|
|
|
—
|
|
|
|
876
|
|
Improvements to other real estate owned
|
|
|
(140
|
)
|
|
|
—
|
|
|
|
—
|
|
Purchases of Federal Home Loan Bank stock
|
|
|
(600
|
)
|
|
|
—
|
|
|
|
—
|
|
Proceeds from mandatory redemption of Federal Home Loan Bank stock
|
|
|
950
|
|
|
|
996
|
|
|
|
90
|
|
Net changes in loans
|
|
|
(37,772
|
)
|
|
|
(35,538
|
)
|
|
|
(52,885
|
)
|
Proceeds from sale of premises and equipment
|
|
|
—
|
|
|
|
1
|
|
|
|
1,590
|
|
Purchases of premises and equipment
|
|
|
(879
|
)
|
|
|
(1,321
|
)
|
|
|
(1,168
|
)
|
Net cash paid for acquisition
|
|
|
—
|
|
|
|
(5,280
|
)
|
|
|
—
|
|
Purchase of bank owned life insurance
|
|
|
(7,000
|
)
|
|
|
—
|
|
|
|
—
|
|
Net cash from investing activities
|
|
|
(38,346
|
)
|
|
|
(45,877
|
)
|
|
|
(102,486
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in deposits
|
|
|
92,632
|
|
|
|
975
|
|
|
|
47,207
|
|
Repayment of Federal Home Loan Bank advances
|
|
|
(145,766
|
)
|
|
|
(160,160
|
)
|
|
|
(120,248
|
)
|
Advances from Federal Home Loan Bank
|
|
|
105,000
|
|
|
|
175,000
|
|
|
|
155,000
|
|
Repayment of subordinated capital note
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,250
|
)
|
Proceeds from issuance of subordinated capital notes
|
|
|
8,000
|
|
|
|
17,000
|
|
|
|
—
|
|
Repayment of senior debt
|
|
|
(5,000
|
)
|
|
|
(5,000
|
)
|
|
|
—
|
|
Proceeds from issuance of common stock, net
|
|
|
—
|
|
|
|
—
|
|
|
|
14,910
|
|
Common shares withheld for taxes
|
|
|
(75
|
)
|
|
|
(314
|
)
|
|
|
—
|
|
Redemption of preferred stock
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,505
|
)
|
Net cash from financing activities
|
|
|
54,791
|
|
|
|
27,501
|
|
|
|
91,114
|
|
Net change in cash and cash equivalents
|
|
|
37,490
|
|
|
|
(5,158
|
)
|
|
|
1,258
|
|
Beginning cash and cash equivalents
|
|
|
30,203
|
|
|
|
35,361
|
|
|
|
34,103
|
|
Ending cash and cash equivalents
|
|
$
|
67,693
|
|
|
$
|
30,203
|
|
|
$
|
35,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
10,422
|
|
|
$
|
13,763
|
|
|
$
|
10,607
|
|
Income taxes paid (refunded)
|
|
|
(346
|
)
|
|
|
(346
|
)
|
|
|
—
|
|
Supplemental non-cash disclosure:
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfer from loans to other real estate
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
730
|
|
Transfer from premises and equipment to premises held for sale
|
|
|
310
|
|
|
|
—
|
|
|
|
1,050
|
|
Financed sales of other real estate owned
|
|
|
1,360
|
|
|
|
—
|
|
|
|
—
|
|
Initial recognition of right-of-use lease assets
|
|
|
—
|
|
|
|
507
|
|
|
|
—
|
|
See accompanying notes.
LIMESTONE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2020, 2019 and 2018
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Nature of Operations – The consolidated financial statements include Limestone Bancorp, Inc. (Company) and its wholly-owned subsidiary, Limestone Bank, Inc. (Bank). All significant intercompany transactions and accounts have been eliminated in consolidation.
The Bank, established in 1902, is a state chartered non-member financial institution providing financial services through its banking center locations in south central, southern, and western Kentucky, as well as Lexington, Louisville, and Frankfort.
Use of Estimates – To prepare financial statements in conformity with U.S. generally accepted accounting principles, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and future results could differ.
In March 2020, the World Health Organization declared novel coronavirus disease 2019 (“COVID-19”) as a global pandemic. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains, created significant volatility and disruption in financial markets, and increased unemployment levels. In addition, the pandemic has resulted in temporary closures of many businesses and the institution of social distancing and sheltering in place requirements in many states and communities, including those in markets in which the Company is located or does business.
The extent to which the COVID-19 pandemic impacts the Company’s business, liquidity, asset valuations, results of operations, and financial condition, as well as its regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic. Moreover, the effects of the COVID- 19 pandemic may have a material adverse effect on all or a combination of valuation impairments on the Company’s intangible assets, investments, loans, or deferred tax assets.
Cash and Cash Equivalents – For the purpose of presentation in the statements of cash flows, the Company considers all cash and amounts due from depository institutions as well as interest bearing deposits in banks that mature within one year and are carried at cost to be cash equivalents. Included in cash and due from banks and interest bearing deposits are amounts required to be held at the Federal Reserve Bank of St. Louis or maintained in vault cash in accordance with regulatory reserve requirements. There were no balance requirements as of December 31, 2020 and $10.1 million as of December 31, 2019.
Securities – Debt securities are classified as held to maturity and carried at amortized cost when management has the intent and ability to hold them to maturity. Debt securities are classified as available for sale when they might be sold before maturity. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income, net of tax.
Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level-yield method anticipating prepayments on mortgage backed securities. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.
In evaluating securities for other-than-temporary impairment (“OTTI”), management considers the length of time and extent to which fair value has been less than cost, the financial condition, and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into 1) OTTI related to credit loss, which is recognized in the income statement and 2) OTTI related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis.
Loans – Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of deferred loan fees and costs, and an allowance for loan losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments. The recorded investment in loans includes the outstanding principal balance and unamortized deferred origination costs and fees.
Interest income recognition on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the loan is well collateralized and in process of collection. Consumer loans are typically charged off no later than 90 days past due. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is not expected.
All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
The Bank participated in the SBA Paycheck Protection Program (“PPP”) as a lender to provide loans to small businesses for payroll and other basic expenses during the COVID-19 pandemic. These loans are eligible to be forgiven if certain conditions are satisfied and are fully guaranteed by the SBA. Additionally, loan payments are deferred for the first six months of the loan term. No collateral or personal guarantees were required. PPP loans were considered in the provision for loan losses in 2020, however, due to SBA guaranty the provision for loan losses impact was insignificant.
Loans purchased in a business acquisition are accounted for using one of the following accounting standards. 1) ASC Topic 310-20, Non Refundable Fees and Other Costs, is used to value loans that have not demonstrated post origination credit quality deterioration and the acquirer expects to collect all contractually required payments from the borrower. For these loans, the difference between the loan’s day-one fair value and amortized cost would be amortized or accreted into income using the interest method or 2) ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, is used to value purchased credit impaired (PCI) loans. For these loans, it is probable the acquirer will be unable to collect all contractually required payments from the borrower. Under ASC Topic 310-30, the expected cash flows that exceed the initial investment in the loan, or fair value, represent the “accretable yield,” which is recognized as interest income on a level-yield basis over the expected cash flow periods of the loans. Additionally, the difference between contractual cash flows and expected cash flows of PCI loans is referred to as the “non-accretable discount.”
Allowance for Loan Losses – The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.
The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. A loan is deemed impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and treated as impaired.
Factors considered in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. The significance of payment delays and payment shortfalls is determined on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans, are collectively evaluated for impairment and are not separately identified for impairment disclosures. Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported at the fair value of the collateral. For troubled debt restructurings that subsequently default, the amount of reserve is determined in accordance with the accounting policy for the allowance for loan losses.
The general component covers non‑impaired loans and is based on historical loss experience adjusted for current factors. The historical loss experience is determined by portfolio segment and is based on actual loss history experienced over the most recent five years with equal weighting. This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment. These economic factors include consideration of the following: changes in lending policies, procedures, and practices; effects of any change in risk selection and underwriting standards; national and local economic trends and conditions; industry conditions; trends in volume and terms of loans; experience, ability and depth of lending management and other relevant staff; levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; and effects of changes in credit concentrations.
A portfolio segment is defined as the level at which an entity develops and documents a systematic methodology to determine its allowance for loan losses. Management identified the following portfolio segments: commercial, commercial real estate, residential real estate, consumer, agricultural, and other.
|
●
|
Commercial loans are made to businesses and depend on the strength of the industries, related borrowers, and cash flow from the businesses. Commercial loans are advances for equipment purchases, or to provide working capital, or to meet other financing needs of business enterprises. These loans may be secured by accounts receivable, inventory, equipment or other business assets. Financial information is obtained from the borrowers to evaluate their ability to repay the loans.
|
|
●
|
Commercial real estate loans are affected by the local commercial real estate market and the local economy. Commercial real estate loans include loans on commercial properties occupied by borrowers and/or tenants. Construction and development loans are a component of this segment. These loans are generally secured by land under development or homes and commercial buildings under construction. Loans secured by farmland are also a component of this segment. Appraisals are obtained to support the loan amount. Financial information is obtained from the borrowers and/or the individual project to evaluate cash flows sufficiency to service the debt.
|
|
●
|
Residential real estate loans are affected by the local residential real estate market, local economy, and, for variable rate mortgages, movement in indices tied to these loans. For owner occupied residential loans, the borrowers’ repayment ability is evaluated through a review of credit scores and debt to income ratios. For non-owner occupied residential loans, such as rental real estate, financial information is obtained from the borrowers and/or the individual project to evaluate cash flows sufficiency to service the debt. Appraisals are obtained to support the loan amount.
|
|
●
|
Consumer loans depend on local economies. Consumer loans are generally unsecured, but may be secured by consumer assets. Management evaluates the borrowers’ repayment ability through a review of credit scores and an evaluation of debt to income ratios. Consumer loans may be for consumer goods purchases, cash flow needs, or for student loans or student debt refinances.
|
|
●
|
Agriculture loans depend on the industries tied to these loans and are generally secured by livestock, crops, and/or equipment, but may be unsecured. Management evaluates the borrowers’ repayment ability through financial and business performance review.
|
|
●
|
Other loans include loans to municipalities, loans secured by stock, and overdrafts. For municipal loans, management evaluates the borrowers’ revenue streams as well as ability to repay form general funds. For loans secured by stock, management evaluates the market value of the stock securing the loan in relation to the loan amount. Overdrafts are funded based on pre-established criteria related to the deposit account relationship.
|
Management analyzes key relevant risk characteristics for each portfolio segment having determined that loans in each segment possess similar general risk characteristics that are analyzed in connection with loan underwriting processes and procedures. In determining the allocated allowance, the weighted average loss rates over the most recent five years are used with equal weighting. Commercial real estate qualitative adjustment considerations include trends in the markets for underlying collateral values, risks related to tenant rents, and economic factors such as decreased sales demand, elevated inventory levels, and declining collateral values. Residential real estate loan considerations include macro-economic factors such as unemployment rates, trends in vacancy rates, and home value trends. The commercial and agricultural portfolio qualitative adjustments are related to economic and portfolio performance trends. The agricultural, consumer and other portfolios are less significant in terms of size and risk is assessed based on the smaller dollar size of these loans and the geographical areas where the collateral is located.
Transfers of Financial Assets – Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
Other Real Estate Owned (“OREO”) – Assets acquired through or instead of loan foreclosure are initially recorded at fair value less estimated costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at the lower of cost or fair value, less estimated costs to sell. If fair value declines subsequent to foreclosure, a write-down is recorded through expense. Costs after acquisition are expensed unless the expenditure is for a recoverable improvement, which may be capitalized.
Premises and Equipment – Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation and are depreciated using the straight-line method with useful lives generally ranging from 3 to 40 years. Leasehold improvements are amortized using the straight-line or accelerated method over terms of the related leases, including expected renewals, or over the useful lives of the improvements, whichever is shorter. Maintenance and repairs are expensed as incurred while major additions and improvements are capitalized.
Premises and equipment held for sale are recorded at fair value less estimated cost to sell at the time of transfer based upon independent third party appraisal. If fair value declines subsequent to transfer, write-downs are recorded through expense.
Premises and equipment are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value through a charge to earnings.
Federal Home Loan Bank (FHLB) Stock – The Bank is a member of the FHLB system. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment. Because this stock is viewed as long term investment, impairment is based on ultimate recovery of par value. Both cash and stock dividends are reported as income.
Bank Owned Life Insurance – The Bank has purchased life insurance policies on certain key executives. Company owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.
Goodwill and Other Intangible Assets – Goodwill arises from business combinations and is generally determined as the excess of the fair value of the consideration transferred, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually or more frequently if events and circumstances exists that indicate that a goodwill impairment test should be performed. The Bank has selected November 30 as the date to perform the annual impairment test. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Goodwill is the only intangible asset with an indefinite life on the Bank’s balance sheet.
Other intangible assets consist of core deposit intangible assets arising from a branch acquisition, which were initially measured at fair value and then amortized on an accelerated method over the estimated useful life.
Benefit Plans – Employee 401(k) plan expense is the amount of matching contributions.
Stock-Based Compensation – Compensation cost is recognized for unvested stock awards issued to employees, based on the fair value of these awards at the date of grant. The market price of the Company’s common stock at the date of grant is used for restricted stock awards. Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. The Company’s accounting policy is to recognize compensation cost net of forfeitures as they occur.
Income Taxes – Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.
A tax position is recognized as a benefit only if it is "more likely than not" that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the "more likely than not" test, no tax benefit is recorded. The Company recognizes interest and/or penalties related to income tax matters in income tax expense.
Loan Commitments and Related Financial Instruments – Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer-financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded upon funding.
Comprehensive Income (Loss) – Comprehensive loss consists of net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains and losses on securities available for sale, which are also recognized as a separate component of equity.
Earnings Per Common Share – Basic earnings per common share is net income attributable to common shareholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share include the dilutive effect, if any, of additional potential common shares issuable under stock options, warrants, and any convertible securities. Earnings and dividends per share are restated for all stock splits and dividends through the date of issue of the financial statements.
Earnings Allocated to Participating Securities – The Company has issued and outstanding unvested common shares to employees and directors through its equity compensation plan. Earnings are allocated to these participating securities based on their percentage of total issued and outstanding shares.
Loss Contingencies – Loss contingencies, including claims and legal actions arising in the normal course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated.
Dividend Restrictions – Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Bank to the Company or by the Company to shareholders.
Fair Value of Financial Instruments – Fair values of financial instruments are estimated using relevant market information and other assumptions. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.
Derivatives – Derivative financial instruments are carried at fair value and reflect the estimated amounts that would have been received to terminate these contracts at the reporting date based upon pricing or valuation models applied to current market information.
As part of the asset/liability management program, the Company utilizes, from time to time, risk participation agreements to reduce its sensitivity to changing interest rates. These are derivative instruments, which are recorded as assets or liabilities in the consolidated balance sheets at fair value. Changes in the fair values of derivatives are reported in the consolidated statements of operations or other comprehensive income (“OCI”) depending on the use of the derivative and whether the instrument qualifies for hedge accounting. The key criterion for the hedge accounting is that the hedged relationship must be found to be effective as determined by FASB ASC 815 Derivatives and Hedging.
The risk participation agreements are not designated against specific assets or liabilities under ASC 815, and, therefore, do not qualify for hedge accounting. The derivatives are recorded on the balance sheet at fair value and changes in fair value of both the borrower and the offsetting swap agreements are recorded (and essentially offset) in non-interest income. The fair value of the derivative instruments incorporates a consideration of credit risk in accordance with ASC 820, resulting in some volatility in earnings each period.
To date, the Company has not entered into a cash flow hedge. For cash flow hedges, changes in the fair values of the derivative instruments are reported in OCI to the extent the hedge is effective. The gains and losses on derivative instruments that are reported in OCI are reflected in the consolidated statements of income in the periods in which the results of operations are impacted by the variability of the cash flows of the hedged item. Generally, net interest income is increased or decreased by amounts receivable or payable with respect to the derivatives, which qualify for hedge accounting. At inception of the hedge, a Company must establish the method it uses for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective aspect of the hedge. The ineffective portion of the hedge, if any, is recognized currently in the consolidated statements of operations and time value expiration of the hedge when measuring ineffectiveness is excluded.
New Accounting Standards – In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The final standard will change estimates for credit losses related to financial assets measured at amortized cost such as loans, held-to-maturity debt securities, and certain other contracts. For estimating credit losses, the FASB is replacing the incurred loss model with an expected loss model, which is referred to as the current expected credit loss (CECL) model. Under the CECL model, certain financial assets that are carried at amortized cost, such as loans held for investment and held-to-maturity debt securities, are required to be presented at the net amount expected to be collected. The measurement of expected credit losses is to be based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This measurement will take place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs significantly from the “incurred loss” model required under current GAAP, which delays recognition until it is probable a loss has been incurred. The change could materially affect how the allowance for loan losses is determined. The impact of CECL model implementation is being evaluated, but it is expected that a one-time cumulative-effect adjustment to the allowance for loan losses will be recognized in retained earnings on the consolidated balance sheet as of the beginning of the first reporting period in which the new standard is effective, as is consistent with regulatory expectations set forth in interagency guidance. In December 2018, the OCC, The Board of Governors of the Federal Reserve System, and the FDIC approved a final rule to address changes to the credit loss accounting under GAAP, including banking organizations’ implementation of CECL. The final rule provides banking organizations the option to phase in over a three-year period the day-one adverse effects on regulatory capital that may result from adoption of the new accounting standard. In October 2019, the FASB voted to delay implementation for smaller reporting companies, private companies, and not-for-profit entities. The Company currently qualifies as a smaller reporting company and, as such, will be required to implement CECL for fiscal year and interim periods beginning after December 15, 2022.
In December 2019, the FASB issued ASU 2019-12, Income Taxes - Simplifying the Accounting for Income Taxes. The final standard removes specific exceptions to the general principles in Topic 740, improves financial statement preparers’ application of income tax-related guidance, and simplifies GAAP. Certain provisions under ASU 2019-12 require prospective application, some require modified retrospective adoption, while other provisions require retrospective application to all periods presented in the consolidated financial statements upon adoption. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. Adoption of this new guidance will not have a material impact on the consolidated financial statements.
NOTE 2 – SECURITIES
Securities are classified as available for sale (AFS). AFS securities may be sold if needed for liquidity, asset liability management, or other reasons. AFS securities are reported at fair value, with unrealized gains or losses included as a separate component of equity, net of tax.
The amortized cost and fair value of securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows:
|
|
Amortized Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair Value
|
|
December 31, 2020
|
|
(in thousands)
|
|
Available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and federal agency
|
|
$
|
18,811
|
|
|
$
|
806
|
|
|
$
|
—
|
|
|
$
|
19,617
|
|
Agency mortgage-backed: residential
|
|
|
71,582
|
|
|
|
2,777
|
|
|
|
(26
|
)
|
|
|
74,333
|
|
Collateralized loan obligations
|
|
|
44,730
|
|
|
|
—
|
|
|
|
(1,578
|
)
|
|
|
43,152
|
|
State and municipal
|
|
|
34,759
|
|
|
|
1,296
|
|
|
|
—
|
|
|
|
36,055
|
|
Corporate bonds
|
|
|
31,635
|
|
|
|
472
|
|
|
|
(1,402
|
)
|
|
|
30,705
|
|
Total available for sale
|
|
$
|
201,517
|
|
|
$
|
5,351
|
|
|
$
|
(3,006
|
)
|
|
$
|
203,862
|
|
|
|
Amortized Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair Value
|
|
December 31, 2019
|
|
(in thousands)
|
|
Available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and federal agency
|
|
$
|
22,281
|
|
|
$
|
196
|
|
|
$
|
(147
|
)
|
|
$
|
22,330
|
|
Agency mortgage-backed: residential
|
|
|
91,269
|
|
|
|
1,186
|
|
|
|
(255
|
)
|
|
|
92,200
|
|
Collateralized loan obligations
|
|
|
49,831
|
|
|
|
—
|
|
|
|
(412
|
)
|
|
|
49,419
|
|
State and municipal
|
|
|
27,819
|
|
|
|
550
|
|
|
|
(3
|
)
|
|
|
28,366
|
|
Corporate bonds
|
|
|
16,472
|
|
|
|
213
|
|
|
|
—
|
|
|
|
16,685
|
|
Total available for sale
|
|
$
|
207,672
|
|
|
$
|
2,145
|
|
|
$
|
(817
|
)
|
|
$
|
209,000
|
|
Sales and calls of securities were as follows:
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
|
(in thousands)
|
|
Proceeds
|
|
$
|
9,030
|
|
|
$
|
5,351
|
|
|
$
|
6,054
|
|
Gross gains
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
Gross losses
|
|
|
5
|
|
|
|
6
|
|
|
|
6
|
|
The amortized cost and fair value of debt securities are shown by contractual maturity. Expected maturities may differ from actual maturities when borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed securities not due at a single maturity date are shown separately.
|
|
December 31, 2020
|
|
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
|
|
(in thousands)
|
|
Maturity
|
|
|
|
|
|
|
|
|
Available for sale
|
|
|
|
|
|
|
|
|
Within one year
|
|
$
|
19,141
|
|
|
$
|
18,217
|
|
One to five years
|
|
|
44,757
|
|
|
|
46,185
|
|
Five to ten years
|
|
|
44,902
|
|
|
|
45,148
|
|
Beyond ten years
|
|
|
21,135
|
|
|
|
19,979
|
|
Agency mortgage-backed: residential
|
|
|
71,582
|
|
|
|
74,333
|
|
Total
|
|
$
|
201,517
|
|
|
$
|
203,862
|
|
Securities pledged at year-end 2020 and 2019 had carrying values of approximately $81.4 million and $75.8 million, respectively, and were pledged to secure public deposits.
At December 31, 2020 and 2019, the Bank held securities issued by the Commonwealth of Kentucky or Kentucky municipalities having a book value of $23.0 million and $14.5 million, respectively. At year-end 2020, there were no other holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders’ equity.
The Company evaluates securities for other-than-temporary impairment at least on a quarterly basis. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, underlying credit quality of the issuer, and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer’s financial condition, the Company may consider whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, the sector or industry trends and cycles affecting the issuer, and the results of reviews of the issuer’s financial condition. As of December 31, 2020, management does not believe any securities in the portfolio with unrealized losses should be classified as other than temporarily impaired.
The Bank owns Collateralized Loan Obligations (CLOs), which are debt securities secured by professionally managed portfolios of senior-secured loans to corporations. CLOs are typically $300 million to $1 billion in size, contain one hundred or more loans, have five to six credit tranches ranging from AAA, AA, A, BBB, BB, B and equity tranche. Interest and principal are paid first to the AAA tranche then to the next lower rated tranche. Losses are borne first by the equity tranche then by the subsequently higher rated tranche. CLOs may be less liquid than government securities from time to time and volatility in the CLO market may cause the value of these investments to decline.
The market value of CLOs may be affected by, among other things, changes in composition of the underlying loans, changes in the market values of the underlying loans, changes in the cash flows from the underlying loans, defaults and recoveries on the underlying loans, capital gains and losses on the underlying loans, prepayments on the underlying loans, and other conditions or economic factors.
At December 31, 2020, $27.1 million, $13.6 million, and $2.4 million of the Bank’s CLOs were AA, A, and BBB rated, respectively. There was one CLO rated below A at BBB, which was downgraded during the third quarter of 2020. Stress testing was completed on each security in the CLO portfolio as of year-end to determine the conditions necessary for the Bank’s investment to incur the first dollar of loss. 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.
The corporate bond portfolio consists of 13 subordinated debt securities and one senior debt security of U.S. banks and bank holding companies with maturities ranging from 2024 to 2037. The securities are either initially fixed for five years converting to floating at an index over LIBOR, or SOFR, or floating at an index over LIBOR, or SOFR, from inception. Management regularly monitors the financial condition of these corporate issuers by reviewing their regulatory and public filings.
Securities with unrealized losses at December 31, 2020 and December 31, 2019, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position, are as follows:
|
|
Less than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
Description of Securities
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
|
(in thousands)
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and federal agency
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Agency mortgage-backed: residential
|
|
|
4,772
|
|
|
|
(26
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
4,772
|
|
|
|
(26
|
)
|
Collateralized loan obligations
|
|
|
8,794
|
|
|
|
(251
|
)
|
|
|
34,358
|
|
|
|
(1,327
|
)
|
|
|
43,152
|
|
|
|
(1,578
|
)
|
State and municipal
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Corporate bonds
|
|
|
10,849
|
|
|
|
(1,402
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
10,849
|
|
|
|
(1,402
|
)
|
Total temporarily impaired
|
|
$
|
24,415
|
|
|
$
|
(1,679
|
)
|
|
$
|
34,358
|
|
|
$
|
(1,327
|
)
|
|
$
|
58,773
|
|
|
$
|
(3,006
|
)
|
|
|
Less than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
Description of Securities
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
|
(in thousands)
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and federal agency
|
|
$
|
12,567
|
|
|
$
|
(147
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12,567
|
|
|
$
|
(147
|
)
|
Agency mortgage-backed: residential
|
|
|
18,457
|
|
|
|
(97
|
)
|
|
|
10,665
|
|
|
|
(158
|
)
|
|
|
29,122
|
|
|
|
(255
|
)
|
Collateralized loan obligations
|
|
|
9,539
|
|
|
|
(46
|
)
|
|
|
35,336
|
|
|
|
(366
|
)
|
|
|
44,875
|
|
|
|
(412
|
)
|
State and municipal
|
|
|
911
|
|
|
|
(3
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
911
|
|
|
|
(3
|
)
|
Corporate bonds
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total temporarily impaired
|
|
$
|
41,474
|
|
|
$
|
(293
|
)
|
|
$
|
46,001
|
|
|
$
|
(524
|
)
|
|
$
|
87,475
|
|
|
$
|
(817
|
)
|
NOTE 3 – LOANS
Loans net of unearned income, deferred loan origination costs, and net premiums on acquired loans by class were as follows:
|
|
2020
|
|
|
2019
|
|
|
|
(in thousands)
|
|
Commercial (1)
|
|
$
|
208,244
|
|
|
$
|
145,551
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
Construction
|
|
|
92,916
|
|
|
|
64,911
|
|
Farmland
|
|
|
70,272
|
|
|
|
79,118
|
|
Nonfarm nonresidential
|
|
|
266,394
|
|
|
|
255,459
|
|
Residential Real Estate:
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
61,180
|
|
|
|
70,950
|
|
1-4 Family
|
|
|
188,955
|
|
|
|
226,629
|
|
Consumer
|
|
|
31,429
|
|
|
|
47,790
|
|
Agriculture
|
|
|
42,044
|
|
|
|
35,064
|
|
Other
|
|
|
647
|
|
|
|
799
|
|
Subtotal
|
|
|
962,081
|
|
|
|
926,271
|
|
Less: Allowance for loan losses
|
|
|
(12,443
|
)
|
|
|
(8,376
|
)
|
Loans, net
|
|
$
|
949,638
|
|
|
$
|
917,895
|
|
(1)
|
Includes PPP loans of $20.3 million at December 31, 2020.
|
The following table presents the activity in the allowance for loan losses by portfolio segment for the years ended December 31, 2020, 2019, and 2018:
|
|
Commercial
|
|
|
Commercial
Real Estate
|
|
|
Residential
Real Estate
|
|
|
Consumer
|
|
|
Agriculture
|
|
|
Other
|
|
|
Total
|
|
|
|
(in thousands)
|
|
December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
1,710
|
|
|
$
|
4,080
|
|
|
$
|
1,743
|
|
|
$
|
485
|
|
|
$
|
355
|
|
|
$
|
3
|
|
|
$
|
8,376
|
|
Provision (negative provision)
|
|
|
822
|
|
|
|
2,870
|
|
|
|
135
|
|
|
|
324
|
|
|
|
261
|
|
|
|
(12
|
)
|
|
|
4,400
|
|
Loans charged off
|
|
|
(32
|
)
|
|
|
(101
|
)
|
|
|
(130
|
)
|
|
|
(493
|
)
|
|
|
(46
|
)
|
|
|
–
|
|
|
|
(802
|
)
|
Recoveries
|
|
|
29
|
|
|
|
201
|
|
|
|
151
|
|
|
|
45
|
|
|
|
30
|
|
|
|
13
|
|
|
|
469
|
|
Ending balance
|
|
$
|
2,529
|
|
|
$
|
7,050
|
|
|
$
|
1,899
|
|
|
$
|
361
|
|
|
$
|
600
|
|
|
$
|
4
|
|
|
$
|
12,443
|
|
|
|
Commercial
|
|
|
Commercial
Real Estate
|
|
|
Residential
Real Estate
|
|
|
Consumer
|
|
|
Agriculture
|
|
|
Other
|
|
|
Total
|
|
|
|
(in thousands)
|
|
December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
1,299
|
|
|
$
|
4,676
|
|
|
$
|
2,452
|
|
|
$
|
130
|
|
|
$
|
321
|
|
|
$
|
2
|
|
|
$
|
8,880
|
|
Provision (negative provision)
|
|
|
342
|
|
|
|
(622
|
)
|
|
|
(958
|
)
|
|
|
943
|
|
|
|
297
|
|
|
|
(2
|
)
|
|
|
–
|
|
Loans charged off
|
|
|
(37
|
)
|
|
|
(47
|
)
|
|
|
(275
|
)
|
|
|
(663
|
)
|
|
|
(266
|
)
|
|
|
–
|
|
|
|
(1,288
|
)
|
Recoveries
|
|
|
106
|
|
|
|
73
|
|
|
|
524
|
|
|
|
75
|
|
|
|
3
|
|
|
|
3
|
|
|
|
784
|
|
Ending balance
|
|
$
|
1,710
|
|
|
$
|
4,080
|
|
|
$
|
1,743
|
|
|
$
|
485
|
|
|
$
|
355
|
|
|
$
|
3
|
|
|
$
|
8,376
|
|
|
|
Commercial
|
|
|
Commercial
Real Estate
|
|
|
Residential
Real Estate
|
|
|
Consumer
|
|
|
Agriculture
|
|
|
Other
|
|
|
Total
|
|
|
|
(in thousands)
|
|
December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
892
|
|
|
$
|
4,032
|
|
|
$
|
2,900
|
|
|
$
|
64
|
|
|
$
|
313
|
|
|
$
|
1
|
|
|
$
|
8,202
|
|
Provision (negative provision)
|
|
|
196
|
|
|
|
(192
|
)
|
|
|
(599
|
)
|
|
|
92
|
|
|
|
6
|
|
|
|
(3
|
)
|
|
|
(500
|
)
|
Loans charged off
|
|
|
(50
|
)
|
|
|
(198
|
)
|
|
|
(252
|
)
|
|
|
(95
|
)
|
|
|
(13
|
)
|
|
|
(8
|
)
|
|
|
(616
|
)
|
Recoveries
|
|
|
261
|
|
|
|
1,034
|
|
|
|
403
|
|
|
|
69
|
|
|
|
15
|
|
|
|
12
|
|
|
|
1,794
|
|
Ending balance
|
|
$
|
1,299
|
|
|
$
|
4,676
|
|
|
$
|
2,452
|
|
|
$
|
130
|
|
|
$
|
321
|
|
|
$
|
2
|
|
|
$
|
8,880
|
|
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method as of December 31, 2020:
|
|
Commercial
|
|
|
Commercial
Real Estate
|
|
|
Residential
Real Estate
|
|
|
Consumer
|
|
|
Agriculture
|
|
|
Other
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending allowance balance attributable to loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
–
|
|
|
$
|
2,176
|
|
|
$
|
1
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
2,177
|
|
Collectively evaluated for impairment
|
|
|
2,529
|
|
|
|
4,874
|
|
|
|
1,898
|
|
|
|
361
|
|
|
|
600
|
|
|
|
4
|
|
|
|
10,266
|
|
Total ending allowance balance
|
|
$
|
2,529
|
|
|
$
|
7,050
|
|
|
$
|
1,899
|
|
|
$
|
361
|
|
|
$
|
600
|
|
|
$
|
4
|
|
|
$
|
12,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated for impairment
|
|
$
|
–
|
|
|
$
|
5,361
|
|
|
$
|
1,060
|
|
|
$
|
–
|
|
|
$
|
91
|
|
|
$
|
–
|
|
|
$
|
6,512
|
|
Loans collectively evaluated for impairment
|
|
|
208,244
|
|
|
|
424,221
|
|
|
|
249,075
|
|
|
|
31,429
|
|
|
|
41,953
|
|
|
|
647
|
|
|
|
955,569
|
|
Total ending loans balance
|
|
$
|
208,244
|
|
|
$
|
429,582
|
|
|
$
|
250,135
|
|
|
$
|
31,429
|
|
|
$
|
42,044
|
|
|
$
|
647
|
|
|
$
|
962,081
|
|
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method as of December 31, 2019:
|
|
Commercial
|
|
|
Commercial
Real Estate
|
|
|
Residential
Real Estate
|
|
|
Consumer
|
|
|
Agriculture
|
|
|
Other
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending allowance balance attributable to loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
|
$
|
3
|
|
|
$
|
37
|
|
|
$
|
2
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
42
|
|
Collectively evaluated for impairment
|
|
|
1,707
|
|
|
|
4,043
|
|
|
|
1,741
|
|
|
|
485
|
|
|
|
355
|
|
|
|
3
|
|
|
|
8,334
|
|
Total ending allowance balance
|
|
$
|
1,710
|
|
|
$
|
4,080
|
|
|
$
|
1,743
|
|
|
$
|
485
|
|
|
$
|
355
|
|
|
$
|
3
|
|
|
$
|
8,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans individually evaluated for impairment
|
|
$
|
74
|
|
|
$
|
1,064
|
|
|
$
|
892
|
|
|
$
|
98
|
|
|
$
|
42
|
|
|
$
|
–
|
|
|
$
|
2,170
|
|
Loans collectively evaluated for impairment
|
|
|
145,477
|
|
|
|
398,424
|
|
|
|
296,687
|
|
|
|
47,692
|
|
|
|
35,022
|
|
|
|
799
|
|
|
|
924,101
|
|
Total ending loans balance
|
|
$
|
145,551
|
|
|
$
|
399,488
|
|
|
$
|
297,579
|
|
|
$
|
47,790
|
|
|
$
|
35,064
|
|
|
$
|
799
|
|
|
$
|
926,271
|
|
Impaired Loans
Impaired loans include restructured loans and loans on nonaccrual or classified as doubtful, whereby collection of the total amount is improbable, or loss, whereby all or a portion of the loan has been written off or a specific allowance for loss had been provided.
The following table presents information related to loans individually evaluated for impairment by class of loan as of and for the year ended December 31, 2020:
|
|
Unpaid
Principal
Balance
|
|
|
Recorded
Investment
|
|
|
Allowance
For Loan
Losses
Allocated
|
|
|
Average
Recorded
Investment
|
|
|
Interest
Income
Recognized
|
|
|
Cash
Basis
Income
Recognized
|
|
|
|
(in thousands)
|
|
|
|
|
|
With No Related Allowance Recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
308
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
82
|
|
|
$
|
16
|
|
|
$
|
16
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Farmland
|
|
|
555
|
|
|
|
456
|
|
|
|
—
|
|
|
|
326
|
|
|
|
45
|
|
|
|
45
|
|
Nonfarm nonresidential
|
|
|
1,323
|
|
|
|
549
|
|
|
|
—
|
|
|
|
501
|
|
|
|
44
|
|
|
|
15
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
1-4 Family
|
|
|
1,883
|
|
|
|
954
|
|
|
|
—
|
|
|
|
894
|
|
|
|
86
|
|
|
|
83
|
|
Consumer
|
|
|
259
|
|
|
|
—
|
|
|
|
—
|
|
|
|
55
|
|
|
|
3
|
|
|
|
3
|
|
Agriculture
|
|
|
393
|
|
|
|
91
|
|
|
|
—
|
|
|
|
27
|
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Subtotal
|
|
|
4,721
|
|
|
|
2,050
|
|
|
|
—
|
|
|
|
1,885
|
|
|
|
194
|
|
|
|
162
|
|
With An Allowance Recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5
|
|
|
|
—
|
|
|
|
—
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Farmland
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
198
|
|
|
|
4
|
|
|
|
—
|
|
Nonfarm nonresidential
|
|
|
6,465
|
|
|
|
4,356
|
|
|
|
2,176
|
|
|
|
901
|
|
|
|
263
|
|
|
|
—
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
1-4 Family
|
|
|
106
|
|
|
|
106
|
|
|
|
1
|
|
|
|
102
|
|
|
|
9
|
|
|
|
—
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Agriculture
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Subtotal
|
|
|
6,571
|
|
|
|
4,462
|
|
|
|
2,177
|
|
|
|
1,206
|
|
|
|
276
|
|
|
|
—
|
|
Total
|
|
$
|
11,292
|
|
|
$
|
6,512
|
|
|
$
|
2,177
|
|
|
$
|
3,091
|
|
|
$
|
470
|
|
|
$
|
162
|
|
The following table presents information related to loans individually evaluated for impairment by class of loan as of and for the year ended December 31, 2019:
|
|
Unpaid
Principal
Balance
|
|
|
Recorded
Investment
|
|
|
Allowance
For Loan
Losses
Allocated
|
|
|
Average
Recorded
Investment
|
|
|
Interest
Income
Recognized
|
|
|
Cash
Basis
Income
Recognized
|
|
|
|
(in thousands)
|
|
|
|
|
|
With No Related Allowance Recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
138
|
|
|
$
|
50
|
|
|
$
|
—
|
|
|
$
|
57
|
|
|
$
|
3
|
|
|
$
|
3
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Farmland
|
|
|
380
|
|
|
|
293
|
|
|
|
—
|
|
|
|
179
|
|
|
|
23
|
|
|
|
23
|
|
Nonfarm nonresidential
|
|
|
1,057
|
|
|
|
489
|
|
|
|
—
|
|
|
|
295
|
|
|
|
34
|
|
|
|
3
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
1-4 Family
|
|
|
1,679
|
|
|
|
745
|
|
|
|
—
|
|
|
|
1,402
|
|
|
|
219
|
|
|
|
191
|
|
Consumer
|
|
|
309
|
|
|
|
98
|
|
|
|
—
|
|
|
|
56
|
|
|
|
6
|
|
|
|
6
|
|
Agriculture
|
|
|
304
|
|
|
|
42
|
|
|
|
—
|
|
|
|
47
|
|
|
|
3
|
|
|
|
3
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Subtotal
|
|
|
3,867
|
|
|
|
1,717
|
|
|
|
—
|
|
|
|
2,036
|
|
|
|
288
|
|
|
|
229
|
|
With An Allowance Recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
24
|
|
|
|
24
|
|
|
|
3
|
|
|
|
15
|
|
|
|
2
|
|
|
|
—
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Farmland
|
|
|
282
|
|
|
|
282
|
|
|
|
37
|
|
|
|
236
|
|
|
|
9
|
|
|
|
—
|
|
Nonfarm nonresidential
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
1-4 Family
|
|
|
183
|
|
|
|
147
|
|
|
|
2
|
|
|
|
459
|
|
|
|
6
|
|
|
|
—
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Agriculture
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Subtotal
|
|
|
489
|
|
|
|
453
|
|
|
|
42
|
|
|
|
710
|
|
|
|
17
|
|
|
|
—
|
|
Total
|
|
$
|
4,356
|
|
|
$
|
2,170
|
|
|
$
|
42
|
|
|
$
|
2,746
|
|
|
$
|
305
|
|
|
$
|
229
|
|
The following table presents information related to loans individually evaluated for impairment by class of loan as of and for the year ended December 31, 2018:
|
|
Unpaid
Principal
Balance
|
|
|
Recorded
Investment
|
|
|
Allowance
For Loan
Losses
Allocated
|
|
|
Average
Recorded
Investment
|
|
|
Interest
Income
Recognized
|
|
|
Cash
Basis
Income
Recognized
|
|
|
|
(in thousands)
|
|
|
|
|
|
With No Related Allowance Recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
120
|
|
|
$
|
53
|
|
|
$
|
—
|
|
|
$
|
125
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Farmland
|
|
|
1,860
|
|
|
|
89
|
|
|
|
—
|
|
|
|
1,156
|
|
|
|
360
|
|
|
|
360
|
|
Nonfarm nonresidential
|
|
|
402
|
|
|
|
262
|
|
|
|
—
|
|
|
|
327
|
|
|
|
19
|
|
|
|
—
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
1-4 Family
|
|
|
2,678
|
|
|
|
1,628
|
|
|
|
—
|
|
|
|
1,964
|
|
|
|
—
|
|
|
|
—
|
|
Consumer
|
|
|
12
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
Agriculture
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Subtotal
|
|
|
5,072
|
|
|
|
2,032
|
|
|
|
—
|
|
|
|
3,573
|
|
|
|
379
|
|
|
|
360
|
|
With An Allowance Recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
60
|
|
|
|
3
|
|
|
|
—
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Farmland
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Nonfarm nonresidential
|
|
|
159
|
|
|
|
159
|
|
|
|
35
|
|
|
|
100
|
|
|
|
—
|
|
|
|
—
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
1-4 Family
|
|
|
720
|
|
|
|
720
|
|
|
|
168
|
|
|
|
1,111
|
|
|
|
—
|
|
|
|
—
|
|
Consumer
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Agriculture
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Subtotal
|
|
|
879
|
|
|
|
879
|
|
|
|
203
|
|
|
|
1,271
|
|
|
|
3
|
|
|
|
—
|
|
Total
|
|
$
|
5,951
|
|
|
$
|
2,911
|
|
|
$
|
203
|
|
|
$
|
4,844
|
|
|
$
|
382
|
|
|
$
|
360
|
|
Troubled Debt Restructuring
A troubled debt restructuring (TDR) occurs when the Bank has agreed to a loan modification in the form of a concession for a borrower who is experiencing financial difficulty. The Bank’s TDRs typically involve a reduction in interest rate, a deferral of principal for a stated period of time, or an interest only period. All TDRs are considered impaired and the Bank has allocated reserves for these loans to reflect the present value of the concessionary terms granted to the borrower.
The following table presents the TDR loan modifications by portfolio segment outstanding as of December 31, 2020 and 2019:
|
|
TDRs
Performing to
Modified Terms
|
|
|
TDRs Not
Performing to
Modified Terms
|
|
|
Total
TDRs
|
|
|
|
(in thousands)
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonfarm nonresidential
|
|
$
|
374
|
|
|
$
|
—
|
|
|
$
|
374
|
|
Residential Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 Family
|
|
|
106
|
|
|
|
—
|
|
|
|
106
|
|
Total TDRs
|
|
$
|
480
|
|
|
$
|
—
|
|
|
$
|
480
|
|
|
|
TDRs
Performing to
Modified Terms
|
|
|
TDRs Not
Performing to
Modified Terms
|
|
|
Total
TDRs
|
|
|
|
(in thousands)
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonfarm nonresidential
|
|
$
|
400
|
|
|
$
|
—
|
|
|
$
|
400
|
|
Residential Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 Family
|
|
|
75
|
|
|
|
—
|
|
|
|
75
|
|
Total TDRs
|
|
$
|
475
|
|
|
$
|
—
|
|
|
$
|
475
|
|
At December 31, 2020 and 2019, 100% of the Company’s TDRs were performing according to their modified terms. The Company allocated $1,000 as of December 31, 2020 and 2019, in reserves to customers whose loan terms have been modified in TDRs. The Company has committed to lend no additional amounts as of December 31, 2020 or December 31, 2019 to customers with outstanding loans that are classified as TDRs.
During the years ended December 31, 2020, 2019, and 2018, no TDRs defaulted on their restructured loan within the twelve-month period following the loan modification. A default is considered to have occurred once the TDR is past due 90 days or more or it has been placed on nonaccrual.
The following table presents a summary of the TDR loan modifications by portfolio segment that occurred during the year ended December 31, 2020:
|
|
TDRs
Performing to
Modified Terms
|
|
|
TDRs Not
Performing to
Modified Terms
|
|
|
Total
TDRs
|
|
|
|
(in thousands)
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 Family
|
|
|
33
|
|
|
|
—
|
|
|
|
33
|
|
Total TDRs
|
|
$
|
33
|
|
|
$
|
—
|
|
|
$
|
33
|
|
The Company has not allocated any reserves to customers whose loan terms have been modified during 2020. For modifications occurring during the twelve months ended December 31, 2020, the post-modification balances approximate the pre-modification balances. There were no TDR loan modifications during the year ended December 31, 2019.
Non-TDR Loan Modifications due to COVID-19
The Company has elected to account for eligible loan modifications under Section 4013 of the Coronavirus Aid Relief and Economic Security Act (“CARES Act”). To be an eligible loan under Section 4013 of the CARES Act, a loan modification must be (1) related to the COVID-19 pandemic; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020 and the earlier of (A) 60 days after the date of termination of the national emergency declared by the President on March 13, 2020 concerning the COVID-19 outbreak (the “national emergency”) or (B) January 1, 2022. Eligible loan modifications are not required to be classified as TDRs and will not be reported as past due provided that they are performing in accordance with the modified terms. Interest income will continue to be recognized in accordance with GAAP unless the loan is placed on nonaccrual status. Short-term loan modifications totaled $15.3 million at December 31, 2020.
Non-performing Loans
Non-performing loans include impaired loans and smaller balance homogeneous loans, such as residential mortgage and consumer loans, that are collectively evaluated for impairment. The following table presents the recorded investment in nonaccrual and loans past due 90 days and still on accrual by class of loan as of December 31, 2020 and 2019:
|
|
Nonaccrual
|
|
|
Loans Past
Due 90 Days
And Over Still
Accruing
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
—
|
|
|
$
|
50
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Farmland
|
|
|
456
|
|
|
|
431
|
|
|
|
—
|
|
|
|
—
|
|
Nonfarm nonresidential
|
|
|
175
|
|
|
|
90
|
|
|
|
—
|
|
|
|
—
|
|
Residential Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
1-4 Family
|
|
|
954
|
|
|
|
817
|
|
|
|
—
|
|
|
|
—
|
|
Consumer
|
|
|
—
|
|
|
|
98
|
|
|
|
—
|
|
|
|
—
|
|
Agriculture
|
|
|
91
|
|
|
|
42
|
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
1,676
|
|
|
$
|
1,528
|
|
|
$
|
—
|
|
|
$
|
—
|
|
The following table presents the aging of the recorded investment in past due loans by class as of December 31, 2020 and 2019:
|
|
30 – 59
Days
Past Due
|
|
|
60 – 89
Days
Past Due
|
|
|
90 Days
And Over
Past Due
|
|
|
Nonaccrual
|
|
|
Total
Past Due
And
Nonaccrual
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
20
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
20
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Farmland
|
|
|
325
|
|
|
|
53
|
|
|
|
—
|
|
|
|
456
|
|
|
|
834
|
|
Nonfarm nonresidential
|
|
|
—
|
|
|
|
26
|
|
|
|
—
|
|
|
|
175
|
|
|
|
201
|
|
Residential Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
1-4 Family
|
|
|
1,110
|
|
|
|
217
|
|
|
|
—
|
|
|
|
954
|
|
|
|
2,281
|
|
Consumer
|
|
|
59
|
|
|
|
49
|
|
|
|
—
|
|
|
|
—
|
|
|
|
108
|
|
Agriculture
|
|
|
23
|
|
|
|
27
|
|
|
|
—
|
|
|
|
91
|
|
|
|
141
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
1,537
|
|
|
$
|
372
|
|
|
$
|
—
|
|
|
$
|
1,676
|
|
|
$
|
3,585
|
|
|
|
30 – 59
Days
Past Due
|
|
|
60 – 89
Days
Past Due
|
|
|
90 Days
And Over
Past Due
|
|
|
Nonaccrual
|
|
|
Total
Past Due
And
Nonaccrual
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
14
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
50
|
|
|
$
|
67
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Farmland
|
|
|
274
|
|
|
|
—
|
|
|
|
—
|
|
|
|
431
|
|
|
|
705
|
|
Nonfarm nonresidential
|
|
|
206
|
|
|
|
—
|
|
|
|
—
|
|
|
|
90
|
|
|
|
296
|
|
Residential Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
1-4 Family
|
|
|
1,162
|
|
|
|
503
|
|
|
|
—
|
|
|
|
817
|
|
|
|
2,482
|
|
Consumer
|
|
|
91
|
|
|
|
164
|
|
|
|
—
|
|
|
|
98
|
|
|
|
353
|
|
Agriculture
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
42
|
|
|
|
42
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
1,747
|
|
|
$
|
670
|
|
|
$
|
—
|
|
|
$
|
1,528
|
|
|
$
|
3,945
|
|
Credit Quality Indicators
Management categorizes all loans into risk categories at origination based upon original underwriting. Thereafter, management categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends. Additionally, loans are analyzed through internal and external loan review processes and are routinely analyzed through credit administration processes which classify the loans as to credit risk. The following definitions are used for risk ratings:
Watch – Loans classified as watch are those loans which have experienced or may experience a potentially adverse development which necessitates increased monitoring.
Special Mention – Loans classified as special mention do not have all of the characteristics of substandard or doubtful loans. They have one or more deficiencies which warrant special attention and which corrective action, such as accelerated collection practices, may remedy.
Substandard – Loans classified as substandard are those loans with clear and defined weaknesses such as a highly leveraged position, unfavorable financial ratios, uncertain repayment sources or poor financial condition which may jeopardize the repayment of the debt as contractually agreed. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.
Doubtful – Loans classified as doubtful are those loans which have characteristics similar to substandard loans but with an increased risk that collection or liquidation in full is highly questionable and improbable.
Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be “Pass” rated loans. As of December 31, 2020 and 2019, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:
|
|
Pass
|
|
|
Watch
|
|
|
Special
Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
201,240
|
|
|
$
|
192
|
|
|
$
|
—
|
|
|
$
|
6,812
|
|
|
$
|
—
|
|
|
$
|
208,244
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
92,916
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
92,916
|
|
Farmland
|
|
|
65,556
|
|
|
|
3,714
|
|
|
|
—
|
|
|
|
1,002
|
|
|
|
—
|
|
|
|
70,272
|
|
Nonfarm nonresidential
|
|
|
258,665
|
|
|
|
1,605
|
|
|
|
—
|
|
|
|
6,124
|
|
|
|
—
|
|
|
|
266,394
|
|
Residential Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
50,732
|
|
|
|
10,448
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
61,180
|
|
1-4 Family
|
|
|
183,379
|
|
|
|
2,831
|
|
|
|
—
|
|
|
|
2,745
|
|
|
|
—
|
|
|
|
188,955
|
|
Consumer
|
|
|
31,387
|
|
|
|
3
|
|
|
|
—
|
|
|
|
39
|
|
|
|
—
|
|
|
|
31,429
|
|
Agriculture
|
|
|
41,503
|
|
|
|
86
|
|
|
|
—
|
|
|
|
455
|
|
|
|
—
|
|
|
|
42,044
|
|
Other
|
|
|
647
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
647
|
|
Total
|
|
$
|
926,025
|
|
|
$
|
18,879
|
|
|
$
|
—
|
|
|
$
|
17,177
|
|
|
$
|
—
|
|
|
$
|
962,081
|
|
|
|
Pass
|
|
|
Watch
|
|
|
Special
Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
130,312
|
|
|
$
|
11,280
|
|
|
$
|
—
|
|
|
$
|
3,959
|
|
|
$
|
—
|
|
|
$
|
145,551
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
64,911
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
64,911
|
|
Farmland
|
|
|
71,503
|
|
|
|
6,663
|
|
|
|
—
|
|
|
|
952
|
|
|
|
—
|
|
|
|
79,118
|
|
Nonfarm nonresidential
|
|
|
245,995
|
|
|
|
6,986
|
|
|
|
—
|
|
|
|
2,478
|
|
|
|
—
|
|
|
|
255,459
|
|
Residential Real Estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
|
|
70,950
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
70,950
|
|
1-4 Family
|
|
|
221,727
|
|
|
|
2,420
|
|
|
|
—
|
|
|
|
2,482
|
|
|
|
—
|
|
|
|
226,629
|
|
Consumer
|
|
|
47,657
|
|
|
|
5
|
|
|
|
—
|
|
|
|
128
|
|
|
|
—
|
|
|
|
47,790
|
|
Agriculture
|
|
|
34,853
|
|
|
|
168
|
|
|
|
—
|
|
|
|
43
|
|
|
|
—
|
|
|
|
35,064
|
|
Other
|
|
|
799
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
799
|
|
Total
|
|
$
|
888,707
|
|
|
$
|
27,522
|
|
|
$
|
—
|
|
|
$
|
10,042
|
|
|
$
|
—
|
|
|
$
|
926,271
|
|
NOTE 4 – PREMISES AND EQUIPMENT
Year-end premises and equipment were as follows:
|
|
2020
|
|
|
2019
|
|
|
|
(in thousands)
|
|
Land and buildings
|
|
$
|
21,214
|
|
|
$
|
21,228
|
|
Furniture and equipment
|
|
|
9,323
|
|
|
|
8,884
|
|
Leased right-of-use asset
|
|
|
2,477
|
|
|
|
3,070
|
|
|
|
|
33,014
|
|
|
|
33,182
|
|
Accumulated depreciation
|
|
|
(14,481
|
)
|
|
|
(13,524
|
)
|
|
|
$
|
18,533
|
|
|
$
|
19,658
|
|
See ‘Note 5 – Leases’ for additional details regarding the Bank’s leased right-of-use asset and lease liability.
Depreciation expense was $1.1 million, $801,000 and $833,000 for 2020, 2019 and 2018, respectively.
NOTE 5 – LEASES
As of December 31, 2020, the Company leases real estate for six branch offices or offsite ATM machines under various operating lease agreements. The lease agreements have maturity dates ranging from 2021 to 2045, including all expected extension periods. The weighted average remaining life of the lease term for these leases was 21 years as of December 31, 2020.
In determining the present value of lease payments, the Bank uses the implicit lease rate when readily determinable. As most of the Bank’s leases do not provide an implicit rate, the incremental borrowing rate based on the information available at commencement date is used. The incremental borrowing rate is the estimated rate of interest that the Bank would have to pay to borrow on a collateralized basis over a similar term in an amount equal to the lease payments in a similar economic environment. The weighted average discount rate for the leases was 5.47% as of December 31, 2020.
Total rental expense was $551,000 and $294,000 for the years ended December 31, 2020 and December 31, 2019, respectively. During 2019, the Company assumed three leases as a result of the branch purchase transaction, and also commenced the lease for a new branch in Lexington. The right-of-use asset, included in premises and equipment, and lease liability, included in other liabilities, was $2.5 million as of December 31, 2020 and $3.1 million as of December 31, 2019.
Total estimated rental commitments for the operating leases were as follows as of December 31, 2020 (in thousands):
|
|
2020
|
|
|
|
|
|
|
2021
|
|
|
279
|
|
2022
|
|
|
183
|
|
2023
|
|
|
186
|
|
2024
|
|
|
185
|
|
2025
|
|
|
162
|
|
Thereafter
|
|
|
3,503
|
|
Total minimum lease payments
|
|
|
4,498
|
|
Discount effect of cash flows
|
|
|
(2,021
|
)
|
Present value of lease liabilities
|
|
$
|
2,477
|
|
At December 31, 2020, the Company has entered into two additional leases for new branch offices that have yet to commence. The right of use asset and lease liability for the leases yet to commence are estimated to be approximately $3.3 million and are expected to be recorded in the first quarter of 2021.
NOTE 6 – OTHER REAL ESTATE OWNED
Other real estate owned (OREO) is real estate acquired as a result of foreclosure or by deed in lieu of foreclosure. It is classified as real estate owned until such time as it is sold. When property is acquired as a result of foreclosure or by deed in lieu of foreclosure, it is recorded at its fair market value less estimated cost to sell. Any write-down of the property at the time of acquisition is charged to the allowance for loan losses.
The following table presents the major categories of OREO at the period-ends indicated:
|
|
2020
|
|
|
2019
|
|
|
|
(in thousands)
|
|
Commercial Real Estate:
|
|
|
|
|
|
|
|
|
Construction, land development, and other land
|
|
|
1,765
|
|
|
|
3,225
|
|
|
|
$
|
1,765
|
|
|
$
|
3,225
|
|
Residential loans secured by 1-4 family residential properties in the process of foreclosure totaled $35,000 and $172,000 at December 31, 2020 and December 31, 2019, respectively.
Activity relating to OREO during the years indicated is as follows:
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
|
(in thousands)
|
|
OREO Activity
|
|
|
|
|
|
|
|
|
|
|
|
|
OREO as of January 1
|
|
$
|
3,225
|
|
|
$
|
3,485
|
|
|
$
|
4,409
|
|
Real estate acquired
|
|
|
—
|
|
|
|
—
|
|
|
|
730
|
|
Valuation adjustment write-downs
|
|
|
—
|
|
|
|
(260
|
)
|
|
|
(850
|
)
|
Net gain on sale
|
|
|
—
|
|
|
|
—
|
|
|
|
72
|
|
Proceeds from sale of properties
|
|
|
(1,600
|
)
|
|
|
—
|
|
|
|
(876
|
)
|
Improvements
|
|
|
140
|
|
|
|
—
|
|
|
|
—
|
|
OREO as of December 31
|
|
$
|
1,765
|
|
|
$
|
3,225
|
|
|
$
|
3,485
|
|
Expenses related to OREO include:
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
|
(in thousands)
|
|
Net gain on sale
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(72
|
)
|
Valuation adjustment write-downs
|
|
|
—
|
|
|
|
260
|
|
|
|
850
|
|
Operating expense
|
|
|
63
|
|
|
|
108
|
|
|
|
90
|
|
Total
|
|
$
|
63
|
|
|
$
|
368
|
|
|
$
|
868
|
|
NOTE 7 – GOODWILL AND INTANGIBLE ASSETS
The following table summarizes the Company’s acquired goodwill and intangible assets as of December 31, 2020 and December 31, 2019:
|
|
2020
|
|
|
2019
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
6,252
|
|
|
$
|
—
|
|
|
$
|
6,252
|
|
|
$
|
—
|
|
Core deposit intangibles
|
|
|
2,500
|
|
|
|
256
|
|
|
|
2,500
|
|
|
|
—
|
|
Outstanding, ending
|
|
$
|
8,752
|
|
|
$
|
256
|
|
|
$
|
8,752
|
|
|
$
|
—
|
|
During 2019, the Company recorded $6.3 million of goodwill related to a branch purchase transaction. Goodwill represents the excess of the total purchase price paid over the fair value of the identifiable assets acquired, net of the fair value of the liabilities assumed. Goodwill is not amortized but is evaluated for impairment on an annual basis or whenever events or changes in circumstances indicate the carrying value may not be recoverable. Impairment exists when a reporting unit’s carrying amount exceeds its fair value. Given the current economic environment, the Company engaged an independent third party expert to perform a quantitative assessment as of November 30, 2020 to determine if it was more likely than not that the fair value of the reporting unit exceeded its carrying value, including goodwill. The assessment indicated that the fair value of the reporting unit exceeded its carrying value, resulting in no impairment. Goodwill is the only intangible asset with an indefinite life on the Company’s balance sheet.
The Company recorded $256,000 intangible amortization expense during 2020. During 2019, the Company did not record any intangible amortization expense.
The estimated amortization expense of the core deposit intangible for the years ending December 31 is as follows (in thousands):
|
|
Amortization
Expense
|
|
2021
|
|
$
|
256
|
|
2022
|
|
|
256
|
|
2023
|
|
|
256
|
|
2024
|
|
|
256
|
|
2025
|
|
|
256
|
|
Thereafter
|
|
|
964
|
|
|
|
$
|
2,244
|
|
NOTE 8 – DEPOSITS
The following table details deposits by category:
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
|
|
(in thousands)
|
|
Non-interest bearing
|
|
$
|
243,022
|
|
|
$
|
187,551
|
|
Interest checking
|
|
|
190,625
|
|
|
|
146,038
|
|
Money market
|
|
|
175,785
|
|
|
|
160,837
|
|
Savings
|
|
|
142,623
|
|
|
|
56,015
|
|
Certificates of deposit
|
|
|
367,552
|
|
|
|
476,534
|
|
Total
|
|
$
|
1,119,607
|
|
|
$
|
1,026,975
|
|
Time deposits of $250,000 or more were approximately $50.7 million and $51.2 million at year-end 2020 and 2019, respectively.
Scheduled maturities of total time deposits for each of the next five years are as follows (in thousands):
|
|
Total
|
|
2021
|
|
$
|
272,031
|
|
2022
|
|
|
39,876
|
|
2023
|
|
|
17,419
|
|
2024
|
|
|
11,092
|
|
2025
|
|
|
26,657
|
|
Thereafter
|
|
|
477
|
|
|
|
$
|
367,552
|
|
NOTE 9 – ADVANCES FROM FEDERAL HOME LOAN BANK
At year-end, advances from the Federal Home Loan Bank were as follows:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Short term advance (fixed rate 0.00%) maturing April 2021
|
|
$
|
623
|
|
|
$
|
60,000
|
|
Long term advance (fixed rate 0.77%) maturing February 2030
|
|
|
20,000
|
|
|
|
1,389
|
|
Total advances from the Federal Home Loan Bank
|
|
$
|
20,623
|
|
|
$
|
61,389
|
|
FHLB advances had a weighted-average rate of 0.75% at December 31, 2020 and 1.70% at December 31, 2019. Each advance is payable per terms on agreement, with a prepayment penalty. No prepayment penalties were incurred during 2020 or 2019. The $20.0 million long term advance is callable quarterly at the FHLB’s option. The advances were collateralized by approximately $133.7 million and $166.0 million of first mortgage loans, under a blanket lien arrangement at December 31, 2020 and December 31, 2019, respectively and $20.3 million of loans originated under the SBA Payment Protection Plan at December 31, 2020. At December 31, 2020, the Bank’s additional borrowing capacity with the FHLB was $93.9 million.
Scheduled principal payments during the next five years and thereafter (in thousands):
|
|
Advances
|
|
2021
|
|
$
|
623
|
|
2022
|
|
|
—
|
|
2023
|
|
|
—
|
|
2024
|
|
|
—
|
|
2025
|
|
|
—
|
|
Thereafter
|
|
|
20,000
|
|
|
|
$
|
20,623
|
|
At year-end 2020, the Company had a $5.0 million federal funds line of credit available on an unsecured basis from a correspondent institution.
NOTE 10 – BORROWINGS
Junior Subordinated Debentures - The junior subordinated debentures are redeemable at par prior to maturity at the option of the Company as defined within the trust indenture. The Company has the option to defer interest payments on the junior 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. The Company is prohibited from paying dividends on preferred and common shares when interest payments are in deferral. At December 31, 2020, the Company is current on all interest payments.
A summary of the junior subordinated debentures is as follows:
Description
|
|
Issuance
Date
|
|
|
Interest Rate (1)
|
|
|
Junior
Subordinated
Debt Owed
To Trust
|
|
|
Maturity
Date (2)
|
|
Statutory Trust I
|
|
2/13/2004
|
|
|
3-month LIBOR + 2.85%
|
|
|
$
|
3,000,000
|
|
|
2/13/2034
|
|
Statutory Trust II
|
|
2/13/2004
|
|
|
3-month LIBOR + 2.85%
|
|
|
|
5,000,000
|
|
|
2/13/2034
|
|
Statutory Trust III
|
|
4/15/2004
|
|
|
3-month LIBOR + 2.79%
|
|
|
|
3,000,000
|
|
|
4/15/2034
|
|
Statutory Trust IV
|
|
12/14/2006
|
|
|
3-month LIBOR + 1.67%
|
|
|
|
10,000,000
|
|
|
3/01/2037
|
|
|
|
|
|
|
|
|
|
|
|
$
|
21,000,000
|
|
|
|
|
|
(1)
|
As of December 31, 2020, the 3-month LIBOR was 0.24%.
|
(2)
|
The debentures are callable at the Company’s option at their principal amount plus accrued interest.
|
Subordinated Capital Notes - The Company’s subordinated notes mature on July 31, 2029. The notes carry interest at a fixed rate of 5.75% until July 30, 2024 and then convert to variable at three-month LIBOR plus 395 basis points until maturity. The subordinated capital notes qualify as Tier 2 regulatory capital. On July 31, 2020, the Company completed the issuance of an additional $8.0 million in subordinated notes under the July 23, 2019 indenture with the same terms and with the additional commitment by the Company to extend the optional prepayment date to July 31, 2025 so long as the additional notes qualify as Tier 2 regulatory capital. The Company used the net proceeds from the issuance of the additional notes to retire its senior debt and retained the remaining balance for general corporate purposes. The subordinated capital notes qualify as Tier 2 regulatory capital.
NOTE 11 – OTHER BENEFIT PLANS
401(k) Plan – The Company’s 401(k) Savings Plan allows employees to contribute up to the annual limits as determined by the Internal Revenue Service, which is matched 100% of the first 1% of compensation contributed and 50% of the next 5% contributed by employees. The Company, at its discretion, may make additional contributions. Total contributions made by the Company to the plan totaled approximately $399,000, $362,000 and $347,000 in 2020, 2019 and 2018, respectively.
NOTE 12 – INCOME TAXES
Income tax expense was as follows:
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
|
(in thousands)
|
|
Current
|
|
$
|
(173
|
)
|
|
$
|
(173
|
)
|
|
$
|
(346
|
)
|
Deferred
|
|
|
1,372
|
|
|
|
505
|
|
|
|
121
|
|
Net operating loss
|
|
|
903
|
|
|
|
1,725
|
|
|
|
2,255
|
|
Establish state deferred tax asset
|
|
|
(478
|
)
|
|
|
(1,577
|
)
|
|
|
—
|
|
|
|
$
|
1,624
|
|
|
$
|
480
|
|
|
$
|
2,030
|
|
For 2020 and 2019, income tax expense benefitted from the establishment of a net deferred tax assets related to a change in Kentucky tax law enacted during 2019. Income tax expense benefitted $478,000 and $1.6 million for the years ended December 31, 2020 and 2019, respectively, or $0.06 per basic and diluted common share, and $0.21 per basic and diluted common share, respectively. 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 went into effect on January 1, 2021.
Effective tax rates differ from federal statutory rate applied to income before income taxes due to the following:
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
|
(in thousands)
|
|
Federal statutory rate
|
|
|
21
|
%
|
|
|
21
|
%
|
|
|
21
|
%
|
Federal statutory rate times financial statement income
|
|
$
|
2,232
|
|
|
$
|
2,310
|
|
|
$
|
2,273
|
|
Effect of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt income
|
|
|
(73
|
)
|
|
|
(66
|
)
|
|
|
(80
|
)
|
Establish state deferred tax asset
|
|
|
(478
|
)
|
|
|
(1,577
|
)
|
|
|
—
|
|
Non-taxable life insurance income
|
|
|
(89
|
)
|
|
|
(86
|
)
|
|
|
(92
|
)
|
Restricted stock vesting
|
|
|
7
|
|
|
|
(137
|
)
|
|
|
(115
|
)
|
Other, net
|
|
|
25
|
|
|
|
36
|
|
|
|
44
|
|
Total
|
|
$
|
1,624
|
|
|
$
|
480
|
|
|
$
|
2,030
|
|
Year-end deferred tax assets and liabilities were due to the following:
|
|
2020
|
|
|
2019
|
|
|
|
(in thousands)
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carry-forward
|
|
$
|
22,012
|
|
|
$
|
22,915
|
|
Allowance for loan losses
|
|
|
3,104
|
|
|
|
2,090
|
|
OREO write-down
|
|
|
914
|
|
|
|
2,665
|
|
Alternative minimum tax credit carry-forward
|
|
|
—
|
|
|
|
173
|
|
Net assets from acquisitions
|
|
|
72
|
|
|
|
228
|
|
New market tax credit carry-forward
|
|
|
208
|
|
|
|
208
|
|
Nonaccrual loan interest
|
|
|
315
|
|
|
|
303
|
|
Accrued expenses
|
|
|
131
|
|
|
|
102
|
|
Lease liability
|
|
|
618
|
|
|
|
766
|
|
Other
|
|
|
332
|
|
|
|
309
|
|
|
|
|
27,706
|
|
|
|
29,759
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
FHLB stock dividends
|
|
|
478
|
|
|
|
563
|
|
Fixed assets
|
|
|
71
|
|
|
|
57
|
|
Deferred loan costs
|
|
|
172
|
|
|
|
170
|
|
Net unrealized gain on securities
|
|
|
585
|
|
|
|
331
|
|
Lease right-of-use assets
|
|
|
618
|
|
|
|
766
|
|
Other
|
|
|
68
|
|
|
|
107
|
|
|
|
|
1,992
|
|
|
|
1,994
|
|
Net deferred tax assets
|
|
$
|
25,714
|
|
|
$
|
27,765
|
|
At December 31, 2020, the Company had net federal net operating loss carryforwards of $98.2 million, which will begin to expire in 2032, and state net operating loss carryforwards of $35.0 million, which will begin to expire in 2025. During 2020, the $173,000 alternative minimum tax credit carry-forward was refunded due to the enactment of CARES Act.
The Company does not have any beginning and ending unrecognized tax benefits. The Company does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next twelve months. There were no interest and penalties recorded in the income statement or accrued for the years ended December 31, 2020 or December 31, 2019 related to unrecognized tax benefits.
Under Section 382 of the Internal Revenue Code, as amended (“Section 382”), the Company’s net operating loss carryforwards and other deferred tax assets can generally be used to offset future taxable income and therefore reduce federal income tax obligations. However, the Company's ability to use its NOLs would be limited if there was an “ownership change” as defined by Section 382. This would occur if shareholders owning (or deemed to own under the tax rules) 5% or more of the Company's voting and non-voting common shares increase their aggregate ownership of the Company by more than 50 percentage points over a defined period of time.
In 2015, the Company took two measures to preserve the value of its NOLs. First, the Company adopted a tax benefits preservation plan designed to reduce the likelihood of an “ownership change” occurring as a result of purchases and sales of the Company's common shares. Upon adoption of this plan, the Company declared a dividend of one preferred stock purchase right for each common share outstanding as of the close of business on July 10, 2015. Any shareholder or group that acquires beneficial ownership of 5% or more of the Company (an “acquiring person”) could be subject to significant dilution in its holdings if the Company's Board of Directors does not approve such acquisition. Existing shareholders holding 5% or more of the Company will not be considered acquiring persons unless they acquire additional shares, subject to certain exceptions described in the plan. In addition, as amended November 25, 2019, the Board of Directors has the discretion to exempt certain transactions and certain persons whose acquisition of securities is determined by the Board not to jeopardize the Company's deferred tax assets. The rights plan was extended in May 2018 to expire upon the earlier of (i) June 30, 2021, (ii) the beginning of a taxable year with respect to which the Board of Directors determines that no tax benefits may be carried forward, (iii) the repeal or amendment of Section 382 or any successor statute, if the Board of Directors determines that the plan is no longer needed to preserve the tax benefits, and (iv) certain other events as described in the plan.
On September 23, 2015, the Company’s shareholders approved an amendment to its articles of incorporation to further help protect the long-term value of the Company’s NOLs. The amendment provides a means to block transfers of the Company’s common shares that could result in an ownership change under Section 382. The transfer restrictions were extended in May 2018 by shareholder vote and will expire on the earlier of (i) May 23, 2021, (ii) the beginning of a taxable year with respect to which the Board of Directors determines that no tax benefit may be carried forward, (iii) the repeal of Section 382 or any successor statute if the Company’s Board determines that the transfer restrictions are no longer needed to preserve the tax benefits of its NOLs, or (iv) such date as the Board otherwise determines that the transfer restrictions are no longer necessary.
The Company and its subsidiaries are subject to U.S. federal income tax and the Company is subject to income tax in the Commonwealth of Kentucky. The Company is no longer subject to examination by taxing authorities for years before 2017.
NOTE 13 – RELATED PARTY TRANSACTIONS
Loans to principal officers, directors, significant shareholders, and their affiliates in 2020 were as follows (in thousands):
Beginning balance
|
|
$
|
13,045
|
|
New loans and advances
|
|
|
4,750
|
|
Repayments
|
|
|
(3,500
|
)
|
Ending balance
|
|
$
|
14,295
|
|
Deposits from principal officers, directors, significant shareholders, and their affiliates at year-end 2020 and 2019 were $1.3 million and $505,000, respectively.
Hogan Development Company assists the Bank in onboarding, managing, and selling the Bank’s OREO. Hogan Development Company is owned by W. Glenn Hogan, a director. The agreement with Hogan Development Company is periodically reviewed and evaluated by the Audit Committee. The Bank paid real estate management fees of $26,000 in 2020 and $20,000 in 2019. The Bank paid no real estate sales and leasing commissions in 2020 or 2019.
NOTE 14 – REGULATORY CAPITAL MATTERS
Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can result in regulatory action.
The Basel III rules established a “capital conservation buffer” of 2.5% above the regulatory minimum risk-based capital ratios. Including the capital conservation buffer, 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 without prior regulatory approval.
The Company’s capital ratios were positively impacted by the additional $8.0 million of subordinated notes issued on July 21, 2020, as the subordinated notes meet the requirements to qualify as Tier 2 capital.
As of December 31, 2020, the Company and Bank meet all capital adequacy requirements to which they are subject. At year end 2020 and 2019, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since the notification that management believes have changed the institution’s category.
The following tables show the ratios (excluding capital conservation buffer) and amounts of common equity Tier 1, Tier 1 capital, and total capital to risk-adjusted assets and the leverage ratios for the Bank at the dates indicated (dollars in thousands):
|
|
Actual
|
|
|
Minimum Requirement
for Capital Adequacy
Purposes
|
|
|
Minimum Requirement
to be Well Capitalized
Under Prompt
Corrective Action
Provisions
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
As of December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk-based capital (to risk-weighted assets)
|
|
$
|
142,449
|
|
|
|
13.20
|
%
|
|
$
|
86,302
|
|
|
|
8.00
|
%
|
|
$
|
107,878
|
|
|
|
10.00
|
%
|
Total common equity Tier 1 risk-based capital (to risk-weighted assets)
|
|
|
130,006
|
|
|
|
12.05
|
|
|
|
48,545
|
|
|
|
4.50
|
|
|
|
70,120
|
|
|
|
6.50
|
|
Tier 1 capital (to risk-weighted assets)
|
|
|
130,006
|
|
|
|
12.05
|
|
|
|
64,727
|
|
|
|
6.00
|
|
|
|
86,302
|
|
|
|
8.00
|
|
Tier 1 capital (to average assets)
|
|
|
130,006
|
|
|
|
10.21
|
|
|
|
50,908
|
|
|
|
4.00
|
|
|
|
63,636
|
|
|
|
5.00
|
|
|
|
Actual
|
|
|
Minimum Requirement
for Capital Adequacy
Purposes
|
|
|
Minimum Requirement
to be Well Capitalized
Under Prompt
Corrective Action
Provisions
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
As of December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk-based capital (to risk-weighted assets)
|
|
$
|
121,335
|
|
|
|
12.08
|
%
|
|
$
|
80,341
|
|
|
|
8.00
|
%
|
|
$
|
100,426
|
|
|
|
10.00
|
%
|
Total common equity Tier 1 risk-based capital (to risk-weighted assets)
|
|
|
112,959
|
|
|
|
11.25
|
|
|
|
45,192
|
|
|
|
4.50
|
|
|
|
65,277
|
|
|
|
6.50
|
|
Tier 1 capital (to risk-weighted assets)
|
|
|
112,959
|
|
|
|
11.25
|
|
|
|
60,256
|
|
|
|
6.00
|
|
|
|
80,341
|
|
|
|
8.00
|
|
Tier 1 capital (to average assets)
|
|
|
112,959
|
|
|
|
9.99
|
|
|
|
45,208
|
|
|
|
4.00
|
|
|
|
56,510
|
|
|
|
5.00
|
|
Kentucky banking laws limit the amount of dividends that may be paid to a holding company by its subsidiary banks without prior approval. These laws limit the amount of dividends that may be paid in any calendar year to current year’s net income, as defined in the laws, combined with the retained net income of the preceding two years, less any dividends declared during those periods. In addition, a bank must have positive retained earnings.
NOTE 15 – OFF BALANCE SHEET RISKS, COMMITMENTS, AND CONTINGENT LIABILITIES
The Company, in the normal course of business, is party to financial instruments with off balance sheet risk. The financial instruments include commitments to extend credit and standby letters of credit. The contract or notional amounts of these instruments reflect the potential future obligations of the Company pursuant to those financial instruments. Creditworthiness for all instruments is evaluated on a case-by-case basis in accordance with the Company’s credit policies. Collateral from the client may be required based on the Company’s credit evaluation of the client and may include business assets of commercial clients, as well as personal property and real estate of individual clients or guarantors.
An approved but unfunded loan commitment represents a potential credit risk and a liquidity risk, since the Company’s client(s) may demand immediate cash that would require funding. In addition, unfunded loan commitments represent interest rate risk as market interest rates may rise above the rate committed to the Company’s client. Since a portion of these loan commitments normally expire unused, the total amount of outstanding commitments at any point in time may not require future funding. Commitments to make loans are generally made for periods of one year or less.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a client to a third party. The terms and risk of loss involved in issuing standby letters of credit are similar to those involved in issuing loan commitments and extending credit. In addition to credit risk, the Company also has liquidity risk associated with standby letters of credit because funding for these obligations could be required immediately. The Company does not deem this risk to be material. No liability is currently established for standby letters of credit.
The following table presents the contractual amounts of financial instruments with off-balance sheet risk for each year
ended:
|
|
2020
|
|
|
2019
|
|
|
|
Fixed
Rate
|
|
|
Variable
Rate
|
|
|
Fixed
Rate
|
|
|
Variable
Rate
|
|
|
|
(in thousands)
|
|
Commitments to make loans
|
|
$
|
20,990
|
|
|
$
|
17,466
|
|
|
$
|
11,577
|
|
|
$
|
20,415
|
|
Unused lines of credit
|
|
|
5,964
|
|
|
|
144,790
|
|
|
|
7,916
|
|
|
|
111,230
|
|
Standby letters of credit
|
|
|
175
|
|
|
|
1,342
|
|
|
|
531
|
|
|
|
3,164
|
|
Commitments to make loans are generally made for periods of one year or less.
In connection with the purchase of loan participations, the Bank entered into risk participation agreements, which had notional amounts totaling $26.6 million at December 31, 2020 and December 31, 2019. The risk participation agreements are not designated against specific assets or liabilities under ASC 815, Derivatives and Hedging, and, therefore, do not qualify for hedge accounting. The derivatives are recorded in other liabilities on the balance sheet at fair value and changes in fair value of both the borrower and the offsetting swap agreements are recorded (and essentially offset) in non-interest income. The fair value of the derivative instruments incorporates a consideration of credit risk in accordance with ASC 820, resulting in some volatility in earnings each period. At December 31, 2020 and December 31, 2019, the fair value of the risk participation agreements were $188,000 and $87,000, respectively.
In the normal course of business, the Company and its subsidiaries have been named, from time to time, as defendants in various legal actions. Certain of the actual or threatened legal actions may include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages.
The Company contests liability and/or the amount of damages as appropriate in each pending matter. In view of the inherent difficulty of predicting the outcome of such matters, particularly in cases where claimants seek substantial or indeterminate damages or where investigations and proceedings are in the early stages, the Company cannot predict with certainty the loss or range of loss, if any, related to such matters, how or if such matters will be resolved, when they will ultimately be resolved, or what the eventual settlement, or other relief, if any, might be. Subject to the foregoing, the Company believes, based on current knowledge and after consultation with counsel, that the outcome of such pending matters will not have a material adverse effect on the consolidated financial condition of the Company, although the outcome of such matters could be material to the Company’s operating results and cash flows for a particular future period, depending on, among other things, the level of the Company’s revenues or income for such period. The Company will accrue for a loss contingency if (1) it is probable that a future event will occur and confirm the loss and (2) the amount of the loss can be reasonably estimated. The Company is not currently involved in any material litigation.
NOTE 16 – FAIR VALUES
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Various valuation techniques are used to determine fair value, including market, income and cost approaches. There are three levels of inputs that may be used to measure fair values:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that an entity has the ability to access as of the measurement date, or observable inputs.
Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. When that occurs, the fair value hierarchy is classified on the lowest level of input that is significant to the fair value measurement. The following methods and significant assumptions are used to estimate fair value.
Securities: The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges, if available. This valuation method is classified as Level 1 in the fair value hierarchy. For securities where quoted prices are not available, fair values are calculated on market prices of similar securities, or matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. Matrix pricing relies on the securities’ relationship to similarly traded securities, benchmark curves, and the benchmarking of like securities. Matrix pricing utilizes observable market inputs such as benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, and industry and economic events. In instances where broker quotes are used, these quotes are obtained from market makers or broker-dealers recognized to be market participants. This valuation method is classified as Level 2 in the fair value hierarchy. For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators. This valuation method is classified as Level 3 in the fair value hierarchy. Discounted cash flows are calculated using spread to swap and LIBOR curves that are updated to incorporate loss severities, volatility, credit spread and optionality. During times when trading is more liquid, broker quotes are used (if available) to validate the model. Rating agency and industry research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into the calculations.
Impaired Loans: An impaired loan is evaluated at the time the loan is identified as impaired and is recorded at fair value less costs to sell. Fair value is measured based on the value of the collateral securing the loan and is classified as Level 3 in the fair value hierarchy. Fair value is determined using several methods. Generally, the fair value of real estate is determined based on appraisals by qualified licensed appraisers. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach.
Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. These routine adjustments are made to adjust the value of a specific property relative to comparable properties for variations in qualities such as location, size, and income production capacity relative to the subject property of the appraisal. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.
Management routinely applies internal discounts to the value of appraisals used in the fair value evaluation of the Bank’s impaired loans. The deductions to the appraisal take into account changing business factors and market conditions, as well as potential value impairment in cases where the Bank’s appraisal date predates a likely change in market conditions. These deductions range from 10% for routine real estate collateral to 25% for real estate that is determined to have a thin trading market or to be specialized collateral. This is in addition to estimated discounts for cost to sell of six to ten percent.
Management also applies discounts to the expected fair value of collateral for impaired loans where the likely resolution involves litigation or foreclosure. Resolution of this nature generally results in receiving lower values for real estate collateral in a more aggressive sales environment. Discounts ranging from 10% to 33% have been utilized in the Bank’s impairment evaluations when applicable.
Impaired loans are evaluated quarterly for additional impairment. Management obtains updated appraisals on properties securing the Bank’s loans when circumstances are warranted such as at the time of renewal or when market conditions have significantly changed. This determination is made on a property-by-property basis in light of circumstances in the broader economic climate and the assessment of deterioration of real estate values in the market in which the property is located.
Other Real Estate Owned (OREO): OREO is evaluated at the time of acquisition and recorded at fair value as determined by independent appraisal or internal evaluation less estimated cost to sell. Quarterly evaluations of OREO for impairment are driven by property type. For smaller dollar single family homes, management consults with staff from the Bank’s special assets group as well as external realtors and appraisers. Based on these consultations, management determines asking prices for OREO properties being marketed for sale. If the internally evaluated fair value or asking price is below the recorded investment in the property, appropriate write-downs are taken.
For larger dollar commercial real estate properties, management obtains a new appraisal of the subject property or has staff in the special assets group evaluate the latest in-file appraisal in connection with the transfer to OREO. Management generally obtains updated appraisals within five quarters of the anniversary date of ownership unless a sale is imminent. When an asking price is lowered below the most recent appraised value, appropriate write-downs are taken.
Financial assets measured at fair value on a recurring basis are summarized below:
|
|
|
|
|
|
Fair Value Measurements at December 31, 2020 Using
|
|
|
|
|
|
|
|
(in thousands)
|
|
Description
|
|
Carrying
Value
|
|
|
Quoted Prices In
Active Markets for
Identical Assets
(Level 1)
|
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Available for sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and federal agency
|
|
$
|
19,617
|
|
|
$
|
—
|
|
|
$
|
19,617
|
|
|
$
|
—
|
|
Agency mortgage-backed: residential
|
|
|
74,333
|
|
|
|
—
|
|
|
|
74,333
|
|
|
|
—
|
|
Collateralized loan obligations
|
|
|
43,152
|
|
|
|
—
|
|
|
|
40,764
|
|
|
|
2,388
|
|
State and municipal
|
|
|
36,055
|
|
|
|
—
|
|
|
|
36,055
|
|
|
|
—
|
|
Corporate bonds
|
|
|
30,705
|
|
|
|
—
|
|
|
|
18,789
|
|
|
|
11,916
|
|
Total
|
|
$
|
203,862
|
|
|
$
|
—
|
|
|
$
|
189,558
|
|
|
$
|
14,304
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2019 Using
|
|
|
|
|
|
|
|
(in thousands)
|
|
Description
|
|
Carrying
Value
|
|
|
Quoted Prices In
Active Markets for
Identical Assets
(Level 1)
|
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Available for sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and federal agency
|
|
$
|
22,330
|
|
|
$
|
—
|
|
|
$
|
22,330
|
|
|
$
|
—
|
|
Agency mortgage-backed: residential
|
|
|
92,200
|
|
|
|
—
|
|
|
|
92,200
|
|
|
|
—
|
|
Collateralized loan obligations
|
|
|
49,419
|
|
|
|
—
|
|
|
|
49,419
|
|
|
|
—
|
|
State and municipal
|
|
|
28,366
|
|
|
|
—
|
|
|
|
28,366
|
|
|
|
—
|
|
Corporate bonds
|
|
|
16,685
|
|
|
|
—
|
|
|
|
16,685
|
|
|
|
—
|
|
Total
|
|
$
|
209,000
|
|
|
$
|
—
|
|
|
$
|
209,000
|
|
|
$
|
—
|
|
There were no transfers between Level 1 and Level 2 during 2020 or 2019.
The Company’s policy is to transfer assets or liabilities from one level to another when the methodology to obtain the fair value changes such that there are more or fewer unobservable inputs as of the end of the reporting period. During the year ended December 31, 2020, the Company reclassified one collateralized loan obligation and six corporate bonds from Level 2 to Level 3. The Company’s collateralized loan obligations and corporate bond valuations were supported by an analysis prepared by an independent third party and approved by management.
The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the year ended December 31, 2020:
|
|
Collateralized
Loan Obligations
|
|
|
Corporate Bonds
|
|
|
|
(in thousands)
|
|
Balance of recurring Level 3 assets at January 1, 2020
|
|
$
|
—
|
|
|
$
|
—
|
|
Total gains or losses for the year:
|
|
|
|
|
|
|
|
|
Included in other comprehensive income
|
|
|
—
|
|
|
|
—
|
|
Transfers into Level 3
|
|
|
2,388
|
|
|
|
11,916
|
|
Balance of recurring Level 3 assets at December 31, 2020
|
|
$
|
2,388
|
|
|
$
|
11,916
|
|
The following table presents quantitative information about recurring level 3 fair value measurements at December 31, 2020:
|
|
Fair Value
|
|
Valuation
Technique(s)
|
|
Unobservable Input(s)
|
|
Range (Weighted
Average)
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized loan obligations
|
|
$
|
2,388
|
|
Discounted cash flow
|
|
Constant prepayment rate
|
|
|
|
0%
|
|
|
|
|
|
|
|
|
|
|
Additional asset defaults
|
|
|
|
2%
|
|
(2%)
|
|
|
|
|
|
|
|
|
Expected asset recoveries
|
|
|
|
49%
|
|
(49%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
11,916
|
|
Discounted cash flow
|
|
Constant prepayment rate
|
|
|
|
0%
|
|
|
|
|
|
|
|
|
|
|
Spread to benchmark yield
|
|
|
322%
|
-
|
497%
|
(381%)
|
|
|
|
|
|
|
|
|
Indicative broker bid
|
|
|
72%
|
-
|
107%
|
(80%)
|
|
Financial assets measured at fair value on a non-recurring basis are summarized below:
|
|
|
|
|
|
Fair Value Measurements at December 31, 2020 Using
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
Carrying
Value
|
|
|
Quoted Prices In
Active Markets for
Identical Assets
(Level 1)
|
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Description
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonfarm nonresidential
|
|
$
|
2,180
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,180
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 Family
|
|
|
105
|
|
|
|
—
|
|
|
|
—
|
|
|
|
105
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2019 Using
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
Carrying
Value
|
|
|
Quoted Prices In
Active Markets for
Identical Assets
(Level 1)
|
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Description
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
21
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
21
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Farmland
|
|
|
245
|
|
|
|
—
|
|
|
|
—
|
|
|
|
245
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4 Family
|
|
|
145
|
|
|
|
—
|
|
|
|
—
|
|
|
|
145
|
|
Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $4.5 million, with a valuation allowance of $2.2 million, at December 31, 2020, resulting in $2.1 million provision for loan losses for the year ended December 31, 2020. At December 31, 2019, impaired loans had a carrying amount of $453,000, with a valuation allowance of $42,000, at December 31, 2019, resulting in no additional provision for loan losses for the year ended December 31, 2019.
The following table presents qualitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at December 31, 2020:
|
|
Fair Value
|
|
Valuation
Technique(s)
|
|
Unobservable Input(s)
|
|
Range (Weighted
Average)
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans - Commercial real estate
|
|
$
|
2,180
|
|
Sales comparison approach
|
|
Adjustment for differences between the comparable sales
|
|
|
0%
|
-
|
65%
|
(33%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income approach
|
|
Discount or capitalization rate
|
|
|
|
12%
|
|
(12%)
|
|
Carrying amount and estimated fair values of financial instruments were as follows at year-end 2020:
|
|
|
|
|
|
Fair Value Measurements at December 31, 2020 Using
|
|
|
|
Carrying
Amount
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
67,693
|
|
|
$
|
67,693
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
67,693
|
|
Securities available for sale
|
|
|
203,862
|
|
|
|
—
|
|
|
|
189,558
|
|
|
|
14,304
|
|
|
|
203,862
|
|
Federal Home Loan Bank stock
|
|
|
5,887
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Loans, net
|
|
|
949,638
|
|
|
|
—
|
|
|
|
—
|
|
|
|
941,330
|
|
|
|
941,330
|
|
Accrued interest receivable
|
|
|
4,444
|
|
|
|
—
|
|
|
|
925
|
|
|
|
3,519
|
|
|
|
4,444
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
1,119,607
|
|
|
$
|
243,022
|
|
|
$
|
878,309
|
|
|
$
|
—
|
|
|
$
|
1,121,331
|
|
Federal Home Loan Bank advances
|
|
|
20,623
|
|
|
|
—
|
|
|
|
20,665
|
|
|
|
—
|
|
|
|
20,665
|
|
Junior subordinated debentures
|
|
|
21,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
16,194
|
|
|
|
16,194
|
|
Subordinated capital notes
|
|
|
25,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
25,207
|
|
|
|
25,207
|
|
Accrued interest payable
|
|
|
859
|
|
|
|
—
|
|
|
|
231
|
|
|
|
628
|
|
|
|
859
|
|
Carrying amount and estimated fair values of financial instruments were as follows at year-end 2019:
|
|
|
|
|
|
Fair Value Measurements at December 31, 2019 Using
|
|
|
|
Carrying
Amount
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
30,203
|
|
|
$
|
30,203
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
30,203
|
|
Securities available for sale
|
|
|
209,000
|
|
|
|
—
|
|
|
|
209,000
|
|
|
|
—
|
|
|
|
209,000
|
|
Federal Home Loan Bank stock
|
|
|
6,237
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Loans, net
|
|
|
917,895
|
|
|
|
—
|
|
|
|
—
|
|
|
|
925,388
|
|
|
|
925,388
|
|
Accrued interest receivable
|
|
|
4,257
|
|
|
|
—
|
|
|
|
1,118
|
|
|
|
3,139
|
|
|
|
4,257
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
1,026,975
|
|
|
$
|
187,551
|
|
|
$
|
839,882
|
|
|
$
|
—
|
|
|
$
|
1,027,433
|
|
Federal Home Loan Bank advances
|
|
|
61,389
|
|
|
|
—
|
|
|
|
61,395
|
|
|
|
—
|
|
|
|
61,395
|
|
Junior subordinated debentures
|
|
|
21,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
17,466
|
|
|
|
17,466
|
|
Subordinated capital notes
|
|
|
17,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
17,003
|
|
|
|
17,003
|
|
Senior debt
|
|
|
5,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,022
|
|
|
|
5,022
|
|
Accrued interest payable
|
|
|
1,129
|
|
|
|
—
|
|
|
|
647
|
|
|
|
482
|
|
|
|
1,129
|
|
NOTE 17 – STOCK PLANS AND STOCK BASED COMPENSATION
Shares available for issuance under the 2018 Omnibus Equity Compensation Plan (“2018 Plan”) total 262,374. Shares issued to employees under the plan vest annually on the anniversary date of the grant over three years. Shares issued annually to each non-employee director have a fair market value of $25,000 and vest on December 31 in the year of grant.
The fair value of the 2020 unvested shares issued was $534,000, or $15.33 per weighted-average share. The Company recorded $580,000, $535,000, and $524,000 of stock-based compensation during 2020, 2019, and 2018, respectively, to salaries and employee benefits. Management expects substantially all of the unvested shares outstanding at the end of the period to vest according to the vesting schedule. A deferred tax benefit of $122,000, $112,000, and $110,000 was recognized related to this expense in 2020, 2019, and 2018, respectively.
The following table summarizes unvested share activity as of and for the periods indicated for the Company’s equity compensation plan:
|
|
Twelve Months Ended
|
|
|
Twelve Months Ended
|
|
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Grant
|
|
|
|
|
|
|
Grant
|
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
Outstanding, beginning
|
|
|
57,774
|
|
|
$
|
13.35
|
|
|
|
116,909
|
|
|
$
|
8.69
|
|
Granted
|
|
|
34,858
|
|
|
|
15.33
|
|
|
|
34,501
|
|
|
|
14.81
|
|
Vested
|
|
|
(43,836
|
)
|
|
|
12.69
|
|
|
|
(89,388
|
)
|
|
|
7.83
|
|
Forfeited
|
|
|
(1,358
|
)
|
|
|
15.95
|
|
|
|
(4,248
|
)
|
|
|
13.07
|
|
Outstanding, ending
|
|
|
47,438
|
|
|
$
|
15.34
|
|
|
|
57,774
|
|
|
$
|
13.35
|
|
Unrecognized stock based compensation expense related to unvested shares for 2021 and beyond is estimated as follows (in thousands):
2021
|
|
$
|
305
|
|
2022
|
|
|
134
|
|
2023
|
|
|
16
|
|
2024 & thereafter
|
|
|
—
|
|
NOTE 18 – EARNINGS PER SHARE
The factors used in the basic and diluted earnings per share computation follow:
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
|
(in thousands, except share and per share data)
|
|
Net income
|
|
$
|
9,005
|
|
|
$
|
10,518
|
|
|
$
|
8,794
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings allocated to unvested shares
|
|
|
68
|
|
|
|
106
|
|
|
|
144
|
|
Net income attributable to common shareholders, basic and diluted
|
|
$
|
8,937
|
|
|
$
|
10,412
|
|
|
$
|
8,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares including unvested common shares and participating preferred shares outstanding
|
|
|
7,492,190
|
|
|
|
7,468,215
|
|
|
|
7,159,723
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average unvested common shares
|
|
|
56,809
|
|
|
|
75,084
|
|
|
|
117,030
|
|
Weighted average common shares outstanding
|
|
|
7,435,381
|
|
|
|
7,393,131
|
|
|
|
7,042,693
|
|
Basic income per common share
|
|
$
|
1.20
|
|
|
$
|
1.41
|
|
|
$
|
1.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Add: Dilutive effects of assumed exercises of common stock warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Weighted average common shares and potential common shares
|
|
|
7,435,381
|
|
|
|
7,393,131
|
|
|
|
7,042,693
|
|
Diluted income per common share
|
|
$
|
1.20
|
|
|
$
|
1.41
|
|
|
$
|
1.23
|
|
The Company had no outstanding stock options at December 31, 2020, 2019 or 2018.
NOTE 19 – REVENUE FROM CONTRACTS WITH CUSTOMERS
All of the Company’s revenue from customers in the scope of ASC 606 is recognized within non-interest income. A description of the Company’s revenue streams accounted for under ASC 606 follows:
Service Charges on Deposit Accounts: The Company earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which include services such as ATM use fees, stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Company fulfills the customer’s request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges are withdrawn from the customer’s account balance.
Bank Card Interchange Income: The Company earns interchange fees from bank cardholder transactions conducted through a third party payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder.
Gains/Losses on Sales of OREO: The Company records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the Company finances the sale of OREO to the buyer, the Company assess whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon transfer of control of the property to the buyer. In determining the gain or loss on the sale, the Company adjusts the transaction price and related gain (loss) on sale if a significant financing component is present. Gains and losses on sales of OREO are netted with OREO expense and reported in non-interest expense.
Other Non-interest Income: Other non-interest income includes revenue from several sources that are within the scope of ASC 606, including title insurance commissions, income from secondary market loan sales, gains on sales of premises and equipment, and other transaction-based revenue that is individually immaterial. Other non-interest income included approximately $558,000, $501,000, and $660,000 of revenue for the years ended December 31, 2020, 2019, and 2018, respectively, within the scope of ASC 606. The remaining other non-interest income for the year is excluded from the scope of ASC 606.
NOTE 20 – PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
Condensed financial information of Limestone Bancorp Inc. is presented as follows:
CONDENSED BALANCE SHEETS
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(in thousands)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,037
|
|
|
$
|
4,769
|
|
Investment in banking subsidiary
|
|
|
150,560
|
|
|
|
138,321
|
|
Investment in and advances to other subsidiaries
|
|
|
776
|
|
|
|
776
|
|
Deferred taxes, net
|
|
|
5,953
|
|
|
|
5,138
|
|
Other assets
|
|
|
1,180
|
|
|
|
1,083
|
|
Total assets
|
|
$
|
163,506
|
|
|
$
|
150,087
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Debt
|
|
$
|
46,775
|
|
|
$
|
43,775
|
|
Accrued expenses and other liabilities
|
|
|
707
|
|
|
|
562
|
|
Shareholders’ equity
|
|
|
116,024
|
|
|
|
105,750
|
|
Total liabilities and shareholders’ equity
|
|
$
|
163,506
|
|
|
$
|
150,087
|
|
CONDENSED STATEMENTS OF OPERATIONS
|
|
Years ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
|
(in thousands)
|
|
Interest income
|
|
$
|
37
|
|
|
$
|
83
|
|
|
$
|
45
|
|
Dividends from subsidiaries
|
|
|
23
|
|
|
|
36
|
|
|
|
35
|
|
Other income
|
|
|
20
|
|
|
|
19
|
|
|
|
38
|
|
Interest expense
|
|
|
(2,008
|
)
|
|
|
(1,803
|
)
|
|
|
(1,370
|
)
|
Other expense
|
|
|
(1,357
|
)
|
|
|
(1,179
|
)
|
|
|
(1,290
|
)
|
Loss before income tax and undistributed subsidiary income
|
|
|
(3,285
|
)
|
|
|
(2,844
|
)
|
|
|
(2,542
|
)
|
Income tax expense (benefit)
|
|
|
(815
|
)
|
|
|
(1,997
|
)
|
|
|
(645
|
)
|
Equity in undistributed subsidiary income
|
|
|
11,475
|
|
|
|
11,365
|
|
|
|
10,691
|
|
Net income
|
|
$
|
9,005
|
|
|
$
|
10,518
|
|
|
$
|
8,794
|
|
CONDENSED STATEMENTS OF CASH FLOWS
|
|
Years ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
|
(in thousands)
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
9,005
|
|
|
$
|
10,518
|
|
|
$
|
8,794
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in undistributed subsidiary income
|
|
|
(11,475
|
)
|
|
|
(11,365
|
)
|
|
|
(10,691
|
)
|
Deferred taxes, net
|
|
|
(815
|
)
|
|
|
(1,996
|
)
|
|
|
(645
|
)
|
Stock-based compensation expense
|
|
|
580
|
|
|
|
535
|
|
|
|
524
|
|
Net change in other assets
|
|
|
(97
|
)
|
|
|
(401
|
)
|
|
|
30
|
|
Net change in other liabilities
|
|
|
145
|
|
|
|
423
|
|
|
|
(1,093
|
)
|
Net cash used in operating activities
|
|
|
(2,657
|
)
|
|
|
(2,286
|
)
|
|
|
(3,081
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in subsidiaries
|
|
|
—
|
|
|
|
(10,000
|
)
|
|
|
(5,000
|
)
|
Net cash used in investing activities
|
|
|
—
|
|
|
|
(10,000
|
)
|
|
|
(5,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
|
—
|
|
|
|
—
|
|
|
|
14,910
|
|
Redemption of preferred stock
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,505
|
)
|
Proceeds from issuance of subordinated capital notes
|
|
|
8,000
|
|
|
|
17,000
|
|
|
|
—
|
|
Repayment of senior debt
|
|
|
(5,000
|
)
|
|
|
(5,000
|
)
|
|
|
—
|
|
Common shares withheld for taxes
|
|
|
(75
|
)
|
|
|
(314
|
)
|
|
|
—
|
|
Net cash provided by financing activities
|
|
|
2,925
|
|
|
|
11,686
|
|
|
|
11,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
268
|
|
|
|
(600
|
)
|
|
|
3,324
|
|
Beginning cash and cash equivalents
|
|
|
4,769
|
|
|
|
5,369
|
|
|
|
2,045
|
|
Ending cash and cash equivalents
|
|
$
|
5,037
|
|
|
$
|
4,769
|
|
|
$
|
5,369
|
|
NOTE 21 – QUARTERLY FINANCIAL DATA (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
Per Common Share
|
|
|
|
Interest
Income
|
|
|
Net Interest
Income
|
|
|
Provision
For
Loan Losses
|
|
|
Income
Before
Income
Taxes
|
|
|
Net
Income
|
|
|
Basic (1)
|
|
|
Diluted (1)
|
|
|
|
(in thousands, except per share data)
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First quarter (2)
|
|
$
|
13,267
|
|
|
$
|
9,762
|
|
|
$
|
1,050
|
|
|
$
|
2,201
|
|
|
$
|
1,840
|
|
|
$
|
0.25
|
|
|
$
|
0.25
|
|
Second quarter (2)(3)
|
|
|
12,786
|
|
|
|
10,110
|
|
|
|
1,100
|
|
|
|
2,375
|
|
|
|
1,982
|
|
|
|
0.26
|
|
|
|
0.26
|
|
Third quarter (2)(3)
|
|
|
12,094
|
|
|
|
9,943
|
|
|
|
1,350
|
|
|
|
2,256
|
|
|
|
2,066
|
|
|
|
0.28
|
|
|
|
0.28
|
|
Fourth quarter (2)(3)
|
|
|
12,606
|
|
|
|
10,786
|
|
|
|
900
|
|
|
|
3,797
|
|
|
|
3,117
|
|
|
|
0.42
|
|
|
|
0.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First quarter (2)
|
|
$
|
12,186
|
|
|
$
|
8,959
|
|
|
$
|
—
|
|
|
$
|
2,962
|
|
|
$
|
2,839
|
|
|
$
|
0.38
|
|
|
$
|
0.38
|
|
Second quarter (2)
|
|
|
12,376
|
|
|
|
8,800
|
|
|
|
—
|
|
|
|
3,022
|
|
|
|
3,633
|
|
|
|
0.49
|
|
|
|
0.49
|
|
Third quarter (2)
|
|
|
12,485
|
|
|
|
8,730
|
|
|
|
—
|
|
|
|
2,813
|
|
|
|
2,282
|
|
|
|
0.31
|
|
|
|
0.31
|
|
Fourth quarter (2)(4)
|
|
|
12,537
|
|
|
|
8,861
|
|
|
|
—
|
|
|
|
2,201
|
|
|
|
1,764
|
|
|
|
0.24
|
|
|
|
0.24
|
|
|
(1)
|
The sum of the quarterly net income per share (basic and diluted) differs from the annual net income per share (basic and diluted) because of the differences in the weighted average number of common shares outstanding and the common shares used in the quarterly and annual computations as well as differences in rounding.
|
|
(2)
|
Income tax expense for 2020 and 2019 benefitted from the establishment of a state net deferred tax assets related to the 2019 tax law enactments.
|
|
|
Income Tax
Benefit (Expense)
|
|
|
Basic and
Diluted per
Share Impact
|
|
2020:
|
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
72,000
|
|
|
$
|
0.01
|
|
Second quarter
|
|
|
79,000
|
|
|
|
0.01
|
|
Third quarter
|
|
|
245,000
|
|
|
|
0.03
|
|
Fourth quarter
|
|
|
82,000
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
2019:
|
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
341,000
|
|
|
$
|
0.05
|
|
Second quarter
|
|
|
1,209,000
|
|
|
|
0.16
|
|
Third quarter
|
|
|
34,000
|
|
|
|
NM
|
|
Fourth quarter
|
|
|
(7,000
|
)
|
|
|
NM
|
|
|
(3)
|
Interest income benefitted $179,000, or $0.02 per basic and diluted share, in the second quarter of 2020, $195,000, or $0.02 per basic and diluted share, in the third quarter of 2020, and $767,000, or $0.08 per basic and diluted share, in the fourth quarter of 2020 from fees earned on PPP loans.
|
|
(4)
|
On November 15, 2019, the Company completed a four branch acquisition. Acquisition related costs totaled $775,000, or $0.08 per common share after taxes.
|