The following consolidated financial statements of Limestone Bancorp, Inc. and subsidiary, Limestone Bank, Inc. are submitted:
See accompanying notes to unaudited consolidated financial statements.
See accompanying notes to unaudited consolidated financial statements.
See accompanying notes to unaudited consolidated financial statements.
See accompanying notes to unaudited consolidated financial statements.
See accompanying notes to unaudited consolidated financial statements.
See accompanying notes to unaudited consolidated financial statements.
Notes to Unaudited Consolidated Financial Statements
Note 1 – Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation – The consolidated financial statements include Limestone Bancorp, Inc. (Company) and its subsidiary, Limestone Bank, Inc. (Bank). All significant inter-company transactions and accounts have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, the financial statements do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2022 are not necessarily indicative of the results that may be expected for the entire year. A description of other significant accounting policies is presented in the notes to the Consolidated Financial Statements for the year ended December 31, 2021 included in the Company’s Annual Report on Form 10-K.
Use of Estimates – To prepare financial statements in conformity with U.S. generally accepted accounting principles, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and future results could differ.
In March 2020, the World Health Organization declared novel coronavirus disease 2019 (“COVID-19”) as a global pandemic. The COVID-19 pandemic has created economic and financial disruptions that have adversely affected, and are likely to continue to adversely affect, the business, financial condition, and results of operations of the Company and its customers. The COVID-19 pandemic caused changes in the behavior of customers, businesses, and their employees, as well as supply chain interruptions, and overall economic and financial market instability.
Future effects, including further actions taken by federal, state, and local governments in response to the disruptions and economic and geopolitical instabilities that have followed COVID-19 or their impact, are unknown. In addition, federal governmental actions are meaningfully influencing the interest-rate environment. If these actions are sustained, it may adversely impact several industries within the Company’s geographic footprint and impair the ability of the Company’s customers to fulfill their contractual obligations. This could cause the Company to experience a material adverse effect on business operations, liquidity, asset valuations, results of operations, and financial condition, as well as its regulatory capital and liquidity ratios. Material adverse impacts may include all or a combination of valuation impairments on the Company’s intangible assets, investments, loans, or deferred tax assets.
Reclassifications – Some items in the prior year financial statements were reclassified to conform to the current presentation. The reclassifications did not impact net income or stockholders’ equity.
New Accounting Standards – In 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, held-to-maturity debt securities, and off-balance sheet credit exposures are required to be presented at the net amount expected to be collected. The measurement of expected credit losses is to be based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This measurement will take place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs significantly from the “incurred loss” model required under current GAAP, which delays recognition until it is probable a loss has been incurred. The change could materially affect how the allowance for loan losses is determined. Management is focused on refining assumptions, reviewing challenges to the model, analyzing forecast scenarios, and stress testing the volatility of the model. Additionally, management is implementing various accounting policies, developing processes and related controls, and considering various reporting disclosures. A one-time cumulative-effect adjustment to the allowance for loan losses will be recognized in retained earnings on the consolidated balance sheet as of the beginning of the first reporting period in which the new standard is effective, as is consistent with regulatory expectations set forth in interagency guidance. In December 2018, the OCC, The Board of Governors of the Federal Reserve System (Federal Reserve), and the FDIC approved a final rule to address changes to the credit loss accounting under GAAP, including banking organizations’ implementation of CECL. The final rule provides banking organizations the option to phase in over a three-year period the day-one adverse effects on regulatory capital that may result from adoption of the new 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 March 2022, the FASB issued ASU 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The final standard affects all entities after adoption of ASU 2016-13 (Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments) and eliminates the accounting guidance for TDRs by creditors in Subtopic 310-40, Receivables – Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. The Company currently qualifies as a smaller reporting company and, as such, will be required to implement CECL and ASU 2022-02 for fiscal year and interim periods beginning after December 15, 2022.
Note 2 – Securities
Securities are classified as available for sale (“AFS”) or held to maturity (“HTM”). 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. HTM securities are those securities the Bank has the intent and ability to hold until maturity and are reported at amortized cost.
The following table summarizes the amortized cost and fair value of AFS and HTM securities at September 30, 2022 and December 31, 2021 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) and gross unrecognized gains and losses (in thousands):
|
|
Amortized Cost |
|
|
Gross Unrealized Gains |
|
|
Gross Unrealized Losses |
|
|
Fair Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and federal agency |
|
$ |
24,810 |
|
|
$ |
— |
|
|
$ |
(2,864 |
) |
|
$ |
21,946 |
|
Agency mortgage-backed: residential |
|
|
82,193 |
|
|
|
16 |
|
|
|
(11,777 |
) |
|
|
70,432 |
|
Collateralized loan obligations |
|
|
48,209 |
|
|
|
— |
|
|
|
(2,221 |
) |
|
|
45,988 |
|
Corporate bonds |
|
|
45,493 |
|
|
|
9 |
|
|
|
(2,576 |
) |
|
|
42,926 |
|
Total available for sale |
|
$ |
200,705 |
|
|
$ |
25 |
|
|
$ |
(19,438 |
) |
|
$ |
181,292 |
|
|
|
Amortized Cost |
|
|
Gross Unrecognized Gains |
|
|
Gross Unrecognized Losses |
|
|
Fair Value |
|
Held to maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and municipal |
|
$ |
43,350 |
|
|
$ |
— |
|
|
$ |
(9,582 |
) |
|
$ |
33,768 |
|
Total held to maturity |
|
$ |
43,350 |
|
|
$ |
— |
|
|
$ |
(9,582 |
) |
|
$ |
33,768 |
|
December 31, 2021 |
|
Amortized Cost |
|
|
Gross Unrealized Gains |
|
|
Gross Unrealized Losses |
|
|
Fair Value |
|
Available for sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and federal agency |
|
$ |
26,075 |
|
|
$ |
301 |
|
|
$ |
(133 |
) |
|
$ |
26,243 |
|
Agency mortgage-backed: residential |
|
|
93,650 |
|
|
|
1,339 |
|
|
|
(970 |
) |
|
|
94,019 |
|
Collateralized loan obligations |
|
|
50,227 |
|
|
|
— |
|
|
|
(78 |
) |
|
|
50,149 |
|
Corporate bonds |
|
|
43,432 |
|
|
|
572 |
|
|
|
(202 |
) |
|
|
43,802 |
|
Total available for sale |
|
$ |
213,384 |
|
|
$ |
2,212 |
|
|
$ |
(1,383 |
) |
|
$ |
214,213 |
|
|
|
Amortized Cost |
|
|
Gross Unrecognized Gains |
|
|
Gross Unrecognized Losses |
|
|
Fair Value |
|
Held to maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and municipal |
|
$ |
46,460 |
|
|
$ |
158 |
|
|
$ |
(338 |
) |
|
$ |
46,280 |
|
Total held to maturity |
|
$ |
46,460 |
|
|
$ |
158 |
|
|
$ |
(338 |
) |
|
$ |
46,280 |
|
Sales and calls of securities were as follows:
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
|
(in thousands) (in thousands) |
|
Proceeds |
|
$ |
350 |
|
|
$ |
6,500 |
|
|
$ |
1,314 |
|
|
$ |
7,204 |
|
Gross gains |
|
|
— |
|
|
|
465 |
|
|
|
— |
|
|
|
465 |
|
Gross losses |
|
|
— |
|
|
|
— |
|
|
|
3 |
|
|
|
5 |
|
The amortized cost and fair value of the debt securities are shown by contractual maturity. Expected maturities may differ from actual maturities when borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed securities not due at a single maturity date are shown separately.
|
|
September 30, 2022 |
|
|
|
Amortized Cost |
|
|
Fair Value |
|
|
|
(in thousands) |
|
Maturity |
|
|
|
|
|
|
|
|
Available for sale |
|
|
|
|
|
|
|
|
Within one year |
|
$ |
— |
|
|
$ |
— |
|
One to five years |
|
|
4,658 |
|
|
|
4,504 |
|
Five to ten years |
|
|
84,522 |
|
|
|
79,322 |
|
Beyond ten years |
|
|
29,332 |
|
|
|
27,034 |
|
Agency mortgage-backed: residential |
|
|
82,193 |
|
|
|
70,432 |
|
Total |
|
$ |
200,705 |
|
|
$ |
181,292 |
|
|
|
|
|
|
|
|
|
|
Held to maturity |
|
|
|
|
|
|
|
|
Within one year |
|
$ |
1,147 |
|
|
|
1,114 |
|
One to five years |
|
|
7,740 |
|
|
$ |
7,386 |
|
Five to ten years |
|
|
4,121 |
|
|
|
3,459 |
|
Beyond ten years |
|
|
30,342 |
|
|
|
21,809 |
|
Total |
|
$ |
43,350 |
|
|
$ |
33,768 |
|
Securities pledged at September 30, 2022 and December 31, 2021 had carrying values of approximately $117.8 million and $155.4 million, respectively, and were pledged to secure public deposits.
At September 30, 2022 and December 31, 2021, the Bank held securities issued by the Commonwealth of Kentucky or Kentucky municipalities having a book value of $35.2 million. At September 30, 2022 and December 31, 2021, there were no other holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders’ equity.
The Company evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, underlying credit quality of the issuer, and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer’s financial condition, the Company may consider whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, the sector or industry trends and cycles affecting the issuer, and the results of reviews of the issuer’s financial condition. As of September 30, 2022, 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 managed by large non-bank financial institutions or banks and are typically $300 million to $1 billion in size, contain one hundred or more loans, have five to six credit tranches ranging from AAA, AA, A, BBB, BB, B and equity tranche. Interest and principal are paid first to the AAA tranche then to the next lower rated tranche. Losses are borne first by the equity tranche then by the subsequently higher rated tranche. CLOs may be less liquid than government securities from time to time and volatility in the CLO market may cause the value of these investments to decline.
The market value of CLOs may be affected by, among other things, changes in composition of the underlying loans, changes in the cash flows from the underlying loans, defaults and recoveries on the underlying loans, capital gains and losses on the underlying loans, prepayments on the underlying loans, and other conditions or economic factors. At September 30, 2022, $27.0 million and $19.0 million of the Bank’s CLOs were AA and A rated, respectively. None of the CLOs were subject to ratings downgrade during the nine months ended September 30, 2022.
Stress testing was completed on each security in the CLO portfolio as of September 30, 2022. Each security in the portfolio passed, without dollar loss, a stress scenario characterized as severe, which assumed a ten percent per annum constant prepayment rate, a twelve percent per annum constant default rate for four years followed by a four percent rate thereafter, and a forty-five percent recovery rate on a one-year lag.
The corporate bond portfolio consists of 16 subordinated debt securities and two senior debt securities of U.S. banks and bank holding companies with maturities ranging from 2024 to 2037. The securities have either initially a fixed rate for five years converting to floating rate at an index over LIBOR or SOFR, or a floating rate at an index over LIBOR or SOFR from inception. Management regularly monitors the financial condition of these corporate issuers by reviewing their regulatory and public filings.
Securities with unrealized and unrecognized losses at September 30, 2022 and December 31, 2021, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position, are as follows (in thousands):
|
|
Less than 12 Months |
|
|
12 Months or More |
|
|
Total |
|
Description of Securities |
|
Fair Value |
|
|
Unrealized Loss |
|
|
Fair Value |
|
|
Unrealized Loss |
|
|
Fair Value |
|
|
Unrealized Loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and federal agency |
|
$ |
21,946 |
|
|
$ |
(2,864 |
) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
21,946 |
|
|
$ |
(2,864 |
) |
Agency mortgage-backed: residential |
|
|
43,291 |
|
|
|
(5,944 |
) |
|
|
24,894 |
|
|
|
(5,833 |
) |
|
|
68,185 |
|
|
|
(11,777 |
) |
Collateralized loan obligations |
|
|
30,210 |
|
|
|
(1,414 |
) |
|
|
15,778 |
|
|
|
(807 |
) |
|
|
45,988 |
|
|
|
(2,221 |
) |
Corporate bonds |
|
|
23,240 |
|
|
|
(1,666 |
) |
|
|
15,711 |
|
|
|
(910 |
) |
|
|
38,951 |
|
|
|
(2,576 |
) |
Total temporarily impaired |
|
$ |
118,687 |
|
|
$ |
(11,888 |
) |
|
$ |
56,383 |
|
|
$ |
(7,550 |
) |
|
$ |
175,070 |
|
|
$ |
(19,438 |
) |
|
|
Less than 12 Months |
|
|
12 Months or More |
|
|
Total |
|
|
|
Fair Value |
|
|
Unrecognized Loss |
|
|
Fair Value |
|
|
Unrecognized Loss |
|
|
Fair Value |
|
|
Unrecognized Loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and municipal |
|
$ |
15,420 |
|
|
|
(3,932 |
) |
|
|
17,018 |
|
|
|
(5,650 |
) |
|
|
32,438 |
|
|
|
(9,582 |
) |
Total temporarily impaired |
|
$ |
15,420 |
|
|
$ |
(3,932 |
) |
|
$ |
17,018 |
|
|
$ |
(5,650 |
) |
|
$ |
32,438 |
|
|
$ |
(9,582 |
) |
|
|
Less than 12 Months |
|
|
12 Months or More |
|
|
Total |
|
Description of Securities |
|
Fair Value |
|
|
Unrealized Loss |
|
|
Fair Value |
|
|
Unrealized Loss |
|
|
Fair Value |
|
|
Unrealized Loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and federal agency |
|
$ |
11,645 |
|
|
$ |
(133 |
) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
11,645 |
|
|
$ |
(133 |
) |
Agency mortgage-backed: residential |
|
|
53,733 |
|
|
|
(960 |
) |
|
|
642 |
|
|
|
(10 |
) |
|
|
54,375 |
|
|
|
(970 |
) |
Collateralized loan obligations |
|
|
10,036 |
|
|
|
(7 |
) |
|
|
16,514 |
|
|
|
(71 |
) |
|
|
26,550 |
|
|
|
(78 |
) |
Corporate bonds |
|
|
22,548 |
|
|
|
(202 |
) |
|
|
— |
|
|
|
— |
|
|
|
22,548 |
|
|
|
(202 |
) |
Total temporarily impaired |
|
$ |
97,962 |
|
|
$ |
(1,302 |
) |
|
$ |
17,156 |
|
|
$ |
(81 |
) |
|
$ |
115,118 |
|
|
$ |
(1,383 |
) |
|
|
Less than 12 Months |
|
|
12 Months or More |
|
|
Total |
|
|
|
Fair Value |
|
|
Unrecognized Loss |
|
|
Fair Value |
|
|
Unrecognized Loss |
|
|
Fair Value |
|
|
Unrecognized Loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and municipal |
|
$ |
26,829 |
|
|
|
(338 |
) |
|
|
— |
|
|
|
— |
|
|
|
26,829 |
|
|
|
(338 |
) |
Total temporarily impaired |
|
$ |
26,829 |
|
|
$ |
(338 |
) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
26,829 |
|
|
$ |
(338 |
) |
Note 3 – Loans
Loans net of unearned income, deferred loan origination costs, and net premiums on acquired loans by class were as follows:
| | September 30, | | | December 31, | |
| | 2022 | | | 2021 | |
| | (in thousands) | |
Commercial (1) | | $ | 240,182 | | | $ | 220,826 | |
Commercial Real Estate: | | | | | | | | |
Construction | | | 127,302 | | | | 74,806 | |
Farmland | | | 66,820 | | | | 68,388 | |
Nonfarm nonresidential | | | 399,958 | | | | 345,893 | |
Residential Real Estate: | | | | | | | | |
Multi-family | | | 45,903 | | | | 50,224 | |
1-4 Family | | | 166,715 | | | | 168,873 | |
Consumer | | | 33,894 | | | | 36,440 | |
Agriculture | | | 46,689 | | | | 35,924 | |
Other | | | 482 | | | | 466 | |
Subtotal | | | 1,127,945 | | | | 1,001,840 | |
Less: Allowance for loan losses | | | (13,031 | ) | | | (11,531 | ) |
Loans, net | | $ | 1,114,914 | | | $ | 990,309 | |
(1) | Includes SBA Paycheck Protection Program (“PPP”) loans of $150,000 and $1.2 million at September 30, 2022 and December 31, 2021, respectively. |
The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended September 30, 2022 and 2021:
| | Commercial | | | Commercial Real Estate | | | Residential Real Estate | | | Consumer | | | Agriculture | | | Other | | | Total | |
| | (in thousands) | |
September 30, 2022: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Beginning balance | | $ | 2,988 | | | $ | 7,131 | | | $ | 1,397 | | | $ | 537 | | | $ | 493 | | | $ | 4 | | | $ | 12,550 | |
Provision (negative provision) | | | (46 | ) | | | (1,132 | ) | | | (254 | ) | | | 43 | | | | 140 | | | | (1 | ) | | | (1,250 | ) |
Loans charged off | | | (6 | ) | | | – | | | | (43 | ) | | | (37 | ) | | | – | | | | – | | | | (86 | ) |
Recoveries | | | 28 | | | | 1,492 | | | | 267 | | | | 30 | | | | – | | | | – | | | | 1,817 | |
Ending balance | | $ | 2,964 | | | $ | 7,491 | | | $ | 1,367 | | | $ | 573 | | | $ | 633 | | | $ | 3 | | | $ | 13,031 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
September 30, 2021: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Beginning balance | | $ | 2,304 | | | $ | 7,799 | | | $ | 1,646 | | | $ | 385 | | | $ | 500 | | | $ | 3 | | | $ | 12,637 | |
Provision (negative provision) | | | 371 | | | | (80 | ) | | | (124 | ) | | | 146 | | | | (13 | ) | | | – | | | | 300 | |
Loans charged off | | | – | | | | – | | | | (18 | ) | | | (7 | ) | | | – | | | | – | | | | (25 | ) |
Recoveries | | | 10 | | | | 3 | | | | 34 | | | | 7 | | | | 7 | | | | – | | | | 61 | |
Ending balance | | $ | 2,685 | | | $ | 7,722 | | | $ | 1,538 | | | $ | 531 | | | $ | 494 | | | $ | 3 | | | $ | 12,973 | |
The following table presents the activity in the allowance for loan losses by portfolio segment for the nine months ended September 30, 2022 and 2021:
| | Commercial | | | Commercial Real Estate | | | Residential Real Estate | | | Consumer | | | Agriculture | | | Other | | | Total | |
| | (in thousands) | |
September 30, 2022: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Beginning balance | | $ | 2,888 | | | $ | 6,179 | | | $ | 1,443 | | | $ | 538 | | | $ | 480 | | | $ | 3 | | | $ | 11,531 | |
Provision (negative provision) | | | 70 | | | | (244 | ) | | | (76 | ) | | | 92 | | | | 108 | | | | – | | | | (50 | ) |
Loans charged off | | | (31 | ) | | | (158 | ) | | | (369 | ) | | | (122 | ) | | | – | | | | – | | | | (680 | ) |
Recoveries | | | 37 | | | | 1,714 | | | | 369 | | | | 65 | | | | 45 | | | | – | | | | 2,230 | |
Ending balance | | $ | 2,964 | | | $ | 7,491 | | | $ | 1,367 | | | $ | 573 | | | $ | 633 | | | $ | 3 | | | $ | 13,031 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
September 30, 2021: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Beginning balance | | $ | 2,529 | | | $ | 7,050 | | | $ | 1,899 | | | $ | 361 | | | $ | 600 | | | $ | 4 | | | $ | 12,443 | |
Provision (negative provision) | | | 155 | | | | 788 | | | | (403 | ) | | | 187 | | | | (76 | ) | | | (1 | ) | | | 650 | |
Loans charged off | | | (19 | ) | | | (129 | ) | | | (30 | ) | | | (58 | ) | | | (44 | ) | | | – | | | | (280 | ) |
Recoveries | | | 20 | | | | 13 | | | | 72 | | | | 41 | | | | 14 | | | | – | | | | 160 | |
Ending balance | | $ | 2,685 | | | $ | 7,722 | | | $ | 1,538 | | | $ | 531 | | | $ | 494 | | | $ | 3 | | | $ | 12,973 | |
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method as of September 30, 2022:
| | 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 | | $ | – | | | $ | – | | | $ | 1 | | | $ | – | | | $ | – | | | $ | – | | | $ | 1 | |
Collectively evaluated for impairment | | | 2,964 | | | | 7,491 | | | | 1,366 | | | | 573 | | | | 633 | | | | 3 | | | | 13,030 | |
Total ending allowance balance | | $ | 2,964 | | | $ | 7,491 | | | $ | 1,367 | | | $ | 573 | | | $ | 633 | | | $ | 3 | | | $ | 13,031 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans individually evaluated for impairment | | $ | – | | | $ | 477 | | | $ | 509 | | | $ | 214 | | | $ | – | | | $ | – | | | $ | 1,200 | |
Loans collectively evaluated for impairment | | | 240,182 | | | | 593,603 | | | | 212,109 | | | | 33,680 | | | | 46,689 | | | | 482 | | | | 1,126,745 | |
Total ending loans balance | | $ | 240,182 | | | $ | 594,080 | | | $ | 212,618 | | | $ | 33,894 | | | $ | 46,689 | | | $ | 482 | | | $ | 1,127,945 | |
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, 2021:
| | Commercial | | | Commercial Real Estate | | | Residential Real Estate | | | Consumer | | | Agriculture | | | Other | | | Total | |
| | (in thousands) | |
Allowance for loan losses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending allowance balance attributable to loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Individually evaluated for impairment | | $ | – | | | $ | – | | | $ | 2 | | | $ | – | | | $ | – | | | $ | – | | | $ | 2 | |
Collectively evaluated for impairment | | | 2,888 | | | | 6,179 | | | | 1,441 | | | | 538 | | | | 480 | | | | 3 | | | | 11,529 | |
Total ending allowance balance | | $ | 2,888 | | | $ | 6,179 | | | $ | 1,443 | | | $ | 538 | | | $ | 480 | | | $ | 3 | | | $ | 11,531 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans individually evaluated for impairment | | $ | – | | | $ | 2,878 | | | $ | 566 | | | $ | 12 | | | $ | 9 | | | $ | – | | | $ | 3,465 | |
Loans collectively evaluated for impairment | | | 220,826 | | | | 486,209 | | | | 218,531 | | | | 36,428 | | | | 35,915 | | | | 466 | | | | 998,375 | |
Total ending loans balance | | $ | 220,826 | | | $ | 489,087 | | | $ | 219,097 | | | $ | 36,440 | | | $ | 35,924 | | | $ | 466 | | | $ | 1,001,840 | |
Impaired Loans
Impaired loans include restructured loans and loans on nonaccrual or classified as doubtful, whereby collection of the total amount is improbable, or loss, whereby all or a portion of the loan has been written off or a specific allowance for loss has been provided.
The following tables present information related to loans individually evaluated for impairment by class of loans as of September 30, 2022 and December 31, 2021 and for the three and nine months ended September 30, 2022 and 2021:
| | As of September 30, 2022 | | | Three Months Ended September 30, 2022 | | | Nine Months Ended September 30, 2022 | |
| | Unpaid Principal Balance | | | Recorded Investment | | | Allowance For Loan Losses Allocated | | | Average Recorded Investment | | | Interest Income Recognized | | | Average Recorded Investment | | | Interest Income Recognized | |
| | (in thousands) | | | | | | | | | |
With No Related Allowance Recorded: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | | $ | 265 | | | $ | — | | | $ | — | | | $ | — | | | $ | 1 | | | $ | — | | | $ | 1 | |
Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Construction | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Farmland | | | 81 | | | | 29 | | | | — | | | | 29 | | | | — | | | | 112 | | | | 53 | |
Nonfarm nonresidential | | | 1,048 | | | | 448 | | | | — | | | | 1,482 | | | | 2 | | | | 2,129 | | | | 148 | |
Residential real estate: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Multi-family | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
1-4 Family | | | 1,355 | | | | 450 | | | | — | | | | 489 | | | | 20 | | | | 501 | | | | 119 | |
Consumer | | | 446 | | | | 214 | | | | — | | | | 118 | | | | — | | | | 70 | | | | 1 | |
Agriculture | | | 315 | | | | — | | | | — | | | | — | | | | — | | | | 4 | | | | 23 | |
Other | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Subtotal | | | 3,510 | | | | 1,141 | | | | — | | | | 2,118 | | | | 23 | | | | 2,816 | | | | 345 | |
With An Allowance Recorded: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Construction | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Farmland | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Nonfarm nonresidential | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Residential real estate: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Multi-family | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
1-4 Family | | | 59 | | | | 59 | | | | 1 | | | | 60 | | | | — | | | | 84 | | | | — | |
Consumer | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Agriculture | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Other | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Subtotal | | | 59 | | | | 59 | | | | 1 | | | | 60 | | | | — | | | | 84 | | | | — | |
Total | | $ | 3,569 | | | $ | 1,200 | | | $ | 1 | | | $ | 2,178 | | | $ | 23 | | | $ | 2,900 | | | $ | 345 | |
| | As of December 31, 2021 | | | Three Months Ended September 30, 2021 | | | Nine Months Ended September 30, 2021 | |
| | Unpaid Principal Balance | | | Recorded Investment | | | Allowance For Loan Losses Allocated | | | Average Recorded Investment | | | Interest Income Recognized | | | Average Recorded Investment | | | Interest Income Recognized | |
| | (in thousands) | | | | | | | | | |
With No Related Allowance Recorded: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | | $ | 290 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Construction | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Farmland | | | 302 | | | | 215 | | | | — | | | | 616 | | | | 26 | | | | 596 | | | | 26 | |
Nonfarm nonresidential | | | 7,755 | | | | 2,663 | | | | — | | | | 492 | | | | 12 | | | | 517 | | | | 39 | |
Residential real estate: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Multi-family | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
1-4 Family | | | 1,408 | | | | 501 | | | | — | | | | 716 | | | | 74 | | | | 829 | | | | 112 | |
Consumer | | | 272 | | | | 12 | | | | — | | | | 28 | | | | — | | | | 21 | | | | 1 | |
Agriculture | | | 366 | | | | 9 | | | | — | | | | 101 | | | | — | | | | 99 | | | | — | |
Other | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Subtotal | | | 10,393 | | | | 3,400 | | | | — | | | | 1,953 | | | | 112 | | | | 2,062 | | | | 178 | |
With An Allowance Recorded: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Construction | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Farmland | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Nonfarm nonresidential | | | — | | | | — | | | | — | | | | 4,356 | | | | 66 | | | | 4,356 | | | | 196 | |
Residential real estate: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Multi-family | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
1-4 Family | | | 65 | | | | 65 | | | | 2 | | | | 100 | | | | 1 | | | | 102 | | | | 2 | |
Consumer | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Agriculture | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Other | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Subtotal | | | 65 | | | | 65 | | | | 2 | | | | 4,456 | | | | 67 | | | | 4,458 | | | | 198 | |
Total | | $ | 10,458 | | | $ | 3,465 | | | $ | 2 | | | $ | 6,409 | | | $ | 179 | | | $ | 6,520 | | | $ | 376 | |
Cash basis income recognized on impaired loans for the three and nine months ended September 30, 2022 was $21,000 and $333,000, respectively, compared to $96,000 and $148,000 for the three and nine months ended September 30, 2021, respectively.
Troubled Debt Restructuring
A troubled debt restructuring (TDR) occurs when the Bank has agreed to a loan modification in the form of a concession for a borrower who is experiencing financial difficulty. The Bank’s TDRs typically involve a reduction in interest rate, a deferral of principal for a stated period of time, or an interest only period. All TDRs are considered impaired and the Bank has allocated reserves for these loans to reflect the present value of the concessionary terms granted to the borrower.
The following table presents the types of TDR loan modifications by portfolio segment outstanding as of September 30, 2022 and December 31, 2021:
| | TDRs Performing to Modified Terms | | | TDRs Not Performing to Modified Terms | | | Total TDRs | |
| | (in thousands) | |
September 30, 2022 | | | | | | | | | | | | |
Commercial Real Estate: | | | | | | | | | | | | |
Nonfarm nonresidential | | $ | 146 | | | $ | — | | | $ | 146 | |
Residential Real Estate: | | | | | | | | | | | | |
1-4 Family | | | — | | | | 59 | | | | 59 | |
Total TDRs | | $ | 146 | | | $ | 59 | | | $ | 205 | |
| | TDRs Performing to Modified Terms | | | TDRs Not Performing to Modified Terms | | | Total TDRs | |
| | (in thousands) | |
December 31, 2021 | | | | | | | | | | | | |
Commercial Real Estate: | | | | | | | | | | | | |
Nonfarm nonresidential | | $ | 340 | | | $ | — | | | $ | 340 | |
Residential Real Estate: | | | | | | | | | | | | |
1-4 Family | | | — | | | | 65 | | | | 65 | |
Total TDRs | | $ | 340 | | | $ | 65 | | | $ | 405 | |
At September 30, 2022 and December 31, 2021, 71% and 84%, respectively, of the Company’s TDRs were performing according to their modified terms. The Company allocated $1,000 and $2,000 in reserves to borrowers whose loan terms have been modified in TDRs as of September 30, 2022 and December 31, 2021, respectively. The Company has no commitment to lend additional amounts as of September 30, 2022 and December 31, 2021 to borrowers with outstanding loans classified as TDRs.
No TDR modifications occurred during the three and nine months ended September 30, 2022. The following table presents a summary of the TDR loan modification by portfolio segment that occurred during the three and nine months ended September 30, 2021:
| | TDRs Performing to Modified Terms | | | TDRs Not Performing to Modified Terms | | | Total TDRs | |
| | (in thousands) | |
September 30, 2021 | | | | | | | | | | | | |
Residential Real Estate: | | | | | | | | | | | | |
1-4 Family | | $ | 180 | | | $ | — | | | $ | 180 | |
Total TDRs | | $ | 180 | | | $ | — | | | $ | 180 | |
During the three and nine months ended September 30, 2022 and September 30, 2021, no TDRs defaulted on their restructured loan within the 12-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.
Past Due Loans
The following table presents the aging of the recorded investment in past due loans as of September 30, 2022 and December 31, 2021:
| | 30 – 59 Days Past Due | | | 60 – 89 Days Past Due | | | 90 Days And Over Past Due | | | Nonaccrual | | | Total Past Due And Nonaccrual | |
| | (in thousands) | |
September 30, 2022 | | | | | | | | | | | | | | | | | | | | |
Commercial | | $ | — | | | $ | 22 | | | $ | — | | | $ | — | | | $ | 22 | |
Commercial Real Estate: | | | | | | | | | | | | | | | | | | | | |
Construction | | | — | | | | — | | | | — | | | | — | | | | — | |
Farmland | | | — | | | | — | | | | — | | | | 29 | | | | 29 | |
Nonfarm nonresidential | | | 31 | | | | — | | | | — | | | | 302 | | | | 333 | |
Residential Real Estate: | | | | | | | | | | | | | | | | | | | | |
Multi-family | | | — | | | | — | | | | — | | | | — | | | | — | |
1-4 Family | | | 213 | | | | 14 | | | | — | | | | 509 | | | | 736 | |
Consumer | | | 30 | | | | 3 | | | | — | | | | 214 | | | | 247 | |
Agriculture | | | 26 | | | | 18 | | | | — | | | | — | | | | 44 | |
Other | | | — | | | | — | | | | — | | | | — | | | | — | |
Total | | $ | 300 | | | $ | 57 | | | $ | — | | | $ | 1,054 | | | $ | 1,411 | |
| | 30 – 59 Days Past Due | | | 60 – 89 Days Past Due | | | 90 Days And Over Past Due | | | Nonaccrual | | | Total Past Due And Nonaccrual | |
| | | | | | | | | | | | | | | | | | | | |
| | (in thousands) | |
December 31, 2021 | | | | | | | | | | | | | | | | | | | | |
Commercial | | $ | 6 | | | $ | — | | | $ | — | | | $ | — | | | $ | 6 | |
Commercial Real Estate: | | | | | | | | | | | | | | | | | | | | |
Construction | | | — | | | | — | | | | — | | | | — | | | | — | |
Farmland | | | — | | | | — | | | | — | | | | 215 | | | | 215 | |
Nonfarm nonresidential | | | — | | | | 34 | | | | — | | | | 2,323 | | | | 2,357 | |
Residential Real Estate: | | | | | | | | | | | | | | | | | | | | |
Multi-family | | | — | | | | — | | | | — | | | | — | | | | — | |
1-4 Family | | | 513 | | | | 148 | | | | — | | | | 566 | | | | 1,227 | |
Consumer | | | 37 | | | | 28 | | | | — | | | | 12 | | | | 77 | |
Agriculture | | | — | | | | — | | | | — | | | | 8 | | | | 8 | |
Other | | | — | | | | — | | | | — | | | | — | | | | — | |
Total | | $ | 556 | | | $ | 210 | | | $ | — | | | $ | 3,124 | | | $ | 3,890 | |
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.
As of September 30, 2022, and December 31, 2021, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:
| | Pass | | | Watch | | | Special Mention | | | Substandard | | | Doubtful | | | Total | |
| | (in thousands) | |
September 30, 2022 | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | | $ | 235,779 | | | $ | 41 | | | $ | — | | | $ | 4,362 | | | $ | — | | | $ | 240,182 | |
Commercial Real Estate: | | | | | | | | | | | | | | | | | | | | | | | | |
Construction | | | 127,302 | | | | — | | | | — | | | | — | | | | — | | | | 127,302 | |
Farmland | | | 64,845 | | | | 167 | | | | — | | | | 1,808 | | | | — | | | | 66,820 | |
Nonfarm nonresidential | | | 398,464 | | | | 1,174 | | | | — | | | | 320 | | | | — | | | | 399,958 | |
Residential Real Estate: | | | | | | | | | | | | | | | | | | | | | | | | |
Multi-family | | | 45,903 | | | | — | | | | — | | | | — | | | | — | | | | 45,903 | |
1-4 Family | | | 163,329 | | | | 1,773 | | | | — | | | | 1,613 | | | | — | | | | 166,715 | |
Consumer | | | 33,270 | | | | 7 | | | | — | | | | 617 | | | | — | | | | 33,894 | |
Agriculture | | | 46,635 | | | | 15 | | | | — | | | | 39 | | | | — | | | | 46,689 | |
Other | | | 482 | | | | — | | | | — | | | | — | | | | — | | | | 482 | |
Total | | $ | 1,116,009 | | | $ | 3,177 | | | $ | — | | | $ | 8,759 | | | $ | — | | | $ | 1,127,945 | |
| | Pass | | | Watch | | | Special Mention | | | Substandard | | | Doubtful | | | Total | |
| | (in thousands) | |
December 31, 2021 | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | | $ | 207,729 | | | $ | 5,207 | | | $ | — | | | $ | 7,890 | | | $ | — | | | $ | 220,826 | |
Commercial Real Estate: | | | | | | | | | | | | | | | | | | | | | | | | |
Construction | | | 74,806 | | | | — | | | | — | | | | — | | | | — | | | | 74,806 | |
Farmland | | | 65,836 | | | | 170 | | | | — | | | | 2,382 | | | | — | | | | 68,388 | |
Nonfarm nonresidential | | | 341,780 | | | | 413 | | | | — | | | | 3,700 | | | | — | | | | 345,893 | |
Residential Real Estate: | | | | | | | | | | | | | | | | | | | | | | | | |
Multi-family | | | 50,224 | | | | — | | | | — | | | | — | | | | — | | | | 50,224 | |
1-4 Family | | | 164,850 | | | | 2,038 | | | | — | | | | 1,985 | | | | — | | | | 168,873 | |
Consumer | | | 36,408 | | | | 5 | | | | — | | | | 27 | | | | — | | | | 36,440 | |
Agriculture | | | 35,863 | | | | 23 | | | | — | | | | 38 | | | | — | | | | 35,924 | |
Other | | | 466 | | | | — | | | | — | | | | — | | | | — | | | | 466 | |
Total | | $ | 977,962 | | | $ | 7,856 | | | $ | — | | | $ | 16,022 | | | $ | — | | | $ | 1,001,840 | |
Note 4 – Leases
As of September 30, 2022, the Company leases real estate for seven branch offices or offsite ATM machines under various operating lease agreements. The lease agreements have maturity dates ranging from 2024 to 2046, including all expected extension periods. The weighted average remaining life of the lease term for these leases was 21 years as of September 30, 2022.
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 rate of interest that the Bank estimates it would 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 4.20% as of September 30, 2022.
Total rental expense was $125,000 and $375,000, respectively, for the three and nine months ended September 30, 2022, compared to $78,000 and $326,000, respectively, for the three and nine months ended September 30, 2021. The right-of-use asset, included in premises and equipment, and lease liability, included in other liabilities, was $6.4 million as of September 30, 2022 and $5.3 million as of December 31, 2021.
Total estimated rental commitments for the operating leases were as follows as of September 30, 2022 (in thousands):
| | September 30, 2022 | |
| | | | |
October – December 2022 | | $ | 114 | |
2023 | | | 457 | |
2024 | | | 458 | |
2025 | | | 438 | |
2026 | | | 408 | |
Thereafter | | | 8,899 | |
Total minimum lease payments | | | 10,774 | |
Discount effect of cash flows | | | (4,352 | ) |
Present value of lease liabilities | | $ | 6,422 | |
Note 5 – Deposits
The following table details deposits by category:
| | September 30, 2022 | | | December 31, 2021 | |
| | (in thousands) | |
Non-interest bearing | | $ | 287,938 | | | $ | 274,083 | |
Interest checking | | | 286,867 | | | | 287,208 | |
Money market | | | 215,450 | | | | 217,943 | |
Savings | | | 154,545 | | | | 163,423 | |
Certificates of deposit (1) | | | 273,780 | | | | 266,011 | |
Total | | $ | 1,218,580 | | | $ | 1,208,668 | |
(1) | Includes brokered deposits of $29.0 million at September 30, 2022. There were no brokered deposits at December 31, 2021. |
Time deposits of $250,000 or more were $65.3 million and $33.4 million at September 30, 2022 and December 31, 2021, respectively.
Scheduled maturities of total time deposits at September 30, 2022 for each of the next five years are as follows (in thousands):
Year 1 | | $ | 209,169 | |
Year 2 | | | 37,577 | |
Year 3 | | | 17,358 | |
Year 4 | | | 5,918 | |
Year 5 | | | 2,819 | |
Thereafter | | | 939 | |
| | $ | 273,780 | |
Note 6 – Advances from the Federal Home Loan Bank
Advances from the Federal Home Loan Bank were as follows:
| | September 30, | | | December 31, | |
| | 2022 | | | 2021 | |
| | (in thousands) | |
| | | | | | | | |
Short term advances (fixed rates 3.04% to 4.02%) maturing October 2022 to January 2023 | | $ | 90,000 | | | $ | — | |
Long term advances | | | — | | | | 20,000 | |
Total advances from the Federal Home Loan Bank | | $ | 90,000 | | | $ | 20,000 | |
FHLB advances had a weighted-average rate of 3.33% at September 30, 2022 and 0.77% at December 31, 2021. Each advance is payable per terms on agreement, with a prepayment penalty. The $20.0 million long-term advance outstanding at December 31, 2021 was called by the FHLB in May 2022. No prepayment penalties were incurred during 2022 or 2021. The advances were collateralized by approximately $351.7 million of commercial real estate and first mortgage residential loans, under a blanket lien arrangement at September 30, 2022. At December 31, 2021, the advances were collateralized by approximately $121.8 million of first mortgage residential loans under a blanket lien arrangement and loans originated under the SBA Payment Protection Plan. At September 30, 2022, the Bank’s additional borrowing capacity with the FHLB was $71.5 million.
Scheduled principal payments on the above during the next five years and thereafter (in thousands):
| | Advances | |
Year 1 | | | 90,000 | |
| | $ | 90,000 | |
Note 7 – Borrowings
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. At September 30, 2022, 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 September 30, 2022, 3-month LIBOR was 3.75%. |
(2) | The debentures are callable at the Company’s option at their principal amount plus accrued interest. |
Subordinated Capital Notes – The Company’s subordinated notes mature on July 31, 2029. The notes carry interest at a fixed rate of 5.75% until July 30, 2024 and then convert to variable at three-month LIBOR plus 395 basis points until maturity. The subordinated capital notes qualify as Tier 2 regulatory capital.
Federal Funds Line – At September 30, 2022, the Company had a $5.0 million federal funds line of credit available on an unsecured basis from a correspondent institution.
Note 8 – Fair Values Measurement
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Various valuation techniques are used to determine fair value, including market, income and cost approaches. There are three levels of inputs that may be used to measure fair values:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that an entity has the ability to access as of the measurement date, or observable inputs.
Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. When that occurs, the fair value hierarchy is classified on the lowest level of input that is significant to the fair value measurement. The following methods and significant assumptions are used to estimate fair value.
Securities: The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges, if available. This valuation method is classified as Level 1 in the fair value hierarchy. For securities where quoted prices are not available, fair values are calculated on market prices of similar securities, or matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. Matrix pricing relies on the securities’ relationship to similarly traded securities, benchmark curves, and the benchmarking of like securities. Matrix pricing utilizes observable market inputs such as benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, and industry and economic events. In instances where broker quotes are used, these quotes are obtained from market makers or broker-dealers recognized to be market participants. This valuation method is classified as Level 2 in the fair value hierarchy. For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators. This valuation method is classified as Level 3 in the fair value hierarchy. Discounted cash flows are calculated using spread to swap and relative index curves that are updated to incorporate loss severities, volatility, credit spread and optionality. During times when trading is more liquid, broker quotes are used (if available) to validate the model. Rating agency and industry research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into the calculations.
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. 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.
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.
Financial assets measured at fair value on a recurring basis at September 30, 2022 and December 31, 2021 are summarized below:
| | | | | | Fair Value Measurements at September 30, 2022 Using | |
| | | | | | (in thousands) | |
| | | | | | Quoted Prices In | | | | | | | Significant | |
| | | | | | Active Markets for | | | Significant Other | | | Unobservable | |
| | Carrying | | | Identical Assets | | | Observable Inputs | | | Inputs | |
Description | | Value | | | (Level 1) | | | (Level 2) | | | (Level 3) | |
Available for sale securities | | | | | | | | | | | | | | | | |
U.S. Government and federal agency | | $ | 21,946 | | | $ | — | | | $ | 21,946 | | | $ | — | |
Agency mortgage-backed: residential | | | 70,432 | | | | — | | | | 70,432 | | | | — | |
Collateralized loan obligations | | | 45,988 | | | | — | | | | 45,988 | | | | — | |
Corporate bonds | | | 42,926 | | | | — | | | | 29,594 | | | | 13,332 | |
Total | | $ | 181,292 | | | $ | — | | | $ | 167,960 | | | $ | 13,332 | |
| | | | | | Fair Value Measurements at December 31, 2021 Using | |
| | | | | | (in thousands) | |
Description | | Carrying Value | | | Quoted Prices In Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | |
Available for sale securities | | | | | | | | | | | | | | | | |
U.S. Government and federal agency | | $ | 26,243 | | | $ | — | | | $ | 26,243 | | | $ | — | |
Agency mortgage-backed: residential | | | 94,019 | | | | — | | | | 94,019 | | | | — | |
Collateralized loan obligations | | | 50,149 | | | | — | | | | 50,149 | | | | — | |
Corporate bonds | | | 43,802 | | | $ | — | | | $ | 29,761 | | | $ | 14,041 | |
Total | | $ | 214,213 | | | $ | — | | | $ | 200,172 | | | $ | 14,041 | |
There were no transfers between Level 1 and Level 2 during 2022 or 2021.
The Company’s policy is to transfer assets or liabilities from one level to another when the methodology to obtain the fair value changes such that there are more or fewer unobservable inputs as of the end of the reporting period. There were no transfers between Level 2 and Level 3 during 2022.
The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended September 30, 2022 and 2021:
| | September 30, 2022 | |
| | Corporate Bonds | |
| | (in thousands) | |
Balance of recurring Level 3 assets at January 1, 2022 | | $ | 14,041 | |
Total gains or losses for the year: | | | | |
Included in other comprehensive income | | | (709 | ) |
Transfers into Level 3 | | | — | |
Balance of recurring Level 3 assets at September 30, 2022 | | $ | 13,332 | |
| | September 30, 2021 | |
| | Collateralized Loan Obligations | | | Corporate Bonds | |
| | (in thousands) | |
Balance of recurring Level 3 assets at January 1, 2021 | | $ | 2,388 | | | $ | 11,916 | |
Total gains or losses for the year: | | | | | | | | |
Included in earnings | | | — | | | | 465 | |
Included in other comprehensive income | | | 106 | | | | 1,479 | |
Calls | | | — | | | | (5,000 | ) |
Transfers into Level 3 | | | — | | | | — | |
Balance of recurring Level 3 assets at September 30, 2021 | | $ | 2,494 | | | $ | 8,860 | |
The following table presents quantitative information about recurring level 3 fair value measurements are summarized below (in thousands):
| | Fair Value Measurements at September 30, 2022 | |
| | Fair Value | | Valuation Technique(s) | | Unobservable Input(s) | | Range (Weighted Average) | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Corporate bonds | | $ | 13,332 | | Discounted cash flow | | Constant prepayment rate | | | | 0% | | |
| | | | | | | Spread to benchmark yield | | 224% | - | 377% | (288%) | |
| | | | | | | Indicative broker bid | | 80% | - | 97% | (89%) | |
| | Fair Value Measurements at December 31, 2021 | |
| | Fair Value | | Valuation Technique(s) | | Unobservable Input(s) | | Range (Weighted Average) | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Corporate bonds | | $ | 14,041 | | Discounted cash flow | | Constant prepayment rate | | | | 0% | | |
| | | | | | | Spread to benchmark yield | | 200% | - | 298% | (235%) | |
| | | | | | | Indicative broker bid | | 99% | - | 106% | (103%) | |
Financial assets measured at fair value on a non-recurring basis are summarized below (in thousands):
| | | | | | Fair Value Measurements at September 30, 2022 Using | |
| | | | | | | | | | | | | | | | |
Description | | | Carrying Value | | | Quoted Prices In Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | |
Impaired loans: | | | | | | | | | | | | | | | | |
Residential real estate: | | | | | | | | | | | | | | | | |
1-4 Family | | $ | 58 | | | $ | — | | | $ | — | | | $ | 58 | |
| | | | | | Fair Value Measurements at December 31, 2021 Using | |
| | | | | | | | | | | | | | | | |
Description | | | Carrying Value | | | Quoted Prices In Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | |
Impaired loans: | | | | | | | | | | | | | | | | |
Residential real estate: | | | | | | | | | | | | | | | | |
1-4 Family | | $ | 63 | | | $ | — | | | $ | — | | | $ | 63 | |
Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $59,000 at September 30, 2022 with a valuation allowance of $1,000, resulting in no provision for loan losses for the three months or nine months ended September 30, 2022. Impaired loans had a carrying amount of $4.5 million at September 30, 2021 with a valuation allowance of $2.2 million, resulting in no provision for loan losses for the three months ended September 30, 2021 and $1,000 provision for loan losses for the nine months ended September 30, 2021, respectively. At December 31, 2021, impaired loans had a carrying amount of $65,000, with a valuation allowance of $2,000.
Carrying amount and estimated fair values of financial instruments were as follows for the periods indicated:
| | | | | | Fair Value Measurements at September 30, 2022 Using | |
| | Carrying Amount | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| | (in thousands) | |
Financial assets | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 57,370 | | | $ | 57,370 | | | $ | — | | | $ | — | | | $ | 57,370 | |
Securities available for sale | | | 181,292 | | | | — | | | | 167,960 | | | | 13,332 | | | | 181,292 | |
Securities held to maturity | | | 43,350 | | | | — | | | | 33,768 | | | | — | | | | 33,768 | |
Federal Home Loan Bank stock | | | 5,176 | | | | N/A | | | | N/A | | | | N/A | | | | N/A | |
Loans, net | | | 1,114,914 | | | | — | | | | — | | | | 1,043,243 | | | | 1,043,243 | |
Accrued interest receivable | | | 4,351 | | | | — | | | | 1,094 | | | | 3,257 | | | | 4,351 | |
Financial liabilities | | | | | | | | | | | | | | | | | | | | |
Deposits | | $ | 1,218,580 | | | $ | 287,938 | | | $ | 926,278 | | | $ | — | | | $ | 1,214,216 | |
Federal Home Loan Bank advances | | | 90,000 | | | | — | | | | 90,009 | | | | — | | | | 90,009 | |
Junior subordinated debentures | | | 21,000 | | | | — | | | | — | | | | 18,498 | | | | 18,498 | |
Subordinated capital notes | | | 25,000 | | | | — | | | | — | | | | 23,791 | | | | 23,791 | |
Accrued interest payable | | | 586 | | | | — | | | | 285 | | | | 301 | | | | 586 | |
| | | | | | Fair Value Measurements at December 31, 2021 Using | |
| | Carrying Amount | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| | (in thousands) | |
Financial assets | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 77,603 | | | $ | 77,603 | | | $ | — | | | $ | — | | | $ | 77,603 | |
Securities available for sale | | | 214,213 | | | | — | | | | 200,172 | | | | 14,041 | | | | 214,213 | |
Securities held to maturity | | | 46,460 | | | | — | | | | 46,280 | | | | — | | | | 46,280 | |
Federal Home Loan Bank stock | | | 5,116 | | | | N/A | | | | N/A | | | | N/A | | | | N/A | |
Loans, net | | | 990,309 | | | | — | | | | — | | | | 981,995 | | | | 981,995 | |
Accrued interest receivable | | | 3,870 | | | | — | | | | 1,022 | | | | 2,848 | | | | 3,870 | |
Financial liabilities | | | | | | | | | | | | | | | | | | | | |
Deposits | | $ | 1,208,668 | | | $ | 274,083 | | | $ | 935,768 | | | $ | — | | | $ | 1,209,851 | |
Federal Home Loan Bank advances | | | 20,000 | | | | — | | | | 20,046 | | | | — | | | | 20,046 | |
Junior subordinated debentures | | | 21,000 | | | | — | | | | — | | | | 19,500 | | | | 19,500 | |
Subordinated capital notes | | | 25,000 | | | | — | | | | — | | | | 26,149 | | | | 26,149 | |
Accrued interest payable | | | 764 | | | | — | | | | 136 | | | | 628 | | | | 764 | |
In accordance with ASU 2016-01, the methods utilized to measure the fair value of financial instruments represent an approximation of exit price; however, an actual exit price may differ.
Fair value estimates are made at a specific point in time based on relevant market information and information about financial instruments. Because no market exists for a portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Therefore, calculated fair value estimates in many instances cannot be substantiated by comparison to independent markets and, in many cases, may not be realizable in a current sale of the instrument. Changes in assumptions could significantly impact estimates.
Note 9 – Income Taxes
Deferred tax assets and liabilities were due to the following as of:
| | September 30, | | | December 31, | |
| | 2022 | | | 2021 | |
| | (in thousands) | |
Deferred tax assets: | | | | | | | | |
Net operating loss carry-forward | | $ | 15,329 | | | $ | 19,335 | |
Allowance for loan losses | | | 3,252 | | | | 2,877 | |
Net unrealized loss on securities | | | 4,711 | | | | — | |
New market tax credit carry-forward | | | 208 | | | | 208 | |
Nonaccrual loan interest | | | 328 | | | | 321 | |
Accrued expenses | | | 94 | | | | 138 | |
Lease liability | | | 1,603 | | | | 1,328 | |
Other | | | 179 | | | | 202 | |
| | | 25,704 | | | | 24,409 | |
| | | | | | | | |
Deferred tax liabilities: | | | | | | | | |
FHLB stock dividends | | | 361 | | | | 415 | |
Fixed assets | | | 120 | | | | 133 | |
Deferred loan costs | | | 165 | | | | 176 | |
Net unrealized gain on securities | | | — | | | | 390 | |
Lease right-of-use assets | | | 1,603 | | | | 1,328 | |
Net assets from acquisitions | | | 249 | | | | 108 | |
Other | | | 204 | | | | 276 | |
| | | 2,702 | | | | 2,826 | |
Net deferred tax asset | | $ | 23,002 | | | $ | 21,583 | |
At September 30, 2022, the Company had net federal operating loss carryforwards of $68.6 million, which will begin to expire in 2033, and state net operating loss carryforwards of $23.2 million, which begin to expire in 2029.
The Company does not have any beginning and ending unrecognized tax benefits. The Company does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next twelve months. There were no interest and penalties recorded in the income statement or accrued for the three or nine months ended September 30, 2022 or September 30, 2021 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 2021 to expire upon the earlier of (i) June 30, 2024, (ii) the beginning of a taxable year with respect to which the Board of Directors determines that no tax benefits may be carried forward, (iii) the repeal or amendment of Section 382 or any successor statute, if the Board of Directors determines that the plan is no longer needed to preserve the tax benefits, and (iv) certain other events as described in the plan. On October 24, 2022, with the unanimous approval of the Company’s Board of Directors, the Company amended the rights plan to accelerate its final expiration date to October 24, 2022, effectively terminating the tax benefits preservation plan as of that date.
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 2021 by shareholder vote and will expire on the earlier of (i) May 19, 2024, (ii) the beginning of a taxable year with respect to which the Board of Directors determines that no tax benefit may be carried forward, (iii) the repeal of Section 382 or any successor statute if the Board determines that the transfer restrictions are no longer needed to preserve the tax benefits of the 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 2019.
Note 10 – Stock Plans and Stock Based Compensation
Shares available for issuance under the 2018 Omnibus Equity Compensation Plan (“2018 Plan”) total 122,203. Shares issued to employees under the plan vest over periods of up to seven years. Shares issued annually to non-employee directors have a fair market value of $25,000 and vest on December 31 in the year of grant.
The fair value of the 2022 unvested shares issued was $1.3 million, or $19.61 per weighted-average share. The Company recorded $212,000 and $673,000 of stock-based compensation to salaries expense for the three and nine months ended September 30, 2022, respectively, and $214,000 and $515,000 for the three and nine months ended September 30, 2021, respectively. Management expects substantially all of the unvested shares outstanding at the end of the period to vest according to the vesting schedule. A deferred tax benefit of $53,000 and $168,000 was recognized related to this expense during the three and nine months ended September 30, 2022, respectively, and $54,000 and $129,000 for the three and nine months ended September 30, 2021, respectively.
The following table summarizes unvested share activity as of and for the periods indicated for the Stock Compensation Plan:
| | Nine Months Ended | | | Twelve Months Ended | |
| | September 30, 2022 | | | December 31, 2021 | |
| | | | | | Weighted | | | | | | | Weighted | |
| | | | | | Average | | | | | | | Average | |
| | | | | | Grant | | | | | | | Grant | |
| | Shares | | | Price | | | Shares | | | Price | |
Outstanding, beginning | | | 111,536 | | | $ | 13.73 | | | | 47,438 | | | $ | 15.34 | |
Granted | | | 64,600 | | | | 19.61 | | | | 110,024 | | | | 13.52 | |
Vested | | | (30,827 | ) | | | 16.06 | | | | (37,590 | ) | | | 15.13 | |
Forfeited | | | (10,109 | ) | | | 15.20 | | | | (8,336 | ) | | | 13.66 | |
Outstanding, ending | | | 135,200 | | | $ | 15.90 | | | | 111,536 | | | $ | 13.73 | |
Unrecognized stock-based compensation expense related to unvested shares is estimated as follows (in thousands):
October 2022 – December 2022 | | $ | 211 | |
2023 | | | 467 | |
2024 | | | 339 | |
2025 | | | 197 | |
2026 | | | 189 | |
Thereafter | | | 175 | |
Note 11 – Earnings per Share
The factors used in the basic and diluted earnings per share computations follow:
| | Three Months Ended | | | Nine Months Ended | |
| | September 30, | | | September 30, | |
| | 2022 | | | 2021 | | | 2022 | | | 2021 | |
| | (in thousands, except share and per share data) | |
| | | | | | | | | | | | | | | | |
Net income | | $ | 5,813 | | | $ | 4,341 | | | $ | 13,428 | | | $ | 11,464 | |
Less: | | | | | | | | | | | | | | | | |
Earnings allocated to unvested shares | | | 104 | | | | 76 | | | | 221 | | | | 169 | |
Net income available to common shareholders, basic and diluted | | $ | 5,709 | | | $ | 4,265 | | | $ | 13,207 | | | $ | 11,295 | |
| | | | | | | | | | | | | | | | |
Basic and Diluted | | | | | | | | | | | | | | | | |
Weighted average common shares including unvested common shares outstanding | | | 7,639,492 | | | | 7,602,686 | | | | 7,628,677 | | | | 7,591,800 | |
Less: | | | | | | | | | | | | | | | | |
Weighted average unvested common shares | | | 136,283 | | | | 133,073 | | | | 125,736 | | | | 111,790 | |
Weighted average common shares outstanding | | | 7,503,209 | | | | 7,469,613 | | | | 7,502,941 | | | | 7,480,010 | |
Basic and diluted income per common share | | $ | 0.76 | | | $ | 0.57 | | | $ | 1.76 | | | $ | 1.51 | |
The Company had no outstanding stock options or warrants at September 30, 2022 or 2021.
Note 12 – 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.
As of September 30, 2022, Management believes the Company and Bank met all capital adequacy requirements to which they are subject. As of September 30, 2022, 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 September 30, 2022: | | | | | | | | | | | | | | | | | | | | | | | | |
Total risk-based capital (to risk- weighted assets) | | $ | 179,662 | | | | 13.53 | % | | $ | 106,196 | | | | 8.00 | % | | $ | 132,745 | | | | 10.00 | % |
Total common equity Tier 1 risk- based capital (to risk-weighted assets) | | | 166,631 | | | | 12.55 | | | | 59,735 | | | | 4.50 | | | | 86,284 | | | | 6.50 | |
Tier 1 capital (to risk-weighted assets) | | | 166,631 | | | | 12.55 | | | | 79,647 | | | | 6.00 | | | | 106,196 | | | | 8.00 | |
Tier 1 capital (to average assets) | | | 166,631 | | | | 11.56 | | | | 57,662 | | | | 4.00 | | | | 72,078 | | | | 5.00 | |
| | Actual | | | Minimum Requirement for Capital Adequacy Purposes | | | Minimum Requirement to be Well Capitalized Under Prompt Corrective Action Provisions | |
| | Amount | | | Ratio | | | Amount | | | Ratio | | | Amount | | | Ratio | |
As of December 31, 2021: | | | | | | | | | | | | | | | | | | | | | | | | |
Total risk-based capital (to risk- weighted assets) | | $ | 160,700 | | | | 13.31 | % | | $ | 96,591 | | | | 8.00 | % | | $ | 120,738 | | | | 10.00 | % |
Total common equity Tier 1 risk- based capital (to risk-weighted assets) | | | 149,169 | | | | 12.35 | | | | 54,332 | | | | 4.50 | | | | 78,480 | | | | 6.50 | |
Tier 1 capital (to risk-weighted assets) | | | 149,169 | | | | 12.35 | | | | 72,443 | | | | 6.00 | | | | 96,591 | | | | 8.00 | |
Tier 1 capital (to average assets) | | | 149,169 | | | | 10.84 | | | | 55,057 | | | | 4.00 | | | | 68,822 | | | | 5.00 | |
Kentucky banking laws limit the amount of dividends that may be paid to a holding company by its subsidiary banks without prior approval. 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. Based on these regulations, the Bank was eligible to pay $19.6 million in dividends as of September 30, 2022. The Bank paid the Company $2.4 million in dividends during the nine months ended September 30, 2022.
Note 13 – 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 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 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 except for home equity loans, which generally have a term of 10 years.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a client to a third party. The terms and risk of loss involved in issuing standby letters of credit are similar to those involved in issuing loan commitments and extending credit. In addition to credit risk, the Company also has liquidity risk associated with standby letters of credit because funding for these obligations could be required immediately. The Company does not deem this risk to be material. No liability is currently established for standby letters of credit.
The following table presents the contractual amounts of financial instruments with off-balance sheet risk for each period ended:
| | September 30, 2022 | | | December 31, 2021 | |
| | Fixed Rate | | | Variable Rate | | | Fixed Rate | | | Variable Rate | |
| | (in thousands) | |
Commitments to make loans | | $ | 56,136 | | | $ | 41,637 | | | $ | 85,294 | | | $ | 60,683 | |
Unused lines of credit | | | 9,311 | | | | 114,960 | | | | 12,828 | | | | 108,635 | |
Standby letters of credit | | | 365 | | | | 346 | | | | 566 | | | | 326 | |
In connection with the purchase of loan participations, the Bank entered into risk participation agreements, which had notional amounts totaling $12.1 million at September 30, 2022 and December 31, 2021. The risk participation agreements are not designated against specific assets or liabilities under ASC 815, Derivatives and Hedging, and, therefore, do not qualify for hedge accounting. The derivatives are recorded in other liabilities on the balance sheet at fair value and changes in fair value of both the borrower and the offsetting swap agreements are recorded (and essentially offset) in non-interest income. The fair value of the derivative instruments incorporates a consideration of credit risk in accordance with ASC 820, resulting in some volatility in earnings each period. At September 30, 2022 and December 31, 2021, the fair value of the risk participation agreements were $5,000 and $67,000, respectively.
In the normal course of business, the Company and its subsidiaries have been named, from time to time, as defendants in various legal actions. Certain of the actual or threatened legal actions may include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages.
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 14 – Revenue from Contracts with Customers
All of the Company’s revenue from customers within the scope of ASC 606 is recognized as non-interest income. A description of the Company’s revenue streams accounted for under ASC 606 follows:
Service Charges on Deposit Accounts: The Company earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which include services such as ATM use fees, stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Company fulfills the customer’s request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges are withdrawn from the customer’s account balance.
Bank Card Interchange Income: The Company earns interchange fees from bank cardholder transactions conducted through a third-party payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. Prior to adopting ASC 606, the Company reported bank card interchange fees net of expenses. Under ASC 606, bank card interchange fees are reported gross.
Gains/Losses on Sales of OREO: The Company records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the Company finances the sale of OREO to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and 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, and other transaction-based revenue that is individually immaterial. Other non-interest income included approximately $195,000 and $512,000 of revenue for the three and nine months ended September 30, 2022, respectively, within the scope of ASC 606. Other non-interest income included approximately $162,000 and $460,000 of revenue for the three and nine months ended September 30, 2021, respectively, within the scope of ASC 606. The remaining other non-interest income for the three and nine months is excluded from the scope of ASC 606.
Note 15 – Subsequent Events
Merger Agreement – On October 24, 2022, the Company entered into an Agreement and Plan of Merger ("Merger Agreement") with Peoples Bancorp, Inc. (“Peoples”). The Merger Agreement provides for a business combination whereby the Company will merge with and into Peoples (the “Merger”), with Peoples as the surviving corporation in the Merger. Under the terms and subject to the conditions of the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each share of the Company’s common stock, issued and outstanding immediately prior to the Effective Time (except for Dissenting Shares, as provided for in the Merger Agreement), will be converted, in accordance with the procedures set forth in the Merger Agreement, into 0.90 of common shares, no par value, of Peoples (“Peoples Common Shares”). The Merger Agreement contains certain termination rights for both Peoples and the Company, and further provides that, upon termination of the Merger Agreement under specified circumstances, the Company may be required to pay Peoples a termination fee of $8.3 million. The Merger is expected to close in the second quarter of 2023, pending satisfaction of various closing conditions, including, but not limited to: (1) adoption of the Merger Agreement by the shareholders of Peoples and the Company; (2) authorization for listing on Nasdaq of the Peoples Common Shares to be issued in the Merger; (3) the receipt of required regulatory approvals, including the approval of the Board of Governors of the Federal Reserve System, the Ohio Division of Financial Institutions, and the Kentucky Department of Financial Institutions; (4) effectiveness of the registration statement on Form S-4 for the Peoples Common Shares to be issued in the Merger; and (5) the absence of any order, injunction or other legal restraint preventing or making illegal the completion of the Merger or any of the other transactions contemplated by the Merger Agreement.
Tax Benefit Preservation Plan Termination – In 2015, the Company adopted a Tax Benefits Preservation Plan designed to reduce the likelihood of an “ownership change” occurring as a result of purchases and sales of the Company's common shares. See “Note 9 – Income Taxes,” to the financial statements for additional disclosure related to the Tax Benefits Preservation Plan. On October 24, 2022, with the unanimous approval of the Company’s Board of Directors, the Company amended the Tax Benefits Preservation Plan to accelerate its final expiration date to October 24, 2022, effectively terminating the Tax Benefits Preservation Plan as of that date.