LIMESTONE BANCORP, INC. - Quarter Report: 2016 June (Form 10-Q)

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		June 30, 2016				December 31, 2015
Assets
Cash and due from banks		$	8,289			$	8,006
Interest bearing deposits in banks			49,313				85,329
Cash and cash equivalents			57,602				93,335
Securities available for sale			143,145				144,978
Securities held to maturity (fair value of $44,955 and $44,253, respectively)			41,948				42,075
Loans held for sale			—				186
Loans, net of allowance of $10,104 and $12,041, respectively			614,032				606,625
Premises and equipment, net			18,618				18,812
Other real estate owned			12,322				19,214
Federal Home Loan Bank stock			7,323				7,323
Bank owned life insurance			14,646				9,441
Accrued interest receivable and other assets			6,916				6,733
Total assets		$	916,552			$	948,722
Liabilities and Stockholders’ Equity
Deposits
Non-interest bearing		$	117,843			$	120,043
Interest bearing			722,248				757,954
Total deposits			840,091				877,997
Federal Home Loan Bank advances			2,775				3,081
Accrued interest payable and other liabilities			7,651				10,577
Subordinated capital note			3,600				4,050
Junior subordinated debentures			21,000				21,000
Total liabilities			875,117				916,705
Stockholders’ equity
Preferred stock, no par
Series E - 6,198 issued and outstanding; Liquidation preference of $6.2 million			1,644				1,644
Series F - 4,304 issued and outstanding; Liquidation preference of $4.3 million			1,127				1,127
Total preferred stockholders’ equity			2,771				2,771
Common stock, no par, 86,000,000 shares authorized, 23,160,302 and 20,089,533 voting, and 7,958,000 and 6,858,000 non-voting shares issued and outstanding, respectively			125,729				120,699
Additional paid-in capital			23,821				23,654
Retained deficit			(108,316	)			(110,808	)
Accumulated other comprehensive loss			(2,570	)			(4,299	)
Total common stockholders’ equity			38,664				29,246
Total stockholders' equity			41,435				32,017
Total liabilities and stockholders’ equity		$	916,552			$	948,722

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		Three Months Ended June 30,								Six Months Ended June 30,
		2016				2015				2016				2015
Interest income
Loans, including fees		$	7,455			$	7,846			$	15,337			$	15,601
Taxable securities			950				1,010				1,939				2,136
Tax exempt securities			158				190				322				393
Fed funds sold and other			142				121				292				240
			8,705				9,167				17,890				18,370
Interest expense
Deposits			1,280				1,607				2,588				3,299
Federal Home Loan Bank advances			18				24				37				51
Subordinated capital note			38				41				77				83
Junior subordinated debentures			173				155				341				307
Federal funds purchased and other			—				1				—				1
			1,509				1,828				3,043				3,741
Net interest income			7,196				7,339				14,847				14,629
Provision (negative provision) for loan losses			(600	)			—				(1,150	)			—
Net interest income after provision for loan losses			7,796				7,339				15,997				14,629
Non-interest income
Service charges on deposit accounts			473				475				902				884
Bank card interchange fees			221				229				423				432
Other real estate owned rental income			149				372				405				729
Net gain on sales of securities			—				199				203				1,696
Other			309				290				610				520
			1,152				1,565				2,543				4,261
Non-interest expense
Salaries and employee benefits			3,857				4,028				7,679				7,875
Occupancy and equipment			808				828				1,662				1,698
Professional fees			492				714				877				1,693
FDIC Insurance			493				564				1,016				1,134
Data processing expense			295				278				592				582
State franchise and deposit tax			255				285				510				570
Other real estate owned expense			294				2,932				962				3,665
Loan collection expense			271				291				353				574
Other			1,171				1,114				2,376				2,635
			7,936				11,034				16,027				20,426
Income (loss) before income taxes			1,012				(2,130	)			2,513				(1,536	)
Income tax expense			—				—				21				—
Net income (loss)			1,012				(2,130	)			2,492				(1,536	)
Less:
Earnings (loss) allocated to participating securities			33				(91	)			84				(269	)
Net income (loss) available to common shareholders		$	979			$	(2,039	)		$	2,408			$	(1,267	)
Basic and diluted income (loss) per common share		$	0.03			$	(0.08	)		$	0.09			$	(0.06	)

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		Three Months Ended June 30,								Six Months Ended June 30,
		2016				2015				2016				2015
Net income (loss)		$	1,012			$	(2,130	)		$	2,492			$	(1,536	)
Other comprehensive income (loss):
Unrealized gain (loss) on securities:
Unrealized gain (loss) arising during the period			659				(1,762	)			1,868				(433	)
Amortization during the period of net unrealized loss transferred to held to maturity			32				32				64				64
Reclassification adjustment for gains included in net income			—				(199	)			(203	)			(1,696	)
Net unrealized gain/(loss) recognized in comprehensive income			691				(1,929	)			1,729				(2,065	)
Tax effect			—				—				—				—
Other comprehensive income (loss)			691				(1,929	)			1,729				(2,065	)
Comprehensive income (loss)		$	1,703			$	(4,059	)		$	4,221			$	(3,601	)

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		Shares																				Amount
		Common												Preferred												Preferred								Common
		Common				Non- Voting Common				Total Common				Series E				Series F				Common and Non-Voting Common				Series E				Series F				Additional Paid-In Capital				Retained Deficit				Accumulated Other Compre- hensive Income (Loss)				Total
Balances, January 1, 2016			20,089,533				6,858,000				26,947,533				6,198				4,304			$	120,699			$	1,644			$	1,127			$	23,654			$	(110,808	)		$	(4,299	)		$	32,017
Issuance of unvested stock			177,290				—				177,290				—				—				—				—				—				—				—				—				—
Forfeited unvested stock			(6,521	)			—				(6,521	)			—				—				—				—				—				—				—				—				—
Stock-based compensation expense			—				—				—				—				—				—				—				—				167				—				—				167
Net income			—				—				—				—				—				—				—				—				—				2,492				—				2,492
Net change in accumulated other comprehensive income (loss), net of taxes			—				—				—				—				—				—				—				—				—				—				1,729				1,729
Issuance of stock			2,900,000				1,100,000				4,000,000				—				—				5,030				—				—				—				—				—				5,030
Balances, June 30, 2016			23,160,302				7,958,000				31,118,302				6,198				4,304			$	125,729			$	1,644			$	1,127			$	23,821			$	(108,316	)		$	(2,570	)		$	41,435

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		2016				2015
Cash flows from operating activities
Net income		$	2,492			$	(1,536	)
Adjustments to reconcile net loss to net cash from operating activities
Depreciation and amortization			747				814
Provision (negative provision) for loan losses			(1,150	)			—
Net amortization on securities			643				721
Stock-based compensation expense			167				181
Net loss (gain) on sales of loans held for sale			(29	)			232
Loans originated for sale			(1,814	)			(4,146	)
Proceeds from sales of loans held for sale			2,029				4,075
Net (gain) loss on sales of other real estate owned			(169	)			(43	)
Net write-down of other real estate owned			650				2,630
Net realized gain on sales of available for sale securities			(203	)			(1,696	)
Earnings on bank owned life insurance, net of premium expense			(205	)			(153	)
Net change in accrued interest receivable and other assets			(384	)			742
Net change in accrued interest payable and other liabilities			(127	)			309
Net cash from operating activities			2,647				2,130
Cash flows from investing activities
Purchases of available for sale securities			(11,295	)			(16,800	)
Sales and calls of available for sale securities			3,721				44,110
Maturities and prepayments of available for sale securities			10,823				10,756
Proceeds from sale of other real estate owned			6,987				5,020
Proceeds from sales of loans not originated for sale			—				8,640
Loan originations and payments, net			(6,903	)			(26,974	)
Purchases of premises and equipment, net			(282	)			(134	)
Purchase of bank owned life insurance			(5,000	)			—
Net cash from investing activities			(1,949	)			24,618
Cash flows from financing activities
Net change in deposits			(37,906	)			(22,690	)
Net change in repurchase agreements			—				(76	)
Repayment of Federal Home Loan Bank advances			(306	)			(17,322	)
Advances from Federal Home Loan Bank			—				5,000
Repayment of subordinated capital note			(450	)			(450	)
Issuance of common stock			2,231				—
Net cash from financing activities			(36,431	)			(35,538	)
Net change in cash and cash equivalents			(35,733	)			(8,790	)
Beginning cash and cash equivalents			93,335				80,180
Ending cash and cash equivalents		$	57,602			$	71,390
Supplemental cash flow information:
Interest paid		$	2,627			$	3,622
Income taxes paid			21				—
Supplemental non-cash disclosure:
Proceeds from common stock issuance directed by investors for junior subordinated debenture interest		$	2,799			$	—
Transfer from loans to other real estate			576				955

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Note 1 – Basis of Presentation and Summary of Significant Accounting Policies

 

Basis of Presentation – The consolidated financial statements include Porter Bancorp, Inc. (Company) and its subsidiary, PBI Bank (Bank).  The Company owns a 100% interest in the Bank. All significant inter-company transactions and accounts have been eliminated in consolidation.

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, the financial statements do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  Operating results for the six months ended June 30, 2016 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, 2015 included in the Company’s Annual Report on Form 10-K.

 

Use of Estimates – To prepare financial statements in conformity with U.S. generally accepted accounting principles, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and future results could differ.

 

Reclassifications – Some items in the prior year financial statements were reclassified to conform to the current presentation. The reclassifications did not impact net income or stockholders’ equity.

 

Adoption of New Accounting Standards – In August 2015, FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606). This ASU is an update to ASU 2014-09, and delays the effective date of ASU 2014-09. The ASU provides guidance on revenue recognition for entities that enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of nonfinancial assets. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additional disclosures are required to provide quantitative and qualitative information regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new guidance is effective for annual reporting periods, and interim reporting periods within those annual periods, beginning after December 15, 2017. Early adoption is not permitted. Management is currently evaluating the impact of the adoption of this guidance on the Company’s financial statements.

 

In January 2016, the FASB issued an update ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this update impact public business entities as follows: 1) Require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. 2) Simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value. 3) Eliminate the requirement to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. 4) Require entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. 5) Require an entity to present separately in other comprehensive income the portion of the total change in fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. 6) Require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements. 7) Clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements, but it is not expected to have a material impact.

 

In February 2016, the FASB issued an update ASU No. 2016-02, Leases (Topic 842). Under the new guidance, lessees will be required to recognize the following for all leases, with the exception of short-term leases, at the commencement date: a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting in largely unchanged. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2018. We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements, but it is not expected to have a material impact.

 

 

In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Shared-Based Payment Accounting. The amendments are intended to improve the accounting for employee shared-based payments and affects all organizations that issue share-based payment awards to their employees. Several aspects of the accounting for share-based payment award transactions are simplified, including the income tax consequences, the classification of awards as either equity or liabilities, and the classification on the statement of cash flows. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2016. We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements, but it is not expected to have a material impact.

 

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. The largest impact will be on the allowance for loan and lease losses. The standard is effective for public companies for fiscal years beginning after December 15, 2019. We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements.

 

Note 2 – Going Concern Considerations and Future Plans

 

Our consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business for the foreseeable future. However, the events and circumstances described in this discussion create substantial doubt about the Company’s ability to continue as a going concern.

 

For the six months ended June 30, 2016, we reported net income of $2.5 million compared with net loss of $3.2 million and $11.2 million for the years ended December 31, 2015 and 2014, respectively. Our financial performance has been negatively impacted by the Bank’s elevated level of non-performing assets, although the impact continues to diminish as we have substantially reduced non-performing assets during recent periods. Non-performing loans were 1.86%, 2.28%, and 7.57% of total loans at June 30, 2016, December 31, 2015, and December 31, 2014, respectively. Non-performing assets were 2.61%, 3.51%, and 9.19% of total assets at June 30, 2016, December 31, 2015, and December 31, 2014, respectively. See “Analysis of Financial Condition,” below.

 

On April 15, 2016, we completed a private placement of 2.9 million common shares and 1.1 million non-voting common shares to accredited investors for a total purchase price of $5.0 million. The investors in the private placement directed a portion of the purchase price to pay all deferred interest payments on our trust preferred securities, bringing our interest payments current through the second quarter of 2016. We had deferred interest payable on the junior subordinated debentures held by our trust subsidiaries since the fourth quarter of 2011, requiring our trust subsidiaries to defer distributions on our trust preferred securities held by investors during that period. The remaining proceeds from the private placement totaled approximately $2.2 million and will be used for general corporate purposes and to support the Bank.

 

On June 29, 2016, we notified the trustees of our election to again defer our interest payments effective with the third quarter 2016 payment. We have the ability to defer distributions on our trust preferred securities for 20 consecutive quarters or through the second quarter of 2021. After 20 consecutive quarters, we must pay all deferred distributions or we will be in default.

 

We continue to be involved in various legal proceedings, which are more fully described in Note 13 – “Contingencies”. We are appealing a judgment against us that we believe, after conferring with our legal advisors, we have meritorious grounds on which to prevail. If we do not prevail, the ultimate outcome of this matter could have a material adverse effect on our financial condition, results of operations, or cash flows.

 

PBI Bank is in compliance with each element of its Consent Order with the FDIC and KDFI other than the requirement for the Bank to maintain a minimum Tier 1 leverage ratio of 9% and a minimum total risk based capital ratio of 12%. As of June 30, 2016, the Bank’s Tier 1 leverage ratio and total risk based capital ratio were 6.65% and 10.87%, respectively, both less than the minimum capital ratios required by the Consent Order, but otherwise compliant with Basel III capital requirements. The Consent Order provides that if the Bank should be unable to reach the required capital levels, and if directed in writing by the FDIC, the Bank would be required to develop, adopt and implement a written plan to sell or merge itself into another federally insured financial institution or otherwise obtain a capital investment into the Bank sufficient to recapitalize the Bank. The Bank has not been directed by the FDIC to implement such a plan.

 

In order to meet the 9.0% Tier 1 leverage ratio and 12.0% total risk based capital ratio requirements of the Consent Order, the Board of Directors and management are continuing to evaluate and implement strategies to achieve the following objectives:

 

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Continuing to increase capital through the issuance of senior debt, subordinated debt, and equity securities.

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Continuing to operate the Company and Bank in a safe and sound manner.  We have reduced our lending concentrations and the size of our balance sheet while continuing to remediate non-performing loans.

 

 

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Executing on the sale of other real estate owned (“OREO”) and reinvesting the sale proceeds in quality income producing assets.

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Continuing to improve our internal processes and procedures, distribution of labor, and work-flow to ensure we have adequately and appropriately deployed resources in an efficient manner in the current environment.

 

Bank regulatory agencies can exercise discretion when an institution does not meet the terms of a consent order. Based on individual circumstances, the agencies may issue mandatory directives, impose monetary penalties, initiate changes in management, or take more serious adverse actions such as directing a bank to seek a buyer or taking a bank into receivership.

 

The Consent Order requires the Bank to obtain the written consent of both agencies before declaring or paying any future dividends to the Company, which are its principal source of revenue. Since the Bank is unlikely to be in a position to pay dividends to the Company until the Consent Order is satisfied, cash inflows for the Company are limited to the issuance of new debt or the issuance of capital securities. The Company’s liquid assets were $2.3 million as of June 30, 2016. Ongoing operating expenses of the Company are forecast at approximately $1.0 million for the next twelve months.

 

Our consolidated financial statements do not include any adjustments that may result should the Company be unable to continue as a going concern. 

 

Note 3 – Securities

 

The fair value of available for sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows:

 

  

  

  

 

 

Sales and calls of available for sale securities were as follows:

 

 

The amortized cost and fair value of the debt investment securities portfolio are shown by contractual maturity.  Contractual maturities may differ from actual maturities if issuers 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 detailed separately.

 

                                                                                                 

Securities pledged at June 30, 2016 and December 31, 2015 had carrying values of approximately $53.7 million and $68.0 million, respectively, and were pledged to secure public deposits.

 

At June 30, 2016 and December 31, 2015, we held securities issued by the Commonwealth of Kentucky or municipalities in the Commonwealth of Kentucky having a book value of $17.4 million and $17.7 million, respectively. Additionally, at June 30, 2016 and December 31, 2015, we held securities issued by the State of Texas or municipalities in the State of Texas having a book value of $4.3 million at each period end. At June 30, 2016 and December 31, 2015, 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.

 

 

Securities with unrealized losses at June 30, 2016 and December 31, 2015, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position, are as follows:

 

 

There were no held to maturity securities in an unrecognized loss position at June 30, 2016 or December 31, 2015.

 

The Company evaluates securities for other than temporary impairment (OTTI) 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. Management currently intends to hold all securities with unrealized losses until recovery, which for fixed income securities may be at maturity. As of June 30, 2016, management does not believe securities within our portfolio with unrealized losses should be classified as other than temporarily impaired.

 

Note 4 – Loans

 

 

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended June 30, 2016 and 2015:

 

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the six months ended June 30, 2016 and 2015: 

 

 

 

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 June 30, 2016:

 

 

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, 2015:

 

 

 

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 June 30, 2016 and December 31, 2015 and for the three and six months ended June 30, 2016 and 2015:

 

 

 

 

Cash basis income recognized for the three and six months ended June 30, 2016 was $7,000 and $290,000, respectively, and $29,000 and $102,000 for the three and six months ended June 30, 2015, respectively.

 

 

Troubled Debt Restructuring

 

A troubled debt restructuring (TDR) occurs when the Company has agreed to a loan modification in the form of a concession for a borrower who is experiencing financial difficulty. The majority of the Company’s TDRs 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 Company 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 June 30, 2016 and December 31, 2015:

 

  

 

At June 30, 2016 and December 31, 2015, 80% and 83%, respectively, of the Company’s TDRs were performing according to their modified terms. The Company allocated $137,000 and $179,000 in reserves to borrowers whose loan terms have been modified in TDRs as of June 30, 2016, and December 31, 2015, respectively. The Company has committed to lend no additional amounts as of June 30, 2016 and December 31, 2015 to borrowers with outstanding loans classified as TDRs.

 

 

Management periodically reviews renewals/modifications of previously identified TDRs, for which there was no principal forgiveness, to consider if it is appropriate to remove the TDR classification. If the borrower is no longer experiencing financial difficulty and the renewal/modification did not contain a concessionary interest rate or other concessionary terms, management considers the potential removal of the TDR classification. If deemed appropriate, the TDR classification is removed as the borrower has complied with the terms of the loan at the date of renewal/modification and there was a reasonable expectation that the borrower would continue to comply with the terms of the loan subsequent to the date of the renewal/modification. In this instance, the TDR was originally considered a restructuring in a prior year as a result of a modification with an interest rate that was not commensurate with the risk of the underlying loan. Additionally, TDR classification can be removed in circumstances in which the Company performs a non-concessionary re-modification of the loan at terms that were considered to be at market for loans with comparable risk. Management expects the borrower will continue to perform under the re-modified terms based on the borrower’s past history of performance.

 

No TDR loan modifications occurred during the three or six months ended June 30, 2016 or June 30, 2015. During the first six months of 2016 and 2015, 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.

 

Nonperforming Loans

 

Nonperforming loans include impaired loans not on accrual 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 June 30, 2016, and December 31, 2015: 

 

 

The following table presents the aging of the recorded investment in past due loans as of June 30, 2016 and December 31, 2015: 

 

 

 

  

Credit Quality Indicators 

 

We categorize all loans into risk categories at origination based upon original underwriting. Thereafter, we categorize 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 regularly through our internal and external loan review processes. Borrower relationships in excess of $500,000 are routinely analyzed through our 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 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 we will sustain some losses if the deficiencies are not corrected.

 

Doubtful – Loans classified as doubtful are those loans which have characteristics similar to substandard loans but with an increased risk that collection or liquidation in full is highly questionable and improbable.

 

 

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be “Pass” rated loans. As of June 30, 2016, and December 31, 2015, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows: