LIMESTONE BANCORP, INC. - Quarter Report: 2019 June (Form 10-Q)

 

 

Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

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FORM 10-Q

 

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended June 30, 2019

 

Or

 

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to             

 

Commission file number: 001-33033

 

LIMESTONE BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

 

Kentucky	61-1142247
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
2500 Eastpoint Parkway, Louisville, Kentucky	40223
(Address of principal executive offices)	(Zip Code)

 

(502) 499-4800

(Registrant’s telephone number, including area code)

 

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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒     No  ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Securities registered pursuant to Section 12(b) of the Exchange Act:

 

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common shares	LMST	Nasdaq

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  ☐	Accelerated filer  ☒
Non-accelerated filer  ☐	Smaller reporting company  ☒
	Emerging growth company  ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ☐    No  ☒

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

6,250,593 Common Shares and 1,220,000 Non-Voting Common Shares were outstanding at July 31, 2019.

 

 

 

INDEX

 

 

	Page
PART I –	FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS	3
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	32
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	45
ITEM 4.	CONTROLS AND PROCEDURES	45
PART II –	OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	46
ITEM 1A.	RISK FACTORS	46
ITEM 2.	UNREGISTERED SALES ON EQUITY SECURITIES AND USE OF PROCEEDS	46
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	46
ITEM 4.	MINE SAFETY DISCLOSURES	46
ITEM 5.	OTHER INFORMATION	46
ITEM 6.	EXHIBITS	47

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

The following consolidated financial statements of Limestone Bancorp, Inc. and subsidiary, Limestone Bank, Inc. are submitted:

 

Unaudited Consolidated Balance Sheets for June 30, 2019 and December 31, 2018

Unaudited Consolidated Statements of Income for the three and six months ended June 30, 2019 and 2018

Unaudited Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2019 and 2018

Unaudited Consolidated Statement of Changes in Stockholders’ Equity for the three and six months ended June 30, 2019 and 2018

Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018

Notes to Unaudited Consolidated Financial Statements

 

 

 

		June 30, 2019				December 31, 2018
Assets
Cash and due from banks		$	6,860			$	6,963
Interest bearing deposits in banks			40,755				28,398
Cash and cash equivalents			47,615				35,361
Securities available for sale			208,614				201,192
Loans, net of allowance of $8,832 and $8,880, respectively			794,282				756,364
Premises and equipment, net			14,827				14,655
Premises held for sale			995				1,050
Other real estate owned			3,225				3,485
Federal Home Loan Bank stock			6,693				7,233
Bank owned life insurance			15,853				15,646
Deferred taxes, net			28,708				29,282
Accrued interest receivable and other assets			5,976				5,424
Total assets		$	1,126,788			$	1,069,692
Liabilities and Stockholders’ Equity
Deposits
Non-interest bearing		$	141,448			$	142,618
Interest bearing			797,029				751,613
Total deposits			938,477				894,231
Federal Home Loan Bank advances			51,470				46,549
Accrued interest payable and other liabilities			4,419				5,815
Junior subordinated debentures			21,000				21,000
Senior debt			10,000				10,000
Total liabilities			1,025,366				977,595
Commitments and contingent liabilities (Note 13)			—				—
Stockholders’ equity
Common stock, no par, 39,000,000 shares authorized, 6,237,832 and 6,242,720 voting, and 1,220,000 and 1,220,000 non-voting issued and outstanding, respectively			140,639				140,639
Additional paid-in capital			24,147				24,287
Retained deficit			(59,729	)			(66,201	)
Accumulated other comprehensive loss			(3,635	)			(6,628	)
Total stockholders' equity			101,422				92,097
Total liabilities and stockholders’ equity		$	1,126,788			$	1,069,692

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		Three Months Ended June 30,								Six Months Ended June 30,
		2019				2018				2019				2018
Interest income
Loans, including fees		$	10,465			$	9,094			$	20,719			$	17,884
Taxable securities			1,608				1,198				3,181				2,141
Tax exempt securities			88				96				181				192
Federal funds sold and other			215				197				481				383
			12,376				10,585				24,562				20,600
Interest expense
Deposits			2,965				1,649				5,552				2,993
Federal Home Loan Bank advances			255				216				536				372
Senior debt			98				98				194				194
Junior subordinated debentures			258				236				521				447
Subordinated capital note			—				12				—				39
			3,576				2,211				6,803				4,045
Net interest income			8,800				8,374				17,759				16,555
Provision (negative provision) for loan losses			—				(150	)			—				(150	)
Net interest income after provision for loan losses			8,800				8,524				17,759				16,705
Non-interest income
Service charges on deposit accounts			571				591				1,067				1,159
Bank card interchange fees			596				446				1,104				847
Income from bank owned life insurance			118				138				217				237
Net loss on sales and calls of investment securities			(5	)			(6	)			(5	)			(6	)
Other			166				178				347				361
			1,446				1,347				2,730				2,598
Non-interest expense
Salaries and employee benefits			3,915				3,885				7,830				7,673
Occupancy and equipment			854				880				1,752				1,775
Professional fees			179				222				344				427
Marketing expense			212				308				439				608
FDIC Insurance			103				139				211				321
Data processing expense			315				307				628				631
State franchise and deposit tax			315				282				630				564
Deposit account related expense			310				221				591				440
Other real estate owned expense			142				237				308				319
Litigation and loan collection expense			34				48				80				101
Other			845				876				1,692				1,715
			7,224				7,405				14,505				14,574
Income before income taxes			3,022				2,466				5,984				4,729
Income tax expense (benefit)			(611	)			483				(488	)			812
Net income			3,633				1,983				6,472				3,917
Basic and diluted income per common share		$	0.49			$	0.27			$	0.87			$	0.57

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		Three Months Ended June 30,								Six Months Ended June 30,
		2019				2018				2019				2018
Net income		$	3,633			$	1,983			$	6,472			$	3,917
Other comprehensive income (loss):
Unrealized gain (loss) on securities:
Unrealized gain (loss) arising during the period			1,882				(523	)			3,877				(2,234	)
Reclassification adjustment for gains (losses) included in net income			(5	)			(6	)			(5	)			(6	)
Net unrealized gain (loss) recognized in comprehensive income			1,887				(517	)			3,882				(2,228	)
Tax effect			(471	)			109				(889	)			469
Other comprehensive income (loss)			1,416				(408	)			2,993				(1,759	)
Comprehensive income		$	5,049			$	1,575			$	9,465			$	2,158

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		Shares																				Amount
		Preferred								Common												Preferred								Common
		Series E				Series F				Common				Non-Voting Common				Total Common				Series E				Series F				Common and Non-Voting Common				Additional Paid-In Capital				Retained Deficit				Accumulated Other Comprehensive Income (Loss)				Total
Balances, January 1, 2019			—				—				6,242,720				1,220,000				7,462,720			$	—			$	—			$	140,639			$	24,287			$	(66,201	)		$	(6,628	)		$	92,097
Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations upon award			—				—				1,642				—				1,642				—				—				—				(276	)			—				—				(276	)
Forfeited unvested stock			—				—				(3,748	)			—				(3,748	)			—				—				—				—				—				—				—
Stock-based compensation expense			—				—				—				—				—				—				—				—				82				—				—				82
Net income			—				—				—				—				—				—				—				—				—				2,839				—				2,839
Net change in accumulated other comprehensive income, net of taxes			—				—				—				—				—				—				—				—				—				—				1,577				1,577
Balances, March 31, 2019			—				—				6,240,614				1,220,000				7,460,614			$	—			$	—			$	140,639			$	24,093			$	(63,362	)		$	(5,051	)		$	96,319
Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations upon award			—				—				(2,532	)			—				(2,532	)			—				—				—				(39	)			—				—				(39	)
Forfeited unvested stock			—				—				(250	)			—				(250	)			—				—				—				—				—				—				—
Stock-based compensation expense			—				—				—				—				—				—				—				—				93				—				—				93
Net income			—				—				—				—				—				—				—				—				—				3,633				—				3,633
Net change in accumulated other comprehensive income, net of taxes			—				—				—				—				—				—				—				—				—				—				1,416				1,416
Balances, June 30, 2019			—				—				6,237,832				1,220,000				7,457,832			$	—			$	—			$	140,639			$	24,147			$	(59,729	)		$	(3,635	)		$	101,422

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		Shares																				Amount
		Preferred								Common												Preferred								Common
		Series E				Series F				Common				Non-Voting Common				Total Common				Series E				Series F				Common and Non-Voting Common				Additional Paid-In Capital				Retained Deficit				Accumulated Other Comprehensive Income (Loss)				Total
Balances, January 1, 2018			6,198				4,304				6,039,864				220,000				6,259,864			$	1,644			$	1,127			$	125,729			$	24,497			$	(75,108	)		$	(5,216	)		$	72,673
Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations upon award			—				—				—				—				—				—				—				—				—				—				—				—
Forfeited unvested stock			—				—				—				—				—				—				—				—				—				—				—				—
Issuance of stock			—				—				150,000				1,000,000				1,150,000				—				—				14,910				—				—				—				14,910
Stock-based compensation expense			—				—				—				—				—				—				—				—				64				—				—				64
Net income			—				—				—				—				—				—				—				—				—				1,934				—				1,934
Reclassification of disproportionate tax effect
due to change in federal tax rate			—				—				—				—				—				—				—				—				—				113				(113	)			—
Net change in accumulated other comprehensive income, net of taxes			—				—				—				—				—				—				—				—				—				—				(1,351	)			(1,351	)
Balances, March 31, 2018			6,198				4,304				6,189,864				1,220,000				7,409,864			$	1,644			$	1,127			$	140,639			$	24,561			$	(73,061	)		$	(6,680	)		$	88,230
Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations upon award			—				—				45,129				—				45,129				—				—				—				—				—				—				—
Forfeited unvested stock			—				—				—				—				—				—				—				—				—				—				—				—
Redemption and retirement of preferred shares			(6,198	)			(4,304	)			—				—				—				(1,644	)			(1,127	)			—				(734	)			—				—				(3,505	)
Stock-based compensation expense			—				—				—				—				—				—				—				—				99				—				—				99
Net income			—				—				—				—				—				—				—				—				—				1,983				—				1,983
Net change in accumulated other comprehensive income, net of taxes			—				—				—				—				—				—				—				—				—				—				(408	)			(408	)
Balances, June 30, 2018			—				—				6,234,993				1,220,000				7,454,993			$	—			$	—			$	140,639			$	23,926			$	(71,078	)		$	(7,088	)		$	86,399

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		2019				2018
Cash flows from operating activities
Net income		$	6,472			$	3,917
Adjustments to reconcile net income to net cash from operating activities
Depreciation and amortization			979				477
Provision (negative provision) for loan losses			—				(150	)
Net amortization on securities			363				444
Stock-based compensation expense			175				163
Deferred taxes, net			(317	)			1,158
Net gain on sales of loans held for sale			—				(1	)
Proceeds from sales of loans held for sale			—				71
Net gain on sales of other real estate owned			—				(50	)
Net write-down of other real estate owned			260				325
Net realized loss on sales and calls of investment securities			5				6
Net write-down on premises held for sale			55				—
Earnings on bank owned life insurance, net of premium expense			(207	)			(227	)
Net change in accrued interest receivable and other assets			(552	)			(767	)
Net change in accrued interest payable and other liabilities			(1,780	)			(795	)
Net cash from operating activities			5,453				4,571
Cash flows from investing activities
Purchases of available for sale securities			(13,894	)			(41,911	)
Sales and calls of available for sale securities			2,452				6,054
Maturities and prepayments of available for sale securities			7,534				7,003
Proceeds from mandatory redemptions of FHLB stock			540				—
Proceeds from sale of other real estate owned			—				354
Loan originations and payments, net			(38,476	)			(37,372	)
Purchases of premises and equipment, net			(208	)			(449	)
Proceeds from sale of premises and equipment			1				—
Net cash from investing activities			(42,051	)			(66,321	)
Cash flows from financing activities
Net change in deposits			44,246				(794	)
Repayment of Federal Home Loan Bank advances			(65,079	)			(40,167	)
Advances from Federal Home Loan Bank			70,000				100,000
Repayment of subordinated capital note			—				(2,250	)
Issuance of common stock			—				14,910
Common shares withheld for taxes			(315	)			—
Redemption of preferred stock			—				(3,505	)
Net cash from financing activities			48,852				68,194
Net change in cash and cash equivalents			12,254				6,444
Beginning cash and cash equivalents			35,361				34,103
Ending cash and cash equivalents		$	47,615			$	40,547
Supplemental cash flow information:
Interest paid		$	6,771			$	4,973
Supplemental non-cash disclosure:
Transfer from loans to other real estate			—				730
Initial recognition of right-of-use lease assets			507				—

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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 (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 three and six months ended June 30, 2019 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, 2018 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.

 

New Accounting Standards – In February 2016, the FASB issued an update ASU No. 2016-02, Leases (Topic 842). Under the new guidance, lessees are 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 is largely unchanged. The amendments in this update became effective for annual periods and interim periods within those annual periods beginning after December 15, 2018. Based on the Company’s existing lease agreements, the impact of adopting the new guidance on the consolidated financial statements was the recording of a $507,000 lease liability and a right of use asset, which is included in other liabilities and premises and equipment, respectively, on the consolidated balance sheet. The adoption of this ASU did not have a meaningful impact on the Company’s performance metrics, including regulatory capital ratios and return on average assets. The Company’s leases mature through 2024 and have a weighted average discount rate of 6%. The operating lease cost was approximately $65,000 and $130,000 for the three and six months ended June 30, 2019. At June 30, 2019, the Company had entered into one lease that has yet to commence. The right of use asset and lease liability for the lease yet to commence are estimated to be approximately $1.1 million.

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The final standard will change estimates for credit losses related to financial assets measured at amortized cost such as loans, held-to-maturity debt securities, and certain other contracts. For estimating credit losses, the FASB is replacing the incurred loss model with an expected loss model, which is referred to as the current expected credit loss (CECL) model. Under the CECL model, certain financial assets that are carried at amortized cost, such as loans held for investment and held-to-maturity debt securities, are required to be presented at the net amount expected to be collected. The measurement of expected credit losses is to be based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This measurement will take place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs significantly from the “incurred loss” model required under current GAAP, which delays recognition until it is probable a loss has been incurred. The change could materially affect how the allowance for loan losses is determined. The standard is effective for public companies for fiscal years beginning after December 15, 2019. As previously disclosed, management has formed a cross functional committee that has overseen the enhancement of existing technology required to source and model data for the purpose of meeting this standard. The committee has selected a vendor to assist in generating loan level cash flows and disclosures. The project plan involved data and model validation during the first half of 2019, with parallel processing the existing model with the CECL model for two to three quarters prior to implementation, depending on how model completion and validation occurs. During 2019, management is focused on refining assumptions and continued review of the model. Additionally, management is researching and resolving interpretive accounting issues in the ASU, contemplating various accounting policies, developing processes and related controls, and considering various reporting disclosures. The impact of CECL model implementation is being evaluated, but it is expected that a one-time cumulative-effect adjustment to the allowance for loan losses will be recognized in retained earnings on the consolidated balance sheet as of the beginning of the first reporting period in which the new standard is effective, as is consistent with regulatory expectations set forth in interagency guidance. In December 2018, the OCC, The Board of Governors of the Federal Reserve System, and the FDIC approved a final rule to address changes to the credit loss accounting under GAAP, including banking organizations’ implementation of CECL. The final rule provides banking organizations the option to phase in over a three-year period the day-one adverse effects on regulatory capital that may result from adoption of the new accounting standard. In July 2019, the FASB voted for a proposal to delay implementation for smaller reporting companies, private companies, and not-for-profit entities. The Company currently qualifies as a smaller reporting company. Companies benefiting from the delay will have to implement CECL for fiscal year and interim periods beginning after December 15, 2022. The proposal will undergo a 30-day public comment period in August 2019.

 

 

In March 2017, the FASB issued ASU No. 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization of Purchased Callable Debt Securities. The final standard will shorten the amortization period for premiums on callable debt securities by requiring that premiums be amortized to the first (or earliest) call date instead of as an adjustment to the yield over the contractual life. The standard was effective for public companies for fiscal years beginning after December 15, 2018. Adoption of this new guidance did not have a material impact on the consolidated financial statements.

 

 

Note 2 – Securities

 

Securities are classified as available for sale (AFS). AFS securities may be sold if needed for liquidity, asset liability management, or other reasons. AFS securities are reported at fair value, with unrealized gains or losses included as a separate component of equity, net of tax.

 

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

 

 

 

 

 

Sales and calls of securities were as follows:

 

 

 

The amortized cost and fair value of our 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. 

 

 

                                                                                              

Securities pledged at June 30, 2019 and December 31, 2018 had carrying values of approximately $69.9 million and $64.4 million, respectively, and were pledged to secure public deposits.

 

At June 30, 2019 and December 31, 2018, the Bank held securities issued by the Commonwealth of Kentucky or Kentucky municipalities having a book value of $14.9 million. At June 30, 2019 and December 31, 2018, 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 Bank owns Collateralized Loan Obligations (CLOs), which are debt securities secured by professionally managed portfolios of senior-secured loans to corporations. CLO managers are typically large non-bank financial institutions or banks and are typically $300 million to $1 billion in size, contain one hundred or more loans, have five to six credit tranches ranging from AAA, AA, A, BBB, BB, B and equity tranche. Interest and principal are paid first to the AAA tranche then to the next lower rated tranche. Losses are borne first by the equity tranche then by the subsequently higher rated tranche. CLOs may be less liquid than government securities from time to time and volatility in the CLO market may cause the value of these investments to decline.

 

The market value of CLOs may be affected by, among other things, changes in composition of the underlying loans, changes in the cash flows from the underlying loans, defaults and recoveries on the underlying loans, capital gains and losses on the underlying loans, and prepayments on the underlying loans.

 

At June 30, 2019, $33.0 million and $16.7 million of our CLOs were AA and A rated, respectively. There were no CLOs rated below A and none of the CLOs were subject to ratings downgrade in the six months ended June 30, 2019. All of our CLOs are floating rate, with rates set on a quarterly basis at three month LIBOR plus a spread.

 

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 June 30, 2019, management does not believe any securities in the portfolio with unrealized losses should be classified as other than temporarily impaired.

 

 

Securities with unrealized losses at June 30, 2019 and December 31, 2018, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position, are as follows:

 

 

 

 

Note 3 – Loans

 

Loans net of unearned income, deferred loan origination costs, and net premiums on acquired loans by class were as follows:

 

 

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended June 30, 2019 and 2018:

 

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the six months ended June 30, 2019 and 2018: 

 

 

 

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, 2019:

 

 

 

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, 2018:

 

 

 

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, 2019 and December 31, 2018 and for the three and six months ended June 30, 2019 and 2018:

 

 

 

 

Cash basis income recognized for the three and six months ended June 30, 2019 was $30,000 and $60,000, respectively, compared to $111,000 and $317,000 for the three and six months ended June 30, 2018, 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 may 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 June 30, 2019 and December 31, 2018:

 

 

 

 

At June 30, 2019 and December 31, 2018, 100% of the Company’s TDRs were performing according to their modified terms. The Company allocated $157,000 and $168,000 in reserves to borrowers whose loan terms have been modified in TDRs as of June 30, 2019, and December 31, 2018, respectively. The Company has committed to lend no additional amounts as of June 30, 2019 and December 31, 2018 to borrowers with outstanding loans classified as TDRs.

 

No TDR loan modifications occurred during the three or six months ended June 30, 2019 or June 30, 2018. During the first six months of 2019 and 2018, 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.

 

 

Non-performing Loans

 

Non-performing loans include impaired loans and smaller balance homogeneous loans, such as residential mortgage and consumer loans, that are collectively evaluated for impairment. The following table presents the recorded investment in nonaccrual and loans past due 90 days and still on accrual by class of loan as of June 30, 2019, and December 31, 2018: 

 

 

 

The following table presents the aging of the recorded investment in past due loans as of June 30, 2019 and December 31, 2018:

 

 

 

 

 

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. Borrower relationships in excess of $500,000 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 or may experience a potentially adverse development which necessitates increased monitoring.

 

Special Mention – Loans classified as special mention do not have all of the characteristics of substandard or doubtful loans. They have one or more deficiencies which warrant special attention and which corrective action, such as accelerated collection practices, may remedy.

 

Substandard – Loans classified as substandard are those loans with clear and defined weaknesses such as a highly leveraged position, unfavorable financial ratios, uncertain repayment sources or poor financial condition which may jeopardize the repayment of the debt as contractually agreed. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

 

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

 

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be “Pass” rated loans. As of June 30, 2019, and December 31, 2018, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows: