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LIMESTONE BANCORP, INC. - Quarter Report: 2020 September (Form 10-Q)

lmst20200930_10q.htm
 

 

 

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


 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 September 30, 2020

 

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)

 


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 (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 ☐

 

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.

 

6,500,157 Common Shares and 1,000,000 Non-Voting Common Shares were outstanding at October 30, 2020.

 

 

 


 

 

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

48

ITEM 4.

CONTROLS AND PROCEDURES

48

  

  

  

PART II –

OTHER INFORMATION

  

ITEM 1.

LEGAL PROCEEDINGS

49

ITEM 1A.

RISK FACTORS

49

ITEM 2.

UNREGISTERED SALES ON EQUITY SECURITIES AND USE OF PROCEEDS

49

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

49

ITEM 4.

MINE SAFETY DISCLOSURES

50

ITEM 5.

OTHER INFORMATION

50

ITEM 6.

EXHIBITS

50

 

 

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 September 30, 2020 and December 31, 2019

Unaudited Consolidated Statements of Income for the three and nine months ended September 30, 2020 and 2019

Unaudited Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2020 and 2019

Unaudited Consolidated Statement of Changes in Stockholders’ Equity for the three and nine months ended September 30, 2020 and 2019

Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019

Notes to Unaudited Consolidated Financial Statements

 

 

 

LIMESTONE BANCORP, INC.

Unaudited Consolidated Balance Sheets

(dollars in thousands except share data)

 

 

  

September 30,

2020

  

December 31,

2019

 

Assets

        

Cash and due from banks

 $7,593  $8,241 

Interest bearing deposits in banks

  24,358   21,962 

Cash and cash equivalents

  31,951   30,203 

Securities available for sale

  203,544   209,000 

Loans, net of allowance of $11,481 and $8,376, respectively

  962,987   917,895 

Premises and equipment, net

  18,572   19,658 

Premises held for sale

  1,110   900 

Other real estate owned

  1,625   3,225 

Federal Home Loan Bank stock

  5,962   6,237 

Bank owned life insurance

  23,347   16,037 

Deferred taxes, net

  26,540   27,765 

Goodwill

  6,252   6,252 

Other intangible assets, net

  2,308   2,500 

Accrued interest receivable and other assets

  7,426   6,107 

Total assets

 $1,291,624  $1,245,779 
         

Liabilities and Stockholders’ Equity

        

Deposits

        

Non-interest bearing

 $217,675  $187,551 

Interest bearing

  876,714   839,424 

Total deposits

  1,094,389   1,026,975 

Federal Home Loan Bank advances

  30,634   61,389 

Accrued interest payable and other liabilities

  8,315   8,665 

Junior subordinated debentures

  21,000   21,000 

Subordinated capital notes

  25,000   17,000 

Senior debt

     5,000 

Total liabilities

  1,179,338   1,140,029 

Commitments and contingent liabilities (Note 15)

      

Stockholders’ equity

        

Common stock, no par, 39,000,000 shares authorized, 6,499,183 and 6,251,975 voting, and 1,000,000 and 1,220,000 non-voting issued and outstanding, respectively

  140,639   140,639 

Additional paid-in capital

  24,831   24,508 

Retained deficit

  (49,795

)

  (55,683

)

Accumulated other comprehensive loss

  (3,389

)

  (3,714

)

Total stockholders' equity

  112,286   105,750 

Total liabilities and stockholders’ equity

 $1,291,624  $1,245,779 

 

See accompanying notes to unaudited consolidated financial statements.

 

 

 

LIMESTONE BANCORP, INC.

Unaudited Consolidated Statements of Income

(dollars in thousands, except per share data)

 

 

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
   

2020

   

2019

   

2020

   

2019

 
Interest income                                

Loans, including fees

  $ 10,805     $ 10,671     $ 33,772     $ 31,390  

Taxable securities

    1,139       1,553       3,913       4,734  

Tax exempt securities

    108       76       255       257  

Interest-bearing deposits and other

    42       185       207       666  
      12,094       12,485       38,147       37,047  

Interest expense

                               

Deposits

    1,627       3,105       6,526       8,657  

Federal Home Loan Bank advances

    39       132       332       668  

Junior subordinated debentures

    138       251       525       772  

Subordinated capital notes

    335       190       830       190  

Senior debt

    12       77       119       271  
      2,151       3,755       8,332       10,558  

Net interest income

    9,943       8,730       29,815       26,489  

Provision for loan losses

    1,350             3,500        

Net interest income after provision for loan losses

    8,593       8,730       26,315       26,489  
                                 

Non-interest income

                               

Service charges on deposit accounts

    565       633       1,674       1,700  

Bank card interchange fees

    881       623       2,494       1,727  

Income from bank owned life insurance

    113       97       325       314  

Net loss on sales and calls of investment securities

                (5

)

    (5

)

Other

    183       181       579       528  
      1,742       1,534       5,067       4,264  

Non-interest expense

                               

Salaries and employee benefits

    4,413       4,202       13,584       12,032  

Occupancy and equipment

    1,008       880       2,990       2,632  

Professional fees

    261       254       704       598  

Marketing expense

    134       251       452       690  

FDIC Insurance

    81             148       211  

Data processing expense

    382       315       1,121       943  

State franchise and deposit tax

    360       315       1,080       945  

Deposit account related expense

    487       300       1,398       891  

Other real estate owned expense

    20       25       58       333  

Litigation and loan collection expense

    54       32       178       112  

Communications expense

    201       193       666       572  

Insurance expense

    102       109       316       335  

Postage and delivery

    156       129       476       404  

Other

    420       446       1,379       1,258  
      8,079       7,451       24,550       21,956  

Income before income taxes

    2,256       2,813       6,832       8,797  

Income tax expense

    190       531       944       43  

Net income

    2,066       2,282       5,888       8,754  

Basic and diluted income per common share

  $ 0.28     $ 0.31     $ 0.79     $ 1.17  

 

See accompanying notes to unaudited consolidated financial statements.

 

 

 

LIMESTONE BANCORP, INC.

Unaudited Consolidated Statements of Comprehensive Income

(in thousands)

                                              

 

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
   

2020

   

2019

   

2020

   

2019

 

Net income

  $ 2,066     $ 2,282     $ 5,888     $ 8,754  

Other comprehensive income (loss):

                               

Unrealized gain on securities:

                               

Unrealized gain arising during the period

    1,300       588       428       4,465  

Less reclassification adjustment for gains (losses) included in net income

                (5

)

    (5

)

Net unrealized gain recognized in comprehensive income

    1,300       588       433       4,470  

Tax effect

    (324

)

    (146

)

    (108

)

    (1,035

)

Other comprehensive income

    976       442       325       3,435  
                                 

Comprehensive income

  $ 3,042     $ 2,724     $ 6,213     $ 12,189  

 

See accompanying notes to unaudited consolidated financial statements.

 

 

 

LIMESTONE BANCORP, INC.

Unaudited Consolidated Statements of Changes in Stockholders’ Equity

For Three and Nine Months Ended September 30, 2020 and 2019

(Dollar amounts in thousands except share and per share data)

 

   

 

Shares

    Amount  
    Common     Common  
   

Common

   

Non-Voting Common

   

Total

Common

   

Common and

Non-Voting Common

   

Additional

Paid-In Capital

   

 

 

Retained Deficit

   

Accumulated Other Comprehensive Loss

   

Total

 
                                                                 

Balances, January 1, 2020

    6,251,975       1,220,000       7,471,975     $ 140,639     $ 24,508     $ (55,683

)

  $ (3,714

)

  $ 105,750  

Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations upon award

    17,330             17,330             (37

)

                (37

)

Forfeited unvested stock

                                               

Stock-based compensation expense

                            106                   106  

Net income

                                  1,840             1,840  

Net change in accumulated other comprehensive loss, net of taxes

                                        (3,148

)

    (3,148

)

Balances, March 31, 2020

    6,269,305       1,220,000       7,489,305     $ 140,639     $ 24,577     $ (53,843

)

  $ (6,862

)

  $ 104,511  

Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations upon award

    (3,433

)

          (3,433

)

          (38

)

                (38

)

Forfeited unvested stock

                                               

Stock-based compensation expense

                            104                   104  

Net income

                                  1,982             1,982  

Net change in accumulated other comprehensive income, net of taxes

                                        2,497       2,497  

Balances, June 30, 2020

    6,265,872       1,220,000       7,485,872     $ 140,639     $ 24,643     $ (51,861

)

  $ (4,365

)

  $ 109,056  

Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations upon award

    13,377             13,377                                

Forfeited unvested stock

    (66

)

          (66

)

                             

Stock-based compensation expense

                            188                   188  

Non-voting shares converted to voting

    220,000       (220,000

)

                                   

Net income

                                  2,066             2,066  

Net change in accumulated other comprehensive income, net of taxes

                                        976       976  

Balances, September 30, 2020

    6,499,183       1,000,000       7,499,183     $ 140,639     $ 24,831     $ (49,795

)

  $ (3,389

)

  $ 112,286  

 

See accompanying notes to unaudited consolidated financial statements.

 

 

LIMESTONE BANCORP, INC.

Unaudited Consolidated Statements of Changes in Stockholders’ Equity

For Three and Nine Months Ended September 30, 2020 and 2019

(Dollar amounts in thousands except share and per share data)

 

   

 

Shares

    Amount  
    Common     Common  
   

Common

   

Non-Voting Common

   

Total

Common

   

Common and

Non-Voting Common

   

Additional

Paid-In Capital

   

 

 

Retained Deficit

   

Accumulated Other Comprehensive 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  

Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations upon award

    13,750             13,750                                

Forfeited unvested stock

                                               

Stock-based compensation expense

                            181                   181  

Net income

                                  2,282             2,282  

Net change in accumulated other comprehensive income, net of taxes

                                        442       442  

Balances, September 30, 2019

    6,251,582       1,220,000       7,471,582     $ 140,639     $ 24,328     $ (57,447

)

  $ (3,193

)

  $ 104,327  

 

See accompanying notes to unaudited consolidated financial statements.

 

 

 

LIMESTONE BANCORP, INC.

Unaudited Consolidated Statements of Cash Flows

For Nine Months Ended September 30, 2020 and 2019

(dollars in thousands)

 

   

2020

   

2019

 

Cash flows from operating activities

               

Net income

  $ 5,888     $ 8,754  

Adjustments to reconcile net income to net cash from operating activities

               

Depreciation and amortization

    1,760       1,310  

Provision for loan losses

    3,500        

Net amortization on securities

    500       530  

Stock-based compensation expense

    398       356  

Deferred taxes, net

    1,117       215  

Net write-down of other real estate owned

          260  

Net gain on sales of premises and equipment

          (1

)

Net realized loss on sales and calls of investment securities

    5       5  

Net write-down on premises held for sale

    100       115  

Increase in cash surrender value of life insurance, net of premium expense

    (310

)

    (300

)

Amortization of operating lease right-of-use assets

    562       184  

Net change in accrued interest receivable and other assets

    (1,319

)

    (987

)

Net change in accrued interest payable and other liabilities

    (350

)

    (1,349

)

Net cash from operating activities

    11,851       9,092  
                 

Cash flows from investing activities

               

Purchases of available for sale securities

    (28,931

)

    (14,894

)

Proceeds from sales and calls of available for sale securities

    8,530       3,452  

Proceeds from maturities and prepayments of available for sale securities

    25,785       13,190  

Purchases of Federal Home Loan Bank stock

    (600

)

     

Proceeds from mandatory redemptions of Federal Home Loan Bank stock

    875       766  

Proceeds from sale of other real estate owned

    1,600        

Net change in loans

    (49,362

)

    (38,986

)

Purchases of premises and equipment

    (584

)

    (744

)

Proceeds from sale of premises and equipment

          1  

Purchase of bank owned life insurance

    (7,000 )      

Net cash from investing activities

    (49,687

)

    (37,215

)

                 

Cash flows from financing activities

               

Net change in deposits

    67,414       29,203  

Repayment of Federal Home Loan Bank advances

    (135,755

)

    (105,119

)

Advances from Federal Home Loan Bank

    105,000       115,000  

Proceeds from issuance of subordinated capital note

    8,000       17,000  

Repayment of senior debt

    (5,000

)

    (5,000

)

Common shares withheld for taxes

    (75

)

    (315

)

Net cash from financing activities

    39,584       50,769  

Net change in cash and cash equivalents

    1,748       22,646  

Beginning cash and cash equivalents

    30,203       35,361  

Ending cash and cash equivalents

  $ 31,951     $ 58,007  
                 

Supplemental cash flow information:

               

Interest paid

  $ 8,924     $ 10,364  

Income tax refund

    346        

Supplemental non-cash disclosure:

               

Transfer from loans to other real estate

           

Transfer from premises and equipment to premises held for sale

    310        

Financed sales of other real estate owned

    1,360        

Initial recognition of right-of-use lease assets

          507  

 

See accompanying notes to unaudited consolidated financial statements.

 

 

LIMESTONE BANCORP, INC.

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). 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 nine months ended September 30, 2020 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, 2019 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 negatively impacted the global economy, disrupted global supply chains, created significant volatility and disruption in financial markets, and increased unemployment levels. In addition, the pandemic has resulted in temporary closures of many businesses and the institution of social distancing and sheltering in place requirements in many states and communities, including those in markets in which the Company is located or does business.

 

The extent to which the COVID-19 pandemic impacts the Company’s business, liquidity, asset valuations, results of operations, and financial condition, as well as its regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic. Moreover, the effects of the COVID-19 pandemic may have a material adverse effect on all or a combination of valuation impairments on the Company’s intangible assets, investments, loans, or deferred tax assets.

 

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 and held-to-maturity debt securities, are required to be presented at the net amount expected to be collected. The measurement of expected credit losses is to be based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This measurement will take place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs significantly from the “incurred loss” model required under current GAAP, which delays recognition until it is probable a loss has been incurred. The change could materially affect how the allowance for loan losses is determined. The impact of CECL model implementation is being evaluated, but it is expected that a one-time cumulative-effect adjustment to the allowance for loan losses will be recognized in retained earnings on the consolidated balance sheet as of the beginning of the first reporting period in which the new standard is effective, as is consistent with regulatory expectations set forth in interagency guidance. In December 2018, the OCC, The Board of Governors of the Federal Reserve System, and the FDIC approved a final rule to address changes to the credit loss accounting under GAAP, including banking organizations’ implementation of CECL. The final rule provides banking organizations the option to phase in over a three-year period the day-one adverse effects on regulatory capital that may result from adoption of the new accounting standard. In October 2019, the FASB voted to delay implementation for smaller reporting companies, private companies, and not-for-profit entities. The Company currently qualifies as a smaller reporting company and, as such, will be required to implement CECL for fiscal year and interim periods beginning after December 15, 2022.

 

 

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.

 

10

 

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

 

  

Amortized

Cost

  

Gross Unrealized

Gains

  

Gross Unrealized

Losses

  

Fair Value

 
  

(in thousands)

 

September 30, 2020

                

Available for sale

                

U.S. Government and federal agency

 $19,158  $931  $  $20,089 

Agency mortgage-backed: residential

  76,388   2,974   (13

)

  79,349 

Collateralized loan obligations

  44,730      (1,905

)

  42,825 

State and municipal

  34,391   1,076   (32

)

  35,435 

Corporate bonds

  27,116   373   (1,643

)

  25,846 

Total available for sale

 $201,783  $5,354  $(3,593

)

 $203,544 

 

 

 

 

 

Amortized

Cost

  

Gross Unrealized

Gains

  

Gross Unrealized

Losses

  

Fair Value

 
December 31, 2019                

Available for sale

                

U.S. Government and federal agency

 $22,281  $196  $(147

)

 $22,330 

Agency mortgage-backed: residential

  91,269   1,186   (255

)

  92,200 

Collateralized loan obligations

  49,831      (412

)

  49,419 

State and municipal

  27,819   550   (3

)

  28,366 

Corporate bonds

  16,472   213      16,685 

Total available for sale

 $207,672  $2,145  $(817

)

 $209,000 

 

 

Sales and calls of securities were as follows:

 

  

Three Months Ended

September 30,

  

Nine Months Ended

September 30,

 
  

2020

  

2019

  

2020

  

2019

 
   (in thousands)   (in thousands) 

Proceeds

 $  $1,000  $8,530  $3,452 

Gross gains

           1 

Gross losses

        5   6 

 

 

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, 2020

 
  

Amortized

Cost

  

Fair

Value

 
  

(in thousands)

 

Maturity

        

Available for sale

        

Within one year

 $19,534  $18,381 

One to five years

  36,469   37,996 

Five to ten years

  46,194   45,894 

Beyond ten years

  23,198   21,924 

Agency mortgage-backed: residential

  76,388   79,349 

Total

 $201,783  $203,544 

 

                                                                                

Securities pledged at September 30, 2020 and December 31, 2019 had carrying values of approximately $73.6 million and $75.8 million, respectively, and were pledged to secure public deposits.

 

11

 

At September 30, 2020 and December 31, 2019, the Bank held securities issued by the Commonwealth of Kentucky or Kentucky municipalities having a book value of $22.3 million and $14.5 million, respectively. At September 30, 2020 and December 31, 2019, 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. 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, 2020, $27.0 million, $13.5 million, and $2.4 million of the Bank’s CLOs were AA, A, and BBB rated, respectively. There was one CLO rated below A at BBB, which was downgraded during the third quarter of 2020. All of the Bank’s CLOs are floating rate, with rates set on a quarterly basis at three-month LIBOR plus a spread. Stress testing was completed on each security in the CLO portfolio as of September 30, 2020. 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 fair value of the Bank’s corporate bond portfolio has also been impacted by market disruption and declining rates. The corporate bond portfolio consists of 12 subordinated debt securities of U.S. banks and bank holding companies with maturities ranging from 2024 to 2037. The securities are either fixed for five years converting to floating at an index over LIBOR or floating at an index over LIBOR from inception. Management regularly monitors the financial condition of these corporate issuers by reviewing their regulatory and public filings.

 

The 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, 2020, 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 September 30, 2020 and December 31, 2019, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position, are as follows:

 

 

  

Less than 12 Months

  

12 Months or More

  

Total

 

Description of Securities

 

Fair

Value

  

Unrealized

Loss

  

Fair

Value

  

Unrealized

Loss

  

Fair

Value

  

Unrealized

Loss

 
  

(in thousands)

 

September 30, 2020

                        

Available for sale

                        

U.S. Government and federal agency

 $  $  $  $  $  $ 

Agency mortgage-backed: residential

  3,567   (13

)

        3,567   (13

)

Collateralized loan obligations

  11,102   (443

)

  31,723   (1,462

)

  42,825   (1,905

)

State and municipal

  2,436   (32

)

        2,436   (32

)

Corporate bonds

  13,710   (1,643

)

        13,710   (1,643

)

Total temporarily impaired

 $30,815  $(2,131

)

 $31,723  $(1,462

)

 $62,538  $(3,593

)

 

12

 
                         

December 31, 2019

                        

Available for sale

                        

U.S. Government and federal agency

 $12,567  $(147

)

 $  $  $12,567  $(147

)

Agency mortgage-backed: residential

  18,457   (97

)

  10,665   (158

)

  29,122   (255

)

Collateralized loan obligations

  9,539   (46

)

  35,336   (366

)

  44,875   (412

)

State and municipal

  911   (3

)

        911   (3

)

Corporate bonds

                  

Total temporarily impaired

 $41,474  $(293

)

 $46,001  $(524

)

 $87,475  $(817

)

 

 

Note 3 – Loans

 

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

 

 

  

September 30,

  

December 31,

 
  

2020

  

2019

 
  

(in thousands)

 

Commercial (1)

 $218,762  $145,551 

Commercial Real Estate:

        

Construction

  83,977   64,911 

Farmland

  69,017   79,118 

Nonfarm nonresidential

  266,477   255,459 

Residential Real Estate:

        

Multi-family

  63,757   70,950 

1-4 Family

  194,829   226,629 

Consumer

  35,289   47,790 

Agriculture

  41,749   35,064 

Other

  611   799 

Subtotal

  974,468   926,271 

Less: Allowance for loan losses

  (11,481

)

  (8,376

)

Loans, net

 $962,987  $917,895 

       

(1)

Includes PPP loans of $42.3 million at September 30, 2020.

 

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended September 30, 2020 and 2019:

 

  

Commercial

  

Commercial

Real Estate

  

Residential

Real Estate

  

Consumer

  

Agriculture

  

Other

  

Total

 
  

(in thousands)

 

September 30, 2020:

                            

Beginning balance

 $2,532  $4,494  $2,146  $581  $472  $3  $10,228 

Provision (negative provision)

  494   665   13   104   76   (2

)

  1,350 

Loans charged off

        (17

)

  (131

)

  (2

)

     (150

)

Recoveries

  5   6   13   13   14   2   53 

Ending balance

 $3,031  $5,165  $2,155  $567  $560  $3  $11,481 
                             
                             

September 30, 2019:

                            

Beginning balance

 $1,492  $4,453  $2,327  $153  $405  $2  $8,832 

Provision (negative provision)

  (68

)

  341   (686

)

  354   60   (1

)

   

Loans charged off

  (10

)

  (32

)

  (73

)

  (184

)

        (299

)

Recoveries

  6   7   345   9   3   1   371 

Ending balance

 $1,420  $4,769  $1,913  $332  $468  $2  $8,904 

 

13

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the nine months ended September 30, 2020 and 2019:

 

  

Commercial

  

Commercial

Real Estate

  

Residential

Real Estate

  

Consumer

  

Agriculture

  

Other

  

Total

 
  

(in thousands)

 

September 30, 2020:

                            

Beginning balance

 $1,710  $4,080  $1,743  $485  $355  $3  $8,376 

Provision (negative provision)

  1,337   1,016   422   503   228   (6

)

  3,500 

Loans charged off

  (32

)

  (57

)

  (99

)

  (444

)

  (46

)

     (678

)

Recoveries

  16   126   89   23   23   6   283 

Ending balance

 $3,031  $5,165  $2,155  $567  $560  $3  $11,481 
                             
                             

September 30, 2019:

                            

Beginning balance

 $1,299  $4,676  $2,452  $130  $321  $2  $8,880 

Provision (negative provision)

  30   130   (838

)

  531   148   (1

)

   

Loans charged off

  (10

)

  (47

)

  (190

)

  (398

)

  (4

)

     (649

)

Recoveries

  101   10   489   69   3   1   673 

Ending balance

 $1,420  $4,769  $1,913  $332  $468  $2  $8,904 

 

 

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, 2020:

 

  

Commercial

  

Commercial

Real Estate

  

Residential

Real Estate

  

Consumer

  

Agriculture

  

Other

  

Total

 
  

(in thousands)

 

Allowance for loan losses:

                            

Ending allowance balance attributable to loans:

                            

Individually evaluated for impairment

 $  $170  $1  $  $  $  $171 

Collectively evaluated for impairment

  3,031   4,995   2,154   567   560   3   11,310 

Total ending allowance balance

 $3,031  $5,165  $2,155  $567  $560  $3  $11,481 
                             

Loans:

                            

Loans individually evaluated for impairment

 $99  $1,273  $1,165  $18  $1  $  $2,556 

Loans collectively evaluated for impairment

  218,663   418,198   257,421   35,271   41,748   611   971,912 

Total ending loans balance

 $218,762  $419,471  $258,586  $35,289  $41,749  $611  $974,468 

 

14

 

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method as of December 31, 2019:

 

 

  

Commercial

  

Commercial

Real Estate

  

Residential

Real Estate

  

Consumer

  

Agriculture

  

Other

  

Total

 
  

(in thousands)

 

Allowance for loan losses:

                            

Ending allowance balance attributable to loans:

                            

Individually evaluated for impairment

 $3  $37  $2  $  $  $  $42 

Collectively evaluated for impairment

  1,707   4,043   1,741   485   355   3   8,334 

Total ending allowance balance

 $1,710  $4,080  $1,743  $485  $355  $3  $8,376 
                             
                             

 

Loans:

                            

Loans individually evaluated for impairment

 $74  $1,064  $892  $98  $42  $  $2,170 

Loans collectively evaluated for impairment

  145,477   398,424   296,687   47,692   35,022   799   924,101 

Total ending loans balance

 $145,551  $399,488  $297,579  $47,790  $35,064  $799  $926,271 

 

Impaired Loans

 

Impaired loans include restructured loans and loans on nonaccrual or classified as doubtful, whereby collection of the total amount is improbable, or loss, whereby all or a portion of the loan has been written off or a specific allowance for loss has been provided.

 

The following tables present information related to loans individually evaluated for impairment by class of loans as of September 30, 2020 and December 31, 2019 and for the three and nine months ended September 30, 2020 and 2019:

 

  

As of September 30, 2020

  

Three Months Ended

September 30, 2020

  

Nine Months Ended

September 30, 2020

 
  

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

 $230  $99  $  $101  $  $103  $ 

Commercial real estate:

                            

Construction

                     

Farmland

  418   290      292   1   294   14 

Nonfarm nonresidential

  1,133   562      494   13   489   31 

Residential real estate:

                            

Multi-family

                     

1-4 Family

  2,025   1,059      963   10   879   64 

Consumer

  288   18      16   2   68   3 

Agriculture

  306   1            11    

Other

                     

Subtotal

  4,400   2,029      1,866   26   1,844   112 

With An Allowance Recorded:

                            

Commercial

                 6    

Commercial real estate:

                            

Construction

                     

Farmland

  421   421   170   282      247   4 

Nonfarm nonresidential

           75      38    

Residential real estate:

                            

Multi-family

                     

1-4 Family

  106   106   1   91   4   100   7 

Consumer

                     

Agriculture

                     

Other

                     

Subtotal

  527   527   171   448   4   391   11 

Total

 $4,927  $2,556  $171  $2,314  $30  $2,235  $123 

 

15

 
  

As of December 31, 2019

  

Three Months Ended

September 30, 2019

  

Nine Months Ended

September 30, 2019

 
  

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

 $138  $50  $  $66  $2  $59  $2 

Commercial real estate:

                            

Construction

                     

Farmland

  380   293      202   2   150   10 

Nonfarm nonresidential

  1,057   489      237   2   247   9 

Residential real estate:

                            

Multi-family

                     

1-4 Family

  1,679   745      1,588   132   1,566   182 

Consumer

  309   98      76   2   45   4 

Agriculture

  304   42      65      49    

Other

                     

Subtotal

  3,867   1,717      2,234   140   2,116   207 

With An Allowance Recorded:

                            

Commercial

  24   24   3   26   1   13   2 

Commercial real estate:

                            

Construction

                     

Farmland

  282   282   37   292   7   225   7 

Nonfarm nonresidential

                     

Residential real estate:

                            

Multi-family

                     

1-4 Family

  183   147   2   356   7   537   28 

Consumer

                     

Agriculture

                     

Other

                     

Subtotal

  489   453   42   674   15   775   37 

Total

 $4,356  $2,170  $42  $2,908  $155  $2,891  $244 

 

Cash basis income recognized on impaired loans for the three and nine months ended September 30, 2020 was $19,000 and $87,000, respectively, compared to $137,000 and $197,000 for the three and nine months ended September 30, 2019, respectively.

 

Troubled Debt Restructuring

 

A troubled debt restructuring (TDR) occurs when the Bank has agreed to an other than short-term 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 September 30, 2020 and December 31, 2019:

 

  

TDRs

Performing to

Modified Terms

  

TDRs Not

Performing to

Modified Terms

  

Total

TDRs

 
  

(in thousands)

 

September 30, 2020

            

Commercial Real Estate:

            

Nonfarm nonresidential

 $382  $  $382 

Residential Real Estate:

            

1-4 Family

  107      107 

Total TDRs

 $489  $  $489 

 

16

 
  

TDRs

Performing to

Modified Terms

  

TDRs Not

Performing to

Modified Terms

  

Total

TDRs

 
  

(in thousands)

 

December 31, 2019

            

Commercial Real Estate:

            

Nonfarm nonresidential

 $400  $  $400 

Residential Real Estate:

            

1-4 Family

  75      75 

Total TDRs

 $475  $  $475 

 

At September 30, 2020 and December 31, 2019, 100% of the Company’s TDRs were performing according to their modified terms. The Company allocated $1,000 in reserves to borrowers whose loan terms have been modified in TDRs as of September 30, 2020 and December 31, 2019. The Company has no commitment to lend additional amounts as of September 30, 2020 and December 31, 2019 to borrowers with outstanding loans classified as TDRs. During the three and nine months ended September 30, 2020 and September 30, 2019, 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.

 

The following table presents a summary of the TDR loan modifications by portfolio segment that occurred during the three and nine months ended September 30, 2020:

 

  

TDRs

Performing to

Modified Terms

  

TDRs Not

Performing to

Modified Terms

  

Total

TDRs

 
  

(in thousands)

 

September 30, 2020

            

Residential Real Estate:

            

1-4 Family

  33      33 

Total TDRs

 $33  $  $33 

 

As of September 30, 2020, 100% of the Company’s TDRs that occurred during 2020 were performing in accordance with their modified terms. The Company has not allocated any reserves to customers whose loan terms have been modified during 2020. For modifications occurring during the three and nine months ended September 30, 2020, the post-modification balances approximate the pre-modification balances. There were no TDR loan modifications during the three or nine months ended September 30, 2019.

 

Management periodically reviews renewals and modifications of previously identified TDRs, for which there was no principal forgiveness, to consider if it is appropriate to remove the TDR classification. If the borrower is no longer experiencing financial difficulty and the renewal/modification did not contain a concessionary interest rate or other concessionary terms, management considers the potential removal of the TDR classification. If deemed appropriate based upon current underwriting, the TDR classification is removed as the borrower has complied with the terms of the loan at the date of renewal/modification and there was a reasonable expectation that the borrower would continue to comply with the terms of the loan 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.

 

Non-TDR Loan Modifications due to COVID-19

 

The Company has elected to account for eligible loan modifications under Section 4013 of the CARES Act. To be an eligible loan under Section 4013 of the CARES Act, a loan modification must be (1) related to the COVID 19 pandemic; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020 and the earlier of (A) 60 days after the date of termination of the national emergency declared by the President on March 13, 2020 concerning the COVID-19 outbreak (the “national emergency”) or (B) December 31, 2020. Eligible loan modifications are not required to be classified as TDRs and will not be reported as past due provided that they are performing in accordance with the modified terms. Interest income will continue to be recognized in accordance with GAAP unless the loan is placed on nonaccrual status.

 

17

 

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 September 30, 2020, and December 31, 2019:

 

 

  

Nonaccrual

  

Loans Past Due 90 Days

And Over Still Accruing

 
  

September 30,

2020

  

December 31,

2019

  

September 30,

2020

  

December 31,

2019

 
  

(in thousands)

 
                 

Commercial

 $99  $50  $  $ 

Commercial Real Estate:

                

Construction

            

Farmland

  711   431       

Nonfarm nonresidential

  180   90       

Residential Real Estate:

                

Multi-family

            

1-4 Family

  1,029   817       

Consumer

  18   98       

Agriculture

  1   42       

Other

            

Total

 $2,038  $1,528  $  $ 

 

 

The following table presents the aging of the recorded investment in past due loans as of September 30, 2020 and December 31, 2019:

 

 

  

30 – 59

Days

Past Due

  

60 – 89

Days

Past Due

  

90 Days

And Over

Past Due

  

 

 

Nonaccrual

  

Total

Past Due

And

Nonaccrual

 
  

(in thousands)

 

September 30, 2020

                    

Commercial

 $12  $  $  $99  $111 

Commercial Real Estate:

                    

Construction

               

Farmland

  76         711   787 

Nonfarm nonresidential

     39      180   219 

Residential Real Estate:

                    

Multi-family

               

1-4 Family

  365   196      1,029   1,590 

Consumer

  29   30      18   77 

Agriculture

           1   1 

Other

               

Total

 $482  $265  $  $2,038  $2,785 

 

18

 
  

30 – 59

Days

Past Due

  

60 – 89

Days

Past Due

  

90 Days

And Over

Past Due

  

 

 

Nonaccrual

  

Total

Past Due

And

Nonaccrual

 
                     
  

(in thousands)

 

December 31, 2019

                    

Commercial

 $14  $3  $  $50  $67 

Commercial Real Estate:

                    

Construction

               

Farmland

  274         431   705 

Nonfarm nonresidential

  206         90   296 

Residential Real Estate:

                    

Multi-family

               

1-4 Family

  1,162   503      817   2,482 

Consumer

  91   164      98   353 

Agriculture

           42   42 

Other

               

Total

 $1,747  $670  $  $1,528  $3,945 

 

Credit Quality Indicators 

 

Management categorizes all loans into risk categories at origination based upon original underwriting. Thereafter, management categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends. 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.

 

19

 

As of September 30, 2020, and December 31, 2019, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

 

  

Pass

  

Watch

  

Special

Mention

  

Substandard

  

Doubtful

  

Total

 
  

(in thousands)

 

September 30, 2020

                        

Commercial

 $201,009  $3,568  $  $14,185  $  $218,762 

Commercial Real Estate:

                        

Construction

  83,977               83,977 

Farmland

  61,919   5,617   273   1,208      69,017 

Nonfarm nonresidential

  258,116   4,578      3,783      266,477 

Residential Real Estate:

                        

Multi-family

  53,309   10,448            63,757 

1-4 Family

  188,519   3,474      2,836      194,829 

Consumer

  35,236   6      47      35,289 

Agriculture

  41,199   91   91   368      41,749 

Other

  611               611 

Total

 $923,895  $27,782  $364  $22,427  $  $974,468 

 

 

  

Pass

  

Watch

  

Special

Mention

  

Substandard

  

Doubtful

  

Total

 
                         
  

(in thousands)

 

December 31, 2019

                        

Commercial

 $130,312  $11,280  $  $3,959  $  $145,551 

Commercial Real Estate:

                        

Construction

  64,911               64,911 

Farmland

  71,503   6,663      952      79,118 

Nonfarm nonresidential

  245,995   6,986      2,478      255,459 

Residential Real Estate:

                        

Multi-family

  70,950               70,950 

1-4 Family

  221,727   2,420      2,482      226,629 

Consumer

  47,657   5      128      47,790 

Agriculture

  34,853   168      43      35,064 

Other

  799               799 

Total

 $888,707  $27,522  $  $10,042  $  $926,271 

 

 

Note 4 – Leases

 

As of September 30, 2020, the Company leases real estate for six branch offices or offsite ATM machines under various operating lease agreements. The lease agreements have maturity dates ranging from 2021 to 2055, including all expected extension periods. The weighted average remaining life of the lease term for these leases was 22 years as of September 30, 2020.

 

In determining the present value of lease payments, the Bank uses the implicit lease rate when readily determinable. As most of the Bank’s leases do not provide an implicit rate, the incremental borrowing rate based on the information available at commencement date is used. The incremental borrowing rate is the 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 5.47% as of September 30, 2020.

 

Total rental expense was $133,000 and $389,000, respectively, for the three and nine months ended September 30, 2020, compared to $66,000 and $196,000, respectively, for the three and nine months ended September 30, 2019. The right-of-use asset, included in premises and equipment, and lease liability, included in other liabilities, was $2.5 million as of September 30, 2020 and $323,000 as of September 30, 2019.

 

20

 

Total estimated rental commitments for the operating leases were as follows as of September 30, 2020 (in thousands):

 

  

September 30,

2020

 
     

October – December 2020

 $128 

2021

  222 

2022

  203 

2023

  206 

2024

  205 

Thereafter

  3,720 

Total minimum lease payments

  4,684 

Discount effect of cash flows

  (2,176

)

Present value of lease liabilities

 $2,508 

 

At September 30, 2020, the Company has entered into two additional leases for new branch offices that have yet to commence. The right of use asset and lease liability for the leases yet to commence are estimated to be approximately $3.3 million and are expected to be recorded in the first quarter of 2021.

 

 

Note 5 – Other Real Estate Owned

 

Other real estate owned (OREO) is real estate acquired as a result of foreclosure or by deed in lieu of foreclosure. It is classified as real estate owned until such time as it is sold. When property is acquired as a result of foreclosure or by deed in lieu of foreclosure, it is recorded at its fair market value less estimated cost to sell. Any write-down of the property at the time of acquisition is charged to the allowance for loan losses.

 

The following table presents the major categories of OREO at the period-ends indicated: 

 

   

September 30,

2020

   

December 31,

2019

 
   

(in thousands)

 

Commercial Real Estate:

               

Construction, land development, and other land

  $ 1,625     $ 3,225  
    $ 1,625     $ 3,225  

 

Residential loans secured by 1-4 family residential properties in the process of foreclosure totaled $154,000 and $172,000 at September 30, 2020 and December 31, 2019, respectively.

 

Activity relating to OREO during the nine months ended September 30, 2020 and 2019 is as follows:

 

   

For the Nine

Months Ended

September 30,

 
   

2020

   

2019

 
   

(in thousands)

 

OREO Activity

               

OREO as of January 1

  $ 3,225     $ 3,485  

Real estate acquired

           

Valuation adjustment write-downs

          (260

)

Net gain on sales

           

Proceeds from sales of properties

    (1,600

)

     

OREO as of September 30

  $ 1,625     $ 3,225  

 

21

 

Expenses related to other real estate owned include:

 

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
   

2020

   

2019

   

2020

   

2019

 
      (in thousands)       (in thousands)  

Net gain on sales

  $     $     $     $  

Valuation adjustment write-downs

                      260  

Operating expense

    20       25       58       73  

Total

  $ 20     $ 25     $ 58     $ 333  

 

 

 

Note 6 – Goodwill and Intangible Assets

 

The following table summarizes the Company’s acquired goodwill and intangible assets as of September 30, 2020 and December 31, 2019 (in thousands):

 

   

September 30, 2020

   

December 31, 2019

 
   

Gross

Carrying

Amount

   

Accumulated Amortization

   

Gross

Carrying

Amount

   

Accumulated Amortization

 

Goodwill

  $ 6,252     $     $ 6,252     $  

Core deposit intangibles

    2,500       192       2,500        

Outstanding, ending

  $ 8,752     $ 192     $ 8,752     $  

 

The Company has $6.3 million of goodwill related to a 2019 branch acquisition transaction. Goodwill represents the excess of the total purchase price paid over the fair value of the identifiable assets acquired, net of the fair value of the liabilities assumed. Goodwill is not amortized but is evaluated for impairment on an annual basis or whenever events or changes in circumstances may indicate the carrying value of goodwill exceeds fair value and may not be recoverable.

 

Based upon current economic conditions as a result of COVID-19, management performed a qualitative goodwill impairment assessment as of September 30, 2020. After evaluating certain qualitative assessment assumptions, which are subject to risk and uncertainties, such as forecasted revenues, expenses and cash flows, current discount rates, the Company’s market capitalization, observable market transactions and multiples, changes to the regulatory environment, and the nature and amount of government support that has been and is expected to be provided in the future, management concluded it was more likely than not that the fair value of goodwill exceeds its carrying amount and thus, no impairment was identified. Goodwill is the Company’s sole intangible asset with an indefinite life.

 

The Company also has a core deposit intangible asset, which is amortized over the weighted average estimated life of the related deposits and is not estimated to have a significant residual value. During the three and nine months ended September 30, 2020, the Company recorded intangible amortization expense totaling $64,000 and $192,000, respectively.

 

Amortization expense related to the core deposit intangible for the remainder of 2020 and beyond is estimated as follows (in thousands):

 

   

September 30,

2020

 

October 2020 – December 2020

  $ 64  

2021

    256  

2022

    256  

2023

    256  

2024

    256  

Thereafter

    1,220  
    $ 2,308  

 

22

 

 

Note 7 – Deposits

 

The following table details deposits by category:

 

 

   

September 30,

2020

   

December 31,

2019

 
   

(in thousands)

 

Non-interest bearing

  $ 217,675     $ 187,551  

Interest checking

    168,735       146,038  

Money market

    174,588       160,837  

Savings

    134,962       56,015  

Certificates of deposit

    398,429       476,534  

Total

  $ 1,094,389     $ 1,026,975  

 

Time deposits of $250,000 or more were $56.8 million and $51.2 million at September 30, 2020 and December 31, 2019, respectively.

 

Scheduled maturities of total time deposits at September 30, 2020 for each of the next five years and thereafter are as follows (in thousands):

 

Year 1

  $ 303,986  

Year 2

    40,954  

Year 3

    16,327  

Year 4

    12,747  

Year 5

    23,993  

Thereafter

    422  
    $ 398,429  

 

 

 

Note 8 – Advances from the Federal Home Loan Bank

 

Advances from the Federal Home Loan Bank were as follows:

 

  

September 30,

  

December 31,

 
  

2020

  

2019

 
  

(in thousands)

 
         

Short-term advances (fixed rates 0.19%)

 $10,000  $60,000 

Long-term advances (fixed rates 0.00% to 0.77%) maturing April 2021 to February 2030

  20,634   1,389 

Total advances from the Federal Home Loan Bank

 $30,634  $61,389 

 

FHLB advances had a weighted-average rate of 0.56% at September 30, 2020 and 1.70% at December 31, 2019. Each advance is payable per terms on agreement, with a prepayment penalty. No prepayment penalties were incurred during 2020 or 2019. The advances were collateralized by approximately $137.9 million and $166.0 million of first mortgage loans, under a blanket lien arrangement at September 30, 2020 and December 31, 2019, respectively, and $42.3 million of loans originated under the SBA Payment Protection Plan at September 30, 2020. At September 30, 2020, the Bank’s additional borrowing capacity with the FHLB was $106.6 million.

 

Scheduled principal payments on the above during the next five years and thereafter (in thousands):

 

  

Advances

 

Year 1

 $10,634 

Year 2

   

Year 3

   

Year 4

   

Year 5

   

Thereafter

  20,000 
  $30,634 

 

23

 

 

Note 9Borrowings

 

Junior Subordinated Debentures – The junior subordinated debentures are redeemable at par prior to maturity at the option of the Company as defined within the trust indenture. The Company has the option to defer interest payments on the junior subordinated debentures from time to time for a period not to exceed 20 consecutive quarters. A deferral period may begin at the Company’s discretion so long as interest payments are current. The Company is prohibited from paying dividends on preferred and common shares when interest payments are in deferral. At September 30, 2020, the Company is current on all interest payments.

 

Subordinated Capital Notes – The Company’s subordinated notes mature on July 31, 2029. The notes carry interest at a fixed rate of 5.75% until July 30, 2024 and then convert to variable at three-month LIBOR plus 395 basis points until maturity. The subordinated capital notes qualify as Tier 2 regulatory capital. On July 31, 2020, the Company completed the issuance of an additional $8.0 million in subordinated notes under the July 23, 2019 indenture with the same terms and with the additional commitment by the Company to extend the optional prepayment date to July 31, 2025 so long as the additional notes qualify as Tier 2 regulatory capital. The Company used the net proceeds from the issuance of the additional notes to retire its senior debt and retained the remaining balance for general corporate purposes. The subordinated capital notes qualify as Tier 2 regulatory capital.

 

 

Note 10 – 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 LIBOR curves that are updated to incorporate loss severities, volatility, credit spread and optionality. During times when trading is more liquid, broker quotes are used (if available) to validate the model. Rating agency and industry research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into the calculations.

 

Impaired Loans: An impaired loan is evaluated at the time the loan is identified as impaired and is recorded at fair value less costs to sell. Fair value is measured based on the value of the collateral securing the loan and is classified as Level 3 in the fair value hierarchy. Fair value is determined using several methods. Generally, the fair value of real estate is determined based on appraisals by qualified licensed appraisers. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach.

 

Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. These routine adjustments are made to adjust the value of a specific property relative to comparable properties for variations in qualities such as location, size, and income production capacity relative to the subject property of the appraisal. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.

 

24

 

Management routinely applies internal discounts to the value of appraisals used in the fair value evaluation of 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 appraisal date predates a likely change in market conditions. These deductions range from 10% for routine real estate collateral to 25% for real estate that is determined to have a thin trading market or to be specialized collateral. This is in addition to estimated discounts for cost to sell of six to ten percent.

 

Management also applies discounts to the expected fair value of collateral for impaired loans where the likely resolution involves litigation or foreclosure. Resolution of this nature generally results in receiving lower values for real estate collateral in a more aggressive sales environment. Discounts ranging from 10% to 33% have been utilized in the impairment evaluations when applicable.

 

Impaired loans are evaluated quarterly for additional impairment. Management obtains updated appraisals on properties securing loans when circumstances are warranted such as at the time of renewal or when market conditions have significantly changed. This determination is made on a property-by-property basis in light of circumstances in the broader economic climate and the assessment of deterioration of real estate values in the market in which the property is located.

 

Other Real Estate Owned (OREO): OREO is evaluated at the time of acquisition and recorded at fair value as determined by independent appraisal or internal evaluation less estimated cost to sell. Quarterly evaluations of OREO for impairment are driven by property type. For smaller dollar single family homes, management consults with staff from the Bank’s special assets group as well as external realtors and appraisers. Based on these consultations, management determines asking prices for OREO properties being marketed for sale. If the internally evaluated fair value or asking price is below the recorded investment in the property, appropriate write-downs are taken.

 

For larger dollar commercial real estate properties, management obtains a new appraisal of the subject property or has staff in the special assets group evaluate the latest in-file appraisal in connection with the transfer to OREO. Management generally obtains updated appraisals within five quarters of the anniversary date of ownership unless a sale is imminent. When an asking price is lowered below the most recent appraised value, appropriate write-downs are taken.

 

Financial assets measured at fair value on a recurring basis at September 30, 2020 and December 31, 2019 are summarized below:

 

      

Fair Value Measurements at September 30, 2020 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

 $20,089  $  $20,089  $ 

Agency mortgage-backed: residential

  79,349      79,349    

Collateralized loan obligations

  42,825      42,825    

State and municipal

  35,435      35,435    

Corporate bonds

  25,846      25,846    

Total

 $203,544  $  $203,544  $ 

 

      

Fair Value Measurements at December 31, 2019 Using

 
      

(in thousands)

 

Description

 

Carrying

Value

  

Quoted Prices In

Active Markets for

Identical Assets

(Level 1)

  

Significant Other

Observable Inputs

(Level 2)

  

Significant

Unobservable

Inputs

(Level 3)

 

Available for sale securities

                

U.S. Government and federal agency

 $22,330  $  $22,330  $ 

Agency mortgage-backed: residential

  92,200      92,200    

Collateralized loan obligations

  49,419      49,419    

State and municipal

  28,366      28,366    

Corporate bonds

  16,685      16,685    

Total

 $209,000  $  $209,000  $ 

 

 

There were no transfers between Level 1 and Level 2 during 2020 or 2019.

 

25

 

Financial assets measured at fair value on a non-recurring basis are summarized below: 

 

      

Fair Value Measurements at September 30, 2020 Using

 
      

(in thousands)

 
  

Carrying

Value

  

Quoted Prices In

Active Markets for

Identical Assets

(Level 1)

  

Significant Other

Observable Inputs

(Level 2)

  

Significant

Unobservable

Inputs

(Level 3)

 

Description

                

Impaired loans:

                

Commercial real estate:

                

Farmland

 $251  $  $  $251 

Residential real estate:

                

1-4 Family

  105         105 

 

      

Fair Value Measurements at December 31, 2019 Using

 
      

(in thousands)

 
  

Carrying

Value

  

Quoted Prices In

Active Markets for

Identical Assets

(Level 1)

  

Significant Other

Observable Inputs

(Level 2)

  

Significant

Unobservable

Inputs

(Level 3)

 

Description

                

Impaired loans:

                

Commercial

 $21  $  $  $21 

Commercial real estate:

                

Farmland

  245         245 

Residential real estate:

                

1-4 Family

  145         145 

 

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $527,000 at September 30, 2020 with a valuation allowance of $171,000, resulting in $147,000 and $129,000 provision for loan losses for the three and nine months ended September 30, 2020, respectively. Impaired loans had a carrying amount of $316,000 with a valuation allowance of $33,000, resulting in no additional provision for loan losses for the three and nine months ended September 30, 2019, respectively. At December 31, 2019, impaired loans had a carrying amount of $453,000, with a valuation allowance of $42,000.

 

Carrying amount and estimated fair values of financial instruments were as follows for the periods indicated:

 

      

Fair Value Measurements at September 30, 2020 Using

 
  

Carrying

Amount

  

Level 1

  

Level 2

  

Level 3

  

Total

 
  

(in thousands)

 

Financial assets

                    

Cash and cash equivalents

 $31,951  $31,951  $  $  $31,951 

Securities available for sale

  203,544      203,544      203,544 

Federal Home Loan Bank stock

  5,962   N/A   N/A   N/A   N/A 

Loans, net

  962,987         943,495   943,495 

Accrued interest receivable

  5,351      906   4,445   5,351 

Financial liabilities

                    

Deposits

 $1,094,389  $217,675  $878,723  $  $1,096,398 

Federal Home Loan Bank advances

  30,634      30,666      30,666 

Junior subordinated debentures

  21,000         15,432   15,432 

Subordinated capital notes

  25,000         24,720   24,720 

Senior Debt

               

Accrued interest payable

  537      269   268   537 

 

26

 
      

Fair Value Measurements at December 31, 2019 Using

 
  

Carrying

Amount

  

Level 1

  

Level 2

  

Level 3

  

Total

 
  

(in thousands)

 

Financial assets

                    

Cash and cash equivalents

 $30,203  $30,203  $  $  $30,203 

Securities available for sale

  209,000      209,000      209,000 

Federal Home Loan Bank stock

  6,237   N/A   N/A   N/A   N/A 

Loans, net

  917,895         925,388   925,388 

Accrued interest receivable

  4,257      1,118   3,139   4,257 

Financial liabilities

                    

Deposits

 $1,026,975  $187,551  $839,882  $  $1,027,433 

Federal Home Loan Bank advances

  61,389      61,395      61,395 

Junior subordinated debentures

  21,000         17,466   17,466 

Subordinated capital notes

  17,000         17,003   17,003 

Senior Debt

  5,000         5,022   5,022 

Accrued interest payable

  1,129      647   482   1,129 

 

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.

 

 

Note 11 – Income Taxes

 

Deferred tax assets and liabilities were due to the following as of:

 

  

September 30,

  

December 31,

 
  

2020

  

2019

 
  

(in thousands)

 

Deferred tax assets:

        

Net operating loss carry-forward

 $22,970  $22,915 

Allowance for loan losses

  2,864   2,090 

OREO write-down

  914   2,665 

Alternative minimum tax credit carry-forward

     173 

Net assets from acquisitions

  111   228 

New market tax credit carry-forward

  208   208 

Nonaccrual loan interest

  313   303 

Accrued expenses

  102   102 

Lease liability

  626   766 

Other

  342   309 
   28,450   29,759 
         

Deferred tax liabilities:

        

FHLB stock dividends

  485   563 

Fixed assets

  73   57 

Deferred loan costs

  181   170 

Net unrealized gain on securities

  439   331 

Lease right-of-use assets

  626   766 

Other

  106   107 
   1,910   1,994 

Net deferred tax asset

 $26,540  $27,765 

 

At September 30, 2020, the Company had net federal operating loss carryforwards of $102.9 million, which will begin to expire in 2032, and state net operating loss carryforwards of $34.3 million, which begin to expire in 2025. During 2020, the $173,000 alternative minimum tax credit carryforward was refunded due to the enactment of the Coronavirus Aid Relief and Economic Security Act (“CARES Act”).

 

The Company does not have any beginning and ending unrecognized tax benefits. The Company does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next twelve months. There were no interest and penalties recorded in the income statement or accrued for the three or nine months ended September 30, 2020 or September 30, 2019 related to unrecognized tax benefits.

 

27

 

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, the Board of Directors has the discretion to exempt certain transactions and certain persons whose acquisition of securities is determined by the Board not to jeopardize the Company's deferred tax assets. The rights plan was extended in May 2018 to expire upon the earlier of (i) June 30, 2021, (ii) the beginning of a taxable year with respect to which the Board of Directors determines that no tax benefits may be carried forward, (iii) the repeal or amendment of Section 382 or any successor statute, if the Board of Directors determines that the plan is no longer needed to preserve the tax benefits, and (iv) certain other events as described in the plan.

 

On September 23, 2015, the Company’s shareholders approved an amendment to its articles of incorporation to further help protect the long-term value of the Company’s NOLs. The amendment provides a means to block transfers of the Company’s common shares that could result in an ownership change under Section 382. The transfer restrictions were extended in May 2018 by shareholder vote and will expire on the earlier of (i) May 23, 2021, (ii) the beginning of a taxable year with respect to which the Board of Directors determines that no tax benefit may be carried forward, (iii) the repeal of Section 382 or any successor statute if the 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 2017.

 

 

Note 12 – Stock Plans and Stock Based Compensation

 

Shares available for issuance under the 2018 Omnibus Equity Compensation Plan (“2018 Plan”) total 262,056. Shares issued to employees under the plan vest annually on the anniversary date of the grant over three 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 2020 unvested shares issued was $524,000, or $15.47 per weighted-average share. The Company recorded $188,000 and $398,000 of stock-based compensation to salaries for the three and nine months ended September 30, 2020, respectively, and $181,000 and $356,000 for the three and nine months ended September 30, 2019, 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 $39,000 and $84,000 was recognized related to this expense during the three and nine months ended September 30, 2020, respectively, and $38,000 and $75,000 for the three and nine months ended September 30, 2019, 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, 2020

   

December 31, 2019

 
           

Weighted

           

Weighted

 
           

Average

           

Average

 
           

Grant

           

Grant

 
   

Shares

   

Price

   

Shares

   

Price

 

Outstanding, beginning

    57,774     $ 13.35       116,909     $ 8.69  

Granted

    33,884       15.47       34,501       14.81  

Vested

    (28,371

)

    12.43       (89,388

)

    7.83  

Forfeited

    (66

)

    13.93       (4,248

)

    13.07  

Outstanding, ending

    63,221     $ 14.90       57,774     $ 13.35  

 

28

 

Unrecognized stock based compensation expense related to unvested shares for the remainder of 2020 and beyond is estimated as follows (in thousands):

 

October 2020 – December 2020

  $ 188  

2021

    310  

2022

    136  

2023

    14  

 

 

Note 13 – 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,

 
  

2020

  

2019

  

2020

  

2019

 
  

(in thousands, except share and per share data)

 
                 

Net income

 $2,066  $2,282  $5,888  $8,754 

Less:

                

Earnings allocated to unvested shares

  16   20   47   93 

Net income available to common shareholders, basic and diluted

 $2,050  $2,262  $5,841  $8,661 
                 

Basic

                

Weighted average common shares including unvested common shares outstanding

  7,499,223   7,471,582   7,489,795   7,467,048 

Less:

                

Weighted average unvested common shares

  56,938   63,913   59,151   79,411 

Weighted average common shares outstanding

  7,442,285   7,407,669   7,430,644   7,387,637 

Basic income per common share

 $0.28  $0.31  $0.79  $1.17 
                 

Diluted

                

Add: Dilutive effects of assumed exercises of common stock warrants

            

Weighted average common shares and potential common shares

  7,442,285   7,407,669   7,430,644   7,387,637 

Diluted income per common share

 $0.28  $0.31  $0.79  $1.17 

 

 

The Company had no outstanding stock options or warrants at September 30, 2020 or 2019.

 

 

Note 14Regulatory Capital Matters

 

Banks and bank holding companies are subject to regulatory capital requirements in accordance with Basel III, as 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. The minimum ratios are a common equity Tier 1 risk-based capital ratio of 7.0%, a Tier 1 risk-based capital ratio of 8.5%, and a total risk-based capital ratio of 10.5%. An institution is subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if capital levels fall below minimum levels plus the buffer amounts. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions without prior regulatory approval.

 

The Company’s capital ratios were positively impacted by the additional $8.0 million of subordinated notes issued on July 21, 2020, as the subordinated notes meet the requirements to qualify as Tier 2 capital.

 

As of September 30, 2020, Management believes the Company and Bank met all capital adequacy requirements to which they are subject. As of September 30, 2020, 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.

 

29

 

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, 2020:

                                               

Total risk-based capital (to risk- weighted assets)

  $ 136,629       12.97

%

  $ 84,298       8.00

%

  $ 105,372       10.00

%

Total common equity Tier 1 risk- based capital (to risk-weighted assets)

    125,148       11.88       47,417       4.50       68,492       6.50  

Tier 1 capital (to risk-weighted assets)

    125,148       11.88       63,223       6.00       84,298       8.00  

Tier 1 capital (to average assets)

    125,148       9.90       50,540       4.00       63,175       5.00  

 

 

   

Actual

   

Minimum Requirement

for Capital Adequacy

Purposes

   

Minimum Requirement

to be Well Capitalized

Under Prompt Corrective

Action Provisions

 
                                     
   

Amount

   

Ratio

   

Amount

   

Ratio

   

Amount

   

Ratio

 

As of December 31, 2019:

                                               

Total risk-based capital (to risk- weighted assets)

  $ 121,335       12.08

%

  $ 80,341       8.00

%

  $ 100,426       10.00

%

Total common equity Tier 1 risk- based capital (to risk-weighted assets)

    112,959       11.25       45,192       4.50       65,277       6.50  

Tier 1 capital (to risk-weighted assets)

    112,959       11.25       60,256       6.00       80,341       8.00  

Tier 1 capital (to average assets)

    112,959       9.99       45,208       4.00       56,510       5.00  

 

 

Kentucky banking laws limit the amount of dividends that may be paid to a holding company by its subsidiary banks without prior approval. These laws limit the amount of dividends that may be paid in any calendar year to current year’s net income, as defined in the laws, combined with the retained net income of the preceding two years, less any dividends declared during those periods. In addition, a bank must have positive retained earnings.

 

 

 

Note 15Off Balance Sheet Risks, Commitments, and Contingent Liabilities

 

The Company, in the normal course of business, is party to financial instruments with off balance sheet risk. The financial instruments include commitments to extend credit and standby letters of credit. The contract or notional amounts of these instruments reflect the potential future obligations of the Company pursuant to those financial instruments. Creditworthiness for all instruments is evaluated on a case-by-case basis in accordance with the Company’s credit policies. Collateral from the client may be required based on the Company’s credit evaluation of the client and may include business assets of commercial clients, as well as personal property and real estate of individual clients or guarantors.

 

An approved but unfunded loan commitment represents a potential credit risk and a liquidity risk, since the Company’s client(s) may demand immediate cash that would require funding. In addition, unfunded loan commitments represent interest rate risk as market interest rates may rise above the rate committed to the Company’s client. Since a portion of these loan commitments normally expire unused, the total amount of outstanding commitments at any point in time may not require future funding. Commitments to make loans are generally made for periods of one year or less.

 

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a client to a third party. The terms and risk of loss involved in issuing standby letters of credit are similar to those involved in issuing loan commitments and extending credit. In addition to credit risk, the Company also has liquidity risk associated with standby letters of credit because funding for these obligations could be required immediately. The Company does not deem this risk to be material. No liability is currently established for standby letters of credit.

 

30

 

The following table presents the contractual amounts of financial instruments with off-balance sheet risk for each period ended:

 

  

September 30, 2020

  

December 31, 2019

 
  

Fixed

Rate

  

Variable

Rate

  

Fixed

Rate

  

Variable

Rate

 
  

(in thousands)

 

Commitments to make loans

 $14,369  $17,439  $11,577  $20,415 

Unused lines of credit

  6,431   134,512   7,916   111,230 

Standby letters of credit

  531   1,336   531   3,164 

 

 

 

Commitments to make loans are generally made for periods of one year or less.

 

In connection with the purchase of loan participations, the Bank entered into risk participation agreements, which had notional amounts totaling $26.6 million at September 30, 2020 and December 31, 2019. The risk participation agreements are not designated against specific assets or liabilities under ASC 815, Derivatives and Hedging, and, therefore, do not qualify for hedge accounting. The derivatives are recorded in other liabilities on the balance sheet at fair value and changes in fair value of both the borrower and the offsetting swap agreements are recorded (and essentially offset) in non-interest income.

 

In the normal course of business, the Company and its subsidiaries have been named, from time to time, as defendants in various legal actions. Certain of the actual or threatened legal actions may include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages.

 

The Company contests liability and/or the amount of damages as appropriate in each pending matter. In view of the inherent difficulty of predicting the outcome of such matters, particularly in cases where claimants seek substantial or indeterminate damages or where investigations and proceedings are in the early stages, the Company cannot predict with certainty the loss or range of loss, if any, related to such matters, how or if such matters will be resolved, when they will ultimately be resolved, or what the eventual settlement, or other relief, if any, might be. Subject to the foregoing, the Company believes, based on current knowledge and after consultation with counsel, that the outcome of such pending matters will not have a material adverse effect on the consolidated financial condition of the Company, although the outcome of such matters could be material to the Company’s operating results and cash flows for a particular future period, depending on, among other things, the level of the Company’s revenues or income for such period. The Company will accrue for a loss contingency if (1) it is probable that a future event will occur and confirm the loss and (2) the amount of the loss can be reasonably estimated. The Company is not currently involved in any material litigation.

 

 

Note 16 – 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, income from secondary market loan sales, and other transaction-based revenue that is individually immaterial. Other non-interest income included approximately $124,000 and $409,000 of revenue for the three and nine months ended September 30, 2020, respectively, within the scope of ASC 606. Other non-interest income included approximately $133,000 and $388,000 of revenue for the three and nine months ended September 30, 2019, 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.

 

31

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

This item analyzes the Company’s financial condition, change in financial condition and results of operations. It should be read in conjunction with the unaudited consolidated financial statements and accompanying notes presented in Part I, Item 1 of this report.

 

Preliminary Note Concerning Forward-Looking Statements

 

This report contains statements about the future expectations, activities and events that constitute forward-looking statements. Forward-looking statements express our beliefs, assumptions and expectations of our future financial and operating performance and growth plans, taking into account information currently available to us. These statements are not statements of historical fact. The words “believe,” “may,” “should,” “anticipate,” “estimate,” “expect,” “intend,” “objective,” “seek,” “plan,” “strive” or similar words, or the negatives of these words, identify forward-looking statements.

 

Forward-looking statements are not guarantees of performance or results. A forward-looking statement may include the assumptions or bases underlying the forward-looking statement. Management has made assumptions and bases in good faith and believe they are reasonable. However, that estimates based on such assumptions or bases frequently differ from actual results, and the differences can be material. The forward-looking statements included in this report speak only as of the date of the report. Management does not intend to update these statements unless required by applicable laws.

 

Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from the expectations of future results we expressed or implied in any forward-looking statements. These risks and uncertainties can be difficult to predict and may be out of management’s control. Factors that could contribute to differences in results include, but are not limited to the following:

 

 

Ability of borrowers to resume contractual payments upon expiration of COVID-19 short-term loan concessions;

 

Changes in fiscal, monetary, regulatory and tax policies;

 

Changes in political and economic conditions;

 

The magnitude and frequency of changes to the Federal Funds Target Rate implemented by the Federal Open Market Committee of the Federal Reserve Bank;

 

Long-term and short-term interest rate fluctuations as well as the overall steepness of the yield curve;

 

Competitive product and pricing pressures;

 

Equity and fixed income market fluctuations;

 

Client bankruptcies and loan defaults;

 

Inflation;

 

Recession;

 

Epidemics and pandemics;

 

Natural disasters impacting Company operations;

 

Future acquisitions;

 

Integrations and performance of acquired businesses;

 

Changes in technology and regulations or the interpretation and enforcement thereof;

 

Changes in accounting standards;

 

Changes to the Company’s overall internal control environment;

 

Success in gaining regulatory approvals when required;

 

Information security breaches or cyber security attacks involving either the Company or one of the Company’s third-party service providers; and

 

Other risks and uncertainties reported from time to time in the Company’s filings with the Securities and Exchange Commission (“SEC”), including Part II Item 1A “Risk Factors” of this report, as well as Part I Item 1A “Risk Factors” of the Company’s December 31, 2019 Annual Report on Form 10-K for the year ended December 31, 2019.

 

Overview

 

The Company is a bank holding company headquartered in Louisville, Kentucky. The Company’s common stock is traded on Nasdaq’s Capital Market under the symbol LMST. The Company operates Limestone Bank (the Bank), its wholly owned subsidiary and the tenth largest bank domiciled in the Commonwealth of Kentucky based on total assets. The Bank operates banking offices in 14 counties in Kentucky. The Bank’s markets include metropolitan Louisville in Jefferson County and the surrounding counties of Bullitt and Henry. The Bank serves south central, southern, and western Kentucky from banking centers in Barren, Butler, Daviess, Edmonson, Green, Hardin, Hart, Ohio, and Warren counties. The Bank also has banking centers in Lexington, Kentucky, the second largest city in the state, and Frankfort, Kentucky, the state capital. The Bank is a traditional community bank with a wide range of personal and business banking products and services. As of September 30, 2020, the Company had total assets of $1.29 billion, total loans of $974.5 million, total deposits of $1.09 billion and stockholders’ equity of $112.3 million.

 

 

The Company reported net income of $2.1 million and $5.9 million for the three and nine months ended September 30, 2020, compared with net income of $2.3 million and $8.8 million for the same periods of 2019. Income tax expense was $190,000 and $944,000 for the third quarter of 2020 and for the first nine months of 2020, respectively, compared to income tax expense of $531,000 and $43,000 for the third quarter of 2019 and for the first nine months of 2019, respectively. Income tax expense benefitted from the establishment of a net deferred tax asset related to a change in Kentucky tax law enacted during 2019. Income tax expense benefitted $244,000 and $33,000 for the third quarter of 2020 and 2019, respectively. Income tax expense benefitted $395,000 and $1.6 million for the first nine months of 2020 and 2019, respectively. The new Kentucky income tax will go into effect on January 1, 2021.

 

Highlights for the nine months ended September 30, 2020 are as follows:

 

 

Loan growth outpaced paydowns during the period. Average loans receivable increased approximately $176.8 million or 22.5% to $963.7 million for the nine months ended September 30, 2020, compared with $786.8 million for the first nine months of 2019. This resulted in an increase in interest revenue volume of approximately $6.5 million for the nine months ended September 30, 2020 compared with the nine months of 2019. Average loans were positively impacted from the branch purchase acquisition, which included approximately $126.8 million in loans at the time of the purchase, along with loan growth during 2019 and 2020, as well as $42.3 million loan originations under the SBA Paycheck Protection Program.

 

 

Net interest margin decreased 16 basis points to 3.30% in the first nine months of 2020 compared with 3.46% in the first nine months of 2019. The yield on earning assets decreased to 4.23% for the first nine months of 2020, compared to 4.83% for the first nine months of 2019. The decline in yield on earning assets was driven by the impact of falling interest rates on the Bank’s fed funds, certain floating rate investment securities, and loans with variable rate pricing features as the Federal Reserve lowered the federal funds target rate by 75 basis points in the latter half of 2019, 50 basis points on March 6, 2020, and 100 basis points on March 15, 2020. The cost of interest-bearing liabilities decreased from 1.67% in the first nine months of 2019 to 1.15% in the first nine months of 2020 as a result of decreases in short-term interest rates during 2019 and 2020.

 

 

A provision of $1.4 million and $3.5 million was recorded in the third quarter and the first nine months of 2020, respectively, compared to no provision for loan losses in the third quarter and first nine months of 2019. The 2020 loan loss provisions were attributable to the net loan charge-offs during the period, trends within the portfolio over the period, and primarily to changes in the economic and business environment attributable to COVID-19, the state and national emergencies that have been declared and the resultant risk the pandemic poses for business disruptions for the Bank’s borrowers which may lead to credit quality deterioration. Substandard loans increased $12.3 million during the first nine months of 2020. The increase in substandard loans was primarily attributable to the commercial and industrial loan segment, which increased $10.2 million during 2020. Net loan charge-offs were $395,000 for the first nine months of 2020, compared to net loan recoveries of $24,000 for the first nine months of 2019.

 

 

Loans past due 30-59 days decreased from $1.7 million at December 31, 2019 to $482,000 at September 30, 2020, and loans past due 60-89 days decreased from $670,000 at December 31, 2019 to $265,000 at September 30, 2020. Total loans past due and nonaccrual loans decreased to $2.8 million at September 30, 2020, from $3.9 million at December 31, 2019.

 

 

In response to requests from borrowers who have been impacted by COVID-19 through business and cash flow interruption, the Bank made short-term loan modifications involving principal deferrals (interest only) and, in other cases, principal and interest deferrals. See the table under “COVID-19 Short-term Loan Concessions” section for detailed discussion.

 

 

Foreclosed properties decreased from $3.2 million at December 31, 2019 and September 30, 2019 to $1.6 million at September 30, 2020. Operating expenses totaled $58,000 for the first nine months of 2020 compared to operating expenses and fair value write downs of $333,000 for the first nine months of 2019.

 

 

The ratio of non-performing assets to total assets decreased to 0.32% at September 30, 2020, compared with 0.42% at December 31, 2019, and 0.51% at September 30, 2019.

 

 

Deposits were $1.09 billion at September 30, 2020, compared with $1.03 billion at December 31, 2019. Certificate of deposit balances decreased $78.1 million during the first nine months of 2020 to $398.4 million at September 30, 2020, from $476.5 million at December 31, 2019. Interest checking accounts increased $22.7 million, non-interest bearing accounts increased $30.1 million, money market increased $13.8 million, and savings accounts increased $78.9 during the first nine months of 2020 compared with December 31, 2019.

 

 

On July 31, 2020, the Company completed the issuance of an additional $8.0 million in subordinated notes pursuant to the July 23, 2019 indenture under which the Company’s outstanding subordinated notes were previously issued. The Company used $5.0 million of the net proceeds from the offering to retire its senior debt and retained the remaining balance for general corporate purposes. The subordinated capital notes qualify as Tier 2 regulatory capital.

 

 

Application of Critical Accounting Policies

 

Management continually reviews accounting policies and financial information disclosures. The Company’s more significant accounting policies that require the use of estimates and judgments in preparing the financial statements are summarized in “Application of Critical Accounting Policies” in Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operation of the Company’s Annual Report on Form 10-K for the calendar year ended December 31, 2019. Management has discussed the development, selection, and application of critical accounting policies with the Audit Committee. During the first nine months of 2020, there were no material changes in the critical accounting policies and assumptions.

 

Results of Operations

 

The following table summarizes components of income and expense and the change in those components for the three months ended September 30, 2020, compared with the same period of 2019:

 

   

For the Three Months

   

Change from

 
   

Ended September 30,

   

Prior Period

 
   

2020

   

2019

   

Amount

   

Percent

 
   

(dollars in thousands)

 
                                 

Gross interest income

  $ 12,094     $ 12,485     $ (391

)

    (3.1

)%

Gross interest expense

    2,151       3,755       (1,604

)

    (42.7

)

Net interest income

    9,943       8,730       1,213       13.9  

Provision for loan losses

    1,350             1,350       100.0  

Non-interest income

    1,742       1,534       208       13.6  

Non-interest expense

    8,079       7,451       628       8.4  

Net income before taxes

    2,256       2,813       (557

)

    (19.8

)

Income tax expense

    190       531       (341

)

    (64.2

)

Net income

    2,066       2,282       (216

)

    (9.5

)

 

Net income for the three months ended September 30, 2020 totaled $2.1 million, compared with $2.3 million for the comparable period of 2019. Net income before taxes and income tax expense was $2.3 million and $190,000, respectively for the third quarter of 2020, compared with $2.8 million and income tax expense of $531,000, respectively for the third quarter of 2019. Income tax expense benefitted $244,000 and $33,000 for the third quarter of 2020 and 2019, respectively, from the establishment of a net deferred tax asset related to a change in Kentucky tax law enacted during the first quarter of 2019. The new law eliminates the Kentucky bank franchise tax, which is assessed at a rate of 1.1% of average capital and implements a state income tax for the Bank at a statutory rate of 5%. The new Kentucky income tax will go into effect on January 1, 2021.

 

Net interest income increased $1.2 million from the 2019 third quarter primarily as a result of an increase in earning assets from the branch transaction, as well as loan growth, and lower cost of interest-bearing liabilities given the current interest rate environment. Provision expense of $1.4 million was recorded in the third quarter of 2020 as compared to no provision expense the third quarter of 2019 primarily in response to the level of net loan charge-offs for the quarter, trends within the portfolio over the quarter, and to changes in the economic and business environment attributable to COVID-19. Non-interest income increased $208,000 from $1.5 million in the third quarter of 2019 to $1.7 million for the third quarter of 2020 primarily related to bank card interchange fees primarily as a result of the deposit accounts acquired in the branch acquisition transaction on November 15, 2019. Non-interest expense increased $628,000 from $7.5 million in the third quarter of 2019 to $8.1 million in the third quarter of 2020 primarily due to increase in salaries and employee benefits of $211,000 and $187,000 in deposit account related expense. The Bank added sales talent and customer facing associates during the latter half of 2019 and branch staff in connection with the branch purchase transaction. The increase in deposit account related expense is the result of the deposit accounts acquired in the branch acquisition transaction.

 

 

The following table summarizes components of income and expense and the change in those components for the nine months ended September 30, 2020, compared with the same period of 2019:

 

   

For the Nine Months

   

Change from

 
   

Ended September 30,

   

Prior Period

 
   

2020

   

2019

   

Amount

   

Percent

 
   

(dollars in thousands)

 
                                 

Gross interest income

  $ 38,147     $ 37,047     $ 1,100       3.0

%

Gross interest expense

    8,332       10,558       (2,226

)

    (21.1

)

Net interest income

    29,815       26,489       3,326       12.6  

Provision for loan losses

    3,500             3,500       100.0  

Non-interest income

    5,067       4,264       803       18.8  

Non-interest expense

    24,550       21,956       2,594       11.8  

Net income before taxes

    6,832       8,797       (1,965

)

    (22.3

)

Income tax expense

    944       43       901       NM  

Net income

    5,888       8,754       (2,866

)

    (32.7

)

 

  NM: Not Meaningful

 

Net income for the nine months ended September 30, 2020 totaled $5.9 million, compared with net income of $8.8 million for the comparable period of 2019. Net income before taxes and income tax expense was $6.8 million and $944,000, respectively, for the nine months ended September 30, 2020, compared with $8.8 million and income tax expense of $43,000, respectively, for the nine months ended September 30, 2019. Income tax expense benefitted $395,000 and $1.6 million for the first nine months of 2020 and 2019, respectively, from the establishment of a state net deferred tax asset related to the 2019 tax law enactments discussed previously.

 

Net interest income increased $3.3 million from the first nine months of 2019 as a result of an increase in earning assets from the branch transaction, along with loan growth during 2019 and 2020, as well as lower cost of interest-bearing liabilities given the current interest rate environment. Provision expense of $3.5 million was recorded in the first nine months of 2020 as compared to no provision expense the first nine months of 2019 primarily in response to the level of net loan charge-offs for the period, trends within the portfolio over the period, and to changes in the economic and business environment attributable to COVID-19. Non-interest income increased by $803,000 to $5.1 million from $4.3 million in the first nine months of 2019 primarily due to an increase in bank card interchange fees of $767,000. Non-interest expense increased from $22.0 million in the first nine months of 2019 to $24.6 million in the first nine months of 2020 primarily due to increases of $1.6 million in salaries and employee benefits and $507,000 in deposit account related expense.

 

Net Interest Income – Net interest income was $9.9 million for the three months ended September 30, 2020, an increase of $1.2 million, or 13.9%, compared with $8.7 million for the same period in 2019. Net interest spread and margin were 3.08% and 3.27%, respectively, for the third quarter of 2020, compared with 3.04% and 3.35%, respectively, for the third quarter of 2019.

 

The interest rate environment has been challenging during the first nine months of 2020 as the Federal Reserve, after lowering rates 75 basis points in the latter half of 2019, lowered the federal funds target rate by 50 basis points on March 6, 2020 and 100 basis points on March 15, 2020. In particular, the Federal Reserve’s actions served to lower rates on the short end of the yield curve impacting yields on fed funds, certain floating rate investment securities, and loans with variable rate pricing features.

 

The yield on earning assets decreased to 3.98% for the third quarter of 2020, as compared to 4.79% in the third quarter of 2019. The yield on earning assets for the third quarter of 2020 was negatively impacted by falling interest rates on the Bank’s fed funds, certain floating rate investment securities, and loans with variable rate repricing features. Average interest-earning assets were $1.21 billion for the third quarter of 2020, compared with $1.04 billion for the third quarter of 2019, a 17.1% increase, primarily attributable to higher average loans. Average loans increased approximately $163.3 million for the third quarter of 2020 compared with the third quarter of 2019. Average loans were positively impacted from the branch purchase transaction on November 15, 2019, which included approximately $126.8 million of loans at the time of purchase, as well as loan growth during 2019 and the first nine months of 2020. Average loans for the third quarter of 2020 were also positively impacted by $42.3 million in loan originations under the SBA Paycheck Protection Program. The increase in average loans resulted in an increase in interest revenue volume of approximately $2.0 million for the quarter ended September 30, 2020, which was offset by a decrease in interest revenue due to declining rates of $1.8 million, as compared with the third quarter of 2019. Loan fee income can meaningfully impact net interest income, loan yields, and net interest income. The amount of loan fee income included in total interest income represents 13 basis points and nine basis points of yield on earning assets and net interest margin for the third quarter ended September 30, 2020 and 2019, respectively. Total interest income decreased 3.1%, or $391,000, for the third quarter of 2020 compared to the third quarter of 2019.

 

 

The cost of interest-bearing liabilities decreased to 0.90% for the third quarter of 2020, as compared to 1.75% for the third quarter of 2019. The cost of interest-bearing liabilities continued to decline primarily based on the downward repricing of time deposits. Time deposits declined $47.9 million during the third quarter of 2020 as approximately $127.3 million of time deposits with an average rate of 1.41% matured or repriced at lower interest rates. During the third quarter of 2020, newly originated or renewed time deposits had an average rate of 0.39% and an average term of approximately 23 months. Average interest-bearing liabilities increased by 12.1% to $955.7 million for the third quarter of 2020, as compared to $852.5 million for the third quarter of 2019 due to deposit growth and the completion of the branch acquisition on November 15, 2019, which included approximately $131.8 million in deposits at the time of purchase. Total interest expense decreased by 42.7% to $2.2 million for the third quarter of 2020 as compared to the third quarter of 2019. The cost of interest-bearing liabilities for the third quarter of 2020 was also impacted by the additional subordinated debt issuance in July 2020 and repayment of the senior debt. As of September 30, 2020, time deposits comprise $398.4 million of the Company’s liabilities including $84.7 million with a current average rate of 1.01%, which reprice or mature in the fourth quarter of 2020.

 

Net interest income was $29.8 million for the nine months ended September 30, 2020, an increase of $3.3 million, or 12.6%, compared with $26.5 million for the same period in 2019. Net interest spread and margin were 3.08% and 3.30%, respectively, for the first nine months of 2020, compared with 3.16% and 3.46%, respectively, for the first nine months of 2019.

 

The yield on earning assets decreased to 4.23% for the first nine months of 2020, as compared to 4.83% in the first nine months of 2019. The yield on earning assets for the nine months of 2020 was negatively impacted by falling interest rates on the Bank’s fed funds, certain floating rate investment securities, and loans with variable rate repricing features. Average interest-earning assets increased approximately $181.6 for the nine months ended September 30, 2020 compared with the first nine months of 2019. Average loans increased approximately $176.8 million for the first nine months ended September 30, 2020 compared with the first nine months of 2019. Average loans were positively impacted from the branch purchase transaction on November 15, 2019, along with loan growth during 2019 and 2020, as well as loan originations under the SBA Paycheck Protection Program. The increase in average loans resulted in an increase in interest revenue volume of approximately $6.5 million for the nine months ended September 30, 2020, which was partially offset by a decrease in interest revenue to due declining rates of $4.1 million, as compared with the third quarter of 2019. Loan fee income can meaningfully impact net interest income, loan yields, and net interest income. The amount of loan fee income included in total interest income represents 13 basis points of yield on earning assets and net interest margin for the first nine months ended September 30, 2020 and 2019. Total interest income increased 3.0%, or $1.1 million, for the first nine months of 2020 compared to the first nine months of 2019.

 

The cost of interest-bearing liabilities decreased to 1.15% for the first nine months of 2020, as compared to 1.67% for the first nine months of 2019. Average interest-bearing liabilities increased by $118.8 for the nine months ended September 30, 2020 compared with the first nine months of 2019 due to deposit growth and the completion of the branch acquisition. Total interest expense decreased by 21.1% to $8.3 million for the nine months ended September 30, 2020 as compared to $10.6 million for the first nine months of 2019. The cost of interest-bearing liabilities for the first nine months of 2020 was also impacted by the subordinated debt issuance in July 2019 and July 2020, as well as the senior debt repayment in July 2020.

 

 

Average Balance Sheets

 

The following table presents the average balance sheets for the three-month periods ended September 30, 2020 and 2019, along with the related calculations of tax-equivalent net interest income, net interest margin and net interest spread for the related periods.

 

   

Three Months Ended September 30,

 
   

2020

   

2019

 
   

Average

Balance

   

Interest

Earned/Paid

   

Average

Yield/Cost

   

Average

Balance

   

Interest

Earned/Paid

   

Average

Yield/Cost

 
   

(dollars in thousands)

 

ASSETS

                                               

Interest-earning assets:

                                               

Loan receivables (1)(2)

  $ 963,486     $ 10,805       4.46

%

  $ 800,194     $ 10,671       5.29

%

Securities

                                               

Taxable

    186,114       1,139       2.43       193,133       1,553       3.19  

Tax-exempt (3)

    17,002       108       3.20       10,723       76       3.56  

FHLB stock

    6,057       33       2.17       6,593       76       4.57  

Interest-bearing deposits and other

    40,380       9       0.09       24,879       109       1.74  

Total interest-earning assets

    1,213,039       12,094       3.98

%

    1,035,522       12,485       4.79

%

Less: Allowance for loan losses

    (10,233

)

                    (8,884

)

               

Non-interest earning assets

    93,008                       78,794                  

Total assets

  $ 1,295,814                     $ 1,105,432                  
                                                 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

                                               

Interest-bearing liabilities:

                                               

Certificates of deposit and other time deposits

  $ 423,739     $ 1,122       1.05

%

  $ 498,754     $ 2,571       2.05

%

NOW and money market deposits

    341,610       364       0.42       256,373       518       0.80  

Savings accounts

    124,543       141       0.45       34,043       16       0.19  

FHLB advances

    20,746       39       0.75       23,238       132       2.25  

Junior subordinated debentures

    21,000       138       2.61       21,000       251       4.74  

Subordinated capital notes

    22,391       335       5.95       12,935       190       5.83  

Senior debt

    1,632       12       2.93       6,196       77       4.93  

Total interest-bearing liabilities

    955,661       2,151       0.90

%

    852,539       3,755       1.75

%

                                                 

Non-interest-bearing liabilities:

                                               

Non-interest-bearing deposits

    221,973                       144,378                  

Other liabilities

    7,250                       4,697                  

Total liabilities

    1,184,884                       1,001,614                  

Stockholders’ equity

    110,930                       103,818                  

Total liabilities and stockholders’ equity

  $ 1,295,814                     $ 1,105,432                  
                                                 

Net interest income

          $ 9,943                     $ 8,730          
                                                 

Net interest spread

                    3.08

%

                    3.04

%

Net interest margin

                    3.27

%

                    3.35

%

 

(1)

Includes loan fees in both interest income and the calculation of yield on loans.

(2)

Calculations include non-accruing loans averaging $1.8 million and $2.4 million, respectively, in average loan amounts outstanding.

(3)

Taxable equivalent yields are calculated assuming a federal income tax rate of 21%.

 

 

The following table presents the average balance sheets for the nine-month periods ended September 30, 2020 and 2019, along with the related calculations of tax-equivalent net interest income, net interest margin and net interest spread for the related periods.

 

   

Nine Months Ended September 30,

 
   

2020

   

2019

 
   

Average

Balance

   

Interest

Earned/Paid

   

Average

Yield/Cost

   

Average

Balance

   

Interest

Earned/Paid

   

Average

Yield/Cost

 
   

(dollars in thousands)

 

ASSETS

                                               

Interest-earning assets:

                                               

Loan receivables (1)(2)

  $ 963,668     $ 33,772       4.68

%

  $ 786,843     $ 31,390       5.33

%

Securities

                                               

Taxable

    189,827       3,913       2.75       193,395       4,734       3.27  

Tax-exempt (3)

    12,670       255       3.40       12,305       257       3.53  

FHLB stock

    6,304       112       2.37       6,811       281       5.52  

Interest-bearing deposits and other

    35,587       95       0.36       27,090       385       1.90  

Total interest-earning assets

    1,208,056       38,147       4.23

%

    1,026,444       37,047       4.83

%

Less: Allowance for loan losses

    (9,248

)

                    (8,823

)

               

Non-interest earning assets

    92,842                       76,303                  

Total assets

  $ 1,291,650                     $ 1,093,924                  
                                                 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

                                               

Interest-bearing liabilities:

                                               

Certificates of deposit and other timedeposits

  $ 454,279     $ 4,976       1.46

%

  $ 482,181     $ 7,035       1.95

%

NOW and money market deposits

    327,584       1,149       0.47       260,902       1,579       0.81  

Savings accounts

    102,341       401       0.52       33,829       43       0.17  

FHLB advances

    38,406       332       1.15       36,502       668       2.45  

Junior subordinated debentures

    21,000       525       3.34       21,000       772       4.92  

Subordinated capital notes

    18,810       830       5.89       4,359       190       5.83  

Senior debt

    3,869       119       4.11       8,718       271       4.16  

Total interest-bearing liabilities

    966,289       8,332       1.15

%

    847,491       10,558       1.67

%

                                                 

Non-interest-bearing liabilities:

                                               

Non-interest-bearing deposits

    209,605                       143,577                  

Other liabilities

    7,111                       4,472                  

Total liabilities

    1,183,005                       995,540                  

Stockholders’ equity

    108,645                       98,384                  

Total liabilities and stockholders’ equity

  $ 1,291,650                     $ 1,093,924                  
                                                 

Net interest income

          $ 29,815                     $ 26,489          
                                                 

Net interest spread

                    3.08

%

                    3.16

%

                                                 

Net interest margin

                    3.30

%

                    3.46

%

 

(1)

Includes loan fees in both interest income and the calculation of yield on loans.

(2)

Calculations include non-accruing loans averaging $1.6 million and $2.3 million, respectively, in average loan amounts outstanding.

(3)

Taxable equivalent yields are calculated assuming a federal income tax rate of 21%.

 

 

Rate/Volume Analysis

 

The table below sets forth certain information regarding changes in interest income and interest expense for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in rate (changes in rate multiplied by old volume); (2) changes in volume (changes in volume multiplied by old rate); and (3) changes in rate-volume (change in rate multiplied by change in volume). Changes in rate-volume are proportionately allocated between rate and volume variance.

 

   

Three Months Ended September 30,

2020 vs. 2019

   

Nine Months Ended September 30,

2020 vs. 2019

 
   

Increase (decrease)

due to change in

   

Increase (decrease)

due to change in

 
   

Rate

   

Volume

   

Net

Change

   

Rate

   

Volume

   

Net

Change

 
   

(in thousands)

 

Interest-earning assets:

                                               

Loan receivables

  $ (1,849

)

  $ 1,983     $ 134     $ (4,116

)

  $ 6,498     $ 2,382  

Securities

    (376

)

    (6

)

    (382

)

    (746

)

    (77

)

    (823

)

FHLB stock

    (37

)

    (6

)

    (43

)

    (149

)

    (20

)

    (169

)

Interest-bearing deposits and other

    (142

)

    42       (100

)

    (384

)

    94       (290

)

Total increase (decrease) in interest income

    (2,404

)

    2,013       (391

)

    (5,395

)

    6,495       1,100  
                                                 

Interest-bearing liabilities:

                                               

Certificates of deposit and other time deposits

    (1,106

)

    (343

)

    (1,449

)

    (1,671

)

    (388

)

    (2,059

)

NOW and money market accounts

    (293

)

    139       (154

)

    (770

)

    340       (430

)

Savings accounts

    44       81       125       182       176       358  

FHLB advances

    (80

)

    (13

)

    (93

)

    (369

)

    33       (336

)

Junior subordinated debentures

    (113

)

          (113

)

    (247

)

          (247

)

Subordinated capital notes

    4       141       145       2       638       640  

Senior debt

    (23

)

    (42

)

    (65

)

    (3

)

    (149

)

    (152

)

Total increase (decrease) in interest expense

    (1,567

)

    (37

)

    (1,604

)

    (2,876

)

    650       (2,226

)

Increase (decrease) in net interest income

  $ (837

)

  $ 2,050     $ 1,213     $ (2,519

)

  $ 5,845     $ 3,326  

 

 

Non-Interest Income – The following table presents the major categories of non-interest income for the three and nine months ended September 30, 2020 and 2019:

 

   

For the Three Months

   

For the Nine Months

 
   

Ended September 30,

   

Ended September 30,

 
   

2020

   

2019

   

2020

   

2019

 
   

(dollars in thousands)

 
                                 

Service charges on deposit accounts

  $ 565     $ 633     $ 1,674     $ 1,700  

Bank card interchange fees

    881       623       2,494       1,727  

Income from bank owned life insurance

    113       97       325       314  

Net gain (loss) on sales and calls of securities

                (5

)

    (5

)

Other

    183       181       579       528  

Total non-interest income

  $ 1,742     $ 1,534     $ 5,067     $ 4,264  

 

Non-interest income for the third quarter of 2020 increased by $208,000, or 13.6%, compared with the third quarter of 2019. The increase in non-interest income for the third quarter of 2020 compared to the third quarter of 2019 was primarily driven by an increase in bank card interchange fees of $258,000 primarily as a result of the deposit accounts acquired in the branch acquisition transaction on November 15, 2019. For the nine months ended September 30, 2020, non-interest income increased by $803,000, or 18.8% to $5.1 million compared with $4.3 million for the same period of 2019. The increase in non-interest income between the nine-month comparative periods was primarily due to an increase in bank card interchange fees of $767,000.

 

 

Non-interest ExpenseThe following table presents the major categories of non-interest expense for the three and nine months ended September 30, 2020 and 2019:

 

   

For the Three Months

   

For the Nine Months

 
   

Ended September 30,

   

Ended September 30,

 
   

2020

   

2019

   

2020

   

2019

 
   

(dollars in thousands)

 
                                 

Salary and employee benefits

  $ 4,413     $ 4,202     $ 13,584     $ 12,032  

Occupancy and equipment

    1,008       880       2,990       2,632  

Professional fees

    261       254       704       598  

Marketing expense

    134       251       452       690  

FDIC insurance

    81             148       211  

Data processing expense

    382       315       1,121       943  

State franchise and deposit tax

    360       315       1,080       945  

Deposit account related expenses

    487       300       1,398       891  

Other real estate owned expense

    20       25       58       333  

Litigation and loan collection expense

    54       32       178       112  

Communications expense

    201       193       666       572  

Insurance expense

    102       109       316       335  

Postage and delivery

    156       129       476       404  

Other

    420       446       1,379       1,258  

Total non-interest expense

  $ 8,079     $ 7,451     $ 24,550     $ 21,956  

 

Non-interest expense for the third quarter ended September 30, 2020 increased $628,000, or 8.4%, compared with the third quarter of 2019. This increase was primarily due to an increase in salaries and employee benefits of $211,000 and $187,000 in deposit account related expense. The Bank added sales talent and customer facing associates during the latter half of 2019 and branch staff in connection with the branch purchase transaction. In response to COVID-19 and the change in customer branch usage patterns, the Bank realized a reduction of approximately 20 FTEs in the second quarter of 2020. Quarterly savings of approximately $150,000 is expected as a result of these position eliminations. The increase in deposit account related expense is the result of the deposit accounts acquired in the branch acquisition transaction. For the nine months ended September 30, 2020, non-interest expense increased $2.6 million, or 11.8% to $24.6 million compared with $22.0 million for the first nine months of 2019. The increase in non-interest expense for the nine months ended September 30, 2020 was primarily attributable to increases of $1.6 million in salaries and employee benefits and $507,000 in deposit account related expense.

 

Income Tax Expense Effective tax rates differ from the federal statutory rate of 21% applied to income before income taxes due to the following:

 

   

For the Three Months

   

For the Nine Months

 
   

Ended September 30,

   

Ended September 30,

 
   

2020

   

2019

   

2020

   

2019

 
   

(dollars in thousands)

 
                                 

Federal statutory rate times financial statement income

  $ 474     $ 591     $ 1,435     $ 1,847  

Effect of:

                               

Tax-exempt income

    (21

)

    (15

)

    (50

)

    (52

)

Establish state deferred tax asset

    (244

)

    (33

)

    (395

)

    (1,583

)

Non-taxable life insurance income

    (24

)

    (20

)

    (68

)

    (66

)

Restricted stock vesting

                4       (128

)

Other, net

    5       8       18       25  

Total

  $ 190     $ 531     $ 944     $ 43  

 

Net income before taxes was $2.3 million and $6.8 million for the third quarter of 2020 and for the first nine months of 2020, respectively, compared to $2.8 million and $8.8 million for the third quarter and first nine months of 2019, respectively. Income tax expense was $190,000 and $944,000 for the third quarter of 2020 and for the first nine months of 2020, respectively, compared to income tax expense of $531,000 and $43,000 for the third quarter of 2019 and for the first nine months of 2019, respectively.

 

For 2019 and 2020, income tax expense benefitted from the establishment of a net deferred tax asset related to a change in Kentucky tax law enacted during 2019. Income tax expense benefitted $244,000 and $33,000 for the third quarter of 2020 and 2019, respectively. Income tax expense benefitted $395,000 and $1.6 million for the first nine months of 2020 and 2019, respectively. The new Kentucky income tax will go into effect on January 1, 2021.

 

 

Analysis of Financial Condition

 

Total assets increased $45.8 million, or 3.7%, to $1.29 billion at September 30, 2020, from $1.25 billion at December 31, 2019. This increase was primarily attributable to an increase in net loans of $45.1 million.

 

Loans ReceivableLoans receivable increased $48.2 million, or 5.2%, during the nine months ended September 30, 2020 to $974.5 million as loan growth outpaced paydowns. Loan originations included $42.3 million under the SBA Paycheck Protection Program which are classified as commercial loans. The commercial and commercial real estate portfolios increased by an aggregate of $93.2 million, or 17.1% during the first nine months of 2020 and comprised 65.5% of the loan portfolio at September 30, 2020. Residential real estate and consumer portfolios decreased by an aggregate of $51.5 million, or 14.9% during the first nine months of 2020 and comprised 30.2% of the loan portfolio at September 30, 2020.

 

Loan Portfolio CompositionThe following table presents a summary of the loan portfolio at the dates indicated, net of deferred loan fees, by type. There are no foreign loans in the portfolio and other than the categories noted, there is no concentration of loans in any industry exceeding 10% of total loans.

 

   

As of September 30,

   

As of December 31,

 
   

2020

   

2019

 
   

Amount

   

Percent

   

Amount

   

Percent

 
           

(dollars in thousands)

         
                                 

Commercial

  $ 218,762       22.45

%

  $ 145,551       15.71

%

Commercial Real Estate

                               

Construction

    83,977       8.62       64,911       7.01  

Farmland

    69,017       7.08       79,118       8.54  

Nonfarm nonresidential

    266,477       27.35       255,459       27.58  

Residential Real Estate

                               

Multi-family

    63,757       6.54       70,950       7.66  

1-4 Family

    194,829       19.99       226,629       24.47  

Consumer

    35,289       3.62       47,790       5.16  

Agriculture

    41,749       4.28       35,064       3.79  

Other

    611       0.07       799       0.08  

Total loans

  $ 974,468       100.00

%

  $ 926,271       100.00

%

 

Loan Portfolio by Risk Category – The following table presents a summary of the loan portfolio at the dates indicated, by risk category.

 

    September 30, 2020     December 31, 2019  
   

Loans

   

% to

Total

   

Loans

   

% to

Total

 
   

(dollars in thousands)

 
                                 

Pass

  $ 923,895       94.8

%

  $ 888,707       95.9

%

Watch

    27,782       2.9       27,522       3.0  

Special Mention

    364                    

Substandard

    22,427       2.3       10,042       1.1  

Doubtful

                       

Total

  $ 974,468       100.0

%

  $ 926,271       100.00

%

 

Loans receivable increased $48.2 million, or 5.2%, during the nine months ended September 30, 2020 primarily as a result of originations under the SBA Paycheck Protection Program. Since December 31, 2019, the pass category increased approximately $35.2 million, the watch category increased approximately $260,000, the special mention category increased approximately $364,000, and the substandard category increased approximately $12.4 million. The $12.4 million increase in loans classified as substandard was primarily driven by $16.5 million in loans moved to substandard offset by $3.6 million in payments, $551,000 in charge-offs, and $52,000 in loans upgraded from substandard during the first nine months of 2020. The increase in substandard loans was primarily within the commercial and industrial loan segment as $12.0 million in loans to two borrowers migrated from watch to substandard during the third quarter of 2020. The trend in risk categories is considered during the evaluation of qualitative trends in the portfolio when establishing the general component of the allowance for loan losses.

 

 

Loan Delinquency – The following table presents a summary of loan delinquencies at the dates indicated.

 

   

September 30,

2020

   

December 31,

2019

 
   

(in thousands)

 

Past Due Loans:

               

30-59 Days

  $ 482     $ 1,747  

60-89 Days

    265       670  

90 Days and Over

           

Total Loans Past Due 30-90+ Days

    747       2,417  
                 

Nonaccrual Loans

    2,038       1,528  

Total Past Due and Nonaccrual Loans

  $ 2,785     $ 3,945  

 

During the nine months ended September 30, 2020, nonaccrual loans increased by $510,000 to $2.0 million. Loans past due 30-59 days decreased from $1.7 million at December 31, 2019 to $482,000 at September 30, 2020. Loans past due 60-89 days decreased from $670,000 at December 31, 2019 to $265,000 at September 30, 2020. This represents a $1.7 million decrease in accruing past due loans from December 31, 2019 to September 30, 2020 in loans past due 30-89 days. This trend in delinquency levels is considered during the evaluation of qualitative trends in the portfolio when establishing the general component of the allowance for loan losses.

 

Troubled Debt Restructuring - A troubled debt restructuring (TDR) occurs when the Bank has agreed to an other than short-term loan modification in the form of a concession to a borrower who is experiencing financial difficulty. The Bank’s TDRs typically involve a reduction in interest rate, a deferral of principal for a stated period of time, or an interest only period. All TDRs are considered impaired, and the Bank has allocated reserves for these loans to reflect the present value of the concessionary terms granted to the borrower. If the loan is considered collateral dependent, it is reported net of allocated reserves, at the fair value of the collateral less cost to sell.

 

The Bank does not have a formal loan modification program. If a borrower is unable to make contractual payments, management reviews the particular circumstances of that borrower’s situation and determine whether or not to negotiate a revised payment stream. The goal when restructuring a credit is to afford the borrower a reasonable period of time to remedy the issue causing cash flow constraints so that the credit may return to performing status over time. If a borrower fails to perform under the modified terms, the loan(s) are placed on nonaccrual status and collection actions are initiated.

 

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

 

If the borrower fails to perform, management places the loan on nonaccrual status and seeks to liquidate the underlying collateral. The nonaccrual policy for restructured loans is identical to the nonaccrual policy for all loans. The policy calls for a loan to be reported as nonaccrual if it is maintained on a cash basis because of deterioration in the financial condition of the borrower, payment in full of principal and interest is not expected, or principal or interest is past due 90 days or more unless the assets are both well secured and in the process of collection. Changes in value for impairment, including the amount attributed to the passage of time, are recorded entirely within the provision for loan losses. Upon determination that a loan is collateral dependent, the loan is charged down to the fair value of collateral less estimated costs to sell.

 

At September 30, 2020 and December 31, 2019, the Bank had four and three restructured loans totaling $489,000 and $475,000, respectively, with borrowers who experienced deterioration in financial condition. In general, these loans were granted interest rate reductions to provide cash flow relief to borrowers experiencing cash flow difficulties. The Bank had no restructured loans that had been granted principal payment deferrals until maturity at September 30, 2020 or December 31, 2019. There were no concessions made to forgive principal relative to these loans, although partial charge-offs have been recorded for certain restructured loans. In general, these loans are secured by first liens on 1-4 residential properties or commercial real estate properties. At September 30, 2020 and December 31, 2019, all TDRs were performing according to their modified terms.

 

There was one modification granted during 2020 and two modifications granted during 2019 that resulted in loans being identified as TDRs. See “Note 3 – Loans,” to the financial statements for additional disclosure related to troubled debt restructuring.

 

 

COVID-19 Short-term Loan Concessions - The Bank has elected to account for eligible loan modifications under Section 4013 of the CARES Act.  To be an eligible loan under Section 4013 of the CARES Act, a loan modification must be (1) related to the coronavirus pandemic (“COVID-19”); (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020 and the earlier of (A) 60 days after the date of termination of the national emergency declared by the President on March 13, 2020 concerning the COVID-19 outbreak (the “national emergency”) or (B) December 31, 2020. Eligible loan modifications are not required to be classified as TDRs and will not be reported as past due provided they are performing in accordance with the modified terms. Interest income will continue to be recognized in accordance with GAAP unless the loan is placed on nonaccrual status.

 

Short-term loan modifications totaled $64.9 million as of September 30, 2020 compared to $161.5 million at June 30, 2020. The table below details the status of the Bank’s short-term loan modifications by loan category or type as of September 30, 2020. First Modification Active includes loans within the terms of the original modification agreement. Subsequent Modification Active includes loans with a matured original modification that have been further modified within the short-term parameters. Modification Ended includes loans that have reached final deferred payment and have yet to make a payment in accordance with the loan’s original terms or have yet to request a subsequent modification. Loans that returned to original contracted terms with a verified payment are considered cured and are no longer included as modified loans in the table below.

 

   

First

Modification

Active

   

Subsequent Modification

Active

   

Modification

Ended

   

Total Modified

Loans

   

Total

Loan

Portfolio

   

% Modified

to Total

Portfolio

 
   

(in thousands)

 
                                                 

Hotel, Motel, & Lodging

  $     $ 8,112     $ 22,818     $ 30,930     $ 51,435       60.1

%

Retail Facility

    3,087       6,764             9,851       62,707       15.7  

Commercial Real Estate

    5,228       76       107       5,411       161,524       3.3  

1-4 Family Residential

    2,306       450       225       2,981       194,829       1.5  

Restaurant Full Service

    2,184       6,307       2,872       11,363       19,966       56.9  

Restaurant Limited Service

    2,303                   2,303       14,842       15.5  

Multi-family

                            63,757        

Construction and Development

                            39,980        

Commercial & Industrial

    345             1,239       1,584       218,762       0.7  

Farmland

                            69,017        

Consumer, Agriculture & Other

    486                   486       77,649       0.6  

Total

  $ 15,939     $ 21,709     $ 27,261     $ 64,909     $ 974,468       6.7

%

 

 

Retail purpose commercial real estate operators, as well as hotel and restaurant operators, have been disproportionately impacted by COVID-19. As of September 30, 2020, 83.9% of the remaining short-term modifications under COVID-19 were related to these three industries.

 

As of October 19, 2020, $27.1 million of the loans categorized as Modification Ended in the table above have received a verified payment and are now considered cured.

 

Non-Performing AssetsNon-performing assets consist of certain restructured loans for which interest rate or other terms have been renegotiated, loans past due 90 days or more still on accrual, loans on which interest is no longer accrued, real estate acquired through foreclosure and repossessed assets. The following table sets forth information with respect to non-performing assets as of September 30, 2020 and December 31, 2019:

 

   

September 30,

2020

   

December 31,

2019

 
   

(dollars in thousands)

 
                 

Loans on nonaccrual status

  $ 2,038     $ 1,528  

Troubled debt restructurings on accrual

    489       475  

Past due 90 days or more still on accrual

           

Total non-performing loans

    2,527       2,003  

Real estate acquired through foreclosure

    1,625       3,225  

Other repossessed assets

           

Total non-performing assets

  $ 4,152     $ 5,228  
                 

Non-performing loans to total loans

    0.26

%

    0.22

%

Non-performing assets to total assets

    0.32

%

    0.42

%

Allowance for non-performing loans

  $ 195     $ 48  

Allowance for non-performing loans to non-performing loans

    7.72

%

    2.40

%

 

 

Nonperforming loans at September 30, 2020, were $2.5 million, or 0.26% of total loans, compared with $2.0 million, or 0.22% of total loans at December 31, 2019, and $2.6 million, or 0.32% of total loans at September 30, 2019.

 

Provision and Allowance for Loan LossesThe Bank maintains an allowance for loan losses believed to be sufficient to absorb probable incurred losses existing in the loan portfolio. Management evaluates the adequacy of the allowance using, among other things, historical loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of the underlying collateral and current economic conditions and trends. The allowance may be allocated for specific loans or loan categories, but the entire allowance is available for any loan. The allowance consists of specific and general components. The specific component relates to loans that are individually evaluated and measured for impairment. The general component is based on historical loss experience adjusted for qualitative environmental factors. Management develops allowance estimates based on actual loss experience adjusted for current economic conditions and trends. Allowance estimates are a prudent measurement of the risk in the loan portfolio applied to individual loans based on loan type. If the mix and amount of future charge-off percentages differ significantly from the assumptions used by management in making its determination, management may be required to materially increase its allowance for loan losses and provision for loan losses, which could adversely affect results.

 

A provision of $1.4 million and $3.5 million was recorded in the third quarter and first nine months of 2020, respectively, compared to no provision for loan losses in the first nine months of 2019. The 2020 loan loss provisions were attributable to the net loan charge-offs during the period, trends within the portfolio over the period, and primarily to changes in the economic and business environment attributable to COVID-19, the state and national emergencies that have been declared and the resultant risk the pandemic poses for business disruptions for the Bank’s borrowers which may lead to credit quality deterioration. Substandard loans increased $12.3 million during the nine months of 2020. The increase in substandard loans was primarily within the commercial and industrial loan segment as $12.0 million in loans to two borrowers migrated from watch to substandard during the third quarter of 2020. The trend in risk categories is considered during the evaluation of qualitative trends in the portfolio when establishing the general component of the allowance for loan losses.

 

While the Company expects the U.S. Government’s economic response to the COVID-19 pandemic through monetary policy and fiscal stimulus have provided meaningful support to the economy, management deemed it prudent to increase the allowance for loan losses through its qualitative environmental factors to account for the pandemic risk.

 

The following table sets forth an analysis of loan loss experience as of and for the periods indicated:

 

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

   

December

31,

 
   

2020

   

2019

   

2020

   

2019

      201  
   

(in thousands)

 

Balance at beginning of period

  $ 10,228     $ 8,832     $ 8,376     $ 8,880     $ 8,880  
                                         

Loans charged-off:

                                       

Real estate

    17       105       156       237       322  

Commercial

          10       32       10       37  

Consumer

    131       184       444       398       663  

Agriculture

    2             46       4       266  

Other

                             

Total charge-offs

    150       299       678       649       1,288  
                                         

Recoveries

                                       

Real estate

    19       352       215       499       597  

Commercial

    5       6       16       101       106  

Consumer

    13       9       23       69       75  

Agriculture

    14       3       23       3       3  

Other

    2       1       6       1       3  

Total recoveries

    53       371       283       673       784  

Net charge-offs (recoveries)

    97       (72

)

    395       (24

)

    504  

Provision for loan losses

    1,350             3,500              

Balance at end of period

  $ 11,481     $ 8,904     $ 11,481     $ 8,904     $ 8,376  
                                         

Allowance for loan losses to period-end loans

    1.18

%

    1.11

%

    1.18

%

    1.11

%

    0.90

%

Net charge-offs (recoveries) to average loans

    0.04

%

    (0.04 )%     0.05

%

    0.00

%

    0.06

%

Allowance for loan losses to non-performing loans

    454.33

%

    345.52

%

    454.33

%

    345.52

%

    418.17

%

 

 

The allowance for loan losses to total loans was 1.18% at September 30, 2020, compared to 0.90% at December 31, 2019, and 1.11% at September 30, 2019. Loans acquired in the November 2019 branch transaction totaled $100.3 million at September 30, 2020 and $124.7 million at December 31, 2019. These loans were recorded at fair value as determined by an independent third party. The remaining discount associated with the fair value purchase accounting adjustments on the acquired loans was $301,000 at September 30, 2020, compared to $480,000 at December 31, 2019. Additionally, management added a qualitative environmental adjustment for these loans as the fair value assessment at the time of purchase did not contemplate COVID-19. Any subsequent deterioration of these acquired loans may require an adjustment through the allowance for loan loss. Net loan charge-offs in the first nine months of 2020 totaled $395,000, compared to net loan recoveries of $24,000 in the first nine months of 2019. The allowance for loan losses to non-performing loans was 454.33% at September 30, 2020, compared with 418.17% at December 31, 2019, and 345.52% at September 30, 2019.

 

The majority of nonperforming loans are secured by real estate collateral, and the underlying collateral coverage for nonperforming loans supports the likelihood of collection of principal. Management has assessed these loans for collectability and considered, among other things, the borrower’s ability to repay, the value of the underlying collateral, and other market conditions to ensure the allowance for loan losses is adequate to absorb probable incurred losses. Based on prior charge-offs, the current recorded investment in loans individually evaluated for impairment in the commercial real estate and residential real estate segments of the portfolio are significantly below the unpaid principal balance for those loans. The recorded investment net of the allocated allowance was 55.93% and 54.62% of the unpaid principal balance in the commercial real estate and residential real estate segments of the portfolio, respectively, at September 30, 2020.

 

Investment SecuritiesThe securities portfolio serves as a source of liquidity and earnings and contributes to the management of interest rate risk. Investments are made in various types of liquid assets, including U.S. Treasury obligations and securities of various federal agencies, obligations of states and political subdivisions, corporate bonds, and collateralized loan obligations. The investment portfolio decreased by $5.5 million, or 2.6%, to $203.5 million at September 30, 2020, compared with $209.0 million at December 31, 2019.

 

The following table sets forth the carrying value of the securities portfolio at the dates indicated:

 

   

September 30, 2020

   

December 31, 2019

 
   

Amortized

Cost

   

Gross

Unrealized

Gains

   

Gross

Unrealized

Losses

   

Fair

Value

   

Amortized

Cost

   

Gross

Unrealized

Gains

   

Gross

Unrealized

Losses

   

Fair

Value

 
   

(dollars in thousands)

 

Securities available for sale

                                                               

U.S. Government and federal agencies

  $ 19,158     $ 931     $     $ 20,089     $ 22,281     $ 196     $ (147

)

  $ 22,330  

Agency mortgage-backed residential

    76,388       2,974       (13

)

    79,349       91,269       1,186       (255

)

    92,200  

Collateralized loan obligations

    44,730             (1,905

)

    42,825       49,831             (412

)

    49,419  

State and municipal

    34,391       1,076       (32

)

    35,435       27,819       550       (3

)

    28,366  

Corporate bonds

    27,116       373       (1,643

)

    25,846       16,472       213             16,685  

Total available for sale

  $ 201,783     $ 5,354     $ (3,593

)

  $ 203,544     $ 207,672     $ 2,145     $ (817

)

  $ 209,000  

 

 

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

 

The market value of CLOs may be affected by, among other things, changes in composition of the underlying loans, changes in the cash flows from the underlying loans, defaults and recoveries on the underlying loans, capital gains and losses on the underlying loans, prepayments on the underlying loans, and other conditions or economic factors. During the first quarter of 2020, the fair value of the Bank’s CLO portfolio declined as the market was disrupted by COVID-19. At March 31, 2020, the CLO portfolio had an unrealized loss of $4.0 million, or 9% of amortized cost. During the second and third quarters of 2020, the fair value improved as the market stabilized. At September 30, 2020, the portfolio had an unrealized loss of $1.9 million, or 4% of amortized cost.

 

Although the Bank attempts to mitigate the credit and liquidity risks associated with CLOs by purchasing CLOs with credit ratings of A or higher, completing pre-purchase due diligence, and through ongoing monitoring, no assurance can be given that these risk mitigation efforts will be successful. At September 30, 2020, $27.0 million, $13.5 million, and $2.4 million of the Bank’s CLOs were AA, A, and BBB rated, respectively. There was one CLO rated below A at BBB, which was downgraded during the third quarter of 2020. Stress testing was completed on each security in the CLO portfolio as of quarter-end. Each security in the portfolio passed, without dollar loss, a stress scenario characterized as severe, which assumed a ten percent per annum constant prepayment rate, a twelve percent per annum constant default rate for four years followed by a four percent rate thereafter, and a forty-five percent recovery rate on a one-year lag. During the first quarter, one of the CLOs in the investment portfolio rated AA with a book value of $5.0 million was called and redeemed at par value or $5.0 million by the issuer. The Bank’s CLOs are all floating rate with rates set on a quarterly basis at three-month LIBOR plus a spread.

 

 

The fair value of the Bank’s corporate bond portfolio has also been impacted by market disruption and declining rates. At March 31, 2020, the corporate bond portfolio had a net unrealized loss of $1.3 million, or 6% of amortized cost. At September 30, 2020, the portfolio had a net unrealized loss of $1.3 million, or 5% of amortized cost. The corporate bond portfolio consists of 12 subordinated debt securities of U.S. banks and bank holding companies with maturities ranging from 2024 to 2037. The securities are either initially fixed for five years converting to floating at an index over LIBOR or floating at an index over LIBOR from inception. Management regularly monitors the financial condition of these corporate issuers by reviewing their regulatory and public filings.

 

The Bank has the intent and ability to hold its CLO and corporate debt securities to maturity and, at this juncture, has determined the value decline is temporary in nature.

 

Foreclosed Properties – Foreclosed properties declined from $3.2 million at September 30, 2019 and December 31, 2019 to $1.6 million at September 30, 2020. See Note 5 – “Other Real Estate Owned,” to the financial statements. Management values foreclosed properties at fair value less estimated costs to sell when acquired and expects to liquidate these properties to recover the investment in the due course of business.

 

OREO is recorded at fair market value less estimated cost to sell at time of acquisition. Any write-down of the property at the time of acquisition is charged to the allowance for loan losses. When foreclosed properties are acquired, management obtains a new appraisal or has staff from the Bank’s special assets group evaluate the latest in-file appraisal in connection with the transfer to OREO. Management typically obtains updated appraisals within five quarters of the anniversary date of ownership unless a sale is imminent. Subsequent reductions in fair value are recorded as non-interest expense when a new appraisal indicates a decline in value or in cases where a listing price is lowered below the appraisal amount.

 

There were no OREO sales during the third quarter of 2020 and $1.6 million for the first nine months of 2020, respectively, compared to no sales during the third quarter or nine months ended September 30, 2019. Operating expenses for OREO totaled $20,000 and $58,000 for the third quarter and nine months ended September 30, 2020, respectively, compared to operating expenses of $25,000 and write-downs and operating expenses of $333,000 for the third quarter and nine months ending September 30, 2019, respectively. There were no fair value write-downs recorded during the third quarter or nine months ended September 30, 2020, compared with no write-downs and $260,000 for the third quarter and nine months ended September 30, 2019, respectively.

 

LiabilitiesTotal liabilities at September 30, 2020 were $1.18 billion compared with $1.14 billion at December 31, 2019, an increase of $39.3 million, or 3.4%. This increase was primarily attributable to an increase in deposits of $67.4 million offset by a decrease of $30.8 million in FHLB advances.

 

Deposits are the Bank’s primary source of funds. The following table sets forth the average daily balances and weighted average rates paid for deposits for the periods indicated:

 

   

For the Nine Months

   

For the Year

 
   

Ended September 30,

   

Ended December 31,

 
   

2020

   

2019

 
   

Average

   

Average

   

Average

   

Average

 
   

Balance

   

Rate

   

Balance

   

Rate

 
   

(dollars in thousands)

 

Demand

  $ 209,605             $ 151,299          

Interest checking

    164,256       0.34

%

    104,077       0.30

%

Money market

    163,328       0.60       161,610       1.06  

Savings

    102,341       0.52       36,035       0.19  

Certificates of deposit

    454,279       1.46       483,222       1.98  

Total deposits

  $ 1,093,809       0.80

%

  $ 936,243       1.25

%

 

The following table shows at September 30, 2020 the amount of time deposits of $250,000 or more by time remaining until maturity (in thousands):

  

Maturity Period

 
         

Three months or less

  $ 13,732  

Three months through six months

    11,759  

Six months through twelve months

    16,352  

Over twelve months

    14,950  

Total

  $ 56,793  

 

 

Liquidity

 

Liquidity risk arises from the possibility the Company may not be able to satisfy current or future financial commitments or may become unduly reliant on alternative funding sources. The objective of liquidity risk management is to ensure that the Company meets the cash flow requirements of depositors and borrowers, as well as operating cash needs, taking into account all on- and off-balance sheet funding demands. Liquidity risk management also involves ensuring that cash flow needs are met at a reasonable cost. Management maintains an investment and funds management policy, which identifies the primary sources of liquidity, establishes procedures for monitoring and measuring liquidity, and establishes minimum liquidity requirements in compliance with regulatory guidance. The Asset Liability Committee regularly monitors and reviews the Company’s liquidity position.

 

Funds are available to the Bank from a number of sources, including the sale of securities in the available for sale investment portfolio, principal pay-downs on loans and mortgage-backed securities, customer deposit inflows, and other wholesale funding.

 

The Bank also borrows from the FHLB to supplement funding requirements. At September 30, 2020, the Bank had an unused borrowing capacity with the FHLB of $106.6 million. Advances are collateralized by first mortgage residential loans as well as loans originated under the SBA Payment Protection Plan loans and borrowing capacity is based on the underlying book value of eligible pledged loans.

 

The Bank also has available on an unsecured basis federal funds borrowing lines from a correspondent bank totaling $5.0 million. Management believes the sources of liquidity are adequate to meet expected cash needs for the foreseeable future. Historically, the Bank has also utilized brokered and wholesale deposits to supplement its funding strategy. At September 30, 2020, the Bank had no brokered deposits.

 

The Company uses cash on hand to service the subordinated capital notes, junior subordinated debentures, and to provide for operating cash flow needs. The Company also may issue common equity, preferred equity and debt to support cash flow needs and liquidity requirements.

 

Capital

 

Stockholders’ equity increased $6.5 million to $112.3 million at September 30, 2020, compared with $105.8 million at December 31, 2019 primarily due to current year net income of $5.9 million.

 

The following table shows the ratios of Tier 1 capital, common equity Tier 1 capital, and total capital to risk-adjusted assets and the leverage ratios (excluding the capital conservation buffer) for the Bank at the dates indicated:

 

   

Regulatory

Minimums

   

Well-Capitalized

Minimums

   

September 30, 2020

   

December 31, 2019

 
                                 

Tier 1 Capital

    6.0 %     8.0 %     11.88 %     11.25 %

Common equity Tier 1 capital

    4.5       6.5       11.88       11.25  

Total risk-based capital

    8.0       10.0       12.97       12.08  

Tier 1 leverage ratio

    4.0       5.0       9.90       9.99  

 

 

Failure to meet minimum capital requirements could result in discretionary actions by regulators that, if taken, could have a materially adverse effect on the Bank or Company’s financial condition.

 

The Basel III rules established a “capital conservation buffer” of 2.5% above the regulatory minimum risk-based capital ratios. The minimum ratios are a common equity Tier 1 risk-based capital ratio of 7.0%, a Tier 1 risk-based capital ratio of 8.5%, and a total risk-based capital ratio of 10.5%. An institution is subject to limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses if capital levels fall below minimum levels plus the buffer amounts. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions.

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Given an instantaneous 100 basis point increase in interest rates, the base net interest income would increase by an estimated 0.1% at September 30, 2020, compared with a decrease of 2.3% at December 31, 2019. Given a 200 basis point increase in interest rates, base net interest income would increase by an estimated 0.9% at September 30, 2020, compared with a decrease of 5.1% at December 31, 2019.

 

The following table indicates the estimated impact on net interest income under various interest rate scenarios for the twelve months following September 30, 2020, as calculated using the static shock model approach:

 

   

Change in Future

Net Interest Income

 
   

Dollar Change

   

Percentage

Change

 
   

(dollars in thousands)

 

+ 200 basis points

  $ 347       0.85

%

+ 100 basis points

    34       0.08  

- 100 basis points

    (570 )     (1.40 )

- 200 basis points

    (1,547

)

    (3.80

)

 

 

Item 4. Controls and Procedures

 

As of the end of the quarterly period covered by this report, an evaluation was carried out under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”)). Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were, to the best of their knowledge, effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms as of such date.

 

There was no change in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

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 amount of damages. Litigation is subject to inherent uncertainties and unfavorable outcomes could occur.

 

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.

 

Item 1A. Risk Factors

 

The following risk factor supplements the “Risk Factors” section in our 2019 Annual Report and Part I Item 1A of our 2019 Form 10-K.

 

The COVID-19 Pandemic Creates Significant Risks and Uncertainties for the Company’s Business.

 

In March 2020, the World Health Organization declared novel coronavirus disease 2019 (“COVID-19”) as a global pandemic. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains, lowered equity market valuations, created significant volatility and disruption in financial markets, and increased unemployment levels. In addition, the pandemic has resulted in temporary closures of many businesses and the institution of social distancing and sheltering in place requirements in many states and communities, including those in markets in which the Company is located or does business.

 

As a result, the demand for the Company’s products and services has been, and will continue to be, significantly impacted. Furthermore, the pandemic could influence the recognition of credit losses in the Company’s loan portfolio and increase its allowance for loan losses as both businesses and consumers are negatively impacted by the economic downturn. In addition, governmental actions are meaningfully influencing the interest-rate environment, which could adversely affect the Company’s results of operations and financial condition. The business operations of the Bank may also be disrupted if significant portions of its workforce are unable to work effectively, including because of illness, quarantines, government actions, or other restrictions in connection with the pandemic, travel restrictions, technology limitations and/or disruptions. Furthermore, the business operations of the Company and Bank have been, and may again in the future be, disrupted due to vendors and third-party service providers being unable to work or provide services effectively, including because of illness, quarantines, government actions, or other restrictions in connection with the pandemic.

 

In response to the pandemic, the Bank has made certain accommodations to customers, which may negatively impact revenue and other results of operations of the Company in the near term and, if not effective in mitigating the effect of COVID-19 on the Company’s customers, may adversely affect the Company’s business and results of operations more substantially over a longer period of time.

 

The extent to which the COVID-19 pandemic impacts the Company’s business, liquidity, asset valuations such as goodwill, loan collections, results of operations, and financial condition, as well as its regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic. Moreover, the effects of the COVID-19 pandemic may heighten many of the other risks described in the section entitled “Risk Factors” in our most recent Annual Report on Form 10-K.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

Not applicable.

 

Item 3. Default Upon Senior Securities

 

Not applicable.

 

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

Not applicable.

 

Item 6. Exhibits

 

 

(a)

Exhibits

 

The following exhibits are filed or furnished as part of this report:

 

Exhibit Number Description of Exhibit
   

3.1

Articles of Incorporation of the Company, restated to reflect amendments. Filed as Exhibit 3.1 to the Quarterly Report on Form 10-Q filed August 2, 2019 and incorporated by reference.

 

 

3.3

Amended and Restated Bylaws of Limestone Bancorp, Inc. dated June 18, 2018. Exhibit 3.2 to Form 8-K filed June 6, 2018 is hereby incorporated by reference.

 

 

4.1

Tax Benefits Preservation Plan, dated as of June 25, 2015, between the Company and American Stock Transfer Company, as Rights Agent. Exhibit 4.1 to Form 8-K filed June 29, 2015 is incorporated by reference.

 

 

4.2

Amendment No. 1 to the Tax Benefits Preservation Plan, dated August 4, 2015. Exhibit 4.2 to the Quarterly Report on Form 10-Q filed August 5, 2015 is incorporated by reference.

 

 

4.3

Amendment No. 2 to the Tax Benefits Preservation Plan dated May 23, 2018. Exhibit 4 to the Form 8-K filed May 23, 2018 is incorporated by reference.

   

4.4

Amendment No. 3 to the Limestone Bancorp, Inc. Tax Benefits Preservation Plan, dated November 25, 2019. Exhibit 4.4 to the Form 8-K filed November 27, 2019 is incorporated herein by reference.

   

4.5

Indenture dated as of July 23, 2019 by and among Limestone Bancorp, Inc. and Wilmington Trust, National Association is incorporated by reference to the Company’s Current Report on Form 8-K dated July 25, 2019.

   

4.6

Company Order of Limestone Bancorp, Inc. dated July 21, 2020. Exhibit 4.2 to Form 8-K filed July 24, 2020 is incorporated by reference.

   

4.7

Form of 5.75% Fixed-to-Floating Subordinated Notes due 2029 of Limestone Bancorp, Inc. issued July 31, 2020. Exhibit 4.7 to the Quarterly Report on Form 10-Q filed July 31, 2020 is incorporated by reference.

   

10.1

Form of Subordinated Note Purchase Agreement dated July 21, 2020 by and among Limestone Bancorp, Inc. and the Purchasers. Exhibit 10.1 to Form 8-K filed July 24, 2020 is incorporated by reference.

   

31.1

Certification of Principal Executive Officer, pursuant to Rule 13a - 14(a).

  

31.2

Certification of Principal Financial Officer, pursuant to Rule 13a - 14(a).

  

32.1

Certification of Principal Executive Officer, pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

  

32.2

Certification of Principal Financial Officer, pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

101

The following financial statements from the Company’s Quarterly Report on Form 10Q for the quarter ended September 30, 2020, formatted in Inline XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income (Loss), (iv) Consolidated Statement of Changes in Stockholders’ Equity, (v) Consolidated Statements of Cash Flows, (vi) Notes to Consolidated Financial Statements.

   
104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

 

 

The Company has other long-term debt agreements that meet the exclusion set forth in Section 601 (b)(4)(iii)(A) of Regulation S-K. The Company hereby agrees to furnish a copy of such agreements to the Securities and Exchange Commission upon request.

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant had duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

  

LIMESTONE BANCORP, INC.

  

(Registrant)

  

October 30, 2020

By:

/s/ John T. Taylor

  

  

John T. Taylor

  

  

Chief Executive Officer

  

October 30, 2020

By:

/s/ Phillip W. Barnhouse

 

 

Phillip W. Barnhouse 

  

  

Chief Financial Officer

  

  

 

 

 

52