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

lmst20200331_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 March 31, 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.

 

6,269,305 Common Shares and 1,220,000 Non-Voting Common Shares were outstanding at April 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

  31

     

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

45

     

ITEM 4.

CONTROLS AND PROCEDURES

45

  

  

  

PART II –

OTHER INFORMATION

  

     

ITEM 1.

LEGAL PROCEEDINGS

46

     

ITEM 1A.

RISK FACTORS

46

     

ITEM 2.

UNREGISTERED SALES ON EQUITY SECURITIES AND USE OF PROCEEDS

46

     

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

46

     

ITEM 4.

MINE SAFETY DISCLOSURES

46

     

ITEM 5.

OTHER INFORMATION

46

     

ITEM 6.

EXHIBITS

47

 

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

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

 

Unaudited Consolidated Balance Sheets for March 31, 2020 and December 31, 2019

Unaudited Consolidated Statements of Income for the three months ended March 31, 2020 and 2019

Unaudited Consolidated Statements of Comprehensive Income for the three months ended March 31, 2020 and 2019

Unaudited Consolidated Statement of Changes in Stockholders’ Equity for the three months ended March 31, 2020 and 2019

Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019

Notes to Unaudited Consolidated Financial Statements

 

 

 

LIMESTONE BANCORP, INC.

Unaudited Consolidated Balance Sheets

(dollars in thousands except share data)

 

   

March 31,

2020

   

December 31,

2019

 

Assets

               

Cash and due from banks

  $ 9,509     $ 8,241  

Interest bearing deposits in banks

    23,639       21,962  

Cash and cash equivalents

    33,148       30,203  

Securities available for sale

    198,657       209,000  

Loans, net of allowance of $9,150 and $8,376, respectively

    952,411       917,895  

Premises and equipment, net

    19,282       19,658  

Premises held for sale

    1,185       900  

Other real estate owned

    3,225       3,225  

Federal Home Loan Bank stock

    6,837       6,237  

Bank owned life insurance

    16,128       16,037  

Deferred taxes, net

    28,208       27,765  

Goodwill

    6,252       6,252  

Other intangible assets, net

    2,436       2,500  

Accrued interest receivable and other assets

    6,441       6,107  

Total assets

  $ 1,274,210     $ 1,245,779  
                 

Liabilities and Stockholders’ Equity

               

Deposits

               

Non-interest bearing

  $ 185,658     $ 187,551  

Interest bearing

    872,242       839,424  

Total deposits

    1,057,900       1,026,975  

Federal Home Loan Bank advances

    61,349       61,389  

Accrued interest payable and other liabilities

    7,450       8,665  

Junior subordinated debentures

    21,000       21,000  

Subordinated capital note

    17,000       17,000  

Senior debt

    5,000       5,000  

Total liabilities

    1,169,699       1,140,029  

Commitments and contingent liabilities (Note 15)

           

Stockholders’ equity

               

Common stock, no par, 39,000,000 shares authorized, 6,269,305 and 6,251,975 voting, and 1,220,000 and 1,220,000 non-voting issued and outstanding, respectively

    140,639       140,639  

Additional paid-in capital

    24,577       24,508  

Retained deficit

    (53,843

)

    (55,683

)

Accumulated other comprehensive loss

    (6,862

)

    (3,714

)

Total stockholders' equity

    104,511       105,750  

Total liabilities and stockholders’ equity

  $ 1,274,210     $ 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

March 31,

 
   

2020

   

2019

 

Interest income

               

Loans, including fees

  $ 11,611     $ 10,254  

Taxable securities

    1,467       1,573  

Tax exempt securities

    70       93  

Federal funds sold and other

    119       266  
      13,267       12,186  

Interest expense

               

Deposits

    2,772       2,587  

Federal Home Loan Bank advances

    220       281  

Senior debt

    56       96  

Junior subordinated debentures

    215       263  

Subordinated capital note

    242        
      3,505       3,227  
                 

Net interest income

    9,762       8,959  

Provision for loan losses

    1,050        

Net interest income after provision for loan losses

    8,712       8,959  
                 

Non-interest income

               

Service charges on deposit accounts

    668       496  

Bank card interchange fees

    750       508  

Income from bank owned life insurance

    96       99  

Other

    210       181  
      1,724       1,284  

Non-interest expense

               

Salaries and employee benefits

    4,538       3,915  

Occupancy and equipment

    999       898  

Professional fees

    208       165  

Marketing expense

    214       227  

FDIC insurance

          108  

Data processing expense

    359       313  

State franchise and deposit tax

    360       315  

Deposit account related expense

    451       281  

Other real estate owned expense

    16       166  

Litigation and loan collection expense

    65       46  

Communications expense

    218       190  

Insurance expense

    103       114  

Postage and delivery

    168       141  

Other

    536       402  
      8,235       7,281  

Income before income taxes

    2,201       2,962  

Income tax expense

    361       123  

Net income

    1,840       2,839  

Basic and diluted income per common share

  $ 0.25     $ 0.38  

 

See accompanying notes to unaudited consolidated financial statements.

 

 

 

LIMESTONE BANCORP, INC.

Unaudited Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

                                              

   

Three Months Ended

March 31,

 
   

2020

   

2019

 

Net income

  $ 1,840     $ 2,839  

Other comprehensive income (loss):

               

Unrealized gain (loss) on securities:

               

Unrealized gain (loss) arising during the period

    (4,126

)

    1,995  

Reclassification adjustment for gains (losses) included in net income

           

Net unrealized gain (loss) recognized in comprehensive income (loss)

    (4,126

)

    1,995  

Tax effect

    978       (418

)

Other comprehensive income (loss)

    (3,148

)

    1,577  
                 

Comprehensive income (loss)

  $ (1,308

)

  $ 4,416  

 

See accompanying notes to unaudited consolidated financial statements.

 

 

 

LIMESTONE BANCORP, INC.

Unaudited Consolidated Statements of Changes in Stockholders’ Equity

For Three Months Ended March 31, 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  

 

    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 loss, 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  

 

See accompanying notes to unaudited consolidated financial statements.

 

 

 

LIMESTONE BANCORP, INC.

Unaudited Consolidated Statements of Cash Flows

For Three Months Ended March 31, 2020 and 2019

(dollars in thousands)

 

   

2020

   

2019

 

Cash flows from operating activities

               

Net income

  $ 1,840     $ 2,839  

Adjustments to reconcile net income to net cash from operating activities

               

Depreciation and amortization

    479       679  

Provision for loan losses

    1,050        

Net amortization on securities

    146       189  

Stock-based compensation expense

    106       82  

Deferred taxes, net

    535       295  

Net write-down of other real estate owned

          150  

Impairment of premises held for sale

    25        

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

    (91

)

    (93

)

Amortization of operating lease right-of-use assets

    187       62  

Net change in accrued interest receivable and other assets

    (334

)

    (668

)

Net change in accrued interest payable and other liabilities

    (1,215

)

    (2,671

)

Net cash from operating activities

    2,728       864  
                 

Cash flows from investing activities

               

Purchases of available for sale securities

    (6,869

)

    (8,096

)

Proceeds from sales and calls of available for sale securities

    6,000       1,000  

Proceeds from maturities and prepayments of available for sale securities

    6,940       3,683  

Purchases of Federal Home Loan Bank stock

    (600

)

     

Proceeds from mandatory redemptions of Federal Home Loan Bank stock

          420  

Net changes in loans

    (35,712

)

    (22,002

)

Purchases of premises and equipment

    (390

)

    (37

)

Net cash from investing activities

    (30,631

)

    (25,032

)

                 

Cash flows from financing activities

               

Net change in deposits

    30,925       14,611  

Repayment of Federal Home Loan Bank advances

    (95,040

)

    (30,038

)

Advances from Federal Home Loan Bank

    95,000       35,000  

Common shares withheld for taxes

    (37

)

    (276

)

Net cash from financing activities

    30,848       19,297  

Net change in cash and cash equivalents

    2,945       (4,871

)

Beginning cash and cash equivalents

    30,203       35,361  

Ending cash and cash equivalents

  $ 33,148     $ 30,490  
                 

Supplemental cash flow information:

               

Interest paid

  $ 3,919     $ 3,193  

Supplemental non-cash disclosure:

               

Transfer from loans to other real estate

  $     $  

Transfer from premises and equipment to premises held for sale

    310        

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 three months ended March 31, 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, 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.

 

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. Companies qualifying for the delay 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.

 

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)

 

March 31, 2020

                               

Available for sale

                               

U.S. Government and federal agency

  $ 20,751     $ 353     $     $ 21,104  

Agency mortgage-backed: residential

    86,840       2,428       (167

)

    89,101  

Collateralized loan obligations

    44,732             (3,978

)

    40,754  

State and municipal

    28,301       346       (493

)

    28,154  

Corporate bonds

    20,831       199       (1,486

)

    19,544  

Total available for sale

  $ 201,455     $ 3,326     $ (6,124

)

  $ 198,657  

 

December 31, 2019

 

Amortized

Cost

   

Gross Unrealized

Gains

   

Gross Unrealized

Losses

   

Fair Value

 

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

March 31,

 
   

2020

   

2019

 
   

(in thousands)

 

Proceeds

  $ 6,000     $ 1,000  

Gross gains

           

Gross losses

           

 

The amortized cost and fair value of our debt securities are shown by contractual maturity. Expected maturities may differ from actual maturities when borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed securities not due at a single maturity date are shown separately.  

 

   

March 31, 2020

 
   

Amortized

Cost

   

Fair

Value

 
   

(in thousands)

 

Maturity

               

Available for sale

               

Within one year

  $ 31,403     $ 30,003  

One to five years

    40,037       40,515  

Five to ten years

    23,970       22,852  

Beyond ten years

    19,205       16,186  

Agency mortgage-backed: residential

    86,840       89,101  

Total

  $ 201,455     $ 198,657  

 

Securities pledged at March 31, 2020 and December 31, 2019 had carrying values of approximately $80.9 million and $75.8 million, respectively, and were pledged to secure public deposits.

 

 

At March 31, 2020 and December 31, 2019, the Bank held securities issued by the Commonwealth of Kentucky or Kentucky municipalities having a book value of $17.0 million and $14.5 million, respectively. At March 31, 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 March 31, 2020, $25.7 million and $15.0 million of our CLOs were AA and A rated, respectively. There were no CLOs rated below A and none of the CLOs were subject to ratings downgrade in the three months ended March 31, 2020. All of our 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 March 31, 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 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 March 31, 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 March 31, 2020 and December 31, 2019, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position, are as follows:

 

   

Less than 12 Months

   

12 Months or More

   

Total

 

Description of Securities

 

Fair

Value

   

Unrealized

Loss

   

Fair

Value

   

Unrealized

Loss

   

Fair

Value

   

Unrealized

Loss

 
   

(in thousands)

 

March 31, 2020

                                               

Available for sale

                                               

U.S. Government and federal agency

  $     $     $     $     $     $  

Agency mortgage-backed: residential

    10,843       (120

)

    1,617       (47

)

    12,460       (167

)

Collateralized loan obligations

    10,702       (843

)

    30,052       (3,135

)

    40,754       (3,978

)

State and municipal

    10,192       (493

)

                10,192       (493

)

Corporate bonds

    11,008       (1,486

)

                11,008       (1,486

)

Total temporarily impaired

  $ 42,745     $ (2,942

)

  $ 31,669     $ (3,182

)

  $ 74,414     $ (6,124

)

                                                 
                                                 

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:

 

   

March 31,

   

December 31,

 
   

2020

   

2019

 
   

(in thousands)

 

Commercial

  $ 169,176     $ 145,551  

Commercial Real Estate:

               

Construction

    71,267       64,911  

Farmland

    80,579       79,118  

Nonfarm nonresidential

    261,807       255,459  

Residential Real Estate:

               

Multi-family

    75,525       70,950  

1-4 Family

    220,701       226,629  

Consumer

    44,814       47,790  

Agriculture

    36,977       35,064  

Other

    715       799  

Subtotal

    961,561       926,271  

Less: Allowance for loan losses

    (9,150

)

    (8,376

)

Loans, net

  $ 952,411     $ 917,895  

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2020 and 2019:

 

   

Commercial

   

Commercial

Real Estate

   

Residential

Real Estate

   

Consumer

   

Agriculture

   

Other

   

Total

 
   

(in thousands)

 

March 31, 2020:

                                                       

Beginning balance

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

Provision (negative provision)

    339       141       220       265       87       (2

)

    1,050  

Loans charged off

    (29

)

    (29

)

    (75

)

    (161

)

    (41

)

          (335

)

Recoveries

    5       20       21       4       8       1       59  

Ending balance

  $ 2,025     $ 4,212     $ 1,909     $ 593     $ 409     $ 2     $ 9,150  
                                                         
                                                         

March 31, 2019:

                                                       

Beginning balance

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

Provision (negative provision)

    143       (165

)

    (204

)

    193       33              

Loans charged off

          (15

)

    (82

)

    (180

)

    (1

)

          (278

)

Recoveries

    5       2       61       16                   84  

Ending balance

  $ 1,447     $ 4,498     $ 2,227     $ 159     $ 353     $ 2     $ 8,686  

 

 

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 March 31, 2020:

 

   

Commercial

   

Commercial

Real Estate

   

Residential

Real Estate

   

Consumer

   

Agriculture

   

Other

   

Total

 
   

(in thousands)

 

Allowance for loan losses:

                                                       

Ending allowance balance attributable to loans:

                                                       

Individually evaluated for impairment

  $     $ 19     $ 1     $     $     $     $ 20  

Collectively evaluated for impairment

    2,025       4,193       1,908       593       409       2       9,130  

Total ending allowance balance

  $ 2,025     $ 4,212     $ 1,909     $ 593     $ 409     $ 2     $ 9,150  
                                                         

Loans:

                                                       

Loans individually evaluated for impairment

  $ 158     $ 922     $ 921     $ 143     $     $     $ 2,144  

Loans collectively evaluated for impairment

    169,018       412,731       295,305       44,671       36,977       715       959,417  

Total ending loans balance

  $ 169,176     $ 413,653     $ 296,226     $ 44,814     $ 36,977     $ 715     $ 961,561  

 

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

 

   

Commercial

   

Commercial

Real Estate

   

Residential

Real Estate

   

Consumer

   

Agriculture

   

Other

   

Total

 
   

(in thousands)

 

Allowance for loan losses:

                                                       

Ending allowance balance attributable to loans:

                                                       

Individually evaluated for impairment

  $ 3     $ 37     $ 2     $     $     $     $ 42  

Collectively evaluated for impairment

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

Total ending allowance balance

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

Loans:

                                                       

Loans individually evaluated for impairment

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

Loans collectively evaluated for impairment

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

Total ending loans balance

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

 

 

Impaired Loans

 

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

 

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

 

   

As of March 31, 2020

   

Three Months Ended March 31, 2020

 
   

Unpaid

Principal

Balance

   

Recorded

Investment

   

Allowance

For Loan

Losses

Allocated

   

Average

Recorded

Investment

   

Interest

Income

Recognized

   

Cash

Basis

Income

Recognized

 
   

(in thousands)

         

With No Related Allowance Recorded:

                                               

Commercial

  $ 265     $ 158     $     $ 104     $     $  

Commercial real estate:

                                               

Construction

                                   

Farmland

    414       299             296       10       10  

Nonfarm nonresidential

    1,043       480             485       8        

Residential real estate:

                                               

Multi-family

                                   

1-4 Family

    1,862       846             795       3       3  

Consumer

    354       143             121       1       1  

Agriculture

    297                   21              

Other

                                   

Subtotal

    4,235       1,926             1,822       22       14  
                                                 

With An Allowance Recorded:

                                               

Commercial

                      12              

Commercial real estate:

                                               

Construction

                                   

Farmland

    143       143       19       212       2        

Nonfarm nonresidential

                                   

Residential real estate:

                                               

Multi-family

                                   

1-4 Family

    75       75       1       111       2        

Consumer

                                   

Agriculture

                                   

Other

                                   

Subtotal

    218       218       20       335       4        

Total

  $ 4,453     $ 2,144     $ 20     $ 2,157     $ 26     $ 14  

 

 

   

As of December 31, 2019

   

Three Months Ended March 31, 2019

 
   

Unpaid

Principal

Balance

   

Recorded

Investment

   

Allowance

For Loan

Losses

Allocated

   

Average

Recorded

Investment

   

Interest

Income

Recognized

   

Cash

Basis

Income

Recognized

 
   

(in thousands)

         

With No Related Allowance Recorded:

                                               

Commercial

  $ 138     $ 50     $     $ 52     $     $  

Commercial real estate:

                                               

Construction

                                   

Farmland

    380       293             98       5       5  

Nonfarm nonresidential

    1,057       489             256       3       3  

Residential real estate:

                                               

Multi-family

                                   

1-4 Family

    1,679       745             1,544       22       22  

Consumer

    309       98             14              

Agriculture

    304       42             32              

Other

                                   

Subtotal

    3,867       1,717             1,996       30       30  

With An Allowance Recorded:

                                               

Commercial

    24       24       3                    

Commercial real estate:

                                               

Construction

                                   

Farmland

    282       282       37       158              

Nonfarm nonresidential

                                   

Residential real estate:

                                               

Multi-family

                                   

1-4 Family

    183       147       2       719       11        

Consumer

                                   

Agriculture

                                   

Other

                                   

Subtotal

    489       453       42       877       11        

Total

  $ 4,356     $ 2,170     $ 42     $ 2,873     $ 41     $ 30  

 

 

Troubled Debt Restructuring

 

A troubled debt restructuring (TDR) occurs when the Bank has agreed to a loan modification in the form of a concession for a borrower who is experiencing financial difficulty. The Bank’s TDRs typically involve a reduction in interest rate, a deferral of principal for a stated period of time, or an interest only period. All TDRs are considered impaired and the Bank has allocated reserves for these loans to reflect the present value of the concessionary terms granted to the borrower.

 

The following table presents the types of TDR loan modifications by portfolio segment outstanding as of March 31, 2020 and December 31, 2019:

 

   

TDRs

Performing to

Modified Terms

   

TDRs Not

Performing to

Modified Terms

   

Total

TDRs

 
   

(in thousands)

 

March 31, 2020

                       

Commercial Real Estate:

                       

Nonfarm nonresidential

  $ 391     $     $ 391  

Residential Real Estate:

                       

1-4 Family

    75             75  

Total TDRs

  $ 466     $     $ 466  

 

   

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 March 31, 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 March 31, 2020 and December 31, 2019. The Company has committed to lend no additional amounts as of March 31, 2020 and December 31, 2019 to borrowers with outstanding loans classified as TDRs.

 

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.

 

No TDR loan modifications occurred during the three months ended March 31, 2020 or March 31, 2019. During the first three months of 2020 and 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.

 

 

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 March 31, 2020, and December 31, 2019:

 

   

Nonaccrual

   

Loans Past Due 90 Days

And Over Still Accruing

 
   

March 31,

2020

   

December 31,

2019

   

March 31,

2020

   

December 31,

2019

 
   

(in thousands)

 

Commercial

  $ 158     $ 50     $     $  

Commercial Real Estate:

                               

Construction

                       

Farmland

    298       431              

Nonfarm nonresidential

    89       90              

Residential Real Estate:

                               

Multi-family

                       

1-4 Family

    812       817              

Consumer

    143       98              

Agriculture

          42              

Other

                       

Total

  $ 1,500     $ 1,528     $     $  

 

The following table presents the aging of the recorded investment in past due loans as of March 31, 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)

 

March 31, 2020

                                       

Commercial

  $     $ 1     $     $ 158     $ 159  

Commercial Real Estate:

                                       

Construction

                             

Farmland

    81                   298       379  

Nonfarm nonresidential

    19       41             89       149  

Residential Real Estate:

                                       

Multi-family

                             

1-4 Family

    961       147             812       1,920  

Consumer

    97       56             143       296  

Agriculture

          3                   3  

Other

                             

Total

  $ 1,158     $ 248     $     $ 1,500     $ 2,906  

 

 

   

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 or may experience a potentially adverse development which necessitates increased monitoring.

 

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

 

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

 

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

 

 

As of March 31, 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)

 

March 31, 2020

                                               

Commercial

  $ 146,310     $ 20,903     $     $ 1,963     $     $ 169,176  

Commercial Real Estate:

                                               

Construction

    71,267                               71,267  

Farmland

    73,202       6,568             809             80,579  

Nonfarm nonresidential

    252,982       7,152             1,673             261,807  

Residential Real Estate:

                                               

Multi-family

    75,525                               75,525  

1-4 Family

    214,559       3,683             2,459             220,701  

Consumer

    44,640       3             171             44,814  

Agriculture

    36,785       155             37             36,977  

Other

    715                               715  

Total

  $ 915,985     $ 38,464     $     $ 7,112     $     $ 961,561  

 

   

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 March 31, 2020, the Company leases real estate for six branch offices or offsite ATM machines under various operating lease agreements. The lease agreements have maturity dates ranging from 2021 to 2055, including all expected extension periods. The weighted average remaining life of the lease term for these leases was 22 years as of March 31, 2020.

 

In determining the present value of lease payments, the Bank uses the implicit lease rate when readily determinable. As most of the Bank’s leases do not provide an implicit rate, the incremental borrowing rate based on the information available at commencement date is used. The incremental borrowing rate is the 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. This methodology will be continued for the commencement of any subsequent lease agreements. The weighted average discount rate for the leases was 5.47% as of March 31, 2020.

 

Total rental expense was $120,000 for the three months ended March 31, 2020 and $65,000 for the three months ended March 31, 2019. The right-of-use asset, included in premises and equipment, and lease liability, included in other liabilities, was $2.9 million as of March 31, 2020 and $445,000 as of March 31, 2019.

 

 

Total estimated rental commitments for the operating leases were as follows as of March 31, 2020 (in thousands):

 

   

March 31, 2020

 
         

2020

  $ 383  

2021

    260  

2022

    242  

2023

    246  

2024

    246  

Thereafter

    3,720  

Total minimum lease payments

    5,097  

Discount effect of cash flows

    (2,214

)

Present value of lease liabilities

  $ 2,883  

 

 

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:

 

   

March 31,

2020

   

December 31,

2019

 
   

(in thousands)

 

Commercial Real Estate:

               

Construction, land development, and other land

  $ 3,225     $ 3,225  
    $ 3,225     $ 3,225  

 

Residential loans secured by 1-4 family residential properties in the process of foreclosure totaled $156,000 and $172,000 at March 31, 2020 and December 31, 2019, respectively.

 

Activity relating to OREO during the three months ended March 31, 2020 and 2019 is as follows:

 

   

For the Three

Months Ended

March 31,

 
   

2020

   

2019

 
   

(in thousands)

 

OREO Activity

               

OREO as of January 1

  $ 3,225     $ 3,485  

Real estate acquired

           

Valuation adjustment write-downs

          (150

)

Net gain (loss) on sales

           

Proceeds from sales of properties

           

OREO as of March 31

  $ 3,225     $ 3,335  

 

Expenses related to OREO include:

 

   

For the Three Months

Ended March 31,

 
   

2020

   

2019

 
   

(in thousands)

 

Net loss (gain) on sales

  $     $  

Valuation adjustment write-downs

          150  

Operating expense

    16       16  

Total

  $ 16     $ 166  

 

 

 

 Note 6 – Goodwill and Intangible Assets

 

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

 

   

March 31, 2020

   

December 31, 2019

 
   

Gross

Carrying Amount

   

Accumulated Amortization

   

Gross

Carrying Amount

   

Accumulated Amortization

 

Goodwill

  $ 6,252     $     $ 6,252     $  

Core deposit intangibles

    2,500       64       2,500        

Outstanding, ending

  $ 8,752     $ 64     $ 8,752     $  

 

The Company has $6.3 million of goodwill related to a branch acquisition transaction from 2019. Goodwill represents the excess of the total purchase price paid over the fair value of the identifiable assets acquired, net of the fair value of the liabilities assumed. Goodwill is not amortized but is evaluated for impairment on an annual basis or whenever events or changes in circumstances indicate the carrying value may not be recoverable. Impairment exists when a reporting unit’s carrying amount exceeds its fair value. Based upon current economic conditions as a result of COVID-19, management assessed goodwill for impairment as of March 31, 2020 and concluded there was no impairment. Goodwill is the only intangible asset with an indefinite life on the balance sheet.

 

The Company also has a core deposit intangible asset, which is amortized over a weighted average estimated life of the related deposits and is not estimated to have a significant residual value. During the three months ended March 31, 2020, the Company recorded intangible amortization expense totaling $64,000.

 

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

 

   

March 31,

2020

 

April 2020 – December 2020

  $ 192  

2021

    256  

2022

    256  

2023

    256  

2024

    256  

Thereafter

    1,220  
    $ 2,436  

 

 

Note 7 – Deposits

 

The following table details deposits by category:

 

   

March 31,

2020

   

December 31,

2019

 
   

(in thousands)

 

Non-interest bearing

  $ 185,658     $ 187,551  

Interest checking

    157,621       146,038  

Money market

    154,851       160,837  

Savings

    92,235       56,015  

Certificates of deposit

    467,535       476,534  

Total

  $ 1,057,900     $ 1,026,975  

 

Time deposits of $250,000 or more were approximately $64.9 million and $51.2 million at March 31, 2020 and December 31, 2019, respectively.

 

 

Scheduled maturities of total time deposits at March 31, 2020 for each of the next five years are as follows (in thousands):

 

Year 1

  $ 383,049  

Year 2

    47,132  

Year 3

    10,719  

Year 4

    15,232  

Year 5

    10,854  

Thereafter

    549  
    $ 467,535  

 

 

Note 8 – Advances from the Federal Home Loan Bank

 

Advances from the Federal Home Loan Bank were as follows: 

 

   

March 31,

   

December 31,

 
   

2020

   

2019

 
   

(in thousands)

 
                 

Short term advances (fixed rates 0.13% to 0.22%) maturing April 2020

  $ 40,000     $ 60,000  

Long term advances (fixed rates 0.00% to 5.24%) maturing April 2020 to August 2033

    21,349       1,389  

Total advances from the Federal Home Loan Bank

  $ 61,349     $ 61,389  

 

FHLB advances had a weighted-average rate of 0.39% at March 31, 2020 and 1.70% at December 31, 2019. Each advance is payable per terms on agreement, with a prepayment penalty. No prepayment penalties were incurred during 2020 or 2019. The advances were collateralized by approximately $158.5 million and $166.0 million of first mortgage loans, under a blanket lien arrangement at March 31, 2020 and December 31, 2019, respectively. At March 31, 2020, the Bank’s additional borrowing capacity with the FHLB was $53.6 million.

 

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

 

   

Advances

 

Year 1

  $ 41,090  

Year 2

    98  

Year 3

    99  

Year 4

    42  

Year 5

    16  

Thereafter

    20,004  
    $ 61,349  

 

 

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 March 31, 2020, the Company is current on all interest payments.

 

Subordinated Capital Note – The Company’s $17.0 million subordinated note matures on July 31, 2029. The note carries interest at a fixed rate of 5.75% until July 30, 2024 and then converts to variable at three-month LIBOR plus 395 basis points until maturity. The subordinated capital note qualifies as Tier 2 regulatory capital.

 

Senior Debt - The Company’s $5.0 million senior secured loan matures on June 30, 2022. Interest is payable quarterly at a rate of three-month LIBOR plus 250 basis points through June 30, 2020, at which time quarterly principal payments of $250,000 plus interest will commence. The loan is secured by a first priority pledge of 100% of the issued and outstanding stock of the Bank. The Company may prepay any amount due under the promissory note at any time without premium or penalty.

 

The loan agreement contains customary representations, warranties, covenants and events of default, including the following financial covenants: (i) the Company must maintain minimum cash on hand of not less than $2,500,000, (ii) the Company must maintain a total risk based capital ratio at least equal to 10% of risk-weighted assets, (iii) the Bank must maintain a total risk based capital ratio at least equal to 11% of risk-weighted assets, and (iv) non-performing assets of the Bank may not exceed 2.5% of the Bank’s total assets. Both the Company and Bank were in compliance with the covenants as of March 31, 2020.

 

 

 

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.

 

Management routinely applies internal discounts to the value of appraisals used in the fair value evaluation of our 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 our 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 our impairment evaluations when applicable.

 

Impaired loans are evaluated quarterly for additional impairment. Management obtains updated appraisals on properties securing our 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 March 31, 2020 and December 31, 2019 are summarized below:

 

           

Fair Value Measurements at March 31, 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

  $ 21,104     $     $ 21,104     $  

Agency mortgage-backed: residential

    89,101             89,101        

Collateralized loan obligations

    40,754             40,754        

State and municipal

    28,154             28,154        

Corporate bonds

    19,544             19,544        

Total

  $ 198,657     $     $ 198,657     $  

 

           

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.

 

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

 

           

Fair Value Measurements at March 31, 2020 Using

 
           

(in thousands)

 
Description   

Carrying

Value

   

Quoted Prices In

Active Markets for

Identical Assets

(Level 1)

   

 

Significant Other

Observable Inputs

(Level 2)

   

Significant

Unobservable

Inputs

(Level 3)

 

Impaired loans:

                               

Commercial real estate:

                               

Farmland

  $ 124     $     $     $ 124  

Residential real estate:

                               

1-4 Family

    74                   74  

 

 

           

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)

 

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 $218,000 at March 31, 2020 with a valuation allowance of $20,000, resulting in no additional provision for loan losses for the three months ended March 31, 2020. Impaired loans had a carrying amount of $873,000 with a valuation allowance of $193,000, resulting in no additional provision for loan losses for the three months ended March 31, 2019. 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 March 31, 2020 Using

 
   

Carrying

Amount

   

Level 1

   

Level 2

   

Level 3

   

Total

 
   

(in thousands)

 

Financial assets

                                       

Cash and cash equivalents

  $ 33,148     $ 33,148     $     $     $ 33,148  

Securities available for sale

    198,657             198,657             198,657  

Federal Home Loan Bank stock

    6,837       N/A       N/A       N/A       N/A  

Loans, net

    952,411                   903,898       903,898  

Accrued interest receivable

    4,219             993       3,226       4,219  

Financial liabilities

                                       

Deposits

  $ 1,057,900     $ 185,658     $ 874,347     $     $ 1,060,005  

Federal Home Loan Bank advances

    61,349             61,357             61,357  

Junior subordinated debentures

    21,000                   14,153       14,153  

Subordinated capital note

    17,000                   16,095       16,095  

Senior Debt

    5,000                   4,900       4,900  

Accrued interest payable

    715             509       206       715  

 

 

           

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 note

    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:

 

   

March

31,

   

December

31,

 
   

2020

   

2019

 
   

(in thousands)

 

Deferred tax assets:

               

Net operating loss carry-forward

  $ 22,403     $ 22,915  

Allowance for loan losses

    2,283       2,090  

OREO write-down

    2,665       2,665  

Alternative minimum tax credit carry-forward

          173  

Net assets from acquisitions

    188       228  

Net unrealized loss on securities

    646        

New market tax credit carry-forward

    208       208  

Nonaccrual loan interest

    310       303  

Accrued expenses

    99       102  

Lease liability

    719       766  

Other

    295       309  
      29,816       29,759  
                 

Deferred tax liabilities:

               

FHLB stock dividends

    563       563  

Fixed assets

    49       57  

Deferred loan costs

    170       170  

Net unrealized gain on securities

          331  

Lease right-of-use assets

    719       766  

Other

    107       107  
      1,608       1,994  

Net deferred tax asset

  $ 28,208     $ 27,765  

 

At March 31, 2020, the Company had net federal operating loss carryforwards of $100.5 million, which will begin to expire in 2032, and state net operating loss carryforwards of $32.7 million, which begin to expire in 2025. As of March 31, 2020, a total of $173,000 in alternative minimum tax credit carryforward was reclassified to other assets as it is currently refundable for the 2019 tax year 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 months ended March 31, 2020 or March 31, 2019 related to unrecognized tax benefits.

 

Under Section 382 of the Internal Revenue Code, as amended (“Section 382”), the Company’s net operating loss carryforwards and other deferred tax assets can generally be used to offset future taxable income and therefore reduce federal income tax obligations. However, the Company's ability to use its NOLs would be limited if there was an “ownership change” as defined by Section 382. This would occur if shareholders owning (or deemed to own under the tax rules) 5% or more of the Company's voting and non-voting common shares increase their aggregate ownership of the Company by more than 50 percentage points over a defined period of time.

 

In 2015, the Company took two measures to preserve the value of its NOLs. First, the Company adopted a tax benefits preservation plan designed to reduce the likelihood of an “ownership change” occurring as a result of purchases and sales of the Company's common shares. Upon adoption of this plan, the Company declared a dividend of one preferred stock purchase right for each common share outstanding as of the close of business on July 10, 2015. Any shareholder or group that acquires beneficial ownership of 5% or more of the Company (an “acquiring person”) could be subject to significant dilution in its holdings if the Company's Board of Directors does not approve such acquisition. Existing shareholders holding 5% or more of the Company will not be considered acquiring persons unless they acquire additional shares, subject to certain exceptions described in the plan. In addition, 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 our 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 our Board determines that the transfer restrictions are no longer needed to preserve the tax benefits of our 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 2016.

 

 

Note 12 – Stock Plans and Stock Based Compensation

 

Shares available for issuance under the 2018 Omnibus Equity Compensation Plan (“2018 Plan”) total 273,329. 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 $349,000, or $17.03 per weighted-average share. The Company recorded $106,000 and $82,000 of stock-based compensation to salaries and employee benefits for the three months ended March 31, 2020 and 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 $22,000 and $17,000 was recognized related to this expense during the three months ended March 31, 2020 and 2019, respectively.

 

The following table summarizes unvested share activity as of and for the periods indicated for the Stock Incentive Plan:

 

   

Three Months Ended

   

Twelve Months Ended

 
   

March 31, 2020

   

December 31, 2019

 
           

Weighted

           

Weighted

 
           

Average

           

Average

 
           

Grant

           

Grant

 
   

Shares

   

Price

   

Shares

   

Price

 

Outstanding, beginning

    57,774     $ 13.35       116,909     $ 8.69  

Granted

    20,507       17.03       34,501       14.81  

Vested

    (13,329

)

    11.85       (89,388

)

    7.83  

Forfeited

                (4,248

)

    13.07  

Outstanding, ending

    64,952     $ 14.82       57,774     $ 13.35  

 

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

 

April 2020 – December 2020

  $ 305  

2021

    311  

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

 
   

March 31,

 
   

2020

   

2019

 
   

(in thousands, except

share and per share data)

 
                 

Net income

  $ 1,840     $ 2,839  

Less:

               

Earnings allocated to unvested shares

    15       36  

Net income available to common shareholders, basic and diluted

  $ 1,825     $ 2,803  
                 

Basic

               

Weighted average common shares including unvested common shares outstanding

    7,481,884       7,469,912  

Less:

               

Weighted average unvested common shares

    61,363       94,909  

Weighted average common shares outstanding

    7,420,521       7,375,003  

Basic income per common share

  $ 0.25     $ 0.38  
                 

Diluted

               

Add: Dilutive effects of assumed exercises of common stock warrants

           

Weighted average common shares and potential common shares

    7,420,521       7,375,003  

Diluted income per common share

  $ 0.25     $ 0.38  

 

The Company had no outstanding stock options or warrants at March 31, 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.

 

As of March 31, 2020, Management believes the Company and Bank met all capital adequacy requirements to which they are subject. As of March 31, 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.

 

 

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 March 31, 2020:

                                               

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

  $ 129,035       12.38     $ 83,378       8.00     $ 104,223       10.00

%

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

    119,885       11.50       46,900       4.50       67,745       6.50  

Tier 1 capital (to risk-weighted assets)

    119,885       11.50       62,534       6.00       83,378       8.00  

Tier 1 capital (to average assets)

    119,885       9.67       49,607       4.00       62,008       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.

 

 

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

 

   

March 31, 2020

   

December 31, 2019

 
   

Fixed

Rate

   

Variable

Rate

   

Fixed

Rate

   

Variable

Rate

 
   

(in thousands)

 

Commitments to make loans

  $ 12,403     $ 26,290     $ 11,577     $ 20,415  

Unused lines of credit

    8,684       96,982       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 March 31, 2020 and December 31, 2019. The risk participation agreements are not designated against specific assets or liabilities under ASC 815, Derivatives and Hedging, and, therefore, do not qualify for hedge accounting. The derivatives are recorded in other liabilities on the balance sheet at fair value and changes in fair value of both the borrower and the offsetting swap agreements are recorded (and essentially offset) in non-interest income.

 

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 16Revenue 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 $156,000 and $136,000 of revenue for three months ended March 31, 2020 and March 31, 2019, respectively, within the scope of ASC 606. The remaining other non-interest income for the three months is excluded from the scope of ASC 606.

 

 

 

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 our 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:

 

 

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.

 

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, 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.

 

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 eighth 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 March 31, 2020, the Company had total assets of $1.27 billion, total loans of $961.6 million, total deposits of $1.06 billion and stockholders’ equity of $104.5 million.

 

 

The coronavirus pandemic (“COVID-19”) currently impacting the nation has caused a setback to the country’s economy. Since early March, the Company and Bank have felt the impact alongside thousands of businesses across the nation. In response to the global pandemic, and the declarations of emergency at the state and national levels the pandemic has triggered, the Bank has implemented several temporary operational changes to serve customers during the COVID-19 health crisis. Lobby services have been amended to appointment only while drive thru, mobile, and online banking have become the Bank’s primary channels of serving customers. Customer facing employees have been divided into two teams working separate ‘ten day on’ and ‘ten day off’ shifts to ensure a healthy workforce remains available to serve customers. Additionally, operational and support staff have been assigned to work from home where circumstances permit.

 

The Company reported net income of $1.8 million for the three months ended March 31, 2020, compared with $2.8 million for the first quarter of 2019. Net income before taxes and income tax expense was $2.2 million and $361,000, respectively for the first quarter of 2020, compared with $3.0 million and $123,000, respectively for the first quarter of 2019. Income tax expense for the first quarter of 2019 benefitted $341,000 or $0.05 per basic and diluted common share, 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.

 

Significant items for the three months ended March 31, 2020 are as follows:

 

 

Loan growth outpaced paydowns during the period. Average loans receivable increased approximately $182.7 million or 23.8% to $949.2 million for the quarter ended March 31, 2020, compared with $766.5 million for the first quarter of 2019. This resulted in an increase in interest revenue volume of approximately $2.3 million for the quarter ended March 31, 2020, compared with the first quarter 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, as well as loan growth during 2019 and the first quarter of 2020.

 

 

Net interest margin was 3.31% for the first three months of 2020 compared with 3.61% for the first three months of 2019. The yield on earning assets decreased to 4.50% in the first quarter of 2020 as compared to 4.90% in the first quarter 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 1.57% in the first quarter of 2019 to 1.45% in the first quarter of 2020 as a result of decreases in short-term interest rates during 2019 and 2020.

 

 

While the Company has experienced historically strong trends in asset quality over the last several quarters and management’s assessment of risk within the portfolio has been low, the Company recorded provision for loan losses expense of $1.1 million in the first quarter of 2020, compared to no provision for loan losses expense in the first quarter of 2019. The first quarter 2020 loan loss provision was attributable to the level of net loan charge-offs for the quarter, to the impact of the increase in loan volume within the portfolio over the quarter, and to changes in the economic and business environment attributable to COVID-19 and the resultant risk it poses for business disruptions for the Bank’s borrowers. Net loan charge-offs were $276,000 for the first quarter of 2020, compared to net loan charge-offs of $194,000 for the first quarter of 2019.

 

 

Loans past due 30-59 days decreased from $1.7 million at December 31, 2019 to $1.2 million at March 31, 2020, and loans past due 60-89 days decreased from $670,000 at December 31, 2019 to $248,000 at March 31, 2020. Total loans past due and nonaccrual loans decreased to $2.9 million at March 31, 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.

 

 

At March 31, 2020, foreclosed properties remained unchanged at $3.2 million compared to December 31, 2019, and declined from $3.3 million at March 31, 2019. Operating expenses totaled $16,000 in the first quarter of 2020 compared to operating expenses and fair value write-downs of $166,000 in the first quarter of 2019.

 

 

The ratio of non-performing assets to total assets decreased to 0.41% at March 31, 2020, compared with 0.42% at December 31, 2019, and 0.57% at March 31, 2019.

 

 

Deposits were $1.06 billion at March 31, 2020, compared with $1.03 billion at December 31, 2019. Certificate of deposit balances decreased $9.0 million during the first three months of 2020 to $467.5 million at March 31, 2020, from $476.5 million at December 31, 2019. Interest checking accounts increased $11.6 million, non-interest bearing accounts decreased $1.9 million, money market declined $6.0 million, and savings accounts increased $36.2 million during the quarter ended March 31, 2020.

 

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 our Annual Report on Form 10-K for the calendar year ended December 31, 2019. Management has discussed the development, selection, and application of our critical accounting policies with our Audit Committee. During the first three 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 March 31, 2020, compared with the same period of 2019:

 

   

For the Three Months

   

Change from

 
   

Ended March 31,

   

Prior Period

 
   

2020

   

2019

   

Amount

   

Percent

 
   

(dollars in thousands)

 
                                 

Gross interest income

  $ 13,267     $ 12,186     $ 1,081       8.9

%

Gross interest expense

    3,505       3,227       278       8.6  

Net interest income

    9,762       8,959       803       9.0  

Provision for loan losses

    1,050             1,050       100  

Non-interest income

    1,724       1,284       440       34.3  

Non-interest expense

    8,235       7,281       954       13.1  

Net income before taxes

    2,201       2,962       (761

)

    (25.7

)

Income tax expense

    361       123       238       193.5  

Net income

    1,840       2,839       (999

)

    (35.2

)

 

Net income for the three months ended March 31, 2020 totaled $1.8 million, compared with $2.8 million for the comparable period of 2019. Net interest income increased $803,000 from the 2019 first quarter as a result of an increase in earning assets from the branch transaction as well as loan growth. Provision expense of $1.1 million was recorded in the first quarter of 2020 as compared to no provision expense the first quarter of 2019 primarily in response to the level of net loan charge-offs for the quarter, to the impact of the increase in loan volume within the portfolio over the quarter, and to changes in the economic and business environment attributable to COVID-19. Non-interest income increased $440,000 from $1.3 million in the first quarter of 2019 to $1.7 million for the first quarter of 2020 primarily related to service charges on deposit accounts and interchange fee volume increases. Non-interest expense increased $954,000 from $7.3 million in the first quarter of 2019 to $8.2 million in the first quarter of 2020 primarily due to an increase in salaries and benefits connected to the addition of sales talent and associates acquired in the branch transaction.

 

Net income before taxes and income tax expense was $2.2 million and $361,000, respectively for the first quarter of 2020, compared with $3.0 million and $123,000, respectively for the first quarter of 2019. Income tax expense for the first quarter of 2019 benefitted $341,000 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 – Net interest income was $9.8 million for the three months ended March 31, 2020, an increase of $803,000, or 9.0%, compared with $9.0 million for the same period in 2019. Net interest spread and margin were 3.05% and 3.31%, respectively, for the first quarter of 2020, compared with 3.33% and 3.61%, respectively, for the first quarter of 2019.

 

The interest rate environment remained challenging in the first quarter 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 4.50% for the first quarter of 2020, as compared to 4.90% in the first quarter of 2019. Average interest-earning assets were $1.18 billion for the first quarter of 2020, compared with $1.01 billion for the first quarter of 2019, a 17.7% increase, primarily attributable to higher average loans. Average loans receivable increased approximately $182.7 million for the first quarter of 2020 compared with the first 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 three months of 2020. The increase in average loans resulted in an increase in interest revenue volume of approximately $2.3 million for the quarter ended March 31, 2020, which was offset by a decrease in interest revenue to due declining rate of $933,000, as compared with the first 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 eight basis points and 22 basis points of yield on earning assets and net interest margin for the first quarter ended March 31, 2020 and 2019, respectively. Total interest income increased 8.9%, or $1.1 million, for the first quarter of 2020 compared to the first quarter of 2019.

 

The cost of interest-bearing liabilities decreased to 1.45% for the first quarter of 2020, as compared to 1.57% for the first quarter of 2019. Average interest-bearing liabilities increased by 16.4% to $971.6 million for the first quarter of 2020, as compared to $834.6 million for the first 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 increased by 8.6% to $3.5 million for the first quarter of 2020 as compared to the first quarter of 2019. The cost of interest-bearing liabilities for the first quarter of 2020 was also impacted by the subordinated debt issuance at a fixed rate of 5.75% in July 2019. As of March 31, 2020, time deposits comprise $467.5 million of the Company’s liabilities with $311.6 million, or 67%, set to mature in 2020.

 

 

Average Balance Sheets

 

The following table presents the average balance sheets for the three-month periods ended March 31, 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 March 31,

 
   

2020

   

2019

 
   

Average

Balance

   

Interest

Earned/Paid

   

Average

Yield/Cost

   

Average

Balance

   

Interest

Earned/Paid

   

Average

Yield/Cost

 
   

(dollars in thousands)

 

ASSETS

                                               

Interest-earning assets:

                                               

Loan receivables (1)(2)

  $ 949,204     $ 11,611       4.92

%

  $ 766,505     $ 10,254       5.43

%

Securities

                                               

Taxable

    193,260       1,467       3.05       191,656       1,573       3.33  

Tax-exempt (3)

    9,989       70       3.57       13,512       93       3.53  

FHLB stock

    6,283       40       2.56       7,068       109       6.25  

Federal funds sold and other

    29,578       79       1.07       31,207       157       2.04  

Total interest-earning assets

    1,188,314       13,267       4.50

%

    1,009,948       12,186       4.90

%

Less: Allowance for loan losses

    (8,287

)

                    (8,855

)

               

Non-interest earning assets

    93,140                       74,460                  

Total assets

  $ 1,273,167                     $ 1,075,553                  
                                                 

LIABILITIES AND STOCKHOLDERS’ EQUITY

                                               

Interest-bearing liabilities:

                                               

Certificates of deposit and other time deposits

  $ 481,797     $ 2,233       1.86

%

  $ 459,709     $ 2,048       1.81

%

NOW and money market deposits

    310,046       428       0.56       264,847       525       0.80  

Savings accounts

    74,304       111       0.60       33,557       14       0.17  

FHLB advances

    62,407       220       1.42       45,524       281       2.50  

Junior subordinated debentures

    21,000       215       4.12       21,000       263       5.08  

Subordinated capital note

    17,000       242       5.73                    

Senior debt

    5,000       56       4.50       10,000       96       3.89  

Total interest-bearing liabilities

    971,554       3,505       1.45

%

    834,637       3,227       1.57

%

                                                 

Non-interest-bearing liabilities:

                                               

Non-interest-bearing deposits

    186,797                       142,716                  

Other liabilities

    7,184                       4,709                  

Total liabilities

    1,165,535                       982,062                  

Stockholders’ equity

    107,632                       93,491                  

Total liabilities and stockholders’ equity

  $ 1,273,167                     $ 1,075,553                  
                                                 

Net interest income

          $ 9,762                     $ 8,959          
                                                 

Net interest spread

                    3.05

%

                    3.33

%

Net interest margin

                    3.31

%

                    3.61

%

 


(1)

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

(2)

Calculations include non-accruing loans averaging $1.5 million and $2.1 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 March 31,

2020 vs. 2019

 
   

Increase (decrease)

due to change in

   

Net

 
   

Rate

   

Volume

   

Change

 
   

(in thousands)

 

Interest-earning assets:

                       

Loan receivables

  $ (933

)

  $ 2,290     $ 1,357  

Securities

    (113

)

    (16

)

    (129

)

FHLB stock

    (58

)

    (11

)

    (69

)

Federal funds sold and other

    (70

)

    (8

)

    (78

)

Total increase (decrease) in interest income

    (1,174

)

    2,255       1,081  
                         

Interest-bearing liabilities:

                       

Certificates of deposit and other time deposits

    85       100       185  

NOW and money market accounts

    (177

)

    80       (97

)

Savings accounts

    66       31       97  

FHLB advances

    (145

)

    84       (61

)

Junior subordinated debentures

    (48

)

          (48

)

Subordinated capital note

          242       242  

Senior debt

    14       (54

)

    (40

)

Total decrease in interest expense

    (205

)

    483       278  

Increase (decrease) in net interest income

  $ (969

)

  $ 1,772     $ 803  

 

 

Non-Interest Income – The following table presents the major categories of non-interest income for the three months ended March 31, 2020 and 2019:

 

   

For the Three Months

 
   

Ended March 31,

 
   

2020

   

2019

 
   

(in thousands)

 
                 

Service charges on deposit accounts

  $ 668     $ 496  

Bank card interchange fees

    750       508  

Income from bank owned life insurance

    96       99  

Other

    210       181  

Total non-interest income

  $ 1,724     $ 1,284  

 

Non-interest income for the first quarter of 2020 increased by $440,000, or 34.3%, to $1.7 million compared with $1.3 million for the first quarter of 2019. The increase was primarily related to services charges on deposit accounts and bank card interchange fees. The service charges on deposit accounts and interchange fee volume increases are primarily attributable to the deposit accounts acquired in the branch acquisition transaction on November 15, 2019.

 

 

Non-interest ExpenseThe following table presents the major categories of non-interest expense for the three months ended March 31, 2020 and 2019:

 

   

For the Three Months

 
   

Ended March 31,

 
   

2020

   

2019

 
   

(in thousands)

 
                 

Salary and employee benefits

  $ 4,538     $ 3,915  

Occupancy and equipment

    999       898  

Professional fees

    208       165  

Marketing expense

    214       227  

FDIC insurance

          108  

Data processing expense

    359       313  

State franchise and deposit tax

    360       315  

Deposit account related expenses

    451       281  

Other real estate owned expense

    16       166  

Litigation and loan collection expense

    65       46  

Communications expense

    218       190  

Insurance expense

    103       114  

Postage and delivery

    168       141  

Other

    536       402  

Total non-interest expense

  $ 8,235     $ 7,281  

 

Non-interest expense for the first quarter ended March 31, 2020 increased $954,000, or 13.1%, to $8.2 million compared with $7.3 million for the first quarter of 2019. The increase from the first quarter of 2019 was primarily due to an increase in salaries and employee benefits of $623,000, as the Bank added sales talent and customer facing associates during the latter half of 2019 and branch staff added in connection with the branch purchase transaction. Deposit account related expense increased $170,000, which correlated to the growth in interchange fees. OREO expense decreased $150,000 as the first quarter of 2020 had no valuation write-downs as compared to write-downs of $150,000 in the first quarter of 2019. No FDIC insurance premium expense was recorded in the first quarter of 2020 as the Bank utilized assessment credits. FDIC insurance expense is expected to return to normalized levels in the second quarter of 2020.

 

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

 
   

Ended March 31,

 
   

2020

   

2019

 
   

(in thousands)

 
                 

Federal statutory rate times financial statement income

  $ 462     $ 622  

Effect of:

               

Tax-exempt income

    (14

)

    (19

)

Establish state deferred tax asset

    (72

)

    (341

)

Non-taxable life insurance income

    (20

)

    (21

)

Restricted stock vesting

    (1

)

    (126

)

Other, net

    6       8  

Total

  $ 361     $ 123  

 

Net income before taxes and income tax expense was $2.2 million and $361,000, respectively for the first quarter of 2020, compared with $3.0 million and $123,000, respectively for the first quarter of 2019. Income tax expense for the first quarter of 2019 benefitted $341,000 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.

 

Analysis of Financial Condition

 

Total assets increased $28.4 million, or 2.3%, to $1.27 billion at March 31, 2020, from $1.25 billion at December 31, 2019. This increase was primarily attributable to an increase in loans receivable of $35.3 million, partially offset by a decrease in securities available for sale of $10.3 million.

 

 

Loans ReceivableLoans receivable increased $35.3 million, or 3.8%, during the three months ended March 31, 2020 to $961.6 million as loan growth outpaced paydowns. Our commercial and commercial real estate portfolios increased by an aggregate of $37.8 million, or 6.9% during the first quarter of 2020 and comprised 60.6% of the loan portfolio at March 31, 2020. Residential real estate and consumer portfolios decreased by an aggregate of $4.3 million, or 1.3% during the first quarter of 2020 and comprised 35.5% of the loan portfolio at March 31, 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 our portfolio and other than the categories noted, there is no concentration of loans in any industry exceeding 10% of total loans.

 

   

As of March 31,

   

As of December 31,

 
   

2020

   

2019

 
   

Amount

   

Percent

   

Amount

   

Percent

 
           

(dollars in thousands)

         
                                 

Commercial

  $ 169,176       17.59

%

  $ 145,551       15.71

%

Commercial Real Estate

                               

Construction

    71,267       7.41       64,911       7.01  

Farmland

    80,579       8.38       79,118       8.54  

Nonfarm nonresidential

    261,807       27.23       255,459       27.58  

Residential Real Estate

                               

Multi-family

    75,525       7.85       70,950       7.66  

1-4 Family

    220,701       22.95       226,629       24.47  

Consumer

    44,814       4.66       47,790       5.16  

Agriculture

    36,977       3.85       35,064       3.79  

Other

    715       0.08       799       0.08  

Total loans

  $ 961,561       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.

 

    March 31, 2020     December 31, 2019  
   

Loans

   

% to

Total

   

Loans

   

% to

Total

 
    (dollars in thousands)  
                                 

Pass

  $ 915,985       95.3

%

  $ 888,707       95.9

%

Watch

    38,464       4.0       27,522       3.0  

Special Mention

                       

Substandard

    7,112       0.7       10,042       1.1  

Doubtful

                       

Total

  $ 961,561       100.0

%

  $ 926,271       100.00

%

 

Loans receivable increased $35.3 million, or 3.8%, during the three months ended March 31, 2020. Since December 31, 2019, the pass category increased approximately $27.3 million, the watch category increased approximately $10.9 million, and the substandard category decreased approximately $2.9 million. The increase in watch category primarily related to $9.6 million in commercial loans migrating during the first quarter of 2020. The $2.9 million decrease in loans classified as substandard was primarily driven by $3.2 million in payments, $305,000 in charge-offs, and $27,000 in loans upgraded from substandard offset by $563,000 in loans moved to substandard during the quarter.

 

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

 

   

March 31,

2020

   

December 31,

2019

 
   

(in thousands)

 

Past Due Loans:

               

30-59 Days

  $ 1,158     $ 1,747  

60-89 Days

    248       670  

90 Days and Over

           

Total Loans Past Due 30-90+ Days

    1,406       2,417  
                 

Nonaccrual Loans

    1,500       1,528  

Total Past Due and Nonaccrual Loans

  $ 2,906     $ 3,945  

 

 

During the three months ended March 31, 2020, nonaccrual loans decreased by $28,000 to $1.5 million. During the three months ended March 31, 2020, loans past due 30-59 days decreased from $1.7 million at December 31, 2019 to $1.2 million at March 31, 2020. Loans past due 60-89 days decreased from $670,000 at December 31, 2019 to $248,000 at March 31, 2020. This represents a $1.0 million decrease from December 31, 2019 to March 31, 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 a loan modification in the form of a concession to a borrower who is experiencing financial difficulty. The Bank’s TDRs typically involve a reduction in interest rate, a deferral of principal for a stated period of time, or an interest only period. 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 March 31, 2020 and December 31, 2019, the Bank had three restructured loans totaling $466,000 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 March 31, 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 March 31, 2020 and December 31, 2019, all TDRs were performing according to their modified terms.

 

There were no modifications 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 - 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 as defined under section 4013 of the Coronavirus Aid Relief and Economic Security Act ("CARES Act") involving principal deferrals (interest only) and, in other cases, principal and interest deferrals. The following table details those modifications by loan category and type as of March 31, 2020 and April 29, 2020:

 

   

March 31, 2020

   

April 29, 2020

 
   

Amount

   

Number

   

Amount

   

Number

 
   

(dollars in thousands)

 
                                 

Commercial:

                               

Interest only

  $ 103       4     $ 392       7  

Principal and interest deferral

    413       6       10,578       25  

Commercial Real Estate

                               

Construction:

                               

Interest only

                       

Principal and interest deferral

                7,052       4  

Farmland:

                               

Interest only

                9       1  

Principal and interest deferral

    498       4       2,296       14  

Nonfarm nonresidential:

                               

Interest only

    4,796       15       18,217       31  

Principal and interest deferral

    3,877       7       86,534       59  

Residential Real Estate

                               

Multi-family:

                               

Interest only

                1,740       2  

Principal and interest deferral

    188       1       619       2  

1-4 Family:

                               

Interest only

    143       2       4,450       17  

Principal and interest deferral

    2,046       11       11,291       66  

Consumer:

                               

Interest only

    50       5       74       8  

Principal and interest deferral

    7       2       41       5  

Agriculture:

                               

Interest only

                       

Principal and interest deferral

                       

Other:

                               

Interest only

                       

Principal and interest deferral

                       

Total modified loans

  $ 12,121       57     $ 143,293       241  

 

Retail purpose commercial real estate operators, as well as hotel and restaurant operators, have been disproportionately impacted by COVID-19. As of March 31, 2020, the Bank had loans totaling $63.9 million secured by retail purpose commercial real estate, $50.4 million secured by hotel and lodging real estate, and $30.9 million secured by limited and full-service restaurant real estate, or 6.6%, 5.2%, and 3.2% of total loans, respectively. As of April 29, 2020, loans with outstanding principal balances of $22.9 million for retail purpose commercial real estate, $49.2 million for hotel and lodging real estate, and $21.9 million for limited and full-service restaurant real estate were granted principal and interest deferrals.

 

The Bank is also working with borrowers to secure SBA guaranteed financing for those who qualify through the SBA Paycheck Protection Program, which became available in early April through the CARES Act. As of April 29, 2020, the Bank had secured loan guarantees for 414 borrowers totaling approximately $40.5 million.

 

 

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 March 31, 2020 and December 31, 2019.

 

   

March

31,

2020

   

December

31,

2019

 
   

(dollars in thousands)

 
                 

Loans on nonaccrual status

  $ 1,500     $ 1,528  

Troubled debt restructurings on accrual

    466       475  

Past due 90 days or more still on accrual

           

Total non-performing loans

    1,966       2,003  

Real estate acquired through foreclosure

    3,225       3,225  

Other repossessed assets

           

Total non-performing assets

  $ 5,191     $ 5,228  
                 

Non-performing loans to total loans

    0.20

%

    0.22

%

Non-performing assets to total assets

    0.41

%

    0.42

%

Allowance for non-performing loans

  $ 33     $ 48  

Allowance for non-performing loans to non-performing loans

    1.68

%

    2.40

%

 

Nonperforming loans at March 31, 2020, were $2.0 million, or 0.20% of total loans, compared with $2.0 million, or 0.22% of total loans at December 31, 2019, and $2.8 million, or 0.36% of total loans at March 31, 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.

 

While the Company has experienced historically strong trends in asset quality over the last several quarters and management’s assessment of risk in the loan portfolio has been low, a provision of $1.05 million was recorded in the first quarter of 2020 compared to no provision for loan losses in the first quarter of 2019. The first quarter 2020 loan loss provision was attributable to the level of net loan charge-offs for the quarter, the impact of the increase in loan volume within the portfolio over the quarter, and 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.

 

While the Company expects the U.S. Government’s economic response to the COVID-19 pandemic through monetary policy and fiscal stimulus will provide 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

March 31,

   

Year Ended

December 31,

 
   

2020

   

2019

    2019  
   

(dollars in thousands)

 

Balances at beginning of period

  $ 8,376     $ 8,880     $ 8,880  
                         

Loans charged-off:

                       

Real estate

    104       97       322  

Commercial

    29             37  

Consumer

    161       180       663  

Agriculture

    41       1       266  

Other

                 

Total charge-offs

    335       278       1,288  
                         

Recoveries:

                       

Real estate

    41       63       597  

Commercial

    5       5       106  

Consumer

    4       16       75  

Agriculture

    8             3  

Other

    1             3  

Total recoveries

    59       84       784  

Net charge-offs (recoveries)

    276       194       504  

Provision (negative provision) for loan losses

    1,050              

Balance at end of period

  $ 9,150     $ 8,686     $ 8,376  
                         

Allowance for loan losses to period-end loans

    0.95

%

    1.10

%

    0.90

%

Net charge-offs (recoveries) to average loans

    0.12

%

    0.10

%

    0.06

%

Allowance for loan losses to non-performing loans

    465.41

%

    306.82

%

    418.17

%

 

The allowance for loan losses to total loans was 0.95% at March 31, 2020, compared to 0.90% at December 31, 2019, and 1.10% at March 31, 2019. Loans acquired in the November 2019 branch transaction totaled $118.0 million at March 31, 2020 and $124.7 million at December 31, 2019. These loans were recorded at fair value as determined by an independent third party. The remaining discount associated with the fair value purchase accounting adjustments on the acquired loans was $427,000 at March 31, 2020, compared to $480,000 at December 31, 2019. Any subsequent deterioration of these acquired loans may require an adjustment through the allowance for loan loss. Excluding loans acquired in the November 2019 branch transaction, the allowance for loan losses to total loans was 1.08% and 1.04% at March 31, 2020 and December 31, 2019, respectively. Net loan charge-offs were $276,000 for the first quarter of 2020, compared to $194,000 for the first quarter of 2019. The allowance for loan losses to non-performing loans was 465.41% at March 31, 2020, compared with 418.17% at December 31, 2019, and 306.82% at March 31, 2019. Net charge-offs in the first three months of 2019 totaled $276,000 compared to net charge-offs of $194,000 in the first three months of 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 56.44% and 47.50% of the unpaid principal balance in the commercial real estate and residential real estate segments of the portfolio, respectively, at March 31, 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 $10.3 million, or 4.9%, to $198.7 million at March 31, 2020, compared with $209.0 million at December 31, 2019.

 

 

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

 

   

March 31, 2020

   

December 31, 2019

 
   

Amortized

Cost

   

Gross

Unrealized

Gains

   

Gross

Unrealized

Losses

   

Fair

Value

   

Amortized

Cost

   

Gross

Unrealized

Gains

   

Gross

Unrealized

Losses

   

Fair

Value

 
   

(dollars in thousands)

 

Securities available for sale

                                                               

U.S. Government andfederal agencies

  $ 20,751     $ 353     $     $ 21,104     $ 22,281     $ 196     $ (147

)

  $ 22,330  

Agency mortgage-backed residential

    86,840       2,428       (167

)

    89,101       91,269       1,186       (255

)

    92,200  

Collateralized loan obligations

    44,732             (3,978

)

    40,754       49,831             (412

)

    49,419  

State and municipal

    28,301       346       (493

)

    28,154       27,819       550       (3

)

    28,366  

Corporate bonds

    20,831       199       (1,486

)

    19,544       16,472       213             16,685  

Total available for sale

  $ 201,455     $ 3,326     $ (6,124

)

  $ 198,657     $ 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 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. The fair value of the Bank’s CLOs declined by approximately $3.6 million, or 8% of amortized cost, during the first quarter of 2020 as market liquidity within the CLO sector was disrupted by COVID-19.

 

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 March 31, 2020, $25.7 million and $15.0 million of our CLOs were AA and A rated, respectively. There were no CLOs rated below A and none of the CLOs were subject to ratings downgrade in 2019 or in the first 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 was also impacted by market disruption and declining rates, resulting in a fair value decline of approximately $1.5 million, or 7% of amortized cost, during the first quarter. The corporate bond portfolio consists of ten 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 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 at March 31, 2020 were $3.2 million compared with $3.3 million at March 31, 2019 and $3.2 million at December 31, 2019. 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.

 

 

Operating expenses for OREO totaled $16,000 for the three months ended March 31, 2020, compared to write-downs and operating expenses of $166,000 for the three months ended March 31, 2019. There were no fair value write-downs recorded during the three months ended March 31, 2020, compared with write-downs of $150,000 for the three months ended March 31, 2019.

 

LiabilitiesTotal liabilities at March 31, 2020 were $1.2 billion compared with $1.1 billion at December 31, 2019, an increase of $29.7 million, or 2.6%. This increase was primarily attributable to an increase in total deposits of $30.9 million.

 

Deposits are the 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 Three Months

   

For the Year

 
   

Ended March 31,

   

Ended December 31,

 
   

2020

   

2019

 
   

Average

   

Average

   

Average

   

Average

 
   

Balance

   

Rate

   

Balance

   

Rate

 
   

(dollars in thousands)

 

Demand

  $ 186,797             $ 151,299          

Interest checking

    153,965       0.36

%

    104,077       0.30

%

Money market

    156,081       0.74       161,610       1.06  

Savings

    74,304       0.60       36,035       0.19  

Certificates of deposit

    481,797       1.86       483,222       1.98  

Total deposits

  $ 1,052,944       1.06

%

  $ 936,243       1.25

%

 

 

The following table shows at March 31, 2020 the amount of time deposits of $250,000 or more by time remaining until maturity (in thousands):

  

Maturity Period

 

(in thousands)

       

Three months or less

  $ 29,235  

Three months through six months

    13,076  

Six months through twelve months

    15,633  

Over twelve months

    6,956  

Total

  $ 64,900  

 

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 our 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 March 31, 2020, the Bank had an unused borrowing capacity with the FHLB of $53.6 million. Advances are collateralized by first mortgage residential 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 March 31, 2020, the Bank had no brokered deposits.

 

The Company uses cash on hand to service senior debt, the subordinated capital note, 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. The senior debt loan agreement requires the Company to maintain a minimum of $2.5 million in cash on hand. At March 31, 2020, cash on hand totaled $3.8 million.

 

Capital

 

Stockholders’ equity decreased $1.2 million to $104.5 million at March 31, 2020, compared with $105.8 million at December 31, 2019 primarily due to the other comprehensive loss for the quarter of $3.1 million, offset by current year net income of $1.8 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

   

March 31, 2020

   

December 31, 2019

 
                                 

Tier 1 Capital

    6.0 %     8.0 %     11.50 %     11.25 %

Common equity Tier 1 capital

    4.5       6.5       11.50       11.25  

Total risk-based capital

    8.0       10.0       12.38       12.08  

Tier 1 leverage ratio

    4.0       5.0       9.67       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 our financial condition.

 

The Basel III rules also 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 decrease by an estimated 1.6% at March 31, 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 decrease by an estimated 2.4% at March 31, 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 March 31, 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

  $ (1,026 )     (2.44

)%

+ 100 basis points

    (680 )     (1.62 )

- 100 basis points

    100

 

    0.24

 

- 200 basis points

    (943

)

    (2.24

)

 

 

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

 

The following chart depicts information regarding the shares of restricted stock that were withheld to satisfy required tax withholdings upon vesting of restricted stock awarded under the Company’s equity compensation plan.

 

Period

Total Shares Purchased

(Withheld)

 

Average Price Paid

(Credited) Per Share

February 2020

 

1,339

$17.04

March 2020

 

1,838

$7.50

 

The Company does not have a publicly announced share plan or program.

 

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 3.1 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.

 
   

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 March 31, 2020, formatted in 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.

 

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)

  

May 1, 2020

By:

/s/ John T. Taylor

  

  

John T. Taylor

  

  

Chief Executive Officer 

  

May 1, 2020

By:

/s/ Phillip W. Barnhouse

 

 

Phillip W. Barnhouse 

  

  

Chief Financial Officer

  

  

 

 

48