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Section 1: 10-Q (FORM 10-Q)

lmst20190930_10q.htm
 

 

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 FORM 10-Q

 

(Mark One)

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

 

For the Quarterly Period Ended September 30, 2019

 

Or

 

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

 

For the transition period from              to             

 

Commission file number: 001-33033

 

LIMESTONE BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

  

  

  

Kentucky

  

61-1142247

(State or other jurisdiction of

incorporation or organization)

  

(I.R.S. Employer

Identification No.)

  

  

2500 Eastpoint Parkway, Louisville, Kentucky

  

40223

(Address of principal executive offices)

  

(Zip Code)

 

(502) 499-4800

(Registrant’s telephone number, including area code)

 


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.

 

6,251,332 Common Shares and 1,220,000 Non-Voting Common Shares were outstanding at October 31, 2019.

 

1

 

 

INDEX

 

 

  

  

Page

PART I –

FINANCIAL INFORMATION

  

ITEM 1.

FINANCIAL STATEMENTS

3

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

  32

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

47

ITEM 4.

CONTROLS AND PROCEDURES

47

  

  

  

PART II –

OTHER INFORMATION

  

ITEM 1.

LEGAL PROCEEDINGS

48

ITEM 1A.

RISK FACTORS

48

ITEM 2.

UNREGISTERED SALES ON EQUITY SECURITIES AND USE OF PROCEEDS

48

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

48

ITEM 4.

MINE SAFETY DISCLOSURES

48

ITEM 5.

OTHER INFORMATION

48

ITEM 6.

EXHIBITS

49

 

2

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

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

 

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

Unaudited Consolidated Statements of Income for the three and nine months ended September 30, 2019 and 2018

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

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

Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018

Notes to Unaudited Consolidated Financial Statements

 

3

 

 

LIMESTONE BANCORP, INC.

Unaudited Consolidated Balance Sheets

(dollars in thousands except share data)

 

 

   

September 30,

2019

   

December 31,

2018

 

Assets

               

Cash and due from banks

  $ 7,680     $ 6,963  

Interest bearing deposits in banks

    50,327       28,398  

Cash and cash equivalents

    58,007       35,361  

Securities available for sale

    203,381       201,192  

Loans, net of allowance of $8,904 and $8,880, respectively

    794,665       756,364  

Premises and equipment, net

    15,098       14,655  

Premises held for sale

    935       1,050  

Other real estate owned

    3,225       3,485  

Federal Home Loan Bank stock

    6,467       7,233  

Bank owned life insurance

    15,946       15,646  

Deferred taxes, net

    28,029       29,282  

Accrued interest receivable and other assets

    6,411       5,424  

Total assets

  $ 1,132,164     $ 1,069,692  
                 

Liabilities and Stockholders’ Equity

               

Deposits

               

Non-interest bearing

  $ 151,524     $ 142,618  

Interest bearing

    771,910       751,613  

Total deposits

    923,434       894,231  

Federal Home Loan Bank advances

    56,430       46,549  

Accrued interest payable and other liabilities

    4,973       5,815  

Junior subordinated debentures

    21,000       21,000  

Subordinated capital note

    17,000        

Senior debt

    5,000       10,000  

Total liabilities

    1,027,837       977,595  

Commitments and contingent liabilities (Note 13)

           

Stockholders’ equity

               

Common stock, no par, 39,000,000 shares authorized, 6,251,582 and 6,242,720 voting, and 1,220,000 and 1,220,000 non-voting issued and outstanding, respectively

    140,639       140,639  

Additional paid-in capital

    24,328       24,287  

Retained deficit

    (57,447

)

    (66,201

)

Accumulated other comprehensive loss

    (3,193

)

    (6,628

)

Total stockholders' equity

    104,327       92,097  

Total liabilities and stockholders’ equity

  $ 1,132,164     $ 1,069,692  

 

 

See accompanying notes to unaudited consolidated financial statements.

 

4

Table of Contents

 

 

LIMESTONE BANCORP, INC.

Unaudited Consolidated Statements of Income

(dollars in thousands, except per share data)

 

 

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
   

2019

   

2018

   

2019

   

2018

 
Interest income                                

Loans, including fees

  $ 10,671     $ 9,539     $ 31,390     $ 27,423  

Taxable securities

    1,553       1,245       4,734       3,386  

Tax exempt securities

    76       95       257       287  

Federal funds sold and other

    185       241       666       624  
      12,485       11,120       37,047       31,720  

Interest expense

                               

Deposits

    3,105       2,130       8,657       5,123  

Federal Home Loan Bank advances

    132       233       668       605  

Senior debt

    77       98       271       292  

Junior subordinated debentures

    251       247       772       694  

Subordinated capital note

    190             190       39  
      3,755       2,708       10,558       6,753  

Net interest income

    8,730       8,412       26,489       24,967  

Provision (negative provision) for loan losses

          (350

)

          (500

)

Net interest income after provision for loan losses

    8,730       8,762       26,489       25,467  
                                 

Non-interest income

                               

Service charges on deposit accounts

    633       608       1,700       1,767  

Bank card interchange fees

    623       411       1,727       1,258  

Income from bank owned life insurance

    97       100       314       337  

Net loss on sales and calls of investment securities

                (5

)

    (6

)

Other

    181       390       528       751  
      1,534       1,509       4,264       4,107  

Non-interest expense

                               

Salaries and employee benefits

    4,202       3,893       12,032       11,566  

Occupancy and equipment

    880       896       2,632       2,671  

Professional fees

    254       186       598       613  

Marketing expense

    251       259       690       867  

FDIC Insurance

          118       211       439  

Data processing expense

    315       281       943       912  

State franchise and deposit tax

    315       282       945       846  

Deposit account related expense

    300       213       891       653  

Other real estate owned expense

    25       271       333       590  

Litigation and loan collection expense

    32       61       112       162  

Other

    877       770       2,569       2,485  
      7,451       7,230       21,956       21,804  

Income before income taxes

    2,813       3,041       8,797       7,770  

Income tax expense

    531       604       43       1,416  

Net income

    2,282       2,437       8,754       6,354  

Basic and diluted income per common share

  $ 0.31     $ 0.33     $ 1.17     $ 0.90  

 

 

See accompanying notes to unaudited consolidated financial statements.

 

5

Table of Contents

 

 

LIMESTONE BANCORP, INC.

Unaudited Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

                                              

 

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
   

2019

   

2018

   

2019

   

2018

 

Net income

  $ 2,282     $ 2,437     $ 8,754     $ 6,354  

Other comprehensive income (loss):

                               

Unrealized gain (loss) on securities:

                               

Unrealized gain (loss) arising during the period

    588       (1,006

)

    4,465       (3,234

)

Reclassification adjustment for gains (losses) included in net income

                (5

)

     

Net unrealized gain (loss) recognized in comprehensive income

    588       (1,006

)

    4,470       (3,234

)

Tax effect

    (146

)

    211       (1,035

)

    680  

Other comprehensive income (loss)

    442       (795

)

    3,435       (2,554

)

                                 

Comprehensive income

  $ 2,724     $ 1,642     $ 12,189     $ 3,800  

 

 

See accompanying notes to unaudited consolidated financial statements.

 

6

Table of Contents

 

 

LIMESTONE BANCORP, INC.

Unaudited Consolidated Statements of Changes in Stockholders’ Equity

For Three and Nine Months Ended September 30, 2019 and 2018

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

 

    Shares     Amount  
    Preferred     Common     Preferred     Common          
   

Series E

   

Series F

   

Common

   

Non-Voting

Common

   

Total

Common

    Series E    

Series F

   

Common and

Non-Voting

Common

   

Additional

Paid-In

Capital

   

Retained Deficit

   

Accumulated

Other

Comprehensive

Income (Loss)

   

Total

 
                                                                                                 

Balances, January 1, 2019

                6,242,720       1,220,000       7,462,720     $     $     $ 140,639     $ 24,287     $ (66,201

)

  $ (6,628

)

  $ 92,097  

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

                1,642             1,642                         (276

)

                (276

)

Forfeited unvested stock

                (3,748

)

          (3,748

)

                                         

Stock-based compensation expense

                                                    82                   82  

Net income

                                                          2,839             2,839  

Net change in accumulated other comprehensive income, net of taxes

                                                                1,577       1,577  

Balances, March 31, 2019

                6,240,614       1,220,000       7,460,614     $     $     $ 140,639     $ 24,093     $ (63,362

)

  $ (5,051

)

  $ 96,319  

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

                (2,532

)

          (2,532

)

                      (39

)

                (39

)

Forfeited unvested stock

                (250

)

          (250

)

                                         

Stock-based compensation expense

                                                    93                   93  

Net income

                                                          3,633             3,633  

Net change in accumulated other comprehensive income, net of taxes

                                                                1,416       1,416  

Balances, June 30, 2019

                6,237,832       1,220,000       7,457,832     $     $     $ 140,639     $ 24,147     $ (59,729

)

  $ (3,635

)

  $ 101,422  

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

                13,750             13,750                                            

Forfeited unvested stock

                                                                       

Stock-based compensation expense

                                                    181                   181  

Net income

                                                          2,282             2,282  

Net change in accumulated other comprehensive income, net of taxes

                                                                442       442  

Balances, September 30, 2019

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

)

  $ (3,193

)

  $ 104,327  

 

 

See accompanying notes to unaudited consolidated financial statements.

 

7

Table of Contents

 

LIMESTONE BANCORP, INC.

Unaudited Consolidated Statements of Changes in Stockholders’ Equity

For Three and Nine Months Ended September 30, 2019 and 2018

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

 

    Shares     Amount  
    Preferred     Common     Preferred     Common          
   

Series E

   

Series F

   

Common

   

Non-Voting

Common

   

Total

Common

   

Series E

   

Series F

   

Common and

Non-Voting

Common

   

Additional

Paid-In Capital

   

Retained Deficit

   

Accumulated

Other

Comprehensive

Income (Loss)

   

Total

 
                                                                                                 

Balances, January 1, 2018

    6,198       4,304       6,039,864       220,000       6,259,864     $ 1,644     $ 1,127     $ 125,729     $ 24,497     $ (75,108

)

  $ (5,216

)

  $ 72,673  

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

                                                                       

Forfeited unvested stock

                                                                       

Issuance of stock

                150,000       1,000,000       1,150,000                   14,910                         14,910  

Stock-based compensation expense

                                                    64                   64  

Net income

                                                          1,934             1,934  

Reclassification of disproportionate tax effect due to change in federal tax rate

                                                          113       (113

)

     

Net change in accumulated other comprehensive income, net of taxes

                                                                (1,351

)

    (1,351

)

Balances, March 31, 2018

    6,198       4,304       6,189,864       1,220,000       7,409,864     $ 1,644     $ 1,127     $ 140,639     $ 24,561     $ (73,061

)

  $ (6,680

)

  $ 88,230  

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

                45,129             45,129                                            

Forfeited unvested stock

                                                                       

Redemption and retirement of preferred shares

    (6,198

)

    (4,304

)

                      (1,644

)

    (1,127

)

          (734

)

                (3,505

)

Stock-based compensation expense

                                                    99                   99  

Net income

                                                          1,983             1,983  

Net change in accumulated other comprehensive income, net of taxes

                                                                (408

)

    (408

)

Balances, June 30, 2018

                6,234,993       1,220,000       7,454,993     $     $     $ 140,639     $ 23,926     $ (71,078

)

  $ (7,088

)

  $ 86,399  

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

                1,597             1,597                                            

Forfeited unvested stock

                                                                       

Redemption and retirement of preferred shares

                                                                       

Stock-based compensation expense

                                                    171                   171  

Net income

                                                          2,437             2,437  

Net change in accumulated other comprehensive income, net of taxes

                                                                (795

)

    (795

)

Balances, September 30, 2018

                6,236,590       1,220,000       7,456,590     $     $     $ 140,639     $ 24,097     $ (68,641

)

  $ (7,883

)

  $ 88,212  

 

 

See accompanying notes to unaudited consolidated financial statements.

 

8

Table of Contents

 

 

LIMESTONE BANCORP, INC.

Unaudited Consolidated Statements of Cash Flows

For Nine Months Ended September 30, 2019 and 2018

(dollars in thousands)

 

   

2019

   

2018

 

Cash flows from operating activities

               

Net income

  $ 8,754     $ 6,354  

Adjustments to reconcile net income to net cash from operating activities

               

Depreciation and amortization

    1,310       739  

Provision (negative provision) for loan losses

          (500

)

Net amortization on securities

    530       669  

Stock-based compensation expense

    356       334  

Deferred taxes, net

    215       1,762  

Net gain on sales of loans held for sale

          (1

)

Proceeds from sales of loans held for sale

          71  

Net gain on sales of other real estate owned

          (72

)

Net write-down of other real estate owned

    260       585  

Net gain on sales of premises and equipment

    (1

)

    (46

)

Net realized loss on sales and calls of investment securities

    5       6  

Net write-down on premises held for sale

    115        

Earnings on bank owned life insurance, net of premium expense

    (300

)

    (322

)

Net change in accrued interest receivable and other assets

    (987

)

    (950

)

Net change in accrued interest payable and other liabilities

    (1,165

)

    (395

)

Net cash from operating activities

    9,092       8,234  
                 

Cash flows from investing activities

               

Purchases of available for sale securities

    (14,894

)

    (58,965

)

Sales and calls of available for sale securities

    3,452       6,054  

Maturities and prepayments of available for sale securities

    13,190       16,852  

Proceeds from mandatory redemptions of FHLB stock

    766       90  

Proceeds from sale of other real estate owned

          876  

Loan originations and payments, net

    (38,986

)

    (44,823

)

Purchases of premises and equipment, net

    (744

)

    (982

)

Proceeds from sale of premises and equipment

    1       141  

Net cash from investing activities

    (37,215

)

    (80,757

)

                 

Cash flows from financing activities

               

Net change in deposits

    29,203       27,002  

Repayment of Federal Home Loan Bank advances

    (105,119

)

    (85,206

)

Advances from Federal Home Loan Bank

    115,000       125,000  

Repayment of subordinated capital note

          (2,250

)

Proceeds from issuance of subordinated capital note

    17,000        

Repayment of senior debt

    (5,000

)

     

Issuance of common stock

          14,910  

Common shares withheld for taxes

    (315

)

     

Redemption of preferred stock

          (3,505

)

Net cash from financing activities

    50,769       75,951  

Net change in cash and cash equivalents

    22,646       3,428  

Beginning cash and cash equivalents

    35,361       34,103  

Ending cash and cash equivalents

  $ 58,007     $ 37,531  
                 

Supplemental cash flow information:

               

Interest paid

  $ 10,364     $ 7,631  

Supplemental non-cash disclosure:

               

Transfer from loans to other real estate

          730  

Initial recognition of right-of-use lease assets

    507        

 

 

See accompanying notes to unaudited consolidated financial statements.

 

9

Table of Contents

 

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 (Bank). The Company owns a 100% interest in the Bank. All significant inter-company transactions and accounts have been eliminated in consolidation.

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, the financial statements do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the entire year. A description of other significant accounting policies is presented in the notes to the Consolidated Financial Statements for the year ended December 31, 2018 included in the Company’s Annual Report on Form 10-K.

 

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

 

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

 

New Accounting Standards In February 2016, the FASB issued an update ASU No. 2016-02, Leases (Topic 842). Under the new guidance, lessees are required to recognize the following for all leases, with the exception of short-term leases, at the commencement date: a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. The amendments in this update became effective for annual periods and interim periods within those annual periods beginning after December 15, 2018. Based on the Company’s existing lease agreements, the impact of adopting the new guidance on the consolidated financial statements was the recording of a $507,000 lease liability and a right of use asset, which is included in other liabilities and premises and equipment, respectively, on the consolidated balance sheet. The adoption of this ASU did not have a meaningful impact on the Company’s performance metrics, including regulatory capital ratios and return on average assets. The Company’s leases mature through 2024 and have a weighted average discount rate of 6%. The operating lease cost was approximately $65,000 and $195,000 for the three and nine months ended September 30, 2019. At September 30, 2019, the Company had entered into one lease that has yet to commence. The right of use asset and lease liability for the lease yet to commence are estimated to be approximately $1.1 million and are expected to be recorded in the fourth quarter of 2019.

 

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.

 

10

 

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

 

 

Note 2 – Securities

 

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

 

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

 

   

Amortized

Cost

   

Gross

Unrealized

Gains

   

Gross

Unrealized

Losses

   

Fair Value

 
   

(in thousands)

 
September 30, 2019                                

Available for sale

                               

U.S. Government and federal agency

  $ 22,674     $ 317     $ (56

)

  $ 22,935  

Agency mortgage-backed: residential

    88,884       1,387       (169

)

    90,102  

Collateralized loan obligations

    49,851       5       (260

)

    49,596  

State and municipal

    29,026       609       (2

)

    29,633  

Corporate bonds

    10,926       189             11,115  

Total available for sale

  $ 201,361     $ 2,507     $ (487

)

  $ 203,381  

 

December 31, 2018

 

Amortized

Cost

   

Gross

Unrealized

Gains

   

Gross

Unrealized

Losses

   

Fair Value

 

Available for sale

                               

U.S. Government and federal agency

  $ 23,280     $ 2     $ (722

)

  $ 22,560  

Agency mortgage-backed: residential

    87,689       192       (1,891

)

    85,990  

Collateralized loan obligations

    49,942             (103

)

    49,839  

State and municipal

    32,841       230       (259

)

    32,812  

Corporate bonds

    9,890       127       (26

)

    9,991  

Total available for sale

  $ 203,642     $ 551     $ (3,001

)

  $ 201,192  

 

 

Sales and calls of securities were as follows:

 

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
   

2019

   

2018

   

2019

   

2018

 
    (in thousands)     (in thousands)  

Proceeds

  $ 1,000     $     $ 3,452     $ 6,054  

Gross gains

                1        

Gross losses

                6       6  

 

11

 

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. 

 

   

September 30, 2019

 
   

Amortized

Cost

   

Fair

Value

 
   

(in thousands)

 

Maturity

               

Available for sale

               

Within one year

  $ 47,700     $ 47,548  

One to five years

    37,548       38,168  

Five to ten years

    26,229       26,563  

Beyond ten years

    1,000       1,000  

Agency mortgage-backed: residential

    88,884       90,102  

Total

  $ 201,361     $ 203,381  

 

                                                                                              

Securities pledged at September 30, 2019 and December 31, 2018 had carrying values of approximately $74.6 million and $64.4 million, respectively, and were pledged to secure public deposits.

 

At September 30, 2019 and December 31, 2018, the Bank held securities issued by the Commonwealth of Kentucky or Kentucky municipalities having a book value of $14.7 million and $15.3 million, respectively. At September 30, 2019 and December 31, 2018, there were no other holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders’ equity.

 

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

 

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

 

At September 30, 2019, $33.0 million and $16.6 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 nine months ended September 30, 2019. All of the Bank’s CLOs are floating rate, with rates set on a quarterly basis at three-month LIBOR plus a spread.

 

The Company evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, underlying credit quality of the issuer, and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer’s financial condition, the Company may consider whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, the sector or industry trends and cycles affecting the issuer, and the results of reviews of the issuer’s financial condition. As of September 30, 2019, management does not believe any securities in the portfolio with unrealized losses should be classified as other than temporarily impaired.

 

12

 

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

 

 

   

Less than 12 Months

   

12 Months or More

   

Total

 

Description of Securities

 

Fair

Value

   

Unrealized

Loss

   

Fair

Value

   

Unrealized

Loss

   

Fair

Value

   

Unrealized

Loss

 
   

(in thousands)

 

September 30, 2019

                                               

Available for sale

                                               

U.S. Government and federal agency

  $ 9,128     $ (56

)

  $     $     $ 9,128     $ (56

)

Agency mortgage-backed: residential

    11,701       (34

)

    12,315       (135

)

    24,016       (169

)

Collateralized loan obligations

    19,893       (178

)

    15,568       (82

)

    35,461       (260

)

State and municipal

                934       (2

)

    934       (2

)

Corporate bonds

                                   

Total temporarily impaired

  $ 40,722     $ (268

)

  $ 28,817     $ (219

)

  $ 69,539     $ (487

)

                                                 
                                                 

December 31, 2018

                                               

Available for sale

                                               

U.S. Government and federal agency

  $ 3,431     $ (57

)

  $ 17,212     $ (665

)

  $ 20,643     $ (722

)

Agency mortgage-backed: residential

    30,229       (343

)

    40,932       (1,548

)

    71,161       (1,891

)

Collateralized loan obligations

    48,294       (103

)

                48,294       (103

)

State and municipal

    6,133       (29

)

    7,252       (230

)

    13,385       (259

)

Corporate Bonds

    3,569       (26

)

                3,569       (26

)

Total temporarily impaired

  $ 91,656     $ (558

)

  $ 65,396     $ (2,443

)

  $ 157,052     $ (3,001

)

 

 

Note 3 – Loans

 

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

 

   

September 30,

   

December 31,

 
   

2019

   

2018

 
   

(in thousands)

 

Commercial

  $ 135,981     $ 129,368  

Commercial Real Estate:

               

Construction

    66,351       86,867  

Farmland

    82,593       77,937  

Nonfarm nonresidential

    194,660       172,177  

Residential Real Estate:

               

Multi-family

    59,385       49,757  

1-4 Family

    166,412       175,761  

Consumer

    52,347       39,104  

Agriculture

    45,357       33,737  

Other

    483       536  

Subtotal

    803,569       765,244  

Less: Allowance for loan losses

    (8,904

)

    (8,880

)

Loans, net

  $ 794,665     $ 756,364  

 

13

 

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

 

   

Commercial

   

Commercial

Real Estate

   

Residential

Real Estate

   

Consumer

   

Agriculture

   

Other

   

Total

 
   

(in thousands)

 

September 30, 2019:

                                                       

Beginning balance

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

Provision (negative provision)

    (68

)

    341       (686

)

    354       60       (1

)

     

Loans charged off

    (10

)

    (32

)

    (73

)

    (184

)

                (299

)

Recoveries

    6       7       345       9       3       1       371  

Ending balance

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

September 30, 2018:

                                                       

Beginning balance

  $ 1,133     $ 4,234     $ 2,778     $ 66     $ 367     $ 2     $ 8,580  

Provision (negative provision)

    65       (48

)

    (393

)

    21       5             (350

)

Loans charged off

    (50

)

          (78

)

    (15

)

                (143

)

Recoveries

    10       295       231       9       2             547  

Ending balance

  $ 1,158     $ 4,481     $ 2,538     $ 81     $ 374     $ 2     $ 8,634  

 

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

 

   

Commercial

   

Commercial

Real Estate

   

Residential

Real Estate

   

Consumer

   

Agriculture

   

Other

   

Total

 
   

(in thousands)

 

September 30, 2019:

                                                       

Beginning balance

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

Provision (negative provision)

    30       130       (838

)

    531       148       (1

)

     

Loans charged off

    (10

)

    (47

)

    (190

)

    (398

)

    (4

)

          (649

)

Recoveries

    101       10       489       69       3       1       673  

Ending balance

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

September 30, 2018:

                                                       

Beginning balance

  $ 892     $ 4,032     $ 2,900     $ 64     $ 313     $ 1     $ 8,202  

Provision (negative provision)

    61       (68

)

    (557

)

    7       60       (3

)

    (500

)

Loans charged off

    (50

)

    (198

)

    (166

)

    (49

)

    (12

)

    (8

)

    (483

)

Recoveries

    255       715       361       59       13       12       1,415  

Ending balance

  $ 1,158     $ 4,481     $ 2,538     $ 81     $ 374     $ 2     $ 8,634  

 

14

 

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method as of September 30, 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

  $ 1     $ 32     $     $     $     $     $ 33  

Collectively evaluated for impairment

    1,419       4,737       1,913       332       468       2       8,871  

Total ending allowance balance

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

Loans:

                                                       

Loans individually evaluated for impairment

  $ 75     $ 723     $ 1,739     $ 153     $ 65     $     $ 2,755  

Loans collectively evaluated for impairment

    135,906       342,881       224,058       52,194       45,292       483       800,814  

Total ending loans balance

  $ 135,981     $ 343,604     $ 225,797     $ 52,347     $ 45,357     $ 483     $ 803,569  

 

 

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method as of December 31, 2018:

 

 

   

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

  $     $ 35     $ 168     $     $     $     $ 203  

Collectively evaluated for impairment

    1,299       4,641       2,284       130       321       2       8,677  

Total ending allowance balance

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

 

Loans:

                                                       

Loans individually evaluated for impairment

  $ 53     $ 510     $ 2,348     $     $     $     $ 2,911