UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended June 30, 2021
Or
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☐ |
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)
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Kentucky |
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61-1142247 |
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(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
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2500 Eastpoint Parkway, Louisville, Kentucky |
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40223 |
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(Address of principal executive offices) |
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(Zip Code) |
(502) 499-4800
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
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Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
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Common shares |
LMST |
The Nasdaq Stock Market |
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.
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Large accelerated filer ☐ |
Accelerated filer ☐ |
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Non-accelerated filer ☒ |
Smaller reporting company ☒ |
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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.
6,602,686 Common Shares and 1,000,000 Non-Voting Common Shares were outstanding at July 30, 2021.
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Page |
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PART I – |
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ITEM 1. |
3 |
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ITEM 2. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
32 |
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ITEM 3. |
47 |
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ITEM 4. |
47 |
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PART II – |
48 |
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ITEM 1. |
48 |
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ITEM 1A. |
48 | |
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ITEM 2. |
48 | |
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ITEM 3. |
48 | |
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ITEM 4. |
48 | |
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ITEM 5. |
48 | |
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ITEM 6. |
49 |
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
Unaudited Consolidated Statements of Income
Unaudited Consolidated Statements of Comprehensive Income
Unaudited Consolidated Statement of Changes in Stockholders’ Equity
Unaudited Consolidated Statements of Cash Flows
Notes to Unaudited Consolidated Financial Statements
LIMESTONE BANCORP, INC.
Unaudited Consolidated Balance Sheets
(dollars in thousands except share data)
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June 30, 2021 |
December 31, 2020 |
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Assets |
||||||||
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Cash and due from banks |
$ | 9,584 | $ | 10,830 | ||||
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Interest bearing deposits in banks |
75,536 | 56,863 | ||||||
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Cash and cash equivalents |
85,120 | 67,693 | ||||||
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Securities available for sale |
182,154 | 203,862 | ||||||
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Securities held to maturity (fair value of $46,685) |
46,717 | — | ||||||
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Loans, net of allowance of $12,637 and $12,443, respectively |
934,788 | 949,638 | ||||||
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Premises and equipment, net |
21,912 | 18,533 | ||||||
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Premises held for sale |
980 | 1,060 | ||||||
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Other real estate owned |
— | 1,765 | ||||||
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Federal Home Loan Bank stock |
5,449 | 5,887 | ||||||
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Bank owned life insurance |
23,738 | 23,441 | ||||||
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Deferred taxes, net |
23,452 | 25,714 | ||||||
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Goodwill |
6,252 | 6,252 | ||||||
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Other intangible assets, net |
2,117 | 2,244 | ||||||
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Accrued interest receivable and other assets |
6,231 | 6,213 | ||||||
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Total assets |
$ | 1,338,910 | $ | 1,312,302 | ||||
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Liabilities and Stockholders’ Equity |
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Deposits |
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Non-interest bearing |
$ | 267,059 | $ | 243,022 | ||||
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Interest bearing |
872,042 | 876,585 | ||||||
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Total deposits |
1,139,101 | 1,119,607 | ||||||
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Federal Home Loan Bank advances |
20,000 | 20,623 | ||||||
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Accrued interest payable and other liabilities |
9,850 | 10,048 | ||||||
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Junior subordinated debentures |
21,000 | 21,000 | ||||||
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Subordinated capital notes |
25,000 | 25,000 | ||||||
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Total liabilities |
1,214,951 | 1,196,278 | ||||||
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Commitments and contingent liabilities (Note 15) |
— | — | ||||||
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Stockholders’ equity |
||||||||
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Common stock, no par, 39,000,000 shares authorized, 6,602,686 and 6,498,865 voting, and 1,000,000 and 1,000,000 non-voting issued and outstanding, respectively |
140,639 | 140,639 | ||||||
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Additional paid-in capital |
25,227 | 25,013 | ||||||
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Retained deficit |
(39,555 |
) |
(46,678 |
) |
||||
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Accumulated other comprehensive loss |
(2,352 |
) |
(2,950 |
) |
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Total stockholders' equity |
123,959 | 116,024 | ||||||
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Total liabilities and stockholders’ equity |
$ | 1,338,910 | $ | 1,312,302 | ||||
See accompanying notes to unaudited consolidated financial statements.
LIMESTONE BANCORP, INC.
Unaudited Consolidated Statements of Income
(dollars in thousands, except per share data)
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Three Months Ended June 30, |
Six Months Ended June 30, |
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2021 |
2020 |
2021 |
2020 |
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| Interest income | ||||||||||||||||
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Loans, including fees |
$ | 11,047 | $ | 11,356 | $ | 22,008 | $ | 22,967 | ||||||||
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Taxable securities |
1,103 | 1,307 | 2,219 | 2,774 | ||||||||||||
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Tax exempt securities |
177 | 77 | 308 | 147 | ||||||||||||
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Federal funds sold and other |
49 | 46 | 91 | 165 | ||||||||||||
| 12,376 | 12,786 | 24,626 | 26,053 | |||||||||||||
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Interest expense |
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Deposits |
917 | 2,127 | 1,943 | 4,899 | ||||||||||||
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Federal Home Loan Bank advances |
38 | 73 | 76 | 293 | ||||||||||||
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Senior debt |
— | 51 | — | 107 | ||||||||||||
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Junior subordinated debentures |
132 | 172 | 262 | 387 | ||||||||||||
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Subordinated capital notes |
375 | 253 | 751 | 495 | ||||||||||||
| 1,462 | 2,676 | 3,032 | 6,181 | |||||||||||||
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Net interest income |
10,914 | 10,110 | 21,594 | 19,872 | ||||||||||||
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Provision for loan losses |
— | 1,100 | 350 | 2,150 | ||||||||||||
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Net interest income after provision for loan losses |
10,914 | 9,010 | 21,244 | 17,722 | ||||||||||||
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Non-interest income |
||||||||||||||||
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Service charges on deposit accounts |
520 | 441 | 1,068 | 1,109 | ||||||||||||
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Bank card interchange fees |
1,073 | 863 | 2,033 | 1,613 | ||||||||||||
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Income from bank owned life insurance |
143 | 116 | 308 | 212 | ||||||||||||
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Gain on sale of other real estate owned |
191 | — | 191 | — | ||||||||||||
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Other |
208 | 181 | 419 | 391 | ||||||||||||
| 2,135 | 1,601 | 4,019 | 3,325 | |||||||||||||
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Non-interest expense |
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Salaries and employee benefits |
4,467 | 4,633 | 8,949 | 9,171 | ||||||||||||
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Occupancy and equipment |
979 | 983 | 2,039 | 1,982 | ||||||||||||
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Professional fees |
246 | 235 | 482 | 443 | ||||||||||||
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Marketing expense |
179 | 104 | 361 | 318 | ||||||||||||
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FDIC Insurance |
90 | 67 | 225 | 67 | ||||||||||||
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Data processing expense |
377 | 380 | 755 | 739 | ||||||||||||
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Deposit and state franchise tax |
90 | 360 | 180 | 720 | ||||||||||||
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Deposit account related expense |
556 | 460 | 1,047 | 911 | ||||||||||||
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Communications expense |
194 | 247 | 367 | 465 | ||||||||||||
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Insurance expense |
115 | 111 | 219 | 214 | ||||||||||||
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Postage and delivery |
139 | 152 | 291 | 320 | ||||||||||||
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Other |
522 | 504 | 1,023 | 1,121 | ||||||||||||
| 7,954 | 8,236 | 15,938 | 16,471 | |||||||||||||
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Income before income taxes |
5,095 | 2,375 | 9,325 | 4,576 | ||||||||||||
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Income tax expense |
1,194 | 393 | 2,202 | 754 | ||||||||||||
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Net income |
3,901 | 1,982 | 7,123 | 3,822 | ||||||||||||
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Basic and diluted income per common share |
$ | 0.51 | $ | 0.26 | $ | 0.94 | $ | 0.51 | ||||||||
See accompanying notes to unaudited consolidated financial statements.
LIMESTONE BANCORP, INC.
Unaudited Consolidated Statements of Comprehensive Income
(in thousands)
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Three Months Ended June 30, |
Six Months Ended June 30, |
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2021 |
2020 |
2021 |
2020 |
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Net income |
$ | 3,901 | $ | 1,982 | $ | 7,123 | $ | 3,822 | ||||||||
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Other comprehensive income (loss): |
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Unrealized gain (loss) on securities: |
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Unrealized gain (loss) arising during the period |
682 | 3,254 | 962 | (872 |
) |
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Amortization during period of net unrealized gain transferred to held to maturity |
(120 |
) |
— | (170 |
) |
— | ||||||||||
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Less reclassification adjustment for gains (losses) included in net income |
(5 |
) |
(5 |
) |
(5 |
) |
(5 |
) |
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Net unrealized gain (loss) recognized in comprehensive income |
567 | 3,259 | 797 | (867 |
) |
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Tax effect |
(142 |
) |
(762 |
) |
(199 |
) |
216 | |||||||||
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Other comprehensive income (loss) |
425 | 2,497 | 598 | (651 |
) |
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Comprehensive income |
$ | 4,326 | $ | 4,479 | $ | 7,721 | $ | 3,171 | ||||||||
See accompanying notes to unaudited consolidated financial statements.
LIMESTONE BANCORP, INC.
Unaudited Consolidated Statements of Changes in Stockholders’ Equity
For Three and Six Months Ended June 30, 2021 and 2020
(Dollar amounts in thousands except share and per share data)
| Shares | Amount | |||||||||||||||||||||||||||||||
| Common |
Non-Voting Common |
Total Common |
Common and Non-Voting Common |
Additional Paid-In Capital |
Retained Deficit |
Accumulated Other Comprehensive Loss |
Total |
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Balances, January 1, 2021 |
6,498,865 | 1,000,000 | 7,498,865 | $ | 140,639 | $ | 25,013 | $ | (46,678 | ) | $ | (2,950 | ) | $ | 116,024 | |||||||||||||||||
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Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations upon vesting |
95,634 | — | 95,634 | — | (48 | ) | — | — | (48 | ) | ||||||||||||||||||||||
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Forfeited unvested stock |
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||
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Stock-based compensation expense |
— | — | — | — | 149 | — | — | 149 | ||||||||||||||||||||||||
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Net income |
— | — | — | — | — | 3,222 | — | 3,222 | ||||||||||||||||||||||||
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Net change in accumulated other comprehensive loss, net of taxes |
— | — | — | — | — | — | 173 | 173 | ||||||||||||||||||||||||
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Balances, March 31, 2021 |
6,594,499 | 1,000,000 | 7,594,499 | $ | 140,639 | $ | 25,114 | $ | (43,456 | ) | $ | (2,777 | ) | $ | 119,520 | |||||||||||||||||
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Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations upon vesting |
8,586 | — | 8,586 | — | (39 | ) | — | — | (39 | ) | ||||||||||||||||||||||
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Forfeited unvested stock |
(399 | ) | — | (399 | ) | — | — | — | — | — | ||||||||||||||||||||||
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Stock-based compensation expense |
— | — | — | — | 152 | — | — | 152 | ||||||||||||||||||||||||
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Net income |
— | — | — | — | — | 3,901 | — | 3,901 | ||||||||||||||||||||||||
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Net change in accumulated other comprehensive income, net of taxes |
— | — | — | — | — | — | 425 | 425 | ||||||||||||||||||||||||
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Balances, June 30, 2021 |
6,602,686 | 1,000,000 | 7,602,686 | $ | 140,639 | $ | 25,227 | $ | (39,555 | ) | $ | (2,352 | ) | $ | 123,959 | |||||||||||||||||
See accompanying notes to unaudited consolidated financial statements.
LIMESTONE BANCORP, INC.
Unaudited Consolidated Statements of Changes in Stockholders’ Equity
For Three and Six Months Ended June 30, 2021 and 2020
(Dollar amounts in thousands except share and per share data)
| Shares | Amount | |||||||||||||||||||||||||||||||
| Common |
Non-Voting Common |
Total Common |
Common and Non-Voting Common |
Additional Paid-In Capital |
Retained Deficit |
Accumulated Other Comprehensive Loss |
Total |
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Balances, January 1, 2020 |
6,251,975 | 1,220,000 | 7,471,975 | $ | 140,639 | $ | 24,508 | $ | (55,683 | ) | $ | (3,714 | ) | $ | 105,750 | |||||||||||||||||
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Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations upon award |
17,330 | — | 17,330 | — | (37 | ) | — | — | (37 | ) | ||||||||||||||||||||||
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Forfeited unvested stock |
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||
|
Stock-based compensation expense |
— | — | — | — | 106 | — | — | 106 | ||||||||||||||||||||||||
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Net income |
— | — | — | — | — | 1,840 | — | 1,840 | ||||||||||||||||||||||||
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Net change in accumulated other comprehensive loss, net of taxes |
— | — | — | — | — | — | (3,148 | ) | (3,148 | ) | ||||||||||||||||||||||
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Balances, March 31, 2020 |
6,269,305 | 1,220,000 | 7,489,305 | $ | 140,639 | $ | 24,577 | $ | (53,843 | ) | $ | (6,862 | ) | $ | 104,511 | |||||||||||||||||
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Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations upon award |
(3,433 | ) | — | (3,433 | ) | — | (38 | ) | — | — | (38 | ) | ||||||||||||||||||||
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Forfeited unvested stock |
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||
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Stock-based compensation expense |
— | — | — | — | 104 | — | — | 104 | ||||||||||||||||||||||||
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Net income |
— | — | — | — | — | 1,982 | — | 1,982 | ||||||||||||||||||||||||
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Net change in accumulated other comprehensive loss, net of taxes |
— | — | — | — | — | — | 2,497 | 2,497 | ||||||||||||||||||||||||
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Balances, June 30, 2020 |
6,265,872 | 1,220,000 | 7,485,872 | $ | 140,639 | $ | 24,643 | $ | (51,861 | ) | $ | (4,365 | ) | $ | 109,056 | |||||||||||||||||
See accompanying notes to unaudited consolidated financial statements.
LIMESTONE BANCORP, INC.
Unaudited Consolidated Statements of Cash Flows
For Six Months Ended June 30, 2021 and 2020
(dollars in thousands)
|
2021 |
2020 |
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Cash flows from operating activities |
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Net income |
$ | 7,123 | $ | 3,822 | ||||
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Adjustments to reconcile net income to net cash from operating activities |
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Depreciation, amortization and accretion, net |
2,135 | 1,080 | ||||||
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Provision for loan losses |
350 | 2,150 | ||||||
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Net amortization on securities |
282 | 321 | ||||||
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Stock-based compensation expense |
301 | 210 | ||||||
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Deferred taxes, net |
2,063 | 927 | ||||||
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Net realized loss on sales and calls of investment securities |
5 | 5 | ||||||
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Net realized gain on other real estate owned |
(191 |
) |
— | |||||
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Net write-down on premises held for sale |
80 | 61 | ||||||
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Increase in cash surrender value of life insurance, net of premium |
(297 |
) |
(201 |
) |
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Amortization of operating lease right-of-use assets |
165 | 375 | ||||||
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Net change in accrued interest receivable and other assets |
(3,241 |
) |
(1,425 |
) |
||||
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Net change in accrued interest payable and other liabilities |
(198 |
) |
(1,645 |
) |
||||
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Net cash from operating activities |
8,577 | 5,680 | ||||||
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Cash flows from investing activities |
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Purchases of available for sale securities |
(33,819 |
) |
(18,309 |
) |
||||
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Proceeds from sales and calls of available for sale securities |
— | 8,530 | ||||||
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Proceeds from maturities and prepayments of available for sale securities |
20,424 | 14,990 | ||||||
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Purchases of held to maturity securities |
(12,463 |
) |
— | |||||
|
Proceeds from calls of held to maturity securities |
704 | — | ||||||
|
Proceeds from maturities and prepayments of held to maturity securities |
655 | — | ||||||
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Purchases of Federal Home Loan Bank stock |
— | (600 |
) |
|||||
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Proceeds from mandatory redemptions of Federal Home Loan Bank stock |
438 | 695 | ||||||
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Proceeds from sale of other real estate owned |
1,956 | 1,600 | ||||||
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Net change in loans |
13,040 | (50,212 |
) |
|||||
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Purchases of premises and equipment |
(869 |
) |
(553 |
) |
||||
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Net cash from investing activities |
(9,934 |
) |
(43,859 |
) |
||||
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Cash flows from financing activities |
||||||||
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Net change in deposits |
19,494 | 97,813 | ||||||
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Repayment of Federal Home Loan Bank advances |
(623 |
) |
(135,745 |
) |
||||
|
Advances from Federal Home Loan Bank |
— | 95,000 | ||||||
|
Common shares withheld for taxes |
(87 |
) |
(75 |
) |
||||
|
Net cash from financing activities |
18,784 | 56,993 | ||||||
|
Net change in cash and cash equivalents |
17,427 | 18,814 | ||||||
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Beginning cash and cash equivalents |
67,693 | 30,203 | ||||||
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Ending cash and cash equivalents |
$ | 85,120 | $ | 49,017 | ||||
|
Supplemental cash flow information: |
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Interest paid |
$ | 3,121 | $ | 6,549 | ||||
|
Income tax paid |
220 | — | ||||||
|
Supplemental non-cash disclosure: |
||||||||
|
Transfer from loans to other real estate |
— | — | ||||||
|
Transfer from premises and equipment to premises held for sale |
— | 310 | ||||||
|
Transfer from available for sale to held to maturity securities |
34,741 | — | ||||||
|
AOCI component of transfer from available for sale to held to maturity |
1,081 | — | ||||||
|
Financed sales of other real estate owned |
— | 1,360 | ||||||
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). All significant inter-company transactions and accounts have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, the financial statements do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2021 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, 2020 included in the Company’s Annual Report on Form 10-K.
Use of Estimates – To prepare financial statements in conformity with U.S. generally accepted accounting principles, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and future results could differ.
In March 2020, the World Health Organization declared novel coronavirus disease 2019 (“COVID-19”) as a global pandemic. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains, created significant volatility and disruption in financial markets, and increased unemployment levels. In addition, the pandemic has resulted in temporary closures of many businesses and the institution of social distancing and sheltering in place requirements in many states and communities, including those in markets in which the Company is located or does business.
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 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, results of operations, and financial condition, as well as its regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic. Moreover, the effects of the COVID-19 pandemic may have a material adverse effect on all or a combination of valuation impairments on the Company’s intangible assets, investments, loans, or deferred tax assets.
Reclassifications – Some items in the prior year financial statements were reclassified to conform to the current presentation. The reclassifications did not impact net income or stockholders’ equity.
New Accounting Standards – In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The final standard will change estimates for credit losses related to financial assets measured at amortized cost such as loans, held-to-maturity debt securities, and certain other contracts. For estimating credit losses, the FASB is replacing the incurred loss model with an expected loss model, which is referred to as the current expected credit loss (CECL) model. Under the CECL model, certain financial assets that are carried at amortized cost, such as loans held for investment and held-to-maturity debt securities, are required to be presented at the net amount expected to be collected. The measurement of expected credit losses is to be based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This measurement will take place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs significantly from the “incurred loss” model required under current GAAP, which delays recognition until it is probable a loss has been incurred. The change could materially affect how the allowance for loan losses is determined. The impact of CECL model implementation is being evaluated, but it is expected that a one-time cumulative-effect adjustment to the allowance for loan losses will be recognized in retained earnings on the consolidated balance sheet as of the beginning of the first reporting period in which the new standard is effective, as is consistent with regulatory expectations set forth in interagency guidance. In December 2018, the OCC, The Board of Governors of the Federal Reserve System, and the FDIC approved a final rule to address changes to the credit loss accounting under GAAP, including banking organizations’ implementation of CECL. The final rule provides banking organizations the option to phase in over a three-year period the day-one adverse effects on regulatory capital that may result from adoption of the new accounting standard. In October 2019, the FASB voted to delay implementation for smaller reporting companies, private companies, and not-for-profit entities. The Company currently qualifies as a smaller reporting company and, as such, will be required to implement CECL for fiscal year and interim periods beginning after December 15, 2022.
In December 2019, the FASB issued ASU 2019-12, Income Taxes - Simplifying the Accounting for Income Taxes. The final standard removes specific exceptions to the general principles in Topic 740, improves financial statement preparers’ application of income tax-related guidance, and simplifies GAAP. Certain provisions under ASU 2019-12 require prospective application, some require modified retrospective adoption, while other provisions require retrospective application to all periods presented in the consolidated financial statements upon adoption. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020. 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”) or held to maturity (“HTM”). 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. HTM securities are those securities the Bank has the intent and ability to hold until maturity and are reported at amortized cost.
The following table summarizes the amortized cost and fair value of AFS securities and HTM securities at June 30, 2021 and December 31, 2020 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) and gross unrecognized gains and losses (in thousands):
|
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
|||||||||||||
|
June 30, 2021 |
||||||||||||||||
|
Available for sale |
||||||||||||||||
|
U.S. Government and federal agency |
$ | 28,918 | $ | 845 | $ | (3 |
) |
$ | 29,760 | |||||||
|
Agency mortgage-backed: residential |
79,146 | 2,121 | (265 |
) |
81,002 | |||||||||||
|
Collateralized loan obligations |
40,185 | — | (240 |
) |
39,945 | |||||||||||
|
Corporate bonds |
31,674 | 487 | (714 |
) |
31,447 | |||||||||||
|
Total available for sale |
$ | 179,923 | $ | 3,453 | $ | (1,222 |
) |
$ | 182,154 | |||||||
|
Amortized Cost |
Gross Unrecognized Gains |
Gross Unrecognized Losses |
Fair Value |
|||||||||||||
|
Held to maturity |
||||||||||||||||
|
State and municipal |
$ | 46,717 | $ | 217 | $ | (249 |
) |
$ | 46,685 | |||||||
|
Total held to maturity |
$ | 46,717 | $ | 217 | $ | (249 |
) |
$ | 46,685 | |||||||
|
December 31, 2020 |
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
||||||||||||
|
Available for sale |
||||||||||||||||
|
U.S. Government and federal agency |
$ | 18,811 | $ | 806 | $ | — | $ | 19,617 | ||||||||
|
Agency mortgage-backed: residential |
71,582 | 2,777 | (26 |
) |
74,333 | |||||||||||
|
Collateralized loan obligations |
44,730 | — | (1,578 |
) |
43,152 | |||||||||||
|
State and municipal |
34,759 | 1,296 | — | 36,055 | ||||||||||||
|
Corporate bonds |
31,635 | 472 | (1,402 |
) |
30,705 | |||||||||||
|
Total available for sale |
$ | 201,517 | $ | 5,351 | $ | (3,006 |
) |
$ | 203,862 | |||||||
During March 2021, to better manage interest rate risk, management transferred from AFS to HTM all the municipal securities in the portfolio having a book value of approximately $34.7 million, a market value of approximately $35.8 million, and a net unrealized gain of approximately $1.1 million. The transfer occurred at fair value. The related net unrealized gain included in other comprehensive income remained in other comprehensive income and is being amortized from other comprehensive income with an offsetting entry to interest income as a yield adjustment through earnings over the remaining term of the securities. No gain or loss was recorded at the time of transfer. This transfer was completed after careful consideration of the intent and ability to hold these securities to maturity.
Sales and calls of securities were as follows:
|
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
|
2021 |
2020 |
2021 |
2020 |
|||||||||||||
| (in thousands) | (in thousands) | |||||||||||||||
|
Proceeds |
$ | 704 | $ | 2,530 | $ | 704 | $ | 8,530 | ||||||||
|
Gross gains |
— | — | — | — | ||||||||||||
|
Gross losses |
5 | 5 | 5 | 5 | ||||||||||||
The amortized cost and fair value of the debt securities are shown by contractual maturity. Expected maturities may differ from actual maturities when borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed securities not due at a single maturity date are shown separately.
|
June 30, 2021 |
||||||||
|
Amortized Cost |
Fair Value |
|||||||
|
(in thousands) |
||||||||
|
Maturity |
||||||||
|
Available for sale |
||||||||
|
Within one year |
$ | — | $ | — | ||||
|
One to five years |
3,590 | 3,768 | ||||||
|
Five to ten years |
69,655 | 70,043 | ||||||
|
Beyond ten years |
27,532 | 27,341 | ||||||
|
Agency mortgage-backed: residential |
79,146 | 81,002 | ||||||
|
Total |
$ | 179,923 | $ | 182,154 | ||||
|
Held to maturity |
||||||||
|
Within one year |
$ | 4,828 | 4,830 | |||||
|
One to five years |
11,278 | $ | 11,259 | |||||
|
Five to ten years |
1,925 | 1,933 | ||||||
|
Beyond ten years |
28,686 | 28,663 | ||||||
|
Total |
$ | 46,717 | $ | 46,685 | ||||
Securities pledged at June 30, 2021 and December 31, 2020 had carrying values of approximately $95.8 million and $81.4 million, respectively, and were pledged to secure public deposits.
At June 30, 2021 and December 31, 2020, the Bank held securities issued by the Commonwealth of Kentucky or Kentucky municipalities having a book value of $34.8 million and $23.0 million, respectively. At June 30, 2021 and December 31, 2020, 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 Company evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, underlying credit quality of the issuer, and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer’s financial condition, the Company may consider whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, the sector or industry trends and cycles affecting the issuer, and the results of reviews of the issuer’s financial condition. As of June 30, 2021, management does not believe any securities in the portfolio with unrealized losses should be classified as other than temporarily impaired.
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 June 30, 2021, $27.9 million, $9.5 million, and $2.5 million of the Bank’s CLOs were AA, A, and BBB rated, respectively. None of the CLOs were subject to ratings downgrade during the six months ended June 30, 2021.
The corporate bond portfolio consists of 13 subordinated debt securities and one senior debt security of U.S. banks and bank holding companies with maturities ranging from 2024 to 2037. The securities are either initially fixed for five years converting to floating at an index over LIBOR, or SOFR, or floating at an index over LIBOR, or SOFR, from inception. Management regularly monitors the financial condition of these corporate issuers by reviewing their regulatory and public filings.
Securities with unrealized and unrecognized losses at June 30, 2021 and December 31, 2020, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position, are as follows (in thousands):
|
Less than 12 Months |
12 Months or More |
Total |
||||||||||||||||||||||
|
Description of Securities |
Fair Value |
Unrealized Loss |
Fair Value |
Unrealized Loss |
Fair Value |
Unrealized Loss |
||||||||||||||||||
|
June 30, 2021 |
||||||||||||||||||||||||
|
Available for sale |
||||||||||||||||||||||||
|
U.S. Government and federal agency |
$ | 2,960 | $ | (3 |
) |
$ | — | $ | — | $ | 2,960 | $ | (3 |
) |
||||||||||
|
Agency mortgage-backed: residential |
20,180 | (258 |
) |
905 | (7 |
) |
21,085 | (265 |
) |
|||||||||||||||
|
Collateralized loan obligations |
— | — | 35,445 | (240 |
) |
35,445 | (240 |
) |
||||||||||||||||
|
Corporate bonds |
3,942 | (58 |
) |
10,626 | (656 |
) |
14,568 | (714 |
) |
|||||||||||||||
|
Total temporarily impaired |
$ | 27,082 | $ | (319 |
) |
$ | 46,976 | $ | (903 |
) |
$ | 74,058 | $ | (1,222 |
) |
|||||||||
|
Less than 12 Months |
12 Months or More |
Total |
||||||||||||||||||||||
|
Fair Value |
Unrecognized Loss |
Fair Value |
Unrecognized Loss |
Fair Value |
Unrecognized Loss |
|||||||||||||||||||
|
Held to maturity |
||||||||||||||||||||||||
|
State and municipal |
26,411 | (249 |
) |
— | — | 26,411 | (249 |
) |
||||||||||||||||
|
Total temporarily impaired |
$ | 26,411 | $ | (249 |
) |
$ | — | $ | — | $ | 26,411 | $ | (249 |
) |
||||||||||
|
Less than 12 Months |
12 Months or More |
Total |
||||||||||||||||||||||
|
Fair Value |
Unrealized Loss |
Fair Value |
Unrealized Loss |
Fair Value |
Unrealized Loss |
|||||||||||||||||||
|
December 31, 2020 |
||||||||||||||||||||||||
|
Available for sale |
||||||||||||||||||||||||
|
Agency mortgage-backed: residential |
$ | 4,772 | $ | (26 |
) |
$ | — | $ | — | $ | 4,772 | $ | (26 |
) |
||||||||||
|
Collateralized loan obligations |
8,794 | (251 |
) |
34,358 | (1,327 |
) |
43,152 | (1,578 |
) |
|||||||||||||||
|
Corporate bonds |
10,849 | (1,402 |
) |
— | — | 10,849 | (1,402 |
) |
||||||||||||||||
|
Total temporarily impaired |
$ | 24,415 | $ | (1,679 |
) |
$ | 34,358 | $ | (1,327 |
) |
$ | 58,773 | $ | (3,006 |
) |
|||||||||
Note 3 – Loans
Loans net of unearned income, deferred loan origination costs, and net premiums on acquired loans by class were as follows:
|
June 30, |
December 31, |
|||||||
|
2021 |
2020 |
|||||||
|
(in thousands) |
||||||||
|
Commercial (1) |
$ | 206,578 | $ | 208,244 | ||||
|
Commercial Real Estate: |
||||||||
|
Construction |
78,659 | 92,916 | ||||||
|
Farmland |
65,631 | 70,272 | ||||||
|
Nonfarm nonresidential |
296,737 | 266,394 | ||||||
|
Residential Real Estate: |
||||||||
|
Multi-family |
62,428 | 61,180 | ||||||
|
1-4 Family |
168,215 | 188,955 | ||||||
|
Consumer |
31,511 | 31,429 | ||||||
|
Agriculture |
37,086 | 42,044 | ||||||
|
Other |
580 | 647 | ||||||
|
Subtotal |
947,425 | 962,081 | ||||||
|
Less: Allowance for loan losses |
(12,637 |
) |
(12,443 |
) |
||||
|
Loans, net |
$ | 934,788 | $ | 949,638 | ||||
|
(1) |
Includes SBA Paycheck Protection Program (“PPP”) loans of $21.0 million and $20.3 million at June 30, 2021 and December 31, 2020, respectively. |
The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended June 30, 2021 and 2020:
|
Commercial |
Commercial Real Estate |
Residential Real Estate |
Consumer |
Agriculture |
Other |
Total |
||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||
|
June 30, 2021: |
||||||||||||||||||||||||||||
|
Beginning balance |
$ | 2,480 | $ | 7,705 | $ | 1,781 | $ | 334 | $ | 452 | $ | 3 | $ | 12,755 | ||||||||||||||
|
Provision (negative provision) |
(183 |
) |
221 | (153 |
) |
68 | 47 | – | — | |||||||||||||||||||
|
Loans charged off |
– | (129 |
) |
(12 |
) |
(32 |
) |
(5 |
) |
– | (178 |
) |
||||||||||||||||
|
Recoveries |
7 | 2 | 30 | 15 | 6 | – | 60 | |||||||||||||||||||||
|
Ending balance |
$ | 2,304 | $ | 7,799 | $ | 1,646 | $ | 385 | $ | 500 | $ | 3 | $ | 12,637 | ||||||||||||||
|
June 30, 2020: |
||||||||||||||||||||||||||||
|
Beginning balance |
$ | 2,025 | $ | 4,212 | $ | 1,909 | $ | 593 | $ | 409 | $ | 2 | $ | 9,150 | ||||||||||||||
|
Provision (negative provision) |
504 | 210 | 189 | 134 | 65 | (2 | ) | 1,100 | ||||||||||||||||||||
|
Loans charged off |
(3 |
) |
(28 |
) |
(7 |
) |
(152 |
) |
(3 |
) |
– | (193 |
) |
|||||||||||||||
|
Recoveries |
6 | 100 | 55 | 6 | 1 | 3 | 171 | |||||||||||||||||||||
|
Ending balance |
$ | 2,532 | $ | 4,494 | $ | 2,146 | $ | 581 | $ | 472 | $ | 3 | $ | 10,228 | ||||||||||||||
The following table presents the activity in the allowance for loan losses by portfolio segment for the six months ended June 30, 2021 and 2020:
|
Commercial |
Commercial Real Estate |
Residential Real Estate |
Consumer |
Agriculture |
Other |
Total |
||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||
|
June 30, 2021: |
||||||||||||||||||||||||||||
|
Beginning balance |
$ | 2,529 | $ | 7,050 | $ | 1,899 | $ | 361 | $ | 600 | $ | 4 | $ | 12,443 | ||||||||||||||
|
Provision (negative provision) |
(216 |
) |
868 | (279 |
) |
41 | (63 |
) |
(1 | ) | 350 | |||||||||||||||||
|
Loans charged off |
(19 |
) |
(129 |
) |
(12 |
) |
(51 |
) |
(44 |
) |
– | (255 |
) |
|||||||||||||||
|
Recoveries |
10 | 10 | 38 | 34 | 7 | – | 99 | |||||||||||||||||||||
|
Ending balance |
$ | 2,304 | $ | 7,799 | $ | 1,646 | $ | 385 | $ | 500 | $ | 3 | $ | 12,637 | ||||||||||||||
|
June 30, 2020: |
||||||||||||||||||||||||||||
|
Beginning balance |
$ | 1,710 | $ | 4,080 | $ | 1,743 | $ | 485 | $ | 355 | $ | 3 | $ | 8,376 | ||||||||||||||
|
Provision (negative provision) |
843 | 351 | 409 | 399 | 152 | (4 | ) | 2,150 | ||||||||||||||||||||
|
Loans charged off |
(32 |
) |
(57 |
) |
(82 |
) |
(313 |
) |
(44 |
) |
– | (528 |
) |
|||||||||||||||
|
Recoveries |
11 | 120 | 76 | 10 | 9 | 4 | 230 | |||||||||||||||||||||
|
Ending balance |
$ | 2,532 | $ | 4,494 | $ | 2,146 | $ | 581 | $ | 472 | $ | 3 | $ | 10,228 | ||||||||||||||
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method as of June 30, 2021:
|
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 |
$ | – | $ | 2,176 | $ | 2 | $ | – | $ | – | $ | – | $ | 2,178 | ||||||||||||||
|
Collectively evaluated for impairment |
2,304 | 5,623 | 1,644 | 385 | 500 | 3 | 10,459 | |||||||||||||||||||||
|
Total ending allowance balance |
$ | 2,304 | $ | 7,799 | $ | 1,646 | $ | 385 | $ | 500 | $ | 3 | $ | 12,637 | ||||||||||||||
|
Loans: |
||||||||||||||||||||||||||||
|
Loans individually evaluated for impairment |
$ | – | $ | 5,435 | $ | 720 | $ | 18 | $ | 101 | $ | – | $ | 6,274 | ||||||||||||||
|
Loans collectively evaluated for impairment |
206,578 | 435,592 | 229,923 | 31,493 | 36,985 | 580 | 941,151 | |||||||||||||||||||||
|
Total ending loans balance |
$ | 206,578 | $ | 441,027 | $ | 230,643 | $ | 31,511 | $ | 37,086 | $ | 580 | $ | 947,425 | ||||||||||||||
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, 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 |
$ | – | $ | 2,176 | $ | 1 | $ | – | $ | – | $ | – | $ | 2,177 | ||||||||||||||
|
Collectively evaluated for impairment |
2,529 | 4,874 | 1,898 | 361 | 600 | 4 | 10,266 | |||||||||||||||||||||
|
Total ending allowance balance |
$ | 2,529 | $ | 7,050 | $ | 1,899 | $ | 361 | $ | 600 | $ | 4 | $ | 12,443 | ||||||||||||||
|
Loans: |
||||||||||||||||||||||||||||
|
Loans individually evaluated for impairment |
$ | – | $ | 5,361 | $ | 1,060 | $ | – | $ | 91 | $ | – | $ | 6,512 | ||||||||||||||
|
Loans collectively evaluated for impairment |
208,244 | 424,221 | 249,075 | 31,429 | 41,953 | 647 | 955,569 | |||||||||||||||||||||
|
Total ending loans balance |
$ | 208,244 | $ | 429,582 | $ | 250,135 | $ | 31,429 | $ | 42,044 | $ | 647 | $ | 962,081 | ||||||||||||||
Impaired Loans
Impaired loans include restructured loans and loans on nonaccrual or classified as doubtful, whereby collection of the total amount is improbable, or loss, whereby all or a portion of the loan has been written off or a specific allowance for loss has been provided.
The following tables present information related to loans individually evaluated for impairment by class of loans as of June 30, 2021 and December 31, 2020 and for the three and six months ended June 30, 2021 and 2020:
|
As of June 30, 2021 |
Three Months Ended June 30, 2021 |
Six Months Ended June 30, 2021 |
||||||||||||||||||||||||||
|
Unpaid Principal Balance |
Recorded Investment |
Allowance For Loan Losses Allocated |
Average Recorded Investment |
Interest Income Recognized |
Average Recorded Investment |
Interest Income Recognized |
||||||||||||||||||||||
|
(in thousands) |
||||||||||||||||||||||||||||
|
With No Related Allowance Recorded: |
||||||||||||||||||||||||||||
|
Commercial |
$ | 307 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
|
Commercial real estate: |
||||||||||||||||||||||||||||
|
Construction |
— | — | — | — | — | — | — | |||||||||||||||||||||
|
Farmland |
783 | 592 | — | 644 | — | 581 | — | |||||||||||||||||||||
|
Nonfarm nonresidential |
1,296 | 487 | — | 512 | 13 | 524 | 27 | |||||||||||||||||||||
|
Residential real estate: |
||||||||||||||||||||||||||||
|
Multi-family |
— | — | — | — | — | — | — | |||||||||||||||||||||
|
1-4 Family |
1,540 | 619 | — | 775 | 21 | 835 | 38 | |||||||||||||||||||||
|
Consumer |
278 | 18 | — | 22 | 1 | 15 | 1 | |||||||||||||||||||||
|
Agriculture |
440 | 101 | — | 102 | — | 98 | — | |||||||||||||||||||||
|
Other |
— | — | — | — | — | — | — | |||||||||||||||||||||
|
Subtotal |
4,644 | 1,817 | — | 2,055 | 35 | 2,053 | 66 | |||||||||||||||||||||
|
With An Allowance Recorded: |
||||||||||||||||||||||||||||
|
Commercial |
— | — | — | — | — | — | — | |||||||||||||||||||||
|
Commercial real estate: |
||||||||||||||||||||||||||||
|
Construction |
— | — | — | — | — | — | — | |||||||||||||||||||||
|
Farmland |
— | — | — | — | — | — | — | |||||||||||||||||||||
|
Nonfarm nonresidential |
6,464 | 4,356 | 2,176 | 4,356 | 114 | 4,356 | 227 | |||||||||||||||||||||
|
Residential real estate: |
||||||||||||||||||||||||||||
|
Multi-family |
— | — | — | — | — | — | — | |||||||||||||||||||||
|
1-4 Family |
101 | 101 | 2 | 102 | — | 103 | 1 | |||||||||||||||||||||
|
Consumer |
— | — | — | — | — | — | — | |||||||||||||||||||||
|
Agriculture |
— | — | — | — | — | — | — | |||||||||||||||||||||
|
Other |
— | — | — | — | — | — | — | |||||||||||||||||||||
|
Subtotal |
6,565 | 4,457 | 2,178 | 4,458 | 114 | 4,459 | 228 | |||||||||||||||||||||
|
Total |
$ | 11,209 | $ | 6,274 | $ | 2,178 | $ | 6,513 | $ | 149 | $ | 6,512 | $ | 294 | ||||||||||||||
|
As of December 31, 2020 |
Three Months Ended June 30, 2020 |
Six Months Ended June 30, 2020 |
||||||||||||||||||||||||||
|
Unpaid Principal Balance |
Recorded Investment |
Allowance For Loan Losses Allocated |
Average Recorded Investment |
Interest Income Recognized |
Average Recorded Investment |
Interest Income Recognized |
||||||||||||||||||||||
|
(in thousands) |
||||||||||||||||||||||||||||
|
With No Related Allowance Recorded: |
||||||||||||||||||||||||||||
|
Commercial |
$ | 308 | $ | — | $ | — | $ | 131 | $ | — | $ | 104 | $ | — | ||||||||||||||
|
Commercial real estate: |
||||||||||||||||||||||||||||
|
Construction |
— | — | — | — | — | — | — | |||||||||||||||||||||
|
Farmland |
555 | 456 | — | 297 | 3 | 296 | 13 | |||||||||||||||||||||
|
Nonfarm nonresidential |
1,323 | 549 | — | 453 | 10 | 465 | 18 | |||||||||||||||||||||
|
Residential real estate: |
||||||||||||||||||||||||||||
|
Multi-family |
— | — | — | — | — | — | — | |||||||||||||||||||||
|
1-4 Family |
1,883 | 954 | — | 856 | 51 | 819 | 54 | |||||||||||||||||||||
|
Consumer |
259 | — | — | 78 | — | 85 | 1 | |||||||||||||||||||||
|
Agriculture |
393 | 91 | — | — | — | 14 | — | |||||||||||||||||||||
|
Other |
— | — | — | — | — | — | — | |||||||||||||||||||||
|
Subtotal |
4,721 | 2,050 | — | 1,815 | 64 | 1,783 | 86 | |||||||||||||||||||||
|
With An Allowance Recorded: |
||||||||||||||||||||||||||||
|
Commercial |
— | — | — | — | — | 8 | — | |||||||||||||||||||||
|
Commercial real estate: |
||||||||||||||||||||||||||||
|
Construction |
— | — | — | — | — | — | — | |||||||||||||||||||||
|
Farmland |
— | — | — | 143 | 2 | 189 | 4 | |||||||||||||||||||||
|
Nonfarm nonresidential |
6,465 | 4,356 | 2,176 | 75 | — | 50 | — | |||||||||||||||||||||
|
Residential real estate: |
||||||||||||||||||||||||||||
|
Multi-family |
— | — | — | — | — | — | — | |||||||||||||||||||||
|
1-4 Family |
106 | 106 | 1 | 74 | 1 | 98 | 3 | |||||||||||||||||||||
|
Consumer |
— | — | — | — | — | — | — | |||||||||||||||||||||
|
Agriculture |
— | — | — | — | — | — | — | |||||||||||||||||||||
|
Other |
— | — | — | — | — | — | — | |||||||||||||||||||||
|
Subtotal |
6,571 | 4,462 | 2,177 | 292 | 3 | 345 | 7 | |||||||||||||||||||||
|
Total |
$ | 11,292 | $ | 6,512 | $ | 2,177 | $ | 2,107 | $ | 67 | $ | 2,128 | $ | 93 | ||||||||||||||
Cash basis income recognized on impaired loans for the three and six months ended June 30, 2021 was $28,000 and $52,000, respectively, compared to $54,000 and $68,000 for the three and six months ended June 30, 2020, respectively.
Troubled Debt Restructuring
A troubled debt restructuring (TDR) occurs when the Bank has agreed to an other than short-term loan modification in the form of a concession for a borrower who is experiencing financial difficulty. The Bank’s TDRs may involve a reduction in interest rate, a deferral of principal for a stated period of time, or an interest only period. All TDRs are considered impaired and the Bank has allocated reserves for these loans to reflect the present value of the concessionary terms granted to the borrower.
The following table presents the types of TDR loan modifications by portfolio segment outstanding as of June 30, 2021 and December 31, 2020:
|
TDRs Performing to Modified Terms |
TDRs Not Performing to Modified Terms |
Total TDRs |
||||||||||
|
(in thousands) |
||||||||||||
|
June 30, 2021 |
||||||||||||
|
Commercial Real Estate: |
||||||||||||
|
Nonfarm nonresidential |
$ | 358 | $ | — | $ | 358 | ||||||
|
Residential Real Estate: |
||||||||||||
|
1-4 Family |
32 | 69 | 101 | |||||||||
|
Total TDRs |
$ | 390 | $ | 69 | $ | 459 | ||||||
|
TDRs Performing to Modified Terms |
TDRs Not Performing to Modified Terms |
Total TDRs |
||||||||||
|
(in thousands) |
||||||||||||
|
December 31, 2020 |
||||||||||||
|
Commercial Real Estate: |
||||||||||||
|
Nonfarm nonresidential |
$ | 374 | $ | — | $ | 374 | ||||||
|
Residential Real Estate: |
||||||||||||
|
1-4 Family |
106 | — | 106 | |||||||||
|
Total TDRs |
$ | 480 | $ | — | $ | 480 | ||||||
At June 30, 2021 and December 31, 2020, 85% and 100%, respectively, of the Company’s TDRs were performing according to their modified terms. The Company allocated $2,000 in reserves to borrowers whose loan terms have been modified in TDRs as of June 30, 2021 and December 31, 2020. The Company has no commitment to lend additional amounts as of June 30, 2021 and December 31, 2020 to borrowers with outstanding loans classified as TDRs. No TDR modifications occurred during the three and six months ended June 30, 2021 or June 30, 2020. During the three and six months ended June 30, 2021 and June 30, 2020, 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-TDR Loan Modifications due to COVID-19
The Company has elected to account for eligible loan modifications under Section 4013 of the Coronavirus Aid Relief and Economic Security Act (“CARES Act”). To be an eligible loan under Section 4013 of the CARES Act, a loan modification must be (1) related to the COVID-19 pandemic; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020 and the earlier of (A) 60 days after the date of termination of the national emergency declared by the President on March 13, 2020 concerning the COVID-19 outbreak (the “national emergency”) or (B) December 31, 2020. On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (“Economic Aid Act”) extended eligible loan modifications under Section 4013 of the CARES Act from December 31, 2020 to January 1, 2022. Eligible loan modifications are not required to be classified as TDRs and will not be reported as past due provided that they are performing in accordance with the modified terms. Interest income will continue to be recognized in accordance with GAAP unless the loan is placed on nonaccrual status.
Short-term loan modifications totaled $4.7 million at June 30, 2021 and $15.3 million at December 31, 2020. Included in the $4.7 million of short-term modifications is one commercial real estate loan secured by a retail entertainment facility totaling $4.4 million, which remains subject to, and is performing in accordance with, a short-term COVID-19 modification. The loan is graded substandard, has been evaluated under ASC-310-10, and allocated a specific reserve of $2.2 million as of June 30, 2021 and December 31, 2020.
Past Due Loans
The following table presents the aging of the recorded investment in past due loans as of June 30, 2021 and December 31, 2020:
|
30 – 59 Days Past Due |
60 – 89 Days Past Due |
90 Days And Over Past Due |
Nonaccrual |
Total Past Due And Nonaccrual |
||||||||||||||||
|
(in thousands) |
||||||||||||||||||||
|
June 30, 2021 |
||||||||||||||||||||
|
Commercial |
$ | 25 | $ | 55 | $ | — | $ | — | $ | 80 | ||||||||||
|
Commercial Real Estate: |
||||||||||||||||||||
|
Construction |
— | — | — | — | — | |||||||||||||||
|
Farmland |
53 | 106 | — | 593 | 752 | |||||||||||||||
|
Nonfarm nonresidential |
— | 24 | — | 130 | 154 | |||||||||||||||
|
Residential Real Estate: |
||||||||||||||||||||
|
Multi-family |
— | — | — | — | — | |||||||||||||||
|
1-4 Family |
94 | 56 | — | 688 | 838 | |||||||||||||||
|
Consumer |
7 | 11 | — | 18 | 36 | |||||||||||||||
|
Agriculture |
2 | — | — | 101 | 103 | |||||||||||||||
|
Other |
— | — | — | — | — | |||||||||||||||
|
Total |
$ | 181 | $ | 252 | $ | — | $ | 1,530 | $ | 1,963 | ||||||||||
|
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, 2020 |
||||||||||||||||||||
|
Commercial |
$ | 20 | $ | — | $ | — | $ | — | $ | 20 | ||||||||||
|
Commercial Real Estate: |
||||||||||||||||||||
|
Construction |
— | — | — | — | — | |||||||||||||||
|
Farmland |
325 | 53 | — | 456 | 834 | |||||||||||||||
|
Nonfarm nonresidential |
— | 26 | — | 175 | 201 | |||||||||||||||
|
Residential Real Estate: |
||||||||||||||||||||
|
Multi-family |
— | — | — | — | — | |||||||||||||||
|
1-4 Family |
1,110 | 217 | — | 954 | 2,281 | |||||||||||||||
|
Consumer |
59 | 49 | — | — | 108 | |||||||||||||||
|
Agriculture |
23 | 27 | — | 91 | 141 | |||||||||||||||
|
Other |
— | — | — | — | — | |||||||||||||||
|
Total |
$ | 1,537 | $ | 372 | $ | — | $ | 1,676 | $ | 3,585 | ||||||||||
Credit Quality Indicators
Management categorizes all loans into risk categories at origination based upon original underwriting. Thereafter, management categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends. Additionally, loans are analyzed through internal and external loan review processes and are routinely analyzed through credit administration processes which classify the loans as to credit risk. The following definitions are used for risk ratings:
Watch – Loans classified as watch are those loans which have experienced or may experience a potentially adverse development which necessitates increased monitoring.
Special Mention – Loans classified as special mention do not have all of the characteristics of substandard or doubtful loans. They have one or more deficiencies which warrant special attention and which corrective action, such as accelerated collection practices, may remedy.
Substandard – Loans classified as substandard are those loans with clear and defined weaknesses such as a highly leveraged position, unfavorable financial ratios, uncertain repayment sources or poor financial condition which may jeopardize the repayment of the debt as contractually agreed. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.
Doubtful – Loans classified as doubtful are those loans which have characteristics similar to substandard loans but with an increased risk that collection or liquidation in full is highly questionable and improbable.
As of June 30, 2021, and December 31, 2020, 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) |
||||||||||||||||||||||||
|
June 30, 2021 |
||||||||||||||||||||||||
|
Commercial |
$ | 199,914 | $ | 149 | $ | — | $ | 6,515 | $ | — | $ | 206,578 | ||||||||||||
|
Commercial Real Estate: |
||||||||||||||||||||||||
|
Construction |
78,659 | — | — | — | — | 78,659 | ||||||||||||||||||
|
Farmland |
62,584 | 1,900 | — | 1,147 | — | 65,631 | ||||||||||||||||||
|
Nonfarm nonresidential |
288,362 | 923 | — | 7,452 | — | 296,737 | ||||||||||||||||||
|
Residential Real Estate: |
||||||||||||||||||||||||
|
Multi-family |
52,000 | 10,428 | — | — | — | 62,428 | ||||||||||||||||||
|
1-4 Family |
163,261 | 2,454 | — | 2,500 | — | 168,215 | ||||||||||||||||||
|
Consumer |
31,468 | 3 | — | 40 | — | 31,511 | ||||||||||||||||||
|
Agriculture |
36,925 | 31 | — | 130 | — | 37,086 | ||||||||||||||||||
|
Other |
580 | — | — | — | — | 580 | ||||||||||||||||||
|
Total |
$ | 913,753 | $ | 15,888 | $ | — | $ | 17,784 | $ | — | $ | 947,425 | ||||||||||||
|
Pass |
Watch |
Special Mention |
Substandard |
Doubtful | Total | |||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||
|
December 31, 2020 |
||||||||||||||||||||||||
|
Commercial |
$ | 201,240 | $ | 192 | $ | — | $ | 6,812 | $ | — | $ | 208,244 | ||||||||||||
|
Commercial Real Estate: |
||||||||||||||||||||||||
|
Construction |
92,916 | — | — | — | — | 92,916 | ||||||||||||||||||
|
Farmland |
65,556 | 3,714 | — | 1,002 | — | 70,272 | ||||||||||||||||||
|
Nonfarm nonresidential |
258,665 | 1,605 | — | 6,124 | — | 266,394 | ||||||||||||||||||
|
Residential Real Estate: |
||||||||||||||||||||||||
|
Multi-family |
50,732 | 10,448 | — | — | — | 61,180 | ||||||||||||||||||
|
1-4 Family |
183,379 | 2,831 | — | 2,745 | — | 188,955 | ||||||||||||||||||
|
Consumer |
31,387 | 3 | — | 39 | — | 31,429 | ||||||||||||||||||
|
Agriculture |
41,503 | 86 | — | 455 | — | 42,044 | ||||||||||||||||||
|
Other |
647 | — | — | — | — | 647 | ||||||||||||||||||
|
Total |
$ | 926,025 | $ | 18,879 | $ | — | $ | 17,177 | $ | — | $ | 962,081 | ||||||||||||
Note 4 – Leases
As of June 30, 2021, the Company leases real estate for seven branch offices or offsite ATM machines under various operating lease agreements. The lease agreements have maturity dates ranging from 2024 to 2046, including all expected extension periods. The weighted average remaining life of the lease term for these leases was 22 years as of June 30, 2021.
In determining the present value of lease payments, the Bank uses the implicit lease rate when readily determinable. As most of the Bank’s leases do not provide an implicit rate, the incremental borrowing rate based on the information available at commencement date is used. The incremental borrowing rate is the rate of interest that the Bank estimates it would pay to borrow on a collateralized basis over a similar term in an amount equal to the lease payments in a similar economic environment. The weighted average discount rate for the leases was 4.19% as of June 30, 2021.
Total rental expense was $86,000 and $248,000, respectively, for the three and six months ended June 30, 2021, compared to $136,000 and $256,000, respectively, for the three and six months ended June 30, 2020. The right-of-use asset, included in premises and equipment, and lease liability, included in other liabilities, was $5.5 million as of June 30, 2021 and $2.5 million as of December 31, 2020.
Total estimated rental commitments for the operating leases were as follows as of June 30, 2021 (in thousands):
|
June 30, 2021 |
||||
|
July – December 2021 |
$ | 219 | ||
|
2022 |
363 | |||
|
2023 |
366 | |||
|
2024 |
365 | |||
|
2025 |
342 | |||
|
Thereafter |
7,471 | |||
|
Total minimum lease payments |
9,126 | |||
|
Discount effect of cash flows |
(3,591 |
) |
||
|
Present value of lease liabilities |
$ | 5,535 | ||
At June 30, 2021, the Company has one additional lease for a new branch office that has yet to commence. The right of use asset and lease liability for the lease yet to commence is estimated to be approximately $2.2 million and is expected to be recorded in the fourth quarter of 2021.
Note 5 – Other Real Estate Owned
Other real estate owned (OREO) is real estate acquired as a result of foreclosure or by deed in lieu of foreclosure. It is classified as real estate owned until such time as it is sold. When property is acquired as a result of foreclosure or by deed in lieu of foreclosure, it is recorded at its fair market value less estimated cost to sell. Any write-down of the property at the time of acquisition is charged to the allowance for loan losses.
The following table presents the major categories of OREO at the period-ends indicated:
|
June 30, 2021 |
December 31, 2020 |
|||||||
|
(in thousands) |
||||||||
|
Commercial Real Estate: |
||||||||
|
Construction, land development, and other land |
$ | — | $ | 1,765 | ||||
| $ | — | $ | 1,765 | |||||
Residential loans secured by 1-4 family residential properties in the process of foreclosure totaled $100,000 and $35,000 at June 30, 2021 and December 31, 2020, respectively.
Activity relating to OREO during the six months ended June 30, 2021 and 2020 is as follows:
|
For the Six Months Ended June 30, |
||||||||
|
2021 |
2020 |
|||||||
|
(in thousands) |
||||||||
|
OREO Activity |
||||||||
|
OREO as of January 1 |
$ | 1,765 | $ | 3,225 | ||||
|
Real estate acquired |
— | — | ||||||
|
Valuation adjustment write-downs |
— | — | ||||||
|
Net gain on sale |
191 | — | ||||||
|
Proceeds from sales of properties |
(1,956 |
) |
(1,600 |
) |
||||
|
OREO as of June 30 |
$ | — | $ | 1,625 | ||||
Expenses related to OREO include:
|
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
|
2021 |
2020 |
2021 |
2020 |
|||||||||||||
| (in thousands) | (in thousands) | |||||||||||||||
|
Valuation adjustment write-downs |
$ | — | $ | — | $ | — | $ | — | ||||||||
|
Operating expense |
2 | 22 | 13 | 38 | ||||||||||||
|
Total |
$ | 2 | $ | 22 | $ | 13 | $ | 38 | ||||||||
OREO expenses are reported in other non-interest expense.
Note 6 – Goodwill and Intangible Assets
The following table summarizes the Company’s acquired goodwill and intangible assets as of June 30, 2021 and December 31, 2020 (in thousands):
|
June 30, 2021 |
December 31, 2020 |
|||||||||||||||
|
Gross Carrying Amount |
Accumulated Amortization |
Gross Carrying Amount |
Accumulated Amortization |
|||||||||||||
|
Goodwill |
$ | 6,252 | $ | — | $ | 6,252 | $ | — | ||||||||
|
Core deposit intangibles |
2,500 | 383 | 2,500 | 256 | ||||||||||||
|
Outstanding, ending |
$ | 8,752 | $ | 383 | $ | 8,752 | $ | 256 | ||||||||
The Company has $6.3 million of goodwill related to a 2019 branch acquisition transaction. Goodwill represents the excess of the total purchase price paid over the fair value of the identifiable assets acquired, net of the fair value of the liabilities assumed. Goodwill is not amortized but is evaluated for impairment on an annual basis or whenever events or changes in circumstances may indicate the carrying value of goodwill exceeds fair value and may not be recoverable. The Company engaged an independent third-party expert to perform a quantitative assessment as of November 30, 2020 to determine if it was more likely than not that the fair value of the reporting unit exceeded its carrying value, including goodwill. The assessment indicated that the fair value of the reporting unit exceeded its carrying value, resulting in no impairment. Goodwill is the Company’s sole intangible asset with an indefinite life.
The Company also has a core deposit intangible asset, which is amortized over the weighted average estimated life of the related deposits and is not estimated to have a significant residual value. Total amortization was $64,000 and $128,000 for the three and six months ended June 30, 2021, respectively, compared to $64,000 and $128,000 for the three and six months ended June 30, 2020, respectively.
Amortization expense related to the core deposit intangible is estimated as follows (in thousands):
|
June 30, 2021 |
||||
|
July 2021 – December 2021 |
$ | 128 | ||
|
2022 |
256 | |||
|
2023 |
256 | |||
|
2024 |
256 | |||
|
2025 |
256 | |||
|
Thereafter |
965 | |||
| $ | 2,117 | |||
Note 7 – Deposits
The following table details deposits by category:
|
June 30, 2021 |
December 31, 2020 |
|||||||
|
(in thousands) |
||||||||
|
Non-interest bearing |
$ | 267,059 | $ | 243,022 | ||||
|
Interest checking |
216,344 | 190,625 | ||||||
|
Money market |
191,773 | 175,785 | ||||||
|
Savings |
160,257 | 142,623 | ||||||
|
Certificates of deposit |
303,668 | 367,552 | ||||||
|
Total |
$ | 1,139,101 | $ | 1,119,607 | ||||
Time deposits of $250,000 or more were $41.3 million and $50.7 million at June 30, 2021 and December 31, 2020, respectively.
Scheduled maturities of total time deposits at June 30, 2021 for each of the next five years are as follows (in thousands):
|
Year 1 |
$ | 191,121 | ||
|
Year 2 |
48,044 | |||
|
Year 3 |
29,193 | |||
|
Year 4 |
13,533 | |||
|
Year 5 |
21,192 | |||
|
Thereafter |
585 | |||
| $ | 303,668 |
Note 8 – Advances from the Federal Home Loan Bank
Advances from the Federal Home Loan Bank were as follows:
|
June 30, |
December 31, |
|||||||
|
2021 |
2020 |
|||||||
|
(in thousands) |
||||||||
|
Short term advances |
$ | — | $ | 623 | ||||
|
Long term advances (fixed rate 0.77%) maturing February 2030 |
20,000 | 20,000 | ||||||
|
Total advances from the Federal Home Loan Bank |
$ | 20,000 | $ | 20,623 | ||||
FHLB advances had a weighted-average rate of 0.77% at June 30, 2021 and 0.75% at December 31, 2020. Each advance is payable per terms on agreement, with a prepayment penalty. No prepayment penalties were incurred during 2021 or 2020. The $20.0 million long term advance is callable quarterly at the FHLB’s option. The advances were collateralized by approximately $118.2 million and $133.7 million of first mortgage loans, under a blanket lien arrangement at June 30, 2021 and December 31, 2020, respectively, and $21.0 million and $20.3 million of loans originated under the SBA Payment Protection Plan at June 30, 2021 and December 31, 2020, respectively. At June 30, 2021, the Bank’s additional borrowing capacity with the FHLB was $88.6 million.
Scheduled principal payments on the above during the next five years and thereafter (in thousands):
|
Advances |
||||
|
Year 1 |
$ | — | ||
|
Year 2 |
— | |||
|
Year 3 |
— | |||
|
Year 4 |
— | |||
|
Year 5 |
— | |||
|
Thereafter |
20,000 | |||
| $ | 20,000 | |||
Note 9 – Borrowings
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 June 30, 2021, the Company is current on all interest payments.
A summary of the junior subordinated debentures is as follows:
|
Description |
Issuance Date |
Interest Rate (1) |
Junior Subordinated Debt Owed To Trust |
Maturity Date (2) |
|||||
|
Statutory Trust I |
2/13/2004 |
3-month LIBOR + 2.85% |
$ | 3,000,000 |
2/13/2034 |
||||
|
Statutory Trust II |
2/13/2004 |
3-month LIBOR + 2.85% |
5,000,000 |
2/13/2034 |
|||||
|
Statutory Trust III |
4/15/2004 |
3-month LIBOR + 2.79% |
3,000,000 |
4/15/2034 |
|||||
|
Statutory Trust IV |
12/14/2006 |
3-month LIBOR + 1.67% |
10,000,000 |
3/01/2037 |
|||||
| $ | 21,000,000 | ||||||||
|
(1) |
As of June 30, 2021, the 3-month LIBOR was 0.15%. |
|
(2) |
The debentures are callable at the Company’s option at their principal amount plus accrued interest. |
Subordinated Capital Notes – The Company’s subordinated notes mature on July 31, 2029. The notes carry interest at a fixed rate of 5.75% until July 30, 2024 and then convert to variable at three-month LIBOR plus 395 basis points until maturity. The subordinated capital notes qualify as Tier 2 regulatory capital.
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 impaired loans. The deductions to the appraisal take into account changing business factors and market conditions, as well as potential value impairment in cases where the appraisal date predates a likely change in market conditions. These deductions range from 10% for routine real estate collateral to 25% for real estate that is determined to have a thin trading market or to be specialized collateral. This is in addition to estimated discounts for cost to sell of six to ten percent.
Management also applies discounts to the expected fair value of collateral for impaired loans where the likely resolution involves litigation or foreclosure. Resolution of this nature generally results in receiving lower values for real estate collateral in a more aggressive sales environment. Discounts ranging from 10% to 33% have been utilized in the impairment evaluations when applicable.
Impaired loans are evaluated quarterly for additional impairment. Management obtains updated appraisals on properties securing loans when circumstances are warranted such as at the time of renewal or when market conditions have significantly changed. This determination is made on a property-by-property basis in light of circumstances in the broader economic climate and the assessment of deterioration of real estate values in the market in which the property is located.
Financial assets measured at fair value on a recurring basis at June 30, 2021 and December 31, 2020 are summarized below:
|
Fair Value Measurements at June 30, 2021 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 |
$ | 29,760 | $ | — | $ | 29,760 | $ | — | ||||||||
|
Agency mortgage-backed: residential |
81,002 | — | 81,002 | — | ||||||||||||
|
Collateralized loan obligations |
39,945 | — | 37,464 | 2,481 | ||||||||||||
|
Corporate bonds |
31,447 | — | 18,771 | 12,676 | ||||||||||||
|
Total |
$ | 182,154 | $ | — | $ | 166,997 | $ | 15,157 | ||||||||
|
Fair Value Measurements at December 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) |
||||||||||||
|
Available for sale securities |
||||||||||||||||
|
U.S. Government and federal agency |
$ | 19,617 | $ | — | $ | 19,617 | $ | — | ||||||||
|
Agency mortgage-backed: residential |
74,333 | — | 74,333 | — | ||||||||||||
|
Collateralized loan obligations |
43,152 | — | 40,764 | 2,388 | ||||||||||||
|
State and municipal |
36,055 | — | 36,055 | — | ||||||||||||
|
Corporate bonds |
30,705 | — | 18,789 | 11,916 | ||||||||||||
|
Total |
$ | 203,862 | $ | — | $ | 189,558 | $ | 14,304 | ||||||||
There were no transfers between Level 1 and Level 2 during 2021 or 2020.
The Company’s policy is to transfer assets or liabilities from one level to another when the methodology to obtain the fair value changes such that there are more or fewer unobservable inputs as of the end of the reporting period. There were no transfers between Level 2 and Level 3 during 2021.
The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the six months ended June 30, 2021:
|
June 30, 2021 |
||||||||
|
Collateralized Loan Obligations |
Corporate Bonds |
|||||||
|
(in thousands) |
||||||||
|
Balance of recurring Level 3 assets at January 1, 2021 |
$ | 2,388 | $ | 11,916 | ||||
|
Total gains or losses for the year: |
||||||||
|
Included in other comprehensive income |
93 | 760 | ||||||
|
Transfers into Level 3 |
— | — | ||||||
|
Balance of recurring Level 3 assets at June 30, 2021 |
$ | 2,481 | $ | 12,676 | ||||
These securities were transferred to Level 3 during the fourth quarter of 2020.
The following table presents quantitative information about recurring level 3 fair value measurements at June 30, 2021:
|
Fair Value |
Valuation Technique(s) |
Unobservable Input(s) |
Range (Weighted Average) |
||||||||||
|
(in thousands) |
|||||||||||||
|
Collateralized loan obligations |
$ | 2,481 |
Discounted cash flow |
Constant prepayment rate |
0% | ||||||||
| Additional asset defaults | 1% | (1%) | |||||||||||
| Expected asset recoveries | 49% | (49%) | |||||||||||
|
Corporate bonds |
$ | 12,676 |
Discounted cash flow |
Constant prepayment rate |
0% | ||||||||
| Spread to benchmark yield | 108% | - | 350% | (293%) | |||||||||
| Indicative broker bid | 76% | - | 104% | (85%) | |||||||||
The following table presents quantitative information about recurring level 3 fair value measurements at December 31, 2020:
|
Fair Value |
Valuation Technique(s) |
Unobservable Input(s) |
Range (Weighted Average) |
||||||||||
|
(in thousands) |
|||||||||||||
|
Collateralized loan obligations |
$ | 2,388 |
Discounted cash flow |
Constant prepayment rate |
0% | ||||||||
| Additional asset defaults | 2% | (2%) | |||||||||||
| Expected asset recoveries | 49% | (49%) | |||||||||||
|
Corporate bonds |
$ | 11,916 |
Discounted cash flow |
Constant prepayment rate |
0% | ||||||||
| Spread to benchmark yield | 322% | - | 497% | (381%) | |||||||||
| Indicative broker bid | 72% | - | 107% | (80%) | |||||||||
Financial assets measured at fair value on a non-recurring basis are summarized below:
|
Fair Value Measurements at June 30, 2021 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: |
||||||||||||||||
|
Nonfarm nonresidential |
$ | 2,180 | $ | — | $ | — | $ | 2,180 | ||||||||
|
Residential real estate: |
||||||||||||||||
|
1-4 Family |
99 | — | — | 99 | ||||||||||||
|
Fair Value Measurements at December 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: |
||||||||||||||||
|
Nonfarm nonresidential |
$ | 2,180 | $ | — | $ | — | $ | 2,180 | ||||||||
|
Residential real estate: |
||||||||||||||||
|
1-4 Family |
105 | — | — | 105 | ||||||||||||
Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $4.5 million at June 30, 2021 with a valuation allowance of $2.2 million, resulting in no provision for loan losses for the three months ended June 30, 2021 and $1,000 provision for loan losses for the six months ended June 30, 2021, respectively. Impaired loans had a carrying amount of $367,000 at June 30, 2020 with a valuation allowance of $25,000, resulting in $5,000 and no additional provision for loan losses for the three and six months ended June 30, 2020, respectively. At December 31, 2020, impaired loans had a carrying amount of $4.5 million, with a valuation allowance of $2.2 million.
Carrying amount and estimated fair values of financial instruments were as follows for the periods indicated:
|
Fair Value Measurements at June 30, 2021 Using |
||||||||||||||||||||
|
Carrying Amount |
Level 1 |
Level 2 |
Level 3 |
Total |
||||||||||||||||
|
(in thousands) |
||||||||||||||||||||
|
Financial assets |
||||||||||||||||||||
|
Cash and cash equivalents |
$ | 85,120 | $ | 85,120 | $ | — | $ | — | $ | 85,120 | ||||||||||
|
Securities available for sale |
182,154 | — | 166,997 | 15,157 | 182,154 | |||||||||||||||
|
Securities held to maturity |
46,717 | — | 46,685 | — | 46,685 | |||||||||||||||
|
Federal Home Loan Bank stock |
5,449 | N/A | N/A | N/A | N/A | |||||||||||||||
|
Loans, net |
934,788 | — | — | 931,949 | 931,949 | |||||||||||||||
|
Accrued interest receivable |
4,063 | — | 968 | 3,095 | 4,063 | |||||||||||||||
|
Financial liabilities |
||||||||||||||||||||
|
Deposits |
$ | 1,139,101 | $ | 267,059 | $ | 873,488 | $ | — | $ | 1,140,547 | ||||||||||
|
Federal Home Loan Bank advances |
20,000 | — | 20,100 | — | 20,100 | |||||||||||||||
|
Junior subordinated debentures |
21,000 | — | — | 18,578 | 18,578 | |||||||||||||||
|
Subordinated capital notes |
25,000 | — | — | 26,289 | 26,289 | |||||||||||||||
|
Accrued interest payable |
770 | — | 144 | 626 | 770 | |||||||||||||||
|
Fair Value Measurements at December 31, 2020 Using |
||||||||||||||||||||
|
Carrying Amount |
Level 1 |
Level 2 |
Level 3 |
Total |
||||||||||||||||
|
(in thousands) |
||||||||||||||||||||
|
Financial assets |
||||||||||||||||||||
|
Cash and cash equivalents |
$ | 67,693 | $ | 67,693 | $ | — | $ | — | $ | 67,693 | ||||||||||
|
Securities available for sale |
203,862 | — | 189,558 | 14,304 | 203,862 | |||||||||||||||
|
Federal Home Loan Bank stock |
5,887 | N/A | N/A | N/A | N/A | |||||||||||||||
|
Loans, net |
949,638 | — | — | 941,330 | 941,330 | |||||||||||||||
|
Accrued interest receivable |
4,444 | — | 925 | 3,519 | 4,444 | |||||||||||||||
|
Financial liabilities |
||||||||||||||||||||
|
Deposits |
$ | 1,119,607 | $ | 243,022 | $ | 878,309 | $ | — | $ | 1,121,331 | ||||||||||
|
Federal Home Loan Bank advances |
20,623 | — | 20,665 | — | 20,665 | |||||||||||||||
|
Junior subordinated debentures |
21,000 | — | — | 16,194 | 16,194 | |||||||||||||||
|
Subordinated capital notes |
25,000 | — | — | 25,207 | 25,207 | |||||||||||||||
|
Accrued interest payable |
859 | — | 231 | 628 | 859 | |||||||||||||||
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:
|
June 30, |
December 31, |
|||||||
|
2021 |
2020 |
|||||||
|
(in thousands) |
||||||||
|
Deferred tax assets: |
||||||||
|
Net operating loss carry-forward |
$ | 20,869 | $ | 22,012 | ||||
|
Allowance for loan losses |
3,153 | 3,104 | ||||||
|
OREO write-down |
— | 914 | ||||||
|
Net assets from acquisitions |
— | 72 | ||||||
|
New market tax credit carry-forward |
208 | 208 | ||||||
|
Nonaccrual loan interest |
330 | 315 | ||||||
|
Accrued expenses |
136 | 131 | ||||||
|
Lease liability |
1,381 | 618 | ||||||
|
Other |
346 | 332 | ||||||
| 26,423 | 27,706 | |||||||
|
Deferred tax liabilities: |
||||||||
|
FHLB stock dividends |
442 | 478 | ||||||
|
Fixed assets |
74 | 71 | ||||||
|
Deferred loan costs |
190 | 172 | ||||||
|
Net unrealized gain on securities |
784 | 585 | ||||||
|
Lease right-of-use assets |
1,381 | 618 | ||||||
|
Net assets from acquisitions |
18 | — | ||||||
|
Other |
82 | 68 | ||||||
| 2,971 | 1,992 | |||||||
|
Net deferred tax asset |
$ | 23,452 | $ | 25,714 | ||||
At June 30, 2021, the Company had net federal operating loss carryforwards of $93.1 million, which will begin to expire in 2032, and state net operating loss carryforwards of $33.5 million, which begin to expire in 2025.
The Company does not have any beginning and ending unrecognized tax benefits. The Company does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next twelve months. There were no interest and penalties recorded in the income statement or accrued for the three or six months ended June 30, 2021 or June 30, 2020 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, as amended November 25, 2019, 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 2021 to expire upon the earlier of (i) June 30, 2024, (ii) the beginning of a taxable year with respect to which the Board of Directors determines that no tax benefits may be carried forward, (iii) the repeal or amendment of Section 382 or any successor statute, if the Board of Directors determines that the plan is no longer needed to preserve the tax benefits, and (iv) certain other events as described in the plan.
On September 23, 2015, the Company’s shareholders approved an amendment to its articles of incorporation to further help protect the long-term value of the Company’s NOLs. The amendment provides a means to block transfers of the Company’s common shares that could result in an ownership change under Section 382. The transfer restrictions were extended in May 2021 by shareholder vote and will expire on the earlier of (i) May 19, 2024, (ii) the beginning of a taxable year with respect to which the Board of Directors determines that no tax benefit may be carried forward, (iii) the repeal of Section 382 or any successor statute if the Board determines that the transfer restrictions are no longer needed to preserve the tax benefits of the NOLs, or (iv) such date as the Board otherwise determines that the transfer restrictions are no longer necessary.
The Company and its subsidiaries are subject to U.S. federal income tax and the Company is subject to income tax in the Commonwealth of Kentucky. The Company is no longer subject to examination by taxing authorities for years before 2017.
Note 12 – Stock Plans and Stock Based Compensation
Shares available for issuance under the 2018 Omnibus Equity Compensation Plan (“2018 Plan”) total 158,553. Shares issued to employees under the plan vest annually on the anniversary date of the grant over three to seven 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 2021 unvested shares issued was $1.5 million, or $13.52 per weighted-average share. The Company recorded $152,000 and $301,000 of stock-based compensation to salaries for the three and six months ended June 30, 2021, respectively, and $104,000 and $210,000 for the three and six months ended June 30, 2020, 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 $38,000 and $75,000 was recognized related to this expense during the three and six months ended June 30, 2021, respectively, and $22,000 and $44,000 for the three and six months ended June 30, 2020, respectively.
The following table summarizes unvested share activity as of and for the periods indicated for the Stock Compensation Plan:
|
Six Months Ended |
Twelve Months Ended |
|||||||||||||||
|
June 30, 2021 |
December 31, 2020 |
|||||||||||||||
|
Weighted |
Weighted |
|||||||||||||||
|
Average |
Average |
|||||||||||||||
|
Grant |
Grant |
|||||||||||||||
|
Shares |
Price |
Shares |
Price |
|||||||||||||
|
Outstanding, beginning |
47,438 | $ | 15.34 | 57,774 | $ | 13.35 | ||||||||||
|
Granted |
110,024 | 13.52 | 34,858 | 15.33 | ||||||||||||
|
Vested |
(23,728 |
) |
14.96 | (43,836 |
) |
12.69 | ||||||||||
|
Forfeited |
(399 |
) |
14.14 | (1,358 |
) |
15.95 | ||||||||||
|
Outstanding, ending |
133,335 | $ | 13.91 | 47,438 | $ | 15.34 | ||||||||||
Unrecognized stock-based compensation expense related to unvested shares is estimated as follows (in thousands):
|
July 2021 – December 2021 |
$ | 427 | ||
|
2022 |
396 | |||
|
2023 |
279 | |||
|
2024 |
137 | |||
|
2025 |
130 | |||
|
Thereafter |
266 |
Note 13 – Earnings per Share
The factors used in the basic and diluted earnings per share computations follow:
|
Three Months Ended |
Six Months Ended |
|||||||||||||||
|
June 30, |
June 30, |
|||||||||||||||
|
2021 |
2020 |
2021 |
2020 |
|||||||||||||
|
(in thousands, except share and per share data) |
||||||||||||||||
|
Net income |
$ | 3,901 | $ | 1,982 | $ | 7,123 | $ | 3,822 | ||||||||
|
Less: |
||||||||||||||||
|
Earnings allocated to unvested shares |
69 | 15 | 98 | 30 | ||||||||||||
|
Net income available to common shareholders, basic and diluted |
$ | 3,832 | $ | 1,967 | $ | 7,025 | $ | 3,792 | ||||||||
|
Basic |
||||||||||||||||
|
Weighted average common shares including unvested common shares outstanding |
7,597,202 | 7,488,173 | 7,586,267 | 7,485,028 | ||||||||||||
|
Less: |
||||||||||||||||
|
Weighted average unvested common shares |
133,455 | 57,804 | 104,782 | 57,794 | ||||||||||||
|
Weighted average common shares outstanding |
7,463,747 | 7,430,369 | 7,481,485 | 7,427,234 | ||||||||||||
|
Basic and diluted income per common share |
$ | 0.51 | $ | 0.26 | $ | 0.94 | $ | 0.51 | ||||||||
The Company had no outstanding stock options or warrants at June 30, 2021 or 2020.
Note 14 – Regulatory 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. Including the capital conservation buffer, 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 June 30, 2021, Management believes the Company and Bank met all capital adequacy requirements to which they are subject. As of June 30, 2021, 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 June 30, 2021: |
||||||||||||||||||||||||
|
Total risk-based capital (to risk- weighted assets) |
$ | 153,078 | 14.11 |
% |
$ | 86,792 | 8.00 |
% |
$ | 108,491 | 10.00 |
% |
||||||||||||
|
Total common equity Tier 1 risk-based capital (to risk-weighted assets) |
140,441 | 12.95 | 48,821 | 4.50 | 70,519 | 6.50 | ||||||||||||||||||
|
Tier 1 capital (to risk-weighted assets) |
140,441 | 12.95 | 65,094 | 6.00 | 86,792 | 8.00 | ||||||||||||||||||
|
Tier 1 capital (to average assets) |
140,441 | 10.55 | 53,231 | 4.00 | 66,539 | 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, 2020: |
||||||||||||||||||||||||
|
Total risk-based capital (to risk- weighted assets) |
$ | 142,449 | 13.20 |
% |
$ | 86,302 | 8.00 |
% |
$ | 107,878 | 10.00 |
% |
||||||||||||
|
Total common equity Tier 1 risk-based capital (to risk-weighted assets) |
130,006 | 12.05 | 48,545 | 4.50 | 70,120 | 6.50 | ||||||||||||||||||
|
Tier 1 capital (to risk-weighted assets) |
130,006 | 12.05 | 64,727 | 6.00 | 86,302 | 8.00 | ||||||||||||||||||
|
Tier 1 capital (to average assets) |
130,006 | 10.21 | 50,908 | 4.00 | 63,636 | 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 15 – Off 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:
|
June 30, 2021 |
December 31, 2020 |
|||||||||||||||
|
Fixed Rate |
Variable Rate |
Fixed Rate |
Variable Rate |
|||||||||||||
|
(in thousands) |
||||||||||||||||
|
Commitments to make loans |
$ | 49,966 | $ | 15,106 | $ | 20,990 | $ | 17,466 | ||||||||
|
Unused lines of credit |
7,566 | 146,072 | 5,964 | 144,790 | ||||||||||||
|
Standby letters of credit |
613 | 349 | 175 | 1,342 | ||||||||||||
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 June 30, 2021 and December 31, 2020. 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. The fair value of the derivative instruments incorporates a consideration of credit risk in accordance with ASC 820, resulting in some volatility in earnings each period. At June 30, 2021 and December 31, 2020, the fair value of the risk participation agreements were $126,000 and $188,000, respectively.
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. After discussion with legal counsel, management does not believe these legal actions or proceedings will have a material adverse effect on the consolidated financial position or results of operation of the Company.
Note 16 – Revenue from Contracts with Customers
All of the Company’s revenue from customers within the scope of ASC 606 is recognized as non-interest income. A description of the Company’s revenue streams accounted for under ASC 606 follows:
Service Charges on Deposit Accounts: The Company earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which include services such as ATM use fees, stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Company fulfills the customer’s request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges are withdrawn from the customer’s account balance.
Bank Card Interchange Income: The Company earns interchange fees from bank cardholder transactions conducted through a third-party payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. Prior to adopting ASC 606, the Company reported bank card interchange fees net of expenses. Under ASC 606, bank card interchange fees are reported gross.
Gains/Losses on Sales of OREO: The Company records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the Company finances the sale of OREO to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon transfer of control of the property to the buyer. In determining the gain or loss on the sale, the Company adjusts the transaction price and related gain (loss) on sale if a significant financing component is present. Gains and losses on sales of OREO are reported in non-interest income.
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 $145,000 and $298,000 of revenue for the three and six months ended June 30, 2021, respectively, within the scope of ASC 606. Other non-interest income included approximately $129,000 and $285,000 of revenue for the three and six months ended June 30, 2020, respectively, within the scope of ASC 606. The remaining other non-interest income for the three and six 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 the Company’s beliefs, assumptions and expectations of its 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 involve risks and uncertainties that may cause the Company’s actual results to differ materially from the expectations of future results management expressed or implied in any forward-looking statements. These risks and uncertainties can be difficult to predict and may be beyond the Company’s control. Factors that could contribute to differences in the Company’s results include, but are not limited to:
|
● |
the impact and duration of the novel coronavirus disease 2019 (“COVID-19”) pandemic and national, state and local emergency conditions the pandemic has produced; |
|
● |
deterioration in the financial condition of borrowers resulting in significant increases in loan losses and provisions for those losses; |
|
● |
changes in the interest rate environment, which may reduce the Company’s margins or impact the value of securities, loans, deposits and other financial instruments; |
|
● |
changes in loan underwriting, credit review or loss reserve policies associated with economic conditions, examination conclusions, or regulatory developments; |
|
● |
general economic or business conditions, either nationally, regionally or locally in the communities the Bank serves, may be worse than expected, resulting in, among other things, a deterioration in credit quality or a reduced demand for credit; |
|
● |
the results of regulatory examinations; |
|
● |
any matter that would cause the Bank to conclude that there was impairment of any asset, including intangible assets; |
|
● |
the continued service of key management personnel, the Company’s ability to attract, motivate and retain qualified employees; |
|
● |
factors that increase the competitive pressure among depository and other financial institutions, including product and pricing pressures; the ability of the Company’s competitors with greater financial resources to develop and introduce products and services that enable them to compete more successfully; |
|
● |
inability to comply with regulatory capital requirements and to secure any required regulatory approvals for capital actions; |
|
● |
failure in or breach of operational or security systems or infrastructure, or those of third-party vendors and other service providers, including as a result of cyber-attacks; |
|
● |
legislative or regulatory developments, including changes in laws concerning taxes, banking, securities, insurance and other aspects of the financial services industry; |
|
● |
future acquisitions, integrations and performance of acquired businesses; |
|
● |
fiscal and governmental policies of the United States federal government; and |
|
● |
Other risks and uncertainties reported from time to time in the Company’s filings with the Securities and Exchange Commission (“SEC”), including those identified in Part I Item 1A “Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. |
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
Organized in 1988, Limestone Bancorp, Inc. (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, Inc. (the Bank), the twelfth 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 June 30, 2021, the Company had total assets of $1.34 billion, total loans of $947.4 million, total deposits of $1.14 billion and stockholders’ equity of $124.0 million.
The Company reported net income of $3.9 million and $7.1 million for the three and six months ended June 30, 2021, compared with net income of $2.0 million and $3.8 million for the same periods of 2020. Income tax expense was $1.2 million and $2.2 million for the second quarter of 2021 and for the first six months of 2021, respectively, compared to income tax expense of $393,000 and $754,000 for the second quarter of 2020 and for the first six months of 2020, respectively. Effective January 1, 2021, the state of Kentucky eliminated the bank franchise tax, which was previously recorded as a non-interest expense, and implemented a state income tax at a statutory rate of 5%. State income tax expense was $235,000 and $449,000 for the second quarter of 2021 and for the first six months of 2021, respectively, compared to a state income tax benefit of $79,000 and $151,000 for the second quarter of 2020 and for the first six months of 2020, which was related to the establishment of a net deferred tax asset due to the tax law change.
Highlights for the six months ended June 30, 2021 are as follows:
|
● |
Average loans receivable decreased approximately $629,000, or 0.1%, to $963.1 million for the six months ended June 30, 2021, compared with $963.8 million for the first six months of 2020. The first six months of 2021 included loan originations under the SBA Paycheck Protection Program ("PPP") of $23.5 million, compared to $42.0 million in the first six months of 2020. The PPP program loans began funding in the second quarter of 2020. PPP loan balances total $21.0 million at June 30, 2021, compared to $20.3 million at December 31, 2020, and $41.9 million at June 30, 2020. |
|
● |
Net interest margin increased 17 basis points to 3.49% in the first six months of 2021 compared with 3.32% in the first six months of 2020. The yield on earning assets decreased to 3.98% for the first six months of 2021, compared to 4.35% for the first six months of 2020. The yield on earning assets in the first six months of 2021 was negatively impacted by lower interest rates on the Bank’s fed funds, certain floating rate investment securities, loans with variable rate pricing features, and new loans originated in the lower interest rate environment, including PPP loans which carry a rate of 1.0%. The negative impact of lower rates was offset by $1.1 million in fees earned on PPP loans during the first six months of 2021, compared to $179,000 during the first six months of 2020. PPP fees during the first six months of 2021 represented 18 basis points, compared to three basis points of earning asset yield and net interest margin for the first six months of 2020. The cost of interest-bearing liabilities decreased from 1.28% in the first six months of 2020 to 0.64% in the first six months of 2021 as a result of decreases in short-term interest rates during 2020 and continued improvement in deposit mix. |
|
● |
No provision for loan losses and a $350,000 provision for loan losses was recorded in the second quarter and first six months of 2021, respectively, compared to $1.1 million and $2.2 million in the second quarter and the first six months of 2020, respectively. The 2021 loan loss provision was attributable to the net loan charge-offs and trends within the portfolio during the period, while the 2020 provisions were largely attributable to the uncertainty surrounding the COVID-19 pandemic related economic and business disruptions. At June 30, 2021, the allowance for loan loss remained elevated in relation to recent historical levels due to the continued uncertainty surrounding the COVID-19 pandemic despite declining loan balances and improved credit trends. Net loan charge-offs were $156,000 for the first six months of 2021, compared to net loan charge-offs of $298,000 for the first six months of 2020. |
|
● |
Loans past due 30-59 days decreased from $1.5 million at December 31, 2020 to $181,000 at June 30, 2021, and loans past due 60-89 days decreased from $372,000 at December 31, 2020 to $252,000 at June 30, 2021. Total loans past due and nonaccrual loans decreased to $2.0 million at June 30, 2021, from $3.6 million at December 31, 2020. |
|
● |
Deposits were $1.14 billion at June 30, 2021, compared with $1.12 billion at December 31, 2020. Certificate of deposit balances decreased $63.9 million during the first six months of 2021 to $303.7 million at June 30, 2021, from $367.6 million at December 31, 2020 due to liquidity management considerations and planned reduction in higher cost deposits. Interest checking accounts increased $25.7 million, non-interest bearing accounts increased $24.0 million, money market increased $16.0 million, and savings accounts increased $17.6 during the first six months of 2021 compared with December 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 the Company’s Annual Report on Form 10-K for the calendar year ended December 31, 2020. Management has discussed the development, selection, and application of critical accounting policies with the Audit Committee. During the first six months of 2021, 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 June 30, 2021, compared with the same period of 2020:
|
For the Three Months |
Change from |
|||||||||||||||
|
Ended June 30, |
Prior Period |
|||||||||||||||
|
2021 |
2020 |
Amount |
Percent |
|||||||||||||
|
(dollars in thousands) |
||||||||||||||||
|
Gross interest income |
$ | 12,376 | $ | 12,786 | $ | (410 |
) |
(3.2 |
)% |
|||||||
|
Gross interest expense |
1,462 | 2,676 | (1,214 |
) |
(45.4 |
) |
||||||||||
|
Net interest income |
10,914 | 10,110 | 804 | 8.0 | ||||||||||||
|
Provision for loan losses |
— | 1,100 | (1,100 |
) |
(100.0 |
) |
||||||||||
|
Non-interest income |
2,135 | 1,601 | 534 | 33.4 | ||||||||||||
|
Non-interest expense |
7,954 | 8,236 | (282 |
) |
(3.4 |
) |
||||||||||
|
Net income before taxes |
5,095 | 2,375 | 2,720 | 114.5 | ||||||||||||
|
Income tax expense |
1,194 | 393 | 801 | 203.8 | ||||||||||||
|
Net income |
3,901 | 1,982 | 1,919 | 96.8 | ||||||||||||
Net income for the three months ended June 30, 2021 totaled $3.9 million, compared with $2.0 million for the comparable period of 2020. Net interest income increased $804,000 from the 2020 second quarter as a result of a decrease in the cost of interest-bearing liabilities due primarily to downward repricing within the time deposit portfolio, as well as a reduction in the size of the time deposit portfolio. No provision for loan losses expense was recorded in the second quarter of 2021, as compared to $1.1 million in the second quarter of 2020. The 2020 provision for loan losses was largely attributable to the uncertainty surrounding the COVID-19 pandemic related economic and business disruptions. Non-interest income increased $534,000 from $1.6 million in the second quarter of 2020 to $2.1 million for the second quarter of 2021 primarily related to an increase in bank card interchange fees of $210,000 as a result of an increase in debit card transactions, and a $191,000 gain on the sale of OREO. Non-interest expense decreased $282,000 from $8.2 million in the second quarter of 2020 to $8.0 million in the second quarter of 2021 primarily due to a decrease in deposit and state franchise tax expense of $270,000, as a result of the elimination of the Kentucky bank franchise tax discussed below.
Net income before taxes was $5.1 million for the second quarter of 2021, compared with $2.4 million for the second quarter of 2020. Income tax expense was $1.2 million for the second quarter of 2021, compared with $393,000 for the second quarter of 2020. Effective January 1, 2021, the state of Kentucky eliminated the bank franchise tax and implemented a state income tax at a statutory rate of 5%. State income tax expense was $235,000 for the second quarter of 2021, compared to a state income tax benefit of $79,000 for the second quarter of 2020 related to the establishment of a net deferred tax asset due to the tax law change.
The following table summarizes components of income and expense and the change in those components for the six months ended June 30, 2021, compared with the same period of 2020:
|
For the Six Months |
Change from |
|||||||||||||||
|
Ended June 30, |
Prior Period |
|||||||||||||||
|
2021 |
2020 |
Amount |
Percent |
|||||||||||||
|
(dollars in thousands) |
||||||||||||||||
|
Gross interest income |
$ | 24,626 | $ | 26,053 | $ | (1,427 |
) |
(5.5 |
)% |
|||||||
|
Gross interest expense |
3,032 | 6,181 | (3,149 |
) |
(50.9 |
) |
||||||||||
|
Net interest income |
21,594 | 19,872 | 1,722 | 8.7 | ||||||||||||
|
Provision for loan losses |
350 | 2,150 | (1,800 |
) |
(83.7 |
) |
||||||||||
|
Non-interest income |
4,019 | 3,325 | 694 | 20.9 | ||||||||||||
|
Non-interest expense |
15,938 | 16,471 | (533 |
) |
(3.2 |
) |
||||||||||
|
Net income before taxes |
9,325 | 4,576 | 4,749 | 103.8 | ||||||||||||
|
Income tax expense |
2,202 | 754 | 1,448 | 192.0 | ||||||||||||
|
Net income |
7,123 | 3,822 | 3,301 | 86.4 | ||||||||||||
Net income for the six months ended June 30, 2020 totaled $7.1 million, compared with net income of $3.8 million for the comparable period of 2020. Net interest income increased $1.7 million from the first six months of 2020 as a result of a decrease in the cost of interest-bearing liabilities due primarily to downward repricing within the time deposit portfolio, as well as a reduction in the size of the time deposit portfolio. Provision for loan loss expense of $350,000 was recorded in the first six months of 2021, as compared to $2.2 million provision for loan loss expense in the first six months of 2020. The 2021 provision was primarily in response to the level of net loan charge-offs and trends during the first six months of the year, while the provision for 2020 was largely attributable to the uncertainty surrounding the COVID-19 pandemic related economic and business disruptions. At June 30, 2021, the allowance for loan loss remained elevated in relation to recent historical levels due to the continued uncertainty surrounding the COVID-19 pandemic despite declining loan balances and improved credit trends. Non-interest income increased by $694,000 to $4.0 million from $3.3 million in the first six months of 2020 primarily due to an increase in bank card interchange fees of $420,000 and a $191,000 gain on the sale of OREO. Non-interest expense decreased from $16.5 million in the first six months of 2020 to $15.9 million in the first six months of 2021 primarily due to a decrease of $540,000 in deposit and state franchise tax expense.
Net income before taxes was $9.3 million for the first six months of 2021, compared with $4.6 million for the first six months of 2020. Income tax expense was $2.2 million for the first six months of 2021, compared with $754,000 for the first six months of 2020. Effective January 1, 2021, the state of Kentucky eliminated the bank franchise tax and implemented a state income tax at a statutory rate of 5%. State income tax expense was $449,000 for the first six months of 2021, compared to a state income tax benefit of $151,000 for the first six months of 2020 related to the establishment of a net deferred tax asset due to the tax law change.
Net Interest Income – Net interest income was $10.9 million for the three months ended June 30, 2021, an increase of $804,000, or 8.0%, compared with $10.1 million for the same period in 2020. Net interest spread and margin were 3.30% and 3.45%, respectively, for the second quarter of 2021, compared with 3.10% and 3.33%, respectively, for the second quarter of 2020.
The interest rate environment remained challenging during 2021 and 2020 as the Federal Reserve 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, loans with variable rate pricing features, and the production rates for new loan originations.
The yield on earning assets decreased to 3.91% for the second quarter of 2021, as compared to 4.21% in the second quarter of 2020. Average interest-earning assets were $1.28 billion for the second quarter of 2021, compared with $1.22 billion for the second quarter of 2020, a 4.3% increase, primarily attributable to higher interest-bearing deposits. Average loans decreased approximately $16.4 million for the second quarter of 2021 compared with the second quarter of 2020. Average loans for the second quarter of 2021 included $23.5 million in loan originations under the SBA Paycheck Protection Program during the first six months of 2021, compared with $42.0 million in loan originations during the first six months of 2020. The decrease in average loans resulted in a decrease in interest revenue volume of approximately $189,000 for the quarter ended June 30, 2021, in addition to a decrease in interest revenue due to declining rates of $120,000, as compared with the second quarter of 2020. Total interest income decreased 3.2%, or $410,000, for the second quarter of 2021 compared to the second quarter of 2020.
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 was $933,000 and $535,000 for the quarters ended June 30, 2021 and June 30, 2020, respectively. This represents 29 basis points and 17 basis points of yield on earning assets and net interest margin for the second quarter ended June 30, 2021 and 2020, respectively. Loan fee income for the second quarter of 2021 included $692,000 in fees earned on SBA PPP loans, compared to $179,000 in the second quarter of 2020, which represents 22 basis points and six basis points of earning asset yield and net interest margin for those quarters, respectively.
The cost of interest-bearing liabilities decreased to 0.61% for the second quarter of 2021, as compared to 1.11% for the second quarter of 2020 primarily based on the downward repricing of time and other interest-bearing deposits and reduction in the size of the time deposit portfolio, as well as a shift in deposit mix. Average interest-bearing liabilities decreased by 1.6% to $956.2 million for the second quarter of 2021, as compared to $971.8 million for the second quarter of 2020 primarily due to a $12.3 million decrease in FHLB advances. Total interest expense decreased by 45.4% to $1.5 million for the second quarter of 2021 as compared to the second quarter of 2020.
Net interest income was $21.6 million for the six months ended June 30, 2021, an increase of $1.7 million, or 8.7%, compared with $19.9 million for the same period in 2020. Net interest spread and margin were 3.34% and 3.49%, respectively, for the first six months of 2021, compared with 3.07% and 3.32%, respectively, for the first six months of 2020.
The yield on earning assets decreased to 3.98% for the first six months of 2021, as compared to 4.35% in the first six months of 2020. Average interest-earning assets increased approximately $47.6 million for the six months ended June 30, 2021 compared with the first six months of 2020. Average loans decreased approximately $629,000 for the first six months ended June 30, 2021 compared with the first six months of 2020. Interest revenue for the first six months of 2021 declined $944,000 due to lower interest rates on new and renewed loans, as well as repricing of variable rate loans, as compared to the first six months of 2020. Total interest income decreased 5.5%, or $1.4 million, for the first six months of 2021 compared to the first six months of 2020.
The amount of loan fee income included in total interest income was $1.8 million and $751,000 for the six months ended June 30, 2021 and 2020, respectively. This represents 29 basis points and 12 basis points of yield on earning assets and net interest margin for the six months ended June 30, 2021 and 2020, respectively. Loan fee income included PPP fees of $1.1 million and $179,000 for the six months ended June 30, 2021 and 2020, respectively, which represents 18 basis points and three basis points of earning asset yield and net interest margin for those six-month periods, respectively.
The cost of interest-bearing liabilities decreased to 0.64% for the first six months of 2021, as compared to 1.28% for the first six months of 2020 primarily based on downward repricing of time and other interest-bearing deposits and reduction in the size of the time deposit portfolio, as well as a shift in deposit mix. Average interest-bearing liabilities decreased by $22.9 million for the six months ended June 30, 2021 compared with the first six months of 2020 primarily due to a $27.0 million decrease in FHLB advances. Total interest expense decreased by 50.9% to $3.0 million for the six months ended June 30, 2021 as compared to $6.2 million for the first six months of 2020.
Average Balance Sheets
The following table presents the average balance sheets for the three-month periods ended June 30, 2021 and 2020, along with the related calculations of tax-equivalent net interest income, net interest margin and net interest spread for the related periods.
|
(1) |
Includes loan fees in both interest income and the calculation of yield on loans. |
The following table presents the average balance sheets for the six-month periods ended June 30, 2021 and 2020, along with the related calculations of tax-equivalent net interest income, net interest margin and net interest spread for the related periods.
|
(1) |
Includes loan fees in both interest income and the calculation of yield on loans. |
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 June 30, 2021 vs. 2020 |
Six Months Ended June 30, 2021 vs. 2020 |
|||||||||||||||||||||||
|
Increase (decrease) due to change in |
Increase (decrease) due to change in |
|||||||||||||||||||||||
|
Rate |
Volume |
Net Change |
Rate |
Volume |
Net Change |
|||||||||||||||||||
|
(in thousands) |
||||||||||||||||||||||||
|
Interest-earning assets: |
||||||||||||||||||||||||
|
Loan receivables |
$ | (120 |
) |
$ | (189 |
) |
$ | (309 |
) |
$ | (944 |
) |
$ | (15 |
) |
$ | (959 |
) |
||||||
|
Securities |
(247 |
) |
143 | (104 |
) |
(546 |
) |
152 | (394 |
) |
||||||||||||||
|
FHLB stock |
(5 |
) |
(5 |
) |
(10 |
) |
(13 |
) |
(7 |
) |
(20 |
) |
||||||||||||
|
Federal funds sold and other |
2 | 11 | 13 | (105 |
) |
51 | (54 |
) |
||||||||||||||||
|
Total increase (decrease) in interest income |
(370 |
) |
(40 |
) |
(410 |
) |
(1,608 |
) |
181 | (1,427 |
) |
|||||||||||||
|
Interest-bearing liabilities: |
||||||||||||||||||||||||
|
Certificates of deposit and other time deposits |
(782 |
) |
(374 |
) |
(1,156 |
) |
(1,931 |
) |
(856 |
) |
(2,787 |
) |
||||||||||||
|
NOW and money market accounts |
(95 |
) |
71 | (24 |
) |
(293 |
) |
147 | (146 |
) |
||||||||||||||
|
Savings accounts |
(83 |
) |
53 | (30 |
) |
(150 |
) |
127 | (23 |
) |
||||||||||||||
|
FHLB advances |
(10 |
) |
(25 |
) |
(35 |
) |
(89 |
) |
(128 |
) |
(217 |
) |
||||||||||||
|
Junior subordinated debentures |
(40 |
) |
— | (40 |
) |
(125 |
) |
— | (125 |
) |
||||||||||||||
|
Subordinated capital notes |
2 | 120 | 122 | 16 | 240 | 256 | ||||||||||||||||||
|
Senior debt |
(25 |
) |
(26 |
) |
(51 |
) |
(53 |
) |
(54 |
) |
(107 |
) |
||||||||||||
|
Total increase (decrease) in interest expense |
(1,033 |
) |
(181 |
) |
(1,214 |
) |
(2,625 |
) |
(524 |
) |
(3,149 |
) |
||||||||||||
|
Increase (decrease) in net interest income |
$ | 663 | $ | 141 | $ | 804 | $ | 1,017 | $ | 705 | $ | 1,722 | ||||||||||||
Non-Interest Income – The following table presents the major categories of non-interest income for the three and six months ended June 30, 2021 and 2020:
|
For the Three Months |
For the Six Months |
|||||||||||||||
|
Ended June 30, |
Ended June 30, |
|||||||||||||||
|
2021 |
2020 |
2021 |
2020 |
|||||||||||||
|
(dollars in thousands) |
||||||||||||||||
|
Service charges on deposit accounts |
$ | 520 | $ | 441 | $ | 1,068 | $ | 1,109 | ||||||||
|
Bank card interchange fees |
1,073 | 863 | 2,033 | 1,613 | ||||||||||||
|
Income from bank owned life insurance |
143 | 116 | 308 | 212 | ||||||||||||
|
Net gain on sale of other real estate owned |
191 | — | 191 | — | ||||||||||||
|
Other |
208 | 181 | 419 | 391 | ||||||||||||
|
Total non-interest income |
$ | 2,135 | $ | 1,601 | $ | 4,019 | $ | 3,325 | ||||||||
Non-interest income for the second quarter of 2021 increased by $534,000, or 33.4%, compared with the second quarter of 2020. The increase in non-interest income for the second quarter of 2021 compared to the second quarter of 2020 was primarily driven by an increase in bank card interchange fees of $210,000 due to an increase in debit card transactions, and a $191,000 gain on the sale of OREO.
For the six months ended June 30, 2021, non-interest income increased by $694,000, or 20.9%, to $4.0 million compared with $3.3 million for the same period of 2020. The increase in non-interest income between the six-month comparative periods was primarily due to an increase in bank card interchange fees of $420,000 and a $191,000 gain on the sale of OREO.
Non-interest Expense – The following table presents the major categories of non-interest expense for the three and six months ended June 30, 2021 and 2020:
|
For the Three Months |
For the Six Months |
|||||||||||||||
|
Ended June 30, |
Ended June 30, |
|||||||||||||||
|
2021 |
2020 |
2021 |
2020 |
|||||||||||||
|
(dollars in thousands) |
||||||||||||||||
|
Salary and employee benefits |
$ | 4,467 | $ | 4,633 | $ | 8,949 | $ | 9,171 | ||||||||
|
Occupancy and equipment |
979 | 983 | 2,039 | 1,982 | ||||||||||||
|
Professional fees |
246 | 235 | 482 | 443 | ||||||||||||
|
Marketing expense |
179 | 104 | 361 | 318 | ||||||||||||
|
FDIC insurance |
90 | 67 | 225 | 67 | ||||||||||||
|
Data processing expense |
377 | 380 | 755 | 739 | ||||||||||||
|
Deposit and state franchise tax |
90 | 360 | 180 | 720 | ||||||||||||
|
Deposit account related expenses |
556 | 460 | 1,047 | 911 | ||||||||||||
|
Communications expense |
194 | 247 | 367 | 465 | ||||||||||||
|
Insurance expense |
115 | 111 | 219 | 214 | ||||||||||||
|
Postage and delivery |
139 | 152 | 291 | 320 | ||||||||||||
|
Other |
522 | 504 | 1,023 | 1,121 | ||||||||||||
|
Total non-interest expense |
$ | 7,954 | $ | 8,236 | $ | 15,938 | $ | 16,471 | ||||||||
Non-interest expense for the second quarter ended June 30, 2021 decreased $282,000, or 3.4%, compared with the second quarter of 2020. This decrease was primarily due to the elimination of the Kentucky bank franchise tax discussed below, resulting in a decrease in deposit and state franchise tax expense of $270,000, or 75%. Salary and employee benefits, which includes salaries, payroll taxes, health insurance, 401k matching contributions, incentive compensation, and stock-based compensation, decreased $166,000, or 3.6%, for the second quarter of 2021, as compared with the second quarter of 2020. The second quarter of 2020 included $111,000 in severance expense as the Bank realized a reduction in FTEs from 248 at March 31, 2020 to 228 at June 30, 2020. These decreases were partially offset by an increase in deposit account related expense of $96,000, or 20.9%, due to an increase in debit card transactions.
For the six months ended June 30, 2021, non-interest expense decreased $533,000, or 3.2% to $15.9 million compared with $16.5 million for the first six months of 2020. The decrease in non-interest expense for the six months ended June 30, 2021 was primarily attributable to a decrease of $540,000, or 75%, in deposit and state franchise tax expense. Salary and employee benefits decreased $222,000, or 2.4%, for the six months ended June 30, 2021, as compared with the first six months of 2020 given the prior period severance expense discussed above, and modestly lower FTE counts in the first six months of 2021 compared to the same period in 2020. These decreases were partially offset by increases in FDIC insurance of $158,000, or 235.8%, as no expense was recorded during the first quarter of 2020 due to the Bank utilizing assessment credits, and deposit account related expense of $136,000, or 14.9%, due to an increase in debit card transactions.
Income Tax Expense – Effective tax rates differ from the federal statutory rate of 21% applied to income before income taxes due to the following:
|
For the Three Months |
For the Six Months |
|||||||||||||||
|
Ended June 30, |
Ended June 30, |
|||||||||||||||
|
2021 |
2020 |
2021 |
2020 |
|||||||||||||
|
(dollars in thousands) |
||||||||||||||||
|
Federal statutory tax rate |
21 |
% |
21 |
% |
21 |
% |
21 |
% |
||||||||
|
Federal statutory rate times financial statement income |
$ | 1,070 | $ | 499 | $ | 1,958 | $ | 961 | ||||||||
|
Effect of: |
||||||||||||||||
|
State income taxes |
202 | — | 383 | — | ||||||||||||
|
Tax-exempt interest income |
(40 |
) |
(15 |
) |
(70 |
) |
(29 |
) |
||||||||
|
Establish state deferred tax asset |
— | (79 |
) |
— | (151 |
) |
||||||||||
|
Non-taxable life insurance income |
(36 |
) |
(24 |
) |
(77 |
) |
(44 |
) |
||||||||
|
Restricted stock vesting |
(5 |
) |
5 | — | 4 | |||||||||||
|
Other, net |
3 | 7 | 8 | 13 | ||||||||||||
|
Total |
$ | 1,194 | $ | 393 | $ | 2,202 | $ | 754 | ||||||||
Income tax expense was $1.2 million and $2.2 million for the second quarter of 2021 and for the first six months of 2021, respectively, compared with $393,000 for the second quarter of 2020 and $754,000 for the first six months of 2020, respectively. Effective January 1, 2021, the state of Kentucky eliminated the bank franchise tax, which was previously recorded as a non-interest expense, and implemented a state income tax at a statutory rate of 5%. State income tax expense was $235,000 and $449,000 for the second quarter of 2021 and for the first six months of 2021, respectively, compared to a state income tax benefit of $79,000 and $151,000 for the second quarter of 2020 and for the first six months of 2020, respectively, which was related to the establishment of a net deferred tax asset due to the tax law change.
Analysis of Financial Condition
Total assets increased $26.6 million, or 2.0%, to $1.34 billion at June 30, 2021, from $1.31 billion at December 31, 2020. This increase was primarily attributable to an increase in cash and cash equivalents of $17.4 million and securities of $25.0 million, partially offset by a decrease in net loans of $14.9 million.
Loans Receivable – Loans receivable decreased $14.7 million, or 1.5%, during the six months ended June 30, 2021 to $947.4 million as loan paydowns outpaced growth. The commercial and commercial real estate portfolios increased by an aggregate of $9.8 million, or 1.5%, during the first six months of 2021 and comprised 68.4% of the loan portfolio at June 30, 2021. Residential real estate and consumer portfolios decreased by an aggregate of $19.4 million, or 6.9%, during the first six months of 2021 and comprised 27.7% of the loan portfolio at June 30, 2021.
Loan Portfolio Composition – The following table presents a summary of the loan portfolio at the dates indicated, net of deferred loan fees, by type. There are no foreign loans in the portfolio and other than the categories noted, there is no concentration of loans in any industry exceeding 10% of total loans.
|
As of June 30, |
As of December 31, |
|||||||||||||||
|
2021 |
2020 |
|||||||||||||||
|
Amount |
Percent |
Amount |
Percent |
|||||||||||||
|
(dollars in thousands) |
||||||||||||||||
|
Commercial (1) |
$ | 206,578 | 21.80 |
% |
$ | 208,244 | 21.65 |
% |
||||||||
|
Commercial Real Estate |
||||||||||||||||
|
Construction |
78,659 | 8.30 | 92,916 | 9.66 | ||||||||||||
|
Farmland |
65,631 | 6.93 | 70,272 | 7.30 | ||||||||||||
|
Nonfarm nonresidential |
296,737 | 31.32 | 266,394 | 27.69 | ||||||||||||
|
Residential Real Estate |
||||||||||||||||
|
Multi-family |
62,428 | 6.59 | 61,180 | 6.36 | ||||||||||||
|
1-4 Family |
168,215 | 17.75 | 188,955 | 19.64 | ||||||||||||
|
Consumer |
31,511 | 3.33 | 31,429 | 3.27 | ||||||||||||
|
Agriculture |
37,086 | 3.91 | 42,044 | 4.37 | ||||||||||||
|
Other |
580 | 0.07 | 647 | 0.06 | ||||||||||||
|
Total loans |
$ | 947,425 | 100.00 |
% |
$ | 962,081 | 100.00 |
% |
||||||||
|
(1) |
Includes PPP loans of $21.0 million and $20.3 million at June 30, 2021 and December 31, 2021, respectively. |
Loan Portfolio by Risk Category – The following table presents a summary of the loan portfolio at the dates indicated, by risk category.
|
June 30, 2021 |
December 31, 2020 |
|||||||||||||||
|
Loans |
% to Total |
Loans |
% to Total |
|||||||||||||
|
(dollars in thousands) |
||||||||||||||||
|
Pass |
$ | 913,753 | 96.4 |
% |
$ | 926,025 | 96.2 |
% |
||||||||
|
Watch |
15,888 | 1.7 | 18,879 | 2.0 | ||||||||||||
|
Special Mention |
— | — | — | — | ||||||||||||
|
Substandard |
17,784 | 1.9 | 17,177 | 1.8 | ||||||||||||
|
Doubtful |
— | — | — | — | ||||||||||||
|
Total |
$ | 947,425 | 100.0 |
% |
$ | 962,081 | 100.00 |
% |
||||||||
Loans receivable decreased $14.7 million, or 1.5%, during the six months ended June 30, 2021 primarily as a result of loan payoffs outpacing loan originations during the period. Since December 31, 2020, the pass category decreased approximately $12.3 million, the watch category decreased approximately $3.0 million, and the substandard category increased approximately $607,000. The $607,000 increase in loans classified as substandard was primarily driven by $2.2 million in loans migrating to substandard, offset by $1.4 million in payments and $231,000 in charge-offs during the first six months of 2021.
Loan Delinquency – The following table presents a summary of loan delinquencies at the dates indicated.
|
June 30, 2021 |
December 31, 2020 |
|||||||
|
(in thousands) |
||||||||
|
Past Due Loans: |
||||||||
|
30-59 Days |
$ | 181 | $ | 1,537 | ||||
|
60-89 Days |
252 | 372 | ||||||
|
90 Days and Over |
— | — | ||||||
|
Total Loans Past Due 30-90+ Days |
433 | 1,909 | ||||||
|
Nonaccrual Loans |
1,530 | 1,676 | ||||||
|
Total Past Due and Nonaccrual Loans |
$ | 1,963 | $ | 3,585 | ||||
During the six months ended June 30, 2021, nonaccrual loans decreased by $146,000 to $1.5 million. Loans past due 30-59 days decreased from $1.5 million at December 31, 2020 to $181,000 at June 30, 2021. Loans past due 60-89 days decreased from $372,000 at December 31, 2020 to $252,000 at June 30, 2021. This represents a $1.5 million decrease in accruing past due loans from December 31, 2020 to June 30, 2021 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.
At June 30, 2021 and December 31, 2020, the Bank had four restructured loans totaling $459,000 and $480,000, 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 June 30, 2021 or December 31, 2020. 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 June 30, 2021 and December 31, 2020, 85% and 100%, respectively, of the TDRs were performing according to their modified terms.
There were no modifications granted during 2021 and one modification granted during the third quarter of 2020 that resulted in loans being identified as TDRs. See “Note 3 – Loans,” to the financial statements for additional disclosure related to troubled debt restructuring.
COVID-19 Short-term Loan Concessions - The Bank has elected to account for eligible loan modifications under Section 4013 of the Coronavirus Aid Relief and Economic Security Act (“CARES Act”). To be an eligible loan under Section 4013 of the CARES Act, a loan modification must be (1) related to the COVID-19 pandemic; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020 and the earlier of (A) 60 days after the date of termination of the national emergency declared by the President on March 13, 2020 concerning the COVID-19 outbreak (the “national emergency”) or (B) December 31, 2020. On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (“Economic Aid Act”) extended eligible loan modifications under Section 4013 of the CARES Act from December 31, 2020 to January 1, 2022. Eligible loan modifications are not required to be classified as TDRs and will not be reported as past due provided that they are performing in accordance with the modified terms. Interest income will continue to be recognized in accordance with GAAP unless the loan is placed on nonaccrual status.
Short-term loan modifications declined to $4.7 million as of June 30, 2021, as compared to $15.3 million at December 31, 2020. Included in the $4.7 million of short-term loan modifications is one commercial real estate loan secured by a retail entertainment facility totaling $4.4 million, which remains subject to and is performing in accordance with, a short-term COVID-19 modification. The loan is graded substandard, has been evaluated under ASC-310-10, and allocated a specific reserve of $2.2 million as of June 30, 2021 and December 31, 2020.
Non-Performing Assets – Non-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 June 30, 2021 and December 31, 2020:
|
June 30, 2021 |
December 31, 2020 |
|||||||
|
(dollars in thousands) |
||||||||
|
Loans on nonaccrual status |
$ | 1,530 | $ | 1,676 | ||||
|
Troubled debt restructurings on accrual |
390 | 480 | ||||||
|
Past due 90 days or more still on accrual |
— | — | ||||||
|
Total non-performing loans |
1,920 | 2,156 | ||||||
|
Real estate acquired through foreclosure |
— | 1,765 | ||||||
|
Other repossessed assets |
— | — | ||||||
|
Total non-performing assets |
$ | 1,920 | $ | 3,921 | ||||
|
Non-performing loans to total loans |
0.20 |
% |
0.22 |
% |
||||
|
Non-performing assets to total assets |
0.14 |
% |
0.30 |
% |
||||
|
Allowance for non-performing loans |
$ | 17 | $ | 22 | ||||
|
Allowance for non-performing loans to non-performing loans |
0.89 |
% |
1.02 |
% |
||||
Nonperforming loans at June 30, 2021, were $1.9 million, or 0.20% of total loans, compared with $2.2 million, or 0.22% of total loans at December 31, 2020, and $1.9 million, or 0.19% of total loans at June 30, 2020.
Provision and Allowance for Loan Losses – The 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.
No provision for loan losses and a $350,000 provision for loan losses was recorded in the second quarter and first six months of 2021, respectively, compared to $1.1 million and $2.2 million provision for loan losses in the second quarter and the first six months of 2020, respectively. The 2021 loan loss provision was attributable to the net loan charge-offs and trends within the portfolio during the period, while the provisions for 2020 were largely attributable to the uncertainty surrounding the COVID-19 pandemic related economic and business disruptions. At June 30, 2021, the allowance for loan loss remained elevated in relation to recent historical levels due to the continued uncertainty surrounding the COVID-19 pandemic despite declining loan balances and improved credit trends.
The following table sets forth an analysis of loan loss experience as of and for the periods indicated:
|
Three Months Ended June 30, |
Six Months Ended June 30, |
December 31, |
||||||||||||||||||
|
2021 |
2020 |
2021 |
2020 |
2020 | ||||||||||||||||
|
(in thousands) |
||||||||||||||||||||
|
Balance at beginning of period |
$ | 12,755 | $ | 9,150 | $ | 12,443 | $ | 8,376 | $ | 8,376 | ||||||||||
|
Loans charged-off: |
||||||||||||||||||||
|
Real estate |
141 | 35 | 141 | 139 | 231 | |||||||||||||||
|
Commercial |
— | 3 | 19 | 32 | 32 | |||||||||||||||
|
Consumer |
32 | 152 | 51 | 313 | 493 | |||||||||||||||
|
Agriculture |
5 | 3 | 44 | 44 | 46 | |||||||||||||||
|
Other |
— | — | — | — | — | |||||||||||||||
|
Total charge-offs |
178 | 193 | 255 | 528 | 802 | |||||||||||||||
|
Recoveries |
||||||||||||||||||||
|
Real estate |
32 | 155 | 48 | 196 | 352 | |||||||||||||||
|
Commercial |
7 | 6 | 10 | 11 | 29 | |||||||||||||||
|
Consumer |
15 | 6 | 34 | 10 | 45 | |||||||||||||||
|
Agriculture |
6 | 1 | 7 | 9 | 30 | |||||||||||||||
|
Other |
— | 3 | — | 4 | 13 | |||||||||||||||
|
Total recoveries |
60 | 171 | 99 | 230 | 469 | |||||||||||||||
|
Net charge-offs (recoveries) |
118 | 22 | 156 | 298 | 333 | |||||||||||||||
|
Provision for loan losses |
— | 1,100 | 350 | 2,150 | 4,400 | |||||||||||||||
|
Balance at end of period |
$ | 12,637 | $ | 10,228 | $ | 12,637 | $ | 10,228 | $ | 12,443 | ||||||||||
|
Allowance for loan losses to period-end loans |
1.33 |
% |
1.05 |
% |
1.33 |
% |
1.05 |
% |
1.29 |
% |
||||||||||
|
Net charge-offs (recoveries) to average loans |
0.05 |
% |
0.01 |
% |
0.03 |
% |
0.06 |
% |
0.03 |
% |
||||||||||
|
Allowance for loan losses to non-performing loans |
658.18 |
% |
546.37 |
% |
658.18 |
% |
546.37 |
% |
577.13 |
% |
||||||||||
The allowance for loan losses to total loans was 1.33% at June 30, 2021, compared to 1.29% at December 31, 2020, and 1.05% at June 30, 2020. Net loan charge-offs in the first six months of 2021 totaled $156,000, compared to net loan charge-offs of $298,000 in the first six months of 2020. The allowance for loan losses to non-performing loans was 658.18% at June 30, 2021, compared with 577.13% at December 31, 2020, and 546.37% at June 30, 2020.
Investment Securities – The 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 increased by $25.0 million, or 12.3%, to $228.9 million at June 30, 2021, compared with $203.9 million at December 31, 2020.
The following table sets forth the carrying value of the securities portfolio at the dates indicated (in thousands):
|
June 30, 2021 |
December 31, 2020 | |||||||||||||||||||||||||||||||
|
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
|||||||||||||||||||||||||
|
Available for sale |
||||||||||||||||||||||||||||||||
|
U.S. Government andfederal agencies |
$ | 28,918 | $ | 845 | $ | (3 |
) |
$ | 29,760 | $ | 18,811 | $ | 806 | $ | — | $ | 19,617 | |||||||||||||||
|
Agency mortgage-backed residential |
79,146 | 2,121 | (265 |
) |
81,002 | 71,582 | 2,777 | (26 |
) |
74,333 | ||||||||||||||||||||||
|
Collateralized loan obligations |
40,185 | — | (240 |
) |
39,945 | 44,730 | — | (1,578 |
) |
43,152 | ||||||||||||||||||||||
|
State and municipal |
— | — | — | — | 34,759 | 1,296 | — | 36,055 | ||||||||||||||||||||||||
|
Corporate bonds |
31,674 | 487 | (714 |
) |
31,447 | 31,635 | 472 | (1,402 |
) |
30,705 | ||||||||||||||||||||||
|
Total available for sale |
$ | 179,923 | $ | 3,453 | $ | (1,222 |
) |
$ | 182,154 | $ | 201,517 | $ | 5,351 | $ | (3,006 |
) |
$ | 203,862 | ||||||||||||||
|
Amortized Cost |
Gross Unrecognized Gains |
Gross Unrecognized Losses |
Fair Value |
Amortized Cost |
Gross Unrecognized Gains |
Gross Unrecognized Losses |
Fair Value |
|||||||||||||||||||||||||
|
Held to maturity |
||||||||||||||||||||||||||||||||
|
State and municipal |
$ | 46,717 | $ | 217 | $ | (249 |
) |
$ | 46,685 | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
|
Total held to maturity |
$ | 46,717 | $ | 217 | $ | (249 |
) |
$ | 46,685 | $ | — | $ | — | $ | — | $ | — | |||||||||||||||
During March 2021, to better manage interest rate risk, management transferred from AFS to HTM all the municipal securities in the portfolio having a book value of approximately $34.7 million, a market value of approximately $35.8 million, and a net unrealized gain of approximately $1.1 million. The transfer occurred at fair value. The related net unrealized gain included in other comprehensive income remained in other comprehensive income and is being amortized from other comprehensive income with an offsetting entry to interest income as a yield adjustment through earnings over the remaining term of the securities. No gain or loss was recorded at the time of transfer. This transfer was completed after careful consideration of the intent and ability to hold these securities to maturity.
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 $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. At June 30, 2021, $27.9 million, $9.5 million, and $2.5 million of the Bank’s CLOs were AA, A, and BBB rated, respectively. None of the CLOs were subject to ratings downgrade during the six months ended June 30, 2021.
The corporate bond portfolio consists of 13 subordinated debt securities and one senior debt security 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 SOFR, or floating at an index over LIBOR, or SOFR, 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 – There were no foreclosed properties at June 30, 2021, compared with $1.8 million at December 31, 2020. See Note 5, “Other Real Estate Owned,” to the financial statements. Management values foreclosed properties at fair value less estimated costs to sell when acquired and expects to liquidate these properties to recover the investment in the due course of business.
OREO is recorded at fair market value less estimated cost to sell at time of acquisition. Any write-down of the property at the time of acquisition is charged to the allowance for loan losses. When foreclosed properties are acquired, management obtains a new appraisal or has staff from the Bank’s special assets group evaluate the latest in-file appraisal in connection with the transfer to OREO. Management typically obtains updated appraisals within five quarters of the anniversary date of ownership unless a sale is imminent. Subsequent reductions in fair value are recorded as non-interest expense when a new appraisal indicates a decline in value or in cases where a listing price is lowered below the appraisal amount.
OREO sales totaled $2.0 million for the second quarter and first six months of 2021, compared to $1.6 million for the second quarter and first six months ended June 30, 2020. Net gain on sales of OREO totaled $191,000 for the second quarter and six months ended June 30, 2021, compared to no gain on sales of OREO for the second quarter and six months ended June 30, 2020. Operating expenses for OREO totaled $2,000 and $13,000 for the second quarter and six months ended June 30, 2021, respectively, compared to operating expenses of $22,000 and $38,000 for the second quarter and six months ending June 30, 2020, respectively. There were no fair value write-downs recorded during the six months ended June 30, 2021 or the six months ended June 30, 2020.
Liabilities – Total liabilities at June 30, 2021 were $1.21 billion compared with $1.20 billion at December 31, 2020, an increase of $18.7 million, or 1.6%. This increase was primarily attributable to an increase in deposits of $19.5 million.
Deposits are the Bank’s primary source of funds. The following table sets forth the average daily balances and weighted average rates paid for deposits for the periods indicated:
|
For the Six Months |
For the Year |
|||||||||||||||
|
Ended June 30, |
Ended December 31, |
|||||||||||||||
|
2021 |
2020 |
|||||||||||||||
|
Average |
Average |
Average |
Average |
|||||||||||||
|
Balance |
Rate |
Balance |
Rate |
|||||||||||||
|
(dollars in thousands) |
||||||||||||||||
|
Demand |
$ | 262,849 | $ | 215,145 | ||||||||||||
|
Interest checking |
208,246 | 0.31 |
% |
169,808 | 0.32 |
% |
||||||||||
|
Money market |
181,282 | 0.35 | 166,788 | 0.55 | ||||||||||||
|
Savings |
152,093 | 0.31 | 111,559 | 0.48 | ||||||||||||
|
Certificates of deposit |
340,870 | 0.63 | 436,083 | 1.33 | ||||||||||||
|
Total deposits |
$ | 1,145,340 | 0.34 |
% |
$ | 1,099,383 | 0.71 |
% |
||||||||
The following table shows at June 30, 2021 the amount of time deposits of $250,000 or more by time remaining until maturity (in thousands):
|
Maturity Period |
||||
|
Three months or less |
$ | 7,811 | ||
|
Three months through six months |
7,235 | |||
|
Six months through twelve months |
10,043 | |||
|
Over twelve months |
16,254 | |||
|
Total |
$ | 41,343 | ||
Liquidity
The objective of liquidity risk management is to ensure that the Company meets the cash flow requirements of depositors, borrowers, and creditors, as well as operating cash needs, taking into account all on- and off-balance sheet funding demands. Liquidity risk management also involves ensuring that cash flow needs are met at a reasonable cost. Management maintains an investment and funds management policy, which identifies the primary sources of liquidity, establishes procedures for monitoring and measuring liquidity, and establishes minimum liquidity requirements in compliance with regulatory guidance. The Asset Liability Committee regularly monitors and reviews the Company’s liquidity position.
Funds are available to the Bank from a number of sources, including the sale of securities in the available for sale investment portfolio, principal pay-downs on loans and mortgage-backed securities, customer deposit inflows, and other wholesale funding.
The Bank also borrows from the FHLB to supplement funding requirements. At June 30, 2021, the Bank had an unused borrowing capacity with the FHLB of $88.6 million. Advances are collateralized by first mortgage residential loans as well as loans originated under the SBA Payment Protection Plan loans and borrowing capacity is based on the underlying book value of eligible pledged loans.
The Bank also has available on an unsecured basis federal funds borrowing lines from a correspondent bank totaling $5.0 million. Management believes the sources of liquidity are adequate to meet expected cash needs for the foreseeable future. Historically, the Bank has also utilized brokered and wholesale deposits to supplement its funding strategy. At June 30, 2021, the Bank had no brokered deposits.
The Company uses cash on hand to service the subordinated capital notes, junior subordinated debentures, and to provide for operating cash flow needs. The Company also may issue common equity, preferred equity and debt to support cash flow needs and liquidity requirements.
Capital
Stockholders’ equity increased $7.9 million to $124.0 million at June 30, 2021, compared with $116.0 million at December 31, 2020 primarily due to current year net income of $7.1 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 for the Bank as of June 30, 2021:
|
Regulatory Minimums |
Well-Capitalized Minimums |
Basel III Plus Conservation Buffer |
Limestone Bank |
|||||||||||||
|
Tier 1 Capital |
6.0 | % | 8.0 | % | 7.0 | % | 13.0 | % | ||||||||
|
Common equity Tier 1 capital |
4.5 | 6.5 | 8.5 | 13.0 | ||||||||||||
|
Total risk-based capital |
8.0 | 10.0 | 10.5 | 14.1 | ||||||||||||
|
Tier 1 leverage ratio |
4.0 | 5.0 | — | 10.6 | ||||||||||||
Failure to meet minimum capital requirements could result in discretionary actions by regulators that, if taken, could have a materially adverse effect on the Bank or Company’s financial condition.
The Basel III rules require a “capital conservation buffer” of 2.5% above the regulatory minimum risk-based capital ratios. An institution is subject to limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses if capital levels fall below minimum Basel III 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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Given an instantaneous 100 basis point increase in interest rates, the base net interest income would increase by an estimated 1.1% at June 30, 2021, compared with an increase of 0.8% at December 31, 2020. Given a 200 basis point increase in interest rates, base net interest income would increase by an estimated 2.8% at June 30, 2021, compared with an increase of 2.2% at December 31, 2020.
The following table indicates the estimated impact on net interest income under various interest rate scenarios for the twelve months following June 30, 2021, as calculated using the static shock model approach:
|
Change in Future Net Interest Income |
||||||||
|
Dollar Change |
Percentage Change |
|||||||
|
(dollars in thousands) |
||||||||
|
+ 200 basis points |
$ | 1,156 | 2.83 |
% |
||||
|
+ 100 basis points |
462 | 1.13 | ||||||
|
- 100 basis points |
(835 | ) | (2.04 | ) | ||||
|
- 200 basis points |
(1,718 |
) |
(4.20 |
) |
||||
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.
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. After discussions with legal counsel, management does not believe these legal actions or proceedings will have a material adverse effect on the consolidated financial position or results of operation of the Company.
Refer to the detailed cautionary statements and discussion of risks that affect the Company and its business in “Item 1A – Risk Factors” of the Annual Report on Form 10-K, for the year ended December 31, 2020. There have been no material changes from the risk factors previously discussed in that report.
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 |
|
June 2021
|
2,824 |
$13.66 |
Item 3. Default Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Not applicable.
|
(a) |
Exhibits |
The following exhibits are filed or furnished as part of this report:
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) |
|
|
|
||
|
July 30, 2021 |
By: |
/s/ John T. Taylor |
|
|
|
John T. Taylor |
|
|
|
Chief Executive Officer |
|
|
||
|
July 30, 2021 |
By: |
/s/ Phillip W. Barnhouse |
|
Phillip W. Barnhouse |
||
|
|
|
Chief Financial Officer |
Exhibit 3.1
The following is a complete copy of the Articles of Incorporation of Limestone Bancorp, Inc., as restated to incorporate all amendments:
ARTICLES OF INCORPORATION
OF
LIMESTONE BANCORP, INC.
ARTICLE I - NAME
The Corporation’s name shall be Limestone Bancorp, Inc.
ARTICLE II - PURPOSE
The Corporation’s purpose shall be to engage in any lawful business for which corporations may be incorporated under the Kentucky Business Corporation Act (“KBCA”).
ARTICLE III - AUTHORIZED CAPITAL STOCK
The aggregate number of shares which the Corporation shall have the authority to issue shall be 39,000,000 shares, without par value, which shall be comprised of: (a) 28,000,000 Common Shares; (b) 10,000,000 Non-Voting Common Shares; and (c) 1,000,000 Preferred Shares with such preferences, limitations and relative rights as may be determined by the Corporation’s board of directors (the “Board of Directors”) pursuant to Article IV and which may be divided into and issued in series.
Of the 1,000,000 authorized Preferred Shares, 38,000 shares have been designated as Series G Participating Preferred Shares.
ARTICLE IV - RELATIVE RIGHTS AND PREFERENCES
The preferences, limitations and relative rights in respect of the Corporation’s shares shall be as follows:
A. Common Shares.
|
(1) |
Voting. Subject to the voting rights of any series of Preferred Shares or as otherwise required by law, the Common Shares shall have the exclusive right to vote for the election of directors and on all other matters in which shareholders are generally entitled to vote. Each Common Share shall have one vote per share on matters on which holders of Common Shares are entitled to vote. |
|
(2) |
Dividends. |
|
(a) |
Subject to the preferential dividend rights, if any, of any Preferred Shares and after the Corporation has complied with any requirements for setting aside sums as sinking funds or as redemption or purchase accounts and subject further to subpart (b) of this paragraph and any other conditions that may be established in accordance with the provisions of Paragraph C of this Article IV, the holders of Common Shares shall be entitled to receive such dividends, if any, as may be declared from time to time by the Board of Directors. |
|
(b) |
No dividend will be paid or authorized and set apart for payment on any Common Shares for any period unless the Corporation has paid or authorized and set aside for payment in the same period, or contemporaneously pays or authorizes and sets aside for payment, an equal amount to be paid as a dividend on Non-Voting Common Shares. |
|
(3) |
Distributions. After distribution in full of any preferential amount to be distributed to the holders of Preferred Shares, and subject to any other rights of the holders of Preferred Shares to further participate in a liquidation, distribution or sale of assets, dissolution or winding-up of the Corporation, the holders of Common Shares and Non-Voting Common Shares shall be entitled to receive, upon the voluntary or involuntary liquidation, distribution or sale of assets, dissolution or winding-up of the Corporation, all of its remaining assets, tangible and intangible, of whatever kind available for distribution to the shareholders, ratably in proportion to the number of Common Shares and Non-Voting Common Shares held by each, with each share being proportionally equal in relation to the sum total of the two classes. |
|
(4) |
Issuance. Common Shares may be issued from time to time on such terms and for such consideration as shall be determined by the Board of Directors. |
B. Non-Voting Common Shares
|
(1) |
Same Rights As Common Shares. Except with respect to voting rights and as otherwise specifically provided in these Articles of Incorporation, Non-Voting Common Shares shall have the same preferences, limitations, and relative rights as, and shall be identical in all respects to, the Common Shares. |
|
(2) |
No Voting Rights. Except as required by the KBCA or these Articles of Incorporation, Non-Voting Common Shares shall not have the right to vote on any matter submitted to a vote at a meeting of shareholders of the Corporation. |
|
(3) |
Dividends. |
|
(a) |
Subject to the preferential dividend rights, if any, of any Preferred Shares and after the Corporation has complied with any requirements for setting aside sums as sinking funds or as redemption or purchase accounts and subject further to subpart (b) of this paragraph and any other conditions that may be established in accordance with the provisions of Paragraph C, D or E of this Article IV, the holders of Non-Voting Common Shares shall be entitled to receive such dividends, if any, as may be declared from time to time by the Board of Directors. |
|
(b) |
No dividend will be paid or authorized and set apart for payment on any Non-Voting Common Shares for any period unless the Corporation has paid or authorized and set aside for payment in the same period, or contemporaneously pays or authorizes and sets aside for payment, an equal amount to be paid as a dividend on Common Shares. |
|
(4) |
Distributions. After distribution in full of any preferential amount to be distributed to the holders of Preferred Shares, and subject to any other rights of the holders of Preferred Shares to further participate in a liquidation, distribution or sale of assets, dissolution or winding-up of the Corporation, the holders of Non-Voting Common Shares and Common Shares shall be entitled to receive, upon the voluntary or involuntary liquidation, distribution or sale of assets, dissolution or winding-up of the Corporation, all of its remaining assets, tangible and intangible, of whatever kind available for distribution to the shareholders, ratably in proportion to the number of Common Shares and Non-Voting Common Shares held by each, with each share being proportionally equal in relation to the sum total of the two classes. |
|
(5) |
Automatic Conversion. Each issued and outstanding Non-Voting Common Share shall automatically be converted into one (1) Common Share·(the “Conversion Rate”) upon the transfer of such Non-Voting Common Share (or any security convertible to or exercisable for such Non-Voting Common Share) in (a) a widespread public distribution, including pursuant to a registration statement filed with and declared effective by the SEC or pursuant to Rule 144 under the Securities Act, (b) a transfer in which no transferee (or group of associated transferees) would receive more than 2% of any class of Voting Securities or (c) a transfer to a transferee that controls more than 50% of the Voting Securities without any transfer from the transferor. The foregoing automatic conversion may occur as to some or all of the Non-Voting Common Shares held by any holder. |
|
(6) |
Adjustments. The one-to-one conversion ratio for the conversion of the Non-Voting Common Shares into Common Shares in accordance with item (4) of this Article IV(B) shall in all events be equitably adjusted in the event of (a) any recapitalization of the Corporation by means of a stock dividend on, or a stock split or combination of, outstanding Common Shares and Non-Voting Common Shares, or (b) any merger, consolidation or other reorganization of the Corporation with another corporation. |
|
(7) |
Reservation. The Corporation shall at all times reserve and keep available out of its authorized but unissued Common Shares, solely for the purpose of effecting the conversion of the Non-Voting Common Shares, such number of Common Shares as shall from time to time be sufficient to effect the conversion of all outstanding Non-Voting Common Shares. |
|
(8) |
Retirement. If any Non-Voting Common Shares shall be converted pursuant to this Article IV, the Shares so converted shall be retired and may not be reissued as Non-Voting Common Shares. |
|
(9) |
Redesignation. Upon the conversion of all of the outstanding Non-Voting Common Shares into Common Shares, the Non-Voting Common Shares shall be automatically redesignated as “Common Shares.” |
C. Preferred Stock
The Board of Directors is expressly vested with authority to determine, in whole or in part, the preferences, limitations, and relative rights of the Preferred Shares, or one or more series of Preferred Shares, before the issuance of any such Shares. All shares of a series of Preferred Shares shall have preferences, limitations and relative rights identical with those of other Preferred Shares of the same series. The preferences, limitations, and relative rights of the Preferred Shares shall be specified in a subsequent amendment to these Articles of Incorporation adopted by the Board of Directors and may include, without limitation:
|
(1) |
Special, conditional, or limited voting rights, or no right to vote, except to the extent prohibited by the KBCA; |
|
(2) |
That the Preferred Shares be redeemable or convertible (a) at the option of the Corporation, the shareholder, or another person or upon the occurrence of a designated event; (b) for cash, indebtedness, securities, or other property; or (c) in a designated amount or in an amount determined in accordance with a designated formula or by reference to extrinsic data or events; |
|
(3) |
Rights entitling the holders to distributions calculated in any manner, including dividends that may be cumulative, noncumulative, or partially cumulative; |
|
(4) |
Preferences over any other class of shares with respect to distributions, including dividends and distributions upon the dissolution of the Corporation; and |
|
(5) |
Other preferences, limitations, or relative rights not prohibited by law. |
D. Series G Participating Preferred Shares
Section 1. Designation and Number of Shares. The shares of such series shall be designated as “Series G Participating Preferred Shares” (the “Series G Preferred Shares”), and the number of shares constituting such series shall be 38,000. Such number of shares of the Series G Preferred Shares may be increased or decreased by resolution of the Board of Directors; provided that no decrease shall reduce the number of Series G Preferred Shares to a number less than the number of shares then outstanding plus the number of shares issuable upon exercise or conversion of outstanding rights, options or other securities issued by the Corporation.
Section 2. Dividends and Distributions.
(a) Subject to the prior and superior rights of the holders of any shares of any class or series of stock of the Corporation ranking prior and superior to the Series G Preferred Shares with respect to dividends, the holders of Series G Preferred Shares shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, regular quarterly dividends payable on such dates each year as designated by the Board of Directors (each such date being referred to herein as a “Quarterly Dividend Payment Date”), commencing on the first Quarterly Dividend Payment Date after the first issuance of any share or fraction of a Series G Preferred Share, in an amount per share (rounded to the nearest cent) equal to the Multiplier Number times the aggregate per share amount of all cash dividends or other distributions and the Multiplier Number times the aggregate per share amount of all non-cash dividends or other distributions (other than (i) a dividend payable in Common Shares or NonVoting Common Shares, or (ii) a subdivision of the outstanding Common Shares or Non-Voting Common Shares (by reclassification or otherwise)), declared on the Common Shares or NonVoting Common Shares since the immediately preceding Quarterly Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a Series G Preferred Share. As used herein, the “Multiplier Number” shall be 1,000; provided that if, at any time after June 29, 2015, there shall be any change in the Common Shares or Non-Voting Common Shares, whether by reason of stock dividends, stock splits, reverse stock splits, recapitalization, mergers, consolidations, combinations or exchanges of securities, split-ups, split-offs, spin-offs, liquidations or other similar changes in capitalization, or any distribution or issuance of shares of its capital stock in a merger, share exchange, reclassification, or change of the outstanding Common Shares or Non-Voting Common Shares, then in each such event the Board of Directors shall adjust the Multiplier Number to the extent appropriate such that following such adjustment each Series G Preferred Share shall be in the same economic position as prior to such event.
(b) The Corporation shall declare a dividend or distribution on the Series G Preferred Shares as provided in Section 2(a) immediately after it declares a dividend or distribution on the Common Shares or Non-Voting Common Shares (other than as described in Sections 2(a)(i) and 2(a)(ii)).
(c) Dividends, to the extent payable as provided in Sections 2,(a) and 2(b), shall begin to accrue and be cumulative on outstanding Series G Preferred Shares from the Quarterly Dividend Payment Date immediately preceding the date of issuance of such Series G Preferred Shares, unless the date of issuance of such shares is on or before the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue and be cumulative from the date of issue of such shares, or unless the date of issue is a date after the record date for the determination of holders of Series G Preferred Shares entitled to receive a quarterly dividend and on or before such Quarterly Dividend Payment Date, in which case dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on Series G Preferred Shares in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of Series G Preferred Shares entitled to receive payment of a dividend or distribution declared thereon, which record date shall not be more than 60 days prior to the date fixed for the payment thereof.
Section 3. Voting Rights. In addition to any other voting rights required by law, the holders of Series G Preferred Shares shall have the following voting rights:
(a) Each Series G Preferred Share shall entitle the holder thereof to a number of votes equal to the Multiplier Number on all matters submitted to a vote of shareholders of the Corporation.
(b) Except as otherwise provided herein or by law, the holders of Series G Preferred Shares and the holders of Common Shares shall vote together as a single class on all matters submitted to a vote of shareholders of the Corporation.
(c) The Articles of Incorporation of the Corporation shall not be amended in any manner (whether by merger or otherwise) so as to adversely affect the powers, preferences or special rights of the Series G Preferred Shares without the affirmative vote of the holders of a majority of the outstanding Series G Preferred Shares, voting separately as a class.
(d) Except as otherwise expressly provided herein, holders of Series G Preferred Shares shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Shares as set forth herein) for taking any corporate action.
Section 4. Certain Restrictions. (a) Whenever quarterly dividends or other dividends or distributions payable on the Series G Preferred Shares as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on outstanding Series G Preferred Shares shall have been paid in full, the Corporation shall not:
(i) declare or pay dividends on, or make any other distributions on, any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding-up) to the Series G Preferred Shares;
(ii) declare or pay dividends on, or make any other distributions on, any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series G Preferred Shares, except dividends paid ratably on the Series G Preferred Shares and all such other parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled;
(iii) redeem, purchase or otherwise acquire for value any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding-up) to the Series G Preferred Shares; provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such junior stock in exchange for shares of stock of the Corporation ranking junior (as to dividends and upon dissolution, liquidation or winding-up) to the Series G Preferred Shares; or
(iv) redeem, purchase or otherwise acquire for value any Series G Preferred Shares, or any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding-up) with the Series G Preferred Shares, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of Series G Preferred Shares and all such other parity stock upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes.
(b) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for value any shares of stock of the Corporation unless the Corporation could, under Section 4(a), purchase or otherwise acquire such shares at such time and in such manner.
Section 5. Reacquired Shares. Any Series G Preferred Shares purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired promptly after the acquisition thereof. All such shares shall upon their retirement become authorized but unissued shares of Preferred Stock without designation as to series and may be reissued as part of a new series of Preferred Stock to be created by the Board of Directors as permitted by the certificate of incorporation of the Corporation or as otherwise permitted under Kentucky law.
Section 6. Liquidation, Dissolution and Winding-up. Upon any liquidation, dissolution or winding-up of the Corporation, no distribution shall be made (a) to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding-up) to the Series G Preferred Shares unless, prior thereto, the holders of Series G Preferred Shares shall have received $1.00 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment; provided that the holders of Series G Preferred Shares shall be entitled to receive an aggregate amount per share equal to (x) the Multiplier Number times (y) the aggregate amount to be distributed per share to holders of Common Shares or Non-Voting Common Shares, or (b) to the holders of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding-up) with the Series G Preferred Shares, except distributions made ratably on the Series G Preferred Shares and all such other parity stock in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding-up.
Section 7. Consolidation, Merger, etc. If the Corporation shall enter into any consolidation, merger, combination or other transaction in which the Common Shares or NonVoting Common Shares are exchanged for or changed into other stock or securities, cash or any other property, then in any such case the Series G Preferred Shares shall at the same time be similarly exchanged for or changed into an amount per share equal to (x) the Multiplier Number times (y) the aggregate amount of stock, securities, cash or any other property, as the case may be, into which or for which each Common Share or Non-Voting Common Shares is changed or exchanged.
Section 8. No Redemption. The Series G Preferred Shares shall not be redeemable.
Section 9. Rank. The Series G Preferred Shares shall rank junior to all other series of the Preferred Shares as to the payment of dividends and the distribution of assets upon liquidation, dissolution and winding-up, unless the terms of such series shall specifically provide otherwise, and shall rank senior to the Common Shares and Non-Voting Common Shares as to such matters.
Section 10. Fractional Shares. Series G Preferred Shares may be issued in fractions of a share which shall entitle the holder, in proportion to such holder’s fractional shares, to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders of Series G Preferred Shares.”
ARTICLE V - BOARD OF DIRECTORS
The number of directors of the Corporation shall be such number, not less than two (2) nor more than fifteen (15), the exact number from time to time to be fixed by the Board of Directors. The number of directors may be fixed or changed from time to time, within the minimum and maximum by the shareholders or the Board of Directors.
ARTICLE VI - LIMITATION OF LIABILITY
No director of the Corporation shall be personally liable to the Corporation or its shareholders for monetary damages for breach of fiduciary duty as a director; provided, however, that the foregoing shall not eliminate or limit the liability of a director (a) for any breach of the director’s duty of loyalty to the Corporation or its shareholders; (b) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of the law; (c) under KRS 271B.8-330; or (d) for any transaction from which the director derived an improper personal benefit. Any repeal or modification of this Article VI by the shareholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation existing at the time of, or increase the liability of any director of the Corporation with respect to any acts or omission occurring prior to, such repeal or modification.
ARTICLE VII - INDEMNIFICATION
Each person who is or becomes an executive officer or director of the Corporation shall be indemnified and advanced expenses by the Corporation with respect to all threatened, pending or completed actions, suits or proceedings in which that person was, is or is threatened to be made a named defendant or respondent because he is or was a director or executive officer of the Corporation. This Article obligates the Corporation to indemnify and advance expenses to its executive officers or directors only in connection with proceedings arising from that person’s conduct in his official capacity with the Corporation and to the extent permitted by the KBCA, as amended from time to time, when the determination and authorization of such indemnification and advancement has been made in accordance with the KBCA. The indemnification and advancement of expenses provided by this Article shall not be deemed exclusive of any other rights to which directors and executive officers may be entitled under any agreement, vote of shareholders or disinterested directors, or otherwise.
ARTICLE VIII - RESTRICTIONS ON TRANSFERS OF SHARES
Section 1. Definitions. As used in this Article VIII, the following capitalized terms have the following meanings when used herein with initial capital letters (and any references to any portions of Treasury Regulation §§ l.382-2T, 1-383 and 1-384 shall include any successor provisions):
(a) "5.0 percent Transaction” means any Transfer described in clause (a) or of Section 2 of this Article VIII.
(b) "5.0 percent Stockholder” a Person who owns a Percentage Stock Ownership equal to or exceeding 5.0 of the Corporation’s then-outstanding Stock, whether directly or indirectly, and including Stock such Person would be deemed to constructively own or which otherwise would be aggregated with shares owned by such Person pursuant to Section 382 of the Code, or any successor provision or replacement provision and the applicable Treasury Regulations and Internal Revenue Service guidance thereunder.
(c) "Agent” has the meaning set forth in Section 5 of this Article VIII.
(d) "Board of Directors” or “Board” means the board of directors of the Corporation.
(e) "Code” means the United States Internal Revenue Code of 1986, as amended from time to time.
(f) "Corporation Security” or “Corporation Securities” means (i) any Stock, (ii) shares of Preferred Stock issued by the Corporation (other than Preferred Stock described in Section 1504(a) (4) of the Code), and (iii) warrants, rights, or options (including options within the meaning of Treasury Regulation § l.382-2T(h)(4)(v)) to purchase Securities of the Corporation.
(g) "Effective Date” means the date of filing of these Articles of Amendment to the Amended and Restated Articles of Incorporation of the Corporation with the Secretary of State of the Commonwealth of Kentucky.
(h) "Excess Securities” has the meaning given such term in Section 4 of this Article VIII.
(i) "Expiration Date” means the earlier of (i) the close of business on May 19, 2024, (ii) the repeal of Section 382 of the Code or any successor statute if the Board of Directors determines that this Article VIII is no longer necessary or desirable for the preservation of Tax Benefits, (iii) the close of business on the first day of a taxable year of the Corporation as to which the Board of Directors determines that no Tax Benefits may be carried forward or (iv) such date as the Board of Directors shall fix in accordance with Section 12 of this Article VIII.
(j) "Percentage Stock Ownership” means the percentage Stock Ownership interest of any Person or group (as the context may require) for purposes of Section 382 of the Code as determined in accordance with the Treasury Regulation § l .382-2T(g), (h), (j) and (k) or any successor provision and other pertinent Internal Revenue Service guidance.
(k) "Person” means any individual, firm, corporation or other legal entity, including persons treated as an entity pursuant to Treasury Regulation § l.382-3(a)(l)(i); and includes any successor (by merger or otherwise) of such entity.
(l) "Prohibited Distributions” means any and all dividends or other distributions paid by the Corporation with respect to any Excess Securities received by a Purported Transferee.
(m) "Prohibited Transfer” means any Transfer or purported Transfer of Corporation Securities to the extent that such Transfer is prohibited and/or void under this Article VIII.
(n) "Public Group” has the meaning set forth in Treasury Regulation § 1.382-2T(f)(13).
(o) "Purported Transferee” has the meaning set forth in Section 4 of this Article VIII.
(p) "Securities” and “Security” each has the meaning set forth in Section 7 of this Article VIII.
(q) "Stock” means any interest that would be treated as “stock” of the Corporation pursuant to Treasury Regulation § 1.382-2T(f)(18).
(r) "Stock Ownership” means any direct or indirect ownership of Stock, including any ownership by virtue of application of constructive ownership rules, with such direct, indirect, and constructive ownership determined under the provisions of Section 382 of the Code and the regulations thereunder.
(s) "Tax Benefits” means the net operating loss carryforwards, capital loss carryforwards, general business credit carryforwards, alternative minimum tax credit carryforwards and foreign tax credit carryforwards, as well as any loss or deduction attributable to a “net unrealized built-in loss” of the Corporation or any direct or indirect subsidiary thereof, within the meaning of Section 382 of the Code.
(t) "Transfer” means, any direct or indirect sale, transfer, assignment, conveyance, pledge or other disposition or other action taken by a Person, other than the Corporation, that alters the Percentage Stock Ownership of any Person or group. A Transfer also shall include the creation or grant of an option (including an option within the meaning of Treasury Regulation § l. 382-4(d)). For the avoidance of doubt, a Transfer shall not include the creation or grant of an option by the Corporation, nor shall a Transfer include the issuance of Stock by the Corporation.
(u) "Transferee” means any Person to whom Corporation Securities are Transferred.
(v) "Treasury Regulations” means the regulations, including temporary regulations or any successor regulations promulgated under the Code, as amended from time to time.
Section 2. Transfer and Ownership Restrictions. In order to preserve the Tax Benefits, from and after the Effective Date of this Article VIII, any attempted Transfer of Corporation Securities prior to the Expiration Date and any attempted Transfer of Corporation Securities pursuant to an agreement entered into prior to the Expiration Date shall be prohibited and void ab initio to the extent that, as a result of such Transfer (or any series of Transfers of which such Transfer is a part), either (a) any Person or Persons would become a 5.0-percent Stockholder or the Percentage Stock Ownership in the Corporation of any 5.0-percent Stockholder would be increased.
Section 3. Exceptions.
(a) Notwithstanding anything to the contrary herein, Transfers to a Public Group (including a new Public Group created under Treasury Regulation § l .382-2T(j)(3)(i)) shall be permitted.
(b) The restrictions set forth in Section 2 of this Article VIII shall not apply to an attempted Transfer that is a 5.0-percent Transaction if the transferor or the Transferee obtains the written approval of the Board of Directors or a duly authorized committee thereof. As a condition to granting its approval pursuant to this Section 3 of Article VIII, the Board of Directors, may, in its discretion, require (at the expense of the transferor and/or Transferee) an opinion of counsel selected by the Board of Directors that the Transfer shall not result in a limitation on the use of the Tax Benefits as a result of the application of Section 382 of the Code; provided that the Board may grant such approval notwithstanding the effect of such approval on the Tax Benefits if it determines that the approval is in the best interests of the Corporation. The Board of Directors may grant its approval in whole or in part with respect to such Transfer and may impose any conditions that it deems reasonable and appropriate in connection with such approval, including, without limitation, restrictions on the ability of any Transferee to Transfer Stock acquired through a Transfer. Approvals of the Board of Directors hereunder may be given prospectively or retroactively. The Board of Directors, to the fullest extent permitted by law, may exercise the authority granted by this Article VIII through duly authorized officers or agents of the Corporation. Nothing in this Section 3 of this Article VIII shall be construed to limit or restrict the Board of Directors in the exercise of its fiduciary duties under applicable law.
Section 4. Excess Securities.
(a) No employee or agent of the Corporation shall record any Prohibited Transfer, and the purported transferee of such a Prohibited Transfer (the “Purported Transferee”) shall not be recognized as a shareholder of the Corporation for any purpose whatsoever in respect of the Corporation Securities which are the subject of the Prohibited Transfer (the “Excess Securities”). Until the Excess Securities are acquired by another person in a Transfer that is not a Prohibited Transfer, the Purported Transferee shall not be entitled, with respect to such Excess Securities, to any rights of shareholders of the Corporation, including, without limitation, the right to vote such Excess Securities and to receive dividends or distributions, whether liquidating or otherwise, in respect thereof, if any, and the Excess Securities shall be deemed to remain with the transferor unless and until. the Excess Securities are transferred to the Agent pursuant to Section 5 of this Article VIII or until an approval is obtained under Section 3 of this Article VIII. After the Excess Securities have been acquired in a Transfer that is not a Prohibited Transfer, the Corporation Securities shall cease to be Excess Securities. For this purpose, any Transfer of Excess Securities not in accordance with the provisions of Section 4 or 15.5 of this Article VIII shall also be a Prohibited Transfer.
(b) The Corporation may require as a condition to the registration of the Transfer of any Corporation Securities or the payment of any distribution on any Corporation Securities that the proposed Transferee or payee furnish to the Corporation all information reasonably requested by the Corporation with respect to its direct or indirect ownership interests in such Corporation Securities. The Corporation may make such arrangements or issue such instructions to its stock transfer agent as may be determined by the Board of Directors to be necessary or advisable to implement this Article VIII, including, without limitation, authorizing such transfer agent to require an affidavit from a Purported Transferee regarding such Person’s actual and constructive ownership of Stock and other evidence that a Transfer will not be prohibited by this Article VIII as a condition to registering any transfer.
Section 5. Transfer to Agent. If the Board of Directors determines that a Transfer of Corporation Securities constitutes a Prohibited Transfer then, upon written demand by the Corporation sent within thirty days of the date on which the Board of Directors determines that the attempted Transfer would result in Excess Securities, the Purported Transferee shall transferor cause to be transferred any certificate or other evidence of ownership of the Excess Securities within the Purported Transferee’s possession or control, together with any Prohibited Distributions, to an agent designated by the Board of Directors (the “Agent”). The Agent shall thereupon sell to a buyer or buyers, which may include the Corporation, the Excess Securities transferred to it in one or more arm’s-length transactions (on the public securities market on which such Excess Securities are traded, if possible, or otherwise privately); provided, however, that any such sale must not constitute a Prohibited Transfer and provided, farther, that the Agent shall effect such sale or sales in an orderly fashion and shall not be required to effect any such sale within any specific time frame if, in the Agent’s discretion, such sale or sales would disrupt the market for the Corporation Securities or otherwise would adversely affect the value of the Corporation Securities. If the Purported Transferee has resold the Excess Securities before receiving the Corporation’s demand to surrender Excess Securities to the Agent, the Purported Transferee shall be deemed to have sold the Excess Securities for the Agent, and shall be required to transfer to the Agent any Prohibited Distributions and proceeds of such sale, except to the extent that the Corporation grants written permission to the Purported Transferee to retain a portion of such sales proceeds not exceeding the amount that the Purported Transferee would have received from the Agent pursuant to Section 6 of this Article VIII if the Agent rather than the Purported Transferee had resold the Excess Securities.
Section 6. Application of Proceeds and Prohibited Distributions. The Agent shall apply any proceeds of a sale by it of Excess Securities and, if the Purported Transferee has previously resold the Excess Securities, any amounts received by it from a Purported Transferee, together, in either case, with any Prohibited Distributions, as follows: (a) first, such amounts shall be paid to the Agent to the extent necessary to cover its costs and expenses incurred in connection with its duties hereunder; (b) second, any remaining amounts shall be paid to the Purported Transferee, up to the amount paid by the Purported Transferee for the Excess Securities (or the fair market value at the time of the Transfer, in the event the purported Transfer of the Excess Securities was, in whole or in part, a gift, inheritance or similar Transfer) which amount shall be determined at the discretion of the Board of Directors; and (c) third, any remaining amounts shall be paid to one or more organizations qualifying under section 50l(c)(3) of the Code (or any comparable successor provision) selected by the Board of Directors. The Purported Transferee of Excess Securities shall have no claim, cause of action or any other recourse whatsoever against any transferor of Excess Securities. The Purported Transferee’s sole right with respect to such shares shall be limited to the amount payable to the Purported Transferee pursuant to this Section 6 of Article VII. In no event shall the proceeds of any sale of Excess Securities pursuant to this Section 6 of Article VIII inure to the benefit of the Corporation or the Agent, except to the extent used to cover costs and expenses incurred by Agent in performing its duties hereunder.
Section 7. Modification of Remedies for Certain Indirect Transfers. If any Transfer which does not involve a transfer of securities of the Corporation within the meaning of Kentucky law (“Securities,” and individually, a “Security”) but which would cause a 5.0-percent Stockholder to violate a restriction on Transfers provided for in this Article VIII, the application of Sections 15.5 and 15.6 of this Article VIII shall be modified as described in this Section 7 of this Article VIII. In such case, no such 5.0-percent Stockholder shall be required to dispose of any interest that is not a Security, but such 5.0-percent Stockholder and/or any Person whose ownership of Securities is attributed to such 5.0-percent Stockholder shall be deemed to have disposed of and shall be required to dispose of sufficient Securities (which Securities shall be disposed of in the inverse order in which they were acquired) to cause such 5.0-percent Stockholder, following such disposition, not to be in violation of this Article VIII. Such disposition shall be deemed to occur simultaneously with the Transfer giving rise to the application of this provision, and such number of Securities that are deemed to be disposed of shall be considered Excess Securities and shall be disposed of through the Agent as provided in Sections 15.5 and 15.6 of this Article VIII, except that the maximum aggregate amount payable either to such 5.0-percent Stockholder, or to such other Person that was the direct holder of such Excess Securities, in connection with such sale shall be the fair market value of such Excess Securities at the time of the purported Transfer. All expenses incurred by the Agent in disposing of such Excess Stock shall be paid out of any amounts due such 5.0-percent Stockholder or such other Person. The purpose of this Section 7 of Article VIII is to extend the restrictions in Sections 15.2 and 15.5 of this Article VIII to situations in which there is a 5.0-percent Transaction without a direct Transfer of Securities, and this Section 7 of Article VIII, along with the other provisions of this Article VIII, shall be interpreted to produce the same results, with differences as the context requires, as a direct Transfer of Corporation Securities.
Section 8. Legal Proceedings; Prompt Enforcement. If the Purported Transferee fails to surrender the Excess Securities or the proceeds of a sale thereof to the Agent within thirty days from the date on which the Corporation makes a written demand pursuant to Section 5 of this Article VIII (whether or not made within the time specified in Section 5 of this Article VIII), then the Corporation may take such actions as it deems appropriate to enforce the provisions hereof, including the institution of legal proceedings to compel the surrender. Nothing in this Section 8 of Article VIII shall (a) be deemed inconsistent with any Transfer of the Excess Securities provided in this Article VIII being void ab initio, (b) preclude the Corporation in its discretion from immediately bringing legal proceedings without a prior demand or (c) cause any failure of the Corporation to act within the time periods set forth in Section 5 of this Article VIII to constitute a waiver or loss of any right of the Corporation under this Article VIII. The Board of Directors may authorize such additional actions as it deems advisable to give effect to the provisions of this Article VIII.
Section 9. Liability. To the fullest extent permitted by law, any shareholder subject to the provisions of this Article VIII who knowingly violates the provisions of this Article VIII and any Persons controlling, controlled by or under common control with such shareholder shall be jointly and severally liable to the Corporation for, and shall indemnify and hold the Corporation harmless against any and all damages suffered as a result of such violation, including but not limited to damages resulting from a reduction in, or elimination of, the Corporation’s ability to utilize its Tax Benefits, and attorneys’ and auditors’ fees incurred in connection with such violation.
Section 10. Obligation to Provide Information. As a condition to the registration of the Transfer of any Stock, any Person who is a beneficial, legal or record holder of Stock, and any proposed Transferee and any Person controlling, controlled by or under common control with the proposed Transferee, shall provide such information as the Corporation may request from time to time in order to determine compliance with this Article VIII or the status of the Tax Benefits of the Corporation.
Section 11. Legends. The Board of Directors may require that any certificates issued by the Corporation evidencing ownership of shares of Stock that are subject to the restrictions on transfer and ownership contained in this Article VIII bear the following legend:
“THE ARTICLES OF INCORPORATION OF THE CORPORATION CONTAIN RESTRICTIONS PROHIBITING THE TRANSFER (AS DEFINED IN THE ARTICLES OF INCORPORATION) OF STOCK OF THE CORPORATION (INCLUDING THE CREATION OR GRANT OF CERTAIN OPTIONS, RIGHTS AND WARRANTS) WITHOUT THE PRIOR AUTHORIZATION OF THE BOARD OF DIRECTORS OF THE CORPORATION IF SUCH TRANSFER AFFECTS THE PERCENTAGE OF STOCK OF THE CORPORATION (WITHIN THE MEANING OF SECTION 382 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE “CODE” ) AND THE TREASURY REGULATIONS PROMULGATED THEREUNDER), THAT IS TREATED AS OWNED BY A 5.0 PERCENT STOCKHOLDER (AS DEFINED IN THE ARTICLES OF INCORPORATION). IF THE TRANSFER RESTRICTIONS ARE VIOLATED, THEN THE TRANSFER WILL BE VOID AB INITIO, AND THE PURPORTED TRANSFEREE OF THE STOCK WILL BE REQUIRED TO TRANSFER EXCESS SECURITIES (AS DEFINED IN THE ARTICLES OF INCORPORATION) TO THE CORPORATION’S AGENT. IF A TRANSFER WHICH DOES NOT INVOLVE SECURITIES OF THE CORPORATION WITHIN THE MEANING OF KENTUCKY LAW (“SECURITIES”) BUT WHICH WOULD VIOLATE THE TRANSFER RESTRICTIONS, THE PURPORTED TRANSFEREE (OR THE RECORD OWNER) OF THE SECURITIES WILL BE REQUIRED TO TRANSFER SUFFICIENT SECURITIES PURSUANT TO THE TERMS PROVIDED FOR IN THE CORPORATION’S ARTICLES OF INCORPORATION TO CAUSE THE 5.0 PERCENT STOCKHOLDER TO NO LONGER BE IN VIOLATION OF THE TRANSFER RESTRICTIONS. THE CORPORATION WILL FURNISH WITHOUT CHARGE TO THE HOLDER OF RECORD OF THIS CERTIFICATE A COPY OF THE ARTICLES OF INCORPORATION, CONTAINING THE ABOVE-REFERENCED TRANSFER RESTRICTIONS, UPON WRITTEN REQUEST TO THE CORPORATION AT ITS PRINCIPAL PLACE OF BUSINESS.”
The Board of Directors may also require that any certificates issued by the Corporation evidencing ownership of shares of Stock that are subject to conditions imposed by the Board of Directors under Section 3 of this Article VIII also bear a conspicuous legend referencing the applicable restrictions.
Section 12. Authority of Board of Directors.
(a) The Board of Directors shall have the power to determine all matters necessary for assessing compliance with this Article VIII, including, without limitation, (i) the identification of 5.0-percent Stockholders, (ii) whether a Transfer is a 5.0-percent Transaction or a Prohibited Transfer, (iii) the Percentage Stock Ownership in the Corporation of any 5.0-percent Stockholder, (iv) whether an instrument constitutes a Corporation Security, (v) the amount (or fair market value) due to a Purported Transferee pursuant to Section 6 of this Article VIII, and (vi) any other matters which the Board of Directors determines to be relevant; and the good faith determination of the Board of Directors on such matters shall be conclusive and binding for all the purposes of this Article VIII. In addition, the Board of Directors may, to the extent permitted by law, from time to time establish, modify, amend or rescind Bylaws, regulations and procedures of the Corporation not inconsistent with the provisions of this Article VIII for purposes of determining whether any Transfer of Corporation Securities would jeopardize or endanger the Corporation’s ability to preserve and use the Tax Benefits and for the orderly application, administration and implementation of this Article VIII.
(b) Nothing contained in this Article VIII shall limit the authority of the Board of Directors to take such other action to the extent permitted by law as it deems necessary or advisable to protect the Corporation and its shareholders in preserving the Tax Benefits. Without limiting the generality of the foregoing, in the event of a change in law making one or more of the following actions necessary or desirable, the Board of Directors may, by adopting a written resolution, (i) accelerate or extend the Expiration Date, (ii) modify the ownership interest percentage in the Corporation or the Persons or groups covered by this Article VIII, (iii) modify the definitions of any terms set forth in this Article VIII or (iv) modify the terms of this Article VIII as appropriate, in each case, in order to prevent an ownership change for purposes of Section 382 of the Code as a result of any changes in applicable Treasury Regulations or otherwise; provided, however, that the Board of Directors shall not cause there to be such acceleration, extension or modification unless it determines, by adopting a written resolution, that such action is reasonably necessary or advisable to preserve the Tax Benefits or that the continuation of these restrictions is no longer reasonably necessary for the preservation of the Tax Benefits. Shareholders of the Corporation shall be notified of such determination through a filing with the Securities and Exchange Commission or such other method of notice as the Secretary of the Corporation shall deem appropriate.
(c) In the case of an ambiguity in the application of any of the provisions of this Article VIII, including any definition used herein, the Board of Directors shall have the power to determine the application of such provisions with respect to any situation based on its reasonable belief, understanding or knowledge of the circumstances. If this Article VIII requires an action by the Board of Directors but fails to provide specific guidance with respect to such action, the Board of Directors shall have the power to determine the action to be taken so long as such action is not contrary to the provisions of this Article VIII. All such actions, calculations, interpretations and determinations which are done or made by the Board of Directors in good faith shall be conclusive and binding on the Corporation, the Agent, and all other parties for all other purposes of this Article VIII. The Board of Directors may delegate all or any portion of its duties and powers under this Article VIII to a committee of the Board of Directors as it deems necessary or advisable and, to the fullest extent permitted by law, may exercise the authority granted by this Article VIII through duly authorized officers or agents of the Corporation. Nothing in this Article VIII shall be construed to limit or restrict the Board of Directors in the exercise of its fiduciary duties under applicable law.
Section 13. Reliance. To the fullest extent permitted by law, the Corporation and the members of the Board of Directors shall be fully protected in relying in good faith upon the information, opinions, reports or statements of the chief executive officer, the chief financial officer, the chief accounting officer or the corporate controller of the Corporation and the Corporation’s legal counsel, independent auditors, transfer agent, investment bankers or other employees and agents in making the determinations and findings contemplated by this Article VIII. The members of the Board of Directors shall not be responsible for any good faith errors made in connection therewith. For purposes of determining the existence and identity of, and the amount of any Corporation Securities owned by any shareholder, the Corporation is entitled to rely on the existence and absence of filings of Schedule 13D or 13G under the Securities and Exchange Act of 1934, as amended (or similar filings), as of any date, subject to its actual knowledge of the ownership of Corporation Securities.
Section 14. Benefits of This Article VIII. Nothing in this Article VIII shall be construed to give to any Person other than the Corporation or the Agent any legal or equitable right, remedy or claim under this Article VIII. This Article VIII shall be for the sole and exclusive benefit of the Corporation and the Agent.
Section 15. Severability. The purpose of this Article VIII is to facilitate the Corporation’s ability to maintain or preserve its Tax Benefits. If any provision of this Article VIII or the application of any such provision to any Person or under any circumstance shall be held invalid, illegal or unenforceable in any respect by a court of competent jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision of this Article VIII.
Section 16. Waiver. With regard to any power, remedy or right provided herein or otherwise available to the Corporation or the Agent under this Article VIII, (a) no waiver will be effective unless expressly contained in a writing signed by the waiving party; and (b) no alteration, modification or impairment will be implied by reason of any previous waiver, extension of time, delay or omission in exercise, or other indulgence.
* * * * *
Exhibit 31.1
Limestone Bancorp, Inc.
Rule 13a-14(a) Certification
of Chief Executive Officer
I, John T. Taylor, Chief Executive Officer of Limestone Bancorp, Inc. (the “Company”), certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of the Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
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Dated: July 30, 2021 |
/s/ John T. Taylor |
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John T. Taylor |
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Chief Executive Officer |
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Exhibit 31.2
Limestone Bancorp, Inc.
Rule 13a-14(a) Certification
of Chief Financial Officer
I, Phillip W. Barnhouse, Chief Financial Officer of Limestone Bancorp, Inc. (the “Company”), certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of the Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
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Dated: July 30, 2021 |
/s/ Phillip W. Barnhouse |
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Phillip W. Barnhouse |
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Chief Financial Officer |
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Exhibit 32.1
SECTION 906 CERTIFICATION
In connection with the Quarterly Report on Form 10-Q of Limestone Bancorp, Inc. (the “Company”) for the quarterly period ended June 30, 2021, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John T. Taylor, Chief Executive Officer of the Company, do hereby certify, in accordance with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
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(1) |
The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and |
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(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
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LIMESTONE BANCORP, INC. |
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Dated: July 30, 2021 |
By: |
/s/ John T. Taylor |
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John T. Taylor |
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Chief Executive Officer |
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Exhibit 32.2
SECTION 906 CERTIFICATION
In connection with the Quarterly Report on Form 10-Q of Limestone Bancorp, Inc. (the “Company”) for the quarterly period ended June 30, 2021, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Phillip W. Barnhouse, Chief Financial Officer of the Company, do hereby certify, in accordance with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
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(1) |
The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and |
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(2) |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
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LIMESTONE BANCORP, INC. |
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Dated: July 30, 2021 |
By: |
/s/ Phillip W. Barnhouse |
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Phillip W. Barnhouse |
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Chief Financial Officer |
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