LIMESTONE BANCORP, INC. - FORM 10-Q

Attached files

file	filename
EX-32.2 - EXHIBIT 32.2 - LIMESTONE BANCORP, INC.	ex_111507.htm
EX-32.1 - EXHIBIT 32.1 - LIMESTONE BANCORP, INC.	ex_111506.htm
EX-31.2 - EXHIBIT 31.2 - LIMESTONE BANCORP, INC.	ex_111505.htm
EX-31.1 - EXHIBIT 31.1 - LIMESTONE BANCORP, INC.	ex_111504.htm

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the Quarterly Period Ended March 31, 2018

☐	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

PORTER BANCORP, INC.

(Exact name of registrant as specified in its charter)

Kentucky		61-1142247
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

2500 Eastpoint Parkway, Louisville, Kentucky		40223
(Address of principal executive offices)		(Zip Code)

(502) 499-4800

(Registrant’s telephone number, including area code)

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ☒ No ☐

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

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☐ (Do not check if a smaller reporting company)	Smaller reporting company ☒
	Emerging growth company ☐

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

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

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

6,189,864 Common Shares and 1,220,000 Non-Voting Common Shares, no par value, were outstanding at April 30, 2018.

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INDEX

		Page
PART I –	FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS	3
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	35
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	49
ITEM 4.	CONTROLS AND PROCEDURES	49

PART II –	OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	50
ITEM 1A.	RISK FACTORS	50
ITEM 2.	UNREGISTERED SALES ON EQUITY SECURITIES AND USE OF PROCEEDS	50
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	50
ITEM 4.	MINE SAFETY DISCLOSURES	50
ITEM 5.	OTHER INFORMATION	50
ITEM 6.	EXHIBITS	50

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

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

Unaudited Consolidated Balance Sheets for March 31, 2018 and December 31, 2017

Unaudited Consolidated Statements of Income for the three months ended March 31, 2018 and 2017

Unaudited Consolidated Statements of Comprehensive Income for the three months ended March 31, 2018 and 2017

Unaudited Consolidated Statement of Changes in Stockholders’ Equity for the three months ended March 31, 2018

Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2018 and 2017

Notes to Unaudited Consolidated Financial Statements

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PORTER BANCORP, INC.

Unaudited Consolidated Balance Sheets

(dollars in thousands except share data)

	March 31, 2018			December 31, 2017
Assets
Cash and due from banks	$	7,610		$	8,137
Interest bearing deposits in banks		30,073			25,966
Cash and cash equivalents		37,683			34,103
Securities available for sale		160,812			152,720
Loans held for sale		—			70
Loans, net of allowance of $8,526 and $8,202, respectively		720,906			703,913
Premises and equipment, net		16,789			16,789
Other real estate owned		4,385			4,409
Federal Home Loan Bank stock		7,323			7,323
Bank owned life insurance		15,323			15,229
Deferred taxes, net		30,997			31,313
Accrued interest receivable and other assets		5,886			4,932
Total assets	$	1,000,104		$	970,801

Liabilities and Stockholders’ Equity
Deposits
Non-interest bearing	$	135,984		$	137,386
Interest bearing		710,927			709,638
Total deposits		846,911			847,024
Federal Home Loan Bank advances		26,752			11,797
Accrued interest payable and other liabilities		5,186			6,057
Subordinated capital note		2,025			2,250
Junior subordinated debentures		21,000			21,000
Senior debt		10,000			10,000
Total liabilities		911,874			898,128
Commitments and contingent liabilities (Note 13)		—			—
Stockholders’ equity
Preferred stock, no par
Series E - 6,198 issued and outstanding; Liquidation preference of $6.2 million		1,644			1,644
Series F - 4,304 issued and outstanding; Liquidation preference of $4.3 million		1,127			1,127
Total preferred stockholders’ equity		2,771			2,771
Common stock, no par, 39,000,000 shares authorized, 6,189,864 and 6,039,864 voting, and 1,220,000 and 220,000 non-voting issued and outstanding, respectively		140,639			125,729
Additional paid-in capital		24,561			24,497
Retained deficit		(73,061	)		(75,108	)
Accumulated other comprehensive loss		(6,680	)		(5,216	)
Total common stockholders’ equity		85,459			69,902
Total stockholders' equity		88,230			72,673
Total liabilities and stockholders’ equity	$	1,000,104		$	970,801

See accompanying notes to unaudited consolidated financial statements.

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PORTER BANCORP, INC.

Unaudited Consolidated Statements of Income

(dollars in thousands, except per share data)

	Three Months Ended March 31,
	2018		2017
Interest income
Loans, including fees	$	8,790	$	7,829
Taxable securities		943		1,114
Tax exempt securities		96		145
Federal funds sold and other		186		137
		10,015		9,225
Interest expense
Deposits		1,344		1,244
Federal Home Loan Bank advances		156		31
Senior debt		96		—
Junior subordinated debentures		211		175
Subordinated capital note		27		34
		1,834		1,484

Net interest income		8,181		7,741
Provision for loan losses		—		—
Net interest income after provision for loan losses		8,181		7,741

Non-interest income
Service charges on deposit accounts		568		501
Bank card interchange fees		401		337
Income from bank owned life insurance		99		102
Other		183		252
		1,251		1,192
Non-interest expense
Salaries and employee benefits		3,788		3,947
Occupancy and equipment		895		821
Professional fees		205		303
Marketing expense		300		254
FDIC insurance		182		342
Data processing expense		324		292
State franchise and deposit tax		282		225
Deposit account related expense		219		205
Other real estate owned expense		82		(16	)
Litigation and loan collection expense		53		3
Other		839		877
		7,169		7,253
Income before income taxes		2,263		1,680
Income tax expense		329		—
Net income		1,934		1,680
Less:
Earnings allocated to participating securities		34		44
Net income available to common shareholders	$	1,900	$	1,636
Basic and diluted income per common share	$	0.31	$	0.27

See accompanying notes to unaudited consolidated financial statements.

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PORTER BANCORP, INC.

Unaudited Consolidated Statements of Comprehensive Income

(in thousands)

	Three Months Ended March 31,
	2018			2017
Net income	$	1,934		$	1,680
Other comprehensive income (loss):
Unrealized gain (loss) on securities:
Unrealized gain arising during the period		(1,711	)		1,005
Amortization during period of net unrealized loss transferred to held to maturity		—			33
Net unrealized gain (loss) recognized in comprehensive income		(1,711	)		1,038
Tax effect		360			—
Other comprehensive income (loss)		(1,351	)		1,038

Comprehensive income	$	583		$	2,718

See accompanying notes to unaudited consolidated financial statements.

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PORTER BANCORP, INC.

Unaudited Consolidated Statements of Changes in Stockholders’ Equity

For Three Months Ended March 31, 2018

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

	Shares										Amount
	Preferred				Common						Preferred				Common
	Series E		Series F		Common		Non-Voting Common		Total Common		Series E		Series F		Common and Non-Voting Common		Additional Paid-In Capital		Retained Deficit			Accumulated Other Comprehensive Income (Loss)			Total

Balances, January 1, 2018		6,198		4,304		6,039,864		220,000		6,259,864	$	1,644	$	1,127	$	125,729	$	24,497	$	(75,108	)	$	(5,216	)	$	72,673
Issuance of stock		—		—		150,000		1,000,000		1,150,000		—		—		14,910		—		—			—			14,910
Stock-based compensation expense		—		—		—		—		—		—		—		—		64		—			—			64
Net income		—		—		—		—		—		—		—		—		—		1,934			—			1,934
Reclassification of disproportionate tax effect due to change in federal tax rate		—		—		—		—		—		—		—		—		—		113			(113	)		—
Net change in accumulated other comprehensive income, net of taxes		—		—		—		—		—		—		—		—		—		—			(1,351	)		(1,351	)
Balances, March 31, 2018		6,198		4,304		6,189,864		1,220,000		7,409,864	$	1,644	$	1,127	$	140,639	$	24,561	$	(73,061	)	$	(6,680	)	$	88,230

See accompanying notes to unaudited consolidated financial statements.

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PORTER BANCORP, INC.

Unaudited Consolidated Statements of Cash Flows

For Three Months Ended March 31, 2018 and 2017

(dollars in thousands)

	2018			2017
Cash flows from operating activities
Net income	$	1,934		$	1,680
Adjustments to reconcile net loss to net cash from operating activities
Depreciation and amortization		295			374
Net amortization on securities		249			312
Stock-based compensation expense		64			54
Deferred taxes, net		675			—
Proceeds from sales of loans held for sale		71			—
Net gain on sale of loans		(1	)		—
Net loss (gain) on sales of other real estate owned		4			(38	)
Net write-down of other real estate owned		60			—
Earnings on bank owned life insurance, net of premium expense		(94	)		(97	)
Net change in accrued interest receivable and other assets		(954	)		1,973
Net change in accrued interest payable and other liabilities		(871	)		(11,003	)
Net cash from operating activities		1,432			(6,745	)

Cash flows from investing activities
Purchases of available for sale securities		(13,667	)		(7,670	)
Maturities and prepayments of available for sale securities		3,615			5,251
Proceeds from sale of other real estate owned		70			388
Loan originations and payments, net		(17,191	)		(25,096	)
Purchases of premises and equipment, net		(206	)		(67	)
Net cash from investing activities		(27,379	)		(27,194	)

Cash flows from financing activities
Net change in deposits		(113	)		10,778
Repayment of Federal Home Loan Bank advances		(35,045	)		(15,145	)
Advances from Federal Home Loan Bank		50,000			10,000
Repayment of subordinated capital note		(225	)		(225	)
Issuance of common stock		14,910			—
Net cash from financing activities		29,527			5,408
Net change in cash and cash equivalents		3,580			(28,531	)
Beginning cash and cash equivalents		34,103			66,316
Ending cash and cash equivalents	$	37,683		$	37,785

Supplemental cash flow information:
Interest paid	$	1,558		$	1,316
Supplemental non-cash disclosure:
Transfer from loans to other real estate	$	110		$	100

See accompanying notes to unaudited consolidated financial statements.

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PORTER 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 Porter Bancorp, Inc. (Company) and its subsidiary, Limestone Bank (Bank). The Company owns a 100% interest in the Bank. All significant inter-company transactions and accounts have been eliminated in consolidation.

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, the financial statements do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2018 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, 2017 included in the Company’s Annual Report on Form 10-K.

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

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

New Accounting Standards – In May 2014, FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASC 606”). The ASU provides guidance on revenue recognition for entities that enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of nonfinancial assets. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The majority of the Company’s revenues come from interest income and other sources, including loans and securities that are outside the scope of ASC 606. The Company’s services that fall within the scope of ASC 606 are presented in non-interest income and are recognized as revenue as the Company satisfies its obligation to the customer. Services within the scope of ASC 606 include service charges on deposit accounts, bank card interchange income, and the sale of OREO. Additional disclosures are required to provide quantitative and qualitative information regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new guidance became effective for the Company on January 1, 2018. The impact of adopting this new guidance did not have a material impact on the consolidated financial statements, but did result in additional disclosures, which have been incorporated into “Note 14 – Revenue from Contracts with Customers.”

In January 2016, the FASB issued an update ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this update impact public business entities as follows: 1) Require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. 2) Simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value. 3) Eliminate the requirement to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. 4) Require entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. 5) Require an entity to present separately in other comprehensive income the portion of the total change in fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. 6) Require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements. 7) Clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The amendments in this update became effective for the Company on January 1, 2018. The impact of adopting the new guidance did not have a material impact on the consolidated financial statements, but did require additional disclosures. The additional disclosures have been incorporated into “Note 8 – Fair Value Measurements.”

In February 2016, the FASB issued an update ASU No. 2016-02, Leases (Topic 842). Under the new guidance, lessees will be required to recognize the following for all leases, with the exception of short-term leases, at the commencement date: a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting in largely unchanged. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2018. The impact of adopting the new guidance on the consolidated financial statements will not have a material impact.

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In June 2016, the FASB issued ASU No. 2016-13, –Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The final standard will change estimates for credit losses related to financial assets measured at amortized cost such as loans, held-to-maturity debt securities, and certain other contracts. For estimating credit losses, the FASB is replacing the incurred loss model with an expected loss model, which is referred to as the current expected credit loss (CECL) model. Under the CECL model, certain financial assets that are carried at amortized cost, such as loans held for investment and held-to-maturity debt securities, are required to be presented at the net amount expected to be collected. The measurement of expected credit losses is to be based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This measurement will take place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs significantly from the “incurred loss” model required under current GAAP, which delays recognition until it is probable a loss has been incurred. The change could materially affect how the allowance for loan losses is determined. The standard is effective for public companies for fiscal years beginning after December 15, 2019. Management is currently gathering loan level data, and assessing our data and system needs. 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. The magnitude of any adjustment or the overall impact of the new standard on financial condition or results of operation cannot yet be determined.

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

In February 2018, the FASB issued ASU No. 2018-02, –Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects From Other Comprehensive Income. The final standard allows institutions to elect to reclassify the stranded tax effects from AOCI to retained earnings, limited to amounts in AOCI that are affected by the tax reform law. This includes remeasuring deferred tax assets and liabilities related to items presented in AOCI at the newly enacted tax rate and on other income tax effects of items remaining in AOCI. The standard is effective for public companies for fiscal years beginning after December 15, 2018, and interim periods during 2018. Early adoption is permitted. The Company adopted the standard on January 1, 2018 and adoption did not have a material impact on the consolidated financial statements as it resulted in a $113,000 entry between AOCI and retained deficit.

Note 2 – Securities

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

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

Amortized

Cost

Gross

Unrealized

Gains

Gross

Unrealized

Losses

Fair Value

(in thousands)

March 31, 2018

Available for sale

U.S. Government and federal agency

23,286

—

(710

)

22,576

Agency mortgage-backed: residential

74,714

(2,074

)

72,738

Collateralized loan obligations

25,260

)

25,287

State and municipal

33,215

298

(243

)

33,270

Corporate bonds

6,852

—

6,941

Total available for sale

163,327

517

(3,032

)

160,812

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December 31, 2017

Amortized

Cost

Gross

Unrealized

Gains

Gross

Unrealized

Losses

Fair Value

Available for sale

U.S. Government and federal agency

22,105

(483

)

21,624

Agency mortgage-backed: residential

65,935

117

(1,087

)

64,965

Collateralized loan obligations

25,343

182

(20

)

25,505

State and municipal

33,303

508

(101

)

33,710

Corporate bonds

6,838

—

6,916

Total available for sale

153,524

887

(1,691

)

152,720

There were no sales of securities during the three months ended March 31, 2018 or 2017.

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

	March 31, 2018
	Amortized Cost		Fair Value
	(in thousands)
Maturity
Available for sale
Within one year	$	24,197	$	24,269
One to five years		34,932		34,954
Five to ten years		29,484		28,851
Agency mortgage-backed: residential		74,714		72,738
Total	$	163,327	$	160,812

Securities pledged at March 31, 2018 and December 31, 2017 had carrying values of approximately $57.8 million and $76.8 million, respectively, and were pledged to secure public deposits.

At March 31, 2018 and December 31, 2017, the Bank held securities issued by the Commonwealth of Kentucky or Kentucky municipalities having a book value of $15.4 million. At March 31, 2018 and December 31, 2017, 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 on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, underlying credit quality of the issuer, and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer’s financial condition, the Company may consider whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, the sector or industry trends and cycles affecting the issuer, and the results of reviews of the issuer’s financial condition. As of March 31, 2018, management does not believe any securities in the portfolio with unrealized losses should be classified as other than temporarily impaired.

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Securities with unrealized losses at March 31, 2018 and December 31, 2017, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position, are as follows:

	Less than 12 Months					12 Months or More					Total
Description of Securities	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
	(in thousands)
March 31, 2018
Available for sale
U.S. Government and federal agency	$	7,091	$	(226	)	$	13,480	$	(484	)	$	20,571	$	(710	)
Agency mortgage-backed: residential		38,539		(773	)		25,698		(1,301	)		64,237		(2,074	)
Collateralized loan obligations		12,160		(5	)		—		—			12,160		(5	)
State and municipal		13,415		(243	)		—		—			13,415		(243	)
Total temporarily impaired	$	71,205	$	(1,247	)	$	39,178	$	(1,785	)	$	110,383	$	(3,032	)


December 31, 2017
Available for sale
U.S. Government and federal agency	$	5,788	$	(97	)	$	14,121	$	(386	)	$	19,909	$	(483	)
Agency mortgage-backed: residential		21,104		(172	)		27,158		(915	)		48,262		(1,087	)
Collateralized loan obligations		6,038		(20	)		—		—			6,038		(20	)
State and municipal		7,492		(101	)		—		—			7,492		(101	)
Total temporarily impaired	$	40,422	$	(390	)	$	41,279	$	(1,301	)	$	81,701	$	(1,691	)

Note 3 – Loans

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

	March 31,			December 31,
	2018			2017
	(in thousands)
Commercial	$	119,602		$	113,771
Commercial Real Estate:
Construction		68,315			57,342
Farmland		85,662			88,320
Nonfarm nonresidential		154,384			156,724
Residential Real Estate:
Multi-family		55,218			56,588
1-4 Family		177,454			179,222
Consumer		28,210			18,439
Agriculture		40,044			41,154
Other		543			555
Subtotal		729,432			712,115
Less: Allowance for loan losses		(8,526	)		(8,202	)
Loans, net	$	720,906		$	703,913

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The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2018 and 2017:

	Commercial			Commercial Real Estate			Residential Real Estate			Consumer			Agriculture		Other			Total
	(in thousands)
March 31, 2018:
Beginning balance	$	892		$	4,032		$	2,900		$	64		$	313	$	1		$	8,202
Provision (negative provision)		(55	)		63			(116	)		13			95		–			–
Loans charged off		–			(1	)		(19	)		(27	)		–		–			(47	)
Recoveries		240			18			68			34			11		–			371
Ending balance	$	1,077		$	4,112		$	2,833		$	84		$	419	$	1		$	8,526


March 31, 2017:
Beginning balance	$	475		$	4,894		$	3,426		$	8		$	162	$	2		$	8,967
Provision (negative provision)		334			(866	)		394			4			138		(4	)		–
Loans charged off		–			(27	)		(294	)		(5	)		–		–			(326	)
Recoveries		5			241			43			25			7		4			325
Ending balance	$	814		$	4,242		$	3,569		$	32		$	307	$	2		$	8,966

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

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

–

269

–

282

Collectively evaluated for impairment

1,064

4,112

2,564

419

8,244

Total ending allowance balance

1,077

4,112

2,833

419

8,526

Loans:

Loans individually evaluated for impairment

119

1,963

3,692

–

5,775

Loans collectively evaluated for impairment

119,483

306,398

228,980

28,209

40,044

543

723,657

Total ending loans balance

119,602

308,361

232,672

28,210

40,044

543

729,432

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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, 2017:

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

–

206

–

219

Collectively evaluated for impairment

879

4,032

2,694

313

7,983

Total ending allowance balance

892

4,032

2,900

313

8,202

Loans:

Loans individually evaluated for impairment

587

2,635

3,950

–

7,173

Loans collectively evaluated for impairment

113,184

299,751

231,860

18,438

41,154

555

704,942

Total ending loans balance

113,771

302,386

235,810

18,439

41,154

555

712,115

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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 March 31, 2018 and December 31, 2017 and for the three months ended March 31, 2018 and 2017:

	As of March 31, 2018						Three Months Ended March 31, 2018
	Unpaid Principal Balance		Recorded Investment		Allowance For Loan Losses Allocated		Average Recorded Investment		Interest Income Recognized		Cash Basis Income Recognized
	(in thousands)
With No Related Allowance Recorded:
Commercial	$	35	$	19	$	—	$	253	$	—	$	—
Commercial real estate:
Construction		—		—		—		—		—		—
Farmland		3,298		1,684		—		1,872		198		198
Nonfarm nonresidential		750		279		—		427		5		—
Residential real estate:
Multi-family		—		—		—		—		—		—
1-4 Family		3,609		2,224		—		2,505		8		8
Consumer		9		1		—		1		—		—
Agriculture		—		—		—		—		—		—
Other		—		—		—		—		—		—
Subtotal		7,701		4,207		—		5,058		211		206

With An Allowance Recorded:
Commercial		100		100		13		100		2		—
Commercial real estate:
Construction		—		—		—		—		—		—
Farmland		—		—		—		—		—		—
Nonfarm nonresidential		—		—		—		—		—		—
Residential real estate:
Multi-family		—		—		—		—		—		—
1-4 Family		1,564		1,468		269		1,316		16		—
Consumer		—		—		—		—		—		—
Agriculture		—		—		—		—		—		—
Other		—		—		—		—		—		—
Subtotal		1,664		1,568		282		1,416		18		—
Total	$	9,365	$	5,775	$	282	$	6,474	$	229	$	206

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	As of December 31, 2017						Three Months Ended March 31, 2017
	Unpaid Principal Balance		Recorded Investment		Allowance For Loan Losses Allocated		Average Recorded Investment		Interest Income Recognized		Cash Basis Income Recognized
	(in thousands)
With No Related Allowance Recorded:
Commercial	$	703	$	487	$	—	$	494	$	—	$	—
Commercial real estate:
Construction		—		—		—		—		—		—
Farmland		3,687		2,059		—		3,264		206		206
Nonfarm nonresidential		1,047		576		—		1,192		32		30
Residential real estate:
Multi-family		—		—		—		2,050		—		—
1-4 Family		4,293		2,787		—		2,938		8		8
Consumer		9		1		—		4		—		—
Agriculture		—		—		—		—		—		—
Other		—		—		—		—		—		—
Subtotal		9,739		5,910		—		9,942		246		244
With An Allowance Recorded:
Commercial		100		100		13		100		2		—
Commercial real estate:
Construction		—		—		—		—		—		—
Farmland		—		—		—		588		—		—
Nonfarm nonresidential		—		—		—		301		4		—
Residential real estate:
Multi-family		—		—		—		—		—		—
1-4 Family		1,163		1,163		206		1,519		17		—
Consumer		—		—		—		—		—		—
Agriculture		—		—		—		60		—		—
Other		—		—		—		—		—		—
Subtotal		1,263		1,263		219		2,568		23		—
Total	$	11,002	$	7,173	$	219	$	12,510	$	269	$	244

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Troubled Debt Restructuring

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

The following table presents the types of TDR loan modifications by portfolio segment outstanding as of March 31, 2018 and December 31, 2017:

TDRs

Performing to

Modified Terms

TDRs Not

Performing to

Modified Terms

Total

TDRs

(in thousands)

March 31, 2018

Commercial Real Estate:

Farmland

Principal deferral

—

1,362

Nonfarm nonresidential

Rate reduction

192

—

192

Residential Real Estate:

1-4 Family

Rate reduction

730

—

730

Total TDRs

922

1,362

2,284

TDRs

Performing to

Modified Terms

TDRs Not

Performing to

Modified Terms

Total

TDRs

(in thousands)

December 31, 2017

Commercial

Rate reduction

—

Principal deferral

—

434

Commercial Real Estate:

Farmland

Principal deferral

—

1,362

Nonfarm nonresidential

Rate reduction

483

—

483

Residential Real Estate:

1-4 Family

Rate reduction

734

—

734

Total TDRs

1,217

1,829

3,046

At March 31, 2018 and December 31, 2017, 40% of the Company’s TDRs were performing according to their modified terms. The Company allocated $114,000 and $122,000 in reserves to borrowers whose loan terms have been modified in TDRs as of March 31, 2018, and December 31, 2017, respectively. The Company has committed to lend no additional amounts as of March 31, 2018 and December 31, 2017 to borrowers with outstanding loans classified as TDRs.

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

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No TDR loan modifications occurred during the three months ended March 31, 2018 or March 31, 2017. During the first three months of 2018 and 2017, no TDRs defaulted on their restructured loan within the 12 month period following the loan modification. A default is considered to have occurred once the TDR is past due 90 days or more or it has been placed on nonaccrual.

Non-performing Loans

Non-performing loans include impaired loans and smaller balance homogeneous loans, such as residential mortgage and consumer loans, that are collectively evaluated for impairment. The following table presents the recorded investment in nonaccrual and loans past due 90 days and still on accrual by class of loan as of March 31, 2018, and December 31, 2017:

	Nonaccrual				Loans Past Due 90 Days And Over Still Accruing
	March 31, 2018		December 31, 2017		March 31, 2018		December 31, 2017
	(in thousands)

Commercial	$	19	$	487	$	—	$	—
Commercial Real Estate:
Construction		—		—		—		—
Farmland		1,684		2,059		—		—
Nonfarm nonresidential		87		93		—		—
Residential Real Estate:
Multi-family		—		—		—		—
1-4 Family		2,579		2,817		—		—
Consumer		1		1		—		1
Agriculture		—		—		—		—
Other		—		—		—		—
Total	$	4,370	$	5,457	$	—	$	1

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The following table presents the aging of the recorded investment in past due loans as of March 31, 2018 and December 31, 2017:

	30 – 59 Days Past Due		60 – 89 Days Past Due		90 Days And Over Past Due		Nonaccrual		Total Past Due And Nonaccrual
	(in thousands)
March 31, 2018
Commercial	$	—	$	—	$	—	$	19	$	19
Commercial Real Estate:
Construction		—		—		—		—		—
Farmland		4,479		—		—		1,684		6,163
Nonfarm nonresidential		551		—		—		87		638
Residential Real Estate:
Multi-family		—		—		—		—		—
1-4 Family		897		167		—		2,579		3,643
Consumer		9		—		—		1		10
Agriculture		466		305		—		—		771
Other		—		—		—		—		—
Total	$	6,402	$	472	$	—	$	4,370	$	11,244

	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, 2017
Commercial	$	—	$	—	$	—	$	487	$	487
Commercial Real Estate:
Construction		—		—		—		—		—
Farmland		593		—		—		2,059		2,652
Nonfarm nonresidential		—		—		—		93		93
Residential Real Estate:
Multi-family		—		—		—		—		—
1-4 Family		850		126		—		2,817		3,793
Consumer		30		45		1		1		77
Agriculture		5		—		—		—		5
Other		—		—		—		—		—
Total	$	1,478	$	171	$	1	$	5,457	$	7,107

Credit Quality Indicators

Management categorizes all loans into risk categories at origination based upon original underwriting. Thereafter, management categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends. Additionally, loans are analyzed through internal and external loan review processes. Borrower relationships in excess of $500,000 are routinely analyzed through the credit administration processes which classify the loans as to credit risk. The following definitions are used for risk ratings:

Watch – Loans classified as watch are those loans which have or may experience a potentially adverse development which necessitates increased monitoring.

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

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

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

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be “Pass” rated loans. As of March 31, 2018, and December 31, 2017, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

Pass

Watch

Special

Mention

Substandard

Doubtful

Total

(in thousands)

March 31, 2018

Commercial

119,276

122

—

204

—

119,602

Commercial Real Estate:

Construction

68,315

—

68,315

Farmland

74,815

2,702

—

8,145

—

85,662

Nonfarm nonresidential

151,222

2,471

—

691

—

154,384

Residential Real Estate:

Multi-family

45,824

9,394

—

55,218

1-4 Family

168,941

3,016

162

5,335

—

177,454

Consumer

27,819

—

331

—

28,210

Agriculture

38,752

173

—

1,119

—

40,044

Other

543

—

543

Total

695,507

17,938

162

15,825

—

729,432

	Pass		Watch		Special Mention		Substandard		Doubtful		Total
	(in thousands)
December 31, 2017
Commercial	$	112,978	$	84	$	—	$	709	$	—	$	113,771
Commercial Real Estate:
Construction		57,342		—		—		—		—		57,342
Farmland		76,563		7,607		—		4,150		—		88,320
Nonfarm nonresidential		152,004		2,906		—		1,814		—		156,724
Residential Real Estate:
Multi-family		47,121		9,467		—		—		—		56,588
1-4 Family		169,774		3,535		164		5,749		—		179,222
Consumer		18,042		306		—		91		—		18,439
Agriculture		38,654		1,810		—		690		—		41,154
Other		555		—		—		—		—		555
Total	$	673,033	$	25,715	$	164	$	13,203	$	—	$	712,115

Note 4 – 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 cost to sell. Any write-down of the property at the time of acquisition is charged to the allowance for loan losses.

Fair value of OREO is determined on an individual property basis. When foreclosed properties are acquired, management obtains a new appraisal of the subject property or has staff from the Bank’s special assets group evaluate the latest in-file appraisal in connection with the transfer to OREO. Updated appraisals are typically obtained 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 appraised amount.

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

	March 31, 2018		December 31, 2017
	(in thousands)
Commercial Real Estate:
Construction, land development, and other land	$	4,275	$	4,335
Farmland		110		74
	$	4,385	$	4,409

Residential loans secured by 1-4 family residential properties in the process of foreclosure totaled $593,000 and $616,000 at March 31, 2018 and December 31, 2017, respectively.

Activity relating to OREO during the three months ended March 31, 2018 and 2017 is as follows:

	For the Three Months Ended March 31,
	2018			2017
	(in thousands)
OREO Activity
OREO as of January 1	$	4,409		$	6,821
Real estate acquired		110			100
Valuation adjustment write-downs		(60	)		—
Net gain (loss) on sales		(4	)		38
Proceeds from sales of properties		(70	)		(388	)
OREO as of March 31	$	4,385		$	6,571

Expenses related to OREO include:

	For the Three Months Ended March 31,
	2018		2017
	(in thousands)
Net loss (gain) on sales	$	4	$	(38	)
Valuation adjustment write-downs		60		—
Operating expense		18		22
Total	$	82	$	(16	)

Note 5 – Deposits

The following table details deposits by category:

	March 31, 2018		December 31, 2017
	(in thousands)
Non-interest bearing	$	135,984	$	137,386
Interest checking		92,048		99,383
Money market		150,974		151,388
Savings		35,984		34,632
Certificates of deposit		431,921		424,235
Total	$	846,911	$	847,024

Time deposits of $250,000 or more were $29.2 million and $31.7 million at March 31, 2018 and December 31, 2017, respectively.

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Scheduled maturities of total time deposits at March 31, 2018 for each of the next five years are as follows (in thousands):

Year 1	$	244,178
Year 2		149,506
Year 3		21,583
Year 4		4,989
Year 5		11,665
	$	431,921

Note 6 – Advances from the Federal Home Loan Bank

Advances from the Federal Home Loan Bank were as follows:

	March 31,		December 31,
	2018		2017
	(in thousands)
Advances with fixed rates from 0.00% to 5.24% and maturities ranging from 2018 through 2033, averaging 1.77% at March 31, 2018 and 1.48% at December 31, 2017	$	26,752	$	11,797

Each advance is payable per terms on agreement, with a prepayment penalty. No prepayment penalties were incurred during 2018 or 2017. The advances were collateralized by approximately $129.1 million and $130.9 million of first mortgage loans, under a blanket lien arrangement at March 31, 2018 and December 31, 2017, respectively. At March 31, 2018, our additional borrowing capacity with the FHLB was $65.6 million.

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

	Advances
Year 1	$	25,202
Year 2		505
Year 3		761
Year 4		108
Year 5		107
Thereafter		69
	$	26,752

Note 7 – Senior Debt

The Company has a $10.0 million senior secured loan agreement with a commercial bank. The loan matures on June 30, 2022. Interest is payable quarterly at a rate of three-month LIBOR plus 250 basis points through June 30, 2020, at which time quarterly principal payments of $250,000 plus interest will commence. The loan is secured by a first priority pledge of 100% of the issued and outstanding stock of the Bank. The Company may prepay any amount due under the promissory note at any time without premium or penalty. The lender retained a portion of the proceeds in escrow to service quarterly interest payments. At March 31, 2018, the escrow account had a balance of $710,000.

The loan agreement contains customary representations, warranties, covenants and events of default, including the following financial covenants: (i) the Company must maintain minimum cash on hand of not less than $750,000 through June 30, 2018, and not less than $2,500,000 thereafter, (ii) the Company must maintain a total risk based capital ratio at least equal to 9% of risk-weighted assets to June 30, 2018, and 10% thereafter, (iii) the Bank must maintain a total risk based capital ratio at least equal to 10% of risk-weighted assets to June 30, 2018, and 11% thereafter, and (iv) non-performing assets of the Bank may not exceed 2.5% of the Bank’s total assets. Both the Company and Bank were in compliance with the covenants as of March 31, 2018.

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Note 8 – 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 apply an internal discount to the value of appraisals used in the fair value evaluation of our impaired loans. The deductions to the appraisal take into account changing business factors and market conditions, as well as potential value impairment in cases where our appraisal date predates a likely change in market conditions. These deductions range from 10% for routine real estate collateral to 25% for real estate that is determined (1) to have a thin trading market or (2) to be specialized collateral. This is in addition to estimated discounts for cost to sell of six to ten percent.

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

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Impaired loans are evaluated quarterly for additional impairment. Management obtains updated appraisals on properties securing our loans when circumstances are warranted such as at the time of renewal or when market conditions have significantly changed. This determination is made on a property-by-property basis in light of circumstances in the broader economic climate and the assessment of deterioration of real estate values in the market in which the property is located. The first stage of management’s assessment involves management’s inspection of the property in question. Management also engages in conversations with local real estate professionals, investors, and market participants to determine the likely marketing time and value range for the property. The second stage involves an assessment of current trends in the regional market. After thorough consideration of these factors, management will either internally evaluate fair value or order a new appraisal.

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

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

Management routinely applies an internal discount to the value of appraisals used in the fair value evaluation of OREO. The deductions to the appraisal take into account changing business factors and market conditions, as well as potential value impairment in cases where our appraisal date predates a likely change in market conditions. These deductions range from 10% for routine real estate collateral to 25% for real estate that is determined (1) to have a thin trading market or (2) to be specialized collateral. This is in addition to estimated discounts for cost to sell of six to ten percent.

Financial assets measured at fair value on a recurring basis at March 31, 2018 and December 31, 2017 are summarized below:

Fair Value Measurements at March 31, 2018 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

22,576

—

22,576

—

Agency mortgage-backed: residential

72,738

—

72,738

—

Collateralized loan obligations

25,287

—

25,287

—

State and municipal

33,270

—

33,270

—

Corporate bonds

6,941

—

6,941

—

Total

160,812

—

160,812

—

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Fair Value Measurements at December 31, 2017 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

21,624

—

21,624

—

Agency mortgage-backed: residential

64,965

—

64,965

—

Collateralized loan obligations

25,505

—

25,505

—

State and municipal

33,710

—

33,710

—

Corporate bonds

6,916

—

6,916

—

Total

152,720

—

152,720

—

There were no transfers between Level 1 and Level 2 during 2018 or 2017.

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

			Fair Value Measurements at March 31, 2018 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	$	87	$	—	$	—	$	87
Commercial real estate:
Construction		—		—		—		—
Farmland		—		—		—		—
Nonfarm nonresidential		—		—		—		—
Residential real estate:
Multi-family		—		—		—		—
1-4 Family		1,199		—		—		1,199
Consumer		—		—		—		—
Agriculture		—		—		—		—
Other		—		—		—		—
Other real estate owned, net:
Commercial real estate:
Construction		4,275		—		—		4,275
Farmland		110		—		—		110
Nonfarm nonresidential		—		—		—		—
Residential real estate:
Multi-family		—		—		—		—
1-4 Family		—		—		—		—

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			Fair Value Measurements at December 31, 2017 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	$	87	$	—	$	—	$	87
Commercial real estate:
Construction		—		—		—		—
Farmland		—		—		—		—
Nonfarm nonresidential		—		—		—		—
Residential real estate:
Multi-family		—		—		—		—
1-4 Family		957		—		—		957
Consumer		—		—		—		—
Agriculture		—		—		—		—
Other		—		—		—		—
Other real estate owned, net:
Commercial real estate:
Construction		4,335		—		—		4,335
Farmland		74		—		—		74
Nonfarm nonresidential		—		—		—		—
Residential real estate:
Multi-family		—		—		—		—
1-4 Family		—		—		—		—

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $1.6 million at March 31, 2018 with a valuation allowance of $282,000, resulting in additional provision for loan losses of $63,000 for the three months ended March 31, 2018. Impaired loans had a carrying amount of $2.2 million with a valuation allowance of $303,000, resulting in no additional provision for loan losses for the three months ended March 31, 2017. At December 31, 2017, impaired loans had a carrying amount of $1.3 million, with a valuation allowance of $219,000.

OREO, which is measured at the lower of carrying or fair value less costs to sell, had a net carrying amount of $4.4 million as of March 31, 2018, compared with $6.6 million at March 31, 2017 and $4.4 million at December 31, 2017. Write-downs of $60,000 were recorded on OREO for the three months ended March 31, 2018, compared to no write-downs for the three months ended March 31, 2017.

The following table presents qualitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at March 31, 2018:

Fair Value

Valuation

Technique(s)

Unobservable Input(s)

Range (Weighted

Average)

(in thousands)

Impaired loans – Residential real estate

1,199

Sales comparison approach

Adjustment for differences between the comparable sales

26%

(9%)

Other real estate owned – Commercial real estate

4,385

Sales comparison approach

Adjustment for differences between the comparable sales

35%

(18%)

Income approach

Discount or capitalization rate

25%

(25%)

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The following table presents qualitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at December 31, 2017:

Fair Value

Valuation

Technique(s)

Unobservable Input(s)

Range (Weighted

Average)

(in thousands)

Impaired loans – Residential real estate

957

Sales comparison approach

Adjustment for differences between the comparable sales

26%

(9%)

Other real estate owned – Commercial real estate

4,409

Sales comparison approach

Adjustment for differences between the comparable sales

35%

(18%)

Income approach

Discount or capitalization rate

25%

(25%)

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

Fair Value Measurements at March 31, 2018 Using

Carrying

Amount

Level 1

Level 2

Level 3

Total

(in thousands)

Financial assets

Cash and cash equivalents

37,683

34,120

3,563

—

37,683

Securities available for sale

160,812

—

160,812

—

160,812

Federal Home Loan Bank stock

7,323

N/A

Loans, net

720,906

—

709,889

Accrued interest receivable

3,080

—

934

2,146

3,080

Financial liabilities

Deposits

846,911

135,984

710,274

—

846,258

Federal Home Loan Bank advances

26,752

—

26,713

—

26,713

Subordinated capital notes

2,025

—

1,978

Junior subordinated debentures

21,000

—

15,109

Senior debt

10,000

—

10,019

Accrued interest payable

1,750

—

421

1,329

1,750

Fair Value Measurements at December 31, 2017 Using

Carrying

Amount

Level 1

Level 2

Level 3

Total

(in thousands)

Financial assets

Cash and cash equivalents

34,103

29,898

4,205

—

34,103

Securities available for sale

152,720

—

152,720

—

152,720

Federal Home Loan Bank stock

7,323

N/A

Loans held for sale

—

Loans, net

703,913

—

703,263

Accrued interest receivable

3,136

—

925

2,211

3,136

Financial liabilities

Deposits

847,024

137,386

693,320

—

830,706

Federal Home Loan Bank advances

11,797

—

11,799

—

11,799

Subordinated capital notes

2,250

—

2,246

Junior subordinated debentures

21,000

—

19,090

Senior Debt

10,000

—

10,000

Accrued interest payable

1,475

—

357

1,118

1,475

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The methods and assumptions used to estimate fair values are described as follows:

(a) Cash and Cash Equivalents

The carrying amounts of cash and short-term instruments approximate fair values and are classified as either Level 1 or Level 2. Noninterest bearing deposits are Level 1 whereas interest bearing due from bank accounts and fed funds sold are Level 2.

(b) FHLB Stock

It is not practical to determine the fair value of FHLB stock due to restrictions placed on its transferability.

(c) Loans, Net

At March 31, 2018, fair values of loans, excluding loans held for sale, are determined using an estimated exit price. Contractual cash flow estimates are projected using a loan's balance, interest rate, repricing characteristics, maturity and payment amounts. Loans are grouped into homogenous pools for valuation purposes based on type and credit risk metrics. Contractual cash flows are adjusted for potential prepayment estimates, as well as potential defaults over the expected life of each pool. A discount rate is determined based upon current financial conditions and the nature of the cash flow forecast. The resulting exit price for the portfolio is a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously.

At December 31, 2017, fair values of loans, excluding loans held for sale, was estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values were based on carrying values resulting in a Level 3 classification. Fair values for other loans were estimated using discounted cash flow analyses, using interest rates being offered for loans with similiar terms to borrowers of similiar credit quality resulting in a Level 3 classification. Impaired loans are valued at the lower of cost fair value as described previously. The mthods utilized to estimate the fair value of loans did not necessarily represent an exit price.

(d) Loans Held for Sale

The fair value of loans held for sale is estimated based upon binding contracts and quotes from third party investors resulting in a Level 2 classification.

(e) Deposits

The fair values for non-interest bearing non-maturity deposits are, by definition, equal to the amount payable on demand at the reporting date resulting in a Level 1 classification. The carrying amount of interest bearing non-maturity deposits approximate their fair values at the reporting date resulting in a Level 2 classification. Fair Values for interest bearing time deposits are estimated using discounted cash flow calculations that utilize the contract rate of the deposits discounted at current market rates for like maturities resulting in a Level 2 classification.

(f) Other Borrowings

At March 31, 2018, fair values of FHLB advances are determined using an estimated exit price. Contractual cash flow estimates are projected for each advance utilizing contractual interest rates, repricing characteristics, maturities and payment amounts. Contractual cash flows are adjusted for potential prepayment estimates. A discount rate is determined based upon current market conditions and the nature of the cash flow forecast. The resulting exit price for FHLB advances is a Level 2 classification. At December 31, 2017, the fair value of FHLB advances were estimated using discounted cash flow analyses based on the current borrowing rates resulting in a Level 2 classification.

At March 31, 2018, fair values of subordinated capital notes, junior subordinated debentures, and senior debt are determined using an estimated exit price. Contractual cash flow estimates are projected for each instrument utilizing contractual interest rates, repricing characteristics, maturities and payment amounts. Contractual cash flows are adjusted for potential prepayment estimates and credit risk. A discount rate is determined based upon current market conditions and the nature of the cash flow forecast. The resulting exit price is a Level 3 classification. At December 31, 2017, the fair values of subordinated capital notes, junior subordinated debentures, and senior debt were estimated using discounted cash flow analyses based on the current borrowing rates for similiar types of borrowing arrangements resulting in a Level 3 classification.

(g) Accrued Interest Receivable/Payable

The carrying amounts of accrued interest approximate fair value resulting in a Level 2 or Level 3 classification based on the level of the asset or liability with which the accrual is associated.

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Note 9 – Income Taxes

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

	March 31,		December 31,
	2018		2017
	(in thousands)
Deferred tax assets:
Net operating loss carry-forward	$	25,362	$	25,645
Allowance for loan losses		1,790		1,723
OREO write-down		2,445		2,432
Alternative minimum tax credit carry-forward		346		692
Net assets from acquisitions		342		358
Net unrealized loss on securities		529		169
New market tax credit carry-forward		208		208
Nonaccrual loan interest		274		271
Accrued expenses		105		172
Deferred compensation		275		277
Other		190		241
		31,866		32,188

Deferred tax liabilities:
FHLB stock dividends		557		557
Fixed assets		63		68
Deferred loan costs		151		152
Other		98		98
		869		875
Net deferred tax asset	$	30,997	$	31,313

At March 31, 2018, the Company had net operating loss carryforwards (“NOLs”) of $120.8 million, which will begin to expire in 2031. As of March 31, 2018, a total of $346,000 in alternative minimum tax credit carry-forward was reclassified to other assets as it is currently refundable for the 2018 tax year.

The Company does not have any beginning and ending unrecognized tax benefits. The Company does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next twelve months. There were no interest and penalties recorded in the income statement or accrued for the three months ended March 31, 2018 or March 31, 2017 related to unrecognized tax benefits.

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

In 2015, the Company took two measures to preserve the value of its NOLs. First, the Company adopted a tax benefits preservation plan designed to reduce the likelihood of an “ownership change” occurring as a result of purchases and sales of the Company's common shares. Upon adoption of this plan, the Company declared a dividend of one preferred stock purchase right for each common share outstanding as of the close of business on July 10, 2015. Any shareholder or group that acquires beneficial ownership of 5% or more of the Company (an “acquiring person”) could be subject to significant dilution in its holdings if the Company's Board of Directors does not approve such acquisition. Existing shareholders holding 5% or more of the Company will not be considered acquiring persons unless they acquire additional shares, subject to certain exceptions described in the plan. In addition, the Board of Directors has the discretion to exempt certain transactions and certain persons whose acquisition of securities is determined by the Board not to jeopardize the Company's deferred tax assets. The rights will expire upon the earlier of (i) June 29, 2018, (ii) the beginning of a taxable year with respect to which the Board of Directors determines that no tax benefits may be carried forward, (iii) the repeal or amendment of Section 382 or any successor statute, if the Board of Directors determines that the plan is no longer needed to preserve the tax benefits, and (iv) certain other events as described in the plan.

On September 23, 2015, the Company’s shareholders approved an amendment to its articles of incorporation to further help protect the long-term value of the Company’s NOLs. The amendment provides a means to block transfers of our common shares that could result in an ownership change under Section 382. The transfer restrictions will expire on the earlier of (i) September 23, 2018, (ii) the beginning of a taxable year with respect to which the Board of Directors determines that no tax benefit may be carried forward, (iii) the repeal of Section 382 or any successor statute if our Board determines that the transfer restrictions are no longer needed to preserve the tax benefits of our NOLs, or (iv) such date as the Board otherwise determines that the transfer restrictions are no longer necessary.

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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 2014.

Note 10 – Stock Plans and Stock Based Compensation

Shares available for issuance under the 2016 Omnibus Equity Compensation Plan (“2016 Plan”) total 25,000. Shares issued to employees under the plan vest annually on the anniversary date of the grant generally over three to four years.

The Company also maintains the Porter Bancorp, Inc. 2006 Non-Employee Directors Stock Ownership Incentive Plan (“2006 Director Plan”) pursuant to which 2,834 shares remain available for issuance as annual awards of restricted stock to the Company’s non-employee directors. Shares issued annually to non-employee directors have a fair market value of $25,000 and vest in December 31 in the year of grant.

The Company recorded $64,000 and $54,000 of stock-based compensation during the first three months of 2018 and 2017, respectively, to salaries and employee benefits. 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 $13,000 was recognized related to this expense during the three months ended March 31, 2018, while no deferred tax benefit was recognized for the three months ended March 31, 2017.

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

Three Months Ended

Twelve Months Ended

March 31, 2018

December 31, 2017

Weighted

Average

Grant

Shares

Price

Shares

Price

Outstanding, beginning

142,334

5.67

179,513

4.89

Granted

—

37,865

9.64

Vested

(60,623

)

5.05

(73,728

)

5.75

Forfeited

—

(1,316

)

9.35

Outstanding, ending

81,711

6.13

142,334

5.67

Unrecognized stock based compensation expense related to unvested shares for the remainder of 2018 and beyond is estimated as follows (in thousands):

April 2018 – December 2018	$	193
2019		99
2020		25

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Note 11 – Earnings per Share

The factors used in the basic and diluted earnings per share computations follow:

	Three Months Ended
	March 31,
	2018		2017
	(in thousands, except share and per share data)

Net income	$	1,934	$	1,680
Less:
Earnings allocated to unvested shares		34		44
Net income available to common shareholders, basic and diluted	$	1,900	$	1,636

Basic
Weighted average common shares including unvested common shares outstanding		6,285,420		6,227,265
Less:
Weighted average unvested common shares		112,023		164,239
Weighted average common shares outstanding		6,173,397		6,063,026
Basic income per common share	$	0.31	$	0.27

Diluted
Add: Dilutive effects of assumed exercises of common stock warrants		—		—
Weighted average common shares and potential common shares		6,173,397		6,063,026
Diluted income per common share	$	0.31	$	0.27

The Company had no outstanding stock options at March 31, 2018 or 2017. A warrant for the purchase of 66,113 shares of the Company’s common stock at an exercise price of $79.41 was outstanding at March 31, 2018 and 2017, but was not included in the diluted EPS computation as inclusion would have been anti-dilutive. The warrant is exercisable at the holder’s option through November 21, 2018.

Note 12 – Regulatory Capital Matters

Banks and bank holding companies are subject to regulatory capital requirements 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 final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. Banks (Basel III rules) became effective for the Company and Bank on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule through January 1, 2019. The final rules allowed banks and their holding companies with less than $250 billion in assets a one-time opportunity to opt-out of a requirement to include unrealized gains and losses in accumulated other comprehensive income in their capital calculation. The Company and the Bank opted out of this requirement. The rules also establish a “capital conservation buffer” of 2.5% above the regulatory minimum risk-based capital ratios. Once the capital conservation buffer is fully phased in, 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%. The capital conservation buffer for 2018 is 1.875% and 1.25% for 2017. 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.

The Company completed a private placement of common stock on March 30, 2018. In the transaction, the Company issued 150,000 common shares and 1.0 million non-voting common shares to Patriot Financial Partners III, L.P. at $13.00 per share resulting in net proceeds of $14.9 million of which $5.0 million was contributed as capital to the Bank. The balance of the proceeds will be used for general corporate purposes and to support the growth of the Bank.

The Company is no longer subject to a written agreement with the Federal Reserve Bank of St. Louis. The Company was notified the prior written agreement was terminated effective April 10, 2018.

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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 Porter Bancorp, Inc. and the Bank at the dates indicated (dollars in thousands):

Actual

Minimum Requirement

for Capital Adequacy

Purposes

Minimum Requirement

to be Well Capitalized

Under Prompt Corrective

Action Provisions

Amount

Ratio

Amount

Ratio

Amount

Ratio

As of March 31, 2018:

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

Consolidated

100,807

12.56

64,204

8.00

N/A

Bank

99,653

12.43

64,130

8.00

80,162

10.00

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

Consolidated

72,048

8.98

36,115

4.50

N/A

Bank

89,642

11.18

36,073

4.50

52,105

6.50

Tier 1 capital (to risk-weighted assets)

Consolidated

88,501

11.03

48,153

6.00

N/A

Bank

89,642

11.18

48,097

6.00

64,130

8.00

Tier 1 capital (to average assets)

Consolidated

88,501

9.18

38,560

4.00

N/A

Bank

89,642

9.31

38,506

4.00

48,132

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, 2017:

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

Consolidated

83,072

10.55

63,014

8.00

N/A

Bank

91,305

11.61

62,938

8.00

78,672

10.00

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

Consolidated

54,535

6.92

35,445

4.50

N/A

Bank

81,393

10.35

35,403

4.50

51,137

6.50

Tier 1 capital (to risk-weighted assets)

Consolidated

66,487

8.44

47,260

6.00

N/A

Bank

81,393

10.35

47,203

6.00

62,938

8.00

Tier 1 capital (to average assets)

Consolidated

66,487

7.11

37,392

4.00

N/A

Bank

81,393

8.70

37,421

4.00

46,777

5.00

N/A: Not applicable. Regulatory framework does not define well capitalized for holding companies.

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.

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Note 13 – 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:

March 31, 2018

December 31, 2017

Fixed

Rate

Variable

Rate

Fixed

Rate

Variable

Rate

(in thousands)

Commitments to make loans

19,569

24,842

27,349

31,412

Unused lines of credit

9,798

55,289

11,034

57,727

Standby letters of credit

527

372

2,216

373

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 $19.8 million at March 31, 2018 and December 31, 2017.

The Company is subject to claims and lawsuits that arise primarily in the ordinary course of business. Litigation is subject to inherent uncertainties and unfavorable rulings could occur. The Company records contingent liabilities resulting from claims against it when a loss is assessed to be probable and the amount of the loss is reasonably estimable. Accruals are not made in cases where liability is not probable or the amount cannot be reasonably estimated. Assessing probability of loss and estimating probable losses requires analysis of multiple factors, including in some cases judgments about the potential actions of third party claimants and courts. Recorded contingent liabilities are based on the best information available and actual losses in any future period are inherently uncertain. Based upon current knowledge and after consultation with counsel, the Company believes pending legal proceedings or claims should not have a material impact on its financial position or results of operations. However, in light of the uncertainties involved in such proceedings, the outcome of a particular matter may be material to the financial position or results of operations for a particular reporting period in the future.

On October 17, 2014, the United States Department of Justice (the “DOJ”) notified the Bank that it was the subject of an investigation into possible violations of federal laws, including, among other things, possible violations related to false bank entries, bank fraud and securities fraud. The investigation concerns allegations that Bank personnel engaged in practices intended to delay or avoid disclosure of the Bank’s asset quality at the time of and following the United States Treasury’s purchase of preferred shares from the Company in November 2008. The Bank has cooperated with all requests for information from DOJ. At this time, the DOJ has not indicated whether it intends to pursue any action in this matter.

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Note 14 – Revenue from Contracts with Customers

The Company adopted ASC 606 using the full retrospective method applied to all contracts not completed as of January 1, 2018. The adoption of ASC 606 for in-scope revenue streams did not result in a cumulative effect adjustment. Bank card interchange income and expenses were previously reported net in non-interest income. The income statement impact of adopting ASC 606 resulted in a reclassification adjustment of $124,000 related to the three months ended March 31, 2017 between bank card interchange income and deposit account related expense in order to report debit card interchange income gross and provide a comparable disclosure for 2018 and 2017 results. This reclassification adjustment had no impact on previously reported net income for the three months ended March 31, 2017.

All of the Company’s revenue from customers in the scope of ASC 606 is recognized within 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 the Shazam 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 assess 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. The Company did not finance any OREO sale during 2018 or 2017. Gains and losses on sales of OREO are netted with OREO expense and reported in non-interest expense.

Other Non-interest Income: Other non-interest income includes revenue from several sources that are within the scope of ASC 606, including title insurance commissions, income from secondary market loan sales, and other transaction-based revenue that is individually immaterial. Other non-interest income included approximately $130,000 and $182,000 of revenue for 2018 and 2017, respectively, within the scope of ASC 606. The remaining $53,000 and $70,000 for 2018 and 2017, respectively, are excluded from the scope of ASC 606.

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

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

Preliminary Note Concerning Forward-Looking Statements

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

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

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

●

Changes in fiscal, monetary, regulatory and tax policies;

●

Changes in political and economic conditions;

•

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

•

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

•

Competitive product and pricing pressures;

•

Equity and fixed income market fluctuations;

•

Client bankruptcies and loan defaults;

•

Inflation;

•

Recession;

•

Natural disasters impacting Company operations;

•

Future acquisitions;

•

Integrations of acquired businesses;

•

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

●

Changes in accounting standards;

●

Changes to the Company’s overall internal control environment;

●

Success in gaining regulatory approvals when required;

●

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

●

Other risks and uncertainties reported from time to time in the Company’s filings with the Securities and Exchange Commission (“SEC”), including Part 1 Item 1A “Risk Factors” of the Company’s December 31, 2017 Annual Report on Form 10-K for the year ended December 31, 2017.

Overview

The Company is a bank holding company headquartered in Louisville, Kentucky. The Company’s common stock is traded on Nasdaq’s Capital Market under the symbol PBIB. The Company operates Limestone Bank (the Bank), our wholly owned subsidiary and the fifteenth largest bank domiciled in the Commonwealth of Kentucky based on total assets. The Bank operates banking offices in twelve counties in Kentucky. The Bank’s markets include metropolitan Louisville in Jefferson County and the surrounding counties of Henry and Bullitt. The Bank serves south central Kentucky and southern Kentucky from banking offices in Butler, Green, Hart, Edmonson, Barren, Warren, Ohio, and Daviess Counties. The Bank also has an office in Lexington, the second largest city in Kentucky. The Bank is a community bank with a wide range of commercial and personal banking products. As of March 31, 2018, the Company had total assets of $1.0 billion, total loans of $729.4 million, total deposits of $846.9 million and stockholders’ equity of $88.2 million.

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The Company reported net income of $1.9 million for the three months ended March 31, 2018, compared with $1.7 million for the first quarter of 2017. After allocating earnings to participating securities, net income available to common shareholders was $1.9 million for the three months ended March 31, 2018, compared with $1.6 million for the three months ended March 31, 2017. Basic and diluted net income per common share were $0.31 for the three months ended March 31, 2018 compared with $0.27 for the three months ended March 31, 2017.

Highlights for the three months ended March 31, 2018 are as follows:

●

The Company completed a private placement of common stock on March 30, 2018. In the transaction, the Company issued 150,000 common shares and 1.0 million non-voting common shares to Patriot Financial Partners III, L.P. at $13.00 per share resulting in net proceeds of $14.9 million of which $5.0 million was contributed as capital to the Bank. The balance of the proceeds will be used for general corporate purposes and to support the growth of the Bank.

●

The Company is no longer subject to a written agreement with the Federal Reserve Bank of St. Louis. The Company was notified that the prior written agreement was terminated, effective April 10, 2018.

●

Loan growth outpaced paydowns during the period. Average loans receivable increased approximately $74.9 million or 11.5% to $724.2 million for the quarter ended March 31, 2018, compared with $649.3 million for the first quarter of 2017. This resulted in an increase in interest revenue volume of approximately $909,000 for the quarter ended March 31, 2018, compared with the first quarter of 2017.

●

Net interest margin increased eight basis points to 3.63% in the first three months of 2018 compared with 3.55% in the first three months of 2017. The cost of interest bearing liabilities increased from 0.78% in the first quarter of 2017 to 0.96% in the first quarter of 2018 as a result of increases in short-term interest rates during 2017 and 2018.

●

During the period, our improving trends in non-performing loans and loan risk categories continued. The Company recorded no provision for loan losses expense in the first quarter of 2018, compared to no provision for loan losses expense in the first quarter of 2017. Both were attributable to declining historical loss rates, improvements in asset quality, and management’s assessment of risk in the loan portfolio. Net loan recoveries were $324,000 for the first quarter of 2018, compared to net charge-offs of $1,000 for the first quarter of 2017.

●

Non-performing loans decreased $1.1 million to $4.4 million at March 31, 2018, compared with $5.5 million at December 31, 2017. The decrease in non-performing loans was primarily due to $995,000 in paydowns and $110,000 in loans transferred to OREO, which were partially offset by $19,000 in loans placed on nonaccrual during the quarter.

●

Loans past due 30-59 days increased from $1.5 million at December 31, 2017 to $6.4 million at March 31, 2018, and loans past due 60-89 days increased from $171,000 at December 31, 2017 to $472,000 at March 31, 2018. Total loans past due and nonaccrual loans increased to $11.2 million at March 31, 2018, from $7.1 million at December 31, 2017. The increase in loans past due 30-59 days was primarily the result of a $4.8 million loan relationship secured by farmland. A portion of the underlying collateral was liquidated by the borrower in April bringing payments current and reducing the principal balance of the loan relationship by approximately $3.5 million.

●

At March 31, 2018, foreclosed properties remained unchanged at $4.4 million compared to December 31, 2017, and declined from $6.6 million at March 31, 2017. During the first three months of 2018, the Company acquired $110,000 and sold $70,000 of OREO. Operating expenses, fair value write downs, and a net loss on sales totaled $82,000 in the first quarter of 2018 compared to a net gain on sales, net of expenses, of $16,000 in the first quarter of 2017.

●

The ratio of non-performing assets to total assets decreased to 0.88% at March 31, 2018, compared with 1.02% at December 31, 2017, and 1.56% at March 31, 2017.

●

Deposits were $846.9 million at March 31, 2018, compared with $847.0 million at December 31, 2017. Certificate of deposit balances increased $7.7 million during the first three months of 2018 to $431.9 million at March 31, 2018, from $424.2 million at December 31, 2017. Interest checking accounts decreased $7.3 million during the quarter ended March 31, 2018.

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Application of Critical Accounting Policies

Management continually reviews accounting policies and financial information disclosures. The Company’s more significant accounting policies that require the use of estimates and judgments in preparing the financial statements are summarized in “Application of Critical Accounting Policies” in Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operation of our Annual Report on Form 10-K for the calendar year ended December 31, 2017. Management has discussed the development, selection, and application of our critical accounting policies with our Audit Committee. During the first three months of 2018, there were no material changes in the critical accounting policies and assumptions.

Results of Operations

The following table summarizes components of income and expense and the change in those components for the three months ended March 31, 2018, compared with the same period of 2017:

	For the Three Months				Change from
	Ended March 31,				Prior Period
	2018		2017		Amount			Percent
	(dollars in thousands)

Gross interest income	$	10,015	$	9,225	$	790			8.6	%
Gross interest expense		1,834		1,484		350			23.6
Net interest income		8,181		7,741		440			5.7
Non-interest income		1,251		1,192		59			4.9
Non-interest expense		7,169		7,253		(84	)		(1.2	)
Net income before taxes		2,263		1,680		583			34.7
Income tax expense		329		—		329			100.0
Net income		1,934		1,680		254			15.1

Net income for the three months ended March 31, 2018 totaled $1.9 million, compared with $1.7 million for the comparable period of 2017. Net interest income increased $440,000 from the 2017 first quarter as a result of an increase in earning assets and net interest margin. Net interest margin increased eight basis points to 3.63% in the first three months of 2018 compared with 3.55% in the first three months of 2017. The increase in margin between periods was due in part to an increase in the yield on interest earning assets from 4.23% in the first quarter of 2017 to 4.45% in the first quarter of 2018. Average earning assets increased from $892.3 million for the first quarter of 2017 to $915.8 million for the first quarter of 2018. Non-interest income increased by $59,000 to $1.3 million from $1.2 million in the first quarter of 2017 primarily due to an increase in bank card interchange fees of $64,000 as well as an increase in service charges on deposit accounts of $67,000. These increases were partially offset by a decrease in other non-interest income of $69,000. Non-interest expense decreased $84,000 from $7.3 million in the first quarter of 2017 to $7.2 million in the first quarter of 2018.

Net Interest Income – Net interest income was $8.2 million for the three months ended March 31, 2018, an increase of $440,000, or 5.7%, compared with $7.7 million for the same period in 2017. Net interest spread and margin were 3.49% and 3.63%, respectively, for the first quarter of 2018, compared with 3.45% and 3.55%, respectively, for the first quarter of 2017. Net average non-accrual loans were $4.9 million and $8.7 million for the first quarters of 2018 and 2017, respectively.

Average loans receivable increased approximately $74.9 million for the first quarter of 2018 compared with the first quarter of 2017. This resulted in an increase in interest revenue volume of approximately $909,000 for the quarter ended March 31, 2018, compared with the first quarter of 2017. Interest foregone on non-accrual loans totaled $87,000 in the first quarter of 2018, compared with $139,000 in the first quarter of 2017.

Net interest margin increased eight basis points from our margin of 3.55% in the prior year first quarter to 3.63% for the first quarter of 2018. The yield on earning assets increased 22 basis points and cost of interest-bearing liabilities increased 18 basis points from the first quarter of 2017. Both the yield on earning assets and cost of interest-bearing liabilities were impacted by increases in short-term interest rates during 2017 and 2018.

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Average Balance Sheets

The following table presents the average balance sheets for the three month periods ended March 31, 2018 and 2017, along with the related calculations of tax-equivalent net interest income, net interest margin and net interest spread for the related periods.

	Three Months Ended March 31,
	2018								2017
	Average Balance			Interest Earned/Paid		Average Yield/Cost			Average Balance			Interest Earned/Paid		Average Yield/Cost
	(dollars in thousands)
ASSETS
Interest-earning assets:
Loan receivables (1)(2)	$	724,203		$	8,790		4.92	%	$	649,325		$	7,829		4.89	%
Securities
Taxable		143,842			943		2.66			176,113			1,114		2.57
Tax-exempt (3)		14,223			96		3.47			19,989			145		4.53
FHLB stock		7,323			106		5.87			7,323			83		4.60
Federal funds sold and other		26,171			80		1.24			39,542			54		0.55
Total interest-earning assets		915,762			10,015		4.45	%		892,292			9,225		4.23	%
Less: Allowance for loan losses		(8,333	)							(8,942	)
Non-interest earning assets		79,961								54,266
Total assets	$	987,390							$	937,616

LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
Certificates of deposit and other time deposits	$	422,245		$	1,062		1.02	%	$	459,178		$	1,019		0.90	%
NOW and money market deposits		245,911			268		0.44			237,410			210		0.36
Savings accounts		34,921			14		0.16			34,917			15		0.17
FHLB advances		40,823			156		1.55			11,808			31		1.06
Junior subordinated debentures		23,240			238		4.15			24,148			209		3.51
Senior debt		10,000			96		3.89			—			—		—
Total interest-bearing liabilities		777,140			1,834		0.96	%		767,461			1,484		0.78	%

Non-interest-bearing liabilities:
Non-interest-bearing deposits		131,618								122,051
Other liabilities		5,427								14,372
Total liabilities		914,185								903,884
Stockholders’ equity		73,205								33,732
Total liabilities and stockholders’ equity	$	987,390							$	937,616

Net interest income				$	8,181							$	7,741

Net interest spread							3.49	%							3.45	%

Net interest margin							3.63	%							3.55	%

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

(2)	Calculations include non-accruing loans averaging $4.9 million and $8.7 million, respectively, in average loan amounts outstanding.

(3)	Taxable equivalent yields are calculated assuming a federal income tax rate of 21% and 35% for 2018 and 2017, respectively.

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Rate/Volume Analysis

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

	Three Months Ended March 31, 2018 vs. 2017
	Increase (decrease) due to change in						Net
	Rate			Volume			Change
	(in thousands)
Interest-earning assets:
Loan receivables	$	52		$	909		$	961
Securities		29			(249	)		(220	)
FHLB stock		23			—			23
Federal funds sold and other		49			(23	)		26
Total increase (decrease) in interest income		153			637			790

Interest-bearing liabilities:
Certificates of deposit and other time deposits		129			(86	)		43
NOW and money market accounts		50			8			58
Savings accounts		(1	)		—			(1	)
FHLB advances		19			106			125
Junior subordinated debentures		37			(8	)		29
Senior debt		—			96			96
Total decrease in interest expense		234			116			350
Increase (decrease) in net interest income	$	(81	)	$	521		$	440

Non-Interest Income – The following table presents the major categories of non-interest income for the three months ended March 31, 2018 and 2017:

	For the Three Months
	Ended March 31,
	2018		2017
	(in thousands)

Service charges on deposit accounts	$	568	$	501
Bank card interchange fees		401		337
Income from bank owned life insurance		99		102
Other		183		252
Total non-interest income	$	1,251	$	1,192

Non-interest income for the first quarter of 2018 increased by $59,000, or 4.9%, compared with the first quarter of 2017. The increase in non-interest income was primarily driven by increase in bank card interchange fees of $64,000 as well as an increase in service charges on deposit accounts of $67,000. These increases were partially offset by a decrease in other non-interest income of $69,000.

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Non-interest Expense – The following table presents the major categories of non-interest expense for the three months ended March 31, 2018 and 2017:

	For the Three Months
	Ended March 31,
	2018		2017
	(in thousands)

Salary and employee benefits	$	3,788	$	3,947
Occupancy and equipment		895		821
Professional fees		205		303
Marketing expense		300		254
FDIC insurance		182		342
Data processing expense		324		292
State franchise and deposit tax		282		225
Deposit account related expenses		219		205
Other real estate owned expense		82		(16	)
Litigation and loan collection expense		53		3
Other		839		877
Total non-interest expense	$	7,169	$	7,253

Non-interest expense for the first quarter ended March 31, 2018 decreased $84,000, or 1.2%, compared with the first quarter of 2017 primarily due to lower salary and employee benefits expense and lower FDIC insurance expense partially offset by higher occupancy and equipment expenses and higher marketing expenses.

Income Tax Expense – Effective tax rates differ from the federal statutory rate of 21% for 2018 and 35% for 2017 applied to income before income taxes due to the following:

	For the Three Months
	Ended March 31,
	2018			2017
	(in thousands)

Federal statutory rate times financial statement income	$	475		$	588
Effect of:
Valuation allowance		—			(419	)
Tax-exempt income		(20	)		(49	)
Non-taxable life insurance income		(21	)		(36	)
Restricted stock vesting		(111	)		(92	)
Other, net		6			8
Total	$	329		$	—

The Company previously had a full valuation allowance against its net deferred tax asset and therefore, the effective tax rate was 0% for the three months ended March 31, 2017. During the fourth quarter of 2017, management concluded it was more-likely-than-not the asset would be utilized to reduce future taxes payable related to the future taxable income of the Company, and as such, reversed the valuation allowance and recorded an income tax benefit.

Analysis of Financial Condition

Total assets increased $29.3 million, or 3.0%, to $1.0 billion at March 31, 2018, from $970.8 million at December 31, 2017. This increase was primarily attributable to an increase in loans receivable of $17.3 million, an increase in securities available for sale of $8.1 million, and an increase in interest bearing deposits in banks of $4.1 million.

Loans Receivable – Loans receivable increased $17.3 million, or 2.4%, during the three months ended March 31, 2018 to $729.4 million as loan growth outpaced paydowns. Our commercial and commercial real estate portfolios increased by an aggregate of $11.8 million, or 2.8% during the first quarter of 2018 and comprised 58.7% of the loan portfolio at March 31, 2018.

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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 our portfolio and other than the categories noted, there is no concentration of loans in any industry exceeding 10% of total loans.

	As of March 31,					As of December 31,
	2018					2017
	Amount		Percent			Amount		Percent
			(dollars in thousands)

Commercial	$	119,602		16.40	%	$	113,771		15.98	%
Commercial Real Estate
Construction		68,315		9.37			57,342		8.05
Farmland		85,662		11.74			88,320		12.40
Nonfarm nonresidential		154,384		21.16			156,724		22.01
Residential Real Estate
Multi-family		55,218		7.57			56,588		7.94
1-4 Family		177,454		24.33			179,222		25.17
Consumer		28,210		3.87			18,439		2.59
Agriculture		40,044		5.49			41,154		5.78
Other		543		0.07			555		0.08
Total loans	$	729,432		100.00	%	$	712,115		100.00	%

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

	March 31, 2018					December 31, 2017
	Loans		% to Total			Loans		% to Total
	(dollars in thousands)

Pass	$	695,507		95.3	%	$	673,033		94.5	%
Watch		17,938		2.5			25,715		3.6
Special Mention		162		0.0			164		0.0
Substandard		15,825		2.2			13,203		1.9
Doubtful		—		—			—		—
Total	$	729,432		100.0	%	$	712,115		100.00	%

Loans receivable increased $17.3 million, or 2.4%, during the three months ended March 31, 2018. Since December 31, 2017, the pass category increased approximately $22.5 million, the watch category decreased approximately $7.8 million, the special mention category remained stable, and the substandard category increased approximately $2.6 million. The $2.6 million increase in loans classified as substandard was primarily driven by $5.1 million in loans moved to substandard during the quarter, offset by $2.4 million in payments, $110,000 in loans transferred to OREO, and $39,000 in charge-offs.

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

	March 31, 2018		December 31, 2017
	(in thousands)
Past Due Loans:
30-59 Days	$	6,402	$	1,478
60-89 Days		472		171
90 Days and Over		—		1
Total Loans Past Due 30-90+ Days		6,874		1,650

Nonaccrual Loans		4,370		5,457
Total Past Due and Nonaccrual Loans	$	11,244	$	7,107

During the three months ended March 31, 2018, nonaccrual loans decreased by $1.1 million to $4.4 million. This decrease was due primarily to $995,000 in paydowns and $110,000 in loans transferred to OREO. During the three months ended March 31, 2018, loans past due 30-59 days increased from $1.5 million at December 31, 2017 to $6.4 million at March 31, 2018. Loans past due 60-89 days increased from $171,000 at December 31, 2017 to $472,000 at March 31, 2018. This represents a $5.2 million increase from December 31, 2017 to March 31, 2018, in loans past due 30-89 days. The increase in loans past due 30-59 days was primarily the result of a $4.8 million loan relationship secured by farmland. A portion of the underlying collateral was liquidated by the borrower in April bringing payments current and reducing the principal balance of the loan relationship by approximately $3.5 million. This trend in delinquency levels is considered during the evaluation of qualitative trends in the portfolio when establishing the general component of our allowance for loan losses.

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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 March 31, 2018 and December 31, 2017.

	March 31, 2018			December 31, 2017
	(dollars in thousands)

Past due 90 days or more still on accrual	$	—		$	1
Loans on nonaccrual status		4,370			5,457
Total non-performing loans		4,370			5,458
Real estate acquired through foreclosure		4,385			4,409
Other repossessed assets		—			—
Total non-performing assets	$	8,755		$	9,867

Non-performing loans to total loans		0.60	%		0.77	%
Non-performing assets to total assets		0.88	%		1.02	%
Allowance for non-performing loans	$	172		$	108
Allowance for non-performing loans to non-performing loans		3.94	%		1.98	%

Nonperforming loans at March 31, 2018, were $4.4 million, or 0.60% of total loans, compared with $5.5 million, or 0.77% of total loans at December 31, 2017, and $8.1 million, or 1.22% of total loans at March 31, 2017.

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 they may return to performing status over time.

Loan modifications have taken the form of a reduction in interest rate and/or curtailment of scheduled principal payments for a short-term period, usually three to six months, but in some cases until maturity of the loan. In some circumstances management may restructure real estate secured loans in a bifurcated fashion whereby there is a fully amortizing “A” loan at a market interest rate and an interest-only “B” loan at a reduced interest rate. The majority of restructured loans are collateral secured loans. If a borrower fails to perform under the modified terms, the loan(s) are placed on nonaccrual status and collection actions are intiated.

Management considers any loan that is restructured for a borrower experiencing financial difficulties due to a borrower’s potential inability to pay in accordance with contractual terms of the loan to be a troubled debt restructuring. Specifically, management consider a concession involving a modification of the loan terms, such as (i) a reduction of the stated interest rate, (ii) a reduction or deferral of principal, or (iii) a reduction or deferral of accrued interest at a stated interest rate lower than the current market rate for new debt with similar risk all to be troubled debt restructurings. When a modification of terms is made for a competitive reason, management does not consider it to be a troubled debt restructuring. A primary example of a competitive modification would be an interest rate reduction for a performing customer’s loan to a market rate as the result of a market decline in rates.

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

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

At March 31, 2018, the Bank had three restructured loans totaling $2.3 million with borrowers who experienced deterioration in financial condition compared with six loans totaling $3.0 million at December 31, 2017. In general, these loans were granted interest rate reductions to provide cash flow relief to borrowers experiencing cash flow difficulties. At March 31, 2018, one loan totaling approximately $1.4 million had been granted principal payment deferral until maturity. There were no concessions made to forgive principal relative to these loans, although we have recorded partial charge-offs for certain restructured loans. In general, these loans are secured by first liens on 1-4 residential or commercial real estate properties, or farmland. At March 31, 2018, $922,000 of TDRs were performing according to their modified terms.

There were no modifications granted during the first three months of 2018 or during all of 2017 that resulted in loans being identified as TDRs. During the three months ended March 31, 2018, TDRs were reduced as a result of $762,000 in payments. See “Note 3 - Loans,” of the notes to the financial statements for additional disclosure related to troubled debt restructuring.

The following table sets forth information with respect to TDRs, non-performing loans, real estate acquired through foreclosure, and other repossessed assets.

	March 31, 2018			December 31, 2017
	(dollars in thousands)

Total non-performing loans	$	4,370		$	5,458
TDRs on accrual		922			1,217
Total non-performing loans and TDRs on accrual	$	5,292		$	6,675
Real estate acquired through foreclosure		4,385			4,409
Other repossessed assets		—			—
Total non-performing assets and TDRs on accrual	$	9,677		$	11,084

Total non-performing loans and TDRs on accrual to total loans		0.73	%		0.94	%
Total non-performing assets and TDRs on accrual to total assets		0.97	%		1.14	%

See “Note 3 - Loans,” of the notes to the financial statements for additional disclosure related to troubled debt restructuring.

Allowance for Loan Losses – The allowance for loan losses is based on management’s continuing review and evaluation of individual loans, loss experience, current economic conditions, risk characteristics of various categories of loans and such other factors that, in management’s judgment, require current recognition in estimating loan losses.

Management has established loan grading procedures that result in specific allowance allocations for any estimated inherent risk of loss. For loans not individually evaluated, a general allowance allocation is computed using factors developed over time based on actual loss experience. The specific and general allocations plus consideration of qualitative factors represent management’s estimate of probable losses contained in the loan portfolio at the evaluation date. Although the allowance for loan losses is comprised of specific and general allocations, the entire allowance is available to absorb any credit losses.

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An analysis of changes in the allowance for loan losses and selected ratios for the three month periods ended March 31, 2018 and 2017, and for the year ended December 31, 2017 follows:

	Three Months Ended March 31,						Year Ended December 31,
	2018			2017			2017
	(dollars in thousands)
Balances at beginning of period	$	8,202		$	8,967		$	8,967

Loans charged-off:
Real estate		20			321			750
Commercial		—			—			5
Consumer		27			5			51
Agriculture		—			—			95
Total charge-offs		47			326			901

Recoveries:
Real estate		86			284			714
Commercial		240			5			59
Consumer		34			25			115
Agriculture		11			7			33
Other		—			4			15
Total recoveries		371			325			936
Net charge-offs (recoveries)		(324	)		1			(35	)
Provision (negative provision) for loan losses		—			—			(800	)
Balance at end of period	$	8,526		$	8,966		$	8,202

Allowance for loan losses to period-end loans		1.17	%		1.35	%		1.15	%
Net charge-offs (recoveries) to average loans		(0.18	%)		0.00	%		(0.01	%)
Allowance for loan losses to non-performing loans		195.10	%		110.66	%		150.27	%

Allowance for loan losses for loans individually evaluated for impairment	$	282		$	332		$	219
Loans individually evaluated for impairment		5,775			9,891			7,173
Allowance for loan losses to loans individually evaluated for impairment		4.88	%		3.36	%		3.05	%

Allowance for loan losses for loans collectively evaluated for impairment	$	8,244		$	8,634		$	7,983
Loans collectively evaluated for impairment		723,657			654,292			704,942
Allowance for loan losses to loans collectively evaluated for impairment		1.14	%		1.32	%		1.13	%

The allowance for loan losses is a reserve established through charges to earnings in the form of a provision for loan losses. The allowance for loan losses is comprised of general reserves and specific reserves. The loan loss reserve, as a percentage of total loans at March 31, 2018, increased to 1.17% from 1.15% at December 31, 2017 and from 1.35% at March 31, 2017. The change in loan loss reserve as a percentage of total loans between periods is attributable to growth in the portfolio driven by new loans underwritten with lower loss expectations, improving historical loss experience, improvement in risk grade classification metrics, and improved charge-off levels. The allowance for loan losses to non-performing loans was 195.10% at March 31, 2018, compared with 150.27% at December 31, 2017, and 110.66% at March 31, 2017. Net recoveries in the first three months of 2018 totaled $324,000 compared to net loan charge-offs of $1,000 in the first three months of 2017.

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The following table sets forth the net charge-offs (recoveries) for the periods indicated:

	Three Months Ended March 31, 2018			Year Ended December 31, 2017
	(in thousands)
Commercial	$	(240	)	$	(54	)
Commercial Real Estate		(17	)		(361	)
Residential Real Estate		(49	)		397
Consumer		(7	)		(64	)
Agriculture		(11	)		62
Other		—			(15	)
Total net charge-offs (recoveries)	$	(324	)	$	(35	)

The majority of nonperforming loans are secured by real estate collateral, and the underlying collateral coverage for nonperforming loans supports the likelihood of collection of principal. Management has assessed these loans for collectability and considered, among other things, the borrower’s ability to repay, the value of the underlying collateral, and other market conditions to ensure the allowance for loan losses is adequate to absorb probable incurred losses. The allowance for non-performing loans to non-performing loans was 3.94% at March 31, 2018 compared with 1.98% at December 31, 2017, and 2.01% at March 31, 2017. The increase in this ratio from December 31, 2017 to March 31, 2018 was primarily attributable to the improving non-performing loan trends during the period.

The following table presents the unpaid principal balance, recorded investment and allocated allowance related to loans individually evaluated for impairment in the commercial real estate and residential real estate portfolios as of March 31, 2018 and December 31, 2017.

	March 31, 2018						December 31, 2017
	Commercial Real Estate			Residential Real Estate			Commercial Real Estate			Residential Real Estate
	(in thousands)
Unpaid principal balance	$	4,048		$	5,173		$	4,734		$	5,456
Prior charge-offs		(2,085	)		(1,481	)		(2,099	)		(1,506	)

Recorded investment		1,963			3,692			2,635			3,950
Allocated allowance		—			(269	)		—			(206	)

Recorded investment, less allocated allowance	$	1,963		$	3,423		$	2,635		$	3,744

Recorded investment, less allocated allowance/ Unpaid principal balance		48.49	%		66.17	%		55.66	%		68.62	%

Based on prior charge-offs, the current recorded investment in loans individually evaluated for impairment in the commercial real estate and residential real estate segments of the portfolio are significantly below the unpaid principal balance for those loans. The recorded investment net of the allocated allowance was 48.49% and 66.17% of the unpaid principal balance in the commercial real estate and residential real estate segments of the portfolio, respectively, at March 31, 2018.

Provision for Loan Losses – No provision for loan losses was recorded for the first quarter of 2018 or 2017 as a result of declining historical loss rates, improvements in asset quality, and management’s assessment of risk within the portfolio. The pass category increased approximately $22.5 million, the watch category decreased approximately $7.8 million, the special mention category remained stable, and the substandard category increased approximately $2.6 million. Net loan recoveries were $324,000 for the three months ended March 31, 2018, compared with $1,000 for the three months ended March 31, 2017. Management considers the size and volume of the portfolio as well as the credit quality of the loan portfolio based upon risk category classification when determining the loan loss provision for each period and the allowance for loan losses at period end.

Foreclosed Properties – Foreclosed properties at March 31, 2018 were $4.4 million compared with $6.6 million at March 31, 2017 and $4.4 million at December 31, 2017. See Note 4, “Other Real Estate Owned,” to the financial statements. During the first three months of 2018, the Bank acquired $110,000 of OREO properties, and sold properties totaling approximately $70,000. 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.

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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.

Net gain (loss) on sales, write-downs, and operating expenses for OREO totaled $82,000 for the three months ended March 31, 2018, compared to income of $16,000 after considering gains on sales and operating expenses. During the three months ended March 31, 2018, fair value write-downs of $60,000 were recorded to reflect declines in fair value driven by reductions in listing prices and new appraisals compared with no write-downs for the three months ended March 31, 2017.

Liabilities – Total liabilities at March 31, 2018 were $911.9 million compared with $898.1 million at December 31, 2017, an increase of $13.7 million, or 1.5%. This increase was primarily attributable to an increase in FHLB advances of $15.0 million and an increase in certificates of deposit of $7.7 million, offset by a decrease in interest checking deposits of $7.3 million.

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

	For the Three Months					For the Year
	Ended March 31,					Ended December 31,
	2018					2017
	Average		Average			Average		Average
	Balance		Rate			Balance		Rate
	(dollars in thousands)
Demand	$	131,618				$	129,088
Interest checking		94,049		0.13	%		101,980		0.13	%
Money market		151,862		0.64			145,281		0.55
Savings		34,921		0.16			35,486		0.17
Certificates of deposit		422,245		1.02			452,443		0.93
Total deposits	$	834,695		0.65	%	$	864,278		0.60	%

The following table sets forth the average daily balances and weighted average rates paid for certificates of deposit for the periods indicated:

	For the Three Months					For the Year
	Ended March 31,					Ended December 31,
	2018					2017
	Average		Average			Average		Average
	Balance		Rate			Balance		Rate
	(dollars in thousands)
Less than $250,000	$	391,843		1.01	%	$	419,816		0.92	%
$250,000 or more		30,402		1.19	%		32,627		1.01	%
Total	$	422,245		1.02	%	$	452,443		0.93	%

The following table shows at March 31, 2018 the amount of time deposits of $250,000 or more by time remaining until maturity (in thousands):

Maturity Period
(in thousands)
Three months or less	$	2,250
Three months through six months		1,569
Six months through twelve months		9,487
Over twelve months		15,931
Total	$	29,237

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Liquidity

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

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

The Bank also borrows from the FHLB to supplement funding requirements. At March 31, 2018, the Bank had an unused borrowing capacity with the FHLB of $65.6 million. Advances are collateralized by first mortgage residential loans and borrowing capacity is based on the underlying book value of eligible pledged loans.

The Bank also has available on a secured 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 it’s funding strategy. At March 31, 2018, the Bank had no brokered deposits.

The Company uses cash on hand to service senior debt 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. At March 31, 2018, cash on hand totaled $11.7 million, of which, $710,000 is held in escrow by the Company’s senior debt holder to service interest payments.

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Capital

Stockholders’ equity increased $15.6 million to $88.2 million at March 31, 2018, compared with $72.7 million at December 31, 2017 primarily due to the $14.9 million private placement of common stock completed during the first quarter of 2018, as well as current year net income of $1.9 million, offset by the other comprehensive loss for the quarter of $1.5 million.

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

	Regulatory Minimums			Well-Capitalized Minimums			March 31, 2018			December 31, 2017

Tier 1 Capital		6.0	%		8.0	%		11.18	%		10.35	%
Common equity Tier 1 capital		4.5			6.5			11.18			10.35
Total risk-based capital		8.0			10.0			12.43			11.61
Tier 1 leverage ratio		4.0			5.0			9.31			8.70

Failure to meet minimum capital requirements could result in discretionary actions by regulators that, if taken, could have a materially adverse effect on our financial condition.

Each of the federal bank regulatory agencies has established risk-based capital requirements for banking organizations. The Basel III regulatory capital reforms became effective for the Company and Bank on January 1, 2015, and include new minimum risk-based capital and leverage ratios. These rules refine the definition of what constitutes “capital” for purposes of calculating those ratios, including the definitions of Tier 1 capital and Tier 2 capital. The final rules allow banks and their holding companies with less than $250 billion in assets a one-time opportunity to opt-out of a requirement to include unrealized gains and losses in accumulated other comprehensive income in their capital calculation. The Company and the Bank opted out of this requirement. The rules also establish a “capital conservation buffer” of 2.5%, to be phased in over three years, above the regulatory minimum risk-based capital ratios. Once the capital conservation buffer is fully phased in, 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 capital to total risk-weighted assets (“total risk-based capital ratio”) of 10.5%. The capital conservation buffer for 2018 is 1.875% and 1.25% for 2017. 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.

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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 1.7% at March 31, 2018, compared with an increase of 0.9% at December 31, 2017. Given a 200 basis point increase in interest rates, base net interest income would increase by an estimated 3.2% at March 31, 2018, compared with an increase of 1.7% at December 31, 2017.

The following table indicates the estimated impact on net interest income under various interest rate scenarios for the twelve months following March 31, 2018, as calculated using the static shock model approach:

	Change in Future Net Interest Income
	Dollar Change			Percentage Change
	(dollars in thousands)
+ 200 basis points	$	1,020			3.23	%
+ 100 basis points		523			1.66
- 100 basis points		(216	)		(0.68	)
- 200 basis points		(1,412	)		(4.47	)

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.

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings

The Company and Bank are subject to claims and lawsuits that arise primarily in the ordinary course of business. Litigation is subject to inherent uncertainties and unfavorable outcomes could occur. See Note 13, “Off Balance Sheet Risks, Commitments, and Contingent Liabilities” to the consolidated financial statements for additional detail regarding involvement in legal proceedings.

Item 1A. Risk Factors

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, 2017. There have been no material changes from the risk factors previously discussed in those reports.

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

Not applicable.

Item 3. Default Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable

Item 6. Exhibits

(a) Exhibits

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

Exhibit Number	Description of Exhibit

4.1	Tax Benefits Preservation Plan, dated as of June 25, 2015, between Porter Bancorp, Inc. and American Stock Transfer Company, as Rights Agent. Exhibit 3.1 to Form 8-K filed June 29, 2015 is incorporated by reference.

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

10.1	Securities Purchase Agreement, dated March 30, 2018, between Porter Bancorp, Inc. and Patriot Financial Partners III, L.P., incorporated by reference to exhibit 10.1 of the Current Report on Form 8-K dated March 30, 2018.

10.2	Registration Rights Agreement, dated March 30, 2018, between Porter Bancorp, Inc. and Patriot Financial Partners III, L.P., incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K dated March 30, 2018.

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

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

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

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

101	The following financial statements from the Company’s Quarterly Report on Form 10Q for the quarter ended March 31, 2018, formatted in XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income (Loss), (iv) Consolidated Statement of Changes in Stockholders’ Equity, (v) Consolidated Statements of Cash Flows, (vi) Notes to Consolidated Financial Statements.

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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.

	PORTER BANCORP, INC.
	(Registrant)

May 3, 2018	By:	/s/ John T. Taylor
		John T. Taylor
		Chief Executive Officer

May 3, 2018	By:	/s/ Phillip W. Barnhouse
		Phillip W. Barnhouse
		Chief Financial Officer

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