LIMESTONE BANCORP, INC. - Quarter Report: 2021 March (Form 10-Q)

lmst20210331_10q.htm

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, 2021

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

For the transition period from to

Commission file number: 001-33033

LIMESTONE BANCORP, INC.

(Exact name of registrant as specified in its charter)

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

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

(502) 499-4800

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Exchange Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which

registered

Common shares

LMST

The Nasdaq Stock Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☒	Smaller reporting company ☒
	Emerging growth company ☐

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

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

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

6,594,499 Common Shares and 1,000,000 Non-Voting Common Shares were outstanding at April 29, 2021.

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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	31
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	44
ITEM 4.	CONTROLS AND PROCEDURES	44

PART II –	OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	45
ITEM 1A.	RISK FACTORS	45
ITEM 2.	UNREGISTERED SALES ON EQUITY SECURITIES AND USE OF PROCEEDS	45
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	45
ITEM 4.	MINE SAFETY DISCLOSURES	45
ITEM 5.	OTHER INFORMATION	45
ITEM 6.	EXHIBITS	46

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

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

Unaudited Consolidated Balance Sheets for March 31, 2021 and December 31, 2020

Unaudited Consolidated Statements of Income for the three months ended March 31, 2021 and 2020

Unaudited Consolidated Statements of Comprehensive Income for the three months ended March 31, 2021 and 2020

Unaudited Consolidated Statement of Changes in Stockholders’ Equity for the three months ended March 31, 2021 and 2020

Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2021 and 2020

Notes to Unaudited Consolidated Financial Statements

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LIMESTONE BANCORP, INC.

Unaudited Consolidated Balance Sheets

(dollars in thousands except share data)

	March 31, 2021			December 31, 2020
Assets
Cash and due from banks	$	9,800		$	10,830
Interest bearing deposits in banks		74,047			56,863
Cash and cash equivalents		83,847			67,693
Securities available for sale		177,690			203,862
Securities held to maturity (fair value of $40,618)		41,254			—
Loans, net of allowance of $12,755 and $12,443, respectively		966,110			949,638
Premises and equipment, net		20,405			18,533
Premises held for sale		1,035			1,060
Other real estate owned		1,765			1,765
Federal Home Loan Bank stock		5,810			5,887
Bank owned life insurance		23,601			23,441
Deferred taxes, net		24,992			25,714
Goodwill		6,252			6,252
Other intangible assets, net		2,181			2,244
Accrued interest receivable and other assets		6,769			6,213
Total assets	$	1,361,711		$	1,312,302

Liabilities and Stockholders’ Equity
Deposits
Non-interest bearing	$	268,882		$	243,022
Interest bearing		898,108			876,585
Total deposits		1,166,990			1,119,607
Federal Home Loan Bank advances		20,613			20,623
Accrued interest payable and other liabilities		8,588			10,048
Junior subordinated debentures		21,000			21,000
Subordinated capital notes		25,000			25,000
Total liabilities		1,242,191			1,196,278
Commitments and contingent liabilities (Note 15)		—			—
Stockholders’ equity
Common stock, no par, 39,000,000 shares authorized, 6,594,499 and 6,498,865 voting, and 1,000,000 and 1,000,000 non-voting issued and outstanding, respectively		140,639			140,639
Additional paid-in capital		25,114			25,013
Retained deficit		(43,456	)		(46,678	)
Accumulated other comprehensive loss		(2,777	)		(2,950	)
Total stockholders' equity		119,520			116,024
Total liabilities and stockholders’ equity	$	1,361,711		$	1,312,302

See accompanying notes to unaudited consolidated financial statements.

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LIMESTONE BANCORP, INC.

Unaudited Consolidated Statements of Income

(dollars in thousands, except per share data)

	Three Months Ended March 31,
	2021		2020
Interest income
Loans, including fees	$	10,961	$	11,611
Taxable securities		1,116		1,467
Tax exempt securities		131		70
Interest-bearing deposits and other		42		119
		12,250		13,267
Interest expense
Deposits		1,026		2,772
Federal Home Loan Bank advances		38		220
Senior debt		—		56
Junior subordinated debentures		130		215
Subordinated capital notes		376		242
		1,570		3,505

Net interest income		10,680		9,762
Provision for loan losses		350		1,050
Net interest income after provision for loan losses		10,330		8,712

Non-interest income
Service charges on deposit accounts		548		668
Bank card interchange fees		960		750
Income from bank owned life insurance		165		96
Other		211		210
		1,884		1,724
Non-interest expense
Salaries and employee benefits		4,482		4,538
Occupancy and equipment		1,060		999
Professional fees		236		208
Marketing expense		182		214
FDIC insurance		135		—
Data processing expense		378		359
Deposit and state franchise tax		90		360
Deposit account related expense		491		451
Communications expense		173		218
Insurance expense		104		103
Postage and delivery		152		168
Other		501		617
		7,984		8,235
Income before income taxes		4,230		2,201
Income tax expense		1,008		361
Net income		3,222		1,840
Basic and diluted income per common share	$	0.43	$	0.25

See accompanying notes to unaudited consolidated financial statements.

LIMESTONE BANCORP, INC.

Unaudited Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

	Three Months Ended March 31,
	2021			2020
Net income	$	3,222		$	1,840
Other comprehensive income (loss):
Unrealized gain (loss) on securities:
Unrealized gain (loss) arising during the period		280			(4,126	)
Amortization during period of net unrealized gain transferred to held to maturity		(50	)		—
Net unrealized gain (loss) recognized in comprehensive income (loss)		230			(4,126	)
Tax effect		(57	)		978
Other comprehensive income (loss)		173			(3,148	)

Comprehensive income (loss)	$	3,395		$	(1,308	)

See accompanying notes to unaudited consolidated financial statements.

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LIMESTONE BANCORP, INC.

Unaudited Consolidated Statements of Changes in Stockholders’ Equity

For Three Months Ended March 31, 2021 and 2020

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

	Shares						Amount
	Common						Common
	Common		Non-Voting Common		Total Common		Common and Non-Voting Common		Additional Paid-In Capital			Retained Deficit			Accumulated Other Comprehensive Loss			Total
Balances, January 1, 2021		6,498,865		1,000,000		7,498,865	$	140,639		25,013		$	(46,678	)	$	(2,950	)	$	116,024
Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations upon vesting		95,634		—		95,634		—		(48	)		—			—			(48	)
Forfeited unvested stock		—		—		—		—		—			—			—			—
Stock-based compensation expense		—		—		—		—		149			—			—			149
Net income		—		—		—		—		—			3,222			—			3,222
Net change in accumulated other comprehensive loss, net of taxes		—		—		—		—		—			—			173			173
Balances, March 31, 2021		6,594,499		1,000,000		7,594,499	$	140,639		25,114		$	(43,456	)	$	(2,777	)	$	119,520

	Shares						Amount
	Common						Common
	Common		Non-Voting Common		Total Common		Common and Non-Voting Common		Additional Paid-In Capital			Retained Deficit			Accumulated Other Comprehensive Loss			Total
Balances, January 1, 2020		6,251,975		1,220,000		7,471,975	$	140,639	$	24,508		$	(55,683	)	$	(3,714	)	$	105,750
Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations upon vesting		17,330		—		17,330		—		(37	)		—			—			(37	)
Forfeited unvested stock		—		—		—		—		—			—			—			—
Stock-based compensation expense		—		—		—		—		106			—			—			106
Net income		—		—		—		—		—			1,840			—			1,840
Net change in accumulated other comprehensive loss, net of taxes		—		—		—		—		—			—			(3,148	)		(3,148	)
Balances, March 31, 2020		6,269,305		1,220,000		7,489,305	$	140,639	$	24,577		$	(53,843	)	$	(6,862	)	$	104,511

See accompanying notes to unaudited consolidated financial statements.

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LIMESTONE BANCORP, INC.

Unaudited Consolidated Statements of Cash Flows

For Three Months Ended March 31, 2021 and 2020

(dollars in thousands)

	2021			2020
Cash flows from operating activities
Net income	$	3,222		$	1,840
Adjustments to reconcile net income to net cash from operating activities
Depreciation, amortization and accretion, net		916			479
Provision for loan losses		350			1,050
Net amortization on securities		145			146
Stock-based compensation expense		149			106
Deferred taxes, net		1,007			535
Net write-down of premises held for sale		25			25
Increase in cash surrender value of life insurance, net of premium expense		(160	)		(91	)
Amortization of operating lease right-of-use assets		81			187
Net change in accrued interest receivable and other assets		(2,319	)		(334	)
Net change in accrued interest payable and other liabilities		(1,460	)		(1,215	)
Net cash from operating activities		1,956			2,728

Cash flows from investing activities
Purchases of available for sale securities		(23,700	)		(6,869	)
Proceeds from sales and calls of available for sale securities		—			6,000
Proceeds from maturities and prepayments of available for sale securities		13,852			6,940
Purchases of held to maturity securities		(5,491	)		—
Purchases of Federal Home Loan Bank stock		—			(600	)
Proceeds from mandatory redemptions of Federal Home Loan Bank stock		77			—
Net changes in loans		(17,420	)		(35,712	)
Purchases of premises and equipment		(445	)		(390	)
Net cash from investing activities		(33,127	)		(30,631	)

Cash flows from financing activities
Net change in deposits		47,383			30,925
Repayment of Federal Home Loan Bank advances		(10	)		(95,040	)
Advances from Federal Home Loan Bank		—			95,000
Common shares withheld for taxes		(48	)		(37	)
Net cash from financing activities		47,325			30,848
Net change in cash and cash equivalents		16,154			2,945
Beginning cash and cash equivalents		67,693			30,203
Ending cash and cash equivalents	$	83,847		$	33,148

Supplemental cash flow information:
Interest paid	$	1,976		$	3,919
Supplemental non-cash disclosure:
Transfer from loans to other real estate	$	—		$	—
Transfer from premises and equipment to premises held for sale		—			310
Transfer from available for sale to held to maturity securities		34,741			—
AOCI component of transfer from available for sale to held to maturity		1,081			—

See accompanying notes to unaudited consolidated financial statements.

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LIMESTONE BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

Note 1 – Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation – The consolidated financial statements include Limestone Bancorp, Inc. (Company) and its subsidiary, Limestone Bank, Inc. (Bank). All significant inter-company transactions and accounts have been eliminated in consolidation.

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, the financial statements do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2021 are not necessarily indicative of the results that may be expected for the entire year. A description of other significant accounting policies is presented in the notes to the Consolidated Financial Statements for the year ended December 31, 2020 included in the Company’s Annual Report on Form 10-K.

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

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

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

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

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

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

New Accounting Standards – In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The final standard will change estimates for credit losses related to financial assets measured at amortized cost such as loans, held-to-maturity debt securities, and certain other contracts. For estimating credit losses, the FASB is replacing the incurred loss model with an expected loss model, which is referred to as the current expected credit loss (CECL) model. Under the CECL model, certain financial assets that are carried at amortized cost, such as loans held for investment and held-to-maturity debt securities, are required to be presented at the net amount expected to be collected. The measurement of expected credit losses is to be based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This measurement will take place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs significantly from the “incurred loss” model required under current GAAP, which delays recognition until it is probable a loss has been incurred. The change could materially affect how the allowance for loan losses is determined. The impact of CECL model implementation is being evaluated, but it is expected that a one-time cumulative-effect adjustment to the allowance for loan losses will be recognized in retained earnings on the consolidated balance sheet as of the beginning of the first reporting period in which the new standard is effective, as is consistent with regulatory expectations set forth in interagency guidance. In December 2018, the OCC, The Board of Governors of the Federal Reserve System, and the FDIC approved a final rule to address changes to the credit loss accounting under GAAP, including banking organizations’ implementation of CECL. The final rule provides banking organizations the option to phase in over a three-year period the day-one adverse effects on regulatory capital that may result from adoption of the new accounting standard. In October 2019, the FASB voted to delay implementation for smaller reporting companies, private companies, and not-for-profit entities. The Company currently qualifies as a smaller reporting company and, as such, will be required to implement CECL for fiscal year and interim periods beginning after December 15, 2022.

In December 2019, the FASB issued ASU 2019-12, Income Taxes - Simplifying the Accounting for Income Taxes. The final standard removes specific exceptions to the general principles in Topic 740, improves financial statement preparers’ application of income tax-related guidance, and simplifies GAAP. Certain provisions under ASU 2019-12 require prospective application, some require modified retrospective adoption, while other provisions require retrospective application to all periods presented in the consolidated financial statements upon adoption. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020. Adoption of this new guidance did not have a material impact on the consolidated financial statements.

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Note 2 – Securities

Securities are classified as available for sale (“AFS”) or held to maturity (“HTM”). AFS securities may be sold if needed for liquidity, asset liability management, or other reasons. AFS securities are reported at fair value, with unrealized gains or losses included as a separate component of equity, net of tax. HTM securities are those securities the Bank has the intent and ability to hold until maturity and are reported at amortized cost.

The following table summarizes the amortized cost and fair value of securities available for sale and securities held to maturity at March 31, 2021 and December 31, 2020 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) and gross unrecognized gains and losses (in thousands):

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value

March 31, 2021
Available for sale
U.S. Government and federal agency	$	29,345	$	493	$	(19	)	$	29,819
Agency mortgage-backed: residential		75,303		2,295		(302	)		77,296
Collateralized loan obligations		40,185		—		(566	)		39,619
Corporate bonds		31,655		394		(1,093	)		30,956
Total available for sale	$	176,488	$	3,182	$	(1,980	)	$	177,690

	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses			*Fair Value*
Held to maturity
State and municipal	$	41,254	$	37	$	(673	)	$	40,618
Total held to maturity	$	41,254	$	37	$	(673	)	$	40,618

December 31, 2020	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available for sale
U.S. Government and federal agency	$	18,811	$	806	$	—		$	19,617
Agency mortgage-backed: residential		71,582		2,777		(26	)		74,333
Collateralized loan obligations		44,730		—		(1,578	)		43,152
State and municipal		34,759		1,296		—			36,055
Corporate bonds		31,635		472		(1,402	)		30,705
Total available for sale	$	201,517	$	5,351	$	(3,006	)	$	203,862

During March 2021, to better manage interest rate risk, management transferred from AFS to HTM all the municipal securities in the portfolio having a book value of approximately $34.7 million, a market value of approximately $35.8 million, and a net unrealized gain of approximately $1.1 million. The transfer occurred at fair value. The related net unrealized gain included in other comprehensive income remained in other comprehensive income and will be amortized from other comprehensive income with an offsetting entry to interest income as a yield adjustment through earnings over the remaining term of the securities. No gain or loss was recorded at the time of transfer. This transfer was completed after careful consideration of the intent and ability to hold these securities to maturity.

Sales and calls of securities were as follows:

	Three Months Ended March 31,
	2021		2020
	(in thousands)
Proceeds	$	—	$	6,000
Gross gains		—		—
Gross losses		—		—

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The amortized cost and fair value of 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, 2021
	Amortized Cost		Fair Value
	(in thousands)
Maturity
Available for sale
Within one year	$	—	$	—
One to five years		3,591		3,775
Five to ten years		59,738		59,639
Beyond ten years		37,856		36,980
Agency mortgage-backed: residential		75,303		77,296
Total	$	176,488	$	177,690

Held to maturity
Within one year	$	4,835		4,835
One to five years		12,252	$	12,229
Five to ten years		2,433		2,420
Beyond ten years		21,734		21,134
Total	$	41,254	$	40,618

Securities pledged at March 31, 2021 and December 31, 2020 had carrying values of approximately $79.3 million and $81.4 million, respectively, and were pledged to secure public deposits.

At March 31, 2021 and December 31, 2020, the Bank held securities issued by the Commonwealth of Kentucky or Kentucky municipalities having a book value of $29.2 million and $23.0 million, respectively. At March 31, 2021 and December 31, 2020, there were no other holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders’ equity.

The Company evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, underlying credit quality of the issuer, and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer’s financial condition, the Company may consider whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, the sector or industry trends and cycles affecting the issuer, and the results of reviews of the issuer’s financial condition. As of March 31, 2021, management does not believe any securities in the portfolio with unrealized losses should be classified as other than temporarily impaired.

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

The market value of CLOs may be affected by, among other things, changes in composition of the underlying loans, changes in the cash flows from the underlying loans, defaults and recoveries on the underlying loans, capital gains and losses on the underlying loans, prepayments on the underlying loans, and other conditions or economic factors. At March 31, 2021, $27.7 million, $9.5 million, and $2.5 million of the Bank’s CLOs were AA, A, and BBB rated, respectively. None of the CLOs were subject to ratings downgrade during the three months ended March 31, 2021.

The corporate bond portfolio consists of 13 subordinated debt securities and one senior debt security of U.S. banks and bank holding companies with maturities ranging from 2024 to 2037. The securities are either initially fixed for five years converting to floating at an index over LIBOR, or SOFR, or floating at an index over LIBOR, or SOFR, from inception. Management regularly monitors the financial condition of these corporate issuers by reviewing their regulatory and public filings.

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Securities with unrealized and unrecognized losses at March 31, 2021 and December 31, 2020, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position, are as follows (in thousands):

	Less than 12 Months					12 Months or More					Total
Description of Securities	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss

March 31, 2021
Available for sale
U.S. Government and federal agency	$	9,988	$	(19	)	$	—	$	—		$	9,988	$	(19	)
Agency mortgage-backed: residential		14,426		(302	)		—		—			14,426		(302	)
Collateralized loan obligations		—		—			37,119		(566	)		37,119		(566	)
Corporate bonds		18,417		(1,093	)		—		—			18,417		(1,093	)
Total temporarily impaired	$	42,831	$	(1,414	)	$	37,119	$	(566	)	$	79,950	$	(1,980	)

	Less than 12 Months					12 Months or More				Total
	Fair Value		Unrecognized Loss			Fair Value		Unrecognized Loss		Fair Value		Unrecognized Loss

Held to maturity
State and municipal		33,301		(673	)		—		—		33,301		(673	)
Total temporarily impaired	$	33,301	$	(673	)	$	—	$	—	$	33,301	$	(673	)

	Less than 12 Months					12 Months or More					Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss

December 31, 2020
Available for sale
Agency mortgage-backed: residential	$	4,772	$	(26	)	$	—	$	—		$	4,772	$	(26	)
Collateralized loan obligations		8,794		(251	)		34,358		(1,327	)		43,152		(1,578	)
Corporate bonds		10,849		(1,402	)		—		—			10,849		(1,402	)
Total temporarily impaired	$	24,415	$	(1,679	)	$	34,358	$	(1,327	)	$	58,773	$	(3,006	)

Note 3 – Loans

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

	March 31,			December 31,
	2021			2020
	(in thousands)
Commercial (1)	$	216,976		$	208,244
Commercial Real Estate:
Construction		87,249			92,916
Farmland		68,218			70,272
Nonfarm nonresidential		303,005			266,394
Residential Real Estate:
Multi-family		63,706			61,180
1-4 Family		176,996			188,955
Consumer		28,425			31,429
Agriculture		33,727			42,044
Other		563			647
Subtotal		978,865			962,081
Less: Allowance for loan losses		(12,755	)		(12,443	)
Loans, net	$	966,110		$	949,638

(1)	Includes SBA Paycheck Protection Program (“PPP”) loans of $27.9 million and $20.3 million at March 31, 2021 and December 31, 2020, respectively.

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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, 2021 and 2020:

	Commercial			Commercial Real Estate			Residential Real Estate			Consumer			Agriculture			Other			Total
	(in thousands)
March 31, 2021:
Beginning balance	$	2,529		$	7,050		$	1,899		$	361		$	600		$	4		$	12,443
Provision		(33	)		647			(126	)		(27	)		(110	)		(1	)		350
Loans charged off		(19	)		–			–			(19	)		(39	)		–			(77	)
Recoveries		3			8			8			19			1			–			39
Ending balance	$	2,480		$	7,705		$	1,781		$	334		$	452		$	3		$	12,755


March 31, 2020:
Beginning balance	$	1,710		$	4,080		$	1,743		$	485		$	355		$	3		$	8,376
Provision		339			141			220			265			87			(2	)		1,050
Loans charged off		(29	)		(29	)		(75	)		(161	)		(41	)		–			(335	)
Recoveries		5			20			21			4			8			1			59
Ending balance	$	2,025		$	4,212		$	1,909		$	593		$	409		$	2		$	9,150

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, 2021:

	Commercial		Commercial Real Estate		Residential Real Estate		Consumer		Agriculture		Other		Total
	(in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	–	$	2,176	$	2	$	–	$	–	$	–	$	2,178
Collectively evaluated for impairment		2,480		5,529		1,779		334		452		3		10,577
Total ending allowance balance	$	2,480	$	7,705	$	1,781	$	334	$	452	$	3	$	12,755

Loans:
Loans individually evaluated for impairment	$	–	$	5,588	$	1,034	$	25	$	103	$	–	$	6,750
Loans collectively evaluated for impairment		216,976		452,884		239,668		28,400		33,624		563		972,115
Total ending loans balance	$	216,976	$	458,472	$	240,702	$	28,425	$	33,727	$	563	$	978,865

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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, 2020:

	Commercial		Commercial Real Estate		Residential Real Estate		Consumer		Agriculture		Other		Total
	(in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	–	$	2,176	$	1	$	–	$	–	$	–	$	2,177
Collectively evaluated for impairment		2,529		4,874		1,898		361		600		4		10,266
Total ending allowance balance	$	2,529	$	7,050	$	1,899	$	361	$	600	$	4	$	12,443


Loans:
Loans individually evaluated for impairment	$	–	$	5,361	$	1,060	$	–	$	91	$	–	$	6,512
Loans collectively evaluated for impairment		208,244		424,221		249,075		31,429		41,953		647		955,569
Total ending loans balance	$	208,244	$	429,582	$	250,135	$	31,429	$	42,044	$	647	$	962,081

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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 had been provided.

The following tables present information related to loans individually evaluated for impairment by class of loans as of March 31, 2021 and December 31, 2020 and for the three months ended March 31, 2021 and 2020:

	As of March 31, 2021						Three Months Ended March 31, 2021
	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	$	315	$	—	$	—	$	—	$	—	$	—
Commercial real estate:
Construction		—		—		—		—		—		—
Farmland		793		696		—		576		—		—
Nonfarm nonresidential		1,311		536		—		542		14		7
Residential real estate:
Multi-family		—		—		—		—		—		—
1-4 Family		1,860		930		—		942		17		17
Consumer		285		25		—		13		—		—
Agriculture		443		103		—		97		—		—
Other		—		—		—		—		—		—
Subtotal		5,007		2,290		—		2,170		31		24

With An Allowance Recorded:
Commercial		—		—		—		—		—		—
Commercial real estate:
Construction		—		—		—		—		—		—
Farmland		—		—		—		—		—		—
Nonfarm nonresidential		6,464		4,356		2,176		4,356		113		—
Residential real estate:
Multi-family		—		—		—		—		—		—
1-4 Family		104		104		2		105		1		—
Consumer		—		—		—		—		—		—
Agriculture		—		—		—		—		—		—
Other		—		—		—		—		—		—
Subtotal		6,568		4,460		2,178		4,461		114		—
Total	$	11,575	$	6,750	$	2,178	$	6,631	$	145	$	24

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	As of December 31, 2020						Three Months Ended March 31, 2020
	Unpaid Principal Balance		Recorded Investment		Allowance For Loan Losses Allocated		Average Recorded Investment		Interest Income Recognized		Cash Basis Income Recognized
	(in thousands)
With No Related Allowance Recorded:
Commercial	$	308	$	—	$	—	$	104	$	—	$	—
Commercial real estate:
Construction		—		—		—		—		—		—
Farmland		555		456		—		296		10		10
Nonfarm nonresidential		1,323		549		—		485		8		—
Residential real estate:
Multi-family		—		—		—		—		—		—
1-4 Family		1,883		954		—		795		3		3
Consumer		259		—		—		121		1		1
Agriculture		393		91		—		21		—		—
Other		—		—		—		—		—		—
Subtotal		4,721		2,050		—		1,822		22		14
With An Allowance Recorded:
Commercial		—		—		—		12		—		—
Commercial real estate:
Construction		—		—		—		—		—		—
Farmland		—		—		—		212		2		—
Nonfarm nonresidential		6,465		4,356		2,176		—		—		—
Residential real estate:
Multi-family		—		—		—		—		—		—
1-4 Family		106		106		1		111		2		—
Consumer		—		—		—		—		—		—
Agriculture		—		—		—		—		—		—
Other		—		—		—		—		—		—
Subtotal		6,571		4,462		2,177		335		4		—
Total	$	11,292	$	6,512	$	2,177	$	2,157		26		14

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, 2021 and December 31, 2020:

	TDRs Performing to Modified Terms		TDRs Not Performing to Modified Terms		Total TDRs
	(in thousands)
March 31, 2021
Commercial Real Estate:
Nonfarm nonresidential	$	366	$	—	$	366
Residential Real Estate:
1-4 Family		33		71		104
Total TDRs	$	399	$	71	$	470

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	TDRs Performing to Modified Terms		TDRs Not Performing to Modified Terms		Total TDRs
	(in thousands)
December 31, 2020
Commercial Real Estate:
Nonfarm nonresidential	$	374	$	—	$	374
Residential Real Estate:
1-4 Family		106		—		106
Total TDRs	$	480	$	—	$	480

At March 31, 2021 and December 31, 2020, 75% and 100%, respectively, of the Company’s TDRs were performing according to their modified terms. The Company allocated $2,000 in reserves to borrowers whose loan terms have been modified in TDRs as of March 31, 2021 and December 31, 2020. The Company has committed to lend no additional amounts as of March 31, 2021 and December 31, 2020 to borrowers with outstanding loans classified as TDRs. During the three months ended March 31, 2021 and March 31, 2020, no TDRs defaulted on their restructured loan within the 12-month period following the loan modification. A default is considered to have occurred once the TDR is past due 90 days or more or it has been placed on nonaccrual.

Non-TDR Loan Modifications due to COVID-19

The Company has elected to account for eligible loan modifications under Section 4013 of the Coronavirus Aid Relief and Economic Security Act (“CARES Act”). To be an eligible loan under Section 4013 of the CARES Act, a loan modification must be (1) related to the COVID-19 pandemic; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020 and the earlier of (A) 60 days after the date of termination of the national emergency declared by the President on March 13, 2020 concerning the COVID-19 outbreak (the “national emergency”) or (B) December 31, 2020. On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (“Economic Aid Act”) extended eligible loan modifications under Section 4013 of the CARES Act from December 31, 2020 to January 1, 2022. Eligible loan modifications are not required to be classified as TDRs and will not be reported as past due provided that they are performing in accordance with the modified terms. Interest income will continue to be recognized in accordance with GAAP unless the loan is placed on nonaccrual status.

Short-term loan modifications totaled $4.7 million at March 31, 2021 and $15.3 million at December 31, 2020. Included in the $4.7 million of short-term modifications is one commercial real estate loan secured by a retail facility totaling $4.4 million, which remains subject to, and is performing in accordance with, an interest only short-term COVID-19 modification. The loan is graded substandard, has been evaluated under ASC-310-10, and allocated a specific reserve of $2.2 million as of March 31, 2021 and December 31, 2020.

Past Due Loans

The following table presents the aging of the recorded investment in past due and nonaccrual loans as of March 31, 2021 and December 31, 2020:

	30 – 59 Days Past Due		60 – 89 Days Past Due		90 Days And Over Past Due		Nonaccrual		Total Past Due And Nonaccrual
	(in thousands)
March 31, 2021
Commercial	$	—	$	—	$	—	$	—	$	—
Commercial Real Estate:
Construction		—		—		—		—		—
Farmland		309		—		—		696		1,005
Nonfarm nonresidential		—		—		—		170		170
Residential Real Estate:
Multi-family		—		—		—		—		—
1-4 Family		257		3		—		1,002		1,262
Consumer		—		56		—		25		81
Agriculture		111		195		—		103		409
Other		—		—		—		—		—
Total	$	677	$	254	$	—	$	1,996	$	2,927

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	30 – 59 Days Past Due			60 – 89 Days Past Due	90 Days And Over Past Due		Nonaccrual			Total Past Due And Nonaccrual

	(in thousands)
December 31, 2020
Commercial	$	20	$	—	$	—	$	—	$	20
Commercial Real Estate:
Construction		—		—		—		—		—
Farmland		325		53		—		456		834
Nonfarm nonresidential		—		26		—		175		201
Residential Real Estate:
Multi-family		—		—		—		—		—
1-4 Family		1,110		217		—		954		2,281
Consumer		59		49		—		—		108
Agriculture		23		27		—		91		141
Other		—		—		—		—		—
Total	$	1,537	$	372	$	—	$	1,676	$	3,585

Credit Quality Indicators

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

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

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

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

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

As of March 31, 2021, and December 31, 2020, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

	Pass		Watch		Special Mention		Substandard		Doubtful		Total
	(in thousands)
March 31, 2021
Commercial	$	210,143	$	178	$	—	$	6,655	$	—	$	216,976
Commercial Real Estate:
Construction		87,249		—		—		—		—		87,249
Farmland		63,291		3,671		—		1,256		—		68,218
Nonfarm nonresidential		293,926		1,569		—		7,510		—		303,005
Residential Real Estate:
Multi-family		53,258		10,448		—		—		—		63,706
1-4 Family		172,374		1,777		—		2,845		—		176,996
Consumer		28,377		2		—		46		—		28,425
Agriculture		33,311		284		—		132		—		33,727
Other		563		—		—		—		—		563
Total	$	942,492	$	17,929	$	—	$	18,444	$	—	$	978,865

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	Pass			Watch	Special Mention		Substandard			Doubtful		Total

	(in thousands)
December 31, 2020
Commercial	$	201,240	$	192	$	—	$	6,812	$	—	$	208,244
Commercial Real Estate:
Construction		92,916		—		—		—		—		92,916
Farmland		65,556		3,714		—		1,002		—		70,272
Nonfarm nonresidential		258,665		1,605		—		6,124		—		266,394
Residential Real Estate:
Multi-family		50,732		10,448		—		—		—		61,180
1-4 Family		183,379		2,831		—		2,745		—		188,955
Consumer		31,387		3		—		39		—		31,429
Agriculture		41,503		86		—		455		—		42,044
Other		647		—		—		—		—		647
Total	$	926,025	$	18,879	$	—	$	17,177	$	—	$	962,081

Note 4 – Leases

As of March 31, 2021, the Company leases real estate for seven branch offices or offsite ATM machines under various operating lease agreements. The lease agreements have maturity dates ranging from 2021 to 2046, including all expected extension periods. The weighted average remaining life of the lease term for these leases was 23 years as of March 31, 2021.

In determining the present value of lease payments, the Bank uses the implicit lease rate when readily determinable. As most of the Bank’s leases do not provide an implicit rate, the incremental borrowing rate based on the information available at commencement date is used. The incremental borrowing rate is the estimated rate of interest that the Bank would have to pay to borrow on a collateralized basis over a similar term in an amount equal to the lease payments in a similar economic environment. The weighted average discount rate for the leases was 4.53% as of March 31, 2021.

Total rental expense was $162,000 and $120,000 for the three months ended March 31, 2021 and 2020, respectively. The right-of-use asset, included in premises and equipment, and lease liability, included in other liabilities, was $4.2 million as of March 31, 2021 and $2.5 million as of December 31, 2020. During the first quarter of 2021, the Bank opened a new banking center in Louisville, which increased the right-of-use asset and lease liability by $1.8 million.

Total estimated rental commitments for the operating leases were as follows as of March 31, 2021 (in thousands):

	March 31, 2021

April – December 2021	$	261
2022		273
2023		276
2024		274
2025		252
Thereafter		5,803
Total minimum lease payments		7,139
Discount effect of cash flows		(2,980	)
Present value of lease liabilities	$	4,159

At March 31, 2021, the Company has entered into two additional leases for new branch offices that have yet to commence. The right of use asset and lease liability for the leases yet to commence are estimated to be approximately $3.7 million, with approximately $1.5 million expected to be recorded in the second quarter of 2021 and $2.2 million expected to be recorded in the fourth quarter of 2021.

Note 5 – Other Real Estate Owned

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

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

	March 31, 2021		December 31, 2020
	(in thousands)
Commercial Real Estate:
Construction, land development, and other land	$	1,765	$	1,765
	$	1,765	$	1,765

Residential loans secured by 1-4 family residential properties in the process of foreclosure totaled $100,000 and $35,000 at March 31, 2021 and December 31, 2020, respectively.

Activity relating to OREO during the three months ended March 31, 2021 and 2020 is as follows:

	For the Three Months Ended March 31,
	2021		2020
	(in thousands)
OREO Activity
OREO as of January 1	$	1,765	$	3,225
Real estate acquired		—		—
Valuation adjustment write-downs		—		—
Net gain (loss) on sales		—		—
Proceeds from sales of properties		—		—
OREO as of March 31	$	1,765	$	3,225

Expenses related to OREO include:

	For the Three Months Ended March 31,
	2021		2020
	(in thousands)
Net loss (gain) on sales	$	—	$	—
Valuation adjustment write-downs		—		—
Operating expense		11		16
Total	$	11	$	16

Note 6 – Goodwill and Intangible Assets

The following table summarizes the Company’s goodwill and intangible assets as of March 31, 2021 and December 31, 2020 (in thousands):

	March 31, 2021				December 31, 2020
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Goodwill	$	6,252	$	—	$	6,252	$	—
Core deposit intangibles		2,500		319		2,500		256
Outstanding, ending	$	8,752	$	319	$	8,752	$	256

The Company has $6.3 million of goodwill related to a 2019 branch acquisition transaction. Goodwill represents the excess of the total purchase price paid over the fair value of the identifiable assets acquired, net of the fair value of the liabilities assumed. Goodwill is not amortized but is evaluated for impairment on an annual basis or whenever events or changes in circumstances may indicate the carrying value of goodwill exceeds fair value and may not be recoverable. The Company engaged an independent third-party expert to perform a quantitative assessment as of November 30, 2020 to determine if it was more likely than not that the fair value of the reporting unit exceeded its carrying value, including goodwill. The assessment indicated that the fair value of the reporting unit exceeded its carrying value, resulting in no impairment. Goodwill is the Company’s sole intangible asset with an indefinite life.

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The Company also has a core deposit intangible asset, which is amortized over a weighted average estimated life of the related deposits and is not estimated to have a significant residual value. Total amortization expense was $63,000 for the three months ended March 31, 2021 and the three months ended March 31, 2020.

Amortization expense related to the core deposit intangible is estimated as follows (in thousands):

	March 31, 2021
April – December 2021	$	192
2022		256
2023		256
2024		256
2025		256
Thereafter		965
	$	2,181

Note 7 – Deposits

The following table details deposits by category:

	March 31, 2021		December 31, 2020
	(in thousands)
Non-interest bearing	$	268,882	$	243,022
Interest checking		211,322		190,625
Money market		180,137		175,785
Savings		151,340		142,623
Certificates of deposit		355,309		367,552
Total	$	1,166,990	$	1,119,607

Time deposits of $250,000 or more were approximately $51.5 million and $50.7 million at March 31, 2021 and December 31, 2020, respectively.

Scheduled maturities of total time deposits at March 31, 2021 for each of the next five years are as follows (in thousands):

Year 1	$	246,568
Year 2		41,747
Year 3		29,258
Year 4		12,538
Year 5		24,541
Thereafter		657
	$	355,309

Note 8 – Advances from the Federal Home Loan Bank

Advances from the Federal Home Loan Bank were as follows:

	March 31,		December 31,
	2021		2020
	(in thousands)

Short term advances (fixed rate 0.00%) maturing April 2021	$	613	$	623
Long term advances (fixed rate 0.77%) maturing February 2030		20,000		20,000
Total advances from the Federal Home Loan Bank	$	20,613	$	20,623

FHLB advances had a weighted-average rate of 0.75% at March 31, 2021 and December 31, 2020. Each advance is payable per terms on agreement, with a prepayment penalty. No prepayment penalties were incurred during 2021 or 2020. The $20.0 million long term advance is callable quarterly at the FHLB’s option. The advances were collateralized by approximately $124.3 million and $133.7 million of first mortgage loans, under a blanket lien arrangement at March 31, 2021 and December 31, 2020, respectively, and $27.9 million and $20.3 million of loans originated under the SBA Paycheck Protection Plan at March 31, 2021 and December 31, 2020, respectively. At March 31, 2021, the Bank’s additional borrowing capacity with the FHLB was $87.9 million.

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

	Advances
Year 1	$	613
Year 2		—
Year 3		—
Year 4		—
Year 5		—
Thereafter		20,000
	$	20,613

Note 9 – Borrowings

Junior Subordinated Debentures – The junior subordinated debentures are redeemable at par prior to maturity at the option of the Company as defined within the trust indenture. The Company has the option to defer interest payments on the junior subordinated debentures from time to time for a period not to exceed 20 consecutive quarters. A deferral period may begin at the Company’s discretion so long as interest payments are current. The Company is prohibited from paying dividends on preferred and common shares when interest payments are in deferral. At March 31, 2021, the Company is current on all interest payments.

A summary of the junior subordinated debentures is as follows:

Description	Issuance Date	Interest Rate (1)	Junior Subordinated Debt Owed To Trust		Maturity Date (2)
Statutory Trust I	2/13/2004	3-month LIBOR + 2.85%	$	3,000,000	2/13/2034
Statutory Trust II	2/13/2004	3-month LIBOR + 2.85%		5,000,000	2/13/2034
Statutory Trust III	4/15/2004	3-month LIBOR + 2.79%		3,000,000	4/15/2034
Statutory Trust IV	12/14/2006	3-month LIBOR + 1.67%		10,000,000	3/01/2037
			$	21,000,000

(1)	As of March 31, 2021, the 3-month LIBOR was 0.19%.

(2)	The debentures are callable at the Company’s option at their principal amount plus accrued interest.

Subordinated Capital Notes – The Company’s subordinated notes mature on July 31, 2029. The notes carry interest at a fixed rate of 5.75% until July 30, 2024 and then convert to variable at three-month LIBOR plus 395 basis points until maturity. The subordinated capital notes qualify as Tier 2 regulatory capital.

Note 10 – Fair Values Measurement

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Various valuation techniques are used to determine fair value, including market, income and cost approaches. There are three levels of inputs that may be used to measure fair values:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that an entity has the ability to access as of the measurement date, or observable inputs.

Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

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In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. When that occurs, the fair value hierarchy is classified on the lowest level of input that is significant to the fair value measurement. The following methods and significant assumptions are used to estimate fair value.

Securities: The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges, if available. This valuation method is classified as Level 1 in the fair value hierarchy. For securities where quoted prices are not available, fair values are calculated on market prices of similar securities, or matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. Matrix pricing relies on the securities’ relationship to similarly traded securities, benchmark curves, and the benchmarking of like securities. Matrix pricing utilizes observable market inputs such as benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, and industry and economic events. In instances where broker quotes are used, these quotes are obtained from market makers or broker-dealers recognized to be market participants. This valuation method is classified as Level 2 in the fair value hierarchy. For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators. This valuation method is classified as Level 3 in the fair value hierarchy. Discounted cash flows are calculated using spread to swap and LIBOR curves that are updated to incorporate loss severities, volatility, credit spread and optionality. During times when trading is more liquid, broker quotes are used (if available) to validate the model. Rating agency and industry research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into the calculations.

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

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

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

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

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

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

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

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Financial assets measured at fair value on a recurring basis at March 31, 2021 and December 31, 2020 are summarized below:

			Fair Value Measurements at March 31, 2021 Using
			(in thousands)
			Quoted Prices In				Significant
			Active Markets for		Significant Other		Unobservable
	*Carrying*		*Identical Assets*		*Observable Inputs*		*Inputs*
Description	*Value*		*(Level 1)*		*(Level 2)*		*(Level 3)*
Available for sale securities
U.S. Government and federal agency	$	29,819	$	—	$	29,819	$	—
Agency mortgage-backed: residential		77,296		—		77,296		—
Collateralized loan obligations		39,619		—		37,163		2,456
Corporate bonds		30,956		—		18,608		12,348
Total	$	177,690	$	—	$	162,886	$	14,804

			Fair Value Measurements at December 31, 2020 Using
			(in thousands)
Description	Carrying Value		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available for sale securities
U.S. Government and federal agency	$	19,617	$	—	$	19,617	$	—
Agency mortgage-backed: residential		74,333		—		74,333		—
Collateralized loan obligations		43,152		—		40,764		2,388
State and municipal		36,055		—		36,055		—
Corporate bonds		30,705		—		18,789		11,916
Total	$	203,862	$	—	$	189,558	$	14,304

There were no transfers between Level 1 and Level 2 during 2021 or 2020.

The Company’s policy is to transfer assets or liabilities from one level to another when the methodology to obtain the fair value changes such that there are more or fewer unobservable inputs as of the end of the reporting period. There were no transfers between Level 2 and Level 3 during 2021.

The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2021:

	March 31, 2021
	Collateralized Loan Obligations		Corporate Bonds
	(in thousands)
Balance of recurring Level 3 assets at January 1, 2021	$	2,388	$	11,916
Total gains or losses for the year:
Included in other comprehensive income		68		432
Transfers into Level 3		—		—
Balance of recurring Level 3 assets at March 31, 2021	$	2,456	$	12,348

These securities were transferred to Level 3 during the fourth quarter of 2020.

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The following table presents quantitative information about recurring level 3 fair value measurements at March 31, 2021:

		Fair Value	Valuation Technique(s)	Unobservable Input(s)	Range (Weighted Average)
		(in thousands)

Collateralized loan obligations	$	2,456	Discounted cash flow	Constant prepayment rate		0%
				Additional asset defaults		2%		(2%)
				Expected asset recoveries		49%		(49%)

Corporate bonds	$	12,348	Discounted cash flow	Constant prepayment rate		0%
				Spread to benchmark yield	244%	-	350%	(328%)
				Indicative broker bid	76%	-	105%	(83%)

The following table presents quantitative information about recurring level 3 fair value measurements at December 31, 2020:

		Fair Value	Valuation Technique(s)	Unobservable Input(s)	Range (Weighted Average)
		(in thousands)

Collateralized loan obligations	$	2,388	Discounted cash flow	Constant prepayment rate		0%
				Additional asset defaults		2%		(2%)
				Expected asset recoveries		49%		(49%)

Corporate bonds	$	11,916	Discounted cash flow	Constant prepayment rate		0%
				Spread to benchmark yield	322%	-	497%	(381%)
				Indicative broker bid	72%	-	107%	(80%)

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

			Fair Value Measurements at March 31, 2021 Using
			(in thousands)
Description		Carrying Value	Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans:
Commercial real estate:
Nonfarm nonresidential	$	2,180	$	—	$	—	$	2,180
Residential real estate:
1-4 Family		102		—		—		102

			Fair Value Measurements at December 31, 2020 Using
			(in thousands)
Description		Carrying Value	Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans:
Commercial real estate:
Nonfarm nonresidential	$	2,180	$	—	$	—	$	2,180
Residential real estate:
1-4 Family		105		—		—		105

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $4.5 million at March 31, 2021 with a valuation allowance of $2.2 million, resulting in additional provision for loan losses of $1,000 for the three months ended March 31, 2021. Impaired loans had a carrying amount of $218,000 with a valuation allowance of $20,000, resulting in no additional provision for loan losses for the three months ended March 31, 2020. At December 31, 2020, impaired loans had a carrying amount of $4.5 million, with a valuation allowance of $2.2 million.

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

			Fair Value Measurements at March 31, 2021 Using
	Carrying Amount		Level 1		Level 2		Level 3		Total
	(in thousands)
Financial assets
Cash and cash equivalents	$	83,847	$	83,847	$	—	$	—	$	83,847
Securities available for sale		177,690		—		162,886		14,804		177,690
Securities held to maturity		41,254		—		40,618		—		40,618
Federal Home Loan Bank stock		5,810		N/A		N/A		N/A		N/A
Loans, net		966,110		—		—		962,943		962,943
Accrued interest receivable		4,432		—		893		3,539		4,432
Financial liabilities
Deposits	$	1,166,990	$	268,882	$	899,734	$	—	$	1,168,616
Federal Home Loan Bank advances		20,613		—		20,745		—		20,745
Junior subordinated debentures		21,000		—		—		17,708		17,708
Subordinated capital notes		25,000		—		—		25,883		25,883
Accrued interest payable		453		—		184		269		453

			Fair Value Measurements at December 31, 2020 Using
	Carrying Amount		Level 1		Level 2		Level 3		Total
	(in thousands)
Financial assets
Cash and cash equivalents	$	67,693	$	67,693	$	—	$	—	$	67,693
Securities available for sale		203,862		—		189,558		14,304		203,862
Federal Home Loan Bank stock		5,887		N/A		N/A		N/A		N/A
Loans, net		949,638		—		—		941,330		941,330
Accrued interest receivable		4,444		—		925		3,519		4,444
Financial liabilities
Deposits	$	1,119,607	$	243,022	$	878,309	$	—	$	1,121,331
Federal Home Loan Bank advances		20,623		—		20,665		—		20,665
Junior subordinated debentures		21,000		—		—		16,194		16,194
Subordinated capital notes		25,000		—		—		25,207		25,207
Accrued interest payable		859		—		231		628		859

In accordance with ASU 2016-01, the methods utilized to measure the fair value of financial instruments represent an approximation of exit price; however, an actual exit price may differ.

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Note 11 – Income Taxes

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

	March 31,		December 31,
	2020		2020
	(in thousands)
Deferred tax assets:
Net operating loss carry-forward	$	20,966	$	22,012
Allowance for loan losses		3,183		3,104
OREO write-down		914		914
Net assets from acquisitions		28		72
New market tax credit carry-forward		208		208
Nonaccrual loan interest		323		315
Accrued expenses		145		131
Lease liability		1,037		618
Other		339		332
		27,143		27,706

Deferred tax liabilities:
FHLB stock dividends		471		478
Fixed assets		74		71
Deferred loan costs		188		172
Net unrealized gain on securities		300		585
Lease right-of-use assets		1,037		618
Other		81		68
		2,151		1,992
Net deferred tax asset	$	24,992	$	25,714

At March 31, 2021, the Company had net federal operating loss carryforwards of $94.0 million, which will begin to expire in 2032, and state net operating loss carryforwards of $30.8 million, which begin to expire in 2025.

The Company does not have any beginning and ending unrecognized tax benefits. The Company does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next twelve months. There were no interest and penalties recorded in the income statement or accrued for the three months ended March 31, 2021 or March 31, 2020 related to unrecognized tax benefits.

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

In 2015, the Company took two measures to preserve the value of its NOLs. First, the Company adopted a tax benefits preservation plan designed to reduce the likelihood of an “ownership change” occurring as a result of purchases and sales of the Company's common shares. Upon adoption of this plan, the Company declared a dividend of one preferred stock purchase right for each common share outstanding as of the close of business on July 10, 2015. Any shareholder or group that acquires beneficial ownership of 5% or more of the Company (an “acquiring person”) could be subject to significant dilution in its holdings if the Company's Board of Directors does not approve such acquisition. Existing shareholders holding 5% or more of the Company will not be considered acquiring persons unless they acquire additional shares, subject to certain exceptions described in the plan. In addition, as amended November 25, 2019, the Board of Directors has the discretion to exempt certain transactions and certain persons whose acquisition of securities is determined by the Board not to jeopardize the Company's deferred tax assets. The rights plan was extended in May 2018 to expire upon the earlier of (i) June 30, 2021, (ii) the beginning of a taxable year with respect to which the Board of Directors determines that no tax benefits may be carried forward, (iii) the repeal or amendment of Section 382 or any successor statute, if the Board of Directors determines that the plan is no longer needed to preserve the tax benefits, and (iv) certain other events as described in the plan.

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

Note 12 – Stock Plans and Stock Based Compensation

Shares available for issuance under the 2018 Omnibus Equity Compensation Plan (“2018 Plan”) total 166,740. Shares issued to employees under the plan vest annually on the anniversary date of the grant over three to seven years. Shares issued annually to non-employee directors have a fair market value of $25,000 and vest on December 31 in the year of grant.

The fair value of the 2021 unvested shares issued was $1.3 million, or $13.25 per weighted-average share. The Company recorded $149,000 and $106,000 of stock-based compensation to salaries and employee benefits for the three months ended March 31, 2021 and 2020, respectively. Management expects substantially all of the unvested shares outstanding at the end of the period to vest according to the vesting schedule. A deferred tax benefit of $37,000 and $22,000 was recognized related to this expense during the three months ended March 31, 2021 and 2020, respectively.

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

	Three Months Ended					Twelve Months Ended
	March 31, 2021					December 31, 2020
				Weighted					Weighted
				Average					Average
				Grant					Grant
	Shares			Price		Shares			Price
Outstanding, beginning		47,438		$	15.34		57,774		$	13.35
Granted		99,013			13.25		34,858			15.33
Vested		(12,876	)		15.82		(43,836	)		12.69
Forfeited		—			—		(1,358	)		15.95
Outstanding, ending		133,575		$	13.74		47,438		$	15.34

Unrecognized stock-based compensation expense related to unvested shares is estimated as follows (in thousands):

April – December 2021	$	407
2022		398
2023		280
2024		137
2025		130
Thereafter		267

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Note 13 – Earnings per Share

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

	Three Months Ended
	March 31,
	2021		2020
	(in thousands, except share and per share data)

Net income	$	3,222	$	1,840
Less:
Earnings allocated to unvested shares		38		15
Net income available to common shareholders, basic and diluted	$	3,184	$	1,825

Basic and Diluted
Weighted average common shares including unvested common shares outstanding		7,575,211		7,481,884
Less:
Weighted average unvested common shares		90,507		61,363
Weighted average common shares outstanding		7,484,704		7,420,521
Basic and diluted income per common share	$	0.43	$	0.25

The Company had no outstanding stock options or warrants at March 31, 2021 or 2020.

Note 14 – 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 Basel III rules established a “capital conservation buffer” of 2.5% above the regulatory minimum risk-based capital ratios. Including the capital conservation buffer, the minimum ratios are a common equity Tier 1 risk-based capital ratio of 7.0%, a Tier 1 risk-based capital ratio of 8.5%, and a total risk-based capital ratio of 10.5%. An institution is subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if capital levels fall below minimum levels plus the buffer amounts. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions without prior regulatory approval.

As of March 31, 2021, Management believes the Company and Bank met all capital adequacy requirements to which they are subject. As of March 31, 2021, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since the notification that management believes have changed the institution’s category.

The following tables show the ratios (excluding capital conservation buffer) and amounts of common equity Tier 1, Tier 1 capital, and total capital to risk-adjusted assets and the leverage ratios for the Bank at the dates indicated (dollars in thousands):

	Actual					Minimum Requirement for Capital Adequacy Purposes					Minimum Requirement to be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of March 31, 2021:
Total risk-based capital (to risk-weighted assets)	$	146,865		13.37	%	$	87,890		8.00	%	$	109,862		10.00	%
Total common equity Tier 1 risk-based capital (to risk-weighted assets)		134,110		12.21			49,438		4.50			71,410		6.50
Tier 1 capital (to risk-weighted assets)		134,110		12.21			65,917		6.00			87,890		8.00
Tier 1 capital (to average assets)		134,110		10.44			51,380		4.00			64,225		5.00

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	Actual					Minimum Requirement for Capital Adequacy Purposes					Minimum Requirement to be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2020:
Total risk-based capital (to risk-weighted assets)	$	142,449		13.20	%	$	86,302		8.00	%	$	107,878		10.00	%
Total common equity Tier 1 risk-based capital (to risk-weighted assets)		130,006		12.05			48,545		4.50			70,120		6.50
Tier 1 capital (to risk-weighted assets)		130,006		12.05			64,727		6.00			86,302		8.00
Tier 1 capital (to average assets)		130,006		10.21			50,908		4.00			63,636		5.00

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

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

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

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

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

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

	March 31, 2021				December 31, 2020
	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate
	(in thousands)
Commitments to make loans	$	21,139	$	19,198	$	20,990	$	17,466
Unused lines of credit		6,969		153,381		5,964		144,790
Standby letters of credit		433		346		175		1,342

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

In connection with the purchase of loan participations, the Bank entered into risk participation agreements, which had notional amounts totaling $26.6 million at March 31, 2021 and December 31, 2020. The risk participation agreements are not designated against specific assets or liabilities under ASC 815, Derivatives and Hedging, and, therefore, do not qualify for hedge accounting. The derivatives are recorded in other liabilities on the balance sheet at fair value and changes in fair value of both the borrower and the offsetting swap agreements are recorded (and essentially offset) in non-interest income. The fair value of the derivative instruments incorporates a consideration of credit risk in accordance with ASC 820, resulting in some volatility in earnings each period. At March 31, 2021 and December 31, 2020, the fair value of the risk participation agreements were $113,000 and $188,000, respectively.

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

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

Note 16 – Revenue from Contracts with Customers

All of the Company’s revenue from customers within the scope of ASC 606 is recognized as non-interest income. A description of the Company’s revenue streams accounted for under ASC 606 follows:

Service Charges on Deposit Accounts: The Company earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which include services such as ATM use fees, stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Company fulfills the customer’s request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Company satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges are withdrawn from the customer’s account balance.

Bank Card Interchange Income: The Company earns interchange fees from bank cardholder transactions conducted through a third-party payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. Prior to adopting ASC 606, the Company reported bank card interchange fees net of expenses. Under ASC 606, bank card interchange fees are reported gross.

Gains/Losses on Sales of OREO: The Company records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the Company finances the sale of OREO to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon transfer of control of the property to the buyer. In determining the gain or loss on the sale, the Company adjusts the transaction price and related gain (loss) on sale if a significant financing component is present. Gains and losses on sales of OREO are netted with OREO expense and reported in non-interest expense.

Other Non-interest Income: Other non-interest income includes revenue from several sources that are within the scope of ASC 606, including title insurance commissions, income from secondary market loan sales, and other transaction-based revenue that is individually immaterial. Other non-interest income included approximately $153,000 and $156,000 of revenue for three months ended March 31, 2021 and March 31, 2020, respectively, within the scope of ASC 606. The remaining other non-interest income for the three months is excluded from the scope of ASC 606.

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

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

Preliminary Note Concerning Forward-Looking Statements

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

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

●

the impact and duration of the novel coronavirus disease 2019 (“COVID-19”) pandemic and national, state and local emergency conditions the pandemic has produced;

●

deterioration in the financial condition of borrowers resulting in significant increases in loan losses and provisions for those losses;

●

changes in the interest rate environment, which may reduce the Company’s margins or impact the value of securities, loans, deposits and other financial instruments;

●

changes in loan underwriting, credit review or loss reserve policies associated with economic conditions, examination conclusions, or regulatory developments;

●

general economic or business conditions, either nationally, regionally or locally in the communities the Bank serves, may be worse than expected, resulting in, among other things, a deterioration in credit quality or a reduced demand for credit;

●

the results of regulatory examinations;

●

any matter that would cause the Bank to conclude that there was impairment of any asset, including intangible assets;

●

the continued service of key management personnel, the Company’s ability to attract, motivate and retain qualified employees;

●

factors that increase the competitive pressure among depository and other financial institutions, including product and pricing pressures; the ability of the Company’s competitors with greater financial resources to develop and introduce products and services that enable them to compete more successfully;

●

inability to comply with regulatory capital requirements and to secure any required regulatory approvals for capital actions;

●

legislative or regulatory developments, including changes in laws concerning taxes, banking, securities, insurance and other aspects of the financial services industry;

●

future acquisitions, integrations and performance of acquired businesses;

●

fiscal and governmental policies of the United States federal government; and

●

Other risks and uncertainties reported from time to time in the Company’s filings with the Securities and Exchange Commission (“SEC”), including Part II Item 1A “Risk Factors” of this report, as well as Part I Item 1A “Risk Factors” of the Company’s December 31, 2020 Annual Report on Form 10-K for the year ended December 31, 2020.

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

Overview

Organized in 1988, Limestone Bancorp, Inc. (the Company) is a bank holding company headquartered in Louisville, Kentucky. The Company’s common stock is traded on Nasdaq’s Capital Market under the symbol LMST. The Company operates Limestone Bank, Inc. (the Bank), the eleventh largest bank domiciled in the Commonwealth of Kentucky based on total assets. The Bank operates banking offices in 14 counties in Kentucky. The Bank’s markets include metropolitan Louisville in Jefferson County and the surrounding counties of Bullitt and Henry. The Bank serves south central, southern, and western Kentucky from banking centers in Barren, Butler, Daviess, Edmonson, Green, Hardin, Hart, Ohio, and Warren counties. The Bank also has banking centers in Lexington, Kentucky, the second largest city in the state, and Frankfort, Kentucky, the state capital. The Bank is a traditional community bank with a wide range of personal and business banking products and services. As of March 31, 2021, the Company had total assets of $1.36 billion, total loans of $978.9 million, total deposits of $1.17 billion and stockholders’ equity of $119.5 million.

The Company reported net income of $3.2 million for the three months ended March 31, 2021, compared with $1.8 million for the first quarter of 2020. Income tax expense was $1.0 million for the first quarter of 2021, compared with $361,000 for the first quarter of 2020. Effective January 1, 2021, the state of Kentucky eliminated the bank franchise tax, which was previously recorded as a non-interest expense, and implemented a state income tax at a statutory rate of 5%. State income tax expense was $214,000 for the first quarter of 2021, compared to a state income tax benefit of $72,000 for the first quarter of 2020, which was related to the establishment of a net deferred tax asset due to the tax law change.

Significant items for the three months ended March 31, 2021 are as follows:

●

Average loans receivable were $964.4 million for the quarter ended March 31, 2021, compared with $965.3 million for the fourth quarter of 2020, and $949.2 million for the first quarter of 2020. SBA Paycheck Protection Program (“PPP”) loan balances total $27.9 million at March 31, 2021, compared to $20.3 million at December 31, 2020. The first quarter of 2021 included PPP loan originations of $18.6 million. The PPP program loans began funding in the second quarter of 2020.

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●

Net interest margin was 3.53% for the first three months of 2021 compared with 3.31% for the first three months of 2020. The yield on earning assets decreased to 4.05% in the first quarter of 2021 as compared to 4.50% in the first quarter of 2020. The yield on earning assets in the first quarter of 2021 was negatively impacted by lower interest rates on the Bank’s fed funds, certain floating rate investment securities, loans with variable rate pricing features, and new loans originated in the lower interest rate environment, including PPP loans which carry a rate of 1.0%. The negative impact of lower rates was offset by $436,000 in fees earned on PPP loans during the first quarter of 2021. The cost of interest-bearing liabilities decreased from 1.45% in the first quarter of 2020 to 0.68% in the first quarter of 2021 as a result of decreases in short-term interest rates during 2020 and continued improvement in deposit mix.

●

A provision of $350,000 was recorded in the first quarter of 2021, compared to $1.1 million in the first quarter of 2020. The 2021 loan loss provision was attributable to the net loan charge-offs and growth trends within the portfolio during the quarter, while the 2020 provision was largely attributable to the uncertainty surrounding the COVID-19 pandemic related economic and business disruptions. Net loan charge-offs were $38,000 for the first quarter of 2021, compared to net loan charge-offs of $276,000 for the first quarter of 2020.

●

Loans past due 30-59 days decreased from $1.5 million at December 31, 2020 to $677,000 at March 31, 2021, and loans past due 60-89 days decreased from $372,000 at December 31, 2020 to $254,000 at March 31, 2021. Total loans past due and nonaccrual loans decreased to $2.9 million at March 31, 2021, from $3.6 million at December 31, 2020.

●

Deposits were $1.17 billion at March 31, 2021, compared with $1.12 billion at December 31, 2020. Certificate of deposit balances decreased $12.2 million during the first three months of 2021 to $355.3 million at March 31, 2021, from $367.6 million at December 31, 2020. Interest checking accounts increased $20.7 million, non-interest bearing accounts increased $25.9 million, money market increased $4.4 million, and savings accounts increased $8.7 million during the quarter ended March 31, 2021 compared with December 31, 2020.

Application of Critical Accounting Policies

Management continually reviews accounting policies and financial information disclosures. The Company’s more significant accounting policies that require the use of estimates and judgments in preparing the financial statements are summarized in “Application of Critical Accounting Policies” in Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operation of the Company’s Annual Report on Form 10-K for the calendar year ended December 31, 2020. Management has discussed the development, selection, and application of the Company’s critical accounting policies with its Audit Committee. During the first three months of 2021, there were no material changes in the critical accounting policies and assumptions.

Results of Operations

The following table summarizes components of income and expense and the change in those components for the three months ended March 31, 2021, compared with the same period of 2020:

	For the Three Months				Change from
	Ended March 31,				Prior Period
	2021		2020		Amount			Percent
	(dollars in thousands)

Gross interest income	$	12,250	$	13,267	$	(1,017	)		(7.7	)%
Gross interest expense		1,570		3,505		(1,935	)		(55.2	)
Net interest income		10,680		9,762		918			9.4
Provision for loan losses		350		1,050		(700	)		(66.7	)
Non-interest income		1,884		1,724		160			9.3
Non-interest expense		7,984		8,235		(251	)		(3.0	)
Net income before taxes		4,230		2,201		2,029			92.2
Income tax expense		1,008		361		647			179.2
Net income		3,222		1,840		1,382			75.1

Net income for the three months ended March 31, 2021 totaled $3.2 million, compared with $1.8 million for the comparable period of 2020. Net interest income increased $918,000 from the first quarter of 2020 as a result of a decrease in the cost of interest-bearing liabilities due primarily to downward repricing within the time deposit portfolios. Provision for loan losses expense of $350,000 was recorded in the first quarter of 2021 as compared to $1.1 million in the first quarter of 2020. The 2021 provision was primarily in response to the level of net loan charge-offs and loan growth during the quarter, while the provision for 2020 was largely attributable to the uncertainty surrounding the COVID-19 pandemic related economic and business disruptions. Non-interest income increased $160,000 from $1.7 million in the first quarter of 2020 to $1.9 million for the first quarter of 2021 primarily related to the increase in bank card interchange fees of $210,000, partially offset by a decrease of $120,000 in service charges on deposit accounts. Non-interest expense decreased $251,000 from $8.2 million in the first quarter of 2020 to $8.0 million in the first quarter of 2021 primarily due to a $270,000 decrease in state franchise tax expense as a result of the elimination of the Kentucky bank franchise tax as discussed below.

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Net income before taxes was $4.2 million for the first quarter of 2021, compared with $2.2 million for the first quarter of 2020. Income tax expense was $1.0 million for the first quarter of 2021, compared with $361,000 for the first quarter of 2020. Effective January 1, 2021, the state of Kentucky eliminated the bank franchise tax and implemented a state income tax at a statutory rate of 5%. State income tax expense was $214,000 for the first quarter of 2021, compared to a state income tax benefit of $72,000 for the first quarter of 2020 related to the establishment of a net deferred tax asset due to the tax law change.

Net Interest Income – Net interest income was $10.7 million for the three months ended March 31, 2021, an increase of $918,000, or 9.4%, compared with $9.8 million for the same period in 2020. Net interest spread and margin were 3.37% and 3.53%, respectively, for the first quarter of 2021, compared with 3.05% and 3.31%, respectively, for the first quarter of 2020.

The interest rate environment remained challenging during 2021 and 2020 as the Federal Reserve lowered the federal funds target rate by 50 basis points on March 6, 2020 and 100 basis points on March 15, 2020. In particular, the Federal Reserve’s actions served to lower rates on the short end of the yield curve impacting yields on fed funds, certain floating rate investment securities, loans with variable rate pricing features, and the production rates for new loan originations.

The yield on earning assets decreased to 4.05% for the first quarter of 2021, as compared to 4.50% in the first quarter of 2020. Average interest-earning assets were $1.23 billion for the first quarter of 2021, compared with $1.19 billion for the first quarter of 2020, a 3.6% increase, primarily attributable to higher interest-bearing deposits and higher average loans. Average interest-bearing deposits increased $27.8 million for the first quarter 2021 as compared to the first quarter of 2020. Average loans receivable increased approximately $15.1 million for the first quarter of 2021 compared with the first quarter of 2020. Average loans for the first quarter of 2021 were positively impacted by $18.6 million in loan originations under the SBA Paycheck Protection Program during the first quarter. The increase in average loans resulted in an increase in interest revenue volume of approximately $183,000 for the quarter ended March 31, 2021, which was offset by a decrease in interest revenue of $833,000 due to the lower interest rates on new and renewed loans, as compared with the first quarter of 2020. Loan fee income can meaningfully impact net interest income, loan yields, and net interest income. The amount of loan fee income included in total interest income represents 28 basis points and eight basis points of yield on earning assets and net interest margin for the first quarter ended March 31, 2021 and 2020, respectively. Loan fee income for the first quarter of 2021 included $436,000 in PPP fees, which accounted for 14 basis points of earning asset yield and net interest margin for the quarter. Total interest income decreased $1.0 million, or 7.7%, for the first quarter of 2021 compared to the first quarter of 2020.

The cost of interest-bearing liabilities decreased to 0.68% for the first quarter of 2021, as compared to 1.45% for the first quarter of 2020 primarily based on the downward repricing of time and other interest-bearing deposits, as well as a shift in deposit mix. Average interest-bearing liabilities decreased by 3.1% to $941.3 million for the first quarter of 2021, as compared to $971.6 million for the first quarter of 2020, primarily due to a $41.8 million decrease in FHLB advances. Total interest expense decreased by 55.2% to $1.6 million for the first quarter of 2021 as compared to the first quarter of 2020. The cost of interest-bearing liabilities for the first quarter of 2021 was also impacted by the subordinated debt issuance and senior debt repayment in July 2020.

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Average Balance Sheets

The following table presents the average balance sheets for the three-month periods ended March 31, 2021 and 2020, along with the related calculations of tax-equivalent net interest income, net interest margin and net interest spread for the related periods.

	Three Months Ended March 31,
	2021								2020
	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)	$	964,353		$	10,961		4.61	%	$	949,204		$	11,611		4.92	%
Securities
Taxable		180,562			1,116		2.51			193,260			1,467		3.05
Tax-exempt		22,446			131		3.15			9,989			70		3.57
FHLB stock		5,847			30		2.08			6,283			40		2.56
Interest-bearing deposits and other		57,402			12		0.08			29,578			79		1.07
Total interest-earning assets		1,230,610			12,250		4.05	%		1,188,314			13,267		4.50	%
Less: Allowance for loan losses		(12,454	)							(8,287	)
Non-interest earning assets		98,722								93,140
Total assets	$	1,316,878							$	1,273,167

LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
Certificates of deposit and other time deposits	$	354,855		$	602		0.69	%	$	481,797		$	2,233		1.86	%
NOW and money market deposits		373,841			306		0.33			310,046			428		0.56
Savings accounts		146,029			118		0.33			74,304			111		0.60
FHLB advances		20,617			38		0.75			62,407			220		1.42
Junior subordinated debentures		21,000			130		2.51			21,000			215		4.12
Subordinated capital notes		25,000			376		6.10			17,000			242		5.73
Senior debt		—			—		—			5,000			56		4.50
Total interest-bearing liabilities		941,342			1,570		0.68	%		971,554			3,505		1.45	%

Non-interest-bearing liabilities:
Non-interest-bearing deposits		251,218								186,797
Other liabilities		6,655								7,184
Total liabilities		1,199,215								1,165,535
Stockholders’ equity		117,663								107,632
Total liabilities and stockholders’ equity	$	1,316,878							$	1,273,167

Net interest income				$	10,680							$	9,762

Net interest spread							3.37	%							3.05	%

Net interest margin							3.53	%							3.31	%

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

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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, 2021 vs. 2020
	Increase (decrease) due to change in						Net
	Rate			Volume			Change
	(in thousands)
Interest-earning assets:
Loan receivables	$	(833	)	$	183		$	(650	)
Securities		(288	)		(2	)		(290	)
FHLB stock		(7	)		(3	)		(10	)
Interest-bearing deposits and other		(107	)		40			(67	)
Total increase (decrease) in interest income		(1,235	)		218			(1,017	)

Interest-bearing liabilities:
Certificates of deposit and other time deposits		(1,152	)		(479	)		(1,631	)
NOW and money market accounts		(198	)		76			(122	)
Savings accounts		(67	)		74			7
FHLB advances		(76	)		(106	)		(182	)
Junior subordinated debentures		(85	)		—			(85	)
Subordinated capital notes		15			119			134
Senior debt		(28	)		(28	)		(56	)
Total decrease in interest expense		(1,591	)		(344	)		(1,935	)
Increase (decrease) in net interest income	$	356		$	562		$	918

Non-Interest Income – The following table presents the major categories of non-interest income for the three months ended March 31, 2021 and 2020:

	For the Three Months
	Ended March 31,
	2021		2020
	(in thousands)

Service charges on deposit accounts	$	548	$	668
Bank card interchange fees		960		750
Income from bank owned life insurance		165		96
Other		211		210
Total non-interest income	$	1,884	$	1,724

Non-interest income for the first quarter of 2021 increased by $160,000, or 9.3%, to $1.9 million compared with $1.7 million for the first quarter of 2020. The increase was primarily related to bank card interchange fees of $210,000, partially offset by a decrease of $120,000 in service charges on deposit accounts.

Non-interest Expense – The following table presents the major categories of non-interest expense for the three months ended March 31, 2021 and 2020:

	For the Three Months
	Ended March 31,
	2021		2020
	(in thousands)

Salary and employee benefits	$	4,482	$	4,538
Occupancy and equipment		1,060		999
Professional fees		236		208
Marketing expense		182		214
FDIC insurance		135		—
Data processing expense		378		359
Deposit and state franchise tax		90		360
Deposit account related expenses		491		451
Communications expense		173		218
Insurance expense		104		103
Postage and delivery		152		168
Other		501		617
Total non-interest expense	$	7,984	$	8,235

Non-interest expense for the first quarter ended March 31, 2021 decreased $251,000, or 3.0%, to $8.0 million compared with $8.2 million for the first quarter of 2020. The decrease from the first quarter of 2020 was primarily due to a decrease in deposit and state franchise tax expense of $270,000 as a result of the elimination of the Kentucky bank franchise tax as discussed below.

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

	For the Three Months
	Ended March 31,
	2021			2020
	(in thousands)

Federal statutory tax rate		21	%		21	%
Federal statutory rate times financial statement income	$	888		$	462
Effect of:
State income taxes		181			—
Tax-exempt income		(30	)		(14	)
Establish state deferred tax asset		—			(72	)
Non-taxable life insurance income		(41	)		(20	)
Restricted stock vesting		5			(1	)
Other, net		5			6
Total	$	1,008		$	361

Income tax expense was $1.0 million for the first quarter of 2021, compared with $361,000 for the first quarter of 2020. Effective January 1, 2021, the state of Kentucky eliminated the bank franchise tax, which was previously recorded as a non-interest expense, and implemented a state income tax at a statutory rate of 5%. State income tax expense was $214,000 for the first quarter of 2021, compared to a state income tax benefit of $72,000 for the first quarter of 2020, which was related to the establishment of a net deferred tax asset due to the tax law change.

Analysis of Financial Condition

Total assets increased $49.4 million, or 3.8%, to $1.36 billion at March 31, 2021, from $1.31 billion at December 31, 2020. This increase was primarily attributable to increases in loans receivable of $16.8 million, cash and cash equivalents of $16.2 million, as well as securities of $15.1 million.

Loans Receivable – Loans receivable increased $16.8 million, or 1.7%, during the three months ended March 31, 2021 to $978.9 million as loan growth outpaced paydowns. The Bank’s commercial and commercial real estate portfolios increased by an aggregate of $37.6 million, or 5.9%, during the first quarter of 2021 and comprised 69.0% of the loan portfolio at March 31, 2021. Residential real estate and consumer portfolios decreased by an aggregate of $12.4 million, or 4.4%, during the first quarter of 2021 and comprised 27.5% of the loan portfolio at March 31, 2021.

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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 the Bank’s 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,
	2021					2020
	Amount		Percent			Amount		Percent
			(dollars in thousands)

Commercial (1)	$	216,976		22.17	%	$	208,244		21.65	%
Commercial Real Estate
Construction		87,249		8.91			92,916		9.66
Farmland		68,218		6.97			70,272		7.30
Nonfarm nonresidential		303,005		30.95			266,394		27.69
Residential Real Estate
Multi-family		63,706		6.51			61,180		6.36
1-4 Family		176,996		18.08			188,955		19.64
Consumer		28,425		2.90			31,429		3.27
Agriculture		33,727		3.45			42,044		4.37
Other		563		0.06			647		0.06
Total loans	$	978,865		100.00	%	$	962,081		100.00	%

(1)

Includes PPP loans of $27.9 million and $20.3 million at March 31, 2021 and December 31, 2021, respectively.

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

	March 31, 2021					December 31, 2020
	Loans		% to Total			Loans		% to Total
	(dollars in thousands)

Pass	$	942,492		96.3	%	$	926,025		96.2	%
Watch		17,929		1.8			18,879		2.0
Special Mention		—		—			—		—
Substandard		18,444		1.9			17,177		1.8
Doubtful		—		—			—		—
Total	$	978,865		100.0	%	$	962,081		100.00	%

Loans receivable increased $16.8 million, or 1.7%, during the three months ended March 31, 2021. Since December 31, 2020, the pass category increased approximately $16.5 million, the watch category decreased approximately $950,000, and the substandard category increased approximately $1.3 million. The $1.3 million increase in loans classified as substandard was primarily driven by $2.0 million in loans migrating to substandard during the quarter offset by $650,000 in payments and $65,000 in charge-offs.

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

	March 31, 2021		December 31, 2020
	(in thousands)
Past Due Loans:
30-59 Days	$	677	$	1,537
60-89 Days		254		372
90 Days and Over		—		—
Total Loans Past Due 30-90+ Days		931		1,909

Nonaccrual Loans		1,996		1,676
Total Past Due and Nonaccrual Loans	$	2,927	$	3,585

During the three months ended March 31, 2021, nonaccrual loans increased by $320,000 to $2.0 million. During the three months ended March 31, 2021, loans past due 30-59 days decreased from $1.5 million at December 31, 2020 to $677,000 at March 31, 2021. Loans past due 60-89 days decreased from $372,000 at December 31, 2020 to $254,000 at March 31, 2021. This represents a $978,000 decrease from December 31, 2020 to March 31, 2021, in loans past due 30-89 days. This trend in delinquency levels is considered during the evaluation of qualitative trends in the portfolio when establishing the general component of the allowance for loan losses.

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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 to a borrower who is experiencing financial difficulty. The Bank’s TDRs typically involve a reduction in interest rate, a deferral of principal for a stated period of time, or an interest only period. All TDRs are considered impaired, and the Bank has allocated reserves for these loans to reflect the present value of the concessionary terms granted to the borrower. If the loan is considered collateral dependent, it is reported net of allocated reserves, at the fair value of the collateral less cost to sell.

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

At March 31, 2021 and December 31, 2020, the Bank had four restructured loans totaling $470,000 and $480,000, respectively, with borrowers who experienced deterioration in financial condition. In general, these loans were granted interest rate reductions to provide cash flow relief to borrowers experiencing cash flow difficulties. The Bank had no restructured loans that had been granted principal payment deferrals until maturity at March 31, 2021 or December 31, 2020. There were no concessions made to forgive principal relative to these loans, although partial charge-offs have been recorded for certain restructured loans. In general, these loans are secured by first liens on 1-4 residential properties or commercial real estate properties. At March 31, 2021 and December 31, 2020, 75% and 100%, respectively, of the TDRs were performing according to their modified terms.

There were no modifications granted during 2021 and one modification granted during 2020 that resulted in loans being identified as TDRs. See “Note 3 – Loans,” to the financial statements for additional disclosure related to troubled debt restructuring.

COVID-19 Short-term Loan Concessions – The Bank has elected to account for eligible loan modifications under Section 4013 of the Coronavirus Aid Relief and Economic Security Act (“CARES Act”). To be an eligible loan under Section 4013 of the CARES Act, a loan modification must be (1) related to the COVID-19 pandemic; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020 and the earlier of (A) 60 days after the date of termination of the national emergency declared by the President on March 13, 2020 concerning the COVID-19 outbreak (the “national emergency”) or (B) December 31, 2020. On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (“Economic Aid Act”) extended eligible loan modifications under Section 4013 of the CARES Act from December 31, 2020 to January 1, 2022. Eligible loan modifications are not required to be classified as TDRs and will not be reported as past due provided that they are performing in accordance with the modified terms. Interest income will continue to be recognized in accordance with GAAP unless the loan is placed on nonaccrual status.

Short-term loan modifications declined to $4.7 million as of March 31, 2021, as compared to $15.3 million at December 31, 2020. Included in the $4.7 million of short-term loan modifications is one commercial real estate loan secured by a retail facility totaling $4.4 million, which remains subject to and is performing in accordance with, an interest only short-term COVID-19 modification. The loan is graded substandard, has been evaluated under ASC-310-10, and allocated a specific reserve of $2.2 million as of March 31, 2021 and December 31, 2020.

Non-Performing Assets – Non-performing assets consist of certain restructured loans for which interest rate or other terms have been renegotiated, loans past due 90 days or more still on accrual, loans on which interest is no longer accrued, real estate acquired through foreclosure and repossessed assets. The following table sets forth information with respect to non-performing assets as of March 31, 2021 and December 31, 2020.

	March 31, 2021			December 31, 2020
	(dollars in thousands)

Loans on nonaccrual status	$	1,996		$	1,676
Troubled debt restructurings on accrual		399			480
Past due 90 days or more still on accrual		—			—
Total non-performing loans		2,395			2,156
Real estate acquired through foreclosure		1,765			1,765
Other repossessed assets		—			—
Total non-performing assets	$	4,160		$	3,921

Non-performing loans to total loans		0.24	%		0.22	%
Non-performing assets to total assets		0.31	%		0.30	%
Allowance for non-performing loans	$	19		$	22
Allowance for non-performing loans to non-performing loans		0.79	%		1.02	%

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Nonperforming loans at March 31, 2021, were $2.4 million, or 0.24%, of total loans, compared with $2.2 million, or 0.22%, of total loans at December 31, 2020, and $2.0 million, or 0.20%, of total loans at March 31, 2020.

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

A provision for loan losses of $350,000 was recorded in the first quarter of 2021, compared to $1.1 million of provision for loan losses in the first quarter of 2020. The 2021 loan loss provision was attributable to the net loan charge-offs and trends within the portfolio during the quarter, while the provision for 2020 was largely attributable to the uncertainty surrounding the COVID-19 pandemic related economic and business disruptions.

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

	Three Months Ended March 31,						Year Ended December 31,
	2021			2020			2020
	(dollars in thousands)
Balances at beginning of period	$	12,443		$	8,376		$	8,376

Loans charged-off:
Real estate		—			104			231
Commercial		19			29			32
Consumer		19			161			493
Agriculture		39			41			46
Other		—			—			—
Total charge-offs		77			335			802

Recoveries:
Real estate		16			41			352
Commercial		3			5			29
Consumer		19			4			45
Agriculture		1			8			30
Other		—			1			13
Total recoveries		39			59			469
Net charge-offs		38			276			333
Provision for loan losses		350			1,050			4,400
Balance at end of period	$	12,755		$	9,150		$	12,443

Allowance for loan losses to period-end loans		1.30	%		0.95	%		1.29	%
Net charge-offs to average loans		0.02	%		0.12	%		0.03	%
Allowance for loan losses to non-performing loans		532.57	%		465.41	%		577.13	%

The allowance for loan losses to total loans was 1.30% at March 31, 2021, compared to 1.29% at December 31, 2020, and 0.95% at March 31, 2020. Net loan charge-offs were $38,000 for the first quarter of 2021, compared to $276,000 for the first quarter of 2020. The allowance for loan losses to non-performing loans was 532.57% at March 31, 2021, compared with 577.13% at December 31, 2020, and 465.41% at March 31, 2020.

Investment Securities – The securities portfolio serves as a source of liquidity and earnings and contributes to the management of interest rate risk. Investments are made in various types of liquid assets, including U.S. Treasury obligations and securities of various federal agencies, obligations of states and political subdivisions, corporate bonds, and collateralized loan obligations. The investment portfolio increased by $15.1 million, or 7.4%, to $218.9 million at March 31, 2021, compared with $203.9 million at December 31, 2020.

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The following table sets forth the carrying value of the Bank’s securities portfolio at the dates indicated (in thousands):

	March 31, 2021									December 31, 2020
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available for sale
U.S. Government and federal agencies	$	29,345	$	493	$	(19	)	$	29,819	$	18,811	$	806	$	—		$	19,617
Agency mortgage-backed residential		75,303		2,295		(302	)		77,296		71,582		2,777		(26	)		74,333
Collateralized loan obligations		40,185		—		(566	)		39,619		44,730		—		(1,578	)		43,152
State and municipal		—		—		—			—		34,759		1,296		—			36,055
Corporate bonds		31,655		394		(1,093	)		30,956		31,635		472		(1,402	)		30,705
Total available for sale	$	176,488	$	3,182	$	(1,980	)	$	177,690	$	201,517	$	5,351	$	(3,006	)	$	203,862

	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses			Fair Value		Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Fair Value

Held to maturity
State and municipal	$	41,254	$	37	$	(673	)	$	40,618	$	—	$	—	$	—	$	—
Total held to maturity	$	41,254	$	37	$	(673	)	$	40,618	$	—	$	—	$	—	$	—

During March 2021, to better manage interest rate risk, management transferred from AFS to HTM all the municipal securities in the portfolio having a book value of approximately $34.7 million, a market value of approximately $35.8 million, and a net unrealized gain of approximately $1.1 million. The transfer occurred at fair value. The related net unrealized gain included in other comprehensive income remained in other comprehensive income and will be amortized from other comprehensive income with an offsetting entry to interest income as a yield adjustment through earnings over the remaining term of the securities. No gain or loss was recorded at the time of transfer. This transfer was completed after careful consideration of the intent and ability to hold these securities to maturity.

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

The market value of CLOs may be affected by, among other things, changes in composition of the underlying loans, changes in the cash flows from the underlying loans, defaults and recoveries on the underlying loans, capital gains and losses on the underlying loans, prepayments on the underlying loans, and other conditions or economic factors. At March 31, 2021, $27.7 million, $9.5 million, and $2.5 million of the Bank’s CLOs were AA, A, and BBB rated, respectively. None of the CLOs were subject to ratings downgrade during the three months ended March 31, 2021.

The corporate bond portfolio consists of 13 subordinated debt securities and one senior debt security of U.S. banks and bank holding companies with maturities ranging from 2024 to 2037. The securities are either fixed for five years converting to floating at an index over LIBOR, or SOFR, or floating at an index over LIBOR, or SOFR, from inception. Management regularly monitors the financial condition of these corporate issuers by reviewing their regulatory and public filings.

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

Foreclosed Properties – Foreclosed properties at March 31, 2021 were $1.8 million compared with $3.2 million at March 31, 2020 and $1.8 million at December 31, 2020. See Note 5, “Other Real Estate Owned,” to the financial statements. Management values foreclosed properties at fair value less estimated costs to sell when acquired and expects to liquidate these properties to recover the investment in the due course of business.

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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.

Operating expenses for OREO totaled $11,000 for the three months ended March 31, 2021, compared to $16,000 for the three months ended March 31, 2020. There were no fair value write-downs recorded during the three months ended March 31, 2021 and March 31, 2020.

Liabilities – Total liabilities at March 31, 2021 were $1.24 billion compared with $1.20 billion at December 31, 2020, an increase of $45.9 million, or 3.8%. This increase was primarily attributable to an increase in total deposits of $47.4 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,
	2021					2020
	Average		Average			Average		Average
	Balance		Rate			Balance		Rate
	(dollars in thousands)
Demand	$	251,218				$	215,145
Interest checking		196,042		0.32	%		169,808		0.32	%
Money market		177,799		0.35			166,788		0.55
Savings		146,029		0.33			111,559		0.48
Certificates of deposit		354,855		0.69			436,083		1.33
Total deposits	$	1,125,943		0.37	%	$	1,099,383		0.71	%

The following table shows at March 31, 2021 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	$	15,611
Three months through six months		7,901
Six months through twelve months		10,744
Over twelve months		17,241
Total	$	51,497

Liquidity

The objective of liquidity risk management is to ensure that the Company meets the cash flow requirements of depositors, borrowers, and creditors, as well as operating cash needs, taking into account all on- and off-balance sheet funding demands. Liquidity risk management also involves ensuring that cash flow needs are met at a reasonable cost. Management maintains an investment and funds management policy, which identifies the primary sources of liquidity, establishes procedures for monitoring and measuring liquidity, and establishes minimum liquidity requirements in compliance with regulatory guidance. The Asset Liability Committee regularly monitors and reviews the Company’s liquidity position.

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

The Bank also borrows from the FHLB to supplement funding requirements. At March 31, 2021, the Bank had an unused borrowing capacity with the FHLB of $87.9 million. Advances are collateralized by first mortgage residential loans as well as loans originated under the SBA Paycheck Protection Plan loans and borrowing capacity is based on the underlying book value of eligible pledged loans.

The Bank also has available on an unsecured basis federal funds borrowing lines from a correspondent bank totaling $5.0 million. Management believes the sources of liquidity are adequate to meet expected cash needs for the foreseeable future. Historically, the Bank has also utilized brokered and wholesale deposits to supplement its funding strategy. At March 31, 2021, the Bank had no brokered deposits.

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

Capital

Stockholders’ equity increased $3.5 million to $119.5 million at March 31, 2021, compared with $116.0 million at December 31, 2020 primarily due to current year net income of $3.2 million.

The following table shows the ratios of Tier 1 capital, common equity Tier 1 capital, and total capital to risk-adjusted assets and the leverage ratios for the Bank as of March 31, 2021:

	Regulatory Minimums			Well-Capitalized Minimums			Basel III Plus Conservation Buffer			Limestone Bank

Tier 1 Capital		6.0	%		8.0	%		7.0	%		12.2	%
Common equity Tier 1 capital		4.5			6.5			8.5			12.2
Total risk-based capital		8.0			10.0			10.5			13.4
Tier 1 leverage ratio		4.0			5.0			—			10.4

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

The Basel III rules require a “capital conservation buffer” of 2.5% above the regulatory minimum risk-based capital ratios. An institution is subject to limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses if capital levels fall below minimum Basel III levels plus the buffer amounts. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions without prior regulatory approval.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Given an instantaneous 100 basis point increase in interest rates, the base net interest income would increase by an estimated 0.5% at March 31, 2021, compared with an increase of 0.8% at December 31, 2020. Given a 200 basis point increase in interest rates, base net interest income would increase by an estimated 2.0% at March 31, 2021, compared with an increase of 2.2% at December 31, 2020.

The following table indicates the estimated impact on net interest income under various interest rate scenarios for the twelve months following March 31, 2021, as calculated using the static shock model approach:

	Change in Future Net Interest Income
	Dollar Change			Percentage Change
	(dollars in thousands)
+ 200 basis points	$	814			1.95	%
+ 100 basis points		212			0.51
- 100 basis points		(684	)		(1.64	)
- 200 basis points		(1,694	)		(4.06	)

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

In the normal course of business, the Company and its subsidiaries have been named, from time to time, as defendants in various legal actions. Certain of the actual or threatened legal actions may include claims for substantial compensatory and/or punitive damages or claims for indeterminate amount of damages. Litigation is subject to inherent uncertainties and unfavorable outcomes could occur.

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

The Company is not currently involved in any material litigation.

Item 1A. Risk Factors

Refer to the detailed cautionary statements and discussion of risks that affect the Company and its business in “Item 1A – Risk Factors” of the Annual Report on Form 10-K, for the year ended December 31, 2020. There have been no material changes from the risk factors previously discussed in those reports.

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

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

Period

Total Shares Purchased

(Withheld)

Average Price Paid

(Credited) Per Share

February 13, 2021

3,379

$14.40

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

Item 3. Default Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable

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Item 6. Exhibits

(a) Exhibits

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

Exhibit Number	Description of Exhibit

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

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

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

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

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

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

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, 2021, formatted in inline XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income (Loss), (iv) Consolidated Statement of Changes in Stockholders’ Equity, (v) Consolidated Statements of Cash Flows, (vi) Notes to Consolidated Financial Statements.

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

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

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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.

	LIMESTONE BANCORP, INC.
	(Registrant)

April 29, 2021	By:	/s/ John T. Taylor
		John T. Taylor
		Chief Executive Officer

April 29, 2021	By:	/s/ Phillip W. Barnhouse
		Phillip W. Barnhouse
		Chief Financial Officer