LIMESTONE BANCORP, INC. - Quarter Report: 2022 September (Form 10-Q)

lmst20220930_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 September 30, 2022

☐	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.

6,638,883 Common Shares and 1,000,000 Non-Voting Common Shares were outstanding at October 28, 2022.

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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	45
ITEM 4.	CONTROLS AND PROCEDURES	45

PART II –	OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	46
ITEM 1A.	RISK FACTORS	46
ITEM 2.	UNREGISTERED SALES ON EQUITY SECURITIES AND USE OF PROCEEDS	47
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	48
ITEM 4.	MINE SAFETY DISCLOSURES	48
ITEM 5.	OTHER INFORMATION	48
ITEM 6.	EXHIBITS	48

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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

Unaudited Consolidated Statements of Income

Unaudited Consolidated Statements of Comprehensive Income (Loss)

Unaudited Consolidated Statement of Changes in Stockholders’ Equity

Unaudited Consolidated Statements of Cash Flows

Notes to Unaudited Consolidated Financial Statements

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LIMESTONE BANCORP, INC.

Unaudited Consolidated Balance Sheets

(dollars in thousands except share data)

	September 30, 2022			December 31, 2021
Assets
Cash and due from banks	$	6,430		$	10,493
Interest bearing deposits in banks		50,940			67,110
Cash and cash equivalents		57,370			77,603
Securities available for sale		181,292			214,213
Securities held to maturity (fair value of $33,768 and $46,280, respectively)		43,350			46,460
Loans, net of allowance of $13,031 and $11,531, respectively		1,114,914			990,309
Premises and equipment, net		22,503			21,575
Premises held for sale		—			310
Federal Home Loan Bank stock		5,176			5,116
Bank owned life insurance		31,032			23,946
Deferred taxes, net		23,002			21,583
Goodwill		6,252			6,252
Other intangible assets, net		1,797			1,989
Accrued interest receivable and other assets		7,007			6,336
Total assets	$	1,493,695		$	1,415,692

Liabilities and Stockholders’ Equity
Deposits
Non-interest bearing	$	287,938		$	274,083
Interest bearing		930,642			934,585
Total deposits		1,218,580			1,208,668
Federal Home Loan Bank advances		90,000			20,000
Accrued interest payable and other liabilities		10,744			10,065
Junior subordinated debentures		21,000			21,000
Subordinated capital notes		25,000			25,000
Total liabilities		1,365,324			1,284,733
Commitments and contingent liabilities (Note 13)		—			—
Stockholders’ equity
Common stock, no par, 39,000,000 shares authorized, 6,639,033 and 6,594,749 voting, and 1,000,000 and 1,000,000 non-voting issued and outstanding, respectively		140,639			140,639
Additional paid-in capital		26,101			25,625
Retained deficit		(19,486	)		(31,769	)
Accumulated other comprehensive loss		(18,883	)		(3,536	)
Total stockholders' equity		128,371			130,959
Total liabilities and stockholders’ equity	$	1,493,695		$	1,415,692

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 September 30,					Nine Months Ended September 30,
	2022			2021		2022			2021
Interest income
Loans, including fees	$	13,179		$	11,565	$	35,537		$	33,573
Taxable securities		1,592			1,183		4,338			3,402
Tax exempt securities		166			168		495			476
Interest-bearing deposits and other		184			59		300			150
		15,121			12,975		40,670			37,601
Interest expense
Deposits		1,242			812		2,790			2,755
Federal Home Loan Bank advances		354			39		502			115
Junior subordinated debentures		239			128		546			390
Subordinated capital notes		374			375		1,126			1,126
		2,209			1,354		4,964			4,386
Net interest income		12,912			11,621		35,706			33,215
Provision (negative provision) for loan losses		(1,250	)		300		(50	)		650
Net interest income after provision for loan losses		14,162			11,321		35,756			32,565

Non-interest income
Service charges on deposit accounts		748			583		2,072			1,651
Bank card interchange fees		1,061			1,044		3,151			3,077
Income from bank owned life insurance		148			112		599			420
Gain on sale of other real estate owned		—			—		—			191
Gain (loss) on sales and calls of securities, net		—			465		(3	)		460
Gain on sale of premises held for sale		—			—		163			—
Other		271			232		740			656
		2,228			2,436		6,722			6,455
Non-interest expense
Salaries and employee benefits		4,959			4,582		14,174			13,531
Occupancy and equipment		1,134			1,024		3,218			3,063
Deposit account related expense		571			545		1,692			1,592
Data processing expense		402			378		1,191			1,133
Professional fees		206			219		663			701
Marketing expense		159			200		464			561
FDIC Insurance		90			90		270			315
Deposit tax		99			90		297			270
Communications expense		108			153		293			520
Insurance expense		104			105		318			324
Postage and delivery		156			169		469			460
Other		709			495		1,846			1,518
		8,697			8,050		24,895			23,988
Income before income taxes		7,693			5,707		17,583			15,032
Income tax expense		1,880			1,366		4,155			3,568
Net income		5,813			4,341		13,428			11,464
Basic and diluted income per common share	$	0.76		$	0.57	$	1.76		$	1.51

See accompanying notes to unaudited consolidated financial statements.

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LIMESTONE BANCORP, INC.

Unaudited Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021
Net income	$	5,813		$	4,341		$	13,428		$	11,464
Other comprehensive income (loss):
Unrealized gain (loss) on securities:
Unrealized gain (loss) arising during the period		(5,126	)		756			(20,245	)		1,718
Amortization during period of net unrealized gain transferred to held to maturity		(57	)		(91	)		(207	)		(261	)
Less reclassification adjustment for gains (losses) included in net income		—			465			(3	)		460
Net unrealized gain (loss) recognized in comprehensive income (loss)		(5,183	)		200			(20,449	)		997
Tax effect		1,293			(50	)		5,102			(249	)
Other comprehensive income (loss)		(3,890	)		150			(15,347	)		748

Comprehensive income (loss)	$	1,923		$	4,491		$	(1,919	)	$	12,212

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 and Nine Months Ended September 30, 2022

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

	Shares								Amount
	Common			Non-Voting Common		Total Common			Common and Non-Voting Common		Additional Paid-In Capital			Retained Deficit			Accumulated Other Comprehensive Loss			Total
Balances, January 1, 2022		6,594,749			1,000,000		7,594,749		$	140,639	$	25,625		$	(31,769	)	$	(3,536	)	$	130,959
Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations upon vesting		27,722			—		27,722			—		(197	)		—			—			(197	)
Forfeited unvested stock		(314	)		—		(314	)		—		—			—			—			—
Stock-based compensation expense		—			—		—			—		305			—			—			305
Net income		—			—		—			—		—			3,579			—			3,579
Dividends declared on common stock ($0.05 per share)		—			—		—			—		—			(381	)		—			(381	)
Net change in accumulated other comprehensive loss, net of taxes		—			—		—			—		—			—			(6,045	)		(6,045	)
Balances, March 31, 2022		6,622,157			1,000,000		7,622,157		$	140,639	$	25,733		$	(28,571	)	$	(9,581	)	$	128,220
Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations upon vesting		26,671			—		26,671			—		—			—			—			—
Forfeited unvested stock		(8,148	)		—		(8,148	)		—		—			—			—			—
Stock-based compensation expense		—			—		—			—		156			—			—			156
Net income		—			—		—			—		—			4,036			—			4,036
Dividends declared on common stock ($0.05 per share)		—			—		—			—		—			(382	)		—			(382	)
Net change in accumulated other comprehensive loss, net of taxes		—			—		—			—		—			—			(5,412	)		(5,412	)
Balances, June 30, 2022		6,640,680			1,000,000		7,640,680		$	140,639	$	25,889		$	(24,917	)	$	(14,993	)	$	126,618
Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations upon vesting		—			—		—			—		—			—			—			—
Forfeited unvested stock		(1,647	)		—		(1,647	)		—		—			—			—			—
Stock-based compensation expense		—			—		—			—		212			—			—			212
Net income		—			—		—			—		—			5,813			—			5,813
Dividends declared on common stock ($0.05 per share)		—			—		—			—		—			(382	)		—			(382	)
Net change in accumulated other comprehensive loss, net of taxes		—			—		—			—		—			—			(3,890	)		(3,890	)
Balances, September 30, 2022		6,639,033			1,000,000		7,639,033		$	140,639	$	26,101		$	(19,486	)	$	(18,883	)	$	128,371

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 and Nine Months Ended September 30, 2021

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

	Shares								Amount
	Common			Non-Voting Common		Total Common			Common and Non-Voting Common		Additional Paid-In Capital			Retained Deficit			Accumulated Other Comprehensive Loss			Total
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
Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations upon vesting		8,586			—		8,586			—		(39	)		—			—			(39	)
Forfeited unvested stock		(399	)		—		(399	)		—		—			—			—			—
Stock-based compensation expense		—			—		—			—		152			—			—			152
Net income		—			—		—			—		—			3,901			—			3,901
Net change in accumulated other comprehensive income, net of taxes		—			—		—			—		—			—			425			425
Balances, June 30, 2021		6,602,686			1,000,000		7,602,686		$	140,639	$	25,227		$	(39,555	)	$	(2,352	)	$	123,959
Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations upon vesting		—			—		—			—		—			—			—			—
Forfeited unvested stock		—			—		—			—		—			—			—			—
Stock-based compensation expense		—			—		—			—		214			—			—			214
Net income		—			—		—			—		—			4,341			—			4,341
Net change in accumulated other comprehensive income, net of taxes		—			—		—			—		—			—			150			150
Balances, September 30, 2021		6,602,686			1,000,000		7,602,686		$	140,639	$	25,441		$	(35,214	)	$	(2,202	)	$	128,664

See accompanying notes to unaudited consolidated financial statements.

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LIMESTONE BANCORP, INC.

Unaudited Consolidated Statements of Cash Flows

For Nine Months Ended September 30, 2022 and 2021

(dollars in thousands)

	2022			2021
Cash flows from operating activities
Net income	$	13,428		$	11,464
Adjustments to reconcile net income to net cash from operating activities
Depreciation, amortization and accretion, net		1,435			3,878
Provision (negative provision) for loan losses		(50	)		650
Net amortization on securities		291			422
Stock-based compensation expense		673			515
Deferred taxes, net		3,682			3,304
Net realized (gain) loss on sales and calls of investment securities		3			(460	)
Net realized gain on sales of other real estate owned		—			(191	)
Net realized loss on sales of premises and equipment		—			1
Net write-down on premises held for sale		—			80
Net gain on sale of premises held for sale		(163	)		—
Increase in cash surrender value of life insurance, net of premium		(586	)		(404	)
Amortization of operating lease right-of-use assets		301			269
Net change in accrued interest receivable and other assets		(2,068	)		(3,138	)
Net change in accrued interest payable and other liabilities		679			145
Net cash from operating activities		17,625			16,535

Cash flows from investing activities
Purchases of available for sale securities		(9,924	)		(68,827	)
Proceeds from sales and calls of available for sale securities		—			6,500
Proceeds from maturities and prepayments of available for sale securities		22,362			28,182
Purchases of held to maturity securities		(658	)		(15,414	)
Proceeds from calls of held to maturity securities		1,314			704
Proceeds from maturities and prepayments of held to maturity securities		2,195			2,665
Purchases of Federal Home Loan Bank stock		(727	)		—
Proceeds from mandatory redemptions of Federal Home Loan Bank stock		667			771
Proceeds from sale of other real estate owned		—			1,956
Net change in loans		(124,958	)		(8,998	)
Purchases of premises and equipment		(672	)		(953	)
Proceeds from sale of premises held for sale		473			—
Purchase of bank owned life insurance		(6,500	)		—
Net cash from investing activities		(116,428	)		(53,414	)

Cash flows from financing activities
Net change in deposits		9,912			28,384
Repayment of Federal Home Loan Bank advances		(70,000	)		(623	)
Advances from Federal Home Loan Bank		140,000			—
Common shares withheld for taxes		(197	)		(87	)
Cash dividends paid on common stock		(1,145	)		—
Net cash from financing activities		78,570			27,674
Net change in cash and cash equivalents		(20,233	)		(9,205	)
Beginning cash and cash equivalents		77,603			67,693
Ending cash and cash equivalents	$	57,370		$	58,488

Supplemental cash flow information:
Interest paid	$	5,142		$	4,837
Income taxes paid		310			220
Supplemental non-cash disclosure:
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 nine months ended September 30, 2022 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, 2021 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 created economic and financial disruptions that have adversely affected, and are likely to continue to adversely affect, the business, financial condition, and results of operations of the Company and its customers. The COVID-19 pandemic caused changes in the behavior of customers, businesses, and their employees, as well as supply chain interruptions, and overall economic and financial market instability.

Future effects, including further actions taken by federal, state, and local governments in response to the disruptions and economic and geopolitical instabilities that have followed COVID-19 or their impact, are unknown. In addition, federal governmental actions are meaningfully influencing the interest-rate environment. If these actions are sustained, it may adversely impact several industries within the Company’s geographic footprint and impair the ability of the Company’s customers to fulfill their contractual obligations. This could cause the Company to experience a material adverse effect on business operations, liquidity, asset valuations, results of operations, and financial condition, as well as its regulatory capital and liquidity ratios. Material adverse impacts may include 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, held-to-maturity debt securities, and off-balance sheet credit exposures 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. Management is focused on refining assumptions, reviewing challenges to the model, analyzing forecast scenarios, and stress testing the volatility of the model. Additionally, management is implementing various accounting policies, developing processes and related controls, and considering various reporting disclosures. 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 (Federal Reserve), 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.

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In March 2022, the FASB issued ASU 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The final standard affects all entities after adoption of ASU 2016-13 (Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments) and eliminates the accounting guidance for TDRs by creditors in Subtopic 310-40, Receivables – Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. The Company currently qualifies as a smaller reporting company and, as such, will be required to implement CECL and ASU 2022-02 for fiscal year and interim periods beginning after December 15, 2022.

Note 2 – Securities

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

The following table summarizes the amortized cost and fair value of AFS and HTM securities at September 30, 2022 and December 31, 2021 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

September 30, 2022
Available for sale
U.S. Government and federal agency	$	24,810	$	—	$	(2,864	)	$	21,946
Agency mortgage-backed: residential		82,193		16		(11,777	)		70,432
Collateralized loan obligations		48,209		—		(2,221	)		45,988
Corporate bonds		45,493		9		(2,576	)		42,926
Total available for sale	$	200,705	$	25	$	(19,438	)	$	181,292

	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses			Fair Value
Held to maturity
State and municipal	$	43,350	$	—	$	(9,582	)	$	33,768
Total held to maturity	$	43,350	$	—	$	(9,582	)	$	33,768

December 31, 2021	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available for sale
U.S. Government and federal agency	$	26,075	$	301	$	(133	)	$	26,243
Agency mortgage-backed: residential		93,650		1,339		(970	)		94,019
Collateralized loan obligations		50,227		—		(78	)		50,149
Corporate bonds		43,432		572		(202	)		43,802
Total available for sale	$	213,384	$	2,212	$	(1,383	)	$	214,213

	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses			Fair Value
Held to maturity
State and municipal	$	46,460	$	158	$	(338	)	$	46,280
Total held to maturity	$	46,460	$	158	$	(338	)	$	46,280

Sales and calls of securities were as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
	(in thousands) (in thousands)
Proceeds	$	350	$	6,500	$	1,314	$	7,204
Gross gains		—		465		—		465
Gross losses		—		—		3		5

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

	September 30, 2022
	Amortized Cost		Fair Value
	(in thousands)
Maturity
Available for sale
Within one year	$	—	$	—
One to five years		4,658		4,504
Five to ten years		84,522		79,322
Beyond ten years		29,332		27,034
Agency mortgage-backed: residential		82,193		70,432
Total	$	200,705	$	181,292

Held to maturity
Within one year	$	1,147		1,114
One to five years		7,740	$	7,386
Five to ten years		4,121		3,459
Beyond ten years		30,342		21,809
Total	$	43,350	$	33,768

Securities pledged at September 30, 2022 and December 31, 2021 had carrying values of approximately $117.8 million and $155.4 million, respectively, and were pledged to secure public deposits.

At September 30, 2022 and December 31, 2021, the Bank held securities issued by the Commonwealth of Kentucky or Kentucky municipalities having a book value of $35.2 million. At September 30, 2022 and December 31, 2021, 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 September 30, 2022, 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 September 30, 2022, $27.0 million and $19.0 million of the Bank’s CLOs were AA and A rated, respectively. None of the CLOs were subject to ratings downgrade during the nine months ended September 30, 2022.

Stress testing was completed on each security in the CLO portfolio as of September 30, 2022. Each security in the portfolio passed, without dollar loss, a stress scenario characterized as severe, which assumed a ten percent per annum constant prepayment rate, a twelve percent per annum constant default rate for four years followed by a four percent rate thereafter, and a forty-five percent recovery rate on a one-year lag.

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The corporate bond portfolio consists of 16 subordinated debt securities and two senior debt securities of U.S. banks and bank holding companies with maturities ranging from 2024 to 2037. The securities have either initially a fixed rate for five years converting to floating rate at an index over LIBOR or SOFR, or a floating rate at an index over LIBOR or SOFR from inception. Management regularly monitors the financial condition of these corporate issuers by reviewing their regulatory and public filings.

Securities with unrealized and unrecognized losses at September 30, 2022 and December 31, 2021, 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

September 30, 2022
Available for sale
U.S. Government and federal agency	$	21,946	$	(2,864	)	$	—	$	—		$	21,946	$	(2,864	)
Agency mortgage-backed: residential		43,291		(5,944	)		24,894		(5,833	)		68,185		(11,777	)
Collateralized loan obligations		30,210		(1,414	)		15,778		(807	)		45,988		(2,221	)
Corporate bonds		23,240		(1,666	)		15,711		(910	)		38,951		(2,576	)
Total temporarily impaired	$	118,687	$	(11,888	)	$	56,383	$	(7,550	)	$	175,070	$	(19,438	)

	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	$	15,420		(3,932	)		17,018		(5,650	)		32,438		(9,582	)
Total temporarily impaired	$	15,420	$	(3,932	)	$	17,018	$	(5,650	)	$	32,438	$	(9,582	)

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

December 31, 2021
Available for sale
U.S. Government and federal agency	$	11,645	$	(133	)	$	—	$	—		$	11,645	$	(133	)
Agency mortgage-backed: residential		53,733		(960	)		642		(10	)		54,375		(970	)
Collateralized loan obligations		10,036		(7	)		16,514		(71	)		26,550		(78	)
Corporate bonds		22,548		(202	)		—		—			22,548		(202	)
Total temporarily impaired	$	97,962	$	(1,302	)	$	17,156	$	(81	)	$	115,118	$	(1,383	)

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

Held to maturity
State and municipal	$	26,829		(338	)		—		—		26,829		(338	)
Total temporarily impaired	$	26,829	$	(338	)	$	—	$	—	$	26,829	$	(338	)

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Note 3 – Loans

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

	September 30,			December 31,
	2022			2021
	(in thousands)
Commercial (1)	$	240,182		$	220,826
Commercial Real Estate:
Construction		127,302			74,806
Farmland		66,820			68,388
Nonfarm nonresidential		399,958			345,893
Residential Real Estate:
Multi-family		45,903			50,224
1-4 Family		166,715			168,873
Consumer		33,894			36,440
Agriculture		46,689			35,924
Other		482			466
Subtotal		1,127,945			1,001,840
Less: Allowance for loan losses		(13,031	)		(11,531	)
Loans, net	$	1,114,914		$	990,309

(1)	Includes SBA Paycheck Protection Program (“PPP”) loans of $150,000 and $1.2 million at September 30, 2022 and December 31, 2021, respectively.

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended September 30, 2022 and 2021:

	Commercial			Commercial Real Estate			Residential Real Estate			Consumer			Agriculture			Other			Total
	(in thousands)
September 30, 2022:
Beginning balance	$	2,988		$	7,131		$	1,397		$	537		$	493		$	4		$	12,550
Provision (negative provision)		(46	)		(1,132	)		(254	)		43			140			(1	)		(1,250	)
Loans charged off		(6	)		–			(43	)		(37	)		–			–			(86	)
Recoveries		28			1,492			267			30			–			–			1,817
Ending balance	$	2,964		$	7,491		$	1,367		$	573		$	633		$	3		$	13,031


September 30, 2021:
Beginning balance	$	2,304		$	7,799		$	1,646		$	385		$	500		$	3		$	12,637
Provision (negative provision)		371			(80	)		(124	)		146			(13	)		–			300
Loans charged off		–			–			(18	)		(7	)		–			–			(25	)
Recoveries		10			3			34			7			7			–			61
Ending balance	$	2,685		$	7,722		$	1,538		$	531		$	494		$	3		$	12,973

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The following table presents the activity in the allowance for loan losses by portfolio segment for the nine months ended September 30, 2022 and 2021:

	Commercial			Commercial Real Estate			Residential Real Estate			Consumer			Agriculture			Other			Total
	(in thousands)
September 30, 2022:
Beginning balance	$	2,888		$	6,179		$	1,443		$	538		$	480		$	3		$	11,531
Provision (negative provision)		70			(244	)		(76	)		92			108			–			(50	)
Loans charged off		(31	)		(158	)		(369	)		(122	)		–			–			(680	)
Recoveries		37			1,714			369			65			45			–			2,230
Ending balance	$	2,964		$	7,491		$	1,367		$	573		$	633		$	3		$	13,031


September 30, 2021:
Beginning balance	$	2,529		$	7,050		$	1,899		$	361		$	600		$	4		$	12,443
Provision (negative provision)		155			788			(403	)		187			(76	)		(1	)		650
Loans charged off		(19	)		(129	)		(30	)		(58	)		(44	)		–			(280	)
Recoveries		20			13			72			41			14			–			160
Ending balance	$	2,685		$	7,722		$	1,538		$	531		$	494		$	3		$	12,973

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method as of September 30, 2022:

	Commercial		Commercial Real Estate		Residential Real Estate		Consumer		Agriculture		Other		Total
	(in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	–	$	–	$	1	$	–	$	–	$	–	$	1
Collectively evaluated for impairment		2,964		7,491		1,366		573		633		3		13,030
Total ending allowance balance	$	2,964	$	7,491	$	1,367	$	573	$	633	$	3	$	13,031

Loans:
Loans individually evaluated for impairment	$	–	$	477	$	509	$	214	$	–	$	–	$	1,200
Loans collectively evaluated for impairment		240,182		593,603		212,109		33,680		46,689		482		1,126,745
Total ending loans balance	$	240,182	$	594,080	$	212,618	$	33,894	$	46,689	$	482	$	1,127,945

Table of Contents

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, 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	$	–	$	–	$	–	$	2
Collectively evaluated for impairment		2,888		6,179		1,441		538		480		3		11,529
Total ending allowance balance	$	2,888	$	6,179	$	1,443	$	538	$	480	$	3	$	11,531


Loans:
Loans individually evaluated for impairment	$	–	$	2,878	$	566	$	12	$	9	$	–	$	3,465
Loans collectively evaluated for impairment		220,826		486,209		218,531		36,428		35,915		466		998,375
Total ending loans balance	$	220,826	$	489,087	$	219,097	$	36,440	$	35,924	$	466	$	1,001,840

Impaired Loans

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

The following tables present information related to loans individually evaluated for impairment by class of loans as of September 30, 2022 and December 31, 2021 and for the three and nine months ended September 30, 2022 and 2021:

	As of September 30, 2022						Three Months Ended September 30, 2022				Nine Months Ended September 30, 2022
	Unpaid Principal Balance		Recorded Investment		Allowance For Loan Losses Allocated		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(in thousands)
With No Related Allowance Recorded:
Commercial	$	265	$	—	$	—	$	—	$	1	$	—	$	1
Commercial real estate:
Construction		—		—		—		—		—		—		—
Farmland		81		29		—		29		—		112		53
Nonfarm nonresidential		1,048		448		—		1,482		2		2,129		148
Residential real estate:
Multi-family		—		—		—		—		—		—		—
1-4 Family		1,355		450		—		489		20		501		119
Consumer		446		214		—		118		—		70		1
Agriculture		315		—		—		—		—		4		23
Other		—		—		—		—		—		—		—
Subtotal		3,510		1,141		—		2,118		23		2,816		345
With An Allowance Recorded:
Commercial		—		—		—		—		—		—		—
Commercial real estate:
Construction		—		—		—		—		—		—		—
Farmland		—		—		—		—		—		—		—
Nonfarm nonresidential		—		—		—		—		—		—		—
Residential real estate:
Multi-family		—		—		—		—		—		—		—
1-4 Family		59		59		1		60		—		84		—
Consumer		—		—		—		—		—		—		—
Agriculture		—		—		—		—		—		—		—
Other		—		—		—		—		—		—		—
Subtotal		59		59		1		60		—		84		—
Total	$	3,569	$	1,200	$	1	$	2,178	$	23	$	2,900	$	345

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	As of December 31, 2021						Three Months Ended September 30, 2021				Nine Months Ended September 30, 2021
	Unpaid Principal Balance		Recorded Investment		Allowance For Loan Losses Allocated		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(in thousands)
With No Related Allowance Recorded:
Commercial	$	290	$	—	$	—	$	—	$	—	$	—	$	—
Commercial real estate:
Construction		—		—		—		—		—		—		—
Farmland		302		215		—		616		26		596		26
Nonfarm nonresidential		7,755		2,663		—		492		12		517		39
Residential real estate:
Multi-family		—		—		—		—		—		—		—
1-4 Family		1,408		501		—		716		74		829		112
Consumer		272		12		—		28		—		21		1
Agriculture		366		9		—		101		—		99		—
Other		—		—		—		—		—		—		—
Subtotal		10,393		3,400		—		1,953		112		2,062		178
With An Allowance Recorded:
Commercial		—		—		—		—		—		—		—
Commercial real estate:
Construction		—		—		—		—		—		—		—
Farmland		—		—		—		—		—		—		—
Nonfarm nonresidential		—		—		—		4,356		66		4,356		196
Residential real estate:
Multi-family		—		—		—		—		—		—		—
1-4 Family		65		65		2		100		1		102		2
Consumer		—		—		—		—		—		—		—
Agriculture		—		—		—		—		—		—		—
Other		—		—		—		—		—		—		—
Subtotal		65		65		2		4,456		67		4,458		198
Total	$	10,458	$	3,465	$	2	$	6,409	$	179	$	6,520	$	376

Cash basis income recognized on impaired loans for the three and nine months ended September 30, 2022 was $21,000 and $333,000, respectively, compared to $96,000 and $148,000 for the three and nine months ended September 30, 2021, respectively.

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 September 30, 2022 and December 31, 2021:

	TDRs Performing to Modified Terms		TDRs Not Performing to Modified Terms		Total TDRs
	(in thousands)
September 30, 2022
Commercial Real Estate:
Nonfarm nonresidential	$	146	$	—	$	146
Residential Real Estate:
1-4 Family		—		59		59
Total TDRs	$	146	$	59	$	205

Table of Contents

	TDRs Performing to Modified Terms		TDRs Not Performing to Modified Terms		Total TDRs
	(in thousands)
December 31, 2021
Commercial Real Estate:
Nonfarm nonresidential	$	340	$	—	$	340
Residential Real Estate:
1-4 Family		—		65		65
Total TDRs	$	340	$	65	$	405

At September 30, 2022 and December 31, 2021, 71% and 84%, respectively, of the Company’s TDRs were performing according to their modified terms. The Company allocated $1,000 and $2,000 in reserves to borrowers whose loan terms have been modified in TDRs as of September 30, 2022 and December 31, 2021, respectively. The Company has no commitment to lend additional amounts as of September 30, 2022 and December 31, 2021 to borrowers with outstanding loans classified as TDRs.

No TDR modifications occurred during the three and nine months ended September 30, 2022. The following table presents a summary of the TDR loan modification by portfolio segment that occurred during the three and nine months ended September 30, 2021:

	TDRs Performing to Modified Terms		TDRs Not Performing to Modified Terms		Total TDRs
	(in thousands)
September 30, 2021
Residential Real Estate:
1-4 Family	$	180	$	—	$	180
Total TDRs	$	180	$	—	$	180

During the three and nine months ended September 30, 2022 and September 30, 2021, 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.

Past Due Loans

The following table presents the aging of the recorded investment in past due loans as of September 30, 2022 and December 31, 2021:

	30 – 59 Days Past Due		60 – 89 Days Past Due		90 Days And Over Past Due		Nonaccrual		Total Past Due And Nonaccrual
	(in thousands)
September 30, 2022
Commercial	$	—	$	22	$	—	$	—	$	22
Commercial Real Estate:
Construction		—		—		—		—		—
Farmland		—		—		—		29		29
Nonfarm nonresidential		31		—		—		302		333
Residential Real Estate:
Multi-family		—		—		—		—		—
1-4 Family		213		14		—		509		736
Consumer		30		3		—		214		247
Agriculture		26		18		—		—		44
Other		—		—		—		—		—
Total	$	300	$	57	$	—	$	1,054	$	1,411

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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, 2021
Commercial	$	6	$	—	$	—	$	—	$	6
Commercial Real Estate:
Construction		—		—		—		—		—
Farmland		—		—		—		215		215
Nonfarm nonresidential		—		34		—		2,323		2,357
Residential Real Estate:
Multi-family		—		—		—		—		—
1-4 Family		513		148		—		566		1,227
Consumer		37		28		—		12		77
Agriculture		—		—		—		8		8
Other		—		—		—		—		—
Total	$	556	$	210	$	—	$	3,124	$	3,890

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 September 30, 2022, and December 31, 2021, 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)
September 30, 2022
Commercial	$	235,779	$	41	$	—	$	4,362	$	—	$	240,182
Commercial Real Estate:
Construction		127,302		—		—		—		—		127,302
Farmland		64,845		167		—		1,808		—		66,820
Nonfarm nonresidential		398,464		1,174		—		320		—		399,958
Residential Real Estate:
Multi-family		45,903		—		—		—		—		45,903
1-4 Family		163,329		1,773		—		1,613		—		166,715
Consumer		33,270		7		—		617		—		33,894
Agriculture		46,635		15		—		39		—		46,689
Other		482		—		—		—		—		482
Total	$	1,116,009	$	3,177	$	—	$	8,759	$	—	$	1,127,945

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	Pass		Watch		Special Mention		Substandard		Doubtful		Total
	(in thousands)
December 31, 2021
Commercial	$	207,729	$	5,207	$	—	$	7,890	$	—	$	220,826
Commercial Real Estate:
Construction		74,806		—		—		—		—		74,806
Farmland		65,836		170		—		2,382		—		68,388
Nonfarm nonresidential		341,780		413		—		3,700		—		345,893
Residential Real Estate:
Multi-family		50,224		—		—		—		—		50,224
1-4 Family		164,850		2,038		—		1,985		—		168,873
Consumer		36,408		5		—		27		—		36,440
Agriculture		35,863		23		—		38		—		35,924
Other		466		—		—		—		—		466
Total	$	977,962	$	7,856	$	—	$	16,022	$	—	$	1,001,840

Note 4 – Leases

As of September 30, 2022, the Company leases real estate for seven branch offices or offsite ATM machines under various operating lease agreements. The lease agreements have maturity dates ranging from 2024 to 2046, including all expected extension periods. The weighted average remaining life of the lease term for these leases was 21 years as of September 30, 2022.

In determining the present value of lease payments, the Bank uses the implicit lease rate when readily determinable. As most of the Bank’s leases do not provide an implicit rate, the incremental borrowing rate based on the information available at commencement date is used. The incremental borrowing rate is the rate of interest that the Bank estimates it would pay to borrow on a collateralized basis over a similar term in an amount equal to the lease payments in a similar economic environment. The weighted average discount rate for the leases was 4.20% as of September 30, 2022.

Total rental expense was $125,000 and $375,000, respectively, for the three and nine months ended September 30, 2022, compared to $78,000 and $326,000, respectively, for the three and nine months ended September 30, 2021. The right-of-use asset, included in premises and equipment, and lease liability, included in other liabilities, was $6.4 million as of September 30, 2022 and $5.3 million as of December 31, 2021.

Total estimated rental commitments for the operating leases were as follows as of September 30, 2022 (in thousands):

	September 30, 2022

October – December 2022	$	114
2023		457
2024		458
2025		438
2026		408
Thereafter		8,899
Total minimum lease payments		10,774
Discount effect of cash flows		(4,352	)
Present value of lease liabilities	$	6,422

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Note 5 – Deposits

The following table details deposits by category:

	September 30, 2022		December 31, 2021
	(in thousands)
Non-interest bearing	$	287,938	$	274,083
Interest checking		286,867		287,208
Money market		215,450		217,943
Savings		154,545		163,423
Certificates of deposit (1)		273,780		266,011
Total	$	1,218,580	$	1,208,668

(1)	Includes brokered deposits of $29.0 million at September 30, 2022. There were no brokered deposits at December 31, 2021.

Time deposits of $250,000 or more were $65.3 million and $33.4 million at September 30, 2022 and December 31, 2021, respectively.

Scheduled maturities of total time deposits at September 30, 2022 for each of the next five years are as follows (in thousands):

Year 1	$	209,169
Year 2		37,577
Year 3		17,358
Year 4		5,918
Year 5		2,819
Thereafter		939
	$	273,780

Note 6 – Advances from the Federal Home Loan Bank

Advances from the Federal Home Loan Bank were as follows:

	September 30,		December 31,
	2022		2021
	(in thousands)

Short term advances (fixed rates 3.04% to 4.02%) maturing October 2022 to January 2023	$	90,000	$	—
Long term advances		—		20,000
Total advances from the Federal Home Loan Bank	$	90,000	$	20,000

FHLB advances had a weighted-average rate of 3.33% at September 30, 2022 and 0.77% at December 31, 2021. Each advance is payable per terms on agreement, with a prepayment penalty. The $20.0 million long-term advance outstanding at December 31, 2021 was called by the FHLB in May 2022. No prepayment penalties were incurred during 2022 or 2021. The advances were collateralized by approximately $351.7 million of commercial real estate and first mortgage residential loans, under a blanket lien arrangement at September 30, 2022. At December 31, 2021, the advances were collateralized by approximately $121.8 million of first mortgage residential loans under a blanket lien arrangement and loans originated under the SBA Payment Protection Plan. At September 30, 2022, the Bank’s additional borrowing capacity with the FHLB was $71.5 million.

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

	Advances
Year 1		90,000
	$	90,000

Note 7 – 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. At September 30, 2022, the Company is current on all interest payments.

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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 September 30, 2022, 3-month LIBOR was 3.75%.

(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.

Federal Funds Line – At September 30, 2022, the Company had a $5.0 million federal funds line of credit available on an unsecured basis from a correspondent institution.

Note 8 – Fair Values Measurement

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

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

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

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

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

Securities: The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges, if available. This valuation method is classified as Level 1 in the fair value hierarchy. For securities where quoted prices are not available, fair values are calculated on market prices of similar securities, or matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. Matrix pricing relies on the securities’ relationship to similarly traded securities, benchmark curves, and the benchmarking of like securities. Matrix pricing utilizes observable market inputs such as benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, and industry and economic events. In instances where broker quotes are used, these quotes are obtained from market makers or broker-dealers recognized to be market participants. This valuation method is classified as Level 2 in the fair value hierarchy. For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators. This valuation method is classified as Level 3 in the fair value hierarchy. Discounted cash flows are calculated using spread to swap and relative index 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.

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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. 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.

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.

Financial assets measured at fair value on a recurring basis at September 30, 2022 and December 31, 2021 are summarized below:

			Fair Value Measurements at September 30, 2022 Using
			(in thousands)
			Quoted Prices In				Significant
			Active Markets for		Significant Other		Unobservable
	*Carrying*		*Identical Assets*		*Observable Inputs*		*Inputs*
Description	*Value*		*(Level 1)*		*(Level 2)*		*(Level 3)*
Available for sale securities
U.S. Government and federal agency	$	21,946	$	—	$	21,946	$	—
Agency mortgage-backed: residential		70,432		—		70,432		—
Collateralized loan obligations		45,988		—		45,988		—
Corporate bonds		42,926		—		29,594		13,332
Total	$	181,292	$	—	$	167,960	$	13,332

			Fair Value Measurements at December 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)
Available for sale securities
U.S. Government and federal agency	$	26,243	$	—	$	26,243	$	—
Agency mortgage-backed: residential		94,019		—		94,019		—
Collateralized loan obligations		50,149		—		50,149		—
Corporate bonds		43,802	$	—	$	29,761	$	14,041
Total	$	214,213	$	—	$	200,172	$	14,041

There were no transfers between Level 1 and Level 2 during 2022 or 2021.

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 2022.

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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 nine months ended September 30, 2022 and 2021:

	September 30, 2022
	Corporate Bonds
	(in thousands)
Balance of recurring Level 3 assets at January 1, 2022	$	14,041
Total gains or losses for the year:
Included in other comprehensive income		(709	)
Transfers into Level 3		—
Balance of recurring Level 3 assets at September 30, 2022	$	13,332

	September 30, 2021
	Collateralized Loan Obligations		Corporate Bonds
	(in thousands)
Balance of recurring Level 3 assets at January 1, 2021	$	2,388	$	11,916
Total gains or losses for the year:
Included in earnings		—		465
Included in other comprehensive income		106		1,479
Calls		—		(5,000	)
Transfers into Level 3		—		—
Balance of recurring Level 3 assets at September 30, 2021	$	2,494	$	8,860

The following table presents quantitative information about recurring level 3 fair value measurements are summarized below (in thousands):

	Fair Value Measurements at September 30, 2022
	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range (Weighted Average)


Corporate bonds	$	13,332	Discounted cash flow	Constant prepayment rate			0%
				Spread to benchmark yield	224%	-	377%	(288%)
				Indicative broker bid	80%	-	97%	(89%)

	Fair Value Measurements at December 31, 2021
	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range (Weighted Average)


Corporate bonds	$	14,041	Discounted cash flow	Constant prepayment rate			0%
				Spread to benchmark yield	200%	-	298%	(235%)
				Indicative broker bid	99%	-	106%	(103%)

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

			Fair Value Measurements at September 30, 2022 Using

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:
Residential real estate:
1-4 Family	$	58	$	—	$	—	$	58

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			Fair Value Measurements at December 31, 2021 Using

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:
Residential real estate:
1-4 Family	$	63	$	—	$	—	$	63

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $59,000 at September 30, 2022 with a valuation allowance of $1,000, resulting in no provision for loan losses for the three months or nine months ended September 30, 2022. Impaired loans had a carrying amount of $4.5 million at September 30, 2021 with a valuation allowance of $2.2 million, resulting in no provision for loan losses for the three months ended September 30, 2021 and $1,000 provision for loan losses for the nine months ended September 30, 2021, respectively. At December 31, 2021, impaired loans had a carrying amount of $65,000, with a valuation allowance of $2,000.

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

			Fair Value Measurements at September 30, 2022 Using
	Carrying Amount		Level 1		Level 2		Level 3		Total
	(in thousands)
Financial assets
Cash and cash equivalents	$	57,370	$	57,370	$	—	$	—	$	57,370
Securities available for sale		181,292		—		167,960		13,332		181,292
Securities held to maturity		43,350		—		33,768		—		33,768
Federal Home Loan Bank stock		5,176		N/A		N/A		N/A		N/A
Loans, net		1,114,914		—		—		1,043,243		1,043,243
Accrued interest receivable		4,351		—		1,094		3,257		4,351
Financial liabilities
Deposits	$	1,218,580	$	287,938	$	926,278	$	—	$	1,214,216
Federal Home Loan Bank advances		90,000		—		90,009		—		90,009
Junior subordinated debentures		21,000		—		—		18,498		18,498
Subordinated capital notes		25,000		—		—		23,791		23,791
Accrued interest payable		586		—		285		301		586

			Fair Value Measurements at December 31, 2021 Using
	Carrying Amount		Level 1		Level 2		Level 3		Total
	(in thousands)
Financial assets
Cash and cash equivalents	$	77,603	$	77,603	$	—	$	—	$	77,603
Securities available for sale		214,213		—		200,172		14,041		214,213
Securities held to maturity		46,460		—		46,280		—		46,280
Federal Home Loan Bank stock		5,116		N/A		N/A		N/A		N/A
Loans, net		990,309		—		—		981,995		981,995
Accrued interest receivable		3,870		—		1,022		2,848		3,870
Financial liabilities
Deposits	$	1,208,668	$	274,083	$	935,768	$	—	$	1,209,851
Federal Home Loan Bank advances		20,000		—		20,046		—		20,046
Junior subordinated debentures		21,000		—		—		19,500		19,500
Subordinated capital notes		25,000		—		—		26,149		26,149
Accrued interest payable		764		—		136		628		764

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.

Fair value estimates are made at a specific point in time based on relevant market information and information about financial instruments. Because no market exists for a portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Therefore, calculated fair value estimates in many instances cannot be substantiated by comparison to independent markets and, in many cases, may not be realizable in a current sale of the instrument. Changes in assumptions could significantly impact estimates.

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Note 9 – Income Taxes

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

	September 30,		December 31,
	2022		2021
	(in thousands)
Deferred tax assets:
Net operating loss carry-forward	$	15,329	$	19,335
Allowance for loan losses		3,252		2,877
Net unrealized loss on securities		4,711		—
New market tax credit carry-forward		208		208
Nonaccrual loan interest		328		321
Accrued expenses		94		138
Lease liability		1,603		1,328
Other		179		202
		25,704		24,409

Deferred tax liabilities:
FHLB stock dividends		361		415
Fixed assets		120		133
Deferred loan costs		165		176
Net unrealized gain on securities		—		390
Lease right-of-use assets		1,603		1,328
Net assets from acquisitions		249		108
Other		204		276
		2,702		2,826
Net deferred tax asset	$	23,002	$	21,583

At September 30, 2022, the Company had net federal operating loss carryforwards of $68.6 million, which will begin to expire in 2033, and state net operating loss carryforwards of $23.2 million, which begin to expire in 2029.

The Company does not have any beginning and ending unrecognized tax benefits. The Company does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next twelve months. There were no interest and penalties recorded in the income statement or accrued for the three or nine months ended September 30, 2022 or September 30, 2021 related to unrecognized tax benefits.

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

In 2015, the Company took two measures to preserve the value of its NOLs. First, the Company adopted a tax benefits preservation plan designed to reduce the likelihood of an “ownership change” occurring as a result of purchases and sales of the Company's common shares. Upon adoption of this plan, the Company declared a dividend of one preferred stock purchase right for each common share outstanding as of the close of business on July 10, 2015. Any shareholder or group that acquires beneficial ownership of 5% or more of the Company (an “acquiring person”) could be subject to significant dilution in its holdings if the Company's Board of Directors does not approve such acquisition. Existing shareholders holding 5% or more of the Company will not be considered acquiring persons unless they acquire additional shares, subject to certain exceptions described in the plan. In addition, as amended November 25, 2019, the Board of Directors has the discretion to exempt certain transactions and certain persons whose acquisition of securities is determined by the Board not to jeopardize the Company's deferred tax assets. The rights plan was extended in May 2021 to expire upon the earlier of (i) June 30, 2024, (ii) the beginning of a taxable year with respect to which the Board of Directors determines that no tax benefits may be carried forward, (iii) the repeal or amendment of Section 382 or any successor statute, if the Board of Directors determines that the plan is no longer needed to preserve the tax benefits, and (iv) certain other events as described in the plan. On October 24, 2022, with the unanimous approval of the Company’s Board of Directors, the Company amended the rights plan to accelerate its final expiration date to October 24, 2022, effectively terminating the tax benefits preservation plan as of that date.

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On September 23, 2015, the Company’s shareholders approved an amendment to its articles of incorporation to further help protect the long-term value of the Company’s NOLs. The amendment provides a means to block transfers of the Company’s common shares that could result in an ownership change under Section 382. The transfer restrictions were extended in May 2021 by shareholder vote and will expire on the earlier of (i) May 19, 2024, (ii) the beginning of a taxable year with respect to which the Board of Directors determines that no tax benefit may be carried forward, (iii) the repeal of Section 382 or any successor statute if the Board determines that the transfer restrictions are no longer needed to preserve the tax benefits of the NOLs, or (iv) such date as the Board otherwise determines that the transfer restrictions are no longer necessary.

The Company and its subsidiaries are subject to U.S. federal income tax and the Company is subject to income tax in the Commonwealth of Kentucky. The Company is no longer subject to examination by taxing authorities for years before 2019.

Note 10 – Stock Plans and Stock Based Compensation

Shares available for issuance under the 2018 Omnibus Equity Compensation Plan (“2018 Plan”) total 122,203. Shares issued to employees under the plan vest over periods of up 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 2022 unvested shares issued was $1.3 million, or $19.61 per weighted-average share. The Company recorded $212,000 and $673,000 of stock-based compensation to salaries expense for the three and nine months ended September 30, 2022, respectively, and $214,000 and $515,000 for the three and nine months ended September 30, 2021, 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 $53,000 and $168,000 was recognized related to this expense during the three and nine months ended September 30, 2022, respectively, and $54,000 and $129,000 for the three and nine months ended September 30, 2021, respectively.

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

	Nine Months Ended					Twelve Months Ended
	September 30, 2022					December 31, 2021
				Weighted					Weighted
				Average					Average
				Grant					Grant
	Shares			Price		Shares			Price
Outstanding, beginning		111,536		$	13.73		47,438		$	15.34
Granted		64,600			19.61		110,024			13.52
Vested		(30,827	)		16.06		(37,590	)		15.13
Forfeited		(10,109	)		15.20		(8,336	)		13.66
Outstanding, ending		135,200		$	15.90		111,536		$	13.73

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

October 2022 – December 2022	$	211
2023		467
2024		339
2025		197
2026		189
Thereafter		175

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Note 11 – Earnings per Share

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
	(in thousands, except share and per share data)

Net income	$	5,813	$	4,341	$	13,428	$	11,464
Less:
Earnings allocated to unvested shares		104		76		221		169
Net income available to common shareholders, basic and diluted	$	5,709	$	4,265	$	13,207	$	11,295

Basic and Diluted
Weighted average common shares including unvested common shares outstanding		7,639,492		7,602,686		7,628,677		7,591,800
Less:
Weighted average unvested common shares		136,283		133,073		125,736		111,790
Weighted average common shares outstanding		7,503,209		7,469,613		7,502,941		7,480,010
Basic and diluted income per common share	$	0.76	$	0.57	$	1.76	$	1.51

The Company had no outstanding stock options or warrants at September 30, 2022 or 2021.

Note 12 – Regulatory Capital Matters

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can result in regulatory action.

The 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 September 30, 2022, Management believes the Company and Bank met all capital adequacy requirements to which they are subject. As of September 30, 2022, 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 September 30, 2022:
Total risk-based capital (to risk- weighted assets)	$	179,662		13.53	%	$	106,196		8.00	%	$	132,745		10.00	%
Total common equity Tier 1 risk- based capital (to risk-weighted assets)		166,631		12.55			59,735		4.50			86,284		6.50
Tier 1 capital (to risk-weighted assets)		166,631		12.55			79,647		6.00			106,196		8.00
Tier 1 capital (to average assets)		166,631		11.56			57,662		4.00			72,078		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, 2021:
Total risk-based capital (to risk- weighted assets)	$	160,700		13.31	%	$	96,591		8.00	%	$	120,738		10.00	%
Total common equity Tier 1 risk- based capital (to risk-weighted assets)		149,169		12.35			54,332		4.50			78,480		6.50
Tier 1 capital (to risk-weighted assets)		149,169		12.35			72,443		6.00			96,591		8.00
Tier 1 capital (to average assets)		149,169		10.84			55,057		4.00			68,822		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. Based on these regulations, the Bank was eligible to pay $19.6 million in dividends as of September 30, 2022. The Bank paid the Company $2.4 million in dividends during the nine months ended September 30, 2022.

Note 13 – Off Balance Sheet Risks, Commitments, and Contingent Liabilities

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

An approved but unfunded loan commitment represents a potential credit risk and a liquidity risk, since the 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 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 except for home equity loans, which generally have a term of 10 years.

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:

	September 30, 2022				December 31, 2021
	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate
	(in thousands)
Commitments to make loans	$	56,136	$	41,637	$	85,294	$	60,683
Unused lines of credit		9,311		114,960		12,828		108,635
Standby letters of credit		365		346		566		326

In connection with the purchase of loan participations, the Bank entered into risk participation agreements, which had notional amounts totaling $12.1 million at September 30, 2022 and December 31, 2021. 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 September 30, 2022 and December 31, 2021, the fair value of the risk participation agreements were $5,000 and $67,000, respectively.

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

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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 14 – 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, and other transaction-based revenue that is individually immaterial. Other non-interest income included approximately $195,000 and $512,000 of revenue for the three and nine months ended September 30, 2022, respectively, within the scope of ASC 606. Other non-interest income included approximately $162,000 and $460,000 of revenue for the three and nine months ended September 30, 2021, respectively, within the scope of ASC 606. The remaining other non-interest income for the three and nine months is excluded from the scope of ASC 606.

Note 15 – Subsequent Events

Merger Agreement – On October 24, 2022, the Company entered into an Agreement and Plan of Merger ("Merger Agreement") with Peoples Bancorp, Inc. (“Peoples”). The Merger Agreement provides for a business combination whereby the Company will merge with and into Peoples (the “Merger”), with Peoples as the surviving corporation in the Merger. Under the terms and subject to the conditions of the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each share of the Company’s common stock, issued and outstanding immediately prior to the Effective Time (except for Dissenting Shares, as provided for in the Merger Agreement), will be converted, in accordance with the procedures set forth in the Merger Agreement, into 0.90 of common shares, no par value, of Peoples (“Peoples Common Shares”). The Merger Agreement contains certain termination rights for both Peoples and the Company, and further provides that, upon termination of the Merger Agreement under specified circumstances, the Company may be required to pay Peoples a termination fee of $8.3 million. The Merger is expected to close in the second quarter of 2023, pending satisfaction of various closing conditions, including, but not limited to: (1) adoption of the Merger Agreement by the shareholders of Peoples and the Company; (2) authorization for listing on Nasdaq of the Peoples Common Shares to be issued in the Merger; (3) the receipt of required regulatory approvals, including the approval of the Board of Governors of the Federal Reserve System, the Ohio Division of Financial Institutions, and the Kentucky Department of Financial Institutions; (4) effectiveness of the registration statement on Form S-4 for the Peoples Common Shares to be issued in the Merger; and (5) the absence of any order, injunction or other legal restraint preventing or making illegal the completion of the Merger or any of the other transactions contemplated by the Merger Agreement.

Tax Benefit Preservation Plan Termination – In 2015, 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. See “Note 9 – Income Taxes,” to the financial statements for additional disclosure related to the Tax Benefits Preservation Plan. On October 24, 2022, with the unanimous approval of the Company’s Board of Directors, the Company amended the Tax Benefits Preservation Plan to accelerate its final expiration date to October 24, 2022, effectively terminating the Tax Benefits Preservation Plan as of that date.

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

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

Preliminary Note Concerning Forward-Looking Statements

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

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

●

^{the impact of the novel coronavirus disease 2019 (}“^COVID-19”^{) pandemic and the economic and financial disruptions and instabilities that have followed it;}

●

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

●

^{changes in inflation and efforts to control it;}

●

^{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 and the ability of the Company}’^{s competitors with greater financial resources to develop and introduce products and services that enable them to compete more successfully;}

●

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

●

^{failure in or breach of operational or security systems or infrastructure, or those of third-party vendors and other service providers, including as a result of cyber-attacks;}

●

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

●

^{risks related to the pending Merger with Peoples Bancorp, including risks if the Company is unable to complete the Merger due to the failure of the Company’s shareholders or Peoples’ shareholders to approve the Merger Agreement, the failure to satisfy other conditions to completion of the Merger, including receipt of required regulatory and other approvals, the failure of the proposed Merger to close for any other reason, the diversion of management’s attention from ongoing business operations and opportunities due to the Merger, and the effect of the announcement of the Merger on the Company’s customer and employee relationships and operating results;}

●

^{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 Annual Report on Form 10-K for the year ended December 31, 2021.}

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.

Cautionary Statement

The statements in this quarterly report regarding the Company’s Merger Agreement with Peoples are qualified by the detailed terms and conditions of the Merger Agreement, which is Exhibit 2.1 to this report. The Merger Agreement is the contractual document that establishes and governs the legal relations of the Company and Peoples with respect to the Merger and is not intended to be, and should not be relied on as, a source of factual, business or operational information about either the Company or Peoples. The representations, warranties, covenants and agreements made by the parties to the Merger Agreement are made as of specific dates and are qualified and limited, including by information in disclosure schedules that the parties exchanged in connection with the execution of such Merger Agreement. Moreover, certain of the representations and warranties are subject to a contractual standard of materiality that may be different from what may be viewed as material to an investor. Representations and warranties may be used as a tool to allocate risks between the parties to the Merger Agreement, including where the parties do not have complete knowledge of all facts. The Merger Agreement should not be read alone, but should instead be read in conjunction with the other information regarding Peoples, the Company, their respective affiliates or their respective businesses, the Merger Agreement and the Merger that will be contained in, or incorporated by reference into, the Registration Statement on Form S-4 to be filed by Peoples that will include a proxy statement of the Company and Peoples and a prospectus of Peoples, as well as in the Forms 10-K, Forms 10-Q and other filings that each of Peoples and the Company make with the SEC. INVESTORS ARE URGED TO READ THE REGISTRATION STATEMENT AND THE CORRESPONDING PROXY STATEMENT/PROSPECTUS REGARDING THE MERGER WHEN IT BECOMES AVAILABLE, AS WELL AS ANY OTHER RELEVANT DOCUMENTS FILED WITH THE SEC, TOGETHER WITH ALL AMENDMENTS AND SUPPLEMENTS TO THOSE DOCUMENTS, AS THEY WILL CONTAIN IMPORTANT INFORMATION. Investors and security holders may obtain a free copy of these documents (when available) through the website maintained by the SEC at www.sec.gov or by accessing Peoples' website (http://www.peoplesbancorp.com) under the tab "Investor Relations" and then under the heading "SEC Filings." and the Company’s website (https://www.limestonebank.com) under the tab “About Us – Investor Relations” and then under the tab “Documents – SEC Filings.” Shareholders of the Company also will be able to obtain copies of the proxy statement/prospectus and the filings with the SEC that will be incorporated by reference in the proxy statement/prospectus, without charge, by directing a request to Phil W. Barnhouse, Chief Financial Officer, Limestone Bancorp, Inc., 2500 Eastpoint Parkway, Louisville, Kentucky 40223-4156, telephone 502-499-4800.

This quarterly report is not intended to and shall not constitute an offer to sell or the solicitation of an offer to buy securities. This quarterly report is also not a solicitation of any vote in connection with the Merger. No offer of securities or solicitation will be made except by means of a prospectus meeting the requirements of Section 10 of the Securities Act of 1933, as amended.

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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 thirteenth 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 September 30, 2022, the Company had total assets of $1.49 billion, total loans of $1.13 billion, total deposits of $1.22 billion and stockholders’ equity of $128.4 million.

On October 24, 2022, the Company entered into an Agreement and Plan of Merger ("Merger Agreement") with Peoples Bancorp, Inc. (“Peoples”). The Merger Agreement provides for a business combination whereby the Company will merge with and into Peoples (the “Merger”), with Peoples as the surviving corporation in the Merger. Under the terms and subject to the conditions of the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each share of the Company’s common stock, issued and outstanding immediately prior to the Effective Time (except for Dissenting Shares, as provided for in the Merger Agreement), will be converted, in accordance with the procedures set forth in the Merger Agreement, into 0.90 of common shares, no par value, of Peoples. Upon the terms and subject to the conditions set forth in the Merger Agreement, the Merger is expected to close in the second quarter of 2023.

In conjunction with the Merger Agreement discussed above, the Company, with the unanimous approval of the Board of Directors, terminated its Tax Benefit Preservation Plan on October 24, 2022. The Tax Benefit Preservation Plan was originally put in place in 2015 and designed to preserve the benefits of the Company’s substantial tax assets. Restrictions on transfer designed to protect the Company’s tax assets remain in effect under the Company’s Articles of Incorporation, as approved by shareholders.

The Company reported net income of $5.8 million, or $0.76 per basic and diluted common share, and $13.4 million, or $1.76 per basic and diluted common share, for the three and nine months ended September 30, 2022, compared with net income of $4.3 million, or $0.57 per basic and diluted common share, and $11.5 million, or $1.51 per basic and diluted common share, for the same periods of 2021.

Highlights for the nine months ended September 30, 2022 are as follows:

●

Average loans receivable increased approximately $100.0 million, or 10.4%, to $1.06 billion for the nine months ended September 30, 2022, compared with $959.6 million for the first nine months of 2021. SBA Paycheck Protection Program (“PPP”) loans averaged $340,000 and $19.4 million for the first nine months of 2022 and 2021, respectively.

●

Net interest margin increased three basis points to 3.56% in the first nine months of 2022 compared with 3.53% in the first nine months of 2021. The Federal Reserve increased the fed funds target by 25 basis points on March 16, 2022, 50 basis points on May 4, 2022, 75 basis points on June 15, 2022, 75 basis points on July 26, 2022, and 75 basis points on September 20, 2022. During the second and third quarters of 2022, the Bank’s fed funds sold, floating rate investment securities, loans with variable rate pricing features, and new loan originations benefitted from the upward movement in short-term rates and are expected to continue to benefit as rates continue to rise. The cost of interest-bearing liabilities has also been impacted to a lesser extent but is also expected to continue to increase as short-term interest rates continue to rise.

●

The yield on earning assets increased to 4.05% for the first nine months of 2022, compared to 4.00% for the first nine months of 2021. The yield on earning assets for the first nine months of 2021 was significantly impacted by $2.5 million in PPP fees, compared to $45,000 for the first nine months of 2022. During the first nine months of 2022, PPP fees represented approximately one basis point of earning asset yield and net interest margin, compared to 27 basis points for the first nine months of 2021. The reduction in PPP fee income was offset by an increase in interest revenue due to an increase in average loans between periods. The increase in average loans resulted in an increase in interest revenue volume of approximately $3.4 million for nine months ended September 30, 2022, which was offset by a decrease in interest revenue attributable to rates of $1.4 million due primarily to lower PPP fees between periods, as compared with the nine months ended September 30, 2021.

●

The cost of interest-bearing liabilities increased from 0.62% in the first nine months of 2021 to 0.66% in the first nine months of 2022 as a result of increases in short-term interest rates during 2022.

●

Net loan recoveries were $1.6 million for the first nine months of 2022, compared to net loan charge-offs of $120,000 for the first nine months of 2021. During the third quarter of 2022, the Bank received a payoff of $2.0 million on a nonaccrual commercial real estate loan resulting in a recovery of $1.5 million.

●

A negative provision for loan losses of $1.3 million and $50,000 was recorded in the third quarter and first nine months of 2022, respectively, compared to a provision for loan losses of $300,000 and $650,000 in the third quarter and the first nine months of 2021, respectively. The 2022 negative loan loss provisions were primarily attributable to the significant recovery recognized during the third quarter and its impact on the historical loss percentages, offset by the additional reserve required by the growth trends within the portfolio during the period. The 2021 loan loss provisions were attributable to growth trends within the portfolio and net loan charge-offs impacting historical loss percentages during the period.

●

Loans past due 30-59 days decreased from $556,000 at December 31, 2021 to $300,000 at September 30, 2022, and loans past due 60-89 days decreased from $210,000 at December 31, 2021 to $57,000 at September 30, 2022. Total loans past due and nonaccrual loans decreased to $1.4 million at September 30, 2022 from $3.9 million at December 31, 2021.

●

Deposits were $1.22 billion at September 30, 2022, compared with $1.21 billion at December 31, 2021. Certificate of deposit balances increased $7.8 million during the first nine months of 2022 to $273.8 million at September 30, 2022, from $266.0 million at December 31, 2021. Non-interest bearing accounts increased $13.9 million, savings accounts decreased $8.9 million, money market accounts decreased $2.5 million, and interest checking accounts decreased $341,000 during the first nine months of 2022 compared with December 31, 2021.

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●

On October 1, 2022, the Company paid a $0.05 per common share cash dividend to shareholders of record as of the close of business on September 16, 2022.

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, 2021. Management has discussed the development, selection, and application of the Company’s critical accounting policies with its Audit Committee. During the first nine months of 2022, 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 September 30, 2022, compared with the same period of 2021:

	For the Three Months					Change from
	Ended September 30,					Prior Period
	2022			2021		Amount			Percent
	(dollars in thousands)

Gross interest income	$	15,121		$	12,975	$	2,146			16.5	%
Gross interest expense		2,209			1,354		855			63.1
Net interest income		12,912			11,621		1,291			11.1
Provision (negative provision) for loan losses		(1,250	)		300		(1,550	)		(516.7	)
Non-interest income		2,228			2,436		(208	)		(8.5	)
Non-interest expense		8,697			8,050		647			8.0
Net income before taxes		7,693			5,707		1,986			34.8
Income tax expense		1,880			1,366		514			37.6
Net income		5,813			4,341		1,472			33.9

Net income for the three months ended September 30, 2022 totaled $5.8 million, compared with $4.3 million for the comparable period of 2021. Net interest income increased $2.1 million from the 2021 third quarter primarily as a result of an increase in average loans as compared to the prior period. A negative provision for loan losses of $1.3 million was recorded in the third quarter of 2022, as compared to a provision for loan losses of $300,000 in the third quarter of 2021. The 2022 negative loan loss provision was primarily attributable to the significant recovery recognized during the third quarter and its impact on the historical loss percentages, offset by the additional reserve required by the growth trends within the portfolio during the period. The 2021 loan loss provision was attributable to growth trends within the portfolio and net loan charge-offs impacting historical loss percentages during the period.

Non-interest income decreased $208,000 from $2.4 million in the third quarter of 2021 to $2.2 million for the third quarter of 2022. The third quarter of 2021 included a $465,000 gain on the call of a corporate bond from the Bank’s available for sale securities portfolio. Service charges on deposit accounts increased $165,000 as compared to the third quarter of 2021 due to an increase in transaction volumes. Non-interest expense increased $647,000 from $8.1 million in the third quarter of 2021 to $8.7 million in the third quarter of 2022. Salaries and benefits expense increased $377,000 from the third quarter of 2021 as a result of the inflationary impact on talent acquisition and the administration of annual salary adjustments, increased health care utilization costs, and a modest increase in performance-based incentive compensation. Other non-interest expense increased $214,000 from the third quarter of 2021 primarily related to an increase in losses associated with demand deposit charge-offs and fraudulent check and debit card activity during the period.

The following table summarizes components of income and expense and the change in those components for the nine months ended September 30, 2022, compared with the same period of 2021:

	For the Nine Months					Change from
	Ended September 30,					Prior Period
	2022			2021		Amount			Percent
	(dollars in thousands)

Gross interest income	$	40,670		$	37,601	$	3,069			8.2	%
Gross interest expense		4,964			4,386		578			13.2
Net interest income		35,706			33,215		2,491			7.5
Provision (negative provision) for loan losses		(50	)		650		(700	)		(107.7	)
Non-interest income		6,722			6,455		267			4.1
Non-interest expense		24,895			23,988		907			3.8
Net income before taxes		17,583			15,032		2,551			17.0
Income tax expense		4,155			3,568		587			16.5
Net income		13,428			11,464		1,964			17.1

Net income for the nine months ended September 30, 2022 totaled $13.4 million, compared with net income of $11.5 million for the comparable period of 2021. Net interest income increased $2.5 million from the first nine months of 2021 as a result of an increase in average loans and average investment securities. A negative provision for loan losses of $50,000 was recorded in the first nine months of 2022, as compared to $650,000 provision for loan losses in the first nine months of 2021. The 2022 negative loan loss provision was primarily attributable to the significant recovery recognized during the third quarter and its impact on the historical loss percentages, offset by the additional reserve required by the growth trends within the portfolio during the period. The 2021 loan loss provision was attributable to growth trends within the portfolio and net loan charge-offs impacting historical loss percentages during the period.

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Non-interest income increased by $267,000 to $6.7 million from $6.5 million in the first nine months of 2021. The increase was primarily due to an increase in services charges on deposit accounts of $421,000 due to an increase in transaction volumes, as well as a $179,000 increase in bank owned life insurance income due to additional policies being purchased in March 2022. Non-interest income for the first nine months of 2022 also included a $163,000 gain on sale of premises held for sale from the first quarter of 2022, while the first nine months of 2021 included a $191,000 gain on sale of OREO from the second quarter of 2021, as well as a $465,000 gain on the call of a corporate bond from the third quarter of 2021. Non-interest expense increased $907,000 from $24.0 million in the first nine months of 2021 to $24.9 million in the first nine months of 2022. The increase was primarily due to an increase of $643,000 in salaries and benefits as discussed above, and a $328,000 increase in other non-interest expense primarily related to losses associated with demand deposit charge-offs and fraudulent check and debit card activity during the period.

Net Interest Income – Net interest income was $12.9 million for the three months ended September 30, 2022, an increase of $1.3 million, or 11.1%, compared with $11.6 million for the same period in 2021. Net interest spread and margin were 3.52% and 3.73%, respectively, for the third quarter of 2022, compared with 3.47% and 3.61%, respectively, for the third quarter of 2021.

The Federal Reserve increased the fed funds target by 25 basis points on March 16, 2022, 50 basis points on May 4, 2022, 75 basis points on June 15, 2022, 75 basis points on July 26, 2022, and 75 basis points on September 20, 2022. During the second and third quarters of 2022, the Bank’s fed funds sold, floating rate investment securities, loans with variable rate pricing features, and new loan originations benefitted from the upward movement in short-term rates and are expected to continue to benefit as rates continue to rise. The cost of interest-bearing liabilities has also been impacted to a lesser extent but is also expected to continue to increase as short-term interest rates continue to rise.

The yield on earning assets increased to 4.37% for the third quarter of 2022, as compared to 4.03% in the third quarter of 2021. Average interest-earning assets were $1.38 billion for the third quarter of 2022, compared with $1.28 billion for the third quarter of 2021, a 7.4% increase. Average loans increased approximately $143.9 million and average investment securities increased $7.4 million, while average lower yielding fed funds sold decreased $56.2 million for the third quarter of 2022, compared with the third quarter of 2021. PPP loans averaged $157,000 and $12.6 million for the third quarter of 2022 and 2021, respectively. The increase in average loans resulted in an increase in interest revenue volume of approximately $1.7 million for the quarter ended September 30, 2022, which was partially offset by a decrease in interest revenue attributable to rates of $117,000 due primarily to lower PPP fees between periods, as compared with the third quarter of 2021. Total interest income increased 16.5%, or $2.1 million, for the third quarter of 2022 compared to the third quarter of 2021.

Loan fee income can meaningfully impact net interest income, loan yields, and net interest margin. The amount of loan fee income included in total interest income was $279,000 and $1.5 million for the quarters ended September 30, 2022 and September 30, 2021, respectively. This represents eight basis points and 48 basis points of yield on earning assets and net interest margin for the third quarter ended September 30, 2022 and 2021, respectively. Loan fee income for the third quarter of 2022 did not include any fees earned on PPP loans, compared to $1.4 million in the third quarter of 2021, which represented 43 basis points of earning asset yield and net interest margin for the third quarter of 2021.

The cost of interest-bearing liabilities increased to 0.85% for the third quarter of 2022, as compared to 0.56% for the third quarter of 2021. While deposit mix has continued to improve as compared to the prior year third quarter, the cost of interest-bearing liabilities was impacted by recent increases in short-term interest rates. Future short-term rate increases are expected to further impact the cost of interest-bearing liabilities. Average interest-bearing liabilities increased by 7.9% to $1.03 billion for the third quarter of 2022, as compared to $954.0 million for the third quarter of 2021 primarily due to an increase of $42.2 million in average FHLB advances and a $32.9 million increase in average interest-bearing deposits. Total interest expense increased by 63.1% to $2.2 million for the third quarter of 2022 as compared to $1.4 million for the third quarter of 2021.

Net interest income was $35.7 million for the nine months ended September 30, 2022, an increase of $2.5 million, or 7.5%, compared with $33.2 million for the same period in 2021. Net interest spread and margin were 3.39% and 3.56%, respectively, for the first nine months of 2022, compared with 3.38% and 3.53%, respectively, for the first nine months of 2021.

The yield on earning assets increased to 4.05% for the first nine months of 2022, as compared to 4.00% in the first nine months of 2021. Average interest-earning assets increased approximately $84.8 million for the nine months ended September 30, 2022, compared with the first nine months of 2021. Average loans for the first nine months of 2022 increased approximately $100.0 million and average investment securities increased $30.8 million, while average lower yielding fed funds sold decreased $45.4 million compared with the first nine months of 2021. PPP loans averaged $340,000 and $19.4 million for the first nine months of 2022 and 2021, respectively. The increase in average loans resulted in an increase in interest revenue volume of approximately $3.4 million for nine months ended September 30, 2022, which was offset by a decrease in interest revenue attributable to rates of $1.4 million due primarily to lower PPP fees between periods, as compared with the nine months ended September 30, 2021. The increase in average investment securities also resulted in $565,000 in additional interest income as compared to the prior period. Total interest income increased 8.2%, or $3.1 million, for the first nine months of 2022 compared to the first nine months of 2021.

The amount of loan fee income included in total interest income was $776,000 and $3.3 million for the nine months ended September 30, 2022 and 2021, respectively. This represents eight basis points and 35 basis points of yield on earning assets and net interest margin for the nine months ended September 30, 2022 and 2021, respectively. Loan fee income included PPP fees of $45,000 and $2.5 million for the nine months ended September 30, 2022 and 2021, respectively, which represents approximately one basis point and 27 basis points of earning asset yield and net interest margin for those nine-month periods, respectively.

The cost of interest-bearing liabilities increased to 0.66% for the first nine months of 2022, as compared to 0.62% for the first nine months of 2021. While deposit mix has continued to improve as compared to the prior year, the cost of interest-bearing liabilities was impacted by the recent increases in short-term interest rates and is expected to continue to increase as short-term interest rates continue to rise. Average interest-bearing liabilities increased by $58.3 million for the nine months ended September 30, 2022 compared with the first nine months of 2021 primarily due to a $94.3 million increase in average money market accounts, offset by a decrease of $67.4 million in average certificate of deposits. Total interest expense increased by 13.2% to $5.0 million for the nine months ended September 30, 2022 as compared to $4.4 million for the first nine months of 2021.

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Average Balance Sheets

The following table presents the average balance sheets for the three-month periods ended September 30, 2022 and 2021, 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 September 30,
	2022								2021
	Average Balance			Interest Earned/Paid		Average Yield/Cost			Average Balance			Interest Earned/Paid		Average Yield/Cost
	(dollars in thousands)
ASSETS
Interest-earning assets:
Loan receivables (1)(2)	$	1,096,478		$	13,179		4.77	%	$	952,567		$	11,565		4.82	%
Securities
Taxable		219,410			1,592		2.88			213,173			1,183		2.20
Tax-exempt		29,615			166		2.96			28,464			168		3.12
FHLB stock		4,718			63		5.30			5,247			28		2.12
Federal funds sold and other		28,550			121		1.68			84,737			31		0.15
Total interest-earning assets		1,378,771			15,121		4.37	%		1,284,188			12,975		4.03	%
Less: Allowance for loan losses		(12,915	)							(12,659	)
Non-interest earning assets		85,791								97,843
Total assets	$	1,451,647							$	1,369,372

LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
Certificates of deposit and other time deposits	$	251,608		$	381		0.60	%	$	290,062		$	384		0.53	%
NOW and money market deposits		510,914			729		0.57			436,146			322		0.29
Savings accounts		158,380			132		0.33			161,799			106		0.26
FHLB advances		62,229			354		2.26			20,000			39		0.77
Junior subordinated debentures		21,000			239		4.52			21,000			128		2.42
Subordinated capital notes		25,000			374		5.94			25,000			375		5.95
Total interest-bearing liabilities		1,029,131			2,209		0.85	%		954,007			1,354		0.56	%

Non-interest-bearing liabilities:
Non-interest-bearing deposits		282,196								278,778
Other liabilities		10,974								10,031
Total liabilities		1,322,301								1,242,816
Stockholders’ equity		129,346								126,556
Total liabilities and stockholders’ equity	$	1,451,647							$	1,369,372

Net interest income				$	12,912							$	11,621

Net interest spread							3.52	%							3.47	%
Net interest margin							3.73	%							3.61	%

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

(2)	Loan fee income included no PPP fees in the three months ended September 30, 2022 and $1.4 million, or 43 basis points, in the three months ended September 30, 2021.

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The following table presents the average balance sheets for the nine-month periods ended September 30, 2022 and 2021, along with the related calculations of tax-equivalent net interest income, net interest margin and net interest spread for the related periods.

	Nine Months Ended September 30,
	2022								2021
	Average Balance			Interest Earned/Paid		Average Yield/Cost			Average Balance			Interest Earned/Paid		Average Yield/Cost
	(dollars in thousands)
ASSETS
Interest-earning assets:
Loan receivables (1)(2)	$	1,059,609		$	35,537		4.48	%	$	959,571		$	33,573		4.68	%
Securities
Taxable		223,648			4,338		2.59			197,318			3,402		2.31
Tax-exempt		29,906			495		2.95			25,476			476		3.33
FHLB stock		4,982			127		3.41			5,619			87		2.07
Federal funds sold and other		30,234			173		0.77			75,600			63		0.11
Total interest-earning assets		1,348,379			40,670		4.05	%		1,263,584			37,601		4.00	%
Less: Allowance for loan losses		(12,291	)							(12,620	)
Non-interest earning assets		89,330								98,339
Total assets	$	1,425,418							$	1,349,303

LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
Certificates of deposit and other time deposits	$	256,320		$	999		0.52	%	$	323,748		$	1,451		0.60	%
NOW and money market deposits		499,568			1,471		0.39			405,238			961		0.32
Savings accounts		162,864			320		0.26			155,364			343		0.30
FHLB advances		44,103			502		1.52			20,203			115		0.76
Junior subordinated debentures		21,000			546		3.48			21,000			390		2.48
Subordinated capital notes		25,000			1,126		6.02			25,000			1,126		6.02
Total interest-bearing liabilities		1,008,855			4,964		0.66	%		950,553			4,386		0.62	%

Non-interest-bearing liabilities:
Non-interest-bearing deposits		276,829								268,217
Other liabilities		10,317								8,632
Total liabilities		1,296,001								1,227,402
Stockholders’ equity		129,417								121,901
Total liabilities and stockholders’ equity	$	1,425,418							$	1,349,303

Net interest income				$	35,706							$	33,215

Net interest spread							3.39	%							3.38	%

Net interest margin							3.56	%							3.53	%

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

(2)	Loan fee income included PPP fees of $45,000, or approximately one basis point, for the nine months ended September 30, 2022 and $2.5 million, or 27 basis points, for the nine months ended September 30, 2021.

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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 September 30, 2022 vs. 2021									Nine Months Ended September 30, 2022 vs. 2021
	Increase (decrease) due to change in									Increase (decrease) due to change in
	Rate			Volume			Net Change			Rate			Volume			Net Change
	(in thousands)
Interest-earning assets:
Loan receivables	$	(117	)	$	1,731		$	1,614		$	(1,432	)	$	3,396		$	1,964
Securities		365			42			407			390			565			955
FHLB stock		38			(3	)		35			51			(11	)		40
Federal funds sold and other		124			(34	)		90			169			(59	)		110
Total increase (decrease) in interest income		410			1,736			2,146			(822	)		3,891			3,069

Interest-bearing liabilities:
Certificates of deposit and other time deposits		51			(54	)		(3	)		(174	)		(278	)		(452	)
NOW and money market accounts		344			63			407			259			251			510
Savings accounts		28			(2	)		26			(39	)		16			(23	)
FHLB advances		150			165			315			177			210			387
Junior subordinated debentures		111			—			111			156			—			156
Subordinated capital notes		(1	)		—			(1	)		—			—			—
Total increase (decrease) in interest expense		683			172			855			379			199			578
Increase (decrease) in net interest income	$	(273	)	$	1,564		$	1,291		$	(1,201	)	$	3,692		$	2,491

Non-Interest Income – The following table presents the major categories of non-interest income for the three and nine months ended September 30, 2022 and 2021:

	For the Three Months				For the Nine Months
	Ended September 30,				Ended September 30,
	2022		2021		2022			2021
	(dollars in thousands)

Service charges on deposit accounts	$	748	$	583	$	2,072		$	1,651
Bank card interchange fees		1,061		1,044		3,151			3,077
Income from bank owned life insurance		148		112		599			420
Net gain on sale of other real estate owned		—		—		—			191
Gain (loss) on sales and calls of securities, net		—		465		(3	)		460
Gain on sale of premises held for sale		—		—		163			—
Other		271		232		740			656
Total non-interest income	$	2,228	$	2,436	$	6,722		$	6,455

Non-interest income for the third quarter of 2022 decreased by $208,000, or 8.5%, compared with the third quarter of 2021. The third quarter of 2021 included a $465,000 gain on the call of a corporate bond from the Bank’s available for sale securities portfolio. Compared to the third quarter of 2021, service charges on deposit accounts increased $165,000 due to an increase in transaction volumes.

For the nine months ended September 30, 2022, non-interest income increased by $267,000, or 4.1%, to $6.7 million compared with $6.5 million for the same period of 2021. The increase was primarily due to an increase in services charges on deposit accounts of $421,000 due to an increase in transaction volumes, as well as a $179,000 increase in bank owned life insurance income due to additional policies being purchased in March 2022. Non-interest income for the first nine months of 2022 also included a $163,000 gain on sale of premises held for sale from the first quarter of 2022, while the first nine months of 2021 included a $191,000 gain on sale of OREO from the second quarter of 2021, as well as, a $465,000 gain on the call of a corporate bond from the third quarter of 2021.

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Non-interest Expense – The following table presents the major categories of non-interest expense for the three and nine months ended September 30, 2022 and 2021:

	For the Three Months				For the Nine Months
	Ended September 30,				Ended September 30,
	2022		2021		2022		2021
	(dollars in thousands)

Salary and employee benefits	$	4,959	$	4,582	$	14,174	$	13,531
Occupancy and equipment		1,134		1,024		3,218		3,063
Deposit account related expenses		571		545		1,692		1,592
Data processing expense		402		378		1,191		1,133
Professional fees		206		219		663		701
Marketing expense		159		200		464		561
FDIC insurance		90		90		270		315
Deposit tax		99		90		297		270
Communications expense		108		153		293		520
Insurance expense		104		105		318		324
Postage and delivery		156		169		469		460
Other		709		495		1,846		1,518
Total non-interest expense	$	8,697	$	8,050	$	24,895	$	23,988

Non-interest expense for the third quarter ended September 30, 2022 increased $647,000, or 8.0%, compared with the third quarter of 2021. Salaries and benefits expense increased $377,000 from the third quarter of 2021 as a result of the inflationary impact on talent acquisition and the administration of annual salary adjustments, increased health care utilization costs, and a modest increase in performance-based incentive compensation. Other non-interest expense increased $214,000 from the third quarter of 2021 primarily related to an increase in losses associated with demand deposit charge-offs and fraudulent check and debit card activity during the period.

For the nine months ended September 30, 2022, non-interest expense increased $907,000, or 3.8% to $24.9 million compared with $24.0 million for the first nine months of 2021. The increase was primarily due to an increase of $643,000 in salaries and benefits as discussed above, and a $328,000 increase in other non-interest expense primarily related to losses associated with demand deposit charge-offs and fraudulent check and debit card activity during the period.

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

	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
	2022			2021			2022			2021
	(dollars in thousands)

Federal statutory tax rate		21	%		21	%		21	%		21	%
Federal statutory rate times financial statement income	$	1,615		$	1,199		$	3,692		$	3,157
Effect of:
State income taxes		294			224			657			607
Tax-exempt interest income		(32	)		(38	)		(95	)		(108	)
Non-taxable life insurance income		(31	)		(28	)		(126	)		(105	)
Restricted stock vesting		—			(1	)		(21	)		(1	)
Other, net		34			10			48			18
Total	$	1,880		$	1,366		$	4,155		$	3,568

Analysis of Financial Condition

Total assets increased $78.0 million, or 5.5%, to $1.49 billion at September 30, 2022, from $1.42 billion at December 31, 2021. This increase was primarily attributable to an increase in loans receivable of $126.1 million and bank owned life insurance of $7.1 million, offset by decreases of $36.0 million in the securities portfolio and $20.2 million in cash and cash equivalents.

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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 decreased by $36.0 million, or 13.8%, to $224.6 million at September 30, 2022, compared with $260.7 million at December 31, 2021. The decrease was comprised primarily of $25.9 million in payment proceeds and $20.2 million in fair value declines attributable to the rising interest rate environment, partially offset by purchases of $10.6 million.

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

	September 30, 2022									December 31, 2021
	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	$	24,810	$	—	$	(2,864	)	$	21,946	$	26,075	$	301	$	(133	)	$	26,243
Agency mortgage-backed residential		82,193		16		(11,777	)		70,432		93,650		1,339		(970	)		94,019
Collateralized loan obligations		48,209		—		(2,221	)		45,988		50,227		—		(78	)		50,149
Corporate bonds		45,493		9		(2,576	)		42,926		43,432		572		(202	)		43,802
Total available for sale	$	200,705	$	25	$	(19,438	)	$	181,292	$	213,384	$	2,212	$	(1,383	)	$	214,213

	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	$	43,350	$	—	$	(9,582	)	$	33,768	$	46,460	$	158	$	(338	)	$	46,280
Total held to maturity	$	43,350	$	—	$	(9,582	)	$	33,768	$	46,460	$	158	$	(338	)	$	46,280

The Bank owns Collateralized Loan Obligations (CLOs), which are debt securities secured by professionally managed portfolios of senior-secured loans to corporations. CLO are typically $300 million to $1 billion in size, contain one hundred or more loans and have five to six credit tranches with credit ratings 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 September 30, 2022, $27.0 million and $19.0 million of the Bank’s CLOs were risk rated AA and A rated, respectively. None of the CLOs were subject to ratings downgrade during the nine months ended September 30, 2022.

Stress testing was completed on each security in the CLO portfolio as of September 30, 2022. Each security in the portfolio passed, without dollar loss, a stress scenario characterized as severe, which assumed a ten percent per annum constant prepayment rate, a twelve percent per annum constant default rate for four years followed by a four percent rate thereafter, and a forty-five percent recovery rate on a one-year lag.

The corporate bond portfolio consists of 16 subordinated debt securities and two senior debt securities of U.S. banks and bank holding companies with maturities ranging from 2024 to 2037. The securities have either initially a fixed rate for five years converting to floating rate at an index over LIBOR or SOFR, or a floating rate 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 Company evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, underlying credit quality of the issuer, and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer’s financial condition, the Company may consider whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, the sector or industry trends and cycles affecting the issuer, and the results of reviews of the issuer’s financial condition. As of September 30, 2022, management does not believe any securities in the portfolio with unrealized losses should be classified as other than temporarily impaired.

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Loans Receivable – Loans receivable increased $126.1 million, or 12.6%, during the nine months ended September 30, 2022 to $1.13 billion as loan growth outpaced paydowns. The commercial and commercial real estate portfolios increased by an aggregate of $124.3 million, or 17.5%, during the first nine months of 2022 and comprised 74.0% of the loan portfolio at September 30, 2022. Residential real estate and consumer portfolios decreased by an aggregate of $9.0 million, or 3.5%, during the first nine months of 2022 and comprised 21.9% of the loan portfolio at September 30, 2022.

Loan Portfolio Composition – The following table presents a summary of the loan portfolio at the dates indicated, net of deferred loan fees, by type. There are no foreign loans in the portfolio and other than the categories noted, there is no concentration of loans in any industry exceeding 10% of total loans.

	As of September 30,					As of December 31,
	2022					2021
	Amount		Percent			Amount		Percent
			(dollars in thousands)

Commercial (1)	$	240,182		21.29	%	$	220,826		22.04	%
Commercial Real Estate
Construction		127,302		11.29			74,806		7.47
Farmland		66,820		5.92			68,388		6.83
Nonfarm nonresidential		399,958		35.46			345,893		34.53
Residential Real Estate
Multi-family		45,903		4.07			50,224		5.01
1-4 Family		166,715		14.78			168,873		16.86
Consumer		33,894		3.00			36,440		3.64
Agriculture		46,689		4.14			35,924		3.59
Other		482		0.05			466		0.03
Total loans	$	1,127,945		100.00	%	$	1,001,840		100.00	%

(1)

Includes PPP loans of $150,000 and $1.2 million at September 30, 2022 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.

	September 30, 2022					December 31, 2021
	Loans		% to Total			Loans		% to Total
	(dollars in thousands)

Pass	$	1,116,009		98.9	%	$	977,962		97.6	%
Watch		3,177		0.3			7,856		0.8
Special Mention		—		—			—		—
Substandard		8,759		0.8			16,022		1.6
Doubtful		—		—			—		—
Total	$	1,127,945		100.0	%	$	1,001,840		100.00	%

Loans receivable increased $126.1 million, or 12.6%, during the nine months ended September 30, 2022 primarily as a result of loan growth outpacing loan payoffs during the period. Since December 31, 2021, the pass category increased approximately $138.0 million, the watch category decreased approximately $4.7 million, and the substandard category decreased approximately $7.3 million. The $7.3 million decrease in loans classified as substandard was primarily driven by $7.8 million in payments, $331,000 in charge-offs, and $262,000 in loans upgraded from substandard, offset by $1.1 million in loans migrating to substandard.

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

	September 30, 2022		December 31, 2021
	(in thousands)
Past Due Loans:
30-59 Days	$	300	$	556
60-89 Days		57		210
90 Days and Over		—		—
Total Loans Past Due 30-90+ Days		357		766

Nonaccrual Loans		1,054		3,124
Total Past Due and Nonaccrual Loans	$	1,411	$	3,890

During the nine months ended September 30, 2022, nonaccrual loans decreased by $2.1 million to $1.1 million. Loans past due 30-59 days decreased from $556,000 at December 31, 2021 to $300,000 at September 30, 2022. Loans past due 60-89 days decreased from $210,000 at December 31, 2021 to $57,000 at September 30, 2022. This represents a $409,000 decrease in accruing past due loans from December 31, 2021 to September 30, 2022 in loans past due 30-89 days. The $2.1 million decrease in nonaccrual loans was primarily due to a payoff of a $2.0 million commercial real estate loan, which resulted in a recovery of $1.5 million. This trend in delinquency levels is considered during the evaluation of qualitative trends in the portfolio when establishing the general component of the allowance for loan losses.

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

The Bank generally 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 September 30, 2022 and December 31, 2021, the Bank had two and three restructured loans totaling $205,000 and $405,000, 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 September 30, 2022 or December 31, 2021. 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 commercial real estate properties or 1-4 residential properties. At September 30, 2022 and December 31, 2021, 71% and 84%, respectively, of the TDRs were performing according to their modified terms.

There were no modifications granted during the nine months ended September 30, 2022 and one modification granted during the third quarter and nine months ended September 30, 2021 that resulted in loans being identified as TDRs. See “Note 3 – Loans,” to the financial statements for additional disclosure related to troubled debt restructuring.

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 September 30, 2022 and December 31, 2021:

	September 30, 2022			December 31, 2021
	(dollars in thousands)

Loans on nonaccrual status	$	1,054		$	3,124
Troubled debt restructurings on accrual		146			340
Past due 90 days or more still on accrual		—			—
Total non-performing loans		1,200			3,464
Real estate acquired through foreclosure		—			—
Other repossessed assets		—			—
Total non-performing assets	$	1,200		$	3,464

Nonaccrual loans to total loans		0.09	%		0.31	%
Non-performing loans and TDRs on accrual to total loans		0.11	%		0.35	%
Non-performing assets and TDRs on accrual to total assets		0.08	%		0.24	%
Allowance for loan losses to nonaccrual loans		1,236.34	%		369.11	%
Allowance for non-performing loans	$	22		$	12
Allowance for non-performing loans to non-performing loans and TDRs on accrual		1.83	%		0.35	%

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Allowance for Loan Losses and Provision 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. This assessment is an estimate and is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available or as events change.

Net loan recoveries were $1.7 million and $1.6 million, for the three and nine months ended September 30, 2022, compared to net loan recoveries of $36,000 and net loan charge-offs of $120,000, for the three and nine months ended September 30, 2021. During the third quarter of 2022, the Bank received a payoff of $2.0 million on a nonaccrual commercial real estate loan resulting in a recovery of $1.5 million.

A negative provision for loan losses of $1.3 million and $50,000 was recorded in the third quarter and first nine months of 2022, respectively, compared to a provision for loan losses of $300,000 and $650,000 in the third quarter and the first nine months of 2021, respectively. The 2022 negative loan loss provisions were primarily attributable to the significant recovery during the third quarter and its impact on the historical loss percentages, offset by the additional reserve required by the growth trends within the portfolio during the period. The 2021 loan loss provisions were attributable to growth trends within the portfolio and net loan charge-offs impacting historical loss percentages during the period.

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

	Three Months Ended September 30,						Nine Months Ended September 30,						December 31,
	2022			2021			2022			2021			2021
	(in thousands)
Balance at beginning of period	$	12,550		$	12,637		$	11,531		$	12,443		$	12,443

Loans charged-off:
Real estate		43			18			527			159			2,332
Commercial		6			—			31			19			19
Consumer		37			7			122			58			131
Agriculture		—			—			—			44			44
Other		—			—			—			—			—
Total charge-offs		86			25			680			280			2,526

Recoveries
Real estate		1,759			37			2,083			85			228
Commercial		28			10			37			20			172
Consumer		30			7			65			41			49
Agriculture		—			7			45			14			15
Other		—			—			—			—			—
Total recoveries		1,817			61			2,230			160			464
Net charge-offs (recoveries)		(1,731	)		(36	)		(1,550	)		120			2,062
Provision (negative provision) for loan losses		(1,250	)		300			(50	)		650			1,150
Balance at end of period	$	13,031		$	12,973		$	13,031		$	12,973		$	11,531

Allowance for loan losses to period-end loans		1.16	%		1.34	%		1.16	%		1.34	%		1.15	%
Net charge-offs to average loans		(0.63	)%		(0.01	)%		(0.20	)%		0.02	%		0.22	%
Allowance for loan losses to non-performing loans		1,085.92	%		592.92	%		1,085.92	%		592.92	%		332.88	%

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The allowance for loan losses to total loans was 1.16% at September 30, 2022, compared to 1.15% at December 31, 2021, and 1.34% at September 30, 2021. The allowance for loan losses to non-performing loans was 1,085.92% at September 30, 2022, compared with 332.88% at December 31, 2021, and 592.92% at September 30, 2021.

Liabilities – Total liabilities at September 30, 2022 were $1.37 billion compared with $1.28 billion at December 31, 2021, an increase of $80.6 million, or 6.3%. This increase was primarily attributable to an increase in FHLB advances of $60.0 million and $19.9 million in deposits.

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

	For the Nine Months					For the Year
	Ended September 30,					Ended December 31,
	2022					2021
	Average		Average			Average		Average
	Balance		Rate			Balance		Rate
	(dollars in thousands)
Demand	$	276,829				$	271,994
Interest checking		283,494		0.39	%		233,844		0.27	%
Money market		216,074		0.39			190,094		0.34
Savings		162,864		0.26			157,283		0.28
Certificates of deposit		256,320		0.52			311,140		0.57
Total deposits	$	1,195,581		0.31	%	$	1,164,355		0.30	%

The following table shows at September 30, 2022 the amount of time deposits of $250,000 or more by time remaining until maturity (in thousands):

Maturity Period

Three months or less	$	11,971
Three months through six months		10,659
Six months through twelve months		32,883
Over twelve months		9,770
Total	$	65,283

Capital

Stockholders’ equity decreased $2.6 million to $128.4 million at September 30, 2022, compared with $131.0 million at December 31, 2021 due primarily to the other comprehensive loss for the period of $15.3 million attributable to the fair value decline in the available for sale investment portfolio and $1.1 million in dividends paid to common shareholders, offset by current year net income of $13.4 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 September 30, 2022:

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

Tier 1 Capital		6.0	%		8.0	%		7.0	%		12.6	%
Common equity Tier 1 capital		4.5			6.5			8.5			12.6
Total risk-based capital		8.0			10.0			10.5			13.5
Tier 1 leverage ratio		4.0			5.0			—			11.6

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

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Liquidity and Capital Resource Management

Liquidity risk arises from the possibility the Company may not be able to satisfy current or future financial commitments, or may become unduly reliant on alternative funding sources. The objective of liquidity risk management is to ensure that the Company meets the cash flow requirements of depositors and borrowers, as well as operating cash needs, taking into account all on- and off-balance sheet funding demands. Liquidity risk management also involves ensuring that cash flow needs are met at a reasonable cost. Management maintains an investment and funds management policy, which identifies the primary sources of liquidity, establishes procedures for monitoring and measuring liquidity, and establishes minimum liquidity requirements in compliance with regulatory guidance. The Asset Liability Committee regularly monitors and reviews 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 September 30, 2022, the Bank had an unused borrowing capacity with the FHLB of $71.5 million. Advances are collateralized by commercial real estate and first mortgage residential loans. 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 September 30, 2022, the Bank had $29.0 million in brokered deposits. The Bank had no brokered deposits at December 31, 2021.

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’s primary source of funding to meet its obligations is dividends from the Bank. At September 30, 2022, the Bank was eligible to pay $19.6 million in dividends. The Bank paid the Company $2.4 million in dividends during the nine months ended September 30, 2022.

Additionally, the Company also may issue common equity, preferred equity and debt to support cash flow needs and liquidity requirements.

Impact of Inflation and Changing Prices

The financial statements and related data presented herein have been prepared in accordance with U.S. generally accepted accounting principles, which require the measurement of financial position and operating results in historical dollars without considering changes in the relative purchasing power of money over time due to inflation.

The Bank has an asset and liability structure that is essentially monetary in nature. As a result, interest rates have a more significant impact on performance than the effects of general levels of inflation. Periods of high inflation are often accompanied by relatively higher interest rates, and periods of low inflation are accompanied by relatively lower interest rates. As market interest rates rise or fall in relation to the rates earned on loans and investments, the value of these assets decreases or increases respectively. Inflation has and is expected to continue to impact core non-interest expenses associated with delivering the Bank’s services.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Given an instantaneous 100 basis point increase in interest rates, the base net interest income would decrease by an estimated 0.5% at September 30, 2022, compared with a decrease of 1.3% at December 31, 2021. Given a 200 basis point increase in interest rates, base net interest income would decrease by an estimated 1.2% at September 30, 2022, compared with a decrease of 2.0% at December 31, 2021.

The following table indicates the estimated impact on net interest income under various interest rate scenarios for the twelve months following September 30, 2022, as calculated using the static shock model approach:

	Change in Future Net Interest Income
	Dollar Change			Percentage Change
	(dollars in thousands)
+ 200 basis points	$	(661	)		(1.20	)%
+ 100 basis points		(259	)		(0.47	)
- 100 basis points		(299	)		(0.54	)
- 200 basis points		(2,181	)		(3.95	)

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 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.

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, 2021. The following risk factors supplement the "Item 1A - Risk Factors" section of the Annual Report on Form 10-K for the year ended December 31, 2021.

Risks Related to the Company’s Pending Merger Transaction

Failure to complete the Company’s proposed Merger with Peoples could negatively impact the Company’s business, financial results and stock price.

If the Merger is not completed for any reason, the Company’s ongoing business may be adversely affected, and, without realizing any of the benefits of having completed the Merger, the Company will be subject to a number of risks, including the following:

●

the Company may experience negative reactions from the financial markets, including negative impacts on its stock price;

●

the market price of the Company’s common stock could decline to the extent that the current market prices reflect a market assumption that the Merger will be completed;

●

the Company may experience negative reactions from the Company’s customers, vendors and team members;

●

the Company will have incurred substantial expenses and will be required to pay certain costs relating to the Merger, whether or not the Merger is completed, such as legal, accounting, investment banking and advisory and printing fees;

●

the Merger Agreement places certain restrictions on the conduct of the Company’s business prior to completion of the Merger, such restrictions, the waiver of which is subject to the consent of Peoples, may adversely affect the Company’s ability to execute certain of its business strategies; and

●

matters relating to the Merger may require substantial commitments of time and resources by the Company’s management (including integration planning), which could otherwise have been devoted to other opportunities that may have been beneficial to the Company, as an independent company.

In addition to the above risks, if the Merger Agreement is terminated and the Company’s Board of Directors seeks another merger or business combination, the market price of the Company’s common stock could decline, which could make it more difficult to find a party willing to offer equivalent or more attractive consideration than the consideration Peoples has agreed to provide. If the Merger Agreement is terminated under certain circumstances, the Company may be required to pay a termination fee of $8.3 million to Peoples, which may adversely affect the price of the Company’s common stock. Any of the above risks could materially affect the Company’s business, financial results and stock price.

Because the market price of Peoples common stock may fluctuate, the Company’s shareholders cannot be certain of the precise value of the Merger consideration they may receive in the Merger.

At the time the Merger is completed, each issued and outstanding share of the Company’s common stock will be converted into the right to receive 0.90 of a share of Peoples common stock.

The market value of Peoples common stock may fluctuate prior to closing of the Merger as a result of a variety of factors, including general market and economic conditions, changes in Peoples’ businesses, operations and prospects, and regulatory considerations. Many of these factors are outside of the Company’s and Peoples’ control. Consequently, while the Merger Agreement includes a termination right designed to protect against a greater than 17.5% decline in the market price of Peoples common stock prior to the closing that exceeds the change in the Nasdaq Bank Index plus 17.5%, the Company’s shareholders will not know in advance the actual market value of the shares of Peoples common stock that they are to receive in the Merger. The actual market value of the shares of Peoples common stock received by the Company’s shareholders will depend on the market value of shares of Peoples common stock at the time the Merger is completed. This market value may be less or more than the value used to determine the exchange ratio stated in the Merger Agreement.

The Company faces risks and uncertainties related to its proposed Merger with Peoples.

Uncertainty about the effect of the Merger on the Company’s team members and customers may have an adverse effect on the Company. These uncertainties may impair the Company’s ability to attract, retain and motivate key personnel until the Merger is consummated and for a period of time thereafter, and could cause customers and others that deal with the Company to seek to change their existing business relationships with the Company. Team member retention may be particularly challenging during the pendency of the Merger, as team members may experience uncertainty about their roles with the surviving corporation following the Merger.

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In addition, the Merger Agreement contains provisions that restrict the Company’s ability to, among other things, solicit, knowingly encourage or facilitate inquiries or proposals or enter into any agreement with respect to, or initiate or participate in any negotiations or discussions with any person concerning any alternative business combination proposals, subject to a limited exception when required by the Company’s Board of Directors’ exercise of its fiduciary duties in response to an unsolicited acquisition proposal that is, or is reasonably capable of becoming, a superior proposal. These provisions, which include a $8.3 million termination fee payable under certain circumstances, might discourage a potential competing acquirer that might have an interest in engaging in a superior transaction from considering or proposing that acquisition, or might result in lower value received by the Company’s shareholders than would have otherwise been received.

The Company and Peoples have operated and, until the completion of the Merger, will continue to operate, independently. The success of the Merger, including anticipated benefits and cost savings among other things, will depend, in part, on the Company’s and Peoples’ ability to successfully combine and integrate the Company’s and Peoples’ businesses in a manner that facilitates growth opportunities and realizes cost savings. It is possible that the integration process could result in the loss of key employees, the loss of customers, the disruption of either company’s or both companies’ ongoing business, inconsistencies in standards, controls, procedures and policies, unexpected integration issues, higher than expected integration costs and an overall post-completion integration process that takes longer than originally anticipated. If the combined companies experience difficulties with the integration process, the anticipated benefits of the Merger may not be realized fully or at all or may take longer to realize than expected.

The Merger Agreement may be terminated in accordance with its terms and the Merger may not be completed.

The Merger Agreement is subject to a number of conditions which must be fulfilled in order to complete the Merger. Those conditions include: the approval of the Merger by the Company’s shareholders; the effectiveness of the registration statement on Form S-4 for the shares of Peoples common stock to be issued in the Merger; the receipt of authorization for listing on Nasdaq of the shares of Peoples common stock to be issued in the Merger; the receipt of all required regulatory approvals; the absence of any order, decree or injunction enjoining or prohibiting the Merger; the receipt of a fairness opinion by the Company’s financial advisor; subject to certain exceptions, the accuracy of representations and warranties under the Merger Agreement; the Company’s and Peoples’ performance of the Company’s and their respective obligations under the Merger Agreement in all material respects; the absence of a material adverse effect on the Company or Peoples while the transaction is pending; and the Company’s receipt of a tax opinion to the effect that the Merger will be treated as a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended. These conditions to the closing of the Merger may not be fulfilled in a timely manner or at all, and, accordingly, the Merger may be delayed or may not be completed.

The Company and Peoples may elect to terminate the Merger Agreement under certain circumstances. Among other situations, if the Merger is not completed by July 31, 2023, either the Company or Peoples may choose not to proceed with the Merger, subject to certain exceptions. The Company and Peoples can also mutually decide to terminate the Merger Agreement at any time. If the Merger Agreement is terminated, under certain limited circumstances, the Company may be required to pay a termination fee of $8.3 million to Peoples.

The Company’s ability to complete the Merger is subject to the receipt of approval from various regulatory agencies, which may impose conditions that could adversely affect the Company or cause the Merger to be abandoned.

Before the transactions contemplated in the Merger Agreement can be completed, the Company and Peoples must obtain various regulatory approvals. The terms and conditions of the approvals that are granted may impose conditions, limitations, obligations or costs, or place restrictions on the conduct of the combined company’s business or require changes to the terms of the transactions contemplated by the Merger Agreement. Although the Company and Peoples do not currently expect that any such conditions or changes would be imposed, there can be no assurance that the regulators will not impose any such conditions, obligations or restrictions, and that such conditions, limitations, obligations or restrictions will not have the effect of delaying or preventing completion of any of the transactions contemplated by the Merger Agreement, imposing additional material costs on or materially limiting the revenues of the combined company following the Merger or otherwise reduce the anticipated benefits of the Merger if the Merger were consummated successfully within the expected timeframe, any of which might have an adverse effect on the combined company following the Merger. Neither Peoples nor the Company will be required to complete the Merger if Peoples determines any required regulatory approval contains an unduly burdensome provision.

Shareholder litigation could prevent or delay the closing of the proposed Merger or otherwise negatively impact the Company’s business and operations.

In connection with the Merger, lawsuits may be filed against the Company, Peoples, or the directors and officers of either company in connection with the Merger. Litigation filed against the Company, the Company’s Board of Directors or Peoples and its Board of Directors could prevent or delay the completion of the Merger or result in the payment of damages following completion of the Merger. The defense or settlement of any lawsuit or claim that remains unresolved at the Effective Time of the Merger may adversely affect the combined company’s business, financial condition, results of operations, cash flows and market price.

Global Economic and Geopolitical Instability and Inflationary Risks

Instability in global economic conditions and geopolitical matters, as well as volatility in financial markets, could have a material adverse effect on the Company’s results of operations and financial condition. The macroeconomic environment in the United States is susceptible to global events and volatility in financial markets. For example, global demand for products continues to exceed supply during the economic recovery from the COVID-19 pandemic, creating significant inflationary pressures which, in turn, may adversely impact regional and global economic conditions, as well as the Company’s financial condition and results of operations.

The risks described above and in our 2021 Form 10-K are not the only risks that we encounter. Additional risks and uncertainties not currently known to us or that we currently do not deem to be material to the Company also may materially adversely affect our business, results of operations, financial condition and/or liquidity.

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

On October 20, 2021, the Board of Directors approved a share repurchase program authorizing the Company to purchase up to $3.0 million of the Company’s Common Shares over time in the open market or in privately negotiated transactions. The repurchase program may be modified, terminated, or suspended at any time at the Company’s discretion and will expire on December 31, 2022. To date, no shares have been repurchased under the plan. The Company’s Merger Agreement with Peoples prohibits the Company from repurchasing any of its shares while the Merger transaction is pending.

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Item 3. Default Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits

(a)

Exhibits

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

Exhibit Number	Description of Exhibit

2.1*	Agreement and Plan of Merger by and between Peoples Bancorp, Inc. and Limestone Bancorp, Inc. dated October 24, 2022. Exhibit 2.1 to Form 8-K filed October 25, 2022 is incorporated by reference.

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 July 30, 2021 and incorporated by reference.

3.2	Amended and Restated Bylaws of Limestone Bancorp, Inc. dated June 18, 2018. Exhibit 3.2 to Form 8-K filed June 18, 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 5, 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.

4.5	Amendment No. 4 to the Limestone Bancorp, Inc. Tax Benefits Preservation Plan, dated May 19, 2021. Exhibit 4 to the Form 8-K filed May 19, 2021 is incorporated by reference.

4.6	Amendment No. 5 to the Limestone Bancorp, Inc. Tax Benefits Preservation Plan, dated October 24, 2022. Exhibit 4.6 to the Form 8-K filed October 25, 2022 is incorporated 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 10-Q for the quarter ended September 30, 2022, 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).

*	Schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K but Limestone Bancorp, Inc. will provide them to the Securities and Exchange Commission upon request.

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)

October 28, 2022	By:	/s/ John T. Taylor
		John T. Taylor
		Chief Executive Officer

October 28, 2022	By:	/s/ Phillip W. Barnhouse
		Phillip W. Barnhouse
		Chief Financial Officer