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

ex_398766.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 June 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.

6,639,816 Common Shares and 1,000,000 Non-Voting Common Shares were outstanding at July 29, 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	30
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	46
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	46
ITEM 4.	MINE SAFETY DISCLOSURES	46
ITEM 5.	OTHER INFORMATION	46
ITEM 6.	EXHIBITS	47

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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)

	June 30, 2022			December 31, 2021
Assets
Cash and due from banks	$	7,742		$	10,493
Interest bearing deposits in banks		18,244			67,110
Cash and cash equivalents		25,986			77,603
Securities available for sale		193,022			214,213
Securities held to maturity (fair value of $36,223 and $46,280, respectively)		44,205			46,460
Loans, net of allowance of $12,550 and $11,531, respectively		1,061,265			990,309
Premises and equipment, net		22,747			21,575
Premises held for sale		—			310
Federal Home Loan Bank stock		5,116			5,116
Bank owned life insurance		30,888			23,946
Deferred taxes, net		23,343			21,583
Goodwill		6,252			6,252
Other intangible assets, net		1,861			1,989
Accrued interest receivable and other assets		6,383			6,336
Total assets	$	1,421,068		$	1,415,692

Liabilities and Stockholders’ Equity
Deposits
Non-interest bearing	$	269,425		$	274,083
Interest bearing		898,137			934,585
Total deposits		1,167,562			1,208,668
Federal Home Loan Bank advances		70,000			20,000
Accrued interest payable and other liabilities		10,888			10,065
Junior subordinated debentures		21,000			21,000
Subordinated capital notes		25,000			25,000
Total liabilities		1,294,450			1,284,733
Commitments and contingent liabilities (Note 13)		—			—
Stockholders’ equity
Common stock, no par, 39,000,000 shares authorized, 6,640,680 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		25,889			25,625
Retained deficit		(24,917	)		(31,769	)
Accumulated other comprehensive loss		(14,993	)		(3,536	)
Total stockholders' equity		126,618			130,959
Total liabilities and stockholders’ equity	$	1,421,068		$	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 June 30,						Six Months Ended June 30,
	2022			2021			2022			2021
Interest income
Loans, including fees	$	11,440		$	11,047		$	22,358		$	22,008
Taxable securities		1,442			1,103			2,746			2,219
Tax exempt securities		163			177			329			308
Interest-bearing deposits and other		77			49			116			91
		13,122			12,376			25,549			24,626
Interest expense
Deposits		786			917			1,548			1,943
Federal Home Loan Bank advances		108			38			148			76
Junior subordinated debentures		171			132			307			262
Subordinated capital notes		377			375			752			751
		1,442			1,462			2,755			3,032
Net interest income		11,680			10,914			22,794			21,594
Provision for loan losses		450			—			1,200			350
Net interest income after provision for loan losses		11,230			10,914			21,594			21,244

Non-interest income
Service charges on deposit accounts		690			520			1,324			1,068
Bank card interchange fees		1,087			1,073			2,090			2,033
Income from bank owned life insurance		249			143			451			308
Gain on sale of other real estate owned		—			191			—			191
Gain (loss) on sales and calls of securities, net		(3	)		(5	)		(3	)		(5	)
Gain on sale of premises held for sale		—			—			163			—
Other		233			213			469			424
		2,256			2,135			4,494			4,019
Non-interest expense
Salaries and employee benefits		4,651			4,467			9,215			8,949
Occupancy and equipment		1,055			979			2,084			2,039
Deposit account related expense		574			556			1,121			1,047
Data processing expense		403			377			789			755
Professional fees		236			246			457			482
Marketing expense		172			179			305			361
FDIC Insurance		90			90			180			225
Deposit tax		99			90			198			180
Communications expense		121			194			185			367
Insurance expense		109			115			214			219
Postage and delivery		150			139			313			291
Other		567			522			1,137			1,023
		8,227			7,954			16,198			15,938
Income before income taxes		5,259			5,095			9,890			9,325
Income tax expense		1,223			1,194			2,275			2,202
Net income		4,036			3,901			7,615			7,123
Basic and diluted income per common share	$	0.53		$	0.51		$	1.00		$	0.94

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 June 30,						Six Months Ended June 30,
	2022			2021			2022			2021
Net income	$	4,036		$	3,901		$	7,615		$	7,123
Other comprehensive income (loss):
Unrealized gain (loss) on securities:
Unrealized gain (loss) arising during the period		(7,146	)		682			(15,119	)		962
Amortization during period of net unrealized gain transferred to held to maturity		(69	)		(120	)		(150	)		(170	)
Less reclassification adjustment for gains (losses) included in net income		(3	)		(5	)		(3	)		(5	)
Net unrealized gain (loss) recognized in comprehensive income (loss)		(7,212	)		567			(15,266	)		797
Tax effect		1,800			(142	)		3,809			(199	)
Other comprehensive income (loss)		(5,412	)		425			(11,457	)		598

Comprehensive income (loss)	$	(1,376	)	$	4,326		$	(3,842	)	$	7,721

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 Six Months Ended June 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

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 Six Months Ended June 30, 2021

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

	Shares								Amount
	Common			Non-Voting Commo		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 loss, 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

See accompanying notes to unaudited consolidated financial statements.

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LIMESTONE BANCORP, INC.

Unaudited Consolidated Statements of Cash Flows

For Six Months Ended June 30, 2022 and 2021

(dollars in thousands)

	2022			2021
Cash flows from operating activities
Net income	$	7,615		$	7,123
Adjustments to reconcile net income to net cash from operating activities
Depreciation, amortization and accretion, net		1,008			2,135
Provision for loan losses		1,200			350
Net amortization on securities		203			282
Stock-based compensation expense		461			301
Deferred taxes, net		2,048			2,063
Net realized loss on sales and calls of investment securities		3			5
Net realized gain on sales of other real estate owned		—			(191	)
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		(442	)		(297	)
Amortization of operating lease right-of-use assets		196			165
Net change in accrued interest receivable and other assets		(1,444	)		(3,241	)
Net change in accrued interest payable and other liabilities		823			(198	)
Net cash from operating activities		11,508			8,577

Cash flows from investing activities
Purchases of available for sale securities		(9,924	)		(33,819	)
Proceeds from maturities and prepayments of available for sale securities		15,833			20,424
Purchases of held to maturity securities		(658	)		(12,463	)
Proceeds from calls of held to maturity securities		964			704
Proceeds from maturities and prepayments of held to maturity securities		1,760			655
Proceeds from mandatory redemptions of Federal Home Loan Bank stock		—			438
Proceeds from sale of other real estate owned		—			1,956
Net change in loans		(72,471	)		13,040
Purchases of premises and equipment		(536	)		(869	)
Proceeds from sale of premises held for sale		473			—
Purchase of bank owned life insurance		(6,500	)		—
Net cash from investing activities		(71,059	)		(9,934	)

Cash flows from financing activities
Net change in deposits		(41,106	)		19,494
Repayment of Federal Home Loan Bank advances		(25,000	)		(623	)
Advances from Federal Home Loan Bank		75,000			—
Common shares withheld for taxes		(197	)		(87	)
Cash dividends paid on common stock		(763	)		—
Net cash from financing activities		7,934			18,784
Net change in cash and cash equivalents		(51,617	)		17,427
Beginning cash and cash equivalents		77,603			67,693
Ending cash and cash equivalents	$	25,986		$	85,120

Supplemental cash flow information:
Interest paid	$	2,703		$	3,121
Income taxes paid		170			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 six months ended June 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 to contain COVID-19 or treat its 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 June 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
June 30, 2022
Available for sale
U.S. Government and federal agency	$	26,438	$	—	$	(2,062	)	$	24,376
Agency mortgage-backed: residential		87,182		42		(8,864	)		78,360
Collateralized loan obligations		48,216		—		(2,038	)		46,178
Corporate bonds		45,473		16		(1,381	)		44,108
Total available for sale	$	207,309	$	58	$	(14,345	)	$	193,022

	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses			Fair Value
Held to maturity
State and municipal	$	44,205	$	3	$	(7,985	)	$	36,223
Total held to maturity	$	44,205	$	3	$	(7,985	)	$	36,223

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

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Sales and calls of securities were as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
	(in thousands)				(in thousands)
Proceeds	$	89	$	704	$	964	$	704
Gross gains		—		—		—		—
Gross losses		3		5		3		5

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

	June 30, 2022
	Amortized Cost		Fair Value
	(in thousands)
Maturity
Available for sale
Within one year	$	—	$	—
One to five years		5,115		4,994
Five to ten years		84,496		80,993
Beyond ten years		30,516		28,675
Agency mortgage-backed: residential		87,182		78,360
Total	$	207,309	$	193,022

Held to maturity
Within one year	$	539		538
One to five years		9,083	$	8,806
Five to ten years		4,023		3,504
Beyond ten years		30,560		23,375
Total	$	44,205	$	36,223

Securities pledged at June 30, 2022 and December 31, 2021 had carrying values of approximately $90.1 million and $155.4 million, respectively, and were pledged to secure public deposits.

At June 30, 2022 and December 31, 2021, the Bank held securities issued by the Commonwealth of Kentucky or Kentucky municipalities having a book value of $35.7 million. At June 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 June 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 June 30, 2022, $27.1 million and $19.1 million of the Bank’s CLOs were AA and A rated, respectively. None of the CLOs were subject to ratings downgrade during the six months ended June 30, 2022.

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Stress testing was completed on each security in the CLO portfolio as of June 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.

Securities with unrealized and unrecognized losses at June 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

June 30, 2022
Available for sale
U.S. Government and federal agency	$	24,376	$	(2,062	)	$	—	$	—		$	24,376	$	(2,062	)
Agency mortgage-backed: residential		63,074		(6,987	)		10,612		(1,877	)		73,686		(8,864	)
Collateralized loan obligations		30,335		(1,295	)		15,842		(743	)		46,177		(2,038	)
Corporate bonds		34,757		(1,343	)		2,829		(38	)		37,586		(1,381	)
Total temporarily impaired	$	152,542	$	(11,687	)	$	29,283	$	(2,658	)	$	181,825	$	(14,345	)

	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		22,663		(5,247	)		10,302		(2,738	)		32,965		(7,985	)
Total temporarily impaired	$	22,663	$	(5,247	)	$	10,302	$	(2,738	)	$	32,965	$	(7,985	)

	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:

	June 30,			December 31,
	2022			2021
	(in thousands)
Commercial (1)	$	228,513		$	220,826
Commercial Real Estate:
Construction		109,647			74,806
Farmland		67,727			68,388
Nonfarm nonresidential		384,069			345,893
Residential Real Estate:
Multi-family		46,341			50,224
1-4 Family		166,531			168,873
Consumer		33,586			36,440
Agriculture		36,729			35,924
Other		672			466
Subtotal		1,073,815			1,001,840
Less: Allowance for loan losses		(12,550	)		(11,531	)
Loans, net	$	1,061,265		$	990,309

(1)	Includes SBA Paycheck Protection Program (“PPP”) loans of $165,000 and $1.2 million at June 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 June 30, 2022 and 2021:

	Commercial			Commercial Real Estate			Residential Real Estate			Consumer			Agriculture			Other		Total
	(in thousands)
June 30, 2022:
Beginning balance	$	3,014		$	6,717		$	1,402		$	529		$	530		$	3	$	12,195
Provision (negative provision)		(3	)		238			241			39			(66	)		1		450
Loans charged off		(25	)		–			(286	)		(56	)		–			–		(367	)
Recoveries		2			176			40			25			29			–		272
Ending balance	$	2,988		$	7,131		$	1,397		$	537		$	493		$	4	$	12,550


June 30, 2021:
Beginning balance	$	2,480		$	7,705		$	1,781		$	334		$	452		$	3	$	12,755
Provision (negative provision)		(183	)		221			(153	)		68			47			–		—
Loans charged off		–			(129	)		(12	)		(32	)		(5	)		–		(178	)
Recoveries		7			2			30			15			6			–		60
Ending balance	$	2,304		$	7,799		$	1,646		$	385		$	500		$	3	$	12,637

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

	Commercial			Commercial Real Estate			Residential Real Estate			Consumer			Agriculture			Other			Total
	(in thousands)
June 30, 2022:
Beginning balance	$	2,888		$	6,179		$	1,443		$	538		$	480		$	3		$	11,531
Provision (negative provision)		116			888			178			49			(32	)		1			1,200
Loans charged off		(25	)		(158	)		(326	)		(85	)		–			–			(594	)
Recoveries		9			222			102			35			45			–			413
Ending balance	$	2,988		$	7,131		$	1,397		$	537		$	493		$	4		$	12,550


June 30, 2021:
Beginning balance	$	2,529		$	7,050		$	1,899		$	361		$	600		$	4		$	12,443
Provision (negative provision)		(216	)		868			(279	)		41			(63	)		(1	)		350
Loans charged off		(19	)		(129	)		(12	)		(51	)		(44	)		–			(255	)
Recoveries		10			10			38			34			7			–			99
Ending balance	$	2,304		$	7,799		$	1,646		$	385		$	500		$	3		$	12,637

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method as of June 30, 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		2,988		7,131		1,396		537		493		4		12,549
Total ending allowance balance	$	2,988	$	7,131	$	1,397	$	537	$	493	$	4	$	12,550

Loans:
Loans individually evaluated for impairment	$	–	$	2,545	$	590	$	22	$	–	$	–	$	3,157
Loans collectively evaluated for impairment		228,513		558,898		212,282		33,564		36,729		672		1,070,658
Total ending loans balance	$	228,513	$	561,443	$	212,872	$	33,586	$	36,729	$	672	$	1,073,815

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The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method as of December 31, 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 June 30, 2022 and December 31, 2021 and for the three and six months ended June 30, 2022 and 2021:

	As of June 30, 2022						Three Months Ended June 30, 2022				Six Months Ended June 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	$	270	$	—	$	—	$	—	$	—	$	—	$	—
Commercial real estate:
Construction		—		—		—		—		—		—		—
Farmland		81		30		—		102		27		140		53
Nonfarm nonresidential		7,552		2,515		—		2,702		133		2,689		146
Residential real estate:
Multi-family		—		—		—		—		—		—		—
1-4 Family		1,448		529		—		527		40		519		99
Consumer		255		22		—		26		1		21		1
Agriculture		315		—		—		4		19		5		23
Other		—		—		—		—		—		—		—
Subtotal		9,921		3,096		—		3,361		220		3,374		322
With An Allowance Recorded:
Commercial		—		—		—		—		—		—		—
Commercial real estate:
Construction		—		—		—		—		—		—		—
Farmland		—		—		—		—		—		—		—
Nonfarm nonresidential		—		—		—		—		—		—		—
Residential real estate:
Multi-family		—		—		—		—		—		—		—
1-4 Family		61		61		1		107		—		93		—
Consumer		—		—		—		—		—		—		—
Agriculture		—		—		—		—		—		—		—
Other		—		—		—		—		—		—		—
Subtotal		61		61		1		107		—		93		—
Total	$	9,982	$	3,157	$	1	$	3,468	$	220	$	3,467	$	322

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	As of December 31, 2021						Three Months Ended June 30, 2021				Six Months Ended June 30, 2021
	Unpaid Principal Balance		Recorded Investment		Allowance For Loan Losses Allocated		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(in thousands)
With No Related Allowance Recorded:
Commercial	$	290	$	—	$	—	$	—	$	—	$	—	$	—
Commercial real estate:
Construction		—		—		—		—		—		—		—
Farmland		302		215		—		644		—		581		—
Nonfarm nonresidential		7,755		2,663		—		512		13		524		27
Residential real estate:
Multi-family		—		—		—		—		—		—		—
1-4 Family		1,408		501		—		775		21		835		38
Consumer		272		12		—		22		1		15		1
Agriculture		366		9		—		102		—		98		—
Other		—		—		—		—		—		—		—
Subtotal		10,393		3,400		—		2,055		35		2,053		66
With An Allowance Recorded:
Commercial		—		—		—		—		—		—		—
Commercial real estate:
Construction		—		—		—		—		—		—		—
Farmland		—		—		—		—		—		—		—
Nonfarm nonresidential		—		—		—		4,356		114		4,356		227
Residential real estate:
Multi-family		—		—		—		—		—		—		—
1-4 Family		65		65		2		102		—		103		1
Consumer		—		—		—		—		—		—		—
Agriculture		—		—		—		—		—		—		—
Other		—		—		—		—		—		—		—
Subtotal		65		65		2		4,458		114		4,459		228
Total	$	10,458	$	3,465	$	2	$	6,513	$	149	$	6,512	$	294

Cash basis income recognized on impaired loans for the three and six months ended June 30, 2022 was $217,000 and $312,000, respectively, compared to $28,000 and $52,000 for the three and six months ended June 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 June 30, 2022 and December 31, 2021:

	TDRs Performing to Modified Terms		TDRs Not Performing to Modified Terms		Total TDRs
	(in thousands)
June 30, 2022
Commercial Real Estate:
Nonfarm nonresidential	$	150	$	—	$	150
Residential Real Estate:
1-4 Family		—		61		61
Total TDRs	$	150	$	61	$	211

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	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 June 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 June 30, 2022 and December 31, 2021, respectively. The Company has no commitment to lend additional amounts as of June 30, 2022 and December 31, 2021 to borrowers with outstanding loans classified as TDRs.

No TDR modifications occurred during the three and six months ended June 30, 2022 and June 30, 2021. During the three and six months ended June 30, 2022 and June 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 June 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)
June 30, 2022
Commercial	$	18	$	—	$	—	$	—	$	18
Commercial Real Estate:
Construction		—		—		—		—		—
Farmland		147		—		—		30		177
Nonfarm nonresidential		32		—		—		2,365		2,397
Residential Real Estate:
Multi-family		—		—		—		—		—
1-4 Family		285		128		—		590		1,003
Consumer		118		81		—		22		221
Agriculture		—		—		—		—		—
Other		—		—		—		—		—
Total	$	600	$	209	$	—	$	3,007	$	3,816

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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 June 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)
June 30, 2022
Commercial	$	217,464	$	3,565	$	—	$	7,484	$	—	$	228,513
Commercial Real Estate:
Construction		109,647		—		—		—		—		109,647
Farmland		65,637		168		—		1,922		—		67,727
Nonfarm nonresidential		379,566		1,243		—		3,260		—		384,069
Residential Real Estate:
Multi-family		46,341		—		—		—		—		46,341
1-4 Family		163,341		1,407		—		1,783		—		166,531
Consumer		33,280		14		—		292		—		33,586
Agriculture		36,676		29		—		24		—		36,729
Other		672		—		—		—		—		672
Total	$	1,052,624	$	6,426	$	—	$	14,765	$	—	$	1,073,815

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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 June 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 June 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 4.21% as of June 30, 2022.

Total rental expense was $135,000 and $250,000, respectively, for the three and six months ended June 30, 2022, compared to $86,000 and $248,000, respectively, for the three and six months ended June 30, 2021. The right-of-use asset, included in premises and equipment, and lease liability, included in other liabilities, was $6.5 million as of June 30, 2022 and $5.3 million as of December 31, 2021.

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

	June 30, 2022

July – December 2022	$	227
2023		457
2024		458
2025		438
2026		408
Thereafter		8,899
Total minimum lease payments		10,887
Discount effect of cash flows		(4,360	)
Present value of lease liabilities	$	6,527

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Note 5 – Deposits

The following table details deposits by category:

	June 30, 2022		December 31, 2021
	(in thousands)
Non-interest bearing	$	269,425	$	274,083
Interest checking		269,240		287,208
Money market		209,183		217,943
Savings		163,573		163,423
Certificates of deposit		256,141		266,011
Total	$	1,167,562	$	1,208,668

Time deposits of $250,000 or more were $36.0 million and $33.4 million at June 30, 2022 and December 31, 2021, respectively.

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

Year 1	$	178,417
Year 2		42,787
Year 3		14,104
Year 4		16,876
Year 5		3,264
Thereafter		693
	$	256,141

Note 6 – Advances from the Federal Home Loan Bank

Advances from the Federal Home Loan Bank were as follows:

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

Short term advances (fixed rates 1.02% to 1.65%) maturing July 2022	$	70,000	$	—
Long term advances		—		20,000
Total advances from the Federal Home Loan Bank	$	70,000	$	20,000

FHLB advances had a weighted-average rate of 1.44% at June 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 $323.0 million of commercial real estate and first mortgage residential loans, under a blanket lien arrangement at June 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 June 30, 2022, the Bank’s additional borrowing capacity with the FHLB was $91.2 million.

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

	Advances
Year 1		70,000
	$	70,000

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. The Company has the option to defer interest payments on the junior subordinated debentures from time to time for a period not to exceed 20 consecutive quarters. A deferral period may begin at the Company’s discretion so long as interest payments are current. The Company is prohibited from paying dividends on preferred and common shares when interest payments are in deferral. At June 30, 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 June 30, 2022, 3-month LIBOR was 2.29%.

(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 June 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.

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.

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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 June 30, 2022 and December 31, 2021 are summarized below:

			Fair Value Measurements at June 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	$	24,376	$	—	$	24,376	$	—
Agency mortgage-backed: residential		78,360		—		78,360		—
Collateralized loan obligations		46,178		—		46,178		—
Corporate bonds		44,108		—		30,559		13,549
Total	$	193,022	$	—	$	179,473	$	13,549

			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 six months ended June 30, 2022 and 2021:

	June 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		(492	)
Transfers into Level 3		—
Balance of recurring Level 3 assets at June 30, 2022	$	13,549

	June 30, 2021
	Collateralized Loan Obligations		Corporate Bonds
	(in thousands)
Balance of recurring Level 3 assets at January 1, 2021	$	2,388	$	11,916
Total gains or losses for the year:
Included in other comprehensive income		93		760
Transfers into Level 3		—		—
Balance of recurring Level 3 assets at June 30, 2021	$	2,481	$	12,676

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

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


Corporate bonds	$	13,549	Discounted cash flow	Constant prepayment rate		0%
				Additional asset defaults	200%	-	370% (273%)
				Expected asset recoveries	78%	-	100% (90%)

	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 June 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	$	60	$	—	$	—	$	60

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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 $61,000 at June 30, 2022 with a valuation allowance of $1,000, resulting in no provision for loan losses for the three months or six months ended June 30, 2022. Impaired loans had a carrying amount of $4.5 million at June 30, 2021 with a valuation allowance of $2.2 million, resulting in no provision for loan losses for the three months ended June 30, 2021 and $1,000 provision for loan losses for the six months ended June 30, 2021, respectively. 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 June 30, 2022 Using
	Carrying Amount		Level 1		Level 2		Level 3		Total
	(in thousands)
Financial assets
Cash and cash equivalents	$	25,986	$	25,986	$	—	$	—	$	25,986
Securities available for sale		193,022		—		179,473		13,549		193,022
Securities held to maturity		44,205		—		36,223		—		36,223
Federal Home Loan Bank stock		5,116		N/A		N/A		N/A		N/A
Loans, net		1,061,265		—		—		1,019,973		1,019,973
Accrued interest receivable		4,117		—		1,042		3,075		4,117
Financial liabilities
Deposits	$	1,167,562	$	269,425	$	894,770	$	—	$	1,164,195
Federal Home Loan Bank advances		70,000		—		69,995		—		69,995
Junior subordinated debentures		21,000		—		—		18,191		18,191
Subordinated capital notes		25,000		—		—		24,190		24,190
Accrued interest payable		816		—		171		645		816

			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		—		204,164		10,049		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.

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Note 9 – Income Taxes

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

	June 30,		December 31,
	2022		2021
	(in thousands)
Deferred tax assets:
Net operating loss carry-forward	$	17,195	$	19,335
Allowance for loan losses		3,130		2,877
Net unrealized loss on securities		3,418		—
New market tax credit carry-forward		208		208
Nonaccrual loan interest		311		321
Accrued expenses		108		138
Lease liability		1,628		1,328
Other		181		202
		26,179		24,409

Deferred tax liabilities:
FHLB stock dividends		415		415
Fixed assets		129		133
Deferred loan costs		167		176
Net unrealized gain on securities		—		390
Lease right-of-use assets		1,628		1,328
Net assets from acquisitions		199		108
Other		298		276
		2,836		2,826
Net deferred tax asset	$	23,343	$	21,583

At June 30, 2022, the Company had net federal operating loss carryforwards of $76.8 million, which will begin to expire in 2033, and state net operating loss carryforwards of $26.9 million, which begin to expire in 2027.

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

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The Company and its subsidiaries are subject to U.S. federal income tax and the Company is subject to income tax in the Commonwealth of Kentucky. The Company is no longer subject to examination by taxing authorities for years before 2018.

Note 10 – Stock Plans and Stock Based Compensation

Shares available for issuance under the 2018 Omnibus Equity Compensation Plan (“2018 Plan”) total 120,557. 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 $156,000 and $461,000 of stock-based compensation to salaries expense for the three and six months ended June 30, 2022, respectively, and $152,000 and $301,000 for the three and six months ended June 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 $39,000 and $115,000 was recognized related to this expense during the three and six months ended June 30, 2022, respectively, and $38,000 and $75,000 for the three and six months ended June 30, 2021, respectively.

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

	Six Months Ended					Twelve Months Ended
	June 30, 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		(30,310	)		16.07		(37,590	)		15.13
Forfeited		(8,460	)		14.64		(8,336	)		13.66
Outstanding, ending		137,366		$	15.92		111,536		$	13.73

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

July 2022 – December 2022	$	431
2023		475
2024		345
2025		200
2026		193
Thereafter		176

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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				Six Months Ended
	June 30,				June 30,
	2022		2021		2022		2021
	(in thousands, except share and per share data)

Net income	$	4,036	$	3,901	$	7,615	$	7,123
Less:
Earnings allocated to unvested shares		68		69		122		98
Net income available to common shareholders, basic and diluted	$	3,968	$	3,832	$	7,493	$	7,025

Basic and Diluted
Weighted average common shares including unvested common shares outstanding		7,631,883		7,597,202		7,623,181		7,586,267
Less:
Weighted average unvested common shares		128,104		133,455		122,582		104,782
Weighted average common shares outstanding		7,503,779		7,463,747		7,500,599		7,481,485
Basic and diluted income per common share	$	0.53	$	0.51	$	1.00	$	0.94

The Company had no outstanding stock options or warrants at June 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 June 30, 2022, Management believes the Company and Bank met all capital adequacy requirements to which they are subject. As of June 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 June 30, 2022:
Total risk-based capital (to risk- weighted assets)	$	172,290		13.35	%	$	103,222		8.00	%	$	129,028		10.00	%
Total common equity Tier 1 risk- based capital (to risk-weighted assets)		159,740		12.38			58,063		4.50			83,868		6.50
Tier 1 capital (to risk-weighted assets)		159,740		12.38			77,417		6.00			103,222		8.00
Tier 1 capital (to average assets)		159,740		11.39			56,085		4.00			70,106		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 $14.4 million in dividends as of June 30, 2022. The Bank paid the Company $1.0 million in dividends during the six months ended June 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:

	June 30, 2022				December 31, 2021
	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate
	(in thousands)
Commitments to make loans	$	70,802	$	48,921	$	85,294	$	60,683
Unused lines of credit		10,266		130,921		12,828		108,635
Standby letters of credit		366		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 June 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 June 30, 2022 and December 31, 2021, the fair value of the risk participation agreements were $8,000 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 $156,000 and $317,000 of revenue for the three and six months ended June 30, 2022, respectively, within the scope of ASC 606. Other non-interest income included approximately $145,000 and $298,000 of revenue for the three and six months ended June 30, 2021, respectively, within the scope of ASC 606. The remaining other non-interest income for the three and six months is excluded from the scope of ASC 606.

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

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

Preliminary Note Concerning Forward-Looking Statements

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

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

●

the impact and duration of the novel coronavirus disease 2019 (“COVID-19”) pandemic;

●

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

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●

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;

●

future acquisitions, integrations and performance of acquired businesses;

●

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

●

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

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 June 30, 2022, the Company had total assets of $1.42 billion, total loans of $1.07 billion, total deposits of $1.17 billion and stockholders’ equity of $126.6 million.

The Company reported net income of $4.0 million, or $0.53 per basic and diluted common share, and $7.6 million, or $1.00 per basic and diluted common share, for the three and six months ended June 30, 2022, compared with net income of $3.9 million, or $0.51 per basic and diluted common share, and $7.1 million, or $0.94 per basic and diluted common share, for the same periods of 2021.

Highlights for the six months ended June 30, 2022 are as follows:

●

Average loans receivable increased approximately $77.7 million, or 8.1%, to $1.41 billion for the six months ended June 30, 2022, compared with $963.1 million for the first six months of 2021. SBA Paycheck Protection Program (“PPP”) loans averaged $419,000 and $23.5 million for the first six months of 2022 and 2021, respectively.

●

Net interest margin decreased two basis points to 3.47% in the first six months of 2022 compared with 3.49% in the first six months of 2021. While the Federal Reserve increased the fed funds target by 25 basis points on March 16, 2022, 50 basis points on May 4, 2022, and 75 basis points on June 15, 2022, the yield on earning assets for fiscal year 2021 and the first quarter of 2022 were impacted by the low interest rate environment. During the second quarter of 2022, the Bank’s fed funds sold, floating rate investment securities, loans with variable rate pricing features, and new loan originations began to benefit from the movement in short-term rates and are expected to continue to benefit as rates continue to rise. The cost of interest-bearing liabilities was also impacted to a lesser extent, but is also expected to increase as short-term interest rates continue to rise.

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●

The yield on earning assets decreased to 3.88% for the first six months of 2022, compared to 3.98% for the first six months of 2021. The yield on earning assets for the first six months of 2021 was significantly impacted by $1.1 million in PPP fees, compared to $45,000 for the first six months of 2022. During the first six months of 2022, PPP fees represented less than one basis point of earning asset yield and net interest margin, compared to 18 basis points for the for the first six months of 2021.

●

The cost of interest-bearing liabilities decreased from 0.64% in the first six months of 2021 to 0.56% in the first six months of 2022 as a result of an improvement in deposit mix, as well as the downward repricing of time deposits between periods.

●

A provision for loan loss of $450,000 and $1.2 million was recorded in the second quarter and first six months of 2022, respectively, compared to no provision for loan losses and $350,000 in the second quarter and the first six months of 2021, respectively. The loan loss provisions were attributable to growth within the portfolio and net loan charge-offs impacting historical loss percentages during the periods. Net loan charge-offs were $181,000 for the first six months of 2022, compared to net loan charge-offs of $156,000 for the first six months of 2021.

●

Loans past due 30-59 days increased from $556,000 at December 31, 2021 to $600,000 at June 30, 2022, and loans past due 60-89 days decreased from $210,000 at December 31, 2021 to $209,000 at June 30, 2022. Total loans past due and nonaccrual loans decreased to $3.8 million at June 30, 2022 from $3.9 million at December 31, 2021.

●

Deposits were $1.17 billion at June 30, 2022, compared with $1.21 billion at December 31, 2021. Certificate of deposit balances decreased $9.9 million during the first six months of 2022 to $256.1 million at June 30, 2022, from $266.0 million at December 31, 2021. Interest checking accounts decreased $18.0 million during the first six months of 2022 compared with December 31, 2021 and was primarily attributable to the outflow of previously deposited school construction funds. To a lesser extent, money market accounts decreased $8.8 million, non-interest bearing accounts decreased $4.7 million, and savings accounts increased $150,000 during the first six months of 2022 compared with December 31, 2021.

●

On July 1, 2022, the Company paid a $0.05 per common share cash dividend to shareholders of record as of the close of business on June 17, 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 six 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 June 30, 2022, compared with the same period of 2021:

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

Gross interest income	$	13,122	$	12,376	$	746			6.0	%
Gross interest expense		1,442		1,462		(20	)		(1.4	)
Net interest income		11,680		10,914		766			7.0
Provision for loan losses		450		—		450			100.0
Non-interest income		2,256		2,135		121			5.7
Non-interest expense		8,227		7,954		273			3.4
Net income before taxes		5,259		5,095		164			3.2
Income tax expense		1,223		1,194		29			2.4
Net income		4,036		3,901		135			3.5

Net income for the three months ended June 30, 2022 totaled $4.0 million, compared with $3.9 million for the comparable period of 2021. Net interest income increased $766,000 from the 2021 second quarter primarily as a result of an increase in average loans and average investment securities as compared to the prior period. A provision for loan loss of $450,000 was recorded in the second quarter of 2022, as compared to no provision for loan loss in the second quarter of 2021. The 2022 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 increased $121,000 from $2.1 million in the second quarter of 2021 to $2.3 million for the second quarter of 2022 primarily due to an increase in transaction volumes which led to an increase in service charges on deposit accounts of $170,000 and an increase in bank owned life insurance income of $106,000 due to additional policies being purchased in March 2022, offset by a non-recurring $191,000 gain on the sale of OREO from the second quarter of 2021. Non-interest expense increased $273,000 from $8.0 million in the second quarter of 2021 to $8.2 million in the second quarter of 2022 primarily due to an increase in salaries and employee benefits of $184,000 as a result of the inflationary impact on talent acquisition and the administration of annual salary adjustments.

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

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

Gross interest income	$	25,549	$	24,626	$	923			3.7	%
Gross interest expense		2,755		3,032		(277	)		(9.1	)
Net interest income		22,794		21,594		1,200			5.6
Provision for loan losses		1,200		350		850			242.9
Non-interest income		4,494		4,019		475			11.8
Non-interest expense		16,198		15,938		260			1.6
Net income before taxes		9,890		9,325		565			6.1
Income tax expense		2,275		2,202		73			3.3
Net income		7,615		7,123		492			6.9

Net income for the six months ended June 30, 2022 totaled $7.6 million, compared with net income of $7.1 million for the comparable period of 2021. Net interest income increased $1.2 million from the first six months of 2021 as a result of an increase in average loans and average investment securities, as well as an improvement in deposit mix and the downward repricing of time deposits between periods. Provision for loan loss expense of $1.2 million was recorded in the first six months of 2022, as compared to $350,000 provision for loan loss expense in the first six months of 2021. The 2022 and 2021 loan loss provisions were attributable to growth trends within the portfolio and net loan charge-offs impacting historical loss percentages during the periods. Non-interest income increased by $475,000 to $4.5 million from $4.0 million in the first six months of 2021 primarily due to an increase in transaction volumes which led to an increase in service charges on deposit accounts of $256,000 and $143,000 in bank owned life insurance income as discussed above. Non-interest income for the first six months of 2022 also included a $163,000 non-recurring gain on sale of premises held for sale from the first quarter of 2022, while the first six months of 2021 included a $191,000 non-recurring gain on sale of OREO from the second quarter of 2021. Non-interest expense increased from $15.9 million in the first six months of 2021 to $16.2 million in the first six months of 2022 primarily due to an increase of $266,000 in salaries and benefits as discussed above.

Net Interest Income – Net interest income was $11.7 million for the three months ended June 30, 2022, an increase of $766,000, or 7.0%, compared with $10.9 million for the same period in 2021. Net interest spread and margin were 3.37% and 3.51%, respectively, for the second quarter of 2022, compared with 3.30% and 3.45%, respectively, for the second quarter of 2021.

While the Federal Reserve increased the fed funds target by 25 basis points on March 16, 2022, 50 basis points on May 4, 2022, and 75 basis points on June 15, 2022, the yield on earning assets for fiscal year 2021 and the first quarter of 2022 were impacted by the low interest rate environment. During the second quarter of 2022, the Bank’s fed funds sold, floating rate investment securities, loans with variable rate pricing features, and new loan originations began to benefit 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 was also impacted to a lesser extent, but is also expected to increase as short-term interest rates continue to rise.

The yield on earning assets increased to 3.95% for the second quarter of 2022, as compared to 3.91% in the second quarter of 2021. Average interest-earning assets were $1.34 billion for the second quarter of 2022, compared with $1.28 billion for the second quarter of 2021, a 5.0% increase. Average loans increased approximately $91.1 million and average investment securities increased $31.1 million, while average lower yielding fed funds sold decreased $57.4 million for the second quarter of 2022, compared with the second quarter of 2021. PPP loans averaged $172,000 and $26.9 million for the second quarter of 2022 and 2021, respectively. The increase in average loans resulted in an increase in interest revenue volume of approximately $1.0 million for the quarter ended June 30, 2022, which was partially offset by a decrease in interest revenue attributable to rates of $618,000 due primarily to lower PPP fees between periods, as compared with the second quarter of 2021. Total interest income increased 6.0%, or $746,000, for the second quarter of 2022 compared to the second quarter of 2021.

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Loan fee income can meaningfully impact net interest income, loan yields, and net interest income. The amount of loan fee income included in total interest income was $173,000 and $933,000 for the quarters ended June 30, 2022 and June 30, 2021, respectively. This represents six basis points and 29 basis points of yield on earning assets and net interest margin for the second quarter ended June 30, 2022 and 2021, respectively. Loan fee income for the second quarter of 2022 did not include any fees earned on PPP loans, compared to $692,000 in the second quarter of 2021, which represented 22 basis points of earning asset yield and net interest margin for the second quarter of 2021.

The cost of interest-bearing liabilities decreased to 0.58% for the second quarter of 2022, as compared to 0.61% for the second quarter of 2021 primarily based on the downward repricing of time deposits, as well as a shift in deposit mix. Average interest-bearing liabilities increased by 4.6% to $1.00 billion for the second quarter of 2022, as compared to $956.2 million for the second quarter of 2021 primarily due to an increase of $28.0 million in average FHLB advances and a $16.2 million increase in average deposits. Total interest expense decreased by 1.4% to $1.4 million for the second quarter of 2022 as compared to $1.5 million for the second quarter of 2021.

Net interest income was $22.8 million for the six months ended June 30, 2022, an increase of $1.2 million, or 5.6%, compared with $21.6 million for the same period in 2021. Net interest spread and margin were 3.32% and 3.47%, respectively, for the first six months of 2022, compared with 3.34% and 3.49%, respectively, for the first six months of 2021.

The yield on earning assets decreased to 3.88% for the first six months of 2022, as compared to 3.98% in the first six months of 2021. Average interest-earning assets increased approximately $79.8 million for the six months ended June 30, 2022, compared with the first six months of 2021. Average loans for the first six months of 2022 increased approximately $77.7 million and average investment securities increased $42.6 million, while average lower yielding fed funds sold decreased $39.9 million compared with the first six months of 2021. PPP loans averaged $419,000 and $23.5 million for the first six months of 2022 and 2021, respectively. The increase in average loans resulted in an increase in interest revenue volume of approximately $1.7 million for six months ended June 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 six months ended June 30, 2021. The increase in average investment securities also resulted in $512,000 in additional interest income as compared to the prior period. Total interest income increased 3.7%, or $923,000, for the first six months of 2022 compared to the first six months of 2021.

The amount of loan fee income included in total interest income was $497,000 and $1.8 million for the six months ended June 30, 2022 and 2021, respectively. This represents seven basis points and 29 basis points of yield on earning assets and net interest margin for the six months ended June 30, 2022 and 2021, respectively. Loan fee income included PPP fees of $45,000 and $1.1 million for the six months ended June 30, 2022 and 2021, respectively, which represents less than one basis point and 18 basis points of earning asset yield and net interest margin for those six-month periods, respectively.

The cost of interest-bearing liabilities decreased to 0.56% for the first six months of 2022, as compared to 0.64% for the first six months of 2021. The cost of interest-bearing liabilities for the first six months of 2022 benefitted from an improvement in deposit mix, as well as the downward repricing of time deposits between periods compared to the first six months of 2021. Average interest-bearing liabilities increased by $49.8 million for the six months ended June 30, 2022 compared with the first six months of 2021 primarily due to a $104.3 million increase in average money market accounts, offset by a decrease of $82.2 million in average certificate of deposits. Total interest expense decreased by 9.1% to $2.8 million for the six months ended June 30, 2022 as compared to $3.0 million for the first six months of 2021.

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Average Balance Sheets

The following table presents the average balance sheets for the three-month periods ended June 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 June 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)	$	1,053,057		$	11,440		4.36	%	$	961,922		$	11,047		4.61	%
Securities
Taxable		224,209			1,442		2.58			197,860			1,103		2.24
Tax-exempt		30,210			163		2.88			25,451			177		3.72
FHLB stock		5,116			38		2.98			5,769			29		2.02
Federal funds sold and other		26,963			39		0.58			84,361			20		0.10
Total interest-earning assets		1,339,555			13,122		3.95	%		1,275,363			12,376		3.91	%
Less: Allowance for loan losses		(12,329	)							(12,744	)
Non-interest earning assets		89,861								98,461
Total assets	$	1,417,087							$	1,361,080

LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
Certificates of deposit and other time deposits	$	256,713		$	308		0.48	%	$	327,039		$	465		0.57	%
NOW and money market deposits		484,222			383		0.32			405,043			333		0.33
Savings accounts		165,464			95		0.23			158,090			119		0.30
FHLB advances		47,968			108		0.90			20,000			38		0.76
Junior subordinated debentures		21,000			171		3.27			21,000			132		2.52
Subordinated capital notes		25,000			377		6.05			25,000			375		6.02
Total interest-bearing liabilities		1,000,367			1,442		0.58	%		956,172			1,462		0.61	%

Non-interest-bearing liabilities:
Non-interest-bearing deposits		278,027								274,352
Other liabilities		10,866								9,170
Total liabilities		1,289,260								1,239,694
Stockholders’ equity		127,827								121,386
Total liabilities and stockholders’ equity	$	1,417,087							$	1,361,080

Net interest income				$	11,680							$	10,914

Net interest spread							3.37	%							3.30	%

Net interest margin							3.51	%							3.45	%

(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 June 30, 2022 and $692,000, or 22 basis points, in the three months ended June 30, 2021.

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The following table presents the average balance sheets for the six-month periods ended June 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.

	Six Months Ended June 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)	$	1,040,869		$	22,358		4.33	%	$	963,131		$	22,008		4.61	%
Securities
Taxable		225,802			2,746		2.45			189,259			2,219		2.36
Tax-exempt		30,054			329		2.94			23,957			308		3.45
FHLB stock		5,116			64		2.52			5,808			59		2.05
Federal funds sold and other		31,090			52		0.34			70,956			32		0.09
Total interest-earning assets		1,332,931			25,549		3.88	%		1,253,111			24,626		3.98	%
Less: Allowance for loan losses		(11,974	)							(12,600	)
Non-interest earning assets		91,129								98,591
Total assets	$	1,412,086							$	1,339,102

LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
Certificates of deposit and other time deposits	$	258,715		$	618		0.48	%	$	340,870		$	1,067		0.63	%
NOW and money market deposits		493,801			742		0.30			389,528			639		0.33
Savings accounts		165,143			188		0.23			152,093			237		0.31
FHLB advances		34,890			148		0.86			20,307			76		0.75
Junior subordinated debentures		21,000			307		2.95			21,000			262		2.52
Subordinated capital notes		25,000			752		6.07			25,000			751		6.06
Total interest-bearing liabilities		998,549			2,755		0.56	%		948,798			3,032		0.64	%

Non-interest-bearing liabilities:
Non-interest-bearing deposits		274,101								262,849
Other liabilities		9,983								7,920
Total liabilities		1,282,633								1,219,567
Stockholders’ equity		129,453								119,535
Total liabilities and stockholders’ equity	$	1,412,086							$	1,339,102

Net interest income				$	22,794							$	21,594

Net interest spread							3.32	%							3.34	%

Net interest margin							3.47	%							3.49	%

(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 less than one basis point, for the six months ended June 30, 2022 and $1.1 million, or 18 basis points, for the six months ended June 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 June 30, 2022 vs. 2021									Six Months Ended June 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	$	(618	)	$	1,011		$	393		$	(1,365	)	$	1,715		$	350
Securities		137			188			325			36			512			548
FHLB stock		12			(3	)		9			13			(8	)		5
Federal funds sold and other		41			(22	)		19			46			(26	)		20
Total increase (decrease) in interest income		(428	)		1,174			746			(1,270	)		2,193			923

Interest-bearing liabilities:
Certificates of deposit and other time deposits		(66	)		(91	)		(157	)		(223	)		(226	)		(449	)
NOW and money market accounts		(13	)		63			50			(57	)		160			103
Savings accounts		(30	)		6			(24	)		(68	)		19			(49	)
FHLB advances		8			62			70			11			61			72
Junior subordinated debentures		39			—			39			45			—			45
Subordinated capital notes		2			—			2			1			—			1
Total increase (decrease) in interest expense		(60	)		40			(20	)		(291	)		14			(277	)
Increase (decrease) in net interest income	$	(368	)	$	1,134		$	766		$	(979	)	$	2,179		$	1,200

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

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2022			2021			2022			2021
	(dollars in thousands)

Service charges on deposit accounts	$	690		$	520		$	1,324		$	1,068
Bank card interchange fees		1,087			1,073			2,090			2,033
Income from bank owned life insurance		249			143			451			308
Net gain on sale of other real estate owned		—			191			—			191
Gain (loss) on sales and calls of securities, net		(3	)		(5	)		(3	)		(5	)
Gain on sale of premises held for sale		—			—			163			—
Other		233			213			469			424
Total non-interest income	$	2,256		$	2,135		$	4,494		$	4,019

Non-interest income for the second quarter of 2022 increased by $121,000, or 5.7%, compared with the second quarter of 2021. The increase was primarily driven by an increase in transaction volumes which led to an increase in service charges on deposit accounts of $170,000 and an increase in bank owned life insurance income of $106,000 due to additional policies being purchased in March 2022, offset by a non-recurring $191,000 gain on the sale of OREO from the second quarter of 2021.

For the six months ended June 30, 2022, non-interest income increased by $475,000, or 11.8%, to $4.5 million compared with $4.0 million for the same period of 2021. The increase in non-interest income between the six-month comparative periods was primarily due to an increase in service charges on deposit accounts of $256,000 and $143,000 in bank owned life insurance income as discussed above. Non-interest income for the first six months of 2022 also included a non-recurring $163,000 gain on sale of premises from the first quarter of 2021, while the first six months of 2021 included a non-recurring $191,000 gain on sale of OREO from the second 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 six months ended June 30, 2022 and 2021:

	For the Three Months				For the Six Months
	Ended June 30,				Ended June 30,
	2022		2021		2022		2021
	(dollars in thousands)

Salary and employee benefits	$	4,651	$	4,467	$	9,215	$	8,949
Occupancy and equipment		1,055		979		2,084		2,039
Deposit account related expenses		574		556		1,121		1,047
Data processing expense		403		377		789		755
Professional fees		236		246		457		482
Marketing expense		172		179		305		361
FDIC insurance		90		90		180		225
Deposit tax		99		90		198		180
Communications expense		121		194		185		367
Insurance expense		109		115		214		219
Postage and delivery		150		139		313		291
Other		567		522		1,137		1,023
Total non-interest expense	$	8,227	$	7,954	$	16,198	$	15,938

Non-interest expense for the second quarter ended June 30, 2022 increased $273,000, or 3.4%, compared with the second quarter of 2021. Salaries and benefits expense increased $184,000, or 4.1%, from the second quarter of 2021. While FTEs declined between the periods, salaries expense increased as a result of the inflationary impact on talent acquisition and the administration of annual salary adjustments.

For the six months ended June 30, 2022, non-interest expense increased $260,000, or 1.6% to $16.2 million compared with $15.9 million for the first six months of 2021. The increase was primarily due to an increase of $266,000, or 3.0%, in salaries and benefits as discussed above.

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

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2022			2021			2022			2021
	(dollars in thousands)

Federal statutory tax rate		21	%		21	%		21	%		21	%
Federal statutory rate times financial statement income	$	1,105		$	1,070		$	2,077		$	1,958
Effect of:
State income taxes		195			202			363			383
Tax-exempt interest income		(31	)		(40	)		(63	)		(70	)
Non-taxable life insurance income		(53	)		(36	)		(95	)		(77	)
Restricted stock vesting		—			(5	)		(21	)		—
Other, net		7			3			14			8
Total	$	1,223		$	1,194		$	2,275		$	2,202

Analysis of Financial Condition

Total assets increased $5.4 million, or 0.4%, to $1.42 billion at June 30, 2022, from $1.42 billion at December 31, 2021. This increase was primarily attributable to an increase in loans receivable of $72.0 and bank owned life insurance of $6.9 million, offset by a decrease in cash and cash equivalents and the securities portfolio of $51.2 million and $23.4 million, respectively.

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 $23.4 million, or 9.0%, to $237.2 million at June 30, 2022, compared with $260.7 million at December 31, 2021. The decrease was comprised primarily of $18.6 million in payment proceeds and $15.1 million in fair value declines attributable to the rising interest rate environment, partially offset by purchases of $10.6 million.

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

	June 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	$	26,438	$	—	$	(2,062	)	$	24,376	$	26,075	$	301	$	(133	)	$	26,243
Agency mortgage-backed residential		87,182		42		(8,864	)		78,360		93,650		1,339		(970	)		94,019
Collateralized loan obligations		48,216		—		(2,038	)		46,178		50,227		—		(78	)		50,149
Corporate bonds		45,473		16		(1,381	)		44,108		43,432		572		(202	)		43,802
Total available for sale	$	207,309	$	58	$	(14,345	)	$	193,022	$	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	$	44,205	$	3	$	(7,985	)	$	36,223	$	46,460	$	158	$	(338	)	$	46,280
Total held to maturity	$	44,205	$	3	$	(7,985	)	$	36,223	$	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 June 30, 2022, $27.1 million and $19.1 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 six months ended June 30, 2022.

Stress testing was completed on each security in the CLO portfolio as of June 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 June 30, 2022, management does not believe any securities in the portfolio with unrealized losses should be classified as other than temporarily impaired.

Loans Receivable – Loans receivable increased $72.0 million, or 7.2%, during the six months ended June 30, 2022 to $1.07 billion as loan growth outpaced paydowns. The commercial and commercial real estate portfolios increased by an aggregate of $80.0 million, or 11.3%, during the first six months of 2022 and comprised 73.6% of the loan portfolio at June 30, 2022. Residential real estate and consumer portfolios decreased by an aggregate of $9.1 million, or 3.6%, during the first six months of 2022 and comprised 23.0% of the loan portfolio at June 30, 2022.

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

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

Commercial (1)	$	228,513		21.28	%	$	220,826		22.04	%
Commercial Real Estate
Construction		109,647		10.21			74,806		7.47
Farmland		67,727		6.31			68,388		6.83
Nonfarm nonresidential		384,069		35.77			345,893		34.53
Residential Real Estate
Multi-family		46,341		4.32			50,224		5.01
1-4 Family		166,531		15.51			168,873		16.86
Consumer		33,586		3.13			36,440		3.64
Agriculture		36,729		3.42			35,924		3.59
Other		672		0.05			466		0.03
Total loans	$	1,073,815		100.00	%	$	1,001,840		100.00	%

(1)

Includes PPP loans of $165,000 and $1.2 million at June 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.

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

Pass	$	1,052,624		98.0	%	$	977,962		97.6	%
Watch		6,426		0.6			7,856		0.8
Special Mention		—		—			—		—
Substandard		14,765		1.4			16,022		1.6
Doubtful		—		—			—		—
Total	$	1,073,815		100.0	%	$	1,001,840		100.00	%

Loans receivable increased $72.0 million, or 7.2%, during the six months ended June 30, 2022 primarily as a result of loan growth outpacing loan payoffs during the period. Since December 31, 2021, the pass category increased approximately $74.7 million, the watch category decreased approximately $1.4 million, and the substandard category decreased approximately $1.3 million. The $1.3 million decrease in loans classified as substandard was primarily driven by $1.5 million in payments, $270,000 in charge-offs, and $27,000 in loans upgraded from substandard, offset by $580,000 in loans migrating to substandard.

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

	June 30, 2022		December 31, 2021
	(in thousands)
Past Due Loans:
30-59 Days	$	600	$	556
60-89 Days		209		210
90 Days and Over		—		—
Total Loans Past Due 30-90+ Days		809		766

Nonaccrual Loans		3,007		3,124
Total Past Due and Nonaccrual Loans	$	3,816	$	3,890

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During the six months ended June 30, 2022, nonaccrual loans decreased by $117,000 to $3.0 million. Loans past due 30-59 days increased from $556,000 at December 31, 2021 to $600,000 at June 30, 2022. Loans past due 60-89 days decreased from $210,000 at December 31, 2021 to $209,000 at June 30, 2022. This represents a $43,000 increase in accruing past due loans from December 31, 2021 to June 30, 2022 in loans past due 30-89 days. This trend in delinquency levels is considered during the evaluation of qualitative trends in the portfolio when establishing the general component of the allowance for loan losses.

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

The Bank 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 June 30, 2022 and December 31, 2021, the Bank had two and three restructured loans totaling $211,000 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 June 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 June 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 six months ended June 30, 2022 or 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 June 30, 2022 and December 31, 2021:

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

Loans on nonaccrual status	$	3,007		$	3,124
Troubled debt restructurings on accrual		150			340
Past due 90 days or more still on accrual		—			—
Total non-performing loans		3,157			3,464
Real estate acquired through foreclosure		—			—
Other repossessed assets		—			—
Total non-performing assets	$	3,157		$	3,464

Nonaccrual loans to total loans		0.28	%		0.31	%
Non-performing loans and TDRs on accrual to total loans		0.29	%		0.35	%
Non-performing assets and TDRs on accrual to total assets		0.22	%		0.24	%
Allowance for loan losses to nonaccrual loans		417.36	%		369.11	%
Allowance for non-performing loans	$	14		$	12
Allowance for non-performing loans to non-performing loans and TDRs on accrual		0.44	%		0.35	%

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.

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A provision for loan loss of $450,000 and $1.2 million was recorded in the second quarter and first six months of 2022, respectively, compared to no provision for loan loss and $350,000 provision for loan loss in the second quarter and the first six months of 2021, respectively. The 2022 and 2021 loan loss provisions were attributable to growth trends within the portfolio and net loan charge-offs impacting historical loss percentages during the periods.

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

	Three Months Ended June 30,						Six Months Ended June 30,						December 31,
	2022			2021			2022			2021			2021
	(in thousands)
Balance at beginning of period	$	12,195		$	12,755		$	11,531		$	12,443		$	12,443

Loans charged-off:
Real estate		286			141			484			141			2,332
Commercial		25			—			25			19			19
Consumer		56			32			85			51			131
Agriculture		—			5			—			44			44
Other		—			—			—			—			—
Total charge-offs		367			178			594			255			2,526

Recoveries
Real estate		216			32			324			48			228
Commercial		2			7			9			10			172
Consumer		25			15			35			34			49
Agriculture		29			6			45			7			15
Other		—			—			—			—			—
Total recoveries		272			60			413			99			464
Net charge-offs		95			118			181			156			2,062
Provision for loan losses		450			—			1,200			350			1,150
Balance at end of period	$	12,550		$	12,637		$	12,550		$	12,637		$	11,531

Allowance for loan losses to period-end loans		1.17	%		1.33	%		1.17	%		1.33	%		1.15	%
Net charge-offs to average loans		0.04	%		0.05	%		0.04	%		0.03	%		0.22	%
Allowance for loan losses to non-performing loans		397.53	%		658.18	%		397.53	%		658.18	%		332.88	%

The allowance for loan losses to total loans was 1.17% at June 30, 2022, compared to 1.15% at December 31, 2021, and 1.33% at June 30, 2021. Net loan charge-offs in the first six months of 2022 totaled $181,000, compared to net loan charge-offs of $156,000 in the first six months of 2021. The allowance for loan losses to non-performing loans was 397.53% at June 30, 2022, compared with 332.88% at December 31, 2021, and 658.18% at June 30, 2021.

Liabilities – Total liabilities at June 30, 2022 were $1.29 billion compared with $1.28 billion at December 31, 2021, an increase of $9.7 million, or 0.8%. This increase was primarily attributable to an increase in FHLB advances of $50.0 million, offset by a $41.1 million decrease in deposits.

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

	For the Six Months					For the Year
	Ended June 30,					Ended December 31,
	2022					2021
	Average		Average			Average		Average
	Balance		Rate			Balance		Rate
	(dollars in thousands)
Demand	$	274,101				$	271,994
Interest checking		278,555		0.29	%		233,844		0.27	%
Money market		215,246		0.32			190,094		0.34
Savings		165,143		0.23			157,283		0.28
Certificates of deposit		258,715		0.48			311,140		0.57
Total deposits	$	1,191,760		0.26	%	$	1,164,355		0.30	%

The following table shows at June 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	$	8,363
Three months through six months		8,220
Six months through twelve months		6,213
Over twelve months		13,186
Total	$	35,982

Capital

Stockholders’ equity decreased $4.3 million to $126.6 million at June 30, 2022, compared with $131.0 million at December 31, 2021 due primarily to the other comprehensive loss for the period of $11.5 million attributable to the investment portfolio fair value decline and $763,000 in dividends paid to common shareholders, offset by current year net income of $7.6 million.

The following table shows the ratios of Tier 1 capital, common equity Tier 1 capital, and total capital to risk-adjusted assets and the leverage ratios for the Bank as of June 30, 2022:

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

Tier 1 Capital		6.0	%		8.0	%		7.0	%		12.4	%
Common equity Tier 1 capital		4.5			6.5			8.5			12.4
Total risk-based capital		8.0			10.0			10.5			13.4
Tier 1 leverage ratio		4.0			5.0			—			11.4

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

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

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.

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

The Bank also borrows from the FHLB to supplement funding requirements. At June 30, 2022, the Bank had an unused borrowing capacity with the FHLB of $91.2 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 June 30, 2022, the Bank had no brokered deposits.

The Company uses cash on hand to service the subordinated capital notes, junior subordinated debentures, and to provide for operating cash flow needs. The Company’s primary source of funding to meet its obligations is dividends from the Bank. At June 30, 2022, the Bank was eligible to pay $14.4 million in dividends. The Bank paid the Company $1.0 million in dividends during the six months ended June 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 1.2% at June 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 2.4% at June 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 June 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	$	(1,186	)		(2.39	)%
+ 100 basis points		(579	)		(1.16	)
- 100 basis points		(1,963	)		(3.95	)
- 200 basis points		(3,338	)		(6.71	)

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

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

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. Subject to applicable rules and regulations, the shares may be purchased from time to time in the open market or in privately negotiated transactions. Such purchases will be at times and in amounts as the Company deems appropriate, based on factors such as availability of shares, market conditions, the trading price of the shares, the Company’s financial performance and liquidity, legal and regulatory capital requirements, and other business conditions. The repurchase program does not obligate the Company to acquire any particular number of common shares, and it may be modified, terminated, or suspended at any time at the Company’s discretion. The share repurchase program expires on December 31, 2022. To date, no shares have been repurchased under the plan.

Item 3. Default Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

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Item 6. Exhibits

(a)

Exhibits

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

Exhibit Number	Description of Exhibit

3.1	Articles of Incorporation of the Company, restated to reflect amendments. Filed as Exhibit 3.1 to the Quarterly Report on Form 10-Q filed 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.

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 June 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).

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)

July 29, 2022	By:	/s/ John T. Taylor
		John T. Taylor
		Chief Executive Officer

July 29, 2022	By:	/s/ Phillip W. Barnhouse
		Phillip W. Barnhouse
		Chief Financial Officer