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

lmst20220331_10q.htm
 
 

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

         


FORM 10-Q  

 

(Mark One)

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

 

For the Quarterly Period Ended March 31, 2022

 

Or

 

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

(Registrants 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.

 

6,622,157 Common Shares and 1,000,000 Non-Voting Common Shares were outstanding at April 29, 2022.

         

         


 

 

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

29

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

42

ITEM 4.

CONTROLS AND PROCEDURES

42

 

 

 

PART II –

OTHER INFORMATION

 

ITEM 1.

LEGAL PROCEEDINGS

43

ITEM 1A.

RISK FACTORS

43

ITEM 2.

UNREGISTERED SALES ON EQUITY SECURITIES AND USE OF PROCEEDS

43

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

43

ITEM 4.

MINE SAFETY DISCLOSURES

43

ITEM 5.

OTHER INFORMATION

43

ITEM 6.

EXHIBITS

44

 

 


         

PART I FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

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

 

Unaudited Consolidated Balance Sheets

Unaudited Consolidated Statements of Income

Unaudited Consolidated Statements of Comprehensive Income

Unaudited Consolidated Statement of Changes in Stockholders’ Equity

Unaudited Consolidated Statements of Cash Flows

Notes to Unaudited Consolidated Financial Statements

 

 

 

LIMESTONE BANCORP, INC.

Unaudited Consolidated Balance Sheets

(dollars in thousands except share data)

 

  

March 31,

2022

  

December 31,

2021

 

Assets

        

Cash and due from banks

 $10,009  $10,493 

Interest bearing deposits in banks

  22,040   67,110 

Cash and cash equivalents

  32,049   77,603 

Securities available for sale

  204,071   214,213 

Securities held to maturity (fair value of $40,790 and $46,280, respectively)

  45,639   46,460 

Loans, net of allowance of $12,195 and $11,531, respectively

  1,035,090   990,309 

Premises and equipment, net

  23,043   21,575 

Premises held for sale

     310 

Federal Home Loan Bank stock

  5,116   5,116 

Bank owned life insurance

  30,643   23,946 

Deferred taxes, net

  22,648   21,583 

Goodwill

  6,252   6,252 

Other intangible assets, net

  1,925   1,989 

Accrued interest receivable and other assets

  6,230   6,336 

Total assets

 $1,412,706  $1,415,692 
         

Liabilities and Stockholders Equity

        

Deposits

        

Non-interest bearing

 $281,533  $274,083 

Interest bearing

  917,098   934,585 

Total deposits

  1,198,631   1,208,668 

Federal Home Loan Bank advances

  30,000   20,000 

Accrued interest payable and other liabilities

  9,855   10,065 

Junior subordinated debentures

  21,000   21,000 

Subordinated capital notes

  25,000   25,000 

Total liabilities

  1,284,486   1,284,733 

Commitments and contingent liabilities (Note 13)

      

Stockholders’ equity

        

Common stock, no par, 39,000,000 shares authorized, 6,622,157 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

  25,733   25,625 

Retained deficit

  (28,571

)

  (31,769

)

Accumulated other comprehensive loss

  (9,581

)

  (3,536

)

Total stockholders' equity

  128,220   130,959 

Total liabilities and stockholders’ equity

 $1,412,706  $1,415,692 

 

See accompanying notes to unaudited consolidated financial statements.

 

 

 

LIMESTONE BANCORP, INC.

Unaudited Consolidated Statements of Income

(dollars in thousands, except per share data)

 

  

Three Months Ended

March 31,

 
  

2022

  

2021

 

Interest income

        

Loans, including fees

 $10,918  $10,961 

Taxable securities

  1,304   1,116 

Tax exempt securities

  166   131 

Interest-bearing deposits and other

  39   42 
   12,427   12,250 

Interest expense

        

Deposits

  762   1,026 

Federal Home Loan Bank advances

  40   38 

Junior subordinated debentures

  136   130 

Subordinated capital notes

  375   376 
   1,313   1,570 
         

Net interest income

  11,114   10,680 

Provision for loan losses

  750   350 

Net interest income after provision for loan losses

  10,364   10,330 
         

Non-interest income

        

Service charges on deposit accounts

  634   548 

Bank card interchange fees

  1,003   960 

Income from bank owned life insurance

  202   165 

Gain on sale of premises held for sale

  163    

Other

  236   211 
   2,238   1,884 

Non-interest expense

        

Salaries and employee benefits

  4,564   4,482 

Occupancy and equipment

  1,029   1,060 

Deposit account related expense

  547   491 

Data processing expense

  386   378 

Professional fees

  221   236 

Marketing expense

  133   182 

FDIC insurance

  90   135 

Deposit tax

  99   90 

Communications expense

  64   173 

Insurance expense

  105   104 

Postage and delivery

  163   152 

Other

  570   501 
   7,971   7,984 

Income before income taxes

  4,631   4,230 

Income tax expense

  1,052   1,008 

Net income

  3,579   3,222 

Basic and diluted income per common share

 $0.47  $0.43 

 

See accompanying notes to unaudited consolidated financial statements.

 

 

 

LIMESTONE BANCORP, INC.

Unaudited Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

 

  

Three Months Ended

March 31,

 
  

2022

  

2021

 

Net income

 $3,579  $3,222 

Other comprehensive income (loss):

        

Unrealized gain (loss) on securities:

        

Unrealized gain (loss) arising during the period

  (7,973

)

  280 

Amortization during period of net unrealized gain transferred to held to maturity

  (81

)

  (50

)

Net unrealized gain (loss) recognized in comprehensive income (loss)

  (8,054

)

  230 

Tax effect

  2,009   (57

)

Other comprehensive income (loss)

  (6,045

)

  173 
         

Comprehensive income (loss)

 $(2,466

)

 $3,395 

 

See accompanying notes to unaudited consolidated financial statements.

 

 

 

LIMESTONE BANCORP, INC.

Unaudited Consolidated Statements of Changes in Stockholders Equity

For Three Months Ended March 31, 2022 and 2021

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

 

  Shares  Amount 
  Common  Common 
  Common  

Non-Voting

Common

  

Total

Common

  

Common and

Non-Voting

Common

  

Additional

Paid-In Capital

  

Retained

Deficit

  

Accumulated Other

Comprehensive Loss

  Total 

Balances, January 1, 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 

 

 

  Shares  Amount 
  Common  Common 
  Common  

Non-Voting

Common

  

Total

Common

  

Common and

Non-Voting

Common

  

Additional

Paid-In Capital

  

Retained

Deficit

  

Accumulated Other

Comprehensive Loss

  Total 

Balances, January 1, 2021

  6,498,865   1,000,000   7,498,865  $140,639  $25,013  $(46,678

)

 $(2,950

)

 $116,024 

Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations upon vesting

  95,634      95,634      (48

)

        (48)

Forfeited unvested stock

                        

Stock-based compensation expense

              149         149 

Net income

                 3,222      3,222 

Net change in accumulated other comprehensive loss, net of taxes

                    173   173 

Balances, March 31, 2021

  6,594,499   1,000,000   7,594,499  $140,639  $25,114  $(43,456

)

 $(2,777

)

 $119,520 

 

See accompanying notes to unaudited consolidated financial statements.

 

 

 

LIMESTONE BANCORP, INC.

Unaudited Consolidated Statements of Cash Flows

For Three Months Ended March 31, 2022 and 2021

(dollars in thousands)

 

  

2022

  

2021

 

Cash flows from operating activities

        

Net income

 $3,579  $3,222 

Adjustments to reconcile net income to net cash from operating activities

        

Depreciation, amortization and accretion, net

  551   916 

Provision for loan losses

  750   350 

Net amortization on securities

  121   145 

Stock-based compensation expense

  305   149 

Deferred taxes, net

  944   1,007 

Net write-down of premises held for sale

     25 

Net gain on sale of premises held for sale

  (163

)

   

Increase in cash surrender value of life insurance, net of premium expense

  (197

)

  (160

)

Amortization of operating lease right-of-use assets

  91   81 

Net change in accrued interest receivable and other assets

  (1,291

)

  (2,319

)

Net change in accrued interest payable and other liabilities

  (210

)

  (1,460

)

Net cash from operating activities

  4,480   1,956 
         

Cash flows from investing activities

        

Purchases of available for sale securities

  (7,021

)

  (23,700

)

Proceeds from maturities and prepayments of available for sale securities

  9,092   13,852 

Purchases of held to maturity securities

  (658

)

  (5,491

)

Proceeds from calls of held to maturity securities

  875    

Proceeds from maturities and prepayments of held to maturity securities

  500    

Proceeds from mandatory redemptions of Federal Home Loan Bank stock

     77 

Net changes in loans

  (45,743

)

  (17,420

)

Purchases of premises and equipment

  (437

)

  (445

)

Proceeds from sale of premises held for sale

  473    

Purchase of bank owned life insurance

  (6,500

)

   

Net cash from investing activities

  (49,419

)

  (33,127

)

         

Cash flows from financing activities

        

Net change in deposits

  (10,037

)

  47,383 

Repayment of Federal Home Loan Bank advances

     (10

)

Advances from Federal Home Loan Bank

  10,000    

Common shares withheld for taxes

  (197

)

  (48

)

Cash dividends paid on common stock

  (381

)

   

Net cash from financing activities

  (615

)

  47,325 

Net change in cash and cash equivalents

  (45,554

)

  16,154 

Beginning cash and cash equivalents

  77,603   67,693 

Ending cash and cash equivalents

 $32,049  $83,847 
         

Supplemental cash flow information:

        

Interest paid

 $1,675  $1,976 

Income taxes paid

      

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.

 

 

LIMESTONE BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

 

 

 

Note 1 Basis of Presentation and Summary of Significant Accounting Policies

 

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

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, the financial statements do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 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, including illness, quarantines, social distancing practices, cancellation of events and travel, business and school shutdowns, reduction in commercial activity and financial transactions, supply chain interruptions, increased unemployment, 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. The impact of CECL model implementation is being evaluated, but it is expected that a one-time cumulative-effect adjustment to the allowance for loan losses will be recognized in retained earnings on the consolidated balance sheet as of the beginning of the first reporting period in which the new standard is effective, as is consistent with regulatory expectations set forth in interagency guidance. In December 2018, the OCC, The Board of Governors of the Federal Reserve System (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.

 

9

 

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 securities available for sale and securities held to maturity at March 31, 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

 
                 

March 31, 2022

                

Available for sale

                

U.S. Government and federal agency

 $26,952  $  $(1,196

)

 $25,756 

Agency mortgage-backed: residential

  90,589   177   (5,097

)

  85,669 

Collateralized loan obligations

  48,221      (297

)

  47,924 

Corporate bonds

  45,453   221   (952

)

  44,722 

Total available for sale

 $211,215  $398  $(7,542

)

 $204,071 

 

  

Amortized

Cost

  

Gross

Unrecognized

Gains

  

Gross

Unrecognized

Losses

  

Fair Value

 

Held to maturity

                

State and municipal

 $45,639  $24  $(4,873

)

 $40,790 

Total held to maturity

 $45,639  $24  $(4,873

)

 $40,790 

 

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 

 

10

 

Sales and calls of securities were as follows:

 

  

Three Months Ended

March 31,

 
  

2022

  

2021

 
  

(in thousands)

 

Proceeds

 $875  $ 

Gross gains

      

Gross losses

      

 

 

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

 

 

  

March 31, 2022

 
  

Amortized

Cost

  

Fair

Value

 
  

(in thousands)

 

Maturity

        

Available for sale

        

Within one year

 $  $ 

One to five years

  5,113   5,103 

Five to ten years

  82,497   81,245 

Beyond ten years

  33,016   32,054 

Agency mortgage-backed: residential

  90,589   85,669 

Total

 $211,215  $204,071 
         

Held to maturity

        

Within one year

 $1,699   1,697 

One to five years

  9,336  $9,130 

Five to ten years

  3,346   3,091 

Beyond ten years

  31,258   26,872 

Total

 $45,639  $40,790 

 

 

Securities pledged at March 31, 2022 and December 31, 2021 had carrying values of approximately $133.3 million and $155.4 million, respectively, and were pledged to secure public deposits.

 

At March 31, 2022 and December 31, 2021, the Bank held securities issued by the Commonwealth of Kentucky or Kentucky municipalities having a book value of $36.0 million and $35.7 million, respectively. At March 31, 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 March 31, 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.

 

11

 

The market value of CLOs may be affected by, among other things, changes in composition of the underlying loans, changes in the cash flows from the underlying loans, defaults and recoveries on the underlying loans, capital gains and losses on the underlying loans, prepayments on the underlying loans, and other conditions or economic factors. At March 31, 2022, $27.9 million and $20.0 million of the Bank’s CLOs were risk rated AA and A rated, respectively. None of the CLOs were subject to ratings downgrade during the three months ended March 31, 2022.

 

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 are either initially fixed rate for five years converting to floating rate at an index over LIBOR or SOFR, or 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 March 31, 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

 
                         

March 31, 2022

                        

Available for sale

                        

U.S. Government and federal agency

 $22,728  $(1,196

)

 $  $  $22,728  $(1,196

)

Agency mortgage-backed: residential

  56,323   (3,867

)

  11,594   (1,230

)

  67,917   (5,097

)

Collateralized loan obligations

  31,483   (152

)

  16,440   (145

)

  47,923   (297

)

Corporate bonds

  30,023   (916

)

  2,829   (36

)

  32,852   (952

)

Total temporarily impaired

 $140,557  $(6,131

)

 $30,863  $(1,411

)

 $171,420  $(7,542

)

 

  

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

  28,067   (3,381

)

  9,921   (1,492

)

  37,988   (4,873

)

Total temporarily impaired

 $28,067  $(3,381

)

 $9,921  $(1,492

)

 $37,988  $(4,873

)

 

 

  

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

)

 

12

 

 

 

Note 3 Loans

 

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

 

  

March 31,

  

December 31,

 
  

2022

  

2021

 
  

(in thousands)

 

Commercial (1)

 $231,179  $220,826 

Commercial Real Estate:

        

Construction

  92,851   74,806 

Farmland

  67,646   68,388 

Nonfarm nonresidential

  368,989   345,893 

Residential Real Estate:

        

Multi-family

  46,840   50,224 

1-4 Family

  165,693   168,873 

Consumer

  34,506   36,440 

Agriculture

  39,080   35,924 

Other

  501   466 

Subtotal

  1,047,285   1,001,840 

Less: Allowance for loan losses

  (12,195

)

  (11,531

)

Loans, net

 $1,035,090  $990,309 

 


(1)

Includes SBA Paycheck Protection Program (“PPP”) loans of $180,000 and $1.2 million at March 31, 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 March 31, 2022 and 2021:

 

  Commercial  

Commercial

Real Estate

  

Residential

Real Estate

  Consumer  Agriculture  Other  Total 
  

(in thousands)

 

March 31, 2022:

                            

Beginning balance

 $2,888  $6,179  $1,443  $538  $480  $3  $11,531 

Provision (negative provision)

  119   650   (63

)

  10   34      750 

Loans charged off

     (158

)

  (40

)

  (29

)

        (227

)

Recoveries

  7   46   62   10   16      141 

Ending balance

 $3,014  $6,717  $1,402  $529  $530  $3  $12,195 
                             
                             

March 31, 2021:

                            

Beginning balance

 $2,529  $7,050  $1,899  $361  $600  $4  $12,443 

Provision (negative provision)

  (33

)

  647   (126

)

  (27

)

  (110

)

  (1

)

  350 

Loans charged off

  (19

)

        (19

)

  (39

)

     (77

)

Recoveries

  3   8   8   19   1      39 

Ending balance

 $2,480  $7,705  $1,781  $334  $452  $3  $12,755 

 

13

 

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

 $  $  $37  $  $  $  $37 

Collectively evaluated for impairment

  3,014   6,717   1,365   529   530   3   12,158 

Total ending allowance balance

 $3,014  $6,717  $1,402  $529  $530  $3  $12,195 
                             

Loans:

                            

Loans individually evaluated for impairment

 $  $3,063  $679  $30  $8  $  $3,780 

Loans collectively evaluated for impairment

  231,179   526,423   211,854   34,476   39,072   501   1,043,505 

Total ending loans balance

 $231,179  $529,486  $212,533  $34,506  $39,080  $501  $1,047,285 

 

 

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 

 

14

 

Impaired Loans

 

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

 

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

 

  

As of March 31, 2022

  

Three Months Ended March 31, 2022

 
  

Unpaid

Principal

Balance

  

Recorded

Investment

  

Allowance

For Loan

Losses

Allocated

  

Average

Recorded

Investment

  

Interest

Income

Recognized

  

Cash

Basis

Income

Recognized

 
  

(in thousands)

     

With No Related Allowance Recorded:

                        

Commercial

 $275  $  $  $  $  $ 

Commercial real estate:

                        

Construction

                  

Farmland

  226   174      195   26   26 

Nonfarm nonresidential

  8,113   2,889      2,776   13   6 

Residential real estate:

                        

Multi-family

                  

1-4 Family

  1,431   526      513   59   59 

Consumer

  289   30      21       

Agriculture

  323   8      8   4   4 

Other

                  

Subtotal

  10,657   3,627      3,513   102   95 
                         

With An Allowance Recorded:

                        

Commercial

                  

Commercial real estate:

                        

Construction

                  

Farmland

                  

Nonfarm nonresidential

                  

Residential real estate:

                        

Multi-family

                  

1-4 Family

  194   153   37   109       

Consumer

                  

Agriculture

                  

Other

                  

Subtotal

  194   153   37   109       

Total

 $10,851  $3,780  $37  $3,622  $102  $95 

 

15

 
  

As of December 31, 2021

  

Three Months Ended March 31, 2021

 
  

Unpaid

Principal

Balance

  

Recorded

Investment

  

Allowance

For Loan

Losses

Allocated

  

Average

Recorded

Investment

  

Interest

Income

Recognized

  

Cash

Basis

Income

Recognized

 
  

(in thousands)

     

With No Related Allowance Recorded:

                        

Commercial

 $290  $  $  $  $  $ 

Commercial real estate:

                        

Construction

                  

Farmland

  302   215      576       

Nonfarm nonresidential

  7,755   2,663      542   14   7 

Residential real estate:

                        

Multi-family

                  

1-4 Family

  1,408   501      942   17   17 

Consumer

  272   12      13       

Agriculture

  366   9      97       

Other

                  

Subtotal

  10,393   3,400      2,170   31   24 

With An Allowance Recorded:

                        

Commercial

                  

Commercial real estate:

                        

Construction

                  

Farmland

                  

Nonfarm nonresidential

           4,356   113    

Residential real estate:

                        

Multi-family

                  

1-4 Family

  65   65   2          

Consumer

           105   1    

Agriculture

                  

Other

                  

Subtotal

  65   65   2   4,461   114    

Total

 $10,458  $3,465  $2  $6,631   145   24 

 

 

Troubled Debt Restructuring

 

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

 

The following table presents the types of TDR loan modifications by portfolio segment outstanding as of March 31, 2022 and December 31, 2021:

 

  

TDRs

Performing to

Modified Terms

  

TDRs Not

Performing to

Modified Terms

  

Total

TDRs

 
  

(in thousands)

 

March 31, 2022

            

Commercial Real Estate:

            

Nonfarm nonresidential

 $333  $  $333 

Residential Real Estate:

            

1-4 Family

     63   63 

Total TDRs

 $333  $63  $396 

 

16

 
  

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

 

No TDR modifications occurred during the three months ended March 31, 2022 or March 31, 2021. During the three months ended March 31, 2022 and March 31, 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 and nonaccrual loans as of March 31, 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)

 

March 31, 2022

                    

Commercial

 $  $25  $  $  $25 

Commercial Real Estate:

                    

Construction

  70            70 

Farmland

           174   174 

Nonfarm nonresidential

  420   33      2,556   3,009 

Residential Real Estate:

                    

Multi-family

               

1-4 Family

  457         679   1,136 

Consumer

  151   31      30   212 

Agriculture

  10         8   18 

Other

               

Total

 $1,108  $89  $  $3,447  $4,644 

 

  

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 

 

17

 

Credit Quality Indicators

 

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

 

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

 

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

 

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

 

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

 

As of March 31, 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)

 

March 31, 2022

                        

Commercial

 $218,456  $4,878  $  $7,845  $  $231,179 

Commercial Real Estate:

                        

Construction

  92,851               92,851 

Farmland

  65,174   169      2,303      67,646 

Nonfarm nonresidential

  364,248   1,277      3,464      368,989 

Residential Real Estate:

                        

Multi-family

  46,840               46,840 

1-4 Family

  161,490   2,210      1,993      165,693 

Consumer

  34,461   3      42      34,506 

Agriculture

  39,018   30      32      39,080 

Other

  501               501 

Total

 $1,023,039  $8,567  $  $15,679  $  $1,047,285 

 

  

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 March 31, 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 March 31, 2022.

 

18

 

In determining the present value of lease payments, the Bank uses the implicit lease rate when readily determinable. As most of the Bank’s leases do not provide an implicit rate, the incremental borrowing rate based on the information available at commencement date is used. The incremental borrowing rate is the estimated rate of interest that the Bank would have to pay to borrow on a collateralized basis over a similar term in an amount equal to the lease payments in a similar economic environment. The weighted average discount rate for the leases was 4.21% as of March 31, 2022.

 

Total rental expense was $115,000 and $162,000 for the three months ended March 31, 2022 and 2021, respectively. The right-of-use asset, included in premises and equipment, and lease liability, included in other liabilities, was $6.6 million as of March 31, 2022 and $5.3 million as of December 31, 2021. During the first quarter of 2022, the Bank relocated a banking center in Owensboro and commenced a new lease which increased the right-of-use asset and lease liability by $1.4 million.

 

Total estimated rental commitments for the operating leases were as follows as of March 31, 2022 (in thousands):

 

  

March 31,

2022

 
     

April – December 2022

 $340 

2023

  457 

2024

  458 

2025

  438 

2026

  408 

Thereafter

  8,899 

Total minimum lease payments

  11,000 

Discount effect of cash flows

  (4,368

)

Present value of lease liabilities

 $6,632 

 

 

 

Note 5 Deposits

 

The following table details deposits by category:

 

  

March 31,

2022

  

December 31,

2021

 
  

(in thousands)

 

Non-interest bearing

 $281,533  $274,083 

Interest checking

  274,054   287,208 

Money market

  216,845   217,943 

Savings

  166,135   163,423 

Certificates of deposit

  260,064   266,011 

Total

 $1,198,631  $1,208,668 

 

Time deposits of $250,000 or more were approximately $33.0 million and $33.4 million at March 31, 2022 and December 31, 2021, respectively.

 

Scheduled maturities of total time deposits at March 31, 2022 for each of the next five years are as follows (in thousands):

 

Year 1

 $168,256 

Year 2

  49,192 

Year 3

  15,856 

Year 4

  23,411 

Year 5

  2,579 

Thereafter

  770 
  $260,064 

 

19

 

 

Note 6 Advances from the Federal Home Loan Bank

 

Advances from the Federal Home Loan Bank were as follows: 

 

  

March 31,

  

December 31,

 
  

2022

  

2021

 
  

(in thousands)

 
         

Short term advances (fixed rate 0.43%) maturing April 2022

 $10,000  $ 

Long term advances (fixed rate 0.77%) maturing February 2030

  20,000   20,000 

Total advances from the Federal Home Loan Bank

 $30,000  $20,000 

 

FHLB advances had a weighted-average rate of 0.66% at March 31, 2022 and 0.77% at December 31, 2021. Each advance is payable per terms on agreement, with a prepayment penalty. No prepayment penalties were incurred during 2022 or 2021. The $20.0 million long term advance is callable quarterly at the FHLB’s option. Advances were collateralized by approximately $118.4 million and $120.5 million of first mortgage loans, under a blanket lien arrangement at March 31, 2022 and December 31, 2021, respectively, and $1.2 million of loans originated under the SBA Payment Protection Plan at December 31, 2021. At March 31, 2022, the Bank’s additional borrowing capacity with the FHLB was $52.3 million.

 

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

 

  

Advances

 

Year 1

 $10,000 

Year 2

   

Year 3

   

Year 4

   

Year 5

   

Thereafter

  20,000 
  $30,000 

 

 

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 March 31, 2022, the Company is current on all interest payments.

 

A summary of the junior subordinated debentures is as follows:

 

Description 

Issuance

Date

 Interest Rate (1) 

Junior

Subordinated

Debt Owed

To Trust

 

Maturity

Date (2)

Statutory Trust I

 

2/13/2004

 

3-month LIBOR + 2.85%

 $3,000,000 

2/13/2034

Statutory Trust II

 

2/13/2004

 

3-month LIBOR + 2.85%

  5,000,000 

2/13/2034

Statutory Trust III

 

4/15/2004

 

3-month LIBOR + 2.79%

  3,000,000 

4/15/2034

Statutory Trust IV

 

12/14/2006

 

3-month LIBOR + 1.67%

  10,000,000 

3/01/2037

      $21,000,000  

 


(1)

As of March 31, 2022, the 3-month LIBOR was 0.96%.

(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 March 31, 2022, the Company had a $5.0 million federal funds line of credit available on an unsecured basis from a correspondent institution.

 

20

 

 

 

Note 8 Fair Values Measurement

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Management routinely 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.

 

21

 

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

 

      

Fair Value Measurements at March 31, 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

 $25,756  $  $25,756  $ 

Agency mortgage-backed: residential

  85,669      85,669    

Collateralized loan obligations

  47,924      47,924    

Corporate bonds

  44,722      31,023   13,699 

Total

 $204,071  $  $190,372  $13,699 

 

 

 

      

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.

 

The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2022 and 2021:

 

  

March 31, 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

  (342

)

Transfers into Level 3

   

Balance of recurring Level 3 assets at March 31, 2022

 $13,699 

 

 

  

March 31, 2021

 
  

Collateralized

Loan Obligations

  

Corporate

Bonds

 
  

(in thousands)

 

Balance of recurring Level 3 assets at January 1, 2021

 $2,388  $11,916 

Total gains or losses for the year:

        

Included in other comprehensive income

  68   432 

Transfers into Level 3

      

Balance of recurring Level 3 assets at March 31, 2021

 $2,456  $12,348 

 

22

 

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

 

  

Fair Value Measurements at March 31, 2022

 
  

Fair Value

 

Valuation

Technique(s)

 

Unobservable Input(s)

 

Range (Weighted

Average)

 
              
              

Corporate bonds

 $13,699 

Discounted cash flow

 

Constant prepayment rate

  0%   
       Additional asset defaults 190%-355%(258%) 
       Expected asset recoveries 77%-102%(92%) 

 

 

 

  

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 March 31, 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

 $116  $  $  $116 

 

      

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 $153,000 at March 31, 2022 with a valuation allowance of $37,000, resulting in additional provision for loan losses of $35,000 for the three months ended March 31, 2022. Impaired loans had a carrying amount of $4.5 million with a valuation allowance of $2.2 million, resulting in additional provision for loan losses of $1,000 for the three months ended March 31, 2021. At December 31, 2021, impaired loans had a carrying amount of $65,000, with a valuation allowance of $2,000.

 

23

 

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

 

      

Fair Value Measurements at March 31, 2022 Using

 
  

Carrying

Amount

  

Level 1

  

Level 2

  

Level 3

  

Total

 
  

(in thousands)

 

Financial assets

                    

Cash and cash equivalents

 $32,049  $32,049  $  $  $32,049 

Securities available for sale

  204,071      190,372   13,699   204,071 

Securities held to maturity

  45,639      40,790      40,790 

Federal Home Loan Bank stock

  5,116   N/A   N/A   N/A   N/A 

Loans, net

  1,035,090         1,002,848   1,002,848 

Accrued interest receivable

  3,880      931   2,949   3,880 

Financial liabilities

                    

Deposits

 $1,198,631  $281,533  $915,221  $  $1,196,754 

Federal Home Loan Bank advances

  30,000      30,013      30,013 

Junior subordinated debentures

  21,000         18,772   18,772 

Subordinated capital notes

  25,000         24,826   24,826 

Accrued interest payable

  402      128   274   402 

 

 

      

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.

 

24

 

 

Note 9 Income Taxes

 

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

 

  

March 31,

  

December 31,

 
  

2022

  

2021

 
  

(in thousands)

 

Deferred tax assets:

        

Net operating loss carry-forward

 $18,359  $19,335 

Allowance for loan losses

  3,043   2,877 

Net unrealized loss on securities

  1,619    

New market tax credit carry-forward

  208   208 

Nonaccrual loan interest

  326   321 

Accrued expenses

  118   138 

Lease liability

  1,655   1,328 

Other

  150   202 
   25,478   24,409 
         

Deferred tax liabilities:

        

FHLB stock dividends

  415   415 

Fixed assets

  139   133 

Deferred loan costs

  174   176 

Net unrealized gain on securities

     390 

Lease right-of-use assets

  1,655   1,328 

Net assets from acquisitions

  154   108 

Other

  293   276 
   2,830   2,826 

Net deferred tax asset

 $22,648  $21,583 

 

At March 31, 2022, the Company had net federal operating loss carryforwards of $81.9 million, which will begin to expire in 2032, and state net operating loss carryforwards of $29.1 million, which begin to expire in 2026.

 

The Company does not have any beginning and ending unrecognized tax benefits. The Company does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next twelve months. There were no interest and penalties recorded in the income statement or accrued for the three months ended March 31, 2022 or March 31, 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.

 

25

 

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

 

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

 

 

Note 10 Stock Plans and Stock Based Compensation

 

Shares available for issuance under the 2018 Omnibus Equity Compensation Plan total 139,081. 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 $747,000, or $19.70 per weighted-average share. The Company recorded $305,000 and $149,000 of stock-based compensation to salaries and employee benefits for the three months ended March 31, 2022 and 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 $76,000 and $37,000 was recognized related to this expense during the three months ended March 31, 2022 and 2021, respectively.

 

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

 

  

Three Months Ended

  

Twelve Months Ended

 
  

March 31, 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

  37,929   19.70   110,024   13.52 

Vested

  (30,310

)

  16.07   (37,590

)

  15.13 

Forfeited

  (313

)

  17.01   (8,336

)

  13.66 

Outstanding, ending

  118,842  $15.03   111,536  $13.73 

 

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

 

April – December 2022

 $400 

2023

  433 

2024

  296 

2025

  143 

2026

  134 

Thereafter

  160 

 

26

 

 

 

Note 11 Earnings per Share

 

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

 

  

Three Months Ended

 
  

March 31,

 
  

2022

  

2021

 
  

(in thousands, except

share and per share data)

 
         

Net income

 $3,579  $3,222 

Less:

        

Earnings allocated to unvested shares

  54   38 

Net income available to common shareholders, basic and diluted

 $3,525  $3,184 
         

Basic and Diluted

        

Weighted average common shares including unvested common shares outstanding

  7,614,382   7,575,211 

Less:

        

Weighted average unvested common shares

  115,189   90,507 

Weighted average common shares outstanding

  7,499,193   7,484,704 

Basic and diluted income per common share

 $0.47  $0.43 

 

The Company had no outstanding stock options or warrants at March 31, 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 March 31, 2022, Management believes the Company and Bank met all capital adequacy requirements to which they are subject. As of March 31, 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 March 31, 2022:

                        

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

 $166,920   13.17

%

 $101,389   8.00

%

 $126,736   10.00

%

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

  154,725   12.21   57,031   4.50   82,378   6.50 

Tier 1 capital (to risk-weighted assets)

  154,725   12.21   76,042   6.00   101,389   8.00 

Tier 1 capital (to average assets)

  154,725   11.20   55,283   4.00   69,104   5.00 

 

27

 
  

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 $10.6 million of dividends as of March 31, 2022. The Bank did not pay the Company any dividends during the three months ended March 31, 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 Company’s client(s) may demand immediate cash that would require funding. In addition, unfunded loan commitments represent interest rate risk as market interest rates may rise above the rate committed to the Company’s client. Since a portion of these loan commitments normally expire unused, the total amount of outstanding commitments at any point in time may not require future funding. Commitments to make loans are generally made for periods of one year or less 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:

 

  

March 31, 2022

  

December 31, 2021

 
  

Fixed

Rate

  

Variable

Rate

  

Fixed

Rate

  

Variable

Rate

 
  

(in thousands)

 

Commitments to make loans

 $76,992  $53,058  $85,294  $60,683 

Unused lines of credit

  10,750   126,550   12,828   108,635 

Standby letters of credit

  566   343   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 March 31, 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 March 31, 2022 and December 31, 2021, the fair value of the risk participation agreements were $28,000 and $67,000, respectively.

 

28

 

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

 

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

 

 

Note 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, income from secondary market loan sales, and other transaction-based revenue that is individually immaterial. Other non-interest income included approximately $161,000 and $153,000 of revenue for three months ended March 31, 2022 and March 31, 2021, respectively, within the scope of ASC 606. The remaining other non-interest income for the three months is excluded from the scope of ASC 606.

 

Item 2. Managements 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;

 

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 March 31, 2022, the Company had total assets of $1.41 billion, total loans of $1.05 billion, total deposits of $1.20 billion and stockholders’ equity of $128.2 million.

 

The Company reported net income of $3.6 million, or $0.47 per basic and diluted common share, for the three months ended March 31, 2022, compared with $3.2 million, or $0.43 per basic and diluted common share, for the first quarter of 2021.

 

Significant items for the three months ended March 31, 2022 are as follows:

 

 

Average loans receivable were $1.03 billion for the quarter ended March 31, 2022, $955.5 million for the quarter ended December 31, 2021, and $964.4 million for the first quarter of 2021. SBA Paycheck Protection Program (“PPP”) loans averaged $605,000 for the first quarter of 2022, compared to $3.5 million for the fourth quarter of 2021 and $21.1 million for the first quarter of 2021.

 

 

 

Net interest margin was 3.42% for the first three months of 2022 compared with 3.32% for the fourth quarter of 2021, and 3.53% for the first three months of 2021. The yield on earning assets increased to 3.82% in the first quarter of 2022 as compared to 3.71% for the fourth quarter of 2021 and decreased as compared to 4.05% in the first quarter of 2021. While the Federal Reserve recently increased the federal funds target rate by 25 basis points on March 16, 2022, the yield on earning assets for the first quarter of 2022 and for the 2021 fiscal year were negatively impacted by lower interest rates on the Bank’s fed funds, certain floating rate investment securities, loans with variable rate pricing features, and new loan originations, including PPP loans which carry a rate of 1.0%. Additionally, higher yielding average loans and investment securities increased during the first quarter of 2022 as lower yielding fed funds decreased as compared to the fourth quarter of 2021 and the first quarter of 2021.

 

 

The negative impact of low rates was offset by $45,000, $261,000, and $436,000 in fees earned on PPP loans for the first quarter of 2022, the fourth quarter of 2021, and the first quarter of 2021, respectively. During the first quarter of 2022, PPP fees represented two basis points of earning asset yield and net interest margin, compared to eight basis points for the fourth quarter of 2021, and 14 basis points for the first quarter of 2021. At March 31, 2022, PPP loans totaled $180,000 with no significant unearned origination fees remaining.

 

 

The cost of interest-bearing liabilities decreased from 0.68% in the first quarter of 2021 to 0.53% in both the fourth quarter of 2021 and first quarter of 2022 as a result of the continued downward repricing of time deposits and continued improvement in deposit mix.

 

 

A provision of $750,000 was recorded in the first quarter of 2022, compared to $500,000 in the fourth quarter of 2021, and $350,000 in the first quarter of 2021. The loan loss provisions were attributable to net loan charge-offs impacting historical loss percentages and growth within the portfolio during the quarters. Net loan charge-offs were $86,000 for the first quarter of 2022, compared to net loan charge-offs of $1.9 million for the fourth quarter of 2021, and net loan charge-offs of $38,000 for the first quarter of 2021.

 

 

Loans past due 30-59 days increased from $556,000 at December 31, 2021 to $1.1 million at March 31, 2022, and loans past due 60-89 days decreased from $210,000 at December 31, 2021 to $89,000 at March 31, 2022. Total loans past due and nonaccrual loans increased to $4.6 million at March 31, 2022, from $3.9 million at December 31, 2021.

 

 

Deposits were $1.20 billion at March 31, 2022, compared with $1.21 billion at December 31, 2021. Certificate of deposit balances decreased $5.9 million during the first three months of 2022 to $260.1 million at March 31, 2022, from $266.0 million at December 31, 2021. Interest checking accounts decreased $13.2 million, non-interest bearing accounts increased $7.5 million, money market decreased $1.1 million, and savings accounts increased $2.7 million during the quarter ended March 31, 2022 compared with December 31, 2021.

 

 

On April 1, 2022, the Company paid a $0.05 per common share cash dividend to shareholders of record as of the close of business on March 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 three 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 March 31, 2022, compared with the same period of 2021:

 

   

For the Three Months

   

Change from

 
   

Ended March 31,

   

Prior Period

 
   

2022

   

2021

   

Amount

   

Percent

 
   

(dollars in thousands)

 
                                 

Gross interest income

  $ 12,427     $ 12,250     $ 177       1.4

%

Gross interest expense

    1,313       1,570       (257

)

    (16.4

)

Net interest income

    11,114       10,680       434       4.1  

Provision for loan losses

    750       350       400       114.3  

Non-interest income

    2,238       1,884       354       18.8  

Non-interest expense

    7,971       7,984       (13

)

    (0.2

)

Net income before taxes

    4,631       4,230       401       9.5  

Income tax expense

    1,052       1,008       44       4.4  

Net income

    3,579       3,222       357       11.1  

 

 

Net income for the three months ended March 31, 2022 totaled $3.6 million, compared with $3.2 million for the comparable period of 2021. Net interest income increased $434,000 from the first quarter of 2021 as a result of a decrease in the cost of interest-bearing liabilities due primarily to downward repricing within the time deposit portfolios and a change in the mix of interest earning assets. Provision for loan losses expense of $750,000 was recorded in the first quarter of 2022 as compared to $350,000 in the first quarter of 2021. The 2022 and 2021 loan loss provisions were primarily attributable to net loan charge-offs impacting historical loss percentages and growth trends within the portfolio during the quarters. Non-interest income increased $354,000 from $1.9 million in the first quarter of 2021 to $2.2 million for the first quarter of 2022 primarily related to a $163,000 gain on the sale of premises held for sale. Non-interest expense decreased $13,000 and remained largely unchanged at $8.0 million for the first quarter of 2022 and 2021.

 

Net Interest Income – Net interest income was $11.1 million for the three months ended March 31, 2022, an increase of $434,000, or 4.1%, compared with $10.7 million for the same period in 2021. Net interest spread and margin were 3.29% and 3.42%, respectively, for the first quarter of 2022, compared with 3.37% and 3.53%, respectively, for the first quarter of 2021.

 

The yield on earning assets decreased to 3.82% for the first quarter of 2022, as compared to 4.05% in the first quarter of 2021. Average interest-earning assets were $1.33 billion for the first quarter of 2022, compared with $1.23 billion for the first quarter of 2021, a 7.8% increase. Average fed funds sold decreased $22.1 million for the first quarter 2022 as compared to the first quarter of 2021 as average loans receivable increased approximately $64.2 million and average investment securities increased $54.3 million. PPP loans averaged $605,000 and $21.1 million for the first quarter of 2022 and 2021, respectively. The increase in average loans resulted in an increase in interest revenue volume of approximately $705,000 for the quarter ended March 31, 2022, which was offset by a decrease in interest revenue of $748,000 due to the lower interest rates on new and renewed loans, as compared with the first quarter of 2021.

 

While the Federal Reserve recently increased the federal funds target rate by 25 basis points on March 16, 2022, the yield on earning assets for the first quarter of 2022 and for the 2021 fiscal year were negatively impacted by the low interest rate environment on the Bank’s fed funds sold, certain floating rate investment securities, loans with variable rate pricing features, and new loan originations, including PPP loans which carry a rate of 1.0%. The negative impact of low rates was offset by loan fee income discussed below.

 

Loan fee income can meaningfully impact net interest income, loan yields, and net interest income. The amount of loan fee income included in total interest income represents 10 basis points and 28 basis points of yield on earning assets and net interest margin for the first quarter ended March 31, 2022 and 2021, respectively. Loan fee income for the first quarter of 2022 included $45,000 in fees earned on SBA PPP loans, compared to $436,000 in the first quarter of 2021, which represents two basis points and 14 basis points of earning asset yield and net interest margin for those quarters, respectively. Total interest income increased $177,000, or 1.4%, for the first quarter of 2022 compared to the first quarter of 2021.

 

The cost of interest-bearing liabilities decreased to 0.53% for the first quarter of 2022, as compared to 0.68% for the first quarter of 2021 primarily based on the downward repricing of time and deposits, as well as a shift in deposit mix. Average interest-bearing liabilities increased by 5.9% to $996.7 million for the first quarter of 2022, as compared to $941.3 million for the first quarter of 2021 primarily due to a $129.6 million increase in interest-bearing deposits and money market accounts, offset by a $94.1 million decrease in time deposits between periods. Total interest expense decreased by 16.4% to $1.3 million for the first quarter of 2022 as compared to the first quarter of 2021.

 

 

Average Balance Sheets

 

The following table presents the average balance sheets for the three-month periods ended March 31, 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 March 31,

 
   

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)

  $ 1,028,546     $ 10,918       4.30

%

  $ 964,353     $ 10,961       4.61

%

Securities

                                               

Taxable

    227,413       1,304       2.33       180,562       1,116       2.51  

Tax-exempt

    29,896       166       3.00       22,446       131       3.15  

FHLB stock

    5,116       26       2.06       5,847       30       2.08  

Interest-bearing deposits and other

    35,263       13       0.15       57,402       12       0.08  

Total interest-earning assets

    1,326,234       12,427       3.82

%

    1,230,610       12,250       4.05

%

Less: Allowance for loan losses

    (11,615

)

                    (12,454

)

               

Non-interest earning assets

    92,411                       98,722                  

Total assets

  $ 1,407,030                     $ 1,316,878                  
                                                 

LIABILITIES AND STOCKHOLDERS EQUITY

                                               

Interest-bearing liabilities:

                                               

Certificates of deposit and other time deposits

  $ 260,739     $ 310       0.48

%

  $ 354,855     $ 602       0.69

%

NOW and money market deposits

    503,486       359       0.29       373,841       306       0.33  

Savings accounts

    164,818       93       0.23       146,029       118       0.33  

FHLB advances

    21,667       40       0.75       20,617       38       0.75  

Junior subordinated debentures

    21,000       136       2.63       21,000       130       2.51  

Subordinated capital notes

    25,000       375       6.08       25,000       376       6.10  

Total interest-bearing liabilities

    996,710       1,313       0.53

%

    941,342       1,570       0.68

%

                                                 

Non-interest-bearing liabilities:

                                               

Non-interest-bearing deposits

    270,131                       251,218                  

Other liabilities

    9,092                       6,655                  

Total liabilities

    1,275,933                       1,199,215                  

Stockholders’ equity

    131,097                       117,663                  

Total liabilities and stockholders equity

  $ 1,407,030                     $ 1,316,878                  
                                                 

Net interest income

          $ 11,114                     $ 10,680          
                                                 

Net interest spread

                    3.29

%

                    3.37

%

                                                 

Net interest margin

                    3.42

%

                    3.53

%

 

         


(1)

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

 

 

Rate/Volume Analysis

 

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

 

   

Three Months Ended March 31,

2022 vs. 2021

 
   

Increase (decrease)

due to change in

   

Net

 
   

Rate

   

Volume

    Change  
   

(in thousands)

 

Interest-earning assets:

                       

Loan receivables

  $ (748

)

  $ 705     $ (43

)

Securities

    (92

)

    315       223  

FHLB stock

          (4

)

    (4

)

Interest-bearing deposits and other

    7       (6

)

    1  

Total increase (decrease) in interest income

    (833

)

    1,010       177  
                         

Interest-bearing liabilities:

                       

Certificates of deposit and other time deposits

    (155

)

    (137

)

    (292

)

NOW and money market accounts

    (43

)

    96       53  

Savings accounts

    (39

)

    14       (25

)

FHLB advances

          2       2  

Junior subordinated debentures

    6             6  

Subordinated capital notes

    (1

)

          (1

)

Total decrease in interest expense

    (232

)

    (25

)

    (257

)

Increase (decrease) in net interest income

  $ (601

)

  $ 1,035     $ 434  

 

 

Non-Interest Income – The following table presents the major categories of non-interest income for the three months ended March 31, 2022 and 2021:

 

   

For the Three Months

 
   

Ended March 31,

 
   

2022

   

2021

 
   

(in thousands)

 
                 

Service charges on deposit accounts

  $ 634     $ 548  

Bank card interchange fees

    1,003       960  

Income from bank owned life insurance

    202       165  

Gain on sale of premises held for sale

    163        

Other

    236       211  

Total non-interest income

  $ 2,238     $ 1,884  

 

Non-interest income for the first quarter of 2022 increased by $354,000, or 18.8%, to $2.2 million compared with $1.9 million for the first quarter of 2021. The increase was primarily related to a $163,000 gain on the sale of premises held for sale.

 

 

Non-interest Expense The following table presents the major categories of non-interest expense for the three months ended March 31, 2022 and 2021:

 

   

For the Three Months

 
   

Ended March 31,

 
   

2022

   

2021

 
   

(in thousands)

 
                 

Salary and employee benefits

  $ 4,564     $ 4,482  

Occupancy and equipment

    1,029       1,060  

Deposit account related expenses

    547       491  

Data processing expense

    386       378  

Professional fees

    221       236  

Marketing expense

    133       182  

FDIC insurance

    90       135  

Deposit tax

    99       90  

Communications expense

    64       173  

Insurance expense

    105       104  

Postage and delivery

    163       152  

Other

    570       501  

Total non-interest expense

  $ 7,971     $ 7,984  

 

Non-interest expense for the first quarter ended March 31, 2022 decreased $13,000, or 0.2%, and remained largely unchanged at $8.0 million for the first quarter of 2022 and 2021. Salaries and benefits represent our most significant non-interest expense. Salaries and benefits expense increased $82,000 from the first quarter of 2021. These fluctuations are generally driven by changes in FTEs during each period. Given current market conditions, Management expects inflationary pressure to impact salaries and benefits in the range of four to five percent in 2022 as the Bank competes for talent and administers wage and benefit programs.

 

Income Tax Expense Income tax expense was $1.1 million for the first quarter of 2022, compared with $1.0 million for the first quarter of 2021. Effective tax rates differ from the federal statutory rate applied to income before income taxes due to the following:

 

   

For the Three Months

 
   

Ended March 31,

 
   

2022

   

2021

 
   

(in thousands)

 
                 

Federal statutory tax rate

    21

%

    21

%

Federal statutory rate times financial statement income

  $ 972     $ 888  

Effect of:

               

State income taxes

    168       181  

Tax-exempt income

    (32

)

    (30

)

Non-taxable life insurance income

    (42

)

    (41

)

Restricted stock vesting

    (21

)

    5  

Other, net

    7       5  

Total

  $ 1,052     $ 1,008  

 

Analysis of Financial Condition

 

Total assets were $1.41 billion at March 31, 2022, compared to $1.42 billion at December 31, 2021. This decrease was primarily attributable to decreases cash and cash equivalents of $45.1 million and securities of $11.0 million, offset by an increase in loans receivable of $45.4 million and bank owned life insurance of $6.7 million.

 

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 $11.0 million, or 4.2%, to $249.7 million at March 31, 2022, compared with $260.7 million at December 31, 2021.

 

 

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

 

   

March 31, 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

  $ 26,952     $     $ (1,196

)

  $ 25,756     $ 26,075     $ 301     $ (133

)

  $ 26,243  

Agency mortgage-backed residential

    90,589       177       (5,097

)

    85,669       93,650       1,339       (970

)

    94,019  

Collateralized loan obligations

    48,221             (297

)

    47,924       50,227             (78

)

    50,149  

Corporate bonds

    45,453       221       (952

)

    44,722       43,432       572       (202

)

    43,802  

Total available for sale

  $ 211,215     $ 398     $ (7,542

)

  $ 204,071     $ 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

  $ 45,639     $ 24     $ (4,873

)

  $ 40,790     $ 46,460     $ 158     $ (338

)

  $ 46,280  

Total held to maturity

  $ 45,639     $ 24     $ (4,873

)

  $ 40,790     $ 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 March 31, 2022, $27.9 million and $20.0 million of the Bank’s CLOs were risk rated AA and A rated, respectively. None of the CLOs were subject to ratings downgrade during the three months ended March 31, 2022.

 

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 are either initially fixed rate for five years converting to floating rate at an index over LIBOR or SOFR, or 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 March 31, 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 $45.4 million, or 4.5%, during the three months ended March 31, 2022 to $1.047 billion as loan growth outpaced paydowns. The Bank’s commercial and commercial real estate portfolios increased by an aggregate of $50.8 million, or 7.1%, during the first quarter of 2022 and comprised 72.6% of the loan portfolio at March 31, 2022. Residential real estate and consumer portfolios decreased by an aggregate of $8.5 million, or 3.3%, during the first quarter of 2022 and comprised 23.6% of the loan portfolio at March 31, 2022.

 

 

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

 

   

As of March 31,

   

As of December 31,

 
   

2022

   

2021

 
   

Amount

   

Percent

   

Amount

   

Percent

 
           

(dollars in thousands)

         
                                 

Commercial (1)

  $ 231,179       22.07

%

  $ 220,826       22.04

%

Commercial Real Estate

                               

Construction

    92,851       8.87       74,806       7.47  

Farmland

    67,646       6.46       68,388       6.83  

Nonfarm nonresidential

    368,989       35.23       345,893       34.53  

Residential Real Estate

                               

Multi-family

    46,840       4.47       50,224       5.01  

1-4 Family

    165,693       15.82       168,873       16.86  

Consumer

    34,506       3.29       36,440       3.64  

Agriculture

    39,080       3.73       35,924       3.59  

Other

    501       0.06       466       0.03  

Total loans

  $ 1,047,285       100.00

%

  $ 1,001,840       100.00

%

 


 

(1)

Includes PPP loans of $180,000 and $1.2 million at March 31, 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.

 

   

March 31, 2022

   

December 31, 2021

 
   

Loans

   

% to

Total

   

Loans

   

% to

Total

 
   

(dollars in thousands)

 
                                 

Pass

  $ 1,023,039       97.7 %   $ 977,962       97.6

%

Watch

    8,567       0.8       7,856       0.8  

Special Mention

                       

Substandard

    15,679       1.5       16,022       1.6  

Doubtful

                       

Total

  $ 1,047,285       100.0 %   $ 1,001,840       100.00

%

 

Loans receivable increased $45.5 million, or 4.5%, during the three months ended March 31, 2022. Since December 31, 2021, the pass category increased approximately $45.1 million, the watch category increased approximately $711,000, and the substandard category decreased approximately $343,000. These trends were considered during the evaluation of the qualitative trends in the portfolio when establishing the general component of the allowance for loan losses.

 

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

 

   

March 31,

2022

   

December 31,

2021

 
   

(in thousands)

 

Past Due Loans:

               

30-59 Days

  $ 1,108     $ 556  

60-89 Days

    89       210  

90 Days and Over

           

Total Loans Past Due 30-90+ Days

    1,197       766  
                 

Nonaccrual Loans

    3,447       3,124  

Total Past Due and Nonaccrual Loans

  $ 4,644     $ 3,890  

 

During the three months ended March 31, 2022, nonaccrual loans increased by $323,000 to $3.4 million. Loans past due 30-59 days increased from $556,000 at December 31, 2021 to $1.1 million at March 31, 2022. Loans past due 60-89 days decreased from $210,000 at December 31, 2021 to $89,000 at March 31, 2022. This represents a $431,000 increase in loans past due 30-89 days from December 31, 2021 to March 31, 2022. 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 March 31, 2022 and December 31, 2021, the Bank had three restructured loans totaling $396,000 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 March 31, 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 1-4 residential properties or commercial real estate properties. At March 31, 2022 and December 31, 2021, 84% of the TDRs were performing according to their modified terms.

 

There were no modifications granted during the first quarter of 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 March 31, 2022 and December 31, 2021.

 

   

March 31,

2022

   

December 31,

2021

 
   

(dollars in thousands)

 
                 

Loans on nonaccrual status

  $ 3,447     $ 3,124  

Troubled debt restructurings on accrual

    333       340  

Past due 90 days or more still on accrual

           

Total non-performing loans and TDRs on accrual

    3,780       3,464  

Real estate acquired through foreclosure

           

Other repossessed assets

           

Total non-performing assets

  $ 3,780     $ 3,464  
                 

Nonaccrual loans to total loans

    0.33

%

    0.31

%

Non-performing loans and TDRs on accrual to total loans

    0.36

%

    0.35

%

Non-performing assets and TDRs on accrual to total assets

    0.27

%

    0.24

%

Allowance for loan losses to nonaccrual loans

    353.79

%

    369.11

%

Allowance for non-performing loans

  $ 59     $ 12  

Allowance for non-performing loans to non-performing loans and TDRs on accrual

    1.56

%

    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.

 

 

A provision for loan losses of $750,000 was recorded in the first quarter of 2022, compared to $350,000 of provision for loan losses in the first quarter of 2021. The 2022 and 2021 loan loss provisions were attributable to net loan charge-offs impacting historical loss percentages and growth trends within the portfolio during the quarters.

 

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

 

   

Three Months Ended

March 31,

   

Year Ended

December 31,

 
   

2022

   

2021

    2021  
   

(dollars in thousands)

 

Balances at beginning of period

  $ 11,531     $ 12,443     $ 12,443  
                         

Loans charged-off:

                       

Real estate

    198             2,332  

Commercial

          19       19  

Consumer

    29       19       131  

Agriculture

          39       44  

Other

                 

Total charge-offs

    227       77       2,526  
                         

Recoveries:

                       

Real estate

    108       16       228  

Commercial

    7       3       172  

Consumer

    10       19       49  

Agriculture

    16       1       15  

Other

                 

Total recoveries

    141       39       464  

Net charge-offs

    86       38       2,062  

Provision for loan losses

    750       350       1,150  

Balance at end of period

  $ 12,195     $ 12,755     $ 11,531  
                         

Allowance for loan losses to period-end loans

    1.16

%

    1.30

%

    1.15

%

Net charge-offs to average loans

    0.03

%

    0.02

%

    0.22

%

Allowance for loan losses to non-performing loans

    322.62

%

    532.57

%

    332.88

%

 

The allowance for loan losses to total loans was 1.16% at March 31, 2022, compared to 1.15% at December 31, 2021, and 1.30% at March 31, 2021. Net loan charge-offs were $86,000 for the first quarter of 2022, compared to $38,000 for the first quarter of 2021. The allowance for loan losses to non-performing loans was 322.62% at March 31, 2022, compared with 332.88% at December 31, 2021, and 532.57% at March 31, 2021.

 

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

 

   

For the Three Months

   

For the Year

 
   

Ended March 31,

   

Ended December 31,

 
   

2022

   

2021

 
   

Average

   

Average

   

Average

   

Average

 
   

Balance

   

Rate

   

Balance

   

Rate

 
   

(dollars in thousands)

 

Demand

  $ 270,131             $ 271,994          

Interest checking

    284,967       0.27

%

    233,844       0.27

%

Money market

    218,519       0.31       190,094       0.34  

Savings

    164,818       0.23       157,283       0.28  

Certificates of deposit

    260,739       0.48       311,140       0.57  

Total deposits

  $ 1,199,174       0.26

%

  $ 1,164,355       0.30

%

 

 

The following table shows at March 31, 2022 the amount of time deposits of $250,000 or more by time remaining until maturity (in thousands):

 

Maturity Period

 

(in thousands)

       

Three months or less

  $ 7,186  

Three months through six months

    4,612  

Six months through twelve months

    6,511  

Over twelve months

    14,725  

Total

  $ 33,034  

 

Capital

 

Stockholders’ equity decreased $2.7 million to $128.2 million at March 31, 2022, compared with $131.0 million at December 31, 2021 due to the other comprehensive loss for the quarter of $6.0 million and $381,000 in dividends paid to common shareholders, offset by current year net income of $3.6 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 March 31, 2022:

 

   

Regulatory

Minimums

   

Well-Capitalized

Minimums

   

Basel III Plus

Conservation

Buffer

   

Limestone Bank

 
                                 

Tier 1 Capital

    6.0 %     8.0 %     7.0 %     12.2 %

Common equity Tier 1 capital

    4.5       6.5       8.5       12.2  

Total risk-based capital

    8.0       10.0       10.5       13.2  

Tier 1 leverage ratio

    4.0       5.0             11.2  

 

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.

 

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

 

The Bank also borrows from the FHLB to supplement funding requirements. At March 31, 2022, the Bank had an unused borrowing capacity with the FHLB of $52.3 million. Advances are collateralized by first mortgage residential loans and borrowing capacity is based on the underlying book value of eligible pledged loans.

 

The Bank also has available on an unsecured basis federal funds borrowing lines from a correspondent bank totaling $5.0 million. Management believes the sources of liquidity are adequate to meet expected cash needs for the foreseeable future. Historically, the Bank has also utilized brokered and wholesale deposits to supplement its funding strategy. At March 31, 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 March 31, 2022, the Bank was eligible to pay $10.6 million of dividends. The Bank did not pay the Company any dividends during the three months ended March 31, 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 is also expected to impact core non-interest expenses associated with delivering the Bank’s services.

 

 

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 1.8% at March 31, 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 3.0% at March 31, 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 March 31, 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

  $ (1,412 )     (3.04

)%

+ 100 basis points

    (843 )     (1.82 )

- 100 basis points

    (176

)

    (0.38

)

- 200 basis points

    (740

)

    (1.59

)

 

 

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.

 

 

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

 

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

 

Period

Total Shares Purchased

(Withheld)

 

Average Price Paid

(Credited) Per Share

January 19, 2022

 

4,389

$19.45

January 20, 2022

 

2,531

$19.20

February 13, 2022

 

3,287

$19.30

 

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

 

 

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.

   

3.3

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 4, 2015. Exhibit 4.2 to the Quarterly Report on Form 10-Q filed August 5, 2015 is incorporated by reference.

   

4.3

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

   

4.4

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

   

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 10Q for the quarter ended March 31, 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.

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant had duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

LIMESTONE BANCORP, INC.

 

(Registrant)

 

April 29, 2022

By:

/s/ John T. Taylor

 

 

John T. Taylor

 

 

Chief Executive Officer

 

April 29, 2022

By:

/s/ Phillip W. Barnhouse

   

Phillip W. Barnhouse 

 

 

Chief Financial Officer

 

 

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