0001358356 LIMESTONE BANCORP, INC. false --12-31 Q3 2021 47,407 12,973 12,443 — — 0 0 39,000,000 39,000,000 6,602,686 6,602,686 6,498,865 6,498,865 1,000,000 1,000,000 1,000,000 1,000,000 2,000 0 0 0 0 0 2.2 5.4 2.5 2.3 0.77 0.77 0 February 13, 2004 2.85 February 13, 2034 February 13, 2004 2.85 February 13, 2034 April 15, 2004 2.79 April 15, 2034 December 14, 2006 1.67 March 01, 2037 6 10 0 1 1 49 49 0 280 450 327 80 105 88 0 2 2 49 49 0 322 497 381 72 107 80 0 0 0 0 1 3 7 0 0.025 0.07 0.085 0.105 1 26.6 As of September 30, 2021, the 3-month LIBOR was 0.13%. The debentures are callable at the Company’s option at their principal amount plus accrued interest. 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Table of Contents


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

         


FORM 10-Q  

 

(Mark One)

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

 

For the Quarterly Period Ended September 30, 2021

 

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.

 

6,602,204 Common Shares and 1,000,000 Non-Voting Common Shares were outstanding at October 29, 2021.          

 

 

 


 

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)

 

   

September 30,

2021

   

December 31,

2020

 

Assets

               

Cash and due from banks

  $ 13,579     $ 10,830  

Interest bearing deposits in banks

    44,909       56,863  

Cash and cash equivalents

    58,488       67,693  

Securities available for sale

    203,548       203,862  

Securities held to maturity (fair value of $47,407)

    47,539        

Loans, net of allowance of $12,973 and $12,443, respectively

    955,115       949,638  

Premises and equipment, net

    21,623       18,533  

Premises held for sale

    980       1,060  

Other real estate owned

          1,765  

Federal Home Loan Bank stock

    5,116       5,887  

Bank owned life insurance

    23,845       23,441  

Deferred taxes, net

    22,161       25,714  

Goodwill

    6,252       6,252  

Other intangible assets, net

    2,053       2,244  

Accrued interest receivable and other assets

    6,128       6,213  

Total assets

  $ 1,352,848     $ 1,312,302  
                 

Liabilities and Stockholders Equity

               

Deposits

               

Non-interest bearing

  $ 266,035     $ 243,022  

Interest bearing

    881,956       876,585  

Total deposits

    1,147,991       1,119,607  

Federal Home Loan Bank advances

    20,000       20,623  

Accrued interest payable and other liabilities

    10,193       10,048  

Junior subordinated debentures

    21,000       21,000  

Subordinated capital notes

    25,000       25,000  

Total liabilities

    1,224,184       1,196,278  

Commitments and contingent liabilities (Note 15)

           

Stockholders’ equity

               

Common stock, no par, 39,000,000 shares authorized, 6,602,686 and 6,498,865 voting, and 1,000,000 and 1,000,000 non-voting issued and outstanding, respectively

    140,639       140,639  

Additional paid-in capital

    25,441       25,013  

Retained deficit

    (35,214

)

    (46,678

)

Accumulated other comprehensive loss

    (2,202

)

    (2,950

)

Total stockholders' equity

    128,664       116,024  

Total liabilities and stockholders’ equity

  $ 1,352,848     $ 1,312,302  

 

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

September 30,

   

Nine Months Ended

September 30,

 
   

2021

   

2020

   

2021

   

2020

 
Interest income                                

Loans, including fees

  $ 11,565     $ 10,805     $ 33,573     $ 33,772  

Taxable securities

    1,183       1,139       3,402       3,913  

Tax exempt securities

    168       108       476       255  

Federal funds sold and other

    59       42       150       207  
      12,975       12,094       37,601       38,147  

Interest expense

                               

Deposits

    812       1,627       2,755       6,526  

Federal Home Loan Bank advances

    39       39       115       332  

Senior debt

          12             119  

Junior subordinated debentures

    128       138       390       525  

Subordinated capital notes

    375       335       1,126       830  
      1,354       2,151       4,386       8,332  

Net interest income

    11,621       9,943       33,215       29,815  

Provision for loan losses

    300       1,350       650       3,500  

Net interest income after provision for loan losses

    11,321       8,593       32,565       26,315  
                                 

Non-interest income

                               

Service charges on deposit accounts

    583       565       1,651       1,674  

Bank card interchange fees

    1,044       881       3,077       2,494  

Income from bank owned life insurance

    112       113       420       325  

Gain on sale of other real estate owned

                191        

Gain (loss) on sales and calls of securities, net

    465             460       (5

)

Other

    232       183       656       579  
      2,436       1,742       6,455       5,067  

Non-interest expense

                               

Salaries and employee benefits

    4,582       4,413       13,531       13,584  

Occupancy and equipment

    1,024       1,008       3,063       2,990  

Professional fees

    219       261       701       704  

Marketing expense

    200       134       561       452  

FDIC Insurance

    90       81       315       148  

Data processing expense

    378       382       1,133       1,121  

Deposit and state franchise tax

    90       360       270       1,080  

Deposit account related expense

    545       487       1,592       1,398  

Communications expense

    153       201       520       666  

Insurance expense

    105       102       324       316  

Postage and delivery

    169       156       460       476  

Other

    495       494       1,518       1,615  
      8,050       8,079       23,988       24,550  

Income before income taxes

    5,707       2,256       15,032       6,832  

Income tax expense

    1,366       190       3,568       944  

Net income

    4,341       2,066       11,464       5,888  

Basic and diluted income per common share

  $ 0.57     $ 0.28     $ 1.51     $ 0.79  

 

See accompanying notes to unaudited consolidated financial statements.

 

 

 

LIMESTONE BANCORP, INC.

Unaudited Consolidated Statements of Comprehensive Income

(in thousands)

 

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
   

2021

   

2020

   

2021

   

2020

 

Net income

  $ 4,341     $ 2,066     $ 11,464     $ 5,888  

Other comprehensive income:

                               

Unrealized gain (loss) on securities:

                               

Unrealized gain (loss) arising during the period

    756       1,300       1,718       428  

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

    (91

)

          (261

)

     

Less reclassification adjustment for gains (losses)included in net income

    465             460       (5

)

Net unrealized gain (loss) recognized in comprehensive income

    200       1,300       997       433  

Tax effect

    (50

)

    (324

)

    (249

)

    (108

)

Other comprehensive income

    150       976       748       325  
                                 

Comprehensive income

  $ 4,491     $ 3,042     $ 12,212     $ 6,213  

 

See accompanying notes to unaudited consolidated financial statements.

 

 

 

LIMESTONE BANCORP, INC.

Unaudited Consolidated Statements of Changes in Stockholders Equity

For Three and Nine Months Ended September 30, 2021 and 2020

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

 

    Shares     Amount  
    Common    

Non-Voting

Common

   

Total

Common

   

Common and

Non-Voting

Common

   

Additional

Paid-In Capital

    Retained Deficit     Accumulated Other Comprehensive Loss     Total  
                                                                 

Balances, January 1, 2021

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

)

  $ (2,950

)

  $ 116,024  

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

    95,634             95,634             (48

)

                (48 )

Forfeited unvested stock

                                               

Stock-based compensation expense

                            149                   149  

Net income

                                  3,222             3,222  

Net change in accumulated other comprehensive loss, net of taxes

                                        173       173  

Balances, March 31, 2021

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

)

  $ (2,777

)

  $ 119,520  

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

    8,586             8,586             (39

)

                (39 )

Forfeited unvested stock

    (399

)

          (399 )                              

Stock-based compensation expense

                            152                   152  

Net income

                                  3,901             3,901  

Net change in accumulated other comprehensive income, net of taxes

                                        425       425  

Balances, June 30, 2021

    6,602,686       1,000,000       7,602,686     $ 140,639     $ 25,227     $ (39,555

)

  $ (2,352

)

  $ 123,959  

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

                                               

Forfeited unvested stock

                                               

Stock-based compensation expense

                            214                   214  

Net income

                                  4,341             4,341  

Net change in accumulated other comprehensive income, net of taxes

                                        150       150  

Balances, September 30, 2021

    6,602,686       1,000,000       7,602,686     $ 140,639     $ 25,441     $ (35,214

)

  $ (2,202

)

  $ 128,664  

 

See accompanying notes to unaudited consolidated financial statements.

 

 

LIMESTONE BANCORP, INC.

Unaudited Consolidated Statements of Changes in Stockholders Equity

For Three and Nine Months Ended September 30, 2021 and 2020

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

 

    Shares     Amount  
    Common    

Non-Voting

Common

   

Total

Common

   

Common and

Non-Voting

Common

   

Additional

Paid-In Capital

    Retained Deficit     Accumulated Other Comprehensive Loss     Total  
                                                                 

Balances, January 1, 2020

    6,251,975       1,220,000       7,471,975     $ 140,639     $ 24,508     $ (55,683 )   $ (3,714

)

  $ 105,750  

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

    17,330             17,330             (37

)

                (37 )

Forfeited unvested stock

                                               

Stock-based compensation expense

                            106                   106  

Net income

                                  1,840             1,840  

Net change in accumulated other comprehensive loss, net of taxes

                                        (3,148

)

    (3,148 )

Balances, March 31, 2020

    6,269,305       1,220,000       7,489,305     $ 140,639     $ 24,577     $ (53,843 )   $ (6,862

)

  $ 104,511  

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

    (3,433             (3,433

)

          (38

)

                (38 )

Forfeited unvested stock

                                               

Stock-based compensation expense

                            104                   104  

Net income

                                  1,982             1,982  

Net change in accumulated other comprehensive income, net of taxes

                                        2,497       2,497  

Balances, June 30, 2020

    6,265,872       1,220,000       7,485,872     $ 140,639     $ 24,643     $ (51,861 )   $ (4,365

)

  $ 109,056  

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

    13,377             13,377                                

Forfeited unvested stock

    (66 )           (66

)

                             

Stock-based compensation expense

                            188                   188  

Non-voting shares converted to voting

    220,000       (220,000

)

                                   

Net income

                                  2,066             2,066  

Net change in accumulated other comprehensive income, net of taxes

                                        976       976  

Balances, September 30, 2020

    6,499,183       1,000,000       7,499,183     $ 140,639     $ 24,831     $ (49,795 )   $ (3,389

)

  $ 112,286  

 

See accompanying notes to unaudited consolidated financial statements.

 

 

 

LIMESTONE BANCORP, INC.

Unaudited Consolidated Statements of Cash Flows

For Nine Months Ended September 30, 2021 and 2020

(dollars in thousands)

 

   

2021

   

2020

 

Cash flows from operating activities

               

Net income

  $ 11,464     $ 5,888  

Adjustments to reconcile net income to net cash from operating activities

               

Depreciation, amortization and accretion, net

    3,878       1,760  

Provision for loan losses

    650       3,500  

Net amortization on securities

    422       500  

Stock-based compensation expense

    515       398  

Deferred taxes, net

    3,304       1,117  

Net realized (gain) loss on sales and calls of investment securities

    (460

)

    5  

Net realized gain on sales of other real estate owned

    (191

)

     

Net realized loss on sales of premises and equipment

    1        

Net write-down on premises held for sale

    80       100  

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

    (404

)

    (310

)

Amortization of operating lease right-of-use assets

    269       562  

Net change in accrued interest receivable and other assets

    (3,138

)

    (1,319

)

Net change in accrued interest payable and other liabilities

    145       (350

)

Net cash from operating activities

    16,535       11,851  
                 

Cash flows from investing activities

               

Purchases of available for sale securities

    (68,827

)

    (28,931

)

Proceeds from sales and calls of available for sale securities

    6,500       8,530  

Proceeds from maturities and prepayments of available for sale securities

    28,182       25,785  

Purchases of held to maturity securities

    (15,414

)

     

Proceeds from calls of held to maturity securities

    704        

Proceeds from maturities and prepayments of held to maturity securities

    2,665        

Purchases of Federal Home Loan Bank stock

          (600

)

Proceeds from mandatory redemptions of Federal Home Loan Bank stock

    771       875  

Proceeds from sale of other real estate owned

    1,956       1,600  

Net change in loans

    (8,998

)

    (49,362

)

Purchases of premises and equipment

    (953

)

    (584

)

Purchases of bank owned life insurance

          (7,000

)

Net cash from investing activities

    (53,414

)

    (49,687

)

                 

Cash flows from financing activities

               

Net change in deposits

    28,384       67,414  

Repayment of Federal Home Loan Bank advances

    (623

)

    (135,755

)

Advances from Federal Home Loan Bank

          105,000  

Proceeds from issuance of subordinated capital note

          8,000  

Repayment of senior debt

          (5,000

)

Common shares withheld for taxes

    (87

)

    (75

)

Net cash from financing activities

    27,674       39,584  

Net change in cash and cash equivalents

    (9,205

)

    1,748  

Beginning cash and cash equivalents

    67,693       30,203  

Ending cash and cash equivalents

  $ 58,488     $ 31,951  
                 

Supplemental cash flow information:

               

Interest paid

  $ 4,837     $ 8,924  

Income tax paid (refund)

    220       (346

)

Supplemental non-cash disclosure:

               

Transfer from loans to other real estate

           

Transfer from premises and equipment to premises held for sale

          310  

Transfer from available for sale to held to maturity securities

    34,741        

AOCI component of transfer from available for sale to held to maturity

    1,081        

Financed sales of other real estate owned

          1,360  

 

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 nine months ended September 30, 2021 are not necessarily indicative of the results that may be expected for the entire year. A description of other significant accounting policies is presented in the notes to the Consolidated Financial Statements for the year ended December 31, 2020 included in the Company’s Annual Report on Form 10-K.

 

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

 

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

 

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

 

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

 

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

 

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

 

10

 

New Accounting Standards In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The final standard will change estimates for credit losses related to financial assets measured at amortized cost such as loans, held-to-maturity debt securities, and certain other contracts. For estimating credit losses, the FASB is replacing the incurred loss model with an expected loss model, which is referred to as the current expected credit loss (CECL) model. Under the CECL model, certain financial assets that are carried at amortized cost, such as loans held for investment and held-to-maturity debt securities, are required to be presented at the net amount expected to be collected. The measurement of expected credit losses is to be based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This measurement will take place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs significantly from the “incurred loss” model required under current GAAP, which delays recognition until it is probable a loss has been incurred. The change could materially affect how the allowance for loan losses is determined. Management has selected a vendor to assist in generating loan level cash flows and disclosures. The project plan has been running parallel with the existing historical loss model and will continue up until CECL implementation. Management continues to focus on refining assumptions and challenges to the model. Additionally, management is contemplating 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, and the FDIC approved a final rule to address changes to the credit loss accounting under GAAP, including banking organizations’ implementation of CECL. The final rule provides banking organizations the option to phase in over a three-year period the day-one adverse effects on regulatory capital that may result from adoption of the new accounting standard. In October 2019, the FASB voted to delay implementation for smaller reporting companies, private companies, and not-for-profit entities. The Company currently qualifies as a smaller reporting company and, as such, will be required to implement CECL for fiscal year and interim periods beginning after December 15, 2022.

 

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

 

 

Note 2 Securities

 

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

 

The following table summarizes the amortized cost and fair value of AFS securities and HTM securities at September 30, 2021 and December 31, 2020 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) and gross unrecognized gains and losses (in thousands):

 

   

Amortized

Cost

   

Gross

Unrealized

Gains

   

Gross

Unrealized

Losses

   

Fair Value

 
                                 

September 30, 2021

                               

Available for sale

                               

U.S. Government and federal agency

  $ 26,443     $ 641     $     $ 27,084  

Agency mortgage-backed: residential

    84,938       1,925       (493

)

    86,370  

Collateralized loan obligations

    50,233       1       (104

)

    50,130  

Corporate bonds

    39,412       656       (104

)

    39,964  

Total available for sale

  $ 201,026     $ 3,223     $ (701

)

  $ 203,548  

 

   

Amortized

Cost

   

Gross

Unrecognized

Gains

   

Gross

Unrecognized

Losses

   

Fair Value

 

Held to maturity

                               

State and municipal

  $ 47,539     $ 201     $ (333

)

  $ 47,407  

Total held to maturity

  $ 47,539     $ 201     $ (333

)

  $ 47,407  

 

December 31, 2020

 

Amortized

Cost

   

Gross

Unrealized

Gains

   

Gross

Unrealized

Losses

   

Fair Value

 

Available for sale

                               

U.S. Government and federal agency

  $ 18,811     $ 806     $     $ 19,617  

Agency mortgage-backed: residential

    71,582       2,777       (26

)

    74,333  

Collateralized loan obligations

    44,730             (1,578

)

    43,152  

State and municipal

    34,759       1,296             36,055  

Corporate bonds

    31,635       472       (1,402

)

    30,705  

Total available for sale

  $ 201,517     $ 5,351     $ (3,006

)

  $ 203,862  

 

11

 

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

 

Sales and calls of securities were as follows:

 

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
   

2021

   

2020

   

2021

   

2020

 
   

(in thousands)

    (in thousands)  

Proceeds

  $ 6,500     $     $ 7,204     $ 8,530  

Gross gains

    465             465        

Gross losses

                5       5  

 

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

 

   

September 30, 2021

 
   

Amortized

Cost

   

Fair

Value

 
   

(in thousands)

 

Maturity

               

Available for sale

               

Within one year

  $     $  

One to five years

    5,255       5,435  

Five to ten years

    78,686       79,214  

Beyond ten years

    32,147       32,529  

Agency mortgage-backed: residential

    84,938       86,370  

Total

  $ 201,026     $ 203,548  
                 

Held to maturity

               

Within one year

  $ 4,703       4,706  

One to five years

    9,397     $ 9,387  

Five to ten years

    3,829       3,820  

Beyond ten years

    29,610       29,494  

Total

  $ 47,539     $ 47,407  

 

Securities pledged at September 30, 2021 and December 31, 2020 had carrying values of approximately $118.2 million and $81.4 million, respectively, and were pledged to secure public deposits.

 

At September 30, 2021 and December 31, 2020, the Bank held securities issued by the Commonwealth of Kentucky or Kentucky municipalities having a book value of $35.7 million and $23.0 million, respectively. At September 30, 2021 and December 31, 2020, there were no other holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders’ equity.

 

The Company evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, underlying credit quality of the issuer, and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer’s financial condition, the Company may consider whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, the sector or industry trends and cycles affecting the issuer, and the results of reviews of the issuer’s financial condition. As of September 30, 2021, management does not believe any securities in the portfolio with unrealized losses should be classified as other than temporarily impaired.

 

12

 

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

 

The market value of CLOs may be affected by, among other things, changes in composition of the underlying loans, changes in the cash flows from the underlying loans, defaults and recoveries on the underlying loans, capital gains and losses on the underlying loans, prepayments on the underlying loans, and other conditions or economic factors. At September 30, 2021, $28.0 million and $22.1 million of the Bank’s CLOs were AA and A rated, respectively. None of the CLOs were subject to ratings downgrade during the nine months ended September 30, 2021.

 

The corporate bond portfolio consists of 14 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 for five years converting to floating at an index over LIBOR, or SOFR, or floating at an index over LIBOR, or SOFR, from inception. Management regularly monitors the financial condition of these corporate issuers by reviewing their regulatory and public filings.

 

Securities with unrealized and unrecognized losses at September 30, 2021 and December 31, 2020, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position, are as follows (in thousands):

 

 

   

Less than 12 Months

   

12 Months or More

   

Total

 

Description of Securities

 

Fair

Value

   

Unrealized

Loss

   

Fair

Value

   

Unrealized

Loss

   

Fair

Value

   

Unrealized

Loss

 
                                                 

September 30, 2021

                                               

Available for sale

                                               

U.S. Government and federal agency

  $     $     $     $     $     $  

Agency mortgage-backed: residential

    33,008       (488

)

    754       (5

)

    33,762       (493

)

Collateralized loan obligations

                25,681       (104

)

    25,681       (104

)

Corporate bonds

    16,706       (44

)

    2,798       (60

)

    19,504       (104

)

Total temporarily impaired

  $ 49,714     $ (532

)

  $ 29,233     $ (169

)

  $ 78,947     $ (701

)

 

   

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

    26,676       (333

)

                26,676       (333

)

Total temporarily impaired

  $ 26,676     $ (333

)

  $     $     $ 26,676     $ (333

)

 

   

Less than 12 Months

   

12 Months or More

   

Total

 
   

Fair

Value

   

Unrealized

Loss

   

Fair

Value

   

Unrealized

Loss

   

Fair

Value

   

Unrealized

Loss

 
                                                 

December 31, 2020

                                               

Available for sale

                                               

Agency mortgage-backed: residential

  $ 4,772     $ (26

)

  $     $     $ 4,772     $ (26

)

Collateralized loan obligations

    8,794       (251

)

    34,358       (1,327

)

    43,152       (1,578

)

Corporate bonds

    10,849       (1,402

)

                10,849       (1,402

)

Total temporarily impaired

  $ 24,415     $ (1,679

)

  $ 34,358     $ (1,327

)

  $ 58,773     $ (3,006

)

 

 

 

Note 3 Loans

 

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

 

   

September 30,

   

December 31,

 
   

2021

   

2020

 
   

(in thousands)

     

Commercial (1)

  $ 217,189     $ 208,244  

Commercial Real Estate:

               

Construction

    75,432       92,916  

Farmland

    69,531       70,272  

Nonfarm nonresidential

    307,637       266,394  

Residential Real Estate:

               

Multi-family

    57,346       61,180  

1-4 Family

    164,944       188,955  

Consumer

    38,464       31,429  

Agriculture

    36,980       42,044  

Other

    565       647  

Subtotal

    968,088       962,081  

Less: Allowance for loan losses

    (12,973

)

    (12,443

)

Loans, net

  $ 955,115     $ 949,638  

 


(1)

Includes SBA Paycheck Protection Program (“PPP”) loans of $5.7 million and $20.3 million at September 30, 2021 and December 31, 2020, respectively.

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended September 30, 2021 and 2020:

 

   

Commercial

   

Commercial

Real Estate

   

Residential

Real Estate

   

Consumer

   

Agriculture

   

Other

    Total  
   

(in thousands)

 

September 30, 2021:

                                                       

Beginning balance

  $ 2,304     $ 7,799     $ 1,646     $ 385     $ 500     $ 3     $ 12,637  

Provision (negative provision)

    371       (80

)

    (124

)

    146       (13

)

          300  

Loans charged off

                (18

)

    (7

)

                (25

)

Recoveries

    10       3       34       7       7             61  

Ending balance

  $ 2,685     $ 7,722     $ 1,538     $ 531     $ 494     $ 3     $ 12,973  
                                                         
                                                         

September 30, 2020:

                                                       

Beginning balance

  $ 2,532     $ 4,494     $ 2,146     $ 581     $ 472     $ 3     $ 10,228  

Provision (negative provision)

    494       665       13       104       76       (2

)

    1,350  

Loans charged off

                (17

)

    (131

)

    (2

)

          (150

)

Recoveries

    5       6       13       13       14       2       53  

Ending balance

  $ 3,031     $ 5,165     $ 2,155     $ 567     $ 560     $ 3     $ 11,481  

 

14

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the nine months ended September 30, 2021 and 2020:

 

   

Commercial

   

Commercial

Real Estate

   

Residential

Real Estate

   

Consumer

   

Agriculture

   

 

Other
    Total  
   

(in thousands)

 

September 30, 2021:

                                                       

Beginning balance

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

Provision (negative provision)

    155       788       (403

)

    187       (76

)

    (1

)

    650  

Loans charged off

    (19

)

    (129

)

    (30

)

    (58

)

    (44

)

          (280

)

Recoveries

    20       13       72       41       14             160  

Ending balance

  $ 2,685     $ 7,722     $ 1,538     $ 531     $ 494     $ 3     $ 12,973  
                                                         
                                                         

September 30, 2020:

                                                       

Beginning balance

  $ 1,710     $ 4,080     $ 1,743     $ 485     $ 355     $ 3     $ 8,376  

Provision (negative provision)

    1,337       1,016       422       503       228       (6

)

    3,500  

Loans charged off

    (32

)

    (57

)

    (99

)

    (444

)

    (46

)

          (678

)

Recoveries

    16       126       89       23       23       6       283  

Ending balance

  $ 3,031     $ 5,165     $ 2,155     $ 567     $ 560     $ 3     $ 11,481  

 

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method as of September 30, 2021:

 

   

Commercial

   

Commercial

Real Estate

   

Residential

Real Estate

   

Consumer

   

Agriculture

   

Other

   

Total

 
   

(in thousands)

 

Allowance for loan losses:

                                                       

Ending allowance balance attributable to loans:

                                                       

Individually evaluated for impairment

  $     $ 2,176     $ 2     $     $     $     $ 2,178  

Collectively evaluated for impairment

    2,685       5,546       1,536       531       494       3       10,795  

Total ending allowance balance

  $ 2,685     $ 7,722     $ 1,538     $ 531     $ 494     $ 3     $ 12,973  
                                                         

Loans:

                                                       

Loans individually evaluated for impairment

  $     $ 5,492     $ 912     $ 38     $ 101     $     $ 6,543  

Loans collectively evaluated for impairment

    217,189       447,108       221,378       38,426       36,879       565       961,545  

Total ending loans balance

  $ 217,189     $ 452,600     $ 222,290     $ 38,464     $ 36,980     $ 565     $ 968,088  

 

15

 

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method as of December 31, 2020:

 

   

Commercial

   

Commercial

Real Estate

   

Residential

Real Estate

   

Consumer

   

Agriculture

   

Other

   

Total

 
   

(in thousands)

 

Allowance for loan losses:

                                                       

Ending allowance balance attributable to loans:

                                                       

Individually evaluated for impairment

  $     $ 2,176     $ 1     $     $     $     $ 2,177  

Collectively evaluated for impairment

    2,529       4,874       1,898       361       600       4       10,266  

Total ending allowance balance

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

Loans:

                                                       

Loans individually evaluated for impairment

  $     $ 5,361     $ 1,060     $     $ 91     $     $ 6,512  

Loans collectively evaluated for impairment

    208,244       424,221       249,075       31,429       41,953       647       955,569  

Total ending loans balance

  $ 208,244     $ 429,582     $ 250,135     $ 31,429     $ 42,044     $ 647     $ 962,081  

 

Impaired Loans

 

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

 

The following tables present information related to loans individually evaluated for impairment by class of loans as of September 30, 2021 and December 31, 2020 and for the three and nine months ended September 30, 2021 and 2020:

 

   

As of September 30, 2021

   

Three Months Ended

September 30, 2021

   

Nine Months Ended

September 30, 2021

 
   

Unpaid

Principal

Balance

   

Recorded

Investment

   

Allowance

For Loan

Losses

Allocated

   

Average

Recorded

Investment

   

Interest

Income

Recognized

   

Average

Recorded

Investment

   

Interest

Income

Recognized

 
   

(in thousands)

 

With No Related Allowance Recorded:

                                                       

Commercial

  $ 298     $     $     $     $     $     $  

Commercial real estate:

                                                       

Construction

                                         

Farmland

    821       640             616       26       596       26  

Nonfarm nonresidential

    1,306       496             492       12       517       39  

Residential real estate:

                                                       

Multi-family

                                         

1-4 Family

    1,733       813             716       74       829       112  

Consumer

    298       38             28             21       1  

Agriculture

    459       101             101             99        

Other

                                         

Subtotal

    4,915       2,088             1,953       112       2,062       178  

With An Allowance Recorded:

                                                       

Commercial

                                         

Commercial real estate:

                                                       

Construction

                                         

Farmland

                                         

Nonfarm nonresidential

    6,464       4,356       2,176       4,356       66       4,356       196  

Residential real estate:

                                                       

Multi-family

                                         

1-4 Family

    99       99       2       100       1       102       2  

Consumer

                                         

Agriculture

                                         

Other

                                         

Subtotal

    6,563       4,455       2,178       4,456       67       4,458       198  

Total

  $ 11,478     $ 6,543     $ 2,178     $ 6,409     $ 179     $ 6,520     $ 376  

 

16

 
   

As of December 31, 2020

   

Three Months Ended

September 30, 2020

   

Nine Months Ended

September 30, 2020

 
   

Unpaid

Principal

Balance

   

Recorded

Investment

   

Allowance

For Loan

Losses

Allocated

   

Average

Recorded

Investment

   

Interest

Income

Recognized

   

Average

Recorded

Investment

   

Interest

Income

Recognized

 
   

(in thousands)

 

With No Related Allowance Recorded:

                                                       

Commercial

  $ 308     $     $     $ 101     $     $ 103     $  

Commercial real estate:

                                                       

Construction

                                         

Farmland

    555       456             292       1       294       14  

Nonfarm nonresidential

    1,323       549             494       13       489       31  

Residential real estate:

                                                       

Multi-family

                                         

1-4 Family

    1,883       954             963       10       879       64  

Consumer

    259                   16       2       68       3  

Agriculture

    393       91                         11        

Other

                                         

Subtotal

    4,721       2,050             1,866       26       1,844       112  

With An Allowance Recorded:

                                                       

Commercial

                                  6        

Commercial real estate:

                                                       

Construction

                                         

Farmland

                      282             247       4  

Nonfarm nonresidential

    6,465       4,356       2,176       75             38        

Residential real estate:

                                                       

Multi-family

                                         

1-4 Family

    106       106       1       91       4       100       7  

Consumer

                                         

Agriculture

                                         

Other

                                         

Subtotal

    6,571       4,462       2,177       448       4       391       11  

Total

  $ 11,292     $ 6,512     $ 2,177     $ 2,314     $ 30     $ 2,235     $ 123  

 

Cash basis income recognized on impaired loans for the three and nine months ended September 30, 2021 was $96,000 and $148,000, respectively, compared to $19,000 and $87,000 for the three and nine months ended September 30, 2020, respectively.

 

Troubled Debt Restructuring

 

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

 

The following table presents the types of TDR loan modifications by portfolio segment outstanding as of September 30, 2021 and December 31, 2020:

 

   

TDRs

Performing to

Modified Terms

   

TDRs Not

Performing to

Modified Terms

   

Total

TDRs

 
   

(in thousands)

 

September 30, 2021

                       

Commercial Real Estate:

                       

Nonfarm nonresidential

  $ 349     $     $ 349  

Residential Real Estate:

                       

1-4 Family

    212       67       279  

Total TDRs

  $ 561     $ 67     $ 628  

 

17

 
   

TDRs

Performing to

Modified Terms

   

TDRs Not

Performing to

Modified Terms

   

Total

TDRs

 
   

(in thousands)

 

December 31, 2020

                       

Commercial Real Estate:

                       

Nonfarm nonresidential

  $ 374     $     $ 374  

Residential Real Estate:

                       

1-4 Family

    106             106  

Total TDRs

  $ 480     $     $ 480  

 

At September 30, 2021 and December 31, 2020, 89% and 100%, respectively, of the Company’s TDRs were performing according to their modified terms. The Company allocated $2,000 in reserves to borrowers whose loan terms have been modified in TDRs as of September 30, 2021 and December 31, 2020. The Company has no commitment to lend additional amounts as of September 30, 2021 and December 31, 2020 to borrowers with outstanding loans classified as TDRs. During the three and nine months ended September 30, 2021 and September 30, 2020, no TDRs defaulted on their restructured loan within the 12-month period following the loan modification. A default is considered to have occurred once the TDR is past due 90 days or more or it has been placed on nonaccrual.

 

The following table presents a summary of the TDR loan modification by portfolio segment that occurred during the three and nine months ended September 30, 2021:

 

   

TDRs

Performing to

Modified Terms

   

TDRs Not

Performing to

Modified Terms

   

Total

TDRs

 
   

(in thousands)

 

September 30, 2021

                       

Residential Real Estate:

                       

1-4 Family

  $ 180     $     $ 180  

Total TDRs

  $ 180     $     $ 180  

 

As of September 30, 2021, the TDR that occurred during the three and nine months ended September 30, 2021 was performing according to its modified terms. There were no reserves allocated to this loan as of September 30, 2021. The post-modification balance approximates the pre-modification balance. There were no modifications during the three and nine months ended September 30, 2020.

 

Non-TDR Loan Modifications due to COVID-19

 

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

 

Loans subject to CARES Act modifications that had not returned to normal payment terms were $4.5 million at September 30, 2021 and $15.3 million at December 31, 2020. Included in the $4.5 million of CARES Act modifications is one commercial real estate loan secured by a retail entertainment facility totaling $4.4 million, which remains subject to, and is performing in accordance with, a COVID-19 modification. The loan is graded substandard, has been evaluated under ASC-310-10, and allocated a specific reserve of $2.2 million as of September 30, 2021 and December 31, 2020.

 

18

 

Past Due Loans

 

The following table presents the aging of the recorded investment in past due loans as of September 30, 2021 and December 31, 2020:

 

   

30 59

Days

Past Due

   

60 89

Days

Past Due

   

90 Days

And Over

Past Due

   

Nonaccrual

   

Total

Past Due

And

Nonaccrual

 
   

(in thousands)

 

September 30, 2021

                                       

Commercial

  $ 68     $ 11     $     $     $ 79  

Commercial Real Estate:

                                       

Construction

                             

Farmland

    93                   640       733  

Nonfarm nonresidential

    107                   147       254  

Residential Real Estate:

                                       

Multi-family

                             

1-4 Family

    311       100             700       1,111  

Consumer

    51       26             39       116  

Agriculture

          5             101       106  

Other

                             

Total

  $ 630     $ 142     $     $ 1,627     $ 2,399  

 

   

30 59

Days

Past Due

   

60 89

Days

Past Due

   

90 Days

And Over

Past Due

    Nonaccrual    

Total

Past Due

And

Nonaccrual

 
   

(in thousands)

 

December 31, 2020

                                       

Commercial

  $ 20     $     $     $     $ 20  

Commercial Real Estate:

                                       

Construction

                             

Farmland

    325       53             456       834  

Nonfarm nonresidential

          26             175       201  

Residential Real Estate:

                                       

Multi-family

                             

1-4 Family

    1,110       217             954       2,281  

Consumer

    59       49                   108  

Agriculture

    23       27             91       141  

Other

                             

Total

  $ 1,537     $ 372     $     $ 1,676     $ 3,585  

 

Credit Quality Indicators

 

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

 

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

 

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

 

19

 

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

 

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

 

As of September 30, 2021, and December 31, 2020, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

 

   

Pass

   

Watch

   

Special

Mention

   

Substandard

   

Doubtful

   

Total

 
   

(in thousands)

 

September 30, 2021

                                               

Commercial

  $ 209,155     $ 144     $     $ 7,890     $     $ 217,189  

Commercial Real Estate:

                                               

Construction

    75,432                               75,432  

Farmland

    66,499       193             2,839             69,531  

Nonfarm nonresidential

    300,733       906             5,998             307,637  

Residential Real Estate:

                                               

Multi-family

    57,346                               57,346  

1-4 Family

    160,443       2,133             2,368             164,944  

Consumer

    38,403       1             60             38,464  

Agriculture

    36,820       30             130             36,980  

Other

    565                               565  

Total

  $ 945,396     $ 3,407     $     $ 19,285     $     $ 968,088  

 

   

Pass

    Watch    

Special

Mention

    Substandard     Doubtful     Total  
   

(in thousands)

 

December 31, 2020

                                               

Commercial

  $ 201,240     $ 192     $     $ 6,812     $     $ 208,244  

Commercial Real Estate:

                                               

Construction

    92,916                               92,916  

Farmland

    65,556       3,714             1,002             70,272  

Nonfarm nonresidential

    258,665       1,605             6,124             266,394  

Residential Real Estate:

                                               

Multi-family

    50,732       10,448                         61,180  

1-4 Family

    183,379       2,831             2,745             188,955  

Consumer

    31,387       3             39             31,429  

Agriculture

    41,503       86             455             42,044  

Other

    647                               647  

Total

  $ 926,025     $ 18,879     $     $ 17,177     $     $ 962,081  

 

 

Note 4 Leases

 

As of September 30, 2021, the Company leases real estate for seven branch offices or offsite ATM machines under various operating lease agreements. The lease agreements have maturity dates ranging from 2024 to 2046, including all expected extension periods. The weighted average remaining life of the lease term for these leases was 22 years as of September 30, 2021.

 

In determining the present value of lease payments, the Bank uses the implicit lease rate when readily determinable. As most of the Bank’s leases do not provide an implicit rate, the incremental borrowing rate based on the information available at commencement date is used. The incremental borrowing rate is the rate of interest that the Bank estimates it would pay to borrow on a collateralized basis over a similar term in an amount equal to the lease payments in a similar economic environment. The weighted average discount rate for the leases was 4.18% as of September 30, 2021.

 

Total rental expense was $78,000 and $326,000, respectively, for the three and nine months ended September 30, 2021, compared to $133,000 and $389,000, respectively, for the three and nine months ended September 30, 2020. The right-of-use asset, included in premises and equipment, and lease liability, included in other liabilities, was $5.4 million as of September 30, 2021 and $2.5 million as of December 31, 2020.

 

20

 

Total estimated rental commitments for the operating leases were as follows as of September 30, 2021 (in thousands):

 

   

September 30, 2021

 
         

October – December 2021

  $ 110  

2022

    363  

2023

    366  

2024

    365  

2025

    342  

Thereafter

    7,471  

Total minimum lease payments

    9,017  

Discount effect of cash flows

    (3,586

)

Present value of lease liabilities

  $ 5,431  

 

At September 30, 2021, the Company has one additional lease for a new branch office that has yet to commence. The right of use asset and lease liability for the lease yet to commence is estimated to be approximately $2.3 million and is expected to be recorded in the first quarter of 2022.

 

 

Note 5 Other Real Estate Owned

 

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

 

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

 

   

September 30,

2021

   

December 31,

2020

 
   

(in thousands)

 

Commercial Real Estate:

               

Construction, land development, and other land

  $     $ 1,765  
    $     $ 1,765  

 

Residential loans secured by 1-4 family residential properties in the process of foreclosure totaled $110,000 and $35,000 at September 30, 2021 and December 31, 2020, respectively.

 

Activity relating to OREO during the nine months ended September 30, 2021 and 2020 is as follows:

 

   

For the Nine

Months Ended

September 30,

 
   

2021

   

2020

 
   

(in thousands)

 

OREO Activity

               

OREO as of January 1

  $ 1,765     $ 3,225  

Real estate acquired

           

Valuation adjustment write-downs

           

Net gain on sale

    191        

Proceeds from sales of properties

    (1,956

)

    (1,600

)

OREO as of September 30

  $     $ 1,625  

 

21

 

Expenses related to OREO include:

 

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
   

2021

   

2020

   

2021

   

2020

 
   

(in thousands)

    (in thousands)  

Valuation adjustment write-downs

  $     $     $     $  

Operating expense

          20       13       58  

Total

  $     $ 20     $ 13     $ 58  

 

OREO expenses are reported in other non-interest expense.

 

 

Note 6 Goodwill and Intangible Assets

 

The following table summarizes the Company’s acquired goodwill and intangible assets as of September 30, 2021 and December 31, 2020 (in thousands):

 

   

September 30, 2021

   

December 31, 2020

 
   

Gross

Carrying

Amount

   

Accumulated

Amortization

   

Gross

Carrying

Amount

   

Accumulated

Amortization

 

Goodwill

  $ 6,252     $     $ 6,252     $  

Core deposit intangibles

    2,500       447       2,500       256  

Outstanding, ending

  $ 8,752     $ 447     $ 8,752     $ 256  

 

The Company has $6.3 million of goodwill related to a 2019 branch acquisition transaction. Goodwill represents the excess of the total purchase price paid over the fair value of the identifiable assets acquired, net of the fair value of the liabilities assumed. Goodwill is not amortized but is evaluated for impairment on an annual basis or whenever events or changes in circumstances may indicate the carrying value of goodwill exceeds fair value and may not be recoverable. Goodwill is the Company’s sole intangible asset with an indefinite life.

 

The Company also has a core deposit intangible asset, which is amortized over the weighted average estimated life of the related deposits and is not estimated to have a significant residual value. Total amortization was $64,000 and $192,000 for the three and nine months ended September 30, 2021, respectively, compared to $64,000 and $192,000 for the three and nine months ended September 30, 2020, respectively.

 

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

 

   

September 30,

2021

 

October 2021 – December 2021

  $ 64  

2022

    256  

2023

    256  

2024

    256  

2025

    256  

Thereafter

    965  
    $ 2,053  

 

 

 

Note 7 Deposits

 

The following table details deposits by category:

 

   

September 30,

2021

   

December 31,

2020

 
   

(in thousands)

 

Non-interest bearing

  $ 266,035     $ 243,022  

Interest checking

    239,923       190,625  

Money market

    198,470       175,785  

Savings

    163,018       142,623  

Certificates of deposit

    280,545       367,552  

Total

  $ 1,147,991     $ 1,119,607  

 

Time deposits of $250,000 or more were $38.1 million and $50.7 million at September 30, 2021 and December 31, 2020, respectively.

 

Scheduled maturities of total time deposits at September 30, 2021 for each of the next five years are as follows (in thousands):

 

Year 1

  $ 167,083  

Year 2

    59,085  

Year 3

    22,854  

Year 4

    23,371  

Year 5

    7,585  

Thereafter

    567  
    $ 280,545  

 

 

Note 8 Advances from the Federal Home Loan Bank

 

Advances from the Federal Home Loan Bank were as follows:

 

   

September 30,

   

December 31,

 
   

2021

   

2020

 
   

(in thousands)

 
                 

Short term advances

  $     $ 623  

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

    20,000       20,000  

Total advances from the Federal Home Loan Bank

  $ 20,000     $ 20,623  

 

FHLB advances had a weighted-average rate of 0.77% at September 30, 2021 and 0.75% at December 31, 2020. Each advance is payable per terms on agreement, with a prepayment penalty. No prepayment penalties were incurred during 2021 or 2020. The $20.0 million long term advance is callable quarterly at the FHLB’s option. The advances were collateralized by approximately $115.7 million and $133.7 million of first mortgage loans, under a blanket lien arrangement at September 30, 2021 and December 31, 2020, respectively, and $5.7 million and $20.3 million of loans originated under the SBA Payment Protection Plan at September 30, 2021 and December 31, 2020, respectively. At September 30, 2021, the Bank’s additional borrowing capacity with the FHLB was $68.6 million.

 

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

 

   

Advances

 

Year 1

  $  

Year 2

     

Year 3

     

Year 4

     

Year 5

     

Thereafter

    20,000  
    $ 20,000  

 

 

 

Note 9 Borrowings

 

Junior Subordinated Debentures – The junior subordinated debentures are redeemable at par prior to maturity at the option of the Company as defined within the trust indenture. The Company has the option to defer interest payments on the junior subordinated debentures from time to time for a period not to exceed 20 consecutive quarters. A deferral period may begin at the Company’s discretion so long as interest payments are current. The Company is prohibited from paying dividends on preferred and common shares when interest payments are in deferral. At September 30, 2021, the Company is current on all interest payments.

 

A summary of the junior subordinated debentures is as follows:

 

Description

 

Issuance

Date

 

Interest Rate (1)

 

Junior Subordinated Debt Owed

To Trust

 

Maturity

Date (2)

Statutory Trust I

 

2/13/2004

 

3-month LIBOR + 2.85%

  $ 3,000,000  

2/13/2034

Statutory Trust II

 

2/13/2004

 

3-month LIBOR + 2.85%

    5,000,000  

2/13/2034

Statutory Trust III

 

4/15/2004

 

3-month LIBOR + 2.79%

    3,000,000  

4/15/2034

Statutory Trust IV

 

12/14/2006

 

3-month LIBOR + 1.67%

    10,000,000  

3/01/2037

            $ 21,000,000    

 


(1)

As of September 30, 2021, the 3-month LIBOR was 0.13%.

(2)

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

 

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

 

 

Note 10 Fair Values Measurement

 

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

 

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

 

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

 

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

 

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.

 

24

 

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 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 appraisal date predates a likely change in market conditions. These deductions range from 10% for routine real estate collateral to 40% for real estate that is determined to have a thin trading market or to be specialized collateral. This is in addition to estimated discounts for cost to sell of six to ten percent.

 

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

 

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

 

 

Financial assets measured at fair value on a recurring basis at September 30, 2021 and December 31, 2020 are summarized below:

 

            Fair Value Measurements at September 30, 2021 Using  
            (in thousands)  
   

Carrying

   

Quoted Prices In

Active Markets for

Identical Assets

   

Significant Other

Observable Inputs

   

Significant

Unobservable
Inputs

 

Description

 

Value

   

(Level 1)

   

(Level 2)

   

(Level 3)

 

Available for sale securities

                               

U.S. Government and federal agency

  $ 27,084     $     $ 27,084     $  

Agency mortgage-backed: residential

    86,370             86,370        

Collateralized loan obligations

    50,130             47,636       2,494  

Corporate bonds

    39,964             31,104       8,860  

Total

  $ 203,548     $     $ 192,194     $ 11,354  

 

           

Fair Value Measurements at December 31, 2020 Using

 
           

(in thousands)

 

Description

 

Carrying

Value

   

Quoted Prices In

Active Markets for

Identical Assets

(Level 1)

   

Significant Other

Observable Inputs

(Level 2)

   

Significant

Unobservable

Inputs

(Level 3)

 

Available for sale securities

                               

U.S. Government and federal agency

  $ 19,617     $     $ 19,617     $  

Agency mortgage-backed: residential

    74,333             74,333        

Collateralized loan obligations

    43,152             40,764       2,388  

State and municipal

    36,055             36,055        

Corporate bonds

    30,705             18,789       11,916  

Total

  $ 203,862     $     $ 189,558     $ 14,304  

 

25

 

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

 

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

 

The table below presents a reconciliation of all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended September 30, 2021:

 

   

September 30, 2021

 
   

Collateralized Loan Obligations

   

Corporate Bonds

 
   

(in thousands)

 

Balance of recurring Level 3 assets at January 1, 2021

  $ 2,388     $ 11,916  

Total gains or losses for the year:

               

Included in earnings

          465  

Included in other comprehensive income

    106       1,479  

Calls

          (5,000

)

Transfers into Level 3

           

Balance of recurring Level 3 assets at September 30, 2021

  $ 2,494     $ 8,860  

 

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

 

The following table presents quantitative information about recurring level 3 fair value measurements at September 30, 2021:

 

   

Fair Value

 

Valuation

Technique(s)

 

Unobservable Input(s)

 

Range (Weighted

Average)

 
   

(in thousands)

                       
                               

Collateralized loan obligations

  $ 2,494  

Discounted cash flow

 

Constant prepayment rate

    0%          
              Additional asset defaults     1%   (1%)      
              Expected asset recoveries     49%   (49%)      
                               

Corporate bonds

  $ 8,860  

Discounted cash flow

 

Constant prepayment rate

    0%          
              Spread to benchmark yield     280% - 450%   (327% )
              Indicative broker bid     80% - 105%   (88% )

 

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

 

   

Fair Value

 

Valuation

Technique(s)

 

Unobservable Input(s)

 

Range (Weighted

Average)

 
   

(in thousands)

                       
                               

Collateralized loan obligations

  $ 2,388  

Discounted cash flow

 

Constant prepayment rate

    0%          
              Additional asset defaults     2%   (2%)      
              Expected asset recoveries     49%   (49%)      
                               

Corporate bonds

  $ 11,916  

Discounted cash flow

 

Constant prepayment rate

    0%          
              Spread to benchmark yield     322% - 497%   (381% )
              Indicative broker bid     72% - 107%   (80% )

 

26

 

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

 

           

Fair Value Measurements at September 30, 2021 Using

 
           

(in thousands)

 
Description  

Carrying

Value

   

Quoted Prices In

Active Markets for

Identical Assets

(Level 1)

   

Significant Other

Observable Inputs

(Level 2)

   

Significant

Unobservable

Inputs

(Level 3)

 

Impaired loans:

                               

Commercial real estate:

                               

Nonfarm nonresidential

  $ 2,180     $     $     $ 2,180  

Residential real estate:

                               

1-4 Family

    97                   97  

 

           

Fair Value Measurements at December 31, 2020 Using

 
           

(in thousands)

 
Description  

Carrying

Value

   

Quoted Prices In

Active Markets for

Identical Assets

(Level 1)

   

Significant Other

Observable Inputs

(Level 2)

   

Significant

Unobservable

Inputs

(Level 3)

 
Impaired loans:                                

Commercial real estate:

                               

Nonfarm nonresidential

  $ 2,180     $     $     $ 2,180  

Residential real estate:

                               

1-4 Family

    105                   105  

 

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $4.5 million at September 30, 2021 with a valuation allowance of $2.2 million, resulting in no provision for loan losses for the three months ended September 30, 2021 and $1,000 provision for loan losses for the nine months ended September 30, 2021, respectively. Impaired loans had a carrying amount of $527,000 at September 30, 2020 with a valuation allowance of $171,000, resulting in $147,000 and $129,000 provision for loan losses for the three and nine months ended September 30, 2020, respectively. At December 31, 2020, impaired loans had a carrying amount of $4.5 million, with a valuation allowance of $2.2 million.

 

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

 

           

Fair Value Measurements at September 30, 2021 Using

 
   

Carrying

Amount

   

Level 1

   

Level 2

   

Level 3

   

Total

 
   

(in thousands)

 

Financial assets

                                       

Cash and cash equivalents

  $ 58,488     $ 58,488     $     $     $ 58,488  

Securities available for sale

    203,548             192,194       11,354       203,548  

Securities held to maturity

    47,539             47,407             47,407  

Federal Home Loan Bank stock

    5,116       N/A       N/A       N/A       N/A  

Loans, net

    955,115                   949,609       949,609  

Accrued interest receivable

    3,920             987       2,933       3,920  

Financial liabilities

                                       

Deposits

  $ 1,147,991     $ 266,035     $ 883,408     $     $ 1,149,443  

Federal Home Loan Bank advances

    20,000             20,094             20,094  

Junior subordinated debentures

    21,000                   19,297       19,297  

Subordinated capital notes

    25,000                   26,505       26,505  

Accrued interest payable

    408             142       266       408  

 

27

 
           

Fair Value Measurements at December 31, 2020 Using

 
   

Carrying

Amount

   

Level 1

   

Level 2

   

Level 3

   

Total

 
   

(in thousands)

 

Financial assets

                                       

Cash and cash equivalents

  $ 67,693     $ 67,693     $     $     $ 67,693  

Securities available for sale

    203,862             189,558       14,304       203,862  

Federal Home Loan Bank stock

    5,887       N/A       N/A       N/A       N/A  

Loans, net

    949,638                   941,330       941,330  

Accrued interest receivable

    4,444             925       3,519       4,444  

Financial liabilities

                                       

Deposits

  $ 1,119,607     $ 243,022     $ 878,309     $     $ 1,121,331  

Federal Home Loan Bank advances

    20,623             20,665             20,665  

Junior subordinated debentures

    21,000                   16,194       16,194  

Subordinated capital notes

    25,000                   25,207       25,207  

Accrued interest payable

    859             231       628       859  

 

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

 

 

Note 11 Income Taxes

 

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

 

   

September 30,

   

December  31,

 
   

2021

   

2020

 
   

(in thousands)

 

Deferred tax assets:

               

Net operating loss carry-forward

  $ 19,552     $ 22,012  

Allowance for loan losses

    3,237       3,104  

OREO write-down

          914  

Net assets from acquisitions

          72  

New market tax credit carry-forward

    208       208  

Nonaccrual loan interest

    316       315  

Accrued expenses

    140       131  

Lease liability

    1,355       618  

Other

    402       332  
      25,210       27,706  
                 

Deferred tax liabilities:

               

FHLB stock dividends

    415       478  

Fixed assets

    73       71  

Deferred loan costs

    169       172  

Net unrealized gain on securities

    834       585  

Lease right-of-use assets

    1,355       618  

Net assets from acquisitions

    63        

Other

    140       68  
      3,049       1,992  

Net deferred tax asset

  $ 22,161     $ 25,714  

 

At September 30, 2021, the Company had net federal operating loss carryforwards of $87.3 million, which will begin to expire in 2032, and state net operating loss carryforwards of $30.8 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 or nine months ended September 30, 2021 or September 30, 2020 related to unrecognized tax benefits.

 

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

 

28

 

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

 

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

 

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 12 Stock Plans and Stock Based Compensation

 

Shares available for issuance under the 2018 Omnibus Equity Compensation Plan (“2018 Plan”) total 158,553. Shares issued to employees under the plan vest annually on the anniversary date of the grant over three to seven years. Shares issued annually to non-employee directors have a fair market value of $25,000 and vest on December 31 in the year of grant.

 

The fair value of the 2021 unvested shares issued was $1.5 million, or $13.52 per weighted-average share. The Company recorded $214,000 and $515,000 of stock-based compensation to salaries for the three and nine months ended September 30, 2021, respectively, and $188,000 and $398,000 for the three and nine months ended September 30, 2020, respectively. Management expects substantially all of the unvested shares outstanding at the end of the period to vest according to the vesting schedule. A deferred tax benefit of $54,000 and $129,000 was recognized related to this expense during the three and nine months ended September 30, 2021, respectively, and $39,000 and $84,000 for the three and nine months ended September 30, 2020, respectively.

 

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

 

   

Nine Months Ended

   

Twelve Months Ended

 
   

September 30, 2021

   

December 31, 2020

 
           

Weighted

           

Weighted

 
           

Average

           

Average

 
           

Grant

           

Grant

 
   

Shares

   

Price

   

Shares

   

Price

 

Outstanding, beginning

    47,438     $ 15.34       57,774     $ 13.35  

Granted

    110,024       13.52       34,858       15.33  

Vested

    (24,251

)

    14.96       (43,836

)

    12.69  

Forfeited

    (399

)

    14.14       (1,358

)

    15.95  

Outstanding, ending

    132,812     $ 13.90       47,438     $ 15.34  

 

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

 

October 2021 – December 2021

  $ 213  

2022

    396  

2023

    279  

2024

    137  

2025

    130  

Thereafter

    266  

 

 

 

Note 13 Earnings per Share

 

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

 

   

Three Months Ended

   

Nine Months Ended

 
   

September 30,

   

September 30,

 
   

2021

   

2020

   

2021

   

2020

 
   

(in thousands, except share and per share data)

 
                                 

Net income

  $ 4,341     $ 2,066     $ 11,464     $ 5,888  

Less:

                               

Earnings allocated to unvested shares

    76       16       169       47  

Net income available to common shareholders, basic and diluted

  $ 4,265     $ 2,050     $ 11,295     $ 5,841  
                                 

Basic

                               

Weighted average common shares including unvested common shares outstanding

    7,602,686       7,499,223       7,591,800       7,489,795  

Less:

                               

Weighted average unvested common shares

    133,073       56,938       111,790       59,151  

Weighted average common shares outstanding

    7,469,613       7,442,285       7,480,010       7,430,644  

Basic and diluted income per common share

  $ 0.57     $ 0.28     $ 1.51     $ 0.79  

 

The Company had no outstanding stock options or warrants at September 30, 2021 or 2020.

 

 

Note 14 Regulatory Capital Matters

 

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

 

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

 

As of September 30, 2021, Management believes the Company and Bank met all capital adequacy requirements to which they are subject. As of September 30, 2021, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since the notification that management believes have changed the institution’s category.

 

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

 

   

Actual

   

Minimum Requirement

for Capital Adequacy

Purposes

   

Minimum Requirement

to be Well Capitalized

Under Prompt Corrective

Action Provisions

 
   

Amount

   

Ratio

   

Amount

   

Ratio

   

Amount

   

Ratio

 

As of September 30, 2021:

                                               

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

  $ 159,757       13.80

%

  $ 92,636       8.00

%

  $ 115,796       10.00

%

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

    146,784       12.68       52,108       4.50       75,267       6.50  

Tier 1 capital (to risk-weighted assets)

    146,784       12.68       69,477       6.00       92,636       8.00  

Tier 1 capital (to average assets)

    146,784       10.96       53,561       4.00       66,952       5.00  

 

30

 
   

Actual

   

Minimum Requirement

for Capital Adequacy

Purposes

   

Minimum Requirement

to be Well Capitalized

Under Prompt Corrective

Action Provisions

 
   

Amount

   

Ratio

   

Amount

   

Ratio

   

Amount

   

Ratio

 

As of December 31, 2020:

                                               

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

  $ 142,449       13.20

%

  $ 86,302       8.00

%

  $ 107,878       10.00

%

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

    130,006       12.05       48,545       4.50       70,120       6.50  

Tier 1 capital (to risk-weighted assets)

    130,006       12.05       64,727       6.00       86,302       8.00  

Tier 1 capital (to average assets)

    130,006       10.21       50,908       4.00       63,636       5.00  

 

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

 

 

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

 

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

 

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

 

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

 

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

 

   

September 30, 2021

   

December 31, 2020

 
   

Fixed

Rate

   

Variable

Rate

   

Fixed

Rate

   

Variable

Rate

 
   

(in thousands)

 

Commitments to make loans

  $ 88,655     $ 48,604     $ 20,990     $ 17,466  

Unused lines of credit

    11,470       108,260       5,964       144,790  

Standby letters of credit

    785       345       175       1,342  

 

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

 

In connection with the purchase of loan participations, the Bank entered into risk participation agreements, which had notional amounts totaling $26.6 million at September 30, 2021 and December 31, 2020. The risk participation agreements are not designated against specific assets or liabilities under ASC 815, Derivatives and Hedging, and, therefore, do not qualify for hedge accounting. The derivatives are recorded in other liabilities on the balance sheet at fair value and changes in fair value of both the borrower and the offsetting swap agreements are recorded (and essentially offset) in non-interest income. The fair value of the derivative instruments incorporates a consideration of credit risk in accordance with ASC 820, resulting in some volatility in earnings each period. At September 30, 2021 and December 31, 2020, the fair value of the risk participation agreements were $108,000 and $188,000, respectively.

 

31

 

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. After discussion with legal counsel, management does not believe these legal actions or proceedings will have a material adverse effect on the consolidated financial position or results of operation of the Company.

 

 

Note 16 Revenue from Contracts with Customers

 

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

 

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

 

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

 

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

 

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 $162,000 and $460,000 of revenue for the three and nine months ended September 30, 2021, respectively, within the scope of ASC 606. Other non-interest income included approximately $124,000 and $409,000 of revenue for the three and nine months ended September 30, 2020, respectively, within the scope of ASC 606. The remaining other non-interest income for the three and nine months is excluded from the scope of ASC 606.

 

 

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 and national, state and local emergency conditions the pandemic has produced;

 

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

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

 

 

 

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

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

the results of regulatory examinations;
 

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

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

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

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

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, 2020.

 

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

 

Overview

 

Organized in 1988, Limestone Bancorp, Inc. (the Company) is a bank holding company headquartered in Louisville, Kentucky. The Company’s common stock is traded on Nasdaq’s Capital Market under the symbol LMST. The Company operates Limestone Bank, Inc. (the Bank), the thirteenth largest bank domiciled in the Commonwealth of Kentucky based on total assets. The Bank operates banking offices in 14 counties in Kentucky. The Bank’s markets include metropolitan Louisville in Jefferson County and the surrounding counties of Bullitt and Henry. The Bank serves south central, southern, and western Kentucky from banking centers in Barren, Butler, Daviess, Edmonson, Green, Hardin, Hart, Ohio, and Warren counties. The Bank also has banking centers in Lexington, Kentucky, the second largest city in the state, and Frankfort, Kentucky, the state capital. The Bank is a traditional community bank with a wide range of personal and business banking products and services. As of September 30, 2021, the Company had total assets of $1.35 billion, total loans of $968.1 million, total deposits of $1.15 billion and stockholders’ equity of $128.7 million.

 

The Company reported net income of $4.3 million and $11.5 million for the three and nine months ended September 30, 2021, compared with net income of $2.1 million and $5.9 million for the same periods of 2020. Income tax expense was $1.4 million and $3.6 million for the third quarter of 2021 and for the first nine months of 2021, respectively, compared to income tax expense of $190,000 and $944,000 for the third quarter of 2020 and for the first nine months of 2020, respectively. Effective January 1, 2021, the state of Kentucky eliminated the bank franchise tax, which was previously recorded as a non-interest expense, and implemented a state income tax at a statutory rate of 5%. State income tax expense was $275,000 and $724,000 for the third quarter of 2021 and for the first nine months of 2021, respectively, compared to a state income tax benefit of $244,000 and $395,000 for the third quarter of 2020 and for the first nine months of 2020, which was related to the establishment of a net deferred tax asset due to the tax law change.

 

Highlights for the nine months ended September 30, 2021 are as follows:

 

 

Average loans receivable decreased approximately $4.1 million, or 0.4%, to $959.6 million for the nine months ended September 30, 2021, compared with $963.7 million for the first nine months of 2020. SBA Paycheck Protection Program (“PPP”) loans averaged $19.4 million and $20.6 million for the first nine months of 2021 and 2020, respectively. The PPP program loans began funding in the second quarter of 2020. PPP loan balances total $5.7 million at September 30, 2021, compared to $20.3 million at December 31, 2020, and $42.3 million at September 30, 2020.

 

 

 

Net interest margin increased 23 basis points to 3.53% in the first nine months of 2021 compared with 3.30% in the first nine months of 2020. The yield on earning assets decreased to 4.00% for the first nine months of 2021, compared to 4.23% for the first nine months of 2020. The yield on earning assets in the first nine months of 2021 was negatively impacted by lower interest rates on the Bank’s fed funds, certain floating rate investment securities, loans with variable rate pricing features, and new loans originated in the lower interest rate environment, including PPP loans which carry a rate of 1.0%. The negative impact of lower rates was offset by $2.5 million in fees earned on PPP loans during the first nine months of 2021, compared to $373,000 during the first nine months of 2020. PPP fees during the first nine months of 2021 represented 27 basis points, compared to five basis points of earning asset yield and net interest margin for the first nine months of 2020. The cost of interest-bearing liabilities decreased from 1.15% in the first nine months of 2020 to 0.62% in the first nine months of 2021 as a result of decreases in short-term interest rates during 2020 and continued improvement in deposit mix.

 

 

A provision for loan loss of $300,000 and $650,000 was recorded in the third quarter and first nine months of 2021, respectively, compared to $1.4 million and $3.5 million in the third quarter and the first nine months of 2020, respectively. The 2021 loan loss provisions were attributable to the net loan charge-offs and growth within the portfolio during the period, while the 2020 provisions were largely attributable to the uncertainty surrounding the COVID-19 pandemic related economic and business disruptions. At September 30, 2021, the allowance for loan loss remained elevated in relation to recent historical levels due to the continued uncertainty surrounding the COVID-19 pandemic. Net loan charge-offs were $120,000 for the first nine months of 2021, compared to net loan charge-offs of $395,000 for the first nine months of 2020.

 

 

Loans past due 30-59 days decreased from $1.5 million at December 31, 2020 to $630,000 at September 30, 2021, and loans past due 60-89 days decreased from $372,000 at December 31, 2020 to $142,000 at September 30, 2021. Total loans past due and nonaccrual loans decreased from $3.6 million at December 31, 2020 to $2.4 million at September 30, 2021.

 

 

Deposits were $1.15 billion at September 30, 2021, compared with $1.12 billion at December 31, 2020. Certificate of deposit balances decreased $87.0 million during the first nine months of 2021 to $280.5 million at September 30, 2021, from $367.6 million at December 31, 2020 due to liquidity management considerations and planned reduction in higher cost deposits. Interest checking accounts increased $49.3 million, non-interest bearing accounts increased $23.0 million, money market accounts increased $22.7 million, and savings accounts increased $20.4 during the first nine months of 2021 compared with December 31, 2020.

 

 

Subsequent to quarter-end 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.

 

Application of Critical Accounting Policies

 

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

 

 

Results of Operations

 

The following table summarizes components of income and expense and the change in those components for the three months ended September 30, 2021, compared with the same period of 2020:

 

   

For the Three Months

   

Change from

 
   

Ended September 30,

   

Prior Period

 
   

2021

   

2020

   

Amount

   

Percent

 
   

(dollars in thousands)

 
                                 

Gross interest income

  $ 12,975     $ 12,094     $ 881       7.3

%

Gross interest expense

    1,354       2,151       (797

)

    (37.1

)

Net interest income

    11,621       9,943       1,678       16.9  

Provision for loan losses

    300       1,350       (1,050

)

    (77.8

)

Non-interest income

    2,436       1,742       694       39.8  

Non-interest expense

    8,050       8,079       (29

)

    (0.4

)

Net income before taxes

    5,707       2,256       3,451       153.0  

Income tax expense

    1,366       190       1,176       NM  

Net income

    4,341       2,066       2,275       110.1  

 

NM: Not Meaningful

 

Net income for the three months ended September 30, 2021 totaled $4.3 million, compared with $2.1 million for the comparable period of 2020. Net interest income increased $1.7 million from the 2020 third quarter as a result of increased PPP fee recognition connected to the forgiveness and payoff of PPP loans and a decrease in the cost of interest-bearing liabilities due primarily to downward repricing within the time deposit portfolio, as well as a reduction in the size of the time deposit portfolio. A provision for loan loss of $300,000 was recorded in the third quarter of 2021, as compared to $1.4 million in the third quarter of 2020. The 2021 provision for loan loss was primarily in response to growth trends within the loan portfolio during the quarter, while the provision for loan loss for 2020 was largely attributable to the uncertainty surrounding the COVID-19 pandemic related economic and business disruptions. Non-interest income increased $694,000 from $1.7 million in the third quarter of 2020 to $2.4 million for the third quarter of 2021 primarily due to a $465,000 gain on the call of a corporate bond from the Bank’s available for sale securities portfolio and an increase in bank card interchange fees of $163,000 as a result of an increase in debit card transactions. Non-interest expense decreased $29,000 from $8.1 million in the third quarter of 2020 to $8.1 million in the third quarter of 2021 primarily due to a decrease in deposit and state franchise tax expense of $270,000, as a result of the elimination of the Kentucky bank franchise tax discussed below, partially offset by an increase in salaries and employee benefits of $169,000 as a result of an increase in average FTEs as compared to the third quarter of 2020.

 

Net income before taxes was $5.7 million for the third quarter of 2021, compared with $2.3 million for the third quarter of 2020. Income tax expense was $1.4 million for the third quarter of 2021, compared with $190,000 for the third quarter of 2020. Effective January 1, 2021, the state of Kentucky eliminated the bank franchise tax and implemented a state income tax at a statutory rate of 5%. State income tax expense was $275,000 for the third quarter of 2021, compared to a state income tax benefit of $244,000 for the third quarter of 2020 related to the establishment of a net deferred tax asset due to the tax law change.

 

The following table summarizes components of income and expense and the change in those components for the nine months ended September 30, 2021, compared with the same period of 2020:

 

   

For the Nine Months

   

Change from

 
   

Ended September 30,

   

Prior Period

 
   

2021

   

2020

   

Amount

   

Percent

 
   

(dollars in thousands)

 
                                 

Gross interest income

  $ 37,601     $ 38,147     $ (546

)

    (1.4

)%

Gross interest expense

    4,386       8,332       (3,946

)

    (47.4

)

Net interest income

    33,215       29,815       3,400       11.4  

Provision for loan losses

    650       3,500       (2,850

)

    (81.4

)

Non-interest income

    6,455       5,067       1,388       27.4  

Non-interest expense

    23,988       24,550       (562

)

    (2.3

)

Net income before taxes

    15,032       6,832       8,200       120.0  

Income tax expense

    3,568       944       2,624       NM  

Net income

    11,464       5,888       5,576       94.7  

 

NM: Not Meaningful

 

 

Net income for the nine months ended September 30, 2021 totaled $11.5 million, compared with net income of $5.9 million for the comparable period of 2020. Net interest income increased $3.4 million from the first nine months of 2020 as a result of a decrease in the cost of interest-bearing liabilities due primarily to downward repricing within the time deposit portfolio, as well as a reduction in the size of the time deposit portfolio. Provision for loan loss expense of $650,000 was recorded in the first nine months of 2021, as compared to $3.5 million provision for loan loss expense in the first nine months of 2020. The 2021 provision was primarily in response to the level of net loan charge-offs and growth trends within the portfolio during the first nine months of the year, while the provision for 2020 was largely attributable to the uncertainty surrounding the COVID-19 pandemic related economic and business disruptions. At September 30, 2021, the allowance for loan loss remained elevated in relation to recent historical levels due to the continued uncertainty surrounding the COVID-19 pandemic. Non-interest income increased by $1.4 million to $6.5 million from $5.1 million in the first nine months of 2020 primarily due to an increase in bank card interchange fees of $583,000 as a result of an increase in debit card transactions, a $191,000 gain on the sale of OREO from the second quarter of 2021, and a $465,000 gain on the call of an available for sale bond. Non-interest expense decreased from $24.6 million in the first nine months of 2020 to $24.0 million in the first nine months of 2021 primarily due to a decrease of $810,000 in deposit and state franchise tax expense. This decrease was partially offset by an increase in deposit account related expense of $194,000 due to an increase in debit card transactions and an increase in FDIC insurance of $167,000 due to no expense being recorded during the first quarter of 2020 as the Bank was utilizing assessment credits.

 

Net income before taxes was $15.0 million for the first nine months of 2021, compared with $6.8 million for the first nine months of 2020. Income tax expense was $3.6 million for the first nine months of 2021, compared with $944,000 for the first nine months of 2020. Effective January 1, 2021, the state of Kentucky eliminated the bank franchise tax and implemented a state income tax at a statutory rate of 5%. State income tax expense was $724,000 for the first nine months of 2021, compared to a state income tax benefit of $395,000 for the first nine months of 2020 related to the establishment of a net deferred tax asset due to the tax law change.

 

Net Interest Income – Net interest income was $11.6 million for the three months ended September 30, 2021, an increase of $1.7 million, or 16.9%, compared with $9.9 million for the same period in 2020. Net interest spread and margin were 3.47% and 3.61%, respectively, for the third quarter of 2021, compared with 3.08% and 3.27%, respectively, for the third quarter of 2020.

 

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

 

The yield on earning assets increased to 4.03% for the third quarter of 2021, as compared to 3.98% in the third quarter of 2020. Average interest-earning assets were $1.28 billion for the third quarter of 2021, compared with $1.21 billion for the third quarter of 2020, a 5.9% increase, primarily attributable to higher interest-bearing deposits and investment securities. Average loans decreased approximately $10.9 million for the third quarter of 2021, compared with the third quarter of 2020. PPP loans averaged $12.6 million and $41.6 million for the third quarter of 2021 and 2020, respectively. The decrease in average loans resulted in a decrease in interest revenue volume of approximately $123,000 for the quarter ended September 30, 2021, which was offset by an increase in loan fee income, as compared with the third quarter of 2020. Total interest income increased 7.3%, or $881,000, for the third quarter of 2021 compared to the third quarter of 2020.

 

Loan fee income can meaningfully impact net interest income, loan yields, and net interest income. The amount of loan fee income included in total interest income was $1.5 million and $387,000 for the quarters ended September 30, 2021 and September 30, 2020, respectively. This represents 48 basis points and 13 basis points of yield on earning assets and net interest margin for the third quarter ended September 30, 2021 and 2020, respectively. Loan fee income for the third quarter of 2021 included $1.4 million in fees earned on SBA PPP loans, compared to $195,000 in the third quarter of 2020, which represents 43 basis points and six basis points of earning asset yield and net interest margin for those quarters, respectively.

 

The cost of interest-bearing liabilities decreased to 0.56% for the third quarter of 2021, as compared to 0.90% for the third quarter of 2020 primarily based on the downward repricing of time and other interest-bearing deposits and reduction in the size of the time deposit portfolio, as well as a shift in deposit mix. Average interest-bearing liabilities decreased by 0.2% to $954.0 million for the third quarter of 2021, as compared to $955.7 million for the third quarter of 2020 primarily due to a slight decrease of $1.9 million in interest-bearing deposits. Total interest expense decreased by 37.1% to $1.4 million for the third quarter of 2021 as compared to $2.2 million for the third quarter of 2020.

 

Net interest income was $33.2 million for the nine months ended September 30, 2021, an increase of $3.4 million, or 11.4%, compared with $29.8 million for the same period in 2020. Net interest spread and margin were 3.38% and 3.53%, respectively, for the first nine months of 2021, compared with 3.08% and 3.30%, respectively, for the first nine months of 2020.

 

The yield on earning assets decreased to 4.00% for the first nine months of 2021, as compared to 4.23% in the first nine months of 2020. Average interest-earning assets increased approximately $55.5 million primarily attributable to an increase in investment securities for the nine months ended September 30, 2021 compared with the first nine months of 2020. Average loans decreased approximately $4.1 million for the first nine months ended September 30, 2021 compared with the first nine months of 2020. PPP loans averaged $19.4 million and $20.6 million for the first nine months of 2021 and 2020, respectively. Interest revenue for the first nine months of 2021 declined $56,000 due to lower interest rates on new and renewed loans, the downward repricing of variable rate loans, and lower rates on securities purchased over the past seven quarters, as compared to the first nine months of 2020. Total interest income decreased 1.4%, or $546,000, for the first nine months of 2021 compared to the first nine months of 2020.

 

The amount of loan fee income included in total interest income was $3.3 million and $1.1 million for the nine months ended September 30, 2021 and 2020, respectively. This represents 35 basis points and 13 basis points of yield on earning assets and net interest margin for the nine months ended September 30, 2021 and 2020, respectively. Loan fee income included PPP fees of $2.5 million and $373,000 for the nine months ended September 30, 2021 and 2020, respectively, which represents 27 basis points and five basis points of earning asset yield and net interest margin for those nine-month periods, respectively.

 

The cost of interest-bearing liabilities decreased to 0.62% for the first nine months of 2021, as compared to 1.15% for the first nine months of 2020 primarily based on downward repricing of time and other interest-bearing deposits and reduction in the size of the time deposit portfolio, as well as a shift in deposit mix. Average interest-bearing liabilities decreased by $15.7 million for the nine months ended September 30, 2021 compared with the first nine months of 2020 primarily due to a $18.2 million decrease in FHLB advances. Total interest expense decreased by 47.4% to $4.4 million for the nine months ended September 30, 2021 as compared to $8.3 million for the first nine months of 2020.

 

 

Average Balance Sheets

 

The following table presents the average balance sheets for the three-month periods ended September 30, 2021 and 2020, along with the related calculations of tax-equivalent net interest income, net interest margin and net interest spread for the related periods.

 

   

Three Months Ended September 30,

 
   

2021

   

2020

 
   

Average

Balance

   

Interest

Earned/Paid

   

Average

Yield/Cost

   

Average

Balance

   

Interest

Earned/Paid

   

Average

Yield/Cost

 
   

(dollars in thousands)

 

ASSETS

                                               

Interest-earning assets:

                                               

Loan receivables (1)

  $ 952,567     $ 11,565       4.82

%

  $ 963,486     $ 10,805       4.46

%

Securities

                                               

Taxable

    213,173       1,183       2.20       186,114       1,139       2.43  

Tax-exempt

    28,464       168       3.12       17,002       108       3.20  

FHLB stock

    5,247       28       2.12       6,057       33       2.17  

Federal funds sold and other

    84,737       31       0.15       40,380       9       0.09  

Total interest-earning assets

    1,284,188       12,975       4.03

%

    1,213,039       12,094       3.98

%

Less: Allowance for loan losses

    (12,659

)

                    (10,233

)

               

Non-interest earning assets

    97,843                       93,008                  

Total assets

  $ 1,369,372                     $ 1,295,814                  
                                                 

LIABILITIES AND STOCKHOLDERS EQUITY

                                               

Interest-bearing liabilities:

                                               

Certificates of deposit and other time deposits

  $ 290,062     $ 384       0.53

%

  $ 423,739     $ 1,122       1.05

%

NOW and money market deposits

    436,146       322       0.29       341,610       364       0.42  

Savings accounts

    161,799       106       0.26       124,543       141       0.45  

FHLB advances

    20,000       39       0.77       20,746       39       0.75  

Junior subordinated debentures

    21,000       128       2.42       21,000       138       2.61  

Subordinated capital notes

    25,000       375       5.95       22,391       335       5.95  

Senior debt

                      1,632       12       2.93  

Total interest-bearing liabilities

    954,007       1,354       0.56

%

    955,661       2,151       0.90

%

                                                 

Non-interest-bearing liabilities:

                                               

Non-interest-bearing deposits

    278,778                       221,973                  

Other liabilities

    10,031                       7,250                  

Total liabilities

    1,242,816                       1,184,884                  

Stockholders’ equity

    126,556                       110,930                  

Total liabilities and stockholders equity

  $ 1,369,372                     $ 1,295,814                  
                                                 

Net interest income

          $ 11,621                     $ 9,943          
                                                 

Net interest spread

                    3.47

%

                    3.08

%

                                                 

Net interest margin

                    3.61

%

                    3.27

%

         


(1)

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

 

 

The following table presents the average balance sheets for the nine-month periods ended September 30, 2021 and 2020, along with the related calculations of tax-equivalent net interest income, net interest margin and net interest spread for the related periods.

 

   

Nine Months Ended September 30,

 
   

2021

   

2020

 
   

Average

Balance

   

Interest

Earned/Paid

   

Average

Yield/Cost

   

Average

Balance

   

Interest

Earned/Paid

   

Average

Yield/Cost

 
   

(dollars in thousands)

 

ASSETS

                                               

Interest-earning assets:

                                               

Loan receivables (1)

  $ 959,571     $ 33,573       4.68

%

  $ 963,668     $ 33,772       4.68

%

Securities

                                               

Taxable

    197,318       3,402       2.31       189,827       3,913       2.75  

Tax-exempt

    25,476       476       3.33       12,670       255       3.40  

FHLB stock

    5,619       87       2.07       6,304       112       2.37  

Federal funds sold and other

    75,600       63       0.11       35,587       95       0.36  

Total interest-earning assets

    1,263,584       37,601       4.00

%

    1,208,056       38,147       4.23

%

Less: Allowance for loan losses

    (12,620

)

                    (9,248

)

               

Non-interest earning assets

    98,339                       92,842                  

Total assets

  $ 1,349,303                     $ 1,291,650                  
                                                 

LIABILITIES AND STOCKHOLDERS EQUITY

                                               

Interest-bearing liabilities:

                                               

Certificates of deposit and other time deposits

  $ 323,748     $ 1,451       0.60

%

  $ 454,279     $ 4,976       1.46

%

NOW and money market deposits

    405,238       961       0.32       327,584       1,149       0.47  

Savings accounts

    155,364       343       0.30       102,341       401       0.52  

FHLB advances

    20,203       115       0.76       38,406       332       1.15  

Junior subordinated debentures

    21,000       390       2.48       21,000       525       3.34  

Subordinated capital notes

    25,000       1,126       6.02       18,810       830       5.89  

Senior debt

                      3,869       119       4.11  

Total interest-bearing liabilities

    950,553       4,386       0.62

%

    966,289       8,332       1.15

%

                                                 

Non-interest-bearing liabilities:

                                               

Non-interest-bearing deposits

    268,217                       209,605                  

Other liabilities

    8,632                       7,111                  

Total liabilities

    1,227,402                       1,183,005                  

Stockholders’ equity

    121,901                       108,645                  

Total liabilities and stockholders equity

  $ 1,349,303                     $ 1,291,650                  
                                                 

Net interest income

          $ 33,215                     $ 29,815          
                                                 

Net interest spread

                    3.38

%

                    3.08

%

                                                 

Net interest margin

                    3.53

%

                    3.30

%

 


(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 September 30,

2021 vs. 2020

   

Nine Months Ended September 30,

2021 vs. 2020

 
   

Increase (decrease)

due to change in

   

Increase (decrease)

due to change in

 
   

Rate

   

Volume

   

Net

Change

   

Rate

   

Volume

   

Net

Change

 
   

(in thousands)

 

Interest-earning assets:

                                               

Loan receivables

  $ 883     $ (123

)

  $ 760     $ (56

)

  $ (143

)

  $ (199

)

Securities

    (118

)

    222       104       (682

)

    392       (290

)

FHLB stock

    (1

)

    (4

)

    (5

)

    (13

)

    (12

)

    (25

)

Federal funds sold and other

    8       14       22       (93

)

    61       (32

)

Total increase (decrease) in interest income

    772       109       881       (844

)

    298       (546

)

                                                 

Interest-bearing liabilities:

                                               

Certificates of deposit and other time deposits

    (452

)

    (286

)

    (738

)

    (2,372

)

    (1,153

)

    (3,525

)

NOW and money market accounts

    (128

)

    86       (42

)

    (423

)

    235       (188

)

Savings accounts

    (70

)

    35       (35

)

    (217

)

    159       (58

)

FHLB advances

    1       (1

)

          (91

)

    (126

)

    (217

)

Junior subordinated debentures

    (10

)

          (10

)

    (135

)

          (135

)

Subordinated capital notes

    1       39       40       17       279       296  

Senior debt

    (6

)

    (6

)

    (12

)

    (59

)

    (60

)

    (119

)

Total increase (decrease) in interest expense

    (664

)

    (133

)

    (797

)

    (3,280

)

    (666

)

    (3,946

)

Increase (decrease) in net interest income

  $ 1,436     $ 242     $ 1,678     $ 2,436     $ 964     $ 3,400  

 

Non-Interest Income – The following table presents the major categories of non-interest income for the three and nine months ended September 30, 2021 and 2020:

 

   

For the Three Months

   

For the Nine Months

 
   

Ended September 30,

   

Ended September 30,

 
   

2021

   

2020

   

2021

   

2020

 
   

(dollars in thousands)

 
                                 

Service charges on deposit accounts

  $ 583     $ 565     $ 1,651     $ 1,674  

Bank card interchange fees

    1,044       881       3,077       2,494  

Income from bank owned life insurance

    112       113       420       325  

Net gain on sale of other real estate owned

                191        

Gain (loss) on sales and calls of securities, net

    465             460       (5

)

Other

    232       183       656       579  

Total non-interest income

  $ 2,436     $ 1,742     $ 6,455     $ 5,067  

 

Non-interest income for the third quarter of 2021 increased by $694,000, or 39.8%, compared with the third quarter of 2020. The increase in non-interest income for the third quarter of 2021 compared to the third quarter of 2020 was primarily driven by a $465,000 gain on the call of a corporate bond from the Bank’s available for sale securities portfolio. The bond was called before maturity and owned at a discount to par value. Bank card interchange fees also increased $163,000 from the third quarter of 2020 due to an increase in debit card transactions.

 

 

For the nine months ended September 30, 2021, non-interest income increased by $1.4 million, or 27.4%, to $6.5 million compared with $5.1 million for the same period of 2020. The increase in non-interest income between the nine-month comparative periods was primarily due to an increase in bank card interchange fees of $583,000 as a result of an increase in debit card transactions, a $191,000 gain on the sale of OREO from the second quarter of 2021, and a $465,000 gain on the call of an available for sale bond.

 

Non-interest Expense The following table presents the major categories of non-interest expense for the three and nine months ended September 30, 2021 and 2020:

 

   

For the Three Months

   

For the Nine Months

 
   

Ended September 30,

   

Ended September 30,

 
   

2021

   

2020

   

2021

   

2020

 
   

(dollars in thousands)

 
                                 

Salary and employee benefits

  $ 4,582     $ 4,413     $ 13,531     $ 13,584  

Occupancy and equipment

    1,024       1,008       3,063       2,990  

Professional fees

    219       261       701       704  

Marketing expense

    200       134       561       452  

FDIC insurance

    90       81       315       148  

Data processing expense

    378       382       1,133       1,121  

Deposit and state franchise tax

    90       360       270       1,080  

Deposit account related expenses

    545       487       1,592       1,398  

Communications expense

    153       201       520       666  

Insurance expense

    105       102       324       316  

Postage and delivery

    169       156       460       476  

Other

    495       494       1,518       1,615  

Total non-interest expense

  $ 8,050     $ 8,079     $ 23,988     $ 24,550  

 

Non-interest expense for the third quarter ended September 30, 2021 decreased $29,000, or 0.4%, compared with the third quarter of 2020. This decrease was primarily due to a decrease in deposit and state franchise tax expense of $270,000, as a result of the elimination of the Kentucky bank franchise tax discussed below. This decrease was partially offset by an increase in salaries and employee benefits of $169,000 as a result of an increase in average FTEs to 232 as compared to 226 in the third quarter of 2020.

 

For the nine months ended September 30, 2021, non-interest expense decreased $562,000, or 2.3% to $24.0 million compared with $24.6 million for the first nine months of 2020. The decrease in non-interest expense for the nine months ended September 30, 2021 was primarily attributable to a decrease of $810,000 in deposit and state franchise tax expense. This decrease was partially offset by an increase in deposit account related expense of $194,000 due to an increase in debit card transactions and an increase in FDIC insurance of $167,000 due to no expense being recorded during the first quarter of 2020 as the Bank was utilizing assessment credits.

 

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

 

   

For the Three Months

   

For the Nine Months

 
   

Ended September 30,

   

Ended September 30,

 
   

2021

   

2020

   

2021

   

2020

 
   

(dollars in thousands)

 
                                 

Federal statutory tax rate

    21

%

    21

%

    21

%

    21

%

Federal statutory rate times financial statement income

  $ 1,199     $ 474     $ 3,157     $ 1,435  

Effect of:

                               

State income taxes

    224             607        

Tax-exempt interest income

    (38

)

    (21

)

    (108

)

    (50

)

Establish state deferred tax asset

          (244

)

          (395

)

Non-taxable life insurance income

    (28

)

    (24

)

    (105

)

    (68

)

Restricted stock vesting

    (1

)

          (1

)

    4  

Other, net

    10       5       18       18  

Total

  $ 1,366     $ 190     $ 3,568     $ 944  

 

Income tax expense was $1.4 million and $3.6 million for the third quarter of 2021 and for the first nine months of 2021, respectively, compared with $190,000 for the third quarter of 2020 and $944,000 for the first nine months of 2020, respectively. Effective January 1, 2021, the state of Kentucky eliminated the bank franchise tax, which was previously recorded as a non-interest expense, and implemented a state income tax at a statutory rate of 5%. State income tax expense was $275,000 and $724,000 for the third quarter of 2021 and for the first nine months of 2021, respectively, compared to a state income tax benefit of $244,000 and $395,000 for the third quarter of 2020 and for the first nine months of 2020, respectively, which was related to the establishment of a net deferred tax asset due to the tax law change.

 

 

Analysis of Financial Condition

 

Total assets increased $40.5 million, or 3.1%, to $1.35 billion at September 30, 2021, from $1.31 billion at December 31, 2020. This increase was primarily attributable to an increase in securities of $47.2 million and an increase in net loans of $5.5 million, partially offset by a decrease in cash and cash equivalents of $9.2 million.

 

Loans Receivable Loans receivable increased $6.0 million, or 0.6%, during the nine months ended September 30, 2021 to $968.1 million as loan growth outpaced paydowns. The commercial and commercial real estate portfolios increased by an aggregate of $32.0 million, or 5.0%, during the first nine months of 2021 and comprised 69.2% of the loan portfolio at September 30, 2021. Residential real estate and consumer portfolios decreased by an aggregate of $20.8 million, or 7.4%, during the first nine months of 2021 and comprised 26.9% of the loan portfolio at September 30, 2021.

 

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

 

   

As of September 30,

   

As of December 31,

 
   

2021

   

2020

 
   

Amount

   

Percent

   

Amount

   

Percent

 
           

(dollars in thousands)

         
                                 

Commercial (1)

  $ 217,189       22.43

%

  $ 208,244       21.65

%

Commercial Real Estate

                               

Construction

    75,432       7.79       92,916       9.66  

Farmland

    69,531       7.18       70,272       7.30  

Nonfarm nonresidential

    307,637       31.78       266,394       27.69  

Residential Real Estate

                               

Multi-family

    57,346       5.92       61,180       6.36  

1-4 Family

    164,944       17.04       188,955       19.64  

Consumer

    38,464       3.97       31,429       3.27  

Agriculture

    36,980       3.82       42,044       4.37  

Other

    565       0.07       647       0.06  

Total loans

  $ 968,088       100.00

%

  $ 962,081       100.00

%

 


 

(1)

Includes PPP loans of $5.7 million and $20.3 million at September 30, 2021 and December 31, 2021, respectively.

 

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

 

   

September 30, 2021

   

December 31, 2020

 
   

Loans

   

% to Total

   

Loans

   

% to Total

 
   

(dollars in thousands)

 
                                 

Pass

  $ 945,396       97.7

%

  $ 926,025       96.2

%

Watch

    3,407       0.3       18,879       2.0  

Special Mention

                       

Substandard

    19,285       2.0       17,177       1.8  

Doubtful

                       

Total

  $ 968,088       100.0

%

  $ 962,081       100.00

%

 

Since December 31, 2020, the pass category increased approximately $19.4 million, the watch category decreased approximately $15.5 million, and the substandard category increased approximately $2.1 million. The $15.5 million decrease in loans classified as watch is primarily due to $12.0 million in payments and $1.9 million in loans migrating from watch to substandard. The $2.1 million increase in loans classified as substandard was primarily driven by $5.6 million in loans migrating to substandard, offset by $3.0 million in payments, $231,000 in charge-offs, and $325,000 in loans upgraded from substandard during the first nine months of 2021.

 

 

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

 

   

September 30,

2021

   

December 31,

2020

 
   

(in thousands)

 

Past Due Loans:

               

30-59 Days

  $ 630     $ 1,537  

60-89 Days

    142       372  

90 Days and Over

           

Total Loans Past Due 30-90+ Days

    772       1,909  
                 

Nonaccrual Loans

    1,627       1,676  

Total Past Due and Nonaccrual Loans

  $ 2,399     $ 3,585  

 

During the nine months ended September 30, 2021, nonaccrual loans decreased by $49,000 to $1.6 million. Loans past due 30-59 days decreased from $1.5 million at December 31, 2020 to $630,000 at September 30, 2021. Loans past due 60-89 days decreased from $372,000 at December 31, 2020 to $142,000 at September 30, 2021. This represents a $1.1 million decrease in accruing past due loans from December 31, 2020 to September 30, 2021 in loans past due 30-89 days. This trend in delinquency levels is considered during the evaluation of qualitative trends in the portfolio when establishing the general component of the allowance for loan losses.

 

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

 

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

 

At September 30, 2021 and December 31, 2020, the Bank had five and four restructured loans totaling $628,000 and $480,000, respectively, with borrowers who experienced deterioration in financial condition. In general, these loans were granted interest rate reductions to provide cash flow relief to borrowers experiencing cash flow difficulties. The Bank had no restructured loans that had been granted principal payment deferrals until maturity at September 30, 2021 or December 31, 2020. There were no concessions made to forgive principal relative to these loans, although partial charge-offs have been recorded for certain restructured loans. In general, these loans are secured by first liens on 1-4 residential properties or commercial real estate properties. At September 30, 2021 and December 31, 2020, 89% and 100%, respectively, of the TDRs were performing according to their modified terms.

 

There was one modification granted during the third quarter of 2021 and one modification granted during the third quarter of 2020 that resulted in loans being identified as TDRs. See “Note 3 – Loans,” to the financial statements for additional disclosure related to troubled debt restructuring.

 

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

 

Loans subject to CARES Act modifications that had not returned to normal payment terms declined to $4.5 million as of September 30, 2021, as compared to $15.3 million at December 31, 2020. At September 30, 2021, there is one commercial real estate loan secured by a retail entertainment facility totaling $4.4 million, which remains subject to, and is performing in accordance with, a COVID-19 modification. The loan is graded substandard, has been evaluated under ASC-310-10, and allocated a specific reserve of $2.2 million.

 

 

Non-Performing Assets Non-performing assets consist of certain restructured loans for which interest rate or other terms have been renegotiated, loans past due 90 days or more still on accrual, loans on which interest is no longer accrued, real estate acquired through foreclosure and repossessed assets. The following table sets forth information with respect to non-performing assets as of September 30, 2021 and December 31, 2020:

 

   

September

30,

2021

   

December

31,

2020

 
   

(dollars in thousands)

 
                 

Loans on nonaccrual status

  $ 1,627     $ 1,676  

Troubled debt restructurings on accrual

    561       480  

Past due 90 days or more still on accrual

           

Total non-performing loans

    2,188       2,156  

Real estate acquired through foreclosure

          1,765  

Other repossessed assets

           

Total non-performing assets

  $ 2,188     $ 3,921  
                 

Non-performing loans to total loans

    0.23

%

    0.22

%

Non-performing assets to total assets

    0.16

%

    0.30

%

Allowance for non-performing loans

  $ 20     $ 22  

Allowance for non-performing loans to non-performing loans

    0.91

%

    1.02

%

 

Nonperforming loans at September 30, 2021, were $2.2 million, or 0.23% of total loans, compared with $2.2 million, or 0.22% of total loans at December 31, 2020, and $2.5 million, or 0.26% of total loans at September 30, 2020.

 

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

 

A provision for loan loss of $300,000 and $650,000 was recorded in the third quarter and first nine months of 2021, respectively, compared to $1.4 million and $3.5 million provision for loan losses in the third quarter and the first nine months of 2020, respectively. The 2021 loan loss provisions were attributable to the net loan charge-offs and growth trends within the portfolio during the period, while the provisions for 2020 were largely attributable to the uncertainty surrounding the COVID-19 pandemic related economic and business disruptions. At September 30, 2021, the allowance for loan loss remained elevated in relation to recent historical levels due to the continued uncertainty surrounding the COVID-19 pandemic.

 

 

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

 

   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

   

December 31,

 
   

2021

   

2020

   

2021

   

2020

    2020  
   

(in thousands)

 

Balance at beginning of period

  $ 12,637     $ 10,228     $ 12,443     $ 8,376     $ 8,376  
                                         

Loans charged-off:

                                       

Real estate

    18       17       159       156       231  

Commercial

                19       32       32  

Consumer

    7       131       58       444       493  

Agriculture

          2       44       46       46  

Other

                             

Total charge-offs

    25       150       280       678       802  
                                         

Recoveries

                                       

Real estate

    37       19       85       215       352  

Commercial

    10       5       20       16       29  

Consumer

    7       13       41       23       45  

Agriculture

    7       14       14       23       30  

Other

          2             6       13  

Total recoveries

    61       53       160       283       469  

Net charge-offs (recoveries)

    (36

)

    97       120       395       333  

Provision for loan losses

    300       1,350       650       3,500       4,400  

Balance at end of period

  $ 12,973     $ 11,481     $ 12,973     $ 11,481     $ 12,443  
                                         

Allowance for loan losses to period-end loans

    1.34

%

    1.18

%

    1.34

%

    1.18

%

    1.29

%

Net charge-offs (recoveries) to average loans

    (0.01

)%

    0.04

%

    0.02

%

    0.05

%

    0.03

%

Allowance for loan losses to non-performing loans

    592.92

%

    454.33

%

    592.92

%

    454.33

%

    577.13

%

 

The allowance for loan losses to total loans was 1.34% at September 30, 2021, compared to 1.29% at December 31, 2020, and 1.18% at September 30, 2020. Net loan charge-offs in the first nine months of 2021 totaled $120,000, compared to net loan charge-offs of $395,000 in the first nine months of 2020. The allowance for loan losses to non-performing loans was 592.92% at September 30, 2021, compared with 577.13% at December 31, 2020, and 454.33% at September 30, 2020.

 

Investment Securities The securities portfolio serves as a source of liquidity and earnings and contributes to the management of interest rate risk. Investments are made in various types of liquid assets, including U.S. Treasury obligations and securities of various federal agencies, obligations of states and political subdivisions, corporate bonds, and collateralized loan obligations. The investment portfolio increased by $47.2 million, or 23.2%, to $251.1 million at September 30, 2021, compared with $203.9 million at December 31, 2020.

 

 

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

 

   

September 30, 2021

    December 31, 2020  
   

Amortized

Cost

   

Gross

Unrealized

Gains

   

Gross

Unrealized

Losses

   

Fair

Value

   

Amortized

Cost

   

Gross

Unrealized

Gains

   

Gross

Unrealized

Losses

   

Fair

Value

 
                                                                 

Available for sale

                                                               

U.S. Government and federal agencies

  $ 26,443     $ 641     $     $ 27,084     $ 18,811     $ 806     $     $ 19,617  

Agency mortgage-backed residential

    84,938       1,925       (493

)

    86,370       71,582       2,777       (26

)

    74,333  

Collateralized loan obligations

    50,233       1       (104

)

    50,130       44,730             (1,578

)

    43,152  

State and municipal

                            34,759       1,296             36,055  

Corporate bonds

    39,412       656       (104

)

    39,964       31,635       472       (1,402

)

    30,705  

Total available for sale

  $ 201,026     $ 3,223     $ (701

)

  $ 203,548     $ 201,517     $ 5,351     $ (3,006

)

  $ 203,862  

 

   

Amortized

Cost

   

Gross

Unrecognized

Gains

   

Gross

Unrecognized

Losses

   

Fair

Value

   

Amortized

Cost

   

Gross

Unrecognized

Gains

   

Gross

Unrecognized

Losses

   

Fair

Value

 
                                                                 

Held to maturity

                                                               

State and municipal

  $ 47,539     $ 201     $ (333

)

  $ 47,407     $     $     $     $  

Total held to maturity

  $ 47,539     $ 201     $ (333

)

  $ 47,407     $     $     $     $  

 

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

 

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

 

The market value of CLOs may be affected by, among other things, changes in composition of the underlying loans, changes in the cash flows from the underlying loans, defaults and recoveries on the underlying loans, capital gains and losses on the underlying loans, prepayments on the underlying loans, and other conditions or economic factors. At September 30, 2021, $28.0 million and $22.1 million of the Bank’s CLOs were AA and A rated, respectively. None of the CLOs were subject to ratings downgrade during the nine months ended September 30, 2021.

 

The corporate bond portfolio consists of 14 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 fixed for five years converting to floating at an index over LIBOR, or SOFR, or floating at an index over LIBOR, or SOFR, from inception. Management regularly monitors the financial condition of these corporate issuers by reviewing their regulatory and public filings.

 

Foreclosed Properties – There were no foreclosed properties at September 30, 2021, compared with $1.8 million at December 31, 2020. See Note 5, “Other Real Estate Owned,” to the financial statements. Management values foreclosed properties at fair value less estimated costs to sell when acquired and expects to liquidate these properties to recover the investment in the due course of business.

 

There were no OREO sales during the third quarter of 2021 and $2.0 million for the first nine months of 2021, respectively, compared to no sales during the third quarter and $1.6 million for the first nine months ended September 30, 2020. There were no gain on sales of OREO during the third quarter of 2021 and $191,000 for the first nine months of 2021, respectively, compared to no gain on sales of OREO for the third quarter or nine months ended September 30, 2020. Operating expenses during the third quarter and first nine months of 2021 were zero and $13,000, respectively, compared to operating expenses of $20,000 and $58,000 for the third quarter and nine months ending September 30, 2020, respectively. There were no fair value write-downs recorded during the nine months ended September 30, 2021 or 2020.

 

 

Liabilities Total liabilities at September 30, 2021 were $1.22 billion compared with $1.20 billion at December 31, 2020, an increase of $27.9 million, or 2.3%. This increase was primarily attributable to an increase in deposits of $28.4 million.

 

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

 

   

For the Nine Months

   

For the Year

 
   

Ended September 30,

   

Ended December 31,

 
   

2021

   

2020

 
   

Average

   

Average

   

Average

   

Average

 
   

Balance

   

Rate

   

Balance

   

Rate

 
   

(dollars in thousands)

 

Demand

  $ 268,217             $ 215,145          

Interest checking

    219,454       0.29

%

    169,808       0.32

%

Money market

    185,784       0.35       166,788       0.55  

Savings

    155,364       0.30       111,559       0.48  

Certificates of deposit

    323,748       0.60       436,083       1.33  

Total deposits

  $ 1,152,567       0.32

%

  $ 1,099,383       0.71

%

 

The following table shows at September 30, 2021 the amount of time deposits of $250,000 or more by time remaining until maturity (in thousands):

 

Maturity Period

 
         

Three months or less

  $ 7,730  

Three months through six months

    6,001  

Six months through twelve months

    7,818  

Over twelve months

    16,522  

Total

  $ 38,071  

 

Liquidity

 

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

 

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

 

The Bank also borrows from the FHLB to supplement funding requirements. At September 30, 2021, the Bank had an unused borrowing capacity with the FHLB of $68.6 million. Advances are collateralized by first mortgage residential loans, as well as loans originated under the SBA Payment Protection Plan loans and borrowing capacity is based on the underlying book value of eligible pledged loans.

 

The Bank also has available on an unsecured basis federal funds borrowing lines from a correspondent bank totaling $5.0 million. Management believes the sources of liquidity are adequate to meet expected cash needs for the foreseeable future. Historically, the Bank has also utilized brokered and wholesale deposits to supplement its funding strategy. At September 30, 2021, 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 also may issue common equity, preferred equity and debt to support cash flow needs and liquidity requirements.

 

Capital

 

Stockholders’ equity increased $12.6 million to $128.7 million at September 30, 2021, compared with $116.0 million at December 31, 2020 due primarily to current year net income of $11.5 million.

 

 

The following table shows the ratios of Tier 1 capital, common equity Tier 1 capital, and total capital to risk-adjusted assets and the leverage ratios for the Bank as of September 30, 2021:

 

   

Regulatory

Minimums

   

Well-Capitalized

Minimums

   

Basel III Plus

Conservation

Buffer

   

Limestone Bank

 
                                 

Tier 1 Capital

    6.0 %     8.0 %     7.0 %     12.7 %

Common equity Tier 1 capital

    4.5       6.5       8.5       12.7  

Total risk-based capital

    8.0       10.0       10.5       13.8  

Tier 1 leverage ratio

    4.0       5.0             11.0  

 

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

 

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.

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Given an instantaneous 100 basis point increase in interest rates, the base net interest income would decrease by an estimated 0.8% at September 30, 2021, compared with an increase of 0.8% at December 31, 2020. Given a 200 basis point increase in interest rates, base net interest income would decrease by an estimated 0.8% at September 30, 2021, compared with an increase of 2.2% at December 31, 2020.

 

The following table indicates the estimated impact on net interest income under various interest rate scenarios for the twelve months following September 30, 2021, as calculated using the static shock model approach:

 

   

Change in Future

Net Interest Income

 
   

Dollar Change

   

Percentage Change

 
   

(dollars in thousands)

 

+ 200 basis points

  $ (329 )     (0.79

)%

+ 100 basis points

    (337 )     (0.81 )

- 100 basis points

    189

 

    0.46

 

- 200 basis points

    (438

)

    (1.05

)

 

 

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 amount of damages. After discussion with legal counsel, management does not believe these legal actions or proceedings will have a material adverse effect on the consolidated financial position or results of operation of the Company.

 

Item 1A. Risk Factors

 

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

 

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

 

Not applicable.

 

Item 3. Default Upon Senior Securities

 

Not applicable.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

Not applicable.

 

 

Item 6. Exhibits

 

 

(a)

Exhibits

 

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

 

Exhibit Number

 

Description of Exhibit

 

 

3.1

  Articles of Incorporation of the Company, restated to reflect amendments. Filed as Exhibit 3.1 to the Quarterly Report on Form 10-Q filed July 30, 2021 and incorporated by reference.
     

3.2

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

4.1

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

4.2

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

4.3

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

4.4

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

4.5

 

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

     

31.1

 

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

 

 

31.2

 

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

 

 

32.1

 

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

 

 

32.2

 

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

     

101

 

The following financial statements from the Company’s Quarterly Report on Form 10Q for the quarter ended September 30, 2021, formatted in inline XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income (Loss), (iv) Consolidated Statement of Changes in Stockholders’ Equity, (v) Consolidated Statements of Cash Flows, (vi) Notes to Consolidated Financial Statements.

     

104

 

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

 

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

 

 

SIGNATURES

 

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

 

 

 

LIMESTONE BANCORP, INC.

 

(Registrant)

 

October 29, 2021

By:

/s/ John T. Taylor

 

 

John T. Taylor

 

 

Chief Executive Officer

 

October 29, 2021

By:

/s/ Phillip W. Barnhouse

   

Phillip W. Barnhouse 

 

 

Chief Financial Officer

 

51
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