insiderdeltaSEC filings, surfaced and scored

CoverageForm 410-K10-Q8-K13D13G13F

Limestone Bancorp, Inc.

LMSTCIK 0001358356 · Every Form 4 filed by insiders at this issuer. See financials →

Annual report (10-K)

Latest 10-K filed Feb 28, 2023. Sentiment + YoY language diff vs prior year. Read sections →

Signal:Neutral

Risk Factors:tone -0.0364Δ+0.000881% similar+39/-18 ¶

MD&A:tone -0.0160Δ-0.001985% similar+64/-77 ¶

Sentiment via Loughran-McDonald lexicon · YoY diff via Jaccard similarity + paragraph set difference.

YoY shift: Neutral

Year-over-year tone shift - average net-tone change across Risk Factors and MD&A vs the prior 10-K. This filing is -0.05pp more bearish than last year's.

Why YoY instead of absolute: the LM lexicon has ~6.6× more negative words than positive (legal/risk-disclosure language is heavy on hedging), so every 10-K reads bearish on raw tone. Year-over-year change strips that bias and surfaces the actual shift in management's framing.

Tone shift by section

The two components the gauge averages: how Risk Factors and MD&A each shifted in net tone versus last year's 10-K. The headline above is their average, so a green needle over a soft section just means the other section carried it.

Risk Factors

+0.08pp

Flat

Net-tone change vs last year's 10-K.

MD&A

-0.19pp

Flat

Net-tone change vs last year's 10-K.

Per-snippet highlights

Sentence-level sentiment highlighting with category and subcategory filters is coming once the snippet-scoring pipeline lands. For now, dig into the actual section text on the Sections tab.

Top insiders

Most active reporters at Limestone Bancorp, Inc.

Name	Roles	Filings
Barnhouse Phillip W. Jr	Officer	5
Davis John Redmon	Officer	5
Seiler Joseph C	Officer	5
Taylor John T.	OfficerDirector	5
Koehler John Michael	Officer	4

Showing 1-5 of 12

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All filings

38 Form 4 / 4-A filings, newest first

Filed	Insider	Top transaction	Shares	Price	Value
May 1, 2023	Barnhouse Phillip W. Jr CFO	FTax	6,545	$23.42	$153,284
May 1, 2023	Taylor John T. President · Director	FTax	830	$23.42	$19,439
May 1, 2023	Koehler John Michael SVP, Chief Accounting Officer	FTax	2,799	$23.42	$65,553
May 1, 2023	Seiler Joseph C EVP	FTax	6,583	$23.42	$154,174
May 1, 2023	Davis John Redmon Chief Credit Officer	FTax	6,610	$23.42	$154,806

Showing 1-5 of 38

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Real-time Form 4 intelligence. Smarter insider tracking.

Filed		Top transaction	Shares	Price	Value

Item 1A. Risk Factors

FACTORS THAT MAY AFFECT FUTURE RESULTS

An investment in the Company’s common stock is subject to certain risks, which are particular to the Company, as well as the industry and markets in which the Company operates. Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included in this filing. In addition to the risks and uncertainties described below, other risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially and adversely affect its business, financial condition, and results of operations in the future. The value or market price of the Company’s common stock could decline due to any of these identified or other risks, and an investor could lose all or part of their investment.

There are factors, many beyond the Company’s control, which may significantly change the results or expectations of the Company. Some of these factors are described below, however, many are described in the other sections of this Annual Report on Form 10-K.

Risks Related to the Company ’ s Pending Merger Transaction

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

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

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

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

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

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

the Company’s compliance with the restrictions the Merger Agreement places on the conduct of the Company’s business prior to completion of the Merger, the waiver of which is subject to the consent of Peoples, may adversely affect the Company’s ability to pursue or execute alternative business strategies; and

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

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

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

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

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

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

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

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

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

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

The Merger Agreement is subject to a number of conditions which must be fulfilled in order to complete the Merger. Those conditions include: the approval of the Merger by the Company’s shareholders and by the shareholders of Peoples (which approvals were obtained at meetings of shareholders held on February 23, 2023); the effectiveness of the registration statement on Form S-4 for the shares of Peoples common stock to be issued in the Merger; the receipt of authorization for listing on Nasdaq of the shares of Peoples common stock to be issued in the Merger; the receipt of all required regulatory approvals; the absence of any order, decree or injunction enjoining or prohibiting the Merger; subject to certain exceptions, the accuracy of representations and warranties under the Merger Agreement; the Company’s and Peoples’ performance of the Company’s and their respective obligations under the Merger Agreement in all material respects; the absence of a material adverse effect on the Company or Peoples while the transaction is pending; and the Company’s receipt of a tax opinion to the effect that the Merger will be treated as a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended. These conditions to the closing of the Merger may not be fulfilled in a timely manner or at all, and, accordingly, the Merger may be or may not be completed.

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

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

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

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

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

Pandemic

The COVID-19 pandemic creates significant risks and uncertainties for the Company ’ s business.

In March 2020, the World Health Organization declared COVID-19 as a global pandemic. The COVID-19 pandemic created economic and financial disruption and adversely affected the business, financial condition, and results of operations of the Company and its customers. The COVID-19 pandemic caused changes in the behavior of customers, businesses, and their employees, as well as supply chain interruptions, and overall economic and financial market instability.

While government, schools, and businesses have largely reopened, future effects, including any actions taken by federal, state, and local governments in response to potential disruptions in the future or their impact, are unknown. Prior and ongoing governmental actions have and continue to meaningfully influence the interest-rate environment. If these actions are sustained, it may adversely impact several industries within the Company’s geographic footprint and impair the ability of the Company’s customers to fulfill their contractual obligations. This could cause the Company to experience a material adverse effect on business operations, liquidity, asset valuations, results of operations, and financial condition, as well as its regulatory capital and liquidity ratios.

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Bank Lending, Allowance for Loan Losses and Other Real Estate Owned

Global Economic and Geopolitical Instability and Inflationary Risks

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

The Company ’ s business may be adversely affected by conditions in the financial markets and by economic conditions generally.

Weakness in business and economic conditions generally or specifically in the Company’s markets may have one or more of the following adverse effects on the Company’s business:

A decrease in the demand for loans and other products and services the Bank offers;

A decrease in the value of collateral securing the Bank’s loans; and

An increase in the number of customers who become delinquent, file for protection under bankruptcy laws, or default on their loans.

Adverse conditions in the general business environment have had an adverse effect on the Company’s business in the past. Certain economic indicators, such as real estate asset values, rents, and unemployment, may vary between geographic markets. These economic indicators typically affect the real estate and financial services industries, in which the Bank has a significant number of customers, more significantly than other economic sectors. Furthermore, the Bank has a substantial lending business that depends upon the ability of borrowers to make debt service payments on loans. Should economic conditions experience stress, the Company’s business, financial condition, or results of operations could be adversely affected.

The Bank ’ s profitability depends significantly on local economic conditions.

Most of the Bank’s business activities are conducted in Kentucky and contiguous states and most of its credit exposure is in that region. The Bank is at risk from adverse economic or business developments affecting this area, including declining regional and local business and employment activity, a downturn in real estate values and agricultural activities, and natural disasters. To the extent the economy weakens, delinquency rates, foreclosures, bankruptcies, and losses in the Bank’s loan portfolio will likely increase. Moreover, the value of real estate or other collateral that secures the loans could be adversely affected by the economic downturn or a localized natural disaster. Events that adversely affect business activity and real estate values have had in the past and may in the future have a impact on the Bank’s business, financial condition, results of operations, and future prospects.

Small to medium-sized businesses may have fewer resources to weather a downturn in the economy.

The loan portfolio includes loans to small and medium-sized businesses and other commercial enterprises. Small and medium-sized businesses frequently have smaller market shares than their competitors, may be more vulnerable to economic downturns, often need additional capital to expand or compete, and may experience variations in operating results, any of which may impair a borrower’s ability to repay a loan. In addition, the success of a small or medium-sized business often depends on the management talents and efforts of one or two persons or a small group of persons. The death, disability, or resignation of one or more of these persons could have a material adverse impact on the business and its ability to repay the loan. A continued economic downturn may have a more pronounced negative impact on the target market, causing the Bank to incur substantial credit losses that could materially harm operating results.

The Bank ’ s decisions regarding credit risk may not be accurate, and its allowance for loan losses may not be sufficient to cover actual losses, which could adversely affect its business, financial condition, and results of operations.

The Bank maintains an allowance for loan losses at a level management believes is adequate to absorb probable incurred losses in the loan portfolio based on historical loan loss experience, economic and environmental factors, specific problem loans, value of underlying collateral, and other relevant factors. If management’s assessment of these factors is ultimately inaccurate, the allowance may not be sufficient to cover actual future loan losses, which would adversely affect operating results. Management’s estimates are subjective, and their accuracy depends on the outcome of future events. Changes in economic, operating, and other conditions that are generally beyond the Bank’s control could cause actual loan losses to increase significantly. In addition, bank regulatory agencies, as an integral part of their supervisory functions, periodically review the adequacy of the allowance for loan losses. Regulatory agencies may require an increase in provision for loan losses or to recognize additional loan charge-offs when their judgment differs. Any of these events could have a material impact on operating results.

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Levels of classified loans and non-performing assets may increase in the future if economic conditions cause borrowers to default. Furthermore, the value of the collateral underlying a given loan, and the realizable value of such collateral in a foreclosure sale, may decline, making it less likely to realize a full recovery if a borrower defaults on a loan. Any increases in the level of non-performing assets, loan charge-offs or provision for loan losses, or the inability to realize the estimated net value of underlying collateral in the event of a loan default, could negatively affect the Bank’s business, financial condition, results of operations, and the trading price of the Company’s common shares.

If the Bank experiences greater credit losses than anticipated, its operating results would be adversely affected.

As a lender, the Bank is exposed to the risk that borrowers will be unable to repay their loans according to their terms and that any collateral securing the payment of their loans may not be sufficient to assure repayment. Credit losses are inherent in the business of making loans and could have a material adverse effect on operating results. Credit risk with respect to the real estate and construction loan portfolio will relate principally to the creditworthiness of borrowers and the value of the real estate serving as security for the repayment of loans. Credit risk with respect to the commercial and consumer loan portfolio will relate principally to the general creditworthiness of businesses and individuals within the local markets.

Management makes various assumptions and judgments about the collectability of its loan portfolio and provides an allowance for estimated loss losses based on a number of factors. Management believes the Bank’s allowance for loan losses is adequate. However, if assumptions or judgments are wrong, the allowance for loan losses may not be sufficient to cover actual loan losses. Management may have to increase the allowance in the future at the request of one of the Bank’s primary regulators, to adjust for changing conditions and assumptions, or as a result of any deterioration in the quality of the loan portfolio. The actual amount of future provisions for loan losses cannot be determined at this time and may vary from the amounts of past provisions.

A large percentage of the Bank ’ s loans are collateralized by real estate, and any prolonged weakness in the real estate market may result in losses and adversely affect profitability.

Approximately 72.4% of the Bank’s loan portfolio as of December 31, 2022, was comprised of commercial and residential loans collateralized by real estate. Adverse economic conditions could decrease demand for real estate and depress real estate values in the Company’s markets. Persistent weakness in the real estate market could significantly impair the value of loan collateral and the ability to sell the collateral upon foreclosure. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. If real estate values decline, it will become more likely that management would be required to increase the Bank’s allowance for loan losses. If during a period of depressed real estate values, management was required to liquidate the collateral securing a loan to the debt or to increase the allowance for loan , it could materially reduce the Bank’s and affect its financial condition.

The Bank offers real estate construction and development loans, which carry a higher degree of risk than other real estate loans.

Approximately 12.2% of the Company’s loan portfolio as of December 31, 2022 consisted of real estate construction and development loans, up from 7.5% at December 31, 2021 and 9.7% at December 31, 2020. These loans generally carry a higher degree of risk than long-term financing of existing properties because repayment depends on the ultimate completion of the project and permanent financing or sale of the property. If the Bank is forced to foreclose on a project prior to its completion, it may not be able to recover the entire unpaid portion of the loan or it may be required to fund additional money to complete the project, or hold the property for an indeterminate period of time. Any of these outcomes may result in losses and adversely affect profitability and financial condition.

The CECL accounting standard will result in a significant change in how the Company recognizes credit losses and may have a material impact on the Company ’ s financial condition or results of operations.

In June 2016, the FASB issued ASU, “Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments,” which replaces the current “incurred loss” model for recognizing credit losses with an “expected loss” model. Whereas the incurred loss model delays recognition of loss on financial instruments until it is probable a loss has occurred, the expected loss model will recognize a loss at the time the loan is first added to the balance sheet. As a result of this differing methodology, the Company expects adoption of the CECL model will materially affect the determination of the allowance and could require a significant increase to the allowance. Any material increase to the required level of loan loss allowance could adversely affect the Company’s business, financial condition, and results of operations. The CECL standard became for the Company on January 1, 2023. See Note 1, “New Accounting Standards ” for discussion regarding the standard and the estimated one-time cumulative-effect adjustment to the allowance and shareholders’ equity. Interagency guidance issued in December 2018 allows for a three-year phase-in of the cumulative-effect adjustment for regulatory capital reporting.

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The Bank may acquire or hold from time to time OREO properties, which could increase operating expenses and result in future losses to the Company.

While there were no OREO properties held by the Bank at December 31, 2022, the Bank may acquire and dispose of a significant amount of real estate as a result of foreclosure or by deed in lieu of foreclosure that is listed on the balance sheet as other real estate owned (“OREO”). An increase in the OREO portfolio increases the expenses incurred to manage and dispose of these properties, which sometimes includes funding construction required to facilitate sale.

Interest Rates, Asset-Liability Management, Liquidity, and Common Stock

Profitability is vulnerable to fluctuations in interest rates.

Changes in interest rates could harm financial condition or results of operations. The results of operations depend substantially on net interest income, the difference between interest earned on interest-earning assets (such as investments and loans) and interest paid on interest-bearing liabilities (such as deposits and borrowings). Interest rates are highly sensitive to many factors, including governmental monetary policies and domestic or international economic or political conditions. Factors beyond the Company’s control, such as inflation, recession, unemployment, and money supply may also affect interest rates. If, as a result of decreasing interest rates, interest-earning assets mature or reprice more quickly than interest-bearing liabilities in a given period, net interest income may decrease. Likewise, net interest income may decrease if interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a given period as a result of increasing interest rates.

Fixed-rate loans increase the exposure to interest rate risk in a rising rate environment because interest-bearing liabilities may be subject to repricing before assets become subject to repricing. Fixed rate investment securities are subject to fair value declines as interest rates rise. Adjustable-rate loans decrease the interest rate risk associated with rising interest rates but involve other risks, such as the inability of borrowers to make higher payments in an increasing interest rate environment. At the same time, for secured loans, the marketability of the underlying collateral may be adversely affected by higher interest rates. In a declining interest rate environment, there may be an increase in prepayments on loans as the borrowers refinance their loans at lower interest rates, which could reduce net interest income and harm results of operations.

The planned phasing out of the LIBOR as a financial benchmark presents risks to the financial instruments originated or held by the Company.

LIBOR is the reference rate used for many transactions, including lending and borrowing, as well as the derivatives that may be used to manage risk related to such transactions. Effective January 1, 2022, LIBOR ceased to exist as a published rate for one-week and two-month dollar settings and will cease for remaining U.S. dollar settings after June 30, 2023. The expected discontinuation of LIBOR could have a significant impact on the financial markets and market participants such as the Company. As of December 31, 2022, the Company had approximately $66.1 million in variable rate loans with interest rates tied to LIBOR for which a replacement index had not yet been identified, as well as certain investment securities and debt obligations tied to LIBOR, all of which have maturity dates beyond June 30, 2023.

All loan contracts extending beyond June 30, 2023 will need to be managed effectively to ensure appropriate benchmark rate replacements are provided for and adopted. The Adjustable Interest Rate (LIBOR) Act, enacted in 2022, provides a mechanism to replace LIBOR with a replacement benchmark rate selected by the Federal Reserve Board in existing contracts that do not provide for a clearly defined or practicable replacement benchmark rate. In December 2022, the Federal Reserve Board finalized regulations to designate the Secured Overnight Financing Rate (SOFR) as its selected replacement benchmark rate.

Failure to identify a replacement benchmark rate and/or update data processing systems could result in future interest rate changes not being correctly captured, which could result in interest rate risk not being mitigated as intended, or interest earned being miscalculated, which could adversely impact the Company’s business, financial condition, and results of operations. Uncertainty regarding the impact of LIBOR’s phasing out and the taking of discretionary actions or negotiations of fallback provisions could result in pricing volatility, adverse tax or accounting impacts, or additional compliance, legal and operational costs.

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If the Bank cannot obtain adequate funding, it may not be able to meet the cash flow requirements of its depositors and borrowers, or meet the operating cash needs of the Company.

The Company’s liquidity policies and limits are established by the Board of Directors of the Bank, with operating limits managed and monitored by the Asset Liability Committee (“ALCO”), based upon analyses of the ratio of loans to deposits and the percentage of assets funded with non-core or wholesale funding. The ALCO regularly monitors the overall liquidity position of the Bank and the Company to ensure that various alternative strategies exist to meet unanticipated events that could affect liquidity. Liquidity is the ability to meet cash flow needs on a timely basis at a reasonable cost. If the Company’s liquidity policies and strategies do not work as well as intended, the Bank may be unable to make loans and repay deposit liabilities as they become due or are demanded by customers. The ALCO follows established board approved policies and monitors guidelines to diversify the Company’s wholesale funding sources to avoid concentrations in any one-market source. Wholesale funding sources include Federal funds purchased, securities sold under repurchase agreements, brokered deposits, and Federal Home Loan Bank (“FHLB”) advances that are collateralized with mortgage-related assets.

The Bank maintains a portfolio of securities that can be used as a secondary source of liquidity. There are other available sources of liquidity, including additional collateralized borrowings such as FHLB advances, the issuance of debt securities, and the issuance of preferred or common shares in public or private transactions. If the Bank is unable to access any of these funding sources when needed, it might not be able to meet the needs of customers, which could adversely impact its financial condition, its results of operations, cash flows, and its level of regulatory-qualifying capital.

As a bank holding company, the Company depends on dividends and distributions paid to it by its banking subsidiary.

The Company is a legal entity separate and distinct from the Bank and its other subsidiaries. The principal source of cash flow, from which it would fund any dividends paid to shareholders, has historically been dividends the Company receives from the Bank. Regulations of the FDIC and the KDFI govern the ability of the Bank to pay dividends and other distributions to the Company, and regulations of the Federal Reserve govern the ability to pay dividends or make other distributions to shareholders. Based on these regulations, the Bank was eligible to pay $20.4 million of dividends at December 31, 2022. The Bank paid the Company $7.5 million of dividends during 2022. See the “Item 1. Business” “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities – Dividends.”

Deferred Tax Assets

The Company may not be able to realize the value of its deferred tax assets.

Due to losses in prior years, the Company has a net operating loss carry-forward of $13.8 million, credit carry-forwards of $208,000, and other net deferred tax assets of $7.3 million. In order to realize the benefit of these tax losses, credits, and deductions, the Company must generate substantial taxable income in future periods. Deferred tax assets are calculated using a federal corporate tax rate of 21% and a state corporate tax rate of 5%. Changes in tax laws and rates may affect deferred tax assets in the future. If higher federal corporate tax rates are enacted, net deferred tax assets would be increased commensurate with the rate increase. Federal net operating loss carry-forwards begin to expire in 2033 and state net operating loss carryforwards begin to expire in 2031. Additionally, should the Company need to raise additional capital by issuing new common shares or securities convertible into common shares, then depending on the number of common share equivalents issued, it could trigger a “change in control,” as defined by Section 382 of the Internal Revenue Code. Such an event could negatively impact or limit the ability to utilize net operating loss carry-forwards, credit carry-forwards, and other net deferred tax assets, and result in an of these deferred tax assets for financial reporting purposes.

Litigation

Risk related to legal proceedings.

From time to time, the Company is involved in judicial, regulatory, and arbitration proceedings concerning matters arising from the Company’s business activities and fiduciary responsibilities. The Company establishes reserves for legal claims when payments associated with the claims become probable and the costs can be reasonably estimated. The Company may still incur legal costs for a matter even if a reserve has not been established. In addition, the actual cost of resolving a legal claim may be substantially higher than any amounts reserved for that matter. The ultimate resolution of a pending or future legal proceeding, depending on the remedy sought and granted, could materially adversely affect results of operations and financial condition.

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Deposit Insurance Expense

FDIC deposit insurance premiums and assessments can impact non-interest expense.

The Bank’s deposits are insured by the FDIC up to legal limits and, accordingly, the Bank is subject to FDIC deposit insurance premiums and assessments. FDIC assessments for deposit insurance are based on the average total consolidated assets of the insured institution during the assessment period, less the average tangible equity of the institution during the assessment period. Any increase in assessment rates may adversely affect the Bank’s business, financial condition, or results of operations.

Competition, Management

The Bank faces strong competition from other financial institutions and financial service companies, which could adversely affect the results of operations and financial condition.

The Bank competes with other financial institutions in attracting deposits and making loans. The competition in attracting deposits comes principally from other commercial banks, credit unions, savings and loan associations, securities brokerage firms, insurance companies, money market funds, and other mutual funds. The competition in making loans comes principally from other commercial banks, credit unions, farm credit associations, savings and loan associations, mortgage banking firms, and consumer finance companies. In addition, competition for business in the Louisville and Lexington metropolitan areas has grown in recent years as changes in banking law have allowed banks to enter those markets by establishing new branches.

Competition in the banking industry may also limit the ability to attract and retain banking clients. The Bank maintains smaller staffs of associates and has fewer financial and other resources than larger institutions with which it competes. Financial institutions that have far greater resources and greater efficiencies than the Bank may have several marketplace advantages resulting from their ability to:

offer higher interest rates on deposits and lower interest rates on loans than the Bank can;

offer a broader range of services than the Bank does;

maintain more branch locations than the Bank does; and

mount extensive promotional and advertising campaigns.

In addition, banks and other financial institutions with larger capitalization and other financial intermediaries may not be subject to the same regulatory restrictions and may have larger lending limits. Some of the Company’s current commercial banking clients may seek alternative banking sources as they develop needs for credit facilities larger than the Bank can accommodate. If the Bank is unable to attract and retain customers, it may not be able to maintain growth and the results of operations and financial condition may otherwise be negatively impacted.

The Company depends on its senior management team, and the unexpected loss of one or more of the senior executives could impair relationships with customers and adversely affect business and financial results.

The Company’s success significantly depends on the services and performance of key management personnel. Future performance will depend on the ability to motivate and retain key officers. The Dodd-Frank Act, and the policies of bank regulatory agencies have placed restrictions on executive compensation practices. Such restrictions and standards may further impact the ability to compete for talent with other businesses that are not subject to the same limitations. The unexpected loss of the services of members of senior management or other key officers or the inability to attract additional qualified personnel as needed could materially harm its business.

Accounting Estimates, Internal Controls, Cybersecurity

Reported financial results depend on management ’ s selection of accounting methods and certain assumptions and estimates.

Accounting policies and assumptions are fundamental to the reported financial condition and results of operations. Management must exercise judgment in selecting and applying many of these accounting policies and methods so they comply with generally accepted accounting principles and reflect management’s judgment of the most appropriate manner in which to report the financial condition and results. In some cases, management must select the accounting policy or method to apply from two or more alternatives, any of which may be reasonable under the circumstances, yet may result in reporting materially different results than would have been reported under a different alternative.

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Certain accounting policies require management to make difficult, subjective, or complex judgments about matters that are uncertain. Materially different amounts could be reported under different conditions or using different assumptions or estimates. These accounting policies include the valuation of securities, allowance for loan losses, and valuation of net deferred income tax asset. Because of the uncertainty of estimates involved in these matters, the Company may be required, among other things, to recognize other-than-temporary impairment on securities, significantly increase the allowance for credit losses, sustain credit losses that are higher than the reserve provided, or permanently impair deferred tax assets.

While management continually monitors and improves the system of internal controls, data processing systems, and corporate wide processes and procedures, the Company may suffer losses from operational risk in the future.

Management maintains internal operational controls and has invested in technology to help process large volumes of transactions. However, the Company may not be able to continue processing at the same or higher levels of transactions. If systems of internal controls should fail to work as expected, if systems were to be used in an unauthorized manner, or if employees were to subvert the system of internal controls, significant losses could occur.

The Company processes large volumes of transactions on a daily basis exposing it to numerous types of operational risk, which could cause it to incur substantial losses. Operational risk resulting from inadequate or failed internal processes, people, and systems includes the risk of fraud by employees or persons outside of the Company, the execution of unauthorized transactions by employees, errors relating to transaction processing and systems, and breaches of the internal control system and compliance requirements. This risk of loss also includes potential legal actions that could arise as a result of the operational deficiency or as a result of noncompliance with applicable regulatory standards.

The Company establishes and maintains systems of internal operational controls that provide management with timely and accurate information about its level of operational risk. While not foolproof, these systems have been designed to manage operational risk at appropriate, cost effective levels. The Company has also established procedures that are designed to ensure policies relating to conduct, ethics and business practices are followed. Nevertheless, the Company experiences loss from operational risk from time to time, including the effects of operational errors, and these losses may be substantial.

Information systems may experience an interruption or security breach.

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, could disrupt the Bank’s businesses, result in the disclosure or misuse of confidential or proprietary information, damage its reputation, increase costs, and cause losses. As a financial institution, the Bank depends on its ability to process, record, and monitor a large number of customer transactions on a continuous basis. As customer, public and regulatory expectations regarding operational and information security have increased, operational systems and infrastructure must continue to be safeguarded and monitored for potential failures, disruptions, and breakdowns. Business, financial, accounting, data processing systems, or other operating systems and facilities may stop operating properly or become disabled or damaged as a result of a number of factors including events that are wholly or partially beyond the Bank’s control. For example, there could be sudden increases in customer transaction volume, electrical or telecommunications , natural such as earthquakes, tornadoes, and hurricanes; disease pandemics, events arising from local or larger scale political or social matters, including terrorist acts, and, as described below, cyber-attacks. Although the Bank has business continuity plans and other safeguards in place, its business operations may be affected by significant and widespread to its physical infrastructure or operating systems that support its businesses and customers.

Information security risks for financial institutions have generally increased in recent years in part because of the proliferation of new technologies, the use of the Internet and telecommunications technologies to conduct financial transactions, and the increased sophistication and activities of organized crime, hackers, terrorists, activists, and other external parties. As noted above, the Bank’s operations rely on the secure processing, transmission, and storage of confidential information in its computer systems and networks. In addition, to access the Bank’s products and services, its customers may use personal smartphones, tablet PC’s, and other mobile devices that are beyond its control systems. Although the Bank believes it has appropriate information security procedures and controls, its technologies, systems, networks, and its customers’ devices may become the target of cyber-attacks or information security breaches. These events could result in the unauthorized release, gathering, monitoring, misuse, loss, or destruction of the Bank’s customers’ confidential, proprietary, and other information or that of its customers, or otherwise disrupt the business operations of the Bank, its customers, or other third parties.

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Third parties with which the Bank does business or that facilitate its business activities could also be sources of operational and information security risk to the Bank, including from breakdowns or failures of their own systems or capacity constraints. Although to date the Bank has not experienced any material losses relating to cyber-attacks or other information security breaches, the Bank can give no assurance that it will not suffer such losses in the future. Risk and exposure to these matters remains heightened because of, among other things, the evolving nature of these threats and the prevalence of Internet and mobile banking. As cyber threats continue to evolve, the Bank may be required to expend significant additional resources to continue to modify or enhance its protective measures or to investigate and remediate any information security vulnerabilities. Disruptions or in the physical infrastructure or operating systems that support the Bank’s businesses and customers, or cyber-attacks or security of the networks, systems, or devices that the Bank’s customers use to access its products and services could result in customer , regulatory , or intervention, reputational , reimbursement or other compensation costs, and/or additional compliance costs, any of which could materially affect the Bank’s business, results of operations, or financial condition.

Bank Regulation

The Company operates in a highly regulated environment and, as a result, is subject to extensive regulation and supervision that could adversely affect financial performance and ability to implement growth and operating strategies.

The Company is subject to examination, supervision, and comprehensive regulation by federal and state regulatory agencies, as described under “Item 1 – Business-Supervision and Regulation.” Regulatory oversight of banks is primarily intended to protect depositors, the federal deposit insurance funds, and the banking system as a whole, and not shareholders. Compliance with these regulations is costly and may make it more difficult to operate profitably.

Federal and state banking laws and regulations govern numerous matters including the payment of dividends, bank acquisition and merger transactions, and the establishment of new banking offices. The Company must also meet specific regulatory capital requirements. Failure to comply with these laws, regulations, and policies or to maintain required capital could affect the ability to pay dividends on common shares and the implementation of strategic plans.

In addition, the laws and regulations applicable to banks could change at any time, which could significantly impact the Company’s business and profitability. For example, new legislation or regulation could limit the manner in which the Company may conduct its business, including its ability to attract deposits and make loans. Events that may not have a direct impact on us, such as the bankruptcy or insolvency of a prominent U.S. corporation, can cause legislators and banking regulators and other agencies such as the Consumer Financial Protection Bureau, the SEC, the Public Company Accounting Oversight Board, and various taxing authorities to respond by adopting and or proposing substantive revisions to laws, regulations, rules, standards, policies, and interpretations. The nature, extent, and timing of the adoption of significant new laws and regulations, or changes in or repeal of existing laws and regulations may have a material impact on the Company’s business and results of operations. Changes in regulation may cause the Company to devote substantial additional financial resources and management time to compliance, which may negatively affect operating results.

Changes in banking laws could have a material adverse effect.

The Bank is subject to changes in federal and state laws as well as changes in banking and credit regulations, and governmental economic and monetary policies. Management cannot predict whether any of these changes could adversely and materially affect us. The current regulatory environment for financial institutions entails significant potential increases in compliance requirements and associated costs. Federal and state banking regulators also possess broad powers to take supervisory actions as they deem appropriate. These supervisory actions may result in higher capital requirements, higher insurance premiums, and limitations on the Bank’s activities that could have a material adverse effect on its business and profitability.

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Management’s discussion and analysis of financial condition and results of operations analyzes the consolidated financial condition and results of operations of Limestone Bancorp, Inc. (the Company) and its wholly owned subsidiary, Limestone Bank, Inc. (the Bank). The Company is a Louisville, Kentucky-based bank holding company that operates banking offices in 14 Kentucky counties. 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 offices in Barren, Butler, Daviess, Edmonson, Green, Hardin, Hart, Ohio, and Warren Counties. The Bank also has offices in Lexington, the second largest city in the state, and Frankfort, the state capital. The Bank is a traditional community bank with a wide range of personal and business banking products and services.

Selected Consolidated Financial Data

As of and for the Years Ended December 31,

(Dollars in thousands except per share data)

Income Statement Data:

Interest income

Interest expense

Net interest income

Provision (negative provision) for loan losses

Non-interest income (1)

Non-interest expense (2)

Income before income taxes

Income tax expense (3)

Net income

Less:

Earnings allocated to participating securities

Net income attributable to common

Common Share Data:

Basic earnings per common share

Diluted earnings per common share

Cash dividends declared per common share

Book value per common share

Tangible book value per common share (4)

Balance Sheet Data (at period end):

Total assets

Debt obligations:

FHLB advances

Junior subordinated debentures

Subordinated capital notes

Senior debt

Average Balance Data:

Average assets

Average loans

Average deposits

Average FHLB advances

Average junior subordinated debentures

Average subordinated capital notes

Average senior debt

Average stockholders’ equity

In 2022, the Company recognized a $163,000 gain on sale of premises held for sale.

In 2021, the Company recognized a $191,000 gain on the sale of OREO and a $465,000 gain on the call of a corporate bond from the Company’s available for sale securities portfolio.

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On October 24, 2022, Peoples and the Company entered into the Merger Agreement. Merger expenses totaled $691,000, or $0.07 per common share after taxes.

On November 15, 2019, the Company completed a four branch acquisition. The purchase included $126.8 million in performing loans and $1.5 million in premises and equipment, as well as $131.8 million in customer deposits. Acquisition related costs totaled $775,000, or $0.08 per common share after taxes.

Effective January 1, 2021, the Commonwealth of Kentucky eliminated the bank franchise tax, which was previously reported as a non-interest expense, and implemented a state income tax at a statutory rate of 5%. State income tax was $1.0 million for 2022 and $939,000 for 2021. For 2020 and 2019, income tax expense benefitted $478,000 and $1.6 million, respectively, from the establishment of a net deferred tax asset related to a change in Kentucky tax law enacted during 2019.

Tangible book value per common share is a non-GAAP financial measure derived from GAAP based amounts. Tangible book value is calculated by excluding the balance of intangible assets from common stockholders’ equity. Tangible book value per common share is calculated by dividing tangible common equity by common shares outstanding, as compared to book value per common share, which is calculated by dividing common stockholders’ equity by common shares outstanding. Management believes this is consistent with bank regulatory agency treatment, which excludes tangible assets from the calculation of risk-based capital.

As of and for the Years Ended December 31,

Tangible Book Value Per Share

(in thousands, except share and per share data)

Common stockholder’s equity

Less: Goodwill

Less: Intangible assets

Tangible common equity

Shares outstanding

Tangible book value per common share

Book value per common share

The following discussion should be read in conjunction with the Company’s consolidated financial statements and accompanying notes and other schedules presented elsewhere in the report.

Overview

For the year ended December 31, 2022, the Company reported net income of $18.3 million compared with net income of $14.9 million for the year ended December 31, 2021 and net income of $9.0 million for the year ended December 31, 2020. Basic and diluted income per common share were $2.40 for the year ended December 31, 2022, compared with $1.96 for 2021, and $1.20 for 2020.

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

The following significant items are of note for the year ended December 31, 2022:

Average loans receivable increased approximately $113.8 million, or 11.9%, to $1.07 billion for the year ended December 31, 2022, compared with $958.5 million for the year ended December 31, 2021, as loan growth outpaced payoffs during 2022. SBA Paycheck Protection Program (“PPP”) loans averaged $294,000 and $15.5 million for the year ended December 31, 2022 and 2021, respectively.

Net interest margin increased 14 basis points to 3.62% for the year ended December 31, 2022, compared with 3.48% for the year ended December 31, 2021. The Federal Reserve increased the fed funds target by 425 basis points over its last seven meetings of 2022. As a result, the Bank’s fed funds sold, floating rate investment securities, loans with variable rate pricing features, and new loan originations benefitted from the upward movement in short-term rates during 2022.

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The yield on earning assets increased to 4.27% for the year ended December 31, 2022, compared to 3.92% for the year ended December 31, 2021. The yield on earning assets for the year ended December 31, 2021 was significantly impacted by $2.8 million in PPP fees, compared to $45,000 for the year ended December 31, 2022. During the year ended December 31, 2022, PPP fees represented approximately one basis point of earning asset yield and net interest margin, compared to 21 basis points for the year ended December 31, 2021. The reduction in PPP fee income was offset by an increase in interest revenue due to an increase in average loans between periods. The increase in average loans resulted in an increase in interest revenue volume of approximately $5.3 million for the year ended December 31, 2022, as well as an increase in interest revenue attributable to rates of $552,000 due primarily to the impact of the increase in interest rates on new and renewed loans and the upward repricing of variable rate loans.

The cost of interest-bearing liabilities increased to 0.86% in 2022 from 0.59% in 2021 as a result of increases in short-term interest rates during 2022.

Net loan recoveries were $1.4 million for 2022, compared to net loan charge-offs of $2.1 million for 2021, and net loan charge-offs of $333,000 for 2020. During the third quarter of 2022, the Bank received a payoff on a $2.0 million nonaccrual commercial real estate loan resulting in a recovery of $1.5 million.

A provision for loan losses of $80,000 was recorded in 2022, compared to a provision for loan losses of $1.2 million in 2021. The 2022 loan loss provisions were primarily attributable to growth trends within the portfolio, offset by a significant recovery during the third quarter and its impact on the historical loss percentages. The 2021 loan loss provisions were attributable to growth trends within the portfolio and net loan charge-offs impacting historical loss percentages during the period.

Deposits were $1.20 billion at December 31, 2022, compared with $1.21 billion at December 31, 2021. Certificate of deposit balances increased $24.2 million and interest checking accounts increased $26.9 million during the year. These increases were offset by a decrease of $38.9 million in money market accounts, a decrease of $14.9 million in savings accounts, and a $5.1 million decrease in non-interest bearing demand deposits.

The Company paid a $0.20 per common share in cash dividends to shareholders of record during 2022.

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

These items are discussed in further detail throughout this Item 7.

Application of Critical Accounting Policies

The Company’s accounting and reporting policies comply with GAAP and conform to general practices within the banking industry. Management believes the following significant accounting policies may involve a higher degree of management assumptions and judgments that could result in materially different amounts to be reported if conditions or underlying circumstances were to change.

Allowance for Loan Losses – The Bank maintains an allowance for loan losses believed to be sufficient to absorb probable incurred credit losses existing in the loan portfolio. The Board of Directors evaluates the adequacy of the allowance for loan losses on a quarterly basis. 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 also 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 and provision for loan , which could affect results.

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In June 2016, the FASB issued ASU, “Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments,” which replaces the current “incurred loss” model for recognizing credit losses with an “expected loss” model. Whereas the incurred loss model delays recognition of loss on financial instruments until it is probable a loss has occurred, the expected loss model will recognize a loss at the time the loan is first added to the balance sheet. The CECL standard became effective for the Company on January 1, 2023. Management continues to refine assumptions, analyze forecast scenarios, and stress test the volatility of the model. Additionally, management is finalizing various accounting processes, and related controls. As a result, the Company estimates a one-time cumulative adjustment to the allowance for credit of up to $2.0 million. This estimate and the ongoing impact of adopting CECL are dependent on various factors, including credit quality, macroeconomic forecasts and conditions, composition of the loan and securities portfolios, and other management judgments. The ultimate adjustment to record the impact of adoption may differ from the current estimate as the model is subject to further review and analysis by the Company’s management team. Interagency guidance issued in December 2018 allows for a three-year phase-in of the cumulative-effect adjustment for regulatory capital reporting.

Results of Operations

The following table summarizes components of income and expense and the change in those components for 2022 compared with 2021:

For the

Years Ended December 31,

Change from Prior Period

Amount

Percent

(dollars in thousands)

Gross interest income

Gross interest expense

Net interest income

Provision for loan losses

Non-interest income

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

Non-interest expense

Net income before taxes

Income tax expense

Net income

NM: Not Meaningful

Net income of $18.3 million for the year ended December 31, 2022 increased by $3.4 million from net income of $14.9 million for 2021. Net interest income increased $4.9 million for 2022 as a result of growth in the loan portfolio and increasing yields on earning assets, offset by $3.0 million increase in the cost of interest-bearing liabilities primarily due to recent increases in short-term interest rates. A provision for loan losses of $80,000 was recorded in 2022, compared to a $1.2 million provision for loan losses in 2021. The 2022 loan loss provisions were primarily attributable to growth trends within the portfolio, offset by a significant recovery during the third quarter and its impact on the historical loss percentages. The 2021 loan loss provisions were attributable to growth trends within the portfolio and net loan charge-offs impacting historical loss percentages during the period.

Non-interest income increased $438,000 during 2022. The increase was primarily due to an increase in service charges on deposit accounts of $519,000 and an increase in bank card interchange fees of $162,000, both of which were due to an increase in transaction volumes. Bank owned life insurance income increased $180,000 for the year ended December 31, 2022 due to additional policies being purchased in March 2022. Non-interest income for the year ended December 31, 2022 also included a $163,000 gain on sale of premises held for sale from the first quarter of 2022, while the year ended December 31, 2021 included a $191,000 gain on sale of OREO from the second quarter of 2021, as well as a $465,000 gain on the call of a corporate bond from the third quarter of 2021.

Non-interest expense increased $1.8 million during 2022. The increase was primarily due to an increase of $889,000 in salaries and benefits as a result of the inflationary impact on salary administration, increased health care utilization costs, and increased performance-based incentive compensation, merger expenses of $691,000 related to the pending Merger with Peoples as announced on October 24, 2022, and a $396,000 increase in other non-interest expense primarily related to losses associated with demand deposit charge-offs and fraudulent check and debit card activity during the period. These increases from the prior year were offset by a decrease in communications expense of $262,000 for 2022 as a result of changes in information technology infrastructure during the period.

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The following table summarizes components of income and expense and the change in those components for 2021 compared with 2020:

For the

Years Ended December 31,

Change from Prior Period

Amount

Percent

(dollars in thousands)

Gross interest income

Gross interest expense

Net interest income

Provision for loan losses

Non-interest income

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

Non-interest expense

Net income before taxes

Income tax expense

Net income

NM: Not Meaningful

Net income of $14.9 million for the year ended December 31, 2021 increased by $5.9 million from net income of $9.0 million for 2020. Net interest income increased $3.6 million for 2021 as a result of $1.7 million in increased PPP fee recognition connected to the forgiveness and payoff of PPP loans, partially offset by declining yields on earning assets, and a $4.5 million decrease in the cost of interest-bearing liabilities primarily due to downward repricing within the time deposit portfolio, and a reduction in the size of the time deposit portfolio. Provision for loan losses of $1.2 million was recorded in 2021, compared to a $4.4 million provision for loan losses in 2020. The 2021 loan loss provision was attributable to net loan charge-offs impacting historical loss percentages and growth trends within the portfolio during the year, while the provision for 2020 was largely attributable to the uncertainty surrounding the COVID-19 pandemic related economic and business disruptions.

Non-interest income increased $1.6 million during 2021. The increase was primarily due to an increase in bank card interchange fees of $740,000 as a result of an increase in debit card transactions, a $191,000 gain on the sale of OREO, and a $465,000 gain on the call of a corporate bond from the Bank’s available for sale securities portfolio.

Non-interest expense decreased $445,000 during 2021. The decrease was primarily attributable to a decrease of $1.1 million in deposit and state franchise tax expense 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 $381,000 attributable to moderate merit increases in compensation and performance-based incentive compensation partially offset in 2021 by year over year average FTE reductions. Additionally, deposit account related expense increased $268,000 due to an increase in debit card transactions and the related processing costs.

Income tax expense was $4.6 million and $1.6 million for the year ended December 31, 2021 and 2020, respectively. Effective January 1, 2021, the Commonwealth of Kentucky eliminated the bank franchise tax and implemented a state income tax at a statutory rate of 5%. State income tax expense was $939,000 for the year ended December 31, 2021, compared to a state income tax benefit of $478,000 for the year ended December 31, 2020 related to the establishment of a net deferred tax asset due to the tax law change.

Net Interest Income – Net interest income was $49.1 million for the year ended December 31, 2022, an increase of $4.9 million, or 11.0%, compared with $44.2 million for the same period in 2021. Net interest spread and margin were 3.41% and 3.62%, respectively, for 2022, compared with 3.33% and 3.48%, respectively, for 2021.

The Federal Reserve increased the fed funds target by 425 basis points over its last seven meetings of 2022. As a result, the Bank’s fed funds sold, floating rate investment securities, loans with variable rate pricing features, and new loan originations benefitted from the upward movement in short-term rates during 2022. The cost of interest-bearing liabilities were also impacted, although to a lesser extent.

The yield on earning assets increased to 4.27% for the year ended December 31, 2022, as compared to 3.92% for the year ended December 31, 2021 due to the rising interest rate environment. Average interest-earning assets increased $81.8 million during 2022 primarily attributable to an increase in loans and investment securities. Average loans increased approximately $113.8 million and average investment securities increased $20.2 million, while average lower yielding interest-bearing deposits in other financial institutions decreased $51.7 million during 2022. PPP loans averaged $294,000 and $15.5 million for the year ended December 31, 2022 and 2021, respectively. The increase in average loans resulted in an increase in interest revenue volume of approximately $5.3 million and an increase in interest revenue related to the increase in rates on new and renewed loans and the upward repricing of variable rate loans of $552,000. The increase in average investment securities also resulted in approximately $995,000 in additional income as compared to the prior year. Total interest income increased 15.8%, or $7.9 million, in 2022 compared to 2021.

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Loan fee income can meaningfully impact net interest income, loan yields, and net interest margin. The amount of loan fee income included in total interest income was $1.0 million and $4.3 million for the years ended December 31, 2022 and 2021, respectively. This represents eight basis points of yield on earning assets and net interest margin for the year ended December 31, 2022 as compared to 33 basis points for the year ended December 31, 2021. Loan fee income for 2022 included $45,000 in fees earned on PPP loans, compared to $2.8 million in 2021, which represents approximately one basis point and 21 basis points of earning asset yield and net interest margin for those years, respectively.

The cost of interest-bearing liabilities increased to 0.86% for the year ended December 31, 2022, as compared to 0.59% for the year ended December 31, 2021. The cost of interest-bearing liabilities was negatively impacted by the increases in short-term interest rates. Average interest-bearing liabilities increased by $57.7 million during 2022 primarily due to a $73.9 million increase in average money market accounts and $30.1 million increase in FHLB advances offset by a $48.4 million decrease in average certificates of deposits. Total interest expense increased by 53.4% to $8.7 million for the year ended December 31, 2022 as compared to $5.7 million for the year ended December 31, 2021. As of December 31, 2022, time deposits comprise $290.2 million of the Company’s liabilities with $233.0 million, or 80%, set to reprice or mature within one year of which, $69.3 million with a current average rate of 0.98% reprice or mature within the first quarter of 2023.

Net interest income was $44.2 million for the year ended December 31, 2021, an increase of $3.6 million, or 8.9%, compared with $40.6 million for the same period in 2020. Net interest spread and margin were 3.33% and 3.48%, respectively, for 2021, compared with 3.15% and 3.36%, respectively, for 2020.

The yield on earning assets decreased to 3.92% for the year ended December 31, 2021, as compared to 4.20% for the year ended December 31, 2020 due to the lower interest rate environment. Average interest-earning assets increased $67.4 million during 2021 primarily attributable to an increase in investment securities. Average loans decreased approximately $5.5 million during 2021. PPP loans averaged $15.5 million and $22.5 million for the year ended December 31, 2021 and 2020, respectively. Interest revenue in 2021 declined $390,000 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 eight quarters, as compared to 2020. Total interest income decreased 1.7%, or $838,000, in 2021 compared to 2020.

Loan fee income can meaningfully impact net interest income, loan yields, and net interest margin. The amount of loan fee income included in total interest income was $4.3 million and $2.1 million for the years ended December 31, 2021 and 2020, respectively. This represents 33 basis points of yield on earning assets and net interest margin for the year ended December 31, 2021 as compared to 18 basis points for the year ended December 31, 2020. Loan fee income for 2021 included $2.8 million in fees earned on PPP loans, compared to $1.1 million in 2020, which represents 21 basis points and 10 basis points of earning asset yield and net interest margin for those years, respectively.

The cost of interest-bearing liabilities decreased to 0.59% for the year ended December 31, 2021, as compared to 1.05% for the year ended December 31, 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 $4.1 million during 2021 primarily due to a $13.9 million decrease in FHLB advances. Total interest expense decreased by 43.9% to $5.7 million for the year ended December 31, 2021 as compared to $10.2 million for the year ended December 31, 2020. As of December 31, 2021, time deposits comprise $266.0 million of the Company’s liabilities with $161.9 million, or 61%, set to reprice or mature within one year of which, $55.0 million with a current average rate of 0.33% reprice or mature within the first quarter of 2022.

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Average Balance Sheets

The following table sets forth the average daily balances, the interest earned or paid on such amounts, and the weighted average yield on interest-earning assets and weighted average cost of interest-bearing liabilities for the periods indicated. Dividing income or expense by the average daily balance of assets or liabilities, respectively, derives such yields and costs for the periods presented.

For the Years Ended December 31,

Average

Balance

Interest

Earned/Paid

Average

Yield/Cost

Average

Balance

Interest

Earned/Paid

Average

Yield/Cost

(dollars in thousands)

ASSETS

Interest-earning assets:

Loans receivables (1)

Real estate

Commercial

Consumer

Agriculture

Other

U.S. Treasury and agencies

Mortgage-backed securities

Collateralized loan obligations

State and political subdivision securities (non-taxable)

State and political subdivision securities (taxable)

Corporate bonds

FHLB stock

Federal funds sold

Interest-bearing deposits in other financial institutions

Total interest-earning assets

Less: Allowance for loan losses

Non-interest-earning assets

Total assets

LIABILITIES AND STOCKHOLDERS ’ EQUITY

Interest-bearing liabilities

Certificates of deposit and other time deposits

Interest checking and money market deposits

Savings accounts

FHLB advances

Junior subordinated debentures

Subordinated capital notes

Senior debt

Total interest-bearing liabilities

Non-interest-bearing liabilities

Non-interest-bearing deposits

Other liabilities

Total liabilities

Stockholders’ equity

Total liabilities and stockholders ’ equity

Net interest income

Net interest spread

Net interest margin

Ratio of average interest-earning assets to average interest-bearing liabilities

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

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For the Years Ended December 31,

Average

Balance

Interest

Earned/Paid

Average

Yield/Cost

Average

Balance

Interest

Earned/Paid

Average

Yield/Cost

(dollars in thousands)

ASSETS

Interest-earning assets:

Loans receivables (1)

Real estate

Commercial

Consumer

Agriculture

Other

U.S. Treasury and agencies

Mortgage-backed securities

Collateralized loan obligations

State and political subdivision securities (non-taxable)

State and political subdivision securities (taxable)

Corporate bonds

FHLB stock

Federal funds sold

Interest-bearing deposits in other financial institutions

Total interest-earning assets

Less: Allowance for loan losses

Non-interest-earning assets

Total assets

LIABILITIES AND STOCKHOLDERS ’ EQUITY

Interest-bearing liabilities

Certificates of deposit and other time deposits

Interest checking and money market deposits

Savings accounts

FHLB advances

Junior subordinated debentures

Subordinated capital notes

Senior debt

Total interest-bearing liabilities

Non-interest-bearing liabilities

Non-interest-bearing deposits

Other liabilities

Total liabilities

Stockholders’ equity

Total liabilities and stockholders ’ equity

Net interest income

Net interest spread

Net interest margin

Ratio of average interest-earning assets to average interest-bearing liabilities

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

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Rate/Volume Analysis

The table below sets forth 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.

Year Ended December 31, 2022 vs. 2021

Year Ended December 31, 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

U.S. Treasury and agencies

Mortgage-backed securities

Collateralized loan obligations

State and political subdivision securities

Corporate bonds

FHLB stock

Federal funds sold

Interest-bearing deposits in other financial institutions

Total increase (decrease) in interest income

Interest-bearing liabilities:

Certificates of deposit and other time deposits

Interest checking and money market accounts

Savings accounts

FHLB advances

Junior subordinated debentures

Subordinated capital notes

Senior debt

Total increase (decrease) in interest expense

Increase (decrease) in net interest income

Non-interest Income – The following table presents for the periods indicated the major categories of non-interest income:

For the Years Ended

December 31,

(in thousands)

Service charges on deposit accounts

Bank card interchange fees

Income from bank owned life insurance

Gain on sale of other real estate owned

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

Gain on sale of premises held for sale

Other

Total non-interest income

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Non-interest Income Comparison – 2022 to 2021

Non-interest income increased by $438,000 for 2022 to $8.9 million compared with $8.4 million for the year ended December 31, 2021. The increase was primarily due to an increase in services charges on deposit accounts of $519,000 and an increase in bank card interchange fees of $162,000, both of which were due to an increase in transaction volumes. Bank owned life insurance income increased $180,000 for the year ended December 31, 2022 due to additional policies being purchased in March 2022. Non-interest income for the year ended December 31, 2022 also included a $163,000 gain on sale of premises held for sale from the first quarter of 2022, while the year ended December 31, 2021 included a $191,000 gain on sale of OREO from the second quarter of 2021, as well as a $465,000 gain on the call of a corporate bond from the third quarter of 2021.

Non-interest Income Comparison – 2021 to 2020

Non-interest income increased by $1.6 million for 2021 to $8.4 million compared with $6.8 million for the year ended December 31, 2020. This increase was primarily related to bank card interchange fees of $740,000 as a result of an increase in debit card transactions, a $191,000 gain on the sale of OREO, and a $465,000 gain on the call of a corporate bond from the Bank’s available for sale securities portfolio.

Non-interest Expense – The following table presents the major categories of non-interest expense:

For the Years Ended

December 31,

(in thousands)

Salary and employee benefits

Occupancy and equipment

Deposit account related expense

Data processing expense

FDIC insurance

Marketing expense

Deposit and state franchise tax

Professional fees

Communications

Insurance expense

Postage and delivery

Merger expenses

Other

Total non-interest expense

Non-interest Expense Comparison – 2022 to 2021

Non-interest expense increased $1.8 million, or 5.6%, to $33.8 million for the year ended December 31, 2022, compared with $32.0 million for the year ended December 31, 2021. The increase was primarily due to an increase of $889,000 in salaries and benefits as a result of the inflationary impact on salary administration, increased health care utilization costs, and increased performance-based incentive compensation, merger expenses of $691,000 related to the pending merger with Peoples, and a $396,000 increase in other non-interest expense primarily related to losses associated with demand deposit charge-offs and fraudulent check and debit card activity during the period. These increases from the prior year were offset by a decrease in communications expense of $262,000 for 2022 as a result of changes in information technology infrastructure during the period.

Non-interest Expense Comparison – 2021 to 2020

Non-interest expense for the year ended December 31, 2021 of $32.0 million represented a $445,000, or 1.4%, decrease from $32.4 million for 2020. The decrease in non-interest expense was primarily due to a $1.1 million decrease in deposit and state franchise tax expense 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 $381,000 attributable to moderate merit increases in compensation and performance-based incentive compensation partially offset in 2021 by year over year average FTE reductions. Additionally, deposit account related expense increased $268,000 due to an increase in debit card transactions.

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

(in thousands)

Federal statutory tax rate

Federal statutory rate times financial statement income

Effect of:

State income taxes

Tax-exempt interest income

Establish state deferred tax asset

Non-taxable life insurance income

Restricted stock vesting

Other, net

Total income tax expense

State income tax expense was $1.0 million for 2022, compared to $939,000 for 2021. For 2020, income tax expense benefitted $478,000 from the establishment of a net deferred tax assets related to a change in Kentucky tax law enacted during 2019. Effective January 1, 2021, the Commonwealth of Kentucky eliminated the bank franchise tax, which was previously recorded as non-interest expense, and implemented a state income tax at a statutory rate of 5%.

See Note 12, “Income Taxes”, to the financial statements for additional discussion of the Company’s income taxes.

Analysis of Financial Condition

Total assets at December 31, 2022 were $1.46 billion compared with $1.42 billion at December 31, 2021, an increase of $46.8 million or 3.3%. This increase was primarily attributable to an increase in net loans of $108.5 million, offset by a decrease in investment securities of $37.2 million, as well as $33.0 million decrease in cash and cash equivalents.

Total assets at December 31, 2021 were $1.42 billion compared with $1.31 billion at December 31, 2020, an increase of $103.4 million or 7.9%. This increase was primarily attributable to an increase in investment securities of $56.8 million, as well as $40.7 million in net loans.

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, collateralized loan obligations, corporate bonds, and obligations of states and political subdivisions. The investment portfolio decreased by $37.2 million, or 14.3%, to $223.4 million at December 31, 2022, compared with $260.7 million at December 31, 2021. The decrease was comprised primarily of $28.0 million in payment proceeds and $19.2 million in fair value declines attributable to the rising interest rate environment, partially offset by purchases of $10.6 million.

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

December 31, 2022

December 31, 2021

Amortized

Cost

Gross

Unrealized

Gains

Gross

Unrealized

Losses

Fair

Value

Amortized

Cost

Gross

Unrealized

Gains

Gross

Unrealized

Losses

Fair

Value

(dollars in thousands)

Securities available for sale

U.S. Government and federal agencies

Agency mortgage-backed: residential

Collateralized loan obligations

Corporate bonds

Total available for sale

Amortized

Cost

Gross

Unrecognized

Gains

Gross

Unrecognized

Losses

Fair

Value

Amortized

Cost

Gross

Unrecognized

Gains

Gross

Unrecognized

Losses

Fair

Value

Securities held to maturity

State and municipal

Total held to maturity

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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 with credit ratings ranging from AAA, AA, A, BBB, BB, B and an 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 December 31, 2022, $27.0 million and $19.0 million of the Bank’s CLOs were risk rated AA and A rated, respectively. None of the CLOs were subject to a ratings downgrade during the year ended December 31, 2022.

Stress testing was completed on each security in the CLO portfolio as of December 31, 2022. Each security in the portfolio passed, without dollar loss, a stress scenario characterized as severe, which assumed a ten percent per annum constant prepayment rate, a twelve percent per annum constant default rate for four years followed by a four percent rate thereafter, and a forty-five percent recovery rate on a one-year lag.

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

The Company evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, underlying credit quality of the issuer, and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer’s financial condition, the Company may consider whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, the sector or industry trends and cycles affecting the issuer, and the results of reviews of the issuer’s financial condition. As of December 31, 2022, management does not believe any securities in the portfolio with unrealized losses should be classified as other than temporarily impaired.

The following table sets forth the contractual maturities, carrying values and weighted-average yields for the Bank’s investment securities held at December 31, 2022:

Due Within

One Year

After One Year

But Within

Five Years

After Five Years

But Within

Ten Years

After Ten Years

Total

Amount

Yield

Amount

Yield

Amount

Yield

Amount

Yield

Amount

Yield

Available for sale

U.S. Government and federal agencies

Agency mortgage-backed: residential

Collateralized loan obligations

Corporate bonds

Total available for sale

Held to maturity

State and municipal

Total available for sale

Average yields in the table above were calculated on a tax equivalent basis. Mortgage-backed securities are securities that have been developed by pooling a number of real estate mortgages. These securities are issued by federal agencies such as Ginnie Mae, Fannie Mae and Freddie Mac, as well as non-agency company issuers. These securities are deemed to have high credit ratings, and minimum regular monthly cash flows of principal and interest. Cash flows from agency backed mortgage-backed securities are guaranteed by the issuing agencies.

Unlike U.S. Treasury and U.S. government agency securities, which have a lump sum payment at maturity, mortgage-backed securities provide cash flows from regular principal and interest payments and principal prepayments throughout the lives of the securities. Mortgage-backed securities that are purchased at a premium will generally return decreasing net yields as interest rates drop because home owners tend to refinance their mortgages. Thus, the premium paid must be amortized over a shorter period. Therefore, those securities purchased at a discount will obtain higher net yields in a decreasing interest rate environment. As interest rates rise, the opposite will generally be true. During a period of increasing interest rates, fixed rate mortgage-backed securities generally do not experience increasing prepayments of principal and, consequently, average life will not be shortened. When interest rates fall, prepayments will generally increase. Non-agency issuer mortgage-backed securities do not carry a government guarantee. Management limits purchases of these securities to bank qualified issues with high credit ratings. At this time, there are no holdings of this type in the portfolio. At December 31, 2022, 88.8% of the Bank’s agency mortgage-backed securities had contractual final maturities of more than ten years with a weighted maturity of 21.6 years.

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Loans Receivable – Loans receivable increased $110.0 million, or 11.0%, during the year ended December 31, 2022, to $1.10 billion. The Bank’s commercial and commercial real estate portfolios increased by an aggregate of $112.4 million, or 15.8%, during 2022 and comprised 74.0% of the total loan portfolio at December 31, 2022. The residential real estate and consumer portfolios decreased by an aggregate of $8.1 million, or 3.2%, during 2022 and comprised 22.3% of the total loan portfolio at December 31, 2022.

Loans receivable increased $39.8 million, or 4.1%, during the year ended December 31, 2021, to $1.0 billion. The Bank’s commercial and commercial real estate portfolios increased by an aggregate of $72.1 million, or 11.3%, during 2021 and comprised 70.9% of the total loan portfolio at December 31, 2021. The residential real estate and consumer portfolios decreased by an aggregate of $26.0 million, or 9.2%, during 2021 and comprised 25.5% of the total loan portfolio at December 31, 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 Bank’s portfolio and other than the categories noted, there is no concentration of loans in any industry exceeding 10% of total loans.

As of December 31,

Amount

Percent

Amount

Percent

(dollars in thousands)

Commercial (1)

Commercial Real Estate:

Construction

Farmland

Nonfarm nonresidential

Residential Real Estate:

Multi-family

1-4 Family

Consumer

Agriculture

Other

Total loans

Includes PPP loans of $141,000 and $1.2 million at December 31, 2022 and 2021, respectively.

Lending activities are subject to a variety of lending limits imposed by state and federal law. The Bank’s statutory secured legal lending limit to a single borrower or guarantor was approximately $48.7 million at December 31, 2022 as measured at 30% of the Bank’s unimpaired capital and surplus.

The Bank had 22 loan relationships each with aggregate extensions of credit in excess of $10.0 million at year end 2022 and 2021. The aggregate extension of credit to these relationships totaled $355.2 million and $310.7 million at year end 2022 and 2021, respectively. With respect to these large loan relationships, all 22 were classified as pass by the Bank’s internal loan review process at December 31, 2022 and 2021. At December 31, 2022, the largest relationship totaled $32.4 million and was secured by multiple income producing commercial real estate properties.

As of December 31, 2022, the Bank had $128.5 million of loan participations purchased from, and $41.5 million of loan participations sold to, other banks. As of December 31, 2021, the Bank had $85.2 million of loan participations purchased from, and $12.8 million of loan participations sold to, other banks.

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Loan Maturity Schedule – The following table sets forth at December 31, 2022, the dollar amount of loans, net of deferred loan fees, maturing in the loan portfolio based on their contractual terms to maturity:

As of December 31, 2022

Maturing

Within

One Year

Maturing

1 through

5 Years

Maturing

5 through

15 Years

Maturing

Over 15

Years

Total

Loans

(dollars in thousands)

Loans with fixed rates:

Commercial

Commercial Real Estate:

Construction

Farmland

Nonfarm nonresidential

Residential Real Estate:

Multi-family

1-4 Family

Consumer

Agriculture

Other

Total fixed rate loans

Loans with floating rates:

Commercial

Commercial Real Estate:

Construction

Farmland

Nonfarm nonresidential

Residential Real Estate:

Multi-family

1-4 Family

Consumer

Agriculture

Other

Total floating rate loans

Loan Portfolio by Risk Category – The Bank follows a loan grading program designed to evaluate the credit risk in the loan portfolio. Through this loan grading process, an internally classified watch list is maintained which helps management assess the overall quality of the loan portfolio and the adequacy of the allowance for loan losses. In establishing the appropriate risk rating for loans, management considers, among other factors, the borrower’s ability to repay, the borrower’s repayment history, the current delinquency status, the estimated value of the underlying collateral, and the capacity and willingness of a guarantor to satisfy the obligation. As a result of this process, loans are categorized as pass, watch, special mention, substandard or doubtful.

Loans categorized as “watch” show warning elements where the present status exhibits one or more deficiencies that require attention in the short-term or where pertinent ratios of the loan account have weakened warranting more frequent monitoring. These loans do not have all of the characteristics of a classified loan (substandard or doubtful), but show weakened elements as compared with those of a satisfactory credit.

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

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 that may jeopardize the repayment of the debt as contractually agreed. They are characterized by the distinct possibility the Bank will sustain some losses if the deficiencies are not corrected.

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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.

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

As of December 31,

(in thousands)

Pass

Watch

Special Mention

Substandard

Doubtful

Total

Loans receivable increased $110.0 million, or 11.0%, during the year ended December 31, 2022. Since December 31, 2021, the pass category increased approximately $111.4 million, the watch category increased approximately $7.3 million, and the substandard category decreased approximately $8.7 million. The increase in the watch category is primarily related to the downgrade of an $11.0 million commercial loan relationship. This downgrade was offset by $5.1 million in commercial loan payoffs during 2022. The $8.7 million decrease in loans classified as substandard was primarily driven by $8.2 million in principal payments received, $2.1 million in loans upgraded from substandard, and $462,000 in charge-offs, offset by $2.1 million in loans moved to substandard during 2022. These trends were considered during the evaluation of qualitative trends in the portfolio when establishing the general component of the allowance for loan losses.

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

As of December 31,

(in thousands)

Past Due Loans:

30-59 Days

60-89 Days

90 Days and Over

Total Loans Past Due 30-90+ Days

Nonaccrual Loans

Total Past Due and Nonaccrual Loans

The trend in delinquency levels is considered during the evaluation of qualitative trends in the portfolio when establishing the general component of the Bank’s allowance for loan losses.

Nonaccrual loans decreased $2.3 million from December 31, 2021 to December 31, 2022. This decrease was primarily driven by $2.9 million in paydowns, $245,000 in charge-offs, and $77,000 loans upgraded from non-accrual, offset by $924,000 in loans placed on non-accrual. The $2.9 million in paydowns of nonaccrual loans was driven by the payoff of a $2.0 million commercial real estate loan during the third quarter of 2022, which resulted in a recovery of $1.5 million. The $856,000 in nonaccrual loans at December 31, 2022 were generally secured by residential real estate loans. The $3.1 million in nonaccrual loans at December 31, 2021 were generally secured by commercial real estate loans. Management believes it has established adequate loan loss reserves for these credits.

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. TDRs are considered to be impaired loans, and the Bank has allocated reserves for these loans to reflect the present value of the concessionary terms granted to the borrower. If the loan is considered collateral dependent, it is reported net of allocated reserves, at the fair value of the collateral less cost to sell.

The Bank generally does not have a formal loan modification program. If a borrower is unable to make contractual payments, management reviews the particular circumstances of that borrower’s situation and determines 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 shortfalls 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.

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At December 31, 2022, the Bank had two restructured loans totaling $186,000 with borrowers who experienced deterioration in financial condition compared with three restructured loans totaling $405,000 at December 31, 2021. In general, these loans were granted interest rate reductions to provide cash flow relief to borrowers experiencing cash flow difficulties. At December 31, 2022 and December 31, 2021, the Bank had no restructured loans that had been granted principal payment deferrals until maturity. 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 commercial real estate properties or first liens on 1-4 residential properties. At December 31, 2022 and December 31, 2021, 72% and 84%, respectively, of the TDRs were performing according to their modified terms.

No TDR modifications occurred during the year ended December 31, 2022. There was one modification granted during 2021 that resulted in a loan being identified as a TDR. See “Note 4 – Loans,” to the financial statements for additional disclosure related to troubled debt restructuring.

Non-Performing Assets – Non-performing assets consist of certain restructured loans for which interest rate or other terms have been renegotiated, loans past due 90 days or more still on accrual, loans on which interest is no longer accrued, real estate acquired through foreclosure and repossessed assets. Loans, including impaired loans, are placed on nonaccrual status when they become past due 90 days or more as to principal or interest, unless they are adequately secured and in the process of collection. Loans are considered impaired if full principal or interest payments are not anticipated in accordance with the contractual loan terms. Impaired loans are carried at the present value of expected future cash flows discounted at the loan’s effective interest rate or at the fair value of the collateral less cost to sell if the loan is collateral dependent. Loans are reviewed on a regular basis and normal collection procedures are implemented when a borrower fails to make a required payment on a loan. If the on a mortgage loan exceeds 120 days and is not cured through normal collection procedures or an acceptable arrangement is not agreed to with the borrower, management institutes measures to remedy the , including commencing a action. Consumer loans generally are charged off when a loan is deemed and often before any available collateral has been disposed. Commercial business and real estate loan are handled on an individual basis, generally with the advice of legal counsel.

Interest income on loans is recognized on the accrual basis except for those loans placed on nonaccrual status. The accrual of interest on impaired loans is discontinued when management believes, after consideration of economic and business conditions and collection efforts, that the borrowers’ financial condition is such that collection of interest is doubtful, which typically occurs after the loan becomes 90 days delinquent. When interest accrual is discontinued, existing accrued interest is reversed and interest income is subsequently recognized only to the extent cash payments are received on well-secured loans.

Real estate acquired as a result of foreclosure or by deed in lieu of foreclosure is classified as real estate owned until such time as it is sold. New and used automobiles and other motor vehicles acquired as a result of foreclosure are classified as repossessed assets until they are sold. When such property is acquired it is recorded at its fair market value less cost to sell. Any write-down of the property at the time of acquisition is charged to the allowance for loan losses. Subsequent gains and losses are included in non-interest expense.

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The following table sets forth information with respect to non-performing assets as of the dates indicated:

As of December 31,

(dollars in thousands)

Loans on nonaccrual status

Troubled debt restructurings on accrual

Past due 90 days or more still on accrual

Total non-performing loans and TDRs on accrual

Real estate acquired through foreclosure

Other repossessed assets

Total non-performing assets and TDRs on accrual

Nonaccrual loans to total loans

Non-performing loans and TDRs on accrual to total loans

Non-performing assets and TDRs on accrual to total assets

Allowance for loan losses to nonaccrual loans

Allowance for non-performing loans

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

Interest income that would have been recorded if nonaccrual loans were on a current basis in accordance with their original terms was $265,000, $287,000, and $288,000 for the years ended December 31, 2022, 2021, and 2020, respectively. Nonperforming loans at December 31, 2022, were $989,000, or 0.09% of total loans, at December 31, 2022, and $3.5 million, or 0.35% of total loans, at December 31, 2021.

Allowance for Loan Losses and Provision for Loan Losses – The allowance for loan losses is established to provide for probable losses on loans that may not be fully repaid. It is based on management’s continuing review and evaluation of individual loans, loss experience, current economic conditions, risk characteristics of various categories of loans and such other factors that, in management’s judgment, require current recognition in estimating loan losses. Based on its assessment of the loan portfolio, management presents a quarterly review of the allowance for loan losses to the Bank’s Board of Directors, indicating any change in the allowance for loan losses since the last review and any recommendations as to adjustments in the allowance for loan losses. The allowance for loan losses is adjusted through charges to earnings in the form of a provision for loan losses. This assessment is an estimate and is inherently subjective as it requires estimates that are to significant revision as more information becomes available or as events change.

Management utilizes loan grading procedures that result in specific allowance allocations for the estimated risk of loss. For loans not individually evaluated, a general allowance allocation is computed using factors developed over time based on actual loss experience. The specific and general allocations plus consideration of qualitative factors represent management’s estimate of probable losses contained in the loan portfolio at the evaluation date. Although the allowance for loan losses is comprised of specific and general allocations, the entire allowance is available to absorb any credit losses.

A significant portion of the portfolio is comprised of loans secured by real estate. A decline in the value of the real estate serving as collateral for loans may impact the Bank’s ability to collect those loans. In general, management obtains updated appraisals on property securing the Bank’s loans when circumstances are warranted such as at the time of renewal or when market conditions have significantly changed. Management uses qualified licensed appraisers approved by the Company’s Board of Directors. These appraisers possess prerequisite certifications and knowledge of the local and regional marketplace.

General Reserve - A general reserve is maintained for each loan type in the loan portfolio. In determining the amount of the general reserve portion of the allowance for loan losses, management considers factors such as the Bank’s historical loan loss experience, the growth, composition and diversification of its loan portfolio, current delinquency levels, loan quality grades, the results of recent regulatory examinations, and general economic conditions. Based on these factors, management applies estimated loss percentages to the various categories of loans, not including any loan that has a specific allowance allocated to it.

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Specific Reserve - A loan is considered impaired when, based on current information, it is probable that the Bank will not receive all amounts due in accordance with the contractual terms of the loan agreement. Once a loan has been identified as impaired, management measures impairment in accordance with ASC 310-10, “ Impairment of a Loan. ” Generally, all loans identified as impaired are reviewed individually on a quarterly basis in order to determine whether a specific allowance is required. Additionally, specific reserves may be carried for accruing TDRs in compliance with restructured terms. When management’s measured value of the impaired loan is less than the recorded investment in the loan, the amount of the impairment is recorded as a specific reserve or charged-off if the loan is deemed collateral dependent. Loans for which specific reserves have been provided are excluded from the general reserve calculations described above.

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

As of December 31,

(dollars in thousands)

Balances at beginning of period

Loans charged-off:

Real estate

Commercial

Consumer

Agriculture

Other

Total charge-offs

Recoveries:

Real estate

Commercial

Consumer

Agriculture

Other

Total recoveries

Net charge-offs (recoveries)

Provision (negative provision) for loan losses

Balance at end of period

Allowance for loan losses to period-end loans

Net charge-offs (recoveries) to average loans

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

The loan loss reserve, as a percentage of total loans at December 31, 2022, was 1.17% compared to 1.15% at December 31, 2021. The allowance for loan losses to non-performing loans was 1,317.49% at December 31, 2022, compared with 332.88% at December 31, 2021.

A provision for loan losses of $80,000 was recorded for the year ended December 31, 2022, compared to a provision for loan losses of $1.2 million for 2021, and $4.4 million for 2020. The loan loss provision for the year ended December 31, 2022 was primarily attributable to growth trends within the portfolio, offset by a recovery of $1.5 million recognized during the third quarter and its impact on the historical loss percentages. The 2021 loan loss provisions were attributable to growth trends within the portfolio and net loan charge-offs impacting historical loss percentages during the periods.

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The following table depicts management’s allocation of the allowance for loan losses by loan type based on the factors previously discussed. Since these factors and management’s assumptions are subject to change, the allocation is not necessarily predictive of future portfolio performance. The allocation is made for analytical purposes and is not necessarily indicative of the categories in which future losses may occur. The total allowance is available to absorb losses from any segment of loans.

Allocation of Allowance for Credit Losses

As of December 31,

Amount of

Allowance

Percent of

Loans to Total

Loans

Amount of

Allowance

Percent of

Loans to Total

Loans

(dollars in thousands)

Commercial

Commercial Real Estate:

Construction

Farmland

Nonfarm nonresidential

Residential Real Estate:

Multi-family

1-4 Family

Consumer

Agriculture

Other

Total

Deposits – The Bank attracts both short-term and long-term deposits from the general public by offering a wide range of deposit accounts and interest rates.

The Bank primarily relies on its banking office network to attract and retain deposits in its local markets, as well as deposit listing services, brokered deposits, deposit gathering networks, and the online channel to attract both in and out-of-market deposits. Market interest rates and rates on deposit products offered by competing financial institutions can significantly affect the Bank’s ability to attract and retain deposits.

During 2022, total deposits decreased $7.9 million compared with 2021. The decrease in deposits for 2022 was primarily in money market and savings accounts, offset by increases in interest-bearing demand deposit accounts and certificate of deposits. At December 31, 2022, the Bank had $75.1 million in brokered deposits. The Bank had no brokered deposits as of December 31, 2021. During 2021, total deposits increased $89.1 million compared with 2020. The increase in deposits for 2021 was primarily in interest-bearing demand deposit account balances, as well as money market and non-interest demand deposit accounts.

The Bank continues to offer attractively priced deposit products along its product line to allow it to retain deposit customers and reduce interest rate risk during various rising and falling interest rate cycles. The Bank offers savings accounts, interest checking accounts, money market accounts and fixed rate certificates with varying maturities. The flow of deposits is influenced significantly by general economic conditions, changes in interest rates and competition. Management adjusts interest rates, maturity terms, service fees and withdrawal penalties on the Bank’s deposit products periodically. The variety of deposit products allows the Bank to compete more effectively in obtaining funds and to respond with more flexibility to the flow of funds away from depository institutions into outside investment alternatives. However, the ability to attract and maintain deposits at acceptable rates will continue to be significantly affected by market conditions.

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The following table sets forth the average daily balances and weighted average rates paid for deposits for the periods indicated:

For the Years Ended December 31,

Average

Balance

Average

Rate

Average

Balance

Average

Rate

Average

Balance

Average

Rate

(dollars in thousands)

Demand

Interest Checking

Money Market

Savings

Certificates of Deposit

Total Deposits

Weighted Average Rate

The following table shows at December 31, 2022 the amount of the Bank’s time deposits of $250,000 or more by time remaining until maturity:

Maturity Period

(in thousands)

Three months or less

Three months through six months

Six months through twelve months

Over twelve months

Total

The Bank maintains competitive pricing on its deposit products, which management believes allows it to retain a substantial percentage of the Bank’s customers when their time deposits mature.

Borrowing – Deposits are the primary source of funds for lending activities, investment activities, and for general business purposes. The Bank also uses borrowings from the FHLB of Cincinnati to supplement the pool of lendable funds, meet deposit withdrawal requirements and manage the terms of liabilities. FHLB borrowings are secured by the Bank’s stock in the FHLB, as well as the commercial real estate and first mortgage residential loans under a blanket lien arrangement. At December 31, 2022, the Bank had $70.0 million in outstanding borrowings from the FHLB and the capacity to increase borrowings by an additional $91.0 million. The FHLB of Cincinnati functions as a central reserve bank providing credit for member financial institutions. As a member, the Bank is required to own capital stock in the FHLB and is authorized to borrow on the security of such stock and certain of its home mortgages and other assets (principally, securities that are obligations of, or guaranteed by, the United States) provided that it meets certain standards related to creditworthiness.

The following table sets forth information about the Bank’s FHLB borrowings as of and for the periods indicated:

December 31,

(dollars in thousands)

Average balance outstanding

Maximum amount outstanding at any month-end during the period

End of period balance

Weighted average interest rate:

At end of period

During the period

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Junior Subordinated Debentures – At December 31, 2022, the Company had four issues of junior subordinated debentures outstanding totaling $21.0 million as shown in the table below.

Description

Liquidation

Amount

Trust

Preferred

Securities

Issuance Date

Interest Rate (1)

Junior

Subordinated

Debt and

Investment

in Trust

Maturity Date

(dollars in thousands)

Statutory Trust I

3-month LIBOR + 2.85%

Statutory Trust II

3-month LIBOR + 2.85%

Statutory Trust III

3-month LIBOR + 2.79%

Statutory Trust IV

3-month LIBOR + 1.67%

As of December 31, 2022, 3-month LIBOR was 4.77%.

The trust preferred securities are subject to mandatory redemption, in whole or in part, upon repayment of the subordinated debentures at maturity or their earlier redemption at the liquidation preference. The subordinated debentures are redeemable before the maturity date at the Company’s option at their principal amount plus accrued interest. At December 31, 2022, the Company is current on all interest payments.

The Federal Reserve Board rules allow trust preferred securities issued prior to May 19, 2010 to be included in Tier 1 capital, subject to quantitative and qualitative limits. Currently, no more than 25% of the Company’s Tier 1 capital can consist of trust preferred securities and qualifying perpetual preferred stock. To the extent the amount of the Company’s trust preferred securities exceeds the 25% limit, the excess would be includable in Tier 2 capital. As of December 31, 2022, all of the Company’s trust preferred securities were included in and comprised 14% of Tier 1 capital.

Each of the trusts issuing the trust preferred securities holds junior subordinated debentures issued with an original maturity of 30 years. In the last five years before the junior subordinated debentures mature, the associated trust preferred securities are excluded from Tier 1 capital and included in Tier 2 capital. In addition, the trust preferred securities during this five-year period are amortized out of Tier 2 capital by one-fifth each year and excluded from Tier 2 capital completely during the year before maturity.

Subordinated Capital Notes – The Company’s subordinated notes mature on July 31, 2029 with an optional prepayment date of July 31, 2025. 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.

Capital

Stockholders’ equity increased $2.9 million to $133.9 million at December 31, 2022, compared with $131.0 million at December 31, 2021. The increase was due primarily to current year net income of $18.3 million, offset by the other comprehensive loss for the year of $14.6 million attributable to the fair value decline in the available for sale investment portfolio driven by rising interest rates and changing credit spreads, and $1.5 million in dividends paid to common shareholders.

The following table shows the ratios of common equity Tier 1, Tier 1 capital, total capital to risk-adjusted assets, and Tier 1 leverage for the Bank at December 31, 2022:

Regulatory

Minimums

Well-Capitalized

Minimums

Basel III Plus Conservation Buffer

Limestone Bank

Common equity Tier 1 capital

Tier 1 capital

Total risk-based capital

Tier 1 leverage ratio

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

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

Liquidity and Capital Resource Management

Liquidity risk arises from the possibility the Company may not be able to satisfy current or future financial commitments, or may become unduly reliant on alternative funding sources. The objective of liquidity risk management is to ensure that the Company meets the cash flow requirements of depositors and borrowers, as well as operating cash needs, taking into account all on- and off-balance sheet funding demands. Liquidity risk management also involves ensuring that cash flow needs are met at a reasonable cost. Management maintains an investment and funds management policy, which identifies the primary sources of liquidity, establishes procedures for monitoring and measuring liquidity, and establishes minimum liquidity requirements in compliance with regulatory guidance. The Asset Liability Committee regularly monitors and reviews the Company’s liquidity position.

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

The Bank also borrows from the FHLB to supplement funding requirements. At December 31, 2022, the Bank had an unused borrowing capacity with the FHLB of $91.0 million. Advances are collateralized by commercial real estate and first mortgage residential loans under a blanket lien arrangement. 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 line 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. Additionally, the Bank may utilize brokered and wholesale deposits to supplement its funding strategy.

The Company uses cash on hand to service the subordinated capital notes, junior subordinated debentures, pay dividends to common shareholders, and to provide for operating cash flow needs. The Company’s primary source of funding to meet its obligations is dividends from the Bank. At December 31, 2022, the Bank was eligible to pay $20.4 million of dividends. The Bank paid the Company $7.5 million of dividends during 2022.

Under the terms of the Merger Agreement, the Company is precluded from issuing additional common equity, preferred equity, or debt to support cash flow needs and liquidity requirements.

Impact of Inflation and Changing Prices

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

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

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Material Cash Requirements and Obligations

The following table summarizes key obligations by maturity date or scheduled payment date and other commitments to make future payments as of December 31, 2022:

One year

or less

More than 1

year but less

than 3 years

3 years or

more but less

than 5 years

5 years or

Total

(dollars in thousands)

Time deposits

FHLB borrowing (1)

Operating leases

Junior subordinated debentures

Subordinated capital notes

Total

(1) Fixed rate borrowings with rates ranging from 4.02% to 4.38%, and maturing in 2023.

Off-Balance Sheet Arrangements

In the normal course of business, the Bank enters into various transactions, which, in accordance with GAAP, are not included in the Company’s consolidated balance sheets. The Bank enters into these transactions to meet the financing needs of its customers. These transactions include commitments to extend credit and standby letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the consolidated balance sheets.

The commitments associated with outstanding standby letters of credit and commitments to extend credit as of December 31, 2022 are summarized below. Since commitments associated with letters of credit and commitments to extend credit may expire unused, the amounts shown do not necessarily reflect the Bank’s actual future cash funding requirements:

One year

or less

More than 1

year but less

than 3 years

3 years or

more but less

than 5 years

5 years

or more

Total

(dollars in thousands)

Commitments to extend credit

Standby letters of credit

Total

Commitments to Extend Credit – The Bank enters into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes. Substantially all of the Bank’s commitments to extend credit are contingent upon borrowers maintaining specific credit standards at the time of loan funding. The Bank minimizes its exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures.

Standby Letters of Credit – Standby letters of credit are written conditional commitments the Bank issues to guarantee the performance of a borrower to a third party. If the borrower does not perform in accordance with the terms of the agreement with the third party, the Bank may be required to fund the commitment. The maximum potential amount of future payments the Bank could be required to make is represented by the contractual amount of the commitment. If the commitment is funded, the Bank would be entitled to seek recovery from the borrower. The Bank’s policies generally require that standby letter of credit arrangements be underwritten in a manner consistent with a loan of similar characteristics.

Risk Participation Agreements – In connection with the purchase of loan participations, the Bank has entered into risk participation agreements, which had notional amounts totaling $12.1 million at December 31, 2022 and 2021.

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Limestone Bancorp, Inc.

Annual report (10-K)

Tone shift by section

Language change vs prior 10-K

Language change vs prior 10-K

External resources

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Top insiders

All filings

Tone shift by section

Language change vs prior 10-K

Language change vs prior 10-K

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Risk Factors (Item 1A)

MD&A (Item 7)