07/30/2021 | Press release | Distributed by Public on 07/30/2021 16:41

Quarterly Report (SEC Filing - 10-Q)

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

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

Unaudited Consolidated Balance Sheets

Unaudited Consolidated Statements of Income

Unaudited Consolidated Statements of Comprehensive Income

Unaudited Consolidated Statement of Changes in Stockholders' Equity

Unaudited Consolidated Statements of Cash Flows

Notes to Unaudited Consolidated Financial Statements

LIMESTONE BANCORP, INC.

Unaudited Consolidated Balance Sheets

(dollars in thousands except share data)

See accompanying notes to unaudited consolidated financial statements.

LIMESTONE BANCORP, INC.

Unaudited Consolidated Statements of Income

(dollars in thousands, except per share data)

See accompanying notes to unaudited consolidated financial statements.

LIMESTONE BANCORP, INC.

Unaudited Consolidated Statements of Comprehensive Income

(in thousands)

See accompanying notes to unaudited consolidated financial statements.

LIMESTONE BANCORP, INC.

Unaudited Consolidated Statements of Changes in Stockholders' Equity

For Three and Six Months Ended June 30, 2021 and 2020

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

See accompanying notes to unaudited consolidated financial statements.

LIMESTONE BANCORP, INC.

Unaudited Consolidated Statements of Changes in Stockholders' Equity

For Three and Six Months Ended June 30, 2021 and 2020

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

See accompanying notes to unaudited consolidated financial statements.

LIMESTONE BANCORP, INC.

Unaudited Consolidated Statements of Cash Flows

For Six Months Ended June 30, 2021 and 2020

(dollars in thousands)

See accompanying notes to unaudited consolidated financial statements.

LIMESTONE BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

Note 1- Basis of Presentation and Summary of Significant Accounting Policies

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

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, the financial statements do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2021 are not necessarily indicative of the results that may be expected for the entire year. A description of other significant accounting policies is presented in the notes to the Consolidated Financial Statements for the year ended December 31, 2020 included in the Company's Annual Report on Form 10-K.

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

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

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

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

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

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

New Accounting Standards -In June 2016, the FASB issued ASU No.2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The final standard will change estimates for credit losses related to financial assets measured at amortized cost such as loans, held-to-maturity debt securities, and certain other contracts. For estimating credit losses, the FASB is replacing the incurred loss model with an expected loss model, which is referred to as the current expected credit loss (CECL) model. Under the CECL model, certain financial assets that are carried at amortized cost, such as loans held for investment and held-to-maturity debt securities, are required to be presented at the net amount expected to be collected. The measurement of expected credit losses is to be based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This measurement will take place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs significantly from the 'incurred loss' model required under current GAAP, which delays recognition until it is probable a loss has been incurred. The change could materially affect how the allowance for loan losses is determined. The impact of CECL model implementation is being evaluated, but it is expected that a one-time cumulative-effect adjustment to the allowance for loan losses will be recognized in retained earnings on the consolidated balance sheet as of the beginning of the first reporting period in which the new standard is effective, as is consistent with regulatory expectations set forth in interagency guidance. In December 2018, the OCC, The Board of Governors of the Federal Reserve System, and the FDIC approved a final rule to address changes to the credit loss accounting under GAAP, including banking organizations' implementation of CECL. The final rule provides banking organizations the option to phase in over a three-year period the day-one adverse effects on regulatory capital that may result from adoption of the new accounting standard. In October 2019, the FASB voted to delay implementation for smaller reporting companies, private companies, and not-for-profit entities. The Company currently qualifies as a smaller reporting company and, as such, will be required to implement CECL for fiscal year and interim periods beginning after December 15, 2022.

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

Note 2- Securities

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

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

		Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses			Fair Value
June 30, 2021
Available for sale
U.S. Government and federal agency		$	28,918			$	845			$	(3	)		$	29,760
Agency mortgage-backed: residential			79,146				2,121				(265	)			81,002
Collateralized loan obligations			40,185				-				(240	)			39,945
Corporate bonds			31,674				487				(714	)			31,447
Total available for sale		$	179,923			$	3,453			$	(1,222	)		$	182,154

		Amortized Cost			Gross Unrecognized Gains			Gross Unrecognized Losses			Fair Value
Held to maturity
State and municipal		$	46,717			$	217			$	(249	)		$	46,685
Total held to maturity		$	46,717			$	217			$	(249	)		$	46,685

December31, 2020		Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses			Fair Value
Available for sale
U.S. Government and federal agency		$	18,811			$	806			$	-			$	19,617
Agency mortgage-backed: residential			71,582				2,777				(26	)			74,333
Collateralized loan obligations			44,730				-				(1,578	)			43,152
State and municipal			34,759				1,296				-				36,055
Corporate bonds			31,635				472				(1,402	)			30,705
Total available for sale		$	201,517			$	5,351			$	(3,006	)		$	203,862

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

Sales and calls of securities were as follows:

		Three Months Ended June 30,			Six Months Ended June 30,
		2021			2020			2021			2020
			(in thousands)				(in thousands)
Proceeds		$	704			$	2,530			$	704			$	8,530
Gross gains			-				-				-				-
Gross losses			5				5				5				5

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

		June 30, 2021
		Amortized Cost			Fair Value
		(inthousands)
Maturity
Available for sale
Within one year		$	-			$	-
One to five years			3,590				3,768
Five to ten years			69,655				70,043
Beyond ten years			27,532				27,341
Agency mortgage-backed: residential			79,146				81,002
Total		$	179,923			$	182,154
Held to maturity
Within one year		$	4,828				4,830
One to five years			11,278			$	11,259
Five to ten years			1,925				1,933
Beyond ten years			28,686				28,663
Total		$	46,717			$	46,685

Securities pledged at June 30, 2021 and December 31, 2020 had carrying values of approximately $95.8 million and $81.4 million, respectively, and were pledged to secure public deposits.

At June 30, 2021 and December 31, 2020, the Bank held securities issued by the Commonwealth of Kentucky or Kentucky municipalities having a book value of $34.8 million and $23.0 million, respectively. At June 30, 2021 and December 31, 2020, there were no other holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders' equity.

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

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

The market value of CLOs may be affected by, among other things, changes in composition of the underlying loans, changes in the cash flows from the underlying loans, defaults and recoveries on the underlying loans, capital gains and losses on the underlying loans, prepayments on the underlying loans, and other conditions or economic factors. At June 30, 2021, $27.9 million, $9.5 million, and $2.5 million of the Bank's CLOs were AA, A, and BBB rated, respectively. None of the CLOs were subject to ratings downgrade during the six months ended June 30, 2021.

The corporate bond portfolio consists of 13 subordinated debt securities and one senior debt security of U.S. banks and bank holding companies with maturities ranging from 2024 to 2037. The securities are either initially fixed for five years converting to floating at an index over LIBOR, or SOFR, or floating at an index over LIBOR, or SOFR, from inception. Management regularly monitors the financial condition of these corporate issuers by reviewing their regulatory and public filings.

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

		Less than 12 Months			12 Months or More			Total
Description of Securities		Fair Value			Unrealized Loss			Fair Value			Unrealized Loss			Fair Value			Unrealized Loss
June 30, 2021
Available for sale
U.S. Government and federal agency		$	2,960			$	(3	)		$	-			$	-			$	2,960			$	(3	)
Agency mortgage-backed: residential			20,180				(258	)			905				(7	)			21,085				(265	)
Collateralized loan obligations			-				-				35,445				(240	)			35,445				(240	)
Corporate bonds			3,942				(58	)			10,626				(656	)			14,568				(714	)
Total temporarily impaired		$	27,082			$	(319	)		$	46,976			$	(903	)		$	74,058			$	(1,222	)

		Less than 12 Months			12 Months or More			Total
		Fair Value			Unrecognized Loss			Fair Value			Unrecognized Loss			Fair Value			Unrecognized Loss
Held to maturity
State and municipal			26,411				(249	)			-				-				26,411				(249	)
Total temporarily impaired		$	26,411			$	(249	)		$	-			$	-			$	26,411			$	(249	)

		Less than 12 Months			12 Months or More			Total
		Fair Value			Unrealized Loss			Fair Value			Unrealized Loss			Fair Value			Unrealized Loss
December 31, 2020
Available for sale
Agency mortgage-backed: residential		$	4,772			$	(26	)		$	-			$	-			$	4,772			$	(26	)
Collateralized loan obligations			8,794				(251	)			34,358				(1,327	)			43,152				(1,578	)
Corporate bonds			10,849				(1,402	)			-				-				10,849				(1,402	)
Total temporarily impaired		$	24,415			$	(1,679	)		$	34,358			$	(1,327	)		$	58,773			$	(3,006	)

Note 3- Loans

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

		June 30,			December 31,
		2021			2020
		(in thousands)
Commercial (1)		$	206,578			$	208,244
Commercial Real Estate:
Construction			78,659				92,916
Farmland			65,631				70,272
Nonfarm nonresidential			296,737				266,394
Residential Real Estate:
Multi-family			62,428				61,180
1-4 Family			168,215				188,955
Consumer			31,511				31,429
Agriculture			37,086				42,044
Other			580				647
Subtotal			947,425				962,081
Less: Allowance for loan losses			(12,637	)			(12,443	)
Loans, net		$	934,788			$	949,638

(1)	Includes SBA Paycheck Protection Program ('PPP') loans of $21.0 million and $20.3 million at June 30, 2021 and December 31, 2020, respectively.

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

		Commercial			Commercial Real Estate			Residential Real Estate			Consumer			Agriculture			Other			Total
		(in thousands)
June 30, 2021:
Beginning balance		$	2,480			$	7,705			$	1,781			$	334			$	452			$	3			$	12,755
Provision (negative provision)			(183	)			221				(153	)			68				47				-				-
Loans charged off			-				(129	)			(12	)			(32	)			(5	)			-				(178	)
Recoveries			7				2				30				15				6				-				60
Ending balance		$	2,304			$	7,799			$	1,646			$	385			$	500			$	3			$	12,637
June 30, 2020:
Beginning balance		$	2,025			$	4,212			$	1,909			$	593			$	409			$	2			$	9,150
Provision (negative provision)			504				210				189				134				65				(2	)			1,100
Loans charged off			(3	)			(28	)			(7	)			(152	)			(3	)			-				(193	)
Recoveries			6				100				55				6				1				3				171
Ending balance		$	2,532			$	4,494			$	2,146			$	581			$	472			$	3			$	10,228

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

		Commercial			Commercial Real Estate			Residential Real Estate			Consumer			Agriculture			Other			Total
		(in thousands)
June 30, 2021:
Beginning balance		$	2,529			$	7,050			$	1,899			$	361			$	600			$	4			$	12,443
Provision (negative provision)			(216	)			868				(279	)			41				(63	)			(1	)			350
Loans charged off			(19	)			(129	)			(12	)			(51	)			(44	)			-				(255	)
Recoveries			10				10				38				34				7				-				99
Ending balance		$	2,304			$	7,799			$	1,646			$	385			$	500			$	3			$	12,637
June 30, 2020:
Beginning balance		$	1,710			$	4,080			$	1,743			$	485			$	355			$	3			$	8,376
Provision (negative provision)			843				351				409				399				152				(4	)			2,150
Loans charged off			(32	)			(57	)			(82	)			(313	)			(44	)			-				(528	)
Recoveries			11				120				76				10				9				4				230
Ending balance		$	2,532			$	4,494			$	2,146			$	581			$	472			$	3			$	10,228

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

		Commercial			Commercial Real Estate			Residential Real Estate			Consumer			Agriculture			Other			Total
		(in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment		$	-			$	2,176			$	2			$	-			$	-			$	-			$	2,178
Collectively evaluated for impairment			2,304				5,623				1,644				385				500				3				10,459
Total ending allowance balance		$	2,304			$	7,799			$	1,646			$	385			$	500			$	3			$	12,637
Loans:
Loans individually evaluated for impairment		$	-			$	5,435			$	720			$	18			$	101			$	-			$	6,274
Loans collectively evaluated for impairment			206,578				435,592				229,923				31,493				36,985				580				941,151
Total ending loans balance		$	206,578			$	441,027			$	230,643			$	31,511			$	37,086			$	580			$	947,425

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

		Commercial			Commercial Real Estate			Residential Real Estate			Consumer			Agriculture			Other			Total
		(in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment		$	-			$	2,176			$	1			$	-			$	-			$	-			$	2,177
Collectively evaluated for impairment			2,529				4,874				1,898				361				600				4				10,266
Total ending allowance balance		$	2,529			$	7,050			$	1,899			$	361			$	600			$	4			$	12,443
Loans:
Loans individually evaluated for impairment		$	-			$	5,361			$	1,060			$	-			$	91			$	-			$	6,512
Loans collectively evaluated for impairment			208,244				424,221				249,075				31,429				41,953				647				955,569
Total ending loans balance		$	208,244			$	429,582			$	250,135			$	31,429			$	42,044			$	647			$	962,081

Impaired Loans

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

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

		As of June 30, 2021			Three Months Ended June 30, 2021			Six Months Ended June 30, 2021
		Unpaid Principal Balance			Recorded Investment			Allowance For Loan Losses Allocated			Average Recorded Investment			Interest Income Recognized			Average Recorded Investment			Interest Income Recognized
		(in thousands)
With No Related Allowance Recorded:
Commercial		$	307			$	-			$	-			$	-			$	-			$	-			$	-
Commercial real estate:
Construction			-				-				-				-				-				-				-
Farmland			783				592				-				644				-				581				-
Nonfarm nonresidential			1,296				487				-				512				13				524				27
Residential real estate:
Multi-family			-				-				-				-				-				-				-
1-4 Family			1,540				619				-				775				21				835				38
Consumer			278				18				-				22				1				15				1
Agriculture			440				101				-				102				-				98				-
Other			-				-				-				-				-				-				-
Subtotal			4,644				1,817				-				2,055				35				2,053				66
With An Allowance Recorded:
Commercial			-				-				-				-				-				-				-
Commercial real estate:
Construction			-				-				-				-				-				-				-
Farmland			-				-				-				-				-				-				-
Nonfarm nonresidential			6,464				4,356				2,176				4,356				114				4,356				227
Residential real estate:
Multi-family			-				-				-				-				-				-				-
1-4 Family			101				101				2				102				-				103				1
Consumer			-				-				-				-				-				-				-
Agriculture			-				-				-				-				-				-				-
Other			-				-				-				-				-				-				-
Subtotal			6,565				4,457				2,178				4,458				114				4,459				228
Total		$	11,209			$	6,274			$	2,178			$	6,513			$	149			$	6,512			$	294

		As of December 31, 2020			Three Months Ended June 30, 2020			Six Months Ended June 30, 2020
		Unpaid Principal Balance			Recorded Investment			Allowance For Loan Losses Allocated			Average Recorded Investment			Interest Income Recognized			Average Recorded Investment			Interest Income Recognized
		(in thousands)
With No Related Allowance Recorded:
Commercial		$	308			$	-			$	-			$	131			$	-			$	104			$	-
Commercial real estate:
Construction			-				-				-				-				-				-				-
Farmland			555				456				-				297				3				296				13
Nonfarm nonresidential			1,323				549				-				453				10				465				18
Residential real estate:
Multi-family			-				-				-				-				-				-				-
1-4 Family			1,883				954				-				856				51				819				54
Consumer			259				-				-				78				-				85				1
Agriculture			393				91				-				-				-				14				-
Other			-				-				-				-				-				-				-
Subtotal			4,721				2,050				-				1,815				64				1,783				86
With An Allowance Recorded:
Commercial			-				-				-				-				-				8				-
Commercial real estate:
Construction			-				-				-				-				-				-				-
Farmland			-				-				-				143				2				189				4
Nonfarm nonresidential			6,465				4,356				2,176				75				-				50				-
Residential real estate:
Multi-family			-				-				-				-				-				-				-
1-4 Family			106				106				1				74				1				98				3
Consumer			-				-				-				-				-				-				-
Agriculture			-				-				-				-				-				-				-
Other			-				-				-				-				-				-				-
Subtotal			6,571				4,462				2,177				292				3				345				7
Total		$	11,292			$	6,512			$	2,177			$	2,107			$	67			$	2,128			$	93

Cash basis income recognized on impaired loans for the three and six months ended June 30, 2021 was $28,000 and $52,000, respectively, compared to $54,000 and $68,000 for the three and six months ended June 30, 2020, respectively.

Troubled Debt Restructuring

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

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

		TDRs Performing to Modified Terms			TDRs Not Performing to Modified Terms			Total TDRs
		(in thousands)
June 30, 2021
Commercial Real Estate:
Nonfarm nonresidential		$	358			$	-			$	358
Residential Real Estate:
1-4 Family			32				69				101
Total TDRs		$	390			$	69			$	459

		TDRs Performing to Modified Terms			TDRs Not Performing to Modified Terms			Total TDRs
		(in thousands)
December 31, 2020
Commercial Real Estate:
Nonfarm nonresidential		$	374			$	-			$	374
Residential Real Estate:
1-4 Family			106				-				106
Total TDRs		$	480			$	-			$	480

At June 30, 2021 and December 31, 2020, 85% and 100%, respectively, of the Company's TDRs were performing according to their modified terms. The Company allocated $2,000 in reserves to borrowers whose loan terms have been modified in TDRs as of June 30, 2021 and December 31, 2020. The Company has no commitment to lend additional amounts as of June 30, 2021 and December 31, 2020 to borrowers with outstanding loans classified as TDRs. No TDR modifications occurred during the three and six months ended June 30, 2021 or June 30, 2020. During the three and six months ended June 30, 2021 and June 30, 2020, no TDRs defaulted on their restructured loan within the 12-month period following the loan modification. A default is considered to have occurred once the TDR is past due 90 days or more or it has been placed on nonaccrual.

Non-TDR Loan Modifications due to COVID-19

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

Short-term loan modifications totaled $4.7 million at June 30, 2021 and $15.3 million at December 31, 2020. Included in the $4.7 million of short-term modifications is one commercial real estate loan secured by a retail entertainment facility totaling $4.4 million, which remains subject to, and is performing in accordance with, a short-term COVID-19 modification. The loan is graded substandard, has been evaluated under ASC-310-10, and allocated a specific reserve of $2.2 million as of June 30, 2021 and December 31, 2020.

Past Due Loans

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

		30 - 59 Days Past Due			60 - 89 Days Past Due			90 Days And Over Past Due			Nonaccrual			Total Past Due And Nonaccrual
		(in thousands)
June 30, 2021
Commercial		$	25			$	55			$	-			$	-			$	80
Commercial Real Estate:
Construction			-				-				-				-				-
Farmland			53				106				-				593				752
Nonfarm nonresidential			-				24				-				130				154
Residential Real Estate:
Multi-family			-				-				-				-				-
1-4 Family			94				56				-				688				838
Consumer			7				11				-				18				36
Agriculture			2				-				-				101				103
Other			-				-				-				-				-
Total		$	181			$	252			$	-			$	1,530			$	1,963

		30 - 59 Days Past Due			60 - 89 Days Past Due			90 Days And Over Past Due			Nonaccrual			Total Past Due And Nonaccrual
		(in thousands)
December 31, 2020
Commercial		$	20			$	-			$	-			$	-			$	20
Commercial Real Estate:
Construction			-				-				-				-				-
Farmland			325				53				-				456				834
Nonfarm nonresidential			-				26				-				175				201
Residential Real Estate:
Multi-family			-				-				-				-				-
1-4 Family			1,110				217				-				954				2,281
Consumer			59				49				-				-				108
Agriculture			23				27				-				91				141
Other			-				-				-				-				-
Total		$	1,537			$	372			$	-			$	1,676			$	3,585

Credit Quality Indicators

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

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

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

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

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

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

		Pass			Watch			Special Mention			Substandard			Doubtful			Total
		(in thousands)
June 30, 2021
Commercial		$	199,914			$	149			$	-			$	6,515			$	-			$	206,578
Commercial Real Estate:
Construction			78,659				-				-				-				-				78,659
Farmland			62,584				1,900				-				1,147				-				65,631
Nonfarm nonresidential			288,362				923				-				7,452				-				296,737
Residential Real Estate:
Multi-family			52,000				10,428				-				-				-				62,428
1-4 Family			163,261				2,454				-				2,500				-				168,215
Consumer			31,468				3				-				40				-				31,511
Agriculture			36,925				31				-				130				-				37,086
Other			580				-				-				-				-				580
Total		$	913,753			$	15,888			$	-			$	17,784			$	-			$	947,425

		Pass			Watch			Special Mention			Substandard			Doubtful			Total
			(in thousands)
December 31, 2020
Commercial		$	201,240			$	192			$	-			$	6,812			$	-			$	208,244
Commercial Real Estate:
Construction			92,916				-				-				-				-				92,916
Farmland			65,556				3,714				-				1,002				-				70,272
Nonfarm nonresidential			258,665				1,605				-				6,124				-				266,394
Residential Real Estate:
Multi-family			50,732				10,448				-				-				-				61,180
1-4 Family			183,379				2,831				-				2,745				-				188,955
Consumer			31,387				3				-				39				-				31,429
Agriculture			41,503				86				-				455				-				42,044
Other			647				-				-				-				-				647
Total		$	926,025			$	18,879			$	-			$	17,177			$	-			$	962,081

Note 4- Leases

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

In determining the present value of lease payments, the Bank uses the implicit lease rate when readily determinable. As most of the Bank's leases do not provide an implicit rate, the incremental borrowing rate based on the information available at commencement date is used. The incremental borrowing rate is the rate of interest that the Bank estimates it would pay to borrow on a collateralized basis over a similar term in an amount equal to the lease payments in a similar economic environment. The weighted average discount rate for the leases was 4.19% as of June 30, 2021.

Total rental expense was $86,000 and $248,000, respectively, for the three and six months ended June 30, 2021, compared to $136,000 and $256,000, respectively, for the three and six months ended June 30, 2020. The right-of-use asset, included in premises and equipment, and lease liability, included in other liabilities, was $5.5 million as of June 30, 2021 and $2.5 million as of December 31, 2020.

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

		June 30, 2021
July - December 2021		$	219
2022			363
2023			366
2024			365
2025			342
Thereafter			7,471
Total minimum lease payments			9,126
Discount effect of cash flows			(3,591	)
Present value of lease liabilities		$	5,535

At June 30, 2021, the Company has one additional lease for a new branch office that has yet to commence. The right of use asset and lease liability for the lease yet to commence is estimated to be approximately $2.2 million and is expected to be recorded in the fourth quarter of 2021.

Note 5- Other Real Estate Owned

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

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

		June 30, 2021			December 31, 2020
		(in thousands)
Commercial Real Estate:
Construction, land development, and other land		$	-			$	1,765
		$	-			$	1,765

Residential loans secured by 1-4 family residential properties in the process of foreclosure totaled $100,000 and $35,000 at June 30, 2021 and December 31, 2020, respectively.

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

		For the Six Months Ended June 30,
		2021			2020
		(in thousands)
OREO Activity
OREO as of January 1		$	1,765			$	3,225
Real estate acquired			-				-
Valuation adjustment write-downs			-				-
Net gain on sale			191				-
Proceeds from sales of properties			(1,956	)			(1,600	)
OREO as of June 30		$	-			$	1,625

Expenses related to OREO include:

		Three Months Ended June 30,			Six Months Ended June 30,
		2021			2020			2021			2020
		(in thousands)			(in thousands)
Valuation adjustment write-downs		$	-			$	-			$	-			$	-
Operating expense			2				22				13				38
Total		$	2			$	22			$	13			$	38

OREO expenses are reported in other non-interest expense.

Note 6- Goodwill and Intangible Assets

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

		June 30, 2021			December 31, 2020
		Gross Carrying Amount			Accumulated Amortization			Gross Carrying Amount			Accumulated Amortization
Goodwill		$	6,252			$	-			$	6,252			$	-
Core deposit intangibles			2,500				383				2,500				256
Outstanding, ending		$	8,752			$	383			$	8,752			$	256

The Company has $6.3 million of goodwill related to a 2019 branch acquisition transaction. Goodwill represents the excess of the total purchase price paid over the fair value of the identifiable assets acquired, net of the fair value of the liabilities assumed. Goodwill is not amortized but is evaluated for impairment on an annual basis or whenever events or changes in circumstances may indicate the carrying value of goodwill exceeds fair value and may not be recoverable. The Company engaged an independent third-party expert to perform a quantitative assessment as of November 30, 2020 to determine if it was more likely than not that the fair value of the reporting unit exceeded its carrying value, including goodwill. The assessment indicated that the fair value of the reporting unit exceeded its carrying value, resulting in no impairment. Goodwill is the Company's sole intangible asset with an indefinite life.

The Company also has a core deposit intangible asset, which is amortized over the weighted average estimated life of the related deposits and is not estimated to have a significant residual value. Total amortization was $64,000 and $128,000 for the three and six months ended June 30, 2021, respectively, compared to $64,000 and $128,000 for the three and six months ended June 30, 2020, respectively.

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

		June 30, 2021
July 2021 - December 2021		$	128
2022			256
2023			256
2024			256
2025			256
Thereafter			965
		$	2,117

Note 7- Deposits

The following table details deposits by category:

		June 30, 2021			December 31, 2020
		(in thousands)
Non-interest bearing		$	267,059			$	243,022
Interest checking			216,344				190,625
Money market			191,773				175,785
Savings			160,257				142,623
Certificates of deposit			303,668				367,552
Total		$	1,139,101			$	1,119,607

Time deposits of $250,000 or more were $41.3 million and $50.7 million at June 30, 2021 and December 31, 2020, respectively.

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

Year 1		$	191,121
Year 2			48,044
Year 3			29,193
Year 4			13,533
Year 5			21,192
Thereafter			585
		$	303,668

Note 8- Advances from the Federal Home Loan Bank

Advances from the Federal Home Loan Bank were as follows:

		June 30,			December 31,
		2021			2020
		(in thousands)
Short term advances		$	-			$	623
Long term advances (fixed rate 0.77%) maturing February 2030			20,000				20,000
Total advances from the Federal Home Loan Bank		$	20,000			$	20,623

FHLB advances had a weighted-average rate of 0.77% at June 30, 2021 and 0.75% at December 31, 2020. Each advance is payable per terms on agreement, with a prepayment penalty. No prepayment penalties were incurred during 2021 or 2020. The $20.0 million long term advance is callable quarterly at the FHLB's option. The advances were collateralized by approximately $118.2 million and $133.7 million of first mortgage loans, under a blanket lien arrangement at June 30, 2021 and December 31, 2020, respectively, and $21.0 million and $20.3 million of loans originated under the SBA Payment Protection Plan at June 30, 2021 and December 31, 2020, respectively. At June 30, 2021, the Bank's additional borrowing capacity with the FHLB was $88.6 million.

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

		Advances
Year 1		$	-
Year 2			-
Year 3			-
Year 4			-
Year 5			-
Thereafter			20,000
		$	20,000

Note 9- Borrowings

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

A summary of the junior subordinated debentures is as follows:

Description		Issuance Date		Interest Rate (1)		Junior Subordinated Debt Owed To Trust		Maturity Date (2)
Statutory Trust I		2/13/2004		3-month LIBOR + 2.85%		$	3,000,000		2/13/2034
Statutory Trust II		2/13/2004		3-month LIBOR + 2.85%			5,000,000		2/13/2034
Statutory Trust III		4/15/2004		3-month LIBOR + 2.79%			3,000,000		4/15/2034
Statutory Trust IV		12/14/2006		3-month LIBOR + 1.67%			10,000,000		3/01/2037
						$	21,000,000

(1)	As of June 30, 2021, the 3-month LIBOR was 0.15%.

(2)	The debentures are callable at the Company's option at their principal amount plus accrued interest.

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

Note 10- Fair Values Measurement

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

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

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

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

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

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

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

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

Management routinely applies internal discounts to the value of appraisals used in the fair value evaluation of impaired loans. The deductions to the appraisal take into account changing business factors and market conditions, as well as potential value impairment in cases where the appraisal date predates a likely change in market conditions. These deductions range from 10% for routine real estate collateral to 25% for real estate that is determined to have a thin trading market or to be specialized collateral. This is in addition to estimated discounts for cost to sell of six to ten percent.

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

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

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

						Fair Value Measurements at June 30, 2021 Using
						(in thousands)
						Quoted Prices In							Significant
						Active Markets for			Significant Other			Unobservable
		Carrying			Identical Assets			Observable Inputs			Inputs
Description		Value			(Level 1)			(Level 2)			(Level 3)
Available for sale securities
U.S. Government and federal agency		$	29,760			$	-			$	29,760			$	-
Agency mortgage-backed: residential			81,002				-				81,002				-
Collateralized loan obligations			39,945				-				37,464				2,481
Corporate bonds			31,447				-				18,771				12,676
Total		$	182,154			$	-			$	166,997			$	15,157

						Fair Value Measurements at December 31, 2020 Using
						(in thousands)
Description		Carrying Value			Quoted Prices In Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Available for sale securities
U.S. Government and federal agency		$	19,617			$	-			$	19,617			$	-
Agency mortgage-backed: residential			74,333				-				74,333				-
Collateralized loan obligations			43,152				-				40,764				2,388
State and municipal			36,055				-				36,055				-
Corporate bonds			30,705				-				18,789				11,916
Total		$	203,862			$	-			$	189,558			$	14,304

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

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

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

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

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

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

		Fair Value		Valuation Technique(s)		Unobservable Input(s)		Range (Weighted Average)
		(in thousands)
Collateralized loan obligations		$	2,481		Discounted cash flow		Constant prepayment rate			0%
							Additional asset defaults			1%		(1%)
							Expected asset recoveries			49%		(49%)
Corporate bonds		$	12,676		Discounted cash flow		Constant prepayment rate			0%
							Spread to benchmark yield		108%	-	350%	(293%)
							Indicative broker bid		76%	-	104%	(85%)

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

		Fair Value		Valuation Technique(s)		Unobservable Input(s)		Range (Weighted Average)
		(in thousands)
Collateralized loan obligations		$	2,388		Discounted cash flow		Constant prepayment rate			0%
							Additional asset defaults			2%		(2%)
							Expected asset recoveries			49%		(49%)
Corporate bonds		$	11,916		Discounted cash flow		Constant prepayment rate			0%
							Spread to benchmark yield		322%	-	497%	(381%)
							Indicative broker bid		72%	-	107%	(80%)

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

						Fair Value Measurements at June 30, 2021 Using
						(in thousands)
Description		Carrying Value			Quoted Prices In Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Impaired loans:
Commercial real estate:
Nonfarm nonresidential		$	2,180			$	-			$	-			$	2,180
Residential real estate:
1-4 Family			99				-				-				99

						Fair Value Measurements at December 31, 2020 Using
						(in thousands)
Description		Carrying Value			Quoted Prices In Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Impaired loans:
Commercial real estate:
Nonfarm nonresidential		$	2,180			$	-			$	-			$	2,180
Residential real estate:
1-4 Family			105				-				-				105

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $4.5 million at June 30, 2021 with a valuation allowance of $2.2 million, resulting in no provision for loan losses for the three months ended June 30, 2021 and $1,000 provision for loan losses for the six months ended June 30, 2021, respectively. Impaired loans had a carrying amount of $367,000 at June 30, 2020 with a valuation allowance of $25,000, resulting in $5,000 and no additional provision for loan losses for the three and six months ended June 30, 2020, respectively. At December 31, 2020, impaired loans had a carrying amount of $4.5 million, with a valuation allowance of $2.2 million.

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

						Fair Value Measurements at June 30, 2021 Using
		Carrying Amount			Level 1			Level 2			Level 3			Total
		(in thousands)
Financial assets
Cash and cash equivalents		$	85,120			$	85,120			$	-			$	-			$	85,120
Securities available for sale			182,154				-				166,997				15,157				182,154
Securities held to maturity			46,717				-				46,685				-				46,685
Federal Home Loan Bank stock			5,449				N/A				N/A				N/A				N/A
Loans, net			934,788				-				-				931,949				931,949
Accrued interest receivable			4,063				-				968				3,095				4,063
Financial liabilities
Deposits		$	1,139,101			$	267,059			$	873,488			$	-			$	1,140,547
Federal Home Loan Bank advances			20,000				-				20,100				-				20,100
Junior subordinated debentures			21,000				-				-				18,578				18,578
Subordinated capital notes			25,000				-				-				26,289				26,289
Accrued interest payable			770				-				144				626				770

						Fair Value Measurements at December 31, 2020 Using
		Carrying Amount			Level 1			Level 2			Level 3			Total
		(in thousands)
Financial assets
Cash and cash equivalents		$	67,693			$	67,693			$	-			$	-			$	67,693
Securities available for sale			203,862				-				189,558				14,304				203,862
Federal Home Loan Bank stock			5,887				N/A				N/A				N/A				N/A
Loans, net			949,638				-				-				941,330				941,330
Accrued interest receivable			4,444				-				925				3,519				4,444
Financial liabilities
Deposits		$	1,119,607			$	243,022			$	878,309			$	-			$	1,121,331
Federal Home Loan Bank advances			20,623				-				20,665				-				20,665
Junior subordinated debentures			21,000				-				-				16,194				16,194
Subordinated capital notes			25,000				-				-				25,207				25,207
Accrued interest payable			859				-				231				628				859

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

Note 11- Income Taxes

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

		June 30,			December 31,
		2021			2020
		(in thousands)
Deferred tax assets:
Net operating loss carry-forward		$	20,869			$	22,012
Allowance for loan losses			3,153				3,104
OREO write-down			-				914
Net assets from acquisitions			-				72
New market tax credit carry-forward			208				208
Nonaccrual loan interest			330				315
Accrued expenses			136				131
Lease liability			1,381				618
Other			346				332
			26,423				27,706
Deferred tax liabilities:
FHLB stock dividends			442				478
Fixed assets			74				71
Deferred loan costs			190				172
Net unrealized gain on securities			784				585
Lease right-of-use assets			1,381				618
Net assets from acquisitions			18				-
Other			82				68
			2,971				1,992
Net deferred tax asset		$	23,452			$	25,714

At June 30, 2021, the Company had net federal operating loss carryforwards of $93.1 million, which will begin to expire in 2032, and state net operating loss carryforwards of $33.5 million, which begin to expire in 2025.

The Company does nothave any beginning and ending unrecognized tax benefits. The Company does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next twelve months. There were no interest and penalties recorded in the income statement or accrued for the three or six months ended June 30, 2021 or June 30, 2020 related to unrecognized tax benefits.

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

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

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

The Company and its subsidiaries are subject to U.S. federal income tax and the Company is subject to income tax in the Commonwealth of Kentucky. The Company is no longer subject to examination by taxing authorities for years before 2017.

Note 12- Stock Plans and Stock Based Compensation

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

The fair value of the 2021 unvested shares issued was $1.5 million, or $13.52 per weighted-average share. The Company recorded $152,000 and $301,000 of stock-based compensation to salaries for the three and six months ended June 30, 2021, respectively, and $104,000 and $210,000 for the three and six months ended June 30, 2020, respectively. Management expects substantially all of the unvested shares outstanding at the end of the period to vest according to the vesting schedule. A deferred tax benefit of $38,000 and $75,000 was recognized related to this expense during the three and six months ended June 30, 2021, respectively, and $22,000 and $44,000 for the three and six months ended June 30, 2020, respectively.

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

		Six Months Ended			Twelve Months Ended
		June 30, 2021			December 31, 2020
						Weighted							Weighted
						Average							Average
						Grant							Grant
		Shares			Price			Shares			Price
Outstanding, beginning			47,438			$	15.34				57,774			$	13.35
Granted			110,024				13.52				34,858				15.33
Vested			(23,728	)			14.96				(43,836	)			12.69
Forfeited			(399	)			14.14				(1,358	)			15.95
Outstanding, ending			133,335			$	13.91				47,438			$	15.34

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

July 2021 - December 2021		$	427
2022			396
2023			279
2024			137
2025			130
Thereafter			266

Note 13- Earnings per Share

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

		Three Months Ended			Six Months Ended
		June 30,			June 30,
		2021			2020			2021			2020
		(in thousands, except share and per share data)
Net income		$	3,901			$	1,982			$	7,123			$	3,822
Less:
Earnings allocated to unvested shares			69				15				98				30
Net income available to common shareholders, basic and diluted		$	3,832			$	1,967			$	7,025			$	3,792
Basic
Weighted average common shares including unvested common shares outstanding			7,597,202				7,488,173				7,586,267				7,485,028
Less:
Weighted average unvested common shares			133,455				57,804				104,782				57,794
Weighted average common shares outstanding			7,463,747				7,430,369				7,481,485				7,427,234
Basic and diluted income per common share		$	0.51			$	0.26			$	0.94			$	0.51

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

Note 14- Regulatory Capital Matters

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

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

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

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

		Actual			Minimum Requirement for Capital Adequacy Purposes			Minimum Requirement to be Well Capitalized Under Prompt Corrective Action Provisions
		Amount			Ratio			Amount			Ratio			Amount			Ratio
As of June 30, 2021:
Total risk-based capital (to risk- weighted assets)		$	153,078				14.11	%		$	86,792				8.00	%		$	108,491				10.00	%
Total common equity Tier 1 risk-based capital (to risk-weighted assets)			140,441				12.95				48,821				4.50				70,519				6.50
Tier 1 capital (to risk-weighted assets)			140,441				12.95				65,094				6.00				86,792				8.00
Tier 1 capital (to average assets)			140,441				10.55				53,231				4.00				66,539				5.00

		Actual			Minimum Requirement for Capital Adequacy Purposes			Minimum Requirement to be Well Capitalized Under Prompt Corrective Action Provisions
		Amount			Ratio			Amount			Ratio			Amount			Ratio
As of December 31, 2020:
Total risk-based capital (to risk- weighted assets)		$	142,449				13.20	%		$	86,302				8.00	%		$	107,878				10.00	%
Total common equity Tier 1 risk-based capital (to risk-weighted assets)			130,006				12.05				48,545				4.50				70,120				6.50
Tier 1 capital (to risk-weighted assets)			130,006				12.05				64,727				6.00				86,302				8.00
Tier 1 capital (to average assets)			130,006				10.21				50,908				4.00				63,636				5.00

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

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

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

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

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

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

		June 30, 2021			December 31, 2020
		Fixed Rate			Variable Rate			Fixed Rate			Variable Rate
		(in thousands)
Commitments to make loans		$	49,966			$	15,106			$	20,990			$	17,466
Unused lines of credit			7,566				146,072				5,964				144,790
Standby letters of credit			613				349				175				1,342

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

In connection with the purchase of loan participations, the Bank entered into risk participation agreements, which had notional amounts totaling $26.6 million at June 30, 2021 and December 31, 2020. The risk participation agreements are not designated against specific assets or liabilities under ASC 815, Derivatives and Hedging, and, therefore, do not qualify for hedge accounting. The derivatives are recorded in other liabilities on the balance sheet at fair value and changes in fair value of both the borrower and the offsetting swap agreements are recorded (and essentially offset) in non-interest income. The fair value of the derivative instruments incorporates a consideration of credit risk in accordance with ASC 820, resulting in some volatility in earnings each period. At June 30, 2021 and December 31, 2020, the fair value of the risk participation agreements were $126,000 and $188,000, respectively.

In the normal course of business, the Company and its subsidiaries have been named, from time to time, as defendants in various legal actions. Certain of the actual or threatened legal actions may include claims for substantial compensatory and/or punitive damages or claims for indeterminate amounts of damages. After discussion with legal counsel, management does not believe these legal actions or proceedings will have a material adverse effect on the consolidated financial position or results of operation of the Company.

Note 16- Revenue from Contracts with Customers

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

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

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

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

Other Non-interest Income: Other non-interest income includes revenue from several sources that are within the scope of ASC 606, including title insurance commissions, income from secondary market loan sales, and other transaction-based revenue that is individually immaterial. Other non-interest income included approximately $145,000 and $298,000 of revenue for the three and six months ended June 30, 2021, respectively, within the scope of ASC 606. Other non-interest income included approximately $129,000 and $285,000 of revenue for the three and six months ended June 30, 2020, respectively, within the scope of ASC 606. The remaining other non-interest income for the three and six months is excluded from the scope of ASC 606.

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

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

Preliminary Note Concerning Forward-Looking Statements

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

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

●

the impact and duration of the novel coronavirus disease 2019 ('COVID-19') pandemic and national, state and local emergency conditions the pandemic has produced;

●

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

●

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

●

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

●

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

●

the results of regulatory examinations;

●

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

●

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

●

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

●

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

●

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

●

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

●

future acquisitions, integrations and performance of acquired businesses;

●

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

●

Other risks and uncertainties reported from time to time in the Company's filings with the Securities and Exchange Commission ('SEC'), including those identified in Part I Item 1A 'Risk Factors' of the Company's Annual Report on Form 10-K for the year ended December 31, 2020.

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

Overview

Organized in 1988, Limestone Bancorp, Inc. (the Company) is a bank holding company headquartered in Louisville, Kentucky. The Company's common stock is traded on Nasdaq's Capital Market under the symbol LMST. The Company operates Limestone Bank, Inc. (the Bank), the twelfth largest bank domiciled in the Commonwealth of Kentucky based on total assets. The Bank operates banking offices in 14 counties in Kentucky. The Bank's markets include metropolitan Louisville in Jefferson County and the surrounding counties of Bullitt and Henry. The Bank serves south central, southern, and western Kentucky from banking centers in Barren, Butler, Daviess, Edmonson, Green, Hardin, Hart, Ohio, and Warren counties. The Bank also has banking centers in Lexington, Kentucky, the second largest city in the state, and Frankfort, Kentucky, the state capital. The Bank is a traditional community bank with a wide range of personal and business banking products and services. As of June 30, 2021, the Company had total assets of $1.34 billion, total loans of $947.4 million, total deposits of $1.14 billion and stockholders' equity of $124.0 million.

The Company reported net income of $3.9 million and $7.1 million for the three and six months ended June 30, 2021, compared with net income of $2.0 million and $3.8 million for the same periods of 2020. Income tax expense was $1.2 million and $2.2 million for the second quarter of 2021 and for the first six months of 2021, respectively, compared to income tax expense of $393,000 and $754,000 for the second quarter of 2020 and for the first six months of 2020, respectively. Effective January 1, 2021, the state of Kentucky eliminated the bank franchise tax, which was previously recorded as a non-interest expense, and implemented a state income tax at a statutory rate of 5%. State income tax expense was $235,000 and $449,000 for the second quarter of 2021 and for the first six months of 2021, respectively, compared to a state income tax benefit of $79,000 and $151,000 for the second quarter of 2020 and for the first six months of 2020, which was related to the establishment of a net deferred tax asset due to the tax law change.

Highlights for the six months ended June 30, 2021 are as follows:

●

Average loans receivable decreased approximately $629,000, or 0.1%, to $963.1 million for the six months ended June 30, 2021, compared with $963.8 million for the first six months of 2020. The first six months of 2021 included loan originations under the SBA Paycheck Protection Program ('PPP') of $23.5 million, compared to $42.0 million in the first six months of 2020. The PPP program loans began funding in the second quarter of 2020. PPP loan balances total $21.0 million at June 30, 2021, compared to $20.3 million at December 31, 2020, and $41.9 million at June 30, 2020.

●

Net interest margin increased 17 basis points to 3.49% in the first six months of 2021 compared with 3.32% in the first six months of 2020. The yield on earning assets decreased to 3.98% for the first six months of 2021, compared to 4.35% for the first six months of 2020. The yield on earning assets in the first six months of 2021 was negatively impacted by lower interest rates on the Bank's fed funds, certain floating rate investment securities, loans with variable rate pricing features, and new loans originated in the lower interest rate environment, including PPP loans which carry a rate of 1.0%. The negative impact of lower rates was offset by $1.1 million in fees earned on PPP loans during the first six months of 2021, compared to $179,000 during the first six months of 2020. PPP fees during the first six months of 2021 represented 18 basis points, compared to three basis points of earning asset yield and net interest margin for the first six months of 2020. The cost of interest-bearing liabilities decreased from 1.28% in the first six months of 2020 to 0.64% in the first six months of 2021 as a result of decreases in short-term interest rates during 2020 and continued improvement in deposit mix.

●

No provision for loan losses and a $350,000 provision for loan losses was recorded in the second quarter and first six months of 2021, respectively, compared to $1.1 million and $2.2 million in the second quarter and the first six months of 2020, respectively. The 2021 loan loss provision was attributable to the net loan charge-offs and trends within the portfolio during the period, while the 2020 provisions were largely attributable to the uncertainty surrounding the COVID-19 pandemic related economic and business disruptions. At June 30, 2021, the allowance for loan loss remained elevated in relation to recent historical levels due to the continued uncertainty surrounding the COVID-19 pandemic despite declining loan balances and improved credit trends. Net loan charge-offs were $156,000 for the first six months of 2021, compared to net loan charge-offs of $298,000 for the first six months of 2020.

●

Loans past due 30-59 days decreased from $1.5 million at December 31, 2020 to $181,000 at June 30, 2021, and loans past due 60-89 days decreased from $372,000 at December 31, 2020 to $252,000 at June 30, 2021. Total loans past due and nonaccrual loans decreased to $2.0 million at June 30, 2021, from $3.6 million at December 31, 2020.

●

Deposits were $1.14 billion at June 30, 2021, compared with $1.12 billion at December 31, 2020. Certificate of deposit balances decreased $63.9 million during the first six months of 2021 to $303.7 million at June 30, 2021, from $367.6 million at December 31, 2020 due to liquidity management considerations and planned reduction in higher cost deposits. Interest checking accounts increased $25.7 million, non-interest bearing accounts increased $24.0 million, money market increased $16.0 million, and savings accounts increased $17.6 during the first six months of 2021 compared with December 31, 2020.

Application of Critical Accounting Policies

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

Results of Operations

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

		For the Three Months			Change from
		Ended June 30,			Prior Period
		2021			2020			Amount			Percent
		(dollars in thousands)
Gross interest income		$	12,376			$	12,786			$	(410	)			(3.2	)%
Gross interest expense			1,462				2,676				(1,214	)			(45.4	)
Net interest income			10,914				10,110				804				8.0
Provision for loan losses			-				1,100				(1,100	)			(100.0	)
Non-interest income			2,135				1,601				534				33.4
Non-interest expense			7,954				8,236				(282	)			(3.4	)
Net income before taxes			5,095				2,375				2,720				114.5
Income tax expense			1,194				393				801				203.8
Net income			3,901				1,982				1,919				96.8

Net income for the three months ended June 30, 2021 totaled $3.9 million, compared with $2.0 million for the comparable period of 2020. Net interest income increased $804,000 from the 2020 second quarter as a result of a decrease in the cost of interest-bearing liabilities due primarily to downward repricing within the time deposit portfolio, as well as a reduction in the size of the time deposit portfolio. No provision for loan losses expense was recorded in the second quarter of 2021, as compared to $1.1 million in the second quarter of 2020. The 2020 provision for loan losses was largely attributable to the uncertainty surrounding the COVID-19 pandemic related economic and business disruptions. Non-interest income increased $534,000 from $1.6 million in the second quarter of 2020 to $2.1 million for the second quarter of 2021 primarily related to an increase in bank card interchange fees of $210,000 as a result of an increase in debit card transactions, and a $191,000 gain on the sale of OREO. Non-interest expense decreased $282,000 from $8.2 million in the second quarter of 2020 to $8.0 million in the second quarter of 2021 primarily due to a decrease in deposit and state franchise tax expense of $270,000, as a result of the elimination of the Kentucky bank franchise tax discussed below.

Net income before taxes was $5.1 million for the second quarter of 2021, compared with $2.4 million for the second quarter of 2020. Income tax expense was $1.2 million for the second quarter of 2021, compared with $393,000 for the second quarter of 2020. Effective January 1, 2021, the state of Kentucky eliminated the bank franchise tax and implemented a state income tax at a statutory rate of 5%. State income tax expense was $235,000 for the second quarter of 2021, compared to a state income tax benefit of $79,000 for the second quarter of 2020 related to the establishment of a net deferred tax asset due to the tax law change.

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

		For the Six Months			Change from
		Ended June 30,			Prior Period
		2021			2020			Amount			Percent
		(dollars in thousands)
Gross interest income		$	24,626			$	26,053			$	(1,427	)			(5.5	)%
Gross interest expense			3,032				6,181				(3,149	)			(50.9	)
Net interest income			21,594				19,872				1,722				8.7
Provision for loan losses			350				2,150				(1,800	)			(83.7	)
Non-interest income			4,019				3,325				694				20.9
Non-interest expense			15,938				16,471				(533	)			(3.2	)
Net income before taxes			9,325				4,576				4,749				103.8
Income tax expense			2,202				754				1,448				192.0
Net income			7,123				3,822				3,301				86.4

Net income for the six months ended June 30, 2020 totaled $7.1 million, compared with net income of $3.8 million for the comparable period of 2020. Net interest income increased $1.7 million from the first six months of 2020 as a result of a decrease in the cost of interest-bearing liabilities due primarily to downward repricing within the time deposit portfolio, as well as a reduction in the size of the time deposit portfolio. Provision for loan loss expense of $350,000 was recorded in the first six months of 2021, as compared to $2.2 million provision for loan loss expense in the first six months of 2020. The 2021 provision was primarily in response to the level of net loan charge-offs and trends during the first six months of the year, while the provision for 2020 was largely attributable to the uncertainty surrounding the COVID-19 pandemic related economic and business disruptions. At June 30, 2021, the allowance for loan loss remained elevated in relation to recent historical levels due to the continued uncertainty surrounding the COVID-19 pandemic despite declining loan balances and improved credit trends.Non-interest income increased by $694,000 to $4.0 million from $3.3 million in the first six months of 2020 primarily due to an increase in bank card interchange fees of $420,000 and a $191,000 gain on the sale of OREO. Non-interest expense decreased from $16.5 million in the first six months of 2020 to $15.9 million in the first six months of 2021 primarily due to a decrease of $540,000 in deposit and state franchise tax expense.

Net income before taxes was $9.3 million for the first six months of 2021, compared with $4.6 million for the first six months of 2020. Income tax expense was $2.2 million for the first six months of 2021, compared with $754,000 for the first six months of 2020. Effective January 1, 2021, the state of Kentucky eliminated the bank franchise tax and implemented a state income tax at a statutory rate of 5%. State income tax expense was $449,000 for the first six months of 2021, compared to a state income tax benefit of $151,000 for the first six months of 2020 related to the establishment of a net deferred tax asset due to the tax law change.

Net Interest Income - Net interest income was $10.9 million for the three months ended June 30, 2021, an increase of $804,000, or 8.0%, compared with $10.1 million for the same period in 2020. Net interest spread and margin were 3.30% and 3.45%, respectively, for the second quarter of 2021, compared with 3.10% and 3.33%, respectively, for the second quarter of 2020.

The interest rate environment remained challenging during 2021 and 2020 as the Federal Reserve lowered the federal funds target rate by 50 basis points on March 6, 2020 and 100 basis points on March 15, 2020. In particular, the Federal Reserve's actions served to lower rates on the short end of the yield curve impacting yields on fed funds, certain floating rate investment securities, loans with variable rate pricing features, and the production rates for new loan originations.

The yield on earning assets decreased to 3.91% for the second quarter of 2021, as compared to 4.21% in the second quarter of 2020. Average interest-earning assets were $1.28 billion for the second quarter of 2021, compared with $1.22 billion for the second quarter of 2020, a 4.3% increase, primarily attributable to higher interest-bearing deposits. Average loans decreased approximately $16.4 million for the second quarter of 2021 compared with the second quarter of 2020. Average loans for the second quarter of 2021 included $23.5 million in loan originations under the SBA Paycheck Protection Program during the first six months of 2021, compared with $42.0 million in loan originations during the first six months of 2020. The decrease in average loans resulted in a decrease in interest revenue volume of approximately $189,000 for the quarter ended June 30, 2021, in addition to a decrease in interest revenue due to declining rates of $120,000, as compared with the second quarter of 2020. Total interest income decreased 3.2%, or $410,000, for the second quarter of 2021 compared to the second quarter of 2020.

Loan fee income can meaningfully impact net interest income, loan yields, and net interest income. The amount of loan fee income included in total interest income was $933,000 and $535,000 for the quarters ended June 30, 2021 and June 30, 2020, respectively. This represents 29 basis points and 17 basis points of yield on earning assets and net interest margin for the second quarter ended June 30, 2021 and 2020, respectively. Loan fee income for the second quarter of 2021 included $692,000 in fees earned on SBA PPP loans, compared to $179,000 in the second quarter of 2020, which represents 22 basis points and six basis points of earning asset yield and net interest margin for those quarters, respectively.

The cost of interest-bearing liabilities decreased to 0.61% for the second quarter of 2021, as compared to 1.11% for the second quarter of 2020 primarily based on the downward repricing of time and other interest-bearing deposits and reduction in the size of the time deposit portfolio, as well as a shift in deposit mix. Average interest-bearing liabilities decreased by 1.6% to $956.2 million for the second quarter of 2021, as compared to $971.8 million for the second quarter of 2020 primarily due to a $12.3 million decrease in FHLB advances. Total interest expense decreased by 45.4% to $1.5 million for the second quarter of 2021 as compared to the second quarter of 2020.

Net interest income was $21.6 million for the six months ended June 30, 2021, an increase of $1.7 million, or 8.7%, compared with $19.9 million for the same period in 2020. Net interest spread and margin were 3.34% and 3.49%, respectively, for the first six months of 2021, compared with 3.07% and 3.32%, respectively, for the first six months of 2020.

The yield on earning assets decreased to 3.98% for the first six months of 2021, as compared to 4.35% in the first six months of 2020. Average interest-earning assets increased approximately $47.6 million for the six months ended June 30, 2021 compared with the first six months of 2020. Average loans decreased approximately $629,000 for the first six months ended June 30, 2021 compared with the first six months of 2020. Interest revenue for the first six months of 2021 declined $944,000 due to lower interest rates on new and renewed loans, as well as repricing of variable rate loans, as compared to the first six months of 2020. Total interest income decreased 5.5%, or $1.4 million, for the first six months of 2021 compared to the first six months of 2020.

The amount of loan fee income included in total interest income was $1.8 million and $751,000 for the six months ended June 30, 2021 and 2020, respectively. This represents 29 basis points and 12 basis points of yield on earning assets and net interest margin for the six months ended June 30, 2021 and 2020, respectively. Loan fee income included PPP fees of $1.1 million and $179,000 for the six months ended June 30, 2021 and 2020, respectively, which represents 18 basis points and three basis points of earning asset yield and net interest margin for those six-month periods, respectively.

The cost of interest-bearing liabilities decreased to 0.64% for the first six months of 2021, as compared to 1.28% for the first six months of 2020 primarily based on downward repricing of time and other interest-bearing deposits and reduction in the size of the time deposit portfolio, as well as a shift in deposit mix. Average interest-bearing liabilities decreased by $22.9 million for the six months ended June 30, 2021 compared with the first six months of 2020 primarily due to a $27.0 million decrease in FHLB advances. Total interest expense decreased by 50.9% to $3.0 million for the six months ended June 30, 2021 as compared to $6.2 million for the first six months of 2020.

Average Balance Sheets

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

		Three Months Ended June 30,
		2021			2020
		Average Balance			Interest Earned/Paid			Average Yield/Cost			Average Balance			Interest Earned/Paid			Average Yield/Cost
		(dollars in thousands)
ASSETS
Interest-earning assets:
Loan receivables (1)		$	961,922			$	11,047				4.61	%		$	978,316			$	11,356				4.67	%
Securities
Taxable			197,860				1,103				2.24				190,148				1,307				2.76
Tax-exempt			25,451				177				3.72				10,971				77				3.57
FHLB stock			5,769				29				2.02				6,575				39				2.39
Federal funds sold and other			84,361				20				0.10				36,750				7				0.08
Total interest-earning assets			1,275,363				12,376				3.91	%			1,222,760				12,786				4.21	%
Less: Allowance for loan losses			(12,744	)											(9,213	)
Non-interest earning assets			98,461												92,376
Total assets		$	1,361,080											$	1,305,923
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Certificates of deposit and other time deposits		$	327,039			$	465				0.57	%		$	457,637			$	1,621				1.42	%
NOW and money market deposits			405,043				333				0.33				330,942				357				0.43
Savings accounts			158,090				119				0.30				107,932				149				0.56
FHLB advances			20,000				38				0.76				32,259				73				0.91
Junior subordinated debentures			21,000				132				2.52				21,000				172				3.29
Subordinated capital notes			25,000				375				6.02				17,000				253				5.99
Senior debt			-				-				-				5,000				51				4.10
Total interest-bearing liabilities			956,172				1,462				0.61	%			971,770				2,676				1.11	%
Non-interest-bearing liabilities:
Non-interest-bearing deposits			274,352												219,909
Other liabilities			9,170												6,896
Total liabilities			1,239,694												1,198,575
Stockholders' equity			121,386												107,348
Total liabilities and stockholders' equity		$	1,361,080											$	1,305,923
Net interest income						$	10,914											$	10,110
Net interest spread											3.30	%											3.10	%
Net interest margin											3.45	%											3.33	%

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

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

		Six Months Ended June 30,
		2021			2020
		Average Balance			Interest Earned/Paid			Average Yield/Cost			Average Balance			Interest Earned/Paid			Average Yield/Cost
		(dollars in thousands)
ASSETS
Interest-earning assets:
Loan receivables (1)		$	963,131			$	22,008				4.61	%		$	963,760			$	22,967				4.79	%
Securities
Taxable			189,259				2,219				2.36				191,704				2,774				2.91
Tax-exempt			23,957				308				3.45				10,480				147				3.57
FHLB stock			5,808				59				2.05				6,429				79				2.47
Federal funds sold and other			70,956				32				0.09				33,164				86				0.52
Total interest-earning assets			1,253,111				24,626				3.98	%			1,205,537				26,053				4.35	%
Less: Allowance for loan losses			(12,600	)											(8,750	)
Non-interest earning assets			98,591												92,758
Total assets		$	1,339,102											$	1,289,545
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Certificates of deposit and other time deposits		$	340,870			$	1,067				0.63	%		$	469,717			$	3,854				1.65	%
NOW and money market deposits			389,528				639				0.33				320,494				785				0.49
Savings accounts			152,093				237				0.31				91,118				260				0.57
FHLB advances			20,307				76				0.75				47,333				293				1.24
Junior subordinated debentures			21,000				262				2.52				21,000				387				3.71
Subordinated capital notes			25,000				751				6.06				17,000				495				5.86
Senior debt			-				-				-				5,000				107				4.30
Total interest-bearing liabilities			948,798				3,032				0.64	%			971,662				6,181				1.28	%
Non-interest-bearing liabilities:
Non-interest-bearing deposits			262,849												203,353
Other liabilities			7,920												7,040
Total liabilities			1,219,567												1,182,055
Stockholders' equity			119,535												107,490
Total liabilities and stockholders' equity		$	1,339,102											$	1,289,545
Net interest income						$	21,594											$	19,872
Net interest spread											3.34	%											3.07	%
Net interest margin											3.49	%											3.32	%

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

Rate/Volume Analysis

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

		Three Months Ended June 30, 2021 vs. 2020			Six Months Ended June 30, 2021 vs. 2020
		Increase(decrease) due to change in			Increase (decrease) due to change in
		Rate			Volume			Net Change			Rate			Volume			Net Change
		(in thousands)
Interest-earning assets:
Loan receivables		$	(120	)		$	(189	)		$	(309	)		$	(944	)		$	(15	)		$	(959	)
Securities			(247	)			143				(104	)			(546	)			152				(394	)
FHLB stock			(5	)			(5	)			(10	)			(13	)			(7	)			(20	)
Federal funds sold and other			2				11				13				(105	)			51				(54	)
Total increase (decrease) in interest income			(370	)			(40	)			(410	)			(1,608	)			181				(1,427	)
Interest-bearing liabilities:
Certificates of deposit and other time deposits			(782	)			(374	)			(1,156	)			(1,931	)			(856	)			(2,787	)
NOW and money market accounts			(95	)			71				(24	)			(293	)			147				(146	)
Savings accounts			(83	)			53				(30	)			(150	)			127				(23	)
FHLB advances			(10	)			(25	)			(35	)			(89	)			(128	)			(217	)
Junior subordinated debentures			(40	)			-				(40	)			(125	)			-				(125	)
Subordinated capital notes			2				120				122				16				240				256
Senior debt			(25	)			(26	)			(51	)			(53	)			(54	)			(107	)
Total increase (decrease) in interest expense			(1,033	)			(181	)			(1,214	)			(2,625	)			(524	)			(3,149	)
Increase (decrease) in net interest income		$	663			$	141			$	804			$	1,017			$	705			$	1,722

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

		For the Three Months			For the Six Months
		Ended June 30,			Ended June 30,
		2021			2020			2021			2020
		(dollars in thousands)
Service charges on deposit accounts		$	520			$	441			$	1,068			$	1,109
Bank card interchange fees			1,073				863				2,033				1,613
Income from bank owned life insurance			143				116				308				212
Net gain on sale of other real estate owned			191				-				191				-
Other			208				181				419				391
Total non-interest income		$	2,135			$	1,601			$	4,019			$	3,325

Non-interest income for the second quarter of 2021 increased by $534,000, or 33.4%, compared with the second quarter of 2020. The increase in non-interest income for the second quarter of 2021 compared to the second quarter of 2020 was primarily driven by an increase in bank card interchange fees of $210,000 due to an increase in debit card transactions, and a $191,000 gain on the sale of OREO.

For the six months ended June 30, 2021, non-interest income increased by $694,000, or 20.9%, to $4.0 million compared with $3.3 million for the same period of 2020. The increase in non-interest income between the six-month comparative periods was primarily due to an increase in bank card interchange fees of $420,000 and a $191,000 gain on the sale of OREO.

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

		For the Three Months			For the Six Months
		Ended June 30,			Ended June 30,
		2021			2020			2021			2020
		(dollars in thousands)
Salary and employee benefits		$	4,467			$	4,633			$	8,949			$	9,171
Occupancy and equipment			979				983				2,039				1,982
Professional fees			246				235				482				443
Marketing expense			179				104				361				318
FDIC insurance			90				67				225				67
Data processing expense			377				380				755				739
Deposit and state franchise tax			90				360				180				720
Deposit account related expenses			556				460				1,047				911
Communications expense			194				247				367				465
Insurance expense			115				111				219				214
Postage and delivery			139				152				291				320
Other			522				504				1,023				1,121
Total non-interest expense		$	7,954			$	8,236			$	15,938			$	16,471

Non-interest expense for the second quarter ended June 30, 2021 decreased $282,000, or 3.4%, compared with the second quarter of 2020. This decrease was primarily due to the elimination of the Kentucky bank franchise tax discussed below, resulting in a decrease in deposit and state franchise tax expense of $270,000, or 75%. Salary and employee benefits, which includes salaries, payroll taxes, health insurance, 401k matching contributions, incentive compensation, and stock-based compensation, decreased $166,000, or 3.6%, for the second quarter of 2021, as compared with the second quarter of 2020. The second quarter of 2020 included $111,000 in severance expense as the Bank realized a reduction in FTEs from 248 at March 31, 2020 to 228 at June 30, 2020. These decreases were partially offset by an increase in deposit account related expense of $96,000, or 20.9%, due to an increase in debit card transactions.

For the six months ended June 30, 2021, non-interest expense decreased $533,000, or 3.2% to $15.9 million compared with $16.5 million for the first six months of 2020. The decrease in non-interest expense for the six months ended June 30, 2021 was primarily attributable to a decrease of $540,000, or 75%, in deposit and state franchise tax expense. Salary and employee benefits decreased $222,000, or 2.4%, for the six months ended June 30, 2021, as compared with the first six months of 2020 given the prior period severance expense discussed above, and modestly lower FTE counts in the first six months of 2021 compared to the same period in 2020. These decreases were partially offset by increases in FDIC insurance of $158,000, or 235.8%, as no expense was recorded during the first quarter of 2020 due to the Bank utilizing assessment credits, and deposit account related expense of $136,000, or 14.9%, due to an increase in debit card transactions.

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

		For the Three Months			For the Six Months
		Ended June 30,			Ended June 30,
		2021			2020			2021			2020
		(dollars in thousands)
Federal statutory tax rate			21	%			21	%			21	%			21	%
Federal statutory rate times financial statement income		$	1,070			$	499			$	1,958			$	961
Effect of:
State income taxes			202				-				383				-
Tax-exempt interest income			(40	)			(15	)			(70	)			(29	)
Establish state deferred tax asset			-				(79	)			-				(151	)
Non-taxable life insurance income			(36	)			(24	)			(77	)			(44	)
Restricted stock vesting			(5	)			5				-				4
Other, net			3				7				8				13
Total		$	1,194			$	393			$	2,202			$	754

Income tax expense was $1.2 million and $2.2 million for the second quarter of 2021 and for the first six months of 2021, respectively, compared with $393,000 for the second quarter of 2020 and $754,000 for the first six months of 2020, respectively. Effective January 1, 2021, the state of Kentucky eliminated the bank franchise tax, which was previously recorded as a non-interest expense, and implemented a state income tax at a statutory rate of 5%. State income tax expense was $235,000 and $449,000 for the second quarter of 2021 and for the first six months of 2021, respectively, compared to a state income tax benefit of $79,000 and $151,000 for the second quarter of 2020 and for the first six months of 2020, respectively, which was related to the establishment of a net deferred tax asset due to the tax law change.

Analysis of Financial Condition

Total assets increased $26.6 million, or 2.0%, to $1.34 billion at June 30, 2021, from $1.31 billion at December 31, 2020. This increase was primarily attributable to an increase in cash and cash equivalents of $17.4 million and securities of $25.0 million, partially offset by a decrease in net loans of $14.9 million.

Loans Receivable-Loans receivable decreased $14.7 million, or 1.5%, during the six months ended June 30, 2021 to $947.4 million as loan paydowns outpaced growth. The commercial and commercial real estate portfolios increased by an aggregate of $9.8 million, or 1.5%, during the first six months of 2021 and comprised 68.4% of the loan portfolio at June 30, 2021. Residential real estate and consumer portfolios decreased by an aggregate of $19.4 million, or 6.9%, during the first six months of 2021 and comprised 27.7% of the loan portfolio at June 30, 2021.

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

		As of June 30,			As of December 31,
		2021			2020
		Amount			Percent			Amount			Percent
						(dollars in thousands)
Commercial (1)		$	206,578				21.80	%		$	208,244				21.65	%
Commercial Real Estate
Construction			78,659				8.30				92,916				9.66
Farmland			65,631				6.93				70,272				7.30
Nonfarm nonresidential			296,737				31.32				266,394				27.69
Residential Real Estate
Multi-family			62,428				6.59				61,180				6.36
1-4 Family			168,215				17.75				188,955				19.64
Consumer			31,511				3.33				31,429				3.27
Agriculture			37,086				3.91				42,044				4.37
Other			580				0.07				647				0.06
Total loans		$	947,425				100.00	%		$	962,081				100.00	%

(1)

Includes PPP loans of $21.0 million and $20.3 million at June 30, 2021 and December 31, 2021, respectively.

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

		June 30, 2021			December 31, 2020
		Loans			% to Total			Loans			% to Total
		(dollars in thousands)
Pass		$	913,753				96.4	%		$	926,025				96.2	%
Watch			15,888				1.7				18,879				2.0
Special Mention			-				-				-				-
Substandard			17,784				1.9				17,177				1.8
Doubtful			-				-				-				-
Total		$	947,425				100.0	%		$	962,081				100.00	%

Loans receivable decreased $14.7 million, or 1.5%, during the six months ended June 30, 2021 primarily as a result of loan payoffs outpacing loan originations during the period. Since December 31, 2020, the pass category decreased approximately $12.3 million, the watch category decreased approximately $3.0 million, and the substandard category increased approximately $607,000. The $607,000 increase in loans classified as substandard was primarily driven by $2.2 million in loans migrating to substandard, offset by $1.4 million in payments and $231,000 in charge-offs during the first six months of 2021.

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

		June 30, 2021			December 31, 2020
		(in thousands)
Past Due Loans:
30-59 Days		$	181			$	1,537
60-89 Days			252				372
90 Days and Over			-				-
Total Loans Past Due 30-90+ Days			433				1,909
Nonaccrual Loans			1,530				1,676
Total Past Due and Nonaccrual Loans		$	1,963			$	3,585

During the six months ended June 30, 2021, nonaccrual loans decreased by $146,000 to $1.5 million. Loans past due 30-59 days decreased from $1.5 million at December 31, 2020 to $181,000 at June 30, 2021. Loans past due 60-89 days decreased from $372,000 at December 31, 2020 to $252,000 at June 30, 2021. This represents a $1.5 million decrease in accruing past due loans from December 31, 2020 to June 30, 2021 in loans past due 30-89 days. This trend in delinquency levels is considered during the evaluation of qualitative trends in the portfolio when establishing the general component of the allowance for loan losses.

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

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

At June 30, 2021 and December 31, 2020, the Bank had four restructured loans totaling $459,000 and $480,000, respectively, with borrowers who experienced deterioration in financial condition. In general, these loans were granted interest rate reductions to provide cash flow relief to borrowers experiencing cash flow difficulties. The Bank had no restructured loans that had been granted principal payment deferrals until maturity at June 30, 2021 or December 31, 2020. There were no concessions made to forgive principal relative to these loans, although partial charge-offs have been recorded for certain restructured loans. In general, these loans are secured by first liens on 1-4 residential properties or commercial real estate properties. At June 30, 2021 and December 31, 2020, 85% and 100%, respectively, of the TDRs were performing according to their modified terms.

There were no modifications granted during 2021 and one modification granted during the third quarter of 2020 that resulted in loans being identified as TDRs. See 'Note 3 - Loans,' to the financial statements for additional disclosure related to troubled debt restructuring.

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

Short-term loan modifications declined to $4.7 million as of June 30, 2021, as compared to $15.3 million at December 31, 2020. Included in the $4.7 million of short-term loan modifications is one commercial real estate loan secured by a retail entertainment facility totaling $4.4 million, which remains subject to and is performing in accordance with, a short-term COVID-19 modification. The loan is graded substandard, has been evaluated under ASC-310-10, and allocated a specific reserve of $2.2 million as of June 30, 2021 and December 31, 2020.

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

		June 30, 2021			December 31, 2020
		(dollars in thousands)
Loans on nonaccrual status		$	1,530			$	1,676
Troubled debt restructurings on accrual			390				480
Past due 90 days or more still on accrual			-				-
Total non-performing loans			1,920				2,156
Real estate acquired through foreclosure			-				1,765
Other repossessed assets			-				-
Total non-performing assets		$	1,920			$	3,921
Non-performing loans to total loans			0.20	%			0.22	%
Non-performing assets to total assets			0.14	%			0.30	%
Allowance for non-performing loans		$	17			$	22
Allowance for non-performing loans to non-performing loans			0.89	%			1.02	%

Nonperforming loans at June 30, 2021, were $1.9 million, or 0.20% of total loans, compared with $2.2 million, or 0.22% of total loans at December 31, 2020, and $1.9 million, or 0.19% of total loans at June 30, 2020.

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

No provision for loan losses and a $350,000 provision for loan losses was recorded in the second quarter and first six months of 2021, respectively, compared to $1.1 million and $2.2 million provision for loan losses in the second quarter and the first six months of 2020, respectively. The 2021 loan loss provision was attributable to the net loan charge-offs and trends within the portfolio during the period, while the provisions for 2020 were largely attributable to the uncertainty surrounding the COVID-19 pandemic related economic and business disruptions. At June 30, 2021, the allowance for loan loss remained elevated in relation to recent historical levels due to the continued uncertainty surrounding the COVID-19 pandemic despite declining loan balances and improved credit trends.

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

		Three Months Ended June 30,			Six Months Ended June 30,			December 31,
		2021			2020			2021			2020			2020
		(in thousands)
Balance at beginning of period		$	12,755			$	9,150			$	12,443			$	8,376			$	8,376
Loans charged-off:
Real estate			141				35				141				139				231
Commercial			-				3				19				32				32
Consumer			32				152				51				313				493
Agriculture			5				3				44				44				46
Other			-				-				-				-				-
Total charge-offs			178				193				255				528				802
Recoveries
Real estate			32				155				48				196				352
Commercial			7				6				10				11				29
Consumer			15				6				34				10				45
Agriculture			6				1				7				9				30
Other			-				3				-				4				13
Total recoveries			60				171				99				230				469
Net charge-offs (recoveries)			118				22				156				298				333
Provision for loan losses			-				1,100				350				2,150				4,400
Balance at end of period		$	12,637			$	10,228			$	12,637			$	10,228			$	12,443
Allowance for loan losses to period-end loans			1.33	%			1.05	%			1.33	%			1.05	%			1.29	%
Net charge-offs (recoveries) to average loans			0.05	%			0.01	%			0.03	%			0.06	%			0.03	%
Allowance for loan losses to non-performing loans			658.18	%			546.37	%			658.18	%			546.37	%			577.13	%

The allowance for loan losses to total loans was 1.33% at June 30, 2021, compared to 1.29% at December 31, 2020, and 1.05% at June 30, 2020. Net loan charge-offs in the first six months of 2021 totaled $156,000, compared to net loan charge-offs of $298,000 in the first six months of 2020. The allowance for loan losses to non-performing loans was 658.18% at June 30, 2021, compared with 577.13% at December 31, 2020, and 546.37% at June 30, 2020.

Investment Securities-The securities portfolio serves as a source of liquidity and earnings and contributes to the management of interest rate risk. Investments are made in various types of liquid assets, including U.S. Treasury obligations and securities of various federal agencies, obligations of states and political subdivisions, corporate bonds, and collateralized loan obligations. The investment portfolio increased by $25.0 million, or 12.3%, to $228.9 million at June 30, 2021, compared with $203.9 million at December 31, 2020.

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

		June 30, 2021			December31, 2020
		Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses			Fair Value			Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses			Fair Value
Available for sale
U.S. Government andfederal agencies		$	28,918			$	845			$	(3	)		$	29,760			$	18,811			$	806			$	-			$	19,617
Agency mortgage-backed residential			79,146				2,121				(265	)			81,002				71,582				2,777				(26	)			74,333
Collateralized loan obligations			40,185				-				(240	)			39,945				44,730				-				(1,578	)			43,152
State and municipal			-				-				-				-				34,759				1,296				-				36,055
Corporate bonds			31,674				487				(714	)			31,447				31,635				472				(1,402	)			30,705
Total available for sale		$	179,923			$	3,453			$	(1,222	)		$	182,154			$	201,517			$	5,351			$	(3,006	)		$	203,862

		Amortized Cost			Gross Unrecognized Gains			Gross Unrecognized Losses			Fair Value			Amortized Cost			Gross Unrecognized Gains			Gross Unrecognized Losses			Fair Value
Held to maturity
State and municipal		$	46,717			$	217			$	(249	)		$	46,685			$	-			$	-			$	-			$	-
Total held to maturity		$	46,717			$	217			$	(249	)		$	46,685			$	-			$	-			$	-			$	-

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

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

The market value of CLOs may be affected by, among other things, changes in composition of the underlying loans, changes in the cash flows from the underlying loans, defaults and recoveries on the underlying loans, capital gains and losses on the underlying loans, prepayments on the underlying loans, and other conditions or economic factors. At June 30, 2021, $27.9 million, $9.5 million, and $2.5 million of the Bank's CLOs were AA, A, and BBB rated, respectively. None of the CLOs were subject to ratings downgrade during the six months ended June 30, 2021.

The corporate bond portfolio consists of 13 subordinated debt securities and one senior debt security of U.S. banks and bank holding companies with maturities ranging from 2024 to 2037. The securities are either fixed for five years converting to floating at an index over LIBOR, or SOFR, or floating at an index over LIBOR, or SOFR, from inception. Management regularly monitors the financial condition of these corporate issuers by reviewing their regulatory and public filings.

The Bank has the intent and ability to hold its CLO and corporate debt securities to maturity and, at this juncture, has determined the value decline is temporary in nature.

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

OREO is recorded at fair market value less estimated cost to sell at time of acquisition. Any write-down of the property at the time of acquisition is charged to the allowance for loan losses. When foreclosed properties are acquired, management obtains a new appraisal or has staff from the Bank's special assets group evaluate the latest in-file appraisal in connection with the transfer to OREO. Management typically obtains updated appraisals within five quarters of the anniversary date of ownership unless a sale is imminent. Subsequent reductions in fair value are recorded as non-interest expense when a new appraisal indicates a decline in value or in cases where a listing price is lowered below the appraisal amount.

OREO sales totaled $2.0 million for the second quarter and first six months of 2021, compared to $1.6 million for the second quarter and first six months ended June 30, 2020. Net gain on sales of OREO totaled $191,000 for the second quarter and six months ended June 30, 2021, compared to no gain on sales of OREO for the second quarter and six months ended June 30, 2020. Operating expenses for OREO totaled $2,000 and $13,000 for the second quarter and six months ended June 30, 2021, respectively, compared to operating expenses of $22,000 and $38,000 for the second quarter and six months ending June 30, 2020, respectively. There were no fair value write-downs recorded during the six months ended June 30, 2021 or the six months ended June 30, 2020.

Liabilities-Total liabilities at June 30, 2021 were $1.21 billion compared with $1.20 billion at December 31, 2020, an increase of $18.7 million, or 1.6%. This increase was primarily attributable to an increase in deposits of $19.5 million.

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

		For the Six Months			For the Year
		Ended June 30,			Ended December 31,
		2021			2020
		Average			Average			Average			Average
		Balance			Rate			Balance			Rate
		(dollars in thousands)
Demand		$	262,849							$	215,145
Interest checking			208,246				0.31	%			169,808				0.32	%
Money market			181,282				0.35				166,788				0.55
Savings			152,093				0.31				111,559				0.48
Certificates of deposit			340,870				0.63				436,083				1.33
Total deposits		$	1,145,340				0.34	%		$	1,099,383				0.71	%

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

Maturity Period
Three months or less		$	7,811
Three months through six months			7,235
Six months through twelve months			10,043
Over twelve months			16,254
Total		$	41,343

Liquidity

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

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

The Bank also borrows from the FHLB to supplement funding requirements. At June 30, 2021, the Bank had an unused borrowing capacity with the FHLB of $88.6 million. Advances are collateralized by first mortgage residential loans as well as loans originated under the SBA Payment Protection Plan loans and borrowing capacity is based on the underlying book value of eligible pledged loans.

The Bank also has available on an unsecured basis federal funds borrowing lines from a correspondent bank totaling $5.0 million. Management believes the sources of liquidity are adequate to meet expected cash needs for the foreseeable future. Historically, the Bank has also utilized brokered and wholesale deposits to supplement its funding strategy. At June 30, 2021, the Bank had no brokered deposits.

The Company uses cash on hand to service the subordinated capital notes, junior subordinated debentures, and to provide for operating cash flow needs. The Company also may issue common equity, preferred equity and debt to support cash flow needs and liquidity requirements.

Capital

Stockholders' equity increased $7.9 million to $124.0 million at June 30, 2021, compared with $116.0 million at December 31, 2020 primarily due to current year net income of $7.1 million.

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

		Regulatory Minimums			Well-Capitalized Minimums			Basel III Plus Conservation Buffer			Limestone Bank
Tier 1 Capital			6.0	%			8.0	%			7.0	%			13.0	%
Common equity Tier 1 capital			4.5				6.5				8.5				13.0
Total risk-based capital			8.0				10.0				10.5				14.1
Tier 1 leverage ratio			4.0				5.0				-				10.6

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

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Given an instantaneous 100 basis point increase in interest rates, the base net interest income would increase by an estimated 1.1% at June 30, 2021, compared with an increase of 0.8% at December 31, 2020. Given a 200 basis point increase in interest rates, base net interest income would increase by an estimated 2.8% at June 30, 2021, compared with an increase of 2.2% at December 31, 2020.

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

		Change in Future Net Interest Income
		Dollar Change			Percentage Change
		(dollars in thousands)
+ 200 basis points		$	1,156				2.83	%
+ 100 basis points			462				1.13
- 100 basis points			(835	)			(2.04	)
- 200 basis points			(1,718	)			(4.20	)

Item 4. Controls and Procedures

As of the end of the quarterly period covered by this report, an evaluation was carried out under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934 ('Exchange Act')). Based on this evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures were, to the best of their knowledge, effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms as of such date.

There was no change in the Company's internal control over financial reporting that occurred during the Company's fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

In the normal course of business, the Company and its subsidiaries have been named, from time to time, as defendants in various legal actions. Certain of the actual or threatened legal actions may include claims for substantial compensatory and/or punitive damages or claims for indeterminate amount of damages. After discussions with legal counsel, management does not believe these legal actions or proceedings will have a material adverse effect on the consolidated financial position or results of operation of the Company.

Item 1A. Risk Factors

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

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

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

Period	Total Shares Purchased (Withheld)	Average Price Paid (Credited) Per Share
June 2021	2,824	$13.66

Item 3. Default Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits

(a)

Exhibits

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

Exhibit Number	Description of Exhibit
3.1	Articles of Incorporation of the Company, restated to reflect amendments.
3.2	Amended and Restated Bylaws of Limestone Bancorp, Inc. dated June 18, 2018. Exhibit 3.2 to Form 8-K filed June 18, 2018 is hereby incorporated by reference.

4.1	Tax Benefits Preservation Plan, dated as of June 25, 2015, between the Company and American Stock Transfer Company, as Rights Agent. Exhibit 4.1 to Form 8-K filed June 29, 2015 is incorporated by reference.
4.2	Amendment No. 1 to the Tax Benefits Preservation Plan, dated August 5, 2015. Exhibit 4.2 to the Quarterly Report on Form 10-Q filed August 5, 2015 is incorporated by reference.
4.3	Amendment No. 2 to the Tax Benefits Preservation Plan dated May 23, 2018. Exhibit 4 to the Form 8-K filed May 23, 2018 is incorporated by reference.
4.4	Amendment No. 3 to the Limestone Bancorp, Inc. Tax Benefits Preservation Plan, dated November 25, 2019. Exhibit 4.4 to the Form 8-K filed November 27, 2019 is incorporated herein by reference.
4.5	Amendment No. 4 to the Limestone Bancorp, Inc. Tax Benefits Preservation Plan, dated May 19, 2021. Exhibit 4 to the Form 8-K filed May 19, 2021 is incorporated by reference.
31.1	Certification of Principal Executive Officer, pursuant to Rule 13a - 14(a).
31.2	Certification of Principal Financial Officer, pursuant to Rule 13a - 14(a).
32.1	Certification of Principal Executive Officer, pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Principal Financial Officer, pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101	The following financial statements from the Company's Quarterly Report on Form 10Q for the quarter ended June 30, 2021, formatted in inline XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income (Loss), (iv) Consolidated Statement of Changes in Stockholders' Equity, (v) Consolidated Statements of Cash Flows, (vi) Notes to Consolidated Financial Statements.
104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

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

SIGNATURES

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

	LIMESTONE BANCORP, INC.
	(Registrant)
July 30, 2021	By:	/s/ John T. Taylor
		John T. Taylor
		Chief Executive Officer
July 30, 2021	By:	/s/ Phillip W. Barnhouse
		Phillip W. Barnhouse
		Chief Financial Officer