UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ~~For the Fiscal Year Ended December 31, 2021~~

For the Fiscal Year Ended December 31, 2022

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ~~For the transition period from to~~

For the transition period from to

Commission file number: 001-33033

LIMESTONE BANCORP, INC.

(Exact name of registrant as specified in its charter)

Kentucky		61-1142247
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

2500 Eastpoint Parkway, Louisville, Kentucky		40223
(Address of principal executive offices)		(Zip Code)

(502) 499-4800

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Exchange Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common shares	LMST	The Nasdaq Stock Market

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer (as defined in Rule 405 of the Securities Act). Yes ☐ No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

~~Indicate~~If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the ~~registrant~~financial isstatements aof ~~large~~the ~~accelerated~~registrant ~~filer,~~included anin ~~accelerated~~the ~~filer,~~filing areflect ~~non-accelerated~~the ~~filer,~~correction aof ~~smaller~~an ~~reporting~~error ~~company,~~to orpreviously anissued ~~emerging~~financial ~~growth company~~statements. ~~See~~Yes ☐ No ☐ Indicate ~~the~~by ~~definitions~~check ofmark ~~“large~~whether ~~accelerated~~any ~~filer,”~~of ~~“accelerated~~those ~~filer,”~~error ~~“smaller~~corrections ~~reporting~~are ~~company,”~~restatements ~~and~~that ~~“emerging~~required ~~growth~~a ~~company~~recovery inanalysis ~~Rule~~of ~~12b~~incentive-2based compensation received by any of the ~~Exchange~~registrant’s ~~Act~~executive officers during the relevant recovery period pursuant to §240.10D-1(b). Yes ☐ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company, in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☒	Smaller reporting company ☒
	Emerging growth company ☐

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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Exchange Act. Yes ☐ No ☐

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes ☐ No ☒

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

~~Indicate~~The byaggregate ~~check~~market ~~mark~~value ~~whether~~of the ~~registrant~~voting ~~has~~and ~~filed~~non-voting acommon ~~report~~equity onheld ~~and~~by ~~attestation~~non-affiliates computed by reference to ~~its~~the ~~management’s~~price ~~assessment~~at which the common equity was last sold as of the ~~effectiveness~~close of ~~its~~business ~~internal~~on ~~control~~June ~~over~~30, ~~financial~~2022, ~~reporting~~was ~~under~~$96,526,944 ~~Section~~based ~~404~~upon the last sales price reported (b)for purposes of this calculation, the ~~Sarbanes~~market value of non-~~Oxley~~voting ~~Act~~common ~~(15~~shares ~~U.S.C.~~was ~~7262(b))~~based byon the ~~registered~~market ~~public~~value ~~accounting~~of ~~firm~~the ~~that~~common ~~prepared~~shares orinto ~~issued~~which ~~its~~they ~~audit~~are ~~report Yes ☐ No ☒~~convertible upon transfer).

~~The~~6,629,402 ~~aggregate~~Common ~~market~~Shares ~~value of the voting~~ and ~~non-voting~~1,000,000 ~~common equity held by non~~Non-~~affiliates~~Voting ~~computed~~Common byShares ~~reference~~were tooutstanding ~~the price at which the common equity was last sold~~ as of ~~the~~February ~~close of business on June 30~~28, 2021, was $86,915,446 based upon the last sales price reported (for purposes of this calculation, the market value of non-voting common shares was based on the market value of the common shares into which they are convertible upon transfer)2023.

6,617,278 Common Shares and 1,000,000 Non-Voting Common Shares were outstanding as of February 25, 2022.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Proxy Statement for the Annual Meeting of Shareholders to be held May 18, 2022 are incorporated by reference into Part III of this Form 10-K.

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TABLE OF CONTENTS

		Page No.
PART I		1
Item 1.	Business	2
Item 1A.	Risk Factors	9
Item 1B.	Unresolved Staff Comments	1719
Item 2.	Properties	1719
Item 3.	Legal Proceedings	1719
Item 4.	Mine Safety Disclosures	1820
PART II		1921
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	1921
Item 6.	Reserved	2123
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2123
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	46
Item 8.	Financial Statements and Supplementary Data	47
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	8785
Item 9A.	Controls and Procedures	8785
Item 9B.	Other Information	8886
PART III		89
Item 9C.	Disclosure Regarding Foreign Jurisdictions that Prevent Inspections	86
Item 10.	Directors, Executive Officers and Corporate Governance	89
PART III		87
Item 11.	Executive Compensation	89
Item 10.	Directors, Executive Officers and Corporate Governance	87
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	89
Item 11.	Executive Compensation	91
Item 13.	Certain Relationships and Related Transactions, and Director Independence	89
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	100
Item 14.	Principal Accounting Fees and Services	89
Item 13.	Certain Relationships and Related Transactions, and Director Independence	103
PART IV		90
Item 14.	Principal Accounting Fees and Services	104
Item 15.	Exhibits. Financial Statement Schedules	90
PART IV		105
Item 16.	Form 10-K Summary	90
Item 15.	Exhibits. Financial Statement Schedules	105
	Index to Exhibits	91
Item 16.	Form 10-K Summary	105
	Signatures	93
	Index to Exhibits	106
	Signatures	108

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PART I

As used in this report, references to “the Company,” “we,” “our,” “us,” and similar terms refer to the consolidated entity consisting of Limestone Bancorp, Inc. and its wholly-owned subsidiary, Limestone Bank, Inc., which is referred to in this report as “the Bank.”

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:

● risks related to the ~~impact~~Company’s pending merger with Peoples Bancorp Inc., including risks if the Company is unable to complete the Merger due to the failure to satisfy the conditions to completion of the Merger, including receipt of required regulatory and ~~duration~~other approvals, the failure of the ~~novel~~proposed ~~coronavirus~~merger ~~disease~~to ~~2019~~close ~~(“COVID-19”)~~for ~~pandemic~~any other reason, the diversion of management’s attention from ongoing business operations and ~~national~~opportunities due to the merger transaction, ~~state~~and the effect of the announcement and ~~local~~pendency ~~emergency~~of ~~conditions~~the merger transaction on the ~~pandemic~~Company’s ~~has~~customer ~~produced~~and employee relationships and operating results;

●

the impact of the novel coronavirus disease 2019 (“COVID-19”) pandemic and the economic and financial disruptions and instabilities that have followed it;

●

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

● changes in ~~the~~inflation ~~interest rate environment, which may reduce the Company’s margins or impact the value~~ and ~~market~~efforts ~~for~~to ~~securities,~~control ~~loans, deposits and other financial instruments~~it;

●

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

●

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

●

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

●

the results of regulatory examinations;

●

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

● the continued service of key management personnel, and 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~~failure toin ~~comply~~or ~~with~~breach ~~regulatory~~of ~~capital~~operational ~~requirements~~or security systems or infrastructure, or those of third-party vendors and toother ~~secure~~service ~~any~~providers, ~~required~~including ~~regulatory~~as ~~approvals~~a ~~for~~result ~~capital~~of ~~actions~~cyber-attacks;

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

● future acquisitions, integrations and performance of acquired businesses; and

●

fiscal and governmental policies of the United States federal government.

Other risks are detailed in Item 1A. “Risk Factors” of this Form 10-K all of which are difficult to predict and many of which are beyond the Company’s control.

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.

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Other risks are detailed in Item 1A. “Risk Factors” of this Form 10-K all of which are difficult to predict and many of which are beyond the Company’s control.

Item 1. Business

Organized in 1988, Limestone Bancorp, Inc. (the Company) is a bank holding company headquartered in Louisville, Kentucky. The Company’s common stock is traded on Nasdaq’s Capital Market under the symbol LMST. The Company operates Limestone Bank, Inc. (the Bank), the ~~thirteenth~~eleventh 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 December 31, ~~2021~~2022, the Company had total assets of $1.4246 billion, total loans of $1.011 billion, total deposits of $1.2120 billion and stockholders’ equity of $~~131~~133.09 million.

Recent Developments

On October 24, 2022, Peoples Bancorp Inc., an Ohio corporation ("Peoples"), and the Company, entered into an Agreement and Plan of Merger (the "Merger Agreement") pursuant to which the Company agreed to merge with and into Peoples (the "Merger"). The Merger Agreement provides that the Company’s wholly-owned banking subsidiary, Limestone Bank, Inc., will be merged with and into Peoples' wholly-owned banking subsidiary, Peoples Bank (the “Bank Merger”), following the Merger. The Boards of Directors of both Peoples and the Company have approved the Merger, the Bank Merger, and the Merger Agreement. The Merger is expected to close during the second quarter of 2022, subject to customary regulatory approval and completion of other customary closing conditions.

Website Access to Reports

The Company files reports with the SEC including the Annual Report on Form 10-K, quarterly reports on Form 10-Q, current event reports on Form 8-K, and proxy statements, as well as any amendments to those reports. The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at http://www.sec.gov. The Company’s Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to section 13(a) or 15(d) of the Exchange Act are also accessible at no cost on the Company’s web site at http://www.limestonebank.com after they are electronically filed with the SEC. The information contained on our website is not included, a part of, or incorporated by reference into this Annual Report on Form 10-K.

Markets

The Bank operates in markets that include the four largest cities in Kentucky – Louisville, Lexington, Bowling Green and Owensboro – and in other communities along the I-65, Western Kentucky Parkway, and Natcher Parkway corridors.

■

Louisville/Jefferson, Bullitt and Henry Counties: The Company’s headquarters are in Louisville, the largest city in Kentucky. The Bank also has banking offices in Bullitt County, south of Louisville, and Henry County, east of Louisville. The Company’s banking offices in these counties also serve the contiguous counties of Spencer, Shelby and Oldham to the east and northeast of Louisville. The area’s major employers are diversified across many industries and include the Worldport air hub for United Parcel Service (“UPS”), two Ford assembly plants, Humana, Norton Healthcare, the University of Louisville, Brown-Forman, Churchill Downs, YUM! Brands, and Texas Roadhouse.

■

Lexington/Fayette County: Lexington, located in Fayette County, is the second largest city in Kentucky. Lexington is the financial, educational, retail, healthcare and cultural hub for Central and Eastern Kentucky. It is known worldwide for its horse farms and Keeneland Race Track, and proudly boasts of itself as “The Horse Capital of the World”. It is also the home of the University of Kentucky and Transylvania University. The area’s major employers include Toyota, Xerox, Lexmark, and Valvoline.

■

Frankfort/Franklin County: Frankfort, located along Interstate 64 in Franklin County, is the capital of the Commonwealth of Kentucky and the seat of Franklin County. Frankfort is home to Kentucky’s General Assembly or Legislature which consists of the Kentucky Senate and the Kentucky House of Representatives. Frankfort is also the home of the Kentucky State University and major employers including Montaplast of North America, Inc., Buffalo Trace Distillery, Topy Corporation, Beam, Inc., and Nashville Wire Products.

■ Southern Kentucky: This market includes Bowling Green, the third largest city in Kentucky, located about 120 miles south of Louisville and 60 miles north of Nashville, Tennessee. Bowling Green, located in Warren County, is the home of Western Kentucky University and is the economic hub of the area. This market also includes communities in the contiguous Barren County, including the city of Glasgow. Major employers in Barren and Warren Counties include General Motor’s Corvette plant, automotive supply chain manufacturers, and R.R. Donnelley’s regional printing facility.

■ Owensboro/Daviess County: Owensboro, located on the banks of the Ohio River, is Kentucky’s fourth largest city. The city is called a festival city, with over 20 annual community celebrations that attract visitors from around the world, including its world famous Bar-B-Q Festival which attracts over 80,000 visitors. It is an industrial, medical, retail and cultural hub for Western Kentucky. The area employers include Owensboro Medical System, US Bank Home Mortgage, Titan Contracting, Specialty Food Group, and Toyotetsu.

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■

Southern Kentucky: This market includes Bowling Green, the third largest city in Kentucky, located about 120 miles south of Louisville and 60 miles north of Nashville, Tennessee. Bowling Green, located in Warren County, is the home of Western Kentucky University and is the economic hub of the area. This market also includes communities in the contiguous Barren County, including the city of Glasgow. Major employers in Barren and Warren Counties include General Motor’s Corvette plant, automotive supply chain manufacturers, and R.R. Donnelley’s regional printing facility.

■

Owensboro/Daviess County: Owensboro, located on the banks of the Ohio River, is Kentucky’s fourth largest city. The city is called a festival city, with over 20 annual community celebrations that attract visitors from around the world, including its world famous Bar-B-Q Festival which attracts over 80,000 visitors. It is an industrial, medical, retail and cultural hub for Western Kentucky. The area employers include Owensboro Medical System, US Bank Home Mortgage, Titan Contracting, Specialty Food Group, and Toyotetsu.

■

South Central Kentucky: South of the Louisville metropolitan area, the Bank has banking offices in Butler, Edmonson, Green, Hardin, Hart, and Ohio Counties. This region includes stable community markets comprised primarily of agricultural and service-based businesses. Each of the Company’s banking offices in these markets has a stable customer and core deposit base.

Products and Services

The Bank meets its customers’ banking needs with a broad range of financial products and services. Its lending services include real estate, commercial, mortgage, agriculture and equine, and consumer loans to those in its communities and to small to medium-sized businesses, the owners and employees of those businesses, as well as other executives and professionals. Lending operations are complemented with an array of retail and commercial deposit products. In addition, the Bank offers customers drive-through banking facilities, curbside banking services, automatic teller machines, night depository, personalized checks, credit cards, debit cards, internet banking, mobile banking, curbside banking, treasury management services, remote deposit services, electronic funds transfers through ACH services, domestic and foreign wire transfers, cash management and vault services, and loan and deposit sweep accounts.

Human Capital Resources

At December 31, ~~2021~~2022, the Company had ~~227~~222 full-time equivalent employees and a total of ~~233~~228 employees (“team members”). The ~~Bank~~Company’s team members are instrumental in building, maintaining, and servicing the customer relationships that make the community banking model a success. The ~~Bank~~Company strives to attract and retain a well-qualified, enthusiastic workforce by offering competitive compensation packages, comprehensive benefits, training, and opportunities for professional development and advancement. Team members are held accountable to the ~~Bank~~Company’s core values, which are:

●

Commitment to honesty and integrity;

●

Commitment to have a positive and constructive attitude;

●

Commitment to be a team player;

●

Commitment to conduct oneself in a professional manner; and

●

Commitment to celebrate successes.

The Company’s team members are not subject to a collective bargaining agreement, and management considers the Company’s relationship with its team members to be good. The Bank is consistently recognized as one of the “Best Places to Work in Kentucky.”

Acquisitions

The Bank maintains an acquisition strategy to selectively grow its franchise as a complement to its organic growth strategies. Management regularly explores opportunities to acquire banks, branches, or financial institutions in existing, adjacent, and complementary markets that align with the Bank’s business model and strategic plan.

Competition

The banking business is highly competitive, and the Bank experiences competition from a number of other financial institutions and non-bank financial competitors, many of whom may not be subject to the same extensive regulatory regime as the Bank. Competition is based upon relationships, the quality and scope of services levels, interest rates offered on deposit accounts, interest rates charged on loans, other credit and service charges relating to loans, the convenience of banking facilities, the availability of technology channels, and, in the case of loans to commercial borrowers, relative lending limits. The Bank competes with commercial banks, credit unions, savings and loan associations, mortgage banking firms, consumer finance companies, farm credit organizations, securities brokerage firms, insurance companies, money market funds and other mutual funds, as well as super-regional, national, and international financial institutions that operate offices within the Company’s market area and beyond.

Supervision and Regulation

Bank and Holding Company Laws, Rules and Regulations. The Company and the Bank are subject to an extensive system of the laws, rules, and regulations that are intended primarily for the protection of customers, the Deposit Insurance Fund (DIF), and the banking system in general and not for the protection of shareholders and creditors. These laws and regulations govern areas such as capital, permissible activities, allowance for loan and lease losses, loans and investments, interest rates that can be charged on loans, and consumer protection communications and disclosures. Certain elements of selected laws, rules, and regulations are described in the sections that follow. These descriptions are not intended to be complete and are qualified in their entirety by reference to the full text of the laws, rules, and regulations.

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Supervision and Regulation

Bank and Holding Company Laws, Rules and Regulations. The Company and the Bank are subject to an extensive system of the laws, rules, and regulations that are intended primarily for the protection of customers, the Deposit Insurance Fund (DIF), and the banking system in general and not for the protection of shareholders and creditors. These laws and regulations govern areas such as capital, permissible activities, allowance for loan and lease losses, loans and investments, interest rates that can be charged on loans, and consumer protection communications and disclosures. Certain elements of selected laws, rules, and regulations are described in the sections that follow. These descriptions are not intended to be complete and are qualified in their entirety by reference to the full text of the laws, rules, and regulations.

Limestone Bancorp. The Company is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended, and is subject to supervision and regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). As such, the Company must file with the Federal Reserve Board annual and quarterly reports and other information regarding the Company’s business operations and the business operations of the Company’s subsidiaries. The Company is also subject to examination by the Federal Reserve Board and to operational guidelines established by the Federal Reserve Board. The Company is subject to the Bank Holding Company Act and other federal laws on the types of activities in which it may engage, and to other supervisory requirements, including regulatory enforcement actions for violations of laws and regulations.

Acquisitions. As a bank holding company, the Company must obtain Federal Reserve Board approval before acquiring, directly or indirectly, ownership or control of more than 5% of any class of voting stock or all or substantially all of the assets of a bank, before merging or consolidating with any other bank holding company, and before engaging, or acquiring a company that is not a bank and is engaged in certain non-banking activities. For any acquisition transaction structured as a merger of the Bank, the approval of the Federal Deposit Insurance Corporation (“FDIC”) and the Kentucky Department of Financial Institutions (“KDFI”) would be required.

The Bank Holding Company Act and the Change in Bank Control Act prohibit a person or group of persons from acquiring “control” of a bank holding company without notifying the Federal Reserve Board in advance and obtaining the Federal Reserve Board’s approval of, or non-objection to, the proposed transaction. The Federal Reserve Board has established a rebuttable presumptive standard that the acquisition of 10% or more of any class of voting securities of a bank holding company that has registered securities under Section 12 of the Securities Exchange Act of 1934 (such as the Company) constitutes an acquisition of control of the bank holding company for purposes of the Change in Bank Control Act. An acquisition of 25% of any class of voting securities of a bank holding company will conclusively be deemed to be an acquisition of control under the Change in Bank Control Act.

Permissible Activities. The Company is generally permitted under the Bank Holding Company Act to own up to 5% of the voting shares of a company and, subject to the receipt of any required approval by the Federal Reserve Board, to engage in or acquire direct or indirect control of more than 5% of the voting shares of any bank, bank holding company or company engaged in any activity that the Federal Reserve Board determines to be so closely related to banking as to be a proper incident to the business of banking.

Under current federal law, a bank holding company may elect to become a financial holding company, which enables the holding company to conduct activities that are “financial in nature,” incidental to financial activity, or complementary to financial activity that do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. Activities that are “financial in nature” include securities underwriting, dealing and market making in securities; sponsoring mutual funds and investment companies; insurance underwriting and agency; merchant banking activities; and activities that the Federal Reserve Board has determined to be closely related to banking. No prior regulatory approval or notice is required for a financial holding company to acquire a company, other than a bank or savings association, engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve Board. The Company has not filed an election to become a financial holding company.

Source of Financial Strength. Under Federal Reserve policy, a bank holding company is expected to act as a source of financial strength to, and to commit resources to support, its bank subsidiaries. This support may be required at times when, absent such a policy, the bank holding company may not be inclined to provide it. In addition, any capital loans by the bank holding company to its bank subsidiaries are subordinate in right of payment to depositors and to certain other indebtedness of the bank subsidiary. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of subsidiary banks will be assumed by the bankruptcy trustee and entitled to a priority of payment. The Federal Reserve’s “Source of Financial Strength” policy was codified in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”).

Dividends. Under Federal Reserve Board policy, bank holding companies should pay cash dividends on common stock only out of income available over the past year and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition. The policy provides that bank holding companies should not declare a level of cash dividends that undermines the bank holding company’s ability to serve as a source of strength to its banking subsidiaries.

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~~The~~Dividends. ~~Company~~Under isFederal aReserve ~~legal~~Board ~~entity separate and distinct from the Bank. Historically~~policy, ~~the~~bank ~~majority~~holding ofcompanies ~~the~~should ~~Company’s~~pay ~~revenue~~cash ~~has been from~~ dividends ~~paid~~on tocommon itstock byonly ~~the~~out ~~Bank. The Bank is subject to laws and regulations that limit the amount~~ of ~~dividends~~income itavailable ~~can~~over ~~pay. If, in~~ the ~~opinion~~past ofyear aand ~~federal~~only ~~regulatory~~if ~~agency,~~prospective anearnings ~~institution~~retention ~~under its jurisdiction~~ is ~~engaged~~consistent inwith ~~or is about to engage in an unsafe or unsound practice,~~ the ~~agency may require, after notice and hearing, that the institution cease such practice. The federal banking agencies have indicated that paying dividends that deplete an institution~~organization’s ~~capital~~expected ~~base~~future toneeds ~~an inadequate level would be an unsafe~~ and ~~unsound~~financial ~~banking practice~~condition. The Bank is prohibited from paying any dividend if payment would cause it to become undercapitalized or if it already is undercapitalized, and it must maintain a sufficient capital conservation buffer under the capital adequacy guidelines in order to avoid limitations on dividends. Moreover, the Federal Reserve and the FDIC have issued policy ~~statements~~provides ~~providing~~ that bank holding companies ~~and banks~~ should ~~generally~~not ~~pay dividends only out of current operating earnings. A bank holding company may still~~ declare ~~and pay~~ a ~~dividend~~level ifof itcash ~~does~~dividends ~~not~~that ~~have~~undermines ~~current operating earnings if~~ the bank holding company’s ~~expects~~ability ~~profits~~to ~~for~~serve ~~the~~as ~~entire~~a ~~year~~source ~~and~~of ~~the~~strength ~~bank~~to ~~holding~~its ~~company~~banking ~~obtains the prior consent of the Federal Reserve~~subsidiaries.

The Company is a legal entity separate and distinct from the Bank. The majority of the Company’s revenue has been from dividends paid to it by the Bank. The Bank is subject to laws and regulations that limit the amount of dividends it can pay. If, in the opinion of a federal regulatory agency, an institution under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice, the agency may require, after notice and hearing, that the institution cease such practice. The federal banking agencies have indicated that paying dividends that deplete an institution’s capital base to an inadequate level would be an unsafe and unsound banking practice. The Bank is prohibited from paying any dividend if undercapitalized or if payment would cause it to become undercapitalized, and it must maintain a sufficient capital conservation buffer under the capital adequacy guidelines in order to avoid limitations on dividends. Moreover, the Federal Reserve and the FDIC have issued policy statements providing that bank holding companies and banks should generally pay dividends only out of current operating earnings.

Under Kentucky law, dividends by Kentucky banks may be paid only from current or retained net profits. The KDFI must approve the declaration of dividends if the total dividends to be declared by a bank for any calendar year would exceed the bank’s total net profits for such year combined with its retained net profits for the preceding two years, less any required transfers to surplus or a fund for the retirement of preferred stock or debt. Additionally, retained earnings must be positive. The Company is also subject to the Kentucky Business Corporation Act, which generally prohibits dividends to the extent they result in the insolvency of the corporation from a balance sheet perspective or if the corporation is unable to pay its debts as they come due.

Based on these regulations, the Bank was eligible to pay $620.54 million of dividends as of December 31, ~~2021~~2022. The Bank paid the Company $27.05 million of dividends during ~~2021~~2022.

Limestone Bank. The Bank, a Kentucky chartered commercial bank, is subject to regular bank examinations and other supervision and regulation by both the FDIC and the KDFI. Kentucky’s banking statutes contain a “super-parity” provision that permits a well-rated Kentucky banking corporation to engage in any banking activity which could be engaged in by a national bank operating in Kentucky; a state bank, a thrift or savings bank operating in any other state; or a federal chartered thrift or federal savings association meeting the qualified thrift lender test and operating in any state could engage, provided the Kentucky bank first obtains a legal opinion specifying the statutory or regulatory provisions that permit the activity.

Capital Adequacy Requirements. The Company and the Bank are required to comply with capital adequacy guidelines. Guidelines are established by the Federal Reserve Board for the Company and the FDIC for the Bank. Both the Federal Reserve Board and the FDIC have substantially similar risk based and leverage ratio guidelines for banking organizations, which are intended to ensure that banking organizations have adequate capital related to the risk levels of assets and off-balance sheet instruments. The capital adequacy guidelines are minimum supervisory ratios generally applicable to banking organizations that meet certain specified criteria, assuming they have the highest regulatory rating. Banking organizations not meeting these criteria are expected to operate with capital positions well above the minimum ratios. The federal bank regulatory agencies may set capital requirements for a particular banking organization that are higher than the minimum ratios when circumstances warrant. Federal Reserve Board guidelines also provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets.

The minimum capital level requirements applicable to the Company and the Bank are a common equity Tier 1 capital ratio of 4.5%, a Tier 1 risk-based capital ratio of 6%, a total risk-based capital ratio of 8%, and a Tier 1 leverage ratio of 4% for all institutions. The rules also require a “capital conservation buffer” of 2.5% above the regulatory minimum risk-based capital ratios. Including this buffer, the required 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 capital that can be utilized for such actions.

Under the capital rules, Tier 1 capital generally consists of common stock (plus related surplus) and retained earnings, limited amounts of minority interest in the form of additional Tier 1 capital instruments, and non-cumulative preferred stock and related surplus, subject to certain eligibility standards, less goodwill and other specified intangible assets and other regulatory deductions. Tier 2 capital may consist of subordinated debt, certain hybrid capital instruments, qualifying preferred stock, and a limited amount of the allowance for loan losses. Proceeds of trust preferred securities are excluded from Tier 1 capital unless issued before 2010 by an institution with less than $15 billion of assets. Total capital is the sum of Tier 1 and Tier 2 capital.

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Prompt Corrective Action. Pursuant to the Federal Deposit Insurance Act (“FDIA”), the FDIC must take prompt corrective action to resolve the problems of undercapitalized institutions. FDIC regulations define the levels at which an insured institution would be considered “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized”. A bank is “undercapitalized” if it fails to meet any one of the ratios required to be adequately capitalized. A depository institution may be deemed to be in a capitalization category that is lower than is indicated by its actual capital position if it receives an unsatisfactory examination rating. The degree of regulatory scrutiny increases and the permissible activities of a bank decrease as the bank moves downward through the capital categories. Depending on a bank’s level of capital, an institution may be required to submit a capital restoration plan, and its holding company must guarantee compliance with the capital restoration plan up to 5% of the institution’s assets at the time it became undercapitalized.

Deposit Insurance Assessments. The deposits of the Bank are insured by the Deposit Insurance Fund (“DIF”) of the FDIC up to the limits set forth under applicable law and are subject to the deposit insurance premium assessments of the DIF. The FDIC imposes a risk-based deposit premium assessment system, which calculates a bank’s premium assessment by multiplying its risk-based assessment rate by its assessment base. As required by the Dodd-Frank Act, a bank’s assessment base is determined by its consolidated total assets less average tangible equity rather than deposits.

Safety and Soundness Standards. The FDIA requires the federal bank regulatory agencies to prescribe standards, by regulations or guidelines, relating to internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, asset quality, earnings, stock valuation and compensation, fees and benefits, and such other operational and managerial standards as the agencies deem appropriate. Guidelines adopted by the federal bank regulatory agencies establish general standards relating to these matters. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risk and exposures specified in the guidelines. In addition, the agencies adopted regulations that authorize, but do not require, an agency to order an institution that has been given notice by an agency that it is not satisfying any of such safety and soundness standards to submit a compliance plan. If, after being so notified, an institution fails to submit an acceptable compliance plan or fails in any material respect to implement an acceptable compliance plan, the agency must issue an order directing action to correct the deficiency and may issue an order directing other actions of the types to which an undercapitalized institution is subject under the “prompt corrective action” provisions of FDIA. See “Prompt Corrective Actions” above. If an institution fails to comply with such an order, the agency may seek to enforce such order in judicial proceedings and to impose civil money penalties.

Incentive Compensation. The Dodd-Frank Act requires the federal bank regulatory agencies and the SEC to establish joint regulations or guidelines prohibiting incentive-based payment arrangements at specified regulated entities having at least $1 billion in total assets, such as the Company and the Bank, that encourage inappropriate risks by providing an executive officer, employee, director, or principal shareholder with excessive compensation, fees, or benefits or that could lead to material financial loss to the entity. In addition, ~~these~~the ~~regulators~~Dodd-Frank Act requires the SEC to adopt rules under which listed companies must ~~establish~~have ~~regulations~~(and ordisclose) ~~guidelines~~a ~~requiring~~“clawback” ~~enhanced~~policy ~~disclosure~~for tothe ~~regulators~~recovery of erroneously awarded executive incentive~~-based~~ compensation ~~arrangements.~~following ~~The~~an ~~agencies~~accounting ~~proposed~~restatement ~~such~~due ~~regulations~~to inmaterial ~~April~~noncompliance ~~2011,~~with ~~but~~financial ~~the~~reporting ~~regulations~~requirements ~~have~~under ~~not~~the ~~been~~securities ~~finalized~~laws. IfIn October 2022, the ~~regulations~~SEC ~~are~~finalized ~~adopted~~rules into ~~the~~require ~~form~~listing ~~initially~~standards ~~proposed,~~to ~~they~~be ~~will~~updated to implement this “clawback” policy requirement and to impose ~~limitations~~related disclosure requirements on ~~the~~listed ~~manner~~companies. inWhen ~~which~~fully implemented, listed companies, like the Company, ~~may~~will ~~structure~~be ~~compensation~~required to have a policy providing for ~~its~~the ~~executives~~recovery, in the event of a required accounting restatement, of incentive-based compensation received by current or former executive officers where that compensation is based on the erroneously reported financial information.

In June 2010, the Federal Reserve, OCC, and FDIC issued comprehensive final guidance on incentive compensation policies of banking organizations intended to ensure that these policies do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The guidance, which covers all employees who have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors. These three principles are incorporated into ~~the~~ proposed joint compensation regulations under the Dodd-Frank Act. The agencies proposed such regulations in April 2011, ~~discussed~~and ~~above~~reproposed the regulations in 2016, but they have not been finalized.

The Federal Reserve will review, as part of the regular, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as the Company, that are not “large, complex banking organizations.” These reviews will be tailored to each organization based on the scope and complexity of the organization’s activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the organization’s supervisory ratings, which can affect the organization’s ability to make acquisitions and take other actions.

Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.

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Branching. Kentucky law permits Kentucky chartered banks to establish a banking office in any county in Kentucky. A Kentucky bank may also establish a banking office outside of Kentucky. Well capitalized Kentucky banks that have been in operation at least three years and satisfy certain criteria relating to, among other things, their composite and management ratings, may establish a banking office in Kentucky without the approval of the KDFI upon notice to the KDFI and any other state bank with its main office located in the county where the new banking office will be located. Otherwise, branching requires the approval of the KDFI, which must ascertain and determine that the public convenience and advantage will be served and promoted and that there is reasonable probability of the successful operation of the banking office. The transaction must also be approved by the FDIC, which considers a number of factors, including financial history, capital adequacy, earnings prospects, character of management, needs of the community, and consistency with corporate powers.

Section 613 of the Dodd-Frank Act effectively eliminated the interstate branching restrictions set forth in the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. Banks located in any state may now de novo branch in any other state, including Kentucky. Such unlimited branching power may increase competition within the markets in which the Company and the Bank operate.

Insider Credit Transactions. The restrictions on loans to directors, executive officers, principal shareholders and their related interests (collectively referred to as “insiders”) contained in the Federal Reserve Act and Regulation O apply to all insured depository institutions and their subsidiaries. These restrictions include limits on loans to one borrower and conditions that must be met before such a loan can be made. There is also an aggregate limitation on all loans to insiders and their related interests, which may not exceed the institution’s total unimpaired capital and surplus.

Consumer Protection Laws. The Bank is subject to federal consumer protection statues and regulations promulgated under those laws, including, but not limited to, the:

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Truth-In-Lending Act and Regulation Z, governing disclosures of credit terms to consumer borrowers;

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Home Mortgage Disclosure Act and Regulation C, requiring financial institutions to provide certain information about home mortgage and refinanced loans;

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Real Estate Settlement Procedures Act (“RESPA”), requiring lenders to provide borrowers with disclosures regarding the nature and cost of real estate settlements and prohibiting certain abusive practices;

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Secure and Fair Enforcement for Mortgage Licensing Act (“S.A.F.E. Act”), requiring residential loan originators who are employees of financial institutions to meet registration requirements;

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Fair Credit Reporting Act and Regulation V, governing the provision of consumer information to credit reporting agencies and the use of consumer information;

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Equal Credit Opportunity Act and Regulation B, and the Fair Housing Act, prohibiting discrimination on the basis of race, religion, national origin, sex, and a variety of other prohibited factors in the extension of credit;

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Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;

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Truth in Savings Act, which requires disclosure of deposit terms to consumers;

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Regulation CC, which relates to the availability of deposit funds to consumers;

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Right to Financial Privacy Act, which imposes a duty to maintain the confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;

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Electronic Funds Transfer Act and Regulation E, establishing rights, liabilities, and responsibilities of participants in electronic fund transfer systems such as automated teller machine transfers, telephone bill-payment services, point-of-sale (POS) terminal transfers in stores, and preauthorized transfers from or to a consumer's account; and

●

Automated Overdraft Payment Regulations, requiring financial institutions to provide customer notices, monitor overdraft payment programs, and prohibiting financial institutions from charging consumer fees for paying overdrafts on automated teller machine and one time debit card transactions unless a consumer consents, or opts in to the service for those types of transactions.

The Dodd-Frank Act created the Consumer Financial Protection Bureau (“CFPB”), which has broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws. As a bank with less than $10 billion or more in assets, the Bank is subject to rules promulgated by the CFPB, but continues to be examined and supervised by the FDIC, its federal banking regulator for consumer compliance purposes. The CFPB has authority to prevent unfair, deceptive, or abusive acts or practices in connection with the offering of consumer financial products. The CFPB has established certain minimum standards for the origination of residential mortgages including a determination of the borrower’s ability to repay. The Dodd-Frank Act allows borrowers to raise certain defenses to foreclosure if they receive any loan other than a “qualified mortgage” as defined by the CFPB. The Economic Growth, Regulatory Relief and Consumer Protection Act created a qualified mortgage safe harbor for eligible loans that are originated and retained by a bank with total assets of less than $10 billion.

The Dodd-Frank Act also permits states to adopt consumer protection laws and standards that are more stringent than those adopted at the federal level and, in certain circumstances, permits state attorneys general to enforce compliance with both the state and federal laws and regulations.

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Loans to One Borrower. Under current limits, loans and extensions of credit outstanding at one time to a single borrower and not fully secured generally may not exceed 20% of an institution’s unimpaired capital and unimpaired surplus. Loans and extensions of credit fully secured by collateral may represent an additional 10% of unimpaired capital and unimpaired surplus.

Privacy. Federal law currently contains extensive customer privacy protection provisions. Under these provisions, the Bank must provide to its customers, at the inception of the customer relationship and annually thereafter, its policies and procedures regarding the handling of customers’ nonpublic personal financial information. Except for certain limited exceptions, the Bank may not provide such personal information to unaffiliated third parties unless it discloses to the customer that such information may be so provided and the customer is given the opportunity to opt out of such disclosure. Federal law makes it a criminal offense, except in limited circumstances, to obtain or attempt to obtain customer information of a financial nature by fraudulent or deceptive means.

Community Reinvestment Act. The Community Reinvestment Act (“CRA”) requires the FDIC to assess the Company’s record in meeting the credit needs of the communities the Bank serves, including low- and moderate-income neighborhoods and persons. The FDIC’s assessment of the Company’s record is made available to the public. The assessment also is part of the Federal Reserve Board’s and the FDIC’s consideration of applications to acquire, merge or consolidate with another banking institution or its holding company, to establish a new banking office or to relocate an office.

Bank Secrecy Act. The Bank Secrecy Act of 1970 (“BSA”) was enacted to deter money laundering, establish regulatory reporting standards for currency transactions, and improve detection and investigation of criminal, tax, and other regulatory violations. BSA and subsequent laws and regulations require steps to be taken to prevent the use of the Bank in the flow of illegal or illicit money, including, without limitation, ensuring effective management oversight, establishing sound policies and procedures, developing effective monitoring and reporting capabilities, ensuring adequate training, and establishing a comprehensive internal audit of BSA compliance activities. Rules issued under the BSA require the Bank to identify the beneficial owners who own or control certain legal entity customers at the time an account is opened and to include in its anti-money laundering program risk-based procedures for conducting ongoing customer due diligence.

USA Patriot Act. The USA Patriot Act of 2001 (the “Patriot Act”) contains anti-money laundering measures affecting insured depository institutions, broker-dealers, and certain other financial institutions. The Patriot Act requires financial institutions to implement policies and procedures to combat money laundering and the financing of terrorism. This includes standards for verifying customer identification at account opening, as well as rules to promote cooperation among financial institutions, regulators, and law enforcement entities in identifying parties that may be involved in terrorism or money laundering. It grants the Secretary of the Treasury broad authority to establish regulations and to impose requirements and restrictions on the operations of financial institutions. In addition, the Patriot Act requires the federal bank regulatory agencies to consider the effectiveness of a financial institution’s anti-money laundering activities when reviewing bank mergers and bank holding company acquisitions.

The Dodd-Frank Act. The Dodd-Frank Act imposed new restrictions and requirements and an expanded framework of regulatory oversight for financial institutions, including depository institutions and their holding companies. The implementation of the Dodd-Frank Act has resulted in greater compliance costs and higher fees paid to regulators. The Economic Growth, Regulatory Relief and Consumer Protection Act of 2018 provided some regulatory relief to banking organizations, primarily small, community banking organizations, by adjusting thresholds at which certain increased regulatory requirements imposed under the Dodd-Frank Act begin to apply. As a result, traditional community banking organizations with assets of less than $10 billion, such as the Company, are exempt from the Volker Rule under the Dodd-Frank Act, which places limits and restrictions on trading and hedging activities. In addition, community banking organizations with assets of less than $10 billion are now subject to reduced reporting requirements and, ~~effective January 1, 2020,~~ an optional simplified capital adequacy measure is available to those that have a leverage ratio greater than 9%. The Bank ~~has~~elected not ~~elected~~ to use this optional capital adequacy measure.

Effect on Economic Environment. The policies of regulatory authorities, including the monetary policy of the Federal Reserve Board, have a significant effect on the operating results of bank holding companies and bank subsidiaries. Among the means available to the Federal Reserve Board to affect the money supply are open market operations in U.S. government securities, changes in the discount rate on member bank borrowings, and changes in reserve requirements against member bank deposits. These means are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits. Their use may affect interest rates charged on loans or paid for deposits.

Federal Reserve Board monetary policies have materially affected the operating results of commercial banks in the past and are expected to continue to do so in the future. The nature of future monetary policies and the effect of such policies on the Company’s business and earnings and those of the Company’s subsidiaries cannot be predicted.

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Effect of Economic Environment. The policies of regulatory authorities, including the monetary policy of the Federal Reserve Board, have a significant effect on the operating results of bank holding companies and bank subsidiaries. Among the means available to the Federal Reserve Board to affect the money supply are open market operations in U.S. government securities, changes in the discount rate on member bank borrowings, and changes in reserve requirements against member bank deposits. These means are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits. Their use may affect interest rates charged on loans or paid for deposits.

Legislative and Regulatory Initiatives. From time to time various laws, regulations, and governmental programs affecting financial institutions and the financial industry are introduced in Congress or otherwise promulgated by regulatory agencies. Such measures may change the environment in which the Company and its subsidiaries operate in substantial and unpredictable ways. The nature and extent of future legislative, regulatory, or other changes affecting financial institutions are unpredictable at this time. Future legislation, policies, and the effects thereof might have a significant influence on overall growth and distribution of loans, investments, and deposits. They also may affect interest rates charged on loans or paid on time and savings deposits. New legislation and policies have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future.

Item 1A. Risk Factors

FACTORS THAT MAY AFFECT FUTURE RESULTS

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

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

Risks Related to the Company’s Pending Merger Transaction

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

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

●

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

●

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

●

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

●

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

●

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

●

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Pandemic

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

In March 2020, the World Health Organization declared ~~novel coronavirus disease 2019 (“~~COVID-19”) as a global pandemic. The COVID-19 pandemic ~~has~~ created economic and financial ~~disruptions~~disruption ~~that~~and ~~have~~ adversely affected, ~~and are likely to continue to adversely affect,~~ the business, financial condition, and results of operations of the Company and its customers. The COVID-19 pandemic caused changes in the behavior of customers, businesses, and their employees, ~~including~~as ~~illness,~~well ~~quarantines,~~as ~~social distancing practices, cancellation of events and travel, business and school shutdowns, reduction in commercial activity and financial transactions,~~ supply chain interruptions, ~~increased unemployment,~~ and overall economic and financial market instability.

~~Future~~While government, schools, and businesses have largely reopened, future effects, including ~~further~~any actions taken by federal, state, and local governments in response to ~~contain~~potential ~~COVID-19~~disruptions orin ~~treat~~the ~~its~~future or their impact, are unknown. InPrior ~~addition,~~and ~~federal~~ongoing governmental actions ~~are~~have and continue to meaningfully ~~influencing~~influence the interest-rate environment. If these actions are sustained, it may adversely impact several industries within the Company’s geographic footprint and impair the ability of the Company’s customers to fulfill their contractual obligations. This could cause the Company to experience a material adverse effect on business operations, liquidity, asset valuations, results of operations, and financial condition, as well as its regulatory capital and liquidity ratios. ~~Material adverse impacts may include all or a combination of valuation impairments on the Company’s intangible assets, investments, loans, or deferred tax assets.~~

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

Global Economic and Geopolitical Instability and Inflationary Risks

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Approximately 7072.74% of the Bank’s loan portfolio as of December 31, ~~2021~~2022, was comprised of commercial and residential loans collateralized by real estate. Adverse economic conditions could decrease demand for real estate and depress real estate values in the Company’s markets. Persistent weakness in the real estate market could significantly impair the value of loan collateral and the ability to sell the collateral upon foreclosure. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. If real estate values decline, it will become more likely that management would be required to increase the Bank’s allowance for loan losses. If during a period of depressed real estate values, management was required to liquidate the collateral securing a loan to satisfy the debt or to increase the allowance for loan losses, it could materially reduce the Bank’s profitability and adversely affect its financial condition.

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

Approximately 712.52% of the Company’s loan portfolio as of December 31, ~~2021~~2022 consisted of real estate construction and development loans, ~~down~~up from 9.7.5% at December 31, ~~2020~~2021 and ~~up from 7~~9.07% at December 31, ~~2019~~2020. These loans generally carry a higher degree of risk than long-term financing of existing properties because repayment depends on the ultimate completion of the project and permanent financing or sale of the property. If the Bank is forced to foreclose on a project prior to its completion, it may not be able to recover the entire unpaid portion of the loan or it may be required to fund additional money to complete the project, or hold the property for an indeterminate period of time. Any of these outcomes may result in losses and adversely affect profitability and financial condition.

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

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

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

While there were no OREO properties held by the Bank at December 31, ~~2021~~2022, the Bank may acquire and dispose of a significant amount of real estate as a result of foreclosure or by deed in lieu of foreclosure that is listed on the balance sheet as other real estate owned (“OREO”). An increase in the OREO portfolio increases the expenses incurred to manage and dispose of these properties, which sometimes includes funding construction required to facilitate sale.

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

Profitability is vulnerable to fluctuations in interest rates.

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

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

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

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

~~The~~ LIBOR is the reference rate used for many transactions, including lending and borrowing, as well as the derivatives that may be used to manage risk related to such transactions. Effective January 1, 2022, LIBOR ceased to exist as a published rate for one-week and two-month dollar settings and will cease for remaining U.S. dollar settings after June 30, 2023. The expected discontinuation of LIBOR could have a significant impact on the financial markets and market participants such as the Company. As of December 31, ~~2021~~2022, the Company had approximately $8066.41 million in variable rate loans with interest rates tied to LIBOR for which a replacement index had not yet been identified, as well as certain investment securities and debt obligations tied to LIBOR, all of which have maturity dates beyond June 30, 2023.

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

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

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

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

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

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

The Company is a legal entity separate and distinct from the Bank and its other subsidiaries. The principal source of cash flow, from which it would fund any dividends paid to shareholders, has historically been dividends the Company receives from the Bank. Regulations of the FDIC and the KDFI govern the ability of the Bank to pay dividends and other distributions to the Company, and regulations of the Federal Reserve govern the ability to pay dividends or make other distributions to shareholders. ~~During 2021, the Bank returned to a positive retained earnings position.~~ Based on these regulations, the Bank was eligible to pay $620.54 million of dividends at December 31, ~~2021~~2022. The Bank paid the Company $27.05 million of dividends during ~~2021~~2022. See the “Item 1. Business” “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities – Dividends.”

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The Company may sell capital stock in the future to raise additional capital or for additional liquidity. Future sales or other dilution of equity may adversely affect the market price of the Company’s common shares.

The issuance of additional common shares or securities convertible into common shares would dilute the ownership interest of the Company’s existing common shareholders. The market price of the Company’s common shares could decline as a result of such an offering as well as other sales of a large block of shares of common shares or similar securities in the market after such an offering, or the perception that such sales could occur. The Company’s common shares have traded from time-to-time at a price below book value per share. A sale of common shares at or below book value would be dilutive to current shareholders. The sale of shares at a price below market value could negatively impact the market price of the Company’s common shares.

Deferred Tax Assets

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

Due to losses in prior years, the Company has a net operating loss carry-forward of $1913.38 million, credit carry-forwards of $208,000, and other net deferred tax assets of $27.03 million. In order to realize the benefit of these tax losses, credits, and deductions, the Company must generate substantial taxable income in future periods. Deferred tax assets are calculated using a federal corporate tax rate of 21% and a state corporate tax rate of 5%. Changes in tax laws and rates may affect deferred tax assets in the future. If higher federal corporate tax rates are enacted, net deferred tax assets would be increased commensurate with the rate increase. Federal net operating loss carry-forwards begin to expire in ~~2032~~2033 and state net operating loss carryforwards begin to expire in ~~2026~~2031. Additionally, should the Company need to raise additional capital by issuing new common shares or securities convertible into common shares, then depending on the number of common share equivalents issued, it could trigger a “change in control,” as defined by Section 382 of the Internal Revenue Code. Such an event could negatively impact or limit the ability to utilize net operating loss carry-forwards, credit loss carry-forwards, and other net deferred tax assets, and result in an impairment of these deferred tax assets for financial reporting purposes.

Acquisitions

Acquisitions may not produce revenue enhancements or cost savings at levels or within time frames originally anticipated and may result in unforeseen integration difficulties.

The Company regularly explores opportunities to acquire banks, branches, financial institutions, or other financial services businesses or assets. The Company cannot predict the number, size, or timing of acquisitions. Difficulty in integrating an acquired business or company may cause the Company not to realize expected revenue increases, cost savings, increases in geographic or product presence, and/or other projected benefits from the acquisition. The integration could result in higher than expected deposit attrition (run-off), loss of key employees, disruption of the Company’s business or the business of the acquired company, or otherwise adversely affect the Company’s ability to maintain relationships with customers and employees or achieve the anticipated benefits of the acquisition. Also, the negative effect of any divestitures required by regulatory authorities in acquisitions or business combinations may be greater than expected. The Company may also issue equity securities in connection with acquisitions, which could cause ownership and economic dilution to current shareholders.

Litigation

Risk related to legal proceedings.

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

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Deposit Insurance Expense

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

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

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Competition, Management

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

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

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

●

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

●

offer a broader range of services than the Bank does;

●

maintain more branch locations than the Bank does; and

●

mount extensive promotional and advertising campaigns.

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

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

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

Accounting Estimates, Internal Controls, Cybersecurity

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

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

Certain accounting policies require management to make difficult, subjective, or complex judgments about matters that are uncertain. Materially different amounts could be reported under different conditions or using different assumptions or estimates. These accounting policies include the valuation of securities, allowance for loan losses, and valuation of net deferred income tax asset. Because of the uncertainty of estimates involved in these matters, the Company may be required, among other things, to recognize other-than-temporary impairment on securities, significantly increase the allowance for credit losses, sustain credit losses that are higher than the reserve provided, or permanently impair deferred tax assets. 16

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

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

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

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

Information systems may experience an interruption or security breach.

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

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

Third parties with which the Bank does business or that facilitate its business activities could also be sources of operational and information security risk to the Bank, including from breakdowns or failures of their own systems or capacity constraints. Although to date the Bank has not experienced any material losses relating to cyber-attacks or other information security breaches, the Bank can give no assurance that it will not suffer such losses in the future. Risk and exposure to these matters remains heightened because of, among other things, the evolving nature of these threats and the prevalence of Internet and mobile banking. As cyber threats continue to evolve, the Bank may be required to expend significant additional resources to continue to modify or enhance its protective measures or to investigate and remediate any information security vulnerabilities. Disruptions or failures in the physical infrastructure or operating systems that support the Bank’s businesses and customers, or cyber-attacks or security breaches of the networks, systems, or devices that the Bank’s customers use to access its products and services could result in customer attrition, regulatory fines, penalties or intervention, reputational damage, reimbursement or other compensation costs, and/or additional compliance costs, any of which could materially adversely affect the Bank’s business, results of operations, or financial condition. 17

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Bank Regulation

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

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

Federal and state banking laws and regulations govern numerous matters including the payment of dividends, ~~the~~bank acquisition ofand ~~other~~merger ~~banks~~transactions, and the establishment of new banking offices. The Company must also meet specific regulatory capital requirements. Failure to comply with these laws, regulations, and policies or to maintain required capital could affect the ability to pay dividends on common shares, ~~the~~and ~~ability to grow through~~ the ~~development~~implementation of ~~new~~strategic ~~offices, make acquisitions, and remain independent~~plans. ~~These limitations may prevent the Company from successfully implementing growth and operating strategies.~~

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

Changes in banking laws could have a material adverse effect.

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

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Item 1B. Unresolved Staff Comments

Not applicable.

Item 2. Properties

The Bank operates 20 banking offices in Kentucky. The following table shows the location, square footage, and ownership of each property. Management believes that each of these locations is adequately insured. Support operations are located at the main office in Louisville and in Canmer.

Markets	Square Footage		~~Owned/Leased~~	Owned/Leased
Frankfort/Franklin County
Frankfort Office: 100 Highway 676, Frankfort	~~3,000~~	3,000	~~Leased~~	Leased
Elizabethtown/Hardin County
Elizabethtown Office: 1690 Ring Road, Suite 100, Elizabethtown	~~4,000~~	4,000	~~Leased~~	Leased
Louisville/Jefferson, Bullitt and Henry Counties
Main Office: 2500 Eastpoint Parkway, Louisville	~~30,000~~	30,000	~~Owned~~	Owned
Eminence Office: 646 Elm Street, Eminence	~~1,500~~	1,500	~~Owned~~	Owned
Hillview Office: 6890 North Preston Highway, Hillview	~~3,500~~	3,500	~~Owned~~	Owned
Pleasureville Office: 5440 Castle Highway, Pleasureville	~~10,000~~	10,000	~~Owned~~	Owned
Conestoga Office: 155 Conestoga Parkway, Shepherdsville	3,900		Owned
Shepherdsville Office: 155 Conestoga Parkway, Shepherdsville		3,900		Owned
St. Matthews Office: 4304 Shelbyville Road, Louisville	~~3,400~~	3,400	~~Leased~~	Leased
Lexington/Fayette County
Lexington Office: 3880 Fountainblue Lane, Suite 120, Lexington	~~3,000~~	3,000	~~Leased~~	Leased
City Center Office: 130 West Main Street, Lexington	~~2,400~~	2,400	~~Leased~~	Leased
South Central Kentucky
Brownsville Office: 113 East Main Cross Street, Brownsville	~~8,500~~	8,500	~~Owned~~	Owned
Greensburg Office: 202 North Main Street, Greensburg	~~11,000~~	11,000	~~Owned~~	Owned
Horse Cave Office: 201 East Main Street, Horse Cave	~~5,000~~	5,000	~~Owned~~	Owned
Morgantown Office: 112 West G.L. Smith Street, Morgantown	~~7,500~~	7,500	~~Owned~~	Owned
Munfordville Office: 949 South Dixie Highway, Munfordville	~~9,000~~	9,000	~~Owned~~	Owned
Beaver Dam Office: 1300 North Main Street, Beaver Dam	~~3,200~~	3,200	~~Owned~~	Owned
Owensboro/Daviess County
Owensboro Frederica Office: 3500 Frederica Street, Owensboro	~~5,000~~	5,000	~~Owned~~	Owned
Owensboro Villa Point: 3332 Villa Point Drive, Owensboro	2,000		Leased
Owensboro Gateway Commons: 3250 Hayden Road Unit #3, Owensboro		3,000		Leased
Southern Kentucky
Campbell Lane Office: 751 Campbell Lane, Bowling Green	~~7,500~~	7,500	~~Owned~~	Owned
Glasgow Office: 1006 West Main Street, Glasgow	~~12,000~~	12,000	~~Owned~~	Owned
Other Properties
Office Building: 2708 North Jackson Highway, Canmer	~~3,500~~	3,500	~~Owned~~	Owned

Item 3. 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. Litigation is subject to inherent uncertainties and unfavorable outcomes could occur.

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

The Company is not currently ~~involved~~a inparty to any material litigation.

Item 4. Mine Safety Disclosure

Not applicable.

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

The Company’s common shares are traded on the Nasdaq Capital Market under the ticker symbol “LMST”.

As of January 31, ~~2022~~2023, the Company’s common shares were held by approximately 1,~~439~~ 839 shareholders, including ~~323~~336 shareholders of record and approximately 1,~~116~~ 503 beneficial owners whose shares are held in “street” name by securities broker-dealers or other nominees, and the Company’s non-voting common shares were held by one holder.

Dividends

As a bank holding company, the Company’s ability to declare and pay dividends depends on various federal regulatory considerations, including the guidelines of the Federal Reserve regarding capital adequacy and dividends.

The principal source of revenue with which to pay dividends on common shares are dividends the Bank may declare and pay out of funds legally available for payment of dividends. A Kentucky chartered bank may declare a dividend of an amount of the bank’s net profits as the board deems appropriate. The approval of the KDFI is required if the total of all dividends declared by a bank in any calendar year exceeds the total of its net profits for that year combined with its retained net profits for the preceding two years, less any required transfers to surplus or a fund for the retirement of preferred stock or debt.

1921

Table of Contents

Purchase of Equity Securities by Issuer

On October 20, 2021, the Board of Directors ~~of the Company~~ approved a share repurchase program authorizing the ~~repurchase~~Company ofto purchase up to $3.0 million of the Company’s ~~common~~Common ~~shares~~Shares over time. ~~The~~in ~~share~~the ~~repurchase~~open ~~program~~market isor ~~scheduled~~in toprivately ~~expire~~negotiated ~~December 31, 2022~~transactions. ~~During~~No ~~the~~shares ~~fourth~~were ~~quarter~~repurchased ofunder ~~2021,~~ the ~~Company~~plan, ~~did~~which ~~not~~expired ~~repurchase~~on ~~any~~December of31, ~~its common shares~~2022.

Equity Compensation Plan Information

The following table provides information about the Company’s equity compensation plans as of December 31, ~~2021~~2022:

Plan category

Number of securities to be issued upon exercise of outstanding options, warrants and rights

Weighted-average exercise price of outstanding options, warrants and rights

Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column 1)

Equity compensation plans approved by shareholders

—

~~166~~122,~~375~~603

Equity compensation plans not approved by shareholders

—

Total

—

~~166~~122,~~375~~603

At December 31, ~~2021~~2022, ~~166~~122,~~375~~603 common shares remain available for issuance under the Company’s 2018 Omnibus Equity Compensation Plan; however, the Company is precluded from issuing additional shares based on the terms of the Merger Agreement.

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Item 6. Reserved

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s discussion and analysis of financial condition and results of operations analyzes the consolidated financial condition and results of operations of Limestone Bancorp, Inc. (the “Company”) and its wholly owned subsidiary, Limestone Bank, Inc. (the “Bank”). The Company is a Louisville, Kentucky-based bank holding company that operates banking offices in 14 Kentucky counties. The Bank’s markets include metropolitan Louisville in Jefferson County and the surrounding counties of Bullitt and Henry. The Bank serves south central, southern, and western Kentucky from banking offices in Barren, Butler, Daviess, Edmonson, Green, Hardin, Hart, Ohio, and Warren Counties. The Bank also has anoffices ~~office~~ in Lexington, the second largest city in the state, and Frankfort, the state capital. The Bank is a traditional community bank with a wide range of personal and business banking products and services.

Selected Consolidated Financial Data

As of and for the Years Ended December 31,

(Dollars in thousands except per share data)

~~2021~~2022

~~2020~~2021

~~2019~~2020

~~2018~~2019

~~2017~~2018

Income Statement Data:

Interest income

4957,~~915~~810

5049,~~753~~915

4950,~~584~~753

4349,~~461~~584

3743,~~522~~461

Interest expense

58,~~693~~732

105,~~152~~693

1410,~~234~~152

914,~~790~~234

69,~~405~~790

Net interest income

4449,~~222~~078

4044,~~601~~222

3540,~~350~~601

3335,~~671~~350

3133,~~117~~671

Provision (negative provision) for loan losses

~~1,150~~80

41,~~400~~150

—4,400

~~(500~~—

)

(~~800~~500

)

Non-interest income (1)

8,~~439~~877

68,~~844~~439

56,~~918~~844

5,~~779~~918

5,~~404~~779

Non-interest expense (2)

3133,~~971~~757

3231,~~416~~971

3032,~~270~~416

2930,~~126~~270

3029,~~767~~126

Income before income taxes

1924,~~540~~118

1019,~~629~~540

10,~~998~~629

10,~~824~~998

610,~~554~~824

Income tax expense (benefit) (3)

4,631

1,624

480

2,030

(31,899

)

Income tax expense (3)

5,776

4,631

1,624

480

2,030

Net income

1418,~~909~~342

914,~~005~~909

109,~~518~~005

810,~~794~~518

388,~~453~~794

Less:

Earnings allocated to participating securities

~~219~~302

68219

~~106~~68

~~144~~106

~~967~~144

Net income attributable to common

1418,~~690~~040

814,~~937~~690

108,~~412~~937

810,~~650~~412

378,~~486~~650

Common Share Data:

Basic earnings per common share

12.9640

1.2096

1.4120

1.2341

61.1523

Diluted earnings per common share

12.9640

1.2096

1.4120

1.2341

61.1523

Cash dividends declared per common share

—0.20

—

Book value per common share

17.2452

1517.4724

~~14.~~15.47

1214.3415

1112.1734

Tangible book value per common share (4)

16.1648

1416.3416

1214.9834

12.3498

1112.1734

Balance Sheet Data (at period end): (2)

Balance Sheet Data (at period end):

Total assets

1,~~415~~462,~~692~~455

1,~~312~~415,~~302~~692

1,~~245~~312,~~779~~302

1,~~069~~245,~~692~~779

~~970~~1,~~801~~069,692

Debt obligations:

FHLB advances

2070,000

20,~~623~~000

6120,~~389~~623

4661,~~549~~389

1146,~~797~~549

Junior subordinated debentures

21,000

Subordinated capital notes

25,000

1725,000

—17,000

~~2,250~~—

Senior debt

—

~~5,000~~—

105,000

10,000

Average Balance Data: (2)

Average Balance Data:

Average assets

1,~~363~~434,~~397~~437

1,~~294~~363,~~934~~397

1,~~112~~294,~~388~~934

1,~~026~~112,~~310~~388

~~947~~1,~~961~~026,310

Average loans

~~958~~1,~~549~~072,330

~~964~~958,~~088~~549

~~801~~964,~~813~~088

~~743~~801,~~352~~813

~~667~~743,~~474~~352

Average deposits

1,~~164~~197,~~355~~906

1,~~099~~164,~~383~~355

~~936~~1,~~243~~099,383

~~860~~936,~~825~~243

~~864~~860,~~278~~825

Average FHLB advances

2050,~~152~~274

3420,~~101~~152

3534,~~038~~101

4335,~~363~~038

943,~~184~~363

Average junior subordinated debentures

21,000

Average subordinated capital notes

25,000

2025,~~366~~000

720,~~545~~366

~~791~~7,545

~~2,805~~791

Average senior debt

—

~~2,896~~—

72,~~781~~896

107,~~000~~781

510,~~068~~000

Average stockholders’ equity

~~123~~129,~~942~~453

~~109~~123,~~958~~942

~~100~~109,~~126~~958

84100,~~860~~126

3784,~~851~~860

(1) In 2022, the Company recognized a $163,000 gain on sale of premises held for sale. In 2021, the Company recognized a $191,000 gain on the sale of OREO and a $465,000 gain on the call of a corporate bond from the Company’s available for sale securities portfolio.

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(2) On October 24, 2022, Peoples and the Company entered into the Merger Agreement. Merger expenses totaled $691,000, or $0.07 per common share after taxes. On November 15, 2019, the Company completed a four branch acquisition. The purchase included $126.8 million in performing loans and $1.5 million in premises and equipment, as well as $131.8 million in customer deposits. Acquisition related costs totaled $775,000, or $0.08 per common share after taxes.

(3) Effective January 1, 2021, the Commonwealth of Kentucky eliminated the bank franchise tax, which was previously reported as a non-interest expense, and implemented a state income tax at a statutory rate of 5%. State income tax was $1.0 million for 2022 and $939,000 for 2021. For 2020 and 2019, income tax expense benefitted $478,000 and $1.6 million, respectively, from the establishment of a net deferred tax asset related to a change in Kentucky tax law enacted during 2019. Income tax expense for 2017 benefitted $54.0 million from the reversal of the deferred tax valuation allowance offset by $20.3 million of income tax expense related to the revaluation of the deferred tax asset to 21%.

(4)

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

	As of and for the Years Ended December 31,
	2021		2020		2019		2018		2017
	2022		2021		2020		2019		2018
Tangible Book Value Per Share	(in thousands, except share and per share data)
Common stockholder’s equity	$	~~130~~133,~~959~~858	$	~~116~~130,~~024~~959	$	~~105~~116,~~750~~024	$	92105,~~097~~750	$	6992,~~902~~097
Less: Goodwill		6,252		6,252		6,252		—6,252		—
Less: Intangible assets		1,~~989~~733		21,~~244~~989		2,~~500~~244		—2,500		—
Tangible common equity		~~122~~125,~~718~~873		~~107~~122,~~528~~718		96107,~~998~~528		9296,~~097~~998		6992,~~902~~097
Shares outstanding		7,~~594~~638,~~749~~633		7,~~498~~594,~~865~~749		7,~~471~~498,~~975~~865		7,~~462~~471,~~720~~975		67,~~259~~462,~~864~~720
Tangible book value per common share	$	16.1648	$	1416.3416	$	1214.9834	$	12.3498	$	1112.1734
Book value per common share		17.2452		1517.4724		~~14.~~15.47		1214.3415		1112.1734

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

Overview

For the year ended December 31, ~~2021~~2022, the Company reported net income of $1418.93 million compared with net income of $914.09 million for the year ended December 31, ~~2020~~2021 and net income of $109.50 million for the year ended December 31, ~~2019~~2020. Basic and diluted income per common share were $12.9640 for the year ended December 31, ~~2021~~2022, compared with $1.2096 for ~~2020~~2021, and $1.4120 for ~~2019~~2020.

~~Net~~On ~~income~~October ~~before~~24, ~~taxes~~2022, ~~was~~the ~~$19.5~~Company ~~million~~entered ~~for~~into ~~the~~an ~~year~~Agreement ~~ended~~and ~~December~~Plan ~~31,~~of ~~2021,~~Merger ~~compared~~(Merger toAgreement) ~~$10~~with Peoples Bancorp Inc.6 ~~million~~(Peoples). The Merger Agreement provides for ~~the~~a ~~year~~business ~~ended~~combination ~~December~~whereby ~~31,~~the ~~2020,~~Company will merge with and ~~$11.0~~into ~~million~~Peoples ~~for~~(the Merger), with Peoples as the ~~year~~surviving ~~ended~~corporation ~~December~~in ~~31,~~the ~~2019~~Merger. ~~Income~~Under ~~tax~~the ~~expense~~terms ~~was~~and ~~$4.6~~subject ~~million~~to ~~for~~the ~~2021,~~conditions ~~$1.6~~of ~~million~~the ~~for~~Merger ~~2020~~Agreement, ~~and~~at ~~$480,000~~the ~~for~~effective ~~2019.~~time ~~Effective~~of ~~January~~the 1,Merger ~~2021~~(the “Effective Time”), ~~the~~each ~~Commonwealth~~share of ~~Kentucky~~the ~~eliminated~~Company’s common stock, issued and outstanding immediately prior to the ~~bank~~Effective ~~franchise~~Time ~~tax~~(except for Dissenting Shares, ~~which~~as ~~was~~provided ~~previously~~for ~~recorded~~in asthe ~~non-interest~~Merger ~~expense~~Agreement), ~~and~~will ~~implemented~~be aconverted, ~~state~~in ~~income~~accordance ~~tax~~with atthe aprocedures ~~statutory~~set ~~rate~~forth ofin ~~5%.~~the ~~State~~Merger ~~income~~Agreement, ~~tax~~into ~~expense~~0.90 ~~was~~common ~~$939~~shares,~~000~~ ~~for~~no ~~2021~~par value, ~~compared~~of Peoples. Upon the terms and subject to anthe ~~income~~conditions ~~tax~~set ~~benefit~~forth ofin ~~$478,000~~the ~~for~~Merger ~~2020~~Agreement, ~~and~~the anMerger ~~income~~is ~~tax~~expected ~~benefit~~to ofclose ~~$1.6~~in ~~million~~the ~~for~~second ~~2019~~quarter of 2023.

The following significant items are of note for the year ended December 31, ~~2021~~2022:

● Average loans receivable ~~decreased~~increased approximately $5113.58 million, or 011.69%, to $~~958~~1.507 ~~million~~billion for the year ended December 31, ~~2021~~2022, compared with $~~964~~958.15 million for the year ended December 31, ~~2020~~2021, as loan growth outpaced payoffs during 2022. SBA Paycheck Protection Program (“PPP”) loans averaged $~~15.5~~294,000 ~~million~~ and $2215.5 million for the year ended December 31, ~~2021~~2022 and ~~2020~~2021, respectively. ~~After forgiveness and paydowns, PPP loans declined to $1.2 million at December 31, 2021, compared to $20.3 million at December 31, 2020.~~

● Net interest margin increased 1214 basis points to 3.4862% for the year ended ~~2021~~December 31, 2022, compared with 3.3648% for the year ended December 31, ~~2020~~2021. The ~~yield~~Federal onReserve ~~earning~~increased ~~assets~~the ~~decreased~~fed tofunds ~~3.92%~~target inby ~~2021,~~425 ~~compared~~basis topoints ~~4.20%~~over inits ~~2020.~~last ~~The~~seven ~~yield~~meetings onof ~~earning~~2022. ~~assets~~As ~~was~~a ~~negatively~~result, ~~impacted by falling interest rates on~~ the Bank’s fed funds sold, ~~certain~~ floating rate investment securities, loans with variable rate pricing features, and new ~~loans~~loan ~~originated~~originations inbenefitted from the ~~lower~~upward ~~interest~~movement ~~rate~~in ~~environment,~~short-term ~~including~~rates ~~PPP~~during ~~loans which carry a rate of 1~~2022.~~0%.~~

2224

Table of Contents

● The ~~negative~~yield ~~impact~~on ofearning ~~falling~~assets ~~rates~~increased ~~was~~to ~~offset~~4.27% byfor $2the year ended December 31, 2022, compared to 3.892% ~~million~~for inthe ~~fees~~year ~~earned~~ended December 31, 2021. The yield on ~~PPP~~earning ~~loans~~assets ~~during~~for ~~2021~~the year ended December 31, ~~compared~~2021 towas significantly impacted by $12.18 million ~~during~~in ~~2020.~~ PPP fees, ~~during~~compared to $45,000 for the year ended December 31, ~~2021~~2022. ~~represented~~During 21the ~~basis~~year ~~points~~ended December 31, ~~compared~~2022, toPPP 10fees represented approximately one basis ~~points~~point of earning asset yield and net interest margin, compared to 21 basis points for the year ended December 31, ~~2020~~2021. The reduction in PPP fee income was offset by an increase in interest revenue due to an increase in average loans between periods. The increase in average loans resulted in an increase in interest revenue volume of approximately $5.3 million for the year ended December 31, ~~respectively~~2022, as well as an increase in interest revenue attributable to rates of $552,000 due primarily to the impact of the increase in interest rates on new and renewed loans and the upward repricing of variable rate loans.

● The cost of interest-bearing liabilities ~~decreased~~increased to 0.5986% in ~~2021~~2022 from 10.0559% in ~~2020~~2021 as a result of ~~decreases~~increases in short-term interest rates during ~~2020, the continued downward repricing of deposits, and continued improvement in deposit mix~~2022.

● ANet ~~provision for~~ loan ~~losses~~recoveries ofwere $1.24 million ~~was~~for ~~recorded in 2021~~2022, compared to ~~$4.4~~net ~~million~~loan incharge-offs ~~2020~~of $2.1 ~~The~~million for 2021, ~~loan~~and ~~loss provision was attributable to~~ net loan charge-offs ~~impacting~~of ~~historical~~$333,000 ~~loss~~for ~~percentages~~2020. ~~and~~During ~~growth within~~ the ~~portfolio~~third ~~during~~quarter ~~the~~of ~~year~~2022, ~~while~~ the ~~2020~~Bank ~~provision~~received ~~was~~a ~~largely~~payoff ~~attributable~~on toa ~~the uncertainty surrounding the COVID-19 pandemic related economic and business disruptions. Net loan charge-offs were~~ $2.10 million ~~for~~nonaccrual ~~2021,~~commercial ~~compared~~real toestate ~~net~~ loan ~~charge-offs~~resulting ofin ~~$333,000~~a ~~for~~recovery ~~2020, and net loan charge-offs~~ of $~~504,000~~1.5 ~~for 2019~~million.

● ~~Deposits~~A ~~were~~provision ~~$1.21~~for ~~billion~~loan atlosses ~~December~~of ~~31, 2021, compared with~~ $~~1.12 billion at December 31~~80,000 ~~2020.~~was ~~Non-interest~~recorded ~~bearing~~in ~~demand deposits increased $31.1 million~~2022, orcompared ~~12.8%,~~ to ~~$274.1~~a ~~million~~provision ~~compared~~for ~~with~~loan ~~$243.0~~losses ~~million~~of ~~at December 31, 2020. Interest checking accounts increased~~ $961.~~6 million, or 50.7%, to $287.~~2 million atin ~~December 31,~~ 2021~~, compared with $190~~.6 ~~million~~The at2022 ~~December~~loan ~~31,~~loss ~~2020.~~provisions ~~Money~~were ~~market~~primarily ~~accounts~~attributable ~~increased $42.2 million or 24.0%~~ to ~~$217.9~~growth ~~million~~trends ~~compared~~within ~~with~~the ~~$175.8 million at December 31~~portfolio, ~~2020.~~offset ~~Savings~~by ~~accounts~~a ~~increased~~significant ~~$20.8~~recovery ~~million,~~during orthe ~~14.6%,~~third toquarter ~~$163.4~~and ~~million~~its ~~compared~~impact ~~with~~on ~~$142.6~~the ~~million~~historical atloss ~~December 31, 2020~~percentages. ~~Certificate~~The of2021 ~~deposit~~loan ~~balances~~loss ~~decreased~~provisions ~~$101.5~~were ~~million,~~attributable ~~or 27.6%,~~ to ~~$266.0~~growth ~~million~~trends atwithin ~~December~~the ~~31,~~portfolio ~~2021,~~and ~~from~~net ~~$367.6~~loan ~~million~~charge-offs atimpacting ~~December~~historical ~~31,~~loss ~~2020~~percentages ~~due~~during tothe ~~liquidity management considerations and planned reduction in higher cost deposits~~period.

● OnDeposits ~~October~~were $1.20, ~~2021,~~billion ~~the~~at ~~Board~~December of31, ~~Directors~~2022, ~~approved~~compared awith ~~share~~$1.21 ~~repurchase~~billion ~~program~~at ~~authorizing~~December ~~the~~31, ~~Company~~2021. toCertificate ~~purchase~~of updeposit tobalances increased $324.02 million ofand ~~the~~interest ~~Company’s~~checking ~~Common~~accounts ~~Shares~~increased ~~over time~~$26.9 ~~Subject~~million toduring ~~applicable rules and regulations,~~ the ~~shares~~year. ~~may~~These beincreases ~~purchased~~were ~~from~~offset ~~time~~by toa ~~time~~decrease inof ~~the open market or in privately negotiated transactions~~$38.9 ~~Such~~million ~~purchases will be at times and~~ in ~~amounts~~money ~~as the Company deems appropriate, based on factors such as availability of shares,~~ market ~~conditions~~accounts, ~~the~~a ~~trading~~decrease ~~price~~ of ~~the shares, the Company’s financial performance and liquidity, legal and regulatory capital requirements, and other business conditions~~$14.9 ~~The~~million ~~repurchase~~in ~~program~~savings ~~does not obligate the Company to acquire any particular number of common shares~~accounts, and ita ~~may be modified, terminated, or suspended at any time at the Company’s discretion~~$5.1 ~~The~~million ~~share~~decrease ~~repurchase~~in ~~program~~non-interest ~~expires~~bearing ondemand ~~December 31, 2022~~deposits.

●

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

●

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

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

Application of Critical Accounting Policies

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

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

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Table of Contents

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

Results of Operations

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

	For the Years Ended December 31,					Change from Prior Period
	2022			2021		Amount			Percent
	(dollars in thousands)
Gross interest income	$	57,810		$	49,915	$	7,895			15.8	%
Gross interest expense		8,732			5,693		3,039			53.4
Net interest income		49,078			44,222		4,856			11.0
Provision for loan losses		80			1,150		(1,070	)		(93.0	)
Non-interest income		8,880			7,979		901			11.3
Gain (loss) on sales and calls of securities, net		(3	)		460		(463	)		NM
Non-interest expense		33,757			31,971		1,786			5.6
Net income before taxes		24,118			19,540		4,578			23.4
Income tax expense		5,776			4,631		1,145			24.7
Net income		18,342			14,909		3,433			23.0

NM: Not Meaningful

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

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

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

Table of Contents

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

	For the Years Ended December 31,					Change from Prior Period
	2021		2020			Amount			Percent
	(dollars in thousands)
Gross interest income	$	49,915	$	50,753		$	(838	)		(1.7	)%
Gross interest expense		5,693		10,152			(4,459	)		(43.9	)
Net interest income		44,222		40,601			3,621			8.9
Provision for loan losses		1,150		4,400			(3,250	)		(73.9	)
Non-interest income		7,979		6,849			1,130			16.5
Gain (loss) on sales and calls of securities, net		460		(5	)		465			NM
Non-interest expense		31,971		32,416			(445	)		(1.4	)
Net income before taxes		19,540		10,629			8,911			83.8
Income tax expense		4,631		1,624			3,007			185.2
Net income		14,909		9,005			5,904			65.6

NM: Not Meaningful

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

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

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

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

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

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

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

Table of Contents

~~The~~Loan ~~following~~fee ~~table~~income ~~summarizes~~can ~~components~~meaningfully impact net interest income, loan yields, and net interest margin. The amount of loan fee income included in total interest income was $1.0 million and ~~expense~~$4.3 million for the years ended December 31, 2022 and 2021, respectively. This represents eight basis points of yield on earning assets and net interest margin for the ~~change~~year inended ~~those~~December ~~components~~31, 2022 as compared to 33 basis points for ~~2020~~the year ended December 31, 2021. Loan fee income for 2022 included $45,000 in fees earned on PPP loans, compared ~~with~~to ~~2019:~~$2.8 million in 2021, which represents approximately one basis point and 21 basis points of earning asset yield and net interest margin for those years, respectively.

	For the Years Ended December 31,						Change from Prior Period
	2020			2019			Amount			Percent
	(dollars in thousands)
Gross interest income	$	50,753		$	49,584		$	1,169			2.4	%
Gross interest expense		10,152			14,234			(4,082	)		(28.7	)
Net interest income		40,601			35,350			5,251			14.9
Provision for loan losses		4,400			—			4,400			100.0
Non-interest income		6,849			5,923			926			15.6
Loss on sales and calls of securities, net		(5	)		(5	)		—			—
Non-interest expense		32,416			30,270			2,146			7.1
Net income before taxes		10,629			10,998			(369	)		(3.4	)
Income tax expense		1,624			480			1,144			238.3
Net income		9,005			10,518			(1,513	)		(14.4	)

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

Net income of $9.0 million for the year ended December 31, 2020 decreased by $1.5 million from net income of $10.5 million for 2019. Net interest income increased $5.3 million for 2020 as a result of PPP fee recognition of $1.1 million connected to the forgiveness and payoff of PPP loans and a decrease in the cost of interest-bearing liabilities due to downward repricing within the time deposit portfolio, as well as a reduction in the size of the time deposit portfolio. A provision for loan losses of $4.4 million was recorded in 2020, compared to no provision for loan losses expense in 2019. The 2020 loan loss provision was attributable to the net loan charge-offs during the year, trends within the portfolio during the year, and primarily to changes in the economic and business environment attributable to COVID-19.

Non-interest income increased $926,000 during 2020. There was an increase of $938,000 in bank card interchange fees, primarily as a result of the deposit accounts acquired in the branch purchase transaction.

Non-interest expense increased $2.1 million during 2020 due primarily to an increase in salaries and employee benefits of $1.5 million, $666,000 in deposit account related expense, and $479,000 in occupancy expense. The Bank added sales talent and customer facing associates during the latter half of 2019 and branch staff in connection with its purchase of four branches in November 2019. These increases were muted somewhat by efforts in 2020 to reduce FTEs from 248 at March 31, 2020 to 219 as of December 31, 2020 through attrition and workforce reduction. The increase in deposit account related expense and occupancy expense is the result of the branch purchase transaction.

Income tax expense for 2020 and 2019 benefitted $478,000 and $1.6 million, respectively, from the establishment of a state net deferred tax asset related to the 2019 tax law enactments. The new laws eliminate the Kentucky bank franchise tax, which is assessed at a rate of 1.1% of average capital, and implements a state income tax for the Bank at a statutory rate of 5%. The new Kentucky income tax went into effect on January 1, 2021.

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

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

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

Table of Contents

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

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

Net interest income was $40.6 million for the year ended December 31, 2020, an increase of $5.3 million, or 14.9%, compared with $35.4 million for the same period in 2019. Net interest spread and margin were 3.15% and 3.36%, respectively, for 2020, compared with 3.10% and 3.40%, respectively, for 2019. 28

The yield on earning assets decreased to 4.20% for the year ended December 31, 2020, as compared to 4.76% for the year ended December 31, 2019. The yield on earning assets was negatively impacted by falling interest rates on the Bank’s fed funds, certain floating rate investment securities, loans with variable rate repricing features, and new loan production during the year. Average loans increased approximately $162.3 million during 2020. Average loans were positively impacted from the branch purchase transaction on November 15, 2019, along with loan growth during 2019 and 2020, as well as PPP loan originations. The increase in average loans resulted in an increase in interest revenue volume of approximately $7.9 million for 2020, which was partially offset by a decrease in interest revenue to due declining rates of $5.0 million, as compared to 2019. Loan fee income can meaningfully impact net interest income, loan yields, and net interest margin. The amount of loan fee income included in total interest income represents 18 basis points of yield on earning assets and net interest margin for the year ended December 31, 2020 as compared to 11 basis points for the year ended December 31, 2019. Loan fee income for 2020 included $1.1 million in fees earned on PPP loans. Total interest income increased 2.4%, or $1.2 million, for 2020 as compared 2019.

The cost of interest-bearing liabilities decreased to 1.05% for the year ended December 31, 2020, as compared to 1.66% for the year ended December 31, 2019 primarily based on the downward repricing of time deposits. Average interest-bearing liabilities increased by $106.3 million during 2020 due to deposit growth and the completion of the branch purchase transaction in 2019. Total interest expense decreased by 28.7% to $10.2 million for the year ended December 31, 2020 as compared to $14.2 million for the year ended December 31, 2019. The cost of interest-bearing liabilities for 2020 was also impacted by the subordinated debt issuances and senior debt repayments in July 2019 and July 2020. As of December 31, 2020, time deposits comprise $367.6 million of the Company’s liabilities with $272.0 million, or 74%, set to reprice or mature within one year of which $104.9 million with a current average rate of 0.99% reprice or mature within the first quarter of 2021.

Table of Contents

Average Balance Sheets

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

For the Years Ended December 31,

2021

2020

2022

2021

Average Balance

Interest Earned/Paid

Average Yield/Cost

Average Balance

Interest Earned/Paid

Average Yield/Cost

(dollars in thousands)

ASSETS

Interest-earning assets:

Loans receivables (1)

Real estate

~~675~~767,~~791~~859

3035,~~615~~526

4.5363

~~684~~675,~~447~~791

3230,~~572~~615

4.7653

Commercial

~~211~~230,~~573~~519

10,~~266~~471

4.8554

~~200~~211,~~260~~573

810,~~398~~266

4.1985

Consumer

34,~~041~~237

1,~~608~~947

45.7269

3934,~~931~~041

21,~~051~~608

54.1472

Agriculture

3639,~~596~~190

12,~~945~~375

56.3106

3836,~~833~~596

21,~~058~~945

5.3031

Other

~~548~~525

1113

2.0148

~~617~~548

1411

2.2701

U.S. Treasury and agencies

25,~~657~~695

~~542~~523

2.1104

2025,~~239~~657

~~491~~542

2.4311

Mortgage-backed securities

8187,~~829~~335

1,~~561~~855

12.9112

8281,~~330~~829

1,~~863~~561

21.2691

Collateralized loan obligations

4448,~~396~~539

~~831~~1,712

13.8753

4544,~~595~~396

~~1,234~~831

21.7187

State and political subdivision securities (non-taxable)

2629,~~509~~749

~~643~~660

32.2396

1426,~~139~~509

~~370~~643

3.3123

State and political subdivision securities (taxable)

1614,~~971~~525

~~425~~393

2.5071

16,~~301~~971

~~494~~425

32.0350

Corporate bonds

3545,~~340~~058

1,~~253~~682

3.5573

2335,~~572~~340

~~960~~1,253

43.0755

FHLB stock

5,~~493~~031

~~115~~199

23.0996

65,~~208~~493

~~143~~115

2.3009

Federal funds sold

—1

—2.86

7235

—

Interest-bearing deposits in other financial institutions

8332,~~736~~050

~~100~~453

01.1241

3883,~~525~~736

~~105~~100

0.2712

Total interest-earning assets

1,~~278~~360,~~515~~347

4957,~~915~~810

34.9227

1,~~211~~278,~~069~~515

5049,~~753~~915

43.2092

Less: Allowance for loan losses

(12,~~714~~469

)

(912,~~819~~714

)

Non-interest-earning assets

9786,~~596~~559

9397,~~684~~596

Total assets

1,~~363~~434,~~397~~437

1,~~294~~363,~~934~~397

LIABILITIES AND STOCKHOLDERS’ EQUITY

Interest-bearing liabilities

Certificates of deposit and other time deposits

~~311~~262,~~140~~692

1,~~788~~929

0.5773

~~436~~311,~~083~~140

51,~~802~~788

10.3357

Interest checking and money market deposits

~~423~~497,~~938~~811

12,~~289~~712

0.3054

~~336~~423,~~596~~938

1,~~464~~289

0.4330

Savings accounts

~~157~~159,~~283~~422

~~441~~561

0.2835

~~111~~157,~~559~~283

~~530~~441

0.4828

FHLB advances

2050,~~152~~274

~~154~~1,162

02.7631

3420,~~101~~152

~~371~~154

10.0976

Junior subordinated debentures

21,000

~~521~~867

24.4813

21,000

~~660~~521

32.1448

Subordinated capital notes

25,000

1,~~500~~501

6.00

2025,~~366~~000

1,~~206~~500

56.9200

Senior debt

—

~~2,896~~—

~~119~~—

~~4.11~~—

Total interest-bearing liabilities

~~958~~1,~~513~~016,199

58,~~693~~732

0.5986

~~962~~958,~~601~~513

105,~~152~~693

10.0559

Non-interest-bearing liabilities

Non-interest-bearing deposits

~~271~~277,~~994~~981

~~215~~271,~~145~~994

Other liabilities

810,~~948~~804

78,~~230~~948

Total liabilities

1,~~239~~304,~~455~~984

1,~~184~~239,~~976~~455

Stockholders’ equity

~~123~~129,~~942~~453

~~109~~123,~~958~~942

Total liabilities and stockholders’ equity

1,~~363~~434,~~397~~437

1,~~294~~363,~~934~~397

Net interest income

4449,~~222~~078

4044,~~601~~222

Net interest spread

3.3341

3.1533

Net interest margin

3.4862

3.3648

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

133.3987

~~125~~133.8139

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

27 29

Table of Contents

For the Years Ended December 31,

2020

2019

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:

Loans receivables (1)

Real estate

~~684~~675,~~447~~791

3230,~~572~~615

4.7653

~~576~~684,~~441~~447

3032,~~139~~572

54.2376

Commercial

~~200~~211,~~260~~573

810,~~398~~266

4.1985

~~134~~200,~~735~~260

68,~~660~~398

4.9419

Consumer

3934,~~931~~041

21,~~051~~608

54.1472

5139,~~001~~931

2,~~863~~051

5.6114

Agriculture

3836,~~833~~596

21,~~058~~945

5.3031

3938,~~116~~833

2,~~480~~058

65.3430

Other

~~617~~548

1411

2.2701

~~520~~617

1114

2.1227

U.S. Treasury and agencies

2025,~~239~~657

~~491~~542

2.4311

2320,~~263~~239

~~558~~491

2.4043

Mortgage-backed securities

8281,~~330~~829

1,~~863~~561

21.2691

9182,~~609~~330

21,~~495~~863

2.7226

Collateralized loan obligations

4544,~~595~~396

~~1,234~~831

21.7187

4945,~~881~~595

21,~~015~~234

42.0471

State and political subdivision securities (non-taxable)

1426,~~139~~509

~~370~~643

3.3123

1114,~~759~~139

~~326~~370

3.5131

State and political subdivision securities (taxable)

16,~~301~~971

~~494~~425

32.0350

1816,~~270~~301

~~583~~494

3.1903

Corporate bonds

2335,~~572~~340

~~960~~1,253

43.0755

1123,~~376~~572

~~618~~960

54.4307

FHLB stock

65,~~208~~493

~~143~~115

2.3009

6,~~691~~208

~~348~~143

52.2030

Federal funds sold

7235

—

~~182~~72

4—

~~2.20~~—

Interest-bearing deposits in other financial institutions

3883,~~525~~736

~~105~~100

0.2712

2738,~~809~~525

~~484~~105

10.7427

Total interest-earning assets

1,~~211~~278,~~069~~515

5049,~~753~~915

43.2092

1,~~042~~211,~~653~~069

4950,~~584~~753

4.7620

Less: Allowance for loan losses

(912,~~819~~714

)

(89,~~786~~819

)

Non-interest-earning assets

9397,~~684~~596

7893,~~521~~684

Total assets

1,~~294~~363,~~934~~397

1,~~112~~294,~~388~~934

LIABILITIES AND STOCKHOLDERS’ EQUITY

Interest-bearing liabilities

Certificates of deposit and other time deposits

~~436~~311,~~083~~140

51,~~802~~788

10.3357

~~483~~436,~~222~~083

95,~~564~~802

1.9833

Interest checking and money market deposits

~~336~~423,~~596~~938

1,~~464~~289

0.4330

~~265~~336,~~687~~596

21,~~026~~464

0.7643

Savings accounts

~~111~~157,~~559~~283

~~530~~441

0.4828

36111,~~035~~559

67530

0.1948

FHLB advances

3420,~~101~~152

~~371~~154

10.0976

3534,~~038~~101

~~810~~371

21.3109

Junior subordinated debentures

21,000

~~660~~521

32.1448

21,000

~~1,005~~660

43.7914

Subordinated capital notes

2025,~~366~~000

1,~~206~~500

56.9200

720,~~545~~366

~~433~~1,206

5.7492

Senior debt

~~2,896~~—

~~119~~—

~~4.11~~—

72,~~781~~896

~~329~~119

4.2311

Total interest-bearing liabilities

~~962~~958,~~601~~513

105,~~152~~693

10.0559

~~856~~962,~~308~~601

1410,~~234~~152

1.6605

Non-interest-bearing liabilities

Non-interest-bearing deposits

~~215~~271,~~145~~994

~~151~~215,~~299~~145

Other liabilities

78,~~230~~948

47,~~655~~230

Total liabilities

1,~~184~~239,~~976~~455

1,~~012~~184,~~262~~976

Stockholders’ equity

~~109~~123,~~958~~942

~~100~~109,~~126~~958

Total liabilities and stockholders’ equity

1,~~294~~363,~~934~~397

1,~~112~~294,~~388~~934

Net interest income

4044,~~601~~222

3540,~~350~~601

Net interest spread

3.1533

3.1015

Net interest margin

3.3648

3.4036

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

~~125~~133.8139

~~121~~125.7681

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

28 30

Table of Contents

Rate/Volume Analysis

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

	Year Ended December 31, 2021 vs. 2020									Year Ended December 31, 2020 vs. 2019
	Year Ended December 31, 2022 vs. 2021									Year Ended December 31, 2021 vs. 2020
	Increase (decrease) due to change in									Increase (decrease) due to change in
	Rate			Volume			Net Change			Rate			Volume			Net Change
	(in thousands)
Interest-earning assets:
Loan receivables	$	~~(390~~552	)	$	~~(258~~5,335	)	$	~~(648~~5,887	)	$	(~~4,982~~390	)	$	~~7,922~~(258	)	$	~~2,940~~(648	)
U.S. Treasury and agencies		(6920	)		~~120~~1			51(19	)		6(69	)		~~(73~~120	)		~~(67~~51	)
Mortgage-backed securities		~~(291~~185	)		~~(11~~109	)		~~(302~~294	)		(~~395~~291	)		(~~237~~11	)		(~~632~~302	)
Collateralized loan obligations		~~(372~~796	)		~~(31~~85	)		~~(403~~881	)		(~~620~~372	)		(~~161~~31	)		(~~781~~403	)
State and political subdivision securities		(~~128~~35	)		~~332~~20			~~204~~(15	)		(57128	)		12332			~~(45~~204	)
Corporate bonds		~~(137~~69	)		~~430~~360			~~293~~429			(~~186~~137	)		~~528~~430			~~342~~293
FHLB stock		~~(13~~95	)		(1511	)		~~(28~~84	)		(~~182~~13	)		(2315	)		(~~205~~28	)
Federal funds sold		—1			—			—1			(3—	)		(1—	)		(4—	)
Interest-bearing deposits in other financial institutions		~~(81~~451	)		76(98	)		(5353	)		(~~516~~81	)		~~137~~76			(~~379~~5	)
Total increase (decrease) in interest income		(12,~~481~~094	)		~~643~~5,801			~~(838~~7,895	)		(61,~~935~~481	)		~~8,104~~643			~~1,169~~(838	)
Interest-bearing liabilities:
Certificates of deposit and other time deposits		~~(2,668~~447	)		(~~1,346~~306	)		~~(4,014~~141	)		(2,~~899~~668	)		(~~863~~1,346	)		(34,~~762~~014	)
Interest checking and money market accounts		~~(502~~1,166	)		~~327~~257			~~(175~~1,423	)		(~~1,014~~502	)		~~452~~327			(~~562~~175	)
Savings accounts		~~(262~~114	)		~~173~~6			~~(89~~120	)		~~197~~(262	)		~~266~~173			~~463~~(89	)
FHLB advances		~~(91~~580	)		~~(126~~428	)		~~(217~~1,008	)		(~~418~~91	)		(21126	)		(~~439~~217	)
Junior subordinated debentures		~~(139~~346	)		—			~~(139~~346	)		(~~345~~139	)		—			(~~345~~139	)
Subordinated capital notes		161			~~278~~—			~~294~~1			1416			~~759~~278			~~773~~294
Senior debt		~~(59~~—	)		~~(60~~—	)		~~(119~~—	)		(959	)		(~~201~~60	)		(~~210~~119	)
Total increase (decrease) in interest expense		(32,~~705~~654	)		~~(754~~385	)		(43,~~459~~039	)		(43,~~474~~705	)		~~392~~(754	)		(4,~~082~~459	)
Increase (decrease) in net interest income	$	~~2,224~~(560	)	$	15,~~397~~416		$	34,~~621~~856		$	(2,~~461~~224	)	$	71,~~712~~397		$	53,~~251~~621

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

	For the Years Ended December 31,
	2021			2020			2019
	2022			2021			2020
	(in thousands)
Service charges on deposit accounts	$	2,~~256~~775		$	2,~~268~~256		$	2,~~381~~268
Bank card interchange fees		4,~~116~~278			34,~~376~~116			23,~~438~~376
Income from bank owned life insurance		~~526~~706			~~424~~526			~~410~~424
Gain on sale of other real estate owned		~~191~~—			—191			—
Gain (loss) on sales and calls of securities, net		~~460~~(3	)		(5460	)		(5	)
Other		890			781			694
Gain on sale of premises held for sale		163			—			—
Total non-interest income	$	8,439		$	6,844		$	5,918
Other		958			890			781
Total non-interest income	$	8,877		$	8,439		$	6,844

Table of Contents

Non-interest Income Comparison – 2022 to 2021

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

Non-interest Income Comparison – 2021 to 2020

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

Table of Contents

Non-interest Income Comparison – 2020 to 2019

Non-interest income increased by $926,000 for 2020 to $6.8 million compared with $5.9 million for the year ended December 31, 2019. This increase was primarily related to bank card interchange fees of $938,000 as a result of the deposit accounts acquired in the branch purchase transaction on November 15, 2019.

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

For the Years Ended December 31,

2021

2020

2019

2022

2021

2020

(in thousands)

Salary and employee benefits

1819,~~132~~021

1718,~~751~~132

1617,~~233~~751

Occupancy and equipment

4,~~041~~201

4,~~001~~041

34,~~522~~001

Deposit account related expense

2,~~158~~249

12,~~890~~158

1,~~224~~890

Data processing expense

1,~~512~~591

1,~~502~~512

1,~~259~~502

FDIC insurance

~~405~~360

~~229~~405

~~211~~229

Marketing expense

~~727~~605

~~629~~727

~~908~~629

Deposit and state franchise tax

~~375~~396

~~1,475~~375

1,~~210~~475

Professional fees

~~952~~818

~~937~~952

~~769~~937

Communications

~~681~~419

~~856~~681

~~772~~856

Insurance expense

~~415~~420

~~428~~415

~~444~~428

Postage and delivery

~~605~~622

~~627~~605

~~544~~627

Acquisition costs

—

775

Merger expenses

691

—

Other

12,~~968~~364

21,~~091~~968

2,~~399~~091

Total non-interest expense

3133,~~971~~757

3231,~~416~~971

3032,~~270~~416

Non-interest Expense Comparison – 2022 to 2021

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

Non-interest Expense Comparison – 2021 to 2020

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

~~Non-interest Expense Comparison – 2020 to 2019~~ 32

Non-interest expense for the year ended December 31, 2020 of $32.4 million represented a $2.1 million, or 7.1%, increase from $30.3 million for 2019. The increase in non-interest expense was primarily due to an increase in salaries and employee benefits of $1.5 million. The Bank added sales talent and customer facing associates during the latter half of 2019 and branch staff in connection with the branch purchase transaction in November 2019. These increases were muted somewhat by efforts in 2020 to reduce FTEs from 248 at March 31, 2020 to 219 as of December 31, 2020 through attrition and workforce reduction. Deposit account related expense increased by $666,000 and occupancy expense increased by $479,000 as a result of the branch purchase transaction. Franchise tax expense increased by $265,000 as a function of growth in the Bank’s taxable capital. These increases were offset by a decrease in OREO expenses of $305,000 due to lower valuation write-downs and operating expenses in 2020 compared to 2019. Non-interest expense for 2019 also included $775,000 of acquisition expenses associated with the branch purchase transaction.

Table of Contents

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

	2021			2020			2019
	2022			2021			2020
	(in thousands)
Federal statutory tax rate		21	%		21	%		21	%
Federal statutory rate times financial statement income	$	45,~~103~~065		$	24,~~232~~103		$	2,~~310~~232
Effect of:
State income taxes		~~741~~907			—741			—
Tax-exempt interest income		(~~123~~107	)		(73123	)		(6673	)
Establish state deferred tax asset		—			~~(478~~—	)		(~~1,577~~478	)
Non-taxable life insurance income		(~~111~~148	)		(89111	)		(8689	)
Restricted stock vesting		(1030	)		7(10	)		~~(137~~7	)
Other, net		3189			2531			3625
Total income tax expense	$	45,~~631~~776		$	14,~~624~~631		$	~~480~~1,624

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

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

Analysis of Financial Condition

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

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

~~Total~~Investment ~~assets~~Securities at– ~~December 31,~~The ~~2020~~securities ~~were~~portfolio $1serves as a source of liquidity and earnings and contributes to the management of interest rate risk.31 ~~billion~~Investments ~~compared~~are ~~with~~made $1in various types of liquid assets, including U.25S. ~~billion~~Treasury atobligations ~~December 31~~and securities of various federal agencies, ~~2019~~collateralized loan obligations, ancorporate ~~increase~~bonds, and obligations of states and political subdivisions. The investment portfolio decreased by $6637.52 million, or 514.3%, to $223.4 ~~This~~million ~~increase~~at ~~was~~December 31, 2022, ~~primarily~~compared ~~attributable~~with to$260.7 anmillion ~~increase~~at inDecember 31, ~~net~~2021. ~~loans~~The decrease was comprised primarily of $3128.70 million, asin ~~well~~payment asproceeds and $3419.92 million in fair value declines attributable to the rising interest~~-bearing~~ ~~deposits~~rate inenvironment, ~~banks~~partially offset by purchases of $10.6 million.

~~Investment Securities –~~ The ~~securities~~following ~~portfolio~~table ~~serves~~sets asforth ~~a source of liquidity and earnings and contributes to~~ the ~~management~~carrying ofvalue ~~interest rate risk. Investments are made in various types~~ of ~~liquid~~the ~~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 $56.8 million, or 27.9%, to $260.7 million~~ at ~~December 31, 2021,~~the ~~compared~~dates ~~with~~indicated ~~$203.9~~(in ~~million at December 31, 2020.~~thousands):

The following table sets forth the carrying value of the Bank’s securities portfolio at the dates indicated.

	December 31, 2022									December 31, 2021
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(dollars in thousands)
Securities available for sale
U.S. Government and federal agencies	$	24,541	$	—	$	(2,784	)	$	21,757	$	26,075	$	301	$	(133	)	$	26,243
Agency mortgage-backed: residential		80,283		9		(10,387	)		69,905		93,650		1,339		(970	)		94,019
Collateralized loan obligations		48,202		—		(2,161	)		46,041		50,227		—		(78	)		50,149
Corporate bonds		45,512		—		(3,042	)		42,470		43,432		572		(202	)		43,802
Total available for sale	$	198,538	$	9	$	(18,374	)	$	180,173	$	213,384	$	2,212	$	(1,383	)	$	214,213

	December 31, 2021									December 31, 2020
	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses			Fair Value		Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses			Fair Value
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Securities held to maturity
	(dollars in thousands)
State and municipal	$	43,282	$	—	$	(8,386	)	$	34,896	$	46,460	$	158	$	(338	)	$	46,280
Securities available for sale
Total held to maturity	$	43,282	$	—	$	(8,386	)	$	34,896	$	46,460	$	158	$	(338	)	$	46,280
U.S. Government and federal agencies	$	26,075	$	301	$	(133	)	$	26,243	$	18,811	$	806	$	—		$	19,617
Agency mortgage-backed: residential		93,650		1,339		(970	)		94,019		71,582		2,777		(26	)		74,333
Collateralized loan obligations		50,227		—		(78	)		50,149		44,730		—		(1,578	)		43,152
State and municipal		—		—		—			—		34,759		1,296		—			36,055
Corporate bonds		43,432		572		(202	)		43,802		31,635		472		(1,402	)		30,705
Total available for sale	$	213,384	$	2,212	$	(1,383	)	$	214,213	$	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
Securities held to maturity
State and municipal	$	46,460	$	158	$	(338	)	$	46,280	$	—	$	—	$	—	$	—
Total held to maturity	$	46,460	$	158	$	(338	)	$	46,280	$	—	$	—	$	—	$	—

Table of Contents

~~During~~The ~~March~~Bank ~~2021,~~owns toCollateralized ~~better~~Loan ~~manage~~Obligations ~~interest rate risk~~(CLOs), ~~management~~which ~~changed~~are ~~the~~debt ~~classification of all the municipal~~ securities insecured ~~the~~by ~~portfolio~~professionally ~~from~~managed ~~available~~portfolios ~~for~~of ~~sale~~senior-secured ~~(“AFS”)~~loans to ~~held to maturity (“HTM”)~~corporations. ~~These~~CLOs ~~municipal~~are ~~securities~~typically ~~had~~$300 amillion ~~book~~to ~~value~~$1 ofbillion ~~approximately~~in ~~$34.7 million~~size, acontain ~~market~~one ~~value~~hundred ofor ~~approximately~~more ~~$35.8~~loans ~~million,~~ and ahave ~~net~~five ~~unrealized~~to ~~gain~~six ofcredit ~~approximately~~tranches ~~$1.1~~with ~~million.~~credit ~~The~~ratings ~~transfer~~ranging ~~occurred~~from atAAA, ~~fair~~AA, ~~value.~~A, ~~The~~BBB, ~~related~~BB, ~~net~~B ~~unrealized~~and ~~gain~~an ~~included~~equity intranche. ~~other~~Interest ~~comprehensive~~and ~~income~~principal ~~remained~~are inpaid ~~other~~first ~~comprehensive~~to ~~income~~the ~~and~~AAA istranche ~~being~~then ~~amortized~~to ~~from~~the ~~other~~next ~~comprehensive~~lower ~~income~~rated ~~with~~tranche. anLosses ~~offsetting~~are ~~entry~~borne tofirst ~~interest~~by ~~income~~the asequity atranche ~~yield~~then ~~adjustment~~by ~~through earnings over~~ the ~~remaining~~subsequently ~~term~~higher ofrated ~~the securities~~tranche. NoCLOs ~~gain~~may orbe ~~loss~~less ~~was~~liquid ~~recorded~~than atgovernment ~~the~~securities from time ofto ~~transfer.~~time ~~This~~and ~~transfer~~volatility ~~was~~in ~~completed~~the ~~after~~CLO ~~careful~~market ~~consideration~~may ofcause the ~~intent~~value ~~and~~of ~~ability to hold~~ these ~~securities~~investments to ~~maturity~~decline.

The ~~Bank~~market ~~owns~~value ~~Collateralized~~of ~~Loan Obligations (~~CLOs), ~~which~~may ~~are~~be ~~debt~~affected ~~securities secured~~ by, ~~professionally~~among ~~managed~~other ~~portfolios~~things, ofchanges ~~senior-secured~~in ~~loans~~composition toof ~~corporations.~~the ~~CLO~~underlying ~~are~~loans, ~~typically~~changes ~~$300 million to $1 billion~~ in ~~size,~~the ~~contain~~cash ~~one~~flows ~~hundred~~from orthe ~~more~~underlying loans, defaults and ~~have~~recoveries ~~five~~on tothe ~~six~~underlying ~~credit~~loans, ~~tranches~~capital ~~with~~gains ~~credit~~and ~~ratings~~losses ~~ranging~~on ~~from~~the ~~AAA,~~underlying AAloans, A,prepayments ~~BBB,~~on ~~BB,~~the Bunderlying ~~and~~loans, ~~equity tranche. Interest~~ and ~~principal~~other ~~are~~conditions ~~paid~~or ~~first~~economic tofactors. ~~the~~At ~~AAA~~December ~~tranche~~31, ~~then~~2022, to$27.0 ~~the~~million ~~next~~and ~~lower rated tranche~~$19.0 ~~Losses~~million ~~are~~of ~~borne first by~~ the ~~equity~~Bank’s ~~tranche~~CLOs ~~then~~were byrisk ~~the~~rated ~~subsequently~~AA ~~higher~~and A rated, ~~tranche~~respectively. ~~CLOs~~None ~~may~~of bethe ~~less~~CLOs ~~liquid~~were ~~than~~subject ~~government securities from time~~ to ~~time~~a ~~and~~ratings ~~volatility~~downgrade induring the ~~CLO~~year ~~market~~ended ~~may~~December ~~cause~~31, ~~the value of these investments to decline~~2022.

~~The~~Stress ~~market~~testing ~~value~~was ofcompleted ~~CLOs~~on ~~may~~each besecurity ~~affected~~in ~~by,~~the ~~among~~CLO ~~other~~portfolio ~~things,~~as ~~changes in composition~~ of ~~the~~December ~~underlying loans~~31, ~~changes~~2022. inEach ~~the~~security ~~cash~~in ~~flows from~~ the ~~underlying~~portfolio ~~loans~~passed, ~~defaults~~without ~~and~~dollar ~~recoveries on the underlying loans~~loss, ~~capital~~a ~~gains~~stress ~~and~~scenario ~~losses~~characterized onas ~~the underlying loans~~severe, ~~prepayments~~which onassumed ~~the~~a ~~underlying~~ten ~~loans,~~percent ~~and~~per ~~other~~annum ~~conditions~~constant orprepayment ~~economic~~rate, ~~factors.~~a Attwelve ~~December~~percent ~~31,~~per ~~2021,~~annum ~~$30.0~~constant ~~million~~default ~~and~~rate ~~$20.1~~for ~~million~~four ofyears ~~the~~followed ~~Bank’s~~by ~~CLOs~~a ~~were~~four ~~risk~~percent ~~rated~~rate AAthereafter, and Aa ~~rated,~~forty-five ~~respectively.~~percent ~~None~~recovery ofrate ~~the~~on ~~CLOs~~a ~~were subject to ratings downgrade during the~~ one-year ~~ended December 31, 2021~~lag.

The corporate bond portfolio consists of 1516 subordinated debt securities and two senior debt ~~security~~securities of U.S. banks and bank holding companies with maturities ranging from 2024 to 2037. The securities are either initially fixed rate for five years converting to floating rate at an index over LIBOR or SOFR, or floating rate at an index over LIBOR or SOFR from inception. Management regularly monitors the financial condition of these corporate issuers by reviewing their regulatory and public filings.

The ~~following~~Company ~~table~~evaluates ~~sets~~securities ~~forth~~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 ~~contractual~~length ~~maturities~~of time and the extent to which the fair value has been less than cost, ~~carrying~~the ~~values~~financial condition and ~~weighted~~near-~~average~~term ~~yields~~prospects ~~for~~of the ~~Bank~~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 ~~investment~~financial condition, the Company may consider whether the securities ~~held~~are atissued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, the sector or industry trends and cycles affecting the issuer, and the results of reviews of the issuer’s financial condition. As of December 31, ~~2021:~~2022, management does not believe any securities in the portfolio with unrealized losses should be classified as other than temporarily impaired.

	Due Within One Year					After One Year But Within Five Years					After Five Years But Within Ten Years					After Ten Years					Total
	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
Available for sale
U.S. Government and federal agencies	$	—		—	%	$	2,775		2.19	%	$	8,470		2.08	%	$	14,998		1.96	%	$	26,243		2.02	%
Agency mortgage-backed: residential		—		—			4,066		2.34			10,508		2.25			79,445		1.43			94,019		1.56
Collateralized loan obligations		—		—			—		—			40,114		1.81			10,035		1.69			50,149		1.79
Corporate bonds		—		—			1,586		4.02			35,357		3.36			6,859		3.01			43,802		3.33
Total available for sale	$	—		—	%	$	8,427		2.61	%	$	94,449		2.46	%	$	111,337		1.62	%	$	214,213		2.02	%
Held to maturity
State and municipal	$	2,325		0.61	%	$	9,690		1.15	%	$	3,824		2.03	%	$	30,621		2.64	%	$	46,460		2.18	%
Total available for sale	$	2,325		0.61	%	$	9,690		1.15	%	$	3,824		2.03	%	$	30,621		2.64	%	$	46,460		2.18	%

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

	Due Within One Year					After One Year But Within Five Years					After Five Years But Within Ten Years					After Ten Years					Total
	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
Available for sale
U.S. Government and federal agencies	$	—		—	%	$	1,405		2.18	%	$	10,099		2.18	%	$	10,253		1.91	%	$	21,757		2.05	%
Agency mortgage-backed: residential		—		—			1,186		2.29			6,632		2.06			62,087		2.38			69,905		2.35
Collateralized loan obligations		—		—			—		—			36,628		5.75			9,413		5.65			46,041		5.73
Corporate bonds		—		—			3,078		5.14			32,952		3.48			6,440		7.63			42,470		4.22
Total available for sale	$	—		—	%	$	5,669		3.78	%	$	86,311		4.15	%	$	88,193		3.01	%	$	180,173		3.56	%
Held to maturity
State and municipal	$	3,265		1.71	%	$	5,571		1.39	%	$	4,713		1.84	%	$	29,733		2.42	%	$	43,282		2.17	%
Total available for sale	$	3,265		1.71	%	$	5,571		1.39	%	$	4,713		1.84	%	$	29,733		2.42	%	$	43,282		2.17	%

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

Unlike U.S. Treasury and U.S. government agency securities, which have a lump sum payment at maturity, mortgage-backed securities provide cash flows from regular principal and interest payments and principal prepayments throughout the lives of the securities. Mortgage-backed securities that are purchased at a premium will generally return decreasing net yields as interest rates drop because home owners tend to refinance their mortgages. Thus, the premium paid must be amortized over a shorter period. Therefore, those securities purchased at a discount will obtain higher net yields in a decreasing interest rate environment. As interest rates rise, the opposite will generally be true. During a period of increasing interest rates, fixed rate mortgage-backed securities generally do not experience increasing prepayments of principal and, consequently, average life will not be shortened. When interest rates fall, prepayments will generally increase. Non-agency issuer mortgage-backed securities do not carry a government guarantee. Management limits purchases of these securities to bank qualified issues with high credit ratings. At this time, there are no holdings of this type in the portfolio. At December 31, ~~2021~~2022, 8488.58% of the Bank’s agency mortgage-backed securities had contractual final maturities of more than ten years with a weighted maturity of 2221.36 years.

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Loans Receivable – Loans receivable increased $39110.80 million, or 411.10%, during the year ended December 31, ~~2021~~2022, to $1.010 billion. ~~At December 31, 2021, the Bank had $1.2 million in loans outstanding under the SBA Paycheck Protection Program.~~ The Bank’s commercial and commercial real estate portfolios increased by an aggregate of $72112.14 million, or 1115.38%, during ~~2021~~2022 and comprised 7074.90% of the total loan portfolio at December 31, ~~2021~~2022. The residential real estate and consumer portfolios decreased by an aggregate of $268.01 million, or 93.2%, during ~~2021~~2022 and comprised 2522.53% of the total loan portfolio at December 31, ~~2021~~2022.

Loans receivable increased $3539.8 million, or 34.91%, during the year ended December 31, ~~2020~~2021, to $~~962.~~1.0 ~~million~~billion. AtThe ~~December~~Bank’s ~~31,~~commercial ~~2020,~~and ~~the~~commercial ~~Bank~~real ~~had~~estate portfolios increased by an aggregate of $2072.31 million, inor ~~loans~~11.3%, ~~outstanding~~during ~~under~~2021 ~~the~~and ~~SBA~~comprised ~~Paycheck~~70.9% ~~Protection~~of ~~Program.~~the ~~The~~total ~~Bank’s~~loan ~~commercial~~portfolio ~~and~~at ~~commercial~~December 31, 2021. The residential real estate and consumer portfolios ~~increased~~decreased by an aggregate of $9226.80 million, or 179.02%, during ~~2020~~2021 and comprised 6625.35% of the total loan portfolio at December 31, ~~2020~~2021.

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

	As of December 31,
	2021					2020
	2022					2021
	Amount		Percent			Amount		Percent
	(dollars in thousands)
Commercial (1)	$	~~220~~230,~~826~~262		2220.0471	%	$	~~208~~220,~~244~~826		2122.6504	%
Commercial Real Estate:
Construction		74135,~~806~~159		712.4716			9274,~~916~~806		97.6647
Farmland		6865,~~388~~256		65.8387			7068,~~272~~388		76.3083
Nonfarm nonresidential		~~345~~391,~~893~~701		3435.5323			~~266~~345,~~394~~893		2734.6953
Residential Real Estate:
Multi-family		5045,~~224~~222		54.0107			6150,~~180~~224		65.3601
1-4 Family		~~168~~166,~~873~~988		1615.8602			~~188~~168,~~955~~873		1916.6486
Consumer		3635,~~440~~277		3.6417			3136,~~429~~440		3.2764
Agriculture		3541,~~924~~498		3.5973			4235,~~044~~924		43.3759
Other		~~466~~491		0.0304			~~647~~466		0.0603
Total loans	$	1,~~001~~111,~~840~~854		100.00	%	$	~~962~~1,~~081~~001,840		100.00	%

(1) Includes PPP loans of $~~1.2~~141,000 ~~million~~ and $201.32 million at December 31, ~~2021~~2022 and ~~2020~~2021, respectively.

	As of December 31,
	2019					2018					2017
	Amount		Percent			Amount		Percent			Amount		Percent
	(dollars in thousands)
Commercial	$	145,551		15.71	%	$	129,368		16.91	%	$	113,771		15.98	%
Commercial Real Estate:
Construction		64,911		7.01			86,867		11.35			57,342		8.05
Farmland		79,118		8.54			77,937		10.18			88,320		12.40
Nonfarm nonresidential		255,459		27.58			172,177		22.50			156,724		22.01
Residential Real Estate:
Multi-family		70,950		7.66			49,757		6.50			56,588		7.94
1-4 Family		226,629		24.47			175,761		22.97			179,222		25.17
Consumer		47,790		5.16			39,104		5.11			18,439		2.59
Agriculture		35,064		3.79			33,737		4.41			41,154		5.78
Other		799		0.08			536		0.07			555		0.08
Total loans	$	926,271		100.00	%	$	765,244		100.00	%	$	712,115		100.00	%

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

~~Lending~~The ~~activities~~Bank ~~are~~had ~~subject~~22 toloan arelationships ~~variety~~each ofwith ~~lending~~aggregate ~~limits~~extensions ~~imposed~~of bycredit ~~state~~in ~~and~~excess ~~federal~~of ~~law~~$10.0 million ~~The~~at ~~Bank’s~~year ~~statutory~~end ~~secured~~2022 ~~legal~~and ~~lending~~2021. ~~limit~~The toaggregate aextension ~~single~~of ~~borrower~~credit orto ~~guarantor~~these ~~was~~relationships ~~approximately~~totaled $50355.2 million and $310.7 million at ~~December 31,~~year end 2022 and 2021, asrespectively. ~~measured~~With atrespect ~~30%~~to ofthese large loan relationships, all 22 were classified as pass by the Bank’s ~~unimpaired~~internal ~~capital~~loan review process at December 31, 2022 and ~~surplus~~2021. At December 31, 2022, the largest relationship totaled $32.4 million and was secured by multiple income producing commercial real estate properties.

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

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~~The~~Loan ~~Bank~~Maturity ~~had~~Schedule 22– ~~and 18 loan relationships each with aggregate extensions of credit in excess of $10.0 million at year end 2021 and 2020, respectively.~~ The ~~aggregate~~following ~~extension~~table ofsets ~~credit~~forth ~~to these relationships totaled $310.7 million and $217.6 million~~ at ~~year end 2021 and 2020, respectively. With respect to these large loan relationships, all 22 were classified as pass by the Bank’s internal loan review process at~~ December 31, ~~2021 and 17 were classified as pass and one classified as watch at December 31~~2022, ~~2020. At December 31, 2021,~~ the ~~largest~~dollar ~~relationship~~amount ~~totaled $27.4 million,~~ of ~~which~~loans, ~~$17.2~~net ~~million~~of ~~was~~deferred ~~secured~~loan ~~by a multi-family development currently under construction~~fees, ~~and~~maturing ~~$10.2~~in ~~million~~the ~~was~~loan ~~secured~~portfolio bybased aon ~~combination~~their ofcontractual ~~commercial~~terms ~~real~~to ~~estate currently under development and income producing commercial real estate.~~maturity:

As of December 31, 2021, the Bank had $85.2 million of loan participations purchased from, and $12.8 million of loan participations sold to, other banks. As of December 31, 2020, the Bank had $74.3 million of loan participations purchased from, and $21.3 million of loan participations sold to, other banks.

	As of December 31, 2022
	Maturing Within One Year		Maturing 1 through 5 Years		Maturing 5 through 15 Years		Maturing Over 15 Years		Total Loans
	(dollars in thousands)
Loans with fixed rates:
Commercial	$	6,815	$	65,747	$	63,145	$	—	$	135,707
Commercial Real Estate:
Construction		4,747		27,826		18,045		—		50,618
Farmland		2,856		17,353		10,513		1,844		32,566
Nonfarm nonresidential		16,803		152,005		94,100		5,110		268,018
Residential Real Estate:
Multi-family		22		24,522		6,849		—		31,393
1-4 Family		2,325		13,860		22,610		47,944		86,739
Consumer		3,010		18,507		766		844		23,127
Agriculture		1,974		6,569		528		—		9,071
Other		—		491		—		—		491
Total fixed rate loans	$	38,552	$	326,880	$	216,556	$	55,742	$	637,730

Loans with floating rates:
Commercial	$	31,739	$	45,209	$	17,607	$	—	$	94,555
Commercial Real Estate:
Construction		14,486		61,110		8,416		529		84,541
Farmland		1,158		5,224		9,855		16,453		32,690
Nonfarm nonresidential		10,681		50,453		25,927		36,622		123,683
Residential Real Estate:
Multi-family		—		11,096		2,305		428		13,829
1-4 Family		3,072		10,210		34,896		32,071		80,249
Consumer		12,000		32		118		—		12,150
Agriculture		29,731		2,363		333		—		32,427
Other		—		—		—		—		—
Total floating rate loans	$	102,867	$	185,697	$	99,457	$	86,103	$	474,124

Loan Maturity Schedule – The following table sets forth at December 31, 2021, the dollar amount of loans, net of deferred loan fees, maturing in the loan portfolio based on their contractual terms to maturity:

			As of December 31, 2021
	Maturing Within One Year		Maturing 1 through 5 Years		Maturing 5 through 15 Years		Maturing Over 15 Years		Total Loans
	(dollars in thousands)
Loans with fixed rates:
Commercial	$	5,310	$	51,315	$	61,428	$	—	$	118,053
Commercial Real Estate:
Construction		6,762		12,227		11,631		—		30,620
Farmland		1,975		19,305		11,462		1,216		33,958
Nonfarm nonresidential		6,369		111,284		117,847		232		235,732
Residential Real Estate:
Multi-family		844		16,989		15,695		—		33,528
1-4 Family		5,081		20,113		25,963		37,925		89,082
Consumer		1,375		21,702		427		650		24,154
Agriculture		2,141		6,648		664		—		9,453
Other		—		466		—		—		466
Total fixed rate loans	$	29,857	$	260,049	$	245,117	$	40,023	$	575,046
Loans with floating rates:
Commercial	$	25,241	$	54,709	$	22,823	$	—	$	102,773
Commercial Real Estate:
Construction		16,894		22,649		2,007		2,636		44,186
Farmland		168		9,540		8,923		15,799		34,430
Nonfarm nonresidential		1,046		44,765		37,630		26,720		110,161
Residential Real Estate:
Multi-family		325		10,994		4,936		441		16,696
1-4 Family		4,371		8,325		38,543		28,552		79,791
Consumer		12,000		152		134		—		12,286
Agriculture		24,934		1,258		279		—		26,471
Other		—		—		—		—		—
Total floating rate loans	$	84,979	$	152,392	$	115,275	$	74,148	$	426,794

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

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

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

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

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

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

	As of December 31,
	2021		2020		2019		2018		2017
	2022		2021		2020		2019		2018
		~~(in thousands)~~	(in thousands)
Pass	$	~~977~~1,~~962~~089,330	$	~~926~~977,~~025~~962	$	~~888~~926,~~707~~025	$	~~745~~888,~~604~~707	$	~~673~~745,~~033~~604
Watch		715,~~856~~189		187,~~879~~856		2718,~~522~~879		1327,~~164~~522		2513,~~715~~164
Special Mention		—		—		—		~~113~~—		~~164~~113
Substandard		167,~~022~~335		1716,~~177~~022		1017,~~042~~177		610,~~363~~042		136,~~203~~363
Doubtful		—		—		—		—		—
Total	$	1,~~001~~111,~~840~~854	$	~~962~~1,~~081~~001,840	$	~~926~~962,~~271~~081	$	~~765~~926,~~244~~271	$	~~712~~765,~~115~~244

Loans receivable increased $39110.80 million, or 411.10%, during the year ended December 31, ~~2021~~2022. Since December 31, ~~2020~~2021, the pass category increased approximately $51111.94 million, the watch category ~~decreased~~increased approximately $117.03 million, and the substandard category decreased approximately $18.27 million. The increase in the watch category is primarily related to the downgrade of an $11.0 million commercial loan relationship. This downgrade was offset by $5.1 million in commercial loan payoffs during 2022.2 The $8.7 million decrease in loans classified as substandard was primarily driven by $48.52 million in principal payments received, $2.51 million in ~~charge-offs~~loans upgraded from substandard, and $~~325~~462,000 in ~~loans upgraded from substandard~~charge-offs, offset by $62.1 million in loans moved to substandard during ~~2021~~2022. These trends were considered during the evaluation of qualitative trends in the portfolio when establishing the general component of the allowance for loan losses.

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

	As of December 31,
	2021		2020		2019		2018		2017
	2022		2021		2020		2019		2018
		~~(in thousands)~~	(in thousands)
Past Due Loans:
30-59 Days	$	~~556~~1,919	$	~~1,537~~556	$	1,~~747~~537	$	1,~~593~~747	$	1,~~478~~593
60-89 Days		~~210~~268		~~372~~210		~~670~~372		~~331~~670		~~171~~331
90 Days and Over		—		—		—		—		1—
Total Loans Past Due 30-90+ Days		~~766~~2,187		~~1,909~~766		21,~~417~~909		12,~~924~~417		1,~~650~~924
Nonaccrual Loans		~~3,124~~856		13,~~676~~124		1,~~528~~676		1,~~991~~528		51,~~457~~991
Total Past Due and Nonaccrual Loans	$	3,~~890~~043	$	3,~~585~~890	$	3,~~945~~585	$	3,~~915~~945	$	73,~~107~~915

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

Nonaccrual loans ~~increased~~decreased $12.43 million from December 31, ~~2020~~2021 to December 31, ~~2021~~2022. This ~~increase~~decrease was primarily driven by $2.9 million in paydowns, $245,000 in charge-offs, and $77,000 loans ~~placed~~upgraded onfrom non-accrual, offset by $1924,000 in loans placed on non-accrual.3 The $2.9 million in paydowns ~~and~~of nonaccrual loans was driven by the payoff of a $~~203~~2.0 million commercial real estate loan during the third quarter of 2022,~~000~~ which resulted in ~~charge-offs.~~a ~~The~~recovery of $3.1.5 million. The $856,000 in nonaccrual loans at December 31, ~~2021~~2022 were ~~primarily~~generally secured by ~~commercial~~residential real estate loans. The $13.71 million in nonaccrual loans at December 31, ~~2020~~2021 were generally secured by ~~residential~~commercial real estate loans. Management believes it has established adequate loan loss reserves for these credits.

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

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

At December 31, 2021, the Bank had three restructured loans totaling $405,000 with borrowers who experienced deterioration in financial condition compared with four restructured loans totaling $480,000 at December 31, 2020. In general, these loans were granted interest rate reductions to provide cash flow relief to borrowers experiencing cash flow difficulties. At December 31, 2021 and December 31, 2020, the Bank had no restructured loans that had been granted principal payment deferrals until maturity. There were no concessions made to forgive principal relative to these loans, although partial charge-offs have been recorded for certain restructured loans. In general, these loans are secured by first liens on 1-4 residential properties or commercial real estate properties. At December 31, 2021 and December 31, 2020, 84% and 100%, respectively, of the TDRs were performing according to their modified terms. 37

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

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

Loans subject to CARES Act modifications that had not returned to normal payment terms declined to $2.2 million as of December 31, 2021, as compared to $15.3 million at December 31, 2020. At the beginning of the fourth quarter of 2021, the Bank had one remaining commercial real estate loan secured by a retail entertainment facility subject to a CARES Act modification. This loan totaled $4.4 million, had been graded substandard, evaluated under ASC -310-10, and allocated a specific reserve of $2.2 million since December 2020. Given the uncertainty of the borrower’s ability to return to amortizing principal and interest payments, this loan was placed on nonaccrual during the fourth quarter of 2021 and a partial charge-off of the specifically allocated $2.2 million reserve was recognized.

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

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

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

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

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

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

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

	As of December 31,
	2021			2020			2019			2018			2017
	2022			2021			2020			2019			2018
	(dollars in thousands)
Loans on nonaccrual status	$	~~3,124~~856			13,~~676~~124			1,~~528~~676			1,~~991~~528			51,~~457~~991
Troubled debt restructurings on accrual		~~340~~133			~~480~~340			~~475~~480			~~910~~475			~~1,217~~910
Past due 90 days or more still on accrual		—			—			—			—			1—
Total non-performing loans and TDRs on accrual		~~3,464~~989			23,~~156~~464			2,~~003~~156			2,~~901~~003			62,~~675~~901
Real estate acquired through foreclosure		—			~~1,765~~—			31,~~225~~765			3,~~485~~225			43,~~409~~485
Other repossessed assets		—			—			—			—			—
Total non-performing assets and TDRs on accrual	$	~~3,464~~989		$	3,~~921~~464		$	53,~~228~~921		$	65,~~386~~228		$	116,~~084~~386
Nonaccrual loans to total loans		0.3108	%		0.1731	%		0.17	%		0.2617	%		0.7726	%
Non-performing loans and TDRs on accrual to total loans		0.3509	%		0.2235	%		0.22	%		0.3822	%		0.9438	%
Non-performing assets and TDRs on accrual to total assets		0.2407	%		0.3024	%		0.4230	%		0.6042	%		10.1460	%
Allowance for loan losses to nonaccrual loans		~~369~~1,522.1120	%		~~742~~369.4211	%		~~548~~742.1742	%		~~446~~548.0117	%		~~150~~446.3001	%
Allowance for non-performing loans	$	1218		$	2212		$	4822		$	8348		$	~~108~~83
Allowance for non-performing loans to non-performing loans and TDRs on accrual		01.3582	%		10.0235	%		21.4002	%		2.8640	%		12.6286	%

Interest income that would have been recorded if nonaccrual loans were on a current basis in accordance with their original terms was $~~287~~265,000, $~~288~~287,000, and $~~315~~288,000 for the years ended December 31, ~~2021~~2022, ~~2020~~2021, and ~~2019~~2020, respectively. Nonperforming loans at December 31, ~~2021~~2022, were $~~3.5 million~~989,000, or 0.3509% of total loans, at December 31, ~~2021~~2022, and $23.25 million, or 0.2235% of total loans, at December 31, ~~2020~~2021.

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

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

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

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

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

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

	As of December 31,
	2021			2020			2019			2018			2017
	2022			2021			2020			2019			2018
	(dollars in thousands)
Balances at beginning of period	$	1211,~~443~~531		$	812,~~376~~443		$	8,~~880~~376		$	8,~~202~~880		$	8,~~967~~202
Loans charged-off:
Real estate		~~2,332~~558			~~231~~2,332			~~322~~231			~~450~~322			~~750~~450
Commercial		1931			3219			3732			5037			550
Consumer		~~131~~249			~~493~~131			~~663~~493			95663			5195
Agriculture		44—			4644			~~266~~46			13266			9513
Other		—			—			—			8—			—8
Total charge-offs		~~2,526~~838			~~802~~2,526			~~1,288~~802			~~616~~1,288			~~901~~616
Recoveries:
Real estate		~~228~~2,099			~~352~~228			~~597~~352			~~1,437~~597			~~714~~1,437
Commercial		~~172~~38			29172			~~106~~29			~~261~~106			59261
Consumer		4975			4549			7545			6975			~~115~~69
Agriculture		1545			3015			330			153			3315
Other		—			13—			313			123			1512
Total recoveries		~~464~~2,257			~~469~~464			~~784~~469			~~1,794~~784			~~936~~1,794
Net charge-offs (recoveries)		2(1,~~062~~419	)		~~333~~2,062			~~504~~333			~~(1,178~~504	)		(351,178	)
Provision (negative provision) for loan losses		~~1,150~~80			41,~~400~~150			—4,400			~~(500~~—	)		(~~800~~500	)
Balance at end of period	$	1113,~~531~~030		$	1211,~~443~~531		$	812,~~376~~443		$	8,~~880~~376		$	8,~~202~~880
Allowance for loan losses to period-end loans		1.1517	%		1.2915	%		01.9029	%		10.1690	%		1.1516	%
Net charge-offs (recoveries) to average loans		(0.2213	)%		0.0322	%		0.0603	%		(0.1606	)%		(0.0116	)%)
Allowance for loan losses to non-performing loans and TDRs on accrual		~~332~~1,317.8849	%		~~577~~332.1388	%		~~418~~577.1713	%		~~306~~418.1017	%		~~122~~306.8810	%

The loan loss reserve, as a percentage of total loans at December 31, ~~2021~~2022, was 1.1517% compared to 1.2915% at December 31, ~~2020~~2021. The allowance for loan losses to non-performing loans was ~~332~~1,317.8849% at December 31, ~~2021~~2022, compared with ~~577~~332.1388% at December 31, ~~2020~~2021.

AtA ~~the~~provision ~~beginning~~for ofloan ~~the~~losses ~~fourth quarter~~ of ~~2021~~$80,000 ~~the~~was ~~Bank~~recorded ~~had~~for ~~one~~the ~~remaining~~year ~~commercial~~ended ~~real~~December 31, ~~estate~~2022, ~~loan~~compared ~~secured~~to by a ~~retail~~provision ~~entertainment~~for ~~facility that remained subject to an eligible~~ loan ~~modification~~losses ~~under Section 4013~~ of ~~the CARES Act. This loan totaled~~ $41.42 million, ~~had~~for ~~been graded substandard~~2021, ~~evaluated under ASC-310-10,~~ and ~~allocated a specific reserve of~~ $24.24 million ~~since~~for ~~December~~ 2020. ~~Given~~The ~~the~~loan ~~uncertainty~~loss ofprovision for the ~~borrower’s~~year ~~ability~~ended toDecember ~~return to amortizing principal and interest payments~~31, ~~this~~2022 ~~loan~~ was ~~placed~~primarily onattributable ~~nonaccrual~~to ~~during~~growth ~~the~~trends ~~fourth~~within ~~quarter~~the ofportfolio, ~~2021~~offset ~~and~~by a ~~partial~~recovery ~~charge-off~~ of ~~the specifically allocated~~ $21.25 million ~~reserve was~~ recognized. ~~The~~during ~~remaining~~the ~~balance~~third ofquarter ~~this~~and ~~loan~~its ~~was~~impact ~~$2.2~~on ~~million~~the athistorical ~~December~~loss ~~31, 2021~~percentages. ~~Net~~The 2021 loan ~~charge-offs~~loss provisions were ~~$2.1~~attributable ~~million for 2021, compared~~ to ~~net~~growth ~~loan~~trends ~~charge-offs~~within ofthe ~~$333,000~~portfolio ~~in 2020~~ and net loan charge-offs ofimpacting ~~$504,000~~historical inloss ~~2019~~percentages during the periods.

3840

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A provision for loan losses of $1.2 million was recorded for the year ended December 31, 2021, compared to provision for loan losses of $4.4 million for 2020, and no provision for loan losses for 2019. The 2021 loan loss provision was attributable to net loan charge-offs impacting historical loss percentages and growth trends within the portfolio during the year, while the provision for 2020 was largely attributable to the uncertainty surrounding the COVID-19 pandemic related economic and business disruptions.

While the U.S. Government’s economic responses to the COVID-19 pandemic through monetary policy and fiscal stimulus have provided meaningful support to the economy, management deemed it prudent to continue to maintain its qualitative environmental factor in the allowance for loan losses to account for the continued uncertainty surrounding the COVID-19 pandemic.

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

Allocation of Allowance for Credit Losses

	As of December 31,
	2021					2020
	2022					2021
	Amount of Allowance		Percent of Loans to Total Loans			Amount of Allowance		Percent of Loans to Total Loans
	(dollars in thousands)
Commercial	$	2,~~888~~827		2220.0471	%	$	2,~~529~~888		2122.6504	%
Commercial Real Estate:
Construction		1,~~011~~843		712.4716			1,~~158~~011		97.6647
Farmland		~~840~~782		65.8387			~~775~~840		76.3083
Nonfarm nonresidential		4,~~328~~981		3435.5323			54,~~117~~328		2734.6953
Residential Real Estate:
Multi-family		~~381~~360		54.0107			~~482~~381		65.3601
1-4 Family		1,~~062~~039		1615.8602			1,~~417~~062		1916.6486
Consumer		~~538~~591		3.6417			~~361~~538		3.2764
Agriculture		~~480~~604		3.5973			~~600~~480		43.3759
Other		3		0.0304			43		0.0603
Total	$	1113,~~531~~030		100.0	%	$	1211,~~443~~531		100.0	%

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	As of December 31,
	2019					2018					2017
	Amount of Allowance		Percent of Loans to Total Loans			Amount of Allowance		Percent of Loans to Total Loans			Amount of Allowance		Percent of Loans to Total Loans
	(dollars in thousands)
Commercial	$	1,710		15.71	%	$	1,299		16.91	%	$	892		15.98	%
Commercial Real Estate:
Construction		363		7.01			419		11.35			301		8.05
Farmland		654		8.54			543		10.18			449		12.40
Nonfarm nonresidential		3,063		27.58			3,714		22.50			3,282		22.01
Residential Real Estate:
Multi-family		478		7.66			403		6.50			627		7.94
1-4 Family		1,265		24.47			2,049		22.97			2,273		25.17
Consumer		485		5.16			130		5.11			64		2.59
Agriculture		355		3.79			321		4.41			313		5.78
Other		3		0.08			2		0.07			1		0.08
Total	$	8,376		100.0	%	$	8,880		100.0	%	$	8,202		100.0	%

Foreclosed Properties – There were no foreclosed properties at December 31, 2021, compared with $1.8 million at December 31, 2020. See “Note 6 - Other Real Estate Owned,” to the financial statements.

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.

Net activity relating to OREO during the years indicated is as follows:

	2021			2020			2019
	(in thousands)
OREO Activity
OREO as of January 1	$	1,765		$	3,225		$	3,485
Real estate acquired		—			—			—
Valuation adjustment write-downs		—			—			(260	)
Gain on sale		191			—			—
Proceeds from sale of properties		(1,956	)		(1,600	)		—
Improvements		—			140			—
OREO as of December 31	$	—		$	1,765		$	3,225

There were no acquisitions of OREO during 2021 or 2020. The Bank sold properties totaling $2.0 million and $1.6 million during 2021 and 2020, respectively. There were no fair value write-downs recorded during 2021 or 2020. Fair value write-downs of $260,000 were recorded in 2019. Fair value write-downs reflect updated appraisals, changes in marketing strategies, or reductions in listing prices for certain properties. The Bank recognized gain on sales of OREO of $191,000 for the year ended December 31, 2021, compared to no gain on sales of OREO during the year ended December 31, 2020 or 2019. Certain nonaccrual loans may be resolved through the acquisition and sale of the underlying real estate collateral.

Operating expenses for OREO totaled $13,000 for the year ended December 31, 2021, compared with operating expenses of $63,000 in 2020, and write-downs and operating expenses of $368,000 in 2019.

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

The Bank primarily relies on its banking office network to attract and retain deposits in its local markets, as well as deposit listing services, brokered deposits, deposit gathering networks, and the online channel to attract both in and out-of-market deposits. Market interest rates and rates on deposit products offered by competing financial institutions can significantly affect the Bank’s ability to attract and retain deposits. During 2021, total deposits increased $89.1 million compared with 2020. The increase in deposits for 2021 was primarily in interest-bearing demand deposit account balances, as well as money market and non-interest demand deposit accounts. During 2020, total deposits increased $92.6 million compared with 2019. The increase in deposits for 2020 was primarily in savings account balances, as well as non-interest and interest-bearing demand deposit accounts.

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

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

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

	For the Years Ended December 31,
	2021					2020					2019
	Average Balance		Average Rate			Average Balance		Average Rate			Average Balance		Average Rate
	(dollars in thousands)
Demand	$	271,994				$	215,145				$	151,299
Interest Checking		233,844		0.27	%		169,808		0.32	%		104,077		0.30	%
Money Market		190,094		0.34			166,788		0.55			161,610		1.06
Savings		157,283		0.28			111,559		0.48			36,035		0.19
Certificates of Deposit		311,140		0.57			436,083		1.33			483,222		1.98
Total Deposits	$	1,164,355				$	1,099,383				$	936,243
Weighted Average Rate				0.30	%				0.71	%				1.25	%

The following table shows at December 31, 2021 the amount of the Bank’s time deposits of $250,000 or more by time remaining until maturity:

Maturity Period
(in thousands)
Three months or less	$	6,120
Three months through six months		6,185
Six months through twelve months		5,561
Over twelve months		15,534
Total	$	33,400

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

Borrowing – Deposits are the primary source of funds for lending activities, investment activities, and for general business purposes. The Bank also uses borrowings from the FHLB of Cincinnati to supplement the pool of lendable funds, meet deposit withdrawal requirements and manage the terms of liabilities. FHLB borrowings are secured by the Bank’s stock in the FHLB, substantially all of its first mortgage residential loans, as well as its outstanding PPP loans. At December 31, 2021, the Bank had $20.0 million in outstanding borrowings from the FHLB and the capacity to increase borrowings by an additional $62.5 million. The FHLB of Cincinnati functions as a central reserve bank providing credit for member financial institutions. As a member, the Bank is required to own capital stock in the FHLB and is authorized to borrow on the security of such stock and certain of its home mortgages and other assets (principally, securities that are obligations of, or guaranteed by, the United States) provided that it meets certain standards related to creditworthiness.

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

	For the Years Ended December 31,
	2022					2021					2020
	Average Balance		Average Rate			Average Balance		Average Rate			Average Balance		Average Rate
	(dollars in thousands)
Demand	$	277,981				$	271,994				$	215,145
Interest Checking		288,480		0.54	%		233,844		0.27	%		169,808		0.32	%
Money Market		209,331		0.55			190,094		0.34			166,788		0.55
Savings		159,422		0.35			157,283		0.28			111,559		0.48
Certificates of Deposit		262,692		0.73			311,140		0.57			436,083		1.33
Total Deposits	$	1,197,906				$	1,164,355				$	1,099,383
Weighted Average Rate				0.43	%				0.30	%				0.71	%

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

Maturity Period
(in thousands)
Three months or less	$	11,772
Three months through six months		69,705
Six months through twelve months		17,655
Over twelve months		7,391
Total	$	106,523

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

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

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

	December 31,
	2021			2020			2019
	2022			2021			2020
	(dollars in thousands)
Average balance outstanding	$	2050,~~152~~274		$	3420,~~101~~152		$	3534,~~038~~101
Maximum amount outstanding at any month-end during the period		2090,~~620~~000			7120,~~376~~620			6171,~~389~~376
End of period balance		2070,000			20,~~623~~000			6120,~~389~~623
Weighted average interest rate:
At end of period		04.7725	%		0.7577	%		10.7075	%
During the period		02.7631	%		10.0976	%		21.3109	%

~~Junior Subordinated Debentures – At December 31, 2021, the Company had four issues of junior subordinated debentures outstanding totaling $21.0 million as shown in the table below.~~ 42

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

Description

Liquidation

Amount

Trust

Preferred

Securities

Issuance Date

Interest Rate (1)

Junior

Subordinated

Debt and

Investment

in Trust

Maturity Date

(dollars in thousands)

Statutory Trust I

3,000

2/13/2004

3-month LIBOR + 2.85%

3,093

2/13/2034

Statutory Trust II

5,000

2/13/2004

3-month LIBOR + 2.85%

5,155

2/13/2034

Statutory Trust III

3,000

4/15/2004

3-month LIBOR + 2.79%

3,093

4/15/2034

Statutory Trust IV

10,000

12/14/2006

3-month LIBOR + 1.67%

10,435

3/01/2037

21,000

21,776

(1) As of December 31, ~~2021~~2022, ~~the~~ 3-month LIBOR was 04.2177%.

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

The ~~Company~~Federal ~~has~~Reserve ~~the~~Board ~~option~~rules toallow ~~defer~~trust ~~interest~~preferred ~~payments~~securities onissued ~~the~~prior ~~subordinated~~to ~~debentures~~May ~~from~~19, ~~time~~2010 to ~~time~~be ~~for~~included ain ~~period~~Tier ~~not~~1 capital, subject to ~~exceed~~quantitative 20and ~~consecutive~~qualitative ~~quarters~~limits. ACurrently, ~~deferral~~no ~~period~~more ~~may~~than ~~begin~~25% atof the Company’s ~~discretion~~Tier so1 ~~long~~capital ascan ~~interest~~consist ~~payments~~of ~~are~~trust ~~current~~preferred securities and qualifying perpetual preferred stock. AtTo ~~December~~the extent the amount of the Company’s trust preferred securities exceeds the 25% limit, the excess would be includable in Tier 2 capital. As of December 31, ~~2021~~2022, all of the Company’s istrust ~~current~~preferred onsecurities ~~all~~were ~~interest~~included ~~payments~~in and comprised 14% of Tier 1 capital.

The Federal Reserve Board rules allow trust preferred securities issued prior to May 19, 2010 to be included in Tier 1 capital, subject to quantitative and qualitative limits. Currently, no more than 25% of the Company’s Tier 1 capital can consist of trust preferred securities and qualifying perpetual preferred stock. To the extent the amount of the Company’s trust preferred securities exceeds the 25% limit, the excess would be includable in Tier 2 capital. As of December 31, 2021, all of the Company’s trust preferred securities were included in and comprised 17% of Tier 1 capital.

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

Subordinated Capital Notes – The Company’s subordinated notes mature on July 31, 2029 with an optional prepayment date of July 31, 2025. The notes carry interest at a fixed rate of 5.75% until July 30, 2024 and then convert to variable at three-month LIBOR plus 395 basis points until maturity. The subordinated capital notes qualify as Tier 2 regulatory capital. On July 31, 2020, the Company completed the issuance of an additional $8.0 million in subordinated notes under the July 23, 2019 indenture with the same terms and with the additional commitment by the Company to extend the optional prepayment date to July 31, 2025 so long as the additional notes qualify as Tier 2 regulatory capital. The Company used the net proceeds from the issuance of the additional notes to retire its senior debt and retained the remaining balance for general corporate purposes. The subordinated capital notes qualify as Tier 2 regulatory capital.

Capital

Stockholders’ equity increased $142.9 million to $~~131~~133.09 million at December 31, ~~2021~~2022, compared with $~~116~~131.0 million at December 31, ~~2020~~2021. The increase was due primarily to current year net income of $18.3 million, offset by the other comprehensive loss for the year of $14.96 million attributable to the fair value decline in the available for sale investment portfolio driven by rising interest rates and changing credit spreads, and $1.5 million in dividends paid to common shareholders.

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

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

Common equity Tier 1 capital		4.5	%		6.5	%		7.0	%		13.01	%
Tier 1 capital		6.0			8.0			8.5			13.01
Total risk-based capital		8.0			10.0			10.5			14.01
Tier 1 leverage ratio		4.0			5.0			—			11.59

The following table shows the ratios of common equity Tier 1, Tier 1 capital, total capital to risk-adjusted assets, and Tier 1 leverage for the Bank at December 31, 2021:

	Regulatory Minimums			Well-Capitalized Minimums			Basel III Plus Conservation Buffer			Limestone Bank
Common equity Tier 1 capital		4.5	%		6.5	%		7.0	%		12.35	%
Tier 1 capital		6.0			8.0			8.5			12.35
Total risk-based capital		8.0			10.0			10.5			13.31
Tier 1 leverage ratio		4.0			5.0			—			10.84

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

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

Liquidity and Capital Resource Management

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

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

The Bank also borrows from the FHLB to supplement funding requirements. At December 31, ~~2021~~2022, the Bank had an unused borrowing capacity with the FHLB of $6291.50 million. Advances are collateralized by commercial real estate and first mortgage residential loans, asunder ~~well~~a asblanket ~~its~~lien ~~outstanding PPP loans~~arrangement. Borrowing capacity is based on the underlying book value of eligible pledged loans.

The Bank also has available on an unsecured basis federal funds borrowing line from a correspondent bank totaling $5.0 million. Management believes the sources of liquidity are adequate to meet expected cash needs for the foreseeable future. ~~Historically~~Additionally, the Bank ~~has~~may ~~also~~utilize ~~utilized~~ brokered and wholesale deposits to supplement its funding strategy. ~~At December 31, 2021, the Bank had no brokered deposits.~~

The Company uses cash on hand to service the subordinated capital notes, junior subordinated debentures, pay dividends to common shareholders, and to provide for operating cash flow needs. The Company’s primary source of funding to meet its obligations is dividends from the Bank. At December 31, ~~2021~~2022, the Bank was eligible to pay $620.54 million of dividends. The Bank paid the Company $27.05 million of dividends during ~~2021~~2022.

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

43 Impact of Inflation and Changing Prices

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

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

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Material Cash Requirements and Obligations

The following table summarizes key obligations by maturity date or scheduled payment date and other commitments to make future payments as of December 31, ~~2021~~2022:

	One year or less		More than 1 year but less than 3 years		3 years or more but less than 5 years		5 years or more		Total
	(dollars in thousands)
Time deposits	$	~~161~~233,~~917~~016	$	7551,~~360~~132	$	285,~~196~~311	$	~~538~~702	$	~~266~~290,~~011~~161
FHLB borrowing (1)		—70,000		—		—		~~20,000~~—		2070,000
Operating leases		~~363~~457		~~731~~899		~~652~~873		78,~~161~~434		810,~~907~~660
Junior subordinated debentures		—		—		—		21,000		21,000
Subordinated capital notes		—		—		—		25,000		25,000
Total	$	~~162~~303,~~280~~473	$	7652,~~091~~028	$	286,~~848~~184	$	7355,~~699~~136	$	~~340~~416,~~918~~821

(1) Fixed rate ~~borrowing~~borrowings atwith 0rates ranging from 4.7702%, ~~maturing~~to ~~in 2030~~4.38%, and ~~callable~~maturing ~~quarterly~~in ~~at the option of the FHLB~~2023.

Off-Balance Sheet Arrangements

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

The commitments associated with outstanding standby letters of credit and commitments to extend credit as of December 31, ~~2021~~2022 are summarized below. Since commitments associated with letters of credit and commitments to extend credit may expire unused, the amounts shown do not necessarily reflect the Bank’s actual future cash funding requirements:

One year or less

More than 1 year but less than 3 years

3 years or more but less than 5 years

5 years or more

Total

(dollars in thousands)

Commitments to extend credit

6159,~~531~~632

7563,~~966~~018

7430,~~125~~369

5548,~~818~~679

~~267~~201,~~440~~698

Standby letters of credit

~~888~~1,087

—4

4—

—

~~892~~1,091

Total

6260,~~419~~719

7563,~~966~~022

7430,~~129~~369

5548,~~818~~679

~~268~~202,~~332~~789

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

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

Risk Participation Agreements – In connection with the purchase of loan participations, the Bank has entered into risk participation agreements, which had notional amounts totaling $12.1 million at December 31, ~~2021~~2022 and ~~$26~~2021.~~6 million at December 31, 2020.~~

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Impact of Inflation and Changing Prices

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

To minimize the volatility of net interest income and exposure to economic loss that may result from fluctuating interest rates, the Bank manages its exposure to adverse changes in interest rates through asset and liability management activities within guidelines established by the Asset Liability Committee (“ALCO”). The ALCO, which is comprised of senior officers, has the responsibility for approving and ensuring compliance with asset/liability management policies. Interest rate risk is the exposure to adverse changes in the net interest income as a result of market fluctuations in interest rates. The ALCO, on an ongoing basis, monitors interest rate and liquidity risk in order to implement appropriate funding and balance sheet strategies. Management considers interest rate risk to be the Bank’s most significant market risk.

The Company utilizes an earnings simulation model to analyze net interest income sensitivity. It then evaluates potential changes in market interest rates and their subsequent effects on net interest income. The model projects the effect of instantaneous movements in interest rates of both 100 and 200 basis points that are sustained for one year. Assumptions based on the historical behavior of the Company’s deposit rates and balances in relation to changes in interest rates are also incorporated into the model. These assumptions are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results may differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and the application and timing of various management strategies.

Given an instantaneous 100 basis point increase in interest rates, the base net interest income would decrease by an estimated 12.31% at December 31, ~~2021~~2022 compared with ana ~~increase~~decrease of 01.83% at December 31, ~~2020~~2021. Given an instantaneous 100 basis point decrease in interest rates, the base net interest income would ~~decrease~~increase by an estimated 0.83% at December 31, ~~2021~~2022 compared with a decrease of 20.98% at December 31, ~~2020~~2021.

The following table indicates the estimated impact on net interest income under various interest rate scenarios for the year ended December 31, ~~2021~~2022, as calculated using the static shock model approach:

	Change in Future Net Interest Income
	Dollar Change			Percentage Change
	(dollars in thousands)
+ 200 basis points	$	(~~903~~1,952	)		(23.06	)%
+ 100 basis points		(~~576~~1,172	)		(12.31	)
- 100 basis points		~~(340~~145	)		(0.83	)
- 200 basis points		(~~1,438~~950	)		(31.27	)

Implementation of strategies to mitigate the risk of changing interest rates in the future, could lessen the Company’s forecasted “base case” net interest income in the event of no interest rate changes. Interest sensitivity at any point in time will be affected by a number of factors. These factors include the mix of interest sensitive assets and liabilities as well as their relative pricing schedules. It is also influenced by market interest rates, deposit growth, loan growth, deposit decay rates and asset prepayment speed assumptions.

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Item 8. Financial Statements and Supplementary Data

The following consolidated financial statements and reports are included in this section:

Report of Independent Registered Public Accounting Firm (PCAOB ID: 173)

Consolidated Balance Sheets

Consolidated Statements of Operations

Consolidated Statements of Comprehensive Income

Consolidated Statements of Change in Stockholders’ Equity

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

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Crowe LLP

Independent Member Crowe Global

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Shareholders and the Board of Directors of Limestone Bancorp, Inc.

Louisville, Kentucky

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Limestone Bancorp, Inc. (the "Company") as of December 31, ~~2021~~2022 and ~~2020~~2021, the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, ~~2021~~2022, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, ~~2021~~2022 and ~~2020~~2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, ~~2021~~2022, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosures to which it relates.

Allowance for Loan Losses – Qualitative Risk Factors

As described in Notes 1 and 3 to the consolidated financial statements, the Company’s allowance for loan losses represents management’s best estimate of probable incurred credit losses inherent in the held for investment loan portfolio as of the balance sheet date. Management assesses the risk inherent in the loan portfolio based on qualitative and quantitative risk factors. The allowance for loan losses consists of two components: the valuation allowance for loans that are individually classified as impaired and separately identified for impairment (“specific component”), totaling $0 as of December 31, ~~2021~~2022 and the valuation allowance for loans not considered impaired and collectively evaluated for impairment (“general component”), totaling $1113,~~531~~030,000 as of December 31, ~~2021~~2022.

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The general component covers non-impaired loans and is based on historical loss rates adjusted for current factors. The historical loss rates are determined by loan portfolio segment and based on actual loss history realized over the most recent five years with equal weighting. This actual loss experience is supplemented with other qualitative risk factors based on the risks present for each portfolio segment. The qualitative risk factor identification and analysis requires significant judgment and allows management to adjust the estimate of losses based on the most recent information available and to address other limitations in the historical loss rates. The Company’s qualitative risk factors include the changes in lending policies, procedures and practices, effects of any change in risk selection and underwriting standards, national and local economic trends and conditions, industry conditions, trends in volume and terms of loans, experience, ability and depth of lending management and other relevant staff, levels of and trends in delinquencies and impaired loans, levels of and trends in charge-offs and recoveries, and effects of changes in credit concentrations. The evaluation of these qualitative risk factors contributes significantly to the general component of the estimate of the allowance for loan losses.

We identified auditing the qualitative risk factors of the allowance for loan losses of the general component as a critical audit matter because of the necessary ~~judment~~judgment applied by us to evaluate management’s significant estimates and subjective assumptions related to the following:

●

Adjustments to the historical loss rates using qualitative risk factors including the selection of qualitative risk factors and the magnitude of each adjustment based on management’s judgments regarding factors which impact asset quality.

~~The~~Testing ~~primary~~management’s ~~procedures~~process, ~~performed~~including toevaluating ~~address~~their judgments and assumptions for developing the ~~critical~~qualitative ~~audit~~risk ~~matter~~factors which included:

●o ~~Testing~~Evaluation of the ~~effectiveness~~reasonableness of ~~controls~~management’s ~~over~~judgments and assumptions related to the qualitative risk factors. Our evaluation ofconsidered the ~~allowance~~weight ~~for~~of evidence from internal and external sources and loan ~~losses~~portfolio ~~related~~performance. too Evaluation of the ~~qualitative~~relevance ~~risk~~and ~~factors~~reliability of data, including ~~controls~~completeness ~~addressing:~~and accuracy of data used to develop the qualitative risk factors.

o Management’s review over the qualitative risk factors used in the allowance for loan losses calculation, including data used as the basis for adjustments and the reasonableness of the adjustments and assumptions related to the qualitative risk factors.

o Data inputs including the completeness and accuracy of loan data used in the qualitative risk factor computations.

● Substantively testing management’s process, including evaluating their judgments and assumptions for developing the qualitative risk factors which included:

o Evaluation of the reasonableness of management’s judgments and assumptions related to the qualitative risk factors. Our evaluation considered the weight of evidence from internal and external sources and loan portfolio performance.

o Evaluation of the relevance and reliability of data, including completeness and accuracy of data used to develop the qualitative risk factors.

Evaluation of management’s methodology to ensure it was consistently applied year over year.

/s/Crowe LLP

We have served as the Company's auditor since 1998.

Louisville, Kentucky

February 2528, ~~2022~~2023

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LIMESTONE BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

December 31,

(Dollar amounts in thousands except share data)

	2021			2020
	2022			2021
Assets
Cash and due from banks	$	107,~~493~~159		$	10,~~830~~493
Interest bearing deposits in banks		6737,~~110~~476			5667,~~863~~110
Cash and cash equivalents		7744,~~603~~635			6777,~~693~~603
Securities available for sale		~~214~~180,~~213~~173			~~203~~214,~~862~~213
Securities held to maturity (fair value of $46,280)		46,460			—
Securities held to maturity (fair value of $34,896 and $46,280, respectively)		43,282			46,460
Loans, net of allowance of $11,531 and $12,443, respectively		990,309			949,638
Loans, net of allowance of $13,030 and $11,531, respectively		1,098,824			990,309
Premises and equipment, net		2122,~~575~~103			1821,~~533~~575
Premises held for sale		~~310~~—			~~1,060~~310
Other real estate owned		—			1,765
Federal Home Loan Bank stock		5,176			5,116
Federal Home Loan Bank stock		5,116			5,887
Bank owned life insurance		31,132			23,946
Bank owned life insurance		23,946			23,441
Deferred taxes, net		21,283			21,583
Deferred taxes, net		21,583			25,714
Goodwill		6,252			6,252
Other intangible assets, net		1,~~989~~733			21,~~244~~989
Accrued interest receivable and other assets		67,~~336~~862			6,~~213~~336
Total assets	$	1,~~415~~462,~~692~~455		$	1,~~312~~415,~~302~~692
Liabilities and Stockholders’ Equity
Deposits
Non-interest bearing	$	~~274~~268,~~083~~954		$	~~243~~274,~~022~~083
Interest bearing		~~934~~931,~~585~~830			~~876~~934,585
Total deposits		1,~~208~~200,~~668~~784			1,~~119~~208,~~607~~668
Federal Home Loan Bank advances		2070,000			20,~~623~~000
Accrued interest payable and other liabilities		1011,~~065~~813			10,~~048~~065
Junior subordinated debentures		21,000			21,000
Subordinated capital notes		25,000			25,000
Total liabilities		1,~~284~~328,~~733~~597			1,~~196~~284,~~278~~733
Commitments and contingent liabilities (Note 15)		—			—
Stockholders’ equity
Common stock, no par, 39,000,000 shares authorized, 6,594,749 and 6,498,865 voting, and 1,000,000 and 1,000,000 non-voting shares issued and outstanding, respectively		140,639			140,639
Common stock, no par, 39,000,000 shares authorized, 6,638,633 and 6,594,749 voting, and 1,000,000 and 1,000,000 non-voting shares issued and outstanding, respectively		140,639			140,639
Additional paid-in capital		2526,~~625~~312			25,~~013~~625
Retained deficit		(3114,~~769~~954	)		(4631,~~678~~769	)
Accumulated other comprehensive loss		(318,~~536~~139	)		(23,~~950~~536	)
Total common stockholders’ equity		~~130~~133,~~959~~858			~~116~~130,~~024~~959
Total liabilities and stockholders’ equity	$	1,~~415~~462,~~692~~455		$	1,~~312~~415,~~302~~692

See accompanying notes.

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LIMESTONE BANCORP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31,

(Dollar amounts in thousands except per share data)

2021

2020

2019

2022

2021

2020

Interest income

Loans, including fees

4450,~~445~~332

4544,~~093~~445

4245,~~153~~093

Taxable securities

46,~~612~~165

54,~~042~~612

65,~~269~~042

Tax exempt securities

~~643~~660

~~370~~643

~~326~~370

Federal funds sold and other

~~215~~653

~~248~~215

~~836~~248

49,915

50,753

49,584

57,810

49,915

50,753

Interest expense

Deposits

35,~~518~~202

73,~~796~~518

117,~~657~~796

Federal Home Loan Bank advances

~~154~~1,162

~~371~~154

~~810~~371

Senior debt

—

~~119~~—

~~329~~119

Junior subordinated debentures

~~521~~867

~~660~~521

~~1,005~~660

Subordinated capital notes

1,~~500~~501

1,~~206~~500

~~433~~1,206

5,693

10,152

14,234

8,732

5,693

10,152

Net interest income

4449,~~222~~078

4044,~~601~~222

3540,~~350~~601

Provision for loan losses

~~1,150~~80

41,~~400~~150

—4,400

Net interest income after provision for loan losses

4348,~~072~~998

3643,~~201~~072

3536,~~350~~201

Non-interest income

Service charges on deposit accounts

2,~~256~~775

2,~~268~~256

2,~~381~~268

Bank card interchange fees

4,~~116~~278

34,~~376~~116

23,~~438~~376

Income from bank owned life insurance

~~526~~706

~~424~~526

~~410~~424

Gain on sale of other real estate owned

~~191~~—

—191

—

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

~~460~~(3

)

(5460

)

Other

890

781

694

Gain on sale of premises held for sale

163

—

8,439

6,844

5,918

Other

958

890

781

8,877

8,439

6,844

Non-interest expense

Salaries and employee benefits

1819,~~132~~021

1718,~~751~~132

1617,~~233~~751

Occupancy and equipment

4,~~041~~201

4,~~001~~041

34,~~522~~001

Deposit account related expense

2,~~158~~249

12,~~890~~158

1,~~224~~890

Data processing expense

1,~~512~~591

1,~~502~~512

1,~~259~~502

Professional fees

~~952~~818

~~937~~952

~~769~~937

Marketing expense

~~727~~605

~~629~~727

~~908~~629

FDIC insurance

~~405~~360

~~229~~405

~~211~~229

Deposit and state franchise tax

~~375~~396

~~1,475~~375

1,~~210~~475

Communications expense

~~681~~419

~~856~~681

~~772~~856

Insurance expense

~~415~~420

~~428~~415

~~444~~428

Postage and delivery

~~605~~622

~~627~~605

~~544~~627

Acquisition costs

—

775

Merger expenses

691

—

Other

12,~~968~~364

21,~~091~~968

2,~~399~~091

31,971

32,416

30,270

33,757

31,971

32,416

Income before income taxes

1924,~~540~~118

1019,~~629~~540

10,~~998~~629

Income tax expense

45,~~631~~776

14,~~624~~631

~~480~~1,624

Net income

1418,~~909~~342

914,~~005~~909

109,~~518~~005

Basic and diluted income per common share

12.9640

1.2096

1.4120

See accompanying notes.

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LIMESTONE BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Years Ended December 31,

(in thousands)

	2021			2020			2019
	2022			2021			2020
Net income	$	1418,~~909~~342		$	914,~~005~~909		$	109,~~518~~005
Other comprehensive income (loss):
Unrealized gain (loss) on securities:
Unrealized gain (loss) arising during the period		25(19,197	)		~~1,012~~25			31,~~773~~012
Amortization during period of net unrealized gain transferred to held to maturity		(~~346~~264	)		—(346	)		—
Less reclassification adjustment for losses included in net income		460			(5	)		(5	)
Less reclassification adjustment for gains (losses) included in net income		(3	)		460			(5	)
Net unrealized gain (loss) recognized in comprehensive income		(~~781~~19,458	)		~~1,017~~(781	)		31,~~778~~017
Tax effect		~~195~~4,855			~~(253~~195	)		(~~864~~253	)
Other comprehensive income (loss)		(~~586~~14,603	)		~~764~~(586	)		~~2,914~~764
Comprehensive income	$	143,~~323~~739		$	914,~~769~~323		$	139,~~432~~769

See accompanying notes.

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LIMESTONE BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Years Ended December 31, ~~2021~~

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

	Shares									Amount
	Common			Non-Voting Common			Total Common			Common and Non-Voting Common		Additional Paid-In Capital			Retained Deficit			Accumulated Other Comprehensive Loss			Total
Balances, December 31, 2018		6,242,720			1,220,000			7,462,720		$	140,639	$	24,287		$	(66,201	)	$	(6,628	)	$	92,097
Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations upon vesting		13,503			—			13,503			—		(314	)		—			—			(314	)
Forfeited unvested stock		(4,248	)		—			(4,248	)		—		—			—			—			—
Stock-based compensation expense		—			—			—			—		535			—			—			535
Net income		—			—			—			—		—			10,518			—			10,518
Net change in accumulated other comprehensive loss, net of taxes		—			—			—			—		—			—			2,914			2,914
Balances, December 31, 2019		6,251,975			1,220,000			7,471,975		$	140,639	$	24,508		$	(55,683	)	$	(3,714	)	$	105,750
Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations upon vesting		28,248			—			28,248			—		(75	)		—			—			(75	)
Forfeited unvested stock		(1,358	)		—			(1,358	)		—		—			—			—			—
Stock-based compensation expense		—			—			—			—		580			—			—			580
Non-voting shares converted to voting		220,000			(220,000	)		—			—		—			—			—			—
Net income		—			—			—			—		—			9,005			—			9,005
Net change in accumulated other comprehensive income, net of taxes		—			—			—			—		—			—			764			764
Balances, December 31, 2020		6,498,865			1,000,000			7,498,865		$	140,639	$	25,013		$	(46,678	)	$	(2,950	)	$	116,024
Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations upon vesting		104,220			—			104,220			—		(87	)		—			—			(87	)
Forfeited unvested stock		(8,336	)		—			(8,336	)		—		—			—			—			—
Stock-based compensation expense		—			—			—			—		699			—			—			699
Net income		—			—			—			—		—			14,909			—			14,909
Net change in accumulated other comprehensive income, net of taxes		—			—			—			—		—			—			(586	)		(586	)
Net change in accumulated other comprehensive loss, net of taxes		—			—			—			—		—			—			(586	)		(586	)
Balances, December 31, 2021		6,594,749			1,000,000			7,594,749		$	140,639	$	25,625		$	(31,769	)	$	(3,536	)	$	130,959
Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations upon vesting		54,393			—			54,393			—		(197	)		—			—			(197	)
Forfeited unvested stock		(10,509	)		—			(10,509	)		—		—			—			—			—
Stock-based compensation expense		—			—			—			—		884			—			—			884
Net income		—			—			—			—		—			18,342			—			18,342
Dividends declared on common stock ($0.20 per share)		—			—			—			—		—			(1,527	)		—			(1,527	)
Net change in accumulated other comprehensive loss, net of taxes		—			—			—			—		—			—			(14,603	)		(14,603	)
Balances, December 31, 2022		6,638,633			1,000,000			7,638,633		$	140,639	$	26,312		$	(14,954	)	$	(18,139	)	$	133,858

See accompanying notes to unaudited consolidated financial statements.

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LIMESTONE BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31,

(in thousands)

	2021			2020			2019
	2022			2021			2020
Cash flows from operating activities
Net income	$	1418,~~909~~342		$	914,~~005~~909		$	109,~~518~~005
Adjustments to reconcile net income (loss) to net cash from operating activities
Depreciation, amortization and accretion, net		41,~~677~~873			24,~~986~~677			12,~~669~~986
Provision for loan losses		~~1,150~~80			41,~~400~~150			—4,400
Net amortization on securities		~~594~~338			~~655~~594			~~700~~655
Stock-based compensation expense		~~699~~884			~~580~~699			~~535~~580
Deferred taxes, net		45,~~326~~155			14,~~798~~326			~~653~~1,798
Net realized gain on sales of other real estate owned		~~(191~~—	)		—(191	)		—
Net write-down of other real estate owned		—			—			260
Net realized (gain) loss on sales and calls of investment securities		3			(460	)		5
Net realized (gain) loss on sales and calls of investment securities		(460	)		5			5
Net realized (gain) loss on disposal of premises and equipment		37			1			—
Net realized (gain) loss on sales of premises and equipment		1			—			(1	)
Net write-down on premises held for sale		—			45			150
Net write-down on premises held for sale		45			150			150
Net gain on sale of premises held for sale		(163	)		—			—
Increase in cash surrender value of life insurance, net of premium expense		(~~505~~686	)		(~~404~~505	)		(~~391~~404	)
Amortization of operating lease right-of-use assets		~~374~~406			~~593~~374			~~185~~593
Net change in accrued interest receivable and other assets		(32,~~346~~923	)		(~~106~~3,346	)		(~~302~~106	)
Net change in accrued interest payable and other liabilities		171,748			~~1,383~~17			~~(763~~1,383	)
Net cash from operating activities		2225,~~290~~094			2122,~~045~~290			1321,~~218~~045
Cash flows from investing activities
Purchases of available for sale securities		(919,~~189~~924	)		(3891,~~416~~189	)		(2938,~~169~~416	)
Proceeds from sales and calls of available for sale securities		~~7,500~~—			97,~~030~~500			59,~~351~~030
Proceeds from maturities and prepayments of available for sale securities		3724,~~038~~492			3437,~~881~~038			1934,~~083~~881
Purchases of held to maturity securities		(~~16,444~~658	)		—(16,444	)		—
Proceeds from calls of held to maturity securities		1,~~704~~314			—1,704			—
Proceeds from maturities and prepayments of held to maturity securities		32,~~665~~195			—3,665			—
Proceeds from sale of other real estate owned		~~1,956~~—			1,~~600~~956			—1,600
Improvements to other real estate owned		—			~~(140~~—	)		—(140	)
Purchases of Federal Home Loan Bank stock		—(727	)		~~(600~~—	)		—(600	)
Proceeds from mandatory redemption of Federal Home Loan Bank stock		~~771~~667			~~950~~771			~~996~~950
Net changes in loans		(45109,~~164~~099	)		(3745,~~772~~164	)		(3537,~~538~~772	)
Proceeds from sale of premises and equipment		1—			—1			1—
Proceeds from sale of premises held for sale		~~705~~473			—705			—
Purchases of premises and equipment		(~~1,274~~687	)		(~~879~~1,274	)		(~~1,321~~879	)
Net cash paid for acquisition		—			—			(5,280	)
Purchase of bank owned life insurance		(6,500	)		—			(7,000	)
Purchase of bank owned life insurance		—			(7,000	)		—
Net cash from investing activities		(98,454	)		(100,731	)		(38,346	)
Net cash from investing activities		(100,731	)		(38,346	)		(45,877	)
Cash flows from financing activities
Net change in deposits		89(7,~~061~~884	)		9289,~~632~~061			~~975~~92,632
Repayment of Federal Home Loan Bank advances		(~~623~~120,000	)		(~~145,766~~623	)		(~~160~~145,~~160~~766	)
Advances from Federal Home Loan Bank		—170,000			~~105,000~~—			~~175~~105,000
Proceeds from issuance of subordinated capital notes		—			~~8,000~~—			178,000
Repayment of senior debt		—			~~(5,000~~—	)		(5,000	)
Common shares withheld for taxes		(87197	)		(7587	)		(~~314~~75	)
Net cash from financing activities		88,351			54,791			27,501
Cash dividends paid on common stock		(1,527	)		—			—
Net change in cash and cash equivalents		9,910			37,490			(5,158	)
Net cash from financing activities		40,392			88,351			54,791
Beginning cash and cash equivalents		67,693			30,203			35,361
Net change in cash and cash equivalents		(32,968	)		9,910			37,490
Ending cash and cash equivalents	$	77,603		$	67,693		$	30,203
Beginning cash and cash equivalents		77,603			67,693			30,203
Ending cash and cash equivalents	$	44,635		$	77,603		$	67,693
Supplemental cash flow information:
Interest paid	$	57,~~788~~925		$	105,~~422~~788		$	1310,~~763~~422
Income taxes paid (refunded)		~~370~~530			~~(346~~370	)		(346	)
Supplemental non-cash disclosure:
Transfer from loans to other real estate		—		$	—		$	—
Transfer from premises and equipment to premises held for sale		—			—			310
Transfer from premises and equipment to premises held for sale		—			310			—
Transfer of available for sale to held to maturity securities		—			34,741			—
Transfer of available for sale to held to maturity securities		34,741			—			—
AOCI component of transfer from available for sale to held to maturity		—			1,081			—
AOCI component of transfer from available for sale to held to maturity		1,081			—			—
Financed sales of other real estate owned		—			—			1,360
Financed sales of other real estate owned		—			1,360			—
Initial recognition of right-of-use lease assets		—			—			507

See accompanying notes.

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LIMESTONE BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, ~~2021~~2022, ~~2020~~2021 and ~~2019~~2020

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation and Nature of Operations – The consolidated financial statements include Limestone Bancorp, Inc. (Company) and its wholly-owned subsidiary, Limestone Bank, Inc. (Bank). All significant intercompany transactions and accounts have been eliminated in consolidation.

The Bank, established in 1902, is a state chartered non-member financial institution providing financial services through its banking center locations in south central, southern, and western Kentucky, as well as Lexington, Louisville, and Frankfort.

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

In March 2020, the World Health Organization declared novel coronavirus disease 2019 (“COVID-19”) as a global pandemic. The COVID-19 pandemic has created economic and financial disruptions that have adversely affected, and are likely to continue to adversely affect, the business, financial condition, and results of operations of the Company and its customers. The COVID-19 pandemic caused changes in the behavior of customers, businesses, and their employees, including illness, quarantines, social distancing practices, cancellation of events and travel, business and school shutdowns, reduction in commercial activity and financial transactions, supply chain interruptions, increased unemployment, and overall economic and financial market instability.

Future effects, including further actions taken by federal, state, and local governments to contain COVID-19 or treat its impact, are unknown. In addition, federal governmental actions are meaningfully influencing the interest-rate environment. If these actions are sustained, it may adversely impact several industries within the Company’s geographic footprint and impair the ability of the Company’s customers to fulfill their contractual obligations. This could cause the Company to experience a material adverse effect on business operations, liquidity, asset valuations, results of operations, and financial condition, as well as its regulatory capital and liquidity ratios. Material adverse impacts may include all or a combination of valuation impairments on the Company’s intangible assets, investments, loans, or deferred tax assets.

Cash and Cash Equivalents – For the purpose of presentation in the statements of cash flows, the Company considers all cash and amounts due from depository institutions as well as interest bearing deposits in banks that mature within one year and are carried at cost to be cash equivalents.

Securities – Debt securities are classified as held to maturity and carried at amortized cost when management has the intent and ability to hold them to maturity. Debt securities are classified as available for sale when they might be sold before maturity. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income, net of tax.

Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level-yield method anticipating prepayments on mortgage backed securities. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.

In evaluating securities for other-than-temporary impairment (“OTTI”), management considers the length of time and extent to which fair value has been less than cost, the financial condition, and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into 1) OTTI related to credit loss, which is recognized in the income statement and 2) OTTI related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis.

Loans – Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of deferred loan fees and costs, and an allowance for loan losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments. The recorded investment in loans includes the outstanding principal balance and unamortized deferred origination costs and fees.

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Interest income recognition on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the loan is well collateralized and in process of collection. Consumer loans are typically charged off no later than 90 days past due. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is not expected.

All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

The Bank participated in the SBA Paycheck Protection Program (“PPP”) as a lender to provide loans to small businesses for payroll and other basic expenses during the COVID-19 pandemic. These loans are eligible to be forgiven if certain conditions are satisfied and are fully guaranteed by the SBA. Additionally, loan payments are deferred for the first six months of the loan term. No collateral or personal guarantees were required. PPP loans were considered in the provision for loan losses in 2021 and 2020, however, due to SBA guaranty the provision for loan losses impact was insignificant.

Allowance for Loan Losses – The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.

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The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. A loan is deemed impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and are also treated as impaired.

Factors considered in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. The significance of payment delays and payment shortfalls is determined on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans, are collectively evaluated for impairment and are not separately identified for impairment disclosures. Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported at the fair value of the collateral. For troubled debt restructurings that subsequently default, the amount of reserve is determined in accordance with the accounting policy for the allowance for loan losses.

The general component covers non‑impaired loans and is based on historical loss experience adjusted for current factors. The historical loss experience is determined by portfolio segment and is based on actual loss history experienced over the most recent five years with equal weighting. This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment. These economic factors include consideration of the following: changes in lending policies, procedures, and practices; effects of any change in risk selection and underwriting standards; national and local economic trends and conditions; industry conditions; trends in volume and terms of loans; experience, ability and depth of lending management and other relevant staff; levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; and effects of changes in credit concentrations.

A portfolio segment is defined as the level at which an entity develops and documents a systematic methodology to determine its allowance for loan losses. Management identified the following portfolio segments: commercial, commercial real estate, residential real estate, consumer, agricultural, and other.

● Commercial loans are made to businesses and depend on the strength of the industries, related borrowers, and cash flow from the businesses. Commercial loans are advances for equipment purchases, or to provide working capital, or to meet other financing needs of business enterprises. These loans may be unsecured or secured by accounts receivable, inventory, equipment or other business assets. Financial information is obtained from the borrowers to evaluate their ability to repay the loans.

56 ● Commercial real estate loans are affected by the local commercial real estate market and the local economy. Commercial real estate loans include loans on commercial properties occupied by borrowers and/or tenants. Construction and development loans are a component of this segment. These loans are generally secured by land under development or homes and commercial buildings under construction. Loans secured by farmland are also a component of this segment. Appraisals are obtained to support the loan amount. Financial information is obtained from the borrowers and/or the individual project to evaluate cash flow sufficiency to service the debt.

~~Table~~● Residential real estate loans are affected by the local residential real estate market, local economy, and, for variable rate mortgages, movement in indices tied to these loans. For owner occupied residential loans, the borrowers’ repayment ability is evaluated through a review of ~~Contents~~ credit scores and debt to income ratios. For non-owner occupied residential loans, such as rental real estate, financial information is obtained from the borrowers and/or the individual project to evaluate cash flow sufficiency to service the debt. Appraisals are obtained to support the determination of collateral value.

● Commercial real estate loans are affected by the local commercial real estate market and the local economy. Commercial real estate loans include loans on commercial properties occupied by borrowers and/or tenants. Construction and development loans are a component of this segment. These loans are generally secured by land under development or homes and commercial buildings under construction. Loans secured by farmland are also a component of this segment. Appraisals are obtained to support the loan amount. Financial information is obtained from the borrowers and/or the individual project to evaluate cash flows sufficiency to service the debt.

● Residential real estate loans are affected by the local residential real estate market, local economy, and, for variable rate mortgages, movement in indices tied to these loans. For owner occupied residential loans, the borrowers’ repayment ability is evaluated through a review of credit scores and debt to income ratios. For non-owner occupied residential loans, such as rental real estate, financial information is obtained from the borrowers and/or the individual project to evaluate cash flows sufficiency to service the debt. Appraisals are obtained to support the determination of collateral value.

●

Consumer loans depend on local economies. Consumer loans are generally unsecured, but may be secured by consumer assets. Management evaluates the borrowers’ repayment ability through a review of credit scores and an evaluation of debt to income ratios. Consumer loans may be for consumer goods purchases, cash flow needs, or for student debt refinances.

●

Agriculture loans depend on the industries tied to these loans and are generally secured by livestock, crops, and/or equipment, but may be unsecured. Management evaluates the borrowers’ repayment ability through financial and business performance review.

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●

Other loans include loans to municipalities, loans secured by stock, and overdrafts. For municipal loans, management evaluates the borrowers’ revenue streams as well as ability to repay form general funds. For loans secured by stock, management evaluates the market value of the stock securing the loan in relation to the loan amount. Overdrafts are funded based on pre-established criteria related to the deposit account relationship.

Management analyzes key relevant risk characteristics for each portfolio segment having determined that loans in each segment possess similar general risk characteristics that are analyzed in connection with loan underwriting processes and procedures. In determining the allocated allowance, the weighted average loss rates over the most recent five years are used with equal weighting. Commercial real estate qualitative adjustment considerations include trends in the markets for underlying collateral values, risks related to tenant rents, and economic factors such as decreased sales demand, elevated inventory levels, and declining collateral values. Residential real estate loan considerations include macro-economic factors such as unemployment rates, trends in vacancy rates, and home value trends. The commercial and agricultural portfolio qualitative adjustments are related to economic and portfolio performance trends. The agricultural, consumer and other portfolios are less significant in terms of size and risk is assessed based on the smaller dollar size of these loans and the geographical areas where the collateral is located.

Transfers of Financial Assets – Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Other Real Estate Owned (“OREO”) – Assets acquired through or instead of loan foreclosure are initially recorded at fair value less estimated costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at the lower of cost or fair value, less estimated costs to sell. If fair value declines subsequent to foreclosure, a write-down is recorded through expense. Costs after acquisition are expensed unless the expenditure is for a recoverable improvement, which may be capitalized. There was no OREO as of December 31, 2022 or 2021. Residential loans secured by 1-4 family residential properties in the process of foreclosure totaled $73,000 and $47,000 at December 31, 2022 and December 31, 2021, respectively.

Premises and Equipment – Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation and are depreciated using the straight-line method with useful lives generally ranging from 3 to 40 years. Leasehold improvements are amortized using the straight-line or accelerated method over terms of the related leases, including expected renewals, or over the useful lives of the improvements, whichever is shorter. Maintenance and repairs are expensed as incurred while major additions and improvements are capitalized.

Premises and equipment held for sale are recorded at fair value less estimated cost to sell at the time of transfer based upon independent third party appraisal. If fair value declines subsequent to transfer, write-downs are recorded through expense.

Premises and equipment are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are written down to fair value through a charge to earnings.

Federal Home Loan Bank (FHLB) Stock – The Bank is a member of the FHLB system. Members are required to own stock based on its level of borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment. Because this stock is viewed as long term investment, impairment is based on ultimate recovery of par value. Both cash and stock dividends are reported as income.

Bank Owned Life Insurance – The Bank owns life insurance policies on certain key executives and associates. Company owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.

Goodwill and Other Intangible Assets – Goodwill arises from business combinations and is generally determined as the excess of the fair value of the consideration transferred, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually or more frequently if events and circumstances exists that indicate that a goodwill impairment test should be performed. The Bank utilizes November 30 as the date to perform the annual impairment test. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Goodwill is the only intangible asset with an indefinite life on the Bank’s balance sheet.

Other intangible assets consist of core deposit intangible assets arising from a branch acquisition, which were initially measured at fair value and then amortized on an accelerated method over the estimated useful life.

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Federal Home Loan Bank (FHLB) Stock – The Bank is a member of the FHLB system. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment. Because this stock is viewed as long term investment, impairment is based on ultimate recovery of par value. Both cash and stock dividends are reported as income.

Bank Owned Life Insurance – The Bank has purchased life insurance policies on certain key executives and associates. Company owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.

Goodwill and Other Intangible Assets – Goodwill arises from business combinations and is generally determined as the excess of the fair value of the consideration transferred, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually or more frequently if events and circumstances exists that indicate that a goodwill impairment test should be performed. The Bank has selected November 30 as the date to perform the annual impairment test. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Goodwill is the only intangible asset with an indefinite life on the Bank’s balance sheet.

Benefit Plans – Employee 401(k) plan expense is the amount of matching contributions.

Stock-Based Compensation – Compensation cost is recognized for stock awards issued to employees, based on the fair value of these awards at the date of grant. The market price of the Company’s common stock at the date of grant is used for stock awards. Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. The Company’s accounting policy is to recognize compensation cost net of forfeitures as they occur.

Income Taxes – Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.

A tax position is recognized as a benefit only if it is "more likely than not" that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the "more likely than not" test, no tax benefit is recorded. The Company recognizes interest and/or penalties related to income tax matters in income tax expense.

Loan Commitments and Related Financial Instruments – Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer-financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded upon funding.

Comprehensive Income (Loss) – Comprehensive loss consists of net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains and losses on securities available for sale, which are also recognized as a separate component of equity.

Earnings Per Common Share – Basic earnings per common share is net income attributable to common shareholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share include the dilutive effect, if any, of additional potential common shares issuable under stock options, warrants, and any convertible securities. Earnings and dividends per share are restated for all stock splits and dividends through the date of issue of the financial statements.

Earnings Allocated to Participating Securities – The Company has issued and outstanding unvested common shares to employees and directors through its equity compensation plan. Earnings are allocated to these participating securities based on their percentage of total issued and outstanding shares.

Loss Contingencies – Loss contingencies, including claims and legal actions arising in the normal course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated.

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Dividend Restrictions – Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Bank to the Company or by the Company to shareholders.

Fair Value of Financial Instruments – Fair values of financial instruments are estimated using relevant market information and other assumptions. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.

Derivatives – Derivative financial instruments are carried at fair value and reflect the estimated amounts that would have been received to terminate these contracts at the reporting date based upon pricing or valuation models applied to current market information.

As part of the asset/liability management program, the Company utilizes, from time to time, risk participation agreements to reduce its sensitivity to changing interest rates. These are derivative instruments, which are recorded as assets or liabilities in the consolidated balance sheets at fair value. Changes in the fair values of derivatives are reported in the consolidated statements of operations or other comprehensive income (“OCI”) depending on the use of the derivative and whether the instrument qualifies for hedge accounting. The key criterion for the hedge accounting is that the hedged relationship must be found to be effective as determined by FASB ASC 815 Derivatives and Hedging.

The risk participation agreements are not designated against specific assets or liabilities under ASC 815, and, therefore, do not qualify for hedge accounting. The derivatives are recorded 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.

To date, the Company has not entered into a cash flow hedge. For cash flow hedges, changes in the fair values of the derivative instruments are reported in OCI to the extent the hedge is effective. The gains and losses on derivative instruments that are reported in OCI are reflected in the consolidated statements of income in the periods in which the results of operations are impacted by the variability of the cash flows of the hedged item. Generally, net interest income is increased or decreased by amounts receivable or payable with respect to the derivatives, which qualify for hedge accounting. At inception of the hedge, a Company must establish the method it uses for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective aspect of the hedge. The ineffective portion of the hedge, if any, is recognized currently in the consolidated statements of operations and time value expiration of the hedge when measuring ineffectiveness is excluded. 58

~~New~~ Table ~~Accounting Standards – In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement~~ of Credit Losses on Financial Instruments. The final standard will change estimates for credit losses related to financial assets measured at amortized cost such as loans, held-to-maturity debt securities, and certain other contracts. For estimating credit losses, the FASB is replacing the incurred loss model with an expected loss model, which is referred to as the current expected credit loss (CECL) model. Under the CECL model, certain financial assets that are carried at amortized cost, such as loans held for investment, held-to-maturity debt securities, and off-balance sheet credit exposures are required to be presented at the net amount expected to be collected. The measurement of expected credit losses is to be based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This measurement will take place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs significantly from the “incurred loss” model required under current GAAP, which delays recognition until it is probable a loss has been incurred. The change could materially affect how the allowance for loan losses is determined. Management is focused on refining assumptions, reviewing challenges to the model, analyzing forecast scenarios, and stress testing the volatility of the model. Additionally, management is implementing various accounting policies, developing processes and related controls, and considering various reporting disclosures. The impact of CECL model implementation is being evaluated, but it is expected that a one-time cumulative-effect adjustment to the allowance for loan losses will be recognized in retained earnings on the consolidated balance sheet as of the beginning of the first reporting period in which the new standard is effective, as is consistent with regulatory expectations set forth in interagency guidance. In December 2018, the OCC, The Board of Governors of the Federal Reserve System, 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.Contents

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 changes the method for estimating credit losses related to financial assets measured at amortized cost such as loans, held-to-maturity debt securities, and certain other contracts. For estimating credit losses, the FASB is replacing the incurred loss model with an expected loss model, which is referred to as the current expected credit loss (CECL) model. Under the CECL model, certain financial assets that are carried at amortized cost, such as loans held for investment, held-to-maturity debt securities, and off-balance sheet credit exposures are required to be presented at the net amount expected to be collected. The measurement of expected credit losses is to be based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This measurement will take place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs significantly from the “incurred loss” model required under current GAAP, which delays recognition until it is probable a loss has been incurred. The change could materially affect how the allowance for loan losses is determined. In December 2018, federal banking regulators 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.

Management continues to refine assumptions, analyze forecast scenarios, and stress test the volatility of the model. Additionally, management is finalizing various accounting processes, and related controls. This estimate and the ongoing impact of adopting CECL are dependent on various factors, including credit quality, macroeconomic forecasts and conditions, composition of the loan and securities portfolios, and other management judgments, all of which remain subject to further review and analysis by the Company’s management team.

In March 2022, the FASB issued ASU 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The final standard affects all entities after adoption of ASU 2016-13 (Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments) and eliminates the accounting guidance for TDRs by creditors in Subtopic 310-40, Receivables – Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. The Company will be required to implement CECL and ASU 2022-02 for fiscal year and interim periods beginning after December 15, 2022.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this update provide optional guidance to ease the potential burden in accounting for reference rate reform on financial reporting. The new guidance provides optional expedients and exceptions for applying GAAP to contracts and hedging relationships, if certain criteria are met, that reference LIBOR or another reference rate expected to be discontinued. In December 2022, the FASB voted to delay the sunset date for Topic 848 until December 31, 2024 effective immediately. Adoption of this new guidance will not have a material impact on the consolidated financial statements.

NOTE 2 – PENDING MERGER

On October 24, 2022, the Company entered into an Agreement and Plan of Merger ("Merger Agreement") with Peoples Bancorp Inc. (“Peoples”). The Merger Agreement provides for a business combination whereby the Company will merge with and into Peoples (the “Merger”), with Peoples as the surviving corporation in the Merger. Under the terms and subject to the conditions of the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each share of the Company’s common stock, issued and outstanding immediately prior to the Effective Time (except for Dissenting Shares, as provided for in the Merger Agreement), will be converted, in accordance with the procedures set forth in the Merger Agreement, into 0.90 of common shares, no par value, of Peoples. The Merger Agreement contains certain termination rights for both Peoples and the Company, and further provides that, upon termination of the Merger Agreement under specified circumstances, the Company may be required to pay Peoples a termination fee of $8.3 million.

The Merger Agreement was approved by the shareholders of both the Company and Peoples at Special Shareholders’ Meetings held on February 23, 2023. Additionally, the registration statement on Form S-4 for the Peoples Common Shares to be issued in the Merger became effective with the Securities and Exchange Commission on January 10, 2023.

The Merger is expected to close in the second quarter of 2023, pending satisfaction of various remaining closing conditions, including, but not limited to: (1) authorization for listing on Nasdaq of the Peoples Common Shares to be issued in the Merger; (2) the receipt of required regulatory approvals, including the approval of the Board of Governors of the Federal Reserve System, the Ohio Division of Financial Institutions, and the Kentucky Department of Financial Institutions; (3) the absence of any order, injunction or other legal restraint preventing or making illegal the completion of the Merger or any of the other transactions contemplated by the Merger Agreement.

Table of Contents

~~In December~~Merger ~~2019,~~expenses ~~the~~totaling ~~FASB issued ASU 2019-12~~$691,000 ~~Income~~have ~~Taxes~~been -expensed ~~Simplifying~~by the ~~Accounting~~Company 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 afterthrough December 1531, ~~2020, with early adoption permitted~~2022. ~~Adoption~~ ofAdditional ~~this~~merger ~~new~~costs ~~guidance~~will ~~did~~be ~~not~~expensed ~~have~~in afuture ~~material~~periods ~~impact~~as ~~on the consolidated financial statements~~incurred.

~~In March~~NOTE ~~2020,~~3 ~~the~~– FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in this update provides optional guidance to ease the potential burden in accounting for reference rate reform on financial reporting. The new guidance provides optional expedients and exceptions for applying GAAP to contracts and hedging relationships, if certain criteria are met, that reference LIBOR or another reference rate expected to be discontinued. The amendments are effective for all entities as of March 12, 2020 through December 31, 2022. Adoption of this new guidance did not have a material impact on the consolidated financial statements.SECURITIES

~~NOTE~~Securities 2are –classified ~~SECURITIES~~as available for sale (“AFS”) or held to maturity (“HTM”). 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 reported at amortized cost.

~~Securities~~The ~~are~~following ~~classified~~table assummarizes ~~available~~the ~~for~~amortized ~~sale~~cost ~~(“AFS”)~~and orfair ~~held~~value toof ~~maturity~~AFS (“and HTM~~”).~~ ~~AFS~~ securities at ~~may~~December ~~be sold if needed for liquidity~~31, ~~asset~~2022 ~~liability~~and December ~~management~~31, or2021 ~~other~~and ~~reasons.~~the ~~AFS~~corresponding ~~securities~~amounts ~~are~~of ~~reported~~gross ~~at fair value, with~~ unrealized gains orand losses ~~included~~recognized asin aaccumulated ~~separate~~other ~~component~~comprehensive ofincome ~~equity,~~(loss) ~~net of tax. HTM securities are those securities the Bank has the intent~~ and ~~ability~~gross tounrecognized ~~hold~~gains ~~until maturity~~ and ~~are~~losses ~~reported~~(in ~~at amortized cost.~~thousands):

The following table summarizes the amortized cost and fair value of AFS securities and HTM and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) and gross unrecognized gains and losses:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value

December 31, 2022
Available for sale
U.S. Government and federal agency	$	24,541	$	—	$	(2,784	)	$	21,757
Agency mortgage-backed: residential		80,283		9		(10,387	)		69,905
Collateralized loan obligations		48,202		—		(2,161	)		46,041
Corporate bonds		45,512		—		(3,042	)		42,470
Total available for sale	$	198,538	$	9	$	(18,374	)	$	180,173

	Amortized Cost		Gross ~~Unrealized~~Unrecognized Gains		Gross ~~Unrealized~~Unrecognized Losses			Fair Value
December 31, 2021
Held to maturity
Available for sale
State and municipal	$	43,282	$	—	$	(8,386	)	$	34,896
U.S. Government and federal agency	$	26,075	$	301	$	(133	)	$	26,243
Total held to maturity	$	43,282	$	—	$	(8,386	)	$	34,896
Agency mortgage-backed: residential		93,650		1,339		(970	)		94,019
Collateralized loan obligations		50,227		—		(78	)		50,149
Corporate bonds		43,432		572		(202	)		43,802
Total available for sale	$	213,384	$	2,212	$	(1,383	)	$	214,213

December 31, 2021	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available for sale
U.S. Government and federal agency	$	26,075	$	301	$	(133	)	$	26,243
Agency mortgage-backed: residential		93,650		1,339		(970	)		94,019
Collateralized loan obligations		50,227		—		(78	)		50,149
Corporate bonds		43,432		572		(202	)		43,802
Total available for sale	$	213,384	$	2,212	$	(1,383	)	$	214,213

	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses			Fair Value
Held to maturity
State and municipal	$	46,460	$	158	$	(338	)	$	46,280

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