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

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 ourthe 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. We haveManagement has made our assumptions and bases in good faith and believe they are reasonable. We caution you however, thatHowever, 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. We doManagement does not intend to update these statements unless required by applicable laws require us to do so.

As used in this report, references to “the Company,” “we,” “our,” “us,” and similar terms refer to the consolidated entity consisting of Porter Bancorp, Inc. and its wholly-owned subsidiary. The “Bank” refers to Porter Bancorp, Inc.’s bank subsidiary, Limestone Bank, Inc.laws.

The CompanyItem1.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 PBIB. We operateLMST. The Company operates Limestone Bank, Inc. (the Bank), the Bank, our wholly owned subsidiary and the fifteentheleventh largest bank domiciled in the Commonwealth of Kentucky based on total assets (formerly known as PBI Bank). We operateassets. The Bank operates banking offices in twelve14 counties in Kentucky. OurThe Bank’s markets include metropolitan Louisville in Jefferson County and the surrounding counties of HenryBullitt and Bullitt. We serveHenry. The Bank serves south central, Kentuckysouthern, and southernwestern Kentucky from banking officescenters in Barren, Butler, Daviess, Edmonson, Green, Hardin, Hart, Edmonson, Barren, Warren, Ohio, and Daviess Counties. WeWarren counties. The Bank also have an officehas banking centers in Lexington, Kentucky, the second largest city in Kentucky.the state, and Frankfort, Kentucky, the state capital. The Bank is a traditional community bank with a wide range of commercialpersonal and personalbusiness banking products.products and services. As of December 31, 2017, we2022, the Company had total assets of $970.8 million,$1.46 billion, total loans of $712.1 million,$1.11 billion, total deposits of $847.0 million$1.20 billion and stockholders’ equity of $72.7$133.9 million.

Recent Developments

Our 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

We operateThe 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.

Our Products and Services

We meet our customers’The Bank meets its customers’ banking needs with a broad range of financial products and services. OurIts lending services include real estate, commercial, mortgage, agriculture and equine, and consumer loans to those in ourits communities and to small to medium-sized businesses, the owners and employees of those businesses, as well as other executives and professionals. We complement our lendingLending operations are complemented with an array of retail and commercial deposit products. In addition, we offer ourthe 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, along withand loan and deposit sweep accounts.

EmployeesHuman Capital Resources

At December 31, 2017,2022, the Company had 217222 full-time equivalent employees. Our employees and a total of 228 employees (“team members”). The Company’s team members are instrumental in building, maintaining, and servicing the customer relationships that make the community banking model a success. The 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 Company’s core values, which are:

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

Competition

The banking business is highly competitive, and we experiencethe Bank experiences competition from manya number of other financial institutions.institutions and non-bank financial competitors, many of whom may not be subject to the same extensive regulatory regime as the Bank. Competition among financial institutions 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 quality and scope of the services offered, the convenience of banking facilities, the availability of technology channels, and, in the case of loans to commercial borrowers, relative lending limits. We competeThe 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 ourthe Company’s market area and beyond.

Supervision and Regulation

Written Agreement. On September 21, 2011, we entered into a written agreement (“Written Agreement”) with the Federal Reserve Bank of St. Louis. The Company made formal commitments in the Written Agreement to use its financial and management resources to serve as a source of strength for the Bank and to assist the Bank in addressing weaknesses identified by the FDIC and the KDFI, to pay no dividends without prior written approval, to pay no interest or principal on subordinated debentures or trust preferred securities without written approval, and to submit an acceptable plan to maintain sufficient capital.

Bank and Holding Company Laws,, Rules and Regulations. The following is a summary descriptionCompany and the Bank are subject to an extensive system of the relevant laws, rules, and regulations governing banksthat are intended primarily for the protection of customers, the Deposit Insurance Fund (DIF), and bank holding companies. The descriptionsthe banking system in general and not for the protection of shareholders and references to, the statutescreditors. These laws and regulations belowgovern 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 brief summaries and dodescribed in the sections that follow. These descriptions are not purportintended to be complete. The descriptionscomplete and are qualified in their entirety by reference to the specific statutesfull text of the laws, rules, and regulations discussed.regulations.

The Dodd-Frank Act.On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”) was signed into law. The Dodd-Frank Act imposed new restrictions and an expanded framework of regulatory oversight for financial institutions, including depository institutions.

The Dodd-Frank Act represents a comprehensive overhaul of the financial services industry within the United States. There are a number of reform provisions that significantly impact the ways in which banks and bank holding companies, including the Company and the Bank, do business. For example, regulations issued under the Dodd-Frank Act changed the assessment base for federal deposit insurance premiums by modifying the assessment base calculation to be based on a depository institution’s consolidated assets less tangible capital instead of deposits, and permanently increased the standard maximum amount of deposit insurance per customer to $250,000. The Dodd-Frank Act also imposed more stringent capital requirements on bank holding companies by, among other things, imposing leverage ratios on bank holding companies and prohibiting new trust preferred security issuances from counting as Tier I capital. The Dodd-Frank Act also repealed the federal prohibition on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts. The Dodd-Frank Act codified and expanded the Federal Reserve’s source of strength doctrine, which requires that all bank holding companies serve as a source of financial strength for its subsidiary banks. Other provisions of the Dodd-Frank Act include, but are not limited to: (i) the creation of a financial consumer protection agency that is empowered to promulgate new consumer protection regulations and revise existing regulations in many areas of consumer protection; (ii) enhanced regulation of financial markets, including derivatives and securitization markets; (iii) reform related to the regulation of credit rating agencies; (iv) the elimination of certain trading activities by banks; and (v) new disclosure and other requirements relating to executive compensation and corporate governance.

Many provisions of the Dodd-Frank Act require interpretation and rule-making by federal agencies. The Company monitors all relevant sections of the Dodd-Frank Act to ensure continued compliance with laws and regulations, which results in greater compliance costs and higher fees paid to regulators. Future implementation of the Dodd-Frank Act may result in restrictions on the Company’s operations.

Porter Bancorp.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, wethe Company must file with the Federal Reserve Board annual and quarterly reports and other information regarding ourthe Company’s business operations and the business operations of ourthe Company’s subsidiaries. We areThe Company is also subject to examination by the Federal Reserve Board and to operational guidelines established by the Federal Reserve Board. We areThe Company is subject to the Bank Holding Company Act and other federal laws on the types of activities in which weit may engage, and to other supervisory requirements, including regulatory enforcement actions for violations of laws and regulations.

Acquisitions. AAs 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 theany 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 law also prohibitsDeposit 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 then may only do so ifobtaining the Federal Reserve Board does not objectBoard’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 theany class of voting stocksecurities of a bank holding company would constitutethat 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. In addition, approvalcompany for purposes of the Federal Reserve Board is required before acquiringChange in Bank Control Act. An acquisition of 25% (5% in the case of an acquirer that is a bank holding company) or more of any class of voting securities of a bank holding company’s voting securities, or otherwise obtainingcompany will conclusively be deemed to be an acquisition of control or a “controlling influence” over a bank holding company.under the Change in Bank Control Act.

Permissible Activities.Activities. A bank holding companyThe 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. We haveThe 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.

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 $20.4 million of dividends as of December 31, 2022. The Bank paid the Company $7.5 million of dividends during 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.Requirements. Both theThe 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.

In July 2013, the Federal Reserve Board and the FDIC approved final rules that substantially amended the regulatory risk-based capital rules applicable to the Company and Bank. The final rules implement the regulatory capital reforms of the Basel Committee on Banking Supervision reflected in “Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems” (“Basel III”) and changes required by the Dodd-Frank Act. The final rules implementing the Basel III regulatory capital reforms became effective for the Company and Bank on January 1, 2015, and include new minimum risk-based capital and leverage ratios. These rules refine the definition of what constitutes “capital” for purposes of calculating the capital ratios.

The Basel III minimum capital level requirements applicable to bank holding companiesthe Company and banks subject to the rulesBank 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 establishrequire a “capital conservation buffer” of 2.5%, to be phased in over three years, above the regulatory minimum risk-based capital ratios. OnceIncluding this buffer, the capital conservation buffer is fully phased in, the minimumrequired ratios areaare: 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%.

The phase-in of the capital conservation buffer requirement began in January 2016 at 0.625% of risk-weighted assets and increases each year until fully implemented in January 2019. An institution is subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if capital levels fall below minimum levels plus the buffer amounts. These limitations establish a maximum percentage of eligible retained incomecapital that couldcan be utilized for such actions.

Under these newthe capital rules, Tier 1 capital generally consistsconsists 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.

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”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, the FDIC’s corrective powers include:

If an institution ismay be required to submit a capital restoration plan, the institution’sand its holding company must guarantee the subsidiary’s compliance with the capital restoration plan up to a certain specified amount. Any such guarantee from a depository institution’s holding company is entitled to a priority of payment in bankruptcy. The aggregate liability of the holding company of an undercapitalized bank is limited to the lesser of 5% of the institution’s assets at the time it became undercapitalized or the amount necessary to cause the institution to be “adequately capitalized.” The bank regulators have greater power in situations where an institution becomes “significantly” or “critically” undercapitalized or fails to submit a capital restoration plan. For example, a bank holding company controlling such an institution can be required to obtain prior Federal Reserve Board approval of proposed dividends, or might be required to consent to a consolidation or to divest the troubled institution or other affiliates.

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.

The Company is a legal entity separate and distinct from the Bank. Historically, 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. Under the Federal Deposit Insurance Corporation Improvement Act (“FDICIA”), an insured institution may not pay any dividend if payment would cause it to become undercapitalized or if it already is undercapitalized. 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. A bank holding company may still declare and pay a dividend if it does not have current operating earnings if the bank holding company expects profits for the entire year and the bank holding company obtains the prior consent of the Federal Reserve.

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. We are 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 in the corporation becoming unable to pay its debts as they come due. The Bank did not pay any dividends in 2017 or 2016 and cannot currently pay any dividends without prior regulatory approval.

With respect to the payment of dividends, Porter Bancorp’s issued and outstanding Series E and Series F Preferred Shares rank senior to its common shares and non-voting common shares.

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 deposits 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 Act.

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 Requirements. Please see capital adequacy requirements discussion above.

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 was amended pursuant to the Federal Deposit Insurance Reform Act of 2005 (the “Reform Act”). Under this system, as amended, thecalculates a bank’s premium assessment rates for an insured depository institution vary according to the level of risk incurred inby multiplying its activities. To arrive at anrisk-based assessment rate for a banking institution, the FDIC places it in one of four risk categories determined by reference to its capital levels and supervisory ratings. The assessment rate schedule can change from time to time, at the discretion of the FDIC, subject to certain limits.

The Dodd-Frank Act imposed additional assessments and costs with respect to deposits. Underbase. As required by the Dodd-Frank Act, the FDIC imposes deposit insurance assessments based ona bank’s assessment base is determined by its consolidated total assets less average tangible equity rather than total deposits. Pursuant to the Dodd-Frank Act, the FDIC revised the deposit insurance assessment system and implemented a revised assessment rate process with the goal of differentiating insured depository institutions who pose greater risk to the DIF.

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. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal shareholder. 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, the Dodd-Frank Act requires the SEC to adopt rules under which listed companies must have (and disclose) a “clawback” policy for the recovery of erroneously awarded executive incentive compensation following an accounting restatement due to material noncompliance with financial reporting requirements under the securities laws. In October 2022, the SEC finalized rules to require listing standards to be updated to implement this “clawback” policy requirement and to impose related disclosure requirements on listed companies. When fully implemented, listed companies, like the Company, will be required to have a policy providing for the 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 proposed joint compensation regulations under the Dodd-Frank Act. The agencies proposed such regulations in April 2011, and 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.

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-FrankDodd-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.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:

The Dodd-Frank Act created the Consumer Financial Protection Bureau (“CFPB”), which is grantedhas broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws. The CFPB has examination and primary enforcement authorityAs a bank with respect to depository institutions withless than $10 billion or more in assets. Smaller institutions areassets, the Bank is subject to rules promulgated by the CFPB, but continuecontinues to be examined and supervised by the FDIC, its federal banking regulatorsregulator 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 Dodd-Frank Act authorizes the CFPB to establishhas established certain minimum standards for the origination of residential mortgages including a determination of the borrower’s ability to repay. In addition, theThe 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 andand regulations. Federal preemption of state consumer protection law requirements, traditionally an attribute of the federal savings association charter, has also been modified by the Dodd-Frank Act and now requires a case-by-case determination of preemption by the Office of the Comptroller of the Currency (“OCC”) and eliminates preemption for subsidiaries of a bank. Depending on the implementation of this revised federal preemption standard, the operations of the Bank could become subject to additional compliance burdens in the states in which it operates.

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’sinstitution’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.

Volcker Rule. On December 10, 2013, the final Volcker Rule under the Dodd-Frank Act was approved and implemented by the Federal Reserve Board, the FDIC, the Securities and Exchange Commission (“SEC”), and the Commodity Futures Trading Commission. The Volcker Rule attempts to reduce risk and banking system instability by restricting U.S. banks from investing in or engaging in proprietary trading and speculation and imposing a strict framework to justify exemptions for underwriting, market-making and hedging activities. U.S. banks are restricted from investing in funds with collateral comprised of less than 100% loans that are not registered with the SEC and from engaging in hedging activities that do not hedge a specific identified risk. The Volcker Rule does not have a significant effect on the Bank’s operations.

Privacy. Federal law currently contains extensive customer privacy protection provisions. Under these provisions, a financial institutionthe Bank must provide to its customers, at the inception of the customer relationship and annually thereafter, the institution’sits policies and procedures regarding the handling of customers’ nonpublic personal financial information. These provisions also provide that, exceptExcept for certain limited exceptions, an institutionthe Bank may not provide such personal information to unaffiliated third parties unless the institutionit 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 ourthe Company’s record in meeting the credit needs of the communities we serve,the Bank serves, including low- and moderate-income neighborhoods and persons. The FDIC’s assessment of ourthe 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 ussteps to take stepsbe 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. In recent years, federal regulators have increasedRules issued under the attention paidBSA require the Bank to compliance withidentify the provisions of BSAbeneficial owners who own or control certain legal entity customers at the time an account is opened and related laws, with particular attention paid to “Know Your Customer” practices. Banks have been encouraged by regulators to enhance their identificationinclude in its anti-money laundering program risk-based procedures prior to accepting new customers in order to deter criminal elements from using the banking system to move and hide illegal and illicit activities.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 an optional simplified capital adequacy measure is available to those that have a leverage ratio greater than 9%. The Bank elected not to use this optional capital adequacy measure.

Effect onof 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 ourthe Company’s business and earnings and those of ourthe Company’s subsidiaries cannot be predicted.

Legislative and Regulatory Initiatives.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.

Available Information

The Company files periodic reports with the SEC including its annual report on Form 10-K, quarterly reports on Form 10-Q, current event reports on Form 8-K and proxy statements. The public may read and copy any materials filed with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. 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. Our SEC reports are accessible at no cost on our web site at http://www.limestonebank.com, under the Investors Relations section of the About Us tab, once they have been electronically filed with the SEC. A shareholder may also request a copy of our Annual Report on Form 10-K free of charge upon written request to: Chief Financial Officer, Porter Bancorp, Inc., 2500 Eastpoint Parkway, Louisville, Kentucky 40223.

Item1A. Risk Factors

FACTORS THAT MAY AFFECT FUTURE RESULTS

An investment in the Company’s common stock involvesis 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. Realizationrisks, including the following:

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.

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 described belowand uncertainties for the Company’s business.

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

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

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 business, financial condition, results of operations cash flow and/or future prospects.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 Companyis subject to a Written Agreement with the Federal Reserve that restrict’s the conduct of the Company’s operations and business may have a material adverse effect on its business.

In a Written Agreement with the Federal Reserve Bank of St. Louis, the Company made formal commitments in the agreement to use its financial and management resources to serve as a source of strength for the Bank and to assist the Bank in addressing weaknesses identified by the FDIC and the KDFI, to pay no dividends without prior written approval, to pay no interest or principal on subordinated debentures or trust preferred securities without written approval, and to submit an acceptable plan to maintain sufficient capital.

Bank regulatory agencies can exercise discretion when an institution does not meet minimum regulatory capital levels and the other terms of a consent order. The agencies may initiate changes in management, issue mandatory directives, impose monetary penalties or refrain from formal sanctions, depending on individual circumstances. Any action taken by regulatory agencies could damage our reputation and have a material adverse effect on the Company’s business.

As a bank holding company, we depend on dividends and distributions paid to us by our banking subsidiary.

The Company is a legal entity separate and distinct from the Bank and our other subsidiaries. Our principal source of cash flow, from which we would fund any dividends paid to our 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 our ability to pay dividends or make other distributions to shareholders. Since the Bank is unlikely to be in a position to pay dividends to the Company without prior regulatory approval until retained earnings are positive, cash inflows for the Company are limited to common stock or debt issuances. See the “Item 1. Business” “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities – Dividends.”

We are currently precluded from paying any dividends.

Our agreement with the holders of our trust preferred securities provides that we cannot pay dividends until we pay all deferred distributions in full and resume paying quarterly distributions. We have also agreed with the Federal Reserve to obtain its written consent prior to declaring or paying any future dividends. In addition, the dividend preferences of our Series E and Series F Preferred Shares entitle our preferred shareholders to receive an annual, noncumulative 2% dividend before we can pay a dividend on our non-voting common shares and voting common shares.

Interest on junior subordinated debt is in deferral.

At December 31, 2017, we had an aggregate obligation of $22.2 million relating to the principal and accrued unpaid interest on our four issues of junior subordinated debentures, which has resulted in a deferral of distributions on our trust preferred securities. Although we are permitted to defer payments on these securities for up to five years (and we commenced doing so in 2016), the deferred interest payments continue to accrue until paid in full. Our deferral period expires after the second quarter of 2021.

The Company’s senior debt is secured by the Bank’s common stock and contains financial covenants that must be maintained to avoid default.

The Company’s senior secured loan agreement is with a commercial bank. The loan matures on June 30, 2022. Interest is payable quarterly at a rate of three-month LIBOR plus 250 basis points through June 30, 2020, at which time quarterly principal payments of $250,000 plus interest will commence. The loan is secured by a first priority pledge of 100% of the issued and outstanding stock of the Bank. The Company may prepay any amount due under the promissory note at any time without premium or penalty.

The loan agreement contains customary representations, warranties, covenants and events of default, including the following financial covenants: (i) the Company must maintain minimum cash on hand of not less than $750,000 through June 30, 2018, and not less than $2,500,000 thereafter, (ii) the Company must maintain a total risk based capital ratio at least equal to 9% of risk-weighted assets to June 30, 2018, and 10% thereafter, (iii) the Bank must maintain a total risk based capital ratio at least equal to 10% of risk-weighted assets to June 30, 2018, and 11% thereafter, and (iv) non-performing assets of the Bank may not exceed 2.5% of the Bank’s total assets. Both the Company and Bank were in compliance with the covenants as of December 31, 2017.

We are defendants in various legal proceedings.

The Company and the Bank are involved in judicial proceedings and regulatory investigations concerning matters arising from our business activities. Although we believe we have a meritorious defense in all significant litigation pending against us, we cannot predict the ultimate outcome. Litigation is subject to inherent uncertainties and unfavorable rulings could occur. We record contingent liabilities resulting from claims against us when a loss is assessed to be probable and the amount of the loss is reasonably estimable. Assessing probability of loss and estimating probable losses requires analysis of multiple factors, including in some cases judgments about the potential actions of third party claimants and courts. Recorded contingent liabilities are based on the best information available and actual losses in any future period are inherently uncertain. Accruals are not made in cases where liability is not probable or the amount cannot be reasonably estimated. We provide disclosure of matters where we believe liability is reasonably possible and which may be material to our consolidated financial statements. If we do not prevail, the ultimate outcome of litigation matters could have a material adverse effect on our financial condition, results of operations, or cash flows. For more information about ongoing legal proceedings, see the Notes to Consolidated Financial Statements.

In the past, the Bank served as trustee for employee stock ownership plans (“ESOPs”)which engaged in transactions that are under review by the U. S. Department of Labor (“DOL”), subjecting us to certain legal risks.

From 2007 until the first quarter of 2013, the Bank served as trustee for certain ESOPs that purchased the stock of companies from prior owners in purchase transactions. Stock purchase transactions by ESOPs are subject to regular and routine reviews by the DOL for compliance with ERISA. Failure to fulfill fiduciary duties under ERISA with respect to any such plan would subject the Bank to certain financial risks such as claims for damages as well as fines and penalties assessable under ERISA. The Bank was a defendant in legal proceedings initiated by the DOL with respect to two stock purchase transactions by ESOPs for which the Bank served as trustee. Both matters were settled. A ruling in any future litigation that the Bank failed to fulfill its fiduciary duties under ERISA with respect to an ESOP, including stock purchases by the ESOP, could subject the Bank to claims for damages as well as fines and penalties assessable under ERISA.

Investigations into and heightened scrutiny of our operations could result in additional costs and damage our reputation.

In October 2014, the Department of Justice (“DOJ”) initiated an investigation concerning possible violations of federal laws, including, among other things, possible violations related to false bank entries, bank fraud and securities fraud. The investigation concerns allegations that Bank personnel engaged in practices intended to delay or avoid disclosure of the Bank’s asset quality at the time of and following the United States Treasury’s purchase of preferred shares from the Company in November 2008. The Bank has cooperated with all requests for information from the DOJ. At this time, the DOJ has not indicated whether it intends to pursue any action in the matter. Heightened scrutiny of the operations of the Company and the Bank by federal officials may subject us to governmental or regulatory inquiries, investigations, actions, penalties and fines, which could adversely affect our reputation and result in costs to us in excess of current reserves and management’s estimate of the aggregate range of possible loss for such matters.

Our business may be adversely affected by conditions in the financial markets and by economic conditions generally.

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

Adverse conditions in the general business environment have had an adverse effect on ourthe Company’s business in the past. Although the general business environment has improved, we cannot predict how long such improvement can be sustained. In addition, the improvement of certainCertain economic indicators, such as real estate asset values, rents, and unemployment, may vary between geographic markets and may continue to lag behind improvement in the overall economy.markets. These economic indicators typically affect the real estate and financial services industries, in which we havethe Bank has a significant number of customers, more significantly than other economic sectors. Furthermore, we havethe Bank has a substantial lending business that depends upon the ability of borrowers to make debt service payments on loans. Should economic conditions worsen, ourexperience stress, the Company’s business, financial condition, or results of operations could be adversely affected.

A large percentage of our loans are collateralized by real estate, and prolonged weakness in the real estatemarket may result in losses and adversely affect our profitability.

Approximately 73.7% of our loan portfolio as of December 31, 2017, 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 our markets. Persistent weakness in the real estate market could significantly impair the value of our collateral and our 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 we would be required to increase our allowance for loan losses. If during a period of depressed real estate values, we were required to liquidate the collateral securing a loan to satisfy the debt or to increase our allowance for loan losses, it could materially reduce our profitability and adversely affect our financial condition.

We offer real estate construction and development loans, which carry a higher degree of risk than other real estate loans. Weakness in the residential construction and commercial development real estate markets has in the past increased the non-performing assets in our loan portfolio and our provision for loan loss expense. These impacts have had, and could havein the future, a material adverse effect on capital, financial condition and results of operations.

Approximately 8.1% of our loan portfolio as of December 31, 2017 consisted of real estate construction and development loans, up from 5.7% at December 31, 2016 and 5.4% at December 31, 2015. 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.

Residential construction and commercial development real estate activity in our markets were affected by the challenging economic conditions that followed the financial crisis of 2008. Weakness in these sectors could lead to valuation adjustments to the loan portfolios and real estate owned. A weak real estate market could reduce demand for residential housing, which, in turn, could adversely affect real estate development and construction activities. Consequently, the longer challenging economic conditions persist, the more likely they are to adversely affect the ability of residential real estate development borrowers to repay loans and the value of property used as collateral for such loans.

Our decisions regarding credit risk may not be accurate, and our allowance for loan losses may not besufficient to cover actual losses, which could adversely affect our business, financial condition and resultsof operations.

The Bank maintains an allowance for loan losses at a level we believe 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 our 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 our 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 our 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 differed from ours. Any of these events could have a material negative impact on our operating results.

Our levels of classified loans and non-performing assets may increase in the foreseeable future if economic conditions cause borrowers to default. Further, 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 additional increases in the level of our non-performing assets, loan charge-offs or provision for loan losses, or our inability to realize the estimated net value of underlying collateral in the event of a loan default, could negatively affect our business, financial condition, results of operations and the trading price of our securities.

’If we experience greater credit losses than anticipated, our operating resultswouldbe 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 our operating results. Our credit risk with respect to our 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. Our credit risk with respect to our commercial and consumer loan portfolio will relate principally to the general creditworthiness of businesses and individuals within our local markets.

We make various assumptions and judgments about the collectability of our loan portfolio and provide an allowance for estimated loss losses based on a number of factors. We believe that our allowance for loan losses is adequate. However, if our assumptions or judgments are wrong, our allowance for loan losses may not be sufficient to cover our actual loan losses. We may have to increase our allowance in the future at the request of one of our primary banking regulators, to adjust for changing conditions and assumptions, or as a result of any deterioration in the quality of our 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.

We continue to hold and from time to time acquire OREO properties, which could increase operating expenses and result in future losses to the Company.

During recent years, the Bank has acquired and disposed of a significant amount of real estate as a result of foreclosure or by deed in lieu of foreclosure that is listed on our balance sheet as other real estate owned (“OREO”). An increase in our OREO portfolio increases the expenses incurred to manage and dispose of these properties, which sometimes includes funding construction required to facilitate sale.

Properties in our OREO portfolio are recorded at fair value, which represents the estimated sales price of the properties on the date acquired less estimated selling costs. Generally, in determining “fair value” an orderly disposition of the property is assumed, except where a different disposition strategy is expected. Significant judgment is required in estimating the fair value of OREO, and the period of time within which such estimates can be considered current may change during periods of market volatility. Any decreases in market prices of real estate in our market areas may lead to additional OREO write downs, with a corresponding expense in our statement of operations. We evaluate OREO property values periodically and write down the carrying value of the properties if and when the results of our analysis require it.

In response to market conditions and other economic factors, we may utilize alternative sale strategies other than orderly disposition as part of our OREO disposition strategy, such as auctions or bulk sales. In this event, as a result of the significant judgments required in estimating fair value and the variables involved in different methods of disposition, the net proceeds realized from such sales transactions could differ significantly from appraisals, comparable sales, and other estimates used to determine the fair value of our OREO properties. In addition, our disposition of OREO through alternative sales strategies could impact the fair value of comparable OREO properties remaining in our portfolio.

Ours profitability depends significantly on local economic conditions.

MostMost of ourthe Bank’s business activities are conducted in central Kentucky and contiguous states and most of ourits credit exposure is in that region. We areThe 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 central Kentucky economy weakens, delinquency rates, foreclosures, bankruptcies, and losses in ourthe Bank’s loan portfolio will likely increase. Moreover, the value of real estate or other collateral that secures ourthe loans could be adversely affected by the economic downturn or a localized natural disaster. Events that adversely affect business activity and real estate values in central Kentucky have had in the past and may continue toin the future have a negative impact on ourthe Bank’s business, financial condition, results of operations, and future prospects.

Our smallSmall to medium-sized business portfoliobusinesses may have fewer resources to weather a downturn in theeconomy.

Our 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 ourthe loan. A continued economic downturn may have a more pronounced negative impact on ourthe target market, causing usthe Bank to incur substantial credit losses that could materially harm our operating results.

OurThe 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.

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

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

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

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

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

Approximately 72.4% of the Bank’s loan portfolio as of December 31, 2022, was comprised of commercial and residential loans collateralized by real estate. Adverse economic conditions could decrease demand for real estate and depress real estate values in the Company’s markets. Persistent weakness in the real estate market could significantly impair the value of loan collateral and the ability to sell the collateral upon foreclosure. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. If real estate values decline, it will become more likely that management would be required to increase the Bank’s allowance for loan losses. If during a period of depressed real estate values, management was required to liquidate the collateral securing a loan to 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 12.2% of the Company’s loan portfolio as of December 31, 2022 consisted of real estate construction and development loans, up from 7.5% at December 31, 2021 and 9.7% at December 31, 2020. These loans generally carry a higher degree of risk than long-term financing of existing properties because repayment depends on the ultimate completion of the project and permanent financing or sale of the property. If the Bank is forced to foreclose on a project prior to its completion, it may not be able to recover the entire unpaid portion of the loan or it may be required to fund additional money to complete the project, or hold the property for an indeterminate period of time. Any of these outcomes may result in losses and adversely affect profitability and financial condition.

TheCECL accounting standard will result in a significant change in howthe Companyrecognizescredit losses and may have a material impact onthe Company’sfinancial condition or results of operations.

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

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

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

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

Profitability is vulnerable to fluctuations in interest rates.

Changes in interest rates could harm our financial condition or results of operations. OurThe 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 ourthe Company’s control, such as inflation, recession, unemployment, and money supply may also affect interest rates. If, as a result of decreasing interest rates, our interest-earning assets mature or reprice more quickly than our interest-bearing liabilities in a given period, our net interest income may decrease. Likewise, our net interest income may decrease if interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a given period as a result of increasing interest rates.

Fixed-rate loans increase ourthe exposure to interest rate risk in a rising rate environment because interest-bearinginterest-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 changes inrising 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 our results of operations.

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

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

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

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

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

OurThe 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 ourthe Company’s liquidity policies and strategies do not work as well as intended, wethe 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 ourthe 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.

We maintainThe 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 we arethe Bank is unable to access any of these funding sources when needed, weit might not be able to meet the needs of our customers, which could adversely impact ourits financial condition, ourits results of operations, cash flows, and ourits level of regulatory-qualifying capital.

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

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

WeDeferred Tax Assets

The Company may not be able to realize the value of ourits deferred tax losses and deductions.assets.

Due to historic losses we havein prior years, the Company has a net operating loss carry-forward of $25.6$13.8 million, credit carry-forwards of $900,000,$208,000, and other net deferred tax assets of $4.8$7.3 million. In order to realize the benefit of these tax losses, credits, and deductions, we will need tothe Company must generate substantial taxable income in future periods. Our deferredDeferred 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 our deferred tax assets in the future. If lowerhigher federal corporate tax rates are enacted, our net deferred tax assets would be reducedincreased commensurate with the rate reduction.increase. Federal net operating loss carry-forwards begin to expire in 2033 and state net operating loss carryforwards begin to expire in 2031. Additionally, should the Company need to raise additional capital by issuing new common shares or securities convertible into common shares, then depending on the number of common share equivalents issued, it could trigger a “change in control,” as defined by Section 382 of the Internal Revenue Code. Such an event could negatively impact or limit the ability to utilize our net operating loss carry-forwards, credit loss carry-forwards, and other net deferred tax assets.assets, and result in an impairment of these deferred tax assets for financial reporting purposes.

Litigation

Risk related to legal proceedings.

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

We may Deposit Insurance Expensesell capital stock in the future to raise additional capital or for additional liquidity at the holding company. Future sales or other dilution of our equity may adversely affect the market price of our common shares.

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

Higher FDIC deposit insurance premiums and assessments could significantly increase ourcan impact non-interest expense.

OurThe Bank’s deposits are insured by the FDIC up to legal limits and, accordingly, we arethe 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 ourthe Bank’s business, financial condition, or results of operations.

We faceCompetition, Management

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

We competeThe Bank competes with other financial institutions in attracting deposits and making loans. OurThe 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. OurThe 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 ourthe ability to attract and retain banking clients. We maintainThe Bank maintains smaller staffs of associates and havehas fewer financial and other resources than larger institutions with which we compete.it competes. Financial institutions that have far greater resources and greater efficiencies than we dothe Bank may have several marketplace advantages resulting from their ability to:

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

We dependThe Company depends on ourits senior management team, and the unexpected loss of one or more of ourthe seniorexecutives could impair our relationshiprelationships with customers and adversely affect our business and financialresults.

Our futureThe Company’s success significantly depends on the continued services and performance of our key management personnel. Our futureFuture performance will depend on ourthe 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 ourthe ability to compete for talent with other businesses that are not subject to the same limitations as we are.limitations. The unexpected loss of the services of members of senior management or other key officers or ourthe inability to attract additional qualified personnel as needed could materially harm ourits business.

Our reportedAccounting Estimates, Internal Controls, Cybersecurity

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

AccountingAccounting 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 ourthe 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 are critical to presenting our reported financial condition and results. They 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 critical accounting policies include the valuation of securities, allowance for loan losses, valuation of OREO, valuation of stock based compensation,and valuation of net deferred income tax asset, assessing and estimating contingencies, and revenue recognition.asset. Because of the uncertainty of estimates involved in these matters, wethe 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 significantly higher than the reserve provided, recognize significant impairment on OREO, or permanently impair deferred tax assets.

While management continually monitors and improves ourthe system of internal controls, data processingsystems, and corporate wide processes and procedures, we the Company may sufferlosses from operational risk in the future.

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

We processThe Company processes large volumes of transactions on a daily basis and are exposedexposing it to numerous types of operationaloperational risk, which could cause usit 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 our company,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.

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

Our informationInformation systems may experience an interruption or security breach.

Failure in or breach of our operational or security systems or infrastructure, or those of our third party vendors and other service providers, including as a result of cyber attacks,cyber-attacks, could disrupt ourthe Bank’s businesses, result in the disclosure or misuse of confidential or proprietary information, damage ourits reputation, increase our costs, and cause losses. As a financial institution, we dependthe Bank depends on ourits 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, our operational systems and infrastructure must continue to be safeguarded and monitored for potential failures, disruptions,, and breakdowns. Our business,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 ourthe 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.cyber-attacks. Although we havethe Bank has business continuity plans and other safeguards in place, ourits business operations may be adversely affected by significant and widespread disruption to ourits physical infrastructure or operating systems that support ourits 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, ourthe Bank’s operations rely on the secure processing, transmission, and storage of confidential information in ourits computer systems and networks. In addition, to access ourthe Bank’s products and services, ourits customers may use personal smartphones, tablet PC’s, and other mobile devices that are beyond ourits control systems. Although we believe we havethe Bank believes it has appropriate information security procedures and controls, ourits technologies, systems, networks, and ourits customers’ devices may become the target of cyber attackscyber-attacks or information security breaches. These events could result in the unauthorized release, gathering, monitoring, misuse, loss, or destruction of ourthe Bank’s customers’ confidential, proprietary, and other information or that of ourits customers, or otherwise disrupt the business operations of ourselves, ourthe Bank, its customers, or other third parties.

Third parties with which we dothe Bank does business or that facilitate ourits business activities could also be sources of operational and information security risk to us,the Bank, including from breakdowns or failures of their own systems or capacity constraints. Although to date we havethe Bank has not experienced any material losses relating to cyber attackscyber-attacks or other information security breaches, wethe Bank can give no assurance that weit will not suffer such losses in the future. Our riskRisk 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, wethe Bank may be required to expend significant additional resources to continue to modify or enhance ourits protective measures or to investigate and remediate any information security vulnerabilities. Disruptions or failures in the physical infrastructure or operating systems that support ourthe Bank’s businesses and customers, or cyber attackscyber-attacks or security breaches of the networks, systems, or devices that ourthe Bank’s customers use to access ourits 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 ourthe Bank’s business, results of operations, or financial condition.

We operateBank Regulation

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

We areThe 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 our 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, thebank acquisition of other banks,and merger transactions, and the establishment of new banking offices. WeThe Company must also meet specific regulatory capital requirements. Our failureFailure to comply with these laws, regulations, and policies or to maintain required capital could affect ourthe ability to pay dividends on common shares our ability to grow throughand the developmentimplementation of new offices, make acquisitions, and remain independent. These limitations may prevent us from successfully implementing our growth and operating strategies.strategic plans.

In addition, the laws and regulations applicable to banks could change at any time, which could significantly impact ourthe Company’s business and profitability. For example, new legislation or regulation could limit the manner in which wethe Company may conduct ourits business, including ourits 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 ourthe Company’s business and results of operations. Changes in regulation may cause usthe Company to devote substantial additional financial resources and management time to compliance, which may negatively affect our operating results.

Changes in banking laws could have a material adverse effect on us.effect.

We areThe 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. WeManagement 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 ourthe Bank’s activities that could have a material adverse effect on ourits business and profitability.

Recent legislation regarding the financial services industry may have a significant adverse effect on operations.

Enacted in July 2010, the Dodd-Frank Act has had a significant impact the U.S. financial system, including among other things:

1618

---

Table of Contents

Some provisions in the Dodd-Frank Act remain subject to regulatory rule-making, implementation, and interpretation, the effects of which are not yet known. As a result, it is difficult to gauge the ultimate impact of certain provisions of the Dodd-Frank Act because the implementation of many concepts is left to regulatory agencies. For example, the CFPB is given the power to adopt new regulations to protect consumers and is given control over existing consumer protection regulations adopted by federal banking regulators. The CFPB has already adopted a number of regulations but it is not known at this time when additional rules will be finalized and implemented.

The provisions of the Dodd-Frank Act and any rules adopted to implement those provisions, as well as any additional legislative or regulatory changes may impact the profitability of our business activities and costs of operations, require that we change certain of our business practices, materially affect our business model or affect retention of key personnel, require us to raise additional regulatory capital, including additional Tier 1 capital, and could expose us to additional costs (including increased compliance costs). These and other changes may also require us to invest significant management attention and resources to make any necessary changes and may adversely affect our ability to conduct our business as previously conducted or our results of operations or financial condition.

17

---

Table of Contents

 

ItemItem 1B.Unresolved Staff Comments

Unresolved Staff Comments

 

Not applicable.

 

Item 2. Item2.Properties

Properties

 

The Bank operates 1520 banking offices in Kentucky. The following table shows the location, square footage, and ownership of each property. We believeManagement believes that each of these locations is adequately insured. Support operations are located in ourat the main office in Louisville and in Glasgow.Canmer.

 

Markets		SquareFootage				Owned/Leased
Frankfort/Franklin County
Frankfort Office: 100 Highway 676, Frankfort			3,000		Leased
Elizabethtown/Hardin County
Elizabethtown Office: 1690 Ring Road, Suite 100, Elizabethtown			4,000		Leased
Louisville/Jefferson, Bullitt and Henry Counties
Main Office: 2500 Eastpoint Parkway, Louisville		30,000	30,000		Owned
Eminence Office: 646 Elm Street, Eminence		1,500	1,500		Owned
Hillview Office: 6890 North Preston Highway, Hillview		3,500	3,500		Owned
Pleasureville Office: 5440 Castle Highway, Pleasureville		10,000	10,000		Owned
ConestogaShepherdsville Office: 155 Conestoga Parkway, Shepherdsville		3,900	3,900		Owned
			St. Matthews Office: 4304 Shelbyville Road, Louisville			3,400		Leased
Lexington/Fayette County
Lexington Office: 2424 Harrodsburg Road,3880 Fountainblue Lane, Suite 100,120, Lexington		8,500	3,000		Leased
			City Center Office: 130 West Main Street, Lexington			2,400		Leased
South Central Kentucky
Brownsville Office: 113 East Main Cross Street, Brownsville		8,500	8,500		Owned
Greensburg Office: 202 North Main Street, Greensburg		11,000	11,000		Owned
Horse Cave Office: 201201 East Main Street, Horse Cave		5,000	5,000		Owned
Morgantown Office: 112 West G.L. Smith Street, Morgantown		7,500	7,500		Owned
Munfordville Office: 949 South Dixie Highway, Munfordville		9,000	9,000		Owned
Beaver Dam Office: 1300 North Main Street, Beaver Dam		3,200	3,200		Owned
			Owensboro/Daviess County
Owensboro/Daviess County
Owensboro Frederica Office: 18193500 Frederica Street, Owensboro		3,000	5,000		Owned
			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
Glasgow Office: 1006 West Main Street, Glasgow		12,000	12,000		Owned
Other Properties
Office Building: 701 Columbia Avenue, Glasgow2708 North Jackson Highway, Canmer		19,000	3,500		Owned

 

Item3.Legal Proceedings

Item 3.

Legal Proceedings

We are

In the normal course of business, the Company and its subsidiaries have been named, from time to time, as defendants in various legal proceedings.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. See Note 16, “Off Balance Sheet Risks, Commitments, and Contingent Liabilities” in the Notes to our consolidated financial statements for detail regarding ongoing legal proceedings and other matters.

Item 4.

Mine Safety Disclosure

Not applicable.

 

18

19

---

Table of Contents

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 a party to any material litigation.

 

PART IIItem4.Mine Safety Disclosure

 

Item 5. Not applicable. 20 Table of Contents PART II Item5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

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

 

Market Information

 

OurThe Company’s common shares are traded on the Nasdaq Capital Market under the ticker symbol “PBIB”“LMST”. The following table presents the high and low market closing prices per share for our common shares reported on the Nasdaq Capital Market for the periods indicated. The per share prices shown in the table have been adjusted for the 1-for-5 reverse stock split of our common shares that took effect on December 16, 2016.

		2017
		Market Value
Quarter Ended		High				Low				Dividend
Fourth Quarter		$	15.45			$	11.42			$	0.00
Third Quarter			11.81				9.98				0.00
Second Quarter			10.49				8.73				0.00
First Quarter			12.75				9.14				0.00

		2016
		Market Value
Quarter Ended		High				Low				Dividend
Fourth Quarter		$	12.90			$	8.05			$	0.00
Third Quarter			8.55				7.70				0.00
Second Quarter			11.25				5.95				0.00
First Quarter			7.10				5.45				0.00

 

As of January 31, 2018, we had2023, the Company’s common shares were held by approximately 1,6641,839 shareholders, including 470336 shareholders of record and approximately 1,1941,503 beneficial owners whose shares are held in “street”“street” name by securities broker-dealers or other nominees.nominees, and the Company’s non-voting common shares were held by one holder.

19

---

Table of Contents

 

Dividends

 

As a bank holding company, ourthe 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.

 

OurThe principal source of revenue with which to pay dividends on our common shares are dividends the Bank may declare and pay out of funds legally available for payment of dividends. Currently, the Bank must obtain the prior written consent of its primary regulators prior to declaring or paying any dividends until retained earnings are positive. 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. Under our Written Agreement, the prior approval of the Federal Reserve Bank of St. Louis is also required for the payment of any Bank dividends.

 

Effective with the third quarter

21

---

Table of 2016, the Company resumed deferring interest payments on the junior subordinated notes underlying our trust preferred securities. Deferring interest payments on the junior subordinated notes resulted in the deferral of distributions on our trust preferred securities. If we defer interest payments on our trust preferred securities for 20 consecutive quarters, we must pay all deferred interest or we will be in default. Our deferral period expires after the second quarter of 2021.

Contents

 

We will not be able to pay cash dividends on our common shares until we have paid all deferred distributions on our trust preferred securities. Deferred distributions on trust preferred securities are cumulative, and distributions accrue and compound on each subsequent payment date. If we become subject to any liquidation, dissolution or winding up of affairs, holders of the trust preferred securities and then holders of our preferred shares will be entitled to receive the liquidation amounts to which they are entitled including the amount of any accrued and unpaid distributions and dividends, before any distribution can be made to the holders of common shares or preferred shares. Series E and Series F Preferred Shares have priority over our common shares and non-voting common shares with respect to any payment of dividends.

Purchase of Equity Securities by Issuer

 

DuringOn October 20, 2021, the fourth quarterBoard of 2017,Directors approved a share repurchase program authorizing the Company did not repurchase anyto purchase up to $3.0 million of itsthe Company’s Common Shares over time in the open market or in privately negotiated transactions. No shares were repurchased under the plan, which expired on December 31, 2022.

Equity Compensation Plan Information

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

Plan category		Numberofsecuritiesto beissueduponexercise ofoutstandingoptions, warrants and rights				Weighted-average exercise price of outstandingoptions, warrants and rights				Numberofsecurities remainingavailablefor future issuance under equity compensation plans (excluding securities reflected in column 1)
Equity compensation plans approved by shareholders			—				—				122,603
Equity compensation plans not approved by shareholders			—				—				—
Total			—				—				122,603

At December 31, 2022, 122,603 common shares whichremain available for issuance under the Company’s 2018 Omnibus Equity Compensation Plan; however, the Company is its only registered classprecluded from issuing additional shares based on the terms of equity securities.the Merger Agreement.

 

2022

---

Table of Contents

Item 6.

Selected Financial Data

 

The following table summarizes our selected historical consolidated financial data from 2013 to 2017. You should read this information in conjunction with Item6.Reserved

Item7. “Management’sManagement’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 8. “Financial Statements and Supplementary Data.”Operations

 

Selected Consolidated Financial Data

		As of and for the Years Ended December 31,
(Dollars in thousands except per share data)		2017				2016				2015				2014				2013
Income Statement Data:
Interest income		$	37,522			$	35,602			$	36,574			$	39,513			$	43,228
Interest expense			6,405				5,981				7,023				9,795				11,143
Net interest income			31,117				29,621				29,551				29,718				32,085
Provision (negative provision) for loan losses			(800	)			(2,450	)			(4,500	)			7,100				700
Non-interest income			4,855				4,764				7,695				4,079				5,919
Non-interest expense			30,218				39,567				44,959				39,435				38,890
Income (loss) before income taxes			6,554				(2,732	)			(3,213	)			(12,738	)			(1,586	)
Income tax expense (benefit)			(31,899	)			21				—				(1,583	)			—
Net income (loss)			38,453				(2,753	)			(3,213	)			(11,155	)			(1,586	)
Less:
Dividends and accretion on preferred stock			—				—				—				2,362				2,079
Effect of exchange of preferred stock for common stock			—				—				—				(36,104	)			—
Earnings (loss) allocated to participating securities			967				(88	)			(336	)			3,159				(267	)
Net income (loss) attributable to common		$	37,486			$	(2,665	)		$	(2,877	)		$	19,428			$	(3,398	)
Common Share Data: (1)
Basic earnings (loss) per common share		$	6.15			$	(0.46	)		$	(0.62	)		$	7.94			$	(1.44	)
Diluted earnings (loss) per common share			6.15				(0.46	)			(0.62	)			7.94				(1.44	)
Cash dividends declared per common share			—				—				—				—				—
Book value per common share (2)			11.17				4.81				5.43				8.37				(0.92	)
Tangible book value per common share (2)			11.17				4.79				5.33				8.05				(1.46	)
Balance Sheet Data (at period end):
Total assets		$	970,801			$	945,177			$	948,722			$	1,017,989			$	1,076,121
Debt obligations:
FHLB advances			11,797				22,458				3,081				15,752				4,492
Junior subordinated debentures			21,000				21,000				21,000				25,000				25,000
Subordinated capital note			2,250				3,150				4,050				4,950				5,850
Senior debt			10,000				—				—				—				—
Average Balance Data:
Average assets		$	947,961			$	929,140			$	984,419			$	1,049,232			$	1,098,400
Average loans			667,474				621,275				635,948				662,442				788,176
Average deposits			864,278				852,717				907,785				961,671				1,004,052
Average FHLB advances			9,184				2,967				3,473				4,473				4,990
Average junior subordinated debentures			21,000				21,000				23,981				25,000				25,000
Average subordinated capital note			2,805				3,708				4,608				5,508				6,404
Average senior debt			5,068				—				—				—				—
Average stockholders’ equity			37,851				39,423				33,083				33,881				42,631

---

(1)

On December 16, 2016, the Company completed a 1-for-5 reverse stock split of its issued and outstanding common and non-voting common shares. As a result of the reverse stock split, all share and per share data has been adjusted in the accompanying tables. Preferred shares were not impacted by the 1-for-5 reverse stock split.

(2)	After shareholder approval on February 25, 2015, our two series of mandatorily convertible preferred shares converted into a total of 810,720 common shares and 1,291,600 non-voting common shares.

21

---

Table of Contents

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

Management’s discussion and analysis of financial condition and results of operations analyzes the consolidated financial condition and results of operations of PorterLimestone Bancorp, Inc. (the “Company”)Company) and its wholly owned subsidiary, Limestone Bank, Inc. (the “Bank”)Bank). The Bank completed a name change from PBI Bank to Limestone Bank on February 20, 2018. The Company is a Louisville, Kentucky-based bank holding company that operates banking offices of the Bank in twelve14 Kentucky counties. OurThe Bank’s markets include metropolitan Louisville in Jefferson County and the surrounding counties of HenryBullitt and Bullitt. We serveHenry. The Bank serves south central, Kentuckysouthern, and southernwestern Kentucky from banking offices in Barren, Butler, Daviess, Edmonson, Green, Hardin, Hart, Edmonson, Barren, Warren, Ohio, and DaviessWarren Counties. WeThe Bank also have an officehas offices in Lexington, the second largest city in Kentucky.the state, and Frankfort, the state capital. The Bank is a traditional community bank with a wide range of commercialpersonal and personalbusiness banking products.products and services.

 

Historically, we have focused on commercial and commercial real estate lending, both in markets where we have banking offices and other growing markets in our region. Commercial, commercial real estate and real estate construction loans accounted for 58.4%Selected Consolidated Financial Data

		As of and for the Years Ended December 31,
(Dollars in thousands except per share data)		2022				2021				2020				2019				2018
Income Statement Data:
Interest income		$	57,810			$	49,915			$	50,753			$	49,584			$	43,461
Interest expense			8,732				5,693				10,152				14,234				9,790
Net interest income			49,078				44,222				40,601				35,350				33,671
Provision (negative provision) for loan losses			80				1,150				4,400				—				(500	)
Non-interest income (1)			8,877				8,439				6,844				5,918				5,779
Non-interest expense (2)			33,757				31,971				32,416				30,270				29,126
Income before income taxes			24,118				19,540				10,629				10,998				10,824
Income tax expense (3)			5,776				4,631				1,624				480				2,030
Net income			18,342				14,909				9,005				10,518				8,794
Less:
Earnings allocated to participating securities			302				219				68				106				144
Net income attributable to common		$	18,040			$	14,690			$	8,937			$	10,412			$	8,650
Common Share Data:
Basic earnings per common share		$	2.40			$	1.96			$	1.20			$	1.41			$	1.23
Diluted earnings per common share			2.40				1.96				1.20				1.41				1.23
Cash dividends declared per common share			0.20				—				—				—				—
Book value per common share			17.52				17.24				15.47				14.15				12.34
Tangible book value per common share (4)			16.48				16.16				14.34				12.98				12.34
Balance Sheet Data (at period end):
Total assets		$	1,462,455			$	1,415,692			$	1,312,302			$	1,245,779			$	1,069,692
Debt obligations:
FHLB advances			70,000				20,000				20,623				61,389				46,549
Junior subordinated debentures			21,000				21,000				21,000				21,000				21,000
Subordinated capital notes			25,000				25,000				25,000				17,000				—
Senior debt			—				—				—				5,000				10,000
Average Balance Data:
Average assets		$	1,434,437			$	1,363,397			$	1,294,934			$	1,112,388			$	1,026,310
Average loans			1,072,330				958,549				964,088				801,813				743,352
Average deposits			1,197,906				1,164,355				1,099,383				936,243				860,825
Average FHLB advances			50,274				20,152				34,101				35,038				43,363
Average junior subordinated debentures			21,000				21,000				21,000				21,000				21,000
Average subordinated capital notes			25,000				25,000				20,366				7,545				791
Average senior debt			—				—				2,896				7,781				10,000
Average stockholders’ equity			129,453				123,942				109,958				100,126				84,860

---

(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.

23

---

Table of our total loan portfolio as of December 31, 2017, and 55.6% as of December 31, 2016. Commercial lending generally produces higher yields than residential lending, but involves greater risk and requires more rigorous underwriting standards and credit quality monitoring.Contents

(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.

(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,
		2022				2021				2020				2019				2018
Tangible Book Value Per Share		(in thousands, except share and per share data)
Common stockholder’s equity		$	133,858			$	130,959			$	116,024			$	105,750			$	92,097
Less: Goodwill			6,252				6,252				6,252				6,252				—
Less: Intangible assets			1,733				1,989				2,244				2,500				—
Tangible common equity			125,873				122,718				107,528				96,998				92,097
Shares outstanding			7,638,633				7,594,749				7,498,865				7,471,975				7,462,720
Tangible book value per common share		$	16.48			$	16.16			$	14.34			$	12.98			$	12.34
Book value per common share			17.52				17.24				15.47				14.15				12.34

 

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

 

Overview

 

For the year ended December 31, 2017,2022, the Company reported net income of $38.5$18.3 million compared with net lossincome of $2.8$14.9 million for the year ended December 31, 20162021 and a net lossincome of $3.2$9.0 million for the year ended December 31, 2015. After allocating earnings to participating securities, net income attributable to common shareholders was $37.5 million for the year ended December 31, 2017, compared with net loss attributable to common shareholders of $2.7 million for the year ended December 31, 2016, and a net loss attributable to common shareholders of $2.9 million for the year ended December 31, 2015.2020. Basic and diluted income per common share were $6.15$2.40 for the year ended December 31, 2017,2022, compared with net loss per common$1.96 for 2021, and $1.20 for 2020.

On October 24, 2022, the Company entered into an Agreement and Plan of Merger (Merger Agreement) with Peoples Bancorp Inc. (Peoples). The Merger Agreement provides for a business combination whereby the Company will merge with and into Peoples (the Merger), with Peoples as the surviving corporation in the Merger. Under the terms and subject to the conditions of the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each share of ($0.46)the Company’s common stock, issued and outstanding immediately prior to the Effective Time (except for 2016,Dissenting Shares, as provided for in the Merger Agreement), will be converted, in accordance with the procedures set forth in the Merger Agreement, into 0.90 common shares, no par value, of Peoples. Upon the terms and net loss per common sharesubject to the conditions set forth in the Merger Agreement, the Merger is expected to close in the second quarter of ($0.62) for 2015.2023.

 

The following significant items are of note for the year ended December 31, 2017:2022:

 

●

The Company has had a full valuation allowance against its net deferred tax asset since 2011. The abilityAverage loans receivable increased approximately $113.8 million, or 11.9%, to utilize$1.07 billion for the net deferred tax asset depends upon generating sufficient future levels of taxable income. The determination to restore a deferred tax asset and eliminate a valuation allowance depends upon the evaluation of both positive and negative evidence regarding the likelihood of achieving sufficient future taxable income levels. During the fourth quarter of 2017, management concluded it was more-likely-than-not the asset would be utilized to reduce future taxes payable related to the future taxable income of the Company, and as such, reversed the valuation allowance. As a result of the conclusion to reverse the valuation allowance, the Company recorded an income tax benefit of $54.0year ended December 31, 2022, compared with $958.5 million for the year ended December 31, 2017. On December 22, 2017, the Tax Cuts2021, as loan growth outpaced payoffs during 2022. SBA Paycheck Protection Program (“PPP”) loans averaged $294,000 and Jobs Act of 2017 was signed into law. Among other significant changes to the tax code, the new law lowered the federal corporate tax rate from 35% to 21% beginning in 2018. As a result, the Company revalued its net deferred tax asset at the new 21% rate. Due to this revaluation, the Company recorded a $20.3 million charge to income tax expense for the year ended December 31, 2017. The combination of the reversal of the valuation allowance and the change in federal corporate tax rates, as well as income tax expense for the year, resulted in an income tax benefit of $31.9$15.5 million for the year ended December 31, 2017.2022 and 2021, respectively.

 

●

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

24

---

Table of Contents

●

The Bank is no longer subjectyield on earning assets increased to a consent order with the Federal Deposit Insurance Corporation and Kentucky Department of Financial Institutions. We were notified that the Bank’s prior consent order was terminated, effective October 31, 2017.

●

Loan growth outpaced paydowns during the period. Average loans receivable increased approximately $46.2 million or 7.4% to $667.5 million4.27% for the year ended December 31, 2017,2022, compared with $621.3 millionto 3.92% for the year ended December 31, 2016. This2021. The yield on earning assets for the year ended December 31, 2021 was significantly impacted by $2.8 million in PPP fees, compared to $45,000 for the year ended December 31, 2022. During the year ended December 31, 2022, PPP fees represented approximately one basis point of earning asset yield and net interest margin, compared to 21 basis points for the year ended December 31, 2021. The reduction in PPP fee income was offset by an increase in interest revenue due to an increase in average loans between periods. The increase in average loans resulted in an increase in interest revenue volume of approximately $2.2 million, which was offset by rate decreases of $895,000 for the year ended December 31, 2017, compared with the year ended December 31, 2016.

●

Net interest margin increased six basis points to 3.48% for the year ended 2017 compared with 3.42% in the year ended December 31, 2016. The increase in margin between periods was primarily due to an increase in the rate of interest earned on interest earning assets from 4.11% in 2016 to 4.18% in 2017.

22

---

Table of Contents

●

Negative provision for loan losses expense was $800,000 in 2017, compared to a negative provision for loan losses expense of $2.5 million for 2016, because of declining historical loss rates, improvements in loan quality, and management’s assessment of risk in the loan portfolio. Net loan recoveries were $35,000 for 2017, compared to net loan charge-offs of $624,000 for 2016 and $2.8 million for 2015. In the following paragraphs, we discuss the improving trends in non-performing loans, past due loans, and loan risk categories during the period, factors that led to the negative provision expense.

●

Non-performing loans decreased $3.8 million to $5.5 million at December 31, 2017, compared with $9.2 million at December 31, 2016. The decrease in non-performing loans was due to $5.0 million in paydowns, $665,000 in charge-offs, $199,000 in loans returned to accrual status, and $270,000 in transfers to OREO, offset by $2.3 million in loans placed on non-accrual.

●

Loans past due 30-59 days decreased from $2.3 million at December 31, 2016 to $1.5 million at December 31, 2017, and loans past due 60-89 days decreased from $315,000 at December 31, 2016 to $171,000 at December 31, 2017. Loans past due 90 days or more totaled $1,000 at December 31, 2017, compared to no loans past due 90 days or more at December 31, 2016. Total loans past due and nonaccrual loans decreased to $7.1 million at December 31, 2017 from $11.8 million at December 31, 2016.

●

All loan risk categories (other than pass loans) have decreased since December 31, 2016. Pass loans represent 94.5% of the portfolio at December 31, 2017, compared to 91.7% at December 31, 2016 and 83.6% at December 31, 2015. During 2017, the pass category increased approximately $86.6 million, the watch category declined approximately $4.7 million, the special mention category declined approximately $333,000, and the substandard category declined approximately $8.7 million. The $8.7 million decrease in loans classified as substandard was driven by $6.8 million in principal payments received, $270,000 in migration to OREO, $4.6 million in loans upgraded from substandard, and $790,000 in charge-offs, offset by $3.7 million in loans moved to substandard during 2017.

●

Foreclosed properties were $4.4 million at December 31, 2017, compared with $6.8 million at December 31, 2016. During the year ended December 31, 2017, the Company acquired $270,000 and sold $793,000 of OREO. We incurred OREO losses totaling $2.0 million during the year ended December 31, 2017, reflecting fair value write-downs for updated appraisals, changes in marketing strategies, and reductions in listing prices for certain properties, offset by $74,000 in net gain on sales of OREO.

●

Non-performing assets decreased to $9.9 million or 1.02% of total assets at December 31, 2017, compared with $16.0 million or 1.70% of total assets at December 31, 2016. In addition, accruing troubled debt restructurings declined to $1.2 million at December 31, 2017 from $5.4 million at December 31, 2016.

●

Non-interest income increased by $91,000 in 2017 to $4.9 million compared with $4.8$5.3 million for the year ended December 31, 2016. This2022, as well as an increase was primarilyin interest revenue attributable to a $295,000rates of $552,000 due primarily to the impact of the increase in service chargesinterest rates on deposit accounts, a $123,000 increase in bank card interchange fees,new and a $72,000 increase in net gain on salerenewed loans and the upward repricing of securities partially offset by no OREO income during 2017, compared to $456,000 during 2016.variable rate loans.

 

●

Non-interest expense for the year ended December 31, 2017The cost of $30.2 million representedinterest-bearing liabilities increased to 0.86% in 2022 from 0.59% in 2021 as a 23.6% decrease from $39.6result of increases in short-term interest rates during 2022.

●

Net loan recoveries were $1.4 million for 2016. The decrease2022, compared to net loan charge-offs of $2.1 million for 2021, and net loan charge-offs of $333,000 for 2020. During the third quarter of 2022, the Bank received a payoff on a $2.0 million nonaccrual commercial real estate loan resulting in non-interest expensea recovery of $1.5 million.

●

A provision for loan losses of $80,000 was attributable primarilyrecorded in 2022, compared to a decreaseprovision for loan losses of $1.2 million in litigation and2021. The 2022 loan collection expense, which decreased $8.6 million. Litigation expense was negatively impacted in 2016loss provisions were primarily attributable to growth trends within the portfolio, offset by a ruling fromsignificant recovery during the Kentucky Court of Appeals againstthird quarter and its impact on the Bank that approximated $8.0 million. Non-interest expense also benefited from a $590,000 decrease in professional fees, a $418,000 decrease in salarieshistorical loss percentages. The 2021 loan loss provisions were attributable to growth trends within the portfolio and employee benefits, and a $248,000 decrease in FDIC insurance.net loan charge-offs impacting historical loss percentages during the period.

 

●

Deposits decreased $2.9 million or 0.3% to $847.0 millionwere $1.20 billion at December 31, 20172022, compared with $849.9 million$1.21 billion at December 31, 2016.2021. Certificate of deposit balances decreased $20.4increased $24.2 million and interest checking accounts increased $26.9 million during 2017 to $424.2the year. These increases were offset by a decrease of $38.9 million at December 31, 2017, from $444.6in money market accounts, a decrease of $14.9 million at December 31, 2016. Non-interestin savings accounts, and a $5.1 million decrease in non-interest bearing demand deposits increased $13.0 million or 10.4% during 2017 to $137.4 million compared with $124.4 million at December 31, 2016. Money market accounts increased $8.9 million or 6.2% during 2017 to $151.4 million compared with $142.5 million at December 31, 2016.deposits.

 

23

---

Table of Contents

●

On June 30, 2017,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, entered into a $10.0 million senior secured loan agreement with a commercial bank. The loan matures on June 30, 2022. Interest is payable quarterly at a rate of three-month LIBOR plus 250 basis points through June 30, 2020, at which time quarterly principal payments of $250,000 plus interest will commence. The loan is secured by a first priority pledge of 100%the unanimous approval of the issuedBoard of Directors, terminated its Tax Benefit Preservation Plan on October 24, 2022. The Tax Benefit Preservation Plan was placed in service in 2015 and outstanding stockdesigned to preserve the benefits of the Bank. The Company may prepay any amount dueCompany’s substantial tax assets. Restrictions on transfer designed to protect the Company’s tax assets remain in effect under the promissory note at any time without premium or penalty. The Company contributed $9.0 millionCompany’s Articles of the borrowing proceeds to the BankIncorporation, as common equity Tier 1 capital. The remaining $1.0 million of the borrowing proceeds was retainedapproved by the lender in escrow to service quarterly interest payments. At December 31, 2017, the escrow account had a balance of $806,000.shareholders.

 

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

 

Application of Critical Accounting Policies

 

The Company’sCompany’s accounting and reporting policies comply with GAAP and conform to general practices within the banking industry. We believe thatManagement 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. We evaluateManagement 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. We developManagement 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, wemanagement may be required to materially increase ourits allowance for loan losses and provision for loan losses, which could adversely affect our results.

Other Real Estate Owned – OREO is real estate acquired as a result of foreclosure or by deed in lieu of foreclosure. It is classified as real estate owned until such time as it is sold. OREO is recorded at its fair market value less estimated cost to sell. Any write-down of the property at the time of acquisition is charged to the allowance for loan losses. Costs incurred in order to perfect the lien prior to foreclosure may be capitalized if the fair value less the cost to sell exceeds the balance of the loan at the time of transfer to OREO. Examples of eligible costs to be capitalized are payments of delinquent property taxes to clear tax liens or payments to contractors and subcontractors to clear mechanics’ liens. Fair value of OREO is determined on an individual property basis. To determine the fair value of OREO for smaller dollar single family homes, we consult with staff from the Bank’s special assets group as well as external realtors and appraisers. If the internally evaluated market price is below our underlying investment in the property, appropriate write-downs are taken. For larger dollar residential and commercial real estate properties, we obtain a new appraisal of the subject property or have staff from our special assets group evaluate the latest in-file appraisal in connection with the transfer to OREO. We typically obtain 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 appraised amount. 

Stock-based Compensation – Compensation cost is recognized for restricted 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 shares at the date of grant is used for restricted 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.

Valuation of Deferred Tax Asset – We evaluate deferred tax assets for impairment on a quarterly basis. We established a 100% deferred tax valuation allowance in December 2011 based upon the analysis of our past performance and our expected future performance. The Company’s ability to utilize the net deferred tax asset depends upon generating suffient future levels of taxable income. The determination to restore a deferred tax asset and eliminate a valuation allowance depends upon the evaluation of both positive and negative evidence regarding the likelihood of achieving future taxable income levels. In 2017, management concluded it was more-likely-than-not the asset would be utilized to reduce future taxes payable related to the future taxable income of the Company, and as such, reversed the valuation allowance.

 

24

25

---

Table of Contents

 

Contingencies – We are defendants in various legal proceedings. We record contingent liabilities resulting from claims against us whenIn 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 assessedfirst added to be probablethe 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 amountongoing impact of adopting CECL are dependent on various factors, including credit quality, macroeconomic forecasts and conditions, composition of the lossloan 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 reasonably estimable. Assessing probabilitysubject 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 loss and estimating probable losses requires analysis of multiple factors, including in some cases judgments about the potential actions of third party claimants and courts. Recorded contingent liabilities are based on the best information available and actual losses in any future period are inherently uncertain.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 20172022 compared with 2016:2021:

 

		For the Years Ended December 31,								Change from Prior Period
		2017				2016				Amount				Percent
		(dollars in thousands)
Gross interest income		$	37,522			$	35,602			$	1,920				5.4	%
Gross interest expense			6,405				5,981				424				7.1
Net interest income			31,117				29,621				1,496				5.1
Provision (negative provision) for loan losses			(800	)			(2,450	)			1,650				67.3
Non-interest income			4,567				4,548				19				0.4
Gains on sale of securities, net			288				216				72				33.3
Non-interest expense			30,218				39,567				(9,349	)			(23.6	)
Net income (loss) before taxes			6,554				(2,732	)			9,286				339.9
Income tax expense (benefit)			(31,899	)			21				(31,920	)			NM
Net income (loss)			38,453				(2,753	)			41,206				NM
Earnings (losses) attributable to participating securities			967				(88	)			1,055				NM
Net income (loss) attributable to common shareholders			37,486				(2,665	)			40,151				NM

		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 $38.5$18.3 million for the year ended December 31, 20172022 increased by $41.2$3.4 million from a net lossincome of $2.8$14.9 million for 2016. During the period, improving trends in non-performing loans, past due loans, and loan risk categories continued. In addition, net2021. Net interest income increased $4.9 million for 2017 was impacted by the reversal of the Company’s deferred tax asset valuation allowance and the change in federal corporate tax rates in connection with the enactment of the Tax Cuts and Jobs Act of 2017. The net2022 as a result of these two items, as well as income tax expense forgrowth in the year, was an income tax benefitloan portfolio and increasing yields on earning assets, offset by $3.0 million increase in the cost of $31.9 million for 2017.interest-bearing liabilities primarily due to recent increases in short-term interest rates. A negative provision for loan losses expense of $800,000$80,000 was recorded during 2017,in 2022, compared to $2.5a $1.2 million negative provision for loan losses expense for 2016. 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 $19,000$438,000 during 2017. There2022. The increase was primarily due to an increase of $295,000 in service charges on deposit accounts $123,000of $519,000 and an increase in bank card interchange fees and $62,000of $162,000, both of which were due to an increase in other non-interesttransaction volumes. Bank owned life insurance income which was offset by no OREO income during 2017, compared to $456,000 during 2016. Non-interest expense decreased $9.3 million during 2017 due primarily to a decrease in litigation and loan collection expense of $8.6 million as 2016 was negatively impacted by a ruling from the Kentucky Court of Appeals against the Bank that approximated $8.0 million. After consideration of earnings attributable to participating securities, net income attributable to common shareholders was $37.5 millionincreased $180,000 for the year ended December 31, 2017,2022 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 comparedwell 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 net loss attributablean 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 common shareholdersthe 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 $2.7 million$262,000 for 2016.2022 as a result of changes in information technology infrastructure during the period.

 

2526

---

Table of Contents

 

The following table summarizes components of income and expense and the change in those components for 20162021 compared with 2015:2020:

 

		For the Years Ended December 31,								Change from Prior Period								For the Years Ended December 31,								Change from Prior Period
		2016				2015				Amount				Percent				2021				2020				Amount				Percent
		(dollars in thousands)																(dollars in thousands)
Gross interest income		$	35,602			$	36,574			$	(972	)			(2.7	)%		$	49,915			$	50,753			$	(838	)			(1.7	)%
Gross interest expense			5,981				7,023				(1,042	)			(14.8	)			5,693				10,152				(4,459	)			(43.9	)
Net interest income			29,621				29,551				70				0.2				44,222				40,601				3,621				8.9
Provision (negative provision) for loan losses			(2,450	)			(4,500	)			(2,050	)			(45.6	)
Provision for loan losses																			1,150				4,400				(3,250	)			(73.9	)
Non-interest income			4,548				5,929				(1,381	)			(23.3	)			7,979				6,849				1,130				16.5
Gains on sale of securities, net			216				1,766				(1,550	)			(87.8	)
Gain (loss) on sales and calls of securities, net																			460				(5	)			465				NM
Non-interest expense			39,567				44,959				(5,392	)			(12.0	)			31,971				32,416				(445	)			(1.4	)
Net loss before taxes			(2,732	)			(3,213	)			481				15.0
Net income before taxes																			19,540				10,629				8,911				83.8
Income tax expense			21				—				21				100.0				4,631				1,624				3,007				185.2
Net loss			(2,753	)			(3,213	)			(460	)			(14.3	)
Earnings (losses) attributable to participating securities			(88	)			(336	)			248				(73.8	)
Net loss attributable to common shareholders			(2,665	)			(2,877	)			(212	)			(7.4	)
Net income																			14,909				9,005				5,904				65.6

NM: Not Meaningful

 

Net loss of $2.8 million for the year ended December 31, 2016 decreased by $460,000 from a net loss of $3.2 million for 2015. A negative provision for loan losses expense of $2.5 million was recorded for 2016 due to improvements in loan quality and management’s assessment of risk within the portfolio as compared to $4.5 million negative provision for loan losses expense for 2015. Non-interest income decreased $2.9 million during 2016 due primarily to a decrease in OREO rental income of $890,000 driven by the sale of income producing properties and a $1.6 million decrease in gains on the sale of securities compared to 2015. Non-interest expense decreased $5.4 million during 2016. OREO expense decreased by $10.8 million, but was offset by a $7.7 million increase in litigation and loan collection expense primarily resulting from the adverse Kentucky Court of Appeals ruling. After consideration of losses attributable to participating securities, net loss attributable to common shareholders was $2.7$14.9 million for the year ended December 31, 2016, as compared to2021 increased by $5.9 million from net loss attributable to common shareholdersincome of $2.9$9.0 million for 2015.

Net Interest Income –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 $31.1recorded 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, 2017, an increase2021 and 2020, respectively. Effective January 1, 2021, the Commonwealth of $1.5 million, or 5.1%, compared with $29.6 millionKentucky 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 same period in 2016. Net interest spread and margin were 3.35% and 3.48%, respectively,year ended December 31, 2021, compared to a state income tax benefit of $478,000 for 2017, compared with 3.32% and 3.42%, respectively, for 2016. Average nonaccrual loans were $7.1 million and $11.4 million in 2017 and 2016, respectively.the year ended December 31, 2020 related to the establishment of a net deferred tax asset due to the tax law change.

 

Average interest-earning assets were $904.1 million for 2017, compared with $875.3 million for 2016, a 3.3% increase, primarily attributable to higher average loans and investment securities, partially offset by a decrease in interest bearing deposits with financial institutions. Average loans were $667.5 million for 2017, compared with $621.3 million for 2016, a 7.4% increase. Average investment securities were $193.1 million for 2017, compared with $183.7 million for 2016, a 5.1% increase. Average interest bearing deposits with financial institutions and fed funds sold were $36.2 million in 2017, compared with $62.9 million in 2016, a 42.4% decrease. Total interest income increased 5.4% to $37.5 million for 2017, compared with $35.6 million for 2016.

Average interest-bearing liabilities increased by 1.7% to $773.2 million for 2017, compared with $760.7 million for 2016. Our total interest expense increased by 7.1% to $6.4 million for 2017, compared with $6.0 million during 2016, due primarily to the completion of a $10.0 million senior debt transaction during 2017 as well as an increase in FHLB advances outstanding during 2017. Average volume of certificates of deposit decreased 2.9% to $452.4 million for 2017, compared with $466.0 million for 2016. The average interest rate paid on certificates of deposit increased to 0.93% for 2017, compared with 0.88% for 2016. Average volume of interest checking and money market deposit accounts increased 6.2% to $247.3 million for 2017, compared with $232.7 million for 2016. The average interest rate paid on interest checking and money market deposit accounts decreased to 0.38% for 2017, compared with 0.40% for 2016.

NetNet Interest Income – Net interest income was $29.6$49.1 million for the year ended December 31, 2016,2022, an increase of $70,000,$4.9 million, or 0.2%11.0%, compared with $29.6$44.2 million for the same period in 2015.2021. Net interest spread and margin were 3.32%3.41% and 3.42%3.62%, respectively, for 2016,2022, compared with 3.18%3.33% and 3.27%3.48%, respectively, for 2015. Average nonaccrual loans were $11.4 million and $29.0 million in 2016 and 2015, respectively.2021.

 

AverageThe 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 were $875.3increased $81.8 million for 2016, compared with $917.5 million for 2015, a 4.6% decrease,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 andalso resulted in approximately $995,000 in additional income as compared to the prior year. Total interest bearing deposits with financial institutions. Average loans were $621.3 million for 2016, compared with $635.9 million for 2015, a 2.3% decrease. Average investment securities were $183.7 million for 2016, compared with $194.1 million for 2015, a 5.3% decrease. Average interest bearing deposits with financial institutions were $62.3income increased 15.8%, or $7.9 million, in 2016,2022 compared with $78.9 million in 2015, a 21.0% decrease. Our total interest income decreased 2.7% to $35.6 million for 2016, compared with $36.6 million for 2015.2021.

 

26

27

---

Table of Contents

 

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

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

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

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

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

The cost of interest-bearing liabilities decreased to 0.59% for the year ended December 31, 2021, as compared to 1.05% for the year ended December 31, 2020 primarily based on downward repricing of time and other interest-bearing deposits and reduction in the size of the time deposit portfolio, as well as a shift in deposit mix. Average interest-bearing liabilities decreased by 8.0%$4.1 million during 2021 primarily due to $760.7a $13.9 million for 2016, compared with $826.9 million for 2015.decrease in FHLB advances. Total interest expense decreased by 14.8%43.9% to $6.0$5.7 million for 2016,the year ended December 31, 2021 as compared with $7.0 million during 2015, due primarily to lower interest rates paid on and lower volume of certificates of deposit. Average volume of certificates of deposit decreased 16.4% to $466.0$10.2 million for 2016, comparedthe year ended December 31, 2020. As of December 31, 2021, time deposits comprise $266.0 million of the Company’s liabilities with $557.4$161.9 million, for 2015. Theor 61%, set to reprice or mature within one year of which, $55.0 million with a current average interest rate paid on certificates of deposit decreased to 0.88% for 2016, compared with 0.96% for 2015, as0.33% reprice or mature within the resultfirst quarter of continued re-pricing of certificates of deposit at maturity to lower interest rates. The average volume of interest checking and money market deposit accounts increased 15.7% to $232.7 million for 2016, compared with $201.2 million for 2015. The average interest rate paid on interest checking and money market deposit accounts increased to 0.40% for 2016, compared with 0.38% for 2015.2022.

 

2728

---

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,
		2017												2016
		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)(2)
Real estate		$	509,133			$	24,544				4.82	%		$	493,068			$	24,486				4.97	%
Commercial			107,188				4,403				4.11				81,110				3,471				4.28
Consumer			10,790				843				7.81				9,818				826				8.41
Agriculture			39,839				2,047				5.14				36,811				1,733				4.71
Other			524				29				5.53				468				21				4.49
U.S. Treasury and agencies			31,440				694				2.21				34,049				757				2.22
Mortgage-backed securities			94,451				2,240				2.37				101,249				2,240				2.21
Collateralized loan obligations			20,242				541				2.67				802				28				3.49
State and political subdivision securities (non-taxable) (3)			19,617				571				4.48				21,041				620				4.53
State and political subdivision securities (taxable)			23,689				757				3.20				23,921				768				3.21
Corporate bonds			3,651				167				4.57				2,656				93				3.50
FHLB stock			7,323				366				5.00				7,323				293				4.00
Federal funds sold			960				10				1.04				639				3				0.47
Interest-bearing deposits in other financial institutions			35,222				310				0.88				62,307				263				0.42
Total interest-earning assets			904,069				37,522				4.18	%			875,262				35,602				4.11	%
Less: Allowance for loan losses			(8,961	)											(10,719	)
Non-interest-earning assets			52,853												64,597
Total assets		$	947,961											$	929,140
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities
Certificates of deposit and other time deposits		$	452,443			$	4,191				0.93	%		$	466,007			$	4,111				0.88	%
Interest checking and money market deposits			247,261				940				0.38				232,717				921				0.40
Savings accounts			35,486				59				0.17				34,257				61				0.18
FHLB advances			9,184				120				1.31				2,967				70				2.36
Junior subordinated debentures			23,805				901				3.78				24,708				818				3.31
Senior debt			5,068				194				3.83				—				—				—
Total interest-bearing liabilities			773,247				6,405				0.83	%			760,656				5,981				0.79	%
Non-interest-bearing liabilities
Non-interest-bearing deposits			129,088												119,736
Other liabilities			7,775												9,325
Total liabilities			910,110												889,717
Stockholders’ equity			37,851												39,423
Total liabilities and stockholders’ equity		$	947,961											$	929,140
Net interest income						$	31,117											$	29,621
Net interest spread											3.35	%											3.32	%
Net interest margin											3.48	%											3.42	%
Ratio of average interest-earning assets to average interest-bearing liabilities											116.92	%											115.07	%

		For the Years Ended December 31,
		2022												2021
		Average Balance				Interest Earned/Paid				Average Yield/Cost				Average Balance				Interest Earned/Paid				Average Yield/Cost
		(dollars in thousands)
ASSETS
Interest-earning assets:
Loans receivables (1)
Real estate		$	767,859			$	35,526				4.63	%		$	675,791			$	30,615				4.53	%
Commercial			230,519				10,471				4.54				211,573				10,266				4.85
Consumer			34,237				1,947				5.69				34,041				1,608				4.72
Agriculture			39,190				2,375				6.06				36,596				1,945				5.31
Other			525				13				2.48				548				11				2.01
U.S. Treasury and agencies			25,695				523				2.04				25,657				542				2.11
Mortgage-backed securities			87,335				1,855				2.12				81,829				1,561				1.91
Collateralized loan obligations			48,539				1,712				3.53				44,396				831				1.87
State and political subdivision securities (non-taxable)			29,749				660				2.96				26,509				643				3.23
State and political subdivision securities (taxable)			14,525				393				2.71				16,971				425				2.50
Corporate bonds			45,058				1,682				3.73				35,340				1,253				3.55
FHLB stock			5,031				199				3.96				5,493				115				2.09
Federal funds sold			35				1				2.86				35				—				—
Interest-bearing deposits in other financial institutions			32,050				453				1.41				83,736				100				0.12
Total interest-earning assets			1,360,347				57,810				4.27	%			1,278,515				49,915				3.92	%
Less: Allowance for loan losses			(12,469	)											(12,714	)
Non-interest-earning assets			86,559												97,596
Total assets		$	1,434,437											$	1,363,397
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities
Certificates of deposit and other time deposits		$	262,692			$	1,929				0.73	%		$	311,140			$	1,788				0.57	%
Interest checking and money market deposits			497,811				2,712				0.54				423,938				1,289				0.30
Savings accounts			159,422				561				0.35				157,283				441				0.28
FHLB advances			50,274				1,162				2.31				20,152				154				0.76
Junior subordinated debentures			21,000				867				4.13				21,000				521				2.48
Subordinated capital notes			25,000				1,501				6.00				25,000				1,500				6.00
Senior debt			—				—				—				—				—				—
Total interest-bearing liabilities			1,016,199				8,732				0.86	%			958,513				5,693				0.59	%
Non-interest-bearing liabilities
Non-interest-bearing deposits			277,981												271,994
Other liabilities			10,804												8,948
Total liabilities			1,304,984												1,239,455
Stockholders’ equity			129,453												123,942
Total liabilities and stockholders’ equity		$	1,434,437											$	1,363,397
Net interest income						$	49,078											$	44,222
Net interest spread											3.41	%											3.33	%
Net interest margin											3.62	%											3.48	%
Ratio of average interest-earning assets to average interest-bearing liabilities											133.87	%											133.39	%

 

---

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

(2)	Calculations include non-accruing loansIncludes loan fees in both interest income and the calculation of $7.1 million and $11.4 million in average loan amounts outstanding.

(3)	Taxable equivalent yields are calculated assuming a 35% federal income tax rate.yield on loans.

 

2829

---

Table of Contents

   

		For the Years Ended December 31,
		2016												2015
		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)(2)
Real estate		$	493,068			$	24,486				4.97	%		$	516,605			$	25,423				4.92	%
Commercial			81,110				3,471				4.28				78,993				3,475				4.40
Consumer			9,818				826				8.41				10,432				856				8.21
Agriculture			36,811				1,733				4.71				29,395				1,470				5.00
Other			468				21				4.49				523				27				5.16
U.S. Treasury and agencies			34,049				757				2.22				31,269				684				2.19
Mortgage-backed securities			101,249				2,240				2.21				107,277				2,420				2.26
Collateralized loan obligations			802				28				3.49				—				—				—
State and political subdivision securities (non-taxable) (3)			21,041				620				4.53				25,354				764				4.64
State and political subdivision securities (taxable)			23,921				768				3.21				24,059				774				3.22
Corporate bonds			2,656				93				3.50				6,116				155				2.53
FHLB stock			7,323				293				4.00				7,323				293				4.00
Other debt securities			—				—				—				544				43				7.90
Federal funds sold			639				3				0.47				752				1				0.13
Interest-bearing deposits in other financial institutions			62,307				263				0.42				78,904				189				0.24
Total interest-earning assets			875,262				35,602				4.11	%			917,546				36,574				4.03	%
Less: Allowance for loan losses			(10,719	)											(17,154	)
Non-interest-earning assets			64,597												84,027
Total assets		$	929,140											$	984,419
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities
Certificates of deposit and other time deposits		$	466,007			$	4,111				0.88	%		$	557,441			$	5,329				0.96	%
Interest checking and money market deposits			232,717				921				0.40				201,164				756				0.38
Savings accounts			34,257				61				0.18				35,604				75				0.21
Federal funds purchased and repurchase agreements			—				—				—				587				1				0.17
FHLB advances			2,967				70				2.36				3,473				95				2.74
Junior subordinated debentures			24,708				818				3.31				28,589				767				2.68
Total interest-bearing liabilities			760,656				5,981				0.79	%			826,858				7,023				0.85	%
Non-interest-bearing liabilities
Non-interest-bearing deposits			119,736												113,576
Other liabilities			9,325												10,902
Total liabilities			889,717												951,336
Stockholders’ equity			39,423												33,083
Total liabilities and stockholders’ equity		$	929,140											$	984,419
Net interest income						$	29,621											$	29,551
Net interest spread											3.32	%											3.18	%
Net interest margin											3.42	%											3.27	%
Ratio of average interest-earning assets to average interest-bearing liabilities											115.07	%											110.97	%

		For the Years Ended December 31,
		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		$	675,791			$	30,615				4.53	%		$	684,447			$	32,572				4.76	%
Commercial			211,573				10,266				4.85				200,260				8,398				4.19
Consumer			34,041				1,608				4.72				39,931				2,051				5.14
Agriculture			36,596				1,945				5.31				38,833				2,058				5.30
Other			548				11				2.01				617				14				2.27
U.S. Treasury and agencies			25,657				542				2.11				20,239				491				2.43
Mortgage-backed securities			81,829				1,561				1.91				82,330				1,863				2.26
Collateralized loan obligations			44,396				831				1.87				45,595				1,234				2.71
State and political subdivision securities (non-taxable)			26,509				643				3.23				14,139				370				3.31
State and political subdivision securities (taxable)			16,971				425				2.50				16,301				494				3.03
Corporate bonds			35,340				1,253				3.55				23,572				960				4.07
FHLB stock			5,493				115				2.09				6,208				143				2.30
Federal funds sold			35				—				—				72				—				—
Interest-bearing deposits in other financial institutions			83,736				100				0.12				38,525				105				0.27
Total interest-earning assets			1,278,515				49,915				3.92	%			1,211,069				50,753				4.20	%
Less: Allowance for loan losses			(12,714	)											(9,819	)
Non-interest-earning assets			97,596												93,684
Total assets		$	1,363,397											$	1,294,934
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities
Certificates of deposit and other time deposits		$	311,140			$	1,788				0.57	%		$	436,083			$	5,802				1.33	%
Interest checking and money market deposits			423,938				1,289				0.30				336,596				1,464				0.43
Savings accounts			157,283				441				0.28				111,559				530				0.48
FHLB advances			20,152				154				0.76				34,101				371				1.09
Junior subordinated debentures			21,000				521				2.48				21,000				660				3.14
Subordinated capital notes			25,000				1,500				6.00				20,366				1,206				5.92
Senior debt			—				—				—				2,896				119				4.11
Total interest-bearing liabilities			958,513				5,693				0.59	%			962,601				10,152				1.05	%
Non-interest-bearing liabilities
Non-interest-bearing deposits			271,994												215,145
Other liabilities			8,948												7,230
Total liabilities			1,239,455												1,184,976
Stockholders’ equity			123,942												109,958
Total liabilities and stockholders’ equity		$	1,363,397											$	1,294,934
Net interest income						$	44,222											$	40,601
Net interest spread											3.33	%											3.15	%
Net interest margin											3.48	%											3.36	%
Ratio of average interest-earning assets to average interest-bearing liabilities											133.39	%											125.81	%

 

---

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

(2)	Calculations include non-accruing loansIncludes loan fees in both interest income and the calculation of $11.4 million and $29.0 million in average loan amounts outstanding.

(3)	Taxable equivalent yields are calculated assuming a 35% federal income tax rate.yield on loans.

 

2930

---

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, 2017 vs. 2016												Year Ended December 31, 2016 vs. 2015												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												Increase (decrease) due to change in												Increase (decrease) due to change in
		Rate				Volume				Net Change				Rate				Volume				Net Change				Rate				Volume				Net Change				Rate				Volume				Net Change
		(in thousands)																								(in thousands)
Interest-earning assets:
Loan receivables		$	(895	)		$	2,224			$	1,329			$	7			$	(721	)		$	(714	)		$	552			$	5,335			$	5,887			$	(390	)		$	(258	)		$	(648	)
U.S. Treasury and agencies			(5	)			(58	)			(63	)			11				62				73				(20	)			1				(19	)			(69	)			120				51
Mortgage-backed securities			155				(155	)			—				(46	)			(134	)			(180	)			185				109				294				(291	)			(11	)			(302	)
Collateralized loan obligations			(9	)			522				513				—				28				28				796				85				881				(372	)			(31	)			(403	)
State and political subdivision securities			(9	)			(51	)			(60	)			(13	)			(137	)			(150	)			(35	)			20				(15	)			(128	)			332				204
Corporate bonds			33				41				74				126				(188	)			(62	)			69				360				429				(137	)			430				293
FHLB stock			73				—				73				—				—				—				95				(11	)			84				(13	)			(15	)			(28	)
Other debt securities			—				—				—				—				(43	)			(43	)
Federal funds sold			4				3				7				2				—				2				1				—				1				—				—				—
Interest-bearing deposits in other financial institutions			196				(149	)			47				102				(28	)			74				451				(98	)			353				(81	)			76				(5	)
Total increase (decrease) in interest income			(457	)			2,377				1,920				189				(1,161	)			(972	)			2,094				5,801				7,895				(1,481	)			643				(838	)
Interest-bearing liabilities:
Certificates of deposit and other time deposits			202				(122	)			80				(390	)			(828	)			(1,218	)			447				(306	)			141				(2,668	)			(1,346	)			(4,014	)
Interest checking and money market accounts			(37	)			56				19				42				123				165				1,166				257				1,423				(502	)			327				(175	)
Savings accounts			(4	)			2				(2	)			(11	)			(3	)			(14	)			114				6				120				(262	)			173				(89	)
Federal funds purchased and repurchase agreements			—				—				—				—				(1	)			(1	)
FHLB advances			(42	)			92				50				(12	)			(13	)			(25	)			580				428				1,008				(91	)			(126	)			(217	)
Junior subordinated debentures			114				(31	)			83				164				(113	)			51				346				—				346				(139	)			—				(139	)
Subordinated capital notes																											1				—				1				16				278				294
Senior debt			—				194				194				—				—				—				—				—				—				(59	)			(60	)			(119	)
Total increase (decrease) in interest expense			233				191				424				(207	)			(835	)			(1,042	)			2,654				385				3,039				(3,705	)			(754	)			(4,459	)
Increase (decrease) in net interest income		$	(690	)		$	2,186			$	1,496			$	396			$	(326	)		$	70			$	(560	)		$	5,416			$	4,856			$	2,224			$	1,397			$	3,621

 

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

 

		For the Years Ended December 31,												For the Years Ended December 31,
		2017				2016				2015				2022				2021				2020
		(in thousands)												(in thousands)
Service charges on deposit accounts		$	2,253			$	1,958			$	1,851			$	2,775			$	2,256			$	2,268
Bank card interchange fees			972				849				839				4,278				4,116				3,376
Income from bank owned life insurance			412				417				295				706				526				424
Net gain on sales and calls of securities			288				216				1,766
Other real estate owned rental income			—				456				1,346
Gain on extinguishment of junior subordinated debt			—				—				883
Gain on sale of other real estate owned															—				191				—
Gain (loss) on sales and calls of securities, net															(3	)			460				(5	)
Gain on sale of premises held for sale															163				—				—
Other			930				868				715				958				890				781
Total non-interest income		$	4,855			$	4,764			$	7,695			$	8,877			$	8,439			$	6,844

31

---

Table of Contents

 

Non-interestNon-interest Income Comparison – 2022 to 2021

Non-interest income increased by $91,000 in 2017$438,000 for 2022 to $4.9$8.9 million compared with $4.8$8.4 million for the year ended December 31, 2016. This2021. The increase was primarily attributabledue to a $295,000an increase in serviceservices charges on deposit accounts a $123,000of $519,000 and an increase in bank card interchange fees and a $72,000of $162,000, both of which were due to an increase in nettransaction 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 securities partially offset by nopremises 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 income during 2017, compared to $456,000 during 2016.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.

 

30

---

Table of Contents

Non-interest Income Comparison – 2021 to 2020

 

Non-interest income decreased increased by $2.9$1.6 million in 2016for 2021 to $4.8$8.4 million compared with $7.7$6.8 million for the year ended December 31, 2015 driven2020. This increase was primarily by a decline in gains on the salesrelated to bank card interchange fees of securities from $1.8 million in 2015 to $216,000 in 2016, as well as a decrease in OREO rental income of $890,000 between the two periods$740,000 as a result of income producing properties being sold. Non-interest income for 2015 was also positively impacted by an $883,000increase in debit card transactions, a $191,000 gain on extinguishmentthe sale of junior subordinated debt.OREO, and a $465,000 gain on the call of a corporate bond from the Bank’s available for sale securities portfolio.

 

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

 

		For the Years Ended December 31,												For the Years Ended December 31,
		2017				2016				2015				2022				2021				2020
		(in thousands)												(in thousands)
Salary and employee benefits		$	15,090			$	15,508			$	15,857			$	19,021			$	18,132			$	17,751
Occupancy and equipment			3,420				3,517				3,449				4,201				4,041				4,001
Deposit account related expense															2,249				2,158				1,890
Data processing expense															1,591				1,512				1,502
FDIC insurance			1,412				1,660				2,212				360				405				229
Data processing expense			1,256				1,185				1,128
Marketing expense			1,098				973				560				605				727				629
State franchise and deposit tax			956				965				1,120
Deposit and state franchise tax															396				375				1,475
Professional fees			978				1,568				2,885				818				952				937
Communications			722				706				663				419				681				856
Insurance expense			540				565				589				420				415				428
Postage and delivery			395				359				400				622				605				627
Litigation and loan collection expense			179				8,805				1,141
Other real estate owned expense			1,973				1,541				12,302
Merger expenses															691				—				—
Other			2,199				2,215				2,653				2,364				1,968				2,091
Total non-interest expense		$	30,218			$	39,567			$	44,959			$	33,757			$	31,971			$	32,416

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, 20172021 of $30.2$32.0 million represented a 23.6%$445,000, or 1.4%, decrease from $39.6$32.4 million for 2016.2020. The decrease in non-interest expense was attributable primarily due to a $1.1 million decrease in litigationdeposit and loan collection expense, which decreased $8.6 million. Litigation expense was negatively impacted in 2016 by a ruling from the Kentucky Court of Appeals against the Bank that approximated $8.0 million. Non-interest expense also benefited from a $590,000 decrease in professional fees, a $418,000 decrease in salaries and employee benefits, and a $248,000 decrease in FDIC insurance. As shown below, expenses related to OREO trended higher due to higher valuation adjustment writedowns during 2017 compared to 2016.

		2017				2016
		(in thousands)
Net gain on sales		$	(74	)		$	(222	)
Provision to allowance for declining market values			1,963				1,180
Operating expense			84				583
Total		$	1,973			$	1,541

During the year ended December 31, 2017, fair value write-downs of $2.0 million were recorded compared with $1.2 million for the year ended December 31, 2016. The 2017 write-downs reflect declines in the fair value due to updated appraisals, changes in marketing strategies, and reductions in listing prices for certain properties. We were successful in selling OREO totaling $793,000 and $12.7 million during 2017 and 2016, respectively.

31

---

Table of Contents

Non-interest Expense Comparison – 2016to 2015

Non-interest expense for the year ended December 31, 2016 of $39.6 million represented a 12.0% decrease from $45.0 million for 2015. The decrease in non-interest expense was attributable primarily to decreases in OREO expenses and professional fees, offset by increases in litigation and loan collectionstate franchise tax expense as a result of the Kentucky Court of Appeals ruling against the Bank. As shown below, expenses related to OREO trended lower as the sizeelimination of the portfolio significantly declined.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.

 

		2016				2015
		(in thousands)
Net (gain) loss on sales		$	(222	)		$	74
Provision to allowance for declining market values			1,180				9,855
Operating expense			583				2,373
Total		$	1,541			$	12,302

During the year ended December 31, 2016, fair value write-downs

32

---

Table of $1.2 million were recorded compared with $9.9 million for the year ended December 31, 2015. The write-downs reflect declines in the fair value and include reductions in listing prices for certain properties, updated appraisals, and sales of certain properties through auctions. We were successful in selling OREO totaling $12.7 million and $22.6 million during 2016 and 2015, respectively.

Contents

 

Income Tax Expense and Benefit – Effective tax rates differ from the federal statutory rate of 35% applied to income (loss) before income taxes due to the following:

 

		2017				2016				2015
		(in thousands)
Federal statutory rate times financial statement income (loss)		$	2,294			$	(956	)		$	(1,125	)
Effect of:
Valuation allowance			(54,049	)			1,238				717
Tax-exempt income			(196	)			(211	)			(264	)
Non-taxable life insurance income			(144	)			(146	)			(103	)
Restricted stock vesting			(121	)			—				—
Change in federal statutory rate			20,274				—				—
Other, net			43				96				775
Total		$	(31,899	)		$	21			$	—

		2022				2021				2020
		(in thousands)
Federal statutory tax rate			21	%			21	%			21	%
Federal statutory rate times financial statement income		$	5,065			$	4,103			$	2,232
Effect of:
State income taxes			907				741				—
Tax-exempt interest income			(107	)			(123	)			(73	)
Establish state deferred tax asset			—				—				(478	)
Non-taxable life insurance income			(148	)			(111	)			(89	)
Restricted stock vesting			(30	)			(10	)			7
Other, net			89				31				25
Total income tax expense		$	5,776			$	4,631			$	1,624

 

The Company has hadState income tax expense was $1.0 million for 2022, compared to $939,000 for 2021. For 2020, income tax expense benefitted $478,000 from the establishment of a full valuation allowance against its net deferred tax asset since 2011. The Company’s ability to utilize the net deferred tax asset depends upon generating sufficient future levels of taxable income. The determination to restore a deferred tax asset and eliminate a valuation allowance depends upon the evaluation of both positive and negative evidence regarding the likelihood of achieving sufficient future taxable income levels. During the fourth quarter of 2017, management concluded it was more-likely-than-not the asset would be utilized to reduce future taxes payableassets related to a change in Kentucky tax law enacted during 2019. Effective January 1, 2021, the future taxable incomeCommonwealth of Kentucky eliminated the Company,bank franchise tax, which was previously recorded as non-interest expense, and as such, reversed the valuation allowance. Asimplemented a result of the conclusion to reverse the valuation allowance, the Company recorded anstate income tax benefitat a statutory rate of $54.0 million for the year ended December 31, 2017.

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 was signed into law. Among other significant changes to the tax code, the new law lowered the federal corporate tax rate from 35% to 21% beginning in 2018. As a result, the Company revalued its net deferred tax asset at the new 21% rate. Due to this revaluation, the Company recorded a $20.3 million charge to income tax expense for the year ended December 31, 2017.

The combination of the reversal of the valuation allowance and the change in federal corporate tax rates, as well as income tax expense for the year, resulted in an income tax benefit of $31.9 million for the year ended December 31, 2017.5%.

 

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

 

Income tax expense of $21,000 was recorded for 2016, with no income tax expense or benefit recorded for 2015. Our deferred tax valuation allowance increased to $54.0 million at December 31, 2016. Our statutory federal tax rate was 35% in both 2016 and 2015. The effective tax rate for 2016 and 2015 is not meaningful due to the reduction of income tax benefit as the result of the deferred tax valuation allowance.

32

---

Table of Contents

Analysis of Financial Condition

 

Total assets at December 31, 20172022 were $970.8 million$1.46 billion compared with $945.2 million$1.42 billion at December 31, 2016,2021, an increase of $25.6$46.8 million or 2.7%3.3%. This increase was primarily attributable to an increase in net loans of $73.6$108.5 million, as well as the restoration of a net deferred tax asset of $31.3 million. These increases were partially offset by a decrease in investment securities of $41.9$37.2 million, as well as a $30.9$33.0 million decrease in interest bearing deposits in banks.

Total assets at December 31, 2016 were $945.2 million compared with $948.7 million at December 31, 2015, a decrease of $3.5 million or 0.4%. This decrease was primarily attributable to a decrease in cash and cash equivalentsequivalents.

Total assets at December 31, 2021 were $1.42 billion compared with $1.31 billion at December 31, 2020, an increase of $27.0$103.4 million which funded the redemption of deposits of $28.1 million. Thereor 7.9%. This increase was also a decrease in OREO of $12.4 million offset byprimarily attributable to an increase in net loans of $23.6 million, an increase in available for saleinvestment securities of $7.8$56.8 million, and an increaseas well as $40.7 million in FHLB advances of $19.4 million.net loans.

 

Reversal of Deferred Tax Asset Valuation Allowance and Change in Federal Tax RateInvestment Securities – The Company hadsecurities portfolio serves as a full valuation allowance against its net deferred tax asset since 2011. The Company’s ability to utilize the net deferred tax asset depends upon generating sufficient future levelssource of taxable income. The determination to restore a deferred tax assetliquidity and eliminate a valuation allowance depends upon the evaluation of both positiveearnings and negative evidence regarding the likelihood of achieving sufficient future taxable income levels. During the fourth quarter of 2017, management concluded it was more-likely-than-not the asset would be utilized to reduce future taxes payable relatedcontributes to the future taxable incomemanagement of the Company,interest rate risk. Investments are made in various types of liquid assets, including U.S. Treasury obligations and as such, reversed the valuation allowance.

As a resultsecurities of the conclusionvarious federal agencies, collateralized loan obligations, corporate bonds, and obligations of states and political subdivisions. The investment portfolio decreased by $37.2 million, or 14.3%, to reverse the valuation allowance and the reduction of the federal tax rate from 35% to 21%, the Company has a net deferred tax asset of $31.3$223.4 million at December 31, 2017.2022, compared with $260.7 million at December 31, 2021. The decrease was comprised primarily of $28.0 million in payment proceeds and $19.2 million in fair value declines attributable to the rising interest rate environment, partially offset by purchases of $10.6 million.

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

		December 31, 2022																December 31, 2021
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value				Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
		(dollars in thousands)
Securities available for sale
U.S. Government and federal agencies		$	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

		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		$	43,282			$	—			$	(8,386	)		$	34,896			$	46,460			$	158			$	(338	)		$	46,280
Total held to maturity		$	43,282			$	—			$	(8,386	)		$	34,896			$	46,460			$	158			$	(338	)		$	46,280

33

---

Table of Contents

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

The market value of CLOs may be affected by, among other things, changes in composition of the underlying loans, changes in the cash flows from the underlying loans, defaults and recoveries on the underlying loans, capital gains and losses on the underlying loans, prepayments on the underlying loans, and other conditions or economic factors. At December 31, 2022, $27.0 million and $19.0 million of the Bank’s CLOs were risk rated AA and A rated, respectively. None of the CLOs were subject to a ratings downgrade during the year ended December 31, 2022.

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

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

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

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

		Due Within One Year								After One Year But Within Five Years								After Five Years But Within Ten Years								After Ten Years								Total
		Amount				Yield				Amount				Yield				Amount				Yield				Amount				Yield				Amount				Yield
Available for sale
U.S. Government and federal agencies		$	—				—	%		$	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, 2022, 88.8% of the Bank’s agency mortgage-backed securities had contractual final maturities of more than ten years with a weighted maturity of 21.6 years.

34

---

Table of Contents

 

Loans Receivable –Loans receivable increased $72.9$110.0 million, or 11.4%11.0%, during the year ended December 31, 2017,2022, to $712.1 million. Our$1.10 billion. The Bank’s commercial and commercial real estate and real estate construction portfolios increased by an aggregate of $61.0$112.4 million, or 17.2%15.8%, during 20172022 and comprised 58.4%74.0% of the total loan portfolio at December 31, 2017.

Loans receivable increased $20.6 million, or 3.3%, during the year ended December 31, 2016, to $639.2 million. Our commercial, commercial2022. The residential real estate and real estate constructionconsumer portfolios increaseddecreased by an aggregate of $18.8$8.1 million, or 5.6%3.2%, during 20162022 and comprised 55.6%22.3% of the total loan portfolio at December 31, 2016.2022.

Loans receivable increased $39.8 million, or 4.1%, during the year ended December 31, 2021, to $1.0 billion. The Bank’s commercial and commercial real estate portfolios increased by an aggregate of $72.1 million, or 11.3%, during 2021 and comprised 70.9% of the total loan portfolio at December 31, 2021. The residential real estate and consumer portfolios decreased by an aggregate of $26.0 million, or 9.2%, during 2021 and comprised 25.5% of the total loan portfolio at December 31, 2021.

 

Loan Portfolio Composition– – The following table presents a summary of the loan portfolio at the dates indicated, net of deferred loan fees, by type. There are no foreign loans in ourthe 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,																As of December 31,
		2017								2016								2022								2021
		Amount				Percent				Amount				Percent				Amount				Percent				Amount				Percent
		(dollars in thousands)																(dollars in thousands)
Commercial		$	113,771				15.98	%		$	97,761				15.29	%
Commercial (1)																		$	230,262				20.71	%		$	220,826				22.04	%
Commercial Real Estate:
Construction			57,342				8.05				36,330				5.68				135,159				12.16				74,806				7.47
Farmland			88,320				12.40				71,507				11.19				65,256				5.87				68,388				6.83
Nonfarm nonresidential			156,724				22.01				149,546				23.39				391,701				35.23				345,893				34.53
Residential Real Estate:
Multi-family			56,588				7.94				48,197				7.54				45,222				4.07				50,224				5.01
1-4 Family			179,222				25.17				188,092				29.42				166,988				15.02				168,873				16.86
Consumer			18,439				2.59				9,818				1.54				35,277				3.17				36,440				3.64
Agriculture			41,154				5.78				37,508				5.87				41,498				3.73				35,924				3.59
Other			555				0.08				477				0.08				491				0.04				466				0.03
Total loans		$	712,115				100.00	%		$	639,236				100.00	%		$	1,111,854				100.00	%		$	1,001,840				100.00	%

 

33

---

Table of Contents

		As of December 31,
		2015								2014								2013
		Amount				Percent				Amount				Percent				Amount				Percent
		(dollars in thousands)
Commercial		$	86,176				13.93	%		$	60,936				9.75	%		$	52,878				7.45	%
Commercial Real Estate:
Construction			33,154				5.36				33,173				5.31				43,326				6.11
Farmland			76,412				12.35				77,419				12.39				71,189				10.04
Nonfarm nonresidential			140,570				22.72				175,452				28.07				232,026				32.71
Residential Real Estate:
Multi-family			44,131				7.13				41,891				6.70				46,858				6.61
1-4 Family			201,478				32.57				197,278				31.56				228,505				32.21
Consumer			10,010				1.62				11,347				1.82				14,365				2.03
Agriculture			26,316				4.25				26,966				4.31				19,199				2.71
Other			419				0.07				537				0.09				980				0.13
Total loans		$	618,666				100.00	%		$	624,999				100.00	%		$	709,326				100.00	%

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

 

LendingLending 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 $31.4$48.7 million at December 31, 2017.2022 as measured at 30% of the Bank’s unimpaired capital and surplus.

 

At December 31, 2017, weThe Bank had 1222 loan relationships each with aggregate extensions of credit in excess of $10.0 million at year end 2022 and 2021. The aggregate extension of credit to these relationships totaled $355.2 million and $310.7 million at year end 2022 and 2021, respectively. With respect to these large loan relationships, all of which22 were classified as pass by the Bank’s internal loan review process. In 2016, we had four loan relationships each with aggregate extensions of credit in excess of $10.0 million.process at December 31, 2022 and 2021. At December 31, 2022, the largest relationship totaled $32.4 million and was secured by multiple income producing commercial real estate properties.

 

As of December 31, 2017, we2022, the Bank had $46.2$128.5 million of loan participations purchased from, and $19.1$41.5 million of loan participations sold to, other banks. As of December 31, 2016, we2021, the Bank had $33.4$85.2 million of loan participations purchased from, and $26.0$12.8 million of loan participations sold to, other banks.

 

34

35

---

Table of Contents

 

Loan Maturity Schedule – The following table sets forth at December 31, 2017,2022, the dollar amount of loans, net of deferred loan fees, maturing in the loan portfolio based on their contractual terms to maturity:

 

		As of December 31, 2017																As of December 31, 2022
		Maturing Within One Year				Maturing 1 through 5 Years				Maturing Over 5 Years				Total Loans				Maturing Within One Year				Maturing 1 through 5 Years				Maturing 5 through 15 Years				Maturing Over 15 Years				Total Loans
		(dollars in thousands)																(dollars in thousands)
Loans with fixed rates:
Commercial		$	4,509			$	25,481			$	4,707			$	34,697			$	6,815			$	65,747			$	63,145			$	—			$	135,707
Commercial Real Estate:
Construction			5,602				17,765				10,177				33,544				4,747				27,826				18,045				—				50,618
Farmland			5,273				16,985				21,075				43,333				2,856				17,353				10,513				1,844				32,566
Nonfarm nonresidential			14,801				77,138				22,287				114,226				16,803				152,005				94,100				5,110				268,018
Residential Real Estate:
Multi-family			5,038				28,337				15,449				48,824				22				24,522				6,849				—				31,393
1-4 Family			14,028				27,730				58,034				99,792				2,325				13,860				22,610				47,944				86,739
Consumer			1,172				5,951				1,275				8,398				3,010				18,507				766				844				23,127
Agriculture			3,143				5,582				779				9,504				1,974				6,569				528				—				9,071
Other			90				316				59				465				—				491				—				—				491
Total fixed rate loans		$	53,656			$	205,285			$	133,842			$	392,783			$	38,552			$	326,880			$	216,556			$	55,742			$	637,730
Loans with floating rates:
Commercial		$	10,169			$	45,673			$	23,232			$	79,074			$	31,739			$	45,209			$	17,607			$	—			$	94,555
Commercial Real Estate:
Construction			9,790				13,976				32				23,798				14,486				61,110				8,416				529				84,541
Farmland			1,127				5,665				38,195				44,987				1,158				5,224				9,855				16,453				32,690
Nonfarm nonresidential			1,598				7,170				33,730				42,498				10,681				50,453				25,927				36,622				123,683
Residential Real Estate:
Multi-family			208				4,956				2,600				7,764				—				11,096				2,305				428				13,829
1-4 Family			1,885				5,096				72,449				79,430				3,072				10,210				34,896				32,071				80,249
Consumer			10,013				—				28				10,041				12,000				32				118				—				12,150
Agriculture			22,087				9,349				214				31,650				29,731				2,363				333				—				32,427
Other			—				—				90				90				—				—				—				—				—
Total floating rate loans		$	56,877			$	91,885			$	170,570			$	319,332			$	102,867			$	185,697			$	99,457			$	86,103			$	474,124

 

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

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

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

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

36

---

Table of Contents

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,																				As of December 31,
			2017				2016				2015				2014				2013				2022				2021				2020				2019				2018
			(in thousands)																								(in thousands)
Pass	Pass		$	673,033			$	586,430			$	517,484			$	461,126			$	369,529			$	1,089,330			$	977,962			$	926,025			$	888,707			$	745,604
Watch	Watch			25,715				30,431				63,363				68,200				144,316				15,189				7,856				18,879				27,522				13,164
Special Mention	Special Mention			164				497				1,395				4,189				5,865				—				—				—				—				113
Substandard	Substandard			13,203				21,878				36,424				91,484				189,616				7,335				16,022				17,177				10,042				6,363
Doubtful	Doubtful			—				—				—				—				—				—				—				—				—				—
Total	Total		$	712,115			$	639,236			$	618,666			$	624,999			$	709,326			$	1,111,854			$	1,001,840			$	962,081			$	926,271			$	765,244

 

LoansLoans receivable increased $72.9$110.0 million, or 11.4%11.0%, during the year ended December 31, 2017. All loan risk categories have decreased since2022. Since December 31, 2016, with2021, the exception of pass graded loans. The pass category increased approximately $86.6$111.4 million, the watch category declinedincreased approximately $4.7$7.3 million, the special mention category declined approximately $333,000, and the substandard category declineddecreased approximately $8.7 million. The increase in the watch category is primarily related to the downgrade of an $11.0 million commercial loan relationship. This downgrade was offset by $5.1 million in commercial loan payoffs during 2022. The $8.7 million decrease in loans classified as substandard was primarily driven by $8.2 million in principal payments received, $2.1 million in loans upgraded from substandard, and $462,000 in charge-offs, offset by $2.1 million in loans moved to substandard during 2022. These trends were considered during the evaluation of qualitative trends in the portfolio when establishing the general component of the allowance for loan losses.

 

35

---

Table of Contents

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

 

			As of December 31,																				As of December 31,
			2017				2016				2015				2014				2013				2022				2021				2020				2019				2018
			(in thousands)																								(in thousands)
Past Due Loans:	Past Due Loans:
30-59 Days	30-59 Days		$	1,478			$	2,302			$	3,133			$	3,960			$	10,696			$	1,919			$	556			$	1,537			$	1,747			$	1,593
60-89 Days	60-89 Days			171				315				241				980				775				268				210				372				670				331
90 Days and Over	90 Days and Over			1				—				—				151				232				—				—				—				—				—
Total Loans Past Due 30-90+ Days	Total Loans Past Due 30-90+ Days			1,650				2,617				3,374				5,091				11,703				2,187				766				1,909				2,417				1,924
Nonaccrual Loans	Nonaccrual Loans			5,457				9,216				14,087				47,175				101,767				856				3,124				1,676				1,528				1,991
Total Past Due and Nonaccrual Loans	Total Past Due and Nonaccrual Loans		$	7,107			$	11,833			$	17,461			$	52,266			$	113,470			$	3,043			$	3,890			$	3,585			$	3,945			$	3,915

 

Loans past due 30-59 days decreased from $2.3 million at December 31, 2016 to $1.5 million at December 31, 2017, and loans past due 60-89 days decreased from $315,000 at December 31, 2016 to $171,000 at December 31, 2017. This represents a $968,000 decrease in loans past due 30-89 days. We considered thisThe 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.

 

NonaccrualNonaccrual loans decreased $3.8$2.3 million from December 31, 20162021 to December 31, 2017. The $3.8 million2022. This decrease in nonaccrual loans was primarily driven by $5.0$2.9 million in paydowns, $665,000$245,000 in charge-offs, $270,000 in transfers to OREO, and $199,000 in$77,000 loans returned to accrual status,upgraded from non-accrual, offset by $2.3 million$924,000 in loans placed on non-accrual. The $5.5$2.9 million in paydowns of nonaccrual loans was driven by the payoff of a $2.0 million commercial real estate loan during the third quarter of 2022, which resulted in a recovery of $1.5 million. The $856,000 in nonaccrual loans at December 31, 2022 were generally secured by residential real estate loans. The $3.1 million in nonaccrual loans at December 31, 2017, and $9.2 million at December 31, 2016,2021 were generally secured by farmland, other commercial real estate, and other residential real estate loans. Management believes it has established adequate loan loss reserves for these credits.

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

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

37

---

Table of Contents

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, we institutemanagement 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 exceptexcept 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 automobilesautomobiles 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.

 

36

38

---

Table of Contents

 

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

 

		As of December 31,
		2017				2016				2015				2014				2013
		(dollars in thousands)
Past due 90 days or more still on accrual		$	1			$	—			$	—			$	151			$	232
Loans on nonaccrual status			5,457				9,216				14,087				47,175				101,767
Total non-performing loans			5,458				9,216				14,087				47,326				101,999
Real estate acquired through foreclosure			4,409				6,821				19,214				46,197				30,892
Other repossessed assets			—				—				—				—				—
Total non-performing assets		$	9,867			$	16,037			$	33,301			$	93,523			$	132,891
Non-performing loans to total loans			0.77	%			1.44	%			2.28	%			7.57	%			14.38	%
Non-performing assets to total assets			1.02	%			1.70	%			3.51	%			9.19	%			12.35	%
Allowance for non-performing loans		$	108			$	241			$	295			$	1,253			$	2,285
Allowance for non-performing loans to non-performing loans			1.98	%			2.62	%			2.09	%			2.65	%			2.24	%

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

The Bank does not have a formal loan modification program. If a borrower is unable to make contractual payments, we review the particular circumstances of that borrower’s situation and determine whether or not to negotiate a revised payment stream. The goal when restructuring a credit is to afford the borrower a reasonable period of time to remedy the issue causing cash flow constraints so that they may return to performing status over time.

Loan modifications have taken the form of a reduction in interest rate and/or curtailment of scheduled principal payments for a short-term period, usually three to six months, but in some cases until maturity of the loan. In some circumstances we may restructure real estate secured loans in a bifurcated fashion whereby there is a fully amortizing “A” loan at a market interest rate and an interest-only “B” loan at a reduced interest rate. The majority of restructured loans are collateral secured loans. If a borrower fails to perform under the modified terms, the loan(s) are placed on nonaccrual status and collection actions are intiated.

We consider any loan that is restructured for a borrower experiencing financial difficulties due to a borrower’s potential inability to pay in accordance with contractual terms of the loan to be a troubled debt restructuring. Specifically, we consider a concession involving a modification of the loan terms, such as (i) a reduction of the stated interest rate, (ii) a reduction or deferral of principal, or (iii) a reduction or deferral of accrued interest at a stated interest rate lower than the current market rate for new debt with similar risk all to be troubled debt restructurings. When a modification of terms is made for a competitive reason, we do not consider it to be a troubled debt restructuring. A primary example of a competitive modification would be an interest rate reduction for a performing customer’s loan to a market rate as the result of a market decline in rates.

Management periodically reviews renewals and modifications of previously identified TDRs for which there was no principal forgiveness, to consider if it is appropriate to remove the TDR classification. If the borrower is no longer experiencing financial difficulty and the renewal/modification did not contain a concessionary interest rate or other concessionary terms, management considers the potential removal of the TDR classification. If deemed appropriate based upon current underwriting, the TDR classification is removed as the borrower has complied with the terms of the loan at the date of renewal/modification and there was a reasonable expectation that the borrower would continue to comply with the terms of the loan after the date of the renewal/modification. Additionally, the TDR classification may be removed in circumstances in which the Company performs a non-concessionary re-modification of the loan at terms that were considered to be at market for loans with comparable risk. Management expects the borrower will continue to perform under the re-modified terms based on the borrower’s past history of performance.

If the borrower fails to perform, we place the loan on nonaccrual status and seek to liquidate the underlying collateral. The nonaccrual policy for restructured loans is identical to the nonaccrual policy for all loans. The policy calls for a loan to be reported as nonaccrual if it is maintained on a cash basis because of deterioration in the financial condition of the borrower, payment in full of principal and interest is not expected, or principal or interest is past due 90 days or more unless the assets are both well secured and in the process of collection. Changes in value for impairment, including the amount attributed to the passage of time, are recorded entirely within the provision for loan losses. Upon determination that a loan is collateral dependent, the loan is charged down to the fair value of collateral less estimated costs to sell.

37

---

Table of Contents

At December 31, 2017, we had six restructured loans totaling $3.0 million with borrowers who experienced deterioration in financial condition compared with nine restructured loans totaling $8.7 million at December 31, 2016. In general, these loans were granted interest rate reductions to provide cash flow relief to borrowers experiencing cash flow difficulties. At December 31, 2017, two loans totaling approximately $1.8 million had been granted principal payment deferrals until maturity. There were no concessions made to forgive principal relative to these loans, although we have recorded partial charge-offs for certain restructured loans. In general, these loans are secured by first liens on 1-4 residential or commercial real estate properties, or farmland. Restructured loans also included $467,000 of commercial loans at December 31, 2017. At December 31, 2017, $1.2 million of TDRs were performing according to their modified terms.

There were no modifications granted during 2017 or 2016 that resulted in loans being identified as TDRs. During the twelve months ended December 31, 2017, TDRs were reduced as a result of $1.6 million in payments. In addition, the TDR classification was removed from two loans that met the requirements discussed above in 2017. These loans totaled $4.1 million at December 31, 2016, and are no longer evaluated individually for impairment.

The following table sets forth information with respect to TDRs, non-performing loans, real estate acquired through foreclosure, and other repossessed assets.

		As of December 31,
		2017				2016				2015				2014				2013
		(dollars in thousands)
Total non-performing loans		$	5,458			$	9,216			$	14,087			$	47,326			$	101,999
TDRs on accrual			1,217				5,350				17,440				21,985				44,346
Total non-performing loans and TDRs on accrual		$	6,675			$	14,566			$	31,527			$	69,311			$	146,345
Real estate acquired through foreclosure			4,409				6,821				19,214				46,197				30,892
Other repossessed assets			—				—				—				—				—
Total non-performing assets and TDRs on accrual		$	11,084			$	21,387			$	50,741			$	115,508			$	177,237
Total non-performing loans and TDRs on accrual to total loans			0.94	%			2.28	%			5.10	%			11.09	%			20.63	%
Total non-performing assets and TDRs on accrual to total assets			1.14	%			2.26	%			5.35	%			11.35	%			16.47	%

See Footnote 3, “Loans”, to the financial statements for additional disclosure related to troubled debt restructuring.

		As of December 31,
		2022				2021				2020				2019				2018
		(dollars in thousands)
Loans on nonaccrual status		$	856				3,124				1,676				1,528				1,991
Troubled debt restructurings on accrual			133				340				480				475				910
Past due 90 days or more still on accrual			—				—				—				—				—
Total non-performing loans and TDRs on accrual			989				3,464				2,156				2,003				2,901
Real estate acquired through foreclosure			—				—				1,765				3,225				3,485
Other repossessed assets			—				—				—				—				—
Total non-performing assets and TDRs on accrual		$	989			$	3,464			$	3,921			$	5,228			$	6,386
Nonaccrual loans to total loans			0.08	%			0.31	%			0.17	%			0.17	%			0.26	%
Non-performing loans and TDRs on accrual to total loans			0.09	%			0.35	%			0.22	%			0.22	%			0.38	%
Non-performing assets and TDRs on accrual to total assets			0.07	%			0.24	%			0.30	%			0.42	%			0.60	%
Allowance for loan losses to nonaccrual loans			1,522.20	%			369.11	%			742.42	%			548.17	%			446.01	%
Allowance for non-performing loans		$	18			$	12			$	22			$	48			$	83
Allowance for non-performing loans to non-performing loans and TDRs on accrual			1.82	%			0.35	%			1.02	%			2.40	%			2.86	%

 

Interest income that would have been earnedrecorded if nonaccrual loans were on non-performing loansa current basis in accordance with their original terms was $465,000, $738,000,$265,000, $287,000, and $1.7 million$288,000 for the years ended December 31, 2017, 2016,2022, 2021, and 2015,2020, respectively. Interest income recognized on accruing non-performingNonperforming loans was $135,000, $445,000, and $710,000 for the years endedat December 31, 2017, 2016,2022, were $989,000, or 0.09% of total loans, at December 31, 2022, and 2015, respectively.$3.5 million, or 0.35% of total loans, at December 31, 2021.

 

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

 

Management has establishedutilizes loan grading procedures that result in specific allowance allocations for any estimated inherentthe 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. Prior to June 2017, the look-back period for historical losses was 12 quarters, weighted 40% for the most recent eight quarters and 20% for the previous four quarter period. Effective June 30, 2017, the Company extended the look-back period to 16 quarters on a prospective basis, weighted 40% for the most recent four quarters, then declining one tenth for each of the remaining annual periods. Management determined the four-year look-back period was appropriate as the four-year period more appropriately correlates to the period in which the current portfolio was underwritten and originated. 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.

 

38

---

Table

A significant portion of Contents

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

		As of December 31,
		2017				2016				2015				2014				2013
		(dollars in thousands)
Balances at beginning of period		$	8,967			$	12,041			$	19,364			$	28,124			$	56,680
Loans charged-off:
Real estate			750				2,157				5,050				17,943				28,879
Commercial			5				276				696				1,099				2,828
Consumer			51				178				268				354				773
Agriculture			95				18				118				30				128
Total charge-offs			901				2,629				6,132				19,426				32,608
Recoveries:
Real estate			714				1,189				2,338				2,726				1,622
Commercial			59				334				723				614				1,212
Consumer			130				368				240				213				266
Agriculture			33				114				8				13				252
Total recoveries			936				2,005				3,309				3,566				3,352
Net charge-offs (recoveries)			(35	)			624				2,823				15,860				29,256
Provision (negative provision) for loan losses			(800	)			(2,450	)			(4,500	)			7,100				700
Balance at end of period		$	8,202			$	8,967			$	12,041			$	19,364			$	28,124
Allowance for loan losses to period-end loans			1.15	%			1.40	%			1.95	%			3.10	%			3.96	%
Net charge-offs (recoveries) to average loans			(0.01	%)			0.10	%			0.44	%			2.39	%			3.71	%
Allowance for loan losses to non-performing loans			150.27	%			97.30	%			85.48	%			40.92	%			27.57	%
Allowance for loan losses for loans individually evaluated for impairment		$	219			$	399			$	428			$	752			$	3,471
Loans individually evaluated for impairment			7,173				15,131				31,776				71,993				149,883
Allowance for loan losses to loans individually evaluated for impairment			3.05	%			2.64	%			1.35	%			1.04	%			2.32	%
Allowance for loan losses for loans collectively evaluated for impairment		$	7,983			$	8,568			$	11,613			$	18,612			$	24,653
Loans collectively evaluated for impairment			704,942				624,105				586,890				553,006				559,443
Allowance for loan losses to loans collectively evaluated for impairment			1.13	%			1.37	%			1.98	%			3.37	%			4.41	%

The allowance for loan losses is a reserve established through charges to earnings in the form of a provision for loan losses. The allowance for loan lossesportfolio is comprised of general reserves and specific reserves. The loan loss reserve, as a percentage of total loans at December 31, 2017, decreased to 1.15% from 1.40% at December 31, 2016. The change in loan loss reserve as a percentage of total loans between periods is attributable to growthsecured by real estate. A decline in the portfolio drivenvalue 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 new loans underwritten with lower loss expectations, improving historical loss experience, improvement in risk grade classification metrics, improved charge-off levels,the Company’s Board of Directors. These appraisers possess prerequisite certifications and improved past due trends. The allowance for loan losses to non-performing loans was 150.27% at December 31, 2017, compared with 97.30% at December 31, 2016. Net recoveries in 2017 totaled $35,000.

39

---

Tableknowledge of Contents

The following table sets forth the net charge-offs (recoveries) for the periods indicated:local and regional marketplace.

 

		Year Ended December 31, 2017				Year Ended December 31, 2016				Year Ended December 31, 2015
		(in thousands)
Commercial		$	(54	)		$	(58	)		$	(27	)
Commercial Real Estate			(361	)			(339	)			1,225
Residential Real Estate			397				1,307				1,487
Consumer			(64	)			(200	)			37
Agriculture			62				(96	)			110
Other			(15	)			10				(9	)
Total net charge-offs (recoveries)		$	(35	)		$	624			$	2,823

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 ourthe Bank’s historical loan loss experience, the growth, composition and diversification of ourits loan portfolio, current delinquency levels, loan quality grades, the results of recent regulatory examinations, and general economic conditions. Based on these factors, we applymanagement applies estimated loss percentages to the various categories of loans, not including any loan that has a specific allowance allocated to it, based on our historical experience, portfolio trends and economic and industry trends. This information is used by management to set the general reserve portion of the allowance for loan losses at a level it deems prudent.it.

 

39

---

Table of Contents

Generally, all loans identified as impaired are reviewed on a quarterly basis in order to determine whether a specific allowance is required.

Specific Reserve - A loan is considered impaired when,, based on current information, it is probable that wethe 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 LoanLoan..” 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. These specific reserves are determined on an individual loan basis based on management’s current evaluation of our loss exposure for each credit given the payment status, financial condition of the borrower and value of any underlying collateral. Loans for which specific reserves have been provided are excluded from the general reserve calculations described below. Changes in specific reserves from period to period are the result of changes in the circumstances of individual loans such as charge-offs, pay-offs, changes in collateral values or other factors.above.

 

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

		As of December 31,
		2022				2021				2020				2019				2018
		(dollars in thousands)
Balances at beginning of period		$	11,531			$	12,443			$	8,376			$	8,880			$	8,202
Loans charged-off:
Real estate			558				2,332				231				322				450
Commercial			31				19				32				37				50
Consumer			249				131				493				663				95
Agriculture			—				44				46				266				13
Other			—				—				—				—				8
Total charge-offs			838				2,526				802				1,288				616
Recoveries:
Real estate			2,099				228				352				597				1,437
Commercial			38				172				29				106				261
Consumer			75				49				45				75				69
Agriculture			45				15				30				3				15
Other			—				—				13				3				12
Total recoveries			2,257				464				469				784				1,794
Net charge-offs (recoveries)			(1,419	)			2,062				333				504				(1,178	)
Provision (negative provision) for loan losses			80				1,150				4,400				—				(500	)
Balance at end of period		$	13,030			$	11,531			$	12,443			$	8,376			$	8,880
Allowance for loan losses to period-end loans			1.17	%			1.15	%			1.29	%			0.90	%			1.16	%
Net charge-offs (recoveries) to average loans			(0.13	)%			0.22	%			0.03	%			0.06	%			(0.16	%)
Allowance for loan losses to non-performing loans and TDRs on accrual			1,317.49	%			332.88	%			577.13	%			418.17	%			306.10	%

The loan loss reserve, as a percentage of total loans at December 31, 2022, was 1.17% compared to 1.15% at December 31, 2021. The allowance for loan losses represents management’s estimate of the amount necessary to provide for probable losses in the loan portfolio in the normal course of business. Due to the uncertainty of risks in the loan portfolio, management’s judgment of the amount of the allowance necessary to absorb loan losses is approximate. The allowancenon-performing loans was 1,317.49% at December 31, 2022, compared with 332.88% at December 31, 2021.

A provision for loan losses is also subject to regulatory examinations and may be adjusted in responseof $80,000 was recorded for the year ended December 31, 2022, compared to a determination by the regulatory agencies as to its adequacy in comparison with peer institutions.

We make specific allowances for each impaired loan based on its type and risk classification as discussed above. At year-end 2017, the allowanceprovision for loan losses of $1.2 million for 2021, and $4.4 million for 2020. The loan loss provision for the year ended December 31, 2022 was primarily attributable to total non-performing loans increasedgrowth trends within the portfolio, offset by a recovery of $1.5 million recognized during the third quarter and its impact on the historical loss percentages. The 2021 loan loss provisions were attributable to 150.27% from 97.30% at year-end 2016. It is important to look more closely at this ratio as a significant portion of impaired loans are collateral dependentgrowth trends within the portfolio and have been charged down tonet loan charge-offs impacting historical loss percentages during the estimated fair value of the underlying collateral less cost to sell. Please see the next table for comparison and disclosure of recorded investment less allocated allowance relative to the unpaid principal balance. Impaired loans have been assessed for collectability which considered, among other things, the borrower’s ability to repay, the value of the underlying collateral, and other market conditions to ensure that the allowance for loan losses is adequate to absorb probable incurred losses.periods.

 

40

---

Table of Contents

The following table presents the unpaid principal balance, recorded investment and allocated allowance related to loans individually evaluated for impairment in the commercial real estate and residential real estate portfolios as of December 31, 2017 and 2016.

		December 31, 2017								December 31, 2016
		Commercial Real Estate				Residential Real Estate				Commercial Real Estate				Residential Real Estate
		(in thousands)
Unpaid principal balance		$	4,734			$	5,456			$	10,985			$	10,439
Prior charge-offs			(2,099	)			(1,506	)			(5,131	)			(1,818	)
Recorded investment			2,635				3,950				5,854				8,621
Allocated allowance			—				(206	)			(35	)			(350	)
Recorded investment, less allocated allowance		$	2,635			$	3,744			$	5,819			$	8,271
Recorded investment, less allocated allowance/ Unpaid principal balance			55.66	%			68.62	%			52.97	%			79.23	%

Based on prior charge-offs, the current recorded investments in loans individually evaluated for impairment in the commercial real estate and residential real estate segments of the portfolio are significantly below the unpaid principal balances of those loans. The recorded investment net of the allocated allowance was 55.66% and 68.62% of the unpaid principal balance in the commercial real estate and residential real estate segments, respectively, at December 31, 2017.

The following table illustrates recent trends in loans collectively evaluated for impairment and the related allowance for loan losses by portfolio segment:

		December 31, 2017												December 31, 2016
		Loans				Allowance				% to Total				Loans				Allowance				% to Total
		(dollars in thousands)
Commercial		$	113,184			$	879				0.78	%		$	97,166			$	462				0.48	%
Commercial real estate			299,751				4,032				1.35				251,529				4,859				1.93
Residential real estate			231,860				2,694				1.16				227,668				3,076				1.35
Consumer			18,438				64				0.35				9,817				8				0.08
Agriculture			41,154				313				0.76				37,448				161				0.43
Other			555				1				0.18				477				2				0.42
Total		$	704,942			$	7,983				1.13	%		$	624,105			$	8,568				1.37	%

The allowance for those loan losses related to loans collectively evaluated for impairment trended downward from 1.37% at December 31, 2016 to 1.13% at December 31, 2017 as a result of declining historical charge-off levels and improving trends in loan category risk ratings. The residential real estate segment constitutes approximately 32.9% of total loans collectively evaluated for impairment. The related allowance for the residential real estate segment trended downward from 1.35% at December 31, 2016 to 1.16% at December 31, 2017 as net charge-offs declined from approximately $1.3 million in 2016 to $397,000 in 2017. The commercial real estate segment constitutes approximately 42.5% of total loans collectively evaluated for impairment. The related allowance for the commercial real estate segment trended downward from 1.93% at December 31, 2016 to 1.35% at December 31, 2017. This is consistent with the decline in historical rates and improvement in loan quality within the commercial real estate segment. The overall decrease in the allowance also reflects improving historical loss experience, qualitative factors, improvement in risk grade classification metrics, improved charge-off levels, improved past due trends, and the negative provision.  

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 our ability to collect those loans. In general, we obtain updated appraisals on property securing our loans when circumstances are warranted such as at the time of renewal or when market conditions have significantly changed. We use qualified licensed appraisers approved by our Board of Directors. These appraisers possess prerequisite certifications and knowledge of the local and regional marketplace.

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.

41

---

Table of Contents

This assessment is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available or as events change. The allowance for loan losses has decreased as a percentage of loans outstanding to 1.15% at December 31, 2017 from 1.40% at December 31, 2016. This decline is the result of growth in the portfolio driven by new loans underwritten with lower loss expectations, improving historical loss experience, improvement in risk grade classification metrics, improved charge-off levels, and improved past due trends. The level of the allowance is based on estimates, and losses may ultimately vary from these estimates.

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. Loans categorized as watch list loans 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 to a point where more frequent monitoring is warranted. 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. These loans are reviewed to assist in assessing the adequacy of the allowance for loan losses.

In establishing the appropriate risk rating for specific assets, 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 special mention, substandard or doubtful.

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 we will sustain some losses if the deficiencies are not corrected.

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.

Specific reserves may be carried for accruing TDRs in compliance with restructured terms. Once a loan is deemed impaired or uncollectible as contractually agreed (other than performing TDRs), the loan is charged-off either partially or in-full against the allowance for loan losses, based upon the expected future cash flows discounted at the loan’s effective interest rate, or the fair value of collateral less estimated cost to sell with respect to collateral-based loans if collateral dependent.

As of December 31, 2017, $13.2 million of loans were classified as substandard, $164,000 classified as special mention and no loans classified as doubtful or loss. This compares with $21.9 million of loans classified as substandard, $497,000 classified as special mention and no loans classified as doubtful or loss as of December 31, 2016. The $8.7 million decrease in loans classified as substandard was primarily driven by $6.8 million in principal payments received, $270,000 in migration to OREO, $4.6 million in loans upgraded from substandard, and $790,000 in charge-offs, offset by $3.7 million in loans moved to substandard during 2017. Substandard loans are primarily concentrated in the residential real estate portfolio. As of December 31, 2017, $418,000 of the allowance for loan losses was allocated to substandard loans. This compares to allocations of $600,000 in the allowance for loan losses related to substandard loans at December 31, 2016.

42

---

Table of Contents

 

The following table depicts management’s allocation of the allowance for loan losses by loan type. Allowance funding and allocation istype based on management’s current evaluation of risk in each category, economic conditions, past loss experience, loan volume, past due history and other factors.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.

		As of December 31,
		2017								2016
		Amount of Allowance				Percent of Loans to Total Loans				Amount of Allowance				Percent of Loans to Total Loans
		(dollars in thousands)
Commercial		$	892				15.98	%		$	475				15.29	%
Commercial Real Estate:
Construction			301				8.05				470				5.68
Farmland			449				12.40				288				11.19
Nonfarm nonresidential			3,282				22.01				4,136				23.39
Residential Real Estate:
Multi-family			627				7.94				610				7.54
1-4 Family			2,273				25.17				2,816				29.42
Consumer			64				2.59				8				1.54
Agriculture			313				5.78				162				5.87
Other			1				0.08				2				0.08
Total		$	8,202				100.0	%		$	8,967				100.0	%

		As of December 31,
		2015								2014								2013
		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		$	818				13.93	%		$	2,046				9.75	%		$	3,221				7.45	%
Commercial Real Estate:
Construction			424				5.36				739				5.31				2,149				6.11
Farmland			364				12.35				1,094				12.39				1,623				10.04
Nonfarm nonresidential			6,205				22.72				9,098				28.07				12,642				32.71
Residential Real Estate:
Multi-family			422				7.13				886				6.70				1,449				6.61
1-4 Family			3,562				32.57				4,901				31.56				6,313				32.21
Consumer			122				1.62				274				1.82				416				2.03
Agriculture			122				4.25				319				4.31				305				2.71
Other			2				0.07				7				0.09				6				0.13
Total		$	12,041				100.0	%		$	19,364				100.0	%		$	28,124				100.00	%

Provision for Loan Losses –A negative provision for loan losses of $800,000 was recorded for the year ended December 31, 2017, compared with a negative provision for loan losses of $2.5 million for 2016 and a negative provision for loan losses of $4.5 million for 2015. The negative provision in 2017 was driven by declining historical loss rates, improvements in loan quality, and management’s assessment of risk within the portfolio. The total allowance for loan losses was $8.2 million, or 1.15% of total loans, at December 31, 2017, compared with $9.0 million, or 1.40% of total loans, at December 31, 2016, and $12.0 million, or 1.95% of total loans, at December 31, 2015. The decreased allowance is consistent with the overall trends within the portfolio. Substandard loans decreased by $8.7 million or 39.7% during 2017, net recoveries were $35,000 for 2017 compared to net charge-offs of $624,000 in 2016 and $2.8 million in 2015, and nonaccrual loans decreased by $3.8 million or 40.8% during 2017. Charge-offs for 2017 were concentrated in the loans secured by the residential real estate category of the portfolio. These net charge-offs consisted of $397,000 of residential real estate loans. We consider the size and volume of our portfolio as well as the credit quality of our loan portfolio based upon risk category classification when determining the loan loss provision for each period and the allowance for loan losses at period end.

43

---

Table of Contents

Foreclosed Properties – Foreclosed properties at December 31, 2017 were $4.4 million compared with $6.8 million at December 31, 2016. See Note 5, “Other Real Estate Owned”, to the financial statements. During 2017, we acquired $270,000 of OREO properties and sold properties totaling approximately $793,000. We value foreclosed properties at fair value less estimated cost to sell when acquired and expect to liquidate these properties to recover our investment in the due course of business.

OREO is recorded at fair market value less estimated cost to sell at time of acquisition. Any write-down of the property at the time of acquisition is charged to the allowance for loan losses. When foreclosed properties are acquired, management obtains a new appraisal or has staff from the Bank’s special assets group evaluate the latest in-file appraisal in connection with the transfer to OREO. We typically obtain 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.

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

		2017				2016				2015
		(in thousands)
Commercial Real Estate:
Construction, land development, and other land		$	4,335			$	6,571			$	12,344
Farmland			74				—				—
Nonfarm nonresidential			—				—				6,746
Residential Real Estate:
1-4 Family			—				250				124
		$	4,409			$	6,821			$	19,214

Net activity relating to other real estate owned during the years indicated is as follows:

		2017				2016				2015
		(in thousands)
OREO Activity
OREO as of January 1		$	6,821			$	19,214			$	46,197
Real estate acquired			270				1,273				5,513
Valuation adjustment write-downs			(1,963	)			(1,180	)			(9,855	)
Net gain (loss) on sale			74				222				(74	)
Proceeds from sale of properties			(793	)			(12,708	)			(22,567	)
OREO as of December 31		$	4,409			$	6,821			$	19,214

Net gain on sales, write-downs, and operating expenses for OREO totaled $2.0 million for the year ended December 31, 2017, compared with $1.5 million in 2016 and $12.3 million in 2015.

During the year ended December 31, 2017, fair value write-downs of $2.0 million were recorded compared with $1.2 million for 2016 and $9.9 million for 2015. The write-downs recorded in each year reflect fair value write-downs due to updated appraisals, changes in marketing strategies, and reductions in listing prices for certain properties. OREO sales totaled $793,000, $12.7 million, and $22.6 million during 2017, 2016, and 2015, respectively. We expect to resolve certain nonaccrual loans through the acquisition and sale of the underlying real estate collateral.

Investment Securities – The securities portfolio serves as a source of liquidity and earnings and contributes to the management of interest rate risk. Investments are made in various types of liquid assets, including short-term United States Treasury obligations and securities of various federal agencies, obligations of states and political subdivisions, corporate bonds, collateralized loan obligations, certificates of deposit at insured savings and loans and banks, bankers’ acceptances and federal funds. The investment policy also authorizes investment in mutual funds and stocks whose assets conform to the investments that we are authorized to make directly. The investment portfolio decreased by $41.9 million, or 21.5%, to $152.7 million at December 31, 2017, compared with $194.6 million at December 31, 2016 as the Bank sold selected securities to manage liquidity and interest rate risk.

44

---

Table of Contents

The following table sets forth the carrying value of our securities portfolio at the dates indicated.

		December 31, 2017																December 31, 2016
		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		$	22,105			$	2			$	(483	)		$	21,624			$	34,757			$	50			$	(708	)		$	34,099
Agency mortgage-backed: residential			65,935				117				(1,087	)			64,965				103,390				455				(1,492	)			102,353
Collateralized loan obligations			25,343				182				(20	)			25,505				11,203				—				—				11,203
State and municipal			33,303				508				(101	)			33,710				2,028				25				(8	)			2,045
Corporate bonds			6,838				78				—				6,916				3,069				24				(3	)			3,090
Total available for sale		$	153,524			$	887			$	(1,691	)		$	152,720			$	154,447			$	554			$	(2,211	)		$	152,790

		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		$	—			$	—			$	—			$	—			$	41,818			$	1,272			$	(18	)		$	43,072
Total held to maturity		$	—			$	—			$	—			$	—			$	41,818			$	1,272			$	(18	)		$	43,072

In 2013, the Bank transferred a portion of its tax-free municipal and taxable municipal bond portfolios from available for sale (AFS) to held to maturity (HTM). At that time, the transfer occurred at fair value with the unrealized loss of $1.3 million remaining in other comprehensive income. That unrealized loss has subsequently been amortized on the level yield method out of other comprehensive income with an offsetting entry reducing interest income as a yield adjustment through earnings. No gain or loss was recorded at the time of transfer in 2013. Given the Bank’s current balance sheet composition, interest rate risk profile, the current tax environment, and the Bank’s strategic plan, management reassessed the classification of the held to maturity securities and, effective December 1, 2017, transferred $41.4 million of tax-free municipals and taxable municipals from HTM to AFS. As a result, the $702,000 in remaining unamortized loss from the 2013 transfer was reclassified through a book value adjustment of these securities. At December 31, 2017, these securities were carried at fair value with unrealized holding gains and losses reported in other comprehensive income, net of tax, with the remaining securities classified as AFS.

The following table sets forth the contractual maturities, fair values and weighted-average yields for our available for sale securities held at December 31, 2017:

		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		$	—				—	%		$	—				—	%		$	5,788				2.19	%		$	15,836				2.18	%		$	21,624				2.18	%
Agency mortgage-backed: residential			—				—				2,956				2.64				9,415				2.31				52,594				2.46				64,965				2.45
Collateralized loan obligations			—				—				—				—				10,631				0.28				14,874				2.59				25,505				1.63
State and municipal			145				2.10				19,612				3.31				11,539				3.27				2,414				5.19				33,710				3.42
Corporate bonds			—				—				—				—				3,160				4.54				3,756				5.11				6,916				4.86
Total available for sale		$	145				2.10	%		$	22,568				3.22	%		$	40,533				2.20	%		$	89,474				2.61	%		$	152,720				2.59	%

 

---

Average yields in the table above were calculated on a tax equivalent basis using a federal income tax rateAllocation of 35%. 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.Allowance for Credit Losses

---

 

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 do not tend to experience heavy prepayments of principal and consequently, average life will not be shortened. If interest rates begin to fall, prepayments will generally increase. Non-agency issuer mortgage-backed securities do not carry a government guarantee. We limit our purchases of these securities to bank qualified issues with high credit ratings. We regularly monitor the performance and credit ratings of these securities and evaluate these securities, as we do all of our securities, for other-than-temporary impairment on a quarterly basis. At December 31, 2017, 81.0% of the agency mortgage-backed securities we held had contractual final maturities of more than ten years with a weighted average life of 23.9 years.

45

---

Table of Contents

		As of December 31,
		2022								2021
		Amount of Allowance				Percent of Loans to Total Loans				Amount of Allowance				Percent of Loans to Total Loans
		(dollars in thousands)
Commercial		$	2,827				20.71	%		$	2,888				22.04	%
Commercial Real Estate:
Construction			1,843				12.16				1,011				7.47
Farmland			782				5.87				840				6.83
Nonfarm nonresidential			4,981				35.23				4,328				34.53
Residential Real Estate:
Multi-family			360				4.07				381				5.01
1-4 Family			1,039				15.02				1,062				16.86
Consumer			591				3.17				538				3.64
Agriculture			604				3.73				480				3.59
Other			3				0.04				3				0.03
Total		$	13,030				100.0	%		$	11,531				100.0	%

 

Deposits – We attractThe Bank attracts both short-term and long-term deposits from the general public by offering a wide range of deposit accounts and interest rates. In recent years, we have been required by market conditions to rely increasingly on short to mid-term certificate accounts and other deposit alternatives, which are more responsive to market interest rates.

 

WeThe Bank primarily relyrelies on ourits banking office network to attract and retain deposits in ourits local markets, as well as deposit listing services, brokered deposits, deposit gathering networks, andhave in the past leveraged 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 ourthe Bank’s ability to attract and retain deposits.

During 2017,2022, total deposits decreased $2.9$7.9 million compared with 2016. During 2016, total deposits decreased $28.1 million compared with 2015.2021. The decrease in deposits for 2017 and 20162022 was primarily in higher cost certificatesmoney 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 balances.account balances, as well as money market and non-interest demand deposit accounts.

 

To evaluate our funding needs in light of deposit trends resulting from continually changing conditions, we evaluate simulated performance reports that forecast changes in margins along with other pertinent economic data. We continueThe Bank continues to offer attractively priced deposit products along ourits product line to allow usit to retain deposit customers and reduce interest rate risk during various rising and falling interest rate cycles.

We offer 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 and the cost of these funds have been, andat 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 our deposits for the periods indicated:

		For the Years Ended December 31,
		2017								2016								2015
		Average Balance				Average Rate				Average Balance				Average Rate				Average Balance				Average Rate
		(dollars in thousands)
Demand		$	129,088							$	119,736							$	113,576
Interest Checking			101,980				0.13	%			96,294				0.13	%			88,814				0.13	%
Money Market			145,281				0.55				136,423				0.58				112,350				0.57
Savings			35,486				0.17				34,257				0.18				35,604				0.21
Certificates of Deposit			452,443				0.93				466,007				0.88				557,441				0.96
Total Deposits		$	864,278							$	852,717							$	907,785
Weighted Average Rate							0.60	%							0.60	%							0.68	%

41

---

Table of Contents

 

The following table sets forth the average daily balances and weighted average rates paid for our certificates of depositdeposits for the periods indicated:

 

		For the Years Ended December 31,
		2017								2016								2015
		Average Balance				Average Rate				Average Balance				Average Rate				Average Balance				Average Rate
		(dollars in thousands)
Certificates of Deposit
Less than $250,000		$	419,816				1.01	%		$	437,955				0.88	%		$	524,279				0.95	%
$250,000 or more			32,627				0.92				28,052				0.97				33,162				1.12
Total		$	452,443				0.93	%		$	466,007				0.88	%		$	557,441				0.96	%

46

---

Table of Contents

		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, 20172022 the amount of ourthe Bank’s time deposits of $250,000 or more by time remaining until maturity:

 

Maturity Period	Maturity Period						Maturity Period
(in thousands)	(in thousands)
Three months or less		$	5,276			$	11,772
Three months through six months			1,995				69,705
Six months through twelve months			3,497				17,655
Over twelve months			20,963				7,391
Total		$	31,731			$	106,523

 

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

 

Borrowing – Deposits are the primary source of funds for lending andactivities, investment activities, and for general business purposes. We canThe Bank also use advances (borrowings)uses borrowings from the FHLB of Cincinnati to supplement the pool of lendable funds, meet deposit withdrawal requirements and manage the terms of liabilities. Advances from the FHLB borrowings are secured by the Bank’s stock in the FHLB, as well as the commercial real estate and substantially all of its first mortgage residential loans.loans under a blanket lien arrangement. At December 31, 2017,2022, the Bank had $11.8$70.0 million in advances outstanding borrowings from the FHLB and the capacity to increase borrowings by an additional $79.0$91.0 million. The FHLB of Cincinnati functions as a central reserve bank providing credit for savings banks and other member financial institutions. As a member, the Bank is required to own capital stock in the FHLB and is authorized to apply for advancesborrow on the security of such stock and certain of ourits 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 ourthe Bank’s FHLB advancesborrowings as of and for the periods indicated:

 

		December 31,
		2017				2016				2015
		(dollars in thousands)
Average balance outstanding		$	9,184			$	2,967			$	3,473
Maximum amount outstanding at any month-end during the period			26,830				22,458				8,705
End of period balance			11,797				22,458				3,081
Weighted average interest rate:
At end of period			1.48	%			0.85	%			2.65	%
During the period			1.31	%			2.34	%			2.73	%

Subordinated Capital Note – At December 31, 2017, the Bank had a subordinated capital note outstanding in the principal amount of $2.3 million. The note is unsecured, bears interest at three-month LIBOR plus 300 basis points adjusting quarterly, and qualifies as Tier 2 capital until five years before the note matures on July 1, 2020. Beginning on July 1, 2015, one-fifth of the principal amount of the subordinated note was excluded from Tier 2 capital each year until fully excluded during the year before maturity. At December 31, 2017, a total of $1.7 million of the outstanding balance was included in Tier 2 capital. The note requires quarterly principal payments of $225,000 plus interest. At December 31, 2017, the interest rate on this note was 4.34%.

		December 31,
		2022				2021				2020
		(dollars in thousands)
Average balance outstanding		$	50,274			$	20,152			$	34,101
Maximum amount outstanding at any month-end during the period			90,000				20,620				71,376
End of period balance			70,000				20,000				20,623
Weighted average interest rate:
At end of period			4.25	%			0.77	%			0.75	%
During the period			2.31	%			0.76	%			1.09	%

 

47

42

---

Table of Contents

 

Junior Subordinated Debentures – At December 31, 2017,2022, 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)

Porter Statutory Trust II

$

5,000

2/13/2004

3-month LIBOR + 2.85%

$

5,155

2/13/2034

Porter Statutory Trust III

3,000

4/15/2004

3-month LIBOR + 2.79%

3,093

4/15/2034

Porter Statutory Trust IV

10,000

12/14/2006

3-month LIBOR + 1.67%

10,433

3/1/2037

Ascencia Statutory Trust I

3,000

2/13/2004

3-month LIBOR + 2.85%

3,093

2/13/2034

$

21,000

$

21,774

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, 2017, the2022, 3-month LIBOR was 1.69%4.77%.

 

The trust preferred securities are subject to mandatory redemption, in whole or in part, upon repayment of the subordinated debentures at maturity or their earlier redemption at the liquidation preference. The subordinated debentures are redeemable before the maturity date at ourthe Company’s option at their principal amount plus accrued interest.

On April 15, 2016, At December 31, 2022, the Company completed the private placement of 580,000 common shares and 220,000 non-voting common shares to accredited investors resulting in total proceeds of $5.0 million. The investors in the private placement directed a portion of the purchase price to payis current on all deferred interest payments on junior subordinated debentures, bringing interest payments current through the second quarter of 2016.payments.

 

The Company has the option to defer interest payments on the subordinated debentures from time to time for a period not to exceed 20 consecutive quarters. Since the third quarter of 2016, we have been deferring interest payments on the junior subordinated debentures held by our trust subsidiaries, requiring the trust subsidiaries to defer distributions on the trust preferred securities held by investors. Deferred distributions on the $21.0 million of trust preferred securities outstanding totaled $1.2 million as of December 31, 2017. The deferral period expires after the second quarter of 2021, at which time we will be required to pay all accrued interest or be in default. A deferral period may begin at the Company’s discression so long as interest payments are current. We are prohibited from paying cash dividends on our preferred and common shares until such time as we have paid all deferred distributions on our trust preferred securities. So long as the Written Agreement remains in effect, we will be required to obtain the approval of the Federal Reserve Bank of St. Louis before making any interest payments on the subordinated debentures.

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 ourthe Company’s Tier 1 capital can consist of trust preferred securities and qualifying perpetual preferred stock. To the extent the amount of ourthe Company’s trust preferred securities exceeds the 25% limit, the excess would be includable in Tier 2 capital. As of December 31, 2017,2022, all of the Company’s trust preferred securities totaled 22%were included in and comprised 14% of its Tier 1 capital and 40% of its Tier 2 capital.

 

Each of the trusts issuing the trust preferred securities holds junior subordinated debentures issued with anan 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.

 

Senior DebtSubordinated Capital Notes – On June 30, 2017, the Company entered into a $10.0 million senior secured loan agreementThe Company’s subordinated notes mature on July 31, 2029 with a commercial bank.an optional prepayment date of July 31, 2025. The loan matures on June 30, 2022. Interest is payable quarterlynotes carry interest at a fixed rate of 5.75% until July 30, 2024 and then convert to variable at three-month LIBOR plus 250395 basis points through June 30, 2020,until maturity. The subordinated capital notes qualify as Tier 2 regulatory capital.

Capital

Stockholders’ equity increased $2.9 million to $133.9 million at which time quarterly principal paymentsDecember 31, 2022, compared with $131.0 million at December 31, 2021. The increase was due primarily to current year net income of $250,000 plus$18.3 million, offset by the other comprehensive loss for the year of $14.6 million attributable to the fair value decline in the available for sale investment portfolio driven by rising interest will commence. rates and changing credit spreads, and $1.5 million in dividends paid to common shareholders.

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

		Regulatory Minimums				Well-Capitalized Minimums				Basel III Plus Conservation Buffer				Limestone Bank
Common equity Tier 1 capital			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

Failure to meet minimum capital requirements could result in discretionary actions by regulators that, if taken, could have a first priority pledge of 100% ofmaterially adverse effect on the issued and outstanding stock of the Bank. The Company may prepay any amount due under the promissory note at any time without premium or penalty.Company’s financial condition.

 

48

43

---

Table of Contents

 

The Company contributed $9.0 millionBasel III rules require a “capital conservation buffer” of 2.5% above the borrowing proceedsregulatory 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 Bank as common equity Tier 1 capital. The remaining $1.0 millionbuffer amounts. These limitations establish a maximum percentage of the borrowing proceeds wereeligible retained by the lender in escrow to service quarterly interest payments. At December 31, 2017, the escrow account had a balance of $806,000.

The loan agreement contains customary representations, warranties, covenants and events of default, including the following financial covenants: (i) the Company must maintain minimum cash on hand of not less than $750,000 through June 30, 2018, and not less than $2,500,000 thereafter, (ii) the Company must maintain a total risk based capital ratio at least equal to 9% of risk-weighted assets to June 30, 2018, and 10% thereafter, (iii) the Bank must maintain a total risk based capital ratio at least equal to 10% of risk-weighted assets to June 30, 2018, and 11% thereafter, and (iv) non-performing assets of the Bank may not exceed 2.5% of the Bank’s total assets. Both the Company and Bank were in compliance with the covenants as of December 31, 2017.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 we meetthe 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 we meet our cash flow needs are met at a reasonable cost. We maintainManagement 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 ourthe 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, 2017,2022, the Bank had an unused borrowing capacity with the FHLB was $79.0of $91.0 million. Advances are collateralized by commercial real estate and first mortgage residential loans and borrowingunder a blanket lien arrangement. Borrowing capacity is based on the underlying book value of eligible pledged loans.

 

The Bank also has available on an unsecured basis federal funds borrowing linesline 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. However,Additionally, the availability of these lines could be affected by our financial position.

Historically, we have also utilizedBank may utilize brokered and wholesale deposits to supplement ourits funding strategy. At December 31, 2017, we had no brokered deposits.

 

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

Under the terms of the Merger Agreement, the Company is precluded from issuing additional common equity, preferred equity, andor debt to support cash flow needs and liquidity requirements. At December 31, 2017, cash on hand totaled $2.0 million, of which, $806,000 is held in escrow by the Company’s senior debt holder to service interest payments.

 

Capital

Stockholders’ equity increased $39.9 million to $72.7 million at December 31, 2017, compared with $32.7 million at December 31, 2016. The increase was due primarily to current year net income $38.5 million.Impact of Inflation and Changing Prices

 

The Company had a full valuation allowance against its net deferred taxfinancial 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 since 2011. During the fourth quarter of 2017, management concluded it was more-likely-than-not the asset would be utilized to reduce future taxes payable related to the future taxable income of the Company, and as such, reversed the valuation allowance. On December 22, 2017, the Tax Cuts and Jobs Act of 2017 was signed into law. Among other significant changes to the tax code, the new law lowered the federal corporate tax rate from 35% to 21% beginningliability structure that is essentially monetary in 2018.nature. As a result, interest rates have a more significant impact on performance than the Company revalued its net deferred tax asset at the new 21% rate. The combinationeffects of the reversalgeneral levels of the valuation allowanceinflation. Periods of high inflation are often accompanied by relatively higher interest rates, and the changeperiods of low inflation are accompanied by relatively lower interest rates. As market interest rates rise or fall in federal corporate tax rates, as well as income tax expense for the year, resulted in an income tax benefit of $31.9 million for the year ended December 31, 2017.

On June 30, 2017, the Company entered into a $10.0 million senior secured loan agreement with a commercial bank. The loan matures on June 30, 2022. Interest is payable quarterly at a rate of three-month LIBOR plus 250 basis points through June 30, 2020, at which time quarterly principal payments of $250,000 plus interest will commence. The loan is secured by a first priority pledge of 100% of the issued and outstanding stock of the Bank. The Company may prepay any amount due under the promissory note at any time without premium or penalty. A total of $9.0 million of loan proceeds was injectedrelation to the Bank as common equity Tier 1 capital.

On December 16, 2016, rates earned on loans and investments, the Company completed a 1-for-5 reverse stock splitvalue of its issued and outstanding common and non-voting common shares. The reverse stock split was intended to increasethese assets decreases or increases respectively. Inflation can also impact core non-interest expenses associated with delivering the trading price per share of the common shares, with the objective to make the common shares a more attractive and cost effective investment and enhance liquidity for shareholders. All share and per share data in this annual report has been adjusted to reflect the reverse stock split. Preferred shares were not affected by the 1-for-5 reverse stock split.Bank’s services.

 

49

44

---

Table of Contents

 

On April 15, 2016, the Company completed the private placement of 580,000 common sharesMaterial Cash Requirements and 220,000 non-voting common shares to accredited investors, raising total proceeds of $5.0 million. The investors in the private placement directed a portion of purchase price to pay all deferred interest payments on our junior subordinated debentures, bringing interest payments current through the second quarter of 2016. The remaining proceeds were retained for general corporate purposes and to support the Bank.Obligations

 

EachThe following table summarizes key obligations by maturity date or scheduled payment date and other commitments to make future payments as of the federal bank regulatory agencies has established risk-based capital requirements for banking organizations. The Basel III regulatory capital reforms became effective for the Company and Bank on January 1, 2015, and include new minimum risk-based capital and leverage ratios. These rules refine the definition of what constitutes “capital” for purposes of calculating those ratios, including the definitions of Tier 1 capital and Tier 2 capital. The final rules allowed banks and their holding companiesDecember 31, 2022:

		One year or less				More than 1 year but less than 3 years				3 years or more but less than 5 years				5 years or more				Total
		(dollars in thousands)
Time deposits		$	233,016			$	51,132			$	5,311			$	702			$	290,161
FHLB borrowing (1)			70,000				—				—				—				70,000
Operating leases			457				899				873				8,434				10,660
Junior subordinated debentures			—				—				—				21,000				21,000
Subordinated capital notes			—				—				—				25,000				25,000
Total		$	303,473			$	52,028			$	6,184			$	55,136			$	416,821

---

(1)         Fixed rate borrowings with less than $250 billion in assets a one-time opportunityrates ranging from 4.02% to opt-out of a requirement to include unrealized gains and losses in accumulated other comprehensive income in their capital calculation. The Company and the Bank opted out of this requirement. The rules also establish a “capital conservation buffer” of 2.5% above the regulatory minimum risk-based capital ratios. Once the capital conservation buffer is fully phased in, the minimum ratios are a common equity Tier 1 risk-based capital ratio of 7.0%, a Tier 1 risk-based capital ratio of 8.5%4.38%, and a total risk-based capital ratio of 10.5%. The phase-in of the capital conservation buffer requirement beganmaturing in January 2016 at 0.625% of risk-weighted assets and increases each year until fully implemented in January 2019. An institution is subject to limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses if capital levels fall below minimum levels plus the buffer amounts. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions.2023.

 

The following table shows the ratios of Tier 1 capital, common equity Tier 1, and total capital to risk-adjusted assets and the leverage ratios (excluding the capital conservation buffer) for the Bank at December 31, 2017:

		Regulatory Minimums				Well-Capitalized Minimums				Limestone Bank
Tier 1 capital			6.0	%			8.0	%			10.35	%
Common equity Tier 1 capital			4.5				6.5				10.35
Total risk-based capital			8.0				10.0				11.61
Tier 1 leverage ratio			4.0				5.0				8.70

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

Off BalanceOff-Balance Sheet Arrangements

 

In the normal course of business, we enterthe Bank enters into various transactions, which, in accordance with GAAP, are not included in ourthe Company’s consolidated balance sheets. We enterThe Bank enters into these transactions to meet the financing needs of ourits 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, 20172022 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 ourthe 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				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)																				(dollars in thousands)
Commitments to extend credit		$	37,862			$	36,699			$	19,542			$	33,419			$	127,522			$	59,632			$	63,018			$	30,369			$	48,679			$	201,698
Standby letters of credit			2,588				—				1				—				2,589				1,087				4				—				—				1,091
Total		$	40,450			$	36,699			$	19,543			$	33,419			$	130,111			$	60,719			$	63,022			$	30,369			$	48,679			$	202,789

 

Standby Letters of Credit – Standby letters of credit are written conditional commitments we issue 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, we may be required to fund the commitment. The maximum potential amount of future payments we could be required to make is represented by the contractual amount of the commitment. If the commitment is funded, we would be entitled to seek recovery from the borrower. Our policies generally require that standby letter of credit arrangements be underwritten in a manner consistent with a loan of similar characteristics.

50

---

Table of Contents

Commitments to Extend Credit – We enterThe 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 ourthe Bank’s commitments to extend credit are contingent upon borrowers maintaining specific credit standards at the time of loan funding. We minimize ourThe 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 $19.8$12.1 million at December 31, 20172022 and $14.6 million at December 31, 2016.

Contractual Obligations

The following table summarizes our contractual obligations and other commitments to make future payments as of December 31, 2017:

		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		$	204,018			$	205,986			$	14,231			$	—			$	424,235
FHLB borrowing (1)			10,200				665				836				96				11,797
Subordinated capital note			900				1,350				—				—				2,250
Junior subordinated debentures			—				—				—				21,000				21,000
Senior debt			—				500				2,000				7,500				10,000
Total		$	215,118			$	208,501			$	17,067			$	28,596			$	469,282

---

(1)	Fixed rate borrowings with rates ranging from 0% to 5.24%, and maturities ranging from 2018 through 2033, averaging 1.48%.

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.

We have 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.2021.

 

5145

---

Table of Contents

 

Item 7A. Item7A.Quantitative and Qualitative Disclosures About Market Risk

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, we manage ourthe Bank manages its exposure to adverse changes in interest rates through asset and liability management activities within guidelines established by ourthe 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 ourthe 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 ourthe 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 instantaneousinstantaneous 100 basis point increase in interest rates, the base net interest income would decrease by an estimated 2.1% at December 31, 2022 compared with a decrease of 1.3% at December 31, 2021. Given an instantaneous 100 basis point decrease in interest rates, the base net interest income would increase by an estimated 0.9%0.3% at December 31, 20172022 compared with ana decrease of 2.5%0.8% at December 31, 2016. 2021.

The following table indicates the estimated impact on net interest income under various interest rate scenarios for the year ended December 31, 2017,2022, as calculated using the static shock model approach:

 

		Change in Future Net Interest Income								Change in Future Net Interest Income
		Dollar Change				Percentage Change				Dollar Change				Percentage Change
		(dollars in thousands)								(dollars in thousands)
+ 200 basis points		$	545				1.7	%		$	(1,952	)			(3.6	)%
+ 100 basis points			271				0.9				(1,172	)			(2.1	)
- 100 basis points			(1,061	)			(3.3	)			145				0.3
- 200 basis points			(2,384	)			(7.5	)			(950	)			(1.7	)

 

ImplementationImplementation of strategies to mitigate the risk of changing interest rates in the future, could lessen ourthe 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.

The following table sets forth the amounts of our interest-earning assets and interest-bearing liabilities outstanding at December 31, 2017, which we anticipate, based upon certain assumptions, to reprice or mature in each of the future time periods shown. The projected repricing of assets and liabilities anticipates prepayments and scheduled rate adjustments, as well as contractual maturities under an interest rate unchanged scenario within the selected time intervals. While we believe such assumptions are reasonable, we cannot provide assurance that assumed repricing rates will approximate actual future activity.

 

5246

---

Table of Contents

		Volume Subject to Repricing Within
		0 – 90 Days				91 – 181 Days				182 – 365 Days				1 – 5 Years				Over 5 Years				Non- Interest Sensitive				Total
		(dollars in thousands)
Assets:
Federal funds sold and short-term investments		$	25,966			$	—			$	—			$	—			$	—			$	—			$	25,966
Investment securities			46,712				2,726				7,649				58,131				37,056				516				152,790
FHLB stock			7,323				—				—				—				—				—				7,323
Loans held for sale			70				—				—				—				—				—				70
Loans, net of allowance			272,599				48,677				84,009				260,961				45,869				(8,202	)			703,913
Fixed and other assets			—				—				—				—				—				80,739				80,739
Total assets		$	352,670			$	51,403			$	91,658			$	319,092			$	82,925			$	73,053			$	970,801
Liabilities and Stockholders’ Equity
Interest-bearing checking, savings, and money market accounts		$	285,403			$	—			$	—			$	—			$	—			$	—			$	285,403
Certificates of deposit			74,560				52,197				76,126				221,184				168				—				424,235
Borrowed funds			43,274				208				233				1,187				145				—				45,047
Other liabilities			—				—				—				—				—				143,443				143,443
Stockholders’ equity			—				—				—				—				—				72,673				72,673
Total liabilities and stockholders’ equity		$	403,237			$	52,405			$	76,359			$	222,371			$	313			$	216,116			$	970,801
Period gap		$	(50,567	)		$	(1,002	)		$	15,299			$	96,721			$	82,612
Cumulative gap		$	(50,567	)		$	(51,569	)		$	(36,270	)		$	60,451			$	143,063
Period gap to total assets			(5.21	)%			(0.10	)%			1.58	%			9.96	%			8.51	%
Cumulative gap to total assets			(5.21	)%			(5.31	)%			(3.74	)%			6.23	%			14.74	%
Cumulative interest-earning assets to cumulative interest-bearing liabilities			87.46	%			88.68	%			93.18	%			108.01	%			118.96	%

The one-year cumulative gap position as of December 31, 2017 was negative $36.3 million or 3.7% of total assets. This is a one-day position that is continually changing and is not necessarily indicative of the Company’s position at any other time. Any gap analysis has inherent shortcomings because certain assets and liabilities may not move proportionally as interest rates change.

53

---

Table of Contents

 

Item 8. Item8.Financial Statements and Supplementary Data

Financial Statements and Supplementary Data

 

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

 

Report of Independent Registered Public Accounting Firm 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

Consolidated Balance Sheets as of December 31, 2017 and 2016

Consolidated Statements of Operations for the Years Ended December 31, 2017, 2016, and 2015

Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2017, 2016, and 2015

Consolidated Statements of Change in Stockholders’ Equity for the Years Ended December 31, 2017, 2016, and 2015

Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 2016, and 2015

Notes to Consolidated Financial Statements

 

54

47

---

Table of Contents

  

Crowe Horwath LLP Independent Member Crowe Horwath InternationalGlobal

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

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

Louisville, Kentucky

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of PorterLimestone Bancorp, Inc. (the "Company") as of December 31, 20172022 and 2016,2021, the related consolidated statements of operations, comprehensive income, (loss), changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2017,2022, 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, 20172022 and 2016,2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017,2022, 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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting in accordance with the standards of the PCAOB. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion in accordance with the standards of the PCAOB.

Our audits included performing procedures to assess the risksrisks 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, 2022 and the valuation allowance for loans not considered impaired and collectively evaluated for impairment (“general component”), totaling $13,030,000 as of December 31, 2022.

48

---

Table of Contents

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 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.

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.

o

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

 

 

/s/Crowe Horwath, LLP

 

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

 

Louisville, Kentucky

February 28, 20182023

 

5549

---

Table of Contents

 

PORTERLIMESTONE BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

December31,

(Dollar amounts in thousands except share data)

 

		2017				2016				2022				2021
Assets
Cash and due from banks		$	8,137			$	9,449			$	7,159			$	10,493
Interest bearing deposits in banks			25,966				56,867				37,476				67,110
Cash and cash equivalents			34,103				66,316				44,635				77,603
Securities available for sale			152,720				152,790				180,173				214,213
Securities held to maturity (fair value of $0 and $43,072, respectively)			—				41,818
Loans held for sale			70				—
Loans, net of allowance of $8,202 and $8,967, respectively			703,913				630,269
Premises and equipment, net			16,789				17,848
Other real estate owned			4,409				6,821
Securities held to maturity (fair value of $34,896 and $46,280, respectively)											43,282				46,460
Loans, net of allowance of $13,030 and $11,531, respectively											1,098,824				990,309
Premises and equipment, net											22,103				21,575
Premises held for sale											—				310
Federal Home Loan Bank stock			7,323				7,323				5,176				5,116
Bank owned life insurance			15,229				14,838				31,132				23,946
Deferred taxes, net			31,313				—				21,283				21,583
Goodwill											6,252				6,252
Other intangible assets, net											1,733				1,989
Accrued interest receivable and other assets			4,932				7,154				7,862				6,336
Total assets		$	970,801			$	945,177			$	1,462,455			$	1,415,692
Liabilities and Stockholders’ Equity
Deposits
Non-interest bearing		$	137,386			$	124,395			$	268,954			$	274,083
Interest bearing			709,638				725,530				931,830				934,585
Total deposits			847,024				849,925				1,200,784				1,208,668
Federal Home Loan Bank advances			11,797				22,458				70,000				20,000
Accrued interest payable and other liabilities			6,057				15,911				11,813				10,065
Subordinated capital note			2,250				3,150
Junior subordinated debentures			21,000				21,000				21,000				21,000
Senior debt			10,000				—
Subordinated capital notes											25,000				25,000
Total liabilities			898,128				912,444				1,328,597				1,284,733
Commitments and contingent liabilities (Note 16)			—				—
Stockholders’ equity
Preferred stock, no par
Series E - 6,198 issued and outstanding; Liquidation preference of $6.2 million			1,644				1,644
Series F - 4,304 issued and outstanding; Liquidation preference of $4.3 million			1,127				1,127
Total preferred stockholders’ equity			2,771				2,771
Common stock, no par, 39,000,000 shares authorized, 6,039,864 and 4,632,933 voting, and 220,000 and 1,591,600 non-voting shares issued and outstanding, respectively			125,729				125,729
Commitments and contingent liabilities (Note 15)											—				—
Stockholders’ equity
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			24,497				24,097				26,312				25,625
Retained deficit			(75,108	)			(113,561	)			(14,954	)			(31,769	)
Accumulated other comprehensive loss			(5,216	)			(6,303	)
Total common stockholders’ equity			69,902				29,962
Total stockholders' equity			72,673				32,733
Total liabilities and stockholders’ equity		$	970,801			$	945,177
Accumulated other comprehensive loss											(18,139	)			(3,536	)
Total common stockholders’ equity											133,858				130,959
Total liabilities and stockholders’ equity										$	1,462,455			$	1,415,692

 

See accompanying notes.

 

5650

---

Table of Contents

 

 

PORTERLIMESTONE BANCORP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONSOPERATIONS

Years Ended December31,

(Dollar amounts in thousands except per share data)

 

		2017				2016				2015				2022				2021				2020
Interest income
Loans, including fees		$	31,866			$	30,537			$	31,251			$	50,332			$	44,445			$	45,093
Taxable securities			4,399				3,886				4,076				6,165				4,612				5,042
Tax exempt securities			571				620				764				660				643				370
Federal funds sold and other			686				559				483				653				215				248
			37,522				35,602				36,574				57,810				49,915				50,753
Interest expense
Deposits			5,190				5,093				6,160				5,202				3,518				7,796
Federal Home Loan Bank advances			120				70				95				1,162				154				371
Senior debt			194				—				—
Senior debt															—				—				119
Junior subordinated debentures			753				671				606				867				521				660
Subordinated capital note			148				147				161
Federal funds purchased and other			—				—				1
			6,405				5,981				7,023
Subordinated capital notes															1,501				1,500				1,206
															8,732				5,693				10,152
Net interest income			31,117				29,621				29,551				49,078				44,222				40,601
Negative provision for loan losses			(800	)			(2,450	)			(4,500	)
Net interest income after negative provision for loan losses			31,917				32,071				34,051
Provision for loan losses															80				1,150				4,400
Net interest income after provision for loan losses															48,998				43,072				36,201
Non-interest income
Service charges on deposit accounts			2,253				1,958				1,851				2,775				2,256				2,268
Bank card interchange fees			972				849				839				4,278				4,116				3,376
Income from bank owned life insurance			412				417				295				706				526				424
Other real estate owned rental income			—				456				1,346
Net gain on sales of securities			288				216				1,766
Gain on extinguishment of junior subordinated debt			—				—				883
Gain on sale of other real estate owned															—				191				—
Gain (loss) on sales and calls of securities, net															(3	)			460				(5	)
Gain on sale of premises held for sale															163				—				—
Other			930				868				715				958				890				781
			4,855				4,764				7,695				8,877				8,439				6,844
Non-interest expense
Salaries and employee benefits			15,090				15,508				15,857				19,021				18,132				17,751
Occupancy and equipment			3,420				3,517				3,449				4,201				4,041				4,001
Deposit account related expense															2,249				2,158				1,890
Data processing expense															1,591				1,512				1,502
Professional fees															818				952				937
Marketing expense															605				727				629
FDIC insurance			1,412				1,660				2,212				360				405				229
Data processing expense			1,256				1,185				1,128
Marketing expense			1,098				973				560
State franchise and deposit tax			956				965				1,120
Professional fees			978				1,568				2,885
Communications			722				706				663
Deposit and state franchise tax															396				375				1,475
Communications expense															419				681				856
Insurance expense			540				565				589				420				415				428
Postage and delivery			395				359				400				622				605				627
Litigation and loan collection expense			179				8,805				1,141
Other real estate owned expense			1,973				1,541				12,302
Merger expenses															691				—				—
Other			2,199				2,215				2,653				2,364				1,968				2,091
			30,218				39,567				44,959				33,757				31,971				32,416
Income (loss) before income taxes			6,554				(2,732	)			(3,213	)
Income tax expense (benefit)			(31,899	)			21				—
Net income (loss)			38,453				(2,753	)			(3,213	)
Less:
Earnings (loss) allocated to participating securities			967				(88	)			(336	)
Net income (loss) attributable to common shareholders		$	37,486			$	(2,665	)		$	(2,877	)
Basic and diluted income (loss) per common share		$	6.15			$	(0.46	)		$	(0.62	)
Income before income taxes															24,118				19,540				10,629
Income tax expense															5,776				4,631				1,624
Net income															18,342				14,909				9,005
Basic and diluted income per common share														$	2.40			$	1.96			$	1.20

 

See accompanying notes.

 

57

51

---

Table of Contents

 

 

PORTERLIMESTONE BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Years Ended December 31,

(in thousands)

 

		2017				2016				2015
Net income (loss)		$	38,453			$	(2,753	)		$	(3,213	)
Other comprehensive income (loss):
Unrealized gain (loss) on securities:
Unrealized gain (loss) arising during the period			1,141				(1,917	)			(490	)
Transfer of investment securities from held to maturity to available for sale			702				—				—
Amortization during the period of net unrealized loss transferred to held to maturity			119				129				129
Reclassification of adjustment for gains included in net income			(288	)			(216	)			(1,766	)
Net unrealized gain/(loss) recognized in comprehensive income			1,674				(2,004	)			(2,127	)
Tax effect			(587	)			—				—
Other comprehensive income (loss)			1,087				(2,004	)			(2,127	)
Comprehensive income (loss)		$	39,540			$	(4,757	)		$	(5,340	)

		2022				2021				2020
Net income		$	18,342			$	14,909			$	9,005
Other comprehensive income (loss):
Unrealized gain (loss) on securities:
Unrealized gain (loss) arising during the period			(19,197	)			25				1,012
Amortization during period of net unrealized gain transferred to held to maturity			(264	)			(346	)			—
Less reclassification adjustment for gains (losses) included in net income			(3	)			460				(5	)
Net unrealized gain (loss) recognized in comprehensive income			(19,458	)			(781	)			1,017
Tax effect			4,855				195				(253	)
Other comprehensive income (loss)			(14,603	)			(586	)			764
Comprehensive income		$	3,739			$	14,323			$	9,769

 

See accompanying notes.

 

58

52

---

Table of Contents

 

 

PORTERLIMESTONE BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Years Ended December31,

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

 

			Shares																				Amount
							Preferred																				Preferred																Common
			Voting and Non-voting Common				Series B				Series D				Series E				Series F				Common				Series B				Series D				Series E				Series F				Additional Paid-In Capital				Retained Earnings (Deficit)				Accumulated Other Compre- hensive Income (Loss)				Total
Balances, December 31, 2014				2,978,103				40,536				64,580				6,198				4,304			$	113,238			$	2,229			$	3,552			$	1,644			$	1,127			$	21,442			$	(107,595	)		$	(2,172	)		$	33,465
Issuance of unvested stock				183,148				—				—				—				—				—				—				—				—				—				—				—				—				—
Terminated stock				(107,696	)			—				—				—				—				—				—				—				—				—				—				—				—				—
Forfeited unvested stock				(6,368	)			—				—				—				—				—				—				—				—				—				—				—				—				—
Stock-based compensation expense				—				—				—				��				—				—				—				—				—				—				445				—				—				445
Net loss				—				—				—				—				—				—				—				—				—				—				—				(3,213	)			—				(3,213	)
Net change in accumulated other comprehensive income, net of taxes				—				—				—				—				—				—				—				—				—				—				—				—				(2,127	)			(2,127	)
Debt to equity exchange				240,000				—				—				—				—				1,680				—				—				—				—				1,767				—				—				3,447
Conversion of preferred stock to common and non-voting common stock				2,102,320				(40,536	)			(64,580	)			—				—				5,781				(2,229	)			(3,552	)			—				—				—				—				—				—
Balances, December 31, 2015				5,389,507				—				—				6,198				4,304			$	120,699			$	—			$	—			$	1,644			$	1,127			$	23,654			$	(110,808	)		$	(4,299	)		$	32,017
Issuance of unvested stock				35,465				—				—				—				—				—				—				—				—				—				—				—				—				—
Forfeited unvested stock				(1,972	)			—				—				—				—				—				—				—				—				—				—				—				—				—
Reverse stock split rounding shares				1,533				—				—				—				—				—				—				—				—				—				—				—				—				—
Stock-based compensation expense				—				—				—				—				—				—				—				—				—				—				443				—				—				443
Net loss				—				—				—				—				—				—				—				—				—				—				—				(2,753	)			—				(2,753	)
Net change in accumulated other comprehensive income, net of taxes				—				—				—				—				—				—				—				—				—				—				—				—				(2,004	)			(2,004	)
Issuance of stock				800,000				—				—				—				—				5,030				—				—				—				—				—				—				—				5,030
Balances, December 31, 2016				6,224,533				—				—				6,198				4,304			$	125,729			$	—			$	—			$	1,644			$	1,127			$	24,097			$	(113,561	)		$	(6,303	)		$	32,733
Issuance of unvested stock				37,865				—				—				—				—				—				—				—				—				—				—				—				—				—
Forfeited unvested stock				(1,316	)			—				—				—				—				—				—				—				—				—				—				—				—				—
Reverse stock split rounding shares				(1,218	)			—				—				—				—				—				—				—				—				—				—				—				—				—
Stock-based compensation expense				—				—				—				—				—				—				—				—				—				—				400				—				—				400
Net income				—				—				—				—				—				—				—				—				—				—				—				38,453				—				38,453
Net change in accumulated other comprehensive income, net of taxes				—				—				—				—				—				—				—				—				—				—				—				—				1,087				1,087
Balances, December 31, 2017				6,259,864				—				—				6,198				4,304			$	125,729			$	—			$	—			$	1,644			$	1,127			$	24,497			$	(75,108	)		$	(5,216	)		$	72,673

		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, 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 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.

53

---

Table of Contents

LIMESTONE BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December31,

(in thousands)

		2022				2021				2020
Cash flows from operating activities
Net income		$	18,342			$	14,909			$	9,005
Adjustments to reconcile net income (loss) to net cash from operating activities
Depreciation, amortization and accretion, net			1,873				4,677				2,986
Provision for loan losses			80				1,150				4,400
Net amortization on securities			338				594				655
Stock-based compensation expense			884				699				580
Deferred taxes, net			5,155				4,326				1,798
Net realized gain on sales of other real estate owned			—				(191	)			—
Net realized (gain) loss on sales and calls of investment securities			3				(460	)			5
Net realized (gain) loss on disposal of premises and equipment			37				1				—
Net write-down on premises held for sale			—				45				150
Net gain on sale of premises held for sale			(163	)			—				—
Increase in cash surrender value of life insurance, net of premium expense			(686	)			(505	)			(404	)
Amortization of operating lease right-of-use assets			406				374				593
Net change in accrued interest receivable and other assets			(2,923	)			(3,346	)			(106	)
Net change in accrued interest payable and other liabilities			1,748				17				1,383
Net cash from operating activities			25,094				22,290				21,045
Cash flows from investing activities
Purchases of available for sale securities			(9,924	)			(91,189	)			(38,416	)
Proceeds from sales and calls of available for sale securities			—				7,500				9,030
Proceeds from maturities and prepayments of available for sale securities			24,492				37,038				34,881
Purchases of held to maturity securities			(658	)			(16,444	)			—
Proceeds from calls of held to maturity securities			1,314				1,704				—
Proceeds from maturities and prepayments of held to maturity securities			2,195				3,665				—
Proceeds from sale of other real estate owned			—				1,956				1,600
Improvements to other real estate owned			—				—				(140	)
Purchases of Federal Home Loan Bank stock			(727	)			—				(600	)
Proceeds from mandatory redemption of Federal Home Loan Bank stock			667				771				950
Net changes in loans			(109,099	)			(45,164	)			(37,772	)
Proceeds from sale of premises and equipment			—				1				—
Proceeds from sale of premises held for sale			473				705				—
Purchases of premises and equipment			(687	)			(1,274	)			(879	)
Purchase of bank owned life insurance			(6,500	)			—				(7,000	)
Net cash from investing activities			(98,454	)			(100,731	)			(38,346	)
Cash flows from financing activities
Net change in deposits			(7,884	)			89,061				92,632
Repayment of Federal Home Loan Bank advances			(120,000	)			(623	)			(145,766	)
Advances from Federal Home Loan Bank			170,000				—				105,000
Proceeds from issuance of subordinated capital notes			—				—				8,000
Repayment of senior debt			—				—				(5,000	)
Common shares withheld for taxes			(197	)			(87	)			(75	)
Cash dividends paid on common stock			(1,527	)			—				—
Net cash from financing activities			40,392				88,351				54,791
Net change in cash and cash equivalents			(32,968	)			9,910				37,490
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		$	7,925			$	5,788			$	10,422
Income taxes paid (refunded)			530				370				(346	)
Supplemental non-cash disclosure:
Transfer from premises and equipment to premises held for sale			—				—				310
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				—
Financed sales of other real estate owned			—				—				1,360

 

See accompanying notes.

 

5954

---

Table of Contents

PORTER BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31,

(in thousands)

		2017				2016				2015
Cash flows from operating activities
Net income (loss)		$	38,453			$	(2,753	)		$	(3,213	)
Adjustments to reconcile net income (loss) to net cash from operating activities
Depreciation and amortization			1,239				1,725				1,711
Negative provision for loan losses			(800	)			(2,450	)			(4,500	)
Net amortization on securities			1,246				1,297				1,434
Stock-based compensation expense			400				443				445
Deferred taxes, net			(31,899	)			—				—
Gain on extinguishment of junior subordinated debt			—				—				(883	)
Net (gain) loss on sales of loans held for sale			(46	)			(86	)			204
Loans originated for sale			(2,859	)			(5,145	)			(6,652	)
Proceeds from sales of loans held for sale			2,835				5,417				6,548
Net (gain) loss on sales of other real estate owned			(74	)			(222	)			74
Net write-down of other real estate owned			1,963				1,180				9,855
Net realized (gain) loss on sales and calls of investment securities			(288	)			(216	)			(1,766	)
Net (gain) loss on sale of premises and equipment			3				(1	)			—
Increase in cash surrender value of owned life insurance, net of premium expense			(391	)			(397	)			(274	)
Net change in accrued interest receivable and other assets			2,079				(814	)			810
Net change in accrued interest payable and other liabilities			(9,854	)			8,133				267
Net cash from operating activities			2,007				6,111				4,060
Cash flows from investing activities
Purchases of available for sale securities			(21,112	)			(41,827	)			(21,828	)
Sales and calls of available for sale securities			41,686				8,311				45,012
Maturities and prepayments of available for sale securities			21,838				22,876				21,084
Proceeds from calls of held to maturity securities			47				—				—
Proceeds from maturities of held to maturity securities			145
Proceeds from sales of loans not originated for sale			—				—				8,640
Proceeds from sale of other real estate owned			793				12,438				22,567
Loan originations and payments, net			(73,202	)			(22,368	)			(2,239	)
Proceeds from sale of premises and equipment			331				268				—
Purchases of premises and equipment			(284	)			(464	)			(385	)
Purchase of bank owned life insurance			—				(5,000	)			—
Net cash from investing activities			(29,758	)			(25,766	)			72,851
Cash flows from financing activities
Net change in deposits			(2,901	)			(28,072	)			(48,844	)
Net change in repurchase agreements			—				—				(1,341	)
Repayment of Federal Home Loan Bank advances			(55,661	)			(623	)			(17,671	)
Advances from Federal Home Loan Bank			45,000				20,000				5,000
Repayment of subordinated capital note			(900	)			(900	)			(900	)
Proceeds from senior debt			10,000				—				—
Issuance of common stock			—				2,231				—
Net cash from financing activities			(4,462	)			(7,364	)			(63,756	)
Net change in cash and cash equivalents			(32,213	)			(27,019	)			13,155
Beginning cash and cash equivalents			66,316				93,335				80,180
Ending cash and cash equivalents		$	34,103			$	66,316			$	93,335
Supplemental cash flow information:
Interest paid		$	5,665			$	5,253			$	7,076
Income taxes paid (refunded)			—				21				—
Supplemental non-cash disclosure:
Proceeds from common stock issuance directed by investors to pay junior subordinated debt interest		$	—				2,799				—
Transfer from loans to other real estate			270			$	1,273			$	5,513
Financed sales of other real estate owned			—				270				—
Effect of junior subordinated debt to equity exchange			—				—				4,330
Transfer from held to maturity to available for sale securities			41,380				—				—
AOCI component of transfer from held to maturity to available for sale, net of tax			456				—				—

See accompanying notes.

60

---

Table of Contents

 

PORTERLIMESTONE BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December31, 2017, 20162022, 2021 and 20202015

 

 

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation and Nature of Operations and Principles of Consolidation – The consolidated financial statements include PorterLimestone Bancorp, Inc. (Company) and its wholly-owned subsidiary, PBILimestone Bank, Inc. (Bank). The Bank completed a name change to Limestone Bank on February 20, 2018. The Company owns a 100% interestAll significant intercompany transactions and accounts have been eliminated in the Bank.consolidation.

 

The Company providesBank, established in 1902, is a state chartered non-member financial institution providing financial services through its officesbanking center locations in Centralsouth central, southern, and South Centralwestern Kentucky, as well as Lexington, Louisville, and Louisville. Its primary deposit products are checking, savings, and term certificate accounts, and its primary lending products are residential mortgage, commercial, agricultural, and real estate loans. Substantially all loans are collateralized by specific items of collateral including business assets and real estate. Commercial loans are expected to be repaid from cash flow from operations of businesses. There are no significant concentrations of loans to any one industry or customer. However, borrowers’ ability to repay their loans is dependent on the real estate and general economic conditions in the area. Other financial instruments which potentially represent concentrations of credit risk include deposit accounts in other financial institutions, federal funds sold, municipal securities, collateralized loan obligations, corporate securities, and bank owned life insurance.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.

 

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. The Bank is required to maintain average reserve balances with the Federal Reserve Bank of St. Louis.

 

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.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.

 

Management evaluatesIn evaluating securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position,, management considers the length of time and extent and duration of the unrealized loss, andto 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 Held for Sale – Loans held for sale include residential mortgage loans originated for sale into the secondary market and are carried at the lower of aggregate cost or fair value, as determined by outstanding commitments from investors. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings.

Mortgage loans held for sale are generally sold with servicing rights released. If sold with servicing retained, the carrying value of mortgage loans sold is reduced by the amount allocated to the servicing right. Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related loan sold.

Mortgage banking derivatives used in the ordinary course of business consist of mandatory forward sales contracts and rate lock loan commitments. Forward contracts represent future commitments to deliver loans at a specified price and date and are used to manage interest rate risk on loan commitments and mortgage loans held for sale. Rate lock commitments represent commitments to fund loans at a specific rate. These derivatives involve underlying items, such as interest rates, and are designed to transfer risk. Substantially all of these instruments expire within 60 days from the date of issuance. Notional amounts are amounts on which calculations and payments are based, but which do not represent credit exposure, as credit exposure is limited to the amounts required to be received or paid. Commitments to deliver loans and rate lock loan commitments were insignificant at year end.

61

---

Table of Contents

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.

 

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.

 

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 ourmanagement’s judgment, should be charged off.

 

55

---

Table of Contents

The allowance consists of specificspecific 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 CompanyBank 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’sloan’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-impairednon‑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 fourfive years with weighting towards the most recent periods.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.

62

---

Table of Contents

 

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.

 

●

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 flowsflow 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 flowsflow sufficiency to service the debt. Appraisals are obtained to support the loan amount.determination of collateral value.

 

●

Consumer loans depend on local economies. Consumer loans are generally secured by consumer assets,unsecured, but may be unsecured.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.

 

56

---

Table of Contents

●

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 fourfive years are used with weighting towards the most recent periods.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 economicmacro-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 more 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.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. Buildingsdepreciation and related components are depreciated using the straight-line method with useful lives generally ranging from 53 to 40 years. Furniture, fixtures and equipmentLeasehold improvements are depreciatedamortized using the straight-line or accelerated method withover terms of the related leases, including expected renewals, or over the useful lives generally ranging from 2 to 10 years.of the improvements, whichever is shorter. Maintenance and repairs are expensed as incurred while major additions and improvements are capitalized.

 

63

---

Table

Premises and equipment held for sale are recorded at fair value less estimated cost to sell at the time of Contents

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 a certain amount of stock based on theits 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.

 

Intangible Assets – Intangible assets with definite useful lives are included with other assets and amortized over their estimated useful lives to their estimated residual values, if any. Other intangible assets consist of core deposit intangible assets arising from whole bank and branch acquisitions. They are initially measured at fair value and then are amortized on an accelerated or straight-line basis over their estimated useful lives, which range from 7 to 10 years.

Bank Owned Life Insurance – The Bank has purchasedowns life insurance policies on certain key executives.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.

 

Long-TermGoodwill and Other Intangible Assets– PremisesGoodwill arises from business combinations and equipment, otheris 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 other long-term assetsdetermined to have an indefinite useful life are reviewednot amortized, but tested for impairment whenat 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 carrying amount may not be recoverableestimated 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 future undiscounted cash flows. If impaired, the assets are recordeda branch acquisition, which were initially measured at fair value through a charge to earnings.and then amortized on an accelerated method over the estimated useful life.

 

57

---

Table of Contents

Benefit Plans – Employee 401(k) and profit sharing plan expense is the amount of matching contributions. Deferred compensation and supplemental retirement plan expense allocates the benefits over years of service.

 

Stock-Based Compensation – Compensation cost is recognized for unvested stock awards issued to employees, based on the fair value of these awards at the date of grant. The market price of the Corporation’sCompany’s common stock at the date of grant is used for restricted 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 examinationexamination 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 when they are funded.upon funding.

 

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

 

Earnings (Loss) Allocated to Participating Securities – The Company has issued and outstanding unvested common shares to employees and directors through the stock incentiveits equity compensation plan. Earnings (loss) 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 ordinarynormal 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.

 

Dividend RestrictionsRestrictions – 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.

 

64

---

Table of Contents

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.

 

DDerivatives –erivative Instruments – Derivative Instrumentsfinancial 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,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 highly effective in achieving offsetting changes in those cash flows that are attributable to the hedged risk, both at inception of the hedge and on an ongoing basis.

Derivatives that qualify for the hedge accounting treatment are designated as either: a hedge of the fair value of the recognized asset or liability or of an unrecognized commitment (a fair value hedge) or a hedge of a forecasted transaction or the variability of cash flowsfound to be received or paid related to a recognized asset or liability (a cash flow hedge). To date, the Company haseffective as determined by FASB ASC not815 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 gainsDerivatives 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.Hedging.

 

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

Adoption of New Accounting Standards – In August 2015, FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606). This ASU is an update to ASU 2014-09, and delays the effective date of ASU 2014-09. The ASU provides guidance on revenue recognition for entities that enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of nonfinancial assets. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additional disclosures are required to provide quantitative and qualitative information regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The new guidance is effective for annual reporting periods, and interim reporting periods within those annual periods, beginning after December 15, 2017. The Company’s revenue is comprised of net interest income on financial assets and liabilities, which is explicitly excluded from the scope of this guidance, and non-interest income. Based on the evaluation of the Company’s non-interest income revenue streams, adoption of this new guidance will not have a material impact on the consolidated financial statements. Changes to the related disclosures are still being finalized.

In January 2016, the FASB issued an update ASU No.2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this update impact public business entities as follows: 1) Require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. 2) Simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value. 3) Eliminate the requirement to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. 4) Require entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. 5) Require an entity to present separately in other comprehensive income the portion of the total change in fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. 6) Require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements. 7) Clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15,2017. The impact of adopting the new guidance did not have a material impact on the consolidated financial statements, but will require additional disclosures. The Company currently does not have any equity investments.

 

65

58

---

Table of Contents

In February 2016, the FASB issued an update ASU No.2016-02, Leases (Topic 842). Under the new guidance, lessees will be required to recognize the following for all leases, with the exception of short-term leases, at the commencement date: a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting in largely unchanged. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2018. The impact of adopting the new guidance on the consolidated financial statements will not have a material impact.

New Accounting Standards –In June 2016, the FASB issued ASU No. 2016-13, –Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The final standard will change estimateschanges 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, and 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 effective for public companiesexperiencing financial difficulty. The Company will be required to implement CECL and ASU 2022-02 for fiscal yearsyear and interim periods beginning after December 15, 2019. 2022.Management is currently gathering loan level data, and assessing our data and system needs. 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. The magnitude of any adjustment or the overall impact of the new standard on financial condition or results of operation cannot yet be determined.

 

In March 2017,2020, the FASB issued ASU No.20172020-08,04, –Receivables – Nonrefundable Fees and Other Costs (SubtopicReference Rate Reform (Topic 310-20848): Premium AmortizationFacilitation of Purchased Callable Debt Securities.the Effects of Reference Rate Reform on Financial Reporting. The final standard will shortenamendments in this update provide optional guidance to ease the amortization periodpotential burden in accounting for premiumsreference rate reform on callable debt securities by requiring that premiums be amortized to the first (or earliest) call date instead of as an adjustment to the yield over the contractual life.financial reporting. The standard is effective for public companies for fiscal years beginning after December 15, 2018. The Company is currently evaluating the impact of adopting the new guidance on the consolidated financial statements.

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 February 2018, December 2022, the FASB issued ASU No. 2018-02, –Income Statement – Reporting Comprehensive Income (Topic 220): Reclassificationvoted to delay the sunset date for Topic 848 until December 31, 2024 effective immediately. Adoption of Certain Tax Effects From Other Comprehensive Income. The final standard allows institutions to elect to reclassify the stranded tax effects from AOCI to retained earnings, limited to amounts in AOCI that are affected by the tax reform law.  This includes remeasuring deferred tax assets and liabilities related to items presented in AOCI at the newly enacted tax rate and on other income tax effects of items remaining in AOCI. The standard is effective for public companies for fiscal years beginning after December 15, 2018, and interim periods during 2018. Early adoption is permitted.  The Companythis new guidance will adopt the standard in the first quarter of 2018 and adoption 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.

 

66

59

---

Table of Contents

Merger expenses totaling $691,000 have been expensed by the Company through December 31, 2022. Additional merger costs will be expensed in future periods as incurred.

  

 

NNOTE 3OTE 2– – SECURITIES

 

Securities are classified intoas available for sale (AFS) and(“AFS”) or held to maturity (HTM) categories. AFS securities are those that may be sold if needed for liquidity, asset liability management, or other reasons.(“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 those that the Bank has the intent and ability to hold to maturity and are reported at amortized cost.

 

The following table summarizes the amortized cost and fair value of AFS and HTM securities at December 31, 2022 and December 31, 2021 and the relatedcorresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows:

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
December 31, 2017		(in thousands)
Available for sale
U.S. Government and federal agency		$	22,105			$	2			$	(483	)		$	21,624
Agency mortgage-backed: residential			65,935				117				(1,087	)			64,965
Collateralized loan obligations			25,343				182				(20	)			25,505
State and municipal			33,303				508				(101	)			33,710
Corporate bonds			6,838				78				—				6,916
Total available for sale		$	153,524			$	887			$	(1,691	)		$	152,720

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
December 31, 2016		(in thousands)
Available for sale
U.S. Government and federal agency		$	34,757			$	50			$	(708	)		$	34,099
Agency mortgage-backed: residential			103,390				455				(1,492	)			102,353
Collateralized loan obligations			11,203				—				—				11,203
State and municipal			2,028				25				(8	)			2,045
Corporate bonds			3,069				24				(3	)			3,090
Total available for sale		$	154,447			$	554			$	(2,211	)		$	152,790

		Amortized Cost				Gross Unrecognized Gains				Gross Unrecognized Losses				Fair Value
Held to maturity
State and municipal		$	41,818			$	1,272			$	(18	)		$	43,072
Total held to maturity		$	41,818			$	1,272			$	(18	)		$	43,072

In 2013, the Bank transferred a portion of its tax-free municipal and taxable municipal bond portfolios from AFS to HTM. At that time, the transfer occurred at fair value with the unrealized loss of $1.3 million remaining in other comprehensive income. That unrealized loss has subsequently been amortized on the level yield method out of other comprehensive income with an offsetting entry reducing interest income as a yield adjustment through earnings. No gain or loss was recorded at the time of transfer in 2013. Given the Bank’s current balance sheet composition, interest rate risk profile, the current tax environment, and the Bank’s strategic plan, management reassessed the classification of the held to maturity securities and, effective December 1, 2017, transferred $41.4 million of tax-free municipals and taxable municipals from HTM to AFS. As a result, the $702,000 in remaining unamortized loss from the 2013 transfer was reclassified through a book value adjustment of these securities. At December 31, 2017, these securities were carried at fair value with unrealized holdinggross unrecognized gains and losses reported in other comprehensive income, net of tax, with the remaining securities classified as AFS.(in thousands):

 

67

---

Table of Contents

		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 Unrecognized Gains				Gross Unrecognized Losses				Fair Value
Held to maturity
State and municipal		$	43,282			$	—			$	(8,386	)		$	34,896
Total held to maturity		$	43,282			$	—			$	(8,386	)		$	34,896

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

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

 

Sales and calls of securities were as follows:  

		2017				2016				2015
		(in thousands)
Proceeds		$	41,733			$	8,311			$	45,012
Gross gains			449				245				1,902
Gross losses			161				29				136

The tax provision related to net gains and losses realized on sales was $101,000,$76,000, and $618,000, respectively.

 

		2022				2021				2020
		(in thousands)
Proceeds		$	1,314			$	9,204			$	9,030
Gross gains			—				465				—
Gross losses			3				5				5

The

60

---

Table of Contents

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

 

		December 31, 2017								December 31, 2022
		Amortized Cost				Fair Value				Amortized Cost				Fair Value
		(in thousands)								(in thousands)
Maturity
Available for sale
Within one year		$	14,648			$	14,682			$	—			$	—
One to five years			40,197				40,675				4,661				4,483
Five to ten years			32,744				32,398				84,946				79,679
Beyond ten years											28,648				26,106
Agency mortgage-backed: residential			65,935				64,965				80,283				69,905
Total		$	153,524			$	152,720			$	198,538			$	180,173
Held to maturity
Within one year										$	3,265				3,204
One to five years											5,571			$	5,324
Five to ten years											4,713				4,100
Beyond ten years											29,733				22,268
Total										$	43,282			$	34,896

 

Securities pledged at year-end 20172022 and 20162021 had carrying values of approximately $76.8$122.1 million and $61.2$155.4 million, respectively, and were pledged to secure public deposits.

 

At December 31, 20172022 and 2016,2021, the Bank held securities issued by the Commonwealth of Kentucky or Kentucky municipalities having a book value of $15.4$35.2 million and $16.4$35.7 million, respectively. At year-end 2017,2022, there were no other holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders’ equity.

 

The Company evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation.basis. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, underlying credit quality of the issuer, and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer’sissuer’s financial condition, the Company may consider whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, the sector or industry trends and cycles affecting the issuer, and the results of reviews of the issuer’s financial condition. As of December 31, 2017,2022, management does not believe any securities in the portfolio with unrealized losses should be classified as other than temporarily impaired.

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

The market value of CLOs may be affected by, among other things, changes in composition of the underlying loans, changes in the cash flows from the underlying loans, defaults and recoveries on the underlying loans, capital gains and losses on the underlying loans, prepayments on the underlying loans, and other conditions or economic factors. At December 31, 2022, $27.0 million and $19.0 million of the Bank’s CLOs were risk rated AA and A rated, respectively. None of the CLOs were subject to ratings downgrade during the year ended December 31, 2022.

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

61

---

Table of Contents

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

 

Securities with unrealized and unrecognized losses at December 31, 20172022 and December 31, 2016,2021, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position, are as follows:follows (in thousands):

 

		Less than 12 Months								12 Months or More								Total
Description of Securities		Fair Value				Unrealized Loss				Fair Value				Unrealized Loss				Fair Value				Unrealized Loss
		(in thousands)
2017
Available for sale
U.S. Government and federal agency		$	5,788			$	(97	)		$	14,121			$	(386	)		$	19,909			$	(483	)
Agency mortgage-backed: residential			21,104				(172	)			27,158				(915	)			48,262				(1,087	)
State and municipal			7,492				(101	)			—				—				7,492				(101	)
Collateralized loan obligations			6,038				(20	)			—				—				6,038				(20	)
Total temporarily impaired		$	40,422			$	(390	)		$	41,279			$	(1,301	)		$	81,701			$	(1,691	)

		Less than 12 Months								12 Months or More								Total
Description of Securities		Fair Value				Unrealized Loss				Fair Value				Unrealized Loss				Fair Value				Unrealized Loss
2022
Available for sale
U.S. Government and federal agency		$	12,234			$	(1,022	)		$	9,523			$	(1,762	)		$	21,757			$	(2,784	)
Agency mortgage-backed: residential			26,917				(1,916	)			41,992				(8,471	)			68,909				(10,387	)
Collateralized loan obligations			20,816				(784	)			25,225				(1,377	)			46,041				(2,161	)
Corporate bonds			22,537				(1,352	)			19,934				(1,690	)			42,471				(3,042	)
Total temporarily impaired		$	82,504			$	(5,074	)		$	96,674			$	(13,300	)		$	179,178			$	(18,374	)

		Less than 12 Months								12 Months or More								Total
		Fair Value				Unrecognized Loss				Fair Value				Unrecognized Loss				Fair Value				Unrecognized Loss
Held to maturity
State and municipal		$	13,897			$	(3,328	)		$	19,179			$	(5,058	)		$	33,076			$	(8,386	)
Total temporarily impaired		$	13,897			$	(3,328	)		$	19,179			$	(5,058	)		$	33,076			$	(8,386	)

		Less than 12 Months								12 Months or More								Total
		Fair Value				Unrealized Loss				Fair Value				Unrealized Loss				Fair Value				Unrealized Loss
2021
Available for sale
U.S. Government and federal agency		$	11,645			$	(133	)		$	—			$	—			$	11,645			$	(133	)
Agency mortgage-backed: residential			53,733				(960	)			642				(10	)			54,375				(970	)
Collateralized loan obligations			10,036				(7	)			16,514				(71	)			26,550				(78	)
Corporate bonds			22,548				(202	)			—				—				22,548				(202	)
Total temporarily impaired		$	97,962			$	(1,302	)		$	17,156			$	(81	)		$	115,118			$	(1,383	)

		Less than 12 Months								12 Months or More								Total
		Fair Value				Unrecognized Loss				Fair Value				Unrecognized Loss				Fair Value				Unrecognized Loss
Held to maturity
State and municipal		$	26,829			$	(338	)		$	—			$	—			$	26,829			$	(338	)
Total temporarily impaired		$	26,829			$	(338	)		$	—			$	—			$	26,829			$	(338	)

 

68

62

---

Table of Contents

		Less than 12 Months								12 Months or More								Total
Description of Securities		Fair Value				Unrealized Loss				Fair Value				Unrealized Loss				Fair Value				Unrealized Loss
		(in thousands)
2016
Available for sale
U.S. Government and federal agency		$	27,738			$	(708	)		$	—			$	—			$	27,738			$	(708	)
Agency mortgage-backed: residential			63,460				(1,449	)			2,745				(43	)			66,205				(1,492	)
State and municipal			465				(8	)			—				—				465				(8	)
Corporate bonds			—				—				1,566				(3	)			1,566				(3	)
Total temporarily impaired		$	91,663			$	(2,165	)		$	4,311			$	(46	)		$	95,974			$	(2,211	)
Held to maturity
State and municipal			1,540				(18	)			—				—				1,540				(18	)
Total		$	1,540			$	(18	)		$	—			$	—			$	1,540			$	(18	)

 

NOTE NOTE 34 –– LOANS

 

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

 

		2017				2016				2022				2021
		(in thousands)								(in thousands)
Commercial(1)		$	113,771			$	97,761			$	230,262			$	220,826
Commercial Real Estate:
Construction			57,342				36,330				135,159				74,806
Farmland			88,320				71,507				65,256				68,388
Nonfarm nonresidential			156,724				149,546				391,701				345,893
Residential Real Estate:
Multi-family			56,588				48,197				45,222				50,224
1-4 Family			179,222				188,092				166,988				168,873
Consumer			18,439				9,818				35,277				36,440
Agriculture			41,154				37,508				41,498				35,924
Other			555				477				491				466
Subtotal			712,115				639,236				1,111,854				1,001,840
Less: Allowance for loan losses			(8,202	)			(8,967	)			(13,030	)			(11,531	)
Loans, net		$	703,913			$	630,269			$	1,098,824			$	990,309

 

69

---

Table

(1)         Includes PPP loans of Contents

$141,000 and $1.2 million at December 31, 2022 and 2021, respectively.

 

The following table presents the activity in the allowance for loan losses by portfolio segment for the yearyears ended December 31, 2022, 2017,2016,2021, and 2015:2020:

 

		Commercial				Commercial Real Estate				Residential Real Estate				Consumer				Agriculture				Other				Total				Commercial				Commercial Real Estate				Residential Real Estate				Consumer				Agriculture				Other				Total
December 31, 2017:		(in thousands)
December 31, 2022:																														(in thousands)
Beginning balance		$	475			$	4,894			$	3,426			$	8			$	162			$	2			$	8,967			$	2,888			$	6,179			$	1,443			$	538			$	480			$	3			$	11,531
Provision (negative provision)			363				(1,223	)			(129	)			(8	)			213				(16	)			(800	)
Provision (negative provision)																															(68	)			(131	)			(27	)			227				79				–				80
Loans charged off			(5	)			(58	)			(692	)			(51	)			(95	)			–				(901	)			(31	)			(158	)			(400	)			(249	)			–				–				(838	)
Recoveries			59				419				295				115				33				15				936				38				1,716				383				75				45				–				2,257
Ending balance		$	892			$	4,032			$	2,900			$	64			$	313			$	1			$	8,202			$	2,827			$	7,606			$	1,399			$	591			$	604			$	3			$	13,030

 

		Commercial				Commercial Real Estate				Residential Real Estate				Consumer				Agriculture				Other				Total
December 31, 2021:		(in thousands)
Beginning balance		$	2,529			$	7,050			$	1,899			$	361			$	600			$	4			$	12,443
Provision (negative provision)			206				1,314				(537	)			259				(91	)			(1	)			1,150
Loans charged off			(19	)			(2,302	)			(30	)			(131	)			(44	)			–				(2,526	)
Recoveries			172				117				111				49				15				–				464
Ending balance		$	2,888			$	6,179			$	1,443			$	538			$	480			$	3			$	11,531

 

		Commercial				Commercial Real Estate				Residential Real Estate				Consumer				Agriculture				Other				Total
December 31, 2020:		(in thousands)
Beginning balance		$	1,710			$	4,080			$	1,743			$	485			$	355			$	3			$	8,376
Provision (negative provision)			822				2,870				135				324				261				(12	)			4,400
Loans charged off			(32	)			(101	)			(130	)			(493	)			(46	)			–				(802	)
Recoveries			29				201				151				45				30				13				469
Ending balance		$	2,529			$	7,050			$	1,899			$	361			$	600			$	4			$	12,443

 

December 31, 2016:
Beginning balance		$	818			$	6,993			$	3,984			$	122			$	122			$	2			$	12,041
Provision (negative provision)			(401	)			(2,438	)			749				(314	)			(56	)			10				(2,450	)
Loans charged off			(276	)			(505	)			(1,652	)			(99	)			(18	)			(79	)			(2,629	)
Recoveries			334				844				345				299				114				69				2,005
Ending balance		$	475			$	4,894			$	3,426			$	8			$	162			$	2			$	8,967

63

---

Table of Contents

December 31, 2015:
Beginning balance		$	2,046			$	10,931			$	5,787			$	274			$	319			$	7			$	19,364
Provision (negative provision)			(1,255	)			(2,713	)			(316	)			(115	)			(87	)			(14	)			(4,500	)
Loans charged off			(696	)			(2,879	)			(2,171	)			(221	)			(118	)			(47	)			(6,132	)
Recoveries			723				1,654				684				184				8				56				3,309
Ending balance		$	818			$	6,993			$	3,984			$	122			$	122			$	2			$	12,041

TheThe following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method as of December 31, 2017:2022:

 

		Commercial				Commercial Real Estate				Residential Real Estate				Consumer				Agriculture				Other				Total
		(in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment		$	13			$	–			$	206			$	–			$	–			$	–			$	219
Collectively evaluated for impairment			879				4,032				2,694				64				313				1				7,983
Total ending allowance balance		$	892			$	4,032			$	2,900			$	64			$	313			$	1			$	8,202
Loans:
Loans individually evaluated for impairment		$	587			$	2,635			$	3,950			$	1			$	–			$	–			$	7,173
Loans collectively evaluated for impairment			113,184				299,751				231,860				18,438				41,154				555				704,942
Total ending loans balance		$	113,771			$	302,386			$	235,810			$	18,439			$	41,154			$	555			$	712,115

70

---

Table of Contents

		Commercial				Commercial Real Estate				Residential Real Estate				Consumer				Agriculture				Other				Total
		(in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment		$	–			$	–			$	1			$	–			$	–			$	–			$	1
Collectively evaluated for impairment			2,827				7,606				1,398				591				604				3				13,029
Total ending allowance balance		$	2,827			$	7,606			$	1,399			$	591			$	604			$	3			$	13,030
Loans:
Loans individually evaluated for impairment		$	–			$	429			$	441			$	119			$	–			$	–			$	989
Loans collectively evaluated for impairment			230,262				591,687				211,769				35,158				41,498				491				1,110,865
Total ending loans balance		$	230,262			$	592,116			$	212,210			$	35,277			$	41,498			$	491			$	1,111,854

 

TheThe following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method as of December 31, 2016:2021:

 

		Commercial				Commercial Real Estate				Residential Real Estate				Consumer				Agriculture				Other				Total				Commercial				Commercial Real Estate				Residential Real Estate				Consumer				Agriculture				Other				Total
		(in thousands)																												(in thousands)
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment		$	13			$	35			$	350			$	–			$	1			$	–			$	399			$	–			$	–			$	2			$	–			$	–			$	–			$	2
Collectively evaluated for impairment			462				4,859				3,076				8				161				2				8,568				2,888				6,179				1,441				538				480				3				11,529
Total ending allowance balance		$	475			$	4,894			$	3,426			$	8			$	162			$	2			$	8,967			$	2,888			$	6,179			$	1,443			$	538			$	480			$	3			$	11,531
Loans:
Loans individually evaluated for impairment		$	595			$	5,854			$	8,621			$	1			$	60			$	–			$	15,131			$	–			$	2,878			$	566			$	12			$	9			$	–			$	3,465
Loans collectively evaluated for impairment			97,166				251,529				227,668				9,817				37,448				477				624,105				220,826				486,209				218,531				36,428				35,915				466				998,375
Total ending loans balance		$	97,761			$	257,383			$	236,289			$	9,818			$	37,508			$	477			$	639,236			$	220,826			$	489,087			$	219,097			$	36,440			$	35,924			$	466			$	1,001,840

 

64

---

Table of Contents

ImpairedImpaired Loans

 

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

The following table presents information related to loans individually evaluated for impairment by class of loan as of and for the year ended December 31, 2017:

		Unpaid Principal Balance				Recorded Investment				Allowance For Loan Losses Allocated				Average Recorded Investment				Interest Income Recognized				Cash Basis Income Recognized
		(in thousands)
With No Related Allowance Recorded:
Commercial		$	703			$	487			$	—			$	495			$	7			$	7
Commercial real estate:
Construction			—				—				—				—				—				—
Farmland			3,687				2,059				—				2,651				210				210
Nonfarm nonresidential			1,047				576				—				716				59				47
Residential real estate:
Multi-family			—				—				—				820				—				—
1-4 Family			4,293				2,787				—				2,884				143				143
Consumer			9				1				—				2				2				2
Agriculture			—				—				—				24				1				1
Other			—				—				—				—				—				—
Subtotal			9,739				5,910				—				7,592				422				410
With An Allowance Recorded:
Commercial			100				100				13				100				7				—
Commercial real estate:
Construction			—				—				—				—				—				—
Farmland			—				—				—				235				—				—
Nonfarm nonresidential			—				—				—				238				14				—
Residential real estate:
Multi-family			—				—				—				—				—				—
1-4 Family			1,163				1,163				206				1,404				68				—
Consumer			—				—				—				—				—				—
Agriculture			—				—				—				24				—				—
Other			—				—				—				—				—				—
Subtotal			1,263				1,263				219				2,001				89				—
Total		$	11,002			$	7,173			$	219			$	9,593			$	511			$	410

71

---

Table of Contents

 

The following table presents information related to loans individually evaluated for impairment by class of loan as of and for the year ended December 31, 2022:2016:

 

		Unpaid Principal Balance				Recorded Investment				Allowance For Loan Losses Allocated				Average Recorded Investment				Interest Income Recognized				Cash Basis Income Recognized				Unpaid Principal Balance				Recorded Investment				Allowance For Loan Losses Allocated				Average Recorded Investment				Interest Income Recognized				Cash Basis Income Recognized
		(in thousands)																								(in thousands)
With No Related Allowance Recorded:
Commercial		$	707			$	495			$	—			$	758			$	39			$	39			$	257			$	—			$	—			$	—			$	1			$	1
Commercial real estate:
Construction			—				—				—				156				9				—				—				—				—				—				—				—
Farmland			5,566				3,742				—				4,188				94				95				80				29				—				95				53				53
Nonfarm nonresidential			4,502				1,219				—				4,699				310				189				1,001				400				—				1,783				202				189
Residential real estate:
Multi-family			4,100				4,100				—				2,608				287				1				—				—				—				—				—				—
1-4 Family			4,663				2,910				—				5,509				162				94				1,181				388				—				479				161				161
Consumer			41				1				—				7				8				8				350				119				—				80				2				2
Agriculture			—				—				—				73				28				28				315				—				—				3				23				23
Other			—				—				—				—				—				—				—				—				—				—				—				—
Subtotal			19,579				12,467				—				17,998				937				454				3,184				936				—				2,440				442				429
With An Allowance Recorded:
Commercial			100				100				13				20				6				—				—				—				—				—				—				—
Commercial real estate:
Construction			—				—				—				—				—				—				—				—				—				—				—				—
Farmland			614				590				5				358				—				—				—				—				—				—				—				—
Nonfarm nonresidential			303				303				30				398				23				—				—				—				—				—				—				—
Residential real estate:
Multi-family			—				—				—				2,506				101				—				—				—				—				—				—				—
1-4 Family			1,676				1,611				350				1,659				111				—				53				53				1				78				—				—
Consumer			—				—				—				—				—				—				—				—				—				—				—				—
Agriculture			78				60				1				39				—				—				—				—				—				—				—				—
Other			—				—				—				—				—				—				—				—				—				—				—				—
Subtotal			2,771				2,664				399				4,980				241				—				53				53				1				78				—				—
Total		$	22,350			$	15,131			$	399			$	22,978			$	1,178			$	454			$	3,237			$	989			$	1			$	2,518			$	442			$	429

 

72

65

---

Table of Contents

The following table presents information related to loans individually evaluated for impairment by class of loan as of and for the year ended December 31, 2015:2021:

 

		Unpaid Principal Balance				Recorded Investment				Allowance For Loan Losses Allocated				Average Recorded Investment				Interest Income Recognized				Cash Basis Income Recognized				Unpaid Principal Balance				Recorded Investment				Allowance For Loan Losses Allocated				Average Recorded Investment				Interest Income Recognized				Cash Basis Income Recognized
		(in thousands)																								(in thousands)
With No Related Allowance Recorded:
Commercial		$	1,558			$	1,112			$	—			$	1,526			$	5			$	5			$	290			$	—			$	—			$	—			$	—			$	—
Commercial real estate:
Construction			278				262				—				1,993				14				1				—				—				—				—				—				—
Farmland			6,004				4,263				—				4,497				114				114				302				215				—				520				55				55
Nonfarm nonresidential			11,256				7,829				—				16,073				263				9				7,755				2,663				—				4,430				302				25
Residential real estate:
Multi-family			32				32				—				35				—				—				—				—				—				—				1				1
1-4 Family			14,066				11,756				—				13,584				456				99				1,408				501				—				764				135				126
Consumer			118				20				—				23				—				—				272				12				—				19				1				1
Agriculture			260				152				—				206				—				—				366				9				—				81				7				7
Other			—				—				—				49				5				5				—				—				—				—				—				—
Subtotal			33,572				25,426				—				37,986				857				233				10,393				3,400				—				5,814				501				215
With An Allowance Recorded:
Commercial			—				—				—				13				—				—				—				—				—				—				—				—
Commercial real estate:
Construction			—				—				—				—				—				—				—				—				—				—				—				—
Farmland			—				—				—				63				—				—				—				—				—				—				—				—
Nonfarm nonresidential			574				465				43				4,591				25				—				—				—				—				—				—				—
Residential real estate:
Multi-family			4,195				4,195				57				4,229				204				—				—				—				—				—				—				—
1-4 Family			1,690				1,690				328				1,705				89				—				65				65				2				95				2				—
Consumer			—				—				—				8				—				—				—				—				—				—				—				—
Agriculture			—				—				—				—				—				—				—				—				—				—				—				—
Other			—				—				—				—				—				—				—				—				—				—				—				—
Subtotal			6,459				6,350				428				10,609				318				—				65				65				2				95				2				—
Total		$	40,031			$	31,776			$	428			$	48,595			$	1,175			$	233			$	10,458			$	3,465			$	2			$	5,909			$	503			$	215

 

73

66

---

Table of Contents

The following table presents information related to loans individually evaluated for impairment by class of loan as of and for the year ended December 31, 2020:

		Unpaid Principal Balance				Recorded Investment				Allowance For Loan Losses Allocated				Average Recorded Investment				Interest Income Recognized				Cash Basis Income Recognized
		(in thousands)
With No Related Allowance Recorded:
Commercial		$	308			$	—			$	—			$	82			$	16			$	16
Commercial real estate:
Construction			—				—				—				—				—				—
Farmland			555				456				—				326				45				45
Nonfarm nonresidential			1,323				549				—				501				44				15
Residential real estate:
Multi-family			—				—				—				—				—				—
1-4 Family			1,883				954				—				894				86				83
Consumer			259				—				—				55				3				3
Agriculture			393				91				—				27				—				—
Other			—				—				—				—				—				—
Subtotal			4,721				2,050				—				1,885				194				162
With An Allowance Recorded:
Commercial			—				—				—				5				—				—
Commercial real estate:
Construction			—				—				—				—				—				—
Farmland			—				—				—				198				4				—
Nonfarm nonresidential			6,465				4,356				2,176				901				263				—
Residential real estate:
Multi-family			—				—				—				—				—				—
1-4 Family			106				106				1				102				9				—
Consumer			—				—				—				—				—				—
Agriculture			—				—				—				—				—				—
Other			—				—				—				—				—				—
Subtotal			6,571				4,462				2,177				1,206				276				—
Total		$	11,292			$	6,512			$	2,177			$	3,091			$	470			$	162

 

Troubled Debt Restructuring

 

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

 

The following table presents the types of TDR loan modifications by portfolio segment outstanding as of December 31, 20172022 and 2016:2021:

 

		TDRs Performing to Modified Terms				TDRs Not Performing to Modified Terms				Total TDRs
		(in thousands)
December 31, 2017
Commercial
Rate reduction		$	—			$	33			$	33
Principal deferral			—				434				434
Commercial Real Estate:
Farmland
Principal deferral			—				1,362				1,362
Nonfarm nonresidential
Rate reduction			483				—				483
Residential Real Estate:
1-4 Family
Rate reduction			734				—				734
Total TDRs		$	1,217			$	1,829			$	3,046
December 31, 2016
Commercial
Rate reduction		$	—			$	33			$	33
Principal deferral			—				434				434
Commercial Real Estate:
Farmland
Principal deferral			—				2,300				2,300
Nonfarm nonresidential
Rate reduction			507				—				507
Principal deferral			—				607				607
Residential Real Estate:
Multi-family
Rate reduction			4,100				—				4,100
1-4 Family
Rate reduction			743				—				743
Total TDRs		$	5,350			$	3,374			$	8,724

		TDRs Performing to Modified Terms				TDRs Not Performing to Modified Terms				Total TDRs
		(in thousands)
December 31, 2022
Commercial Real Estate:
Nonfarm nonresidential		$	133			$	—			$	133
Residential Real Estate:
1-4 Family			—				53				53
Total TDRs		$	133			$	53			$	186
December 31, 2021
Commercial Real Estate:
Nonfarm nonresidential		$	340			$	—			$	340
Residential Real Estate:
1-4 Family			—				65				65
Total TDRs		$	340			$	65			$	405

 

67

---

Table of Contents

At December 31, 20172022 and 2016,2021, 40%72% and 61%84%, respectively, of the Company’s TDRs were performing according to their modified terms. The Company allocated $122,000$1,000 and $197,000$2,000 as of December 31, 20172022 and 2016,2021, respectively, in reserves to customers whose loan terms have been modified in TDRs. The Company has committed to lend no additional amounts to customers as of December 31, 20172022 or 2016December 31, 2021 to customers with outstanding loans that are classified as TDRs.

 

Management periodically reviews renewals and modifications of previously identified TDRs, for which there was no principal forgiveness, to consider if it is appropriate to removeDuring the TDR classification. If the borrower is no longer experiencing financial difficulty and the renewal/modification did not contain a concessionary interest rate or other concessionary terms, management considers the potential removal of the TDR classification. If deemed appropriate based upon current underwriting, the TDR classification is removed as the borrower has complied with the terms of the loan at the date of renewal/modification and there was a reasonable expectation that the borrower would continue to comply with the terms of the loan subsequent to the date of the renewal/modification. In this instance, the TDR was originally considered a restructuring in a prior year as a result of a modification with an interest rate that was not commensurate with the risk of the underlying loan. Additionally, TDR classification can be removed in circumstances in which the Company performs a non-concessionary re-modification of the loan at terms that were considered to be at market for loans with comparable risk. Management expects the borrower will continue to perform under the re-modified terms based on the borrower’s past history of performance. During 2017, the TDR classification was removed from two loans that met the requirements as discussed above. These loans totaled $4.1 million at December 31, 2016. These loans are no longer evaluated individually for impairment.

74

---

Table of Contents

No TDR loan modifications occurred during the twelve monthsyears ended December 31, 20172022, or 2016.2021, During the year ended December, 31 2017 and 2016,2020, no TDRs defaulted on their restructured loan within the twelve-month period following the loan modification. A default is considered to have occurred once the TDR is past due 90 days or more or it has been placed on nonaccrual.

 

Non-performing Loans

Non-performing loans include impaired loans and smaller balance homogeneous loans, such as residential mortgage and consumer loans, that are collectively evaluated for impairment. No TDR modifications occurred during the year ended December 31, 2022. The following table presents a summary of the recorded investment in nonaccrual and loans past due 90 days and still on accrualTDR loan modifications by class of loan as ofportfolio segment that occurred during the year ended December 31, 2017 2021:and 2016:

 

		Nonaccrual								Loans Past Due 90 Days And Over Still Accruing
		2017				2016				2017				2016
		(in thousands)
Commercial		$	487			$	495			$	—			$	—
Commercial Real Estate:
Construction			—				—				—				—
Farmland			2,059				4,332				—				—
Nonfarm nonresidential			93				1,016				—				—
Residential Real Estate:
Multi-family			—				—				—				—
1-4 Family			2,817				3,312				—				—
Consumer			1				1				1				—
Agriculture			—				60				—				—
Other			—				—				—				—
Total		$	5,457			$	9,216			$	1			$	—

		TDRs Performing to Modified Terms				TDRs Not Performing to Modified Terms				Total TDRs
		(in thousands)
December 31, 2021
Residential Real Estate:
1-4 Family		$	180			$	—			$	180
Total TDRs		$	180			$	—			$	180

 

TheThe Company did not allocate any reserves to customers whose loan terms were modified during 2021. For modifications occurring during the year ended December 31, 2021, the post-modification balances approximate the pre-modification balances.

The following table presents the aging of the recorded investment in past due loans by class as of December 31, 20172022 and 2016:2021:

		30 – 59 Days Past Due				60 – 89 Days Past Due				90 Days And Over Past Due				Nonaccrual				Total Past Due And Nonaccrual
		(in thousands)
December 31, 2017
Commercial		$	—			$	—			$	—			$	487			$	487
Commercial Real Estate:
Construction			—				—				—				—				—
Farmland			593				—				—				2,059				2,652
Nonfarm nonresidential			—				—				—				93				93
Residential Real Estate:
Multi-family			—				—				—				—				—
1-4 Family			850				126				—				2,817				3,793
Consumer			30				45				—				1				76
Agriculture			5				—				1				—				6
Other			—				—				—				—				—
Total		$	1,478			$	171			$	1			$	5,457			$	7,107

		30 – 59 Days Past Due				60 – 89 Days Past Due				90 Days And Over Past Due				Nonaccrual				Total Past Due And Nonaccrual
		(in thousands)
December 31, 2022
Commercial		$	32			$	—			$	—			$	—			$	32
Commercial Real Estate:
Construction			—				—				—				—				—
Farmland			219				29				—				28				276
Nonfarm nonresidential			577				—				—				268				845
Residential Real Estate:
Multi-family			—				—				—				—				—
1-4 Family			913				239				—				441				1,593
Consumer			178				—				—				119				297
Agriculture			—				—				—				—				—
Other			—				—				—				—				—
Total		$	1,919			$	268			$	—			$	856			$	3,043

 

75

68

---

Table of Contents

		30 – 59 Days Past Due				60 – 89 Days Past Due				90 Days And Over Past Due				Nonaccrual				Total Past Due And Nonaccrual
		(in thousands)
December 31, 2016
Commercial		$	—			$	—			$	—			$	495			$	495
Commercial Real Estate:
Construction			—				—				—				—				—
Farmland			626				—				—				4,332				4,958
Nonfarm nonresidential			—				59				—				1,016				1,075
Residential Real Estate:
Multi-family			—				—				—				—				—
1-4 Family			1,454				256				—				3,312				5,022
Consumer			19				—				—				1				20
Agriculture			203				—				—				60				263
Other			—				—				—				—				—
Total		$	2,302			$	315			$	—			$	9,216			$	11,833

   

		30 – 59 Days Past Due				60 – 89 Days Past Due				90 Days And Over Past Due				Nonaccrual				Total Past Due And Nonaccrual
		(in thousands)
December 31, 2021
Commercial		$	6			$	—			$	—			$	—			$	6
Commercial Real Estate:
Construction			—				—				—				—				—
Farmland			—				—				—				215				215
Nonfarm nonresidential			—				34				—				2,323				2,357
Residential Real Estate:
Multi-family			—				—				—				—				—
1-4 Family			513				148				—				566				1,227
Consumer			37				28				—				12				77
Agriculture			—				—				—				8				8
Other			—				—				—				—				—
Total		$	556			$	210			$	—			$	3,124			$	3,890

 

Credit Quality Indicators

 

Management categorizes all loans into risk categories at origination based upon original underwriting. Thereafter, management categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends. Additionally, loans are analyzed through internal and external loan review processes. Borrower relationships in excess of $500,000processes and are routinely analyzed through the credit administration processes which classify the loans as to credit risk. The following definitions are used for risk ratings:ratings:

 

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

 

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

 

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

 

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

 

76

69

---

Table of Contents

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be “Pass” rated loans.loans. As of December 31, 20172022 and 2016,2021, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

 

		Pass				Watch				Special Mention				Substandard				Doubtful				Total				Pass				Watch				Special Mention				Substandard				Doubtful				Total
																										(in thousands)
		(in thousands)
December 31, 2017
December 31, 2022
Commercial		$	112,978			$	84			$	—			$	709			$	—			$	113,771			$	222,420			$	3,503			$	—			$	4,339			$	—			$	230,262
Commercial Real Estate:
Construction			57,342				—				—				—				—				57,342				132,618				2,541				—				—				—				135,159
Farmland			76,563				7,607				—				4,150				—				88,320				63,303				1,594				—				359				—				65,256
Nonfarm nonresidential			152,004				2,906				—				1,814				—				156,724				385,434				5,981				—				286				—				391,701
Residential Real Estate:
Multi-family			47,121				9,467				—				—				—				56,588				45,222				—				—				—				—				45,222
1-4 Family			169,774				3,535				164				5,749				—				179,222				164,150				1,525				—				1,313				—				166,988
Consumer			18,042				306				—				91				—				18,439				35,032				20				—				225				—				35,277
Agriculture			38,654				1,810				—				690				—				41,154				40,660				25				—				813				—				41,498
Other			555				—				—				—				—				555				491				—				—				—				—				491
Total		$	673,033			$	25,715			$	164			$	13,203			$	—			$	712,115			$	1,089,330			$	15,189			$	—			$	7,335			$	—			$	1,111,854

 

		Pass				Watch				Special Mention				Substandard				Doubtful				Total
		(in thousands)
December 31, 2021
Commercial		$	207,729			$	5,207			$	—			$	7,890			$	—			$	220,826
Commercial Real Estate:
Construction			74,806				—				—				—				—				74,806
Farmland			65,836				170				—				2,382				—				68,388
Nonfarm nonresidential			341,780				413				—				3,700				—				345,893
Residential Real Estate:
Multi-family			50,224				—				—				—				—				50,224
1-4 Family			164,850				2,038				—				1,985				—				168,873
Consumer			36,408				5				—				27				—				36,440
Agriculture			35,863				23				—				38				—				35,924
Other			466				—				—				—				—				466
Total		$	977,962			$	7,856			$	—			$	16,022			$	—			$	1,001,840

  

		Pass				Watch				Special Mention				Substandard				Doubtful				Total
		(in thousands)
December 31, 2016
Commercial		$	96,402			$	294			$	—			$	1,065			$	—			$	97,761
Commercial Real Estate:
Construction			35,823				507				—				—				—				36,330
Farmland			63,323				1,521				—				6,663				—				71,507
Nonfarm nonresidential			142,222				5,217				445				1,662				—				149,546
Residential Real Estate:
Multi-family			38,281				6,080				—				3,836				—				48,197
1-4 Family			173,565				6,909				52				7,566				—				188,092
Consumer			9,397				348				—				73				—				9,818
Agriculture			26,940				9,555				—				1,013				—				37,508
Other			477				—				—				—				—				477
Total		$	586,430			$	30,431			$	497			$	21,878			$	—			$	639,236

NOTE NOTE 45 –– PREMISES AND EQUIPMENT

 

Year-end premises and equipment were as follows:

 

		2017				2016				2022				2021
		(in thousands)								(in thousands)
Land and buildings		$	23,124			$	23,515			$	22,033			$	21,590
Furniture and equipment			10,151				10,050				8,439				9,395
Leased right-of-use asset											6,317				5,326
			33,275				33,565				36,789				36,311
Accumulated depreciation			(16,486	)			(15,717	)			(14,686	)			(14,736	)
		$	16,789			$	17,848			$	22,103			$	21,575

 

Depreciation expense was $955,000,$1.1$1.1 million, $1.0 million and $1.0$1.1 million for 2017,2022, 20162021 and 2015,2020, respectively.

 

77

70

---

Table of Contents

 

NNOTE 6OTE 5– – OTHER REAL ESTATE OWNEDLEASES

 

OtherAs of December 31, 2022, the Company had real estate owned (OREO) is real estate acquired as a result of foreclosureleases for seven branch offices or by deed in lieu of foreclosure. It is classified as real estate owned until such time as it is sold. When property is acquired as a result of foreclosure or by deed in lieu of foreclosure, it is recorded at its fair market value less costoffsite ATM machines under various operating lease agreements. The lease agreements have maturity dates ranging from 2024 to sell. Any write-down2046, including all expected extension periods. The weighted average remaining life of the propertylease term for these leases was 20 years as of December 31, 2022.

In determining the present value of lease payments, the Bank uses the implicit lease rate when readily determinable. As most of the Bank’s leases do not provide an implicit rate, the incremental borrowing rate based on the information available at commencement date is used. The incremental borrowing rate is the timeestimated rate of acquisition is chargedinterest that the Bank would pay to borrow on a collateralized basis over a similar term in an amount equal to the allowancelease payments in a similar economic environment. The weighted average discount rate for loan losses.the leases was 4.20% as of December 31, 2022.

 

Fair value of OREO is determined on an individual property basis. When foreclosed properties are acquired, management obtains a new appraisal of the subject property or has staff from the Bank’s special assets group evaluate the latest in-file appraisal in connection with the transfer to OREO. Updated appraisals are typically obtained within five quarters of the anniversary date of ownership unless a sale is imminent. Subsequent reductions in fair value are recorded as non-interestTotal rental expense when a new appraisal indicates a decline in value or in cases where a listing price is lowered below the appraised amount. 

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

		2017				2016
		(in thousands)
Commercial Real Estate:
Construction, land development, and other land		$	4,335			$	6,571
Farmland			74				—
Residential Real Estate:
1-4 Family			—				250
		$	4,409			$	6,821

Residential loans secured by 1-4 family residential properties in the process of foreclosure totaled $616,000was $499,000 and $932,000 at December 31, 2017 and December 31, 2016, respectively.

Activity relating to OREO owned during the years indicated is as follows:

		2017				2016				2015
		(in thousands)
OREO Activity
OREO as of January 1		$	6,821			$	19,214			$	46,197
Real estate acquired			270				1,273				5,513
Valuation adjustment write-downs			(1,963	)			(1,180	)			(9,855	)
Net gain (loss) on sale			74				222				(74	)
Proceeds from sale of properties			(793	)			(12,708	)			(22,567	)
OREO as of December 31		$	4,409			$	6,821			$	19,214

There was noOREO rental income for the year ended December 31, 2017, compared to $456,000, and $1.3 million$503,000 for the years ended December 31, 2016,2022 and 2015,December 31, 2021, respectively. The right-of-use asset, included in premises and equipment, and lease liability, included in other liabilities, was $6.3 million as of December 31, 2022 and $5.3 million as of December 31, 2021.

 

Expenses related to OREO owned include:Total estimated rental commitments for the operating leases were as follows as of December 31, 2022 (in thousands):

		2017				2016				2015
		(in thousands)
Net (gain) loss on sales		$	(74	)		$	(222	)		$	74
Valuation adjustment write-downs			1,963				1,180				9,855
Operating expense			84				583				2,373
Total		$	1,973			$	1,541			$	12,302

		2022
2023			457
2024			458
2025			438
2026			408
2027			465
Thereafter			8,434
Total minimum lease payments			10,660
Discount effect of cash flows			(4,343	)
Present value of lease liabilities		$	6,317

  

78

---

Table of Contents

NNOTE 7OTE 6– GOODWILL AND INTANGIBLE ASSETS– DEPOSITS

 

The following table summarizes the Company’s acquired goodwill and intangible assets as of December 31, 2022 and December 31, 2021:

		2022								2021
		Gross Carrying Amount				Accumulated Amortization				Gross Carrying Amount				Accumulated Amortization
		(in thousands)
Goodwill		$	6,252			$	—			$	6,252			$	—
Core deposit intangibles			2,500				767				2,500				511
Outstanding, ending		$	8,752			$	767			$	8,752			$	511

During 2019, the Company recorded $6.3 million of goodwill related to a branch purchase transaction. Goodwill represents the excess of the total purchase price paid over the fair value of the identifiable assets acquired, net of the fair value of the liabilities assumed. Goodwill is not amortized but is evaluated for impairment on an annual basis or whenever events or changes in circumstances indicate the carrying value may not be recoverable. Impairment exists when a reporting unit’s carrying amount exceeds its fair value. At November 30, 2022, the Company’s reporting unit had positive equity and the Company elected to perform a qualitative assessment to determine if it was more likely than not that the fair value of the reporting unit exceeded its carrying value, including goodwill. The qualitative assessment indicated that the fair value of the reporting unit exceeded its carrying value, resulting in no impairment. Since the annual impairment test on November 30, 2022, there have been no events or circumstances that would indicate it was more likely than not goodwill impairment exists. Goodwill is the only intangible asset with an indefinite life on the Company’s balance sheet.

The Company also has a core deposit intangible asset, which is amortized over the weighted average estimated life of the related deposits and is not estimated to have a significant residual value. Total amortization was $256,000 for the years ended December 31, 2022 and 2021.

71

---

Table of Contents

The estimated amortization expense of the core deposit intangible for the next five years and thereafter is as follows (in thousands):

		Amortization Expense
2023		$	256
2024			256
2025			256
2026			256
2027			256
Thereafter			453
		$	1,733

NOTE 8– DEPOSITS

The following table details deposits by category:category at year end:

		December 31, 2017				December 31, 2016
		(in thousands)
Non-interest bearing		$	137,386			$	124,395
Interest checking			99,383				103,876
Money market			151,388				142,497
Savings			34,632				34,518
Certificates of deposit			424,235				444,639
Total		$	847,024			$	849,925

		2022				2021
		(in thousands)
Non-interest bearing		$	268,954			$	274,083
Interest checking			314,082				287,208
Money market			179,035				217,943
Savings			148,552				163,423
Certificates of deposit (1)			290,161				266,011
Total		$	1,200,784			$	1,208,668

---

(1)         Includes brokered deposits of $75.1 million as of December 31, 2022. There were no brokered deposits at December 31, 2021.

 

Time deposits of $250,000 or more were approximately $31.7$106.5 million and $29.1$33.4 million at year-end 20172022 and 2016,2021, respectively.

 

Scheduled maturities of total time deposits for each of the next five years and thereafter are as follows (in thousands):

 

		Total
2018		$	204,018
2019			178,479
2020			27,507
2021			5,316
2022			8,915
		$	424,235

		Total
2023		$	233,016
2024			35,759
2025			15,373
2026			2,277
2027			3,034
Thereafter			702
		$	290,161

 

 

NOTE 97– –ADVANCES FROM FEDERAL HOME LOAN BANK

 

At year-end, advances from the Federal Home Loan Bank were as follows:

 

		2017				2016
		(in thousands)
Advances with fixed rates from 0.00% to 5.24% and maturities ranging from 2018 through 2033, averaging 1.48% for 2017 and 0.85% for 2016		$	11,797			$	22,458

		2022				2021
		(in thousands)
Short term advance (fixed rates 4.02% to 4.38%) maturing January 2023		$	70,000			$	—
Long term advance			—				20,000
Total advances from the Federal Home Loan Bank		$	70,000			$	20,000

 

FHLB advances had a weighted-average rate of 4.25% at December 31, 2022 and 0.77% at December 31, 2021. Each advance is payable per terms on agreement, with a prepayment penalty. The $20.0 million long-term advance outstanding at December 31, 2021 was called by the FHLB in May 2022. No prepayment penalties were incurred during 20172022 or 2016.2021. The advances were collateralized by approximately $130.9$339.5 million of commercial real estate and $124.2first mortgage residential loans, under a blanket lien arrangement at December 31, 2022. At December 31, 2021, the advances were collateralized by approximately $121.8 million of first mortgage loans under a blanket lien arrangement at year-end 2017and 2016, respectively.loans originated under the SBA Payment Protection Plan. At December 31, 2017,2022, ourthe Bank’s additional borrowing capacity with the FHLB was $79.0$91.0 million.

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

		Advances
2018		$	10,200
2019			180
2020			485
2021			728
2022			108
Thereafter			96
		$	11,797

At year-end 2017, the Company had a $5.0 million federal funds line of credit available on an unsecured basis from a correspondent institution.

NOTE 8– SUBORDINATED CAPITAL NOTE

The outstanding principal amount of the Bank’s subordinated capital note totaled $2.3 million at December 31, 2017. The note is unsecured, bears interest at the BBA three-month LIBOR floating rate plus 300 basis points, and qualifies as Tier 2 capital until five years before maturity on July 1, 2020. During the final five-year period to maturity, one-fifth of principal amount of the subordinated note is excluded from Tier 2 capital each year and until fully excluded from Tier 2 capital during the year before maturity. Principal payments of $225,000 plus interest are due quarterly. Scheduled principal payments of $900,000 per year are due each of the next two years with $450,000 due thereafter. The interest rate was 4.34% and 3.85% at December 31, 2017 and 2016, respectively.

 

79

72

---

Table of Contents

 

NNOTE 10OTE 9– BORROWINGS– JUNIOR SUBORDINATED DEBENTURES

 

Junior Subordinated Debentures - The junior subordinated debentures are redeemable at par prior to maturity at the option of the Company as defined within the trust indenture. The Company has At December 31, 2022, the option to defer interest payments on the junior subordinated debentures from time to time for a period not to exceed 20 consecutive quarters. A deferral period may begin at the Company’s discression so long as interest payments are current. The Company is prohibited from paying dividendscurrent on its preferred and common shares whenall interest payments are in deferral.

On April 15, 2016, the Company completed the private placement of 580,000 common shares and 220,000 non-voting common shares to accredited investors resulting in total proceeds of $5.0 million. The investors in the private placement directed a portion of purchase price to pay all deferred interest payments on junior subordinated debentures, bringing our interest payments current through the second quarter of 2016.

On June 29, 2016, the Company notified the trustees of its election to again defer interest payments effective with the third quarter 2016 payment. The deferral period ends after the second quarter of 2021. After 20 consecutive quarters, the Company must pay all deferred distributions to avoid default. Dividends accrued and unpaid on our junior subordinated debentures totaled $1.2 million at December 31, 2017.payments.

 

A summarysummary of the junior subordinated debentures is as follows:

 

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

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

 

---

(1)	As of December 31,2017, the 3-month LIBOR was 1.69%.

(2)	The debentures are callable at our (1)         As of December 31,2022,3-month LIBOR was 4.77%. (2)         The debentures are callable at the Company’s option at their principal amount plus accrued interest.

On September 30, 2015, the Company completed a common equity for debt exchange with holders of $4.0 million of the capital securities (the “Trust Securities”) of Porter Statutory Trust IV, a trust subsidiary of the Company. Accrued and unpaid interest on the Trust Securities totaled of approximately $330,000. In exchange for the $4.3 million debt and interest liability, the Company issued 160,000 common shares and 80,000 non-voting common shares, for a total of 240,000 shares. In the transaction, a wholly owned subsidiary of the Company received a one-third portion of the Trust Securities directly from an unrelated third party in exchange for the issuance of 80,000 common shares resulting in an $883,000 gain on extinguishment of debt. The $883,000 gain was determined based upon the difference in the $560,000 fair value of the common shares issued and the $1.4 million book value of the debt securities and accrued interest thereon tendered to the Company by the unrelated third party on the date of closing. The fair value of the shares issued to the unrelated third party was computed by multiplying the 80,000 shares issued by $7.00 per share, which was the NASDAQ closing price of the Company’s common stock on September 30, 2015. The subsidiary also received two-thirds of the Trust Securities having a book value of $2.9 million from related parties in exchange for the issuance of 80,000 common shares and 80,000 non-voting common shares. In accordance with ASC 470-50-40-2 and SEC Guidance 405-20-40-1.J, the debt and interest liability exchanged with related parties was treated as a capital transaction.

NOTE10 – SENIOR DEBT

 

On June 30, 2017, the Company entered into a $10.0 million senior secured loan agreement with a commercial bank. Subordinated Capital Notes - The loan maturesCompany’s subordinated notes mature on June 30, 2022.July 31, 2029 Interest is payable quarterlywith 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 250395 basis points throughuntil maturity. The subordinated capital notes qualify as Tier June 30, 2020, at which time quarterly principal payments of $250,0002 plus interest will commence. The loan is secured by a first priority pledge of 100% of the issued and outstanding stock of the Bank. The Company may prepay any amount due under the promissory note at any time without premium or penalty.regulatory capital.

 

The Company contributedFederal Funds Line – At year-end $9.02022, million of the borrowing proceeds to the Bank as common equity Tier 1 capital. The remaining $1.0 million of the borrowing proceeds were retained by the lender in escrow to service quarterly interest payments. At December 31, 2017, the escrow account had a balance of $806,000.

80

---

Table of Contents

The loan agreement contains customary representations, warranties, covenants and events of default, including the following financial covenants: (i) the Company must maintain minimum cashhad an unused $5.0 million federal funds line of credit available on hand of not less than $750,000 through June 30, 2018, and not less than $2,500,000 thereafter, (ii) the Company must maintainan unsecured basis from a total risk based capital ratio at least equal to 9% of risk-weighted assets to June 30, 2018, and 10% thereafter, (iii) the Bank must maintain a total risk based capital ratio at least equal to 10% of risk-weighted assets to June 30, 2018, and 11% thereafter, and (iv) non-performing assets of the Bank may not exceed 2.5% of the Bank’s total assets. Both the Company and Bank were in compliance with the covenants as of December 31, 2017.correspondent institution.

 

NOTE 11–11– OTHER BENEFIT PLANS

 

401(k)(k) Plan – The CompanyCompany’s 401(k) Savings Plan allows employees to contribute up to the annual limits as determined by the Internal Revenue Service, which is matched equal to 50%100% of the first 4%1% of compensation contributed.contributed and 50% of the next 5% contributed by employees. The Company, at its discretion, may make an additional contribution. Total contributionscontributions. Contributions made by the Company to the plan totaled approximately $372,000, $373,000 and $399,000 in $200,000,2022, $189,0002021 and $160,000 in 2017,2016 and 2015,2020, respectively.

NOTE 12– INCOME TAXES

 

Supplemental Executive Retirement Plan – The Company has a supplemental executive retirement plan covering certain executive officers. Under the plan, the Company pays each participant, or their beneficiary, a specific defined benefit amount over 10 years, beginning with the individual’s retirement or early termination of service for reasons other than cause. A liability is accrued for the obligation under these plans. TheIncome tax expense incurred for the plan was $121,000,$121,000 and $121,000 for the years ended December 31,2017,2016 and 2015, respectively. The related liability was $1.3 million at December 31,2017 and 2016 and is included in other liabilities on the balance sheets.as follows:

		2022				2021				2020
		(in thousands)
Current		$	621			$	305			$	(173	)
Deferred			(354	)			1,649				1,372
Net operating loss			5,509				2,677				903
Establish state deferred tax asset			—				—				(478	)
		$	5,776			$	4,631			$	1,624

 

The Company purchased life insurance on the participants of the plan. The cash surrender value of all insurance policies was $15.2 million and $14.8 million at December 31,2017 and 2016, respectively. Income earned from the cash surrender value of life insurance totaled $412,000,$417,000 and $295,000 for the years ended December 31,2017,2016, and 2015, respectively. The income is recorded as other non-interest income.

NOTE 12– INCOME TAXES

The Company has had a full valuation allowance against its net deferred tax asset since 2011. The Company’s ability to utilize the net deferred tax asset depends upon generating sufficient future levels of taxable income. The determination to restore a deferred tax asset and eliminate a valuation allowance depends upon the evaluation of both positive and negative evidence regarding the likelihood of achieving sufficient future taxable income levels. During the fourth quarter of 2017, management concluded it was more-likely-than-not the asset would be utilized to reduce future taxes payable related to the future taxable income of the Company, and as such, reversed the valuation allowance. The positive evidence that outweighed the negative evidence evaluated by management in arriving at the conclusion to remove the valuation allowance included, but was not limited to, the following:

●

positive cumulative pre-tax earnings over the prior three-year period ended December 31, 2017

●

growth in net interest income, stable non-interest income trends, and lower non-interest expense trends

●

improvement in asset quality which increases management’s ability to forecast future taxable income and achieve forecasted results

●

the Company’s net operating loss (“NOLs”) carryforwards do not begin to expire until 2032, and

●

the Bank’s Consent Order was terminated in the fourth quarter of 2017

As a result of the conclusion to reverse the valuation allowance, the Company recorded anrecognized state income tax benefitexpense of $54.0$1.0 million for the year ended December 31, 2017.2022

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 was signed into law. Among other significant changes to the tax code, the new law lowered the federal corporate tax rate from 35% to 21% beginning in 2018. As a result, the Company revalued its net deferred tax asset at the new 21% rate. Due to this revaluation, the Company recorded a $20.3 million charge tostate income tax expense of $939,000 for the year ended December 31, 2017.2021.

The combination of the reversal of the valuation allowance and the change in federal corporate tax rates, as well as income tax expense for the year, resulted in an income tax benefit of $31.9 million forFor the year ended December 31, 2017.2020, the Company recognized a state income tax benefit of $478,000 due to the establishment of a net deferred tax asset. 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%.

 

81

73

---

Table of Contents

Income tax expense (benefit) was as follows:

		2017				2016				2015
		(in thousands)
Current		$	—			$	21			$	—
Deferred			2,523				2,771				5,258
Net operating loss			(647	)			(4,009	)			(5,975	)
Change in federal statutory rate			20,274				—				—
Change in valuation allowance			(54,049	)			1,238				717
		$	(31,899	)		$	21			$	—

Effective tax rates differ from the federal statutory rate of 35%applied to income(loss) before income taxes due to the following:

 

		2017				2016				2015				2022				2021				2020
		(in thousands)												(in thousands)
Federal statutory rate times financial statement income (loss)		$	2,294			$	(956	)		$	(1,125	)
Federal statutory tax rate															21	%			21	%			21	%
Federal statutory rate times financial statement income														$	5,065			$	4,103			$	2,232
Effect of:
Valuation allowance			(54,049	)			1,238				717
Tax-exempt income			(196	)			(211	)			(264	)
Non-taxable life insurance income			(144	)			(146	)			(103	)
State income taxes															907				741				—
Tax-exempt interest income															(107	)			(123	)			(73	)
Establish state deferred tax asset															—				—				(478	)
Non-taxable life insurance income															(148	)			(111	)			(89	)
Restricted stock vesting			(121	)			—				—				(30	)			(10	)			7
Change in federal statutory rate			20,274				—				—
Other, net			43				96				775				89				31				25
Total		$	(31,899	)		$	21			$	—			$	5,776			$	4,631			$	1,624

 

Year-end deferred tax assets and liabilitiesliabilities were due to the following:

 

		2017				2016				2022				2021
		(in thousands)								(in thousands)
Deferred tax assets:
Net operating loss carry-forward		$	25,645			$	42,094			$	13,826			$	19,335
Allowance for loan losses			1,723				3,139				3,250				2,877
OREO write-down			2,432				3,366
Alternative minimum tax credit carry-forward			692				692
Net assets from acquisitions			358				674
Net unrealized loss on securities			169				867				4,465				—
New market tax credit carry-forward			208				208				208				208
Nonaccrual loan interest			271				481				317				321
Accrued expenses			172				3,860				97				138
Deferred compensation			277				465
Lease liability											1,577				1,328
Other			241				360				240				202
			32,188				56,206				23,980				24,409
Deferred tax liabilities:
FHLB stock dividends			557				928				361				415
Fixed assets			68				89				117				133
Deferred loan costs			152				274				158				176
Net unrealized gain on securities											—				390
Lease right-of-use assets											1,577				1,328
Net assets from acquisitions											304				108
Other			98				866				180				276
			875				2,157				2,697				2,826
Net deferred tax assets before valuation allowance			31,313				54,049
Valuation allowance			—				(54,049	)
Net deferred tax asset		$	31,313			$	—
Net deferred tax assets										$	21,283			$	21,583

 

At December 31, 2017, 2022, the Company had federal net operating loss carryforwards ("NOLs") of $122.1$62.0 million, which will begin to expire in 2033, and state net operating loss carryforwards of $20.5 million, which will begin to expire in 2031.

 

The Company does not have any beginning and ending unrecognized tax benefits.benefits. The Company does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next twelve months. There were no interest and penalties recorded in the income statement or accrued for the years ended 2017December 31, 2022 or 2016December 31, 2021 related to unrecognized tax benefits.

 

82

---

Table of Contents

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

 

74

---

Table of Contents

In 2015, the Company took two measures to preserve the value of its NOLs. First, the Company adopted a tax benefits preservation plan designed to reduce the likelihood of an “ownership change” occurring as a result of purchases and sales of the Company's common shares. Upon adoption of this plan, the Company declared a dividend of one preferred stock purchase right for each common share outstanding as of the close of business on July 10, 2015. Any shareholder or group that acquiresacquiring beneficial ownership of 5% or more of the Company (an “acquiring person”) could be subject to significant dilution in its holdings if the Company's Board of Directors does not approve such acquisition. Existing shareholders holding 5% or more of the Company willare not be considered acquiring persons unless they acquire additional shares, subject to certain exceptions described in the plan. In addition, as amended November 25, 2019, the Board of Directors has the discretion to exempt certain transactions and certain persons whose acquisition of securities is determined by the Board not to jeopardize the Company's deferred tax assets. The rights willplan was extended in May 2021 to expire upon the earlier of (i) June 29, 2018,30, 2024, (ii) the beginning of a taxable year with respect to which the Board of Directors determines that no tax benefits may be carried forward, (iii) the repeal or amendment of Section 382 or any successor statute, if the Board of Directors determines that the plan is no longer needed to preserve the tax benefits, and (iv) certain other events as described in the plan. On October 24, 2022, with the unanimous approval of the Company’s Board of Directors, the Company amended the rights plan to accelerate its final expiration date to October 24, 2022, effectively terminating the tax benefits preservation plan as of that date.

 

OnAlso in September 23, 2015,the Company’sCompany’s shareholders approved an amendment to its articles of incorporation to further help protect the long-term value of the Company’s NOLs. The amendment provides a means to block transfers of ourthe Company’s common shares that could result in an ownership change under Section 382. The transfer restrictions were extended in May 2021 by shareholder vote and will expire on the earlier of (i) September 23, 2018,May 19, 2024, (ii) the beginning of a taxable year with respect to which the Board of Directors determines that no tax benefit may be carried forward, (iii) the repeal of Section 382 or any successor statute if ourthe Board determines that the transfer restrictions are no longer needed to preserve the tax benefits of ourthe NOLs, or (iv) such date as the Board otherwise determines that the transfer restrictions are no longer necessary.

 

The Company and its subsidiaries are subject to U.S. federal income tax and the Company is subject to incomeincome tax in the Commonwealth of Kentucky. The Company is no longer subject to examination by taxing authorities for years before 2014.2019.

 

NOTE 13–13– RELATED PARTY TRANSACTIONS

 

Loans to principal officers, directors, significant shareholders, and their affiliates in 20172022 were as follows (in thousands):

 

Beginning balance		$	—			$	13,542
New loans			9,400
New loans and advances							12,851
Repayments			—				(8,880	)
Ending balance		$	9,400			$	17,513

 

DepositsDeposits from principal officers, directors, significant shareholders, and their affiliates at year-end 20172022 and 20162021 were $2.4 million and $876,000, respectively.

During $401,0002021 and $321,000,2020, respectively.

Hogan Development Company assistsand Hogan Real Estate Company assisted the Bank in onboarding, managing,managing and selling the Bank’s OREO. Hogan Development Company isBoth companies are owned by W. Glenn Hogan, a director. The agreement with Hogan Developmentdirector of the Company is periodicallyand Bank. This arrangement was reviewed and evaluated by the Audit Committee.Committee in conjunction with the Board’s annual assessment of director independence. The Bank paid real estate management and sales fees to these companies in the amount of $45,000 and $26,000 for the years ended $20,000December 31, 2021, and $56,0002020, and real estate sales and leasing commissions of $6,000 and $478,000respectively. There were no payments to Hogan Development Company inor Hogan Real Estate Company during 20172022. and 2016, respectively.

On April 15, 2016, the Company completed the private placement of 580,000 common shares and 220,000 non-voting common shares to accredited investors resulting in total proceeds of $5.0 million. The investors in the private placement directed a portion of purchase price to pay all deferred interest payments on junior subordinated debentures, bringing our interest payments current through the second quarter of 2016. The investors included three directors of the Company, including President and CEO John T. Taylor, who purchased common shares on the same terms and conditions as the other investors.

83

---

Table of Contents

 

NOTE 1414– – PREFERRED STOCK

The Company has issued and outstanding 6,198 Series E preferred shares and 4,304 Series F preferred shares, both of which series are not convertible into common shares, have a liquidation preference of $1,000 per share, and are entitled to a 2% noncumulative annual dividend if and when declared. Series E and Series F preferred shares rank senior to, and have liquidation and dividend preferences over, the common shares and non-voting common shares.

NOTE 15–REGULATORY CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGSMATTERS

 

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

 

The finalBasel III rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. Banks (Basel III rules) became effective for the Company and Bank on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule through January 1, 2019. The final rules allowed banks and their holding companies with less than $250 billion in assets a one-time opportunity to opt-out of a requirement to include unrealized gains and losses in accumulated other comprehensive income in their capital calculation. The Company and the Bank opted out of this requirement. The rules also establishestablished a “capital conservation buffer” of 2.5% above the regulatory minimum risk-based capital ratios. OnceIncluding the capital conservation buffer, is fully phased in, the minimum ratios are a common equity Tier 1 risk-based capital ratio of 7.0%, a Tier 1 risk-based capital ratio of 8.5%, and a total risk-based capital ratio of 10.5%. The capital conservation buffer for 2017 is 1.25% and 0.625% for 2016. An institution is subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if capital levels fall below minimum levels plus the buffer amounts. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions.     

The Bank is no longer subject to a consent order with the Federal Deposit Insurance Corporation and Kentucky Department of Financial Institutions. The Bank’s prior consent order was terminated effective October 31, 2017.

On September 21, 2011, the Company entered into a Written Agreement with the Federal Reserve Bank of St. Louis. Pursuant to the Agreement, management made formal commitments to use the Company’s financial and management resources to serve as a source of strength for the Bank and to assist the Bank in addressing weaknesses identified by the FDIC and the KDFI (which has since been terminated), to pay no dividendsactions without prior written approval, to pay no interest or principal on subordinated debentures or trust preferred securities without prior written approval, and to submit an acceptable plan to maintain sufficient capital.regulatory approval.

 

84

75

---

Table of Contents

As of December 31, 2022, the Company and Bank meet all capital adequacy requirements to which they are subject. At year end 2022 and 2021, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since the notification that management believes have changed the institution’s category.

 

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

		Actual								Minimum Requirement for Capital Adequacy Purposes								Minimum Requirement to be Well Capitalized Under Prompt Corrective Action Provisions
		Amount				Ratio				Amount				Ratio				Amount				Ratio
As of December 31, 2017:
Total risk-based capital (to risk-weighted assets)
Consolidated		$	83,072				10.55	%		$	63,014				8.00	%			N/A				N/A
Bank			91,305				11.61				62,938				8.00			$	78,672				10.00	%
Total common equity Tier 1 risk- based capital (to risk-weighted assets)
Consolidated			54,535				6.92				35,445				4.50				N/A				N/A
Bank			81,393				10.35				35,403				4.50				51,137				6.50
Tier 1 capital (to risk-weighted assets)
Consolidated			66,487				8.44				47,260				6.00				N/A				N/A
Bank			81,393				10.35				47,203				6.00				62,938				8.00
Tier 1 capital (to average assets)
Consolidated			66,487				7.11				37,392				4.00				N/A				N/A
Bank			81,393				8.70				37,421				4.00				46,777				5.00

 

		Actual								Minimum Requirement for Capital Adequacy Purposes								Minimum Requirement to be Well Capitalized Under Prompt Corrective Action Provisions
		Amount				Ratio				Amount				Ratio				Amount				Ratio
As of December 31, 2016:
Total risk-based capital (to risk-weighted assets)
Consolidated		$	71,109				10.21	%		$	55,714				8.00	%			N/A				N/A
Bank			68,773				9.88				55,663				8.00			$	69,579				10.00	%
Total common equity Tier 1 risk- based capital (to risk-weighted assets)
Consolidated			36,199				5.20				31,339				4.50				N/A				N/A
Bank			57,642				8.28				31,311				4.50				45,226				6.50
Tier 1 capital (to risk-weighted assets)
Consolidated			48,713				6.99				41,786				6.00				N/A				N/A
Bank			57,642				8.28				41,747				6.00				55,663				8.00
Tier 1 capital (to average assets)
Consolidated			48,713				5.27				36,975				4.00				N/A				N/A
Bank			57,642				6.24				36,949				4.00				46,186				5.00

		Actual								Minimum Requirement for Capital Adequacy Purposes								Minimum Requirement to be Well Capitalized Under Prompt Corrective Action Provisions
		Amount				Ratio				Amount				Ratio				Amount				Ratio
As of December 31, 2022:
Total risk-based capital (to risk-weighted assets)		$	182,113				14.01	%		$	104,007				8.00	%		$	130,008				10.00	%
Total common equity Tier 1 risk- based capital (to risk-weighted assets)			169,083				13.01				58,504				4.50				84,505				6.50
Tier 1 capital (to risk-weighted assets)			169,083				13.01				78,005				6.00				104,007				8.00
Tier 1 capital (to average assets)			169,083				11.59				58,379				4.00				72,974				5.00

 

N/A: Not applicable. Regulatory framework does not define well capitalized for holding companies.

		Actual								Minimum Requirement for Capital Adequacy Purposes								Minimum Requirement to be Well Capitalized Under Prompt Corrective Action Provisions
		Amount				Ratio				Amount				Ratio				Amount				Ratio
As of December 31, 2021:
Total risk-based capital (to risk-weighted assets)		$	160,700				13.31	%		$	96,591				8.00	%		$	120,738				10.00	%
Total common equity Tier 1 risk- based capital (to risk-weighted assets)			149,169				12.35				54,332				4.50				78,480				6.50
Tier 1 capital (to risk-weighted assets)			149,169				12.35				72,443				6.00				96,591				8.00
Tier 1 capital (to average assets)			149,169				10.84				55,057				4.00				68,822				5.00

 

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

85

---

TableBased on these regulations, the Bank was eligible to pay $20.4 million of Contents

dividends as of December 31, 2022. The Bank paid the Company $7.5 million of dividends during 2022.

 

NOTE 1516– – OFF BALANCEOFF-BALANCE SHEET RISKS, COMMITMENTS, AND CONTINGENT LIABILITIES

 

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

 

An approved but unfunded loan commitment represents a potential credit risk and a liquidity risk, since the Company’s client(s) may demand immediate cash that would require funding. In addition, unfunded loan commitments represent interest rate risk as market interest rates may rise above the rate committed to the Company’s client. Since a portion of these loan commitments normally expire unused, the total amount of outstanding commitments at any point in time may not require future funding. Commitments to make loans are generally made for periods of one year or less.less except for home equity loans, which generally have a term of 10 years.

 

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

 

76

---

Table of Contents

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

ended:

 

		2017								2016								2022								2021
		Fixed Rate				Variable Rate				Fixed Rate				Variable Rate				Fixed Rate				Variable Rate				Fixed Rate				Variable Rate
		(in thousands)																(in thousands)
Commitments to make loans		$	27,349			$	31,412			$	19,445			$	18,347			$	35,773			$	35,781			$	85,294			$	60,683
Unused lines of credit			11,034				57,727				7,935				51,407				12,383				117,761				12,828				108,635
Standby letters of credit			2,216				373				582				360				444				647				566				326

 

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

InIn connection with the purchase of loan participations, the Bank entered into risk participation agreements, which had notional amounts totaling $19.8$12.1 million at December 31, 20172022 and $14.62021. millionThe risk participation agreements are not designated against specific assets or liabilities under ASC 815, Derivatives and Hedging, and, therefore, do not qualify for hedge accounting. The derivatives are recorded in other liabilities on the balance sheet at fair value and changes in fair value of both the borrower and the offsetting swap agreements are recorded (and essentially offset) in non-interest income. The fair value of the derivative instruments incorporates a consideration of credit risk in accordance with ASC 820, resulting in some volatility in earnings each period.At December 31, 2016.2022 and December 31, 2021, the fair value of the risk participation agreements were $1,000 and $67,000, respectively.

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

 

The Company is subject to claims and lawsuits that arise primarily in the ordinary course of business. Litigation is subject to inherent uncertainties and unfavorable rulings could occur. The Company records contingent liabilities resulting from claims against it when a loss is assessed to be probable andcontests liability and/or the amount of damages as appropriate in each pending matter. In view of the loss is reasonably estimable. Accruals are not madeinherent difficulty of predicting the outcome of such matters, particularly in cases where liability is not probableclaimants seek substantial or indeterminate damages or where investigations and proceedings are in the amountearly stages, the Company cannot be reasonably estimated. Assessing probabilitypredict with certainty the loss or range of loss, and estimating probable losses requires analysis of multiple factors, including in some cases judgments aboutif any, related to such matters, how or if such matters will be resolved, when they will ultimately be resolved, or what the potential actions of third party claimants and courts. Recorded contingent liabilities areeventual settlement, or other relief, if any, might be. Subject to the foregoing, the Company believes, based on the best information available and actual losses in any future period are inherently uncertain. Based upon current knowledge and after consultation with counsel, that the Company believesoutcome of such pending legal proceedings or claims shouldmatters will not have a material impactadverse effect on itsthe consolidated financial position or results of operations. However, in lightcondition of the uncertainties involved in such proceedings,Company, although the outcome of a particular matter may such matters could be material to the financial position orCompany’s operating results of operationsand cash flows for a particular reportingfuture period, in the future.

On October 17, 2014, the United States Department of Justice (the “DOJ”) notified the Bank that it was the subject of an investigation into possible violations of federal laws, including,depending on, among other things, possible violations related to false bank entries, bank fraud and securities fraud. The investigation concerns allegations that Bank personnel engaged in practices intended to delay or avoid disclosurethe level of the Bank’s asset quality atCompany’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 timeloss and (2) the amount of and following the United States Treasury’s purchase of preferred shares from theloss can be reasonably estimated. The Company in November 2008. The Bank has cooperated with all requests for information from DOJ. At this time, the DOJ hasis not indicated whether it intends to pursuecurrently involved in any action in this matter.material litigation.

86

---

Table of Contents

 

NOTE 16–17– FAIR VALUES

 

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

 

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

 

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

 

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

 

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

 

77

---

Table of Contents

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

 

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

 

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

 

Management routinely apply anapplies internal discountdiscounts to the value of appraisals used in the fair value evaluation of ourthe Bank’s impaired loans. The deductions to the appraisal take into account changing business factors and market conditions, as well as potential value impairment in cases where ourthe Bank’s appraisal date predates a likely change in market conditions. These deductions range from 10% for routine real estate collateral to 25% for real estate that is determined (1) to have a thin trading market or (2) to be specialized collateral. This is in addition to estimated discounts for cost to sell of six to ten percent.

87

---

Table of Contents

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

 

Impaired loans are evaluated quarterlyquarterly for additional impairment. Management obtains updated appraisals on properties securing ourthe Bank’s loans when circumstances are warranted such as at the time of renewal or when market conditions have significantly changed. This determination is made on a property-by-property basis in light of circumstances in the broader economic climate and the assessment of deterioration of real estate values in the market in which the property is located. The first stage of management’s assessment involves management’s inspection of the property in question. Management also engages in conversations with local real estate professionals, investors, and market participants to determine the likely marketing time and value range for the property. The second stage involves an assessment of current trends in the regional market. After thorough consideration of these factors, management will either internally evaluate fair value or order a new appraisal.

Other Real Estate Owned (OREO): OREO is evaluated at the time of acquisition and recorded at fair value as determined by independent appraisal or internal evaluation less cost to sell. Quarterly evaluations of OREO for impairment are driven by property type. For smaller dollar single family homes, management consults with staff from the Bank’s special assets group as well as external realtors and appraisers. Based on these consultations, management determines asking prices for OREO properties being marketed for sale. If the internally evaluated fair value or asking price is below the recorded investment in the property, appropriate write-downs are taken.

For larger dollar commercial real estate properties, management obtains a new appraisal of the subject property or has staff in the special assets group evaluate the latest in-file appraisal in connection with the transfer to OREO. Management generally obtains updated appraisals within five quarters of the anniversary date of ownership unless a sale is imminent. When an asking price is lowered below the most recent appraised value, appropriate write-downs are taken.

Management routinely applies an internal discount to the value of appraisals used in the fair value evaluation of OREO. The deductions to the appraisal take into account changing business factors and market conditions, as well as potential value impairment in cases where our appraisal date predates a likely change in market conditions. These deductions range from 10% for routine real estate collateral to 25% for real estate that is determined (1) to have a thin trading market or (2) to be specialized collateral. This is in addition to estimated discounts for cost to sell of six to ten percent.

88

---

Table of Contents

 

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

 

						Fair Value Measurements at December 31, 2017 Using																Fair Value Measurements at December 31, 2022 Using
						(in thousands)																(in thousands)
Description		Carrying Value				Quoted Prices In Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Carrying Value				Quoted Prices In Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Available for sale securities
U.S. Government and federal agency		$	21,624			$	—			$	21,624			$	—			$	21,757			$	—			$	21,757			$	—
Agency mortgage-backed: residential			64,965				—				64,965				—
Agency mortgage-backed: residential																			69,905				—				69,905				—
Collateralized loan obligations			25,505				—				25,505				—				46,041				—				46,041				—
State and municipal			33,710				—				33,710				—
Corporate bonds			6,916				—				6,916				—				42,470				—				20,223				22,247
Total		$	152,720			$	—			$	152,720			$	—			$	180,173			$	—			$	157,926			$	22,247

 

						Fair Value Measurements at December 31, 2016 Using
						(in thousands)
Description		Carrying Value				Quoted Prices In Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Available for sale securities
U.S. Government and federal agency		$	34,099			$	—			$	34,099			$	—
Agency mortgage-backed: residential			102,353				—				102,353				—
Collateralized loan obligations			11,203				—				11,203				—
State and municipal			2,045				—				2,045				—
Corporate bonds			3,090				—				3,090				—
Total		$	152,790			$	—			$	152,790			$	—

78

---

Table of Contents

 

						Fair Value Measurements at December 31, 2021 Using
						(in thousands)
Description		Carrying Value				Quoted Prices In Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Available for sale securities
U.S. Government and federal agency		$	26,243			$	—			$	26,243			$	—
Agency mortgage-backed: residential			94,019				—				94,019				—
Collateralized loan obligations			50,149				—				50,149				—
Corporate bonds			43,802				—				29,761				14,041
Total		$	214,213			$	—			$	200,172			$	14,041

 

There were no transfers between Level 1 and Level 2 during 20172022 or 2016.2021.

 

89

---

Table

The Company’s policy is to transfer assets or liabilities from one level to another when the methodology to obtain the fair value changes such that there are more or fewer unobservable inputs as of Contents

the end of the reporting period. During the year ended December 31, 2022, the Company transferred five corporate bonds from Level 2 to Level 3. The Company’s corporate bond valuations were supported by an analysis prepared by an independent third party and approved by management.

 

FinancialThe table below presents a reconciliation of all assets measured at fair value on a non-recurringrecurring basis are summarized below:

						Fair Value Measurements at December 31, 2017 Using
						(in thousands)
Description		Carrying Value				Quoted Prices In Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Impaired loans:
Commercial		$	87			$	—			$	—			$	87
Commercial real estate:
Construction			—				—				—				—
Farmland			—				—				—				—
Nonfarm nonresidential			—				—				—				—
Residential real estate:
Multi-family			—				—				—				—
1-4 Family			957				—				—				957
Consumer			—				—				—				—
Agriculture			—				—				—				—
Other			—				—				—				—
Other real estate owned, net:
Commercial real estate:
Construction			4,335				—				—				4,335
Farmland			74				—				—				74
Nonfarm nonresidential			—				—				—				—
Residential real estate:
Multi-family			—				—				—				—
1-4 Family			—				—				—				—

						Fair Value Measurements at December 31, 2016 Using
						(in thousands)
Description		Carrying Value				Quoted Prices In Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Impaired loans:
Commercial		$	87			$	—			$	—			$	87
Commercial real estate:
Construction			—				—				—				—
Farmland			585				—				—				585
Nonfarm nonresidential			—				—				—				—
Residential real estate:
Multi-family			—				—				—				—
1-4 Family			1,261				—				—				1,261
Consumer			—				—				—				—
Agriculture			59				—				—				59
Other			—				—				—				—
Other real estate owned, net:
Commercial real estate:
Construction			6,571				—				—				6,571
Farmland			—				—				—				—
Nonfarm nonresidential			—				—				—				—
Residential real estate:
Multi-family			—				—				—				—
1-4 Family			250				—				—				250

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount ofsignificant unobservable inputs (Level $1.33 million, with a valuation allowance of $219,000, at December 31, 2017, resulting in no additional provision for loan losses for the year ended December 31, 2017. At December 31, 2016, impaired loans had a carrying amount of $2.4 million, with a valuation allowance of $370,000, at December 31, 2016, resulting in no additional provision for loan losses for the year ended December 31, 2016.

90

---

Table of Contents

OREO, which is measured at the lower of carrying or fair value less costs to sell, had a net carrying amount of $4.4 million as of December 31, 2017, compared with $6.8 million at December 31, 2016. Write-downs of $2.0 million and $1.2 million were recorded on OREO) for the years ended December 31, 20172022 and 2016,2021: respectively.

 

		December 31, 2022
		Corporate Bonds
		(in thousands)
Balance of recurring Level 3 assets at January 1, 2022		$	14,041
Total gains or losses for the year:
Included in other comprehensive income			(1,009	)
Transfers into Level 2			(6,524	)
Transfers into Level 3			15,739
Balance of recurring Level 3 assets at December 31, 2022		$	22,247

		December 31, 2021
		Collateralized Loan Obligations				Corporate Bonds
		(in thousands)
Balance of recurring Level 3 assets at January 1, 2021		$	2,388			$	11,916
Total gains or losses for the year:
Included in earnings			—				465
Included in other comprehensive income			108				1,532
Calls			—				(6,000	)
Transfers into Level 2			(2,496	)			(1,042	)
Transfers into Level 3			—				7,170
Balance of recurring Level 3 assets at December 31, 2021		$	—			$	14,041

79

---

Table of Contents

The following table presents qualitativequantitative information about recurring level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at December 31, 2017:are summarized below (in thousands):

 

		Fair Value			Valuation Technique(s)		Unobservable Input(s)		Range (Weighted Average)
		(in thousands)
Impaired loans – Residential real estate		$	957		Sales comparison approach		Adjustment for differences between the comparable sales		0%	-	26%	(9%)
Other real estate owned – Commercial real estate		$	4,409		Sales comparison approach		Adjustment for differences between the comparable sales		0%	-	35%	(18%)
					Income approach		Discount or capitalization rate		25%			(25%)

		Fair Value Measurements at December 31, 2022
		Fair Value			Valuation Technique(s)		Unobservable Input(s)		Range (Weighted Average)
		(in thousands)
Corporate bonds		$	22,247		Discounted cash flow		Constant prepayment rate			0%
							Spread to benchmark yield		198%	-	421%	(299%)
							Indicative broker bid		78%	-	97%	(90%)

 

The following table presents qualitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at December 31, 2016:

		Fair Value			Valuation Technique(s)		Unobservable Input(s)		Range (Weighted Average)
		(in thousands)
Impaired loans – Residential real estate		$	1,261		Sales comparison approach		Adjustment for differences between the comparable sales		0%	-	22%	(9%)
Other real estate owned – Commercial real estate		$	6,571		Sales comparison approach		Adjustment for differences between the comparable sales		0%	-	20%	(9%)
					Income approach		Discount or capitalization rate		18%	-	20%	(19%)

		Fair Value Measurements at December 31, 2021
		Fair Value			Valuation Technique(s)		Unobservable Input(s)		Range (Weighted Average)
		(in thousands)
Corporate bonds		$	14,041		Discounted cash flow		Constant prepayment rate			0%
							Spread to benchmark yield		200%	-	298%	(235%)
							Indicative broker bid		99%	-	106%	(103%)

 

91

80

---

Table of Contents

CarryingCarrying amount and estimated fair values of financial instruments were as follows at year-end 2017:for the periods indicated:

 

						Fair Value Measurements at December 31, 2017 Using																				Fair Value Measurements at December 31, 2022 Using
		Carrying Amount				Level 1				Level 2				Level 3				Total				Carrying Amount				Level 1				Level 2				Level 3				Total
		(in thousands)																				(in thousands)
Financial assets
Cash and cash equivalents		$	34,103			$	29,898			$	4,205			$	—			$	34,103			$	44,635			$	44,635			$	—			$	—			$	44,635
Securities available for sale			152,720				—				152,720				—				152,720				180,173				—				157,926				22,247				180,173
Securities held to maturity																							43,282				—				34,896				—				34,896
Federal Home Loan Bank stock			7,323				N/A				N/A				N/A				N/A				5,176				N/A				N/A				N/A				N/A
Loans held for sale			70				—				70				—				70
Loans, net			703,913				—				—				703,263				703,263				1,098,824				—				—				1,046,734				1,046,734
Accrued interest receivable			3,136				—				925				2,211				3,136				5,004				—				1,306				3,698				5,004
Financial liabilities
Deposits		$	847,024			$	137,386			$	693,320			$	—			$	830,706			$	1,200,784			$	268,954			$	926,725			$	—			$	1,195,679
Federal Home Loan Bank advances			11,797				—				11,799				—				11,799				70,000				—				69,993				—				69,993
Junior subordinated debentures																							21,000				—				—				19,084				19,084
Subordinated capital notes			2,250				—				—				2,246				2,246				25,000				—				—				24,212				24,212
Junior subordinated debentures			21,000				—				—				19,090				19,090
Senior debt			10,000				—				—				10,000				10,000
Accrued interest payable			1,475				—				357				1,118				1,475				1,571				—				889				682				1,571

						Fair Value Measurements at December 31, 2021 Using
		Carrying Amount				Level 1				Level 2				Level 3				Total
		(in thousands)
Financial assets
Cash and cash equivalents		$	77,603			$	77,603			$	—			$	—			$	77,603
Securities available for sale			214,213				—				200,172				14,041				214,213
Securities held to maturity			46,460				—				46,280				—				46,280
Federal Home Loan Bank stock			5,116				N/A				N/A				N/A				N/A
Loans, net			990,309				—				—				981,995				981,995
Accrued interest receivable			3,870				—				1,022				2,848				3,870
Financial liabilities
Deposits		$	1,208,668			$	274,083			$	935,768			$	—			$	1,209,851
Federal Home Loan Bank advances			20,000				—				20,046				—				20,046
Junior subordinated debentures			21,000				—				—				19,500				19,500
Subordinated capital notes			25,000				—				—				26,149				26,149
Accrued interest payable			764				—				136				628				764

 

Carrying amount and estimated fair values of financial instruments were as follows at year-endIn accordance with ASU 2016:2016

						Fair Value Measurements at December 31, 2016 Using
		Carrying Amount				Level 1				Level 2				Level 3				Total
		(in thousands)
Financial assets
Cash and cash equivalents		$	66,316			$	31,091			$	35,225			$	—			$	66,316
Securities available for sale			152,790				—				152,790				—				152,790
Securities held to maturity			41,818				—				43,072				—				43,072
Federal Home Loan Bank stock			7,323				N/A				N/A				N/A				N/A
Loans, net			630,269				—				—				632,528				632,528
Accrued interest receivable			3,137				—				1,203				1,934				3,137
Financial liabilities
Deposits		$	849,925			$	124,395			$	712,458			$	—			$	836,853
Federal Home Loan Bank advances			22,458				—				22,475				—				22,475
Subordinated capital notes			3,150				—				—				3,091				3,091
Junior subordinated debentures			21,000				—				—				13,263				13,263
Accrued interest payable			734				—				369				365				734

The-01, the methods and assumptions usedutilized to estimate fair value are described as follows:

(a) Cash and Cash Equivalents

The carrying amounts of cash and short-term instruments approximate fair values and are classified as either Level 1 or Level 2. Noninterest bearing deposits are Level1 whereas interest bearing due from bank accounts and fed funds sold are Level 2.

(b) FHLB Stock

It is not practical to determinemeasure the fair value of FHLB stock due to restrictions placed on its transferability.  financial instruments represent an approximation of exit price; however, an actual exit price may differ.

 

(c) Loans, Net

Fair values of loans, excluding loans held for sale,value estimates are estimated as follows: For variable rate loans that reprice frequentlymade at a specific point in time based on relevant market information and withinformation about financial instruments. Because no significant change in credit risk,market exists for a portion of the Company’s financial instruments, fair valuesvalue estimates are based on carrying values resultingjudgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Therefore, calculated fair value estimates in many instances cannot be substantiated by comparison to independent markets and, in many cases, may not be realizable in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

92

---

Table of Contents

(d) Loans Held for Sale

The fair value of loans held forcurrent sale is estimated based upon binding contracts and quotes from third party investors resulting in a Level 2 classification.

(e) Deposits

The fair values disclosed for non-interest bearing deposits are, by definition, equal to the amount payable on demand at the reporting date resulting in a Level 1 classification. The carrying amounts of variable rate interest bearing deposits approximate their fair values at the reporting date resulting in a Level 2 classification. Fair values for fixed rate interest bearing deposits are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

(f) Other Borrowings

The fair values of FHLB advances are estimated using discounted cash flow analyses based on the current borrowing rates resulting in a Level 2 classification.

The fair values of subordinated capital notes, junior subordinated debentures, and senior debt are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 3 classification.

(g) Accrued Interest Receivable/Payable

The carrying amounts of accrued interest approximate fair value resulting in a Level 2 or Level 3 classification based on the level of the asset or liability with which the accrual is associated.instrument. Changes in assumptions could significantly impact estimates.

 

NNOTE 17–OTE 18– STOCK PLANS AND STOCK BASED COMPENSATION

 

SharesShares available for issuance under the 20162018 Omnibus Equity Compensation Plan (“2016 Plan”) total 25,000.122,603; however, the Company is precluded from issuing additional shares based on the terms of the Merger Agreement. Shares issued to employees under the plan vest annually on the anniversary dateover periods of the grant generally over threeup to fourseven years.

The Company also maintains the Porter Bancorp, Inc. 2006 Non-Employee Directors Stock Ownership Incentive Plan (“2006 Director Plan”) pursuant to which 2,834 shares remain available for issuance as annual awards of restricted stock to the Company’s non-employee directors. Shares issued annually for the next year of service to each non-employee directorsdirector on the first business day of the month following election have a fair market value of $25,000$25,000 and vest on December 31 in the year of grant.

 

The fair value of thethe 20172022 unvested shares issued was $365,000,$1.3 million, or $9.64$19.61 per weighted-average share. The Company recorded $400,000$884,000, $699,000, and $443,000$580,000 of stock-based compensation during 20172022,2021, and 2016,2020, respectively, to salaries and employee benefits. Management expects substantially all of the unvested shares outstanding at the end of the period to vest according to the vesting schedule.schedule or upon the anticipated closing of the Merger transaction should all closing conditions be met. A deferred tax benefit of $140,000$221,000, $175,000, and $122,000 was recognized in 2017 related to this expense whereas no deferred tax benefit was recognized in 2016.2022,2021, and 2020, respectively.

 

81

---

Table of Contents

The following table summarizes unvestedstock plan share activity as of and for the periods indicated for the Stock Incentive Plan:Company’s equity compensation plan:

 

		Twelve Months Ended								Twelve Months Ended								Year Ended								Year Ended
		December 31, 2017								December 31, 2016								December 31, 2022								December 31, 2021
						Weighted								Weighted								Weighted								Weighted
						Average								Average								Average								Average
						Grant								Grant								Grant								Grant
		Shares				Price				Shares				Price				Shares				Price				Shares				Price
Outstanding, beginning			179,513			$	4.89				184,482			$	4.81				111,536			$	13.73				47,438			$	15.34
Granted			37,865				9.64				35,465				9.10				64,600				19.61				110,024				13.52
Vested			(73,728	)			5.75				(38,462	)			8.32				(40,137	)			16.86				(37,590	)			15.13
Forfeited			(1,316	)			9.35				(1,972	)			6.16				(10,509	)			15.35				(8,336	)			13.66
Outstanding, ending			142,334			$	5.67				179,513			$	4.89				125,490			$	15.62				111,536			$	13.73

 

Unrecognized stock based compensation expense related to unvested shares for 20182023 and beyond is estimated as follows (in thousands):

 

2018		$	258
2019			99
2020			25
2021 & thereafter			—

2023		$	466
2024			337
2025			195
2026			188
2027			149
Thereafter			25

 

93

---

Table of Contents

NNOTE 18OTE 19– – EARNINGS (LOSS) PER SHARE

 

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

 

		2017				2016				2015
		(in thousands, except share and per share data)
Net income (loss)		$	38,453			$	(2,753	)		$	(3,213	)
Less:
Earnings (losses) allocated to unvested shares			967				(88	)			(122	)
Earnings (losses) allocated to participating preferred shares			—				—				(214	)
Net income (loss) attributable to common shareholders, basic and diluted		$	37,486			$	(2,665	)		$	(2,877	)
Basic
Weighted average common shares including unvested common shares and participating preferred shares outstanding			6,249,059				5,980,945				5,191,944
Less:
Weighted average unvested common shares			157,127				192,232				197,355
Weighted average Series B Preferred Shares			—				—				133,269
Weighted average Series D Preferred Shares			—				—				212,318
Weighted average common shares outstanding			6,091,932				5,788,713				4,649,002
Basic income (loss) per common share		$	6.15			$	(0.46	)		$	(0.62	)
Diluted
Add: Dilutive effects of assumed exercises of common stock warrants			—				—				—
Weighted average common shares and potential common shares			6,091,932				5,788,713				4,649,002
Diluted income (loss) per common share		$	6.15			$	(0.46	)		$	(0.62	)

		2022				2021				2020
		(in thousands, except share and per share data)
Net income		$	18,342			$	14,909			$	9,005
Less:
Earnings allocated to unvested shares			302				219				68
Net income attributable to common shareholders, basic and diluted		$	18,040			$	14,690			$	8,937
Basic and Diluted
Weighted average common shares including unvested common shares outstanding			7,631,243				7,593,176				7,492,190
Less:
Weighted average unvested common shares			125,687				111,740				56,809
Weighted average common shares outstanding			7,505,556				7,481,436				7,435,381
Basic and diluted income per common share		$	2.40			$	1.96			$	1.20

 

The Company had no outstanding stock options at December 31, 2017,2022, 20162021 or 2015.2020.

NOTE 19 A warrant for the purchase of 66,113 shares– REVENUE FROM CONTRACTS WITH CUSTOMERS

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

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

82

---

Table of Contents

Bank Card Interchange Income: The Company earns interchange fees from bank cardholder transactions conducted through a third party payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder.

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

Other Non-interest Income: Other non-interest income includes revenue from several sources that are within the scope of ASC $79.41606, was outstanding atincluding title insurance commissions, income from secondary market loan sales, gains on sales of premises and equipment, and other transaction-based revenue that is individually immaterial. Other non-interest income included approximately $695,000, $623,000, and $558,000 of revenue for the years ended December 31, 2017,2022, 20162021, and 2015,2020, but wasrespectively, within the scope of ASC not606. included inThe remaining other non-interest income for the diluted EPS computation as inclusion would have been anti-dilutive. The warrantyear is exercisable atexcluded from the holder’s option throughscope of ASC November 21, 2018.606.

  

 

NOTE20–20– PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION

 

Condensed financial information of PorterLimestone Bancorp Inc. is presented as follows:

 

CONDENSED BALANCE SHEETS

December31,

										December 31,
		2017				2016				2022				2021
		(in thousands)								(in thousands)
ASSETS
Cash and cash equivalents (1)		$	2,045			$	2,048
Cash and cash equivalents										$	7,337			$	4,759
Investment in banking subsidiary			99,651				51,528				164,811				165,481
Investment in and advances to other subsidiaries			776				776				776				776
Deferred taxes, net			2,497				—
Deferred taxes, net											6,921				6,532
Other assets			711				645				1,982				1,282
Total assets		$	105,680			$	54,997			$	181,827			$	178,830
LIABILITIES AND SHAREHOLDERS’ EQUITY
Debt		$	31,775			$	21,775			$	46,775			$	46,775
Accrued expenses and other liabilities			1,232				489				1,194				1,096
Shareholders’ equity			72,673				32,733
Shareholders’ equity											133,858				130,959
Total liabilities and shareholders’ equity		$	105,680			$	54,997			$	181,827			$	178,830

 

CONDENSED STATEMENTS OF OPERATIONS

		Years ended December 31,
		2022				2021				2020
		(in thousands)
Interest income		$	37			$	18			$	37
Dividends from subsidiaries			7,530				2,019				23
Other income			21				20				20
Interest expense			(2,398	)			(2,040	)			(2,008	)
Other expense			(1,827	)			(1,501	)			(1,357	)
Income (loss) before income tax and undistributed subsidiary income			3,363				(1,484	)			(3,285	)
Income tax benefit			(1,047	)			(885	)			(815	)
Equity in undistributed subsidiary income			13,932				15,508				11,475
Net income		$	18,342			$	14,909			$	9,005

83

---

Table of Contents

CONDENSED STATEMENTS OF CASH FLOWS

		Years ended December 31,
		2022				2021				2020
		(in thousands)
Cash flows from operating activities
Net income		$	18,342			$	14,909			$	9,005
Adjustments:
Equity in undistributed subsidiary income			(13,932	)			(15,508	)			(11,475	)
Deferred taxes, net			(389	)			(579	)			(815	)
Stock-based compensation expense			884				699				580
Net change in other assets			(700	)			(102	)			(97	)
Net change in other liabilities			97				390				145
Net cash from operating activities			4,302				(191	)			(2,657	)
Cash flows from investing activities
Investments in subsidiaries			—				—				—
Net cash from investing activities			—				—				—
Cash flows from financing activities
Proceeds from issuance of subordinated capital notes			—				—				8,000
Repayment of senior debt			—				—				(5,000	)
Common shares withheld for taxes			(197	)			(87	)			(75	)
Cash dividends paid on common stock			(1,527	)			—				—
Net cash from by financing activities			(1,724	)			(87	)			2,925
Net change in cash and cash equivalents			2,578				(278	)			268
Beginning cash and cash equivalents			4,759				5,037				4,769
Ending cash and cash equivalents		$	7,337			$	4,759			$	5,037

NOTE 21– QUARTERLY FINANCIAL DATA (UNAUDITED)

Presented below is a summary of the consolidated quarterly financial data for the years ended December 31, 2022 and 2021.

		2022
		Fourth				Third				Second				First
		Quarter				Quarter				Quarter				Quarter
		(in thousands)
Interest income (1)		$	17,140			$	15,121			$	13,122			$	12,427
Interest expense			3,768				2,209				1,442				1,313
Net interest income			13,372				12,912				11,680				11,114
Provision (negative provision) for loan losses			130				(1,250	)			450				750
Net interest income after provision			13,242				14,162				11,230				10,364
Non-interest income			2,155				2,228				2,256				2,238
Non-interest expense (2)			8,862				8,697				8,227				7,971
Income before income taxes			6,535				7,693				5,259				4,631
Income tax expense (3)			1,621				1,880				1,223				1,052
Net income		$	4,914			$	5,813			$	4,036			$	3,579
Basic and diluted earnings per common share (4)		$	0.64			$	0.76			$	0.53			$	0.47
Cash dividends declared per common share		$	0.05			$	0.05			$	0.05			$	0.05

84

---

Table of Contents

 

		2021
		Fourth				Third				Second				First
		Quarter				Quarter				Quarter				Quarter
		(in thousands)
Interest income (1)		$	12,314			$	12,975			$	12,376			$	12,250
Interest expense			1,307				1,354				1,462				1,570
Net interest income			11,007				11,621				10,914				10,680
Provision for loan losses			500				300				—				350
Net interest income after provision			10,507				11,321				10,914				10,330
Non-interest income			1,984				2,436				2,135				1,884
Non-interest expense			7,983				8,050				7,954				7,984
Income before income taxes			4,508				5,707				5,095				4,230
Income tax expense (3)			1,063				1,366				1,194				1,008
Net income		$	3,445			$	4,341			$	3,901			$	3,222
Basic and diluted earnings per common share (4)		$	0.45			$	0.57			$	0.51			$	0.43
Cash dividends declared per common share		$	0.00			$	0.00			$	0.00			$	0.00

(1)

$806,000 is held in escrow by the senior note lender to be used exclusively for interest payments on senior debt.Interest income included PPP loan origination fees as detailed below:

 

94

---

Table of Contents

CONDENSED STATEMENTS OF OPERATIONS

Years ended December31,

		2017				2016				2015
		(in thousands)
Interest income		$	4			$	5			$	46
Dividends from subsidiaries			26				23				20
Other income			—				17				102
Interest expense			(973	)			(694	)			(647	)
Other expense			(1,137	)			(1,240	)			(1,457	)
Income (loss) before income tax and undistributed subsidiary income			(2,080	)			(1,889	)			(1,936	)
Income tax expense (benefit)			(2,497	)			21				—
Equity in undistributed subsidiary income (loss)			38,036				(843	)			(1,277	)
Net income (loss)		$	38,453			$	(2,753	)		$	(3,213	)

CONDENSED STATEMENTS OF CASH FLOWS

Years ended December31,

		2017				2016				2015
		(in thousands)
Cash flows from operating activities
Net income (loss)		$	38,453			$	(2,753	)		$	(3,213	)
Adjustments:
Equity in undistributed subsidiary (income) loss			(38,036	)			843				1,277
Deferred taxes, net			(2,497	)			—				—
Gain on sale of assets			—				—				(70	)
Change in other assets			743				(95	)			(40	)
Change in other liabilities			(128	)			358				634
Other			462				978				481
Net cash (used in) operating activities			(1,003	)			(669	)			(931	)
Cash flows from investing activities
Investments in subsidiaries			(9,000	)			(500	)			—
Sales of securities			—				—				642
Net cash (used in) from investing activities			(9,000	)			(500	)			642
Cash flows from financing activities
Proceeds from issuance of common stock			—				2,231				—
Proceeds from senior debt			10,000				—				—
Net cash (used in) financing activities			10,000				2,231				—
Net change in cash and cash equivalents			(3	)			1,062				(289	)
Beginning cash and cash equivalents			2,048				986				1,275
Ending cash and cash equivalents		$	2,045			$	2,048			$	986

95

---

Table of Contents

NOTE 21– QUARTERLY FINANCIAL DATA (UNAUDITED)

																						Earnings (Loss) Per Common Share
		Interest Income				Net Interest Income				Provision For Loan Losses				OREO Expense				Net Income (Loss)				Basic (1)				Diluted (1)
		(in thousands, except per share data)
2017
First quarter		$	9,225			$	7,741			$	—			$	(16	)		$	1,680			$	0.27			$	0.27
Second quarter			9,134				7,588				—				(3	)			1,709				0.27				0.27
Third quarter			9,446				7,787				—				111				1,794				0.29				0.29
Fourth quarter			9,717				8,001				(800	)			1,881				33,270		(2)		5.31				5.31
2016
First quarter		$	9,185			$	7,651			$	(550	)		$	668			$	1,480			$	0.27			$	0.27
Second quarter			8,705				7,196				(600	)			294				1,012				0.17				0.17
Third quarter			8,931				7,458				(750	)			322				1,393				0.22				0.22
Fourth quarter			8,781				7,316				(550	)			257				(6,638	)	(3)		(1.07	)			(1.07	)

		2022				2021
		(in thousands)
First quarter		$	45			$	436
Second quarter			—				692
Third quarter			—				1,368
Fourth quarter			—				261

 

(12)

Non-interest expense for the fourth quarter of 2022 included $691,000 in merger expenses.

(3)

See Footnote 12 for more information on the Company’s income taxes for 2022 and 2021.

(4)

The sum of the quarterly net income (loss) per share (basic and diluted) differs from the annual net income (loss) per share (basic and diluted) because of the differences in the weighted average number of common shares outstanding and the common shares used in the quarterly and annual computations as well as differences in rounding.

(2)

Net income for the fourth quarter of 2017 was impacted by the reversal of the Company’s deferred tax asset valuation allowance and the change in federal corporate tax rates in connection with the enectment of the Tax Cuts and Jobs Act of 2017. The net result of these two items, as well as tax expense for the year, was an income tax benefit of $31.9 million.

(3)

The $6.6 million loss for the fourth quarter of 2016 was due to the $8.0 million in litigation expenses accrued as a result of the Kentucky Court of Appeals ruling against the Bank.

  

96

---

Table of Contents

 

Item9.Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

 

None

 

Item 9A. Item9A.Controls and Procedures

Controls and Procedures

 

Disclosure Controls and Procedures

Management is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rulesin Rule 13a-15(e) and 15d-15(e) ofunder the Securities Exchange Act of 1934. Our The Company’s management, under the supervision and with the participation of ourits Chief Executive Officer and ourits Chief Financial Officer, evaluated the effectiveness of the design and operation of ourthe Company’s disclosure controls and procedures as of December 31, 2017.2022. Based on that evaluation, management believes that ourthe Company’s disclosure controls and procedures were effective to collect, process, and disclose the information required to be disclosed in the reports filed withor submitted under the SECSecurities Exchange Act of 1934 within the required time periods as of the end of the period covered by this report.

 

There was no change in the internal control over financial reporting, as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Management’s’s Report on Internal Control Over Financial Reporting

 

The management of PorterLimestone Bancorp, Inc. (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of; the principal executive and principal financial officers and effected by the board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation, integrity, and fair presentation of the Company’s annual consolidated financial statements for external purposesstatements. All information has been prepared in accordance with U.S. generally accepted accounting principles and, as such, includes certain amounts that are based on management’s best estimates and judgments.

85

---

Table of Contents

Management is responsible for establishing and maintaining adequate internal control over financial reporting presented in conformity with U.S. generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that:

Pertainthat (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;

Providethe assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that our receipts and expenditures of the Company are being made only in accordance with authorizations of our management and directors;directors of the Company; and

Provide (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of ourthe Company’s assets that could have a material effect on the financial statements.

 

BecauseTwo of itsthe objectives of internal control are to provide reasonable assurance to management and the Board of Directors that transactions are properly authorized and recorded in the Company’s financial records, and that the preparation of the Company’s financial statements and other financial reporting is done in accordance with U.S. generally accepted accounting principles. There are inherent limitations in the effectiveness of internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even effective internal control can provide only reasonable assurance with respect to reliability of financial statements. Furthermore, internal control can vary with changes in circumstances.

Management has made its own assessment of the effectiveness of the Company’s internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2017. In making this assessment, management used2022, in relation to the criteria set forthdescribed in the report, Internal Control — Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"(“COSO”) in the 2013 Internal Control-Integrated Framework. .

Based on thatits assessment, management believes that as of December 31, 2017, our2022, the Company’s internal control over financial reporting iswas effective based on those criteria.in achieving the objectives stated above.

 

This annual report does not include an attestation report of our registered public accounting firm regarding internal controlscontrols over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.

Item9B.Other Information

 

/s/ John T. TaylorNone

John T. Taylor

Item9C.Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

Not applicable.

86

---

Table of Contents

PART III

Item 10. Directors, Executive Officers and Corporate Governance

Directors and Executive Officers

The table below identifies each of the members of the Company’s Board of Directors. None of the Directors currently serves as a director of any other public or registered investment company, nor have they held any such directorship, except as described in each director’s biography below.

Director		Age		Position
W. Glenn Hogan		61		Chairman of the Board of Directors
Celia P. Catlett		46		Director
Kevin J. Kooman		53		Director
Michael T. Levy		54		Director
James M. Parsons		66		Director
Bradford T. Ray		65		Director
Dr. Edmond J. Seifried		76		Director
John T. Taylor		63		President, CEO and Director of Limestone Bancorp President, CEO and Chairman of the Board of Limestone Bank, Inc.

Board Diversity Matrix (As of February 28, 2023 and as of April 15, 2022)*
Board Size:
Total Number of Directors	8
	Female	Male	Non-Binary	Did Not Disclose Gender
Gender:
Directors	1	7	-	-
Number of Directors who identify in Any of the Categories Below:
African American or Black	-	-	-	-
Alaskan Native or Native American	-	-	-	-
Asian	-	-	-	-
Hispanic or Latinx	-	-	-	-
Native Hawaiian or Pacific Islander	-	-	-	-
White	1	7	-	-
Two or More Races or Ethnicities	-	-	-	-
LGBTQ+	-
Persons with Disabilities	-

* There have been no changes in the Board Diversity Matrix during the past year.

Each Director is independent under the applicable listing standards of the Nasdaq corporate governance rules, with the exception of Mr. Taylor.

W. Glenn Hogan, a director since 2006, is founder, President and Chief Executive Officer of Hogan Real Estate, a full service commercial real estate development company headquartered in Louisville, Kentucky. Mr. Hogan has more than thirty years of real estate development experience and has developed millions of square feet of retail space in the Midwest and Southeast. He is a Certified Commercial Investment Member and a past president of the Kentucky State CCIM Chapter. Mr. Hogan brings executive decision making skills and his commercial real estate background strengthens our risk assessment function. He also is familiar with the banking industry from previous service on the Board of Directors of two other Louisville community banks. Mr. Hogan served as a director of US Wireless Online, Inc. from August 2005 until May 2006.

 

/s/ Phillip W. BarnhouseCelia P. Catlett, a director since 2018, is General Counsel at the TurnPoint Services Group, a rapidly growing commercial services company. Ms. Catlett also serves as a director and officer of Mothers Esquire, Inc., a 501(c)(3) dedicated to achieving gender equity in the legal profession. Ms. Catlett previously served as the General Counsel of Texas Roadhouse, a Nasdaq listed company, from 2013 through 2019. She joined Texas Roadhouse in 2005 and served as its Corporate Secretary from 2011 through 2019. Prior to joining Texas Roadhouse, Ms. Catlett practiced law in New York City. She graduated magna cum laude from the University of Alabama with a Bachelor’s Degree in communications, and earned her Juris Doctor Degree from Vanderbilt University Law School. In 2014, Ms. Catlett was named one of Louisville Business First’s Forty Under 40 and recognized by the Kentucky Governor’s office as an Outstanding Kentuckian. In 2016, Ms. Catlett was named as the Enterprising Woman to Watch by Louisville Business First. Ms. Catlett brings her public company experience, legal background, and experience in the customer-focused hospitality industry.

87

---

Table of Contents

Kevin J. Kooman, a director since 2019, is a Partner with Patriot Financial Partners, L.P., a private equity investment fund focused on investments in the community bank and financial services sectors. Mr. Kooman joined Patriot Financial Partners in 2007 and has over 25 years of private equity, investment banking and corporate finance experience. Prior to joining Patriot Financial Partners, he served as a Vice President of Investment Banking at Janney Montgomery Scott LLC in the firm’s Financial Institutions Group. Prior to joining Janney, Mr. Kooman held the positions of divisional Controller and Manager of Financial Operations at CIGNA Corporation and ACE Limited. Mr. Kooman began his career in the Philadelphia office of Arthur Andersen LLP. He currently serves on the board of Freedom Financial Holdings, Inc., the holding company for The Freedom Bank of Virginia. Mr. Kooman received a Bachelor’s Degree in Accounting from Villanova University and received an M.B.A. in Finance from Temple University. He is a Certified Public Accountant (currently inactive). Mr. Kooman brings extensive leadership and community banking experience to our Board of Directors, including merger and acquisition experience, public company expertise and risk assessment skills.

Mr. Kooman is serving on the Board of Directors as a representative of Patriot Financial Partners III, L.P. (“Patriot”). Pursuant to the Securities Purchase Agreement the Company entered into with Patriot in connection with its private purchase of 150,000 common shares and 1,000,000 non-voting common shares of the Company on March 30, 2018, Patriot has the right to nominate a director to the Board of Directors of both the Company and Limestone Bank for so long as it beneficially owns at least 50% or more of all the securities purchased under the agreement or 4.9% of the Company’s outstanding common shares. The Securities Purchase Agreement requires the Company to recommend to the shareholders the election of the board representative of Patriot to the Board, subject to all legal and governance requirements regarding service as a director of the Company and the reasonable approval of the Nominating and Governance Committee.

Michael T. Levy, a director since 2014,is President of Muirfield Insurance LLC of Kentucky, a Lexington, Kentucky insurance brokerage firm. An owner of Bluewater Farm, LLC, Mr. Levy is active in breeding and selling Thoroughbreds and has served in the past as a board member of the Thoroughbred Owners and Breeders Association and Breeders Cup, Ltd. He is a graduate of the University of Pennsylvania. The lead producer in an insurance agency, Mr. Levy has intimate knowledge of the Lexington market, which has been identified as a target growth market in our strategic planning. He also has extensive experience in the equine industry, a niche market also identified in the strategic plan of our banking subsidiary, Limestone Bank, Inc.

James M. Parsons, a director since 2015,is the Chief Financial Officer of Ball Homes, LLC, a residential real estate development firm headquartered in Lexington, Kentucky with operations in Kentucky and Tennessee. Mr. Parsons has served with Ball Homes since 2005. Mr. Parsons previously served as President and CEO of ONB Insurance Group. His background in accounting and real estate development finance strengthen the Board’s depth of experience in those areas. Mr. Parsons earned his Bachelor’s Degree in Business Administration and Accounting from West Virginia University.

Bradford T. Ray, a director since 2014, served in various leadership roles at Steel Technologies, Inc., a steel processor, from 1981 to 2010, serving as CEO beginning in 1999 and as Chairman beginning in 2002. He served as an advisor to Steel Technologies, Inc. from 2010 to 2012. He has been a consultant with BTR Advisory Services since 2012 and served as an independent director of Global Brass and Copper Holdings, Inc. from 2014 through 2019. Mr. Ray also previously served on the Board of Trustees of Bellarmine University in Louisville, Kentucky. He provides the experience and perspective of a former chief executive of a publicly traded manufacturing business.

Dr. Edmond J. Seifried, a director since 2015, is a principal in S&B West LLC, a community bank consulting center in Easton, Pennsylvania. In addition, Dr. Seifried is Professor Emeritus of Economics and Business at Lafayette College in Easton, Pennsylvania. He also serves as Executive Consultant and Chief Economist for Sheshunoff Affiliation Programs, a national bank consulting organization. Dr. Seifried serves as the dean of the Virginia and West Virginia Banking Schools and has served on the faculty of numerous banking schools including Stonier Graduate School of Banking and the Graduate School of Banking at Louisiana State University. Dr. Seifried provides experience and insight with respect to trends and developments affecting community banks nationally.

John T. Taylor has served as President and a director of Limestone Bancorp, and as President and Chief Executive Officer of the Bank since July 2012. He became Chief Executive Officer of Limestone Bancorp in 2013. Mr. Taylor serves as an executive officer and is nominated as a director in accordance with his employment agreement with the Company and the Bank. Prior to joining Limestone, Mr. Taylor served as President and CEO of American Founders Bank, Inc. and American Founders Bancorp, Inc. of Lexington, Kentucky since 2007. Prior to joining American Founders, he served in senior management positions with increasing responsibility for PNC Bank, N.A., including as President of its Ohio/Northern Kentucky region for six years. Mr. Taylor has over 30 years of banking experience in Kentucky and Ohio. Mr. Taylor has been actively involved in a number of civic and professional organizations. He has a solid history of building organizations with a clear vision and strategy to build long-term enterprise value. Mr. Taylor also has strong roots in Kentucky with significant experience in our key markets. He is a graduate of the University of Kentucky where he earned a Master’s and a Bachelor’s Degree in Business Administration.

88

---

Table of Contents

Other Executive Officers

Name		Age		Position
Phillip W. Barnhouse		52		Chief Financial Officer Limestone Bancorp and Limestone Bank
John R. Davis		60		Chief Credit Officer of Limestone Bank
Joseph C. Seiler		56		Executive Vice President of Limestone Bank

Phillip W. Barnhouse has served as Executive Vice President and Chief Financial Officer since 2012 and has served as Chief Financial Officer of the Bank since 2006. He served as the Bank’s Chief Operating Officer from 2013 to 2018. Mr. Barnhouse served as Chief Financial Officer of Ascencia Bank from 1998 to 2005. Prior to joining the Bank, Mr. Barnhouse worked with Arthur Andersen LLP, where he managed the audits of public and private companies. He is a member of the American Institute of Certified Public Accountants and the Kentucky Society of CPAs. Mr. Barnhouse earned a Bachelor's Degree in Accounting from Western Kentucky University and a diploma from The Graduate School of Banking at Louisiana State University. Mr. Barnhouse serves as an executive officer in accordance with his employment agreement with the Company and the Bank.

John R. Davis has served as Executive Vice President and Chief Credit Officer of the Bank since September 2012. Mr. Davis has the responsibility for establishing and executing credit quality policies and overseeing credit administration. He previously served as Executive Vice President and Chief Credit Officer of American Founders Bank, Inc. and American Founders Bancorp, Inc. of Lexington, Kentucky. Before joining American Founders in 2005, he served for 17 years in various commercial lending and credit administration positions of increasing authority with National City Bank. Mr. Davis earned his Bachelor’s Degree in Business from the University of Louisville, an MBA from Bellarmine University and is a graduate of the Stonier Graduate School of Banking. Mr. Davis serves as an executive officer in accordance with his employment agreement with the Company and the Bank.

Joseph C. Seiler has served as Executive Vice President and head of the Bank’s commercial banking business since August 2013. Mr. Seiler previously served as Executive Vice President, Asset Resolution Team, of PNC Bank, N.A. in Louisville, Kentucky. Before joining PNC Bank in 2009, he served as Executive Vice President and Managing Director, Investment Real Estate Group, for National City Bank of Louisville, Kentucky. Mr. Seiler earned his Bachelor’s Degree in Economics from Centre College in Danville, Kentucky and an MBA from the University of Louisville. Mr. Seiler serves as an executive officer in accordance with his employment agreement with the Company and the Bank.

Director Nominating Procedures

There have not been any material changes to the procedures by which shareholders may recommend nominees to the Company’s Board of Directors during the past year.

Board Committees

The Company’s Board of Directors has established standing committees in connection with the discharge of its responsibilities. These committees include an Audit Committee, a Compensation Committee and a Nominating and Corporate Governance Committee, each of which has a separate charter. Our committee charters are available on our website at www.limestonebank.com under “Investor Relations” and “Governance Documents.”

Audit Committee

The Company has a separately designated standing Audit Committee established by the Board of Directors for the purpose of overseeing the accounting and financial reporting processes of the Company and audits of the financial statements of the Company.

During the past year, the Audit Committee was comprised of Ms. Catlett, Mr. Kooman, Mr. Levy, Mr. Parsons, and Mr. Ray. The Board of Directors determined that each of the members of the Audit Committee met the independence requirements of the Nasdaq corporate governance rules and relevant federal securities laws and regulations, and that Mr. Parsons qualified as an audit committee financial expert.

89

---

Table of Contents

Code of Ethics and Conflict of Interest Policy

The Board has adopted a Code of Ethics and a Conflict of Interest Policy that set forth important policies and procedures in conducting our business in a legal, ethical and responsible manner. The Code of Ethics is applicable to our CEO, CFO, and all Senior Financial Officers. The Conflict of Interest Policy is applicable to all employees and directors. The Code of Ethics Policy and the Conflict of Interest Policy are each available on our website at www.limestonebank.com under “About Us - Investor Relations” and “Governance Documents.” If the Company amends or waives any of the provisions of the Code of Ethics applicable to its Chief Executive Officer or senior financial officers, management intends to disclose the amendment or waiver on this website. The Company will provide to any person without charge, upon request, a copy of its Code of Ethics. You can request a copy by contacting Limestone Bancorp, Inc., Chief Financial Officer, 2500 Eastpoint Parkway, Louisville, Kentucky, 40223, (telephone) 502-499-4800.

Delinquent Section 16(a) Reports

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our directors, executive officers, and persons who own more than 10 percent of our common shares, to file reports of ownership and changes in ownership with the SEC. Directors, executive officers, and greater than 10 percent beneficial owners, referred to as “reporting persons,” are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file. Based solely on a review of the copies of such forms furnished to us, we believe that during 2022 all reporting persons complied with the filing requirements of Section 16(a).

90

---

Table of Contents

Item 11. Executive Compensation

The Compensation Committee of the Board of Directors is responsible for developing specific policies regarding compensation of our executive officers, as well as evaluating and approving our executive officer incentive compensation, benefit, severance, equity-based or other compensation plans, policies and programs, and implementing and administering all aspects of our benefit and compensation plans and programs. The Compensation Committee is currently comprised of Mr. Levy, Ms. Catlett, Mr. Kooman, Mr. Ray, and Dr. Seifried.

Compensation Discussion and Analysis

Executive Compensation Philosophy and Objectives

Our philosophy for executive compensation is to attract, retain and reward excellent executives and align their interests with the interests of our shareholders. To promote this philosophy, we have established the following objectives:

●

provide fair and competitive compensation to executives, based on their performance and contributions to the Company, that will attract, motivate and retain individuals who will enable the Company to successfully compete with other financial institutions in our markets;

●

provide incentives that reward executives for attaining predetermined objectives that promote and reward individual performance, Company financial performance, achievement of strategic goals and Company stock performance;

●

instill in our executives a long-term commitment and a sense of ownership through the use of equity-based compensation; and

●

ensure that the interests of our executives are aligned with our shareholders’ interests.

Overview

The Company has employment agreements with each of its four named executive officers, which were updated in April 2019. The agreements provide for severance and take into account each executive’s cash incentive compensation, in addition to base salary, and provide for continued health care coverage in the case of employment termination concurrently with or within 24 months following a change in control of the Company or the Bank (as defined under Section 409A of the Internal Revenue Code and the regulations thereunder). The current employment agreements are described after the Summary Compensation Table under “Executive Compensation” below.

To induce talented and capable individuals to join our organization, we must offer a competitive compensation package including incentive compensation. To that end, we provide an incentive compensation program for our executive officers that provides for cash and stock incentive awards to be earned upon on the attainment of annual targeted performance goals. Stock awards vest in some cases when granted and in others for periods up to seven years.

Executive Compensation Components

The compensation program is comprised of three components:

●

A base salary that is competitive with levels paid by comparable financial institutions;

●

Annual incentive cash payments based on the attainment of targeted performance goals; and

●

Equity-based compensation, generally in the form of restricted stock awards, based on the attainment of targeted performance goals.

The Company provides a compensation package that is driven by our overall financial performance and is intended to be competitive with the public and non-public financial institutions in our market, thereby enabling us to attract and retain executives who we believe are critical to our future success. The compensation strategy includes base salary compensation along with the opportunity for our CEO to earn cash incentive compensation of up to 50% of base salary and equity incentive compensation of up to 50% of base salary and the opportunity for our other named executives to earn cash incentive compensation of up to 35% of base salary and equity incentive compensation of up to 35% of base salary. The Committee establishes the target percentage of compensation for each of the three components at the beginning of each year.

Base Salary. When establishing base salaries for our executives, we consider the scope of executive responsibilities and publicly available information concerning the compensation paid to executives with similar levels of responsibility by other comparable public and non-public financial institutions in our market. Although we do not attempt to set the salaries of our executives to fall within a certain percentage range compared to the salaries paid by other comparable institutions, we consider compensation data from comparable institutions to satisfy ourselves that the compensation we pay is competitive and sufficient to recruit and retain the talented employees our business depends upon to be successful.

91

---

Table of Contents

In the first quarter of 2022, the Committee reviewed 2020 publicly available national peer group data as compiled by SNL Financial in its 2021 Executive Compensation Review, the most recent data available, to ensure that our base salaries, and our incentive compensation that is determined as a percentage of base salary, were competitive with comparable financial institutions. The publicly available data showed base salary and total compensation, which included base salary, annual bonus, other annual compensation, restricted stock awards, performance units, and other compensation paid due to long-term incentive plans. The peer groups were: (i) the seven financial institutions in the Midwest with assets of $500 million to $1 billion, and (ii) the 49 financial institutions in the Midwest with assets of $1 billion to $5 billion. As of December 31, 2021, the Company had total assets of approximately $1.416 billion. Average assets for 2021 were approximately $1.363 billion and average assets for 2020 were approximately $1.295 billion.

The following table shows the median base salary for 2020 paid to chief executive officers, chief financial officers, chief credit officers, and senior lending officers of the two peer groups described above:

Position		Median Base Salary of Midwest Financial Institutions with Assets of $500 million to $1 billion				Median Base Salary of Midwest Financial Institutions with Assets of $1 billion to $5 billion
CEO		$	339,414			$	444,231
CFO			192,868				246,242
CCO			n/a				250,371
SLO			188,156				254,642

The following table shows the median total compensation for 2020 paid to chief executive officers, chief financial officers, chief operating officers, chief credit officers, and senior lending officers of the two peer groups described above:

Position		Median Total Compensation of Midwest Financial Institutions with Assets of $500 million to $1 billion				Median Total Compensation of Midwest Financial Institutions with Assets of $1 billion to $5 billion
CEO		$	574,329			$	772,057
CFO			364,612				433,531
CCO			n/a				457,235
SLO			354,748				429,392

Incentive Compensation Bonus Plan. The cash and equity incentive plan awards cash and equity bonuses based on a weighted scoring of Company performance metrics across a range of pre-determined targets. The five metrics are financial ratios customarily used to evaluate the performance of banks: earnings per share, loan growth, efficiency ratio, core deposit growth, and asset quality. Equity incentive awards are generally granted between January and March each year when our financial results are final and we have all the data necessary to make the calculations. The Compensation Committee retains the discretion to assess our performance results and make adjustments it deems appropriate.

For 2022, the Compensation Committee set the maximum incentive compensation for our CEO at a maximum cash bonus of 50% of base salary and a maximum equity bonus at 50% of base salary. The Committee set the maximum incentive compensation for our other named executive officers at a maximum cash bonus at 35% of base salary and a maximum equity bonus at 35% of base salary.

The incentive compensation earned under our incentive plan is a function of the weighted percentage allocated to each of five financial metrics for the Bank’s performance. The weighted percentages for 2022 were as follows: (i) earnings per share – 30%; (ii) loan growth – 25%; (iii) efficiency ratio – 15%; (iv) core deposit growth – 20%; and (v) the ratio of classified assets to capital – 10%. For each metric, a range of results is established, with a threshold level required to earn a minimum weighted percentage and a maximum level at which the entire weighted percentage would be earned. The sum of the resulting percentages is then multiplied against the maximum cash and equity bonus amounts. The following table shows the performance range from threshold to maximum incentive for each of the five metrics for 2022, as well as the results attained in 2022.

Metric (dollar amounts in millions)(1)		Threshold				Maximum				2022 Results
Earnings per share		$	1.51			$	1.85			$	2.40
Loans		$	1,025.0			$	1,105.0			$	1,111.9
Efficiency ratio			62.0	%			58.0	%			53.0	%
Core deposits		$	852.0			$	972.0			$	919.0
Classified assets to capital			18	%			5	%			6.6	%

---

(1)

Excludes gain on sale of securities, other than temporary impairment charges and non-recurring items as determined at the discretion of the Compensation Committee.

92

---

Table of Contents

For 2022, the Compensation Committee determined, based upon the performance results and metrics of the plan, that the CEO qualified to receive cash and equity incentive compensation equal to 46.2% and 46.2% of base salary, respectively, and that the three named executive officers qualified to receive cash and equity incentive compensation equal to 31.6% and 31.6% of base salary, respectively. In determining the incentive compensation payout for the plan year, the Committee exercised its discretion given that earnings per share performance exceeded the maximum goal by approximately $0.55 per share representing additional net income of $4.2 million for the Company. In view of this outsized performance, the Committee exercised its discretion and awarded our CEO cash and equity incentive compensation of 50.0% and 50.0%, respectively, as well as cash and equity incentive of 35.0% and 35.0%, respectively, for Mr. Davis, Mr. Seiler, and Mr. Barnhouse.

Due to the restriction against issuing shares contained in the Merger Agreement, on January 18, 2023, the Board of Directors, at the recommendation of the Compensation Committee, amended the executive officer incentive bonus plan for the 2022 calendar year to provide for the payment of awards thereunder to its executive officers 100% in cash.

At the recommendation of the Compensation Committee, the Incentive Compensation Bonus Plan is not in place for the CEO or the named executive officers for 2023 given the Company’s pending Merger Agreement.

Other Benefits

401(k) Plan. All full and part-time employees, including our named executive officers, are eligible to participate in the 401(k) Plan after 90 days of employment. Employees may contribute a portion of their compensation up to the limitations imposed by federal tax laws. In 2022, the Company matched 100% of the first 1% of compensation and 50% of the next 5% contributed by employees. The Company has the discretion to make an additional contribution each plan year. No discretionary contributions were made in 2022.

Compensation Risk Assessment

The Compensation Committee evaluates annually whether the Company’s compensation policies and practices could create risks that are reasonably likely to have a material adverse effect on the Company. As part of its assessment, the Committee reviews its previously established compensation objectives, which are:

●

Incentive compensation must be sufficiently competitive to attract and retain talented employees who can contribute to the Company's future success;

●

Compensation should be allocated among equity and cash incentives based on the specific role of the employee. A significant portion of compensation should be performance-based for higher levels of responsibility;

●

A significant portion of senior level compensation should be equity grants with appropriate vesting or holding periods that align the interests of our senior officers with the interests of shareholders;

●

Performance measures should not be so difficult to achieve that they fail to provide an adequate incentive for the employee to perform, and the metrics should be measurable and enforceable; and

●

Performance measures should be tailored to encompass performance of both individuals and business units, considering business objectives and other factors such as revenue production, expertise, compliance with corporate policies, and leadership.

The Compensation Committee then identifies and evaluates possible risks that might arise from the Company’s current compensation policies and practices. These considerations include:

●

Whether incentive features could encourage the manipulation of reported earnings to increase compensation;

●

Whether incentive features could encourage a lender to promote a loan transaction that is not in the Company’s best interest and could result in the borrower subsequently becoming insolvent or otherwise unable to meet its financial obligations;

●

Whether compensation policies appropriately encourage the identification and correction of possible weaknesses in operations, data security and, internal controls or systems;

●

Whether compensation policies appropriately emphasize compliance with legal rules, regulations or guidelines issued by banking regulators;

●

Whether compensation practices could expose the Company and the Board to criticism from regulators, shareholders, or the public and risk opposition to proposals regarding executive compensation and/or share availability; and;

93

---

Table of Contents

●

Whether compensation policies create risks that could endanger the Company’s existence as an ongoing enterprise.

In its most recent review, the Compensation Committee concluded that the Company’s current compensation policies and practices did not create undue risks for a community bank of its size whose principal source of revenue is net interest income. The performance measures used for senior management include incentives to encourage growth in core deposits and quality loan production, as well as incentives which consider classified assets to encourage prudent banking practices. The Compensation Committee also reviews and adjusts the performance measures and their relative weighting annually, based on the Company’s financial condition and the past year’s results, strategic planning, market conditions, and trends in the current banking environment.

Compensation Committee Report

The Company’s Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussions, has recommended to the Board of Directors that the foregoing Compensation Discussion and Analysis disclosure be included in this report.

The Compensation Committee

Michael T. Levy, Chairman

Celia P. Catlett

Kevin J. Kooman

Bradford T. Ray

Dr. Edmond J. Seifried

94

---

Table of Contents

Executive Compensation

The following table discloses the compensation received by the Company’s Chief Executive Officer, Chief Financial Officer, and the other most highly paid executive officers (these four individuals are referred to as the “named executive officers”) during the year ended December 31, 2022.

Summary Compensation Table

Name and Principal Position		Year		Salary				Stock Award(1)				Non-Equity Incentive Plan Compensation(2)				Change in Nonqualified Deferred Compensation Earnings				All Other Compensation(3)				Total
John T. Taylor		2022		$	465,000			$	-			$	465,000			$	-			$	16,526			$	946,526
President and CEO		2021			450,000				172,125				172,125				-				17,732				811,982
		2020			431,021				71,802				143,597				-				15,185				661,605
John R. Davis		2022			269,000				-				188,300				-				16,279				473,579
Chief Credit Officer		2021			260,000				68,900				68,900				-				15,975				413,775
		2020			258,542				198,565				33,313				-				14,638				505,058
Joseph C. Seiler		2022			259,000				-				181,300				-				15,652				455,952
Head of Commercial Banking		2021			250,000				66,250				66,250				-				13,279				395,779
		2020			248,483				187,156				41,406				-				10,967				488,012
Phillip W. Barnhouse		2022			259,000				-				181,300				-				16,042				456,342
Chief Financial Officer		2021			250,000				66,250				66,250				-				13,579				396,079
		2020			248,483				196,537				32,301				-				11,910				489,231

(1)		Includes restricted stock granted as equity incentive compensation on January 20, 2021 and January 19, 2022, based on prior year financial results. Additionally, on January 20, 2021, Mr. Davis, Mr. Seiler, and Mr. Barnhouse received 11,000 long-term incentive shares vesting pro-ratably over the third through seventh anniversary dates of grant. The grant date fair value for the stock awards was $13.25 per share for January 20, 2021, and $19.45 per share for January 19, 2022. Due to the restriction against issuing shares contained in the Merger Agreement, on January 18, 2023, the Company amended its executive officer incentive bonus plan for the 2022 calendar year to provide for the payment of awards thereunder to its executive officers 100% in cash. Awards were paid February 8, 2023 based on results attained in 2022.
(2)		Our cash and equity incentive plan is discussed in further detail under “Compensation Discussion and Analysis -- Executive Compensation Components -- Cash and Equity Incentives.”
(3)		All other compensation for the named executive officers is set forth below:

Name		Vehicle Allowance				401(k) Matching Contribution				H S A Matching Contribution				Life & LTD Premiums Paid for Benefit of Employee				Total Other Compensation
John T. Taylor		$	-			$	10,675			$	1,250			$	4,601			$	16,526
John R. Davis			-				10,675				1,000				4,604				16,279
Joseph C. Seiler			-				10,675				750				4,227				15,652
Phillip W. Barnhouse			-				10,675				1,250				4,117				16,042

Employment Agreements

The Company entered into employment agreements with our named executive officers on April 24, 2019. The terms of the employment agreements with the named executive officers are summarized below.

Term.Each of the employment agreements has an initial three-year term, subject to extension and early termination. On each anniversary of the date of the agreement, the term of the agreement will be extended for an additional one year unless we or the executive elect not to extend the term by providing written notice not less than 30 days before the anniversary date. If notice of election not to renew is provided, the agreement will terminate at the conclusion of its remaining term.

95

---

Table of Contents

Base salary.The Board of Directors may increase an executive’s base salary from time to time but may only decrease it with his express written consent. At its January 2020 meeting, the Compensation Committee approved increases in the annual base salary to $433,500 for Mr. Taylor, to $260,000 for Mr. Davis, and to $250,000 for Mr. Seiler and Mr. Barnhouse. At its March 2021 meeting, the Compensation Committee increased Mr. Taylor’s base salary to $450,000. At its January 2022 meeting, the Compensation Committee approved increases in the annual base salary to $465,000 for Mr. Taylor, to $269,000 for Mr. Davis, and to $259,000 for Mr. Seiler and Mr. Barnhouse. At its January 2023 meeting, base salaries were not adjusted.

Incentive Compensation. The named executives are eligible to receive cash and equity incentive compensation as described in “Compensation Discussion and Analysis -- Executive Compensation Components – Incentive Compensation Bonus Plan.” Mr. Taylor’s employment agreement assures him of the opportunity to earn annual cash incentive compensation of up 50% of his base salary.

Termination of employment. The employment agreements provide that if the executive’s employment is terminated for one of the following reasons, he will have no right to compensation or other benefits for any period after the date of termination:

●

for “Cause;”

●

as a result of disability, retirement or death; or

●

by the executive other than for “Good Reason.”

The executive will be entitled to a cash severance payment and payment of the premiums for up to 12 months of continued health insurance coverage for the executive and his dependents if the executive’s employment is terminated for one of the following reasons:

●

by the Company other than for Cause, disability, retirement or death;

●

by the executive for Good Reason; or

●

by the Company for other than Cause, disability, retirement or death within six months following the expiration of the term of the agreement.

The amount of the cash severance payment is based on the executive’s average annual base salary for the calendar year in which his employment is terminated and the 2 preceding years and his average cash incentive compensation for the 3 calendar years immediately preceding termination of employment. For Mr. Seiler, the cash severance payment would equal one times the executive’s average annual base salary and cash incentive compensation. For Messrs. Taylor, Davis and Barnhouse, the amount of the cash severance would be one times his average base salary and cash incentive compensation if the termination is not concurrent with or within 24 months after a Change in Control. If the termination were concurrent with or within 24 months after a Change in Control, then Mr. Taylor’s severance payment would be 2.99 times his average annual base salary and cash incentive compensation, and Messrs. Davis’s and Barnhouse’s severance payment would be 2 times his average base salary and cash incentive compensation.

The employment agreements define “Change in Control” as a change in the ownership of the Company or the Bank, a change in the effective control of the Company or the Bank or a change in the ownership of a substantial portion of the assets of the Company or the Bank, in each case as provided under Section 409A of the Internal Revenue Code and the regulations thereunder, except that a change in ownership of less than 50% of the assets of the Company or the Bank will not constitute a “Change in Control” under the employment agreements. The Merger of the Company with Peoples as provided for in the Merger Agreement will constitute a Change in Control as defined in the employment agreements.

The obligation of the Company and the Bank to pay the severance amount is subject to several conditions, including the executive’s execution of a general release of claims, and the Company and the Bank have the right to claw-back compensation which is subject to recovery under any law, government regulation or stock exchange listing requirement.

In the event that any of the payments or benefits provided under the employment agreement or otherwise would constitute an “excess parachute payment” as defined in Section 280G of the Internal Revenue Code, the payments or benefits under the employment agreements will be reduced by the amount necessary to avoid treatment as an “excess parachute payment.”

The employment agreements define “Cause” as termination because of personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or final consent or cease-and-desist order or material breach of any provision of the agreement.

96

---

Table of Contents

“Good Reason” is defined as any material change in the Metro Louisville or Metro Lexington, Kentucky location at which the executive must perform his services or any material breach of the employment agreement by the Company and the Bank, including:

●

a material diminution in the executive’s base salary or opportunity to earn cash incentive compensation (as a percentage of base salary),

●

a material diminution in his authority, duties or responsibilities (including, in the case of Mr. Taylor, his position as Chairman of the Board of the Bank), or

●

any change in the executive’s reporting duties.

Prior to any termination for Good Reason, the executive must provide written notice within 90 days of the initial existence of the condition, and the Company and the Bank will have the right to remedy the condition within 30 days of receipt.

Restrictive covenants. The employment agreements include covenants not to solicit the employees and customers of the Company or the Bank and, in the case of Messrs. Taylor, Davis and Barnhouse, covenants not to compete with the Company and the Bank for a period of 12 months after termination of employment. The agreements also include covenants to maintain the confidentiality of the confidential information of the Company and the Bank other than in the course of performing services for them.

Grants of Plan-Based Awards

The following table details all non-equity and equity awards granted in 2022 under our incentive compensation plan to each of the officers named in the “Summary Compensation Table”.

Equity grants are issued under the Limestone Bancorp, Inc. 2018 Omnibus Equity Compensation Plan. Although the Plan authorizes both stock options and restricted stock grants, the Company currently awards only restricted stock. The criteria for earning cash and restricted stock awards are more fully described in “Compensation Discussion and Analysis.”

		Grant		Estimated Possible Payouts Under Non-Equity Incentive Plan Awards (1)								Estimated Possible Payouts Under Equity Incentive Plan Awards (1,2)								All Other Stock Awards: Number of Shares of Stock				Grant Date Fair Value of Stock
Name		Date		Threshold				Maximum				Threshold				Maximum				or Units				Awards (2)
John T. Taylor		1/19/22		$	6,975			$	232,500				359				11,954				n/a			$	172,125
John R. Davis		1/19/22			2,690				94,150				138				4,841				n/a				68,900
Joseph C. Seiler		1/19/22			2,590				90,650				133				4,661				n/a				66,250
Phillip W. Barnhouse		1/19/22			2,590				90,650				133				4,661				n/a				66,250

---

(1)

Under our incentive plan for 2022, the maximum cash incentive award and the maximum equity incentive award that the named executive officers (other than Mr. Taylor) can earn are each 35% of base salary based upon the attainment of the highest level for all five financial metrics. Mr. Taylor can earn a maximum cash incentive award of 50% of base salary and the maximum equity incentive award of 50% of base salary. The threshold cash and equity incentive awards represent attainment of only the minimum level for the lowest weighted financial metric. Due to the restriction against issuing shares contained in the Merger Agreement, on January 18, 2023, the Company amended its executive officer incentive bonus plan for the 2022 calendar year to provide for the payment of awards thereunder to its executive officers 100% in cash.

(2)

The grant date fair value for the January 19, 2022, stock awards was $19.45 per share.

97

---

Table of Contents

Outstanding Equity Awards at Fiscal Year-End

The following table shows outstanding stock awards at December 31, 2022. None of our named executive officers had outstanding options as of that date.

		Stock Awards
Name		Number of Shares or Units of Stock that Have Not Vested				Market Value of Shares or Units of Stock That Have Not Vested (5)				Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested				Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested (5)
John T. Taylor			n/a				n/a				1,247	(1)		$	30,452
											3,612	(2)			88,205
John R. Davis			11,000	(4)		$	268,620				978	(1)			23,883
											2,657	(2)			64,884
											3,542	(3)			86,496
Joseph C. Seiler			11,000	(4)			268,620				724	(1)			17,680
											2,083	(2)			50,867
											3,406	(3)			83,175
Phillip W. Barnhouse			11,000	(4)			268,620				724	(1)			17,680
											2,555	(2)			62,393
											3,406	(3)			83,175

---

(1)

Restricted shares granted on February 13, 2020. One-third of the shares vest over three years on each anniversary date of the grant.

(2)

Restricted shares granted on January 20, 2021. One-third of the shares vest over three years on each anniversary date of the grant.

(3)

Restricted shares granted on January 19, 2022. One-third of the shares vest over three years on each anniversary date of grant.

(4)

Long-term restricted shares granted on January 20, 2021. One-fifth of the shares vest on January 20, 2024 and each year thereafter.

(5)

Based on the $24.42 per share closing price of Limestone Bancorp, Inc. common shares on December 31, 2022.

Stock Vested and Options Exercised

The following table shows stock awards that vested during 2022. None of our named executive officers hold stock options.

		Stock Awards
Name		Number of Shares Acquired on Vesting (1)				Value Realized on Vesting (2)
John T. Taylor			12,911			$	250,329
John R. Davis			2,911			$	56,049
Joseph C. Seiler			2,345			$	45,154
Phillip W. Barnhouse			2,581			$	49,686

---

⁽¹⁾         One-third of the restricted shares awarded in each of 2019, 2020, and 2021 vested on the anniversary date of grant in 2022.

⁽²⁾         Value realized on vesting is based on the Nasdaq closing price per share of LMST common stock on each vesting date in 2022.

98

---

Table of Contents

Pension Benefits

The Company currently does not provide pension benefits.

Potential Payments upon Termination or Change-in-Control

The employment agreements with each of our executive officers provide that the executive would currently be entitled to receive a lump sum cash severance payment upon termination of employment other than for Cause or due to retirement, death or disability, as described above under Employment Agreements – Termination of Employment.

The market value of unvested restricted shares held by our executive officers as of December 31, 2022, which shares would vest upon a change-in-control of the Company, is shown in the table under “Outstanding Equity Awards at Fiscal Year-End,” above.

Except for the benefits described in this section and as described above under Employment Agreements – Termination of Employment, and the automatic vesting of outstanding restricted stock upon a change of control, we have no agreements or understandings with our executive officers that provide for payments upon termination of employment or a change-in-control of our Company.

Director Compensation

The Compensation Committee reviews Board compensation at least every two years. For 2022, each non-employee director received an annual retainer of $35,000, each committee chair received an additional $5,000, and the Chairman of the Board received an additional $25,000. Cash compensation is paid quarterly. In addition, each non-employee director received a grant of restricted shares having a market value of $25,000, based on the trading price of our common shares at the closing of trading on the grant date. Shares are issued annually on the first day of the month following the election of directors for the next year of service.

Restricted shares are common shares that may not be transferred and are subject to forfeiture during a specified period. Otherwise, restricted shares have all of the rights of common shares during the restriction period, including the right to vote and the right to receive dividends. Restricted shares awarded to directors vest on December 31 of the year of grant. If a director ceases to serve on the Board of Directors for any reason, the director will automatically forfeit any unvested restricted shares. In the event of a change in control, the restrictions on the transfer of the shares will end. Under the terms of the restricted share awards to non-employee directors, a change in control means (i) the disposal of our business or the business of the Bank pursuant to a liquidation, sale of assets or otherwise, (ii) any person, group or entity acquiring or gaining ownership or control of more than 50% of our outstanding shares or the outstanding shares of the Bank, other than any trustee or other fiduciary holding shares under any employee benefit plan, or (iii) during any period of two consecutive years, individuals who were our directors at the beginning of that period cease to constitute a majority of the Board of Directors, unless the election of each new director was approved by at least two-thirds of the directors then still in office who were directors at the beginning of the period.

The following table shows the compensation paid to non-employee directors in 2022.

Name		Fees Earned or Paid in Cash				Stock Awards (1)				Option Awards				All Other Compensation				Total
W. Glenn Hogan		$	60,000			$	25,000			$	-			$	-			$	85,000
Celia P. Catlett			35,000				25,000				-				-				60,000
Kevin J. Kooman (2)			35,000				25,000				-				-				60,000
Michael T. Levy			40,000				25,000				-				-				65,000
James M. Parsons			40,000				25,000				-				-				65,000
Bradford T. Ray			40,000				25,000				-				-				65,000
Edmond J. Seifried			35,000				25,000				-				-				60,000

(1)

On June 1, 2022, each non-employee director received an award of 1,253 restricted shares with a grant date fair value of $19.96 per share. The restricted shares are granted to each non-employee director on the first business day of the month following election. The shares have a fair market value of $25,000 on the date of grant and vest on December 31 in the year of grant. The amounts in the Stock Awards column reflect the grant date fair value for the restricted stock awards for the fiscal year ended December 31, 2022. The assumptions used in the calculation of these amounts for awards granted in 2022 are included in Note 17 “Stock Plans and Stock-Based Compensation” in the “Notes to Consolidated Financial Statements” included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

(2)

Mr. Kooman’s fees and restricted stock award are for the benefit of Patriot Financial Manager LP.

99

---

Table of Contents

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

As of February 28, 2023, the Company had 6,629,402 common shares and 1,000,000 non-voting common shares issued and outstanding. The Company has no outstanding stock options or stock warrants. The information provided below is based on our records, information filed with the SEC, and information provided to us, except where otherwise noted.

Security Ownership of Directors and Management

The following table shows, as of February 28, 2023, the number and percentage of our shares held by (1) the Company’s directors, (2) each of the named executive officers set forth in the Summary Compensation Table and (3) current directors and named executive officers as a group. Unless otherwise indicated, each person has sole voting and investment power (or shares these powers with his or her spouse) with respect to the shares set forth in the following table.

Name and Address of Beneficial Owner(1)	Common Shares Beneficially Owned	% of Class	Non-Voting Common Shares Beneficially Owned	% of Class
Directors
John T. Taylor	146,256	2.2%	-	-%
W. Glenn Hogan	488,314	7.4	-	-
Celia P. Catlett	7,730	*	-	-
Kevin J. Kooman (2)	-	*	-	-
Michael T. Levy	81,677	1.2	-	-
James M. Parsons	46,008	*	-	-
Bradford T. Ray	74,068	1.1	-	-
Dr. Edmond J. Seifried	84,152	1.3	-	-
Other Named Executive Officers
John R. Davis	46,948	*	-	-
Phillip W. Barnhouse	44,994	*	-	-
Joseph C. Seiler	34,830	*	-	-
Named Executive Officers and Directors as a Group (11 persons)	1,054,977	15.9%	-	-

---

*		Represents beneficial ownership of less than 1%.
(1)		The business address for these individuals is c/o Limestone Bancorp, Inc., 2500 Eastpoint Parkway, Louisville, Kentucky 40223.
(2)		Mr. Kooman does not have direct ownership of LMST shares. This total does not include 17,433 common shares beneficially owned by Patriot Financial Manager, L.P. of which Mr. Kooman is a partner, or the 319,118 common shares and 1.0 million non-voting common shares held by Patriot Financial Partners III, L.P. Mr. Kooman disclaims beneficial ownership of the 336,551 common shares and the 1.0 million non-voting common shares, except to the extent of his pecuniary interest therein. See footnote 5 to the share ownership table on the following page.

100

---

Table of Contents

Security Ownership of Certain Beneficial Owners

The following table sets forth beneficial ownership information for each shareholder who is not a director and is known to us to own 5% or more of the outstanding shares of our common shares, based on public filings made with the SEC, except as noted below.

		Common Shares								Non-Voting Common Shares
Name and Address of Beneficial Owner		Beneficially Owned				Percent of Class				Beneficially Owned				Percent of Class
J. Chester Porter Trust Funds (1) 318 S. Buckman Street Shepherdsville, Kentucky 40165			614,999				9.3	%			–				–
Banc Funds Company LLC (2) 200 North Wacker Drive, Suite 300 Chicago, IL 60606			385,678				5.9	%			–				–
Maria L. Bouvette (3) c/o Limestone Bancorp, Inc. 2500 Eastpoint Parkway Louisville, Kentucky 40223			388,672				5.9	%			–				–
FJ Capital Management, LLC. (4) 29525 Chagrin Boulevard, Suite 318 Pepper Pike, OH 44122			384,204				5.8	%			–				–
Patriot Financial Group (5) Four Radnor Corporate Center 100 Matsonford Road, Suite 210 Radnor, PA 19087			336,551				5.1	%			1,000,000				100	%

---

(1)	The information is included in reliance upon information provided by the J. Chester Porter Trust Funds as of February 14, 2023 and a Form 4 filed with the SEC by Jack C. Porter, Jr and Jennifer E. Porter, Co-Trustees on October 3, 2019. J. Chester Porter Trust Fund A and J. Chester Porter Trust Fund B (together the “J. Chester Porter Trust Funds”) are the beneficial owners of 266,879 and 342,857 common shares, respectively. Shared voting power of these funds is held by Jack C. Porter, Jr. and Jennifer E. Porter. Mr. Porter and Ms. Porter disclaim beneficial ownership of these shares except to the extent of his or her pecuniary interest therein. In addition, Mr. Porter is the beneficial owner with sole voting power of 4,131 common shares and Ms. Porter is the beneficial owner with sole voting power of 1,132 common shares.
(2)	This information is included in reliance upon Form 13G filed with the SEC by Banc Funds Company, LLC on February 6, 2023.
(3)	The information is included in reliance upon information provided by Maria L. Bouvette to the Company as of February 14, 2023.
(4)	This information is included in reliance upon Form 13G filed with the SEC by FJ Capital Management, LLC on February 8, 2023.
(5)	This information is included in reliance upon Form 13F filed with the SEC by Patriot Financial Partners GP, LP on February 13, 2023 and Mr. Kooman’s Form 4 filed with the SEC on June 2, 2022. Includes 319,118 common shares and 1.0 million non-voting common shares beneficially owned directly by Patriot Financial Partners III, L.P.; 17,433 common shares beneficially owned directly by Patriot Financial Manager, L.P. Securities owned by Patriot Financial Partners III, L.P. may be regarded as being beneficially owned by Patriot Financial Partners GP III, L.P, and Patriot Financial GP III, LLC. Mr. Kooman disclaims beneficial ownership of the shares that Patriot beneficially owns, except to the extent of his pecuniary interest therein.

Pending Merger Transaction

As discussed in this report, the Company is a party to a Merger Agreement with Peoples Bancorp Inc. (Peoples) that provides for the merger of the Company with and into Peoples, with Peoples as the surviving corporation in the Merger. Under the terms and subject to the satisfaction and completion of the conditions of the Merger Agreement, at the Effective Time of the Merger each share of the Company’s common stock, issued and outstanding immediately prior to the Effective Time (except for Dissenting Shares), will be converted, in accordance with the procedures set forth in the Merger Agreement, into 0.90 common shares of Peoples,

101

---

Table of Contents

Equity Compensation Plan Information

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

Plan category		Numberofsecuritiesto beissueduponexercise ofoutstandingoptions, warrants and rights				Weighted-average exercise price of outstandingoptions, warrants and rights				Numberofsecurities remainingavailablefor future issuance under equity compensation plans (excluding securities reflected in column 1)
Equity compensation plans approved by shareholders			—				—				122,603
Equity compensation plans not approved by shareholders			—				—				—
Total			—				—				122,603

At December 31, 2022, 122,603 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.

102

---

Table of Contents

Item 13. Certain Relationships and Related Transactions, and Director Independence

Transactions with Related Parties

The Audit Committee of the Board of Directors has the responsibility to review and approve or ratify all transactions, other than loans and extensions of credit, between the Company and related parties, including without limitation, fees and commissions for services, purchases or sales of assets, rental arrangements and any other financial arrangement.

As a banking institution, the Bank is not subject to Section 402 of the Sarbanes-Oxley Act of 2002, which prohibits any issuer to extend, renew or arrange for the extension of credit in the form of a personal loan to or for any director or executive officer of that issuer. However, any such loans we make must be:

●

made in the ordinary course of our consumer credit business;

●

of a type we generally make available to the public; and

●

made on market terms, or terms that are no more favorable than those offered by the issuer to the general public.

We have long-standing policies and procedures governing our extension of credit to related parties in compliance with the insider lending restrictions of Section 22(h) of the Federal Reserve Act or the Federal Reserve’s Regulation O. All loans to directors and executive officers or their affiliates are approved by the Board of Directors of Limestone Bank. As of December 31, 2022 and 2021, we had loans to our executive officers and directors, the executive officers and directors of Limestone Bank, or the firms and corporations in which they have at least a ten percent beneficial interest totaling $17.5 million and $13.5 million, respectively. All such loans were made in the ordinary course of business of the Bank, were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with persons not related to the Bank and did not involve more than the normal risk of collectability or present other unfavorable features.

The Company’s officers, directors and principal shareholders and their affiliates, as well as certain of the officers and directors of the Bank and their affiliates, have conducted banking transactions with the Bank from time to time, including investments in certificates of deposit. All such investments have been made, and will continue to be made, only in the ordinary course of business of the Bank on substantially the same terms as those prevailing at the time for comparable transactions with unaffiliated persons.

Transactions in Which Related Parties Have an Interest

Hogan Development Company and Hogan Real Estate Company periodically assist the Bank in managing and selling the Bank’s OREO. Both companies are owned by W. Glenn Hogan, a director of the Company and Bank. This arrangement was reviewed and evaluated by the Audit Committee in conjunction with the Board’s annual assessment of director independence. The Bank paid real estate management and sales fees to these companies of $45,000 and $26,000 for the years ended December 31, 2021, and 2020, respectively. There were no payments to Hogan Development Company or Hogan Real Estate Company during 2022.

Director Independence

The Company’s corporate governance principles provide that a majority of the members of the Board of Directors must be independent from management. For this purpose, the Board has adopted director independence standards that meet the listing standards of the Nasdaq corporate governance rules. In accordance with our corporate governance guidelines, the Nominating and Corporate Governance Committee of the Board of Directors undertakes an annual review of director independence during the first quarter of each year. During this review, the Board considers any and all commercial and charitable relationships of directors, including transactions and relationships between each director or any member of his or her immediate family and the Company and its subsidiaries, including those described above. In its 2022 review, the Board affirmatively determined that directors Celia P. Catlett, W. Glenn Hogan, Kevin J. Kooman, Michael T. Levy, James M. Parsons, Bradford T. Ray, and Dr. Edmond J. Seifried are each independent of the Company and its management in that none have any relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director, in accordance with the Nasdaq corporate governance rules.

Each Director of the Company also meets the independence requirements of the Nasdaq corporate governance rules and relevant federal securities laws and regulations applicable to each committee of the Board of Directors on which he or she serves. During the past year:

●

The Audit Committee of the Board of Directors was comprised of Ms. Catlett, Mr. Kooman, Mr. Levy, Mr. Parsons, and Mr. Ray. The Board of Directors determined that each of the members of the Audit Committee met the independence requirements of the Nasdaq corporate governance rules and relevant federal securities laws and regulations.

103

---

Table of Contents

●

The Compensation Committee of the Board of Directors was comprised of Ms. Catlett, Mr. Kooman, Mr. Levy, Mr. Ray, and Dr. Seifried. Our Board of Directors determined that each member of the Compensation Committee met the independence requirements of the Nasdaq corporate governance rules.

●

The Nominating and Corporate Governance Committee of the Board of Directors was comprised of Ms. Catlett, Mr. Levy, Mr. Ray, and Mr. Kooman. The Board of Directors determined that each member of the Nominating and Corporate Governance Committee met the independence requirements of the Nasdaq corporate governance rules.

Item 14. Principal Accounting Fees and Services

At its meeting held on April 20, 2022, the Audit Committee selected Crowe LLP to serve as Limestone Bancorp’s independent registered public accounting firm and auditors for the fiscal year ending December 31, 2022.  Crowe LLP or its predecessor has served as Limestone Bancorp’s independent registered public accounting firm since 1998.

Fees Incurred by Limestone Bancorp for Crowe LLP

The following table presents fees for professional services rendered by Crowe LLP for the audit of the Company’s annual financial statements for 2022 and 2021 and fees billed for audit-related services, tax services, and all other services rendered by Crowe LLP for 2022 and 2021.  

		2022				2021
Audit Fees		$	280,000			$	265,000
Audit-Related Fees			27,819				17,862
Tax Fees			50,838				38,825
All Other Fees			--				--

As defined by the SEC, (i) “audit fees” are fees for professional services rendered by the Company’s principal accountant for the audit of the Company’s annual financial statements and review of financial statements included in the Company’s Form 10-Q, or for services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years; (ii) “audit-related fees” are fees for assurance and related services by the Company’s principal accountant that are reasonably related to the performance of the audit or review of the Company’s financial statements and are not reported under “audit fees” including the audit of the Company’s 401k Plan; (iii) “tax fees” are fees for professional services rendered by the Company’s principal accountant for tax compliance, tax advice, and tax planning; and (iv) “all other fees” are fees for products purchased from the Company’s principal accountant, other than the services reported under “audit fees,” “audit-related fees,” and “tax fees.” The Audit Committee approved all (100%) of the services provided by the Company’s principal accountant in each of the categories shown in the above table.

Under applicable SEC rules, the Audit Committee is required to pre-approve the audit and non-audit services performed by the independent auditors in order to ensure that they do not impair the auditors’ independence. The SEC’s rules specify the types of non-audit services that an independent auditor may not provide to its audit client and establish the Audit Committee’s responsibility for administration of the engagement of the independent auditors.

Consistent with the SEC’s rules, the Audit Committee Charter requires that the Audit Committee review and pre-approve all audit services and permitted non-audit services provided by the independent auditors to us or any of our subsidiaries. The Audit Committee may delegate pre-approval authority to a member of the Audit Committee and if it does, the decisions of that member must be presented to the full Audit Committee at its next scheduled meeting.

104

---

Table of Contents

PART IV

Item15.Exhibits and Financial Statement Schedules

(a) 1.	The following financial statements are included in this Form 10-K:
	Consolidated Balance Sheets as of December 31, 2022 and 2021
	Consolidated Statements of Operations for the Years Ended December 31, 2022, 2021, and 2020
	Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2022, 2021, and 2020
	Consolidated Statements of Change in Stockholders’ Equity for the Years Ended December 31, 2022, 2021, and 2020
	Consolidated Statements of Cash Flows for the Years Ended December 31, 2022, 2021, and 2020
	Notes to Consolidated Financial Statements
	Report of Independent Registered Public Accounting Firm

(a) 2.	List of Financial Statement Schedules
	Financial statement schedules are omitted because the information is not applicable.
(a) 3.	List of Exhibits
	The Exhibit Index appearing before the required signatures in this report is incorporated by reference. The compensatory plans or arrangement required to be filed as exhibits to this Form 10-K pursuant to Item 15(c) are noted with an asterisk in the Exhibit Index as noted therein.

Item16.Form 10-K Summary

None

105

---

Table of Contents

EXHIBIT INDEX

ExhibitNo.(1)	Description
2.1^	Agreement and Plan of Merger by and between Peoples Bancorp Inc. and Limestone Bancorp, Inc. dated October 24, 2022. Exhibit 2.1 to the Form 8-K filed October 25, 2022 is incorporated by reference.
3.1	Articles of Incorporation of the Company, restated to reflect amendments. Exhibit 3.1 to the Quarterly Report on Form 10-Q filed July 30, 2021 is incorporated by reference.
3.2	Amended and Restated Bylaws of Limestone Bancorp, Inc. dated June 18, 2018. Exhibit 3.2 to Form 8-K filed June 18, 2018 is hereby incorporated by reference.
4.1	Tax Benefits Preservation Plan, dated as of June 25, 2015, between the Company and American Stock Transfer Company, as Rights Agent. Exhibit 4.1 to Form 8-K filed June 29, 2015 is incorporated by reference.
4.2	Amendment No. 1 to the Tax Benefits Preservation Plan, dated August 5, 2015. Exhibit 4.2 to the Quarterly Report on Form 10-Q filed August 5, 2015 is incorporated by reference.
4.3	Amendment No. 2 to the Tax Benefits Preservation Plan dated May 23, 2018. Exhibit 4 to the Form 8-K filed May 23, 2018 is incorporated by reference.
4.4	Amendment No. 3 to the Limestone Bancorp, Inc. Tax Benefits Preservation Plan, dated November 25, 2019. Exhibit 4.4 to the Form 8-K filed November 27, 2019 is incorporated by reference.
4.5	Amendment No. 4 to the Limestone Bancorp, Inc. Tax Benefits Preservation Plan, dated May 19, 2021. Exhibit 4 to the Form 8-K filed May 19, 2021 is incorporated by reference.
4.6	Amendment No. 5 to the Limestone Bancorp, Inc. Tax Benefits Preservation Plan, dated October 24, 2022. Exhibit 4.6 to the Form 8-K filed October 25, 2022 is incorporated by reference.
4.7	Indenture, dated July 23, 2019, by and between Limestone Bancorp, Inc. and Wilmington Trust National Association, as trustee. Exhibit 4.1 to the Form 8-K filed July 25, 2019 is incorporated by reference.
4.8	Form of 5.75% Fixed-to-Floating Subordinated Notes due 2029 of Limestone Bancorp, Inc. Exhibit 4.2 to the Form 8-K filed July 25, 2019 is incorporated by reference.
4.9	Company Order of Limestone Bancorp, Inc. dated July 21, 2020. Exhibit 4.2 to the Form 8-K filed July 24, 2020 is incorporated by reference.
4.10	Form of 5.75% Fixed-to-Floating Subordinated Notes due 2029 of Limestone Bancorp, Inc. issued July 31, 2020. Exhibit 4.7 to the Quarterly Report on Form 10-Q filed July 31, 2020 is incorporated by reference.
4.11	Description of Securities of Limestone Bancorp, Inc. registered under Section 12 of the Securities Exchange Act of 1934, as amended. Exhibit 99.1 to the Form 8-K filed December 6, 2022 is incorporated by reference.
10.1	Form of Subordinated Note Purchase Agreement, dated July 23, 2019, by and among Limestone Bancorp, Inc. and the Purchasers. Exhibit 10.1 to the Form 8-K filed July 25, 2019 is incorporated by reference.

106

---

Table of Contents

10.2	Form of Subordinated Note Purchase Agreement dated July 21, 2020 by and among Limestone Bancorp, Inc. and the Purchasers. Exhibit 10.1 to the Form 8-K filed July 24, 2020 is incorporated by reference.
10.3*	Limestone Bancorp, Inc. 2018 Omnibus Equity Compensation Plan, Appendix B to Schedule 14A Proxy Statement (DEF 14A) filed April 13, 2018 is incorporated by reference.
10.4*	Form of Restricted Stock Award Agreement. Exhibit 10.11 to the Form 10-K filed March 8, 2019 is incorporated by reference.
10.5*	Employment Agreement, dated April 24, 2019, with John T. Taylor. Exhibit 10.1 to the Form 8-K filed April 26, 2019 is incorporated by reference.
10.6*	Employment Agreement, dated April 24, 2019, with John R. Davis. Exhibit 10.3 to the Form 8-K filed April 26, 2019 is incorporated by reference.
10.7*	Employment Agreement, dated April 24, 2019, with Joseph C. Seiler. Exhibit 10.4 to the Form 8-K filed April 26, 2019 is incorporated by reference.
10.8*	Employment Agreement, dated April 24, 2019, with Phillip W. Barnhouse. Exhibit 10.2 to the Form 8-K filed April 26, 2019 is incorporated by reference.
10.9	Securities Purchase Agreement, dated March 30, 2018, between Limestone Bancorp, Inc. and Patriot Financial Partners III, L.P. Exhibit 10.1 to the Form 8-K dated March 30, 2018 is incorporated by reference.
10.10	Registration Rights Agreement, dated March 30, 2018, between Limestone Bancorp, Inc. and Patriot Financial Partners III, L.P. Exhibit 10.2 to the Form 8-K dated March 30, 2018 is incorporated by reference.
10.11*	Description of Non-employee Director Restricted Stock Awards. Exhibit 10.19 to the Form 10-K filed February 28, 2020 is incorporated herein by reference.
10.12*	Incentive Compensation Bonus Plan. The description of the incentive compensation bonus plan in Item 11 of this Form 10-K for the year ended December 31, 2022 is incorporated by reference.
21.1	List of Subsidiaries of Limestone Bancorp, Inc.
23.1	Consent of Crowe LLP, Independent Registered Public Accounting Firm.
31.1	Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14 or 15d-14.
31.2	Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14 or 15d-14.
32.1	Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(b) or 15d-14(b) and 18 U.S.C. Section 1350.
32.2	Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(b) or 15d-14(b) and U.S.C. Section 1350.
101	The following financial statements from the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, formatted in Inline XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Stockholders’ Equity, (v) Consolidated Statements of Cash Flows, (vi) Notes to Consolidated Financial Statements.
104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

---

^	Schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K but Limestone Bancorp, Inc. will provide them to the Securities and Exchange Commission upon request.

*	Management contract or compensatory plan or arrangement.

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

107

---

Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	LIMESTONE BANCORP, INC.
February 28, 2023	By:	/s/ John T. Taylor
		John T. Taylor
		Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated.

/s/ John T. Taylor John T. Taylor	Chief Executive Officer (principal executive officer)	February 28, 2023
/s/ Phillip W. Barnhouse Phillip W. Barnhouse	Chief Financial Officer Item 9B.     Other Information None 97 Table of Contents PART III Item 10. Directors, Executive Officers and Corporate Governance. The Company has adopted a code of ethics applicable to the Chief Executive Officer and the senior(principal financial officers, which is posted on the Bank’s website at http://www.limestonebank.com under the Investors Relations section of the About Us tab. If we amend or waive any of the provisions of the Code of Ethics applicable to our Chief Executive Officer or senior financial officers, we intend to disclose the amendment or waiver on our website. We will provide to any person without charge, upon request, a copy of this Code of Ethics. You can request a copy by contacting Porter Bancorp, Inc., Chief Financial Officer, 2500 Eastpoint Parkway, Louisville, Kentucky, 40223, (telephone) 502-499-4800.officer)	Additional information required by this Item 10 is omitted because we are filing a definitive proxy statement pursuant to Regulation 14A on or before April 30, 2018, which includes the required information. The required information contained in our proxy statement is incorporated herein by reference. Item 11. Executive Compensation. The information required by this Item 11 is omitted because we are filing a definitive proxy statement pursuant to Regulation 14A on or before April 30, 2018, which includes the required information. The required information contained in our proxy statement is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required by this Item 12 is omitted because we are filing a definitive proxy statement pursuant to Regulation 14A on or before April 30, 2018, which includes the required information. The required information contained in our proxy statement is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions, and Director Independence. The information required by this Item 13 is omitted because we are filing a definitive proxy statement pursuant to Regulation 14A on or before April 30, 2018, which includes the required information. The required information contained in our proxy statement is incorporated herein by reference. Item 14. Principal Accounting Fees and Services. The information required by this Item 14 is omitted because we are filing a definitive proxy statement pursuant to Regulation 14A on or before April 30, 2018, which includes the required information. The required information contained in our proxy statement is incorporated herein by reference. 98 Table of Contents PART IV Item 15. Exhibits and Financial Statement Schedules (a) 1. The following financial statements are included in this Form 10-K:February 28, 2023   Consolidated Balance Sheets as of December 31, 2017 and 2016 Consolidated Statements of Operations for the Years Ended December 31, 2017, 2016, and 2015 Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2017, 2016, and 2015 Consolidated Statements of Change in Stockholders’ Equity for the Years Ended December 31, 2017, 2016, and 2015 Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 2016, and 2015 Notes to Consolidated Financial Statements Report of Independent Registered Public Accounting Firm (a) 2. List of Financial Statement Schedules Financial statement schedules are omitted because the information is not applicable. (a) 3. List of Exhibits The Exhibit Index of this report is incorporated by reference. The compensatory plans or arrangement required to be filed as exhibits to this Form 10-K pursuant to Item 15(c) are noted with an asterisk in the Exhibit Index. 99 Table of Contents EXHIBIT INDEX Exhibit No. (1) Description   3.1 Amended and Restated Articles of Incorporation, dated March 25, 2016. Exhibit 3.1 to Form 8-K filed May 26, 2016 is incorporated by reference.   3.2 Amendment to Articles of Incorporation, dated December 6, 2016, effecting reverse stock split.  Exhibit 3.1 to Form 8-K filed December 21, 2016 is incorporated by reference.   3.3 Amended and Restated Bylaws of Porter Bancorp, Inc. Exhibit 3.1 to Form 8-K filed May 22, 2013 is hereby incorporated by reference.   4.1 Warrant to purchase up to 299,829 shares.  Exhibit 4.1 to Form 8-K filed November 24, 2008 is incorporated by reference. 10.1 Loan Agreement between Porter Bancorp, Inc. and First Merchants Bank dated June 30, 2017.  Exhibit 1.1 to Form 8-K filed July 5, 2017 is incorporated by reference. 10.2 Promissory Note between Porter Bancorp, Inc. and First Merchants Bank dated June 30, 2017.  Exhibit 1.2 to Form 8-K filed July 5, 2017 is incorporated by reference. 10.3 Pledge Agreement between Porter Bancorp, Inc. and First Merchants Bank dated June 30, 2017.  Exhibit 1.3 to Form 8-K filed July 5, 2017 is incorporated by reference. 10.4+ Porter Bancorp, Inc. 2016 Omnibus Equity Compensation Plan.  Appendix A to Schedule 14A proxy statement (DEF 14A) filed April 25, 2016 is incorporated by reference. 10.5+ Form of Porter Bancorp, Inc. Restricted Stock Award Agreement. Exhibit 10.3 to 8-K filed June 22, 2016 is incorporated by reference. 10.6+ Porter Bancorp, Inc. 2006 Non-Employee Directors Stock Ownership Incentive Plan, as amended and restated as of March 26, 2014. Exhibit 10.1 to Form S-8 Registration Statement (Reg. No. 333-202746) filed March 13, 2015 is incorporated by reference. 10.7+ Non-Employee Director Stock Incentive Program.  Exhibit 10.1 to Form 8-K filed June 22, 2016 is incorporated by reference. 10.8+ Porter Bancorp, Inc. 2017 Incentive Compensation Bonus Plan.  Exhibit 10.1 to Form 10-Q filed May 4, 2017 is incorporated by reference. 10.9+ Form of Ascencia Bank (now Limestone Bank) Supplemental Executive Retirement Plan. Exhibit 10.5 to Form S-1 Registration Statement (Reg. No. 333-133198) filed April 11, 2006 is incorporated by reference. 10.10+ Form of Amendment to Supplemental Executive Retirement Plan.  Exhibit 10.7 to Form 10-K filed March 26, 2009 is incorporated by reference. 10.11+ Employment Agreement with John T. Taylor. Exhibit 10.1 to Form 8-K filed September 27, 2016 is incorporated by reference. 10.12+ Employment Agreement with John R. Davis.  Exhibit 10.2 to Form 8-K filed September 27, 2016 is incorporated by reference. 10.13+ Employment Agreement with Joseph C. Seiler.  Exhibit 10.3 to Form 8-K filed September 27, 2016 is incorporated by reference. 10.14+ Employment Agreement with Phillip W. Barnhouse.  Exhibit 10.4 to Form 8-K filed September 27, 2016 is incorporated by reference. 21.1 List of Subsidiaries of Porter Bancorp, Inc. 23.1 Consent of Crowe Horwath LLP, Independent Registered Public Accounting Firm. 31.1 Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14 or 15d-14. 31.2 Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14 or 15d-14. 32.1 Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(b) or 15d-14(b) and 18 U.S.C. Section 1350. 100 Table of Contents Exhibit No. (1) Description 32.2 Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(b) or 15d-14(b) and U.S.C. Section 1350. 101 The following financial statements from the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, formatted in XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Stockholders’ Equity, (v) Consolidated Statements of Cash Flows, (vi) Notes to Consolidated Financial Statements. + Management contract or compensatory plan or arrangement. (1) The Company has other long-term debt agreements that meet the exclusion set forth in Section 601(b)(4)(iii)(A) of Regulation S-K. The Company hereby agrees to furnish a copy of such agreements to the Securities and Exchange Commission upon request. 101 Table of Contents SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PORTER BANCORP, INC. February 28, 2018 By: /s/ John T. Taylor John T. Taylor Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated. /s/ John T. Taylor Chief Executive Officer February 28, 2018 John T. Taylor /s/ Phillip W. Barnhouse Chief Financial Officer February 28, 2018 Phillip W. Barnhouse /s/ W. Glenn Hogan Director February 28, 2018 W. Glenn Hogan /s/ Michael T. Levy Director February 28, 2018 Michael T. Levy /s/ Bradford T. Ray Director February 28, 2018 Bradford T. Ray /s/ W. Kirk Wycoff Director February 28, 2018 W. Kirk Wycoff /s/ James M. Parsons Director February 28, 2018 James M. Parsons /s/ Dr. Edmond J. Seifried Director February 28, 2018 Dr. Edmond J. Seifried
/s/ John M. Koehler John M. Koehler	Chief Accounting Officer 102(principal accounting officer)	February 28, 2023
/s/ Celia P. Catlett Celia P. Catlett	Director	February 28, 2023
/s/ W. Glenn Hogan W. Glenn Hogan	Director	February 28, 2023
/s/ Kevin J. Kooman Kevin J. Kooman	Director	February 28, 2023
/s/ Michael T. Levy Michael T. Levy	Director	February 28, 2023
/s/ James M. Parsons James M. Parsons	Director	February 28, 2023
/s/ Bradford T. Ray Bradford T. Ray	Director	February 28, 2023
/s/ Dr. Edmond J. Seifried Dr. Edmond J. Seifried	Director	February 28, 2023

108