Edgar Filing: LIMESTONE BANCORP, INC.

lmst20190331_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the Quarterly Period Ended March 31, 2019

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

For the transition period from to

Commission file number: 001-33033

LIMESTONE BANCORP, INC.

(Exact name of registrant as specified in its charter)


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

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

(502) 499-4800

(Registrant’s telephone number, including area code)

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

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

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

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

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

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

6,240,614 Common Shares and 1,220,000 Non-Voting Common Shares were outstanding at April 30, 2019.

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INDEX

		Page
PART I –	FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS	3
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	32
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	44
ITEM 4.	CONTROLS AND PROCEDURES	44

PART II –	OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	45
ITEM 1A.	RISK FACTORS	45
ITEM 2.	UNREGISTERED SALES ON EQUITY SECURITIES AND USE OF PROCEEDS	45
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	45
ITEM 4.	MINE SAFETY DISCLOSURES	45
ITEM 5.	OTHER INFORMATION	45
ITEM 6.	EXHIBITS	45

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

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

Unaudited Consolidated Balance Sheets for March 31, 2019 and December 31, 2018

Unaudited Consolidated Statements of Income for the three months ended March 31, 2019 and 2018

Unaudited Consolidated Statements of Comprehensive Income for the three months ended March 31, 2019 and 2018

Unaudited Consolidated Statement of Changes in Stockholders’ Equity for the three months ended March 31, 2019 and 2018

Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018

Notes to Unaudited Consolidated Financial Statements

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LIMESTONE BANCORP, INC.

Unaudited Consolidated Balance Sheets

(dollars in thousands except share data)

	March 31, 2019			December 31, 2018
Assets
Cash and due from banks	$	6,461		$	6,963
Interest bearing deposits in banks		24,029			28,398
Cash and cash equivalents		30,490			35,361
Securities available for sale		206,411			201,192
Loans, net of allowance of $8,686 and $8,880, respectively		777,899			756,364
Premises and equipment, net		14,926			14,655
Premises held for sale		1,050			1,050
Other real estate owned		3,335			3,485
Federal Home Loan Bank stock		6,813			7,233
Bank owned life insurance		15,739			15,646
Deferred taxes, net		28,568			29,282
Accrued interest receivable and other assets		6,092			5,424
Total assets	$	1,091,323		$	1,069,692

Liabilities and Stockholders’ Equity
Deposits
Non-interest bearing	$	146,440		$	142,618
Interest bearing		762,402			751,613
Total deposits		908,842			894,231
Federal Home Loan Bank advances		51,511			46,549
Accrued interest payable and other liabilities		3,651			5,815
Junior subordinated debentures		21,000			21,000
Senior debt		10,000			10,000
Total liabilities		995,004			977,595
Commitments and contingent liabilities (Note 13)		—			—
Stockholders’ equity
Common stock, no par, 39,000,000 shares authorized, 6,240,614 and 6,242,720 voting, and 1,220,000 and 1,220,000 non-voting issued and outstanding, respectively		140,639			140,639
Additional paid-in capital		24,093			24,287
Retained deficit		(63,362	)		(66,201	)
Accumulated other comprehensive loss		(5,051	)		(6,628	)
Total stockholders' equity		96,319			92,097
Total liabilities and stockholders’ equity	$	1,091,323		$	1,069,692

See accompanying notes to unaudited consolidated financial statements.

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LIMESTONE BANCORP, INC.

Unaudited Consolidated Statements of Income

(dollars in thousands, except per share data)

	Three Months Ended March 31,
	2019		2018
Interest income
Loans, including fees	$	10,254	$	8,790
Taxable securities		1,573		943
Tax exempt securities		93		96
Federal funds sold and other		266		186
		12,186		10,015
Interest expense
Deposits		2,587		1,344
Federal Home Loan Bank advances		281		156
Senior debt		96		96
Junior subordinated debentures		263		211
Subordinated capital note		—		27
		3,227		1,834

Net interest income		8,959		8,181
Provision for loan losses		—		—
Net interest income after provision for loan losses		8,959		8,181

Non-interest income
Service charges on deposit accounts		496		568
Bank card interchange fees		508		401
Income from bank owned life insurance		99		99
Other		181		183
		1,284		1,251
Non-interest expense
Salaries and employee benefits		3,915		3,788
Occupancy and equipment		898		895
FDIC insurance		108		182
Data processing expense		313		324
Marketing expense		227		300
State franchise and deposit tax		315		282
Deposit account related expense		281		219
Professional fees		165		205
Litigation and loan collection expense		46		53
Other real estate owned expense		166		82
Other		847		839
		7,281		7,169
Income before income taxes		2,962		2,263
Income tax expense		123		329
Net income		2,839		1,934
Basic and diluted income per common share	$	0.38	$	0.31

See accompanying notes to unaudited consolidated financial statements.

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LIMESTONE BANCORP, INC.

Unaudited Consolidated Statements of Comprehensive Income

(in thousands)

	Three Months Ended March 31,
	2019			2018
Net income	$	2,839		$	1,934
Other comprehensive income (loss):
Unrealized gain (loss) on securities:
Unrealized gain (loss) arising during the period		1,995			(1,711	)
Net unrealized gain (loss) recognized in comprehensive income		1,995			(1,711	)
Tax effect		(418	)		360
Other comprehensive income (loss)		1,577			(1,351	)

Comprehensive income	$	4,416		$	583

See accompanying notes to unaudited consolidated financial statements.

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LIMESTONE BANCORP, INC.

Unaudited Consolidated Statements of Changes in Stockholders’ Equity

For Three Months Ended March 31, 2019 and 2018

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

	Shares												Amount
	Preferred				Common								Preferred				Common
	Series E		Series F		Common			Non-Voting Common		Total Common			Series E		Series F		Common and Non-Voting Common		Additional Paid-In Capital			Retained Deficit			Accumulated Other Comprehensive Income (Loss)			Total

Balances, January 1, 2019		—		—		6,242,720			1,220,000		7,462,720		$	—	$	—	$	140,639	$	24,287		$	(66,201	)	$	(6,628	)	$	92,097
Issuance of unvested stock		—		—		20,108			—		20,108			—		—		—		—			—			—			—
Forfeited unvested stock		—		—		(3,748	)		—		(3,748	)		—		—		—		—			—			—			—
Shares withheld for taxes		—		—		(18,466	)		—		(18,466	)		—		—		—		(276	)		—			—			(276	)
Stock-based compensation expense		—		—		—			—		—			—		—		—		82			—			—			82
Net income		—		—		—			—		—			—		—		—		—			2,839			—			2,839
Net change in accumulated other comprehensive income, net of taxes		—		—		—			—		—			—		—		—		—			—			1,577			1,577
Balances, March 31, 2019		—		—		6,240,614			1,220,000		7,460,614		$	—	$	—	$	140,639	$	24,093		$	(63,362	)	$	(5,051	)	$	96,319

	Shares										Amount
	Preferred				Common						Preferred				Common
	Series E		Series F		Common		Non-Voting Common		Total Common		Series E		Series F		Common and Non-Voting Common		Additional Paid-In Capital		Retained Deficit			Accumulated Other Comprehensive Income (Loss)			Total

Balances, January 1, 2018		6,198		4,304		6,039,864		220,000		6,259,864	$	1,644	$	1,127	$	125,729	$	24,497	$	(75,108	)	$	(5,216	)	$	72,673
Issuance of stock		—		—		150,000		1,000,000		1,150,000		—		—		14,910		—		—			—			14,910
Stock-based compensation expense		—		—		—		—		—		—		—		—		64		—			—			64
Net income		—		—		—		—		—		—		—		—		—		1,934			—			1,934
Reclassification of disproportionate tax effect due to change in federal tax rate		—		—		—		—		—		—		—		—		—		113			(113	)		—
Net change in accumulated other comprehensive income, net of taxes		—		—		—		—		—		—		—		—		—		—			(1,351	)		(1,351	)
Balances, March 31, 2018		6,198		4,304		6,189,864		1,220,000		7,409,864	$	1,644	$	1,127	$	140,639	$	24,561	$	(73,061	)	$	(6,680	)	$	88,230

See accompanying notes to unaudited consolidated financial statements.

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LIMESTONE BANCORP, INC.

Unaudited Consolidated Statements of Cash Flows

For Three Months Ended March 31, 2019 and 2018

(dollars in thousands)

	2019			2018
Cash flows from operating activities
Net income	$	2,839		$	1,934
Adjustments to reconcile net income to net cash from operating activities
Depreciation and amortization		679			295
Net amortization on securities		189			249
Stock-based compensation expense		82			64
Deferred taxes, net		295			675
Proceeds from sales of loans held for sale		—			71
Net gain on sale of loans		—			(1	)
Net loss (gain) on sales of other real estate owned		—			4
Net write-down of other real estate owned		150			60
Earnings on bank owned life insurance, net of premium expense		(93	)		(94	)
Net change in accrued interest receivable and other assets		(668	)		(954	)
Net change in accrued interest payable and other liabilities		(2,609	)		(871	)
Net cash from operating activities		864			1,432

Cash flows from investing activities
Purchases of available for sale securities		(8,096	)		(13,667	)
Sales and calls of available for sale securities		1,000			—
Maturities and prepayments of available for sale securities		3,683			3,615
Proceeds from mandatory redemptions of FHLB stock		420			—
Proceeds from sale of other real estate owned		—			70
Loan originations and payments, net		(22,002	)		(17,191	)
Purchases of premises and equipment, net		(37	)		(206	)
Net cash from investing activities		(25,032	)		(27,379	)

Cash flows from financing activities
Net change in deposits		14,611			(113	)
Repayment of Federal Home Loan Bank advances		(30,038	)		(35,045	)
Advances from Federal Home Loan Bank		35,000			50,000
Repayment of subordinated capital note		—			(225	)
Issuance of common stock		—			14,910
Common shares withheld for taxes		(276	)		—
Net cash from financing activities		19,297			29,527
Net change in cash and cash equivalents		(4,871	)		3,580
Beginning cash and cash equivalents		35,361			34,103
Ending cash and cash equivalents	$	30,490		$	37,683

Supplemental cash flow information:
Interest paid	$	3,193		$	1,558
Supplemental non-cash disclosure:
Transfer from loans to other real estate	$	—		$	110
Initial recognition of right-of-use lease assets		507			—

See accompanying notes to unaudited consolidated financial statements.

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LIMESTONE BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

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

Basis of Presentation – The consolidated financial statements include Limestone Bancorp, Inc. (Company) and its subsidiary, Limestone Bank (Bank). The Company owns a 100% interest in the Bank. All significant inter-company transactions and accounts have been eliminated in consolidation.

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, the financial statements do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the entire year. A description of other significant accounting policies is presented in the notes to the Consolidated Financial Statements for the year ended December 31, 2018 included in the Company’s Annual Report on Form 10-K.

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

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

New Accounting Standards – In February 2016, the FASB issued an update ASU No. 2016-02, Leases (Topic 842). Under the new guidance, lessees are 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 is largely unchanged. The amendments in this update became effective for annual periods and interim periods within those annual periods beginning after December 15, 2018. Based on the Company’s existing lease agreements, the impact of adopting the new guidance on the consolidated financial statements was the recording of a $507,000 lease liability and a right of use asset, which is included in other liabilities and premises and equipment, respectively, on the consolidated balance sheet. The adoption of this ASU did not have a meaningful impact on the Company’s performance metrics, including regulatory capital ratios and return on average assets. The Company’s leases mature through 2024 and have a weighted average discount rate of 6%. The operating lease cost was approximately $65,000 for the three months ended March 31, 2019. At March 31, 2019, the Company had entered into one lease that has yet to commence. The right of use asset and lease liability for the lease yet to commence are estimated to be approximately $1.1 million.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The final standard will change estimates for credit losses related to financial assets measured at amortized cost such as loans, held-to-maturity debt securities, and certain other contracts. For estimating credit losses, the FASB is replacing the incurred loss model with an expected loss model, which is referred to as the current expected credit loss (CECL) model. Under the CECL model, certain financial assets that are carried at amortized cost, such as loans held for investment and held-to-maturity debt securities, are required to be presented at the net amount expected to be collected. The measurement of expected credit losses is to be based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This measurement will take place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs significantly from the “incurred loss” model required under current GAAP, which delays recognition until it is probable a loss has been incurred. The change could materially affect how the allowance for loan losses is determined. The standard is effective for public companies for fiscal years beginning after December 15, 2019. As previously disclosed, management has formed a cross functional committee that has overseen the enhancement of existing technology required to source and model data for the purpose of meeting this standard. The committee has selected a vendor to assist in generating loan level cash flows and disclosures. The project plan is targeting data and model validation completion during the first half of 2019, with parallel processing the existing model with the CECL model for two to three quarters prior to implementation, depending on how model completion and validation occurs. During 2019, management is focused on refining assumptions and continued review of the model. Additionally, management is researching and resolving interpretive accounting issues in the ASU, contemplating various accounting policies, developing processes and related controls, and considering various reporting disclosures. The impact of CECL model implementation is being evaluated, but it is expected that a one-time cumulative-effect adjustment to the allowance for loan losses will be recognized in retained earnings on the consolidated balance sheet as of the beginning of the first reporting period in which the new standard is effective, as is consistent with regulatory expectations set forth in interagency guidance. In December 2018, the OCC, The Board of Governors of the Federal Reserve System, and the FDIC approved a final rule to address changes to the credit loss accounting under GAAP, including banking organizations’ implementation of CECL. The final rule provides banking organizations the option to phase in over a three-year period the day-one adverse effects on regulatory capital that may result from adoption of the new accounting standard.

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In March 2017, the FASB issued ASU No. 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization of Purchased Callable Debt Securities. The final standard will shorten the amortization period for premiums 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. The standard was effective for public companies for fiscal years beginning after December 15, 2018. Adoption of this new guidance did not have a material impact on the consolidated financial statements.

Note 2 – Securities

Securities are classified as available for sale (AFS). AFS securities may be sold if needed for liquidity, asset liability management, or other reasons. AFS securities are reported at fair value, with unrealized gains or losses included as a separate component of equity, net of tax.

The amortized cost and fair value of securities and the related 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
	(in thousands)
March 31, 2019
Available for sale
U.S. Government and federal agency	$	24,293	$	75	$	(415	)	$	23,953
Agency mortgage-backed: residential		91,005		448		(810	)		90,643
Collateralized loan obligations		49,902		—		(189	)		49,713
State and municipal		31,764		358		(63	)		32,059
Corporate bonds		9,902		153		(12	)		10,043
Total available for sale	$	206,866	$	1,034	$	(1,489	)	$	206,411

December 31, 2018	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available for sale
U.S. Government and federal agency	$	23,280	$	2	$	(722	)	$	22,560
Agency mortgage-backed: residential		87,689		192		(1,891	)		85,990
Collateralized loan obligations		49,942		—		(103	)		49,839
State and municipal		32,841		230		(259	)		32,812
Corporate bonds		9,890		127		(26	)		9,991
Total available for sale	$	203,642	$	551	$	(3,001	)	$	201,192

Sales and calls of securities were as follows:

	Three Months Ended March31,
	2019		2018
	(in thousands)
Proceeds	$	1,000	$	—
Gross gains		—		—
Gross losses		—		—

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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.

	March 31, 2019
	Amortized Cost		Fair Value
	(in thousands)
Maturity
Available for sale
Within one year	$	40,359	$	40,366
One to five years		55,881		55,776
Five to ten years		19,621		19,626
Agency mortgage-backed: residential		91,005		90,643
Total	$	206,866	$	206,411

Securities pledged at March 31, 2019 and December 31, 2018 had carrying values of approximately $69.5 million and $64.4 million, respectively, and were pledged to secure public deposits.

At March 31, 2019 and December 31, 2018, the Bank held securities issued by the Commonwealth of Kentucky or Kentucky municipalities having a book value of $15.3 million. At March 31, 2019 and December 31, 2018, 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 Bank owns Collateralized Loan Obligations (CLOs), which are debt securities secured by professionally managed portfolios of senior-secured loans to corporations. CLO managers are typically large non-bank financial institutions or banks and are typically $300 million to $1 billion in size, contain one hundred or more loans, have five to six credit tranches ranging from AAA, AA, A, BBB, BB, B and equity tranche. Interest and principal are paid first to the AAA tranche then to the next lower rated tranche. Losses are borne first by the equity tranche then by the subsequently higher rated tranche. CLOs may be less liquid than government securities from time to time and volatility in the CLO market may cause the value of these investments to decline.

The market value of CLOs may be affected by, among other things, changes in composition of the underlying loans, changes in the cash flows from the underlying loans, defaults and recoveries on the underlying loans, capital gains and losses on the underlying loans, and prepayments on the underlying loans.

At March 31, 2019, $33.1 million and $16.7 million of our CLOs were AA and A rated, respectively. There were no CLOs rated below A and none of the CLOs were subject to ratings downgrade in the three months ended March 31, 2019. All of our CLOs are floating rate, with rates set on a quarterly basis at three month LIBOR plus a spread.

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 March 31, 2019, management does not believe any securities in the portfolio with unrealized losses should be classified as other than temporarily impaired.

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Securities with unrealized losses at March 31, 2019 and December 31, 2018, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position, are as follows:

	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)
March 31, 2019
Available for sale
U.S. Government and federal agency	$	—	$	—		$	18,146	$	(415	)	$	18,146	$	(415	)
Agency mortgage-backed: residential		—		—			48,390		(810	)		48,390		(810	)
Collateralized loan obligations		40,083		(187	)		5,085		(2	)		45,168		(189	)
State and municipal		—		—			9,639		(63	)		9,639		(63	)
Corporate bonds		1,588		(12	)		—		—			1,588		(12	)
Total temporarily impaired	$	41,671	$	(199	)	$	81,260	$	(1,290	)	$	122,931	$	(1,489	)


December 31, 2018
Available for sale
U.S. Government and federal agency	$	3,431	$	(57	)	$	17,212	$	(665	)	$	20,643	$	(722	)
Agency mortgage-backed: residential		30,229		(343	)		40,932		(1,548	)		71,161		(1,891	)
Collateralized loan obligations		48,294		(103	)		—		—			48,294		(103	)
State and municipal		6,133		(29	)		7,252		(230	)		13,385		(259	)
Corporate Bonds		3,569		(26	)		—		—			3,569		(26	)
Total temporarily impaired	$	91,656	$	(558	)	$	65,396	$	(2,443	)	$	157,052	$	(3,001	)

Note 3 – Loans

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

	March 31,			December 31,
	2019			2018
	(in thousands)
Commercial	$	128,586		$	129,368
Commercial Real Estate:
Construction		63,135			86,867
Farmland		77,545			77,937
Nonfarm nonresidential		191,522			172,177
Residential Real Estate:
Multi-family		58,860			49,757
1-4 Family		171,134			175,761
Consumer		57,837			39,104
Agriculture		37,528			33,737
Other		438			536
Subtotal		786,585			765,244
Less: Allowance for loan losses		(8,686	)		(8,880	)
Loans, net	$	777,899		$	756,364

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The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2019 and 2018:

	Commercial			Commercial Real Estate			Residential Real Estate			Consumer			Agriculture			Other		Total
	(in thousands)
March 31, 2019:
Beginning balance	$	1,299		$	4,676		$	2,452		$	130		$	321		$	2	$	8,880
Provision (negative provision)		143			(165	)		(204	)		193			33			–		–
Loans charged off		–			(15	)		(82	)		(180	)		(1	)		–		(278	)
Recoveries		5			2			61			16			–			–		84
Ending balance	$	1,447		$	4,498		$	2,227		$	159		$	353		$	2	$	8,686


March 31, 2018:
Beginning balance	$	892		$	4,032		$	2,900		$	64		$	313		$	1	$	8,202
Provision (negative provision)		(55	)		63			(116	)		13			95			–		–
Loans charged off		–			(1	)		(19	)		(27	)		–			–		(47	)
Recoveries		240			18			68			34			11			–		371
Ending balance	$	1,077		$	4,112		$	2,833		$	84		$	419		$	1	$	8,526

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method as of March 31, 2019:

	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	$	–	$	33	$	160	$	–	$	–	$	–	$	193
Collectively evaluated for impairment		1,447		4,465		2,067		159		353		2		8,493
Total ending allowance balance	$	1,447	$	4,498	$	2,227	$	159	$	353	$	2	$	8,686

Loans:
Loans individually evaluated for impairment	$	50	$	516	$	2,175	$	28	$	65	$	–	$	2,834
Loans collectively evaluated for impairment		128,536		331,686		227,819		57,809		37,463		438		783,751
Total ending loans balance	$	128,586	$	332,202	$	229,994	$	57,837	$	37,528	$	438	$	786,585

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The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method as of December 31, 2018:

	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	$	–	$	35	$	168	$	–	$	–	$	–	$	203
Collectively evaluated for impairment		1,299		4,641		2,284		130		321		2		8,677
Total ending allowance balance	$	1,299	$	4,676	$	2,452	$	130	$	321	$	2	$	8,880


Loans:
Loans individually evaluated for impairment	$	53	$	510	$	2,348	$	–	$	–	$	–	$	2,911
Loans collectively evaluated for impairment		129,315		336,471		223,170		39,104		33,737		536		762,333
Total ending loans balance	$	129,368	$	336,981	$	225,518	$	39,104	$	33,737	$	536	$	765,244

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Impaired Loans

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

The following tables present information related to loans individually evaluated for impairment by class of loans as of March 31, 2019 and December 31, 2018 and for the three months ended March 31, 2019 and 2018:

	As of March 31, 2019						Three Months Ended March 31, 2019
	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	$	116	$	50	$	—	$	52	$	—	$	—
Commercial real estate:
Construction		—		—		—		—		—		—
Farmland		249		107		—		98		5		5
Nonfarm nonresidential		712		252		—		256		3		3
Residential real estate:
Multi-family		—		—		—		—		—		—
1-4 Family		2,578		1,459		—		1,544		22		22
Consumer		208		28		—		14		—		—
Agriculture		65		65		—		32		—		—
Other		—		—		—		—		—		—
Subtotal		3,928		1,961		—		1,996		30		30

With An Allowance Recorded:
Commercial		—		—		—		—		—		—
Commercial real estate:
Construction		—		—		—		—		—		—
Farmland		157		157		33		158		—		—
Nonfarm nonresidential		—		—		—		—		—		—
Residential real estate:
Multi-family		—		—		—		—		—		—
1-4 Family		716		716		160		719		11		—
Consumer		—		—		—		—		—		—
Agriculture		—		—		—		—		—		—
Other		—		—		—		—		—		—
Subtotal		873		873		193		877		11		—
Total	$	4,801	$	2,834	$	193	$	2,873	$	41	$	30

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	As of December 31, 2018						Three Months Ended March 31, 2018
	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	$	120	$	53	$	—	$	253	$	—	$	—
Commercial real estate:
Construction		—		—		—		—		—		—
Farmland		1,860		89		—		1,872		198		198
Nonfarm nonresidential		402		262		—		427		5		—
Residential real estate:
Multi-family		—		—		—		—		—		—
1-4 Family		2,678		1,628		—		2,505		8		8
Consumer		12		—		—		1		—		—
Agriculture		—		—		—		—		—		—
Other		—		—		—		—		—		—
Subtotal		5,072		2,032		—		5,058		211		206
With An Allowance Recorded:
Commercial		—		—		—		100		2		—
Commercial real estate:
Construction		—		—		—		—		—		—
Farmland		—		—		—		—		—		—
Nonfarm nonresidential		159		159		35		—		—		—
Residential real estate:
Multi-family		—		—		—		—		—		—
1-4 Family		720		720		168		1,316		16		—
Consumer		—		—		—		—		—		—
Agriculture		—		—		—		—		—		—
Other		—		—		—		—		—		—
Subtotal		879		879		203		1,416		18		—
Total	$	5,951	$	2,911	$	203	$	6,474	$	229	$	206

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Troubled Debt Restructuring

A troubled debt restructuring (TDR) occurs when the Bank has agreed to a loan modification in the form of a concession 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 March 31, 2019 and December 31, 2018:

	TDRs Performing to Modified Terms		TDRs Not Performing to Modified Terms		Total TDRs
	(in thousands)
March 31, 2019
Commercial Real Estate:
Nonfarm nonresidential
Rate reduction	$	190	$	—	$	190
Residential Real Estate:
1-4 Family
Rate reduction		720		—		720
Total TDRs	$	910	$	—	$	910

	TDRs Performing to Modified Terms		TDRs Not Performing to Modified Terms		Total TDRs
	(in thousands)
December 31, 2018
Commercial Real Estate:
Nonfarm nonresidential
Rate reduction	$	190	$	—	$	190
Residential Real Estate:
1-4 Family
Rate reduction		720		—		720
Total TDRs	$	910	$	—	$	910

At March 31, 2019 and December 31, 2018, 100% of the Company’s TDRs were performing according to their modified terms. The Company allocated $160,000 and $168,000 in reserves to borrowers whose loan terms have been modified in TDRs as of March 31, 2019, and December 31, 2018, respectively. The Company has committed to lend no additional amounts as of March 31, 2019 and December 31, 2018 to borrowers with outstanding loans 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 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 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.

No TDR loan modifications occurred during the three months ended March 31, 2019 or March 31, 2018. During the first three months of 2019 and 2018, no TDRs defaulted on their restructured loan within the 12 month period following the loan modification. A default is considered to have occurred once the TDR is past due 90 days or more or it has been placed on nonaccrual.

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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. The following table presents the recorded investment in nonaccrual and loans past due 90 days and still on accrual by class of loan as of March 31, 2019, and December 31, 2018:

	Nonaccrual				Loans Past Due 90 Days And Over Still Accruing
	March 31, 2019		December 31, 2018		March 31, 2019		December 31, 2018
	(in thousands)
Commercial	$	50	$	53	$	—	$	—
Commercial Real Estate:
Construction		—		—		—		—
Farmland		264		249		—		—
Nonfarm nonresidential		55		61		—		—
Residential Real Estate:
Multi-family		—		—		—		—
1-4 Family		1,459		1,628		—		—
Consumer		28		—		—		—
Agriculture		65		—		—		—
Other		—		—		—		—
Total	$	1,921	$	1,991	$	—	$	—

The following table presents the aging of the recorded investment in past due loans as of March 31, 2019 and December 31, 2018:

	30 – 59 Days Past Due		60 – 89 Days Past Due		90 Days And Over Past Due		Nonaccrual		Total Past Due And Nonaccrual
	(in thousands)
March 31, 2019
Commercial	$	39	$	—	$	—	$	50	$	89
Commercial Real Estate:
Construction		—		—		—		—		—
Farmland		120		163		—		264		547
Nonfarm nonresidential		—		—		—		55		55
Residential Real Estate:
Multi-family		209		—		—		—		209
1-4 Family		1,583		74		—		1,459		3,116
Consumer		—		—		—		28		28
Agriculture		50		3		—		65		118
Other		—		—		—		—		—
Total	$	2,001	$	240	$	—	$	1,921	$	4,162

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	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, 2018
Commercial	$	39	$	—	$	—	$	53	$	92
Commercial Real Estate:
Construction		—		—		—		—		—
Farmland		244		107		—		249		600
Nonfarm nonresidential		—		52		—		61		113
Residential Real Estate:
Multi-family		—		—		—		—		—
1-4 Family		1,299		137		—		1,628		3,064
Consumer		8		35		—		—		43
Agriculture		3		—		—		—		3
Other		—		—		—		—		—
Total	$	1,593	$	331	$	—	$	1,991	$	3,915

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 $500,000 are routinely analyzed through credit administration processes which classify the loans as to credit risk. The following definitions are used for risk ratings:

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

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

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

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

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Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be “Pass” rated loans. As of March 31, 2019, and December 31, 2018, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

	Pass		Watch		Special Mention		Substandard		Doubtful		Total
	(in thousands)
March 31, 2019
Commercial	$	123,957	$	124	$	—	$	4,505	$	—	$	128,586
Commercial Real Estate:
Construction		63,135		—		—		—		—		63,135
Farmland		72,251		4,220		—		1,074		—		77,545
Nonfarm nonresidential		183,717		5,025		—		2,780		—		191,522
Residential Real Estate:
Multi-family		54,258		4,393		—		209		—		58,860
1-4 Family		164,604		2,620		—		3,910		—		171,134
Consumer		57,726		9		—		102		—		57,837
Agriculture		36,407		1,021		—		100		—		37,528
Other		438		—		—		—		—		438
Total	$	756,493	$	17,412	$	—	$	12,680	$	—	$	786,585

	Pass		Watch		Special Mention		Substandard		Doubtful		Total
	(in thousands)
December 31, 2018
Commercial	$	129,106	$	141	$	—	$	121	$	—	$	129,368
Commercial Real Estate:
Construction		86,867		—		—		—		—		86,867
Farmland		74,054		2,741		—		1,142		—		77,937
Nonfarm nonresidential		169,551		1,983		—		643		—		172,177
Residential Real Estate:
Multi-family		44,697		5,060		—		—		—		49,757
1-4 Family		169,342		2,209		113		4,097		—		175,761
Consumer		38,768		11		—		325		—		39,104
Agriculture		32,683		1,019		—		35		—		33,737
Other		536		—		—		—		—		536
Total	$	745,604	$	13,164	$	113	$	6,363	$	—	$	765,244

Note 4 – Other Real Estate Owned

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

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-interest expense when a new appraisal indicates a decline in value or in cases where a marketing price is lowered below the appraised amount.

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

	March 31, 2019		December 31, 2018
	(in thousands)
Commercial Real Estate:
Construction, land development, and other land	$	3,335	$	3,485
	$	3,335	$	3,485

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Residential loans secured by 1-4 family residential properties in the process of foreclosure totaled $770,000 and $771,000 at March 31, 2019 and December 31, 2018, respectively.

Activity relating to OREO during the three months ended March 31, 2019 and 2018 is as follows:

	For the Three Months Ended March 31,
	2019			2018
	(in thousands)
OREO Activity
OREO as of January 1	$	3,485		$	4,409
Real estate acquired		—			110
Valuation adjustment write-downs		(150	)		(60	)
Net gain (loss) on sales		—			(4	)
Proceeds from sales of properties		—			(70	)
OREO as of March 31	$	3,335		$	4,385

Expenses related to OREO include:

	For the Three Months Ended March 31,
	2019		2018
	(in thousands)
Net loss (gain) on sales	$	—	$	4
Valuation adjustment write-downs		150		60
Operating expense		16		18
Total	$	166	$	82

Note 5 – Deposits

The following table details deposits by category:

	March 31, 2019		December 31, 2018
	(in thousands)
Non-interest bearing	$	146,440	$	142,618
Interest checking		96,537		94,269
Money market		166,430		171,924
Savings		34,066		34,534
Certificates of deposit		465,369		450,886
Total	$	908,842	$	894,231

Time deposits of $250,000 or more were approximately $29.3 million and $28.1 million at March 31, 2019 and December 31, 2018, respectively.

Scheduled maturities of total time deposits at March 31, 2019 for each of the next five years are as follows (in thousands):

Year 1	$	362,344
Year 2		73,866
Year 3		10,084
Year 4		8,307
Year 5		10,458
Thereafter		310
	$	465,369

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Note 6 – Advances from the Federal Home Loan Bank

Advances from the Federal Home Loan Bank were as follows:

	March 31,		December 31,
	2019		2018
	(in thousands)

Short term advances (fixed rates 2.52% to 2.58%) maturing April 2019	$	50,000	$	45,000
Long term advances (fixed rates 0.00% to 5.24%) maturing April 2020 to August 2033		1,511		1,549
Total advances from the Federal Home Loan Bank	$	51,511	$	46,549

FHLB advances had a weighted-average rate of 2.50% at March 31, 2019 and 2.45% at December 31, 2018. Each advance is payable per terms on agreement, with a prepayment penalty. No prepayment penalties were incurred during 2019 or 2018. The advances were collateralized by approximately $128.1 million and $130.4 million of first mortgage loans, under a blanket lien arrangement at March 31, 2019 and December 31, 2018, respectively. At March 31, 2019, our additional borrowing capacity with the FHLB was $39.8 million.

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

	Advances
Year 1	$	50,502
Year 2		748
Year 3		98
Year 4		99
Year 5		42
Thereafter		22
	$	51,511

Note 7 – Senior Debt

The Company’s $10.0 million senior secured 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 $2,500,000, (ii) the Company must maintain a total risk based capital ratio at least equal to 10% of risk-weighted assets, (iii) the Bank must maintain a total risk based capital ratio at least equal to 11% of risk-weighted assets, 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 March 31, 2019.

Note 8 – Fair Values Measurement

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

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

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

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

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

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

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

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

Management routinely applies internal discounts to the value of appraisals used in the fair value evaluation of our 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 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 to have a thin trading market or to be specialized collateral. This is in addition to estimated discounts for cost to sell of six to ten percent.

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

Impaired loans are evaluated quarterly for additional impairment. Management obtains updated appraisals on properties securing our 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.

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 estimated 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.

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Financial assets measured at fair value on a recurring basis at March 31, 2019 and December 31, 2018 are summarized below:

			Fair Value Measurements at March 31, 2019 Using
			(in thousands)
			Quoted Prices In				Significant
			Active Markets for		Significant Other		Unobservable
	Carrying		Identical Assets		Observable Inputs		Inputs
Description	Value		(Level 1)		(Level 2)		(Level 3)
Available for sale securities
U.S. Government and federal agency	$	23,953	$	—	$	23,953	$	—
Agency mortgage-backed: residential		90,643		—		90,643		—
Collateralized loan obligations		49,713		—		49,713		—
State and municipal		32,059		—		32,059		—
Corporate bonds		10,043		—		10,043		—
Total	$	206,411	$	—	$	206,411	$	—

			Fair Value Measurements at December 31, 2018 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	$	22,560	$	—	$	22,560	$	—
Agency mortgage-backed: residential		85,990		—		85,990		—
Collateralized loan obligations		49,839		—		49,839		—
State and municipal		32,812		—		32,812		—
Corporate bonds		9,991		—		9,991		—
Total	$	201,192	$	—	$	201,192	$	—

There were no transfers between Level 1 and Level 2 during 2019 or 2018.

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

			Fair Value Measurements at March 31, 2019 Using
			(in thousands)
Descriptions	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	$	—	$	—	$	—	$	—
Commercial real estate:
Construction		—		—		—		—
Farmland		—		—		—		—
Nonfarm nonresidential		124		—		—		124
Residential real estate:
Multi-family		—		—		—		—
1-4 Family		556		—		—		556
Consumer		—		—		—		—
Agriculture		—		—		—		—
Other		—		—		—		—
Other real estate owned, net:
Commercial real estate:
Construction		3,335		—		—		3,335
Farmland		—		—		—		—
Nonfarm nonresidential		—		—		—		—
Residential real estate:
Multi-family		—		—		—		—
1-4 Family		—		—		—		—

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			Fair Value Measurements at December 31, 2018 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	$	—	$	—	$	—	$	—
Commercial real estate:
Construction		—		—		—		—
Farmland		—		—		—		—
Nonfarm nonresidential		124		—		—		124
Residential real estate:
Multi-family		—		—		—		—
1-4 Family		552		—		—		552
Consumer		—		—		—		—
Agriculture		—		—		—		—
Other		—		—		—		—
Other real estate owned, net:
Commercial real estate:
Construction		3,485		—		—		3,485
Farmland		—		—		—		—
Nonfarm nonresidential		—		—		—		—
Residential real estate:
Multi-family		—		—		—		—
1-4 Family		—		—		—		—

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $873,000 at March 31, 2019 with a valuation allowance of $193,000, resulting in no additional provision for loan losses for the three months ended March 31, 2019. Impaired loans had a carrying amount of $1.6 million with a valuation allowance of $282,000, resulting in additional provision for loan losses of $63,000 for the three months ended March 31, 2018. At December 31, 2018, impaired loans had a carrying amount of $879,000, with a valuation allowance of $203,000, resulting in no additional provision for loan losses.

OREO, which is measured at the lower of carrying or fair value less costs to sell, had a net carrying amount of $3.3 million as of March 31, 2019, compared with $3.5 million at December 31, 2018. Write-downs of $150,000 were recorded on OREO for the three months ended March 31, 2019, compared to write-downs of $60,000 for the three months ended March 31, 2018.

The following table presents qualitative information about level 3 fair value measurements for financial assets measured at fair value on a non-recurring basis at March 31, 2019:

	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range (Weighted Average)
	(in thousands)

Impaired loans – Residential real estate	$	556	Sales comparison approach	Adjustment for differences between the comparable sales	0%	-	26%	(11%)

Other real estate owned – Commercial real estate	$	3,335	Sales comparison approach	Adjustment for differences between the comparable sales	0%	-	35%	(18%)

			Income approach	Discount or capitalization rate		25%		(25%)

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The following table presents qualitative information about level 3 fair value measurements for financial assets measured at fair value on a non-recurring basis at December 31, 2018:

	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range (Weighted Average)
	(in thousands)

Impaired loans – Residential real estate	$	552	Sales comparison approach	Adjustment for differences between the comparable sales	0%	-	26%	(11%)

Other real estate owned – Commercial real estate	$	3,485	Sales comparison approach	Adjustment for differences between the comparable sales	0%	-	35%	(18%)

			Income approach	Discount or capitalization rate		25%		(25%)

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

			Fair Value Measurements at March 31, 2019 Using
	Carrying Amount		Level 1		Level 2		Level 3		Total
	(in thousands)
Financial assets
Cash and cash equivalents	$	30,490	$	30,490	$	—	$	—	$	30,490
Securities available for sale		206,411		—		206,411		—		206,411
Federal Home Loan Bank stock		6,813		N/A		N/A		N/A		N/A
Loans, net		777,899		—		—		773,191		773,191
Accrued interest receivable		3,998		—		1,221		2,777		3,998
Financial liabilities
Deposits	$	908,842	$	146,440	$	760,936	$	—	$	907,376
Federal Home Loan Bank advances		51,511		—		51,493		—		51,493
Junior subordinated debentures		21,000		—		—		17,040		17,040
Senior debt		10,000		—		—		9,766		9,766
Accrued interest payable		692		—		633		59		692

			Fair Value Measurements at December 31, 2018 Using
	Carrying Amount		Level 1		Level 2		Level 3		Total
	(in thousands)
Financial assets
Cash and cash equivalents	$	35,361	$	35,361	$	—	$	—	$	35,361
Securities available for sale		201,192		—		201,192		—		201,192
Federal Home Loan Bank stock		7,233		N/A		N/A		N/A		N/A
Loans, net		756,364		—		—		744,076		744,076
Accrued interest receivable		3,665		—		1,222		2,443		3,665
Financial liabilities
Deposits	$	894,231	$	142,618	$	750,015	$	—	$	892,633
Federal Home Loan Bank advances		46,549		—		46,519		—		46,519
Junior subordinated debentures		21,000		—		—		16,226		16,226
Senior Debt		10,000		—		—		9,585		9,585
Accrued interest payable		658		—		598		60		658

In accordance with the Company’s adoption of ASU 2016-01 as of January 1, 2018, the methods utilized to measure the fair value of financial instruments at March 31, 2019 and December 31, 2018 represent an approximation of exit price; however, an actual exit price may differ.

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Note 9 – Income Taxes

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

	March 31,			December 31,
	2019			2018
	(in thousands)
Deferred tax assets:
Net operating loss carry-forward	$	24,486		$	23,390
Allowance for loan losses		2,167			1,865
OREO write-down		2,642			2,611
Alternative minimum tax credit carry-forward		173			346
Net assets from acquisitions		303			290
Net unrealized loss on securities		114			515
New market tax credit carry-forward		208			208
Nonaccrual loan interest		285			235
Accrued expenses		161			239
Deferred compensation		—			267
Other		199			241
		30,738			30,207

Deferred tax liabilities:
FHLB stock dividends		615			557
Fixed assets		87			94
Deferred loan costs		159			136
Other		137			138
		998			925
Net deferred tax assets before valuation allowance		29,740			29,282
Valuation allowance		(1,172	)		—
Net deferred tax asset	$	28,568		$	29,282

During the first quarter of 2019, the Company benefited $341,000 from the establishment of a net deferred tax asset related to a change in Kentucky tax law enacted during the quarter. The new law eliminates the Kentucky bank franchise tax, which is assessed at a rate of 1.1% of average capital, and implements a state income tax for the Bank at a statutory rate of 5%. The new Kentucky income tax will go into effect on January 1, 2021.

At March 31, 2019, the Company had net federal operating loss carryforwards (“NOLs”) of $111.0 million, which will begin to expire in 2031. As of March 31, 2019, a total of $173,000 in alternative minimum tax credit carry-forward was reclassified to other assets as it is currently refundable for the 2019 tax year.

In addition, the Company had state NOLs of $28.5 million, which are subject to a full valuation allowance at March 31, 2019 and will begin to expire in 2025. In April 2019, tax legislation was enacted which allowed for certain Kentucky NOLs to be utilized in a combined filing return. Therefore, the Company will begin filing a Kentucky combined filing in 2021 that will include the Bank unless the Company timely elects alternative filing. As of March 31, 2019, the Company had not yet concluded whether it would make the election for consolidated filing. The Company estimates that based on the default combined filing requirement or if it were to elect for consolidated filing, a state NOL tax benefit, net of federal impact, of $1.2 million or approximately $0.16 per diluted share would be recognized in the second quarter of 2019.

The Company does not have any beginning and ending unrecognized tax benefits. The Company does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next twelve months. There were no interest and penalties recorded in the income statement or accrued for the three months ended March 31, 2019 or March 31, 2018 related to unrecognized tax benefits.

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

In 2015, the Company took two measures to preserve the value of its NOLs. First, the Company adopted a tax benefits preservation plan designed to reduce the likelihood of an “ownership change” occurring as a result of purchases and sales of the Company's common shares. Upon adoption of this plan, the Company declared a dividend of one preferred stock purchase right for each common share outstanding as of the close of business on July 10, 2015. Any shareholder or group that acquires beneficial ownership of 5% or more of the Company (an “acquiring person”) could be subject to significant dilution in its holdings if the Company's Board of Directors does not approve such acquisition. Existing shareholders holding 5% or more of the Company will not be considered acquiring persons unless they acquire additional shares, subject to certain exceptions described in the plan. In addition, the Board of Directors has the discretion to exempt certain transactions and certain persons whose acquisition of securities is determined by the Board not to jeopardize the Company's deferred tax assets. The rights plan was extended in May 2018 to expire upon the earlier of (i) June 30, 2021, (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.

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On September 23, 2015, the Company’s shareholders approved an amendment to its articles of incorporation to further help protect the long-term value of the Company’s NOLs. The amendment provides a means to block transfers of our common shares that could result in an ownership change under Section 382. The transfer restrictions were extended in May 2018 by shareholder vote and will expire on the earlier of (i) May 23, 2021, (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 our Board determines that the transfer restrictions are no longer needed to preserve the tax benefits of our NOLs, or (iv) such date as the Board otherwise determines that the transfer restrictions are no longer necessary.

The Company and its subsidiaries are subject to U.S. federal income tax and the Company is subject to income tax in the Commonwealth of Kentucky. The Company is no longer subject to examination by taxing authorities for years before 2015.

Note 10 – Stock Plans and Stock Based Compensation

Shares available for issuance under the 2018 Omnibus Equity Compensation Plan (“2018 Plan”) total 304,886. Shares issued to employees under the plan vest annually on the anniversary date of the grant over three years. Shares issued annually to non-employee directors have a fair market value of $25,000 and vest on December 31 in the year of grant.

The fair value of the 2019 unvested shares issued was $292,000, or $14.53 per weighted-average share. The Company recorded $82,000 and $64,000 of stock-based compensation to salaries and employee benefits for the three months ended March 31, 2019 and 2018, respectively. Management expects substantially all of the unvested shares outstanding at the end of the period to vest according to the vesting schedule. A deferred tax benefit of $17,000 and $13,000 was recognized related to this expense during the three months ended March 31, 2019 and 2018, respectively.

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

	Three Months Ended					Twelve Months Ended
	March 31, 2019					December 31, 2018
				Weighted					Weighted
				Average					Average
				Grant					Grant
	Shares			Price		Shares			Price
Outstanding, beginning		116,909		$	8.69		142,334		$	5.67
Granted		20,108			14.53		52,856			13.94
Vested		(60,360	)		5.03		(78,281	)		6.75
Forfeited		(3,748	)		12.94		—			—
Outstanding, ending		72,909		$	13.11		116,909		$	8.69

Unrecognized stock based compensation expense related to unvested shares for the remainder of 2019 and beyond is estimated as follows (in thousands):

April 2019 – December 2019	$	274
2020		296
2021		182
2022		11

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Note 11 – Earnings per Share

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

	Three Months Ended
	March 31,
	2019		2018
	(in thousands, except share and per share data)
Net income	$	2,839	$	1,934
Less:
Earnings allocated to unvested shares		36		34
Net income available to common shareholders, basic and diluted	$	2,803	$	1,900

Basic
Weighted average common shares including unvested common shares outstanding		7,469,912		6,285,420
Less:
Weighted average unvested common shares		94,909		112,023
Weighted average common shares outstanding		7,375,003		6,173,397
Basic income per common share	$	0.38	$	0.31

Diluted
Add: Dilutive effects of assumed exercises of common stock warrants		—		—
Weighted average common shares and potential common shares		7,375,003		6,173,397
Diluted income per common share	$	0.38	$	0.31

The Company had no outstanding stock options at March 31, 2019 or 2018. A warrant for the purchase of 66,113 shares of the Company’s common stock at an exercise price of $79.41 was outstanding at March 31, 2018, but was not included in the diluted EPS computation as inclusion would have been anti-dilutive. The warrant expired on November 21, 2018.

Note 12 – Regulatory Capital Matters

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 final 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 establish a “capital conservation buffer” of 2.5% above the regulatory minimum risk-based capital ratios. With the capital conservation buffer fully phased in as of January 1, 2019, 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 2019 is 2.5% and was 1.875% for 2018. An institution is subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if capital levels fall below minimum levels plus the buffer amounts. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions without prior regulatory approval.

Management believes as of March 31, 2019, the Company and Bank meet all capital adequacy requirements to which they are subject. As of March 31, 2019, 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.

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

	Actual				Minimum Requirement for Capital Adequacy Purposes				Minimum Requirement to be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
As of March 31, 2019:
Total risk-based capital (to risk- weighted assets)	$	112,779		13.01	$	69,329		8.00	$	86,661		10.00	%
Total common equity Tier 1 risk-based capital (to risk-weighted assets)		104,093		12.01		38,997		4.50		56,330		6.50
Tier 1 capital (to risk-weighted assets)		104,093		12.01		51,997		6.00		69,329		8.00
Tier 1 capital (to average assets)		104,093		9.88		42,149		4.00		52,686		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, 2018:
Total risk-based capital (to risk- weighted assets)	$	109,309		12.88	%	$	67,920		8.00	%	$	84,900		10.00	%
Total common equity Tier 1 risk-based capital (to risk-weighted assets)		100,429		11.83			38,205		4.50			55,185		6.50
Tier 1 capital (to risk-weighted assets)		100,429		11.83			50,940		6.00			67,920		8.00
Tier 1 capital (to average assets)		100,429		9.60			41,837		4.00			52,297		5.00

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

Note 13 – Off Balance Sheet Risks, Commitments, and Contingent Liabilities

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

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

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

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

	March 31, 2019				December 31, 2018
	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate
	(in thousands)
Commitments to make loans	$	3,295	$	11,460	$	5,317	$	11,236
Unused lines of credit		11,333		75,070		7,410		73,024
Standby letters of credit		541		1,752		541		1,752

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

In connection with the purchase of loan participations, the Bank entered into risk participation agreements, which had notional amounts totaling $26.6 million at March 31, 2019 and December 31, 2018. The risk participation agreements are not designated against specific assets or liabilities under ASC 815, Derivatives and Hedging, and, therefore, do not qualify for hedge accounting. The derivatives are recorded in other liabilities on the balance sheet at fair value and changes in fair value of both the borrower and the offsetting swap agreements are recorded (and essentially offset) in non-interest income.

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

Note 14 – Revenue from Contracts with Customers

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

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

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

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

Other Non-interest Income: Other non-interest income includes revenue from several sources that are within the scope of ASC 606, including title insurance commissions, income from secondary market loan sales, and other transaction-based revenue that is individually immaterial. Other non-interest income included approximately $136,000 and $130,000 of revenue for three months ended March 31, 2019 and March 31, 2018, respectively, within the scope of ASC 606. The remaining other non-interest income for the three months is excluded from the scope of ASC 606.

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

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

Preliminary Note Concerning Forward-Looking Statements

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

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

●

Changes in fiscal, monetary, regulatory and tax policies;

●

Changes in political and economic conditions;

•

The magnitude and frequency of changes to the Federal Funds Target Rate implemented by the Federal Open Market Committee of the Federal Reserve Bank;

•

Long-term and short-term interest rate fluctuations as well as the overall steepness of the yield curve;

•

Competitive product and pricing pressures;

•

Equity and fixed income market fluctuations;

•

Client bankruptcies and loan defaults;

•

Inflation;

•

Recession;

•

Natural disasters impacting Company operations;

•

Future acquisitions;

•

Integrations of acquired businesses;

•

Changes in technology and regulations or the interpretation and enforcement thereof;

●

Changes in accounting standards;

●

Changes to the Company’s overall internal control environment;

●

Success in gaining regulatory approvals when required;

●

Information security breaches or cyber security attacks involving either the Company or one of the Company’s third-party service providers; and

●

Other risks and uncertainties reported from time to time in the Company’s filings with the Securities and Exchange Commission (“SEC”), including Part 1 Item 1A “Risk Factors” of the Company’s December 31, 2018 Annual Report on Form 10-K for the year ended December 31, 2018.

Overview

The Company is a bank holding company headquartered in Louisville, Kentucky. The Company’s common stock is traded on Nasdaq’s Capital Market under the symbol LMST. The Company operates Limestone Bank (the Bank), its wholly owned subsidiary and the thirteenth largest bank domiciled in the Commonwealth of Kentucky based on total assets. The Bank operates banking offices in twelve counties in Kentucky. The Bank’s markets include metropolitan Louisville in Jefferson County and the surrounding counties of Henry and Bullitt. The Bank serves south central Kentucky and southern Kentucky from banking offices in Butler, Green, Hart, Edmonson, Barren, Warren, Ohio, and Daviess Counties. The Bank also has an office in Lexington, the second largest city in Kentucky. The Bank is a community bank with a wide range of commercial and personal banking products. As of March 31, 2019, the Company had total assets of $1.1 billion, total loans of $786.6 million, total deposits of $908.8 million and stockholders’ equity of $96.3 million.

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The Company reported net income of $2.8 million for the three months ended March 31, 2019, compared with $1.9 million for the first quarter of 2018. Net income before taxes and income tax expense was $3.0 million and $123,000, respectively for the first quarter of 2019, compared with $2.3 million and $329,000, respectively for the first quarter of 2018. Income tax expense for the first quarter of 2019 benefitted $341,000 or $0.05 per basic and diluted common share, from the establishment of a net deferred tax asset related to a change in Kentucky tax law enacted during the first quarter of 2019. The new law eliminates the Kentucky bank franchise tax, which is assessed at a rate of 1.1% of average capital, and implements a state income tax for the Bank at a statutory rate of 5%. The new Kentucky income tax will go into effect on January 1, 2021.

Highlights for the three months ended March 31, 2019 are as follows:

●

Loan growth outpaced paydowns during the period. Average loans receivable increased approximately $42.3 million or 5.8% to $766.5 million for the quarter ended March 31, 2019, compared with $724.2 million for the first quarter of 2018. This resulted in an increase in interest revenue volume of approximately $532,000 for the quarter ended March 31, 2019, compared with the first quarter of 2018.

●

Net interest margin was 3.61% for the first three months of 2019 compared with 3.63% for the first three months of 2018. Loan fee income can meaningfully impact net interest income, loan yields, and net interest income. The amount of loan fee income included in total interest income was $546,000 and $97,000 for the first quarter ended March 31, 2019 and 2018, respectively. This represents 22 basis points and five basis points of yield on earning assets and net interest margin for the first quarter ended March 31, 2019 and 2018, respectively. The cost of interest bearing liabilities increased from 0.96% in the first quarter of 2018 to 1.57% in the first quarter of 2019 as a result of increases in short-term interest rates during 2018.

●

The Company recorded no provision for loan losses expense in the first quarter of 2019 or 2018. Historical loss experience, risk grade classification metrics, charge-off levels, and past due trends remain at historically strong levels and were stable between periods. Net loan charge-offs were $194,000 for the first quarter of 2019, compared to net recoveries of $324,000 for the first quarter of 2018.

●

Loans past due 30-59 days increased from $1.6 million at December 31, 2018 to $2.0 million at March 31, 2019, and loans past due 60-89 days decreased from $331,000 at December 31, 2018 to $240,000 at March 31, 2019. Total loans past due and nonaccrual loans increased to $4.2 million at March 31, 2019, from $3.9 million at December 31, 2018.

●

At March 31, 2019, foreclosed properties declined from $3.5 million to $3.3 million compared to December 31, 2018, and declined from $4.4 million at March 31, 2018. Operating expenses and fair value write downs totaled $166,000 in the first quarter of 2019 compared to operating expenses, fair value write-downs, and a net loss on sales of $82,000 in the first quarter of 2018.

●

The ratio of non-performing assets to total assets decreased to 0.57% at March 31, 2019, compared with 0.60% at December 31, 2018, and 0.97% at March 31, 2018.

●

Deposits were $908.8 million at March 31, 2019, compared with $894.2 million at December 31, 2018. Certificate of deposit balances increased $14.5 million during the first three months of 2019 to $465.4 million at March 31, 2019, from $450.9 million at December 31, 2018. Interest checking accounts increased $2.3 million during the quarter ended March 31, 2019.

Application of Critical Accounting Policies

Management continually reviews accounting policies and financial information disclosures. The Company’s more significant accounting policies that require the use of estimates and judgments in preparing the financial statements are summarized in “Application of Critical Accounting Policies” in Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operation of our Annual Report on Form 10-K for the calendar year ended December 31, 2018. Management has discussed the development, selection, and application of our critical accounting policies with our Audit Committee. During the first three months of 2019, there were no material changes in the critical accounting policies and assumptions.

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Results of Operations

The following table summarizes components of income and expense and the change in those components for the three months ended March 31, 2019, compared with the same period of 2018:

	For the Three Months				Change from
	Ended March 31,				Prior Period
	2019		2018		Amount			Percent
	(dollars in thousands)

Gross interest income	$	12,186	$	10,015	$	2,171			21.7	%
Gross interest expense		3,227		1,834		1,393			76.0
Net interest income		8,959		8,181		778			9.5
Non-interest income		1,284		1,251		33			2.6
Non-interest expense		7,281		7,169		112			1.6
Net income before taxes		2,962		2,263		699			30.9
Income tax expense		123		329		(206	)		(62.6	)
Net income		2,839		1,934		905			46.8

Net income for the three months ended March 31, 2019 totaled $2.8 million, compared with $1.9 million for the comparable period of 2018. Net income before taxes and income tax expense was $3.0 million and $123,000, respectively for the first quarter of 2019, compared with $2.3 million and $329,000, respectively for the first quarter of 2018. Income tax expense for the first quarter of 2019 benefitted $341,000 from the establishment of a net deferred tax asset related to a change in Kentucky tax law enacted during the first quarter of 2019. The new law eliminates the Kentucky bank franchise tax, which is assessed at a rate of 1.1% of average capital, and implements a state income tax for the Bank at a statutory rate of 5%. The new Kentucky income tax will go into effect on January 1, 2021.

Net interest income increased $778,000 from the 2018 first quarter as a result of an increase in earning assets. Net interest margin decreased two basis points to 3.61% in the first three months of 2019 compared with 3.63% in the first three months of 2018. Average earning assets increased from $915.8 million for the first quarter of 2018 to $1.0 billion for the first quarter of 2019. Non-interest income remained unchanged at $1.3 million in the first quarter of 2019 compared to the first quarter of 2018. Non-interest expense increased $112,000 from $7.2 million in the first quarter of 2018 to $7.3 million in the first quarter of 2019.

Net Interest Income – Net interest income was $9.0 million for the three months ended March 31, 2019, an increase of $778,000, or 9.5%, compared with $8.2 million for the same period in 2018. Net interest spread and margin were 3.33% and 3.61%, respectively, for the first quarter of 2019, compared with 3.49% and 3.63%, respectively, for the first quarter of 2018. Net average non-accrual loans were $2.1 million and $4.9 million for the first quarters of 2019 and 2018, respectively.

Average loans receivable increased approximately $42.3 million for the first quarter of 2019 compared with the first quarter of 2018. This resulted in an increase in interest revenue volume of approximately $532,000 for the quarter ended March 31, 2019, compared with the first quarter of 2018. Interest foregone on non-accrual loans totaled $78,000 in the first quarter of 2019, compared with $87,000 in the first quarter of 2018.

Net interest margin decreased two basis points from our margin of 3.63% in the prior year first quarter to 3.61% for the first quarter of 2019. The yield on earning assets increased 45 basis points and cost of interest-bearing liabilities increased 61 basis points from the first quarter of 2018. Loan fee income can meaningfully impact net interest income, loan yields, and net interest income. The amount of loan fee income included in total interest income was $546,000 and $97,000 for the first quarter ended March 31, 2019 and 2018, respectively. This represents 22 basis points and five basis points of yield on earning assets and net interest margin for the first quarter ended March 31, 2019 and 2018, respectively. Both the yield on earning assets and cost of interest-bearing liabilities were impacted by increases in short-term interest rates throughout 2018.

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Average Balance Sheets

The following table presents the average balance sheets for the three month periods ended March 31, 2019 and 2018, along with the related calculations of tax-equivalent net interest income, net interest margin and net interest spread for the related periods.

	Three Months Ended March 31,
	2019								2018
	Average Balance			Interest Earned/Paid		Average Yield/Cost			Average Balance			Interest Earned/Paid		Average Yield/Cost
	(dollars in thousands)
ASSETS
Interest-earning assets:
Loan receivables (1)(2)	$	766,505		$	10,254		5.43	%	$	724,203		$	8,790		4.92	%
Securities
Taxable		191,656			1,573		3.33			143,842			943		2.66
Tax-exempt (3)		13,512			93		3.53			14,223			96		3.47
FHLB stock		7,068			109		6.25			7,323			106		5.87
Federal funds sold and other		31,207			157		2.04			26,171			80		1.24
Total interest-earning assets		1,009,948			12,186		4.90	%		915,762			10,015		4.45	%
Less: Allowance for loan losses		(8,855	)							(8,333	)
Non-interest earning assets		74,460								79,961
Total assets	$	1,075,553							$	987,390

LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
Certificates of deposit and other time deposits	$	459,709		$	2,048		1.81	%	$	422,245		$	1,062		1.02	%
NOW and money market deposits		264,847			525		0.80			245,911			268		0.44
Savings accounts		33,557			14		0.17			34,921			14		0.16
FHLB advances		45,524			281		2.50			40,823			156		1.55
Junior subordinated debentures		21,000			263		5.08			23,240			238		4.15
Senior debt		10,000			96		3.89			10,000			96		3.89
Total interest-bearing liabilities		834,637			3,227		1.57	%		777,140			1,834		0.96	%

Non-interest-bearing liabilities:
Non-interest-bearing deposits		142,716								131,618
Other liabilities		4,709								5,427
Total liabilities		982,062								914,185
Stockholders’ equity		93,491								73,205
Total liabilities and stockholders’ equity	$	1,075,553							$	987,390

Net interest income				$	8,959							$	8,181

Net interest spread							3.33	%							3.49	%

Net interest margin							3.61	%							3.63	%

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

(2)	Calculations include non-accruing loans averaging $2.1 million and $4.9 million, respectively, in average loan amounts outstanding.

(3)	Taxable equivalent yields are calculated assuming a federal income tax rate of 21%.

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Rate/Volume Analysis

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

	Three Months Ended March 31, 2019 vs. 2018
	Increase (decrease) due to change in					Net
	Rate		Volume			Change
	(in thousands)
Interest-earning assets:
Loan receivables	$	932	$	532		$	1,464
Securities		277		350			627
FHLB stock		7		(4	)		3
Federal funds sold and other		60		17			77
Total increase (decrease) in interest income		1,276		895			2,171

Interest-bearing liabilities:
Certificates of deposit and other time deposits		884		102			986
NOW and money market accounts		235		22			257
Savings accounts		1		(1	)		—
FHLB advances		105		20			125
Junior subordinated debentures		50		(25	)		25
Senior debt		—		—			—
Total decrease in interest expense		1,275		118			1,393
Increase (decrease) in net interest income	$	1	$	777		$	778

Non-Interest Income – The following table presents the major categories of non-interest income for the three months ended March 31, 2019 and 2018:

	For the Three Months
	Ended March 31,
	2019		2018
	(in thousands)

Service charges on deposit accounts	$	496	$	568
Bank card interchange fees		508		401
Income from bank owned life insurance		99		99
Other		181		183
Total non-interest income	$	1,284	$	1,251

Non-interest income for the first quarter of 2019 increased by $33,000, or 2.6%, compared with the first quarter of 2018. The increase in non-interest income was primarily driven by increase in bank card interchange fees of $107,000, which was partially offset by a decrease in service charges on deposit accounts of $72,000.

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Non-interest Expense – The following table presents the major categories of non-interest expense for the three months ended March 31, 2019 and 2018:

	For the Three Months
	Ended March 31,
	2019		2018
	(in thousands)

Salary and employee benefits	$	3,915	$	3,788
Occupancy and equipment		898		895
Professional fees		165		205
Marketing expense		227		300
FDIC insurance		108		182
Data processing expense		313		324
State franchise and deposit tax		315		282
Deposit account related expenses		281		219
Other real estate owned expense		166		82
Litigation and loan collection expense		46		53
Other		847		839
Total non-interest expense	$	7,281	$	7,169

Non-interest expense for the first quarter ended March 31, 2019 increased $112,000, or 1.6%, compared with the first quarter of 2018 primarily due to an increase of $127,000 in salaries and employee benefits expense, an increase of $62,000 in deposit account related expenses, and an increase of $84,000 in OREO expenses partially offset by a decrease of $73,000 in marketing expenses and $74,000 of FDIC insurance expense.

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

	For the Three Months
	Ended March 31,
	2019			2018
	(in thousands)

Federal statutory rate times financial statement income	$	622		$	475
Effect of:
Tax-exempt income		(19	)		(20	)
Establish state deferred tax asset		(341	)		—
Non-taxable life insurance income		(21	)		(21	)
Restricted stock vesting		(126	)		(111	)
Other, net		8			6
Total	$	123		$	329

Net income before taxes and income tax expense was $3.0 million and $123,000, respectively for the first quarter of 2019, compared with $2.3 million and $329,000, respectively for the first quarter of 2018. Income tax expense for the first quarter of 2019 benefitted $341,000 from the establishment of a net deferred tax asset related to a change in Kentucky tax law enacted during the first quarter of 2019. The new law eliminates the Kentucky bank franchise tax, which is assessed at a rate of 1.1% of average capital, and implements a state income tax for the Bank at a statutory rate of 5%. The new Kentucky income tax will go into effect on January 1, 2021.

Analysis of Financial Condition

Total assets increased $21.6 million, or 2.0%, to $1.1 billion at March 31, 2019, from $1.1 billion at December 31, 2018. This increase was primarily attributable to an increase in loans receivable of $21.3 million and an increase in securities available for sale of $5.2 million, partially offset by a decrease in cash and cash equivalents of $4.9 million.

Loans Receivable – Loans receivable increased $21.3 million, or 2.8%, during the three months ended March 31, 2019 to $786.6 million as loan growth outpaced paydowns. Our commercial and commercial real estate portfolios decreased by an aggregate of $5.6 million, or 1.2% during the first quarter of 2019 and comprised 58.6% of the loan portfolio at March 31, 2019. Residential real estate and consumer portfolios increased by an aggregate of $23.2 million, or 8.8% during the first quarter of 2019 and comprised 36.6% of the loan portfolio at March 31, 2019.

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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 our portfolio and other than the categories noted, there is no concentration of loans in any industry exceeding 10% of total loans.

	As of March 31,					As of December 31,
	2019					2018
	Amount		Percent			Amount		Percent
			(dollars in thousands)

Commercial	$	128,586		16.35	%	$	129,368		16.91	%
Commercial Real Estate
Construction		63,135		8.03			86,867		11.35
Farmland		77,545		9.86			77,937		10.18
Nonfarm nonresidential		191,522		24.35			172,177		22.50
Residential Real Estate
Multi-family		58,860		7.48			49,757		6.50
1-4 Family		171,134		21.76			175,761		22.97
Consumer		57,837		7.35			39,104		5.11
Agriculture		37,528		4.77			33,737		4.41
Other		438		0.05			536		0.07
Total loans	$	786,585		100.00	%	$	765,244		100.00	%

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

	March 31, 2019					December 31, 2018
	Loans		% to Total			Loans		% to Total
	(dollars in thousands)

Pass	$	756,493		96.2	%	$	745,604		97.4	%
Watch		17,412		2.2			13,164		1.8
Special Mention		—		—			113		—
Substandard		12,680		1.6			6,363		0.8
Doubtful		—		—			—		—
Total	$	786,585		100.0	%	$	765,244		100.00	%

Loans receivable increased $21.3 million, or 2.8%, during the three months ended March 31, 2019. Since December 31, 2018, the pass category increased approximately $10.9 million, the watch category increased approximately $4.2 million, and the substandard category increased approximately $6.3 million. The $6.3 million increase in loans classified as substandard was primarily driven by $7.4 million in loans moved to substandard during the quarter, offset by $473,000 in loans upgraded from substandard, $343,000 in payments, and $268,000 in charge-offs.

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

	March 31, 2019		December 31, 2018
	(in thousands)
Past Due Loans:
30-59 Days	$	2,001	$	1,593
60-89 Days		240		331
90 Days and Over		—		—
Total Loans Past Due 30-90+ Days		2,241		1,924

Nonaccrual Loans		1,921		1,991
Total Past Due and Nonaccrual Loans	$	4,162	$	3,915

During the three months ended March 31, 2019, nonaccrual loans decreased by $70,000 to $1.9 million. During the three months ended March 31, 2019, loans past due 30-59 days increased from $1.6 million at December 31, 2018 to $2.0 million at March 31, 2019. Loans past due 60-89 days decreased from $331,000 at December 31, 2018 to $240,000 at March 31, 2019. This represents a $317,000 increase from December 31, 2018 to March 31, 2019, in loans past due 30-89 days. This trend in delinquency levels is considered during the evaluation of qualitative trends in the portfolio when establishing the general component of our allowance for loan losses.

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

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

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 performance.

If the borrower fails to perform, management places the loan on nonaccrual status and seeks 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.

At March 31, 2019 and December 31, 2018, the Bank had two restructured loans totaling $910,000 with borrowers who experienced deterioration in financial condition. In general, these loans were granted interest rate reductions to provide cash flow relief to borrowers experiencing cash flow difficulties. The Bank had no restructured loans that had been granted principal payment deferrals until maturity at March 31, 2019 or December 31, 2018. There were no concessions made to forgive principal relative to these loans, although partial charge-offs have been recorded for certain restructured loans. In general, these loans are secured by first liens on 1-4 residential properties, commercial real estate properties, or farmland. Both TDRs were performing according to their modified terms at March 31, 2019 and December 31, 2018.

There were no modifications granted during 2019 or 2018 that resulted in loans being identified as TDRs. See “Note 3 – Loans,” to the financial statements for additional disclosure related to troubled debt restructuring.

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Non-Performing Assets – Non-performing assets consist of certain restructured loans for which interest rate or other terms have been renegotiated, loans past due 90 days or more still on accrual, loans on which interest is no longer accrued, real estate acquired through foreclosure and repossessed assets. The following table sets forth information with respect to non-performing assets as of March 31, 2019 and December 31, 2018.

	March 31, 2019			December 31, 2018
	(dollars in thousands)

Loans on nonaccrual status	$	1,921		$	1,991
Troubled debt restructurings on accrual		910			910
Past due 90 days or more still on accrual		—			—
Total non-performing loans		2,831			2,901
Real estate acquired through foreclosure		3,335			3,485
Other repossessed assets		—			—
Total non-performing assets	$	6,166		$	6,386

Non-performing loans to total loans		0.36	%		0.38	%
Non-performing assets to total assets		0.57	%		0.60	%
Allowance for non-performing loans	$	73		$	83
Allowance for non-performing loans to non-performing loans		2.58	%		2.86	%

Nonperforming loans at March 31, 2019, were $2.8 million, or 0.36% of total loans, compared with $2.9 million, or 0.38% of total loans at December 31, 2018, and $5.3 million, or 0.73% of total loans at March 31, 2018.

Allowance for Loan Losses – The allowance for loan losses 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.

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

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

	Three Months Ended March 31,						Year Ended December 31,
	2019			2018			2018
	(dollars in thousands)
Balances at beginning of period	$	8,880		$	8,202		$	8,202

Loans charged-off:
Real estate		97			20			450
Commercial		—			—			50
Consumer		180			27			95
Agriculture		1			—			13
Other		—			—			8
Total charge-offs		278			47			616

Recoveries:
Real estate		63			86			1,437
Commercial		5			240			261
Consumer		16			34			69
Agriculture		—			11			15
Other		—			—			12
Total recoveries		84			371			1,794
Net charge-offs (recoveries)		194			(324	)		(1,178	)
Provision (negative provision) for loan losses		—			—			(500	)
Balance at end of period	$	8,686		$	8,526		$	8,880

Allowance for loan losses to period-end loans		1.10	%		1.17	%		1.16	%
Net charge-offs (recoveries) to average loans		0.10	%		(0.18	)%		(0.16	)%
Allowance for loan losses to non-performing loans		306.82	%		195.10	%		306.10	%

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 losses is comprised of general reserves and specific reserves. The loan loss reserve, as a percentage of total loans at March 31, 2019, decreased to 1.10% from 1.16% at December 31, 2018 and from 1.17% at March 31, 2018. New loans continue to be underwritten with lower loss expectations. Historical loss experience, risk grade classification metrics, charge-off levels, and past due trends remain at historically strong levels and were stable between periods. The allowance for loan losses to non-performing loans was 306.82% at March 31, 2019, compared with 306.10% at December 31, 2018, and 195.10% at March 31, 2018. Net charge-offs in the first three months of 2019 totaled $194,000 compared to net loan recoveries of $324,000 in the first three months of 2018.

The majority of nonperforming loans are secured by real estate collateral, and the underlying collateral coverage for nonperforming loans supports the likelihood of collection of principal. Management has assessed these loans for collectability and considered, among other things, the borrower’s ability to repay, the value of the underlying collateral, and other market conditions to ensure the allowance for loan losses is adequate to absorb probable incurred losses. The allowance for loan losses to non-performing loans and TDRs on accrual was 306.82% at March 31, 2019 compared with 306.10% at December 31, 2018, and 195.10% at March 31, 2018. The decrease in this ratio from December 31, 2018 to March 31, 2019 was primarily attributable to the improving non-performing loan trends during the period.

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Based on prior charge-offs, the current recorded investment 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 balance for those loans. The recorded investment net of the allocated allowance was 17.59% and 57.10% of the unpaid principal balance in the commercial real estate and residential real estate segments of the portfolio, respectively, at March 31, 2019.

Provision for Loan Losses – Based upon historically strong trends in asset quality and management’s assessment of risk in the loan portfolio, no provision for loan losses was recorded for the first quarter of 2019 or 2018. The pass category increased approximately $10.9 million, the watch category increased $4.2 million, and the substandard category increased approximately $6.3 million. Net loan charge-offs were $194,000 for the three months ended March 31, 2019, compared with net recoveries of $324,000 for the three months ended March 31, 2018. Management considers the size and volume of the portfolio as well as the credit quality of the 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.

Foreclosed Properties – Foreclosed properties at March 31, 2019 were $3.3 million compared with $4.4 million at March 31, 2018 and $3.5 million at December 31, 2018. See Note 4, “Other Real Estate Owned,” to the financial statements. Management values foreclosed properties at fair value less estimated costs to sell when acquired and expects to liquidate these properties to recover the investment in the due course of business.

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

Write-downs and operating expenses for OREO totaled $166,000 for the three months ended March 31, 2019, compared to loss on sales, write-downs, and operating expenses of $82,000 for the three months ended March 31, 2018. During the three months ended March 31, 2019, fair value write-downs of $150,000 were recorded due to changing marketing strategies compared with write-downs of $60,000 for the three months ended March 31, 2018.

Liabilities – Total liabilities at March 31, 2019 were $995.0 million compared with $977.6 million at December 31, 2018, an increase of $17.4 million, or 1.8%. This increase was primarily attributable to an increase in total deposits of $14.6 million and an increase in FHLB advances of $5.0 million, offset by a decrease in other liabilities of $2.2 million.

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

	For the Three Months					For the Year
	Ended March 31,					Ended December 31,
	2019					2018
	Average		Average			Average		Average
	Balance		Rate			Balance		Rate
	(dollars in thousands)
Demand	$	142,716				$	136,947
Interest checking		95,140		0.17	%		90,583		0.13	%
Money market		169,707		1.16			158,832		0.90
Savings		33,557		0.17			34,866		0.16
Certificates of deposit		459,709		1.81			439,597		1.35
Total deposits	$	900,829		1.16	%	$	860,825		0.88	%

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

	For the Three Months					For the Year
	Ended March 31,					Ended December 31,
	2019					2018
	Average		Average			Average		Average
	Balance		Rate			Balance		Rate
	(dollars in thousands)
Less than $250,000	$	431,088		1.79	%	$	410,942		1.34	%
$250,000 or more		28,621		2.01	%		28,655		1.51	%
Total	$	459,709		1.81	%	$	439,597		1.35	%

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The following table shows at March 31, 2019 the amount of time deposits of $250,000 or more by time remaining until maturity (in thousands):

Maturity Period
(in thousands)
Three months or less	$	4,313
Three months through six months		2,471
Six months through twelve months		14,830
Over twelve months		7,688
Total	$	29,302

Liquidity

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 meet the cash flow requirements of depositors and borrowers, as well as operating cash needs, taking into account all on- and off-balance sheet funding demands. Liquidity risk management also involves ensuring that cash flow needs are met at a reasonable cost. Management maintains an investment and funds management policy, which identifies the primary sources of liquidity, establishes procedures for monitoring and measuring liquidity, and establishes minimum liquidity requirements in compliance with regulatory guidance. The Asset Liability Committee regularly monitors and reviews our 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 March 31, 2019, the Bank had an unused borrowing capacity with the FHLB of $39.8 million. Advances are collateralized by first mortgage residential loans and borrowing capacity is based on the underlying book value of eligible pledged loans.

The Bank also has available on an unsecured basis federal funds borrowing lines from a correspondent bank totaling $5.0 million. Management believes the sources of liquidity are adequate to meet expected cash needs for the foreseeable future. Historically, the Bank has also utilized brokered and wholesale deposits to supplement its funding strategy. At March 31, 2019, the Bank had no brokered deposits.

The Company uses cash on hand to service senior debt, junior subordinated debentures, and to provide for operating cash flow needs. The Company also may issue common equity, preferred equity and debt to support cash flow needs and liquidity requirements. At March 31, 2019, cash on hand totaled $4.6 million, of which, $321,000 is held in escrow by the Company’s senior debt holder to service interest payments.

Capital

Stockholders’ equity increased $4.2 million to $96.3 million at March 31, 2019, compared with $92.1 million at December 31, 2018 primarily due to current year net income of $2.8 million and other comprehensive income for the quarter of $1.6 million.

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

	Regulatory Minimums			Well-Capitalized Minimums			March 31, 2019			December 31, 2018

Tier 1 Capital		6.0	%		8.0	%		12.01	%		11.83	%
Common equity Tier 1 capital		4.5			6.5			12.01			11.83
Total risk-based capital		8.0			10.0			13.01			12.88
Tier 1 leverage ratio		4.0			5.0			9.88			9.60

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

Each 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 allow 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 establish a “capital conservation buffer” of 2.5%, to be phased in over three years, above the regulatory minimum risk-based capital ratios. With the capital conservation buffer as fully phased in effective January 1, 2019, 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 capital to total risk-weighted assets (“total risk-based capital ratio”) of 10.5%. The capital conservation buffer for 2019 is 2.50% and was 1.875% for 2018. 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.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Given an instantaneous 100 basis point increase in interest rates, the base net interest income would increase by an estimated 1.5% at March 31, 2019, compared with an increase of 2.0% at December 31, 2018. Given a 200 basis point increase in interest rates, base net interest income would increase by an estimated 2.8% at March 31, 2019, compared with an increase of 3.9% at December 31, 2018.

The following table indicates the estimated impact on net interest income under various interest rate scenarios for the twelve months following March 31, 2019, as calculated using the static shock model approach:

	Change in Future Net Interest Income
	Dollar Change			Percentage Change
	(dollars in thousands)
+ 200 basis points	$	971			2.81	%
+ 100 basis points		520			1.50
- 100 basis points		(1,242	)		(3.60	)
- 200 basis points		(1,577	)		(4.57	)

Item 4. Controls and Procedures

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

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

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings

The Company is not currently involved in any material litigation.

Item 1A. Risk Factors

Refer to the detailed cautionary statements and discussion of risks that affect the Company and its business in “Item 1A – Risk Factors” of the Annual Report on Form 10-K, for the year ended December 31, 2018. There have been no material changes from the risk factors previously discussed in those reports.

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

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

Period	Total Shares Purchased (Withheld)	Average Price Paid (Credited) Per Share
March 2019	18,466	$14.95

The Company does not have a publicly announced share repurchase plan or program.

Item 3. Default Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable

Item 6. Exhibits

(a) Exhibits

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

Exhibit Number	Description of Exhibit

3.1	Articles of Incorporation of the Company, restated to reflect amendments. Exhibit 3.1 to Form 10-Q filed August 2, 2018 is incorporated by reference.

3.3	Amended and Restated Bylaws of Limestone Bancorp, Inc. dated June 18, 2018. Exhibit 3.2 to Form 8-K filed June 6, 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 3.1 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 4, 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.

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

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

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

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

101	The following financial statements from the Company’s Quarterly Report on Form 10Q for the quarter ended March 31, 2019, formatted in XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income (Loss), (iv) Consolidated Statement of Changes in Stockholders’ Equity, (v) Consolidated Statements of Cash Flows, (vi) Notes to Consolidated Financial Statements.

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.

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SIGNATURES

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

	LIMESTONE BANCORP, INC.
	(Registrant)

May 2, 2019	By:	/s/ John T. Taylor
		John T. Taylor
		Chief Executive Officer

May 2, 2019	By:	/s/ Phillip W. Barnhouse
		Phillip W. Barnhouse
		Chief Financial Officer