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Section 1: 10-Q (FORM 10-Q)

lmst20200630_10q.htm
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Table of Contents


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 June 30, 2020

 

Or

 

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)

 


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

 

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

 

Indicate 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.

 

6,499,249 Common Shares and 1,000,000 Non-Voting Common Shares were outstanding at July 31, 2020.

 

 


 

 

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

31

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

48

ITEM 4.

CONTROLS AND PROCEDURES

48

  

  

  

PART II –

OTHER INFORMATION

  

ITEM 1.

LEGAL PROCEEDINGS

49

ITEM 1A.

RISK FACTORS

49

ITEM 2.

UNREGISTERED SALES ON EQUITY SECURITIES AND USE OF PROCEEDS

50

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

50

ITEM 4.

MINE SAFETY DISCLOSURES

50

ITEM 5.

OTHER INFORMATION

50

ITEM 6.

EXHIBITS

50

 

2

 


 

 

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 June 30, 2020 and December 31, 2019

Unaudited Consolidated Statements of Income for the three and six months ended June 30, 2020 and 2019

Unaudited Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2020 and 2019

Unaudited Consolidated Statement of Changes in Stockholders’ Equity for the three and six months ended June 30, 2020 and 2019

Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019

Notes to Unaudited Consolidated Financial Statements

 

3

 

 

LIMESTONE BANCORP, INC.

Unaudited Consolidated Balance Sheets

(dollars in thousands except share data)

 

  

June 30,

2020

  

December 31,

2019

 

Assets

        

Cash and due from banks

 $9,990  $8,241 

Interest bearing deposits in banks

  39,027   21,962 

Cash and cash equivalents

  49,017   30,203 

Securities available for sale

  202,596   209,000 

Loans, net of allowance of $10,228 and $8,376, respectively

  965,531   917,895 

Premises and equipment, net

  19,000   19,658 

Premises held for sale

  1,149   900 

Other real estate owned

  1,625   3,225 

Federal Home Loan Bank stock

  6,142   6,237 

Bank owned life insurance

  16,238   16,037 

Deferred taxes, net

  27,054   27,765 

Goodwill

  6,252   6,252 

Other intangible assets, net

  2,372   2,500 

Accrued interest receivable and other assets

  7,532   6,107 

Total assets

 $1,304,508  $1,245,779 
         

Liabilities and Stockholders’ Equity

        

Deposits

        

Non-interest bearing

 $224,901  $187,551 

Interest bearing

  899,887   839,424 

Total deposits

  1,124,788   1,026,975 

Federal Home Loan Bank advances

  20,644   61,389 

Accrued interest payable and other liabilities

  7,020   8,665 

Junior subordinated debentures

  21,000   21,000 

Subordinated capital notes

  17,000   17,000 

Senior debt

  5,000   5,000 

Total liabilities

  1,195,452   1,140,029 

Commitments and contingent liabilities (Note 15)

      

Stockholders’ equity

        

Common stock, no par, 39,000,000 shares authorized, 6,265,872 and 6,251,975 voting, and 1,220,000 and 1,220,000 non-voting issued and outstanding, respectively

  140,639   140,639 

Additional paid-in capital

  24,643   24,508 

Retained deficit

  (51,861

)

  (55,683

)

Accumulated other comprehensive loss

  (4,365

)

  (3,714

)

Total stockholders' equity

  109,056   105,750 

Total liabilities and stockholders’ equity

 $1,304,508  $1,245,779 

 

See accompanying notes to unaudited consolidated financial statements.

 

4

 

 

LIMESTONE BANCORP, INC.

Unaudited Consolidated Statements of Income

(dollars in thousands, except per share data)

 

   

Three Months Ended

June 30,

   

Six Months Ended

June 30,

 
   

2020

   

2019

   

2020

   

2019

 
Interest income                                

Loans, including fees

  $ 11,356     $ 10,465     $ 22,967     $ 20,719  

Taxable securities

    1,307       1,608       2,774       3,181  

Tax exempt securities

    77       88       147       181  

Federal funds sold and other

    46       215       165       481  
      12,786       12,376       26,053       24,562  

Interest expense

                               

Deposits

    2,127       2,965       4,899       5,552  

Federal Home Loan Bank advances

    73       255       293       536  

Senior debt

    51       98       107       194  

Junior subordinated debentures

    172       258       387       521  

Subordinated capital notes

    253             495        
      2,676       3,576       6,181       6,803  

Net interest income

    10,110       8,800       19,872       17,759  

Provision for loan losses

    1,100             2,150        

Net interest income after provision for loan losses

    9,010       8,800       17,722       17,759  
                                 

Non-interest income

                               

Service charges on deposit accounts

    441       571       1,109       1,067  

Bank card interchange fees

    863       596       1,613       1,104  

Income from bank owned life insurance

    116       118       212       217  

Net loss on sales and calls of investment securities

    (5

)

    (5

)

    (5

)

    (5

)

Other

    186       166       396       347  
      1,601       1,446       3,325       2,730  

Non-interest expense

                               

Salaries and employee benefits

    4,633       3,915       9,171       7,830  

Occupancy and equipment

    983       854       1,982       1,752  

Professional fees

    235       179       443       344  

Marketing expense

    104       212       318       439  

FDIC Insurance

    67       103       67       211  

Data processing expense

    380       315       739       628  

State franchise and deposit tax

    360       315       720       630  

Deposit account related expense

    460       310       911       591  

Other real estate owned expense

    22       142       38       308  

Litigation and loan collection expense

    59       34       124       80  

Communications expense

    247       189       465       379  

Insurance expense

    111       112       214       226  

Postage and delivery

    152       134       320       275  

Other

    423       410       959       812  
      8,236       7,224       16,471       14,505  

Income before income taxes

    2,375       3,022       4,576       5,984  

Income tax expense (benefit)

    393       (611

)

    754       (488

)

Net income

    1,982       3,633       3,822       6,472  

Basic and diluted income per common share

  $ 0.26     $ 0.49     $ 0.51     $ 0.87  

 

See accompanying notes to unaudited consolidated financial statements.

 

5

 

 

LIMESTONE BANCORP, INC.

Unaudited Consolidated Statements of Comprehensive Income

(in thousands)

                                          

   

Three Months Ended

June 30,

   

Six Months Ended

June 30,

 
   

2020

   

2019

   

2020

   

2019

 

Net income

  $ 1,982     $ 3,633     $ 3,822     $ 6,472  

Other comprehensive income (loss):

                               

Unrealized gain (loss) on securities:

                               

Unrealized gain (loss) arising during the period

    3,254       1,882       (872

)

    3,877  

Less reclassification adjustment for gains (losses) included in net income

    (5

)

    (5

)

    (5

)

    (5

)

Net unrealized gain (loss) recognized in comprehensive income (loss)

    3,259       1,887       (867

)

    3,882  

Tax effect

    (762

)

    (471

)

    216       (889

)

Other comprehensive income (loss)

    2,497       1,416       (651

)

    2,993  
                                 

Comprehensive income

  $ 4,479     $ 5,049     $ 3,171     $ 9,465  

 

See accompanying notes to unaudited consolidated financial statements.

 

6

 

 

LIMESTONE BANCORP, INC.

Unaudited Consolidated Statements of Changes in Stockholders’ Equity

For Three and Six Months Ended June 30, 2020 and 2019

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

 

    Shares     Amount  
    Common     Common  
   

Common

   

Non-Voting

Common

   

Total

Common

   

Common and Non-Voting Common

   

Additional

Paid-In Capital

   

 

 

Retained Deficit

   

Accumulated Other Comprehensive Loss

   

Total

 
                                                                 

Balances, January 1, 2020

    6,251,975       1,220,000       7,471,975     $ 140,639     $ 24,508     $ (55,683

)

  $ (3,714

)

  $ 105,750  

Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations upon award

    17,330             17,330             (37

)

                (37

)

Forfeited unvested stock

                                               

Stock-based compensation expense

                            106                   106  

Net income

                                  1,840             1,840  

Net change in accumulated other comprehensive loss, net of taxes

                                        (3,148

)

    (3,148

)

Balances, March 31, 2020

    6,269,305       1,220,000       7,489,305     $ 140,639     $ 24,577     $ (53,843

)

  $ (6,862

)

  $ 104,511  

Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations upon award

    (3,433

)

          (3,433

)

          (38

)

                (38

)

Forfeited unvested stock

                                               

Stock-based compensation expense

                            104                   104  

Net income

                                  1,982             1,982  

Net change in accumulated other comprehensive loss, net of taxes

                                        2,497       2,497  

Balances, June 30, 2020

    6,265,872       1,220,000       7,485,872     $ 140,639     $ 24,643     $ (51,861

)

  $ (4,365

)

  $ 109,056  

 

See accompanying notes to unaudited consolidated financial statements.

 

7

 

 

LIMESTONE BANCORP, INC.

Unaudited Consolidated Statements of Changes in Stockholders’ Equity

For Three and Six Months Ended June 30, 2020 and 2019

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

 

    Shares     Amount  
    Common     Common  
   

Common

   

Non-Voting

Common

   

Total

Common

   

Common and Non-Voting Common

   

Additional

Paid-In Capital

   

 

 

Retained Deficit

   

Accumulated Other Comprehensive 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  

Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations upon award

    1,642             1,642             (276

)

                (276

)

Forfeited unvested stock

    (3,748

)

          (3,748

)

                             

Stock-based compensation expense

                            82                   82  

Net income

                                  2,839             2,839  

Net change in accumulated other comprehensive loss, 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  

Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations upon award

    (2,532

)

          (2,532

)

          (39

)

                (39

)

Forfeited unvested stock

    (250

)

          (250

)

                             

Stock-based compensation expense

                            93                   93  

Net income

                                  3,633             3,633  

Net change in accumulated other comprehensive loss, net of taxes

                                        1,416       1,416  

Balances, June 30, 2019

    6,237,832       1,220,000       7,457,832     $ 140,639     $ 24,147     $ (59,729

)

  $ (3,635

)

  $ 101,422  

 

See accompanying notes to unaudited consolidated financial statements.

 

8

 

 

LIMESTONE BANCORP, INC.

Unaudited Consolidated Statements of Cash Flows

For Six Months Ended June 30, 2020 and 2019

(dollars in thousands)

 

   

2020

   

2019

 

Cash flows from operating activities

               

Net income

  $ 3,822     $ 6,472  

Adjustments to reconcile net income to net cash from operating activities

               

Depreciation and amortization

    1,080       979  

Provision for loan losses

    2,150        

Net amortization on securities

    321       363  

Stock-based compensation expense

    210       175  

Deferred taxes, net

    927       (317

)

Net write-down of other real estate owned

          260  

Net realized loss on sales and calls of investment securities

    5       5  

Net write-down on premises held for sale

    61       55  

Increase in cash surrender value of life insurance, net of premium expense

    (201

)

    (207

)

Amortization of operating lease right-of-use assets

    375       123  

Net change in accrued interest receivable and other assets

    (1,425

)

    (552

)

Net change in accrued interest payable and other liabilities

    (1,645

)

    (1,903

)

Net cash from operating activities

    5,680       5,453  
                 

Cash flows from investing activities

               

Purchases of available for sale securities

    (18,309

)

    (13,894

)

Proceeds from sales and calls of available for sale securities

    8,530       2,452  

Proceeds from maturities and prepayments of available for sale securities

    14,990       7,534  

Purchases of Federal Home Loan Bank stock

    (600

)

     

Proceeds from mandatory redemptions of Federal Home Loan Bank stock

    695       540  

Proceeds from sale of other real estate owned

    1,600        

Net change in loans

    (50,212

)

    (38,476

)

Purchases of premises and equipment

    (553

)

    (208

)

Proceeds from sale of premises and equipment

          1  

Net cash from investing activities

    (43,859

)

    (42,051

)

                 

Cash flows from financing activities

               

Net change in deposits

    97,813       44,246  

Repayment of Federal Home Loan Bank advances

    (135,745

)

    (65,079

)

Advances from Federal Home Loan Bank

    95,000       70,000  

Common shares withheld for taxes

    (75

)

    (315

)

Net cash from financing activities

    56,993       48,852  

Net change in cash and cash equivalents

    18,814       12,254  

Beginning cash and cash equivalents

    30,203       35,361  

Ending cash and cash equivalents

  $ 49,017     $ 47,615  
                 

Supplemental cash flow information:

               

Interest paid

  $ 6,549     $ 6,771  

Supplemental non-cash disclosure:

               

Transfer from loans to other real estate

           

Transfer from premises and equipment to premises held for sale

    310        

Financed sales of other real estate owned

    1,360        

Initial recognition of right-of-use lease assets

          507  

 

See accompanying notes to unaudited consolidated financial statements.

 

9

 

LIMESTONE BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

 

 

 

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

 

Basis of Presentation – The consolidated financial statements include Limestone Bancorp, Inc. (Company) and its subsidiary, Limestone Bank, Inc. (Bank). 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 six months ended June 30, 2020 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, 2019 included in the Company’s Annual Report on Form 10-K.

 

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

 

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

 

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

 

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

 

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

 

 

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.

 

10

 

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)

 

June 30, 2020

                

Available for sale

                

U.S. Government and federal agency

 $20,302  $772  $  $21,074 

Agency mortgage-backed: residential

  85,048   3,152   (21

)

  88,179 

Collateralized loan obligations

  44,730      (3,042

)

  41,688 

State and municipal

  28,708   917   (57

)

  29,568 

Corporate bonds

  23,347   313   (1,573

)

  22,087 

Total available for sale

 $202,135  $5,154  $(4,693

)

 $202,596 

 

 

 

 

Amortized

Cost

  

Gross

Unrealized

Gains

  

Gross

Unrealized

Losses

  

Fair Value

 
December 31, 2019                

Available for sale

                

U.S. Government and federal agency

 $22,281  $196  $(147

)

 $22,330 

Agency mortgage-backed: residential

  91,269   1,186   (255

)

  92,200 

Collateralized loan obligations

  49,831      (412

)

  49,419 

State and municipal

  27,819   550   (3

)

  28,366 

Corporate bonds

  16,472   213      16,685 

Total available for sale

 $207,672  $2,145  $(817

)

 $209,000 

 

Sales and calls of securities were as follows:

 

  

Three Months Ended

June 30,

  

Six Months Ended

June 30,

 
  

2020

  

2019

  

2020

  

2019

 
  (in thousands)  (in thousands) 

Proceeds

 $2,530  $1,45