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

Unaudited Consolidated Balance Sheets ~~for~~ ~~September 30, 2017 and December 31, 2016~~

Unaudited Consolidated Statements of Income ~~for the three and nine months ended September 30, 2017 and 2016~~

Unaudited Consolidated Statements of Comprehensive Income ~~for the three and nine months ended September 30, 2017 and 2016~~

Unaudited Consolidated Statement of Changes in ~~Stockholders~~’Stockholders’ Equity ~~for the nine months ended September 30, 2017~~

Unaudited Consolidated Statements of Cash Flows ~~for the~~ ~~nine months ended September 30, 2017 and 2016~~

Unaudited Consolidated Statements of Changes in StockholdersC~~onsolidated Statements~~’ Equityof C~~hanges~~in S~~tockholders~~~~’ E~~~~quity~~

For ~~Nine~~Three and Six Months Ended ~~September~~June 30,, ~~201~~7 2021 and 2020

~~For~~ ~~Nine~~ ~~Months Ended~~ ~~September~~ 30~~, 201~~7 ~~and 201~~6

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

Basis of Presentation – The consolidated financial statements include ~~Porter~~Limestone Bancorp, Inc. (Company) and its subsidiary, ~~PBI~~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 an~~d10-Q and Rule ~~10-01~~10-01 of Regulation ~~S-X.~~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 ~~nine~~six months ended ~~September~~June 30, ~~2017~~ 2021 are not necessarily indicative of the results that may be expected for the entire year. A description of other significant accounting policies is presented in the notes to the Consolidated Financial Statements for the year ended December 31, ~~2016~~ 2020 included in the Company’s Annual Report on Form ~~10-K.~~10-K.

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

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

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

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

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

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

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

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

~~In February 2016, the FASB issued an update ASU N~~o. 2016-02, Leases (Topic 842). Under the new guidance, lessees will be required to recognize the following for all leases, with the exception of short-term leases, at the commencement date: a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting in largely unchanged. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2018. The impact of adopting the new guidance on the consolidated financial statements will not have a material impact.

~~In June 2016,~~ the FASB issued ASU No. ~~2016-13,~~2016-13, Financial Instruments – Credit Losses (Topic ~~326)~~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. We are currently gathering loan level data, and assessing our data and system needs. The~~ impact of CECL model implementation is being evaluated, but it is expected that a ~~one-time~~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 ~~magnitude~~Board of ~~any adjustment or~~Governors of the ~~overall impact~~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 ~~standard on financial condition or results~~accounting standard. In October 2019, the FASB voted to delay implementation for smaller reporting companies, private companies, and not-for-profit entities. The Company currently qualifies as a smaller reporting company and, as such, will be required to implement CECL for fiscal year and interim periods beginning after December 15, 2022.

Table of ~~operation cannot yet be determined.~~

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In ~~March 2017,~~ December 2019, the FASB issued ASU ~~No. 2017-08,~~ ~~Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization of Purchased Callable Debt Securities.~~2019-12, Income Taxes - Simplifying the Accounting for Income Taxes. The final standard ~~will shorten the amortization period for premiums on callable debt securities by requiring that premiums be amortized~~removes specific exceptions to the ~~first (or earliest) call date instead~~general principles in Topic 740, improves financial statement preparers’ application of ~~as an adjustment~~income tax-related guidance, and simplifies GAAP. Certain provisions under ASU 2019-12 require prospective application, some require modified retrospective adoption, while other provisions require retrospective application to all periods presented in the ~~yield over the contractual life. The standard~~consolidated financial statements upon adoption. ASU 2019-12 is effective ~~for public companies~~ for fiscal years beginning after December 15, ~~2018. We are currently evaluating the impact~~2020. Adoption of ~~adopting the~~this new guidance did not have a material impact on the consolidated financial statements.

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

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

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

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The amortized cost and fair value of the debt ~~investment~~ securities ~~portfolio~~ are shown by ~~contractual~~contractual maturity. ~~Contractual~~Expected maturities may differ from actual maturities ~~if issuers~~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 ~~detailed~~shown separately.

Securities pledged at ~~September~~June 30, ~~2017~~ 2021 and December 31, ~~2016~~ 2020 had carrying values of approximately ~~$85.3~~$95.8 million and ~~$61.2~~$81.4 million, respectively, and were pledged to secure public deposits.

At ~~September~~June 30, ~~2017~~ 2021 and December 31, ~~2016, we~~2020, the Bank held securities issued by the Commonwealth of Kentucky or Kentucky municipalities having a book value of ~~$15.8~~$34.8 million and ~~$16.4~~$23.0 million, respectively. ~~Additionally, at September~~At June 30, ~~2017~~ 2021 and December 31, ~~2016, we held securities issued by the State of Texas or Texas municipalities having a book value of $4.3 million at each period end. At September 30, 2017 and December 31, 2016,~~ 2020, there were no other holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders’ equity.

The Company evaluates securities for ~~other than temporary~~other-than-temporary impairment ~~(OTTI)~~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 ~~credit quality,~~ 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 ~~September~~ June 30, ~~2017,~~2021, management does not believe any securities in ~~our~~the portfolio with unrealized losses should be classified as other than temporarily impaired.

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

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

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

Securities with unrealized and unrecognized losses at ~~September~~June 30, ~~2017~~ 2021 and December 31, ~~2016,~~ 2020, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position, are as ~~follows:~~follows (in thousands):

~~There were~~ ~~no held to maturity securities in an unrecognized loss position at September 30, 2017.~~

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

The following table presents the activity in the allowance for loan losses by portfolio segment for the three months ended ~~September~~June 30, ~~2017~~ 2021 and ~~2016:~~2020:

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The following table presents the activity in the allowance for loan losses by p~~ortfolio~~portfolio segment for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~ 2021 and ~~2016:~~ 2020:

TheThe following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method as of ~~September~~June 30, ~~2017:~~2021:

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The following t~~able~~table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method as of December 31, ~~2016:~~2020:

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

The following ~~table~~stables present information related to loans individually evaluated for impairment by class of loans as of ~~September~~June 30, ~~2017~~ 2021 and December 31, ~~2016~~ 2020 and for the ~~nine~~three and six months ended ~~September~~June 30, ~~2017~~ 2021 and ~~2016:~~2020:

As of December 31, 2016

Three Months Ended
September 30, 2016

Nine Months Ended
September 30, 2016

Unpaid
Principal
Balance

Recorded
Investment

Allowance
For Loan
Losses
Allocated

Average
Recorded
Investment

Interest
Income
Recognized

Average
Recorded
Investment

Interest
Income
Recognized

(in thousands)

With No Related Allowance Recorded:

Commercial
$ 707 $ 495 $ — $ 659 $ — $ 824 $ 1
Commercial real estate:

Construction
— — — 129 3 195 9
Farmland
5,566 3,742 — 4,404 79 4,299 87
Nonfarm nonresidential
4,502 1,219 — 4,023 2 5,569 308
Residential real estate:

Multi-family
4,100 4,100 — 3,254 179 2,235 237
1-4 Family
4,663 2,910 — 3,523 14 6,159 85
Consumer
41 1 — 4 — 8 8
Agriculture
— — — 69 — 92 —
Other
— — — — — — —
Subtotal
19,579 12,467 — 16,065 277 19,381 735
With A Related Allowance Recorded:

Commercial
100 100 13 — — — —
Commercial real estate:

Construction
— — — — — — —
Farmland
614 590 5 600 — 300 —
Nonfarm nonresidential
303 303 30 405 6 421 18
Residential real estate:

Multi-family
— — — 2,080 — 3,133 101
1-4 Family
1,676 1,611 350 1,656 20 1,671 74
Consumer
— — — — — — —
Agriculture
78 60 1 68 — 34 —
Other
— — — — — — —
Subtotal
2,771 2,664 399 4,809 26 5,559 193
Total
$ 22,350 $ 15,131 $ 399 $ 20,874 $ 303 $ 24,940 $ 928

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Cash basis income recognized on impaired loans for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~ 2021 was ~~$24,000~~$28,000 and ~~$309,000,~~$52,000, respectively, compared to ~~$87,000~~$54,000 and ~~$377,000~~$68,000 for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016,~~ 2020, respectively.

A troubled debt restructuring (TDR) occurs when the Bank has agreed to aan other than short-term loan modification in the form of a concession for a borrower who is experiencing financial difficulty. The Bank’s TDRs ~~typically~~ may involve a reduction in interest rate, a deferral of principal for a stated period of time, or an interest only period. All TDRs are considered impaired and the Bank ~~allocates~~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~~portfolio segment outstanding as of ~~September~~June 30, ~~2017~~ 2021 and December 31, ~~2016:~~2020:

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At ~~September~~June 30, ~~2017~~ 2021 and December 31, ~~2016, 39%~~2020, 85% and ~~61%~~100%, respectively, of the Company’s TDRs were performing according to their modified terms. The Company allocated ~~$141,000 and $197,000~~$2,000 in reserves to borrowers whose loan terms have been modified in TDRs as of ~~September~~June 30, ~~2017,~~ 2021 and December 31, ~~2016, respectively.~~ 2020. The Company has ~~committed~~0 commitment to lend no additional amounts as of ~~September~~June 30, ~~2017~~ 2021 and December 31, ~~2016~~ 2020 to borrowers with outstanding loans classified as TDRs.

~~Management periodically reviews renewals and~~ NaN TDR 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 will continue to comply with the terms of the loan after the date of the renewal/modification. Additionally, TDR classification can be removed in circumstances in which the Company performs a non-concessionary re-modification of the loan at terms considered to be at market for loans with comparable risk and management expects the borrower will continue to perform under the re-modified terms based on the borrower’s past history of performance. In March 2017, the TDR classification was removed from two loans that met the requirements as discussed above. These loans totaled $4.1 million at December 31, 2016. These loans are no longer evaluated individually for impairment.

~~No TDR loan modification~~s occurred during the three ~~or nine~~ and six months ended ~~September~~June 30, ~~2017~~ 2021 or ~~September~~June 30, ~~2016.~~ 2020. During the ~~first nine~~three and six months ~~of 2017~~ ended June 30, 2021 and ~~2016, no~~June 30, 2020, 0 TDRs defaulted on their restructured loan within the ~~twelve-month~~12-month period following the loan modification. A default is considered to have occurred once the TDR is past due 90 days or more or it has been placed on nonaccrual.

~~Non-performing loans include impaired loans~~The Company has elected to account for eligible loan modifications under Section 4013 of the Coronavirus Aid Relief and ~~smaller balance homogeneous loans, such as residential mortgage and consumer loans,~~Economic Security Act (“CARES Act”). To be an eligible loan under Section 4013 of the CARES Act, a loan modification must be (1) related to the COVID-19 pandemic; (2) executed on a loan that ~~are collectively evaluated for impairment. The following table presents the recorded investment in nonaccrual and loans~~was not more than 30 days past due ~~90 days and still on accrual by class of loan~~ as of ~~September 30, 2017, and~~ December 31, ~~2016:~~ 2019; and (3) executed between March 1, 2020 and the earlier of (A) 60 days after the date of termination of the national emergency declared by the President on March 13, 2020 concerning the COVID-19 outbreak (the “national emergency”) or (B) December 31, 2020. On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (“Economic Aid Act”) extended eligible loan modifications under Section 4013 of the CARES Act from December 31, 2020 to January 1, 2022. Eligible loan modifications are not required to be classified as TDRs and will not be reported as past due provided that they are performing in accordance with the modified terms. Interest income will continue to be recognized in accordance with GAAP unless the loan is placed on nonaccrual status.

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

The following table presents the aging of the recorded investment in past due loans as of ~~September~~June 30, ~~2017~~ 2021 and December 31, ~~2016:~~2020:

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~~We categorize~~Management categorizes all loans into risk categories at origination based upon original underwriting. Thereafter, ~~we categorize~~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. ~~Loans~~Additionally, loans are ~~also~~ analyzed through ~~our~~ internal and external loan review ~~processes. Borrower relationships in excess of $500,000~~processes and are routinely analyzed through ~~our~~ credit administration processes which classify the loans as to credit risk. The following definitions are used for risk ratings:

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

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

Substandard –Loans classified as substandard are those loans with clear and defined weaknesses such as a highly leveraged position, unfavorable financial ratios, uncertain repayment sources or poor financial condition which may jeopardize the repayment of the debt as contractually agreed. They are characterized by the distinct possibility that wethe Bank will sustain some ~~losses~~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.

~~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 ~~September~~June 30, ~~2017,~~ 2021, and December 31, ~~2016,~~ 2020, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

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

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

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

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

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

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 lieulieu of foreclosure, it is recorded at its fair market value less ~~expected~~estimated cost to sell. Any write-down of the property at the time of acquisition is charged to the allowance for loan losses.

Table of ~~OREO is determined on an individual property basis~~. When foreclosed properties are acquired, we obtain a new appraisal of the subject property or have staff from our special assets group evaluate the latest in-file appraisal in connection with the transfer to OREO. We typically obtain updated appraisals within five quarters of the anniversary date of ownership unless a sale is imminent. Subsequent reductions in fair value are recorded as non-interest expense when a new appraisal indicates a decline in value or in cases where a listing price is lowered below the appraised amount.

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

September 30,
2017

December 31,
2016

(in thousands)

Commercial Real Estate:

Construction, land development, and other land
$ 6,200 $ 6,571
Farmland
74 —
Residential Real Estate:

1-4 Family
56 250
$ 6,330 $ 6,821

	June 30, 2021		December 31, 2020
	(in thousands)
Commercial Real Estate:
Construction, land development, and other land	$	0	$	1,765
	$	0	$	1,765

R~~esidential~~Residential loans secured by ~~1-4~~1-4 family residential properties in the process of foreclosure totaled ~~$643,000~~$100,000 and ~~$932,000~~$35,000 at ~~September~~June 30, ~~2017~~ 2021 and December 31, ~~2016,~~ 2020, respectively.

Activity relating to OREO during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~ 2021 and ~~2016~~2020 is as follows:

For the Nine
Months Ended
September 30,

2017

2016

(in thousands)

OREO Activity

OREO as of January 1
$ 6,821 $ 19,214
Real estate acquired
270 1,243
Valuation adjustment write-downs
(98
)
(970
)
Net gain on sales
75 221
Proceeds from sales of properties
(738
)
(12,610
)
OREO as of September 30
$ 6,330 $ 7,098

~~We recognized~~ ~~no OREO rental income for the three and nine months ended September 30, 2017, respectively, and $46,000 and $451,000 for the three and nine months ended September 30, 2016, respectively.~~

	For the Six Months Ended June 30,
	2021			2020
	(in thousands)
OREO Activity
OREO as of January 1	$	1,765		$	3,225
Real estate acquired		0			0
Valuation adjustment write-downs		0			0
Net gain on sale		191			0
Proceeds from sales of properties		(1,956	)		(1,600	)
OREO as of June 30	$	0		$	1,625

Expenses related to ~~other real estate owned~~OREO include:

	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended June 30,				Six Months Ended June 30,
	2017			2016			2017			2016			2021		2020		2021		2020
	(in thousands)						(in thousands)						(in thousands)				(in thousands)
Net gain on sales	$	(10	)	$	(52	)	$	(75	)	$	(221	)
Valuation adjustment write-downs		98			320			98			970		$	0	$	0	$	0	$	0
Operating expense		23			54			69			535			2		22		13		38
Total	$	111		$	322		$	92		$	1,284		$	2	$	22	$	13	$	38

OREO expenses are reported in other non-interest expense.

Note 56– ~~Deposits~~ Goodwill and Intangible Assets

The following table ~~shows~~ ~~ending deposit balances by category~~summarizes the Company’s acquired goodwill and intangible assets as ~~of:~~of June 30, 2021 and December 31, 2020 (in thousands):

September 30,
2017

December 31,
2016

(in thousands)

Non-interest bearing
$ 133,896 $ 124,395
Interest checking
94,523 103,876
Money market
156,905 142,497
Savings
35,946 34,518
Certificates of deposit
445,577 444,639
Total
$ 866,847 $ 849,925

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

The Company has $6.3 million of goodwill related to a 2019 branch acquisition transaction. Goodwill represents the excess of the total purchase price paid over the fair value of the identifiable assets acquired, net of the fair value of the liabilities assumed. Goodwill is not amortized but is evaluated for impairment on an annual basis or whenever events or changes in circumstances may indicate the carrying value of goodwill exceeds fair value and may not be recoverable. The Company engaged an independent third-party expert to perform a quantitative assessment as of November 30, 2020 to determine if it was more likely than not that the fair value of the reporting unit exceeded its carrying value, including goodwill. The assessment indicated that the fair value of the reporting unit exceeded its carrying value, resulting in 0 impairment. Goodwill is the Company’s sole intangible asset with an indefinite life.

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

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

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

Note 7– Deposits

The following table details deposits by category:

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

Time deposits of $250,000 or more were ~~$33.1~~$41.3 million and ~~$29.1~~$50.7 million at ~~September~~June 30, ~~2017~~ 2021 and December 31, ~~2016,~~ 2020, respectively.

Scheduled maturities of ~~all~~total time deposits at ~~September~~June 30, ~~2017 were~~2021 for each of the next five years are as follows (in thousands):

Year 1	$	221,600	$	191,121
Year 2		174,906		48,044
Year 3		35,418		29,193
Year 4		6,626		13,533
Year 5		7,027		21,192
Thereafter				585
	$	445,577	$	303,668

Note 68– ~~– Advance~~sAdvances from the Federal Home Loan Bank

Advances from the Federal Home Loan Bank ~~(FHLB)~~ were as follows:

September 30,

December 31,

2017

2016

(in thousands)

Advances with fixed rates from 0.00% to 5.24% and maturities ranging from 2017 through 2033, averaging 1.24% at September 30, 2017 and 0.85% at December 31, 2016
$ 16,847 $ 22,458

	June 30,		December 31,
	2021		2020
	(in thousands)

Short term advances	$	0	$	623
Long term advances (fixed rate 0.77%) maturing February 2030		20,000		20,000
Total advances from the Federal Home Loan Bank	$	20,000	$	20,623

~~Scheduled principal payments on~~ FHLB advances ~~during the next five years~~ had a weighted-average rate of 0.77% at June 30, 2021 and ~~thereafter (in thousands):~~

Advances

Year 1
$ 15,203
Year 2
182
Year 3
492
Year 4
739
Year 5
108
Thereafter
123
$ 16,847

0.75% at December 31, 2020. Each advance is payable ~~based upon the~~per terms ofon agreement, with a prepayment penalty. NoNaN prepayment penalties were incurred during ~~2017~~2021 or ~~2016.~~2020. The $20.0 million long term advance is callable quarterly at the FHLB’s option. The advances ~~are~~were collateralized by approximately $118.2 million and $133.7 million of first mortgage ~~residential loans. In September 2017, the FHLB notified the Bank of an upgrade to its collateral reporting status from physical delivery status to~~loans, under a blanket ~~summary status whereby the FHLB determines borrowing capacity from the eligible book value of qualifying residential loans pledged rather than the discounted market value~~lien arrangement at June 30, 2021 and December 31, 2020, respectively, and $21.0 million and $20.3 million of loans ~~delivered to physical custody.~~originated under the SBA Payment Protection Plan at June 30, 2021 and December 31, 2020, respectively. At ~~September~~June 30, ~~2017, our~~2021, the Bank’s additional borrowing capacity with the FHLB was ~~$74.8~~$88.6 million.

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

	Advances
Year 1	$	0
Year 2		0
Year 3		0
Year 4		0
Year 5		0
Thereafter		20,000
	$	20,000

Note 9– Borrowings

~~Note 7~~ Junior Subordinated Debentures – ~~Senior Debt~~The junior subordinated debentures are redeemable at par prior to maturity at the option of the Company as defined within the trust indenture. The Company has the option to defer interest payments on the junior subordinated debentures from time to time for a period not to exceed 20 consecutive quarters. A deferral period may begin at the Company’s discretion so long as interest payments are current. The Company is prohibited from paying dividends on preferred and common shares when interest payments are in deferral. At June 30, 2021, the Company is current on all interest payments.

~~On June 30, 2017,~~A summary of the ~~Company entered into a $10.0 million senior secured loan agreement with a commercial bank.~~junior subordinated debentures is as follows:

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

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

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

Subordinated Capital Notes – The ~~loan matures~~Company’s subordinated notes mature on ~~June 30, 2022. Interest is payable quarterly~~July 31, 2029. The notes carry interest at a fixed rate of ~~three-month~~5.75% until July 30, 2024 and then convert to variable at three-month LIBOR plus ~~250~~395 basis points ~~through June 30, 2020, at which time quarterly principal payments of $250,000 plus interest will commence.~~until maturity. 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 Company contributed $9.0 million~~ ~~of the borrowing proceeds to the Bank~~subordinated capital notes qualify as ~~common equity~~ Tier 12 regulatory capital. ~~The remaining $1.0 million of the borrowing proceeds were retained by the lender in escrow to service quarterly interest payments. At September 30, 2017, the escrow account had a balance of $903,000.~~

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

Note 10–8 – Fair Values Measurement

Fair value is the ~~exchange~~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. ~~We use various~~Various valuation techniques are used to determine fair value, including market, income and cost approaches. There are three levels of inputs that may be used to measure fair values:

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

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

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

In certain cases, the inputs used to measure fair value may fall into different ~~leve~~lslevels of the fair value hierarchy. When that occurs, ~~we classify~~ the fair value hierarchy is classified on the lowest level of input that is significant to the fair value measurement. ~~We used the~~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~~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.

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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~~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.

WeManagement routinely ~~apply an~~applies internal ~~discount~~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~~the appraisal date predates a likely change in market conditions. These deductions range from 10% for routine real estate collateral to 25% for real estate that is determined ~~(1)~~ to have a thin trading market or ~~(2)~~ to be specialized collateral. This is in addition to estimated discounts for cost to sell of ~~six~~6 to ~~ten~~10 percent.

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

Im~~paired~~Impaired loans are evaluated quarterly for additional impairment. ~~We obtain~~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 ~~our~~the assessment of deterioration of real estate values in the market in which the property is located. The first stage of our assessment involves management’s inspection of the property in question. Management also engages in conversations with local real estate professionals and market participants to determine the likely marketing time and value range for the property. The second stage involves an assessment of current trends in the regional market. After thorough consideration of these factors, management will either internally evaluate fair value or order a new appraisal.

~~Other Real Estate Owned (OREO)~~~~: OREO is evaluated at the time~~

Table of acquisition and recorded at fair value as determined by independent appraisal or internal evaluation less cost to sell. Our quarterly evaluations of OREO for impairment are driven by property type. For smaller dollar single family homes, we consult with staff from our special assets group as well as external realtors and appraisers. Based on these consultations, we determine asking prices for OREO properties we are marketing for sale. If the internally evaluated fair value or asking price is below our recorded investment in the property, appropriate write-downs are taken.

~~For larger dollar commercial real estate properties, we obtain a new appraisal of the subject property or have staff in our special assets group evaluate the latest in-file appraisal in connection wit~~h the transfer to other real estate owned. We generally obtain 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.

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

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Financial assets measured at fair value on a recurring basis at ~~September~~June 30, ~~2017~~ 2021 and December 31, ~~2016~~ 2020 are summarized below:

			Fair Value Measurements at September 30, 2017 Using								Fair Value Measurements at June 30, 2021 Using
			(in thousands)								(in thousands)
			Quoted Prices In				Significant				Quoted Prices In				Significant
			Active Markets for		Significant Other		Unobservable				Active Markets for		Significant Other		Unobservable
	Carrying		Identical Assets		Observable Inputs		Inputs		*Carrying*		*Identical Assets*		*Observable Inputs*		*Inputs*
Description	Value		(Level 1)		(Level 2)		(Level 3)		*Value*		*(Level 1)*		*(Level 2)*		*(Level 3)*
Available for sale securities
Available for sale securities
U.S. Government and federal agency	$	29,708	$	—	$	29,708	$	—	$	29,760	$	0	$	29,760	$	0
Agency mortgage-backed: residential		91,735		—		91,735		—		81,002		0		81,002		0
Collateralized loan obligations		23,526		—		23,526		—		39,945		0		37,464		2,481
State and municipal		1,661		—		1,661		—
Corporate bonds		3,167		—		3,167		—		31,447		0		18,771		12,676

Total	$	149,797	$	—	$	149,797	$	—	$	182,154	$	0	$	166,997	$	15,157

			Fair Value Measurements at December 31, 2016 Using								Fair Value Measurements at December 31, 2020 Using
			(in thousands)								(in thousands)
Description	Carrying Value		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Carrying Value		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Available for sale securities
Available for sale securities
U.S. Government and federal agency	$	34,099	$	—	$	34,099	$	—	$	19,617	$	0	$	19,617	$	0
Agency mortgage-backed: residential		102,353		—		102,353		—		74,333		0		74,333		0
Collateralized loan obligations		11,203		—		11,203		—		43,152		0		40,764		2,388
State and municipal		2,045		—		2,045		—		36,055		0		36,055		0
Corporate bonds		3,090		—		3,090		—		30,705		0		18,789		11,916
Total	$	152,790	$	—	$	152,790	$	—	$	203,862	$	0	$	189,558	$	14,304

There were no transfers between Level 1 and Level 2 during ~~2017~~2021 or ~~2016.~~2020.

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

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

	June 30, 2021
	Collateralized Loan Obligations		Corporate Bonds
	(in thousands)
Balance of recurring Level 3 assets at January 1, 2021	$	2,388	$	11,916
Total gains or losses for the year:
Included in other comprehensive income		93		760
Transfers into Level 3		0		0
Balance of recurring Level 3 assets at June 30, 2021	$	2,481	$	12,676

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

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

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

Collateralized loan obligations	$	2,481	Discounted cash flow	Constant prepayment rate		0%
				Additional asset defaults		1%		(1%)
				Expected asset recoveries		49%		(49%)

Corporate bonds	$	12,676	Discounted cash flow	Constant prepayment rate		0%
				Spread to benchmark yield	108%	-	350%	(293%)
				Indicative broker bid	76%	-	104%	(85%)

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

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

Collateralized loan obligations	$	2,388	Discounted cash flow	Constant prepayment rate		0%
				Additional asset defaults		2%		(2%)
				Expected asset recoveries		49%		(49%)

Corporate bonds	$	11,916	Discounted cash flow	Constant prepayment rate		0%
				Spread to benchmark yield	322%	-	497%	(381%)
				Indicative broker bid	72%	-	107%	(80%)

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

Fair Value Measurements at September 30, 2017 Using

(in thousands)

Carrying
Value

Quoted Prices In
Active Markets for
Identical Assets
(Level 1)

Significant Other
Observable Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Description

Impaired loans:

Commercial
$ 87 $ — $ — $ 87
Commercial real estate:

Construction
— — — —
Farmland
— — — —
Nonfarm nonresidential
— — — —
Residential real estate:

Multi-family
— — — —
1-4 Family
1,236 — — 1,236
Consumer
— — — —
Agriculture
— — — —
Other
— — — —
Other real estate owned:

Commercial real estate:

Construction, land development, and other land
6,200 — — 6,200
Farmland
74 — — 74
Nonfarm nonresidential
— — — —
Residential real estate:

Multi-family
— — — —
1-4 Family
56 — — 56

			Fair Value Measurements at June 30, 2021 Using
			(in thousands)
Description	Carrying Value		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans:
Commercial real estate:
Nonfarm nonresidential	$	2,180	$	0	$	0	$	2,180
Residential real estate:
1-4 Family		99		0		0		99

Fair Value Measurements at December 31, 2016 Using

(in thousands)

Carrying
Value

Quoted Prices In
Active Markets for
Identical Assets
(Level 1)

Significant Other
Observable Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Description

Impaired loans:

Commercial
$ 87 $ — $ — $ 87
Commercial real estate:

Construction
— — — —
Farmland
585 — — 585
Nonfarm nonresidential
— — — —
Residential real estate:

Multi-family
— — — —
1-4 Family
1,261 — — 1,261
Consumer
— — — —
Agriculture
59 — — 59
Other
— — — —
Other real estate owned:

Commercial real estate:

Construction, land development, and other land
6,571 — — 6,571
Farmland
— — — —
Nonfarm nonresidential
— — — —
Residential real estate:

Multi-family
— — — —
1-4 Family
250 — — 250

			Fair Value Measurements at December 31, 2020 Using
			(in thousands)
Description	Carrying Value		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired loans:
Commercial real estate:
Nonfarm nonresidential	$	2,180	$	0	$	0	$	2,180
Residential real estate:
1-4 Family		105		0		0		105

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of ~~$1.7~~$4.5 million at ~~September~~June 30, ~~2017~~ 2021 with a valuation allowance of ~~$399,000,~~$2.2 million, resulting in ~~$171,000 and $29,000 in additional~~0 provision for loan losses for the three ~~and nine~~ months ended ~~September~~June 30, ~~2017,~~ 2021 and $1,000 provision for loan losses for the six months ended June 30, 2021, respectively. Impaired loans had a carrying amount of ~~$2.5 million~~ $367,000 at June 30, 2020 with a valuation allowance of ~~$309,000,~~$25,000, resulting in ~~$220,000~~$5,000 and no0 additional provision for loan losses for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2020, respectively. At December 31, ~~2016,~~ 2020, impaired loans had a carrying amount of ~~$2.4~~$4.5 million, with a valuation allowance of ~~$370,000.~~$2.2 million.

~~OREO, which is measured at the lower~~

Table of carrying or fair value less costs to sell, had a net carrying amount of $6.3 million as of September 30, 2017, compared with $6.8 million at December 31, 2016. Write-downs of $98,000 were recorded on OREO for the three and nine months ended September 30, 2017, compared to write-downs of $761,000 and $1.6 million for the three and nine months ended September 30, 2016, respectively.

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~~The following table presents qualitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at September 30, 2017:~~

Fair Value

Valuation
Technique(s)

Unobservable Input(s)

Range (Weighted
Average)

(in thousands)

Impaired loans – Residential real estate
$ 1,236
Sales comparison approach

Adjustment for differences between the comparable sales
0% - 34% (11%)

Other real estate owned – Commercial real estate
$ 6,274
Sales comparison approach

Adjustment for differences between the comparable sales
0% - 11% (5%)

Income approach Discount or capitalization rate 18% (18%)

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

Fair Value

Valuation
Technique(s)

Unobservable Input(s)

Range (Weighted
Average)

(in thousands)

Impaired loans – Residential real estate
$ 1,261
Sales comparison approach

Adjustment for differences between the comparable sales
0% - 22% (9%)

Other real estate owned – Commercial real estate
$ 6,571
Sales comparison approach

Adjustment for differences between the comparable sales
0% - 20% (9%)

Income approach Discount or capitalization rate 18% - 20% (19%)

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

			Fair Value Measurements at September 30, 2017 Using										Fair Value Measurements at June 30, 2021 Using
	Carrying Amount		Level 1		Level 2		Level 3		Total		Carrying Amount		Level 1		Level 2		Level 3		Total
	(in thousands)										(in thousands)
Financial assets
Cash and cash equivalents	$	47,369	$	27,815	$	19,554	$	—	$	47,369	$	85,120	$	85,120	$	0	$	0	$	85,120
Securities available for sale		149,797		—		149,797		—		149,797		182,154		0		166,997		15,157		182,154
Securities held to maturity		41,424		—		43,397		—		43,397		46,717		0		46,685		0		46,685
Federal Home Loan Bank stock		7,323		N/A		N/A		N/A		N/A		5,449		N/A		N/A		N/A		N/A
Loans, net		673,534		—		—		673,616		673,616		934,788		0		0		931,949		931,949
Accrued interest receivable		3,285		—		1,137		2,148		3,285		4,063		0		968		3,095		4,063
Financial liabilities
Deposits	$	866,847	$	133,896	$	719,827	$	—	$	853,723	$	1,139,101	$	267,059	$	873,488	$	0	$	1,140,547
Federal Home Loan Bank advances		16,847		—		16,865		—		16,865		20,000		0		20,100		0		20,100
Subordinated capital note		2,475		—		—		2,458		2,458
Junior subordinated debentures		21,000		—		—		19,087		19,087		21,000		0		0		18,578		18,578
Senior debt		10,000		—		—		10,000		10,000
Subordinated capital notes												25,000		0		0		26,289		26,289
Accrued interest payable		1,284		—		366		918		1,284		770		0		144		626		770

			Fair Value Measurements at December 31, 2016 Using										Fair Value Measurements at December 31, 2020 Using
	Carrying Amount		Level 1		Level 2		Level 3		Total		Carrying Amount		Level 1		Level 2		Level 3		Total
	(in thousands)										(in thousands)
Financial assets
Cash and cash equivalents	$	66,316	$	31,091	$	35,225	$	—	$	66,316	$	67,693	$	67,693	$	0	$	0	$	67,693
Securities available for sale		152,790		—		152,790		—		152,790		203,862		0		189,558		14,304		203,862
Securities held to maturity		41,818		—		43,072		—		43,072
Federal Home Loan Bank stock		7,323		N/A		N/A		N/A		N/A		5,887		N/A		N/A		N/A		N/A
Loans, net		630,269		—		—		632,528		632,528		949,638		0		0		941,330		941,330
Accrued interest receivable		3,137		—		1,203		1,934		3,137		4,444		0		925		3,519		4,444
Financial liabilities
Deposits	$	849,925	$	124,395	$	712,458	$	—	$	836,853	$	1,119,607	$	243,022	$	878,309	$	0	$	1,121,331
Federal Home Loan Bank advances		22,458		—		22,475		—		22,475		20,623		0		20,665		0		20,665
Subordinated capital note		3,150		—		—		3,091		3,091
Junior subordinated debentures		21,000		—		—		13,263		13,263		21,000		0		0		16,194		16,194
Subordinated capital notes												25,000		0		0		25,207		25,207
Accrued interest payable		734		—		369		365		734		859		0		231		628		859

~~The~~In accordance with ASU 2016-01, the methods ~~and assumptions, not previously presented, used~~utilized to ~~estimate fair values are described as follows:~~

~~(a) Cash and Cash Equivalents~~

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

~~(b) FHLB Stock~~

~~It is~~ ~~not practical to determine~~measure the fair value of ~~FHLB stock due to restrictions placed on its transferability.~~

~~(c) Loans, Net~~

~~Fair values of loans, excluding loans held for~~ sale, are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarilyfinancial instruments represent an approximation of exit ~~price.~~

(d~~) Deposits~~

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

(e~~) Other Borrowings~~

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

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

(f~~) Accrued Interest Receivable/Payable~~

~~The carrying amounts of accrued interest approximate fair value resulting in a Level 2 or Level 3 classification based on the level of the asset or liability with which the accrual is associated.~~price; however, an actual exit price may differ.

Note 11–9 – Income Taxes

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

	September 30,			December 31,			June 30,		December 31,
	2017			2016			2021		2020
	(in thousands)						(in thousands)
Deferred tax assets:
Net operating loss carry-forward	$	43,515		$	42,094		$	20,869	$	22,012
Allowance for loan losses		3,142			3,139			3,153		3,104
Other real estate owned write-down		3,401			3,366
Alternative minimum tax credit carry-forward		692			692
OREO write-down								0		914
Net assets from acquisitions		617			674			0		72
Net unrealized loss on securities		209			867
New market tax credit carry-forward		208			208			208		208
Nonaccrual loan interest		477			481			330		315
Accrued expenses		193			3,860
Deferred compensation		463			465
Accrued expenses								136		131
Lease liability								1,381		618
Other		394			360			346		332
		53,311			56,206			26,423		27,706

Deferred tax liabilities:
FHLB stock dividends		928			928			442		478
Fixed assets		70			89			74		71
Deferred loan costs		266			274			190		172
Net unrealized gain on securities								784		585
Lease right-of-use assets								1,381		618
Net assets from acquisitions								18		0
Other		145			866			82		68
		1,409			2,157			2,971		1,992
Net deferred tax assets before valuation allowance		51,902			54,049
Valuation allowance		(51,902	)		(54,049	)
Net deferred tax asset	$	—		$	—		$	23,452	$	25,714

~~Our estimate~~

Table of ~~our ability~~Contents

At June 30, 2021, the Company had net federal operating loss carryforwards of $93.1 million, which will begin to ~~realize the deferred tax asset depends on our estimate~~expire in 2032, and state net operating loss carryforwards of projected future levels of taxable income. In analyzing future taxable income levels, we considered all evidence currently available, both positive and negative. Based on our analysis, we established a valuation allowance for all deferred tax assets as of December 31, 2011. The valuation allowance remains$33.5 million, which begin to expire in ~~effect as of September 30, 2017.~~2025.

The Company does not have any beginning and ending unrecognized tax benefits. The Co~~mpany~~Company does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next twelve months. There were no0 interest and penalties recorded in the income statement or accrued for the three or ~~nine~~six months ended ~~September~~June 30, ~~2017~~ 2021 or ~~September~~June 30, ~~2016~~ 2020 related to unrecognized tax benefits.

Under Section 382 of the Internal Revenue Code, as amended (“Section 382”), the Company’s ~~its~~ net operating loss carryforwards ~~(“NOLs”)~~ 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, wethe 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, as amended November 25, 2019, the Board of Directors has the discretion to exempt certain transactions and certain persons whose acquisition of securities is determined by the Board not to jeopardize the Company's deferred tax assets. The rights ~~will~~plan was extended in May 2021 to expire upon the earlier of (i) June ~~29, 2018, (ii)~~30, 2024, (ii) the beginning of a taxable year with respect to which the Board of Directors determines that no tax benefits may be carried forward, (iii) the repeal or amendment of Section 382 or any successor statute, if the Board of Directors determines that the plan is no longer needed to preserve the tax benefits, and (iv) certain other events as described in the plan.

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

The Company and its ~~subsidiaries~~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 ~~2014.~~2017.

Note 12–10 – Stock Plans and Stock Based Compensation

S~~hares~~Shares available for issuance under the ~~2016~~2018 Omnibus Equity Compensation Plan ~~(“2016~~(“2018 Plan”) total ~~25,000.~~158,553. Shares issued to employees under the plan vest annually on the anniversary date of the grant ~~generally~~ over three to ~~four~~seven years.

~~The Company~~ also maintains the Porter Bancorp, Inc. 2006 Non-Employee Directors Stock Ownership Incentive Plan (“2006 Director Plan”) pursuant to which 2,834 shares remain available for issuance as annual awards of restricted stock to the Company’s non-employee directors. Shares issued annually 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 t~~he 2017~~the 2021 unvested shares issued was ~~$365,000,~~$1.5 million, or ~~$9.64~~$13.52 per weighted-average share. The Company recorded ~~$129,000~~$152,000 and ~~$271,000~~$301,000 of stock-based compensation to salaries ~~and employee benefits~~ for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~ 2021, respectively, and ~~$148,000~~$104,000 and ~~$315,000~~$210,000 for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016,~~ 2020, respectively. ~~We expect~~Management expects substantially all of the unvested shares outstanding at the end of the period to vest according to the vesting schedule. NoA deferred tax benefit of $38,000 and $75,000 was recognized related to this expense during the three and six months ended June 30, 2021, respectively, and $22,000 and $44,000 for ~~either period.~~the three and six months ended June 30, 2020, respectively.

Table of Contents

The following table summarizes unvested ~~shar~~eshare activity as of and for the periods indicated for the Stock ~~Incentive~~Compensation Plan:

	Nine Months Ended					Twelve Months Ended					Six Months Ended					Twelve Months Ended
	September 30, 2017					December 31, 2016					June 30, 2021					December 31, 2020
				Weighted					Weighted					Weighted					Weighted
				Average					Average					Average					Average
				Grant					Grant					Grant					Grant
	Shares			Price		Shares			Price		Shares			Price		Shares			Price
Outstanding, beginning		179,513		$	4.89		184,482		$	4.81
Outstanding, beginning												47,438		$	15.34		57,774		$	13.35
Granted		37,865			9.64		35,465			9.10		110,024			13.52		34,858			15.33
Vested		(58,650	)		4.67		(38,462	)		8.32		(23,728	)		14.96		(43,836	)		12.69
Forfeited		(1,316	)		9.35		(1,972	)		6.16		(399	)		14.14		(1,358	)		15.95
Outstanding, ending		157,412		$	6.08		179,513		$	4.89		133,335		$	13.91		47,438		$	15.34

Unrecognized ~~stock based~~stock-based compensation expense related to unvested shares ~~for the remainder of 2017 and beyond~~ is estimated as follows (in thousands):

October 2017 – December 2017
$ 129
2018
258
2019
99
2020 & thereafter
25

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

Note 113–1 – Earnings per Share

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

	Three Months Ended				Nine Months Ended				Three Months Ended				Six Months Ended
	September 30,				September 30,				June 30,				June 30,
	2017		2016		2017		2016		2021		2020		2021		2020
	(in thousands, except share and per share data)								(in thousands, except share and per share data)

Net income	$	1,794	$	1,393	$	5,183	$	3,885	$	3,901	$	1,982	$	7,123	$	3,822
Less:
Earnings allocated to unvested shares		45		46		133		129		69		15		98		30
Net income available to common shareholders, basic and diluted	$	1,749	$	1,347	$	5,050	$	3,756
Net income available to common shareholders, basic and diluted									$	3,832	$	1,967	$	7,025	$	3,792

Basic
Weighted average common shares including unvested common shares outstanding		6,259,864		6,223,045		6,245,418		5,897,617		7,597,202		7,488,173		7,586,267		7,485,028
Less:
Weighted average unvested common shares		157,412		206,829		160,825		195,412		133,455		57,804		104,782		57,794
Weighted average common shares outstanding		6,102,452		6,016,216		6,084,593		5,702,205		7,463,747		7,430,369		7,481,485		7,427,234
Basic income per common share	$	0.29	$	0.22	$	0.83	$	0.66

Diluted
Add: Dilutive effects of assumed exercises of common stock warrants		—		—		—		—
Weighted average common shares and potential common shares		6,102,452		6,016,216		6,084,593		5,702,205
Diluted income per common share	$	0.29	$	0.22	$	0.83	$	0.66
Basic and diluted income per common share									$	0.51	$	0.26	$	0.94	$	0.51

The Company had no0 outstanding stock options or warrants at ~~September~~June 30, ~~2017~~ 2021 or 2016. 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 September 30, 2017 and 2016, but was not included in the diluted EPS computation as inclusion would have been anti-dilutive.2020.

Note 1142– –Regulatory Capital ~~Requirements and Restrictions on Retained Earnings~~Matters

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

The ~~final~~Basel III rules ~~implementing Basel Committee on Banking Supervision~~’s capital guidelines for U.S. Banks (Basel III rules) became effective for the Company and Bank on January 1, 2015 with full compliance with all the requirements being phased in over a multi-year schedule through January 1, 2019. The final rules allowed banks and their holding companies with less than $250 billion in assets a one-time opportunity to opt-out of a requirement to include unrealized gains and losses in accumulated other comprehensive income in their capital calculation. The Company and the Bank opted out of this requirement. The rules also establishestablished a “capital conservation buffer” of 2.5% above the regulatory minimum risk-based capital ratios. ~~Once~~Including the capital conservation buffer, ~~is fully phased in,~~ the minimum ratios are a common equity Tier 1 risk-based capital ratio of 7.0%, a Tier 1 risk-based capital ratio of 8.5%, and a total risk-based capital ratio of 10.5%. ~~The phase-in of the capital conservation buffer requirement began in January 2016 at 0.625% of risk-weighted assets with increases to 1.25% in 2017, 1.875% in 2018, and 2.5% in 2019.~~ An institution is subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if capital levels fall below minimum levels plus the buffer amounts. These limitations establish a maximum percentage of eligible retained income that could be utilized for such ~~actions.~~actions without prior regulatory approval.

~~The Bank is no longer subject to a consent order with the Federal Deposit Insurance Corporation and Kentucky Department~~

Table of ~~Financial Institutions. We were notified that the Bank’s prior consent order was terminated, effective October 31, 2017.~~

Contents

~~On September 21, 2011, we entered into a Written Agreement with~~As of June 30, 2021, Management believes the ~~Federal Reserve~~Company and Bank met all capital adequacy requirements to which they are subject. As of ~~St. Louis. In~~ June 30, 2021, the ~~Agreement, we made formal commitments to use our financial and management resources to serve as a source of strength for~~most recent regulatory notifications categorized the Bank ~~to assist~~as well capitalized under the ~~Bank in addressing weaknesses identified in a consent order with~~regulatory framework for prompt corrective action. There are no conditions or events since the FDIC and KDFI (which has since been terminated), to pay no dividends without prior written approval, to pay no interest or principal on trust preferred securities without prior written approval, and to submit an acceptable plan to maintain sufficient capital.notification that management believes have changed the institution’s category.

The following tables show the ratios (excluding capital conservation buffer) and amounts of common equity Tier 1, Tier 1 capital, and total capital to risk-adjusted assets and the leverage ratios for ~~the Company and~~ the Bank at the dates ~~indicated. Regulatory minimums for capital adequacy purposes are prompt corrective action standards. Dollars are~~indicated (dollars in ~~thousands:~~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 September 30, 2017:

   Total risk-based capital (to risk-weighted assets)

       Consolidated

$
76,402

10.05
%

$
60,833

8.00
%

N/A

N/A

       Bank

84,299

11.10

60,761

8.00

$
75,951

10.00
%
   Total common equity Tier 1 risk-based capital (to risk-weighted assets)

       Consolidated

41,719

5.49

34,219

4.50

N/A

N/A

       Bank

73,387

9.66

34,178

4.50

49,368

6.50

   Tier 1 capital (to risk-weighted assets)

       Consolidated

55,613

7.31

45,625

6.00

N/A

N/A

       Bank

73,387

9.66

45,571

6.00

60,761

8.00

   Tier 1 capital (to average assets)

       Consolidated

55,613

5.85

38,056

4.00

N/A

N/A

       Bank

73,387

7.73

37,986

4.00

47,482

5.00

Actual

Minimum Requirement for Capital Adequacy Purposes

Minimum Requirement to be Well Capitalized Under Prompt Corrective Action Provisions

Amount

Ratio

Amount

Ratio

Amount

Ratio

As of December 31, 2016:

   Total risk-based capital (to risk-weighted assets)

       Consolidated

$
71,109

10.21
%

$
55,714

8.00
%

N/A

N/A

       Bank

68,773

9.88

55,663

8.00

$
69,579

10.00
%
   Total common equity Tier 1 risk-based capital (to risk-weighted assets)

       Consolidated

36,199

5.20

31,339

4.50

N/A

N/A

       Bank

57,642

8.28

31,311

4.50

45,226

6.50

   Tier 1 capital (to risk-weighted assets)

       Consolidated

48,713

6.99

41,786

6.00

N/A

N/A

       Bank

57,642

8.28

41,747

6.00

55,663

8.00

   Tier 1 capital (to average assets)

       Consolidated

48,713

5.27

36,975

4.00

N/A

N/A

       Bank

57,642

6.24

36,949

4.00

46,186

5.00

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

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

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

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

Note 1153– – Off Balance Sheet Risks, Commitments, and Contingent Liabilities

The Company, in the normal course of business, is party to financial ~~instrumen~~tsinstruments 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~~’sCompany’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 andand 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. NoNaN liability is currently established for standby letters of credit.

Table of Contents

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

	September 30, 2017				December 31, 2016				June 30, 2021				December 31, 2020
	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate		Fixed Rate		Variable Rate		Fixed Rate		Variable Rate
	(in thousands)								(in thousands)
Commitments to make loans	$	32,645	$	30,764	$	19,445	$	18,347	$	49,966	$	15,106	$	20,990	$	17,466
Unused lines of credit		7,252		58,107		7,935		51,407		7,566		146,072		5,964		144,790
Standby letters of credit		527		372		582		360		613		349		175		1,342

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

In connection with the purchase of t~~hree~~ loan participations, the Bank entered into ~~three~~ risk participation agreements, which had notional amounts totaling ~~$19.8~~$26.6 million at ~~September~~June 30, ~~2017~~ 2021 and ~~$14.6 million at~~ December 31, ~~2016.~~2020. The risk participation agreements are not designated against specific assets or liabilities under ASC 815, Derivatives and Hedging, and, therefore, do not qualify for hedge accounting. The derivatives are recorded in other liabilities on the balance sheet at fair value and changes in fair value of both the borrower and the offsetting swap agreements are recorded (and essentially offset) in non-interest income. The fair value of the derivative instruments incorporates a consideration of credit risk in accordance with ASC 820, resulting in some volatility in earnings each period. At June 30, 2021 and December 31, 2020, the fair value of the risk participation agreements were $126,000 and $188,000, respectively.

~~The Company is~~ ~~subject to claims and lawsuits that arise primarily in~~In the ~~ordinary~~normal course of ~~business. Litigation is subject~~business, the Company and its subsidiaries have been named, from time to ~~inherent uncertainties and unfavorable rulings could occur. The Company records contingent liabilities resulting from claims against it when a loss is assessed to be probable and the amount~~time, as defendants in various legal actions. Certain of the ~~loss is reasonably estimable. Accruals are not made in cases where liability is not probable~~actual or ~~the amount cannot be reasonably estimated. Assessing probability of loss and estimating probable losses requires analysis of multiple factors, including in some cases judgments about the potential~~threatened legal actions of third party claimants and courts. Recorded contingent liabilities are based on the best information available and actual losses in any future period are inherently uncertain. Based upon current knowledge and after consultation with counsel, the Company believes pending legal proceedingsmay include claims for substantial compensatory and/or punitive damages or claims ~~should~~ for indeterminate amounts of damages. After discussion with legal counsel, management does not believe these legal actions or proceedings will have a material ~~impact~~adverse effect on ~~its~~the consolidated financial position or results of ~~operations. However, in light~~operation of the ~~uncertainties involved~~Company.

Note 16– Revenue from Contracts with Customers

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

Service Charges on Deposit Accounts: The Company earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which include services such as ATM use fees, stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed as that is the point in ~~such proceedings,~~time the ~~outcome~~Company fulfills the customer’s request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a ~~particular matter may be material~~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 ~~financial position or results~~cardholder. Prior to adopting ASC 606, the Company reported bank card interchange fees net of ~~operations for a particular reporting period in the future.~~expenses. Under ASC 606, bank card interchange fees are reported gross.

~~On October 17, 2014,~~Gains/Losses on Sales of OREO: The Company records a gain or loss from the ~~United States Department~~sale of Justice (the “DOJ”) notified the Bank that it was the subject of an investigation into possible violations of federal laws, including, among other things, possible violations related to false bank entries, bank fraud and securities fraud. The investigation concerns allegations that Bank personnel engaged in practices intended to delay or avoid disclosureOREO when control of the ~~Bank’s asset quality~~property transfers to the buyer, which generally occurs at the time of an executed deed. When the Company finances the sale of OREO to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and ~~following~~whether collectability of the ~~United States Treasury’s purchase~~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 ~~preferred shares~~control of the property to the buyer. In determining the gain or loss on the sale, the Company adjusts the transaction price and related gain (loss) on sale if a significant financing component is present. Gains and losses on sales of OREO are reported in non-interest income.

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Other Non-interest Income: Other non-interest income includes revenue from several sources that are within the scope of ASC 606, including title insurance commissions, income from secondary market loan sales, and other transaction-based revenue that is individually immaterial. Other non-interest income included approximately $145,000 and $298,000 of revenue for the three and six months ended June 30, 2021, respectively, within the scope of ASC 606. Other non-interest income included approximately $129,000 and $285,000 of revenue for the three and six months ended June 30, 2020, respectively, within the scope of ASC 606. The remaining other non-interest income for the three and six months is excluded from the ~~Company in November 2008. The Bank has cooperated with all requests for information from the DOJ. At this time, the DOJ has not indicated whether it intends to pursue any action in the matter.~~scope of ASC 606.

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

This item analyzes ~~our~~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.

~~Cautionary~~Preliminary Note ~~Regarding~~Concerning Forward-Looking Statements

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

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

●

~~A significant percentage~~the impact and duration of ~~our loan portfolio is comprised of non-owner occupied commercial real estate loans, real estate construction~~the novel coronavirus disease 2019 (“COVID-19”) pandemic and ~~development loans,~~national, state and ~~multi-family residential real estate loans, all of which carry a higher degree of risk.~~local emergency conditions the pandemic has produced;

●

~~We continue to hold other real estate owned (“OREO”) properties, which could increase operating expenses~~deterioration in the financial condition of borrowers resulting in significant increases in loan losses and ~~result in future losses.~~provisions for those losses;

●

~~Our decisions regarding credit risk~~changes in the interest rate environment, which may ~~not be accurate,~~reduce the Company’s margins or impact the value of securities, loans, deposits and ~~our allowance for loan losses may not be sufficient to cover actual losses.~~other financial instruments;

●

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

●

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

●

the results of regulatory examinations;

●

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

●

the continued service of key management personnel, the Company’s ability to ~~pay cash dividends on our common~~attract, motivate and ~~preferred shares~~retain qualified employees;

●

factors that increase the competitive pressure among depository and ~~pay interest on~~other financial institutions, including product and pricing pressures; the ~~junior subordinated debentures~~ability of the Company’s competitors with greater financial resources to develop and introduce products and services that ~~relate~~enable them to ~~our trust preferred securities is currently restricted. Our~~ compete more successfully;

●

inability to ~~resume paying interest~~comply with regulatory capital requirements and to secure any required regulatory approvals for capital actions;

●

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

●

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

●

future acquisitions, integrations and performance of acquired businesses;

●

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

●

Other risks and uncertainties reported from time to time in the Company’s filings with the Securities and Exchange Commission (“SEC”), including those identified in Part I Item 1A “Risk Factors” of the Company’s Annual Report on ~~our trust preferred securities could adversely affect our common and preferred shareholders.~~Form 10-K for the year ended December 31, 2020.

~~We also refer you to Part II, Item 1A~~ ~~– Risk Factors in this report and to the risks identified and the cautionary statements discussed in greater detail in our December 31, 2016 Annual Report on Form 10-K.~~

Forward-looking statements are not guarantees of performance or results. A forward-looking statement may include ~~a statement of~~ the assumptions or bases underlying the forward-looking ~~statement. The Company believes it~~statement. Management has ~~chosen these~~made assumptions and bases in good faith and believe they are reasonable. ~~We caution you however, forward looking statements relying upon~~However, estimates based on such assumptions or bases ~~almost always vary~~frequently differ from actual results, and the differences ~~between those statements and actual results~~ can be material. The forward-looking statements included in this report speak only as of the date of the report. ~~We have no duty, and do~~Management does not intend to update these statements unless required by applicable ~~laws require us to do so.~~laws.

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Overview

~~Porter~~Organized in 1988, Limestone Bancorp, Inc. (the “~~Company”)~~Company) is a bank holding company headquartered in Louisville, Kentucky. ~~We operate PBI~~The Company’s common stock is traded on Nasdaq’s Capital Market under the symbol LMST. The Company operates Limestone Bank, (“Inc. (the Bank), the ~~Bank”), our wholly owned subsidiary and the fourteenth~~twelfth largest bank domiciled in the Commonwealth of Kentucky based on total assets. ~~We operate~~The Bank operates banking offices in ~~twelve~~14 counties in Kentucky. ~~Our~~The Bank’s markets include metropolitan Louisville in Jefferson County and the surrounding counties of ~~Henry~~Bullitt and ~~Bullitt. We serve~~Henry. The Bank serves south central, ~~Kentucky~~southern, and ~~southern~~western Kentucky from banking ~~offices~~centers in Barren, Butler, Daviess, Edmonson, Green, Hardin, Hart, ~~Edmonson, Barren, Warren,~~ Ohio, and ~~Daviess Counties. We~~Warren counties. The Bank also ~~have an office~~has banking centers in Lexington, Kentucky, the second largest city in ~~Kentucky.~~the state, and Frankfort, Kentucky, the state capital. The Bank is a traditional community bank with a wide range of ~~commercial~~personal and ~~personal~~business banking ~~products.~~products and services. As of ~~September~~June 30, ~~2017, we~~2021, the Company had total assets of ~~$963.0 million,~~$1.34 billion, total loans of ~~$682.5~~$947.4 million, total deposits of ~~$866.8 million~~$1.14 billion and stockholders’ equity of ~~$40.1~~$124.0 million.

The Company reported net income of $~~1.8~~$3.9 million and ~~$5.2~~$7.1 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2021, compared with net income of ~~$1.4~~$2.0 million and ~~$3.9~~$3.8 million for the same periods of ~~2016. After deductions for earnings allocated to participating securities, net income available to common shareholders~~2020. Income tax expense was ~~$1.7~~$1.2 million and ~~$5.1~~$2.2 million for the ~~three~~second quarter of 2021 and ~~nine~~for the first six months of 2021, respectively, compared to income tax expense of $393,000 and $754,000 for the second quarter of 2020 and for the first six months of 2020, respectively. Effective January 1, 2021, the state of Kentucky eliminated the bank franchise tax, which was previously recorded as a non-interest expense, and implemented a state income tax at a statutory rate of 5%. State income tax expense was $235,000 and $449,000 for the second quarter of 2021 and for the first six months of 2021, respectively, compared to a state income tax benefit of $79,000 and $151,000 for the second quarter of 2020 and for the first six months of 2020, which was related to the establishment of a net deferred tax asset due to the tax law change.

Highlights for the six months ended ~~September~~June 30, ~~2017, respectively, compared with net income available to common shareholders of $1.3 million and $3.8 million for the three and nine months ended September 30, 2016, respectively.~~

~~Basic and diluted net income per common share were $0.~~29 and $0.83 for the three and nine months ended September 30, 2017, respectively, compared with basic and diluted net income per common share of $0.22 and $0.66 for the three and nine months ended September 30, 2016, respectively.

~~We note the~~ ~~following significant items for the nine months ended September 30, 2017:~~2021 are as follows:

●

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

●

~~Loan growth outpaced paydowns during the period.~~ Average loans receivable ~~increased~~decreased approximately ~~$36.2 million~~$629,000, or ~~5.8%~~0.1%, to ~~$658.0~~$963.1 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2021, compared with ~~$621.8~~$963.8 million for the first ~~nine~~six months of 2016. This resulted in an increase in interest revenue volume of approximately $1.3 million, which was offset by rate decreases of $852,000 for the nine months September 30, 2017, compared with the nine2020. The first six months of ~~2016.~~2021 included loan originations under the SBA Paycheck Protection Program ("PPP") of $23.5 million, compared to $42.0 million in the first six months of 2020. The PPP program loans began funding in the second quarter of 2020. PPP loan balances total $21.0 million at June 30, 2021, compared to $20.3 million at December 31, 2020, and $41.9 million at June 30, 2020.

●

Net interest margin increased 17 basis points to 3.49% in the first six months of 2021 compared with 3.32% in the first six months of 2020. The yield on earning assets decreased to 3.98% for the first six months of 2021, compared to 4.35% for the first six months of 2020. The yield on earning assets in the first six months of 2021 was negatively impacted by lower interest rates on the Bank’s fed funds, certain floating rate investment securities, loans with variable rate pricing features, and new loans originated in the lower interest rate environment, including PPP loans which carry a rate of 1.0%. The negative impact of lower rates was offset by $1.1 million in fees earned on PPP loans during the first six months of 2021, compared to $179,000 during the first six months of 2020. PPP fees during the first six months of 2021 represented 18 basis points, compared to three basis points ~~to 3.44% in~~of earning asset yield and net interest margin for the ~~third quarter~~first six months of ~~2017 compared to 3.47% in the third quarter of 2016.~~2020. The cost of ~~interest bearing~~interest-bearing liabilities ~~increased seven basis points to 0.85% in the third quarter of 2017 compared to 0.78% in the third quarter of 2016. Net interest margin increased two basis points to 3.47%~~decreased from 1.28% in the first ~~nine~~six months of ~~2017 compared with 3.45%~~2020 to 0.64% in the first ~~nine~~six months of ~~2016. The cost~~2021 as a result of decreases in short-term interest ~~bearing liabilities increased two basis points to 0.81%~~rates during 2020 and continued improvement in ~~the first nine months of 2017 compared with 0.79% in the first nine months of 2016.~~deposit mix.

●

~~During the period, our improving trends in non-performing loans, past due loans, and loan risk categories continued. We recorded no~~No provision for loan losses ~~expense during the first nine months of 2017, compared to negative provisions~~and a $350,000 provision for loan losses ~~expense~~was recorded in the second quarter and first six months of ~~$1.9~~2021, respectively, compared to $1.1 million and $2.2 million in the second quarter and the first six months of 2020, respectively. The 2021 loan loss provision was attributable to the net loan charge-offs and trends within the portfolio during the period, while the 2020 provisions were largely attributable to the uncertainty surrounding the COVID-19 pandemic related economic and business disruptions. At June 30, 2021, the allowance for loan loss remained elevated in relation to recent historical levels due to the continued uncertainty surrounding the COVID-19 pandemic despite declining loan balances and improved credit trends. Net loan charge-offs were $156,000 for the first ~~nine~~six months of 2016 and $750,000 for the third quarter of 2016. Both were attributable to declining historical loss rates, improvements in asset quality, and management’s assessment of risk in the loan portfolio. Net loan recoveries were $10,000 for the first nine months of 2017,2021, compared to net loan charge-offs of ~~$652,000~~$298,000 for the first ~~nine~~six months of ~~2016.~~2020.

●

Non-performing loans decreased by $3.4 million to $5.8 million at September 30, 2017, compared with $9.2 million at December 31, 2016. The decrease in non-performing loans was primarily due to $4.5 million in paydowns and $528,000 in charge-offs which were partially offset by $2.0 million in loans placed on nonaccrual.

●

Loans past due 30-59 days decreased from ~~$2.3~~$1.5 million at December 31, ~~2016~~2020 to ~~$872,000~~$181,000 at ~~September~~June 30, ~~2017,~~2021, and loans past due 60-89 days ~~increased~~decreased from ~~$315,000~~$372,000 at December 31, ~~2016~~2020 to ~~$612,000~~$252,000 at ~~September~~June 30, ~~2017.~~2021. Total loans past due and nonaccrual loans decreased to ~~$7.3~~$2.0 million at ~~September~~June 30, ~~2017,~~2021, from ~~$11.8~~$3.6 million at December 31, ~~2016.~~2020.

●

Pass loans represent 92.8% of the portfolio at September 30, 2017, compared to 91.7% at December 31, 2016. During the nine months ended September 30, 2017, the pass category increased approximately $46.8 million, the watch category increased approximately $4.7 million, the special mention category increased approximately $101,000, and the substandard category declined approximately $8.3 million. The $8.3 million decrease in loans classified as substandard was primarily driven by $5.8 million in principal payments received , $4.5 million in loans upgraded from substandard, $623,000 in charge-offs, and $270,000 in loans moved to OREO, offset by $2.8 million in loans moved to substandard during the period.

●

Foreclosed properties were $6.3 million at September 30, 2017, compared with $6.8 million at December 31, 2016, and $7.1 million at September 30, 2016. During the first nine months of 2017, the Company acquired $270,000 and sold $738,000 of OREO. Operating expenses and fair value write downs, net of net gain on sales totaled $1.3 million for the first nine months of 2016 compared to $92,000 for the first nine months of 2017.

●

~~Our ratio of non-performing assets to total assets, including accruing TDRs, decreased to 1.38% at September 30, 2017, compared with 2.26% at December 31, 2016, and 2.55% at September 30, 2016.~~

●

Non-interest income decreased $291,000 to $3.4 million for the first nine months of 2017, compared with $3.6 million for the first nine months of 2016. The decrease was driven primarily by reductions in OREO income of $451,000, partially offset by a $195,000 increase in service charges on deposits.

●

Non-interest expense decreased $2.7 million to $21.3 million for the first nine months of 2017 compared with $23.9 million for the first nine months of 2016, primarily due to a reduction in OREO expenses of approximately $1.2 million, a reduction of professional fees of $475,000, a reduction of litigation and loan collection expense of $454,000, and a reduction of FDIC insurance expense of $403,000.

●

Deposits ~~increased 2.0%~~were $1.14 billion at June 30, 2021, compared with $1.12 billion at December 31, 2020. Certificate of deposit balances decreased $63.9 million during the first six months of 2021 to ~~$866.8~~$303.7 million at ~~September~~June 30, ~~2017, compared with $849.9~~2021, from $367.6 million at December 31, ~~2016. Noninterest-bearing demand deposits~~2020 due to liquidity management considerations and planned reduction in higher cost deposits. Interest checking accounts increased ~~7.6% from $124.4~~$25.7 million, ~~at December 31, 206 to $133.9~~non-interest bearing accounts increased $24.0 million, ~~at September 30, 2017. Certificate of deposit balances~~money market increased ~~$938,000~~$16.0 million, and savings accounts increased $17.6 during the first ~~nine~~six months of ~~2017 to $446.6 million at September 30, 2017, from $444.6 million at December 31, 2016. Money market deposits increased 10.1% at September 30, 2017~~2021 compared with December 31, ~~2016.~~2020.

●

On June 30, 2017, the Company entered into a $10.0 million senior secured loan agreement with a commercial bank. The loan matures on June 30, 2022. Interest is payable quarterly at a rate of three-month LIBOR plus 250 basis points through June 30, 2020, at which time quarterly principal payments of $250,000 plus interest will commence. The loan is secured by a first priority pledge of 100% of the issued and outstanding stock of the Bank. The Company may prepay any amount due under the promissory note at any time without premium or penalty. The Company contributed $9.0 million of the borrowing proceeds to the Bank as common equity Tier 1 capital. The remaining $1.0 million of the borrowing proceeds was retained by the lender in escrow to service quarterly interest payments. At September 30, 2017, the escrow account had a balance of $903,000.

Application of Critical Accounting Policies

WeManagement continually ~~review our~~reviews accounting policies and financial information disclosures. ~~Our~~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~~the Company’s Annual Report on Form 10-K for the calendar year ended December 31, ~~2016.~~2020. Management has discussed the development, selection, and application of ~~our~~ critical accounting policies with ~~our~~the Audit Committee. During the first ~~nine~~six months of ~~2017,~~2021, 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~~components for the three months ended ~~September~~June 30, ~~2017,~~2021, compared with the same period of ~~2016:~~2020:

	For the Three Months					Change from						For the Three Months				Change from
	Ended September 30,					Prior Period						Ended June 30,				Prior Period
	2017		2016			Amount			Percent			2021		2020		Amount			Percent
	(dollars in thousands)											(dollars in thousands)

Gross interest income	$	9,446	$	8,931		$	515			5.8	%	$	12,376	$	12,786	$	(410	)		(3.2	)%
Gross interest expense		1,659		1,473			186			12.6			1,462		2,676		(1,214	)		(45.4	)
Net interest income		7,787		7,458			329			4.4			10,914		10,110		804			8.0
Provision (negative provision) for loan losses		—		(750	)		750			100.0
Provision for loan losses													—		1,100		(1,100	)		(100.0	)
Non-interest income		1,182		1,105			77			7.0			2,135		1,601		534			33.4
Non-interest expense		7,175		7,920			(745	)		(9.4	)		7,954		8,236		(282	)		(3.4	)
Net income before taxes		1,794		1,393			401			28.8			5,095		2,375		2,720			114.5
Income tax expense		—		—			—			—			1,194		393		801			203.8
Net income		1,794		1,393			401			28.8			3,901		1,982		1,919			96.8

Net income for the three months ended ~~September~~June 30, ~~2017~~2021 totaled ~~$1.8~~$3.9 million, compared with ~~$1.4~~$2.0 million for the comparable period of ~~2016.~~2020. Net interest income increased ~~$329,000~~$804,000 from the ~~2016 third~~2020 second quarter as a result of a decrease in the cost of interest-bearing liabilities due primarily to downward repricing within the time deposit portfolio, as well as a reduction in the size of the time deposit portfolio. No provision for loan losses expense was recorded in the second quarter of 2021, as compared to $1.1 million in the second quarter of 2020. The 2020 provision for loan losses was largely attributable to the uncertainty surrounding the COVID-19 pandemic related economic and business disruptions. Non-interest income increased $534,000 from $1.6 million in the second quarter of 2020 to $2.1 million for the second quarter of 2021 primarily related to an increase in bank card interchange fees of $210,000 as a result of an increase in ~~earning assets. Average earning assets increased~~debit card transactions, and a $191,000 gain on the sale of OREO. Non-interest expense decreased $282,000 from ~~$864.3~~$8.2 million in the second quarter of 2020 to $8.0 million in the second quarter of 2021 primarily due to a decrease in deposit and state franchise tax expense of $270,000, as a result of the elimination of the Kentucky bank franchise tax discussed below.

Net income before taxes was $5.1 million for the ~~third~~second quarter of ~~2016 to $907.7~~2021, compared with $2.4 million for the ~~third~~second quarter of ~~2017. While net interest income increased, net interest margin decreased three basis points to 3.44% in~~2020. Income tax expense was $1.2 million for the ~~third~~second quarter of ~~2017~~2021, compared with ~~3.47%~~$393,000 for the ~~comparable period~~second quarter of ~~2016. The decrease in margin between periods~~2020. Effective January 1, 2021, the state of Kentucky eliminated the bank franchise tax and implemented a state income tax at a statutory rate of 5%. State income tax expense was $235,000 for the second quarter of 2021, compared to a state income tax benefit of $79,000 for the second quarter of 2020 related to the establishment of a net deferred tax asset due to ~~an increase in~~ the ~~cost of interest bearing liabilities from 0.78% in the third quarter of 2016 to 0.85% in the third quarter of 2017.~~tax law change.

~~The third quarter of 2016 benefited from a $750,000 negative loan loss provision. There was no loan loss provisioning in the third quarter of 20~~17. Non-interest income increased by $77,000 to $1.2 million from $1.1 million in the third quarter of 2016 primarily due to an increase in service charges in deposit accounts of $48,000. Non-interest expense decreased from $7.9 million in the third quarter of 2016 to $7.2 million in the third quarter of 2017 primarily due to decreased salaries and employee benefits expense of $262,000, a $211,000 decline in OREO expense, a $144,000 decline in loan collection and litigation expense, and a $142,000 decline in professional fees.

The following table summarizes components of income and expense and the change in those ~~component~~scomponents for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2021, compared with the same period of ~~2016:~~2020:

	For the Nine Months					Change from						For the Six Months				Change from
	Ended September 30,					Prior Period						Ended June 30,				Prior Period
	2017		2016			Amount			Percent			2021		2020		Amount			Percent
	(dollars in thousands)											(dollars in thousands)

Gross interest income	$	27,805	$	26,821		$	984			3.7	%	$	24,626	$	26,053	$	(1,427	)		(5.5	)%
Gross interest expense		4,689		4,516			173			3.8			3,032		6,181		(3,149	)		(50.9	)
Net interest income		23,116		22,305			811			3.6			21,594		19,872		1,722			8.7
Provision (negative provision) for loan losses		—		(1,900	)		1,900			100.0
Provision for loan losses													350		2,150		(1,800	)		(83.7	)
Non-interest income		3,357		3,648			(291	)		(8.0	)		4,019		3,325		694			20.9
Non-interest expense		21,290		23,947			(2,657	)		(11.1	)		15,938		16,471		(533	)		(3.2	)
Net income before taxes		5,183		3,906			1,277			32.7			9,325		4,576		4,749			103.8
Income tax expense		—		21			(21	)		(100.0	)		2,202		754		1,448			192.0
Net income		5,183		3,885			1,298			33.4			7,123		3,822		3,301			86.4

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Net ~~income~~income for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 totaled ~~$5.2~~$7.1 million, compared with net income of ~~$3.9~~$3.8 million for the comparable period of ~~2016.~~2020. Net interest income increased ~~$811,000~~$1.7 million from the first ~~nine~~six months of ~~2016~~2020 as a result of an increase in earning assets and net interest margin. Net interest margin increased two basis points to 3.47% in the first nine months of 2017 compared with 3.45% in the first nine months of 2016. The increase in margin between periods was due to an increase in the yield on earning assets from 4.14% for the first nine months of 2016 to 4.17% for the first nine months of 2017, partially offset by an increasea decrease in the cost of ~~interest bearing~~interest-bearing liabilities ~~from 0.79%~~due primarily to downward repricing within the time deposit portfolio, as well as a reduction in the size of the time deposit portfolio. Provision for the first nine months of 2016 to 0.81% for the first nine months of 2017. Average earning assets increased from $874.2 million for the first nine months of 2016 to $899.9 million for the first nine months of 2017.

~~The nine months ended September 30, 2016 benefited from a $1.9 million negative~~ loan loss ~~provision. There~~expense of $350,000 was ~~no loan loss provisioning~~recorded in the first ~~nine~~six months of ~~2017.~~ 2021, as compared to $2.2 million provision for loan loss expense in the first six months of 2020. The 2021 provision was primarily in response to the level of net loan charge-offs and trends during the first six months of the year, while the provision for 2020 was largely attributable to the uncertainty surrounding the COVID-19 pandemic related economic and business disruptions. At June 30, 2021, the allowance for loan loss remained elevated in relation to recent historical levels due to the continued uncertainty surrounding the COVID-19 pandemic despite declining loan balances and improved credit trends.Non-interest income ~~decreased~~increased by ~~$291,000~~$694,000 to ~~$3.4~~$4.0 million from ~~$3.6~~$3.3 million in the first ~~nine~~six months of ~~2016~~2020 primarily due to ~~a decrease in OREO income of $451,000 and a $192,000 decrease in gains on sales of securities. This was partially offset by an increase in service charges on deposit accounts of $195,000 and~~ an increase in bank card interchange fees of ~~$76,000.~~$420,000 and a $191,000 gain on the sale of OREO. Non-interest expense decreased from ~~$23.9~~$16.5 million in the first ~~nine~~six months of ~~2016~~2020 to ~~$21.3~~$15.9 million in the first ~~nine~~six months of ~~2017~~2021 primarily due to a decrease of $540,000 in ~~OREO expense of $1.2 million, a $475,000 decline in professional fees, a $454,000 decline in litigation~~deposit and ~~loan collection expense, and a $403,000 decline in FDIC insurance.~~state franchise tax expense.

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

Net Interest Income – Net interest income was ~~$7.8~~$10.9 million for the three months ended ~~September~~June 30, ~~2017,~~2021, an increase of ~~$329,000,~~$804,000, or ~~4.4%~~8.0%, compared with ~~$7.5~~$10.1 million for the same period in ~~2016.~~2020. Net interest spread and margin were ~~3.31%~~3.30% and ~~3.44%~~3.45%, respectively, for the ~~third~~second quarter of ~~2017,~~2021, compared with ~~3.37%~~3.10% and ~~3.47%~~3.33%, respectively, for the ~~third~~second quarter of ~~2016. Net average non-accrual~~2020.

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

The yield on earning assets decreased to 3.91% for the second quarter of 2021, as compared to 4.21% in the second quarter of 2020. Average interest-earning assets were ~~$6.2 million and $11.0~~$1.28 billion for the second quarter of 2021, compared with $1.22 billion for the second quarter of 2020, a 4.3% increase, primarily attributable to higher interest-bearing deposits. Average loans decreased approximately $16.4 million for the ~~third quarters of 2017 and 2016, respectively.~~

~~Average loans receivable~~ ~~increased approximately $43.5 million for the third~~second quarter of ~~2017~~2021 compared with the ~~third~~second quarter of ~~2016. This~~2020. Average loans for the second quarter of 2021 included $23.5 million in loan originations under the SBA Paycheck Protection Program during the first six months of 2021, compared with $42.0 million in loan originations during the first six months of 2020. The decrease in average loans resulted in ~~an increase~~a decrease in interest revenue volume of approximately ~~$525,000 which was offset by~~$189,000 for the quarter ended June 30, 2021, in addition to a decrease in interest ~~income driven by interest rate decreases aggregating $203,000 for the quarter ended September 30, 2017,~~revenue due to declining rates of $120,000, as compared with the ~~third~~second quarter of ~~2016. Interest foregone on non-accrual loans totaled $105,000~~2020. Total interest income decreased 3.2%, or $410,000, for the ~~third~~second quarter of ~~2017,~~2021 compared ~~with $180,000~~to the second quarter of 2020.

Loan fee income can meaningfully impact net interest income, loan yields, and net interest income. The amount of loan fee income included in total interest income was $933,000 and $535,000 for the ~~third~~quarters ended June 30, 2021 and June 30, 2020, respectively. This represents 29 basis points and 17 basis points of yield on earning assets and net interest margin for the second quarter ended June 30, 2021 and 2020, respectively. Loan fee income for the second quarter of ~~2016.~~2021 included $692,000 in fees earned on SBA PPP loans, compared to $179,000 in the second quarter of 2020, which represents 22 basis points and six basis points of earning asset yield and net interest margin for those quarters, respectively.

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

Net interest ~~margin~~ decreased three basis points from our margin of 3.47% in the prior year third quarter to 3.44% for the third quarter of 2017. The yield on earning assets increased one basis point and rates paid on interest-bearing liabilities increased seven basis point from the third quarter of 2016.

~~Net~~ ~~interest~~ income was ~~$23.1~~$21.6 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2021, an increase of ~~$811,000,~~$1.7 million, or ~~3.6%~~8.7%, compared with ~~$22.3~~$19.9 million for the same period in ~~2016.~~2020. Net interest spread and margin were ~~3.36%~~3.34% and ~~3.47%~~3.49%, respectively, for the first ~~nine~~six months of ~~2017,~~2021, compared with ~~3.35%~~3.07% and ~~3.45%~~3.32%, respectively, for the first ~~nine~~six months of 2016. Net average non-accrual loans were $7.5 million and $12.0 million for the first nine months of 2017 and 2016, respectively. Cost of interest-bearing liabilities was 0.81% for the first nine months of 2017 compared to 0.79% for the first nine months of 2016.2020.

~~Average loans receivable~~ increased approximately $36.2 million for the nine months ended September 30, 2017 compared with the first nine months of 2016. This resulted in an increase in interest revenue volume of approximately $1.3 million, which was offset by a decrease in interest income driven by interest rate decreases aggregating $852,000 for the nine months ended September 30, 2017 compared with the prior year period. Interest foregone on non-accrual loans totaled $368,000 for the nine months ended September 30, 2017, compared with $576,000 for the nine months ended September 30, 2016.

~~Net interest margin increased~~ ~~two basis points to 3.47% for the first nine months of 2017 from our margin of 3.45% in the first nine months of 2016.~~ The yield on earning assets decreased to 3.98% for the first six months of 2021, as compared to 4.35% in the first six months of 2020. Average interest-earning assets increased approximately $47.6 million for the six months ended June 30, 2021 compared with the first six months of 2020. Average loans decreased approximately $629,000 for the first six months ended June 30, 2021 compared with the first six months of 2020. Interest revenue for the first six months of 2021 declined $944,000 due to lower interest rates on new and renewed loans, as well as repricing of variable rate loans, as compared to the first six months of 2020. Total interest income decreased 5.5%, or $1.4 million, for the first six months of 2021 compared to the first six months of 2020.

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

Table of Contents

The cost of interest-bearing liabilities decreased to 0.64% for the first ~~nine~~six months of ~~2017 from~~2021, as compared to 1.28% for the first ~~nine~~six months of ~~2016,~~2020 primarily based on downward repricing of time and other interest-bearing deposits and reduction in the size of the time deposit portfolio, as well as a shift in deposit mix. Average interest-bearing liabilities decreased by $22.9 million for the six months ended June 30, 2021 compared with ~~an increase~~the first six months of ~~two basis points~~2020 primarily due to a $27.0 million decrease in ~~rates paid on interest-bearing liabilities.~~FHLB advances. Total interest expense decreased by 50.9% to $3.0 million for the six months ended June 30, 2021 as compared to $6.2 million for the first six months of 2020.

Average Balance Sheets

The following table presents the average balance sheets for the ~~three~~ ~~month~~three-month periods ended ~~September~~June 30, ~~2017~~2021 and ~~2016,~~2020, along with the related calculations of tax-equivalent net interest income, net interest margin and net interest spread for the related periods.

	Three Months Ended September 30,																Three Months Ended June 30,
	2017								2016								2021								2020
	Average Balance			Interest Earned/Paid		Average Yield/Cost			Average Balance			Interest Earned/Paid		Average Yield/Cost			Average Balance			Interest Earned/Paid		Average Yield/Cost			Average Balance			Interest Earned/Paid		Average Yield/Cost
	(dollars in thousands)																(dollars in thousands)

ASSETS
Interest-earning assets:
Loan receivables ~~(2)~~(1)	$	669,592		$	8,021		4.75	%	$	626,095		$	7,699		4.89	%	$	961,922		$	11,047		4.61	%	$	978,316		$	11,356		4.67	%
Securities
Taxable		174,776			1,088		2.47			160,130			956		2.38			197,860			1,103		2.24			190,148			1,307		2.76
Tax-exempt ~~(3)~~		19,547			143		4.47			20,779			153		4.51			25,451			177		3.72			10,971			77		3.57
FHLB stock		7,323			95		5.15			7,323			72		3.91			5,769			29		2.02			6,575			39		2.39
Federal funds sold and other		36,485			99		1.08			49,980			51		0.41			84,361			20		0.10			36,750			7		0.08
Total interest-earning assets		907,723			9,446		4.16	%		864,307			8,931		4.15	%		1,275,363			12,376		3.91	%		1,222,760			12,786		4.21	%
Less: Allowance for loan losses		(8,964	)							(10,135	)							(12,744	)							(9,213	)
Non-interest earning assets		52,928								63,453								98,461								92,376
Total assets	$	951,687							$	917,625							$	1,361,080							$	1,305,923


LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
Certificates of deposit and other time deposits	$	451,948		$	1,059		0.93	%	$	455,840		$	1,009		0.88	%	$	327,039		$	465		0.57	%	$	457,637		$	1,621		1.42	%
NOW and money market deposits		253,699			250		0.39			231,601			238		0.41			405,043			333		0.33			330,942			357		0.43
Savings accounts		35,904			15		0.17			33,874			15		0.18			158,090			119		0.30			107,932			149		0.56
FHLB advances		2,350			13		2.19			2,672			17		2.53			20,000			38		0.76			32,259			73		0.91
Junior subordinated debentures		23,696			225		3.77			24,598			194		3.14			21,000			132		2.52			21,000			172		3.29
Subordinated capital notes																		25,000			375		6.02			17,000			253		5.99
Senior debt		10,000			97		3.85			—			—		—			—			—		—			5,000			51		4.10
Total interest-bearing liabilities		777,597			1,659		0.85	%		748,585			1,473		0.78	%
Total interest-bearing liabilities																		956,172			1,462		0.61	%		971,770			2,676		1.11	%

Non-interest-bearing liabilities:
Non-interest-bearing deposits		129,072								118,611								274,352								219,909
Other liabilities		5,859								8,259								9,170								6,896
Total liabilities		912,528								875,455								1,239,694								1,198,575
Stockholders’ equity		39,159								42,170
Stockholders’ equity																		121,386								107,348
Total liabilities and stockholders’ equity	$	951,687							$	917,625							$	1,361,080							$	1,305,923

Net interest income				$	7,787							$	7,458							$	10,914							$	10,110

Net interest spread							3.31	%							3.37	%							3.30	%							3.10	%

Net interest margin							3.44	%							3.47	%							3.45	%							3.33	%

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

~~(2)~~

~~Calculations include non-accruing loans averaging $6.2 million~~Includes loan fees in both interest income and ~~$11.0 million, respectively, in average loan amounts outstanding.~~

~~(3)~~

~~Taxable equivalent yields are calculated assuming a 35% federal income tax rate.~~the calculation of yield on loans.

Table of Contents

The following table presents the av~~erage~~average balance sheets for the ~~nine month~~six-month periods ended ~~September~~June 30, ~~2017~~2021 and ~~2016,~~2020, along with the related calculations of tax-equivalent net interest income, net interest margin and net interest spread for the related periods.

	Nine Months Ended September 30,																Six Months Ended June 30,
	2017								2016								2021								2020
	Average Balance			Interest Earned/Paid		Average Yield/Cost			Average Balance			Interest Earned/Paid		Average Yield/Cost			Average Balance			Interest Earned/Paid		Average Yield/Cost			Average Balance			Interest Earned/Paid		Average Yield/Cost
	(dollars in thousands)																(dollars in thousands)
ASSETS
Interest-earning assets:
Loan receivables ~~(2)~~(1)	$	657,980		$	23,493		4.77	%	$	621,824		$	23,036		4.95	%	$	963,131		$	22,008		4.61	%	$	963,760		$	22,967		4.79	%
Securities
Taxable		175,838			3,370		2.56			161,232			2,895		2.40			189,259			2,219		2.36			191,704			2,774		2.91
Tax-exempt ~~(3)~~		19,805			432		4.49			21,355			475		4.57			23,957			308		3.45			10,480			147		3.57
FHLB stock		7,323			264		4.82			7,323			219		3.99			5,808			59		2.05			6,429			79		2.47
Federal funds sold and other		38,913			246		0.85			62,451			196		0.42			70,956			32		0.09			33,164			86		0.52
Total interest-earning assets		899,859			27,805		4.17	%		874,185			26,821		4.14	%		1,253,111			24,626		3.98	%		1,205,537			26,053		4.35	%
Less: Allowance for loan losses		(8,950	)							(11,138	)							(12,600	)							(8,750	)
Non-interest earning assets		52,904								67,241								98,591								92,758
Total assets	$	943,813							$	930,288							$	1,339,102							$	1,289,545

LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest-bearing liabilities:
Certificates of deposit and other time deposits	$	458,732		$	3,149		0.92	%	$	471,530		$	3,108		0.88	%	$	340,870		$	1,067		0.63	%	$	469,717		$	3,854		1.65	%
NOW and money market deposits		244,521			683		0.37			231,213			696		0.40			389,528			639		0.33			320,494			785		0.49
Savings accounts		35,650			45		0.17			34,460			46		0.18			152,093			237		0.31			91,118			260		0.57
FHLB advances		6,594			64		1.30			2,827			54		2.55			20,307			76		0.75			47,333			293		1.24
Junior subordinated debentures		23,920			651		3.64			24,822			612		3.29			21,000			262		2.52			21,000			387		3.71
Senior debt		3,407			97		3.81			—			—		—
Subordinated capital notes																		25,000			751		6.06			17,000			495		5.86
Senior debt																		—			—		—			5,000			107		4.30
Total interest-bearing liabilities		772,824			4,689		0.81	%		764,852			4,516		0.79	%		948,798			3,032		0.64	%		971,662			6,181		1.28	%

Non-interest-bearing liabilities:
Non-interest-bearing deposits		125,932								117,377								262,849								203,353
Other liabilities		8,401								9,735								7,920								7,040
Total liabilities		907,157								891,964								1,219,567								1,182,055
Stockholders’ equity		36,656								38,324
Stockholders’ equity																		119,535								107,490
Total liabilities and stockholders’ equity	$	943,813							$	930,288							$	1,339,102							$	1,289,545

Net interest income				$	23,116							$	22,305							$	21,594							$	19,872

Net interest spread							3.36	%							3.35	%							3.34	%							3.07	%

Net interest margin							3.47	%							3.45	%							3.49	%							3.32	%

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

~~(2)~~

~~Calculations include non-accruing loans averaging $7.5 million~~Includes loan fees in both interest income and ~~$12.0 million, respectively, in average loan amounts outstanding.~~

~~(3)~~

~~Taxable equivalent yields are calculated assuming a 35% federal income tax rate.~~the calculation of yield on loans.

Table of Contents

Rate/Volume Analysis

The table below sets forth certain information regarding changes in interest income and interest expense for the periods indicated. For each ~~categor~~ycategory 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 September 30, 2017 vs. 2016									Nine Months Ended September 30, 2017 vs. 2016									Three Months Ended June 30, 2021 vs. 2020									Six Months Ended June 30, 2021 vs. 2020
	Increase (decrease) due to change in									Increase (decrease) due to change in									Increase (decrease) due to change in									Increase (decrease) due to change in
	Rate			Volume			Net Change			Rate			Volume			Net Change			Rate			Volume			Net Change			Rate			Volume			Net Change
	(in thousands)																		(in thousands)
Interest-earning assets:
Loan receivables	$	(203	)	$	525		$	322		$	(852	)	$	1,309		$	457		$	(120	)	$	(189	)	$	(309	)	$	(944	)	$	(15	)	$	(959	)
Securities		38			84			122			184			248			432			(247	)		143			(104	)		(546	)		152			(394	)
FHLB stock		23			—			23			45			—			45			(5	)		(5	)		(10	)		(13	)		(7	)		(20	)
Federal funds sold and other		65			(17	)		48			144			(94	)		50			2			11			13			(105	)		51			(54	)
Total increase (decrease) in interest income		(77	)		592			515			(479	)		1,463			984			(370	)		(40	)		(410	)		(1,608	)		181			(1,427	)

Interest-bearing liabilities:
Certificates of deposit and other time deposits		59			(9	)		50			127			(86	)		41			(782	)		(374	)		(1,156	)		(1,931	)		(856	)		(2,787	)
NOW and money market accounts		(10	)		22			12			(52	)		39			(13	)		(95	)		71			(24	)		(293	)		147			(146	)
Savings accounts		(1	)		1			—			(3	)		2			(1	)		(83	)		53			(30	)		(150	)		127			(23	)
FHLB advances		(2	)		(2	)		(4	)		(37	)		47			10			(10	)		(25	)		(35	)		(89	)		(128	)		(217	)
Junior subordinated debentures		38			(7	)		31			62			(23	)		39			(40	)		—			(40	)		(125	)		—			(125	)
Subordinated capital notes																				2			120			122			16			240			256
Senior debt		—			97			97			—			97			97			(25	)		(26	)		(51	)		(53	)		(54	)		(107	)
Total increase (decrease) in interest expense		84			102			186			97			76			173			(1,033	)		(181	)		(1,214	)		(2,625	)		(524	)		(3,149	)
Increase (decrease) in net interest income	$	(161	)	$	490		$	329		$	(576	)	$	1,387		$	811		$	663		$	141		$	804		$	1,017		$	705		$	1,722

Non-Interest Income – The following table presents the major categories of non-interest income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2021 and ~~2016:~~2020:

	For the Three Months					For the Nine Months					For the Three Months				For the Six Months
	Ended September 30,					Ended September 30,					Ended June 30,				Ended June 30,
	2017		2016			2017			2016		2021		2020		2021		2020
	(dollars in thousands)										(dollars in thousands)

Service charges on deposit accounts	$	568	$	520		$	1,617		$	1,422	$	520	$	441	$	1,068	$	1,109
Bank card interchange fees		245		214			713			637		1,073		863		2,033		1,613
Other real estate owned rental income		—		46			—			451
Bank owned life insurance income		103		101			309			316
Net gain (loss) on sales and calls of securities		—		(16	)		(5	)		187
Income from bank owned life insurance												143		116		308		212
Net gain on sale of other real estate owned												191		—		191		—
Other		266		240			723			635		208		181		419		391
Total non-interest income	$	1,182	$	1,105		$	3,357		$	3,648	$	2,135	$	1,601	$	4,019	$	3,325

Non-interest income for the ~~third~~second quarter of ~~2017~~2021 increased by ~~$77,000,~~$534,000, or ~~7.0%~~33.4%, compared with the ~~third~~second quarter of ~~2016.~~2020. The increase in non-interest income for the second quarter of 2021 compared to the second quarter of 2020 was primarily driven by ~~an increase in service charges on deposit accounts of $48,000 as well as~~ an increase in bank card interchange fees of ~~$31,000.~~ $210,000 due to an increase in debit card transactions, and a $191,000 gain on the sale of OREO.

Table of Contents

For the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2021, non-interest income ~~decreased~~increased by ~~$291,000,~~$694,000, or ~~8.0%~~20.9%, to ~~$3.4~~$4.0 million compared with ~~$3.6~~$3.3 million for the same period of ~~2016.~~2020. The ~~decrease~~increase in non-interest income between the ~~nine-month~~six-month comparative periods was primarily due to ~~a $451,000 decrease in OREO rental income and a $192,000 decrease in gains on sales of securities. This was partially offset by~~ an increase in ~~service charges on deposit accounts of $195,000 and~~ bank card interchange fees of ~~$76,000.~~$420,000 and a $191,000 gain on the sale of OREO.

Non-interest Expense – The following table presents the major categories of non-interest expense for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2021 and ~~2016:~~2020:

	For the Three Months				For the Nine Months				For the Three Months				For the Six Months
	Ended September 30,				Ended September 30,				Ended June 30,				Ended June 30,
	2017		2016		2017		2016		2021		2020		2021		2020
	(dollars in thousands)								(dollars in thousands)

Salary and employee benefits	$	3,683	$	3,945	$	11,433	$	11,624	$	4,467	$	4,633	$	8,949	$	9,171
Occupancy and equipment		836		842		2,501		2,504		979		983		2,039		1,982
Professional fees		232		374		776		1,251		246		235		482		443
Marketing expense		364		289		880		706		179		104		361		318
FDIC insurance		356		442		1,055		1,458		90		67		225		67
Data processing expense		321		295		931		887		377		380		755		739
State franchise and deposit tax		225		255		675		765
Other real estate owned expense		111		322		92		1,284
Litigation and loan collection expense		78		222		121		575
Deposit and state franchise tax										90		360		180		720
Deposit account related expenses										556		460		1,047		911
Communications expense										194		247		367		465
Insurance expense										115		111		219		214
Postage and delivery										139		152		291		320
Other		969		934		2,826		2,893		522		504		1,023		1,121
Total non-interest expense	$	7,175	$	7,920	$	21,290	$	23,947	$	7,954	$	8,236	$	15,938	$	16,471

Non-interest expense for the ~~third~~second quarter ended ~~September~~June 30, ~~2017~~2021 decreased ~~$745,000,~~$282,000, or ~~9.4%~~3.4%, compared with the ~~third~~second quarter of ~~2016.~~2020. This decrease was primarily due to the elimination of the Kentucky bank franchise tax discussed below, resulting in a decrease in ~~salary~~deposit and state franchise tax expense of $270,000, or 75%. Salary and employee benefits, ~~expense~~which includes salaries, payroll taxes, health insurance, 401k matching contributions, incentive compensation, and stock-based compensation, decreased $166,000, or 3.6%, for the second quarter of ~~$262,000, a $211,000 decrease~~2021, as compared with the second quarter of 2020. The second quarter of 2020 included $111,000 in ~~OREO~~severance expense as the ~~OREO portfolio was significantly reduced,~~Bank realized a ~~$144,000 decline~~reduction in ~~loan collection and litigation expenses, and a $142,000 decline~~FTEs from 248 at March 31, 2020 to 228 at June 30, 2020. These decreases were partially offset by an increase in ~~professional fees.~~ deposit account related expense of $96,000, or 20.9%, due to an increase in debit card transactions.

For the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2021, non-interest expense decreased ~~$2.7 million,~~$533,000, or ~~11.1%~~3.2% to ~~$21.3~~$15.9 million compared with ~~$23.9~~$16.5 million for the first ~~nine~~six months of ~~2016.~~2020. The ~~decreases~~decrease in non-interest expense for the ~~nine~~six months ended ~~September~~June 30, ~~2017 were~~2021 was primarily attributable to ~~decreased OREO expenses of $1.2 million due to the smaller OREO portfolio. The improvement was also attributable to a reduction in professional fees of $475,000,~~ a decrease of ~~$454,000~~$540,000, or 75%, in ~~litigation~~deposit and ~~loan collection~~state franchise tax expense. Salary and employee benefits decreased $222,000, or 2.4%, for the six months ended June 30, 2021, as compared with the first six months of 2020 given the prior period severance expense discussed above, and ~~a reduction~~modestly lower FTE counts in the first six months of 2021 compared to the same period in 2020. These decreases were partially offset by increases in FDIC insurance of ~~$403,000.~~$158,000, or 235.8%, as no expense was recorded during the first quarter of 2020 due to the Bank utilizing assessment credits, and deposit account related expense of $136,000, or 14.9%, due to an increase in debit card transactions.

Income Tax Expense– –Effective tax rates differ from the federal statutory rate of ~~35%~~21% applied to income before income taxes due to the following:

	For the Three Months						For the Nine Months						For the Three Months						For the Six Months
	Ended September 30,						Ended September 30,						Ended June 30,						Ended June 30,
	2017			2016			2017			2016			2021			2020			2021			2020
	(dollars in thousands)												(dollars in thousands)

Federal statutory tax rate														21	%		21	%		21	%		21	%
Federal statutory rate times financial statement income	$	628		$	487		$	1,814		$	1,367		$	1,070		$	499		$	1,958		$	961
Effect of:
Valuation allowance		(551	)		(465	)		(1,488	)		(1,197	)
Tax-exempt income		(50	)		(52	)		(147	)		(161	)
State income taxes														202			—			383			—
Tax-exempt interest income														(40	)		(15	)		(70	)		(29	)
Establish state deferred tax asset														—			(79	)		—			(151	)
Non-taxable life insurance income		(36	)		(35	)		(108	)		(110	)		(36	)		(24	)		(77	)		(44	)
Restricted stock vesting		—			—			(98	)		—			(5	)		5			—			4
Other, net		9			65			27			122			3			7			8			13
Total	$	—		$	—		$	—		$	21
Total													$	1,194		$	393		$	2,202		$	754

Table of Contents

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

Analysis of Financial Condition

Total assets increased ~~$17.8~~$26.6 million, or ~~1.9%~~2.0%, to ~~$963.0 million~~$1.34 billion at ~~September~~June 30, ~~2017,~~2021, from ~~$945.2 million~~$1.31 billion at December 31, ~~2016.~~2020. This increase was primarily attributable to an increase in ~~net loans~~cash and cash equivalents of ~~$43.3~~$17.4 million and securities of $25.0 million, partially offset by a decrease in ~~interest bearing deposits in banks~~net loans of ~~$19.1 million and a decrease in available for sale securities of $3.0~~$14.9 million.

~~Deferred Tax Asset Valuation Allowance~~ – The Company has a net deferred tax asset of $51.9 million subject to a full valuation allowance at September 30, 2017. Our ability to utilize deferred tax assets depends upon generating sufficient future levels of taxable income. The determination to restore a deferred tax asset and eliminate a valuation allowance depends upon the evaluation of both positive and negative evidence regarding the likelihood of achieving sufficient future taxable income levels. A key element of the evaluation is the achievement of pre-tax net income rather than pre-tax net loss on a cumulative basis for the trailing three-year period. At September 30, 2017, our trailing three-year cumulative pre-tax net loss had declined to $762,000. We continue to monitor and evaluate the positive and negative evidence and will reverse the valuation allowance when we determine it is more-likely-than-not the asset will be utilized to reduce future taxes payable related to the future taxable income of the Company.

Loans Receivable – Loans receivable ~~increased $43.3~~decreased $14.7 million, or ~~6.8%~~1.5%, during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2021 to ~~$682.5~~$947.4 million as loan ~~growth~~paydowns outpaced ~~paydowns. Our~~growth. The commercial and commercial real estate portfolios increased by an aggregate of ~~$43.8~~$9.8 million, or ~~12.3%~~1.5%, during the first ~~nine~~six months of ~~2017~~2021 and comprised ~~58.4%~~68.4% of the loan portfolio at ~~September~~June 30, ~~2017.~~2021. Residential real estate and consumer portfolios decreased by an aggregate of $19.4 million, or 6.9%, during the first six months of 2021 and comprised 27.7% of the loan portfolio at June 30, 2021.

Loan Portfolio Composition – The following table presents a summary of the loan portfolio at the dates indicated, net of deferred loan fees, by type.

As of September 30,

As of December 31,

2017

2016

Amount

Percent

Amount

Percent

(dollars in thousands)

Commercial
$ 107,616 15.77
%
$ 97,761 15.29
%
Commercial Real Estate

Construction
44,956 6.59 36,330 5.68
Farmland
88,370 12.95 71,507 11.19
Nonfarm nonresidential
157,956 23.14 149,546 23.39
Residential Real Estate

Multi-family
55,684 8.16 48,197 7.54
1-4 Family
173,213 25.38 188,092 29.42
Consumer
8,474 1.24 9,818 1.54
Agriculture
45,675 6.69 37,508 5.87
Other
567 0.08 477 0.08
Total loans
$ 682,511 100.00
%
$ 639,236 100.00
%
There are no foreign loans in ~~our portfolio. Except for commercial real estate, 1-4 family residential real estate,~~the portfolio and ~~loans for retail facilities (included in nonfarm nonresidential commercial real estate below),~~other than the categories noted, there is no concentration of loans in any industry exceeding 10% of total loans.

As of June 30,

As of December 31,

2021

2020

Amount

Percent

Amount

Percent

(dollars in thousands)

Commercial (1)
$ 206,578 21.80
%
$ 208,244 21.65
%
Commercial Real Estate

Construction
78,659 8.30 92,916 9.66
Farmland
65,631 6.93 70,272 7.30
Nonfarm nonresidential
296,737 31.32 266,394 27.69
Residential Real Estate

Multi-family
62,428 6.59 61,180 6.36
1-4 Family
168,215 17.75 188,955 19.64
Consumer
31,511 3.33 31,429 3.27
Agriculture
37,086 3.91 42,044 4.37
Other
580 0.07 647 0.06
Total loans
$ 947,425 100.00
%
$ 962,081 100.00
%
(1)
Includes PPP loans of $21.0 million and $20.3 million at June 30, 2021 and December 31, 2021, respectively.
Loan Portfolio by Risk Category –The following table presents a summary of the loan portfolio at the dates indicated, by risk category.
September 30, 2017 December 31, 2016
June 30, 2021

December 31, 2020

Loans

% to
Total

Loans

% to
Total

Loans

% to
Total

Loans

% to
Total

(dollars in thousands)

(dollars in thousands)

Pass
$ 633,203 92.8
%
$ 586,430 91.7
%
$ 913,753 96.4
%
$ 926,025 96.2
%
Watch
35,167 5.1 30,431 4.8 15,888 1.7 18,879 2.0
Special Mention
598 0.1 497 0.1 — — — —
Substandard
13,543 2.0 21,878 3.4 17,784 1.9 17,177 1.8
Doubtful
— — — — — — — —
Total
$ 682,511 100.0
%
$ 639,236 100.0
%
$ 947,425 100.0
%
$ 962,081 100.00
%
40

Table of Contents
~~Our~~ ~~loans~~Loans receivable ~~have increased $43.3~~decreased $14.7 million, or ~~6.8%~~1.5%, during the ~~nine~~six months ended ~~September~~June 30, ~~2017. The~~2021 primarily as a result of loan payoffs outpacing loan originations during the period. Since December 31, 2020, the pass ~~loan~~ category ~~increased~~decreased approximately ~~$46.8~~$12.3 million, the watch category ~~increased~~decreased approximately ~~$4.7~~$3.0 million, ~~the special mention category increased approximately $101,000,~~ and the substandard category ~~declined~~increased approximately ~~$8.3 million.~~$607,000. The ~~$8.3 million decrease~~$607,000 increase in loans classified as substandard was primarily driven by ~~$5.8 million in principal payments received, $4.5~~$2.2 million in loans ~~upgraded from~~migrating to substandard, ~~$623,000 in charge-offs, and $270,000 in loans moved to OREO,~~ offset by ~~$2.8~~$1.4 million in ~~loans moved to substandard~~payments and $231,000 in charge-offs during the first ~~nine~~six months of ~~2017.~~2021.

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

September 30,
2017

December 31,
2016

June 30,
2021

December 31,
2020

(in thousands)
(in thousands)

Past Due Loans:

30-59 Days
$ 872 $ 2,302 $ 181 $ 1,537
60-89 Days
612 315 252 372
90 Days and Over
— — — —
Total Loans Past Due 30-90+ Days
1,484 2,617 433 1,909

Nonaccrual Loans
5,769 9,216 1,530 1,676
Total Past Due and Nonaccrual Loans
$ 7,253 $ 11,833 $ 1,963 $ 3,585

During the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2021, nonaccrual loans decreased by ~~$3.4 million~~$146,000 to ~~$5.8~~$1.5 million. This decrease was due primarily to $4.5 million in paydowns and $528,000 in charge-offs, offset by $2.0 million in loans placed on nonaccrual status. During the nine months ended September 30, 2017, loansLoans past due 30-59 days decreased from ~~$2.3~~$1.5 million at December 31, ~~2016~~2020 to ~~$872,000~~$181,000 at ~~September~~June 30, ~~2017.~~2021. Loans past due 60-89 days ~~increased~~decreased from ~~$315,000~~$372,000 at December 31, ~~2016~~2020 to ~~$612,000~~$252,000 at ~~September~~June 30, ~~2017.~~2021. This represents a ~~$1.1~~$1.5 million decrease in accruing past due loans from December 31, ~~2016~~2020 to ~~September~~June 30, ~~2017,~~2021 in loans past due 30-89 days. ~~We considered this~~This trend in delinquency levels is considered during the evaluation of qualitative trends in the portfolio when establishing the general component of ~~our~~the allowance for loan losses.
N~~on-Performing Assets~~ – Non-performing assets consist of 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 September 30, 2017 and December 31, 2016.

September
30,
2017

December
31,
2016

(dollars in thousands)

Loans past due 90 days or more still on accrual
$ — $ —
Loans on nonaccrual status
5,769 9,216
Total non-performing loans
5,769 9,216
Real estate acquired through foreclosure
6,330 6,821
Other repossessed assets
— —
Total non-performing assets
$ 12,099 $ 16,037

Non-performing loans to total loans
0.85
%
1.44
%
Non-performing assets to total assets
1.26
%
1.70
%
Allowance for non-performing loans
$ 288 $ 241
Allowance for non-performing loans to non-performing loans
4.99
%
2.62
%
~~Nonperforming loans at~~ September 30, 2017, were $5.8 million, or 0.85% of total loans, compared with $9.2 million, or 1.44% of total loans at December 31, 2016, and $10.1 million, or 1.62% of total loans at September 30, 2016. Net loan recoveries for the first nine months of 2017 totaled $10,000 compared to net charge-offs of $652,000 for the first nine months of 2016.

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 ~~allocates~~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.

~~We do~~The Bank does not have a formal loan modification program. If a borrower is unable to make ~~contractual~~contractual payments, ~~we review~~management reviews the particular circumstances of that borrower’s situation and determine whether or not to negotiate a revised payment stream. ~~Our~~The goal when restructuring a credit is to afford the borrower a reasonable period of time to remedy the issue causing cash flow constraints ~~within their business~~ so that ~~they~~the credit may return to performing status over time.
~~Our loan modifications have taken the form of a reduction in interest rate and/or curtailment of scheduled principal payments for a short-term per~~iod, usually three to six months, but in some cases until maturity of the loan. In some circumstances we may restructure real estate secured loans in a bifurcated fashion whereby we have a fully amortizing “A” loan at a market interest rate and an interest-only “B” loan at a reduced interest rate. The majority of our restructured loans are collateral secured loans. If a borrower fails to perform under the modified terms, ~~we place~~ the loan(s) are placed on nonaccrual status and ~~initiate~~ collection ~~actions.~~

~~We consider~~ any loan that is restructured for a borrower experiencing financial difficulties due to a borrower’s potential inability to pay in accordance with contractual terms of the loan to be a troubled debt restructuring. Specifically, we consider a concession involving a modification of the loan terms, such as (i) a reduction of the stated interest rate, (ii) a reduction or deferral of principal, or (iii) a reduction or deferral of accrued interest at a stated interest rate lower than the current market rate for new debt with similar risk all to be troubled debt restructurings. When a modification of terms is made for a competitive reason, we do not consider it to be a troubled debt restructuring. A primary example of a competitive modification would be an interest rate reduction for a performing customer’s loan to a market rate as the result of a market decline in rates.
~~Management periodically reviews renewals and modifications of previously identified TDRs for which there was no principal forgiveness, to consider~~ if it is appropriate to remove the TDR classification. If the borrower is no longer experiencing financial difficulty and the renewal/modification did not contain a concessionary interest rate or other concessionary terms, management considers the potential removal of the TDR classification. If deemed appropriate based upon current underwriting, the TDR classification is removed as the borrower has complied with the terms of the loan at the date of renewal/modification and there was a reasonable expectation that the borrower will continue to comply with the terms of the loan after the date of the renewal/modification. 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, and management expects the borrower will continue to perform under the re-modified terms based on the borrower’s past history of performance.
~~If the borrower fails to perform~~, we place the loan on nonaccrual status and seek to liquidate the underlying collateral. Our nonaccrual policy for restructured loans is identical to our nonaccrual policy for all loans. Our 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 assetsactions 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.initiated.

At ~~September~~June 30, ~~2017, we~~2021 and December 31, 2020, the Bank had ~~six~~four restructured loans totaling ~~$3.2 million~~$459,000 and $480,000, respectively, with borrowers who experienced deterioration in financial ~~condition compared with nine loans totaling $8.7 million at December 31, 2016.~~condition. In general, these loans were granted interest rate reductions to provide cash flow relief to borrowers experiencing cash flow difficulties. ~~Two of these~~The Bank had no restructured loans ~~totaling approximately $1.9 million~~that had been granted principal payment deferrals until ~~maturity.~~maturity at June 30, 2021 or December 31, 2020. There were no concessions made to forgive principal relative to these loans, although wepartial charge-offs have been recorded ~~partial charge-offs~~ for certain restructured loans. In general, these loans are secured by first liens on 1-4 residential properties or commercial real estate ~~properties, or farmland. Restructured loans also include $467,000 of commercial loans.~~properties. At ~~September~~June 30, ~~2017, $1.2 million of our restructured loans were accruing~~2021 and ~~$1.9 million were on nonaccrual compared with $5.4 million and $3.3 million, respectively, at~~ December 31, ~~2016.~~2020, 85% and 100%, respectively, of the TDRs were performing according to their modified terms.

There were no ~~new TDRs~~modifications granted during 2021 and one modification granted during the ~~first~~ ~~nine months of 2017 or 2016. During the nine months ended September 30, 2017, TDRs were reduced as a result of $1.5 million in payments. In addition, the TDR classification was removed in the first~~third quarter of ~~2017 from two~~2020 that resulted in loans ~~that met the requirements~~being identified as ~~discussed above. These loans totaled $4.1 million at December 31, 2016. These loans are no longer evaluated individually for impairment.~~TDRs. See “Note 3 -– Loans,” ~~of the notes~~ to the financial statements for additional disclosure related to troubled debt restructuring.

COVID-19 Short-term Loan Concessions - The Bank has elected to account for eligible loan modifications under Section 4013 of the Coronavirus Aid Relief and Economic Security Act (“CARES Act”). To be an eligible loan under Section 4013 of the CARES Act, a loan modification must be (1) related to the COVID-19 pandemic; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020 and the earlier of (A) 60 days after the date of termination of the national emergency declared by the President on March 13, 2020 concerning the COVID-19 outbreak (the “national emergency”) or (B) December 31, 2020. On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (“Economic Aid Act”) extended eligible loan modifications under Section 4013 of the CARES Act from December 31, 2020 to January 1, 2022. Eligible loan modifications are not required to be classified as TDRs and will not be reported as past due provided that they are performing in accordance with the modified terms. Interest income will continue to be recognized in accordance with GAAP unless the loan is placed on nonaccrual status.
Short-term loan modifications declined to $4.7 million as of June 30, 2021, as compared to $15.3 million at December 31, 2020. Included in the $4.7 million of short-term loan modifications is one commercial real estate loan secured by a retail entertainment facility totaling $4.4 million, which remains subject to and is performing in accordance with, a short-term COVID-19 modification. The loan is graded substandard, has been evaluated under ASC-310-10, and allocated a specific reserve of $2.2 million as of June 30, 2021 and December 31, 2020.
41

Table of Contents
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 ~~TDRs,~~ non-performing ~~loans, real estate acquired through foreclosure,~~ assets as of June 30, 2021 and ~~other repossessed assets.~~December 31, 2020:

September
30,
2017

December
31,
2016

(dollars in thousands)

Total non-performing loans
$ 5,769 $ 9,216
TDRs on accrual
1,226 5,350
Total non-performing loans and TDRs on accrual
$ 6,995 $ 14,566
Real estate acquired through foreclosure
6,330 6,821
Other repossessed assets
— —
Total non-performing assets and TDRs on accrual
$ 13,325 $ 21,387

Total non-performing loans and TDRs on accrual to total loans
1.02
%
2.28
%
Total non-performing assets and TDRs on accrual to total assets
1.38
%
2.26
%

June
30,
2021

December
31,
2020

(dollars in thousands)

Loans on nonaccrual status
$ 1,530 $ 1,676
Troubled debt restructurings on accrual
390 480
Past due 90 days or more still on accrual
— —
Total non-performing loans
1,920 2,156
Real estate acquired through foreclosure
— 1,765
Other repossessed assets
— —
Total non-performing assets
$ 1,920 $ 3,921

Non-performing loans to total loans
0.20
%
0.22
%
Non-performing assets to total assets
0.14
%
0.30
%
Allowance for non-performing loans
$ 17 $ 22
Allowance for non-performing loans to non-performing loans
0.89
%
1.02
%

Nonperforming loans at June 30, 2021, were $1.9 million, or 0.20% of total loans, compared with $2.2 million, or 0.22% of total loans at December 31, 2020, and $1.9 million, or 0.19% of total loans at June 30, 2020.
Provision and Allowance for Loan Losses–The Bank maintains an allowance for loan losses believed to be sufficient to absorb probable incurred losses existing in the loan portfolio. Management evaluates the adequacy of the allowance using, among other things, historical loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of the underlying collateral and current economic conditions and trends. The allowance may be allocated for specific loans or loan categories, but the entire allowance is available for any loan. The allowance consists of specific and general components. The specific component relates to loans that are individually evaluated and measured for impairment. The general component is based on historical loss experience adjusted for qualitative environmental factors. Management develops allowance estimates based on actual loss experience adjusted for current economic conditions and trends. Allowance estimates are a prudent measurement of the risk in the loan portfolio applied to individual loans based on loan type. If the mix and amount of future charge-off percentages differ significantly from the assumptions used by management in making its determination, management may be required to materially increase its allowance for loan losses and provision for loan losses, which could adversely affect results.
No provision for loan losses and a $350,000 provision for loan losses was recorded in the second quarter and first six months of 2021, respectively, compared to $1.1 million and $2.2 million provision for loan losses in the second quarter and the first six months of 2020, respectively. The 2021 loan loss provision was attributable to the net loan charge-offs and trends within the portfolio during the period, while the provisions for 2020 were largely attributable to the uncertainty surrounding the COVID-19 pandemic related economic and business disruptions. At June 30, 2021, the allowance for loan loss remained elevated in relation to recent historical levels due to the continued uncertainty surrounding the COVID-19 pandemic despite declining loan balances and improved credit trends.
42

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

Three Months Ended
June 30,

Six Months Ended
June 30,

December
31,

2021

2020

2021

2020
2020

(in thousands)

Balance at beginning of period
$ 12,755 $ 9,150 $ 12,443 $ 8,376 $ 8,376

Loans charged-off:

Real estate
141 35 141 139 231
Commercial
— 3 19 32 32
Consumer
32 152 51 313 493
Agriculture
5 3 44 44 46
Other
— — — — —
Total charge-offs
178 193 255 528 802

Recoveries

Real estate
32 155 48 196 352
Commercial
7 6 10 11 29
Consumer
15 6 34 10 45
Agriculture
6 1 7 9 30
Other
— 3 — 4 13
Total recoveries
60 171 99 230 469
Net charge-offs (recoveries)
118 22 156 298 333
Provision for loan losses
— 1,100 350 2,150 4,400
Balance at end of period
$ 12,637 $ 10,228 $ 12,637 $ 10,228 $ 12,443

Allowance for loan losses to period-end loans
1.33
%
1.05
%
1.33
%
1.05
%
1.29
%
Net charge-offs (recoveries) to average loans
0.05
%
0.01
%
0.03
%
0.06
%
0.03
%
Allowance for loan losses to non-performing loans
658.18
%
546.37
%
658.18
%
546.37
%
577.13
%
The allowance for loan losses ~~is based on management’s continuing review and evaluation of individual~~to total 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 re~~sult 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. Prior towas 1.33% at June 30, 2017, the look-back period for historical losses was 12 quarters, weighted 40% for the most recent eight quarters and 20% for previous four-quarter period. Effective June 30, 2017, the Company extended the look-back period2021, compared to 16 quarters on a prospective basis, weighted 40% to the most recent four quarters, and then declining one-tenth for each of the remaining annual periods. Management determined the four-year look-back period was appropriate as the four-year period more appropriately correlates to the period in which the current portfolio was underwritten and originated. The specific and general allocations plus consideration of qualitative factors represent management’s estimate of probable losses contained in the loan portfolio at the evaluation date. Although the allowance for loan losses is comprised of specific and general allocations, the entire allowance is available to absorb any credit losses.
~~An analysis of changes in the allowance for loan losses and selected ratios for the three~~ ~~and nine-month periods ended September 30, 2017 and 2016, and for the year ended December 31, 2016 follows:~~

Three Months Ended
September 30,

Nine Months Ended
September 30,

Year Ended
December 31,

2017

2016

2017

2016
2016

(in thousands)

Balance at beginning of period
$ 8,885 $ 10,104 $ 8,967 $ 12,041 $ 12,041

Loans charged-off:

Real estate
57 363 570 1,658 2,157
Commercial
5 15 5 276 276
Consumer
5 21 30 56 178
Agriculture
— 5 95 13 18
Other
— 1 — 79 —
Total charge-offs
67 405 700 2,082 2,629

Recoveries

Real estate
112 381 561 894 1,189
Commercial
3 102 44 169 334
Consumer
25 23 69 216 368
Agriculture
16 1 25 86 114
Other
3 33 11 65 —
Total recoveries
159 540 710 1,430 2,005
Net charge-offs (recoveries)
(92
)
(135
)
(10
)
652 624
Provision (negative provision) for loan losses
— (750
)
— (1,900
)
(2,450
)
Balance at end of period
$ 8,977 $ 9,489 $ 8,977 $ 9,489 $ 8,967

Allowance for loan losses to period-end loans
1.32
%
1.53
%
1.32
%
1.53
%
1.40
%
Net charge-offs (recoveries) to average loans
(0.05

)%
(0.09 )% 0.00
%
0.14
%
0.10
%
Allowance for loan losses to non-performing loans
155.61
%
93.96
%
155.61
%
93.96
%
97.30
%

Allowance for loan losses for loans individually evaluated for impairment
$ 425 $ 339 $ 425 $ 339 $ 399
Loans individually evaluated for impairment
7,509 16,214 7,509 16,214 15,131
Allowance for loan losses to loans individually evaluated for impairment
5.66
%
2.09
%
5.66
%
2.09
%
2.64
%

Allowance for loan losses for loans collectively evaluated for impairment
$ 8,552 $ 9,150 $ 8,552 $ 9,150 $ 8,568
Loans collectively evaluated for impairment
675,002 605,483 675,002 605,483 624,105
Allowance for loan losses to loans collectively evaluated for impairment
1.27
%
1.51
%
1.27
%
1.51
%
1.37
%
~~Our loan loss reserve, as a percentage of total loans at~~ ~~September 30, 2017, decreased to 1.32% from 1.40%~~1.29% at December 31, ~~2016~~2020, and ~~from 1.53%~~1.05% at ~~September~~June 30, ~~2016. The change in our~~2020. Net loan ~~loss reserve as a percentage of total loans between periods is attributable to growth~~charge-offs in the ~~portfolio, historical loss experience, qualitative factors, fewer loans migrating downward~~first six months of 2021 totaled $156,000, compared to net loan charge-offs of $298,000 in ~~risk grade classifications and improved charge-off levels. Our~~the first six months of 2020. The allowance for loan losses to non-performing loans was ~~155.61%~~658.18% at ~~September~~June 30, ~~2017,~~2021, compared with ~~97.30%~~577.13% at December 31, ~~2016,~~2020, and ~~93.96%~~546.37% at ~~September~~June 30, ~~2016. Net recoveries for~~2020.
Investment Securities–The securities portfolio serves as a source of liquidity and earnings and contributes to the ~~first nine months~~management of ~~2017 totaled $10,000~~interest rate risk. Investments are made in various types of liquid assets, including U.S. Treasury obligations and securities of various federal agencies, obligations of states and political subdivisions, corporate bonds, and collateralized loan obligations. The investment portfolio increased by $25.0 million, or 12.3%, to $228.9 million at June 30, 2021, compared ~~to net charge-offs of $652,000 for the first nine months of 2016.~~   with $203.9 million at December 31, 2020.

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Table of Contents

The following table sets forth the ~~net charge-offs (recoveries) for the periods indicated:~~

Nine Months
Ended
September 30,
2017

Year Ended
December 31,
2016

Year Ended
December 31,
2015

(in thousands)

Commercial
$ (39
)
$ (58
)
$ (27
)
Commercial Real Estate
(335
)
(339
)
1,225
Residential Real Estate
344 1,307 1,487
Consumer
(39
)
(200
)
37
Agriculture
70 (96
)
110
Other
(11
)
10 (9
)
Total net charge-offs (recoveries)
$ (10
)
$ 624 $ 2,823
~~The majority of our nonperforming loans are secured by real estate collateral~~, and the underlying collateral coverage for nonperforming loans supports the likelihood of collection of our principal. We have assessed these loans for collectability and considered, among other things, the borrower’s ability to repay, thecarrying value of the ~~underlying collateral,~~securities portfolio at the dates indicated (in thousands):

June 30, 2021
December 31, 2020

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
Value

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
Value

Available for sale

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

Amortized
Cost

Gross
Unrecognized
Gains

Gross
Unrecognized
Losses

Fair
Value

Amortized
Cost

Gross
Unrecognized
Gains

Gross
Unrecognized
Losses

Fair
Value

Held to maturity

State and municipal
$ 46,717 $ 217 $ (249
)
$ 46,685 $ — $ — $ — $ —
Total held to maturity
$ 46,717 $ 217 $ (249
)
$ 46,685 $ — $ — $ — $ —
During March 2021, to better manage interest rate risk, management transferred from AFS to HTM all the municipal securities in the portfolio having a book value of approximately $34.7 million, a market value of approximately $35.8 million, and a net unrealized gain of approximately $1.1 million. The transfer occurred at fair value. The related net unrealized gain included in other ~~market conditions~~comprehensive income remained in other comprehensive income and is being amortized from other comprehensive income with an offsetting entry to ~~ensure~~interest income as a yield adjustment through earnings over the ~~allowance for loan losses is adequate~~remaining term of the securities. No gain or loss was recorded at the time of transfer. This transfer was completed after careful consideration of the intent and ability to ~~absorb probable incurred losses. Our allowance for non-performing loans~~hold these securities to non-performing loans was 4.99% at September 30, 2017 compared with 2.62% at December 31, 2016, and 2.88% at September 30, 2016. The increase in this ratio from December 31, 2016 to September 30, 2017 was primarily attributable to an allocated allowance for an individually evaluated loan.maturity.

The ~~following table presents~~Bank owns Collateralized Loan Obligations (CLOs), which are debt securities secured by professionally managed portfolios of senior-secured loans to corporations. CLOs are typically $300 million to $1 billion in size, contain one hundred or more loans and have five to six credit tranches ranging from AAA, AA, A, BBB, BB, B and equity tranche. Interest and principal are paid first to the ~~unpaid principal balance, recorded investment~~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 ~~allocated allowance related to loans individually evaluated for impairment~~volatility in the ~~commercial real estate and residential real estate portfolios as~~CLO market may cause the value of ~~September 30, 2017 and December 31, 2016.~~these investments to decline.

September 30, 2017

December 31, 2016

Commercial
Real Estate

Residential
Real Estate

Commercial
Real Estate

Residential
Real Estate

(in thousands)

Unpaid principal balance
$ 4,849 $ 5,041 $ 10,985 $ 10,439
Prior charge-offs
(2,100
)
(949
)
(5,131
)
(1,818
)

Recorded investment
2,749 4,092 5,854 8,621
Allocated allowance
(26
)
(386
)
(35
)
(350
)

Recorded investment, less allocated allowance
$ 2,723 $ 3,706 $ 5,819 $ 8,271

Recorded investment, less allocated allowance/ Unpaid principal balance
56.16
%
73.52
%
52.97
%
79.23
%
The market value of CLOs may be affected by, among other things, changes in composition of the underlying loans, changes in the cash flows from the underlying loans, defaults and recoveries on the underlying loans, capital gains and losses on the underlying loans, prepayments on the underlying loans, and other conditions or economic factors. At June 30, 2021, $27.9 million, $9.5 million, and $2.5 million of the Bank’s CLOs were AA, A, and BBB rated, respectively. None of the CLOs were subject to ratings downgrade during the six months ended June 30, 2021.

~~Based on prior~~ ~~charge-offs, our current recorded investment~~The corporate bond portfolio consists of 13 subordinated debt securities and one senior debt security of U.S. banks and bank holding companies with maturities ranging from 2024 to 2037. The securities are either fixed for five years converting to floating at an index over LIBOR, or SOFR, or floating at an index over LIBOR, or SOFR, from inception. Management regularly monitors the financial condition of these corporate issuers by reviewing their regulatory and public filings.
The Bank has the intent and ability to hold its CLO and corporate debt securities to maturity and, at this juncture, has determined the value decline is temporary in the commercial real estate and residential real estate segments is significantly below the unpaid principal balance for these loans. The recorded investment net of the allocated allowance was 56.16% and 73.52% of the unpaid principal balance in the commercial real estate and residential real estate segments of the portfolio, respectively, at September 30, 2017.nature.

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Table of Contents

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

September 30, 2017

December 31, 2016

Loans

Allowance

% to
Total

Loans

Allowance

% to
Total

Commercial
$ 107,008 $ 900 0.84
%
$ 97,166 $ 462 0.48
%
Commercial real estate
288,533 4,412 1.53 251,529 4,859 1.93
Residential real estate
224,805 2,830 1.26 227,668 3,076 1.35
Consumer
8,474 42 0.50 9,817 8 0.08
Agriculture
45,615 366 0.80 37,448 161 0.43
Other
567 2 0.35 477 2 0.42
Total
$ 675,002 $ 8,552 1.27
%
$ 624,105 $ 8,568 1.37
%
~~Our allowance for loan losses for loans collectively~~ ~~evaluated for impairment declined to 1.27%~~Foreclosed Properties – There were no foreclosed properties at ~~September~~June 30, 2017 from 1.51% at September 30, 2016 and 1.37% at December 31, 2016. This decline was driven primarily by declining historical loss trends and an improving loan risk category classification mix and volume which are key factors for estimating general reserves. Other factors include the consideration of growth, composition and diversification of our loan portfolio, current delinquency levels, the results of recent regulatory communications and general economic conditions.
~~Provision for Loan Losses~~–No provision for loan losses was recorded for the first nine months of 2017, compared to a negative provision for loan losses of $1.9 million for the first nine months of 2016. No provision expense was recorded for the first nine months of 2017 due to declining historical loss rates, improvements in asset quality, growth in the portfolio, and management’s assessment of risk within the portfolio. Since December 31, 2016, the pass category increased approximately $46.8 million, the watch category increased approximately $4.7 million, the special mention category increased approximately $101,000, and the substandard category declined approximately $8.3 million. Net recoveries were $10,000 for the nine months ended September 30, 2017,2021, compared with net charge-offs of $652,000 for the nine months ended September 30, 2016. We consider the size and volume of our portfolio as well as the credit quality of our loan portfolio based upon risk category classification when determining the loan loss provision for each period and the allowance for loan losses at period end.
~~Foreclosed Properties~~ ~~– Foreclosed properties at September 30, 2017 were $6.3 million compared with $6.8~~$1.8 million at December 31, ~~2016.~~2020. See ~~“Note 4 - Other~~Note 5, “Other Real Estate Owned,” ~~of the notes~~ to the financial statements. ~~During the first nine months of 2017, we acquired $270,000 of OREO properties, and sold properties totaling approximately $738,000. We value~~Management values foreclosed properties at fair value less estimated costs to sell when acquired and ~~expect~~expects to liquidate these properties to recover ~~our~~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 forfor loan losses. ~~Subsequent reductions in fair value~~When foreclosed properties are ~~recorded as non-interest expense. When OREO is~~ acquired, ~~we obtain~~management obtains a new appraisal ofor has staff from the ~~subject property or have staff in our~~Bank’s special assets group evaluate the latest in-file ~~appraisal. We~~appraisal in connection with the transfer to OREO. Management typically ~~obtain~~obtains updated appraisals within five quarters of the anniversary date of ownership unless a sale is imminent. Subsequent reductions in fair value are recorded as non-interest expense when a new appraisal indicates a decline in value or in cases where a listing price is lowered below the appraisal amount.

OREO sales totaled $2.0 million for the second quarter and first six months of 2021, compared to $1.6 million for the second quarter and first six months ended June 30, 2020. Net gain ~~(loss)~~ on sales ~~write-downs,~~of OREO totaled $191,000 for the second quarter and ~~operating~~six months ended June 30, 2021, compared to no gain on sales of OREO for the second quarter and six months ended June 30, 2020. Operating expenses for OREO totaled ~~$92,000~~$2,000 and $13,000 for the ~~nine~~second quarter and six months ended ~~September~~June 30, ~~2017,~~2021, respectively, compared to ~~net~~operating expenses of ~~$1.3 million in~~$22,000 and $38,000 for the ~~same period of 2016. During the nine~~second quarter and six months ~~ended September~~ending June 30, ~~2017,~~2020, respectively. There were no fair value write-downs ~~of $98,000 were~~ recorded ~~to reflect declines in fair value driven by reductions in listing prices and new appraisals compared with $970,000 for~~during the ~~nine~~six months ended ~~September~~June 30, ~~2016.~~2021 or the six months ended June 30, 2020.
Liabilities
–~~Liabilities~~ – Total liabilities at ~~September~~June 30, ~~2017~~2021 were ~~$922.9 million~~$1.21 billion compared with ~~$912.4 million~~$1.20 billion at December 31, ~~2016,~~2020, an increase of ~~$10.5~~$18.7 million, or ~~1.1%~~1.6%. This increase was primarily attributable to an increase in ~~total~~ deposits of $16.9 million and the issuance of $10.0 million in senior debt, offset by a decrease in FHLB advances of $5.6 million and a decrease in accrued interest payable and other liabilities of $10.2 million due to payment of a litigation settlement.$19.5 million.

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

For the Nine Months

For the Year

Ended September 30,

Ended December 31,

2017

2016

Average

Average

Average

Average

Balance

Rate

Balance

Rate

(dollars in thousands)

Demand
$ 125,932 $ 119,736
Interest checking
102,744 0.13
%
96,294 0.13
%
Money market
141,777 0.55 136,423 0.58
Savings
35,650 0.17 34,257 0.18
Certificates of deposit
458,732 0.92 466,007 0.88
Total deposits
$ 864,835 0.60
%
$ 852,717 0.60
%
~~The following table sets forth the average daily balances and weighted average rates paid for our certificates of deposit for the periods indicated:~~

For the Nine Months

For the Year

Ended September 30,

Ended December 31,

2017

2016

Average

Average

Average

Average

Balance

Rate

Balance

Rate

(dollars in thousands)

Less than $250,000
$ 425,828 0.91
%
$ 437,955 0.88
%
$250,000 or more
32,904 0.99
%
28,052 0.97
%
Total
$ 458,732 0.92
%
$ 466,007 0.88
%

For the Six Months

For the Year

Ended June 30,

Ended December 31,

2021

2020

Average

Average

Average

Average

Balance

Rate

Balance

Rate

(dollars in thousands)

Demand
$ 262,849 $ 215,145
Interest checking
208,246 0.31
%
169,808 0.32
%
Money market
181,282 0.35 166,788 0.55
Savings
152,093 0.31 111,559 0.48
Certificates of deposit
340,870 0.63 436,083 1.33
Total deposits
$ 1,145,340 0.34
%
$ 1,099,383 0.71
%

The following table shows at ~~September~~June 30, ~~2017~~2021 the amount of ~~our~~ time deposits of $250,000 or more by time remaining until maturity (in thousands):

Maturity Period
Maturity Period

Maturity Period

Three months or less
$ 5,227 $ 7,811
Three months through six months
5,264 7,235
Six months through twelve months
3,026 10,043
Over twelve months
19,567 16,254
Total
$ 33,084 $ 41,343

Liquidity

~~Liquidity risk arises from the possibility~~ ~~we 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 Company meets the cash flow requirements of depositors, borrowers, and ~~borrowers,~~creditors, as well as ~~our~~ operating cash needs, taking into account all on- and off-balance sheet funding demands. Liquidity risk management also involves ensuring that ~~we meet our~~ cash flow needs are met at a reasonable cost. ~~We maintain~~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. ~~Our~~The Asset Liability Committee regularly monitors and reviews ~~our~~the Company’s liquidity position.

Funds are available to the Bank from ~~several~~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.

WeThe Bank also ~~borrow~~borrows from the FHLB to supplement ~~our~~ funding requirements. At ~~September~~June 30, ~~2017, we~~2021, the Bank had an unused borrowing capacity with the FHLB of ~~$74.8~~$88.6 million. Advances are collateralized by first mortgage residential loans as well as loans originated under the SBA Payment Protection Plan loans and borrowing capacity is based on the underlying book value of eligible pledged loans.

45
Table of Contents
We
The Bank also ~~have~~has available on an un~~secured~~unsecured basis federal funds borrowing lines from a correspondent bank totaling $5.0 million. Management believes ~~our~~the sources of liquidity are adequate to meet expected cash needs for the foreseeable future. ~~However,~~Historically, the ~~availability of these lines could be affected by our financial position.~~

~~Historically, we have~~Bank has also utilized brokered and wholesale deposits to supplement ~~our~~its funding strategy. At ~~September~~June 30, ~~2017, we~~2021, the Bank had no brokered deposits.

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

~~Stockholders’~~Stockholders’ equity increased ~~$7.3~~$7.9 million to ~~$40.1~~$124.0 million at ~~September~~June 30, ~~2017,~~2021, compared with ~~$32.7~~$116.0 million at December 31, ~~2016~~2020 primarily due to current year net income of ~~$5.1 million and an increase in the fair value of our available for sale securities portfolio of $1.9~~$7.1 million.

The following table shows the ratios of Tier 1 capital, common equity Tier 1 capital, and total capital to risk-adjusted assets and the leverage ratios for the Bank ~~at the dates indicated. Regulatory minimums and well-capitalized minimums are prompt corrective action standards.~~as of June 30, 2021:

Regulatory Minimums

Well-Capitalized
Minimums

September 30, 2017

December 31, 2016

Regulatory
Minimums

Well-Capitalized
Minimums

Basel III Plus Conservation
Buffer

Limestone Bank

Tier 1 Capital
6.0 % 8.0 % 9.66 % 8.28 % 6.0 % 8.0 % 7.0 % 13.0 %
Common equity Tier 1 capital
4.5 6.5 9.66 8.28 4.5 6.5 8.5 13.0
Total risk-based capital
8.0 10.0 11.10 9.88 8.0 10.0 10.5 14.1
Tier 1 leverage ratio
4.0 5.0 7.73 6.24 4.0 5.0 — 10.6

Failure to meet minimum capital requirements could result in ~~additional~~ discretionary actions by regulators that, if taken, could have a materially adverse effect on ~~our~~the Bank or Company’s 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 establishrequire a “capital conservation buffer” of 2.5%~~, to be phased in over three years,~~ above the regulatory minimum risk-based capital ratios. Once the capital conservation buffer is fully phased in, the minimum ratios are a common equity Tier 1 risk-based capital ratio of 7.0%, a Tier 1 risk-based capital ratio of 8.5%, and a total capital to total risk-weighted assets (“total risk-based capital ratio”) of 10.5%. The phase-in of the capital conservation buffer requirement began in January 2016 at 0.625% of risk-weighted assets and increases to 1.25% in 2017, 1.875% in 2018, and 2.5% in 2019. An institution is subject to limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses if capital levels fall below minimum Basel III levels plus the buffer amounts. These limitations establish a maximum percentage of eligible retained income that could be utilized for such ~~actions.~~actions without prior regulatory approval.

46
Table of Contents

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Given an instantaneous 100 basis point increase in interest rates, ~~sustained for one year, our~~the base net interest income would increase by an estimated ~~0.11%~~1.1% at ~~September~~June 30, ~~2017,~~2021, compared with ~~a decrease~~an increase of ~~2.5%~~0.8% at December 31, ~~2016, and is within the risk tolerance parameters of our risk management policy.~~2020. Given a 200 basis point increase in interest rates, ~~sustained for one year,~~ base net interest income would increase by an estimated ~~0.10%~~2.8% at ~~September~~June 30, ~~2017,~~2021, compared with ~~a decrease~~an increase of ~~5.1%~~2.2% at December 31, ~~2016, and is within the risk tolerance parameters of our risk management policy.~~2020.

The following table indicates the estimated impact on net interest income under various interest rate scenarios for the twelve months following ~~September~~ June 30, ~~2017,~~2021, as calculated using the static shock model approach:

Change in Future
Net Interest Income

Change in Future
Net Interest Income

Dollar
Change

Percentage
Change

Dollar Change

Percentage
Change

(dollars in thousands)

(dollars in thousands)

+ 200 basis points
$ 30 0.10
%
$ 1,156 2.83
%
+ 100 basis points
35 0.11 462 1.13
- 100 basis points
(1,290
)
(4.16
)
- 200 basis points
(2,184
)
(7.03
)
- 100 basis points
(835 ) (2.04 )
- 200 basis points
(1,718
)
(4.20
)

Item 4. Controls and Procedures

As of the end of the quarterly period covered by this report, an evaluation was carried out under the supervision and with the participation of the ~~Company~~’sCompany’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~~’sCompany’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.

47
Table of Contents

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

W~~e are subject to claims and lawsuits that arise primarily in~~In the ~~ordinary~~normal course of ~~business.  Litigation is subject~~business, the Company and its subsidiaries have been named, from time to ~~inherent uncertainties and unfavorable outcomes could occur. See Footnote 13, “Off Balance Sheet Risks, Commitments, and Contingent Liabilities”~~time, as defendants in various legal actions. Certain of the ~~Notes to our~~actual or threatened legal actions may include claims for substantial compensatory and/or punitive damages or claims for indeterminate amount of damages. After discussions with legal counsel, management does not believe these legal actions or proceedings will have a material adverse effect on the consolidated financial ~~statements for additional detail regarding our involvement in legal proceedings.~~position or results of operation of the Company.

Item 1A. Risk Factors

We ~~refer you~~Refer to the detailed cautionary statements and discussion of risks that affect ~~our~~the Company and its business in “Item 1A – Risk Factors” of ~~our~~the Annual Report on Form 10-K, for the year ended December 31, ~~2016.~~2020. There have been no material changes from the risk factors previously discussed in ~~those reports.~~
that report.

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

~~Not applicable.~~The following chart depicts information regarding the shares of restricted stock that were withheld to satisfy required tax withholdings upon vesting of restricted stock awarded under the Company's equity compensation plan.
Period
Total Shares Purchased
(Withheld)
Average Price Paid
(Credited) Per Share
June 2021

2,824
$13.66

Item 3. Default Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not ~~applicable~~applicable.
48
Table of Contents

Item 6. Exhibits

(a)
Exhibits
~~(a)~~           ~~Exhibits~~
The following exhibits are filed or furnished as part of this report:

Exhibit Number
Description of Exhibit
3.1
Articles of Incorporation of the Company, restated to reflect amendments.
3.2
Amended and Restated Bylaws of Limestone Bancorp, Inc. dated June 18, 2018. Exhibit 3.2 to Form 8-K filed June 18, 2018 is hereby incorporated by reference.
4.1
Tax Benefits Preservation Plan, dated as of June 25, 2015, between the Company and American Stock Transfer Company, as Rights Agent. Exhibit 4.1 to Form 8-K filed June 29, 2015 is incorporated by reference.
4.2
Amendment No. 1 to the Tax Benefits Preservation Plan, dated August 5, 2015. Exhibit 4.2 to the Quarterly Report on Form 10-Q filed August 5, 2015 is incorporated by reference.
4.3
Amendment No. 2 to the Tax Benefits Preservation Plan dated May 23, 2018. Exhibit 4 to the Form 8-K filed May 23, 2018 is incorporated by reference.
4.4
Amendment No. 3 to the Limestone Bancorp, Inc. Tax Benefits Preservation Plan, dated November 25, 2019. Exhibit 4.4 to the Form 8-K filed November 27, 2019 is incorporated herein by reference.
4.5
Amendment No. 4 to the Limestone Bancorp, Inc. Tax Benefits Preservation Plan, dated May 19, 2021. Exhibit 4 to the Form 8-K filed May 19, 2021 is incorporated by reference.
31.1
Certification of Principal Executive Officer, pursuant to Rule 13a - 14(a).

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

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

32.2
~~Certification~~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~~’sCompany’s Quarterly Report on Form 10Q for the quarter ended ~~September~~June 30, ~~2017,~~2021, formatted in inline XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income (Loss), (iv) Consolidated Statement of Changes in Stockholders’ Equity, (v) Consolidated Statements of Cash Flows, (vi) Notes to Consolidated Financial Statements.
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
The Company has other long-term debt agreements that meet the exclusion set forth in Section 601 (b)(4)(iii)(A) of Regulation S-K. The Company hereby agrees to furnish a copy of such agreements to the Securities and Exchange Commission upon request.

49
Table of Contents

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.

~~PORTER~~LIMESTONE BANCORP, INC.

(Registrant)

~~November 2, 2017~~July 30, 2021
By:
/s/ John T. Taylor

John T. Taylor

Chief Executive Officer

~~November 2, 2017~~July 30, 2021
By:
/s/ Phillip W. Barnhouse
Phillip W. Barnhouse

Chief Financial Officer

52
50

Kentucky
~~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)

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ~~☐ (Do not check if a smaller reporting company)~~ ☒	Smaller reporting company ☒
	Emerging growth company ☐

		Page
PART I –	FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS	3
ITEM 2.	~~MANAGEMENT~~’SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF ~~OPERATIONS~~OPERATIONS	3432
ITEM 3.	QUANTITATIVE AND QUALITATIVE ~~DISCLOSURES~~DISCLOSURES ABOUT MARKET RISK	5047
ITEM 4.	CONTROLS AND PROCEDURES	5047

PART II –	OTHER INFORMATION	48
ITEM 1.	LEGAL PROCEEDINGS	~~LEGAL PROCEEDINGS~~	5148
ITEM 1A.	RISK FACTORS	51 48
ITEM 2.	~~UNREGISTERED~~UNREGISTERED SALES ON EQUITY SECURITIES AND USE OF PROCEEDS	51 48
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	51 48
ITEM 4.	MINE SAFETY DISCLOSURES	51 48
ITEM 5.	OTHER INFORMATION	51 48
ITEM 6.	EXHIBITS	51 49

	September 30, 2017			December 31, 2016
Assets
Cash and due from banks	$	9,557		$	9,449
Interest bearing deposits in banks		37,812			56,867
Cash and cash equivalents		47,369			66,316
Securities available for sale		149,797			152,790
Securities held to maturity (fair value of $43,397 and $43,072, respectively)		41,424			41,818
Loans, net of allowance of $8,977 and $8,967, respectively		673,534			630,269
Premises and equipment, net		16,975			17,848
Other real estate owned		6,330			6,821
Federal Home Loan Bank stock		7,323			7,323
Bank owned life insurance		15,131			14,838
Accrued interest receivable and other assets		5,082			7,154
Total assets	$	962,965		$	945,177

Liabilities and Stockholders’ Equity
Deposits
Non-interest bearing	$	133,896		$	124,395
Interest bearing		732,951			725,530
Total deposits		866,847			849,925
Federal Home Loan Bank advances		16,847			22,458
Accrued interest payable and other liabilities		5,728			15,911
Subordinated capital note		2,475			3,150
Junior subordinated debentures		21,000			21,000
Senior debt		10,000			—
Total liabilities		922,897			912,444
Stockholders’ equity
Preferred stock, no par
Series E - 6,198 issued and outstanding; Liquidation preference of $6.2 million		1,644			1,644
Series F - 4,304 issued and outstanding; Liquidation preference of $4.3 million		1,127			1,127
Total preferred stockholders’ equity		2,771			2,771
Common stock, no par, 86,000,000 shares authorized, 4,668,264 and 4,632,933 voting, and 34,380,437 non-voting shares authorized, 1,591,600 and 1,591,600 non-voting issued and outstanding, respectively		125,729			125,729
Additional paid-in capital		24,368			24,097
Retained deficit		(108,378	)		(113,561	)
Accumulated other comprehensive loss		(4,422	)		(6,303	)
Total common stockholders’ equity		37,297			29,962
Total stockholders' equity		40,068			32,733
Total liabilities and stockholders’ equity	$	962,965		$	945,177

	June 30, 2021			December 31, 2020
Assets
Cash and due from banks	$	9,584		$	10,830
Interest bearing deposits in banks		75,536			56,863
Cash and cash equivalents		85,120			67,693
Securities available for sale		182,154			203,862
Securities held to maturity (fair value of $46,685)		46,717			0
Loans, net of allowance of $12,637 and $12,443, respectively		934,788			949,638
Premises and equipment, net		21,912			18,533
Premises held for sale		980			1,060
Other real estate owned		0			1,765
Federal Home Loan Bank stock		5,449			5,887
Bank owned life insurance		23,738			23,441
Deferred taxes, net		23,452			25,714
Goodwill		6,252			6,252
Other intangible assets, net		2,117			2,244
Accrued interest receivable and other assets		6,231			6,213
Total assets	$	1,338,910		$	1,312,302

Liabilities and Stockholders’ Equity
Deposits
Non-interest bearing	$	267,059		$	243,022
Interest bearing		872,042			876,585
Total deposits		1,139,101			1,119,607
Federal Home Loan Bank advances		20,000			20,623
Accrued interest payable and other liabilities		9,850			10,048
Junior subordinated debentures		21,000			21,000
Subordinated capital notes		25,000			25,000
Total liabilities		1,214,951			1,196,278
Commitments and contingent liabilities (Note 15)		—			—
Stockholders’ equity
Common stock, no par, 39,000,000 shares authorized, 6,602,686 and 6,498,865 voting, and 1,000,000 and 1,000,000 non-voting issued and outstanding, respectively		140,639			140,639
Additional paid-in capital		25,227			25,013
Retained deficit		(39,555	)		(46,678	)
Accumulated other comprehensive loss		(2,352	)		(2,950	)
Total stockholders' equity		123,959			116,024
Total liabilities and stockholders’ equity	$	1,338,910		$	1,312,302

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

Balances, January 1, 2017		4,632,933			1,591,600		6,224,533			6,198		4,304	$	125,729	$	1,644	$	1,127	$	24,097	$	(113,561	)	$	(6,303	)	$	32,733
Issuance of unvested stock		37,865			—		37,865			—		—		—		—		—		—		—			—			—
Forfeited unvested stock		(1,316	)		—		(1,316	)		—		—		—		—		—		—		—			—			—
Reverse stock split rounding shares		(1,218	)		—		(1,218	)		—		—		—		—		—		—		—			—			—
Stock-based compensation expense		—			—		—			—		—		—		—		—		271		—			—			271
Net income		—			—		—			—		—		—		—		—		—		5,183			—			5,183
Net change in accumulated other comprehensive income, net of taxes		—			—		—			—		—		—		—		—		—		—			1,881			1,881
Balances, September 30, 2017		4,668,264			1,591,600		6,259,864			6,198		4,304	$	125,729	$	1,644	$	1,127	$	24,368	$	(108,378	)	$	(4,422	)	$	40,068

	Shares								Amount
	Common			Non-Voting Common		Total Common			Common and Non-Voting Common		Additional Paid-In Capital			Retained Deficit			Accumulated Other Comprehensive Loss			Total

Balances, January 1, 2021		6,498,865			1,000,000		7,498,865		$	140,639	$	25,013		$	(46,678	)	$	(2,950	)	$	116,024
Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations upon vesting		95,634			0		95,634			0		(48	)		0			0			(48	)
Forfeited unvested stock		0			0		0			0		0			0			0			0
Stock-based compensation expense		—			—		—			0		149			0			0			149
Net income		—			—		—			0		0			3,222			0			3,222
Net change in accumulated other comprehensive loss, net of taxes		—			—		—			0		0			0			173			173
Balances, March 31, 2021		6,594,499			1,000,000		7,594,499		$	140,639	$	25,114		$	(43,456	)	$	(2,777	)	$	119,520
Stock issued for share-based awards, net of withholdings to satisfy employee tax obligations upon vesting		8,586			0		8,586			0		(39	)		0			0			(39	)
Forfeited unvested stock		(399	)		0		(399	)		0		0			0			0			0
Stock-based compensation expense		—			—		—			0		152			0			0			152
Net income		—			—		—			0		0			3,901			0			3,901
Net change in accumulated other comprehensive income, net of taxes		—			—		—			0		0			0			425			425
Balances, June 30, 2021		6,602,686			1,000,000		7,602,686		$	140,639	$	25,227		$	(39,555	)	$	(2,352	)	$	123,959

	2017			2016
Cash flows from operating activities
Net income	$	5,183		$	3,885
Adjustments to reconcile net loss to net cash from operating activities
Depreciation and amortization		896			1,141
Negative provision for loan losses		—			(1,900	)
Net amortization on securities		931			965
Stock-based compensation expense		271			315
Net gain on sales of loans held for sale		(39	)		(61	)
Origination of loans for sale		(2,179	)		(3,830	)
Proceeds from sales of loans held for sale		2,218			3,943
Net gain on sales of other real estate owned		(75	)		(221	)
Write-down of other real estate owned		98			970
Net realized (gain) loss on sales and calls of investment securities		5			(187	)
Increase in cash surrender value of owned life insurance, net of premium expense		(293	)		(300	)
Net change in accrued interest receivable and other assets		1,929			(701	)
Net change in accrued interest payable and other liabilities		(10,183	)		(57	)
Net cash from operating activities		(1,238	)		3,962

Cash flows from investing activities
Purchases of available for sale securities		(15,340	)		(18,868	)
Proceeds from sales and calls of available for sale securities		2,000			6,276
Proceeds from maturities and prepayments of available for sale securities		17,480			16,925
Proceeds from calls of held to maturity securities		47			—
Proceeds from maturities of held to maturity securities		145			—
Proceeds from sale of other real estate owned		738			12,340
Loan originations and payments, net		(43,590	)		(4,781	)
Sales (purchases) of premises and equipment, net		175			(386	)
Purchase of bank owned life insurance		—			(5,000	)
Net cash from investing activities		(38,345	)		6,506

Cash flows from financing activities
Net change in deposits		16,922			(41,053	)
Payments of Federal Home Loan Bank advances		(30,611	)		(462	)
Advances from Federal Home Loan Bank		25,000			—
Payments of subordinated capital note		(675	)		(675	)
Proceeds from senior debt		10,000			—
Proceeds from issuance of common stock		—			2,231
Net cash from financing activities		20,636			(39,959	)
Net change in cash and cash equivalents		(18,947	)		(29,491	)
Beginning cash and cash equivalents		66,316			93,335
Ending cash and cash equivalents	$	47,369		$	63,844

Supplemental cash flow information:
Interest paid	$	4,140		$	3,933
Income taxes paid (refunded)		—			21
Supplemental non-cash disclosure:
Proceeds from common stock issuance directed by investors for junior subordinated debenture interest	$	—		$	2,799
Transfer from loans to other real estate		270			1,243
Financed sales of other real estate owned		—			270

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(in thousands)
September 30, 2017
June 30, 2021
Available for sale
U.S. Government and federal agency	$	29,954	$	106	$	(352	)	$	29,708	$	28,918	$	845	$	(3	)	$	29,760
Agency mortgage-backed: residential		91,546		808		(619	)		91,735		79,146		2,121		(265	)		81,002
Collateralized loan obligations		23,444		82		—			23,526		40,185		0		(240	)		39,945
State and municipal		1,648		13		—			1,661
Corporate bonds		3,079		88		—			3,167		31,674		487		(714	)		31,447
Total available for sale	$	149,671	$	1,097	$	(971	)	$	149,797	$	179,923	$	3,453	$	(1,222	)	$	182,154

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

December 31, 2020	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available for sale
U.S. Government and federal agency	$	18,811	$	806	$	0		$	19,617
Agency mortgage-backed: residential		71,582		2,777		(26	)		74,333
Collateralized loan obligations		44,730		0		(1,578	)		43,152
State and municipal		34,759		1,296		0			36,055
Corporate bonds		31,635		472		(1,402	)		30,705
Total available for sale	$	201,517	$	5,351	$	(3,006	)	$	203,862

	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Fair Value
Held to maturity
State and municipal	$	41,424	$	1,973	$	—	$	43,397
Total held to maturity	$	41,424	$	1,973	$	—	$	43,397

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

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

	September 30, 2017
	Amortized Cost		Fair Value
	(in thousands)
Maturity
Available for sale
Within one year	$	7,340	$	7,432
One to five years		15,019		15,102
Five to ten years		32,715		32,464
Beyond ten years		3,051		3,064
Agency mortgage-backed: residential		91,546		91,735
Total	$	149,671	$	149,797

Held to maturity
Within one year	$	646	$	646
One to five years		27,619		28,729
Five to ten years		13,159		14,022
Total	$	41,424	$	43,397

	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)
September 30, 2017
Available for sale
U.S. Government and federal Agency	$	19,543	$	(324	)	$	1,125	$	(28	)	$	20,668	$	(352	)
Agency mortgage-backed: residential		29,928		(489	)		7,261		(130	)		37,189		(619	)
Total temporarily impaired	$	49,471	$	(813	)	$	8,386	$	(158	)	$	57,857	$	(971	)


December 31, 2016
Available for sale
U.S. Government and federal agency	$	27,738	$	(708	)	$	—	$	—		$	27,738	$	(708	)
Agency mortgage-backed: residential		63,460		(1,449	)		2,745		(43	)		66,205		(1,492	)
State and municipal		465		(8	)		—		—			465		(8	)
Corporate bonds		—		—			1,566		(3	)		1,566		(3	)
Total temporarily impaired	$	91,663	$	(2,165	)	$	4,311	$	(46	)	$	95,974	$	(2,211	)

Held to maturity
State and municipal	$	1,540	$	(18	)	$	—	$	—		$	1,540	$	(18	)
Total	$	1,540	$	(18	)	$	—	$	—		$	1,540	$	(18	)

	Commercial			Commercial Real Estate			Residential Real Estate			Consumer			Agriculture			Other			Total			Commercial			Commercial Real Estate			Residential Real Estate			Consumer			Agriculture			Other			Total
	(in thousands)																					(in thousands)
September 30, 2017:
June 30, 2021:
Beginning balance	$	956		$	4,223		$	3,317		$	53		$	335		$	1		$	8,885		$	2,480		$	7,705		$	1,781		$	334		$	452		$	3		$	12,755
Provision (negative provision)		(41	)		206			(147	)		(31	)		15			(2	)		–			(183	)		221			(153	)		68			47			0			0
Loans charged off		(5	)		–			(57	)		(5	)		–			–			(67	)		0			(129	)		(12	)		(32	)		(5	)		0			(178	)
Recoveries		3			9			103			25			16			3			159			7			2			30			15			6			0			60
Ending balance	$	913		$	4,438		$	3,216		$	42		$	366		$	2		$	8,977		$	2,304		$	7,799		$	1,646		$	385		$	500		$	3		$	12,637


September 30, 2016:
June 30, 2020:
Beginning balance	$	730		$	5,429		$	3,778		$	47		$	119		$	1		$	10,104		$	2,025		$	4,212		$	1,909		$	593		$	409		$	2		$	9,150
Provision (negative provision)		(195	)		(436	)		(142	)		(26	)		79			(30	)		(750	)		504			210			189			134			65			(2	)		1,100
Loans charged off		(15	)		(232	)		(131	)		(21	)		(5	)		(1	)		(405	)		(3	)		(28	)		(7	)		(152	)		(3	)		0			(193	)
Recoveries		102			354			27			23			1			33			540			6			100			55			6			1			3			171
Ending balance	$	622		$	5,115		$	3,532		$	23		$	194		$	3		$	9,489		$	2,532		$	4,494		$	2,146		$	581		$	472		$	3		$	10,228

							Three Months Ended September 30, 2017				Nine Months Ended September 30, 2017				As of June 30, 2021						Three Months Ended June 30, 2021				Six Months Ended June 30, 2021
	Unpaid Principal Balance		Recorded Investment		Allowance For Loan Losses Allocated		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Unpaid Principal Balance		Recorded Investment		Allowance For Loan Losses Allocated		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(in thousands)														(in thousands)
With No Related Allowance Recorded:
Commercial	$	724	$	508	$	—	$	499	$	—	$	497	$	—	$	307	$	0	$	—	$	0	$	0	$	0	$	0
Commercial real estate:
Construction		—		—		—		—		—		—		—		0		0		—		0		0		0		0
Farmland		3,783		2,155		—		2,336		—		2,800		209		783		592		—		644		0		581		0
Nonfarm nonresidential		773		301		—		311		1		752		53		1,296		487		—		512		13		524		27
Residential real estate:
Multi-family		—		—		—		—		—		1,025		—		0		0		—		0		0		0		0
1-4 Family		3,858		2,470		—		2,879		22		2,909		50		1,540		619		—		775		21		835		38
Consumer		8		—		—		—		2		2		2		278		18		—		22		1		15		1
Agriculture		130		60		—		60		1		30		1		440		101		—		102		0		98		0
Other		—		—		—		—		—		—		—		0		0		—		0		0		0		0
Subtotal		9,276		5,494		—		6,085		26		8,015		315		4,644		1,817		—		2,055		35		2,053		66
With A Related Allowance Recorded:
With An Allowance Recorded:
Commercial		100		100		13		100		1		100		5		0		0		0		0		0		0		0
Commercial real estate:
Construction		—		—		—		—		—		—		—		0		0		0		0		0		0		0
Farmland		—		—		—		—		—		294		—		0		0		0		0		0		0		0
Nonfarm nonresidential		293		293		26		294		5		298		14		6,464		4,356		2,176		4,356		114		4,356		227
Residential real estate:
Multi-family		—		—		—		—		—		—		—		0		0		0		0		0		0		0
1-4 Family		1,183		1,622		386		1,412		17		1,465		51		101		101		2		102		0		103		1
Consumer		—		—		—		—		—		—		—		0		0		0		0		0		0		0
Agriculture		—		—		—		—		—		30		—		0		0		0		0		0		0		0
Other		—		—		—		—		—		—		—		0		0		0		0		0		0		0
Subtotal		1,576		2,015		425		1,806		23		2,187		70		6,565		4,457		2,178		4,458		114		4,459		228
Total	$	10,852	$	7,509	$	425	$	7,891	$	49	$	10,202	$	385	$	11,209	$	6,274	$	2,178	$	6,513	$	149	$	6,512	$	294

	As of December 31, 2016						Three Months Ended September 30, 2016				Nine Months Ended September 30, 2016
	Unpaid Principal Balance		Recorded Investment		Allowance For Loan Losses Allocated		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(in thousands)
With No Related Allowance Recorded:
Commercial	$	707	$	495	$	—	$	659	$	—	$	824	$	1
Commercial real estate:
Construction		—		—		—		129		3		195		9
Farmland		5,566		3,742		—		4,404		79		4,299		87
Nonfarm nonresidential		4,502		1,219		—		4,023		2		5,569		308
Residential real estate:
Multi-family		4,100		4,100		—		3,254		179		2,235		237
1-4 Family		4,663		2,910		—		3,523		14		6,159		85
Consumer		41		1		—		4		—		8		8
Agriculture		—		—		—		69		—		92		—
Other		—		—		—		—		—		—		—
Subtotal		19,579		12,467		—		16,065		277		19,381		735
With A Related Allowance Recorded:
Commercial		100		100		13		—		—		—		—
Commercial real estate:
Construction		—		—		—		—		—		—		—
Farmland		614		590		5		600		—		300		—
Nonfarm nonresidential		303		303		30		405		6		421		18
Residential real estate:
Multi-family		—		—		—		2,080		—		3,133		101
1-4 Family		1,676		1,611		350		1,656		20		1,671		74
Consumer		—		—		—		—		—		—		—
Agriculture		78		60		1		68		—		34		—
Other		—		—		—		—		—		—		—
Subtotal		2,771		2,664		399		4,809		26		5,559		193
Total	$	22,350	$	15,131	$	399	$	20,874	$	303	$	24,940	$	928

	As of December 31, 2020						Three Months Ended June 30, 2020				Six Months Ended June 30, 2020
	Unpaid Principal Balance		Recorded Investment		Allowance For Loan Losses Allocated		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(in thousands)
With No Related Allowance Recorded:
Commercial	$	308	$	0	$	—	$	131	$	0	$	104	$	0
Commercial real estate:
Construction		0		0		—		0		0		0		0
Farmland		555		456		—		297		3		296		13
Nonfarm nonresidential		1,323		549		—		453		10		465		18
Residential real estate:
Multi-family		0		0		—		0		0		0		0
1-4 Family		1,883		954		—		856		51		819		54
Consumer		259		0		—		78		0		85		1
Agriculture		393		91		—		0		0		14		0
Other		0		0		—		0		0		0		0
Subtotal		4,721		2,050		—		1,815		64		1,783		86
With An Allowance Recorded:
Commercial		0		0		0		0		0		8		0
Commercial real estate:
Construction		0		0		0		0		0		0		0
Farmland		0		0		0		143		2		189		4
Nonfarm nonresidential		6,465		4,356		2,176		75		0		50		0
Residential real estate:
Multi-family		0		0		0		0		0		0		0
1-4 Family		106		106		1		74		1		98		3
Consumer		0		0		0		0		0		0		0
Agriculture		0		0		0		0		0		0		0
Other		0		0		0		0		0		0		0
Subtotal		6,571		4,462		2,177		292		3		345		7
Total	$	11,292	$	6,512	$	2,177	$	2,107	$	67	$	2,128	$	93

	TDRs Performing to Modified Terms		TDRs Not Performing to Modified Terms		Total TDRs
	(in thousands)
September 30, 2017
Commercial
Rate reduction	$	—	$	33	$	33
Principal deferral		—		434		434
Commercial Real Estate:
Farmland
Principal deferral		—		1,465		1,465
Nonfarm nonresidential
Rate reduction		489		—		489
Residential Real Estate:
1-4 Family
Rate reduction		737		—		737
Total TDRs	$	1,226	$	1,932	$	3,158

	TDRs Performing to Modified Terms		TDRs Not Performing to Modified Terms		Total TDRs
	(in thousands)
June 30, 2021
Commercial Real Estate:
Nonfarm nonresidential	$	358	$	0	$	358
Residential Real Estate:
1-4 Family		32		69		101
Total TDRs	$	390	$	69	$	459

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

	Nonaccrual				Loans Past Due 90 Days And Over Still Accruing
	September 30, 2017		December 31, 2016		September 30, 2017		December 31, 2016
	(in thousands)

Commercial	$	508	$	495	$	—	$	—
Commercial Real Estate:
Construction		—		—		—		—
Farmland		2,155		4,332		—		—
Nonfarm nonresidential		105		1,016		—		—
Residential Real Estate:
Multi-family		—		—		—		—
1-4 Family		2,941		3,312		—		—
Consumer		—		1		—		—
Agriculture		60		60		—		—
Other		—		—		—		—
Total	$	5,769	$	9,216	$	—	$	—

	30 – 59 Days Past Due		60 – 89 Days Past Due		90 Days And Over Past Due		Nonaccrual		Total Past Due And Nonaccrual
	(in thousands)
September 30, 2017
Commercial	$	2	$	—	$	—	$	508	$	510
Commercial Real Estate:
Construction		—		—		—		—		—
Farmland		281		19		—		2,155		2,455
Nonfarm nonresidential		239		—		—		105		344
Residential Real Estate:
Multi-family		—		—		—		—		—
1-4 Family		300		593		—		2,941		3,834
Consumer		50		—		—		—		50
Agriculture		—		—		—		60		60
Other		—		—		—		—		—
Total	$	872	$	612	$	—	$	5,769	$	7,253

	Pass		Watch		Special Mention		Substandard		Doubtful		Total		Pass		Watch		Special Mention		Substandard		Doubtful		Total
	(in thousands)												(in thousands)
September 30, 2017
June 30, 2021
Commercial	$	106,645	$	228	$	—	$	743	$	—	$	107,616	$	199,914	$	149	$	0	$	6,515	$	0	$	206,578
Commercial Real Estate:
Construction		44,956		—		—		—		—		44,956		78,659		0		0		0		0		78,659
Farmland		78,156		5,935		—		4,279		—		88,370		62,584		1,900		0		1,147		0		65,631
Nonfarm nonresidential		153,026		2,948		432		1,550		—		157,956		288,362		923		0		7,452		0		296,737
Residential Real Estate:
Multi-family		46,100		9,584		—		—		—		55,684		52,000		10,428		0		0		0		62,428
1-4 Family		162,476		4,473		166		6,098		—		173,213		163,261		2,454		0		2,500		0		168,215
Consumer		8,062		323		—		89		—		8,474		31,468		3		0		40		0		31,511
Agriculture		33,215		11,676		—		784		—		45,675		36,925		31		0		130		0		37,086
Other		567		—		—		—		—		567		580		0		0		0		0		580
Total	$	633,203	$	35,167	$	598	$	13,543	$	—	$	682,511	$	913,753	$	15,888	$	0	$	17,784	$	0	$	947,425

	June 30, 2021

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

	September 30, 2017		December 31, 2016
	(in thousands)
Commercial Real Estate:
Construction, land development, and other land	$	6,200	$	6,571
Farmland		74		—
Residential Real Estate:
1-4 Family		56		250
	$	6,330	$	6,821

	September 30,		December 31,
	2017		2016
	(in thousands)
Advances with fixed rates from 0.00% to 5.24% and maturities ranging from 2017 through 2033, averaging 1.24% at September 30, 2017 and 0.85% at December 31, 2016	$	16,847	$	22,458

	Advances
Year 1	$	15,203
Year 2		182
Year 3		492
Year 4		739
Year 5		108
Thereafter		123
	$	16,847

October 2017 – December 2017	$	129
2018		258
2019		99
2020 & thereafter		25

	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 September 30, 2017:
Total risk-based capital (to risk-weighted assets)
Consolidated	$	76,402		10.05	%	$	60,833		8.00	%		N/A		N/A
Bank		84,299		11.10			60,761		8.00		$	75,951		10.00	%
Total common equity Tier 1 risk-based capital (to risk-weighted assets)
Consolidated		41,719		5.49			34,219		4.50			N/A		N/A
Bank		73,387		9.66			34,178		4.50			49,368		6.50
Tier 1 capital (to risk-weighted assets)
Consolidated		55,613		7.31			45,625		6.00			N/A		N/A
Bank		73,387		9.66			45,571		6.00			60,761		8.00
Tier 1 capital (to average assets)
Consolidated		55,613		5.85			38,056		4.00			N/A		N/A
Bank		73,387		7.73			37,986		4.00			47,482		5.00

	As of September 30,					As of December 31,
	2017					2016
	Amount		Percent			Amount		Percent
			(dollars in thousands)

Commercial	$	107,616		15.77	%	$	97,761		15.29	%
Commercial Real Estate
Construction		44,956		6.59			36,330		5.68
Farmland		88,370		12.95			71,507		11.19
Nonfarm nonresidential		157,956		23.14			149,546		23.39
Residential Real Estate
Multi-family		55,684		8.16			48,197		7.54
1-4 Family		173,213		25.38			188,092		29.42
Consumer		8,474		1.24			9,818		1.54
Agriculture		45,675		6.69			37,508		5.87
Other		567		0.08			477		0.08
Total loans	$	682,511		100.00	%	$	639,236		100.00	%

	As of June 30,					As of December 31,
	2021					2020
	Amount		Percent			Amount		Percent
			(dollars in thousands)

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

	September 30, 2017					December 31, 2016					June 30, 2021					December 31, 2020
	Loans		% to Total			Loans		% to Total			Loans		% to Total			Loans		% to Total
	(dollars in thousands)										(dollars in thousands)

Pass	$	633,203		92.8	%	$	586,430		91.7	%	$	913,753		96.4	%	$	926,025		96.2	%
Watch		35,167		5.1			30,431		4.8			15,888		1.7			18,879		2.0
Special Mention		598		0.1			497		0.1			—		—			—		—
Substandard		13,543		2.0			21,878		3.4			17,784		1.9			17,177		1.8
Doubtful		—		—			—		—			—		—			—		—
Total	$	682,511		100.0	%	$	639,236		100.0	%	$	947,425		100.0	%	$	962,081		100.00	%