Limestone Bancorp, Inc. (NASDAQ: LMST) (“the Company”), parent company of Limestone Bank (“the Bank”), today reported unaudited results for the second quarter of 2021. Net income available to common shareholders for the second quarter of 2021 was $3.9 million, or $0.51 per basic and diluted common share, compared with $2.0 million, or $0.26 per basic and diluted share, for the second quarter of 2020. Net income for the six months ended June 30, 2021, was $7.1 million, or $0.94 per diluted common share, compared with net income of $3.8 million, or $0.51 per diluted share, for the six months ended June 30, 2020.

Total assets declined nominally to $1.34 billion as of June 30, 2021, compared to $1.36 billion at March 31, 2021, and increased nominally compared to $1.31 billion at December 31, 2020. The loan portfolio decreased $31.4 million, or 3.2%, during the quarter as loan payoffs outpaced loan originations during the period. Loans decreased to $947.4 million at June 30, 2021, compared to $978.9 million at March 31, 2021, and $962.1 million at December 31, 2020. SBA Paycheck Protection Program (“PPP”) loans totaled $21.0 million at June 30, 2021, compared to $27.9 million at March 31, 2021, and $20.3 million at December 31, 2020.

Net Interest Income and Average Earning Assets – Net interest income increased to $10.9 million for the second quarter of 2021, compared to $10.7 million for the first quarter of 2021, and $10.1 million for the second quarter of 2020. Average loans decreased to $961.9 million for the second quarter of 2021, compared to $964.4 million for the first quarter of 2021, and $978.3 million for the second quarter of 2020.

Net interest margin decreased to 3.45% for the second quarter of 2021, compared with 3.53% for the first quarter of 2021, and increased from 3.33% for the second quarter of 2020. The yield on earning assets decreased to 3.91% in the second quarter of 2021, compared to 4.05% in the first quarter of 2021, and 4.21% in the second quarter of 2020. The yield on earning assets for the first and second quarters of 2021 were negatively impacted by lower interest rates on the Bank’s fed funds, certain floating rate investment securities, and loans with variable rate repricing features.

Loan fee income can meaningfully impact net interest income, loan yields, and net interest margin. The amount of loan fee income included in total interest income was $933,000, $844,000, and $535,000 for the quarters ended June 30, 2021, March 31, 2021, and June 30, 2020, respectively. This represents 29 basis points, 28 basis points, and 17 basis points of yield on earning assets and net interest margin for the quarters ended June 30, 2021, March 31, 2021, and June 30, 2020, respectively. Loan fee income for the second quarter of 2021 included $692,000 in fees earned on SBA PPP loans, compared to $436,000 in the first quarter of 2021, and $179,000 in the second quarter of 2020, which represents 22 basis points, 14 basis points, and six basis points of earning asset yield and net interest margin for those quarters, respectively.

The cost of interest-bearing liabilities was 0.61% for the second quarter of 2021, compared to 0.68% in the first quarter of 2021, and 1.11% in the second quarter of 2020. The cost of interest-bearing liabilities continued to decline based on the declining volume of the time deposit portfolio, as well as the downward repricing of time deposits. Time deposits declined $51.6 million during the second quarter of 2021 as approximately $105.6 million of time deposits with an average rate of 0.56% matured and redeemed or repriced at lower interest rates. During the second quarter of 2021, newly originated or renewed time deposits had an average rate of 0.21% and an average term of approximately 14 months.

Net interest income increased to $21.6 million for the first six months of 2021, compared with $19.9 million in the first six months of 2020. Average loans decreased nominally to $963.1 million for the first six months of 2021, compared to $963.8 million for the first six months of 2020.

Net interest margin increased to 3.49% in the first six months of 2021, compared with 3.32% for 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 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 June 30, 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. The cost of interest-bearing liabilities was 0.64% for the first six months of 2021, compared to 1.28% in the first six months of 2020.

As of June 30, 2021, time deposits comprise $303.7 million of the Company’s liabilities including $66.0 million with a current average rate of 0.43%, which reprice or mature in the third quarter of 2021. The following table denotes contractual time deposit maturities and average rates as of June 30, 2021:

Provision and Allowance for Loan Losses – The allowance for loan losses to total loans was 1.33% at June 30, 2021, compared to 1.30% at March 31, 2021, and 1.05% at June 30, 2020. There was no provision for loan loss recorded in the second quarter of 2021 and a $350,000 provision for loan losses, or $0.03 per common share after taxes, for the first six months of 2021, respectively, compared to $1.1 million and $2.2 million, or $0.12 and $0.23 per common shares after taxes, 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 year, while the provisions for 2020 were largely attributable to the uncertainty surrounding the COVID-19 pandemic related economic and business disruptions. Net loan charge-offs were $118,000 and $156,000, for the three and six months ended June 30, 2021, respectively, compared to net loan charge-offs of $22,000 and $298,000, for the three and six months ended June 30, 2020, respectively.

While the U.S. Government’s economic responses to the COVID-19 pandemic through monetary policy and fiscal stimulus have provided meaningful support to the economy, management deemed it prudent to continue to maintain its qualitative environmental factor in the allowance for loan losses to account for the pandemic risk. The Bank also granted eligible short-term loan modifications under Section 4013 of the CARES Act. Short-term loan modifications were $4.7 million as of June 30, 2021 and March 31, 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, March 31, 2021 and December 31, 2020.

Non-interest Income and Expense – Non-interest income for the second quarter of 2021 increased $534,000 to $2.1 million, compared with $1.6 million for the second quarter of 2020. The increase was primarily related to an increase in bank card interchange fees of $210,000 due to an increase in debit card transactions, and a $191,000 gain on the sale of OREO. Non-interest expense decreased $282,000, or 3.4%, to $8.0 million for the second quarter of 2021, compared with $8.2 million for the second quarter of 2020. The decrease in the second quarter of 2021 was 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.

Non-interest income for the first six months of 2021 increased $694,000 to $4.0 million, compared with $3.3 million for the first six months of 2020. The increase was primarily due to an increase in bank card interchange fees of $420,000 and a $191,000 gain on the sale of OREO. Non-interest expense decreased $533,000, or 3.2%, to $15.9 million for the first six months of 2021, compared with $16.5 million for the first six months of 2020. The decrease was primarily due to a decrease of $540,000 in deposit and state franchise tax expense.

Income Taxes – 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 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, respectively, which were related to the establishment of a net deferred tax asset due to the tax law change.

About Limestone Bancorp, Inc.

Limestone Bancorp, Inc. (NASDAQ: LMST) is a Louisville, Kentucky-based bank holding company which operates banking centers in 14 counties through its wholly-owned subsidiary Limestone Bank. The Bank’s markets include metropolitan Louisville in Jefferson County and the surrounding counties of Bullitt and Henry and extend south along the Interstate 65 corridor. The Bank serves south central, southern, and western Kentucky from banking centers in Barren, Butler, Daviess, Edmonson, Green, Hardin, Hart, Ohio, and Warren counties. The Bank also has banking centers in Lexington, Kentucky, the second largest city in the state, and Frankfort, Kentucky, the state capital. Limestone Bank is a traditional community bank with a wide range of personal and business banking products and services.

Forward-Looking Statements

Statements in this press release relating to Limestone Bancorp’s plans, objectives, expectations or future performance are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The words “believe,” “may,” “should,” “anticipate,” “estimate,” “expect,” “intend,” “objective,” “possible,” “seek,” “plan,” “strive” or similar words, or negatives of these words, identify forward-looking statements that involve risks and uncertainties. Although the Company's management believes the assumptions underlying the forward-looking statements contained herein are reasonable, any of these assumptions could be inaccurate. Therefore, there can be no assurance the forward-looking statements included herein will prove to be accurate. Factors that could cause actual results to differ from those discussed in forward-looking statements include, but are not limited to: the impact and duration of the COVID-19 pandemic and national, state and local emergency conditions the pandemic has produced; economic conditions both generally and more specifically in the markets in which the Company and its subsidiaries operate; competition for the Company's customers from other providers of financial services; government legislation and regulation, which change from time to time and over which the Company has no control; changes in interest rates; material unforeseen changes in liquidity, results of operations, or financial condition of the Company's customers; and other risks detailed in the Company's filings with the Securities and Exchange Commission, all of which are difficult to predict and many of which are beyond the control of the Company. See Risk Factors outlined in the Company's Form 10-K for the year ended December 31, 2020.

Additional Information

Unaudited supplemental financial information for the second quarter ending June 30, 2021, follows.

Non-GAAP Financial Measures Reconciliation

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

The efficiency ratio is a non-GAAP measure of expense control relative to revenue from net interest income and fee income. The efficiency ratio is calculated by dividing total non-interest expenses as determined under GAAP by net interest income and total non-interest income, but excluding from the calculation net gains on the sale of securities and expenses disclosed from time to time as non-recurring in nature. Management believes this provides a reasonable measure of primary banking expenses relative to primary banking revenue.