Limestone Bancorp Reports Net Income of $1.8 million, or $0.25 per Share, for the 1st Quarter of 2020

Limestone Bancorp, Inc. LMST ("the Company"), parent company of Limestone Bank ("the Bank"), today reported unaudited results for the first quarter of 2020. The coronavirus pandemic ("COVID-19") currently impacting the nation has caused a setback to the country's economy. Since early March, the Company and Bank have felt the impact alongside thousands of businesses across the nation. In response to the global pandemic, and the declarations of emergency at the state and national levels the pandemic has triggered, the Bank has implemented several temporary operational changes to serve customers during the COVID-19 health crisis. Lobby services have been amended to appointment only while drive thru, mobile, and online banking have become the Bank's primary channels of serving customers. Customer facing employees have been divided into two teams working separate ‘ten day on' and ‘ten day off' shifts to ensure a healthy workforce remains available to serve customers. Additionally, operational and support staff have been assigned to work from home where circumstances permit.

Net income for the first quarter of 2020 was $1.8 million, or $0.25 per basic and diluted common share, compared to net income of $2.8 million, or $0.38 per basic and diluted share, for the first quarter of 2019. Net income before taxes and income tax expense was $2.2 million and $361,000, respectively, for the first quarter of 2020, compared with $3.0 million and $123,000, respectively for the first quarter of 2019. Income tax expense for the first quarter of 2019 benefitted $341,000, or $0.05 per basic and diluted common share, from the establishment of a net deferred tax asset related to a change in Kentucky tax law enacted during the first quarter of 2019. The new law eliminated the Kentucky bank franchise tax, which is assessed at a rate of 1.1% of average capital, and, implemented a state income tax for the Bank at a statutory rate of 5%. The new Kentucky income tax will go into effect on January 1, 2021.

Net Interest Income – The interest rate environment remained challenging in the first quarter of 2020 as the Federal Reserve, after lowering rates 75 basis points in the latter half of 2019, lowered the federal funds target rate by 50 basis points on March 6, 2020 and 100 basis points on March 15, 2020.

Net interest income was $9.8 million for the first quarter of 2020, compared to $8.9 million for the fourth quarter of 2019, and $9.0 million for the first quarter of 2019. Average loans increased to $949.2 million for the first quarter of 2020, compared to $846.2 million for the fourth quarter of 2019, and $766.5 million for the first quarter of 2019. Average loans were positively impacted from the branch purchase transaction on November 15, 2019, which included approximately $126.8 million of loans at the time of purchase, as well as loan growth during 2019 and the first three months of 2020. Net interest margin was 3.31% for the first quarter of 2020, 3.23% for the fourth quarter of 2019, and 3.61% for the first quarter of 2019.

The yield on earning assets decreased to 4.50% in the first quarter of 2020, compared to 4.57% in the fourth quarter of 2019, and 4.90% in the first quarter of 2019. The seven basis point decline in the yield on earning assets during the first quarter of 2020 was driven by the impact of falling interest rates on the Bank's fed funds, certain floating rate investment securities, and loans with variable rate pricing 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 $216,000, $218,000, and $546,000 for the quarters ended March 31, 2020, December 31, 2019, and March 31, 2019, respectively. This represents eight basis points, eight basis points, and 22 basis points of yield on earning assets and net interest margin for the quarters ended March 31, 2020, December 31, 2019, and March 31, 2019, respectively. The cost of interest-bearing liabilities was 1.45% for the first quarter of 2020, compared to 1.65% in the fourth quarter of 2019, and 1.57% in the first quarter of 2019.

Time deposits of approximately $179.4 million at an average rate of 2.19% matured or repriced at lower interest rates during the first quarter of 2020. During the first quarter of 2020, time deposits totaling $180.6 million were originated or renewed at an average rate of 1.39% and an average term of approximately 10 months. As of March 31, 2020, time deposits comprise $467.5 million of the Company's liabilities with $311.6 million, or 67%, set to reprice or mature in 2020 of which, $160.4 million with a current average rate of 1.78% reprice or mature in the second quarter of 2020. The following table denotes contractual time deposit maturities and average rates as of March 31, 2020:

Investment Securities – The securities portfolio serves as a source of liquidity and earnings and contributes to the management of interest rate risk. Investments are made in various types of liquid assets, including 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 decreased by $10.3 million, or 4.9%, to $198.7 million at March 31, 2020, compared with $209.0 million at December 31, 2019.

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

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

The market value of CLOs may be affected by, among other things, changes in composition of the underlying loans, changes in the cash flows from the underlying loans, defaults and recoveries on the underlying loans, capital gains and losses on the underlying loans, prepayments on the underlying loans, and other conditions or economic factors. The fair value of the Bank's CLOs declined by approximately $3.6 million, or 8% of amortized cost, during the first quarter of 2020 as market liquidity within the CLO sector was disrupted by COVID-19.

Although the Bank attempts to mitigate the credit and liquidity risks associated with CLOs by purchasing CLOs with credit ratings of A or higher, completing pre-purchase due diligence, and through ongoing monitoring, no assurance can be given that these risk mitigation efforts will be successful. At March 31, 2020, $25.7 million and $15.0 million of our CLOs were AA and A rated, respectively. There were no CLOs rated below A and none of the CLOs were subject to ratings downgrade in 2019 or in the first quarter of 2020. Stress testing was completed on each security in the CLO portfolio as of quarter-end. Each security in the portfolio passed, without dollar loss, a stress scenario characterized as severe, which assumed a ten percent per annum constant prepayment rate, a twelve percent per annum constant default rate for four years followed by a four percent rate thereafter, and a forty-five percent recovery rate on a one-year lag. During the first quarter, one of the CLOs in the investment portfolio rated AA with a book value of $5.0 million was called and redeemed at par value or $5.0 million by the issuer. The Bank's CLOs are all floating rate with rates set on a quarterly basis at three-month LIBOR plus a spread.

The fair value of the Bank's corporate bond portfolio was also impacted by market disruption and declining rates, resulting in a fair value decline of approximately $1.5 million, or 7% of amortized cost, during the first quarter. The corporate bond portfolio consists of ten subordinated debt securities 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 floating at an index over LIBOR 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 nature.

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.

The allowance for loan losses to total loans was 0.95% at March 31, 2020, compared to 0.90% at December 31, 2019, and 1.10% at March 31, 2019. Loans acquired in the November 2019 branch transaction totaled $118.0 million at March 31, 2020 and $124.7 million at December 31, 2019. These loans were recorded at fair value as determined by an independent third party. The remaining discount associated with the fair value purchase accounting adjustments on the acquired loans was $427,000 at March 31, 2020, compared to $480,000 at December 31, 2019. Any subsequent deterioration of these acquired loans may require an adjustment through the allowance for loan loss. Excluding loans acquired in the November 2019 branch transaction, the allowance for loan losses to total loans was 1.08% and 1.04% at March 31, 2020 and December 31, 2019, respectively. Net loan charge-offs were $276,000 for the first quarter of 2020, compared to $194,000 for the first quarter of 2019.

While the Company has experienced historically strong trends in asset quality over the last several quarters and management's assessment of risk in the loan portfolio has been low, a provision of $1.05 million, or $0.11 per common shares after taxes, was recorded in the first quarter of 2020 compared to no provision for loan losses in the first quarter of 2019. The first quarter 2020 loan loss provision was attributable to the level of net loan charge-offs for the quarter, the impact of the increase in loan volume within the portfolio over the quarter, and to changes in the economic and business environment attributable to COVID-19, the state and national emergencies that have been declared and the resultant risk the pandemic poses for business disruptions for the Bank's borrowers which may lead to credit quality deterioration.

While the Company expects the U.S. Government's economic response to the COVID-19 pandemic through monetary policy and fiscal stimulus will provide meaningful support to the economy, management deemed it prudent to increase the allowance for loan losses through its qualitative environmental factors to account for the pandemic risk.

COVID-19 Short-term Loan Concessions – In response to requests from borrowers who have been impacted by COVID-19 through business and cash flow interruption, the Bank made short-term loan modifications involving principal deferrals (interest only) and, in other cases, principal and interest deferrals. The following table details those modifications by loan category and type as of March 31, 2020 and April 14, 2020:

Retail purpose commercial real estate operators, as well as hotel and restaurant operators, have been disproportionately impacted by COVID-19. As of March 31, 2020, the Bank had loans totaling $63.9 million secured by retail purpose commercial real estate, $50.4 million secured by hotel and lodging real estate, and $30.9 million secured by limited and full-service restaurant real estate, or 6.6%, 5.2%, and 3.2% of total loans, respectively. As of April 14, 2020, principal and interest deferrals total $10.5 million for retail purpose commercial real estate, $43.0 million for hotel and lodging real estate, and $7.2 million for limited and full-service restaurant real estate.

The Bank is also working with borrowers to secure SBA guaranteed financing for those who qualify through the SBA Paycheck Protection Program, which became available in early April through the CARES Act. As of April 14, 2020, the Bank had secured loan guarantees for 163 borrowers totaling approximately $27.4 million.

Non-performing Assets – Non-performing assets, which include loans on nonaccrual, accruing troubled debt restructurings, loans past due 90 days and still accruing, and other real estate owned ("OREO"), remained unchanged at $5.2 million, or 0.41% of total assets at March 31, 2020, compared with $5.2 million, or 0.42% of total assets at December 31, 2019, and decreased from $6.2 million, or 0.57% of total assets at March 31, 2019. Non-performing loans were unchanged at $2.0 million, or 0.20% of total loans at March 31, 2020, compared with $2.0 million, or 0.22% of total loans at December 31, 2019, and decreased from $2.8 million, or 0.36% of total loans at March 31, 2019.

OREO at March 31, 2020, remained unchanged at $3.2 million, compared to December 31, 2019, and decreased from $3.3 million at March 31, 2019. There were no fair value write-downs arising from changing marketing strategies in the first quarter of 2020 compared to $150,000 for the first quarter of 2019.

Non-interest Income and Expense – Non-interest income increased $440,000 to $1.7 million for the first quarter of 2020, compared with $1.3 million for the first quarter of 2019. The increase was primarily related to services charges on deposit accounts and bank card interchange fees. The service charges on deposit accounts and interchange fee volume increases are primarily attributable to the deposit accounts acquired in the branch acquisition transaction on November 15, 2019. Non-interest expense increased $954,000, or 13.1%, to $8.2 million for the first quarter of 2020, compared with $7.3 million for the first quarter of 2019. The increase from the first quarter of 2019 was primarily due to an increase in salaries and employee benefits of $623,000, as the Bank added sales talent and customer facing associates during the latter half of 2019 and branch staff added in connection with the branch purchase transaction.

About Limestone Bancorp, Inc.

Limestone Bancorp, Inc. 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, 2019.

Additional Information

Unaudited supplemental financial information for the first quarter ending March 31, 2020, follows.