Limestone Bancorp, Inc. (NASDAQ: LMST) (the “Company”), parent company of Limestone Bank, Inc. (the “Bank”), today reported unaudited results for the third quarter of 2022. Net income available to common shareholders for the third quarter of 2022 was $5.8 million, or $0.76 per basic and diluted common share, compared with $4.3 million, or $0.57 per basic and diluted common share, for the third quarter of 2021. Net income for the nine months ended September 30, 2022, was $13.4 million, or $1.76 per basic and diluted common share, compared with net income of $11.5 million, or $1.51 per basic and diluted common share, for the nine months ended September 30, 2021.

John T. Taylor, Chief Executive Officer, noted, “The Limestone team delivered strong performance results in the third quarter and for the first nine months of 2022. Deposit gathering efforts remain successful and loan growth was 5.0% in the third quarter and 12.6% for the first nine months of the year. Asset quality remains strong and net interest margin expanded 12 basis points quarter over quarter, which is directionally consistent with the Fed’s tightening actions and our approach to interest rate risk management.”

Total assets were $1.49 billion at September 30, 2022, up $72.6 million from the previous quarter. The loan portfolio increased $54.1 million, or 5.0%, during the quarter to $1.13 billion at September 30, 2022. Total deposits increased $51.0 million to $1.22 billion at September 30, 2022.

Net Interest Income and Average Earning Assets – Net interest income increased to $12.9 million for the third quarter of 2022, compared to $11.7 million for the second quarter of 2022, and $11.6 million for the third quarter of 2021. Net interest margin increased to 3.73% for the third quarter of 2022, compared with 3.51% for the second quarter of 2022, and 3.61% for the third quarter of 2021.

The yield on earning assets increased to 4.37% in the third quarter of 2022, compared to 3.95% in the second quarter of 2022, and 4.03% in the third quarter of 2021. Quarter over quarter, average loans increased $43.4 million to $1.10 billion. Compared to the prior year third quarter, average loans increased $143.9 million, average investment securities increased $7.4 million, and average lower yielding fed funds sold decreased $56.2 million. PPP loans averaged $157,000 for the third quarter of 2022, $172,000 for the second quarter of 2022, and $12.6 million for the third quarter of 2021.

The Federal Reserve increased the fed funds target by 25 basis points on March 16, 2022, 50 basis points on May 4, 2022, 75 basis points on June 15, 2022, 75 basis points on July 26, 2022, and 75 basis points on September 20, 2022. During the second and third quarters of 2022, the Bank’s fed funds sold, floating rate investment securities, loans with variable rate pricing features, and new loan originations benefitted from the upward movement in short-term rates and are expected to continue to benefit as rates continue to rise. The cost of interest-bearing liabilities has also been impacted to a lesser extent but is also expected to continue to increase as short-term interest rates continue to rise.

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 $279,000, $173,000, and $1.5 million for the quarters ended September 30, 2022, June 30, 2022, and September 30, 2021, respectively. This represents eight basis points, six basis points, and 48 basis points of yield on earning assets and net interest margin for the quarters ended September 30, 2022, June 30, 2022, and September 30, 2021, respectively. Loan fee income for the third and second quarters of 2022 did not include any fees earned on PPP loans, compared to $1.4 million in the third quarter of 2021, which represents 43 basis points of earning asset yield and net interest margin for the third quarter of 2021.

The following table reconciles the as reported yield on earning assets to the yield on earning assets excluding PPP fees, a non-GAAP financial measure:

The cost of interest-bearing liabilities was 0.85% for the third quarter of 2022, compared to 0.58% in the second quarter of 2022, and 0.56% in the third quarter of 2021. While deposit mix has continued to improve as compared to the prior year third quarter, the movement in short-term rates has impacted the cost of interest-bearing liabilities. Future short-term rate increases are expected to further impact the cost of interest-bearing liabilities.

Net interest income increased to $35.7 million for the first nine months of 2022, compared with $33.2 million in the first nine months of 2021. Net interest margin increased to 3.56% in the first nine months of 2022, compared with 3.53% for the first nine months of 2021.

The yield on earning assets increased to 4.05% for the first nine months of 2022, compared to 4.00% for the first nine months of 2021. During the first nine months of 2022 average loans increased $100.0 million to $1.06 billion and average investment securities increased $30.8 million, while average lower yielding fed funds sold decreased $45.4 million compared to the first nine months of 2021. Average PPP loans were $340,000 and $19.4 million for the first nine months of 2022 and 2021, respectively. The amount of loan fee income included in total interest income was $776,000 and $3.3 million for the nine months ended September 30, 2022 and 2021, respectively. This represents eight basis points and 35 basis points of yield on earning assets and net interest margin for the nine months ended September 30, 2022 and 2021, respectively. Loan fee income included PPP fees of $45,000 and $2.5 million for the nine months ended September 30, 2022 and 2021, respectively, which represented approximately one basis point and 27 basis points of earning asset yield and net interest margin for those nine-month periods, respectively.

The cost of interest-bearing liabilities was 0.66% for the first nine months of 2022, compared to 0.62% in the first nine months of 2021. While deposit mix has continued to improve as compared to the prior year, the cost of interest-bearing liabilities was impacted by the recent increases in short-term interest rates and is expected to continue to increase as short-term interest rates continue to rise.

Time deposits increased $17.6 million during the third quarter of 2022. Approximately $47.9 million of time deposits with an average rate of 0.58% matured and were redeemed or repriced during the third quarter of 2022. During the third quarter of 2022, newly originated or renewed time deposits had an average rate of 2.27% and an average term of approximately 13 months. As of September 30, 2022, time deposits comprised $273.8 million of the Company’s liabilities including $57.1 million with a current average rate of 0.79%, which reprice or mature in the fourth quarter of 2022. The following table denotes contractual time deposit maturities and average rates as of September 30, 2022:

Provision and Allowance for Loan Losses – The allowance for loan losses to total loans was 1.16% at September 30, 2022, compared to 1.17% at June 30, 2022, and 1.34% at September 30, 2021.

Net loan recoveries were $1.7 million and $1.6 million, for the three and nine months ended September 30, 2022, compared to net loan recoveries of $36,000 and net loan charge-offs of $120,000, for the three and nine months ended September 30, 2021. During the third quarter of 2022, the Bank received a payoff of $2.0 million on a nonaccrual commercial real estate loan resulting in a recovery of $1.5 million. A negative provision for loan losses of $1,250,000 and $50,000, or $(0.12) and $(0.01) per common share after taxes, was recorded in the third quarter and the first nine months of 2022, respectively, compared to a provision for loan losses of $300,000 and $650,000, or $0.03 and $0.06 per common share after taxes, for the three and first nine months of 2021. The 2022 negative loan loss provisions were primarily attributable to the significant recovery recognized during the third quarter and its impact on the historical loss percentages, offset by the additional reserve required by the growth trends within the portfolio during the periods. The 2021 loan loss provisions were attributable to growth trends within the portfolio and net loan charge-offs impacting historical loss percentages during the periods.

Non-interest Income and Expense – Non-interest income for the third quarter of 2022 decreased $208,000 to $2.2 million, compared with $2.4 million for the third quarter of 2021. The third quarter of 2021 included a $465,000 gain on the call of a corporate bond from the Bank’s available for sale securities portfolio. Service charges on deposit accounts increased $165,000 due to an increase in transaction volumes. Non-interest expense increased $647,000, or 8.0%, to $8.7 million for the third quarter of 2022, compared with $8.1 million for the third quarter of 2021. Salaries and benefits expense increased $377,000 from the third quarter of 2021 as a result of the inflationary impact on talent acquisition and the administration of annual salary adjustments, increased health care utilization costs, and a modest increase in performance-based incentive compensation. Other non-interest expense increased $214,000 from the third quarter of 2021 primarily related to an increase in losses associated with demand deposit charge-offs and fraudulent check and debit card activity during the period.

Non-interest income for the first nine months of 2022 increased $267,000 to $6.7 million, compared with $6.5 million for the first nine months of 2021. The increase was primarily due to an increase in services charges on deposit accounts of $421,000 due to an increase in transaction volumes, as well as a $179,000 increase in bank owned life insurance income due to additional policies being purchased in March 2022. Non-interest income for the first nine months of 2022 also included a $163,000 gain on sale of premises held for sale from the first quarter of 2022, while the first nine months of 2021 included a $191,000 gain on sale of OREO from the second quarter of 2021, as well as, a $465,000 gain on the call of a corporate bond from the third quarter of 2021. Non-interest expense increased $907,000, or 3.8%, to $24.9 million for the first nine months of 2022, compared with $24.0 million for the first nine months of 2021. The increase was primarily due to an increase of $643,000 in salaries and benefits as discussed above, and a $328,000 increase in other non-interest expense primarily related to losses associated with demand deposit charge-offs and fraudulent check and debit card activity during the period.

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; 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 inflation and efforts to control it; 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, 2021.

Additional Information

Unaudited supplemental financial information for the third quarter ending September 30, 2022, follows.