2020 ANNUAL REPORT
Everyone starts as a customer and leaves as a friend.
“Summer Morning at Mount Oread”
“Summer Morning at Mount Oread”
By Kansas Artist-Jamie Lavin
By Kansas Artist-Jamie Lavin
Contents
Contents
..........................................................................................................................................................................2-32-3
Letter to Stockholders ..........................................................................................................................................................................
Letter to Stockholders
.............................................................................................................................................................................4-54-5
Financial Highlights
Financial Highlights .............................................................................................................................................................................
Executive Officers ......................................................................................................................................................................................
Executive Officers
......................................................................................................................................................................................6 6
Board of Directors
.....................................................................................................................................................................................66
Board of Directors .....................................................................................................................................................................................
............................................................................................................................................................................7 7
Corporate Information ............................................................................................................................................................................
Corporate Information
Map and Locations ...................................................................................................................................................................................
Map and Locations
...................................................................................................................................................................................88
.............................................................................................................................................................. 9 9
Annual Report on Form 10-K ..............................................................................................................................................................
Annual Report on Form 10-K
www.banklandmark.com
1
PRESIDENT’S LETTER TO OUR STOCKHOLDERS, CUSTOMERS AND FRIENDS
Inc.
Landmark Bancorp,
(Landmark)
re-
reported
cord net earnings in 2020 of
$19.5 million, an increase of
$8.8 million, or 82.8%, over
amounts recorded last year.
Diluted earnings per share
totaled $4.10, in the current
year compared to $2.20 in
the prior year. Net loans
grew by $170.6 million to
$702.8 million while total
deposits
increased $181.0
million to $1.0 billion. Total
assets at year-end 2020 were
$1.2 billion. Our return on
average assets was 1.77% in
2020 and return on average
Michael E. Scheopner
President/ Chief Executive Officer
equity totaled 16.70%.
These record net earnings were the result of strong revenue
growth including increased mortgage banking activity, growth
in net interest income and our strategic sales of certain mort-
gage-backed investment securities earlier this year. While the
economy remained uncertain all year due to the pandemic, credit
quality remained solid as net loan charge-offs and loan delinquen-
cies remained well-controlled.
Cash dividends paid in 2020 totaled $0.76 per share, or an in-
crease of 5.0% from cash dividends paid in 2019. Landmark has
paid cash dividends every quarter since the Company’s formation
in 2001. We again declared a 5% stock dividend in 2020, the 20th
consecutive year for this added shareholder benefit. Our capital
remains very strong with total equity to assets of 10.7% while our
book value per share increased this year to $26.66 compared to
$22.50 last year.
I want to begin this annual shareholder communication by ex-
tending a thank you to all associates at Landmark National Bank.
The challenges faced by these dedicated bankers in 2020 resulting
from the COVID-19 pandemic were truly unprecedented. Their
response to these challenges, and our ability to work with our cli-
ents as they dealt with the economic uncertainty presented by the
pandemic is something that I am very proud of. Each associate at
Landmark took their role as part of the nation’s critical infrastruc-
ture sector seriously. Their daily focus on executing our strate-
gies, delivering extraordinary service to our clients and commu-
nities, and carrying out our Company Vision that Everyone Starts
as a Customer and Leaves as a Friend was an integral part of our
2020 record performance.
Contributions from all business lines, in every geographic part
of the Landmark franchise were key to our record performance
this year. I believe Landmark’s capital strength and our risk
management practices position us well for continued long-term
growth. Our commitment to community banking – meeting the
financial needs of families and businesses with service that is
both personal and high-tech – continues to build our presence
across Kansas. I expect our trend of solid core earnings to con-
tinue in 2021.
2
Landmark’s Pandemic Response
Landmark started 2020 with a great deal of momentum in the
commercial, retail and mortgage business lines coming off record
performance in 2019. Core operating profits through the first two
months of the year were trending well ahead of expectations due
to new lending and mortgage banking activities.
On March 13, 2020, a national emergency related to the COVID-19
pandemic was declared and our daily operating model was radi-
cally altered. We witnessed first-hand the impact that this crisis
had on our clients and communities, and we immediately adjusted
our focus to helping them through these troubled and uncertain
times. As part of our pandemic response plan, with the safety and
well-being of our associates and customers foremost in mind, we
limited access to our traditional bank lobby network. We repo-
sitioned a significant portion of our associates to a remote work
from home environment, and implemented enhanced precautions
recommended by the Centers for Disease Control for the safety
of those that remained in our bank facilities. To meet customer
needs, we reassigned associates to support our customer care cen-
ter to handle increased call volumes relating to client questions
and to support client access to all of our digital banking platforms.
As a preferred lender with the Small Business Administration
(SBA), we began to immediately help existing and new clients
access the Paycheck Protection Program (PPP) authorized by the
Coronavirus Aid, Relief, and Economic Security (CARES) Act.
During 2020, we assisted nearly 1,100 customers access over
$131 million of PPP funding. PPP loans to existing Landmark
customers amounted to 78% of those total loans while the remain-
ing PPP loans were provided to new Landmark customers. Our
response to the SBA PPP program required a total team effort.
We continue to actively work with borrowers to navigate the SBA
loan forgiveness process for those loans issued in 2020. In addi-
tion, Landmark has fully participated in the 2021 round of PPP
funding authorized by the Economic Aid to Hard-Hit Small Busi-
nesses, Nonprofits and Venues Act which was signed into law in
late December 2020.
In addition to the SBA PPP efforts, we proactively worked with
clients who requested payment deferrals or loan modifications.
These decisions were made on a case-by-case basis so that the
solutions were specific to the client’s capital or liquidity needs.
While these loan requests were often customized, the approved
modifications were consistent with the interagency regulatory
guidance that was issued in late March 2020. As of the end of
2020, only a small number of customers remained in a modified
agreement with all others returning to their contractual terms.
Record Results in 2020
While our pandemic response plan altered the way we operated in
2020, the momentum that I earlier referenced in the commercial,
retail and mortgage business lines was not slowed. If anything, our
associates adapted and consistently exceeded client expectations.
Immediately following the declaration of the pandemic national
emergency, the Federal Reserve slashed its policy rate by a full
percentage point, lowering its target range for the federal funds
rate to 0 to 0.25%. This near zero, highly accommodative, in-
President’s letter continued
terest rate stance resulted in historically low mortgage loan rates,
which created an active housing market in Kansas and prompted
mortgage loan refinance volumes to record levels for Landmark
in 2020. Mortgage loan production in 2020 totaled nearly $450
million, doubling our $225 million production level from 2019
and almost equally split between purchase and refinance activity.
Traditionally, our mortgage production volumes are weighted in
excess of 80% purchase money activity. Our mortgage loan pro-
duction drove a year-over-year increase of over $11.5 million in
non-interest income primarily associated with the gains on sales of
loans sold into the secondary market.
Also, during the year, we sold certain high-coupon mort-
gage-backed investment securities and recognized a gain of $2.4
million. These strategic investment sales were based on our eval-
uation of the risks associated with these specific securities and the
changing interest rate environment occurring early in the year.
In 2020 efforts from our retail banking team resulted in 21.7%
growth in core deposit account balances. Our strategy to drive
growth in lower-cost deposits in non-public-fund checking, mon-
ey market and savings accounts continues to result in increased
“share of wallet” from our retail and commercial clients. We con-
tinue to invest in a platform of products and services to meet the
financial needs of our client base; with a focus on digital services
and solutions that are simple, intuitive, integrated and relevant.
Our past investments in our digital platform proved timely in 2020
as our clients migrated their access to our products and services
through on-line, mobile and video delivery channels versus in lob-
by meetings.
While our successful distribution of PPP funding to our customers
was a major event in 2020, it was only a part of the commercial
banking story. Net loans as of year-end 2020 totaled $702.8 mil-
lion or an increase of 32.1% over the prior year-end. PPP loans
made up $100.1 million of the 2020 year-end net loan total. Loan
growth, excluding the PPP amount, was $70.5 million, or 13.2%,
during 2020. We realized commercial banking loan growth across
all of our geographic markets. Our commercial team continues
to focus on client relationships that meet our credit portfolio stan-
dards, and we avoid trying to “buy” transactions through low price
or credit-structure compromises. We will continue this disciplined
approach to growth.
Landmark’s credit risk disciplines include maintaining a good geo-
graphic and industry mix for diversification in the loan portfolio.
We are geographically diversified throughout Kansas, operating
in 24 communities across Kansas with good diversity among our
many loan products. At year-end 2020, commercial and industrial
loans represented 32.8% of our total loan portfolio and included
$100.1 million in PPP loans, while commercial real estate loans
totaled 24.2% of total loans. Mortgage, agricultural and construc-
tion loans represented 22.1%, 13.5% and 3.7%, respectively of
total loans. We continue to believe appropriate diversification is
key to maintaining solid credit quality.
During 2020, total net loan charge-offs totaled $992 thousand,
or 0.13% of net loans. Based on the uncertain economy, we in-
creased our allowance for loan losses to $8.8 million, or 1.23%
of total loans, and our provision for loan losses increased to $3.3
million. While non-performing loans increased this year to $10.5
3
million, loans delinquent under ninety days declined from the pri-
or year and remained low.
The Future
Much like we began 2020, our commercial, retail and mortgage
business pipelines have started off strong in 2021. While our “tra-
ditional” operating model remains impacted by the COVID-19 pan-
demic, our clients have adapted to accessing their banking needs via
digital, mobile and video platforms, as well as in person interactions
that are now conducted “mask to mask” versus “face to face”.
Our team continues to focus on recruiting new business in a con-
servative and disciplined manner. We are dedicated to prudently
underwriting loans and investments, monitoring interest rate risk,
and maintaining an organizational risk profile to prepare for any
unforeseen future events. As a community bank with a strong
presence across the state, Landmark is committed to growing our
customer relationships and meeting the diverse financial needs of
families and businesses. I expect our success in organically grow-
ing market share across the Landmark franchise to continue.
After halting our acquisition-related activities in 2020 as a result
of the pandemic, we are resuming actively evaluating potential
acquisition targets that would complement our current footprint
as we did prior to the pandemic. Landmark is committed to a
community banking model in which our decision-makers live in
the cities and towns they serve, supported by centralized systems
and resources enabling them to successfully meet clients’ needs.
We will pursue acquisitive growth with this principle as a guide,
while continuing to invest in the operational and human resources
to navigate the regulatory landscape.
While I began this letter with a thank you to the associates at
Landmark, it seems fitting to conclude with an additional note of
gratitude. The record earnings posted by Landmark in 2020 are
the result of a total team effort and the great work of my fellow as-
sociates. They are highly talented community bankers dedicated
to exceeding the expectations of Landmark customers, and I am
proud to be associated with this team. I also want to express my
thanks to our Board of Directors, whose leadership, knowledge of
our banking markets and contributions to developing Landmark’s
strategic plan help set the stage for continued success.
Lastly, I want to thank our customers and shareholders. Without
your continued support and confidence, none of our past successes
would have been possible. It has been our pleasure to work with
you. We look forward to continuing that partnership. I look for-
ward to our continued success.
Sincerely,
Michael E. Scheopner
President / Chief Executive Officer
Financial HigHligHts
$4.20
$4.20
$4.20
$3.15
$3.15
$3.15
$2.10
$2.10
$2.10
$1.05
$1.05
$1.05
$0.00
$0.00
$0.00
$20.0
$20.0
$20.0
$15.0
$15.0
$15.0
$10.0
$10.0
$10.0
$5.0
$5.0
$5.0
$0.0
$0.0
$0.0
1.80%
1.80%
1.80%
1.35%
1.35%
1.35%
0.90%
0.90%
0.90%
0.45%
0.45%
0.45%
0.00%
0.00%
0.00%
Earnings per Share
Earnings per Share
Earnings per Share
2018
2018
2018
2020
2020
2020
2019
2019
2019
Net Earnings
Net Earnings
Net Earnings
(Dollars in Millions)
(Dollars in Millions)
(Dollars in Millions)
2018
2018
2018
2019
2019
2019
2020
2020
2020
Return on Average Assets
Return on Average Assets
Return on Average Assets
2018
2018
2018
2019
2019
2019
2020
2020
2020
Dividends per Share
Dividends per Share
Dividends per Share
2018
2018
2018
2019
2019
2019
Book Value per Share
Book Value per Share
Book Value per Share
2020
2020
2020
2018
2018
2018
2019
2019
2019
2020
2020
2020
Return on Average Equity
Return on Average Equity
Return on Average Equity
2018
2018
2018
2019
2019
2019
2020
2020
2020
$1.00
$1.00
$1.00
$0.75
$0.75
$0.75
$0.50
$0.50
$0.50
$0.25
$0.25
$0.25
$0.00
$0.00
$0.00
$27.00
$27.00
$27.00
$20.25
$20.25
$20.25
$13.50
$13.50
$13.50
$6.75
$6.75
$6.75
$0.00
$0.00
$0.00
20.00%
20.00%
20.00%
15.00%
15.00%
15.00%
10.00%
10.00%
10.00%
5.00%
5.00%
5.00%
0.00%
0.00%
0.00%
4
1
1
1
$4.10 $2.20 $2.16 $0.76 $0.73 $0.69 $19.5 $10.7 $10.4 $26.66 $22.50 $20.02 1.77%1.07%1.09%16.70%10.58%12.09% $4.10 $2.20 $2.16 $0.76 $0.73 $0.69 $19.5 $10.7 $10.4 $26.66 $22.50 $20.02 1.77%1.07%1.09%16.70%10.58%12.09% $4.10 $2.20 $2.16 $0.76 $0.73 $0.69 $19.5 $10.7 $10.4 $26.66 $22.50 $20.02 1.77%1.07%1.09%16.70%10.58%12.09% $1,200.0
$900.0
$600.0
$300.0
$0.0
$1,200.0
$1,200.0
$150.0
$1,200.0
$900.0
$900.0
$112.5
$900.0
$600.0
$600.0
$75.0
$600.0
$300.0
$300.0
$37.5
$300.0
$0.0
$0.0
$0.0
$0.0
$150.0
$40.0
$150.0
$150.0
$112.5
$30.0
$112.5
$112.5
$75.0
$20.0
$75.0
$75.0
$37.5
$10.0
$37.5
$37.5
$0.0
$0.0
$0.0
$0.0
$40.0
$40.0
$40.0
$30.0
$30.0
$30.0
$20.0
$20.0
$20.0
$10.0
$10.0
$10.0
$0.0
$0.0
$0.0
Total Assets
(Dollars in Millions)
Net Loans
(Dollars in Millions)
$800.0
$600.0
$400.0
Financial HigHligHts
$200.0
2020
$0.0
2018
2018
Total Assets
2019
Total Assets
Stockholders' Equity
(Dollars in Millions)
Total Assets
(Dollars in Millions)
(Dollars in Millions)
(Dollars in Millions)
2020
Net Loans
2019
Net Loans
Deposits
(Dollars in Millions)
Net Loans
(Dollars in Millions)
(Dollars in Millions)
(Dollars in Millions)
2018
2018
2018
2018
2019
2019
Stockholders' Equity
2019
Net Interest Income
Stockholders' Equity
2019
(Dollars in Millions)
(Dollars in Millions)
Stockholders' Equity
(Dollars in Millions)
(Dollars in Millions)
2020
2020
2020
2020
2018
2018
2018
2018
2019
Net Interest Income
2019
2019
Net Interest Income
(Dollars in Millions)
2019
Net Interest Income
(Dollars in Millions)
(Dollars in Millions)
2020
2020
2020
2020
2018
2018
2018
2019
2019
2019
2020
2020
2020
2018
2018
2018
2019
Deposits
2019
2019
Deposits
Gains on Sales of Loans
(Dollars in Millions)
2019
2018
Deposits
(Dollars in Millions)
(Dollars in Millions)
(Dollars in Millions)
2020
2020
2020
2020
2018
2018
2018
2018
2019
2019
Gains on Sales of Loans
2019
Gains on Sales of Loans
(Dollars in Millions)
2019
(Dollars in Millions)
Gains on Sales of Loans
(Dollars in Millions)
2020
2020
2020
2020
2018
2018
2018
2019
2019
2019
2020
2020
2020
$800.0
$800.0
$1,100.0
$800.0
$600.0
$600.0
$825.0
$600.0
$400.0
$400.0
$550.0
$400.0
$200.0
$200.0
$275.0
$200.0
$0.0
$0.0
$0.0
$0.0
$1,100.0
$1,100.0
$16.0
$1,100.0
$825.0
$825.0
$12.0
$825.0
$550.0
$550.0
$8.0
$550.0
$275.0
$275.0
$4.0
$275.0
$0.0
$0.0
$0.0
$0.0
$16.0
$16.0
$16.0
$12.0
$12.0
$12.0
$8.0
$8.0
$8.0
$4.0
$4.0
$4.0
$0.0
$0.0
$0.0
5
1
1
1
1
$126.7 $108.6 $91.9 $1,016.0 $835.0 $823.6 $36.5 $30.4 $27.8 $15.2 $6.4 $5.0 $1,188.0 $998.5 $985.8 $702.8 $532.2 $489.4 $126.7 $108.6 $91.9 $1,016.0 $835.0 $823.6 $36.5 $30.4 $27.8 $15.2 $6.4 $5.0 $1,188.0 $998.5 $985.8 $702.8 $532.2 $489.4 $126.7 $108.6 $91.9 $1,016.0 $835.0 $823.6 $36.5 $30.4 $27.8 $15.2 $6.4 $5.0 $1,188.0 $998.5 $985.8 $702.8 $532.2 $489.4 $126.7 $108.6 $91.9 $1,016.0 $835.0 $823.6 $36.5 $30.4 $27.8 $15.2 $6.4 $5.0 $1,188.0 $998.5 $985.8 $702.8 $532.2 $489.4 DIRECTORS OF LANDMARK BANCORP, INC. AND LANDMARK NATIONAL BANK
DIRECTORS OF LANDMARK BANCORP, INC. AND LANDMARK NATIONAL BANK
DIRECTORS OF LANDMARK BANCORP, INC. AND LANDMARK NATIONAL BANK
EXECUTIVE OFFICERS OF LANDMARK BANCORP, INC.
DIRECTORS OF LANDMARK BANCORP, INC. AND LANDMARK NATIONAL BANK
DIRECTORS OF LANDMARK BANCORP, INC. AND LANDMARK NATIONAL BANK
DIRECTORS OF LANDMARK BANCORP, INC. AND LANDMARK NATIONAL BANK
DIRECTORS OF LANDMARK BANCORP, INC. AND LANDMARK NATIONAL BANK
EXECUTIVE OFFICERS OF LANDMARK BANCORP, INC.
(From left) Sarah Hill-Nelson, Wayne R. Sloan, Patrick L. Alexander, Jim W. Lewis,
David H. Snapp, Susan E. Roepke, Richard A. Ball, Michael E. Scheopner, Brent A. Bowman
Michael E. Scheopner
President and Chief Executive Officer
Mark A. Herpich
Vice President, Secretary,
Chief Financial Officer and Treasurer
Patrick L. Alexander, Chairman
Landmark Bancorp, Inc. and
Landmark National Bank
Michael E. Scheopner
President and Chief Executive Officer
Patrick L. Alexander, Chairman
Landmark Bancorp, Inc. and
Landmark Bancorp, Inc. and
Landmark National Bank
Landmark National Bank
Michael E. Scheopner
President and Chief Executive Officer
Mark A. Herpich
Vice President, Secretary,
Chief Financial Officer and Treasurer
Sarah Hill-Nelson
Michael E. Scheopner
Jim W. Lewis
President and Chief Executive Officer
President and Chief Executive Officer
The Bowersock Mills & Power Company
Owner
Lewis Automotive Group
Michael E. Scheopner
(From left) Sarah Hill-Nelson, Wayne R. Sloan, Patrick L. Alexander, Jim W. Lewis,
(From left) Sarah Hill-Nelson, Wayne R. Sloan, Patrick L. Alexander, Jim W. Lewis,
(From left) Sarah Hill-Nelson, Wayne R. Sloan, Patrick L. Alexander, Jim W. Lewis,
President and Chief Executive Officer
David H. Snapp, Susan E. Roepke, Richard A. Ball, Michael E. Scheopner, Brent A. Bowman
David H. Snapp, Susan E. Roepke, Richard A. Ball, Michael E. Scheopner, Brent A. Bowman
David H. Snapp, Susan E. Roepke, Richard A. Ball, Michael E. Scheopner, Brent A. Bowman
(From left) Sarah Hill-Nelson, Wayne R. Sloan, Patrick L. Alexander, Jim W. Lewis,
EXECUTIVE OFFICERS OF LANDMARK NATIONAL BANK
Jim W. Lewis
David H. Snapp, Susan E. Roepke, Richard A. Ball, Michael E. Scheopner, Brent A. Bowman
(From left) Sarah Hill-Nelson, Wayne R. Sloan, Patrick L. Alexander, Jim W. Lewis,
Owner
(From left) Sarah Hill-Nelson, Wayne R. Sloan, Patrick L. Alexander, Jim W. Lewis,
Lewis Automotive Group
David H. Snapp, Susan E. Roepke, Richard A. Ball, Michael E. Scheopner, Brent A. Bowman
David H. Snapp, Susan E. Roepke, Richard A. Ball, Michael E. Scheopner, Brent A. Bowman
Jim W. Lewis
Patrick L. Alexander, Chairman
EXECUTIVE OFFICERS OF LANDMARK NATIONAL BANK
Mark A. Herpich
Jim W. Lewis
Jim W. Lewis
Patrick L. Alexander, Chairman
Patrick L. Alexander, Chairman
Owner
Landmark Bancorp, Inc. and
Executive Vice President, Secretary and
Owner
Owner
Landmark Bancorp, Inc. and
Landmark Bancorp, Inc. and
DIRECTORS OF LANDMARK BANCORP, INC. AND LANDMARK NATIONAL BANK
Jim W. Lewis
Lewis Automotive Group
Landmark National Bank
Patrick L. Alexander, Chairman
Chief Financial Officer
Lewis Automotive Group
Landmark National Bank
Landmark National Bank
Lewis Automotive Group
Owner
Landmark Bancorp, Inc. and
Mark A. Herpich
Lewis Automotive Group
Jim W. Lewis
Landmark National Bank
Patrick L. Alexander, Chairman
Executive Vice President, Secretary and
Owner
Landmark Bancorp, Inc. and
Michael E. Scheopner
Sarah Hill-Nelson
Chief Financial Officer
Lewis Automotive Group
Landmark National Bank
Michael E. Scheopner
Michael E. Scheopner
Sarah Hill-Nelson
Sarah Hill-Nelson
President and Chief Executive Officer
President and Chief Executive Officer
President and Chief Executive
President and Chief Executive Officer
President and Chief Executive Officer
President and Chief Executive Officer
Michael E. Scheopner
Sarah Hill-Nelson
Landmark Bancorp, Inc. and
The Bowersock Mills & Power Company
Landmark Bancorp, Inc. and
Officer Landmark Bancorp, Inc. and
The Bowersock Mills & Power Company
The Bowersock Mills & Power Company
Sandra J. Moll
Landmark National Bank
President and Chief Executive Officer
President and Chief Executive Officer
Landmark National Bank
Landmark National Bank
Michael E. Scheopner
Landmark Bancorp, Inc. and
Sarah Hill-Nelson
Owner
The Bowersock Mills & Power Company
Sarah Hill-Nelson
Landmark National Bank
Advance Business Solutions, LLC
President and Chief Executive Officer
President and Chief Executive Officer
President and Chief Executive Officer
Sandra J. Moll
Richard A. Ball
Landmark Bancorp, Inc. and
The Bowersock Mills & Power Company
Sandra J. Moll
Richard A. Ball
Richard A. Ball
The Bowersock Mills & Power Company
Sandra J. Moll
Certified Public Accountant
Owner
Landmark National Bank
Certified Public Accountant
Certified Public Accountant
Owner
Owner
Ball Consulting Group, Ltd.
Sandra J. Moll
Richard A. Ball
Advance Business Solutions, LLC
President
Ball Consulting Group, Ltd.
Advance Business Solutions, LLC
Advance Business Solutions, LLC
Certified Public Accountant
Owner
Ball Consulting Group, Ltd.
Ball Consulting Group, Ltd.
Sandra J. Moll
Richard A. Ball
Advance Business Solutions, LLC
Certified Public Accountant
Brent A. Bowman
Owner
Wayne R. Sloan
Dean R. Thibault
Brent A. Bowman
Wayne R. Sloan
Wayne R. Sloan
Ball Consulting Group, Ltd.
Advance Business Solutions, LLC
Vice President
Chairman
Executive Vice President
Brent A. Bowman
President
Chairman and Chief Executive Officer
Chairman and Chief Executive Officer
Brent A. Bowman
BBN Architects, Inc.
BHS Construction, Inc.
Wayne R. Sloan
Chief Lending Officer
President
BBN Architects, Inc.
BHS Construction, Inc.
BHS Construction, Inc.
President
Chairman and Chief Executive Officer
BBN Architects, Inc.
Dean R. Thibault
David H. Snapp
BBN Architects, Inc.
Brent A. Bowman
BHS Construction, Inc.
Wayne R. Sloan
Attorney
Executive Vice President
President
Chairman and Chief Executive Officer
David H. Snapp, LC
Chief Lending Officer
BBN Architects, Inc.
BHS Construction, Inc.
Wayne R. Sloan
Chairman and Chief Executive Officer
BHS Construction, Inc.
Mark J. Oliphant
Executive Vice President and
Market President Central Region
(From left) Sarah Hill-Nelson, Wayne R. Sloan, Patrick L. Alexander, Jim W. Lewis,
David H. Snapp, Susan E. Roepke, Richard A. Ball, Michael E. Scheopner, Brent A. Bowman
Sandra J. Moll
Owner
Advance Business Solutions, LLC
Michael E. Scheopner
President and Chief Executive Officer
Landmark Bancorp, Inc. and
Landmark National Bank
Richard A. Ball
Certified Public Accountant
Ball Consulting Group, Ltd.
Mark J. Oliphant
Executive Vice President and
Market President Central Region
Richard A. Ball
Certified Public Accountant
Ball Consulting Group, Ltd.
Brent A. Bowman
President
BBN Architects, Inc.
Brent A. Bowman
President
BBN Architects, Inc.
Wayne R. Sloan
Chairman and Chief Executive Officer
David H. Snapp
David H. Snapp
David H. Snapp
BHS Construction, Inc.
Attorney
Attorney
Attorney
David H. Snapp
David H. Snapp, LC
David H. Snapp, LC
David H. Snapp, LC
Attorney
David H. Snapp, LC
David H. Snapp
Attorney
David H. Snapp, LC
Jim W. Lewis
Owner
Lewis Automotive Group
Patrick L. Alexander, Chairman
Landmark Bancorp, Inc. and
Landmark National Bank
David H. Snapp
Attorney
David H. Snapp, LC
Michael E. Scheopner
President and Chief Executive Officer
Landmark Bancorp, Inc. and
Landmark National Bank
6
Richard A. Ball
Certified Public Accountant
Ball Consulting Group, Ltd.
Brent A. Bowman
President
BBN Architects, Inc.
6
Sarah Hill-Nelson
President and Chief Executive Officer
The Bowersock Mills & Power Company
Sandra J. Moll
Owner
Advance Business Solutions, LLC
Wayne R. Sloan
Chairman and Chief Executive Officer
BHS Construction, Inc.
6
6
6
6
6
6
7
7
6
David H. Snapp
Attorney
David H. Snapp, LC
CORPORATE INFORMATION
CORPORATE INFORMATION
CORPORATE INFORMATION
CORPORATE INFORMATION
CORPORATEHEADQUARTERS
CORPORATE HEADQUARTERS
CORPORATEHEADQUARTERS
CORPORATEHEADQUARTERS
701 Poyntz Avenue
701 Poyntz Avenue
701 Poyntz Avenue
701 Poyntz Avenue
Manhattan, Kansas 66502
Manhattan, Kansas 66502
Manhattan, Kansas 66502
Manhattan, Kansas 66502
ANNUALMEETING
ANNUAL MEETING
ANNUALMEETING
ANNUALMEETING
The annual meeting of stockholders will
The annual meeting of stockholders will
The annual meeting of stockholders will
The annual meeting of stockholders will
be held by virtual meeting, on Wednesday,
be held by virtual meeting, on Wednesday,
be held by virtual meeting, on Wednesday,
be held by virtual meeting, on Wednesday,
May 19, 2021 at 2:00 PM.
May 19, 2021 at 2:00 PM.
May 19, 2021 at 2:00 PM.
May 19, 2021 at 2:00 PM.
REGISTRAR AND TRANSFER AGENT
REGISTRAR AND TRANSFER AGENT
REGISTRAR AND TRANSFER AGENT
REGISTRAR AND TRANSFER AGENT
Computershare, Inc.
Computershare, Inc.
Computershare, Inc.
Computershare, Inc.
P.O. Box 30170
P.O. Box 30170
P.O. Box 30170
P.O. Box 30170
College Station, Texas 77842
College Station, Texas 77842
College Station, Texas 77842
College Station, Texas 77842
INDEPENDENT REGISTERED
INDEPENDENT REGISTERED
INDEPENDENT REGISTERED
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
PUBLIC ACCOUNTING FIRM
PUBLIC ACCOUNTING FIRM
PUBLIC ACCOUNTING FIRM
Crowe Chizek LLP
Crowe Chizek LLP
Crowe Chizek LLP
Crowe Chizek LLP
One Mid America Plaza, Suite 700
One Mid America Plaza, Suite 700
One Mid America Plaza, Suite 700
One Mid America Plaza, Suite 700
Oak Brook, Illinois 60522
Oak Brook, Illinois 60522
Oak Brook, Illinois 60522
Oak Brook, Illinois 60522
FORM 10-K
FORM 10-K
FORM 10-K
FORM 10-K
A copy of the Annual Report on Form 10-K filed with the
A copy of the Annual Report on Form 10-K filed with the
A copy of the Annual Report on Form 10-K filed with the
A copy of the Annual Report on Form 10-K filed with the
Securities and Exchange Commission may be obtained
Securities and Exchange Commission may be obtained
Securities and Exchange Commission may be obtained
Securities and Exchange Commission may be obtained
by stockholders without charge on written request to
by stockholders without charge on written request to
by stockholders without charge on written request to
by stockholders without charge on written request to
Michael E. Scheopner, President and Chief Executive Officer,
Michael E. Scheopner, President and Chief Executive Officer,
Michael E. Scheopner, President and Chief Executive Officer,
Michael E. Scheopner, President and Chief Executive Officer,
Landmark Bancorp, Inc., P.O. Box 308, Manhattan,
Landmark Bancorp, Inc., P.O. Box 308, Manhattan,
Landmark Bancorp, Inc., P.O. Box 308, Manhattan,
Landmark Bancorp, Inc., P.O. Box 308, Manhattan,
Kansas 66505-0308, or by accessing our website at
Kansas 66505-0308, or by accessing our website at
Kansas 66505-0308, or by accessing our website at
Kansas 66505-0308, or by accessing our website at
http://www.landmarkbancorpinc.com or the SEC’s
http://www.landmarkbancorpinc.com or the SEC’s
http://www.landmarkbancorpinc.com or the SEC’s
http://www.landmarkbancorpinc.com or the SEC’s
website at www.sec.gov.
website at www.sec.gov.
website at www.sec.gov.
website at www.sec.gov.
MISSION STATEMENT
MISSION STATEMENT
MISSION STATEMENT
MISSION STATEMENT
We are dedicated to providing quality financial services to customers in
We are dedicated to providing quality financial services to customers in
We are dedicated to providing quality financial services to customers in
We are dedicated to providing quality financial services to customers in
a manner that exceeds customer expectations. These services will
a manner that exceeds customer expectations. These services will
a manner that exceeds customer expectations. These services will
a manner that exceeds customer expectations. These services will
be delivered by outgoing, professional, and knowledgeable
be delivered by outgoing, professional, and knowledgeable
be delivered by outgoing, professional, and knowledgeable
be delivered by outgoing, professional, and knowledgeable
associates that are focused on asking for the business and
associates that are focused on asking for the business and
associates that are focused on asking for the business and
associates that are focused on asking for the business and
establishing long-term banking relationships. These banking
establishing long-term banking relationships. These banking
establishing long-term banking relationships. These banking
establishing long-term banking relationships. These banking
relationships will have a foundation of personal service and
relationships will have a foundation of personal service and
relationships will have a foundation of personal service and
relationships will have a foundation of personal service and
quality products that are delivered in a convenient manner
quality products that are delivered in a convenient manner
quality products that are delivered in a convenient manner
quality products that are delivered in a convenient manner
that meet our customers’ needs at a fair and competitive price.
that meet our customers’ needs at a fair and competitive price.
that meet our customers’ needs at a fair and competitive price.
that meet our customers’ needs at a fair and competitive price.
OUR VISION
OUR VISION
OUR VISION
OUR VISION
Everyone starts as a customer and leaves as a friend.
Everyone starts as a customer and leaves as a friend.
Everyone starts as a customer and leaves as a friend.
Everyone starts as a customer and leaves as a friend.
7
SERVING COMMUNITIES ACROSS KANSAS
Landmark National Bank, a Bauer 5-Star rated bank, has thirty banks
in twenty-four Kansas communities. We are dedicated to building meaningful
relationships with our customers providing security, convenience and expertise.
MANHATTAN
701 Poyntz
3005 Anderson
AUBURN
1741 N. Washington
DODGE CITY
Central & Spruce
2500 N. 14th
FORT SCOTT
200 S. Main
US 69 HWY & 23rd St.
GARDEN CITY
1007 N. Main
GREAT BEND
1623 Main St.
5200 Broadway
HOISINGTON
623 N. Main
IOLA
1206 East St.
LENEXA
7900 Quivira Rd.
PAOLA
1310 Baptiste Dr.
LOUISBURG
100 W. Amity
PITTSBURG
2300 N. Broadway
JUNCTION CITY
208 S. Washington
MOUND CITY
402 S. Main
PPRRAAIIRRIIEE VVIILLLLAAGGEE
3500 W. 75th St.
KINCAID
102 N. Commercial
OSAGE CITY
102 S. Sixth
LA CROSSE
808 Main
LAWRENCE
2710 Iowa St.
4621 W. 6th St.
OSAWATOMIE
600 Main
OVERLAND PARK
8101 W. 135th St.
TOPEKA
6100 SW 21st St.
6010 SW 6th Ave.
WAMEGO
530 Lincoln
WELLSVILLE
112 W. Sixth
www.banklandmark.com
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For fiscal year ended December 31, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For transition period from __________ to ___________
Commission File Number 0-33203
LANDMARK BANCORP, INC.
(Exact name of Registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)
43-1930755
701 Poyntz Avenue, Manhattan, Kansas 66502
(Address of principal executive offices)
(Zip Code)
(785) 565-2000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class:
Common Stock, par value $0.01 per share
Trading Symbol(s) Name of each exchange on which registered:
Nasdaq Global Market
LARK
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes
No
Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past 90 days.
No
Yes
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be
submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
No
Yes
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a
smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,”
“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition
period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange
Act.
Smaller reporting company
Non-accelerated filer
Accelerated filer
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of
the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.
7262(b)) by the registered public accounting firm that prepared or issued its audit report.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes
No
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based
on the last sales price of $23.53 quoted on the Nasdaq Global Market on the last business day of the registrant’s most recently
completed second fiscal quarter, was approximately $74.0 million. On March 19, 2021, the total number of shares of common
stock outstanding was 4,754,361.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Stockholders of the registrant to be held on May 19, 2021,
are incorporated by reference in Part III hereof, to the extent indicated herein.
9
LANDMARK BANCORP, INC.
2020 Form 10-K Annual Report
Table of Contents
ITEM 1.
BUSINESS .............................................................................................................
ITEM 1A.
RISK FACTORS ...................................................................................................
ITEM 1B.
UNRESOLVED STAFF COMMENTS.................................................................
ITEM 2.
PROPERTIES ........................................................................................................
ITEM 3.
LEGAL PROCEEDINGS ......................................................................................
ITEM 4.
MINE SAFETY DISCLOSURES ..........................................................................
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES .................
ITEM 6.
SELECTED FINANCIAL DATA ........................................................................
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ..............................................
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK ....................................................................................................
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA .......................
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE ............................................
ITEM 9A.
CONTROLS AND PROCEDURES .....................................................................
ITEM 9B.
OTHER INFORMATION .....................................................................................
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 11.
EXECUTIVE COMPENSATION .........................................................................
ITEM 12.
ITEM 13.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS ...........
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE ............................................................................
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES .......................................
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES .............................
ITEM 16.
FORM 10-K SUMMARY .....................................................................................
SIGNATURES
...............................................................................................................................
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107
108
108
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112
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ITEM 1. BUSINESS
The Company
PART I.
Landmark Bancorp, Inc. (the “Company”) is a financial holding company that was incorporated under the
laws of the State of Delaware in 2001. Currently, the Company’s business consists of the ownership of Landmark
National Bank (the “Bank”) and Landmark Risk Management, Inc., which are wholly-owned subsidiaries of the
Company. As of December 31, 2020, the Company had $1.2 billion in consolidated total assets.
The Company is headquartered in Manhattan, Kansas, and has expanded its geographic presence through
opening new branches and past acquisitions. In May 2019, the Bank opened a loan production office in Prairie Village,
Kansas. During the third quarter of 2019, the loan production office was converted into a branch office. The Company
continues to explore opportunities to expand its banking markets through mergers and acquisitions, as well as
branching opportunities.
The Bank has continued to focus on increasing its originations of commercial, commercial real estate and
agricultural loans, which management believes will be more profitable and provide more growth for the Bank than
traditional one-to-four family residential real estate lending. Additionally, greater emphasis has been placed on
diversification of the deposit mix through the expansion of core deposit accounts such as checking, savings, and money
market accounts. The Bank has also diversified its geographical markets as a result of its acquisitions and branching
opportunities. The Company’s main office is in Manhattan, Kansas. The Company has 30 branch offices in 24
communities across the state of Kansas.
Landmark Risk Management, Inc., which was formed and began operations on May 31, 2017, is a Nevada-
based captive insurance company that provides property and casualty insurance coverage to the Company and the
Bank for which insurance may not be currently available or economically feasible in the insurance marketplace.
Landmark Risk Management, Inc. is subject to the regulations of the State of Nevada and undergoes periodic
examinations by the Nevada Division of Insurance. As of May 31, 2019, Landmark Risk Management, Inc. exited the
pool resources relationship of which it was previously a member. On October 1, 2020, Landmark Risk Management,
Inc. joined a new pool and resumed providing insurance to the Company and the Bank.
The results of operations of the Bank and the Company are dependent primarily upon net interest income
and, to a lesser extent, upon other income derived from sales of one-to-four family residential mortgage loans, loan
servicing fees and customer deposit services. Additional expenses of the Bank include general and administrative
expenses such as salaries, employee benefits, federal deposit insurance premiums, data processing, occupancy and
related expenses.
Deposits of the Bank are insured by the Deposit Insurance Fund (the “DIF”) of the Federal Deposit Insurance
Corporation (the “FDIC”) up to the maximum amount allowable under applicable federal laws and regulations. The
Bank is regulated by the Office of the Comptroller of the Currency (the “OCC”), as the chartering authority for national
banks, and the FDIC, as the administrator of the DIF. The Bank is also subject to regulation by the Board of Governors
of the Federal Reserve System (the “Federal Reserve”) with respect to reserves required to be maintained against
deposits and certain other matters. The Bank is a member of the Federal Reserve Bank of Kansas City and the Federal
Home Loan Bank (the “FHLB”) of Topeka.
The Company’s executive office and the Bank’s main office are located at 701 Poyntz Avenue, Manhattan,
Kansas 66502. The telephone number is (785) 565-2000.
Market Areas
The COVID-19 pandemic in the United States has had and continues to have a complex and significant
adverse impact on the economy, the banking industry and the Company, all subject to a high degree of uncertainty for
future periods. The Bank’s products and services are offered primarily in Kansas, where individual and governmental
responses to the COVID-19 pandemic led to a broad curtailment of economic activity beginning in March 2020 as a
11
result of a stay-at-home order, which was lifted on May 3, 2020, with economic and social gatherings reopening in a
phased-in approach since then. The re-opening of the economy in Kansas initially resulted in increased cases of
COVID-19, and additional restrictions were put in place to slow the spread. While case numbers have declined, these
measures have had an impact on the economy of and customers located in Kansas. The Bank and its branches have
remained open during these orders because banks have been deemed essential businesses. The Bank is currently
serving its customers through its digital banking platforms and drive-thru services, with most branch lobbies re-opened
to customers. The Bank will continue to monitor the situation to protect the safety and well-being of our customers
and associates.
The Bank’s primary deposit gathering and lending markets are geographically diversified throughout central,
eastern, southeast, and southwest Kansas. The primary industries within these respective markets are also diverse and
dependent upon a wide array of industry and governmental activity for their economic base. A brief description of the
four geographic areas and the communities which the Bank serves is set forth below.
The central region of the Bank’s market area consists of the Bank’s locations in Auburn, Junction City,
Manhattan, Osage City, Topeka and Wamego, Kansas and includes the counties of Riley, Geary, Osage, Pottawatomie
and Shawnee. The economies are significantly impacted by employment at Fort Riley Military Base in Junction City
and Kansas State University, the second largest university in Kansas, which is located in Manhattan. Topeka is the
capital of Kansas and strongly influenced by the government of the State of Kansas. Topeka and Manhattan are
regional destinations for retail shopping as well as home to regional hospitals. Manhattan was also selected as the site
of a new National Bio and Agro-Defense Facility, which has had a significant impact on the regional economy as the
facility is being constructed, and that impact is expected to continue once the facility begins operations. Construction
of the facility began in 2013, and the facility is expected to be fully operational in December 2022. Additionally,
manufacturing and service industries play a key role within the central Kansas market.
The Bank’s eastern Kansas branches are located in the communities of Lawrence, Lenexa, Louisburg,
Osawatomie, Overland Park, Paola, Prairie Village and Wellsville, Kansas. The Bank’s Lawrence locations are
located in Douglas County and are significantly impacted by the University of Kansas, the largest university in Kansas.
The eastern region is strongly influenced by the Kansas City metropolitan market, which is the highest growth area in
the State of Kansas. The region is influenced by public and private industries and businesses of all sizes. In addition,
housing growth and commercial real estate are major drivers of the region’s economy. The Bank added commercial
lenders in this market and opened a new branch in Prairie Village during 2019. These additions have significantly
contributed to the Bank’s growth in loans and deposits.
The southeast region of the Bank’s market area consists of the Bank’s locations in Fort Scott, Iola, Kincaid,
Mound City and Pittsburg, Kansas. Agriculture, oil, and gas are the predominant industries in the southeast Kansas
region. Both Fort Scott and Pittsburg are recognized as regional commercial centers within the southeast region of
the state, which attracts small retail businesses to the region. Additionally, Pittsburg State University and Fort Scott
Community College attract a number of individuals from the surrounding area to live within the communities to
participate in educational programs and pursue a degree. Additionally, manufacturing and service industries play a
key role within the southeast Kansas market.
The Bank’s southwest Kansas branches are located in the communities of Dodge City, Garden City, Great
Bend, Hoisington and LaCrosse, Kansas. Agriculture, oil, and gas are the predominant industries in the southwest
Kansas region. Predominant activities involve crop production, feed lot operations, and food processing. Dodge City
is known as the “Cowboy Capital of the World” and maintains a significant tourism industry. Both Dodge City and
Garden City are recognized as regional commercial centers within the state with small businesses, manufacturing,
retail, and service industries having a significant influence upon the local economies. Additionally, the Dodge City,
Garden City and Great Bend communities each have a community college that attracts individuals from the
surrounding areas.
Competition
The Company faces strong competition both in attracting deposits and making real estate, commercial and
other loans. Its most direct competition for deposits and loans comes from large national and regional banks, local
community banks, savings and loan associations, securities and brokerage companies, mortgage companies, insurance
12
companies, finance companies, money market mutual funds, credit unions, financial technology (fintech) companies
and other non-bank financial service providers located in its principal market areas, including many larger financial
institutions which have greater financial and marketing resources available to them. The ability of the Company to
attract and retain deposits generally depends on its ability to provide a rate of return, service levels, liquidity and risk
comparable to or better than those offered by competing investment opportunities. The Company competes for loans
principally through the interest rates and loan fees it charges and the efficiency and quality of services it provides
borrowers.
Employees
At December 31, 2020, the Bank had a total of 292 employees (282 full time equivalent employees). The
Company has no employees, although the Company is a party to several employment agreements with executives of
the Bank. Employees are provided with a comprehensive benefits program, including basic and major medical
insurance, life and disability insurance, sick leave, and a 401(k) profit sharing plan. Employees are not represented
by any union or collective bargaining group, and the Bank considers its employee relations to be good.
Lending Activities
General. The Bank strives to provide a full range of financial products and services to small- and medium-
sized businesses and to consumers in each market area it serves. The Bank targets owner-operated businesses and
utilizes Small Business Administration (SBA) lending as a part of its product mix. The Bank has a loan committee
for each of its markets, which has authority to approve credits within established guidelines. Concentrations in excess
of those guidelines must be approved by either a corporate loan committee comprised of the Bank’s Chief Executive
Officer, the Credit Risk Manager, and other senior commercial lenders or the Bank’s board of directors. When lending
to an entity, the Bank generally obtains a guaranty from the principals of the entity. The loan mix is subject to the
discretion of the Bank’s board of directors and the demands of the local marketplace.
The following is a brief description of each major category of the Bank’s lending activity.
One-to-Four Family Residential Real Estate Lending. The Bank originates one-to-four family residential
real estate loans with both fixed and variable rates. One-to-four family residential real estate loans are typically priced
and originated following underwriting standards that are consistent with guidelines established by the major buyers in
the secondary market. Generally, residential real estate loans retained in the Bank’s loan portfolio have fixed or
variable rates with adjustment periods of seven years or less and amortization periods of typically either 15 or 30
years. A significant portion of these loans prepay prior to maturity. The Bank has no potential negative amortization
loans. While the origination of fixed-rate, one-to-four family residential loans continues to be a key component of
our business, the majority of these loans are sold in the secondary market. One-to-four family residential real estate
loans that exceed 80% of the appraised value of the real estate generally are required, by policy, to be supported by
private mortgage insurance, although on occasion the Bank will retain non-conforming residential loans to known
customers at premium pricing. The balances of one-to-four family residential real estate loans increased as of
December 31, 2020 compared to December 31, 2019 as the Bank decided to retain additional loans as an alternative
to purchasing investment securities. While the Bank retains some of the new loan originations, most of the new loans
continue to be sold.
Construction and Land Lending. Loans in this category include loans to facilitate the development of both
residential and commercial real estate. Construction and land loans generally have terms of less than 18 months, and
the Bank will retain a security interest in the borrower’s real estate. Construction loans are generally limited, by policy,
to 80% of the appraised value of the property. Land loans are generally limited, by policy, to 65% of the appraised
value of the property. The origination of construction and land loans has not been a primary strategy of the Bank over
the past few years to reduce risk in the Bank’s loan portfolio. The balances of construction and land loans increased
as of December 31, 2020 compared to December 31, 2019 as a result of increased loans to existing customers.
Commercial Real Estate Lending. Commercial real estate loans, including multi-family loans, generally
have amortization periods of 15 or 20 years. Commercial real estate and multi-family loans are generally limited, by
policy, to 80% of the appraised value of the property. Commercial real estate loans are also supported by an analysis
demonstrating the borrower’s ability to repay. The Bank continues to focus on generating additional commercial real
13
estate loan relationships. The Bank’s loan growth over the past few years has been driven in large part by commercial
real estate loans. These loans are primarily made to customers with owner-occupied properties.
Commercial Lending. Commercial loans include loans to service, retail, wholesale and light manufacturing
businesses. Commercial loans are made based on the financial strength and repayment ability of the borrower, as well
as the collateral securing the loans. The Bank targets owner-operated businesses as its customers and makes lending
decisions based upon a cash flow analysis of the borrower as well as a collateral analysis. Accounts receivable loans
and loans for inventory purchases are generally on a one-year renewable term, and loans for equipment generally have
a term of seven years or less. The Bank generally takes a blanket security interest in all assets of the borrower.
Equipment loans are generally limited to 75% of the cost or appraised value of the equipment. Inventory loans are
generally limited to 50% of the value of the inventory, and accounts receivable loans are generally limited to 75% of
a predetermined eligible base. The Bank continues to focus its organic growth on generating additional commercial
loan relationships, including SBA loans. The Bank has been able to increase its balances of commercial loans over
the past few years as a result of recruiting new customer relationships.
Paycheck Protection Program Lending. Starting in 2020, the Bank participates as a lender in the SBA’s
Paycheck Protection Program (“PPP”). PPP is a loan program administered through the SBA to help businesses
impacted by COVID-19, with the loans guaranteed by the SBA. The Bank receives an origination fee from the SBA
as part of the lending process. The loans have an interest rate of 1.00% plus the amortization of the origination fee.
The maturity date of these loans is two or five years unless the borrower’s loan is forgiven, in which case the loan
may be repaid sooner. The Bank’s ability to originate PPP loans is dependent upon the extent to which the program
is authorized by the federal government to continue in future periods.
Municipal Lending. Loans to municipalities are generally related to equipment leasing or general fund loans.
Terms are generally limited to 5 years. Equipment leases are generally made for the purchase of municipal assets and
are secured by the leased asset. The Bank is generally not active in the origination of municipal loans and leases;
however, the Bank may originate loans or leases for municipalities in its market area.
Agriculture Lending. Agricultural real estate loans generally have amortization periods of 20 years or less,
during which time the Bank generally retains a security interest in the borrower’s real estate. The Bank also provides
short-term credit for operating loans and intermediate-term loans for farm product, livestock and machinery purchases
and other agricultural improvements. Farm product loans generally have a one-year term, and machinery, equipment
and breeding livestock loans generally have five to seven year terms. Extension of credit is based upon the borrower’s
ability to repay, as well as the existence of federal guarantees and crop insurance coverage. These loans are generally
secured by a blanket lien on livestock, equipment, feed, hay, grain and growing crops. Equipment and breeding
livestock loans are generally limited to 75% of appraised value. The Bank continues to focus on generating additional
agriculture loan relationships in each of its market areas. Improvements in the financial results of the Bank’s
agriculture customers contributed to the decline in these loan balances as of December 31, 2020 compared to
December 31, 2019.
Consumer and Other Lending. Loans classified as consumer and other loans include automobile, boat,
home improvement and home equity loans. With the exception of home improvement loans and home equity loans,
the Bank generally takes a purchase money security interest in collateral for which it provides the original financing.
Home improvement loans and home equity loans are principally secured through second mortgages. The terms of the
loans typically range from one to five years, depending upon the use of the proceeds, and generally range from 75%
to 90% of the value of the collateral. The majority of these loans are installment loans with fixed interest rates. Home
improvement and home equity loans are generally secured by a second mortgage on the borrower’s personal residence
and, when combined with the first mortgage, limited to 80% of the value of the property unless further protected by
private mortgage insurance. Home improvement loans are generally made for terms of five to seven years with fixed
interest rates. Home equity loans are generally made for terms of ten years on a revolving basis with adjustable
monthly interest rates tied to the national prime interest rate. While the Bank primarily provides consumer loans to
its existing customers, consumer lending is not a category the Bank targets for organic growth.
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Loan Origination and Processing
Loan originations are derived from a number of sources. Residential loan originations result from real estate
broker referrals, direct solicitation by the Bank’s loan officers, present depositors and borrowers, referrals from
builders and attorneys, walk-in customers and, in some instances, other lenders. Consumer and commercial real estate
loan originations generally emanate from many of the same sources.
Residential loan applications are underwritten and closed based upon standards which generally meet
secondary market guidelines. The loan underwriting procedures followed by the Bank conform to regulatory
specifications and are designed to assess both the borrower’s ability to make principal and interest payments and the
value of any assets or property serving as collateral for the loan. Generally, as part of the process, a loan officer meets
with each applicant to obtain the appropriate employment and financial information as well as any other required loan
information. The Bank then obtains reports with respect to the borrower’s credit record, and on real estate loans,
orders and reviews an appraisal of any collateral for the loan (prepared for the Bank by an independent appraiser).
Loan applicants are notified promptly of the decision of the Bank. Prior to closing any long-term loan, the
borrower must provide proof of fire and casualty insurance on the property serving as collateral, and such insurance
must be maintained during the full term of the loan. Title insurance is required on loans collateralized by real property.
The Bank is focusing on the generation of commercial, commercial real estate and agriculture loans to grow
and diversify the loan portfolio. During 2020, the Bank was able to generate loan growth across the geographic markets
that it serves, primarily in commercial real estate and commercial loans. In addition, the Bank also generated
significant loan growth by originating PPP loans to help businesses impacted by COVID-19.
Supervision and Regulation
General
FDIC-insured institutions, like the Bank, their holding companies and their affiliates are extensively
regulated under federal law. As a result, our growth and earnings performance may be affected not only by
management decisions and general economic conditions, but also by the requirements of applicable statutes and by
the regulations and policies of various bank regulatory agencies, including our primary regulator, the Federal Reserve,
and the Bank’s primary regulator, the OCC, as well as the FDIC, as the insurer of our deposits, and the Consumer
Financial Protection Bureau (“CFPB”), as the regulator of consumer financial services and their providers.
Furthermore, taxation laws administered by the Internal Revenue Service and state taxing authorities, accounting rules
developed by the Financial Accounting Standards Board (“FASB”), securities laws administered by the Securities and
Exchange Commission (“SEC”) and state securities authorities, and anti-money laundering laws enforced by the U.S.
Department of the Treasury (“Treasury”) have an impact on our business. The effect of these statutes, regulations,
regulatory policies and accounting rules are significant to our operations and results.
Federal and state banking laws impose a comprehensive system of supervision, regulation and enforcement
on the operations of FDIC-insured institutions, their holding companies and affiliates that is intended primarily for the
protection of the FDIC-insured deposits and depositors of banks, rather than shareholders. These laws, and the
regulations of the bank regulatory agencies issued under them, affect, among other things, the scope of our business,
the kinds and amounts of investments we may make, required capital levels relative to assets, the nature and amount
of collateral for loans, the establishment of branches, our ability to merge, consolidate and acquire, dealings with the
Company’s and the Bank’s insiders and affiliates and our payment of dividends. In reaction to the global financial
crisis and particularly following passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the
“Dodd-Frank Act”), we experienced heightened regulatory requirements and scrutiny. Although the reforms primarily
targeted systemically significant financial service providers, their influence filtered down in varying degrees to
community banks over time and caused our compliance and risk management processes, and the costs thereof, to
increase. Then, in May 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (“Regulatory
Relief Act”) was enacted by Congress in part to provide regulatory relief for community banks and their holding
companies. To that end, the law eliminated questions about the applicability of certain Dodd-Frank Act reforms to
community bank systems, including relieving us of any requirement to engage in mandatory stress tests, maintain a
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risk committee or comply with the Volcker Rule’s complicated prohibitions on proprietary trading and ownership of
private funds. We believe these reforms are favorable to our operations.
The supervisory framework for U.S. banking organizations subjects banks and bank holding companies to
regular examination by their respective regulatory agencies, which results in examination reports and ratings that are
not publicly available and that can impact the conduct and growth of their business. These examinations consider not
only compliance with applicable laws and regulations, but also capital levels, asset quality and risk, management
ability and performance, earnings, liquidity, and various other factors. The regulatory agencies generally have broad
discretion to impose restrictions and limitations on the operations of a regulated entity where the agencies determine,
among other things, that such operations are unsafe or unsound, fail to comply with applicable law or are otherwise
inconsistent with laws and regulations.
The following is a summary of the material elements of the supervisory and regulatory framework applicable
to the Company and the Bank, beginning with a discussion of the impact of the COVID-19 pandemic on the banking
industry. It does not describe all of the statutes, regulations and regulatory policies that apply, nor does it restate all of
the requirements of those that are described. The descriptions are qualified in their entirety by reference to the
particular statutory and regulatory provision.
COVID-19 Pandemic
The federal bank regulatory agencies, along with their state counterparts, have issued a steady stream of
guidance responding to the COVID-19 pandemic and have taken a number of unprecedented steps to help banks
navigate the pandemic and mitigate its impact. These include, without limitation: requiring banks to focus on business
continuity and pandemic planning; adding pandemic scenarios to stress testing; encouraging bank use of capital buffers
and reserves in lending programs; permitting certain regulatory reporting extensions; reducing margin requirements
on swaps; permitting certain otherwise prohibited investments in investment funds; issuing guidance to encourage
banks to work with customers affected by the pandemic and encourage loan workouts; and providing credit under the
Community Reinvestment Act (“CRA”) for certain pandemic-related loans, investments and public service. Because
of the need for social distancing measures, the agencies revamped the manner in which they conducted periodic
examinations of their regulated institutions, including making greater use of off-site reviews.
Moreover, the Federal Reserve issued guidance encouraging banking institutions to utilize its discount
window for loans and intraday credit extended by its Reserve Banks to help households and businesses impacted by
the pandemic and announced numerous funding facilities. The FDIC also has acted to mitigate the deposit insurance
assessment effects of participating in the PPP and the Federal Reserve’s PPP Liquidity Facility and Money Market
Mutual Fund Liquidity Facility.
Reference is made to the sections “Item 1A. Risk Factors – COVID-19 Risks” and “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations – Impact of COVID-19” for information
on the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), PPP program and the Federal Reserve’s
lending facilities and for discussions of the economic impact of the COVID-19 pandemic. In addition, information as
to selected topics, such as the impact on capital requirements, dividend payments, reserves and CRA, is contained in
the relevant sections of this Supervision and Regulation discussion provided below.
The Role of Capital
Regulatory capital represents the net assets of a banking organization available to absorb losses. Because of
the risks attendant to their business, FDIC-insured institutions are generally required to hold more capital than other
businesses, which directly affects our earnings capabilities. While capital has historically been one of the key measures
of the financial health of both bank holding companies and banks, its role became fundamentally more important in
the wake of the global financial crisis, as the banking regulators recognized that the amount and quality of capital held
by banks prior to the crisis was insufficient to absorb losses during periods of severe stress. Certain provisions of the
Dodd-Frank Act and Basel III, discussed below, establish capital standards for banks and bank holding companies
that are meaningfully more stringent than those in place previously.
Capital Levels. Banks have been required to hold minimum levels of capital based on guidelines established
by the bank regulatory agencies since 1983. The minimums have been expressed in terms of ratios of “capital” divided
by “total assets". The capital guidelines for U.S. banks beginning in 1989 have been based upon international capital
accords (known as “Basel” rules) adopted by the Basel Committee on Banking Supervision, a committee of central
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banks and bank supervisors that acts as the primary global standard-setter for prudential regulation, as implemented
by the U.S. bank regulatory agencies on an interagency basis. The accords recognized that bank assets for the purpose
of the capital ratio calculations needed to be risk weighted (the theory being that riskier assets should require more
capital) and that off-balance sheet exposures needed to be factored in the calculations. Following the global financial
crisis, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking
Supervision, announced agreement on a strengthened set of capital requirements for banking organizations around the
world, known as Basel III, to address deficiencies recognized in connection with the global financial crisis.
The Basel III Rule. In July 2013, the U.S. federal banking agencies approved the implementation of the Basel
III regulatory capital reforms in pertinent part, and, at the same time, promulgated rules effecting certain changes
required by the Dodd-Frank Act (the “Basel III Rule”). In contrast to capital requirements historically, which were in
the form of guidelines, Basel III was released in the form of binding regulations by each of the regulatory agencies.
The Basel III Rule increased the required quantity and quality of capital and required more detailed categories of risk
weighting of riskier, more opaque assets. For nearly every class of assets, the Basel III Rule requires a more complex,
detailed and calibrated assessment of risk in the calculation of risk weightings. The Basel III Rule is applicable to all
banking organizations that are subject to minimum capital requirements, including federal and state banks and savings
and loan associations, as well as to bank and savings and loan holding companies, other than “small bank holding
companies” (generally certain holding companies with consolidated assets of less than $3 billion, which at this juncture
does not include us) and certain qualifying banking organizations that may elect a simplified framework (which we
have not done). Thus, the Company and the Bank are each currently subject to the Basel III Rule as described below.
Not only did the Basel III Rule increase most of the required minimum capital ratios in effect prior to January
1, 2015, but, in requiring that forms of capital be of higher quality to absorb loss, it introduced the concept of Common
Equity Tier 1 Capital, which consists primarily of common stock, related surplus (net of Treasury stock), retained
earnings, and Common Equity Tier 1 minority interests subject to certain regulatory adjustments. The Basel III Rule
also changed the definition of capital by establishing more stringent criteria that instruments must meet to be
considered Additional Tier 1 Capital (primarily non-cumulative perpetual preferred stock that meets certain
requirements) and Tier 2 Capital (primarily other types of preferred stock and subordinated debt, subject to
limitations). The Basel III Rule also constrained the inclusion of minority interests, mortgage-servicing assets, and
deferred tax assets in capital and required deductions from Common Equity Tier 1 Capital in the event that such assets
exceeded a percentage of a banking institution’s Common Equity Tier 1 Capital.
The Basel III Rule required minimum capital ratios as of January 1, 2015, as follows:
• A ratio of minimum Common Equity Tier 1 Capital equal to 4.5% of risk-weighted assets;
• A ratio of minimum Tier 1 Capital equal to 6% of risk-weighted assets;
• A continuation of the minimum required amount of Total Capital (Tier 1 plus Tier 2) at 8% of risk-
weighted assets; and
• A minimum leverage ratio of Tier 1 Capital to total quarterly average assets equal to 4% in all
circumstances.
In addition, institutions that seek the freedom to make capital distributions (including for dividends and
repurchases of stock) and pay discretionary bonuses to executive officers without restriction must also maintain 2.5%
in Common Equity Tier 1 Capital attributable to a capital conservation buffer. The purpose of the conservation buffer
is to ensure that banking institutions maintain a buffer of capital that can be used to absorb losses during periods of
financial and economic stress. Factoring in the conservation buffer increases the minimum ratios depicted above to
7% for Common Equity Tier 1 Capital, 8.5% for Tier 1 Capital and 10.5% for Total Capital. The federal bank
regulators released a joint statement in response to the COVID-19 pandemic reminding the industry that capital and
liquidity buffers were meant to give banks the means to support the economy in adverse situations, and that the
agencies would support banks that use the buffers for that purpose if undertaken in a safe and sound manner.
Well-Capitalized Requirements. The ratios described above are minimum standards in order for banking
organizations to be considered “adequately capitalized.” Bank regulatory agencies uniformly encourage banks to hold
more capital and be “well-capitalized” and, to that end, federal law and regulations provide various incentives for
banking organizations to maintain regulatory capital at levels in excess of minimum regulatory requirements. For
example, a banking organization that is well-capitalized may: (i) qualify for exemptions from prior notice or
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application requirements otherwise applicable to certain types of activities; (ii) qualify for expedited processing of
other required notices or applications; and (iii) accept, roll-over or renew brokered deposits. Higher capital levels
could also be required if warranted by the particular circumstances or risk profiles of individual banking organizations.
For example, the Federal Reserve’s capital guidelines contemplate that additional capital may be required to take
adequate account of, among other things, interest rate risk, or the risks posed by concentrations of credit, nontraditional
activities or securities trading activities. Further, any banking organization experiencing or anticipating significant
growth would be expected to maintain capital ratios, including tangible capital positions (i.e., Tier 1 Capital less all
intangible assets), well above the minimum levels.
Under the capital regulations of the Federal Reserve for the Company and the OCC for the Bank, in order to
be well-capitalized, we must maintain:
• A Common Equity Tier 1 Capital ratio to risk-weighted assets of 6.5% or more;
• A ratio of Tier 1 Capital to total risk-weighted assets of 8% or more;
• A ratio of Total Capital to total risk-weighted assets of 10% or more; and
• A leverage ratio of Tier 1 Capital to total adjusted average quarterly assets of 5% or greater.
It is possible under the Basel III Rule to be well-capitalized while remaining out of compliance with the
capital conservation buffer discussed above.
As of December 31, 2020, the Bank was not subject to a directive from the OCC to increase its capital and
the Bank was well-capitalized, as defined by OCC regulations. As of December 31, 2020, the Company had regulatory
capital in excess of the Federal Reserve’s requirements and met the Basel III Rule requirements to be well-capitalized.
We are also in compliance with the capital conservation buffer.
Prompt Corrective Action. The concept of being “well-capitalized” is part of a regulatory regime that
provides the federal banking regulators with broad power to take “prompt corrective action” to resolve the problems
of undercapitalized institutions based on the capital level of each particular institution. The extent of the regulators’
powers depends on whether the institution in question is “adequately capitalized,” “undercapitalized,” “significantly
undercapitalized” or “critically undercapitalized,” in each case as defined by regulation. Depending upon the capital
category to which an institution is assigned, the regulators’ corrective powers include: (i) requiring the institution to
submit a capital restoration plan; (ii) limiting the institution’s asset growth and restricting its activities; (iii) requiring
the institution to issue additional capital stock (including additional voting stock) or to sell itself; (iv) restricting
transactions between the institution and its affiliates; (v) restricting the interest rate that the institution may pay on
deposits; (vi) ordering a new election of directors of the institution; (vii) requiring that senior executive officers or
directors be dismissed; (viii) prohibiting the institution from accepting deposits from correspondent banks; (ix)
requiring the institution to divest certain subsidiaries; (x) prohibiting the payment of principal or interest on
subordinated debt; and (xi) ultimately, appointing a receiver for the institution.
Community Bank Capital Simplification. Community banks have long raised concerns with bank regulators
about the regulatory burden, complexity, and costs associated with certain provisions of the Basel III Rule. In
response, Congress provided an “off-ramp” for institutions, like us, with total consolidated assets of less than $10
billion. Section 201 of the Regulatory Relief Act instructed the federal banking regulators to establish a single
“Community Bank Leverage Ratio” (“CBLR”) of between 8 and 10%. Under the final rule, a community banking
organization is eligible to elect the new framework if it has: less than $10 billion in total consolidated assets, limited
amounts of certain assets and off-balance sheet exposures, and a CBLR greater than 9%. The bank regulatory agencies
temporarily lowered the CBLR to 8% as a result of the COVID-19 pandemic. We may elect the CBLR framework at
any time, but have not currently determined to do so.
Regulation and Supervision of the Company
General. The Company, as the sole shareholder of the Bank, is a bank holding company. As a bank holding
company, we are registered with, and subject to regulation, supervision and enforcement by, the Federal Reserve under
the Bank Holding Company Act of 1956, as amended (the “BHCA”). We are legally obligated to act as a source of
financial and managerial strength to the Bank and to commit resources to support the Bank in circumstances where
we might not otherwise do so. Under the BHCA, we are subject to periodic examination by the Federal Reserve and
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are required to file with the Federal Reserve periodic reports of our operations and such additional information
regarding the Company and the Bank as the Federal Reserve may require.
Acquisitions and Activities. The primary purpose of a bank holding company is to control and manage banks.
The BHCA generally requires the prior approval of the Federal Reserve for any merger involving a bank holding
company or any acquisition by a bank holding company of another bank or bank holding company. Subject to certain
conditions (including deposit concentration limits established by the BHCA), the Federal Reserve may allow a bank
holding company to acquire banks located in any state of the United States. In approving interstate acquisitions, the
Federal Reserve is required to give effect to applicable state law limitations on the aggregate amount of deposits that
may be held by the acquiring bank holding company and its FDIC-insured institution affiliates in the state in which
the target bank is located (provided that those limits do not discriminate against out-of-state institutions or their holding
companies) and state laws that require that the target bank have been in existence for a minimum period of time (not
to exceed five years) before being acquired by an out-of-state bank holding company. Furthermore, in accordance
with the Dodd-Frank Act, bank holding companies must be well-capitalized and well-managed in order to effect
interstate mergers or acquisitions. For a discussion of the capital requirements, see “—The Role of Capital” above.
The BHCA generally prohibits the Company from acquiring direct or indirect ownership or control of 5% or
more of the voting shares of any company that is not a bank and from engaging in any business other than that of
banking, managing and controlling banks or furnishing services to banks and their subsidiaries. This general
prohibition is subject to a number of exceptions. The principal exception allows bank holding companies to engage
in, and to own shares of companies engaged in, certain businesses found by the Federal Reserve prior to November
11, 1999 to be “so closely related to banking ... as to be a proper incident thereto.” This authority would permit the
Company to engage in a variety of banking-related businesses, including the ownership and operation of a savings
association, or any entity engaged in consumer finance, equipment leasing, the operation of a computer service bureau
(including software development) and mortgage banking and brokerage services. The BHCA does not place territorial
restrictions on the domestic activities of nonbank subsidiaries of bank holding companies.
Additionally, bank holding companies that meet certain eligibility requirements prescribed by the BHCA and
elect to operate as financial holding companies may engage in, or own shares in companies engaged in, a wider range
of nonbanking activities, including securities and insurance underwriting and sales, merchant banking and any other
activity that the Federal Reserve, in consultation with the Secretary of the Treasury, determines by regulation or order
is financial in nature or incidental to any such financial activity or that the Federal Reserve determines by order to be
complementary to any such financial activity and does not pose a substantial risk to the safety or soundness of FDIC-
insured institutions or the financial system generally. We elected to operate as a financial holding company in May
2017. In order to maintain our status as a financial holding company, both the Company and the Bank must be well-
capitalized, well-managed, and the Bank must have at least a satisfactory CRA rating. If the Federal Reserve
determines that either we or the Bank is not well-capitalized or well-managed, the Federal Reserve will provide a
period of time in which to achieve compliance, but during the period of noncompliance, the Federal Reserve may
place any additional limitations on us that it deems appropriate. Furthermore, if non-compliance is based on the failure
of the Bank to achieve a satisfactory CRA rating, we would not be able to commence any new financial activities or
acquire a company that engages in such activities.
Change in Control. Federal law prohibits any person or company from acquiring “control” of an FDIC-
insured depository institution or its holding company without prior notice to the appropriate federal bank regulator.
“Control” is conclusively presumed to exist upon the acquisition of 25% or more of the outstanding voting securities
of a bank or bank holding company, but may arise under certain circumstances between 10% and 24.99% ownership.
Capital Requirements. We file consolidated capital reports with the Federal Reserve under the Basel III Rule.
For a discussion of capital requirements, see “—The Role of Capital” above.
Dividend Payments. Our ability to pay dividends to shareholders may be affected by both general corporate
law considerations and policies of the Federal Reserve applicable to bank holding companies. As a Delaware
corporation, we are subject to the limitations of the Delaware General Corporation Law (the “DGCL”). The DGCL
allows us to pay dividends only out of its surplus (as defined and computed in accordance with the provisions of the
DGCL) or if we have no such surplus, out of its net profits for the fiscal year in which the dividend is declared and/or
the preceding fiscal year.
As a general matter, the Federal Reserve has indicated that the board of directors of a bank holding company
should eliminate, defer or significantly reduce dividends to shareholders if: (i) the company’s net income available to
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shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully
fund the dividends; (ii) the prospective rate of earnings retention is inconsistent with the company’s capital needs and
overall current and prospective financial condition; or (iii) the company will not meet, or is in danger of not meeting,
its minimum regulatory capital adequacy ratios. These factors have come into consideration in the industry as a result
of the COVID-19 pandemic, however, the Company’s net income and capital has allowed it to maintain its dividend
policy. The Federal Reserve also possesses enforcement powers over bank holding companies and their nonbank
subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes
and regulations. Among these powers is the ability to proscribe the payment of dividends by banks and bank holding
companies. In addition, under the Basel III Rule, institutions that seek the freedom to pay dividends have to maintain
2.5% in Common Equity Tier 1 Capital attributable to the capital conservation buffer. See “—The Role of Capital”
above.
Monetary Policy. The monetary policy of the Federal Reserve has a significant effect on the operating results
of financial or bank holding companies and their subsidiaries, and this is evidenced in its reaction to the COVID-19
pandemic. Among the tools available to the Federal Reserve to affect the money supply are open market transactions
in U.S. government securities and changes in the discount rate on bank borrowings. These means are used in varying
combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use may
affect interest rates charged on loans or paid on deposits.
Federal Securities Regulation. Our common stock is registered with the SEC under the Securities Act of
1933, as amended, and the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Consequently, we are
subject to the information, proxy solicitation, insider trading and other restrictions and requirements of the SEC under
the Exchange Act.
Corporate Governance. The Dodd-Frank Act addressed many investor protection, corporate governance and
executive compensation matters that will affect most U.S. publicly traded companies. It increased stockholder
influence over boards of directors by requiring companies to give stockholders a nonbinding vote on executive
compensation and so-called “golden parachute” payments, and authorizing the SEC to promulgate rules that would
allow stockholders to nominate and solicit voters for their own candidates using a company’s proxy materials. The
legislation also directed the Federal Reserve to promulgate rules prohibiting excessive compensation paid to
executives of bank holding companies, regardless of whether such companies are publicly traded.
Regulation and Supervision of the Bank
General. The Bank is a national bank, chartered by the OCC under the National Bank Act. The deposit
accounts of the Bank are insured by the DIF to the maximum extent provided under federal law and FDIC regulations,
currently $250,000 per insured depositor category, and the Bank is a member of the Federal Reserve System. As a
national bank, the Bank is subject to the examination, supervision, reporting and enforcement requirements of the
OCC, the chartering authority for national banks. The Bank is subject to that authority and is examined by the OCC.
The FDIC, as administrator of the DIF, also has regulatory authority over the Bank.
Deposit Insurance. As an FDIC-insured institution, the Bank is required to pay deposit insurance premium
assessments to the FDIC. The FDIC has adopted a risk-based assessment system whereby FDIC-insured institutions
pay insurance premiums at rates based on their risk classification. For institutions like the Bank that are not
considered large and highly complex banking organizations, assessments are now based on examination ratings and
financial ratios. The total base assessment rates currently range from 1.5 basis points to 30 basis points. At least semi-
annually, the FDIC updates its loss and income projections for the DIF and, if needed, increases or decreases the
assessment rates, following notice and comment on proposed rulemaking.
The reserve ratio is the FDIC insurance fund balance divided by estimated insured deposits. The Dodd-Frank
Act altered the minimum reserve ratio of the DIF, increasing the minimum from 1.15% to 1.35% of the estimated
amount of total insured deposits. The reserve ratio reached 1.36% as of September 30, 2018, exceeding the statutory
required minimum. As a result, the FDIC provided assessment credits to insured depository institutions, like the Bank,
with total consolidated assets of less than $10 billion for the portion of their regular assessments that contributed to
growth in the reserve ratio between 1.15% and 1.35%. The FDIC applied the small bank credits for quarterly
assessment periods beginning July 1, 2019. However, the reserve ratio then fell to 1.30% in 2020 as a result of
extraordinary insured deposit growth caused by an unprecedented inflow of more than $1 trillion in estimated insured
deposits in the first half of 2020, stemming mainly from the COVID-19 pandemic. Although the FDIC could have
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ceased the small bank credits, it waived the requirement that the reserve ratio be at least 1.35% for full remittance of
the remaining assessment credits, and it refunded all small bank credits as of September 30, 2020.
Supervisory Assessments. National banks are required to pay supervisory assessments to the OCC to fund the
operations of the OCC. The amount of the assessment is calculated using a formula that considers the bank’s size and
its supervisory condition. During the year ended December 31, 2020, the Bank paid supervisory assessments to the
OCC totaling $201,000.
Capital Requirements. Banks are generally required to maintain capital levels in excess of other businesses.
For a discussion of capital requirements, see “—The Role of Capital” above.
Liquidity Requirements. Liquidity is a measure of the ability and ease with which bank assets may be
converted to cash. Liquid assets are those that can be converted to cash quickly if needed to meet financial obligations.
To remain viable, FDIC-insured institutions must have enough liquid assets to meet their near-term obligations, such
as withdrawals by depositors. Because the global financial crisis was in part a liquidity crisis, Basel III also includes
a liquidity framework that requires FDIC-insured institutions to measure their liquidity against specific liquidity tests.
One test, referred to as the Liquidity Coverage Ratio, or LCR, is designed to ensure that the banking entity has an
adequate stock of unencumbered high-quality liquid assets that can be converted easily and immediately in private
markets into cash to meet liquidity needs for a 30-calendar day liquidity stress scenario. The other test, known as the
Net Stable Funding Ratio, or NSFR, is designed to promote more medium- and long-term funding of the assets and
activities of FDIC-insured institutions over a one-year horizon. These tests provide an incentive for banks and holding
companies to increase their holdings in Treasury securities and other sovereign debt as a component of assets, increase
the use of long-term debt as a funding source and rely on stable funding like core deposits (in lieu of brokered deposits).
In addition to liquidity guidelines already in place, the federal bank regulatory agencies implemented the
Basel III LCR in 2014 and have proposed the NSFR. While these rules do not, and will not, apply to the Bank, we
continue to review our liquidity risk management policies in light of developments.
Dividend Payments. The primary source of funds for the Company is dividends from the Bank. Under the
National Bank Act, a national bank may pay dividends out of its undivided profits in such amounts and at such times
as the bank’s board of directors deems prudent. Without prior OCC approval, however, a national bank may not pay
dividends in any calendar year that, in the aggregate, exceed the bank’s year-to-date net income plus the bank’s
retained net income for the two preceding years. The payment of dividends by any FDIC-insured institution is affected
by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations,
and an FDIC-insured institution generally is prohibited from paying any dividends if, following payment thereof, the
institution would be undercapitalized. As described above, the Bank exceeded its capital requirements under
applicable guidelines as of December 31, 2020. Notwithstanding the availability of funds for dividends, however, the
OCC may prohibit the payment of dividends by the Bank if it determines such payment would constitute an unsafe or
unsound practice. In addition, under the Basel III Rule, institutions that seek the freedom to pay dividends have to
maintain 2.5% in Common Equity Tier 1 Capital attributable to the capital conservation buffer. See “—The Role of
Capital” above.
Insider Transactions. The Bank is subject to certain restrictions imposed by federal law on “covered
transactions” between the Bank and its “affiliates.” The Company is an affiliate of the Bank for purposes of these
restrictions, and covered transactions subject to the restrictions include extensions of credit to the Company,
investments in the stock or other securities of the Company and the acceptance of the stock or other securities of the
Company as collateral for loans made by the Bank. The Dodd-Frank Act enhanced the requirements for certain
transactions with affiliates, including an expansion of the definition of “covered transactions” and an increase in the
amount of time for which collateral requirements regarding covered transactions must be maintained.
Certain limitations and reporting requirements are also placed on extensions of credit by the Bank to its
directors and officers, to directors and officers of the Company and its subsidiaries, to principal shareholders of the
Company and to “related interests” of such directors, officers and principal shareholders. In addition, federal law and
regulations may affect the terms upon which any person who is a director or officer of the Company or the Bank, or a
principal shareholder of the Company, may obtain credit from banks with which the Bank maintains a correspondent
relationship.
Safety and Soundness Standards/Risk Management. FDIC-insured institutions are expected to operate in a
safe and sound manner. The federal banking agencies have adopted operational and managerial standards to promote
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the safety and soundness of such institutions that address internal controls, information systems, internal audit systems,
loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset
quality and earnings.
In general, the safety and soundness standards prescribe the goals to be achieved in each area, and each
institution is responsible for establishing its own procedures to achieve those goals. If an institution fails to operate in
a safe and sound manner, the FDIC-insured institution’s primary federal regulator may require the institution to submit
a plan for achieving and maintaining compliance. If an FDIC-insured institution fails to submit an acceptable
compliance plan, or fails in any material respect to implement a compliance plan that has been accepted by its primary
federal regulator, the regulator is required to issue an order directing the institution to cure the deficiency. Until the
deficiency cited in the regulator’s order is cured, the regulator may restrict the FDIC-insured institution’s rate of
growth, require the FDIC-insured institution to increase its capital, restrict the rates the institution pays on deposits or
require the institution to take any action the regulator deems appropriate under the circumstances. Operating in an
unsafe or unsound manner will also constitute grounds for other enforcement action by the federal bank regulatory
agencies, including cease and desist orders and civil money penalty assessments.
During the past decade, the bank regulatory agencies have increasingly emphasized the importance of sound
risk management processes and strong internal controls when evaluating the activities of the FDIC-insured institutions
they supervise. Properly managing risks has been identified as critical to the conduct of safe and sound banking
activities and has become even more important as new technologies, product innovation, and the size and speed of
financial transactions have changed the nature of banking markets. The agencies have identified a spectrum of risks
facing a banking institution including, but not limited to, credit, market, liquidity, operational, legal and reputational
risk. The OCC, in its 2021 supervisory plan, identified key risk themes for 2021 as: credit risk management given
projected weaker economic conditions and commercial and residential real estate concentration risk management. The
agency will also be monitoring banks for their transition away from LIBOR (London Interbank Offered Rate) as a
reference rate, compliance risk management related to COVID-19 pandemic-related activities, Bank Secrecy Act/anti-
money laundering compliance, cybersecurity, planning for and implementation of the current expected credit losses
(“CECL”) accounting standard, and CRA performance. The Bank is expected to have active board and senior
management oversight; adequate policies, procedures and limits; adequate risk measurement, monitoring and
management information systems; and comprehensive internal controls.
Privacy and Cybersecurity. The Bank is subject to many U.S. federal and state laws and regulations
governing requirements for maintaining policies and procedures to protect non-public confidential information of their
customers. These laws require the Bank to periodically disclose its privacy policies and practices relating to sharing
such information and permit consumers to opt out of their ability to share information with unaffiliated third parties
under certain circumstances. They also impact the Bank’s ability to share certain information with affiliates and non-
affiliates for marketing and/or non-marketing purposes, or to contact customers with marketing offers. In addition, as
a part of its operational risk mitigation, the Bank is required to implement a comprehensive information security
program that includes administrative, technical, and physical safeguards to ensure the security and confidentiality of
customer records and information and to require the same of its service providers. These security and privacy policies
and procedures are in effect across all business lines and geographic locations.
Branching Authority. National banks headquartered in Kansas, such as the Bank, have the same branching
rights in Kansas as banks chartered under Kansas law, subject to OCC approval. Kansas law grants Kansas-chartered
banks the authority to establish branches anywhere in the State of Kansas, subject to receipt of all required regulatory
approvals. The Dodd-Frank Act permits well-capitalized and well-managed banks to establish new branches across
state lines without legal impediments. However, while federal law permits state and national banks to merge with
banks in other states, such mergers are subject to: (i) regulatory approval; (ii) federal and state deposit concentration
limits; and (iii) state law limitations requiring the merging bank to have been in existence for a minimum period of
time (not to exceed five years) prior to the merger.
Financial Subsidiaries. Under federal law and OCC regulations, national banks are authorized to engage,
through “financial subsidiaries,” in any activity that is permissible for a financial holding company and any activity
that the Secretary of the Treasury, in consultation with the Federal Reserve, determines is financial in nature or
incidental to any such financial activity, except (i) insurance underwriting, (ii) real estate development or real estate
investment activities (unless otherwise permitted by law), (iii) insurance company portfolio investments and (iv)
merchant banking. The authority of a national bank to invest in a financial subsidiary is subject to a number of
conditions, including, among other things, requirements that the bank must be well-managed and well-capitalized
22
(after deducting from capital the bank’s outstanding investments in financial subsidiaries). The Bank has not applied
for approval to establish any financial subsidiaries.
Transaction Account Reserves. Federal law requires FDIC-insured institutions to maintain reserves against
their transaction accounts (primarily NOW and regular checking accounts) to provide liquidity. Reserves are
maintained on deposit at the Federal Reserve Banks. The reserve requirements are subject to annual adjustment by the
Federal Reserve, and, for 2020, the Federal Reserve had determined that the first $16.9 million of otherwise reservable
balances had a zero percent reserve requirement; for transaction accounts aggregating between $16.9 million to $127.5
million, the reserve requirement was 3% of those transaction account balances; and for net transaction accounts in
excess of $127.5 million, the reserve requirement was 10% of the aggregate amount of total transaction account
balances in excess of $127.5 million. However, in March 2020, in an unprecedented move, the Federal Reserve
announced that the banking system had ample reserves, and, as reserve requirements no longer played a significant
role in this regime, it reduced all reserve tranches to zero percent, thereby freeing banks from the reserve maintenance
requirement. The action permits the Bank to loan or invest funds that were previously unavailable. The Federal
Reserve has indicated that it expects to continue to operate in an ample reserves regime for the foreseeable future.
Community Reinvestment Act Requirements. The CRA requires the Bank to have a continuing and affirmative
obligation in a safe and sound manner to help meet the credit needs of its entire community, including low- and
moderate-income neighborhoods. Federal regulators regularly assess the Bank’s record of meeting the credit needs of
its communities. Applications for additional acquisitions would be affected by the evaluation of the Bank’s
effectiveness in meeting its CRA requirements. In a joint statement responding to the COVID-19 pandemic, the bank
regulatory agencies announced favorable CRA consideration for banks providing retail banking services and lending
activities in their assessment areas, consistent with safe and sound banking practices, that are responsive to the needs
of low- and moderate-income individuals, small businesses, and small farms affected by the pandemic. Those activities
include waiving certain fees, easing restrictions on out-of-state and non-customer checks, expanding credit products,
increasing credit limits for creditworthy borrowers, providing alternative service options, and offering prudent
payment accommodations. The joint statement also provided favorable CRA consideration for certain pandemic-
related community development activities.
Anti-Money Laundering. The Uniting and Strengthening America by Providing Appropriate Tools Required
to Intercept and Obstruct Terrorism Act of 2001 (the “USA PATRIOT Act”) is designed to deny terrorists and
criminals the ability to obtain access to the U.S. financial system and has significant implications for FDIC-insured
institutions, brokers, dealers and other businesses involved in the transfer of money. The USA PATRIOT Act, along
with other legal authority, mandates financial services companies to have policies and procedures with respect to
measures designed to address any or all of the following matters: (i) customer identification programs; (ii) money
laundering; (iii) terrorist financing; (iv) identifying and reporting suspicious activities and currency transactions; (v)
currency crimes; and (vi) cooperation between FDIC-insured institutions and law enforcement authorities.
Concentrations in Commercial Real Estate. Concentration risk exists when FDIC-insured institutions deploy
too many assets to any one industry or segment. A concentration in commercial real estate is one example of regulatory
concern. The interagency Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices
guidance (“CRE Guidance”) provides supervisory criteria, including the following numerical indicators, to assist bank
examiners in identifying banks with potentially significant commercial real estate loan concentrations that may
warrant greater supervisory scrutiny: (i) commercial real estate loans exceeding 300% of capital and increasing 50%
or more in the preceding three years; or (ii) construction and land development loans exceeding 100% of capital. The
CRE Guidance does not limit banks’ levels of commercial real estate lending activities, but rather guides institutions
in developing risk management practices and levels of capital that are commensurate with the level and nature of their
commercial real estate concentrations. On December 18, 2015, the federal banking agencies issued a statement to
reinforce prudent risk-management practices related to CRE lending, having observed substantial growth in many
CRE asset and lending markets, increased competitive pressures, rising CRE concentrations in banks, and an easing
of CRE underwriting standards. The federal bank agencies reminded FDIC-insured institutions to maintain
underwriting discipline and exercise prudent risk-management practices to identify, measure, monitor, and manage
the risks arising from CRE lending. In addition, FDIC-insured institutions must maintain capital commensurate with
the level and nature of their CRE concentration risk.
Based on the Bank’s loan portfolio as of December 31, 2020, we do not exceed the 300% guideline for
commercial real estate loans.
23
Consumer Financial Services. The historical structure of federal consumer protection regulation applicable
to all providers of consumer financial products and services changed significantly on July 21, 2011, when the CFPB
commenced operations to supervise and enforce consumer protection laws. The CFPB has broad rulemaking authority
for a wide range of consumer protection laws that apply to all providers of consumer products and services, including
the Bank, as well as the authority to prohibit “unfair, deceptive or abusive” acts and practices. The CFPB has
examination and enforcement authority over providers with more than $10 billion in assets. FDIC-insured institutions
with $10 billion or less in assets, like the Bank, continue to be examined by their applicable bank regulators.
Because abuses in connection with residential mortgages were a significant factor contributing to the
financial crisis, many new rules issued by the CFPB and required by the Dodd-Frank Act addressed mortgage and
mortgage-related products, their underwriting, origination, servicing and sales. The Dodd-Frank Act significantly
expanded underwriting requirements applicable to loans secured by 1-4 family residential real property and augmented
federal law combating predatory lending practices. In addition to numerous disclosure requirements, the Dodd-Frank
Act imposed new standards for mortgage loan originations on all lenders, including banks and savings associations,
in an effort to strongly encourage lenders to verify a borrower’s ability to repay, while also establishing a presumption
of compliance for certain “qualified mortgages”. The Regulatory Relief Act provided relief in connection with
mortgages for banks with assets of less than $10 billion, and, as a result, mortgages the Bank makes are now considered
to be qualified mortgages if they are held in portfolio for the life of the loan. The CFPB has from time to time released
additional rules as to qualified mortgages and the borrower’s ability to repay, most recently in October of 2020. The
CFPB’s rules have not had a significant impact on the Bank’s operations, except for higher compliance costs.
Company Web site
The Company maintains a corporate website at www.landmarkbancorpinc.com. In addition, the Company
has an investor relations link at the Bank’s corporate website at www.banklandmark.com. Many of the Company’s
policies, including its code of business conduct and ethics, committee charters and other investor information, are
available on its website. The Company makes available free of charge on or through its website its Annual Reports
on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, proxy statements, and annual reports as soon as
reasonably practicable after the Company electronically files such material with, or furnishes it to, the SEC. Copies
of the Company’s filings with the SEC are also available from the SEC’s website (http://www.sec.gov) free of charge.
The Company will also provide copies of its filings free of charge upon written request to our Corporate Secretary at
Landmark Bancorp, Inc., 701 Poyntz Avenue, Manhattan, Kansas 66502.
STATISTICAL DATA
The Company has a fiscal year ending on December 31. Unless otherwise noted, the information presented
in this Annual Report on Form 10-K presents information on behalf of the Company as of and for the year ended
December 31, 2020.
The statistical data required by Guide 3 of the Securities Act of 1933 Industry Guides is set forth in the
following pages. This data should be read in conjunction with the consolidated financial statements, related notes and
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this Annual
Report on Form 10-K.
24
I. Distribution of Assets, Liabilities, and Stockholders’ Equity; Interest Rates and Interest Differential
The following table describes the extent to which changes in tax equivalent interest income and interest
expense for major components of interest-earning assets and interest-bearing liabilities affected the Company’s
interest income and expense during the periods indicated. The table distinguishes between (i) changes attributable to
rate (changes in rate multiplied by prior volume), (ii) changes attributable to volume (changes in volume multiplied
by prior rate), and (iii) net change (the sum of the previous columns). The net changes attributable to the combined
effect of volume and rate which cannot be segregated have been allocated proportionately to the change due to volume
and the change due to rate.
Years ended December 31,
2020 vs 2019
Increase/(decrease) attributable to
Volume
Rate
2019 vs 2018
Increase/(decrease) attributable to
Volume
Rate
Net
Net
(Dollars in thousands)
Interest income:
Interest-bearing deposits at banks
Investment securities
Taxable
Tax-exempt (1)
Loans (2)
Total
Interest expense:
Deposits
Borrowings
Total
Net interest income
$ (2)
$ - $ (2)
$ 2
$ 6
$ 8
(1,148) (468) (1,616)
(384) (44) (428)
4,125
6,652 (2,527)
2,079
5,118 (3,039)
105
(482)
2,897
2,522
384
489
70 (412)
3,746
849
3,831
1,309
226 (3,462) (3,236)
(293) (459) (752)
(67) (3,921) (3,988)
$ 6,067
$ 882
$ 5,185
231
2,285
2,054
(868) (25) (893)
1,392
2,029
(637)
$ 3,159 $ (720)
$ 2,439
(1) The change in tax-exempt income on investment securities is presented on a fully taxable equivalent basis, using a
21% federal tax rate.
(2) The change in tax-exempt loan income is presented on a fully taxable equivalent basis, using a 21% federal tax rate.
25
The following table sets forth information relating to average balances of interest-earning assets and interest-
bearing liabilities for the years ended December 31, 2020, 2019 and 2018. Average balances are derived from daily
average balances. Non-accrual loans were included in the computation of average balances but have been reflected
in the table as loans carrying a zero yield. The yields set forth in the table below include the effect of deferred fees,
discounts and premiums that are amortized or accreted to interest income or interest expense. This table reflects the
average yields on assets and average costs of liabilities for the periods indicated (derived by dividing income or
expense by the monthly average balance of assets or liabilities, respectively) as well as the "net interest margin" (which
reflects the effect of the net earnings balance) for the periods shown.
Year ended December 31, 2020
Average
balance
Income/
expense
Yield/
cost
Year ended December 31, 2019
Average
balance
Income/
expense
Yield/
cost
Year ended December 31, 2018
Average
balance
Income/
expense
Yield/
cost
(Dollars in thousands)
Assets
Interest-earning assets:
Interest bearing deposits at banks
$
16,594
$
27
0.16%
$
789
$
29
3.68%
$
737
$
21
2.85%
Investment securities
Taxable
Tax-exempt (1)
Loans receivable, net (2)
Total interest-earning assets
Non-interest-earning assets
Total
178,387
142,315
668,326
1,005,622
95,800
4,150
4,132
31,821
40,130
2.33%
2.90%
4.76%
3.99%
226,193
155,567
517,950
900,499
93,258
5,767
4,559
27,696
38,051
2.55%
2.93%
5.35%
4.23%
221,835
171,977
462,939
857,488
95,430
5,278
4,971
23,950
34,220
2.38%
2.89%
5.17%
3.99%
$
1,101,422
$
993,757
$
952,918
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Money market and checking
$
425,525
$
899
Savings accounts
Time deposit
Total deposits
FHLB advances and other borrowings
Total interest-bearing liabilities
Non-interest-bearing liabilities
Stockholders' equity
Total
Interest rate spread (3)
Net interest margin (4)
Tax equivalent interest - imputed (1) (2)
Net interest income
Ratio of average interest-earning assets
to average interest-bearing liabilities
40
1,166
2,105
664
2,769
114,280
133,412
673,217
38,816
712,033
272,642
116,747
0.21%
0.04%
0.87%
0.31%
1.71%
0.39%
$
371,739
$
2,555
35
2,751
5,341
1,416
6,757
97,966
177,091
646,796
51,283
698,079
194,935
100,743
0.69%
0.04%
1.55%
0.83%
2.76%
0.97%
$
371,138
$
1,833
28
1,195
3,056
2,309
5,365
95,532
137,400
604,070
82,743
686,813
179,896
86,209
$
1,101,422
$
993,757
$
952,918
3.60%
3.72%
$
37,361
877
$
36,484
3.26%
3.48%
$
31,294
940
$
30,354
$
28,855
1,067
$
27,788
141.2%
129.0%
124.9%
0.49%
0.03%
0.87%
0.51%
2.79%
0.78%
3.21%
3.37%
(1)
(2)
(3)
Income on tax-exempt investment securities is presented on a fully taxable equivalent basis, using a 21% federal tax rate.
Income on tax-exempt loans is presented on a fully taxable equivalent basis, using a 21% federal tax rate.
Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-
bearing liabilities.
(4) Net interest margin represents net interest income divided by average interest-earning assets.
26
II. Investment Portfolio
Investment Securities. The following table sets forth the carrying value of the Company’s investment securities at
the dates indicated. None of the investment securities issued by an individual issuer held as of December 31, 2020 were in
excess of 10% of the Company’s stockholders’ equity, excluding U.S. federal agency obligations. The Company’s federal
agency obligations consist of obligations of U.S. government-sponsored enterprises, primarily the FHLB. The Company’s
agency mortgage-backed securities portfolio consists of securities predominantly underwritten to the standards of and
guaranteed by the government-sponsored agencies of Federal Home Loan Mortgage Corporation, Federal National Mortgage
Association and Government National Mortgage Association. The Company’s investments in certificates of deposit consist
of FDIC-insured certificates of deposit with other financial institutions.
Investment securities:
U.S. treasury securities
U.S. federal agency obligations
Municipal obligations, tax-exempt
Municipal obligations, taxable
Agency mortgage-backed securities
Certificates of deposit
Total investment securities available-for-sale, at fair value
FHLB stock
Federal Reserve Bank stock
Correspondent bank common stock
Bank stocks, at cost
2020
As of December 31,
2019
(Dollars in thousands)
2018
$ 2,037
18,924
142,676
49,535
78,638
5,460
$ 297,270
$ 2,316
4,106
145,862
46,779
162,031
1,904
$ 362,998
$ 1,971
10,361
159,112
53,035
156,076
7,790
$ 388,345
2,434
1,928
111
$ 4,473
1,079
1,919
111
$ 3,109
2,752
1,913
111
$ 4,776
The following table sets forth certain information regarding the carrying values, weighted average yields, and
maturities of the Company's investment securities portfolio, as of December 31, 2020. Yields on tax-exempt obligations have
been computed on a tax equivalent basis, using a 21% federal tax rate for 2020. Mortgage-backed investment securities
include scheduled principal payments and estimated prepayments based on observable market inputs. Actual prepayments
will differ from contractual maturities because borrowers have the right to prepay obligations with or without prepayment
penalties.
One year or less
One to five years
Five to ten years
More than ten years
Total
Carrying
Average
Carrying
Average
Carrying
Average
Carrying
Average
Carrying
Average
value
yield
value
yield
value
yield
value
yield
value
yield
As of December 31, 2020
(Dollars in thousands)
$
2,037
2.01%
$
-
0.00%
$
-
0.00%
$
-
5,543
1,958
1,566
751
703
0.09%
1.79%
2.75%
2.31%
2.44%
13,381
38,181
18,946
77,887
4,757
0.62%
2.26%
2.73%
2.21%
0.45%
-
45,324
20,459
-
-
0.00%
2.75%
2.98%
0.00%
0.00%
-
57,213
8,564
-
-
0.00%
0.00%
3.58%
3.10%
0.00%
0.00%
2,037
18,924
142,676
49,535
78,638
5,460
$
12,558
1.26%
$
153,152
2.09%
$
65,783
2.82%
$
65,777
3.52%
$
297,270
2.01%
0.46%
2.94%
2.90%
2.21%
0.71%
2.54%
Investment securities:
U.S. treasury securities
U.S. federal agency obligations
Municipal obligations, tax-exempt
Municipal obligations, taxable
Agency mortgage-backed securities
Certificates of deposit
Total
27
III. Loan Portfolio
Loan Portfolio Composition. The following table sets forth the composition of the loan portfolio by type of loan at
the dates indicated.
Balance
One-to-four family residential real estate loans
Construction and land loans
Commercial real estate loans
Commercial loans
Paycheck protection program loans
Agriculture loans
Municipal loans
Consumer loans
Total gross loans
Net deferred loan costs and loans in process
Allowance for loan losses
Loans, net
Percent of total
One-to-four family residential real estate loans
Construction and land loans
Commercial real estate loans
Commercial loans
Paycheck protection program loans
Agriculture loans
Municipal loans
Consumer loans
Total gross loans
2020
2019
As of December 31,
2018
(Dollars in thousands)
2017
2016
$
$
$
$
$
157,984
26,106
172,307
134,047
100,084
96,532
2,332
24,122
713,514
(1,957)
(8,775)
702,782
146,505
22,459
133,501
109,612
-
98,558
2,656
25,101
538,392
255
(6,467)
532,180
136,895
20,083
138,967
74,289
-
96,632
2,953
25,428
495,247
(109)
(5,765)
489,373
136,215
19,356
120,624
54,591
-
83,008
3,396
22,046
439,236
(34)
(5,459)
433,743
136,846
13,738
118,200
54,506
-
78,324
3,884
20,271
425,769
36
(5,344)
420,461
$
$
$
$
$
22.1%
3.7%
24.2%
18.8%
14.0%
13.5%
0.3%
3.4%
100.0%
27.2%
4.2%
24.8%
20.3%
0.0%
18.3%
0.5%
4.7%
100.0%
27.6%
4.1%
28.1%
15.0%
0.0%
19.5%
0.6%
5.1%
100.0%
31.0%
4.4%
27.5%
12.4%
0.0%
18.9%
0.8%
5.0%
100.0%
32.1%
3.2%
27.8%
12.8%
0.0%
18.4%
0.9%
4.8%
100.0%
The following table sets forth the contractual maturities of loans as of December 31, 2020. The table does not
include unscheduled prepayments.
1 year or less
As of December 31, 2020
1-5 years
After 5 years
(Dollars in thousands)
Total
One-to-four family residential real estate loans
Construction and land loans
Commercial real estate loans
Commercial loans
Paycheck protection program loans
Agriculture loans
Municipal loans
Consumer loans
Total gross loans
$ 60,246
$ 20,938
7,339
14,070
63,506
33,755
72,229
44,382
- 100,084
21,046
45,787
658
248
7,992
3,129
$ 305,253
$ 190,156
$ 157,984
$ 76,800
26,106
4,697
172,307
75,046
17,436
134,047
- 100,084
96,532
29,699
2,332
1,426
24,122
13,001
$ 713,514
$ 218,105
28
The following table sets forth the dollar amount of all loans that mature after one year and whether such loans had
fixed interest rates or adjustable interest rates:
Fixed
As of December 31, 2020
Adjustable
(Dollars in thousands)
Total
One-to-four family residential real estate loans
Construction and land loans
Commercial real estate loans
Commercial loans
Paycheck protection program loans
Agriculture loans
Municipal loans
Consumer loans
Total gross loans
$ 64,121 $ 72,925 $ 137,046
480 11,556 12,036
28,056 110,496 138,552
23,587 38,231 61,818
100,050 - 100,050
10,701 40,044 50,745
2,084 - 2,084
2,549 18,444 20,993
523,324
$
231,628
291,696
$
$
Non-performing Assets. The following table sets forth information with respect to non-performing assets, including
non-accrual loans and real estate acquired through foreclosure or by deed in lieu of foreclosure (“real estate owned”). The
accrual of interest on non-performing loans is discontinued at the time the loan is ninety days delinquent, unless the credit is
well secured and in process of collection. Loans are placed on non-accrual or are charged off at an earlier date if collection
of principal or interest is considered doubtful. Under the original terms of the Company’s non-accrual loans as of December
31, 2020, interest earned on such loans for the years ended December 31, 2020, 2019 and 2018 would have increased interest
income by $380,000, $230,000 and $254,000, respectively, if included in the Company’s interest income for those years. No
interest income related to non-accrual loans was included in interest income for the years ended December 31, 2020, 2019
and 2018.
2020
2019
As of December 31,
2018
(Dollars in thousands)
2017
2016
Non-accrual loans
Accruing loans over 90 days past due
Non-performing investments
Real estate owned, net
Non-performing assets
$ 10,515 $ 5,546 $ 5,236 $ 6,041 $ 2,746
- - - - -
- - - - -
1,774 290 35 436 1,279
$ 12,289 $ 5,836 $ 5,271 $ 6,477 $ 4,025
Performing TDRs
$ 1,947 $ 3,134 $ 3,455 $ 3,719 $ 3,983
Non-performing loans to total gross loans
Non-performing assets to total assets
Allowance for loan losses to non-performing loans
1.47%
1.03%
0.64%
1.06%
0.44%
0.53%
83.45% 116.61% 110.10% 90.37% 194.61%
1.38%
0.70%
1.03%
0.58%
The increase in non-performing loans primarily was related to two commercial real estate loan relationships totaling
$5.5 million. The increase in non-accrual loans as of December 31, 2019 compared to December 31, 2018 was driven by
higher levels of non-performing one-to-four family residential real estate loans, primarily related to one loan relationship,
and increased levels of non-performing agriculture loans. Partially offsetting those increases was a decrease in non-
performing loans related to the liquidation of collateral securing a $3.6 million loan relationship. The liquidation resulted in
a charge-off of $259,000 during 2019. The decrease in non-accrual loans as of December 31, 2018 compared to December
31, 2017 was primarily related to a charge-off of $853,000 associated with a $3.6 million loan relationship consisting of $1.8
million in commercial loans and a $1.8 million commercial real estate loan. This loan relationship was primarily responsible
for the increase in non-accrual loans as of December 31, 2017 compared to December 31, 2016.
At December 31, 2020, the $1.8 million of real estate owned primarily consisted of a five residential real estate
properties, two commercial properties and one parcel of land. The increase in real estate owned as of December 31, 2020
29
compared to December 31, 2019 was primarily due to obtaining the collateral securing non-performing commercial real estate
and one-to-four family residential real estate loans. The increase in real estate owned as of December 31, 2019 compared to
December 31, 2018 was principally associated with obtaining the collateral securing a non-performing loan relationship
consisting of commercial real estate and commercial loans. The decrease in real estate owned as of December 31, 2018
compared to December 31, 2017 was primarily associated with the sales of several residential real estate properties and one
commercial real estate property. The decrease in real estate owned as of December 31, 2017 compared to December 31, 2016
was principally associated with the sale of residential real estate properties.
As part of the Company’s credit risk management, the Company continues to aggressively manage the loan portfolio
to identify problem loans and has placed additional emphasis on its commercial real estate relationships. As discussed in
more detail in the “Asset Quality and Distribution” section of “Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” as of December 31, 2020, the Company concluded its allowance for loan losses was
adequate based on the evaluation of the loan portfolio’s probable incurred losses.
IV. Summary of Loan Loss Experience
The following table sets forth information with respect to the Company’s allowance for loan losses at the dates and
for the periods indicated:
2020
As of and for the years ended December 31,
2018
(Dollars in thousands)
2019
2017
2016
Balances at beginning of year
Provision for loan losses
Charge-offs:
One-to-four family residential real estate loans
Construction and land loans
Commercial real estate loans
Commercial loans
Paycheck protection program loans
Agriculture loans
Municipal loans
Consumer loans
Total charge-offs
Recoveries:
One-to-four family residential real estate loans
Construction and land loans
Commercial real estate loans
Commercial loans
Paycheck protection program loans
Agriculture loans
Municipal loans
Consumer loans
Total recoveries
Net charge-offs
Balances at end of year
$
6,467
3,300
$
5,765
1,400
$
5,459
1,400
$
5,344
450
$
5,922
500
(251)
(191)
(131)
(292)
-
(3)
-
(248)
(1,116)
-
-
13
3
-
-
(56)
(31)
-
(453)
-
-
-
(285)
(825)
1
-
-
53
-
-
6
102
124
(992)
8,775
$
6
67
127
(698)
6,467
$
(32)
-
-
(950)
-
-
-
(178)
(1,160)
4
-
1
22
-
(37)
-
(71)
-
-
(45)
-
(335)
(488)
11
-
-
20
-
1
2
36
66
(1,094)
$
5,765
1
37
84
153
(335)
5,459
$
(14)
-
-
(306)
-
(375)
-
(471)
(1,166)
9
-
-
34
-
-
6
39
88
(1,078)
$
5,344
The Company recorded net loan charge-offs of $992,000 during 2020 compared to $698,000 during 2019. The net
loan charge-offs were primarily related to a commercial loan relationship, one-to-four family residential real estate loan
relationship and a commercial real estate loan relationship which included construction and land loans. The Company
recorded net loan charge-offs of $698,000 during 2019 compared to $1.1 million during 2018. The net loan charge-offs in
2019 were primarily related to two commercial loan relationships. The Company recorded net loan charge-offs of $1.1 million
30
during 2018 compared to $335,000 during 2017. The net loan charge-offs in 2018 were primarily related to one commercial
loan relationship. The Company recorded net loan charge-offs of $335,000 during 2017 compared to $1.1 million during
2016. There were no significant loan charge-offs recorded during 2017. The Company recorded net loan charge-offs of $1.1
million during 2016, which were primarily related to an agriculture loan relationship which was subject to trouble debt
restructuring (“TDR”) and the liquidation of the assets securing an impaired commercial loan relationship.
The distribution of the Company’s allowance for losses on loans at the dates indicated and the percent of loans in
each category to total loans is summarized in the following table. This allocation reflects management’s judgment as to risks
inherent in the types of loans indicated, but in general the Company’s total allowance for loan losses included in the table is
not restricted and is available to absorb all loan losses. The amount allocated in the following table to any category should
not be interpreted as an indication of expected actual charge-offs in that category.
2020
2019
As of December 31,
2018
2017
2016
% Loan
type to
% Loan
type to
% Loan
type to
% Loan
type to
Amount
total loans Amount
total loans Amount
total loans Amount
total loans Amount
% Loan
type to
total loans
(Dollars in thousands)
One-to-four family residential real estate loans
Construction and land loans
Commercial real estate loans
Commercial loans
Paycheck protection program loans
Agriculture loans
Municipal loans
Consumer loans
Total
32.1%
$ 859
3.2%
181
27.8%
2,482
12.8%
2,388
0.0%
-
18.4%
2,690
0.9%
6
169
4.8%
$ 8,775 100.0% $ 6,467 100.0% $ 5,765 100.0% $ 5,459 100.0% $ 5,344 100.0%
27.6% $ 542
181
4.1%
28.1%
1,540
15.0% 1,226
0.0% -
19.5% 1,812
0.6% 8
5.1% 150
31.0% $ 504
53
4.4%
27.5%
1,777
12.4% 1,119
0.0% -
18.9% 1,684
0.8% 12
5.0% 195
22.1% $ 501
3.7%
271
24.2% 1,386
18.8% 1,815
14.0% -
13.5% 2,347
0.3% 7
3.4% 140
27.2% $ 449
4.2%
168
24.8% 1,686
20.3% 1,051
0.0% -
18.3% 2,238
0.5% 7
4.7% 166
The increase in the allocation of the allowance for loan losses on our one-to-four family residential real estate loans
as of December 31, 2020 compared to December 31, 2019 was primarily related to increased risk factors associated with
probable and incurred losses due COVID-19. The increase in the allocation of the allowance for loan losses on our one-to-
four family residential real estate loans as of December 31, 2019 compared to December 31, 2018 was primarily related to
growth in our loan balances and an increase in specific allowances related to impaired loans. The decrease in the allocation
of the allowance for loan losses on our one-to-four family residential real estate loans as of December 31, 2018 compared to
December 31, 2017 was primarily related to improvements in the housing market which contributed to lower qualitative
adjustments in our analysis and a decrease in specific allowances related to impaired loans. The increase in the allocation of
the allowance for loan losses on our one-to-four family residential real estate loans as of December 31, 2017 compared to
December 31, 2016 was primarily related to the increase in specific allowances related to impaired loans.
The decrease in the allocation of the allowance for loan losses on construction and land loans as of December 31,
2020 compared to December 31, 2019 was primarily related to related to a decrease in specific allowances related to impaired
loans. The increase in the allocation of the allowance for loan losses on construction and land loans as of December 31, 2019
compared to December 31, 2018 was primarily related to an increase in specific allowances related to impaired loans. The
decrease in the allocation of the allowance for loan losses on construction and land loans as of December 31, 2018 compared
to December 31, 2017 was primarily related to improvements in these markets which contributed to lower qualitative
adjustments in our analysis. The allocation of the allowance for loan losses on construction and land increased as of December
31, 2017 compared to December 31, 2016 due to higher outstanding loan balances.
The increase in the allocation of the allowance for loan losses on commercial real estate loans as of December 31,
2020 compared to December 31, 2019 was primarily related to higher loan balances and increased risk factors associated
with probable and incurred losses due COVID-19. The decrease in the allocation of the allowance for loan losses on
commercial real estate loans as of December 31, 2019 compared to December 31, 2018 was primarily related to lower loan
balances, and improvements in the commercial real estate markets which resulted in lower qualitative adjustments in our
analysis. The allocation of the allowance for loan losses on commercial real estate loans increased as of December 31, 2018
compared to December 31, 2017 due to an increase in classified loans and an increase in specific allowances related to
impaired loans. The allocation of the allowance for loan losses on commercial real estate loans decreased as of December 31,
31
2017 compared to December 31, 2016 due to continued improvements in the commercial real estate market which contributed
to lower qualitative adjustments in our analysis.
The increase in the allocation of the allowance for loan losses on our commercial loans as of December 31, 2020
compared to December 31, 2019 was primarily related to higher loan balances and increased risk factors associated with
probable and incurred losses due COVID-19. The increase in the allocation of the allowance for loan losses on our commercial
loans as of December 31, 2019 compared to December 31, 2018 was primarily related to increased loan balances, higher
specific allowances related to impaired loans and increasing risk in the portfolio which resulted in higher qualitative
adjustments in our analysis. The decrease in the allocation of the allowance for loan losses on our commercial loans as of
December 31, 2018 compared to December 31, 2017 was primarily related to a decline in specific allowances related to
impaired loans as a result of charge-offs recorded during 2018. The increase in the allocation of the allowance for loan losses
on our commercial loans as of December 31, 2017 compared to December 31, 2016 was primarily related to the increase in
specific allowances related to impaired loans.
We do not record an allowance for loan losses on PPP loans because these loans are fully guaranteed by the SBA.
The increase in the allocation of the allowance for loan losses on agriculture loans as of December 31, 2020
compared to December 31, 2019 was primarily related to increased risk factors associated with probable and incurred losses
due COVID-19. The increase in the allocation of the allowance for loan losses on agriculture loans as of December 31, 2019
compared to December 31, 2018 was primarily related to higher specific allowances related to impaired loans and higher loan
balances. The increase in the allocation of the allowance for loan losses on agriculture loans as of December 31, 2018
compared to December 31, 2017 was primarily related to growth in loan balances and higher levels of classified loans. The
increase in the allocation of the allowance for loan losses on agriculture loans as of December 31, 2017 compared to December
31, 2016 was primarily due to higher loan balances and management’s judgment to increase the risk factors.
The allowance for loan losses is discussed in more detail in the “Asset Quality and Distribution” section of “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.” As of December 31, 2020, we
believed the Company’s allowance for loan losses continued to be adequate based on the Company’s evaluation of the loan
portfolio’s probable incurred losses.
V. Deposits
The following table presents the average deposit balances and the average rate paid on those balances for the years
indicated.
(Dollars in thousands)
Non-interest bearing demand
Money market and checking
Savings accounts
Time
Total
2020
Years ended December 31,
2019
2018
Average
Balance
$253,840
425,525
114,280
133,412
$927,057
Average
Average
Balance
Rate
$181,573
-
0.21% 371,739
0.04% 97,966
0.87% 177,091
$828,369
Average
Average
Balance
Rate
$168,855
-
0.69% 371,138
0.04% 95,532
1.55% 137,400
$772,925
Average
Rate
-
0.49%
0.03%
0.87%
32
The following table presents the maturities of jumbo time deposits (amounts of $100,000 or more).
(Dollars in thousands)
Three months or less
Over three months through six months
Over six months through 12 months
Over 12 months
Total
As of December 31,
2020
$ 38,512
15,755
16,493
6,675
$ 77,435
2019
$ 45,883
19,427
13,146
7,702
$ 86,158
VI. Return on Equity and Assets
The following table presents information on return on average equity, return on average assets, equity to total assets
and our dividend payout ratio.
Return on average assets
Return on average equity
Equity to total assets
Dividend payout ratio
As of or for the years ended December 31,
2020
1.77%
16.70%
10.66%
18.54%
2019
2018
1.07%
10.58%
10.88%
32.90%
1.09%
12.09%
9.32%
31.88%
VII. Short-term Borrowings
The following table presents information on certain components of short-term borrowings. Information on short-
term borrowings is excluded for the years ended December 31, 2020 and 2019 as the average balances of each category of
short-term borrowings was less than 30 percent of stockholders’ equity.
FHLB Line of Credit
Balance at year-end
Maximum month-end balance
Average balance during year
Weighted average interest rates:
At year-end
During the year
For the year ended
December 31,
2018
$
20,000
80,600
41,311
2.65%
2.15%
33
ITEM 1A. RISK FACTORS
An investment in our securities is subject to certain risks inherent in our business. Before making an investment
decision, you should carefully consider the risks and uncertainties described below together with all of the other information
included in this report. In addition to the risks and uncertainties described below, other risks and uncertainties not currently
known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial
condition and results of operations. The value or market price of our securities could decline due to any of these identified or
other risks, and you could lose all or part of your investment.
COVID-19 Risks
The outbreak of COVID-19 has led to an economic recession and had other adverse effects on the U.S. economy and
has disrupted our operations. The ongoing COVID-19 pandemic has also adversely impacted certain industries in
which our clients operate and impaired their ability to fulfill their financial obligations to us. The ultimate impact of
the COVID-19 pandemic on our business remains uncertain but may have a material and adverse effect on our
business, financial condition, results of operations and growth prospects.
The COVID-19 pandemic continues to negatively impact the United States and the world. The spread of COVID-
19 has negatively impacted the U.S. economy at large, and small businesses in particular, and has affected our operations.
The responses on the part of the U.S. and global governments and populations have created a recessionary environment,
reduced economic activity and caused significant volatility in the global stock markets. The ultimate impact of the COVID-
19 pandemic on our business remains uncertain but may have a material and adverse effect on our business, financial
condition, results of operations and growth prospects.
The outbreak of COVID-19 has resulted in a decline in the businesses of certain of our clients, a decrease in
consumer confidence, an increase in unemployment, and a disruption in the services provided by our vendors. Continued
disruptions to our clients’ businesses could result in increased risk of delinquencies, defaults, foreclosures, and losses on our
loans, negatively impact regional economic conditions, result in declines in local loan demand, liquidity of loan guarantors,
the value of loan collateral (particularly in real estate), loan originations, and deposit availability and negatively impact the
implementation of our growth strategy. Although the U.S. government introduced, and may introduce in the future, programs
designed to soften the impact of COVID-19 on small businesses or provide stimulus checks to individuals, our borrowers
may still not be able to satisfy their financial obligations to us.
In addition, COVID-19 has impacted and likely will continue to impact the financial ability of businesses and
consumers to borrow money, which would negatively impact loan volumes. Certain of our borrowers are in, or have exposure
to, the retail, restaurant, hospitality and agriculture industries and are located in areas that are, or were, quarantined or under
stay-at-home orders. COVID-19 may also have an adverse effect on our commercial real estate portfolio, particularly with
respect to real estate with exposure to these industries, our one-to-four family residential real estate loan business and loan
portfolio, and the value of certain collateral securing our loans. As COVID-19 cases have begun to surge in recent months,
any new or prolonged quarantine or stay-at-home orders would have a negative adverse impact on these borrowers and their
revenue streams, which consequently impacts their ability to meet their financial obligations to us and could result in loan
defaults.
The ultimate extent of the COVID-19 pandemic’s effect on our business will depend on many factors, primarily
including the speed and extent of any recovery from the related economic recession. Among other things, this will depend on
the duration of the COVID-19 pandemic, particularly in our Kansas market, the development, distribution and supply of
vaccines, therapies and other public health initiatives to control the spread of the disease, the nature and size of federal
economic stimulus and other governmental efforts, and the possibility of additional state lockdown or stay-at-home orders in
our markets in response to the recent surge in the number of COVID-19 cases.
The initial distribution of vaccines has been slow, and there may continue to be challenges with producing and
distributing sufficient quantities of the vaccines. If the general public is unwilling or unable to access effective vaccines and
therapies, this may also prolong the COVID-19 pandemic. In addition, new variants of COVID-19 may increase the spread
or severity of COVID-19 and previously developed vaccines and therapies may not be as effective against new COVID-19
variants.
34
As a result of the COVID-19 pandemic, we may experience adverse financial consequences due to a number of other
factors, including but not limited to:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
a sustained decline in our stock price or the occurrence of what management would deem to be a triggering
event that could, under certain circumstances, cause management to perform impairment testing on our
goodwill and other intangible assets that could result in an impairment charge being recorded for that
period, and adversely impact our results of operations and the ability of the Bank to pay dividends to us;
increased demand on our liquidity as we meet borrowers’ needs, experience significant credit deterioration,
and cover expenses related to our business continuity plan;
the potential for reduced liquidity and its negative affect on our capital and leverage ratios;
the negative effect on earnings resulting from the Bank modifying loans and agreeing to loan payment
deferrals due to the COVID-19 pandemic;
the modification of our business practices, including with respect to branch operations, employee travel,
employee work locations, participation in meetings, events and conferences, and related changes for our
vendors and other business partners;
a decline in demand for our products and services;
a potential increase in loan delinquencies, problem assets and foreclosures if the economic downturn or
high levels of unemployment continue for an extended period of time;
a potential decline in the net worth and liquidity of loan guarantors;
the yield on our assets declining to a greater extent than the decline in our cost of interest-bearing liabilities
as a result of the decline in the Federal Reserve’s target federal funds rate to near 0% (or possibly below
0% in the future);
uncertainties created by the pandemic, combined with the disruptions to our own business, that could
negatively affect our ability to execute our acquisition strategy for the foreseeable future, limiting or
delaying our future growth plans;
increases in federal and state taxes as a result of the effects of the pandemic and stimulus programs on
governmental budgets;
an increase in FDIC premiums if the agency experiences additional resolution costs relating to bank
failures;
increased cyber and payment fraud risk due to increased online and remote activity; and
other operational failures due to changes in our normal business practices because of the pandemic and
governmental actions to contain it.
Overall, we believe that the economic impact from COVID-19 could have a material and adverse impact on our
business and result in significant losses in our loan portfolio, all of which would adversely and materially impact our earnings
and capital. Even after the COVID-19 pandemic has subsided, we may continue to experience materially adverse impacts to
our business as a result of the global economic impact of the COVID-19 pandemic, including the availability of credit, adverse
impacts on liquidity and any recession that has occurred or may occur in the future. There are no comparable recent events
that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and, as a result, the ultimate
impact of the pandemic is highly uncertain and subject to change.
The U.S. government and banking regulators, including the Federal Reserve, have taken a number of unprecedented
actions in response to the COVID-19 pandemic, which could ultimately have a material adverse effect on our business
and results of operations.
On March 27, 2020, President Trump signed into law the CARES Act, which established a $2.0 trillion economic
stimulus package, including cash payments to individuals, supplemental unemployment insurance benefits and a $349.0
billion loan program administered through the SBA referred to as the PPP. In addition, on December 27, 2020, President
Trump signed the Consolidated Appropriations Act, 2021, a $900.0 billion COVID-19 relief package that included an
additional $284.5 billion in PPP funding. On March 11, 2021, President Biden signed into law an additional $1.9 trillion
federal stimulus bill, which could have a material effect on the overall economic environment.
The COVID-19 pandemic has significantly affected the financial markets and the Federal Reserve has taken a
number of actions in response. In March 2020, the Federal Reserve dramatically reduced the target federal funds rate and
announced a $700 billion quantitative easing program in response to the expected economic downturn caused by the COVID-
35
19 pandemic. In addition, the Federal Reserve reduced the interest that it pays on excess reserves. We expect that these
reductions in interest rates, especially if prolonged, could adversely affect our net interest income, our net interest margin and
our profitability. The Federal Reserve also launched the Main Street Lending Program, which offered deferred interest on
four-year loans to small and mid-sized businesses. The Main Street Lending Program terminated on January 8, 2021. The
impact of the COVID-19 pandemic on our business activities as a result of new government and regulatory laws, policies,
programs, and guidelines, as well as market reactions to such activities, remains uncertain but may ultimately have a material
adverse effect on our business and results of operations.
As a participating lender in the PPP, we are subject to additional risks of litigation from our clients or other parties
regarding our processing of loans for the PPP and risks that the SBA may not fund some or all PPP loan guarantees.
Since the opening of the PPP, several other larger banks have been subject to litigation regarding the process and
procedures that such banks used in processing applications for the PPP and claims related to agent fees. If any such litigation
is filed against us and is not resolved in a manner favorable to us, it may result in significant financial liability or adversely
affect our reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs, or
reputational damage caused by the PPP related litigation could have a material adverse impact on our business, financial
condition, and results of operations. Also, it has been reported that many borrowers fraudulently obtained PPP loans through
the program. We may be subject to regulatory and litigation risk if any of our PPP borrowers used fraudulent means to obtain
a PPP loan.
We also have credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner
in which the loan was originated, funded, or serviced by the Bank, such as an issue with the eligibility of a borrower to receive
a PPP loan, which may or may not be related to the ambiguity in the laws, rules, and guidance regarding the operation of the
PPP, or if the borrower fraudulently obtained a PPP loan. In the event of a loss resulting from a default on a PPP loan and a
determination by the SBA that there is a deficiency in the manner in which the PPP loan was originated, funded, or serviced
by us, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or if it has already paid under
the guaranty, seek recovery of any loss related to the deficiency from us.
Credit Risks
We must effectively manage our credit risk.
There are risks inherent in making any loan, including risks inherent in dealing with individual borrowers, risks of
nonpayment, risks resulting from uncertainties as to the future value of collateral and risks resulting from changes in economic
and industry conditions. We attempt to minimize our credit risk through prudent loan application approval procedures, careful
monitoring of the concentration of our loans within specific industries and periodic independent reviews of outstanding loans
by our credit review department. However, we cannot assure you that such approval and monitoring procedures will reduce
these credit risks.
Most of our loans are commercial, real estate, or agriculture loans, each of which is subject to distinct types of risk.
To reduce the lending risks we face, we generally take a security interest in borrowers’ property for all three types of loans.
In addition, we sell certain residential real estate loans to third parties. Nevertheless, the risk of non-payment is inherent in
all types of loans, and if we are unable to collect amounts owed, it may materially affect our operations and financial
performance. For a more complete discussion of our lending activities see Item 1 of this Annual Report on Form 10-K.
Our business is subject to domestic and, to a lesser extent, international economic conditions and other factors, many
of which are beyond our control and could materially and adversely affect us.
Our financial performance generally, and in particular the ability of customers to pay interest on and repay principal
of outstanding loans and the value of collateral securing those loans, as well as demand for loans and other products and
services we offer, is highly dependent upon the business environment not only in the markets where we operate, but also in
the state of Kansas generally and in the United States as a whole. A favorable business environment is generally characterized
by, among other factors: economic growth; efficient capital markets; low inflation; low unemployment; high business and
investor confidence; and strong business earnings. Unfavorable or uncertain economic and market conditions can be caused
by: declines in economic growth, business activity or investor or business confidence; limitations on the availability or
36
increases in the cost of credit and capital; increases in inflation or interest rates; high unemployment; uncertainty in U.S. trade
policies, legislation, treaties and tariffs; natural disasters; acts of war or terrorism; widespread disease or pandemics; or a
combination of these or other factors.
Economic conditions in the state of Kansas are impacted by commodity prices, which may adversely impact the
Kansas economy, specifically the agriculture sector. Declines in commodity prices could materially and adversely affect our
results of operations.
The agricultural economy in the Midwest, including Kansas, has improved recently after experiencing weakness
over the previous several years. A prolonged period of weakness in the agricultural economy could result in a decrease in
demand for loans or other products and services offered by us, an increase in agricultural loan delinquencies and defaults, an
increase in impaired assets and foreclosures, a decline in the value of our loans secured by real estate, and an inability to sell
foreclosed assets. The effects of a prolonged period of a weakened agricultural economy could have a material adverse effect
on our business, financial condition and results of operations.
Our allowance for loan losses may prove to be insufficient to absorb losses in our loan portfolio.
We maintain our allowance for loan losses at a level considered appropriate by management to absorb probable
incurred loan losses in the portfolio. Additionally, our Board of Directors regularly monitors the appropriateness of our
allowance for loan losses. The allowance is also subject to regulatory examinations and a determination by the regulatory
agencies as to the appropriate level of the allowance. The amount of future loan losses is susceptible to changes in economic,
operating and other conditions, including changes in interest rates and the value of the underlying collateral, which may be
beyond our control, and such losses may exceed current estimates. At December 31, 2020 and 2019 our allowance for loan
losses as a percentage of total loans was 1.23% and 1.20%, respectively, and as a percentage of total non-performing loans
was 83.45% and 116.61%, respectively. Although management believes that the allowance for loan losses is appropriate to
absorb probable incurred losses on any existing loans that may become uncollectible, we cannot predict loan losses with
certainty nor can we assure you that our allowance for loan losses will prove sufficient to cover actual loan losses in the
future. Loan losses in excess of our reserves will adversely affect our business, financial condition and results of operations.
Also, beginning in January 2023, the Company will be required to implement the CECL accounting standard, which
will change how the Company calculates its allowance for loan losses by requiring the Company to determine periodic
estimates of lifetime expected credit losses on loans and recognize the expected credit losses as allowances for loan losses.
This will change the current method of providing allowances for loan losses that are probable, which may require us to
increase our allowance for loan losses. Any increase in our allowance for loan losses may have a material adverse effect on
our financial condition and results of operations.
Our concentration of one-to-four family residential mortgage loans may result in lower yields and profitability.
One-to-four family residential mortgage loans comprised $158.0 million and $146.5 million, or 22.1% and 27.2%,
of our loan portfolio at December 31, 2020 and 2019, respectively. These loans are secured primarily by properties located
in the state of Kansas. Our concentration of these loans results in lower yields relative to other loan categories within our
loan portfolio. While these loans generally possess higher yields than investment securities, their repayment characteristics
are not as well defined, and they generally possess a higher degree of interest rate risk versus other loans and investment
securities within our portfolio. This increased interest rate risk is due to the repayment and prepayment options inherent in
residential mortgage loans which are exercised by borrowers based upon the overall level of interest rates. These residential
mortgage loans are generally made on the basis of the borrower’s ability to make repayments from his or her employment
and the value of the property securing the loan. Thus, as a result, repayment of these loans is also subject to general economic
and employment conditions within the communities and surrounding areas where the property is located.
A decline in residential real estate market prices or home sales has the potential to adversely affect our one-to-four
family residential mortgage portfolio in several ways, such as a decrease in collateral values and an increase in non-
performing loans, each of which could adversely affect our operating results and/or financial condition.
37
Our loan portfolio has a large concentration of real estate loans, which involve risks specific to real estate value.
Real estate lending (including commercial real estate, construction and land and residential real estate) is a large
portion of our loan portfolio. These categories were $356.4 million, or approximately 50.0% of our total loan portfolio, as of
December 31, 2020, as compared to $302.5 million, or approximately 56.2% of our total loan portfolio, as of December 31,
2019. The market value of real estate can fluctuate significantly in a short period of time as a result of market conditions in
the geographic area in which the real estate is located. Although a significant portion of commercial real estate and
construction and land loans are secured by a secondary form of collateral, adverse developments affecting real estate values
in one or more of our markets could increase the credit risk associated with our loan portfolio. Additionally, real estate
lending typically involves higher loan principal amounts, and the repayment of the loans generally is dependent, in large part,
on sufficient income from the properties securing the loans to cover operating expenses and debt service. Economic events
or governmental regulations outside of the control of the borrower or lender could negatively impact the future cash flow and
market values of the affected properties.
If the loans that are collateralized by real estate become troubled during a time when market conditions are declining
or have declined, then we may not be able to realize the amount of security that we anticipated at the time of originating the
loan, which could cause us to increase our provision for loan losses and adversely affect our operating results and financial
condition. In light of the uncertainty that exists in the economy and credit markets nationally, there can be no guarantee that
we will not experience additional deterioration in credit performance by our real estate loan customers.
Commercial loans make up a significant portion of our loan portfolio.
Commercial loans comprised $134.0 million and $109.6 million, or 18.8% and 20.3%, of our loan portfolio at
December 31, 2020 and 2019, respectively. Our commercial loans are made based primarily on the identified cash flow of
the borrower and secondarily on the underlying collateral provided by the borrower. Most often, this collateral is accounts
receivable, inventory, or machinery. Credit support provided by the borrower for most of these loans, and the probability of
repayment is based on the liquidation of the pledged collateral and enforcement of a personal guarantee, if any exists. As a
result, in the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be
substantially dependent on the ability of the borrower to collect amounts due from its customers. The collateral securing
other loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the
business. Due to the larger average size of each commercial loan as compared with other loans such as residential loans, as
well as collateral that is generally less readily marketable, losses incurred on a small number of commercial loans could have
a material adverse impact on our financial condition and results of operations.
The success of our SBA lending program is dependent upon the continued availability of SBA loan programs, our
status as a Preferred Lender under the SBA loan programs and our ability to comply with applicable SBA lending
requirements.
As an SBA Preferred Lender, we enable our clients to obtain SBA loans without being subject to the potentially
lengthy SBA approval process necessary for lenders that are not SBA Preferred Lenders. The SBA periodically reviews the
lending operations of participating lenders to assess, among other things, whether the lender exhibits prudent risk
management. When weaknesses are identified, the SBA may request corrective actions or impose other restrictions, including
revocation of the lender’s Preferred Lender status. If we lose our status as a Preferred Lender, we may lose our ability to
compete effectively with other SBA Preferred Lenders, and as a result we could experience a material adverse effect to our
financial results. Any changes to the SBA program, including changes to the level of guaranty provided by the federal
government on SBA loans or changes to the level of funds appropriated by the federal government to the various SBA
programs, may also have an adverse effect on our business, results of operations and financial condition.
In order for a borrower to be eligible to receive an SBA loan, the lender must establish that the borrower would not
be able to secure a bank loan without the credit enhancements provided by a guaranty under the SBA program. Accordingly,
the SBA loans in our portfolio generally have weaker credit characteristics than the rest of our portfolio, and may be at greater
risk of default in the event of deterioration in economic conditions or the borrower’s financial condition. In the event of a
loss resulting from default and a determination by the SBA that there is a deficiency in the manner in which the loan was
originated, funded or serviced by us, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty,
or, if it has already paid under the guaranty, seek recovery of the principal loss related to the deficiency from us. Management
has estimated losses inherent in the outstanding guaranteed portion of SBA loans and recorded a recourse reserve at a level
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determined to be appropriate. Significant increases to the recourse reserve may materially decrease our net income, which
may adversely affect our business, results of operations and financial condition.
Our agriculture loans involve a greater degree of risk than other loans, and the ability of the borrower to repay may
be affected by many factors outside of the borrower’s control.
Agriculture operating loans comprised $48.2 million and $49.9 million, or 6.7% and 9.3%, of our loan portfolio at
December 31, 2020 and 2019, respectively. The repayment of agriculture operating loans is dependent on the successful
operation or management of the farm property. Likewise, agricultural operating loans involve a greater degree of risk than
lending on residential properties, particularly in the case of loans that are unsecured or secured by rapidly depreciating assets
such as farm equipment, livestock or crops. We generally secure agricultural operating loans with a blanket lien on livestock,
equipment, food, hay, grain and crops. Nevertheless, any repossessed collateral for a defaulted loan may not provide an
adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or
depreciation.
We also originate agriculture real estate loans. At December 31, 2020 and 2019, agricultural real estate loans totaled
$48.3 million and $48.7 million, or 6.8% and 9.0% of our total loan portfolio, respectively. Agricultural real estate lending
involves a greater degree of risk and typically involves larger loans to single borrowers than lending on single-family
residences. As with agriculture operating loans, payments on agricultural real estate loans are dependent on the profitable
operation or management of the farm property securing the loan. The success of the farm may be affected by many factors
outside the control of the farm borrower, including adverse weather conditions that prevent the planting of a crop or limit
crop yields (such as hail, drought and floods), loss of livestock due to disease or other factors, declines in market prices for
agricultural products (both domestically and internationally) and the impact of government regulations (including changes in
price supports, tariffs, trade agreements, subsidies and environmental regulations). In addition, many farms are dependent
on a limited number of key individuals whose injury or death may significantly affect the successful operation of the farm.
If the cash flow from a farming operation is diminished, the borrower’s ability to repay the loan may be impaired. The
primary crops in our market areas are wheat, corn and soybean. Accordingly, adverse circumstances affecting wheat, corn
and soybean crops could have an adverse effect on our agricultural real estate loan portfolio.
Our business is concentrated in and dependent upon the continued growth and welfare of the markets in which we
operate, including eastern, central, southeast and southwest Kansas.
We operate primarily in eastern, central, southeast and southwest Kansas, and as a result, our financial condition,
results of operations and cash flows are subject to changes in the economic conditions in those areas. Although each market
we operate in is geographically and economically diverse, our success depends upon the business activity, population, income
levels, deposits and real estate activity in each of these markets. Although our customers’ business and financial interests
may extend well beyond our market area, adverse economic conditions that affect our specific market area could reduce our
growth rate, affect the ability of our customers to repay their loans to us and generally affect our financial condition and
results of operations. Because of our geographic concentration, we are less able than other regional or national financial
institutions to diversify our credit risks across multiple markets.
Non-performing assets take significant time to resolve and adversely affect our results of operations and financial
condition, and could result in further losses in the future.
As of December 31, 2020, our non-performing loans (which consist of non-accrual loans and loans past due 90 days
or more and still accruing interest) totaled $10.5 million, or 1.47% of our loan portfolio, and our non-performing assets (which
include non-performing loans plus real estate owned) totaled $12.3 million, or 1.03% of total assets. In addition, we had $1.5
million in accruing loans that were 30-89 days delinquent as of December 31, 2020.
Our non-performing assets adversely affect our net income in various ways. We do not record interest income on
non-accrual loans or other real estate owned, thereby adversely affecting our net income and returns on assets and equity,
increasing our loan administration costs and adversely affecting our efficiency ratio. When we take collateral in foreclosure
and similar proceedings, we are required to mark the collateral to its then-fair market value, which may result in a loss. These
non-performing loans and other real estate owned also increase our risk profile and the capital our regulators believe is
appropriate in light of such risks. The resolution of non-performing assets requires significant time commitments from
management and can be detrimental to the performance of their other responsibilities. If we experience increases in non-
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performing loans and non-performing assets, our net interest income may be negatively impacted and our loan administration
costs could increase, each of which could have an adverse effect on our net income and related ratios, such as return on assets
and equity.
Interest Rate Risks
Monetary policies and regulations of the Federal Reserve could adversely affect our business, financial condition and
results of operations.
In addition to being affected by general economic conditions, our earnings and growth are affected by the policies
of the Federal Reserve. An important function of the Federal Reserve is to regulate the money supply and credit
conditions. Among the instruments used by the Federal Reserve to implement these objectives are open market operations
in U.S. government securities, adjustments of the discount rate and changes in reserve requirements against bank
deposits. These instruments are used in varying combinations to influence overall economic growth and the distribution of
credit, bank loans, investments and deposits. Their use also affects interest rates charged on loans or paid on deposits.
The monetary policies and regulations of the Federal Reserve have had a significant effect on the operating results
of commercial banks in the past and are expected to continue to do so in the future. The effects of such policies upon our
business, financial condition and results of operations cannot be predicted.
Interest rates and other conditions impact our results of operations.
Our profitability is in part a function of the spread between the interest rates earned on investments and loans and
the interest rates paid on deposits and other interest-bearing liabilities. Like most banking institutions, our net interest spread
and margin will be affected by general economic conditions and other factors, including fiscal and monetary policies of the
federal government that influence market interest rates and our ability to respond to changes in such rates. At any given time,
our assets and liabilities will be such that they are affected differently by a given change in interest rates. As a result, an
increase or decrease in rates, the length of loan terms or the mix of adjustable and fixed rate loans in our portfolio could have
a positive or negative effect on our net income, capital and liquidity. We measure interest rate risk under various rate scenarios
and using specific criteria and assumptions. A summary of this process, along with the results of our net interest income
simulations, is presented in the section entitled Item 7A. “Quantitative and Qualitative Disclosures About Market Risk.”
Although we believe our current level of interest rate sensitivity is reasonable and effectively managed, significant
fluctuations in interest rates may have an adverse effect on our business, financial condition and results of operations.
Changes in interest rates also can affect the value of loans, securities and other assets. An increase in interest rates
that adversely affects the ability of borrowers to pay the principal or interest on loans may lead to an increase in non-
performing assets and a reduction of income recognized, which could have a material adverse effect on our results of
operations and cash flows. Further, when we place a loan on nonaccrual status, we reverse any accrued but unpaid interest
receivable, which decreases interest income. Subsequently, we continue to have a cost to fund the loan, which is reflected as
interest expense, without any interest income to offset the associated funding expense. Thus, an increase in the amount of
non-performing assets would have an adverse impact on net interest income.
Rising interest rates will result in a decline in value of our fixed-rate debt securities. The unrealized losses resulting
from holding these securities would be recognized in other comprehensive income and reduce total stockholders' equity.
Unrealized losses do not negatively impact our regulatory capital ratios; however, tangible common equity and the associated
ratios would be reduced. If debt securities in an unrealized loss position are sold, such losses become realized and will reduce
our regulatory capital ratios.
Interest rates on our financial instruments might be subject to change based on developments related to the LIBOR,
which could adversely impact our revenue, expenses, and value of those financial instruments.
In July 2017, the Financial Conduct Authority, the authority regulating LIBOR, along with various other regulatory
bodies, announced that LIBOR would likely be discontinued at the end of 2021. LIBOR makes up one of the most liquid and
common interest rate indices in the world and is commonly referenced in financial instruments. We have exposure to LIBOR
in various aspects through our financial contracts. Instruments that may be impacted include loans, deposits, securities, and
subordinated debentures, among other financial contracts indexed to LIBOR and that mature after December 31, 2021.
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While there is no consensus on what rate or rates may become accepted alternatives to LIBOR, the Alternative
Reference Rates Committee, a steering committee comprised of U.S. financial market participants, selected by the Federal
Reserve Bank of New York, started in May 2018 to publish the Secured Overnight Financing Rate (“SOFR”) as an alternative
to LIBOR. SOFR is a broad measure of the cost of overnight borrowings collateralized by Treasury securities that was
selected by the Alternative Reference Rate Committee due to the depth and robustness of the U.S. Treasury repurchase
market. At this time, it is impossible to predict whether SOFR will become an accepted alternative to LIBOR.
The market transition away from LIBOR to an alternative reference rate, such as SOFR, is complex and could have
a range of adverse effects on our business, financial condition and results of operations. In particular, any such transition
could:
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adversely affect the interest rates paid or received on, the revenue and expenses associated with, and the value of
our floating-rate obligations, loans, deposits, subordinated debentures and other financial instruments tied to LIBOR
rates, or other securities or financial arrangements given LIBOR’s role in determining market interest rates globally;
prompt inquiries or other actions from regulators in respect of our preparation and readiness for the replacement of
LIBOR with an alternative reference rate;
result in disputes, litigation or other actions with counterparties regarding the interpretation and enforceability of
certain fallback language, or lack of fallback language, in LIBOR-based instruments; and
require the transition to or development of appropriate systems and analytics to effectively transition our risk
management processes from LIBOR-based products to those based on the applicable alternative pricing benchmark,
such as SOFR.
The manner and impact of this transition, as well as the effect of these developments on our funding costs, loan and
investment and trading securities portfolios, asset-liability management, and business, is uncertain.
Declines in value may adversely impact the carrying amount of our investment portfolio and result in other-than-
temporary impairment charges.
We may be required to record impairment charges on our investment securities if they suffer declines in value that
are considered other-than-temporary. If the credit quality of the securities in our investment portfolio deteriorates, we may
also experience a loss in interest income from the suspension of either interest or dividend payments. Numerous factors,
including lack of liquidity for resales of certain investment securities, absence of reliable pricing information for investment
securities, adverse changes in business climate or adverse actions by regulators could have a negative effect on our investment
portfolio in future periods.
Downgrades in the credit rating of one or more insurers that provide credit enhancement for our state and municipal
securities portfolio may have an adverse impact on the market for and valuation of these types of securities.
We invest in tax-exempt and taxable state and local municipal investment securities, some of which are insured by
monoline insurers. As of December 31, 2020, we had $192.2 million of municipal securities, which represented 64.7% of
our total securities portfolio. Even though management generally purchases municipal securities on the overall credit strength
of the issuer, the reduction in the credit rating of an insurer may negatively impact the market for and valuation of our
investment securities. Such downgrade could adversely affect our liquidity, financial condition and results of operations.
Legal, Accounting and Compliance Risks
Legislative and regulatory reforms applicable to the financial services industry may have a significant impact on our
business, financial condition and results of operations.
The laws, regulations, rules, policies and regulatory interpretations governing us are constantly evolving and may
change significantly over time as Congress and various regulatory agencies react to adverse economic conditions or other
matters. The implementation of any current, proposed or future regulatory or legislative changes to laws applicable to the
financial industry may impact the profitability of our business activities and may change certain of our business practices,
including the ability to offer new products, obtain financing, attract deposits, make loans, and achieve satisfactory interest
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spreads, and could expose us to additional costs, including increased compliance costs. These regulations and legislation may
be impacted by the political ideologies of the executive and legislative branches of the U.S. government as well as the heads
of regulatory and administrative agencies, which may change as a result of elections.
The Company and the Bank are subject to stringent capital and liquidity requirements.
The Basel III Rule imposes stringent capital requirements on bank holding companies and banks. In addition to the
minimum capital requirements, banks and bank holding companies are also required to maintain a capital conservation buffer
of 2.5% of Common Equity Tier 1 Capital on top of minimum risk-weighted asset ratios to make capital distributions
(including for dividends and repurchases of stock) and pay discretionary bonuses to executive officers without restriction.
Banking institutions that do not maintain capital in excess of the Basel III Rule standards including the capital conservation
buffer face constraints on the payment of dividends, equity repurchases and compensation based on the amount of the
shortfall. Accordingly, if the Bank fails to maintain the applicable minimum capital ratios and the capital conservation buffer,
distributions to the Company may be prohibited or limited.
Future increases in minimum capital requirements could adversely affect our net income. Furthermore, our failure
to comply with the minimum capital requirements could result in our regulators taking formal or informal actions against us
which could restrict our future growth or operations.
We are subject to changes in accounting principles, policies or guidelines.
Our financial performance is impacted by accounting principles, policies and guidelines. Some of these policies
require the use of estimates and assumptions that may affect the value of our assets or liabilities and financial results. Some
of our accounting policies are critical because they require management to make difficult, subjective and complex judgments
about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under
different conditions or using different assumptions. If such estimates or assumptions underlying our financial statements are
incorrect, we may experience material losses.
From time to time, the FASB and the SEC change the financial accounting and reporting standards or the
interpretation of those standards that govern the preparation of our financial statements, such as the implementation of CECL.
These changes are beyond our control, can be difficult to predict and could materially impact how we report our financial
condition and results of operations. Changes in these standards are continuously occurring, and more drastic changes may
occur in the future. The implementation of such changes could have a material adverse effect on our financial condition and
results of operations.
A new accounting standard may require us to increase our allowance for loan losses and may have a material adverse
effect on our financial condition, amount of capital and results of operations.
The FASB has adopted a new accounting standard that is effective for our fiscal year beginning on January 1, 2023.
This standard, referred to as CECL, makes significant changes to the accounting for credit losses on financial instruments
presented on an amortized cost basis, such as our loans held for investment, and disclosures about them. The new CECL
impairment model will require an estimate of expected credit losses, measured over the contractual life of an instrument,
which considers reasonable and supportable forecasts of future economic conditions in addition to information about past
events and current conditions. The standard provides significant flexibility and requires a high degree of judgment with
regards to pooling financial assets with similar risk characteristics and adjusting the relevant historical loss information in
order to develop an estimate of expected lifetime losses. Providing for losses over the life of our loan portfolio is a change to
the previous method of providing allowances for loan losses that are probable and incurred. This change may require us to
increase our allowance for loan losses rapidly in future periods, and greatly increases the types of data we need to collect and
review to determine the appropriate level of the allowance for loan losses. It may also result in even small changes to future
forecasts having a significant impact on the allowance, which could make the allowance more volatile, and regulators may
impose additional capital buffers to absorb this volatility.
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Our business is affected from time to time by federal and state laws and regulations relating to hazardous
substances.
Under the federal Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), owners
and operators of properties containing hazardous substances may be liable for the costs of cleaning up the substances.
CERCLA and similar state laws can affect us both as an owner of branches and other properties used in our business and as
a lender holding a security interest in property which is found to contain hazardous substances. In particular, our branch office
located in Iola is located on property that has been designated as a “Superfund” site under CERCLA, and we may hold
mortgages on properties located in Iola that are also designated as “Superfund” sites. While CERCLA contains an exemption
for holders of security interests, the exemption is not available if the holder participates in the management of a property, and
some courts have broadly defined what constitutes participation in management of property. Moreover, CERCLA and similar
state statutes can affect our decision whether or not to foreclose on a property. Before foreclosing on commercial real estate,
our general policy is to obtain an environmental report, thereby increasing the costs of foreclosure. In addition, the existence
of hazardous substances on a property securing a troubled loan may cause us to elect not to foreclose on the property, thereby
reducing our flexibility in handling the loan.
Operational, Strategic and Reputational Risks
We may experience difficulties in managing our growth, and our growth strategy involves risks that may negatively
impact our net income.
As part of our general strategy, we may acquire banks, branches and related businesses that we believe provide a
strategic fit with our business. In the past, we have acquired a number of local banks and branches, and, to the extent that we
grow through future acquisitions, we cannot assure you that we will be able to adequately and profitably manage this growth.
Acquiring other banks and businesses will involve risks commonly associated with acquisitions, including:
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potential exposure to unknown or contingent liabilities of banks and businesses we acquire;
exposure to potential asset quality issues of the acquired bank or related business;
difficulty and expense of integrating the operations and personnel of banks and businesses we acquire;
potential disruption to our business;
potential diversion of our management’s time and attention; and
the possible loss of key employees and customers of the banks and businesses we acquire.
In addition to acquisitions, we may expand into additional communities or attempt to strengthen our position in our
current markets by undertaking additional branch openings. We believe that it generally takes several years for new banking
facilities to first achieve operational profitability, due to the impact of organization and overhead expenses and the start-up
phase of generating loans and deposits. To the extent that we undertake additional branch openings, we are likely to
experience the effects of higher operating expenses relative to operating income from the new operations, which may have
an adverse effect on our levels of reported net income, return on average equity and return on average assets.
We face intense competition in all phases of our business from other banks and financial institutions.
The banking and financial services business in our market is highly competitive. Our competitors include large
national and regional banks, local community banks, savings and loan associations, securities and brokerage companies,
mortgage companies, insurance companies, finance companies, money market mutual funds, credit unions, fintech
companies, and other non-bank financial service providers, many of which have greater financial, marketing and
technological resources than us. Many of these competitors are not subject to the same regulatory restrictions that we are and
may be able to compete more effectively as a result. Increased competition in our market may result in a decrease in the
amounts of our loans and deposits, reduced spreads between loan rates and deposit rates or loan terms that are more favorable
to the borrower. Any of these results could have a material adverse effect on our ability to grow and remain profitable. If
increased competition causes us to significantly discount the interest rates we offer on loans or increase the amount we pay
on deposits, our net interest income could be adversely impacted. If increased competition causes us to relax our underwriting
standards, we could be exposed to higher losses from lending activities. Additionally, many of our competitors are much
larger in total assets and capitalization, have greater access to capital markets and offer a broader range of financial services
than we can offer.
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Consumers and businesses are increasingly using non-banks to complete their financial transactions, which could
adversely affect our business and results of operations.
Technology and other changes are allowing consumers and businesses to complete financial transactions that
historically have involved banks through alternative methods. For example, the wide acceptance of internet-based commerce
has resulted in a number of alternative payment processing systems and lending platforms in which banks play only minor
roles. Customers can also maintain funds in prepaid debit cards or digital currencies, and pay bills and transfer funds directly
without the direct assistance of banks. The diminishing role of banks as financial intermediaries has resulted and could
continue to result in the loss of fee income, as well as the loss of customer deposits and the related income generated from
those deposits. The loss of these revenue streams and the potential loss of lower cost deposits as a source of funds could have
a material adverse effect on our business, financial condition and results of operations.
Attractive acquisition opportunities may not be available to us in the future.
We expect that other banking and financial service companies, many of which have significantly greater resources
than us, will compete with us in acquiring other financial institutions if we pursue such acquisitions. This competition could
increase prices for potential acquisitions that we believe are attractive. Also, acquisitions are subject to various regulatory
approvals. If we fail to receive the appropriate regulatory approvals, we will not be able to consummate an acquisition that
we believe is in our best interests. Among other things, our regulators consider our capital, liquidity, profitability, regulatory
compliance and levels of goodwill and intangibles when considering acquisition and expansion proposals. Any acquisition
could be dilutive to our earnings and stockholders' equity per share of our common stock.
Our community banking strategy relies heavily on our management team, and the unexpected loss of key managers
may adversely affect our operations.
Much of our success to date has been influenced strongly by our ability to attract and to retain senior management
experienced in banking and financial services and familiar with the communities in our market area. Our ability to retain
executive officers, the current management teams, branch managers and loan officers will continue to be important to the
successful implementation of our strategy. It is also critical, as we grow, to be able to attract and retain qualified additional
management and loan officers with the appropriate level of experience and knowledge about our market area to implement
our community-based operating strategy. The unexpected loss of services of any key management personnel, or the inability
to recruit and retain qualified personnel in the future, could have an adverse effect on our business, financial condition and
results of operations.
We have a continuing need for technological change, and we may not have the resources to effectively implement new
technology.
The financial services industry continues to undergo rapid technological changes with frequent introductions of new
technology-driven products and services. In addition to better serving customers, the effective use of technology increases
efficiency as well as enables financial institutions to reduce costs. Our future success will depend in part upon our ability to
address the needs of our customers by using technology to provide products and services that will satisfy customer demands
for convenience as well as to create additional efficiencies in our operations as we continue to grow and expand our market
area. Many of our larger competitors have substantially greater resources to invest in technological improvements. As a
result, they may be able to offer additional or superior products to those that we will be able to offer, which would put us at
a competitive disadvantage. Accordingly, we cannot provide you with assurance that we will be able to effectively implement
new technology-driven products and services or be successful in marketing such products and services to our customers.
The occurrence of fraudulent activity, breaches or failures of our information security controls or cybersecurity-
related incidents could have a material adverse effect on our business, financial condition, results of operations and
growth prospects.
As a bank, we are susceptible to fraudulent activity, information security breaches and cybersecurity-related
incidents that may be committed against us or our clients, which may result in financial losses or increased costs to us or our
clients, disclosure or misuse of our information or our client information, misappropriation of assets, privacy breaches against
our clients, litigation or damage to our reputation. Such fraudulent activity may take many forms, including check fraud,
electronic fraud, wire fraud, phishing, social engineering and other dishonest acts. Information security breaches and
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cybersecurity-related incidents may include fraudulent or unauthorized access to systems used by us or our clients, denial or
degradation of service attacks and malware or other cyber-attacks.
In recent periods, there continues to be a rise in electronic fraudulent activity, security breaches and cyber-attacks
within the financial services industry, especially in the commercial banking sector due to cyber criminals targeting
commercial bank accounts. Moreover, several large corporations, including financial institutions and retail companies, have
suffered major data breaches, in some cases exposing not only confidential and proprietary corporate information, but also
sensitive financial and other personal information of their customers and employees and subjecting them to potential
fraudulent activity. Some of our clients may have been affected by these breaches, which could increase their risks of identity
theft and other fraudulent activity that could involve their accounts with us.
Information pertaining to us and our clients is maintained, and transactions are executed, on networks and systems
maintained by us and certain third party partners, such as our online banking, mobile banking or accounting systems. The
secure maintenance and transmission of confidential information, as well as execution of transactions over these systems, are
essential to protect us and our clients against fraud and security breaches and to maintain the confidence of our clients.
Breaches of information security also may occur through intentional or unintentional acts by those having access to our
systems or the confidential information of our clients, including employees. In addition, increases in criminal activity levels
and sophistication, advances in computer capabilities, new discoveries, vulnerabilities in third party technologies (including
browsers and operating systems) or other developments could result in a compromise or breach of the technology, processes
and controls that we use to prevent fraudulent transactions and to protect data about us, our clients and underlying transactions,
as well as the technology used by our clients to access our systems. Our third party partners’ inability to anticipate, or failure
to adequately mitigate, breaches of security could result in a number of negative events, including losses to us or our clients,
loss of business or clients, damage to our reputation, the incurrence of additional expenses, disruption to our business,
additional regulatory scrutiny or penalties or our exposure to civil litigation and possible financial liability, any of which
could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
We depend on information technology and telecommunications systems of third parties, and any systems failures,
interruptions or data breaches involving these systems could adversely affect our operations and financial condition.
Our business is highly dependent on the successful and uninterrupted functioning of our information technology and
telecommunications systems, third party servicers, accounting systems, mobile and online banking platforms and financial
intermediaries. We outsource to third parties many of our major systems, such as data processing and mobile and online
banking. The failure of these systems, or the termination of a third party software license or service agreement on which any
of these systems is based, could interrupt our operations. Because our information technology and telecommunications
systems interface with and depend on third party systems, we could experience service denials if demand for such services
exceeds capacity or such third party systems fail or experience interruptions. A system failure or service denial could result
in a deterioration of our ability to process loans or gather deposits and provide customer service, compromise our ability to
operate effectively, result in potential noncompliance with applicable laws or regulations, damage our reputation, result in a
loss of customer business or subject us to additional regulatory scrutiny and possible financial liability, any of which could
have a material adverse effect on business, financial condition, results of operations and growth prospects. In addition,
failures of third parties to comply with applicable laws and regulations, or fraud or misconduct on the part of employees of
any of these third parties, could disrupt our operations or adversely affect our reputation.
It may be difficult for us to replace some of our third party vendors, particularly vendors providing our core banking
and information services, in a timely manner if they are unwilling or unable to provide us with these services in the future for
any reason and even if we are able to replace them, it may be at higher cost or result in the loss of customers. Any such
events could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
Our operations rely heavily on the secure processing, storage and transmission of information and the monitoring of
a large number of transactions on a minute-by-minute basis, and even a short interruption in service could have significant
consequences. We also interact with and rely on retailers, for whom we process transactions, as well as financial
counterparties and regulators. Each of these third parties may be targets of the same types of fraudulent activity, computer
break-ins and other cyber security breaches described above, and the cyber security measures that they maintain to mitigate
the risk of such activity may be different than our own and may be inadequate.
45
As a result of financial entities and technology systems becoming more interdependent and complex, a cyber-
incident, information breach or loss, or technology failure that compromises the systems or data of one or more financial
entities could have a material impact on counterparties or other market participants, including ourselves. As a result of the
foregoing, our ability to conduct business may be adversely affected by any significant disruptions to us or to third parties
with whom we interact.
We are subject to certain operational risks, including, but not limited to, customer or employee fraud, losses related
to our depositors and data processing system failures and errors.
Employee errors and misconduct could subject us to financial losses or regulatory sanctions and seriously harm our
reputation. Misconduct by our employees could include hiding unauthorized activities from us, improper or unauthorized
activities on behalf of our customers or improper use of confidential information. It is not always possible to prevent employee
errors and misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases.
Employee errors could also subject us to financial claims for negligence. We are also subject to losses related to our
depositors, whether due to simple errors or mistakes, circumvention of controls, or unauthorized override of controls by our
employees, other financial institutions or other third parties.
We maintain a system of internal controls and insurance coverage to mitigate against operational risks, including
data processing system failures and errors and customer or employee fraud. Should our internal controls fail to prevent or
detect an occurrence, or if any resulting loss is not insured or exceeds applicable insurance limits, it could have a material
adverse effect on our business, financial condition and results of operations.
Our framework for managing risks may not be effective in mitigating risk and loss to us.
Our risk management framework seeks to mitigate risk and loss to us. We have established processes and procedures
intended to identify, measure, monitor, report and analyze the types of risk to which we are subject, including liquidity risk,
credit risk, market risk, interest rate risk, operational risk, compensation risk, legal and compliance risk, cyber risk, and
reputational risk, among others. However, as with any risk management framework, there are inherent limitations to our risk
management strategies as there may exist, or develop in the future, risks that we have not appropriately anticipated or
identified. Our ability to successfully identify and manage risks facing us is an important factor that can significantly impact
our results. If our risk management framework proves ineffective, we could suffer unexpected losses and could be materially
adversely affected.
We are subject to environmental liability risk associated with lending activities.
A significant portion of our loan portfolio is secured by real property. During the ordinary course of business, we
may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic
substances could be found on these properties. If hazardous or toxic substances are found, we may be liable for remediation
costs, as well as for personal injury and property damage. Environmental laws may require us to incur substantial expenses
and may materially reduce the affected property’s value or limit our ability to use or sell the affected property. In addition,
future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure
to environmental liability. Environmental reviews of real property before initiating foreclosure actions may not be sufficient
to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an
environmental hazard could have a material adverse effect on our business, financial condition and results of operations.
The Bank may be required to repurchase mortgage loans in some circumstances, which could harm our liquidity,
results of operations and financial condition.
When the Bank sells mortgage loans, we are required to make certain representations and warranties to the purchaser
about the loans and the manner in which they were originated. Our sales agreements require us to repurchase mortgage loans
in the event of a breach of any of these representations or warranties. In addition, we may be required to repurchase mortgage
loans as a result of borrower fraud or in the event of early payment default of the borrower on a mortgage loan. In 2019, we
were obligated to repurchase three loans. We were not required to repurchase any loans in 2020.
46
Financial services companies depend on the accuracy and completeness of information about customers and
counterparties.
In deciding whether to extend credit or enter into other transactions, we may rely on information furnished by or on
behalf of customers and counterparties, including financial statements, credit reports and other financial information. We
may also rely on representations of those customers, counterparties or other third parties, such as independent auditors, as to
the accuracy and completeness of that information. Reliance on inaccurate or misleading financial statements, credit reports
or other financial information could have a material adverse impact on our business, financial condition and results of
operations.
The soundness of other financial institutions could adversely affect us.
Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. We
have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in
the financial services industry, including brokers and dealers, commercial banks, investment banks and other institutional
clients. Many of these transactions expose us to credit risk in the event of default by our counterparty or client. In addition,
our credit risk may be exacerbated when the collateral held by us cannot be realized or is liquidated at prices not sufficient to
recover the full amount of the loan or derivative exposure due us. There is no assurance that any such losses would not
materially and adversely affect our results of operations or earnings.
Liquidity and Capital Risks
Our growth or future losses may require us to raise additional capital in the future, but that capital may not be
available when it is needed.
We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our
operations. We anticipate that our existing capital resources will satisfy our capital requirements for the foreseeable future.
However, we may at some point need to raise additional capital to support continuing growth. Our ability to raise additional
capital is particularly important to our strategy of growth through acquisitions. Our ability to raise additional capital depends
on conditions in the capital markets, economic conditions and a number of other factors, including investor perceptions
regarding the banking industry, market conditions and governmental activities, and on our financial condition and
performance. Accordingly, we cannot assure you of our ability to raise additional capital if needed on terms acceptable to
us. If we cannot raise additional capital when needed, our ability to further expand our operations through internal growth
and acquisitions could be materially impaired.
Risks Related to our Common Stock
There can be no assurances concerning continuing dividend payments.
Our common stockholders are only entitled to receive the dividends declared by our Board of Directors. Although
we have historically paid quarterly dividends on our common stock and an annual 5% stock dividend, there can be no
assurances that we will be able to continue to pay regular quarterly dividends or an annual stock dividend or that any dividends
we do declare will be in any particular amount. The primary source of money to pay our cash dividends comes from dividends
paid to the Company by the Bank. The Bank’s ability to pay dividends to the Company is subject to, among other things, its
earnings, financial condition and applicable regulations, which in some instances limit the amount that may be paid as
dividends. In addition, the Company and the Bank are required to maintain a capital conservation buffer of 2.5% of Common
Equity Tier 1 Capital on top of minimum risk-weighted asset ratios to pay dividends without additional restrictions.
Failure to pay interest on our debt may adversely impact our ability to pay dividends.
Our $21.7 million of subordinated debentures are held by three business trusts that we control. Interest payments on
the debentures must be paid before we pay dividends on our capital stock, including our common stock. We have the right to
defer interest payments on the debentures for up to 20 consecutive quarters. However, if we elect to defer interest payments,
all deferred interest must be paid before we may pay dividends on our capital stock. Deferral of interest payments could also
cause a decline in the market price of our common stock.
47
There is a limited trading market for our common shares, and you may not be able to resell your shares at or above
the price you paid for them.
Although our common shares are listed for trading on the Nasdaq Global Market under the symbol “LARK,” the
trading in our common shares has substantially less liquidity than many other publicly traded companies. A public trading
market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the market of willing
buyers and sellers of our common shares at any given time. This presence depends on the individual decisions of investors
and general economic and market conditions over which we have no control. We cannot assure you that volume of trading
in our common shares will increase in the future.
The stock market can be volatile, and fluctuations in our operating results and other factors could cause our stock
price to decline.
The stock market has experienced, and may continue to experience, fluctuations that significantly impact the market
prices of securities issued by many companies. Market fluctuations could adversely affect our stock price. These fluctuations
have often been unrelated or disproportionate to the operating performance of particular companies. These broad market
fluctuations, as well as general economic, systemic, political and market conditions, such as recessions, loss of investor
confidence, interest rate changes, tariffs, government shutdowns, Brexit, or international currency fluctuations, may
negatively affect the market price of our common stock. Moreover, our operating results may fluctuate and vary from period
to period due to the risk factors set forth herein. As a result, period-to-period comparisons should not be relied upon as an
indication of future performance. Our stock price could fluctuate significantly in response to our quarterly or annual results,
annual projections and the impact of these risk factors on our operating results or financial position.
Although the Company’s common stock is quoted on The Nasdaq Global Market, the volume of trades on any given
day has been limited historically, as a result of which shareholders might not have been able to sell or purchase the Company’s
common stock at the volume, price or time desired. In June 2020, the Company’s common stock was added to the Russell
3000® Index based on the total market value of shares outstanding. Inclusion in this index may have positively impacted the
price, trading volume, and liquidity of the Company’s common stock, in part, because index funds or other institutional
investors often purchase securities that are in this index. There can be no assurance that the Company’s common stock will
remain in that index, and it is projected by industry sources that the Company’s common stock will be removed from that
index in 2021. If the Company’s common stock is removed from the Russell 3000® Index for any reason, including as a
result of a decrease in the total market value of the Company’s outstanding shares, holders attempting to track the composition
of that index will be required to sell the Company’s common stock, which could cause a material decrease in the price at
which the Company’s common stock trades.
48
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2. PROPERTIES
The Company has 30 offices in 24 communities across Kansas: Manhattan (2), Auburn, Dodge City (2), Fort Scott
(2), Garden City, Great Bend (2), Hoisington, Iola, Junction City, Kincaid, LaCrosse, Lawrence (2), Lenexa, Louisburg,
Mound City, Osage City, Osawatomie, Overland Park, Paola, Pittsburg, Prairie Village, Topeka (2), Wamego and Wellsville,
Kansas. The Company owns its main office in Manhattan, Kansas and 26 branch offices and leases three branch offices. The
Company leases the branch offices in Topeka, Wamego and Prairie Village, Kansas. The Company also leases a parking lot
for one of the Dodge City branch offices it owns.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company or the Bank is a party or of which any of
their property is subject, other than ordinary routine litigation incidental to the Bank’s business. While the ultimate outcome
of current legal proceedings cannot be predicted with certainty, it is the opinion of management that the resolution of these
legal actions should not have a material effect on the Company’s consolidated financial position or results of operations.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
49
PART II.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock has traded on the Nasdaq Global Market under the symbol "LARK" since 2001. At December
31, 2020, the Company had approximately 241 common shareholders of record and approximately 1,340 beneficial owners
of our common stock.
In February 2021, we declared our 78th consecutive quarterly dividend, and we currently have no plans to change
our dividend strategy given our current capital and liquidity positions.
In December 2017, our Board of Directors approved a stock repurchase program, permitting us to repurchase up to
108,006 shares of our common stock, which was the amount of shares remaining under our prior stock repurchase program
(“December 2017 Repurchase Program”). Unless terminated earlier by resolution of the Board of Directors, the December
2017 Repurchase Program will expire when we have repurchased all shares authorized for repurchase thereunder. As of
December 31, 2020, there were 1,112 shares remaining to repurchase under the December 2017 Repurchase Program. The
Company repurchased 106,894 shares at an average price of $21.69 during the year ending December 31, 2020 under the
December 2017 Repurchase Program.
In March 2020, our Board of Directors approved a new stock repurchase plan, permitting us to repurchase up to
225,890 shares, which represents approximately 5% of our outstanding common stock (“March 2020 Repurchase Program”),
following repurchase of all shares under the December 2017 Repurchase Program, under which there were 1,112 shares
remaining to be repurchased as of December 31, 2020. Unless terminated earlier by resolution of the Board of Directors, the
March 2020 Repurchase Program will expire when we have repurchased all shares authorized for repurchase thereunder.
50
ITEM 6. SELECTED FINANCIAL DATA
Not required.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Forward-Looking Statements
This document (including information incorporated by reference) contains, and future oral and written statements
by us and our management may contain, forward-looking statements, within the meaning of such term in the Private Securities
Litigation Reform Act of 1995, with respect to our financial condition, results of operations, plans, objectives, future
performance and business. Forward-looking statements, which may be based upon beliefs, expectations and assumptions of
our management and on information currently available to management, are generally identifiable by the use of words such
as “believe,” “expect,” “anticipate,” “plan,” “intend,” “estimate,” “may,” “will,” “would,” “could,” “should” or other similar
expressions. Additionally, all statements in this document, including forward-looking statements, speak only as of the date
they are made, and we undertake no obligation to update any statement in light of new information or future events.
Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could
have a material adverse effect on operations and future prospects by us and our subsidiaries include, but are not limited to,
the following:
• The effects of the COVID-19 pandemic, including its potential effects on the economic environment, our customers
and our operations as well as any changes to federal, state or local government laws, regulations or orders in
connection with the pandemic.
• The impact of the COVID-19 pandemic on our financial results, including possible lost revenue and increased
expenses (including the cost of capital), as well as possible goodwill impairment charges.
• The strength of the United States economy in general and the strength of the local economies in which we conduct
our operations, including the effects of the COVID-19 pandemic on such economies, which may be less favorable
than expected and may result in, among other things, a deterioration in the credit quality and value of our assets.
• The effects of, and changes in, federal, state and local laws, regulations and policies affecting banking, securities,
consumer protection, insurance, tax, trade and monetary and financial matters.
• The effects of changes in interest rates (including the effects of changes in the rate of prepayments of our assets) and
the policies of the Federal Reserve including on our net interest income and the value of our securities portfolio.
• Our ability to compete with other financial institutions due to increases in competitive pressures in the financial
services sector.
• Our inability to obtain new customers and to retain existing customers.
• The timely development and acceptance of products and services.
• Technological changes implemented by us and by other parties, including third-party vendors, which may be more
difficult to implement or more expensive than anticipated or which may have unforeseen consequences to us and
our customers.
• Our ability to develop and maintain secure and reliable electronic systems.
• The effectiveness of our risk management framework.
• The occurrence of fraudulent activity, breaches or failures of our information security controls or cybersecurity-
related incidents and our ability to identify and address such incidents.
•
Interruptions involving our information technology and telecommunications systems or third-party servicers.
• Changes in and uncertainty related to the availability of benchmark interest rates used to price our loans and deposits,
including the expected elimination of LIBOR and the development of a substitute.
• The effects of severe weather, natural disasters, widespread disease or pandemics, and other external events.
• Our ability to retain key executives and employees and the difficulty that we may experience in replacing key
executives and employees in an effective manner.
• Consumer spending and saving habits which may change in a manner that affects our business adversely.
• Our ability to successfully integrate acquired businesses and future growth.
51
• The costs, effects and outcomes of existing or future litigation.
• Changes in accounting policies and practices, as may be adopted by state and federal regulatory agencies and the
FASB, such as the implementation of CECL.
• The economic impact of past and any future terrorist attacks, acts of war or threats thereof, and the response of the
United States to any such threats and attacks.
• Our ability to effectively manage our credit risk.
• Our ability to forecast probable loan losses and maintain an adequate allowance for loan losses.
• The effects of declines in the value of our investment portfolio.
• Our ability to raise additional capital if needed.
• The effects of declines in real estate markets.
• The effects of fraudulent activity on the part of our employees, customers, vendors, or counterparties.
These risks and uncertainties should be considered in evaluating forward-looking statements, and undue reliance
should not be placed on such statements. Additional information concerning us and our business, including other factors that
could materially affect our financial results, is included in “Item 1A. Risk Factors.”
CORPORATE PROFILE AND OVERVIEW
Landmark Bancorp, Inc. is a financial holding company incorporated under the laws of the State of Delaware and is
engaged in the banking business through its wholly-owned subsidiary, Landmark National Bank and in the insurance business
through its wholly-owned subsidiary, Landmark Risk Management, Inc. The Company is listed on the Nasdaq Global Market
under the symbol “LARK.” The Bank is dedicated to providing quality financial and banking services to its local
communities. Our strategy includes continuing a tradition of quality assets while growing our commercial, commercial real
estate and agriculture loan portfolios. We are committed to developing relationships with our borrowers and providing a total
banking service.
The Bank is principally engaged in the business of attracting deposits from the general public and using such
deposits, together with borrowings and other funds, to originate one-to-four family residential real estate, construction and
land, commercial real estate, commercial, agriculture, municipal and consumer loans. Although not our primary business
function, we do invest in certain investment and mortgage-related securities using deposits and other borrowings as funding
sources.
Our results of operations depend generally on net interest income, which is the difference between interest income
from interest-earning assets and interest expense on interest-bearing liabilities. Net interest income is affected by regulatory,
economic and competitive factors that influence interest rates, loan demand and deposit flows. In addition, we are subject to
interest rate risk to the degree that our interest-earning assets mature or reprice at different times, or at different speeds, than
our interest-bearing liabilities. Our results of operations are also affected by non-interest income, such as service charges,
loan fees, gains from the sale of newly originated loans and gains or losses on investments, and certain other non-interest
related items. Our principal operating expenses, aside from interest expense, consist of, among others, compensation and
employee benefits, occupancy costs, professional fees, amortization of intangibles expense, federal deposit insurance costs,
data processing expenses and provision for loan losses.
We are significantly impacted by prevailing economic conditions including federal monetary and fiscal policies and
federal regulations of financial institutions. The Bank’s markets have been impacted by the COVID-19 pandemic, which has
had and continues to have a complex and significant impact on the economy. Deposit balances are influenced by numerous
factors such as competing investments, the level of income and the personal rate of savings within our market areas. Factors
influencing lending activities include the demand for housing and the interest rate pricing competition from other lending
institutions.
Currently, our business consists of ownership of the Bank, with its main office in Manhattan, Kansas and twenty-
nine additional branch offices in central, eastern, southeast and southwest Kansas, and our ownership of Landmark Risk
Management, Inc. Landmark Risk Management, Inc. is a Nevada-based captive insurance company.
52
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are those that are both most important to the portrayal of our financial condition and
results of operations, and require our management’s most difficult, subjective or complex judgments, often as a result of the
need to make estimates about the effect of matters that are inherently uncertain. Our critical accounting policies relate to the
allowance for loan losses, the valuation of investment securities, accounting for goodwill and the accounting for income
taxes, all of which involve significant judgment by our management.
We perform periodic and systematic detailed reviews of our lending portfolio to assess overall collectability. The
level of the allowance for loan losses reflects our estimate of the collectability of the loan portfolio. While these estimates
are based on substantive methods for determining allowance requirements, actual outcomes may differ significantly from
estimated results. Additional explanation of the methodologies used in establishing this allowance is provided in the “Asset
Quality and Distribution” section.
The Company has classified its investment securities portfolio as available-for-sale. Available-for-sale securities
are recorded at fair value with unrealized gains and losses excluded from earnings and reported as a separate component of
stockholders’ equity, net of taxes. The Company obtains market values from a third party on a monthly basis in order to adjust
the securities to fair value. The Company performs quarterly reviews of the investment portfolio to evaluate investment for
other-than-temporary impairment. The Company’s assessment of other-than-temporary impairment is based on its judgment
of the specific facts and circumstances impacting each individual security at the time such assessments are made. The
Company reviews and considers all factual information, including expected cash flows, the structure of the security, the credit
quality of the underlying assets and the current and anticipated market conditions. Any credit-related impairment on debt
securities is recorded through a charge to earnings. Impairment related to other factors is recognized in other comprehensive
income. However, if the Company intends to sell or it is more likely than not that it will be required to sell a security in an
unrealized loss position before recovery of its amortized costs basis, the entire impairment is recorded through a charge to
earnings.
We have completed several business and asset acquisitions since 2002, which have generated significant amounts
of goodwill. The initial value assigned to goodwill is the residual of the purchase price over the fair value of all identifiable
tangible and intangible assets acquired and liabilities assumed. Goodwill is not amortized; however, it is tested for impairment
at each calendar year end or more frequently when events or circumstances dictate. The impairment test compares the carrying
value of goodwill to an implied fair value of the goodwill, which is based on a review of the Company’s market capitalization
adjusted for appropriate control premiums as well as an analysis of valuation multiples of recent, comparable acquisitions.
The Company considers the result from each of these valuation methods to determine the implied fair value of its goodwill.
A goodwill impairment would be recorded for the amount that the carrying value exceeds the implied fair value. The
Company performed a step one impairment test as of December 31, 2020 by comparing the implied fair value of the
Company’s single reporting unit to its carrying value. Fair value was determined using observable market data, including
the Company’s market capitalization, with control premiums and valuation multiples, compared to recent financial industry
acquisition multiples for similar institutions to estimate the fair value of the Company’s single reporting unit. The Company’s
step one impairment test indicated that its goodwill was not impaired. The Company can make no assurances that future
impairment tests will not result in goodwill impairments.
The objective of accounting for income taxes is to recognize the taxes payable or refundable for the current year and
deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial
statements or tax returns. Judgment is required in assessing the future tax consequences of events that have been recognized
in financial statements or tax returns. The Company recognizes an income tax position only if it is more likely than not that
it will be sustained upon examination by the Internal Revenue Service (the “IRS”), based upon its technical merits. Once
that standard is met, the amount recorded will be the largest amount of benefit that has a greater than 50 percent likelihood
of being realized upon ultimate settlement. The Company recognizes interest and penalties related to unrecognized tax
benefits as a component of income tax expense in our consolidated statements of earnings. The Company assesses its deferred
tax assets to determine if the items are more likely than not to be realized and a valuation allowance is established for any
amounts that are not more likely than not to be realized. Changes in estimates regarding the actual outcome of these future
tax consequences, including the effects of IRS examinations and examinations by other state agencies, could materially
impact our financial position and results of operations.
53
IMPACT OF COVID-19
The COVID-19 pandemic in the United States has had and continues to have a complex and significant adverse
impact on the economy, the banking industry and the Company, all subject to a high degree of uncertainty for future periods.
Effects on Our Market Areas. Our commercial and consumer banking products and services are offered primarily
in Kansas, where individual and governmental responses to the COVID-19 pandemic led to a broad curtailment of economic
activity beginning in March 2020, as a result of a stay-at-home order, which was lifted on May 3, 2020, with economic and
social gatherings reopening in a phased-in approach since then. The re-opening of the economy in Kansas has resulted in
increased cases of COVID-19, and additional restrictions have been put in place to slow the spread. These measures have had
an impact on the economy of and customers located in Kansas. The Bank and its branches have remained open during these
orders because banks have been deemed essential businesses. The Bank is currently serving its customers through its digital
banking platforms and drive-thru services, with most branch lobbies re-opened to customers. Based on the current
environment, it is unclear if the State of Kansas will tighten or relax its stay-at-home and social distancing policies going
forward. The Bank will continue to monitor the situation to protect the safety and well-being of our customers and associates.
Across the United States, as a result of stay-at-home orders and other continuing restrictions, many states have
experienced a dramatic increase in unemployment levels as a result of the curtailment of business activities. The
unemployment rate in Kansas was 4.7% in December 2020, which is an increase from 3.1% in December 2019. The
unemployment rate peaked at 12.6 % in April 2020 as a result of economic impacts of the COVID-19 pandemic.
Policy and Regulatory Developments. Federal, state and local governments and regulatory authorities have enacted
and issued a range of policy responses to the COVID-19 pandemic, including the following:
• The Federal Reserve decreased the range for the federal funds target rate by 0.5% on March 3, 2020, and
by another 1.0% on March 16, 2020, reaching a current range of 0.0 – 0.25%.
• On March 27, 2020, President Trump signed the CARES Act, which established a $2.0 trillion economic
stimulus package, including cash payments to individuals, supplemental unemployment insurance benefits
and a $349 billion loan program administered through the SBA, referred to as the PPP. The Bank
participates as a lender in the PPP. After the initial $349 billion in funds for the PPP was exhausted, an
additional $310 billion in funding for PPP loans was authorized. In addition, on December 27, 2020,
President Trump signed the Consolidated Appropriations Act, 2021, a $900.0 billion COVID-19 relief
package that includes an additional $284.5 billion in PPP funding, and on March 11, 2021, President Biden
signed into law an additional $1.9 trillion federal stimulus bill in response to COVID-19.
• The CARES Act, as extended by the Coronavirus Response and Relief Supplemental Appropriations Act
(a part of the Consolidated Appropriations Act, 2021), also provides financial institutions the option to
temporarily suspend certain requirements under GAAP related to TDRs for a limited period of time to
account for the effects of COVID-19. In addition, on April 7, 2020, federal banking regulators issued a
revised Interagency Statement on Loan Modifications and Reporting for Financial Institutions, which,
among other things, encouraged financial institutions to work prudently with borrowers who are or may be
unable to meet their contractual payment obligations because of the effects of COVID-19, and stated that
institutions generally do not need to categorize COVID-19-related modifications as TDRs and that the
agencies will not direct supervised institutions to automatically categorize all COVID-19 related loan
modifications as TDRs.
Effects on Our Business. The COVID-19 pandemic and the specific developments referred to above have had, and
are expected to continue to have, a significant impact on our business. In particular, we anticipate that a significant portion
of the Bank’s borrowers in the retail, restaurant, hospitality and agriculture industries will continue to endure significant
economic distress, which may cause them to draw on their existing lines of credit and adversely affect their ability to repay
existing indebtedness, and the COVID-19 pandemic is expected to adversely impact the value of collateral. These
developments, together with economic conditions generally, are also expected to impact our commercial real estate portfolio,
particularly with respect to real estate with exposure to these industries, our one-to-four family residential real estate loan
business and loan portfolio, and the value of certain collateral securing our loans. As a result, we anticipate that our financial
condition, capital levels and results of operations will be significantly adversely affected, as described in further detail below.
54
Our Response. We have taken numerous steps in response to the COVID-19 pandemic, including the following:
• We established a pandemic response team, which has been meeting as needed since mid-March to address
changes resulting from the COVID-19 pandemic. We have a significant portion of our associates working from
home, and for those that remain in our bank facilities, we have enhanced safety precautions in place for their
safety. We have repositioned associates to support our customer care call center to handle increased volumes of
customer requests and to support our customers’ access to our digital banking platforms.
• As a preferred lender with the SBA, we were able and prepared to immediately respond to help existing and
new clients access the PPP authorized by the CARES Act. As of September 30, 2020, we funded 1,095 PPP
loans totaling approximately $131.0 million. As of December 31, 2020, we had approximately $100.1 million
of PPP loans outstanding. We are actively working with the PPP loan borrowers through the SBA’s forgiveness
process. In addition, we are a participating lender in the second round of PPP lending. From January 1, 2021
through March 10, 2021, we funded an additional 613 PPP loans totaling approximately $43.4 million.
• As of December 31, 2020, we entered into short-term forbearance plans and short-term repayment plans on 3
one-to-four family residential mortgage loans totaling $366,000. We continue to work with our customers by
offering loan forbearance and modifications to those impacted by COVID-19.
• As of December 31, 2020, we had 6 loan modifications on outstanding loan balances of $7.2 million in
connection with the COVID-19 pandemic that had not yet returned to contractual terms. These modifications
consisted of payment deferrals that were applied to either the full loan payment or just the principal component.
• With the safety and well-being of our customers and associates foremost in mind, we initially limited access to
our bank lobbies while keeping our drive-thru lanes open and encouraging our customers to use our online and
mobile banking applications or call our customer care call center. Currently our bank lobbies are open to
customers, but we continue to evaluate this option as the number of COVID-19 cases fluctuate in our
communities.
We currently have no plans to change our dividend strategy given our current capital and liquidity positions.
However, while we have achieved a strong capital base and expect to continue operating profitably, this is dependent upon
the projected length and depth of any economic recession and effects on our operations, profitability and capital positions in
future periods, which we continue to monitor closely. In addition, we will not be permitted to make capital distributions
(including for dividends and repurchases of stock) or pay discretionary bonuses to executive officers without restriction if we
do not maintain 2.5% in Common Equity Tier 1 Capital attributable to a capital conservation buffer.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2020 AND DECEMBER
31, 2019
SUMMARY OF PERFORMANCE. Net earnings for 2020 increased $8.8 million, or 82.8%, to $19.5 million as
compared to $10.7 million for 2019. The increase in net earnings was primarily driven by an $8.8 million increase in gains
on sales of loans as low mortgage rates fueled a robust housing market and refinancing activity.
Net interest income for 2020 increased $6.1 million to $36.5 million, or 20.2% higher than the $30.4 million recorded
for 2019. Our net interest margin, on a tax equivalent basis, increased from 3.48% during 2019 to 3.72% in 2020. The
increase in net interest margin was primarily a result of lower interest expense and the growth in loans within the asset mix.
The increase in average loan balances included an average balance of $88.5 million in PPP loans, which generated interest
income of $3.0 million in 2020.
We distributed a 5% stock dividend for the 20th consecutive year in December 2020. All per share and average
share data in this section reflect the 2020 and 2019 stock dividends.
INTEREST INCOME. Interest income for 2020 increased $2.1 million to $39.3 million, an increase of 5.8% as
compared to 2019. Interest income on loans increased $4.1 million, or 14.9%, to $31.8 million for 2020 as compared to $27.7
million in 2019, due primarily to the increase in our average loan balances from $518.0 million during 2019 to $668.3 million
during 2020. Our average loan balances benefited from the origination of PPP loans in 2020. While the maturities of PPP
loans are two or five years, we anticipate a significant amount will be forgiven during 2021, which will increase the yield on
loans and reduce average loan balances. Partially offsetting the higher average balances were lower yields on loans, which
decreased from 5.35% in 2019 to 4.76% in 2020. The Federal Reserve decreased the target federal funds interest rate by 25
55
basis points in each of August, September and October of 2019. In addition, in response to the COVID-19 pandemic, the
Federal Reserve decreased the target federal funds interest rate by a total of 150 basis points in March 2020. These decreases
impacted yields on loans between 2019 and 2020. In addition, the yield on PPP loans is lower than our typical commercial
loans, resulting in a lower average yield on loans in 2020. We anticipate that our yield on loans will be adversely affected in
future periods as a result originating PPP loans, to the extent the loans are not forgiven and remain on our books, and the
impact of loans repricing lower in the current rate environment. Interest income on investment securities decreased $2.0
million, or 21.0%, to $7.5 million during 2020, as compared to $9.4 million in 2019. The decrease in interest income on
investment securities was the result of lower average balances, which decreased from $381.8 million in 2019 to $320.7 million
in 2020, and lower rates, which decreased from 2.70% in 2019 to 2.58% in 2020.
INTEREST EXPENSE. Interest expense during 2020 decreased $4.0 million, or 59.0%, to $2.8 million as
compared to 2019. Interest expense on interest-bearing deposits decreased $3.2 million, or 60.6%, to $2.1 million for 2020
as compared to $5.3 million in 2019. Our total cost of interest-bearing deposits decreased from 0.83% during 2019 to 0.31%
during 2020 as a result of lower rates paid on money market and checking accounts that have rates that reprice based on
market indexes and lower rates on our certificates of deposit. Our decline in deposit rates during 2020 reflected the decreased
federal funds interest rate and other market interest rates. As these rates are now near zero, we do not expect significant
reductions in our cost of deposits in future periods. Partially offsetting the lower interest rates was an increase in average
interest-bearing deposit balances, which increased from $646.8 million in 2019 to $673.2 million in 2020. Interest expense
on borrowings decreased $752,000, or 53.1%, to $664,000 during 2020 as compared to $1.4 million in 2019. Contributing to
lower interest expense on borrowings were lower average outstanding borrowings, which decreased from $51.3 million in
2019 to $38.8 million during 2020, as well as lower rates paid on borrowings, which decreased from 2.76% in 2019 to 1.71%
in 2020.
NET INTEREST INCOME. Net interest income represents the difference between income derived from interest-
earning assets and the expense incurred on interest-bearing liabilities. Net interest income is affected by both the difference
between the rates of interest earned on interest-earnings assets and the rates paid on interest-bearing liabilities (“interest rate
spread”) as well as the relative amounts of interest-earning assets and interest-bearing liabilities.
As a result of the COVID-19 pandemic, we originated approximately $131.0 million of PPP loans during 2020.
These loans have an interest rate of 1.00% plus the amortization of the origination fee, which resulted in a yield of 3.40% on
PPP loans in 2020. The maturity date of these loans is two or five years unless the borrower’s loan is forgiven, in which case
the loan would be repaid sooner. While the cost of our funds is lower than the yield on these loans, the interest rate spread is
lower than we generally have received on other loans. As a result of the origination of PPP loans and our participation in the
second round of PPP funding in 2021, to the extent PPP loans we originate are not forgiven, our net interest income may
increase in future periods, but our net interest margin may be negatively affected by the lower interest rates on PPP loans.
The balance of PPP loans was $100.1 million at December 31, 2020, after a portion of the loans had been forgiven. The
average balance of PPP loans during 2020 was $88.5 million which generated interest income of $3.0 million. There were
$2.0 million of origination fees remaining to be accreted into income at December 31, 2020. In addition, the COVID-19
pandemic has slowed our origination of new loans, which may lead to lower net interest income and net interest margin in
future periods as a result of lower loan volumes. The decline in market interest rates will adversely impact our net interest
income and net interest margin as a result of lower yields on loans and investment securities exceeding the benefit of a lower
cost of funds.
During 2020, net interest income increased $6.1 million, or 20.2%, to $36.5 million compared to $30.4 million in
2019. Our net interest margin, on a tax-equivalent basis, increased to 3.72% during 2020 from 3.48% during 2019. The
increase in net interest income was primarily due to a 11.7% increase in our average interest-earning assets from $900.5
million in 2019 to $1.0 billion in 2020 and also due to decreases in deposit rates that caused deposit expense to decline. We
may not be able to continue to increase our net interest margin if our loan growth slows or the yields on our interest-earning
assets decline faster than our cost of interest-bearing liabilities.
PROVISION FOR LOAN LOSSES. We maintain, and our Board of Directors monitors, an allowance for losses
on loans. The allowance is established based upon management's periodic evaluation of known and inherent risks in the loan
portfolio, review of significant individual loans and collateral, review of delinquent loans, past loss experience, adverse
situations that may affect the borrowers’ ability to repay, current and expected market conditions, and other factors
management deems important. Determining the appropriate level of reserves involves a high degree of management judgment
and is based upon historical and projected losses in the loan portfolio and the collateral value or discounted cash flows of
56
specifically identified impaired loans. Additionally, allowance policies are subject to periodic review and revision in response
to a number of factors, including current market conditions, actual loss experience and management’s expectations.
During 2020, we recorded a provision for loan losses of $3.3 million compared to $1.4 million in 2019. We recorded
net loan charge-offs of $992,000 during 2020 compared to net loan charge-offs of $698,000 during 2019. The increase in the
provision for loan losses reflected loan growth and uncertainty in the economic environment considering the effects of the
COVID-19 pandemic. As the economic outlook evolves and our pandemic-related loss experience develops, Landmark will
adjust the allowance for loan losses and provisioning will be adjusted accordingly.
NON-INTEREST INCOME. Total non-interest income was $27.4 million in 2020, an increase of $11.5 million,
or 73.1%, compared to 2019. The increase in non-interest income was primarily the result of increases of $8.8 million in
gains on sales of loans, and $354,000 in fees and service charges. Also contributing to the increase in non-interest income
was $2.4 million in gains on sales of investment securities due to approximately $61 million of mortgage-backed investment
securities sold during 2020. A loss of $177,000 was recorded on sales of investment securities during 2019. Partially
offsetting the increases in non-interest income was a decrease of $141,000 in bank owned life insurance income. The increase
in gains on sales of loans was driven by higher volumes of one-to-four family residential real estate loans originated, due to
the decline in mortgage interest rates that have fueled a robust housing market and refinancing activity. The higher fees and
service charges were primarily due to higher fee income on deposit accounts. The decrease in bank owned life insurance
income was due to a death claim payment received in 2019.
NON-INTEREST EXPENSE. Non-interest expense increased $3.6 million, or 11.1%, to $36.3 million in 2020
compared to $32.6 million in 2019. The increase was primarily due to an increase of $2.9 million, or 16.1%, in compensation
and benefits as a result of increases in mortgage lending incentives and as well as general increases in compensation. Also
contributing to higher non-interest expense were increases of $396,000 in amortization of intangibles due to the accelerated
prepayments on mortgage servicing rights and $185,000 in data processing due to the increase in the number of accounts and
products that are offered. Our federal deposit insurance premiums increased $162,000 as a result of utilizing the FDIC
assessment credits in 2019 and the first quarter of 2020. Partially offsetting those increases in non-interest expense was a
decrease of $99,000 in professional fees due to a decrease in costs associated with an external audit of our internal controls
over financial reporting which is no longer required as we no longer qualify as an accelerated filer by the rules of the SEC.
INCOME TAXES. During 2020, we recorded income tax expense of $4.8 million compared to income tax expense
of $1.5 million in 2019. The effective tax rate increased from 12.0% in 2019 to 19.7% in 2020, primarily due to an increase
in earnings before income taxes, while tax-exempt income declined over the comparable periods. In addition, income tax
expense included the recognition of $229,000 and $558,000 in 2020 and 2019, respectively, of previously unrecognized tax
benefits, reducing the effective tax rate in both periods.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2019 AND DECEMBER
31, 2018
For a discussion of the results of operations for the year ended December 31, 2019 compared with the year ended
December 31, 2018, refer to Item 7 of the Company’s 2019 Annual Report on Form 10-K, filed with the SEC on March 12,
2020, which is incorporated herein by reference.
57
QUARTERLY RESULTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
2020 Quarters Ended
March 31
June 30
$
$
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Non-interest income
Non-interest expense
Earnings before income taxes
Income tax expense
Net earnings
Earnings per share (1):
Basic
Diluted
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Non-interest income
Non-interest expense
Earnings before income taxes
Income tax expense
Net earnings
Earnings per share (1):
Basic
Diluted
9,318
1,216
8,102
1,200
6,902
5,353
8,107
4,148
785
3,363
8,884
1,688
7,196
200
6,996
3,256
7,728
2,524
341
2,183
$
September 30 December 31
10,537
$
437
10,100
700
9,400
6,868
9,517
6,751
1,148
5,603
9,757
490
9,267
1,000
8,267
8,165
9,522
6,910
1,483
5,427
$
$
9,641
626
9,015
400
8,615
6,972
9,116
6,471
1,371
5,100
$
$
$
$
0.70
0.70
$
$
1.08
1.08
$
$
1.14
1.14
$
$
1.18
1.18
2019 Quarters Ended
March 31
June 30
$
$
$
September 30 December 31
9,489
$
1,471
8,018
400
7,618
4,010
8,337
3,291
23
3,268
9,445
1,786
7,659
400
7,259
4,555
8,618
3,196
583
2,613
$
$
9,293
1,812
7,481
400
7,081
3,988
7,965
3,104
506
2,598
$
$
$
$
0.45
0.45
$
$
0.54
0.54
$
$
0.54
0.54
$
$
0.68
0.67
(1) All per share amounts have been adjusted to give effect to the 5% stock dividends paid during December 2020 and 2019.
FINANCIAL CONDITION. Economic conditions in the United States deteriorated during 2020 as the impact of
COVID-19 caused portions of the economy to shut down or be subject to operating restrictions. On March 28, 2020, a stay
at home order was issued for the entire state of Kansas, which expanded previously issued local orders. This stay at home
order was lifted on May 3, 2020 with a phased approach to reopening the Kansas economy, but the effects of the stay at home
order and reopening restrictions continue to have an effect on the economies in our market areas. As the economy has
reopened, the State of Kansas has experienced an increase in the number of COVID-19 cases. The State of Kansas and the
geographic markets in which the Company operates have been significantly impacted by this pandemic. The Company’s
allowance for loan losses included estimates of the economic impact of COVID-19 on our loan portfolio. COVID-19 will
likely continue to cause an increase in our delinquent and non-accrual loans as the economic slowdown impacts our
customers. However, our loan portfolio is diversified across various types of loans and collateral throughout the markets in
which we operate. Aside from a few problem loans that management is working to resolve, our asset quality has remained
strong over the past few years. While we anticipate further increases in problem assets as a result of COVID-19, management
believes its efforts to run a high quality financial institution with a sound asset base will continue to create a strong foundation
for continued growth and profitability in the future.
58
ASSET QUALITY AND DISTRIBUTION. Our primary investing activities are the origination of one-to-four
family residential real estate, construction and land, commercial real estate, commercial, agriculture, municipal and consumer
loans and the purchase of investment securities. Total assets increased $189.6 million, or 19.0%, to $1.2 billion at December
31, 2020, compared to $998.5 million at December 31, 2019. The increase in our total assets was primarily the result of a
$170.6 million, or 32.1%, increase in net loans, excluding loans held for sale, which increased to $702.8 million at December
31, 2020 from $532.2 million at December 31, 2019. Our loan growth in 2020 was primarily due to the origination of PPP
loans which totaled $100.1 million at December 31, 2020. Investment securities available-for-sale decreased $65.7 million
from $363.0 million at December 31, 2019 to $297.3 million at December 31, 2020.
The allowance for loan losses is established through a provision for loan losses based on our evaluation of the risk
inherent in the loan portfolio and changes in the nature and volume of our loan activity. This evaluation, which includes a
review of all loans with respect to which full collectability may not be reasonably assured, considers the fair value of the
underlying collateral, economic conditions, historical loan loss experience, level of classified loans and other factors that
warrant recognition in providing for an appropriate allowance for loan losses. If the COVID-19 pandemic or other factors
cause economic declines in excess of our estimations, or if the pandemic lasts longer than currently projected, our provision
for loan losses may remain elevated or increase in future period. We will continue to monitor our allowance for loan losses
in light of changing economic conditions related to COVID-19. At December 31, 2020, our allowance for loan losses totaled
$8.8 million, or 1.23% of gross loans outstanding, as compared to $6.5 million, or 1.20% of gross loans outstanding, at
December 31, 2019. The allowance for loan losses to gross loans outstanding was impacted by the $100.1 million of PPP
loans which are guaranteed by the SBA and have no allowance allocated as of December 31, 2020.
As of December 31, 2020 and 2019, approximately $25.2 million and $18.1 million, respectively, of loans were
considered classified and assigned a risk rating of special mention, substandard or doubtful. The increase in classified loans
was primarily due to the impact of COVID-19 and weakness in the agriculture industry, which deteriorated further due to the
pandemic. COVID-19 has also impacted our commercial and commercial real estate portfolios, with borrowers in the
restaurant, accommodations and hotel industries experiencing the largest declines in revenues. These ratings indicate that the
loans identified as potential problem loans have more than normal risk which raised doubts as to the ability of the borrower
to comply with present loan repayment terms. Even though these borrowers were experiencing moderate cash flow problems
as well as some deterioration in collateral value, management believed the general allowance was sufficient to cover the risks
and probable incurred losses related to such loans at December 31, 2020 and 2019, respectively.
Loans past due 30-89 days and still accruing interest totaled $1.5 million, or 0.22% of gross loans, at December 31,
2020, compared to $3.4 million, or 0.64% of gross loans, at December 31, 2019. At December 31, 2020, $10.5 million of
loans were on non-accrual status, or 1.47% of gross loans, compared to $5.5 million, or 1.03% of gross loans, at December
31, 2019. The increase in non-performing loans primarily related to two commercial real estate loan relationships totaling
$5.5 million. Non-accrual loans consist of loans 90 or more days past due and certain impaired loans. There were no loans
90 days delinquent and accruing interest at December 31, 2020 and 2019. Our impaired loans totaled $12.5 million December
31, 2020 compared to $8.7 million at December 31, 2019. The difference in the Company’s non-accrual loan balances and
impaired loan balances at December 31, 2020 and December 31, 2019 was related to TDRs that were accruing interest but
still classified as impaired.
At December 31, 2020, the Company had nine loan relationships consisting of 21 outstanding loans totaling $3.9
million that were classified as TDRs compared to nine relationships consisting of thirteen outstanding loans totaling $3.6
million that were classified as TDRs at December 31, 2019.
During 2020, the Company modified the payment terms on an agriculture loan totaling $156,000 and classified the
restructuring as a TDR. The loans relating to a $1.6 million loan relationship, consisting of two one-to-our family loans, one
construction and land loan, two commercial real estate loans and one commercial loan, were classified as TDRs during 2020
after negotiating restructuring agreements with the borrowers. The restructuring included a charge-off of $50,000. The loans
relating to one commercial loan relationship, with five loans totaling $742,000, were classified as TDRs during 2020, after
the payments were modified to interest only. All of the loans classified as TDRs were experiencing financial difficulties prior
to the COVID-19 pandemic. An agriculture loan, commercial real estate loan and a one-to-four family residential real estate
loan previously classified as TDRs in 2017, 2015 and 2016, respectively, paid off during 2020.
The Company did not classify any loans as TDRs during 2019. A commercial real estate loan previously classified
as a TDR in 2014 paid off during 2019.
59
During 2018, the Company classified an agriculture loan totaling $64,000 as a TDR after originating a loan to an
existing loan relationship that was classified as a TDR in 2016. As part of the restructuring, the borrower paid off three loans
previously classified as TDRs. Since the agriculture loan relationship was adequately secured, no impairments were recorded
against the principal as of December 31, 2020. The Company also classified a $36,000 commercial loan as a TDR after
extending the maturity of the loan during 2018. The commercial loan had a $8,000 impairment recorded against the principal
balance as of December 31, 2020. An agriculture loan relationship consisting of two loans that were originally classified as
TDRs during 2015 and a municipal loan that was classified as a TDR in 2010 were both paid off in 2018.
As of December 31, 2020, the Company had 6 loan modifications on outstanding loan balances of $7.2 million in
connection with the COVID-19 pandemic that had not yet returned to contractual terms that, per regulatory guidance, are not
deemed to be TDRs. These modifications consisted of payment deferrals that were applied to either the full loan payment or
just the principal component. One commercial real estate loan totaling $3.7 million that was modified was also on non-
accrual status as of December 31, 2020. Consistent with the CARES Act and Joint Interagency Regulatory Guidance, the
Company also entered into short-term forbearance plans and short-term repayment plans on three one-to-four family
residential mortgage loans totaling $366,000 as of December 31, 2020, which were not classified as TDRs.
As part of our credit risk management, we continue to manage the loan portfolio to identify problem loans and have
placed additional emphasis on commercial real estate and construction and land relationships. We are working to resolve the
remaining problem credits or move the non-performing credits out of the loan portfolio. At December 31, 2020, we had $1.8
million of real estate owned compared to $290,000 at December 31, 2019. The increase in real estate owned as of December
31, 2020 compared to December 31, 2019 was primarily due to obtaining the collateral securing non-performing commercial
real estate and one-to-four family residential real estate loans. As of December 31, 2020, real estate owned consisted of
commercial buildings, undeveloped land and residential real estate. The Company is currently marketing all of the remaining
properties in real estate owned.
LIABILITY DISTRIBUTION. Our primary ongoing sources of funds are deposits, FHLB borrowings, proceeds
from principal and interest payments on loans and investment securities and proceeds from the sale of mortgage loans and
investment securities. While maturities and scheduled amortization of loans are a predictable source of funds, deposit flows
and mortgage prepayments are greatly influenced by general interest rates and economic conditions. We experienced an
increase of $181.0 million, or 21.7% in total deposits during 2020, to $1.0 billion at December 31, 2020, from $835.0 million
at December 31, 2019. The increase in deposits was primarily due to deposit growth in all categories of deposits with the
exception of time deposits. The increase in deposits was related to PPP loan proceeds, government stimulus payments and
customers increasing their liquidity positions. Additionally, checking account balances increased as a result of customers
migrating from repurchase agreements to checking account products providing FDIC insurance coverage on higher balances.
The decrease in time deposits was associated with the lower public funds balances.
Total borrowings decreased $14.2 million, or 33.6%, to $28.0 million at December 31, 2020, from $42.2 million at
December 31, 2019. The decline in borrowings was the result of a $3.0 million decrease in our FHLB line of credit borrowings
from $3.0 million at December 31, 2019 to no FHLB borrowings at December 31, 2020 and lower repurchase agreement
balance as customers have migrated to other deposit accounts.
Non-interest-bearing deposits at December 31, 2020, were $264.9 million, or 26.1% of deposits, compared to $182.7
million, or 21.9% of deposits, at December 31, 2019. Money market and checking accounts were 48.3% of our deposit
portfolio and totaled $491.3 million at December 31, 2020, compared to $405.7 million, or 48.6% of deposits, at December
31, 2019. Savings accounts increased to $126.1 million, or 12.4% of deposits, at December 31, 2020, from $99.5 million, or
11.9% of deposits, at December 31, 2019. Certificates of deposit totaled $133.7 million, or 13.2% of deposits, at December
31, 2020, compared to $147.1 million, or 17.6% of deposits, at December 31, 2019. Competition for deposits may affect our
ability to continue to increase deposit balances and could result in a decrease in our deposit balances in future periods.
Certificates of deposit at December 31, 2020, scheduled to mature in one year or less totaled $112.3 million.
Historically, maturing deposits have generally remained with the Bank, and we believe that a significant portion of the
deposits maturing in one year or less will remain with us upon maturity in some type of deposit account.
CASH FLOWS. During 2020, our cash and cash equivalents increased by $71.1 million. Our operating activities
provided net cash of $14.8 million in 2020, which is primarily the result of net earnings and sales of one-to-four family
residential mortgage loans. Our investing activities used net cash of $104.6 million during 2020, primarily as a result of
60
increases in loans. Our financing activities provided net cash of $160.9 million during 2020, primarily as a result of an
increase in deposits.
LIQUIDITY. Our most liquid assets are cash and cash equivalents and investment securities available-for-sale. The
levels of these assets are dependent on the operating, financing, lending and investing activities during any given year. These
liquid assets totaled $382.1 million at December 31, 2020 and $376.7 million at December 31, 2019. During periods in which
we are not able to originate a sufficient amount of loans and/or periods of high principal prepayments, we generally increase
our liquid assets by investing in short-term, high-grade investments.
Liquidity management is both a daily and long-term function of our strategy. Excess funds are generally invested in
short-term investments. Excess funds are typically generated as a result of increased deposit balances, while uses of excess
funds are generally deposit withdrawals and loan advances. In the event we require funds beyond our ability to generate them
internally, additional funds are generally available through the use of brokered deposits, FHLB advances, a line of credit with
the FHLB, other borrowings or through sales of investment securities. At December 31, 2020, we had no outstanding balance
against our line of credit with the FHLB. At December 31, 2020, we had collateral pledged to the FHLB that would allow us
to borrow $56.4 million, subject to FHLB credit requirements and policies. At December 31, 2020, we had no borrowings
through the Federal Reserve discount window, while our borrowing capacity with the Federal Reserve was $103.8 million.
We also have various other federal funds agreements, both secured and unsecured, with correspondent banks totaling
approximately $30.0 million in available credit under which we had no outstanding borrowings at December 31, 2020. At
December 31, 2020, we had subordinated debentures totaling $21.7 million and other borrowings of $6.4 million, which
consisted of repurchase agreements. At December 31, 2020, the Company had no borrowings against a $7.5 million line of
credit from an unrelated financial institution that matures on November 1, 2021, with an interest rate that adjusts daily based
on the prime rate less 0.25%. This line of credit has covenants specific to capital and other financial ratios, which the Company
was in compliance with at December 31, 2020. The Company is eligible to pledge PPP loans to the Federal Reserve’s
Paycheck Protection Program Liquidity Facility for additional liquidity, but the Company has not utilized this facility to date.
OFF-BALANCE SHEET ARRANGEMENTS. As a provider of financial services, we routinely issue financial
guarantees in the form of financial and performance standby letters of credit. Standby letters of credit are contingent
commitments issued by us generally to guarantee the payment or performance obligation of a customer to a third party. While
these standby letters of credit represent a potential outlay by us, a significant amount of the commitments may expire without
being drawn upon. We have recourse against the customer for any amount the customer is required to pay to a third party
under a standby letter of credit. The letters of credit are subject to the same credit policies, underwriting standards and
approval process as loans made by us. Most of the standby letters of credit are secured, and in the event of nonperformance
by the customers, we have the right to the underlying collateral, which could include commercial real estate, physical plant
and property, inventory, receivables, cash and marketable securities. The contract amount of these standby letters of credit,
which represents the maximum potential future payments guaranteed by us, was $2.2 million at December 31, 2020.
At December 31, 2020, we had outstanding loan commitments, excluding standby letters of credit, of $145.1 million.
We anticipate that sufficient funds will be available to meet current loan commitments. These commitments consist of
unfunded lines of credit and commitments to finance real estate loans.
CAPITAL. Current regulatory capital regulations require financial institutions (including banks and bank holding
companies) to meet certain regulatory capital requirements. The Company and the Bank are subject to the Basel III Rule that
implemented the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision and certain changes
required by the Dodd-Frank Act. The Basel III Rule is applicable to all U.S. banks that are subject to minimum capital
requirements, as well as to bank and savings and loan holding companies other than “small bank holding companies”
(generally, non-public bank holding companies with consolidated assets of less than $3.0 billion).
The Basel III Rule requires a common equity Tier 1 capital to risk-weighted assets minimum ratio of 4.5%, a Tier 1
capital to risk-weighted assets minimum ratio of 6.0%, a Total Capital to risk-weighted assets minimum ratio of 8.0%, and a
Tier 1 leverage minimum ratio of 4.0%. A capital conservation buffer, equal to 2.5% common equity Tier 1 capital, is also
established above the regulatory minimum capital requirements (other than the Tier 1 leverage ratio). At December 31, 2020,
the Bank maintained a leverage ratio of 10.47% and a total risk-based capital ratio of 17.50%. As shown by the following
table, the Bank’s capital exceeded the minimum capital requirements in effect at December 31, 2020, including the capital
conservation buffers.
61
(dollars in thousands)
Leverage
Common Equity Tier 1 Capital
Tier 1 Capital
Total risk-based Capital
Actual
amount
$
118,174
118,174
118,174
127,089
Actual
percent
10.47%
16.27%
16.27%
17.50%
$
Minimum Minimum
percent(1)
amount
4.00%
7.00%
8.50%
10.50%
45,139
50,829
61,721
76,244
(1) The minimum required percent includes a capital conservation buffer of 2.5%.
We believe the Company has adequate capital to withstand the impact of the COVID-19 pandemic and any economic
downturn on our asset quality and net earnings. The Company performs stress tests on the loan portfolio to measure the
impact of severe economic recessions on its capital levels to help it monitor capital levels in connection with the COVID-19
pandemic.
Banks and bank holding companies are generally expected to operate at or above the minimum capital requirements.
The Company’s and the Bank’s ratios above are well in excess of regulatory minimums. As of December 31, 2020 and 2019,
the Company and the Bank also exceeded the "well capitalized" thresholds, which is the highest rating available. There are
no conditions or events that management believes have changed the Company’s and the Bank’s category as of the date of this
report. We have $21.7 million in trust preferred securities which, in accordance with current capital guidelines, have been
included in capital as of December 31, 2020. Cash distributions on the securities are payable quarterly, are deductible for
income tax purposes and are included in interest expense in the consolidated financial statements.
DIVIDENDS
During the year ended December 31, 2020, we paid quarterly cash dividends of $0.19 per share to our stockholders,
as adjusted to give effect to 5% stock dividends, which we distributed for the 20th consecutive year in December 2020. The
2019 quarterly cash dividends were $0.18 per share as adjusted to give effect to 5% stock dividends.
The payment of dividends by any financial institution or its holding company is affected by the requirement to
maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations. As described above, the Bank
exceeded its minimum capital requirements under applicable guidelines as of December 31, 2020. The National Bank Act
imposes limitations on the amount of dividends that a national bank may pay without prior regulatory approval. Generally,
the amount is limited to the bank's current year's net earnings plus the adjusted retained earnings for the two preceding years.
As of December 31, 2020, $19.9 million was available to be paid as dividends to the Company by the Bank without prior
regulatory approval.
Additionally, our ability to pay dividends is limited by the subordinated debentures associated with the trust
preferred securities that are held by three business trusts that we control. Interest payments on the debentures must be paid
before we pay dividends on our capital stock, including our common stock. We have the right to defer interest payments on
the debentures for up to 20 consecutive quarters. However, if we elect to defer interest payments, all deferred interest must
be paid before we may pay dividends on our capital stock.
EFFECTS OF INFLATION
Our consolidated financial statements and accompanying footnotes have been prepared in accordance with U.S.
generally accepted accounting principles (“GAAP”), which generally require the measurement of financial position and
operating results in terms of historical dollars without consideration for changes in the relative purchasing power of money
over time due to inflation. The impact of inflation can be found in the increased cost of our operations because our assets and
liabilities are primarily monetary, and interest rates have a greater impact on our performance than do the effects of inflation.
62
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our assets and liabilities are principally financial in nature, and the resulting net interest income thereon is subject
to changes in market interest rates and the mix of various assets and liabilities. Interest rates in the financial markets affect
our decisions on pricing our assets and liabilities which impacts our net interest income, a significant cash flow source for us.
As a result, a substantial portion of our risk management activities relates to managing interest rate risk.
Our Asset/Liability Management Committee monitors the interest rate sensitivity of our balance sheet using earnings
simulation models and interest sensitivity “gap” analysis. We have set policy limits of interest rate risk to be assumed in the
normal course of business and monitor such limits through our simulation process.
In the past, we have been successful in meeting the interest rate sensitivity objectives set forth in our policy.
Simulation models are prepared to determine the impact on net interest income for the coming twelve months, including using
rates at December 31, 2020 and forecasting volumes for the twelve-month projection. This position is then subjected to a
shift in interest rates of 100 and 200 basis points rising and 100 basis points falling with an impact to our net interest income
on a one-year horizon as follows:
Scenario
200 basis point rising
100 basis point rising
100 basis point falling
$000's change
in net interest
income
($99)
($169)
($180)
% change in
net interest
income
(0.3%)
(0.5%)
(0.5%)
ASSET/LIABILITY MANAGEMENT
Interest rate "gap" analysis is a common, though imperfect, measure of interest rate risk which measures the relative
dollar amounts of interest-earning assets and interest-bearing liabilities which reprice within a specific time period, either
through maturity or rate adjustment. The "gap" is the difference between the amounts of such assets and liabilities that are
subject to such repricing. A "positive" gap for a given period means that the amount of interest-earning assets maturing or
otherwise repricing within that period exceeds the amount of interest-bearing liabilities maturing or otherwise repricing
during that same period. In a rising interest rate environment, an institution with a positive gap would generally be expected,
absent the effects of other factors, to experience a greater increase in the yield of its assets relative to the cost of its liabilities.
Conversely, the cost of funds for an institution with a positive gap would generally be expected to decline less quickly than
the yield on its assets in a falling interest rate environment. Changes in interest rates generally have the opposite effect on an
institution with a "negative" gap.
The following is our "static gap" schedule. One-to-four family residential real estate and consumer loans include
prepayment assumptions, while all other loans assume no prepayments. Mortgage-backed securities include published
prepayment assumptions, while all other investments assume no prepayments.
Certificates of deposit reflect contractual maturities only. Money market accounts are rate sensitive, and accordingly,
a higher percentage of the accounts have been included as repricing immediately in the first period. Savings and NOW
accounts are not as rate sensitive as money market accounts, and for that reason a significant percentage of the accounts are
reflected in the 1-to-5 year category.
We have been successful in meeting the interest sensitivity objectives set forth in our policy. This has been
accomplished primarily by managing the assets and liabilities while maintaining our traditional high credit standards.
63
INTEREST-EARNING ASSETS AND INTEREST-BEARING LIABILITIES REPRICING SCHEDULE
("GAP" TABLE)
As of December 31, 2020
Interest-earning assets:
Investment securities
Loans
Total interest-earning assets
Interest-bearing liabilities:
Certificates of deposit
Money market and checking accounts
Savings accounts
Borrowed money
Total interest-bearing liabilities
3 months or
less
3 to 12
months
1 to 5 years Over 5 years
Total
(Dollars in thousands)
$
14,712
228,151
242,863
$
$
29,907
244,593
274,500
$
$
$
170,551
223,491
394,042
$
86,573
22,080
108,653
$
$
301,743
718,315
1,020,058
$
$
$
$
53,393
4,453
-
28,022
85,868
58,943
13,358
-
-
72,301
21,411
385,808
100,899
-
508,118
3
$
87,656
25,225
-
112,884
$
$
$
133,750
491,275
126,124
28,022
779,171
$
$
$
Interest sensitivity gap per period
Cumulative interest sensitivity gap
$
156,995
156,995
$
202,199
359,194
$
(114,076)
245,118
$
(4,231)
240,887
$
240,887
Cumulative gap as a percent of
total interest-earning assets
Cumulative interest sensitive assets
as a percent of cumulative interest
sensitive liabilities
15.39%
35.21%
24.03%
23.62%
282.83%
327.10%
136.79%
130.92%
64
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Stockholders and the Board of Directors
Landmark Bancorp, Inc. and Subsidiaries
Manhattan, Kansas
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Landmark Bancorp, Inc. and Subsidiaries (the "Company")
as of December 31, 2020 and 2019, the related consolidated statements of earnings, comprehensive income, stockholders’
equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively
referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the
financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted
in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion
on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether
due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial
reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether
due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test
basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of
the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that
was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that
are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The
communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole,
and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or
on the accounts or disclosures to which it relates.
Allowance for Loan Losses – Qualitative factors
As described in Note 1 and Note 5 to the consolidated financial statements, the Company’s allowance for loan losses
represents management’s best estimate of probable incurred losses in the loan portfolio. The allowance for loan losses was
$8,775,000 at December 31, 2020, which consists of two components: the valuation allowance for loans individually
evaluated for impairment (“specific component”), representing $266,000, and the valuation allowance for loans collectively
evaluated for impairment (“general component”), representing $8,509,000. The general component is based on the
Company’s historical loss experience, adjusted for qualitative factors.
65
The qualitative factors include changes in lending policies and procedures, including changes in underwriting standards;
changes in international, national, regional, and local economic and business conditions; changes in the nature, volume, and
terms of loans in the portfolio; changes in the lending management and lending staff; changes in the volume and severity of
past due loans, nonaccrual loans, and adversely classified loans; changes in the loan review function; changes in the value of
underlying collateral; the existence of and changes in credit concentrations; and other external factors. Management applied
significant judgment to determine the effect of the qualitative factors. We identified auditing the effect of the qualitative
factors on the allowance for loan losses as a critical audit matter as it involved especially subjective auditor judgment to audit
management’s determination and application of the qualitative factors.
Our substantive audit procedures to address the critical audit matter related to the allowance loan losses qualitative factors
included the following:
• Tested the completeness and accuracy of the data inputs used as a basis for the qualitative factors to source
documentation.
• Evaluated the reasonableness of management’s judgments related to the internal and external data used in the
determination of the qualitative factors and the resulting allocation to the allowance.
• Analytically evaluated the qualitative factors year over year for directional consistency, including the magnitude of
the adjustments.
• Tested the mathematical accuracy of the allowance calculation, including the application of the qualitative factors.
/s/ Crowe LLP
We have served as the Company's auditor since 2014.
Oak Brook, Illinois
March 22, 2021
66
LANDMARK BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands)
Assets
Cash and cash equivalents
Investment securities available-for-sale, at fair value
Bank stocks, at cost
Loans, net of allowance for loans losses of $8,775 and $6,467
Loans held for sale, at fair value
Premises and equipment, net
Bank owned life insurance
Goodwill
Other intangible assets, net
Mortgage servicing rights
Real estate owned, net
Accrued interest and other assets
Total assets
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Non-interest bearing demand
Money market and checking
Savings
Time
Total deposits
Federal Home Loan Bank borrowings
Subordinated debentures
Other borrowings
Accrued interest and other liabilities
Total liabilities
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.01 par, 200,000 shares authorized; none issued
Common stock, $0.01 par, 7,500,000 shares authorized; 4,750,838 and 4,827,266
shares issued and outstanding at December 31, 2020 and 2019, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
Total stockholders’ equity
Total liabilities and stockholders’ equity
See Notes to Consolidated Financial Statements.
67
December 31,
2020
2019
$
$
84,818
297,270
4,473
702,782
15,533
20,493
25,420
17,532
206
3,726
1,774
14,000
1,188,027
13,694
362,998
3,109
532,180
8,497
21,133
24,809
17,532
383
2,446
290
11,394
998,465
$
$
$
264,878
491,275
126,124
133,750
1,016,027
$
182,717
405,746
99,522
147,063
835,048
-
21,651
6,371
17,306
1,061,355
3,000
21,651
17,548
12,611
889,858
-
-
48
72,230
44,947
9,447
126,672
46
69,029
34,293
5,239
108,607
$
1,188,027
$
998,465
LANDMARK BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
(Dollars in thousands, except per share amounts)
Interest income:
Loans:
Taxable
Tax-exempt
Investment securities:
Taxable
Tax-exempt
Total interest income
Interest expense:
Deposits
Subordinated debentures
Borrowings
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Non-interest income:
Fees and service charges
Gains on sales of loans, net
Increase in cash surrender value of bank owned life insurance
Gains (losses) on sales of investment securities, net
Other
Total non-interest income
Non-interest expense:
Compensation and benefits
Occupancy and equipment
Data processing
Amortization of intangibles
Professional fees
Advertising
Federal deposit insurance premiums
Foreclosure and real estate owned expense
Other
Total non-interest expense
Earnings before income taxes
Income tax expense
Net earnings
Earnings per share (1):
Basic
Diluted
Years ended December 31,
2019
2020
2018
$
31,704
93
$
27,563
106
$
23,642
244
4,177
3,279
39,253
2,105
614
50
2,769
36,484
3,300
33,184
8,091
15,155
611
2,448
1,053
27,358
5,796
3,646
37,111
5,341
970
446
6,757
30,354
1,400
28,954
7,737
6,353
752
(177)
1,144
15,809
5,299
3,968
33,153
3,056
1,079
1,230
5,365
27,788
1,400
26,388
7,289
5,023
644
20
2,595
15,571
20,657
4,432
1,831
1,602
1,584
526
233
172
5,225
36,262
24,280
4,787
19,493
$
17,792
4,470
1,646
1,206
1,683
566
71
182
5,032
32,648
12,115
1,453
10,662
$
16,042
4,333
1,525
1,111
1,677
589
291
100
4,697
30,365
11,594
1,168
10,426
$
$
$
4.10
4.10
$
$
2.21
2.20
$
$
2.17
2.17
(1) All per share amounts have been adjusted to give effect to the 5% stock dividends paid during December 2020, 2019 and 2018.
See Notes to Consolidated Financial Statements.
68
LANDMARK BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Dollars in thousands)
Net earnings
Years ended December 31,
2020
2018
2019
10,426
10,662
19,493
$
$
$
Net unrealized holding gains (losses) on available-for-sale securities
Less reclassification adjustment on (gains) losses included in earnings
Net unrealized gains (losses)
Income tax effect on net gains (losses) included in earnings
Income tax effect on net unrealized holding (gains) losses
Other comprehensive income (loss)
8,021
(2,448)
5,573
600
(1,965)
4,208
12,048
177
12,225
(43)
(2,952)
9,230
(4,721)
(20)
(4,741)
5
1,157
(3,579)
Total comprehensive income
$
23,701
$
19,892
$
6,847
See Notes to Consolidated Financial Statements.
69
LANDMARK BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity
(Dollars in thousands, except per share amounts)
Balance at January 1, 2018
Net earnings
Other comprehensive loss
Dividends paid ($0.69 per share) (1)
Stock-based compensation
Adjustment of common stock investments
Exercise of stock options, 72,130 shares (2)
5% stock dividend, 207,794 shares
Balance at December 31, 2018
Net earnings
Other comprehensive income
Dividends paid ($0.73 per share) (1)
Stock-based compensation
Exercise of stock options, 3,275 shares (2)
5% stock dividend, 218,589 shares
Balance at December 31, 2019
Net earnings
Other comprehensive income
Dividends paid ($0.76 per share) (1)
Stock-based compensation
Purchase of 106,894 treasury shares
Exercise of stock options, 19,030 shares (2)
5% stock dividend, 225,650 shares
Balance at December 31, 2020
Common
stock
Additional
paid-in
capital
Retained
earnings
Accumulated other
comprehensive
income (loss)
Total
Treasury stock
$
41
$
57,772
$
30,214
$
-
$
(405)
$
87,622
-
-
-
-
-
1
2
44
-
-
-
-
-
2
46
-
-
-
-
-
-
-
-
-
223
-
533
5,247
63,775
-
-
-
286
36
4,932
69,029
-
-
-
304
-
42
10,426
-
(3,325)
-
-
7
(5,249)
32,073
10,662
-
(3,508)
-
-
(4,934)
34,293
19,493
(3,633)
-
-
-
2
2,855
(5,206)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(2,349)
-
2,349
-
(3,579)
-
-
-
-
(7)
(3,991)
-
9,230
-
-
-
-
5,239
-
4,208
-
-
-
-
-
10,426
(3,579)
(3,325)
223
-
534
-
91,901
10,662
9,230
(3,508)
286
36
-
108,607
19,493
4,208
(3,633)
304
(2,349)
42
-
$
48
$
72,230
$
44,947
$
-
$
9,447
$
126,672
(1) Dividends per share have been adjusted to give effect to the 5% stock dividends paid during December 2020, 2019 and 2018.
(2) Shares from the exercise of stock options are shown net of forfeitures.
See Notes to Consolidated Financial Statements.
70
LANDMARK BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
Cash flows from operating activities:
Net earnings
Adjustments to reconcile net earnings to net cash provided by operating activities:
Provision for loan losses
Valuation allowance on real estate owned
Amortization of investment security premiums, net
Amortization of purchase accounting adjustment on loans
Amortization of purchase accounting adjustment on subordinated debentures
Amortization of intangibles
Depreciation
Increase in cash surrender value of bank owned life insurance
Stock-based compensation
Deferred income taxes
Net (gain) loss on investment securities
Net loss (gain) on sales of premises and equipment and foreclosed assets
Net gains on sales of loans
Proceeds from sale of loans
Origination of loans held for sale
Changes in assets and liabilities:
Accrued interest and other assets
Accrued interest, expenses and other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Net increase in loans
Maturities and prepayments of investment securities
Purchases of investment securities
Proceeds from sale of investment securities
Proceeds from sales of common stock investments
Redemption of bank stocks
Purchase of bank stocks
Proceeds from sales of premises and equipment and foreclosed assets
Proceeds from bank owned life insurance
Purchases of premises and equipment, net
Net cash used in investing activities
Cash flows from financing activities:
Net increase in deposits
Federal Home Loan Bank advance borrowings
Federal Home Loan Bank advance repayments
Proceeds from other borrowings
Repayments on other borrowings
Proceeds from exercise of stock options
Payment of dividends
Purchase of treasury stock
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
(continued)
71
Years ended December 31,
2020
2019
2018
$
19,493
$
10,662
$
10,426
3,300
19
1,223
(67)
-
1,602
987
(611)
304
(503)
(2,448)
29
(15,155)
407,978
(402,564)
(2,606)
3,833
14,814
(175,721)
57,903
(46,540)
61,163
-
3,001
(4,365)
366
-
(359)
(104,552)
1,400
31
1,682
(48)
-
1,206
1,018
(752)
286
(195)
177
(52)
1,400
12
1,908
(211)
167
1,111
1,005
(644)
223
969
(20)
58
(6,353)
207,187
(205,532)
(5,023)
167,001
(160,729)
817
(2,427)
9,107
(44,641)
73,592
(53,197)
15,318
-
7,852
(6,185)
258
284
(1,038)
(7,757)
(72)
3,657
21,238
(56,915)
54,617
(82,742)
21,126
7
10,380
(9,733)
424
-
(1,308)
(64,144)
180,979
161,170
11,400
430,322
58,090
635,303
(164,170)
(447,322)
(646,903)
1,075
(12,252)
42
(3,633)
(2,349)
160,862
71,124
13,694
2,302
-
36
1,737
-
534
(3,508)
(3,325)
-
(6,770)
(5,420)
19,114
-
45,436
2,530
16,584
$
84,818
$
13,694
$
19,114
LANDMARK BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
(Dollars in thousands)
Years ended December 31,
2019
2018
2020
Supplemental disclosure of cash flow information:
Cash payments (refunds) received during the year for income taxes
Cash paid during the year for interest
Cash paid during the year for operating leases
$
4,135
3,005
179
$
722
6,795
163
$
(1,364)
5,030
143
Supplemental schedule of noncash investing and financing activities:
Transfer of loans to real estate owned
Operating lease asset and related liability recorded
$
1,886
-
$
482
353
96
$
-
See Notes to Consolidated Financial Statements.
72
LANDMARK BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
Principles of Consolidation. The accompanying consolidated financial statements include the accounts of Landmark
Bancorp, Inc. and its wholly owned subsidiaries, Landmark National Bank and Landmark Risk Management Inc. All
intercompany balances and transactions have been eliminated in consolidation. The Bank, considered a single operating
segment, is principally engaged in the business of attracting deposits from the general public and using such deposits, together
with borrowings and other funds, to originate one-to-four family residential real estate, construction and land, commercial
real estate, commercial, agriculture, municipal and consumer loans. Landmark Risk Management, Inc. provides property and
casualty insurance coverage to the Company and the Bank for which insurance may not be currently available or economically
feasible in today's insurance marketplace.
Use of Estimates. The preparation of the consolidated financial statements in conformity with U.S. generally
accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amount of
assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Business Combinations. At the date of acquisition, the Company records the net assets acquired and liabilities
assumed on the consolidated balance sheet at their estimated fair values, and goodwill is recognized for the excess purchase
price over the estimated fair value of acquired net assets. The results of operations for acquired companies are included in the
Company’s consolidated statements of earnings beginning at the acquisition date. Expenses arising from the acquisition
activities are recorded in the consolidated statements of earnings during the period incurred.
Reserve Requirements. Regulations of the Federal Reserve require reserves to be maintained by all banking
institutions according to the types and amounts of certain deposit liabilities. These requirements restrict a portion of the
amounts shown as consolidated cash and due from banks from everyday usage in the operation of banks. As of December
31, 2020 and 2019, the Bank did not have a minimum reserve requirement.
Cash Flows. Cash and cash equivalents include cash on hand and amounts due from banks with original maturities
of fewer than 90 days, and are carried at cost. Net cash flows are reported for customer loan and deposit transactions.
Investment Securities. The Company has classified its investment securities portfolio as available-for-sale.
Available-for-sale securities are recorded at fair value with unrealized gains and losses excluded from earnings and reported
as a separate component of stockholders’ equity, net of taxes. Interest income includes amortization of purchase premium or
discount. Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments,
except for mortgage backed securities where prepayments are anticipated. Realized gains and losses on sales of available-
for-sale securities are recorded on a trade date basis and are calculated using the specific identification method.
The Company performs quarterly reviews of the investment portfolio to evaluate investment for other-than-
temporary impairment. The initial review begins with all securities in an unrealized loss position. The Company’s assessment
of other-than-temporary impairment is based on its judgment of the specific facts and circumstances impacting each
individual security at the time such assessments are made. The Company reviews and considers all factual information,
including expected cash flows, the structure of the security, the credit quality of the underlying assets and the current and
anticipated market conditions. Any credit-related impairment on debt securities is recorded through a charge to earnings.
Impairment related to other factors is recognized in other comprehensive income. However, if the Company intends to sell
or it is more likely than not that it will be required to sell a security in an unrealized loss position before recovery of its
amortized costs basis, the entire impairment is recorded through a charge to earnings.
Bank Stocks. Bank stocks are investments acquired for regulatory purposes and borrowing availability and are
accounted for at cost. The cost of such investments represents their redemption value as such investments do not have a
readily determinable fair value. The Company evaluates bank stocks for other-than-temporary impairment by analyzing the
ultimate recoverability based on a credit analysis of the issuer.
73
Acquired Loans. Acquired loans are recorded at estimated fair value at the time of acquisition and accounted for
under ASC 310-20. The Company’s acquired loans were not acquired with deteriorated credit quality. Estimated fair values
of acquired loans are based on a discounted cash flow methodology that considers various factors including the type of loan
and related collateral, the expected timing of cash flows, classification status, fixed or variable interest rate, term of loan and
whether or not the loan is amortizing, and a discount rate reflecting the Company’s assessment of risk inherent in the cash
flow estimates. Discounts or premiums created when acquired loans are recorded at their estimated fair values are accreted
or amortized over the remaining term of the loan as an adjustment to the related loan’s yield. Similar to originated loans
described below, the accrual of interest income on acquired loans is discontinued when the collection of principal or interest,
in whole or in part, is doubtful.
Loans. Loans receivable that management has the intent and ability to hold for the foreseeable future or until
maturity or pay-off are reported at their outstanding principal balances, net of undisbursed loan proceeds, the allowance for
loan losses, and any deferred fees or costs on originated loans. Origination fees received on loans held in portfolio and the
estimated direct costs of origination are deferred and amortized to interest income using the interest method.
A loan is considered impaired when, based on current information and events, it is probable that the Company will
be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by management in determining if a loan is impaired include payment status, probability of
collecting scheduled principal and interest payments when due and value of collateral for collateral dependent loans. Loans
that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management
determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all
of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the
borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. In addition,
the Company classifies troubled debt restructurings (“TDR”) as impaired loans. A loan is classified as a TDR if the Company
modifies a loan with any concessions, as defined by accounting guidance, to a borrower experiencing financial difficulty.
The allowance recorded on impaired loans is measured on a loan-by-loan basis for commercial, commercial real estate,
agriculture and construction and land loans by either the present value of expected future cash flows discounted at the loan’s
effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.
Large groups of homogeneous loans with smaller individual balances are collectively evaluated for impairment. Accordingly,
the Company generally does not separately identify individual consumer and residential loans for impairment disclosures.
In April 2020, various regulatory agencies, including the Board of Governors of the Federal Reserve System, the
Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation, issued a revised Interagency
Statement on Loan Modifications and Reporting for Financial Institutions, which, among other things, encouraged financial
institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because
of the effects of COVID-19, and stated that institutions generally do not need to categorize COVID-19-related modifications
as TDRs and that the agencies will not direct supervised institutions to automatically categorize all COVID-19-related loan
modifications as TDRs. The CARES Act and federal regulatory guidance permit banks to suspend requirements under GAAP
for loan modifications to borrowers affected by COVID-19 that would otherwise be characterized as TDRs if the loan meets
certain criteria. The CARES Act requires the borrower to be 30 days or less past due at December 31, 2019 and the loan
modification be related to the deferral of principal or interest or a change to the interest rate. The federal regulatory guidance
criteria indicates that a loan modification should be short-term and the borrower be less than 30 days past due at the time of
the modification.
The accrual of interest on non-performing loans is discontinued at the time the loan is ninety days delinquent, unless
the credit is well-secured and in process of collection. Loans are placed on non-accrual or are charged off at an earlier date if
collection of the principal or interest is considered doubtful. All interest accrued but not collected for loans that are placed on
non-accrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis
or cost-recovery method, until qualifying for return to accrual. Loans are evaluated individually and are returned to accrual
status when all principal and interest amounts contractually due are brought current and future payments are reasonably
assured.
Allowance for Loan Losses. The Company maintains an allowance for loan losses to absorb probable incurred loan
losses in the loan portfolio. The allowance for loan losses is increased by charges to earnings and decreased by charge-offs
(net of recoveries). The evaluation of the allowance for loan losses groups loans by loan class and includes one-to-four family
residential real estate, construction and land, commercial real estate, commercial, agriculture, municipal and consumer loans.
74
Management’s periodic evaluation of the appropriateness of the allowance is based on the Company’s loan loss experience,
adjusted for qualitative factors. The qualitative factors include changes in lending policies and procedures, including changes
in underwriting standards; changes in international, national, regional, and local economic and business conditions; changes
in the nature, volume, and terms of loans in the portfolio; changes in the lending management and lending staff; changes in
the volume and severity of past due loans, nonaccrual loans, and adversely classified loans; changes in the value of underlying
collateral; the existence of and changes in credit concentrations; and other external factors. This evaluation is inherently
subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The
allowance is also subject to regulatory examinations and a determination by the regulatory agencies as to the appropriate level
of the allowance.
In addition to the general component the allowance consists of a specific component. The specific component relates
to loans that are individually classified as impaired when, based on current information and events, it is probable that the
Company will be unable to collect all amounts due according to the contractual terms of the loan agreement.
Loans Held for Sale. Mortgage loans originated and intended for sale in the secondary market are carried at fair
value. The fair value includes the servicing value of the loans as well as any accrued interest.
Mortgage loans held for sale are generally sold with servicing rights retained. The carrying value of mortgage loans
sold is reduced by the amount allocated to the servicing right. Gains and losses on sales of mortgage loans are based on the
difference between the selling price and the carrying value of the related loan sold.
Mortgage Servicing Rights. When mortgage loans are sold with servicing retained, servicing rights are initially
recorded at fair value with the income statement effect recorded in gains on sales of loans. Fair value is based on market
prices for comparable mortgage servicing contracts, when available or alternatively, is based on a valuation model that
calculates the present value of estimated future net servicing income. All classes of servicing assets are subsequently
measured using the amortization method which requires servicing rights to be recorded in amortization of intangibles in
proportion to, and over the period of, the estimated future net servicing income of the underlying loans.
Servicing rights are evaluated for impairment based upon the fair value of the rights as compared to carrying amount.
Impairment is determined by stratifying rights into groupings based on predominant risk characteristics, such as interest rate,
loan type and investor type. Impairment is recognized through a valuation allowance for an individual grouping, to the extent
that fair value is less than the carrying amount. If the Company later determines that all or a portion of the impairment no
longer exists for a particular grouping, a reduction of the allowance may be recorded as an increase to income. Changes in
valuation allowances are included in amortization expense on the income statement. The fair values of servicing rights are
subject to significant fluctuations as a result of changes in estimated and actual prepayment speeds, default rates and losses.
Transfers of Financial Assets. Transfers of financial assets are accounted for as sales when control over the assets
has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from
the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge
or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through
an agreement to repurchase them before their maturity.
Mortgage Loan Repurchase Reserve. The Company routinely sells one-to-four family residential mortgage loans
to secondary mortgage market investors. Under standard representations and warranties clauses in the Company’s mortgage
sale agreements, the Company may be required to repurchase mortgage loans sold or reimburse the investors for credit losses
incurred on those loans if a breach of the contractual representations and warranties occurred. The Company establishes a
mortgage repurchase liability in an amount equal to management’s estimate of losses on loans for which the Company could
have a repurchase obligation or loss reimbursement. The estimated liability incorporates the volume of loans sold in previous
periods, default expectations, historical investor repurchase demand and actual loss severity. Provisions to the mortgage
repurchase reserve reduce gains on sales of loans.
Premises and Equipment. Land is carried at cost. Premises and equipment are stated at cost less accumulated
depreciation. Major replacements and betterments are capitalized while maintenance and repairs are charged to expense when
incurred. Gains or losses on dispositions are reflected in earnings as incurred.
75
Bank Owned Life Insurance. The Company has purchased life insurance policies on certain key executives. Bank
owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date,
which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.
Goodwill and Intangible Assets. Goodwill is not amortized; however, it is tested for impairment at each calendar
year end or more frequently when events or circumstances dictate. The impairment test compares the carrying value of
goodwill to an implied fair value of the goodwill, which is based on a review of the Company’s market capitalization adjusted
for appropriate control premiums as well as an analysis of valuation multiples of recent, comparable acquisitions. The
Company considers the result from each of these valuation methods in determining the implied fair value of its goodwill. A
goodwill impairment would be recorded for the amount that the carrying value exceeds the implied fair value.
Intangible assets include core deposit intangibles and lease intangibles. Core deposit intangible assets are amortized
over their estimated useful life of ten years on an accelerated basis. Lease intangible assets are amortized over the life of the
lease. When facts and circumstances indicate potential impairment, the Company will evaluate the recoverability of the
intangible asset’s carrying value, using estimates of undiscounted future cash flows over the remaining asset life. Any
impairment loss is measured by the excess of carrying value over fair value.
Income Taxes. The objective of accounting for income taxes is to recognize the amount of taxes payable or
refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been
recognized in an entity’s financial statements or tax returns. Judgment is required in assessing the future tax consequences of
events that have been recognized in financial statements or tax returns. Uncertain income tax positions will be recognized
only if it is more likely than not that they will be sustained upon examination by taxing authorities, based upon their technical
merits. Once that standard is met, the amount recorded will be the largest amount of benefit that has a greater than 50 percent
likelihood of being realized upon ultimate settlement. The Company recognizes interest and penalties related to unrecognized
tax benefits as a component of income tax expense in the consolidated statements of earnings. The Company assesses deferred
tax assets to determine if the items are more likely than not to be realized, and a valuation allowance is established for any
amounts that are not more likely than not to be realized.
Loan Commitments and Related Financial Instruments. Financial instruments include off-balance sheet credit
instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs.
The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay.
Such financial instruments are recorded when they are funded.
Loss Contingencies. Loss contingencies, including claims and legal actions arising in the ordinary course of
business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably
estimated. Management does not believe there now are such matters that will have a material effect on the financial
statements.
Comprehensive Income. Comprehensive income consists of net income and other comprehensive income. Other
comprehensive income includes unrealized gains and losses on securities available for sale, net of tax which are also
recognized as separate components of equity.
Real Estate Owned. Assets acquired through, or in lieu of, foreclosure are initially recorded at fair value less costs
to sell when acquired, establishing a new cost basis. Physical possession of residential real estate property collateralizing a
consumer mortgage loan occurs when legal title is obtained upon completion of foreclosure or when the borrower conveys
all interest in the property to satisfy the loan through completion of a deed in lieu of foreclosure or through a similar legal
agreement. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. If fair value
declines subsequent to foreclosure, a valuation allowance is recorded through expense. Operating costs after acquisition are
expensed.
Stock-Based Compensation. The Company uses the Black-Scholes option pricing model to estimate the grant date
fair value of its stock options, which is recognized as compensation expense over the option vesting period, on a straight-line
basis, which is typically four years. The fair value of restricted common stock is equal to the Company’s stock price on the
grant date, which is recognized as compensation expense on a straight-line basis over the vesting period. The Company
accounts for forfeitures as they occur.
76
Earnings per Share. Basic earnings per share represent net earnings divided by the weighted average number of
common shares outstanding during the year. Diluted earnings per share reflect additional common shares that would have
been outstanding if dilutive potential common shares had been issued. The diluted earnings per share computation for 2020,
2019 and 2018 excluded 94,632, 105,041 and 34,028, respectively, of unexercised stock options because their inclusion
would have been anti-dilutive.
The shares used in the calculation of basic and diluted earnings per share, which have been adjusted to give effect
to the 5% common stock dividends paid by the Company in December 2020, 2019 and 2018, are shown below:
(Dollars in thousands, except per share amounts)
Years ended December 31,
2019
2018
2020
Net earnings available to common shareholders
$
19,493
$
10,662
$
10,426
Weighted average common shares outstanding - basic
Assumed exercise of stock options
Weighted average common shares outstanding - diluted
Earnings per share:
Basic
Diluted
4,749,830
4,361
4,754,191
4,822,288
14,533
4,836,821
4,796,615
16,704
4,813,319
$
$
4.10
4.10
$
$
2.21
2.20
$
$
2.17
2.17
Derivative Financial Instruments. Commitments to fund mortgage loans (interest rate locks) to be sold into the
secondary market and forward commitments for the future delivery of these mortgage loans are accounted for as free standing
derivatives. The fair value of the interest rate lock is recorded at the time the commitment to fund the mortgage loan is
executed and is adjusted for the expected exercise of the commitment before the loan is funded. In order to hedge the change
in interest rates resulting from its commitments to fund the loans, the Company enters into forward commitments for the
future delivery of mortgage loans when interest rate locks are entered into. Fair values of these mortgage derivatives are
estimated based on changes in mortgage interest rates from the date the interest on the loan is locked. Changes in the fair
values of these derivatives are included in net gains on sales of loans.
Dividend Restriction. Banking regulations require maintaining certain capital levels and may limit the dividends paid
by the bank to the holding company or by the holding company to shareholders.
Fair Value of Financial Instruments. Fair values of financial instruments are estimated using relevant market
information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and
matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence
of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect these
estimates.
Reclassifications. Some items in the prior year financial statements were reclassified to the current presentation.
Reclassifications had no effect on prior year net income or stockholders’ equity.
(2) Impact of Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), commonly referred
to as “CECL.” The provisions of the update eliminate the probable initial recognition threshold under current GAAP which
requires reserves to be based on an incurred loss methodology. Under CECL, reserves required for financial assets measured
at amortized cost will reflect an organization’s estimate of all expected credit losses over the expected term of the financial
asset and thereby require the use of reasonable and supportable forecasts to estimate future credit losses. Because CECL
encompasses all financial assets carried at amortized cost, the requirement that reserves be established based on an
organization’s reasonable and supportable estimate of expected credit losses extends to held to maturity debt securities. Under
the provisions of the update, credit losses recognized on available for sale debt securities will be presented as an allowance
as opposed to a write-down. In addition, CECL will modify the accounting for purchased loans. Under prior GAAP, a
purchased loan’s contractual balance was adjusted to fair value through a credit discount, and no reserve was recorded on the
purchased loan upon acquisition. Since under CECL reserves will be established for purchased loans at the time of acquisition,
the accounting for purchased loans is made more comparable to the accounting for originated loans. Finally, increased
disclosure requirements under CECL oblige organizations to present the currently required credit quality disclosures
77
disaggregated by the year of origination or vintage. FASB expects that the evaluation of underwriting standards and credit
quality trends by financial statement users will be enhanced with the additional vintage disclosures. In October 2019, the
FASB approved a change in the effective dates for CECL which delayed the effective date to fiscal years beginning after
December 15, 2022 for smaller reporting companies. Because the Company is a smaller reporting company, the proposed
delay is applicable to the Company, and the Company plans to delay the implementation of CECL until January 1, 2023.
Management has initiated an implementation committee that has implemented a process to collect the data and is utilizing a
vendor solution for the new standard. Initial calculations estimate the effect will be an increase to the allowance for loan
losses upon adoption. However, the size of the overall increase is uncertain at this time. Management will utilize the delay
to continue to refine and back test the CECL calculation. The internal controls over financial reporting specifically related to
CECL are in the design stage and are currently being evaluated.
In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the
Test for Goodwill Impairment. The amendments in this update simplify the subsequent measurement of goodwill by
eliminating Step 2 from the goodwill impairment test. The amendments require an entity to perform its annual, or interim,
goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognizing an
impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the
total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any
tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if
applicable. The amendments also eliminate the requirement for any reporting unit with a zero or negative carrying amount to
perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. The
amendments in this ASU are effective for annual or interim goodwill impairment tests in fiscal years beginning after
December 15, 2019. In October 2019, the FASB approved a change in the effective dates for ASU 2017-04 which delayed
the effective date to fiscal years beginning after December 15, 2022 for smaller reporting companies. Because the Company
is a smaller reporting company, the proposed delay is applicable to the Company, and the Company plans to delay the
implementation of ASU 2017-04 until January 1, 2023. Early adoption of the amendments of this ASU is permitted. The
adoption of ASU 2017-04 is not expected to have a material effect on the Company’s operating results or financial condition.
In May 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of
Reference Rate Reform on Financial Reporting. Reference rate reform relates to the effects undertaken to eliminate certain
reference rates such as the London Interbank Offered Rate (“LIBOR”) and introduce new reference rates that may be based
on larger or more liquid observations and transactions. ASU 2020-04 provides optional expedients and exceptions for
applying GAAP to contracts, hedging relationships and other contracts. Generally, ASU 2020-04 would allow entities to
consider contract modifications due to reference rate reform to be a continuation of an existing contract; thus, the Company
would not have to determine if the modification is considered insignificant. The Company is in the process of reviewing loan
documentation, along with the transition procedures it will need in order to implement reference rate reform. While the
Company has yet to adopt ASU 2020-04, the standard was effective upon issuance and terminates December 31, 2022 such
that changes made to contracts beginning on or after January 1, 2023 would not apply. The adoption of ASU 2020-04 is not
expected to have a material effect on the Company’s operating results or financial condition.
78
(3) Investment Securities
A summary of investment securities available-for-sale is as follows:
(Dollars in thousands)
As of December 31, 2020
Gross
Gross
Amortized
unrealized
unrealized
cost
gains
losses
Estimated
fair value
U. S. treasury securities
$
2,000
$
37
$
-
$
2,037
U. S. federal agency obligations
Municipal obligations, tax exempt
Municipal obligations, taxable
Agency mortgage-backed securities
Certificates of deposit
Total
18,804
136,321
46,643
75,530
5,460
138
6,367
2,892
3,108
-
(18)
(12)
-
-
-
18,924
142,676
49,535
78,638
5,460
$
284,758
$
12,542
$
(30)
$
297,270
As of December 31, 2019
Gross
Gross
Amortized
unrealized
unrealized
cost
gains
losses
Estimated
fair value
U. S. treasury securities
$
2,300
$
16
$
-
$
2,316
U. S. federal agency obligations
Municipal obligations, tax exempt
Municipal obligations, taxable
Agency mortgage-backed securities
Certificates of deposit
Total
4,015
142,391
45,541
159,908
1,904
91
3,513
1,293
2,353
-
-
(42)
(55)
(230)
-
4,106
145,862
46,779
162,031
1,904
$
356,059
$
7,266
$
(327)
$
362,998
The tables above show that some of the securities in the available-for-sale investment portfolio had unrealized losses,
or were temporarily impaired, as of December 31, 2020 and 2019. This temporary impairment represents the estimated
amount of loss that would be realized if the securities were sold on the valuation date. Securities which were temporarily
impaired are shown below, along with the length of time in a continuous unrealized loss position.
(Dollars in thousands)
U.S. federal agency obligations
Municipal obligations, tax exempt
Total
Municipal obligations, tax exempt
Municipal obligations, taxable
Agency mortgage-backed securities
Total
No. of
securities
4
12
16
No. of
securities
23
4
21
48
Less than 12 months
Fair
value
$
Unrealized
losses
$
$
$
As of December 31, 2020
12 months or longer
Fair
value
$
-
Unrealized
losses
$
-
-
$
-
-
$
-
Total
Fair
value
$
Unrealized
losses
$
(18)
(12)
(30)
11,772
4,191
15,963
$
$
(18)
(12)
(30)
Less than 12 months
Fair
value
$
Unrealized
losses
$
As of December 31, 2019
12 months or longer
Fair
value
$
Unrealized
losses
$
(26)
-
(187)
(213)
$
3,473
-
17,137
20,610
(16)
(55)
(43)
(114)
Total
Fair
value
$
Unrealized
losses
$
9,149
2,563
32,872
44,584
(42)
(55)
(230)
(327)
$
$
$
$
$
11,772
4,191
15,963
5,676
2,563
15,735
23,974
79
The Company’s U.S. federal agency portfolio consists of securities issued by the government-sponsored agencies
of Federal Home Loan Mortgage Corporation (“FHLMC”), Federal National Mortgage Association (“FNMA”) and the
FHLB. The receipt of principal and interest on U.S. federal agency obligations is guaranteed by the respective government-
sponsored agency guarantor, such that the Company believes that its U.S. federal agency obligations do not expose the
Company to credit-related losses. Based on these factors, along with the Company’s intent to not sell the securities and its
belief that it was more likely than not that the Company will not be required to sell the securities before recovery of their cost
basis, the Company believed that the U.S. federal agency obligations identified in the tables above were temporarily impaired.
The Company’s portfolio of municipal obligations consists of both tax-exempt and taxable general obligations
securities issued by various municipalities. As of December 31, 2020, the Company did not intend to sell and it is more likely
than not that the Company will not be required to sell its municipal obligations in an unrealized loss position until the recovery
of its cost. Due to the issuers’ continued satisfaction of the securities’ obligations in accordance with their contractual terms
and the expectation that they will continue to do so, the evaluation of the fundamentals of the issuers’ financial condition and
other objective evidence, the Company believed that the municipal obligations identified in the tables above were temporarily
impaired.
The table below includes scheduled principal payments and estimated prepayments, based on observable market
inputs, for agency mortgage-backed securities. Actual maturities will differ from contractual maturities because borrowers
have the right to prepay obligations with or without prepayment penalties. The amortized cost and fair value of investment
securities at December 31, 2020 are as follows:
(Dollars in thousands)
Due in less than one year
Due after one year but within five years
Due after five years but within ten years
Due after ten years
Total
$
Amortized
cost
12,481
148,182
61,972
62,123
284,758
$
$
Estimated
fair value
12,558
153,152
65,783
65,777
297,270
$
Sales proceeds and gross realized gains and losses on sales of available-for-sale securities are as follows:
(Dollars in thousands)
Sales proceeds
Realized gains
Realized losses
Net realized gains
Years ended December 31,
2019
15,318
2020
61,163
$
$
2018
21,126
$
$
$
2,449
(1)
2,448
$
2
(179)
(177)
$
$
$
84
(64)
20
Securities with carrying values of $282.2 million and $240.0 million were pledged to secure public funds on deposit,
repurchase agreements and as collateral for borrowings at December 31, 2020 and 2019, respectively. Except for U.S. federal
agency obligations, no investment in a single issuer exceeded 10% of consolidated stockholders’ equity.
80
(4) Bank Stocks
Bank stocks primarily consist of restricted investments in FHLB and Federal Reserve Bank (“FRB”) stock. The
carrying value of the FHLB stock at December 31, 2020 was $2.4 million compared to $1.1 million at December 31, 2019.
The carrying value of the FRB stock was $1.9 million at both December 31, 2020 and 2019. These securities are not readily
marketable and are required for regulatory purposes and borrowing availability. Since there are no available market values,
these securities are carried at cost. Redemption of these investments at par value is at the option of the FHLB or FRB, as
applicable. Also included in Bank stocks are other miscellaneous investments in the common stock of various correspondent
banks which are held for borrowing purposes and totaled $111,000 at December 31, 2020 and 2019.
(5) Loans and Allowance for Loan Losses
Loans consisted of the following:
(Dollars in thousands)
As of December 31,
2020
2019
One-to-four family residential real estate loans
Construction and land loans
Commercial real estate loans
Commercial loans
Paycheck protection program loans
Agriculture loans
Municipal loans
Consumer loans
Total gross loans
Net deferred loan (fees) costs and loans in process
Allowance for loan losses
Loans, net
$
$
157,984
26,106
172,307
134,047
100,084
96,532
2,332
24,122
713,514
(1,957)
(8,775)
702,782
146,505
22,459
133,501
109,612
-
98,558
2,656
25,101
538,392
255
(6,467)
532,180
$
$
The following tables provide information on the Company’s allowance for loan losses by loan class and allowance
methodology:
(Dollars in thousands)
Allowance for loan losses:
Balance at January 1, 2020
Charge-offs
Recoveries
Provision for loan losses
Balance at December 31, 2020
Allowance for loan losses:
Individually evaluated for loss
Collectively evaluated for loss
Total
Loan balances:
Individually evaluated for loss
Collectively evaluated for loss
Total
Year ended December 31, 2020
One-to-four
family
residential
real estate
loans
Construction
and land loans
Commercial
real estate
loans
Commercial
loans
Paycheck
protection
loans
Agriculture
loans
Municipal
loans
Consumer
loans
Total
$
$
$
$
501
(251)
-
609
859
271
(191)
-
101
181
$
$
$
$
1,815
(292)
3
862
2,388
-
$
-
-
-
$
-
$
2,347
(3)
-
346
2,690
$
$
7
-
6
(7)
$
6
$
$
140
(248)
102
175
169
6,467
(1,116)
124
3,300
8,775
$
$
-
$
-
$
-
-
$
100,084
100,084
$
$
67
2,623
2,690
$
$
-
6
$
6
-
$
169
169
$
$
266
8,509
8,775
$
$
614
95,918
96,532
$
$
36
2,296
2,332
$
$
3
24,119
24,122
$
$
12,462
701,052
713,514
$
1,386
(131)
13
1,214
2,482
177
2,305
2,482
-
$
859
859
$
-
$
181
181
$
$
$
$
$
22
2,366
2,388
$
914
157,070
157,984
$
$
$
$
1,137
24,969
26,106
8,119
164,188
172,307
$
$
$
1,639
132,408
134,047
81
(Dollars in thousands)
Year ended December 31, 2019
One-to-four
family
residential
real estate
Construction
and land
Commercial
real estate
Commercial
loans
Agriculture
loans
Municipal
loans
Consumer
loans
Total
Allowance for loan losses:
Balance at January 1, 2019
Charge-offs
Recoveries
Provision for loan losses
Balance at December 31, 2019
Allowance for loan losses:
Individually evaluated for loss
Collectively evaluated for loss
Total
Loan balances:
Individually evaluated for loss
Collectively evaluated for loss
Total
$
$
$
$
$
$
$
2,238
-
-
109
2,347
$
7
-
6
(6)
$
7
166
(285)
67
192
140
5,765
(825)
127
1,400
6,467
$
$
$
$
$
$
$
449
(56)
1
107
501
129
372
501
168
(31)
-
134
271
191
80
271
1,686
-
-
(300)
1,386
103
1,283
1,386
1,051
(453)
53
1,164
1,815
204
1,611
1,815
$
$
$
$
$
$
$
$
$
$
106
2,241
2,347
$
-
7
$
7
$
-
140
140
$
$
733
5,734
6,467
$
1,256
145,249
146,505
$
$
1,479
20,980
22,459
$
3,461
130,040
133,501
$
$
1,298
108,314
109,612
$
$
1,124
97,434
98,558
$
$
58
2,598
2,656
$
$
4
25,097
25,101
$
$
8,680
529,712
538,392
$
$
(Dollars in thousands)
Year ended December 31, 2018
One-to-
four family
residential
real estate
Construction
and land
Commercial
real estate
Commercial
loans
Agriculture
loans
Municipal
loans
Consumer
loans
Total
Allowance for loan losses:
Balance at January 1, 2018
Charge-offs
Recoveries
Provision for loan losses
Balance at December 31, 2018
Allowance for loan losses:
Individually evaluated for loss
Collectively evaluated for loss
Total
Loan balances:
Individually evaluated for loss
Collectively evaluated for loss
Total
$
$
542
(32)
4
(65)
449
181
$
-
-
(13)
168
$
$
1,540
-
1
145
1,686
$
$
$
1,226
(950)
22
753
1,051
$
1,812
-
1
425
2,238
$
$
8
-
2
(3)
$
7
$
$
150
(178)
36
158
166
5,459
(1,160)
66
1,400
5,765
$
$
$
$
$
$
$
103
65
168
67
1,619
1,686
27
1,024
1,051
13
2,225
2,238
$
-
7
$
7
$
-
166
166
$
$
310
5,455
5,765
$
$
$
$
$
100
349
449
$
623
136,272
136,895
$
$
$
$
$
$
1,808
18,275
20,083
3,912
135,055
138,967
1,528
72,761
74,289
717
95,915
96,632
58
2,895
2,953
$
45
25,383
25,428
$
$
8,691
486,556
495,247
$
$
$
$
$
$
82
The Company’s impaired loans increased $3.8 million from $8.7 million at December 31, 2019 to $12.5 million at
December 31, 2020. The difference between the unpaid contractual principal and the impaired loan balance is a result of
charge-offs recorded against impaired loans. The difference in the Company’s non-accrual loan balances and impaired loan
balances at December 31, 2020 and December 31, 2019 was related to TDRs that are current and accruing interest, but still
classified as impaired. Interest income recognized on a cash basis for impaired loans was immaterial during the years 2020,
2019 and 2018. The following tables present information on impaired loans:
(Dollars in thousands)
As of December 31, 2020
Unpaid
contractual
principal
Impaired
loan balance
Impaired
loans
without an
allowance
Impaired
loans with
an
allowance
Related
allowance
recorded
Year-to-
date average
loan balance
Year-to-
date interest
income
recognized
One-to-four family residential real estate loans
Construction and land loans
Commercial real estate loans
Commercial loans
Agriculture loans
Municipal loans
Consumer loans
Total impaired loans
One-to-four family residential real estate loans
Construction and land loans
Commercial real estate loans
Commercial loans
Agriculture loans
Municipal loans
Consumer loans
Total impaired loans
One-to-four family residential real estate loans
Construction and land loans
Commercial real estate loans
Commercial loans
Agriculture loans
Municipal loans
Consumer loans
Total impaired loans
$
$
$
914
2,872
8,119
1,990
829
36
3
14,763
914
1,137
8,119
1,639
614
36
3
12,462
914
1,137
4,302
1,543
538
36
3
8,473
-
$
-
3,817
96
76
-
-
3,989
$
-
$
-
177
22
67
-
-
$
266
$
925
1,211
8,152
1,984
618
54
4
12,948
3
$
26
8
43
67
1
-
$
148
$
$
$
$
As of December 31, 2019
Unpaid
contractual
principal
Impaired
loan balance
Impaired
loans
without an
allowance
Impaired
loans with
an
allowance
Related
allowance
recorded
Year-to-
date average
loan balance
Year-to-
date interest
income
recognized
$
$
$
$
$
369
191
203
882
511
-
-
2,156
$
129
191
103
204
106
-
-
$
733
1,291
1,631
3,489
1,464
1,166
58
5
9,104
$
10
36
478
11
48
1
-
$
584
$
$
$
$
$
As of December 31, 2018
Unpaid
contractual
principal
Impaired
loan balance
Impaired
loans
without an
allowance
Impaired
loans with
an
allowance
Related
allowance
recorded
Year-to-
date average
loan balance
Year-to-
date interest
income
recognized
$
$
$
$
$
210
425
1,792
82
188
-
-
2,697
$
100
103
67
27
13
-
-
$
310
640
2,689
3,928
1,537
844
58
49
9,745
$
10
53
487
-
52
1
-
$
603
$
$
$
$
$
887
1,288
3,258
416
613
58
4
6,524
413
1,383
2,120
1,446
529
58
45
5,994
1,297
3,214
3,461
1,427
1,339
58
4
10,800
623
3,543
3,912
1,528
932
58
45
10,641
1,256
1,479
3,461
1,298
1,124
58
4
8,680
623
1,808
3,912
1,528
717
58
45
8,691
83
The Company’s key credit quality indicator is a loan’s performance status, defined as accruing or non-accruing.
Performing loans are considered to have a lower risk of loss. Non-accrual loans are those which the Company believes have
a higher risk of loss. The accrual of interest on non-performing loans is discontinued at the time the loan is ninety days
delinquent, unless the credit is well secured and in process of collection. Loans are placed on non-accrual or are charged off
at an earlier date if collection of principal or interest is considered doubtful. There were no loans ninety days delinquent and
accruing interest at December 31, 2020 or December 31, 2019. The following tables present information on the Company’s
past due and non-accrual loans by loan class:
(Dollars in thousands)
As of December 31, 2020
30-59 days
delinquent
and
accruing
60-89 days
delinquent
and
accruing
90 days or
more
delinquent
and accruing
One-to-four family residential real estate loans
Construction and land loans
Commercial real estate loans
Commercial loans
Paycheck protection program loans
Agriculture loans
Municipal loans
Consumer loans
Total
262
$
-
-
832
-
206
-
15
1,315
$
185
$
-
-
-
-
29
-
1
215
$
-
$
-
-
-
-
-
-
-
$
-
Total past
due loans
accruing
447
$
-
-
832
-
235
-
16
1,530
$
Total past
due and non-
accrual
loans
Non-accrual
loans
Total loans
not past due
$
749
694
8,119
874
-
76
-
3
10,515
$
$
$
1,196
694
8,119
1,706
-
311
-
19
12,045
156,788
25,412
164,188
132,341
100,084
96,221
2,332
24,103
701,469
$
$
Percent of gross loans
0.19%
0.03%
0.00%
0.22%
1.47%
1.69%
98.31%
As of December 31, 2019
30-59 days
delinquent
and
accruing
60-89 days
delinquent
and
accruing
90 days or
more
delinquent
and accruing
One-to-four family residential real estate loans
Construction and land loans
Commercial real estate loans
Commercial loans
Agriculture loans
Municipal loans
Consumer loans
Total
79
$
-
1,137
510
316
-
27
2,069
$
593
$
-
707
68
-
-
-
1,368
$
-
$
-
-
-
-
-
-
$
-
Total past
due loans
accruing
672
$
-
1,844
578
316
-
27
3,437
$
Total past
due and non-
accrual
loans
Non-accrual
loans
Total loans
not past due
$
1,088
898
1,440
1,270
846
-
4
5,546
$
$
$
1,760
898
3,284
1,848
1,162
-
31
8,983
144,745
21,561
130,217
107,764
97,396
2,656
25,070
529,409
$
$
Percent of gross loans
0.39%
0.25%
0.00%
0.64%
1.03%
1.67%
98.33%
Under the original terms of the Company’s non-accrual loans, interest earned on such loans for the years 2020, 2019
and 2018, would have increased interest income by $380,000, $230,000 and $254,000, respectively. No interest income
related to non-accrual loans was included in interest income for the years ended December 31, 2020, 2019 and 2018.
84
The Company also categorizes loans into risk categories based on relevant information about the ability of the
borrowers to service their debt such as current financial information, historical payment experience, credit documentation,
public information and current economic trends, among other factors. The Company analyzes loans individually by
classifying the loans as to credit risk. This analysis is performed on a quarterly basis. Non-classified loans generally include
those loans that are expected to be repaid in accordance with contractual loan terms. Classified loans are those that are
assigned a special mention, substandard or doubtful risk rating using the following definitions:
Special Mention: Loans are currently protected by the current net worth and paying capacity of the obligor or of the
collateral pledged but potentially weak. These loans constitute an undue and unwarranted credit risk, but not to the
point of justifying a classification of substandard. The credit risk may be relatively minor, yet constitutes an
unwarranted risk in light of the circumstances surrounding a specific asset.
Substandard: Loans are inadequately protected by the current net worth and paying capacity of the obligor or of the
collateral pledged. Loans have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.
Loans are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not
corrected.
Doubtful: Loans classified doubtful have all the weaknesses inherent in those classified as substandard, with the
added characteristic that weaknesses make collection or liquidation in full, on the basis of currently existing facts,
conditions and values, highly questionable and improbable.
The following table provides information on the Company’s risk categories by loan class:
(Dollars in thousands)
One-to-four family residential real estate loans
Construction and land loans
Commercial real estate loans
Commercial loans
Paycheck protection program loans
Agriculture loans
Municipal loans
Consumer loans
Total
As of December 31, 2020
Classified
Nonclassified
As of December 31, 2019
Classified
Nonclassified
$
$
154,985
25,412
161,661
132,023
100,084
87,662
2,332
24,119
688,278
$
2,999
694
10,646
2,024
-
8,870
-
3
25,236
$
145,311
21,560
130,714
101,678
-
93,259
2,656
25,097
520,275
$
1,194
899
2,787
7,934
-
5,299
-
4
18,117
$
$
$
At December 31, 2020, the Company had nine loan relationships consisting of 21 outstanding loans totaling $3.9
million that were classified as TDRs compared to nine relationships consisting of thirteen outstanding loans totaling $3.6
million that were classified as TDRs at December 31, 2019.
During 2020, the Company modified the payment terms on an agriculture loan totaling $156,000 and classified the
restructuring as a TDR. The loans related to a $1.6 million loan relationship, consisting of two one-to-our family loans, one
construction and land loan, two commercial real estate loans and one commercial loan, were classified as TDRs during 2020
after negotiating restructuring agreements with the borrowers. The restructuring included a charge-off of $50,000. The loans
related to one commercial loan relationship, with five loans totaling $742,000, were classified as TDRs during 2020, after
the payments were modified to interest only. All of the loans classified as TDRs were experiencing financial difficulties prior
to the COVID-19 pandemic. An agriculture loan, a commercial real estate loan and a one-to-four family residential real estate
loan previously classified as TDRs in 2017, 2015 and 2016, respectively, paid off during 2020.
The Company did not classify any loans as TDRs during 2019. A commercial real estate loan previously classified
as a TDR in 2014 paid off during 2019.
During 2018, the Company classified an agriculture loan totaling $64,000 as a TDR after originating a loan to an
existing loan relationship that was classified as a TDR in 2016. As part of the restructuring the borrower paid off three loans
previously classified as TDRs. Since the agriculture loan relationship was adequately secured, no impairments were recorded
85
against the principal as of December 31, 2020. The Company also classified a $36,000 commercial loan as a TDR after
extending the maturity of the loan during 2018. The commercial loan had a $8,000 impairment recorded against the principal
balance as of December 31, 2020. An agriculture loan relationship consisting of two loans that were originally classified as
TDRs during 2015 and a municipal loan that was classified as a TDR in 2010 were both paid off in 2018.
Subsequently, the Company evaluates each TDR individually and returns the loan to accrual status when a payment
history is established after the restructuring and future payments are reasonably assured. There were no loans modified as
TDRs for which there was a payment default within 12 months of modification as of December 31, 2020, 2019 and 2018. At
December 31, 2020, there was a commitment of $10,000 to lend additional funds on one construction and land loan classified
as a TDR. The Company did not record any charge-offs against loans classified as TDRs during 2020 and recorded a credit
provision for loan loss of $1,000 against TDRs during 2020. The Company did not record any charge-offs against loans
classified as TDRs during 2019 and recorded a credit provision for loan loss of $1,000 against TDRs during 2019. The
Company did not record any charge-offs against loans classified as TDRs during 2018 and recorded a credit provision for
loan loss of $117,000 against TDRs during 2018. The Company allocated $8,000 and $9,000 of the allowance for loan losses
recorded against loans classified as TDRs at December 31, 2020 and 2019, respectively.
The following table presents information on loans that were classified as TDRs:
(Dollars in thousands)
As of December 31, 2020
Non-accrual
balance
Accruing
balance
Number of
loans
As of December 31, 2019
Non-accrual
balance
Accruing
balance
Number of
loans
One-to-four family residential real estate loans
Construction and land loans
Commercial real estate loans
Commercial loans
Agriculture
Municipal loans
Total troubled debt restructurings
2
5
2
7
4
1
21
$
-
693
1,227
33
-
-
1,953
$
165
443
-
765
538
36
1,947
2
4
1
1
4
1
13
$
-
510
-
-
-
-
$
510
168
581
2,021
28
278
58
3,134
$
$
$
$
As of December 31, 2020, the Company had 6 loan modifications on outstanding loan balances of $7.2 million in
connection with the COVID-19 pandemic that had not yet returned to contractual terms that, per regulatory guidance, are not
deemed to be TDRs. These modifications consisted of payment deferrals that were applied to either the full loan payment or
just the principal component. One commercial real estate loan totaling $3.7 million that was modified was also on non-
accrual status as of December 31, 2020. Consistent with the CARES Act and Joint Interagency Regulatory Guidance, the
Company also entered into short-term forbearance plans and short-term repayment plans on three one-to-four family
residential mortgage loans totaling $366,000 as of December 31, 2020, which were not classified as TDRs.
The Company had loans and unfunded commitments to directors and officers, and to affiliated parties, at December
31, 2020 and 2019. A summary of such loans is as follows:
(Dollars in thousands)
Balance at December 31, 2019
New loans
Repayments
Balance at December 31, 2020
$
14,203
12,872
(10,981)
16,094
$
(6) Loan Commitments
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet
customers’ financing needs. These financial instruments consist principally of commitments to extend credit. The Company
uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
The Company’s exposure to credit loss in the event of nonperformance by the other party is represented by the contractual
amount of those instruments. In the normal course of business, there are various commitments and contingent liabilities, such
86
as commitments to extend credit, letters of credit, and lines of credit, the balance of which are not recorded in the
accompanying consolidated financial statements. The Company generally requires collateral or other security on unfunded
loan commitments and irrevocable letters of credit. Unfunded commitments to extend credit, excluding standby letters of
credit, aggregated to $145.1 million and $125.4 million at December 31, 2020 and 2019, respectively, and are generally at
variable interest rates. Standby letters of credit totaled $2.2 million at December 31, 2020 and $1.9 million at December 31,
2019.
(7) Goodwill and Intangible Assets
The Company performed its annual step one impairment test as of December 31, 2020. The fair value of the
Company’s single reporting unit was compared to the carrying value of the single reporting unit at the measurement date to
determine if any impairment existed. Based on the results of the December 31, 2020 step one impairment test, the Company
concluded its goodwill was not impaired.
A summary of the other intangible assets that continue to be subject to amortization is as follows:
(Dollars in thousands)
Gross carrying
amount
As of December 31, 2020
Accumulated
amortization
Core deposit intangible assets
Lease intangible asset
Total other intangible assets
$ 2,018 $ (1,838)
350 (324)
$ 2,368 $ (2,162)
Gross carrying
amount
As of December 31, 2019
Accumulated
amortization
Core deposit intangible assets
Lease intangible asset
Total other intangible assets
$ 2,018 $ (1,707)
350 (278)
$ 2,368 $ (1,985)
Net carrying
amount
$ 180
26
$ 206
Net carrying
amount
$ 311
72
$ 383
The following sets forth estimated amortization expense for core deposit and lease intangible assets for the years
ending December 31:
(Dollars in thousands)
2021
2022
2023
Total
Amortization
expense
122
58
26
206
$
(8) Mortgage Loan Servicing
Mortgage loans serviced for others are not reported as assets. The following table provides information on the
principal balances of mortgage loans serviced for others:
(Dollars in thousands)
FHLMC
FHLB
As of December 31,
2019
2020
$ 639,875 $ 509,101
28,157 40,462
Custodial escrow balances maintained in connection with serviced loans were $5.8 million and $4.7 million at
December 31, 2020 and 2019, respectively. Gross service fee income related to such loans was $1.5 million, $1.4 million and
87
$1.4 million for the years ended December 31, 2020, 2019 and 2018, respectively, and is included in fees and service charges
in the consolidated statements of earnings.
Activity for mortgage servicing rights and the related valuation allowance follows:
(Dollars in thousands)
Mortgage servicing rights:
Balance at beginning of year
Additions
Amortization
Balance at end of year
As of December 31,
2020
2019
$ 2,446 $ 2,495
2,705 943
(1,425) (992)
$ 3,726 $ 2,446
At December 31, 2020 and 2019, there was no valuation allowance related to mortgage servicing rights.
The fair value of mortgage servicing rights was $4.4 million and $5.2 million at December 31, 2020 and 2019,
respectively. Fair value at December 31, 2020 was determined using discount rates ranging from 8.78% to 12.00%,
prepayment speeds ranging from 7.10% to 29.61%, depending on the stratification of the specific mortgage servicing right,
and a weighted average default rate of 1.36%. Fair value at December 31, 2019 was determined using discount rates ranging
from 9.00% to 11.00%, prepayment speeds ranging from 6.00% to 23.21%, depending on the stratification of the specific
mortgage servicing right, and a weighted average default rate of 1.40%.
The Company had a mortgage repurchase reserve of $235,000 at December 31, 2020 and December 31, 2019, which
represents the Company’s best estimate of probable losses that the Company will incur related to the repurchase of one-to-
four family residential real estate loans previously sold or to reimburse investors for credit losses incurred on loans previously
sold where a breach of the contractual representations and warranties occurred. As of December 31, 2020, the Company had
no outstanding mortgage repurchase requests.
(9) Premises and Equipment
Premises and equipment consisted of the following:
(Dollars in thousands)
Land
Office buildings and improvements
Furniture and equipment
Automobiles
Total premises and equipment
Accumulated depreciation
Total premises and equipment, net
Estimated
useful lives
Indefinite
10 - 50 years
3 - 15 years
2 - 5 years
As of December 31,
2020
2019
$
$
6,279
21,058
8,336
567
36,240
(15,747)
20,493
6,279
21,047
8,227
651
36,204
(15,071)
21,133
$
$
Depreciation expense totaled $987,000 for the year ended December 31, 2020, and $1.0 million during the years
ended 2019 and 2018 and was included in occupancy and equipment expense on the consolidated statements of earnings.
88
(10) Deposits
The following table presents the maturities of time deposits at December 31, 2020:
(Dollars in thousands)
Year
2021
2022
2023
2024
2025
Thereafter
Total
Amount
$ 112,336
13,784
3,856
1,933
1,838
3
$ 133,750
The aggregate amount of time deposits in denominations of $250,000 or more at December 31, 2020 and 2019 was
$26.3 million and $41.3 million, respectively. As of December 31, 2020, the Company had no brokered deposits as compared
to $32.8 million brokered deposits at December 31, 2019.
The components of interest expense associated with deposits are as follows:
(Dollars in thousands)
Time deposits
Money market and checking
Savings
Total
Years ended December 31,
2019
$ 2,751
2,555
35
$ 5,341
2018
$ 1,195
1,833
28
$ 3,056
2020
$ 1,166
899
40
$ 2,105
(11) Federal Home Loan Bank Borrowings
The Bank has a line of credit, renewable annually each September, with the FHLB under which there were no
borrowings at December 31, 2020 compared to $3.0 million of borrowings as of December 31, 2019. Interest on any
outstanding balance on the line of credit accrues at the federal funds rate plus 0.15% (0.35% at December 31, 2020). The
Company had issued letters of credit through the FHLB totaling $66.0 million and $30.0 million at December 31 2020 and
2019, respectively to secure municipal deposits. The Company did not have any term advances from FHLB at December 31,
2020 and December 31, 2019.
Although no loans are specifically pledged, the FHLB requires the Bank to maintain eligible collateral (qualifying
loans and investment securities) that has a lending value at least equal to its required collateral. At December 31, 2020 and
2019, there was a blanket pledge of loans and securities totaling $175.7 million and $155.2 million, respectively. At December
31, 2020 and 2019, the Bank’s total borrowing capacity with the FHLB was approximately $123.8 million and $113.1 million,
respectively. At December 31, 2020 and 2019, the Bank’s available borrowing capacity was $56.4 million and $78.8 million,
respectively. The difference between the Bank’s total borrowing capacity and available borrowing capacity is related to the
amount of borrowings outstanding and letters of credit issued to collateralized public fund deposits. The available borrowing
capacity with the FHLB is collateral based, and the Bank’s ability to borrow is subject to maintaining collateral that meets
the eligibility requirements. The borrowing capacity is not committed and is subject to FHLB credit requirements and policies.
In addition, the Bank must maintain a restricted investment in FHLB stock to maintain access to borrowings.
89
(12) Subordinated Debentures
In 2003, the Company issued $8.2 million of subordinated debentures. These debentures, which are due in 2034
and are currently redeemable, were issued to a wholly owned grantor trust (the “Trust”) formed to issue preferred securities
representing undivided beneficial interests in the assets of the Trust. The Trust then invested the gross proceeds of such
preferred securities in the debentures. The Trust’s preferred securities and the subordinated debentures require quarterly
interest payments and have variable rates, adjustable quarterly. Interest accrues at three month LIBOR plus 2.85%. The
interest rate at December 31, 2020 and 2019 was 3.06% and 4.79%, respectively.
In 2005, the Company issued an additional $8.2 million of subordinated debentures. These debentures, which are
due in 2036 and are currently redeemable, were issued to a wholly owned grantor trust (“Trust II”) formed to issue preferred
securities representing undivided beneficial interests in the assets of Trust II. Trust II then invested the gross proceeds of such
preferred securities in the debentures. Trust II’s preferred securities and the subordinated debentures require quarterly interest
payments and have variable rates, adjustable quarterly. Interest accrues at three month LIBOR plus 1.34%. The interest rate
at December 31, 2020 and 2019 was 1.56% and 3.23 %, respectively.
In 2013, the Company assumed an additional $5.2 million of subordinated debentures as part of the Bank’s
acquisition of Citizens Bank. These debentures, which are due in 2036 and are currently redeemable, were issued by Citizens
Bank’s former holding company to a wholly owned grantor trust, First Capital (KS) Statutory Trust (“Trust III”) formed to
issue preferred securities representing undivided beneficial interests in the assets of Trust III. Trust III’s preferred securities
and the subordinated debentures require quarterly interest payments and have variable rates, adjustable quarterly. Interest
accrues at three month LIBOR plus 1.62%. The interest rate at December 31, 2020 and 2019 was 1.86% and 3.55%
respectively.
While these trusts are accounted for as unconsolidated equity investments, a portion of the trust preferred securities
issued by the trusts qualifies as Tier 1 Capital for regulatory purposes.
(13) Other Borrowings
The Company has a $7.5 million line of credit from an unrelated financial institution maturing on November 1,
2021, with an interest rate that adjusts daily based on the prime rate less 0.25%. This line of credit has covenants specific to
capital and other financial ratios, which the Company was in compliance with at December 31, 2020. As of December 31,
2020 and 2019, the Company did not have an outstanding balance on the line of credit.
At December 31, 2020 and 2019, the Bank had no borrowings through the Federal Reserve discount window, while
the borrowing capacity was $103.8 million and $17.4 million, respectively. The Bank also has various other federal funds
agreements, both secured and unsecured, with correspondent banks totaling approximately $30.0 million at December 31,
2020 and 2019. As of December 31, 2020 and 2019, there were no borrowings through these correspondent bank federal
funds agreements.
90
(14) Repurchase Agreements
The Company has overnight repurchase agreements with certain deposit customers whereby the Company uses
investment securities as collateral for non-insured funds. These balances are accounted for as collateralized financing and
included in other borrowings on the balance sheet.
Repurchase agreements are comprised of non-insured customer funds, totaling $6.4 million at December 31, 2020,
and $17.5 million at December 31, 2019, which were secured by $8.7 million and $20.1 million of the Bank’s investment
portfolio at the same dates, respectively.
The following is a summary of the balances and collateral of the Company’s repurchase agreements:
(Dollars in thousands)
Years ended December 31,
2020
2019
$ 11,066 $ 15,695
Average daily balance during the year
Average interest rate during the year
0.62%
Maximum month-end balance during the year $ 17,939 $ 17,548
0.47%
Weighted average interest rate at year-end
0.18%
0.20%
As of December 31, 2020
Overnight and
Continuous Up to 30 days
30-90 days
Greater
than 90 days
Total
Repurchase agreements:
U.S. federal agency obligations
Agency mortgage-backed securities
Total
Repurchase agreements:
U.S. federal treasury obligations
U.S. federal agency obligations
Agency mortgage-backed securities
Total
$
$
2,412
3,959
6,371
-
$
-
$
-
-
$
-
$
-
-
$
-
$
-
$
$
2,412
3,959
6,371
As of December 31, 2019
Overnight and
Continuous
Up to
30 days
30-90 days
Greater
than 90 days
Total
$
789
1,978
14,781
17,548
-
$
-
-
$
-
-
$
-
-
$
-
-
$
-
-
$
-
$
$
789
1,978
14,781
17,548
$
The investment securities are held by a third party financial institution in the customer’s custodial account. The
Company is required to maintain adequate collateral for each repurchase agreement. Changes in the fair value of the
investment securities impact the amount of collateral required. If the Company were to default, the investment securities
would be used to settle the repurchase agreement with the deposit customer.
91
(15) Revenue from Contracts with Customers
All of the Company’s revenue from contracts with customers in the scope of ASC 606 is recognized within non-
interest income. Items outside the scope of ASC 606 are noted as such.
(Dollars in thousands)
Non-interest income:
Service charges on deposits
Overdraft fees
Other
Interchange income
Loan servicing fees (1)
Office lease income (1)
Gains on sales of loans (1)
Bank owned life insurance income (1)
Gains (losses) on sales of investment securities (1)
Gains (losses) on sales of premises and equipment and foreclosed assets
Other
Total non-interest income
(1) Not within the scope of ASC 606.
Years ended December 31,
2019
2020
2018
$
$
$
2,991
644
2,604
1,534
652
15,155
611
2,448
(29)
748
27,358
3,591
585
2,049
1,367
642
6,353
752
(177)
52
595
15,809
3,321
529
1,935
1,350
630
5,023
644
20
(58)
2,177
15,571
$
$
$
A description of the Company’s revenue streams within the scope of 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 usage fees, stop payment charges, statement rendering,
and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Company fulfills the
customer’s request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of
a month, representing the period during which the Company satisfies the performance obligation. Overdraft fees are
recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer’s
account balance.
Interchange Income
The Company earns interchange fees from debit cardholder transactions conducted through the interchange 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 cardholder.
Gains (Losses) on Sales of Real Estate Owned
The Company records a gain or loss from the sale of real estate owned when control of the property transfers to the
buyer, which generally occurs at the time of an executed deed. When the Company finances the sale of real estate owned to
the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether
collectability of the transaction price is probable. Once these criteria are met, the real estate owned asset is derecognized and
the gain or loss on sale is recorded upon the transfer of 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. There were no sales of real estate owned that were financed by the Company during the years 2020, 2019 or 2018.
92
(16) Income Taxes
Income tax expense (benefit) attributable to income from operations consisted of the following:
(Dollars in thousands)
Current:
Federal
State
Total current
Deferred:
Federal
State
Total deferred
Deferred tax valuation allowance
Deferred tax remeasurement
Income tax expense
Years ended December 31,
2019
2020
2018
$
4,582
708
5,290
$
1,805
(157)
1,648
$
396
(197)
199
(442)
(8)
(450)
(53)
-
4,787
$
(160)
22
(138)
(57)
-
1,453
$
$
875
155
1,030
(146)
85
1,168
$
The reasons for the difference between actual income tax expense (benefit) and expected income tax
expense attributable to income from operations at the statutory federal income tax rate were as follows:
Years ended December 31,
2019
2018
2020
$
5,099
$
2,544
$
2,435
(695)
-
(26)
(137)
(229)
800
(28)
3
4,787
$
(748)
-
-
(165)
(558)
407
(15)
(12)
1,453
$
(850)
85
(119)
(140)
(512)
364
(24)
(71)
1,168
$
(Dollars in thousands)
Computed “expected” tax expense
(Reduction) increase in income taxes resulting from:
Tax-exempt interest income, net
Deferred tax remeasurement
Excess tax benefit from stock option exercise
Bank owned life insurance
Reversal of unrecognized tax benefits, net
State income taxes, net of federal benefit
Investment tax credits
Other, net
93
The tax effects of temporary differences that give rise to the significant portions of the deferred tax assets and
liabilities at the following dates were as follows:
(Dollars in thousands)
Deferred tax assets:
Loans, including allowance for loan losses
Net operating loss carry forwards
State taxes
Net deferred loan fees
Acquisition costs
Deferred compensation arrangements
Investments
Other, net
Total deferred tax assets
Less valuation allowance
Total deferred tax assets, net of valuation allowance
Deferred tax liabilities:
Unrealized gain on investment securities available-for-sale
Premises and equipment, net of depreciation
Mortgage servicing rights
Prepaid expenses
Intangible assets
FHLB stock dividends
Total deferred tax liabilities
As of December 31,
2020
2019
$
2,040
273
614
432
161
66
54
158
3,798
(273)
3,525
$
1,590
326
414
11
182
69
45
39
2,676
(326)
2,350
3,065
500
777
302
278
12
4,934
1,700
361
492
157
181
6
2,897
Net deferred tax liability
$
(1,409)
$
(547)
The Company has Kansas corporate net operating loss carry forwards totaling $4.7 million and $5.6 million as of
December 31, 2020 and 2019, respectively, which expire between 2021 and 2027. The Company has recorded a valuation
allowance against the Kansas corporate net operating loss carry forwards. A valuation allowance related to the remaining
deferred tax assets has not been provided because management believes it is more likely than not that the results of future
operations will generate sufficient taxable income to realize the deferred tax assets at December 31, 2020.
Retained earnings at December 31, 2020 and 2019 include approximately $6.3 million for which no provision for
federal income tax had been made. This amount represents allocations of income to bad debt deductions in years prior to
1988 for tax purposes only. Reduction of amounts allocated for purposes other than tax bad debt losses will create income
for tax purposes only, which will be subject to the then current corporate income tax rate.
The Company has unrecognized tax benefits representing tax positions for which a liability has been established. A
reconciliation of the beginning and ending amount of the liability relating to unrecognized tax benefits is as follows:
(Dollars in thousands)
Unrecognized tax benefits at beginning of year
Gross increases to current year tax positions
Gross decreases to prior year’s tax positions
Lapse of statute of limitations
Unrecognized tax benefits at end of year
Years ended December 31,
2019
2020
$ 1,472
$ 1,416
1,100
554
(26) (2)
(352) (608)
$ 2,138
$ 1,416
94
Tax years that remain open and subject to audit include the years 2017 through 2020 for both federal and state tax
purposes. The Company recognized $352,000 and $608,000 of previously unrecognized tax benefits during 2020 and 2019,
respectively. The gross unrecognized tax benefits of $2.1 million and $1.4 million at December 31, 2020 and December 31,
2019, respectively, would favorably impact the effective tax rate by $1.7 million and $1.1 million, respectively, if recognized.
During 2020, the Company recorded $71,000 of income tax expense associated with interest and penalties. During 2019 and
2018, the Company recorded an income tax benefit of $77,000 and $119,000, respectively, associated with interest and
penalties. As of December 31, 2020 and 2019, the Company has accrued interest and penalties related to the unrecognized
tax benefits of $325,000 and $254,000, respectively, which are not included in the table above. The Company believes that
it is reasonably possible that a reduction in gross unrecognized tax benefits of up to $48,000 is possible during the next 12
months as a result of the lapse of the statute of limitations.
(17) Employee Benefit Plans
Employee Retirement Plan. Substantially all employees are covered under a 401(k) defined contribution savings
plan. Eligible employees receive 100% matching contributions from the Company of up to 6% of their compensation.
Matching contributions by the Company were $750,000, $610,000 and $468,000 for the years ended December 31, 2020,
2019 and 2018, respectively.
Split Dollar Life Insurance Agreement. The Company has recognized a liability for future benefits payable under
an agreement that splits the benefits of a bank owned life insurance policy between the Company and a former employee.
The liability totaled $42,000 at December 31, 2020 and $34,000 at December 31, 2019.
Deferred Compensation Agreements. The Company has entered into deferred compensation and other retirement
agreements with certain key employees that provide for cash payments to be made after their respective retirements. The
obligations under these arrangements have been recorded at the present value of the accrued benefits. The Company has also
entered into agreements with certain directors to defer portions of their compensation. The balance of accrued benefits under
these arrangements was $690,000 and $612,000 at December 31, 2020 and 2019, respectively, and was included as a
component of other liabilities in the accompanying consolidated balance sheets. The Company recorded expense associated
with the deferred compensation agreements of $10,000 for the year ended December 31, 2020, income of $8,000 for the year
ended December 31, 2019 and an expense of $2,000 for the year ended December 31, 2018. The liability balance is also
impacted by changes in the value of the underlying assets supporting the agreements for directors who have not retired.
(18) Stock Compensation Plan
The Company has a stock-based employee compensation plan which allows for the issuance of stock options and
restricted common stock, the purpose of which is to provide additional incentive to certain officers, directors, and key
employees by facilitating their purchase of a stock interest in the Company. Compensation expense related to prior awards is
recognized on a straight line basis over the vesting period, which is typically four years. The stock-based compensation cost
related to these awards was $304,000, $286,000 and $223,000 for the years ended December 31, 2020, 2019 and 2018,
respectively. The Company recognized tax benefits of $105,000, $71,000, and $194,000 for the years ended December 31,
2020, 2019 and 2018, respectively.
For stock options, the exercise price may not be less than 100% of the fair market value of the shares on the date of
the grant, and no option shall be exercisable after the expiration of ten years from the grant date. In determining compensation
cost, the Black-Scholes option-pricing model is used to estimate the fair value of options on date of grant. The Black-Scholes
model is a closed-end model that uses the assumptions outlined below. Expected volatility is based on historical volatility of
the Company’s stock. The Company uses historical exercise behavior and other qualitative factors to estimate the expected
term of the options, which represents the period of time that the options granted are expected to be outstanding. The risk-
free rate for the expected term is based on U.S. Treasury rates in effect at the time of grant.
On May 20, 2015, our stockholders approved the 2015 Stock Incentive Plan which authorized the issuance of equity
awards covering 335,024 shares of common stock, as adjusted for subsequent stock dividends. On August 1, 2018, the
Compensation Committee awarded 12,479, as adjusted for subsequent stock dividends, shares of restricted common stock.
The value of the 12,479, as adjusted for subsequent stock dividends, shares was based on a stock price of $25.06 on the date
such shares were granted, as adjusted for subsequent stock dividends. On August 1, 2019, the Compensation Committee
awarded 3,766, as adjusted for subsequent stock dividends, shares of restricted common stock and options to acquire 71,007,
95
as adjusted for subsequent stock dividends, shares of common stock. The restricted stock awards vest ratably over one year
and the value was based on a stock price of $21.26 per share on the date such shares were granted, as adjusted for subsequent
stock dividends. The options vest ratably over four years. On August 1, 2020, the Compensation Committee awarded 18,218,
as adjusted for subsequent stock dividends, shares of restricted common stock. The value of the 18,218, as adjusted for
subsequent stock dividends, shares was based on a stock price of $19.62 on the date such shares were granted, as adjusted for
subsequent stock dividends. The fair value of the options granted were determined using the following weighted-average
assumptions as of the grant date:
Risk-free interest rate
Expected term
Expected stock price volatility
Dividend yield
Years ended December 31,
2019
1.77%
7 year
26.06%
3.41%
2020
n/a
n/a
n/a
n/a
2018
n/a
n/a
n/a
n/a
A summary of option activity during 2020 is presented below:
(Dollars in thousands, except per share amounts)
Outstanding at January 1, 2020
Granted
Effect of 5% stock dividend
Forfeited/expired
Exercised
Outstanding at December 31, 2020
Exercisable at December 31, 2020
Fully vested options at December 31, 2020
Weighted
average
exercise
price
per share
Shares
136,340 $ 19.87
-
$ -
5,494
(20,174) $ 16.30
(19,030) $ 10.41
102,630 $ 21.26
38,338 $ 20.33
38,338 $ 20.33
Weighted
average
remaining
contractual
term
6.9 years $ 714
Aggregate
intrinsic
value
7.3 years $ 202
5.9 years $ 120
5.9 years $ 120
Additional information about stock options exercised is presented below:
(Dollars in thousands)
Intrinsic value of options exercised (on exercise date)
Cash received from options exercised
Excess tax benefit realized from options exercised
Years ended December 31,
2019
$ 42
36
$ -
2020
$ 430
42
$ 32
2018
$ 1,523
534
$ 136
As of December 31, 2020, there was $193,000 of unrecognized compensation cost related to the 64,292 outstanding
nonvested options that will be recognized over the following periods:
(Dollars in thousands)
Year
2021
2022
2023
Total
Amount
$ 96
61
36
$ 193
96
A summary of nonvested restricted common stock activity during 2020 is presented below:
Nonvested restricted common stock at January 1, 2020
Granted
Vested
Forfeited
Effect of 5% stock dividend
Nonvested restricted common stock at December 31, 2020
Weighted
average
grant date
price per
share
$
$
$
$
23.98
20.60
22.41
20.60
$
21.05
Shares
14,552
17,350
(8,711)
(971)
1,098
23,318
As of December 31, 2020, there was $355,000 of total unrecognized compensation cost related to the 23,318
outstanding unvested restricted shares that will be recognized over the following periods:
(Dollars in thousands)
Year
2021
2022
2023
2024
Total
Amount
$ 158
96
64
37
$ 355
(19) Fair Value of Financial Instruments and Fair Value Measurements
Fair value is the 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. 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 the entity has the ability
to access as of the measurement date.
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; or other inputs that are observable or can be corroborated by
observable market data.
Level 3 – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that
market participants would use in pricing an asset or liability.
97
Fair value estimates of the Company’s financial instruments as of December 31, 2020 and 2019, including methods
and assumptions utilized, are set forth below:
(Dollars in thousands)
As of December 31, 2020
Financial assets:
Cash and cash equivalents
Investment securities available for sale
Bank stocks, at cost
Loans, net
Loans held for sale
Accrued interest receivable
Derivative financial instruments
Financial liabilities:
Non-maturity deposits
Time deposits
FHLB borrowings
Subordinated debentures
Other borrowings
Accrued interest payable
Derivative financial instruments
Carrying
amount
$
84,818
297,270
4,473
702,782
15,533
4,885
1,796
Level 1
Level 2
Level 3
Total
$
84,818
2,037
n/a
-
-
-
-
$
-
295,233
n/a
-
15,533
1,697
1,796
-
$
-
n/a
718,071
-
3,188
-
$
84,818
297,270
n/a
718,071
15,533
4,885
1,796
$
(882,277)
(133,750)
-
(21,651)
(6,371)
(168)
(466)
$
(882,277)
-
-
-
-
-
-
$
-
(134,048)
-
(15,232)
(6,371)
(168)
(466)
-
$
-
-
-
-
-
-
(882,277)
(134,048)
-
(15,232)
(6,371)
(168)
(466)
(Dollars in thousands)
As of December 31, 2019
Financial assets:
Cash and cash equivalents
Investment securities available-for-sale
Bank stocks, at cost
Loans, net
Loans held for sale
Accrued interest receivable
Derivative financial instruments
Financial liabilities:
Non-maturity deposits
Time deposits
FHLB borrowings
Subordinated debentures
Other borrowings
Accrued interest payable
Derivative financial instruments
Transfers
Carrying
amount
$
13,694
362,998
3,109
532,180
8,497
4,557
532
Level 1
Level 2
Level 3
Total
$
13,694
2,316
n/a
-
-
2
-
$
-
360,682
n/a
-
8,497
1,895
532
-
$
-
n/a
538,427
-
2,660
-
$
13,694
362,998
n/a
538,427
8,497
4,557
532
$
(687,985)
(147,063)
(3,000)
(21,651)
(17,548)
(404)
(50)
$
(687,985)
-
-
-
-
-
-
$
-
(146,390)
(3,000)
(19,527)
(17,548)
(404)
(50)
-
$
-
-
-
-
-
-
(687,985)
(146,390)
(3,000)
(19,527)
(17,548)
(404)
(50)
The Company did not transfer any assets or liabilities among levels during the year ended December 31, 2020 or
2019.
98
Valuation Methods for Instruments Measured at Fair Value on a Recurring Basis
The following table represents the Company’s financial instruments that are measured at fair value on a recurring
basis at December 31, 2020 and 2019, allocated to the appropriate fair value hierarchy:
(Dollars in thousands)
Assets:
Available-for-sale securities
U. S. treasury securities
U. S. federal agency obligations
Municipal obligations, tax exempt
Municipal obligations, taxable
Agency mortgage-backed securities
Certificates of deposit
Loans held for sale
Derivative financial instruments
Liabilities:
Derivative financial instruments
(Dollars in thousands)
Assets:
Available-for-sale securities
U. S. treasury securities
U. S. federal agency obligations
Municipal obligations, tax exempt
Municipal obligations, taxable
Agency mortgage-backed securities
Certificates of deposit
Loans held for sale
Derivative financial instruments
Liabilities:
Derivative financial instruments
As of December 31, 2020
Fair value hierarchy
Level 2
Level 1
Level 3
$
2,037
-
-
-
-
-
-
-
-
$
18,924
142,676
49,535
78,638
5,460
15,533
1,796
-
$
-
-
-
-
-
-
-
Total
$
2,037
18,924
142,676
49,535
78,638
5,460
15,533
1,796
(466)
-
(466)
-
As of December 31, 2019
Fair value hierarchy
Level 2
Level 1
Level 3
$
2,316
-
-
-
-
-
-
-
-
$
4,106
145,862
46,779
162,031
1,904
8,497
532
-
$
-
-
-
-
-
-
-
Total
$
2,316
4,106
145,862
46,779
162,031
1,904
8,497
532
(50)
-
(50)
-
The Company’s investment securities classified as available-for-sale include U.S. treasury securities, U.S. federal
agency securities, municipal obligations, agency mortgage-backed securities, and certificates of deposit. Quoted exchange
prices are available for the Company’s U.S treasury securities which are classified as Level 1. U.S. federal agency securities
and agency mortgage-backed obligations are priced utilizing industry-standard models that consider various assumptions,
including time value, yield curves, volatility factors, prepayment speeds, default rates, loss severity, current market and
contractual prices for the underlying financial instruments, as well as other relevant economic measures. Substantially all of
these assumptions are observable in the marketplace, can be derived from observable data, or are supported by observable
levels at which transactions are executed in the marketplace. These measurements are classified as Level 2. Municipal
securities are valued using a type of matrix, or grid, pricing in which securities are benchmarked against U.S. treasury rates
based on credit rating. These model and matrix measurements are classified as Level 2 in the fair value hierarchy.
Changes in the fair value of available-for-sale securities are included in other comprehensive income to the extent
the changes are not considered other-than-temporary impairments. Other-than-temporary impairment tests are performed on
a quarterly basis and any decline in the fair value of an individual security below its cost that is deemed to be other-than-
temporary results in a write-down of that security’s cost basis.
99
Mortgage loans originated and intended for sale in the secondary market are carried at estimated fair value. The
mortgage loan valuations are based on quoted secondary market prices for similar loans and are classified as Level 2. Changes
in the fair value of mortgage loans originated and intended for sale in the secondary market and derivative financial
instruments are included in gains on sales of loans.
The aggregate fair value, contractual balance (including accrued interest), and gain or loss on loans held for sale
were as follows:
(Dollars in thousands)
Aggregate fair value
Contractual balance
Gain
As of December 31,
2020
2019
$ 15,533
$ 8,497
15,151
8,316
$ 382
$ 181
The Company’s derivative financial instruments consist of interest rate lock commitments and forward commitments
for the future delivery of these mortgage loans. The fair values of these derivatives are based on quoted prices for similar
loans in the secondary market. The market prices are adjusted by a factor, based on the Company’s historical data and its
judgment about future economic trends, which considers the likelihood that a commitment will ultimately result in a closed
loan. These instruments are classified as Level 2. The amounts are included in other assets or other liabilities on the
consolidated balance sheets and gains on sale of loans, net in the consolidated statements of earnings. The total amount of
gains and losses from changes in fair value of derivative financial instruments included in earnings were as follows:
(Dollars in thousands)
2020
2019
2018
Total change in fair value
$ 848
$ (15)
$ 102
As of December 31,
Valuation Methods for Instruments Measured at Fair Value on a Nonrecurring Basis
The Company does not value its loan portfolio at fair value. Collateral-dependent impaired loans are generally
carried at the lower of cost or fair value of the collateral, less estimated selling costs. Collateral values are determined based
on appraisals performed by qualified licensed appraisers hired by the Company and then further adjusted if warranted based
on relevant facts and circumstances. The appraisals may utilize a single valuation approach or a combination of approaches
including the comparable sales and 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. Such adjustments are typically
significant and result in a Level 3 classification of the inputs for determining fair value. Impaired loans are reviewed and
evaluated at least quarterly for additional impairment and adjusted accordingly, based on the same factors identified above.
The loan balance of the Company’s impaired loans was $12.5 million at December 31, 2020 and $8.7 million at December
31, 2019, with an allocated allowance of $266,000 and $733,000, at December 31, 2020 and 2019, respectively.
Real estate owned includes assets acquired through, or in lieu of, foreclosure and land previously acquired for
expansion. Real estate owned is initially recorded at the fair value of the collateral less estimated selling costs. Subsequent
valuations are updated periodically and are based upon independent appraisals, third party price opinions or internal pricing
models. The appraisals may utilize a single valuation approach or a combination of approaches including the comparable
sales and 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. Such adjustments are typically significant and result in a Level 3
classification of the inputs for determining fair value. Real estate owned is reviewed and evaluated at least annually for
additional impairment and adjusted accordingly, based on the same factors identified above.
100
The following table presents quantitative information about Level 3 fair value measurements for impaired loans
measure at fair value on a non-recurring basis as of December 31, 2020 and 2019.
(Dollars in thousands)
As of December 31, 2020
Impaired loans:
Commercial real estate
Commercial loans
Agriculture loans
Real estate owned:
One-to-four family residential real estate
As of December 31, 2019
Impaired loans:
One-to-four family residential real estate
Commercial real estate
Commercial loans
Agriculture loans
(20) Regulatory Capital Requirements
Fair value Valuation technique
Unobservable inputs
Range
$
3,640
74
9
Sales comparison
Sales comparison
Sales comparison
Adjustment to appraised value
Adjustment to comparable sales
Adjustment to appraised value
20%
0%-69%
20%
48
Sales comparison
Adjustment to appraised value
10%
$
240
100
678
405
Sales comparison
Sales comparison
Sales comparison
Sales comparison
Adjustment to appraised value
Adjustment to appraised value
Adjustment to comparable sales
Adjustment to appraised value
0%-25%
15%
0%-75%
0%-30%
Banks and bank holding companies are subject to regulatory capital requirements 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 regulatory action. Management believed that as of December 31, 2020, the Company and the Bank met all capital
adequacy requirements to which they were subject at that time.
Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent
overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required.
The Company and the Bank are subject to the Basel III Rule, which is applicable to all U.S. banks that are subject to minimum
capital requirements, as well as to bank and savings and loan holding companies other than “small bank holding companies”
(generally, non-public bank holding companies with consolidated assets of less than $3.0 billion).
The Basel III Rule includes a common equity Tier 1 capital to risk-weighted assets minimum ratio of 4.5%, a
minimum ratio of Tier 1 capital to risk-weighted assets of 6.0%, a minimum ratio of Total Capital to risk-weighted assets of
8.0%, and a minimum Tier 1 leverage ratio of 4.0%. A capital conservation buffer, equal to 2.5% of common equity Tier 1
capital, is also established above the regulatory minimum capital requirements. The capital conservation buffer increases the
common equity Tier 1 capital ratio, and Tier 1 capital and total risk based capital ratios.
As of December 31, 2020 and December 31, 2019, the most recent regulatory notifications categorized the Bank as
well capitalized under the regulatory framework for prompt corrective action then in effect. There are no conditions or events
since that notification that management believes have changed the institution’s category.
101
The following is a comparison of the Company’s regulatory capital to minimum capital requirements in effect at
December 31, 2020 and 2019:
(Dollars in thousands)
As of December 31, 2020
Leverage
Common Equity Tier 1 Capital
Tier 1 Capital
Total Risk Based Capital
As of December 31, 2019
Leverage
Common Equity Tier 1 Capital
Tier 1 Capital
Total Risk Based Capital
Actual
Ratio
Amount
For capital
adequacy purposes
Amount
Ratio (1)
To be well-capitalized
under regulatory
guidelines
Amount
Ratio
$121,068
100,068
121,068
129,983
10.70%
13.77%
16.66%
17.89%
$ 45,262
50,866
61,766
76,300
$106,938
85,938
106,938
113,545
10.94%
13.09%
16.29%
17.30%
$ 39,109
45,952
55,799
68,928
4.0%
7.0%
8.5%
10.5%
4.0%
7.0%
8.5%
10.5%
$ 56,577
47,233
58,133
72,666
$ 48,887
42,670
52,517
65,646
5.0%
6.5%
8.0%
10.0%
5.0%
6.5%
8.0%
10.0%
(1) The required percent for capital adequacy purposes includes a capital conservation
buffer of 2.5%.
The following is a comparison of the Bank’s regulatory capital to minimum capital requirements in effect at
December 31, 2020 and 2019:
(Dollars in thousands)
As of December 31, 2020
Leverage
Common Equity Tier 1 Capital
Tier 1 Capital
Total Risk Based Capital
As of December 31, 2019
Leverage
Common Equity Tier 1 Capital
Tier 1 Capital
Total Risk Based Capital
Actual
Ratio
Amount
For capital
adequacy purposes
Amount
Ratio (1)
To be well-capitalized
under regulatory
guidelines
Amount
Ratio
$ 118,174
118,174
118,174
127,089
10.47%
16.27%
16.27%
17.50%
$ 45,139
50,829
61,721
76,244
$ 104,510
104,510
104,510
111,117
10.72%
15.94%
15.94%
16.95%
$ 38,984
45,884
55,716
68,826
4.0%
7.0%
8.5%
10.5%
4.0%
7.0%
8.5%
10.5%
$ 56,423
47,199
58,091
72,613
$ 48,730
42,607
52,439
65,547
5.0%
6.5%
8.0%
10.0%
5.0%
6.5%
8.0%
10.0%
(1) The required percent for capital adequacy purposes includes a capital conservation
buffer of 2.5%.
102
(21) Parent Company Condensed Financial Statements
The following is condensed financial information of the parent company as of December 31, 2020 and 2019
and for the years ended December 31, 2020, 2019 and 2018:
Condensed Balance Sheets
(Dollars in thousands)
Assets:
Cash and cash equivalents
Investment securities
Investment in subsidiaries
Other
Total assets
Liabilities and stockholders' equity:
Subordinated debentures
Other
Stockholders' equity
As of December 31,
2020
2019
$
105
$
173
212
146,896
1,217
239
129,049
929
$
148,430
$
130,390
$
21,651
$
21,651
107
132
126,672
108,607
Total liabilities and stockholders' equity
$
148,430
$
130,390
Condensed Statements of Earnings
Years ended December 31,
2020
2018
2019
$
$
$
6,900
21
7
(614)
(352)
5,962
13,087
248
19,297
(196)
19,493
4,208
23,701
4,500
31
7
(970)
(304)
3,264
6,801
338
10,403
(259)
10,662
9,230
19,892
3,200
29
7
(1,078)
(325)
1,833
7,567
740
10,140
(286)
10,426
(3,579)
6,847
$
$
$
(Dollars in thousands)
Dividends from Bank
Interest income
Other non-interest income
Interest expense
Other expense, net
Earnings before equity in undistributed earnings
Increase in undistributed equity of Bank
Increase in undistributed equity of Nonbank subsidiary
Earnings before income taxes
Income tax benefit
Net earnings
Other comprehensive income (loss)
Total comprehensive income
103
Condensed Statements of Cash Flows
(Dollars in thousands)
Cash flows from operating activities:
Net earnings
Increase in undistributed equity of subsidiaries
Amortization of purchase accounting adjustment on
subordinated debentures
Other
Net cash provided by operating activities
Cash flows from investing activities:
Purchase of investment securities
Proceeds from sales of investments
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Proceeds from exercise of stock options
Payment of dividends
Purchase of treasury stock
Net cash used in financing activities
Net (decrease) increase in cash
Cash at beginning of year
Cash at end of year
Years ended December 31,
2019
2018
2020
$
19,493
(13,335)
$
10,662
(7,139)
$
10,426
(8,307)
-
(312)
5,846
-
23
3,546
(2)
28
26
-
(1)
(1)
167
381
2,667
-
7
7
42
(3,633)
(2,349)
(5,940)
(68)
173
105
$
36
(3,508)
-
(3,472)
73
100
173
$
534
(3,325)
-
(2,791)
(117)
217
100
$
Dividends paid by the Company are provided through dividends from the Bank. At December 31, 2020, the Bank
could distribute dividends of up to $19.9 million without regulatory approvals. The primary source of funds for the Company
is dividends from the Bank. Under the National Bank Act, a national bank may pay dividends out of its undivided profits in
such amounts and at such times as the bank’s board of directors deems prudent. Without prior OCC approval, however, a
national bank may not pay dividends in any calendar year that, in the aggregate, exceed the bank’s year-to-date net income
plus the bank’s retained net income for the two preceding years. The payment of dividends by any financial institution is
affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations,
and a financial institution generally is prohibited from paying any dividends if, following payment thereof, the institution
would be undercapitalized.
(22) Commitments, Contingencies and Guarantees
Commitments to extend credit are legally binding agreements to lend to a borrower provided there are no violations
of any conditions established in the contract. The Company, as a provider of financial services, routinely issues financial
guarantees in the form of financial and performance commercial and standby letters of credit. As many of the commitments
are expected to expire without being drawn upon, the total commitment does not necessarily represent future cash
requirements (see Note 6).
There are no pending legal proceedings to which the Company or the Bank is a party other than ordinary routine
litigation incidental to the Bank’s business. While the ultimate outcome of current legal proceedings cannot be predicted
with certainty, it is the opinion of management that the resolution of these legal actions should not have a material effect on
the Company’s consolidated financial position or results of operations.
104
(23) COVID-19 Pandemic
The COVID-19 pandemic in the United States caused a substantial disruption to the economy, employment and
financial markets and is expected to have a complex and significant adverse impact on the economy, the banking industry
and the Company in future fiscal periods, all subject to a high degree of uncertainty. Additional federal government stimulus,
declining COVID-19 cases and the distribution of vaccines may lead to positive impacts on the economy and employment
while new variants of COVID-19 presents risks to the recovery. The Company’s pandemic response plan continues to focus
foremost on the safety and well-being of our customers and associates. The COVID-19 pandemic could adversely impact our
customers, employees or vendors which may impact our operations and financial results. The COVID-19 pandemic may
cause economic declines in excess of current projections, or if the pandemic lasts longer than currently projected, the
Company’s provision for loan losses may remain elevated or increase in future periods. The Company expects to see higher
loan delinquencies and defaults in future periods as a result of the COVID-19 pandemic and will continue to monitor our
allowance for loan losses in light of changing economic conditions related to COVID-19. The COVID-19 pandemic may also
impact the Company’s deposit balances and service charge income. In addition, the fair value of certain assets may be
adversely impacted by the pandemic and the economic downturn, including the fair value of goodwill, mortgage servicing
rights and other real estate. These declines could result in impairments in future periods. The pandemic has caused a
significant decline in market interest rates which may cause our net interest margin to decline. At this time, the full impact of
the COVID-19 pandemic on the Company’s financial statements is uncertain.
105
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
An evaluation was performed under the supervision and with the participation of the Company’s management,
including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the
Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Exchange Act) as of
December 31, 2020. Based on that evaluation, the Company’s management, including the Chief Executive Officer and Chief
Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as
defined by Rule 13a-15(f) promulgated under the Exchange Act). The Company’s internal control over financial reporting
is a process designed under the supervision of the Company’s Chief Executive Officer and Chief Financial Officer to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements
for external purposes in accordance with GAAP.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect all
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
Management has made a comprehensive review, evaluation, and assessment of the Company’s internal control over
financial reporting as of December 31, 2020. In making its assessment of the effectiveness of the Company’s internal control
over financial reporting, management used the framework established in Internal-Control Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission - 2013. Based on that assessment, management
concluded that, as of December 31, 2020, the Company’s internal control over financial reporting was effective.
Our auditors are not required to formally opine on the effectiveness of our internal control over financial reporting
because the Company is not an accelerated filer or a large accelerated filer. As a result, this annual report on Form 10-K does
not include an attestation report of the Company’s independent registered public accounting firm.
There were no changes in the Company’s internal control over financial reporting during the quarter ended
December 31, 2020 that materially affected or were reasonably likely to materially affect the Company’s internal control over
financial reporting.
ITEM 9B. OTHER INFORMATION
None
106
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III.
Directors
The Company incorporates by reference the information called for by Item 10 of this Form 10-K from the sections
entitled “Proposal 1 - Election of Directors,” “Delinquent Section 16(a) Reports” and “Corporate Governance and the Board
of Directors” of the Company’s Proxy Statement for the annual meeting of stockholders to be held May 19, 2021, which will
be filed with the SEC no later than 120 days after December 31, 2020 (the “2021 Proxy Statement”).
The executive officers of the Company, each of whom is also currently an executive officer of the Bank and all of
whom serve at the discretion of the Board of Directors, are identified below:
Name
Michael E. Scheopner
Mark A. Herpich
Age
59
53
Positions with the Company
Held position since
President and Chief Executive Officer
May 2013/January 2014
Vice President, Secretary,
Chief Financial Officer and Treasurer
October 2001
The executive officers of the Bank are identified below:
Name
Age
Positions with the Bank
Held position since
Michael E. Scheopner
Mark A. Herpich
Mark J. Oliphant
59
53
68
President and Chief Executive Officer
May 2013/January 2014
Executive Vice President, Secretary
and Chief Financial Officer
October 2001
Executive Vice President, Market President-Central Region February 2013
ITEM 11.
EXECUTIVE COMPENSATION
The Company incorporates by reference the information called for by Item 11 of this Form 10-K from the sections
entitled “Corporate Governance and the Board of Directors,” and “Executive Compensation” of the 2021 Proxy Statement.
107
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The Company incorporates by reference the information called for by Item 12 of this Form 10-K from the section
entitled “Security Ownership of Certain Beneficial Owners” of the 2021 Proxy Statement.
Equity Compensation Plan Information
The table below sets forth the following information as of December 31, 2020 for all equity compensation plans:
(a) the number of securities to be issued upon the exercise of outstanding options, warrants and rights;
(b) the weighted-average exercise price of such outstanding options, warrants and rights;
(c) other than securities to be issued upon the exercise of such outstanding options, warrants and rights, the number
of securities remaining available for future issuance under the plans.
EQUITY COMPENSATION PLAN INFORMATION
Number of securities to be
issued upon exercise of
outstanding options, warrants
and rights
(a)
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
Number of securities
remaining available for
future issuance
(excluding securities
reflected in column (a))
(c)
102,630 $ 21.26 180,277
-
102,630 $ 21.26 180,277
-
-
Plan category
Equity compensation plans approved
by security holders (1)
Equity compensation plans not
approved by security holders
Total
(1) Reflects outstanding options granted under our 2001 and 2015 Stock Incentive Plans and the remaining share reserve under our 2015
Stock Incentive Plan, each as adjusted for stock dividends.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The Company incorporates by reference the information called for by Item 13 of this Form 10-K from the sections
entitled “Proposal 1 – Election of Directors,” “Corporate Governance and the Board of Directors” and “Certain Relationships
and Related Transactions” of the 2021 Proxy Statement.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The Company incorporates by reference the information called for by Item 14 of this Form 10-K from the section
entitled “Proposal 2 - Ratification of Crowe LLP as our Independent Registered Public Accounting Firm” of the 2021 Proxy
Statement.
108
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
ITEM 14(a)1 and 2. Financial Statements and Schedules
PART IV.
LANDMARK BANCORP, INC. AND SUBSIDIARY
LIST OF FINANCIAL STATEMENTS
The following audited Consolidated Financial Statements of the Company and its subsidiaries and related notes and
auditors’ report are included in Part II, Item 8 of this Report:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets – December 31, 2020 and 2019
Consolidated Statements of Earnings – Years ended December 31, 2020, 2019 and 2018
Consolidated Statements of Comprehensive Income – Years ended December 31, 2020, 2019 and 2018
Consolidated Statements of Stockholders’ Equity – Years ended December 31, 2020, 2019 and 2018
Consolidated Statements of Cash Flows – Years ended December 31, 2020, 2019 and 2018
Notes to Consolidated Financial Statements
All schedules are omitted because they are not required or are not applicable or the required information is shown
in the financial statements incorporated by reference or notes thereto.
Item 15(a)3. Exhibits
Exhibit
Number
Description
3.1
Amended and Restated Certificate of Incorporation
3.2
3.3
4.0
Certificate of Amendment of the Amended and Restated
Certificate of Incorporation
Bylaws
Certain instruments defining the rights of holders of long-term
debt of the Company, none of which authorize a total amount of
indebtedness in excess of 10% of the total assets of the
Company and its subsidiaries on a consolidated basis, have not
been filed as exhibits. The Company hereby agrees to furnish a
copy of any of these agreements to the Commission upon
request.
Attached
hereto
Incorporated by reference to
Exhibit 3.1 to the registrant’s
transition report on Form 10-K filed
with the SEC on March 29, 2002 (SEC
file no. 000-33203)
Exhibit 3.2 to the registrant’s report on
Form 10-K filed with the SEC on
March 29, 2013 (SEC file no. 000-
33203)
Exhibit 3.3 to the registrant’s Form S-
4 filed with the SEC on June 7, 2001
(SEC file no. 333-62466)
4.1
Description of the Company’s securities registered pursuant to
Section 12 of the Securities Exchange Act of 1934
Exhibit 4.1 to the registrant’s report on
Form 10-K filed with the SEC on
March 12, 2020 (SEC file no. 000-
33203)
109
10.1*
10.2*
10.3*
10.4*
Employment Agreement effective January 1, 2014 between
Michael E. Scheopner, the Company and the Bank
Employment Agreement effective November 1, 2013 between
Mark A. Herpich, the Company and the Bank
Employment Agreement effective November 1, 2013 between
Mark J. Oliphant, the Company and the Bank
Form of Landmark Bancorp, Inc. 2001 Stock Incentive Plan
Non-qualified Stock Option Agreement
10.5*
Form of Landmark Bancorp, Inc. Deferred Compensation
Agreement
10.6*
Landmark Bancorp, Inc. 2001 Stock Incentive Plan
10.7*
Landmark Bancorp, Inc. 2015 Stock Incentive Plan
10.8*
10.9*
Form of Landmark Bancorp, Inc. 2015 Stock Incentive Plan Restricted
Stock Award Agreement
Form of Landmark Bancorp, Inc. 2015 Stock Incentive Plan
Nonqualified Stock Option Award Agreement
10.10*
Form of Landmark Bancorp, Inc. 2015 Stock Incentive Plan Restricted
Stock Unit Award Agreement
Exhibit 10.2 to the registrant’s Form 8-
K filed with the SEC on December 20,
2013 (SEC file no. 000-33203)
Exhibit 10.3 to the registrant’s Form 8-
K filed with the SEC on December 20,
2013 (SEC file no. 000-33203)
Exhibit 10.5 to the registrant’s Form 8-
K filed with the SEC on December 20,
2013 (SEC file no. 000-33203)
Exhibit 10.9 to the registrant’s report
on Form 10-K filed with the SEC on
March 30, 2005 (SEC file no. 000-
33203)
Exhibit 10.11 to the registrant’s report
on Form 10-K filed with the SEC on
March 30, 2005 (SEC file no. 000-
33203)
Exhibit 10.1 to the registrant’s Form
S-8 filed with the SEC on February 11,
2003 (SEC file no. 333-103091)
Exhibit 10.20 to the registrant’s report
on Form 10-K filed with the SEC on
March 14, 2016 (SEC file no. 000-
33203)
Exhibit 4.5 to the registrant’s Form S-8
filed with the SEC on May 16, 2016 (SEC
file no. 333-211399)
Exhibit 4.6 to the registrant’s Form S-8
filed with the SEC on May 16, 2016 (SEC
file no. 333-211399)
Exhibit 4.7 to the registrant’s Form S-8
filed with the SEC on May 16, 2016 (SEC
file no. 333-211399)
10.11
10.12
10.13
10.14
10.15
13.1
21.1
23.1
31.1
Business Loan Agreement, Promissory Note and Commercial Pledge
Agreement, dated November 1, 2016, between Landmark Bancorp, Inc.
and First National Bank of Omaha
Exhibit 10.1 to the registrant’s Form 10-Q
filed with the SEC on November 10, 2016
(SEC file no. 000-33203)
Change in Terms Agreement dated November 1, 2017, between
Landmark Bancorp, Inc. and First National Bank of Omaha
Change in Terms Agreement dated November 1, 2018, between
Landmark Bancorp, Inc. and First National Bank of Omaha
Change in Terms Agreement dated November 1, 2019, between
Landmark Bancorp, Inc. and First National Bank of Omaha
Change in Terms Agreement dated October 30, 2020, between
Landmark Bancorp, Inc. and First National Bank of Omaha
Letter to Stockholders and Corporate Information included in 2020
Annual Report to Stockholders
Subsidiaries of the Company
Consent of Crowe LLP
Certification of Principal Executive Officer Pursuant to Rule 13a-
14(a)/15d-14(a)
110
Exhibit 10.1 to the registrant’s Form 10-Q
filed with the SEC on November 13, 2017
(SEC file no. 000-33203)
Exhibit 10.1 to the registrant’s Form 10-Q
filed with the SEC on November 8, 2018
(SEC file no. 000-33203)
Exhibit 10.1 to the registrant’s Form 10-Q
filed with the SEC on November 8, 2019
(SEC file no. 000-33203)
Exhibit 10.1 to the registrant’s Form 10-Q
filed with the SEC on November 6, 2020
(SEC file no. 000-33203)
X
X
X
X
31.2
32.1
32.2
101
Certification of Principal Financial Officer Pursuant to Rule 13a-
14(a)/15d-14(a)
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
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
Interactive data files pursuant to Rule 405 of Regulation S-T, formatted
in inline XBRL: (i) Consolidated Balance Sheets as of December 31,
2020 and 2019; (ii) Consolidated Statements of Earnings for the twelve
months ended December 31, 2020, 2019 and 2018; (iii) Consolidated
Statements of Comprehensive Income for the twelve months ended
December 31, 2020, 2019 and 2018; (iv) Consolidated Statements of
Stockholders’ Equity for the twelve months ended December 31, 2020,
2019 and 2018; (v) Consolidated Statements of Cash Flows for the
twelve months ended December 31, 2020, 2019 and 2018; and (vi)
Notes to Consolidated Financial Statements
104
Cover Page Interactive Data File (formatted as Inline XBRL and
contained in Exhibit 101)
X
X
X
X
X
*Indicates management contract or compensatory plan or arrangement.
Upon written request to the President of the Company, P.O. Box 308, Manhattan, Kansas 66505-0308, copies of the
exhibits listed above are available to stockholders of the Company by specifically identifying each exhibit desired in the
request. The Company’s filings with the SEC are also available free of charge via the Internet at www.sec.gov, the
Company’s website at www.landmarkbancorpinc.com or through the investor relations link at the Bank’s website at
www.banklandmark.com.
ITEM 16.
FORM 10-K SUMMARY
None
111
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
LANDMARK BANCORP, INC.
(Registrant)
By: /s/ Michael E. Scheopner
Michael E. Scheopner
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Mark A. Herpich
Mark A. Herpich
Vice President, Secretary, Treasurer and Chief Financial Officer
(Principal Financial and Accounting Officer)
March 22, 2021
date
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE
/s/ Michael E. Scheopner
Michael E. Scheopner
/s/ Patrick L. Alexander
Patrick L. Alexander
/s/ Mark A. Herpich
Mark A. Herpich
/s/ Richard A. Ball
Richard A. Ball
/s/ Brent A. Bowman
Brent A. Bowman
/s/ Sarah Hill-Nelson
Sarah Hill-Nelson
/s/ Jim W. Lewis
Jim W. Lewis
/s/ Sandra J. Moll
Sandra J. Moll
/s/ Wayne R. Sloan
Wayne R. Sloan
/s/ David H. Snapp
David H. Snapp
TITLE
President, Chief Executive Officer and
Director (Principal Executive Officer)
Chairman of the Board, Director
Vice President, Secretary, Treasurer
and Chief Financial Officer (Principal
Financial and Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
March 22, 2021
Date
March 22, 2021
Date
March 22, 2021
Date
March 22, 2021
Date
March 22, 2021
Date
March 22, 2021
Date
March 22, 2021
Date
March 22, 2021
Date
March 22, 2021
Date
March 22, 2021
Date
112
EXHIBIT 13.1
Letter to Shareholders and Corporate Information Included in 2020 Annual Report to Shareholders
See pages 1-3 of this document for the letters to shareholders and pages 6-7 for the corporate information contained in
exhibit 13.1 filed on form 10-K with the SEC.
EXHIBIT 21.1
Subsidiaries of Landmark Bancorp, Inc.
The most significant subsidiary of the Company is Landmark National Bank, a national banking association with its main
office located in Manhattan, Kansas, and with branch offices located in Auburn, Dodge City (2), Fort Scott (2), Garden City,
Great Bend (2), Hoisington, Iola, Junction City, Kincaid, LaCrosse, Lawrence (2), Lenexa, Louisburg, Manhattan, Mound
City, Osage City, Osawatomie, Overland Park, Paola, Pittsburg, Prairie Village, Topeka (2), Wamego and Wellsville, Kansas.
The Company also owns Landmark Risk Management, Inc., which is a Nevada incorporated captive insurance company that
provides property and casualty insurance coverage to the Company and the Bank for which insurance may not be currently
available or economically feasible in today’s insurance marketplace. Landmark Risk Management, Inc. pools resources with
other captive insurance companies to spread the risk through re-insurance agreements. The Company also owns all of the
common securities of Landmark Capital Trust I, Landmark Capital Trust II and First Capital (KS) Statutory Trust, each a
Delaware statutory trust, formed to issue trust preferred securities in a private placement.
Consent of Independent Registered Public Accounting Firm
EXHIBIT 23.1
We consent to the incorporation by reference in the Registration Statement No. 333-103091 on Form S-8 and Registration
Statement No. 333-211399 on Form S-8 of Landmark Bancorp, Inc. of our report dated March 22, 2021 relating to the
consolidated financial statements, appearing in this Annual Report on Form 10-K.
/s/ Crowe LLP
Oak Brook, Illinois
March 22, 2021
113
1.
2.
3.
4.
CERTIFICATION PURSUANT TO
EXCHANGE ACT RULE 13a-14(a)/15d-14(a)
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 31.1
I, Michael E. Scheopner, certify that:
I have reviewed this annual report on Form 10-K of Landmark Bancorp, Inc.;
Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
(b)
(c)
(d)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared;
designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or
persons performing the equivalent functions):
(a)
(b)
all significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Date: March 22, 2021
/s/ Michael E. Scheopner
Michael E. Scheopner
Chief Executive Officer
114
1.
2.
3.
4.
CERTIFICATION PURSUANT TO
EXCHANGE ACT RULE 13a-14(a)/15d-14(a)
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 31.2
I, Mark A. Herpich, certify that:
I have reviewed this annual report on Form 10-K of Landmark Bancorp, Inc.;
Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
(b)
(c)
(d)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared;
designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or
persons performing the equivalent functions):
(a)
(b)
all significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Date: March 22, 2021
/s/ Mark A. Herpich
Mark A. Herpich
Chief Financial Officer
115
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.1
In connection with the annual report of Landmark Bancorp, Inc. (the “Company”) on Form 10-K for the period ending December
31, 2020 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael E. Scheopner,
Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-
Oxley Act of 2002, that, to my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results
of operations of the Company.
/s/ Michael E. Scheopner
Michael E. Scheopner
Chief Executive Officer
March 22, 2021
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.2
In connection with the annual report of Landmark Bancorp, Inc. (the “Company”) on Form 10-K for the period ending December
31, 2020 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Mark A. Herpich, Chief
Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley
Act of 2002, that, to my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results
of operations of the Company.
/s/ Mark A. Herpich
Mark A. Herpich
Chief Financial Officer
March 22, 2021
116
2020 ANNUAL REPORT
Everyone starts as a customer and leaves as a friend.