Docoh
Loading...

LARK Landmark Bancorp

Filed: 17 May 21, 1:01pm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2021

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ________ to ________

 

Commission File Number 0-33203

 

LANDMARK BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

Delaware43-1930755
(State or other jurisdiction of
incorporation or organization)
 (I.R.S. Employer
Identification Number)

 

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: Trading Symbol(s) Name of exchange on which registered:
Common Stock, par value $0.01 per share LARK Nasdaq Global Market

 

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. Yes ☒ No ☐

 

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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

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 ☐ Accelerated filer ☐ Non-accelerated filer ☒ Smaller reporting company 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. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: as of May 14, 2021, the issuer had outstanding 4,756,604 shares of its common stock, $0.01 par value per share.

 

 

 

 

 

 

LANDMARK BANCORP, INC.

Form 10-Q Quarterly Report

 

Table of Contents

 

Page Number 
   
 PART I
   
Item 1.Financial Statements2 – 24
Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

25 – 33
Item 3.

Quantitative and Qualitative Disclosures about Market Risk

34 – 35
Item 4.Controls and Procedures36
   
PART II 
   
Item 1.Legal Proceedings36
Item 1A.Risk Factors36
Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

36
Item 3.Defaults Upon Senior Securities36
Item 4.Mine Safety Disclosures36
Item 5.Other Information36
Item 6.Exhibits36
   
 Signature Page37

 

 1 

 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

LANDMARK BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

 March 31,  December 31, 
(Dollars in thousands, except per share amounts) 2021  2020 
  (Unaudited)    
Assets        
Cash and cash equivalents $109,151  $84,818 
Investment securities available-for-sale, at fair value  320,905   297,270 
Bank stocks, at cost  4,062   4,473 
Loans, net of allowance for loans losses of $9,271 at March 31, 2021 and $8,775 at December 31, 2020  717,809   702,782 
Loans held for sale, at fair value  13,995   15,533 
Bank owned life insurance  25,568   25,420 
Premises and equipment, net  20,320   20,493 
Goodwill  17,532   17,532 
Other intangible assets, net  168   206 
Mortgage servicing rights  3,966   3,726 
Real estate owned, net  1,474   1,774 
Accrued interest and other assets  13,925   14,000 
Total assets $1,248,875  $1,188,027 
         
Liabilities and Stockholders’ Equity        
Liabilities:        
Deposits:        
Non-interest-bearing demand $314,616  $264,878 
Money market and checking  490,634   491,275 
Savings  142,507   126,124 
Certificates of deposit  123,489   133,750 
Total deposits  1,071,246   1,016,027 
         
Subordinated debentures  21,651   21,651 
Other borrowings  4,165   6,371 
Accrued interest, taxes, and other liabilities  23,532   17,306 
Total liabilities  1,120,594   1,061,355 
         
Commitments and contingencies  -    -  
         
Stockholders’ equity:        
Preferred stock, $0.01 par value per share, 200,000 shares authorized; NaN issued  -   - 
Common stock, $0.01 par value per share, 7,500,000 shares authorized; 4,756,604 and 4,750,838 shares issued at March 31, 2021 and December 31, 2020, respectively  48   48 
Additional paid-in capital  72,336   72,230 
Retained earnings  49,363   44,947 
Accumulated other comprehensive income  6,534   9,447 
Total stockholders’ equity  128,281   126,672 
Total liabilities and stockholders’ equity $1,248,875  $1,188,027 

 

See accompanying notes to consolidated financial statements.

 

 2 

 

 

LANDMARK BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

 

  2021  2020 
  Three months ended 
(Dollars in thousands, except per share amounts) March 31, 
  2021  2020 
Interest income:        
Loans $8,404  $7,126 
Investment securities:        
Taxable  811   1,344 
Tax-exempt  778   848 
Total interest income  9,993   9,318 
Interest expense:        
Deposits  281   983 
Borrowings  121   233 
Total interest expense  402   1,216 
Net interest income  9,591   8,102 
Provision for loan losses  500   1,200 
Net interest income after provision for loan losses  9,091   6,902 
Non-interest income:        
Fees and service charges  2,033   1,962 
Gains on sales of loans, net  3,140   1,193 
Bank owned life insurance  148   154 
Gains on sales of investment securities, net  1,075   1,770 
Other  329   274 
Total non-interest income  6,725   5,353 
Non-interest expense:        
Compensation and benefits  4,941   4,582 
Occupancy and equipment  1,062   1,079 
Data processing  501   425 
Amortization of mortage servicing rights and intangibles  437   277 
Professional fees  392   363 
Other  1,740   1,381 
Total non-interest expense  9,073   8,107 
Earnings before income taxes  6,743   4,148 
Income tax expense  1,376   785 
Net earnings $5,367  $3,363 
Earnings per share (1):        
Basic (1) $1.13  $0.70 
Diluted (1) $1.13  $0.70 
Dividends per share (1) $0.20  $0.19 

  

(1)Per share amounts for the period ended March 31, 2020 have been adjusted to give effect to the 5% stock dividend paid during December 2020.

 

 

See accompanying notes to consolidated financial statements.

 

 3 

 

 

LANDMARK BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

  2021  2020 
  Three months ended 
(Dollars in thousands) March 31, 
  2021  2020 
       
Net earnings $5,367  $3,363 
         
Net unrealized holding (losses) gains on available-for-sale securities  (2,783)  4,405 
Less reclassification adjustment for net gains included in earnings  (1,075)  (1,770)
Net unrealized (losses) gains  (3,858)  2,635 
Income tax effect on net gains included in earnings  263   434 
Income tax effect on net unrealized holding losses (gains)  682   (1,080)
Other comprehensive (loss) income  (2,913)  1,989 
         
Total comprehensive income $2,454  $5,352 

 

See accompanying notes to consolidated financial statements.

 

 4 

 

 

LANDMARK BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

 

(Dollars in thousands, except per share amounts) Common stock  Additional paid-in capital  Retained earnings  Treasury stock  Accumulated other comprehensive income  Total 
                   
Balance at January 1, 2020 $46  $69,029  $34,293  $-  $5,239  $108,607 
Net earnings  -   -   3,363   -   -   3,363 
Other comprehensive income  -   -   -   -   1,989   1,989 
Dividends paid ($0.19 per share)  -   -   (920)  -   -   (920)
Dividends paid ($0.20 per share)                        
Stock-based compensation  -   85   -   -   -   85 
Exercise of stock options, 3,136 shares  -   33   -   -   -   33 
Exercise of stock options, 5,766 shares                        
Purchase of 91,137 treasury shares  -   -   -   (2,023)  -   (2,023)
Balance at March 31, 2020 $46  $69,147  $36,736  $(2,023) $7,228  $111,134 
                         
Balance at January 1, 2021 $48  $72,230  $44,947  $-  $9,447  $126,672 
Net earnings  -   -   5,367       -   5,367 
Other comprehensive loss  -   -   -       (2,913)  (2,913)
Dividends paid ($0.20 per share)  -   -   (951)      -   (951)
Stock-based compensation  -   84   -       -   84 
Exercise of stock options, 5,766 shares  -   22   -   -   -   22 
Balance at March 31, 2021 $48  $72,336  $49,363  $-  $6,534  $128,281 

 

See accompanying notes to consolidated financial statements.

 

 5 

 

 

LANDMARK BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

  2021  2020 
  Three months ended 
(Dollars in thousands) March 31, 
  2021  2020 
Cash flows from operating activities:        
Net earnings $5,367  $3,363 
Adjustments to reconcile net earnings to net cash provided by operating activities:        
Provision for loan losses  500   1,200 
Amortization of investment security premiums, net  397   366 
Amortization of purchase accounting adjustment on loans  (8)  (5)
Amortization of mortgage servicing rights and other intangibles  437   277 
Depreciation  245   250 
Increase in cash surrender value of bank owned life insurance  (148)  (154)
Stock-based compensation  84   85 
Deferred income taxes  628   403 
Net gains on sales of investment securities  (1,075)  (1,770)
Net (gain) losses on sales of foreclosed assets  (5)  1 
Net gains on sales of loans  (3,140)  (1,193)
Proceeds from sales of loans  100,687   45,830 
Origination of loans held for sale  (96,648)  (45,893)
Changes in assets and liabilities:        
Accrued interest and other assets  75   (968)
Accrued expenses, taxes, and other liabilities  (484)  2,948 
Net cash provided by operating activities  6,912   4,740 
Cash flows from investing activities:        
Net increase in loans  (15,519)  (23,065)
Maturities and prepayments of investment securities  7,720   18,948 
Purchases of investment securities  (40,854)  (10,909)
Proceeds from sales of investment securities  13,346   44,508 
Redemption of bank stocks  1,017   680 
Purchase of bank stocks  (606)  (915)
Proceeds from sales of premises and equipment and foreclosed assets  305   45 
Purchases of premises and equipment, net  (72)  (120)
Net cash (used in) provided by investing activities  (34,663)  29,172 
Cash flows from financing activities:        
Net increase (decrease) in deposits  55,219   (4,568)
Federal Home Loan Bank advance borrowings  -   101,768 
Federal Home Loan Bank advance repayments  -   (104,768)
Proceeds from other borrowings  -   1,000 
Repayments on other borrowings  (2,206)  (9,346)
Proceeds from exercise of stock options  22   33 
Payment of dividends  (951)  (920)
Purchase of treasury stock  -   (2,023)
Net cash provided by (used in) financing activities  52,084   (18,824)
Net increase in cash and cash equivalents  24,333   15,088 
Cash and cash equivalents at beginning of period  84,818   13,694 
Cash and cash equivalents at end of period $109,151  $28,782 
         
(Continued)

 

 6 

 

 

LANDMARK BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED

(Unaudited)

 

  Three months ended 
(Dollars in thousands) March 31, 
  2021  2020 
Supplemental disclosure of cash flow information:        
Cash paid for interest $419  $1,258 
Cash paid for operating leases  32   44 
         
Supplemental schedule of noncash investing and financing activities:        
Transfer of loans to real estate owned  -   314 
Investment securities purchases not yet settled  7,028   - 

 

See accompanying notes to consolidated financial statements.

 

 7 

 

 

LANDMARK BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1. Interim Financial Statements

 

The unaudited consolidated financial statements of Landmark Bancorp, Inc. (the “Company”) and its wholly owned subsidiaries, Landmark National Bank (the “Bank”) and Landmark Risk Management Inc., have been prepared in accordance with the instructions to Form 10-Q. Accordingly, they do not include all the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements and should be read in conjunction with the Company’s most recent Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 22, 2021, containing the latest audited consolidated financial statements and notes thereto. The consolidated financial statements in this report have not been audited by an independent registered public accounting firm, but in the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation of financial statements have been reflected herein. The results of the three-month interim period ended March 31, 2021 are not necessarily indicative of the results expected for the year ending December 31, 2021 or any other future time period. The Company has evaluated subsequent events for recognition and disclosure up to the date the financial statements were issued.

 

2. Investments

 

A summary of investment securities available-for-sale is as follows:

 

Schedule of Available-for-sale Securities

  As of March 31, 2021 
     Gross  Gross    
  Amortized  unrealized  unrealized  Estimated 
(Dollars in thousands) cost  gains  losses  fair value 
             
U. S. treasury securities $20,330  $30  $(1) $20,359 
U. S. federal agency obligations  18,748   123   (10)  18,861 
Municipal obligations, tax exempt  138,162   4,998   (55)  143,105 
Municipal obligations, taxable  39,866   1,376   (104)  41,138 
Agency mortgage-backed securities  89,690   2,456   (159)  91,987 
Certificates of deposit  5,455   -   -   5,455 
Total available-for-sale $312,251  $8,983  $(329) $320,905 

 

  As of December 31, 2020 
     Gross  Gross    
  Amortized  unrealized  unrealized  Estimated 
(Dollars in thousands) cost  gains  losses  fair value 
             
U. S. treasury securities $2,000  $37  $-  $2,037 
U. S. federal agency obligations  18,804  ��138   (18)  18,924 
Municipal obligations, tax exempt  136,321   6,367   (12)  142,676 
Municipal obligations, taxable  46,643   2,892   -   49,535 
Agency mortgage-backed securities  75,530   3,108   -   78,638 
Certificates of deposit  5,460   -   -   5,460 
Total available-for-sale $284,758  $12,542  $(30) $297,270 

 

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 March 31, 2021 and December 31, 2020. 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.

 

Schedule of Available for Sale Securities Continuous Unrealized Loss Position Fair Value

 

     As of March 31, 2021 
(Dollars in thousands)    Less than 12 months  12 months or longer  Total 
  No. of  Fair  Unrealized  Fair  Unrealized  Fair  Unrealized 
  securities  value  losses  value  losses  value  losses 
U.S. treasury securities  2  $5,308  $(1) $-  $-  $5,308  $(1)
U.S. federal agency obligations  3   8,712   (10)  -   -   8,712   (10)
Municipal obligations, tax exempt  24   9,541   (55)  -   -   9,541   (55)
Municipal obligations, taxable  8   5,345   (104)  -   -   5,345   (104)
Agency mortgage-backed securities  7   21,085   (159)  

 

     -

        -   21,085   (159)
Total  44  $49,991  $(329) $-  $-  $49,991  $(329)

 

     As of December 31, 2020 
(Dollars in thousands)    Less than 12 months  12 months or longer  Total 
  No. of  Fair  Unrealized  Fair  Unrealized  Fair  Unrealized 
  securities  value  losses  value  losses  value  losses 
U.S. federal agency obligations  4  $11,772  $(18) $-  $-  $11,772  $(18)
Municipal obligations, tax exempt  12   4,191   (12)       -          -   4,191   (12)
Total  16  $15,963  $(30) $-  $-  $15,963  $(30)

 

 8 

 

 

The Company’s U.S. treasury portfolio consists of securities issued by the United States Department of the Treasury. The receipt of principal and interest on U.S. treasury securities is guaranteed by the full faith and credit of the U.S. government. 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 its cost basis, the Company believed that the U.S. treasury securities identified in the table above were temporarily impaired as of March 31, 2021.

 

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 Federal Home Loan Bank (“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 as of March 31, 2021 and December 31, 2020.

 

The Company’s portfolio of municipal obligations consists of both tax-exempt and taxable general obligations securities issued by various municipalities. As of March 31, 2021, 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 as of March 31, 2021 and December 31, 2020.

 

The Company’s agency mortgage-backed securities portfolio consists of securities underwritten to the standards of and guaranteed by the government-sponsored agencies of FHLMC, FNMA and the Government National Mortgage Association. The receipt of principal, at par, and interest on agency mortgage-backed securities is guaranteed by the respective government-sponsored agency guarantor, such that the Company believed that its agency mortgage-backed securities did not expose the Company to credit-related losses. Based on these factors, along with the Company’s intent to not sell the securities and the Company’s 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 agency mortgage-backed securities identified in the table above were temporarily impaired as of March 31, 2021.

 

The table below sets forth amortized cost and fair value of investment securities at March 31, 2021. The table 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.

 

Schedule of Investments Classified by Contractual Maturity Date

(Dollars in thousands) Amortized  Estimated 
  cost  fair value 
Due in less than one year $28,023  $28,100 
Due after one year but within five years  167,223   170,860 
Due after five years but within ten years  58,457   60,891 
Due after ten years  58,548   61,054 
Total $312,251  $320,905 

 

Sales proceeds and gross realized gains and losses on sales of available-for-sale securities were as follows for the periods indicated:

 

Schedule of Realized Gain (loss)

  2021  2020 
(Dollars in thousands) Three months ended March 31, 
  2021  2020 
       
Sales proceeds $13,346  $44,508 
         
Realized gains $1,075  $1,772 
Realized losses  0   (2)
Net realized gains $1,075  $1,770 

 

Securities with carrying values of $285.0 million and $282.2 million were pledged to secure public funds on deposit, repurchase agreements and as collateral for borrowings at March 31, 2021 and December 31, 2020, respectively. Except for U.S. federal agency obligations, no investment in a single issuer exceeded 10% of consolidated stockholders’ equity.

 

 9 

 

 

3. Loans and Allowance for Loan Losses

 

Loans consisted of the following as of the dates indicated below:

Schedule of Loans

 

  March 31,  December 31, 
(Dollars in thousands) 2021  2020 
       
One-to-four family residential real estate loans $159,798  $157,984 
Construction and land loans  26,591   26,106 
Commercial real estate loans  179,781   172,307 
Commercial loans  126,998   134,047 
Paycheck protection program loans  117,297   100,084 
Agriculture loans  92,486   96,532 
Municipal loans  2,183   2,332 
Consumer loans  25,557   24,122 
Total gross loans  730,691   713,514 
Net deferred loan (fees) costs and loans in process  (3,611)  (1,957)
Allowance for loan losses  (9,271)  (8,775)
Loans, net $717,809  $702,782 

 

The following tables provide information on the Company’s allowance for loan losses by loan class and allowance methodology:

Schedule of Allowance for Credit Losses on Financing Receivables 

  Three months ended March 31, 2021 
(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 
                            
Allowance for loan losses:                                    
Balance at January 1, 2021 $859  $181  $2,482  $2,388  $      -  $2,690  $6  $169  $8,775 
Charge-offs  (23)  -   -   -   -   -   -   (41)  (64)
Recoveries  1   1   -   1   -   -   6   51   60 
Provision for loan losses  60   4   775   (143)  -   (187)  (6)  (3)  500 
Balance at March 31, 2021 $897  $186  $3,257  $2,246  $-  $2,503  $6  $176  $9,271 

 

  Three months ended March 31, 2020 
(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 
                            
Allowance for loan losses:                                    
Balance at January 1, 2020 $501  $271  $1,386  $1,815  $-  $2,347  $7  $140  $6,467 
Charge-offs  -   (100)  -   (33)  -   -   -   (87)  (220)
Recoveries  -   -   -   1         -   -   6   25   32 
Provision for loan losses  152   54   242   642   -   34   (6)  82   1,200 
Balance at March 31, 2020 $653  $225  $1,628  $2,425  $-  $2,381  $7  $160  $7,479 

 

 10 

 

 

  As of March 31, 2021 
(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 
                            
Allowance for loan losses:                                    
Individually evaluated for loss $-  $-  $424  $28  $-  $40  $-  $-  $492 
Collectively evaluated for loss  897   186   2,833   2,218   -   2,463   6   176   8,779 
Total $897  $186  $3,257  $2,246  $-  $2,503  $6  $176  $9,271 
                                     
Loan balances:                                    
Individually evaluated for loss $956  $1,027  $7,874  $1,679  $-  $1,182  $36  $4  $12,758 
Collectively evaluated for loss  158,842   25,564   171,907   125,319   117,297   91,304   2,147   25,553   717,933 
Total $159,798  $26,591  $179,781  $126,998  $117,297  $92,486  $2,183  $25,557  $730,691 

 

  As of December 31, 2020 
(Dollars in thousands) One-to-four family residential real estate loan  Construction and land loans  Commercial real estate loans  Commercial loans  Paycheck protection program loans  Agriculture loans  Municipal loans  Consumer loans  Total 
                            
Allowance for loan losses:                                    
Individually evaluated for loss $-  $-  $177  $22  $-  $67  $-  $-  $266 
Collectively evaluated for loss  859   181   2,305   2,366   -   2,623   6   169   8,509 
Total $ 859  $181  $2,482  $2,388  $-  $2,690  $6  $169  $8,775 
                                     
Loan balances:                                    
Individually evaluated for loss $914  $1,137  $8,119  $1,639  $-  $614  $36  $3  $12,462 
Collectively evaluated for loss  157,070   24,969   164,188   132,408   100,084   95,918   2,296   24,119   701,052 
Total $157,984  $26,106  $172,307  $134,047  $100,084  $96,532  $2,332  $24,122  $713,514 

 

The Company recorded net loan charge-offs of $4,000 during the first quarter of 2021 compared to net loan charge-offs of $188,000 during the first quarter of 2020.

 

 11 

 

 

The Company’s impaired loans increased from $12.5 million at December 31, 2020 to $12.8 million at March 31, 2021. 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 March 31, 2021 and December 31, 2020, was related to troubled debt restructurings (“TDR”) that are current and accruing interest, but still classified as impaired. Interest income recognized on a cash basis was immaterial during the three months ended March 31, 2021 and 2020. The following tables present information on impaired loans:

 Schedule of Impaired Financing Receivables

(Dollars in thousands) As of March 31, 2021 
  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 $956  $956  $956  $-  $-  $963  $2 
Construction and land  2,762   1,027   1,027   -   -   1,043   6 
Commercial real estate  7,874   7,874   2,404   5,470   424   7,875   9 
Commercial  2,030   1,679   1,561   118   28   1,705   10 
Agriculture  1,397   1,182   1,131   51   40   1,237   16 
Municipal  36   36   36   -   -   36   - 
Consumer  4   4   4   -   -   5   - 
Total impaired loans $15,059  $12,758  $7,119  $5,639  $492  $12,864  $43 

 

(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 $914  $914  $914  $-  $-  $925  $3 
Construction and land  2,872   1,137   1,137   -   -   1,211   26 
Commercial real estate  8,119   8,119   4,302   3,817   177   8,152   8 
Commercial  1,990   1,639   1,543   96   22   1,984   43 
Agriculture  829   614   538   76   67   618   67 
Municipal  36   36   36   -   -   54   1 
Consumer  3   3   3   -   -   4   - 
Total impaired loans $14,763  $12,462  $8,473  $3,989  $266  $12,948  $148 

 

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 90 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 90 days or more delinquent and accruing interest at March 31, 2021 or December 31, 2020.

 

 12 

 

 

The following tables present information on the Company’s past due and non-accrual loans by loan class:

Schedule of Past Due Financing Receivables 

(Dollars in thousands) As of March 31, 2021 
  30-59 days delinquent and accruing  60-89 days delinquent and accruing  90 days or more delinquent and accruing  Total past due loans accruing  Non-accrual loans  Total past due and non-accrual loans  Total loans not past due 
                      
One-to-four family residential real estate loans $1,268  $124  $-  $1,392  $793  $2,185  $157,613 
Construction and land loans  -   -   -   -   691   691   25,900 
Commercial real estate loans  -   -   -   -   7,874   7,874   171,907 
Commercial loans  1,587   -   -   1,587   947   2,534   124,464 
Paycheck protection program loans  -   -   -   -   -   -   117,297 
Agriculture loans  1,583   424   -   2,007   706   2,713   89,773 
Municipal loans  -   -   -   -   -   -   2,183 
Consumer loans  15   24   -   39   4   43   25,514 
Total $4,453  $572  $-  $5,025  $11,015  $16,040  $714,651 
                             
Percent of gross loans  0.61%  0.08%  0.00%  0.69%  1.51%  2.20%  97.80%

 

(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  Total past due loans accruing  Non-accrual loans  Total past due and non-accrual loans  Total loans not past due 
                      
One-to-four family residential real estate loans $262  $185  $-  $447  $749  $1,196  $156,788 
Construction and land loans  -   -   -   -   694   694   25,412 
Commercial real estate loans  -   -   -   -   8,119   8,119   164,188 
Commercial loans  832   -   -   832   874   1,706   132,341 
Paycheck protection program loans  -   -   -   -   -   -   100,084 
Agriculture loans  206   29   -   235   76   311   96,221 
Municipal loans  -   -   -   -   -   -   2,332 
Consumer loans  15   1   -   16   3   19   24,103 
Total $1,315  $215  $-  $1,530  $10,515  $12,045  $701,469 
                             
Percent of gross loans  0.19%  0.03%  0.00%  0.22%  1.47%  1.69%  98.31%

 

 13 

 

 

Under the original terms of the Company’s non-accrual loans, interest earned on such loans for the three months ended March 31, 2021 and 2020 would have increased interest income by $186,000 and $120,000, respectively. NaN interest income related to non-accrual loans was included in interest income for the three months ended March 31, 2021 and 2020.

 

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. Nonclassified 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 such protection is 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:

Schedule of Risk Categories by Loan Class 

  As of March 31, 2021  As of December 31, 2020 
(Dollars in thousands) Nonclassified  Classified  Nonclassified  Classified 
             
One-to-four family residential real estate loans $155,668  $4,130  $154,985  $2,999 
Construction and land loans  25,900   691   25,412   694 
Commercial real estate loans  168,909   10,872   161,661   10,646 
Commercial loans  125,069   1,929   132,023   2,024 
Paycheck protection program loans  117,297   -   100,084   - 
Agriculture loans  85,305   7,181   87,662   8,870 
Municipal loan  2,183   -   2,332   - 
Consumer loans  25,554   3   24,119   3 
Total $705,885  $24,806  $688,278  $25,236 

 

At March 31, 2021, the Company had ten loan relationships consisting of 21 outstanding loans that were classified as TDRs. During the first quarter of 2021, one commercial loan totaling $47,000 was classified as a TDR after extending the maturity of the loan. The restructuring changed the payment terms to match the borrower’s cash flows. The Company had previously charged-off $100,000 of the loan due to a collateral shortfall. A construction and land loan previously classified as TDR in 2012 paid off during the first three months of 2021. There were 0 loans classified as TDRs during the first three months of 2020.

 

 14 

 

 

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 March 31, 2021 and 2020. The Company did not record any charge-offs against loans classified as TDRs in the first quarter of 2021 or 2020. No credit provisions related to TDRs were recorded in the three months ended March 31, 2021 compared to a credit provision of $1,000 recorded in the three months ended March 31, 2020. The Company allocated $8,000 of the allowance for loan losses recorded against loans classified as TDRs at March 31, 2021 and December 31, 2020.

 

The following table presents information on loans that are classified as TDRs:

Schedule of Troubled Debt Restructurings On Financing Receivables 

(Dollars in thousands)                  
  As of March 31, 2021  As of December 31, 2020 
  Number of loans  Non-accrual balance  Accruing balance  Number of loans  Non-accrual balance  Accruing balance 
                   
One-to-four family residential real estate loans  2  $-  $163   2  $-  $165 
Construction and land loans  4   691   336   5   693   443 
Commercial real estate loans  2   1,227   -   2   1,227   - 
Commercial loans  8   80   732   7   33   765 
Agriculture loans  4   -   476   4   -   538 
Municipal loan  1   -   36   1   -   36 
Total  21  $1,998  $1,743   21  $1,953  $1,947 

 

As of March 31, 2021, the Company had 4 loan modifications on outstanding loan balances of $6.8 million in connection with the Coronavirus Disease 2019 (COVID-19) pandemic. These modifications consisted of payment deferrals that consisted of either the full loan payment or just the principal component. The Company also entered into short-term forbearance plans or short-term repayment plans on two one-to-four family residential mortgage loans totaling $250,000 as of March 31, 2021. Consistent with the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and the Joint Interagency Regulatory Guidance, these loan modifications were not classified as TDRs and are excluded from the table above.

 

4. Goodwill and Other Intangible Assets

 

The Company tests goodwill for impairment annually or more frequently if circumstances warrant. The Company’s annual step one impairment test as of December 31, 2020 concluded that its goodwill was not impaired. The Company concluded there were no triggering events during the first three months of 2021 that required an interim goodwill impairment test.

 

Lease intangible assets are amortized over the life of the lease. Core deposit intangible assets are amortized over the estimated useful life of ten years on an accelerated basis. A summary of the other intangible assets that continue to be subject to amortization was as follows:

 Schedule of Other Intangible Assets and Goodwill

(Dollars in thousands) As of March 31, 2021 
  Gross carrying amount  Accumulated amortization  Net carrying amount 
Core deposit intangible assets $2,018  $(1,865) $153 
Lease intangible asset  350   (335)  15 
Total other intangible assets $2,368  $(2,200) $168 

 

(Dollars in thousands) As of December 31, 2020 
  Gross carrying amount  Accumulated amortization  Net carrying amount 
Core deposit intangible assets $2,018  $(1,838) $180 
Lease intangible asset  350   (324)  26 
Total other intangible assets $2,368  $(2,162) $206 

 

The following sets forth estimated amortization expense for core deposit and lease intangible assets for the remainder of 2021 and in successive years ending December 31:

Schedule of Finite-lived Intangible Assets, Future Amortization Expense 

(Dollars in thousands) Amortization 
  expense 
Remainder of 2021 $84 
2022  58 
2023  26 
Total $168 

 

 15 

 

 

5. 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:

Schedule of Participating Mortgage Loans 

(Dollars in thousands) March 31,  December 31, 
  2021  2020 
FHLMC $662,995  $639,875 
FHLB  24,865   28,157 
Total $687,860  $668,032 

 

Custodial escrow balances maintained in connection with serviced loans were $10.0 million and $5.8 million at March 31, 2021 and December 31, 2020, respectively. Gross service fee income related to such loans was $431,000 and $357,000 for the three months ended March 31, 2021 and 2020, respectively, and is included in fees and service charges in the consolidated statements of earnings.

  

Activity for mortgage servicing rights was as follows:

Schedule of Servicing Asset at Amortized Cost 

  Three months ended 
(Dollars in thousands) March 31, 
  2021  2020 
Mortgage servicing rights:        
Balance at beginning of period $3,726  $2,446 
Additions  639   212 
Amortization  (399)  (230)
Balance at end of period $3,966  $2,428 

 

The fair value of mortgage servicing rights was $6.0 million and $4.4 million at March 31, 2021 and December 31, 2020, respectively. Fair value at March 31, 2021 was determined using discount rates ranging from 8.65% to 12.00%; prepayment speeds ranging from 6.00% to 27.55%, depending on the stratification of the specific mortgage servicing right; and a weighted average default rate of 1.35%. 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%.

 

The Company had a mortgage repurchase reserve of $226,000 at March 31, 2021 and $235,000 at December 31, 2020, 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. The Company charged a $9,000 loss against the reserve during the first three months of 2021. The Company did not incur any losses charged against the reserve or make any provisions to the reserve during the first three months of 2020. As of March 31, 2021, the Company did not have any outstanding mortgage repurchase requests.

 

6. Earnings per Share

 

Basic earnings per share have been computed based upon the weighted average number of common shares outstanding during each period. Diluted earnings per share include the effect of all potential common shares outstanding during each period. The diluted earnings per share computation for the three months ended March 31, 2021 included all unexercised stock options because no stock options were anti-dilutive during such period. The diluted earnings per share computation for the three months ended March 31, 2020 excluded 105,041 of unexercised stock options because their inclusion would have been anti-dilutive during such period. The shares used in the calculation of basic and diluted earnings per share are shown below:

 Schedule of Earnings Per Share, Basic and Diluted

  2021  2020 
  Three months ended 
(Dollars in thousands, except per share amounts) March 31, 
  2021  2020 
Net earnings $5,367  $3,363 
         
Weighted average common shares outstanding - basic (1)  4,752,864   4,808,572 
Assumed exercise of stock options (1)  6,634   19,121 
Weighted average common shares outstanding - diluted (1)  4,759,498   4,827,693 
Earnings per share (1):        
Basic(1) $1.13  $0.70 
Diluted (1)$1.13  $0.70 

 

 (1)Share and per share values for the period ended March 31, 2020 have been adjusted to give effect to the 5% stock dividend paid during December 2020.

 

 16 

 

 

7. 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 $4.2 million at March 31, 2021 and $6.4 million at December 31, 2020, which were secured by $7.2 million and $8.7 million of the Company’s investment portfolio at the same dates, respectively.

 

The following is a summary of the balances and collateral of the Company’s repurchase agreements:

Schedule of Repurchase Agreements 

  As of March 31, 2021 
(dollars in thousands) 

Overnight and

Continuous

  Up to 30 days  30-90 days  

Greater

than 90 days

  Total 
Repurchase agreements:                    
U.S. federal agency obligations $1,989  $-  $-  $-  $1,989 
Agency mortgage-backed securities  2,176        -         -      -   2,176 
Total $4,165  $-  $-  $-  $4,165 

 

   As of December 31, 2020 
(dollars in thousands)  

Overnight and

Continuous

   

Up to

30 days

   30-90 days   

Greater

than 90 days

   Total 
Repurchase agreements:                    
U.S. federal agency obligations $2,412  $-  $-  $-  $2,412 
Agency mortgage-backed securities  3,959   -   -   -   3,959 
Total $6,371  $-  $-  $-  $6,371 

 

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.

 

8. 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.

Schedule of Revenue from Contracts with Customers Within Non-interest Income 

  2021  2020 
  Three months ended 
(Dollars in thousands) March 31, 
  2021  2020 
Non-interest income:        
Service charges on deposit accounts        
Overdraft fees $672  $873 
Other  163   146 
Interchange income  724   535 
Loan servicing fees (1)  431   357 
Office lease income (1)  166   162 
Gains on sales of loans (1)  3,140   1,193 
Bank owned life insurance income (1)  148   154 
Gains on sales of investment securities (1)  1,075   1,770 
Gains (losses) on sales of real estate owned  5   (1)
Other  201   164 
Total non-interest income $6,725  $5,353 

 

 (1)Not within the scope of ASC 606.

 

 17 

 

 

A description of the Company’s revenue streams under ASC 606 follows:

 

Service Charges on Deposit Accounts

 

The Company earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which include services such as ATM 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 first three months of 2021 or 2020.

 

9. 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.

 

 18 

 

 

Fair value estimates of the Company’s financial instruments as of March 31, 2021 and December 31, 2020, including methods and assumptions utilized, are set forth below:

 Schedule of Fair Value, by Balance Sheet Grouping

(Dollars in thousands) As of March 31, 2021 
  Carrying             
  amount  Level 1  Level 2  Level 3  Total 
Financial assets:                    
Cash and cash equivalents $109,151  $109,151  $-  $-  $109,151 
Investment securities available-for-sale  320,905   20,359   300,546   -   320,905 
Bank stocks, at cost  4,062    n/a    n/a    n/a    n/a 
Loans, net  717,809   -   -   733,858   733,858 
Loans held for sale  13,995   -   13,995   -   13,995 
Accrued interest receivable  4,655   65   1,537   3,053   4,655 
Derivative financial instruments  1,757   -   1,757   -   1,757 
                     
Financial liabilities:                    
Non-maturity deposits $(947,757) $(947,757) $-  $-  $(947,757)
Certificates of deposit  (123,489)  -   (123,670)  -   (123,670)
Subordinated debentures  (21,651)  -   (16,168)  -   (16,168)
Other borrowings  (4,165)  -   (4,165)  -   (4,165)
Accrued interest payable  (151)  -   (151)  -   (151)

 

  As of December 31, 2020 
  Carrying             
  amount  Level 1  Level 2  Level 3  Total 
Financial assets:                    
Cash and cash equivalents $84,818  $84,818  $-  $-  $84,818 
Investment securities available-for-sale  297,270   2,037   295,233   -   297,270 
Bank stocks, at cost  4,473    n/a    n/a    n/a    n/a 
Loans, net  702,782   -   -   718,071   718,071 
Loans held for sale  15,533   -   15,533   -   15,533 
Accrued interest receivable  4,885   -   1,697   3,188   4,885 
Derivative financial instruments  1,796   -   1,796   -   1,796 
                     
Financial liabilities:                    
Non-maturity deposits $(882,277) $(882,277) $-  $-  $(882,277)
Certificates of deposit  (133,750)  -   (134,048)  -   (134,048)
Subordinated debentures  (21,651)  -   (15,232)  -   (15,232)
Other borrowings  (6,371)  -   (6,371)  -   (6,371)
Accrued interest payable  (168)  -   (168)  -   (168)
Derivative financial instruments  (466)  -   (466)  -   (466)

 

Transfers

 

The Company did not transfer any assets or liabilities among levels during the three months ended March 31, 2021 or during the year ended December 31, 2020.

 

 19 

 

 

Valuation Methods for Instruments Measured at Fair Value on a Recurring Basis

 

The following tables represent the Company’s financial instruments that are measured at fair value on a recurring basis at March 31, 2021 and December 31, 2020, allocated to the appropriate fair value hierarchy:

 Schedule of Fair Value, Assets Measured on Recurring Basis

(Dollars in thousands)    As of March 31, 2021 
     Fair value hierarchy 
  Total  Level 1  Level 2  Level 3 
Assets:                
Available-for-sale investment securities:                
U. S. treasury securities $20,359  $20,359  $-  $- 
U. S. federal agency obligations  18,861   -   18,861   - 
Municipal obligations, tax exempt  143,105   -   143,105   - 
Municipal obligations, taxable  41,138   -   41,138   - 
Agency mortgage-backed securities  91,987   -   91,987         - 
Certificates of deposit  5,455   -   5,455   - 
Loans held for sale  13,995   -   13,995   - 
Derivative financial instruments  1,757   -   1,757   - 

 

       As of December 31, 2020
       Fair value hierarchy 
   Total   Level 1   Level 2   Level 3 
Assets:                
Available-for-sale investment securities:                
U. S. treasury securities $2,037  $2,037  $-  $- 
U. S. federal agency obligations  18,924   -   18,924   - 
Municipal obligations, tax exempt  142,676   -   142,676   - 
Municipal obligations, taxable  49,535   -   49,535   - 
Agency mortgage-backed securities  78,638   -   78,638   - 
Certificates of deposit  5,460   -   5,460   - 
Loans held for sale  15,533   -   15,533   - 
Derivative financial instruments  1,796   -   1,796   - 
Liability:                
Derivative financial instruments  (466)  -   (466)  - 

 

The Company’s investment securities classified as available-for-sale include U.S. treasury securities, U.S. federal agency obligations, 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 securities 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 obligations 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.

 

Mortgage loans originated and intended for sale in the secondary market are carried at 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.

 

 20 

 

 

The aggregate fair value, contractual balance (including accrued interest), and gain on loans held for sale were as follows:

Schedule of Fair Value Contractual Balance and Gain Loss on Loans Held for Sale 

  As of  As of 
  March 31,  December 31, 
(Dollars in thousands) 2021  2020 
Aggregate fair value $13,995  $15,533 
Contractual balance  13,956   15,151 
Gain $39  $382 

 

The Company’s derivative financial instruments consist of interest rate lock commitments and corresponding forward sales contracts on mortgage loans held for sale. 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 sales of loans, net in the consolidated statements of earnings. The total amount of gains from changes in fair value of loans held for sale included in earnings were as follows:

 Schedule of Gains and Losses from Changes in Fair Value of Loans Held for Sale

  Three months ended 
  March 31, 
(Dollars in thousands) 2021  2020 
Total change in fair value $427  $(34)

 

Valuation Methods for Instruments Measured at Fair Value on a Nonrecurring Basis

 

The Company does not record 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 carrying value of the Company’s impaired loans was $12.8 million and $12.5 million, with an allocated allowance of $492,000 and $266,000, at March 31, 2021 and December 31, 2020, 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.

 

 21 

 

 

The following table presents quantitative information about Level 3 fair value measurements measured at fair value on a nonrecurring basis as of March 31, 2021 and December 31, 2020.

Schedule of Fair Value Measurements on Nonrecurring, Valuation Techniques 

(Dollars in thousands)          
  Fair value  Valuation technique Unobservable inputs Range 
As of March 31, 2021            
Impaired loans:            
Commercial real estate $5,046  Sales comparison Adjustment to appraised value   15%-20%
Commercial  90  Sales comparison Adjustment to comparable sales  0%-86%
Agriculture  11  Sales comparison Adjustment to appraised value  25%
             
As of December 31, 2020            
Impaired loans:            
Commercial real estate $3,640  Sales comparison Adjustment to appraised value  20%
Commercial  74  Sales comparison Adjustment to comparable sales  0%-69%
Agriculture  9  Sales comparison Adjustment to appraised value  20%
Real estate owned:            
One-to-four family residential real estate  48  Sales comparison Adjustment to appraised value  10%

 

10. Regulatory Capital Requirements

 

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 March 31, 2021, 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 March 31, 2021 and December 31, 2020, 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.

 

 22 

 

 

The following is a comparison of the Company’s regulatory capital to minimum capital requirements at March 31, 2021 and December 31, 2020:

 Schedule of Compliance with Regulatory Capital Requirements for Mortgage Companies

(Dollars in thousands)          To be well-capitalized 
        For capital  under regulatory 
  Actual  adequacy purposes  guidelines 
  Amount  Ratio  Amount  Ratio (1)  Amount  Ratio 
As of March 31, 2021                  
Leverage $125,652   10.43% $48,185   4.0% $60,232   5.0%
Common Equity Tier 1 Capital  104,652   14.38%  50,946   7.0%  47,307   6.5%
Tier 1 Capital  125,652   17.26%  61,863   8.5%  58,224   8.0%
Total Risk Based Capital  134,752   18.51%  76,419   10.5%  72,780   10.0%
                         
As of December 31, 2020                        
Leverage $121,068   10.70% $45,262   4.0% $56,577   5.0%
Common Equity Tier 1 Capital  100,068   13.77%  50,866   7.0%  47,233   6.5%
Tier 1 Capital  121,068   16.66%  61,766   8.5%  58,133   8.0%
Total Risk Based Capital  129,983   17.89%  76,300   10.5%  72,666   10.0%

 

(1)The required ratios for capital adequacy purposes include a capital conservation buffer of 2.5%.  

  

The following is a comparison of the Bank’s regulatory capital to minimum capital requirements at March 31, 2021 and December 31, 2020:

Schedule of Compliance with Regulatory Capital Requirements Under Banking Regulation

              To be well-capitalized 
              under prompt 
(Dollars in thousands)    For capital  corrective 
  Actual  adequacy purposes  action provisions 
  Amount  Ratio  Amount  Ratio (1)  Amount  Ratio 
As of March 31, 2021                  
Leverage $122,481   10.19% $48,064   4.0% $60,080   5.0%
Common Equity Tier 1 Capital  122,481   16.84%  50,901   7.0%  47,265   6.5%
Tier 1 Capital  122,481   16.84%  61,808   8.5%  58,173   8.0%
Total Risk Based Capital  131,574   18.09%  76,352   10.5%  72,716   10.0%
                         
As of December 31, 2020                        
Leverage $118,174   10.47% $45,139   4.0% $56,423   5.0%
Common Equity Tier 1 Capital  118,174   16.27%  50,829   7.0%  47,199   6.5%
Tier 1 Capital  118,174   16.27%  61,721   8.5%  58,091   8.0%
Total Risk Based Capital  127,089   17.50%  76,244   10.5%  72,613   10.0%

 

(1)The required ratios for capital adequacy purposes include a capital conservation buffer of 2.5%.  

 

11. Impact of Recent Accounting Pronouncements

 

In June 2016, the Financial Accounting Standards Board (“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 disaggregated by the year of origination or vintage. The 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 is utilizing 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.

 

 23 

 

 

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.

 

12. COVID-19 Pandemic

 

The COVID-19 pandemic in the United States caused a substantial disruption to the economy, employment and financial markets and continues 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 may 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 continue to decline. At this time, the full impact of the COVID-19 pandemic on the Company’s financial statements is uncertain.

 

 24 

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

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. References to the “Company,” “we,” “us,” and “our” refer collectively to Landmark Bancorp, Inc., Landmark National Bank and 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 holding and acquiring 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 invest in certain investment and mortgage-related securities using deposits and other borrowings as funding sources.

 

Landmark Risk Management, Inc., which was formed and began operations on May 31, 2017, is a Nevada-based captive insurance company which 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. is subject to the regulations of the State of Nevada and undergoes periodic examinations by the Nevada Division of Insurance.

 

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, gains or losses on investments and certain other non-interest related items. Our principal operating expenses, aside from interest expense, consist of compensation and employee benefits, occupancy costs, professional fees, 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. 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.

 

Significant Developments – 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, with restrictions such as social distancing requirements and capacity restrictions on businesses. The Bank and its branches have remained open because banks have been deemed essential businesses. Although the Bank had closed its branch lobbies to walk-in customers as a result of the pandemic, all of the Bank’s branch lobbies are currently open to customers, with services also remaining available through the Bank’s digital banking platforms and drive-thru services. 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, including as a result of the increased availability of vaccines. The Bank will continue to monitor the situation to protect the safety and well-being of our customers and associates.

 

 25 

 

 

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 peaked at 12.6 % in April 2020 as a result of economic impacts of the COVID-19 pandemic but has declined since then, with an unemployment rate in Kansas of 3.2% in February 2021.

 

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 Small Business Administration (“SBA”), referred to as the Paycheck Protection Program (“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, a $900.0 billion COVID-19 relief package that includes an additional $284.5 billion in PPP funding. On March 11, 2021, President Biden signed into law the American Rescue Plan Act of 2021, an additional $1.9 trillion federal stimulus bill in response to COVID-19 that includes cash payments to individuals, supplemental unemployment insurance and the modification and expansion of the PPP. In March 2021, President Biden also signed the PPP Extension Act of 2021, which extended the PPP application deadline to May 31, 2021.
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 adversely affected, as described in further detail below.

 

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 2020 to address changes resulting from the COVID-19 pandemic. Some of our associates are still 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. From the beginning of the PPP through December 31, 2020, we funded 1,095 PPP loans totaling approximately $131.0 million. 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 April 30, 2021, we funded an additional 1,033 PPP loans totaling approximately $54.1 million. As of March 31, 2021, we had approximately $117.3 million of PPP loans outstanding.

 

 26 

 

 

As of March 31, 2021, we entered into short-term forbearance plans and short-term repayment plans on two one-to-four family residential mortgage loans totaling $250,000. We continue to work with our customers by offering loan forbearance and modifications to those borrowers impacted by COVID-19.
As of March 31, 2021, we had 4 loan modifications on outstanding loan balances of $6.8 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.

 

In May 2021, we declared our 79th consecutive quarterly dividend and we currently have no plans to change our dividend strategy given our current capital and liquidity position. 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. In addition, as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020, 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.

 

Critical Accounting Policies. Critical accounting policies are those which 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. There have been no material changes to the critical accounting policies included under Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the Securities and Exchange Commission on March 22, 2021.

 

Summary of Results. During the first quarter of 2021, we recorded net earnings of $5.4 million, which was an increase of $2.0 million from the $3.4 million of net earnings recorded in the first quarter of 2020. The increase in net earnings was primarily due to an increase of $1.9 million of gains on sales of loans, net and an increase of $1.5 million in net interest income and a decrease of $700,000 in provision for loan losses.

 

The following table summarizes earnings and key performance measures for the periods presented:

 

(Dollars in thousands, except per share amounts) Three months ended March 31, 
  2021  2020 
Net earnings:        
Net earnings $5,367  $3,363 
Basic earnings per share (1) $1.13  $0.70 
Diluted earnings per share (1) $1.13  $0.70 
Earnings ratios:        
Return on average assets (2)  1.77%  1.35%
Return on average equity (2)  17.06%  12.21%
Equity to total assets  10.27%  11.24%
Net interest margin (2) (3)  3.51%  3.67%
Dividend payout ratio  17.73%  27.40%

 

(1)Per share values for the period ended March 31, 2020 have been adjusted to give effect to the 5% stock dividend paid during December 2020.
(2)Ratios have been annualized and are not necessarily indicative of the results for the entire year.
(3)Net interest margin is presented on a fully tax equivalent basis, using a 21% federal tax rate.

 

 27 

 

 

Interest Income. Interest income was $10.0 million for the quarter ended March 31, 2021, which was an increase of $675,000 as compared to the same period of 2020. Interest income on loans increased $1.3 million, or 17.9%, to $8.4 million for the quarter ended March 31, 2021, compared to the same period of 2020 due primarily to an increase in our average loan balances, which increased from $546.9 million in the first quarter of 2020 to $730.2 million in the first quarter of 2021 due primarily to the origination of PPP loans. The increase in average loan balances included an average balance of $111.0 million in PPP loans which generated interest income of $1.1 million in the first quarter of 2021. Partially offsetting the higher average balances were lower yields on loans, which decreased from 5.24% in the first quarter of 2020 to 4.67% in the first quarter of 2021. 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. This decrease impacted yields on loans between 2020 and 2021. We anticipate that our yield on loans will continue to be adversely affected in future periods as a result of the COVID-19 pandemic due to the expected continuation of the low interest rate environment. Interest income on investment securities decreased $603,000, or 27.5%, to $1.6 million for the first quarter of 2021, as compared to $2.2 million in the same period of 2020. The decrease in interest income on investment securities was the result of lower average balances, which decreased from $361.3 million in the first quarter of 2020 to $307.0 million in the first quarter of 2021, and lower rates, which decreased from 2.67% in the first quarter of 2020 to 2.31% in the first quarter of 2021.

 

Interest Expense. Interest expense during the quarter ended March 31, 2021 decreased $814,000, or 66.9%, to $402,000 as compared to the same period of 2020. Interest expense on interest-bearing deposits decreased $702,000, or 71.4%, to $281,000 for the quarter ended March 31, 2021, as compared to the quarter ended March 31, 2020. Our total cost of interest-bearing deposits decreased from 0.61% in the first quarter of 2020 to 0.15% in the first quarter of 2021 as a result of lower rates paid on money market and checking accounts, as the rates reprice based on market indexes, and lower rates on our certificates of deposit. Offsetting our lower interest expense was an increase in average interest-bearing deposit balances, which increased from $644.8 million in the first quarter of 2020 to $762.7 million in the first quarter of 2021. For the first quarter of 2021, interest expense on borrowings decreased $112,000, or 48.1%, to $121,000 as compared to the same period of 2020 due to a decrease in our average outstanding borrowings, which decreased from $41.1 million in the first quarter of 2020 to $27.6 million in the same period of 2021, and lower rates, which decreased from 2.28% in the first quarter of 2020 to 1.78% in the same period of 2021. The decrease in average borrowings was primarily due to our increased deposit balances which generated excess liquidity and as customers migrated from repurchase agreements to checking account products providing FDIC insurance on higher balances.

 

Net Interest Income. Net interest income increased $1.5 million, or 18.4%, to $9.6 million for the first quarter of 2021 compared to the same period of 2020. The increase was a result of a 24.0% increase in average interest-earning assets, from $912.4 million in the first quarter of 2020 to $1.1 billion in the first quarter of 2021. The increase in average interest-earning assets was primarily driven by growth in our loan portfolio. The decline in interest rates and the origination of PPP loans contributed to a decrease in net interest margin, on a tax equivalent basis, from 3.67% in the first quarter of 2020 to 3.51% in the same period of 2021.

 

As a result of the COVID-19 pandemic, we have originated approximately $185.2 million of PPP loans from April 3, 2020 through April 30, 2021. These loans have an interest rate of 1.00% plus the amortization of the origination fee, which resulted in a yield of 4.08% on PPP loans in the first quarter of 2021. The maturity date of these loans is two years from the date of borrowing unless the borrower’s loan is forgiven, in which case the loan may 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. As a result of the origination of PPP loans, our net interest income has increased, but our net interest margin declined. In addition, the economic effects of the COVID-19 pandemic has slowed our origination of new loans, excluding PPP loans, which may lead to lower net interest income and net interest margin in future periods. The continuation of the low market interest rates will also likely 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.

 

See the Average Assets/Liabilities and Rate/Volume tables at the end of Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional details on asset yields, liability rates and net interest margin.

 

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 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.

 

 28 

 

 

During the first quarter of 2021, we recorded a provision for loan losses of $500,000 compared to a provision for loan losses of $1.2 million during the first quarter of 2020. We recorded net loan charge-offs of $4,000 during the first quarter of 2021 compared to $188,000 during the first quarter of 2020. Our provision for loan losses was impacted by the projected economic impact of the COVID-19 pandemic. The provision for loan losses in the first quarter of 2020 was the first quarterly analysis that included qualitative factors related to the COVID-19 pandemic. If the COVID-19 pandemic causes economic declines in excess of our projections, or if the pandemic lasts longer than currently projected, our provision for loan losses may remain elevated or increase in future periods. We expect to see higher loan delinquencies and defaults in future periods as a result of the COVID-19 pandemic. We will continue to monitor our allowance for loan losses in light of changing economic conditions related to COVID-19.

 

For further discussion of the allowance for loan losses, refer to the “Asset Quality and Distribution” section below.

 

Non-interest Income. Total non-interest income was $6.7 million in the first quarter of 2021, compared to $5.4 million in the same period of 2020. The increase in non-interest income was primarily due to an increase of $1.9 million of gains on sales of loans. Our gains on sales of loans increased as our originations of secondary market one-to-four family residential real estate loans increased due to the decline in mortgage interest rates that have fueled a robust housing market and refinancing activity. Also contributing to the increase in non-interest income was an increase of $71,000 in fees and service charges, which were primarily due to higher interchange and servicing fees which were partially offset by lower overdraft income. Partially offsetting those increases was a decline in gains on sales of investment securities which decreased from $1.8 million in the first quarter of 2020 to $1.1 million in the first quarter of 2021.

 

Non-interest Expense. Non-interest expense increased $1.0 million, or 11.9%, to $9.1 million for the first quarter of 2021 compared to the same period of 2020. The increase in non-interest expense was primarily due to an increase of $359,000 in compensation and benefits, which was driven in part by increases in our one-to-four family residential real estate lending and related commissions as well as general increases in compensation. Also contributing to the increase in non-interest expense was an increase of $160,000 in amortization of mortgage servicing rights and other intangibles due to retaining more servicing on one-to-four family residential mortgage loans.

 

Income Tax Expense. During the first quarter of 2021, we recorded income tax expense of $1.4 million, compared to $785,000 during the same period of 2020. The effective tax rate increased from 18.9% in the first quarter of 2020 to 20.4% in the first quarter of 2021, primarily due to an increase in earnings before income taxes while our tax-exempt income declined over the comparable periods.

 

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. 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.

 

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 $60.8 million, or 5.1%, from December 31, 2020 to $1.2 billion at March 31, 2021.

 

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. At March 31, 2021, our allowance for loan losses totaled $9.3 million, or 1.27% of gross loans outstanding, compared to $8.8 million or 1.23% of gross loans outstanding at December 31, 2020. Our allowance for loan losses as a percentage of gross loans outstanding, excluding PPP loans of $117.3 million at March 31, 2021 and $100.1 million at December 31, 2020, was 1.51% at March 31, 2021 compared to 1.43% at December 31, 2020. This reflects a more comparable ratio to periods prior to PPP, as no allowance for loan losses has been allocated to PPP loans since they are guaranteed by the Small Business Administration.

 

 29 

 

 

As of March 31, 2021 and December 31, 2020, approximately $24.8 million and $25.2 million, respectively, of loans were considered classified and assigned a risk rating of special mention, substandard or doubtful. These ratings indicate that these loans were identified as potential problem loans having more than normal risk which raised doubts as to the ability of the borrower to comply with present loan repayment terms. Even though borrowers were experiencing moderate cash flow problems as well as some deterioration in collateral value, management believed the allowance was sufficient to cover the risks and probable incurred losses related to such loans at March 31, 2021 and December 31, 2020, respectively.

 

Loans past due 30-89 days and still accruing interest totaled $5.0 million, or 0.69% of gross loans, at March 31, 2021 compared to $1.5 million, or 0.22% of gross loans, at December 31, 2020. At March 31, 2021, $11.0 million in loans were on non-accrual status, or 1.51% of gross loans, compared to $10.5 million, or 1.47% of gross loans, at December 31, 2020. 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 March 31, 2021 or December 31, 2020. Our impaired loans totaled $12.8 million at March 31, 2021 compared to $12.5 million at December 31, 2020. The difference in the Company’s non-accrual loan balances and impaired loan balances at March 31, 2021 and December 31, 2020 was related to TDRs that were accruing interest but still classified as impaired.

 

At March 31, 2021, the Company had ten loan relationships consisting of 21 outstanding loans that were classified as TDRs. During the first quarter of 2021, one commercial loan totaling $47,000 was classified as a TDR after extending the maturity of the loan. The restructuring changed the payment terms to match the borrower’s cash flows. The Company had previously charged-off $100,000 of the loan due to a collateral shortfall. A construction and land loan previously classified as a TDR in 2012 paid off during the first three months of 2021. There were no loans classified as TDRs during the first three months of 2020.

 

As of March 31, 2021, the Company had 4 loan modifications on outstanding loan balances of $6.8 million in connection with the COVID-19 pandemic. These modifications consisted of payment deferrals that were less than 180 days and consisted of either the full loan payment or just the principal component. The Company also entered into short-term forbearance plans or short-term repayment plans on two one-to-four family residential mortgage loans totaling $250,000 as of March 31, 2021. Consistent with the CARES Act and the Joint Interagency Regulatory Guidance, these loan modifications 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 March 31, 2021, we had $1.5 million of real estate owned compared to $1.8 million at December 31, 2020. As of March 31, 2021, real estate owned primarily consisted of commercial and residential real estate properties. 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 $55.2 million in total deposits during the first quarter of 2021, to $1.1 billion at March 31, 2021. The increase in deposits was primarily due to increases in non-interest-bearing demand accounts and savings accounts. The increases in non-interest-bearing demand accounts and savings accounts were associated with the deposit of stimulus checks and higher savings rates. Offsetting those increases was a decrease in certificates of deposit. The decrease in certificates of deposit was primarily associated with a decline in public funds certificates of deposit accounts.

 

Non-interest-bearing deposits at March 31, 2021, were $314.6 million, or 29.4% of deposits, compared to $264.9 million, or 26.1% of deposits, at December 31, 2020. Money market and checking deposit accounts were 45.8% of our deposit portfolio and totaled $490.6 million at March 31, 2021, compared to $491.3 million, or 48.3% of deposits, at December 31, 2020. Savings accounts increased to $142.5 million, or 13.3% of deposits, at March 31, 2021, from $126.1 million, or 12.4% of deposits, at December 31, 2020. Certificates of deposit totaled $123.5 million, or 11.5% of deposits, at March 31, 2021, compared to $133.8 million, or 13.2% of deposits, at December 31, 2020.

 

 30 

 

 

Certificates of deposit at March 31, 2021, scheduled to mature in one year or less, totaled $103.2 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.

 

Total borrowings decreased $2.2 million to $25.8 million at March 31, 2021, from $28.0 million at December 31, 2020. The decrease in total borrowings was due to a decrease in repurchase agreement accounts as customers have migrated to other deposit accounts.

 

Cash Flows. During the three months ended March 31, 2021, our cash and cash equivalents increased by $24.3 million. Our operating activities provided net cash of $6.9 million during the first three months of 2021 primarily as a result of the proceeds from the sales of loans. Our investing activities used net cash of $34.7 million during the first three months of 2021, primarily due to the purchase of investment securities. Financing activities provided net cash of $52.1 million during the first three months of 2021, 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 $430.1 million at March 31, 2021 and $382.1 million at December 31, 2020. 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 or holding higher balances of cash and cash equivalents. The higher balances of cash and cash equivalents are primarily held in our Federal Reserve account.

 

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 FHLB advances, a line of credit with the FHLB, other borrowings or through sales of investment securities. At March 31, 2021, we had no borrowings against our line of credit with the FHLB. At March 31, 2021, we had collateral pledged to the FHLB that would allow us to borrow $99.6 million, subject to FHLB credit requirements and policies. At March 31, 2021, we had no borrowings through the Federal Reserve discount window, while our borrowing capacity with the Federal Reserve was $87.1 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 March 31, 2021. At March 31, 2021, we had subordinated debentures totaling $21.7 million and $4.2 million of repurchase agreements. At March 31, 2021, the Company had no borrowings against 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 March 31, 2021.

 

 31 

 

 

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 $1.9 million at March 31, 2021.

 

At March 31, 2021, we had outstanding loan commitments, excluding standby letters of credit, of $142.6 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 Rules that implemented the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision and certain changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Basel III Rules are 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 Rules require 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). As of March 31, 2021 and December 31, 2020, the Bank met the requirements to be “well capitalized,” which is the highest rating available under the regulatory capital regulations framework for prompt corrective action. Management believed that as of March 31, 2021, the Company and the Bank met all capital adequacy requirements to which we are subject.

 

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 ensure we are prepared for events like the COVID-19 pandemic.

 

Dividends. During the quarter ended March 31, 2021, we paid a quarterly cash dividend of $0.20 per share to our stockholders.

 

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. In addition, under the Basel III Rules, financial institutions have to maintain 2.5% in common equity Tier 1 capital attributable to the capital conservation buffer in order to pay dividends and make other capital distributions. As described above, the Bank exceeded its minimum capital requirements under applicable guidelines as of March 31, 2021. 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 March 31, 2021, approximately $24.0 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 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.

 

 32 

 

 

Average Assets/Liabilities. The following table reflects the tax-equivalent yields earned on average interest-earning assets and costs of average interest-bearing liabilities for the periods indicated (derived by dividing income or expense by the monthly average balance of assets or liabilities, respectively) as well as “net interest margin” (which reflects the effect of the net earnings balance) for the periods shown:

 

  Three months ended  Three months ended
  March 31, 2021  March 31, 2020
  Average balance  Income/ expense  Average yield/cost  Average balance  Income/ expense  Average yield/cost 
(Dollars in thousands)                  
Assets                        
Interest-earning assets:                        
Interest-bearing deposits at banks $93,921  $22   0.09% $4,232  $11   1.05%
Investment securities (1)  307,045   1,749   2.31%  361,264   2,397   2.67%
Loans receivable, net (2)  730,210   8,409   4.67%  546,910   7,132   5.24%
Total interest-earning assets  1,131,176   10,180   3.65%  912,406   9,540   4.21%
Non-interest-earning assets  99,008           92,076         
Total $1,230,184          $1,004,482         
                         
Liabilities and Stockholders' Equity                        
Interest-bearing liabilities:                        
Money market and checking $501,100  $125   0.10% $393,028  $514   0.53%
Savings accounts  132,803   11   0.03%  101,738   9   0.04%
Certificates of deposit  128,804   145   0.46%  150,038   460   1.23%
Total interest-bearing deposits  762,707   281   0.15%  644,804   983   0.61%
Subordinate debentures and other borrowings  27,580   121   1.78%  41,140   233   2.28%
Total interest-bearing liabilities  790,287   402   0.21%  685,944   1,216   0.71%
Non-interest-bearing liabilities  312,317           207,767         
Stockholders' equity  127,580           110,771         
Total $1,230,184          $1,004,482         
                         
Interest rate spread (3)          3.44%          3.50%
Net interest margin (4)     $9,778   3.51%     $8,324   3.67%
Tax-equivalent interest - imputed      187           222     
Net interest income     $9,591          $8,102     
                         
Ratio of average interest-earning assets                        
to average interest-bearing liabilities          143.1%          133.0%

 

(1)Income on tax exempt securities is presented on a fully tax-equivalent basis, using a 21% federal tax rate.
(2)Includes loans classified as non-accrual. Income on tax-exempt loans is presented on a fully tax-equivalent basis, using a 21% federal tax rate.
(3)Interest rate spread represents the difference between the average yield earned on interest-earning assets and the average rate paid on interest-bearing liabilities.
(4)Net interest margin represents annualized, tax-equivalent net interest income divided by average interest-earning assets.

 

 33 

 

 

Rate/Volume Table. 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 for 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 (i) and (ii)). The net changes attributable to the combined effect of volume and rate that cannot be segregated have been allocated proportionately to the change due to volume and the change due to rate.

 

  Three months ended March 31, 
  2021 vs 2020 
  Increase/(decrease) attributable to 
  Volume  Rate  Net 
  (Dollars in thousands) 
Interest income:            
Interest-bearing deposits at banks $11  $-  $11 
Investment securities  (341)  (307)  (648)
Loans  1,905   (628)  1,277 
Total  1,575   (935)  640 
Interest expense:            
Deposits  225   (927)  (702)
Other borrowings  (67)  (45)  (112)
Total  158   (972)  (814)
Net interest income $1,417  $37  $1,454 

 

ITEM 3. 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 relating to pricing our assets and liabilities, which impact 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. 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.

 

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 one using interest rates as of the forecast date, 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 with an impact to our net interest income on a one-year horizon as follows:

 

  As of March 31, 2021  As of December 31, 2020 
Scenario Dollar change in net interest income ($000’s)  Percent change in net interest income  Dollar change in net interest income ($000’s)  Percent change in net interest income 
200 basis point rising $1,524   4.20% ($99)  -0.30%
100 basis point rising $799   2.20% ($169)  -0.50%
100 basis point falling ($744)  -2.00% ($180)  -0.50%
200 basis point falling  NM   NM   NM   NM 

 

The 200 basis point falling scenario is considered to be not meaningful (“NM”) in the current low interest rate environment.

 

 34 

 

 

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 of 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.
 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 our filings with the Securities and Exchange Commission, including the “Risk Factors” section in our Annual Report on Form 10-K for the year ended December 31, 2020 filed on March 22, 2021.

 

 35 

 

 

ITEM 4. 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 Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of March 31, 2021. 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 as of March 31, 2021 to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

 

There were no changes in the Company’s internal control over financial reporting during the quarter ended March 31, 2021 that materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

 

PART II – OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

There are no material pending legal proceedings to which the Company or its subsidiaries is a party or which any of their property is subject, other than ordinary routine litigation incidental to their respective businesses.

 

ITEM 1A. RISK FACTORS

 

There have been no material changes in the risk factors set forth under Part I, Item 1A “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable

 

ITEM 5. OTHER INFORMATION

 

None

 

ITEM 6. EXHIBITS

 

Exhibit 3.1 Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s transition report on Form 10-K filed with the SEC on March 29, 2002 (SEC file no. 000-33203))
Exhibit 3.2 Certificate of Amendment of the Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.2 to the Company’s report on Form 10-K filed with the SEC on March 29, 2013 (SEC file no. 000-33203))
Exhibit 3.3 Bylaws (incorporated by reference to Exhibit 3.3 to the Company’s Form S-4 filed with the SEC on June 7, 2001 (SEC file no. 333-62466))
Exhibit 31.1 Certificate of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a)
Exhibit 31.2 Certificate of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a)
Exhibit 32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 101 Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of March 31, 2021 and December 31, 2020; (ii) Consolidated Statements of Earnings for the three months ended March 31, 2021 and March 31, 2020; (iii) Consolidated Statements of Comprehensive Income for the three months ended March 31, 2021 and March 31, 2020; (iv) Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2021 and March 31, 2020; (v) Consolidated Statements of Cash Flows for the three months ended March 31, 2021 and March 31, 2020; and (vi) Notes to Consolidated Financial Statements
Exhibit 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

 

 36 

 

 

SIGNATURES

 

Pursuant to the requirements 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.
  
Date: May 17, 2021/s/ Michael E. Scheopner
 Michael E. Scheopner
 President and Chief Executive Officer
 (Principal Executive Officer)

 

Date: May 17, 2021/s/ Mark A. Herpich
 Mark A. Herpich
 Vice President, Secretary, Treasurer and Chief Financial Officer
 (Principal Financial and Accounting Officer)

 

 37