|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
|
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended
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
(Exact name of registrant as specified in its charter)
|
|
|
|
|
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) |
(Address of principal executive offices) (Zip code)
(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: | ||
|
|
|
|
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.
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).
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 ☐
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 ☐
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: as of November 10, 2023, the issuer had outstanding 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 Statements | 2 - 30 |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 31 – 39 |
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 40 – 41 |
| Item 4. | Controls and Procedures | 42 |
| PART II | ||
| Item 1. | Legal Proceedings | 42 |
| Item 1A. | Risk Factors | 42 |
| Item 2. | Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities | 42 |
| Item 3. | Defaults Upon Senior Securities | 42 |
| Item 4. | Mine Safety Disclosures | 42 |
| Item 5. | Other Information | 42 |
| Item 6. | Exhibits | 43 |
| Signature Page | 44 |
| 1 |
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LANDMARK BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| (Dollars in thousands, except per share amounts) | September 30, | December 31, | ||||||
| 2023 | 2022 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Cash and cash equivalents | $ |
|
$ |
|
||||
| Interest-bearing deposits at other banks |
|
|
||||||
| Investment securities available-for-sale, at fair value |
|
|
||||||
|
Investment securities, held-to-maturity, net of allowance for credit losses of $
|
|
|
||||||
| Bank stocks, at cost |
|
|
||||||
|
Loans, net of allowance for credit losses of $
|
|
|
||||||
| Loans held for sale, at fair value |
|
|
||||||
| Bank owned life insurance |
|
|
||||||
| Premises and equipment, net |
|
|
||||||
| Goodwill |
|
|
||||||
| Other intangible assets, net |
|
|
||||||
| Mortgage servicing rights |
|
|
||||||
| Real estate owned, net |
|
|
||||||
| Accrued interest and other assets |
|
|
||||||
| Total assets | $ |
|
$ |
|
||||
| Liabilities and Stockholders’ Equity | ||||||||
| Liabilities: | ||||||||
| Deposits: | ||||||||
| Non-interest-bearing demand | $ |
|
$ |
|
||||
| Money market and checking |
|
|
||||||
| Savings |
|
|
||||||
| Certificates of deposit |
|
|
||||||
| Total deposits |
|
|
||||||
| Federal Home Loan Bank and other borrowings |
|
|
||||||
| Subordinated debentures |
|
|
||||||
| Repurchase agreements |
|
|
||||||
| Accrued interest and other liabilities |
|
|
||||||
| Total liabilities |
|
|
||||||
| Commitments and contingencies | ||||||||
| Stockholders’ equity: | ||||||||
| Preferred stock, $ par value per share, shares authorized; issued | ||||||||
| Common stock, $ par value per share, shares authorized; and shares issued at September 30, 2023 and December 31, 2022, respectively |
|
|
||||||
| Additional paid-in capital |
|
|
||||||
| Retained earnings |
|
|
||||||
| Accumulated other comprehensive loss |
(
|
) |
(
|
) | ||||
| Total stockholders’ equity |
|
|
||||||
| Total liabilities and stockholders’ equity | $ |
|
$ |
|
||||
See accompanying notes to consolidated financial statements.
| 2 |
LANDMARK BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
| Three months ended | Nine months ended | |||||||||||||||
| (Dollars in thousands, except per share amounts) | September 30, | September 30, | ||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Interest income: | ||||||||||||||||
| Loans | $ |
|
$ |
|
$ |
|
$ |
|
||||||||
| Investment securities: | ||||||||||||||||
| Taxable |
|
|
|
|
||||||||||||
| Tax-exempt |
|
|
|
|
||||||||||||
| Interest-bearing deposits at banks |
|
|
|
|
||||||||||||
| Total interest income |
|
|
|
|
||||||||||||
| Interest expense: | ||||||||||||||||
| Deposits |
|
|
|
|
||||||||||||
| Federal Home Loan Bank and other borrowings |
|
|
|
|
||||||||||||
| Subordinated debentures |
|
|
|
|
||||||||||||
| Repurchase agreements |
|
|
|
|
||||||||||||
| Total interest expense |
|
|
|
|
||||||||||||
| Net interest income |
|
|
|
|
||||||||||||
| Provision for credit losses |
|
|
||||||||||||||
| Net interest income after provision for credit losses |
|
|
|
|
||||||||||||
| Non-interest income: | ||||||||||||||||
| Fees and service charges |
|
|
|
|
||||||||||||
| Gains on sales of loans, net |
|
|
|
|
||||||||||||
| Increase in cash surrender value of bank owned life insurance |
|
|
|
|
||||||||||||
| Losses on sales of investment securities, net |
(
|
) |
(
|
) | ||||||||||||
| Other |
|
|
|
|
||||||||||||
| Total non-interest income |
|
|
|
|
||||||||||||
| Non-interest expense: | ||||||||||||||||
| Compensation and benefits |
|
|
|
|
||||||||||||
| Occupancy and equipment |
|
|
|
|
||||||||||||
| Data processing |
|
|
|
|
||||||||||||
| Amortization of mortgage servicing rights and other intangibles |
|
|
|
|
||||||||||||
| Professional fees |
|
|
|
|
||||||||||||
| Acquisition costs |
|
|
||||||||||||||
| Other |
|
|
|
|
||||||||||||
| Total non-interest expense |
|
|
|
|
||||||||||||
| Earnings before income taxes |
|
|
|
|
||||||||||||
| Income tax expense |
|
|
|
|
||||||||||||
| Net earnings | $ |
|
$ |
|
$ |
|
$ |
|
||||||||
| Earnings per share: | ||||||||||||||||
| Basic (1) | $ |
|
$ |
|
$ |
|
$ |
|
||||||||
| Diluted (1) | $ |
|
$ |
|
$ |
|
$ |
|
||||||||
| Dividends per share (1) | $ |
|
$ |
|
$ |
|
$ |
|
||||||||
| (1) |
|
See accompanying notes to consolidated financial statements.
| 3 |
LANDMARK BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
| Three months ended | Nine months ended | |||||||||||||||
| (Dollars in thousands) | September 30, | September 30, | ||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Net earnings | $ |
|
$ |
|
$ |
|
$ |
|
||||||||
| Net unrealized holding losses on available-for-sale securities |
(
|
) |
(
|
) |
(
|
) |
(
|
) | ||||||||
| Reclassification adjustment for net losses included in earnings |
|
|
||||||||||||||
| Net unrealized losses |
(
|
) |
(
|
) |
(
|
) |
(
|
) | ||||||||
| Income tax effect on net losses included in earnings |
(
|
) |
(
|
) | ||||||||||||
| Income tax effect on net unrealized holding losses |
|
|
|
|
||||||||||||
| Other comprehensive loss |
(
|
) |
(
|
) |
(
|
) |
(
|
) | ||||||||
| Total comprehensive (loss) income | $ |
(
|
) | $ |
(
|
) | $ |
|
$ |
(
|
) | |||||
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 (loss) | Total | ||||||||||||||||||
| Balance at July 1, 2022 | $ |
|
$ |
|
$ |
|
$ |
(
|
) | $ |
(
|
) | $ |
|
||||||||||
| Net earnings |
|
|
||||||||||||||||||||||
| Other comprehensive loss |
(
|
) |
(
|
) | ||||||||||||||||||||
| Dividends paid ($ per share) |
(
|
) |
(
|
) | ||||||||||||||||||||
| Issue of restricted common stock, shares | ||||||||||||||||||||||||
| Stock-based compensation |
|
|
||||||||||||||||||||||
| Purchase of treasury shares |
(
|
) |
(
|
) | ||||||||||||||||||||
| Balance at September 30, 2022 | $ |
|
$ |
|
$ |
|
$ |
(
|
) | $ |
(
|
) | $ |
|
||||||||||
| Balance at July 1, 2023 | $ |
|
$ |
|
$ |
|
$ | $ |
(
|
) | $ |
|
||||||||||||
| Net earnings |
|
|
||||||||||||||||||||||
| Other comprehensive loss |
(
|
) |
(
|
) | ||||||||||||||||||||
| Dividends paid ($ per share) |
(
|
) |
(
|
) | ||||||||||||||||||||
| Issuance of restricted common stock, shares | ||||||||||||||||||||||||
| Stock-based compensation |
|
|
||||||||||||||||||||||
| Balance at September 30, 2023 | $ |
|
$ |
|
$ |
|
$ | $ |
(
|
) | $ |
|
||||||||||||
| (Dollars in thousands, except per share amounts) | Common stock | Additional paid-in capital | Retained earnings | Treasury stock | Accumulated other comprehensive income (loss) | Total | ||||||||||||||||||
| Balance at January 1, 2022 | $ |
|
$ |
|
$ |
|
$ | $ |
|
$ |
|
|||||||||||||
| Net earnings |
|
|
||||||||||||||||||||||
| Other comprehensive loss |
(
|
) |
(
|
) | ||||||||||||||||||||
| Dividends paid ($ per share) |
(
|
) |
(
|
) | ||||||||||||||||||||
| Issuance of restricted common stock, shares | ||||||||||||||||||||||||
| Stock-based compensation |
|
|
||||||||||||||||||||||
| Purchase of treasury shares |
(
|
) |
(
|
) | ||||||||||||||||||||
| Balance at September 30, 2022 | $ |
|
$ |
|
$ |
|
$ |
(
|
) | $ |
(
|
) | $ |
|
||||||||||
| Balance at January 1, 2023 | $ |
|
$ |
|
$ |
|
$ | $ |
(
|
) | $ |
|
||||||||||||
| Net earnings |
|
|
||||||||||||||||||||||
| Other comprehensive loss |
(
|
) |
(
|
) | ||||||||||||||||||||
| Dividends paid ($ per share) |
(
|
) |
(
|
) | ||||||||||||||||||||
| Cumulative effect of change in accounting principle from implementation of ASU 2016-13 |
(
|
) |
(
|
) | ||||||||||||||||||||
| Forfeiture of restricted common stock, shares | ||||||||||||||||||||||||
| Issuance of restricted common stock, shares | ||||||||||||||||||||||||
| Stock-based compensation |
|
|
||||||||||||||||||||||
| Exercise of stock options, shares |
|
|
||||||||||||||||||||||
| Balance at September 30, 2023 | $ |
|
$ |
|
$ |
|
$ | $ |
(
|
) | $ |
|
||||||||||||
See accompanying notes to consolidated financial statements.
| 5 |
LANDMARK BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Nine months ended | ||||||||
| (Dollars in thousands) | September 30 | |||||||
| Cash flows from operating activities: | 2023 | 2022 | ||||||
| Net earnings | $ |
|
$ |
|
||||
| Adjustments to reconcile net earnings to net cash provided by operating activities: | ||||||||
| Provision for credit losses |
|
|||||||
| Amortization of investment security premiums, net |
|
|
||||||
| Accretion of purchase accounting adjustments |
(
|
) |
(
|
) | ||||
| Amortization of mortgage servicing rights and other intangibles |
|
|
||||||
| Depreciation |
|
|
||||||
| Increase in cash surrender value of bank owned life insurance |
(
|
) |
(
|
) | ||||
| Stock-based compensation |
|
|
||||||
| Deferred income taxes |
|
|
||||||
| Net losses on sales of investment securities |
|
|||||||
| Net gains on sales of premises and equipment and foreclosed assets |
(
|
) | ||||||
| Net gains on sales of loans |
(
|
) |
(
|
) | ||||
| Proceeds from sales of loans |
|
|
||||||
| Origination of loans held for sale |
(
|
) |
(
|
) | ||||
| Changes in assets and liabilities: | ||||||||
| Accrued interest and other assets |
(
|
) |
(
|
) | ||||
| Accrued expenses, taxes, and other liabilities |
|
|
||||||
| Net cash provided by operating activities |
|
|
||||||
| Cash flows from investing activities: | ||||||||
| Net increase in loans |
(
|
) |
(
|
) | ||||
| Net change in interest-bearing deposits at banks |
|
(
|
) | |||||
| Maturities and prepayments of investment securities |
|
|
||||||
| Purchases of investment securities |
(
|
) |
(
|
) | ||||
| Proceeds from sales of available-for-sale securities |
|
|||||||
| Redemption of bank stocks |
|
|
||||||
| Purchase of bank stocks |
(
|
) |
(
|
) | ||||
| Premiums paid on bank owned life insurance |
(
|
) | ||||||
| Proceeds from sales of premises and equipment and foreclosed assets |
|
|||||||
| Purchases of premises and equipment, net |
(
|
) |
(
|
) | ||||
| Net cash used in investing activities |
(
|
) |
(
|
) | ||||
| Cash flows from financing activities: | ||||||||
| Net increase (decrease) in deposits |
|
(
|
) | |||||
| Federal Home Loan Bank advance borrowings |
|
|
||||||
| Federal Home Loan Bank advance repayments |
(
|
) |
(
|
) | ||||
| Proceeds from other borrowings |
|
|||||||
| Repayments on other borrowings |
(
|
) | ||||||
| Change in repurchase agreements |
(
|
) |
(
|
) | ||||
| Proceeds from exercise of stock options |
|
|||||||
| Payment of dividends |
(
|
) |
(
|
) | ||||
| Purchase of treasury stock |
(
|
) | ||||||
| Net cash provided by financing activities |
|
|
||||||
| Net decrease in cash and cash equivalents |
|
(
|
) | |||||
| Cash and cash equivalents at beginning of period |
|
|
||||||
| Cash and cash equivalents at end of period | $ |
|
$ |
|
||||
(Continued)
| 6 |
LANDMARK BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(Unaudited)
| Nine months ended | ||||||||
| (Dollars in thousands) | September 30, | |||||||
| 2023 | 2022 | |||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash payments for income taxes | $ | $ |
|
|||||
| Cash paid for interest |
|
|
||||||
| Cash paid for operating leases |
|
|
||||||
| Supplemental schedule of noncash investing and financing activities: | ||||||||
| Investment securities purchases not yet settled |
|
|||||||
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 30, 2023, 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 and nine-month interim period ended September 30, 2023 are not necessarily indicative of the results expected for the year ending December 31, 2023 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. Summary of Significant Accounting Policies
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), commonly referred to as “CECL.” The provisions of the update eliminated the probable initial recognition threshold under previous 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. Under CECL loans determined to be purchased credit deteriorated will have an allowance for credit losses established through purchase accounting. Finally, increased disclosure requirements under CECL oblige organizations to present credit quality disclosures disaggregated by the year of origination or vintage. FASB expects that the evaluation of underwriting standards and credit quality trends by financial statement users will be enhanced with the additional vintage disclosures. In October 2019, the FASB approved a change in the effective dates for CECL which delayed the effective date to fiscal years beginning after December 15, 2022 for smaller reporting companies.
On January 1, 2023, the Company adopted CECL. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity investment securities. It also applies to off-balance credit exposures not accounted for as insurance (loan commitments and standby letters of credit). In addition, ASC 326 made changes to the accounting for available-for-sale investment securities management does not intend to sell or believes that it is more likely than not they will be required to sell.
The
Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet
credit exposures. Results for the reporting periods beginning after January 1, 2023 are presented under ASC 326 while prior period amounts
continue to be reported in accordance with previously applicable GAAP requirements. The adoption of CECL resulted in an increase in the
allowance for credit losses on loans of $
| 8 |
The following table illustrates the impact of ASC 326:
| January 1, 2023 | ||||||||||||
| (Dollars in thousands) | As reported under ASC 326 | Pre-ASC 326 adoption | Impact of ASC 326 adoption | |||||||||
| Allowance for credit losses: | ||||||||||||
| Held-to-maturity investment securities | $ |
|
$ | $ |
|
|||||||
| 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 credit losses for loans | $ |
|
$ |
|
$ |
|
||||||
| Unfunded loan commitments | $ |
|
$ |
|
$ | |||||||
Investment Securities . Investment securities are classified as held-to-maturity when management has the positive intent and ability to hold them to maturity. Securities are classified as available-for-sale when they might be sold before maturity. Held-to-maturity securities are carried at amortized cost while available-for-sale securities are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income, net of tax.
Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments, except for mortgage backed securities where prepayments are anticipated. Realized gains and losses on sales of available-for-sale securities are recorded on a trade date basis and are calculated using the specific identification method.
Allowance for Credit Losses – Held-to-Maturity Investment Securities. Management measures expected credit losses on held-to-maturity investment securities on a collective basis by major security type. Accrued interest is excluded from the estimate of credit losses. The estimate of expected credit losses considers historical loss information adjusted for current conditions and reasonable and supportable forecasts.
Allowance for Credit Losses – Available-for-Sale Investment Securities . For available-for-sale investment securities in an unrealized loss position, the Company first assesses whether it intends to sell, or is more likely than not will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, the Company considers the extent to which fair value is less than amortized cost, the current interest rate environment, changes to rating of the security or security issuer, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected was less than the amortized cost basis, a credit loss existed and an allowance for credit losses would be recorded for the credit loss, which is limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. Changes in the allowance for credit losses are recorded as provision for or reversal of credit loss expense. Losses are charged against the allowance for credit losses when the Company determines the available-for-sale security is uncollectible or when either of the criteria regarding intent or requirement to sell is met. The Company does not estimate credit losses on available-for-sale security accrued interest receivable.
| 9 |
Loans . Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at amortized cost. The amortized cost is the principal balance outstanding net of previous charge-offs, and for purchased loans, net of unamortized purchase premiums and discounts. Interest income is accrued on the unpaid principal balance. Origination fees received on loans held in portfolio and the estimated direct costs of origination are deferred and amortized to interest income using the level yield method without anticipating prepayments.
The accrual of interest on non-performing loans is discontinued at the time the loan is ninety days delinquent, unless the credit is well secured and in process of collection. Loans are placed on non-accrual or are charged off at an earlier date if collection of the principal or interest is considered doubtful. All interest accrued but not collected for loans that are placed on non-accrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash basis or cost recovery method, until qualifying for return to accrual. Loans are evaluated individually and are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Allowance for Credit Losses - Loans . The allowance for credit losses is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on loans. The analysis is updated on a quarterly basis based on historical loss information adjusted for current conditions and reasonable and supportable forecasts. Additionally, the Company considers asset quality trends, composition and trends in the loan portfolio, underlying collateral values, industry trends and other pertinent factors, including regulatory recommendations. The level of the allowance for credit losses maintained by management is believed adequate to absorb all expected future losses expected in the loan portfolio at the balance sheet date. The allowance is adjusted through provision for credit losses and charge-offs, net of recoveries of amounts previously charged off.
The allowance for credit losses is measured on a collective basis for pools of loans with similar risk characteristics. The Company has identified the following pools of financial assets with similar risk characteristics for measuring expected credit losses.
One-to-Four Family Residential Real Estate. One-to-four family residential real estate loans consists primarily of loans secured by 1-4 family residential properties. Repayment is primarily dependent on the personal cash flow of the borrower.
Construction and Land. Construction and land loans consist primarily of loans to facilitate the development of both residential and commercial real estate. Repayment is primarily dependent on the completion of the development and refinancing to longer term financing.
Commercial Real Estate. Commercial real estate loans consist primarily of loans secured by office buildings, industrial buildings, warehouses, retail buildings and multi-family housing and are primarily owner-occupied. For such loans, repayment is largely dependent upon the operation of the borrower’s business.
Commercial. Commercial loans include loans to business enterprises issued for commercial, industrial and/or other professional purposes. These loans are generally secured by equipment, inventory and accounts receivable of the borrower and repayment is primarily dependent on business cash flows.
Agriculture. Agriculture loans include operating and real estate loans to agriculture enterprises. Generally, the borrower’s ability to repay is based on the cash flows from farming operations.
Municipal. Municipal loans are generally related to equipment leasing or general fund loans. Repayment is primarily dependent on the tax revenue of the municipal entity.
Consumer. Consumer loans include automobile, boat, home improvement and home equity loans. Repayment is primarily dependent on the personal cash flow of the borrower.
The Company utilized a weighted average remaining maturity allowance methodology to calculate the allowance for credit losses. Historical loss rates are adjusted for current conditions and reasonable and supportable forecasts. Following the economic forecast period loss rates revert back to historical loss rates over a reasonable period of time. Additional adjustments for qualitative factors are included to quantify the risks within each of the loan categories that are not included in the historical loss rates or economic projections. The data for the allowance calculation may be obtained from internal or external sources.
| 10 |
Loans that do not share similar risk characteristics with the collectively evaluated pools are evaluated on an individual basis and are excluded from the collectively evaluated loan pools. Such loans are evaluated for credit losses based on either discounted cash flows or the fair value of collateral.
The Company estimates expected credit losses over the contractual term of obligations to extend credit, unless the obligation is unconditionally cancellable. The allowance for off-balance-sheet exposures is adjusted through the provision for credit losses. The estimates are determined based on the likelihood of funding during the contractual term and an estimate of credit losses subsequent to funding. Estimated credit losses on subsequently funded balances are based on the same assumptions used to estimated credit losses on loans.
In March 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures which eliminated the recognition and measurement guidance for troubled debt restructurings (“TDRs”) by creditors in ASC 310-40. The update also enhanced disclosure required for loan restructurings by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying the recognition and measurement guidance for TDRs, an entity will apply the loan refinancing and restructuring guidance to determine whether a modification or other form of restructuring results in a new loan or a continuation of an existing loan. Additionally, the amendments to this ASU require a public business entity to disclose current period gross charge-offs by year of origination for loans in the vintage disclosures.
On January 1, 2023, the Company adopted ASU 2022-02, electing the prospective approach. The adoption did not have a material effect on the Company’s operating results or financial condition. The disclosures in this document have been updated to reflect the new guidance.
Loans Modifications . Loan modifications, including modifications to borrowers experiencing financial difficulty, are treated as a new loan if two conditions are met. The terms of the new loan are at least as favorable to the Company as the terms for comparable loans to other customers with similar collection risks and modifications to the terms of the original loan are more than minor.
| 11 |
3. Investments
A summary of investment securities available-for-sale and held-to-maturity is as follows:
| (Dollars in thousands) | As of September 30, 2023 | |||||||||||||||
| Gross | Gross | |||||||||||||||
| Amortized | unrealized | unrealized | Estimated | |||||||||||||
| cost | gains | losses | fair value | |||||||||||||
| Available-for-sale: | ||||||||||||||||
| U. S. treasury securities | $ |
|
$ | $ |
(
|
) | $ |
|
||||||||
| Municipal obligations, tax exempt |
|
(
|
) |
|
||||||||||||
| Municipal obligations, taxable |
|
(
|
) |
|
||||||||||||
| Agency mortgage-backed securities |
|
(
|
) |
|
||||||||||||
| Total available-for-sale | $ |
|
$ | $ |
(
|
) | $ |
|
||||||||
| As of September 30, 2023 | ||||||||||||||||
| Gross | Gross | |||||||||||||||
| Amortized | unrealized | unrealized | Estimated | |||||||||||||
| cost | gains | losses | fair value | |||||||||||||
| Held-to-maturity: | ||||||||||||||||
| Other | $ |
|
$ | $ |
(
|
) | $ |
|
||||||||
| Total held-to-maturity | $ |
|
$ | $ |
(
|
) | $ |
|
||||||||
| As of December 31, 2022 | ||||||||||||||||
| Gross | Gross | |||||||||||||||
| Amortized | unrealized | unrealized | Estimated | |||||||||||||
| cost | gains | losses | fair value | |||||||||||||
| Available-for-sale: | ||||||||||||||||
| U. S. treasury securities | $ |
|
$ | $ |
(
|
) | $ |
|
||||||||
| U. S. federal agency obligations |
|
(
|
) |
|
||||||||||||
| Municipal obligations, tax exempt |
|
|
(
|
) |
|
|||||||||||
| Municipal obligations, taxable |
|
|
(
|
) |
|
|||||||||||
| Agency mortgage-backed securities |
|
|
(
|
) |
|
|||||||||||
| Total available-for-sale | $ |
|
$ |
|
$ |
(
|
) | $ |
|
|||||||
| As of December 31, 2022 | ||||||||||||||||
| Gross | Gross | |||||||||||||||
| Amortized | unrealized | unrealized | Estimated | |||||||||||||
| cost | gains | losses | fair value | |||||||||||||
| Held-to-maturity: | ||||||||||||||||
| Other | $ |
|
$ |
|
$ |
(
|
) | $ |
|
|||||||
| Total held-to-maturity | $ |
|
$ |
|
$ |
(
|
) | $ |
|
|||||||
The
amortized cost of the above held-to-maturity investment securities has been further reduced by the allowance for credit losses of $
| 12 |
The tables above show that some of the securities in the available-for-sale and held-to-maturity investment portfolios had unrealized losses, or were temporarily impaired, as of September 30, 2023 and December 31, 2022. 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.
| As of September 30, 2023 | ||||||||||||||||||||||||||||
| (Dollars in thousands) | Less than 12 months | 12 months or longer | Total | |||||||||||||||||||||||||
| No. of | Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | ||||||||||||||||||||||
| Available-for-sale: | securities | value | losses | value | losses | value | losses | |||||||||||||||||||||
| U.S. treasury securities |
|
$ |
|
$ |
(
|
) | $ |
|
$ |
(
|
) | $ |
|
$ |
(
|
) | ||||||||||||
| Municipal obligations, tax exempt |
|
|
(
|
) |
|
(
|
) |
|
(
|
) | ||||||||||||||||||
| Municipal obligations, taxable |
|
|
(
|
) |
|
(
|
) |
|
(
|
) | ||||||||||||||||||
| Agency mortgage-backed securities |
|
|
(
|
) |
|
(
|
) |
|
(
|
) | ||||||||||||||||||
| Total for available-for-sale |
|
$ |
|
$ |
(
|
) | $ |
|
$ |
(
|
) | $ |
|
$ |
(
|
) | ||||||||||||
| Held-to-maturity: | ||||||||||||||||||||||||||||
| Other |
|
$ |
|
$ |
|
$ | $ | $ |
|
$ |
|
|||||||||||||||||
| Total held-to-maturity |
|
|
|
|
|
|||||||||||||||||||||||
| As of December 31, 2022 | ||||||||||||||||||||||||||||
| Less than 12 months | 12 months or longer | Total | ||||||||||||||||||||||||||
| No. of | Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | ||||||||||||||||||||||
| Available-for-sale: | securities | value | losses | value | losses | value | losses | |||||||||||||||||||||
| U.S. treasury securities |
|
$ |
|
$ |
(
|
) | $ |
|
$ |
(
|
) | $ |
|
$ |
(
|
) | ||||||||||||
| U.S. federal agency obligations |
|
|
(
|
) |
|
(
|
) | |||||||||||||||||||||
| Municipal obligations, tax exempt |
|
|
(
|
) |
|
(
|
) |
|
(
|
) | ||||||||||||||||||
| Municipal obligations, taxable |
|
|
(
|
) |
|
(
|
) |
|
(
|
) | ||||||||||||||||||
| Agency mortgage-backed securities |
|
|
(
|
) |
|
(
|
) |
|
(
|
) | ||||||||||||||||||
| Total for available-for-sale |
|
|
(
|
) |
|
(
|
) |
|
(
|
) | ||||||||||||||||||
| Held-to-maturity: | ||||||||||||||||||||||||||||
| Other |
|
$ |
|
$ |
(
|
) | $ | $ | $ |
|
$ |
(
|
) | |||||||||||||||
| Total held-to-maturity |
|
|
(
|
) |
|
(
|
) | |||||||||||||||||||||
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 September 30, 2023 and December 31, 2022.
The Company’s portfolio of municipal obligations consists of both tax-exempt and taxable general obligations securities issued by various municipalities. As of September 30, 2023, the Company did not intend to sell and it was 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 September 30, 2023 and December 31, 2022.
The Company’s agency mortgage-backed securities portfolio consists of securities underwritten to the standards of and guaranteed by the government-sponsored agencies of Federal Home Loan Mortgage Corporation (“FHLMC”), Federal National Mortgage Association (“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 September 30, 2023 and December 31, 2022.
| 13 |
The Company’s other investment securities portfolio consists of seven subordinated debentures issued by financial institutions. These investment securities were acquired in the Freedom Bank acquisition and classified as held-to-maturity. The securities were issued in 2021 and 2022 with a 10 year maturity and a fixed rate for five years. The securities are callable after the end of the fixed rate term. 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 other securities identified in the tables above were temporarily impaired as of September 30, 2023 and December 31, 2022.
The following table provides information on the Company’s allowance for credit losses related to held-to-maturity investment securities.
| (Dollars in thousands) | ||||
| Balance at January 1, 2023 | $ | |||
| Impact of adopting ASC 326 |
|
|||
| Provision for credit losses |
|
|||
| Balance at September 30, 2023 | $ |
|
||
The table below sets forth amortized cost and fair value of investment securities at September 30, 2023. 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.
| (Dollars in thousands) | Amortized | Estimated | ||||||
| Available-for-sale: | cost | fair value | ||||||
| Due in less than one year | $ |
|
$ |
|
||||
| Due after one year but within five years |
|
|
||||||
| Due after five years but within ten years |
|
|
||||||
| Due after ten years |
|
|
||||||
| Total available-for-sale | $ |
|
$ |
|
||||
| Held-to-maturity: | ||||||||
| Due after five years but within ten years |
|
|
||||||
| Total held-to-maturity | $ |
|
$ |
|
||||
Sales proceeds and gross realized gains and losses on sales of available-for-sale securities were as follows for the periods indicated:
| (Dollars in thousands) | Three months ended September 30, | Nine months ended September 30, | ||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Sales proceeds | $ | $ |
|
$ | $ |
|
||||||||||
| Realized gains | $ | $ | $ | $ | ||||||||||||
| Realized losses |
(
|
) |
(
|
) | ||||||||||||
| Net realized losses | $ | $ |
(
|
) | $ | $ |
(
|
) | ||||||||
Securities
with carrying values of $
| 14 |
4. Loans and Allowance for Credit Losses
Loans consisted of the following as of the dates indicated below:
| September 30, | December 31, | |||||||
| (Dollars in thousands) | 2023 | 2022 | ||||||
| One-to-four family residential real estate loans | $ |
|
$ |
|
||||
| Construction and land loans |
|
|
||||||
| Commercial real estate loans |
|
|
||||||
| Commercial loans |
|
|
||||||
| Paycheck protection program loans |
|
|||||||
| Agriculture loans |
|
|
||||||
| Municipal loans |
|
|
||||||
| Consumer loans |
|
|
||||||
| Total gross loans |
|
|
||||||
| Net deferred loan fees and loans in process |
(
|
) |
(
|
) | ||||
| Allowance for credit losses |
(
|
) |
(
|
) | ||||
| Loans, net | $ |
|
$ |
|
||||
| 15 |
The following tables provide information on the Company’s allowance for credit losses by loan class and allowance methodology:
| Three and nine months ended September 30, 2023 | ||||||||||||||||||||||||||||||||||||
| (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 credit losses: | ||||||||||||||||||||||||||||||||||||
| Balance at July 1, 2023 | $ |
|
$ |
|
$ |
|
$ |
|
$ | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| Charge-offs |
(
|
) |
(
|
) |
(
|
) | ||||||||||||||||||||||||||||||
| Recoveries |
|
|
|
|
|
|||||||||||||||||||||||||||||||
| Provision for credit losses |
|
(
|
) |
|
|
(
|
) |
(
|
) |
|
||||||||||||||||||||||||||
| Balance at September 30, 2023 | $ |
|
$ |
|
$ |
|
$ |
|
$ | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| Allowance for credit losses: | ||||||||||||||||||||||||||||||||||||
| Balance at January 1, 2023 | $ |
|
$ |
|
$ |
|
$ |
|
$ | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| Impact of adopting ASC 326 |
|
|
|
|
(
|
) |
|
|
|
|||||||||||||||||||||||||||
| Charge-offs |
(
|
) |
(
|
) |
(
|
) | ||||||||||||||||||||||||||||||
| Recoveries |
|
|
|
|
|
|||||||||||||||||||||||||||||||
| Provision for credit losses |
|
(
|
) |
|
|
(
|
) |
(
|
) |
|
|
|||||||||||||||||||||||||
| Balance at September 30, 2023 | $ |
|
$ |
|
$ |
|
$ |
|
$ | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| Three and nine months ended September 30, 2022 | ||||||||||||||||||||||||||||||||||||
| (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 credit losses: | ||||||||||||||||||||||||||||||||||||
| Balance at July 1, 2022 | $ |
|
$ |
|
$ |
|
$ |
|
$ | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| Charge-offs |
(
|
) |
(
|
) | ||||||||||||||||||||||||||||||||
| Recoveries |
|
|
|
|
|
|||||||||||||||||||||||||||||||
| Provision for credit losses |
|
(
|
) |
|
|
|
(
|
) |
|
|
||||||||||||||||||||||||||
| Balance at September 30, 2022 | $ |
|
$ |
|
$ |
|
$ |
|
$ | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| Allowance for credit losses: | ||||||||||||||||||||||||||||||||||||
| Balance at January 1, 2022 | $ |
|
$ |
|
$ |
|
$ |
|
$ | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| Charge-offs |
(
|
) |
(
|
) | ||||||||||||||||||||||||||||||||
| Recoveries |
|
|
|
|
|
|
||||||||||||||||||||||||||||||
| Provision for credit losses |
(
|
) |
(
|
) |
|
|
(
|
) |
(
|
) |
|
|||||||||||||||||||||||||
| Balance at September 30, 2022 | $ |
|
$ |
|
$ |
|
$ |
|
$ | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| As of December 31, 2022 | ||||||||||||||||||||||||||||||||||||
| (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 credit losses: | ||||||||||||||||||||||||||||||||||||
| Individually evaluated for loss | $ | $ | $ | $ |
|
$ | $ |
|
$ | $ | $ |
|
||||||||||||||||||||||||
| Collectively evaluated for loss |
|
|
|
|
|
|
|
|
||||||||||||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
$ | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| Loan balances: | ||||||||||||||||||||||||||||||||||||
| Individually evaluated for loss | $ |
|
$ |
|
$ |
|
$ |
|
$ | $ |
|
$ |
|
$ | $ |
|
||||||||||||||||||||
| Collectively evaluated for loss |
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||
| 16 |
The
Company recorded net loan recoveries of $
The following table presents information on non-accrual and loans past due over 89 days and still accruing:
| (Dollars in thousands) | As of September 30, 2023 | |||||||||||
| Non-accrual with no allowance for credit loss | Non-accrual with allowance for credit losses | Loans past due over 89 days still accruing | ||||||||||
| One-to-four family residential real estate loans | $ |
|
$ | $ | ||||||||
| Construction and land loans |
|
|||||||||||
| Commercial real estate loans |
|
|||||||||||
| Commercial loans |
|
|
||||||||||
| Paycheck protection program loans | ||||||||||||
| Agriculture loans |
|
|
||||||||||
| Municipal loans | ||||||||||||
| Consumer loans |
|
|||||||||||
| Total loans | $ |
|
$ |
|
$ | |||||||
The following table presents information on impaired loans:
| (Dollars in thousands) | As of December 31, 2022 | |||||||||||||||||||||||||||
| 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 | $ |
|
$ |
|
$ |
|
$ | $ | $ |
|
$ |
|
||||||||||||||||
| Construction and land |
|
|
|
|
|
|||||||||||||||||||||||
| Commercial real estate |
|
|
|
|
|
|||||||||||||||||||||||
| Commercial |
|
|
|
|
|
|
|
|||||||||||||||||||||
| Agriculture |
|
|
|
|
|
|
|
|||||||||||||||||||||
| Municipal |
|
|
|
|
|
|||||||||||||||||||||||
| Consumer | ||||||||||||||||||||||||||||
| Total impaired loans | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||
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 September 30, 2023 or December 31, 2022.
| 17 |
The following tables present information on the Company’s past due and non-accrual loans by loan class:
| (Dollars in thousands) | As of September 30, 2023 | |||||||||||||||||||||||||||
| 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 | $ | $ |
|
$ | $ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||
| Construction and land loans |
|
|
|
|||||||||||||||||||||||||
| Commercial real estate loans |
|
|
|
|
|
|||||||||||||||||||||||
| Commercial loans |
|
|
|
|
|
|
||||||||||||||||||||||
| Paycheck protection program loans | ||||||||||||||||||||||||||||
| Agriculture loans |
|
|
|
|
|
|
||||||||||||||||||||||
| Municipal loans |
|
|||||||||||||||||||||||||||
| Consumer loans |
|
|
|
|
|
|||||||||||||||||||||||
| Total | $ |
|
$ |
|
$ | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Percent of gross loans |
|
% |
|
% |
|
% |
|
% |
|
% |
|
% |
|
% | ||||||||||||||
| (Dollars in thousands) | As of December 31, 2022 | |||||||||||||||||||||||||||
| 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 | $ |
|
$ |
|
$ | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Construction and land loans |
|
|
|
|||||||||||||||||||||||||
| Commercial real estate loans |
|
|
|
|||||||||||||||||||||||||
| Commercial loans |
|
|
|
|
|
|||||||||||||||||||||||
| Paycheck protection program loans |
|
|||||||||||||||||||||||||||
| Agriculture loans |
|
|
|
|
|
|||||||||||||||||||||||
| Municipal loans |
|
|||||||||||||||||||||||||||
| Consumer loans |
|
|
|
|
||||||||||||||||||||||||
| Total | $ |
|
$ |
|
$ | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Percent of gross loans |
|
% |
|
% |
|
% |
|
% |
|
% |
|
% |
|
% | ||||||||||||||
Under
the original terms of the Company’s non-accrual loans, interest earned on such loans for the nine months ended September 30, 2023
and 2022 would have increased interest income by $
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.
| 18 |
The following table presents information on the Company’s risk category of loans by type and year of origination:
| (Dollars in thousands) | As of September 30, 2023 | ||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Revolving loans amortized cost | Revolving loans converted to term | Total | |||||||||||||||||||||||||||||
| One-to-four family residential real estate loans | |||||||||||||||||||||||||||||||||||||
| Nonclassified | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| Classified |
|
|
|||||||||||||||||||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| Charge-offs | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| Construction and land loans | |||||||||||||||||||||||||||||||||||||
| Nonclassified | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| Classified |
|
|
|||||||||||||||||||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| Charge-offs | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| Commercial real estate loans | |||||||||||||||||||||||||||||||||||||
| Nonclassified | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| Classified |
|
|
|
|
|
||||||||||||||||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| Charge-offs | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| Commercial loans | |||||||||||||||||||||||||||||||||||||
| Nonclassified | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| Classified |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| Charge-offs | $ | $ |
(
|
) | $ |
(
|
) | $ |
(
|
) | $ | $ | $ | $ | $ |
(
|
) | ||||||||||||||||||||
| Agriculture loans | |||||||||||||||||||||||||||||||||||||
| Nonclassified | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| Classified |
|
|
|
|
|||||||||||||||||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| Charge-offs | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| Municipal loans | |||||||||||||||||||||||||||||||||||||
| Nonclassified | $ |
|
$ |
|
$ | $ | $ | $ |
|
$ | $ | $ |
|
||||||||||||||||||||||||
| Classified | |||||||||||||||||||||||||||||||||||||
| Total | $ |
|
$ |
|
$ | $ | $ | $ |
|
$ | $ | $ |
|
||||||||||||||||||||||||
| Charge-offs | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| Consumer loans | |||||||||||||||||||||||||||||||||||||
| Nonclassified | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| Classified |
|
|
|
|
|||||||||||||||||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| Charge-offs | $ | $ | $ | $ | $ | $ | $ |
(
|
) | $ | $ |
(
|
) | ||||||||||||||||||||||||
| Total loans | |||||||||||||||||||||||||||||||||||||
| Nonclassified | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| Classified |
|
|
|
|
|
|
|
|
|
||||||||||||||||||||||||||||
| Total | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||
| Charge-offs | $ | $ |
(
|
) | $ |
(
|
) | $ |
(
|
) | $ | $ | $ |
(
|
) | $ | $ |
(
|
) | ||||||||||||||||||
| 19 |
The following table provides information on the Company’s risk categories by loan class:
| As of December 31, 2022 | ||||||||
| (Dollars in thousands) | Nonclassified | Classified | ||||||
| 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 loan |
|
|||||||
| Consumer loans |
|
|||||||
| Total | $ |
|
$ |
|
||||
The following table provides information on the Company’s allowance for credit losses related to unfunded loan commitments.
| (dollars in thousands) | ||||
| Balance at January 1, 2023 | $ |
|
||
| Impact of adopting ASC 326 | ||||
| Provision for credit losses |
|
|||
| Balance at September 30, 2023 | $ |
|
||
The following table presents the amortized cost basis of loans at September 30, 2023 that were both experiencing financial difficulty and modified during the nine months ended September 30, 2023 by class, type of modification and includes the financial effect of the modification.
| (Dollars in thousands) | As of September 30, 2023 | |||||||||
| Amortized cost basis | % of loan class total | Financial effect | ||||||||
| Term extension: | ||||||||||
| Commercial | $ |
|
|
% |
|
|||||
As of September 30, 2023, all loans experiencing both financial difficulty and modified during the three and nine months ended September 30, 2023 were current under the terms of the agreements. There were no commitments to lend additional funds to the borrowers and there were no charge-offs recorded against the loans. The Company had no allowance for credit losses recorded against these loans as of September 30, 2023. The Company did not have any loan modifications that had a payment default during the three and nine months ended September 30, 2023.
5. Goodwill and Other Intangible Assets
The Company tests goodwill for impairment annually or more frequently if circumstances warrant. The Company’s annual impairment test as of December 31, 2022 concluded that its goodwill was not impaired. As of September 30. 2023, the Company concluded it was more likely than not that its goodwill was not impaired.
| 20 |
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:
| (Dollars in thousands) | As of September 30, 2023 | |||||||||||
| Gross carrying amount | Accumulated amortization | Net carrying amount | ||||||||||
| Core deposit intangible assets | $ |
|
$ |
(
|
) | $ |
|
|||||
| (Dollars in thousands) | As of December 31, 2022 | |||||||||||
| Gross carrying amount | Accumulated amortization | Net carrying amount | ||||||||||
| Core deposit intangible assets | $ |
|
$ |
(
|
) | $ |
|
|||||
The following sets forth estimated amortization expense for core deposit and intangible assets for the remainder of 2023 and in successive years ending December 31:
| (Dollars in thousands) | Amortization | |||
| expense | ||||
| Remainder of 2023 | $ |
|
||
| 2024 |
|
|||
| 2025 |
|
|||
| 2026 |
|
|||
| 2027 |
|
|||
| 2028 |
|
|||
| Thereafter |
|
|||
| Total | $ |
|
||
6. Mortgage Loan Servicing
Mortgage loans serviced for others are not reported as assets. The following table provides information on the principal balances of mortgage loans serviced for others:
| (Dollars in thousands) | September 30, | December 31, | ||||||
| 2023 | 2022 | |||||||
| FHLMC | $ |
|
$ |
|
||||
| FHLB |
|
|
||||||
| Total | $ |
|
$ |
|
||||
Custodial
escrow balances maintained in connection with serviced loans were $
| 21 |
Activity for mortgage servicing rights was as follows:
| Three months ended | Nine months ended | |||||||||||||||
| (Dollars in thousands) | September 30, | September 30, | ||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Mortgage servicing rights: | ||||||||||||||||
| Balance at beginning of period | $ |
|
$ |
|
$ |
|
$ |
|
||||||||
| Additions |
|
|
|
|
||||||||||||
| Amortization |
(
|
) |
(
|
) |
(
|
) |
(
|
) | ||||||||
| Balance at end of period | $ |
|
$ |
|
$ |
|
$ |
|
||||||||
The
fair value of mortgage servicing rights was $
The
Company had a mortgage repurchase reserve of $
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 and nine months ended September 30, 2023 excluded
of unexercised stock options because their inclusion would have
been anti-dilutive during such periods. The diluted earnings per share computation for the three and nine months ended September 30,
2022 excluded
of unexercised stock options because their inclusion would have been anti-dilutive during such periods. The Company’s
Board of Directors declared a cash dividend of $
per share to be paid
| (Dollars in thousands, except per share amounts) |
Three months ended September 30, |
Nine months ended September 30, |
||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Net earnings | $ |
|
$ |
|
$ |
|
$ |
|
||||||||
| Weighted average common shares outstanding - basic (1) |
|
|
|
|
||||||||||||
| Assumed exercise of stock options (1) |
|
|
|
|
||||||||||||
| Weighted average common shares outstanding - diluted (1) |
|
|
|
|
||||||||||||
| Earnings per share (1): | ||||||||||||||||
| Basic | $ |
|
$ |
|
$ |
|
$ |
|
||||||||
| Diluted | $ |
|
$ |
|
$ |
|
$ |
|
||||||||
| (1) |
|
| 22 |
8. Federal Home Loan Bank Borrowings and Other Borrowings
The
Bank has a line of credit, renewable annually each September, with the Federal Home Loan Bank (“FHLB’) under which there
were $
Although
no loans are specifically pledged, the FHLB requires the Bank to maintain eligible collateral (qualifying loans and investment securities)
that has a lending value at least equal to its required collateral. At September 30, 2023 and December 31, 2022, there was a blanket
pledge of loans and securities totaling $
At September 30, 2023, the Bank had no borrowings through the Federal Reserve discount window, while the borrowing
capacity with the Federal Reserve was $
The
Company has a $
million line of credit from an unrelated financial institution maturing on
, with an interest rate
that adjusts daily based on the
%. This line of credit has covenants specific to capital and other financial ratios,
which the Company was in compliance with at September 30, 2023 and December 31, 2022. As of September 30, 2023 and December 31, 2022,
the Company did
On
September 29, 2022, the Company borrowed $
million from an unrelated financial institution at a fixed rate of 6.15%. This borrowing
matures on
and requires quarterly principal and interest payments. Early principal payments are allowed and the balance
was $
9. 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 $
The following is a summary of the balances and collateral of the Company’s repurchase agreements:
| As of September 30, 2023 | ||||||||||||||||||||
| (dollars in thousands) |
Overnight
and
Continuous |
Up to 30 days | 30-90 days |
Greater
than 90 days |
Total | |||||||||||||||
| Repurchase agreements: | ||||||||||||||||||||
| U.S. federal treasury obligations | $ |
|
$ | $ | $ | $ |
|
|||||||||||||
| Agency mortgage-backed securities |
|
|
||||||||||||||||||
| Total | $ |
|
$ | $ | $ | $ |
|
|||||||||||||
| As of December 31, 2022 | ||||||||||||||||||||
| (dollars in thousands) |
Overnight
and
Continuous |
Up
to
30 days |
30-90 days |
Greater
than 90 days |
Total | |||||||||||||||
| Repurchase agreements: | ||||||||||||||||||||
| U.S. federal treasury obligations | $ |
|
$ | $ | $ | $ |
|
|||||||||||||
| U.S. federal agency obligations |
|
|
||||||||||||||||||
| Agency mortgage-backed securities |
|
|
||||||||||||||||||
| Total | $ |
|
$ | $ | $ | $ |
|
|||||||||||||
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.
| 23 |
10. 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.
| Three months ended | Nine months ended | |||||||||||||||
| (Dollars in thousands) | September 30, | September 30, | ||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Non-interest income: | ||||||||||||||||
| Service charges on deposit accounts | ||||||||||||||||
| Overdraft fees | $ |
|
$ |
|
$ |
|
$ |
|
||||||||
| Other |
|
|
|
|
||||||||||||
| Interchange income |
|
|
|
|
||||||||||||
| Loan servicing fees (1) |
|
|
|
|
||||||||||||
| Office lease income (1) |
|
|
|
|
||||||||||||
| Gains on sales of loans (1) |
|
|
|
|
||||||||||||
| Bank owned life insurance income (1) |
|
|
|
|
||||||||||||
| Losses on sales of investment securities (1) |
(
|
) |
(
|
) | ||||||||||||
| Gains on sales of real estate owned |
|
|||||||||||||||
| Other |
|
|
|
|
||||||||||||
| Total non-interest income | $ |
|
$ |
|
$ |
|
$ |
|
||||||||
| (1) |
|
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 nine months of 2023 or 2022.
11. 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.
| 24 |
Fair value estimates of the Company’s financial instruments as of September 30, 2023 and December 31, 2022, including methods and assumptions utilized, are set forth below:
| As of September 30, 2023 | ||||||||||||||||||||
| Carrying | ||||||||||||||||||||
| amount | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
| Financial assets: | ||||||||||||||||||||
| Cash and cash equivalents | $ |
|
$ |
|
$ | $ | $ |
|
||||||||||||
| Interest-bearing deposits at other banks |
|
|
|
|||||||||||||||||
| Investment securities available-for-sale |
|
|
|
|
||||||||||||||||
| Investment securities held-to-maturity |
|
|
|
|||||||||||||||||
| Bank stocks, at cost |
|
n/a | n/a | n/a | n/a | |||||||||||||||
| Loans, net |
|
|
|
|||||||||||||||||
| Loans held for sale |
|
|
|
|||||||||||||||||
| Mortgage servicing rights |
|
|
|
|||||||||||||||||
| Accrued interest receivable |
|
|
|
|
|
|||||||||||||||
| Derivative financial instruments |
|
|
|
|||||||||||||||||
| Financial liabilities: | ||||||||||||||||||||
| Non-maturity deposits | $ |
(
|
) | $ |
(
|
) | $ | $ | $ |
(
|
) | |||||||||
| Certificates of deposit |
(
|
) |
(
|
) |
(
|
) | ||||||||||||||
| FHLB and other borrowings |
(
|
) |
(
|
) |
(
|
) | ||||||||||||||
| Subordinated debentures |
(
|
) |
(
|
) |
(
|
) | ||||||||||||||
| Repurchase agreements |
(
|
) |
(
|
) |
(
|
) | ||||||||||||||
| Accrued interest payable |
(
|
) |
(
|
) |
(
|
) | ||||||||||||||
| As of December 31, 2022 | ||||||||||||||||||||
| Carrying | ||||||||||||||||||||
| amount | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
| Financial assets: | ||||||||||||||||||||
| Cash and cash equivalents | $ |
|
$ |
|
$ | $ | $ |
|
||||||||||||
| Interest-bearing deposits at other banks |
|
|
|
|||||||||||||||||
| Investment securities available-for-sale |
|
|
|
|
||||||||||||||||
| Investment securities held-to-maturity |
|
|
|
|||||||||||||||||
| Bank stocks, at cost |
|
n/a | n/a | n/a | n/a | |||||||||||||||
| Loans, net |
|
|
|
|||||||||||||||||
| Loans held for sale |
|
|
|
|||||||||||||||||
| Mortgage servicing rights |
|
|
|
|||||||||||||||||
| Accrued interest receivable |
|
|
|
|
|
|||||||||||||||
| Derivative financial instruments |
|
|
|
|||||||||||||||||
| Financial liabilities: | ||||||||||||||||||||
| Non-maturity deposits | $ |
(
|
) | $ |
(
|
) | $ | $ | $ |
(
|
) | |||||||||
| Certificates of deposit |
(
|
) |
(
|
) |
(
|
) | ||||||||||||||
| FHLB and other borrowings |
(
|
) |
(
|
) |
(
|
) | ||||||||||||||
| Subordinated debentures |
(
|
) |
(
|
) |
(
|
) | ||||||||||||||
| Repurchase agreements |
(
|
) |
(
|
) |
(
|
) | ||||||||||||||
| Accrued interest payable |
(
|
) |
(
|
) |
(
|
) | ||||||||||||||
Transfers
The Company did not transfer any assets or liabilities among levels during the nine months ended September 30, 2023 or during the year ended December 31, 2022.
| 25 |
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 September 30, 2023 and December 31, 2022, allocated to the appropriate fair value hierarchy:
| (Dollars in thousands) | As of September 30, 2023 | |||||||||||||||
| Fair value hierarchy | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Assets: | ||||||||||||||||
| Available-for-sale investment securities: | ||||||||||||||||
| U. S. treasury securities | $ |
|
$ |
|
$ | $ | ||||||||||
| Municipal obligations, tax exempt |
|
|
||||||||||||||
| Municipal obligations, taxable |
|
|
||||||||||||||
| Agency mortgage-backed securities |
|
|
||||||||||||||
| Loans held for sale |
|
|
||||||||||||||
| Derivative financial instruments |
|
|
||||||||||||||
| As of December 31, 2022 | ||||||||||||||||
| Fair value hierarchy | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Assets: | ||||||||||||||||
| Available-for-sale investment securities: | ||||||||||||||||
| U. S. treasury securities | $ |
|
$ |
|
$ | $ | ||||||||||
| U. S. federal agency obligations |
|
|
||||||||||||||
| Municipal obligations, tax exempt |
|
|
||||||||||||||
| Municipal obligations, taxable |
|
|
||||||||||||||
| Agency mortgage-backed securities |
|
|
||||||||||||||
| Loans held for sale |
|
|
||||||||||||||
| Derivative financial instruments |
|
|
||||||||||||||
The Company’s investment securities classified as available-for-sale include U.S. treasury securities, municipal obligations, and agency mortgage-backed securities. Quoted exchange prices are available for the Company’s U.S. treasury securities, which are classified as Level 1. U.S. federal 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.
| 26 |
The aggregate fair value, contractual balance (including accrued interest), and gains on loans held for sale were as follows:
| As of | As of | |||||||
| September 30, | December 31, | |||||||
| (Dollars in thousands) | 2023 | 2022 | ||||||
| Aggregate fair value | $ |
|
$ |
|
||||
| Contractual balance |
|
|
||||||
| Gain | $ |
|
$ |
|
||||
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 derivative financial instruments included in earnings were as follows:
| Three months ended | Nine months ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| (Dollars in thousands) | 2023 | 2022 | 2023 | 2022 | ||||||||||||
| Total change in fair value | $ |
(
|
) | $ |
(
|
) | $ |
|
$ |
(
|
) | |||||
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 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. Individually
evaluated loans are reviewed at least quarterly for additional impairment and adjusted accordingly, based on the same factors identified
above. The carrying value of the Company’s individually evaluated loans was $
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.
| 27 |
The following table presents quantitative information about Level 3 fair value measurements measured at fair value on a nonrecurring basis as of September 30, 2023 and December 31, 2022.
| (Dollars in thousands) | ||||||||||||
| Fair value | Valuation technique | Unobservable inputs | Range | |||||||||
| As of September 30, 2023 | ||||||||||||
| Impaired loans: | ||||||||||||
| Commercial | $ |
|
|
|
|
% | ||||||
| As of December 31, 2022 | ||||||||||||
| Impaired loans: | ||||||||||||
| Commercial | $ |
|
|
|
|
% | ||||||
| Real estate owned: | ||||||||||||
| One-to-four family residential real estate |
|
|
|
|
% | |||||||
| Commercial real estate |
|
|
|
|
% | |||||||
12. 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 September 30, 2023, 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 $
The
Basel III Rule includes a common equity Tier 1 capital to risk-weighted assets minimum ratio of
As of September 30, 2023 and December 31, 2022, 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.
| 28 |
The following is a comparison of the Company’s regulatory capital to minimum capital requirements at September 30, 2023 and December 31, 2022.
| (Dollars in thousands) | ||||||||||||||||
| For capital | ||||||||||||||||
| Actual | adequacy purposes | |||||||||||||||
| Amount | Ratio | Amount | Ratio (1) | |||||||||||||
| As of September 30, 2023 | ||||||||||||||||
| Leverage | $ |
|
|
% | $ |
|
|
% | ||||||||
| Common Equity Tier 1 Capital |
|
|
% |
|
|
% | ||||||||||
| Tier 1 Capital |
|
|
% |
|
|
% | ||||||||||
| Total Risk Based Capital |
|
|
% |
|
|
% | ||||||||||
| As of December 31, 2022 | ||||||||||||||||
| Leverage | $ |
|
|
% | $ |
|
|
% | ||||||||
| Common Equity Tier 1 Capital |
|
|
% |
|
|
% | ||||||||||
| Tier 1 Capital |
|
|
% |
|
|
% | ||||||||||
| Total Risk Based Capital |
|
|
% |
|
|
% | ||||||||||
| (1) |
|
The following is a comparison of the Bank’s regulatory capital to minimum capital requirements at September 30, 2023 and December 31, 2022:
| 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 September 30, 2023 | ||||||||||||||||||||||||
| Leverage | $ |
|
|
% | $ |
|
|
% | $ |
|
|
% | ||||||||||||
| Common Equity Tier 1 Capital |
|
|
% |
|
|
% |
|
|
% | |||||||||||||||
| Tier 1 Capital |
|
|
% |
|
|
% |
|
|
% | |||||||||||||||
| Total Risk Based Capital |
|
|
% |
|
|
% |
|
|
% | |||||||||||||||
| As of December 31, 2022 | ||||||||||||||||||||||||
| Leverage | $ |
|
|
% | $ |
|
|
% | $ |
|
|
% | ||||||||||||
| Common Equity Tier 1 Capital |
|
|
% |
|
|
% |
|
|
% | |||||||||||||||
| Tier 1 Capital |
|
|
% |
|
|
% |
|
|
% | |||||||||||||||
| Total Risk Based Capital |
|
|
% |
|
|
% |
|
|
% | |||||||||||||||
| (1) |
|
| 29 |
13. Impact of Recent Accounting Pronouncements
On January 1, 2023, the Company adopted ASU 2016-13 and ASU 2022-02 which is described in note 3.
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. The Company adopted ASU 2017-04 effective January 1, 2023. The adoption of ASU 2017-04 did not 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 standard was effective upon issuance and the amendments may be applied prospectively through December 31, 2022 such that changes made to contracts beginning on or after January 1, 2023 would not apply. In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date, which extended the sunset date from December 31, 2022 to December 31, 2024. LIBOR continued to be published until September 30, 2023.
| 30 |
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 in 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 the current 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. On April 10, 2023, the IRS issued IR-2023-74 proposing regulations that classify 831(b) captives with less than a 65% claims loss ratio as a “listed transaction”. We are currently reviewing the proposed regulations and consulting with tax advisors to understand the impact on Landmark Risk Management if the final regulations are substantially similar to the proposed regulations. The ultimate impact of the proposal and the impact on the Company is uncertain.
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 credit 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 thirty additional branch offices in central, eastern, southeast and southwest Kansas, and our ownership of Landmark Risk Management, Inc. On October 1, 2022, the Company completed its acquisition of Freedom Bancshares, Inc., the holding company of Freedom Bank. Freedom Bank was founded in 2006 and operates out of a single location in Overland Park, Kansas.
In October 2023, we declared our 89 th 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, our future dividend practice is dependent upon the performance of the economy and the Company’s overall performance. In addition, as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022, 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, a standard we exceeded at September 30, 2023.
| 31 |
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 credit losses and the accounting for business combinations, each of which involve significant judgment by our management. On January 1, 2023, we adopted CECL which changed our allowance for credit losses from an incurred loss methodology to an expected loss methodology. The CECL model is subject to changes in our economic forecast, which can impact the calculation of our allowance for credit losses substantially. The impact of the adoption and more information on our allowance for credit losses is included in Notes 2 and 4 of the consolidated financial statements. Our most significant critical accounting estimates relate to the allowance for credit losses on loans, which involve significant judgment by our management. The analysis is updated on a quarterly basis based on historical loss information adjusted for current conditions and reasonable and supportable forecasts. Additionally, the Company considers asset quality trends, composition and trends in the loan portfolio, underlying collateral values, industry trends and other pertinent factors, including regulatory recommendations, which impacts the estimate of future credit losses. Other than CECL, 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, 2022, filed with the Securities and Exchange Commission on March 30, 2023.
Summary of Results . During the third quarter of 2023, we recorded net earnings of $2.9 million, which was an increase of $378,000, or 15.1%, from the $2.5 million of net earnings in the third quarter of 2022. During the first nine months of 2023, we recorded net earnings of $9.6 million, which was an increase of $931,000, or 10.7%, from the $8.7 million of net earnings in the first nine months of 2022. The increase in net earnings during 2023 was primarily related to an increase in interest income due to an increase in average interest earning assets and higher yields on those assets. The increase in assets was due to our acquisition of Freedom Bank and organic growth. Higher interest rates and average balances of interest bearing liabilities also increased our interest expense. The acquisition of Freedom Bank also contributed to an increase in non-interest expense in 2023.
The following table summarizes earnings and key performance measures for the periods presented:
| As of or for the | As of or for the | |||||||||||||||
| (Dollars in thousands, except per share amounts) |
three
months ended
September 30, |
nine
months ended
September 30, |
||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Net earnings: | ||||||||||||||||
| Net earnings | $ | 2,878 | $ | 2,500 | $ | 9,597 | $ | 8,666 | ||||||||
| Basic earnings per share (1) | $ | 0.55 | $ | 0.48 | $ | 1.84 | $ | 1.65 | ||||||||
| Diluted earnings per share (1) | $ | 0.55 | $ | 0.48 | $ | 1.84 | $ | 1.65 | ||||||||
| Earnings ratios: | ||||||||||||||||
| Return on average assets (2) | 0.74 | % | 0.76 | % | 0.84 | % | 0.89 | % | ||||||||
| Return on average equity (2) | 9.87 | % | 8.33 | % | 11.13 | % | 9.33 | % | ||||||||
| Equity to total assets | 7.03 | % | 7.78 | % | 7.03 | % | 7.78 | % | ||||||||
| Net interest margin (2) (3) | 3.06 | % | 3.21 | % | 3.19 | % | 3.08 | % | ||||||||
| Dividend payout ratio | 38.08 | % | 42.00 | % | 34.24 | % | 36.42 | % | ||||||||
| (1) Per share values for the periods ended September 30, 2022 have been adjusted to give effect to the 5% dividend paid during December 2022. | |
| (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. |
Interest Income. Interest income of $16.8 million for the quarter ended September 30, 2023 increased $6.2 million, or 58.6%, as compared to the same period of 2022. Interest income on loans increased $5.5 million, or 68.6%, to $13.5 million for the quarter ended September 30, 2023, compared to the same period of 2022 due to higher yields and average balances. Our yields increased from 4.63% in the third quarter of 2022 to 5.93% in the third quarter of 2023. The increase in interest income on loans was also driven by an increase in average loan balances which increased from $687.7 million in the third quarter of 2022 to $906.3 million in the third quarter of 2023. Interest income on investment securities increased $698,000, or 27.7%, to $3.2 million for the third quarter of 2023, as compared to $2.5 million in the same period of 2022. The increase in interest income on investment securities was primarily the result of increased yields on investment securities, which increased from 2.18% in the third quarter of 2022 to 2.77% in the third quarter of 2023. Offsetting the higher investment securities income was a decrease in the average balances of investment securities which decreased from $494.3 million in the third quarter of 2022 to $486.7 million in the third quarter of 2023.
Interest income of $47.2 million for the nine months ended September 30, 2023 increased $18.2 million, or 62.8%, as compared to the same period of 2022. Interest income on loans increased $15.2 million, or 67.8%, to $37.5 million for the nine months ended September 30, 2023, compared to the same period of 2022 due to an increase in our average loan balances, which increased from $659.1 million during the first nine months of 2022 to $877.0 million during the first nine months of 2023. Also contributing to higher interest income was higher yields on loans, which increased from 4.54% in the nine months ended September 30, 2022 to 5.72% during the nine months ended September 30, 2023. Interest income on investment securities increased $3.1 million, or 48.5%, to $9.5 million for the first nine months of 2023, as compared to $6.4 million in the same period of 2022. The increase in interest income on investment securities was primarily the result of increased yields, which increased from 2.00% in the first nine months of 2022 to 2.72% in the first nine months of 2023. Also contributing to the higher yields on investment securities were higher average balances on investment securities, which increased from $464.7 million in the first nine months of 2022 compared to $493.9 million in the first nine months of 2023.
| 32 |
Interest Expense . Interest expense during the quarter ended September 30, 2023 increased $5.0 million, to $6.2 million, as compared to the same period of 2022. Interest expense on interest-bearing deposits increased $3.6 million, to $4.4 million for the quarter ended September 30, 2023 as compared to the same period of 2022. Our total cost of interest-bearing deposits increased from 0.39% in the third quarter of 2022 to 1.93% in the third quarter of 2023 as a result of higher rates and increased competition for deposits. Also contributing to higher interest expense was an increase in average interest-bearing deposit balances, which increased from $782.5 million in the third quarter of 2022 to $902.7 million in the third quarter of 2023. For the third quarter of 2023, interest expense on borrowings increased $1.4 million, to $1.8 million as compared to the same period of 2022 due to an increase in our average borrowings which increased from $44.9 million in the third quarter of 2022 to $126.5 million in the same period of 2023. Also contributing to the increase in interest expense on borrowings were higher rates, which increased from 2.18% in the third quarter of 2022 to 5.60% in the same period of 2023.
Interest expense during the nine months ended September 30, 2023 increased $12.8 million, to $14.8 million, as compared to the same period of 2022. Interest expense on interest-bearing deposits increased $9.1 million, to $10.4 million for the nine months ended September 30, 2023 as compared to the same period of 2022. The increase in interest expense on interest-bearing deposits was the result of higher rates as our cost of interest-bearing deposits increased from 0.22% in the first nine months of 2022 to 1.57% in the first nine months of 2023. The increase in interest expense on deposits was due to an increase in average interest-bearing deposit balances, which increased from $788.7 million in the first nine months of 2022 to $886.2 million in the same period of 2023. For the first nine months of 2023, interest expense on borrowings increased $3.8 million, to $4.4 million as compared to the same period of 2022, due primarily to an increase in our average outstanding borrowings which increased from $34.1 million in the first nine months of 2022 to $112.3 million in the first nine months of 2023. Also contributing to the higher interest expense on borrowings were higher average rates on our borrowings, which increased to 5.26% for the first nine months of 2023 compared to 1.60% for the same period of 2022.
Net Interest Income . Net interest income increased $1.2 million, or 12.4%, to $10.6 million for the third quarter of 2023 compared to the same period of 2022. The increase in net interest income was primarily a result of an increase in interest income on loans and investments, partially offset by higher interest expense. The accretion of purchase accounting adjustments increased net interest income by $282,000 in the third quarter of 2023 compared to an increase of $13,000 in the third quarter of 2022 and was primarily related to fair value adjustments on loans acquired in the Freedom Bank transaction. Compared to the same period last year, the increase in interest rates raised the yields on our interest-earning assets and the cost of our interest-bearing liabilities. Net interest margin, on a tax-equivalent basis, decreased from 3.21% in the third quarter of 2022 to 3.06% in the same period of 2023. Continued increases in interest rates may not result in a higher net interest margin as a result of increased competition for loans and deposits. Additionally, the deposit balance increases we have seen over the past few years may reverse resulting in the need for higher cost funding.
Net interest income increased $5.4 million, or 20.0%, to $32.4 million for the first nine months of 2023 compared to the same period of 2022. The increase in net interest income was primarily a result of an increase in interest income on loans and investments, partially offset by higher interest expense. The accretion of purchase accounting adjustments increased net interest income by $750,000 in the first nine months of 2023 compared to an increase of $22,000 in the first nine months of 2022 and was primarily related to fair value adjustments on loans acquired in the Freedom Bank transaction. Compared to the same period last year, the increase in interest rates raised the yields on our interest-earning assets and the cost of our interest-bearing liabilities. Net interest margin, on a tax-equivalent basis, increased from 3.08% in the first nine months of 2022 to 3.19% in the same period of 2023.
| 33 |
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 | |||||||||||||||||||||||
| September 30, 2023 | September 30, 2022 | |||||||||||||||||||||||
| 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 | $ | 8,733 | $ | 46 | 2.09 | % | $ | 12,266 | $ | 44 | 1.42 | % | ||||||||||||
| Investment securities (1) | 486,706 | 3,396 | 2.77 | % | 494,283 | 2,720 | 2.18 | % | ||||||||||||||||
| Loans receivable, net (2) | 906,289 | 13,535 | 5.93 | % | 687,716 | 8,030 | 4.63 | % | ||||||||||||||||
| Total interest-earning assets | 1,401,728 | 16,977 | 4.81 | % | 1,194,265 | 10,794 | 3.59 | % | ||||||||||||||||
| Non-interest-earning assets | 147,996 | 113,601 | ||||||||||||||||||||||
| Total | $ | 1,549,724 | $ | 1,307,866 | ||||||||||||||||||||
| Liabilities and Stockholders’ Equity | ||||||||||||||||||||||||
| Interest-bearing liabilities: | ||||||||||||||||||||||||
| Money market and checking | $ | 596,405 | $ | 3,065 | 2.04 | % | $ | 516,141 | $ | 684 | 0.53 | % | ||||||||||||
| Savings accounts | 157,157 | 31 | 0.08 | % | 171,645 | 11 | 0.03 | % | ||||||||||||||||
| Certificates of deposit | 149,165 | 1,288 | 3.43 | % | 94,747 | 76 | 0.32 | % | ||||||||||||||||
| Total interest-bearing deposits | 902,727 | 4,384 | 1.93 | % | 782,533 | 771 | 0.39 | % | ||||||||||||||||
| FHLB advances and other borrowings | 89,441 | 1,251 | 5.55 | % | 15,881 | 105 | 1.11 | % | ||||||||||||||||
| Subordinated debentures | 21,651 | 417 | 7.64 | % | 21,651 | 234 | 4.29 | % | ||||||||||||||||
| Repurchase agreements | 15,387 | 116 | 2.99 | % | 7,411 | 27 | 1.45 | % | ||||||||||||||||
| Total borrowings | 126,479 | 1,784 | 5.60 | % | 44,943 | 366 | 2.18 | % | ||||||||||||||||
| Total interest-bearing liabilities | 1,029,206 | 6,168 | 2.38 | % | 827,476 | 1,137 | 0.53 | % | ||||||||||||||||
| Non-interest-bearing liabilities | 404,874 | 361,290 | ||||||||||||||||||||||
| Stockholders’ equity | 115,644 | 119,100 | ||||||||||||||||||||||
| Total | $ | 1,549,724 | $ | 1,307,866 | ||||||||||||||||||||
| Interest rate spread (3) | 2.43 | % | 3.06 | % | ||||||||||||||||||||
| Net interest margin (4) | $ | 10,809 | 3.06 | % | $ | 9,657 | 3.21 | % | ||||||||||||||||
| Tax-equivalent interest - imputed | 183 | 206 | ||||||||||||||||||||||
| Net interest income | $ | 10,626 | $ | 9,451 | ||||||||||||||||||||
| Ratio of average interest-earning assets to average interest-bearing liabilities | 136.2 | % | 140.6 | % | ||||||||||||||||||||
| (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. |
| 34 |
| Nine months ended | Nine months ended | |||||||||||||||||||||||
| September 30, 2023 | September 30, 2022 | |||||||||||||||||||||||
| 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 | $ | 10,973 | $ | 193 | 2.35 | % | $ | 72,631 | $ | 232 | 0.43 | % | ||||||||||||
| Investment securities (1) | 493,853 | 10,029 | 2.72 | % | 464,702 | 6,961 | 2.00 | % | ||||||||||||||||
| Loans receivable, net (2) | 877,048 | 37,543 | 5.72 | % | 659,109 | 22,387 | 4.54 | % | ||||||||||||||||
| Total interest-earning assets | 1,381,874 | 47,765 | 4.62 | % | 1,196,442 | 29,580 | 3.31 | % | ||||||||||||||||
| Non-interest-earning assets | 147,064 | 110,496 | ||||||||||||||||||||||
| Total | $ | 1,528,938 | $ | 1,306,938 | ||||||||||||||||||||
| Liabilities and Stockholders’ Equity | ||||||||||||||||||||||||
| Interest-bearing liabilities: | ||||||||||||||||||||||||
| Money market and checking | $ | 595,990 | $ | 7,759 | 1.74 | % | $ | 520,746 | $ | 1,058 | 0.27 | % | ||||||||||||
| Savings accounts | 163,498 | 92 | 0.08 | % | 167,927 | 31 | 0.02 | % | ||||||||||||||||
| Certificates of deposit | 126,739 | 2,524 | 2.66 | % | 100,005 | 235 | 0.31 | % | ||||||||||||||||
| Total interest-bearing deposits | 886,227 | 10,375 | 1.57 | % | 788,678 | 1,324 | 0.22 | % | ||||||||||||||||
| FHLB advances and other borrowings | 70,774 | 2,845 | 5.37 | % | 5,352 | 105 | 0.52 | % | ||||||||||||||||
| Subordinated debentures | 21,651 | 1,168 | 7.21 | % | 21,651 | 522 | 3.22 | % | ||||||||||||||||
| Repurchase agreements | 19,903 | 403 | 2.71 | % | 7,074 | 38 | 0.72 | % | ||||||||||||||||
| Total borrowings | 112,328 | 4,416 | 5.26 | % | 34,077 | 665 | 1.60 | % | ||||||||||||||||
| Total interest-bearing liabilities | 998,555 | 14,791 | 1.98 | % | 822,755 | 1,989 | 0.31 | % | ||||||||||||||||
| Non-interest-bearing liabilities | 415,108 | 360,006 | ||||||||||||||||||||||
| Stockholders’ equity | 115,275 | 124,177 | ||||||||||||||||||||||
| Total | $ | 1,528,938 | $ | 1,306,938 | ||||||||||||||||||||
| Interest rate spread (3) | 2.64 | % | 3.00 | % | ||||||||||||||||||||
| Net interest margin (4) | $ | 32,974 | 3.19 | % | $ | 27,591 | 3.08 | % | ||||||||||||||||
| Tax-equivalent interest - imputed | 568 | 597 | ||||||||||||||||||||||
| Net interest income | $ | 32,406 | $ | 26,994 | ||||||||||||||||||||
| Ratio of average interest-earning assets to average interest-bearing liabilities | 138.4 | % | 141.7 | % | ||||||||||||||||||||
| (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. |
| 35 |
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 September 30, |
Nine months ended September 30, |
|||||||||||||||||||||||
| 2023 vs 2022 | 2023 vs 2022 | |||||||||||||||||||||||
|
Increase/(decrease) attributable to |
Increase/(decrease) attributable to |
|||||||||||||||||||||||
| Volume | Rate | Net | Volume | Rate | Net | |||||||||||||||||||
| (Dollars in thousands) | (Dollars in thousands) | |||||||||||||||||||||||
| Interest income: | ||||||||||||||||||||||||
| Interest-bearing deposits at banks | $ | (3 | ) | $ | 5 | $ | 2 | $ | 9 | $ | (48 | ) | $ | (39 | ) | |||||||||
| Investment securities | (41 | ) | 717 | 676 | 455 | 2,613 | 3,068 | |||||||||||||||||
| Loans | 2,923 | 2,582 | 5,505 | 8,486 | 6,670 | 15,156 | ||||||||||||||||||
| Total | 2,879 | 3,304 | 6,183 | 8,950 | 9,235 | 18,185 | ||||||||||||||||||
| Interest expense: | ||||||||||||||||||||||||
| Deposits | 135 | 3,478 | 3,613 | 179 | 8,872 | 9,051 | ||||||||||||||||||
| FHLB advances and other borrowings | 294 | 852 | 1,146 | 406 | 2,334 | 2,740 | ||||||||||||||||||
| Subordinated debentures and other borrowings | 47 | 136 | 183 | 96 | 550 | 646 | ||||||||||||||||||
| Repurchase agreements | 45 | 44 | 89 | 145 | 220 | 365 | ||||||||||||||||||
| Total | 521 | 4,510 | 5,031 | 826 | 11,976 | 12,802 | ||||||||||||||||||
| Net interest income | $ | 2,358 | $ | (1,206 | ) | $ | 1,152 | $ | 8,124 | $ | (2,741 | ) | $ | 5,383 | ||||||||||
Provision for Credit Losses . On January 1, 2023, the Company adopted CECL and has established an allowance for credit losses (“ACL”) based on this framework. The ACL is based on the historical loss rates and the weighted average remaining maturity for financial assets measured at amortized costs including loans, investment securities and unfunded loan commitments. The historical loss rates are adjusted to reflect reasonable and supportable forecasts to estimate expected credit losses over the life of the financial asset. Upon adoption, the ACL on loans increased by $1.5 million and the ACL on held-to-maturity investment securities of $72,000 was recorded.
During the third quarter of 2023, we recorded no provision for credit losses as compared to a $500,000 provision for credit losses recorded in the same period of 2022. We recorded net loan recoveries of $521,000 during the third quarter of 2023 compared to net loan recoveries of $43,000 during the third quarter of 2022.
During the first nine months of 2023, we recorded a $299,000 provision for credit losses compared to no provision for credit losses in the first nine months of 2022. The $299,000 provision for credit losses during the first nine months of 2023 consisted of a $250,000 provision to the allowance for credit losses on loans, $30,000 to unfunded loan commitments and $19,000 to the allowance for credit losses on held-to-maturity investment securities. We recorded net loan recoveries of $406,000 during the nine months ended September 30, 2023 compared to net loan recoveries of $83,000 during the nine months ended September 30, 2022.
For further discussion of the allowance for credit losses, refer to the “Asset Quality and Distribution” section below.
Non-interest Income . Total non-interest income was $3.7 million in the third quarter of 2023, an increase of $123,000, or 3.5%, from the same period in 2022. The increase in non-interest income during the third quarter of 2023 compared to the same period last year was primarily due to recording a $353,000 loss on the sale of lower yielding investment securities in the third quarter of 2022 as well as an increase of $107,000 in fees and service charges primarily due to higher fees related to deposit accounts. Other non-interest income also increased by $180,000 which was primarily due to an increase in lease income associated with part of a branch facility that was vacant in the prior year. Partially offsetting this increase was a decrease of $558,000 in gains on sales of one-to-four family residential real estate loans as higher interest rates and low housing inventories reduced originations of these loans, which are typically sold in the secondary market. However, higher mortgage rates did result in increased originations of adjustable-rate loans this quarter which are maintained in our one-to-four family residential loan portfolio.
| 36 |
Total non-interest income was $11.0 million in the first nine months of 2023, a increase of $88,000, or 0.8%, from the first nine months of 2022, primarily as a result of recording of a $353,000 loss on the sale of lower yielding investment securities in the third quarter of 2022 as well as an increase of $378,000 in fees and services charges due primarily to higher overdraft charges and servicing fees. Offsetting the increase in non-interest income was a decrease of $1.0 million in gains on sales of loans. Our gains on sales of loans decreased as our originations of secondary market one-to-four family residential real estate loans slowed due to the increase in mortgage interest rates and decreased inventory in the housing market in our market areas.
Non-interest Expense . Non-interest expense totaled $10.7 million for the third quarter of 2023, an increase of $1.3 million, or 13.4%, over the same quarter of 2022. The increase in non-interest expense in the third quarter of 2023 compared to the same period last year was mainly due to higher compensation and benefits, occupancy and equipment, data processing and other non-interest expense due to the acquisition of Freedom Bank. Also contributing to the increases were higher amortization costs associated with the purchase accounting entries related to the acquisition. Offsetting the increase was a decrease in acquisition costs from the third quarter of 2022 associated with the acquisition of Freedom Bank.
Non-interest expense totaled $31.4 million for the first nine months of 2023, an increase of $4.1 million or 15.0%, from $27.3 million for the first nine months of 2022. The increase in non-interest expense in the nine months of 2023 compared to the same period last year was mainly due to higher compensation and benefits, occupancy and equipment, data processing, and other non-interest expense due to the acquisition of Freedom Bank. Partially offsetting the increases in non-interest expense were acquisition costs of $355,000 during the first nine months of 2022 related to the acquisition of Freedom Bank.
Income Tax Expense . During the third quarter of 2023, we recorded income tax expense of $671,000, compared to $522,000 during the same period of 2022. Our effective tax rate increased from 17.3% in the third quarter of 2022 to 18.9% in the third quarter of 2023. The increase in the effective tax rate was primarily related to losses of our captive insurance subsidiary which are not deductible for income taxes.
We recorded income tax expense of $2.1 million for the first nine months of 2023 compared to $1.9 million in the same period of 2022. Our effective tax rate was 18.0% in the first nine months of 2022 compared to 17.7% in the first nine months of 2023.
Financial Condition. Economic conditions in the United States slowed during the first nine months of 2023 as elevated inflation levels and higher interest rates impacted the economy. The increase in interest rates has impacted financial institutions resulting in higher costs of funding and lower fair values for investment securities. Three large regional banks have been closed by the Federal Deposit Insurance Corporation (FDIC) mainly due to liquidity concerns, resulting from interest rate risk issues and large concentrations of uninsured corporate deposits. The liquidity issues faced by these banks related to their operations and business strategies and the Company does not have these same concerns. We maintain strong capital and liquidity, and a stable, conservative deposit portfolio with a majority of our deposits being retail-based and FDIC insured. We spend significant time each month monitoring our interest rate and concentration risks through our asset/liability management and lending strategies that involve a relationship-based banking model offering stability and consistency. The State of Kansas and the geographic markets in which the Company operates were also impacted by these economic headwinds. Supply chain constraints, labor shortages and geopolitical events have contributed to the rising inflation levels which are impacting all areas of the economy both nationally and locally. The Company’s allowance for credit losses included estimates of the economic impact of these conditions and other qualitative factors on our loan portfolio. 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 further increases in problem assets may arise, 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 $54.7 million, or 3.5%, from December 31, 2022 to $1.6 billion at September 30, 2023.
The allowance for credit losses is established through a provision for credit losses based on our economic projections. At September 30, 2023, our allowance for credit losses on loans totaled $11.0 million, or 1.17% of gross loans outstanding, compared to $8.8 million, or 1.03% of gross loans outstanding, at December 31, 2022. The increase in our allowance for credit losses on loans as a percentage of gross loans outstanding was primarily due to the adoption of CECL on January 1, 2023.
| 37 |
As of September 30, 2023 and December 31, 2022, approximately $9.9 million and $13.0 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 and raised doubts as to the ability of the borrowers 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 ACL was sufficient to cover expected losses related to such loans at September 30, 2023 and December 31, 2022, respectively.
Loans past due 30-89 days and still accruing interest totaled $6.2 million, or 0.66% of gross loans, at September 30, 2023, compared to $738,000, or 0.09% of gross loans, at December 31, 2022. The increase in delinquent loans was primarily due to two relationships which have returned to performing status subsequent to September 30, 2023. At September 30, 2023, $4.4 million in loans were on non-accrual status, or 0.47% of gross loans, compared to $3.3 million, or 0.39% of gross loans, at December 31, 2022. Non-accrual loans consist of loans 90 or more days past due and certain impaired loans. The increase in non-accrual loans during the third quarter of 2023 was principally associated with one commercial lending relationship which was classified as non-accrual as of September 30, 2023. There were no loans 90 days delinquent and accruing interest at September 30, 2023 or December 31, 2022.
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 September 30, 2023 and December 31, 2022, we had $934,000 of real estate owned. As of September 30, 2023, real estate owned primarily consisted of commercial buildings, undeveloped land 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 $7.4 million, or 0.6% in total deposits during the first nine months of 2023, to $1.3 billion at September 30, 2023. The increase in deposits was primarily due to an increase in our brokered deposit balances, which increased from $10.3 million at December 31, 2022 to $72.4 million at September 30, 2023.
Non-interest-bearing deposits at September 30, 2023, were $395.0 million, or 30.20% of deposits, compared to $410.1 million, or 31.5% of deposits, at December 31, 2022. Money market and checking deposit accounts were 44.8% of our deposit portfolio and totaled $586.7 million at September 30, 2023, compared to $626.7 million, or 48.2% of deposits, at December 31, 2022. Savings accounts decreased to $157.1 million, or 12.0% of deposits, at September 30, 2023, from $170.6 million, or 13.1% of deposits, at December 31, 2022. Certificates of deposit totaled $169.2 million, or 12.9% of deposits, at September 30, 2023, compared to $93.3 million, or 7.2% of deposits, at December 31, 2022. The increase in certificates of deposit was primarily related to higher public fund balances, customers seeking higher interest rates and brokered certificates of deposits, which increased from $1.0 million at December 31, 2022 to $32.2 million at September 30, 2023.
Total deposits include estimated uninsured deposits of $202.8 million and $192.9 million as of September 30, 2023 and December 31, 2022, respectively. This represents approximately 15.5% of our total deposits at September 30, 2023 and compares favorably with other similar community banking organizations. Over 95.3% of the Company’s total deposits were considered core deposits at September 30, 2023. These deposit balances are from retail, commercial and public fund customers located in the markets where the Company has bank branch locations.
Certificates of deposit at September 30, 2023, scheduled to mature in one year or less totaled $104.8 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 increased $48.6 million to $116.8 million at September 30, 2023, from $68.3 million at December 31, 2022. The increase in total borrowings was due to an increase in FHLB borrowings. The increase in FHLB borrowings was to fund loan growth and to offset the decline in non-brokered deposits.
Cash Flows. During the nine months ended September 30, 2023, our cash and cash equivalents decreased by $665,000. Our operating activities provided net cash of $11.4 million during the first nine months of 2023 primarily as a result of net earnings. Our investing activities used net cash of $63.4 million during the first nine months of 2023, primarily due to loan growth. Financing activities provided net cash of $52.7 million during the first nine months of 2023, primarily as a result of an increase in FHLB borrowings.
| 38 |
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 $486.6 million at September 30, 2023 and $521.5 million at December 31, 2022. 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.
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 pledging or sales of investment securities. While the sale of available-for-sale investment securities would result in losses due to the current interest environment, pledging these securities as collateral would not result in a loss. At September 30, 2023, we had $74.6 million borrowed on our line of credit with the FHLB. At September 30, 2023, we had collateral pledged to the FHLB that would allow us to borrow $204.1 million, subject to FHLB credit requirements and policies. At September 30, 2023, we had no borrowings through the Federal Reserve discount window, while our borrowing capacity with the Federal Reserve was $57.2 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 September 30, 2023. At September 30, 2023, we had subordinated debentures totaling $21.7 million and $12.6 million of repurchase agreements. At September 30, 2023, the Company had no borrowings against a $5.0 million line of credit from an unrelated financial institution maturing on November 1, 2024, with an interest rate that adjusts daily based on the prime rate less 0.50%. This line of credit has covenants specific to capital and other financial ratios, which the Company was in compliance with at September 30, 2023. The Company also borrowed $8.0 million from the same unrelated financial institution at a fixed rate of 6.15%. This borrowing matures on September 1, 2027 and requires quarterly principal and interest payments. The original $10.0 million of borrowings was used to fund part of the acquisition of Freedom Bancshares, Inc.
Off Balance Sheet Arrangements. As a provider of financial services, we routinely issue financial guarantees in the form of financial and performance standby letters of credit. Standby letters of credit are contingent commitments issued by us generally to guarantee the payment or performance obligation of a customer to a third party. While these standby letters of credit represent a potential outlay by us, a significant amount of the commitments may expire without being drawn upon. We have recourse against the customer for any amount the customer is required to pay to a third party under a standby letter of credit. The letters of credit are subject to the same credit policies, underwriting standards and approval process as loans made by us. Most of the standby letters of credit are secured, and in the event of nonperformance by the customers, we have the right to the underlying collateral, which could include commercial real estate, physical plant and property, inventory, receivables, cash and marketable securities. The contract amount of these standby letters of credit, which represents the maximum potential future payments guaranteed by us, was $2.4 million at September 30, 2023.
At September 30, 2023, we had outstanding loan commitments, excluding standby letters of credit, of $199.8 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 September 30, 2023 and December 31, 2022, 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 September 30, 2023, the Company and the Bank met all capital adequacy requirements to which we are subject.
| 39 |
Dividends . During the quarter ended September 30, 2023, we paid a quarterly cash dividend of $0.21 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 September 30, 2023. 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 three preceding years. As of September 30, 2023, approximately $12.0 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.
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, 200 and 300 basis points with an impact to our net interest income on a one-year horizon as follows:
| As of September 30, 2023 | As of December 31, 2022 | |||||||||||||||
| 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 | ||||||||||||
| 300 basis point rising | $ | (5,434 | ) | (12.0 | )% | $ | (3,245 | ) | (6.6 | )% | ||||||
| 200 basis point rising | $ | (3,689 | ) | (8.2 | )% | $ | (2,218 | ) | (4.5 | )% | ||||||
| 100 basis point rising | $ | (1,961 | ) | (4.3 | )% | $ | (1,215 | ) | (2.5 | )% | ||||||
| 100 basis point falling | $ | 306 | 0.7 | % | $ | 747 | 1.5 | % | ||||||||
| 200 basis point falling | $ | (372 | ) | (0.8 | )% | $ | 434 | 0.9 | % | |||||||
| 300 basis point falling | $ | (1,410 | ) | (3.1 | )% | $ | (67 | ) | (0.1 | )% | ||||||
| 40 |
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 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 and the recent and potential additional rate increases by the Federal Reserve) including on our net interest income and the value of our security portfolio. | |
| ● | 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 inflationary pressures and supply chain constraints 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 economic impact of past and any future terrorist attacks, acts of war, including the current Israeli-Palestinian conflict and the conflict in Ukraine, or threats thereof, and the response of the United States to any such threats and attacks. | |
| ● | 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, including any changes in response to the recent failures of other banks. | |
| ● | Our ability to compete with other financial institutions due to increases in competitive pressures in the financial services sector, including from non-bank competitors such as credit unions and “fintech” companies. | |
| ● | 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. | |
| ● | The effects of severe weather, natural disasters, widespread disease or pandemics (including the COVID-19 pandemic), 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. | |
| ● | Our ability to effectively manage our credit risk. | |
| ● | Our ability to forecast probable credit losses and maintain an adequate allowance for credit losses. | |
| ● | Fluctuations in the value of securities held in our securities portfolio. | |
| ● | Concentrations within our loan portfolio, large loans to certain borrowers, and large deposits from certain clients. | |
| ● | The concentration of large deposits from certain clients who have balances above current FDIC insurance limits and may withdraw deposits to diversify their exposure. | |
| ● | The level of non-performing assets on our balance sheets. | |
| ● | 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. |
| 41 |
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, 2022 filed on March 30, 2023.
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 September 30, 2023. 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 September 30, 2023 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 September 30, 2023 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, 2022.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
| 42 |
ITEM 6. EXHIBITS
| 43 |
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: November 13, 2023 | /s/ Michael E. Scheopner |
| Michael E. Scheopner | |
| President and Chief Executive Officer | |
| (Principal Executive Officer) | |
| Date: November 13, 2023 | /s/ Mark A. Herpich |
| Mark A. Herpich | |
| Vice President, Secretary, Treasurer | |
| and Chief Financial Officer | |
| (Principal Financial and Accounting Officer) |
| 44 |