Landmark Bancorp Inc 10-Q for FY2021 Q3
Landmark Bancorp Inc (LARK)
About this 10-Q
Landmark Bancorp Inc filed this 10-Q on November 12, 2021, covering the quarter ended September 30, 2021 (FY2021 Q3).
Headline figures
Quarter ended September 30, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Net income
- $4.52M
- down 16.8% from net income of $5.43M a year earlier
- Diluted EPS
- $0.95
- down 16.7% from $1.14 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For
the quarterly period ended
OR
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 ☐
Emerging
growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
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 11, 2021, 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 - 25 |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 26 – 35 |
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 36 |
| Item 4. | Controls and Procedures | 37 |
| PART II | ||
| Item 1. | Legal Proceedings | 38 |
| Item 1A. | Risk Factors | 38 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 38 |
| Item 3. | Defaults Upon Senior Securities | 38 |
| Item 4. | Mine Safety Disclosures | 38 |
| Item 5. | Other Information | 38 |
| Item 6. | Exhibits | 38 |
| Signature Page | 39 | |
| 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, | ||||||
| 2021 | 2020 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Investment securities available-for-sale, at fair value | ||||||||
| Bank stocks, at cost | ||||||||
| Loans, net of allowance for loans losses of $ | ||||||||
| 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 | ||||||||
| Subordinated debentures | ||||||||
| Other borrowings | ||||||||
| Accrued interest, taxes, 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, 2021 and December 31, 2020, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Retained earnings | ||||||||
| Accumulated other comprehensive income | ||||||||
| 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)
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Three months ended | Nine months ended | |||||||||||||||
| (Dollars in thousands, except per share amounts) | September 30, | September 30, | ||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Interest income: | ||||||||||||||||
| Loans | $ | $ | $ | $ | ||||||||||||
| Investment securities: | ||||||||||||||||
| Taxable | ||||||||||||||||
| Tax-exempt | ||||||||||||||||
| Total interest income | ||||||||||||||||
| Interest expense: | ||||||||||||||||
| Deposits | ||||||||||||||||
| Borrowings | ||||||||||||||||
| Total interest expense | ||||||||||||||||
| Net interest income | ||||||||||||||||
| Provision for loan losses | - | |||||||||||||||
| Net interest income after provision for loan losses | ||||||||||||||||
| Non-interest income: | ||||||||||||||||
| Fees and service charges | ||||||||||||||||
| Gains on sales of loans, net | ||||||||||||||||
| Bank owned life insurance | ||||||||||||||||
| Gains 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 intangibles | ||||||||||||||||
| Professional fees | ||||||||||||||||
| 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
(Unaudited)
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Three months ended | Nine months ended | |||||||||||||||
| (Dollars in thousands) | September 30, | September 30, | ||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Net earnings | $ | $ | $ | $ | ||||||||||||
| Net unrealized holding (losses) gains on available-for-sale securities | ( | ) | ( | ) | ||||||||||||
| Reclassification adjustment for net gains included in earnings | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net unrealized (losses) gains | ( | ) | ( | ) | ( | ) | ||||||||||
| Income tax effect on net gains included in earnings | ||||||||||||||||
| Income tax effect on net unrealized holding (losses) gains | ( | ) | ( | ) | ||||||||||||
| Other comprehensive (loss) income | ( | ) | ( | ) | ( | ) | ||||||||||
| Total comprehensive 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 | Total | ||||||||||||||||||
| Balance at July 1, 2020 | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||
| Net earnings | ||||||||||||||||||||||||
| Other comprehensive loss | ( | ) | ( | ) | ||||||||||||||||||||
| Dividends paid ($ per share) | ( | ) | ( | ) | ||||||||||||||||||||
| Issuance of restricted common stock, 17,350 shares | ||||||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||
| Exercise of stock options | ||||||||||||||||||||||||
| Purchase of treasury shares | ||||||||||||||||||||||||
| Balance at September 30, 2020 | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||
| Balance at July 1, 2021 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Net earnings | ||||||||||||||||||||||||
| Other comprehensive loss | ( | ) | ( | ) | ||||||||||||||||||||
| Dividends paid ($ per share) | ( | ) | ( | ) | ||||||||||||||||||||
| Issuance of restricted common stock, shares | ||||||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||
| Exercise of stock options, shares | ||||||||||||||||||||||||
| Balance at September 30, 2021 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| (Dollars in thousands, except per share amounts) | Common stock | Additional paid-in capital | Retained earnings | Treasury stock | Accumulated other comprehensive income | Total | ||||||||||||||||||
| Balance at January 1, 2020 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Net earnings | ||||||||||||||||||||||||
| Other comprehensive income | ||||||||||||||||||||||||
| Dividends paid ($ per share) | ( | ) | ( | ) | ||||||||||||||||||||
| Issuance of restricted common stock, shares | ||||||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||
| Exercise of stock options, shares | ||||||||||||||||||||||||
| Purchase of treasury shares | ( | ) | ( | ) | ||||||||||||||||||||
| Balance at September 30, 2020 | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||
| Balance at January 1, 2021 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Net earnings | ||||||||||||||||||||||||
| Other comprehensive loss | ( | ) | ( | ) | ||||||||||||||||||||
| Dividends paid ($ per share) | ( | ) | ( | ) | ||||||||||||||||||||
| Issuance of restricted common stock, shares | ||||||||||||||||||||||||
| Issuance of restricted common stock | ||||||||||||||||||||||||
| Dividends paid | ( | ) | ( | ) | ||||||||||||||||||||
| Stock-based compensation | ||||||||||||||||||||||||
| Exercise of stock options, shares | ||||||||||||||||||||||||
| Exercise of stock options | ||||||||||||||||||||||||
| Balance at September 30, 2021 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
See accompanying notes to consolidated financial statements.
| 5 |
LANDMARK BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| 2021 | 2020 | |||||||
| Nine months ended | ||||||||
| (Dollars in thousands) | September 30, | |||||||
| 2021 | 2020 | |||||||
| Cash flows from operating activities: | ||||||||
| Net earnings | $ | $ | ||||||
| Adjustments to reconcile net earnings to net cash provided by operating activities: | ||||||||
| Provision for loan losses | ||||||||
| Valuation allowance on real estate owned | ||||||||
| Amortization of investment security premiums, net | ||||||||
| Amortization of purchase accounting adjustment on loans | ( | ) | ( | ) | ||||
| Amortization of mortgage servicing rights and other intangibles | ||||||||
| Depreciation | ||||||||
| Increase in cash surrender value of bank owned life insurance | ( | ) | ( | ) | ||||
| Stock-based compensation | ||||||||
| Deferred income taxes | ||||||||
| Net gains on sales of investment securities | ( | ) | ( | ) | ||||
| Net (gains) losses 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 decrease (increase) in loans | ( | ) | ||||||
| Maturities and prepayments of investment securities | ||||||||
| Purchases of investment securities | ( | ) | ( | ) | ||||
| Proceeds from sales of investment securities | ||||||||
| Redemption of bank stocks | ||||||||
| Purchase of bank stocks | ( | ) | ( | ) | ||||
| Purchase 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 in deposits | ||||||||
| Federal Home Loan Bank advance borrowings | - | |||||||
| Federal Home Loan Bank advance repayments | - | ( | ) | |||||
| Proceeds from other borrowings | - | |||||||
| Repayments on other borrowings | ( | ) | ( | ) | ||||
| Proceeds from exercise of stock options | ||||||||
| Payment of dividends | ( | ) | ( | ) | ||||
| Purchase of treasury stock | - | ( | ) | |||||
| Net cash provided by financing activities | ||||||||
| Net increase 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, | |||||||
| 2021 | 2020 | |||||||
| 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: | ||||||||
| Transfer of loans to real estate owned | ||||||||
| Investment securities purchases not yet settled | - | |||||||
| Operating lease asset and related lease liability recorded | - | |||||||
See accompanying notes to consolidated financial statements.
| 7 |
LANDMARK BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Interim Financial Statements
The unaudited consolidated financial statements of Landmark Bancorp, Inc. (the “Company”) and its wholly owned subsidiaries, Landmark National Bank (the “Bank”) and Landmark Risk Management Inc., have been prepared in accordance with the instructions to Form 10-Q. Accordingly, they do not include all the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements and should be read in conjunction with the Company’s most recent Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 22, 2021, containing the latest audited consolidated financial statements and notes thereto. The consolidated financial statements in this report have not been audited by an independent registered public accounting firm, but in the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation of financial statements have been reflected herein. The results of the three-month and nine-month interim periods ended September 30, 2021 are not necessarily indicative of the results expected for the year ending December 31, 2021 or any other future time period. The Company has evaluated subsequent events for recognition and disclosure up to the date the financial statements were issued.
2. Investments
A summary of investment securities available-for-sale is as follows:
Schedule of Available-for-sale Securities
| As of September 30, 2021 | ||||||||||||||||
| Gross | Gross | |||||||||||||||
| Amortized | unrealized | unrealized | Estimated | |||||||||||||
| (Dollars in thousands) | cost | gains | losses | fair value | ||||||||||||
| U. S. treasury securities | $ | $ | $ | ( | ) | $ | ||||||||||
| U. S. federal agency obligations | ( | ) | ||||||||||||||
| Municipal obligations, tax exempt | ( | ) | ||||||||||||||
| Municipal obligations, taxable | ( | ) | ||||||||||||||
| Agency mortgage-backed securities | ( | ) | ||||||||||||||
| Certificates of deposit | ||||||||||||||||
| Total available-for-sale | $ | $ | $ | ( | ) | $ | ||||||||||
| As of December 31, 2020 | ||||||||||||||||
| Gross | Gross | |||||||||||||||
| Amortized | unrealized | unrealized | Estimated | |||||||||||||
| (Dollars in thousands) | cost | gains | losses | fair value | ||||||||||||
| U. S. treasury securities | $ | $ | $ | $ | ||||||||||||
| U. S. federal agency obligations | ( | ) | ||||||||||||||
| Municipal obligations, tax exempt | ( | ) | ||||||||||||||
| Municipal obligations, taxable | ||||||||||||||||
| Agency mortgage-backed securities | ||||||||||||||||
| Certificates of deposit | ||||||||||||||||
| Total available-for-sale | $ | $ | $ | ( | ) | $ | ||||||||||
| 8 |
The tables above show that some of the securities in the available-for-sale investment portfolio had unrealized losses, or were temporarily impaired, as of September 30, 2021 and December 31, 2020. This temporary impairment represents the estimated amount of loss that would be realized if the securities were sold on the valuation date. Securities which were temporarily impaired are shown below, along with the length of time in a continuous unrealized loss position.
Schedule of Available for Sale Securities Continuous Unrealized Loss Position Fair Value
| As of September 30, 2021 | ||||||||||||||||||||||||||||
| (Dollars in thousands) | Less than 12 months | 12 months or longer | Total | |||||||||||||||||||||||||
| No. of | Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | ||||||||||||||||||||||
| securities | value | losses | value | losses | value | losses | ||||||||||||||||||||||
| U.S. treasury securities | $ | $ | ( | ) | $ | $ | $ | $ | ( | ) | ||||||||||||||||||
| U.S. federal agency obligations | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Municipal obligations, tax exempt | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Municipal obligations, taxable | ( | ) | ( | ) | ||||||||||||||||||||||||
| Agency mortgage-backed securities | ( | ) | ( | ) | ||||||||||||||||||||||||
| Total | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||
| As of December 31, 2020 | ||||||||||||||||||||||||||||
| (Dollars in thousands) | Less than 12 months | 12 months or longer | Total | |||||||||||||||||||||||||
| No. of | Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | ||||||||||||||||||||||
| securities | value | losses | value | losses | value | losses | ||||||||||||||||||||||
| U.S. federal agency obligations | $ | $ | ( | ) | $ | $ | $ | $ | ( | ) | ||||||||||||||||||
| Municipal obligations, tax exempt | ( | ) | ( | ) | ||||||||||||||||||||||||
| Total | $ | $ | ( | ) | $ | $ | $ | $ | ( | ) | ||||||||||||||||||
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, 2021.
The Company’s U.S. federal agency portfolio consists of securities issued by the government-sponsored agencies of Federal Home Loan Mortgage Corporation (“FHLMC”), Federal National Mortgage Association (“FNMA”) and Federal Home Loan Bank (“FHLB”). The receipt of principal and interest on U.S. federal agency obligations is guaranteed by the respective government-sponsored agency guarantor, such that the Company believes that its U.S. federal agency obligations do not expose the Company to credit-related losses. Based on these factors, along with the Company’s intent to not sell the securities and its belief that it was more likely than not that the Company will not be required to sell the securities before recovery of their cost basis, the Company believed that the U.S. federal agency obligations identified in the tables above were temporarily impaired as of September 30, 2021 and December 31, 2020.
The Company’s portfolio of municipal obligations consists of both tax-exempt and taxable general obligations securities issued by various municipalities. As of September 30, 2021, 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, 2021 and December 31, 2020.
The Company’s agency mortgage-backed securities portfolio consists of securities underwritten to the standards of and guaranteed by the government-sponsored agencies of FHLMC, FNMA and the Government National Mortgage Association. The receipt of principal, at par, and interest on agency mortgage-backed securities is guaranteed by the respective government-sponsored agency guarantor, such that the Company believed that its agency mortgage-backed securities did not expose the Company to credit-related losses. Based on these factors, along with the Company’s intent to not sell the securities and the Company’s belief that it was more likely than not that the Company will not be required to sell the securities before recovery of their cost basis, the Company believed that the agency mortgage-backed securities identified in the table above were temporarily impaired as of September 30, 2021.
| 9 |
The table below sets forth amortized cost and fair value of investment securities at September 30, 2021. The table includes scheduled principal payments and estimated prepayments, based on observable market inputs, for agency mortgage-backed securities. Actual maturities will differ from contractual maturities because borrowers have the right to prepay obligations with or without prepayment penalties.
Schedule of Investments Classified by Contractual Maturity Date
| (Dollars in thousands) | Amortized | Estimated | ||||||
| cost | fair value | |||||||
| Due in less than one year | $ | $ | ||||||
| Due after one year but within five years | ||||||||
| Due after five years but within ten years | ||||||||
| Due after ten years | ||||||||
| Total | $ | $ | ||||||
Sales proceeds and gross realized gains and losses on sales of available-for-sale securities were as follows for the periods indicated:
Schedule of Realized Gain (loss)
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| (Dollars in thousands) | Three months ended September 30, | Nine months ended September 30, | ||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Sales proceeds | $ | $ | $ | $ | ||||||||||||
| Realized gains | $ | $ | $ | $ | ||||||||||||
| Realized losses | - | - | - | ( | ) | |||||||||||
| Net realized gains | $ | $ | $ | $ | ||||||||||||
Securities
with carrying values of $
3. Loans and Allowance for Loan Losses
Loans consisted of the following as of the dates indicated below:
Schedule of Loans
| September 30, | December 31, | |||||||
| (Dollars in thousands) | 2021 | 2020 | ||||||
| One-to-four family residential real estate loans | $ | $ | ||||||
| Construction and land loans | ||||||||
| Commercial real estate loans | ||||||||
| Commercial loans | ||||||||
| Paycheck protection program loans | ||||||||
| Agriculture loans | ||||||||
| Municipal loans | ||||||||
| Consumer loans | ||||||||
| Total gross loans | ||||||||
| Net deferred loan costs (fees) and loans in process | ( | ) | ||||||
| Allowance for loan losses | ( | ) | ( | ) | ||||
| Loans, net | $ | $ | ||||||
| 10 |
The following tables provide information on the Company’s allowance for loan losses by loan class and allowance methodology:
Schedule of Allowance for Credit Losses on Financing Receivables
| Three and nine months ended September 30, 2021 | ||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | One-to-four family residential real estate loans | Construction and land loans | Commercial real estate loans | Commercial loans | Paycheck protection program loans | Agriculture loans | Municipal loans | Consumer loans | Total | |||||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||||||||||
| Balance at July 1, 2021 | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||||||
| Provision for loan losses | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Balance at September 30, 2021 | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Balance at January 1, 2021 | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||||||
| Provision for loan losses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Balance at September 30, 2021 | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Three and nine months ended September 30, 2020 | ||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | One-to-four family residential real estate loans | Construction and land loans | Commercial real estate loans | Commercial loans | Paycheck protection program loans | Agriculture loans | Municipal loans | Consumer loans | Total | |||||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||||||||||
| Balance at July 1, 2020 | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||||||
| Provision for loan losses | ||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2020 | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Balance at January 1, 2020 | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Charge-offs | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Recoveries | ||||||||||||||||||||||||||||||||||||
| Provision for loan losses | ( | ) | ||||||||||||||||||||||||||||||||||
| Balance at Seeptember 30, 2020 | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| 11 |
| As of September 30, 2021 | ||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | One-to-four family residential real estate loans | Construction and land loans | Commercial real estate loans | Commercial loans | Paycheck protection program loans | Agriculture loans | Municipal loans | Consumer loans | Total | |||||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||||||||||
| Individually evaluated for loss | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Collectively evaluated for loss | ||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Loan balances: | ||||||||||||||||||||||||||||||||||||
| Individually evaluated for loss | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Collectively evaluated for loss | ||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| As of December 31, 2020 | ||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | One-to-four family residential real estate loan | Construction and land loans | Commercial real estate loans | Commercial loans | Paycheck protection program loans | Agriculture loans | Municipal loans | Consumer loans | Total | |||||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||||||||||
| Individually evaluated for loss | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Collectively evaluated for loss | ||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Loan balances: | ||||||||||||||||||||||||||||||||||||
| Individually evaluated for loss | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Collectively evaluated for loss | ||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
The
Company recorded net loan charge-offs of $
| 12 |
The
Company’s impaired loans decreased from $
The following tables present information on impaired loans:
Schedule of Impaired Loans
| (Dollars in thousands) | As of September 30, 2021 | |||||||||||||||||||||||||||
| Unpaid contractual principal | Impaired loan balance | Impaired loans without an allowance | Impaired loans with an allowance | Related allowance recorded | Year-to-date average loan balance | Year-to-date interest income recognized | ||||||||||||||||||||||
| One-to-four family residential real estate | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Construction and land | ||||||||||||||||||||||||||||
| Commercial real estate | ||||||||||||||||||||||||||||
| Commercial | ||||||||||||||||||||||||||||
| Agriculture | ||||||||||||||||||||||||||||
| Municipal | ||||||||||||||||||||||||||||
| Consumer | ||||||||||||||||||||||||||||
| Total impaired loans | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| (Dollars in thousands) | As of December 31, 2020 | |||||||||||||||||||||||||||
| Unpaid contractual principal | Impaired loan balance | Impaired loans without an allowance | Impaired loans with an allowance | Related allowance recorded | Year-to-date average loan balance | Year-to-date interest income recognized | ||||||||||||||||||||||
| One-to-four family residential real estate | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| 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, 2021 or December 31, 2020.
| 13 |
The following tables present information on the Company’s past due and non-accrual loans by loan class:
Schedule of Past Due Financing Receivables
| (Dollars in thousands) | As of September 30, 2021 | |||||||||||||||||||||||||||
| 30-59 days delinquent and accruing | 60-89 days delinquent and accruing | 90 days or more delinquent and accruing | Total past due loans accruing | Non-accrual loans | Total past due and non-accrual loans | Total loans not past due | ||||||||||||||||||||||
| One-to-four family residential real estate loans | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| 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, 2020 | |||||||||||||||||||||||||||
| 30-59 days delinquent and accruing | 60-89 days delinquent and accruing | 90 days or more delinquent and accruing | Total past due loans accruing | Non-accrual loans | Total past due and non-accrual loans | Total loans not past due | ||||||||||||||||||||||
| One-to-four family residential real estate loans | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| 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, 2021
and 2020 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.
| 14 |
The following table provides information on the Company’s risk categories by loan class:
Schedule of Risk Categories by Loan Class
| As of September 30, 2021 | As of December 31, 2020 | |||||||||||||||
| (Dollars in thousands) | Nonclassified | Classified | 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 | $ | $ | $ | $ | ||||||||||||
At
September 30, 2021, the Company had thirteen loan relationships consisting of 17 outstanding loans that were classified as TDRs. During
the three and nine months ended September 30, 2021, an agriculture loan totaling $
The
Company evaluates each TDR individually and returns the loan to accrual status when a payment history is established after the restructuring
and future payments are reasonably assured. There were no loans modified as TDRs for which there was a payment default within 12 months
of modification as of September 30, 2021 and 2020. The Company did not record any charge-offs against loans classified as TDRs in the
first nine months of 2021 or 2020. A credit provision for loan losses of $
The following table presents information on loans that are classified as TDRs:
Schedule of Troubled Debt Restructurings on Financing Receivables
| (Dollars in thousands) | ||||||||||||||||||||||||
| As of September 30, 2021 | As of December 31, 2020 | |||||||||||||||||||||||
| Number of loans | Non-accrual balance | Accruing balance | Number of loans | Non-accrual balance | Accruing balance | |||||||||||||||||||
| One-to-four family residential real estate loans | $ | $ | $ | $ | ||||||||||||||||||||
| Construction and land loans | ||||||||||||||||||||||||
| Commercial real estate loans | ||||||||||||||||||||||||
| Commercial loans | ||||||||||||||||||||||||
| Agriculture loans | ||||||||||||||||||||||||
| Municipal loan | ||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||
| 15 |
As
of September 30, 2021, the Company had one loan modification with an outstanding loan balance of $
4. Goodwill and Other Intangible Assets
The Company tests goodwill for impairment annually or more frequently if circumstances warrant. The Company’s annual step one impairment test as of December 31, 2020 concluded that its goodwill was not impaired. The Company concluded there were no triggering events during the first nine months of 2021 that required an interim goodwill impairment test.
Lease intangible assets are amortized over the life of the lease. Core deposit intangible assets are amortized over the estimated useful life of ten years on an accelerated basis. A summary of the other intangible assets that continue to be subject to amortization was as follows:
Schedule of Other Intangible Assets and Goodwill
| (Dollars in thousands) | As of September 30, 2021 | |||||||||||
| Gross carrying amount | Accumulated amortization | Net carrying amount | ||||||||||
| Core deposit intangible assets | $ | $ | ( | ) | $ | |||||||
| Lease intangible asset | ||||||||||||
| Total other intangible assets | $ | $ | ( | ) | $ | |||||||
| (Dollars in thousands) | As of December 31, 2020 | |||||||||||
| Gross carrying amount | Accumulated amortization | Net carrying amount | ||||||||||
| Core deposit intangible assets | $ | $ | ( | ) | $ | |||||||
| Lease intangible asset | ( | ) | ||||||||||
| Total other intangible assets | $ | $ | ( | ) | $ | |||||||
The following sets forth estimated amortization expense for core deposit and lease intangible assets for the remainder of 2021 and in successive years ending December 31:
Schedule of Finite-lived Intangible Assets, Future Amortization Expense
| (Dollars in thousands) | Amortization | |||
| expense | ||||
| Remainder of 2021 | $ | |||
| 2022 | ||||
| 2023 | ||||
| Total | $ | |||
5. Mortgage Loan Servicing
Mortgage loans serviced for others are not reported as assets. The following table provides information on the principal balances of mortgage loans serviced for others:
Schedule of Participating Mortgage Loans
| (Dollars in thousands) | September 30, | December 31, | ||||||
| 2021 | 2020 | |||||||
| FHLMC | $ | $ | ||||||
| FHLB | ||||||||
| Total | $ | $ | ||||||
Custodial
escrow balances maintained in connection with serviced loans were $
| 16 |
Activity for mortgage servicing rights was as follows:
Schedule of Servicing Asset at Amortized Cost
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Three months ended | Nine months ended | |||||||||||||||
| (Dollars in thousands) | September 30, | September 30, | ||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| 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, 2021 excluded of unexercised stock options because their inclusion would have been anti-dilutive during such period. The diluted earnings per share computation for the three and nine months ended September 30, 2020 excluded of unexercised stock options because their inclusion would have been anti-dilutive during such period. The Company’s Board of Directors declared a cash dividend of $ per share to be paid November 24, 2021, to common stockholders of record as of the close of business on November 10, 2021. The Board of Directors also declared a 5% stock dividend issuable December 15, 2021 to common stockholders of record on December 1, 2021. Historical earnings per share are revised to reflect the impact of stock dividends when such dividends are distributed and as a result, the information in the subsequent table does not reflect the stock distribution to be made in December 2021. The shares used in the calculation of basic and diluted earnings per share are shown below:
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Three months ended | Nine months ended | |||||||||||||||
| (Dollars in thousands, except per share amounts) | September 30, | September 30, | ||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| 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) |
| 17 |
7. Repurchase Agreements
The Company has overnight repurchase agreements with certain deposit customers whereby the Company uses investment securities as collateral for non-insured funds. These balances are accounted for as collateralized financing and included in other borrowings on the balance sheet.
Repurchase
agreements are comprised of non-insured customer funds, totaling $
The following is a summary of the balances and collateral of the Company’s repurchase agreements:
Schedule of Repurchase Agreements
| As of September 30, 2021 | ||||||||||||||||||||
| (dollars in thousands) | Overnight | Greater | ||||||||||||||||||
and Continuous | Up to 30 days | 30-90 days | than 90 days | Total | ||||||||||||||||
| Repurchase agreements: | ||||||||||||||||||||
| U.S. federal agency obligations | $ | | $ | - | $ | $ | - | $ | ||||||||||||
| Agency mortgage-backed securities | ||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | |||||||||||||||
| As of December 31, 2020 | ||||||||||||||||||||
| (dollars in thousands) | Overnight and | Up to | Greater | |||||||||||||||||
| Continuous | 30 days | 30-90 days | than 90 days | Total | ||||||||||||||||
| Repurchase agreements: | ||||||||||||||||||||
| 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.
8. Revenue from Contracts with Customers
All of the Company’s revenue from contracts with customers in the scope of ASC 606 is recognized within non-interest income. Items outside the scope of ASC 606 are noted as such.
Schedule of Revenue from Contracts with Customers Within Non-interest Income
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Three months ended | Nine months ended | |||||||||||||||
| (Dollars in thousands) | September 30, | September 30, | ||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| 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) | ||||||||||||||||
| Gains on sales of investment securities (1) | ||||||||||||||||
| Gains (losses) on sales of real estate owned | ( | ) | ||||||||||||||
| Other | ||||||||||||||||
| Total non-interest income | $ | $ | $ | $ | ||||||||||||
| (1) |
A description of the Company’s revenue streams under ASC 606 follows:
| 18 |
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 2021 or 2020.
9. Fair Value of Financial Instruments and Fair Value Measurements
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:
Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
| 19 |
Fair value estimates of the Company’s financial instruments as of September 30, 2021 and December 31, 2020, including methods and assumptions utilized, are set forth below:
Schedule of Fair Value, by Balance Sheet Grouping
| As of September 30, 2021 | ||||||||||||||||||||
| Carrying | ||||||||||||||||||||
| amount | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
| Financial assets: | ||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | $ | |||||||||||||||
| Investment securities available-for-sale | ||||||||||||||||||||
| Bank stocks, at cost | n/a | n/a | n/a | n/a | ||||||||||||||||
| Loans, net | ||||||||||||||||||||
| Loans held for sale | ||||||||||||||||||||
| Accrued interest receivable | ||||||||||||||||||||
| Derivative financial instruments | ||||||||||||||||||||
| Financial liabilities: | ||||||||||||||||||||
| Non-maturity deposits | $ | ( | ) | $ | ( | ) | $ | $ | $ | ( | ) | |||||||||
| Certificates of deposit | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Subordinated debentures | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Other borrowings | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Accrued interest payable | ( | ) | ( | ) | ( | ) | ||||||||||||||
| As of December 31, 2020 | ||||||||||||||||||||
| Carrying | ||||||||||||||||||||
| amount | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
| Financial assets: | ||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | $ | |||||||||||||||
| Investment securities available-for-sale | ||||||||||||||||||||
| Bank stocks, at cost | n/a | n/a | n/a | n/a | ||||||||||||||||
| Loans, net | ||||||||||||||||||||
| Loans held for sale | ||||||||||||||||||||
| Accrued interest receivable | ||||||||||||||||||||
| Derivative financial instruments | ||||||||||||||||||||
| Financial liabilities: | ||||||||||||||||||||
| Non-maturity deposits | $ | ( | ) | $ | ( | ) | $ | $ | $ | ( | ) | |||||||||
| Certificates of deposit | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Subordinated debentures | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Other borrowings | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Accrued interest payable | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Derivative financial instruments | ( | ) | ( | ) | ( | ) | ||||||||||||||
Transfers
The Company did not transfer any assets or liabilities among levels during the three or nine months ended September 30, 2021 or during the year ended December 31, 2020.
| 20 |
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, 2021 and December 31, 2020, allocated to the appropriate fair value hierarchy:
Schedule of Fair Value, Assets Measured on Recurring Basis
| (Dollars in thousands) | As of September 30, 2021 | |||||||||||||||
| 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 | ||||||||||||||||
| Certificates of deposit | ||||||||||||||||
| Loans held for sale | ||||||||||||||||
| Derivative financial instruments | ||||||||||||||||
| As of December 31, 2020 | ||||||||||||||||
| Fair value hierarchy | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Assets: | ||||||||||||||||
| Available-for-sale investment securities: | ||||||||||||||||
| U. S. treasury securities | $ | $ | $ | $ | ||||||||||||
| U. S. federal agency obligations | ||||||||||||||||
| Municipal obligations, tax exempt | ||||||||||||||||
| Municipal obligations, taxable | ||||||||||||||||
| Agency mortgage-backed securities | ||||||||||||||||
| Certificates of deposit | ||||||||||||||||
| Loans held for sale | ||||||||||||||||
| Derivative financial instruments | ||||||||||||||||
| Liability: | ||||||||||||||||
| Derivative financial instruments | ( | ) | ( | ) | ||||||||||||
The Company’s investment securities classified as available-for-sale include U.S. treasury securities, U.S. federal agency obligations, municipal obligations, agency mortgage-backed securities and certificates of deposit. Quoted exchange prices are available for the Company’s U.S. treasury securities, which are classified as Level 1. U.S. federal agency securities and agency mortgage-backed securities are priced utilizing industry-standard models that consider various assumptions, including time value, yield curves, volatility factors, prepayment speeds, default rates, loss severity, current market and contractual prices for the underlying financial instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace, can be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace. These measurements are classified as Level 2. Municipal obligations are valued using a type of matrix, or grid, pricing in which securities are benchmarked against U.S. treasury rates based on credit rating. These model and matrix measurements are classified as Level 2 in the fair value hierarchy.
Changes in the fair value of available-for-sale securities are included in other comprehensive income to the extent the changes are not considered other-than-temporary impairments. Other-than-temporary impairment tests are performed on a quarterly basis and any decline in the fair value of an individual security below its cost that is deemed to be other-than-temporary results in a write-down of that security’s cost basis.
Mortgage loans originated and intended for sale in the secondary market are carried at fair value. The mortgage loan valuations are based on quoted secondary market prices for similar loans and are classified as Level 2. Changes in the fair value of mortgage loans originated and intended for sale in the secondary market and derivative financial instruments are included in gains on sales of loans.
| 21 |
The aggregate fair value, contractual balance (including accrued interest), and gain on loans held for sale were as follows:
Schedule of Fair Value Contractual Balance and Gain Loss on Loans Held for Sale
| As of | As of | |||||||
| September 30, | December 31, | |||||||
| (Dollars in thousands) | 2021 | 2020 | ||||||
| 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:
Schedule of Gains and Losses from Changes in Fair Value of Loans Held for Sale
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Three months ended | Nine months ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| (Dollars in thousands) | 2021 | 2020 | 2021 | 2020 | ||||||||||||
| 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 impaired loans are generally carried at the lower of cost
or fair value of the collateral, less estimated selling costs. Collateral values are determined based on appraisals performed by qualified
licensed appraisers hired by the Company and then further adjusted if warranted based on relevant facts and circumstances. The appraisals
may utilize a single valuation approach or a combination of approaches including the comparable sales and income approach. Adjustments
are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data
available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.
Impaired loans are reviewed and evaluated at least quarterly for additional impairment and adjusted accordingly, based on the same factors
identified above. The carrying value of the Company’s impaired loans was $
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.
| 22 |
The following table presents quantitative information about Level 3 fair value measurements measured at fair value on a nonrecurring basis as of September 30, 2021 and December 31, 2020.
Schedule of Fair Value Measurements on Nonrecurring, Valuation Techniques
| (Dollars in thousands) | ||||||||||||
| Fair value | Valuation technique | Unobservable inputs | Range | |||||||||
| As of September 30, 2021 | ||||||||||||
| Impaired loans: | ||||||||||||
| Commercial real estate | $ | % | ||||||||||
| Commercial | ||||||||||||
| Agriculture | % | |||||||||||
| Real estate owned: | ||||||||||||
| Commercial real estate | % | |||||||||||
| As of December 31, 2020 | ||||||||||||
| Impaired loans: | ||||||||||||
| Commercial real estate | $ | % | ||||||||||
| Commercial | ||||||||||||
| Agriculture | % | |||||||||||
| Real estate owned: | ||||||||||||
| One-to-four family residential real estate | % | |||||||||||
10. Regulatory Capital Requirements
Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. Management believed that as of September 30, 2021, the Company and the Bank met all capital adequacy requirements to which they were subject at that time.
Prompt
corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately
capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as
is asset growth and expansion, and capital restoration plans are required. The Company and the Bank are subject to the Basel III Rule,
which is applicable to all U.S. banks that are subject to minimum capital requirements, as well as to bank and savings and loan holding
companies other than “small bank holding companies” (generally, non-public bank holding companies with consolidated assets
of less than $
The
Basel III Rule includes a common equity Tier 1 capital to risk-weighted assets minimum ratio of
As of September 30, 2021 and December 31, 2020, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action then in effect. There are no conditions or events since that notification that management believes have changed the institution’s category.
| 23 |
The following is a comparison of the Company’s regulatory capital to minimum capital requirements at September 30, 2021 and December 31, 2020:
Schedule of Compliance with Regulatory Capital Requirements for Mortgage Companies
| (Dollars in thousands) | To be well-capitalized | |||||||||||||||||||||||
| For capital | under regulatory | |||||||||||||||||||||||
| Actual | adequacy purposes | guidelines | ||||||||||||||||||||||
| Amount | Ratio | Amount | Ratio (1) | Amount | Ratio | |||||||||||||||||||
| As of September 30, 2021 | ||||||||||||||||||||||||
| Leverage | $ | % | $ | % | $ | % | ||||||||||||||||||
| Common Equity Tier 1 Capital | % | % | % | |||||||||||||||||||||
| Tier 1 Capital | % | % | % | |||||||||||||||||||||
| Total Risk Based Capital | % | % | % | |||||||||||||||||||||
| As of December 31, 2020 | ||||||||||||||||||||||||
| 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, 2021 and December 31, 2020:
Schedule of Compliance with Regulatory Capital Requirements Under Banking Regulation
| To be well-capitalized | ||||||||||||||||||||||||
| under prompt | ||||||||||||||||||||||||
| (Dollars in thousands) | For capital | corrective | ||||||||||||||||||||||
| Actual | adequacy purposes | action provisions | ||||||||||||||||||||||
| Amount | Ratio | Amount | Ratio (1) | Amount | Ratio | |||||||||||||||||||
| As of September 30, 2021 | ||||||||||||||||||||||||
| Leverage | $ | % | $ | % | $ | % | ||||||||||||||||||
| Common Equity Tier 1 Capital | % | % | % | |||||||||||||||||||||
| Tier 1 Capital | % | % | % | |||||||||||||||||||||
| Total Risk Based Capital | % | % | % | |||||||||||||||||||||
| As of December 31, 2020 | ||||||||||||||||||||||||
| Leverage | $ | % | $ | % | $ | % | ||||||||||||||||||
| Common Equity Tier 1 Capital | % | % | % | |||||||||||||||||||||
| Tier 1 Capital | % | % | % | |||||||||||||||||||||
| Total Risk Based Capital | % | % | % | |||||||||||||||||||||
| (1) |
11. Impact of Recent Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), commonly referred to as “CECL.” The provisions of the update eliminate the probable initial recognition threshold under current GAAP which requires reserves to be based on an incurred loss methodology. Under CECL, reserves required for financial assets measured at amortized cost will reflect an organization’s estimate of all expected credit losses over the expected term of the financial asset and thereby require the use of reasonable and supportable forecasts to estimate future credit losses. Because CECL encompasses all financial assets carried at amortized cost, the requirement that reserves be established based on an organization’s reasonable and supportable estimate of expected credit losses extends to held to maturity debt securities. Under the provisions of the update, credit losses recognized on available for sale debt securities will be presented as an allowance as opposed to a write-down. In addition, CECL will modify the accounting for only purchased credit impaired loans. Under prior GAAP, a purchased loan’s contractual balance was adjusted to fair value through a credit discount, and no reserve was recorded on the purchased loan upon acquisition. Since under CECL reserves will be established for purchased loans at the time of acquisition, the accounting for purchased loans is made more comparable to the accounting for originated loans. Finally, increased disclosure requirements under CECL oblige organizations to present the currently required credit quality disclosures disaggregated by the year of origination or vintage. The FASB expects that the evaluation of underwriting standards and credit quality trends by financial statement users will be enhanced with the additional vintage disclosures. In October 2019, the FASB approved a change in the effective dates for CECL which delayed the effective date to fiscal years beginning after December 15, 2022 for smaller reporting companies. Because the Company is a smaller reporting company, the proposed delay is applicable to the Company, and the Company plans to delay the implementation of CECL until January 1, 2023. Management has initiated an implementation committee that has implemented a process to collect the data and is utilizing a vendor solution for the new standard. Initial calculations estimate the effect will be an increase to the allowance for loan losses upon adoption. However, the size of the overall increase is uncertain at this time. Management is utilizing the delay to continue to refine and back test the CECL calculation. The internal controls over financial reporting specifically related to CECL are in the design stage and are currently being evaluated.
| 24 |
In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The amendments in this update simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. The amendments require an entity to perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognizing an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The amendments also eliminate the requirement for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. The amendments in this ASU are effective for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. In October 2019, the FASB approved a change in the effective dates for ASU 2017-04 which delayed the effective date to fiscal years beginning after December 15, 2022 for smaller reporting companies. Because the Company is a smaller reporting company, the proposed delay is applicable to the Company, and the Company plans to delay the implementation of ASU 2017-04 until January 1, 2023. Early adoption of the amendments of this ASU is permitted. The adoption of ASU 2017-04 is not expected to have a material effect on the Company’s operating results or financial condition.
In May 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. Reference rate reform relates to the effects undertaken to eliminate certain reference rates such as the London Interbank Offered Rate (“LIBOR”) and introduce new reference rates that may be based on larger or more liquid observations and transactions. ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other contracts. Generally, ASU 2020-04 would allow entities to consider contract modifications due to reference rate reform to be a continuation of an existing contract; thus, the Company would not have to determine if the modification is considered insignificant. The Company is in the process of reviewing loan documentation, along with the transition procedures it will need in order to implement reference rate reform. While the Company has yet to adopt ASU 2020-04, the standard was effective upon issuance and terminates December 31, 2022 such that changes made to contracts beginning on or after January 1, 2023 would not apply. The adoption of ASU 2020-04 is not expected to have a material effect on the Company’s operating results or financial condition.
12. COVID-19 Pandemic
The COVID-19 pandemic in the United States caused a substantial disruption to the economy, employment and financial markets and continues to have a complex and significant adverse impact on the economy, the banking industry and the Company. Additional federal government stimulus, declining COVID-19 cases and the distribution of vaccines may lead to positive impacts on the economy and employment while increasing cases and new variants of COVID-19 present risks to the recovery. The Company’s pandemic response plan continues to focus foremost on the safety and well-being of our customers and associates. The COVID-19 pandemic could adversely impact our customers, employees or vendors which may impact our operations and financial results. The COVID-19 pandemic may cause economic declines in excess of current projections, or if the pandemic lasts longer than currently projected, the Company’s provision for loan losses may increase in future periods. The Company may see higher loan delinquencies and defaults in future periods as a result of the COVID-19 pandemic and will continue to monitor our allowance for loan losses in light of changing economic conditions related to COVID-19. The COVID-19 pandemic may also impact the Company’s deposit balances and service charge income. In addition, the fair value of certain assets may be adversely impacted by the pandemic and the economic downturn, including the fair value of goodwill, mortgage servicing rights and other real estate. These declines could result in impairments in future periods. The pandemic has caused a significant decline in market interest rates which may cause our net interest margin to continue to decline. At this time, the full impact of the COVID-19 pandemic on the Company’s financial statements is uncertain.
| 25 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview. Landmark Bancorp, Inc. is a financial holding company incorporated under the laws of the State of Delaware and is engaged in the banking business through its wholly owned subsidiary, Landmark National Bank, and in the insurance business through its wholly owned subsidiary, Landmark Risk Management, Inc. References to the “Company,” “we,” “us,” and “our” refer collectively to Landmark Bancorp, Inc., Landmark National Bank and Landmark Risk Management, Inc. The Company is listed on the Nasdaq Global Market under the symbol “LARK.” The Bank is dedicated to providing quality financial and banking services to its local communities. Our strategy includes continuing a tradition of holding and acquiring quality assets while growing our commercial, commercial real estate and agriculture loan portfolios. We are committed to developing relationships with our borrowers and providing a total banking service.
The Bank is principally engaged in the business of attracting deposits from the general public and using such deposits, together with borrowings and other funds, to originate one-to-four family residential real estate, construction and land, commercial real estate, commercial, agriculture, municipal and consumer loans. Although not our primary business function, we invest in certain investment and mortgage-related securities using deposits and other borrowings as funding sources.
Landmark Risk Management, Inc., which was formed and began operations on 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.
Our results of operations depend generally on net interest income, which is the difference between interest income from interest-earning assets and interest expense on interest-bearing liabilities. Net interest income is affected by regulatory, economic and competitive factors that influence interest rates, loan demand and deposit flows. In addition, we are subject to interest rate risk to the degree that our interest-earning assets mature or reprice at different times, or at different speeds, than our interest-bearing liabilities. Our results of operations are also affected by non-interest income, such as service charges, loan fees, gains from the sale of newly originated loans, gains or losses on investments and certain other non-interest related items. Our principal operating expenses, aside from interest expense, consist of compensation and employee benefits, occupancy costs, professional fees, data processing expenses and provision for loan losses.
We are significantly impacted by prevailing economic conditions, including federal monetary and fiscal policies, and federal regulations of financial institutions. Deposit balances are influenced by numerous factors such as competing investments, the level of income and the personal rate of savings within our market areas. Factors influencing lending activities include the demand for housing and the interest rate pricing competition from other lending institutions.
Currently, our business consists of ownership of the Bank, with its main office in Manhattan, Kansas and twenty- nine additional branch offices in central, eastern, southeast and southwest Kansas, and our ownership of Landmark Risk Management, Inc.
Impact of COVID-19. The COVID-19 pandemic in the United States has had and continues to have a complex and significant adverse impact on the economy, the banking industry and the Company.
Effects on Our Business. The COVID-19 pandemic, federal, state and local government responses to the pandemic, and the effects of existing and future variants of the disease, such as the Delta variant, have had, and are expected to continue to have, a significant impact on our business. In particular, a significant portion of the Bank’s borrowers in the retail, restaurant and hospitality industries were adversely impacted by the COVID-19 pandemic. Future outbreaks may impact these customers, which may cause them to draw on their existing lines of credit and adversely affect their ability to repay existing indebtedness. The decline in interest rates as a result of the COVID-19 pandemic increased our origination of one-to-four family residential mortgage loans in 2020, as the lower interest rates drove an increase in refinancings and sales. The origination of one-to-four family residential mortgage loans has slowed during 2021 due to lower housing inventories and higher mortgage interest rates. We do not expect that future outbreaks will cause a similar increase in origination volumes. The economic conditions as a result of COVID-19 has impacted our commercial real estate portfolio, as cash flows and collateral values were impacted by the economic downturn. Future outbreaks may negatively impact these borrowers and the value of the collateral securing our loans. As a result, we anticipate that our financial condition, capital levels and results of operations may be adversely affected, as described in further detail below.
| 26 |
Our Response. We have taken numerous steps in response to the COVID-19 pandemic, including the following:
| ● | We established a pandemic response team, which has been meeting as needed since mid-March 2020 to address changes resulting from the COVID-19 pandemic. Some of our associates are still working from home, and for those that remain in our bank facilities, we have enhanced safety precautions in place for their safety. We have repositioned associates to support our customer care call center to handle increased volumes of customer requests and to support our customers’ access to our digital banking platforms. |
| ● | As a preferred lender with the SBA, we were able and prepared to immediately respond to help existing and new clients access Paycheck Protection Program (PPP) loans authorized by the CARES Act. In addition, we were a participating lender in the second round of PPP lending. From the beginning of the PPP through September 30, 2021, we funded 2,195 PPP loans totaling approximately $186.0 million. We are actively working with the PPP loan borrowers through the SBA’s loan forgiveness process. As of September 30, 2021, we had approximately $28.7 million of PPP loans outstanding. |
| ● | As of September 30, 2021, we had entered into short-term forbearance plans and short-term repayment plans on two one-to-four family residential mortgage loans totaling $74,000. We continue to work with our customers by offering loan forbearance and modifications to those borrowers impacted by COVID-19. |
| ● | As of September 30, 2021, we had one loan modification in connection with the COVID-19 pandemic on an outstanding loan balance of $3.7 million that had not yet returned to contractual terms. This modification consisted of the deferral of principal payments. As of December 31, 2020, we had nine loan modifications in connection with the COVID-19 pandemic on outstanding loan balances of $7.2 million. |
In October 2021, we declared our 81st consecutive quarterly dividend, and we currently have no plans to change our dividend strategy given our current capital and liquidity position. However, while we have achieved a strong capital base and expect to continue operating profitably, this is dependent upon the performance of the economy. In addition, as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020, we will not be permitted to make capital distributions (including for dividends and repurchases of stock) or pay discretionary bonuses to executive officers without restriction if we do not maintain 2.5% in Common Equity Tier 1 Capital attributable to a capital conservation buffer.
Critical Accounting Policies. Critical accounting policies are those which are both most important to the portrayal of our financial condition and results of operations and require our management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our critical accounting policies relate to the allowance for loan losses, the valuation of investment securities, accounting for goodwill and the accounting for income taxes, all of which involve significant judgment by our management. There have been no material changes to the critical accounting policies included under Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the Securities and Exchange Commission on March 22, 2021.
Summary of Results. During the third quarter of 2021, we recorded net earnings of $4.5 million, which was a decrease of $910,000, or 16.8%, from the $5.4 million of net earnings in the third quarter of 2020. The decrease in net earnings during the third quarter of 2021 was primarily driven by a $2.7 million decrease in non-interest income. During the first nine months of 2021, we recorded net earnings of $14.9 million, which was an increase of $974,000, or 7.0%, from the $13.9 million of net earnings in the first nine months of 2020. The increase in net earnings during the first nine months of 2021 was primarily driven by a $2.8 million increase in net interest income and a $2.1 million decrease in our provision for loan losses.
| 27 |
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, | ||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Net earnings: | ||||||||||||||||
| Net earnings | $ | 4,517 | $ | 5,427 | $ | 14,864 | $ | 13,890 | ||||||||
| Basic earnings per share (1) | $ | 0.95 | $ | 1.15 | $ | 3.13 | $ | 2.92 | ||||||||
| Diluted earnings per share (1) | $ | 0.95 | $ | 1.14 | $ | 3.12 | $ | 2.91 | ||||||||
| Earnings ratios: | ||||||||||||||||
| Return on average assets (2) | 1.42 | % | 1.89 | % | 1.59 | % | 1.71 | % | ||||||||
| Return on average equity (2) | 13.36 | % | 18.06 | % | 15.23 | % | 16.19 | % | ||||||||
| Equity to total assets | 10.79 | % | 10.61 | % | 10.79 | % | 10.61 | % | ||||||||
| Net interest margin (2) (3) | 3.36 | % | 3.60 | % | 3.47 | % | 3.66 | % | ||||||||
| Dividend payout ratio | 21.05 | % | 16.67 | % | 19.23 | % | 19.61 | % | ||||||||
(1) Per share values for the periods ended September 30, 2020 have been adjusted to give effect to the 5% stock dividend paid during December 2020.
(2) Ratios have been annualized and are not necessarily indicative of the results for the entire year.
(3) Net interest margin is presented on a fully tax equivalent basis, using a 21% federal tax rate.
Interest Income. Interest income of $10.0 million for the quarter ended September 30, 2021 increased $234,000, or 2.4%, as compared to the same period of 2020. Interest income on loans increased $463,000, or 5.8%, to $8.5 million for the quarter ended September 30, 2021, compared to the same period of 2020 due primarily to higher yields on loans, which increased from 4.42% in the third quarter of 2020 to 5.03% in the third quarter of 2021. The increase in yields on loans was driven by an increase in interest income on PPP loans, which increased from $832,000 in the third quarter of 2020 to $1.6 million in the third quarter of 2021. A significant amount of PPP loans were forgiven in the third quarter of 2021 which increased the yields on PPP loans from 2.53% in the third quarter of 2020 to 15.4% in the third quarter of 2021 as the remaining unamortized loan origination fees were recognized. Excluding PPP loans, our loan portfolio generally repriced lower during the third quarter of 2021 in the current low interest rate environment. We anticipate our loan portfolio will continue to reprice lower until market interest rates increase. Partially offsetting the higher yields on loans was a decrease in our average loan balances, which decreased from $720.7 million in the third quarter of 2020 to $668.0 million in the third quarter of 2021. Our average loan balances included average PPP loans of $40.4 million in the third quarter of 2021 and $130.8 million in the third quarter of 2020. Interest income on investment securities decreased $229,000, or 13.0%, to $1.5 million for the third quarter of 2021, as compared to $1.8 million in the same period of 2020. The decrease in interest income on investment securities was primarily the result of lower yields on investment securities, which decreased from 2.54% in the third quarter of 2020 to 1.86% in the third quarter of 2021. Partially offsetting the lower yields was an increase in the average balances of investment securities which increased from $307.9 million in the third quarter of 2020 to $357.7 million in the third quarter of 2021.
Interest income of $30.3 million for the nine months ended September 30, 2021 increased $1.6 million, or 5.7%, as compared to the same period of 2020. Interest income on loans increased $2.8 million, or 12.3%, to $25.7 million for the nine months ended September 30, 2021, compared to the same period of 2020 due mainly to an increase in our average loan balances, which increased from $647.5 million during the first nine months of 2020 to $702.5 million during the first nine months of 2021. Also contributing to the increase were higher yields on loans, which increased from 4.73% in the nine months ended September 30, 2020 to 4.90% during the nine months ended September 30, 2021. Our average loan balances included average PPP loans of $82.7 million in the nine months ended September 30, 2021 compared to $78.1 million in the same period of 2020. Interest income on PPP loans increased from $1.5 million in the first nine months of 2020 to $4.9 million in the first nine months of 2021. The yield on PPP loans increased from 3.82% in the first nine months of 2020 to 7.85% in the first nine months of 2021. Interest income on investment securities decreased $1.2 million, or 20.3%, to $4.6 million for the first nine months of 2021, as compared to $5.8 million in the same period of 2020. The decrease in interest income on investment securities was the result of lower yields, which decreased from 2.63% in the first nine months of 2020 to 2.05% in the first nine months of 2021. Partially offsetting the lower yields were higher average balances, which increased from $327.6 million in the first nine months of 2020 to $335.2 million in the first nine months of 2021.
| 28 |
Interest Expense. Interest expense during the quarter ended September 30, 2021 decreased $112,000, or 22.9%, to $378,000 as compared to the same period of 2020. Interest expense on interest-bearing deposits decreased $96,000, or 27.1%, to $258,000 for the quarter ended September 30, 2021 as compared to the same period of 2020. Our total cost of interest-bearing deposits decreased from 0.20% in the third quarter of 2020 to 0.13% in the third quarter of 2021 as a result of lower rates paid on money market and checking accounts, as the rates repriced based on market indexes, and lower rates on our certificates of deposit. Partially offsetting the lower interest rates was an increase in average interest-bearing deposit balances, which increased from $690.9 million in the third quarter of 2020 to $769.7 million in the third quarter of 2021. For the third quarter of 2021, interest expense on borrowings decreased $16,000, or 11.8%, to $120,000 as compared to the same period of 2020 due to a decrease in our average outstanding borrowings, which decreased from $40.1 million in the third quarter of 2020 to $27.0 million in the same period of 2021. Partially offsetting the lower average balance of borrowings were higher rates, which increased from 1.35% in the third quarter of 2020 to 1.76% in the same period of 2021.
Interest expense during the nine months ended September 30, 2021 decreased $1.2 million, or 50.2%, to $1.2 million as compared to the same period of 2020. Interest expense on interest-bearing deposits decreased $998,000, or 55.5%, to $800,000 for the nine months ended September 30, 2021 as compared to the same period of 2020. The decrease in interest expense on interest-bearing deposits was the result of lower rates paid on money market and checking accounts, as the rates repriced based on market indexes, and lower rates on our certificates of deposit. The average rate of interest-bearing deposits decreased 22 basis points to 0.14% for the first nine months of 2021 as compared to 0.36% in the same period of 2020. Partially offsetting the lower rates was an increase in average interest-bearing deposit balances, which increased from $663.5 million in the first nine months of 2020 to $768.1 million in the same period of 2021. For the first nine months of 2021, interest expense on borrowings decreased $172,000, or 32.2%, to $362,000 as compared to the same period of 2020, due primarily to a decrease in our average outstanding borrowings, which decreased from $40.1 million in the first nine months of 2020 to $26.9 million in the first nine months of 2021. Partially offsetting the lower interest expense on borrowings were slightly higher average rates on our borrowings, which increased to 1.80% for the first nine months of 2021 compared to 1.78% for the same period of 2020.
Net Interest Income. Net interest income increased $346,000, or 3.7%, to $9.6 million for the third quarter of 2021 compared to the same period of 2020. The increase in net interest income was primarily a result of higher yields on PPP loans and an increase of 10.4% in average interest-earning assets, from $1.0 billion in the third quarter of 2020 to $1.2 billion for the same period of 2021. The increase in average interest-earning assets was primarily due to growth in the average balances of interest-bearing deposits at banks and investment securities. The higher balances of interest-bearing deposits at banks were the result of deposit growth and negatively impacted our net interest margin due to the low yields on these balances. Our net interest margin, on a tax-equivalent basis, decreased from 3.60% during the third quarter of 2020 to 3.36% in the same period of 2021.
Net interest income increased $2.8 million, or 10.6%, to $29.2 million for the first nine months of 2021 compared to the same period of 2020. The increase was primarily due to higher yields on PPP loans and a result of a 16.3% increase in average interest-earning assets, from $987.4 million in the first nine months of 2020 to $1.1 billion in the first nine months of 2021. The increase in average interest-earning assets was primarily due to growth in our average balances of interest-bearing deposits at banks and loans. Net interest margin, on a tax-equivalent basis, decreased from 3.66% in the first nine months of 2020 to 3.47% in the same period of 2021.
As a result of the COVID-19 pandemic, we originated approximately $186.0 million of PPP loans from April 3, 2020, the first day of the program, through May 31, 2021, the last day of the program. These loans have an interest rate of 1.00% plus the amortization of the origination fee. The maturity date of these loans is two to five years from the date of borrowing unless the borrower’s loan is forgiven, in which case the loan may be repaid sooner. The yield on PPP loans incorporating the acceleration of the origination fee can vary significantly based on the number of loans forgiven, which may increase or decrease our net interest margin. In addition, the economic effects of the COVID-19 pandemic have slowed our origination of new loans, excluding PPP loans, which may lead to lower net interest income and net interest margin in future periods. Our deposit growth, part of which was as a result of government stimulus payments, has exceeded the growth of our loans and investment securities resulting in an increase in our cash balances of interest-bearing deposits at banks and a decrease in borrowings. The yield on interest-bearing deposits at banks is significantly lower than the yields on loans and investment securities, which has negatively impacted our net interest margin. The continuation of the low market interest rates will also likely adversely impact our net interest income and net interest margin because lower yields on loans and investment securities will likely more than offset the lower cost of funds.
| 29 |
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 | |||||||||||||||||||||||
| Seeptember 30, 2021 | September 30, 2020 | |||||||||||||||||||||||
| Average balance | Income/ expense | Average yield/cost | Average balance | Income/ expense | Average yield/cost | |||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||
| Interest-earning assets: | ||||||||||||||||||||||||
| Interest-bearing deposits at banks | $ | 131,610 | $ | 53 | 0.16 | % | $ | 19,337 | $ | 5 | 0.10 | % | ||||||||||||
| Investment securities (1) | 357,652 | 1,674 | 1.86 | % | 307,904 | 1,967 | 2.54 | % | ||||||||||||||||
| Loans receivable, net (2) | 667,952 | 8,466 | 5.03 | % | 720,742 | 8,004 | 4.42 | % | ||||||||||||||||
| Total interest-earning assets | 1,157,214 | 10,193 | 3.49 | % | 1,047,983 | 9,976 | 3.79 | % | ||||||||||||||||
| Non-interest-earning assets | 104,740 | 96,869 | ||||||||||||||||||||||
| Total | $ | 1,261,954 | $ | 1,144,852 | ||||||||||||||||||||
| Liabilities and Stockholders’ Equity | ||||||||||||||||||||||||
| Interest-bearing liabilities: | ||||||||||||||||||||||||
| Money market and checking | $ | 508,405 | $ | 137 | 0.11 | % | $ | 442,023 | $ | 125 | 0.11 | % | ||||||||||||
| Savings accounts | 149,491 | 12 | 0.03 | % | 118,264 | 10 | 0.03 | % | ||||||||||||||||
| Certificates of deposit | 111,762 | 109 | 0.39 | % | 130,613 | 219 | 0.67 | % | ||||||||||||||||
| Total interest-bearing deposits | 769,658 | 258 | 0.13 | % | 690,900 | 354 | 0.20 | % | ||||||||||||||||
| Subordinate debentures and other borrowings | 27,003 | 120 | 1.76 | % | 40,133 | 136 | 1.35 | % | ||||||||||||||||
| Total interest-bearing liabilities | 796,661 | 378 | 0.19 | % | 731,033 | 490 | 0.27 | % | ||||||||||||||||
| Non-interest-bearing liabilities | 331,126 | 294,290 | ||||||||||||||||||||||
| Stockholders’ equity | 134,167 | 119,529 | ||||||||||||||||||||||
| Total | $ | 1,261,954 | $ | 1,144,852 | ||||||||||||||||||||
| Interest rate spread (3) | 3.30 | % | 3.52 | % | ||||||||||||||||||||
| Net interest margin (4) | $ | 9,815 | 3.36 | % | $ | 9,486 | 3.60 | % | ||||||||||||||||
| Tax-equivalent interest - imputed | 202 | 219 | ||||||||||||||||||||||
| Net interest income | $ | 9,613 | $ | 9,267 | ||||||||||||||||||||
| Ratio of average interest-earning assets to average interest-bearing liabilities | 145.3 | % | 143.4 | % | ||||||||||||||||||||
| (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. |
| Nine months ended | Nine months ended | |||||||||||||||||||||||
| (Dollars in thousands) | September 30, 2021 | September 30, 2020 | ||||||||||||||||||||||
| Average balance | Interest | Average yield/rate | Average balance | Interest | Average yield/rate | |||||||||||||||||||
| Assets | ||||||||||||||||||||||||
| Interest-earning assets: | ||||||||||||||||||||||||
| Interest-bearing deposits at banks | $ | 110,288 | $ | 99 | 0.12 | % | $ | 12,300 | $ | 20 | 0.22 | % | ||||||||||||
| Investment securities (1) | 335,186 | 5,142 | 2.05 | % | 327,608 | 6,452 | 2.63 | % | ||||||||||||||||
| Loans receivable, net (2) | 702,450 | 25,721 | 4.90 | % | 647,535 | 22,908 | 4.73 | % | ||||||||||||||||
| Total interest-earning assets | 1,147,924 | 30,962 | 3.61 | % | 987,443 | 29,380 | 3.97 | % | ||||||||||||||||
| Non-interest-earning assets | 100,903 | 95,030 | ||||||||||||||||||||||
| Total | $ | 1,248,827 | $ | 1,082,473 | ||||||||||||||||||||
| Liabilities and Stockholders’ Equity | ||||||||||||||||||||||||
| Interest-bearing liabilities: | ||||||||||||||||||||||||
| Money market and checking | $ | 505,355 | $ | 388 | 0.10 | % | $ | 416,077 | $ | 778 | 0.25 | % | ||||||||||||
| Savings accounts | 142,659 | 36 | 0.03 | % | 111,025 | 29 | 0.03 | % | ||||||||||||||||
| Time deposit | 120,043 | 376 | 0.42 | % | 136,378 | 991 | 0.97 | % | ||||||||||||||||
| Total deposits | 768,057 | 800 | 0.14 | % | 663,480 | 1,798 | 0.36 | % | ||||||||||||||||
| FHLB advances and other borrowings | 26,872 | 362 | 1.80 | % | 40,079 | 534 | 1.78 | % | ||||||||||||||||
| Total interest-bearing liabilities | 794,929 | 1,162 | 0.20 | % | 703,559 | 2,332 | 0.44 | % | ||||||||||||||||
| Non-interest-bearing liabilities | 323,377 | 364,306 | ||||||||||||||||||||||
| Stockholders’ equity | 130,521 | 114,608 | ||||||||||||||||||||||
| Total | $ | 1,248,827 | $ | 1,182,473 | ||||||||||||||||||||
| Interest rate spread (3) | 3.41 | % | 3.53 | % | ||||||||||||||||||||
| Net interest margin (4) | $ | 29,800 | 3.47 | % | $ | 27,048 | 3.66 | % | ||||||||||||||||
| Tax-equivalent interest - imputed | 616 | 664 | ||||||||||||||||||||||
| Net interest income | $ | 29,184 | $ | 26,384 | ||||||||||||||||||||
| Ratio of average interest-earning assets to average interest-bearing liabilities | 144.4 | % | 140.3 | % | ||||||||||||||||||||
| (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. |
| 30 |
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, | |||||||||||||||||||||||
| 2021 vs 2020 | 2021 vs 2020 | |||||||||||||||||||||||
| 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 | $ | 44 | $ | 4 | $ | 48 | $ | 84 | $ | (5 | ) | $ | 79 | |||||||||||
| Investment securities | 446 | (739 | ) | (293 | ) | 153 | (1,463 | ) | (1,310 | ) | ||||||||||||||
| Loans | (523 | ) | 985 | 462 | 1,976 | 837 | 2,813 | |||||||||||||||||
| Total | (33 | ) | 250 | 217 | 2,213 | (631 | ) | 1,582 | ||||||||||||||||
| Interest expense: | ||||||||||||||||||||||||
| Deposits | 46 | (142 | ) | (96 | ) | 347 | (1,345 | ) | (998 | ) | ||||||||||||||
| Other borrowings | (223 | ) | 207 | (16 | ) | (178 | ) | 6 | (172 | ) | ||||||||||||||
| Total | (177 | ) | 65 | (112 | ) | 169 | (1,339 | ) | (1,170 | ) | ||||||||||||||
| Net interest income | $ | 144 | $ | 185 | $ | 329 | $ | 2,044 | $ | 708 | $ | 2,752 | ||||||||||||
Provision for Loan Losses. We maintain, and our Board of Directors monitors, an allowance for losses on loans. The allowance is established based upon management’s periodic evaluation of known and inherent risks in the loan portfolio, review of significant individual loans and collateral, review of delinquent loans, past loss experience, adverse situations that may affect the borrowers’ ability to repay, current and expected market conditions, and other factors management deems important. Determining the appropriate level of reserves involves a high degree of management judgment and is based upon historical and projected losses in the loan portfolio and the collateral value or discounted cash flows of specifically identified impaired loans. Additionally, allowance policies are subject to periodic review and revision in response to a number of factors, including current market conditions, actual loss experience and management’s expectations.
During the third quarter of 2021, we did not record a provision for loan losses compared to a provision of $1.0 million in the third quarter of 2020. We recorded net loan charge-offs of $397,000 during the third quarter of 2021 compared to net loan charge-offs of $381,000 during the third quarter of 2020. A charge-off of $540,000 was recorded during the third quarter of 2021 on a previously impaired commercial real estate loan which had a related allowance recorded against it as of June 30, 2021. The economic impact of COVID-19 improved during the third quarter of 2021, which resulted in no provision for loan losses during the third quarter of 2021.
During the first nine months of 2021, we recorded a provision for loan losses of $500,000 compared to $2.6 million during the same period of 2020. We recorded net loan charge-offs of $509,000 during the nine months ended September 30, 2021 compared to $701,000 during the same period of 2020. The increase in our provision for loan losses during 2020 was primarily due to the estimated economic impact of the COVID-19 pandemic at that time. If the COVID-19 pandemic causes economic declines in excess of our estimations, or if the pandemic lasts longer than currently projected, our provision for loan losses may increase in future periods. We may see higher loan delinquencies and defaults in future periods as a result of the COVID-19 pandemic. We will continue to monitor our allowance for loan losses in light of changing economic conditions related to COVID-19.
For further discussion of the allowance for loan losses, refer to the “Asset Quality and Distribution” section below.
Non-interest Income. Total non-interest income was $5.5 million in the third quarter of 2021, a decrease of $2.7 million, or 33.1%, from the same period in 2020, primarily as a result of a decrease of $2.3 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 Landmark’s market areas. Also contributing to the decrease was a $648,000 decrease in gain on sales of investment securities during the third quarter of 2021. Partially offsetting this decrease was an increase of $146,000 in fees and services charges primarily due to higher interchange and servicing fees.
| 31 |
Total non-interest income was $17.7 million in the first nine months of 2021, a decrease of $2.8 million, or 13.8%, from the first nine months of 2020. The decrease in non-interest income was primarily due to a decrease of $2.3 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 Landmark’s market areas. Also contributing to the decrease in non-interest income was the gains on sales of investment securities as a result of the Company recording $2.4 million in net gains on sales of investment securities during the first nine months of 2020 compared to net gains of $1.1 million in the same period of 2021. Partially offsetting these decreases was a $616,000 increase in fees and services charges due to higher interchange and servicing fees.
Non-interest Expense. Non-interest expense totaled $9.4 million for the third quarter of 2021, a decrease of $79,000, or 0.8%, from $9.5 million for the third quarter of 2020. The decrease was primarily due to a decrease of $427,000 in compensation and benefits expense which was primarily a result of lower one-to-four family residential mortgage commissions. Partially offsetting this decrease was an increase of $359,000 in other non-interest expense which was primarily related to costs associated with the PPP loan forgiveness process and costs associated with foreclosure and real estate owned.
Non-interest expense totaled $27.7 million for the first nine months of 2021, an increase of $961,000 or 3.6%, from $26.7 million for the first nine months of 2020. The increase was primarily due to an increase of $859,000 in other non-interest expense which was primarily related to costs associated with the PPP loan forgiveness process and costs associated with foreclosure and real estate owned. Partially offsetting this increase was a decrease of $298,000 in compensation and benefits expense which was primarily a result of lower one-to-four family residential mortgage commissions.
Income Tax Expense. During the third quarter of 2021, we recorded income tax expense of $1.1 million, compared to $1.5 million during the same period of 2020. Our effective tax rate decreased from 21.5% in the third quarter of 2020 to 19.8% in the third quarter of 2021.
We recorded income tax expense of $3.8 million for the first nine months of 2021 compared to $3.6 million in the same period of 2020. Our effective tax rate was 20.8% in the first nine months of 2020 compared to 20.3% in the first nine months of 2021.
Financial Condition. Economic conditions in the United States deteriorated during 2020 as the impact of COVID-19 caused portions of the economy to shut down or be subject to operating restrictions. On March 28, 2020, a stay at home order was issued for the entire state of Kansas and was lifted on May 3, 2020, with a phased approach to reopening the Kansas economy. The State of Kansas and the geographic markets in which the Company operates were significantly impacted by this pandemic; however, the economic reopening has driven a rebound in the regional economy in late 2020 and 2021. The Company’s allowance for loan losses included estimates of the economic impact of COVID-19 on our loan portfolio. The COVID-19 pandemic and its effects on the economy may cause an increase in our delinquent and non-accrual loans as the economic slowdown continues to impact our customers. However, our loan portfolio is diversified across various types of loans and collateral throughout the markets in which we operate. Aside from a few problem loans that management is working to resolve, our asset quality has remained strong over the past few years. While further increases in problem assets may arise as a result of COVID-19, management believes its efforts to run a high quality financial institution with a sound asset base will continue to create a strong foundation for continued growth and profitability in the future.
Asset Quality and Distribution. Our primary investing activities are the origination of one-to-four family residential real estate, construction and land, commercial real estate, commercial, agriculture, municipal and consumer loans and the purchase of investment securities. Total assets increased $66.5 million, or 5.6%, from December 31, 2020 to $1.3 billion at September 30, 2021.
The allowance for loan losses is established through a provision for loan losses based on our evaluation of the risk inherent in the loan portfolio and changes in the nature and volume of our loan activity. This evaluation, which includes a review of all loans with respect to which full collectability may not be reasonably assured, considers the fair value of the underlying collateral, economic conditions, historical loan loss experience, level of classified loans and other factors that warrant recognition in providing for an appropriate allowance for loan losses. At September 30, 2021, our allowance for loan losses totaled $8.8 million, or 1.32% of gross loans outstanding, compared to $8.8 million, or 1.23% of gross loans outstanding, at December 31, 2020. Our allowance for loan losses as a percentage of gross loans outstanding, excluding PPP loans of $28.7 million at September 30, 2021 and $100.1 million at December 31, 2020, was 1.38% at September 30, 2021 compared to 1.43% at December 31, 2020. This reflects a more comparable ratio to periods prior to PPP, as no allowance for loan losses has been allocated to PPP loans since they are guaranteed by the Small Business Administration.
| 32 |
As of September 30, 2021 and December 31, 2020, approximately $19.7 million and $25.2 million, respectively, of loans were considered classified and assigned a risk rating of special mention, substandard or doubtful. These ratings indicate that these loans were identified as potential problem loans having more than normal risk that 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 allowance was sufficient to cover the risks and probable incurred losses related to such loans at September 30, 2021 and December 31, 2020, respectively.
Loans past due 30-89 days and still accruing interest totaled $1.5 million, or 0.23% of gross loans, at September 30, 2021, compared to $1.5 million, or 0.22% of gross loans, at December 31, 2020. At September 30, 2021, $9.8 million in loans were on non-accrual status, or 1.48% of gross loans, compared to $10.5 million, or 1.47% of gross loans, at December 31, 2020. Non-accrual loans consist of loans 90 or more days past due and certain impaired loans. There were no loans 90 days delinquent and accruing interest at September 30, 2021 or December 31, 2020. Our impaired loans totaled $11.5 million at September 30, 2021 compared to $12.5 million at December 31, 2020. The difference in the Company’s non-accrual loan balances and impaired loan balances at September 30, 2021 and December 31, 2020 was related to TDRs that were accruing interest but still classified as impaired.
At September 30, 2021, the Company had thirteen loan relationships consisting of 17 outstanding loans that were classified as TDRs. During the three and nine months ended September 30, 2021, an agriculture loan totaling $237,000 was classified as a TDR because the loan was a new loan to an existing classified loan relationship. The additional loan provided funds to stabilize the borrower’s operations through the fall harvest. During the three and nine months ended September 30, 2021, an agriculture loan paid off that was previously classified as a TDR in 2016. During the nine months ended September 30, 2021, a commercial loan relationship consisting of five loans was modified after originally being classified as a TDR in 2020. The borrower liquidated some of the collateral securing the loans and refinanced the remaining balance of $479,000 into one loan which retained a TDR classification. During the three and nine months ended September 30, 2020, the Company modified the payment terms for two agriculture loans totaling $571,000 and classified the restructurings as TDRs. A commercial loan totaling $33,000 and a $1.4 million loan relationship consisting of two commercial real estate loans and one construction loan were classified as TDRs during the three and nine months ended September 30, 2020 after negotiating restructuring agreements with the borrowers. Five loans totaling $827,000 related to one commercial loan relationship were classified as TDRs during the nine months ended September 30, 2020, after the payments were modified to interest only. All of the loans classified as TDRs were experiencing financial difficulties prior to the COVID-19 pandemic.
As of September 30, 2021, the Company had one loan modification with an outstanding loan balance of $3.7 million in connection with the COVID-19 pandemic which was also designated non-accrual and impaired; this loan subsequently paid off. This modification consisted of the deferral of principal payments. The Company also entered into short-term forbearance plans or short-term repayment plans on two one-to-four family residential mortgage loans totaling $74,000 as of September 30, 2021. Consistent with the CARES Act and the Joint Interagency Regulatory Guidance, these loan modifications were not classified as TDRs.
As part of our credit risk management, we continue to manage the loan portfolio to identify problem loans and have placed additional emphasis on commercial real estate and construction and land relationships. We are working to resolve the remaining problem credits or move the non-performing credits out of the loan portfolio. At September 30, 2021, we had $2.6 million of real estate owned compared to $1.8 million at December 31, 2020. As of September 30, 2021, real estate owned primarily consisted of commercial and residential real estate properties. The Company is currently marketing all of the remaining properties in real estate owned. During the third quarter of 2021, the Company acquired two multi-family commercial real estate properties with a fair value of $1.2 million through a deed in lieu of foreclosure. The loan was previously classified as impaired and resulted in a $540,000 charge-off during the third quarter.
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 $50.7 million, or 5.0%, in total deposits during the first nine months of 2021, to $1.1 billion at September 30, 2021. The increase in deposits was primarily due to increases in non-interest-bearing demand accounts and savings accounts. Offsetting those increases were decreases in certificates of deposit and money market and checking deposit accounts. The decrease in certificates of deposit and money market and checking deposit accounts was primarily associated with a decline in public funds accounts.
| 33 |
Non-interest-bearing deposits at September 30, 2021, were $317.8 million, or 29.8% of deposits, compared to $264.9 million, or 26.1% of deposits, at December 31, 2020. Money market and checking deposit accounts were 45.8% of our deposit portfolio and totaled $488.2 million at September 30, 2021, compared to $491.3 million, or 48.3% of deposits, at December 31, 2020. Savings accounts increased to $151.4 million, or 14.2% of deposits, at September 30, 2021, from $126.1 million, or 12.4% of deposits, at December 31, 2020. Certificates of deposit totaled $109.3 million, or 10.2% of deposits, at September 30, 2021, compared to $133.8 million, or 13.2% of deposits, at December 31, 2020.
Certificates of deposit at September 30, 2021, scheduled to mature in one year or less totaled $62.6 million. Historically, maturing deposits have generally remained with the Bank, and we believe that a significant portion of the deposits maturing in one year or less will remain with us upon maturity in some type of deposit account.
Total borrowings decreased $152,000 to $27.9 million at September 30, 2021, from $28.0 million at December 31, 2020. The decrease in total borrowings was due to a decrease in repurchase agreement accounts as customers have migrated to other deposit accounts.
Cash Flows. During the nine months ended September 30, 2021, our cash and cash equivalents increased by $32.5 million. Our operating activities provided net cash of $26.0 million during the first nine months of 2021 primarily as a result of the proceeds from the sales of loans. Our investing activities used net cash of $41.2 million during the first nine months of 2021, primarily due to the purchase of investment securities and the purchase of bank owned life insurance. Financing activities provided net cash of $47.7 million during the first nine months of 2021, primarily as a result of an increase in deposits.
Liquidity. Our most liquid assets are cash and cash equivalents and investment securities available-for-sale. The levels of these assets are dependent on the operating, financing, lending and investing activities during any given year. These liquid assets totaled $495.8 million at September 30, 2021 and $382.1 million at December 31, 2020. During periods in which we are not able to originate a sufficient amount of loans and/or periods of high principal prepayments, we generally increase our liquid assets by investing in short-term, high-grade investments or holding higher balances of cash and cash equivalents. The higher balances of cash and cash equivalents are primarily held in our Federal Reserve account.
Liquidity management is both a daily and long-term function of our strategy. Excess funds are generally invested in short-term investments. Excess funds are typically generated as a result of increased deposit balances, while uses of excess funds are generally deposit withdrawals and loan advances. In the event we require funds beyond our ability to generate them internally, additional funds are generally available through the use of FHLB advances, a line of credit with the FHLB, other borrowings or through sales of investment securities. At September 30, 2021, we had no borrowings against our line of credit with the FHLB. At September 30, 2021, we had collateral pledged to the FHLB that would allow us to borrow $63.8 million, subject to FHLB credit requirements and policies. At September 30, 2021, we had no borrowings through the Federal Reserve discount window, while our borrowing capacity with the Federal Reserve was $81.1 million. We also have various other federal funds agreements, both secured and unsecured, with correspondent banks totaling approximately $30.0 million in available credit under which we had no outstanding borrowings at September 30, 2021. At September 30, 2021, we had subordinated debentures totaling $21.7 million and $6.2 million of repurchase agreements. At September 30, 2021, the Company had no borrowings against a $7.5 million line of credit from an unrelated financial institution maturing on November 1, 2022, with an interest rate that adjusts daily based on the prime rate less 0.25%. This line of credit has covenants specific to capital and other financial ratios, which the Company was in compliance with at September 30, 2021.
Off Balance Sheet Arrangements. As a provider of financial services, we routinely issue financial guarantees in the form of financial and performance standby letters of credit. Standby letters of credit are contingent commitments issued by us generally to guarantee the payment or performance obligation of a customer to a third party. While these standby letters of credit represent a potential outlay by us, a significant amount of the commitments may expire without being drawn upon. We have recourse against the customer for any amount the customer is required to pay to a third party under a standby letter of credit. The letters of credit are subject to the same credit policies, underwriting standards and approval process as loans made by us. Most of the standby letters of credit are secured, and in the event of nonperformance by the customers, we have the right to the underlying collateral, which could include commercial real estate, physical plant and property, inventory, receivables, cash and marketable securities. The contract amount of these standby letters of credit, which represents the maximum potential future payments guaranteed by us, was $1.2 million at September 30, 2021.
At September 30, 2021, we had outstanding loan commitments, excluding standby letters of credit, of $141.2 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.
| 34 |
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, 2021 and December 31, 2020, the Bank met the requirements to be “well capitalized,” which is the highest rating available under the regulatory capital regulations framework for prompt corrective action. Management believed that as of September 30, 2021, the Company and the Bank met all capital adequacy requirements to which we are subject.
We believe the Company has adequate capital to withstand the impact of the COVID-19 pandemic and any economic downturn on our asset quality and net earnings. The Company performs stress tests on the loan portfolio to measure the impact of severe economic recessions on its capital levels to ensure we are prepared for events like the COVID-19 pandemic.
Dividends. During the quarter ended September 30, 2021, we paid a quarterly cash dividend of $0.20 per share to our stockholders.
The payment of dividends by any financial institution or its holding company is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations. In addition, under the Basel III Rules, financial institutions have to maintain 2.5% in common equity Tier 1 capital attributable to the capital conservation buffer in order to pay dividends and make other capital distributions. As described above, the Bank exceeded its minimum capital requirements under applicable guidelines as of September 30, 2021. The National Bank Act imposes limitations on the amount of dividends that a national bank may pay without prior regulatory approval. Generally, the amount is limited to the bank’s current year’s net earnings plus the adjusted retained earnings for the two preceding years. As of September 30, 2021, approximately $31.3 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.
| 35 |
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our assets and liabilities are principally financial in nature, and the resulting net interest income thereon is subject to changes in market interest rates and the mix of various assets and liabilities. Interest rates in the financial markets affect our decisions relating to pricing our assets and liabilities, which impact net interest income, a significant cash flow source for us. As a result, a substantial portion of our risk management activities relates to managing interest rate risk.
Our Asset/Liability Management Committee monitors the interest rate sensitivity of our balance sheet using earnings simulation models. We have set policy limits of interest rate risk to be assumed in the normal course of business and monitor such limits through our simulation process.
We have been successful in meeting the interest rate sensitivity objectives set forth in our policy. Simulation models are prepared to determine the impact on net interest income for the coming twelve months, including one using interest rates as of the forecast date, and forecasting volumes for the twelve-month projection. This position is then subjected to a shift in interest rates of 100 and 200 basis points with an impact to our net interest income on a one-year horizon as follows:
| As of September 30, 2021 | As of December 31, 2020 | |||||||||||||||
| Scenario | Dollar change in net interest income ($000’s) | Percent change in net interest income | Dollar change in net interest income ($000’s) | Percent change in net interest income | ||||||||||||
| 200 basis point rising | $ | 2,383 | 7.20 | % | $ | (99 | ) | -0.30 | % | |||||||
| 100 basis point rising | $ | 1,218 | 3.70 | % | $ | (169 | ) | -0.50 | % | |||||||
| 100 basis point falling | $ | (708 | ) | -2.10 | % | $ | (180 | ) | -0.50 | % | ||||||
| 200 basis point falling | NM | NM | NM | NM | ||||||||||||
The 200 basis point falling scenario is considered to be not meaningful (“NM”) in the current low interest rate environment.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
Forward-Looking Statements
This document (including information incorporated by reference) contains, and future oral and written statements by us and our management may contain, forward-looking statements, within the meaning of such term in the Private Securities Litigation Reform Act of 1995, with respect to our financial condition, results of operations, plans, objectives, future performance and business. Forward-looking statements, which may be based upon beliefs, expectations and assumptions of our management and on information currently available to management, are generally identifiable by the use of words such as “believe,” “expect,” “anticipate,” “plan,” “intend,” “estimate,” “may,” “will,” “would,” “could,” “should” or other similar expressions. Additionally, all statements in this document, including forward-looking statements, speak only as of the date they are made, and we undertake no obligation to update any statement in light of new information or future events.
Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on operations and future prospects of us and our subsidiaries include, but are not limited to, the following:
| ● | The effects of the COVID-19 pandemic, including its effects on the economic environment, our customers and our operations, including due to supply chain disruptions, as well as any changes to federal, state or local government laws, regulations or orders in connection with the pandemic. | |
| ● | The impact of the COVID-19 pandemic on our financial results, including possible lost revenue and increased expenses (including the cost of capital), as well as possible goodwill impairment charges. | |
| ● | The strength of the United States economy in general and the strength of the local economies in which we conduct our operations, including the effects of the COVID-19 pandemic on such economies, which may be less favorable than expected and may result in, among other things, a deterioration in the credit quality and value of our assets. |
| 36 |
| ● | The effects of, and changes in, federal, state and local laws, regulations and policies affecting banking, securities, consumer protection, insurance, tax, trade and monetary and financial matters. | |
| ● | The effects of changes in interest rates (including the effects of changes in the rate of prepayments of our assets) and the policies of the Federal Reserve including on our net interest income and the value of our securities portfolio. | |
| ● | Our ability to compete with other financial institutions due to increases in competitive pressures in the financial services sector. | |
| ● | Our inability to obtain new customers and to retain existing customers. | |
| ● | The timely development and acceptance of products and services. | |
| ● | Technological changes implemented by us and by other parties, including third-party vendors, which may be more difficult to implement or more expensive than anticipated or which may have unforeseen consequences to us and our customers. | |
| ● | Our ability to develop and maintain secure and reliable electronic systems. | |
| ● | The effectiveness of our risk management framework. | |
| ● | The occurrence of fraudulent activity, breaches or failures of our information security controls or cybersecurity-related incidents and our ability to identify and address such incidents. | |
| ● | Interruptions involving our information technology and telecommunications systems or third-party servicers. | |
| ● | Changes in and uncertainty related to the availability of benchmark interest rates used to price our loans and deposits, including the expected elimination of LIBOR and the development of a substitute. | |
| ● | The effects of severe weather, natural disasters, widespread disease or pandemics, and other external events. | |
| ● | Our ability to retain key executives and employees and the difficulty that we may experience in replacing key executives and employees in an effective manner. | |
| ● | Consumer spending and saving habits which may change in a manner that affects our business adversely. | |
| ● | Our ability to successfully integrate acquired businesses and future growth. | |
| ● | The costs, effects and outcomes of existing or future litigation. | |
| ● | Changes in accounting policies and practices, as may be adopted by state and federal regulatory agencies and the FASB, such as the implementation of CECL. | |
| ● | The economic impact of past and any future terrorist attacks, acts of war or threats thereof, and the response of the United States to any such threats and attacks. | |
| ● | Our ability to effectively manage our credit risk. | |
| ● | Our ability to forecast probable loan losses and maintain an adequate allowance for loan losses. | |
| ● | The effects of declines in the value of our investment portfolio. | |
| ● | Our ability to raise additional capital if needed. | |
| ● | The effects of declines in real estate markets. | |
| ● | The effects of fraudulent activity on the part of our employees, customers, vendors, or counterparties. |
These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Additional information concerning us and our business, including other factors that could materially affect our financial results, is included in our filings with the Securities and Exchange Commission, including the “Risk Factors” section in our Annual Report on Form 10-K for the year ended December 31, 2020 filed on March 22, 2021.
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, 2021. Based on that evaluation, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2021 to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
There were no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2021 that materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.
| 37 |
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company or its subsidiaries is a party or which any of their property is subject, other than ordinary routine litigation incidental to their respective businesses.
ITEM 1A. RISK FACTORS
There have been no material changes in the risk factors set forth under Part I, Item 1A “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
| 38 |
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 12, 2021 | /s/ Michael E. Scheopner |
| Michael E. Scheopner | |
| President and Chief Executive Officer | |
| (Principal Executive Officer) | |
| Date: November 12, 2021 | /s/ Mark A. Herpich |
| Mark A. Herpich | |
| Vice President, Secretary, Treasurer and Chief Financial Officer | |
| (Principal Financial and Accounting Officer) |
| 39 |