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What changed in LANDMARK BANCORP INC's 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of LANDMARK BANCORP INC's 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+297 added−301 removedSource: 10-K (2024-03-27) vs 10-K (2023-03-30)

Top changes in LANDMARK BANCORP INC's 2023 10-K

297 paragraphs added · 301 removed · 223 edited across 6 sections

Item 1. Business

Business — how the company describes what it does

98 edited+25 added−23 removed149 unchanged
Biggest changeYear ended December 31, 2022 Year ended December 31, 2021 Year ended December 31, 2020 Average balance Income/ expense Yield/ cost Average balance Income/ expense Yield/ cost Average balance Income/ expense Yield/ cost (Dollars in thousands) Assets Interest-earning assets: Interest bearing deposits at banks $ 60,014 $ 321 0.53 % $ 120,171 $ 187 0.16 % $ 19,435 $ 68 0.35 % Investment securities Taxable 342,131 6,414 1.87 % 202,003 3,005 1.49 % 175,547 4,109 2.34 % Tax-exempt (1) 132,601 3,798 2.86 % 141,056 3,816 2.71 % 142,315 4,132 2.90 % Loans receivable, net (2) 702,247 33,493 4.77 % 689,908 33,634 4.88 % 668,326 31,821 4.76 % Total interest-earning assets 1,236,993 44,026 3.56 % 1,153,138 40,642 3.52 % 1,005,623 40,130 3.99 % Non-interest-earning assets 120,486 102,558 95,800 Total $ 1,357,479 $ 1,255,696 $ 1,101,423 Liabilities and Stockholders’ Equity Interest-bearing liabilities: Money market and checking $ 535,693 $ 2,318 0.43 % $ 503,433 $ 500 0.10 % $ 425,525 $ 899 0.21 % Savings accounts 169,478 46 0.03 % 145,200 47 0.03 % 114,280 40 0.04 % Certificates of deposit 98,975 412 0.42 % 116,904 476 0.41 % 133,412 1,166 0.87 % Total deposits 804,146 2,776 0.35 % 765,537 1,023 0.13 % 673,217 2,105 0.31 % FHLB advances and other borrowings 36,712 1,424 3.88 % 21,653 472 2.18 % 27,750 642 2.31 % Repurchase agreements 13,239 146 1.10 % 5,915 11 0.19 % 11,066 22 0.20 % Total interest-bearing liabilities 854,097 4,346 0.51 % 793,105 1,506 0.19 % 712,033 2,769 0.39 % Non-interest-bearing liabilities 383,590 330,937 272,642 Stockholders’ equity 119,792 131,654 116,747 Total $ 1,357,479 $ 1,255,696 $ 1,101,422 Interest rate spread (3) 3.05 % 3.33 % 3.60 % Net interest margin (4) $ 39,680 3.21 % $ 39,136 3.39 % $ 37,361 3.72 % Tax equivalent interest - imputed (1) (2) 800 816 877 Net interest income $ 38,880 $ 38,320 $ 36,484 Ratio of average interest-earning assets to average interest-bearing liabilities 144.8 % 145.4 % 141.2 % (1) Income on tax-exempt investment securities is presented on a fully taxable equivalent basis, using a 21% federal tax rate.
Biggest changeYear ended December 31, 2023 Year ended December 31, 2022 Year ended December 31, 2021 Average balance Income/ expense Yield/ cost Average balance Income/ expense Yield/ cost Average balance Income/ expense Yield/ cost (Dollars in thousands) Assets Interest-earning assets: Interest bearing deposits at banks $ 10,095 $ 242 2.40 % $ 60,014 $ 321 0.53 % $ 120,171 $ 187 0.16 % Investment securities Taxable 363,735 9,594 2.64 % 342,131 6,414 1.87 % 202,003 3,005 1.49 % Tax-exempt (1) 122,533 3,826 3.12 % 132,601 3,798 2.86 % 141,056 3,816 2.71 % Loans receivable, net (2) 891,487 51,770 5.81 % 702,247 33,493 4.77 % 689,908 33,634 4.88 % Total interest-earning assets 1,387,850 65,432 4.71 % 1,236,993 44,026 3.56 % 1,153,138 40,642 3.52 % Non-interest-earning assets 147,844 120,486 102,558 Total $ 1,535,694 $ 1,357,479 $ 1,255,696 Liabilities and Stockholders’ Equity Interest-bearing liabilities: Money market and checking $ 591,000 $ 10,818 1.83 % $ 535,693 $ 2,318 0.43 % $ 503,433 $ 500 0.10 % Savings accounts 161,417 126 0.08 % 169,478 46 0.03 % 145,200 47 0.03 % Certificates of deposit 139,956 4,310 3.08 % 98,975 412 0.42 % 116,904 476 0.41 % Total deposits 892,373 15,254 1.71 % 804,146 2,776 0.35 % 765,537 1,023 0.13 % FHLB advances and other borrowings 74,210 4,048 5.45 % 15,061 584 3.88 % 2 - 0.47 % Subordinated debentures 21,651 1,590 7.34 % 21,651 840 3.88 % 21,651 472 2.18 % Repurchase agreements 18,361 499 2.72 % 13,239 146 1.10 % 5,915 11 0.19 % Total interest-bearing liabilities 1,006,595 21,391 2.13 % 854,097 4,346 0.51 % 793,105 1,506 0.19 % Non-interest-bearing liabilities 414,760 383,590 330,937 Stockholders’ equity 114,339 119,792 131,654 Total $ 1,535,694 $ 1,357,479 $ 1,255,696 Interest rate spread (3) 2.58 % 3.05 % 3.33 % Net interest margin (4) $ 44,041 3.17 % $ 39,680 3.21 % $ 39,136 3.39 % Tax equivalent interest - imputed (1) (2) 749 800 816 Net interest income $ 43,292 $ 38,880 $ 38,320 Ratio of average interest-earning assets to average interest-bearing liabilities 137.9 % 144.8 % 145.4 % (1) Income on tax-exempt investment securities is presented on a fully taxable equivalent basis, using a 21% federal tax rate.
The Company’s executive office and the Bank’s main office are located at 701 Poyntz Avenue, Manhattan, Kansas 66502. The telephone number is (785) 565-2000. Market Areas The Bank’s primary deposit gathering and lending markets are geographically diversified throughout central, eastern, southeast, and southwest Kansas.
The Company’s executive office and the Bank’s main office are located at 701 Poyntz Avenue, Manhattan, Kansas 66502. The telephone number is (785) 565-2000. 3 Market Areas The Bank’s primary deposit gathering and lending markets are geographically diversified throughout central, eastern, southeast, and southwest Kansas.
The deposit services of the Bank are generally comprised of demand deposits, savings deposits, money market deposits, time deposits and individual retirement accounts. Supervision and Regulation General FDIC-insured institutions, like the Bank, their holding companies and their affiliates are extensively regulated under federal law.
The deposit services of the Bank are generally comprised of demand deposits, savings deposits, money market deposits, time deposits and individual retirement accounts. 7 Supervision and Regulation General FDIC-insured institutions, like the Bank, their holding companies and their affiliates are extensively regulated under federal law.
This allocation reflects management’s judgment as to risks inherent in the types of loans indicated, but in general the Company’s total allowance for loan losses included in the table is not restricted and is available to absorb all loan losses.
This allocation reflects management’s judgment as to risks inherent in the types of loans indicated, but in general the Company’s total allowance for credit losses included in the table is not restricted and is available to absorb all loan losses.
Yields on tax-exempt obligations have been computed on a tax equivalent basis, using a 21% federal tax rate for 2022. Mortgage-backed investment securities include scheduled principal payments and estimated prepayments based on observable market inputs. Actual prepayments will differ from contractual maturities because borrowers have the right to prepay obligations with or without prepayment penalties.
Yields on tax-exempt obligations have been computed on a tax equivalent basis, using a 21% federal tax rate for 2023. Mortgage-backed investment securities include scheduled principal payments and estimated prepayments based on observable market inputs. Actual prepayments will differ from contractual maturities because borrowers have the right to prepay obligations with or without prepayment penalties.
Unless otherwise noted, the information presented in this Annual Report on Form 10-K presents information on behalf of the Company as of and for the year ended December 31, 2022. Certain of the statistical data required to be disclosed by banks pursuant to the Securities Act of 1933 is set forth in the following pages.
Unless otherwise noted, the information presented in this Annual Report on Form 10-K presents information on behalf of the Company as of and for the year ended December 31, 2023. Certain of the statistical data required to be disclosed by banks pursuant to the Securities Act of 1933 is set forth in the following pages.
(2) Income on tax-exempt loans is presented on a fully taxable equivalent basis, using a 21% federal tax rate. (3) Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. (4) Net interest margin represents net interest income divided by average interest-earning assets. 17 II. Investment Portfolio Investment Securities .
(2) Income on tax-exempt loans is presented on a fully taxable equivalent basis, using a 21% federal tax rate. (3) Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. (4) Net interest margin represents net interest income divided by average interest-earning assets. 18 II. Investment Portfolio Investment Securities .
Further, any banking organization experiencing or anticipating significant growth would be expected to maintain capital ratios, including tangible capital positions ( i.e. , Tier 1 Capital less all intangible assets), well above the minimum levels. 9 Under the capital regulations of the Federal Reserve for the Company and the OCC for the Bank, in order to be well-capitalized, we must maintain: ● A Common Equity Tier 1 Capital ratio to risk-weighted assets of 6.5% or more; ● A ratio of Tier 1 Capital to total risk-weighted assets of 8% or more; ● A ratio of Total Capital to total risk-weighted assets of 10% or more; and ● A leverage ratio of Tier 1 Capital to total adjusted average quarterly assets of 5% or greater.
Further, any banking organization experiencing or anticipating significant growth would be expected to maintain capital ratios, including tangible capital positions ( i.e. , Tier 1 Capital less all intangible assets), well above the minimum levels. 9 Under the capital regulations of the OCC for the Bank, in order to be well-capitalized, we must maintain: ● A Common Equity Tier 1 Capital ratio to risk-weighted assets of 6.5% or more; ● A ratio of Tier 1 Capital to total risk-weighted assets of 8% or more; ● A ratio of Total Capital to total risk-weighted assets of 10% or more; and ● A leverage ratio of Tier 1 Capital to total adjusted average quarterly assets of 5% or greater.
The Company will also provide copies of its filings free of charge upon written request to our Corporate Secretary at Landmark Bancorp, Inc., 701 Poyntz Avenue, Manhattan, Kansas 66502. 15 Statistical Data The Company has a fiscal year ending on December 31.
The Company will also provide copies of its filings free of charge upon written request to our Corporate Secretary at Landmark Bancorp, Inc., 701 Poyntz Avenue, Manhattan, Kansas 66502. 16 Statistical Data The Company has a fiscal year ending on December 31.
As described above, the Bank exceeded its capital requirements under applicable guidelines as of December 31, 2022. Notwithstanding the availability of funds for dividends, however, the OCC may prohibit the payment of dividends by the Bank if it determines such payment would constitute an unsafe or unsound practice.
As described above, the Bank exceeded its capital requirements under applicable guidelines as of December 31, 2023. Notwithstanding the availability of funds for dividends, however, the OCC may prohibit the payment of dividends by the Bank if it determines such payment would constitute an unsafe or unsound practice.
The key risk themes identified for 2023 are discussed under “—Risk Factors.” The Bank is expected to have active board and senior management oversight; adequate policies, procedures and limits; adequate risk measurement, monitoring and management information systems; and comprehensive internal controls. Privacy and Cybersecurity .
The key risk themes identified for 2024 are discussed under “—Risk Factors.” The Bank is expected to have active board and senior management oversight; adequate policies, procedures and limits; adequate risk measurement, monitoring and management information systems; and comprehensive internal controls. Privacy and Cybersecurity .
Employees are not represented by any union or collective bargaining group, and the Bank considers its employee relations to be good. Diversity, Equity and Inclusion. The Company believes that a diverse workforce is critical to achieving its strategic goals.
Employees are not represented by any union or collective bargaining group, and the Bank considers its employee relations to be excellent. Diversity, Equity and Inclusion. The Company believes that a diverse workforce is critical to achieving its strategic goals.
These laws mandate financial services companies to have policies and procedures with respect to measures designed to address the following matters: (i) customer identification programs; (ii) money laundering; (iii) terrorist financing; (iv) identifying and reporting suspicious activities and currency transactions; (v) currency crimes; and (vi) cooperation between FDIC-insured institutions and law enforcement authorities. Concentrations in Commercial Real Estate.
The laws mandate financial services companies to have policies and procedures with respect to measures designed to address: (i) customer identification programs; (ii) money laundering; (iii) terrorist financing; (iv) identifying and reporting suspicious activities and currency transactions; (v) currency crimes; and (vi) cooperation between FDIC-insured institutions and law enforcement authorities. Concentrations in Commercial Real Estate .
More specifically, the bank regulatory agencies described the goals of the CRA Proposal as follows: (i) to expand access to credit, investment, and basic banking services in low and moderate income communities; (ii) to adapt to changes in the banking industry, including mobile and internet banking by modernizing assessment areas while maintaining a focus on branch based areas; (iii) to provide greater clarity, consistency, and transparency in the application of the regulations through the use of standardized metrics as part of CRA evaluation and clarifying eligible CRA activities focused on low and moderate income communities and under–served rural communities; (iv) to tailor CRA rules and data collection to bank size and business model; and (v) to maintain a unified approach among the regulators.
More specifically, the bank regulatory agencies described the goals of the CRA Rule as follows: (i) to expand access to credit, investment, and basic banking services in low and moderate income communities; (ii) to adapt to changes in the banking industry, including mobile and internet banking by modernizing assessment areas while maintaining a focus on branch based areas; (iii) to provide greater clarity, consistency, and transparency in the application of the regulations through the use of standardized metrics as part of CRA evaluation and clarifying eligible CRA activities focused on low and moderate income communities and underserved rural communities; (iv) to tailor CRA rules and data collection to bank size and business model; and (v) to maintain a unified approach among the regulators.
The United States bank regulatory agencies adopted the Basel III regulatory capital reforms, and, at the same time, effected changes required by the Dodd-Frank Act, in regulations that were effective (with certain phase-ins) in 2015.
The Unites States bank regulatory agencies adopted the Basel III regulatory capital reforms, and, at the same time, effected changes required by the Dodd-Frank Act, in regulations that were effective (with certain phase-ins) in 2015.
The decrease in the allocation of the allowance for loan losses on construction and land loans as of December 31, 2022 compared to December 31, 2021 was primarily related to lower balances of loans in this portfolio.
The decrease in the allocation of the allowance for credit losses on construction and land loans as of December 31, 2022 compared to December 31, 2021 was primarily related to lower balances of loans in this portfolio.
The increase in the allocation of the allowance for loan losses on commercial real estate loans as of December 31, 2022 compared to December 31, 2021 was primarily related to higher balances of loans in this portfolio.
The increase in the allocation of the allowance for credit losses on commercial real estate loans as of December 31, 2022 compared to December 31, 2021 was primarily related to higher balances of loans in this portfolio.
The increase in the allocation of the allowance for loan losses on our commercial loans as of December 31, 2022 compared to December 31, 2021 was primarily related to higher balances of loans in this portfolio.
The increase in the allocation of the allowance for credit losses on our commercial loans as of December 31, 2022 compared to December 31, 2021 was primarily related to higher balances of loans in this portfolio.
(2) The change in tax-exempt loan income is presented on a fully taxable equivalent basis, using a 21% federal tax rate. 16 The following table sets forth information relating to average balances of interest-earning assets and interest-bearing liabilities for the years ended December 31, 2022, 2021 and 2020. Average balances are derived from daily average balances.
(2) The change in tax-exempt loan income is presented on a fully taxable equivalent basis, using a 21% federal tax rate. 17 The following table sets forth information relating to average balances of interest-earning assets and interest-bearing liabilities for the years ended December 31, 2023, 2022 and 2021. Average balances are derived from daily average balances.
In addition, under the Basel III Rule, institutions that seek the freedom to pay dividends have to maintain 2.5% in Common Equity Tier 1 Capital attributable to the capital conservation buffer. See “—The Role of Capital” above. Monetary Policy.
In addition, under the Basel III Rule, institutions that wish to pay dividends have to maintain 2.5% in Common Equity Tier 1 Capital attributable to the capital conservation buffer. See “—The Role of Capital” above. Monetary Policy.
In addition, under the Basel III Rule, institutions that seek the freedom to pay dividends have to maintain 2.5% in Common Equity Tier 1 Capital attributable to the capital conservation buffer. See “—The Role of Capital” above. Insider Transactions.
In addition, under the Basel III Rule, institutions that wish to pay dividends have to maintain 2.5% in Common Equity Tier 1 Capital attributable to the capital conservation buffer. See “—The Role of Capital” above. Insider Transactions.
No interest income related to non-accrual loans was included in interest income for the years ended December 31, 2022, 2021 and 2020.
No interest income related to non-accrual loans was included in interest income for the years ended December 31, 2023, 2022 and 2021.
The Basel III Rule is applicable to all banking organizations that are subject to minimum capital requirements, including federal and state banks and savings and loan associations, as well as to holding companies, other than “small bank holding companies” (generally certain holding companies with consolidated assets of less than $3 billion, which at this juncture does not include us) and certain qualifying banking organizations that may elect a simplified framework (which we have not done).
The Basel III Rule is applicable to all banking organizations that are subject to minimum capital requirements, including federal and state banks and savings and loan associations, as well as to holding companies, other than “small bank holding companies” (generally certain holding companies with consolidated assets of less than $3 billion, which includes us) and certain qualifying banking organizations that may elect a simplified framework (which we have not done).
In addition, institutions that seek the freedom to make capital distributions (including for dividends and repurchases of stock) and pay discretionary bonuses to executive officers without restriction must also maintain 2.5% in Common Equity Tier 1 Capital attributable to a capital conservation buffer.
In addition, institutions that wish to make capital distributions (including for dividends and repurchases of stock) and pay discretionary bonuses to executive officers without restriction must also maintain 2.5% in Common Equity Tier 1 Capital attributable to a capital conservation buffer.
Under the original terms of the Company’s non-accrual loans as of December 31, 2022, interest earned on such loans for the years ended December 31, 2022, 2021 and 2020 would have increased interest income by $137,000, $309,000 and $380,000, respectively, if included in the Company’s interest income for those years.
Under the original terms of the Company’s non-accrual loans as of December 31, 2023, interest earned on such loans for the years ended December 31, 2023, 2022 and 2021 would have increased interest income by $96,000, $137,000 and $309,000, respectively, if included in the Company’s interest income for those years.
For institutions like the Bank that are not considered large and highly complex banking organizations, assessments are now based on examination ratings and financial ratios. The total base assessment rates currently range from 1.5 basis points to 30 basis points.
For institutions like the Bank that are not considered large and highly complex banking organizations, assessments are now based on examination ratings and financial ratios. The total base assessment rates currently range from 2.5 basis points to 32 basis points.
It is possible under the Basel III Rule to be well-capitalized while remaining out of compliance with the capital conservation buffer discussed above. As of December 31, 2022: (i) the Bank was not subject to a directive from the OCC to increase its capital and (ii) the Bank was well-capitalized, as defined by OCC regulations.
It is possible under the Basel III Rule to be well-capitalized while remaining out of compliance with the capital conservation buffer discussed above. As of December 31, 2023: (i) the Bank was not subject to a directive from the OCC to increase its capital and (ii) the Bank was well-capitalized, as defined by OCC regulations. Prompt Corrective Action .
The CRA Proposal is designed to update how CRA activities qualify for consideration, where CRA activities are considered, and how CRA activities are evaluated.
The CRA Rule is designed to update how CRA activities qualify for consideration, where CRA activities are considered, and how CRA activities are evaluated.
Based on the Bank’s loan portfolio as of December 31, 2022, we do not exceed the 300% guideline for commercial real estate loans. Consumer Financial Services.
Based on the Bank’s loan portfolio as of December 31, 2023, we do not exceed the 300% guideline for commercial real estate loans. 15 Consumer Financial Services.
Supervisory Assessments . National banks are required to pay supervisory assessments to the OCC to fund the operations of the OCC. The amount of the assessment is calculated using a formula that considers the bank’s size and its supervisory condition. During the year ended December 31, 2022, the Bank paid supervisory assessments to the OCC totaling $238,000. Capital Requirements.
National banks are required to pay supervisory assessments to the OCC to fund the operations of the OCC. The amount of the assessment is calculated using a formula that considers the bank’s size and its supervisory condition. During the year ended December 31, 2023, the Bank paid supervisory assessments to the OCC totaling $201,000. 12 Capital Requirements.
The Bank is to is to provide a diverse financial suite of products to its deposit customers and seeks to be the primary financial service provider for these customers. The Bank considers these deposit relationships to be its core deposit base. If the Bank requires funding that exceeds these customer’s deposit balances, non-core or brokered deposits may be utilized.
The Bank provides a diverse financial suite of products to its deposit customers and seeks to be the primary financial service provider for these customers. The Bank considers these deposit relationships to be its core deposit base. If the Bank requires funding that exceeds these customers’ deposit balances, non-core or brokered deposits may be utilized.
The authority of a national bank to invest in a financial subsidiary is subject to a number of conditions, including, among other things, requirements that the bank must be well-managed and well-capitalized (after deducting from capital the bank’s outstanding investments in financial subsidiaries). The Bank has not applied for approval to establish any financial subsidiaries. Transaction Account Reserves.
The authority of a national bank to invest in a financial subsidiary is subject to a number of conditions, including, among other things, requirements that the bank must be well-managed and well-capitalized (after deducting from capital the bank’s outstanding investments in financial subsidiaries). The Bank has not applied for approval to establish any financial subsidiaries. 14 Community Reinvestment Act Requirements.
The Company competes for loans principally through the interest rates and loan fees it charges and the efficiency and quality of services it provides borrowers. 4 Human Capital Resources Employees. At December 31, 2022, the Bank had a total of 286 employees (276 full time equivalent employees).
The Company competes for loans principally through the interest rates and loan fees it charges and the efficiency and quality of services it provides borrowers. 4 Human Capital Resources Employees. At December 31, 2023, the Bank had a total of 280 employees (270 full time equivalent employees).
The balances of one-to-four family residential real estate loans increased as of December 31, 2022 compared to December 31, 2021 primarily due to increasing mortgage rates, which increased demand for the Bank’s 7/1 ARM loans. These loans are retained in portfolio and were the primary factor for the increase in balances during 2022.
The balances of one-to-four family residential real estate loans increased as of December 31, 2023 compared to December 31, 2022 primarily due to increasing mortgage rates, which increased demand for the Bank’s variable rate loans. These loans are retained in portfolio and were the primary factor for the increase in balances during 2022 and 2023.
Loans classified as consumer and other loans include automobile, boat, home improvement and home equity loans. With the exception of home improvement loans and home equity loans, the Bank generally takes a purchase money security interest in collateral for which it provides the original financing. Home improvement loans and home equity loans are principally secured through second mortgages.
With the exception of home improvement loans and home equity loans, the Bank generally takes a purchase money security interest in collateral for which it provides the original financing. Home improvement loans and home equity loans are principally secured through second mortgages.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.” As of December 31, 2022, we believed the Company’s allowance for loan losses continued to be adequate based on the Company’s evaluation of the loan portfolio’s probable incurred losses. 22 V.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.” As of December 31, 2023, we believed the Company’s allowance for credit losses continued to be adequate based on the Company’s evaluation of the loan portfolio’s expected incurred losses. 23 V.
This represents less than 15% of our total deposits at December 31, 2022 and compares favorably with other similar community banking organizations. Over 99% of the Company’s total deposits were considered cored deposits at December 31, 2022. These deposit balances are from retail, commercial and public fund customers located in the markets where the Company has bank branch locations.
This represents less than 15.0% of our total deposits at December 31, 2023 and compares favorably with other similar community banking organizations. Approximately 93.7% of the Company’s total deposits were considered core deposits at December 31, 2023. These deposit balances are from retail, commercial and public fund customers located in the markets where the Company has bank branch locations.
For a discussion of capital requirements, see “—the “Role of Capital” above. Dividend Payments. Our ability to pay dividends to shareholders may be affected by both general corporate law considerations and policies of the Federal Reserve applicable to bank holding companies . As a Delaware corporation, we are subject to the limitations of the Delaware General Corporation Law (the “DGCL”).
For a discussion of capital requirements generally, see “—the “Role of Capital” above. Dividend Payments. Our ability to pay dividends to shareholders may be affected by both general corporate law considerations and policies of the Federal Reserve applicable to bank holding companies .
Additionally, manufacturing and service industries play a key role within the southeast Kansas market. The Bank’s southwest Kansas branches are located in the communities of Dodge City, Garden City, Great Bend, Hoisington and LaCrosse, Kansas. Agriculture, oil, and gas are the predominant industries in the southwest Kansas region. Predominant activities involve crop production, feed lot operations, and food processing.
Additionally, manufacturing and service industries play a key role within the southeast Kansas market. Southwest region. The Bank’s southwest Kansas branches are located in the communities of Dodge City, Garden City, Great Bend, Hoisington and LaCrosse, Kansas. Agriculture, oil, and gas are the predominant industries in the southwest Kansas region.
The primary source of funds for the Company is dividends from the Bank. Under the National Bank Act, a national bank may pay dividends out of its undivided profits in such amounts and at such times as the bank’s board of directors deems prudent.
Under the National Bank Act, a national bank may pay dividends out of its undivided profits in such amounts and at such times as the bank’s board of directors deems prudent.
Dodge City is known as the “Cowboy Capital of the World” and maintains a significant tourism industry. Both Dodge City and Garden City are recognized as regional commercial centers within the state with small businesses, manufacturing, retail, and service industries having a significant influence upon the local economies.
Predominant activities involve crop production, feed lot operations, and food processing. Dodge City is known as the “Cowboy Capital of the World” and maintains a significant tourism industry. Both Dodge City and Garden City are recognized as regional commercial centers within the state with small businesses, manufacturing, retail, and service industries having a significant influence upon the local economies.
Banks are generally required to maintain capital levels in excess of other businesses. For a discussion of capital requirements, see “—The Role of Capital” above. Liquidity Requirements. Liquidity is a measure of the ability and ease with which bank assets may be converted to cash.
Banks are generally required to maintain capital levels in excess of other businesses. For a discussion of capital requirements, see “—The Role of Capital” above. Liquidity Requirements. Liquidity is a measure of the ability and ease with which bank assets may be converted to meet financial obligations such as deposits or other funding sources.
“Control” is conclusively presumed to exist upon the acquisition of 25% or more of the outstanding voting securities of a bank or bank holding company, but may arise under certain circumstances between 10% and 24.99% ownership. Capital Requirements. We file consolidated capital reports with the Federal Reserve under the Basel III Rule.
“Control” is conclusively presumed to exist upon the acquisition of 25% or more of the outstanding voting securities of a bank or bank holding company, but may arise under certain circumstances between 10% and 24.99% ownership. Capital Requirements. Because we are a small bank holding company, we are not required to file consolidated financial reports with the Bank.
Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as of December 31, 2022, the Company concluded its allowance for loan losses was adequate based on the evaluation of the loan portfolio’s probable incurred losses. 20 IV.
Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as of December 31, 2023, the Company concluded its allowance for credit losses was adequate based on the evaluation of the loan portfolio’s expected credit losses. 21 IV.
As of or for the years ended December 31, 2022 2021 2020 Return on average assets 0.73 % 1.44 % 1.77 % Return on average equity 8.25 % 13.80 % 16.70 % Equity to total assets 7.41 % 10.21 % 10.66 % Dividend payout ratio 42.55 % 21.11 % 18.67 % 23
As of or for the years ended December 31, 2023 2022 2021 Return on average assets 0.80 % 0.73 % 1.44 % Return on average equity 10.70 % 8.25 % 13.80 % Equity to total assets 8.13 % 7.41 % 10.21 % Dividend payout ratio 35.87 % 42.55 % 21.11 % 24
Freedom Bank was founded in 2006 and operated out of a single location in Overland Park, Kansas. As of September 30, 2022, Freedom Bank reported total assets of $202.0 million, gross loans of $118.0 million, and total deposits of $150.4 million. The acquisition was accounted for as a business combination under ASC 805.
As of September 30, 2022, Freedom Bank reported total assets of $202.0 million, gross loans of $118.0 million, and total deposits of $150.4 million. The acquisition was accounted for as a business combination under ASC 805.
At least semi-annually, the FDIC updates its loss and income projections for the DIF and, if needed, increases or decreases the assessment rates, following notice and comment on proposed rulemaking. The reserve ratio is the DIF balance divided by estimated insured deposits.
At least semi-annually, the FDIC updates its loss and income projections for the DIF and, if needed, increases or decreases the assessment rates, following notice and comment on proposed rulemaking. At least semi-annually, the FDIC updates its loss and income projections for the DIF and, if needed, increases or decreases the assessment rates, following notice and comment on proposed rulemaking.
In response to the global financial crisis, the Dodd-Frank Act increased the minimum reserve ratio from 1.15% to 1.35% of the estimated amount of total insured deposits.
For this purpose, the reserve ratio is the DIF balance divided by estimated insured deposits. In response to the global financial crisis, the Dodd-Frank Act increased the minimum reserve ratio from 1.15% to 1.35% of the estimated amount of total insured deposits.
As of December 31, 2022 2021 2020 (Dollars in thousands) Non-accrual loans $ 3,326 $ 5,230 $ 10,515 Accruing loans over 90 days past due - - - Non-performing investments - - - Real estate owned, net 934 2,551 1,774 Non-performing assets $ 4,260 $ 7,781 $ 12,289 Performing TDRs $ 804 $ 1,488 $ 1,947 Allowance for loan losses to total gross loans 1.03 % 1.32 % 1.23 % Non-performing loans to total gross loans 0.39 % 0.79 % 1.47 % Non-performing assets to total assets 0.28 % 0.59 % 1.03 % Allowance for loan losses to non-performing loans 264.31 % 167.78 % 84.45 % The decrease in non-accrual loans as of December 31, 2022 was primarily related to a commercial real estate loan relationship totaling $989,000 that returned to accrual status during 2022 and a land loan totaling $486,000 that paid off.
As of December 31, 2023 2022 2021 (Dollars in thousands) Non-accrual loans $ 2,391 $ 3,326 $ 5,230 Accruing loans over 90 days past due - - - Non-performing investments - - - Real estate owned, net 928 934 2,551 Non-performing assets $ 3,319 $ 4,260 $ 7,781 Performing TDRs $ - $ 804 $ 1,488 Allowance for credit losses to total gross loans 1.12 % 1.03 % 1.32 % Non-performing loans to total gross loans 0.25 % 0.39 % 0.79 % Non-performing assets to total assets 0.21 % 0.28 % 0.59 % Allowance for credit losses to non-performing loans 443.66 % 264.31 % 167.78 % The decrease in non-accrual loans as of December 31, 2023 was primarily related to a commercial real estate loan relationship totaling $1.2 million that returned to accrual status during 2023.
The effect of these statutes, regulations, regulatory policies and accounting rules are significant to our operations and results. 7 Federal and state banking laws impose a comprehensive system of supervision, regulation and enforcement on the operations of FDIC-insured institutions, their holding companies and affiliates that is intended primarily for the protection of the FDIC-insured deposits and depositors of banks, rather than shareholders.
Federal and state banking laws impose a comprehensive system of supervision, regulation and enforcement on the operations of FDIC-insured institutions, their holding companies and affiliates that is intended primarily for the protection of the FDIC-insured deposits and depositors of banks, rather than shareholders.
The Bank is focusing on the generation of commercial, commercial real estate and agriculture loans to grow and diversify the loan portfolio. Total gross loans increased during 2022 as a result of the acquisition of Freedom Bank and loan growth in the Bank’s other markets.
The Bank is focusing on the generation of commercial, commercial real estate and agriculture loans to grow and diversify the loan portfolio. Total gross loans increased during 2023 as a result of the origination of variable rate mortgage loans and loan growth in commercial real estate, commercial and agriculture loans.
As of December 31, 2022 2021 (Dollars in thousands) Investment securities: U.S. treasury securities $ 123,111 $ 42,675 U.S. federal agency obligations 1,988 17,195 Municipal obligations, tax-exempt 127,262 137,984 Municipal obligations, taxable 67,244 40,046 Agency mortgage-backed securities 169,701 142,817 Total investment securities available-for-sale, at fair value $ 489,306 $ 380,717 The following table sets forth certain information regarding the carrying values, weighted average yields, and maturities of the Company’s investment securities portfolio, as of December 31, 2022.
As of December 31, 2023 2022 (Dollars in thousands) Investment securities: U.S. treasury securities $ 95,667 $ 123,111 U.S. federal agency obligations - 1,988 Municipal obligations, tax-exempt 120,623 127,262 Municipal obligations, taxable 79,083 67,244 Agency mortgage-backed securities 157,396 169,701 Total investment securities available-for-sale, at fair value $ 452,769 $ 489,306 The following table sets forth certain information regarding the carrying values, weighted average yields, and maturities of the Company’s investment securities portfolio, as of December 31, 2023.
The following table presents the maturities of certificates of deposit $250,000 or greater. (Dollars in thousands) As of December 31, 2022 2021 Three months or less $ 12,188 $ 8,966 Over three months through six months 5,054 8,903 Over six months through 12 months 7,387 4,750 Over 12 months 932 761 Total $ 25,561 $ 23,380 VI.
The following table presents the maturities of certificates of deposit $250,000 or greater. (Dollars in thousands) As of December 31, 2023 2022 Three months or less $ 23,919 $ 12,188 Over three months through six months 11,069 5,054 Over six months through 12 months 8,697 7,387 Over 12 months 6,545 932 Total $ 50,230 $ 25,561 VI.
These tests provide an incentive for banks and holding companies to increase their holdings in Treasury securities and other sovereign debt as a component of assets, increase the use of long-term debt as a funding source and rely on stable funding like core deposits (in lieu of brokered deposits). 12 In addition to liquidity guidelines already in place, the federal bank regulatory agencies implemented the Basel III LCR in 2014 and have proposed the NSFR.
These tests provide an incentive for banks and holding companies to increase their holdings in Treasury securities and other sovereign debt as a component of assets, increase the use of long-term debt as a funding source and rely on stable funding like core deposits (in lieu of brokered deposits).
Summary of Loan Loss Experience The following table sets forth information with respect to the Company’s allowance for loan losses at the dates and for the periods indicated: As of and for the years ended December 31, 2022 2021 2020 (Dollars in thousands) Balances at beginning of year $ 8,775 $ 8,775 $ 6,467 Provision for loan losses - 500 3,300 Charge-offs: One-to-four family residential real estate loans - (81 ) (251 ) Construction and land loans - - (191 ) Commercial real estate loans - (540 ) (131 ) Commercial loans - (72 ) (292 ) Paycheck protection program loans - - - Agriculture loans - (50 ) (3 ) Municipal loans - - - Consumer loans (336 ) (235 ) (248 ) Total charge-offs (336 ) (978 ) (1,116 ) Recoveries: One-to-four family residential real estate loans - 11 - Construction and land loans 165 263 - Commercial real estate loans - - 13 Commercial loans 38 14 3 Paycheck protection program loans - - - Agriculture loans 59 66 - Municipal loans 6 6 6 Consumer loans 84 118 102 Total recoveries 352 478 124 Net recoveries (charge-offs) 16 (500 ) (992 ) Balances at end of year $ 8,791 $ 8,775 $ 8,775 The Company recorded net loan recoveries of $16,000 during 2022 compared to net loan charge-offs of $500,000 during 2021.
Summary of Credit Loss Experience The following table sets forth information with respect to the Company’s allowance for credit losses at the dates and for the periods indicated: As of and for the years ended December 31, 2023 2022 2021 (Dollars in thousands) Balances at beginning of year $ 8,791 $ 8,775 $ 8,775 Adoption of ASC 326 1,523 - - Provision for credit losses 250 - 500 Charge-offs: One-to-four family residential real estate loans - - (81 ) Construction and land loans - - - Commercial real estate loans - - (540 ) Commercial loans (479 ) - (72 ) Paycheck protection program loans - - - Agriculture loans - - (50 ) Municipal loans - - - Consumer loans (371 ) (336 ) (235 ) Total charge-offs (850 ) (336 ) (978 ) Recoveries: One-to-four family residential real estate loans - - 11 Construction and land loans 675 165 263 Commercial real estate loans - - - Commercial loans 35 38 14 Paycheck protection program loans - - - Agriculture loans 74 59 66 Municipal loans - 6 6 Consumer loans 110 84 118 Total recoveries 894 352 478 Net recoveries (charge-offs) 44 16 (500 ) Balances at end of year $ 10,608 $ 8,791 $ 8,775 Allowance for credit losses to total gross loans 1.12 % 1.03 % 1.32 % Net loans charged-off (recovered) to average net loans 0.00 % 0.00 % 0.07 % The Company recorded net loan recoveries of $44,000 during 2023 compared to net loan recoveries of $16,000 during 2022.
Thus, the Company and the Bank are each currently subject to the Basel III Rule as described below.
Thus, only the Bank is currently subject to the Basel III Rule as described below.
Accounts receivable loans and loans for inventory purchases are generally on a one-year renewable term, and loans for equipment generally have a term of seven years or less. The Bank generally takes a blanket security interest in all assets of the borrower. Equipment loans are generally limited to 75% of the cost or appraised value of the equipment.
The Bank generally takes a blanket security interest in all assets of the borrower. Equipment loans are generally limited to 75% of the cost or appraised value of the equipment. Inventory loans are generally limited to 50% of the value of the inventory, and accounts receivable loans are generally limited to 75% of a predetermined eligible base.
The southeast region of the Bank’s market area consists of the Bank’s locations in Fort Scott, Iola, Kincaid, Mound City and Pittsburg, Kansas. Agriculture, oil, and gas are the predominant industries in the southeast Kansas region.
This new plant is projected to have a significant impact on the regional economy in eastern Kansas. Southeast region. The southeast region of the Bank’s market area consists of the Bank’s locations in Fort Scott, Iola, Kincaid, Mound City and Pittsburg, Kansas. Agriculture, oil, and gas are the predominant industries in the southeast Kansas region.
The decrease in the allocation of the allowance for loan losses on agriculture loans as of December 31, 2021 compared to December 31, 2020 was primarily related to decreased risk factors associated with probable and incurred losses due to COVID-19. The allowance for loan losses is discussed in more detail in the “Asset Quality and Distribution” section of “Item 7.
The decrease in the allocation of the allowance for credit losses on agriculture loans as of December 31, 2022 compared to December 31, 2021 was primarily related to lower balances in this portfolio. The allowance for credit losses is discussed in more detail in the “Asset Quality and Distribution” section of “Item 7.
The balances of construction and land loans decreased as of December 31, 2022 compared to December 31, 2021 primarily due to lower demand from the Bank’s loan customers for these types of loans. Commercial Real Estate Lending . Commercial real estate loans, including multi-family loans, generally have amortization periods of 15 or 20 years.
The balances of construction and land loans decreased as of December 31, 2023 compared to December 31, 2022 primarily due to lower demand from the Bank’s loan customers and lack of the Bank’s strategic focus for these types of loans. 5 Commercial Real Estate Lending .
Because the global financial crisis was in part a liquidity crisis, Basel III also includes a liquidity framework that requires FDIC-insured institutions to measure their liquidity against specific liquidity tests.
Basel III includes a liquidity framework that requires the largest insured institutions to measure their liquidity against specific liquidity tests.
A brief description of the four geographic areas and the communities which the Bank serves is set forth below. 3 The central region of the Bank’s market area consists of the Bank’s locations in Auburn, Junction City, Manhattan, Osage City, Topeka and Wamego, Kansas and includes the counties of Riley, Geary, Osage, Pottawatomie and Shawnee.
The central region of the Bank’s market area consists of the Bank’s locations in Auburn, Junction City, Manhattan, Osage City, Topeka and Wamego, Kansas and includes the counties of Riley, Geary, Osage, Pottawatomie and Shawnee.
The amount allocated in the following table to any category should not be interpreted as an indication of expected actual charge-offs in that category. 21 As of December 31, 2022 2021 2020 Amount % Loan type to total loans Net charge-offs to average loans Amount % Loan type to total loans Net charge-offs to average loans Amount % Loan type to total loans Net charge-offs to average loans (Dollars in thousands) One-to-four family residential real estate loans $ 655 27.9 % 0.00 % $ 623 25.0 % 0.04 % $ 859 22.1 % 0.16 % Construction and land loans 117 2.7 % (0.72 )% 138 4.2 % (0.96 )% 181 3.7 % 0.70 % Commercial real estate loans 3,158 35.8 % 0.00 % 3,051 30.0 % 0.29 % 2,482 24.2 % 0.08 % Commercial loans 2,753 20.4 % (0.03 )% 2,613 20.0 % 0.04 % 2,388 18.8 % 0.24 % Paycheck protection program loans - 0.0 % 0.00 % - 2.6 % 0.00 % - 14.0 % 0.00 % Agriculture loans 1,966 9.9 % (0.07 )% 2,221 14.2 % (0.02 )% 2,690 13.5 % 0.00 % Municipal loans 5 0.2 % (0.29 )% 6 0.3 % (0.28 )% 6 0.3 % (0.24 )% Consumer loans 137 3.1 % 0.98 % 123 3.7 % 0.46 % 169 3.4 % 0.59 % Total $ 8,791 100.0 % 0.00 % $ 8,775 100.0 % 0.07 % $ 8,775 100.0 % 0.15 % The increase in the allocation of the allowance for loan losses on the one-to-four family residential real estate loans as of December 31, 2022 compared to December 31, 2021 was primarily due to higher balances of loans in the portfolio.
As of December 31, 2023 2022 2021 Amount % Loan type to total loans Net charge-offs to average loans Amount % Loan type to total loans Net charge-offs to average loans Amount % Loan type to total loans Net charge-offs to average loans (Dollars in thousands) One-to-four family residential real estate loans $ 2,035 31.9 % 0.00 % $ 655 27.9 % 0.00 % $ 623 25.0 % 0.04 % Construction and land loans 150 2.2 % 3.19 % 117 2.7 % (0.72 )% 138 4.2 % (0.96 )% Commercial real estate loans 4,518 33.8 % 0.00 % 3,158 35.8 % 0.00 % 3,051 30.0 % 0.29 % Commercial loans 2,486 19.1 % (0.25 )% 2,753 20.4 % (0.03 )% 2,613 20.0 % 0.04 % Paycheck protection program loans 0 0.0 % 0.00 % 0 0.00 % 0.00 % 0 2.6 % 0.00 % Agriculture loans 1,190 9.5 % 0.09 % 1,966 9.9 % (0.07 )% 2,221 14.2 % (0.02 )% Municipal loans 15 0.5 % 0.00 % 5 0.2 % (0.29 )% 6 0.3 % (0.28 )% Consumer loans 214 3.0 % (0.91 )% 137 3.1 % 0.98 % 123 3.7 % 0.46 % Total $ 10,608 100.0 % 0.00 % $ 8,791 100.0 % 0.00 % $ 8,775 100.00 % 0.07 % The increase in the allowance for credit losses on the one-to-four family residential real estate loans as of December 31, 2023 compared to December 31, 2022 was primarily due to the adoption of ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), commonly referred to as “CECL” and, to a lesser extent, higher balances of loans in the portfolio.
A final rule has not yet been issued. Anti-Money Laundering. The USA PATRIOT Act, the Bank Secrecy Act and other similar laws are designed to deny terrorists and criminals the ability to obtain access to the U.S. financial system and have significant implications for FDIC-insured institutions and other businesses involved in the transfer of money.
They are designed to deny terrorists and criminals the ability to obtain access to the U.S. financial system and have significant implications for FDIC-insured institutions and other businesses involved in the transfer of money.
The primary industries within these respective markets are also diverse and dependent upon a wide array of industry and governmental activity for their economic base.
The primary industries within these respective markets are also diverse and dependent upon a wide array of industry and governmental activity for their economic base. A brief description of the four geographic areas and the communities which the Bank serves is set forth below. Central region.
As of December 31, 2022 2021 (Dollars in thousands) One-to-four family residential real estate loans $ 236,982 $ 166,081 Construction and land loans 22,725 27,644 Commercial real estate loans 304,074 198,472 Commercial loans 173,415 132,154 Paycheck protection program loans 21 17,179 Agriculture loans 84,283 94,267 Municipal loans 2,026 2,050 Consumer loans 26,664 24,541 Total gross loans 850,190 662,388 Net deferred loan costs and loans in process (250 ) (380 ) Allowance for loan losses (8,791 ) (8,775 ) Loans, net $ 841,149 $ 653,233 The following table sets forth the contractual maturities of loans as of December 31, 2022.
As of December 31, 2023 2022 (Dollars in thousands) One-to-four family residential real estate loans $ 302,544 $ 236,982 Construction and land loans 21,090 22,725 Commercial real estate loans 320,962 304,074 Commercial loans 180,942 173,415 Paycheck protection program loans - 21 Agriculture loans 89,680 84,283 Municipal loans 4,507 2,026 Consumer loans 28,931 26,664 Total gross loans 948,656 850,190 Net deferred loan costs and loans in process (429 ) (250 ) Allowance for credit losses (10,608 ) (8,791 ) Loans, net $ 937,619 $ 841,149 The following table sets forth the contractual maturities of loans as of December 31, 2023.
Equipment leases are generally made for the purchase of municipal assets and are secured by the leased asset. The Bank is generally not active in the origination of municipal loans and leases; however, the Bank may originate loans or leases for municipalities in its market area. Consumer and Other Lending .
The Bank is generally not active in the origination of municipal loans and leases; however, the Bank may originate loans or leases for municipalities in its market area. Consumer and Other Lending . Loans classified as consumer and other loans include automobile, boat, home improvement and home equity loans.
FDIC-insured institutions are expected to operate in a safe and sound manner. The federal banking agencies have adopted operational and managerial standards to promote the safety and soundness of such institutions that address internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and earnings.
The federal banking agencies have adopted operational and managerial standards to promote the safety and soundness of such institutions that address internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and earnings. 13 In general, the safety and soundness standards prescribe the goals to be achieved in each area, and each institution is responsible for establishing its own procedures to achieve those goals.
Topeka and Manhattan are regional destinations for retail shopping as well as home to regional hospitals. Manhattan was also selected as the site of a new National Bio and Agro-Defense Facility, which has had a significant impact on the regional economy as the facility is being constructed, and that impact is expected to continue once the facility begins operations.
Topeka and Manhattan are regional destinations for retail shopping as well as home to regional hospitals. Manhattan was selected as the site of a new National Bio and Agro-Defense Facility, which has had a significant impact on the regional economy. Additionally, manufacturing and service industries play a key role within the central Kansas market. Eastern region .
At December 31, 2022, the $934,000 of real estate owned primarily consisted of three residential real estate properties, one commercial property and one parcel of land.
At December 31, 2023, the $928,000 of real estate owned primarily consisted of three residential real estate properties, one commercial property and one parcel of land. The decrease in real estate owned as of December 31, 2023 compared to December 31, 2022 was due to a valuation allowance recorded against a residential real estate property.
The balance of non-core or brokered deposits at December 31, 2022 was $10.3 million, or 0.8% of total deposits. In order for the Bank to attract and retain stable deposit relationships, the Bank offers business cash management solution services to help local companies better manage their cash flow.
In order for the Bank to attract and retain stable deposit relationships, the Bank offers business cash management solution services to help local companies better manage their cash flow.
The Bank’s Lawrence locations are located in Douglas County and are significantly impacted by the University of Kansas, the largest university in Kansas. The eastern region is strongly influenced by the Kansas City metropolitan market, which is the highest growth area in the State of Kansas. The region is influenced by public and private industries and businesses of all sizes.
The eastern region is strongly influenced by the Kansas City metropolitan market, which is the highest growth area in the State of Kansas. The region is influenced by public and private industries and businesses of all sizes. In addition, housing growth and commercial real estate are major drivers of the region’s economy.
Commercial real estate and multi-family loans are generally limited, by policy, to 80% of the appraised value of the property. Commercial real estate loans are also supported by an analysis demonstrating the borrower’s ability to repay. The Bank continues to focus on generating additional commercial real estate loan relationships.
Commercial real estate loans, including multi-family loans, generally have amortization periods of 15 or 20 years. Commercial real estate and multi-family loans are generally limited, by policy, to 80% of the appraised value of the property and are subject to strict underwriting guidelines. Commercial real estate loans are also supported by an analysis demonstrating the borrower’s ability to repay.
The Bank’s loan growth over the past few years has been driven in large part by commercial real estate loans. These loans are primarily made to customers with owner-occupied properties. Additionally, the acquisition of Freedom Bank increased the Bank’s commercial real estate loans. 5 Commercial Lending . Commercial loans include loans to service, retail, wholesale and light manufacturing businesses.
The Bank’s loan growth over the past few years has been driven in large part by commercial real estate loans. Commercial Lending . Commercial loans include loans to service, retail, wholesale and light manufacturing businesses. Commercial loans are made based on the financial strength and repayment ability of the borrower, as well as the collateral securing the loans.
As of December 31, 2022, the Company had $1.5 billion in consolidated total assets. The Company is headquartered in Manhattan, Kansas, and has expanded its geographic presence through opening new branches and acquisitions. On October 1, 2022, the Company completed its acquisition of Freedom Bancshares, Inc. (“Freedom”), the holding company of Freedom Bank.
As of December 31, 2023, the Company had approximately $1.6 billion in consolidated total assets. The Company is headquartered in Manhattan, Kansas, and has expanded its geographic presence through opening new branches and acquisitions. In February 2024, the Bank opened a loan production office in Kansas City, Missouri.
Operating in an unsafe or unsound manner will also constitute grounds for other enforcement action by the federal bank regulatory agencies, including cease and desist orders and civil money penalty assessments. 13 During the past decade, the bank regulatory agencies have increasingly emphasized the importance of sound risk management processes and strong internal controls when evaluating the activities of the FDIC-insured institutions they supervise.
Operating in an unsafe or unsound manner will also constitute grounds for other enforcement action by the federal bank regulatory agencies, including cease and desist orders and civil money penalty assessments.
While these rules do not, and will not, apply to the Bank, we continue to review our liquidity risk management policies in light of developments.
Although these tests do not, and will not, apply to the Bank, we continue to review our liquidity risk management policies in light of regulatory requirements and industry developments. Dividend Payments. The primary source of funds for the Company is dividends from the Bank.
These means are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use may affect interest rates charged on loans or paid on deposits. 11 Corporate Governance . The Dodd-Frank Act addressed many investor protection, corporate governance and executive compensation matters that will affect most U.S. publicly traded companies.
These means are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use may affect interest rates charged on loans or paid on deposits. 11 Federal Securities Regulation.
Years ended December 31, 2022 vs 2021 2021 vs 2020 Increase/(decrease) attributable to Increase/(decrease) attributable to Volume Rate Net Volume Rate Net (Dollars in thousands) Interest income: Interest-bearing deposits at banks $ (37 ) $ 171 $ 134 $ 133 $ (14 ) $ 119 Investment securities Taxable 2,493 916 3,409 784 (1,888 ) (1,104 ) Tax-exempt (1) (799 ) 781 (18 ) (37 ) (279 ) (316 ) Loans (2) 541 (682 ) (141 ) 1,018 795 1,813 Total 2,198 1,186 3,384 1,898 (1,386 ) 512 Interest expense: Deposits 51 1,702 1,753 335 (1,417 ) (1,082 ) FHLB advances and other borrowings 449 503 952 (135 ) (35 ) (170 ) Repurchase agreeements 28 107 135 (10 ) (1 ) (11 ) Total 528 2,312 2,840 190 (1,453 ) (1,263 ) Net interest income $ 1,670 $ (1,126 ) $ 544 $ 1,708 $ 67 $ 1,775 (1) The change in tax-exempt income on investment securities is presented on a fully taxable equivalent basis, using a 21% federal tax rate.
Years ended December 31, 2023 vs 2022 2022 vs 2021 Increase/(decrease) attributable to Increase/(decrease) attributable to Volume Rate Net Volume Rate Net (Dollars in thousands) Interest income: Interest-bearing deposits at banks $ (66 ) $ (13 ) $ (79 ) $ (37 ) $ 171 $ 134 Investment securities Taxable 423 2,757 3,180 2,493 916 3,409 Tax-exempt (1) (148 ) 176 28 (799 ) 781 (18 ) Loans (2) 10,103 8,174 18,277 541 (682 ) (141 ) Total 10,312 11,094 21,406 2,198 1,186 3,384 Interest expense: Deposits 343 12,135 12,478 51 1,702 1,753 FHLB advances and other borrowings 3,140 324 3,464 449 135 584 Subordinated debentures - 750 750 - 368 368 Repurchase agreements 73 280 353 28 107 135 Total 3,556 13,489 17,045 528 2,312 2,840 Net interest income $ 6,756 $ (2,395 ) $ 4,361 $ 1,670 $ (1,126 ) $ 544 (1) The change in tax-exempt income on investment securities is presented on a fully taxable equivalent basis, using a 21% federal tax rate.
The net loan recoveries were primarily related to a $150,000 recovery on a land loan. The net loan charge-offs in 2021 were primarily related to a $540,000 charge off on a previously impaired commercial real estate loan relationship that was transferred to real estate owned in 2021. The Company recorded net loan charge-offs of $992,000 during 2020.
The net loan recoveries were primarily related to a $626,000 recovery related to a construction loan previously charged-off in 2011. The Company recorded net loan recoveries of $16,000 during 2022 compared to net loan charge-offs of $500,000 during 2021. The net loan recoveries were primarily related to a $150,000 recovery on a land loan.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeDowngrades in the credit rating of one or more insurers that provide credit enhancement for our state and municipal securities portfolio may have an adverse impact on the market for and valuation of these types of securities. We invest in tax-exempt and taxable state and local municipal investment securities, some of which are insured by monoline insurers.
Biggest changeWe invest in tax-exempt and taxable state and local municipal investment securities, some of which are insured by monoline insurers. As of December 31, 2023, we had $199.7 million of municipal securities, which represented 44.1% of our total securities portfolio.
If the loans that are collateralized by real estate become troubled during a time when market conditions are declining or have declined, then we may not be able to realize the amount of security that we anticipated at the time of originating the loan, which could cause us to increase our provision for loan losses and adversely affect our operating results and financial condition.
If the loans that are collateralized by real estate become troubled during a time when market conditions are declining or have declined, then we may not be able to realize the amount of security that we anticipated at the time of originating the loan, which could cause us to increase our provision for credit losses and adversely affect our operating results and financial condition.
Numerous factors, including lack of liquidity for resales of certain investment securities, absence of reliable pricing information for investment securities, adverse changes in business climate or adverse actions by regulators could have a negative effect on our investment portfolio in future periods. 29 The value of the financial instruments we own may decline in the future.
Numerous factors, including lack of liquidity for resales of certain investment securities, absence of reliable pricing information for investment securities, adverse changes in business climate or adverse actions by regulators could have a negative effect on our investment portfolio in future periods. The value of the financial instruments we own may decline in the future.
Any such events could have a material adverse effect on our business, financial condition, results of operations and growth prospects. Our operations rely heavily on the secure processing, storage and transmission of information and the monitoring of a large number of transactions on a minute-by-minute basis, and even a short interruption in service could have significant consequences.
Any such events could have a material adverse effect on our business, financial condition, results of operations and growth prospects. 35 Our operations rely heavily on the secure processing, storage and transmission of information and the monitoring of a large number of transactions on a minute-by-minute basis, and even a short interruption in service could have significant consequences.
Accordingly, adverse circumstances affecting wheat, corn and soybean crops could have an adverse effect on our agricultural real estate loan portfolio. Our business is concentrated in and dependent upon the continued growth and welfare of the markets in which we operate, including eastern, central, southeast and southwest Kansas.
Accordingly, adverse circumstances affecting wheat, corn and soybean crops could have an adverse effect on our agricultural real estate loan portfolio. 28 Our business is concentrated in and dependent upon the continued growth and welfare of the markets in which we operate, including eastern, central, southeast and southwest Kansas.
Loan losses in excess of our reserves will adversely affect our business, financial condition and results of operations. Also, as of January 1, 2023, the Company was required to adopt accounting standard update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326), commonly referred to as “CECL”.
Credit losses in excess of our reserves will adversely affect our business, financial condition and results of operations. Also, as of January 1, 2023, the Company was required to adopt accounting standard update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326), commonly referred to as “CECL”.
Given the interconnectedness of the global financial system, these vulnerabilities could impact the Company’s business operations and financial condition. Interest rates and other conditions impact our results of operations. Our profitability is in part a function of the spread between the interest rates earned on investments and loans and the interest rates paid on deposits and other interest-bearing liabilities.
Given the interconnectedness of the global financial system, these vulnerabilities could impact the Company’s business operations and financial condition. 29 Interest rates and other conditions impact our results of operations. Our profitability is in part a function of the spread between the interest rates earned on investments and loans and the interest rates paid on deposits and other interest-bearing liabilities.
A decline in residential real estate market prices or home sales has the potential to adversely affect our one-to-four family residential mortgage portfolio in several ways, such as a decrease in collateral values and an increase in non-performing loans, each of which could adversely affect our operating results and/or financial condition. 25 Our loan portfolio has a large concentration of real estate loans, which involve risks specific to real estate value.
A decline in residential real estate market prices or home sales has the potential to adversely affect our one-to-four family residential mortgage portfolio in several ways, such as a decrease in collateral values and an increase in non-performing loans, each of which could adversely affect our operating results and/or financial condition. 26 Our loan portfolio has a large concentration of real estate loans, which involve risks specific to real estate value.
Reliance on inaccurate or misleading financial statements, credit reports or other financial information could have a material adverse impact on our business, financial condition and results of operations. 35 Liquidity and Capital Risks Our growth or future losses may require us to raise additional capital in the future, but that capital may not be available when it is needed.
Reliance on inaccurate or misleading financial statements, credit reports or other financial information could have a material adverse impact on our business, financial condition and results of operations. 36 Liquidity and Capital Risks Our growth or future losses may require us to raise additional capital in the future, but that capital may not be available when it is needed.
Any future changes in the calculation or assessment of FDIC insurance premiums may have a material adverse effect on the Bank’s results of operations, financial condition, and the ability to continue to pay dividends on common stock at the current rate or at all. 30 We are subject to changes in accounting principles, policies or guidelines.
Any future changes in the calculation or assessment of FDIC insurance premiums may have a material adverse effect on the Bank’s results of operations, financial condition, and the ability to continue to pay dividends on common stock at the current rate or at all. 31 We are subject to changes in accounting principles, policies or guidelines.
An overall labor shortage, lack of skilled labor, increased turnover or labor inflation, could have a material adverse impact on our operations, results of operations, liquidity or cash flows. 33 The occurrence of fraudulent activity, breaches or failures of our information security controls or cybersecurity-related incidents could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
An overall labor shortage, lack of skilled labor, increased turnover or labor inflation, could have a material adverse impact on our operations, results of operations, liquidity or cash flows. 34 The occurrence of fraudulent activity, breaches or failures of our information security controls or cybersecurity-related incidents could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
The amount of future loan losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates and the value of the underlying collateral, which may be beyond our control, and such losses may exceed current estimates.
The amount of future credit losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates and the value of the underlying collateral, which may be beyond our control, and such losses may exceed current estimates.
The effects of a prolonged period of a weakened agricultural economy could have a material adverse effect on our business, financial condition and results of operations. 24 Continued elevated levels of inflation could adversely impact our business and results of operations.
The effects of a prolonged period of a weakened agricultural economy could have a material adverse effect on our business, financial condition and results of operations. 25 Continued elevated levels of inflation could adversely impact our business and results of operations.
From time to time, the FASB and the SEC change the financial accounting and reporting standards or the interpretation of those standards that govern the preparation of our financial statements, such as the implementation of CECL. In addition, trends in financial and business reporting, including environmental social and governance (ESG) related disclosures, could require us to incur additional reporting expense.
From time to time, the FASB and the SEC change the financial accounting and reporting standards or the interpretation of those standards that govern the preparation of our financial statements. In addition, trends in financial and business reporting, including environmental social and governance (ESG) related disclosures, could require us to incur additional reporting expense.
Although management believes that the allowance for loan losses is appropriate to absorb probable incurred losses on any existing loans that may become uncollectible, we cannot predict loan losses with certainty nor can we assure you that our allowance for loan losses will prove sufficient to cover actual loan losses in the future.
Although management believes that the allowance for credit losses is appropriate to absorb future losses on any existing loans that may become uncollectible, we cannot predict credit losses with certainty nor can we assure you that our allowance for credit losses will prove sufficient to cover actual credit losses in the future.
As of December 31, 2022, Kansas’s unemployment rate was 2.90%. A sustained labor shortage or increased turnover rates within our employee base could lead to increased costs, such as increased compensation expense to attract and retain employees.
As of December 31, 2023, Kansas’s unemployment rate was 2.8%. A sustained labor shortage or increased turnover rates within our employee base could lead to increased costs, such as increased compensation expense to attract and retain employees.
Thus, an increase in the amount of non-performing assets would have an adverse impact on net interest income. Rising interest rates will result in a decline in value of our fixed-rate debt securities. The unrealized losses resulting from holding these securities would be recognized in other comprehensive income and reduce total stockholders’ equity.
Thus, an increase in the amount of non-performing assets would have an adverse impact on net interest income. Continued high interest rates may result in a further decline in value of our fixed-rate debt securities. The unrealized losses resulting from holding these securities would be recognized in other comprehensive income and reduce total stockholders’ equity.
Our concentration of one-to-four family residential mortgage loans may result in lower yields and profitability. One-to-four family residential mortgage loans comprised $237.0 million and $166.1 million, or 27.9% and 25.0%, of our loan portfolio at December 31, 2022 and 2021, respectively. These loans are secured primarily by properties located in the state of Kansas.
Our concentration of one-to-four family residential mortgage loans may result in lower yields and profitability. One-to-four family residential mortgage loans comprised $302.5 million and $237.0 million, or 31.9% and 27.9%, of our loan portfolio at December 31, 2023 and 2022, respectively. These loans are secured primarily by properties located in the state of Kansas.
The United States has recently experienced elevated levels of inflation, with the consumer price index climbing approximately 6.5% in 2022. Continued levels of inflation could have complex effects on our business and results of operations, some of which could be materially adverse.
The United States has recently experienced elevated levels of inflation, with the consumer price index climbing approximately 3.4% in 2023. Continued levels of inflation could have complex effects on our business and results of operations, some of which could be materially adverse.
As of December 31, 2022, our non-performing loans (which consist of non-accrual loans and loans past due 90 days or more and still accruing interest) totaled $3.3 million, or 0.39% of our loan portfolio, and our non-performing assets (which include non-performing loans plus real estate owned) totaled $4.3 million, or 0.28% of total assets.
As of December 31, 2023, our non-performing loans (which consist of non-accrual loans and loans past due 90 days or more and still accruing interest) totaled $2.4 million, or 0.25% of our loan portfolio, and our non-performing assets (which include non-performing loans plus real estate owned) totaled $3.3 million, or 0.21% of total assets.
At December 31, 2022 and 2021, agricultural real estate loans totaled $38.0 million and $43.7 million, or 4.5% and 6.6% of our total loan portfolio, respectively. Agricultural real estate lending involves a greater degree of risk and typically involves larger loans to single borrowers than lending on single-family residences.
At December 31, 2023 and 2022, agricultural real estate loans totaled $40.1 million and $38.0 million, or 4.2% and 4.5% of our total loan portfolio, respectively. Agricultural real estate lending involves a greater degree of risk and typically involves larger loans to single borrowers than lending on single-family residences.
Such downgrade could adversely affect our liquidity, financial condition and results of operations. Legal, Accounting and Compliance Risks Legislative and regulatory reforms applicable to the financial services industry may have a significant impact on our business, financial condition and results of operations.
Legal, Accounting and Compliance Risks Legislative and regulatory reforms applicable to the financial services industry may have a significant impact on our business, financial condition and results of operations.
Credit support provided by the borrower for most of these loans, and the probability of repayment is based on the liquidation of the pledged collateral and enforcement of a personal guarantee, if any exists.
Most often, this collateral is accounts receivable, inventory, or machinery. Credit support provided by the borrower for most of these loans, and the probability of repayment is based on the liquidation of the pledged collateral and enforcement of a personal guarantee, if any exists.
Real estate lending (including commercial real estate, construction and land and residential real estate) is a large portion of our loan portfolio. These categories were $563.8 million, or approximately 66.3% of our total loan portfolio, as of December 31, 2022, as compared to $392.2 million, or approximately 59.2% of our total loan portfolio, as of December 31, 2021.
Real estate lending (including commercial real estate, construction and land and residential real estate) is a large portion of our loan portfolio. These categories were $644.6 million, or approximately 67.9% of our total loan portfolio, as of December 31, 2023, as compared to $563.8 million, or approximately 66.3% of our total loan portfolio, as of December 31, 2022.
In light of the uncertainty that exists in the economy and credit markets nationally, there can be no guarantee that we will not experience additional deterioration in credit performance by our real estate loan customers. Commercial loans make up a significant portion of our loan portfolio.
In light of the uncertainty that exists in the economy and credit markets nationally, there can be no guarantee that we will not experience additional deterioration in credit performance by our real estate loan customers.
In addition, we had $738,000 in accruing loans that were 30-89 days delinquent as of December 31, 2022. Our non-performing assets adversely affect our net income in various ways.
In addition, we had $1.6 million in accruing loans that were 30-89 days delinquent as of December 31, 2023. Our non-performing assets adversely affect our net income in various ways.
The Federal Reserve has indicated that it is working to avoid abrupt or unpredictable changes in economic or financial conditions so as not to disrupt the financial systems, also known as “shocks;” despite this, the impact of these changes cannot be certain.
The effects of such policies upon our business, financial condition and results of operations cannot be predicted. The Federal Reserve has indicated that it is working to avoid abrupt or unpredictable changes in economic or financial conditions so as not to disrupt the financial systems, also known as “shocks;” despite this, the impact of these changes cannot be certain.
To the extent that we undertake additional branch openings, we are likely to experience the effects of higher operating expenses relative to operating income from the new operations, which may have an adverse effect on our levels of reported net income, return on average equity and return on average assets.
To the extent that we undertake additional branch openings, we are likely to experience the effects of higher operating expenses relative to operating income from the new operations, which may have an adverse effect on our levels of reported net income, return on average equity and return on average assets. 32 We face intense competition in all phases of our business from other banks and financial institutions.
In addition, failures of third parties to comply with applicable laws and regulations, or fraud or misconduct on the part of employees of any of these third parties, could disrupt our operations or adversely affect our reputation. 34 It may be difficult for us to replace some of our third party vendors, particularly vendors providing our core banking and information services, in a timely manner if they are unwilling or unable to provide us with these services in the future for any reason and even if we are able to replace them, it may be at higher cost or result in the loss of customers.
It may be difficult for us to replace some of our third party vendors, particularly vendors providing our core banking and information services, in a timely manner if they are unwilling or unable to provide us with these services in the future for any reason and even if we are able to replace them, it may be at higher cost or result in the loss of customers.
Due to the larger average size of each commercial loan as compared with other loans such as residential loans, as well as collateral that is generally less readily marketable, losses incurred on a small number of commercial loans could have a material adverse impact on our financial condition and results of operations.
Due to the larger average size of each commercial loan as compared with other loans such as residential loans, as well as collateral that is generally less readily marketable, losses incurred on a small number of commercial loans could have a material adverse impact on our financial condition and results of operations. 27 The success of our SBA lending program is dependent upon the continued availability of SBA loan programs, our status as a Preferred Lender under the SBA loan programs and our ability to comply with applicable SBA lending requirements.
If we experience increases in non-performing loans and non-performing assets, our net interest income may be negatively impacted and our loan administration costs could increase, each of which could have an adverse effect on our net income and related ratios, such as return on assets and equity. 27 Interest Rate Risks Monetary policies and regulations of the Federal Reserve could adversely affect our business, financial condition and results of operations.
If we experience increases in non-performing loans and non-performing assets, our net interest income may be negatively impacted and our loan administration costs could increase, each of which could have an adverse effect on our net income and related ratios, such as return on assets and equity.
The loss of these revenue streams and the lower cost of deposits as a source of funds could have a material adverse effect on our financial condition and results of operations.
The loss of these revenue streams and the lower cost of deposits as a source of funds could have a material adverse effect on our financial condition and results of operations. Potential partnerships with digital asset companies, moreover, could also entail significant investment.
Nevertheless, any repossessed collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. We also originate agriculture real estate loans.
We generally secure agricultural operating loans with a blanket lien on livestock, equipment, food, hay, grain and crops. Nevertheless, any repossessed collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. We also originate agriculture real estate loans.
Under the federal Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), owners and operators of properties containing hazardous substances may be liable for the costs of cleaning up the substances.
Our business is affected from time to time by federal and state laws and regulations relating to hazardous substances. Under the federal Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), owners and operators of properties containing hazardous substances may be liable for the costs of cleaning up the substances.
In addition to being affected by general economic conditions, our earnings and growth are affected by the policies of the Federal Reserve. An important function of the Federal Reserve is to regulate the money supply and credit conditions.
Interest Rate Risks Monetary policies and regulations of the Federal Reserve could adversely affect our business, financial condition and results of operations. In addition to being affected by general economic conditions, our earnings and growth are affected by the policies of the Federal Reserve. An important function of the Federal Reserve is to regulate the money supply and credit conditions.
CECL will change how the Company calculates its allowance for loan losses by requiring the Company to determine periodic estimates of lifetime expected credit losses on loans and recognize the expected credit losses as allowances for loan credit losses.
CECL changed how the Company calculates its allowance for credit losses by requiring the Company to determine periodic estimates of lifetime expected credit losses on loans and recognize the expected credit losses as allowances for credit losses. This is a change from the previous method of providing allowances for credit losses that are incurred.
Likewise, agricultural operating loans involve a greater degree of risk than lending on residential properties, particularly in the case of loans that are unsecured or secured by rapidly depreciating assets such as farm equipment, livestock or crops. We generally secure agricultural operating loans with a blanket lien on livestock, equipment, food, hay, grain and crops.
The repayment of agriculture operating loans is dependent on the successful operation or management of the farm property. Likewise, agricultural operating loans involve a greater degree of risk than lending on residential properties, particularly in the case of loans that are unsecured or secured by rapidly depreciating assets such as farm equipment, livestock or crops.
At December 31, 2022 and 2021, our allowance for loan losses as a percentage of total loans, including PPP loans, was 1.03% and 1.32%, respectively, and as a percentage of total non-performing loans was 264.31% and 167.78%, respectively.
At December 31, 2023 and 2022, our allowance for credit losses as a percentage of total loans, was 1.12% and 1.03%, respectively, and as a percentage of total non-performing loans was 443.66% and 264.31%, respectively.
The allowance is also subject to regulatory examinations and a determination by the regulatory agencies as to the appropriate level of the allowance.
Additionally, our Board of Directors regularly monitors the appropriateness of our allowance for credit losses. The allowance is also subject to regulatory examinations and a determination by the regulatory agencies as to the appropriate level of the allowance.
As part of our general strategy, we may acquire banks, branches and related businesses that we believe provide a strategic fit with our business.
Operational, Strategic and Reputational Risks We may experience difficulties in managing our growth, and our growth strategy involves risks that may negatively impact our net income. As part of our general strategy, we may acquire banks, branches and related businesses that we believe provide a strategic fit with our business.
Commercial loans comprised $173.4 million and $132.2 million, or 20.4% and 20.0%, of our loan portfolio at December 31, 2022 and 2021, respectively. Our commercial loans are made based primarily on the identified cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. Most often, this collateral is accounts receivable, inventory, or machinery.
Commercial loans make up a significant portion of our loan portfolio. Commercial loans comprised $180.9 million and $173.4 million, or 19.1% and 20.4%, of our loan portfolio at December 31, 2023 and 2022, respectively. Our commercial loans are made based primarily on the identified cash flow of the borrower and secondarily on the underlying collateral provided by the borrower.
Management has estimated losses inherent in the outstanding guaranteed portion of SBA loans and recorded a recourse reserve at a level determined to be appropriate.
Management has estimated losses inherent in the outstanding guaranteed portion of SBA loans and recorded a recourse reserve at a level determined to be appropriate. Significant increases to the recourse reserve may materially decrease our net income, which may adversely affect our business, results of operations and financial condition.
In addition, we may determine to sell securities in our available-for-sale investment securities portfolio, and any such sale could cause us to realize currently unrealized losses that resulted from the recent increases in the prevailing interest rates.
In addition, we may determine to sell securities in our available-for-sale investment securities portfolio, and any such sale could cause us to realize currently unrealized losses that resulted from the recent increases in the prevailing interest rates. 30 Downgrades in the credit rating of one or more insurers that provide credit enhancement for our state and municipal securities portfolio may have an adverse impact on the market for and valuation of these types of securities.
We may be required to record impairment charges on our investment securities if they suffer declines in value that are considered other-than-temporary. If the credit quality of the securities in our investment portfolio deteriorates, we may also experience a loss in interest income from the suspension of either interest or dividend payments.
If the credit quality of the securities in our investment portfolio deteriorates, we may also experience a loss in interest income from the suspension of either interest or dividend payments.
Economic events or governmental regulations outside of the control of the borrower or lender could negatively impact the future cash flow and market values of the affected properties.
Economic events, including decreases in office occupancy due to the shift to remote working environments following the COVID-19 pandemic, or governmental regulations outside of the control of the borrower or lender could negatively impact the future cash flow and market values of the affected properties.
Our allowance for loan losses may prove to be insufficient to absorb losses in our loan portfolio. We maintain our allowance for loan losses at a level considered appropriate by management to absorb probable incurred loan losses in the portfolio. Additionally, our Board of Directors regularly monitors the appropriateness of our allowance for loan losses.
Our allowance for credit losses may prove to be insufficient to absorb losses in our loan portfolio. We maintain our allowance for credit losses at a level considered appropriate by management to absorb all expected future losses expected in the loan portfolio at the balance sheet date.
Unrealized losses do not negatively impact our regulatory capital ratios; however, tangible common equity and the associated ratios would be reduced.
Unrealized losses do not negatively impact our regulatory capital ratios; however, tangible common equity and the associated ratios would be reduced. If debt securities in an unrealized loss position are sold, such losses become realized and will reduce our regulatory capital ratios.
Economic conditions in the state of Kansas are impacted by commodity prices, which may adversely impact the Kansas economy, specifically the agriculture sector. Declines in commodity prices could materially and adversely affect our results of operations. The agricultural economy in the Midwest, including Kansas, has improved recently after experiencing weakness over the previous several years.
Economic conditions in the state of Kansas are generally impacted by commodity prices, which may adversely impact the Kansas economy, specifically the agriculture sector. Declines in commodity prices could materially and adversely affect our results of operations. During 2023, commodity prices declined from near record highs experienced in 2022.
Accordingly, we cannot provide you with assurance that we will be able to effectively implement new technology-driven products and services or be successful in marketing such products and services to our customers. Attractive acquisition opportunities may not be available to us in the future.
Accordingly, we cannot provide you with assurance that we will be able to effectively implement new technology-driven products and services or be successful in marketing such products and services to our customers. 33 Issues with the use of artificial intelligence in our marketplace may result in reputational harm or liability, or could otherwise adversely affect the Company’s business.
Our stock price could fluctuate significantly in response to our quarterly or annual results, annual projections and the impact of these risk factors on our operating results or financial position. 36 COVID-19 Risks The COVID-19 pandemic could continue to create disruptions that affect our business, financial condition, liquidity, and results of operations.
Our stock price could fluctuate significantly in response to our quarterly or annual results, annual projections and the impact of these risk factors on our operating results or financial position. 37 ITEM 1B. UNRESOLVED STAFF COMMENTS None
As of December 31, 2022, we had $194.5 million of municipal securities, which represented 39.8% of our total securities portfolio. Even though management generally purchases municipal securities on the overall credit strength of the issuer, the reduction in the credit rating of an insurer may negatively impact the market for and valuation of our investment securities.
Even though management generally purchases municipal securities on the overall credit strength of the issuer, the reduction in the credit rating of an insurer may negatively impact the market for and valuation of our investment securities. Such downgrade could adversely affect our liquidity, financial condition and results of operations.
Before foreclosing on commercial real estate, our general policy is to obtain an environmental report, thereby increasing the costs of foreclosure.
Before foreclosing on commercial real estate, our general policy is to obtain an environmental report, thereby increasing the costs of foreclosure. In addition, the existence of hazardous substances on a property securing a troubled loan may cause us to elect not to foreclose on the property, thereby reducing our flexibility in handling the loan.
We face intense competition in all phases of our business from other banks and financial institutions. The banking and financial services business in our market is highly competitive.
The banking and financial services business in our market is highly competitive.
In addition to better serving customers, the effective use of technology increases efficiency as well as enables financial institutions to reduce costs.
The financial services industry continues to undergo rapid technological changes with frequent introductions of new technology-driven products and services, including internet services, cryptocurrencies and payment systems. In addition to better serving customers, the effective use of technology increases efficiency as well as enables financial institutions to reduce costs.
Significant increases to the recourse reserve may materially decrease our net income, which may adversely affect our business, results of operations and financial condition. 26 Our agriculture loans involve a greater degree of risk than other loans, and the ability of the borrower to repay may be affected by many factors outside of the borrower’s control.
Our agriculture loans involve a greater degree of risk than other loans, and the ability of the borrower to repay may be affected by many factors outside of the borrower’s control. Agriculture operating loans comprised $49.6 million and $46.3 million, or 5.3% and 5.4%, of our loan portfolio at December 31, 2023 and 2022, respectively.
The manner and impact of this transition, as well as the effect of these developments on our funding costs, loan and investment and trading securities portfolios, asset-liability management, and business, is uncertain. Declines in value may adversely impact the carrying amount of our investment portfolio and result in other-than-temporary impairment charges.
Declines in value may adversely impact the carrying amount of our investment portfolio and result in other-than-temporary impairment charges. We may be required to record impairment charges on our investment securities if they suffer declines in value that are considered other-than-temporary.
Removed
This is a change from the current method of providing allowances for loan losses that are probable, and may require us to increase our allowance for loan losses. Any increase in our allowance for loan losses may have a material adverse effect on our financial condition and results of operations.
Added
The outlook is for commodity prices to continue to decline modestly over the next few years before stabilizing, but are subject to global economic and market conditions. The agricultural economy in the Midwest, including Kansas, has been stable over the previous several years.
Removed
The success of our SBA lending program is dependent upon the continued availability of SBA loan programs, our status as a Preferred Lender under the SBA loan programs and our ability to comply with applicable SBA lending requirements.
Added
Economic events or governmental regulations outside of the control of the borrower or lender could negatively impact the future cash flow and market values of the affected properties, including (i) declines in the rents or decreases in occupancy and, therefore, in the cash flows generated by those real properties on which the borrowers depend to fund their loan payments to us, (ii) decreases in the values of those real properties, which make it more difficult for the borrowers to sell those real properties for amounts sufficient to repay their loans in full, and (iii) job losses of residential home buyers, which makes it more difficult for these borrowers to fund their loan payments.
Removed
Agriculture operating loans comprised $46.3 million and $50.6 million, or 5.4% and 7.6%, of our loan portfolio at December 31, 2022 and 2021, respectively. The repayment of agriculture operating loans is dependent on the successful operation or management of the farm property.
Added
Adverse changes affecting real estate values, including decreases in office occupancy due to the shift to remote working environments following the COVID-19 pandemic, and the liquidity of real estate in one or more of the Company’s markets could increase the credit risk associated with the Company’s loan portfolio, significantly impair the value of property pledged as collateral on loans and affect the Company’s ability to sell the collateral upon foreclosure without a loss or additional losses or the Company’s ability to sell those loans on the secondary market.
Removed
The effects of such policies upon our business, financial condition and results of operations cannot be predicted. It is widely expected that the Federal Reserve will increase rates, and reduce its balance sheet of bonds and other assets in 2023.
Added
The Company’s loan portfolio has a large concentration of commercial real estate loans, which involve risks specific to real estate values and the health of the real estate market generally.
Removed
If debt securities in an unrealized loss position are sold, such losses become realized and will reduce our regulatory capital ratios. 28 The transition to an alternative reference rate could cause instability and have a negative effect on financial market conditions.
Added
As of December 31, 2023, the Company had $342.1 million of commercial real estate loans, consisting of $100.6 million of non-owner occupied loans, $181.7 million of owner occupied loans, $38.6 million of loans secured by multifamily residential properties and $21.1 million of construction and land development loans.
Removed
In July 2017, the Financial Conduct Authority, the authority regulating LIBOR, along with various other regulatory bodies, announced that LIBOR would likely be discontinued at the end of 2021. End dates for LIBOR have now been set, and U.S.
Added
Commercial real estate loans represented 36.1% of the Company’s total loan portfolio and 237% of the Bank’s total capital at December 31, 2023.
Removed
Regulators have issued guidance as of October 2021 that urges market participants to address their existing LIBOR exposures and transition to robust and sustainable alternative rates by June 30, 2023.
Added
The market value of real estate can fluctuate significantly in a short period of time as a result of interest rates and market conditions in the area in which the real estate is located and some of these values have been negatively affected by the recent rise in prevailing interest rates.
Removed
The Alternative Reference Rate Committee, a steering committee comprised of U.S. financial market participants, selected by the Federal Reserve Bank of New York, has proposed that the Secured Overnight Financing Rate (“SOFR”) is the rate that represents best practice as the alternative to U.S. dollar-LIBOR for use in derivatives and other financial contracts that are currently indexed to LIBOR, but has also advised market participants to conduct a comprehensive evaluation of any alternative reference rates being considered for use.
Added
Adverse developments affecting real estate values in the Company’s market areas could increase the credit risk associated with the Company’s loan portfolio. Additionally, the repayment of commercial real estate loans generally is dependent, in large part, on sufficient income from the properties securing the loans to cover operating expenses and debt service.
Removed
SOFR is a broad measure of the cost of overnight borrowings collateralized by Treasury securities that was selected by the Alternative Reference Rate Committee due to the depth and robustness of the U.S. Treasury repurchase market.
Added
If the loans that are collateralized by real estate become troubled during a time when market conditions are declining or have declined, then the Company may not be able to realize the full value of the collateral that the Company anticipated at the time of originating the loan, which could force the Company to take charge-offs or require the Company to increase the Company’s provision for credit losses, which could have a material adverse effect on the Company’s business, financial condition, results of operations and growth prospects.
Removed
The market transition away from LIBOR to an alternative reference rate, such as SOFR, is complex and could have a range of adverse effects on our business, financial condition and results of operations.
Added
It is currently expected that during 2024, and perhaps beyond, the Federal Open Market Committee of the Federal Reserve, or FOMC, will continue to monitor interest rates, in part to reduce the rate of inflation to its preferred level.
Removed
In particular, any such transition could: ● adversely affect the interest rates paid or received on, the revenue and expenses associated with, and the value of our floating-rate obligations, loans, deposits, subordinated debentures and other financial instruments tied to LIBOR rates, or other securities or financial arrangements given LIBOR’s role in determining market interest rates globally; ● prompt inquiries or other actions from regulators in respect of our preparation and readiness for the replacement of LIBOR with an alternative reference rate; ● result in disputes, litigation or other actions with counterparties regarding the interpretation and enforceability of certain fallback language, or lack of fallback language, in LIBOR-based instruments; and ● require the transition to or development of appropriate systems and analytics to effectively transition our risk management processes from LIBOR-based products to those based on the applicable alternative pricing benchmark, such as SOFR.
Added
In 2023, the FOMC increased at various dates throughout the year the target range for the federal funds rate from 4.25% to 4.50% to a range of 5.25% to 5.50%. All of these increases were expressly made in response to inflationary pressures.
Removed
We have approximately $27.5 million in loans that have interest rates tied to LIBOR, which are in the process of transitioning to SOFR. Our $21.7 million of subordinated debentures also reprice based on LIBOR and these instruments will convert to SOFR pricing.
Added
If the FOMC further increases the targeted federal funds rates, overall interest rates likely will rise, which may negatively impact the entire national economy.

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Item 2. Properties

Properties — owned and leased real estate

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Biggest changeThe Company owns its main office in Manhattan, Kansas and 27 branch offices and leases three branch offices. The Company leases the branch offices in Topeka, Wamego and Prairie Village, Kansas. The Company also leases a parking lot for one of the Dodge City branch offices it owns.
Biggest changeThe Company has opened a loan production office in Missouri. The Company owns its main office in Manhattan, Kansas and 27 branch offices and leases three branch offices. The Company leases the branch offices in Topeka, Wamego and Prairie Village, Kansas and one loan production office in Kansas City, Missouri.
Added
The Company also leases a parking lot for one of the Dodge City branch offices it owns.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

4 edited+1 added−0 removed0 unchanged
Biggest changePeriod Total number of shares purchased Average price paid per share Total number of shares purchased as part of publicly announced plans (1) Maximum number of shares that may yet be purchased under the plans (1) October 1-31, 2022 7,353 $ 25.85 7,353 178,843 November 1-30, 2022 347 25.85 347 178,496 December 1-31, 2022 - - - 178,496 Total 7,700 $ 25.47 7,700 178,496 In March 2020, our Board of Directors approved a stock repurchase plan, permitting us to repurchase up to 225,890 shares (“March 2020 Repurchase Program”).
Biggest changePeriod Total number of shares purchased Average price paid per share Total number of shares purchased as part of publicly announced plans (1) Maximum number of shares that may yet be purchased under the plans (1) October 1-31, 2023 - $ - - 178,496 November 1-30, 2023 - - - 178,496 December 1-31, 2023 3,812 19.58 3,812 174,684 Total 3,812 $ 19.58 3,812 174,684 In March 2020, our Board of Directors approved a stock repurchase plan, permitting us to repurchase up to 225,890 shares (“March 2020 Repurchase Program”).
As of December 31, 2022, there were 178,496 shares remaining to repurchase under the March 2020 Repurchase Program. Unless terminated earlier by resolution of the Board of Directors, the March 2020 Repurchase Program will expire when we have repurchased all shares authorized for repurchase thereunder. ITEM 6. [RESERVED]
As of December 31, 2023, there were 174,684 shares remaining to repurchase under the March 2020 Repurchase Program. Unless terminated earlier by resolution of the Board of Directors, the March 2020 Repurchase Program will expire when we have repurchased all shares authorized for repurchase thereunder. ITEM 6. [RESERVED]
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Our common stock has traded on the Nasdaq Global Market under the symbol “LARK” since 2001. At December 31, 2022, the Company had approximately 289 common shareholders of record and approximately 1,871 beneficial owners of our common stock.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Our common stock has traded on the Nasdaq Global Market under the symbol “LARK” since 2001. At December 31, 2023, the Company had approximately 277 common shareholders of record and approximately 2,137 beneficial owners of our common stock.
In January 2023, we declared our 86 th consecutive cash quarterly dividend of $0.21 per share. We currently have no plans to change our dividend strategy given our current capital and liquidity positions.
We currently have no plans to change our dividend strategy given our current capital and liquidity positions.
Added
In January 2024, we declared our 90 th consecutive cash quarterly dividend of $0.21 per share. We also distributed a 5% stock dividend for the 23 rd consecutive year in December 2023. As adjusted for the stock dividend, the quarterly cash dividends were $0.20 per share in 2023.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeFactors which could have a material adverse effect on operations and future prospects by us and our subsidiaries include, but are not limited to, the following: ● The effects of 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 security portfolio. ● The strength of the United States economy in general and the strength of the local economies in which we conduct our operations, including the effects of inflationary pressures and supply chain constraints on such economies, which may be less favorable than expected and may result in, among other things, a deterioration in the credit quality and value of our assets. ● The economic impact of past and any future terrorist attacks, acts of war, including the current conflict in Ukraine, or threats thereof, and the response of the United States to any such threats and attacks. ● The effects of, and changes in, federal, state and local laws, regulations and policies affecting banking, securities, consumer protection, insurance, tax, trade and monetary and financial matters. ● 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 (including the COVID-19 pandemic), and other external events. ● Our ability to retain key executives and employees and the difficulty that we may experience in replacing key executives and employees in an effective manner. ● Consumer spending and saving habits which may change in a manner that affects our business adversely. ● Our ability to successfully integrate acquired businesses and future growth. ● The costs, effects and outcomes of existing or future litigation. ● Changes in accounting policies and practices, as may be adopted by state and federal regulatory agencies and the FASB, such as the implementation of CECL. ● Our ability to effectively manage our credit risk. ● Our ability to forecast probable 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.
Biggest changeFactors which could have a material adverse effect on operations and future prospects by us and our subsidiaries include, but are not limited to, the following: ● The effects of 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 security portfolio. 40 ● The strength of the United States economy in general and the strength of the local economies in which we conduct our operations, including the effects of inflationary pressures and supply chain constraints on such economies, which may be less favorable than expected and may result in, among other things, a deterioration in the credit quality and value of our assets. ● The effects of recent developments and events in the financial services industry, including the large-scale deposit withdrawals over a short period of time at Silicon Valley Bank, Signature Bank and First Republic Bank that resulted in the failure of those institutions; ● The economic impact of past and any future terrorist attacks, acts of war, including Israeli-Palestinian conflict and the Russian invasion of Ukraine, or threats thereof, and the response of the United States to any such threats and attacks. ● The effects of, and changes in, federal, state and local laws, regulations and policies affecting banking, securities, consumer protection, insurance, tax, trade and monetary and financial matters. ● 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 (including the COVID-19 pandemic), and other external events. ● Our ability to retain key executives and employees and the difficulty that we may experience in replacing key executives and employees in an effective manner. ● Consumer spending and saving habits which may change in a manner that affects our business adversely. ● Our ability to successfully integrate acquired businesses and future growth. ● The costs, effects and outcomes of existing or future litigation. ● Changes in accounting policies and practices, as may be adopted by state and federal regulatory agencies and the FASB. ● Our ability to effectively manage our credit risk. ● Our ability to forecast probable credit losses and maintain an adequate allowance for credit 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.
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.
We are committed to developing relationships with our borrowers and providing a total banking service. 41 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.
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. 38 Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain.
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.
Risk Factors.” 39 CORPORATE PROFILE AND OVERVIEW Landmark Bancorp, Inc. is a financial holding company incorporated under the laws of the State of Delaware and is engaged in the banking business through its wholly-owned subsidiary, Landmark National Bank and in the insurance business through its wholly-owned subsidiary, Landmark Risk Management, Inc.
Risk Factors.” CORPORATE PROFILE AND OVERVIEW Landmark Bancorp, Inc. is a financial holding company incorporated under the laws of the State of Delaware and is engaged in the banking business through its wholly-owned subsidiary, Landmark National Bank and in the insurance business through its wholly-owned subsidiary, Landmark Risk Management, Inc.
Our principal operating expenses, aside from interest expense, consist of, among others, compensation and employee benefits, occupancy costs, professional fees, amortization of intangibles expense, federal deposit insurance costs, data processing expenses and provision for loan losses. We are significantly impacted by prevailing economic conditions including federal monetary and fiscal policies and federal regulations of financial institutions.
Our principal operating expenses, aside from interest expense, consist of, among others, compensation and employee benefits, occupancy costs, professional fees, amortization of intangibles expense, federal deposit insurance costs, data processing expenses and provision for credit losses. We are significantly impacted by prevailing economic conditions including federal monetary and fiscal policies and federal regulations of financial institutions.
There are no conditions or events that management believes have changed the Company’s and the Bank’s category as of the date of this report. We have $21.7 million in trust preferred securities which, in accordance with current capital guidelines, have been included in total risk-based capital as of December 31, 2022.
There are no conditions or events that management believes have changed the Company’s and the Bank’s category as of the date of this report. We have $21.7 million in trust preferred securities which, in accordance with current capital guidelines, have been included in total risk-based capital as of December 31, 2023.
Banks and bank holding companies are generally expected to operate at or above the minimum capital requirements. The Company’s and the Bank’s ratios above are well in excess of regulatory minimums. As of December 31, 2022 and 2021, the Company and the Bank also exceeded the “well capitalized” thresholds, which is the highest rating available.
Banks and bank holding companies are generally expected to operate at or above the minimum capital requirements. The Company’s and the Bank’s ratios above are well in excess of regulatory minimums. As of December 31, 2023 and 2022, the Company and the Bank also exceeded the “well capitalized” thresholds, which is the highest rating available.
The payment of dividends by any financial institution or its holding company is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations. As described above, the Bank exceeded its minimum capital requirements under applicable guidelines as of December 31, 2022.
The payment of dividends by any financial institution or its holding company is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations. As described above, the Bank exceeded its minimum capital requirements under applicable guidelines as of December 31, 2023.
The National Bank Act imposes limitations on the amount of dividends that a national bank may pay without prior regulatory approval. Generally, the amount is limited to the bank’s current year’s net earnings plus the adjusted retained earnings for the two preceding years.
The National Bank Act imposes limitations on the amount of dividends that a national bank may pay without prior regulatory approval. Generally, the amount is limited to the bank’s current year’s net earnings plus the adjusted retained earnings for the three preceding years.
Factors influencing lending activities include the demand for housing and the interest rate pricing competition from other lending institutions. Currently, our business consists of ownership of the Bank, with its main office in Manhattan, Kansas and thirty additional branch offices in central, eastern, southeast and southwest Kansas, and our ownership of Landmark Risk Management, Inc.
Factors influencing lending activities include the demand for housing and the interest rate pricing competition from other lending institutions. Currently, our business consists of ownership of the Bank, with its main office in Manhattan, Kansas and thirty one additional offices in central, eastern, southeast and southwest Kansas and Missouri, and our ownership of Landmark Risk Management, Inc.
This line of credit has covenants specific to capital and other financial ratios, which the Company was in compliance with at December 31, 2022. The Company also borrowed $9.0 million from the same unrelated financial institution at a fixed rate of 6.15%. This borrowing matures on September 1, 2027 and requires quarterly principal and interest payments.
This line of credit has covenants specific to capital and other financial ratios, which the Company was in compliance with at December 31, 2023. The Company also borrowed $6.6 million from the same unrelated financial institution at a fixed rate of 6.15%. This borrowing matures on September 1, 2027 and requires quarterly principal and interest payments.
At December 31, 2022, we had subordinated debentures totaling $21.7 million and $29.4 million of repurchase agreements. At December 31, 2022, the Company had no borrowings against a $5.0 million line of credit from an unrelated financial institution maturing on November 1, 2023, with an interest rate that adjusts daily based on the prime rate less 0.50%.
At December 31, 2023, we had subordinated debentures totaling $21.7 million and $12.7 million of repurchase agreements. At December 31, 2023, the Company had no borrowings against a $5.0 million line of credit from an unrelated financial institution maturing on November 1, 2024, with an interest rate that adjusts daily based on the prime rate less 0.50%.
Competition for deposits may affect our ability to continue to increase deposit balances and could result in a decrease in our deposit balances in future periods. Certificates of deposit at December 31, 2022, scheduled to mature in one year or less totaled $78.4 million.
Competition for deposits may affect our ability to continue to increase deposit balances and could result in a decrease in our deposit balances in future periods. Certificates of deposit at December 31, 2023, scheduled to mature in one year or less totaled $163.4 million.
As of December 31, 2022, $7.7 million was available to be paid as dividends to the Company by the Bank without prior regulatory approval. Additionally, our ability to pay dividends is limited by the subordinated debentures associated with the trust preferred securities that are held by three business trusts that we control.
As of December 31, 2023, $12.9 million was available to be paid as dividends to the Company by the Bank without prior regulatory approval. Additionally, our ability to pay dividends is limited by the subordinated debentures associated with the trust preferred securities that are held by three business trusts that we control.
A capital conservation buffer, equal to 2.5% common equity Tier 1 capital, is also established above the regulatory minimum capital requirements (other than the Tier 1 leverage ratio). At December 31, 2022, the Bank maintained a leverage ratio of 8.14% and a total risk-based capital ratio of 13.44%.
A capital conservation buffer, equal to 2.5% common equity Tier 1 capital, is also established above the regulatory minimum capital requirements (other than the Tier 1 leverage ratio). At December 31, 2023, the Bank maintained a leverage ratio of 8.7% and a total risk-based capital ratio of 13.7%.
At December 31, 2022, we had no borrowings through the Federal Reserve discount window, while our borrowing capacity with the Federal Reserve was $65.4 million. We also have various other federal funds agreements, both secured and unsecured, with correspondent banks totaling approximately $30.0 million in available credit under which we had no outstanding borrowings at December 31, 2022.
At December 31, 2023, we had no borrowings through the Federal Reserve discount window, while our borrowing capacity with the Federal Reserve was $60.7 million. We also have various other federal funds agreements, both secured and unsecured, with correspondent banks totaling approximately $30.0 million in available credit under which we had no outstanding borrowings at December 31, 2023.
These liquid assets totaled $521.5 million at December 31, 2022 and $577.3 million at December 31, 2021. 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.
These liquid assets totaled $484.8 million at December 31, 2023 and $521.5 million at December 31, 2022. During periods in which we are not able to originate a sufficient amount of loans and/or periods of high principal prepayments, we generally increase our liquid assets by investing in short-term, high-grade investments.
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 $173.9 million or 13.1%, to $1.5 billion at December 31, 2022, compared to $1.3 billion at December 31, 2021.
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 $58.8 million, or 3.9%, to $1.6 billion at December 31, 2023, compared to $1.5 billion at December 31, 2022.
Our financing activities provided net cash of $6.3 million during 2022, primarily as a result of an increase in borrowings. 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.
Our financing activities provided net cash of $42.0 million during 2023, primarily as a result of an increase in borrowings. 45 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.
DIVIDENDS During the year ended December 31, 2022, we paid quarterly cash dividends of $0.20 per share to our stockholders, as adjusted to give effect to 5% stock dividends, which we distributed for the 22nd consecutive year in December 2022. The 2021 quarterly cash dividends were $0.18 per share as adjusted to give effect to 5% stock dividends.
DIVIDENDS During the year ended December 31, 2023, we paid quarterly cash dividends of $0.20 per share to our stockholders, as adjusted to give effect to 5% stock dividends, which we distributed for the 23th consecutive year in December 2023. The 2022 quarterly cash dividends were $0.19 per share as adjusted to give effect to 5% stock dividends.
At December 31, 2022, $3.3 million of loans were on non-accrual status, or 0.39% of gross loans, compared to $5.2 million, or 0.79% of gross loans, at December 31, 2021. Non-accrual loans consist of loans 90 or more days past due and certain impaired loans.
At December 31, 2023, $2.4 million of loans were on non-accrual status, or 0.25% of gross loans, compared to $3.3 million, or 0.39% of gross loans, at December 31, 2022. Non-accrual loans consist of loans 90 or more days past due and certain impaired loans.
Historically, maturing deposits have generally remained with the Bank, and we believe that a significant portion of the deposits maturing in one year or less will remain with us upon maturity in some type of deposit account. CASH FLOWS. During 2022, our cash and cash equivalents decreased by $166.1 million.
Historically, maturing deposits have generally remained with the Bank, and we believe that a significant portion of the deposits maturing in one year or less will remain with us upon maturity in some type of deposit account. CASH FLOWS. During 2023, our cash and cash equivalents increased by $3.9 million.
Net interest income is affected by both the difference between the rates of interest earned on interest-earnings assets and the rates paid on interest-bearing liabilities (“interest rate spread”) as well as the relative amounts of interest-earning assets and interest-bearing liabilities. During 2022, net interest income increased $560,000, or 1.5%, to $38.9 million compared to $38.3 million in 2021.
Net interest income is affected by both the difference between the rates of interest earned on interest-earnings assets and the rates paid on interest-bearing liabilities (“interest rate spread”) as well as the relative amounts of interest-earning assets and interest-bearing liabilities. During 2023, net interest income increased $4.4 million, or 11.3%, to $43.3 million compared to $38.9 million in 2022.
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.
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.
Loans past due 30-89 days and still accruing interest totaled $738,000, or 0.09% of gross loans, at December 31, 2022, compared to $2.0 million, or 0.30% of gross loans, at December 31, 2021.
Loans past due 30-89 days and still accruing interest totaled $1.6 million, or 0.17% of gross loans, at December 31, 2023, compared to $738,000, or 0.09% of gross loans, at December 31, 2022.
The contract amount of these standby letters of credit, which represents the maximum potential future payments guaranteed by us, was $2.7 million at December 31, 2022. 44 At December 31, 2022, we had outstanding loan commitments, excluding standby letters of credit, of $183.5 million. We anticipate that sufficient funds will be available to meet current loan commitments.
The contract amount of these standby letters of credit, which represents the maximum potential future payments guaranteed by us, was $1.6 million at December 31, 2023. At December 31, 2023, we had outstanding loan commitments, excluding standby letters of credit, of $211.8 million. We anticipate that sufficient funds will be available to meet current loan commitments.
At December 31, 2022, we had an outstanding balance of $8.2 million against our line of credit with the FHLB. At December 31, 2022, we had collateral pledged to the FHLB that would allow us to borrow $101.8 million, subject to FHLB credit requirements and policies.
At December 31, 2023, we had an outstanding balance of $58.0 million against our line of credit with the FHLB. At December 31, 2023, we had collateral pledged to the FHLB that would allow us to borrow $153.1 million, subject to FHLB credit requirements and policies.
Non-interest-bearing deposits at December 31, 2022, were $410.1 million, or 31.5% of deposits, compared to $350.0 million, or 30.5% of deposits, at December 31, 2021. Money market and checking accounts were 48.2% of our deposit portfolio and totaled $626.7 million at December 31, 2022, compared to $536.9 million, or 46.8% of deposits, at December 31, 2021.
Non-interest-bearing deposits at December 31, 2023, were $367.1 million, or 27.9% of deposits, compared to $410.1 million, or 31.5% of deposits, at December 31, 2022. Money market and checking accounts were 46.6% of our deposit portfolio and totaled $613.6 million at December 31, 2023, compared to $626.7 million, or 48.2% of deposits, at December 31, 2022.
Savings accounts increased to $170.6 million, or 13.1% of deposits, at December 31, 2022, from $155.5 million, or 13.5% of deposits, at December 31, 2021. Certificates of deposit totaled $93.3 million, or 7.2% of deposits, at December 31, 2022, compared to $106.1 million, or 9.2% of deposits, at December 31, 2021.
Savings accounts decreased to $152.4 million, or 11.6% of deposits, at December 31, 2023, from $170.6 million, or 13.1% of deposits, at December 31, 2022. Certificates of deposit totaled $183.2 million, or 13.9% of deposits, at December 31, 2023, compared to $93.3 million, or 7.2% of deposits, at December 31, 2022.
However, if we elect to defer interest payments, all deferred interest must be paid before we may pay dividends on our capital stock. 45 EFFECTS OF INFLATION Our consolidated financial statements and accompanying footnotes have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), which generally require the measurement of financial position and operating results in terms of historical dollars without consideration for changes in the relative purchasing power of money over time due to inflation.
EFFECTS OF INFLATION Our consolidated financial statements and accompanying footnotes have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), which generally require the measurement of financial position and operating results in terms of historical dollars without consideration for changes in the relative purchasing power of money over time due to inflation.
At December 31, 2022, our allowance for loan losses totaled $8.8 million, or 1.03% of gross loans outstanding, compared to $8.8 million, or 1.25% of gross loans outstanding, at December 31, 2021.
At December 31, 2023, our allowance for credit losses on loans totaled $10.6 million, or 1.12% of gross loans outstanding, compared to $8.8 million, or 1.03% of gross loans outstanding, at December 31, 2022.
Higher market interest rates have positively impacted the yield on our investment securities portfolio as our purchases yield more than maturities. Also contributing to the increased income was higher average balances, which increased from $343.1 million in 2021 to $474.7 million in 2022. Interest Expense.
Also contributing to the increase in interest income on investment securities was an increase in the average balances of investment securities, which increased from $474.7 million in 2022 to $486.3 million in 2023. Higher market interest rates have positively impacted the yield on our loans and investment securities. Interest Expense.
Our operating activities provided net cash of $24.8 million in 2022, which is primarily the result of net earnings and sales of one-to-four family residential mortgage loans. Our investing activities used net cash of $197.2 million during 2022, primarily for the purchase of investment securities.
Our operating activities provided net cash of $12.6 million in 2023, which is primarily the result of net earnings and sales of one-to-four family residential mortgage loans. Our investing activities used net cash of $50.6 million during 2023, primarily to fund loan growth.
Interest expense during 2022 increased $2.8 million, or 188.6%, to $4.3 million as compared to 2021. Interest expense on interest-bearing deposits increased $1.8 million, or 171.4%, to $2.8 million for 2022 as compared to $1.0 million in 2021.
Interest expense during 2023 increased $17.0 million, or 392.2%, to $21.4 million as compared to 2022. Interest expense on interest-bearing deposits increased $12.5 million to $15.3 million for 2023 as compared to $2.8 million in 2022.
The decrease in non-interest income was primarily the result of decreases of $7.0 million in gains on sales of loans, as originations of one-to-four family residential real estate loans declined due to lower housing inventories and higher mortgage rates, which reduced refinancing activity.
The decrease in non-interest income was primarily the result of a decrease of $1.2 million in gains on sales of one-to-four family residential real estate loans as higher interest rates and low housing inventories reduced originations of these loans, which are typically sold in the secondary market.
Even though these borrowers were experiencing moderate cash flow problems as well as some deterioration in collateral value, management believed the general allowance was sufficient to cover the risks and probable incurred losses related to such loans at December 31, 2022 and 2021, respectively.
Even though these borrowers were experiencing moderate cash flow problems as well as some deterioration in collateral value, management believed the general allowance was sufficient to cover all expected future losses expected in the loan portfolio at the balance sheet date.
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.
Aside from a few problem loans that management is working to resolve, our asset quality has remained strong over the past few years.
Net loans, excluding loans held for sale, increased $187.9 million, or 28.8%, to $841.1 million at December 31, 2022, compared to $653.2 million at December 31, 2021.
Net loans, excluding loans held for sale, increased $96.5 million, or 11.5%, to $937.6 million at December 31, 2023, compared to $841.1 million at December 31, 2022.
As of December 31, 2022 and 2021, approximately $13.0 million and $18.0 million, respectively, of loans were considered classified and assigned a risk rating of special mention, substandard or doubtful. The decrease in classified loans was primarily due to improvements in the agriculture industry.
The increase in our allowance for credit losses on loans as a percentage of gross loans outstanding was primarily due to the adoption of CECL on January 1, 2023. As of December 31, 2023 and 2022, approximately $7.5 million and $13.0 million, respectively, of loans were considered classified and assigned a risk rating of special mention, substandard or doubtful.
All per share and average share data in this section reflect the 2022 and 2021 stock dividends. Interest Income. Interest income for 2022 increased $3.4 million to $43.2 million, an increase of 8.5% as compared to 2021.
We distributed a 5% stock dividend for the 23rd consecutive year in December 2023. All per share and average share data in this section reflect the 2023 and 2022 stock dividends. Interest Income. Interest income for 2023 increased $21.5 million to $64.7 million, an increase of 49.6% as compared to 2022.
At December 31, 2022, we had $934,000 of real estate owned compared to $2.6 million at December 31, 2021. The decrease in real estate owned as of December 31, 2022 compared to December 31, 2021 was primarily due to sale of commercial real estate and a valuation allowance recorded against another commercial real estate property.
The decrease in real estate owned as of December 31, 2023 compared to December 31, 2022 was primarily due to a valuation allowance recorded against a residential real estate property. As of December 31, 2023, real estate owned consisted of a commercial building, undeveloped land and three residential real estate properties.
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.
There were no loans 90 days delinquent and accruing interest at December 31, 2023 and 2022. As part of our credit risk management, we continue to manage the loan portfolio to identify problem loans and have placed additional emphasis on commercial real estate and construction and land relationships.
Interest income on investment securities increased $3.4 million, or 56.5%, to $9.4 million during 2022, as compared to $6.0 million in 2021. The increase in interest income on investment securities was the result of higher yields on investment securities, which increased from 1.99% in 2021 to 2.15% in 2022.
The increase in interest income on investment securities was primarily the result of increased yields on investment securities, which increased from 2.15% in 2022 to 2.76% in 2023.
Also contributing to the increase in interest expense was an increase in average interest-bearing deposit balances, which increased from $765.5 million in 2021 to $804.1 million in 2022. Interest expense on borrowings increased $1.1 million, or 225.0%, to $1.6 million during 2022 as compared to $483,000 in 2021.
Interest expense on borrowings increased $4.6 million to $6.1 million during 2023, as compared to 2022, due to an increase in our average borrowings, which increased from $50.0 million in 2022 to $114.2 million in 2023. Also contributing to the increase in interest expense on borrowings were higher rates, which increased from 3.14% in 2022 to 5.37% in 2023.
Our critical accounting policies relate to the allowance for loan losses and business combinations, both of which involve significant judgment by our management. We perform periodic and systematic detailed reviews of our lending portfolio to assess overall collectability. The level of the allowance for loan losses reflects our estimate of the incurred losses in our loan portfolio.
Our critical accounting policies relate to the allowance for credit losses and business combinations, both of which involve significant judgment by our management. On January 1, 2023, we adopted CECL, which changed our allowance for credit losses from an incurred loss methodology to an expected loss methodology.
Our total cost of interest-bearing deposits increased from 0.13% during 2021 to 0.35% during 2022 primarily as a result of higher rates paid on money market and checking accounts. Most of the increases in rates was related to accounts that have rates that reprice based on market indexes.
Our total cost of interest-bearing deposits increased from 0.35% during 2022 to 1.71% during 2023 as a result of higher rates and increased competition for deposits.
Contributing to higher interest expense on borrowings were higher average outstanding borrowings, which increased from $27.6 million in 2021 to $50.0 million during 2022 and higher rates on those borrowings. Net Interest Income. Net interest income represents the difference between income derived from interest-earning assets and the expense incurred on interest-bearing liabilities.
Higher market interest rates have negatively impacted our cost of interest-bearing deposits and borrowings. Net Interest Income. Net interest income represents the difference between income derived from interest-earning assets and the expense incurred on interest-bearing liabilities.
Supply chain constraints, labor shortages and geopolitical events have contributed to the rising inflation levels which are impacting all areas of the economy both nationally and locally. The Company’s allowance for loan losses included estimates of the economic impact of these conditions and other qualitative factors on our loan portfolio.
Supply chain constraints, labor shortages and geopolitical events have contributed to the rising inflation levels which are impacting all areas of the economy both nationally and locally. While nationally commercial real estate has been negatively impacted by higher interest rates and vacancies, the Company’s markets have not been impacted as much as other areas of the United States.
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.
The Company is currently marketing all of the remaining properties in real estate owned. Liability Distribution. Our primary ongoing sources of funds are deposits, FHLB borrowings, proceeds from principal and interest payments on loans and investment securities and proceeds from the sale of mortgage loans and investment securities.
We recorded net loan recoveries of $16,000 during 2022 compared to net loan charge-offs of $500,000 during 2021. Non-interest Income. Total non-interest income was $13.7 million in 2022, a decrease of $8.6 million, or 38.5%, compared to 2021.
Total non-interest income was $13.2 million in 2023, a decrease of $470,000, or 3.4%, compared to 2022.
The increase in deposits was primarily due to the Freedom acquisition. 43 Total borrowings increased $39.2 million, or 134.9%, to $68.3 million at December 31, 2022, from $29.1 million at December 31, 2021. The increase in borrowings was primarily due to $22.2 million of repurchase agreements assumed in the Freedom acquisition and borrowings used to finance the purchase.
The increase in deposits was primarily due to higher balances of brokered deposits. Total borrowings increased $30.8 million, or 45.1%, to $99.0 million at December 31, 2023, from $68.3 million at December 31, 2022. The increase in borrowings was primarily due to funding loan growth.
Actual Actual Minimum Minimum (dollars in thousands) amount percent amount percent(1) Leverage $ 122,275 8.14 % $ 60,100 4.00 % Common Equity Tier 1 Capital 101,275 10.37 % 68,352 7.00 % Tier 1 Capital 122,275 12.52 % 82,999 8.50 % Total risk-based Capital 131,236 13.44 % 102,528 10.50 % (1) The minimum required percent includes a capital conservation buffer of 2.5%.
As shown by the following table, the Bank’s capital exceeded the minimum capital requirements in effect at December 31, 2023, including the capital conservation buffers. 46 Actual Actual Minimum Minimum (dollars in thousands) amount percent amount percent(1) Leverage $ 134,422 8.68 % $ 61,951 4.00 % Common Equity Tier 1 Capital 134,422 12.74 % 73,833 7.00 % Tier 1 Capital 134,422 12.74 % 89,655 8.50 % Total risk-based Capital 144,468 13.70 % 110,750 10.50 % (1) The minimum required percent includes a capital conservation buffer of 2.5%.
We experienced an increase of $152.2 million, or 13.2% in total deposits during 2022, to $1.3 billion at December 31, 2022, from $1.1 billion at December 31, 2021.
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 $15.6 million, or 1.2% in total deposits during 2023, to $1.3 billion at December 31, 2023, from $1.1 billion at December 31, 2022.
Also contributing to the increase in non-interest expense were increases of $636,000 in occupancy and equipment, an increase of $248,000 in compensation and benefits and $262,000 in other non-interest expense. These increases were primarily due to the costs associated with operating a new branch facility acquired in the Freedom acquisition during the fourth quarter of 2022.
The increase in non-interest expense in 2023 compared to 2022 was mainly due to higher compensation and benefits, occupancy and equipment and data processing due to the acquisition of Freedom Bank. Also contributing to the increases were higher amortization costs associated with the purchase accounting entries related to the acquisition. Professional fees increased due higher consulting costs and audit fees.
Offsetting those increases was a decrease of $436,000 in data processing expenses which was due to a new contract with our main technology provider during 2022. INCOME TAXES. We recorded income tax expense of $1.4 million in 2022 compared to $4.8 million in 2021.
Offsetting those increases was a $3.4 million decrease in acquisition costs associated with the acquisition of Freedom Bank. INCOME TAXES. We recorded income tax expense of $2.0 million in 2023 compared to $1.4 million in 2022. The effective tax rate increased from 12.7% in 2022 to 13.8% in 2023, primarily due to higher earnings before income taxes.
Interest income on loans decreased $139,000, or 0.4%, to $33.5 million for 2022 as compared to $33.6 million in 2021, due primarily to a decline of $4.8 million in income on PPP loans.
Interest income on loans increased $18.3 million, or 54.6%, to $51.8 million for 2023, as compared to 2022 due to higher yields and average balances. Our yields increased from 4.77% in 2022 to 5.81% in 2023.
Net interest income for 2022 increased $560,000 to $38.9 million, or 1.5% higher than the $38.3 million recorded for 2021. The increase in net interest income was primarily due higher income on our investment securities which increased as a result of higher yields and average balances. We distributed a 5% stock dividend for the 22nd consecutive year in December 2022.
Net earnings for 2023 increased $2.4 million, or 23.9%, to $12.2 million as compared to $9.9 million for 2022. The increase in net earnings during 2023 was primarily related to an increase in interest income due to an increase in average interest earning assets and higher yields on those assets.
The increase in our total assets was primarily the result of the acquisition of Freedom. Investment securities available-for-sale increased $108.6 million, or 28.5%, from $380.7 million at December 31, 2021 to $489.3 million at December 31, 2022.
Investment securities available-for-sale decreased $36.5 million, or 7.5%, from $489.3 million at December 31, 2022 to $452.8 million at December 31, 2023. 44 The allowance for credit losses is established through a provision for credit losses based on our economic projections.
Removed
While these estimates are based on substantive methods for determining allowance requirements, actual outcomes may differ significantly from estimated results. Additional explanation of the methodologies used in establishing this allowance is provided in the “Asset Quality and Distribution” section.
Added
The CECL model is subject to changes in our economic forecast, which can impact the calculation of our allowance for credit losses substantially. Our most significant critical accounting estimates relate to the allowance for credit losses on loans, which involve significant judgment by our management.
Removed
Accounting for business combinations requires us to make estimates and assumptions to record the net assets acquired and liabilities assumed at fair value. Goodwill is recognized for the excess purchase price over the estimated fair value of acquired net assets. 40 COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2022 AND DECEMBER 31, 2021 SUMMARY OF PERFORMANCE.
Added
The analysis is updated on a quarterly basis based on historical loss information adjusted for current conditions and reasonable and supportable forecasts.
Removed
Net earnings for 2022 decreased $8.1 million, or 45.2%, to $9.9 million as compared to $18.0 million for 2021. The decrease in net earnings was primarily driven by lower gains on sales of loans, costs associated with the acquisition of Freedom and losses on sales of investment securities.
Added
Additionally, the Company considers changes in economic and business conditions, changes in policies, procedures and underwriting, changes in management or staff and their related experience, changes in nature and volume of the portfolio, changes in loan review, changes in collateral values, changes in past due and nonaccrual loans, changes in competition, legal and regulatory issues, changes in concentrations and other qualitative factors, which impacts the estimate of future credit losses.
Removed
Gains on sales of one-to-four family residential real estate loans declined as a result of higher interest rates and low housing inventories. During 2022, a loss of $1.1 million was recorded on the sales of investment securities as the lowest yielding investment securities were strategically sold to reinvest into higher yielding assets.
Added
These qualitative factors comprise a significant portion of the Company’s allowance for credit losses. Based on a sensitivity analysis of all collectively evaluated loan pools, a five basis point change in the qualitative risk factors across all loan categories would result in an increase or decrease of $474,000 or 4.5% in the allowance for credit losses as of December 31,2023.
Removed
The yield on PPP loans increased from 8.16% in 2021 to 16.86% in 2022, however, the higher yields were offset by lower average balances which declined from $67.6 million in 2021 to $4.0 million in 2022. As of December 31, 2022, all but one PPP loan had been forgiven by the SBA.
Added
See Note 1 Summary of Significant Accounting Policies for a more detailed description methodology and impact of adoption. We have completed several business and asset acquisitions since 2002, which have generated significant amounts of goodwill.
Removed
Our average loan balances increased from $689.9 million in 2021 to $702.2 million in 2022 as growth in other loan types offset the decline in PPP loans. Additionally, the accretion of purchase accounting on loans , which adjusted acquired loans to market rates, increased by $435,000 in 2022, as compared to 2021, due to the acquisition of Freedom.
Added
The initial value assigned to goodwill is the residual of the purchase price over the fair value of all identifiable tangible and intangible assets acquired and liabilities assumed. Goodwill is not amortized; however, it is tested for impairment at each calendar year end or more frequently when events or circumstances dictate.
Removed
Our net interest margin, on a tax-equivalent basis, decreased to 3.21% during 2022 from 3.39% during 2021.
Added
The Company performed a qualitative assessment of factors to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount as of December 31, 2023.
Removed
Our net interest margin increased from 2.99% in the first quarter of 2022 to 3.05% in the second quarter of 2022, 3.21% in the third quarter of 2022, and 3.53% in the fourth quarter of 2022 as our assets began to reprice faster than our cost of funds.
Added
This assessment included a review of macroeconomic conditions, industry and market specific considerations and other relevant factors including the Company’s market capitalization, with control premiums and valuation multiples, compared to recent financial industry acquisition multiples for similar institutions to estimate the fair value of the Company’s single reporting unit.
Removed
Our net interest margin has been positively impacted by PPP loans over the past three years, however, the impact of these loans on net interest margin going forward will be minimal. While the rise in interest rates should result in higher yields on our assets, these improvements could be offset by increased competition for loans and deposits.
Added
The Company’s qualitative impairment test indicated that its goodwill was not impaired. The Company can make no assurances that future impairment tests will not result in goodwill impairments. 42 COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2023 AND DECEMBER 31, 2022 SUMMARY OF PERFORMANCE.
Removed
Additionally, the deposit balance increases we have seen over the past three years may reverse resulting in the need for higher cost funding. 41 Provision for Loan Losses. We maintain, and our Board of Directors monitors, an allowance for losses on loans.
Added
The increase in assets was due primarily to our acquisition of Freedom Bank on October 1, 2022 and organic growth. Higher interest rates and average balances of interest bearing liabilities also increased our interest expense. The acquisition of Freedom Bank also contributed to an increase in non-interest expense in 2023.
Removed
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.
Added
The increase in interest income on loans was also driven by an increase in average loan balances, which increased from $702.2 million in 2022 to $891.5 million in 2023. Interest income on investment securities increased $3.3 million, or 34.5%, to $12.7 million during 2023, as compared to 2022.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

6 edited+2 added−2 removed4 unchanged
Biggest changeThis position is then subjected to a shift in interest rates of 100, 200 and 300 basis points rising and 100 basis points falling with an impact to our net interest income on a one-year horizon as follows: As of December 31, 2022 As of December 31, 2021 Scenario Dollar change in net interest income ($000’s) Percent change in net interest income Dollar change in net interest income ($000’s) Percent change in net interest income 300 basis point rising $ (3,245 ) (6.6 )% $ 3,356 9.9 % 200 basis point rising (2,218 ) (4.5 )% $ 2,234 6.6 % 100 basis point rising (1,215 ) (2.5 )% $ 1,157 3.4 % 100 basis point falling $ 747 1.5 % $ (845 ) (2.5 )% 200 basis point falling $ 434 90.0 % NM NM 300 basis point falling (67 ) (0.1 )% NM NM The 200 and 300 basis point falling scenarios were considered to be not meaningful (“NM”) as of December 31, 2021.
Biggest changeThis position is then subjected to a shift in interest rates of 100, 200 and 300 basis points rising and 100 basis points falling with an impact to our net interest income on a one-year horizon as follows: As of December 31, 2023 As of December 31, 2022 Scenario Dollar change in net interest income ($000’s) Percent change in net interest income Dollar change in net interest income ($000’s) Percent change in net interest income 300 basis point rising $ (5,924 ) (13.8 )% $ (3,245 ) (6.6 )% 200 basis point rising $ (4,012 ) (9.3 )% $ (2,218 ) (4.5 )% 100 basis point rising $ (2,122 ) (4.9 )% $ (1,215 ) (2.5 )% 100 basis point falling $ 17 0.0 % $ 747 1.5 % 200 basis point falling $ (909 ) (2.1 )% $ 434 90.0 % 300 basis point falling $ (2,037 ) (4.7 )% $ (67 ) (0.1 )% ASSET/LIABILITY MANAGEMENT Interest rate “gap” analysis is a common, though imperfect, measure of interest rate risk which measures the relative dollar amounts of interest-earning assets and interest-bearing liabilities which reprice within a specific time period, either through maturity or rate adjustment.
Loans include prepayment assumptions based on historical prepayment speeds. Mortgage-backed securities include published prepayment assumptions, while all other investments assume no prepayments. 46 Certificates of deposit reflect contractual maturities only. Money market, checking and savings accounts reprice immediately in the first period. Borrowing reflects contractual repricing and maturities.
Loans include prepayment assumptions based on historical prepayment speeds. Mortgage-backed securities include published prepayment assumptions, while all other investments assume no prepayments. Certificates of deposit reflect contractual maturities only. Money market, checking and savings accounts reprice immediately in the first period. Borrowing reflects contractual repricing and maturities.
A “positive” gap for a given period means that the amount of interest-earning assets maturing or otherwise repricing within that period exceeds the amount of interest-bearing liabilities maturing or otherwise repricing during that same period.
The “gap” is the difference between the amounts of such assets and liabilities that are subject to such repricing. A “positive” gap for a given period means that the amount of interest-earning assets maturing or otherwise repricing within that period exceeds the amount of interest-bearing liabilities maturing or otherwise repricing during that same period.
In the past, we have been successful in meeting the interest rate sensitivity objectives set forth in our policy. Simulation models are prepared to determine the impact on net interest income for the coming twelve months, including using rates at December 31, 2022 and forecasting volumes for the twelve-month projection.
Simulation models are prepared to determine the impact on net interest income for the coming twelve months, including using rates at December 31, 2023 and forecasting volumes for the twelve-month projection.
Our Asset/Liability Management Committee monitors the interest rate sensitivity of our balance sheet using earnings simulation models and interest sensitivity “gap” analysis. We have set policy limits of interest rate risk to be assumed in the normal course of business and monitor such limits through our simulation process.
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. 47 In the past, we have been successful in meeting the interest rate sensitivity objectives set forth in our policy.
We have been successful in meeting the interest sensitivity objectives set forth in our policy. This has been accomplished primarily by managing the assets and liabilities while maintaining our traditional high credit standards.
We have been successful in meeting the interest sensitivity objectives set forth in our policy.
Removed
ASSET/LIABILITY MANAGEMENT Interest rate “gap” analysis is a common, though imperfect, measure of interest rate risk which measures the relative dollar amounts of interest-earning assets and interest-bearing liabilities which reprice within a specific time period, either through maturity or rate adjustment. The “gap” is the difference between the amounts of such assets and liabilities that are subject to such repricing.
Added
Our Asset/Liability Management Committee monitors the interest rate sensitivity of our balance sheet using earnings simulation models and interest sensitivity “gap” analysis.
Removed
INTEREST-EARNING ASSETS AND INTEREST-BEARING LIABILITIES REPRICING SCHEDULE (“GAP” TABLE) As of December 31, 2022 3 months or less 3 to 12 months 1 to 5 years Over 5 years Total (Dollars in thousands) Interest-earning assets: Investment securities $ 16,798 $ 31,437 $ 261,504 $ 183,091 $ 492,830 Loans 198,950 350,737 285,139 8,811 843,637 Total interest-earning assets $ 215,748 $ 382,174 $ 546,643 $ 191,902 $ 1,336,467 Interest-bearing liabilities: Certificates of deposit $ 30,825 $ 47,607 $ 14,820 $ 26 $ 93,278 Money market and checking accounts 626,659 - - - 626,659 Savings accounts 170,570 - - - 170,570 Borrowed money 51,315 9,179 7,759 - 68,253 Total interest-bearing liabilities $ 879,369 $ 56,786 $ 22,579 $ 26 $ 958,760 Interest sensitivity gap per period $ (663,621 ) $ 325,388 $ 524,064 $ 191,876 $ 377,707 Cumulative interest sensitivity gap (663,621 ) (338,233 ) 185,831 377,707 Cumulative gap as a percent of total interest-earning assets (49.65 )% (25.31 )% 13.90 % 28.26 % Cumulative interest sensitive assets as a percent of cumulative interest sensitive liabilities 24.53 % 63.87 % 119.38 % 139.40 % 47
Added
This has been accomplished primarily by managing the assets and liabilities while maintaining our traditional high credit standards. 48 INTEREST-EARNING ASSETS AND INTEREST-BEARING LIABILITIES REPRICING SCHEDULE (“GAP” TABLE) As of December 31, 2023 3 months or less 3 to 12 months 1 to 5 years Over 5 years Total (Dollars in thousands) Interest-earning assets: Investment securities $ 4,805 $ 32,340 $ 236,365 $ 182,814 $ 456,324 Loans 228,622 192,229 431,353 96,452 948,656 Total interest-earning assets $ 233,427 $ 224,569 $ 667,718 $ 279,266 $ 1,404,980 Interest-bearing liabilities: Certificates of deposit $ 91,903 $ 71,536 $ 19,713 $ 2 $ 183,154 Money market and checking accounts 613,613 - - - 613,613 Savings accounts 152,381 - - - 152,381 Borrowed money 79,241 14,201 5,585 - 99,027 Total interest-bearing liabilities $ 937,138 $ 85,737 $ 25,298 $ 2 $ 1,048,175 Interest sensitivity gap per period $ (703,711 ) $ 138,832 $ 642,420 $ 279,264 $ 356,805 Cumulative interest sensitivity gap (703,711 ) (564,879 ) 77,541 356,805 Cumulative gap as a percent of total interest-earning assets (50.09 )% (40.21 )% 5.52 % 25.40 % Cumulative interest sensitive assets as a percent of cumulative interest sensitive liabilities 24.91 % 44.78 % 107.40 % 134.04 % 49

Other LARK 10-K year-over-year comparisons