LANDMARK BANCORP INC – 10-Q – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview. Landmark Bancorp, Inc. is a financial holding company incorporated
under the laws of the State of Delaware and is engaged in the banking business
through its wholly owned subsidiary, Landmark National Bank, and in the
insurance business through its wholly owned subsidiary, Landmark Risk
Management, Inc. References to the "Company," "we," "us," and "our" refer
collectively to Landmark Bancorp, Inc., Landmark National Bank and Landmark Risk
Management, Inc. The Company is listed on the Nasdaq Global Market under the
symbol "LARK." The Bank is dedicated to providing quality financial and banking
services to its local communities. Our strategy includes continuing a tradition
of holding and acquiring quality assets while growing our commercial, commercial
real estate and agriculture loan portfolios. We are committed to developing
relationships with our borrowers and providing a total banking service.



The Bank is principally engaged in the business of attracting deposits from the
general public and using such deposits, together with borrowings and other
funds, to originate one-to-four family residential real estate, construction and
land, commercial real estate, commercial, agriculture, municipal and consumer
loans. Although not our primary business function, we invest in certain
investment and mortgage-related securities using deposits and other borrowings
as funding sources.

Landmark Risk Management, Inc., which was formed and began operations on in
2017, is a Nevada-based captive insurance company which provides property and
casualty insurance coverage to the Company and the Bank for which insurance may
not be currently available or economically feasible in the current insurance
marketplace. Landmark Risk Management, Inc. is subject to the regulations of the
State of Nevada and undergoes periodic examinations by the Nevada Division

of
Insurance.

Our results of operations depend generally on net interest income, which is the
difference between interest income from interest-earning assets and interest
expense on interest-bearing liabilities. Net interest income is affected by
regulatory, economic and competitive factors that influence interest rates, loan
demand and deposit flows. In addition, we are subject to interest rate risk to
the degree that our interest-earning assets mature or reprice at different
times, or at different speeds, than our interest-bearing liabilities. Our
results of operations are also affected by non-interest income, such as service
charges, loan fees, gains from the sale of newly originated loans, gains or
losses on investments and certain other non-interest related items. Our
principal operating expenses, aside from interest expense, consist of
compensation and employee benefits, occupancy costs, professional fees, data
processing expenses and provision for loan losses.

We are significantly impacted by prevailing economic conditions, including
federal monetary and fiscal policies, and federal regulations of financial
institutions. Deposit balances are influenced by numerous factors such as
competing investments, the level of income and the personal rate of savings
within our market areas. Factors influencing lending activities include the
demand for housing and the interest rate pricing competition from other lending
institutions.

Currently, our business consists of ownership of the Bank, with its main office
in Manhattan, Kansas and twenty- nine additional branch offices in central,
eastern, southeast and southwest Kansas, and our ownership of Landmark Risk
Management, Inc.

In July 2022, we declared our 84th consecutive quarterly dividend, and we
currently have no plans to change our dividend strategy given our current
capital and liquidity position. However, while we have achieved a strong capital
base and expect to continue operating profitably, this is dependent upon the
performance of the economy. In addition, as disclosed in our Annual Report on
Form 10-K for the year ended December 31, 2021, we will not be permitted to make
capital distributions (including for dividends and repurchases of stock) or pay
discretionary bonuses to executive officers without restriction if we do not
maintain 2.5% in Common Equity Tier 1 Capital attributable to a capital
conservation buffer, a standard we exceeded at June 30, 2022.



Critical Accounting Policies. Critical accounting policies are those which are
both most important to the portrayal of our financial condition and results of
operations and require our management's most difficult, subjective or complex
judgments, often as a result of the need to make estimates about the effect of
matters that are inherently uncertain. Our critical accounting policies relate
to the allowance for loan losses and the accounting for income taxes, each of
which involve significant judgment by our management. There have been no
material changes to the critical accounting policies included under Item 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in our Annual Report on Form 10-K for the year ended December 31,
2021, filed with the Securities and Exchange Commission on March 22, 2022.

26







Summary of Results. During the second quarter of 2022, we recorded net earnings
of $3.0 million, which was a decrease of $2.0 million, or 39.1%, from the $5.0
million of net earnings in the second quarter of 2021. During the first six
months of 2022, we recorded net earnings of $6.2 million, which was a decrease
of $4.1 million, or 40.4%, from the $10.3 million of net earnings in the first
six months of 2021. The decrease in net earnings during 2022 was primarily due
to lower interest income on PPP loans and a decrease in gains on sales of
mortgage loans. Interest income on PPP loans declined as our balances decreased
as a result of the forgiveness of these loans. Gains on sales of mortgage loans
decreased as originations of residential real estate loans declined. Decreased
loan originations mainly resulted from low housing inventories coupled with
increasing mortgage interest rates during 2022, which reduced refinancing
activity.



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



                                         As of or for the                  As of or for the

(Dollars in thousands, except           three months ended                

six months ended
per share amounts)                           June 30,                          June 30,
                                       2022             2021             2022            2021
Net earnings:
Net earnings                       $       3,033     $     4,980     $      6,166     $    10,347

Basic earnings per share (1)       $        0.61     $      1.00     $       1.24     $      2.07
Diluted earnings per share (1)     $        0.61     $      0.99     $     

 1.23     $      2.07
Earnings ratios:
Return on average assets (2)                0.93 %          1.59 %           0.95 %          1.68 %
Return on average equity (2)               10.04 %         15.40 %           9.81 %         16.22 %
Equity to total assets                      9.08 %         10.58 %           9.08 %         10.58 %
Net interest margin (2) (3)                 3.05 %          3.54 %           3.02 %          3.53 %
Dividend payout ratio                      34.43 %         19.23 %          34.15 %         18.43 %

(1) Per share values for the periods ended June 30, 2021 have been adjusted to

give effect to the 5% dividend paid during December 2021.

(2) Ratios have been annualized and are not necessarily indicative of the

results for the entire year.

(3) Net interest margin is presented on a fully tax equivalent basis, using a

      21% federal tax rate.

Interest Income. Interest income of $9.4 million for the quarter ended June 30,
2022 decreased $900,000, or 9.0%, as compared to the same period of 2021.
Interest income on loans decreased $1.7 million, or 19.0%, to $7.2 million for
the quarter ended June 30, 2022, compared to the same period of 2021 due
primarily to lower yields and average loan balances. Our yields decreased from
5.00% in the second quarter of 2021 to 4.40% in the second quarter of 2022. The
decrease in yields on loans was driven by a decrease in interest income on PPP
loans, which decreased from $2.2 million in the second quarter of 2021 to
$178,000 in the second quarter of 2022. Also contributing to lower interest
income on loans was a decrease in our average loan balances, which decreased
from $709.9 million in the second quarter of 2021 to $653.0 million in the
second quarter of 2022, primarily as a result of PPP loan forgiveness. Our
average loan balances included average PPP loans of $4.2 million in the second
quarter of 2022 and $97.5 million in the second quarter of 2021. Interest income
on investment securities increased $751,000, or 49.3%, to $2.3 million for the
second quarter of 2022, as compared to $1.5 million in the same period of 2021.
The increase in interest income on investment securities was primarily the
result of an increase in the average balances of investment securities which
increased from $334.9 million in the second quarter of 2021 to $477.0 million in
the second quarter of 2022. Partially offsetting average balances was lower
yields on investment securities, which decreased from 2.02% in the second
quarter of 2021 to 1.97% in the second quarter of 2022.



Interest income of $18.4 million for the six months ended June 30, 2022
decreased $2.0 million, or 9.6%, as compared to the same period of 2021.
Interest income on loans decreased $2.9 million, or 16.8%, to $14.3 million for
the six months ended June 30, 2022, compared to the same period of 2021 due
mainly to a decrease in our average loan balances, which decreased from $720.0
million during the first six months of 2021 to $644.6 million during the first
six months of 2022. Also contributing to lower interest income were lower yields
on loans, which decreased from 4.83% in the six months ended June 30, 2021 to
4.49% during the six months ended June 30, 2022. Our average loan balances
included average PPP loans of $7.8 million in the six months ended June 30, 2022
compared to $104.2 million the same period of 2021. Interest income on PPP loans
decreased from $3.3 million in the first six months of 2021 to $658,000 in the
first six months of 2022. The yield on PPP loans increased from 6.37% in the
first half of 2021 to 8.47% in the first half of 2022. Interest income on
investment securities increased $937,000, or 30.1%, to $4.0 million for the
first six months of 2022, as compared to $3.1 million in the same period of
2021. The increase in interest income on investment securities was the result of
higher average balances, which increased from $318.4 million in the first six
months of 2021 compared to $449.7 million in the first six months of 2022.
Partially offsetting the higher average balances of investment securities were
lower yields, which decreased from 2.19% in the first six months of 2021 to
1.90% in the first six months of 2022.



27







Interest Expense. Interest expense during the quarter ended June 30, 2022
increased $149,000, or 39.0%, to $531,000 as compared to the same period of
2021. Interest expense on interest-bearing deposits increased $97,000, or 37.2%,
to $358,000 for the quarter ended June 30, 2022 as compared to the same period
of 2021. Our total cost of interest-bearing deposits increased from 0.14% in the
second quarter of 2021 to 0.18% in the second quarter of 2022 as a result of
higher rates paid on money market and checking accounts, as the rates repriced
based on market indexes. Also contributing to higher interest expense was an
increase in average interest-bearing deposit balances, which increased from
$771.7 million in the second quarter of 2021 to $791.3 million in the second
quarter of 2022. For the second quarter of 2022, interest expense on borrowings
increased $52,000, or 43.0%, to $173,000 as compared to the same period of 2021
due to an increase in our average borrowings, which increased from $26.0 million
in the second quarter of 2021 to $28.6 million in the same period of 2022. Also
contributing to the increase in interest expense on borrowings were higher
rates, which increased from 1.86% in the second quarter of 2021 to 2.42% in

the
same period of 2022.



Interest expense during the six months ended June 30, 2022 increased $68,000, or
8.7%, to $852,000 as compared to the same period of 2021. Interest expense on
interest-bearing deposits increased $11,000, or 2.0%, to $553,000 for the six
months ended June 30, 2022 as compared to the same period of 2021. The increase
in interest expense on interest-bearing deposits was the result of higher rates
paid on money market and checking accounts, as the rates reprice based on market
indexes. The increase in interest expense on deposits was due to an increase in
average interest-bearing deposit balances, which increased from $767.2 million
in the first six months of 2021 to $791.8 million in the same period of 2022.
For the first six months of 2022, interest expense on borrowings increased
$57,000, or 23.6%, to $299,000 as compared to the same period of 2021, due
primarily to an increase in our average outstanding borrowings, which increased
from $26.8 million in the first six months of 2021 to $28.6 million in the first
six months of 2022. Also contributing to the higher interest expense on
borrowings were higher average rates on our borrowings, which increased to 2.11%
for the first six months of 2022 compared to 1.82% for the same period of 2021.



Net Interest Income. Net interest income decreased $1.1 million, or 10.8%, to
$8.9 million for the second quarter of 2022 compared to the same period of 2021.
The decrease in net interest income was primarily a result of a decrease in
interest on loans, which declined $1.7 million or 19.0%. Compared to the same
period last year, the decrease in loan interest income was primarily due to
lower interest and fees earned on PPP loans. Interest and fees on PPP loans in
the second quarter of 2022 totaled $178,000 compared to $2.2 million in the same
period last year. Net interest margin, on a tax-equivalent basis, decreased from
3.54% in the second quarter of 2021 to 3.05% in the same period of 2022.



Net interest income decreased $2.0 million, or 10.4%, to $17.5 million for the
first six months of 2022 compared to the same period of 2021. The decrease was
primarily due to lower interest and fees earned on PPP loans, which decreased
from $3.3 million in the first six months of 2021 to $658,000 in the same period
of 2022. Net interest margin, on a tax-equivalent basis, decreased from 3.53% in
the first six months of 2021 to 3.02% in the same period of 2022.



The increase in market interest rate should continue to increase our net
interest margin as a result of higher yields on loans and investment securities
exceeding the increase in our cost of funds. Our net interest margin increased
from 2.99% in the first quarter of 2022 to 3.05% in the second quarter of 2022
as our assets began to reprice faster than our cost of funds. Our net interest
margin has been positively impacted by PPP loans over the past couple of years,
however, the impact of these loans on net interest margin going forward is
expected to be minimal. While the rise in interest rates should result in
increased net interest income and net interest margin, these improvements could
be offset by increased competition for loans and deposits. Additionally, the
deposit balance increases we have seen over the past two years may reverse
resulting in the need for higher cost funding.



28

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

                                            Three months ended                              Three months ended
                                               June 30, 2022                                  June 30, 2021
                                  Average        Income/         Average          Average        Income/        Average
                                  balance        expense        yield/cost        balance        expense       yield/cost
(Dollars in thousands)
Assets
Interest-earning assets:
Interest-bearing deposits at
banks                           $    66,048     $      126             0.77 %   $   110,288     $      32             0.12 %
Investment securities (1)           477,035          2,338             1.97 %       334,936         1,689             2.02 %
Loans receivable, net (2)           653,013          7,161             4.40 %       709,872         8,846             5.00 %
Total interest-earning assets     1,196,096          9,625             3.23 %     1,155,096        10,567             3.67 %
Non-interest-earning assets         111,016                                          98,899
Total                           $ 1,307,112                                     $ 1,253,995

Liabilities and Stockholders'
Equity
Interest-bearing liabilities:
Money market and checking       $   521,148     $      274             0.21 %   $   506,479     $     126             0.10 %
Savings accounts                    169,618             10             0.02 %       145,498            13             0.04 %
Certificates of deposit             100,491             74             0.30 %       119,751           122             0.41 %
Total interest-bearing
deposits                            791,257            358             0.18 %       771,728           261             0.14 %
Subordinate debentures and
other borrowings                     21,651            165             3.06 %        21,651           119             2.20 %
Repurchase agreements                 6,981              8             0.46 %         4,387             2             0.18 %
Total interest-bearing
liabilities                         819,889            531             0.26 %       797,766           382             0.19 %
Non-interest-bearing
liabilities                         366,076                                         326,485
Stockholders' equity                121,147                                         129,744
Total                           $ 1,307,112                                     $ 1,253,995

Interest rate spread (3)                                               2.97 %                                         3.48 %
Net interest margin (4)                         $    9,094             3.05 %                   $  10,185             3.54 %
Tax-equivalent interest -
imputed                                                196                                            205
Net interest income                             $    8,898                                      $   9,980

Ratio of average
interest-earning assets to
average interest-bearing
liabilities                                                           145.9 %                                        144.8 %

(1) Income on tax exempt securities is presented on a fully tax-equivalent

basis, using a 21% federal tax rate.

(2) Includes loans classified as non-accrual. Income on tax-exempt loans is

presented on a fully tax-equivalent basis, using a 21% federal tax rate.

(3) Interest rate spread represents the difference between the average yield

earned on interest-earning assets and the average rate paid on

interest-bearing liabilities.

(4) Net interest margin represents annualized, tax-equivalent net interest

      income divided by average interest-earning assets.




29







                                             Six months ended                               Six months ended
                                              June 30, 2022                                  June 30, 2021
                                  Average        Income/        Average          Average        Income/        Average
                                  balance        expense       yield/cost        balance        expense       yield/cost
(Dollars in thousands)
Assets
Interest-earning assets:
Interest-bearing deposits at
banks                           $   103,314     $     188             0.37 %   $   104,864     $      64             0.12 %
Investment securities (1)           449,667         4,241             1.90 %       318,353         3,451             2.19 %
Loans receivable, net (2)           644,569        14,357             4.49 %       719,985        17,255             4.83 %
Total interest-earning assets     1,197,550        18,786             3.16 %     1,143,202        20,770             3.66 %
Non-interest-earning assets         108,896                                         98,953
Total                           $ 1,306,446                                    $ 1,242,155

Liabilities and Stockholders'
Equity
Interest-bearing liabilities:
Money market and checking       $   523,086     $     374             0.14

%   $   503,805     $     251             0.10 %
Savings accounts                    166,039            20             0.02 %       139,186            24             0.03 %
Certificates of deposit             102,678           159             0.31 %       124,252           267             0.43 %
Total interest-bearing
deposits                            791,803           553             0.14 %       767,243           542             0.14 %
Subordinate debentures and
other borrowings                     21,651           288             2.68 %        21,654           238             2.22 %
Repurchase agreements                 6,903            11             0.32 %         5,151             4             0.16 %
Total interest-bearing
liabilities                         820,357           852             0.21 %       794,048           784             0.20 %
Non-interest-bearing
liabilities                         359,332                                        319,439
Stockholders' equity                126,757                                        128,668
Total                           $ 1,306,446                                    $ 1,242,155

Interest rate spread (3)                                              2.95 %                                         3.46 %
Net interest margin (4)                         $  17,934             3.02 %                   $  19,986             3.53 %
Tax-equivalent interest -
imputed                                               391                                            415
Net interest income                             $  17,543                                      $  19,571

Ratio of average
interest-earning assets to
average interest-bearing
liabilities                                                          146.0 %                                        144.0 %

(1) Income on tax exempt securities is presented on a fully tax-equivalent

basis, using a 21% federal tax rate.

(2) Includes loans classified as non-accrual. Income on tax-exempt loans is

presented on a fully tax-equivalent basis, using a 21% federal tax rate.

(3) Interest rate spread represents the difference between the average yield

earned on interest-earning assets and the average rate paid on

interest-bearing liabilities.

(4) Net interest margin represents annualized, tax-equivalent net interest

      income divided by average interest-earning assets.




30







Rate/Volume Table. The following table describes the extent to which changes in
tax-equivalent interest income and interest expense for major components of
interest-earning assets and interest-bearing liabilities affected the Company's
interest income and expense for the periods indicated. The table distinguishes
between (i) changes attributable to rate (changes in rate multiplied by prior
volume), (ii) changes attributable to volume (changes in volume multiplied by
prior rate), and (iii) net change (the sum of (i) and (ii)). The net changes
attributable to the combined effect of volume and rate that cannot be segregated
have been allocated proportionately to the change due to volume and the change
due to rate.



                                 Three months ended June 30,                        Six months ended June 30,
                                        2022 vs 2021                                      2022 vs 2021
                             Increase/(decrease) attributable to               Increase/(decrease) attributable to
                          Volume               Rate            Net           Volume              Rate            Net
                                   (Dollars in thousands)                            (Dollars in thousands)
Interest income:
Interest-bearing
deposits at banks       $        (8 )       $       102     $      94     $         (1 )     $        125     $     124
Investment securities           689                 (40 )         649            1,164               (374 )         790
Loans                          (674 )            (1,011 )      (1,685 )         (1,733 )           (1,165 )      (2,898 )
Total                             7                (949 )        (942 )           (570 )           (1,414 )      (1,984 )
Interest expense:
Deposits                          8                  89            97               11                  -            11
Subordinated
debentures and other
borrowings                        -                  46            46                -                 50            50
Repurchase agreements             2                   4             6                2                  5             7
Total                            10                 139           149               13                 55            68
Net interest income     $        (3 )       $    (1,088 )   $  (1,091 )   $       (583 )     $     (1,469 )   $  (2,052 )




Provision for Loan Losses. We maintain, and our Board of Directors monitors, an
allowance for losses on loans. The allowance is established based upon
management's periodic evaluation of known and inherent risks in the loan
portfolio, review of significant individual loans and collateral, review of
delinquent loans, past loss experience, adverse situations that may affect the
borrowers' ability to repay, current and expected market conditions, and other
factors management deems important. Determining the appropriate level of
reserves involves a high degree of management judgment and is based upon
historical and projected losses in the loan portfolio and the collateral value
or discounted cash flows of specifically identified impaired loans.
Additionally, allowance policies are subject to periodic review and revision in
response to a number of factors, including current market conditions, actual
loss experience and management's expectations.



During the second quarter of 2022 and 2021, we did not record a provision for
loan losses. We recorded net loan charge-offs of $42,000 during the second
quarter of 2022 compared to net loan charge-offs of $108,000 during the second
quarter of 2021.



During the first six months of 2022, we recorded a reverse provision for loan
losses of $500,000 compared to a provision for loan losses of $500,000 in the
first six months of 2021. We recorded net loan recoveries of $40,000 during the
six months ended June 30, 2022 compared to net loan charge-offs of $112,000
during the six months ended June 30, 2021.

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

Non-interest Income. Total non-interest income was $3.8 million in the second
quarter of 2022, a decrease of $1.7 million, or 30.6%, from the same period in
2021. The decrease in non-interest income during the second quarter of 2022
compared to the same period last year was primarily due to a decrease of $1.8
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
loan which are normally sold. Higher mortgage rates however did result in
increased originations of adjustable-rate loans this quarter which are kept in
our one-to-four family residential loan portfolio. Partially offsetting this
decrease was an increase of $227,000 in fees and services charges primarily due
to higher overdraft charges and servicing fees.



Total non-interest income was $7.4 million in the first half of 2022, a decrease
of $4.8 million, or 39.7%, from the first half of 2021, primarily as a result of
a decrease of $4.0 million in gains on sales of loans. Our gains on sales of
loans decreased as our originations of secondary market one-to-four family
residential real estate loans slowed due to the increase in mortgage interest
rates and decreased inventory in the housing market in our market areas. Also
contributing to the decrease in non-interest income was a decrease of $1.1
million gains on sales of investment securities. We did not record any gains on
sales of investment securities during the first six months of 2022 compared to
net gains of $1.1 million in the same period of 2021. Partially offsetting the
decrease in gains on sales of investment securities was a $382,000 increase in
fees and services charges due primarily to higher overdraft charges and
servicing fees.



31







Non-interest Expense. Non-interest expense totaled $9.0 million for the second
quarter of 2022, a decrease of $168,000, or 1.8%, from $9.2 million for the
first quarter of 2021. The decrease in non-interest expense in the second
quarter of 2022 compared to the same period last year was mainly due to lower
data processing fees, reduced mortgage servicing rights amortization and a
decline in compensation and benefits and other non-interest expense. The decline
in data processing fees was due to a new contract with our main technology
vendor in effect this year, while lower mortgage banking activity this quarter
resulted in lower costs for compensation, amortization and other non-interest
expense. Partially offsetting the decreases in non-interest expense were costs
of $221,000 during the second quarter of 2022 related to the recently announced
acquisition of Freedom Bancshares, Inc. and its wholly owned subsidiary Freedom
Bank.



Non-interest expense totaled $17.9 million for the first six months of 2022, a
decrease of $403,000 or 2.2%, from $18.3 million for the first six months of
2021. The decrease in non-interest expense in the first half of 2022 compared to
the same period last year was mainly due to lower data processing fees, reduced
mortgage servicing rights amortization and a decline in compensation and
benefits and other non-interest expense. The decline in data processing fees was
due to a new contract with our main technology vendor in effect this year, while
lower mortgage banking activity this quarter resulted in lower costs for
compensation, amortization and other non-interest expense. Partially offsetting
the decreases in non-interest expense were costs of $221,000 during the first
six months of 2022 related to the recently announced acquisition of Freedom
Bancshares, Inc. and its wholly owned subsidiary Freedom Bank.



Income Tax Expense. During the second quarter of 2022, we recorded income tax
expense of $639,000, compared to $1.3 million during the same period of 2021.
Our effective tax rate decreased from 20.5% in the second quarter of 2021 to
17.4% in the second quarter of 2022. The decrease in the effective tax rate was
due to lower earnings before income taxes while tax-exempt income was similar
between the periods.

We recorded income tax expense of $1.4 million for the first six months of 2022
compared to $2.7 million in the same period of 2021. Our effective tax rate was
20.4% in the first half of 2021 compared to 18.2% in the first half of 2022. The
decrease in the effective tax rate was due to lower earnings before income taxes
while tax-exempt income was similar between the periods.



Financial Condition. Economic conditions in the United States slowed during the
first six months of 2022 as elevated inflation levels and higher interest rates
impacted the economy. The State of Kansas and the geographic markets in which
the Company operates was also impacted by these economic headwinds. The ongoing
COVID-19 pandemic, supply chain constraints, labor shortages and geopolitical
events have all 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 COVID-19 and other
qualitative factors on our loan portfolio. However, our loan portfolio is
diversified across various types of loans and collateral throughout the markets
in which we operate. Aside from a few problem loans that management is working
to resolve, our asset quality has remained strong over the past few years. While
further increases in problem assets may arise, management believes its efforts
to run a high quality financial institution with a sound asset base will
continue to create a strong foundation for continued growth and profitability in
the future.



Asset Quality and Distribution. Our primary investing activities are the
origination of one-to-four family residential real estate, construction and
land, commercial real estate, commercial, agriculture, municipal and consumer
loans and the purchase of investment securities. Total assets decreased $36.6
million, or 2.8%, from December 31, 2021 to $1.3 billion at June 30, 2022.



The allowance for loan losses is established through a provision for loan losses
based on our evaluation of the risk inherent in the loan portfolio and changes
in the nature and volume of our loan activity. This evaluation, which includes a
review of all loans with respect to which full collectability may not be
reasonably assured, considers the fair value of the underlying collateral,
economic conditions, historical loan loss experience, level of classified loans
and other factors that warrant recognition in providing for an appropriate
allowance for loan losses. At June 30, 2022, our allowance for loan losses
totaled $8.3 million, or 1.24% of gross loans outstanding, compared to $8.8
million, or 1.32% of gross loans outstanding, at December 31, 2021. Our
allowance for loan losses as a percentage of gross loans outstanding, excluding
PPP loans of $652,000 at June 30, 2022 and $17.2 million at December 31, 2021,
was 1.24% at June 30, 2022 compared to 1.36% at December 31, 2021. This reflects
a more comparable ratio to periods prior to PPP, as no allowance for loan losses
has been allocated to PPP loans since they are guaranteed by the Small Business
Administration. The decline in our allowance for loan losses as a percentage of
gross loans outstanding was primarily due to improving economic conditions and a
decrease in our classified loan totals.



32

As of June 30, 2022 and December 31, 2021, approximately $10.9 million and $18.0
million, respectively, of loans were considered classified and assigned a risk
rating of special mention, substandard or doubtful. These ratings indicate that
these loans were identified as potential problem loans having more than normal
risk that raised doubts as to the ability of the borrowers to comply with
present loan repayment terms. Even though borrowers were experiencing moderate
cash flow problems as well as some deterioration in collateral value, management
believed the allowance was sufficient to cover the risks and probable incurred
losses related to such loans at June 30, 2022 and December 31, 2021,
respectively.



Loans past due 30-89 days and still accruing interest totaled $877,000, or 0.13%
of gross loans, at June 30, 2022, compared to $2.0 million, or 0.30% of gross
loans, at December 31, 2021. At June 30, 2022, $4.9 million in loans were on
non-accrual status, or 0.73% 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. There were no loans 90 days
delinquent and accruing interest at June 30, 2022 or December 31, 2021. Our
impaired loans totaled $5.9 million at June 30, 2022 compared to $6.7 million at
December 31, 2021. The difference in the Company's non-accrual loan balances and
impaired loan balances at June 30, 2022 and December 31, 2021 was related to
TDRs that were accruing interest but still classified as impaired.



At June 30, 2022, the Company had seven loan relationships consisting of 11
outstanding loans that were previously classified as TDRs. No loans were
classified as TDRs during the three or six months ending June 30, 2022. During
the second quarter of 2022, a $7,000 commercial loan paid off after being
classified as a TDR in 2018. During the first quarter of 2022, two construction
and land loans totaling $599,000 were paid off. These loans were originally
classified as TDRs in 2012. A commercial loan totaling $32,000 was paid off in
the first quarter of 2022 after being classified as a TDR in the first quarter
of 2021. An agriculture loan totaling $250,000 was also paid off in the first
quarter of 2022 after being classified as a TDR in the third quarter of 2021.
During the six months ended June 30, 2021, one commercial loan totaling $47,000
was classified as a TDR after extending the maturity of the loan. The
restructuring changed the payment terms to match the borrower's cash flows. The
Company had previously charged-off $100,000 of the loan due to a collateral
shortfall.



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. During the first half of 2022, two commercial real estate properties
were sold resulting in a gain of $114,000. At June 30, 2022, we had $1.3 million
of real estate owned compared to $2.6 million at December 31, 2021. As of June
30, 2022, real estate owned primarily consisted of commercial buildings,
undeveloped land and residential real estate properties. The Company is
currently marketing all of the remaining properties in real estate owned.



Liability Distribution. Our primary ongoing sources of funds are deposits, FHLB
borrowings, proceeds from principal and interest payments on loans and
investment securities and proceeds from the sale of mortgage loans and
investment securities. While maturities and scheduled amortization of loans are
a predictable source of funds, deposit flows and mortgage prepayments are
greatly influenced by general interest rates and economic conditions. We
experienced a decrease of $17.0 million in total deposits during the first six
months of 2022, to $1.1 billion at June 30, 2022. The decrease in deposits was
primarily due to a seasonal decline in public funds accounts.



Non-interest-bearing deposits at June 30, 2022, were $343.1 million, or 30.3% of
deposits, compared to $350.0 million, or 30.5% of deposits, at December 31,
2021. Money market and checking deposit accounts were 46.0% of our deposit
portfolio and totaled $520.1 million at June 30, 2022, compared to $536.9
million, or 46.8% of deposits, at December 31, 2021. Savings accounts increased
to $170.4 million, or 15.1% of deposits, at June 30, 2022, from $155.5 million,
or 13.5% of deposits, at December 31, 2021. Certificates of deposit totaled
$97.9 million, or 8.6% of deposits, at June 30, 2022, compared to $106.1
million, or 9.2% of deposits, at December 31, 2021.



Certificates of deposit at June 30, 2022, scheduled to mature in one year or
less totaled $82.1 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.

Total borrowings decreased $1.2 million to $27.9 million at June 30, 2022, from
$29.1 million at December 31, 2021. The decrease in total borrowings was due to
a decrease in balances of repurchase agreement accounts.



Cash Flows. During the six months ended June 30, 2022, our cash and cash
equivalents decreased by $158.8 million. Our operating activities provided net
cash of $5.5 million during the first six months of 2022 primarily as a result
of net earnings. Our investing activities used net cash of $143.5 million during
the first six months of 2022, primarily due to the purchase of investment
securities. Financing activities used net cash of $20.8 million during the first
six months of 2022, primarily as a result of a decrease in deposits.



33







Liquidity. Our most liquid assets are cash and cash equivalents and investment
securities available-for-sale. The levels of these assets are dependent on the
operating, financing, lending and investing activities during any given year.
These liquid assets totaled $525.4 million at June 30, 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 or holding higher balances of cash and cash equivalents. The higher
balances of cash and cash equivalents are primarily held in our Federal Reserve
account.



Liquidity management is both a daily and long-term function of our strategy.
Excess funds are generally invested in short-term investments. Excess funds are
typically generated as a result of increased deposit balances, while uses of
excess funds are generally deposit withdrawals and loan advances. In the event
we require funds beyond our ability to generate them internally, additional
funds are generally available through the use of FHLB advances, a line of credit
with the FHLB, other borrowings or through sales of investment securities. At
June 30, 2022, we had no borrowings against our line of credit with the FHLB. At
June 30, 2022, we had collateral pledged to the FHLB that would allow us to
borrow $95.6 million, subject to FHLB credit requirements and policies. At June
30, 2022, we had no borrowings through the Federal Reserve discount window,
while our borrowing capacity with the Federal Reserve was $68.5 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 June 30, 2022. At June 30, 2022,
we had subordinated debentures totaling $21.7 million and $6.2 million of
repurchase agreements. At June 30, 2022, the Company had no borrowings against a
$7.5 million line of credit from an unrelated financial institution maturing on
November 1, 2022, with an interest rate that adjusts daily based on the prime
rate less 0.25%. This line of credit has covenants specific to capital and other
financial ratios, which the Company was in compliance with at June 30, 2022.



Off Balance Sheet Arrangements. As a provider of financial services, we
routinely issue financial guarantees in the form of financial and performance
standby letters of credit. Standby letters of credit are contingent commitments
issued by us generally to guarantee the payment or performance obligation of a
customer to a third party. While these standby letters of credit represent a
potential outlay by us, a significant amount of the commitments may expire
without being drawn upon. We have recourse against the customer for any amount
the customer is required to pay to a third party under a standby letter of
credit. The letters of credit are subject to the same credit policies,
underwriting standards and approval process as loans made by us. Most of the
standby letters of credit are secured, and in the event of nonperformance by the
customers, we have the right to the underlying collateral, which could include
commercial real estate, physical plant and property, inventory, receivables,
cash and marketable securities. The contract amount of these standby letters of
credit, which represents the maximum potential future payments guaranteed by us,
was $2.1 million at June 30, 2022.

At June 30, 2022, we had outstanding loan commitments, excluding standby letters
of credit, of $133.9 million. We anticipate that sufficient funds will be
available to meet current loan commitments. These commitments consist of
unfunded lines of credit and commitments to finance real estate loans.

Capital. Current regulatory capital regulations require financial institutions
(including banks and bank holding companies) to meet certain regulatory capital
requirements. The Company and the Bank are subject to the Basel III Rules that
implemented the Basel III regulatory capital reforms from the Basel Committee on
Banking Supervision and certain changes required by the Dodd-Frank Wall Street
Reform and Consumer Protection Act. The Basel III Rules are applicable to all
U.S. banks that are subject to minimum capital requirements, as well as to bank
and savings and loan holding companies other than "small bank holding companies"
(generally, non-public bank holding companies with consolidated assets of less
than $3.0 billion).

The Basel III Rules require a common equity Tier 1 capital to risk-weighted
assets minimum ratio of 4.5%, a Tier 1 capital to risk-weighted assets minimum
ratio of 6.0%, a Total Capital to risk-weighted assets minimum ratio of 8.0%,
and a Tier 1 leverage minimum ratio of 4.0%. A capital conservation buffer,
equal to 2.5% common equity Tier 1 capital, is also established above the
regulatory minimum capital requirements (other than the Tier 1 leverage ratio).
As of June 30, 2022 and December 31, 2021, the Bank met the requirements to be
"well capitalized," which is the highest rating available under the regulatory
capital regulations framework for prompt corrective action. Management believed
that as of June 30, 2022, the Company and the Bank met all capital adequacy
requirements to which we are subject.



34

Dividends. During the quarter ended June 30, 2022, we paid a quarterly cash
dividend of $0.21 per share to our stockholders.

The payment of dividends by any financial institution or its holding company is
affected by the requirement to maintain adequate capital pursuant to applicable
capital adequacy guidelines and regulations. In addition, under the Basel III
Rules, financial institutions have to maintain 2.5% in common equity Tier 1
capital attributable to the capital conservation buffer in order to pay
dividends and make other capital distributions. As described above, the Bank
exceeded its minimum capital requirements under applicable guidelines as of June
30, 2022. The National Bank Act imposes limitations on the amount of dividends
that a national bank may pay without prior regulatory approval. Generally, the
amount is limited to the bank's current year's net earnings plus the adjusted
retained earnings for the two preceding years. As of June 30, 2022,
approximately $30.6 million was available to be paid as dividends to the Company
by the Bank without prior regulatory approval.



Additionally, our ability to pay dividends is limited by the subordinated
debentures that are held by three business trusts that we control. Interest
payments on the debentures must be paid before we pay dividends on our capital
stock, including our common stock. We have the right to defer interest payments
on the debentures for up to 20 consecutive quarters. However, if we elect to
defer interest payments, all deferred interest must be paid before we may pay
dividends on our capital stock.