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. On October 1, 2022, the Company completed its acquisition of
Freedom Bancshares, Inc., the holding company of Freedom Bank. Freedom Bank was
founded in 2006 and operates out of a single location in Overland Park, Kansas.
As of September 30, 2022, Freedom Bank reported total assets of $201.9 million,
gross loans of $118.0 million, and total deposits of $150.4 million.



In October 2022, we declared our 85th 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 September 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 third quarter of 2022, we recorded net earnings
of $2.5 million, which was a decrease of $2.0 million, or 44.7%, from the $4.5
million of net earnings in the third quarter of 2021. During the first nine
months of 2022, we recorded net earnings of $8.7 million, which was a decrease
of $6.2 million, or 41.7%, from the $14.9 million of net earnings in the first
nine 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 per
share amounts)                          three months ended September 30,   

nine months ended September 30,

                                            2022                  2021               2022                  2021
Net earnings:
Net earnings                          $           2,500       $       4,517     $         8,666       $        14,864
Basic earnings per share (1)          $            0.50       $        0.90     $          1.74       $          2.98

Diluted earnings per share (1)        $            0.50       $        0.90     $          1.73       $          2.97
Earnings ratios:
Return on average assets (2)                       0.76 %              1.42 %              0.89 %                1.59 %
Return on average equity (2)                       8.33 %             13.36 %              9.33 %               15.23 %
Equity to total assets                             7.78 %             10.79 %              7.78 %               10.79 %
Net interest margin (2) (3)                        3.21 %              3.36

%              3.08 %                3.47 %
Dividend payout ratio                             42.00 %             21.05 %             36.42 %               19.23 %

(1) Per share values for the periods ended September 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 $10.6 million for the quarter ended
September 30, 2022 increased $597,000, or 6.0%, as compared to the same period
of 2021. Interest income on loans decreased $436,000, or 5.2%, to $8.0 million
for the quarter ended September 30, 2022, compared to the same period of 2021
due to lower yields . Our yields decreased from 5.03% in the third quarter of
2021 to 4.63% in the third quarter of 2022. The decrease in yields on loans was
driven by a decrease in interest income on PPP loans, which decreased from $1.6
million in the third quarter of 2021 to $13,000 in the third quarter of 2022.
The increase in market interest rates has offset some of the decline in PPP loan
income as loans reprice or are originated. Partially offsetting the lower yields
was an increase in our average loan balances, which increased from $668.0
million in the third quarter of 2021 to $687.7 million in the third quarter of
2022. Our average loan balances included average PPP loans of $491,000 in the
third quarter of 2022 and $40.4 million in the third quarter of 2021. Interest
income on investment securities increased $1.0 million, or 67.5%, to $2.6
million for the third 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 $351.2 million in the third quarter of 2021 to
$494.3 million in the third quarter of 2022. Also contributing to the average
balances was increased yields on investment securities, which increased from
1.88% in the third quarter of 2021 to 2.18% in the third quarter of 2022.



Interest income of $29.0 million for the nine months ended September 30, 2022
decreased $1.4 million, or 4.5%, as compared to the same period of 2021.
Interest income on loans decreased $3.3 million, or 13.0%, to $22.4 million for
the nine months ended September 30, 2022, compared to the same period of 2021
due to a decrease in our average loan balances, which decreased from $702.5
million during the first nine months of 2021 to $659.1 million during the first
nine months of 2022. Also contributing to lower interest income were lower
yields on loans, which decreased from 4.90% in the nine months ended September
30, 2021 to 4.54% during the nine months ended September 30, 2022. Our average
loan balances included average PPP loans of $5.3 million in the nine months
ended September 30, 2022 compared to $82.7 million the same period of 2021.
Interest income on PPP loans decreased from $4.9 million in the first nine
months of 2021 to $671,000 in the first nine months of 2022. The yield on PPP
loans increased from 7.85% in the first nine months of 2021 to 16.87% in the
first nine months of 2022. The increase in market interest rates has offset some
of the decline in PPP loan income as loans reprice or are originated. Interest
income on investment securities increased $2.0 million, or 42.4%, to $6.6
million for the first nine months of 2022, as compared to $4.6 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 $329.4 million
in the first nine months of 2021 compared to $464.7 million in the first nine
months of 2022. Partially offsetting the higher average balances of investment
securities were lower yields, which decreased from 2.08% in the first nine
months of 2021 to 2.00% in the first nine months of 2022.



27






Interest Expense. Interest expense during the quarter ended September 30, 2022
increased $759,000, or 200.8%, to $1.1 million, as compared to the same period
of 2021. Interest expense on interest-bearing deposits increased $513,000, or
198.8%, to $771,000 for the quarter ended September 30, 2022 as compared to the
same period of 2021. Our total cost of interest-bearing deposits increased from
0.13% in the third quarter of 2021 to 0.39% in the third quarter of 2022 as a
result of higher rates paid on money market and checking accounts, primarily due
to public fund deposit accounts with rates that are repriced based on market
indexes. Also contributing to higher interest expense was an increase in average
interest-bearing deposit balances, which increased from $769.7 million in the
third quarter of 2021 to $782.6 million in the third quarter of 2022. For the
third quarter of 2022, interest expense on borrowings increased $246,000, or
205.0%, to $366,000 as compared to the same period of 2021 due to an increase in
our average borrowings, which increased from $21.7 million in the third quarter
of 2021 to $37.5 million in the same period of 2022. Also contributing to the
increase in interest expense on borrowings were higher rates, which increased
from 2.14% in the third quarter of 2021 to 3.58% in the same period of 2022.



Interest expense during the nine months ended September 30, 2022 increased
$827,000, or 71.2%, to $2.0 million as compared to the same period of 2021.
Interest expense on interest-bearing deposits increased $524,000, or 65.5%, to
$1.3 million for the nine months ended September 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, primarily due to public fund deposit accounts with rates that are
repriced based on market indexes. The increase in interest expense on deposits
was also due to an increase in average interest-bearing deposit balances, which
increased from $768.1 million in the first nine months of 2021 to $788.7 million
in the same period of 2022. For the first nine months of 2022, interest expense
on borrowings increased $303,000, or 83.7%, to $665,000 as compared to the same
period of 2021, due to an increase in our average outstanding borrowings, which
increased from $21.7 million in the first nine months of 2021 to $27.0 million
in the first nine months of 2022. Also contributing to the higher interest
expense on borrowings were higher average rates on our borrowings, which
increased to 3.10% for the first nine months of 2022 compared to 2.19% for

the
same period of 2021.



Net Interest Income. Net interest income decreased $162,000, or 1.7%, to $9.5
million for the third 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, and higher interest expense. 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 as most of these loans were forgiven by the SBA. The
increase in market interest rates has offset some of the decline in PPP loan
income as loans reprice or are originated. Interest and fees on PPP loans in the
third quarter of 2022 totaled $13,000 compared to $1.6 million in the same
period last year. Higher market interest rates also drove the increase in
interest expense as our public fund deposits and borrowings repriced higher. Net
interest margin, on a tax-equivalent basis, decreased from 3.36% in the third
quarter of 2021 to 3.21% in the same period of 2022.



Net interest income decreased $2.2 million, or 7.5%, to $27.0 million for the
first nine 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 $4.9 million in the first nine months of 2021 to $671,000 in the same
period of 2022. Net interest margin, on a tax-equivalent basis, decreased from
3.47% in the first nine months of 2021 to 3.08% 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
and 3.21% in the third 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
                                                      September 30, 2022                                     September 30, 2021
                                                             Income/          Average                               Income/          Average
                                       Average balance       expense        yield/cost        Average balance       expense        yield/cost
(Dollars in thousands)
Assets
Interest-earning assets:
Interest-bearing deposits at banks    $          12,266     $       44              1.42 %   $         138,047     $       63              0.18 %
Investment securities (1)                       494,283          2,720              2.18 %             351,215          1,664              1.88 %
Loans receivable, net (2)                       687,716          8,030              4.63 %             667,952          8,466              5.03 %
Total interest-earning assets                 1,194,265         10,794              3.59 %           1,157,214         10,193              3.49 %
Non-interest-earning assets                     113,601                                                104,740
Total                                 $       1,307,866                                      $       1,261,954

Liabilities and Stockholders'
Equity
Interest-bearing liabilities:
Money market and checking             $         516,141     $      684              0.53 %   $         508,405     $      137              0.11 %
Savings accounts                                171,645             11              0.03 %             149,491             12              0.03 %
Certificates of deposit                          94,767             76              0.32 %             111,762            109              0.39 %

Total interest-bearing deposits                 782,553            771              0.39 %             769,658            258              0.13 %
Subordinate debentures and other
borrowings                                       37,532            339              3.58 %              21,655            117              2.14 %
Repurchase agreements                             7,411             27              1.45 %               5,348              3              0.22 %
Total interest-bearing liabilities              827,496          1,137              0.55 %             796,661            378              0.19 %
Non-interest-bearing liabilities                361,290                    

                           331,126
Stockholders' equity                            119,100                                                134,167
Total                                 $       1,307,886                                      $       1,261,954

Interest rate spread (3)                                                            3.04 %                                                 3.30 %
Net interest margin (4)                                     $    9,657              3.21 %                         $    9,815              3.36 %
Tax-equivalent interest - imputed                                  206                                                    202
Net interest income                                         $    9,451                                             $    9,613

Ratio of average interest-earning
assets to average interest-bearing
liabilities                                                                        144.3 %                                                145.3 %

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

using a 21% federal tax rate.

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

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

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

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

interest-bearing liabilities.

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

     divided by average interest-earning assets.




29






                                                      Nine months ended                                      Nine months ended
                                                      September 30, 2022                                     September 30, 2021
                                                             Income/          Average                               Income/          Average
                                       Average balance       expense        yield/cost        Average balance       expense        yield/cost
(Dollars in thousands)
Assets
Interest-earning assets:
Interest-bearing deposits at banks    $          72,631     $      232              0.43 %   $         116,047     $      127              0.15 %
Investment securities (1)                       464,702          6,961              2.00 %             329,427          5,114              2.08 %
Loans receivable, net (2)                       659,109         22,387              4.54 %             702,450         25,721              4.90 %
Total interest-earning assets                 1,196,442         29,580              3.31 %           1,147,924         30,962              3.61 %
Non-interest-earning assets                     110,496                                                100,903
Total                                 $       1,306,938                                      $       1,248,827

Liabilities and Stockholders'
Equity
Interest-bearing liabilities:
Money market and checking             $         520,746     $    1,058              0.27 %   $         505,355     $      388              0.10 %
Savings accounts                                167,927             31              0.02 %             142,659             36              0.03 %
Certificates of deposit                         100,005            235              0.31 %             120,043            376              0.42 %

 Total interest-bearing deposits                788,678          1,324              0.22 %             768,057            800              0.14 %
Subordinate debentures and other
borrowings                                       27,003            627              3.10 %              21,654            355              2.19 %
Repurchase agreements                             7,074             38              0.72 %               5,218              7              0.18 %
Total interest-bearing liabilities              822,755          1,989              0.32 %             794,929          1,162              0.20 %
Non-interest-bearing liabilities                360,006                    

                           323,377
Stockholders' equity                            124,177                                                130,521
Total                                 $       1,306,938                                      $       1,248,827

Interest rate spread (3)                                                            2.99 %                                                 3.41 %
Net interest margin (4)                                     $   27,591              3.08 %                         $   29,800              3.47 %
Tax-equivalent interest - imputed                                  597                                                    616
Net interest income                                         $   26,994                                             $   29,184

Ratio of average interest-earning
assets  to average interest-bearing
liabilities                                                                        145.4 %                                                144.4 %

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

using a 21% federal tax rate.

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

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

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

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

interest-bearing liabilities.

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

     divided by average interest-earning assets.




30






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



                                         Three months ended September 30,                 Nine months ended September 30,
                                                   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                              $          3        $        (22 )   $  

(19 ) $ (26 ) $ 131 $ 105
Investment securities

                       759                 297       1,056              2,038             (191 )      1,847
Loans                                       258                (694 )      (436 )           (1,522 )         (1,812 )     (3,334 )
Total                                     1,020                (419 )       601                490           (1,872 )     (1,382 )
Interest expense:
Deposits                                      4                 509         513                 24              500          524
Subordinated debentures and
other borrowings                            116                 106         222                101              171          272
Repurchase agreements                         2                  22          24                  3               28           31
Total                                       122                 637         759                128              699          827
Net interest income                $        898        $     (1,056 )   $  (158 )   $          362        $  (2,571 )   $ (2,209 )




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

During the third quarter of 2022 we recorded a $500,000 provision for loan
losses as compared to no provision recorded in the same period of 2021. The
$500,000 provision for loan losses recorded in the third quarter of 2022 was
primarily related to an increase in loan balances. We recorded net loan
recoveries of $43,000 during the third quarter of 2022 compared to net loan
charge-offs of $397,000 during the third quarter of 2021.

During the first nine months of 2022, we had no provision for loan losses as the
$500,000 provision in the third quarter of 2022 was offset by a credit of
$500,000 during the first quarter of 2022. This compared to a provision for loan
losses of $500,000 in the first nine months of 2021. We recorded net loan
recoveries of $83,000 during the nine months ended September 30, 2022 compared
to net loan charge-offs of $509,000 during the nine months ended September

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 $3.5 million in the third
quarter of 2022, a decrease of $1.9 million, or 35.4%, from the same period in
2021. The decrease in non-interest income during the third quarter of 2022
compared to the same period last year was primarily due to a decrease of $1.6
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. Higher mortgage rates
however did result in increased originations of adjustable-rate loans this
quarter which are maintained in our one-to-four family residential loan
portfolio. A loss of $353,000 was recorded in the third quarter of 2022 on the
sale of investment securities due to the sale of the lowest yielding securities
in our portfolio. Partially offsetting this decrease was an increase of $243,000
in fees and services charges primarily due to higher overdraft charges and

other
fees on deposit accounts.



Total non-interest income was $10.9 million in the first nine months of 2022, a
decrease of $6.8 million, or 38.4%, from the first nine months of 2021,
primarily as a result of a decrease of $5.6 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 $1.5 million gains on sales of investment securities. We recorded a
loss of $353,000 on sales of investment securities during the first nine 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 loans and investment
securities was a $625,000 increase in fees and services charges due primarily to
higher overdraft charges and other fees on deposit accounts.



31






Non-interest Expense. Non-interest expense totaled $9.5 million for the third
quarter of 2022, a slight increase of $15,000, or 0.2%, over the same quarter of
2021. The increase in non-interest expense in the third quarter of 2022 compared
to the same period last year was mainly due to higher occupancy and equipment
costs as well as acquisition costs. Partially offsetting those increases were
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.



Non-interest expense totaled $27.3 million for the first nine months of 2022, a
decrease of $388,000 or 1.4%, from $27.7 million for the first nine months of
2021. The decrease in non-interest expense in the first nine months 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
$355,000 during the first nine 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 third quarter of 2022, we recorded income tax
expense of $522,000, compared to $1.1 million during the same period of 2021.
Our effective tax rate decreased from 19.8% in the third quarter of 2021 to
17.3% in the third 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 $1.9 million for the first nine months of 2022
compared to $3.8 million in the same period of 2021. Our effective tax rate was
20.3% in the first nine months of 2021 compared to 18.0% in the first nine
months 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 nine 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 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 these conditions and other qualitative
factors on our loan portfolio. However, our loan portfolio is diversified across
various types of loans and collateral throughout the markets in which we
operate. Aside from a few problem loans that management is working to resolve,
our asset quality has remained strong over the past few years. While further
increases in problem assets may arise, management believes its efforts to run a
high quality financial institution with a sound asset base will continue to
create a strong foundation for continued growth and profitability in the future.



Asset Quality and Distribution. Our primary investing activities are the
origination of one-to-four family residential real estate, construction and
land, commercial real estate, commercial, agriculture, municipal and consumer
loans and the purchase of investment securities. Total assets increased $26.3
million, or 2.0%, from December 31, 2021 to $1.4 billion at September 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 September 30, 2022, our allowance for loan losses
totaled $8.9 million, or 1.25% 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 $410,000 at September 30, 2022 and $17.2 million at December 31,
2021, was 1.25% at September 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 September 30, 2022 and December 31, 2021, approximately $16.2 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 and raised doubts as to the ability of the borrowers to comply with
present loan repayment terms. Even though borrowers were experiencing moderate
cash flow problems as well as some deterioration in collateral value, management
believed the allowance was sufficient to cover the risks and probable incurred
losses related to such loans at September 30, 2022 and December 31, 2021,
respectively.



Loans past due 30-89 days and still accruing interest totaled $657,000, or 0.09%
of gross loans, at September 30, 2022, compared to $2.0 million, or 0.30% of
gross loans, at December 31, 2021. At September 30, 2022, $4.8 million in loans
were on non-accrual status, or 0.68% 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 September 30, 2022 or December 31,
2021. Our impaired loans totaled $5.7 million at September 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 September 30, 2022 and December 31,
2021 was related to TDRs that were accruing interest but still classified as
impaired.

At September 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 nine months ending September 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 three and nine months ended September 30, 2021, an agriculture loan
paid off that was previously classified as a TDR in 2016. During the nine months
ended September 30, 2021, a commercial loan relationship consisting of five
loans was modified after originally being classified as a TDR in 2020. The
borrower liquidated some of the collateral securing the loans and refinanced the
remaining balance of $479,000 into one loan which retained a TDR classification.



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 nine months of 2022, two commercial real estate
properties were sold resulting in a gain of $114,000. At September 30, 2022, we
had $1.3 million of real estate owned compared to $2.6 million at December 31,
2021. As of September 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 $31.3 million in total deposits during the first nine
months of 2022, to $1.1 billion at September 30, 2022. The decrease in deposits
was primarily due to a seasonal decline in public funds accounts.



Non-interest-bearing deposits at September 30, 2022, were $347.9 million, or
31.1% of deposits, compared to $350.0 million, or 30.5% of deposits, at December
31, 2021. Money market and checking deposit accounts were 45.2% of our deposit
portfolio and totaled $505.0 million at September 30, 2022, compared to $536.9
million, or 46.8% of deposits, at December 31, 2021. Savings accounts increased
to $171.0 million, or 15.3% of deposits, at September 30, 2022, from $155.5
million, or 13.5% of deposits, at December 31, 2021. Certificates of deposit
totaled $93.2 million, or 8.4% of deposits, at September 30, 2022, compared to
$106.1 million, or 9.2% of deposits, at December 31, 2021.



Certificates of deposit at September 30, 2022, scheduled to mature in one year
or less totaled $77.6 million. Historically, maturing deposits have generally
remained with the Bank, and we believe that a significant portion of the
deposits maturing in one year or less will remain with us upon maturity in

some
type of deposit account.

Total borrowings increased $83.8 million to $112.9 million at September 30,
2022, from $29.1 million at December 31, 2021. The increase in total borrowings
was due to an increase in Federal Home Loan Bank borrowings and other
borrowings. The increase in borrowings was due to funding the acquisition of
Freedom Bancshares, Inc. and to offset the decline in deposits.



33






Cash Flows. During the nine months ended September 30, 2022, our cash and cash
equivalents decreased by $140.0 million. Our operating activities provided net
cash of $14.5 million during the first nine months of 2022 primarily as a result
of net earnings. Our investing activities used net cash of $202.8 million during
the first nine months of 2022, primarily due to loan growth and the purchase of
investment securities. Financing activities provided net cash of $48.3 million
during the first nine months of 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.
These liquid assets totaled $542.2 million at September 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
September 30, 2022, we had $74.9 million against our line of credit with the
FHLB. At September 30, 2022, we had collateral pledged to the FHLB that would
allow us to borrow $45.9 million, subject to FHLB credit requirements and
policies. At September 30, 2022, we had no borrowings through the Federal
Reserve discount window, while our borrowing capacity with the Federal Reserve
was $64.6 million. We also have various other federal funds agreements, both
secured and unsecured, with correspondent banks totaling approximately $30.0
million in available credit under which we had no outstanding borrowings at
September 30, 2022. At September 30, 2022, we had subordinated debentures
totaling $21.7 million and $6.3 million of repurchase agreements. At September
30, 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%. This line
of credit has covenants specific to capital and other financial ratios, which
the Company was in compliance with at September 30, 2022. The Company also
borrowed $10.0 million from the same unrelated financial institution at a fixed
rate of 6.15%. This borrowing matures on September 1, 2027 and requires
quarterly principal and interest payments. The $10.0 million borrowings was used
to fund part of the acquisition of Freedom Bancshares, Inc.



Off Balance Sheet Arrangements. As a provider of financial services, we
routinely issue financial guarantees in the form of financial and performance
standby letters of credit. Standby letters of credit are contingent commitments
issued by us generally to guarantee the payment or performance obligation of a
customer to a third party. While these standby letters of credit represent a
potential outlay by us, a significant amount of the commitments may expire
without being drawn upon. We have recourse against the customer for any amount
the customer is required to pay to a third party under a standby letter of
credit. The letters of credit are subject to the same credit policies,
underwriting standards and approval process as loans made by us. Most of the
standby letters of credit are secured, and in the event of nonperformance by the
customers, we have the right to the underlying collateral, which could include
commercial real estate, physical plant and property, inventory, receivables,
cash and marketable securities. The contract amount of these standby letters of
credit, which represents the maximum potential future payments guaranteed by us,
was $2.2 million at September 30, 2022.



At September 30, 2022, we had outstanding loan commitments, excluding standby
letters of credit, of $142.0 million. We anticipate that sufficient funds will
be available to meet current loan commitments. These commitments consist of
unfunded lines of credit and commitments to finance real estate loans.



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

The Basel III Rules require a common equity Tier 1 capital to risk-weighted
assets minimum ratio of 4.5%, a Tier 1 capital to risk-weighted assets minimum
ratio of 6.0%, a Total Capital to risk-weighted assets minimum ratio of 8.0%,
and a Tier 1 leverage minimum ratio of 4.0%. A capital conservation buffer,
equal to 2.5% common equity Tier 1 capital, is also established above the
regulatory minimum capital requirements (other than the Tier 1 leverage ratio).
As of September 30, 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 September 30, 2022, the Company and the Bank met
all capital adequacy requirements to which we are subject.



34

Dividends. During the quarter ended September 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
September 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 September 30,
2022, approximately $8.5 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.