ITEM 1A. RISK FACTORS 23
ITEM 1B. UNRESOLVED STAFF COMMENTS 36
ITEM 1C. CYBERSECURITY 36
ITEM 2. PROPERTIES 37
ITEM 3. LEGAL PROCEEDINGS 37
ITEM 4. MINE SAFETY DISCLOSURES 37
ITEM 6. [RESERVED] 38
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 46
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 48
ITEM 9A. CONTROLS AND PROCEDURES 90
ITEM 9B. OTHER INFORMATION 90
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS 90
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 91
ITEM 11. EXECUTIVE COMPENSATION 91
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES 92
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 93
SIGNATURES 96
PART
I.
ITEM
1. BUSINESS
The
Company
Landmark
Bancorp, Inc. (the “Company,” “our,” and “we”) is a financial holding company that was incorporated
under the laws of the State of Delaware in 2001. Currently, the Company’s business consists of the ownership of Landmark National
Bank (the “Bank”) and Landmark Risk Management, Inc. (the “Captive”), which are wholly-owned subsidiaries of
the Company. As of December 31, 2025, the Company had approximately $1.6 billion in consolidated total assets.
The
Company is headquartered in Manhattan, Kansas, and has expanded its geographic presence through both opening of new branches and strategic
acquisitions. The Company has 29 branch offices in 23 communities across the state of Kansas and in February 2024, opened a loan production
office in Kansas City, Missouri.
The
Bank provides banking services to individuals and businesses primarily within its local communities throughout Kansas and in the Kansas
City metropolitan area. The banking services provided to individuals and businesses include commercial, commercial real estate (“CRE”),
agriculture, residential real estate, and consumer lending. The Bank also offers a variety of deposit products including demand, checking,
money market, savings, time deposits and treasury management services. Greater emphasis has been placed on diversification of the deposit
mix through the expansion of core deposit accounts such as checking, savings, and money market accounts. We are committed to developing
relationships with our customers and providing a total banking service.
Landmark
Risk Management, Inc., which was formed and began operations in 2017, is a Nevada-based captive insurance company which provides property
and casualty insurance coverage to the Company and the Bank for which insurance may not be currently available or economically feasible
in the current insurance marketplace. The Captive is subject to the regulations of the State of Nevada and undergoes periodic examinations
by the Nevada Division of Insurance.
The
results of operations of the Bank and the Company are dependent primarily upon net interest income and, to a lesser extent, upon other
income derived from loan servicing fees, customer deposit services and sales of one-to-four family residential mortgage loans. Additional
expenses of the Bank include general and administrative expenses such as salaries, employee benefits, occupancy and related expenses,
data processing, professional fees and federal deposit insurance premiums.
The
Company’s executive office and the Bank’s main office are located at 701 Poyntz Avenue, Manhattan, Kansas 66502. The telephone
number is (785) 565-2000.
Market
Areas
The
Bank’s primary deposit gathering and lending markets are geographically diversified throughout central, eastern, southeast, and
southwest Kansas. The primary industries within these respective markets are also diverse and dependent upon a wide array of industry
and governmental activity for their economic base. A brief description of the four geographic areas and the communities which the Bank
serves is set forth below.
Central
region. The central region of the Bank’s market area consists of the Bank’s locations in Auburn, Junction City, Manhattan,
Osage City, Topeka and Wamego, Kansas and includes the counties of Riley, Geary, Osage, Pottawatomie and Shawnee. The economies are significantly
impacted by employment at Fort Riley Military Base in Junction City and Kansas State University, the second largest university in Kansas,
which is located in Manhattan. Topeka is the capital of Kansas and strongly influenced by the government of the State of Kansas. Topeka
and Manhattan are regional destinations for retail shopping as well as home to regional hospitals. Manhattan is also home to the National
Bio and Agro-Defense Facility, which has a significant impact on the regional economy. Additionally, manufacturing and service industries
play a key role within the central Kansas market.
Eastern
region. The Bank’s eastern Kansas branches are located in the communities of Lawrence, Lenexa, Louisburg, Osawatomie, Overland
Park, Paola, Prairie Village and Wellsville, Kansas, with a loan production office in Kansas City Missouri. The Bank’s Lawrence
locations are located in Douglas County and are significantly impacted by the University of Kansas, the largest university in Kansas.
The eastern region is strongly influenced by the Kansas City metropolitan market, which is the highest growth area in the State of Kansas.
The region is influenced by public and private industries and businesses of all sizes. In addition, housing growth and CRE are major
drivers of the region’s economy.
Southeast
region. The southeast region of the Bank’s market area consists of the Bank’s locations in Fort Scott, Iola, Mound
City and Pittsburg, Kansas. Agriculture, oil, and gas are the predominant industries in the southeast Kansas region. Both Fort Scott
and Pittsburg are recognized as regional commercial centers within the southeast region of the state, which attracts small retail businesses
to the region. Additionally, Pittsburg State University and Fort Scott Community College attract a number of individuals from the surrounding
area to live within the communities to participate in educational programs and pursue a degree. Additionally, manufacturing and service
industries play a key role within the southeast Kansas market.
Southwest
region. The Bank’s southwest Kansas branches are located in the communities of Dodge City, Garden City, Great Bend, Hoisington
and La Crosse, Kansas. Agriculture, oil, and gas are the predominant industries in the southwest Kansas region. Significant activities
involve crop production, feed lot operations, and food processing. Dodge City is known as the “Cowboy Capital of the World”
and maintains a significant tourism industry. Both Dodge City and Garden City are recognized as regional commercial centers within the
state with small businesses, manufacturing, retail, and service industries having a significant influence upon the local economies. Additionally,
the Dodge City, Garden City and Great Bend communities each have a community college that attracts individuals from the surrounding areas.
Competition
The
Company faces strong competition both in attracting deposits and making real estate, commercial and other loans. Its most direct competition
for deposits and loans comes from large national and regional banks, local community banks, savings and loan associations, securities
and brokerage companies, mortgage companies, insurance companies, finance companies, money market mutual funds, credit unions, financial
technology (fintech) companies and other non-bank financial service providers including digital asset service providers, located in its
principal market areas, including many larger financial institutions which have greater financial and marketing resources available to
them. The ability of the Company to attract and retain deposits generally depends on its ability to provide a rate of return, service
levels, liquidity and risk comparable to or better than those offered by competing investment opportunities. The Company competes for
loans principally through the interest rates and loan fees it charges and the efficiency and quality of services it provides borrowers.
Human
Capital Resources
Employees.
At December 31, 2025, the Bank had a total of 283 employees (273 full time equivalent employees). The Company has no employees,
although the Company is a party to several employment agreements with executives of the Bank. Employees are provided with a comprehensive
benefits program, including basic and major medical insurance, life and disability insurance, sick leave, and a 401(k) profit sharing
plan. Employees are not represented by any union or collective bargaining group, and the Bank considers its employee relations to be
excellent.
Diversity,
Equity and Inclusion. The Company believes that a diverse workforce is critical to achieving its strategic goals. The Company
strives to foster a strong and inclusive culture that is committed to delivering extraordinary service to our clients and communities
by meeting the financial needs of families and businesses across Kansas.
Talent
development and retention. The Company utilizes various processes to recruit employees with values that align with the Company’s
vision. The long-term success of the Company revolves around the ability to continue to develop and retain these employees.
Lending
Activities
General.
The Bank strives to provide a full range of financial products and services to small- and medium-sized businesses and to consumers
in each market area it serves. The Bank targets owner-operated businesses and utilizes Small Business Administration (“SBA”)
lending as a part of its product mix. The Bank has a loan committee for each of its markets, which has authority to approve credits within
established guidelines. Concentrations in excess of those guidelines must be approved by either a corporate loan committee comprised
of the Bank’s Chief Executive Officer, the Chief Credit Officer, and other senior commercial lenders or the Bank’s board
of directors. When lending to an entity, the Bank generally obtains a guaranty from the principals of the entity. The loan mix is subject
to the discretion of the Bank’s board of directors and the demands of the local marketplace.
The
following is a brief description of each major category of the Bank’s lending activity.
One-to-Four
Family Residential Real Estate Lending. The Bank originates one-to-four family residential real estate loans with both fixed
and variable rates. One-to-four family residential real estate loans, which make up approximately 33.8% of total loans at December 31,
2025, are typically priced and originated following underwriting standards that are consistent with guidelines established by the major
buyers in the secondary market. Generally, residential real estate loans retained in the Bank’s loan portfolio have fixed or variable
rates with adjustment periods of seven years or less and amortization periods of typically either 15 or 30 years. A significant portion
of these loans prepay prior to maturity. The Bank has no potential negative amortization loans. While the origination of fixed-rate,
one-to-four family residential loans continues to be a key component of our business, the majority of these loans are sold in the secondary
market. One-to-four family residential real estate loans that exceed 80% of the appraised value of the real estate generally are required,
by policy, to be supported by private mortgage insurance, although on occasion the Bank will retain non-conforming residential loans
to known customers at premium pricing. The balances of one-to-four family residential real estate loans increased as of December 31,
2025 compared to December 31, 2024, primarily due to demand for the Bank’s variable rate mortgage loans. These loans are retained
in portfolio and were the primary factor for the 6.6% increase in balances during 2025 and 2024. While the Bank retains some of the new
fixed rate mortgage loan originations, most new fixed rate mortgage loans continue to be sold.
Construction
and Land Lending. Loans in this category include loans to facilitate the development of both residential and CRE, which make
up approximately 1.8% of total loans at December 31, 2025. Construction and land loans generally have terms of less than 18 months, and
the Bank will retain a security interest in the borrower’s real estate. Construction loans are generally limited, by policy, to
80% of the appraised value of the property. Land loans are generally limited, by policy, to 65% of the appraised value of the property.
The origination of construction and land loans has not been a primary strategy of the Bank over the past few years to reduce risk in
the Bank’s loan portfolio. The balances of construction and land loans decreased 18.9% as of December 31, 2025 compared to December
31, 2024 primarily due to lower demand from the Bank’s loan customers.
CRE
Lending. CRE loans, including multi-family loans, generally have amortization periods of 15 or 20 years. CRE loans comprise approximately
35.5% of total loans at December 31, 2025. CRE and multi-family loans are generally limited, by policy, to 80% of the appraised value
of the property and are subject to strict underwriting guidelines. CRE loans are also supported by an analysis demonstrating the borrower’s
ability to repay. The Bank continues to focus on generating additional CRE, which are part of an overall banking relationship with the
customer, and does not focus on originating transactional type loans where the borrower does not have other financial relationships with
the Bank. This focus results in more owner-occupied CRE loans that are diversified by borrower type and geography. The Bank monitors
the CRE loan portfolio closely for concentrations in loan types as well as the financial performance of the borrowers. Currently, the
Bank has not identified any negative trends related to the CRE loan portfolio. The Bank’s loan growth over the past few years has
been driven in large part by CRE loans.
Commercial
Lending. Commercial loans, which make up approximately 16.0% of total loans at December 31, 2025, include loans to service, retail,
wholesale and light manufacturing businesses. Commercial loans are made based on the financial strength and repayment ability of the
borrower, as well as the collateral securing the loans. The Bank targets owner-operated businesses as its customers and makes lending
decisions based upon a cash flow analysis of the borrower as well as a collateral analysis. Accounts receivable loans and loans for inventory
purchases are generally on a one-year renewable term, and loans for equipment generally have a term of seven years or less. The Bank
generally takes a blanket security interest in all assets of the borrower. Equipment loans are generally limited, by policy, to 75% of
the cost or appraised value of the equipment. Inventory loans are generally limited to 50% of the value of the inventory, and accounts
receivable loans are generally limited to 75% of a predetermined eligible base. The Bank continues to focus its organic growth on generating
additional commercial loan relationships, including SBA loans.
Agriculture
Lending. Agricultural real estate and operating loans, which make up approximately 9.3% of total loans at December 31, 2025,
generally have amortization periods of 20 years or less, during which time the Bank generally retains a security interest in the borrower’s
real estate. The Bank also provides short-term credit for operating loans and intermediate-term loans for farm product, livestock and
machinery purchases and other agricultural improvements. Farm product loans generally have a one-year term, and machinery, equipment
and breeding livestock loans generally have five to seven year terms. Extension of credit is based upon the borrower’s ability
to repay, as well as the existence of federal guarantees and crop insurance coverage. These loans are generally secured by a blanket
lien on livestock, equipment, feed, hay, grain and growing crops. Equipment and breeding livestock loans are generally limited, by policy,
to 75% of appraised value of the collateral. The Bank continues to focus on generating additional agriculture loan relationships in each
of its market areas.
Municipal
Lending. Loans to municipalities, which make up approximately 0.6% of total loans at December 31, 2025, are generally related
to equipment leasing or general fund loans. Terms are generally limited to 5 years. Equipment leases are generally made for the purchase
of municipal assets and are secured by the leased asset. The Bank is generally not active in the origination of municipal loans and leases;
however, the Bank may originate loans or leases for municipalities in its market areas.
Consumer
and Other Lending. Loans classified as consumer and other loans, which make up approximately 3.0% of total loans at December
31, 2025, include automobile, boat, home improvement and home equity loans. With the exception of home improvement loans and home equity
loans, the Bank generally takes a purchase money security interest in collateral for which it provides the original financing. Home improvement
loans and home equity loans are principally secured through second mortgages. The terms of the loans typically range from one to five
years, depending upon the use of the proceeds, and generally range from 75% to 90% of the value of the collateral. The majority of these
loans are installment loans with fixed interest rates. Home improvement and home equity loans are generally secured by a second mortgage
on the borrower’s personal residence and, when combined with the first mortgage, limited to 80% of the value of the property unless
further protected by private mortgage insurance. Home improvement loans are generally made for terms of five to seven years with fixed
interest rates. Home equity loans are generally made for terms of ten years on a revolving basis with adjustable monthly interest rates
tied to the national prime interest rate. While the Bank primarily provides consumer loans to its existing customers, consumer lending
is not a category the Bank targets for organic growth.
Loan
Origination and Processing
Loan
originations are derived from a number of sources. Residential loan originations result from real estate broker referrals, direct solicitation
by the Bank’s loan officers, present depositors and borrowers, referrals from builders and attorneys, walk-in customers and, in
some instances, other lenders. Consumer and CRE loan originations generally emanate from many of the same sources.
Residential
loan applications are underwritten and closed based upon standards which generally meet secondary market guidelines. The loan underwriting
procedures followed by the Bank conform to regulatory specifications and are designed to assess both the borrower’s ability to
make principal and interest payments and the value of any assets or property serving as collateral for the loan. Generally, as part of
the process, a loan officer meets with each applicant to obtain the appropriate employment and financial information as well as any other
required loan information. The Bank then obtains reports with respect to the borrower’s credit record, and on real estate loans,
orders and reviews an appraisal of any collateral for the loan (prepared for the Bank by an independent appraiser).
Loan
applicants are notified promptly of the decision of the Bank. Prior to closing any long-term loan, the borrower must provide proof of
fire and casualty insurance on the property serving as collateral, and such insurance must be maintained during the full term of the
loan. Title insurance is required on loans collateralized by real property.
The
Bank is focusing on the generation of commercial, CRE and agriculture loans to grow and diversify the loan portfolio. Total gross loans
increased during 2025 as a result of the origination of variable rate mortgage loans and loan growth in CRE, and agriculture loans.
Deposits
The
Bank has a diversified deposit base. The deposit base consists of retail, commercial and public fund customers located in the markets
in which the Bank operates. The Bank provides a diverse financial suite of products to its deposit customers and seeks to be the primary
financial service provider for these customers. The Bank considers these deposit relationships to be its core deposit base. If the Bank
requires funding that exceeds these customers’ deposit balances, non-core or brokered deposits may be utilized. The balance of
these non-core or brokered deposits at December 31, 2025 was $108.9 million, or 7.8% of total deposits, compared to $91.4 million, or
6.9% of total deposits at December 31, 2024.
In
order for the Bank to attract and retain stable deposit relationships, the Bank offers business cash management solution services to
help local companies better manage their cash flow. The Bank also offers Insured Cash Sweep (“ICS”) and Certificate of Deposit
Account Registry Service to provide customers with FDIC insurance coverage for deposit balances that exceed the insurance limit of $250,000.
The ICS accounts are integrated with the Bank’s core processor so transfers can be automated for the Bank’s customers. The
expertise and experience of the Bank’s management coupled with the latest technology accessed through third party providers enables
the Bank to maximize the growth of business-related deposits.
As
for consumers, deposit growth is driven by a variety of factors including, but not limited to, population growth, bank and non-bank competition,
local bank mergers and consolidations, increases in household income, interest rates, accessibility of location and the sales efforts
of Bank personnel. Time deposits can be attracted and increased by paying an interest rate higher than that offered by competitors, but
are the costliest type of deposit. The most profitable type of deposits are non-interest bearing demand (checking) accounts, which can
be attracted by offering free checking. However, both high interest rates and free checking accounts generate certain expenses for a
bank and the desire to increase deposits must be balanced with the need to be profitable and the extent of banking relationships with
the customers. The deposit services of the Bank are generally comprised of demand deposits, savings deposits, money market deposits,
time deposits and individual retirement accounts.
Supervision
and Regulation
General
Deposits
of the Bank are insured by the Deposit Insurance Fund (the “DIF”) of the Federal Deposit Insurance Corporation (the “FDIC”)
up to the maximum amount allowable under applicable federal laws and regulations. The Bank is regulated by the Office of the Comptroller
of the Currency (the “OCC”), as the chartering authority for national banks, and the FDIC, as the administrator of the DIF.
The Company and the Bank are also subject to regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve”)
with respect to reserves required to be maintained against deposits and certain other matters, including the regulation of bank holding
companies. The Bank is a member of the Federal Reserve Bank of Kansas City and the Federal Home Loan Bank (the “FHLB”) of
Topeka.
FDIC-insured
institutions, like the Bank, their holding companies and their affiliates are extensively regulated under federal law. As a result, our
growth and earnings performance may be affected not only by management decisions and general economic conditions, but also by the requirements
of applicable statutes and by the regulations and policies of various banking agencies, including our primary federal regulator, the
Federal Reserve, and the Bank’s primary federal regulator, the OCC, as well as the FDIC, as the insurer of the Bank’s deposits,
and consumer financial protection agencies. Furthermore, taxation laws administered by the Internal Revenue Service and state taxing
authorities, accounting rules developed by the Financial Accounting Standards Board (“FASB”), securities laws administered
by the Securities and Exchange Commission (“SEC”) and state securities authorities, and anti-money laundering and sanctions
laws enforced by the U.S. Department of the Treasury (“Treasury”) have an impact on our business. The effect of these statutes,
regulations, regulatory policies and accounting rules are significant to our operations and results.
Federal
and state banking laws impose a comprehensive system of supervision, regulation and enforcement on the operations of FDIC-insured institutions,
their holding companies and affiliates that is intended primarily for the protection of the FDIC-insured deposits and depositors of banks,
rather than shareholders. These laws, and the regulations of the banking agencies issued under them, affect, among other things, the
scope of our business, the kinds and amounts of investments that we may make, required capital levels relative to assets, the nature
and amount of collateral for loans, the establishment of branches, our ability to merge, consolidate and acquire, dealings with the Company’s
and the Bank’s insiders and affiliates and our payment of dividends.
In
response to the global financial crisis and particularly following passage of the Dodd-Frank Wall Street Reform and Consumer Protection
Act (the “Dodd-Frank Act”), we experienced heightened regulatory requirements and scrutiny. Although the reforms primarily
targeted large banking organizations and systemically important financial institutions, their influence filtered down in varying degrees
to community banking organizations over time and caused our compliance and risk management processes, and the costs thereof, to increase.
The Economic Growth, Regulatory Relief and Consumer Protection Act of 2018 (the “Regulatory Relief Act) clarified the inapplicability
of certain Dodd-Frank Act reforms to community banking organizations, including relieving them of any requirement to engage in mandatory
stress tests, maintain a risk committee or comply with the Volcker Rule’s complicated prohibitions on proprietary trading and ownership
of private funds.
Over
the past year, the federal banking agencies have continued efforts to reduce regulatory burden on banking organizations, including community
banking organizations, through various supervisory, regulatory and policy initiatives. These efforts have included the rescission or
revision of certain rulemakings and proposals, initiatives to streamline examination and application processes and efforts to increase
transparency and consistency in supervisory expectations. Congress also has considered additional measures aimed at easing specific compliance
obligations for community banks, although no reforms comparable in scope to the Regulatory Relief Act have been enacted to date. The
Company believes that these developments may be favorable to the operations of the Company or the Bank: however, future changes in laws,
regulations or supervisory priorities, and their impacts on the Company’s or the Bank’s business, remain uncertain.
The
supervisory framework applicable to U.S. banking organizations subjects banks and bank holding companies to regular examination by their
respective banking agencies. These examinations result in confidential examination reports and supervisory ratings that may impact an
institution’s operations, capital levels, growth and strategic initiatives. Examinations consider not only compliance with applicable
laws and regulations, but also capital levels, asset quality and risk, management ability and performance, earnings, liquidity and overall
risk profile, among other things. The banking agencies generally have broad discretion to impose restrictions and limitations on the
operations of a regulated entity where the agencies determine that such operations are unsafe or unsound, fail to comply with applicable
law or are otherwise inconsistent with laws and regulations. Changes in supervisory approach or emphasis may materially affect the operations
and financial results of the Company and the Bank, as well as the banking industry in general.
In
recent supervisory communications, rulemakings and policy statements, the federal banking agencies have indicated an increased focus
on core, material financial risks (rather than risk management processes), greater transparency in supervisory expectations, and efforts
to reduce examination burden, particularly for community banks. For example, the OCC has proposed or implemented initiatives: (i) to
clarify standards for unsafe or unsound practices; (ii) to reduce the regulatory burden on community banking organizations in connection
with anti-money laundering and countering the financing of terrorism examinations; and (iii) generally to streamline examination procedures
for community banking organizations by allowing examiners to tailor the scope and frequency of examinations based on risk-based supervision,
consistent with applicable laws and regulations. These initiatives may enable management to focus more effectively on growth opportunities
and the management of material financial risks.
The
following is a summary of the material elements of the supervisory and regulatory framework applicable to the Company and the Bank. It
does not describe all of the statutes, regulations and regulatory policies that apply, nor does it restate all of the requirements of
those that are described. The descriptions are qualified in their entirety by reference to the particular statutory and regulatory provision.
The
Role of Capital
Regulatory
capital represents the net assets of a banking organization available to absorb losses. Because of the risks attendant to their business,
FDIC-insured institutions, such as banks, as well as their holding companies (i.e., banking organizations) generally are required to
hold more capital than other businesses, which directly affects our earnings capabilities. Although capital historically has been one
of the key measures of the financial health of both bank holding companies and banks, its role became fundamentally more important in
the wake of the global financial crisis, as the banking agencies recognized that the amount and quality of capital held by banking organizations
prior to that crisis was insufficient to absorb losses during periods of severe stress.
Capital
Levels. Banking organizations have been required to hold minimum levels of capital based on guidelines established by the federal
banking agencies since 1983. The minimum capital levels for banking organizations have been expressed in terms of ratios of “capital”
divided by “total assets.” The capital guidelines for U.S. banking organizations beginning in 1989 have been based upon international
capital accords (known as the “Basel” accords) adopted by the Basel Committee on Banking Supervision, a committee of central
banks and bank supervisors that acts as the primary global standard-setter for prudential regulation, as interpreted and implemented
by the U.S. federal banking agencies on an interagency basis. These accords recognized that bank assets for the purpose of the capital
ratio calculations needed to be risk weighted (the theory being that riskier assets should require more capital) and that off-balance
sheet exposures needed to be factored in the calculations. Following the global financial crisis, the Group of Governors and Heads of
Supervision, the oversight body of the Basel Committee on Banking Supervision, announced an agreement on a strengthened set of capital
requirements for banking organizations around the world, known as the Basel III accords, to address deficiencies recognized in connection
with the global financial crisis.
The
Basel III Rule. The U.S. federal banking agencies adopted the U.S. Basel III regulatory capital reforms, and, at the same time,
effected changes required by the Dodd-Frank Act, in regulations that were effective in 2015 (with certain phase-ins) (the “Basel
III Rule”). The Basel III Rule established capital standards for banks and bank holding companies that are meaningfully more stringent
than those in place previously and are still in effect today. The Basel III Rule increased the required quantity and quality of capital
and required a more complex, detailed and calibrated assessment of risk in the calculation of risk weightings for bank assets. The Basel
III Rule is applicable to all banking organizations that are subject to minimum capital requirements, including national and state banks
and savings and loan associations, as well as to holding companies, other than “small bank holding companies” and certain
qualifying banking organizations that may elect a simplified framework (which we have not done). The Company and the Bank currently are
subject to the Basel III Rule as described below.
Not
only did the Basel III Rule increase most of the required minimum capital ratios in effect prior to January 1, 2015, but, by requiring
that capital instruments be of higher quality to absorb loss, it introduced the concept of Common Equity Tier 1 Capital (“CET1”),
which consists primarily of common stock, related surplus (net of treasury stock), retained earnings, and CET1 minority interests, subject
to certain regulatory adjustments and deductions. The Basel III Rule also changed the definition of regulatory capital by establishing
more stringent criteria for instruments to qualify as Additional Tier 1 Capital (primarily non-cumulative perpetual preferred stock that
meets certain requirements) and Tier 2 Capital (primarily other types of preferred stock and subordinated debt, subject to limitations).
In addition, the Basel III Rule limited the inclusion of minority interests, mortgage-servicing assets, and deferred tax assets in regulatory
capital and required deductions from CET1 in the event that such assets exceeded prescribed thresholds.
The
Basel III Rule requires banking organizations to maintain minimum capital ratios to be deemed “adequately capitalized” as
follows:
● A ratio of CET1 equal to 4.5% of risk-weighted assets;
● A ratio of Tier 1 Capital equal to 6% of risk-weighted assets;
In
addition, banking organizations that want to make capital distributions (including dividends and stock repurchases) and pay discretionary
bonuses to executive officers without restriction must maintain 2.5% in CET1 in the form of a capital conservation buffer. The purpose
of the conservation buffer is to ensure that banking organizations maintain a cushion of capital that can be used to absorb losses during
periods of financial and economic stress. Factoring in the capital conservation buffer increases the minimum ratios described above to
7% for CET1, 8.5% for Tier 1 Capital and 10.5% for Total Capital.
Well
Capitalized Requirements. The capital ratios described above represent minimum standards for banking organizations to be considered
“adequately capitalized.” Banking agencies uniformly encourage banking organizations to maintain capital levels above these
minimums and to be classified as “well capitalized.” To that end, federal law and regulations provide various incentives
for banking organizations to maintain regulatory capital in excess of minimum regulatory requirements. For example, a well capitalized
banking organization may: (i) qualify for exemptions from prior notice or application requirements otherwise applicable to certain activities;
(ii) receive expedited processing of other required notices or applications; and (iii) accept, roll-over or renew brokered deposits.
In addition, the banking agencies may require higher capital levels where warranted by an institution’s specific risk profile or
operating circumstances. For example, the Federal Reserve’s capital guidelines contemplate that additional capital may be required
to take adequate account of, among other things, risks, such as interest rate risk, or risks associated with credit concentrations, nontraditional
activities or securities trading activities. Further, any banking organization experiencing or anticipating significant growth would
be expected to maintain capital ratios, including tangible capital positions (i.e., Tier 1 Capital less all intangible assets), well
above the minimum regulatory levels.
Under
the capital regulations of the Federal Reserve for the Company and the OCC for the Bank, in order to be well capitalized, we must maintain:
● A CET1 ratio to risk-weighted assets of 6.5% or more;
● A ratio of Tier 1 Capital to total risk-weighted assets of 8% or more;
● A ratio of Total Capital to total risk-weighted assets of 10% or more; and
Under
the Basel III Rule, a banking organization may be considered “well capitalized,” while not complying with the capital conservation
buffer requirement described above.
As
of December 31, 2025: (i) the Bank was not subject to a directive from the OCC to increase its capital and (ii) the Bank was well-capitalized,
as defined by OCC regulations. As of December 31, 2025, the Company had regulatory capital in excess of the Federal Reserve’s requirements
and met the Basel III Rule requirements to be well-capitalized. The Company and the Bank also are in compliance with the capital conservation
buffer.
Basel
III Endgame Proposal. Previously, the federal banking agencies proposed a “Basel III Endgame Rule” to complete the
implementation of certain aspects of the Basel III accords, particularly relating to risk-weighted assets; however, the proposal was
not adopted, in part due to stakeholder concerns regarding potential economic impacts, data transparency and the alignment of certain
provisions with statutory tailoring requirements. Based on public statements from federal agency officials, it is anticipated that a
revised proposal may be issued in the future. Any reproposal of the Basel III Endgame Rule is expected to primarily affect large, complex
banking organizations.
Prompt
Corrective Action. The concept of a banking organization being “adequately capitalized” or “well capitalized,”
as defined above, is part of a regulatory regime that provides the federal banking agencies with broad power to take “prompt corrective
action” to resolve the problems of undercapitalized depository institutions based on the capital level of each particular institution.
The extent of the banking agencies’ powers depends on whether the institution in question is “adequately capitalized,”
“undercapitalized,” “significantly undercapitalized” or “critically undercapitalized,” in each case
as defined by regulation. Depending upon the capital category to which a banking organization is assigned, the agencies’ corrective
powers include: (i) requiring the institution to submit a capital restoration plan; (ii) limiting the institution’s asset
growth and restricting its activities; (iii) requiring the institution to issue additional capital stock (including additional voting
stock) or to sell itself; (iv) restricting transactions between the institution and its affiliates; (v) restricting the interest
rate that the institution may pay on deposits; (vi) ordering a new election of directors of the institution; (vii) requiring
that senior executive officers or directors be dismissed; (viii) prohibiting the institution from accepting deposits from correspondent
banks; (ix) requiring the institution to divest certain subsidiaries; (x) prohibiting the payment of principal or interest
on subordinated debt; and (xi) ultimately, appointing a receiver for the institution.
Community
Bank Capital Simplification. Community banking organizations have long raised concerns with the federal banking agencies about the
regulatory burden, complexity and costs associated with certain provisions of the Basel III Rule. In response, Congress provided an “off-ramp”
for institutions, like the Company, with total consolidated assets of less than $10 billion as part of the Regulatory Relief Act. Section
201 of the Regulatory Relief Act specifically instructed the federal banking agencies to establish a single “Community Bank Leverage
Ratio” (“CBLR”) of between 8 and 10%. Under a final regulation promulgated by the federal banking agencies, a community
banking organization is eligible to elect to comply with its capital requirements under the CBLR framework if it has: (i) less than $10
billion in total consolidated assets; (ii) limited amounts of certain assets and off-balance sheet exposures; and (iii) a CBLR greater
than 9%. In late 2025, the federal banking agencies proposed changes to the CBLR framework intended to encourage broader adoption, including
reducing the required leverage ratio from 9.0% to 8.0%; however, the proposal has not yet been finalized. Neither the Company nor the
Bank has elected to use the CBLR framework at this time.
Supervision
and Regulation of the Company
General.
The Company, as the sole shareholder of the Bank, is a bank holding company. As a bank holding company that has elected financial
holding company status, we are registered with, and subject to regulation, supervision and enforcement by, the Federal Reserve under
the Bank Holding Company Act of 1956, as amended (the “BHCA”). We are legally obligated to act as a source of financial and
managerial strength to the Bank and to commit resources to support the Bank in circumstances where we might not otherwise do so. Under
the BHCA, we are subject to periodic examination by the Federal Reserve and are required to file with the Federal Reserve periodic reports
of our operations and such additional information regarding the Company and the Bank as the Federal Reserve may require.
Acquisitions
and Activities. The primary purpose of a bank holding company is to control and manage banks. The BHCA generally requires the
prior approval of the Federal Reserve for any merger involving a bank holding company or any acquisition by a bank holding company of
another bank or bank holding company. Pursuant to the BHCA and the Dodd-Frank Act, the Federal Reserve may permit a well capitalized
and well managed bank holding company to acquire banks located in any U.S. state, subject to federal deposit concentration limits, applicable
nondiscriminatory state deposit-cap laws and state minimum-existence requirements for target banks (not exceeding five years).
The
BHCA generally prohibits the Company from acquiring direct or indirect ownership or control of more than 5% of a class of the outstanding
voting shares of any nonbanking entity and from engaging in any business other than that of banking, managing and controlling banks or
furnishing services to banks and their subsidiaries. This general prohibition is subject to a number of exceptions. The principal exception
allows bank holding companies to engage in, and to own shares of companies engaged in, certain businesses found by the Federal Reserve
prior to November 11, 1999 to be “so closely related to banking... as to be a proper incident thereto.” This authority would
permit the Company to engage in a variety of banking-related businesses, including, among other things, the ownership and operation of
a savings association, or any entity engaged in consumer finance, equipment leasing, the operation of a computer service bureau (including
software development) and mortgage banking and brokerage services. The BHCA does not place formal territorial restrictions on the domestic
activities of nonbank subsidiaries of bank holding companies. In addition to approval from the Federal Reserve that may be required in
certain circumstances, prior approval for the establishment or acquisition of nonbank subsidiaries by the Company may be required from
other agencies that regulate such nonbank company.
Financial
Holding Company Election. Bank holding companies that meet certain BHCA eligibility requirements and elect to operate as financial
holding companies may engage in, or own shares in companies engaged in, a wider range of nonbanking activities, including securities
and insurance underwriting and sales, merchant banking and any other activity that: (i) the Federal Reserve, in consultation with the
Secretary of the Treasury, determines by regulation or order is financial in nature or incidental to any such financial activity; or
(ii) the Federal Reserve determines by order to be complementary to any such financial activity, as long as the activity does not pose
a substantial risk to the safety or soundness of FDIC-insured institutions or the financial system generally.
We
elected to operate as a financial holding company in May 2017. In order to maintain our status as a financial holding company, both the
Company and the Bank must be well capitalized and well managed, and the Bank must have at least a satisfactory CRA rating. If the Federal
Reserve determines that either a financial holding company or its bank subsidiary is not well capitalized or well managed, the Federal
Reserve will provide a period of time in which to achieve compliance, but during the period of noncompliance, the Federal Reserve may
place any limitations on such company that it deems appropriate. Furthermore, if the Federal Reserve determines that a financial holding
company’s bank subsidiary has not received a satisfactory CRA rating, we would not be able to commence any new financial activities
or acquire a company that engages in such activities.
Change
in Control. Federal law prohibits any person or company from acquiring “control” of an FDIC-insured depository institution
or its bank holding company without prior notice to the appropriate federal banking agency. “Control” is conclusively determined
to exist upon the acquisition of 25% or more of the outstanding voting securities of a bank or bank holding company, but may be presumed
to arise under certain circumstances between 10% and 24.99% ownership.
Capital
Requirements. Bank holding companies are required to maintain capital in accordance with Federal Reserve capital adequacy requirements.
For a discussion of capital requirements generally, see “-the “Role of Capital” above.
Dividend
Payments. Our ability to pay dividends to shareholders may be affected by both general corporate law considerations and the policies
and capital requirements of the Federal Reserve applicable to bank holding companies. As a Delaware corporation, we are subject to the
limitations of the Delaware General Corporation Law (the “DGCL”). The DGCL allows us to pay dividends only out of surplus
(as defined and computed in accordance with the provisions of the DGCL) or if we have no such surplus, out of its net profits for the
fiscal year in which the dividend is declared and/or the preceding fiscal year.
As
a general matter, the Federal Reserve has indicated that the board of directors of a bank holding company should eliminate, defer or
significantly reduce dividends to shareholders if: (i) the company’s net income available to shareholders for the past four quarters,
net of dividends previously paid during that period, is not sufficient to fully fund the dividends; (ii) the prospective rate of
earnings retention is inconsistent with the company’s capital needs and overall current and prospective financial condition;
or (iii) the company will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios. The Federal Reserve
also possesses enforcement powers over bank holding companies and their nonbank subsidiaries to prevent or remedy actions that represent
unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability to proscribe the
payment of dividends by banks and bank holding companies. Finally, the Basel III Rule imposes consolidated capital requirements on banking
organizations. As a result, banking organizations must hold a capital conservation buffer of 2.5% in CET1 above the minimum risk-based
capital requirements to not be subject to regulatory limits on dividends and other capital distributions. See “The Role of Capital”
above.
Monetary
Policy. The monetary policy of the Federal Reserve has a significant effect on the operating results of bank holding companies
and their subsidiaries. Among the tools available to the Federal Reserve to affect the money supply are open market transactions in U.S.
government securities and changes in the discount rate on bank borrowings. These means are used in varying combinations to influence
overall growth and distribution of bank loans, investments and deposits, and their use may affect interest rates charged on loans or
paid on deposits, which may impact the Company’s business and operations.
Federal
Securities Regulation. Our common stock is registered with the SEC under the Securities Act of 1933 (the “Securities
Act”) and the Securities Exchange Act of 1934 (the “Exchange Act”), each as amended. Consequently, we are subject
to the information, proxy solicitation, insider trading and other restrictions and requirements of the SEC under the Exchange
Act.
Corporate
Governance/Incentive Compensation. The Dodd-Frank Act addressed many investor protection, corporate governance and executive
compensation matters that will affect most U.S. publicly traded companies. It increased stockholder influence over boards of directors
by requiring companies to give stockholders a nonbinding vote on executive compensation and so-called “golden parachute”
payments, and authorizing the SEC to promulgate rules that would allow stockholders to nominate and solicit voters for their own candidates
using a company’s proxy materials.
The
Dodd-Frank Act also directed the Federal Reserve, together with the other federal banking and financial services agencies, to promulgate
rules prohibiting excessive incentive-based compensation paid to executives of bank holding companies, regardless of whether such companies
are publicly traded. Although several agencies have made repeated efforts to implement rules under this provision of the Dodd-Frank Act—including
a proposal issued most recently in May 2024, which was subsequently withdrawn—no final rule has been adopted at this time. Nevertheless,
the federal banking agencies have issued interagency guidance on sound incentive compensation practices for banking organizations, reflecting
the agencies’ recognition that incentive compensation practices in the financial industry were among the factors contributing to
the global financial crisis. The interagency guidance recognizes three core principles for effective incentive compensation plans: (i)
appropriately balancing risk and reward; (ii) compatibility with effective controls and risk management; and (iii) support by strong
corporate governance, including active and effective oversight by the organization’s board of directors. Although much of the guidance
is directed at large banking organizations that are expected to maintain systematic and formalized policies and procedures, smaller banking
organizations, like the Company, are expected to implement less extensive and less formalized systems pursuant to the guidance.
Supervision
and Regulation of the Bank
General.
The Bank is a national bank, chartered by the OCC under the National Bank Act, and a member of the Federal Reserve System. The
deposit accounts of the Bank are insured by the DIF to the maximum extent provided under federal law and FDIC regulations, currently
$250,000 per insured depositor, per ownership category. Ongoing policy discussions at the federal level have focused on potential changes
to deposit insurance coverage, including possible adjustments to coverage limits, although no changes have been enacted.
As
a national bank, the Bank is subject to the examination, supervision, reporting and enforcement requirements of the OCC. The FDIC, as
administrator of the DIF, also has residual authority over the Bank.
Deposit
Insurance Assessments. As an FDIC-insured institution, the Bank is required to pay deposit insurance premium assessments to the
FDIC. The FDIC has adopted a risk-based assessment system whereby FDIC-insured institutions pay insurance premiums at rates based on
their risk classification. For institutions like the Bank that are not considered large and highly complex banking organizations, assessments
are now based on examination ratings and financial ratios. The total base assessment rates, effective as of January 1, 2023, generally
range from 2.5 basis points (for the lowest risk institutions) to 32 basis points or beyond (for higher risk institutions).
At
least semi-annually, the FDIC updates its loss and income projections for the DIF and, if needed, increases or decreases the assessment
rates, following notice and comment on proposed rulemaking. For this purpose, the reserve ratio is the DIF balance divided by estimated
insured deposits. In response to the global financial crisis, the Dodd-Frank Act increased the minimum reserve ratio from 1.15% to 1.35%
of the estimated amount of total insured deposits. In its May 2025 report, the FDIC stated that the reserve ratio likely will reach the
statutory minimum by the September 30, 2028 deadline, and no adjustments to the base assessment rates is currently projected.
In
addition, because the cost of the failures of Silicon Valley Bank and Signature Bank to the DIF attributable to the systemic risk exception
was approximately $16.7 billion, the FDIC adopted a special assessment for banking organizations with $5 billion or more in total assets.
Because the Company is a banking organization with less than $5 billion in total assets, this special assessment does not apply to us.
Supervisory
Assessments. National banks are required to pay supervisory assessments to the OCC to fund the operations of the OCC. The amount
of the OCC’s general assessment is calculated using a formula that considers the bank’s size and its supervisory condition.
During the year ended December 31, 2025, the Bank paid supervisory assessments to the OCC totaling $168,000.
Capital
Requirements. Banks generally are required to maintain capital levels in excess of other businesses. For a discussion of capital
requirements, see “The Role of Capital” above.
Liquidity
Requirements. Liquidity is a measure of the ability and ease with which bank assets may be converted to meet financial obligations
such as deposits or other funding sources. Banks are required to implement liquidity risk management frameworks that ensure they maintain
sufficient liquidity, including a cushion of unencumbered, high quality liquid assets, to withstand a range of stress events. The level
and speed of deposit outflows contributing to the failures of Silicon Valley Bank, Signature Bank and First Republic Bank in 2023 was
unprecedented and contributed to acute liquidity and funding strain, underscoring the importance of liquidity risk management and contingency
funding planning by insured depository institutions like the Bank, as highlighted in a 2023 addendum to existing interagency guidance
on funding and liquidity risk management.
The
primary roles of liquidity risk management are to: (i) prospectively assess the need for funds to meet financial obligations; and
(ii) ensure the availability of cash or collateral to fulfill those needs at the appropriate time by coordinating the various sources
of funds available to the institution under normal and stressed conditions. The Basel III Rule includes a liquidity framework that requires
the largest insured institutions to measure their liquidity against specific liquidity tests. One test, referred to as the Liquidity
Coverage Ratio, or LCR, is designed to ensure that the banking organization has an adequate stock of unencumbered high-quality liquid
assets that can be converted easily and immediately in private markets into cash to meet liquidity needs for a 30-calendar day liquidity
stress scenario. The other test, known as the Net Stable Funding Ratio, or NSFR, is designed to promote more medium- and long-term funding
of the assets and activities of FDIC-insured institutions over a one-year horizon. These tests provide an incentive for banks and bank
holding companies to increase their holdings in treasury securities and other sovereign debt as a component of assets, increase the use
of long-term debt as a funding source and rely on stable funding like core deposits (in lieu of brokered deposits).
Although
these tests do not apply to the Bank, we continue to review our liquidity risk management policies in light of regulatory requirements
and industry developments.
Dividend
Payments. The primary source of funds for the Company is dividends from the Bank. Under the National Bank Act, a national bank
may pay dividends out of its undivided profits in such amounts and at such times as the bank’s board of directors deems prudent.
Without prior OCC approval, however, a national bank may not pay dividends in any calendar year that, in the aggregate, exceed the bank’s
year-to-date net income plus the bank’s retained net income for the two preceding years. The payment of dividends by any FDIC-insured
institution is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations,
and an FDIC-insured institution generally is prohibited from paying any dividends if, following payment thereof, the institution would
be undercapitalized. As described above, the Bank exceeded its capital requirements under applicable guidelines as of December 31, 2025.
Notwithstanding the availability of funds for dividends, however, the OCC may prohibit the payment of dividends by the Bank if it determines
such payment would constitute an unsafe or unsound practice. In addition, under the Basel III Rule, banking organizations that wish to
pay dividends must maintain 2.5% in CET1 attributable to the capital conservation buffer. See “The Role of Capital” above.
Investments,
Activities and Acquisitions. The Bank is permitted to make investments and engage in activities directly or through subsidiaries
as authorized by, and subject to the limitations set forth in, the National Bank Act as well as OCC regulations and interpretations.
The Bank may be required to obtain approval from the OCC and other applicable banking or financial services agencies before engaging
in certain acquisitions or mergers under applicable law. With respect to interstate merger and acquisitions, federal law permits national
banks to merge with banks in other states subject to: (i) regulatory approval; (ii) federal and state deposit concentration limits; and
(iii) state law requirements that the merging bank has been in existence for a minimum period of time (not to exceed five years), prior
to the merger. In 2025, the federal banking agencies, including the OCC and the FDIC, rescinded certain prior administrative actions
regarding the review and approval of mergers and acquisitions, with the intent of streamlining and expediting the regulatory review of
certain merger and acquisition applications.
Branching
Authority. As a national bank headquartered in Kansas, the Bank has the same branching rights in Kansas as banks chartered under
Kansas law, subject to OCC approval. Kansas law grants Kansas-chartered banks the authority to establish branches anywhere in the State
of Kansas, subject to receipt of all required regulatory approvals. The Dodd-Frank Act permits well capitalized and well managed banks
to establish new branches across state lines without legal impediments.
Affiliate
and Insider Transactions. The Bank is subject to certain restrictions imposed by federal law on “covered transactions”
between the Bank and its “affiliates.” The Company is an affiliate of the Bank for purposes of these restrictions. Covered
transactions subject to these restrictions include extensions of credit to the Company, investments in the stock or other securities
of the Company and the acceptance of the stock or other securities of the Company as collateral for loans made by the Bank. The Dodd-Frank
Act enhanced these requirements by expanding the definition of “covered transactions” and extending the period for which
collateral requirements regarding covered transactions must be maintained.
Certain