UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
For
fiscal year ended December 31, 2024
OR
For
transition period from __________ to ___________
Commission
File Number 0-33203
LANDMARK
BANCORP, INC.
(Exact
name of Registrant as specified in its charter)
701
Poyntz Avenue, Manhattan, Kansas66502
(Address
of principal executive offices) (Zip Code)
(785)565-2000
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
Common Stock, par value $0.01 per share LARK Nasdaq Global Market
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No
☒
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,”
“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☒ Smaller reporting company ☒
Emerging
growth company ☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness
of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered
public accounting firm that prepared or issued its audit report. ☐
If
securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant
included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate
by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation
received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The
aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based on the last sales price
of $18.29 quoted on the Nasdaq Global Market on the last business day of the registrant’s most recently completed second fiscal
quarter, was approximately $74.1 million. On March 25, 2025, the total number of shares of common stock outstanding was 5,782,259.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the Proxy Statement for the Annual Meeting of Stockholders of the registrant to be held on May 21, 2025, are incorporated by reference
in Part III hereof, to the extent indicated herein.
LANDMARK
BANCORP, INC.
2024
Form 10-K Annual Report
Table
of Contents
ITEM 1. BUSINESS 3
ITEM 1A. RISK FACTORS 27
ITEM 1B. UNRESOLVED STAFF COMMENTS 40
ITEM 1C. CYBERSECURITY 40
ITEM 2. PROPERTIES 41
ITEM 3. LEGAL PROCEEDINGS 41
ITEM 4. MINE SAFETY DISCLOSURES 41
ITEM 6. [RESERVED] 42
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 49
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 52
ITEM 9A. CONTROLS AND PROCEDURES 97
ITEM 9B. OTHER INFORMATION 97
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS 97
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 98
ITEM 11. EXECUTIVE COMPENSATION 98
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES 99
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 100
PART
I.
ITEM 1. BUSINESS
The
Company
Landmark
Bancorp, Inc. (the “Company”) 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, 2024, 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. In February 2024, the Bank opened a loan production office in Kansas City, Missouri. On October 1, 2022, the Company completed
its acquisition of Freedom Bancshares, Inc. (“Freedom”), the holding company of Freedom Bank. The acquisition was accounted
for as a business combination under ASC 805.
The
Bank has continued to focus on increasing its originations of commercial, commercial real estate (“CRE”) and agricultural loans, which management believes will
be more profitable and provide more growth for the Bank than traditional one-to-four family residential real estate lending. The Bank
has grown its one-to-four family residential loan portfolio over the past two years as higher interest rates increased consumer demand
for variable rate loans, which were retained in the Bank’s portfolio. Additionally, 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. The Bank has
also diversified its geographical markets as a result of its branching and acquisition opportunities. The Company’s main office
is in Manhattan, Kansas. The Company has 29 branch offices in 23 communities across the state of Kansas and one loan production office
in Kansas City, Missouri.
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 sales of one-to-four family residential mortgage loans, loan servicing fees and customer deposit services. Additional
expenses of the Bank include general and administrative expenses such as salaries, employee benefits, federal deposit insurance premiums,
data processing, occupancy and related expenses.
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.
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 was selected as the site
of a new National Bio and Agro-Defense Facility, which has had a significant impact on the regional economy. Additionally, manufacturing
and service industries play a key role within the central Kansas market.
Eastern
region. The Bank’s eastern Kansas branches are located in the communities of Lawrence, Lenexa, Louisburg, Osawatomie, Overland
Park, Paola, Prairie Village and Wellsville, Kansas and 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.
The acquisition of Freedom Bank in 2022 expanded the Bank’s presence in Overland Park and contributed to the growth in loans and
deposits. Panasonic Energy is currently constructing a new lithium-ion battery manufacturing facility in De Soto, Kansas which is expected
to begin production in the spring of 2025. This new plant is projected to have a significant impact on the regional economy in eastern
Kansas.
Southeast
region. The southeast region of the Bank’s market area consists of the Bank’s locations in Fort Scott, Iola, 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 LaCrosse, Kansas. Agriculture, oil, and gas are the predominant industries in the southwest Kansas region. Predominant activities
involve crop production, feed lot operations, and food processing. 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.
Dodge City was selected as the site for a new state-of-the-art cheese and whey processing plant, which has had a significant impact on
the regional economy.
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, 2024, the Bank had a total of 287 employees (283 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 33.5% of total loans at December
31, 2024, 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, 2024 compared to December 31, 2023, 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 16.4% increase
in balances during 2024 and 2023. 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 2.4% of total loans at December 31, 2024. 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 increased 20.1% as of December 31, 2024
compared to December 31, 2023 primarily due to higher 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
32.8% of total loans at December 31, 2024. 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 18.3% of total loans at December 31, 2024, 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 loans, which make up approximately 9.5% of total loans at December 31, 2024, 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 0.7% of total loans at December 31, 2024, 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 2.8% of total loans at December
31, 2024, 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 2024 as a result of the origination of variable rate mortgage loans and loan growth in CRE, commercial and agriculture
loans. The Bank was able to generate loan growth across the geographic markets that it serves, primarily in commercial, CRE and one-to-four
residential real estate 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, 2024 was $91.4 million, or 6.9% of total deposits, compared to $83.2 million, or
6.3% of total deposits at December 31, 2023.
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
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 the Consumer Financial Protection Bureau (“CFPB”), as the regulator of consumer financial services and their providers.
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 reaction 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 (“Regulatory Relief Act”) eliminated questions about the applicability of certain Dodd-Frank Act reforms
to community banking systems, 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. These reforms
have been favorable to our operations. It is anticipated that the Trump Administration and the current U.S. Congress likely will not
increase the regulatory burden on community banking organizations and may seek to reduce and streamline certain prudential and regulatory
requirements applicable to community banking organizations at a federal level based on statements made by relevant congressional leaders
and the acting leaders of certain federal banking agencies. At this time, however, it is not possible to predict with any certainty the
actual impact that the Trump Administration may have on the banking industry or our operations.
The
supervisory framework for U.S. banking organizations subjects banks and bank holding companies to regular examination by their respective
banking agencies, which results in examination reports and ratings that are not publicly available and that can impact the conduct and
growth of their businesses. These 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 various other factors. The banking agencies generally
have broad discretion to impose restrictions and limitations on the operations of a regulated entity where the agencies determine, among
other things, that such operations are unsafe or unsound, fail to comply with applicable law or are otherwise inconsistent with laws
and regulations. The approach to supervision adopted by each banking agency may have significant impacts on the operations and results
of the Company and the Bank, as well as the banking industry in general. Based on recent statements made by congressional leaders and
the acting leaders of certain federal banking agencies, there may be changes in the supervisory processes and approach made by the Trump
Administration banking agencies, but it is not possible at this time to predict the specific changes (or the timing of any such changes)
that may be made.
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) are generally required
to hold more capital than other businesses, which directly affects our earnings capabilities. Although capital has historically 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 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 (with certain phase-ins) in 2015 (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 is currently
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, in requiring
that forms of capital be of higher quality to absorb loss, it introduced the concept of Common Equity Tier 1 Capital, which consists
primarily of common stock, related surplus (net of Treasury stock), retained earnings, and Common Equity Tier 1 minority interests subject
to certain regulatory adjustments. The Basel III Rule also changed the definition of capital by establishing more stringent criteria
that instruments must meet to be considered 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). The
Basel III Rule also constrained the inclusion of minority interests, mortgage-servicing assets, and deferred tax assets in capital and
required deductions from Common Equity Tier 1 Capital in the event that such assets exceeded a percentage of a banking organization’s
Common Equity Tier 1 Capital.
The
Basel III Rule requires banking organizations to maintain minimum capital ratios as follows:
● A ratio of Common Equity Tier 1 Capital 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 wish to make capital distributions (including for dividends and repurchases of stock) and pay discretionary
bonuses to executive officers without restriction must also maintain 2.5% in Common Equity Tier 1 Capital attributable to a capital conservation
buffer. The purpose of the conservation buffer is to ensure that banking organizations maintain a buffer of capital that can be used
to absorb losses during periods of financial and economic stress. Factoring in the conservation buffer increases the minimum ratios depicted
above to 7% for Common Equity Tier 1 Capital, 8.5% for Tier 1 Capital and 10.5% for Total Capital.
In
July 2023, the Biden Administration federal banking agencies proposed wide-ranging and significant changes to the Basel III Rules (the
“Basel III Endgame Proposal”), which would have, among other requirements, imposed structural changes to the calculation
of capital requirements and risk-weighted assets in an effort to finish the implementation of the Basel III accords. The Basel III Endgame
Proposal would have primarily impacted the capital requirements applicable to banking organizations with $100 billion or more in total
assets, and, as a general matter, would not have had a significant impact on us. The Basel III Endgame Proposal has not been, and is
not expected to be, adopted in its proposed form. The Trump Administration banking agencies may change or issue their own version of
this proposal.
Well-Capitalized
Requirements. The capital ratios described above are minimum standards in order for banking organizations to be considered “adequately
capitalized.” Banking agencies uniformly encourage banking organizations to hold more capital and be “well-capitalized”
and, to that end, federal law and regulations provide various incentives for banking organizations to maintain regulatory capital at
levels in excess of minimum regulatory requirements. For example, a banking organization that is well-capitalized may: (i) qualify for
exemptions from prior notice or application requirements otherwise applicable to certain types of activities; (ii) qualify for expedited
processing of other required notices or applications; and (iii) accept, roll-over or renew brokered deposits. Higher capital levels could
also be required if warranted by the particular circumstances or risk profiles of individual banking organizations. For example, the
Federal Reserve’s capital guidelines contemplate that additional capital may be required to take adequate account of, among other
things, interest rate risk, or the risks posed by concentrations of credit, 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 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 Common Equity Tier 1 Capital ratio to risk-weighted assets of 6.5% or more;
● A ratio of Tier 1 Capital to total risk-weighted assets of 8% or more;
● A ratio of Total Capital to total risk-weighted assets of 10% or more; and
It
is possible under the Basel III Rule to be well-capitalized, while remaining out of compliance with the capital conservation buffer discussed
above.
As
of December 31, 2024: (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, 2024, 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 also is in compliance with the capital conservation buffer.
Prompt
Corrective Action. The concept of a banking organization being “well-capitalized” 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, U.S. Congress provided
an “off-ramp” for institutions, like the Bank, 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 the final rule, 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%. We may elect the CBLR
framework at any time but have not currently determined to do so.
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, 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. Subject to certain conditions (including deposit concentration limits established by the BHCA),
the Federal Reserve may allow a bank holding company to acquire banks located in any state of the United States (“U.S.”).
In approving interstate acquisitions, the Federal Reserve is required to give effect to applicable state law limitations on the aggregate
amount of deposits that may be held by the acquiring bank holding company and its FDIC-insured institution affiliates in the state in
which the target bank is located (provided that those limits do not discriminate against out-of-state institutions or their holding companies)
and state laws that require that the target bank have been in existence for a minimum period of time (not to exceed five years) before
being acquired by an out-of-state bank holding company. Furthermore, in accordance with the Dodd-Frank Act, bank holding companies must
be well-capitalized and well-managed in order to effect interstate mergers or acquisitions. For a discussion of the capital requirements,
see “–The Role of Capital” above.
The
BHCA generally prohibits the Company from acquiring direct or indirect ownership or control of 5% or more of a class of the voting shares
of any company that is not a bank 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 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 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 acquisitions by the Company may be required from other agencies that regulate the target company of an acquisition.
Additionally,
bank holding companies that meet certain eligibility requirements prescribed by the BHCA 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 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 that 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, well-managed, and
the Bank must have at least a satisfactory CRA rating. If the Federal Reserve determines that either we or the Bank 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 us that it deems appropriate. Furthermore, if the Federal Reserve determines that the
Bank 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 holding company without prior notice to the appropriate federal banking agency. “Control” is conclusively presumed
to exist upon the acquisition of 25% or more of the outstanding voting securities of a bank or bank holding company, but may arise under
certain circumstances between 10% and 24.99% ownership.
Capital
Requirements. 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
its 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. In addition, under the Basel III Rule, banking organizations that wish to pay dividends have to
maintain 2.5% in Common Equity Tier 1 Capital attributable to the capital conservation buffer. See “–The Role of Capital”
above.
Incentive
Compensation. There have been a number of developments in recent years focused on incentive compensation plans sponsored by bank
holding companies and their subsidiary banks, reflecting recognition by the federal banking agencies and U.S. Congress that flawed incentive
compensation practices in the financial industry were one of many factors contributing to the global financial crisis. The result was
interagency guidance on sound incentive compensation practices for banking organizations.
The
interagency guidance recognized three core principles. Effective incentive plans should: (i) provide employees incentives that appropriately
balance risk and reward; (ii) be compatible with effective controls and risk-management; and (iii) be supported by strong corporate governance,
including active and effective oversight by the organization’s board of directors. Much of the guidance is directed at large banking
organizations and, because of the size and complexity of their operations, the banking agencies expect those organizations to maintain
systematic and formalized policies, procedures, and systems for ensuring that the incentive compensation arrangements for all executive
and non-executive employees covered by this guidance are identified and reviewed, and appropriately balance risks and rewards. Under
the interagency guidance, smaller banking organizations, like the Company, that use incentive compensation arrangements are expected
to implement less extensive, formalized, and detailed policies, procedures, and systems than those of larger banks.
In
May 2024, certain of the federal banking and other financial services agencies, including the OCC, released a proposed rule regarding
certain incentive-based compensation arrangements at certain financial institutions with at least $1 billion in assets, as required under
Section 956 of the Dodd-Frank Act. This proposal was largely based on an earlier 2016 proposal. The Federal Reserve and the SEC, however,
did not join this proposal and it was not published in the Federal Register, signaling potential interagency misalignment. In March
2025, the FDIC withdrew its support for this proposed rule, making it unlikely that any rule in a substantially similar form will be
finalized.
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 will be registered with the SEC under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”) as a result of the offering. Consequently, we will be subject to the information, proxy solicitation,
insider trading and other restrictions and requirements of the SEC under the Exchange Act.
Corporate
Governance. The Dodd-Frank Act addressed many investor protection, corporate governance and executive compensation matters that
will affect most U.S. publicly traded companies. 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 compensation paid to executives of bank holding companies, regardless of whether
such companies are publicly traded.