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Section 1: 10-Q (QUARTERLY REPORT)

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2017

 

OR

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ________ to ________

 

Commission File Number 0-33203

 

LANDMARK BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   43-1930755

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

 

701 Poyntz Avenue, Manhattan, Kansas 66502

(Address of principal executive offices) (Zip code)

 

(785) 565-2000

 

(Registrant’s telephone number, including area code)

 

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 [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] 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. (Check one):

 

Large accelerated filer [  ] Accelerated filer [  ] Non-accelerated filer [  ] (Do not check if a smaller reporting company) Smaller reporting company [X] 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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: as of August 10, 2017, the issuer had outstanding 3,873,781 shares of its common stock, $.01 par value per share.

 

 

 

 
  

 

LANDMARK BANCORP, INC.

Form 10-Q Quarterly Report

 

Table of Contents

   
    Page Number
 

PART I

 
     
Item 1. Financial Statements 2 - 25
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 26-33 
Item 3. Quantitative and Qualitative Disclosures about Market Risk 34-35 
Item 4. Controls and Procedures 36
     
PART II
     
Item 1. Legal Proceedings 37
Item 1A. Risk Factors 37
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 37
Item 3. Defaults Upon Senior Securities 37
Item 4. Mine Safety Disclosures 37
Item 5. Other Information 37
Item 6. Exhibits 37
     
  Signature Page 38

 

1
  

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

LANDMARK BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

 

(Dollars in thousands, except per share amounts)  June 30, 2017   December 31, 2016 
   (Unaudited)     
Assets          
Cash and cash equivalents  $10,594   $19,996 
Investment securities available-for-sale, at fair value   389,842    385,563 
Bank Stocks, at cost   5,350    5,299 
Loans, net of allowance for loans losses of $5,326 at June 30, 2017 and $5,344 at December 31, 2016   422,739    420,461 
Loans held for sale, at fair value   9,758    5,517 
Premises and equipment, net   19,938    20,407 
Bank owned life insurance   18,550    18,314 
Goodwill   17,532    17,532 
Other intangible assets, net   3,802    3,986 
Real estate owned, net   1,004    1,279 
Accrued interest and other assets   11,690    13,028 
Total assets  $910,799   $911,382 
           
Liabilities and Stockholders’ Equity          
Liabilities:          
Deposits:          
Non-interest-bearing demand  $158,824   $152,012 
Money market and checking   360,742    361,398 
Savings   93,560    88,273 
Time   131,896    139,838 
Total deposits   745,022    741,521 
           
Federal Home Loan Bank borrowings   31,000    39,100 
Subordinated debentures   21,384    21,284 
Other borrowings   11,447    12,483 
Accrued interest, taxes, and other liabilities   10,911    12,043 
Total liabilities   819,764    826,431 
           
Commitments and contingencies          
           
Stockholders’ equity:          
Preferred stock, $0.01 par value per share, 200,000 shares authorized; none issued   -    - 
Common stock, $0.01 par value per share, 7,500,000 shares authorized; 3,871,045 and 3,868,077 shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively   39    38 
Additional paid-in capital   52,067    51,968 
Retained earnings   37,333    34,293 
Accumulated other comprehensive income (loss)   1,596    (1,348)
Total stockholders’ equity   91,035    84,951 
           
Total liabilities and stockholders’ equity  $910,799   $911,382 

 

See accompanying notes to consolidated financial statements.

 

2
  

 

LANDMARK BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF EARNINGS

 

   Three months ended   Six months ended 
(Dollars in thousands, except per share amounts)  June 30,   June 30, 
   2017   2016   2017   2016 
   (Unaudited)   (Unaudited) 
Interest income:                    
Loans:                    
Taxable  $5,246   $5,285   $10,265   $10,420 
Tax-exempt   34    60    69    127 
Investment securities:                    
Taxable   1,202    1,171    2,394    2,335 
Tax-exempt   974    856    1,916    1,664 
Total interest income   7,456    7,372    14,644    14,546 
Interest expense:                    
Deposits   394    287    732    564 
Borrowings   486    523    968    1,016 
Total interest expense   880    810    1,700    1,580 
Net interest income   6,576    6,562    12,944    12,966 
Provision for loan losses   100    300    150    350 
Net interest income after provision for loan losses   6,476    6,262    12,794    12,616 
Non-interest income:                    
Fees and service charges   1,917    1,847    3,632    3,576 
Gains on sales of loans, net   1,692    1,405    3,081    3,199 
Bank owned life insurance   119    145    236    265 
Gains on sales of investment securities, net   177    285    324    297 
Other   283    266    556    505 
Total non-interest income   4,188    3,948    7,829    7,842 
                     
Non-interest expense:                    
Compensation and benefits   3,918    3,777    7,675    7,578 
Occupancy and equipment   1,097    1,055    2,121    2,111 
Amortization of intangibles   328    331    626    668 
Data processing   337    346    667    657 
Professional fees   476    282    766    501 
Advertising   166    166    332    332 
Federal deposit insurance premiums   73    110    145    220 
Foreclosure and real estate owned expense   49    51    101    116 
Other   1,095    1,093    2,167    2,190 
Total non-interest expense   7,539    7,211    14,600    14,373 
Earnings before income taxes   3,125    2,999    6,023    6,085 
Income tax expense (1)   742    673    1,435    1,366 
Net earnings (1)  $2,383   $2,326   $4,588   $4,719 
Earnings per share:                    
 Basic (1)(2)  $0.62   $0.61   $1.19   $1.25 
 Diluted (1)(2)  $0.60   $0.60   $1.16   $1.23 
Dividends per share (2)  $0.20   $0.19   $0.40   $0.38 

 

(1) Income tax expense, net earnings and earnings per share for the periods ended June 30, 2016 have been recast to reflect the early adoption of Accounting Standards Update ("ASU") 2016-09

 

(2) Per share amounts for the periods ended June 30, 2016 have been adjusted to give effect to the 5% stock dividend paid during December 2016.

 

See accompanying notes to consolidated financial statements.

 

3
  

 

LANDMARK BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

   Three months ended   Six months ended 
(Dollars in thousands)  June 30,   June 30, 
   2017   2016   2017   2016 
   (Unaudited)   (Unaudited) 
                 
Net earnings (1)  $2,383   $2,326   $4,588   $4,719 
                     
Net unrealized holding gains on available-for-sale securities   4,497    3,771    5,019    7,161 
Reclassification adjustment for net gains included in earnings   (177)   (285)   (324)   (297)
Net unrealized gains   4,320    3,486    4,695    6,864 
Income tax effect on net gains included in earnings   65    105    120    110 
Income tax effect on net unrealized holding gains   (1,670)   (1,396)   (1,871)   (2,654)
Other comprehensive income   2,715    2,195    2,944    4,320 
                    
Total comprehensive income  $5,098   $4,521   $7,532   $9,039 

 

(1) Net earnings for the periods ended June 30, 2016 have been recast to reflect the early adoption of ASU 2016-09.

 

See accompanying notes to consolidated financial statements.

 

4
  

 

LANDMARK BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 

(Dollars in thousands, except per share amounts)  Common stock   Additional paid-in capital   Retained earnings   Accumulated other comprehensive income (loss)   Total 
   (Unaudited) 
Balance at January 1, 2016  $35   $45,372   $32,988   $2,175   $80,570 
Net earnings (1)   -    -    4,719    -    4,719 
Other comprehensive income   -    -    -    4,320    4,320 
Dividends paid ($0.38 per share)   -    -    (1,437)   -    (1,437)
Exercise of stock options, 89,633 shares (1)   1    1,194    -    -    1,195 
Balance at June 30, 2016  $36   $46,566   $36,270   $6,495   $89,367 
                          
Balance at January 1, 2017  $38   $51,968   $34,293   $(1,348)  $84,951 
Net earnings   -    -    4,588    -    4,588 
Other comprehensive income   -    -    -    2,944    2,944 
Dividends paid ($0.40 per share)   -    -    (1,548)   -    (1,548)
Stock-based compensation   -    77    -    -    77 
Exercise of stock options, 2,968 shares,   1    22    -    -    23 
Balance at June 30, 2017  $39   $52,067   $37,333   $1,596   $91,035 

 

(1) Net earnings and exercise of stock options for the period ended June 30, 2016 have been recast to reflect the early adoption of ASU 2016-09.

 

See accompanying notes to consolidated financial statements.

 

5
  

 

LANDMARK BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(Dollars in thousands)  Six months ended June 30, 
   2017   2016 
   (Unaudited) 
Cash flows from operating activities:          
Net earnings (1)  $4,588   $4,719 
Adjustments to reconcile net earnings to net cash provided by operating activities:          
Provision for loan losses   150    350 
Valuation allowance on real estate owned   67    - 
Amortization of investment security premiums, net   944    818 
Amortization of purchase accounting adjustment on loans   (91)   (57)
Amortization of purchase accounting adjustment on subordinated debentures   100    100 
Amortization of intangibles   626    668 
Depreciation   520    581 
Increase in cash surrender value of bank owned life insurance   (236)   (265)
Stock-based compensation   77    - 
Deferred income taxes   542    229 
Net gains on sales of investment securities   (324)   (297)
Net (gain) loss on sales of premises, equipment and real estate owned   (10)   72 
Net gains on sales of loans   (3,081)   (3,199)
Proceeds from sales of loans   86,747    121,551 
Origination of loans held for sale   (87,907)   (113,944)
Changes in assets and liabilities:          
Accrued interest and other assets   (1,183)   (1,536)
Accrued expenses, taxes, and other liabilities   (1,201)   (2,538)
Net cash provided by operating activities   328    7,252 
Cash flows from investing activities:          
Net increase in loans   (2,662)   (10,932)
Maturities and prepayments of investment securities   28,501    23,429 
Purchases of investment securities   (42,164)   (43,815)
Proceeds from sales of investment securities   13,459    13,617 
Redemption of bank stocks   6,319    3,009 
Purchase of bank stocks   (6,370)   (3,134)
Proceeds from sales of premises and equipment and foreclosed assets   398    749 
Proceeds from bank owned life insurance   -    351 
Purchases of premises and equipment, net   (51)   (386)
Net cash used in investing activities   (2,570)   (17,112)
Cash flows from financing activities:          
Net increase in deposits   3,501    897 
Federal Home Loan Bank advance borrowings   313,277    156,291 
Federal Home Loan Bank advance repayments   (321,377)   (145,891)
Proceeds from other borrowings   100    - 
Repayments on other borrowings   (1,136)   (447)
Proceeds from exercise of stock options (1)   23    1,195 
Payment of dividends   (1,548)   (1,437)
Net cash (used in) provided by financing activities   (7,160)   10,608 
Net (decrease) increase in cash and cash equivalents   (9,402)   748 
Cash and cash equivalents at beginning of period   19,996    13,569 
Cash and cash equivalents at end of period  $10,594   $14,317 

 

(Continued)

 

6
  

 

LANDMARK BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED

 

   Six months ended 
(Dollars in thousands)  June 30, 
   2017   2016 
   (Unaudited) 
Supplemental disclosure of cash flow information:          
Cash payments for income taxes  $800   $500 
Cash paid for interest   1,616    1,599 
           
Supplemental schedule of noncash investing and financing activities:          
Transfer of loans to real estate owned   180    536 
Investment securities purchases not yet settled   -    - 

 

(1)  Net earnings and proceeds from the exercise of stock options for the period ended June 30, 2016 have been recast to reflect the early adoption of ASU 2016-09.

 

See accompanying notes to consolidated financial statements.

 

7
  

 

LANDMARK BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1. Interim Financial Statements

 

The unaudited consolidated financial statements of Landmark Bancorp, Inc. (the “Company”) and subsidiaries have been prepared in accordance with the instructions to Form 10-Q. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles (“GAAP”) for complete financial statements and should be read in conjunction with the Company’s most recent annual report on Form 10-K, containing the latest audited consolidated financial statements and notes thereto. The consolidated financial statements in this report have not been audited by an independent registered public accounting firm, but in the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation of financial statements, have been reflected herein. The results of the six months ended June 30, 2017 are not necessarily indicative of the results expected for the year ending December 31, 2017 or for any other future time period. The Company has evaluated subsequent events for recognition and disclosure up to the date the financial statements were issued.

 

2. Investments

 

A summary of investment securities available-for-sale is as follows:

 

(Dollars in thousands)  As of June 30, 2017 
       Gross   Gross     
   Amortized   unrealized   unrealized   Estimated 
   cost   gains   losses   fair value 
                 
U. S. treasury securities  $4,993   $24   $(1)  $5,016 
U. S. federal agency obligations   21,377    45    (40)   21,382 
Municipal obligations, tax exempt   177,419    2,485    (661)   179,243 
Municipal obligations, taxable   62,031    828    (81)   62,778 
Agency mortgage-backed securities   112,095    368    (623)   111,840 
Certificates of deposit   9,224    -    -    9,224 
Common stocks   178    181    -    359 
Total  $387,317   $3,931   $(1,406)  $389,842 

 

(Dollars in thousands)  As of December 31, 2016 
       Gross   Gross     
   Amortized   unrealized   unrealized   Estimated 
   cost   gains   losses   fair value 
                 
U. S. treasury securities  $6,005   $10   $-   $6,015 
U. S. federal agency obligations   27,140    48    (49)   27,139 
Municipal obligations, tax exempt   163,632    696    (2,666)   161,662 
Municipal obligations, taxable   71,371    463    (271)   71,563 
Agency mortgage-backed securities   109,427    171    (1,222)   108,376 
Certificates of deposit   9,700    -    -    9,700 
Common stocks   458    650    -    1,108 
Total  $387,733   $2,038   $(4,208)  $385,563 

 

8
  

 

The tables above show that some of the securities in the available-for-sale investment portfolio had unrealized losses, or were temporarily impaired, as of June 30, 2017 and December 31, 2016. This temporary impairment represents the estimated amount of loss that would be realized if the securities were sold on the valuation date. Securities which were temporarily impaired are shown below, along with the length of time in a continuous unrealized loss position.

 

(Dollars in thousands)      As of June 30, 2017 
       Less than 12 months   12 months or longer   Total 
   No. of   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
   securities   value   losses   value   losses   value   losses 
U.S. treasury securities   1   $2,994   $(1)  $-   $-   $2,994   $(1)
U.S. federal agency obligations   12    14,825    (36)   995    (4)   15,820    (40)
Municipal obligations, tax exempt   113    41,363    (566)   4,587    (95)   45,950    (661)
Municipal obligations, taxable   40    15,167    (81)   -    -    15,167    (81)
Agency mortgage-backed securities   38    54,970    (593)   1,320    (30)   56,290    (623)
Total   204   $129,319   $(1,277)  $6,902   $(129)  $136,221   $(1,406)

 

(Dollars in thousands)      As of December 31, 2016 
       Less than 12 months   12 months or longer   Total 
   No. of   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
   securities   value   losses   value   losses   value   losses 
U. S. federal agency obligations   9    15,056    (49)   -    -    15,056    (49)
Municipal obligations, tax exempt   275    97,842    (2,666)   -    -    97,842    (2,666)
Municipal obligations, taxable   66    26,184    (271)   -    -    26,184    (271)
Agency mortgage-backed securities   58    83,011    (1,222)   -    -    83,011    (1,222)
Total   408   $222,093   $(4,208)  $-   $-   $222,093   $(4,208)

 

The Company’s U.S. treasury portfolio consists of securities issued by the United States Department of the Treasury. The receipt of principal and interest on U.S. treasury securities is guaranteed by the full faith and credit of the U.S. government. Based on these factors, along with the Company’s intent to not sell the security and its belief that it was more likely than not that the Company will not be required to sell the security before recovery of their cost basis, the Company believed that the U.S. treasury security identified in the table above was temporarily impaired as of June 30, 2017.

 

The Company’s U.S. federal agency portfolio consists of securities issued by the government-sponsored agencies of Federal Home Loan Mortgage Corporation (“FHLMC”), Federal National Mortgage Association (“FNMA”) and Federal Home Loan Bank (“FHLB”). The receipt of principal and interest on U.S. federal agency obligations is guaranteed by the respective government-sponsored agency guarantor, such that the Company believes that its U.S. federal agency obligations do not expose the Company to credit-related losses. Based on these factors, along with the Company’s intent to not sell the securities and its belief that it was more likely than not that the Company will not be required to sell the securities before recovery of their cost basis, the Company believed that the U.S. federal agency obligations identified in the tables above were temporarily impaired as of June 30, 2017 and December 31, 2016.

 

The Company’s portfolio of municipal obligations consists of both tax-exempt and taxable general obligations securities issued by various municipalities. As of June 30, 2017, the Company did not intend to sell and it was more likely than not that the Company will not be required to sell its municipal obligations in an unrealized loss position until the recovery of their costs. Due to the issuers’ continued satisfaction of the securities’ obligations in accordance with their contractual terms and the expectation that they will continue to do so, the evaluation of the fundamentals of the issuers’ financial condition and other objective evidence, the Company believed that the municipal obligations identified in the tables above were temporarily impaired as of June 30, 2017 and December 31, 2016.

 

The Company’s agency mortgage-backed securities portfolio consists of securities underwritten to the standards of and guaranteed by the government-sponsored agencies of FHLMC, FNMA and the Government National Mortgage Association (“GNMA”). The receipt of principal, at par, and interest on agency mortgage-backed securities is guaranteed by the respective government-sponsored agency guarantor, such that the Company believed that its agency mortgage-backed securities did not expose the Company to credit-related losses. Based on these factors, along with the Company’s intent to not sell the securities and the Company’s belief that it was more likely than not that the Company will not be required to sell the securities before recovery of their cost basis, the Company believed that the agency mortgage-backed securities identified in the tables above were temporarily impaired as of June 30, 2017 and December 31, 2016.

 

9
  

 

The table below sets forth amortized cost and fair value of investment securities at June 30, 2017. The table includes scheduled principal payments and estimated prepayments, based on observable market inputs, for agency mortgage-backed securities. Actual maturities will differ from contractual maturities because borrowers have the right to prepay obligations with or without prepayment penalties. Securities with no maturity are listed separately.

 

(Dollars in thousands)  Amortized   Estimated 
   cost   fair value 
Due in less than one year  $30,111   $30,139 
Due after one year but within five years   182,277    182,573 
Due after five years but within ten years   90,785    92,095 
Due after ten years   83,966    84,676 
Common stocks   178    359 
Total  $387,317   $389,842 

 

Sales proceeds and gross realized gains and losses on sales of available-for-sale securities are as follows:

 

(Dollars in thousands)  Three months ended June 30,   Six months ended June 30, 
   2017   2016   2017   2016 
                 
Sales proceeds  $1,917   $11,801   $13,459   $13,617 
                     
Realized gains  $177   $296   $348   $312 
Realized losses   -    (11)   (24)   (15)
Net realized losses  $177   $285   $324   $297 

 

Securities with carrying values of $230.0 million and $224.3 million were pledged to secure public funds on deposit, repurchase agreements and as collateral for borrowings at June 30, 2017 and December 31, 2016, respectively. Except for U.S. federal agency obligations, no investment in a single issuer exceeded 10% of consolidated stockholders’ equity.

 

3. Loans and Allowance for Loan Losses

 

Loans consisted of the following as of the dates indicated below:

 

   June 30,   December 31, 
(Dollars in thousands)  2017   2016 
         
One-to-four family residential real estate  $138,932   $136,846 
Construction and land   16,557    13,738 
Commercial real estate   116,600    118,200 
Commercial   51,631    54,506 
Agriculture   79,310    78,324 
Municipal   3,593    3,884 
Consumer   21,403    20,271 
Total gross loans   428,026    425,769 
Net deferred loan costs and loans in process   39    36 
Allowance for loan losses   (5,326)   (5,344)
Loans, net  $422,739   $420,461 

 

10
  

 

The following tables provide information on the Company’s activity in the allowance for loan losses by loan class:

 

(Dollars in thousands)  Three and six months ended June 30, 2017 
   One-to-four family residential real estate   Construction and land   Commercial real estate   Commercial   Agriculture   Municipal   Consumer   Total 
                                 
Allowance for loan losses:                                        
Balance at April 1, 2017  $493   $71   $1,740   $1,101   $1,731   $11   $180   $5,327 
Charge-offs   -    -    (61)   -    -    -    (58)   (119)
Recoveries   7    -    -    1    -    -    10    18 
Provision for loan losses   (1)   (1)   30    (21)   41    (1)   53    100 
Balance at June 30, 2017   499    70    1,709    1,081    1,772    10    185    5,326 
                                         
Balance at January 1, 2017  $504   $53   $1,777   $1,119   $1,684   $12   $195   $5,344 
Charge-offs   (19)   -    (61)   -    -    -    (165)   (245)
Recoveries   8    -    -    9    1    -    59    77 
Provision for loan losses   6    17    (7)   (47)   87    (2)   96    150 
Balance at June 30, 2017   499    70    1,709    1,081    1,772    10    185    5,326 

 

(Dollars in thousands)  Three and six months ended June 30, 2016 
   One-to-four family residential real estate   Construction and land   Commercial real estate   Commercial   Agriculture   Municipal   Consumer   Total 
                                 
Allowance for loan losses:                                        
Balance at April 1, 2016  $864   $82   $1,831   $1,384   $1,483   $24   $201   $5,869 
Charge-offs   -    -    -    (306)   (83)   -    (148)   (537)
Recoveries   3    -    -    1    -    6    10    20 
Provision for loan losses   (283)   7    (55)   314    200    (7)   124    300 
Balance at June 30, 2016   584    89    1,776    1,393    1,600    23    187    5,652 
                                         
Balance at January 1, 2016  $925   $77   $1,740   $1,530   $1,428   $23   $199   $5,922 
Charge-offs   -    -    -    (306)   (83)   -    (285)   (674)
Recoveries   5    -    -    20    -    6    23    54 
Provision for loan losses   (346)   12    36    149    255    (6)   250    350 
Balance at June 30, 2016   584    89    1,776    1,393    1,600    23    187    5,652 

 

11
  

 

The following tables provide information on the Company’s activity in the allowance for loan losses by loan class and allowance methodology:

 

(Dollars in thousands)  As of June 30, 2017 
   One-to-four family residential real estate   Construction and land   Commercial real estate   Commercial   Agriculture   Municipal   Consumer   Total 
                                 
Allowance for loan losses:                                        
Individually evaluated for loss   -    -    50    76    149    -    -    275 
Collectively evaluated for loss   499    70    1,659    1,005    1,623    10    185    5,051 
Total   499    70    1,709    1,081    1,772    10    185    5,326 
                                         
Loan balances:                                        
Individually evaluated for loss   732    2,041    2,206    323    868    221    36    6,427 
Collectively evaluated for loss   138,200    14,516    114,394    51,308    78,442    3,372    21,367    421,599 
Total  $138,932   $16,557   $116,600   $51,631   $79,310   $3,593   $21,403   $428,026 

 

(Dollars in thousands)  As of December 31, 2016
   One-to-four family residential real estate   Construction and land   Commercial real estate   Commercial   Agriculture   Municipal   Consumer   Total 
                                 
Allowance for loan losses:                                        
Individually evaluated for loss   -    -    81    87    89    -    17    274 
Collectively evaluated for loss   504    53    1,696    1,032    1,595    12    178    5,070 
Total   504    53    1,777    1,119    1,684    12    195    5,344 
                                         
Loan balances:                                        
Individually evaluated for loss   780    1,937    2,445    355    881    258    72    6,728 
Collectively evaluated for loss   136,066    11,801    115,755    54,151    77,443    3,626    20,199    419,041 
Total  $136,846   $13,738   $118,200   $54,506   $78,324   $3,884   $20,271   $425,769 

 

The Company’s impaired loans decreased from $6.7 million at December 31, 2016 to $6.4 million at June 30, 2017. The difference between the unpaid contractual principal and the impaired loan balance is a result of charge-offs recorded against impaired loans. The difference in the Company’s non-accrual loan balances and impaired loan balances at June 30, 2017 and December 31, 2016, was related to troubled debt restructurings (“TDR”) that are current and accruing interest, but still classified as impaired. Interest income recognized on a cash basis was immaterial during the three and six month periods ended June 30, 2017 and 2016.

 

12
  

 

The following tables present information on impaired loans:

 

(Dollars in thousands)  As of June 30, 2017 
   Unpaid contractual principal   Impaired loan balance   Impaired loans without an allowance   Impaired loans with an allowance   Related allowance recorded   Year-to-date average loan balance   Year-to-date interest income recognized 
                             
One-to-four family residential real estate  $732   $732   $732   $-   $-   $739   $4 
Construction and land   3,776    2,041    2,041    -    -    2,010    33 
Commercial real estate   2,206    2,206    2,156    50    50    2,217    246 
Commercial   323    323    70    253    76    361    - 
Agriculture   1,083    868    49    819    149    933    1 
Municipal   221    221    221    -    -    236    3 
Consumer   36    36    36    -    -    39    - 
Total impaired loans  $8,377   $6,427   $5,305   $1,122   $275   $6,535   $287 

 

(Dollars in thousands)  As of December 31, 2016 
   Unpaid contractual principal   Impaired loan balance   Impaired loans without an allowance   Impaired loans with an allowance   Related allowance recorded   Year-to-date average loan balance   Year-to-date interest income recognized 
                             
One-to-four family residential real estate  $780   $780   $780   $-   $-   $798   $7 
Construction and land   3,672    1,937    1,937    -    -    2,068    72 
Commercial real estate   2,445    2,445    2,145    300    81    2,587    505 
Commercial   355    355    46    309    87    425    2 
Agriculture   1,173    881    147    734    89    1,000    2 
Municipal   258    258    258    -    -    418    - 
Consumer   72    72    55    17    17    78    13 
Total impaired loans  $8,755   $6,728   $5,368   $1,360   $274   $7,374   $601 

 

The Company’s key credit quality indicator is a loan’s performance status, defined as accruing or non-accruing. Performing loans are considered to have a lower risk of loss. Non-accrual loans are those which the Company believes have a higher risk of loss. The accrual of interest on non-performing loans is discontinued at the time the loan is ninety days delinquent, unless the credit is well secured and in process of collection. Loans are placed on non-accrual or are charged off at an earlier date if collection of principal or interest is considered doubtful. There were no loans ninety days delinquent and accruing interest at June 30, 2017 or December 31, 2016.

 

13
  

 

The following tables present information on the Company’s past due and non-accrual loans by loan class:

 

(Dollars in thousands)  As of June 30, 2017 
   30-59 days delinquent and accruing   60-89 days delinquent and accruing   90 days or more delinquent and accruing   Total past due loans accruing   Non-accrual loans   Total past due and non-accrual loans   Total loans not past due 
                             
One-to-four family residential real estate  $300   $316   $-   $616   $557   $1,173   $137,759 
Construction and land   -    -    -    -    692    692    15,865 
Commercial real estate   1,971    42    -    2,013    69    2,082    114,518 
Commercial   176    1,315    -    1,491    323    1,814    49,817 
Agriculture   49    60    -    109    868    977    78,333 
Municipal   -    -    -    -    -    -    3,593 
Consumer   36    17    -    53    36    89    21,314 
 Total  $2,532   $1,750   $-   $4,282   $2,545   $6,827   $421,199 
                                    
Percent of gross loans   0.59%   0.41%   0.00%   1.00%   0.59%   1.59%   98.41%

 

(Dollars in thousands)  As of December 31, 2016 
   30-59 days delinquent and accruing   60-89 days delinquent and accruing   90 days or more delinquent and accruing   Total past due loans accruing   Non-accrual loans   Total past due and non-accrual loans   Total loans not past due 
                             
One-to-four family residential real estate  $215   $388   $-   $603   $595   $1,198   $135,648 
Construction and land   -    -    -    -    599    599    13,139 
Commercial real estate   -    -    -    -    300    300    117,900 
Commercial   13    5    -    18    342    360    54,146 
Agriculture   55    -    -    55    838    893    77,431 
Municipal   -    -    -    -    -    -    3,884 
Consumer   79    3    -    82    72    154    20,117 
 Total  $362   $396   $-   $758   $2,746   $3,504   $422,265 
                                    
Percent of gross loans   0.09%   0.09%   0.00%   0.18%   0.64%   0.82%   99.18%

 

Under the original terms of the Company’s non-accrual loans, interest earned on such loans for the six months ended June 30, 2017 and 2016 would have increased interest income by $63,000 and $44,000, respectively. No interest income related to non-accrual loans was included in interest income for the six months ended June 30, 2017 and 2016.

The Company also categorizes loans into risk categories based on relevant information about the ability of the borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on a quarterly basis. Non-classified loans generally include those loans that are expected to be repaid in accordance with contractual loan terms. Classified loans are those that are assigned a special mention, substandard or doubtful risk rating using the following definitions:

 

Special Mention: Loans are currently protected by the current net worth and paying capacity of the obligor or of the collateral pledged but such protection is potentially weak. These loans constitute an undue and unwarranted credit risk, but not to the point of justifying a classification of substandard. The credit risk may be relatively minor, yet constitutes an unwarranted risk in light of the circumstances surrounding a specific asset.

 

Substandard: Loans are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged. Loans have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Loans are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

 

Doubtful: Loans classified doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

 

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The following table provides information on the Company’s risk categories by loan class:

 

(Dollars in thousands)  As of June 30, 2017   As of December 31, 2016 
   Nonclassified   Classified   Nonclassified   Classified 
                 
One-to-four family residential real estate  $137,803   $1,129   $135,640   $1,206 
Construction and land   15,865    692    13,138    600 
Commercial real estate   110,725    5,875    111,641    6,559 
Commercial   48,115    3,516    51,080    3,426 
Agriculture   74,727    4,583    73,564    4,760 
Municipal   3,593    -    3,884    - 
Consumer   21,356    47    20,181    90 
Total  $412,184   $15,842   $409,128   $16,641 

 

At June 30, 2017, the Company had 11 loan relationships consisting of 19 outstanding loans that were classified as TDRs. During the second quarter of 2017, the Company classified two agriculture loans totaling $87,000 as TDRs after renewing loans to an existing loan relationship that was classified as a TDR in 2016. During the first quarter of 2017, the Company classified an $11,000 commercial real estate loan as a TDR after extending the maturity of the loan and classified as a TDR a $15,000 agriculture loan extended to an existing loan relationship that was classified as a TDR in 2016. Since the commercial loan was adequately secured, no charge-offs or impairments were recorded against the principal as of June 30, 2017. The agriculture loan relationship had a $49,000 impairment recorded against the principal balance as of June 30, 2017 and a charge-off of $215,000 was recorded in the third quarter of 2016. During the second quarter of 2016, the Company classified two loans as TDRs including an $8,000 commercial loan after modifying the payments to interest only and a $188,000 one-to-four family residential real estate loan after agreeing to a loan modification which adjusted the payment schedule. No loans were classified as TDR in the first quarter of 2016.

 

The Company evaluates each TDR individually and returns the loan to accrual status when a payment history is established after the restructuring and future payments are reasonably assured. There were no loans modified as TDRs for which there was a payment default within 12 months of modification as of June 30, 2017 and 2016. At June 30, 2017, there was a commitment of $63,000 to lend additional funds on one construction and land loan classified as a TDR. The Company did not record any charge-offs against loans classified as TDRs in the first six months either of 2017 or 2016. A credit provision for loan losses of $13,000 related to TDRs was recorded in the six months ended June 30, 2017 compared to no provision in the same period of 2016. The Company allocated $67,000 and $80,000 of the allowance for loan losses against loans classified as TDRs at June 30, 2017 and December 31, 2016, respectively.

 

The following table presents information on loans that are classified as TDRs:

 

(Dollars in thousands)  As of June 30, 2017   As of December 31, 2016 
   Number of loans   Non-accrual balance   Accruing balance   Number of loans   Non-accrual balance   Accruing balance 
                         
One-to-four family residential real estate   2   $-   $175    2   $-   $185 
Construction and land   4    581    1,349    4    588    1,338 
Commercial real estate   4    61    2,137    3    64    2,145 
Commercial   -    -    -    2    -    13 
Agriculture   7    409    -    4    268    44 
Municipal   2    -    221    2    -    258 
Total troubled debt restructurings   19   $1,051   $3,882    17   $920   $3,983 

 

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4. Goodwill and Other Intangible Assets

 

The Company tests goodwill for impairment annually or more frequently if circumstances warrant. The Company’s annual step one impairment test as of December 31, 2016 concluded that its goodwill was not impaired. The Company concluded there were no triggering events during the first six months of 2017 that required an interim goodwill impairment test.

 

Lease intangible assets are amortized over the life of the lease. Core deposit intangible assets are amortized over the estimated useful life of ten years on an accelerated basis. Mortgage servicing rights are amortized over the estimated life of the mortgage loan serviced for others. A summary of the other intangible assets that continue to be subject to amortization is as follows:

 

(Dollars in thousands)  As of June 30, 2017 
  Gross carrying amount   Accumulated amortization   Net carrying amount 
Core deposit intangible assets  $2,067   $(1,262)  $805 
Lease intangible asset   350    (166)   184 
Mortgage servicing rights   6,029    (3,216)   2,813 
Total other intangible assets  $8,446   $(4,644)  $3,802 

 

(Dollars in thousands)  As of December 31, 2016 
  Gross carrying amount   Accumulated amortization   Net carrying amount 
Core deposit intangible assets  $2,067   $(1,137)  $930 
Lease intangible asset   350    (143)   207 
Mortgage servicing rights   5,788    (2,939)   2,849 
Total other intangible assets  $8,205   $(4,219)  $3,986 

 

The following sets forth estimated amortization expense for core deposit and lease intangible assets for the remainder of 2017 and in successive years ending December 31:

 

(Dollars in thousands)  Amortization 
   expense 
Remainder of 2017  $141 
2018   252 
2019   214 
2020   177 
2021   121 
Thereafter   84 
Total  $989 

 

Mortgage loans serviced for others are not reported as assets. The following table provides information on the principal balances of mortgage loans serviced for others:

 

(Dollars in thousands)  June 30, 2017   December 31, 2016 
FHLMC  $500,399   $483,356 
FHLB   10,444    11,393 
Total  $510,843   $494,749 

 

Custodial escrow balances maintained in connection with serviced loans were $5.0 million and $4.1 million at June 30, 2017 and December 31, 2016, respectively. Gross service fee income related to such loans was $320,000 and $304,000 for the three months ended June 30, 2017 and 2016, respectively, and is included in fees and service charges in the consolidated statements of earnings. Gross service fee income related to such loans was $639,000 and $604,000 for the six months ended June 30, 2017 and 2016, respectively.

 

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Activity for mortgage servicing rights and the related valuation allowance follows:

 

(Dollars in thousands)  Three months ended June 30,   Six months ended June 30, 
   2017   2016   2017   2016 
Mortgage servicing rights:                    
Balance at beginning of period  $2,787   $2,808   $2,849   $2,840 
Additions   281    291    442    512 
Amortization   (255)   (248)   (478)   (501)
Balance at end of period  $2,813   $2,851   $2,813   $2,851 

 

The fair value of mortgage servicing rights was $5.3 million and $5.1 million at June 30, 2017 and December 31, 2016, respectively. Fair value at June 30, 2017 was determined using discount rates ranging from 9.50% to 9.51%; prepayment speeds ranging from 0% to 33.56%, depending on the stratification of the specific mortgage servicing right; and a weighted average default rate of 2.25%. Fair value at December 31, 2016 was determined using discount rates ranging from 9.50% to 9.51%; prepayment speeds ranging from 4.86% to 32.79%, depending on the stratification of the specific mortgage servicing right; and a weighted average default rate of 2.26%.

 

The Company had a mortgage repurchase reserve of $301,000 at both June 30, 2017 and December 31, 2016, which represents the Company’s best estimate of probable losses that the Company will incur related to the repurchase of one-to-four family residential real estate loans previously sold or to reimburse investors for credit losses incurred on loans previously sold where a breach of the contractual representations and warranties occurred. The Company did not incur any losses charged against the reserve or make any provisions to the reserve during the first six months of 2017 and 2016. The Company did not have any recoveries against the mortgage repurchase reserve in the first six months of 2017. The Company recovered $3,000 of losses during the three months ended June 30, 2016 and recovered $10,000 of losses against the mortgage repurchase reserve during the six months ended June 30, 2016. As of June 30, 2017, the Company had one outstanding mortgage repurchase request and expects to incur a loss of approximately $70,000.

 

5. Earnings per Share

 

Basic earnings per share have been computed based upon the weighted average number of common shares outstanding during each period. Diluted earnings per share include the effect of all potential common shares outstanding during each period. The shares used in the calculation of basic and diluted earnings per share are shown below:

 

   Three months ended   Six months ended 
(Dollars in thousands, except per share amounts)  June 30   June 30 
   2017   2016   2017   2016 
Net earnings(1)  $2,383   $2,326   $4,588   $4,719 
                     
Weighted average common shares outstanding - basic (2)   3,870,564    3,794,355    3,870,183    3,764,497 
Assumed exercise of stock options (1)(2)   80,087    91,322    79,086    89,751 
Weighted average common shares outstanding - diluted (1)(2)   3,950,651    3,885,677    3,949,269    3,854,248 
Net earnings per share (1)(2):                    
Basic  $0.62   $0.61   $1.19   $1.25 
Diluted  $0.60   $0.60   $1.16   $1.22 

 

(1) Net earnings, earnings per share and assumed exercise of stock options for the periods ended June 30, 2016 have been recast to reflect the early adoption of ASU 2016-09.
(2) Share and per share values for the periods ended June 30, 2016 have been adjusted to give effect to the 5% stock dividend paid during December 2016.

 

The diluted earnings per share computations for the three and six months ended June 30, 2017 and 2016 include all unexercised stock options because no stock options were anti-dilutive during such periods.

 

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6. Repurchase Agreements

 

The Company has overnight repurchase agreements with certain deposit customers whereby the Company uses investment securities as collateral for non-insured funds. These balances are accounted for as collateralized financing and included in other borrowings on the balance sheet. The following is a summary of the balances of and collateral for the Company’s repurchase agreements:

 

   As of June 30, 2017 
   Overnight and    Up to 30       Greater     
   Continuous   days   30-90 days   than 90 days   Total 
Repurchase agreements:                         
U.S. federal agency obligations  $3,890   $-   $-   $-   $3,890 
Agency mortgage-backed securities   7,457    -    -    -    7,457 
Total  $11,347   $-   $-   $-   $11,347 

 

   As of December 31, 2016 
   Overnight and   Up to       Greater     
   Continuous   30 days   30-90 days   than 90 days   Total 
Repurchase agreements:                         
U.S. federal agency obligations  $5,007   $-   $-   $-   $5,007 
Agency mortgage-backed securities   7,476    -    -    -    7,476 
Total  $12,483   $-   $-   $-   $12,483 

 

Repurchase agreements are comprised of non-insured customer funds, totaling $11.3 million at June 30, 2017, and $12.5 million at December 31, 2016, which were secured by $17.1 million and $15.7 million of the Company’s investment portfolio at the same dates, respectively.

 

The investment securities are held by a third-party financial institution in the customer’s custodial account. The Company is required to maintain adequate collateral for each repurchase agreement. Changes in the fair value of the investment securities impact the amount of collateral required. If the Company were to default, the investment securities would be used to settle the repurchase agreement with the deposit customer.

 

7. Fair Value of Financial Instruments and Fair Value Measurements

 

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

 

Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

 

Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

 

Level 3 – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

 

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Fair value estimates of the Company’s financial instruments as of June 30, 2017 and December 31, 2016, including methods and assumptions utilized, are set forth below:

 

(Dollars in thousands)  As of June 30, 2017 
   Carrying                 
   amount   Level 1   Level 2   Level 3   Total 
Financial assets:                         
Cash and cash equivalents  $10,594   $10,594   $-   $-   $10,594 
Investment securities available-for-sale   389,842    5,375    384,467    -    389,842 
Bank stocks, at cost   5,350    n/a    n/a    n/a    n/a 
Loans, net   422,739    -    -    420,935    420,935 
Loans held for sale, net   9,758    -    9,758    -    9,758 
Derivative financial instruments   711    -    711    -    711 
Accrued interest receivable   4,089    2    2,219    1,868    4,089 
                          
Financial liabilities:                         
Non-maturity deposits  $(613,126)  $(613,126)  $-   $-    (613,126)
Time deposits   (131,896)   -    (130,377)   -    (130,377)
FHLB borrowings   (31,000)   -    (31,358)   -    (31,358)
Subordinated debentures   (21,384)   -    (19,215)   -    (19,215)
Other borrowings   (11,447)   -    (11,447)   -    (11,447)
Derivative financial instruments   (28)   -    (28)   -    (28)
Accrued interest payable   (253)   -    (253)   -    (253)

 

   As of December 31, 2016 
   Carrying                 
   amount   Level 1   Level 2   Level 3   Total 
Financial assets:                         
Cash and cash equivalents  $19,996   $19,996   $-   $-   $19,996 
Investment securities available-for-sale   385,563    7,123    378,440    -    385,563 
Bank stocks, at cost   5,299    n/a    n/a    n/a    n/a 
Loans, net   420,461    -    -    417,957    417,957 
Loans held for sale   5,517    -    5,517    -    5,517 
Derivative financial instruments   662    -    662    -    662 
Accrued interest receivable   4,240    21    2,104    2,115    4,240 
                          
Financial liabilities:                         
Non-maturity deposits  $(601,683)