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Section 1: 10-Q

 

 

 

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 September 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 November 9, 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

 

 

  PART I  
     
    Page Number
     
Item 1. Financial Statements 3 - 28
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 29 – 38
Item 3. Quantitative and Qualitative Disclosures about Market Risk 39
Item 4. Controls and Procedures 40
     
  PART II  
     
Item 1. Legal Proceedings 41
Item 1A. Risk Factors 41
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 41
Item 3. Defaults Upon Senior Securities 41
Item 4. Mine Safety Disclosures 41
Item 5. Other Information 41
Item 6. Exhibits 41
     
  Signature Page 42

 

2
 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

LANDMARK BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

(Dollars in thousands, except per share amounts)  September 30, 2017   December 31, 2016 
   (Unaudited)     
Assets          
Cash and cash equivalents  $18,772   $19,996 
Investment securities available-for-sale, at fair value   389,388    385,563 
Bank Stocks, at cost   5,384    5,299 
Loans, net of allowance for loans losses of $5,379 at September 30, 2017 and $5,344 at December 31, 2016  
 
 
 
 
428,439
 
 
 
 
 
 
 
420,461
 
 
Loans held for sale, at fair value   8,583    5,517 
Premises and equipment, net   20,999    20,407 
Bank owned life insurance   23,536    18,314 
Goodwill   17,532    17,532 
Other intangible assets, net   3,742    3,986 
Real estate owned, net   677    1,279 
Accrued interest and other assets   13,077    13,028 
Total assets  $930,129   $911,382 
           
Liabilities and Stockholders’ Equity          
Liabilities:          
Deposits:          
Non-interest-bearing demand  $165,384   $152,012 
Money market and checking   345,805    361,398 
Savings   94,570    88,273 
Time   127,251    139,838 
Total deposits   733,010    741,521 
           
Federal Home Loan Bank borrowings   64,400    39,100 
Subordinated debentures   21,434    21,284 
Other borrowings   11,487    12,483 
Accrued interest, taxes, and other liabilities   12,795    12,043 
Total liabilities   843,126    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; 3,873,781 and 3,868,077 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively  
 
 
 
 
39
 
 
 
 
 
 
 
38
 
 
Additional paid-in capital   52,109    51,968 
Retained earnings   33,897    34,293 
Accumulated other comprehensive income (loss)   958    (1,348)
Total stockholders’ equity   87,003    84,951 
           
Total liabilities and stockholders’ equity  $930,129   $911,382 

 

See accompanying notes to consolidated financial statements.

 

3
 

 

LANDMARK BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

 

   Three months ended   Nine months ended 
(Dollars in thousands, except per share amounts)  September 30,   September 30, 
   2017   2016   2017   2016 
   (Unaudited)         (Unaudited)      
Interest income:                    
Loans:                    
Taxable  $5,359   $5,330   $15,624   $15,750 
Tax-exempt   33    62    102    189 
Investment securities:                    
Taxable   1,133    1,089    3,527    3,424 
Tax-exempt   996    869    2,912    2,533 
Total interest income   7,521    7,350    22,165    21,896 
Interest expense:                    
Deposits   418    285    1,150    849 
Borrowings   501    513    1,469    1,529 
Total interest expense   919    798    2,619    2,378 
Net interest income   6,602    6,552    19,546    19,518 
Provision for loan losses   100    150    250    500 
Net interest income after provision for loan losses   6,502    6,402    19,296    19,018 
Non-interest income:                    
Fees and service charges   1,896    1,873    5,528    5,449 
Gains on sales of loans, net   1,220    1,219    4,301    4,418 
Bank owned life insurance   514    125    750    390 
Gains on sales of investment securities, net   39    261    363    558 
Other   267    264    823    769 
Total non-interest income   3,936    3,742    11,765    11,584 
                     
Non-interest expense:                    
Compensation and benefits   3,933    3,903    11,608    11,481 
Occupancy and equipment   1,107    1,131    3,228    3,242 
Amortization of intangibles   320    373    946    1,041 
Data processing   360    369    1,027    1,026 
Professional fees   478    258    1,244    759 
Advertising   166    166    498    498 
Federal deposit insurance premiums   74    75    219    295 
Foreclosure and real estate owned expense   (18)   60    83    176 
Deposit - related loss   8,082    -   8,082    - 
Other   1,120    1,059    3,287    3,249 
Total non-interest expense   15,622    7,394    30,222    21,767 
Earnings (loss) before income taxes   (5,184)   2,750    839    8,835 
Income tax (benefit) expense (1)   (2,523)   594    (1,088)   1,960 
Net (loss) earnings (1)  $(2,661)  $2,156   $1,927   $6,875 
Earnings (loss) per share:                    
Basic (1)(2)  $(0.69)  $0.56   $0.50   $1.82 
Diluted (1)(2)  $(0.69)  $0.55   $0.49   $1.78 
Dividends per share (2)  $0.20   $0.19   $0.60   $0.57 

 

(1) Income tax expense, net earnings, and earnings per share for the periods ended September 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 September 30, 2016 have been adjusted to give effect to the 5% stock dividend paid during December 2016.

 

See accompanying notes to consolidated financial statements.

 

4
 

 

LANDMARK BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

   Three months ended   Nine months ended 
(Dollars in thousands)  September 30,   September 30, 
   2017   2016   2017   2016 
   (Unaudited)       (Unaudited)     
                 
Net (loss) earnings (1)  $(2,661)  $2,156   $1,927   $6,875 
                     
Net unrealized holding (losses) gains on available-for-sale securities   (973)   (2,073)   4,046    5,088 
Reclassification adjustment for net gains included in earnings   (39)   (261)   (363)   (558)
Net unrealized (losses) gains   (1,012)   (2,334)   3,683    4,530 
Income tax effect on net gains included in earnings   15    97    134    206 
Income tax effect on net unrealized holding gains (losses)   359    760    (1,511)   (1,893)
Other comprehensive (loss) income   (638)   (1,477)   2,306    2,843 
                     
Total comprehensive (loss) income  $(3,299)  $679   $4,233   $9,718 

 

(1) Net earnings for the periods ended September 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 SUBSIDIARIES

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)   -    -    6,875    -    6,875 
Other comprehensive income   -    -    -    2,843    2,843 
Dividends paid ($0.57 per share)   -    -    (2,167)   -    (2,167)
Stock-based compensation   -    23    -    -    23 
Exercise of stock options, 117,919 shares (1)   1    1,641    -    -    1,642 
Balance at September 30, 2016  $36   $47,036   $37,696   $5,018   $89,786 
                          
Balance at January 1, 2017  $38   $51,968   $34,293   $(1,348)  $84,951 
Net earnings   -    -    1,927    -    1,927 
Other comprehensive income   -    -    -    2,306    2,306 
Dividends paid ($0.60 per share)   -    -    (2,323)   -    (2,323)
Stock-based compensation   -    119    -    -    119 
Exercise of stock options, 2,968 shares   1    22    -    -    23 
Balance at September 30, 2017  $39   $52,109   $33,897   $958   $87,003 

 

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

 

See accompanying notes to consolidated financial statements.

 

6
 

 

LANDMARK BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(Dollars in thousands)  Nine months ended September 30, 
   2017   2016 
   (Unaudited)     
Cash flows from operating activities:          
Net earnings (1)  $1,927   $6,875 
Adjustments to reconcile net earnings to net cash provided by operating activities:          
Provision for loan losses   250    500 
Valuation allowance on real estate owned   92    - 
Amortization of investment security premiums, net   1,415    1,238 
Amortization of purchase accounting adjustment on loans   (149)   (75)
Amortization of purchase accounting adjustment on subordinated debentures   150    150 
Amortization of intangibles   946    1,041 
Depreciation   773    866 
Increase in cash surrender value of bank owned life insurance   (750)   (390)
Stock-based compensation   119    23 
Deferred income taxes   (1,060)   594 
Net gains on sales of investment securities   (363)   (558)
Net (gain) loss on sales of premises, equipment and real estate owned   (17)   89 
Net gains on sales of loans   (4,301)   (4,418)
Proceeds from sales of loans   132,015    173,967 
Origination of loans held for sale   (130,780)   (164,182)
Changes in assets and liabilities:          
Accrued interest and other assets   (1,033)   (2,305)
Accrued expenses, taxes, and other liabilities   (852)   1,764 
Net cash (used in) provided by operating activities   (1,618)   15,179 
Cash flows from investing activities:          
Net increase in loans   (8,292)   (11,650)
Maturities and prepayments of investment securities   42,716    32,061 
Purchases of investment securities   (55,820)   (62,230)
Proceeds from sales of investment securities   13,513    14,326 
Redemption of bank stocks   7,408    4,686 
Purchase of bank stocks   (7,493)   (5,058)
Proceeds from sales of premises and equipment and foreclosed assets   707    813 
Proceeds from bank owned life insurance   528    358 
Purchase of bank owned life insurance   (5,000)   - 
Purchases of premises and equipment, net   (1,367)   (518)
Net cash used in investing activities   (13,100)   (27,212)
Cash flows from financing activities:          
Net (decrease) increase in deposits   (8,510)   988 
Federal Home Loan Bank advance borrowings   514,443    276,833 
Federal Home Loan Bank advance repayments   (489,143)   (261,733)
Proceeds from other borrowings   100    551 
Repayments on other borrowings   (1,096)   - 
Proceeds from exercise of stock options (1)   23    1,642 
Payment of dividends   (2,323)   (2,167)
Net cash provided by financing activities   13,494    16,373 
Net (decrease) increase in cash and cash equivalents   (1,224)   4,081 
Cash and cash equivalents at beginning of period   19,996    13,569 
Cash and cash equivalents at end of period  $18,772   $17,650 

 

7
 

 

LANDMARK BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED

 

   Nine months ended 
(Dollars in thousands)  September 30, 
   2017   2016 
   (Unaudited) 
Supplemental disclosure of cash flow information:          
Cash payments for income taxes  $800   $510 
Cash paid for interest   2,468    2,254 
           
Supplemental schedule of noncash investing and financing activities:          
Transfer of loans to real estate owned   180    1,077 
Investment securities purchases not yet settled   (1,604)   (1,295)

 

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

 

See accompanying notes to consolidated financial statements.

 

8
 

 

LANDMARK BANCORP, INC. AND SUBSIDIARIES

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 nine months ended September 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 September 30, 2017 
       Gross   Gross     
   Amortized   unrealized   unrealized   Estimated 
   cost   gains   losses   fair value 
                 
U. S. treasury securities  $4,997   $17   $-   $5,014 
U. S. federal agency obligations   20,354    29    (40)   20,343 
Municipal obligations, tax exempt   179,116    2,236    (781)   180,571 
Municipal obligations, taxable   59,610    636    (92)   60,154 
Agency mortgage-backed securities   114,412    197    (850)   113,759 
Certificates of deposit   9,224    -    -    9,224 
Common stocks   162    161    -    323 
Total  $387,875   $3,276   $(1,763)  $389,388 

 

(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 

 

9
 

 

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 September 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 September 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. federal agency obligations  10   $13,812   $(35)   $995   $(5)   $14,807   $(40) 
Municipal obligations, tax exempt   116    17,851    (141)   32,217    (640)   50,068    (781)
Municipal obligations, taxable   43    14,117    (70)   1,723    (22)   15,840    (92)
Agency mortgage-backed securities   60    78,000    (666)   7,640    (184)   85,640    (850)
Total   229   $123,780   $(912)  $42,575   $(851)  $166,355   $(1,763)

 

(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. 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 September 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 September 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 September 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 September 30, 2017 and December 31, 2016.

 

10
 

 

The table below sets forth amortized cost and fair value of investment securities at September 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.

 

  Amortized   Estimated 
(Dollars in thousands)  cost   fair value 
Due in less than one year  $28,765   $28,794 
Due after one year but within five years   176,397    176,366 
Due after five years but within ten years   97,814    98,668 
Due after ten years   84,737    85,237 
Common stocks   162    323 
Total  $387,875   $389,388 

 

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

 

(Dollars in thousands)  Three months ended September 30,   Nine months ended September 30, 
   2017   2016   2017   2016 
                 
Sales proceeds  $54   $708   $13,513   $14,326 
                     
Realized gains  $39   $261   $387   $573 
Realized losses   -    -    (24)   (15)
Net realized losses  $39   $261   $363   $558 

 

Securities with carrying values of $222.9 million and $224.3 million were pledged to secure public funds on deposit, repurchase agreements and as collateral for borrowings at September 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:

 

   September 30,   December 31, 
(Dollars in thousands)  2017   2016 
         
One-to-four family residential real estate  $136,829   $136,846 
Construction and land   15,898    13,738 
Commercial real estate   120,818    118,200 
Commercial   50,944    54,506 
Agriculture   84,101    78,324 
Municipal   3,479    3,884 
Consumer   21,985    20,271 
Total gross loans   434,054    425,769 
Net deferred loan costs and loans in process   (236)   36 
Allowance for loan losses   (5,379)   (5,344)
Loans, net  $428,439   $420,461 
          
Percent of total          
One-to-four family residential real estate   31.5%   32.1%
Construction and land   3.7%   3.2%
Commercial real estate   27.8%   27.8%
Commercial loans   11.7%   12.8%
Agriculture loans   19.4%   18.4%
Municipal loans   0.8%   0.9%
Consumer loans   5.1%   4.8%
Total gross loans   100.0%   100.0%

 

11
 

 

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

 

(Dollars in thousands)  Three and nine months ended September 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 July 1, 2017  $499   $70   $1,709   $1,081   $1,772   $10   $185   $5,326 
Charge-offs   -    -    -    -    -    -    (84)   (84)
Recoveries   1    -    -    10    -    14    12    37 
Provision for loan losses   -    33    11    (82)   87    (15)   66    100 
Balance at September 30, 2017   500    103    1,720    1,009    1,859    9    179    5,379 
                                         
Balance at January 1, 2017  $504   $53   $1,777   $1,119   $1,684   $12   $195   $5,344 
Charge-offs   (19)   -    (61)   -    -    -    (249)   (329)
Recoveries   9    -    -    19    1    14    71    114 
Provision for loan losses   6    50    4    (129)   174    (17)   162    250 
Balance at September 30, 2017   500    103    1,720    1,009    1,859    9    179    5,379 

 

(Dollars in thousands)  Three and nine months ended September 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 July 1, 2016  $584   $89   $1,776   $1,393   $1,600   $23   $187   $5,652 
Charge-offs   (14)      -    -    -    (215)   -    (89)   (318)
Recoveries   3    -    -    9    -    -    11    23 
Provision for loan losses   36    (7)   (40)   (28)   88    -    101    150 
Balance at September 30, 2016   609    82    1,736    1,374    1,473    23    210    5,507 
                                         
Balance at January 1, 2016  $925   $77   $1,740   $1,530   $1,428   $23   $199   $5,922 
Charge-offs   (14)   -    -    (306)   (298)   -    (374)   (992)
Recoveries   8    -    -    29    -    6    34    77 
Provision for loan losses   (310)   5    (4)   121    343    (6)   351    500 
Balance at September 30, 2016   609    82    1,736    1,374    1,473    23    210    5,507 

 

12
 

 

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 September 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   15    36    53    35    111    -    -    250 
Collectively evaluated for loss   485    67    1,667    974    1,748    9    179    5,129 
Total   500    103    1,720    1,009    1,859    9    179    5,379 
                                         
Loan balances:                                        
Individually evaluated for loss   531    2,083    3,999    1,579    883    140    44    9,259 
Collectively evaluated for loss   136,298    13,815    116,819    49,365    83,218    3,339    21,941    424,795 
Total  $136,829   $15,898   $120,818   $50,944   $84,101   $3,479   $21,985   $434,054 

 

(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 increased from $6.7 million at December 31, 2016 to $9.3 million at September 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 September 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 nine month periods ended September 30, 2017 and 2016.

 

13
 

 

The following tables present information on impaired loans:

 

(Dollars in thousands)  As of September 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  $531   $531   $496   $35   $15   $552   $6 
Construction and land   3,818    2,083    1,885    198    36    2,030    49 
Commercial real estate   3,999    3,999    3,939    60    53    4,017    368 
Commercial   1,579    1,579    1,372    207    35    1,660    - 
Agriculture   1,098    883    486    397    111    992    7 
Municipal   140    140    140    -    -    209    4 
Consumer   44    44    44    -    -    47    - 
Total impaired loans  $11,209   $9,259   $8,362   $897   $250   $9,507   $434 

 

(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 September 30, 2017 and December 31, 2016.

 

14
 

 

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

 

(Dollars in thousands)  As of September 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  $1,163   $253   $-   $1,416   $333   $1,749   $135,080 
Construction and land   86    346    -    432    786    1,218    14,680 
Commercial real estate   210    -    -    210    1,864    2,074    118,744 
Commercial   50    -    -    50    1,579    1,629    49,315 
Agriculture   588    90    -    678    883    1,561    82,540 
Municipal   -    -    -    -    -    -    3,479 
Consumer   122    5    -    127    44    171    21,814 
Total  $2,219   $694   $-   $2,913   $5,489   $8,402   $425,652 
                                    
Percent of gross loans   0.51%   0.16%   0.00%   0.67%   1.26%   1.94%   98.06%

 

(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 nine months ended September 30, 2017 and 2016 would have increased interest income by $79,000 and $43,000, respectively. No interest income related to non-accrual loans was included in interest income for the nine months ended September 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.

 

15
 

 

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

 

(Dollars in thousands)  As of September 30, 2017   As of December 31, 2016 
   Nonclassified   Classified   Nonclassified   Classified 
                 
One-to-four family residential real estate  $136,064   $765   $135,640   $1,206 
Construction and land   15,112    786    13,138    600 
Commercial real estate   115,000    5,818    111,641    6,559 
Commercial   47,685    3,259    51,080    3,426 
Agriculture   79,430    4,671    73,564    4,760 
Municipal   3,479    -    3,884    - 
Consumer   21,932    53    20,181    90 
Total  $418,702   $15,352   $409,128   $16,641 

 

At September 30, 2017, the Company had 12 loan relationships consisting of 20 outstanding loans that were classified as TDRs. During the third quarter of 2017, the Company classified one agriculture loan totaling $11,000 as a TDR after refinancing an existing loan to a loan relationship that was classified as a TDR in 2016. The Company also classified a one-to-four family residential real estate totaling $25,000 as a TDR after modifying the terms per a bankruptcy judgement. 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. As of September 30, 2017, no impairments were recorded against the principal balances of loans classified as TDRs during 2017. Since the loans were adequately secured no charge-offs were recorded against the principal balances of loans classified as TDRs during 2017.

 

During the third quarter of 2016, the Company classified a $302,000 agriculture loan relationship consisting of three loans as a TDR after extending the maturities of the loans. The collateral securing the loans was deemed to be insufficient, resulting in a charge-off of $215,000. 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. As of September 30, 2016, an impairment of $2,000 was recorded against loans classified as TDRs. The Company recorded charge-offs of $215,000 against TDRs during the three and nine months ended September 30, 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 September 30, 2017 and 2016. At September 30, 2017, there was a commitment of $32,000 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 nine months of 2017 or 2016. A credit provision for loan losses of $30,000 related to TDRs was recorded in the nine months ended September 30, 2017 compared to no provision in the same period of 2016. The Company allocated $50,000 and $80,000 of the allowance for loan losses against loans classified as TDRs at September 30, 2017 and December 31, 2016, respectively.

 

16
 

 

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

 

(Dollars in thousands)  As of September 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   $-   $198    2   $-   $185 
Construction and land   4    578    1,297    4    588    1,338 
Commercial real estate   4    60    2,135    3    64    2,145 
Commercial   -    -    -    2    -    13 
Agriculture   8    361    -    4    268    44 
Municipal   2    -    140    2    -    258 
Total troubled debt restructurings   20   $999   $3,770    17   $920   $3,983 

 

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 nine 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 September 30, 2017 
   Gross carrying
amount
   Accumulated
amortization
   Net carrying
amount
 
Core deposit intangible assets  $2,067   $(1,324)  $743 
Lease intangible asset   350    (177)   173 
Mortgage servicing rights   6,169    (3,343)   2,826 
Total other intangible assets  $8,586   $(4,844)  $3,742 

 

(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:

 

  Amortization 
(Dollars in thousands)   expense 
Remainder of 2017  $68 
2018   252 
2019   214 
2020   177 
2021   121 
Thereafter   84 
Total  $916 

 

17
 

 

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:

 

  September 30,   December 31, 
(Dollars in thousands)   2017   2016 
FHLMC  $511,517   $483,356 
FHLB   10,002    11,393 
Total  $521,519   $494,749 

 

Custodial escrow balances maintained in connection with serviced loans were $5.0 million and $4.1 million at September 30, 2017 and December 31, 2016, respectively. Gross service fee income related to such loans was $330,000 and $308,000 for the three months ended September 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 $969,000 and $908,000 for the nine months ended September 30, 2017 and 2016, respectively.

 

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

 

  Three months ended September 30,   Nine months ended September 30, 
(Dollars in thousands)   2017   2016   2017   2016 
Mortgage servicing rights:                    
Balance at beginning of period  $2,813   $2,851   $2,849   $2,840 
Additions   260    268    702    780 
Amortization   (247)   (291)   (725)   (792)
Balance at end of period  $2,826   $2,828   $2,826   $2,828 

 

The fair value of mortgage servicing rights was $5.4 million and $5.1 million at September 30, 2017 and December 31, 2016, respectively. Fair value at September 30, 2017 was determined using discount rates ranging from 9.50% to 9.51%; prepayment speeds averaged 9.59% with a range of 0% to 33.92%, depending on the stratification of the specific mortgage servicing right; and a weighted average default rate of 2.23%. Fair value at December 31, 2016 was determined using discount rates ranging from 9.50% to 9.51%; prepayment speeds averaged 8.91% with a range of 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 $235,000 and $301,000 at September 30, 2017 and December 31, 2016 respectively, 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 charged a $66,000 loss against the reserve during the first nine months of 2017. The Company did not have any recoveries against the mortgage repurchase reserve in the first nine months of 2017. The Company had no losses and recovered $10,000 of losses against the mortgage repurchase reserve during the nine months ended September 30, 2016. As of September 30, 2017, the Company did not have any outstanding mortgage repurchase requests.

 

18
 

 

5. Earnings (Loss) 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   Nine months ended 
(Dollars in thousands, except per share amounts)  September 30   September 30 
   2017   2016   2017   2016 
Net (loss) earnings(1)  $(2,661)  $2,156   $1,927   $6,875 
                     
Weighted average common shares outstanding - basic (2)   3,872,829    3,827,899    3,871,075    3,785,784 
Assumed exercise of stock options (1)(2)   -    72,623    74,134    70,486 
Weighted average common shares outstanding - diluted (1)(2)   3,872,829    3,900,522    3,945,209    3,856,270 
Net (loss) earnings per share (1)(2):                    
Basic  $(0.69)  $0.56   $0.50   $1.82 
Diluted  $(0.69)  $0.55   $0.49   $1.78 

 

(1) Net (loss) earnings, earnings per share, and assumed exercise of stock options for the periods ended September 30, 2016 have been recast to reflect the early adoption of ASU 2016-09.

 

(2) Share and per share values for the periods ended September 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 nine months ended September 30, 2017 excluded 180,014 and 21,152, respectively, unexercised stock options because their inclusion would have been anti-dilutive during such periods. The diluted earnings per share computations for the three and nine months ended September 30, 2016 include all unexercised stock options because no stock options were anti-dilutive during such periods.

 

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 September 30, 2017 
   Overnight and           Greater     
   Continuous   Up to 30 days   30-90 days   than 90 days   Total 
Repurchase agreements:                                                                                   
U.S. federal agency obligations  $5,391   $-   $-   $-   $5,391 
Agency mortgage-backed securities   6,096    -    -    -    6,096 
Total  $11,487   $-   $-   $-   $11,487 

 

   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 $11.5 million at September 30, 2017, and $12.5 million at December 31, 2016, which were secured by $18.2 million and $15.7 million of the Company’s investment portfolio at the same dates, respectively.

 

19
 

 

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.

 

20
 

 

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

 

(Dollars in thousands)  As of September 30, 2017 
   Carrying                 
   amount   Level 1   Level 2   Level 3   Total 
Financial assets:                         
Cash and cash equivalents  $18,772   $18,772   $-   $-   $18,772 
Investment securities available-for-sale   389,388    5,337    384,051    -    389,388 
Bank stocks, at cost   5,384    n/a     n/a     n/a     n/a  
Loans, net   428,439    -    -    426,935    426,935 
Loans held for sale, net   8,583    -    8,583    -    8,583 
Derivative financial instruments   583    -    583    -    583 
Accrued interest receivable   4,406    16    2,034    2,356    4,406 
                          
Financial liabilities:                         
Non-maturity deposits  $(605,759)  $(605,759)  $-   $-    (605,759)
Time deposits   (127,251)   -    (125,676)   -    (125,676)
FHLB borrowings   (64,400)   -    (64,646)   -    (64,646)
Subordinated debentures   (21,434)   -    (19,156)   -    (19,156)
Other borrowings   (11,487)   -    (11,487)   -    (11,487)
Derivative financial instruments   (32)   -    (32)   -    (32)
Accrued interest payable   (270)   -    (270)   -    (270)

 

   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