Toggle SGML Header (+)


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 March 31, 2018

 

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   (I.R.S. Employer
incorporation or organization)   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 [X] Non-accelerated filer [  ] (Do not check if a smaller reporting company) Smaller reporting company [  ] Emerging growth company [  ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

Indicate by check mark whether the registrant 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 May 7, 2018, the issuer had outstanding 4,147,946 shares of its common stock, $0.01 par value per share.

 

 

 

   
 

 

LANDMARK BANCORP, INC.

Form 10-Q Quarterly Report

 

Table of Contents

 

  PART I  
     
    Page Number
     
Item 1. Financial Statements 2 - 26
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 27 – 33
Item 3.  Quantitative and Qualitative Disclosures about Market Risk 33 – 34
Item 4. Controls and Procedures 35
     
  PART II  
     
Item 1. Legal Proceedings 36
Item 1A. Risk Factors 36
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds 36
Item 3. Defaults Upon Senior Securities 36
Item 4. Mine Safety Disclosures 36
Item 5. Other Information 36
Item 6. Exhibits 36
     
  Signature Page 37

 

 1 
 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

LANDMARK BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

(Dollars in thousands, except per share amounts)  March 31,   December 31, 
   2018   2017 
   (Unaudited)     
Assets        
Cash and cash equivalents  $13,042   $16,584 
Investment securities available-for-sale, at fair value   398,102    387,983 
Common stocks, at fair value   7    - 
Bank stocks, at cost   5,457  5,423 
Loans, net of allowance for loans losses of $5,644 at March 31, 2018 and $5,459 at December 31, 2017       436,179 433,743   
Loans held for sale, at fair value   6,287    6,535 
Premises and equipment, net   21,051    20,824 
Bank owned life insurance   23,857    23,698 
Goodwill   17,532    17,532 
Other intangible assets, net   3,504    3,659 
Real estate owned, net   416    436 
Accrued interest and other assets   13,560    13,037 
Total assets  $938,994   $929,454 
           
Liabilities and Stockholders’ Equity          
Liabilities:          
Deposits:          
Non-interest-bearing demand  $170,108   $160,496 
Money market and checking   374,633    388,311 
Savings   97,108    93,474 
Time   127,712    123,277 
Total deposits   769,561    765,558 
           
Federal Home Loan Bank borrowings   39,747    31,600 
Subordinated debentures   21,534    21,484 
Other borrowings   12,743    13,509 
Accrued interest, taxes, and other liabilities   10,961    9,681 
Total liabilities   854,546    841,832 
           
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; 4,118,083 and 4,081,659 shares issued at March 31, 2018 and December 31, 2017, respectively       41          41   
Additional paid-in capital   58,160    57,772 
Retained earnings   31,499    30,214 
Accumulated other comprehensive loss   (5,252)   (405)
Total stockholders’ equity   84,448    87,622 
Total liabilities and stockholders’ equity  $938,994   $929,454 

 

See accompanying notes to consolidated financial statements.

 

 2 
 

 

LANDMARK BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

 

   Three months ended 
(Dollars in thousands, except per share amounts)  March 31, 
   2018   2017 
Interest income:          
Loans:          
Taxable  $5,350   $5,019 
Tax-exempt   29    35 
Investment securities:          
Taxable   1,197    1,192 
Tax-exempt   1,025    942 
Total interest income   7,601    7,188 
Interest expense:          
Deposits   541    338 
Borrowings   466    482 
Total interest expense   1,007    820 
Net interest income   6,594    6,368 
Provision for loan losses   200    50 
Net interest income after provision for loan losses   6,394    6,318 
Non-interest income:          
Fees and service charges   1,756    1,715 
Gains on sales of loans, net   1,161    1,389 
Bank owned life insurance   159    117 
Gains on sales of investment securities, net   35    147 
Other   290    273 
Total non-interest income   3,401    3,641 
Non-interest expense:          
Compensation and benefits   3,789    3,757 
Occupancy and equipment   1,078    1,024 
Data processing   365    330 
Amortization of intangibles   277    298 
Professional fees   388    290 
Advertising   167    166 
Federal deposit insurance premiums   72    72 
Foreclosure and real estate owned expense   13    52 
Other   1,291    1,072 
Total non-interest expense   7,440    7,061 
Earnings before income taxes   2,355    2,898 
Income tax expense   256    693 
Net earnings  $2,099   $2,205 
Earnings per share:          
Basic (1)  $0.51   $0.54 
Diluted (1)  $0.51   $0.54 
Dividends per share (1)  $0.20   $0.19 

 

(1) Per share amounts for the period ended March 31, 2017 have been adjusted to give effect to the 5% stock dividend paid during December 2017.

 

See accompanying notes to consolidated financial statements.

 

 3 
 

 

LANDMARK BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

   Three months ended 
(Dollars in thousands)  March 31, 
   2018   2017 
         
Net earnings  $2,099   $2,205 
           
Net unrealized holding (losses) gains on available-for-sale securities   (6,376)   522 
Less reclassification adjustment for net gains included in earnings   (35)   (147)
Net unrealized (losses) gains   (6,411)   375 
Income tax effect on net gains included in earnings   9    54 
Income tax effect on net unrealized holding gains (losses)   1,562    (200)
Other comprehensive (loss) income   (4,840)   229 
           
Total comprehensive (loss) income  $(2,741)  $2,434 

 

See accompanying notes to consolidated financial statements.

 

 4 
 

 

LANDMARK BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

 

(Dollars in thousands, except per share amounts)  Common stock  

Additional

paid-in capital

   Retained earnings  

Accumulated other

comprehensive income (loss)

   Total 
                     
Balance at January 1, 2017  $38   $51,968   $34,293   $(1,348)  $84,951 
Net earnings   -    -    2,205    -    2,205 
Other comprehensive income   -    -    -    229    229 
Dividends paid ($0.19 per share)   -    -    (774)   -    (774)
Stock-based compensation   -    35    -    -    35 
Exercise of stock options, 1,845 shares   1    22    -    -    23 
Balance at March 31, 2017  $39   $52,025   $35,724   $(1,119)  $86,669 
                          
Balance at January 1, 2018  $41   $57,772   $30,214   $(405)  $87,622 
Net earnings   -    -    2,099    -    2,099 
Other comprehensive loss   -    -    -    (4,840)   (4,840)
Dividends paid ($0.20 per share)   -    -    (821)   -    (821)
Stock-based compensation   -    54    -    -    54 
Adjustment of common stock   -    -    7    (7)   - 
Exercise of stock options, 36,424 shares   -    334    -    -    334 
Balance at March 31, 2018  $41   $58,160   $31,499   $(5,252)  $84,448 

 

See accompanying notes to consolidated financial statements.

 

 5 
 

 

LANDMARK BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   Three months ended 
(Dollars in thousands)  March 31, 
   2018   2017 
Cash flows from operating activities:          
Net earnings  $2,099   $2,205 
Adjustments to reconcile net earnings to net cash provided by (used by) operating activities:          
Provision for loan losses   200    50 
Valuation allowance on real estate owned   -    33 
Amortization of investment security premiums, net   485    468 
Amortization of purchase accounting adjustment on loans   (58)   (19)
Amortization of purchase accounting adjustment on subordinated debentures   50    50 
Amortization of intangibles   277    298 
Depreciation   250    263 
Increase in cash surrender value of bank owned life insurance   (159)   (117)
Stock-based compensation   54    35 
Deferred income taxes   105    60 
Net gains on sales of investment securities   (35)   (147)
Net losses on sales of foreclosed assets   1    15 
Net gains on sales of loans   (1,161)   (1,389)
Proceeds from sales of loans   31,886    31,153 
Origination of loans held for sale   (30,477)   (32,835)
Changes in assets and liabilities:          
Accrued interest and other assets   838    (520)
Accrued expenses, taxes, and other liabilities   (1,232)   (99)
Net cash provided by (used in) operating activities   3,123    (496)
Cash flows from investing activities:          
Net (increase) decrease in loans   (2,596)   2,452 
Maturities and prepayments of investment securities   12,682    11,069 
Purchases of investment securities   (29,692)   (30,726)
Proceeds from sales of investment securities   2,535    11,797 
Redemption of bank stocks   3,666    1,802 
Purchase of bank stocks   (3,700)   (1,826)
Proceeds from sales of foreclosed assets   20    233 
Purchases of premises and equipment, net   (477)   (12)
Net cash used in investing activities   (17,562)   (5,211)
Cash flows from financing activities:          
Net increase in deposits   4,003    11,166 
Federal Home Loan Bank advance borrowings   233,570    148,857 
Federal Home Loan Bank advance repayments   (225,423)   (154,507)
Proceeds from other borrowings   -    1,008 
Repayments on other borrowings   (766)   - 
Proceeds from exercise of stock options   334    23 
Payment of dividends   (821)   (774)
Net cash provided by financing activities   10,897    5,773 
Net (decrease) increase in cash and cash equivalents   (3,542)   66 
Cash and cash equivalents at beginning of period   16,584    19,996 
Cash and cash equivalents at end of period  $13,042   $20,062 

 

(Continued)

 

 6 
 

 

LANDMARK BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED

(Unaudited)

 

   Three months ended 
(Dollars in thousands)  March 31, 
   2018   2017 
Supplemental disclosure of cash flow information:          
Cash payments for income taxes  $-   $- 
Cash paid for interest   973    786 
           
Supplemental schedule of noncash investing and financing activities:          
Transfer of loans to real estate owned   -    5 
Investment securities purchases not yet settled   (2,512)   (3,443)

 

See accompanying notes to consolidated financial statements.

 

 7 
 

 

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 its wholly owned subsidiaries, Landmark National Bank (the “Bank”) and Landmark Risk Management Inc., have been prepared in accordance with the instructions to Form 10-Q. Accordingly, they do not include all the information and footnotes required by U.S. 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 three month interim period ended March 31, 2018 are not necessarily indicative of the results expected for the year ending December 31, 2018 or any other future time period. The Company has evaluated subsequent events for recognition and disclosure up to the date the financial statements were issued.

 

On January 1, 2018, the Company adopted ASU 2014-09 Revenue from Contracts with Customers and all subsequent amendments to the ASU (collectively, “ASC 606”), which (i) creates a single framework for recognizing revenue from contracts with customers that fall within its scope and (ii) revises when it is appropriate to recognize a gain (loss) from the transfer of non-financial assets, such as real estate owned. The majority of the Company’s revenues come from interest income and other sources, including loans, leases, securities and derivatives that are outside the scope of ASC 606. Services within the scope of ASC 606 include deposit service charges on deposits, interchange income, and the sale of real estate owned. Refer to footnote 7 to the financial statements, Revenue from Contracts with Customers, for further discussion on the Company’s accounting policies for revenue sources within the scope of ASC 606.

 

The Company adopted ASC 606 using the modified retrospective method applied to all contracts not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606 while prior period amounts continue to be reported in accordance with legacy GAAP. The adoption of ASC 606 did not result in a change to the accounting for any of the in-scope revenue streams. As such, no cumulative effect adjustment was recorded.

 

In January 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU 2016-01, Financial Instruments (Topic 825): Recognition and Measurement of Financial Assets and Liabilities. The main provisions of the update are to eliminate the available for sale classification of accounting for equity securities and to adjust the fair value disclosures for financial instruments carried at amortized costs such that the disclosed fair values represent an exit price as opposed to an entry price. The provisions of this update will require that equity securities be carried at fair market value on the balance sheet and any periodic changes in value will be adjustments to the income statement. A practical expedient is provided for equity securities without a readily determinable fair value, such that these securities can be carried at cost less any impairment. The provisions of this update became effective for interim and annual periods beginning after December 15, 2017. The Company adopted ASU 2016-01 effective January 1, 2018. Effective January 1, 2018, changes in the value of the Company’s common stock investments are adjustments to the income statement. Additionally, the disclosure of fair value of the loan portfolio is presented using an exit price method instead of the discounted cash method previously utilized. Management has concluded that the requirements of this update do not have a material impact to the Company’s financial position, results of operations or cash flows.

 

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Payments (a consensus of Emerging Issues Task Force). This ASU attempts to clarify how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The purpose of this update is to reduce existing diversity in practice in eight areas addressed by the update. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted. The Company adopted ASU 2016-15 effective January 1, 2018. The adoption of ASU 2016-15 did not result in any material changes to the Company’s consolidated financial statements and related disclosures.

 

 8 
 

 

2. Investments

 

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

 

   As of March 31, 2018 
       Gross   Gross     
   Amortized   unrealized   unrealized   Estimated 
(Dollars in thousands)  cost   gains   losses   fair value 
                 
U. S. treasury securities  $1,999   $-   $(38)  $1,961 
U. S. federal agency obligations   14,554    4    (113)   14,445 
Municipal obligations, tax exempt   183,449    459    (3,442)   180,466 
Municipal obligations, taxable   55,065    91    (615)   54,541 
Agency mortgage-backed securities   141,006    8    (3,310)   137,704 
Certificates of deposit   8,985    -    -    8,985 
Total available-for-sale  $405,058   $562   $(7,518)  $398,102 

 

   As of December 31, 2017 
       Gross   Gross     
   Amortized   unrealized   unrealized   Estimated 
(Dollars in thousands)  cost   gains   losses   fair value 
                 
U. S. treasury securities  $1,999   $-   $(9)  $1,990 
U. S. federal agency obligations   16,572    5    (85)   16,492 
Municipal obligations, tax exempt   183,846    1,972    (1,080)   184,738 
Municipal obligations, taxable   57,783    409    (216)   57,976 
Agency mortgage-backed securities   119,096    92    (1,633)   117,555 
Certificates of deposit   9,224    -    -    9,224 
Common stocks   -    8    -    8 
Total available-for-sale  $388,520   $2,486   $(3,023)  $387,983 

 

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 March 31, 2018 and December 31, 2017. 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.

 

       As of March 31, 2018 
(Dollars in thousands)      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   $1,961   $(38)  $-   $-   $1,961   $(38)
U.S. federal agency obligations   12    5,969    (46)   8,248    (67)   14,217    (113)
Municipal obligations, tax exempt   317    95,894    (1,829)   30,798    (1,613)   126,692    (3,442)
Municipal obligations, taxable   105    35,148    (445)   9,850    (170)   44,998    (615)
Agency mortgage-backed securities   101    99,117    (1,730)   37,917    (1,580)   137,034    (3,310)
Total   536   $238,089   $(4,088)  $86,813   $(3,430)  $324,902   $(7,518)

 

       As of December 31, 2017 
(Dollars in thousands)      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    $1,990   $ (9)  $ -   $ -   $ 1,990   $(9)
U. S. federal agency obligations   14    7,989    (24)   8,272    (61)   16,261   $(85)
Municipal obligations, tax exempt   178    37,299    (273)   31,930    (807)   69,229   $(1,080)
Municipal obligations, taxable   73    18,792    (96)   9,744    (120)   28,536   $(216)
Agency mortgage-backed securities   79    68,630    (620)   39,844    (1,013)   108,474   $(1,633)
Total   345   $134,700   $(1,022)  $89,790   $(2,001)  $224,490   $(3,023)

 

 9 
 

 

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 its cost basis, the Company believed that the U.S. treasury security identified in the table above was temporarily impaired as of March 31, 2018 and December 31, 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 March 31, 2018 and December 31, 2017.

 

The Company’s portfolio of municipal obligations consists of both tax-exempt and taxable general obligations securities issued by various municipalities. As of March 31, 2018, the Company did not intend to sell and it is 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 its cost. 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 March 31, 2018 and December 31, 2017.

 

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. 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 March 31, 2018 and December 31, 2017.

 

The table below sets forth amortized cost and fair value of investment securities at March 31, 2018. 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.

 

(Dollars in thousands)  Amortized   Estimated 
   cost   fair value 
Due in less than one year  $28,290   $28,180 
Due after one year but within five years   187,173    183,944 
Due after five years but within ten years   102,653    100,613 
Due after ten years   86,942    85,365 
Total  $405,058   $398,102 

 

 10 
 

 

Sales proceeds and gross realized gains and losses on sales of available-for-sale securities were as follows for the periods indicated:

 

(Dollars in thousands)  Three months ended March 31, 
   2018   2017 
         
Sales proceeds  $2,535   $11,797 
           
Realized gains  $35   $171 
Realized losses   -    (24)
Net realized gains  $35   $147 

 

Securities with carrying values of $227.3 million and $232.5 million were pledged to secure public funds on deposit, repurchase agreements and as collateral for borrowings at March 31, 2018 and December 31, 2017, respectively. Except for U.S. federal agency obligations, no investment in a single issuer exceeded 10% of consolidated stockholders’ equity.

 

Effective January 1, 2018, the Company changed the classification of its common stock investments from available-for-sale with changes in fair value excluded from earnings and reported as a separate component of stockholders’ equity, net of taxes to be carried at fair value with changes in fair value included in net earnings. At March 31, 2018, the Company owned two common stock investments with a fair value of $7,000. During the first quarter of 2018, the fair value declined by $1,000, which was included in other non-interest income.

 

3. Loans and Allowance for Loan Losses

 

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

 

   March 31,   December 31, 
(Dollars in thousands)  2018   2017 
         
One-to-four family residential real estate  $134,565   $136,215 
Construction and land   24,372    19,356 
Commercial real estate   123,194    120,624 
Commercial   52,575    54,591 
Agriculture   81,691    83,008 
Municipal   3,305    3,396 
Consumer   22,516    22,046 
Total gross loans   442,218    439,236 
Net deferred loan costs and loans in process   (395)   (34)
Allowance for loan losses   (5,644)   (5,459)
Loans, net  $436,179   $433,743 

 

 11 
 

 

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

 

   Three months ended March 31, 2018 
(Dollars in thousands)  One-to-four family residential real estate   Construction and land   Commercial real estate   Commercial   Agriculture   Municipal   Consumer   Total 
                                 
Allowance for loan losses:                                        
Balance at January 1, 2018  $542   $181   $1,540   $1,226   $1,812   $8   $150   $5,459 
Charge-offs   -    -    -    -    -    -    (33)   (33)
Recoveries   1    -    1    1    -    2    13    18 
Provision for loan losses   (66)   (60)   21    257    55    (3)   (4)   200 
Balance at March 31, 2018  $477   $ 121   $ 1,562   $1,484   $1,867   $7   $ 126   $ 5,644 

 

   Three months ended March 31, 2017 
(Dollars in thousands)  One-to-four family residential real estate   Construction and land   Commercial real estate   Commercial   Agriculture   Municipal   Consumer   Total 
                                 
Allowance for loan losses:                                        
Balance at January 1, 2017  $504   $53   $1,777   $1,119   $1,684   $12   $195   $5,344 
Charge-offs   (19)   -    -    -    -    -    (107)   (126)
Recoveries   1    -    -    8    1    -    49    59 
Provision for loan losses   7    18    (37)   (26)   46    (1)   43    50 
Balance at March 31, 2017  $493   $ 71   $ 1,740   $ 1,101   $ 1,731   $ 11   $ 180   $ 5,327 

 

   As of March 31, 2018 
(Dollars in thousands)  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  $84   $ 23   $ 15   $ 685   $ 71   $ -   $ 1   $ 879 
Collectively evaluated for loss   393    98    1,547    799    1,796    7    125    4,765 
Total  $477   $ 121   $1,562   $1,484   $ 1,867   $7   $126   $5,644 
                                         
Loan balances:                                        
Individually evaluated for loss  $740   $ 1,780   $ 3,922   $ 2,024   $ 776   $ 126   $ 40   $ 9,408 
Collectively evaluated for loss   133,825    22,592    119,272    50,551    80,915    3,179    22,476    432,810 
Total  $134,565   $24,372   $123,194   $52,575   $81,691   $3,305   $22,516   $442,218 

 

   As of December 31, 2017 
(Dollars in thousands)  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  $73   $ 102   $ 52   $ 391   $ 24   $ -   $ -   $ 642 
Collectively evaluated for loss   469    79    1,488    835    1,788    8    150    4,817 
Total  $542   $181   $1,540   $1,226   $ 1,812   $8   $150   $5,459 
                                         
Loan balances:                                        
Individually evaluated for loss  $747   $ 2,031   $ 3,973   $ 2,002   $ 833   $ 140   $ 34   $ 9,760 
Collectively evaluated for loss   135,468    17,325    116,651    52,589    82,175    3,256    22,012    429,476 
Total  $136,215   $19,356   $120,624   $54,591   $83,008   $3,396   $22,046   $439,236 

 

The Company recorded net loan charge-offs of $15,000 during the first quarter of 2018 compared to net loan charge-offs of $67,000 during the first quarter of 2017.

 

 12 
 

 

The Company’s impaired loans decreased from $9.8 million at December 31, 2017 to $9.4 million at March 31, 2018. 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 March 31, 2018 and December 31, 2017, 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 months ended March 31, 2018 and 2017. The following tables present information on impaired loans:

 

(Dollars in thousands)  As of March 31, 2018 
   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  $740   $740   $467   $273   $84   $746   $2 
Construction and land   3,515    1,780    417    1,363    23    1,797    15.00 
Commercial real estate   3,922    3,922    3,884    38    15    3,925    122.00 
Commercial   2,024    2,024    7    2,017    685    2,041    - 
Agriculture   991    776    517    259    71    791    - 
Municipal   126    126    126    -    -    138    - 
Consumer   40    40    33    7    1    40    - 
Total impaired loans  $11,358   $9,408   $5,451   $3,957   $879   $9,478   $139 

 

(Dollars in thousands)  As of December 31, 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  $747   $747   $503   $244   $73   $774   $8 
Construction and land   3,766    2,031    430    1,601    102    2,033    65 
Commercial real estate   3,973    3,973    3,888    85    52    3,989    490 
Commercial   2,002    2,002    11    1,991    391    2,082    - 
Agriculture   1,048    833    545    288    24    912    1 
Municipal   140    140    140    -    -    192    5 
Consumer   34    34    34    -    -    35    - 
Total impaired loans  $11,710   $9,760   $5,551   $4,209   $642   $10,017   $569 

 

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 90 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 90 days or more delinquent and accruing interest at March 31, 2018 or December 31, 2017.

 

 13 
 

 

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

 

(Dollars in thousands)  As of March 31, 2018 
   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  $314   $ -   $-   $ 314   $549   $863   $133,702 
Construction and land   -    -    -    -    581    581    23,791 
Commercial real estate   -    -    -    -    1,794    1,794    121,400 
Commercial   166    356    -    522    2,024    2,546    50,029 
Agriculture   177    75    -    252    776    1,028    80,663 
Municipal   -    -    -    -    -    -    3,305 
Consumer   35    2    -    37    40    77    22,439 
Total  $692   $433   $-   $1,125   $5,764   $6,889   $435,329 
                                    
Percent of gross loans   0.16%   0.10%   0.00%   0.26%   1.30%   1.56%   98.44%

 

(Dollars in thousands)  As of December 31, 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  $101   $313   $-   $414   $552   $966   $135,249 
Construction and land   -    4    -    4    779    783    18,573 
Commercial real estate   22    209    -    231    1,841    2,072    118,552 
Commercial   -    397    -    397    2,002    2,399    52,192 
Agriculture   -    -    -    -    833    833    82,175 
Municipal   -    -    -    -    -    -    3,396 
Consumer   105    204    -    309    34    343    21,703 
Total  $228   $1,127   $-   $1,355   $6,041   $7,396   $431,840 
                                    
Percent of gross loans   0.05%   0.26%   0.00%   0.31%   1.38%   1.68%   98.32%

 

Under the original terms of the Company’s non-accrual loans, interest earned on such loans for the three months ended March 31, 2018 and 2017 would have increased interest income by $76,000 and $31,000, respectively. No interest income related to non-accrual loans was included in interest income for the three months ended March 31, 2018 and 2017.

 

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. Nonclassified 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.

 

 14 
 

 

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

 

   As of March 31, 2018   As of December 31, 2017 
(Dollars in thousands)  Nonclassified   Classified   Nonclassified   Classified 
                 
One-to-four family residential real estate  $133,478   $1,087   $135,475   $740 
Construction and land   23,791    581    18,577    779 
Commercial real estate   117,401    5,793    114,736    5,888 
Commercial   46,215    6,360    52,313    2,278 
Agriculture   73,641    8,050    76,455    6,553 
Municipal   3,305    -    3,396    - 
Consumer   22,476    40    22,006    40 
Total  $420,307   $21,911   $422,958   $16,278 

 

At March 31, 2018, the Company had eleven loan relationships consisting of eighteen outstanding loans that were classified as TDRs. There were no loans classified as TDRs during the first three months of 2018. During the first three months 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 loans were adequately secured, no charge-offs or impairments were recorded against the principal during the three months ended March 31, 2017.

 

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 March 31, 2018 and 2017. At March 31, 2018, there was a commitment of $8,000 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 quarter of 2018 or 2017. A credit provision for loan losses of $33,000 and $13,000 related to TDRs was recorded in the three months ended March 31, 2018 and 2017, respectively. The Company had $94,000 and $127,000 allowance for loan losses recorded against loans classified as TDRs at March 31, 2018 and December 31, 2017, respectively.

 

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

 

(Dollars in thousands)    
   As of March 31, 2018   As of December 31, 2017 
   Number of loans   Non-accrual balance   Accruing balance   Number of loans   Non-accrual balance   Accruing balance 
                         
One-to-four family residential real estate   2   $-   $191    2   $-   $194 
Construction and land   4    571    1,199    4    575    1,252 
Commercial real estate   2    -    2,128    3    45    2,133 
Agriculture   8    444    -    9    471    - 
Municipal   2    -    126    2    -    140 
Total troubled debt restructurings   18   $1,015   $3,644    20   $1,091   $3,719 

 

 15