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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 June 30, 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 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 [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 August 7, 2018, the issuer had outstanding 4,162,779 shares of its common stock, $0.01 par value per share.

 

 

 

 
 

 

LANDMARK BANCORP, INC.

Form 10-Q Quarterly Report

 

Table of Contents

 

Page
Number
     
PART I
     
Item 1. Financial Statements 3 - 28
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 29
Item 3. Quantitative and Qualitative Disclosures about Market Risk 37
Item 4. Controls and Procedures 39
     
PART II  
     
Item 1. Legal Proceedings 40
Item 1A. Risk Factors 40
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 40
Item 3. Defaults Upon Senior Securities 40
Item 4. Mine Safety Disclosures 40
Item 5. Other Information 40
Item 6. Exhibits 40
     
  Signature Page 41

 

2
 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

LANDMARK BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

 

(Dollars in thousands, except per share amounts)  June 30, 2018   December 31, 2017 
    (Unaudited)      
Assets          
Cash and cash equivalents  $19,883   $16,584 
Investment securities available-for-sale, at fair value   398,137    387,983 
Bank stocks, at cost   6,034    5,423 
Loans, net of allowance for loans losses of $5,835 at June 30, 2018 and $5,459 at December 31, 2017   461,396    433,743 
Loans held for sale, at fair value   11,764    6,535 
Premises and equipment, net   21,381    20,824 
Bank owned life insurance   24,019    23,698 
Goodwill   17,532    17,532 
Other intangible assets, net   3,358    3,659 
Real estate owned, net   452    436 
Accrued interest and other assets   14,224    13,037 
Total assets  $978,180   $929,454 
           
Liabilities and Stockholders’ Equity          
Liabilities:          
Deposits:          
Non-interest-bearing demand  $172,103   $160,496 
Money market and checking   373,843    388,311 
Savings   96,160    93,474 
Time   123,185    123,277 
Total deposits   765,291    765,558 
           
Federal Home Loan Bank borrowings   85,600    31,600 
Subordinated debentures   21,584    21,484 
Other borrowings   8,417    13,509 
Accrued interest, taxes, and other liabilities   10,873    9,681 
Total liabilities   891,765    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; 4,147,946 and 4,081,659 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively   41    41 
Additional paid-in capital   58,356    57,772 
Retained earnings   33,514    30,214 
Accumulated other comprehensive loss   (5,496)   (405)
Total stockholders’ equity   86,415    87,622 
Total liabilities and stockholders’ equity  $978,180   $929,454 

 

See accompanying notes to consolidated financial statements.

 

3
 

 

LANDMARK BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

 

   Three months ended   Six months ended 
(Dollars in thousands, except per share amounts)  June 30,   June 30, 
   2018   2017   2018   2017 
Interest income:                    
Loans:                    
Taxable  $5,709   $5,246   $11,059   $10,265 
Tax-exempt   35    34    64    69 
Investment securities:                    
Taxable   1,305    1,202    2,502    2,394 
Tax-exempt   1,034    974    2,059    1,916 
Total interest income   8,083    7,456    15,684    14,644 
Interest expense:                    
Deposits   631    394    1,172    732 
Borrowings   616    486    1,082    968 
Total interest expense   1,247    880    2,254    1,700 
Net interest income   6,836    6,576    13,430    12,944 
Provision for loan losses   250    100    450    150 
Net interest income after provision for loan losses   6,586    6,476    12,980    12,794 
Non-interest income:                    
Fees and service charges   1,808    1,917    3,564    3,632 
Gains on sales of loans, net   1,468    1,692    2,629    3,081 
Bank owned life insurance   162    119    321    236 
Gains on sales of investment securities, net   -    177    35    324 
Other   815    296    1,105    569 
Total non-interest income   4,253    4,201    7,654    7,842 
                     
Non-interest expense:                    
Compensation and benefits   3,966    3,918    7,755    7,675 
Occupancy and equipment   1,072    1,097    2,150    2,121 
Amortization of intangibles   283    328    560    626 
Data processing   376    337    741    667 
Professional fees   430    476    818    766 
Advertising   165    166    332    332 
Federal deposit insurance premiums   72    73    144    145 
Foreclosure and real estate owned expense   12    49    25    101 
Other   1,190    1,108    2,481    2,180 
Total non-interest expense   7,566    7,552    15,006    14,613 
Earnings before income taxes   3,273    3,125    5,628    6,023 
Income tax expense   428    742    684    1,435 
Net earnings  $2,845   $2,383   $4,944   $4,588 
Earnings per share:                    
Basic (1)  $0.69   $0.59   $1.20   $1.13 
Diluted (1)  $0.68   $0.58   $1.19   $1.11 
Dividends per share (1)  $0.20   $0.19   $0.40   $0.38 

 

(1) Per share amounts for the periods ended June 30, 2017 have been adjusted to give effect to the 5% stock dividend paid during December 2017.

 

See accompanying notes to consolidated financial statements.

 

4
 

 

LANDMARK BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)

(Unaudited)

 

   Three months ended   Six months ended 
(Dollars in thousands)  June 30,   June 30, 
   2018   2017   2018   2017 
                 
Net earnings  $2,845   $2,383   $4,944   $4,588 
                     
Net unrealized holding (losses) gains on available-for-sale securities   (323)   4,497    (6,699)   5,019 
Reclassification adjustment for net gains included in earnings   -    (177)   (35)   (324)
Net unrealized (losses) gains   (323)   4,320    (6,734)   4,695 
Income tax effect on net gains included in earnings   -    65    9    120 
Income tax effect on net unrealized holding losses (gains)   79    (1,670)   1,641    (1,871)
Other comprehensive (loss) income   (244)   2,715    (5,084)   2,944 
                     
Total comprehensive income (loss)  $2,601   $5,098   $(140)  $7,532 

 

See accompanying notes to consolidated financial statements.

 

5
 

 

LANDMARK BANCORP, INC. AND SUBSIDIARY

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   -    -    4,588    -    4,588 
Other comprehensive income   -    -    -    2,944    2,944 
Dividends paid ($0.38 per share)   -    -    (1,548)   -    (1,548)
Stock-based compensation   -    77    -    -    77 
Exercise of stock options, 2,968 shares   1    22    -    -    23 
Balance at June 30, 2017  $39   $52,067   $37,333   $1,596   $91,035 
                          
Balance at January 1, 2018  $41   $57,772   $30,214   $(405)  $87,622 
Net earnings   -    -    4,944    -    4,944 
Other comprehensive loss   -    -    -    (5,084)   (5,084)
Dividends paid ($0.40 per share)   -    -    (1,651)   -    (1,651)
Stock-based compensation   -    100    -       100
Adjustment of common stock investments   -    -    7    (7)   - 
Exercise of stock options, 66,287 shares,   -    484    -    -    484 
Balance at June 30, 2018  $41   $58,356   $33,514   $(5,496)  $86,415 

 

See accompanying notes to consolidated financial statements.

 

6
 

 

LANDMARK BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

(Dollars in thousands)  Six months ended June 30, 
   2018   2017 
Cash flows from operating activities:          
Net earnings   4,944   $4,588 
Adjustments to reconcile net earnings to net cash provided by operating activities:          
Provision for loan losses   450    150 
Valuation allowance on real estate owned   -    67 
Amortization of investment security premiums, net   977    944 
Amortization of purchase accounting adjustment on loans   (80)   (91)
Amortization of purchase accounting adjustment on subordinated debentures   100    100 
Amortization of intangibles   560    626 
Depreciation   498    520 
Increase in cash surrender value of bank owned life insurance   (321)   (236)
Stock-based compensation   100    77 
Deferred income taxes   392    542 
Net gains on sales of investment securities   (35)   (324)
Net gain on sales of premises, equipment and real estate owned   (1)   (10)
Net gains on sales of loans   (2,629)   (3,081)
Proceeds from sales of loans   75,613    86,747 
Origination of loans held for sale   (78,213)   (87,907)
Changes in assets and liabilities:          
Accrued interest and other assets   (152)   (1,183)
Accrued expenses, taxes, and other liabilities   1,192    (1,201)
Net cash provided by operating activities   3,395    328 
Cash flows from investing activities:          
Net increase in loans   (28,096)   (2,662)
Maturities and prepayments of investment securities   25,745    28,501 
Purchases of investment securities   (45,117)   (42,164)
Proceeds from sales of investment securities   1,535    13,459 
Proceeds from sales of common stock investments   7    - 
Redemption of bank stocks   4,516    6,319 
Purchase of bank stocks   (5,127)   (6,370)
Proceeds from sales of premises and equipment and foreclosed assets   22    398 
Purchases of premises and equipment, net   (1,055)   (51)
Net cash used in investing activities   (47,570)   (2,570)
Cash flows from financing activities:          
Net (decrease) increase in deposits   (267)   3,501 
Federal Home Loan Bank advance borrowings   413,190    313,277 
Federal Home Loan Bank advance repayments   (359,190)   (321,377)
Proceeds from other borrowings   -    100 
Repayments on other borrowings   (5,092)   (1,136)
Proceeds from exercise of stock options   484    23 
Payment of dividends   (1,651)   (1,548)
Net cash provided by (used in) financing activities   47,474    (7,160)
Net increase (decrease) in cash and cash equivalents   3,299    (9,402)
Cash and cash equivalents at beginning of period   16,584    19,996 
Cash and cash equivalents at end of period  $19,883   $10,594 

 

(Continued)

 

7
 

 

LANDMARK BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED

(Unaudited)

 

   Six months ended 
(Dollars in thousands)  June 30, 
   2018   2017 
   (Unaudited) 
Supplemental disclosure of cash flow information:        
Cash (refund) payments for income taxes  $(1,000)  $800 
Cash paid for interest   2,079    1,616 
           
Supplemental schedule of noncash investing and financing activities:          
Transfer of loans to real estate owned   38    180 

 

See accompanying notes to consolidated financial statements.

 

8
 

 

LANDMARK BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1. Interim Financial Statements

 

The unaudited consolidated financial statements of Landmark Bancorp, Inc. (the “Company”) and 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 six month interim period ended June 30, 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 did 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.

 

9
 

 

2. Investments

 

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

 

(Dollars in thousands)  As of June 30, 2018 
       Gross   Gross     
   Amortized   unrealized   unrealized   Estimated 
   cost   gains   losses   fair value 
                 
U. S. treasury securities  $1,999   $-   $(47)  $1,952 
U. S. federal agency obligations   13,774    3    (100)   13,677 
Municipal obligations, tax exempt   182,163    482    (3,106)   179,539 
Municipal obligations, taxable   55,284    64    (708)   54,640 
Agency mortgage-backed securities   144,416    9    (3,876)   140,549 
Certificates of deposit   7,780    -    -    7,780 
Total  $405,416   $558   $(7,837)  $398,137 

 

(Dollars in thousands)  As of December 31, 2017 
       Gross   Gross     
   Amortized   unrealized   unrealized   Estimated 
   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  $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 June 30, 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.

 

(Dollars in thousands)      As of June 30, 2018 
       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   $1,952   $(47)  $-   $-   $1,952   $(47)
U.S. federal agency obligations   11    3,723    (31)   9,729    (69)   13,452    (100)
Municipal obligations, tax exempt   301    89,803    (1,508)   33,670    (1,598)   123,473    (3,106)
Municipal obligations, taxable   110    36,430    (531)   10,984    (177)   47,414    (708)
Agency mortgage-backed securities   103    102,870    (2,155)   37,065    (1,721)   139,935    (3,876)
Total   526   $234,778   $(4,272)  $91,448   $(3,565)  $326,226   $(7,837)

 

(Dollars in thousands)      As of December 31, 2017 
       Less than 12 months   12 months or longer   Total 
   No. of   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
   securities   value   losses   value   losses   value   losses 
U.S. treasury securities   1   $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)

 

The Company’s U.S. treasury portfolio consists of securities issued by the United States Department of the Treasury. The receipt of principal and interest on U.S. treasury securities is guaranteed by the full faith and credit of the U.S. government. Based on these factors, along with the Company’s intent to not sell the security and its belief that it was more likely than not that the Company will not be required to sell the security before recovery of their cost basis, the Company believed that the U.S. treasury security identified in the table above was temporarily impaired as of June 30, 2018 and December 31, 2017.

 

10
 

 

The Company’s U.S. federal agency portfolio consists of securities issued by the government-sponsored agencies of Federal Home Loan Mortgage Corporation (“FHLMC”), Federal National Mortgage Association (“FNMA”) and Federal Home Loan Bank (“FHLB”). The receipt of principal and interest on U.S. federal agency obligations is guaranteed by the respective government-sponsored agency guarantor, such that the Company believes that its U.S. federal agency obligations do not expose the Company to credit-related losses. Based on these factors, along with the Company’s intent to not sell the securities and its belief that it was more likely than not that the Company will not be required to sell the securities before recovery of their cost basis, the Company believed that the U.S. federal agency obligations identified in the tables above were temporarily impaired as of June 30, 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. The Company did not intend to sell and it was more likely than not that the Company will not be required to sell its municipal obligations in an unrealized loss position until the recovery of their costs. Due to the issuers’ continued satisfaction of the securities’ obligations in accordance with their contractual terms and the expectation that they will continue to do so, the evaluation of the fundamentals of the issuers’ financial condition and other objective evidence, the Company believed that the municipal obligations identified in the tables above were temporarily impaired as of June 30, 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 (“GNMA”). The receipt of principal, at par, and interest on agency mortgage-backed securities is guaranteed by the respective government-sponsored agency guarantor, such that the Company believed that its agency mortgage-backed securities did not expose the Company to credit-related losses. Based on these factors, along with the Company’s intent to not sell the securities and the Company’s belief that it was more likely than not that the Company will not be required to sell the securities before recovery of their cost basis, the Company believed that the agency mortgage-backed securities identified in the tables above were temporarily impaired as of June 30, 2018 and December 31, 2017.

 

The table below sets forth amortized cost and fair value of investment securities at June 30, 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  $30,042   $29,939 
Due after one year but within five years   196,229    192,202 
Due after five years but within ten years   94,540    92,727 
Due after ten years   84,605    83,269 
Total  $405,416   $398,137 

 

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

 

(Dollars in thousands)  Three months ended
June 30,
   Six months ended
June 30,
 
   2018   2017   2018   2017 
                 
Sales proceeds  $-   $1,917   $1,535   $13,459 
                     
Realized gains  $-   $177   $35   $348 
Realized losses   -    -    -    (24)
Net realized losses  $-   $177   $35   $324 

 

Securities with carrying values of $248.6 million and $232.5 million were pledged to secure public funds on deposit, repurchase agreements and as collateral for borrowings at June 30, 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.

 

11
 

 

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. The Company received $7,000 of proceeds from the sale of its remaining common stock investments during the six months ended June 30, 2018.

 

3. Loans and Allowance for Loan Losses

 

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

 

   June 30,   December 31, 
(Dollars in thousands)  2018   2017 
         
One-to-four family residential real estate  $138,267   $136,215 
Construction and land   26,453    19,356 
Commercial real estate   121,946    120,624 
Commercial   66,531    54,591 
Agriculture   87,901    83,008 
Municipal   3,172    3,396 
Consumer   22,867    22,046 
Total gross loans   467,137    439,236 
Net deferred loan costs and loans in process   94    (34)
Allowance for loan losses   (5,835)   (5,459)
Loans, net  $461,396   $433,743 

 

12
 

 

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

 

(Dollars in thousands)  Three and six months ended June 30, 2018 
   One-to-four family residential real estate   Construction and land   Commercial real estate   Commercial   Agriculture   Municipal   Consumer   Total 
                                 
Allowance for loan losses:                                        
Balance at April 1, 2018  $477   $121   $1,562   $1,484   $1,867   $7   $126   $5,644 
Charge-offs   -    -    -    (29)   -    -    (44)   (73)
Recoveries   1    -    -    1    -    -    12    14 
Provision for loan losses   (39)   (12)   (96)   237    138    -    22    250 
Balance at June 30, 2018   439    109    1,466    1,693    2,005    7    116    5,835 
                                         
Balance at January 1, 2018  $542   $181   $1,540   $1,226   $1,812   $8   $150   $5,459 
Charge-offs   -    -    -    (29)   -    -    (77)   (106)
Recoveries   2    -    1    2    -    2    25    32 
Provision for loan losses   (105)   (72)   (75)   494    193    (3)   18    450 
Balance at June 30, 2018   439    109    1,466    1,693    2,005    7    116    5,835 

 

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

 

13
 

 

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

 

(Dollars in thousands)  As of June 30, 2018 
   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   85    -    14    728    25    -    1    853 
Collectively evaluated for loss   354    109    1,452    965    1,980    7    115    4,982 
Total   439    109    1,466    1,693    2,005    7    116    5,835 
                                         
Loan balances:                                        
Individually evaluated for loss   651    1,641    3,920    2,032    602    126    46    9,018 
Collectively evaluated for loss   137,616    24,812    118,026    64,499    87,299    3,046    22,821    458,119 
Total  $138,267   $26,453   $121,946   $66,531   $87,901   $3,172   $22,867   $467,137 

 

(Dollars in thousands)  As of December 31, 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   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’s impaired loans decreased from $9.8 million at December 31, 2017 to $9.0 million at June 30, 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 June 30, 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 on impaired loans was immaterial during the three and six month periods ended June 30, 2018 and 2017.

 

14
 

 

The following tables present information on impaired loans:

 

(Dollars in thousands)  As of June 30, 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  $651   $651   $395   $256   $85   $661   $5 
Construction and land   3,376    1,641    1,641    -    -    1,736    29 
Commercial real estate   3,920    3,920    2,127    1,793    14    3,926    243 
Commercial   2,032    2,032    3    2,029    728    2,055    8 
Agriculture   817    602    344    258    25    652    27 
Municipal   126    126    126    -    -    132    1 
Consumer   46    46    40    6    1    46    - 
Total impaired loans  $10,968   $9,018   $4,676   $4,342   $853   $9,208   $313 

 

(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 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 or more delinquent and accruing interest at June 30, 2018 or December 31, 2017.

 

15
 

 

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

 

(Dollars in thousands)  As of June 30, 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  $100   $289   $-   $389   $463   $852   $137,415 
Construction and land   -    -    -    -    567    567    25,886 
Commercial real estate   -    -    -    -    1,793    1,793    120,153 
Commercial   48    711    -    759    2,032    2,791    63,740 
Agriculture   127    176    -    303    384    687    87,214 
Municipal   -    -    -    -    -    -    3,172 
Consumer   36    43    -    79    46    125    22,742 
Total  $311   $1,219   $-   $1,530   $5,285   $6,815   $460,322 
                                    
Percent of gross loans   0.07%   0.26%   0.00%   0.33%   1.13%   1.46%   98.54%

 

(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%   1.37%   1.68%   98.32%

 

16
 

 

Under the original terms of the Company’s non-accrual loans, interest earned on such loans for the six months ended June 30, 2018 and 2017 would have increased interest income by $132,000 and $63,000, respectively. No interest income related to non-accrual loans was included in interest income for the six months ended June 30, 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. 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.

 

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

 

(Dollars in thousands)  As of June 30, 2018   As of December 31, 2017 
   Non-classified   Classified   Non-classified   Classified 
                 
One-to-four family residential real estate  $137,325   $942   $135,475   $740 
Construction and land   25,886    567    18,577    779 
Commercial real estate   111,697    10,249    114,736    5,888 
Commercial   58,424    8,107    52,313    2,278 
Agriculture   83,390    4,511    76,455    6,553 
Municipal   3,172    -    3,396    - 
Consumer   22,821    46    22,006    40 
Total  $442,715   $24,422   $422,958   $16,278 

 

At June 30, 2018, the Company had 12 loan relationships consisting of 17 outstanding loans that were classified as TDRs. During the second quarter of 2018, the Company classified an agriculture loan totaling $64,000 as a TDR after originating a loan to an existing loan relationship that was classified as a TDR in 2016. As part of the restructuring the borrower paid off three loans previously classified as TDRs. The Company also classified a $41,000 commercial loan as a TDR after extending the maturity of the loan during the second quarter of 2018. There were no loans classified as TDRs during the first three months of 2018. Since the agriculture loan relationship was adequately secured, no impairments were recorded against the principal as of June 30, 2018. The commercial loan had a $11,000 impairment recorded against the principal balance as of June 30, 2018.

 

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. These two loans were paid off in the second quarter of 2018. During the first quarter of 2017, the Company classified an $11,000 commercial real estate loan as a TDR after extending the maturity of the loan and classified as a TDR a $15,000 agriculture loan extended to an existing loan relationship that was classified as a TDR in 2016. Since the commercial real estate loan was adequately secured, no charge-offs or impairments were recorded against the principal as of June 30, 2017. The agriculture loan relationship had a $49,000 impairment recorded against the principal balance as of June 30, 2017 and a charge-off of $215,000 was recorded in the third quarter of 2016.

 

17
 

 

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 that were classified as TDRs that defaulted within 12 months of modification during the first six months of 2018. There was one commercial real estate loan totaling $11,000 that was classified as a TDR during the second quarter of 2017 which defaulted within 12 months of modification. The loan was charged off in the fourth quarter of 2017. The Company did not record any charge-offs against loans classified as TDRs in the first six months of either 2018 or 2017. A credit provision for loan losses of $58,000 related to TDRs was recorded in the three months ended June 30, 2018. No provision for loan losses was recorded against TDRs during the three months ended June 30, 2017. A credit provision for loan losses of $91,000 and $13,000 related to TDRs was recorded in the six months ended June 30, 2018 and 2017, respectively. The Company allocated $36,000 and $127,000 of the allowance for loan losses against loans classified as TDRs at June 30, 2018 and December 31, 2017, respectively.

 

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

 

(Dollars in thousands)  As of June 30, 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   $-   $188    2   $-   $194 
Construction and land   4    567    1,074    4    575    1,252 
Commercial real estate   2    -    2,127    3    45    2,133 
Commercial   1    41    -    -    -    - 
Agriculture   6    136    218    9    471    - 
Municipal   2    -    126    2    -    140 
Total troubled debt restructurings   17   $744   $3,733    20   $1,091   $3,719 

 

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, 2017 concluded that its goodwill was not impaired. The Company concluded there were no triggering events during the first six months of 2018 that required an interim goodwill impairment test.

 

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

 

(Dollars in thousands)  As of June 30, 2018 
   Gross carrying amount   Accumulated amortization   Net carrying amount 
Core deposit intangible assets  $2,067   $(1,487)  $580 
Lease intangible asset   350    (211)   139 
Mortgage servicing rights   6,410    (3,771)   2,639 
Total other intangible assets  $8,827   $(5,469)  $3,358 

 

(Dollars in thousands)  As of December 31, 2017 
   Gross carrying amount   Accumulated amortization   Net carrying amount 
Core deposit intangible assets  $2,067   $(1,381)  $686 
Lease intangible asset   350    (188)   162 
Mortgage servicing rights   6,285    (3,474)   2,811 
Total other intangible assets  $8,702   $(5,043)  $3,659 

 

18
 

 

The following sets forth estimated amortization expense for core deposit and lease intangible assets for the remainder of 2018 and in successive years ending December 31:

 

(Dollars in thousands)  Amortization 
   expense 
Remainder of 2018  $123 
2019   214 
2020   177 
2021   121 
2022   58 
Thereafter   26 
Total  $719 

 

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

 

(Dollars in thousands)  June 30,   December 31, 
   2018   2017 
FHLMC  $520,587   $517,863 
FHLB   9,324    9,782 
Total  $529,911   $527,645 

 

Custodial escrow balances maintained in connection with serviced loans were $5.0 million and $4.4 million at June 30, 2018 and December 31, 2017, respectively. Gross service fee income related to such loans was $337,000 and $320,000 for the three months ended June 30, 2018 and 2017, respectively, and is included in fees and service charges in the consolidated statements of earnings. Gross service fee income related to such loans was $673,000 and $639,000 for the six months ended June 30, 2018 and 2017, respectively.

 

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

 

(Dollars in thousands)  Three months ended June 30,   Six months ended June 30, 
   2018   2017   2018   2017 
Mortgage servicing rights:                    
Balance at beginning of period  $2,722   $2,787   $2,811   $2,849 
Additions   137    281    259    442 
Amortization   (220)   (255)   (431)   (478)
Balance at end of period  $2,639   $2,813   $2,639   $2,813 

 

The fair value of mortgage servicing rights was $6.1 million and $5.6 million at June 30, 2018 and December 31, 2017, respectively. Fair value at June 30, 2018 was determined using discount rates ranging from 9.00% to 11.00%; prepayment speeds ranging from 6.00% to 23.83%, depending on the stratification of the specific mortgage servicing right; and a weighted average default rate of 1.35%. Fair value at December 31, 2017 was determined using discount rates ranging from 9.50% to 9.59%, prepayment speeds ranging from 5.23% to 33.39%, 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 at both June 30, 2018 and December 31, 2017, which represents the Company’s best estimate of probable losses that the Company will incur related to the repurchase of one-to-four family residential real estate loans previously sold or to reimburse investors for credit losses incurred on loans previously sold where a breach of the contractual representations and warranties occurred. The Company did not incur any losses charged against the reserve or make any provisions to the reserve during the first six months of 2018 and 2017. As of June 30, 2018, the Company did not have any outstanding mortgage repurchase requests.

 

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5. Earnings per Share

 

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

 

   Three months ended   Six months ended 
(Dollars in thousands, except per share amounts)  June 30,   June 30, 
   2018   2017   2018   2017 
Net earnings(1)  $2,845   $2,383   $4,944   $4,588 
                     
Weighted average common shares outstanding - basic (1)   4,141,894    4,064,092    4,124,947    4,063,692 
Assumed exercise of stock options (1)   18,693    84,092    18,544    83,040 
Weighted average common shares outstanding - diluted (1)   4,160,587    4,148,184    4,143,491    4,146,732 
Net earnings per share (1):                    
Basic  $0.69   $0.59   $1.20   $1.13 
Diluted  $0.68   $0.58   $1.19   $1.11 

 

(1) Share and per share values for the periods ended June 30, 2017 have been adjusted to give effect to the 5% stock dividend paid during December 2017.

 

The diluted earnings per share computations for the three and six months ended June 30, 2018 and 2017 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 June 30, 2018 
   Overnight and           Greater     
   Continuous   Up to 30 days   30-90 days   than 90 days   Total 
Repurchase agreements:                         
U.S. federal treasury obligations  $307   $-   $-   $-   $307 
U.S. federal agency obligations   2,948    -    -    -    2,948 
Agency mortgage-backed securities   5,162    -    -    -    5,162 
Total  $8,417