10-Q 1 v165626_10q.htm

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, 2009

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

SECURITIES EXCHANGE ACT OF 1934

For 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 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 ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):

Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company x

(Do not check if a smaller reporting company)

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 Registrant's classes of common stock as of the latest practicable date: as of November 10, 2009, the Registrant had outstanding 2,371,450 shares of its common stock, $.01 par value per share.

LANDMARK BANCORP, INC.

Form 10-Q Quarterly Report

Table of Contents

		Page Number
PART I

Item 1.	Financial Statements and Related Notes	2 - 18
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	19 – 28
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	28 - 29
Item 4.	Controls and Procedures	29

PART II

Item 1.	Legal Proceedings	30
Item 1A.	Risk Factors	30

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	30
Item 3.	Defaults Upon Senior Securities	30
Item 4.	Submission of Matters to a Vote of Security Holders	30
Item 5.	Other Information	30
Item 6.	Exhibits	30

Form 10-Q Signature Page		31

ITEM 1. FINANCIAL STATEMENTS AND RELATED NOTES

LANDMARK BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollars in thousands)	September 30,			December 31,
	2009			2008
Assets
Cash and cash equivalents	$	20,681		$	13,788
Investment securities:
Available for sale, at fair value		170,596			162,245
Other securities		7,950			9,052
Loans, net		348,752			365,772
Loans held for sale		3,974			1,487
Premises and equipment, net		16,490			13,956
Goodwill		12,894			12,894
Other intangible assets, net		2,590			2,407
Bank owned life insurance		12,368			11,996
Accrued interest and other assets		7,626			8,617
Total assets	$	603,921		$	602,214

Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Non-interest bearing demand	$	48,939		$	49,823
Money market and NOW		158,633			150,116
Savings		28,377			26,203
Time, $100,000 and greater		61,441			49,965
Time, other		153,452			163,439
Total deposits		450,842			439,546

Federal Home Loan Bank borrowings		61,060			77,319
Other borrowings		29,664			27,047
Accrued expenses, taxes and other liabilities		7,933			6,896
Total liabilities		549,499			550,808

Stockholders' equity:
Preferred stock, $0.01 par, 200,000 shares authorized, none issued		-			-
Common stock, $0.01 par, 7,500,000 shares authorized, 2,411,412 shares issued, at September 30, 2009 and December 31, 2008		24			24
Additional paid-in capital		23,991			23,873
Retained earnings		28,601			27,819
Treasury stock, at cost; 39,962 and 39,162 shares at September 30, 2009 and December 31, 2008, respectively		(947	)		(935	)
Accumulated other comprehensive income		2,753			625
Total stockholders' equity		54,422			51,406

Total liabilities and stockholders' equity	$	603,921		$	602,214

See accompanying notes to condensed consolidated financial statements.

LANDMARK BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

(Dollars in thousands, except per share data)	Three months ended September 30,					Nine months ended September 30,
	2009			2008		2009			2008
Interest income:
Loans:
Taxable	$	5,062		$	5,900	$	15,365		$	18,626
Tax-exempt		55			52		168			152
Investment securities:
Taxable		1,045			1,213		3,230			3,634
Tax-exempt		637			596		1,867			1,791
Other		3			2		10			39
Total interest income		6,802			7,763		20,640			24,242

Interest expense:
Deposits		1,401			2,259		4,598			7,996
Borrowed funds		793			984		2,483			2,792
Total interest expense		2,194			3,243		7,081			10,788
Net interest income		4,608			4,520		13,559			13,454
Provision for loan losses		1,900			500		3,000			1,400
Net interest income after provision for loan losses		2,708			4,020		10,559			12,054

Non-interest income:
Fees and service charges		1,191			1,093		3,289			3,174
Gains on sale of loans		722			398		2,629			1,137
Gain on prepayment of FHLB borrowings		-			-		-			246
Bank owned life insurance		126			120		373			354
Other		71			130		358			408
Total non-interest income		2,110			1,741		6,649			5,319

Investment securities gains (losses), net:
Impairment losses on investment securities		(885	)		-		(1,795	)		-
Less noncredit-related losses		752			-		1,086			-
Net impairment losses		(133	)		-		(709	)		-
Gains on sales of investment securities		-			-		-			497
Investment securities gains (losses), net		(133	)		-		(709	)		497

Non-interest expense:
Compensation and benefits		2,360			2,214		6,739			6,439
Occupancy and equipment		716			687		2,030			2,121
Federal deposit insurance premiums		176			32		656			58
Data processing		189			183		583			586
Amortization of intangibles		196			196		574			605
Professional fees		190			109		554			342
Advertising		121			88		361			265
Other		878			802		2,729			2,447
Total non-interest expense		4,826			4,311		14,226			12,863
Earnings (losses) before income taxes		(141	)		1,450		2,273			5,007
Income tax (benefit) expense		(254	)		300		139			1,214
Net earnings	$	113		$	1,150	$	2,134		$	3,793

Earnings per share:
Basic	$	0.05		$	0.48	$	0.90		$	1.57
Diluted	$	0.05		$	0.48	$	0.90		$	1.57
Dividends per share	$	0.19		$	0.18	$	0.57		$	0.54

See accompanying notes to condensed consolidated financial statements.

LANDMARK BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)	Nine months ended September 30,
	2009			2008
Net cash provided by operating activities	$	4,089		$	3,628

Cash flows from investing activities:
Net decrease in loans		16,286			383
Maturities and prepayments of investment securities		37,167			13,377
Purchase of investment securities		(43,133	)		(29,793	)
Proceeds from sales of investment securities		1,210			10,408
Proceeds from sales of premises and equipment and foreclosed assets		1,954			1,409
Purchases of premises and equipment, net		(676	)		(572	)
Net cash paid in branch acquisition		(130	)		-
Net cash provided by (used in) investing activities		12,678			(4,788	)

Cash flows from financing activities:
Net increase (decrease) in deposits		4,900			(17,289	)
Federal Home Loan Bank advance borrowings		-			35,000
Federal Home Loan Bank advance repayments		(10,027	)		(13,528	)
Federal Home Loan Bank line of credit, net		(6,000	)		(8,400	)
Other borrowings, net		2,617			5,742
Purchase of treasury stock		(12	)		(3,296	)
Proceeds from issuance of stock under stock option plans		-			30
Excess tax benefit related to stock option plans		-			5
Payment of dividends		(1,352	)		(1,318	)
Net cash used in financing activities		(9,874	)		(3,054	)

Net increase (decrease) in cash and cash equivalents		6,893			(4,214	)
Cash and cash equivalents at beginning of period		13,788			14,739
Cash and cash equivalents at end of period		20,681		$	10,525

Supplemental disclosure of cash flow information:
Cash paid during period for interest	$	7,210		$	11,187
Cash paid during period for taxes, net		872			578

Supplemental schedule of non-cash investing and financing activities:
Transfer of loans to real estate owned	$	1,827		$	1,346
Branch acquisition:
Fair value of liabilities assumed		6,650			-
Fair value of assets acquired		6,520			-

See accompanying notes to condensed consolidated financial statements.

LANDMARK BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF EQUITY AND COMPREHENSIVE INCOME

(Unaudited)

	Common		Additional paid-in		Retained			Treasury			Accumulated other comprehensive
(Dollars in thousands, except per share data)	stock		capital		earnings			stock			income			Total

Balance at December 31, 2007	$	24	$	24,304	$	27,493		$	(206	)	$	681		$	52,296
Comprehensive income:															-
Net earnings		-		-		3,793			-			-			3,793
Change in fair value of investment securities available-for-sale, net of tax		-		-		-			-			(1,275	)		(1,275	)
Total comprehensive income		-		-		3,793			-			(1,275	)		2,518
Dividends paid ($0.54 per share)		-		-		(1,318	)		-			-			(1,318	)
Stock-based compensation		-		96		-			-			-			96
Exercise of stock options, 1,882 shares, including tax benefit of $5,010		-		35		-			-			-			35
Purchase of 134,385 treasury shares		-		-		-			(3,296	)		-			(3,296	)
Adoption of EITF 06-4		-		-		(335	)		-			-			(335	)
Balance September 30, 2008	$	24	$	24,435	$	29,633		$	(3,502	)	$	(594	)	$	49,996

Balance at December 31, 2008	$	24	$	23,873	$	27,819		$	(935	)	$	625		$	51,406
Comprehensive income:
Net earnings		-		-		2,134			-			-			2,134
Change in fair value of investment securities available-for-sale for which a portion of an other than temporary impairment has been recorded in net earnings, net of tax		-		-		-			-			233			233
Change in fair value of all other investment securities available-for-sale, net of tax		-		-		-			-			1,895			1,895
Total comprehensive income		-		-		2,134			-			2,128			4,262
Dividends paid ($0.57 per share)		-		-		(1,352	)		-			-			(1,352	)
Stock-based compensation		-		118		-			-			-			118
Purchase of 800 treasury shares		-		-		-			(12	)		-			(12	)
Balance at September 30, 2009	$	24	$	23,991	$	28,601		$	(947	)	$	2,753		$	54,422

See accompanying notes to condensed consolidated financial statements.

LANDMARK BANCORP, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Interim Financial Statements

The condensed consolidated financial statements of Landmark Bancorp, Inc. (the “Company”) and subsidiary have been prepared in accordance with the instructions to Form 10-Q. To the extent that information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements are contained in or consistent with the consolidated audited financial statements incorporated by reference in the Company’s Form 10-K for the year ended December 31, 2008, such information and footnotes have not been duplicated herein. 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 December 31, 2008, condensed consolidated balance sheet has been derived from the audited consolidated balance sheet as of that date. The results of the interim period ended September 30, 2009 are not necessarily indicative of the results expected for the year ending December 31, 2009. Subsequent events have been evaluated for potential recognition or disclosure through the time of the filing on November 12, 2009, which represents the date the consolidated financial statements were issued.

2. Goodwill and Other Intangible Assets

The Company tests goodwill for impairment annually or more frequently if circumstances warrant. During the first quarter of 2009, the decline in the Company’s stock price coupled with current market conditions in the financial services industry, constituted a triggering event which required an impairment test to be performed. The Company performed an impairment test as of March 31, 2009 by comparing the fair value of the Company’s single reporting unit to its carrying value. Fair value was determined using observable market data including the Company’s market capitalization and valuation multiples compared to recent financial industry acquisition multiples for similar institutions to estimate the fair value of the Company’s single reporting unit. Based on the results of the March 31, 2009 impairment testing which indicated no impairment, along with the Company’s conclusion that no triggering events occurred during the second or third quarters of 2009, the Company concluded its goodwill was not impaired as of September 30, 2009.

On May 8, 2009, the Company’s subsidiary, Landmark National Bank, assumed approximately $6.4 million in deposits in connection with a branch acquisition. As part of the transaction, Landmark National Bank agreed to pay a deposit premium of 1.75 percent on the core deposit balance as of 270 days after the close of the transaction. As of May 8, 2009 the core deposit premium, based on the acquired core deposit balances, was $86,000. The following is an analysis of changes in the core deposit intangible assets:

	Three months ended September 30,
(Dollars in thousands)	2009					2008
	Fair value at acquisition		Accumulated Amortization			Fair value at acquisition		Accumulated Amortization
Balance at beginning of period	$	5,482	$	(3,467	)	$	5,396	$	(2,818	)
Additions		-		-			-		-
Amortization		-		(154	)		-		(174	)
Balance at end of period	$	5,482	$	(3,621	)	$	5,396	$	(2,992	)

	Nine months ended September 30,
(Dollars in thousands)	2009					2008
	Fair value at acquisition		Accumulated Amortization			Fair value at acquisition		Accumulated Amortization
Balance at beginning of period	$	5,396	$	(3,159	)	$	5,396	$	(2,462	)
Additions		86		-			-		-
Amortization		-		(462	)		-		(530	)
Balance at end of period	$	5,482	$	(3,621	)	$	5,396	$	(2,992	)

Mortgage servicing rights are related to loans serviced by the Company for unrelated third parties. The outstanding principal balances of such loans was $134.4 million and $82.0 million at September 30, 2009 and December 31, 2008, respectively. Gross service fee income related to such loans was $79,000 and $54,000 for the quarters ended September 30, 2009 and 2008, respectively, which is included in fees and service charges in the consolidated statements of earnings. Gross service fee income for the nine months ended September 30, 2009 and 2008 was $194,000 and $167,000, respectively. The following is an analysis of changes in the mortgage servicing rights:

	Three months ended September 30,
(Dollars in thousands)	2009						2008
	Cost			Accumulated Amortization			Cost			Accumulated Amortization
Balance at beginning of period	$	1,211		$	(617	)	$	771		$	(581	)
Additions		177			-			22			-
Prepayments/maturities		(12	)		12			(22	)		22
Amortization		-			(42	)		-			(22	)
Balance at end of period	$	1,376		$	(647	)	$	771		$	(581	)

	Nine months ended September 30,
(Dollars in thousands)	2009						2008
	Cost			Accumulated Amortization			Cost			Accumulated Amortization
Balance at beginning of period	$	772		$	(602	)	$	770		$	(560	)
Additions		671			-			45			-
Prepayments/maturities		(67	)		67			(43	)		43
Amortization		-			(112	)		-			(75	)
Balance at end of period	$	1,376		$	(647	)	$	772		$	(592	)

Aggregate core deposit and mortgage servicing rights amortization expense for the quarters ended September 30, 2009 and 2008, was $196,000 in both quarters and $574,000 and $605,000 for the nine months ended September 30, 2009 and 2008, respectively. The following depicts estimated amortization expense for all intangible assets for the remainder of 2009 and in successive years ending December 31:

Year	Amount (in thousands)
Remainder of 2009	$	188
2010		683
2011		584
2012		487
2013		402
Thereafter		246

3. Investments

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

	As of September 30, 2009
			Gross		Gross
	Amortized		unrealized		unrealized			Estimated
(Dollars in thousands)	cost		gains		losses			fair value

U. S. federal agency obligations	$	23,575	$	509	$	(1	)	$	24,083
Municipal obligations		67,739		3,435		(21	)		71,153
Mortgage-backed securities		62,655		1,796		(18	)		64,433
Pooled trust preferred securities		1,780		-		(1,516	)		264
Common stocks		692		189		(12	)		869
Certificates of deposit		9,794		-		-			9,794
Total	$	166,235	$	5,929	$	(1,568	)	$	170,596

	As of December 31, 2008
			Gross		Gross
	Amortized		unrealized		unrealized			Estimated
(Dollars in thousands)	cost		gains		losses			fair value

U. S. federal agency obligations	$	28,566	$	950	$	(2	)	$	29,514
Municipal obligations		63,711		1,532		(934	)		64,309
Mortgage-backed securities		55,752		934		(104	)		56,582
Pooled trust preferred securities		2,488		—		(1,748	)		740
Common stocks		693		389		(8	)		1,074
Certificates of deposit		10,026		—		—			10,026
Total	$	161,236	$	3,805	$	(2,796	)	$	162,245

Included in the September 30, 2009 gross unrealized losses above, are noncredit-related losses of $1.1 million, recorded in accumulated other comprehensive income, related to two $1.0 million par investments in pools of trust preferred securities, which were determined to be other than temporarily impaired. The amortized cost of the two other than temporarily impaired investments, after recognition of $709,000 of impairment losses, was $1.3 million at September 30, 2009. The fair value of these two securities totaled $215,000 at September 30, 2009 compared to $554,000 at December 31, 2008, while the unrealized losses included in accumulated other comprehensive income were $1.1 million at September 30, 2009 and $1.4 million at December 31, 2008.

The summary of available-for-sale investment securities shows that some of the securities in the available-for-sale investment portfolio had unrealized losses, or were temporarily impaired, as of September 30, 2009 and December 31, 2008. 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 the impairment period.

(Dollars in thousands)			As of September 30, 2009
	Number		Less than 12 months					12 months or longer					Total
	of		Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	securities		value		losses			value		losses			value		losses
U. S. federal agency obligations		3	$	149	$	(1	)		-		-		$	149	$	(1	)
Municipal obligations		4		611		(11	)		770		(10	)		1,381		(21	)
Mortgage-backed securities		2		1,949		(18	)		6		-			1,955		(18	)
Pooled trust preferred securities		3		-		-			264		(1,516	)		264		(1,516	)
Common stocks		3		54		(12	)		-		-			54		(12	)
Total		15	$	2,763	$	(42	)	$	1,040	$	(1,526	)	$	3,803	$	(1,568	)

(Dollars in thousands)			As of December 31, 2008
	Number		Less than 12 months					12 months or longer					Total
	of		Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	securities		value		losses			value		losses			value		losses
U. S. federal agency obligations		3	$	64	$	-		$	133	$	(2	)	$	197	$	(2	)
Municipal obligations		56		13,282		(466	)		8,542		(468	)		21,824		(934	)
Mortgage-backed securities		80		12,219		(78	)		3,400		(26	)		15,619		(104	)
Pooled trust preferred securities		3		-		-			740		(1,748	)		740		(1,748	)
Common stocks		3		13		(2	)		18		(6	)		31		(8	)
Total		145	$	25,578	$	(546	)	$	12,834	$	(2,250	)	$	38,412	$	(2,796	)

The Company’s assessment of other than temporary impairment is based on its reasonable judgment of the specific facts and circumstances impacting each individual security at the time such assessments are made. The Company reviews and considers factual information, including expected cash flows, the structure of the security, the credit quality of the underlying assets and the current and anticipated market conditions. As of January 1, 2009, the Company early adopted the guidance on other than temporary impairments in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 320 “Investments - Debt and Equity Securities,” which changed the accounting for other than temporary impairments of debt securities and separates the impairment into credit-related and other factors.

The receipt of principal, at par, and interest on mortgage-backed securities is guaranteed by the respective government-sponsored agency guarantor, such that the Company believes that its mortgage-backed securities do not expose the Company to credit related losses. Based on these factors, along with the Company’s intent to not sell the security and that it is more likely than not that the Company will not be required to sell the security before recovery of its cost basis, the Company believes that the mortgage-backed securities identified in the tables above were temporarily depressed as of September 30, 2009 and December 31, 2008. The Company’s mortgage-backed securities portfolio consisted of securities underwritten to the standards of and guaranteed by the government-sponsored agencies of FHLMC, FNMA and GNMA.

At September 30, 2009, the Company does 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, and management’s intention not to sell and belief that it is more likely than not that the Company will not have to sell such securities prior to the recovery of the Company’s amortized cost, the Company believes that the municipal obligations identified in the tables above were temporarily depressed as of September 30, 2009 and December 31, 2008.

At September 30, 2009, the Company owned three pooled trust preferred securities with an original cost basis of $2.5 million, which represent investments in pools of debt obligations issued by financial institutions and insurance companies. The market for these securities is considered to be inactive according to the guidance issued in ASC Topic 820-10-15, which the Company early adopted as of January 1, 2009. The Company used discounted cash flow models to estimate the fair value of its pooled trust preferred securities. The Company also used discounted cash flow models to assess if the present value of the cash flows expected to be collected was less than the amortized cost, which would result in an other than temporary impairment. The assumptions used in preparing the discounted cash flow models include the following: estimated discount rates (using yields of comparable traded instruments adjusted for illiquidity and other risk factors), estimated deferral and default rates on collateral, and estimated cash flows. The discounted cash flow analysis included a review of all issuers within the collateral pool and incorporated higher deferral and default rates, as compared to historical rates, in the cash flow projections through maturity. The Company also reviewed a stress test of these securities to determine the additional estimated deferrals or defaults in the collateral pool in excess of what the Company believes is likely, before the payments on the individual securities are negatively impacted.

At September 30, 2009, the analysis of the Company’s three investments in pooled trust preferred securities indicated that the unrealized loss was temporary on a $0.5 million investment in a pooled trust preferred security and that it is more likely than not that the Company would be able to recover the cost basis of this security. At September 30, 2009 83% of the collateral in this pool of trust preferred securities was performing according to the contractual terms of the agreements. At September 30, 2009 the cash flow model of this investment indicated that the present value of the cash flows that the Company expects to receive was greater than the amortized cost of the investment. However, the Company determined that a portion of the unrealized loss on the remaining two $1.0 million investments in pooled trust preferred securities was other than temporary. The amount of actual and projected deferrals and/or defaults by the financial institutions underlying these pooled trust preferred securities increased significantly since the beginning of 2009. One of the investments experienced an increase in the percentage of the pool that was not performing according to the contractual terms of the agreements from 9% at December 31, 2008 to 43% at September 30, 2009, while the second investment’s nonperforming percentage increased from 6% at December 31, 2008 to 26% at September 30, 2009. The increase in nonperforming collateral resulted in total other than temporary impairments of $709,000 on these two securities as of September 30, 2009. The Company follows ASC Topic 320-10-65 in determining the amount of the other than temporary impairment recorded to earnings. The Company performed a discounted cash flow analysis, using the factors noted above to determine the amount of the other than temporary impairment that was applicable to either credit losses or other factors. The amount associated with credit losses, $709,000, has been realized through a charge to earnings for the nine months ended September 30, 2009 as an impairment loss, while the $339,000 change in the unrealized loss associated with other factors was recorded in other comprehensive income. During the three months ended September 30, 2009 the Company realized a net credit loss of $133,000 associated with an other than temporary impairment. During the three and nine months ended September 30, 2008 the Company did not record any impairment losses.

The following table reconciles the changes in the Company’s credit losses recognized in earnings.

	Three months ending		Nine months ending
(Dollars in thousands)	September 30, 2009		September 30, 2009
Beginning balance	$	576	$	-
Additional credit losses:
Securities with no previous other than temporary impairment		133		709
Securities with previous other than temporary impairments		-		-
Ending balance	$	709	$	709

It is reasonably possible that the fair values of the Company’s investment securities could decline in the future if the overall economy and the financial condition of some of the issuers continue to deteriorate and the liquidity of these securities remains low. As a result, there is a risk that additional other than temporary impairments may occur in the future and any such amounts could be material to the Company’s consolidated statements of earnings. The fair value of the Company’s investment securities may also decline from an increase in market interest rates, as the market prices of these investments move inversely to their market yields.

Maturities of investment securities at September 30, 2009 are as follows:

(Dollars in thousands)	Amortized cost		Estimated fair value
Due in less than one year	$	27,175	$	25,616
Due after one year but within five years		24,651		25,520
Due after five years		51,062		54,158
Mortgage-backed securities and common stock		63,347		65,302
Total	$	166,235	$	170,596

For mortgage-backed securities, actual maturities will differ from contractual maturities because borrowers have the right to prepay obligations with or without prepayment penalties.

Other investment securities include investments in Federal Home Loan Bank of Topeka (“FHLB”) and Federal Reserve Bank (“FRB”) stock. The carrying value of the FHLB stock at September 30, 2009 and December 31, 2008 was $6.2 million and $7.3 million, respectively, and the carrying value of the FRB stock at September 30, 2009 and December 31, 2008 was $1.8 million and 1.7 million, respectively. These securities are not readily marketable and are required for regulatory purposes and borrowing availability. Since there are no available observable market values, these securities are carried at cost. Redemption of these investments is at the option of the FHLB or FRB.

4. Loans

Loans consisted of the following:

(Dollars in thousands)	September 30, 2009			Percent of total			December 31, 2008			Percent of total
Real estate loans:
One-to-four family residential	$	101,131			28.6	%	$	112,815			30.5	%
Commercial		127,947			36.1	%		126,977			34.4	%
Construction		12,399			3.5	%		19,618			5.3	%
Commercial loans		104,886			29.6	%		101,976			27.6	%
Consumer loans		7,935			2.2	%		7,937			2.2	%
Total gross loans		354,298			100.0	%		369,323			100.0	%

Deferred loan fees/costs and loans in process		(318	)					320
Allowance for loan losses		(5,228	)					(3,871	)
Total net loans	$	348,752					$	365,772

A summary of the activity in the allowance for loan losses is as follows:

	Three months ended September 30,						Nine months ended September 30,
(Dollars in thousands)	2009			2008			2009			2008
Beginning balance	$	4,827		$	3,326		$	3,871		$	4,172
Provision for loan losses		1,900			500			3,000			1,400
Charge-offs		(1,543	)		(60	)		(1,923	)		(1,840	)
Recoveries		44			22			280			56
Ending balance	$	5,228		$	3,788		$	5,228		$	3,788

During the three months ended September 30, 2009 we had net loan charge-offs of $1.5 million compared to $38,000 for the comparable period of 2008. During the nine months ended September 30, 2009 we had net loan charge-offs of $1.6 million compared to $1.8 million for the comparable period of 2008.

A summary of the non-accrual loans is as follows:

(Dollars in thousands)	September 30, 2009		December 31, 2008
Real estate loans:
One-to-four family residential	$	963	$	1,358
Commercial		2,887		2,041
Construction		4,605		759
Commercial loans		3,783		1,537
Consumer loans		16		53
Total non-accrual loans	$	12,254	$	5,748

A summary of the nonperforming assets is as follows:

(Dollars in thousands)	September 30, 2009			December 31, 2008
Total non-accrual loans	$	12,254		$	5,748
Accruing loans over 90 days past due		-			-
Other real estate owned		1,793			1,934
Total nonperforming assets	$	14,047		$	7,682

Total nonperforming loans to total net loans		3.5	%		1.6	%
Total nonperforming assets to total assets		2.3	%		1.3	%
Allowance for loan losses to gross loans outstanding		1.5	%		1.0	%
Allowance for loan losses to total nonperforming loans		42.7	%		67.3	%

Loans past due more than a month totaled $14.5 million at September 30, 2009, compared to $9.4 million at December 31, 2008. At September 30, 2009, $12.3 million in loans were on non-accrual status, or 3.5% of net loans, compared to a balance of $5.7 million in loans on non-accrual status, or 1.6% of net loans, at December 31, 2008. Non-accrual loans consist primarily of loans greater than ninety days past due and which are also included in the past due loan balances. There were no loans 90 days delinquent and still accruing interest at September 30, 2009 or December 31, 2008. The increase in non-accrual and past due loans was primarily driven by a $4.2 million construction loan relationship and a $2.9 million commercial agriculture loan that were classified as non-accrual and past due during the first nine months of 2009.

A summary of the impaired loans is as follows:

(Dollars in thousands)	September 30, 2009		December 31, 2008
Impaired loans for which an allowance has been provided	$	8,954	$	1,867
Impaired loans for which no allowance has been provided		3,260		5,192
Total impaired loans		12,214		7,059
Allowance related to impaired loans	$	2,288	$	705

Our impaired loans increased primarily because of the same two loans impacting non-accrual and past due loan balances. Our analysis of these two impaired loans concluded that the potential exists that the updated collateral values or sources of repayment may not be sufficient to fully cover the outstanding loan balances at September 30, 2009.

5. Fair Value Measurements

The Company follows FASB ASC 820 “Fair Value Measurements and Disclosures,” which defines fair value, establishes a framework for measuring fair value and expands the disclosures about fair value measurements. ASC Topic 820-10-55 requires the use of a hierarchy of fair value techniques based upon whether the inputs to those fair values reflect assumptions other market participants would use based upon market data obtained from independent sources or reflect the Company’s own assumptions of market participant valuation. Effective January 1, 2009, the Company began applying FASB ASC 820 to certain nonfinancial assets and liabilities, which include foreclosed real estate, long-lived assets, goodwill, and core deposit premium, which are recorded at fair value only upon impairment. The fair value hierarchy is as follows:

• Level 1:

Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

• Level 2:

Quoted prices for similar assets in active markets, quoted prices in markets that are not active or quoted prices that contain observable inputs such as yield curves, volatilities, prepayment speeds and other inputs derived from market data.

• Level 3:

Quoted prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable.

Valuation methods for instruments measured at fair value on a recurring basis

The Company’s investment securities classified as available-for-sale include agency securities, municipal obligations, mortgage-backed securities, pooled trust preferred securities, certificates of deposits and common stocks. Quoted exchange prices are available for the common stock investments, which are classified as Level 1. Agency securities and mortgage-backed obligations are priced utilizing industry-standard models that consider various assumptions, including time value, yield curves, volatility factors, prepayment speeds, default rates, loss severity, current market and contractual prices for the underlying financial instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace, can be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace and are classified as Level 2. Municipal securities are valued using a type of matrix, or grid, pricing in which securities are benchmarked against the treasury rate based on credit rating. These model and matrix measurements are classified as Level 2 in the fair value hierarchy. The Company’s investments in fixed rate certificates of deposits are valued using a net present value model that discounts the future cash flows at the current market rates and are classified as Level 2.

The Company classifies its pooled trust preferred securities as Level 3. The portfolio consists of three investments in pooled trust preferred securities issued by various financial companies. The Company has determined that the observable market data associated with these assets do not represent orderly transactions in accordance with FASB ASC 820 and reflect forced liquidations or distressed sales. Based on the lack of observable market data, the Company estimated fair value based on the observable data available and reasonable unobservable market assumptions. The Company estimated fair value based on a discounted cash flow model which used appropriately adjusted discount rates reflecting credit and liquidity risks.

The following table represents the Company’s investment securities that are measured at fair value on a recurring basis at September 30, 2009 and December 31, 2008 allocated to the appropriate fair value hierarchy:

			As of September 30, 2009
			Fair value hierarchy
(Dollars in thousands)	Total		Level 1		Level 2		Level 3
Assets:
Available-for-sale securities	$	170,596	$	809	$	169,523	$	264
Derivative financial instruments		37		-		-		37

			As of December 31, 2008
			Fair value hierarchy
(Dollars in thousands)	Total		Level 1		Level 2		Level 3
Assets:
Available-for-sale securities	$	162,245	$	1,014	$	160,490	$	740
Derivative financial instruments		18		-		-		18

The following table reconciles the changes in the Company’s Level 3 instruments during the first nine months of 2009.

				Derivative
	Available-for			financial
(Dollars in thousands)	sale-securities			instruments
Level 3 asset fair value at December 31, 2008	$	740		$	18
Transfers into Level 3		-
Total gains (losses)
Included in earnings		(709	)		19
Included in other comprehensive income		233			-
Level 3 asset fair value at September 30, 2009	$	264		$	37

Changes in the fair value of available-for-sale securities are included in other comprehensive income to the extent the changes are not considered other than temporary impairments. Other than temporary impairment tests are performed on a quarterly basis and any decline in the fair value of an individual security below its cost that is deemed to be other than temporary results in a write-down of that security’s cost basis. During the first nine months of 2009 the Company recorded a $709,000 impairment loss on two $1.0 million par investments in pooled trust preferred securities.

The Company’s derivative financial instruments consist solely of interest rate lock commitments and corresponding forward sales contracts on mortgage loans held for sale and are not designated as hedging instruments. The fair values of these derivatives are based on quoted prices for similar loans in the secondary market. The market prices are adjusted by a factor, based on the Company’s historical data and its judgment about future economic trends, which considers the likelihood that a commitment will ultimately result in a closed loan. These instruments are classified as Level 3 based on the unobservable nature of these assumptions. The amounts are included in other assets or other liabilities on the consolidated balance sheets and gains on sale of loans in the consolidated statements of earnings.

Valuation methods for instruments measured at fair value on a nonrecurring basis

The Company’s other investment securities include investments in Federal Home Loan Bank of Topeka (“FHLB”) and Federal Reserve Bank (“FRB”) stock, which are held for regulatory purposes. These investments generally have restrictions on the sale and/or liquidation of stock and the carrying value is approximately equal to fair value. Fair value measurements for these securities are classified as Level 3 based on the undeliverable nature and related credit risk.

The Company does not value its loan portfolio at fair value, however adjustments are recorded on certain loans to reflect the impaired value on the underlying collateral. Collateral values are generally reviewed on a loan-by-loan basis through independent appraisals. Appraised values may be discounted based on management’s historical knowledge, changes in market conditions and/or management’s expertise and knowledge of the client and the client’s business. Because many of these inputs are unobservable the valuations are classified as Level 3. The carrying value of the Company’s impaired loans was $12.2 million, before an allocated allowance of $2.3 million at September 30, 2009, compared to a carrying value of $7.1 million and allocated allowance of $705,000 at December 31, 2008.

Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value, determined on an aggregate basis. The mortgage loan valuations are based on quoted secondary market prices for similar loans and are classified as Level 2.

The Company’s measure of its goodwill is based on market based valuation techniques, including reviewing the Company’s stock price and valuation multiples as compared to recent similar financial industry acquisition multiples to estimate the fair value of the Company’s single reporting unit. The fair value measurements are classified as Level 3.

Core deposit intangibles are recognized at the time core deposits are acquired, using valuation techniques which calculate the present value of the estimated net cost savings relative to the Company’s alternative costs of funds over the expected remaining economic life of the deposits. Subsequent evaluations are made when facts or circumstances indicate potential impairment may have occurred. The models incorporate market discount rates, estimated average core deposit lives and alternative funding rates. The fair value measurements are classified as Level 3.

The Company measures its mortgage servicing rights at the lower of cost or fair value, and amortizes them over the period equal to estimated net servicing income. Periodic impairment assessments are performed based on fair value estimates at the reporting date. The fair value of mortgage servicing rights are estimated based on a valuation model which calculates the present value of estimated future cash flows associated with servicing the underlying loans. The model incorporates assumptions that market participants use in estimating future net servicing income, including estimated prepayment speeds, market discount rates, cost to service, and other servicing income, including late fees. The fair value measurements are classified as Level 3.

Other real estate owned include assets acquired through, or in lieu of, foreclosure are initially recorded at the date of foreclosure at the fair value of the collateral less estimates selling costs. Subsequent to foreclosure, valuations are updated periodically and are based upon appraisals, third party price opinions or internal pricing models and are classified as Level 3.

The following table represents the Company’s assets that are measured at fair value on a nonrecurring basis at September 30, 2009 allocated to the appropriate fair value hierarchy:

(Dollars in thousands)			Fair value hierarchy						Total gains
Assets:	Total		Level 1		Level 2		Level 3		(losses)
Other investment securities	$	7,950	$	-	$	-	$	7,950	$	-
Impaired loans		9,926		-		-		9,926		(2,288	)
Loans held for sale		4,180		-		4,180		-		-
Mortgage servicing rights		2,116		-		-		2,116		-
Other real estate owned		1,793		-		-		1,793		-

6. Fair Value of Financial Instruments

Fair value estimates of the Company’s financial instruments as of September 30, 2009 and December 31, 2008, including methods and assumptions utilized, are set forth below:

	As of September 30, 2009				As of December 31, 2008
	(Dollars in thousands)
	Carrying		Estimated		Carrying		Estimated
	amount		fair value		amount		fair value
Cash and cash equivalents	$	20,681	$	20,681	$	13,788	$	13,788
Investment securities		178,546		178,546		171,297		171,297
Loans, net of unearned fees
and allowance for loan losses		348,752		351,244		365,772		368,558
Loans held for sale		3,974		4,180		1,487		1,749
Mortgage servicing rights		729		2,116		170		1,008
Accrued interest receivable	$	3,297	$	3,297	$	3,766	$	3,766
Non-interest bearing demand deposits		48,939		48,939		49,823		49,823
Money market and NOW deposits		158,633		158,633		150,116		150,116
Savings deposits		28,377		28,377		26,203		26,203
Time deposits		214,893		216,441		213,404		214,859
Total deposits		450,842		463,245		439,546		441,001
FHLB borrowings		61,060		64,081		77,319		81,986
Other borrowings		29,664		23,465		27,047		23,298
Accrued interest payable	$	1,262	$	1,262	$	1,673	$	1,673

Methods and Assumptions Utilized

The carrying amount of cash, cash equivalents, repurchase agreements and federal funds sold are considered to approximate fair value and are included in the cash and cash equivalents. The carrying amounts of accrued interest receivable and payable are also considered to approximate fair value.

A detailed description of the estimated fair value of investment securities, mortgage serving rights and loans held-for-sale is available in Note 5.

The estimated fair value of the Company’s loan portfolio is based on the segregation of loans by collateral type, interest terms, and maturities. In estimating the fair value of each category of loans, the carrying amount of the loan is reduced by an allocation of the allowance for loan losses. Such allocation is based on management’s loan classification system, which is designed to measure the credit risk inherent in each classification category. The estimated fair value of performing variable rate loans is the carrying value of such loans, reduced by an allocation of the allowance for loan losses. The estimated fair value of performing fixed rate loans is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the interest rate risk inherent in the loan, reduced by an allocation of the allowance for loan losses. The estimate of maturity is based on the Company’s historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of current economic and lending conditions. The fair value for nonperforming loans is the estimated fair value of the underlying collateral based on recent external appraisals or other available information, which generally approximates carrying value, reduced by an allocation of the allowance for loan losses.