Unassociated Document

10-Q 1 v193265_10q.htm Unassociated Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	UARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
	THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended June 30, 2010

	OR

o	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 o

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 o No o

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 o Accelerated filer o Non-accelerated filer o 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 o 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 August 11, 2010, the Registrant had outstanding 2,504,265 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 - 20
Item 2.	Management's Discussion and Analysis of Financial Condition
	and Results of Operations	21 – 31
Item 3.	Quantitative and Qualitative Disclosures about
	Market Risk	31 - 32
Item 4.	Controls and Procedures	33

PART II

Item 1.	Legal Proceedings	34
Item 1A.	Risk Factors	34
Item 2.	Unregistered Sales of Equity Securities and
	Use of Proceeds	34
Item 3.	Defaults Upon Senior Securities	34
Item 4.	Removed and Reserved	34
Item 5.	Other Information	34
Item 6.	Exhibits	34

Form 10-Q Signature Page		35

ITEM 1. FINANCIAL STATEMENTS AND RELATED NOTES

LANDMARK BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollars in thousands)	June 30,		December 31,
	2010		2009
Assets
Cash and cash equivalents	$	9,655	$	12,379
Investment securities:
Available-for-sale, at fair value		157,420		161,628
Other securities		8,078		7,991
Loans, net		334,912		342,738
Loans held for sale		9,544		4,703
Premises and equipment, net		15,454		15,877
Goodwill		12,894		12,894
Other intangible assets, net		2,236		2,481
Bank owned life insurance		12,794		12,548
Real estate owned		3,370		1,129
Accrued interest and other assets		9,833		9,799
Total assets	$	576,190	$	584,167

Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Non-interest-bearing demand	$	53,333	$	54,799
Money market and NOW		157,549		162,449
Savings		31,981		29,010
Time, $100,000 and greater		53,894		48,422
Time, other		135,993		143,915
Total deposits		432,750		438,595

Federal Home Loan Bank borrowings		57,290		56,004
Other borrowings		26,499		26,179
Accrued interest, taxes, and other liabilities		5,945		9,494
Total liabilities		522,484		530,272

Commitments and contingencies

Stockholders’ equity:
Preferred stock, $0.01 par, 200,000 shares authorized; none issued		-		-
Common stock, $0.01 par, 7,500,000 shares authorized; 2,504,265 and 2,489,779 shares issued at June 30, 2010 and December 31, 2009, respectively		25		25
Additional paid-in capital		25,082		24,844
Retained earnings		26,668		27,523
Accumulated other comprehensive income		1,931		1,503
Total stockholders’ equity		53,706		53,895

Total liabilities and stockholders’ equity	$	576,190	$	584,167

See accompanying notes to consolidated financial statements.

LANDMARK BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Dollars in thousands, except per share amounts)	Three months ended June 30,						Six months ended June 30,
	2010			2009			2010			2009
Interest income:
Loans:
Taxable	$	4,842		$	5,170		$	9,634		$	10,303
Tax-exempt		68			64			146			113
Investment securities:
Taxable		687			1,069			1,481			2,185
Tax-exempt		621			621			1,248			1,230
Other		1			4			2			7
Total interest income		6,219			6,928			12,511			13,838
Interest expense:
Deposits		968			1,558			2,007			3,197
Borrowings		679			811			1,364			1,690
Total interest expense		1,647			2,369			3,371			4,887
Net interest income		4,572			4,559			9,140			8,951
Provision for loan losses		4,000			800			4,700			1,100
Net interest income after provision for loan losses		572			3,759			4,440			7,851
Non-interest income:
Fees and service charges		1,135			1,142			2,140			2,098
Gains on sales of loans, net		893			1,199			1,404			1,907
Bank owned life insurance		124			124			248			247
Other		124			174			249			287
Total non-interest income		2,276			2,639			4,041			4,539

Investment securities gains (losses), net:
Impairment losses on investment securities		(332	)		(60	)		(332	)		(910	)
Less noncredit-related losses		192			(189	)		192			334
Net impairment losses		(140	)		(249	)		(140	)		(576	)
Gains on sales of investment securities		-			-			563			-
Investment securities gains (losses), net		(140	)		(249	)		423			(576	)

Non-interest expense:
Compensation and benefits		2,315			2,203			4,639			4,379
Occupancy and equipment		673			663			1,392			1,314
Federal deposit insurance premiums		183			447			362			480
Data processing		224			204			432			394
Amortization of intangibles		182			191			361			378
Professional fees		186			192			320			364
Advertising		119			119			237			240
Other		890			926			1,837			1,851
Total non-interest expense		4,772			4,945			9,580			9,400
Earnings (loss) before income taxes		(2,064	)		1,204			(676	)		2,414
Income tax expense (benefit)		(1,017	)		192			(772	)		393
Net earnings (loss)	$	(1,047	)	$	1,012		$	96		$	2,021
Earnings (loss) per share:
Basic	$	(0.42	)	$	0.41		$	0.04		$	0.81
Diluted	$	(0.42	)	$	0.41		$	0.04		$	0.81
Dividends per share	$	0.19		$	0.18		$	0.38		$	0.36

See accompanying notes to consolidated financial statements.

LANDMARK BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)	Six months ended June 30,
	2010			2009

Net cash used in operating activities	$	(3,675	)	$	(712	)

Cash flows from investing activities:
Net decrease in loans		395			12,247
Maturities and prepayments of investment securities		18,169			29,101
Purchases of investment securities		(23,372	)		(37,707	)
Proceeds from sale of investment securities		10,097			1,210
Proceeds from sales of foreclosed assets		645			1,095
Purchases of premises and equipment, net		(63	)		(552	)
Net cash paid in branch acquisition		-			(130	)
Net cash provided by investing activities		5,871			5,264
Cash flows from financing activities:
Net (decrease) increase in deposits		(5,845	)		15,636
Federal Home Loan Bank advance repayments		(5,018	)		(10,018	)
Change in Federal Home Loan Bank line of credit, net		6,400			(6,000	)
Other borrowings, net		320			1,808
Proceeds from issuance of common stock under stock option plans		143			-
Excess tax benefit related to stock option plans		31			-
Payment of dividends		(951	)		(901	)
Purchase of treasury stock		-			(12	)
Net cash (used in) provided by financing activities		(4,920	)		513
Net (decrease) increase in cash and cash equivalents		(2,724	)		5,065
Cash and cash equivalents at beginning of period		12,379			13,788
Cash and cash equivalents at end of period	$	9,655		$	18,853
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes	$	950		$	312
Cash paid during the period for interest		3,512			4,832
Supplemental schedule of noncash investing and financing activities:
Transfer of loans to real estate owned	$	2,860		$	1,140
Branch acquisition:
Fair value of liabilities assumed	$	-		$	6,650
Fair value of assets acquired	$	-		$	6,520

See accompanying notes to consolidated financial statements.

LANDMARK BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF EQUITY AND COMPREHENSIVE INCOME

(Unaudited)

(Dollars in thousands, except per share amounts)	Common stock		Additional paid-in capital		Retained earnings			Treasury stock			Accumulated other comprehensive income			Total
Balance at December 31, 2008	$	24	$	23,873	$	27,819		$	(935	)	$	625		$	51,406
Comprehensive income:
Net earnings		-		-		2,021			-			-			2,021
Change in fair value of investment securities available-for-sale, net of tax		-		-		-			-			(43	)		(43	)
Total comprehensive income															1,978
Dividends paid ($0.36 per share)		-		-		(901	)		-			-			(901	)
Stock based compensation		-		78		-			-			-			78
Purchase of 800 treasury shares		-		-		-			(12	)		-			(12	)
Balance at June 30, 2009	$	24	$	23,951	$	28,939		$	(947	)	$	582		$	52,549

Balance at December 31, 2009	$	25	$	24,844	$	27,523		$	-		$	1,503		$	53,895
Comprehensive income:
Net earnings		-		-		96			-			-			96
Change in fair value of investment securities available-for-sale, net of tax		-		-		-			-			428			428
Total comprehensive income															524
Dividends paid ($0.38 per share)		-		-		(951	)		-			-			(951	)
Stock based compensation		-		64		-			-			-			64
Exercise of stock options, 14,486 shares, including excess tax benefit of $31		-		174		-			-			-			174
Balance at June 30, 2010	$	25	$	25,082	$	26,668		$	-		$	1,931		$	53,706

See accompanying notes to 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, 2009, 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, 2009 consolidated balance sheet has been derived from the audited consolidated balance sheet as of that date. The results of the interim period ended June 30, 2010 are not necessarily indicative of the results expected for the year ending December 31, 2010. The Company evaluates subsequent events and transactions that occur after the balance sheet date up to the date that financial statements are filed for potential recognition or disclosure.

2. Goodwill and Other Intangible Assets

The Company tests goodwill for impairment annually or more frequently if circumstances warrant. The Company’s annual impairment test as of December 31, 2009 concluded that its goodwill was not impaired, however the Company can make no assurances that future impairment tests will not result in goodwill impairments. The Company concluded there were no triggering events during the first six months of 2010 that required an interim goodwill impairment test.

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. The core deposit premium, based on the acquired core deposit balances, was $86,000. The final core deposit premium, measured on February 2, 2010, was $49,000. The following is an analysis of changes in the core deposit intangible assets:

	Three months ended June 30,
(Dollars in thousands)	2010					2009
	Fair value at acquisition		Accumulated amortization			Fair value at acquisition		Accumulated amortization
Balance at beginning of period	$	5,445	$	(3,896	)	$	5,396	$	(3,314	)
Additions		-		-			86		-
Amortization		-		(129	)		-		(153	)
Balance at end of period	$	5,445	$	(4,025	)	$	5,482	$	(3,467	)

	Six months ended June 30,
(Dollars in thousands)	2010						2009
	Fair value at acquisition			Accumulated amortization			Fair value at acquisition		Accumulated amortization
Balance at beginning of period	$	5,482		$	(3,767	)	$	5,396	$	(3,159	)
Additions		-			-			86		-
Adjustments to prior estimates		(37	)		-			-		-
Amortization		-			(258	)		-		(308	)
Balance at end of period	$	5,445		$	(4,025	)	$	5,482	$	(3,467	)

Mortgage servicing rights are related to loans serviced by the Company for unrelated third parties. The outstanding principal balances of such loans were $144.6 million and $138.4 million at June 30, 2010 and December 31, 2009, respectively. Gross service fee income related to such loans was $89,000 and $63,000 for the quarters ended June 30, 2010 and 2009, respectively, which is included in fees and service charges in the consolidated statements of operations. Gross service fee income for the six months ended June 30, 2010 and 2009 was $176,000 and $114,000, respectively. The following is an analysis of changes in the mortgage servicing rights:

	Three months ended June 30,
(Dollars in thousands)	2010						2009
	Cost			Accumulated amortization			Cost			Accumulated amortization
Balance at beginning of period	$	1,496		$	(717	)	$	893		$	(600	)
Additions		90			-			339			-
Prepayments/maturities		(14	)		14			(21	)		21
Amortization		-			(53	)		-			(38	)
Balance at end of period	$	1,572		$	(756	)	$	1,211		$	(617	)

	Six months ended June 30,
(Dollars in thousands)	2010						2009
	Cost			Accumulated amortization			Cost			Accumulated amortization
Balance at beginning of period	$	1,447		$	(681	)	$	772		$	(602	)
Additions		153			-			494			-
Prepayments/maturities		(28	)		28			(55	)		55
Amortization		-			(103	)		-			(70	)
Balance at end of period	$	1,572		$	(756	)	$	1,211		$	(617	)

Aggregate core deposit and mortgage servicing rights amortization expense for the quarters ended June 30, 2010 and 2009, was $182,000 and $191,000, respectively. Aggregate core deposit and mortgage servicing rights amortization expense for the six months ended June 30, 2010 and 2009, was $361,000 and $378,000, respectively. The following sets forth estimated amortization expense for all intangible assets for the remainder of 2010 and in successive years ending December 31:

Year	Amount (in thousands)
Remainder of 2010	$	347
2011		610
2012		514
2013		430
2014		261
Thereafter		74

3. Investments

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

	As of June 30, 2010
			Gross		Gross
	Amortized		unrealized		unrealized			Estimated
(Dollars in thousands)	cost		gains		losses			fair value

U. S. federal agency obligations	$	24,974	$	244	$	-		$	25,218
Municipal obligations, tax exempt		64,693		2,430		(83	)		67,040
Municipal obligations, taxable		1,365		8		-			1,373
Mortgage-backed securities		48,949		1,374		-			50,323
Common stocks		764		217		(18	)		963
Pooled trust preferred securities		1,382		-		(1,117	)		265
Certificates of deposit		12,238		-		-			12,238
Total	$	154,365	$	4,273	$	(1,218	)	$	157,420

	As of December 31, 2009
			Gross		Gross
	Amortized		unrealized		unrealized			Estimated
(Dollars in thousands)	cost		gains		losses			fair value

U. S. federal agency obligations	$	18,734	$	356	$	-		$	19,090
Municipal obligations, tax exempt		67,149		1,938		(228	)		68,859
Municipal obligations, taxable		1,366		-		(23	)		1,343
Mortgage-backed securities		63,265		1,532		(102	)		64,695
Common stocks		693		191		(19	)		865
Pooled trust preferred securities		1,528		-		(1,267	)		261
Certificates of deposit		6,515		-		-			6,515
Total	$	159,250	$	4,017	$	(1,639	)	$	161,628

Included in the gross unrealized losses at June 30, 2010, are noncredit-related losses of $1.1 million related to three investments in pools of trust preferred securities with an original cost basis of $2.5 million, which were determined to be other-than-temporarily impaired and recorded in accumulated other comprehensive income. The amortized cost of the portfolio of pooled trust preferred securities, after recognition of $140,000 of credit-related impairment losses during the first six months of 2010, was $1.4 million at June 30, 2010. During 2009, $961,000 of credit-related impairment losses were recognized on the portfolio of pooled trust preferred securities. The fair value of these three securities totaled $265,000 at June 30, 2010 compared to $261,000 at December 31, 2009, while the unrealized losses included in accumulated other comprehensive income were $1.1 million at June 30, 2010 and $1.3 million at December 31, 2009.

The summary of available-for-sale investment securities shows that some of the securities had unrealized losses, or were temporarily impaired, as of June 30, 2010 and December 31, 2009. 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.

			As of June 30, 2010
(Dollars in thousands)			Less than 12 months					12 months or longer					Total
	No. of		Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	securities		value		losses			value		losses			value		losses
Municipal obligations, tax exempt		7	$	1,136	$	(16	)	$	1,123	$	(67	)	$	2,259	$	(83	)
Common stocks		3		54		(10	)		1		(8	)		55		(18	)
Pooled trust preferred securities		3		-		-			265		(1,117	)		265		(1,117	)
Total		13	$	1,190	$	(26	)	$	1,389	$	(1,192	)	$	2,579	$	(1,218	)

			As of December 31, 2009
(Dollars in thousands)			Less than 12 months					12 months or longer					Total
	No. of		Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	securities		value		losses			value		losses			value		losses
Municipal obligations, tax exempt		24	$	7,765	$	(167	)	$	780	$	(61	)	$	8,545	$	(228	)
Municipal obligations, taxable		2		1,233		(23	)		-		-			1,233		(23	)
Mortgage-backed securities		6		8,140		(101	)		44		(1	)		8,184		(102	)
Common stocks		4		59		(19	)		-		-			59		(19	)
Pooled trust preferred securities		3		-		-			261		(1,267	)		261		(1,267	)
Total		39	$	17,197	$	(310	)	$	1,085	$	(1,329	)	$	18,282	$	(1,639	)

The Company performs quarterly reviews of the investment portfolio to determine if investment securities have any declines in fair value which might be considered other-than-temporary. The initial review begins with all securities in an unrealized loss position. 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 all available information, including expected cash flows, the structure of the security, the credit quality of the underlying assets and the current and anticipated market conditions. Any credit-related impairments on debt securities are realized through a charge to operations. If an equity security is determined to be other-than-temporarily impaired, the entire impairment is realized through a charge to operations.

As of June 30, 2010, 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, the Company believes that the municipal obligations identified in the tables above were temporarily impaired as of June 30, 2010 and December 31, 2009.

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 the Company’s belief 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 impaired as of December 31, 2009. The Company’s mortgage-backed securities portfolio consists of securities underwritten to the standards of and guaranteed by the government-sponsored agencies of FHLMC, FNMA and GNMA.

As of June 30, 2010, the Company owned three pooled trust preferred securities with an original cost basis of $2.5 million, which represent investments in pools of collateralized debt obligations issued by financial institutions and insurance companies. The market for these securities is considered to be inactive. The Company 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 associated with the credit of the underlying collateral. The assumptions used in preparing the discounted cash flow models include the following: estimated discount rates, estimated deferral and default rates on collateral, assumed recoveries, and estimated cash flows including all information available through the date of issuance of the financial statements. 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.

As of June 30, 2010, the analysis of the Company’s three investments in pooled trust preferred securities indicated that the unrealized losses on two of the three securities were not credit-related. However, the analysis indicated that a portion of the unrealized loss was other-than-temporary on the third pooled trust preferred security. The increase in nonperforming collateral on a $500,000 par pooled trust preferred investment resulted in a credit-related other-than-temporary impairment of $140,000 during the quarter ended June 30, 2010, which increased the cumulative realized loss to $247,000. During 2009, the Company recorded a credit-related other-than-temporary impairment of $107,000 on the same $500,000 par pooled trust preferred investment. 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. As of June 30, 2010, the Company had recorded credit losses on all three pooled trust preferred securities totaling $1.1 million through charges to operations during 2009 and the first six months of 2010.

The following tables provide additional information related to the Company’s portfolio of investments in pooled trust preferred securities as of June 30, 2010:

(Dollars in thousands)														Cumulative
			Moody's		Original		Cost		Fair		Unrealized			realized
Investment	Class		rating		par		basis		value		loss			loss
PreTSL VIII		B		C	$	1,000	$	381	$	55	$	(326	)	$	(619	)
PreTSL IX		B		C		1,000		759		160		(599	)		(235	)
PreTSL XVII		C		C		500		242		50		(192	)		(247	)
Total					$	2,500	$	1,382	$	265	$	(1,117	)	$	(1,101	)

			Non-performing collateral as %
	Number of		of current collateral (at quarter end)
Investment	issuers in pool			Q4 2009		Q1 2010		Q2 2010
PreTSL VIII		37		43.7	%	43.7	%	43.7	%
PreTSL IX		51		28.1	%	29.2	%	29.2	%
PreTSL XVII		58		19.9	%	20.6	%	24.0	%

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

	Three months ending June 30,
(Dollars in thousands)	2010		2009
Beginning balance	$	961	$	327
Additional credit losses:
Securities with no previous other-than-temporary impairment		-		-
Securities with previous other-than-temporary impairments		140		249
Ending balance	$	1,101	$	576

	Six months ending June 30,
(Dollars in thousands)	2010		2009
Beginning balance	$	961	$	-
Additional credit losses:
Securities with no previous other-than-temporary impairment		-		576
Securities with previous other-than-temporary impairments		140		-
Ending balance	$	1,101	$	576

It is reasonably possible that the fair values of the Company’s investment securities could decline in the future if the overall economy and/or the financial condition of some of the issuers of these securities deteriorate and if the liquidity in markets for these securities declined. 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 financial statements. 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 June 30, 2010 are as follows:

(Dollars in thousands)	Amortized		Estimated
	cost		fair value
Due in less than one year	$	25,918	$	26,007
Due after one year but within five years		30,750		31,657
Due after five years		47,984		48,470
Mortgage-backed securities and common stocks		49,713		51,286
Total	$	154,365	$	157,420

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

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

	Three months ended				Six months ended
(Dollars in thousands)	June 30,				June 30,
	2010		2009		2010		2009
Realized gains	$	-	$	-	$	563	$	-
Realized losses		-		-		-		-
Total	$	-	$	-	$	563	$	-

Other investment securities include restricted investments in Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank (“FRB”) stock. The carrying value of the FHLB stock at June 30, 2010 and December 31, 2009 was $6.3 million and $6.2 million, respectively and the carrying value of the FRB stock at June 30, 2010 and December 31, 2009 was $1.8 million. These securities are not readily marketable and are required for regulatory purposes and borrowing availability. Since there are no available market values for these securities, they are carried at cost. Redemption of these investments at par value is at the option of the FHLB or FRB. We have assessed the ultimate recoverability of these investments and believe that no impairment has occurred.

4. Loans and Allowance for Loan Losses

Loans consisted of the following as of:

(Dollars in thousands)	June 30,			December 31,
	2010			2009
Real estate loans:
One-to-four family residential	$	94,775		$	98,333
Commercial		105,305			106,470
Construction and land		29,378			36,864
Commercial loans		102,702			98,213
Consumer loans		6,676			7,884
Total gross loans		338,836			347,764
Deferred loan fees/(costs) and loans in process		449			442
Allowance for loan losses		(4,373	)		(5,468	)
Loans, net	$	334,912		$	342,738

Percent of total
Real estate loans:
One-to-four family residential		28.0	%		28.3	%
Commercial		31.1	%		30.6	%
Construction and land		8.6	%		10.6	%
Commercial loans		30.3	%		28.2	%
Consumer loans		2.0	%		2.3	%
Total gross loans		100.0	%		100.0	%

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

(Dollars in thousands)	Three months ended June 30,						Six months ended June 30,
	2010			2009			2010			2009
Beginning balance	$	6,037		$	4,307		$	5,468		$	3,871
Provision for loan losses		4,000			800			4,700			1,100
Charge-offs		(5,677	)		(298	)		(5,824	)		(380	)
Recoveries		13			18			29			236
Ending balance	$	4,373		$	4,827		$	4,373		$	4,827

Loans past due more than a month totaled $7.2 million, or 2.1% of gross loans, at June 30, 2010, compared to $13.3 million, or 3.8% of gross loans, at December 31, 2009. At June 30, 2010, $6.7 million in loans were on non-accrual status, or 2.0% of gross loans, compared to a balance of $11.8 million, or 3.4% of gross loans, at December 31, 2009. Non-accrual loans consist primarily of loans greater than ninety days past due. There were no loans 90 days delinquent and still accruing interest at June 30, 2010 or December 31, 2009.

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

(Dollars in thousands)	June 30,		December 31,
	2010		2009
Real estate loans:
One-to-four family residential	$	968	$	1,146
Commercial		2,346		1,475
Construction and land		1,915		6,402
Commercial loans		1,481		2,785
Consumer loans		16		22
Total non-accrual loans	$	6,726	$	11,830

A summary of the nonperforming assets is as follows:

	June 30,			December 31,
(Dollars in thousands)	2010			2009

Total non-accrual loans	$	6,726		$	11,830
Accruing loans over 90 days past due		-			-
Nonperforming investments, at fair value		265			261
Real estate owned		3,370			1,129
Total nonperforming assets	$	10,361		$	13,220

Total nonperforming loans to gross loans		2.0	%		3.4	%
Total nonperforming assets to total assets		1.8	%		2.3	%
Allowance for loan losses to gross loans outstanding		1.3	%		1.6	%
Allowance for loan losses to nonperforming loans		65.0	%		46.2	%

The $5.1 million decline in non-accrual and impaired loans was primarily the result of the charge-off of $3.3 million of a $4.3 million construction loan and the remaining balance on a $2.3 million commercial agriculture loan during the second quarter of 2010. The $2.2 increase in real estate owned was primarily the result of the foreclosure on a $1.3 million residential subdivision development as the Company took possession of the real estate after the development slowed and the borrower was unable to comply with the contractual terms of the loan. The remaining increase in other real estate owned was from foreclosures on commercial real estate and residential properties.

A summary of the impaired loans is as follows:

(Dollars in thousands)	June 30,		December 31,
	2010		2009
Real estate loans:
One-to-four family residential	$	968	$	1,146
Commercial		2,346		1,475
Construction and land		1,915		6,402
Commercial loans		1,481		2,785
Consumer loans		16		22
Total impaired loans	$	6,726	$	11,830

Impaired loans for which an allowance has been provided	$	2,777	$	10,620
Impaired loans for which no allowance has been provided		3,949		1,210
Allowance related to impaired loans	$	953	$	2,770

5. Net Earnings (Loss) per Share

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

(Dollars in thousands, except per share amounts)	Three months ended June 30,					Six months ended June 30,
	2010			2009		2010		2009
Net earnings (loss) available to common shareholders	$	(1,047	)	$	1,012	$	96	$	2,021

Weighted average common shares outstanding - basic		2,504,265			2,490,023		2,499,199		2,490,291
Assumed exercise of stock options		-			5,029		2,412		5,189
Weighted average common shares outstanding - diluted		2,504,265			2,495,052		2,501,611		2,495,480
Net earnings (loss) per share (1):
Basic	$	(0.42	)	$	0.41	$	0.04	$	0.81
Diluted	$	(0.42	)	$	0.41	$	0.04	$	0.81

(1) All per share amounts have been adjusted to give effect to the 5% stock dividend paid during December 2009.

6. Other Comprehensive Income (Loss)

The Company’s other comprehensive income (loss) consists of the unrealized holding gains and losses on available for sale securities as shown below.

(Dollars in thousands)	Three months ended June 30,						Six months ended June 30,
	2010			2009			2010			2009
Net earnings (loss)	$	(1,047	)	$	1,012		$	96		$	2,021

Unrealized holding gains (losses) on available-for-sale securities for which a portion of an other-than-temporary impairment has been recorded in earnings		(47	)		(60	)		10			(185	)
Net unrealized holding gains (losses) on all other available-for-sale securities		1,084			33			1,090			(480	)
Less reclassification adjustment for losses (gains) included in earnings		140			249			(423	)		576
Net unrealized gains (losses)		1,177			222			677			(89	)
Income tax expense (benefit)		437			85			249			(46	)
Total comprehensive income (loss)	$	(307	)	$	1,149		$	524		$	1,978

7. Fair Value of Financial Instruments and Fair Value Measurements

The Company follows the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“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.

Fair value estimates of the Company’s financial instruments as of June 30, 2010 and December 31, 2009, including methods and assumptions utilized, are set forth below:

(Dollars in thousands)	June 30, 2010				December 31, 2009
	Carrying		Estimated		Carrying		Estimated
	amount		fair value		amount		fair value
Financial assets:
Cash and cash equivalents	$	9,655	$	9,655	$	12,379	$	12,379
Investment securities:
Available-for-sale		157,420		157,420		161,628		161,628
Other securities		8,078		8,078		7,991		7,991
Loans, net		334,912		337,259		342,738		343,671
Loans held for sale		9,544		9,909		4,703		4,718
Mortgage servicing rights		816		2,378		766		2,188
Derivative financial instruments