10-Q 1 v359209_10q.htm FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-Q
 
x                           QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2013
 
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 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 issuer's classes of common stock as of the latest practicable date: as of November 13, 2013, the issuer had outstanding 2,935,833 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
2 - 21
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
22 – 32
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
32 – 33
Item 4.
Controls and Procedures
34
 
 
 
PART II
 
 
 
 
Item 1.
Legal Proceedings
35
Item 1A.
Risk Factors
35
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
35
Item 3.
Defaults Upon Senior Securities
35
Item 4.
Mine Safety Disclosures
35
Item 5.
Other Information
35
Item 6.
Exhibits
35
 
 
 
Form 10-Q Signature Page
 
 
1

 
PART 1 – FINANCIAL INFORMATION
 
ITEM 1.  FINANCIAL STATEMENTS
 
LANDMARK BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
 
(Dollars in thousands, except per share amounts)
 
September 30,
 
December 31,
 
 
 
2013
 
2012
 
 
 
(Unaudited)
 
(Audited)
 
Assets
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
12,130
 
$
14,920
 
Investment securities:
 
 
 
 
 
 
 
Available-for-sale, at fair value
 
 
232,873
 
 
213,300
 
Other securities
 
 
4,832
 
 
5,238
 
Loans, net
 
 
319,523
 
 
315,914
 
Loans held for sale, net
 
 
3,769
 
 
7,163
 
Premises and equipment, net
 
 
14,636
 
 
14,967
 
Bank owned life insurance
 
 
17,177
 
 
16,701
 
Goodwill
 
 
13,075
 
 
13,075
 
Other intangible assets, net
 
 
2,712
 
 
2,394
 
Real estate owned
 
 
455
 
 
2,444
 
Accrued interest and other assets
 
 
8,871
 
 
7,951
 
Total assets
 
$
630,053
 
$
614,067
 
 
 
 
 
 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Deposits:
 
 
 
 
 
 
 
Non-interest-bearing demand
 
$
87,410
 
$
75,891
 
Money market and NOW
 
 
203,418
 
 
190,309
 
Savings
 
 
51,130
 
 
45,365
 
Time, $100,000 and greater
 
 
55,291
 
 
59,035
 
Time, other
 
 
101,858
 
 
111,900
 
Total deposits
 
 
499,107
 
 
482,500
 
Federal Home Loan Bank borrowings
 
 
35,698
 
 
38,426
 
Other borrowings
 
 
24,534
 
 
21,541
 
Accrued interest, taxes, and other liabilities
 
 
7,498
 
 
8,267
 
Total liabilities
 
 
566,837
 
 
550,734
 
 
 
 
 
 
 
 
 
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; 2,935,833
 
 
 
 
 
 
 
and 2,922,275 shares issued and outstanding at September 30, 2013 and December 31, 2012, respectively
 
 
29
 
 
29
 
Additional paid-in capital
 
 
32,514
 
 
32,223
 
Retained earnings
 
 
30,089
 
 
27,623
 
Accumulated other comprehensive income
 
 
584
 
 
3,458
 
Total stockholders’ equity
 
 
63,216
 
 
63,333
 
Total liabilities and stockholders’ equity
 
$
630,053
 
$
614,067
 
 
See accompanying notes to consolidated financial statements.
 
 
2

 
LANDMARK BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
 
 
 
Three months ended
 
Nine months ended
 
(Dollars in thousands, except per share amounts)
 
September 30,
 
September 30,
 
 
 
2013
 
2012
 
2013
 
2012
 
Interest income:
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
Taxable
 
$
4,022
 
$
4,033
 
$
11,832
 
$
12,380
 
Tax-exempt
 
 
56
 
 
96
 
 
196
 
 
287
 
Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Taxable
 
 
656
 
 
756
 
 
1,912
 
 
2,280
 
Tax-exempt
 
 
589
 
 
604
 
 
1,764
 
 
1,802
 
Total interest income
 
 
5,323
 
 
5,489
 
 
15,704
 
 
16,749
 
Interest expense:
 
 
 
 
 
 
 
 
 
 
 
 
 
Deposits
 
 
312
 
 
525
 
 
1,044
 
 
1,692
 
Borrowings
 
 
419
 
 
439
 
 
1,240
 
 
1,326
 
Total interest expense
 
 
731
 
 
964
 
 
2,284
 
 
3,018
 
Net interest income
 
 
4,592
 
 
4,525
 
 
13,420
 
 
13,731
 
Provision for loan losses
 
 
200
 
 
1,000
 
 
800
 
 
1,600
 
Net interest income after provision for loan losses
 
 
4,392
 
 
3,525
 
 
12,620
 
 
12,131
 
Non-interest income:
 
 
 
 
 
 
 
 
 
 
 
 
 
Fees and service charges
 
 
1,463
 
 
1,360
 
 
4,176
 
 
3,851
 
Gains on sales of loans, net
 
 
1,047
 
 
1,626
 
 
2,956
 
 
4,255
 
Bank owned life insurance
 
 
136
 
 
103
 
 
426
 
 
393
 
Other
 
 
133
 
 
126
 
 
398
 
 
416
 
Total non-interest income
 
 
2,779
 
 
3,215
 
 
7,956
 
 
8,915
 
Investment securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net impairment losses
 
 
-
 
 
-
 
 
-
 
 
(63)
 
Gains on sales of investment securities
 
 
-
 
 
-
 
 
-
 
 
359
 
Investment securities gains, net
 
 
-
 
 
-
 
 
-
 
 
296
 
Non-interest expense:
 
 
 
 
 
 
 
 
 
 
 
 
 
Compensation and benefits
 
 
2,544
 
 
2,457
 
 
7,450
 
 
7,265
 
Occupancy and equipment
 
 
763
 
 
771
 
 
2,198
 
 
2,254
 
Professional fees
 
 
393
 
 
281
 
 
875
 
 
848
 
Amortization of intangibles
 
 
238
 
 
481
 
 
478
 
 
907
 
Data processing
 
 
234
 
 
213
 
 
696
 
 
631
 
Advertising
 
 
107
 
 
121
 
 
321
 
 
363
 
Federal deposit insurance premiums
 
 
107
 
 
80
 
 
338
 
 
262
 
Foreclosure and real estate owned expense
 
 
246
 
 
60
 
 
305
 
 
89
 
Other
 
 
912
 
 
804
 
 
2,627
 
 
2,508
 
Total non-interest expense
 
 
5,544
 
 
5,268
 
 
15,288
 
 
15,127
 
Earnings before income taxes
 
 
1,627
 
 
1,472
 
 
5,288
 
 
6,215
 
Income tax expense
 
 
342
 
 
267
 
 
1,154
 
 
1,465
 
Net earnings
 
$
1,285
 
$
1,205
 
$
4,134
 
$
4,750
 
Earnings per share:
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic (1)
 
$
0.44
 
$
0.41
 
$
1.41
 
$
1.63
 
Diluted (1)
 
$
0.43
 
$
0.41
 
$
1.39
 
$
1.61
 
Dividends per share (1)
 
$
0.19
 
$
0.18
 
$
0.57
 
$
0.54
 
 
(1) Per share amounts for the periods ended September 30, 2012 have been adjusted to give effect to the 5% stock dividend paid during December 2012.
 
See accompanying notes to consolidated financial statements.
 
 
3

 
LANDMARK BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 
 
Three months ended
 
Nine months ended
 
(Dollars in thousands)
 
September 30,
 
September 30,
 
 
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net earnings
 
$
1,285
 
$
1,205
 
$
4,134
 
$
4,750
 
Unrealized holding gains on available-for-sale securities for which a
 
 
 
 
 
 
 
 
 
 
 
 
 
portion of an other-than-temporary impairment has been recorded in earnings
 
 
-
 
 
84
 
 
-
 
 
178
 
Net unrealized holding gains (losses) on all other available-for-sale
 
 
 
 
 
 
 
 
 
 
 
 
 
securities
 
 
103
 
 
1,139
 
 
(4,568)
 
 
1,011
 
Less reclassification adjustment for net gains included in earnings
 
 
-
 
 
-
 
 
-
 
 
(296)
 
Net unrealized gains (losses)
 
 
103
 
 
1,223
 
 
(4,568)
 
 
893
 
Income tax expense (benefit)
 
 
38
 
 
452
 
 
(1,694)
 
 
328
 
Total comprehensive income
 
$
1,350
 
$
1,976
 
$
1,260
 
$
5,315
 
 
See accompanying notes to consolidated financial statements.
 
 
4

 
LANDMARK BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
 
Nine months ended
 
(Dollars in thousands)
 
September 30,
 
 
 
2013
 
2012
 
Cash flows from operating activities:
 
 
 
 
 
 
 
Net earnings
 
$
4,134
 
$
4,750
 
Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
 
 
 
 
Provision for loan losses
 
 
800
 
 
1,600
 
Provision for valuation allowance on real estate owned
 
 
110
 
 
39
 
Amortization of investment security premiums, net
 
 
1,130
 
 
1,010
 
Amortization of intangibles
 
 
478
 
 
907
 
Depreciation
 
 
694
 
 
716
 
Bank owned life insurance
 
 
(426)
 
 
(393)
 
Stock-based compensation
 
 
44
 
 
67
 
Deferred income taxes
 
 
(221)
 
 
(420)
 
Gains on investment securities, net
 
 
-
 
 
(296)
 
Loss (gain) on sales of real estate owned, net
 
 
146
 
 
(39)
 
Gains on sales of loans, net
 
 
(2,956)
 
 
(4,255)
 
Proceeds from sales of loans held for sale
 
 
125,463
 
 
159,771
 
Origination of loans held for sale
 
 
(119,113)
 
 
(155,529)
 
Changes in assets and liabilities:
 
 
 
 
 
 
 
Accrued interest and other assets
 
 
81
 
 
(2,349)
 
Accrued expenses, taxes, and other liabilities
 
 
(851)
 
 
(1,026)
 
Net cash provided by operating activities
 
 
9,513
 
 
4,553
 
Cash flows from investing activities:
 
 
 
 
 
 
 
Net (increase) decrease in loans
 
 
(4,487)
 
 
16,172
 
Maturities and prepayments of investment securities
 
 
32,797
 
 
38,795
 
Purchases of investment securities
 
 
(58,070)
 
 
(73,970)
 
Proceeds from sales of investment securities
 
 
408
 
 
9,841
 
Net cash received in bank acquisition
 
 
-
 
 
3,965
 
Proceeds from sales of real estate owned
 
 
1,929
 
 
412
 
Purchases of premises and equipment, net
 
 
(363)
 
 
(721)
 
Net cash used in investing activities
 
 
(27,786)
 
 
(5,506)
 
Cash flows from financing activities:
 
 
 
 
 
 
 
Net increase in deposits
 
 
16,639
 
 
25,716
 
Federal Home Loan Bank advance borrowings
 
 
81,100
 
 
42,822
 
Federal Home Loan Bank advance repayments
 
 
(83,828)
 
 
(56,250)
 
Proceeds from other borrowings
 
 
2,993
 
 
1,970
 
Repayments on other borrowings
 
 
-
 
 
(6,108)
 
Proceeds from issuance of common stock under stock option plans
 
 
218
 
 
5
 
Excess tax benefit related to stock option plans
 
 
29
 
 
1
 
Payment of dividends
 
 
(1,668)
 
 
(1,587)
 
Net cash provided by financing activities
 
 
15,483
 
 
6,569
 
Net (decrease) increase in cash and cash equivalents
 
 
(2,790)
 
 
5,616
 
Cash and cash equivalents at beginning of period
 
 
14,920
 
 
17,501
 
Cash and cash equivalents at end of period
 
$
12,130
 
$
23,117
 
 
See accompanying notes to consolidated financial statements.
 
 
5

 
 
LANDMARK BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(Unaudited)
 
 
 
Nine months ended
 
(Dollars in thousands)
 
September 30,
 
 
 
2013
 
2012
 
Supplemental disclosure of cash flow information:
 
 
 
 
 
 
 
Cash payments for income taxes
 
$
550
 
$
1,880
 
Cash paid for interest
 
 
2,345
 
 
3,068
 
 
 
 
 
 
 
 
 
Supplemental schedule of noncash investing and financing activities:
 
 
 
 
 
 
 
Transfer of loans to real estate owned
 
 
196
 
 
125
 
 
 
 
 
 
 
 
 
Bank acquisition:
 
 
 
 
 
 
 
Fair value of liabilities assumed
 
 
-
 
 
35,061
 
Fair value of assets acquired
 
 
-
 
 
31,096
 
 
See accompanying notes to consolidated financial statements.
 
 
6

 
LANDMARK BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
 
(Dollars in thousands, except per share amounts)
 
 
 
 
Additional
 
 
 
 
Accumulated other
 
 
 
 
 
 
Common
 
paid-in
 
Retained
 
comprehensive
 
 
 
 
 
 
stock
 
capital
 
earnings
 
income
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2011
 
$
28
 
$
29,313
 
$
26,200
 
$
3,579
 
$
59,120
 
Net earnings
 
 
-
 
 
-
 
 
4,750
 
 
-
 
 
4,750
 
Comprehensive income
 
 
-
 
 
-
 
 
-
 
 
565
 
 
565
 
Dividends paid ($0.54 per share)
 
 
-
 
 
-
 
 
(1,587)
 
 
-
 
 
(1,587)
 
Stock-based compensation
 
 
-
 
 
67
 
 
-
 
 
-
 
 
67
 
Exercise of stock options, 554 shares, including excess
    tax benefit of $1
 
 
-
 
 
6
 
 
-
 
 
-
 
 
6
 
Balance at September 30, 2012
 
$
28
 
$
29,386
 
$
29,363
 
$
4,144
 
$
62,921
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2012
 
$
29
 
$
32,223
 
$
27,623
 
$
3,458
 
$
63,333
 
Net earnings
 
 
-
 
 
-
 
 
4,134
 
 
-
 
 
4,134
 
Comprehensive loss
 
 
-
 
 
-
 
 
-
 
 
(2,874)
 
 
(2,874)
 
Dividends paid ($0.57 per share)
 
 
-
 
 
-
 
 
(1,668)
 
 
-
 
 
(1,668)
 
Stock-based compensation
 
 
-
 
 
44
 
 
-
 
 
-
 
 
44
 
Exercise of stock options, 13,558 shares, including excess
    tax benefit of $29
 
 
-
 
 
247
 
 
-
 
 
-
 
 
247
 
Balance at September 30, 2013
 
$
29
 
$
32,514
 
$
30,089
 
$
584
 
$
63,216
 
 
See accompanying notes to consolidated financial statements.
 
 
7

 
LANDMARK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1.
Interim Financial Statements
 
The 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, 2012, 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 results of the interim period ended September 30, 2013 are not necessarily indicative of the results expected for the year ending December 31, 2013.  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 step one impairment test as of December 31, 2012 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 nine months of 2013 that required an interim goodwill impairment test.
 
On April 1, 2012, the Company’s subsidiary, Landmark National Bank, assumed approximately $35.0 million in deposits with the acquisition of The Wellsville Bank.  The Company identified $24.7 million of core deposits and recorded a core deposit intangible asset of $308,000 as a result of the acquisition.  The core deposit intangible asset will be amortized over its estimated useful life of ten years on an accelerated basis.  A summary of this and the other intangible assets that continue to be subject to amortization is as follows:
 
(Dollars in thousands)
 
 
As of September 30, 2013
 
 
 
Gross carrying
 
Accumulated
 
Valuation
 
Net carrying
 
 
 
amount
 
amortization
 
allowance
 
amount
 
Core deposit intangible assets
 
$
4,973
 
$
(4,474)
 
$
-
 
$
499
 
Mortgage servicing rights
 
 
3,598
 
 
(1,385)
 
 
-
 
 
2,213
 
Total other intangible assets
 
$
8,571
 
$
(5,859)
 
$
-
 
$
2,712
 
 
(Dollars in thousands)
 
As of December 31, 2012
 
 
 
Gross carrying
 
Accumulated
 
Valuation
 
Net carrying
 
 
 
amount
 
amortization
 
allowance
 
amount
 
Core deposit intangible assets
 
$
4,973
 
$
(4,258)
 
$
-
 
$
715
 
Mortgage servicing rights
 
 
3,038
 
 
(1,147)
 
 
(212)
 
 
1,679
 
Total other intangible assets
 
$
8,011
 
$
(5,405)
 
$
(212)
 
$
2,394
 
 
During 2012, the Company recorded a $212,000 valuation allowance against its mortgage servicing rights.  During the second quarter of 2013, a rise in mortgage rates increased the estimated fair value of these assets as it became less likely some of the loans the Company services will be refinanced.  Based on the increase in estimated fair value, the Company reversed its valuation allowance during the second quarter of 2013. 
 
 
8

   
Aggregate core deposit and mortgage servicing rights amortization expense was $238,000 and $481,000 for the third quarter of 2013 and 2012, respectively.  Aggregate core deposit and mortgage servicing rights amortization expense was $478,000 and $907,000 for the first nine months of 2013 and 2012, respectively.  The Company recorded a $212,000 valuation allowance against its mortgage servicing rights during the third quarter of 2012, which increased amortization expense for the three and nine months periods ending September 30, 2012.  The valuation allowance was reversed during the second quarter of 2013 which reduced amortization expense for the nine months ending September 30, 2013.  The following sets forth estimated amortization expense for other intangible assets for the remainder of 2013 and in successive years ending December 31:
 
(Dollars in thousands)
 
Amortization
 
 
 
expense
 
Remainder of 2013
 
$
223
 
2014
 
 
822
 
2015
 
 
740
 
2016
 
 
669
 
2017
 
 
193
 
Thereafter
 
 
65
 
Total
 
$
2,712
 

3.
Investments
 
A summary of investment securities available-for-sale is as follows:
 
 
 
As of September 30, 2013
 
 
 
 
 
Gross
 
Gross
 
 
 
 
 
Amortized
 
unrealized
 
unrealized
 
Estimated
 
(Dollars in thousands)
 
cost
 
gains
 
losses
 
fair value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U. S. treasury securities
 
$
500
 
$
-
 
$
-
 
$
500
 
U. S. federal agency obligations
 
 
17,721
 
 
10
 
 
(497)
 
 
17,234
 
Municipal obligations, tax exempt
 
 
81,395
 
 
1,950
 
 
(612)
 
 
82,733
 
Municipal obligations, taxable
 
 
54,150
 
 
334
 
 
(802)
 
 
53,682
 
Mortgage-backed securities
 
 
70,856
 
 
596
 
 
(535)
 
 
70,917
 
Common stocks
 
 
602
 
 
462
 
 
-
 
 
1,064
 
Certificates of deposit
 
 
6,743
 
 
-
 
 
-
 
 
6,743
 
Total
 
$
231,967
 
$
3,352
 
$
(2,446)
 
$
232,873
 
 
 
 
As of December 31, 2012
 
 
 
 
 
Gross
 
Gross
 
 
 
 
 
Amortized
 
unrealized
 
unrealized
 
Estimated
 
(Dollars in thousands)
 
cost
 
gains
 
losses
 
fair value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U. S. federal agency obligations
 
$
8,804
 
$
50
 
$
(6)
 
$
8,848
 
Municipal obligations, tax exempt
 
 
73,699
 
 
3,618
 
 
(31)
 
 
77,286
 
Municipal obligations, taxable
 
 
37,334
 
 
818
 
 
(10)
 
 
38,142
 
Mortgage-backed securities
 
 
81,113
 
 
889
 
 
(154)
 
 
81,848
 
Common stocks
 
 
602
 
 
301
 
 
(1)
 
 
902
 
Certificates of deposit
 
 
6,274
 
 
-
 
 
-
 
 
6,274
 
Total
 
$
207,826
 
$
5,676
 
$
(202)
 
$
213,300
 
 
 
9

 
Certain of the Company’s investment securities have unrealized losses, or are temporarily impaired.  This temporary impairment represents the estimated amount of loss that would be realized if the securities were sold on the valuation date.  Securities which are temporarily impaired are shown below, along with the length of the impairment period.
 
 
 
 
 
As of September 30, 2013
 
(Dollars in thousands)
 
 
 
Less than 12 months
 
12 months or longer
 
Total
 
 
 
No. of
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
 
 
securities
 
value
 
losses
 
value
 
losses
 
value
 
losses
 
U. S. federal agency obligations
 
14
 
$
16,725
 
$
(497)
 
$
-
 
$
-
 
$
16,725
 
$
(497)
 
Municipal obligations, tax exempt
 
80
 
 
22,126
 
 
(585)
 
 
1,773
 
 
(27)
 
 
23,899
 
 
(612)
 
Municipal obligations, taxable
 
75
 
 
30,491
 
 
(794)
 
 
772
 
 
(8)
 
 
31,263
 
 
(802)
 
Mortgage-backed securities
 
29
 
 
33,023
 
 
(535)
 
 
-
 
 
-
 
 
33,023
 
 
(535)
 
Total
 
198
 
$
102,365
 
$
(2,411)
 
$
2,545
 
$
(35)
 
$
104,910
 
$
(2,446)
 
 
 
 
 
 
As of December 31, 2012
 
(Dollars in thousands)
 
 
 
Less than 12 months
 
12 months or longer
 
Total
 
 
 
No. of
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
 
 
securities
 
value
 
losses
 
value
 
losses
 
value
 
losses
 
U. S. federal agency obligations
 
2
 
$
2,241
 
$
(6)
 
$
-
 
$
-
 
$
2,241
 
$
(6)
 
Municipal obligations, tax exempt
 
16
 
 
4,669
 
 
(31)
 
 
-
 
 
-
 
 
4,669
 
 
(31)
 
Municipal obligations, taxable
 
8
 
 
2,948
 
 
(8)
 
 
209
 
 
(2)
 
 
3,157
 
 
(10)
 
Mortgage-backed securities
 
24
 
 
27,974
 
 
(154)
 
 
-
 
 
-
 
 
27,974
 
 
(154)
 
Common stocks
 
1
 
 
21
 
 
(1)
 
 
-
 
 
-
 
 
21
 
 
(1)
 
Total
 
51
 
$
37,853
 
$
(200)
 
$
209
 
$
(2)
 
$
38,062
 
$
(202)
 
 
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 the specific facts and circumstances impacting each individual security.  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 impairment on debt securities is realized through a charge to earnings.  If an equity security is determined to be other-than-temporarily impaired, the entire impairment is realized through a charge to earnings.
 
The Company’s U.S. federal agency portfolio consists of securities issued by the government-sponsored agencies of the 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 is more likely than not that the Company will not be required to sell the securities before recovery of their cost basis, the Company believes that the U.S. federal agency obligations identified in the tables above are temporarily impaired. 
 
The Company’s portfolio of municipal obligations consists of both tax-exempt and taxable general obligations securities issued by various municipalities.  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 are temporarily impaired.
 
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 the Government National Mortgage Association (“GNMA”).  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 securities and the Company’s belief that it is more likely than not that the Company will not be required to sell the securities before recovery of their cost basis, the Company believes that the mortgage-backed securities identified in the tables above are temporarily impaired. 
 
 
10

   
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/or if the liquidity in markets for these securities declines.  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 continue to decline from further increases in market interest rates, as the market prices of these investments generally move inversely to market interest rates.
 
Maturities of investment securities at September 30, 2013 are as follows:
 
(Dollars in thousands)
 
Amortized
 
Estimated
 
 
 
cost
 
fair value
 
Due in less than one year
 
$
13,952
 
$
13,998
 
Due after one year but within five years
 
 
139,556
 
 
140,149
 
Due after five years but within ten years
 
 
68,248
 
 
68,155
 
Due after ten years
 
 
9,609
 
 
9,507
 
Common stocks
 
 
602
 
 
1,064
 
Total
 
$
231,967
 
$
232,873
 
 
The preceding table includes scheduled principal payments and estimated prepayments, based on observable market inputs, for mortgage-backed securities, where 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 investment securities are as follows:
 
 
 
Three months ended
 
Nine months ended
 
(Dollars in thousands)
 
September 30,
 
September 30,
 
 
 
2013
 
2012
 
2013
 
2012
 
Realized gains
 
$
-
 
$
-
 
$
-
 
$
359
 
Realized losses
 
 
-
 
 
-
 
 
-
 
 
-
 
Total
 
$
-
 
$
-
 
$
-
 
$
359
 
 
Other investment securities primarily consist of restricted investments in FHLB and Federal Reserve Bank (“FRB”) stock.  The carrying value of the FHLB stock was $3.0 million at September 30, 2013 and $3.4 million at December 31, 2012.  The carrying value of the FRB stock was $1.8 million at September 30, 2013 and December 31, 2012.  These securities are not readily marketable and are required for regulatory purposes and borrowing availability.  Since there is no available market value, these securities are carried at cost.  Redemption of these investments at par value is at the option of the FHLB or FRB.  Also included in other investment securities are other miscellaneous investments in the common stock of various correspondent banks which are held for borrowing purposes and totaled $113,000 at September 30, 2013 and December 31, 2012.  The Company assessed the ultimate recoverability of these investments and believes that no impairment has occurred.
 
 
11

 
4.           Loans and Allowance for Loan Losses
 
Loans consisted of the following as of:
 
 
 
September 30,
 
December 31,
(Dollars in thousands)
 
2013
 
2012
 
 
 
 
 
 
 
One-to-four family residential real estate
 
$
95,759
 
$
88,454
Construction and land
 
 
22,633
 
 
23,435
Commercial real estate
 
 
98,616
 
 
88,790
Commercial loans
 
 
54,951
 
 
64,570
Agriculture loans
 
 
33,166
 
 
31,935
Municipal loans
 
 
6,196
 
 
9,857
Consumer loans
 
 
13,307
 
 
13,417
Total gross loans
 
 
324,628
 
 
320,458
Net deferred loan costs and loans in process
 
 
21
 
 
37
Allowance for loan losses
 
 
(5,126)
 
 
(4,581)
Loans, net
 
$
319,523
 
$
315,914
 
 
12

  
The following tables provide information on the Company’s allowance for loan losses by loan class and allowance methodology:  
 
 
 
Three and nine months ended September 30, 2013
 
(Dollars in thousands)
 
One-to-four
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
family
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
residential
 
Construction
 
Commercial
 
Commercial
 
Agriculture
 
Municipal
 
Consumer
 
 
 
 
 
 
real estate
 
and land
 
real estate
 
loans
 
loans
 
loans
 
loans
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at June 30, 2013
 
$
577
 
$
1,256
 
$
1,879
 
$
583
 
$
354
 
$
97
 
$
159
 
$
4,905
 
Charge-offs
 
 
(48)
 
 
-
 
 
-
 
 
-
 
 
-
 
 
-
 
 
(48)
 
 
(96)
 
Recoveries
 
 
8
 
 
99
 
 
-
 
 
2
 
 
-
 
 
-
 
 
8
 
 
117
 
Net recoveries
 
 
(40)
 
 
99
 
 
-
 
 
2
 
 
-
 
 
-
 
 
(40)
 
 
21
 
Provision for loan losses
 
 
55
 
 
50
 
 
79
 
 
(88)
 
 
108
 
 
(3)
 
 
(1)
 
 
200
 
Balance at September 30, 2013
 
 
592
 
 
1,405
 
 
1,958
 
 
497
 
 
462
 
 
94
 
 
118
 
 
5,126
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2012
 
$
714
 
$
1,214
 
$
1,313
 
$
707
 
$
367
 
$
107
 
$
159
 
$
4,581
 
Charge-offs
 
 
(91)
 
 
(53)
 
 
-
 
 
(200)
 
 
-
 
 
-
 
 
(150)
 
 
(494)
 
Recoveries
 
 
16
 
 
181
 
 
-
 
 
19
 
 
-
 
 
-
 
 
23
 
 
239
 
Net charge-offs
 
 
(75)
 
 
128
 
 
-
 
 
(181)
 
 
-
 
 
-
 
 
(127)
 
 
(255)
 
Provision for loan losses
 
 
(47)
 
 
63
 
 
645
 
 
(29)
 
 
95
 
 
(13)
 
 
86
 
 
800
 
Balance at September 30, 2013
 
 
592
 
 
1,405
 
 
1,958
 
 
497
 
 
462
 
 
94
 
 
118
 
 
5,126
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for loss
 
 
86
 
 
270
 
 
214
 
 
11
 
 
-
 
 
65
 
 
-
 
 
646
 
Collectively evaluated for loss
 
 
506
 
 
1,135
 
 
1,744
 
 
486
 
 
462
 
 
29
 
 
118
 
 
4,480
 
Total
 
 
592
 
 
1,405
 
 
1,958
 
 
497
 
 
462
 
 
94
 
 
118
 
 
5,126
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loan balances:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for loss
 
 
1,193
 
 
8,301
 
 
3,085
 
 
221
 
 
-
 
 
772
 
 
7
 
 
13,579
 
Collectively evaluated for loss
 
 
94,566
 
 
14,332
 
 
95,531
 
 
54,730
 
 
33,166
 
 
5,424
 
 
13,300
 
 
311,049
 
Total
 
$
95,759
 
$
22,633
 
$
98,616
 
$
54,951
 
$
33,166
 
$
6,196
 
$
13,307
 
$
324,628
 
  
 
 
Three and nine months ended September 30, 2012
 
(Dollars in thousands)
 
One-to-four
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
family
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
residential
 
 
Construction
 
Commercial
 
Commercial
 
Agriculture
 
Municipal
 
Consumer
 
 
 
 
 
real estate
 
 
and land
 
real estate
 
loans
 
loans
 
loans
 
loans
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at June 30, 2012
 
$
708
 
$
1,786
 
$
1,485
 
$
652
 
$
402
 
$
112
 
$
127
 
$
5,272
 
Charge-offs
 
 
-
 
 
(15)
 
 
-
 
 
(60)
 
 
-
 
 
-
 
 
(43)
 
 
(118)
 
Recoveries
 
 
1
 
 
1
 
 
-
 
 
5
 
 
1
 
 
-
 
 
5
 
 
13
 
Net charge-offs
 
 
1
 
 
(14)
 
 
-
 
 
(55)
 
 
1
 
 
-
 
 
(38)
 
 
(105)
 
Provision for loan losses
 
 
76
 
 
523
 
 
265
 
 
18
 
 
47
 
 
20
 
 
51
 
 
1,000
 
Balance at September 30, 2012
 
 
785
 
 
2,295
 
 
1,750
 
 
615
 
 
450
 
 
132
 
 
140
 
 
6,167