UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2018

OR

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________

Commission File Number 0-33203

LANDMARK BANCORP, INC.

(Exact name of registrant as specified in its charter)

Delaware	43-1930755
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

701 Poyntz Avenue, Manhattan, Kansas       66502

(Address of principal executive offices)       (Zip code)

(785) 565-2000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ]

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

Large accelerated filer [  ] Accelerated filer [X] Non-accelerated filer [  ] (Do not check if a smaller reporting company)

Smaller reporting company [  ] Emerging growth company [  ]

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: as of August 7, 2018, the issuer had outstanding 4,162,779 shares of its common stock, $0.01 par value per share.

LANDMARK BANCORP, INC.

Form 10-Q Quarterly Report

Table of Contents

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

2

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

LANDMARK BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share amounts)	June 30, 2018			December 31, 2017
		(Unaudited)
Assets
Cash and cash equivalents	$	19,883		$	16,584
Investment securities available-for-sale, at fair value		398,137			387,983
Bank stocks, at cost		6,034			5,423
Loans, net of allowance for loans losses of $5,835 at June 30, 2018 and $5,459 at December 31, 2017		461,396			433,743
Loans held for sale, at fair value		11,764			6,535
Premises and equipment, net		21,381			20,824
Bank owned life insurance		24,019			23,698
Goodwill		17,532			17,532
Other intangible assets, net		3,358			3,659
Real estate owned, net		452			436
Accrued interest and other assets		14,224			13,037
Total assets	$	978,180		$	929,454
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Non-interest-bearing demand	$	172,103		$	160,496
Money market and checking		373,843			388,311
Savings		96,160			93,474
Time		123,185			123,277
Total deposits		765,291			765,558
Federal Home Loan Bank borrowings		85,600			31,600
Subordinated debentures		21,584			21,484
Other borrowings		8,417			13,509
Accrued interest, taxes, and other liabilities		10,873			9,681
Total liabilities		891,765			841,832
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.01 par value per share, 200,000 shares authorized; none issued		-			-
Common stock, $0.01 par value per share, 7,500,000 shares authorized; 4,147,946 and 4,081,659 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively		41			41
Additional paid-in capital		58,356			57,772
Retained earnings		33,514			30,214
Accumulated other comprehensive loss		(5,496	)		(405	)
Total stockholders’ equity		86,415			87,622
Total liabilities and stockholders’ equity	$	978,180		$	929,454

See accompanying notes to consolidated financial statements.

3

LANDMARK BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

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

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

See accompanying notes to consolidated financial statements.

4

LANDMARK BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)

(Unaudited)

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

See accompanying notes to consolidated financial statements.

5

LANDMARK BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

(Dollars in thousands, except per share amounts)	Common stock		Additional paid-in capital		Retained earnings			Accumulated other comprehensive income (loss)			Total
Balance at January 1, 2017	$	38	$	51,968	$	34,293		$	(1,348	)	$	84,951
Net earnings		-		-		4,588			-			4,588
Other comprehensive income		-		-		-			2,944			2,944
Dividends paid ($0.38 per share)		-		-		(1,548	)		-			(1,548	)
Stock-based compensation		-		77		-			-			77
Exercise of stock options, 2,968 shares		1		22		-			-			23
Balance at June 30, 2017	$	39	$	52,067	$	37,333		$	1,596		$	91,035
Balance at January 1, 2018	$	41	$	57,772	$	30,214		$	(405	)	$	87,622
Net earnings		-		-		4,944			-			4,944
Other comprehensive loss		-		-		-			(5,084	)		(5,084	)
Dividends paid ($0.40 per share)		-		-		(1,651	)		-			(1,651	)
Stock-based compensation		-		100		-			-			100
Adjustment of common stock investments		-		-		7			(7	)		-
Exercise of stock options, 66,287 shares,		-		484		-			-			484
Balance at June 30, 2018	$	41	$	58,356	$	33,514		$	(5,496	)	$	86,415

See accompanying notes to consolidated financial statements.

6

LANDMARK BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

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

(Continued)

7

LANDMARK BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED

(Unaudited)

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

See accompanying notes to consolidated financial statements.

8

LANDMARK BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Interim Financial Statements

The unaudited consolidated financial statements of Landmark Bancorp, Inc. (the “Company”) and its wholly owned subsidiaries, Landmark National Bank (the “Bank”) and Landmark Risk Management Inc., have been prepared in accordance with the instructions to Form 10-Q. Accordingly, they do not include all the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements and should be read in conjunction with the Company’s most recent Annual Report on Form 10-K, containing the latest audited consolidated financial statements and notes thereto. The consolidated financial statements in this report have not been audited by an independent registered public accounting firm, but in the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation of financial statements have been reflected herein. The results of the six month interim period ended June 30, 2018 are not necessarily indicative of the results expected for the year ending December 31, 2018 or any other future time period. The Company has evaluated subsequent events for recognition and disclosure up to the date the financial statements were issued.

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

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

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

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

9

2. Investments

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

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

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

The tables above show that some of the securities in the available-for-sale investment portfolio had unrealized losses, or were temporarily impaired, as of June 30, 2018 and December 31, 2017. This temporary impairment represents the estimated amount of loss that would be realized if the securities were sold on the valuation date. Securities which were temporarily impaired are shown below, along with the length of time in a continuous unrealized loss position.

(Dollars in thousands)			As of June 30, 2018
			Less than 12 months					12 months or longer					Total
	No. of		Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	securities		value		losses			value		losses			value		losses
U.S. treasury securities		1	$	1,952	$	(47	)	$	-	$	-		$	1,952	$	(47	)
U.S. federal agency obligations		11		3,723		(31	)		9,729		(69	)		13,452		(100	)
Municipal obligations, tax exempt		301		89,803		(1,508	)		33,670		(1,598	)		123,473		(3,106	)
Municipal obligations, taxable		110		36,430		(531	)		10,984		(177	)		47,414		(708	)
Agency mortgage-backed securities		103		102,870		(2,155	)		37,065		(1,721	)		139,935		(3,876	)
Total		526	$	234,778	$	(4,272	)	$	91,448	$	(3,565	)	$	326,226	$	(7,837	)

(Dollars in thousands)			As of December 31, 2017
			Less than 12 months					12 months or longer					Total
	No. of		Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	securities		value		losses			value		losses			value		losses
U.S. treasury securities		1	$	1,990	$	(9	)	$	-	$	-		$	1,990	$	(9	)
U. S. federal agency obligations		14		7,989		(24	)		8,272		(61	)		16,261		(85	)
Municipal obligations, tax exempt		178		37,299		(273	)		31,930		(807	)		69,229		(1,080	)
Municipal obligations, taxable		73		18,792		(96	)		9,744		(120	)		28,536		(216	)
Agency mortgage-backed securities		79		68,630		(620	)		39,844		(1,013	)		108,474		(1,633	)
Total		345	$	134,700	$	(1,022	)	$	89,790	$	(2,001	)	$	224,490	$	(3,023	)

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

10

The Company’s U.S. federal agency portfolio consists of securities issued by the government-sponsored agencies of Federal Home Loan Mortgage Corporation (“FHLMC”), Federal National Mortgage Association (“FNMA”) and Federal Home Loan Bank (“FHLB”). The receipt of principal and interest on U.S. federal agency obligations is guaranteed by the respective government-sponsored agency guarantor, such that the Company believes that its U.S. federal agency obligations do not expose the Company to credit-related losses. Based on these factors, along with the Company’s intent to not sell the securities and its belief that it was more likely than not that the Company will not be required to sell the securities before recovery of their cost basis, the Company believed that the U.S. federal agency obligations identified in the tables above were temporarily impaired as of June 30, 2018 and December 31, 2017.

The Company’s portfolio of municipal obligations consists of both tax-exempt and taxable general obligations securities issued by various municipalities. The Company did not intend to sell and it was more likely than not that the Company will not be required to sell its municipal obligations in an unrealized loss position until the recovery of their costs. Due to the issuers’ continued satisfaction of the securities’ obligations in accordance with their contractual terms and the expectation that they will continue to do so, the evaluation of the fundamentals of the issuers’ financial condition and other objective evidence, the Company believed that the municipal obligations identified in the tables above were temporarily impaired as of June 30, 2018 and December 31, 2017.

The Company’s agency mortgage-backed securities portfolio consists of securities underwritten to the standards of and guaranteed by the government-sponsored agencies of FHLMC, FNMA and the Government National Mortgage Association (“GNMA”). The receipt of principal, at par, and interest on agency mortgage-backed securities is guaranteed by the respective government-sponsored agency guarantor, such that the Company believed that its agency mortgage-backed securities did not expose the Company to credit-related losses. Based on these factors, along with the Company’s intent to not sell the securities and the Company’s belief that it was more likely than not that the Company will not be required to sell the securities before recovery of their cost basis, the Company believed that the agency mortgage-backed securities identified in the tables above were temporarily impaired as of June 30, 2018 and December 31, 2017.

The table below sets forth amortized cost and fair value of investment securities at June 30, 2018. The table includes scheduled principal payments and estimated prepayments, based on observable market inputs, for agency mortgage-backed securities. Actual maturities will differ from contractual maturities because borrowers have the right to prepay obligations with or without prepayment penalties.

(Dollars in thousands)	Amortized		Estimated
	cost		fair value
Due in less than one year	$	30,042	$	29,939
Due after one year but within five years		196,229		192,202
Due after five years but within ten years		94,540		92,727
Due after ten years		84,605		83,269
Total	$	405,416	$	398,137

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

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

Securities with carrying values of $248.6 million and $232.5 million were pledged to secure public funds on deposit, repurchase agreements and as collateral for borrowings at June 30, 2018 and December 31, 2017, respectively. Except for U.S. federal agency obligations, no investment in a single issuer exceeded 10% of consolidated stockholders’ equity.

11

Effective January 1, 2018, the Company changed the classification of its common stock investments from available-for-sale with changes in fair value excluded from earnings and reported as a separate component of stockholders’ equity, net of taxes to be carried at fair value with changes in fair value included in net earnings. The Company received $7,000 of proceeds from the sale of its remaining common stock investments during the six months ended June 30, 2018.

3. Loans and Allowance for Loan Losses

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

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

12

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

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

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

13

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

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

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

The Company’s impaired loans decreased from $9.8 million at December 31, 2017 to $9.0 million at June 30, 2018. The difference between the unpaid contractual principal and the impaired loan balance is a result of charge-offs recorded against impaired loans. The difference in the Company’s non-accrual loan balances and impaired loan balances at June 30, 2018 and December 31, 2017, was related to troubled debt restructurings (“TDR”) that are current and accruing interest, but still classified as impaired. Interest income recognized on a cash basis on impaired loans was immaterial during the three and six month periods ended June 30, 2018 and 2017.

14

The following tables present information on impaired loans:

(Dollars in thousands)	As of June 30, 2018
	Unpaid contractual principal		Impaired loan balance		Impaired loans without an allowance		Impaired loans with an allowance		Related allowance recorded		Year-to-date average loan balance		Year-to-date interest income recognized
One-to-four family residential real estate	$	651	$	651	$	395	$	256	$	85	$	661	$	5
Construction and land		3,376		1,641		1,641		-		-		1,736		29
Commercial real estate		3,920		3,920		2,127		1,793		14		3,926		243
Commercial		2,032		2,032		3		2,029		728		2,055		8
Agriculture		817		602		344		258		25		652		27
Municipal		126		126		126		-		-		132		1
Consumer		46		46		40		6		1		46		-
Total impaired loans	$	10,968	$	9,018	$	4,676	$	4,342	$	853	$	9,208	$	313

(Dollars in thousands)	As of December 31, 2017
	Unpaid contractual principal		Impaired loan balance		Impaired loans without an allowance		Impaired loans with an allowance		Related allowance recorded		Year-to-date average loan balance		Year-to-date interest income recognized
One-to-four family residential real estate	$	747	$	747	$	503	$	244	$	73	$	774	$	8
Construction and land		3,766		2,031		430		1,601		102		2,033		65
Commercial real estate		3,973		3,973		3,888		85		52		3,989		490
Commercial		2,002		2,002		11		1,991		391		2,082		-
Agriculture		1,048		833		545		288		24		912		1
Municipal		140		140		140		-		-		192		5
Consumer		34		34		34		-		-		35		-
Total impaired loans	$	11,710	$	9,760	$	5,551	$	4,209	$	642	$	10,017	$	569

The Company’s key credit quality indicator is a loan’s performance status, defined as accruing or non-accruing. Performing loans are considered to have a lower risk of loss. Non-accrual loans are those which the Company believes have a higher risk of loss. The accrual of interest on non-performing loans is discontinued at the time the loan is ninety days delinquent, unless the credit is well secured and in process of collection. Loans are placed on non-accrual or are charged off at an earlier date if collection of principal or interest is considered doubtful. There were no loans ninety days or more delinquent and accruing interest at June 30, 2018 or December 31, 2017.

15

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

(Dollars in thousands)	As of June 30, 2018
	30-59 days delinquent and accruing			60-89 days delinquent and accruing			90 days or more delinquent and accruing			Total past due loans accruing			Non-accrual loans			Total past due and non-accrual loans			Total loans not past due
One-to-four family residential real estate	$	100		$	289		$	-		$	389		$	463		$	852		$	137,415
Construction and land		-			-			-			-			567			567			25,886
Commercial real estate		-			-			-			-			1,793			1,793			120,153
Commercial		48			711			-			759			2,032			2,791			63,740
Agriculture		127			176			-			303			384			687			87,214
Municipal		-			-			-			-			-			-			3,172
Consumer		36			43			-			79			46			125			22,742
Total	$	311		$	1,219		$	-		$	1,530		$	5,285		$	6,815		$	460,322
Percent of gross loans		0.07	%		0.26	%		0.00	%		0.33	%		1.13	%		1.46	%		98.54	%

(Dollars in thousands)	As of December 31, 2017
	30-59 days delinquent and accruing			60-89 days delinquent and accruing			90 days or more delinquent and accruing			Total past due loans accruing			Non-accrual loans			Total past due and non-accrual loans			Total loans not past due
One-to-four family residential real estate	$	101		$	313		$	-		$	414		$	552		$	966		$	135,249
Construction and land		-			4			-			4			779			783			18,573
Commercial real estate		22			209			-			231			1,841			2,072			118,552
Commercial		-			397			-			397			2,002			2,399			52,192
Agriculture		-			-			-			-			833			833			82,175
Municipal		-			-			-			-			-			-			3,396
Consumer		105			204			-			309			34			343			21,703
Total	$	228		$	1,127		$	-		$	1,355		$	6,041		$	7,396		$	431,840
Percent of gross loans		0.05	%		0.26	%		0.00	%		0.31	%		1.37	%		1.68	%		98.32	%

16

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

The Company also categorizes loans into risk categories based on relevant information about the ability of the borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on a quarterly basis. Non-classified loans generally include those loans that are expected to be repaid in accordance with contractual loan terms. Classified loans are those that are assigned a special mention, substandard or doubtful risk rating using the following definitions:

Special Mention: Loans are currently protected by the current net worth and paying capacity of the obligor or of the collateral pledged but such protection is potentially weak. These loans constitute an undue and unwarranted credit risk, but not to the point of justifying a classification of substandard. The credit risk may be relatively minor, yet constitutes an unwarranted risk in light of the circumstances surrounding a specific asset.

Substandard: Loans are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged. Loans have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Loans are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful: Loans classified doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

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

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

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

During the second quarter of 2017, the Company classified two agriculture loans totaling $87,000 as TDRs after renewing loans to an existing loan relationship that was classified as a TDR in 2016. These two loans were paid off in the second quarter of 2018. During the first quarter of 2017, the Company classified an $11,000 commercial real estate loan as a TDR after extending the maturity of the loan and classified as a TDR a $15,000 agriculture loan extended to an existing loan relationship that was classified as a TDR in 2016. Since the commercial real estate loan was adequately secured, no charge-offs or impairments were recorded against the principal as of June 30, 2017. The agriculture loan relationship had a $49,000 impairment recorded against the principal balance as of June 30, 2017 and a charge-off of $215,000 was recorded in the third quarter of 2016.

17

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

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

(Dollars in thousands)	As of June 30, 2018						As of December 31, 2017
	Number of loans		Non-accrual balance		Accruing balance		Number of loans		Non-accrual balance		Accruing balance
One-to-four family residential real estate		2	$	-	$	188		2	$	-	$	194
Construction and land		4		567		1,074		4		575		1,252
Commercial real estate		2		-		2,127		3		45		2,133
Commercial		1		41		-		-		-		-
Agriculture		6		136		218		9		471		-
Municipal		2		-		126		2		-		140
Total troubled debt restructurings		17	$	744	$	3,733		20	$	1,091	$	3,719

4. Goodwill and Other Intangible Assets

The Company tests goodwill for impairment annually or more frequently if circumstances warrant. The Company’s annual step one impairment test as of December 31, 2017 concluded that its goodwill was not impaired. The Company concluded there were no triggering events during the first six months of 2018 that required an interim goodwill impairment test.

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

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

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

18

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

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

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

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

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

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

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

The fair value of mortgage servicing rights was $6.1 million and $5.6 million at June 30, 2018 and December 31, 2017, respectively. Fair value at June 30, 2018 was determined using discount rates ranging from 9.00% to 11.00%; prepayment speeds ranging from 6.00% to 23.83%, depending on the stratification of the specific mortgage servicing right; and a weighted average default rate of 1.35%. Fair value at December 31, 2017 was determined using discount rates ranging from 9.50% to 9.59%, prepayment speeds ranging from 5.23% to 33.39%, depending on the stratification of the specific mortgage servicing right, and a weighted average default rate of 2.26%.

The Company had a mortgage repurchase reserve of $235,000 at both June 30, 2018 and December 31, 2017, which represents the Company’s best estimate of probable losses that the Company will incur related to the repurchase of one-to-four family residential real estate loans previously sold or to reimburse investors for credit losses incurred on loans previously sold where a breach of the contractual representations and warranties occurred. The Company did not incur any losses charged against the reserve or make any provisions to the reserve during the first six months of 2018 and 2017. As of June 30, 2018, the Company did not have any outstanding mortgage repurchase requests.

19

5. Earnings per Share

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

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

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

The diluted earnings per share computations for the three and six months ended June 30, 2018 and 2017 include all unexercised stock options because no stock options were anti-dilutive during such periods.

6. Repurchase Agreements

The Company has overnight repurchase agreements with certain deposit customers whereby the Company uses investment securities as collateral for non-insured funds. These balances are accounted for as collateralized financing and included in other borrowings on the balance sheet. The following is a summary of the balances of and collateral for the Company’s repurchase agreements:

	As of June 30, 2018
	Overnight and						Greater
	Continuous		Up to 30 days		30-90 days		than 90 days		Total
Repurchase agreements:
U.S. federal treasury obligations	$	307	$	-	$	-	$	-	$	307
U.S. federal agency obligations		2,948		-		-		-		2,948
Agency mortgage-backed securities		5,162		-		-		-		5,162
Total	$	8,417	$	-	$	-	$	-	$	8,417

	As of December 31, 2017
	Overnight and		Up to				Greater
	Continuous		30 days		30-90 days		than 90 days		Total
Repurchase agreements:
U.S. federal agency obligations	$	5,147	$	-	$	-	$	-	$	5,147
Agency mortgage-backed securities		8,362