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, 2017
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 [ ] Non-accelerated filer [ ] (Do not check if a smaller reporting company) Smaller reporting company [X] 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 10, 2017, the issuer had outstanding 3,873,781 shares of its common stock, $.01 par value per share.
LANDMARK BANCORP, INC.
Form 10-Q Quarterly Report
Table of Contents
Page Number | ||
Item 1. | Financial Statements | 2 - 25 |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 26-33 |
Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 34-35 |
Item 4. | Controls and Procedures | 36 |
PART II | ||
Item 1. | Legal Proceedings | 37 |
Item 1A. | Risk Factors | 37 |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 37 |
Item 3. | Defaults Upon Senior Securities | 37 |
Item 4. | Mine Safety Disclosures | 37 |
Item 5. | Other Information | 37 |
Item 6. | Exhibits | 37 |
Signature Page | 38 |
1 |
PART I – FINANCIAL INFORMATION
LANDMARK BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts) | June 30, 2017 | December 31, 2016 | ||||||
(Unaudited) | ||||||||
Assets | ||||||||
Cash and cash equivalents | $ | 10,594 | $ | 19,996 | ||||
Investment securities available-for-sale, at fair value | 389,842 | 385,563 | ||||||
Bank Stocks, at cost | 5,350 | 5,299 | ||||||
Loans, net of allowance for loans losses of $5,326 at June 30, 2017 and $5,344 at December 31, 2016 | 422,739 | 420,461 | ||||||
Loans held for sale, at fair value | 9,758 | 5,517 | ||||||
Premises and equipment, net | 19,938 | 20,407 | ||||||
Bank owned life insurance | 18,550 | 18,314 | ||||||
Goodwill | 17,532 | 17,532 | ||||||
Other intangible assets, net | 3,802 | 3,986 | ||||||
Real estate owned, net | 1,004 | 1,279 | ||||||
Accrued interest and other assets | 11,690 | 13,028 | ||||||
Total assets | $ | 910,799 | $ | 911,382 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Liabilities: | ||||||||
Deposits: | ||||||||
Non-interest-bearing demand | $ | 158,824 | $ | 152,012 | ||||
Money market and checking | 360,742 | 361,398 | ||||||
Savings | 93,560 | 88,273 | ||||||
Time | 131,896 | 139,838 | ||||||
Total deposits | 745,022 | 741,521 | ||||||
Federal Home Loan Bank borrowings | 31,000 | 39,100 | ||||||
Subordinated debentures | 21,384 | 21,284 | ||||||
Other borrowings | 11,447 | 12,483 | ||||||
Accrued interest, taxes, and other liabilities | 10,911 | 12,043 | ||||||
Total liabilities | 819,764 | 826,431 | ||||||
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; 3,871,045 and 3,868,077 shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively | 39 | 38 | ||||||
Additional paid-in capital | 52,067 | 51,968 | ||||||
Retained earnings | 37,333 | 34,293 | ||||||
Accumulated other comprehensive income (loss) | 1,596 | (1,348 | ) | |||||
Total stockholders’ equity | 91,035 | 84,951 | ||||||
Total liabilities and stockholders’ equity | $ | 910,799 | $ | 911,382 |
See accompanying notes to consolidated financial statements.
2 |
LANDMARK BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
Three months ended | Six months ended | |||||||||||||||
(Dollars in thousands, except per share amounts) | June 30, | June 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Interest income: | ||||||||||||||||
Loans: | ||||||||||||||||
Taxable | $ | 5,246 | $ | 5,285 | $ | 10,265 | $ | 10,420 | ||||||||
Tax-exempt | 34 | 60 | 69 | 127 | ||||||||||||
Investment securities: | ||||||||||||||||
Taxable | 1,202 | 1,171 | 2,394 | 2,335 | ||||||||||||
Tax-exempt | 974 | 856 | 1,916 | 1,664 | ||||||||||||
Total interest income | 7,456 | 7,372 | 14,644 | 14,546 | ||||||||||||
Interest expense: | ||||||||||||||||
Deposits | 394 | 287 | 732 | 564 | ||||||||||||
Borrowings | 486 | 523 | 968 | 1,016 | ||||||||||||
Total interest expense | 880 | 810 | 1,700 | 1,580 | ||||||||||||
Net interest income | 6,576 | 6,562 | 12,944 | 12,966 | ||||||||||||
Provision for loan losses | 100 | 300 | 150 | 350 | ||||||||||||
Net interest income after provision for loan losses | 6,476 | 6,262 | 12,794 | 12,616 | ||||||||||||
Non-interest income: | ||||||||||||||||
Fees and service charges | 1,917 | 1,847 | 3,632 | 3,576 | ||||||||||||
Gains on sales of loans, net | 1,692 | 1,405 | 3,081 | 3,199 | ||||||||||||
Bank owned life insurance | 119 | 145 | 236 | 265 | ||||||||||||
Gains on sales of investment securities, net | 177 | 285 | 324 | 297 | ||||||||||||
Other | 283 | 266 | 556 | 505 | ||||||||||||
Total non-interest income | 4,188 | 3,948 | 7,829 | 7,842 | ||||||||||||
Non-interest expense: | ||||||||||||||||
Compensation and benefits | 3,918 | 3,777 | 7,675 | 7,578 | ||||||||||||
Occupancy and equipment | 1,097 | 1,055 | 2,121 | 2,111 | ||||||||||||
Amortization of intangibles | 328 | 331 | 626 | 668 | ||||||||||||
Data processing | 337 | 346 | 667 | 657 | ||||||||||||
Professional fees | 476 | 282 | 766 | 501 | ||||||||||||
Advertising | 166 | 166 | 332 | 332 | ||||||||||||
Federal deposit insurance premiums | 73 | 110 | 145 | 220 | ||||||||||||
Foreclosure and real estate owned expense | 49 | 51 | 101 | 116 | ||||||||||||
Other | 1,095 | 1,093 | 2,167 | 2,190 | ||||||||||||
Total non-interest expense | 7,539 | 7,211 | 14,600 | 14,373 | ||||||||||||
Earnings before income taxes | 3,125 | 2,999 | 6,023 | 6,085 | ||||||||||||
Income tax expense (1) | 742 | 673 | 1,435 | 1,366 | ||||||||||||
Net earnings (1) | $ | 2,383 | $ | 2,326 | $ | 4,588 | $ | 4,719 | ||||||||
Earnings per share: | ||||||||||||||||
Basic (1)(2) | $ | 0.62 | $ | 0.61 | $ | 1.19 | $ | 1.25 | ||||||||
Diluted (1)(2) | $ | 0.60 | $ | 0.60 | $ | 1.16 | $ | 1.23 | ||||||||
Dividends per share (2) | $ | 0.20 | $ | 0.19 | $ | 0.40 | $ | 0.38 |
(1) Income tax expense, net earnings and earnings per share for the periods ended June 30, 2016 have been recast to reflect the early adoption of Accounting Standards Update ("ASU") 2016-09
(2) Per share amounts for the periods ended June 30, 2016 have been adjusted to give effect to the 5% stock dividend paid during December 2016.
See accompanying notes to consolidated financial statements.
3 |
LANDMARK BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three months ended | Six months ended | |||||||||||||||
(Dollars in thousands) | June 30, | June 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Net earnings (1) | $ | 2,383 | $ | 2,326 | $ | 4,588 | $ | 4,719 | ||||||||
Net unrealized holding gains on available-for-sale securities | 4,497 | 3,771 | 5,019 | 7,161 | ||||||||||||
Reclassification adjustment for net gains included in earnings | (177 | ) | (285 | ) | (324 | ) | (297 | ) | ||||||||
Net unrealized gains | 4,320 | 3,486 | 4,695 | 6,864 | ||||||||||||
Income tax effect on net gains included in earnings | 65 | 105 | 120 | 110 | ||||||||||||
Income tax effect on net unrealized holding gains | (1,670 | ) | (1,396 | ) | (1,871 | ) | (2,654 | ) | ||||||||
Other comprehensive income | 2,715 | 2,195 | 2,944 | 4,320 | ||||||||||||
Total comprehensive income | $ | 5,098 | $ | 4,521 | $ | 7,532 | $ | 9,039 |
(1) Net earnings for the periods ended June 30, 2016 have been recast to reflect the early adoption of ASU 2016-09.
See accompanying notes to consolidated financial statements.
4 |
LANDMARK BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Dollars in thousands, except per share amounts) | Common stock | Additional paid-in capital | Retained earnings | Accumulated other comprehensive income (loss) | Total | |||||||||||||||
(Unaudited) | ||||||||||||||||||||
Balance at January 1, 2016 | $ | 35 | $ | 45,372 | $ | 32,988 | $ | 2,175 | $ | 80,570 | ||||||||||
Net earnings (1) | - | - | 4,719 | - | 4,719 | |||||||||||||||
Other comprehensive income | - | - | - | 4,320 | 4,320 | |||||||||||||||
Dividends paid ($0.38 per share) | - | - | (1,437 | ) | - | (1,437 | ) | |||||||||||||
Exercise of stock options, 89,633 shares (1) | 1 | 1,194 | - | - | 1,195 | |||||||||||||||
Balance at June 30, 2016 | $ | 36 | $ | 46,566 | $ | 36,270 | $ | 6,495 | $ | 89,367 | ||||||||||
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 ($0.40 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 |
(1) Net earnings and exercise of stock options for the period ended June 30, 2016 have been recast to reflect the early adoption of ASU 2016-09.
See accompanying notes to consolidated financial statements.
5 |
LANDMARK BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands) | Six months ended June 30, | |||||||
2017 | 2016 | |||||||
(Unaudited) | ||||||||
Cash flows from operating activities: | ||||||||
Net earnings (1) | $ | 4,588 | $ | 4,719 | ||||
Adjustments to reconcile net earnings to net cash provided by operating activities: | ||||||||
Provision for loan losses | 150 | 350 | ||||||
Valuation allowance on real estate owned | 67 | - | ||||||
Amortization of investment security premiums, net | 944 | 818 | ||||||
Amortization of purchase accounting adjustment on loans | (91 | ) | (57 | ) | ||||
Amortization of purchase accounting adjustment on subordinated debentures | 100 | 100 | ||||||
Amortization of intangibles | 626 | 668 | ||||||
Depreciation | 520 | 581 | ||||||
Increase in cash surrender value of bank owned life insurance | (236 | ) | (265 | ) | ||||
Stock-based compensation | 77 | - | ||||||
Deferred income taxes | 542 | 229 | ||||||
Net gains on sales of investment securities | (324 | ) | (297 | ) | ||||
Net (gain) loss on sales of premises, equipment and real estate owned | (10 | ) | 72 | |||||
Net gains on sales of loans | (3,081 | ) | (3,199 | ) | ||||
Proceeds from sales of loans | 86,747 | 121,551 | ||||||
Origination of loans held for sale | (87,907 | ) | (113,944 | ) | ||||
Changes in assets and liabilities: | ||||||||
Accrued interest and other assets | (1,183 | ) | (1,536 | ) | ||||
Accrued expenses, taxes, and other liabilities | (1,201 | ) | (2,538 | ) | ||||
Net cash provided by operating activities | 328 | 7,252 | ||||||
Cash flows from investing activities: | ||||||||
Net increase in loans | (2,662 | ) | (10,932 | ) | ||||
Maturities and prepayments of investment securities | 28,501 | 23,429 | ||||||
Purchases of investment securities | (42,164 | ) | (43,815 | ) | ||||
Proceeds from sales of investment securities | 13,459 | 13,617 | ||||||
Redemption of bank stocks | 6,319 | 3,009 | ||||||
Purchase of bank stocks | (6,370 | ) | (3,134 | ) | ||||
Proceeds from sales of premises and equipment and foreclosed assets | 398 | 749 | ||||||
Proceeds from bank owned life insurance | - | 351 | ||||||
Purchases of premises and equipment, net | (51 | ) | (386 | ) | ||||
Net cash used in investing activities | (2,570 | ) | (17,112 | ) | ||||
Cash flows from financing activities: | ||||||||
Net increase in deposits | 3,501 | 897 | ||||||
Federal Home Loan Bank advance borrowings | 313,277 | 156,291 | ||||||
Federal Home Loan Bank advance repayments | (321,377 | ) | (145,891 | ) | ||||
Proceeds from other borrowings | 100 | - | ||||||
Repayments on other borrowings | (1,136 | ) | (447 | ) | ||||
Proceeds from exercise of stock options (1) | 23 | 1,195 | ||||||
Payment of dividends | (1,548 | ) | (1,437 | ) | ||||
Net cash (used in) provided by financing activities | (7,160 | ) | 10,608 | |||||
Net (decrease) increase in cash and cash equivalents | (9,402 | ) | 748 | |||||
Cash and cash equivalents at beginning of period | 19,996 | 13,569 | ||||||
Cash and cash equivalents at end of period | $ | 10,594 | $ | 14,317 |
(Continued)
6 |
LANDMARK BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
Six months ended | ||||||||
(Dollars in thousands) | June 30, | |||||||
2017 | 2016 | |||||||
(Unaudited) | ||||||||
Supplemental disclosure of cash flow information: | ||||||||
Cash payments for income taxes | $ | 800 | $ | 500 | ||||
Cash paid for interest | 1,616 | 1,599 | ||||||
Supplemental schedule of noncash investing and financing activities: | ||||||||
Transfer of loans to real estate owned | 180 | 536 | ||||||
Investment securities purchases not yet settled | - | - |
(1) | Net earnings and proceeds from the exercise of stock options for the period ended June 30, 2016 have been recast to reflect the early adoption of ASU 2016-09. |
See accompanying notes to consolidated financial statements.
7 |
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 subsidiaries have been prepared in accordance with the instructions to Form 10-Q. Accordingly, they do not include all the information and footnotes required by 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 months ended June 30, 2017 are not necessarily indicative of the results expected for the year ending December 31, 2017 or for any other future time period. The Company has evaluated subsequent events for recognition and disclosure up to the date the financial statements were issued.
2. Investments
A summary of investment securities available-for-sale is as follows:
(Dollars in thousands) | As of June 30, 2017 | |||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | unrealized | unrealized | Estimated | |||||||||||||
cost | gains | losses | fair value | |||||||||||||
U. S. treasury securities | $ | 4,993 | $ | 24 | $ | (1 | ) | $ | 5,016 | |||||||
U. S. federal agency obligations | 21,377 | 45 | (40 | ) | 21,382 | |||||||||||
Municipal obligations, tax exempt | 177,419 | 2,485 | (661 | ) | 179,243 | |||||||||||
Municipal obligations, taxable | 62,031 | 828 | (81 | ) | 62,778 | |||||||||||
Agency mortgage-backed securities | 112,095 | 368 | (623 | ) | 111,840 | |||||||||||
Certificates of deposit | 9,224 | - | - | 9,224 | ||||||||||||
Common stocks | 178 | 181 | - | 359 | ||||||||||||
Total | $ | 387,317 | $ | 3,931 | $ | (1,406 | ) | $ | 389,842 |
(Dollars in thousands) | As of December 31, 2016 | |||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | unrealized | unrealized | Estimated | |||||||||||||
cost | gains | losses | fair value | |||||||||||||
U. S. treasury securities | $ | 6,005 | $ | 10 | $ | - | $ | 6,015 | ||||||||
U. S. federal agency obligations | 27,140 | 48 | (49 | ) | 27,139 | |||||||||||
Municipal obligations, tax exempt | 163,632 | 696 | (2,666 | ) | 161,662 | |||||||||||
Municipal obligations, taxable | 71,371 | 463 | (271 | ) | 71,563 | |||||||||||
Agency mortgage-backed securities | 109,427 | 171 | (1,222 | ) | 108,376 | |||||||||||
Certificates of deposit | 9,700 | - | - | 9,700 | ||||||||||||
Common stocks | 458 | 650 | - | 1,108 | ||||||||||||
Total | $ | 387,733 | $ | 2,038 | $ | (4,208 | ) | $ | 385,563 |
8 |
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, 2017 and December 31, 2016. 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, 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 | $ | 2,994 | $ | (1 | ) | $ | - | $ | - | $ | 2,994 | $ | (1 | ) | |||||||||||||
U.S. federal agency obligations | 12 | 14,825 | (36 | ) | 995 | (4 | ) | 15,820 | (40 | ) | ||||||||||||||||||
Municipal obligations, tax exempt | 113 | 41,363 | (566 | ) | 4,587 | (95 | ) | 45,950 | (661 | ) | ||||||||||||||||||
Municipal obligations, taxable | 40 | 15,167 | (81 | ) | - | - | 15,167 | (81 | ) | |||||||||||||||||||
Agency mortgage-backed securities | 38 | 54,970 | (593 | ) | 1,320 | (30 | ) | 56,290 | (623 | ) | ||||||||||||||||||
Total | 204 | $ | 129,319 | $ | (1,277 | ) | $ | 6,902 | $ | (129 | ) | $ | 136,221 | $ | (1,406 | ) |
(Dollars in thousands) | As of December 31, 2016 | |||||||||||||||||||||||||||
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 | 9 | 15,056 | (49 | ) | - | - | 15,056 | (49 | ) | |||||||||||||||||||
Municipal obligations, tax exempt | 275 | 97,842 | (2,666 | ) | - | - | 97,842 | (2,666 | ) | |||||||||||||||||||
Municipal obligations, taxable | 66 | 26,184 | (271 | ) | - | - | 26,184 | (271 | ) | |||||||||||||||||||
Agency mortgage-backed securities | 58 | 83,011 | (1,222 | ) | - | - | 83,011 | (1,222 | ) | |||||||||||||||||||
Total | 408 | $ | 222,093 | $ | (4,208 | ) | $ | - | $ | - | $ | 222,093 | $ | (4,208 | ) |
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, 2017.
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, 2017 and December 31, 2016.
The Company’s portfolio of municipal obligations consists of both tax-exempt and taxable general obligations securities issued by various municipalities. As of June 30, 2017, 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, 2017 and December 31, 2016.
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, 2017 and December 31, 2016.
9 |
The table below sets forth amortized cost and fair value of investment securities at June 30, 2017. 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. Securities with no maturity are listed separately.
(Dollars in thousands) | Amortized | Estimated | ||||||
cost | fair value | |||||||
Due in less than one year | $ | 30,111 | $ | 30,139 | ||||
Due after one year but within five years | 182,277 | 182,573 | ||||||
Due after five years but within ten years | 90,785 | 92,095 | ||||||
Due after ten years | 83,966 | 84,676 | ||||||
Common stocks | 178 | 359 | ||||||
Total | $ | 387,317 | $ | 389,842 |
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, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Sales proceeds | $ | 1,917 | $ | 11,801 | $ | 13,459 | $ | 13,617 | ||||||||
Realized gains | $ | 177 | $ | 296 | $ | 348 | $ | 312 | ||||||||
Realized losses | - | (11 | ) | (24 | ) | (15 | ) | |||||||||
Net realized losses | $ | 177 | $ | 285 | $ | 324 | $ | 297 |
Securities with carrying values of $230.0 million and $224.3 million were pledged to secure public funds on deposit, repurchase agreements and as collateral for borrowings at June 30, 2017 and December 31, 2016, respectively. Except for U.S. federal agency obligations, no investment in a single issuer exceeded 10% of consolidated stockholders’ equity.
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) | 2017 | 2016 | ||||||
One-to-four family residential real estate | $ | 138,932 | $ | 136,846 | ||||
Construction and land | 16,557 | 13,738 | ||||||
Commercial real estate | 116,600 | 118,200 | ||||||
Commercial | 51,631 | 54,506 | ||||||
Agriculture | 79,310 | 78,324 | ||||||
Municipal | 3,593 | 3,884 | ||||||
Consumer | 21,403 | 20,271 | ||||||
Total gross loans | 428,026 | 425,769 | ||||||
Net deferred loan costs and loans in process | 39 | 36 | ||||||
Allowance for loan losses | (5,326 | ) | (5,344 | ) | ||||
Loans, net | $ | 422,739 | $ | 420,461 |
10 |
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, 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 |
(Dollars in thousands) | Three and six months ended June 30, 2016 | |||||||||||||||||||||||||||||||
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, 2016 | $ | 864 | $ | 82 | $ | 1,831 | $ | 1,384 | $ | 1,483 | $ | 24 | $ | 201 | $ | 5,869 | ||||||||||||||||
Charge-offs | - | - | - | (306 | ) | (83 | ) | - | (148 | ) | (537 | ) | ||||||||||||||||||||
Recoveries | 3 | - | - | 1 | - | 6 | 10 | 20 | ||||||||||||||||||||||||
Provision for loan losses | (283 | ) | 7 | (55 | ) | 314 | 200 | (7 | ) | 124 | 300 | |||||||||||||||||||||
Balance at June 30, 2016 | 584 | 89 | 1,776 | 1,393 | 1,600 | 23 | 187 | 5,652 | ||||||||||||||||||||||||
Balance at January 1, 2016 | $ | 925 | $ | 77 | $ | 1,740 | $ | 1,530 | $ | 1,428 | $ | 23 | $ | 199 | $ | 5,922 | ||||||||||||||||
Charge-offs | - | - | - | (306 | ) | (83 | ) | - | (285 | ) | (674 | ) | ||||||||||||||||||||
Recoveries | 5 | - | - | 20 | - | 6 | 23 | 54 | ||||||||||||||||||||||||
Provision for loan losses | (346 | ) | 12 | 36 | 149 | 255 | (6 | ) | 250 | 350 | ||||||||||||||||||||||
Balance at June 30, 2016 | 584 | 89 | 1,776 | 1,393 | 1,600 | 23 | 187 | 5,652 |
11 |
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, 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 | - | - | 50 | 76 | 149 | - | - | 275 | ||||||||||||||||||||||||
Collectively evaluated for loss | 499 | 70 | 1,659 | 1,005 | 1,623 | 10 | 185 | 5,051 | ||||||||||||||||||||||||
Total | 499 | 70 | 1,709 | 1,081 | 1,772 | 10 | 185 | 5,326 | ||||||||||||||||||||||||
Loan balances: | ||||||||||||||||||||||||||||||||
Individually evaluated for loss | 732 | 2,041 | 2,206 | 323 | 868 | 221 | 36 | 6,427 | ||||||||||||||||||||||||
Collectively evaluated for loss | 138,200 | 14,516 | 114,394 | 51,308 | 78,442 | 3,372 | 21,367 | 421,599 | ||||||||||||||||||||||||
Total | $ | 138,932 | $ | 16,557 | $ | 116,600 | $ | 51,631 | $ | 79,310 | $ | 3,593 | $ | 21,403 | $ | 428,026 |
(Dollars in thousands) | As of December 31, 2016 | |||||||||||||||||||||||||||||||
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 | - | - | 81 | 87 | 89 | - | 17 | 274 | ||||||||||||||||||||||||
Collectively evaluated for loss | 504 | 53 | 1,696 | 1,032 | 1,595 | 12 | 178 | 5,070 | ||||||||||||||||||||||||
Total | 504 | 53 | 1,777 | 1,119 | 1,684 | 12 | 195 | 5,344 | ||||||||||||||||||||||||
Loan balances: | ||||||||||||||||||||||||||||||||
Individually evaluated for loss | 780 | 1,937 | 2,445 | 355 | 881 | 258 | 72 | 6,728 | ||||||||||||||||||||||||
Collectively evaluated for loss | 136,066 | 11,801 | 115,755 | 54,151 | 77,443 | 3,626 | 20,199 | 419,041 | ||||||||||||||||||||||||
Total | $ | 136,846 | $ | 13,738 | $ | 118,200 | $ | 54,506 | $ | 78,324 | $ | 3,884 | $ | 20,271 | $ | 425,769 |
The Company’s impaired loans decreased from $6.7 million at December 31, 2016 to $6.4 million at June 30, 2017. 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, 2017 and December 31, 2016, 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 was immaterial during the three and six month periods ended June 30, 2017 and 2016.
12 |
The following tables present information on impaired loans:
(Dollars in thousands) | As of June 30, 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 | $ | 732 | $ | 732 | $ | 732 | $ | - | $ | - | $ | 739 | $ | 4 | ||||||||||||||
Construction and land | 3,776 | 2,041 | 2,041 | - | - | 2,010 | 33 | |||||||||||||||||||||
Commercial real estate | 2,206 | 2,206 | 2,156 | 50 | 50 | 2,217 | 246 | |||||||||||||||||||||
Commercial | 323 | 323 | 70 | 253 | 76 | 361 | - | |||||||||||||||||||||
Agriculture | 1,083 | 868 | 49 | 819 | 149 | 933 | 1 | |||||||||||||||||||||
Municipal | 221 | 221 | 221 | - | - | 236 | 3 | |||||||||||||||||||||
Consumer | 36 | 36 | 36 | - | - | 39 | - | |||||||||||||||||||||
Total impaired loans | $ | 8,377 | $ | 6,427 | $ | 5,305 | $ | 1,122 | $ | 275 | $ | 6,535 | $ | 287 |
(Dollars in thousands) | As of December 31, 2016 | |||||||||||||||||||||||||||
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 | $ | 780 | $ | 780 | $ | 780 | $ | - | $ | - | $ | 798 | $ | 7 | ||||||||||||||
Construction and land | 3,672 | 1,937 | 1,937 | - | - | 2,068 | 72 | |||||||||||||||||||||
Commercial real estate | 2,445 | 2,445 | 2,145 | 300 | 81 | 2,587 | 505 | |||||||||||||||||||||
Commercial | 355 | 355 | 46 | 309 | 87 | 425 | 2 | |||||||||||||||||||||
Agriculture | 1,173 | 881 | 147 | 734 | 89 | 1,000 | 2 | |||||||||||||||||||||
Municipal | 258 | 258 | 258 | - | - | 418 | - | |||||||||||||||||||||
Consumer | 72 | 72 | 55 | 17 | 17 | 78 | 13 | |||||||||||||||||||||
Total impaired loans | $ | 8,755 | $ | 6,728 | $ | 5,368 | $ | 1,360 | $ | 274 | $ | 7,374 | $ | 601 |
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 delinquent and accruing interest at June 30, 2017 or December 31, 2016.
13 |
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, 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 | $ | 300 | $ | 316 | $ | - | $ | 616 | $ | 557 | $ | 1,173 | $ | 137,759 | ||||||||||||||
Construction and land | - | - | - | - | 692 | 692 | 15,865 | |||||||||||||||||||||
Commercial real estate | 1,971 | 42 | - | 2,013 | 69 | 2,082 | 114,518 | |||||||||||||||||||||
Commercial | 176 | 1,315 | - | 1,491 | 323 | 1,814 | 49,817 | |||||||||||||||||||||
Agriculture | 49 | 60 | - | 109 | 868 | 977 | 78,333 | |||||||||||||||||||||
Municipal | - | - | - | - | - | - | 3,593 | |||||||||||||||||||||
Consumer | 36 | 17 | - | 53 | 36 | 89 | 21,314 | |||||||||||||||||||||
Total | $ | 2,532 | $ | 1,750 | $ | - | $ | 4,282 | $ | 2,545 | $ | 6,827 | $ | 421,199 | ||||||||||||||
Percent of gross loans | 0.59 | % | 0.41 | % | 0.00 | % | 1.00 | % | 0.59 | % | 1.59 | % | 98.41 | % |
(Dollars in thousands) | As of December 31, 2016 | |||||||||||||||||||||||||||
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 | $ | 215 | $ | 388 | $ | - | $ | 603 | $ | 595 | $ | 1,198 | $ | 135,648 | ||||||||||||||
Construction and land | - | - | - | - | 599 | 599 | 13,139 | |||||||||||||||||||||
Commercial real estate | - | - | - | - | 300 | 300 | 117,900 | |||||||||||||||||||||
Commercial | 13 | 5 | - | 18 | 342 | 360 | 54,146 | |||||||||||||||||||||
Agriculture | 55 | - | - | 55 | 838 | 893 | 77,431 | |||||||||||||||||||||
Municipal | - | - | - | - | - | - | 3,884 | |||||||||||||||||||||
Consumer | 79 | 3 | - | 82 | 72 | 154 | 20,117 | |||||||||||||||||||||
Total | $ | 362 | $ | 396 | $ | - | $ | 758 | $ | 2,746 | $ | 3,504 | $ | 422,265 | ||||||||||||||
Percent of gross loans | 0.09 | % | 0.09 | % | 0.00 | % | 0.18 | % | 0.64 | % | 0.82 | % | 99.18 | % |
Under the original terms of the Company’s non-accrual loans, interest earned on such loans for the six months ended June 30, 2017 and 2016 would have increased interest income by $63,000 and $44,000, respectively. No interest income related to non-accrual loans was included in interest income for the six months ended June 30, 2017 and 2016.
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.
14 |
The following table provides information on the Company’s risk categories by loan class:
(Dollars in thousands) | As of June 30, 2017 | As of December 31, 2016 | ||||||||||||||
Nonclassified | Classified | Nonclassified | Classified | |||||||||||||
One-to-four family residential real estate | $ | 137,803 | $ | 1,129 | $ | 135,640 | $ | 1,206 | ||||||||
Construction and land | 15,865 | 692 | 13,138 | 600 | ||||||||||||
Commercial real estate | 110,725 | 5,875 | 111,641 | 6,559 | ||||||||||||
Commercial | 48,115 | 3,516 | 51,080 | 3,426 | ||||||||||||
Agriculture | 74,727 | 4,583 | 73,564 | 4,760 | ||||||||||||
Municipal | 3,593 | - | 3,884 | - | ||||||||||||
Consumer | 21,356 | 47 | 20,181 | 90 | ||||||||||||
Total | $ | 412,184 | $ | 15,842 | $ | 409,128 | $ | 16,641 |
At June 30, 2017, the Company had 11 loan relationships consisting of 19 outstanding loans that were classified as TDRs. 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. 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 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. During the second quarter of 2016, the Company classified two loans as TDRs including an $8,000 commercial loan after modifying the payments to interest only and a $188,000 one-to-four family residential real estate loan after agreeing to a loan modification which adjusted the payment schedule. No loans were classified as TDR in the first quarter of 2016.
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 modified as TDRs for which there was a payment default within 12 months of modification as of June 30, 2017 and 2016. At June 30, 2017, there was a commitment of $63,000 to lend additional funds on one construction and land loan classified as a TDR. The Company did not record any charge-offs against loans classified as TDRs in the first six months either of 2017 or 2016. A credit provision for loan losses of $13,000 related to TDRs was recorded in the six months ended June 30, 2017 compared to no provision in the same period of 2016. The Company allocated $67,000 and $80,000 of the allowance for loan losses against loans classified as TDRs at June 30, 2017 and December 31, 2016, respectively.
The following table presents information on loans that are classified as TDRs:
(Dollars in thousands) | As of June 30, 2017 | As of December 31, 2016 | ||||||||||||||||||||||
Number of loans | Non-accrual balance | Accruing balance | Number of loans | Non-accrual balance | Accruing balance | |||||||||||||||||||
One-to-four family residential real estate | 2 | $ | - | $ | 175 | 2 | $ | - | $ | 185 | ||||||||||||||
Construction and land | 4 | 581 | 1,349 | 4 | 588 | 1,338 | ||||||||||||||||||
Commercial real estate | 4 | 61 | 2,137 | 3 | 64 | 2,145 | ||||||||||||||||||
Commercial | - | - | - | 2 | - | 13 | ||||||||||||||||||
Agriculture | 7 | 409 | - | 4 | 268 | 44 | ||||||||||||||||||
Municipal | 2 | - | 221 | 2 | - | 258 | ||||||||||||||||||
Total troubled debt restructurings | 19 | $ | 1,051 | $ | 3,882 | 17 | $ | 920 | $ | 3,983 |
15 |
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, 2016 concluded that its goodwill was not impaired. The Company concluded there were no triggering events during the first six months of 2017 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, 2017 | |||||||||||
Gross carrying amount | Accumulated amortization | Net carrying amount | ||||||||||
Core deposit intangible assets | $ | 2,067 | $ | (1,262 | ) | $ | 805 | |||||
Lease intangible asset | 350 | (166 | ) | 184 | ||||||||
Mortgage servicing rights | 6,029 | (3,216 | ) | 2,813 | ||||||||
Total other intangible assets | $ | 8,446 | $ | (4,644 | ) | $ | 3,802 |
(Dollars in thousands) | As of December 31, 2016 | |||||||||||
Gross carrying amount | Accumulated amortization | Net carrying amount | ||||||||||
Core deposit intangible assets | $ | 2,067 | $ | (1,137 | ) | $ | 930 | |||||
Lease intangible asset | 350 | (143 | ) | 207 | ||||||||
Mortgage servicing rights | 5,788 | (2,939 | ) | 2,849 | ||||||||
Total other intangible assets | $ | 8,205 | $ | (4,219 | ) | $ | 3,986 |
The following sets forth estimated amortization expense for core deposit and lease intangible assets for the remainder of 2017 and in successive years ending December 31:
(Dollars in thousands) | Amortization | |||
expense | ||||
Remainder of 2017 | $ | 141 | ||
2018 | 252 | |||
2019 | 214 | |||
2020 | 177 | |||
2021 | 121 | |||
Thereafter | 84 | |||
Total | $ | 989 |
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, 2017 | December 31, 2016 | ||||||
FHLMC | $ | 500,399 | $ | 483,356 | ||||
FHLB | 10,444 | 11,393 | ||||||
Total | $ | 510,843 | $ | 494,749 |
Custodial escrow balances maintained in connection with serviced loans were $5.0 million and $4.1 million at June 30, 2017 and December 31, 2016, respectively. Gross service fee income related to such loans was $320,000 and $304,000 for the three months ended June 30, 2017 and 2016, respectively, and is included in fees and service charges in the consolidated statements of earnings. Gross service fee income related to such loans was $639,000 and $604,000 for the six months ended June 30, 2017 and 2016, respectively.
16 |
Activity for mortgage servicing rights and the related valuation allowance follows:
(Dollars in thousands) | Three months ended June 30, | Six months ended June 30, | ||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Mortgage servicing rights: | ||||||||||||||||
Balance at beginning of period | $ | 2,787 | $ | 2,808 | $ | 2,849 | $ | 2,840 | ||||||||
Additions | 281 | 291 | 442 | 512 | ||||||||||||
Amortization | (255 | ) | (248 | ) | (478 | ) | (501 | ) | ||||||||
Balance at end of period | $ | 2,813 | $ | 2,851 | $ | 2,813 | $ | 2,851 |
The fair value of mortgage servicing rights was $5.3 million and $5.1 million at June 30, 2017 and December 31, 2016, respectively. Fair value at June 30, 2017 was determined using discount rates ranging from 9.50% to 9.51%; prepayment speeds ranging from 0% to 33.56%, depending on the stratification of the specific mortgage servicing right; and a weighted average default rate of 2.25%. Fair value at December 31, 2016 was determined using discount rates ranging from 9.50% to 9.51%; prepayment speeds ranging from 4.86% to 32.79%, 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 $301,000 at both June 30, 2017 and December 31, 2016, 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 2017 and 2016. The Company did not have any recoveries against the mortgage repurchase reserve in the first six months of 2017. The Company recovered $3,000 of losses during the three months ended June 30, 2016 and recovered $10,000 of losses against the mortgage repurchase reserve during the six months ended June 30, 2016. As of June 30, 2017, the Company had one outstanding mortgage repurchase request and expects to incur a loss of approximately $70,000.
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 | ||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Net earnings(1) | $ | 2,383 | $ | 2,326 | $ | 4,588 | $ | 4,719 | ||||||||
Weighted average common shares outstanding - basic (2) | 3,870,564 | 3,794,355 | 3,870,183 | 3,764,497 | ||||||||||||
Assumed exercise of stock options (1)(2) | 80,087 | 91,322 | 79,086 | 89,751 | ||||||||||||
Weighted average common shares outstanding - diluted (1)(2) | 3,950,651 | 3,885,677 | 3,949,269 | 3,854,248 | ||||||||||||
Net earnings per share (1)(2): | ||||||||||||||||
Basic | $ | 0.62 | $ | 0.61 | $ | 1.19 | $ | 1.25 | ||||||||
Diluted | $ | 0.60 | $ | 0.60 | $ | 1.16 | $ | 1.22 |
(1) | Net earnings, earnings per share and assumed exercise of stock options for the periods ended June 30, 2016 have been recast to reflect the early adoption of ASU 2016-09. |
(2) | Share and per share values for the periods ended June 30, 2016 have been adjusted to give effect to the 5% stock dividend paid during December 2016. |
The diluted earnings per share computations for the three and six months ended June 30, 2017 and 2016 include all unexercised stock options because no stock options were anti-dilutive during such periods.
17 |
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, 2017 | ||||||||||||||||||||
Overnight and | Up to 30 | Greater | ||||||||||||||||||
Continuous | days | 30-90 days | than 90 days | Total | ||||||||||||||||
Repurchase agreements: | ||||||||||||||||||||
U.S. federal agency obligations | $ | 3,890 | $ | - | $ | - | $ | - | $ | 3,890 | ||||||||||
Agency mortgage-backed securities | 7,457 | - | - | - | 7,457 | |||||||||||||||
Total | $ | 11,347 | $ | - | $ | - | $ | - | $ | 11,347 |
As of December 31, 2016 | ||||||||||||||||||||
Overnight and | Up to | Greater | ||||||||||||||||||
Continuous | 30 days | 30-90 days | than 90 days | Total | ||||||||||||||||
Repurchase agreements: | ||||||||||||||||||||
U.S. federal agency obligations | $ | 5,007 | $ | - | $ | - | $ | - | $ | 5,007 | ||||||||||
Agency mortgage-backed securities | 7,476 | - | - | - | 7,476 | |||||||||||||||
Total | $ | 12,483 | $ | - | $ | - | $ | - | $ | 12,483 |
Repurchase agreements are comprised of non-insured customer funds, totaling $11.3 million at June 30, 2017, and $12.5 million at December 31, 2016, which were secured by $17.1 million and $15.7 million of the Company’s investment portfolio at the same dates, respectively.
The investment securities are held by a third-party financial institution in the customer’s custodial account. The Company is required to maintain adequate collateral for each repurchase agreement. Changes in the fair value of the investment securities impact the amount of collateral required. If the Company were to default, the investment securities would be used to settle the repurchase agreement with the deposit customer.
7. Fair Value of Financial Instruments and Fair Value Measurements
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:
Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
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Fair value estimates of the Company’s financial instruments as of June 30, 2017 and December 31, 2016, including methods and assumptions utilized, are set forth below:
(Dollars in thousands) | As of June 30, 2017 | |||||||||||||||||||
Carrying | ||||||||||||||||||||
amount | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
Financial assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 10,594 | $ | 10,594 | $ | - | $ | - | $ | 10,594 | ||||||||||
Investment securities available-for-sale | 389,842 | 5,375 | 384,467 | - | 389,842 | |||||||||||||||
Bank stocks, at cost | 5,350 | n/a | n/a | n/a | n/a | |||||||||||||||
Loans, net | 422,739 | - | - | 420,935 | 420,935 | |||||||||||||||
Loans held for sale, net | 9,758 | - | 9,758 | - | 9,758 | |||||||||||||||
Derivative financial instruments | 711 | - | 711 | - | 711 | |||||||||||||||
Accrued interest receivable | 4,089 | 2 | 2,219 | 1,868 | 4,089 | |||||||||||||||
Financial liabilities: | ||||||||||||||||||||
Non-maturity deposits | $ | (613,126 | ) | $ | (613,126 | ) | $ | - | $ | - | (613,126 | ) | ||||||||
Time deposits | (131,896 | ) | - | (130,377 | ) | - | (130,377 | ) | ||||||||||||
FHLB borrowings | (31,000 | ) | - | (31,358 | ) | - | (31,358 | ) | ||||||||||||
Subordinated debentures | (21,384 | ) | - | (19,215 | ) | - | (19,215 | ) | ||||||||||||
Other borrowings | (11,447 | ) | - | (11,447 | ) | - | (11,447 | ) | ||||||||||||
Derivative financial instruments | (28 | ) | - | (28 | ) | - | (28 | ) | ||||||||||||
Accrued interest payable | (253 | ) | - | (253 | ) | - | (253 | ) |
As of December 31, 2016 | ||||||||||||||||||||
Carrying | ||||||||||||||||||||
amount | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
Financial assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 19,996 | $ | 19,996 | $ | - | $ | - | $ | 19,996 | ||||||||||
Investment securities available-for-sale | 385,563 | 7,123 | 378,440 | - | 385,563 | |||||||||||||||
Bank stocks, at cost | 5,299 | n/a | n/a | n/a | n/a | |||||||||||||||
Loans, net | 420,461 | - | - | 417,957 | 417,957 | |||||||||||||||
Loans held for sale | 5,517 | - | 5,517 | - | 5,517 | |||||||||||||||
Derivative financial instruments | 662 | - | 662 | - | 662 | |||||||||||||||
Accrued interest receivable | 4,240 | 21 | 2,104 | 2,115 | 4,240 | |||||||||||||||
Financial liabilities: | ||||||||||||||||||||
Non-maturity deposits | $ | (601,683 | ) | $ | (601,683 | ) | $ | - | $ | - | $ | (601,683 | ) | |||||||
Time deposits | (139,838 | ) | - | (138,623 | ) | - | (138,623 | ) | ||||||||||||
FHLB borrowings | (39,100 | ) | - | (35,695 | ) | - | (35,695 | ) | ||||||||||||
Subordinated debentures | (21,284 | ) | - | (18,608 | ) | - | (18,608 | ) | ||||||||||||
Other borrowings | (12,483 | ) | - | < |