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| 1. | Interim Financial Statements |
The consolidated financial statements of Landmark Bancorp, Inc. (the “Company”) and subsidiary have been prepared in accordance with the instructions to Form 10-Q. To the extent that information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements are contained in or consistent with the consolidated audited financial statements incorporated by reference in the Company’s Form 10-K for the year ended December 31, 2011, such information and footnotes have not been duplicated herein. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation of financial statements have been reflected herein. The results of the interim period ended March 31, 2012 are not necessarily indicative of the results expected for the year ending December 31, 2012. The Company evaluates subsequent events and transactions that occur after the balance sheet date up to the date that financial statements are filed for potential recognition or disclosure.
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| 2. | Goodwill and Other Intangible Assets |
The Company tests goodwill for impairment annually or more frequently if circumstances warrant. The Company’s annual impairment test as of December 31, 2011 concluded that its goodwill was not impaired; however, the Company can make no assurances that future impairment tests will not result in goodwill impairments. The Company concluded there were no triggering events during the first three months of 2012 that required an interim goodwill impairment test.
A summary of the other intangible assets that continue to be subject to amortization is as follows:
| (Dollars in thousands) | As of March 31, 2012 | |||||||||||
| Gross carrying amount |
Accumulated amortization |
Net carrying amount |
||||||||||
| Core deposit intangible assets | $ | 4,665 | $ | (3,985 | ) | $ | 680 | |||||
| Mortgage servicing rights | 2,340 | (1,026 | ) | 1,314 | ||||||||
| Total other intangible assets | $ | 7,005 | $ | (5,011 | ) | $ | 1,994 | |||||
| (Dollars in thousands) | As of December 31, 2011 | |||||||||||
| Gross carrying amount |
Accumulated amortization |
Net carrying amount |
||||||||||
| Core deposit intangible assets | $ | 4,665 | $ | (3,902 | ) | $ | 763 | |||||
| Mortgage servicing rights | 2,149 | (989 | ) | 1,160 | ||||||||
| Total other intangible assets | $ | 6,814 | $ | (4,891 | ) | $ | 1,923 | |||||
Aggregate core deposit and mortgage servicing rights amortization expense was $211,000 and $179,000 for the first quarter of 2012 and 2011, respectively. The following sets forth estimated amortization expense for other intangible assets for the remainder of 2012 and in successive years ending December 31:
| (Dollars in thousands) | Amortization | |||
| expense | ||||
| Remainder of 2012 | $ | 468 | ||
| 2013 | 595 | |||
| 2014 | 510 | |||
| 2015 | 415 | |||
| 2016 | 3 | |||
| Thereafter | 3 | |||
| Total | $ | 1,994 | ||
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| 3. | Investments |
A summary of investment securities available-for-sale is as follows:
| As of March 31, 2012 | ||||||||||||||||
| Gross | Gross | |||||||||||||||
| Amortized | unrealized | unrealized | Estimated | |||||||||||||
| (Dollars in thousands) | cost | gains | losses | fair value | ||||||||||||
| U. S. federal agency obligations | $ | 8,284 | $ | 29 | $ | (13 | ) | $ | 8,300 | |||||||
| Municipal obligations, tax exempt | 68,405 | 3,936 | (78 | ) | 72,263 | |||||||||||
| Municipal obligations, taxable | 25,269 | 432 | (101 | ) | 25,600 | |||||||||||
| Mortgage-backed securities | 102,928 | 1,533 | (121 | ) | 104,340 | |||||||||||
| Common stocks | 621 | 240 | - | 861 | ||||||||||||
| Pooled trust preferred securities | 1,035 | - | (599 | ) | 436 | |||||||||||
| Certificates of deposit | 5,553 | - | - | 5,553 | ||||||||||||
| Total | $ | 212,095 | $ | 6,170 | $ | (912 | ) | $ | 217,353 | |||||||
| As of December 31, 2011 | ||||||||||||||||
| Gross | Gross | |||||||||||||||
| Amortized | unrealized | unrealized | Estimated | |||||||||||||
| (Dollars in thousands) | cost | gains | losses | fair value | ||||||||||||
| U. S. federal agency obligations | $ | 9,120 | $ | 44 | $ | - | $ | 9,164 | ||||||||
| Municipal obligations, tax exempt | 65,404 | 4,226 | (1 | ) | 69,629 | |||||||||||
| Municipal obligations, taxable | 18,961 | 243 | (69 | ) | 19,135 | |||||||||||
| Mortgage-backed securities | 92,742 | 1,823 | (93 | ) | 94,472 | |||||||||||
| Common stocks | 621 | 198 | - | 819 | ||||||||||||
| Pooled trust preferred securities | 1,104 | - | (699 | ) | 405 | |||||||||||
| Certificates of deposit | 4,590 | - | - | 4,590 | ||||||||||||
| Total | $ | 192,542 | $ | 6,534 | $ | (862 | ) | $ | 198,214 | |||||||
| As of March 31, 2012 | ||||||||||||||||||||||||||||
| (Dollars in thousands) | Less than 12 months | 12 months or longer | Total | |||||||||||||||||||||||||
| No. of | Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | ||||||||||||||||||||||
| securities | value | losses | value | losses | value | losses | ||||||||||||||||||||||
| U. S. federal agency obligations | 2 | $ | 1,490 | $ | (13 | ) | $ | - | $ | - | $ | 1,490 | $ | (13 | ) | |||||||||||||
| Municipal obligations, tax exempt | 13 | 3,668 | (78 | ) | - | - | 3,668 | (78 | ) | |||||||||||||||||||
| Municipal obligations, taxable | 16 | 8,013 | (101 | ) | - | - | 8,013 | (101 | ) | |||||||||||||||||||
| Mortgage-backed securities | 11 | 22,130 | (121 | ) | - | - | 22,130 | (121 | ) | |||||||||||||||||||
| Pooled trust preferred securities | 2 | - | - | 436 | (599 | ) | 436 | (599 | ) | |||||||||||||||||||
| Total | 44 | $ | 35,301 | $ | (313 | ) | $ | 436 | $ | (599 | ) | $ | 35,737 | $ | (912 | ) | ||||||||||||
| As of December 31, 2011 | ||||||||||||||||||||||||||||
| (Dollars in thousands) | Less than 12 months | 12 months or longer | Total | |||||||||||||||||||||||||
| No. of | Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | ||||||||||||||||||||||
| securities | value | losses | value | losses | value | losses | ||||||||||||||||||||||
| Municipal obligations, tax exempt | 1 | $ | 247 | $ | (1 | ) | $ | - | $ | - | $ | 247 | $ | (1 | ) | |||||||||||||
| Municipal obligations, taxable | 15 | 6,579 | (69 | ) | - | - | 6,579 | (69 | ) | |||||||||||||||||||
| Mortgage-backed securities | 10 | 14,260 | (93 | ) | - | - | 14,260 | (93 | ) | |||||||||||||||||||
| Pooled trust preferred securities | 2 | - | - | 405 | (699 | ) | 405 | (699 | ) | |||||||||||||||||||
| Total | 28 | $ | 21,086 | $ | (163 | ) | $ | 405 | $ | (699 | ) | $ | 21,491 | $ | (862 | ) | ||||||||||||
The Company performs quarterly reviews of the investment portfolio to determine if investment securities have any declines in fair value which might be considered other-than-temporary. The initial review begins with all securities in an unrealized loss position. The Company’s assessment of other-than-temporary impairment is based on the specific facts and circumstances impacting each individual security. The Company reviews and considers all available information, including expected cash flows, the structure of the security, the credit quality of the underlying assets and the current and anticipated market conditions. Any credit-related impairment on debt securities is realized through a charge to earnings. If an equity security is determined to be other-than-temporarily impaired, the entire impairment is realized through a charge to earnings.
The Company’s U.S. federal agency portfolio consists of securities issued by the government-sponsored agencies of 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 the Company’s belief that it is more likely than not that the Company will not be required to sell the securities before recovery of their cost basis, the Company believes that the U.S. federal agency obligations identified in the tables above are temporarily impaired.
The Company’s portfolio of municipal obligations consists of both tax-exempt and taxable general obligations securities issued by various municipalities. As of March 31, 2012, the Company does not intend to sell and it is more likely than not that the Company will not be required to sell its municipal obligations in an unrealized loss position until the recovery of its cost. Due to the issuers’ continued satisfaction of the securities’ obligations in accordance with their contractual terms and the expectation that they will continue to do so, the evaluation of the fundamentals of the issuers’ financial condition and other objective evidence, the Company believes that the municipal obligations identified in the tables above are temporarily impaired.
The Company’s mortgage-backed securities portfolio consists of securities underwritten to the standards of and guaranteed by the government-sponsored agencies of FHLMC, FNMA and Government National Mortgage Association (“GNMA”). The receipt of principal, at par, and interest on mortgage-backed securities is guaranteed by the respective government-sponsored agency guarantor, such that the Company believes that its mortgage-backed securities do not expose the Company to credit-related losses. Based on these factors, along with the Company’s intent to not sell the securities and the Company’s belief that it is more likely than not that the Company will not be required to sell the securities before recovery of their cost basis, the Company believes that the mortgage-backed securities identified in the tables above are temporarily impaired.
As of March 31, 2012, the Company owned two pooled trust preferred securities, which represent investments in pools of collateralized debt obligations issued by financial institutions and insurance companies. The market for these securities is considered to be inactive. The Company’s investments, Preferred Term Security (“PreTSL”) VIII and PreTSL IX, have remaining aggregate cost bases of $318,000 and $717,000 and non-credit-related, unrealized losses of $187,000 and $412,000, respectively. The Company uses discounted cash flow models on these two securities to assess if the present value of the cash flows expected to be collected is less than the amortized cost, which would result in an other-than-temporary impairment associated with the credit of the underlying collateral. The assumptions used in preparing the discounted cash flow models include the following: estimated discount rates, estimated deferral and default rates on collateral, assumed recoveries and estimated cash flows including all information available through the date of issuance of these financial statements. The discounted cash flow analysis includes a review of all issuers within the collateral pool and incorporates higher deferral and default rates, as compared to historical rates, in the cash flow projections through maturity. The Company also reviews stress tests of these securities to determine the additional estimated deferrals or defaults in the collateral pool in excess of what the Company believes is likely, before the payments on the individual securities are negatively impacted.
As of March 31, 2012, the analysis of the Company’s PreTSL VIII investment indicated that an additional $63,000 of the unrealized loss was credit-related while the remaining $187,000 of unrealized loss was not credit-related. As of March 31, 2012, the analysis of the Company’s PreTSL IX investment indicated that the unrealized loss of $412,000 was not credit-related.
The following table provides additional information related to the Company’s investments in pooled trust preferred securities as of March 31, 2012:
| (Dollars in thousands) | Cumulative | |||||||||||||||||||||||||||||||
| Moody's | Original | Principal | credit | Cost | Unrealized | Fair | ||||||||||||||||||||||||||
| Investment | Class | rating | par | payments | losses | basis | loss | value | ||||||||||||||||||||||||
| PreTSL VIII | B | C | $ | 1,000 | $ | - | $ | (682 | ) | $ | 318 | $ | (187 | ) | $ | 131 | ||||||||||||||||
| PreTSL IX | B | Ca | 1,000 | (48 | ) | (235 | ) | 717 | (412 | ) | 305 | |||||||||||||||||||||
| Total | $ | 2,000 | $ | (48 | ) | $ | (917 | ) | $ | 1,035 | $ | (599 | ) | $ | 436 | |||||||||||||||||
It is reasonably possible that the fair values of the Company’s investment securities could decline in the future if the overall economy and/or the financial condition of some of the issuers of these securities deteriorate and/or if the liquidity in markets for these securities declines. As a result, there is a risk that additional other-than-temporary impairments may occur in the future and any such amounts could be material to the Company’s consolidated financial statements. The fair value of the Company’s investment securities may also decline from an increase in market interest rates, as the market prices of these investments move inversely to their market yields.
Maturities of investment securities at March 31, 2012 are as follows:
| (Dollars in thousands) | Amortized | Estimated | ||||||
| cost | fair value | |||||||
| Due in less than one year | $ | 11,888 | $ | 11,980 | ||||
| Due after one year but within five years | 133,223 | 135,707 | ||||||
| Due after five years but within ten years | 49,122 | 51,259 | ||||||
| Due after ten years | 17,241 | 17,546 | ||||||
| Common stocks | 621 | 861 | ||||||
| Total | $ | 212,095 | $ | 217,353 | ||||
The preceding table includes scheduled principal payments and estimated prepayments for mortgage-backed securities, where actual maturities may differ from contractual maturities because borrowers have the right to prepay obligations with or without prepayment penalties.
Gross realized gains and losses on sales of available-for-sale investment securities are as follows:
| Three months ended | ||||||||
| (Dollars in thousands) | March 31, | |||||||
| 2012 | 2011 | |||||||
| Realized gains | $ | 227 | $ | - | ||||
| Realized losses | - | - | ||||||
| Total | $ | 227 | $ | - | ||||
Other investment securities primarily consist of restricted investments in FHLB and Federal Reserve Bank (“FRB”) stock. The carrying value of the FHLB stock was $4.9 million at March 31, 2012 and December 31, 2011. The carrying value of the FRB stock was $1.8 million at March 31, 2012 and December 31, 2011. These securities are not readily marketable and are required for regulatory purposes and borrowing availability. Since there is no available market values, these securities are carried at cost. Redemption of these investments at par value is at the option of the FHLB or FRB. Also included in other investment securities are $60,000 of other miscellaneous investments in the common stock of various correspondent banks which are held for borrowing purposes. The Company assessed the ultimate recoverability of these investments and believes that no impairment has occurred.
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| 4. | Loans and Allowance for Loan Losses |
Loans consisted of the following as of:
| March 31, | December 31, | |||||||
| (Dollars in thousands) | 2012 | 2011 | ||||||
| One-to-four family residential real estate | $ | 76,450 | $ | 79,108 | ||||
| Construction and land | 20,544 | 21,672 | ||||||
| Commercial real estate | 92,488 | 93,786 | ||||||
| Commercial loans | 56,099 | 57,006 | ||||||
| Agriculture loans | 35,042 | 39,052 | ||||||
| Municipal loans | 10,065 | 10,366 | ||||||
| Consumer loans | 13,040 | 13,584 | ||||||
| Total gross loans | 303,728 | 314,574 | ||||||
| Net deferred loan costs and loans in process | 191 | 214 | ||||||
| Allowance for loan losses | (5,014 | ) | (4,707 | ) | ||||
| Loans, net | $ | 298,905 | $ | 310,081 | ||||
The following tables provide information on the Company’s allowance for loan losses by loan class and allowance methodology:
| Three months ended March 31, 2012 | ||||||||||||||||||||||||||||||||
| (Dollars in thousands) | One-to-four family residential real estate |
Construction and land |
Commercial real estate |
Commercial loans |
Agriculture loans |
Municipal loans |
Consumer loans |
Total | ||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||||||
| Balance at December 31, 2011 | $ | 560 | $ | 928 | $ | 1,791 | $ | 745 | $ | 433 | $ | 130 | $ | 120 | $ | 4,707 | ||||||||||||||||
| Charge-offs | - | - | - | - | - | - | (44 | ) | (44 | ) | ||||||||||||||||||||||
| Recoveries | 2 | 1 | - | 4 | 38 | - | 6 | 51 | ||||||||||||||||||||||||
| Net recoveries | 2 | 1 | - | 4 | 38 | - | (38 | ) | 7 | |||||||||||||||||||||||
| Provision for loan losses | 129 | 133 | 106 | (21 | ) | (63 | ) | 5 | 11 | 300 | ||||||||||||||||||||||
| Balance at March 31, 2012 | 691 | 1,062 | 1,897 | 728 | 408 | 135 | 93 | 5,014 | ||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||||||
| Individually evaluated for loss | 66 | 10 | - | 34 | - | 65 | 18 | 193 | ||||||||||||||||||||||||
| Collectively evaluated for loss | 625 | 1,052 | 1,897 | 694 | 408 | 70 | 75 | 4,821 | ||||||||||||||||||||||||
| Total | 691 | 1,062 | 1,897 | 728 | 408 | 135 | 93 | 5,014 | ||||||||||||||||||||||||
| Loan balances: | ||||||||||||||||||||||||||||||||
| Individually evaluated for loss | 1,277 | 25 | 227 | 648 | 12 | 784 | 39 | 3,012 | ||||||||||||||||||||||||
| Collectively evaluated for loss | 75,173 | 20,519 | 92,261 | 55,451 | 35,030 | 9,281 | 13,001 | 300,716 | ||||||||||||||||||||||||
| Total | $ | 76,450 | $ | 20,544 | $ | 92,488 | $ | 56,099 | $ | 35,042 | $ | 10,065 | $ | 13,040 | $ | 303,728 | ||||||||||||||||
| Three months ended March 31, 2011 | ||||||||||||||||||||||||||||||||
| (Dollars in thousands) | One-to-four family residential real estate |
Construction and land |
Commercial real estate |
Commercial loans |
Agriculture loans |
Municipal loans |
Consumer loans |
Total | ||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||||||
| Balance at December 31, 2010 | 395 | 1,186 | 1,576 | 1,173 | 399 | 99 | 139 | 4,967 | ||||||||||||||||||||||||
| Charge-offs | (103 | ) | - | (434 | ) | (458 | ) | (1 | ) | - | (28 | ) | (1,024 | ) | ||||||||||||||||||
| Recoveries | 22 | - | - | 4 | 1 | - | 12 | 39 | ||||||||||||||||||||||||
| Net charge-offs | (81 | ) | - | (434 | ) | (454 | ) | - | - | (16 | ) | (985 | ) | |||||||||||||||||||
| Provision for loan losses | 47 | 256 | 169 | (9 | ) | (40 | ) | 16 | (39 | ) | 400 | |||||||||||||||||||||
| Balance at March 31, 2011 | 361 | 1,442 | 1,311 | 710 | 359 | 115 | 84 | 4,382 | ||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||||||
| Individually evaluated for loss | 24 | 654 | - | 103 | - | 69 | - | 850 | ||||||||||||||||||||||||
| Collectively evaluated for loss | 337 | 788 | 1,311 | 607 | 359 | 46 | 84 | 3,532 | ||||||||||||||||||||||||
| Total | 361 | 1,442 | 1,311 | 710 | 359 | 115 | 84 | 4,382 | ||||||||||||||||||||||||
| Loan balances: | ||||||||||||||||||||||||||||||||
| Individually evaluated for loss | 716 | 1,217 | - | 333 | 65 | 775 | 63 | 3,169 | ||||||||||||||||||||||||
| Collectively evaluated for loss | 76,938 | 22,486 | 93,817 | 59,530 | 36,339 | 7,662 | 13,850 | 310,622 | ||||||||||||||||||||||||
| Total | $ | 77,654 | $ | 23,703 | $ | 93,817 | $ | 59,863 | $ | 36,404 | $ | 8,437 | $ | 13,913 | $ | 313,791 | ||||||||||||||||
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 90 days delinquent and accruing interest at March 31, 2012 or December 31, 2011. The following tables present information on the Company’s past due and non-accrual loans by loan class:
| As of March 31, 2012 | ||||||||||||||||||||||||
| (Dollars in thousands) | 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 | ||||||||||||||||||
| One-to-four family residential real estate | $ | 120 | $ | 440 | $ | - | $ | 560 | $ | 759 | $ | 1,319 | ||||||||||||
| Construction and land | - | - | - | - | 25 | 25 | ||||||||||||||||||
| Commercial real estate | 739 | - | - | 739 | 227 | 966 | ||||||||||||||||||
| Commercial loans | - | 2 | - | 2 | 648 | 650 | ||||||||||||||||||
| Agriculture loans | - | - | - | - | 12 | 12 | ||||||||||||||||||
| Municipal loans | - | - | - | - | 241 | 241 | ||||||||||||||||||
| Consumer loans | 172 | 15 | - | 187 | 39 | 226 | ||||||||||||||||||
| Total | $ | 1,031 | $ | 457 | $ | - | $ | 1,488 | $ | 1,951 | $ | 3,439 | ||||||||||||
| Percent of gross loans | 0.34 | % | 0.15 | % | 0.00 | % | 0.49 | % | 0.64 | % | 1.13 | % | ||||||||||||
| As of December 31, 2011 | ||||||||||||||||||||||||
| (Dollars in thousands) | 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 | ||||||||||||||||||
| One-to-four family residential real estate | $ | 368 | $ | 1,174 | $ | - | $ | 1,542 | $ | 752 | $ | 2,294 | ||||||||||||
| Construction and land | 21 | - | - | 21 | 225 | 246 | ||||||||||||||||||
| Commercial real estate | 64 | 211 | - | 275 | 17 | 292 | ||||||||||||||||||
| Commercial loans | 1 | 201 | - | 202 | 78 | 280 | ||||||||||||||||||
| Agriculture loans | 1 | - | - | 1 | 63 | 64 | ||||||||||||||||||
| Municipal loans | - | - | - | - | 241 | 241 | ||||||||||||||||||
| Consumer loans | 160 | 18 | - | 178 | 43 | 221 | ||||||||||||||||||
| Total | $ | 615 | $ | 1,604 | $ | - | $ | 2,219 | $ | 1,419 | $ | 3,638 | ||||||||||||
| Percent of gross loans | 0.20 | % | 0.51 | % | 0.00 | % | 0.71 | % | 0.45 | % | 1.16 | % | ||||||||||||
The Company’s impaired loans increased from $2.5 million at December 31, 2011 to $3.0 million at March 31, 2012. 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 March 31, 2012 and December 31, 2011, was related to troubled debt restructurings (“TDR”) that are current and accruing interest, but still classified as impaired. The following tables present information on impaired loans:
| (Dollars in thousands) | As of March 31, 2012 | |||||||||||||||||||||||||||
| 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 | $ | 1,567 | $ | 1,277 | $ | 1,092 | $ | 185 | $ | 66 | $ | 1,291 | $ | 8 | ||||||||||||||
| Construction and land | 25 | 25 | - | 25 | 10 | 25 | - | |||||||||||||||||||||
| Commercial real estate | 227 | 227 | 227 | - | - | 227 | - | |||||||||||||||||||||
| Commercial | 648 | 648 | 570 | 78 | 34 | 731 | - | |||||||||||||||||||||
| Agriculture loans | 12 | 12 | 12 | - | - | 12 | - | |||||||||||||||||||||
| Municipal loans | 784 | 784 | 653 | 131 | 65 | 784 | 4 | |||||||||||||||||||||
| Consumer loans | 39 | 39 | 21 | 18 | 18 | 42 | - | |||||||||||||||||||||
| Total impaired loans | $ | 3,302 | $ | 3,012 | $ | 2,575 | $ | 437 | $ | 193 | $ | 3,112 | $ | 12 | ||||||||||||||
| (Dollars in thousands) | As of December 31, 2011 | |||||||||||||||||||||||||||
| 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 | $ | 1,570 | $ | 1,280 | $ | 1,072 | $ | 208 | $ | 65 | $ | 1,311 | $ | 32 | ||||||||||||||
| Construction and land | 574 | 225 | 200 | 25 | 8 | 419 | - | |||||||||||||||||||||
| Commercial real estate | 17 | 17 | 17 | - | - | 20 | - | |||||||||||||||||||||
| Commercial loans | 78 | 78 | - | 78 | 35 | 83 | - | |||||||||||||||||||||
| Agriculture loans | 63 | 63 | 63 | - | - | 65 | - | |||||||||||||||||||||
| Municipal loans | 784 | 784 | 653 | 131 | 65 | 772 | 35 | |||||||||||||||||||||
| Consumer loans | 43 | 43 | 10 | 33 | 32 | 49 | - | |||||||||||||||||||||
| Total impaired loans | $ | 3,129 | $ | 2,490 | $ | 2,015 | $ | 475 | $ | 205 | $ | 2,719 | $ | 67 | ||||||||||||||
The Company did not classify any loan modifications as TDR during the first quarters of 2012 or 2011. During the first quarter of 2012, a construction and land loan totaling $200,000, after modification, was paid off per the terms of the loan modification agreement. As of March 31, 2012, the Company had four loan modifications that had previously been classified as TDRs. 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 as of March 31, 2012 that had been modified as TDRs and then subsequently defaulted. At March 31, 2012, there are no commitments to lend additional funds to any borrower whose loan terms have been modified as a TDR. As of March 31, 2012, the Company had no related allowance recorded against loans classified as TDRs compared to $5,000 recorded at December 31, 2011. The following table presents information on loans that are classified as TDRs:
| (Dollars in thousands) | ||||||||||||||||
| As of March 31, 2012 | As of December 31, 2011 | |||||||||||||||
| Number of loans |
Loan Balance | Number of loans |
Loan Balance | |||||||||||||
| One-to-four family residential real estate | 2 | $ | 518 | 2 | $ | 528 | ||||||||||
| Construction and land | - | - | 1 | 549 | ||||||||||||
| Municipal loans | 2 | 653 | 2 | 653 | ||||||||||||
| Total troubled debt restructurings | 4 | $ | 1,171 | 5 | $ | 1,730 | ||||||||||
The Company services one-to-four family residential real estate loans for others with outstanding principal balances of $200.1 million and $183.3 million at March 31, 2012 and December 31, 2011, respectively. Gross service fee income related to such loans was $119,000 and $107,000 for the quarters ended March 31, 2012 and 2011, respectively, and is included in fees and service charges in the consolidated statements of earnings.
As of March 31, 2012 and December 31, 2011, the Company had a mortgage repurchase reserve of $500,000 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. Because the level of mortgage repurchase losses depends upon economic factors, investor demand strategies and other external conditions that may change over the life of the underlying loans, mortgage repurchase losses are difficult to estimate and require considerable judgment. The Company did not make any provisions or charge any losses against the reserve during the first quarter of 2012.
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| 5. | Earnings per Share |
Basic earnings per share has been computed based upon the weighted average number of common shares outstanding during each period. Diluted earnings per share includes the effect of all potential common shares outstanding during each period. The shares used in the calculation of basic and diluted earnings per share are shown below:
| Three months ended | ||||||||
| (Dollars in thousands, except per share amounts) | March 31, | |||||||
| 2012 | 2011 | |||||||
| Net earnings | $ | 1,727 | $ | 978 | ||||
| Weighted average common shares outstanding - basic (1) | 2,782,826 | 2,770,706 | ||||||
| Assumed exercise of stock options (1) | 11,532 | 689 | ||||||
| Weighted average common shares outstanding - diluted (1) | 2,794,358 | 2,771,395 | ||||||
| Net earnings per share (1): | ||||||||
| Basic | $ | 0.62 | $ | 0.35 | ||||
| Diluted | $ | 0.62 | $ | 0.35 | ||||
(1) Share and per share values for the period ended March 31, 2011 have been adjusted to give effect to the 5% stock dividend paid during December 2011.
The diluted earnings per share computations for the three months ended March 31, 2012 and 2011 exclude unexercised stock options of 155,632 and 426,944, respectively, because their inclusion would have been anti-dilutive to earnings per share.
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| 6. | Fair Value of Financial Instruments and Fair Value Measurements |
The Company follows the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 820 “Fair Value Measurements and Disclosures,” which defines fair value, establishes a framework for measuring fair value and expands the disclosures about fair value measurements. ASC Topic 820-10-55 requires the use of a hierarchy of fair value techniques based upon whether the inputs to those fair values reflect assumptions other market participants would use based upon market data obtained from independent sources or reflect the Company’s own assumptions of market participant valuation. The Company applies FASB ASC 820 to certain nonfinancial assets and liabilities, which include foreclosed real estate, long-lived assets, goodwill, and core deposit premium, which are recorded at fair value only upon impairment. The fair value hierarchy is as follows:
| • Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. |
| • Level 2: Quoted prices for similar assets in active markets or quoted prices that contain observable inputs such as yield curves, volatilities, prepayment speeds and other inputs derived from market data. |
| • Level 3: Quoted prices in markets that are not active or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable. |
Fair value estimates of the Company’s financial instruments as of March 31, 2012 and December 31, 2011, including methods and assumptions utilized, are set forth below:
| (Dollars in thousands) | ||||||||||||||||
| March 31, 2012 | December 31, 2011 | |||||||||||||||
| Carrying | Estimated | Carrying | Estimated | |||||||||||||
| amount | fair value | amount | fair value | |||||||||||||
| Financial assets: | ||||||||||||||||
| Cash and cash equivalents | $ | 28,824 | $ | 28,824 | $ | 17,501 | $ | 17,501 | ||||||||
| Investment securities: | ||||||||||||||||
| Available-for-sale | 217,353 | 217,353 | 198,214 | 198,214 | ||||||||||||
| Other securities | 6,686 | 6,686 | 6,671 | 6,671 | ||||||||||||
| Loans, net | 298,905 | 298,270 | 310,081 | 309,927 | ||||||||||||
| Loans held for sale | 10,244 | 10,244 | 9,754 | 9,846 | ||||||||||||
| Mortgage servicing rights | 1,314 | 1,467 | 1,160 | 1,319 | ||||||||||||
| Derivative financial instruments | 352 | 352 | 255 | 255 | ||||||||||||
| Accrued interest receivable | 2,790 | 2,790 | 2,468 | 2,468 | ||||||||||||
| Financial liabilities: | ||||||||||||||||
| Non-maturity deposits | $ | 321,463 | $ | 321,463 | $ | 274,301 | $ | 274,301 | ||||||||
| Time deposits | 170,882 | 172,056 | 179,833 | 181,280 | ||||||||||||
| FHLB borrowings | 35,754 | 39,697 | 49,163 | 53,376 | ||||||||||||
| Other borrowings | 23,591 | 21,325 | 27,434 | 25,200 | ||||||||||||
| Accrued interest payable | 503 | 503 | 532 | 532 | ||||||||||||
Methods and Assumptions Utilized
The carrying amount of cash and cash equivalents is considered to approximate fair value.
The Company’s investment securities classified as available-for-sale include U.S. federal agency securities, municipal obligations, mortgage-backed securities, pooled trust preferred securities, certificates of deposits and common stocks. Quoted exchange prices are available for the Company’s common stock investments, which are classified as Level 1. U.S. federal agency securities and mortgage-backed obligations are priced utilizing industry-standard models that consider various assumptions, including time value, yield curves, volatility factors, prepayment speeds, default rates, loss severity, current market and contractual prices for the underlying financial instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace, can be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace and are classified as Level 2. Municipal securities are valued using a type of matrix, or grid, pricing in which securities are benchmarked against the treasury rate based on credit rating. These model and matrix measurements are classified as Level 2 in the fair value hierarchy. The Company’s investments in FDIC-insured, fixed-rate certificates of deposits are valued using a net present value model that discounts the future cash flows at the current market rates and are classified as Level 2.
The Company classifies the fair value of its pooled trust preferred securities as Level 3. The portfolio consists of two investments in pooled trust preferred securities issued by various financial companies. These securities are valued based on a matrix pricing in which the securities are benchmarked against single issuer trust preferred securities based on credit rating. The pooled trust preferred market is inactive; therefore single issuer trading is used as the benchmark, with additional adjustments made for credit and liquidity risk.
The Company’s other investment securities primarily include investments in FHLB and FRB stock, which are held for regulatory purposes. These investments generally have restrictions on the sale and/or liquidation of stock and the carrying value is approximately equal to fair value. Fair value measurements for these securities are classified as Level 3 based on the restrictions on sale and/or liquidation and related credit risk.
The estimated fair value of the Company’s loan portfolio is based on the segregation of loans by collateral type, interest terms, and maturities. The fair value is estimated based on discounting scheduled and estimated cash flows through maturity using an appropriate risk-adjusted yield curve to approximate current interest rates for each category. No adjustment was made to the interest rates for changes in credit risk of performing loans where there were no known credit concerns. Management segregates loans in appropriate risk categories. Management believes that the risk factor embedded in the interest rates along with the allowance for loan losses applicable to the performing loan portfolio results in a fair valuation of such loans. The fair values of impaired loans are generally based on market prices for similar assets determined through independent appraisals or discounted values of independent appraisals and brokers’ opinions of value. This method of estimating fair value is classified as Level 3 and does not incorporate the exit-price concept of fair value prescribed by ASC Topic 820.
Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value, determined on an aggregate basis. The mortgage loan valuations are based on quoted secondary market prices for similar loans and are classified as Level 2.
The Company measures its mortgage servicing rights at the lower of amortized cost or fair value. Periodic impairment assessments are performed based on fair value estimates at the reporting date. The fair value of mortgage servicing rights is estimated based on a valuation model which calculates the present value of estimated future cash flows associated with servicing the underlying loans. The model incorporates assumptions that market participants use in estimating future net servicing income, including estimated prepayment speeds, market discount rates, cost to service, and other servicing income, including late fees. The fair value measurements are classified as Level 3.
The carrying amount of accrued interest receivable and payable is considered to approximate fair value and are classified as Level 3.
The estimated fair value of deposits with no stated maturity, such as non-interest-bearing demand deposits, savings, money market accounts, and NOW accounts, is equal to the amount payable on demand. The fair value of interest-bearing time deposits is based on the discounted value of contractual cash flows of such deposits. The discount rate is tied to the FHLB yield curve plus an appropriate servicing spread. Fair value measurements based on discounted cash flows are classified as Level 3. These fair values do not incorporate the value of core deposit intangibles which may be associated with the deposit base.
The fair value of advances from the FHLB and other borrowings is estimated using current yield curves for similar borrowings adjusted for the Company’s current credit spread, if applicable, and classified as Level 2.
The Company’s derivative financial instruments consist of interest rate lock commitments and corresponding forward sales contracts on mortgage loans held for sale. The fair values of these derivatives are based on quoted prices for similar loans in the secondary market. The market prices are adjusted by a factor, based on the Company’s historical data and its judgment about future economic trends, which considers the likelihood that a commitment will ultimately result in a closed loan. These instruments are classified as Level 2. The amounts are included in other assets or other liabilities on the consolidated balance sheets and gains on sale of loans in the consolidated statements of earnings.
Off-Balance Sheet Financial Instruments
The fair value of letters of credit and commitments to extend credit is based on the fees currently charged to enter into similar agreements. The aggregate of these fees is not material.
Limitations
Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instruments. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment, and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments.
Valuation methods for instruments measured at fair value on a recurring basis
The following table represents the Company’s financial instruments that are measured at fair value on a recurring basis at March 31, 2012 and December 31, 2011, allocated to the appropriate fair value hierarchy:
| (Dollars in thousands) | As of March 31, 2012 | |||||||||||||||
| Fair value hierarchy | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Assets: | ||||||||||||||||
| Available-for-sale securities: | ||||||||||||||||
| U. S. federal agency obligations | $ | 8,300 | $ | - | $ | 8,300 | $ | - | ||||||||
| Municipal obligations, tax exempt | 72,263 | - | 72,263 | - | ||||||||||||
| Municipal obligations, taxable | 25,600 | - | 25,600 | - | ||||||||||||
| Mortgage-backed securities | 104,340 | - | 104,340 | - | ||||||||||||
| Common stocks | 861 | 861 | - | - | ||||||||||||
| Pooled trust preferred securities | 436 | - | - | 436 | ||||||||||||
| Certificates of deposit | 5,553 | - | 5,553 | - | ||||||||||||
| Derivative financial instruments | $ | 352 | $ | - | $ | 352 | $ | - | ||||||||
| As of December 31, 2011 | ||||||||||||||||
| Fair value hierarchy | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| Assets: | ||||||||||||||||
| Available-for-sale securities: | ||||||||||||||||
| U. S. federal agency obligations | $ | 9,164 | $ | - | $ | 9,164 | $ | - | ||||||||
| Municipal obligations, tax exempt | 69,629 | - | 69,629 | - | ||||||||||||
| Municipal obligations, taxable | 19,135 | - | 19,135 | - | ||||||||||||
| Mortgage-backed securities | 94,472 | - | 94,472 | - | ||||||||||||
| Common stocks | 819 | 819 | - | - | ||||||||||||
| Pooled trust preferred securities | 405 | - | - | 405 | ||||||||||||
| Certificates of deposit | 4,590 | - | 4,590 | - | ||||||||||||
| Derivative financial instruments | $ | 255 | $ | - | $ | 255 | $ | - | ||||||||
The following table reconciles the changes in the Company’s Level 3 financial instruments during the first three months of 2012:
| (Dollars in thousands) | ||||
| Available-for | ||||
| sale-securities | ||||
| Level 3 asset fair value at December 31, 2011 | $ | 405 | ||
| Payments applied to reduce carrying value | (6 | ) | ||
| Total (losses) gains: | ||||
| Included in earnings | (63 | ) | ||
| Included in other comprehensive income | 100 | |||
| Level 3 asset fair value at March 31, 2012 | $ | 436 | ||
Changes in the fair value of available-for-sale securities are included in other comprehensive income to the extent the changes are not considered other-than-temporary impairments. Other-than-temporary impairment tests are performed on a quarterly basis and any decline in the fair value of an individual security below its cost that is deemed to be other-than-temporary results in a write-down of that security’s cost basis.
Valuation methods for instruments measured at fair value on a nonrecurring basis
The Company does not value its loan portfolio at fair value, however adjustments are recorded on certain loans to reflect the impaired value on the underlying collateral. Collateral values are reviewed on a loan-by-loan basis through independent appraisals. Appraised values may be discounted based on management’s historical knowledge, changes in market conditions and/or management’s expertise and knowledge of the client and the client’s business. Because many of these inputs are unobservable, the valuations are classified as Level 3. The carrying value of the Company’s impaired loans was $3.0 million at March 31, 2012 and $2.5 million at December 31, 2011, with allocated allowances of $193,000 and $205,000, respectively.
The Company’s measure of its goodwill is based on the Company’s market capitalization with appropriate control premiums and valuation multiples as compared to recent similar financial industry acquisition multiples to estimate the fair value of the Company’s single reporting unit. The fair value measurements are classified as Level 3. Core deposit intangibles are recognized at the time core deposits are acquired, using valuation techniques which calculate the present value of the estimated net cost savings relative to the Company’s alternative costs of funds over the expected remaining economic life of the deposits. Subsequent evaluations are made when facts or circumstances indicate potential impairment may have occurred. The models incorporate market discount rates, estimated average core deposit lives and alternative funding rates. The fair value measurements are classified as Level 3.
Real estate owned includes assets acquired through, or in lieu of, foreclosure and land previously acquired for expansion. Real estate owned is initially recorded at the fair value of the collateral less estimated selling costs. Subsequent valuations are updated periodically and are based upon independent appraisals, third party price opinions or internal pricing models and are classified as Level 3.
The following table represents the Company’s financial instruments that are measured at fair value on a non-recurring basis as of March 31, 2012 and December 31, 2011 allocated to the appropriate fair value hierarchy:
| (Dollars in thousands) | As of March 31, 2012 | |||||||||||||||||||
| Fair value hierarchy | Total | |||||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | losses | ||||||||||||||||
| Assets: | ||||||||||||||||||||
| Impaired loans | $ | 2,819 | $ | - | $ | - | $ | 2,819 | $ | (6 | ) | |||||||||
| Loans held for sale | 10,244 | - | 10,244 | - | (28 | ) | ||||||||||||||
| Mortgage servicing rights | 1,467 | - | - | 1,467 | - | |||||||||||||||
| Real estate owned | $ | 2,283 | $ | - | $ | - | $ | 2,283 | $ | - | ||||||||||
| (Dollars in thousands) | As of December 31 ,2011 | |||||||||||||||||||
| Fair value hierarchy | Total | |||||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | losses | ||||||||||||||||
| Assets: | ||||||||||||||||||||
| Impaired loans | $ | 2,285 | $ | - | $ | - | $ | 2,285 | $ | (112 | ) | |||||||||
| Loans held for sale | 9,846 | - | 9,846 | - | - | |||||||||||||||
| Mortgage servicing rights | 1,319 | - | - | 1,319 | - | |||||||||||||||
| Real estate owned | $ | 2,264 | $ | - | $ | - | $ | 2,264 | $ | (517 | ) | |||||||||
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| 8. | Impact of Recent Accounting Pronouncements |
In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”). The amendments in ASU No. 2011-04 result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRS. Consequently, the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. The amendments in ASU No. 2011-04 are effective for interim and annual periods beginning after December 15, 2011. Adoption of ASU 2011-04 did not have a significant impact on the Company’s consolidated financial statements.
In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. ASU 2011-05 requires that all nonowner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. The new guidance is effective for interim and annual periods beginning after December 15, 2011 with early adoption permitted. Adoption of ASU 2011-05 did not have a significant impact on the Company’s consolidated financial statements.
In September 2011, the FASB issued ASU No. 2011-08, Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment. ASU 2011-08 allows the use of qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amounts as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The new guidance is effective for annual and interim goodwill impairment tests beginning after December 15, 2011 with early adoption permitted. Adoption of ASU 2011-08 is not expected to have a significant impact on the Company’s consolidated financial statements.
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| 9. | Subsequent Events |
The Company announced the completion of the acquisition, by its wholly-owned subsidiary, Landmark National Bank, of The Wellsville Bank from Wellsville Bancshares, Inc., effective April 1, 2012. The purchase price consisted of cash of $3.7 million. The acquisition was effected through the merger of The Wellsville Bank with and into Landmark National Bank. As of March 31, 2012, The Wellsville Bank’s assets and liabilities consisted primarily of investments of $14.2 million, loans of $14.8 million and deposits of $34.9 million. Based on preliminary estimates of the fair values of the net assets acquired, goodwill is expected to be less than $500,000. Such fair values will be finalized prior to year end. The acquisition adds one additional branch, located in Wellsville, Kansas, to Landmark’s existing branch network, giving Landmark a total of 22 offices in 17 communities across Kansas.