UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
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THE SECURITIES AND EXCHANGE ACT OF 1934
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For fiscal year ended December 31, 2011
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES AND EXCHANGE ACT OF 1934
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For transition period from __________ to
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Commission File Number 0-33203
LANDMARK BANCORP, INC.
(Exact name of Registrant as specified in
its charter)
Delaware
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43-1930755
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification Number)
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701 Poyntz Avenue, Manhattan, Kansas 66505
(Address of principal executive offices) (Zip
Code)
(785) 565-2000
(Registrant’s telephone number, including
area code)
Securities registered pursuant to Section 12(b) of the Act:
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Common Stock, par value $0.01 per share
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Securities registered pursuant to Section 12(g) of the Act:
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Preferred Share Purchase Rights
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Indicate by check mark
if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
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No
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Indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes
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No
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Indicate by check mark
whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities and 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
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No
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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 during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files).
Yes
x
No
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Indicate by check mark
if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K.
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Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.
See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company”
in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer
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Accelerated
filer
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Non-accelerated filer
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(do not check if a smaller reporting company) Smaller reporting company
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Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
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No
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The aggregate market
value of the voting and non-voting common equity held by non-affiliates
of the registrant, based on
the last sales price quoted on the Nasdaq Global Market on June 30, 2011, the last business day of the registrant’s most
recently completed second fiscal quarter, was approximately $30.7 million.
At March 14, 2012, the total number of shares
of common stock outstanding was 2,782,826.
Portions of the Proxy
Statement for the Annual Meeting of Stockholders to be held May 23, 2012, are incorporated by reference in Part III hereof, to
the extent indicated herein.
LANDMARK BANCORP, INC.
2011 Form 10-K Annual Report
Table of Contents
ITEM 1.
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BUSINESS
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3
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ITEM 1A.
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RISK FACTORS
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24
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ITEM 1B.
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UNRESOLVED STAFF COMMENTS
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34
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ITEM 2.
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PROPERTIES
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34
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ITEM 3.
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LEGAL PROCEEDINGS
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34
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ITEM 4.
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MINE SAFETY DISCLOSURES
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34
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ITEM 5.
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MARKET FOR THE COMPANY’S COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
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35
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ITEM 6.
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SELECTED FINANCIAL DATA
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36
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ITEM 7.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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37
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ITEM 7A.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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50
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ITEM 8.
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FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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53
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ITEM 9.
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CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
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90
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ITEM 9A.
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CONTROLS AND PROCEDURES
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90
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ITEM 9B.
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OTHER INFORMATION
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90
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ITEM 10.
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DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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91
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ITEM 11.
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EXECUTIVE COMPENSATION
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91
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ITEM 12.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
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92
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ITEM 13.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
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92
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ITEM 14.
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PRINCIPAL ACCOUNTANT FEES AND SERVICES
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92
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ITEM 15.
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EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
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93
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SIGNATURES
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94
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PART I.
ITEM 1. BUSINESS
The Company
Landmark Bancorp, Inc.
(the “Company”) is a bank holding company incorporated under the laws of the State of Delaware in 2001. Currently,
the Company’s business consists solely of the ownership of Landmark National Bank (the “Bank”), which is a wholly-owned
subsidiary of the Company. As of December 31, 2011, the Company had $598.2 million in consolidated total assets.
The Company is headquartered
in Manhattan, Kansas and has expanded its geographic presence through past acquisitions. In May 2009, the Company acquired an additional
branch in Lawrence, Kansas. Effective January 1, 2006, the Company completed the acquisition of First Manhattan Bancorporation,
Inc. (“FMB”), the holding company for First Savings Bank F.S.B. In conjunction with the transaction, FMB was merged
into the Bank (the “2006 Acquisition”). In August 2005, the Company acquired 2 branches in Great Bend, Kansas. Effective
April 1, 2004, the Company acquired First Kansas Financial Corporation (“First Kansas”), the holding company for First
Kansas Federal Savings Association (“First Kansas Federal”). In conjunction with the transaction, First Kansas was
merged into the Bank (the “2004 Acquisition”). In October 2001, Landmark Bancshares, Inc., the holding company for
Landmark Federal Savings Bank, and MNB Bancshares, Inc., the holding company for Security National Bank, completed their merger
into Landmark Merger Company, which immediately changed its name to Landmark Bancorp, Inc. (the “2001 Merger”). In
addition, Landmark Federal Savings Bank merged with Security National Bank and the resulting bank changed its name to Landmark
National Bank.
Pursuant to the 2006
Acquisition, the 2004 Acquisition and the 2001 Merger, the Bank succeeded to all of the assets and liabilities of FMB, First Savings
Bank F.S.B., First Kansas, First Kansas Federal, Landmark Federal Savings Bank and Security National Bank. The Bank is principally
engaged in the business of attracting deposits from the general public and using such deposits, together with borrowings and other
funds, to originate one-to-four family residential real estate, construction and land, commercial real estate, commercial, agriculture,
municipal and consumer loans in the Bank’s principal market areas, as described below. The Bank has continued to focus on
originating greater numbers and amounts of commercial, commercial real estate and agricultural loans; however, generally weak loan
demand over the past few years has made it difficult to grow these loan portfolios significantly. Additionally, greater emphasis
has been placed on diversification of the deposit mix through expansion of core deposit accounts such as checking, savings, and
money market accounts. The Bank has also diversified its geographical markets as a result of the 2006 Acquisition, the 2004 Acquisition
and the 2001 Merger. The Company’s main office is in Manhattan, Kansas with branch offices in central, eastern and southwestern
Kansas. The Company continues to explore opportunities to expand its banking markets through mergers and acquisitions, as well
as branching opportunities. For example, in January 2012, the Company announced an agreement to acquire a bank with approximately
$35 million in assets in Wellsville, Kansas, completion of which is subject to customary closing conditions and is expected to
occur in the second quarter of 2012.
The results of operations
of the Bank and the Company are dependent primarily upon net interest income and, to a lesser extent, upon other income derived
from loan servicing fees and customer deposit services. Additional expenses of the Bank include general and administrative expenses
such as salaries, employee benefits, federal deposit insurance premiums, data processing, occupancy and related expenses.
Deposits of the Bank
are insured by the Deposit Insurance Fund (the “DIF”) of the Federal Deposit Insurance Corporation (the “FDIC”)
up to the maximum amount allowable under applicable federal law and regulation. The Bank is regulated by the Office of the Comptroller
of the Currency (the “OCC”), as the chartering authority for national banks, and the FDIC, as the administrator of
the DIF. The Bank is also subject to regulation by the Board of Governors of the Federal Reserve System with respect to reserves
required to be maintained against deposits and certain other matters. The Bank is a member of the Federal Reserve Bank of Kansas
City and the Federal Home Loan Bank (the “FHLB”) of Topeka.
The Company’s
executive office and the Bank’s main office are located at 701 Poyntz Avenue, Manhattan, Kansas 66502. The telephone number
is (785) 565-2000.
Market Areas
The Bank’s primary
deposit gathering and lending markets are geographically diversified with locations in eastern, central, and southwestern Kansas.
The primary industries within these respective markets are also diverse and dependent upon a wide array of industry and governmental
activity for their economic base. The Bank’s markets have not been immune to the effects of the challenging economic conditions
of recent years. To varying degrees, the Bank’s markets generally have experienced either flat or declining commercial and
residential real estate values, as well as depressed consumer confidence, historically heightened unemployment levels and muted
consumer spending. Even though the geographic markets in which the Company operates have been impacted by the economic conditions
in recent years, the effect has not been as severe as those experienced in some areas of the U.S. A brief description of these
three geographic areas and the communities which the Bank serves within these areas is summarized below.
Shawnee, Douglas, Miami,
Osage, and Bourbon counties are located in eastern Kansas and encompass the Bank’s locations in Topeka, Auburn, Lawrence,
Paola, Louisburg, Osawatomie, Osage City, and Fort Scott. Shawnee County’s market, which encompasses the Bank’s locations
in Topeka and Auburn, is strongly influenced by the State of Kansas, City of Topeka, two regional hospitals and several major private
firms and public institutions. The Bank’s Lawrence locations are located in Douglas County and are significantly impacted
by the University of Kansas, the largest university in Kansas, in addition to several private industries and businesses in the
community. The communities of Paola, Louisburg, and Osawatomie, located within Miami County, are influenced by the Kansas City
market, resulting in housing growth and small private industries and business. Additionally, the Osawatomie State Hospital is a
major government employer within the county. Bourbon and Osage Counties are primarily agricultural with small private industries
and business firms, while Bourbon County is also influenced by a regional hospital and Fort Scott Community College.
Bank locations within
central Kansas include the communities of Manhattan within Riley County, Wamego within Pottawatomie County, Junction City within
Geary County, Great Bend and Hoisington within Barton County, and LaCrosse within Rush County. The Riley, Pottawatomie and Geary
County economies are significantly impacted by employment at Fort Riley Military Base and Kansas State University, the second largest
university in Kansas, which is located in Manhattan. Several private industries and businesses are also located within these counties.
Agriculture, oil, and gas are the predominant industries in Barton County. Additionally, manufacturing and service industries also
play a key role within this central Kansas market. LaCrosse, located within Rush County, is primarily an agricultural community
with an emphasis on crop and livestock production.
The Bank’s southwestern
Kansas branches are located in the cities of Dodge City and Garden City, which are located in Ford County and Finney County, respectively.
The counties of Ford and Finney were founded on agriculture, which continues to play a major role in the economy. Predominant activities
involve crop production, feed lot operations, and food processing. Dodge City is known as the “Cowboy Capital of the World”
and maintains a significant tourism industry. Both Dodge City and Garden City are recognized as regional commercial centers within
the state with small business, manufacturing, retail, and service industries having a significant influence upon the local economies.
Additionally, each community has a community college which also attracts a number of individuals from the surrounding area to live
within the community to participate in educational programs and pursue a degree.
Competition
The Company faces strong
competition both in attracting deposits and making real estate, commercial and other loans. Its most direct competition for deposits
comes from commercial banks and other savings institutions located in its principal market areas, including many large financial
institutions which have greater financial and marketing resources available to them. The ability of the Company to attract and
retain deposits generally depends on its ability to provide a rate of return, liquidity and risk comparable to that offered by
competing investment opportunities. The Company competes for loans principally through the interest rates and loan fees it charges
and the efficiency and quality of services it provides borrowers.
Employees
At December 31, 2011,
the Bank had a total of 216 employees (194 full time equivalent employees). The Company has no employees, although the Company
is a party to several employment agreements with executives of the Bank. Employees are provided with a comprehensive benefits program,
including basic and major medical insurance, life and disability insurance, sick leave, and a 401(k) profit sharing plan. Employees
are not represented by any union or collective bargaining group and the Bank considers its employee relations to be good.
Lending Activities
General
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The Bank strives to provide a full range of financial products and services to small- and medium-sized businesses and to consumers
to each market area it serves. The Bank targets owner-operated businesses and utilizes Small Business Administration and Farm Services
Administration lending as a part of its product mix. Each market has an established loan committee which has authority to approve
credits, within established guidelines. Concentrations in excess of those guidelines must be approved by either a corporate loan
committee comprised of the Bank’s Chief Executive Officer, the Credit Risk Manager, and other senior commercial lenders or
the Bank’s board of directors. When lending to an entity, the Bank generally obtains a guaranty from the principals of the
entity. The loan mix is subject to the discretion of the Bank’s board of directors and the demands of the local marketplace.
The following is a
brief description of each major category of the Bank’s lending activity.
One-to-four Family
Residential Real Estate Lending
. The Bank originates one-to-four family residential real estate loans with both fixed and
variable rates. One-to-four family residential real estate loans are priced and originated following global underwriting standards
that are consistent with guidelines established by the major buyers in the secondary market. Generally, residential real estate
loans retained in the Bank’s loan portfolio have fixed or variable rates with adjustment periods of five years or less and
amortization periods of typically either 15 or 30 years. A significant portion of these loans prepay prior to maturity. The Bank
has no potential negative amortization loans. While the origination of fixed-rate, one-to-four family residential loans continues
to be a key component of our business, the majority of these loans are sold in the secondary market. One-to-four family residential
real estate loans that exceed 80% of the appraised value of the real estate generally are required, by policy, to be supported
by private mortgage insurance, although on occasion the Bank will retain non-conforming residential loans to known customers at
premium pricing. While the Bank does not intend to increase its one-to-four family residential real estate loan portfolio, the
Bank slowed the runoff of the portfolio by retaining a larger percentage of new originations during 2011 to offset weak commercial
loan demand; however, most of the loans continued to be sold.
Construction
and Land Lending.
Loans in this category include loans to facilitate the development of both residential and commercial
real estate. Construction and land loans generally have terms of less than 18 months and the Bank will retain a security interest
in the borrower’s real estate. Construction loans are generally limited, by policy, to 80% of the appraised value of the
property. Land loans are generally limited, by policy, to 65% of the appraised value of the property. The Bank has been reducing
its exposure to construction and land loans over the past few years.
Commercial Real
Estate Lending
. Commercial real estate loans, including multi family loans, represent the largest class of loans of the
Bank. Commercial and multi-family real estate loans generally have amortization periods of 15 or 20 years. Commercial real estate
and multi-family loans are generally limited, by policy, to 80% of the appraised value of the property. Commercial real estate
loans are also supported by an analysis demonstrating the borrower’s ability to repay. The Bank continues to focus on generating
additional commercial real estate loan relationships, however this has been difficult over the past few years as a result of flat
or declining commercial real estate values.
Commercial Lending
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Loans in this category include loans to service, retail, wholesale and light manufacturing businesses. Commercial loans are made
based on the financial strength and repayment ability of the borrower, as well as the collateral securing the loans. The Bank targets
owner-operated businesses as its customers and makes lending decisions based upon a cash flow analysis of the borrower as well
as a collateral analysis. Accounts receivable loans and loans for inventory purchases are generally on a one-year renewable term
and loans for equipment generally have a term of seven years or less. The Bank generally takes a blanket security interest in all
assets of the borrower. Equipment loans are generally limited to 75% of the cost or appraised value of the equipment. Inventory
loans are generally limited to 50% of the value of the inventory, and accounts receivable loans are generally limited to 75% of
a predetermined eligible base. Although the Bank’s commercial loan portfolio declined slightly in 2011, the Bank continues
to focus on generating additional commercial loan relationships.
Municipal Lending.
Loans to municipalities are generally related to equipment leasing or general fund loans. Terms are generally limited to 5 years.
Equipment leases are generally made for the purchase of municipal assets and are secured by the leased asset. The Bank is no longer
active in the origination of municipal leases; however the Bank may still originate loans or leases for municipalities in its market
area.
Agriculture Lending.
Agricultural real estate loans generally have amortization periods of 20 years or less, during which time the Bank retains a security
interest in the borrower’s real estate. The Bank also provides short-term credit for operating loans and intermediate-term
loans for farm product, livestock and machinery purchases and other agricultural improvements. Farm product loans generally have
a one-year term, and machinery, equipment and breeding livestock loans generally have five to seven year terms. Extension of credit
is based upon the borrower’s ability to repay, as well as the existence of federal guarantees and crop insurance coverage.
These loans are generally secured by a blanket lien on livestock, equipment, feed, hay, grain and growing crops. Equipment and
breeding livestock loans are generally limited to 75% of appraised value. The Bank continues to focus on generating additional
agriculture loan relationships.
Consumer and
Other Lending
. Loans classified as consumer and other loans include automobile, boat, home improvement and home equity
loans, the latter two secured principally through second mortgages. With the exception of home improvement loans and home equity
loans, the Bank generally takes a purchase money security interest in collateral for which it provides the original financing.
The terms of the loans typically range from one to five years, depending upon the use of the proceeds, and generally range from
75% to 90% of the value of the collateral. The majority of these loans are installment loans with fixed interest rates. Home improvement
and home equity loans are generally secured by a second mortgage on the borrower’s personal residence and, when combined
with the first mortgage, limited to 80% of the value of the property unless further protected by private mortgage insurance. Home
improvement loans are generally made for terms of five to seven years with fixed interest rates. Home equity loans are generally
made for terms of ten years on a revolving basis with the interest rates adjusting monthly tied to the national prime interest
rate. The Bank has experienced weak consumer loan demand and does not expect consumer loan demand to increase until economic conditions
improve further and the unemployment rate declines.
Loan Origination and Processing
Loan originations are
derived from a number of sources. Residential loan originations result from real estate broker referrals, direct solicitation by
the Bank’s loan officers, present depositors and borrowers, referrals from builders and attorneys, walk-in customers and,
in some instances, other lenders. Consumer and commercial real estate loan originations generally emanate from many of the same
sources. Residential loan applications are underwritten and closed based upon standards which generally meet secondary market guidelines.
The average residential real estate loan is less than $500,000.
The loan underwriting
procedures followed by the Bank conform to regulatory specifications and are designed to assess both the borrower’s ability
to make principal and interest payments and the value of any assets or property serving as collateral for the loan. Generally,
as part of the process, a loan officer meets with each applicant to obtain the appropriate employment and financial information
as well as any other required loan information. The Bank then obtains reports with respect to the borrower’s credit record,
and orders, on real estate loans, and reviews an appraisal of any collateral for the loan (prepared for the Bank through an independent
appraiser).
Loan applicants are
notified promptly of the decision of the Bank. Prior to closing any long-term loan, the borrower must provide proof of fire and
casualty insurance on the property serving as collateral, and such insurance must be maintained during the full term of the loan.
Title insurance is required on loans collateralized by real property.
The Bank is focusing
on the generation of commercial and commercial real estate loans to grow and diversify the loan portfolio, however the difficult
economic environment has materially impacted commercial and commercial real estate loan origination as a result of decreased loan
demand that meets the Bank’s credit standards. In several of the Bank’s markets there is an oversupply of newly constructed,
speculative residential real estate properties and developed vacant lots. As a result of these issues the Bank has severely curtailed
land development and construction lending and does not expect this type of lending to be resumed until the economic outlook improves
and the supply and demand of residential housing and vacant developed lots is in balance. Economic conditions in recent years have
also caused the Bank to increase underwriting requirements on other types of loans to insure borrowers can meet repayment requirements.
SUPERVISION AND REGULATION
General
Financial institutions,
their holding companies and their affiliates are extensively regulated under federal and state law. As a result, the growth and
earnings performance of the Company may be affected not only by management decisions and general economic conditions, but also
by requirements of federal and state statutes and by the regulations and policies of various bank regulatory authorities, including
the OCC, the Federal Reserve, the FDIC, and the newly-created Bureau of Consumer Financial Protection (the “Bureau”).
Furthermore, taxation laws administered by the Internal Revenue Service and state taxing authorities, accounting rules developed
by the Financial Accounting Standards Board (the “FASB”) and securities laws administered by the SEC and state securities
authorities have an impact on the business of the Company. The effect of these statutes, regulations, regulatory policies and accounting
rules are significant to the operations and results of the Company and Bank, and the nature and extent of future legislative, regulatory
or other changes affecting financial institutions are impossible to predict with any certainty.
Federal and state banking
laws impose a comprehensive system of supervision, regulation and enforcement on the operations of financial institutions, their
holding companies and affiliates that is intended primarily for the protection of the FDIC-insured deposits and depositors of banks,
rather than stockholders. These federal and state laws, and the regulations of the bank regulatory authorities issued under them,
affect, among other things, the scope of business, the kinds and amounts of investments banks may make, reserve requirements, capital
levels relative to operations, the nature and amount of collateral for loans, the establishment of branches, the ability to merge,
consolidate and acquire, dealings with insiders and affiliates and the payment of dividends. In addition, turmoil in the credit
markets in recent years prompted the enactment of unprecedented legislation that has allowed the U.S. Treasury Department (“Treasury”)
to make equity capital available to qualifying financial institutions to help restore confidence and stability in the U.S. financial
markets, which imposes additional requirements on institutions in which Treasury invests.
In addition, the Company
and Bank are subject to regular examination by their respective regulatory authorities, which results in examination reports and
ratings (that are not publicly available) that can impact the conduct and growth of business. These examinations consider not only
compliance with applicable laws and regulations, but also capital levels, asset quality and risk, management ability and performance,
earnings, liquidity, and various other factors. The regulatory agencies generally have broad discretion to impose restrictions
and limitations on the operations of a regulated entity where the agencies determine, among other things, that such operations
are unsafe or unsound, fail to comply with applicable law or are otherwise inconsistent with laws and regulations or with the supervisory
policies of these agencies.
The following is a
summary of the material elements of the supervisory and regulatory framework applicable to the Company and the Bank. It does not
describe all of the statutes, regulations and regulatory policies that apply, nor does it restate all of the requirements of those
that are described. The descriptions are qualified in their entirety by reference to the particular statutory or regulatory provision.
Financial Regulatory Reform
On July 21, 2010, President
Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) into law. The Dodd-Frank
Act represents a sweeping reform of the supervisory and regulatory framework applicable to financial institutions and capital markets
in the United States, certain aspects of which are described below in more detail. The Dodd-Frank Act creates new federal governmental
entities responsible for overseeing different aspects of the U.S. financial services industry, including identifying emerging systemic
risks. It also shifts certain authorities and responsibilities among federal financial institution regulators, including the supervision
of holding company affiliates and the regulation of consumer financial services and products. In particular, and among other things,
the Dodd-Frank Act: creates a Bureau of Consumer Financial Protection authorized to regulate providers of consumer credit, savings,
payment and other consumer financial products and services; narrows the scope of federal preemption of state consumer laws enjoyed
by national banks and federal savings associations and expands the authority of state attorneys general to bring actions to enforce
federal consumer protection legislation; imposes more stringent capital requirements on bank holding companies and subjects certain
activities, including interstate mergers and acquisitions, to heightened capital conditions; significantly expands underwriting
requirements applicable to loans secured by 1-4 family residential real property; restricts the interchange fees payable on debit
card transactions for issuers with $10 billion in assets or greater; requires the originator of a securitized loan, or the sponsor
of a securitization, to retain at least 5% of the credit risk of securitized exposures unless the underlying exposures are qualified
residential mortgages or meet certain underwriting standards to be determined by regulation; creates a Financial Stability Oversight
Council as part of a regulatory structure for identifying emerging systemic risks and improving interagency cooperation; provides
for enhanced regulation of advisers to private funds and of the derivatives markets; enhances oversight of credit rating agencies;
and prohibits banking agency requirements tied to credit ratings.
Numerous
provisions of the Dodd-Frank Act are required to be implemented through rulemaking by the appropriate federal regulatory agencies.
Some of the required regulations have been issued and some have been released for public comment, but many have yet to be released
in any form. Furthermore, while the reforms primarily target systemically important financial service providers, their influence
is expected to filter down in varying degrees to smaller institutions over time. Management of the Company and Bank will continue
to evaluate the effect of the changes; however, in many respects, the ultimate impact of the Dodd-Frank Act will not be fully known
for years, and
n
o current assurance may be given that the Dodd-Frank Act, or any other new legislative
changes, will not have a negative impact on the results of operations and financial condition of the Company and the Bank.
The Increasing Importance of Capital
While capital has historically
been one of the key measures of the financial health of both holding companies and depository institutions, its role is becoming
fundamentally more important in the wake of the financial crisis. Not only will capital requirements increase, but the type of
instruments that constitute capital will also change, and, as a result of the Dodd-Frank Act, after a phase-in period, bank holding
companies will have to hold capital under rules as stringent as those for insured depository institutions. Moreover, the actions
of the international Basel Committee on Banking Supervision, a committee of central banks and bank supervisors, to reassess the
nature and uses of capital in connection with an initiative called “Basel III,” discussed below, will have a significant
impact on the capital requirements applicable to U.S. bank holding companies and depository institutions.
Required Capital
Levels
.
The Dodd-Frank Act mandates the Federal Reserve to establish minimum capital levels for bank holding companies
on a consolidated basis that are as stringent as those required for insured depository institutions. The components of Tier 1 capital
will be restricted to capital instruments that are currently considered to be Tier 1 capital for insured depository institutions.
As a result, the proceeds of trust preferred securities will be excluded from Tier 1 capital unless such securities were issued
prior to May 19, 2010 by bank holding companies with less than $15 billion of assets. As the Company has assets of less than
$15 billion, it will be able to maintain its trust preferred proceeds as capital but it will have to comply with new capital mandates
in other respects, and it will not be able to raise Tier 1 capital in the future through the issuance of trust preferred securities.
Under current federal
regulations, the Bank is subject to, and, after a phase-in period, the Company will be subject to, the following minimum capital
standards: (i) a leverage requirement consisting of a minimum ratio of Tier 1 capital to total assets of 3% for the most highly-rated
banks with a minimum requirement of at least 4% for all others; and (ii) a risk-based capital requirement consisting of a minimum
ratio of total capital to total risk-weighted assets of 8% and a minimum ratio of Tier 1 capital to total risk-weighted assets
of 4%. For this purpose, Tier 1 capital consists primarily of common stock, noncumulative perpetual preferred stock and related
surplus less intangible assets (other than certain loan servicing rights and purchased credit card relationships). Total capital
consists primarily of Tier 1 capital plus Tier 2 capital, which includes other nonpermanent capital items such as certain other
debt and equity instruments that do not qualify as Tier 1 capital and a portion of the Bank’s allowance for loan and lease
losses.
The capital requirements
described above are minimum requirements. Federal law and regulations provide various incentives for banking organizations to maintain
regulatory capital at levels in excess of minimum regulatory requirements. For example, a banking organization that is “well-capitalized”
may qualify for exemptions from prior notice or application requirements otherwise applicable to certain types of activities, may
qualify for expedited processing of other required notices or applications and may accept brokered deposits. Additionally, one
of the criteria that determines a bank holding company’s eligibility to operate as a financial holding company (see “—Acquisitions,
Activities and Changes in Control” below) is a requirement that all of its depository institution subsidiaries be “well-capitalized.”
Under the Dodd-Frank Act, that requirement is extended such that, as of July 21, 2011, bank holding companies, as well as their
depository institution subsidiaries, had to be well-capitalized in order to operate as financial holding companies. Under the capital
regulations of the Federal Reserve, in order to be “well-capitalized” a banking organization must maintain a ratio
of total capital to total risk-weighted assets of 10% or greater, a ratio of Tier 1 capital to total risk-weighted assets of 6%
or greater and a ratio of Tier 1 capital to total assets of 5% or greater.
Higher capital levels
may also be required if warranted by the particular circumstances or risk profiles of individual banking organizations. For example,
the Federal Reserve’s capital guidelines contemplate that additional capital may be required to take adequate account of,
among other things, interest rate risk, or the risks posed by concentrations of credit, nontraditional activities or securities
trading activities. Further, any banking organization experiencing or anticipating significant growth would be expected to maintain
capital ratios, including tangible capital positions (
i.e.
, Tier 1 capital less all intangible assets), well above the minimum
levels.
It is important to
note that certain provisions of the Dodd-Frank Act and Basel III, discussed below, will ultimately establish strengthened capital
standards for banks and bank holding companies, will require more capital to be held in the form of common stock and will disallow
certain funds from being included in a Tier 1 capital determination. Once fully implemented, these provisions may represent
regulatory capital requirements which are meaningfully more stringent than those outlined above.
Prompt Corrective
Action
.
A banking organization’s capital plays an important role in connection with regulatory enforcement as well.
Federal law provides the federal banking regulators with broad power to take prompt corrective action to resolve the problems of
undercapitalized institutions. The extent of the regulators’ powers depends on whether the institution in question is “adequately
capitalized,” “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized,”
in each case as defined by regulation. Depending upon the capital category to which an institution is assigned, the regulators’
corrective powers include: (i) requiring the institution to submit a capital restoration plan; (ii) limiting the institution’s
asset growth and restricting its activities; (iii) requiring the institution to issue additional capital stock (including additional
voting stock) or to be acquired; (iv) restricting transactions between the institution and its affiliates; (v) restricting the
interest rate the institution may pay on deposits; (vi) ordering a new election of directors of the institution; (vii) requiring
that senior executive officers or directors be dismissed; (viii) prohibiting the institution from accepting deposits from correspondent
banks; (ix) requiring the institution to divest certain subsidiaries; (x) prohibiting the payment of principal or interest on subordinated
debt; and (xi) ultimately, appointing a receiver for the institution.
As of December 31,
2011: (i) the Bank was not subject to a directive from the OCC to increase its capital to an amount in excess of the minimum regulatory
capital requirements; (ii) the Bank exceeded its minimum regulatory capital requirements under OCC capital adequacy guidelines;
and (iii) the Bank was “well-capitalized,” as defined by OCC regulations. As of December 31, 2011, the Company had
regulatory capital in excess of the Federal Reserve’s requirements and met the Dodd-Frank Act capital requirements.
Basel III
.
The current risk-based capital guidelines that apply to the Bank and will apply to the Company are based upon the 1988 capital
accord of the international Basel Committee on Banking Supervision, a committee of central banks and bank supervisors, as implemented
by the U.S. federal banking agencies on an interagency basis. In 2008, the banking agencies collaboratively began to phase-in
capital standards based on a second capital accord, referred to as “Basel II,” for large or “core” international
banks (generally defined for U.S. purposes as having total assets of $250 billion or more or consolidated foreign exposures of
$10 billion or more). Basel II emphasized internal assessment of credit, market and operational risk, as well as supervisory
assessment and market discipline in determining minimum capital requirements.
On September 12, 2010,
the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, announced agreement
to a strengthened set of capital requirements for banking organizations in the United States and around the world, known as Basel
III. The agreement is currently supported by the U.S. federal banking agencies. As agreed to, Basel III is intended
to be fully-phased in on a global basis on January 1, 2019. Basel III requires, among other things: (i) a new required ratio of
minimum common equity equal to 7% of total assets (4.5% plus a capital conservation buffer of 2.5%); (ii) an increase in the minimum
required amount of Tier 1 capital from the current level of 4% of total assets to 6% of total assets; (iii) an increase in the
minimum required amount of total capital, from the current level of 8% to 10.5% (including 2.5% attributable to the capital conservation
buffer). The purpose of the conservation buffer (to be phased in from January 2016 until January 1, 2019) is to ensure that banks
maintain a buffer of capital that can be used to absorb losses during periods of financial and economic stress. There will also
be a required countercyclical buffer to achieve the broader goal of protecting the banking sector from periods of excess aggregate
credit growth.
Pursuant to Basel III,
certain deductions and prudential filters, including minority interests in financial institutions, mortgage servicing rights and
deferred tax assets from timing differences, would be deducted in increasing percentages beginning January 1, 2014, and would be
fully deducted from common equity by January 1, 2018. Certain instruments that no longer qualify as Tier 1 capital, such
as trust preferred securities, also would be subject to phase-out over a 10-year period beginning January 1, 2013.
The Basel III agreement
calls for national jurisdictions to implement the new requirements beginning January 1, 2013. At that time, the U.S. federal
banking agencies, including the Federal Reserve and OCC, will be expected to have implemented appropriate changes to incorporate
the Basel III concepts into U.S. capital adequacy standards.
The Company
General.
The Company, as the sole stockholder of the Bank, is a bank holding company. As a bank holding company, the Company is registered
with, and is subject to regulation by, the Federal Reserve under the Bank Holding Company Act of 1956, as amended (the “BHCA”).
In accordance with Federal Reserve policy, and as now codified by the Dodd-Frank Act, the Company is legally obligated to act as
a source of financial strength to the Bank and to commit resources to support the Bank in circumstances where the Company might
not otherwise do so. Under the BHCA, the Company is subject to periodic examination by the Federal Reserve. The Company is required
to file with the Federal Reserve periodic reports of the Company’s operations and such additional information regarding the
Company and its subsidiaries as the Federal Reserve may require.
Acquisitions,
Activities and Change in Control
.
The primary purpose of a bank holding company is to control and manage banks.
The BHCA generally requires the prior approval of the Federal Reserve for any merger involving a bank holding company or any acquisition
by a bank holding company of another bank or bank holding company. Subject to certain conditions (including deposit concentration
limits established by the BHCA and the Dodd-Frank Act), the Federal Reserve may allow a bank holding company to acquire banks located
in any state of the United States. In approving interstate acquisitions, the Federal Reserve is required to give effect to applicable
state law limitations on the aggregate amount of deposits that may be held by the acquiring bank holding company and its insured
depository institution affiliates in the state in which the target bank is located (provided that those limits do not discriminate
against out-of-state depository institutions or their holding companies) and state laws that require that the target bank have
been in existence for a minimum period of time (not to exceed five years) before being acquired by an out-of-state bank holding
company. Furthermore, in accordance with the Dodd-Frank Act, as of July 21, 2011, bank holding companies must be well-capitalized
in order to effect interstate mergers or acquisitions. For a discussion of the capital requirements, see “—The Increasing
Importance of Capital” above.
The BHCA generally
prohibits the Company from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company
that is not a bank and from engaging in any business other than that of banking, managing and controlling banks or furnishing services
to banks and their subsidiaries. This general prohibition is subject to a number of exceptions. The principal exception allows
bank holding companies to engage in, and to own shares of companies engaged in, certain businesses found by the Federal Reserve
prior to November 11, 1999 to be “so closely related to banking ... as to be a proper incident thereto.” This authority
would permit the Company to engage in a variety of banking-related businesses, including the ownership and operation of a savings
association, or any entity engaged in consumer finance, equipment leasing, the operation of a computer service bureau (including
software development), and mortgage banking and brokerage. The BHCA generally does not place territorial restrictions on the domestic
activities of nonbank subsidiaries of bank holding companies.
Additionally, bank
holding companies that meet certain eligibility requirements prescribed by the BHCA and elect to operate as financial holding companies
may engage in, or own shares in companies engaged in, a wider range of nonbanking activities, including securities and insurance
underwriting and sales, merchant banking and any other activity that the Federal Reserve, in consultation with the Secretary of
the Treasury, determines by regulation or order is financial in nature or incidental to any such financial activity or that the
Federal Reserve determines by order to be complementary to any such financial activity and does not pose a substantial risk to
the safety or soundness of depository institutions or the financial system generally. As of the date of this filing, the Company
has not applied for approval to operate as a financial holding company.
Federal law also prohibits
any person or company from acquiring “control” of an FDIC-insured depository institution or its holding company without
prior notice to the appropriate federal bank regulator. “Control” is conclusively presumed to exist upon the acquisition
of 25% or more of the outstanding voting securities of a bank or bank holding company, but may arise under certain circumstances
between 10% and 24.99% ownership.
Capital Requirements.
Bank holding companies are required to maintain minimum levels of capital in accordance with Federal Reserve capital adequacy guidelines,
as affected by the Dodd-Frank Act and Basel III. For a discussion of capital requirements, see “—The Increasing Importance
of Capital” above.
Emergency Economic
Stabilization Act of 2008.
Events in the U.S. and global financial markets over the past several years, including deterioration
of the worldwide credit markets, created significant challenges for financial institutions throughout the country. In response
to this crisis affecting the U.S. banking system and financial markets, on October 3, 2008, the U.S. Congress passed, and the President
signed into law, the Emergency Economic Stabilization Act of 2008 (the “EESA”). The EESA authorized the Secretary of
the Treasury to implement various temporary emergency programs designed to strengthen the capital positions of financial institutions
and stimulate the availability of credit within the U.S. financial system. Financial institutions participating in certain of the
programs established under the EESA are required to adopt Treasury’s standards for executive compensation and corporate governance.
The TARP Capital
Purchase Program
.
On October 14, 2008, Treasury announced that it would provide Tier 1 capital (in the form of perpetual
preferred stock) to eligible financial institutions. This program, known as the TARP Capital Purchase Program (the “CPP”),
allocated $250 billion from the $700 billion authorized by the EESA to Treasury for the purchase of senior preferred shares from
qualifying financial institutions (the “CPP Preferred Stock”). Under the program, eligible institutions were able to
sell equity interests to the Treasury in amounts equal to between 1% and 3% of the institution’s risk-weighted assets. The
Preferred Stock is nonvoting and pays dividends at the rate of 5% per annum for the first five years and thereafter at a rate of
9% per annum. In conjunction with the purchase of the CPP Preferred Stock, the Treasury received warrants to purchase common stock
from the participating public institutions with an aggregate market price equal to 15% of the preferred stock investment. Participating
financial institutions were required to adopt Treasury’s standards for executive compensation and corporate governance for
the period during which Treasury holds equity issued under the CPP. The Company elected not to participate in the CPP.
Dividends.
The Company’s ability to pay dividends to its stockholders may be affected by both general corporate law considerations
and policies of the Federal Reserve applicable to bank holding companies. As a Delaware corporation, the Company is subject to
the limitations of the Delaware General Corporation Law (the “DGCL”). The DGCL allows the Company to pay dividends
only out of its surplus (as defined and computed in accordance with the provisions of the DGCL) or if the Company has no such surplus,
out of its net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. Additionally, policies
of the Federal Reserve caution that a bank holding company should not pay cash dividends unless its net income available to common
stockholders over the past year has been sufficient to fully fund the dividends and the prospective rate of earnings retention
appears consistent with its capital needs, asset quality, and overall financial condition. The Federal Reserve also possesses enforcement
powers over bank holding companies and their nonbank subsidiaries to prevent or remedy actions that represent unsafe or unsound
practices or violations of applicable statutes and regulations. Among these powers is the ability to proscribe the payment of dividends
by banks and bank holding companies.
Federal Securities
Regulation.
The Company’s common stock is registered with the SEC under the Securities Act of 1933, as amended, and
the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Consequently, the Company is subject to
the information, proxy solicitation, insider trading and other restrictions and requirements of the SEC under the Exchange Act.
Corporate Governance
.
The Dodd-Frank Act addresses many investor protection, corporate governance and executive compensation matters that will affect
most U.S. publicly traded companies. The Dodd-Frank Act will increase stockholder influence over boards of directors by requiring
companies to give stockholders a nonbinding vote on executive compensation and so-called “golden parachute” payments,
and authorizing the SEC to promulgate rules that would allow stockholders to nominate and solicit voters for their own candidates
using a company’s proxy materials. The legislation also directs the Federal Reserve to promulgate rules prohibiting excessive
compensation paid to bank holding company executives, regardless of whether the Company is publicly traded.
The Bank
General.
The Bank is a national bank, chartered by the OCC under the National Bank Act. The deposit accounts of the Bank are insured
by the FDIC’s Deposit Insurance Fund (the “DIF”) to the maximum extent provided under federal law and FDIC regulations,
and the Bank is a member of the Federal Reserve System. As a national bank, the Bank is subject to the examination, supervision,
reporting and enforcement requirements of the OCC, the chartering authority for national banks. The FDIC, as administrator of the
DIF, also has regulatory authority over the Bank. The Bank is also a member of the Federal Home Loan Bank System, which provides
a central credit facility primarily for member institutions.
Deposit Insurance
.
As an FDIC-insured institution, the Bank is required to pay deposit insurance premium assessments to the FDIC. The
FDIC has adopted a risk-based assessment system whereby FDIC-insured depository institutions pay insurance premiums at rates based
on their risk classification. An institution’s risk classification is assigned based on its capital levels and
the level of supervisory concern the institution poses to the regulators.
On November 12, 2009,
the FDIC adopted a final rule that required insured depository institutions to prepay on December 30, 2009, their estimated quarterly
risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011, and 2012. As such, on December 31, 2009, the Bank
prepaid its assessments based on its actual September 30, 2009 assessment base, adjusted quarterly by an estimated 5% annual growth
rate through the end of 2012. The FDIC also used the institution’s total base assessment rate in effect on September 30,
2009, increasing it by an annualized 3 basis points beginning in 2011. The FDIC began to offset prepaid assessments on March 30,
2010, representing payment of the regular quarterly risk-based deposit insurance assessment for the fourth quarter of 2009. Any
prepaid assessment not exhausted after collection of the amount due on June 30, 2013, will be returned to the institution.
Amendments to the Federal
Deposit Insurance Act also revise the assessment base against which an insured depository institution’s deposit insurance
premiums paid to the DIF will be calculated. Under the amendments, the assessment base will no longer be the institution’s
deposit base, but rather its average consolidated total assets less its average tangible equity. This may shift the burden
of deposit insurance premiums toward those large depository institutions that rely on funding sources other than U.S. deposits.
Additionally, the Dodd-Frank Act makes changes to the minimum designated reserve ratio of the DIF, increasing the minimum from
1.15% to 1.35% of the estimated amount of total insured deposits, and eliminating the requirement that the FDIC pay dividends to
depository institutions when the reserve ratio exceeds certain thresholds. The FDIC is given until September 3, 2020 to meet
the 1.35% reserve ratio target. Several of these provisions could increase the Bank’s FDIC deposit insurance premiums.
The Dodd-Frank Act
permanently increases the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per
insured depositor, retroactive to January 1, 2009. Furthermore, the legislation provides that non-interest-bearing transaction
accounts have unlimited deposit insurance coverage through December 31, 2012. This temporary unlimited deposit insurance coverage
replaces the Transaction Account Guarantee Program (“TAGP”) that expired on December 31, 2010. It covers all depository
institution non-interest-bearing transaction accounts, but not low interest-bearing accounts. Unlike TAGP, there is no special
assessment associated with the temporary unlimited insurance coverage, nor may institutions opt-out of the unlimited coverage.
FICO Assessments
.
The Financing Corporation (“FICO”) is a mixed-ownership governmental corporation chartered by the former
Federal Home Loan Bank Board pursuant to the Competitive Equality Banking Act of 1987 to function as a financing vehicle for the
recapitalization of the former Federal Savings and Loan Insurance Corporation. FICO issued 30-year noncallable bonds of approximately
$8.1 billion that mature in 2017 through 2019. FICO’s authority to issue bonds ended on December 12, 1991. Since 1996, federal
legislation has required that all FDIC-insured depository institutions pay assessments to cover interest payments on FICO’s
outstanding obligations. These FICO assessments are in addition to amounts assessed by the FDIC for deposit insurance. During the
year ended December 31, 2011, the FICO assessment rate was approximately 0.01% of deposits. A rate reduction to .00680% began
with the fourth quarter of 2011 to reflect the change from an assessment base computed on deposits to an assessment base computed
on assets as required by the Dodd-Frank Act.
Supervisory Assessments
.
National banks are required to pay supervisory assessments to the OCC to fund the operations of the OCC. The amount of the assessment
is calculated using a formula that takes into account the bank’s size and its supervisory condition.
During the year
ended December 31, 2011, the Bank paid supervisory assessments to the OCC totaling $145,000.
Capital Requirements.
Banks are generally required to maintain capital levels in excess of other businesses. For a discussion of capital requirements,
see “—The Increasing Importance of Capital” above.
Dividend Payments.
The primary source of funds for the Company is dividends from the Bank. Under the National Bank Act, a national bank may pay dividends
out of its undivided profits in such amounts and at such times as the bank’s board of directors deems prudent. Without prior
OCC approval, however, a national bank may not pay dividends in any calendar year that, in the aggregate, exceed the bank’s
year-to-date net income plus the bank’s retained net income for the two preceding years.
The payment of dividends
by any financial institution is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy
guidelines and regulations, and a financial institution generally is prohibited from paying any dividends if, following payment
thereof, the institution would be undercapitalized. As described above, the Bank exceeded its minimum capital requirements under
applicable guidelines as of December 31, 2011.
As of December 31, 2011, approximately $1.3 million was available to be
paid as dividends by the Bank. Notwithstanding the availability of funds for dividends, however, the OCC may prohibit the payment
of dividends by the Bank if it determines such payment would constitute an unsafe or unsound practice.
Insider Transactions.
The Bank is subject to certain restrictions imposed by federal law on “covered transactions” between the Bank and its
“affiliates.” The Company is an affiliate of the Bank for purposes of these restrictions, and covered transactions
subject to the restrictions include extensions of credit to the Company, investments in the stock or other securities of the Company
and the acceptance of the stock or other securities of the Company as collateral for loans made by the Bank. The Dodd-Frank Act
enhances the requirements for certain transactions with affiliates as of July 21, 2011, including an expansion of the definition
of “covered transactions” and an increase in the amount of time for which collateral requirements regarding covered
transactions must be maintained.
Certain limitations
and reporting requirements are also placed on extensions of credit by the Bank to its directors and officers, to directors and
officers of the Company and its subsidiaries, to principal stockholders of the Company and to “related interests” of
such directors, officers and principal stockholders. In addition, federal law and regulations may affect the terms upon which any
person who is a director or officer of the Company or the Bank or a principal stockholder of the Company may obtain credit from
banks with which the Bank maintains a correspondent relationship.
Safety and Soundness
Standards.
The federal banking agencies have adopted guidelines that establish operational and managerial standards to
promote the safety and soundness of federally insured depository institutions. The guidelines set forth standards for internal
controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset
growth, compensation, fees and benefits, asset quality and earnings.
In general, the safety
and soundness guidelines prescribe the goals to be achieved in each area, and each institution is responsible for establishing
its own procedures to achieve those goals. If an institution fails to comply with any of the standards set forth in the guidelines,
the institution’s primary federal regulator may require the institution to submit a plan for achieving and maintaining compliance.
If an institution fails to submit an acceptable compliance plan, or fails in any material respect to implement a compliance plan
that has been accepted by its primary federal regulator, the regulator is required to issue an order directing the institution
to cure the deficiency. Until the deficiency cited in the regulator’s order is cured, the regulator may restrict the institution’s
rate of growth, require the institution to increase its capital, restrict the rates the institution pays on deposits or require
the institution to take any action the regulator deems appropriate under the circumstances. Noncompliance with the standards established
by the safety and soundness guidelines may also constitute grounds for other enforcement action by the federal banking regulators,
including cease and desist orders and civil money penalty assessments.
Branching Authority
.
National banks headquartered in Kansas, such as the Bank, have the same branching rights in Kansas as banks chartered
under Kansas law, subject to OCC approval. Kansas law grants Kansas-chartered banks the authority to establish branches anywhere
in the State of Kansas, subject to receipt of all required regulatory approvals.
Federal law permits
state and national banks to merge with banks in other states subject to: (i) regulatory approval; (ii) federal and state deposit
concentration limits; and (iii) state law limitations requiring the merging bank to have been in existence for a minimum period
of time (not to exceed five years) prior to the merger. The establishment of new interstate branches or the acquisition of individual
branches of a bank in another state (rather than the acquisition of an out-of-state bank in its entirety) has historically been
permitted only in those states the laws of which expressly authorize such expansion. However, the Dodd-Frank Act permits well-capitalized
banks to establish branches across state lines without these impediments.
Financial Subsidiaries.
Under federal law and OCC regulations, national banks are authorized to engage, through “financial subsidiaries,”
in any activity that is permissible for a financial holding company and any activity that the Secretary of the Treasury, in consultation
with the Federal Reserve, determines is financial in nature or incidental to any such financial activity, except (i) insurance
underwriting, (ii) real estate development or real estate investment activities (unless otherwise permitted by law), (iii) insurance
company portfolio investments and (iv) merchant banking. The authority of a national bank to invest in a financial subsidiary
is subject to a number of conditions, including, among other things, requirements that the bank must be well-managed and well-capitalized
(after deducting from capital the bank’s outstanding investments in financial subsidiaries). The Bank has not applied for
approval to establish any financial subsidiaries.
Transaction Account
Reserves.
Federal Reserve regulations require depository institutions to maintain reserves against
their transaction accounts (primarily NOW and regular checking accounts). For 2012: the first $11.5 million of otherwise reservable
balances are exempt from the reserve requirements; for transaction accounts aggregating more than $11.5 million to $71.0 million,
the reserve requirement is 3% of total transaction accounts; and for net transaction accounts in excess of $71.0 million, a 10%
reserve ratio will be assessed. These reserve requirements are subject to annual adjustment by the Federal Reserve. The Bank is
in compliance with the foregoing requirements.
Consumer Financial
Services
.
There are numerous developments in federal and state laws regarding consumer financial products and services
that impact the Bank’s business. Importantly, the current structure of federal consumer protection regulation applicable
to all providers of consumer financial products and services changed significantly on July 21, 2011, when the new Bureau of Consumer
Financial Protection commenced operations to supervise and enforce consumer protection laws. The Bureau has broad rule-making
authority for a wide range of consumer protection laws that apply to all providers of consumer products and services, including
the Bank, as well as the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Bureau has examination
and enforcement authority over providers with more than $10 billion in assets. Banks and savings institutions with $10 billion
or less in assets, like the Bank, will continue to be examined by their applicable bank regulators. The Dodd-Frank Act also generally
weakens the federal preemption available for national banks and federal savings associations, and gives state attorneys general
the ability to enforce applicable federal consumer protection laws. It is unclear what changes will be promulgated by the Bureau
and what effect, if any, such changes would have on the Bank.
The Dodd-Frank Act
contains additional provisions that affect consumer mortgage lending. First, the new law significantly expands underwriting requirements
applicable to loans secured by one-to-four family residential real property and augments federal law combating predatory lending
practices. In addition to numerous new disclosure requirements, the Dodd-Frank Act imposes new standards for mortgage loan originations
on all lenders, including banks and savings associations, in an effort to strongly encourage lenders to verify a borrower’s
ability to repay. Most significantly, the new standards limit the total points and fees that the Bank and/or a broker may
charge on conforming and jumbo loans to 3% of the total loan amount. Also, the Dodd-Frank Act, in conjunction with the Federal
Reserve’s final rule on loan originator compensation effective April 1, 2011, prohibits certain compensation payments to
loan originators and prohibits steering consumers to loans not in their interest because it will result in greater compensation
for a loan originator. These standards may result in a myriad of new system, pricing and compensation controls in order to
ensure compliance and to decrease repurchase requests and foreclosure defenses. In addition, the Dodd-Frank Act generally
requires lenders or securitizers to retain an economic interest in the credit risk relating to loans the lender sells and other
asset-backed securities that the securitizer issues if the loans have not complied with the ability to repay standards. The
risk retention requirement generally will be 5%, but could be increased or decreased by regulation.
Foreclosure and
Loan Modifications
. Federal and state laws further impact foreclosures and loan modifications, many of which laws have
the effect of delaying or impeding the foreclosure process on real estate secured loans in default. Mortgages on commercial
property can be modified, such as by reducing the principal amount of the loan or the interest rate, or by extending the term of
the loan, through plans confirmed under Chapter 11 of the Bankruptcy Code. In recent years legislation has been introduced
in Congress that would amend the Bankruptcy Code to permit the modification of mortgages secured by residences, although at this
time the enactment of such legislation is not in prospect. The scope, duration and terms of potential future legislation
with similar effect continue to be discussed.
State
legal and/or legislative action may be on the horizon in light of the settlement reached in early February of 2012 by 49 state
attorneys general and the federal government with the country’s five largest loan servicers:
Ally/GMAC
,
Bank of America
,
Citi
,
JPMorgan Chase,
and
Wells
Fargo
. Every state except Oklahoma signed on to the settlement. The settlement will provide as much as $25 billion in relief
to distressed borrowers in the states who
signed on to the settlement
;
and direct payments to signing states and the federal government. The agreement settles state and federal investigations finding
that the country’s five largest loan servicers routinely signed foreclosure related documents outside the presence of a notary
public and without really knowing whether the facts they contained were correct and holds the banks accountable for their wrongdoing
on robo-signing and mortgage servicing. The agreement settles only some aspects of the banks’ conduct related to the
financial crisis (foreclosure practices, loan servicing, and origination of loans). State cases against the rating agencies and
bid-rigging in the municipal bond market, for example, continue.
Company Web site
The Company maintains
a corporate Web site at
www.landmarkbancorpinc.com
. In addition, the Company has an investor relations link at the Bank’s
corporate Web site at www.banklandmark.com. The Company makes available free of charge on or through its Web site its Annual Report
on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after the Company electronically files such material
with, or furnishes it to, the SEC. Many of the Company’s policies, including its code of ethics, committee charters and
other investor information are available on the Web site. The Company will also provide copies of its filings free of charge upon
written request to our Corporate Secretary at the address listed on the front of this Form 10-K.
Statistical
Data
The Company has a fiscal
year ending on December 31. The information presented in this Annual Report on Form 10-K presents information on behalf of the
Company as of and for the year ended December 31, 2011.
The statistical data required by Guide
3 of the Securities Act Industry Guides is set forth in the following pages. This data should be read in conjunction with the consolidated
financial statements, related notes and “Management’s Discussion and Analysis of Financial Condition and Results of
Operations.”
I. Distribution of Assets, Liabilities,
and Stockholders’ Equity; Interest Rates and Interest Differential
The following table
describes the extent to which changes in tax equivalent interest income and interest expense for major components of interest-earning
assets and interest-bearing liabilities affected the Company’s interest income and expense during the periods indicated.
The table distinguishes between (i) changes attributable to rate (changes in rate multiplied by prior volume), (ii) changes attributable
to volume (changes in volume multiplied by prior rate), and (iii) net change (the sum of the previous columns). The net changes
attributable to the combined effect of volume and rate, which cannot be segregated, have been allocated proportionately to the
change due to volume and the change due to rate.
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Years Ended December 31,
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2011 vs 2010
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2010 vs 2009
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Increase/(decrease) attributable to
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Increase/(decrease) attributable to
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Volume
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Rate
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Volume
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Rate
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Net
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(Dollars in thousands)
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Interest income:
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Investment securities
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
$
|
299
|
|
|
$
|
(204
|
)
|
|
$
|
95
|
|
|
$
|
(445
|
)
|
|
$
|
(1,093
|
)
|
|
$
|
(1,538
|
)
|
Tax-exempt
|
|
|
(37
|
)
|
|
|
(26
|
)
|
|
|
(63
|
)
|
|
$
|
9
|
|
|
$
|
(55
|
)
|
|
|
(46
|
)
|
Loans
|
|
|
(1,441
|
)
|
|
|
(332
|
)
|
|
|
(1,773
|
)
|
|
|
(1,166
|
)
|
|
|
(144
|
)
|
|
|
(1,310
|
)
|
Total
|
|
|
(1,179
|
)
|
|
|
(562
|
)
|
|
|
(1,741
|
)
|
|
|
(1,602
|
)
|
|
|
(1,292
|
)
|
|
|
(2,894
|
)
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
44
|
|
|
|
(1,070
|
)
|
|
|
(1,026
|
)
|
|
|
(245
|
)
|
|
|
(1,789
|
)
|
|
|
(2,034
|
)
|
Other borrowings
|
|
|
(267
|
)
|
|
|
(353
|
)
|
|
|
(620
|
)
|
|
|
(503
|
)
|
|
|
(244
|
)
|
|
|
(747
|
)
|
Total
|
|
|
(223
|
)
|
|
|
(1,423
|
)
|
|
|
(1,646
|
)
|
|
|
(748
|
)
|
|
|
(2,033
|
)
|
|
|
(2,781
|
)
|
Net interest income
|
|
$
|
(956
|
)
|
|
$
|
861
|
|
|
$
|
(95
|
)
|
|
$
|
(854
|
)
|
|
$
|
741
|
|
|
$
|
(113
|
)
|
The following table
sets forth information relating to average balances of interest-earning assets and interest-bearing liabilities for the years ended
December 31, 2011, 2010 and 2009. Average balances are derived from daily average balances. Non-accrual loans were included in
the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth
in the table below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income
or interest expense. This table reflects the average yields on assets and average costs of liabilities for the periods indicated
(derived by dividing income or expense by the monthly average balance of assets or liabilities, respectively) as well as the "net
interest margin" (which reflects the effect of the net earnings balance) for the periods shown.
|
|
Year ended December 31, 2011
|
|
|
Year ended December 31, 2010
|
|
|
Year ended December 31, 2009
|
|
|
|
Average
balance
|
|
|
Interest
|
|
|
Yield/
cost
|
|
|
Average
balance
|
|
|
Interest
|
|
|
Yield/
cost
|
|
|
Average
balance
|
|
|
Interest
|
|
|
Yield/
cost
|
|
|
|
(Dollars in thousands)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable (1)
|
|
$
|
129,807
|
|
|
$
|
2,748
|
|
|
|
2.12
|
%
|
|
$
|
104,474
|
|
|
$
|
2,653
|
|
|
|
2.54
|
%
|
|
$
|
118,182
|
|
|
$
|
4,191
|
|
|
|
3.55
|
%
|
Tax-exempt(2)
|
|
|
66,854
|
|
|
|
3,576
|
|
|
|
5.35
|
%
|
|
|
67,554
|
|
|
|
3,639
|
|
|
|
5.39
|
%
|
|
|
67,396
|
|
|
|
3,685
|
|
|
|
5.47
|
%
|
Loans receivable, net
(3)
|
|
|
313,918
|
|
|
|
17,607
|
|
|
|
5.61
|
%
|
|
|
339,698
|
|
|
|
19,380
|
|
|
|
5.71
|
%
|
|
|
359,940
|
|
|
|
20,690
|
|
|
|
5.75
|
%
|
Total interest-earning assets
|
|
|
510,579
|
|
|
|
23,931
|
|
|
|
4.69
|
%
|
|
|
511,726
|
|
|
|
25,672
|
|
|
|
5.02
|
%
|
|
|
545,518
|
|
|
|
28,566
|
|
|
|
5.24
|
%
|
Non-interest-earning assets
|
|
|
67,461
|
|
|
|
|
|
|
|
|
|
|
|
65,877
|
|
|
|
|
|
|
|
|
|
|
|
61,135
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
578,040
|
|
|
|
|
|
|
|
|
|
|
$
|
577,603
|
|
|
|
|
|
|
|
|
|
|
$
|
606,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
$
|
178,364
|
|
|
$
|
2,341
|
|
|
|
1.31
|
%
|
|
$
|
187,236
|
|
|
$
|
3,249
|
|
|
|
1.74
|
%
|
|
$
|
215,159
|
|
|
$
|
5,101
|
|
|
|
2.37
|
%
|
Money market and NOW accounts
|
|
|
171,295
|
|
|
|
371
|
|
|
|
0.22
|
%
|
|
|
162,437
|
|
|
|
471
|
|
|
|
0.29
|
%
|
|
|
155,142
|
|
|
|
643
|
|
|
|
0.41
|
%
|
Savings accounts
|
|
|
36,004
|
|
|
|
48
|
|
|
|
0.13
|
%
|
|
|
31,754
|
|
|
|
66
|
|
|
|
0.21
|
%
|
|
|
28,684
|
|
|
|
76
|
|
|
|
0.26
|
%
|
Total deposits
|
|
|
385,663
|
|
|
|
2,760
|
|
|
|
0.72
|
%
|
|
|
381,427
|
|
|
|
3,786
|
|
|
|
0.99
|
%
|
|
|
398,985
|
|
|
|
5,820
|
|
|
|
1.46
|
%
|
FHLB advances and other
borrowings
|
|
|
68,929
|
|
|
|
1,899
|
|
|
|
2.76
|
%
|
|
|
77,645
|
|
|
|
2,519
|
|
|
|
3.24
|
%
|
|
|
92,855
|
|
|
|
3,266
|
|
|
|
3.52
|
%
|
Total interest-bearing liabilities
|
|
|
454,592
|
|
|
|
4,659
|
|
|
|
1.02
|
%
|
|
|
459,072
|
|
|
|
6,305
|
|
|
|
1.37
|
%
|
|
|
491,840
|
|
|
|
9,086
|
|
|
|
1.85
|
%
|
Non-interest-bearing liabilities
|
|
|
67,238
|
|
|
|
|
|
|
|
|
|
|
|
63,797
|
|
|
|
|
|
|
|
|
|
|
|
61,852
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
56,210
|
|
|
|
|
|
|
|
|
|
|
|
54,734
|
|
|
|
|
|
|
|
|
|
|
|
52,961
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
578,040
|
|
|
|
|
|
|
|
|
|
|
$
|
577,603
|
|
|
|
|
|
|
|
|
|
|
$
|
606,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate spread (4)
|
|
|
|
|
|
|
|
|
|
|
3.67
|
%
|
|
|
|
|
|
|
|
|
|
|
3.65
|
%
|
|
|
|
|
|
|
|
|
|
|
3.39
|
%
|
Net interest margin (5)
|
|
|
|
|
|
$
|
19,272
|
|
|
|
3.77
|
%
|
|
|
|
|
|
$
|
19,367
|
|
|
|
3.78
|
%
|
|
|
|
|
|
$
|
19,480
|
|
|
|
3.57
|
%
|
Tax
equivalent interest - imputed (2) (3)
|
|
|
|
|
|
|
1,345
|
|
|
|
|
|
|
|
|
|
|
|
1,321
|
|
|
|
|
|
|
|
|
|
|
|
1,300
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
17,927
|
|
|
|
|
|
|
|
|
|
|
$
|
18,046
|
|
|
|
|
|
|
|
|
|
|
$
|
18,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of average interest-earning assets
to average interest-bearing liabilities
|
|
|
|
|
|
|
112.3
|
%
|
|
|
|
|
|
|
|
|
|
|
111.5
|
%
|
|
|
|
|
|
|
|
|
|
|
110.9
|
%
|
|
|
|
|
|
(1)
|
Income on investment securities includes interest-bearing deposits in other financial institutions.
|
|
(2)
|
Income on tax-exempt investment securities is presented on a fully taxable equivalent basis, using a 34% federal tax rate.
|
|
(3)
|
Income on tax-exempt loans is presented on a fully taxable equivalent basis, using a 34% federal tax rate.
|
|
(4)
|
Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of
interest-bearing liabilities.
|
|
(5)
|
Net interest margin represents net
interest income divided by average interest-earning assets.
|
II. Investment Portfolio
Investment Securities
.
The following table sets forth the carrying value of the Company’s investment securities at the dates indicated. None of
the investment securities held as of December 31, 2011 were issued by an individual issuer in excess of 10% of the Company’s
stockholders’ equity, excluding U.S. federal agency obligations. The Company’s federal agency obligations consist of
obligations of U.S. government-sponsored enterprises, primarily the Federal Home Loan Bank (“FHLB”). The Company’s
mortgage-backed securities portfolio consists of securities predominantly underwritten to the standards and guaranteed by the government-sponsored
agencies of Federal Home Loan Mortgage Corporation (“FHLMC”), Federal National Mortgage Association (“FNMA”)
and Government National Mortgage Association (“GNMA”). The Company’s investments in certificates of deposits
consists of FDIC-insured certificates of deposits with other financial institutions.
|
|
As of December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands)
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal agency obligations
|
|
$
|
9,164
|
|
|
$
|
22,187
|
|
|
$
|
19,090
|
|
Municipal obligations tax-exempt
|
|
|
69,629
|
|
|
|
65,287
|
|
|
|
68,859
|
|
Municipal obligations taxable
|
|
|
19,135
|
|
|
|
4,188
|
|
|
|
1,343
|
|
Mortgage-backed securities
|
|
|
94,472
|
|
|
|
60,804
|
|
|
|
64,695
|
|
Common stocks
|
|
|
819
|
|
|
|
828
|
|
|
|
805
|
|
Pooled trust preferred securities
|
|
|
405
|
|
|
|
236
|
|
|
|
261
|
|
Certificates of deposits
|
|
|
4,590
|
|
|
|
14,159
|
|
|
|
6,515
|
|
Total available-for-sale investment securities, at fair value
|
|
$
|
198,214
|
|
|
$
|
167,689
|
|
|
$
|
161,568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB stock
|
|
|
4,850
|
|
|
|
6,364
|
|
|
|
6,237
|
|
FRB stock
|
|
|
1,761
|
|
|
|
1,759
|
|
|
|
1,754
|
|
Correspondent bank common stock
|
|
|
60
|
|
|
|
60
|
|
|
|
60
|
|
Total other securities, at cost
|
|
$
|
6,671
|
|
|
$
|
8,183
|
|
|
$
|
8,051
|
|
The following table
sets forth certain information regarding the carrying values, weighted average yields, and maturities of the Company's investment
securities portfolio, excluding common stocks, as of December 31, 2011. Yields on tax-exempt obligations have been computed on
a tax equivalent basis, using a 34% federal tax rate. The table includes scheduled principal payments and estimated prepayments
for mortgage-backed securities. Actual prepayments will differ from contractual maturities because borrowers have the right to
prepay obligations with or without prepayment penalties.
|
|
As of December 31, 2011
|
|
|
|
One year or less
|
|
|
One to five years
|
|
|
Five to ten years
|
|
|
More than ten years
|
|
|
Total
|
|
|
|
Carrying
|
|
|
Average
|
|
|
Carrying
|
|
|
Average
|
|
|
Carrying
|
|
|
Average
|
|
|
Carrying
|
|
|
Average
|
|
|
Carrying
|
|
|
Average
|
|
|
|
value
|
|
|
yield
|
|
|
value
|
|
|
yield
|
|
|
value
|
|
|
yield
|
|
|
value
|
|
|
yield
|
|
|
value
|
|
|
yield
|
|
|
|
(Dollars in thousands)
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal agency obligations
|
|
$
|
3,831
|
|
|
|
1.17
|
%
|
|
$
|
4,329
|
|
|
|
0.73
|
%
|
|
$
|
1,004
|
|
|
|
5.50
|
%
|
|
$
|
-
|
|
|
|
0.00
|
%
|
|
$
|
9,164
|
|
|
|
1.44
|
%
|
Municipal obligations tax-exempt
|
|
|
3,997
|
|
|
|
5.29
|
%
|
|
|
20,476
|
|
|
|
5.09
|
%
|
|
|
31,007
|
|
|
|
5.61
|
%
|
|
|
14,149
|
|
|
|
6.07
|
%
|
|
|
69,629
|
|
|
|
5.53
|
%
|
Municipal obligations taxable
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
8,737
|
|
|
|
1.76
|
%
|
|
|
9,355
|
|
|
|
2.84
|
%
|
|
|
1,043
|
|
|
|
3.98
|
%
|
|
|
19,135
|
|
|
|
2.41
|
%
|
Mortgage-backed securities
|
|
|
4,441
|
|
|
|
3.78
|
%
|
|
|
88,394
|
|
|
|
2.36
|
%
|
|
|
692
|
|
|
|
3.16
|
%
|
|
|
945
|
|
|
|
2.38
|
%
|
|
|
94,472
|
|
|
|
2.43
|
%
|
Pooled trust preferred securities
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
405
|
|
|
|
0.00
|
%
|
|
|
405
|
|
|
|
0.00
|
%
|
Certificates of deposits
|
|
|
1,710
|
|
|
|
0.69
|
%
|
|
|
2,880
|
|
|
|
1.07
|
%
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
4,590
|
|
|
|
0.93
|
%
|
Total
|
|
$
|
13,979
|
|
|
|
3.12
|
%
|
|
$
|
124,816
|
|
|
|
2.68
|
%
|
|
$
|
42,058
|
|
|
|
4.95
|
%
|
|
$
|
16,542
|
|
|
|
5.58
|
%
|
|
$
|
197,395
|
|
|
|
3.44
|
%
|
III.
Loan Portfolio
Loan Portfolio
Composition
.
The following table sets forth the composition of the loan portfolio by type of loan at the dates indicated.
|
|
As of December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential real estate
|
|
$
|
79,108
|
|
|
$
|
79,631
|
|
|
$
|
89,295
|
|
|
$
|
104,369
|
|
|
$
|
118,160
|
|
Construction and land
|
|
|
21,672
|
|
|
|
23,652
|
|
|
|
36,864
|
|
|
|
41,107
|
|
|
|
46,260
|
|
Commercial real estate
|
|
|
93,786
|
|
|
|
92,124
|
|
|
|
99,459
|
|
|
|
98,320
|
|
|
|
88,011
|
|
Commercial loans
|
|
|
57,006
|
|
|
|
57,286
|
|
|
|
61,347
|
|
|
|
63,387
|
|
|
|
66,292
|
|
Agriculture loans
|
|
|
39,052
|
|
|
|
38,836
|
|
|
|
38,205
|
|
|
|
43,144
|
|
|
|
41,292
|
|
Municipal loans
|
|
|
10,366
|
|
|
|
5,393
|
|
|
|
5,672
|
|
|
|
2,613
|
|
|
|
2,388
|
|
Consumer loans
|
|
|
13,584
|
|
|
|
14,385
|
|
|
|
16,922
|
|
|
|
16,383
|
|
|
|
17,464
|
|
Total gross loans
|
|
|
314,574
|
|
|
|
311,307
|
|
|
|
347,764
|
|
|
|
369,323
|
|
|
|
379,867
|
|
Net deferred loan costs, fees and loans in process
|
|
|
214
|
|
|
|
328
|
|
|
|
442
|
|
|
|
320
|
|
|
|
462
|
|
Allowance for loan losses
|
|
|
(4,707
|
)
|
|
|
(4,967
|
)
|
|
|
(5,468
|
)
|
|
|
(3,871
|
)
|
|
|
(4,172
|
)
|
Loans, net
|
|
$
|
310,081
|
|
|
$
|
306,668
|
|
|
$
|
342,738
|
|
|
$
|
365,772
|
|
|
$
|
376,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential real estate
|
|
|
25.2
|
%
|
|
|
25.6
|
%
|
|
|
25.7
|
%
|
|
|
28.3
|
%
|
|
|
31.1
|
%
|
Construction and land
|
|
|
6.9
|
%
|
|
|
7.6
|
%
|
|
|
10.6
|
%
|
|
|
11.1
|
%
|
|
|
12.2
|
%
|
Commercial real estate
|
|
|
29.8
|
%
|
|
|
29.6
|
%
|
|
|
28.6
|
%
|
|
|
26.6
|
%
|
|
|
23.2
|
%
|
Commercial loans
|
|
|
18.1
|
%
|
|
|
18.4
|
%
|
|
|
17.6
|
%
|
|
|
17.2
|
%
|
|
|
17.4
|
%
|
Agriculture loans
|
|
|
12.4
|
%
|
|
|
12.5
|
%
|
|
|
11.0
|
%
|
|
|
11.7
|
%
|
|
|
10.9
|
%
|
Municipal loans
|
|
|
3.3
|
%
|
|
|
1.7
|
%
|
|
|
1.6
|
%
|
|
|
0.7
|
%
|
|
|
0.6
|
%
|
Consumer loans
|
|
|
4.3
|
%
|
|
|
4.6
|
%
|
|
|
4.9
|
%
|
|
|
4.4
|
%
|
|
|
4.6
|
%
|
Total gross loans
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
The following table
sets forth the contractual maturities of loans as of December 31, 2011. The table does not include unscheduled prepayments.
|
|
As of December 31, 2011
|
|
|
|
< 1 year
|
|
|
1-5 years
|
|
|
> 5 years
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential real estate
|
|
$
|
13,972
|
|
|
$
|
30,336
|
|
|
$
|
34,800
|
|
|
$
|
79,108
|
|
Construction and land
|
|
|
19,815
|
|
|
|
1,340
|
|
|
|
517
|
|
|
|
21,672
|
|
Commercial real estate
|
|
|
19,417
|
|
|
|
41,322
|
|
|
|
33,047
|
|
|
|
93,786
|
|
Commercial loans
|
|
|
35,660
|
|
|
|
16,303
|
|
|
|
5,043
|
|
|
|
57,006
|
|
Agriculture loans
|
|
|
30,102
|
|
|
|
5,625
|
|
|
|
3,325
|
|
|
|
39,052
|
|
Municipal loans
|
|
|
1,230
|
|
|
|
5,580
|
|
|
|
3,556
|
|
|
|
10,366
|
|
Consumer loans
|
|
|
4,141
|
|
|
|
7,882
|
|
|
|
1,561
|
|
|
|
13,584
|
|
Total gross loans
|
|
$
|
124,337
|
|
|
$
|
108,388
|
|
|
$
|
81,849
|
|
|
$
|
314,574
|
|
The following table
sets forth the dollar amount of all loans due after December 31, 2012 and whether such loans had fixed interest rates or adjustable
interest rates:
|
|
As of December 31, 2011
|
|
|
|
Fixed
|
|
|
Adjustable
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential real estate
|
|
$
|
27,149
|
|
|
$
|
37,987
|
|
|
$
|
65,136
|
|
Construction and land
|
|
|
966
|
|
|
|
891
|
|
|
|
1,857
|
|
Commercial real estate
|
|
|
23,997
|
|
|
|
50,372
|
|
|
|
74,369
|
|
Commercial loans
|
|
|
9,394
|
|
|
|
11,952
|
|
|
|
21,346
|
|
Agriculture loans
|
|
|
3,525
|
|
|
|
5,425
|
|
|
|
8,950
|
|
Municipal loans
|
|
|
9,136
|
|
|
|
-
|
|
|
|
9,136
|
|
Consumer loans
|
|
|
2,232
|
|
|
|
7,211
|
|
|
|
9,443
|
|
Total gross loans
|
|
$
|
76,399
|
|
|
$
|
113,838
|
|
|
$
|
190,237
|
|
Non-performing
Assets
.
The following table sets forth information with respect to non-performing assets, including non-accrual
loans and real estate acquired through foreclosure or by deed in lieu of foreclosure (“real estate owned”). Under the
original terms of the Company’s non-accrual loans as of December 31, 2011, interest earned on such loans for the years ended
December 31, 2011, 2010 and 2009 would have increased interest income by $47,000, $217,000 and $794,000, respectively, if included
in the Company’s interest income for those years.
|
|
As of December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-accrual loans
|
|
$
|
1,419
|
|
|
$
|
4,817
|
|
|
$
|
11,830
|
|
|
$
|
5,748
|
|
|
$
|
10,037
|
|
Accruing loans over 90 days past due
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Non-performing investments
|
|
|
1,104
|
|
|
|
1,125
|
|
|
|
1,528
|
|
|
|
-
|
|
|
|
-
|
|
Real estate owned
|
|
|
2,264
|
|
|
|
3,194
|
|
|
|
1,129
|
|
|
|
1,934
|
|
|
|
492
|
|
Total non-performing assets
|
|
$
|
4,787
|
|
|
$
|
9,136
|
|
|
$
|
14,487
|
|
|
$
|
7,682
|
|
|
$
|
10,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans to total gross loans
|
|
|
0.45
|
%
|
|
|
1.55
|
%
|
|
|
3.45
|
%
|
|
|
1.56
|
%
|
|
|
2.64
|
%
|
Total non-performing assets to total assets
|
|
|
0.80
|
%
|
|
|
1.63
|
%
|
|
|
2.48
|
%
|
|
|
1.28
|
%
|
|
|
1.74
|
%
|
Allowance for loan losses to non-performing loans
|
|
|
331.71
|
%
|
|
|
103.11
|
%
|
|
|
46.22
|
%
|
|
|
67.35
|
%
|
|
|
41.57
|
%
|
The Company’s
non-accrual loans decreased $10.4 million from December 31, 2009 to December 31, 2011 primarily as a result of the charge-off of
two loans which were placed on non-accrual during 2009. These two loans consisted of a $4.3 million construction loan and a $2.4
million commercial agriculture loan and were primarily responsible for the increase in the Company’s non-accrual loans during
2009. During 2010, the Company charged off the remaining balance of $2.3 million associated with the commercial agriculture loan
and $3.3 million of the construction loan. The remaining $1.0 million balance of the construction loan was charged-off in 2011.
The decline in non-accrual loans during 2008 was primarily the result of the collection of the outstanding balances of two loan
relationships totaling $3.0 million and increased charge-offs on balances in non-accrual status at December 31, 2007.
The decline in real
estate owned during 2011 was primarily related to recording a charge of $517,000 to reflect declines in the fair value of certain
real estate owned assets and from the sales of residential properties. During 2010, real estate owned increased by $2.1 million
primarily as the result of foreclosure on loans that were non-performing at December 31, 2009. The increase was primarily the result
of the foreclosure on a residential subdivision development as the Company took possession of the real estate after the development
slowed and the borrower was unable to comply with the contractual terms of the loan and a loan settlement where the Company took
possession of a commercial real estate building. The remaining increase in other real estate was from foreclosures on residential
properties. As part of the Company’s credit risk management, the Company continues to aggressively manage the loan portfolio
to identify problem loans and has placed additional emphasis on its commercial real estate relationships. As discussed in more
detail in the “Asset Quality and Distribution” section, the Company believes its allowance for loan losses is adequate
based on the evaluation of the loan portfolio’s inherent risk as of December 31, 2011.
IV. Summary
of Loan Loss Experience
The following table sets forth information
with respect to the Company’s allowance for loan losses at the dates indicated:
|
|
As of December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at beginning of year
|
|
$
|
4,967
|
|
|
$
|
5,468
|
|
|
$
|
3,871
|
|
|
$
|
4,172
|
|
|
$
|
4,030
|
|
Provision for loan losses
|
|
|
2,000
|
|
|
|
5,900
|
|
|
|
3,300
|
|
|
|
2,400
|
|
|
|
255
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential real estate
|
|
|
(110
|
)
|
|
|
(387
|
)
|
|
|
(153
|
)
|
|
|
(1,439
|
)
|
|
|
(16
|
)
|
Construction and land
|
|
|
(1,173
|
)
|
|
|
(3,474
|
)
|
|
|
(330
|
)
|
|
|
(453
|
)
|
|
|
(29
|
)
|
Commercial real estate
|
|
|
(434
|
)
|
|
|
(96
|
)
|
|
|
(17
|
)
|
|
|
-
|
|
|
|
-
|
|
Commercial loans
|
|
|
(590
|
)
|
|
|
(8
|
)
|
|
|
(1,404
|
)
|
|
|
(728
|
)
|
|
|
(12
|
)
|
Agriculture loans
|
|
|
(1
|
)
|
|
|
(2,327
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Consumer loans
|
|
|
(132
|
)
|
|
|
(178
|
)
|
|
|
(122
|
)
|
|
|
(149
|
)
|
|
|
(147
|
)
|
Total charge-offs
|
|
|
(2,440
|
)
|
|
|
(6,470
|
)
|
|
|
(2,026
|
)
|
|
|
(2,769
|
)
|
|
|
(204
|
)
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential real estate
|
|
|
41
|
|
|
|
10
|
|
|
|
6
|
|
|
|
2
|
|
|
|
3
|
|
Construction and land
|
|
|
4
|
|
|
|
-
|
|
|
|
200
|
|
|
|
-
|
|
|
|
-
|
|
Commercial real estate
|
|
|
37
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial loans
|
|
|
14
|
|
|
|
17
|
|
|
|
72
|
|
|
|
9
|
|
|
|
25
|
|
Agriculture loans
|
|
|
35
|
|
|
|
10
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Consumer loans
|
|
|
49
|
|
|
|
32
|
|
|
|
45
|
|
|
|
57
|
|
|
|
63
|
|
Total recoveries
|
|
|
180
|
|
|
|
69
|
|
|
|
323
|
|
|
|
68
|
|
|
|
91
|
|
Net charge-offs
|
|
|
(2,260
|
)
|
|
|
(6,401
|
)
|
|
|
(1,703
|
)
|
|
|
(2,701
|
)
|
|
|
(113
|
)
|
Balances at end of year
|
|
$
|
4,707
|
|
|
$
|
4,967
|
|
|
$
|
5,468
|
|
|
$
|
3,871
|
|
|
$
|
4,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses as a percent of total gross loans outstanding
|
|
|
1.50
|
%
|
|
|
1.60
|
%
|
|
|
1.57
|
%
|
|
|
1.05
|
%
|
|
|
1.10
|
%
|
Net loans charged off as a percent of average net loans outstanding
|
|
|
0.74
|
%
|
|
|
1.93
|
%
|
|
|
0.48
|
%
|
|
|
0.72
|
%
|
|
|
0.03
|
%
|
During 2011, the Company’s
net loan charge-offs decreased to $2.3 million compared to $6.4 million during 2010. The increased net loan charge-offs in 2010
were primarily related to a previously identified and impaired construction loan totaling $4.3 million, which experienced a significant
decline in the appraised value of the collateral securing the loan and resulted in a $3.3 million charge-off in 2010. Although
legal efforts to collect payment from the guarantor continue, we charged-off the remaining $1.0 million balance on this loan during
the 2011 due to additional delays associated with the litigation. Also during 2010, the Company charged-off the remaining $2.3
million balance on a commercial agriculture loan after exhausting attempts for collection. The remaining loan charge-offs during
2011 were principally associated with a previously identified and impaired commercial relationship consisting of $2.0 million in
real estate and operating loans, which was charged down to estimated fair value after we acquired ownership of the property securing
the loans during 2011. The commercial real estate property was sold during 2011 without incurring any further losses. The 2009
charge-offs were primarily related to a commercial loan relationship that was liquidated in bankruptcy. The increase in the 2008
one-to-four family residential real estate charge-offs is primarily from the liquidation of a pool of non-owner-occupied, one-to-four
family residential loans, made to a single entity in the Kansas City, Missouri area. The loans were secured by houses located in
deteriorating neighborhoods and originally obtained as part of an acquisition and are not representative of the quality and performance
of the remaining one-to-four family residential mortgage loan portfolio. The loans were sold in early 2009.
The distribution of
the Company’s allowance for losses on loans at the dates indicated and the percent of loans in each category to total loans
is summarized in the following table. This allocation reflects management’s judgment as to risks inherent in the types of
loans indicated, but in general the Company’s total allowance for loan losses included in the table is not restricted and
is available to absorb all loan losses. The amount allocated in the following table to any category should not be interpreted as
an indication of expected actual charge-offs in that category.
|
|
As of December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
Amount
|
|
|
% Loan
type to
total loans
|
|
|
Amount
|
|
|
% Loan
type to
total loans
|
|
|
Amount
|
|
|
% Loan
type to
total loans
|
|
|
Amount
|
|
|
% Loan
type to
total loans
|
|
|
Amount
|
|
|
% Loan
type to
total loans
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential real
estate
|
|
$
|
560
|
|
|
|
25.2
|
%
|
|
$
|
395
|
|
|
|
25.6
|
%
|
|
$
|
625
|
|
|
|
25.7
|
%
|
|
$
|
672
|
|
|
|
28.3
|
%
|
|
$
|
1,189
|
|
|
|
31.1
|
%
|
Construction and land
|
|
|
928
|
|
|
|
6.9
|
%
|
|
|
1,193
|
|
|
|
7.6
|
%
|
|
|
1,326
|
|
|
|
10.6
|
%
|
|
|
833
|
|
|
|
11.1
|
%
|
|
|
879
|
|
|
|
12.2
|
%
|
Commercial real estate
|
|
|
1,791
|
|
|
|
29.8
|
%
|
|
|
1,571
|
|
|
|
29.6
|
%
|
|
|
705
|
|
|
|
28.6
|
%
|
|
|
701
|
|
|
|
26.6
|
%
|
|
|
574
|
|
|
|
23.2
|
%
|
Commercial loans
|
|
|
745
|
|
|
|
18.1
|
%
|
|
|
1,173
|
|
|
|
18.4
|
%
|
|
|
623
|
|
|
|
17.6
|
%
|
|
|
1,121
|
|
|
|
17.2
|
%
|
|
|
859
|
|
|
|
17.5
|
%
|
Agriculture loans
|
|
|
433
|
|
|
|
12.4
|
%
|
|
|
397
|
|
|
|
12.5
|
%
|
|
|
2,103
|
|
|
|
11.0
|
%
|
|
|
415
|
|
|
|
11.7
|
%
|
|
|
398
|
|
|
|
10.9
|
%
|
Municipal loans
|
|
|
130
|
|
|
|
3.3
|
%
|
|
|
99
|
|
|
|
1.7
|
%
|
|
|
-
|
|
|
|
1.6
|
%
|
|
|
-
|
|
|
|
0.7
|
%
|
|
|
-
|
|
|
|
0.6
|
%
|
Consumer loans
|
|
|
120
|
|
|
|
4.3
|
%
|
|
|
139
|
|
|
|
4.6
|
%
|
|
|
86
|
|
|
|
4.9
|
%
|
|
|
129
|
|
|
|
4.4
|
%
|
|
|
273
|
|
|
|
4.5
|
%
|
Total
|
|
$
|
4,707
|
|
|
|
100.0
|
%
|
|
$
|
4,967
|
|
|
|
100.0
|
%
|
|
$
|
5,468
|
|
|
|
100.0
|
%
|
|
$
|
3,871
|
|
|
|
100.0
|
%
|
|
$
|
4,172
|
|
|
|
100.0
|
%
|
The increase in the
allocation of the allowance for loan losses on one-to-four family residential real estate loans during 2011 was related to an increase
in non-accrual one-to-four family residential real estate loans during 2011, while the decline between December 31, 2007 and December
31, 2010 was primarily the result of the decline in the outstanding balances in our one-to-four family residential loan portfolio
and also from the 2008 charge-off associated with one loan relationship on a pool of non-owner occupied, one-to-four family residential
real estate loans in the Kansas City, Missouri area which had a specific reserve associated with the balance at December 31, 2007.
The allocation of the allowance for loan losses on construction and land loans declined in each of 2010 and 2011 as a result of
a decline in outstanding loan balances as well increased charge-offs. The increase in the 2009 and decline in the 2010 allocation
of the allowance for loan losses on agriculture loans was primarily related to a $2.3 million commercial agriculture loan that
was impaired during 2009 and charged off in 2010. The increases in the allocation for commercial real estate was related primarily
to declines in the estimated fair value of certain collateral dependent impaired loans, increased historical charge-offs and management’s
judgment to increase the risk factors used to determine the allowance for loan losses. The allowance for loan losses is discussed
in more detail in the “Non-performing Assets” and “Asset Quality and Distribution” sections. We believe
the Company’s allowance for loan losses continues to be adequate based on the Company’s evaluation of the loan portfolio’s
inherent risk as of December 31, 2011.
V. Deposits
The following table presents the maturities
of jumbo certificates of deposit (amounts of $100,000 or more) at December 31, 2011 and 2010:
(Dollars in thousands)
|
|
As of December 31,
|
|
|
|
2011
|
|
|
2010
|
|
Three months or less
|
|
$
|
20,913
|
|
|
$
|
15,641
|
|
Over three months through six months
|
|
|
28,613
|
|
|
|
8,461
|
|
Over six months through 12 months
|
|
|
10,681
|
|
|
|
10,166
|
|
Over 12 months
|
|
|
3,167
|
|
|
|
15,122
|
|
Total
|
|
$
|
63,374
|
|
|
$
|
49,390
|
|
VI. Return on Equity
and Assets
|
|
As of or for the years ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
Return on average assets
|
|
|
0.78
|
%
|
|
|
0.35
|
%
|
|
|
0.54
|
%
|
Return on average equity
|
|
|
7.98
|
%
|
|
|
3.73
|
%
|
|
|
6.18
|
%
|
Equity to total assets
|
|
|
9.88
|
%
|
|
|
9.58
|
%
|
|
|
9.23
|
%
|
Dividend payout ratio
|
|
|
44.72
|
%
|
|
|
92.31
|
%
|
|
|
55.27
|
%
|
ITEM 1A. RISK FACTORS
An investment in our
securities is subject to risks inherent in our business. Before making an investment decision, you should carefully consider the
risks and uncertainties described below together with all of the other information included in this report. In addition to the
risks and uncertainties described below, other risks and uncertainties not currently known to us or that we currently deem to be
immaterial also may materially and adversely affect our business, financial condition and results of operations. The value or market
price of our securities could decline due to any of these identified or other risks, and you could lose all or part of your investment.
Difficult economic and market conditions have adversely affected
our industry.
Difficult conditions
in the housing market over the past few years, with decreased home prices and increased delinquencies and foreclosures, have negatively
impacted the credit performance of mortgage and commercial real estate loans and resulted in significant write-downs of assets
by many financial institutions across the United States. Difficult economic conditions, reduced availability of commercial credit
and heightened levels of unemployment have negatively impacted the credit performance of commercial and consumer credit, resulting
in write-downs. Concerns over the economy, both by financial institutions and prospective borrowers, have resulted in decreased
lending by many financial institutions to their customers and to each other. These economic conditions have led to heightened commercial
and consumer delinquencies, lack of customer confidence, increased market volatility and inconsistent general business activity.
Financial institutions have also generally experienced decreased access to certain liquidity sources. The resulting economic pressure
on consumers and businesses has adversely affected our industry and may adversely affect our business, results of operations and
financial condition. If these conditions worsen, or fail to improve significantly, they may exacerbate the adverse effects of these
market conditions on us and others in the financial institutions industry. In particular, we may face the following risks in connection
with these events:
|
·
|
We may face further increased regulation of our industry, especially in light of the myriad regulations
passed, and yet to be passed, pursuant to the Dodd-Frank Act, and compliance with such regulation may increase our costs and limit
our ability to pursue business opportunities.
|
|
·
|
Customer demand for loans secured by real estate could be reduced due to weaker economic conditions,
an increase in unemployment, a decrease in real estate values or an increase in interest rates.
|
|
·
|
The process we use to estimate losses inherent in our credit exposure requires difficult, subjective
and complex judgments, including forecasts of economic conditions and how these economic conditions might impair the ability of
our borrowers to repay their loans. The level of uncertainty concerning economic conditions may adversely affect the accuracy of
our estimates which may, in turn, impact the reliability of the process.
|
|
·
|
The value of the portfolio of investment securities that we hold may be adversely affected.
|
|
·
|
We may be required to pay significantly higher FDIC premiums because market developments have significantly
depleted the insurance fund of the FDIC and reduced the ratio of reserves to insured deposits.
|
|
·
|
Our ability to assess the creditworthiness of our customers may be impaired if the models and approaches
we use to select, manage and underwrite the loans become less predictive of future behaviors.
|
|
·
|
Our ability to borrow from other financial institutions or to engage in sales of mortgage loans
to third parties on favorable terms, or at all, could be adversely affected by disruptions in the capital markets or other events,
including deteriorating investor expectations.
|
|
·
|
We expect to face increased capital requirements, both at the Company level and at the Bank level.
In this regard, the Collins Amendment to the Dodd-Frank Act requires the federal banking agencies to establish minimum leverage
and risk-based capital requirements that will apply to both insured banks and their holding companies. Furthermore, the Group of
Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, have announced an agreement
to a strengthened set of capital requirements for internationally active banking organizations, known as Basel III. We expect U.S.
banking authorities to follow the lead of Basel III and require all U.S. banking organizations to maintain significantly higher
levels of capital, which may limit our ability to pursue business opportunities and adversely affect our results of operations
and growth prospects.
|
|
·
|
Declines in our stock price, as well as changes to other risk factors discussed herein, could result
in impairment of our goodwill which would have an adverse effect on our earnings.
|
|
|
|
Legislative and regulatory
actions taken now or in the future may increase our costs and impact our business, governance structure, financial condition or
results of operations.
The Company and the
Bank are subject to extensive regulation by multiple regulatory bodies. These regulations may affect the manner and terms
of delivery of our services. If we do not comply with governmental regulations, we may be subject to fines, penalties, lawsuits
or material restrictions on our businesses in the jurisdiction where the violation occurred, which may adversely affect our business
operations. Changes in these regulations can significantly affect the services that we provide, as well as our costs of compliance
with such regulations. In addition, adverse publicity and damage to our reputation arising from the failure or perceived failure
to comply with legal, regulatory or contractual requirements could affect our ability to attract and retain customers.
Recent economic conditions,
particularly in the financial markets, have resulted in government regulatory agencies and political bodies placing increased focus
and scrutiny on the financial services industry. In recent years the U.S. government has intervened on an unprecedented
scale by temporarily enhancing the liquidity support available to financial institutions, establishing a commercial paper funding
facility, temporarily guaranteeing money market funds and certain types of debt issuances and increasing insurance on bank deposits.
This environment has
subjected financial institutions to additional restrictions, oversight and costs. In addition, new legislative and regulatory
proposals continue to be introduced that could further substantially increase oversight of the financial services industry, impose
restrictions on the operations and general ability of firms within the industry to conduct business consistent with historical
practices, including in the areas of compensation, interest rates, financial product offerings and disclosures, and have an effect
on bankruptcy proceedings with respect to consumer residential real estate mortgages, among other things. If these regulatory
trends continue, they could adversely affect our business and, in turn, our consolidated results of operations.
Monetary policies
and regulations of the Federal Reserve could adversely affect our business, financial condition and results of operations.
In addition to being
affected by general economic conditions, our earnings and growth are affected by the policies of the Federal Reserve. An
important function of the Federal Reserve is to regulate the money supply and credit conditions. Among the instruments used
by the Federal Reserve to implement these objectives are open market operations in U.S. government securities, adjustments
of the discount rate and changes in reserve requirements against bank deposits. These instruments are used in varying combinations
to influence overall economic growth and the distribution of credit, bank loans, investments and deposits. Their use also
affects interest rates charged on loans or paid on deposits.
The monetary policies
and regulations of the Federal Reserve have had a significant effect on the operating results of commercial banks in the past and
are expected to continue to do so in the future. The effects of such policies upon our business, financial condition and
results of operations cannot be predicted.
Legislative and regulatory
reforms applicable to the financial services industry may, if enacted or adopted, have a significant impact on our business, financial
condition and results of operations.
On July 21, 2010,
the Dodd-Frank Act was signed into law, which requires significant changes to the regulation of financial institutions and the
financial services industry. The Dodd-Frank Act, together with the regulations to be developed thereunder, includes provisions
affecting large and small financial institutions alike, including several provisions that will affect how community banks, thrifts
and small bank and thrift holding companies will be regulated in the future.
Ultimately, the Dodd-Frank
Act will, among other things, impose new capital requirements on bank holding companies; change the base for FDIC insurance assessments
to a bank’s average consolidated total assets minus average tangible equity, rather than upon its deposit base, and permanently
raise the current standard deposit insurance limit to $250,000; and expand the FDIC’s authority to raise insurance premiums.
The legislation also called for the FDIC to raise the ratio of reserves to deposits from 1.15% to 1.35% for deposit insurance
purposes by September 30, 2020 and to “offset the effect” of increased assessments on insured depository institutions
with assets of less than $10 billion. The Dodd-Frank Act also authorized the Federal Reserve to limit interchange fees
payable on debit card transactions, established the Bureau of Consumer Financial Protection as an independent entity within the
Federal Reserve, which will have broad rulemaking, supervisory and enforcement authority over consumer financial products and
services, including deposit products, residential mortgages, home-equity loans and credit cards, and contained provisions on mortgage-related
matters, such as steering incentives, determinations as to a borrower’s ability to repay and prepayment penalties.
The Dodd-Frank Act also included provisions that have affected, and will further affect in the future, corporate governance and
executive compensation at all publicly-traded companies.
The Collins Amendment
to the Dodd-Frank Act, among other things, eliminates certain trust preferred securities from Tier 1 capital, but permits
trust preferred securities issued prior to May 19, 2010 by bank holding companies with total consolidated assets of $15 billion
or less to continue to be includible in Tier 1 capital. This provision also requires the federal banking agencies to
establish minimum leverage and risk-based capital requirements that will apply to both insured banks and their holding companies.
Regulations implementing the Collins Amendment must be issued within 18 months of July 21, 2010.
These provisions, or
any other aspects of current or proposed regulatory or legislative changes to laws applicable to the financial industry, if enacted
or adopted, may impact the profitability of our business activities or change certain of our business practices, including the
ability to offer new products, obtain financing, attract deposits, make loans, and achieve satisfactory interest spreads, and could
expose us to additional costs, including increased compliance costs. These changes also may require us to invest significant
management attention and resources to make any necessary changes to operations in order to comply, and could therefore also materially
and adversely affect our business, financial condition and results of operations. Our management continues to stay abreast
of developments with respect to the Dodd-Frank Act, many provisions of which will continue to be phased-in over the next several
months and years, and continues to assess its impact on our operations. However, the ultimate effect of the Dodd-Frank Act
on the financial services industry in general, and us in particular, cannot be quantified at this time.
The U.S. Congress
has also recently adopted additional consumer protection laws such as the Credit Card Accountability Responsibility and Disclosure
Act of 2009, and the Federal Reserve has adopted numerous new regulations addressing banks’ credit card, overdraft and mortgage
lending practices. Additional consumer protection legislation and regulatory activity is anticipated in the near future.
The Group of Governors
and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, adopted Basel III in September 2010,
which is a strengthened set of capital requirements for banking organizations in the United States and around the world. Basel
III is currently supported by the U.S. federal banking agencies. As agreed to, Basel III is intended to be fully-phased in on a
global basis on January 1, 2019. However, the ultimate timing and scope of any U.S. implementation of Basel III remains uncertain.
As agreed to, Basel III would require, among other things: (i) an increase in the minimum required common equity to 7% of total
assets; (ii) an increase in the minimum required amount of Tier 1 capital from the current level of 4% of total assets to 8.5%
of total assets; (iii) an increase in the minimum required amount of total capital, from the current level of 8% to 10.5%. Each
of these increased requirements includes 2.5% attributable to a capital conservation buffer to position banking organizations to
absorb losses during periods of financial and economic stress. Basel III also calls for certain items that are currently included
in regulatory capital to be deducted from common equity and Tier 1 capital. The Basel III agreement calls for national jurisdictions
to implement the new requirements beginning January 1, 2013. At that time, the U.S. federal banking agencies will be expected to
have implemented appropriate changes to incorporate the Basel III concepts into U.S. capital adequacy standards. Basel III changes,
as implemented in the United States, will likely result in generally higher regulatory capital standards for all banking organizations.
Such proposals and
legislation, if finally adopted, would change banking laws and our operating environment and that of our subsidiaries in substantial
and unpredictable ways. We cannot determine whether such proposals and legislation will be adopted, or the ultimate effect
that such proposals and legislation, if enacted, or regulations issued to implement the same, would have upon our business, financial
condition or results of operations.
The downgrade of the U.S. credit rating
and Europe’s debt crisis could have a material adverse effect on our business, financial condition and liquidity.
Standard & Poor’s
lowered its long term sovereign credit rating on the United States of America from AAA to AA+ on August 5, 2011. A further downgrade
or a downgrade by other rating agencies could have a material adverse impact on financial markets and economic conditions in the
United States and worldwide. Any such adverse impact could have a material adverse effect on our liquidity, financial condition
and results of operations. Many of our investment securities are issued by U.S. government sponsored entities.
In addition, the possibility
that certain European Union (“EU”) member states will default on their debt obligations has negatively impacted economic
conditions and global markets. The continued uncertainty over the outcome of international and the EU’s financial support
programs and the possibility that other EU member states may experience similar financial troubles could further disrupt global
markets. The negative impact on economic conditions and global markets could also have a material adverse effect on our liquidity,
financial condition and results of operations.
The soundness of other financial institutions could negatively
affect us.
Our ability to engage
in routine funding and other transactions could be negatively affected by the actions and commercial soundness of other financial
institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships.
Defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry
generally, have led to market-wide liquidity problems and losses of depositor, creditor and counterparty confidence and could lead
to losses or defaults by us or by other institutions. We could experience increases in deposits and assets as a result of the difficulties
or failures of other banks, which would increase the capital we need to support our growth.
Our allowance for loan losses may prove to be insufficient
to absorb losses in our loan portfolio.
We established our
allowance for loan losses and maintain it at a level considered appropriate by management to absorb loan losses that are inherent
in the portfolio. Additionally, our Board of Directors regularly monitors the appropriateness of our allowance for loan loses.
The amount of future loan losses is susceptible to changes in economic, operating and other conditions, including changes in interest
rates and the value of the underlying collateral, which may be beyond our control, and such losses may exceed current estimates.
At December 31, 2011 and 2010, our allowance for loan losses as a percentage of total loans was 1.50% and 1.60%, respectively,
and as a percentage of total non-performing loans was 331.71% and 103.11%, respectively. Although management believes that the
allowance for loan losses is appropriate to absorb losses on any existing loans that may become uncollectible, we cannot predict
loan losses with certainty nor can we assure you that our allowance for loan losses will prove sufficient to cover actual loan
losses in the future. Loan losses in excess of our reserves will adversely affect our business, financial condition and results
of operations. The increased levels of provision for loan losses experienced during recent years, as compared to historical levels,
may continue for some period of time.
Declines in value may adversely impact
the carrying amount of our investment portfolio and result in other-than-temporary impairment charges.
As of December 31,
2011, we had two investments in pooled trust preferred securities with an aggregate par value of $2.0 million and a book value
of $1.1 million after recording other-than-temporary impairment charges of $854,000 in 2009. The remaining unrealized non-credit
related losses on these two securities totaled approximately $699,000 at December 31, 2011. We may be required to record additional
impairment charges on our investment securities if they suffer further declines in value that are considered other-than-temporary.
If the credit quality of the securities in our investment portfolio further deteriorates, we may also experience a loss in interest
income from the suspension of either interest or dividend payments. Numerous factors, including lack of liquidity for resales of
certain investment securities, absence of reliable pricing information for investment securities, adverse changes in business climate
or adverse actions by regulators could have a negative effect on our investment portfolio in future periods.
Downgrades in the credit rating of one
or more insurers that provide credit enhancement for our state and municipal securities portfolio may have an adverse impact on
the market for and valuation of these types of securities.
We invest in tax-exempt
state and local municipal investment securities, some of which are insured by monoline insurers. As of December 31, 2011, we had
$88.8 million of municipal securities, which represented 44.8% of our total securities portfolio. Since the economic crisis unfolded
in 2008, several of these insurers have come under scrutiny by rating agencies. Even though management generally purchases municipal
securities on the overall credit strength of the issuer, the reduction in the credit rating of an insurer may negatively impact
the market for and valuation of our investment securities. Such downgrade could adversely affect our liquidity, financial condition
and results of operations.
Our concentration of one-to-four family
residential mortgage loans may result in lower yields and profitability.
One-to-four family
residential mortgage loans comprised $79.1 million and $79.6 million, or 25.2% and 25.6%, of our loan portfolio at December 31,
2011 and 2010, respectively. These loans are secured primarily by properties located in the state of Kansas. Our concentration
of these loans results in lower yields relative to other loan categories within our loan portfolio. While these loans generally
possess higher yields than investment securities, their repayment characteristics are not as well defined and they generally possess
a higher degree of interest rate risk versus other loans and investment securities within our portfolio. This increased interest
rate risk is due to the repayment and prepayment options inherent in residential mortgage loans which are exercised by borrowers
based upon the overall level of interest rates. These residential mortgage loans are generally made on the basis of the borrower’s
ability to make repayments from his or her employment and the value of the property securing the loan. Thus, as a result, repayment
of these loans is also subject to general economic and employment conditions within the communities and surrounding areas where
the property is located.
The effects of the
mortgage market challenges of recent years, combined with depressed residential real estate market prices and historically lower
levels of home sales, has the potential to adversely affect our one-to-four family residential mortgage
portfolio in several
ways, each of which could adversely affect our operating results and/or financial condition.
The Bank may be required to repurchase
mortgage loans in some circumstances, which could harm our liquidity, results of operations and financial condition.
When the Bank sells
mortgage loans, we are required to make certain representations and warranties to the purchaser about the loans and the manner
in which they were originated. Our sales agreements require us to repurchase mortgage loans in the event we breach any of these
representations or warranties. In addition, we may be required to repurchase mortgage loans as a result of borrower fraud or in
the event of early payment default of the borrower on a mortgage loan. If repurchase and indemnity demands increase, our liquidity,
results of operations and financial condition will be adversely affected.
Commercial loans make up a significant
portion of our loan portfolio.
Commercial
loans comprised $57.0 million and $57.3 million, or 18.1% and 18.4%, of our loan portfolio at December 31, 2011 and 2010, respectively.
Our commercial loans are made based primarily on the identified cash flow of the borrower and secondarily on the underlying collateral
provided by the borrower. Most often, this collateral is accounts receivable, inventory, or machinery. Credit support provided
by the borrower for most of these loans and the probability of repayment is based on the liquidation of the pledged collateral
and enforcement of a personal guarantee, if any exists. As a result, in the case of loans secured by accounts receivable, the availability
of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due
from its customers. The collateral securing other loans may depreciate over time, may be difficult to appraise and may fluctuate
in value based on the success of the business. Due to the larger average size of each commercial loan as compared with other loans
such as residential loans, as well as collateral that is generally less readily-marketable, losses incurred on a small number of
commercial loans could have a material adverse impact on our financial condition and results of operations.
Our agricultural loans involve a greater
degree of risk than other loans, and the ability of the borrower to repay may be affected by many factors outside of the borrower’s
control.
We originate agricultural
operating loans. At both December 31, 2011 and 2010, these loans totaled $33.4 million, or 10.7% of our total loan portfolio. The
repayment of agriculture operating loans is dependent on the successful operation or management of the farm property. Likewise,
agricultural operating loans involve a greater degree of risk than lending on residential properties, particularly in the case
of loans that are unsecured or secured by rapidly depreciating assets such as farm equipment, livestock or crops. We generally
secure agricultural operating loans with a blanket lien on livestock, equipment, food, hay, grain and crops. Nevertheless, any
repossessed collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance as
a result of the greater likelihood of damage, loss or depreciation.
We also originate agriculture
real estate loans. At December 31, 2011 and 2010, agricultural real estate loans totaled $5.6 million and $5.4 million, or 1.7%
and 1.8% of our total loan portfolio, respectively. Agricultural real estate lending involves a greater degree of risk and typically
involves larger loans to single borrowers than lending on single-family residences. As with agriculture operating loans, payments
on agricultural real estate loans are dependent on the profitable operation or management of the farm property securing the loan.
The success of the farm may be affected by many factors outside the control of the farm borrower, including adverse weather conditions
that prevent the planting of a crop or limit crop yields (such as hail, drought and floods), loss of livestock due to disease or
other factors, declines in market prices for agricultural products (both domestically and internationally) and the impact of government
regulations (including changes in price supports, subsidies and environmental regulations). In addition, many farms are dependent
on a limited number of key individuals whose injury or death may significantly affect the successful operation of the farm. If
the cash flow from a farming operation is diminished, the borrower’s ability to repay the loan may be impaired. The primary
crops in our market areas are wheat, corn and soybean. Accordingly, adverse circumstances affecting wheat, corn and soybean crops
could have an adverse effect on our agricultural real estate loan portfolio.
Our business is concentrated in and
dependent upon the continued growth and welfare of the markets in which we operate, including eastern, central and southwestern
Kansas.
We operate primarily
in eastern, central and southwestern Kansas, and as a result, our financial condition, results of operations and cash flows are
subject to changes in the economic conditions in those areas. Although each market we operate in is geographically and economically
diverse, our success depends upon the business activity, population, income levels, deposits and real estate activity in each of
these markets. Although our customers’ business and financial interests may extend well beyond our market area, adverse economic
conditions that affect our specific market area could reduce our growth rate, affect the ability of our customers to repay their
loans to us and generally affect our financial condition and results of operations. Because of our geographic concentration, we
are less able than other regional or national financial institutions to diversify our credit risks across multiple markets.
We may experience difficulties in managing
our growth and our growth strategy involves risks that may negatively impact our net income.
As part of our general
strategy, we may acquire banks, branches and related businesses that we believe provide a strategic fit with our business. In the
past, we have acquired a number of local banks and branches and, to the extent that we grow through future acquisitions, including
our announced acquisition of a bank with approximately $35 million in assets located in Wellsville, Kansas, we cannot assure you
that we will be able to adequately and profitably manage this growth. Acquiring other banks and businesses will involve risks commonly
associated with acquisitions, including:
|
·
|
potential exposure to unknown or contingent liabilities of banks and businesses we acquire;
|
|
·
|
exposure to potential asset quality issues of the acquired bank or related business;
|
|
·
|
difficulty and expense of integrating the operations and personnel of banks and businesses we acquire;
|
|
·
|
potential disruption to our business;
|
|
·
|
potential diversion of our management’s time and attention; and
|
|
·
|
the possible loss of key employees and customers of the banks and businesses we acquire.
|
In addition to acquisitions,
we may expand into additional communities or attempt to strengthen our position in our current markets by undertaking additional
branch openings. We believe that it generally takes several years for new banking facilities to first achieve operational profitability,
due to the impact of organization and overhead expenses and the start-up phase of generating loans and deposits. To the extent
that we undertake additional branch openings, we are likely to experience the effects of higher operating expenses relative to
operating income from the new operations, which may have an adverse effect on our levels of reported net income, return on average
equity and return on average assets.
We face intense competition in all phases
of our business from other banks and financial institutions.
The banking and financial
services business in our market is highly competitive. Our competitors include large regional banks, local community banks, savings
and loan associations, securities and brokerage companies, mortgage companies, insurance companies, finance companies, money market
mutual funds, credit unions and other non-bank financial service providers, many of which have greater financial, marketing and
technological resources than us. Increased competition in our market may result in a decrease in the amounts of our loans and deposits,
reduced spreads between loan rates and deposit rates or loan terms that are more favorable to the borrower. Any of these results
could have a material adverse effect on our ability to grow and remain profitable. If increased competition causes us to significantly
discount the interest rates we offer on loans or increase the amount we pay on deposits, our net interest income could be adversely
impacted. If increased competition causes us to relax
our underwriting standards, we could be exposed to higher losses from
lending activities. Additionally, many of our competitors are much larger in total assets and capitalization, have greater access
to capital markets and offer a broader range of financial services than we can offer.
Interest rates and other conditions
impact our results of operations.
Our profitability is
in part a function of the spread between the interest rates earned on investments and loans and the interest rates paid on deposits
and other interest-bearing liabilities. Like most banking institutions, our net interest spread and margin will be affected by
general economic conditions and other factors, including fiscal and monetary policies of the federal government, that influence
market interest rates and our ability to respond to changes in such rates. At any given time, our assets and liabilities will be
such that they are affected differently by a given change in interest rates. As a result, an increase or decrease in rates, the
length of loan terms or the mix of adjustable and fixed rate loans in our portfolio could have a positive or negative effect on
our net income, capital and liquidity. We measure interest rate risk under various rate scenarios and using specific criteria and
assumptions. A summary of this process, along with the results of our net interest income simulations is presented in the section
entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Although we
believe our current level of interest rate sensitivity is reasonable and effectively managed, significant fluctuations in interest
rates may have an adverse effect on our business, financial condition and results of operations.
Changes in interest
rates also can affect the value of loans, securities and other assets. An increase in interest rates that adversely affects the
ability of borrowers to pay the principal or interest on loans may lead to an increase in non-performing assets and a reduction
of income recognized, which could have a material adverse effect on our results of operations and cash flows. Further, when we
place a loan on nonaccrual status, we reverse any accrued but unpaid interest receivable, which decreases interest income. Subsequently,
we continue to have a cost to fund the loan, which is reflected as interest expense, without any interest income to offset the
associated funding expense. Thus, an increase in the amount of non-performing assets would have an adverse impact on net interest
income.
Rising interest rates
will result in a decline in value of our fixed-rate debt securities. The unrealized losses resulting from holding these securities
would be recognized in other comprehensive income and reduce total stockholders' equity. Unrealized losses do not negatively impact
our regulatory capital ratios; however, tangible common equity and the associated ratios would be reduced. If debt securities in
an unrealized loss position are sold, such losses become realized and will reduce our regulatory capital ratios.
We must effectively manage our credit
risk.
There are risks inherent in making any loan,
including risks inherent in dealing with individual borrowers, risks of nonpayment, risks resulting from uncertainties as to the
future value of collateral and risks resulting from changes in economic and industry conditions. We attempt to minimize our credit
risk through prudent loan application approval procedures, careful monitoring of the concentration of our loans within specific
industries and periodic independent reviews of outstanding loans by our credit review department. However, we cannot assure you
that such approval and monitoring procedures will reduce these credit risks. If the overall economic climate in the United States,
generally, and our market areas, specifically, fails to improve meaningfully, or even if it does, our borrowers may experience
difficulties in repaying their loans, and the level of non-performing loans, charge-offs and delinquencies could rise and require
increases in the provision for loan losses, which would cause our net income and return on equity to decrease.
Most of our loans are commercial, real estate,
or agriculture loans, each of which is subject to distinct types of risk. To reduce the lending risks we face, we generally take
a security interest in borrowers’ property for all three types of loans. In addition, we sell certain residential real estate
loans to third parties. Nevertheless, the risk of non-payment is inherent in all three types of loans and if we are unable to collect
amounts owed, it may materially affect our operations and financial performance. For a more complete discussion of our lending
activities see Item 1 of this Annual Report on Form 10-K.
Non-performing assets take significant time to resolve and
adversely affect our results of operations and financial condition, and could result in further losses in the future.
As of December 31, 2011, our non-performing
loans (which consist of nonaccrual loans and loans past due 90 days or more and still accruing interest) totaled $1.4 million,
or 0.45% of our loan portfolio, and our non-performing assets (which include non-performing loans plus non-performing investments
and real estate owned) totaled $4.8 million, or 0.80% of total assets. In addition, we had $2.2 million in accruing loans
that were 30-89 days delinquent as of December 31, 2011.
Our non-performing assets adversely affect
our net income in various ways. We do not record interest income on nonaccrual loans or other real estate, thereby adversely affecting
our net income and returns on assets and equity, increasing our loan administration costs and adversely affecting our efficiency
ratio. When we take collateral in foreclosure and similar proceedings, we are required to mark the collateral to its then-fair
market value, which may result in a loss. These non-performing loans and other real estate also increase our risk profile and the
capital our regulators believe is appropriate in light of such risks. The resolution of non-performing assets requires significant
time commitments from management and can be detrimental to the performance of their other responsibilities. If we experience increases
in non-performing loans and non-performing assets, our net interest income may be negatively impacted and our loan administration
costs could increase, each of which could have an adverse effect on our net income and related ratios, such as return on assets
and equity.
Our loan portfolio has a large concentration
of real estate loans, which involve risks specific to real estate value.
Real estate lending
(including commercial, construction, land and residential) is a large portion of our loan portfolio. These categories were $194.6
million, or approximately 61.9% of our total loan portfolio as of December 31, 2011, as compared to $195.4 million, or approximately
62.8%, as of December 31, 2010. The market value of real estate can fluctuate significantly in a short period of time as a result
of market conditions in the geographic area in which the real estate is located. Although a significant portion of such loans are
secured by a secondary form of collateral, adverse developments affecting real estate values in one or more of our markets could
increase the credit risk associated with our loan portfolio. Additionally, real estate lending typically involves higher loan principal
amounts and the repayment of the loans generally is dependent, in large part, on sufficient income from the properties securing
the loans to cover operating expenses and debt service. Economic events or governmental regulations outside of the control of the
borrower or lender could negatively impact the future cash flow and market values of the affected properties.
If the loans that are
collateralized by real estate become troubled during a time when market conditions are declining or have declined, then we may
not be able to realize the amount of security that we anticipated at the time of originating the loan, which could cause us to
increase our provision for loan losses and adversely affect our operating results and financial condition. In particular, if the
general declines in values that have occurred in the past few years in the residential and commercial real estate markets continue,
particularly within our market area, the value of collateral securing our real estate loans could decline further. In light of
the uncertainty that exists in the economy and credit markets nationally, there can be no guarantee that we will not experience
additional deterioration resulting from the downturn in credit performance by our real estate loan customers.
Our growth or future losses may require
us to raise additional capital in the future, but that capital may not be available when it is needed.
We are required by
federal and state regulatory authorities to maintain adequate levels of capital to support our operations. We anticipate that our
existing capital resources will satisfy our capital requirements for the foreseeable future and this is a major reason why we did
not participate in the U.S. Department of Treasury’s Capital Purchase Program. However, we may at some point need to raise
additional capital to support continuing growth. Our ability to raise additional capital is particularly important to our strategy
of continual growth through acquisitions. Our ability to raise additional capital depends on conditions in the capital markets,
economic conditions and a number of other factors, including investor perceptions regarding the banking industry, market conditions
and governmental activities, and on our financial condition and performance. Accordingly, we cannot assure you of our ability to
raise additional capital if needed on terms acceptable to us. If we cannot raise additional capital when needed, our ability to
further expand our operations through internal growth and acquisitions could be materially impaired.
Attractive acquisition opportunities may not be available
to us in the future.
We expect that other
banking and financial service companies, many of which have significantly greater resources than us, will compete with us in acquiring
other financial institutions if we pursue such acquisitions. This competition could increase prices for potential acquisitions
that we believe are attractive. Also, acquisitions are subject to various regulatory approvals. If we fail to receive the appropriate
regulatory approvals, we will not be able to consummate an acquisition that we believe is in our best interests. Among other things,
our regulators consider our capital, liquidity, profitability, regulatory compliance and levels of goodwill and intangibles when
considering acquisition and expansion proposals. Any acquisition could be dilutive to our earnings and stockholders' equity per
share of our common stock.
Our community banking strategy relies
heavily on our management team, and the unexpected loss of key managers may adversely affect our operations.
Much of our success
to date has been influenced strongly by our ability to attract and to retain senior management experienced in banking and financial
services and familiar with the communities in our market area. Our ability to retain executive officers, the current management
teams, branch managers and loan officers of our operating subsidiaries will continue to be important to the successful implementation
of our strategy. It is also critical, as we grow, to be able to attract and retain qualified additional management and loan officers
with the appropriate level of experience and knowledge about our market area to implement our community-based operating strategy.
The unexpected loss of services of any key management personnel, or the inability to recruit and retain qualified personnel in
the future, could have an adverse effect on our business, financial condition and results of operations.
We have a continuing need for technological
change and we may not have the resources to effectively implement new technology.
The financial services
industry continues to undergo rapid technological changes with frequent introductions of new technology-driven products and services.
In addition to better serving customers, the effective use of technology increases efficiency as well as enables financial institutions
to reduce costs. Our future success will depend in part upon our ability to address the needs of our customers by using technology
to provide products and services that will satisfy customer demands for convenience as well as to create additional efficiencies
in our operations as we continue to grow and expand our market area. Many of our larger competitors have substantially greater
resources to invest in technological improvements. As a result, they may be able to offer additional or superior products to those
that we will be able to offer, which would put us at a competitive disadvantage. Accordingly, we cannot provide you with assurance
that we will be able to effectively implement new technology-driven products and services or be successful in marketing such products
and services to our customers.
There is a limited trading market for
our common shares, and you may not be able to resell your shares at or above the price you paid for them.
Although our common
shares are listed for trading on the Nasdaq Global Market under the symbol “LARK”, the trading in our common shares
has substantially less liquidity than many other publicly traded companies. A public trading market having the desired characteristics
of depth, liquidity and orderliness depends on the presence in the market of willing buyers and sellers of our common shares at
any given time. This presence depends on the individual decisions of investors and general economic and market conditions over
which we have no control. We cannot assure you that volume of trading in our common shares will increase in the future.
System failure or breaches of our network
security, including with respect to our internet banking activities, could subject us to increased operating costs as well as litigation
and other liabilities.
The computer systems
and network infrastructure we use in our operations and internet banking activities could be vulnerable to unforeseen problems.
Our operations are dependent upon our ability to protect our computer equipment against damage from physical theft, fire, power
loss, telecommunications failure or a similar catastrophic event, as well as from security breaches, denial of service attacks,
viruses, worms and other disruptive problems caused by hackers. Any damage or failure that causes an interruption in our operations
could have a material adverse effect on our financial condition and results of operations. Computer break-ins, phishing and other
disruptions could also jeopardize the security of information stored in and transmitted through our computer systems and network
infrastructure, which may result in significant liability to us and may cause existing and potential customers to refrain from
doing business with us. In addition, advances in computer capabilities, new discoveries in the field of cryptography or other developments
could result in a compromise or breach of the algorithms we and our third-party service providers use to encrypt and protect customer
transaction data. A failure of such security measures could have a material adverse effect on our financial condition and results
of operations. Although we, with the help of third-party service providers, intend to continue to implement security technology
and establish operational procedures to prevent such damage, there can be no assurance that these security measures will be successful.
Any interruption in, or breach in security of, our computer systems and network infrastructure could damage our reputation, result
in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial
liability, any of which could have a material adverse effect on our financial condition and results of operations.
We are subject to certain operational
risks, including, but not limited to, customer or employee fraud and data processing system failures and errors.
Employee errors and
misconduct could subject us to financial losses or regulatory sanctions and seriously harm our reputation. Misconduct by our employees
could include hiding unauthorized activities from us, improper or unauthorized activities on behalf of our customers or improper
use of confidential information. It is not always possible to prevent employee errors and misconduct, and the precautions we take
to prevent and detect this activity may not be effective in all cases. Employee errors could also subject us to financial claims
for negligence.
We maintain a system
of internal controls and insurance coverage to mitigate against operational risks, including data processing system failures and
errors and customer or employee fraud. Should our internal controls fail to prevent or detect an occurrence, or if any resulting
loss is not insured or exceeds applicable insurance limits, it could have a material adverse effect on our business, financial
condition and results of operations.
Failure to pay interest on our debt
may adversely impact our ability to pay dividends.
Our $16.5 million of
subordinated debentures are held by two business trusts that we control. Interest payments on the debentures must be paid before
we pay dividends on our capital stock, including our common stock. We have the right to defer interest payments on the debentures
for up to 20 consecutive quarters. However, if we elect to defer interest payments, all deferred interest must be paid before we
may pay dividends on our capital stock. Deferral of interest payments could also cause a decline in the market price of our common
stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2. PROPERTIES
The Company has 21
locations in 16 communities across Kansas: Manhattan (2), Auburn, Dodge City (2), Fort Scott, Garden City, Great Bend (2), Hoisington,
Junction City, LaCrosse, Lawrence (2), Louisburg, Osage City, Osawatomie, Paola, Topeka (2) and Wamego, Kansas. The Company owns
its main office in Manhattan, Kansas and 18 branch offices and leases two branch offices. The Company leases one of the two Topeka,
Kansas locations and the Wamego, Kansas branch. The Company also leases a parking lot for one of the branch offices it owns. In
January 2012, the Company entered into an agreement to purchase a bank in Wellsville, Kansas with one branch, and, following consummation
of the purchase, will own the real estate associated with such branch.
ITEM 3. LEGAL PROCEEDINGS
There are no pending
legal proceedings to which the Company or the Bank is a party, other than ordinary routine litigation incidental to the Bank’s
business. While the ultimate outcome of current legal proceedings cannot be predicted with certainty, it is the opinion of management
that the resolution of these legal actions should not have a material effect on the Company’s consolidated financial position
or results of operations.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II.
ITEM 5. MARKET FOR THE COMPANY’S
COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock has
traded on the Nasdaq Global Market under the symbol "LARK" since 2001. At December 31, 2011, the Company had approximately
380 owners of record and approximately 705 beneficial owners of our common stock. Set forth below are the reported high and low
sale prices of our common stock and dividends paid during the past two years. Information presented below has been adjusted to
give effect to the 5% stock dividends declared in December 2011 and 2010.
Year ended December 31, 2011
|
|
High
|
|
|
Low
|
|
|
Cash
dividends
paid
|
|
First Quarter
|
|
$
|
16.90
|
|
|
$
|
14.43
|
|
|
$
|
0.1810
|
|
Second Quarter
|
|
|
15.95
|
|
|
|
14.68
|
|
|
|
0.1810
|
|
Third Quarter
|
|
|
15.24
|
|
|
|
14.33
|
|
|
|
0.1810
|
|
Fourth Quarter
|
|
$
|
21.48
|
|
|
$
|
14.54
|
|
|
$
|
0.1810
|
|
Year ended December 31, 2010
|
|
High
|
|
|
Low
|
|
|
Cash
dividends
paid
|
|
First Quarter
|
|
$
|
16.32
|
|
|
$
|
13.05
|
|
|
$
|
0.1723
|
|
Second Quarter
|
|
|
16.76
|
|
|
|
14.38
|
|
|
|
0.1723
|
|
Third Quarter
|
|
|
15.70
|
|
|
|
13.69
|
|
|
|
0.1723
|
|
Fourth Quarter
|
|
$
|
16.41
|
|
|
$
|
13.71
|
|
|
|
0.1723
|
|
The Company’s
ability to pay dividends is largely dependent upon the dividends it receives from the Bank. The Company and the Bank are subject
to regulatory limitations on the amount of cash dividends they may pay. See “Business – Supervision and Regulation
– The Company – Dividends” and “Business - Supervision and Regulation – The Bank – Dividend
Payments” for a more detailed description of these limitations.
In May 2008, our Board
of Directors announced the approval of a stock repurchase program permitting us to repurchase up to 113,400 shares, or 5% of our
outstanding common stock. Unless terminated earlier by resolution of the Board of Directors, the May 2008 Repurchase Program will
expire when we have repurchased all shares authorized for repurchase thereunder. As of December 31, 2011, there were 108,006 shares
remaining to repurchase under the plan. The Company did not repurchase any shares during the quarter ended December 31, 2011.
ITEM 6. SELECTED FINANCIAL DATA
|
|
At or for the years ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands, except per share amounts)
|
|
Selected Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
598,240
|
|
|
$
|
561,506
|
|
|
$
|
584,167
|
|
|
$
|
602,214
|
|
|
$
|
606,455
|
|
Loans, net
|
|
|
310,081
|
|
|
|
306,668
|
|
|
|
342,738
|
|
|
|
365,772
|
|
|
|
376,157
|
|
Investment securities
|
|
|
204,885
|
|
|
|
175,872
|
|
|
|
169,619
|
|
|
|
171,297
|
|
|
|
164,724
|
|
Cash and cash equivalents
|
|
|
17,501
|
|
|
|
9,735
|
|
|
|
12,379
|
|
|
|
13,788
|
|
|
|
14,739
|
|
Deposits
|
|
|
454,134
|
|
|
|
431,314
|
|
|
|
438,595
|
|
|
|
439,546
|
|
|
|
452,652
|
|
Borrowings
|
|
|
76,597
|
|
|
|
70,301
|
|
|
|
82,183
|
|
|
|
104,366
|
|
|
|
93,088
|
|
Stockholders’ equity
|
|
$
|
59,120
|
|
|
$
|
53,817
|
|
|
$
|
53,895
|
|
|
$
|
51,406
|
|
|
$
|
52,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
22,586
|
|
|
$
|
24,351
|
|
|
$
|
27,266
|
|
|
$
|
31,647
|
|
|
$
|
35,551
|
|
Interest expense
|
|
|
4,659
|
|
|
|
6,305
|
|
|
|
9,086
|
|
|
|
13,615
|
|
|
|
17,868
|
|
Net interest income
|
|
|
17,927
|
|
|
|
18,046
|
|
|
|
18,180
|
|
|
|
18,032
|
|
|
|
17,683
|
|
Provision for loan losses
|
|
|
2,000
|
|
|
|
5,900
|
|
|
|
3,300
|
|
|
|
2,400
|
|
|
|
255
|
|
Net interest income after provision for loan losses
|
|
|
15,927
|
|
|
|
12,146
|
|
|
|
14,880
|
|
|
|
15,632
|
|
|
|
17,428
|
|
Non-interest income
|
|
|
8,901
|
|
|
|
9,140
|
|
|
|
8,436
|
|
|
|
7,045
|
|
|
|
5,916
|
|
Investment securities gains (losses), net
|
|
|
114
|
|
|
|
172
|
|
|
|
(952
|
)
|
|
|
497
|
|
|
|
-
|
|
Non-interest expense
|
|
|
19,954
|
|
|
|
20,030
|
|
|
|
18,946
|
|
|
|
17,511
|
|
|
|
16,639
|
|
Earnings before income taxes
|
|
|
4,988
|
|
|
|
1,428
|
|
|
|
3,418
|
|
|
|
5,663
|
|
|
|
6,705
|
|
Income tax expense (benefit)
|
|
|
504
|
|
|
|
(615
|
)
|
|
|
146
|
|
|
|
1,110
|
|
|
|
1,303
|
|
Net earnings
|
|
$
|
4,484
|
|
|
$
|
2,043
|
|
|
$
|
3,272
|
|
|
$
|
4,553
|
|
|
$
|
5,402
|
|
Earnings per share (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.61
|
|
|
$
|
0.74
|
|
|
$
|
1.19
|
|
|
$
|
1.64
|
|
|
$
|
1.83
|
|
Diluted
|
|
|
1.61
|
|
|
|
0.74
|
|
|
|
1.19
|
|
|
|
1.63
|
|
|
|
1.81
|
|
Dividends per share (1)
|
|
|
0.72
|
|
|
|
0.69
|
|
|
|
0.66
|
|
|
|
0.63
|
|
|
|
0.60
|
|
Book value per common share outstanding (1)
|
|
$
|
21.24
|
|
|
$
|
19.44
|
|
|
$
|
19.64
|
|
|
$
|
18.72
|
|
|
$
|
17.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets
|
|
|
0.78
|
%
|
|
|
0.35
|
%
|
|
|
0.54
|
%
|
|
|
0.75
|
%
|
|
|
0.90
|
%
|
Return on average equity
|
|
|
7.98
|
%
|
|
|
3.73
|
%
|
|
|
6.18
|
%
|
|
|
8.98
|
%
|
|
|
10.78
|
%
|
Equity to total assets
|
|
|
9.88
|
%
|
|
|
9.58
|
%
|
|
|
9.23
|
%
|
|
|
8.54
|
%
|
|
|
8.62
|
%
|
Net interest rate spread (2)
|
|
|
3.67
|
%
|
|
|
3.65
|
%
|
|
|
3.39
|
%
|
|
|
3.25
|
%
|
|
|
3.15
|
%
|
Net interest margin (2)
|
|
|
3.77
|
%
|
|
|
3.78
|
%
|
|
|
3.57
|
%
|
|
|
3.51
|
%
|
|
|
3.47
|
%
|
Non-performing assets to total assets
|
|
|
0.80
|
%
|
|
|
1.63
|
%
|
|
|
2.48
|
%
|
|
|
1.28
|
%
|
|
|
1.74
|
%
|
Non-performing loans to total gross loans
|
|
|
0.45
|
%
|
|
|
1.55
|
%
|
|
|
3.45
|
%
|
|
|
1.56
|
%
|
|
|
2.64
|
%
|
Allowance for loan losses to total gross loans
|
|
|
1.50
|
%
|
|
|
1.60
|
%
|
|
|
1.57
|
%
|
|
|
1.05
|
%
|
|
|
1.10
|
%
|
Dividend payout ratio
|
|
|
44.72
|
%
|
|
|
92.31
|
%
|
|
|
55.27
|
%
|
|
|
38.10
|
%
|
|
|
32.70
|
%
|
Number of full service banking offices
|
|
|
21
|
|
|
|
21
|
|
|
|
21
|
|
|
|
20
|
|
|
|
20
|
|
|
(1)
|
All per share amounts have been adjusted to give effect to the 5% stock dividends paid in December 2011, 2010, 2009, 2008 and
2007.
|
|
(2)
|
Presented on a taxable equivalent basis, using a 34% federal tax rate.
|
Our selected consolidated
financial data should be read in conjunction with, and is qualified in its entirety by, our consolidated financial statements,
including the related notes.
ITEM 7. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CORPORATE PROFILE AND OVERVIEW
Landmark Bancorp, Inc.
is a one-bank holding company incorporated under the laws of the State of Delaware and is engaged in the banking business through
its wholly-owned subsidiary, Landmark National Bank. Landmark Bancorp is listed on the Nasdaq Global Market under the symbol “LARK”.
Landmark National Bank is dedicated to providing quality financial and banking services to its local communities. Our strategy
includes continuing a tradition of quality assets while growing our commercial and commercial real estate loan portfolios. We are
committed to developing relationships with our borrowers and providing a total banking service.
Landmark National Bank
is principally engaged in the business of attracting deposits from the general public and using such deposits, together with borrowings
and other funds, to originate one-to-four family residential real estate, construction and land, commercial real estate, commercial,
agriculture, municipal and consumer loans. Although not our primary business function, we do invest in certain investment and mortgage-related
securities using deposits and other borrowings as funding sources.
Our results of operations
depend generally on net interest income, which is the difference between interest income from interest-earning assets and interest
expense on interest-bearing liabilities. While net interest income has remained relatively flat for the past three years, our results
have been affected by certain non-interest related items, including variances in the provision for loan losses. Net interest income
is affected by regulatory, economic and competitive factors that influence interest rates, loan demand and deposit flows. In addition,
we are subject to interest rate risk to the degree that our interest-earning assets mature or reprice at different times, or at
different speeds, than our interest-bearing liabilities. Our results of operations are also affected by non-interest income, such
as service charges, loan fees and gains from the sale of newly originated loans and gains or losses on investments. Our principal
operating expenses, aside from interest expense, consist of compensation and employee benefits, occupancy costs, professional fees,
federal deposit insurance costs, data processing expenses and provision for loan losses.
We are significantly
impacted by prevailing economic conditions including federal monetary and fiscal policies and federal regulations of financial
institutions. Deposit balances are influenced by numerous factors such as competing investments, the level of income and the personal
rate of savings within our market areas. Factors influencing lending activities include the demand for housing and the interest
rate pricing competition from other lending institutions.
Currently, our business
consists of ownership of Landmark National Bank, with its main office in Manhattan, Kansas and twenty branch offices in eastern,
central and southwestern Kansas. In January 2012, we entered into an agreement to purchase a bank in Wellsville, Kansas with approximately
$31.5 million in deposits and $15.6 million in loans, which will be merged into Landmark National Bank upon the anticipated closing
of the acquisition during second quarter of 2012.
CRITICAL ACCOUNTING POLICIES
Critical accounting
policies are those that are both most important to the portrayal of our financial condition and results of operations, and require
our management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the
effect of matters that are inherently uncertain. Our critical accounting policies relate to the allowance for loan losses, the
valuation of real estate owned, the valuation of investment securities, accounting for income taxes and the accounting for goodwill
and other intangible assets, all of which involve significant judgment by our management.
We perform periodic and systematic detailed
reviews of our lending portfolio to assess overall collectability. The level of the allowance for loan losses reflects our estimate
of the collectability of the loan portfolio. While these estimates are based on substantive methods for determining allowance requirements,
actual outcomes may differ significantly from estimated results. Additional explanation of the methodologies used in establishing
this allowance are provided in the “Asset Quality and Distribution” section.
Assets acquired through, or in lieu of,
foreclosure are to be sold and are initially recorded at the date of foreclosure at fair value of the collateral less estimated
selling costs through a gain or a charge to the allowance for loan losses, establishing a new cost basis. Subsequent to foreclosure,
the Company records a charge to earnings if the carrying value of a property exceeds the fair value less estimated costs to sell.
Revenue and expenses from operations and subsequent declines in fair value are included in other non-interest expense in the statement
of earnings.
The Company has classified
its investment securities portfolio as available-for-sale, with the exception of certain investments held for regulatory purposes.
The Company carries its available-for-sale investment securities at fair value and employs valuation techniques which utilize quoted
prices or observable inputs when those inputs are available. These observable inputs reflect assumptions that market participants
would use in pricing the security, developed based on market data obtained from sources independent of the Company. When such information
is not available, the Company employs valuation techniques which utilize unobservable inputs, or those which reflect the Company’s
own assumptions, based on the best information available in the circumstances. These valuation methods typically involve estimated
cash flows and other financial modeling techniques. Changes in underlying factors, assumptions, estimates, or other inputs to the
valuation techniques could have a material impact on the Company’s future financial condition and results of operations.
Fair value measurements are classified as Level 1 (quoted prices), Level 2 (based on observable inputs) or Level 3 (based on unobservable
inputs). Available-for-sale securities are recorded at fair value with unrealized gains and losses excluded from earnings and reported
as a separate component of stockholders’ equity, net of taxes, until realized. Purchase premiums and discounts on investment
securities are amortized/accreted into interest income over the estimated lives of the securities using the interest method. Realized
gains and losses on sales of available-for-sale securities are recorded on a trade date basis and are calculated using the specific
identification method.
The Company performs
quarterly reviews of the investment portfolio to determine if any investment securities have any declines in fair value which might
be considered other-than-temporary. The initial review begins with all securities in an unrealized loss position. The Company’s
assessment of other-than-temporary impairment is based on its judgment of the specific facts and circumstances impacting each individual
security at the time such assessments are made. The Company reviews and considers factual information, including expected cash
flows, the structure of the security, the credit quality of the underlying assets and the current and anticipated market conditions.
Credit-related impairments on debt securities are recorded through a charge to earnings. If an equity security is determined to
be other-than-temporarily impaired, the entire impairment is recorded through a charge to earnings.
We have completed several
business and asset acquisitions, which have generated significant amounts of goodwill and intangible assets and related amortization.
The values assigned to goodwill and intangibles, as well as their related useful lives, are subject to judgment and estimation
by our management. Goodwill and intangibles related to acquisitions are determined and based on purchase price allocations. The
initial value assigned to goodwill is the residual of the purchase price over the fair value of all identifiable tangible and intangible
assets acquired and liabilities assumed. Valuation of intangible assets is generally based on the estimated cash flows related
to those assets. Performing discounted cash flow analyses involves the use of estimates and assumptions. Useful lives are based
on the expected future period of the benefit of the asset, the assessment of which considers various characteristics of the asset,
including the historical cash flows. Due to the number of estimates involved related to the allocation of purchase price and determining
the appropriate useful lives of intangible assets, we have identified purchase accounting, and the subsequent impairment testing
of goodwill and intangible assets, as a critical accounting policy.
Goodwill is not amortized;
however, it is tested for impairment at each calendar year end or more frequently when events or circumstances dictate. The impairment
test compares the carrying value of goodwill to an implied fair value of the goodwill, which is based on a review of the Company’s
market capitalization adjusted for appropriate control premiums as well as an analysis of valuation multiples of recent, comparable
acquisitions. The Company considers the result from each of these valuation methods to determine the implied fair value of its
goodwill. A goodwill impairment would be recorded for the amount that the carrying value exceeds the implied fair value. The Company
performed a step one impairment test as of December 31, 2011 by comparing the implied fair value of the Company’s single
reporting unit to its carrying value. Fair value was determined using observable market data, including the Company’s market
capitalization, with control premiums and valuation multiples, compared to recent financial industry acquisition multiples for
similar institutions to estimate the fair value of the Company’s single reporting unit. The Company’s step one impairment
test indicated that its goodwill was not impaired. The Company can make no assurances that future impairment tests will not result
in goodwill impairments.
Intangible assets include
core deposit intangibles and mortgage servicing rights. Core deposit intangible assets are amortized over their estimated useful
life of ten years on an accelerated basis. When facts and circumstances indicate potential impairment, the Company will evaluate
the recoverability of the intangible asset carrying value, using estimates of undiscounted future cash flows over the asset’s
remaining life. Any impairment loss is measured by the excess of carrying value over fair value. Mortgage servicing assets are
recognized as separate assets when rights are acquired through the sale of financial assets, primarily one-to-four family real
estate loans. Mortgage servicing rights are amortized into non-interest expense in proportion to, and over the period of, the estimated
future net servicing income of the underlying financial assets. Servicing assets are recorded at the lower of amortized cost or
estimated fair value, and are evaluated for impairment based upon the fair value of the retained rights as compared to amortized
cost.
The objective of accounting
for income taxes is to recognize the taxes payable or refundable for the current year and deferred tax liabilities and assets for
the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. Judgment
is required in assessing the future tax consequences of events that have been recognized in financial statements or tax returns.
The Company recognizes an income tax position only if it is more likely than not that it will be sustained upon IRS examination,
based upon its technical merits. Once that standard is met, the amount recorded will be the largest amount of benefit that has
a greater than 50 percent likelihood of being realized upon ultimate settlement. The Company recognizes interest and penalties
related to unrecognized tax benefits as a component of income tax expense in our consolidated statements of earnings. The Company
assesses it deferred tax assets to determine if the items are more likely than not to be realized and a valuation allowance is
established for any amounts that are not more likely than not to be realized. Changes in estimates regarding the actual outcome
of these future tax consequences, including the effects of IRS examinations and examinations by other state agencies, could materially
impact our financial position and results of operations.
COMPARISON OF OPERATING RESULTS FOR THE
YEARS ENDED DECEMBER 31, 2011 AND DECEMBER 31, 2010
SUMMARY OF PERFORMANCE.
Net earnings for 2011 increased $2.4 million, or 119.5%, to $4.5 million as compared to 2010. The improvement in net earnings
was primarily the result of a $3.9 million decrease in our provision for loan losses. Also contributing to the increased 2011
net earnings was a $76,000 decline in non-interest expense. Partially offsetting those items were declines of $239,000 in non-interest
income, $119,000 in net interest income and $58,000 in investment securities gains. Our provision for loan losses decreased to
$2.0 million in 2011 from $5.9 million in 2010 due to improvements in our asset quality, as demonstrated through lower levels
of non-performing loans and reduced charge-offs. Our non-interest income declined as a result of lower gains on sales of loans
as the volume of loans sold in the secondary market declined in 2011 relative to 2010 as well as a higher mortgage repurchase
reserve provision recorded in 2011 than 2010.
Net interest income for
2011 decreased slightly to $17.9 million, or 0.7% lower than 2010. Our net interest margin, on a tax equivalent basis, decreased
slightly from 3.78% during 2010 to 3.77% in 2011. Average interest-earning assets declined slightly from $511.7 million during
2010 to $510.6 million for 2011. The decrease in net interest income and net interest margin was primarily a result of our interest-earnings
assets and interest-bearing liabilities repricing lower in the current rate environment. During 2011, we experienced a decline
in the yields on our investment securities and loan portfolio which was not completely offset by lower rates on our deposits and
borrowings. In addition, we maintained higher average balances of investment securities during 2011 and lower average balances
of loans. Our investments balances increased as we invested excess liquidity from higher deposit and lower loan balances. The
decline in our average loan balances was the result of multiple factors, including our decision to reduce exposure to construction
and land loans, reduced loan demand from our customers. It is unlikely that we will be able to increase our net interest margin
from current levels in the near term and may see a decline as we currently expect to reinvest our future cash flows into lower
yielding investments and we may not be able to renew our current loans at the same rates.
We distributed a 5% stock
dividend for the eleventh consecutive year in December 2011. All per share and average share data in this section reflect the
2011 and 2010 stock dividends.
Interest
Income.
Interest income for 2011 decreased $1.8 million, or 7.3%, to $22.6 million from $24.4 million for 2010. Interest
income on loans decreased $1.8 million, or 9.4%, to $17.4 million for 2011, due to lower average balances, which decreased from
$339.7 million in 2010 to $313.9 million in 2011, and, to a lesser extent, a decrease in the average tax equivalent yield on loans
from 5.71% during 2010 to 5.61% during 2011. Interest income on investment securities increased $40,000, or 0.8%, to $5.1 million
for 2011 due to higher average balances. Average investment securities increased from $172.0 million for 2010, to $196.7 million
for 2011, while the average tax equivalent yield on our investment securities decreased from 3.66% during 2010 to 3.22% during
2011. The yield on our investment securities declined as a result of reinvesting the portfolio’s cash flows into lower yielding
investment securities in the current low interest rate environment.
Interest
Expense.
Interest expense for 2011 decreased $1.6 million, or 26.1%, to $4.7 million from $6.3 million for 2010. Interest
expense on deposits decreased $1.0 million to $2.8 million, or 27.1%, from $3.8 million in 2010, primarily as a result of lower
rates on our maturing certificates of deposit and lower rates on savings, money market and NOW accounts. Our total cost of deposits
declined from 0.99% during 2010 to 0.72% during 2011 while our average interest-bearing deposit balances increased from $381.4
million in 2010 to $385.7 million in 2011. The low interest rate environment has allowed us to reduce the rates paid on savings,
money market and NOW accounts while generally maintaining our balances. Our higher cost certificate of deposit balances declined
during 2011 as we priced our offering rates on new or maturing certificates of deposit to reflect the continued reduction in market
rates. Average certificate of deposit balances declined from $187.2 million in 2010 to $178.4 million in 2011. During 2011, interest
expense on borrowings decreased $620,000, or 24.6%, due to lower rates and average outstanding borrowings. Our cost of borrowing
declined from 3.24% in 2010 to 2.76% in 2011, while our average outstanding borrowings declined from $77.6 million during 2010
to $68.9 million during 2011.
Net
Interest Income.
Net interest income represents the difference between income derived from interest-earning assets
and the expense incurred on interest-bearing liabilities. Net interest income is affected by both the difference between the rates
of interest earned on interest-earnings assets and the rates paid on interest-bearing liabilities (“interest rate spread”)
as well as the relative amounts of interest-earning assets and interest-bearing liabilities.
Net interest income for
2011 decreased $119,000, to $17.9 million, while our net interest income, on a tax equivalent basis, decreased $95,000 over the
same periods. Our net interest margin decreased from 3.78% for 2010 to 3.77% for 2011. The decrease in net interest income and
net interest margin was primarily a result of our interest-earning assets and interest-bearing liabilities repricing lower in
the current rate environment. During 2011, we experienced a decline in the yields on our investment securities and loan portfolio
which was not completely offset by lower rates on our deposits and borrowings. In addition, we maintained higher average balances
of investment securities and lower average balances of loans during 2011.
Provision
for Loan Losses.
We maintain, and our Board of Directors monitors, an allowance for losses on loans. The allowance
is established based upon management's periodic evaluation of known and inherent risks in the loan portfolio, review of significant
individual loans and collateral, review of delinquent loans, past loss experience, adverse situations that may affect the borrowers’
ability to repay, current and expected market conditions, and other factors management deems important. Determining the appropriate
level of reserves involves a high degree of management judgment and is based upon historical and projected losses in the loan
portfolio and the collateral value of specifically identified problem loans. Additionally, allowance strategies and policies are
subject to periodic review and revision in response to a number of factors, including current market conditions, actual loss experience
and management's expectations.
Our provision for loan
losses declined from $5.9 million during 2010 to $2.0 million during 2011. The provision for loan losses declined due to improvements
in our asset quality, as evidenced by our lower levels of non-performing loans and decreased loan charge-offs. During 2011, we
had net loan charge-offs of $2.3 million compared to $6.4 million during 2010. The increased net loan charge-offs in 2010 were
primarily related to a previously identified and impaired construction loan totaling $4.3 million, which experienced a significant
decline in the appraised value of the collateral securing the loan. During 2010, we charged the loan down $3.3 million due to
the decline in value of the collateral. Although legal efforts to collect payment from the guarantor continue, we charged-off
the remaining $1.0 million balance on this loan during 2011 due to additional delays associated with the litigation. Also during
2010, we charged-off the remaining $2.3 million balance on a commercial agriculture loan after exhausting our collection attempts.
The remaining loan charge-offs during 2011 were principally associated with a previously identified and impaired commercial relationship
consisting of $2.0 million in real estate and operating loans, which was charged down to estimated fair value after we acquired
ownership of the property securing the loans during 2011. The commercial real estate property was sold during 2011 without incurring
any further losses. For further discussion of the allowance for loan losses, refer to the “Asset Quality and Distribution”
section.
Non-interest
Income.
Non-interest income decreased $239,000, or 2.6%, for 2011, to $8.9 million, as compared to $9.1 million in
2010. The decline in non-interest income was the result of a $671,000 decline in gains on sales of loans as our volume of residential
real estate loans that were sold in the secondary market was lower in 2011 as compared 2010 as well as a higher mortgage repurchase
reserve provision recorded in 2011 than 2010. Partially offsetting the lower gains on sales of loans were increases of $180,000
in fees and service charges, $164,000 in other non-interest income and $88,000 in bank owned life insurance income. Our fees and
service charges increased as a result of a higher volume of fees and service charges received on our deposit accounts and increased
servicing fee income. During 2010, we introduced a rewards program for our deposit customers that promoted debit card usage and
other customer activity which generated additional non-interest income. We anticipate our rewards program will offset some of
the reductions in future non-interest income projected as a result of recent changes in debit card and overdraft regulations.
Other non-interest income increased primarily as a result of gains on sales of other real estate while our bank owned life insurance
income increased as a result of purchasing $2.5 million in additional life insurance policies in January 2011.
InVESTMENT
SECURITIES GAINS (LOSSES).
During 2011, we recognized $186,000 in gains on sales of investment securities as a result
of selling approximately $4.7 million of short-term, tax-exempt municipal investment securities and reinvesting the proceeds in
longer-term, tax-exempt municipal investment securities as we capitalized on the steepness of the municipal yield curve. Partially
offsetting the gains was $72,000 of other-than-temporary impairment losses that we recorded on common stock investment securities
during 2011. During 2010, we realized $563,000 of gains on sales of investment securities resulting from the sale of $10.1 million
of high-quality mortgage-backed investment securities, as we capitalized on what we believed to be premium pricing that existed
in the markets for these types of securities at the time. Also during 2010, we recorded a credit-related, other-than-temporary
impairment loss of $242,000 for the remaining cost basis of one of our three investments in pooled trust preferred investment
securities in addition to a $9,000 other-than-temporary impairment loss on a common stock investment.
Non-interest
Expense.
Non-interest expense decreased $76,000, or 0.4%, to $20.0 million during 2011. The decrease in non-interest
expense was primarily driven by a $258,000 decline in federal deposit insurance premiums due to lower assessment rates beginning
in the second quarter of 2011, as well as decreases of $126,000 in data processing, $111,000 in foreclosure and real estate owned
expenses, $82,000 in compensation and benefits and $63,000 in advertising. Our data processing costs declined as a result of renewing
our contract at lower rates, while our foreclosure and real estate owned expense declined as a result of lower foreclosure related
costs. Our compensation and benefits declined as a result of fewer employees and the reduction in advertising expense was part
of a change in our marketing strategy. Those lower expenses were almost offset by the $603,000 increase in professional fees,
primarily related to consultants who were engaged to help us review internal processes and procedures to identify opportunities
to improve financial performance.
INCOME TAXES.
During
2011, we recorded income tax expense of $504,000, an effective tax rate of 10.1%, compared to an income tax benefit of $615,000
in 2010. The higher effective tax rate in 2011 was driven by an increase in taxable income compared to 2010, while tax-exempt
investment income and bank owned life insurance income remained similar between the years.
COMPARISON OF OPERATING RESULTS FOR THE
YEARS ENDED DECEMBER 31, 2010 AND DECEMBER 31, 2009
SUMMARY OF PERFORMANCE.
Net earnings for 2010 decreased $1.2 million, or 37.6%, to $2.0 million as compared to 2009. The decline in earnings was primarily
the result of a $2.6 million increase in our provision for loan losses and a $1.1 million increase in non-interest expenses. Partially
offsetting the higher expense was a favorable change of $1.1 million in our net gains and losses on investment securities and
a $704,000 increase in our non-interest income. Our provision for loan losses increased to $5.9 million in 2010 as compared to
$3.3 million in 2009. The provision for loan losses reflected the increased charge-offs that occurred in 2010, primarily related
to a significant decline in appraised value of the collateral securing a previously identified and impaired construction loan.
The increased non-interest expense was primarily related to a $355,000 increase in our foreclosure and other real estate expense
as a result of provisions to record valuation allowances to reflect declines in the fair value of certain real estate owned assets,
as well as higher compensation and benefits, professional fees and advertising expenses. We recorded credit-related, other-than-temporary
impairment losses on our investment securities portfolio during both 2010 and 2009, but the net impairment loss declined from
$961,000 during 2009 to $391,000 during 2010. Also, we realized a $563,000 gain on the sale of investments in 2010 due to the
sale of a portion of our mortgage-backed investment securities portfolio, compared to a gain of only $9,000 during 2009. Our increased
non-interest income in 2010 was a result of higher gains on sales of loans and higher fees and service charges.
Our net interest margin,
on a tax equivalent basis, increased from 3.57% for 2009 to 3.78% for 2010. The increase in net interest margin was primarily
a result of maintaining the yields on our loan portfolio while our deposits and FHLB advances repriced lower. While our net interest
margin increased, our average interest-earning asset balances declined over the same periods. The decline in average interest-earning
assets was a result of a decline in our outstanding loan balances and our decision not to reinvest excess liquidity into lower
yielding investments and instead reducing higher cost liabilities. The decline in our loan balances was the result of multiple
factors, including our decision to reduce exposure to construction and land loans, reduced loan demand from our customers, increased
loan charge-offs and normal run-off in our one-to-four-family residential real estate loans.
Interest
Income.
Interest income for 2010 decreased $2.9 million, or 10.7%, to $24.4 million from $27.3 million for 2009. The
decline in interest income was primarily the result of a decline in average interest-earning assets and lower yields on our investment
securities as a result of reinvesting the portfolio’s cash flows into the lower yielding investment securities that were
available in the lower interest rate environment of 2010. Interest income on loans decreased $1.3 million, or 6.5%, to $19.2 million
for 2010, due to lower average balances, which decreased from $359.9 million in 2009 to $339.7 million in 2010 and to a lesser
extent, a decrease in the average tax equivalent yield on loans from 5.75% during 2009 to 5.71% during 2010. Interest income on
investment securities decreased $1.6 million, or 23.7%, to $5.1 million for 2010 due to lower yields and average balances. The
average tax equivalent yield on our investment securities decreased from 4.24% during 2009 to 3.66% during 2010. Average investment
securities decreased from $185.6 million for 2009, to $172.0 million for 2010 as we used some of our investment portfolio cash
flows to reduce higher cost FHLB borrowings during 2010.
Interest
Expense.
Interest expense for 2010 decreased $2.8 million, or 30.6%, to $6.3 million from $9.1 million for 2009. Interest
expense on deposits decreased $2.0 million to $3.8 million, or 35.0%, from $5.8 million in 2009, primarily as a result of lower
rates on our maturing certificates of deposit and lower rates on savings, money market and NOW accounts. Our total cost of deposits
declined from 1.46% during 2009 to 0.99% during 2010 while our average interest-bearing deposit balances decreased from $399.0
million in 2009 to $381.4 million in 2010. The lower interest rate environment of 2010 allowed us to reduce the rates paid on
savings, money market and NOW accounts while generally maintaining our balances. Our higher cost certificate of deposit balances
declined during 2010 as we priced our offering rates on new or maturing certificates of deposit to reflect our reduced need for
funding. Average certificate of deposit balances declined from $215.2 million in 2009 to $187.2 million in 2010. During 2010,
interest expense on borrowings decreased $747,000, or 22.9%, due to lower rates and average outstanding borrowings. Our cost of
borrowing declined from 3.52% in 2009 to 3.24% in 2010, while our average outstanding borrowings declined from $92.9 million during
2009 to $77.6 million during 2010.
NET INTEREST INCOME.
Net interest income for 2010 decreased $134,000, to $18.0 million, while our net interest income, on a tax equivalent basis,
decreased $113,000 over the same periods. Our net interest margin increased from 3.57% in 2009 to 3.78% for 2010. The increase
in net interest margin occurred primarily because we were able to reduce our costs of funding by more than our yields declined
on our interest earning assets as our interest earning assets and liabilities continued to reprice lower. During 2010 we were
generally able to maintain yields on our loans while the yields on our investment securities and costs of deposits declined. Our
cost of borrowings also declined as some of our higher cost FHLB borrowings matured during 2010. However, the improvement in net
interest margin was not enough to offset our lower levels of average interest-earning assets which declined from $545.5 million
in 2009 to $511.7 million in 2010.
Provision
for Loan Losses.
Our provision for loan losses during 2010 increased $2.6 million to $5.9 million, compared to a provision
of $3.3 million during 2009, primarily as a result of a $4.7 million increase in our net loan charge-offs during 2010. The increased
net loan charge-offs in 2010 were primarily related to the charge-off of $3.3 million of a previously identified and impaired
construction loan totaling $4.3 million, which experienced a significant decline in the appraised value of the collateral securing
the loan. Also during 2010, we charged-off the remaining $2.3 million balance on a commercial agriculture loan after exhausting
our collection attempts. The commercial agriculture loan charge-off exceeded the reserves in the allowance for loan losses by
$242,000.
Non-interest
Income.
Non-interest income increased $704,000, or 8.4%, for 2010, to $9.1 million, as compared to $8.4 million in
2009. The increase was primarily attributable to increases of $355,000 in gains on sales of loans and $284,000 in fees and service
charges. Our gains on sales of loans remained elevated in 2010 primarily due to refinancing activity as a result of low mortgage
rates, as well as our expansion of the mortgage lending activities over the past few years. Typically, we sell most of our residential
real estate loan originations into the secondary market which results in gains on sales of loans. Our fees and service charges
increased as a result of higher fees and service charges on our deposit accounts and increased servicing fee income related to
the residential real loans that were sold with servicing retained.
InVESTMENT
SECURITIES GAINS (LOSSES).
Net gains and losses on investment securities experienced a favorable change of $1.1 million
between 2010 and 2009. We recorded credit-related, other-than-temporary impairment losses on our investment securities portfolio
during both 2010 and 2009, but the net impairment loss declined from $961,000 during 2009 to $391,000 during 2010. Also, we realized
a $563,000 gain on the sale of investments in 2010 due to the sale of a portion of our mortgage-backed investment securities portfolio,
compared to a gain on the sale of investments of only $9,000 during 2009.
Non-interest
Expense.
Non-interest expense increased $1.1 million, or 5.7%, to $20.0 million during 2010, as compared to $18.9 million
during 2009. The increase in non-interest expense was primarily due to increases of $452,000 in compensation and benefits, $355,000
in foreclosure and real estate owned expense, $153,000 in professional fees, $137,000 in advertising and $101,000 in data processing.
Annual increases in salary and the May 2009 acquisition of a branch in Lawrence, Kansas contributed to the increase in compensation
and benefits expense in 2010 compared to 2009. Our increase in foreclosure and real estate owned expense was a result of higher
real estate owned balances and from a $135,000 increase in our provision to record valuation allowances to reflect declines in
the fair value of certain real estate owned assets from 2009 to 2010. The increase in professional fees was primarily the result
of legal action to pursue the guarantor of a construction loan which was partially charged-off in 2010 and fully charged-off in
2011. The higher advertising and data processing costs reflect costs associated with customer rewards program.
INCOME TAXES.
During
2010, we recorded an income tax benefit of $615,000 compared to income tax expense of $146,000, or an effective tax rate of 4.3%,
during 2009. The decline in effective tax rate was driven by lower taxable income while our tax-exempt investment income and bank
owned life insurance income remained similar between the years.
QUARTERLY RESULTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 Quarters Ended
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
Interest income
|
|
$
|
5,561
|
|
|
$
|
5,707
|
|
|
$
|
5,691
|
|
|
$
|
5,627
|
|
Interest expense
|
|
|
1,247
|
|
|
|
1,172
|
|
|
|
1,140
|
|
|
|
1,100
|
|
Net interest income
|
|
|
4,314
|
|
|
|
4,535
|
|
|
|
4,551
|
|
|
|
4,527
|
|
Provision for loan losses
|
|
|
400
|
|
|
|
700
|
|
|
|
500
|
|
|
|
400
|
|
Net interest income after provision for loan losses
|
|
|
3,914
|
|
|
|
3,835
|
|
|
|
4,051
|
|
|
|
4,127
|
|
Non-interest income
|
|
|
2,037
|
|
|
|
2,108
|
|
|
|
2,381
|
|
|
|
2,375
|
|
Investment securities gains (losses), net
|
|
|
-
|
|
|
|
-
|
|
|
|
167
|
|
|
|
(53
|
)
|
Non-interest expense
|
|
|
4,831
|
|
|
|
5,227
|
|
|
|
4,673
|
|
|
|
5,223
|
|
Earnings before income taxes
|
|
|
1,120
|
|
|
|
716
|
|
|
|
1,926
|
|
|
|
1,226
|
|
Income tax expense (benefit)
|
|
|
142
|
|
|
|
(6
|
)
|
|
|
437
|
|
|
|
(69
|
)
|
Net earnings
|
|
$
|
978
|
|
|
$
|
722
|
|
|
$
|
1,489
|
|
|
$
|
1,295
|
|
Earnings per share (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.35
|
|
|
$
|
0.26
|
|
|
$
|
0.53
|
|
|
$
|
0.47
|
|
Diluted
|
|
$
|
0.35
|
|
|
$
|
0.26
|
|
|
$
|
0.53
|
|
|
$
|
0.47
|
|
|
|
2010 Quarters Ended
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
Interest income
|
|
$
|
6,292
|
|
|
$
|
6,219
|
|
|
$
|
6,039
|
|
|
$
|
5,801
|
|
Interest expense
|
|
|
1,724
|
|
|
|
1,647
|
|
|
|
1,570
|
|
|
|
1,364
|
|
Net interest income
|
|
|
4,568
|
|
|
|
4,572
|
|
|
|
4,469
|
|
|
|
4,437
|
|
Provision for loan losses
|
|
|
700
|
|
|
|
4,000
|
|
|
|
500
|
|
|
|
700
|
|
Net interest income after provision for loan losses
|
|
|
3,868
|
|
|
|
572
|
|
|
|
3,969
|
|
|
|
3,737
|
|
Non-interest income
|
|
|
1,765
|
|
|
|
2,276
|
|
|
|
2,388
|
|
|
|
2,711
|
|
Investment securities gains (losses), net
|
|
|
563
|
|
|
|
(140
|
)
|
|
|
(251
|
)
|
|
|
-
|
|
Non-interest expense
|
|
|
4,808
|
|
|
|
4,772
|
|
|
|
4,762
|
|
|
|
5,688
|
|
Earnings (loss) before income taxes
|
|
|
1,388
|
|
|
|
(2,064
|
)
|
|
|
1,344
|
|
|
|
760
|
|
Income tax expense (benefit)
|
|
|
245
|
|
|
|
(1,017
|
)
|
|
|
241
|
|
|
|
(84
|
)
|
Net earnings (loss)
|
|
$
|
1,143
|
|
|
$
|
(1,047
|
)
|
|
$
|
1,103
|
|
|
$
|
844
|
|
Earnings (loss) per share (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.42
|
|
|
$
|
(0.38
|
)
|
|
$
|
0.40
|
|
|
$
|
0.30
|
|
Diluted
|
|
$
|
0.42
|
|
|
$
|
(0.38
|
)
|
|
$
|
0.40
|
|
|
$
|
0.30
|
|
(1) All per share amounts have been
adjusted to give effect to the 5% stock dividends paid during December 2011 and 2010.
FINANCIAL CONDITION.
Our asset quality and performance have been affected by the general economic conditions including difficult credit markets,
depressed residential and commercial real estate values, generally depressed consumer confidence, heightened unemployment and
decreased consumer spending. Even though the geographic markets in which the Company operates have been impacted by these economic
conditions in recent years, the effect has not been as severe as those experienced in some areas of the U.S. In addition, our
loan portfolio is diversified across various types of loans and collateral throughout the markets in which we operate. Outside
of identified problem assets, management believes that it continues to have a high quality asset base and solid core earnings,
and anticipates that its efforts to run a high quality financial institution with a sound asset base will continue to create a
strong foundation for continued growth and profitability in the future.
Asset
Quality and Distribution.
Our primary investing activities are the origination of commercial real estate, commercial
and consumer loans and the purchase of investment and mortgage-backed securities. Total assets increased to $598.2 million at
December 31, 2011, compared to $561.5 million at December 31, 2010. Net loans, excluding loans held for sale, increased to $310.1
million at December 31, 2011 from $306.7 million at December 31, 2010. The $3.1 million increase in net loans was primarily the
result of higher outstanding balances of municipal, commercial real estate and agriculture loans. Partially offsetting those increases
were lower balances in our construction and land, consumer, one-to-four family residential real estate and commercial loans. The
decline in these loan balances is the result of multiple factors, including reduced loan demand from our customers. The decline
in our one-to-four family residential real estate loan portfolio is primarily due to normal runoff related to principal payments
and prepayments. Generally, we originate fixed-rate, residential mortgage loans with maturities in excess of ten years for sale
in the secondary market. These loans are typically sold soon after the loan closing. During 2011, we began retaining some of our
newly originated one-to-four family residential real estate loans. While we do not intend to increase our one-to-four family residential
real estate loan portfolio, we are slowing the runoff of the portfolio by retaining some of the new loan originations to offset
weak commercial loan demand; however, most of the new loan originations will still be sold. We do not originate and warehouse
these fixed-rate residential loans for resale in order to speculate on interest rates.
The allowance for loan
losses is established through a provision for loan losses based on our evaluation of the risk inherent in the loan portfolio and
changes in the nature and volume of our loan activity. This evaluation, which includes a review of all loans with respect to which
full collectability may not be reasonably assured, considers the fair value of the underlying collateral, economic conditions,
historical loan loss experience, level of classified loans and other factors that warrant recognition in providing for an appropriate
allowance for loan losses. At December 31, 2011, our allowance for loan losses totaled $4.7 million, or 1.50% of gross loans outstanding,
as compared to $5.0 million, or 1.60% of gross loans outstanding, at December 31, 2010.
Loans past due 30-89 days
and still accruing interest totaled $2.2 million, or 0.71% of gross loans at December 31, 2011 compared to $1.4 million, or 0.44%
of gross loans, at December 31, 2010. The increase in loans past due 30-89 days was primarily associated with various one-to-four
family residential real estate loans. At December 31, 2011, $1.4 million in loans were on non-accrual status, or 0.45% of gross
loans, compared to a balance of $4.8 million, or 1.55% of gross loans, at December 31, 2010. Non-accrual loans consist of loans
90 or more days past due and certain impaired loans. There were no loans 90 days delinquent and still accruing interest at December
31, 2011 or December 31, 2010. Our impaired loans totaled $2.5 million at December 31, 2011 compared to $5.3 million at December
31, 2010. The difference in the Company’s non-accrual loan balances and impaired loan balances at December 31, 2011 was
related to troubled debt restructurings that are current but still classified as impaired. During 2011, we had net loan charge-offs
of $2.3 million compared to $6.4 million during 2010.
At December 31, 2011,
we had five loan relationships that were classified as troubled debt restructurings. During 2011, we restructured three loan relationships
that we identified as troubled debt restructurings. One of the restructurings was a construction and land loan relationship totaling
$599,000 which was secured by raw land which had experienced a severe decline in value. As part of the agreement, we agreed to
reduce the outstanding loan balance to $250,000 in exchange for a $50,000 principal payment in 2011 with the remaining $200,000
to be received during the first quarter of 2012. We had charged-off $141,000 of the loan during 2010 and an additional $208,000
during 2011, with the remaining $200,000 loan balance classified as non-accrual and impaired as of December 31, 2011. The collateral
deficiency of the raw land had previously been included in our allowance on impaired loans. A loan relationship totaling $110,000
to a municipal sanitary and improvement district was also restructured in 2011 to extend the maturity and lower the interest rate
to allow the district more time to develop. The outstanding balance of $110,000 was classified as non-accrual and impaired as
of December 31, 2011. The restructuring did not impact our allowance for loan losses. Also during 2011, a one-to-four family residential
real estate loan totaling $10,000 was classified as a troubled debt restructuring as a result of the customer receiving a zero
interest rate loan. This loan was classified as impaired as of December 31, 2011.
During 2010, we restructured
two loan relationships that were identified as troubled debt restructurings. One of the relationships was an $853,000 real estate
loan which was secured by real estate which was deficient based on the appraised value. The relationship was restructured into
two 1-4 family residential real estate loans to a borrower who was experiencing financial difficulty and to whom we granted concessions
at renewal. The value of the real estate supported $563,000 of the loan relationship. The $290,000 collateral deficiency of the
real estate had previously been included in our allowance on impaired loans. The loan was returned to accrual status during 2010
after a payment history was established, while the collateral deficiency was charged-off. As of December 31, 2011, the outstanding
balance of the loan was $518,000. A second loan relationship totaling $527,000 to another municipal sanitary and improvement district
was restructured in 2010 to extend the maturity and lower the interest rate to allow the district more time to develop. As of
December 31, 2011, the outstanding balance of the loan was $543,000. The restructuring did not impact our allowance for loan losses.
Both of these loans were current and accruing interest at December 31, 2011, but still classified as impaired.
As part of our credit
risk management, we continue to aggressively manage the loan portfolio to identify problem loans and have placed additional emphasis
on commercial real estate and construction and land relationships. We are aggressively working to resolve the remaining problem
credits or move the non-performing credits out of the loan portfolio. At December 31, 2011, we had $2.3 million of real estate
owned as compared to $3.2 million at December 31, 2010. Real estate owned primarily consists of a residential subdivision development
we took possession of after the development slowed and the borrower was unable to comply with the contractual terms of the loan,
a commercial real estate building resulting from a loan settlement, land previously acquired by the Bank for expansion and a few
residential real estate properties. The Company is currently marketing all of the properties in real estate owned.
Many financial institutions,
including us, experienced a general increase in non-performing assets during recent years, as even well-established business borrowers
developed cash flow, profitability and other business-related problems as a result of economic conditions. While we have experienced
improvement in our non-performing loans and believe that our allowance for loan losses at December 31, 2011 was appropriate, there
can be no assurances that loan losses will not exceed the estimated amounts. We believe that we use the best information available
to determine the allowance for loan losses; however, unforeseen market conditions could result in adjustment to the allowance
for loan losses. In addition, net earnings could be significantly affected if circumstances differ substantially from the assumptions
used in establishing the allowance for loan losses. Further deterioration in the local economy or real estate values may create
additional problem loans for us and require further adjustment to our allowance for loan losses.
Liability
Distribution.
Our primary ongoing sources of funds are deposits, FHLB borrowings, proceeds from principal and interest
payments on loans and investment securities and proceeds from the sale of mortgage loans and investment securities. While maturities
and scheduled amortization of loans are a predictable source of funds, deposit flows and mortgage prepayments are greatly influenced
by general interest rates and economic conditions. We experienced a $22.8 increase in total deposits during 2011, to $454.1 million
at December 31, 2011, from $431.3 million at December 31, 2010. The growth has primarily occurred in our non-interest-bearing
demand, money market and NOW and savings accounts. Our time deposit balances have generally declined except for increases in our
public fund and wholesale certificate of deposit balances. The public fund customers in our markets generally use competitive
bidding to award certificates of deposits to local financial institutions. Total borrowings increased $6.3 million to $76.6 million
at December 31, 2011, from $70.3 million at December 31, 2010. The increase was primarily a result of an increase in borrowings
on our FHLB line of credit and in outstanding balances on our repurchase agreements.
Non-interest-bearing deposits
at December 31, 2011 were $66.1 million, or 14.5% of deposits, compared to $52.7 million, or 12.2%, at December 31, 2010. Money
market and NOW deposit accounts were 37.8% of our deposit portfolio and totaled $171.5 million at December 31, 2011, compared
to $167.8 million, or 38.9%, at December 31, 2010. Savings accounts increased to $36.7 million, or 8.1% of deposits, at December
31, 2010, from $32.4 million, or 7.5%, at December 31, 2010. Certificates of deposit increased to $179.8 million, or 39.6% of
deposits, at December 31, 2011, from $178.4 million, or 41.4%, at December 31, 2010.
Certificates of deposit
at December 31, 2011, scheduled to mature in one year or less totaled $124.9 million. Historically, maturing deposits have generally
remained with the Bank and we believe that a significant portion of the deposits maturing in one year or less will remain with
us upon maturity.
CASH FLOWS.
During
2011, our cash and cash equivalents increased by $7.8 million. Our operating activities provided net cash of $13.1 million in
2011, primarily from the proceeds of sales of one-to-four family residential real estate loans held for sale as our loans held
for sale balance declined during 2011. Our investing activities used net cash of $32.5 million during 2011 as our investment securities
and loan portfolios increased during 2011. Our financing activities provided net cash of $27.2 million during 2011, primarily
as a result of higher deposit balances and borrowings on our FHLB line of credit.
Liquidity.
Our most liquid assets are cash and cash equivalents and investment securities available for sale. The levels of these
assets are dependent on the operating, financing, lending and investing activities during any given year. These liquid assets
totaled $215.7 million at December 31, 2011 and $177.4 million at December 31, 2010. During periods in which we are not able to
originate a sufficient amount of loans and/or periods of high principal prepayments, we increase our liquid assets by investing
in short-term, high-grade investments.
Liquidity management is
both a daily and long-term function of our strategy. Excess funds are generally invested in short-term investments. In the event
we require funds beyond our ability to generate them internally, additional funds are generally available through the use of FHLB
advances, a line of credit with the FHLB, other borrowings or through sales of investment securities. At December 31, 2011, we
had outstanding FHLB advances of $35.8 million and $13.4 million in borrowings against our line of credit with the FHLB. At December
31, 2011, we had collateral pledged to the FHLB that would allow us to borrow an additional $51.5 million, subject to FHLB credit
requirements and policies. At December 31, 2011, we had no borrowings through the Federal Reserve discount window, while our borrowing
capacity was $17.0 million. We also have various other fed funds agreements, both secured and unsecured, with correspondent banks
totaling approximately $60.3 million under which we had no outstanding borrowings at December 31, 2011. We had other borrowings
of $27.4 million at December 31, 2011, which included $16.5 million of subordinated debentures and $9.3 million in repurchase
agreements. The Company has a $7.5 million line of credit from an unrelated financial institution maturing on November 5, 2012,
with an interest rate that adjusts daily based on the prime rate plus 0.25%, but not less than 4.00%. This line of credit has
covenants specific to capital and other financial ratios, which the Company was in compliance with at December 31, 2011. The outstanding
balance on the line of credit at December 30, 2011 was $1.6 million, which was also included in other borrowings.
OFF BALANCE SHEET ARRANGEMENTS.
As a provider of financial services, we routinely issue financial guarantees in the form of financial and performance standby
letters of credit. Standby letters of credit are contingent commitments issued by us generally to guarantee the payment or performance
obligation of a customer to a third party. While these standby letters of credit represent a potential outlay by us, a significant
amount of the commitments may expire without being drawn upon. We have recourse against the customer for any amount the customer
is required to pay to a third party under a standby letter of credit. The letters of credit are subject to the same credit policies,
underwriting standards and approval process as loans made by us. Most of the standby letters of credit are secured, and in the
event of nonperformance by the customers, we have the right to the underlying collateral, which could include commercial real
estate, physical plant and property, inventory, receivables, cash and marketable securities. The contract amount of these standby
letters of credit, which represents the maximum potential future payments guaranteed by us, was $1.7 million at December 31, 2011.
At December 31, 2011,
we had outstanding loan commitments, excluding standby letters of credit, of $57.8 million. We anticipate that sufficient funds
will be available to meet current loan commitments. These commitments consist of unfunded lines of credit and commitments to finance
real estate loans.
CAPITAL.
The Federal
Reserve has established capital requirements for bank holding companies which generally parallel the capital requirements for
national banks under OCC regulations. The regulations provide that such standards will generally be applied on a consolidated
(rather than a bank-only) basis in the case of a bank holding company with more than $500 million in total consolidated assets.
At December 31,
2011, we continued to maintain a sound leverage capital ratio of 9.84% and a total risk-based capital ratio of 16.84%. As shown
by the following table, our capital exceeded the minimum capital requirements at December 31, 2011 (dollars in thousands):
|
|
Actual
|
|
|
Actual
|
|
|
Required
|
|
|
Required
|
|
|
|
amount
|
|
|
percent
|
|
|
amount
|
|
|
percent
|
|
Leverage
|
|
$
|
56,273
|
|
|
|
9.84
|
%
|
|
$
|
22,871
|
|
|
|
4.0
|
%
|
Tier 1 capital
|
|
|
56,273
|
|
|
|
15.02
|
%
|
|
|
14,984
|
|
|
|
4.0
|
%
|
Total risk-based capital
|
|
|
63,085
|
|
|
|
16.84
|
%
|
|
|
29,968
|
|
|
|
8.0
|
%
|
At December 31, 2011,
Landmark National Bank continued to maintain a sound leverage ratio of 10.29% and a total risk-based capital ratio of 16.97%.
As shown by the following table, Landmark National Bank’s capital exceeded the minimum capital requirements at December
31, 2011 (dollars in thousands):
|
|
Actual
|
|
|
Actual
|
|
|
Required
|
|
|
Required
|
|
|
|
amount
|
|
|
percent
|
|
|
amount
|
|
|
percent
|
|
Leverage
|
|
$
|
58,692
|
|
|
|
10.29
|
%
|
|
$
|
22,808
|
|
|
|
4.0
|
%
|
Tier 1 capital
|
|
|
58,692
|
|
|
|
15.73
|
%
|
|
|
14,923
|
|
|
|
4.0
|
%
|
Total risk-based capital
|
|
|
63,325
|
|
|
|
16.97
|
%
|
|
|
29,846
|
|
|
|
8.0
|
%
|
Banks and bank holding
companies are generally expected to operate at or above the minimum capital requirements. The above ratios are well in excess
of regulatory minimums and should allow us to operate without capital adequacy concerns. The Federal Deposit Insurance Corporation
Improvement Act of 1991 establishes a bank rating system based on the capital levels of banks. As of December 31, 2011 and 2010,
we were rated "well capitalized", which is the highest rating available under this capital-based rating system. We have
$16.5 million in trust preferred securities which, in accordance with current capital guidelines, has been included in Tier 1
capital as of December 31, 2011. Cash distributions on the securities are payable quarterly, are deductible for income tax purposes
and are included in interest expense in the consolidated financial statements.
DIVIDENDS
During the year ended
December 31, 2011, we paid a quarterly cash dividend of $0.19 per share to our stockholders. Additionally, we distributed a 5%
stock dividend for the eleventh consecutive year in December 2011. The quarterly cash dividends were $0.181 per share as adjusted
to give effect to the 5% stock dividend.
The payment of dividends
by any financial institution or its holding company is affected by the requirement to maintain adequate capital pursuant to applicable
capital adequacy guidelines and regulations. As described above, Landmark National Bank exceeded its minimum capital requirements
under applicable guidelines as of December 31, 2011. The National Bank Act imposes limitations on the amount of dividends that
a national bank may pay without prior regulatory approval. Generally, the amount is limited to the bank's current year's net earnings
plus the adjusted retained earnings for the two preceding years. As of December 31, 2011, approximately $1.3 million was available
to be paid as dividends to Landmark Bancorp by Landmark National Bank without prior regulatory approval.
Additionally, our ability
to pay dividends is limited by the subordinated debentures that are held by two business trusts that we control. Interest payments
on the debentures must be paid before we pay dividends on our capital stock, including our common stock. We have the right to
defer interest payments on the debentures for up to 20 consecutive quarters. However, if we elect to defer interest payments,
all deferred interest must be paid before we may pay dividends on our capital stock.
EFFECTS OF INFLATION
Our consolidated financial
statements and accompanying footnotes have been prepared in accordance with U.S. generally accepted accounting principles, which
generally requires the measurement of financial position and operating results in terms of historical dollars without consideration
for changes in the relative purchasing power of money over time due to inflation. The impact of inflation can be found in the
increased cost of our operations because our assets and liabilities are primarily monetary and interest rates have a greater impact
on our performance than do the effects of inflation.
RECENT ACCOUNTING DEVELOPMENTS
In April 2011, the FASB
issued ASU No. 2011-02, Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt
Restructuring. ASU 2011-02 clarifies which loan modifications constitute troubled debt restructurings and is intended to assist
creditors in determining whether a modification of the terms of a receivable meets the criteria to be considered a troubled debt
restructuring, both for purposes of recording an impairment loss and for disclosure of troubled debt restructurings. In evaluating
whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude, under the guidance clarified
by ASU 2011-02, that the restructuring constitutes a concession and the debtor is experiencing financial difficulties. During
the third quarter of 2011 the Company began applying the provisions in ASU No. 2011-02 and reassessed all loan restructurings
that occurred on or after January 1, 2011. Adoption of ASU 2011-02 did not have a significant impact on the Company’s consolidated
financial statements.
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 is not expected to 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. The adoption of ASU 2011-05 is not expected to 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. The adoption of ASU 2011-08 is not expected to have a significant impact on the Company’s consolidated
financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Our assets and liabilities
are principally financial in nature and the resulting net interest income thereon is subject to changes in market interest rates
and the mix of various assets and liabilities. Interest rates in the financial markets affect our decision on pricing our assets
and liabilities which impacts our net interest income, a significant cash flow source for us. As a result, a substantial portion
of our risk management activities relates to managing interest rate risk.
Our Asset/Liability Management
Committee monitors the interest rate sensitivity of our balance sheet using earnings simulation models and interest sensitivity
GAP analysis. We have set policy limits of interest rate risk to be assumed in the normal course of business and monitor such
limits through our simulation process.
In the past, we have been
successful in meeting the interest rate sensitivity objectives set forth in our policy. Simulation models are prepared to determine
the impact on net interest income for the coming twelve months, including using rates at December 31, 2011 and forecasting volumes
for the twelve-month projection. This position is then subjected to a shift in interest rates of 100 and 200 basis points rising
and 100 basis points falling with an impact to our net interest income on a one-year horizon as follows:
Scenario
|
|
$000's change
in net interest
income
|
|
|
% change in
net interest
income
|
|
200 basis point rising
|
|
$
|
727
|
|
|
|
4.1
|
%
|
100 basis point rising
|
|
$
|
420
|
|
|
|
2.4
|
%
|
100 basis point falling
|
|
$
|
(772
|
)
|
|
|
-4.3
|
%
|
ASSET/LIABILITY MANAGEMENT
Interest rate "gap"
analysis is a common, though imperfect, measure of interest rate risk which measures the relative dollar amounts of interest-earning
assets and interest-bearing liabilities which reprice within a specific time period, either through maturity or rate adjustment.
The "gap" is the difference between the amounts of such assets and liabilities that are subject to such repricing. A
"positive" gap for a given period means that the amount of interest-earning assets maturing or otherwise repricing within
that period exceeds the amount of interest-bearing liabilities maturing or otherwise repricing during that same period. In a rising
interest rate environment, an institution with a positive gap would generally be expected, absent the effects of other factors,
to experience a greater increase in the yield of its assets relative to the cost of its liabilities. Conversely, the cost of funds
for an institution with a positive gap would generally be expected to decline less quickly than the yield on its assets in a falling
interest rate environment. Changes in interest rates generally have the opposite effect on an institution with a "negative"
gap.
Following is our "static
gap" schedule. One-to-four family and consumer loans include prepayment assumptions, while all other loans assume no prepayments.
Mortgage-backed securities include published prepayment assumptions, while all other investments assume no prepayments.
Certificates of deposit
reflect contractual maturities only. Money market accounts are rate sensitive and accordingly, a higher percentage of the accounts
have been included as repricing immediately in the first period. Savings and NOW accounts are not as rate sensitive as money market
accounts and for that reason a significant percentage of the accounts are reflected in the 1-to-5 year category.
We have been successful
in meeting the interest sensitivity objectives set forth in our policy. This has been accomplished primarily by managing the assets
and liabilities while maintaining our traditional high credit standards.
INTEREST-EARNING ASSETS AND INTEREST-BEARING LIABILITIES REPRICING
SCHEDULE
("GAP" TABLE)
As of December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 months or
less
|
|
|
3 to 12
months
|
|
|
1 to 5 years
|
|
|
Over 5
years
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
|
|
$
|
17,204
|
|
|
$
|
16,277
|
|
|
$
|
90,633
|
|
|
$
|
80,771
|
|
|
$
|
204,885
|
|
Loans
|
|
|
89,646
|
|
|
|
130,643
|
|
|
|
94,722
|
|
|
|
4,824
|
|
|
|
319,835
|
|
Total interest-earning assets
|
|
$
|
106,850
|
|
|
$
|
146,920
|
|
|
$
|
185,355
|
|
|
$
|
85,595
|
|
|
$
|
524,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
$
|
40,645
|
|
|
$
|
84,230
|
|
|
$
|
54,928
|
|
|
$
|
30
|
|
|
$
|
179,833
|
|
Money market and NOW accounts
|
|
|
-
|
|
|
|
11,836
|
|
|
|
159,693
|
|
|
|
-
|
|
|
|
171,529
|
|
Savings accounts
|
|
|
-
|
|
|
|
-
|
|
|
|
36,650
|
|
|
|
-
|
|
|
|
36,650
|
|
Borrowed money
|
|
|
40,500
|
|
|
|
370
|
|
|
|
145
|
|
|
|
35,580
|
|
|
|
76,595
|
|
Total interest-bearing liabilities
|
|
$
|
81,145
|
|
|
$
|
96,436
|
|
|
$
|
251,416
|
|
|
$
|
35,610
|
|
|
$
|
464,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest sensitivity gap per period
|
|
$
|
25,705
|
|
|
$
|
50,484
|
|
|
$
|
(66,061
|
)
|
|
$
|
49,985
|
|
|
$
|
60,113
|
|
Cumulative interest sensitivity gap
|
|
|
25,705
|
|
|
|
76,189
|
|
|
|
10,128
|
|
|
|
60,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative gap as a percent of total interest-earning assets
|
|
|
4.90
|
%
|
|
|
14.52
|
%
|
|
|
1.93
|
%
|
|
|
11.46
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative interest sensitive assets as a percent of cumulative interest sensitive liabilities
|
|
|
131.68
|
%
|
|
|
142.90
|
%
|
|
|
102.36
|
%
|
|
|
112.94
|
%
|
|
|
|
|
Safe Harbor Statement
Under the Private Securities Litigation Reform Act of 1995
Forward-Looking Statements
This document (including
information incorporated by reference) contains, and future oral and written statements by us and our management may contain,
forward-looking statements, within the meaning of such term in the Private Securities Litigation Reform Act of 1995, with respect
to our financial condition, results of operations, plans, objectives, future performance and business. Forward-looking statements,
which may be based upon beliefs, expectations and assumptions of our management and on information currently available to management,
are generally identifiable by the use of words such as “believe,” “expect,” “anticipate,”
“plan,” “intend,” “estimate,” “may,” “will,” “would,”
“could,” “should” or other similar expressions. Additionally, all statements in this document, including
forward-looking statements, speak only as of the date they are made, and we undertake no obligation to update any statement in
light of new information or future events.
Our ability to predict
results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse
effect on operations and future prospects by us and our subsidiaries include, but are not limited to, the following:
|
·
|
The
strength of the
United States economy
in general and
the strength of
the local economies
in which we conduct
our operations
which may be less
favorable than
expected and may
result in, among
other things, a
deterioration in
the credit quality
and value of our
assets.
|
|
·
|
The
effects of, and
changes in, federal,
state and local
laws, regulations
and policies affecting
banking, securities,
insurance and monetary
and financial matters,
including the Dodd-Frank
Act and the rules
and regulations
promulgated thereunder,
and the effects
of further increases
in FDIC premiums.
|
|
·
|
The
effects of changes
in interest rates
(including the
effects of changes
in the rate of
prepayments of
our assets) and
the policies of
the Board of Governors
of the Federal
Reserve System.
|
|
·
|
Our
ability to compete
with other financial
institutions as
effectively as
we currently intend
due to increases
in competitive
pressures in the
financial services
sector.
|
|
·
|
Our
inability to obtain
new customers and
to retain existing
customers.
|
|
·
|
The
timely development
and acceptance
of products and
services, including
products and services
offered through
alternative delivery
channels such as
the Internet.
|
|
·
|
Technological
changes implemented
by us and by other
parties, including
third party vendors,
which may be more
difficult or more
expensive than
anticipated or
which may have
unforeseen consequences
to us and our customers.
|
|
·
|
Our
ability to develop
and maintain secure
and reliable electronic
systems.
|
|
·
|
Our
ability to retain
key executives
and employees and
the difficulty
that we may experience
in replacing key
executives and
employees in an
effective manner.
|
|
·
|
Consumer
spending and saving
habits which may
change in a manner
that affects our
business adversely.
|
|
·
|
Our
ability to successfully
integrate acquired
businesses and
future growth.
|
|
·
|
The
costs, effects
and outcomes of
existing or future
litigation.
|
|
·
|
Changes
in accounting policies
and practices,
as may be adopted
by state and federal
regulatory agencies
and the Financial
Accounting Standards
Board.
|
|
·
|
The
economic impact
of past and any
future terrorist
attacks, acts of
war or threats
thereof, and the
response of the
United States to
any such threats
and attacks.
|
|
·
|
Our
ability to effectively
manage our credit
risk.
|
|
·
|
Our
ability to forecast
probable loan losses
and maintain an
adequate allowance
for loan losses.
|
|
·
|
The
effects of declines
in the value of
our investment
portfolio.
|
|
·
|
Our
ability to raise
additional capital
if needed.
|
|
·
|
The
effects of declines
in real estate
markets.
|
These risks and uncertainties
should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Additional
information concerning us and our business, including other factors that could materially affect our financial results is included
in the “Risk Factors” section.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
The Board of Directors
Landmark Bancorp, Inc.:
We have audited the accompanying
consolidated balance sheets of Landmark Bancorp, Inc. and subsidiary (the “Company”) as of December 31,
2011 and 2010, and the related consolidated statements of earnings, comprehensive income, stockholders’ equity and cash
flows for each of the years in the three-year period ended December 31, 2011. These consolidated financial statements are
the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits
in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated
financial statements referred to above, present fairly, in all material respects, the financial position of Landmark Bancorp,
Inc. and subsidiary as of December 31, 2011 and 2010, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 2011, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
Kansas City, Missouri
March 15, 2012
LANDMARK BANCORP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
(Dollars in thousands)
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
17,501
|
|
|
$
|
9,735
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
Available-for-sale, at fair value
|
|
|
198,214
|
|
|
|
167,689
|
|
Other securities
|
|
|
6,671
|
|
|
|
8,183
|
|
Loans, net
|
|
|
310,081
|
|
|
|
306,668
|
|
Loans held for sale
|
|
|
9,754
|
|
|
|
12,576
|
|
Premises and equipment, net
|
|
|
14,692
|
|
|
|
15,225
|
|
Bank owned life insurance
|
|
|
16,163
|
|
|
|
13,080
|
|
Goodwill
|
|
|
12,894
|
|
|
|
12,894
|
|
Other intangible assets, net
|
|
|
1,923
|
|
|
|
2,233
|
|
Real estate owned
|
|
|
2,264
|
|
|
|
3,194
|
|
Accrued interest and other assets
|
|
|
8,083
|
|
|
|
10,029
|
|
Total assets
|
|
$
|
598,240
|
|
|
$
|
561,506
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
Non-interest bearing demand
|
|
$
|
66,122
|
|
|
$
|
52,683
|
|
Money market and NOW
|
|
|
171,529
|
|
|
|
167,815
|
|
Savings
|
|
|
36,650
|
|
|
|
32,369
|
|
Time, $100,000 and greater
|
|
|
63,374
|
|
|
|
49,390
|
|
Time, other
|
|
|
116,459
|
|
|
|
129,057
|
|
Total deposits
|
|
|
454,134
|
|
|
|
431,314
|
|
|
|
|
|
|
|
|
|
|
Federal Home Loan Bank borrowings
|
|
|
49,163
|
|
|
|
44,300
|
|
Other borrowings
|
|
|
27,434
|
|
|
|
26,001
|
|
Accrued interest, taxes, and other liabilities
|
|
|
8,389
|
|
|
|
6,074
|
|
Total liabilities
|
|
|
539,120
|
|
|
|
507,689
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par, 200,000 shares authorized; none issued
|
|
|
-
|
|
|
|
-
|
|
Common stock, $0.01 par, 7,500,000 shares authorized; 2,782,826 and 2,768,736 shares issued and outstanding at December 31, 2011 and 2010, respectively
|
|
|
28
|
|
|
|
26
|
|
Additional paid-in capital
|
|
|
29,313
|
|
|
|
27,102
|
|
Retained earnings
|
|
|
26,200
|
|
|
|
25,767
|
|
Accumulated other comprehensive income, net
|
|
|
3,579
|
|
|
|
922
|
|
Total stockholders’ equity
|
|
|
59,120
|
|
|
|
53,817
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
598,240
|
|
|
$
|
561,506
|
|
See accompanying notes to consolidated
financial statements
.
LANDMARK BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Earnings
(Dollars in thousands, except per share amounts)
|
|
Years ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
$
|
17,108
|
|
|
$
|
18,974
|
|
|
$
|
20,338
|
|
Tax-exempt
|
|
|
333
|
|
|
|
272
|
|
|
|
236
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
2,748
|
|
|
|
2,653
|
|
|
|
4,191
|
|
Tax-exempt
|
|
|
2,397
|
|
|
|
2,452
|
|
|
|
2,501
|
|
Total interest income
|
|
|
22,586
|
|
|
|
24,351
|
|
|
|
27,266
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
2,760
|
|
|
|
3,786
|
|
|
|
5,820
|
|
Borrowings
|
|
|
1,899
|
|
|
|
2,519
|
|
|
|
3,266
|
|
Total interest expense
|
|
|
4,659
|
|
|
|
6,305
|
|
|
|
9,086
|
|
Net interest income
|
|
|
17,927
|
|
|
|
18,046
|
|
|
|
18,180
|
|
Provision for loan losses
|
|
|
2,000
|
|
|
|
5,900
|
|
|
|
3,300
|
|
Net interest income after provision for loan losses
|
|
|
15,927
|
|
|
|
12,146
|
|
|
|
14,880
|
|
Non-interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees and service charges
|
|
|
4,886
|
|
|
|
4,706
|
|
|
|
4,422
|
|
Gains on sales of loans, net
|
|
|
2,775
|
|
|
|
3,446
|
|
|
|
3,091
|
|
Bank owned life insurance
|
|
|
594
|
|
|
|
506
|
|
|
|
508
|
|
Other
|
|
|
646
|
|
|
|
482
|
|
|
|
415
|
|
Total non-interest income
|
|
|
8,901
|
|
|
|
9,140
|
|
|
|
8,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impairment losses
|
|
|
(72
|
)
|
|
|
(391
|
)
|
|
|
(961
|
)
|
Gains on sales of investment securities
|
|
|
186
|
|
|
|
563
|
|
|
|
9
|
|
Investment securities gains (losses), net
|
|
|
114
|
|
|
|
172
|
|
|
|
(952
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
9,432
|
|
|
|
9,514
|
|
|
|
9,062
|
|
Occupancy and equipment
|
|
|
2,874
|
|
|
|
2,809
|
|
|
|
2,724
|
|
Professional fees
|
|
|
1,434
|
|
|
|
831
|
|
|
|
678
|
|
Amortization of intangibles
|
|
|
778
|
|
|
|
790
|
|
|
|
767
|
|
Data processing
|
|
|
753
|
|
|
|
879
|
|
|
|
778
|
|
Foreclosure and real estate owned expense
|
|
|
652
|
|
|
|
763
|
|
|
|
408
|
|
Advertising
|
|
|
554
|
|
|
|
617
|
|
|
|
480
|
|
Federal deposit insurance premiums
|
|
|
465
|
|
|
|
723
|
|
|
|
849
|
|
Other
|
|
|
3,012
|
|
|
|
3,104
|
|
|
|
3,200
|
|
Total non-interest expense
|
|
|
19,954
|
|
|
|
20,030
|
|
|
|
18,946
|
|
Earnings before income taxes
|
|
|
4,988
|
|
|
|
1,428
|
|
|
|
3,418
|
|
Income tax expense (benefit)
|
|
|
504
|
|
|
|
(615
|
)
|
|
|
146
|
|
Net earnings
|
|
$
|
4,484
|
|
|
$
|
2,043
|
|
|
$
|
3,272
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (1)
|
|
$
|
1.61
|
|
|
$
|
0.74
|
|
|
$
|
1.19
|
|
Diluted (1)
|
|
$
|
1.61
|
|
|
$
|
0.74
|
|
|
$
|
1.19
|
|
(1) All per share amounts have been adjusted to give effect to
the 5% stock dividends paid during December 2011, 2010 and 2009.
See accompanying notes to consolidated financial statements.
LANDMARK BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Comprehensive
Income
(Dollars in thousands)
|
|
Years ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
Net earnings
|
|
$
|
4,484
|
|
|
$
|
2,043
|
|
|
$
|
3,272
|
|
Net unrealized holding gains (losses) on available-for-sale securities for which a portion of an other-than-temporary impairment has been recorded in earnings
|
|
|
190
|
|
|
|
(4
|
)
|
|
|
(479
|
)
|
Net unrealized holding gains (losses) on all other available-for-sale securities
|
|
|
4,139
|
|
|
|
(745
|
)
|
|
|
897
|
|
Less reclassification adjustment for (gains) losses included in earnings
|
|
|
(114
|
)
|
|
|
(172
|
)
|
|
|
952
|
|
Net unrealized gains (losses)
|
|
|
4,215
|
|
|
|
(921
|
)
|
|
|
1,370
|
|
Income tax expense (benefit)
|
|
|
1,558
|
|
|
|
(340
|
)
|
|
|
492
|
|
Total comprehensive income
|
|
$
|
7,141
|
|
|
$
|
1,462
|
|
|
$
|
4,150
|
|
See accompanying notes to consolidated financial statements.
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
|
|
|
Treasury
stock
|
|
|
Accumulated other
comprehensive
income
|
|
|
Total
|
|
Balance at December 31, 2008
|
|
$
|
24
|
|
|
$
|
23,873
|
|
|
$
|
27,819
|
|
|
$
|
(935
|
)
|
|
$
|
625
|
|
|
$
|
51,406
|
|
Net earnings
|
|
|
-
|
|
|
|
-
|
|
|
|
3,272
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,272
|
|
Change in fair value
of investment securities available-for-sale, net of tax
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
878
|
|
|
|
878
|
|
Dividends paid ($0.66 per share) (1)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,806
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,806
|
)
|
Stock-based compensation
|
|
|
-
|
|
|
|
157
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
157
|
|
Purchase of 800 treasury shares
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(12
|
)
|
|
|
-
|
|
|
|
(12
|
)
|
5% stock dividend,
118,329 shares
|
|
|
1
|
|
|
|
814
|
|
|
|
(1,762
|
)
|
|
|
947
|
|
|
|
-
|
|
|
|
-
|
|
Balance at December
31, 2009
|
|
|
25
|
|
|
|
24,844
|
|
|
|
27,523
|
|
|
|
-
|
|
|
|
1,503
|
|
|
|
53,895
|
|
Net earnings
|
|
|
-
|
|
|
|
-
|
|
|
|
2,043
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,043
|
|
Change in fair value
of investment securities available-for-sale, net of tax
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(581
|
)
|
|
|
(581
|
)
|
Dividends paid ($0.69 per share) (1)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,908
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,908
|
)
|
Stock-based compensation
|
|
|
-
|
|
|
|
100
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
100
|
|
Exercise of stock options,
21,793 shares, including excess tax benefit of $40
|
|
|
-
|
|
|
|
268
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
268
|
|
5% stock dividend,
125,319 shares
|
|
|
1
|
|
|
|
1,890
|
|
|
|
(1,891
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance at December
31, 2010
|
|
$
|
26
|
|
|
$
|
27,102
|
|
|
$
|
25,767
|
|
|
$
|
-
|
|
|
$
|
922
|
|
|
$
|
53,817
|
|
Net earnings
|
|
|
-
|
|
|
|
-
|
|
|
|
4,484
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,484
|
|
Change in fair value
of investment securities available-for-sale, net of tax
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,657
|
|
|
|
2,657
|
|
Dividends paid ($0.72 per share) (1)
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,014
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,014
|
)
|
Stock-based compensation
|
|
|
-
|
|
|
|
107
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
107
|
|
Exercise of stock options,
5,228 shares, including excess tax benefit of $12
|
|
|
-
|
|
|
|
69
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
69
|
|
5% stock dividend,
132,107 shares
|
|
|
2
|
|
|
|
2,035
|
|
|
|
(2,037
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance at December
31, 2011
|
|
$
|
28
|
|
|
$
|
29,313
|
|
|
$
|
26,200
|
|
|
$
|
-
|
|
|
$
|
3,579
|
|
|
$
|
59,120
|
|
(1) Dividends per share have been adjusted to give effect to the
5% stock dividends paid during December 2011, 2010 and 2009.
See accompanying notes to consolidated financial statements.
LANDMARK BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Dollars in thousands)
|
|
Years ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
4,484
|
|
|
$
|
2,043
|
|
|
$
|
3,272
|
|
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
2,000
|
|
|
|
5,900
|
|
|
|
3,300
|
|
Valuation allowance on real estate owned
|
|
|
517
|
|
|
|
367
|
|
|
|
232
|
|
Amortization of investment security premiums, net
|
|
|
823
|
|
|
|
669
|
|
|
|
246
|
|
Amortization of intangibles
|
|
|
778
|
|
|
|
790
|
|
|
|
767
|
|
Depreciation
|
|
|
881
|
|
|
|
972
|
|
|
|
946
|
|
Stock-based compensation
|
|
|
107
|
|
|
|
100
|
|
|
|
157
|
|
Deferred income taxes
|
|
|
(793
|
)
|
|
|
(523
|
)
|
|
|
(1,567
|
)
|
Net (gains) losses on investment securities
|
|
|
(114
|
)
|
|
|
(172
|
)
|
|
|
952
|
|
Net (gains) losses on sales of premises and equipment and foreclosed assets
|
|
|
(166
|
)
|
|
|
(24
|
)
|
|
|
3
|
|
Net gains on sales of loans
|
|
|
(2,775
|
)
|
|
|
(3,446
|
)
|
|
|
(3,091
|
)
|
Proceeds from sale of loans
|
|
|
123,431
|
|
|
|
165,349
|
|
|
|
208,023
|
|
Origination of loans held for sale
|
|
|
(117,834
|
)
|
|
|
(169,776
|
)
|
|
|
(208,335
|
)
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued interest and other assets
|
|
|
(585
|
)
|
|
|
(888
|
)
|
|
|
(2,856
|
)
|
Accrued expenses, taxes, and other liabilities
|
|
|
2,316
|
|
|
|
(3,420
|
)
|
|
|
1,982
|
|
Net cash provided by (used in) operating activities
|
|
|
13,070
|
|
|
|
(2,059
|
)
|
|
|
4,031
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (increase) decrease in loans
|
|
|
(6,436
|
)
|
|
|
26,430
|
|
|
|
22,087
|
|
Maturities and prepayments of investment securities
|
|
|
55,002
|
|
|
|
38,142
|
|
|
|
56,077
|
|
Net cash paid in branch acquisition
|
|
|
-
|
|
|
|
-
|
|
|
|
(130
|
)
|
Purchases of investment securities
|
|
|
(87,003
|
)
|
|
|
(55,910
|
)
|
|
|
(57,074
|
)
|
Proceeds from sale of investment securities
|
|
|
6,494
|
|
|
|
10,097
|
|
|
|
2,846
|
|
Purchase of bank owned life insurance
|
|
|
(2,500
|
)
|
|
|
-
|
|
|
|
-
|
|
Proceeds from sales of premises and equipment and foreclosed assets
|
|
|
2,317
|
|
|
|
1,612
|
|
|
|
2,638
|
|
Purchases of premises and equipment, net
|
|
|
(349
|
)
|
|
|
(320
|
)
|
|
|
(814
|
)
|
Net cash (used in) provided by investing activities
|
|
|
(32,475
|
)
|
|
|
20,051
|
|
|
|
25,630
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in deposits
|
|
|
22,820
|
|
|
|
(7,281
|
)
|
|
|
(7,347
|
)
|
Federal Home Loan Bank advance repayments
|
|
|
(37
|
)
|
|
|
(20,037
|
)
|
|
|
(15,037
|
)
|
Change in Federal Home Loan Bank line of credit, net
|
|
|
4,900
|
|
|
|
8,500
|
|
|
|
(6,000
|
)
|
Proceeds from other borrowings
|
|
|
3,633
|
|
|
|
334
|
|
|
|
3,185
|
|
Repayments on other borrowings
|
|
|
(2,200
|
)
|
|
|
(512
|
)
|
|
|
(4,053
|
)
|
Proceeds from issuance of common stock under stock option plans
|
|
|
57
|
|
|
|
228
|
|
|
|
-
|
|
Excess tax benefit related to stock option plans
|
|
|
12
|
|
|
|
40
|
|
|
|
-
|
|
Payment of dividends
|
|
|
(2,014
|
)
|
|
|
(1,908
|
)
|
|
|
(1,806
|
)
|
Purchase of treasury stock
|
|
|
-
|
|
|
|
-
|
|
|
|
(12
|
)
|
Net cash provided by (used in) financing activities
|
|
|
27,171
|
|
|
|
(20,636
|
)
|
|
|
(31,070
|
)
|
Net increase (decrease) in cash and cash equivalents
|
|
|
7,766
|
|
|
|
(2,644
|
)
|
|
|
(1,409
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
9,735
|
|
|
|
12,379
|
|
|
|
13,788
|
|
Cash and cash equivalents at end of year
|
|
$
|
17,501
|
|
|
$
|
9,735
|
|
|
$
|
12,379
|
|
See accompanying notes to consolidated financial statements.
LANDMARK BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
(Dollars in thousands)
|
|
Years ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for income taxes
|
|
$
|
103
|
|
|
$
|
942
|
|
|
$
|
862
|
|
Cash paid during the year for interest
|
|
|
4,802
|
|
|
|
6,658
|
|
|
|
9,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of noncash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfer of loans to real estate owned
|
|
|
1,226
|
|
|
|
4,020
|
|
|
|
2,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Branch acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of liabilities assumed
|
|
|
-
|
|
|
|
-
|
|
|
|
6,650
|
|
Fair value of assets acquired
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,520
|
|
See accompanying notes to consolidated financial statements.
LANDMARK BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
Principles of Consolidation.
The accompanying consolidated financial statements include the accounts of Landmark Bancorp, Inc. (the “Company”)
and its wholly owned subsidiary, Landmark National Bank (the “Bank”). All intercompany balances and transactions
have been eliminated in consolidation. The Bank, considered a single operating segment, is principally engaged in the business
of attracting deposits from the general public and using such deposits, together with borrowings and other funds, to originate
one-to-four family residential real estate, construction and land, commercial real estate, commercial, agriculture, municipal
and consumer loans.
Subsequent Events.
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. Any material events that occur between the balance sheet date and
filing date are disclosed as subsequent events while the consolidated financial statements are adjusted to reflect any conditions
that exist at the balance sheet date.
Cash and cash equivalents.
Cash and cash equivalents include cash on hand and amounts due from banks with original maturities of fewer than 90 days.
Investment Securities.
The Company has classified its investment securities portfolio as available-for-sale, with the exception of certain investments
held for regulatory purposes. The Company carries its available-for-sale investment securities at fair value and employs valuation
techniques which utilize quoted prices or observable inputs when those inputs are available. These observable inputs reflect assumptions
that market participants use in pricing the security, developed based on market data obtained from sources independent of the
Company. When such information is not available, the Company employs valuation techniques which utilize unobservable inputs, or
those which reflect the Company’s own assumptions, based on the best information available in the circumstances. These valuation
methods typically involve estimated cash flows and other financial modeling techniques. Changes in underlying factors, assumptions,
estimates, or other inputs to the valuation techniques could have a material impact on the Company’s future financial condition
and results of operations. Fair value measurements are classified as Level 1 (quoted prices), Level 2 (based on observable inputs)
or Level 3 (based on unobservable inputs) and are discussed in more detail in Note 12 to the consolidated financial statements.
Available-for-sale securities are recorded at fair value with unrealized gains and losses excluded from earnings and reported
as a separate component of stockholders’ equity, net of taxes, until realized. Purchase premiums and discounts on investment
securities are amortized/accreted into interest income over the estimated lives of the securities using the interest method. Realized
gains and losses on sales of available-for-sale securities are recorded on a trade date basis and are calculated using the specific
identification method.
The Company performs quarterly
reviews of the investment portfolio to determine if investment securities have any declines in fair value which might be considered
other-than-temporary. The initial review begins with all securities in an unrealized loss position. The Company’s assessment
of other-than-temporary impairment is based on its judgment of the specific facts and circumstances impacting each individual
security at the time such assessments are made. The Company reviews and considers all factual 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 recorded through a charge to earnings. If an equity security is
determined to be other-than-temporarily impaired, the entire impairment is recorded through a charge to earnings.
Other investments included
in the Company’s investment portfolio are investments acquired for regulatory purposes and borrowing availability and are
accounted for at cost. The cost of such investments represents their redemption value as such investments do not have a readily
determinable fair value.
Loans and Allowance
for Loan Losses.
Loans receivable that management has the intent and ability to hold for the foreseeable future or until
maturity or pay-off are reported at their outstanding principal balances, net of undisbursed loan proceeds, the allowance for
loan losses, and any deferred fees or costs on originated loans. Origination fees received on loans held in portfolio and the
estimated direct costs of origination are deferred and amortized to interest income using the interest method.
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. Net unrealized losses are recognized through a valuation allowance charged against earnings. Origination fees received
and estimated direct costs on such loans are deferred and recognized as a component of the gain or loss on sale. If the Company
retains servicing on a sold mortgage loan, servicing fees are recognized as they are collected and included in fees and service
charges.
The Company maintains
an allowance for loan losses to absorb probable loan losses inherent in the loan portfolio. The allowance for loan losses is increased
by charges to earnings and decreased by charge-offs (net of recoveries). Management’s periodic evaluation of the appropriateness
of the allowance is based on the Bank’s past loan loss experience, known and inherent risks in the portfolio, adverse situations
that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, the current level of
non-performing assets, and current economic conditions. This evaluation is inherently subjective as it requires estimates that
are susceptible to significant revision as more information becomes available. The allowance is also subject to regulatory examinations
and determination by the regulatory agencies as to the appropriate level of the allowance.
A loan is considered impaired
when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments
of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in
determining if a loan is impaired include payment status, probability of collecting scheduled principal and interest payments
when due and value of collateral for collateral dependent loans. Loans that experience insignificant payment delays and payment
shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls
on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the
length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in
relation to the principal and interest owed. In addition, the Company classifies troubled debt restructurings as impaired loans.
A loan is classified as a troubled debt restructuring (“TDR”) if the Company extends a loan with any concessions,
as defined by accounting guidance, to a borrower experiencing financial difficulty. The allowance recorded on impaired loans is
measured on a loan-by-loan basis for commercial, commercial real estate and construction loans by either the present value of
expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or
the fair value of the collateral if the loan is collateral dependent. Large groups of homogeneous loans with smaller individual
balances are collectively evaluated for impairment. Accordingly, the Company generally does not separately identify individual
consumer and residential loans for impairment disclosures.
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. All interest accrued but not collected for loans that are placed on nonaccrual or charged
off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method,
until qualifying for return to accrual. Loans are evaluated individually and are returned to accrual status when all principal
and interest amounts contractually due are brought current and future payments are reasonably assured.
The Company routinely
sells one-to-four family residential mortgage loans to secondary mortgage market investors. Under standard representations and
warranties clauses in the Company’s mortgage sale agreements, the Company may be required to repurchase mortgage loans sold
or reimburse the investors for credit losses incurred on those loans if a breach of the contractual representations and warranties
occurred. The Company establishes a mortgage repurchase liability for management’s estimate of losses on loans for which
the Company could have a repurchase obligation or loss reimbursement. The estimated liability incorporates the volume of loans
sold in previous periods, default expectations, historical investor repurchase demand and actual loss severity. Provisions to
the mortgage repurchase reserve reduce gains on sales of loans.
Premises and Equipment.
Premises and equipment are stated at cost less accumulated depreciation. Major replacements and betterments are capitalized
while maintenance and repairs are charged to expense when incurred. Gains or losses on dispositions are reflected in earnings
as incurred.
Goodwill and Intangible
Assets.
Goodwill is not amortized; however, it is tested for impairment at each calendar year end or more frequently when
events or circumstances dictate. The impairment test compares the carrying value of goodwill to an implied fair value of the goodwill,
which is based on a review of the Company’s market capitalization adjusted for appropriate control premiums as well as an
analysis of valuation multiples of recent, comparable acquisitions. The Company considers the result from each of these valuation
methods in determining the implied fair value of its goodwill. A goodwill impairment would be recorded for the amount that the
carrying value exceeds the implied fair value.
Intangible assets include
core deposit intangibles and mortgage servicing rights. Core deposit intangible assets are amortized over their estimated useful
life of ten years on an accelerated basis. When facts and circumstances indicate potential impairment, the Company will evaluate
the recoverability of the intangible asset’s carrying value, using estimates of undiscounted future cash flows over the
remaining asset life. Any impairment loss is measured by the excess of carrying value over fair value. Mortgage servicing assets
are recognized as separate assets when rights are acquired through the sale of financial assets, primarily one-to-four family
real estate loans and are recorded at the lower of amortized cost or estimated fair value. Mortgage servicing rights are amortized
into non-interest expense in proportion to, and over the period of, the estimated future net servicing income of the underlying
financial assets. Servicing assets are recorded at the lower of amortized cost or estimated fair value, and are evaluated for
impairment based upon the fair value of the retained rights as compared to amortized cost.
Income Taxes.
The objective of accounting for income taxes is to recognize the amount of taxes payable or refundable for the current year and
deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial
statements or tax returns. Judgment is required in assessing the future tax consequences of events that have been recognized in
financial statements or tax returns. Uncertain income tax positions will be recognized only if it is more likely than not that
they will be sustained upon examination by taxing authorities, based upon its technical merits. Once that standard is met, the
amount recorded will be the largest amount of benefit that has a greater than 50 percent likelihood of being realized upon ultimate
settlement. The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense
in the consolidated statements of earnings. The Company assesses deferred tax assets to determine if the items are more likely
than not to be realized, and a valuation allowance is established for any amounts that are not more likely than not to be realized.
Changes in estimates regarding the actual outcome of these future tax consequences, including the effects of IRS examinations
and examinations by other state agencies, could materially impact the financial position and results of operations.
Use of Estimates.
The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles
(“GAAP”) requires the Company to make estimates and assumptions that affect the reported amount of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts
of revenues and expenses during the reporting period. Estimates that are particularly susceptible to significant change include
the determination of the allowance for loan losses, valuation and impairment of real estate owned, valuation and impairment of
investment securities, income taxes and goodwill. Actual results could differ from those estimates.
Comprehensive Income.
The Company’s comprehensive income consists of unrealized holding gains and losses on available-for-sale securities.
Foreclosed Assets.
Assets acquired through, or in lieu of, foreclosure are to be sold and are initially recorded at the date of foreclosure
at fair value of the collateral less estimated selling costs through a gain or a charge to the allowance for loan losses, establishing
a new cost basis. Subsequent to foreclosure, the Company records a charge to earnings if the carrying value of a property exceeds
the fair value less estimated costs to sell. Revenue and expenses from operations and subsequent declines in fair value are included
in other non-interest expense in the consolidated statement of earnings.
Stock-Based Compensation.
The Company has a stock-based employee compensation plan, which is described more fully in Note 11. The fair value
of stock options awarded to employees is calculated through the use of an option pricing model, which requires subjective assumptions,
including future stock price volatility and expected term, which greatly affect the estimated fair value. The Company uses the
Black-Scholes option pricing model to estimate the grant date fair value of its stock options, which is recognized as compensation
expense over the option vesting period, on a straight-line basis, which is typically four or five years. The fair value of restricted
common stock is equal to the Company’s stock price on the grant date, which is recognized as compensation expense on a straight-line
basis over the vesting period.
Earnings per Share.
Basic earnings per share represents net earnings divided by the weighted average number of common shares outstanding during
the year. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common
shares had been issued, as well as any adjustment to earnings that would result from the assumed issuance. Potential common shares
that may be issued by the Company relate solely to outstanding stock options and are determined using the treasury stock method
using the average market price of the Company’s stock for the respective periods. The diluted earnings per share computation
for the years ended December 31, 2011, 2010 and 2009 exclude unexercised stock options of 476,753, 426,944 and 426,944, respectively,
because their inclusion would have been anti-dilutive to earnings per share.
The shares used in the
calculation of basic and diluted earnings per share, which have been adjusted to give effect to the 5% common stock dividends
paid by the Company in December 2011, 2010 and 2009, are shown below:
(Dollars in thousands, except per share amounts)
|
|
Years ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
Net earnings available to common shareholders
|
|
$
|
4,484
|
|
|
$
|
2,043
|
|
|
$
|
3,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - basic
|
|
|
2,777,514
|
|
|
|
2,760,090
|
|
|
|
2,745,121
|
|
Assumed exercise of stock options
|
|
|
-
|
|
|
|
1,077
|
|
|
|
5,629
|
|
Weighted average common shares outstanding - diluted
|
|
|
2,777,514
|
|
|
|
2,761,167
|
|
|
|
2,750,750
|
|
Earnings per share (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.61
|
|
|
$
|
0.74
|
|
|
$
|
1.19
|
|
Diluted
|
|
$
|
1.61
|
|
|
$
|
0.74
|
|
|
$
|
1.19
|
|
(1) All per share amounts have been adjusted to give
effect to the 5% stock dividends paid during December 2011 and 2010.
Treasury Stock.
Purchases of the Company’s common stock are recorded at cost. Upon reissuance, treasury stock is reduced based upon
the average cost basis of total shares held.
Derivative Financial
Instruments.
The Company is exposed to market risk, primarily relating to changes in interest rates. To manage the volatility
relating to these exposures, the Company’s risk management policies permit its use of derivative financial instruments.
The Company uses derivatives on a limited basis mainly to stabilize interest rate margins. The Company more often manages normal
asset and liability positions by altering the terms of the products it offers.
GAAP requires that all
derivative financial instruments be recorded on the balance sheet at fair value. Derivatives that qualify in a hedging relationship
can be designated, based on the exposure being hedged, as fair value or cash flow hedges. Under the cash flow hedging model, the
effective portion of the change in the gain or loss related to the derivative is recognized as a component of other comprehensive
income, net of taxes. The ineffective portion is recognized in current earnings. The Company had no derivative financial instruments
designated as hedging instruments as of December 31, 2011 and 2010.
The Company enters into
interest rate lock commitments on certain mortgage loans, which are commitments to originate fixed rate one-to-four family residential
real estate loans. The Company also has corresponding forward sales contracts related to these interest rate lock commitments.
Both the mortgage loan commitments and the related forward sales contracts are accounted for as derivatives and carried at fair
value with changes in fair value recorded in gains on sales of loans. Fair values are based upon quoted prices, and fair value
measurements of interest rate commitments include the value of loan servicing rights.
Newly Adopted
Accounting Pronouncements.
The Company adopted ASU No. 2011-02, Receivables (Topic 310): A Creditor’s Determination
of Whether a Restructuring Is a Troubled Debt Restructuring. ASU 2011-02 clarifies which loan modifications constitute troubled
debt restructurings and is intended to assist creditors in determining whether a modification of the terms of a receivable meets
the criteria to be considered a troubled debt restructuring, both for purposes of recording an impairment loss and for disclosure
of troubled debt restructurings. In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must
separately conclude, under the guidance clarified by ASU 2011-02, that the restructuring constitutes a concession and the debtor
is experiencing financial difficulties. During the third quarter of 2011 the Company began applying the provisions in ASU No. 2011-02
and reassessed all loan restructurings that occurred on or after January 1, 2011. Adoption of ASU 2011-02 did not have a significant
impact on the Company’s consolidated financial statements.
(2) Goodwill and Intangible Assets
The Company tests goodwill
for impairment annually or more frequently if circumstances warrant. The Company performed its annual step one impairment
test as of December 31, 2011. The fair value of the Company’s single reporting unit was determined using the Company’s
market capitalization adjusted for an appropriate control premium, as well as a review of valuation multiples of recent financial
industry acquisitions for similar institutions, to estimate the fair value of the Company’s single reporting unit.
The fair value was compared to the carrying value of the single reporting unit at the measurement date to determine if any impairment
existed. Based on the results of the December 31, 2011 step one impairment test, the Company concluded its goodwill was
not impaired. The Company can make no assurances that future impairment tests will not result in goodwill impairments.
A summary of the other
intangible assets that continue to be subject to amortization is as follows:
(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
|
|
|
|
As of December 31, 2010
|
|
|
|
Gross carrying
amount
|
|
|
Accumulated
amortization
|
|
|
Net carrying
amount
|
|
Core deposit intangible assets
|
|
$
|
5,445
|
|
|
$
|
(4,272
|
)
|
|
$
|
1,173
|
|
Mortgage servicing rights
|
|
|
1,880
|
|
|
|
(820
|
)
|
|
|
1,060
|
|
Total other intangible assets
|
|
$
|
7,325
|
|
|
$
|
(5,092
|
)
|
|
$
|
2,233
|
|
Estimated amortization expense for the years
ending December 31 is as follows:
(Dollars in thousands)
|
|
Amortization
|
|
|
|
expense
|
|
2012
|
|
$
|
679
|
|
2013
|
|
|
595
|
|
2014
|
|
|
510
|
|
2015
|
|
|
133
|
|
2016
|
|
|
3
|
|
Thereafter
|
|
|
3
|
|
Total
|
|
$
|
1,923
|
|
(3) Investment Securities
A summary of investment
securities available-for-sale is as follows:
(Dollars in thousands)
|
|
As of December 31, 2011
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
unrealized
|
|
|
unrealized
|
|
|
Estimated
|
|
|
|
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 December 31, 2010
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
unrealized
|
|
|
unrealized
|
|
|
Estimated
|
|
|
|
cost
|
|
|
gains
|
|
|
losses
|
|
|
fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. federal agency obligations
|
|
$
|
22,060
|
|
|
$
|
147
|
|
|
$
|
(20
|
)
|
|
$
|
22,187
|
|
Municipal obligations, tax exempt
|
|
|
63,725
|
|
|
|
1,907
|
|
|
|
(345
|
)
|
|
|
65,287
|
|
Municipal obligations, taxable
|
|
|
4,232
|
|
|
|
12
|
|
|
|
(56
|
)
|
|
|
4,188
|
|
Mortgage-backed securities
|
|
|
60,238
|
|
|
|
847
|
|
|
|
(281
|
)
|
|
|
60,804
|
|
Common stocks
|
|
|
693
|
|
|
|
190
|
|
|
|
(55
|
)
|
|
|
828
|
|
Pooled trust preferred securities
|
|
|
1,125
|
|
|
|
-
|
|
|
|
(889
|
)
|
|
|
236
|
|
Certificates of deposit
|
|
|
14,159
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14,159
|
|
Total
|
|
$
|
166,232
|
|
|
$
|
3,103
|
|
|
$
|
(1,646
|
)
|
|
$
|
167,689
|
|
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 December 31, 2011 and 2010. This temporary impairment represents the estimated amount of loss that would be realized if
the securities were sold on the valuation date. Securities which were temporarily impaired are shown below, along with the length
of the impairment period.
(Dollars in thousands)
|
|
|
|
|
As of December 31, 2011
|
|
|
|
|
|
|
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
|
)
|
|
|
|
|
|
As of December 31, 2010
|
|
|
|
|
|
|
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
|
|
|
4
|
|
|
$
|
3,104
|
|
|
$
|
(20
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,104
|
|
|
$
|
(20
|
)
|
Municipal obligations, tax exempt
|
|
|
28
|
|
|
$
|
8,645
|
|
|
$
|
(278
|
)
|
|
$
|
439
|
|
|
$
|
(67
|
)
|
|
|
9,084
|
|
|
|
(345
|
)
|
Municipal obligations, taxable
|
|
|
10
|
|
|
|
2,922
|
|
|
|
(56
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
2,922
|
|
|
|
(56
|
)
|
Mortgage-backed securities
|
|
|
11
|
|
|
|
15,331
|
|
|
|
(281
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
15,331
|
|
|
|
(281
|
)
|
Common stocks
|
|
|
4
|
|
|
|
445
|
|
|
|
(55
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
445
|
|
|
|
(55
|
)
|
Pooled trust preferred securities
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
236
|
|
|
|
(889
|
)
|
|
|
236
|
|
|
|
(889
|
)
|
Total
|
|
|
59
|
|
|
$
|
30,447
|
|
|
$
|
(690
|
)
|
|
$
|
675
|
|
|
$
|
(956
|
)
|
|
$
|
31,122
|
|
|
$
|
(1,646
|
)
|
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 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 December 31, 2011, 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.
During 2011 and 2010,
the Company determined that some of its common stock investments in financial institutions were other-than-temporarily impaired.
The Company recorded other-temporary-impairment charges during 2011 and 2010 of $72,000 and $9,000, respectively, to reduce the
carrying value of the common stock investments to fair value. As of December 31, 2011, the Company did not have any other common
stock investments in unrealized loss positions.
As of December 31, 2011,
the Company owned three pooled trust preferred securities with an original cost basis of $2.5 million, which represent investments
in pools of collateralized debt obligations issued by financial institutions and insurance companies. The market for these securities
is considered to be inactive. Two of the Company’s three investments in pooled trust preferred securities, Preferred Term
Security (“PreTSL”) VIII and PreTSL IX, have a remaining aggregate cost basis of $1.1 million and non-credit-related,
unrealized losses of $699,000. 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 consolidated 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 a stress test 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 December 31, 2011
and 2010, the analyses of the Company’s PreTSL VIII and PreTSL IX investments indicated that the unrealized losses are not
credit-related. During 2010, the Company’s analysis indicated that its investment in a third pooled trust preferred security,
PreTSL XVII, had no value and a credit-related, other-than-temporary impairment charge of $382,000 was recorded for the remaining
cost basis of that security. The Company has recorded credit losses on all three PreTSL securities totaling $1.3 million through
charges to earnings during 2010 and 2009.
The following table provides
additional information related to the Company’s portfolio of investments in pooled trust preferred securities as of December
31, 2011:
(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
|
|
|
$
|
-
|
|
|
$
|
(619
|
)
|
|
$
|
381
|
|
|
$
|
(276
|
)
|
|
$
|
105
|
|
PreTSL IX
|
|
|
B
|
|
|
|
Ca
|
|
|
|
1,000
|
|
|
|
(42
|
)
|
|
|
(235
|
)
|
|
|
723
|
|
|
|
(423
|
)
|
|
|
300
|
|
PreTSL XVII
|
|
|
C
|
|
|
|
C
|
|
|
|
500
|
|
|
|
(11
|
)
|
|
|
(489
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
2,500
|
|
|
$
|
(53
|
)
|
|
$
|
(1,343
|
)
|
|
$
|
1,104
|
|
|
$
|
(699
|
)
|
|
$
|
405
|
|
The following table reconciles
the changes in the Company’s credit losses on its portfolio of investments in pooled trust preferred securities recognized
in earnings:
(Dollars in thousands)
|
|
Year ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
Balance at beginning of year
|
|
$
|
1,343
|
|
|
$
|
961
|
|
Additional credit losses:
|
|
|
|
|
|
|
|
|
Securities with no previous other-than-temporary impairment
|
|
|
-
|
|
|
|
-
|
|
Securities with previous other-than-temporary impairments
|
|
|
-
|
|
|
|
382
|
|
Balance at end of year
|
|
$
|
1,343
|
|
|
$
|
1,343
|
|
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 December 31,
2011 are as follows:
(Dollars in thousands)
|
|
Amortized
|
|
|
Estimated
|
|
|
|
cost
|
|
|
fair value
|
|
Due in less than one year
|
|
$
|
13,870
|
|
|
$
|
13,981
|
|
Due after one year but within five years
|
|
|
122,976
|
|
|
|
125,588
|
|
Due after five years but within ten years
|
|
|
38,871
|
|
|
|
41,285
|
|
Due after ten years
|
|
|
16,204
|
|
|
|
16,541
|
|
Common stocks
|
|
|
621
|
|
|
|
819
|
|
Total
|
|
$
|
192,542
|
|
|
$
|
198,214
|
|
The table above includes
scheduled principal payments and estimated prepayments for mortgage-backed securities, where actual maturities will differ from
contractual maturities because borrowers have the right to prepay obligations with or without prepayment penalties.
Gross realized gains and losses on sales of
available-for-sale securities are as follows:
(Dollars in thousands)
|
|
Years ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
Realized gains
|
|
$
|
186
|
|
|
$
|
563
|
|
|
$
|
9
|
|
Realized losses
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
186
|
|
|
$
|
563
|
|
|
$
|
9
|
|
At December 31, 2011,
securities pledged to secure public funds on deposit, repurchase agreements and as collateral for the Federal Reserve discount
window had a carrying value of approximately $108.2 million. Except for U. S. federal agency obligations, no investment in a single
issuer exceeded 10% of consolidated stockholders’ equity.
Other investment securities
primarily consist of restricted investments in FHLB and Federal Reserve Bank (“FRB”) stock. The carrying value of
the FHLB stock at December 31, 2011 was $4.9 million compared to $6.4 million at December 31, 2010. The carrying value of the
FRB stock at December 31, 2011 and 2010 was $1.8 million. These securities are not readily marketable and are required for regulatory
purposes and borrowing availability. Since there are no available market values, 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 investments 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.
(4) Loans and Allowance for Loan Losses
Loans consist of the following:
|
|
As of December 31,
|
|
(Dollars in thousands)
|
|
2011
|
|
|
2010
|
|
|
|
|
|
One-to-four family residential real estate
|
|
$
|
79,108
|
|
|
$
|
79,631
|
|
Construction and land
|
|
|
21,672
|
|
|
|
23,652
|
|
Commercial real estate
|
|
|
93,786
|
|
|
|
92,124
|
|
Commercial loans
|
|
|
57,006
|
|
|
|
57,286
|
|
Agriculture loans
|
|
|
39,052
|
|
|
|
38,836
|
|
Municipal loans
|
|
|
10,366
|
|
|
|
5,393
|
|
Consumer loans
|
|
|
13,584
|
|
|
|
14,385
|
|
Total gross loans
|
|
|
314,574
|
|
|
|
311,307
|
|
Net deferred loan costs and loans in process
|
|
|
214
|
|
|
|
328
|
|
Allowance for loan losses
|
|
|
(4,707
|
)
|
|
|
(4,967
|
)
|
Loans, net
|
|
$
|
310,081
|
|
|
$
|
306,668
|
|
The Company is a party
to financial instruments with off-balance sheet risk in the normal course of business to meet customers’ financing needs.
These financial instruments consist principally of commitments to extend credit. The Company uses the same credit policies in
making commitments and conditional obligations as it does for on-balance sheet instruments. The Company’s exposure to credit
loss in the event of nonperformance by the other party is represented by the contractual amount of those instruments. In the normal
course of business, there are various commitments and contingent liabilities, such as commitments to extend credit, letters of
credit, and lines of credit, the balance of which are not recorded in the accompanying consolidated financial statements. The
Company generally requires collateral or other security on unfunded loan commitments and irrevocable letters of credit. Unfunded
commitments to extend credit, excluding standby letters of credit, aggregated to $57.8 million and $43.9 million at
December 31, 2011 and 2010, respectively, and are generally at variable interest rates. Standby letters of credit totaled
$1.7 million and $2.9 at December 31, 2011 and 2010, respectively.
The Company is exposed
to varying risks associated with concentrations of credit relating primarily to lending activities in specific geographic areas.
The Company’s principal lending area consists of the cities of Manhattan, Auburn, Dodge City, Garden City, Great Bend, Hoisington,
Junction City, LaCrosse, Lawrence, Osage City, Topeka, Wamego, Paola, Osawatomie, Louisburg, and Fort Scott, Kansas and the surrounding
communities, and substantially all of the Company’s loans are to residents of or secured by properties located in its principal
lending area. Accordingly, the ultimate collectability of the Company’s loan portfolio is dependent in part upon market
conditions in those areas. These geographic concentrations are considered in management’s establishment of the allowance
for loan losses.
The following tables provide information on
the Company’s allowance for loan losses by loan class and allowance methodology:
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2011
|
|
|
|
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
|
|
|
$
|
1,193
|
|
|
$
|
1,571
|
|
|
$
|
1,173
|
|
|
$
|
397
|
|
|
$
|
99
|
|
|
$
|
139
|
|
|
$
|
4,967
|
|
Charge-offs
|
|
|
(110
|
)
|
|
|
(1,173
|
)
|
|
|
(434
|
)
|
|
|
(590
|
)
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
(132
|
)
|
|
|
(2,440
|
)
|
Recoveries
|
|
|
41
|
|
|
|
4
|
|
|
|
37
|
|
|
|
14
|
|
|
|
35
|
|
|
|
-
|
|
|
|
49
|
|
|
|
180
|
|
Net charge-offs
|
|
|
(69
|
)
|
|
|
(1,169
|
)
|
|
|
(397
|
)
|
|
|
(576
|
)
|
|
|
34
|
|
|
|
-
|
|
|
|
(83
|
)
|
|
|
(2,260
|
)
|
Provsion for loan losses
|
|
|
234
|
|
|
|
904
|
|
|
|
617
|
|
|
|
148
|
|
|
|
2
|
|
|
|
31
|
|
|
|
64
|
|
|
|
2,000
|
|
Balance at December 31, 2011
|
|
|
560
|
|
|
|
928
|
|
|
|
1,791
|
|
|
|
745
|
|
|
|
433
|
|
|
|
130
|
|
|
|
120
|
|
|
|
4,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for loss
|
|
|
65
|
|
|
|
8
|
|
|
|
-
|
|
|
|
35
|
|
|
|
-
|
|
|
|
65
|
|
|
|
32
|
|
|
|
205
|
|
Collectively evaluated for
loss
|
|
|
495
|
|
|
|
920
|
|
|
|
1,791
|
|
|
|
710
|
|
|
|
433
|
|
|
|
65
|
|
|
|
88
|
|
|
|
4,502
|
|
Total
|
|
|
560
|
|
|
|
928
|
|
|
|
1,791
|
|
|
|
745
|
|
|
|
433
|
|
|
|
130
|
|
|
|
120
|
|
|
|
4,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for loss
|
|
|
1,280
|
|
|
|
225
|
|
|
|
17
|
|
|
|
78
|
|
|
|
63
|
|
|
|
784
|
|
|
|
43
|
|
|
|
2,490
|
|
Collectively evaluated for
loss
|
|
|
77,828
|
|
|
|
21,447
|
|
|
|
93,769
|
|
|
|
56,928
|
|
|
|
38,989
|
|
|
|
9,582
|
|
|
|
13,541
|
|
|
|
312,084
|
|
Total
|
|
$
|
79,108
|
|
|
$
|
21,672
|
|
|
$
|
93,786
|
|
|
$
|
57,006
|
|
|
$
|
39,052
|
|
|
$
|
10,366
|
|
|
$
|
13,584
|
|
|
$
|
314,574
|
|
|
|
Year ended December 31, 2010
|
|
|
|
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, 2009
|
|
$
|
625
|
|
|
$
|
1,326
|
|
|
$
|
705
|
|
|
$
|
623
|
|
|
$
|
2,103
|
|
|
$
|
-
|
|
|
$
|
86
|
|
|
$
|
5,468
|
|
Charge-offs
|
|
|
(387
|
)
|
|
|
(3,474
|
)
|
|
|
(96
|
)
|
|
|
(8
|
)
|
|
|
(2,327
|
)
|
|
|
-
|
|
|
|
(178
|
)
|
|
|
(6,470
|
)
|
Recoveries
|
|
|
10
|
|
|
|
-
|
|
|
|
-
|
|
|
|
17
|
|
|
|
10
|
|
|
|
-
|
|
|
|
32
|
|
|
|
69
|
|
Net charge-offs
|
|
|
(377
|
)
|
|
|
(3,474
|
)
|
|
|
(96
|
)
|
|
|
9
|
|
|
|
(2,317
|
)
|
|
|
-
|
|
|
|
(146
|
)
|
|
|
(6,401
|
)
|
Provsion for loan losses
|
|
|
147
|
|
|
|
3,341
|
|
|
|
962
|
|
|
|
541
|
|
|
|
611
|
|
|
|
99
|
|
|
|
199
|
|
|
|
5,900
|
|
Balance at December 31, 2010
|
|
|
395
|
|
|
|
1,193
|
|
|
|
1,571
|
|
|
|
1,173
|
|
|
|
397
|
|
|
|
99
|
|
|
|
139
|
|
|
|
4,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for loss
|
|
|
99
|
|
|
|
382
|
|
|
|
397
|
|
|
|
503
|
|
|
|
-
|
|
|
|
65
|
|
|
|
-
|
|
|
|
1,446
|
|
Collectively evaluated for
loss
|
|
|
296
|
|
|
|
811
|
|
|
|
1,174
|
|
|
|
670
|
|
|
|
397
|
|
|
|
34
|
|
|
|
139
|
|
|
|
3,521
|
|
Total
|
|
|
395
|
|
|
|
1,193
|
|
|
|
1,571
|
|
|
|
1,173
|
|
|
|
397
|
|
|
|
99
|
|
|
|
139
|
|
|
|
4,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for loss
|
|
|
1,054
|
|
|
|
1,229
|
|
|
|
1,390
|
|
|
|
733
|
|
|
|
65
|
|
|
|
759
|
|
|
|
118
|
|
|
|
5,348
|
|
Collectively evaluated for
loss
|
|
|
78,577
|
|
|
|
22,423
|
|
|
|
90,734
|
|
|
|
56,553
|
|
|
|
38,771
|
|
|
|
4,634
|
|
|
|
14,267
|
|
|
|
305,959
|
|
Total
|
|
$
|
79,631
|
|
|
$
|
23,652
|
|
|
$
|
92,124
|
|
|
$
|
57,286
|
|
|
$
|
38,836
|
|
|
$
|
5,393
|
|
|
$
|
14,385
|
|
|
$
|
311,307
|
|
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 December 31, 2011 or December
31, 2010. The following tables present information on the Company’s past due and non-accrual loans by loan class:
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2011
|
|
|
|
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
|
%
|
|
|
As of December 31, 2010
|
|
|
|
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
|
|
$
|
80
|
|
|
$
|
962
|
|
|
$
|
-
|
|
|
$
|
1,042
|
|
|
$
|
523
|
|
|
$
|
1,565
|
|
Construction and land
|
|
|
-
|
|
|
|
56
|
|
|
|
-
|
|
|
|
56
|
|
|
|
1,229
|
|
|
|
1,285
|
|
Commercial real estate
|
|
|
116
|
|
|
|
-
|
|
|
|
-
|
|
|
|
116
|
|
|
|
1,390
|
|
|
|
1,506
|
|
Commercial loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
733
|
|
|
|
733
|
|
Agriculture loans
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
1
|
|
|
|
65
|
|
|
|
66
|
|
Municipal loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
759
|
|
|
|
759
|
|
Consumer loans
|
|
|
125
|
|
|
|
34
|
|
|
|
-
|
|
|
|
159
|
|
|
|
118
|
|
|
|
277
|
|
Total
|
|
$
|
321
|
|
|
$
|
1,053
|
|
|
$
|
-
|
|
|
$
|
1,374
|
|
|
$
|
4,817
|
|
|
$
|
6,191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of gross loans
|
|
|
0.10
|
%
|
|
|
0.34
|
%
|
|
|
0.00
|
%
|
|
|
0.44
|
%
|
|
|
1.55
|
%
|
|
|
1.99
|
%
|
Under the original terms
of the Company’s non-accrual loans, interest earned on such loans for the years 2011, 2010 and 2009, would have increased
interest income by $47,000, $217,000 and $794,000, respectively.
The Company’s impaired
loans decreased from $5.3 million at December 31, 2010 to $2.5 million at December 31, 2011. 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 December 31, 2011 and 2010, was related to TDRs
that are current and accruing interest, but still classified as impaired. The following table presents information on impaired
loans:
(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
|
|
|
|
As of December 31, 2010
|
|
|
|
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
|
|
$
|
1,352
|
|
|
$
|
1,054
|
|
|
$
|
879
|
|
|
$
|
175
|
|
|
$
|
99
|
|
|
$
|
1,366
|
|
|
$
|
9
|
|
Construction and land
|
|
|
4,684
|
|
|
|
1,229
|
|
|
|
-
|
|
|
|
1,229
|
|
|
|
382
|
|
|
|
3,008
|
|
|
|
-
|
|
Commercial real estate
|
|
|
1,390
|
|
|
|
1,390
|
|
|
|
-
|
|
|
|
1,390
|
|
|
|
397
|
|
|
|
1,400
|
|
|
|
-
|
|
Commercial loans
|
|
|
733
|
|
|
|
733
|
|
|
|
-
|
|
|
|
733
|
|
|
|
503
|
|
|
|
733
|
|
|
|
-
|
|
Agriculture loans
|
|
|
65
|
|
|
|
65
|
|
|
|
65
|
|
|
|
-
|
|
|
|
-
|
|
|
|
70
|
|
|
|
-
|
|
Municipal loans
|
|
|
759
|
|
|
|
759
|
|
|
|
628
|
|
|
|
131
|
|
|
|
65
|
|
|
|
759
|
|
|
|
-
|
|
Consumer loans
|
|
|
118
|
|
|
|
118
|
|
|
|
118
|
|
|
|
-
|
|
|
|
-
|
|
|
|
74
|
|
|
|
-
|
|
Total impaired loans
|
|
$
|
9,101
|
|
|
$
|
5,348
|
|
|
$
|
1,690
|
|
|
$
|
3,658
|
|
|
$
|
1,446
|
|
|
$
|
7,410
|
|
|
$
|
9
|
|
The Company classified
three loan modifications during 2011 as TDRs in addition to two during 2010. The 2010 TDRs were current and accruing interest
at December 31, 2011, but still included in the Company’s impaired loan totals. The 2011 modifications were classified as
both non-accrual and impaired at December 31, 2011. Each TDR is evaluated individually and are returned to accrual status after
a payment history is established after the restructuring and when future payments are reasonably assured. There were no loans
as of December 31, 2011 that had been modified as TDRs and then subsequently defaulted in 2011. At December 31, 2011 there are
no commitments to lend additional funds to any borrower whose loan terms have been modified as a TDR. As of December 31, 2011
the Company has related allowance of $5,000 recorded against loans classified as a TDR. There was no allowance recorded at December
31, 2010 for TDRs. The following table presents information on loans that are classified as TDRs:
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2011
|
|
|
|
Number of
modifications
|
|
|
Recorded
investment prior to
modification
|
|
|
Recorded
investment after
modification
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential real estate
|
|
|
1
|
|
|
$
|
10
|
|
|
$
|
10
|
|
Construction and land
|
|
|
1
|
|
|
|
549
|
|
|
|
200
|
|
Municipal loans
|
|
|
1
|
|
|
|
110
|
|
|
|
110
|
|
Total troubled debt restructurings
|
|
|
3
|
|
|
$
|
669
|
|
|
$
|
320
|
|
|
|
As of December 31, 2010
|
|
|
|
Number of
modifications
|
|
|
Recorded
investment prior to
modification
|
|
|
Recorded
investment after
modification
|
|
|
|
|
|
|
|
|
|
|
|
One-to-four family residential real estate
|
|
|
1
|
|
|
$
|
853
|
|
|
$
|
531
|
|
Municipal loans
|
|
|
1
|
|
|
|
527
|
|
|
|
527
|
|
Total troubled debt restructurings
|
|
|
2
|
|
|
$
|
1,380
|
|
|
$
|
1,058
|
|
The Company services one-to-four
family residential real estate loans for others with outstanding principal balances of $183.3 million and $168.8 million
at December 31, 2011 and 2010, respectively. Gross service fee income related to such loans was $429,000, $371,000 and $279,000
for the years ended December 31, 2011, 2010 and 2009, respectively, and is included in fees and service charges in the consolidated
statements of earnings.
As of 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. During 2011, the Company provided $650,000 to the mortgage repurchase reserve. Actual losses during 2011,
which were charged against the reserve, were $170,000.
The Company had loans
to directors and officers, and to affiliated parties, at December 31, 2011 and 2010, which carry terms similar to those for
other loans. Management believes such outstanding loans do not represent more than a normal risk of collection. A summary of such
loans is as follows:
(Dollars in thousands)
|
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
$
|
5,747
|
|
New loans
|
|
|
5,781
|
|
Repayments
|
|
|
(1,647
|
)
|
Balance at December 31, 2011
|
|
$
|
9,881
|
|
(5) Premises and Equipment
Premises and equipment consisted of the following:
(Dollars in thousands)
|
|
Estimated
|
|
|
As of December 31,
|
|
|
|
useful lives
|
|
|
2011
|
|
|
2010
|
|
Land
|
|
|
Indefinite
|
|
|
$
|
3,758
|
|
|
$
|
3,758
|
|
Office buildings and improvements
|
|
|
10 - 50 years
|
|
|
|
13,655
|
|
|
|
13,612
|
|
Furniture and equipment
|
|
|
3 - 15 years
|
|
|
|
7,131
|
|
|
|
6,826
|
|
Automobiles
|
|
|
2 - 5 years
|
|
|
|
355
|
|
|
|
355
|
|
Total premises and equipment
|
|
|
|
|
|
|
24,899
|
|
|
|
24,551
|
|
Accumulated depreciation
|
|
|
|
|
|
|
(10,207
|
)
|
|
|
(9,326
|
)
|
Total premises and equipment, net
|
|
|
|
|
|
$
|
14,692
|
|
|
$
|
15,225
|
|
Depreciation expense for
the years ended December 31, 2011, 2010 and 2009 was $881,000 $972,000, and $946,000, respectively and was included in occupancy
and equipment on the consolidated statements of earnings.
(6) Deposits
The following table presents the maturities
of certificates of deposit at December 31, 2011:
(Dollars in thousands)
|
|
|
|
Year
|
|
Amount
|
|
2012
|
|
$
|
124,875
|
|
2013
|
|
|
37,351
|
|
2014
|
|
|
9,206
|
|
2015
|
|
|
3,493
|
|
2016
|
|
|
4,878
|
|
Thereafter
|
|
|
30
|
|
Total
|
|
$
|
179,833
|
|
The components of interest expense associated
with deposits are as follows:
(Dollars in thousands)
|
|
Years ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
Time deposits
|
|
$
|
2,341
|
|
|
$
|
3,249
|
|
|
$
|
5,101
|
|
Money market and NOW
|
|
|
371
|
|
|
|
471
|
|
|
|
643
|
|
Savings
|
|
|
48
|
|
|
|
66
|
|
|
|
76
|
|
Total
|
|
$
|
2,760
|
|
|
$
|
3,786
|
|
|
$
|
5,820
|
|
Regulations of the Federal
Reserve System require reserves to be maintained by all banking institutions according to the types and amounts of certain deposit
liabilities. These requirements restrict a portion of the amounts shown as consolidated cash and due from banks from everyday
usage in operation of the banks. The minimum reserve requirements for the Bank totaled $25,000 at December 31, 2011.
(7) Federal Home Loan Bank Borrowings
Term advances from the
FHLB totaled $35.8 million at both at December 31, 2011 and 2010. Maturities of such borrowings at December 31, 2011
and 2010 are summarized as follows:
(Dollars in thousands)
|
|
As of December 31,
|
|
|
|
2011
|
|
|
2010
|
|
Year
|
|
Amount
|
|
|
Weighted
average rates
|
|
|
Amount
|
|
|
Weighted
average rates
|
|
2017
|
|
$
|
10,000
|
|
|
|
3.64
|
%
|
|
$
|
10,000
|
|
|
|
3.64
|
%
|
2018
|
|
|
25,763
|
|
|
|
3.40
|
%
|
|
|
25,800
|
|
|
|
3.40
|
%
|
Total
|
|
$
|
35,763
|
|
|
|
|
|
|
$
|
35,800
|
|
|
|
|
|
All of the Bank’s
term advances with the FHLB have fixed rates and prepayment penalties. The Bank has $30.0 million of term advances that contain
a conversion option, at which on certain dates the FHLB may exercise an option to convert the borrowing to a variable rate equal
to the FHLB one month short-term advance rate, adjustable monthly. The Bank would then have the option to prepay the advances
without penalty. The Bank may repay the advance at each respective reset date if the FHLB first exercises its option to convert
the fixed-rate borrowing.
Additionally, the Bank
also has a line of credit, renewable annually each September, with the FHLB under which there were $13.4 million and $8.5 million
of outstanding borrowings as of December 31, 2011 and 2010, respectively. Interest on any outstanding balance on the line of credit
accrues at the federal funds rate plus 0.15% (0.26% at December 31, 2011).
Although no loans are
specifically pledged, the FHLB requires the Bank to maintain eligible collateral (qualifying loans and investment securities)
that has a lending value at least equal to its required collateral. At December 31, 2011 and 2010, the Bank’s total
borrowing capacity with the FHLB was approximately $100.6 million and $101.4 million, respectively. At December 31, 2011
and 2010, the Bank’s available borrowing capacity was $51.5 million and $57.1 million, respectively. The available borrowing
capacity with the FHLB of Topeka is collateral based, and the Bank’s ability to borrow is subject to maintaining collateral
that meets the eligibility requirements. The borrowing capacity is not committed and is subject to FHLB credit requirements and
policies. In addition, the Bank must maintain a restricted investment in FHLB stock to maintain access to borrowings.
(8) Other Borrowings
In 2003, the Company issued
$8.2 million of subordinated debentures. These debentures, which are due in 2034 and are currently redeemable, were issued to
a wholly owned grantor trust (the “Trust”) formed to issue preferred securities representing undivided beneficial
interests in the assets of the Trust. The Trust then invested the gross proceeds of such preferred securities in the debentures.
The Trust’s preferred securities and the subordinated debentures require quarterly interest payments and have variable rates,
adjustable quarterly. Interest accrues at LIBOR plus 2.85%. The interest rates at December 31, 2011 and 2010 were 3.28% and 3.14%,
respectively.
In 2005, the Company issued
an additional $8.2 million of subordinated debentures. These debentures, which are due in 2036 and are currently redeemable, were
issued to a wholly owned grantor trust (“Trust II”) formed to issue preferred securities representing undivided beneficial
interests in the assets of Trust II. Trust II then invested the gross proceeds of such preferred securities in the debentures.
Trust II’s preferred securities and the subordinated debentures require quarterly interest payments and have variable rates,
adjustable quarterly. Interest accrues at LIBOR plus 1.34% on $5.2 million of the subordinated debentures. The remaining $3.0
million of the subordinated debentures had a fixed rate of 6.17% through March 14, 2011. Currently, all $8.2 million of the subordinated
debentures accrue at LIBOR plus 1.34%.
While these Trusts are
accounted for as unconsolidated equity investments, a portion of the trust preferred securities issued by the Trust qualifies
as Tier 1 Capital for regulatory purposes.
The Company has a $7.5
million line of credit from an unrelated financial institution maturing on November 5, 2012, with an interest rate that adjusts
daily based on the prime rate plus 0.25%, but not less than 4.00%. This line of credit has covenants specific to capital and other
ratios, which the Company was in compliance with at December 31, 2011. The outstanding balance of the line of credit at December
31, 2011 and 2010 was $1.6 million and $3.8 million, respectively, and is included in other borrowings.
Repurchase agreements
are comprised of non-insured customer funds, totaling $9.3 million at December 31, 2011 and $5.7 million at December 31, 2010
which are secured by $13.4 million and $8.5 million of the Bank’s investment portfolio at the same periods, respectively. Customer
repurchase agreements are offered to deposit customers wishing to earn interest on highly liquid balances and are used by the
Company as a funding source which is considered to be stable and short-term in nature. Most of the repurchase agreements have
variable rates indexed to the 90-day U.S. treasury rate. Outstanding repurchase agreement balances averaged $5.8 million during
2011 and $6.0 million in 2010. The average rate on the repurchase agreements during 2011 was 0.63% compared to 0.64% during 2010.
At December 31, 2011 and
2010, the Bank had no borrowings through the Federal Reserve discount window, while the borrowing capacity was $17.0 million and
$12.8 million, respectively. The Bank also has various other federal funds agreements, both secured and unsecured, with correspondent
banks totaling approximately $60.3 million. As of December 31, 2011 and 2010 there were no borrowings through these correspondent
bank federal funds agreements.
(9) Income Taxes
Income tax expense (benefit) attributable to
income from operations consisted of:
(Dollars in thousands)
|
|
Years ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
1,364
|
|
|
$
|
26
|
|
|
$
|
1,565
|
|
State
|
|
|
(66
|
)
|
|
|
(118
|
)
|
|
|
148
|
|
Total current
|
|
|
1,298
|
|
|
|
(92
|
)
|
|
|
1,713
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(701
|
)
|
|
|
(567
|
)
|
|
|
(1,451
|
)
|
State
|
|
|
(93
|
)
|
|
|
44
|
|
|
|
(116
|
)
|
Total deferred
|
|
|
(794
|
)
|
|
|
(523
|
)
|
|
|
(1,567
|
)
|
Income tax expense (benefit)
|
|
$
|
504
|
|
|
$
|
(615
|
)
|
|
$
|
146
|
|
Total income tax expense (benefit), including
amounts allocated directly to stockholders’ equity, was as follows:
(Dollars in thousands)
|
|
Years ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
Income tax from operations
|
|
$
|
504
|
|
|
$
|
(615
|
)
|
|
$
|
146
|
|
Stockholders’ equity, recognition of tax benefit for stock options exercised
|
|
|
(12
|
)
|
|
|
(40
|
)
|
|
|
-
|
|
Stockholders’ equity, recognition of unrealized gains/(losses) on available-for-sale securities
|
|
|
1,558
|
|
|
|
(340
|
)
|
|
|
492
|
|
|
|
$
|
2,050
|
|
|
$
|
(995
|
)
|
|
$
|
638
|
|
The reasons for the difference
between actual income tax expense (benefit) and expected income tax expense attributable to income from operations at the 34%
statutory federal income tax rate were as follows:
(Dollars in thousands)
|
|
Years ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
Computed “expected” tax expense
|
|
$
|
1,696
|
|
|
$
|
485
|
|
|
$
|
1,162
|
|
Increase (reduction) in income taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt interest income, net
|
|
|
(890
|
)
|
|
|
(875
|
)
|
|
|
(861
|
)
|
Bank owned life insurance
|
|
|
(199
|
)
|
|
|
(176
|
)
|
|
|
(179
|
)
|
Reversal of unrecognized tax benefits, net
|
|
|
(182
|
)
|
|
|
(125
|
)
|
|
|
(107
|
)
|
State income taxes, net of federal benefit
|
|
|
77
|
|
|
|
76
|
|
|
|
128
|
|
Investment tax credits
|
|
|
(43
|
)
|
|
|
(42
|
)
|
|
|
(43
|
)
|
Other, net
|
|
|
45
|
|
|
|
42
|
|
|
|
46
|
|
|
|
$
|
504
|
|
|
$
|
(615
|
)
|
|
$
|
146
|
|
The tax effects of temporary
differences that give rise to the significant portions of the deferred tax assets and liabilities at the following dates were
as follows:
(Dollars in thousands)
|
|
As of December 31,
|
|
|
|
2011
|
|
|
2010
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Federal alternative minimum tax credit and low income housing credit carry forwards
|
|
$
|
2,040
|
|
|
$
|
1,086
|
|
Loans, including allowance for loan losses
|
|
|
1,820
|
|
|
|
1,674
|
|
Investment impairments
|
|
|
507
|
|
|
|
483
|
|
Net operating loss carry forwards
|
|
|
464
|
|
|
|
1,402
|
|
State taxes
|
|
|
389
|
|
|
|
316
|
|
Deferred compensation arrangements
|
|
|
246
|
|
|
|
266
|
|
Valuation allowance on other real estate
|
|
|
172
|
|
|
|
-
|
|
Other, net
|
|
|
43
|
|
|
|
-
|
|
Total deferred tax assets
|
|
|
5,681
|
|
|
|
5,227
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Unrealized gain on investment securities available-for-sale
|
|
|
2,093
|
|
|
|
535
|
|
Premises and equipment, net of depreciation
|
|
|
812
|
|
|
|
862
|
|
FHLB stock dividends
|
|
|
698
|
|
|
|
904
|
|
Intangible assets
|
|
|
105
|
|
|
|
193
|
|
Investments
|
|
|
5
|
|
|
|
11
|
|
Other, net
|
|
|
-
|
|
|
|
22
|
|
Total deferred tax liabilities
|
|
|
3,713
|
|
|
|
2,527
|
|
Less valuation allowance
|
|
|
(464
|
)
|
|
|
(432
|
)
|
Net deferred tax asset
|
|
$
|
1,504
|
|
|
$
|
2,268
|
|
The Company has recorded
a deferred tax asset for future benefits of Federal alternative minimum tax credit carry forwards. At December 31, 2010, the Company
had a net operating loss carryforward of $2.9 million, which was fully utilized in 2011. The Company also has Kansas corporate
net operating loss carry forwards totaling $9.6 million as of December 31, 2011, which expire between 2012 and 2021. The Federal
alternative minimum tax credit carry forward does not expire and totaled $1.6 million as of December 31, 2011. In addition, the
Company has low income housing credit carry forwards of $440,000 which expire in varying amounts between 2026 and 2031. The Company
has recorded a valuation allowance against the Kansas corporate net operating loss carry forwards. The increase in the valuation
allowance during 2011 is related to additional net operating loss carry forwards generated during 2011. A valuation allowance
related to the remaining deferred tax assets has not been provided because management believes it is more likely than not that
the results of future operations will generate sufficient taxable income to realize the deferred tax assets at December 31, 2011.
Retained earnings at December 31,
2011 and 2010 includes approximately $6.3 million for which no provision for federal income tax had been made. This amount represents
allocations of income to bad debt deductions in years prior to 1988 for tax purposes only. Reduction of amounts allocated for
purposes other than tax bad debt losses will create income for tax purposes only, which will be subject to the then current corporate
income tax rate.
The Company has unrecognized
tax benefits representing tax positions for which a liability has been established. A reconciliation of the beginning and ending
amount of the liability relating to unrecognized tax benefits is as follows:
(Dollars in thousands)
|
|
Years ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
Unrecognized tax benefits at beginning of year
|
|
$
|
837
|
|
|
$
|
975
|
|
Gross increases to current year tax positions
|
|
|
297
|
|
|
|
48
|
|
Gross (decreases) increases to prior year’s tax positions
|
|
|
(2
|
)
|
|
|
4
|
|
Lapse of statute of limitations
|
|
|
(276
|
)
|
|
|
(190
|
)
|
Unrecognized tax benefits at end of year
|
|
$
|
856
|
|
|
$
|
837
|
|
Tax years that remain
open and subject to audit include the years 2008 through 2011 for both federal and state tax purposes. The Company recognized
$276,000 and $190,000 of previously unrecognized tax benefits during 2011 and 2010, respectively. The gross unrecognized tax benefits
of $856,000 and $837,000 at December 31, 2011 and 2010, respectively, would favorably impact the effective tax rate by $565,000
and $552,000, respectively, if recognized. As of December 31, 2011 and 2010, the Company has accrued interest and penalties related
to the unrecognized tax benefits of $178,000 and $249,000, respectively which are not included in the table above. The Company
believes that it is reasonably possible that a reduction in gross unrecognized tax benefits of up to $199,000 is possible during
the next 12 months as a result of the lapse of the statute of limitations.
(10) Employee Benefit Plans
Employee Retirement
Plan.
Substantially all employees are covered under a 401(k) defined contribution savings plan. Eligible employees receive
100% matching contributions from the Company of up to 6% of their compensation. Matching contributions by the Company were $350,000,
$370,000 and $368,000 for the years ended December 31, 2011, 2010 and 2009, respectively.
Deferred Compensation
and Retirement Agreements.
The Company has recognized a liability for future benefits payable under an agreement that splits
the benefits of a bank owned life insurance policy between the Company and a former employee. At December 31, 2011 and 2010, the
liability was $303,000 and $316,000, respectively. At December 31, 2011, the Company had an asset of $2.2 million recorded representing
the net cash surrender value of the corresponding bank owned life insurance policy.
The Company has entered
into deferred compensation and other retirement agreements with certain key employees that provide for cash payments to be made
after their retirement. The obligations under these arrangements have been recorded at the present value of the accrued benefits.
The Company has also entered into agreements with certain directors to defer portions of their compensation. The balance of accrued
benefits under all of these arrangements, including the split-dollar life insurance arrangement, was $1.1 million at both December 31,
2011 and 2010, and was included as a component of other liabilities in the accompanying consolidated balance sheets. To assist
in funding benefits under each of these plans, the Bank has purchased certain assets including bank owned life insurance policies
on covered employees in which the Bank is the beneficiary. At December 31, 2011 and 2010, the cash surrender values on these
policies established to meet such obligations were $3.8 million and $3.7 million, respectively.
In addition to these policies,
the Bank purchased $7.5 million of bank owned life insurance policies during 2006 and $2.5 million during 2011. The cash surrender
value of bank owned life insurance policies at December 31, 2011 totaled $12.4 million. These policies are not related to deferred
compensation split-dollar arrangements or other retirement agreements, but are utilized to offset the cost of employee benefits.
(11) Stock Compensation Plan
The Company has a stock-based
employee compensation plan which allows for the issuance of stock options and restricted common stock, the purpose of which is
to provide additional incentive to certain officers, directors, and key employees by facilitating their purchase of a stock interest
in the Company. The plan is administered by the compensation committee of the board of directors who approves employees to whom
awards are granted and the number of shares granted. Compensation expense is recognized over the vesting period, which is typically
four or five years. The stock-based compensation cost related to these awards was $107,000, $100,000 and $157,000 for the years
ended December 31, 2011, 2010, and 2009, respectively. The Company recognized tax benefits of $23,000, $15,000 and $30,000 for
the years ended December 31, 2011, 2010 and 2009, respectively.
For stock options, the
exercise price may not be less than 100% of the fair market value of the shares on the date of the grant, and no option shall be
exercisable after the expiration of ten years from the grant date. In determining compensation cost, the Black-Scholes option-pricing
model is used to estimate the fair value of options on date of grant. The Black-Scholes model is a closed-end model that uses the
assumptions outlined below. Expected volatility is based on historical volatility of the Company’s stock. The Company uses
historical exercise behavior and other qualitative factors to estimate the expected term of the options, which represents the period
of time that the options granted are expected to be outstanding. The risk-free rate for the expected term is based on U.S. Treasury
rates in effect at the time of grant.
On April 20, 2011, the
Company’s Compensation Committee awarded 8,600 shares of restricted common stock and options to acquire 59,131 shares of
common stock. These awards vest ratably over four years. As a result, all awards available under the Company’s 2001 Stock
Incentive Plan have been made. The fair value of options granted were estimated utilizing the following weighted average assumptions:
|
|
Years ended December 31,
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
Dividend rate
|
|
|
6.33
|
%
|
|
|
n/a
|
|
|
n/a
|
Volatility
|
|
|
23.58
|
%
|
|
|
n/a
|
|
|
n/a
|
Risk-free interest rate
|
|
|
2.15
|
%
|
|
|
n/a
|
|
|
n/a
|
Expected term
|
|
|
5 years
|
|
|
|
n/a
|
|
|
n/a
|
Fair value per option at grant date
|
|
$
|
1.59
|
|
|
|
n/a
|
|
|
n/a
|
A summary of option activity during 2011 is
presented below:
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
average
|
|
|
average
|
|
|
|
|
|
|
|
|
|
exercise
|
|
|
remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
price
|
|
|
contractual
|
|
|
intrinsic
|
|
|
|
Shares
|
|
|
per share
|
|
|
term
|
|
|
value
|
|
Outstanding at December 31, 2010
|
|
|
411,714
|
|
|
$
|
20.48
|
|
|
|
5.4 years
|
|
|
$
|
29
|
|
Granted
|
|
|
59,131
|
|
|
$
|
16.25
|
|
|
|
—
|
|
|
|
n/a
|
|
Effect of 5% stock dividend
|
|
|
22,830
|
|
|
$
|
-
|
|
|
|
—
|
|
|
|
n/a
|
|
Forfeited/expired
|
|
|
(11,694
|
)
|
|
$
|
20.11
|
|
|
|
—
|
|
|
|
n/a
|
|
Exercised
|
|
|
(5,228
|
)
|
|
$
|
10.97
|
|
|
|
—
|
|
|
|
n/a
|
|
Outstanding at December 31, 2011
|
|
|
476,753
|
|
|
$
|
19.09
|
|
|
|
5.0 years
|
|
|
$
|
199
|
|
Exercisable at December 31, 2011
|
|
|
375,996
|
|
|
$
|
19.69
|
|
|
|
4.2 years
|
|
|
$
|
3
|
|
Vested and expected to vest at December 31, 2011
|
|
|
454,179
|
|
|
$
|
19.09
|
|
|
|
5.0 years
|
|
|
$
|
189
|
|
A summary of nonvested option activity during
2011 is presented below:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
average
|
|
|
|
|
|
|
exercise
|
|
|
|
|
|
|
price
|
|
|
|
Shares
|
|
|
per share
|
|
Nonvested options at December 31, 2010
|
|
|
77,679
|
|
|
$
|
19.89
|
|
Granted
|
|
|
59,131
|
|
|
$
|
16.25
|
|
Forfeited/expired
|
|
|
(2,237
|
)
|
|
$
|
17.64
|
|
Vested
|
|
|
(38,635
|
)
|
|
$
|
19.91
|
|
Effect of 5% stock dividend
|
|
|
4,819
|
|
|
$
|
-
|
|
Nonvested options at December 31, 2011
|
|
|
100,757
|
|
|
$
|
16.85
|
|
Additional information about stock options exercised
is presented below:
(Dollars in thousands)
|
|
Years ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
Intrinsic value of options exercised (on exercise date)
|
|
$
|
32
|
|
|
$
|
110
|
|
|
$
|
-
|
|
Cash received from options exercised
|
|
|
57
|
|
|
|
228
|
|
|
|
-
|
|
Excess tax benefit realized from options exercised
|
|
$
|
12
|
|
|
$
|
40
|
|
|
$
|
-
|
|
As of December 31, 2011,
there was $102,000 of total unrecognized compensation cost related to outstanding unvested options that will be recognized over
the following periods:
(Dollars in thousands)
|
|
|
|
Year
|
|
Amount
|
|
2012
|
|
$
|
47
|
|
2013
|
|
|
24
|
|
2014
|
|
|
23
|
|
2015
|
|
|
8
|
|
Total
|
|
$
|
102
|
|
The value of the 8,600
shares of restricted common stock awarded was based on a stock price of $16.25 per share on the date such shares were granted.
These awards vest ratably over four years. As of December 31, 2011, there was $117,000 of total unrecognized compensation cost
related to outstanding unvested restricted shares that will be recognized over the following periods:
(Dollars in thousands)
|
|
|
|
Year
|
|
Amount
|
|
2012
|
|
$
|
35
|
|
2013
|
|
|
35
|
|
2014
|
|
|
35
|
|
2015
|
|
|
12
|
|
Total
|
|
$
|
117
|
|
(12) Fair Value of Financial Instruments and Fair Value Measurements
The Company follows FASB
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 December 31, 2011 and 2010, including methods and assumptions utilized, are
set forth below:
(Dollars in thousands)
|
|
As of December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
Carrying
|
|
|
Estimated
|
|
|
Carrying
|
|
|
Estimated
|
|
|
|
amount
|
|
|
fair value
|
|
|
amount
|
|
|
fair value
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
17,501
|
|
|
$
|
17,501
|
|
|
$
|
9,375
|
|
|
$
|
9,375
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
|
|
|
198,214
|
|
|
|
198,214
|
|
|
|
167,689
|
|
|
|
167,689
|
|
Other securities
|
|
|
6,671
|
|
|
|
6,671
|
|
|
|
8,183
|
|
|
|
8,183
|
|
Loans, net
|
|
|
310,081
|
|
|
|
309,927
|
|
|
|
306,668
|
|
|
|
308,014
|
|
Loans held for sale
|
|
|
9,754
|
|
|
|
9,846
|
|
|
|
12,576
|
|
|
|
12,576
|
|
Mortgage servicing rights
|
|
|
1,160
|
|
|
|
1,319
|
|
|
|
1,060
|
|
|
|
2,787
|
|
Derivative financial instruments
|
|
|
255
|
|
|
|
255
|
|
|
|
-
|
|
|
|
-
|
|
Accrued interest receivable
|
|
|
2,468
|
|
|
|
2,468
|
|
|
|
2,649
|
|
|
|
2,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-maturity deposits
|
|
$
|
274,301
|
|
|
$
|
274,301
|
|
|
$
|
252,867
|
|
|
$
|
252,867
|
|
Time deposits
|
|
|
179,833
|
|
|
|
181,280
|
|
|
|
178,447
|
|
|
|
180,084
|
|
FHLB borrowings
|
|
|
49,163
|
|
|
|
53,376
|
|
|
|
44,300
|
|
|
|
46,600
|
|
Other borrowings
|
|
|
27,434
|
|
|
|
25,200
|
|
|
|
26,001
|
|
|
|
22,590
|
|
Derivative financial instruments
|
|
|
-
|
|
|
|
-
|
|
|
|
68
|
|
|
|
68
|
|
Accrued interest payable
|
|
|
532
|
|
|
|
532
|
|
|
|
675
|
|
|
|
675
|
|
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
its pooled trust preferred securities as Level 3. The portfolio consists of three investments in pooled trust preferred securities
issued by various financial companies, one of which had no value at December 31, 2011. 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 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 are 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 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 are 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 are considered to approximate fair value.
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. These instruments are also discussed in Note 16 on “Commitments, Contingencies and Guarantees.”
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 Financial 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 December 31, 2011 and 2010 allocated
to the appropriate fair value hierarchy:
(Dollars in thousands)
|
|
|
|
|
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
|
|
|
$
|
-
|
|
|
|
|
|
|
As of December 31, 2010
|
|
|
|
|
|
|
Fair value hierarchy
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U. S. federal agency obligations
|
|
$
|
22,187
|
|
|
$
|
-
|
|
|
$
|
22,187
|
|
|
$
|
-
|
|
Municipal obligations, tax exempt
|
|
|
65,287
|
|
|
|
-
|
|
|
|
65,287
|
|
|
|
-
|
|
Municipal obligations, taxable
|
|
|
4,188
|
|
|
|
-
|
|
|
|
4,188
|
|
|
|
-
|
|
Mortgage-backed securities
|
|
|
60,804
|
|
|
|
-
|
|
|
|
60,804
|
|
|
|
-
|
|
Common stocks
|
|
|
828
|
|
|
|
828
|
|
|
|
-
|
|
|
|
-
|
|
Pooled trust preferred securities
|
|
|
236
|
|
|
|
-
|
|
|
|
-
|
|
|
|
236
|
|
Certificates of deposit
|
|
|
14,159
|
|
|
|
-
|
|
|
|
14,159
|
|
|
|
-
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
|
$
|
68
|
|
|
$
|
-
|
|
|
$
|
68
|
|
|
$
|
-
|
|
The following table reconciles the changes in
the Company’s Level 3 financial instruments during 2011:
|
|
Available-for
|
|
|
|
sale-securities
|
|
Level 3 asset (liability) fair value at December 31, 2010
|
|
$
|
236
|
|
Transfers into Level 3
|
|
|
-
|
|
Payments applied to reduce carrying value
|
|
|
(21
|
)
|
Total gains:
|
|
|
|
|
Included in other comprehensive income
|
|
|
190
|
|
Level 3 asset fair value at December 31, 2011
|
|
$
|
405
|
|
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 $2.5 million and $5.3 million, with an allocated allowance
of $205,000 and $1.4 million, at December 31, 2011 and December 31, 2010, 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 when 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 at December 31, 2011 and 2010
allocated to the appropriate fair value hierarchy:
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2011
|
|
|
|
|
|
|
|
|
|
Fair value hierarchy
|
|
|
Total gains
|
|
|
|
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
|
)
|
|
|
|
|
|
As of December 31, 2010
|
|
|
|
|
|
|
|
|
|
Fair value hierarchy
|
|
|
Total gains
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
/ (losses)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
3,902
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,902
|
|
|
$
|
(1,146
|
)
|
Loans held for sale
|
|
|
12,576
|
|
|
|
-
|
|
|
|
12,576
|
|
|
|
-
|
|
|
|
(49
|
)
|
Mortgage servicing rights
|
|
|
2,787
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,787
|
|
|
|
-
|
|
Real estate owned
|
|
$
|
3,194
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,194
|
|
|
$
|
(367
|
)
|
(13) Regulatory Capital Requirements
Current regulatory capital
regulations require financial institutions (including banks and bank holding companies) to meet certain regulatory capital requirements.
Institutions are required to have minimum leverage capital equal to 4% of total average assets and total qualifying capital equal
to 8% of total risk-weighted assets in order to be considered “adequately capitalized.” As of December 31, 2011 and
2010, the Company and the Bank were rated “well capitalized,” which is the highest rating available under the regulatory
capital regulations framework for prompt corrective action. Management believes that as of December 31, 2011, the Company
and the Bank meet all capital adequacy requirements to which they are subject. The following is a comparison of the Company’s
regulatory capital to minimum capital requirements at December 31, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To be well-capitalized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
under prompt
|
|
(Dollars in thousands)
|
|
|
|
|
For capital
|
|
|
corrective
|
|
|
|
Actual
|
|
|
adequacy purposes
|
|
|
action provisions
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
As of December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage
|
|
$
|
56,273
|
|
|
|
9.84
|
%
|
|
$
|
22,871
|
|
|
|
4.0
|
%
|
|
$
|
28,589
|
|
|
|
5.0
|
%
|
Tier 1 Capital
|
|
$
|
56,273
|
|
|
|
15.02
|
%
|
|
$
|
14,984
|
|
|
|
4.0
|
%
|
|
$
|
22,476
|
|
|
|
6.0
|
%
|
Total Risk Based Capital
|
|
$
|
63,085
|
|
|
|
16.84
|
%
|
|
$
|
29,968
|
|
|
|
8.0
|
%
|
|
$
|
37,460
|
|
|
|
10.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage
|
|
$
|
55,258
|
|
|
|
10.00
|
%
|
|
$
|
22,094
|
|
|
|
4.0
|
%
|
|
$
|
27,617
|
|
|
|
5.0
|
%
|
Tier 1 Capital
|
|
$
|
55,258
|
|
|
|
15.01
|
%
|
|
$
|
14,722
|
|
|
|
4.0
|
%
|
|
$
|
22,083
|
|
|
|
6.0
|
%
|
Total Risk Based Capital
|
|
$
|
59,925
|
|
|
|
16.28
|
%
|
|
$
|
29,445
|
|
|
|
8.0
|
%
|
|
$
|
36,806
|
|
|
|
10.0
|
%
|
The following is a comparison of the Bank’s
regulatory capital to minimum capital requirements at December 31, 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To be well-capitalized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
under prompt
|
|
(Dollars in thousands)
|
|
|
|
|
For capital
|
|
|
corrective
|
|
|
|
Actual
|
|
|
adequacy purposes
|
|
|
action provisions
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
As of December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage
|
|
$
|
58,692
|
|
|
|
10.29
|
%
|
|
$
|
22,808
|
|
|
|
4.0
|
%
|
|
$
|
28,510
|
|
|
|
5.0
|
%
|
Tier 1 Capital
|
|
$
|
58,692
|
|
|
|
15.73
|
%
|
|
$
|
14,923
|
|
|
|
4.0
|
%
|
|
$
|
22,384
|
|
|
|
6.0
|
%
|
Total Risk Based Capital
|
|
$
|
63,325
|
|
|
|
16.97
|
%
|
|
$
|
29,846
|
|
|
|
8.0
|
%
|
|
$
|
37,307
|
|
|
|
10.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage
|
|
$
|
57,798
|
|
|
|
10.50
|
%
|
|
$
|
22,024
|
|
|
|
4.0
|
%
|
|
$
|
27,530
|
|
|
|
5.0
|
%
|
Tier 1 Capital
|
|
$
|
57,798
|
|
|
|
15.77
|
%
|
|
$
|
14,660
|
|
|
|
4.0
|
%
|
|
$
|
21,990
|
|
|
|
6.0
|
%
|
Total Risk Based Capital
|
|
$
|
62,384
|
|
|
|
17.02
|
%
|
|
$
|
29,320
|
|
|
|
8.0
|
%
|
|
$
|
36,650
|
|
|
|
10.0
|
%
|
(14) Parent Company Condensed Financial Statements
The following is condensed
financial information of the parent company as of December 31, 2011 and 2010, and for the years ended December 31, 2011, 2010
and 2009:
Condensed
Balance Sheets
(Dollars in thousands)
|
|
As of December 31,
|
|
|
|
2011
|
|
|
2010
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
15
|
|
|
$
|
13
|
|
Investment securities
|
|
|
1,107
|
|
|
|
1,115
|
|
Investment in Bank
|
|
|
75,370
|
|
|
|
72,268
|
|
Other
|
|
|
779
|
|
|
|
776
|
|
Total assets
|
|
$
|
77,271
|
|
|
$
|
74,172
|
|
Liabilities and stockholders’ equity:
|
|
|
|
|
|
|
|
|
Other borrowings
|
|
$
|
18,136
|
|
|
$
|
20,336
|
|
Other
|
|
|
15
|
|
|
|
19
|
|
Stockholders’ equity
|
|
|
59,120
|
|
|
|
53,817
|
|
Total liabilities and stockholders’ equity
|
|
$
|
77,271
|
|
|
$
|
74,172
|
|
Condensed
Statements of Earnings
(Dollars in thousands)
|
|
Years ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
Dividends from Bank
|
|
$
|
4,723
|
|
|
$
|
2,910
|
|
|
$
|
2,709
|
|
Interest income
|
|
|
21
|
|
|
|
32
|
|
|
|
53
|
|
Other non-interest income
|
|
|
7
|
|
|
|
7
|
|
|
|
7
|
|
Interest expense
|
|
|
(607
|
)
|
|
|
(743
|
)
|
|
|
(792
|
)
|
Other expense, net
|
|
|
(341
|
)
|
|
|
(219
|
)
|
|
|
(244
|
)
|
Earnings before equity in undistributed earnings of Bank
|
|
|
3,803
|
|
|
|
1,987
|
|
|
|
1,733
|
|
Increase/(decrease) in undistributed equity of Bank
|
|
|
367
|
|
|
|
(260
|
)
|
|
|
1,199
|
|
Earnings before income taxes
|
|
|
4,170
|
|
|
|
1,727
|
|
|
|
2,932
|
|
Income tax benefit
|
|
|
(314
|
)
|
|
|
(316
|
)
|
|
|
(340
|
)
|
Net earnings
|
|
$
|
4,484
|
|
|
$
|
2,043
|
|
|
$
|
3,272
|
|
Condensed
Statements of Cash Flows
(Dollars in thousands)
|
|
Years ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
4,484
|
|
|
$
|
2,043
|
|
|
$
|
3,272
|
|
(Increase)/decrease in undistributed equity of Bank
|
|
|
(367
|
)
|
|
|
260
|
|
|
|
(1,199
|
)
|
Loss on impairment of investment securities
|
|
|
72
|
|
|
|
9
|
|
|
|
-
|
|
Other
|
|
|
(30
|
)
|
|
|
(50
|
)
|
|
|
35
|
|
Net cash provided by operating activities
|
|
|
4,159
|
|
|
|
2,262
|
|
|
|
2,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of investment securities
|
|
|
-
|
|
|
|
(74
|
)
|
|
|
-
|
|
Proceeds from sales and maturities of investment securities
|
|
|
-
|
|
|
|
-
|
|
|
|
150
|
|
Net cash (used in) provided by investing activities
|
|
|
-
|
|
|
|
(74
|
)
|
|
|
150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares under stock option plan
|
|
|
57
|
|
|
|
228
|
|
|
|
-
|
|
Proceeds from other borrowings
|
|
|
-
|
|
|
|
2,398
|
|
|
|
3,185
|
|
Repayments on other borrowings
|
|
|
(2,200
|
)
|
|
|
(2,910
|
)
|
|
|
(3,618
|
)
|
Purchase of treasury stock
|
|
|
-
|
|
|
|
-
|
|
|
|
(12
|
)
|
Payment of dividends
|
|
|
(2,014
|
)
|
|
|
(1,908
|
)
|
|
|
(1,806
|
)
|
Net cash used in financing activities
|
|
|
(4,157
|
)
|
|
|
(2,192
|
)
|
|
|
(2,251
|
)
|
Net increase (decrease) in cash
|
|
|
2
|
|
|
|
(4
|
)
|
|
|
7
|
|
Cash at beginning of year
|
|
|
13
|
|
|
|
17
|
|
|
|
10
|
|
Cash at end of year
|
|
$
|
15
|
|
|
$
|
13
|
|
|
$
|
17
|
|
Dividends paid by the Company
are provided through dividends from the Bank. At December 31, 2011, the Bank could distribute dividends of up to $1.3 million
without regulatory approvals. The primary source of funds for the Company is dividends from the Bank. Under the National Bank Act,
a national bank may pay dividends out of its undivided profits in such amounts and at such times as the bank’s board of directors
deems prudent. Without prior OCC approval, however, a national bank may not pay dividends in any calendar year that, in the aggregate,
exceed the bank’s year-to-date net income plus the bank’s retained net income for the two preceding years. The payment
of dividends by any financial institution is affected by the requirement to maintain adequate capital pursuant to applicable capital
adequacy guidelines and regulations, and a financial institution generally is prohibited from paying any dividends if, following
payment thereof, the institution would be undercapitalized.
(15) Stockholders’ Rights Plan
On October 11, 2001,
the Company’s board of directors adopted a stockholders’ rights plan (the “Rights Plan”). The Rights Plan
provided for the distribution of one right on February 13, 2002, for each share of the Company’s outstanding common
stock as of February 1, 2002. The rights have no immediate economic value to stockholders, because they cannot be exercised
unless and until a person, group or entity acquires 15% or more of the Company’s common stock or announces a tender offer.
The Rights Plan also permits the Company’s board of directors to redeem each right for one cent under various circumstances.
In general, the Rights Plan provides that if a person, group or entity acquires a 15% or larger stake in the Company or announces
a tender offer, and the Company’s board of directors chooses not to redeem the rights, all holders of rights, other than
the 15% stockholder or the tender offeror, will be able to purchase a certain amount of the Company’s common stock for half
of its market price.
(16) Commitments, Contingencies and Guarantees
Commitments to extend credit
are legally binding agreements to lend to a borrower providing there are no violations of any conditions established in the contract.
The Company, as a provider of financial services, routinely issues financial guarantees in the form of financial and performance
commercial and standby letters of credit. As many of the commitments are expected to expire without being drawn upon, the total
commitment does not necessarily represent future cash requirements (see Note 4).
The Company guarantees
payments to holders of certain trust preferred securities issued by wholly owned grantor trusts. The securities are due in 2034
and 2036 and were redeemable beginning in 2009 and 2011. The maximum potential future payments guaranteed by the Company, which
includes future interest and principal payments through maturity, was approximately $26.4 million at December 31, 2011. At December
31, 2011, the Company had a recorded liability of $16.6 million of principal and accrued interest to date, representing amounts
owed to the trusts.
There are no pending legal
proceedings to which the Company or the Bank is a party other than ordinary routine litigation incidental to the Company’s
business. While the ultimate outcome of current legal proceedings cannot be predicted with certainty, it is the opinion of management
that the resolution of these legal actions should not have a material effect on the Company’s consolidated financial position
or results of operations.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
An evaluation was performed
under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as
defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of December 31, 2011.
Based on that evaluation, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded
that the Company’s disclosure controls and procedures were effective.
Management’s Report on Internal Control over Financial
Reporting
Management is responsible
for establishing and maintaining adequate internal control over financial reporting (as defined by Rule 13a-15(f) promulgated under
the Securities and Exchange Act of 1934, as amended). The Company’s internal control over financial reporting is a process
designed under the supervision of the Company’s Chief Executive Officer and Chief Financial Officer to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for
external purposes in accordance with U.S. generally accepted accounting principles.
Because of its inherent
limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
Management has made a comprehensive
review, evaluation, and assessment of the Company’s internal control over financial reporting as of December 31, 2011. In
making its assessment of the effectiveness of the Company’s internal control over financial reporting, management used the
framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework.
Based on that assessment, management concluded that, as of December 31, 2011, the Company’s internal control over financial
reporting was effective.
This annual report does
not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant
to the rules of the SEC permitting the Company to provide only management’s report in the annual report.
There were no changes in
the Company’s internal control over financial reporting during the quarter ended December 31, 2011 that materially affected
or were reasonably likely to materially affect the Company’s internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None
PART III.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS
AND CORPORATE GOVERNANCE
Directors
The Company incorporates
by reference the information called for by Item 10 of this Form 10-K regarding directors of the Company from the sections entitled
“Election of Directors,” “Section 16(a) Beneficial Ownership Reporting Compliance” and “Corporate
Governance and the Board of Directors” of the Company’s Proxy Statement for the annual meeting of stockholders to be
held May 23, 2012 (the “2012 Proxy Statement”).
The executive officers
of the Company, each of whom is also currently an executive officer of the Bank and both of whom serve at the discretion of the
Board of Directors, are identified below:
Name
|
|
Age
|
|
Positions with the Company
|
|
|
|
|
|
Patrick L. Alexander
|
|
59
|
|
President and Chief Executive Officer
|
|
|
|
|
|
Mark A. Herpich
|
|
44
|
|
Vice President, Secretary, Chief Financial Officer and Treasurer
|
The executive officers
of the Bank are identified below:
Name
|
|
Age
|
|
Positions with the Bank
|
|
Held position since
|
|
|
|
|
|
|
|
Patrick L. Alexander
|
|
59
|
|
President and Chief Executive Officer
|
|
October 2001
|
|
|
|
|
|
|
|
Mark A. Herpich
|
|
44
|
|
Executive Vice President and Chief Financial Officer
|
|
October 2001
|
|
|
|
|
|
|
|
Michael E. Scheopner
|
|
50
|
|
Executive Vice President, Credit Risk Manager
|
|
October 2001
|
|
|
|
|
|
|
|
Dean R. Thibault
|
|
60
|
|
Executive Vice President, Commercial Banking
|
|
January 2006
|
|
|
|
|
|
|
|
Larry R. Heyka
|
|
65
|
|
Market President, Manhattan Region
|
|
January 2006
|
|
|
|
|
|
|
|
Mark J. Oliphant
|
|
59
|
|
Market President, Southwest Kansas Region
|
|
October 2001
|
|
|
|
|
|
|
|
Bradly L. Chindamo
|
|
43
|
|
Market President, Eastern Kansas Region
|
|
January 2008
|
|
ITEM 11.
|
EXECUTIVE COMPENSATION
|
The Company incorporates
by reference the information called for by Item 11 of this Form 10-K from the sections entitled “Corporate Governance and
the Board of Directors,” and “Executive Compensation” of the 2012 Proxy Statement.
|
ITEM 12.
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
|
The Company incorporates
by reference the information called for by Item 12 of this Form 10-K from the section entitled “Security Ownership of Certain
Beneficial Owners” of the 2012 Proxy Statement.
Equity Compensation Plan Information
The table below sets forth the following information
as of December 31, 2011 for all compensation plans previously approved by the Company’s stockholders:
|
(a)
|
the number of securities to be issued upon the exercise of outstanding options, warrants and rights;
|
|
(b)
|
the weighted-average exercise price of such outstanding options, warrants and rights;
|
|
(c)
|
other than securities to be issued upon the exercise of such outstanding options, warrants and rights, the number of securities
remaining available for future issuance under the plans.
|
EQUITY COMPENSATION PLAN INFORMATION
|
Plan category
|
|
Number of securities to be
issued upon exercise of
outstanding options
|
|
|
Weighted-average
exercise price of
outstanding options
|
|
|
Number of securities
remaining available for
future issuance
|
|
Equity compensation plans approved
|
|
|
|
|
|
|
|
|
|
|
|
|
by security holders
|
|
|
411,714
|
|
|
$
|
19.09
|
|
|
|
-
|
|
Equity compensation plans not
|
|
|
|
|
|
|
|
|
|
|
|
|
approved by security holders
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Total
|
|
|
411,714
|
|
|
$
|
19.09
|
|
|
|
-
|
|
|
ITEM 13.
|
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
|
The Company incorporates
by reference the information called for by Item 13 of this Form 10-K from the sections entitled “Nominees,” “Corporate
Governance and Board of Directors” and “Certain Relationships and Related Transactions” of the 2012 Proxy Statement.
|
ITEM 14.
|
PRINCIPAL ACCOUNTANT FEES AND SERVICES
|
The Company incorporates
by reference the information called for by Item 14 of this Form 10-K from the section entitled “Ratification of KPMG LLP
as our Independent Registered Public Accounting Firm” of the 2012 Proxy Statement.
PART IV.
|
ITEM 15.
|
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
|
ITEM 15(a)1 and 2. Financial Statements
and Schedules
LANDMARK BANCORP, INC. AND SUBSIDIARY
LIST OF FINANCIAL STATEMENTS
The following audited Consolidated
Financial Statements of the Company and its subsidiaries and related notes and auditors’ report are included in Part II,
Item 8 of this Report:
Report of Independent Registered
Public Accounting Firm
Consolidated Balance Sheets –
December 31, 2011 and 2010
Consolidated Statements of Earnings
– Years ended December 31, 2011, 2010 and 2009
Consolidated Statements of Stockholders’
Equity – Years ended December 31, 2011, 2010 and 2009
Consolidated Statements of Comprehensive
Income – Years ended December 31, 2011, 2010 and 2009
Consolidated Statements of Cash Flows
– Years ended December 31, 2011, 2010 and 2009
Notes to Consolidated Financial Statements
All schedules are omitted
because they are not required or are not applicable or the required information is shown in the financial statements incorporated
by reference or notes thereto.
Item 15(a)3. Exhibits
The exhibits required by
Item 601 of Regulation S-K are included with this Form 10-K and are listed on the “Index to Exhibits” immediately following
the signature page.
Upon written request to
the President of the Company, P.O. Box 308, Manhattan, Kansas 66505-0308, copies of the exhibits listed above are available to
stockholders of the Company by specifically identifying each exhibit desired in the request. The Company’s filings with the
Securities and Exchange Commission are also available via the Internet at www.sec.gov, the Company’s Web site available at
www.landmarkbancorpinc.com or through the investor relations link at the Bank’s Web site at
www.banklandmark.com
.
SIGNATURES
Pursuant to the requirements
of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
LANDMARK BANCORP, INC.
|
|
|
(Registrant)
|
|
|
|
|
|
By: /s/ Patrick L. Alexander
|
|
By: /s/ Mark A. Herpich
|
Patrick L. Alexander
|
|
Mark A. Herpich
|
President and Chief Executive Officer
|
|
Vice President, Secretary, Treasurer and Chief Financial Officer
|
(Principal Executive Officer)
|
|
(Principal Financial and Accounting Officer)
|
Pursuant to the requirements
of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
SIGNATURE
|
|
|
|
TITLE
|
/s/ Patrick L. Alexander
|
|
March 15, 2012
|
|
President, Chief Executive Officer and Director
|
Patrick L. Alexander
|
|
Date
|
|
|
|
|
|
|
|
/s/ Larry L. Schugart
|
|
March 15, 2012
|
|
Chairman of the Board, Director
|
Larry L. Schugart
|
|
Date
|
|
|
|
|
|
|
|
/s/ Richard A. Ball
|
|
March 15, 2012
|
|
Director
|
Richard A. Ball
|
|
Date
|
|
|
|
|
|
|
|
/s/ Brent A. Bowman
|
|
March 15, 2012
|
|
Director
|
Brent A. Bowman
|
|
Date
|
|
|
|
|
|
|
|
/s/ Sarah Hill-Nelson
|
|
March 15, 2012
|
|
Director
|
Sarah Hill-Nelson
|
|
Date
|
|
|
|
|
|
|
|
/s/ Jim W. Lewis
|
|
March 15, 2012
|
|
Director
|
Jim W. Lewis
|
|
Date
|
|
|
|
|
|
|
|
/s/ Jerry R. Pettle
|
|
March 15, 2012
|
|
Director
|
Jerry R. Pettle
|
|
Date
|
|
|
|
|
|
|
|
/s/ Susan E. Roepke
|
|
March 15, 2012
|
|
Director
|
Susan E. Roepke
|
|
Date
|
|
|
|
|
|
|
|
/s/ C. Duane Ross
|
|
March 15, 2012
|
|
Director
|
C. Duane Ross
|
|
Date
|
|
|
|
|
|
|
|
/s/ David H. Snapp
|
|
March 15, 2012
|
|
Director
|
David H. Snapp
|
|
Date
|
|
|
INDEX TO EXHIBITS
Exhibit
Number
|
|
Description
|
|
Incorporated by reference to
|
|
Attached
hereto
|
|
|
|
|
|
|
|
2.1
|
|
Agreement and Plan of Merger, dated January 13, 2012 among Landmark National Bank, The Wellsville Bank and Wellsville Bancshares, Inc.
|
|
the registrant’s Form 8-K filed with the Commission on January 17, 2012 (SEC file no. 000-33203)
|
|
|
|
|
|
|
|
|
|
3.1
|
|
Amended and Restated Certificate of Incorporation
|
|
the registrant’s transition report on Form 10-K for the transition period ending December 31, 2001, filed with the Commission on March 24, 2002 (SEC file no. 000-33203)
|
|
|
|
|
|
|
|
|
|
3.2
|
|
Bylaws
|
|
the registrant’s Form S-4, as amended, filed with the Commission on June 7, 2001 (SEC file no. 333-62466)
|
|
|
|
|
|
|
|
|
|
10.1
|
|
Form of employment agreement between Larry Schugart and the Company
|
|
the registrant’s Form S-4, as amended, filed with the Commission on June 7, 2001 (SEC file no. 333-62466)
|
|
|
|
|
|
|
|
|
|
10.2
|
|
Form of employment agreement between Patrick L. Alexander and the Company
|
|
the registrant’s Form S-4, as amended, filed with the Commission on June 7, 2001 (SEC file no. 333-62466)
|
|
|
|
|
|
|
|
|
|
10.3
|
|
Form of employment agreement between Mark A. Herpich and the Company
|
|
the registrant’s Form S-4, as amended, filed with the Commission on June 7, 2001 (SEC file no. 333-62466)
|
|
|
|
|
|
|
|
|
|
10.4
|
|
Form of employment agreement between Michael E. Scheopner and the Company
|
|
the registrant’s Form S-4, as amended, filed with the Commission on June 7, 2001 (SEC file no. 333-62466)
|
|
|
|
|
|
|
|
|
|
10.5
|
|
Form of employment agreement between Dean R. Thibault and the Company
|
|
the registrant’s Form S-4, as amended, filed with the Commission on June 7, 2001 (SEC file no. 333-62466)
|
|
|
|
|
|
|
|
|
|
10.6
|
|
Rights Agreement between the Company and Landmark National Bank
|
|
the registrant’s Form 8-K filed with the Commission on January 22, 2002 (SEC file no. 000-33203)
|
|
|
|
|
|
|
|
|
|
10.7
|
|
Indenture dated as of December 19, 2003 between the Company and Wilmington Trust Company
|
|
the registrant’s report on Form 10-K for the period ending December 31, 2003, filed with the Commission on March 30, 2004 (SEC file no. 000-33203)
|
|
|
|
|
|
|
|
|
|
10.8
|
|
Form of employment agreement between Mark J. Oliphant and the Company
|
|
the registrant’s Form 8-K filed with the Commission on March 9, 2005 (SEC file no. 000-33203)
|
|
|
|
|
|
|
|
|
|
10.9
|
|
Form of 2001 Landmark Bancorp, Inc. Stock Incentive Plan Option Grant Agreement
|
|
the registrant’s report on Form 10-K for the period ending December 31, 2004, filed with the Commission on March 30, 2005 (SEC file no. 000-33203)
|
|
|
|
|
|
|
|
|
|
10.10
|
|
Form of Landmark Bancorp, Inc. Deferred Compensation Agreements
|
|
the registrant’s report on Form 10-K for the period ending December 31, 2004, filed with the Commission on March 30, 2005 (SEC file no. 000-33203)
|
|
|
10.11
|
|
2001 Stock Incentive Plan
|
|
the registrant’s Registration Statement on form S-8 filed with the Commission on February 11, 2003
|
|
|
|
|
|
|
|
|
|
10.12
|
|
Indenture dated as of December 30, 2005 between the Company and Wilmington Trust Company
|
|
the registrant’s report on Form 10-K for the period ending December 31, 2005, filed with the Commission on March 29, 2006 (SEC file no. 000-33203)
|
|
|
|
|
|
|
|
|
|
10.13
|
|
Revolving Credit Agreement, dated November 19, 2008 between Landmark Bancorp, Inc. and First National Bank of Omaha
|
|
the registrant’s report on Form 10-K for the period ending December 31, 2008, filed with the Commission on March 27, 2009 (SEC file no. 000-33203)
|
|
|
|
|
|
|
|
|
|
10.14
|
|
First Amendment to Revolving Credit Agreement, dated November 18, 2009 between Landmark Bancorp, Inc. and First National Bank of Omaha
|
|
the registrant’s Form 10-K filed with the Commission on March 26, 2010 (SEC file no. 000-33203)
|
|
|
|
|
|
|
|
|
|
10.15
|
|
Second Amendment to Revolving Credit Agreement, dated November 5, 2010 between Landmark Bancorp, Inc. and First National Bank of Omaha
|
|
the registrant’s Form 8-K filed with the Commission on November 9, 2010 (SEC file no. 000-33203)
|
|
|
|
|
|
|
|
|
|
10.16
|
|
Third Amendment to Revolving Credit Agreement, dated November 4, 2011 between Landmark Bancorp, Inc. and First National Bank of Omaha
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the registrant’s Form 10-Q filed with the Commission on November 10, 2011 (SEC file no. 000-33203)
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10.17
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Form of 2001 Landmark Bancorp, Inc. Stock Incentive Plan Restricted Stock Award
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the registrant’s Form 8-K filed with the Commission on April 19, 2011 (SEC file no. 000-33203)
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13.1
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Letter to Stockholders and Corporate Information included in 2011 Annual Report to Stockholders
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X
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21.1
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Subsidiaries of the Company
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X
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23.1
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Consent of KPMG LLP
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X
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31.1
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Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a)
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X
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31.2
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Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a)
|
|
|
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X
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32.1
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Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
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X
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32.2
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Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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X
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Exhibit 101
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Interactive data files pursuant to Rule 405 of Regulation
S-T: (i) Consolidated Balance Sheets as of December 31, 2011 and 2010; (ii) Consolidated Statements of Earnings for the twelve
months ended December 31, 2011, 2010 and 2009; (iii) Consolidated Statements of Comprehensive Income for the twelve months ended
December 31, 2011, 2010 and 2009; (iv) Consolidated Statements of Cash Flows for the twelve months ended December 31, 2011, 2010
and 2009; (v) Consolidated Statements of Stockholders’ Equity for the twelve months ended December 31, 2011, 2010 and 2009;
and (vi) Notes to Consolidated Financial Statements, tagged as blocks of text*
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* As provided in Rule 406T of Regulation S-T,
this information shall not be deemed filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the
Securities Exchange Act of 1934, or otherwise subject to liability under those sections.
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