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Landmark Bancorp Inc (LARK) SEC Quarterly Report (10-Q) for Q2 2017

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2017

OR

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________

Commission File Number 0-33203

LANDMARK BANCORP, INC.

(Exact name of registrant as specified in its charter)

Delaware 43-1930755

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

701 Poyntz Avenue, Manhattan, Kansas 66502

(Address of principal executive offices) (Zip code)

(785) 565-2000

(Registrant's telephone number, including area code)

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

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

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

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

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

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

Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date: as of August 10, 2017, the issuer had outstanding 3,873,781 shares of its common stock, $.01 par value per share.

LANDMARK BANCORP, INC.

Form 10-Q Quarterly Report

Table of Contents

Page Number

PART I

Item 1. Financial Statements 2 - 25
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 26-33
Item 3. Quantitative and Qualitative Disclosures about Market Risk 34-35
Item 4. Controls and Procedures 36
PART II
Item 1. Legal Proceedings 37
Item 1A. Risk Factors 37
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 37
Item 3. Defaults Upon Senior Securities 37
Item 4. Mine Safety Disclosures 37
Item 5. Other Information 37
Item 6. Exhibits 37
Signature Page 38

1

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

LANDMARK BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share amounts) June 30, 2017 December 31, 2016
(Unaudited)
Assets
Cash and cash equivalents $ 10,594 $ 19,996
Investment securities available-for-sale, at fair value 389,842 385,563
Bank Stocks, at cost 5,350 5,299
Loans, net of allowance for loans losses of $5,326 at June 30, 2017 and $5,344 at December 31, 2016 422,739 420,461
Loans held for sale, at fair value 9,758 5,517
Premises and equipment, net 19,938 20,407
Bank owned life insurance 18,550 18,314
Goodwill 17,532 17,532
Other intangible assets, net 3,802 3,986
Real estate owned, net 1,004 1,279
Accrued interest and other assets 11,690 13,028
Total assets $ 910,799 $ 911,382
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Non-interest-bearing demand $ 158,824 $ 152,012
Money market and checking 360,742 361,398
Savings 93,560 88,273
Time 131,896 139,838
Total deposits 745,022 741,521
Federal Home Loan Bank borrowings 31,000 39,100
Subordinated debentures 21,384 21,284
Other borrowings 11,447 12,483
Accrued interest, taxes, and other liabilities 10,911 12,043
Total liabilities 819,764 826,431
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value per share, 200,000 shares authorized; none issued - -
Common stock, $0.01 par value per share, 7,500,000 shares authorized; 3,871,045 and 3,868,077 shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively 39 38
Additional paid-in capital 52,067 51,968
Retained earnings 37,333 34,293
Accumulated other comprehensive income (loss) 1,596 (1,348 )
Total stockholders' equity 91,035 84,951
Total liabilities and stockholders' equity $ 910,799 $ 911,382

See accompanying notes to consolidated financial statements.

2

LANDMARK BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF EARNINGS

Three months ended Six months ended
(Dollars in thousands, except per share amounts) June 30, June 30,
2017 2016 2017 2016
(Unaudited) (Unaudited)
Interest income:
Loans:
Taxable $ 5,246 $ 5,285 $ 10,265 $ 10,420
Tax-exempt 34 60 69 127
Investment securities:
Taxable 1,202 1,171 2,394 2,335
Tax-exempt 974 856 1,916 1,664
Total interest income 7,456 7,372 14,644 14,546
Interest expense:
Deposits 394 287 732 564
Borrowings 486 523 968 1,016
Total interest expense 880 810 1,700 1,580
Net interest income 6,576 6,562 12,944 12,966
Provision for loan losses 100 300 150 350
Net interest income after provision for loan losses 6,476 6,262 12,794 12,616
Non-interest income:
Fees and service charges 1,917 1,847 3,632 3,576
Gains on sales of loans, net 1,692 1,405 3,081 3,199
Bank owned life insurance 119 145 236 265
Gains on sales of investment securities, net 177 285 324 297
Other 283 266 556 505
Total non-interest income 4,188 3,948 7,829 7,842
Non-interest expense:
Compensation and benefits 3,918 3,777 7,675 7,578
Occupancy and equipment 1,097 1,055 2,121 2,111
Amortization of intangibles 328 331 626 668
Data processing 337 346 667 657
Professional fees 476 282 766 501
Advertising 166 166 332 332
Federal deposit insurance premiums 73 110 145 220
Foreclosure and real estate owned expense 49 51 101 116
Other 1,095 1,093 2,167 2,190
Total non-interest expense 7,539 7,211 14,600 14,373
Earnings before income taxes 3,125 2,999 6,023 6,085
Income tax expense (1) 742 673 1,435 1,366
Net earnings (1) $ 2,383 $ 2,326 $ 4,588 $ 4,719
Earnings per share:
 Basic (1)(2) $ 0.62 $ 0.61 $ 1.19 $ 1.25
 Diluted (1)(2) $ 0.60 $ 0.60 $ 1.16 $ 1.23
Dividends per share (2) $ 0.20 $ 0.19 $ 0.40 $ 0.38

(1) Income tax expense, net earnings and earnings per share for the periods ended June 30, 2016 have been recast to reflect the early adoption of Accounting Standards Update ("ASU") 2016-09

(2) Per share amounts for the periods ended June 30, 2016 have been adjusted to give effect to the 5% stock dividend paid during December 2016.

See accompanying notes to consolidated financial statements.

3

LANDMARK BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Three months ended Six months ended
(Dollars in thousands) June 30, June 30,
2017 2016 2017 2016
(Unaudited) (Unaudited)
Net earnings (1) $ 2,383 $ 2,326 $ 4,588 $ 4,719
Net unrealized holding gains on available-for-sale securities 4,497 3,771 5,019 7,161
Reclassification adjustment for net gains included in earnings (177 ) (285 ) (324 ) (297 )
Net unrealized gains 4,320 3,486 4,695 6,864
Income tax effect on net gains included in earnings 65 105 120 110
Income tax effect on net unrealized holding gains (1,670 ) (1,396 ) (1,871 ) (2,654 )
Other comprehensive income 2,715 2,195 2,944 4,320
Total comprehensive income $ 5,098 $ 4,521 $ 7,532 $ 9,039

(1) Net earnings for the periods ended June 30, 2016 have been recast to reflect the early adoption of ASU 2016-09.

See accompanying notes to consolidated financial statements.

4

LANDMARK BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Dollars in thousands, except per share amounts) Common stock Additional paid-in capital Retained earnings Accumulated other comprehensive income (loss) Total
(Unaudited)
Balance at January 1, 2016 $ 35 $ 45,372 $ 32,988 $ 2,175 $ 80,570
Net earnings (1) - - 4,719 - 4,719
Other comprehensive income - - - 4,320 4,320
Dividends paid ($0.38 per share) - - (1,437 ) - (1,437 )
Exercise of stock options, 89,633 shares (1) 1 1,194 - - 1,195
Balance at June 30, 2016 $ 36 $ 46,566 $ 36,270 $ 6,495 $ 89,367
Balance at January 1, 2017 $ 38 $ 51,968 $ 34,293 $ (1,348 ) $ 84,951
Net earnings - - 4,588 - 4,588
Other comprehensive income - - - 2,944 2,944
Dividends paid ($0.40 per share) - - (1,548 ) - (1,548 )
Stock-based compensation - 77 - - 77
Exercise of stock options, 2,968 shares, 1 22 - - 23
Balance at June 30, 2017 $ 39 $ 52,067 $ 37,333 $ 1,596 $ 91,035

(1) Net earnings and exercise of stock options for the period ended June 30, 2016 have been recast to reflect the early adoption of ASU 2016-09.

See accompanying notes to consolidated financial statements.

5

LANDMARK BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands) Six months ended June 30,
2017 2016
(Unaudited)
Cash flows from operating activities:
Net earnings (1) $ 4,588 $ 4,719
Adjustments to reconcile net earnings to net cash provided by operating activities:
Provision for loan losses 150 350
Valuation allowance on real estate owned 67 -
Amortization of investment security premiums, net 944 818
Amortization of purchase accounting adjustment on loans (91 ) (57 )
Amortization of purchase accounting adjustment on subordinated debentures 100 100
Amortization of intangibles 626 668
Depreciation 520 581
Increase in cash surrender value of bank owned life insurance (236 ) (265 )
Stock-based compensation 77 -
Deferred income taxes 542 229
Net gains on sales of investment securities (324 ) (297 )
Net (gain) loss on sales of premises, equipment and real estate owned (10 ) 72
Net gains on sales of loans (3,081 ) (3,199 )
Proceeds from sales of loans 86,747 121,551
Origination of loans held for sale (87,907 ) (113,944 )
Changes in assets and liabilities:
Accrued interest and other assets (1,183 ) (1,536 )
Accrued expenses, taxes, and other liabilities (1,201 ) (2,538 )
Net cash provided by operating activities 328 7,252
Cash flows from investing activities:
Net increase in loans (2,662 ) (10,932 )
Maturities and prepayments of investment securities 28,501 23,429
Purchases of investment securities (42,164 ) (43,815 )
Proceeds from sales of investment securities 13,459 13,617
Redemption of bank stocks 6,319 3,009
Purchase of bank stocks (6,370 ) (3,134 )
Proceeds from sales of premises and equipment and foreclosed assets 398 749
Proceeds from bank owned life insurance - 351
Purchases of premises and equipment, net (51 ) (386 )
Net cash used in investing activities (2,570 ) (17,112 )
Cash flows from financing activities:
Net increase in deposits 3,501 897
Federal Home Loan Bank advance borrowings 313,277 156,291
Federal Home Loan Bank advance repayments (321,377 ) (145,891 )
Proceeds from other borrowings 100 -
Repayments on other borrowings (1,136 ) (447 )
Proceeds from exercise of stock options (1) 23 1,195
Payment of dividends (1,548 ) (1,437 )
Net cash (used in) provided by financing activities (7,160 ) 10,608
Net (decrease) increase in cash and cash equivalents (9,402 ) 748
Cash and cash equivalents at beginning of period 19,996 13,569
Cash and cash equivalents at end of period $ 10,594 $ 14,317

(Continued)

6

LANDMARK BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED

Six months ended
(Dollars in thousands) June 30,
2017 2016
(Unaudited)
Supplemental disclosure of cash flow information:
Cash payments for income taxes $ 800 $ 500
Cash paid for interest 1,616 1,599
Supplemental schedule of noncash investing and financing activities:
Transfer of loans to real estate owned 180 536
Investment securities purchases not yet settled - -

(1)  Net earnings and proceeds from the exercise of stock options for the period ended June 30, 2016 have been recast to reflect the early adoption of ASU 2016-09.

See accompanying notes to consolidated financial statements.

7

LANDMARK BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Interim Financial Statements

The unaudited consolidated financial statements of Landmark Bancorp, Inc. (the "Company") and subsidiaries have been prepared in accordance with the instructions to Form 10-Q. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles ("GAAP") for complete financial statements and should be read in conjunction with the Company's most recent annual report on Form 10-K, containing the latest audited consolidated financial statements and notes thereto. The consolidated financial statements in this report have not been audited by an independent registered public accounting firm, but in the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation of financial statements, have been reflected herein. The results of the six months ended June 30, 2017 are not necessarily indicative of the results expected for the year ending December 31, 2017 or for any other future time period. The Company has evaluated subsequent events for recognition and disclosure up to the date the financial statements were issued.

2. Investments

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

(Dollars in thousands) As of June 30, 2017
Gross Gross
Amortized unrealized unrealized Estimated
cost gains losses fair value
U. S. treasury securities $ 4,993 $ 24 $ (1 ) $ 5,016
U. S. federal agency obligations 21,377 45 (40 ) 21,382
Municipal obligations, tax exempt 177,419 2,485 (661 ) 179,243
Municipal obligations, taxable 62,031 828 (81 ) 62,778
Agency mortgage-backed securities 112,095 368 (623 ) 111,840
Certificates of deposit 9,224 - - 9,224
Common stocks 178 181 - 359
Total $ 387,317 $ 3,931 $ (1,406 ) $ 389,842

(Dollars in thousands) As of December 31, 2016
Gross Gross
Amortized unrealized unrealized Estimated
cost gains losses fair value
U. S. treasury securities $ 6,005 $ 10 $ - $ 6,015
U. S. federal agency obligations 27,140 48 (49 ) 27,139
Municipal obligations, tax exempt 163,632 696 (2,666 ) 161,662
Municipal obligations, taxable 71,371 463 (271 ) 71,563
Agency mortgage-backed securities 109,427 171 (1,222 ) 108,376
Certificates of deposit 9,700 - - 9,700
Common stocks 458 650 - 1,108
Total $ 387,733 $ 2,038 $ (4,208 ) $ 385,563

8

The tables above show that some of the securities in the available-for-sale investment portfolio had unrealized losses, or were temporarily impaired, as of June 30, 2017 and December 31, 2016. This temporary impairment represents the estimated amount of loss that would be realized if the securities were sold on the valuation date. Securities which were temporarily impaired are shown below, along with the length of time in a continuous unrealized loss position.

(Dollars in thousands) As of June 30, 2017
Less than 12 months 12 months or longer Total
No. of Fair Unrealized Fair Unrealized Fair Unrealized
securities value losses value losses value losses
U.S. treasury securities 1 $ 2,994 $ (1 ) $ - $ - $ 2,994 $ (1 )
U.S. federal agency obligations 12 14,825 (36 ) 995 (4 ) 15,820 (40 )
Municipal obligations, tax exempt 113 41,363 (566 ) 4,587 (95 ) 45,950 (661 )
Municipal obligations, taxable 40 15,167 (81 ) - - 15,167 (81 )
Agency mortgage-backed securities 38 54,970 (593 ) 1,320 (30 ) 56,290 (623 )
Total 204 $ 129,319 $ (1,277 ) $ 6,902 $ (129 ) $ 136,221 $ (1,406 )

(Dollars in thousands) As of December 31, 2016
Less than 12 months 12 months or longer Total
No. of Fair Unrealized Fair Unrealized Fair Unrealized
securities value losses value losses value losses
U. S. federal agency obligations 9 15,056 (49 ) - - 15,056 (49 )
Municipal obligations, tax exempt 275 97,842 (2,666 ) - - 97,842 (2,666 )
Municipal obligations, taxable 66 26,184 (271 ) - - 26,184 (271 )
Agency mortgage-backed securities 58 83,011 (1,222 ) - - 83,011 (1,222 )
Total 408 $ 222,093 $ (4,208 ) $ - $ - $ 222,093 $ (4,208 )

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

The Company's U.S. federal agency portfolio consists of securities issued by the government-sponsored agencies of Federal Home Loan Mortgage Corporation ("FHLMC"), Federal National Mortgage Association ("FNMA") and Federal Home Loan Bank ("FHLB"). The receipt of principal and interest on U.S. federal agency obligations is guaranteed by the respective government-sponsored agency guarantor, such that the Company believes that its U.S. federal agency obligations do not expose the Company to credit-related losses. Based on these factors, along with the Company's intent to not sell the securities and its belief that it was more likely than not that the Company will not be required to sell the securities before recovery of their cost basis, the Company believed that the U.S. federal agency obligations identified in the tables above were temporarily impaired as of June 30, 2017 and December 31, 2016.

The Company's portfolio of municipal obligations consists of both tax-exempt and taxable general obligations securities issued by various municipalities. As of June 30, 2017, the Company did not intend to sell and it was more likely than not that the Company will not be required to sell its municipal obligations in an unrealized loss position until the recovery of their costs. Due to the issuers' continued satisfaction of the securities' obligations in accordance with their contractual terms and the expectation that they will continue to do so, the evaluation of the fundamentals of the issuers' financial condition and other objective evidence, the Company believed that the municipal obligations identified in the tables above were temporarily impaired as of June 30, 2017 and December 31, 2016.

The Company's agency mortgage-backed securities portfolio consists of securities underwritten to the standards of and guaranteed by the government-sponsored agencies of FHLMC, FNMA and the Government National Mortgage Association ("GNMA"). The receipt of principal, at par, and interest on agency mortgage-backed securities is guaranteed by the respective government-sponsored agency guarantor, such that the Company believed that its agency mortgage-backed securities did not expose the Company to credit-related losses. Based on these factors, along with the Company's intent to not sell the securities and the Company's belief that it was more likely than not that the Company will not be required to sell the securities before recovery of their cost basis, the Company believed that the agency mortgage-backed securities identified in the tables above were temporarily impaired as of June 30, 2017 and December 31, 2016.

9

The table below sets forth amortized cost and fair value of investment securities at June 30, 2017. The table includes scheduled principal payments and estimated prepayments, based on observable market inputs, for agency mortgage-backed securities. Actual maturities will differ from contractual maturities because borrowers have the right to prepay obligations with or without prepayment penalties. Securities with no maturity are listed separately.

(Dollars in thousands) Amortized Estimated
cost fair value
Due in less than one year $ 30,111 $ 30,139
Due after one year but within five years 182,277 182,573
Due after five years but within ten years 90,785 92,095
Due after ten years 83,966 84,676
Common stocks 178 359
Total $ 387,317 $ 389,842

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

(Dollars in thousands) Three months ended June 30, Six months ended June 30,
2017 2016 2017 2016
Sales proceeds $ 1,917 $ 11,801 $ 13,459 $ 13,617
Realized gains $ 177 $ 296 $ 348 $ 312
Realized losses - (11 ) (24 ) (15 )
Net realized losses $ 177 $ 285 $ 324 $ 297

Securities with carrying values of $230.0 million and $224.3 million were pledged to secure public funds on deposit, repurchase agreements and as collateral for borrowings at June 30, 2017 and December 31, 2016, respectively. Except for U.S. federal agency obligations, no investment in a single issuer exceeded 10% of consolidated stockholders' equity.

3. Loans and Allowance for Loan Losses

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

June 30, December 31,
(Dollars in thousands) 2017 2016
One-to-four family residential real estate $ 138,932 $ 136,846
Construction and land 16,557 13,738
Commercial real estate 116,600 118,200
Commercial 51,631 54,506
Agriculture 79,310 78,324
Municipal 3,593 3,884
Consumer 21,403 20,271
Total gross loans 428,026 425,769
Net deferred loan costs and loans in process 39 36
Allowance for loan losses (5,326 ) (5,344 )
Loans, net $ 422,739 $ 420,461

10

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

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

(Dollars in thousands) Three and six months ended June 30, 2016
One-to-four family residential real estate Construction and land Commercial real estate Commercial Agriculture Municipal Consumer Total
Allowance for loan losses:
Balance at April 1, 2016 $ 864 $ 82 $ 1,831 $ 1,384 $ 1,483 $ 24 $ 201 $ 5,869
Charge-offs - - - (306 ) (83 ) - (148 ) (537 )
Recoveries 3 - - 1 - 6 10 20
Provision for loan losses (283 ) 7 (55 ) 314 200 (7 ) 124 300
Balance at June 30, 2016 584 89 1,776 1,393 1,600 23 187 5,652
Balance at January 1, 2016 $ 925 $ 77 $ 1,740 $ 1,530 $ 1,428 $ 23 $ 199 $ 5,922
Charge-offs - - - (306 ) (83 ) - (285 ) (674 )
Recoveries 5 - - 20 - 6 23 54
Provision for loan losses (346 ) 12 36 149 255 (6 ) 250 350
Balance at June 30, 2016 584 89 1,776 1,393 1,600 23 187 5,652

11

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

(Dollars in thousands) As of June 30, 2017
One-to-four family residential real estate Construction and land Commercial real estate Commercial Agriculture Municipal Consumer Total
Allowance for loan losses:
Individually evaluated for loss - - 50 76 149 - - 275
Collectively evaluated for loss 499 70 1,659 1,005 1,623 10 185 5,051
Total 499 70 1,709 1,081 1,772 10 185 5,326
Loan balances:
Individually evaluated for loss 732 2,041 2,206 323 868 221 36 6,427
Collectively evaluated for loss 138,200 14,516 114,394 51,308 78,442 3,372 21,367 421,599
Total $ 138,932 $ 16,557 $ 116,600 $ 51,631 $ 79,310 $ 3,593 $ 21,403 $ 428,026

(Dollars in thousands) As of December 31, 2016
One-to-four family residential real estate Construction and land Commercial real estate Commercial Agriculture Municipal Consumer Total
Allowance for loan losses:
Individually evaluated for loss - - 81 87 89 - 17 274
Collectively evaluated for loss 504 53 1,696 1,032 1,595 12 178 5,070
Total 504 53 1,777 1,119 1,684 12 195 5,344
Loan balances:
Individually evaluated for loss 780 1,937 2,445 355 881 258 72 6,728
Collectively evaluated for loss 136,066 11,801 115,755 54,151 77,443 3,626 20,199 419,041
Total $ 136,846 $ 13,738 $ 118,200 $ 54,506 $ 78,324 $ 3,884 $ 20,271 $ 425,769

The Company's impaired loans decreased from $6.7 million at December 31, 2016 to $6.4 million at June 30, 2017. The difference between the unpaid contractual principal and the impaired loan balance is a result of charge-offs recorded against impaired loans. The difference in the Company's non-accrual loan balances and impaired loan balances at June 30, 2017 and December 31, 2016, was related to troubled debt restructurings ("TDR") that are current and accruing interest, but still classified as impaired. Interest income recognized on a cash basis was immaterial during the three and six month periods ended June 30, 2017 and 2016.

12

The following tables present information on impaired loans:

(Dollars in thousands) As of June 30, 2017
Unpaid contractual principal Impaired loan balance Impaired loans without an allowance Impaired loans with an allowance Related allowance recorded Year-to-date average loan balance Year-to-date interest income recognized
One-to-four family residential real estate $ 732 $ 732 $ 732 $ - $ - $ 739 $ 4
Construction and land 3,776 2,041 2,041 - - 2,010 33
Commercial real estate 2,206 2,206 2,156 50 50 2,217 246
Commercial 323 323 70 253 76 361 -
Agriculture 1,083 868 49 819 149 933 1
Municipal 221 221 221 - - 236 3
Consumer 36 36 36 - - 39 -
Total impaired loans $ 8,377 $ 6,427 $ 5,305 $ 1,122 $ 275 $ 6,535 $ 287

(Dollars in thousands) As of December 31, 2016
Unpaid contractual principal Impaired loan balance Impaired loans without an allowance Impaired loans with an allowance Related allowance recorded Year-to-date average loan balance Year-to-date interest income recognized
One-to-four family residential real estate $ 780 $ 780 $ 780 $ - $ - $ 798 $ 7
Construction and land 3,672 1,937 1,937 - - 2,068 72
Commercial real estate 2,445 2,445 2,145 300 81 2,587 505
Commercial 355 355 46 309 87 425 2
Agriculture 1,173 881 147 734 89 1,000 2
Municipal 258 258 258 - - 418 -
Consumer 72 72 55 17 17 78 13
Total impaired loans $ 8,755 $ 6,728 $ 5,368 $ 1,360 $ 274 $ 7,374 $ 601

The Company's key credit quality indicator is a loan's performance status, defined as accruing or non-accruing. Performing loans are considered to have a lower risk of loss. Non-accrual loans are those which the Company believes have a higher risk of loss. The accrual of interest on non-performing loans is discontinued at the time the loan is ninety days delinquent, unless the credit is well secured and in process of collection. Loans are placed on non-accrual or are charged off at an earlier date if collection of principal or interest is considered doubtful. There were no loans ninety days delinquent and accruing interest at June 30, 2017 or December 31, 2016.

13

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

(Dollars in thousands) As of June 30, 2017
30-59 days delinquent and accruing 60-89 days delinquent and accruing 90 days or more delinquent and accruing Total past due loans accruing Non-accrual loans Total past due and non-accrual loans Total loans not past due
One-to-four family residential real estate $ 300 $ 316 $ - $ 616 $ 557 $ 1,173 $ 137,759
Construction and land - - - - 692 692 15,865
Commercial real estate 1,971 42 - 2,013 69 2,082 114,518
Commercial 176 1,315 - 1,491 323 1,814 49,817
Agriculture 49 60 - 109 868 977 78,333
Municipal - - - - - - 3,593
Consumer 36 17 - 53 36 89 21,314
 Total $ 2,532 $ 1,750 $ - $ 4,282 $ 2,545 $ 6,827 $ 421,199
Percent of gross loans 0.59 % 0.41 % 0.00 % 1.00 % 0.59 % 1.59 % 98.41 %

(Dollars in thousands) As of December 31, 2016
30-59 days delinquent and accruing 60-89 days delinquent and accruing 90 days or more delinquent and accruing Total past due loans accruing Non-accrual loans Total past due and non-accrual loans Total loans not past due
One-to-four family residential real estate $ 215 $ 388 $ - $ 603 $ 595 $ 1,198 $ 135,648
Construction and land - - - - 599 599 13,139
Commercial real estate - - - - 300 300 117,900
Commercial 13 5 - 18 342 360 54,146
Agriculture 55 - - 55 838 893 77,431
Municipal - - - - - - 3,884
Consumer 79 3 - 82 72 154 20,117
 Total $ 362 $ 396 $ - $ 758 $ 2,746 $ 3,504 $ 422,265
Percent of gross loans 0.09 % 0.09 % 0.00 % 0.18 % 0.64 % 0.82 % 99.18 %

Under the original terms of the Company's non-accrual loans, interest earned on such loans for the six months ended June 30, 2017 and 2016 would have increased interest income by $63,000 and $44,000, respectively. No interest income related to non-accrual loans was included in interest income for the six months ended June 30, 2017 and 2016.

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

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

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

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

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

(Dollars in thousands) As of June 30, 2017 As of December 31, 2016
Nonclassified Classified Nonclassified Classified
One-to-four family residential real estate $ 137,803 $ 1,129 $ 135,640 $ 1,206
Construction and land 15,865 692 13,138 600
Commercial real estate 110,725 5,875 111,641 6,559
Commercial 48,115 3,516 51,080 3,426
Agriculture 74,727 4,583 73,564 4,760
Municipal 3,593 - 3,884 -
Consumer 21,356 47 20,181 90
Total $ 412,184 $ 15,842 $ 409,128 $ 16,641

At June 30, 2017, the Company had 11 loan relationships consisting of 19 outstanding loans that were classified as TDRs. During the second quarter of 2017, the Company classified two agriculture loans totaling $87,000 as TDRs after renewing loans to an existing loan relationship that was classified as a TDR in 2016. During the first quarter of 2017, the Company classified an $11,000 commercial real estate loan as a TDR after extending the maturity of the loan and classified as a TDR a $15,000 agriculture loan extended to an existing loan relationship that was classified as a TDR in 2016. Since the commercial loan was adequately secured, no charge-offs or impairments were recorded against the principal as of June 30, 2017. The agriculture loan relationship had a $49,000 impairment recorded against the principal balance as of June 30, 2017 and a charge-off of $215,000 was recorded in the third quarter of 2016. During the second quarter of 2016, the Company classified two loans as TDRs including an $8,000 commercial loan after modifying the payments to interest only and a $188,000 one-to-four family residential real estate loan after agreeing to a loan modification which adjusted the payment schedule. No loans were classified as TDR in the first quarter of 2016.

The Company evaluates each TDR individually and returns the loan to accrual status when a payment history is established after the restructuring and future payments are reasonably assured. There were no loans modified as TDRs for which there was a payment default within 12 months of modification as of June 30, 2017 and 2016. At June 30, 2017, there was a commitment of $63,000 to lend additional funds on one construction and land loan classified as a TDR. The Company did not record any charge-offs against loans classified as TDRs in the first six months either of 2017 or 2016. A credit provision for loan losses of $13,000 related to TDRs was recorded in the six months ended June 30, 2017 compared to no provision in the same period of 2016. The Company allocated $67,000 and $80,000 of the allowance for loan losses against loans classified as TDRs at June 30, 2017 and December 31, 2016, respectively.

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

(Dollars in thousands) As of June 30, 2017 As of December 31, 2016
Number of loans Non-accrual balance Accruing balance Number of loans Non-accrual balance Accruing balance
One-to-four family residential real estate 2 $ - $ 175 2 $ - $ 185
Construction and land 4 581 1,349 4 588 1,338
Commercial real estate 4 61 2,137 3 64 2,145
Commercial - - - 2 - 13
Agriculture 7 409 - 4 268 44
Municipal 2 - 221 2 - 258
Total troubled debt restructurings 19 $ 1,051 $ 3,882 17 $ 920 $ 3,983

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4. Goodwill and Other Intangible Assets

The Company tests goodwill for impairment annually or more frequently if circumstances warrant. The Company's annual step one impairment test as of December 31, 2016 concluded that its goodwill was not impaired. The Company concluded there were no triggering events during the first six months of 2017 that required an interim goodwill impairment test.

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

(Dollars in thousands) As of June 30, 2017
Gross carrying amount Accumulated amortization Net carrying amount
Core deposit intangible assets $ 2,067 $ (1,262 ) $ 805
Lease intangible asset 350 (166 ) 184
Mortgage servicing rights 6,029 (3,216 ) 2,813
Total other intangible assets $ 8,446 $ (4,644 ) $ 3,802

(Dollars in thousands) As of December 31, 2016
Gross carrying amount Accumulated amortization Net carrying amount
Core deposit intangible assets $ 2,067 $ (1,137 ) $ 930
Lease intangible asset 350 (143 ) 207
Mortgage servicing rights 5,788 (2,939 ) 2,849
Total other intangible assets $ 8,205 $ (4,219 ) $ 3,986

The following sets forth estimated amortization expense for core deposit and lease intangible assets for the remainder of 2017 and in successive years ending December 31:

(Dollars in thousands) Amortization
expense
Remainder of 2017 $ 141
2018 252
2019 214
2020 177
2021 121
Thereafter 84
Total $ 989

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

(Dollars in thousands) June 30, 2017 December 31, 2016
FHLMC $ 500,399 $ 483,356
FHLB 10,444 11,393
Total $ 510,843 $ 494,749

Custodial escrow balances maintained in connection with serviced loans were $5.0 million and $4.1 million at June 30, 2017 and December 31, 2016, respectively. Gross service fee income related to such loans was $320,000 and $304,000 for the three months ended June 30, 2017 and 2016, respectively, and is included in fees and service charges in the consolidated statements of earnings. Gross service fee income related to such loans was $639,000 and $604,000 for the six months ended June 30, 2017 and 2016, respectively.

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

(Dollars in thousands) Three months ended June 30, Six months ended June 30,
2017 2016 2017 2016
Mortgage servicing rights:
Balance at beginning of period $ 2,787 $ 2,808 $ 2,849 $ 2,840
Additions 281 291 442 512
Amortization (255 ) (248 ) (478 ) (501 )
Balance at end of period $ 2,813 $ 2,851 $ 2,813 $ 2,851

The fair value of mortgage servicing rights was $5.3 million and $5.1 million at June 30, 2017 and December 31, 2016, respectively. Fair value at June 30, 2017 was determined using discount rates ranging from 9.50% to 9.51%; prepayment speeds ranging from 0% to 33.56%, depending on the stratification of the specific mortgage servicing right; and a weighted average default rate of 2.25%. Fair value at December 31, 2016 was determined using discount rates ranging from 9.50% to 9.51%; prepayment speeds ranging from 4.86% to 32.79%, depending on the stratification of the specific mortgage servicing right; and a weighted average default rate of 2.26%.

The Company had a mortgage repurchase reserve of $301,000 at both June 30, 2017 and December 31, 2016, which represents the Company's best estimate of probable losses that the Company will incur related to the repurchase of one-to-four family residential real estate loans previously sold or to reimburse investors for credit losses incurred on loans previously sold where a breach of the contractual representations and warranties occurred. The Company did not incur any losses charged against the reserve or make any provisions to the reserve during the first six months of 2017 and 2016. The Company did not have any recoveries against the mortgage repurchase reserve in the first six months of 2017. The Company recovered $3,000 of losses during the three months ended June 30, 2016 and recovered $10,000 of losses against the mortgage repurchase reserve during the six months ended June 30, 2016. As of June 30, 2017, the Company had one outstanding mortgage repurchase request and expects to incur a loss of approximately $70,000.

5. Earnings per Share

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

Three months ended Six months ended
(Dollars in thousands, except per share amounts) June 30 June 30
2017 2016 2017 2016
Net earnings(1) $ 2,383 $ 2,326 $ 4,588 $ 4,719
Weighted average common shares outstanding - basic (2) 3,870,564 3,794,355 3,870,183 3,764,497
Assumed exercise of stock options (1)(2) 80,087 91,322 79,086 89,751
Weighted average common shares outstanding - diluted (1)(2) 3,950,651 3,885,677 3,949,269 3,854,248
Net earnings per share (1)(2):
Basic $ 0.62 $ 0.61 $ 1.19 $ 1.25
Diluted $ 0.60 $ 0.60 $ 1.16 $ 1.22

(1) Net earnings, earnings per share and assumed exercise of stock options for the periods ended June 30, 2016 have been recast to reflect the early adoption of ASU 2016-09.
(2) Share and per share values for the periods ended June 30, 2016 have been adjusted to give effect to the 5% stock dividend paid during December 2016.

The diluted earnings per share computations for the three and six months ended June 30, 2017 and 2016 include all unexercised stock options because no stock options were anti-dilutive during such periods.

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6. Repurchase Agreements

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

As of June 30, 2017
Overnight and Up to 30 Greater
Continuous days 30-90 days than 90 days Total
Repurchase agreements:
U.S. federal agency obligations $ 3,890 $ - $ - $ - $ 3,890
Agency mortgage-backed securities 7,457 - - - 7,457
Total $ 11,347 $ - $ - $ - $ 11,347

As of December 31, 2016
Overnight and Up to Greater
Continuous 30 days 30-90 days than 90 days Total
Repurchase agreements:
U.S. federal agency obligations $ 5,007 $ - $ - $ - $ 5,007
Agency mortgage-backed securities 7,476 - - - 7,476
Total $ 12,483 $ - $ - $ - $ 12,483

Repurchase agreements are comprised of non-insured customer funds, totaling $11.3 million at June 30, 2017, and $12.5 million at December 31, 2016, which were secured by $17.1 million and $15.7 million of the Company's investment portfolio at the same dates, respectively.

The investment securities are held by a third-party financial institution in the customer's custodial account. The Company is required to maintain adequate collateral for each repurchase agreement. Changes in the fair value of the investment securities impact the amount of collateral required. If the Company were to default, the investment securities would be used to settle the repurchase agreement with the deposit customer.

7. Fair Value of Financial Instruments and Fair Value Measurements

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3 – Significant unobservable inputs that reflect a company's own assumptions about the assumptions that market participants would use in pricing an asset or liability.

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Fair value estimates of the Company's financial instruments as of June 30, 2017 and December 31, 2016, including methods and assumptions utilized, are set forth below:

(Dollars in thousands) As of June 30, 2017
Carrying
amount Level 1 Level 2 Level 3 Total
Financial assets:
Cash and cash equivalents $ 10,594 $ 10,594 $ - $ - $ 10,594
Investment securities available-for-sale 389,842 5,375 384,467 - 389,842
Bank stocks, at cost 5,350 n/a n/a n/a n/a
Loans, net 422,739 - - 420,935 420,935
Loans held for sale, net 9,758 - 9,758 - 9,758
Derivative financial instruments 711 - 711 - 711
Accrued interest receivable 4,089 2 2,219 1,868 4,089
Financial liabilities:
Non-maturity deposits $ (613,126 ) $ (613,126 ) $ - $ - (613,126 )
Time deposits (131,896 ) - (130,377 ) - (130,377 )
FHLB borrowings (31,000 ) - (31,358 ) - (31,358 )
Subordinated debentures (21,384 ) - (19,215 ) - (19,215 )
Other borrowings (11,447 ) - (11,447 ) - (11,447 )
Derivative financial instruments (28 ) - (28 ) - (28 )
Accrued interest payable (253 ) - (253 ) - (253 )

As of December 31, 2016
Carrying
amount Level 1 Level 2 Level 3 Total
Financial assets:
Cash and cash equivalents $ 19,996 $ 19,996 $ - $ - $ 19,996
Investment securities available-for-sale 385,563 7,123 378,440 - 385,563
Bank stocks, at cost 5,299 n/a n/a n/a n/a
Loans, net 420,461 - - 417,957 417,957
Loans held for sale 5,517 - 5,517 - 5,517
Derivative financial instruments 662 - 662 - 662
Accrued interest receivable 4,240 21 2,104 2,115 4,240
Financial liabilities:
Non-maturity deposits $ (601,683 ) $ (601,683 ) $ - $ - $ (601,683 )
Time deposits (139,838 ) - (138,623 ) - (138,623 )
FHLB borrowings (39,100 ) - (35,695 ) - (35,695 )
Subordinated debentures (21,284 ) - (18,608 ) - (18,608 )
Other borrowings (12,483 ) - (12,483 ) - (12,483 )
Accrued interest payable (268 ) - (268 ) - (268 )

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. treasury securities, U.S. federal agency securities, municipal obligations, agency mortgage-backed securities, certificates of deposits and common stocks. Quoted exchange prices are available for the Company's U.S treasury securities and common stock investments, which are classified as Level 1. U.S. federal agency securities and agency 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. These measurements are classified as Level 2. Municipal securities are valued using a type of matrix, or grid, pricing in which securities are benchmarked against U.S. treasury rates based on credit rating. These model and matrix measurements are classified as Level 2 in the fair value hierarchy.

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It is not practical to determine the fair value of bank stocks due to restrictions placed on the transferability of FHLB and FRB stock.

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 and is classified as Level 3.

Mortgage loans originated and intended for sale in the secondary market are carried at the 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 carrying amounts 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 checking 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 2. 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, subordinated debentures, and other borrowings is estimated using current yield curves for similar borrowings adjusted for the Company's current credit spread and classified as Level 2.

The Company's derivative financial instruments consist of interest rate lock commitments and forward commitments for the future delivery of these mortgage loans. 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, net 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.

Transfers

The Company did not transfer any assets or liabilities among levels during the six months ended June 30, 2017 or during the year ended December 31, 2016.

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Valuation Methods for Instruments Measured at Fair Value on a Recurring Basis

The following table represents the Company's financial instruments that are measured at fair value on a recurring basis at June 30, 2017 and December 31, 2016, allocated to the appropriate fair value hierarchy:

(Dollars in thousands) As of June 30, 2017
Fair value hierarchy
Total Level 1 Level 2 Level 3
Assets:
Available-for-sale investment securities:
U. S. treasury securities $ 5,016 $ 5,016 $ - $ -
U. S. federal agency obligations 21,382 - 21,382 -
Municipal obligations, tax exempt 179,243 - 179,243 -
Municipal obligations, taxable 62,778 - 62,778 -
Agency mortgage-backed securities 111,840 - 111,840 -
Certificates of deposit 9,224 - 9,224 -
Common stocks 359 359 - -
Loans held for sale 9,758 - 9,758 -
Derivative financial instruments 711 - 711 -
Liabililty:
Derivative financial instruments (28 ) - (28 ) -

(Dollars in thousands) As of December 31, 2016
Fair value hierarchy
Total Level 1 Level 2 Level 3
Assets:
Available-for-sale investment securities:
U. S. treasury securities $ 6,015 $ 6,015 $ - $ -
U. S. federal agency obligations 27,139 - 27,139 -
Municipal obligations, tax exempt 161,662 - 161,662 -
Municipal obligations, taxable 71,563 - 71,563 -
Agency mortgage-backed securities 108,376 - 108,376 -
Certificates of deposit 9,700 - 9,700 -
Common stocks 1,108 1,108 - -
Loans held for sale 5,517 - 5,517 -
Derivative financial instruments 662 - 662 -

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.

The aggregate fair value, contractual balance (including accrued interest), and gain on loans held for sale were as follows:

As of As of
(Dollars in thousands) June 30, 2017 December 31, 2016
Aggregate fair value $ 9,758 $ 5,517
Contractual balance 9,553 5,480
Gain $ 205 $ 37

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The total amount of gains from changes in fair value of loans held for sale included in earnings were as follows:

Three months ended Six months ended
June 30, June 30,
(Dollars in thousands) 2017 2016 2017 2016
Interest income $ 79 $ 210 $ 124 $ 315
Change in fair value 60 (63 ) 169 (67 )
Total change in fair value $ 139 $ 147 $ 293 $ 248

Valuation Methods for Instruments Measured at Fair Value on a Non-recurring Basis

The Company does not value its loan portfolio at fair value. Collateral-dependent impaired loans are generally carried at the lower of cost or fair value of the collateral, less estimated selling costs. Collateral values are determined based on appraisals performed by qualified licensed appraisers hired by the Company and then further adjusted if warranted based on relevant facts and circumstances. The appraisals may utilize a single valuation approach or a combination of approaches including the comparable sales and income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value. Impaired loans are reviewed and evaluated at least quarterly for additional impairment and adjusted accordingly, based on the same factors identified above. The carrying value of the Company's impaired loans was $6.4 million and $6.7 million, with an allocated allowance of $275,000 and $274,000, at June 30, 2017 and December 31, 2016, respectively.

The following table represents the Company's financial instruments that are measured at fair value on a non-recurring basis as of June 30, 2017 and December 31, 2016 allocated to the appropriate fair value hierarchy:

(Dollars in thousands)
As of June 30, 2017 Total
Fair value hierarchy gains
Total Level 1 Level 2 Level 3 (losses)
Assets:
Impaired loans:
Commercial $ 177 $ - $ - $ 177 $ 11
Agriculture 670 - - 670 (60 )
Real estate owned:
One-to-four family residential real estate 302 - - 302 (67 )

As of December 31, 2016 Total
Fair value hierarchy (losses)/
Total Level 1 Level 2 Level 3 gains
Assets:
Impaired loans:
Commercial real estate $ 219 $ - $ - $ 219 $ (81 )
Commercial 222 - - 222 (87 )
Agriculture 645 - - 645 (89 )
Real estate owned:
One-to-four family residential real estate 142 - - 142 (34 )

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The following table presents quantitative information about Level 3 fair value measurements for impaired loans measured at fair value on a non-recurring basis as of June 30, 2017 and December 31, 2016.

(Dollars in thousands)
Fair value Valuation technique Unobservable inputs Range
As of June 30, 2017
Impaired loans:
Commercial 177  Sales comparison  Adjustment to comparable sales 0%-50%
Agriculture 670  Sales comparison  Adjustment to appraised value 10%-50%
Real estate owned:
One-to-four family residential real estate 302  Sales comparison  Adjustment to appraised value 10%
As of December 31, 2016
Impaired loans:
Commercial real estate $ 219  Sales comparison  Adjustment to appraised value 2%-15%
Commercial 222  Sales comparison  Adjustment to comparable sales 7%-80%
Agriculture 645  Sales comparison  Adjustment to appraised value 8%-80%
Real estate owned:
One-to-four family residential real estate 142  Sales comparison  Adjustment to appraised value 10%

8. Regulatory Capital Requirements

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. Management believes as of June 30, 2017, the Company and its subsidiary, Landmark National Bank ("the Bank") meet all capital adequacy requirements to which they were subject at that time.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. The Company and the Bank are subject to the capital rules (the "Basel III Rules") that implemented the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision and certain changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Basel III Rules are applicable to all U.S. banks that are subject to minimum capital requirements, as well as to bank and savings and loan holding companies other than "small bank holding companies" (generally, non-public bank holding companies with consolidated assets of less than $1.0 billion).

The Basel III Rules require a common equity Tier 1 capital to risk-weighted assets minimum ratio of 4.5%, a Tier 1 capital to risk-weighted assets minimum ratio of 6.0%, a Total Capital to risk-weighted assets minimum ratio of 8.0%, and a Tier 1 leverage minimum ratio of 4.0%. A capital conservation buffer, comprised of common equity Tier 1 capital, is also established above the regulatory minimum capital requirements. This capital conservation buffer began on January 1, 2016 at 0.625% of risk-weighted assets, was 1.25% effective on January 1, 2017, and will further increase each subsequent year by an additional 0.625% until reaching its final level of 2.5% on January 1, 2019. The capital conservation buffer increases the common equity Tier 1 capital ratio, Tier 1 capital and total risk based capital ratios as of March 31 of each year.

As of June 30, 2017 and December 31, 2016, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action then in effect. There are no conditions or events since that notification that management believes have changed the institution's category.

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The following is a comparison of the Company's regulatory capital to minimum capital requirements at June 30, 2017 and December 31, 2016:

(Dollars in thousands) Actual For capital
adequacy purposes
Amount Ratio Amount Ratio (1)
As of June 30, 2017
Leverage $ 91,954 10.17 % $ 36,178 4.0 %
Common Equity Tier 1 Capital 71,273 13.86 % 29,565 5.8 %
Tier 1 Capital 91,954 17.88 % 37,277 7.3 %
Total Risk Based Capital 97,502 18.96 % 47,561 9.3 %
As of December 31, 2016
Leverage $ 88,819 10.04 % $ 35,370 4.0 %
Common Equity Tier 1 Capital 68,263 13.32 % 26,265 5.1 %
Tier 1 Capital 88,819 17.33 % 33,952 6.6 %
Total Risk Based Capital 94,596 18.46 % 44,201 8.6 %

(1) The required ratios for capital adequacy purposes include a capital conservation buffer of 1.25% for June 30, 2017 and 0.625% for December 31, 2016.

The following is a comparison of the Bank's regulatory capital to minimum capital requirements at June 30, 2017 and December 31, 2016:

To be well-capitalized
under prompt
(Dollars in thousands) For capital corrective
Actual adequacy purposes action provisions
Amount Ratio Amount Ratio(1) Amount Ratio
As of June 30, 2017
  Leverage $ 91,007 10.08 % $ 36,116 4.0 % $ 45,145 5.0 %
  Common Equity Tier 1 Capital 91,007 17.73 % 29,512 5.8 % 33,361 6.5 %
  Tier 1 Capital 91,007 17.73 % 37,211 7.3 % 41,060 8.0 %
  Total Risk Based Capital 96,473 18.80 % 47,476 9.3 % 51,325 10.0 %
As of December 31, 2016
  Leverage $ 88,076 9.98 % $ 35,284 4.0 % $ 44,105 5.0 %
  Common Equity Tier 1 Capital 88,076 17.23 % 26,194 5.1 % 33,222 6.5 %
  Tier 1 Capital 88,076 17.23 % 33,861 6.6 % 40,888 8.0 %
  Total Risk Based Capital 93,560 18.31 % 44,083 8.6 % 51,110 10.0 %

(1) The required ratios for capital adequacy purposes include a capital conservation buffer of 1.25% for June 30, 2017 and 0.625 for December 31,2016.

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9. Impact of Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The main provisions of the update require the identification of performance obligations within a contract and require the recognition of revenue based on a stand-alone allocation of contract revenue to each performance obligation. Performance obligations may be satisfied and revenue recognized over a period of time if: 1) the customer simultaneously receives and consumes the benefits provided by the entity's performance as the entity performs, or 2) the entity's performance creates or enhances an asset that the customer controls as the asset is created or enhanced, or 3) the entity's performance does not create an asset with an alternative use to the entity, and the entity has an enforceable right to payment for performance completed to date. For public entities the amendments of the update are effective for annual reporting periods beginning after December 15, 2017 including interim periods within that reporting period. The Company's revenue is primarily comprised of net interest income on financial asset and liabilities, which are excluded from the scope of ASU 2014-09. Management is still evaluating the impact of ASU 2014-09 on other non-interest income, but does not believe the adoption of ASU 2014-09 will have a material impact on the Company's financial position, results of operations or cash flows. Management expects the most significant impact of ASU 2014-09 will likely be additional disclosures required for non-interest income. The Company will continue to evaluate the impact as additional guidance is issued and internal assessments progress.

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

In February 2016, the FASB issued an update (ASU No. 2016-02, Leases) creating FASB Topic 842, Leases. The guidance is intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and requiring more disclosures related to leasing transactions. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted. Management has concluded that based on the Company's current operating leases, the adoption of ASU 2016-02 will not have a material impact on the Company's consolidated financial statement and related disclosures.

In March 2016, the FASB issued an update, ASU No. 2016-09, Stock Compensation: Improvements to Employee Share-Based Payment Accounting. The guidance in this update affects any entity that issues share-based payment awards including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flow. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. Early adoption was permitted. The Company elected to adopt ASU 2016-09 in 2016. As a result of this election, income tax expense decreased by $308,000 during 2016 as a result of recognized excess tax benefits from the exercise of stock options. The presentation of excess tax benefits from the exercise of stock options have been presented on a prospective basis and are included in changes in accrued interest and other assets in the operating activities section of the statement of cash flows. The Company's excess tax benefits from the exercise of stock options totaled $24,000 in the first six months of 2017 and $197,000 in the first six months of 2016.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), commonly referred to as "CECL." The provisions of the update eliminate the probable initial recognition threshold under current GAAP which requires reserves to be based on an incurred loss methodology. Under CECL, reserves required for financial assets measured at amortized cost will reflect an organization's estimate of all expected credit losses over the expected term of the financial asset and thereby require the use of reasonable and supportable forecasts to estimate future credit losses. Because CECL encompasses all financial assets carried at amortized cost, the requirement that reserves be established based on an organization's reasonable and supportable estimate of expected credit losses extends to held to maturity debt securities. Under the provisions of the update, credit losses recognized on available for sale debt securities will be presented as an allowance as opposed to a write-down. In addition, CECL will modify the accounting for purchased loans, with credit deterioration since origination, so that reserves are established at the date of acquisition for purchased loans. Under current GAAP a purchased loan's contractual balance is adjusted to fair value through a credit discount and no reserve is recorded on the purchased loan upon acquisition. Since under CECL reserves will be established for purchased loans at the time of acquisition, the accounting for purchased loans is made more comparable to the accounting for originated loans. Finally, increased disclosure requirements under CECL oblige organizations to present the currently required credit quality disclosures disaggregated by the year of origination or vintage. FASB expects that the evaluation of underwriting standards and credit quality trends by financial statement users will be enhanced with the additional vintage disclosures. For public entities, the amendments of the update are effective beginning January 1, 2020. Management has initiated an implementation committee to assist in assessing data and system needs for the new standard. Management anticipates the effect will be an increase to the allowance for loan losses upon adoption. However, the size of the overall increase is uncertain at this time.

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

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In March 2017, the FASB issued ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. The amendments in this Update shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The provisions of this update become effective for interim and annual periods beginning after December 15, 2018. Management has concluded that based on the Company's current portfolio of investment securities that the adoption of these amendments will result in shorter amortization period for investment security premiums, however, the impact will not be material to interest income on investment securities.

10. Subsequent Event

On August 8, 2017, the Company was made aware that checks deposited by our customer from a third party were being returned by another financial institution due to uncollected funds related to the third party. This resulted in a $10.3 million overdraft balance. An investigation of the situation and the potential recovery of losses are in their early stages, and accordingly, no conclusions have been reached concerning the responsibility for any potential losses, nor has there been a determination of whether or not existing insurance policies of any party will cover all or part of any possible losses. Since August 8, 2017, the entity whose checks to our customer were returned has provided $1.7 million in wire transfer deposits to our customer's account, resulting in an $8.6 million overdraft as of the date of this filing. The Company intends to protect all of its rights pursuant to this matter and seek all available legal and equitable remedies. However, should there be no additional recoveries into the customer's account, no insurance proceeds and the Company were to absorb all the losses known at this time to be associated with this event (excluding the costs of investigation), the Company would incur an after-tax loss of approximately $5.4 million in the third quarter of 2017.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview . Landmark Bancorp, Inc. is a financial 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 and in the insurance business through its wholly-owned subsidiary, Landmark Risk Management, Inc. References to the "Company," "we," "us," and "our" refer collectively to Landmark Bancorp, Inc., Landmark National Bank and Landmark Risk Management, Inc. The Company is listed on the Nasdaq Global Market under the symbol "LARK."

The Bank is dedicated to providing quality financial and banking services to its local communities. Our strategy includes continuing a tradition of holding and acquiring quality assets while growing our commercial, commercial real estate and agriculture loan portfolios. We are committed to developing relationships with our borrowers and providing a comprehensive range of banking service. 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. Although not our primary business function, we do invest in certain investment and mortgage-related securities using deposits and other borrowings as funding sources.

Landmark Risk Management, Inc. was formed and began operations on May 31, 2017, which is a Nevada-based captive insurance company which will provide property and casualty insurance coverage to the Company and the Bank for which insurance may not be currently available or economically feasible in today's insurance marketplace. Landmark Risk Management, Inc. pools resources with several other similar insurance company subsidiaries of financial institutions to spread a limited amount of risk among themselves. Landmark Risk Management, Inc. is subject to regulations of the State of Nevada and undergoes periodic examinations by the Nevada Division of Insurance.

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. 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, amortization of intangibles, advertising expenses, foreclosure and real estate owned expense 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, through our ownership of the bank, our business primarily consists of the operations of the Bank, with its main office in Manhattan, Kansas and twenty eight additional branch offices in central, eastern, southeast and southwest Kansas.

Critical Accounting Policies. Critical accounting policies are those which 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 investment securities, accounting for income taxes and the accounting for goodwill and other intangible assets, all of which involve significant judgment by our management. Information about our critical accounting policies is included under Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2016.

Summary of Results. During the second quarter of 2017, we recorded net earnings of $2.4 million, which was an increase of $57,000, or 2.5%, from the $2.3 million of net earnings in the second quarter of 2016. During the first six months of 2017, we recorded net earnings of $4.6 million, which was a decrease of $131,000, or 2.8%, from the $4.7 million of net earnings in the first six months of 2016.

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The following table summarizes earnings and key performance measures for the periods presented.

(Dollars in thousands, except per share amounts) Three months ended
June 30, 		Six months ended
June 30,
2017 2016 2017 2016
Net earnings:
Net earnings (1) $ 2,383 $ 2,326 $ 4,588 $ 4,719
Basic earnings per share (1) (2) $ 0.62 $ 0.61 $ 1.19 $ 1.25
Diluted earnings per share (1) (2) $ 0.60 $ 0.60 $ 1.16 $ 1.23
Earnings ratios:
Return on average assets (1) (2) (3) 1.04 % 1.04 % 1.01 % 1.07 %
Return on average equity (1) (2) (3) 10.78 % 10.86 % 10.62 % 11.22 %
Equity to total assets 10.00 % 9.97 % 10.00 % 9.97 %
Net interest margin (3) (4) 3.41 % 3.46 % 3.41 % 3.47 %
Dividend payout ratio (1) 33.33 % 33.33 % 34.48 % 32.52 %

(1) Net earnings, earnings per share, return on average assets, return on average equity and the dividend payout ratios for the periods ended June 30, 2016 have been recast to reflect the early adoption of ASU 2016-09.
(2) Per share values for the periods ended June 30, 2016 have been adjusted to give effect to the 5% stock dividend paid during December 2016.
(3) Ratios have been annualized and are not necessarily indicative of the results for the entire year.
(4) Net interest margin is presented on a fully tax equivalent basis, using a 34% federal tax rate.

Interest Income. Interest income of $7.5 million for the quarter ended June 30, 2017 increased $84,000, or 1.1%, as compared to the same period of 2016. Interest income on loans decreased $65,000, or 1.2%, to $5.3 million for the quarter ended June 30, 2017, compared to the same period of 2016 due primarily to a decrease in our average loan balances, which decreased from $438.3 million in the second quarter of 2016 to $428.4 million in the second quarter of 2017. Partially offsetting the decrease in interest income were higher yields on loans, which increased from 4.93% in the second quarter of 2016 to 4.96% in the second quarter of 2017. Interest income on investment securities increased $149,000, or 7.4%, to $2.2 million for the second quarter of 2017, as compared to $2.0 million in the same period of 2016. The increase in interest income on investment securities was primarily the result of an increase in our average balance of investment securities from $376.0 million during the second quarter of 2016 to $398.3 million during the second quarter of 2017. Also contributing to the higher interest income on investment securities was an increase in our tax equivalent yield on investment securities, which increased from 2.62% in the second quarter of 2016 to 2.67% during the second quarter of 2017.

Interest income of $14.6 million for the six months ended June 30, 2017 increased $98,000, or 0.7%, as compared to the same period of 2016. Interest income on loans decreased $213,000, or 2.0%, to $10.3 million for the six months ended June 30, 2017, compared to the same period of 2016 due primarily to a decrease in our average loan balances, which decreased from $432.1 million during the first six months of 2016 to $424.5 million during the first six months of 2017. Also contributing to the decrease in interest income were lower yields on loans, which decreased from 4.94% in the first six months of 2016 to 4.93% in the first six months of 2017. Interest income on investment securities increased $311,000, or 7.8%, to $4.3 million for the first six months of 2017, as compared to $4.0 million in the same period of 2016. The increase in interest income on investment securities was primarily the result of an increase in our average balance of investment securities from $367.5 million during the first six months of 2016 to $395.9 million during the first six months of 2017. Also contributing to the higher interest income on investment securities was an increase in our tax equivalent yield on investment securities, which increased from 2.64% in the first six months of 2016 to 2.67% during the same period of 2017.

Interest Expense . Interest expense during the quarter ended June 30, 2017 increased $70,000, or 8.6%, to $880,000 as compared to the same period of 2016. Interest expense on interest-bearing deposits increased $107,000, or 37.3%, to $394,000 for the quarter ended June 30, 2017 as compared to the same period of 2016. The increase in interest expense on interest-bearing deposits was the result of deposits repricing higher and an increase in average interest-bearing deposit balances, which increased from $561.9 million in the second quarter of 2016 to $590.1 million in the second quarter of 2017. The average rate of interest-bearing deposits increased 0.06% for the second quarter of 2017 to 0.27% as compared to 0.21% in the same period of 2016. For the second quarter of 2017, interest expense on borrowings decreased $37,000, or 7.1%, to $486,000 as compared to the same period of 2016, due to a decrease in our average outstanding borrowings, which decreased from $88.6 million in the second quarter of 2016 to $68.5 million in the same period of 2017. Partially offsetting the lower average outstanding borrowings were higher average rates on our borrowings which increased to 2.84% for the second quarter of 2017 compared to 2.38% for the same period of 2016.

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Interest expense during the six months ended June 30, 2017 increased $120,000, or 7.6%, to $1.7 million as compared to the same period of 2016. Interest expense on interest-bearing deposits increased $168,000, or 29.8%, to $732,000 for the six months ended June 30, 2017 as compared to the same period of 2016. The increase in interest expense on interest-bearing deposits was the result of deposits repricing higher and an increase in average interest-bearing deposit balances, which increased from $561.7 million in the first six months of 2016 to $588.8 million in the same period of 2017. The average rate of interest-bearing deposits increased 0.05% for the first six months of 2017 to 0.25% as compared to 0.20% in the same period of 2016. For the first six months of 2017, interest expense on borrowings decreased $48,000, or 4.7%, to $968,000 as compared to the same period of 2016, due to a decrease in our average outstanding borrowings, which decreased from $80.5 million in the first six months of 2016 to $70.1 million in the first six months of 2017. Partially offsetting the lower average outstanding borrowings were higher average rates on our borrowings which increased to 2.78% for the first six months of 2017 compared to 2.54% for the same period of 2016.

Net Interest Income . Net interest income increased $14,000, or 0.2%, to $6.6 million for the second quarter of 2017 compared to the same period of 2016. The increase in net interest income was primarily a result of an increase of 2.0% in average interest-earning assets, from $815.1 million in the second quarter of 2016 to $831.3 million for the same period of 2017. Our net interest margin, on a tax-equivalent basis, decreased from 3.46% during the second quarter of 2016 to 3.41% in the same period of 2017. Lower average balances of loans and higher rates on our interest-bearing deposits were the primary driver of the decrease in our net interest margin.

Net interest income decreased $22,000, or 0.2%, to $12.9 million for the first six months of 2017 compared to the same period of 2016. The decrease in net interest income was primarily a result of lower yields on loans and higher rates on interest-bearing deposits and borrowings, which contributed to a decrease in our net interest margin, on a tax equivalent basis, from 3.47% in the first six months of 2016 to 3.41% in the same period of 2017. Partially offsetting the decline in net interest margin was an increase of 2.9% in average interest-earning assets, from $803.5 million in the first half of 2016 to $827.1 million for the same period of 2017. Our net interest income and net interest margin may continue to decline if short-term interest rates continue to increase and we are unable to reprice our loans higher or grow our average balances while our cost of interest-bearing deposits and borrowings increase.

See the Average Assets/Liabilities and Rate/Volume tables at the end of Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations" for additional details on asset yields, liability rates and net interest margin.

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 or discounted cash flows of specifically identified impaired loans. Additionally, allowance 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.

During the second quarter of 2017, we recorded a provision for loan losses of $100,000 compared to $300,000 in the second quarter of 2016. We recorded net loan charge-offs of $101,000 during the second quarter of 2017 compared to net loan charge-offs of $517,000 during the second quarter of 2016. The net loan charge-offs during the second quarter of 2016 were primarily related to the liquidation of the assets securing a previously identified and impaired commercial loan.

During the first six months of 2017, we recorded a provision for loan losses of $150,000 compared to $350,000 during the same period of 2016. We recorded net loan charge-offs of $168,000 during the six months ended June 30, 2017 compared to $620,000 during the same period of 2016.

For further discussion of the allowance for loan losses, refer to the "Asset Quality and Distribution" section below.

Non-interest Income . Total non-interest income was $4.2 million in the second quarter of 2017, an increase of $240,000, or 6.1%, compared to the second quarter of 2016. This change was primarily the result of a $287,000 increase in gains on sales of loans. Partially offsetting the increase in gains on sales of loans was a decrease of $108,000 in our gains on sales of investment securities. We recorded $177,000 in gains on sales of investment securities during the second quarter of 2017 compared to a gain of $285,000 in the second quarter of 2016.

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Total non-interest income was $7.8 million in the first six months of 2017, a decrease of $13,000, or 0.2%, compared to the same period of 2016. This change was primarily the result of a decline of $118,000 in gains on sales of loans, as the volume of one-to-four family residential real estate loans originated for sale in the first six months of 2017 was lower than in the same period of 2016. Partially offsetting the decline in gains on sales of loans was a $324,000 gain on sales of investment securities during the first six months of 2017, compared to a gain of $297,000 in the same period of 2016.

Non-interest Expense . Non-interest expense totaled $7.5 million for the second quarter of 2017, an increase of $328,000, or 4.6%, from $7.2 million for the second quarter of 2016. The increase was primarily due to increases of $194,000 in professional fees and $141,000 in compensation and benefits in the second quarter of 2017 as compared to the second quarter of 2016. The increase in professional fees was primarily related to costs associated with forming our captive insurance subsidiary and an audit over our internal control over financial reporting which will be required for 2017 as a result of exceeding the market capitalization threshold at June 30, 2017. The increase in compensation and benefits was related to increased salaries and stock-based compensation. Partially offsetting those increases was a decline of $37,000 in federal deposit insurance premiums due to lower rates that began in the third quarter of 2016.

Non-interest expense totaled $14.6 million for the first six months of 2017, an increase of $227,000, or 1.6%, from $14.4 million for the second quarter of 2016. The increase was primarily related to increased professional fees related to costs associated with forming our captive insurance subsidiary and audit over our internal control over financial reporting in the first half of 2017 as compared to the same period of 2016. Partially offsetting those increases was a decline of $75,000 in federal deposit insurance premiums due to lower rates that began in the third quarter of 2016.

Income Tax Expense . During the second quarter of 2017, we recorded income tax expense of $742,000, compared to $673,000 during the same period of 2016. Our effective tax rate increased from 22.4% in the second quarter of 2016 to 23.7% in the second quarter of 2017 primarily as a result of a decrease in excess tax benefits from the exercise of stock options from $81,000 in the second quarter of 2016 to $13,000 in the same period of 2017. Income tax expense was recast for the first quarter of 2016 to reflect the early adoption of ASU 2016-09.

We recorded income tax expense of $1.4 million the first six months of both 2017 and 2016. Our effective tax rate increased from 22.4% in the first half of 2016 to 23.8% in the second quarter of 2017 primarily as a result of a decrease in excess tax benefits from the exercise of stock options from $197,000 in the first half of 2016 to $24,000 in the same period of 2017. Income tax expense was recast for the first six months of 2016 to reflect the early adoption of ASU 2016-09.

Financial Condition . Despite measured improvement in certain metrics, general uncertainty with respect to economic conditions in the United States continues to affect our asset quality and performance. The geographic markets in which the Company operates have also been impacted by an economic downturn in the agriculture sector. However, our loan portfolio is diversified across various types of loans and collateral throughout the markets in which we operate. Aside from a few problem loans that management is working to resolve, our asset quality has generally improved over the past few years. Aside from these identified problem assets, management believes that the Company continues to have a high quality asset base and solid core earnings, and anticipates that its efforts to maintain these quality features will continue to provide a strong foundation for continued growth and profitability in the future.

Asset Quality and Distribution . Our primary investing activities are the origination of one-to-four family residential real estate, construction and land, commercial real estate, commercial, agriculture, municipal and consumer loans and the purchase of investment securities. Total assets decreased slightly to $910.8 million at June 30, 2017, compared to $911.4 million at December 31, 2016.

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 June 30, 2017 our allowance for loan losses totaled $5.3 million, or 1.24% of gross loans outstanding compared to $5.3 million, or 1.26% of gross loans outstanding at December 31, 2016.

As of June 30, 2017 and December 31, 2016, approximately $15.8 million and $16.6 million, respectively, of loans were considered classified and assigned a risk rating of special mention, substandard or doubtful. These ratings indicate that these loans were identified as potential problem loans having more than normal risk which raised doubts as to the ability of the borrower to comply with present loan repayment terms. Even though borrowers were experiencing moderate cash flow problems as well as some deterioration in collateral value, management believed the allowance for loan losses was sufficient to cover the risks and probable incurred losses related to such loans at June 30, 2017 and December 31, 2016, respectively.

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Loans past due 30-89 days and still accruing interest totaled $4.3 million, or 1.00% of gross loans, at June 30, 2017 compared to $758,000, or 0.18% of gross loans, at December 31, 2016. The increase in loans past due 30-89 days was primarily related to a $3.1 million loan relationship consisting of a $1.3 million commercial loan and a $1.8 million commercial real estate loan. At June 30, 2017, $2.5 million in loans were on non-accrual status, or 0.59% of gross loans, compared to $2.7 million, or 0.64% of gross loans, at December 31, 2016. Non-accrual loans consist of loans 90 or more days past due and certain impaired loans. There were no loans 90 days delinquent and accruing interest at June 30, 2017 or December 31, 2016. Our impaired loans totaled $6.4 million at June 30, 2017 compared to $6.7 million at December 31, 2016. The difference in the Company's non-accrual loan balances and impaired loan balances at June 30, 2017 was related to TDRs that were accruing interest but still classified as impaired.

As part of our credit risk management, we continue to manage the loan portfolio to identify problem loans and have placed additional emphasis on commercial real estate and construction and land relationships. We are working to resolve the remaining problem credits or move the non-performing credits out of the loan portfolio. At June 30, 2017, we had $1.0 million of real estate owned compared to $1.3 million at December 31, 2016. As of June 30, 2017, real estate owned primarily consisted of residential real estate and commercial properties. The Company is currently marketing all of the remaining properties in real estate owned.

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 an increase of $3.5 million in total deposits during the six months of 2017, to $745.0 million at June 30, 2017, from $741.5 million at December 31, 2016. The increase in deposits was primarily due to increased balances in non-interest bearing and savings accounts. This increase was partially offset by lower balances of money market and checking and time deposit accounts.

Non-interest-bearing deposits at June 30, 2017, were $158.8 million, or 21.3% of deposits, compared to $152.0 million, or 20.5% of deposits, at December 31, 2016. Money market and checking deposit accounts were 48.4% of our deposit portfolio and totaled $360.7 million at June 30, 2017, compared to $361.4 million, or 48.7% of deposits, at December 31, 2016. Savings accounts increased to $93.6 million, or 12.6% of deposits, at June 30, 2017, from $88.3 million, or 11.9% of deposits, at December 31, 2016. Certificates of deposit totaled $131.9 million, or 17.7% of deposits, at June 30, 2017, compared to $139.8 million, or 18.9% of deposits, at December 31, 2016.

Certificates of deposit at June 30, 2017, scheduled to mature in one year or less, totaled $90.5 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 in some type of deposit account.

Total borrowings decreased $9.0 million to $63.8 million at June 30, 2017, from $72.9 million at December 31, 2016. The decrease in total borrowings was primarily due to a decrease in our FHLB borrowings from $39.1 million at December 31, 2016 to $31.0 million at June 30, 2017, which was primarily the result of two $5.0 million FHLB advance maturing in the six months ended June 30, 2017.

Cash Flows. During the six months ended June 30, 2017, our cash and cash equivalents decreased by $9.4 million. Our operating activities provided cash of $328,000 during the first six months of 2017. Our investing activities used net cash of $2.6 million during the first six months of 2017, primarily as a result of the purchase of investment securities and an increase in our loan balances. Financing activities used net cash of $7.2 million during the first six months of 2017, primarily as a result of decreased borrowings.

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 $400.4 million at June 30, 2017 and $405.6 million at December 31, 2016. During periods in which we are not able to originate a sufficient amount of loans and/or periods of high principal prepayments, we generally increase our liquid assets by investing in short-term, high-grade investments.

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Liquidity management is both a daily and long-term function of our strategy. Excess funds are generally invested in short-term investments. Excess funds are typically generated as a result of increased deposit balances, while uses of excess funds are generally deposit withdrawals and loan advances. 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 June 30, 2017, we had outstanding FHLB advances of $25.0 million and $6.0 million of borrowings against our line of credit with the FHLB. At June 30, 2017, we had collateral pledged to the FHLB that would allow us to borrow an additional $65.5 million, subject to FHLB credit requirements and policies. At June 30, 2017, we had no borrowings through the Federal Reserve discount window, while our borrowing capacity with the Federal Reserve was $14.7 million. We also have various other federal funds agreements, both secured and unsecured, with correspondent banks totaling approximately $30.0 million in available credit under which we had no outstanding borrowings at June 30, 2017. At June 30, 2017, we had subordinated debentures totaling $21.4 million and other borrowings of $11.4 million, which consisted of $11.3 million in repurchase agreements and $100,000 on a line of credit. The Company has a $7.5 million line of credit from an unrelated financial institution maturing on November 1, 2017, with an interest rate that adjusts daily based on the prime rate plus 0.25%, and a floor of 3.75%. This line of credit has covenants specific to capital and other financial ratios, which the Company was in compliance with at June 30, 2017.

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 $826,000 at June 30, 2017.

At June 30, 2017, we had outstanding loan commitments, excluding standby letters of credit, of $86.7 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 . Current regulatory capital regulations require financial institutions (including banks and bank holding companies) to meet certain regulatory capital requirements. The Company and the Bank are subject to the Basel III Rules that implemented the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision and certain changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Basel III Rules are applicable to all U.S. banks that are subject to minimum capital requirements, as well as to bank and savings and loan holding companies other than "small bank holding companies" (generally, non-public bank holding companies with consolidated assets of less than $1.0 billion).

The Basel III Rules require a common equity Tier 1 capital to risk-weighted assets minimum ratio of 4.5%, a Tier 1 capital to risk-weighted assets minimum ratio of 6.0%, a Total Capital to risk-weighted assets minimum ratio of 8.0%, and a Tier 1 leverage minimum ratio of 4.0%. A capital conservation buffer, comprised of common equity Tier 1 capital, is also established above the regulatory minimum capital requirements. This capital conservation buffer began on January 1, 2016 at 0.625% of risk-weighted assets, was 1.25% effective on January 1, 2017, and will increase each subsequent year by an additional 0.625% until reaching its final level of 2.5% on January 1, 2019. As of June 30, 2017 and December 31, 2016, the Bank was rated "well capitalized," which is the highest rating available under the regulatory capital regulations framework for prompt corrective action. Management believes that as of June 30, 2017, the Company and the Bank met all capital adequacy requirements to which we are subject.

Dividends . During the quarter ended June 30, 2017, we paid a quarterly cash dividend of $0.20 per share to our stockholders.

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. In addition, under the Basel III Rules, financial institutions will have to maintain 2.5% in Common Equity Tier 1 attributable to the capital conservation buffer in order to pay dividends and do other capital distributions. This buffer is being phased in over three years beginning in 2016. As described above, the Bank exceeded its minimum capital requirements under applicable guidelines as of June 30, 2017. 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 June 30, 2017, approximately $18.6 million was available to be paid as dividends to the Company by the Bank without prior regulatory approval.

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Additionally, our ability to pay dividends is limited by the subordinated debentures that are held by three 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.

Average Assets/Liabilities . The following tables reflect the tax-equivalent yields earned on average interest-earning assets and costs of average interest-bearing liabilities for the periods indicated (derived by dividing income or expense by the monthly average balance of assets or liabilities, respectively) as well as "net interest margin" (which reflects the effect of the net earnings balance) for the periods shown:

Three months ended Three months ended
(Dollars in thousands) June 30, 2017 June 30, 2016
Average balance Interest Average yield/rate Average balance Interest Average yield/rate
Assets
Interest-earning assets:
Interest-bearing deposits at banks $ 4,566 $ 9 0.79 % $ 817 $ 1 0.49 %
Investment securities (1) 398,328 2,651 2.67 % 375,976 2,453 2.62 %
Loans receivable, net (2) 428,424 5,297 4.96 % 438,261 5,375 4.93 %
Total interest-earning assets 831,318 7,957 3.84 % 815,054 7,829 3.86 %
Non-interest-earning assets 91,856 85,276
Total $ 923,174 $ 900,330
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Money market and checking $ 360,528 $ 236 0.26 % $ 332,109 $ 116 0.14 %
Savings accounts 94,047 7 0.03 % 86,863 7 0.03 %
Time deposit 135,512 151 0.45 % 142,948 164 0.46 %
Total deposits 590,087 394 0.27 % 561,920 287 0.21 %
FHLB advances and other borrowings 68,549 486 2.84 % 88,560 523 2.38 %
Total interest-bearing liabilities 658,636 880 0.54 % 650,480 810 0.50 %
Non-interest-bearing liabilities 175,859 163,718
Stockholders' equity 88,679 86,132
Total $ 923,174 $ 900,330
Interest rate spread (3) 3.30 % 3.36 %
Net interest margin (4) $ 7,077 3.41 % $ 7,019 3.46 %
Tax-equivalent interest - imputed 501 457
Net interest income $ 6,576 $ 6,562
Ratio of average interest-earning assets to average interest-bearing liabilities 126.2 % 125.3 %

(1) Income on tax exempt securities is presented on a fully tax-equivalent basis, using a 34% federal tax rate.
(2) Includes loans classified as non-accrual. Income on tax-exempt loans is presented on a fully tax-equivalent basis, using a 34% federal tax rate.
(3) Interest rate spread represents the difference between the average yield earned on interest-earning assets and the average rate paid on interest-bearing liabilities.
(4) Net interest margin represents annualized, tax-equivalent net interest income divided by average interest-earning assets.

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Six months ended Six months ended
(Dollars in thousands) June 30, 2017 June 30, 2016
Average balance Interest Average yield/rate Average balance Interest Average yield/rate
Assets
Interest-earning assets:
Interest-bearing deposits at banks $ 6,676 $ 27 0.82 % $ 3,875 $ 10 0.52 %
Investment securities (1) 395,947 5,237 2.67 % 367,535 4,819 2.64 %
Loans receivable, net (2) 424,495 10,369 4.93 % 432,137 10,611 4.94 %
Total interest-earning assets 827,118 15,633 3.81 % 803,547 15,440 3.86 %
Non-interest-earning assets 91,448 85,168
Total $ 918,566 $ 888,715
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Money market and checking $ 357,950 $ 417 0.23 % $ 333,231 $ 221 0.13 %
Savings accounts 92,670 14 0.03 % 85,143 13 0.03 %
Time deposit 138,228 301 0.44 % 143,304 330 0.46 %
Total deposits 588,848 732 0.25 % 561,678 564 0.20 %
FHLB advances and other borrowings 70,135 968 2.78 % 80,499 1,016 2.54 %
Total interest-bearing liabilities 658,983 1,700 0.52 % 642,177 1,580 0.49 %
Non-interest-bearing liabilities 172,486 161,982
Stockholders' equity 87,097 84,556
Total $ 918,566 $ 888,715
Interest rate spread (3) 3.29 % 3.37 %
Net interest margin (4) $ 13,933 3.41 % $ 13,860 3.47 %
Tax-equivalent interest - imputed 989 894
Net interest income $ 12,944 $ 12,966
Ratio of average interest-earning assets to average interest-bearing liabilities 125.5 % 125.1 %

(1) Income on tax exempt securities is presented on a fully tax-equivalent basis, using a 34% federal tax rate.
(2) Includes loans classified as non-accrual. Income on tax-exempt loans is presented on a fully tax-equivalent basis, using a 34% federal tax rate.
(3) Interest rate spread represents the difference between the average yield earned on interest-earning assets and the average rate paid on interest-bearing liabilities.
(4) Net interest margin represents annualized, tax-equivalent net interest income divided by average interest-earning assets.

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Rate/Volume Table . 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 for 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 that cannot be segregated have been allocated proportionately to the change due to volume and the change due to rate.

(Dollars in thousands) Three months ended June 30, Six months ended June 30,
2017 vs 2016 2017 vs 2016
Increase/(decrease) attributable to Increase/(decrease) attributable to
Volume Rate Net Volume Rate Net
Interest income:
Interest-bearing deposits at banks $ 7 $ 1 $ 8 $ 9 $ 8 $ 17
Investment securities 150 48 198 365 53 418
Loans (107 ) 29 (78 ) (217 ) (25 ) (242 )
Total 50 78 128 157 36 193
Interest expense:
Deposits 16 91 107 27 141 168
Borrowings (255 ) 219 (37 ) (180 ) 132 (48 )
Total (239 ) 310 70 (153 ) 273 120
Net interest income $ 289 $ (232 ) $ 58 $ 310 $ (237 ) $ 73

ITEM 3. 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 decisions relating to pricing our assets and liabilities, which impact 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. 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.

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 one using rates at June 30, 2017, 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 with an impact to our net interest income on a one-year horizon as follows:

Dollar change in net Percent change in
Scenario interest income ($000's) net interest income
200 basis point rising $ (1,255 ) (4.5 )%
100 basis point rising $ (643 ) (2.3 )%
100 basis point falling $ (58 ) (0.2 )%
200 basis point falling NM NM

The 200 basis point falling scenario is considered to be not meaningful ("NM") in the current low interest rate environment.

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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 and international 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 Wall Street Reform and Consumer Protection Act and the rules and regulations promulgated thereunder, as well as rules adopted by the federal bank regulatory agencies to implement Basel III) and the effects of increases in Federal Deposit Insurance Corporation 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 do 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 cyber-attacks.
● 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 our filings with the Securities and Exchange Commission, including the "Risk Factors" section in our Annual Report on Form 10-K for the year ended December 31, 2016.

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ITEM 4. 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 Company's disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended) as of June 30, 2017. 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 as of June 30, 2017.

There were no changes in the Company's internal control over financial reporting during the quarter ended June 30, 2017 that materially affected or are reasonably likely to materially affect the Company's internal control over financial reporting.

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PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

There are no material pending legal proceedings to which the Company or its subsidiaries is a party or which any of their property is subject, other than ordinary routine litigation incidental to their respective businesses.

ITEM 1A. RISK FACTORS

There have been no material changes in the risk factors applicable to the Company from those disclosed in Part I, Item 1A. "Risk Factors," in the Company's 2016 Annual Report on Form 10-K.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Exhibit 31.1 Certificate of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a)
Exhibit 31.2 Certificate of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a)
Exhibit 32.1 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
Exhibit 32.2 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
Exhibit 101 Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016; (ii) Consolidated Statements of Earnings for the three and six months ended June 30, 2017 and June 30, 2016; (iii) Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2017 and June 30, 2016; (iv) Consolidated Statements of Cash Flows for the six months ended June 30, 2017 and June 30, 2016; (v) Consolidated Statements of Stockholders' Equity for the six months ended June 30, 2017 and June 30, 2016; and (vi) Notes to Consolidated Financial Statements

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SIGNATURES

Pursuant to the requirements 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.
Date: August 21, 2017 /s/ Michael E. Scheopner
Michael E. Scheopner
President and Chief Executive Officer

Date: August 21, 2017 /s/ Mark A. Herpich
Mark A. Herpich
Vice President, Secretary, Treasurer
and Chief Financial Officer

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